Business context and reporting period
First Hawaiian, Inc. is the holding company for First Hawaiian Bank, a full-service bank headquartered in Honolulu, with 58 branches in Hawaii, Guam and Saipan. The 10-K covers the fiscal year ended December 31, 2019; fourth-quarter figures below are unaudited. The company reported in three segments: Retail Banking, Commercial Banking, and Treasury and Other.
Financial results and condition
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net interest income | $573.4 million | $566.3 million | +1% |
| Net interest margin | 3.20% | 3.16% | +4 bps |
| Provision for loan and lease losses | $13.8 million | $22.2 million | −38% |
| Noninterest income | $192.5 million | $179.0 million | +8% |
| Noninterest expense | $370.4 million | $365.0 million | +2% |
| Net income | $284.4 million | $264.4 million | +8% |
| Diluted EPS | $2.13 | $1.93 | +10% |
| Core net income (non-GAAP) | $291.8 million | $286.7 million | +2% |
| Efficiency ratio | 48.36% | 48.96% | Improved |
FY 2019 return on average assets was 1.40%; return on average equity was 10.90%. The effective tax rate was 25.49%, versus 26.18% in 2018. The company declared $1.04 per share in dividends for 2019, up from $0.96.
In Q4 2019, net income was $67.8 million, or $0.52 per diluted share, compared with $60.0 million, or $0.44, in Q4 2018. Quarterly net interest income was $139.6 million versus $144.0 million, and net interest margin was 3.15% versus 3.23%. Q4 2019 noninterest income was $46.7 million, compared with $33.1 million in Q4 2018, which included $24.1 million of securities impairment losses.
| Balance-sheet and credit metric | Dec. 31, 2019 | Dec. 31, 2018 |
|---|---|---|
| Total assets | $20.2 billion | $20.7 billion |
| Gross loans and leases | $13.2 billion | $13.1 billion |
| Deposits | $16.4 billion | $17.2 billion |
| Cash and cash equivalents | $694.0 million | $1.0 billion |
| Investment securities | $4.1 billion | $4.5 billion |
| Short- and long-term borrowings | $600.0 million | $600.0 million |
| Stockholders’ equity | $2.64 billion | $2.52 billion |
| Allowance / loans and leases | 0.99% | 1.08% |
| Nonaccrual loans and leases / total loans | 0.04% | 0.05% |
| Net charge-offs / average loans | 0.19% | 0.14% |
Operating cash flow was $296.5 million in 2019, down from $351.4 million in 2018. Cash and cash equivalents decreased by $309.6 million during 2019. Liquidity sources included $1.7 billion of available FHLB borrowing capacity and $596.8 million from the Federal Reserve, based on pledged collateral. Core deposits were $15.1 billion, or 92% of deposits.
At year-end, the company’s CET1 and Tier 1 capital ratios were 11.88%, total capital was 12.81%, and Tier 1 leverage was 8.79%. The bank’s respective ratios were 11.72%, 11.72%, 12.65%, and 8.67%; both were classified as well-capitalized.
Material changes versus the prior comparable period
- Loan growth was modest: total loans and leases increased 1%. Commercial real estate loans rose 16% and residential mortgage loans rose 7%; commercial and industrial loans fell 15%, including the sale of $408.9 million of loans.
- Deposits fell 4%, chiefly from lower public time deposits; cash balances also declined. The company used investment-security runoff to help fund loan growth, and the securities portfolio fell 9%.
- Net charge-offs increased to $25.0 million from $17.7 million, mainly reflecting consumer lending. Nonaccrual loans remained low, and total nonperforming assets declined 21% to $5.8 million.
- Reported earnings benefited from higher noninterest income and a lower loan-loss provision. The prior-year comparison included $24.1 million of OTTI losses; 2019 included a $2.7 million net securities loss and a $4.5 million Visa-related funding-swap charge.
- Shareholders’ equity increased 5%, supported by earnings and improved accumulated other comprehensive loss, partly offset by $138.2 million in dividends and $136.2 million in share repurchases.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management described Hawaii’s 2019 economy as stable, supported by tourism, low unemployment and generally steady real estate conditions, while monitoring tourism, construction, affordability, interest rates, global economic weakness, trade disputes and political uncertainty.
- CECL: The company adopted the expected-credit-loss standard on January 1, 2020 and estimated an initial allowance increase of approximately 10%–15% versus year-end 2019 reserves. The estimate depends on portfolio and economic assumptions; management noted possible effects on future earnings and lending.
- Regional and concentration risks: Business and credit performance are closely tied to Hawaii, Guam and Saipan, tourism, real estate, construction and military-related economic activity. Approximately 73% of loans were in Hawaii; 65% of the loan portfolio was real-estate related.
- Rates and benchmarks: The filing identifies exposure to falling rates and yield-curve changes, and to the planned LIBOR transition. Its year-end simulation estimated that an immediate 100-basis-point rate decrease could reduce 12-month net interest income by 9.6%, while a 100-basis-point increase could raise it by 8.9%; actual results may differ.
- COVID-19: As of the filing date, management cited potential disruption to the global economy, transportation and tourism, with uncertainty about the outbreak’s course and possible material effects.
- Other risks and contingencies: Risks include deposit competition and outflows, credit losses, natural disasters, cybersecurity and vendor disruption, regulatory and consumer-protection requirements, and mortgage-loan repurchase claims. Management reported no pending legal proceeding expected to have a material adverse effect. A 2018 overdraft-fee class-action settlement was approved in 2019; the company funded $4.1 million and received $0.7 million in insurance proceeds in 2019.
- Capital returns and technology: The 2019 repurchase authorization expired with $13.8 million unused; a new $80 million 2020 program was announced. A new core system and digital modernization were expected to be completed in 2021.
Important facts for investors to verify
- Reconcile annual and Q4 earnings drivers, particularly the securities impairment comparison and Visa funding-swap charges; assess reported GAAP results separately from management’s non-GAAP core measures.
- Track deposit trends, funding costs, borrowing use and liquidity capacity, especially following the 4% deposit decline and lower cash balance.
- Review credit performance and reserve adequacy: net charge-offs rose while the allowance-to-loans ratio declined; assess consumer losses and real-estate concentration.
- Evaluate the actual January 2020 CECL allowance adjustment and subsequent credit trends against the company’s 10%–15% estimate.
- Monitor COVID-19 impacts on tourism and regional borrowers, as well as rate sensitivity and LIBOR-transition progress.
- Confirm the sustainability of dividends and repurchases against bank dividend capacity, capital requirements and parent-company liquidity needs.