First Hawaiian, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report. First Hawaiian is a Hawaii-headquartered bank holding company whose principal subsidiary, First Hawaiian Bank, operates 62 branches in Hawaii, Guam and Saipan. The company completed its IPO in August 2016 and remained majority-owned by BNP Paribas (BNPP); after BNPP’s February 2017 secondary offering, its ownership was approximately 62%.
Financial results and position
| Metric | FY 2016 / Dec. 31, 2016 | Prior comparable period |
|---|---|---|
| Net income | $230.2 million | $213.8 million in 2015; up 8% |
| Diluted EPS | $1.65 | $1.53 in 2015; up 8% |
| Net interest income | $491.7 million | $461.3 million in 2015; up 7% |
| Net interest margin | 2.88% | 2.78% in 2015 |
| Provision for loan and lease losses | $8.6 million | $9.9 million in 2015 |
| Noninterest income | $217.6 million | $211.4 million in 2015; up 3% |
| Noninterest expense | $328.8 million | $319.6 million in 2015; up 3% |
| Efficiency ratio | 46.36% | 47.50% in 2015 |
| Total assets | $19.7 billion | $19.4 billion in 2015 |
| Loans and leases | $11.5 billion | $10.7 billion in 2015; up 7% |
| Deposits | $16.8 billion | $16.1 billion in 2015; up 5% |
| Stockholders’ equity | $2.5 billion | $2.7 billion in 2015 |
FY 2016 operating cash flow was $219.9 million, versus $142.6 million in 2015. Investing activities used $1.90 billion, mainly reflecting purchases of investment securities and loan growth; financing activities provided $78.6 million. Cash and cash equivalents declined to $1.05 billion from $2.65 billion as excess liquidity was deployed. The available-for-sale securities portfolio grew 26% to $5.08 billion; unrealized losses rose to $101.1 million from $44.9 million, primarily as market rates increased.
Funding was predominantly deposits. Year-end short-term borrowings were $9.2 million and long-term debt was $41,000. The Bank reported well-capitalized ratios: CET1 12.51%, total capital 13.62% and Tier 1 leverage 8.19%. Company capital ratios were also well above stated minimums, though lower than 2015, primarily due to $363.6 million of distributions associated with the reorganization. The Bank’s borrowing capacity included approximately $1.7 billion from the FHLB and $0.7 billion from the Federal Reserve, based on pledged collateral.
Material changes and notable items
- Loans grew across commercial and industrial, real estate and consumer categories. Approximately 70% of loans were Hawaii-based; 83% of deposits were based in Hawaii.
- Nonperforming assets fell 42% to $9.8 million; nonaccrual loans and leases were 0.08% of loans, down from 0.16%. The allowance remained near $135.5 million, but declined to 1.18% of loans from 1.26%.
- Net income included a $22.7 million gain from selling Visa Class B shares and higher bank-owned life insurance income, including $3.9 million in death benefits. Management’s non-GAAP core net income was $217.1 million, up from $196.3 million in 2015; this measure excludes specified gains and other items.
- Reported noninterest expense included $6.2 million of one-time IPO-related costs. The company expects incremental standalone and separation expenses of $12.3 million to $17.0 million in aggregate per year in 2017 and 2018; actual costs may be higher.
- Cash dividends of $85.8 million were paid in 2016. The board declared a $0.22-per-share quarterly dividend in January 2017, paid in March 2017.
- The reporting entity changed in April 2016 when Bank of the West was separated from the company. Pre-April 2016 results use allocated items and a retrospective presentation; the filing cautions they may not represent results as a standalone public company.
Outlook, risks and contingencies
The filing gives no formal earnings or revenue guidance. Management described Hawaii’s 2016 economy as growing, supported by tourism, construction, low unemployment and rising real estate prices, while noting dependence on mainland and international conditions. It cited strong loan demand and continued investment of excess liquidity in high-grade securities.
- Interest rates: Management’s simulation estimated that an immediate, sustained +100 basis-point shift would raise next-12-month net interest income by 4.5%, while a -100 basis-point shift would reduce it by 6.0%. These are scenario estimates, not forecasts; deposit repricing, yield-curve changes and other assumptions could alter outcomes.
- Concentration and credit: Results are exposed to Hawaii, Guam and Saipan economies, real estate values, tourism, military spending and natural disasters. Real estate represented 57% of loans; commercial lending about 54%.
- Separation and BNPP: Transitional services are scheduled to end by December 31, 2018, with some services ending earlier. Replacement costs, service interruptions, continuing BNPP control and related regulatory requirements are risks. BNPP also retains significant governance and approval rights.
- Tax and reorganization exposure: Unrecognized tax benefits were $137.1 million, largely associated with the reorganization. The filing says up to $107.1 million of tax benefits and $5.0 million of accrued interest and penalties could decrease within 12 months, subject to resolution and other uncertainties. The company also describes potential contingent liabilities related to the reorganization that it cannot quantify.
- Litigation: A customer filed a purported class action in January 2017 alleging improper overdraft fees and related practices. The company disputes the claims, is defending the case and says it cannot reasonably estimate potential loss. Management did not identify other pending proceedings expected to have a material adverse effect.
- Other risks: Competition, cybersecurity and operational disruption, regulatory and compliance costs, deposit retention, credit-loss estimation and increased standalone expenses could affect results. The company had not completed an internal-control-over-financial-reporting assessment in this filing; the auditor expressed no opinion on those controls. The financial statement audit opinion was unqualified.
Important facts for investors to verify
- Whether loan growth and improved asset-quality metrics persist, and whether the allowance remains adequate as loans expand.
- How much recurring earnings depend on securities gains, Visa-related items, BOLI benefits and other non-core sources.
- Actual standalone separation costs, replacement-service arrangements and progress ahead of the transitional-services deadlines.
- Resolution and cash impact of the $137.1 million unrecognized-tax-benefit balance, related indemnities and reorganization contingencies.
- Updates on the overdraft-fee class action, dividend capacity and BNPP’s remaining ownership and control rights.
- How rising rates, securities valuation losses and regional economic or real estate changes affect margins, capital and liquidity.