First Hawaiian, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. First Hawaiian is a bank holding company whose wholly owned subsidiary, First Hawaiian Bank, operates primarily in Hawaii, Guam and Saipan. It reported 54 branches and approximately 2,100 employees.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $535.7 million | $573.4 million |
| Net interest margin | 2.77% | 3.20% |
| Provision for credit losses | $121.7 million | $13.8 million |
| Noninterest income | $197.4 million | $192.5 million |
| Noninterest expense | $367.7 million | $370.4 million |
| Net income | $185.8 million | $284.4 million |
| Diluted earnings per share | $1.43 | $2.13 |
| Operating cash flow | $209.5 million | $296.5 million |
- Net income fell 35%. The main drivers were a $107.9 million increase in credit-loss provision and a $37.7 million decrease in net interest income; lower income taxes and slightly lower expenses partly offset the decline.
- Net interest income declined 7%, largely reflecting lower loan and securities yields after interest-rate cuts. Deposit funding costs fell substantially, but did not fully offset asset-yield pressure. Noninterest income rose 3%, including higher gains on loan sales, while card and deposit fees weakened.
- At year-end, assets were $22.7 billion, gross loans and leases $13.3 billion, deposits $19.2 billion, and stockholders’ equity $2.7 billion. Loans rose 1% year over year; deposits rose 17%.
- Cash and cash equivalents were $1.04 billion, up from $694 million. Available-for-sale securities were $6.07 billion, up 49%, largely from deploying excess liquidity. Core deposits were $17.9 billion, or 93% of deposits.
- Borrowings were limited: no short-term borrowings remained at year-end, and long-term borrowings were $200 million. The Bank reported $2.0 billion of FHLB and $1.1 billion of Federal Reserve borrowing capacity, subject to collateral availability.
- The loan-loss allowance was $208.5 million, or 1.57% of loans, versus $130.5 million, or 0.99%, in 2019. Net charge-offs were $30.9 million, or 0.23% of average loans, compared with $25.0 million, or 0.19%.
- Regulatory capital remained strong: the Company’s CET1 ratio was 12.47%, total capital ratio 13.73%, and leverage ratio 8.00%. The Bank met the well-capitalized thresholds.
- Cash dividends declared were $1.04 per share for the year. The dividend payout ratio increased to 72.73% from 48.83%.
Material changes versus the prior period
- The pandemic and economic disruption drove materially higher expected credit losses and a sharp increase in provision expense. The company adopted CECL on January 1, 2020; the after-tax cumulative-effect adjustment reduced retained earnings by $12.5 million.
- Hawaii’s December 2020 unemployment rate was 9.3%, versus 2.6% a year earlier; visitor arrivals declined 75.2% for the year. Management said tourism recovery timing and extent remained highly uncertain.
- PPP loans totaled $801.2 million at year-end, approximately 6.0% of loans. Loans receiving COVID-related payment deferrals totaled $3.02 billion, or 22.7% of loans, as of December 31.
- The company closed four branches permanently in November 2020 after temporarily closing 26 locations during the year; 18 temporarily closed branches had reopened by year-end.
- The allowance for unfunded commitments increased to $30.6 million from $0.6 million. Deposit growth, including public deposits, supported liquidity; the company also repaid $400 million of short-term FHLB advances.
Outlook, risks and unusual items
- Outlook: The filing provides no specific numerical earnings or balance-sheet guidance. Management expected adverse economic conditions to continue and said the pandemic’s ultimate impact could not be reliably estimated. It anticipated a gradual, uncertain recovery in Hawaii and tourism.
- Credit and regional concentration: The loan portfolio is concentrated in Hawaii and includes substantial real-estate exposure; roughly 65% of loans were real-estate loans. Management identified tourism, hotels, restaurants, entertainment and commercial real estate as vulnerable sectors. Payment deferrals may mask emerging borrower stress, and CECL reserves depend on forecasts and judgmental overlays.
- Rates and benchmarks: Management’s sensitivity analysis indicated that a parallel 100-basis-point rate increase could raise 12-month net interest income by 12.4%, while a 100-basis-point decline could reduce it by 4.4%, based on a static balance sheet and stated assumptions. LIBOR transition, prepayments and deposit repricing add uncertainty.
- Other risks: The filing highlights cybersecurity, third-party vendors, regulatory and consumer-compliance costs, natural disasters, deposit outflows and the parent company’s reliance on Bank dividends for liquidity and shareholder distributions.
- Unusual items: A $4.8 million charge related to revaluation of the Visa Class B funding-swap liability reduced 2020 results. The company recorded no goodwill impairment, but warned future COVID-related deterioration could trigger one. It reported $154.5 million of unrecognized tax benefits; timing of settlement is unclear.
- Contingencies and controls: A customer lawsuit filed in November 2020 alleges claims related to the sale of credit facilities; the company could not estimate a potential loss and recorded no liability. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
- Capital distributions: The company suspended its 2020 repurchase program after repurchasing $5.0 million of shares. In February 2021 it announced a new program of up to $75 million; the Board declared a $0.26-per-share quarterly dividend in January 2021.
Important facts for investors to verify
- Whether the $3.02 billion of deferred loans have resumed payments, and whether delinquencies, charge-offs or required credit reserves have increased since year-end.
- PPP forgiveness, remaining PPP balances and associated fee income, as well as the repayment performance of borrowers in pandemic-sensitive industries.
- The adequacy of the $208.5 million loan allowance and $30.6 million unfunded-commitment reserve under updated economic forecasts and CECL assumptions.
- Deposit mix and stability, liquidity capacity, collateral availability for borrowing lines, and the Bank’s ability to upstream dividends to the parent.
- Net interest margin and earnings sensitivity as rates, deposit costs, prepayments and LIBOR-linked contracts change.
- Developments in the customer lawsuit, tax examinations and $154.5 million of unrecognized tax benefits, including any potential payments or indemnification recoveries.