First Hawaiian, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. First Hawaiian is a Honolulu-based bank holding company operating through First Hawaiian Bank, with 60 branches in Hawaii, Guam and Saipan. It reported $20.7 billion in assets and $17.2 billion in deposits at year-end.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net interest income | $566.3 million | $528.8 million | +7% |
| Net interest margin | 3.16% | 2.99% | +17 basis points |
| Provision for loan and lease losses | $22.2 million | $18.5 million | +20% |
| Noninterest income | $179.0 million | $205.6 million | -13% |
| Noninterest expense | $365.0 million | $347.6 million | +5% |
| Income before taxes | $358.2 million | $368.4 million | -3% |
| Net income | $264.4 million | $183.7 million | +44% |
| Diluted EPS | $1.93 | $1.32 | +46% |
- The net income increase largely reflected the lower tax burden in 2018. The 2017 comparison included a $47.6 million one-time tax charge from the Tax Act’s corporate-rate reduction and deferred-tax revaluation. Effective tax rates were 26.18% in 2018 and 50.13% in 2017.
- Management’s non-GAAP “core” net income was $286.7 million, up 24%, and core diluted EPS was $2.09, up 27%. These measures exclude specified unusual items and should be considered alongside GAAP results.
- Efficiency ratio was 48.96%, versus 47.32%; return on average assets was 1.31%, versus 0.92%; return on average equity was 10.76%, versus 7.24%.
- Fourth-quarter 2018 net income was $60.0 million, compared with $11.7 million in fourth-quarter 2017, when results included the $47.6 million Tax Act charge. Fourth-quarter 2018 noninterest income included $24.1 million of securities impairment losses and a $7.6 million nonrecurring hedge-related mark-to-market gain.
Balance sheet, liquidity and asset quality
- Gross loans and leases grew 7% to $13.1 billion. Growth was strongest in commercial real estate (+12%) and residential real estate (+9%). Approximately 70% of loans were in Hawaii; real estate loans were about 62% of the portfolio.
- Deposits declined 3% to $17.2 billion, mainly because public time deposits fell $962.3 million. Money-market and savings balances increased. Core deposits were $15.3 billion, or 89% of total deposits.
- Cash and cash equivalents were $1.0 billion; available-for-sale securities were $4.5 billion, down 14%, principally as maturities and paydowns funded loan growth. Reported cash flows were $351.4 million provided by operating activities, $257.8 million used in investing activities and $124.6 million used in financing activities; cash declined $31.0 million.
- Long-term borrowings rose to $600.0 million, consisting mainly of FHLB advances at a weighted-average 2.80% rate, maturing from 2020 to 2024. No short-term borrowings were outstanding at year-end. Available secured borrowing capacity was $1.3 billion from the FHLB and $671.8 million from the Federal Reserve.
- Company capital ratios were 11.97% CET1, 12.99% total capital and 8.72% Tier 1 leverage; the Bank was also classified as well-capitalized. Total stockholders’ equity was $2.52 billion.
- Credit quality remained strong: nonaccrual loans were 0.05% of loans, nonperforming assets were 0.06% of loans and OREO, and net charge-offs were 0.14% of average loans. The allowance was $141.7 million, or 1.08% of loans, compared with 1.12% a year earlier.
Material changes, outlook and risks
- Interest income rose with loan growth and higher asset yields, while deposit funding costs increased $31.0 million as rates paid on interest-bearing deposits rose to 0.65% from 0.38%.
- Noninterest income was reduced by a $24.1 million non-credit OTTI write-down after the Company decided to sell 48 securities with $898.2 million of book value. The securities were sold in January 2019, with an additional $2.6 million loss reported. Unrealized securities losses were $142.2 million at year-end, primarily associated with rising rates.
- The Company recorded a $4.1 million expense for an agreement in principle to settle a putative overdraft-fee class action; court approval remained outstanding. Management said other pending or threatened proceedings were not expected to have a material aggregate effect.
- BNP Paribas completed its exit from First Hawaiian on February 1, 2019. The transitional services agreement ended December 31, 2018, and the Company was working to replace remaining affiliate-provided services; management warned replacement costs or disruption could be higher than expected.
- No numerical earnings or financial guidance is provided in the supplied filing text. Management described Hawaii’s 2018 economy as growing, supported by tourism, while noting softer home-sale volumes and risks from affordability, interest rates, regional economic conditions and construction activity.
- Key risks include geographic concentration in Hawaii, Guam and Saipan; real-estate and commercial-loan concentrations; sensitivity to rates and deposit competition; LIBOR transition; cybersecurity and vendor dependence; regulatory and litigation exposure; and possible natural disasters. Adoption of CECL was scheduled for 2020, but its effect on reserves and capital was not yet reasonably estimable.
- The audited financial statements received an unqualified opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting. Management concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after separating the 2017 Tax Act charge, 2018 securities impairment and other non-GAAP adjustments.
- Whether deposit mix and funding costs stabilize as public time deposits run off and loan growth continues.
- The realized outcome of the January 2019 securities sale and the effect of subsequent interest-rate movements on the remaining portfolio.
- Future credit performance and allowance adequacy, particularly in Hawaii real estate, commercial lending and consumer lending.
- CECL implementation impact, the overdraft settlement’s final court approval, and any material developments in tax or reorganization-related contingencies.
- Costs and operational progress in replacing BNPP-related services following the transition services agreement’s termination.