FIRST HAWAIIAN, INC. quarterly report, Q3 FY2022

First Hawaiian, Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022; comparisons are to the same 2021 periods unless noted. First Hawaiian is a bank holding company whose wholly owned bank provides retail, commercial, and related financial services, primarily in Hawaii.

Financial performance

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Net interest income	$162.7 million	$132.6 million	$441.8 million	$393.2 million
Provision for credit losses	$3.2 million	$(4.0) million benefit	$(1.6) million benefit	$(39.0) million benefit
Noninterest income	$45.9 million	$50.1 million	$131.4 million	$143.3 million
Noninterest expense	$113.3 million	$101.0 million	$326.5 million	$296.7 million
Net income	$69.0 million	$64.3 million	$186.1 million	$208.7 million
Diluted EPS	$0.54	$0.50	$1.45	$1.61
Net interest margin	2.93%	2.36%	2.65%	2.45%

Q3 earnings rose 7%, principally on higher net interest income as rates increased. For the nine-month period, earnings fell 11%: higher net interest income was more than offset by a much smaller credit-loss benefit, higher expenses, and lower noninterest income. Q3 efficiency ratio was 53.98% (55.07% prior year); nine-month ratio was 56.63% (55.10%).

Balance sheet, liquidity, and capital

• At September 30, total assets were $24.9 billion, loans and leases $13.7 billion, deposits $22.1 billion, and stockholders’ equity $2.2 billion. Loans increased 6% and deposits 1% from December 31, 2021.
• Cash and cash equivalents were $948.9 million, down from $1.26 billion at year-end. Nine-month cash flow was $321.6 million from operations, $(794.4) million from investing, and $163.3 million from financing.
• Core deposits were $21.1 billion, or 96% of deposits. Available borrowing capacity was $1.5 billion from the FHLB and $1.2 billion from the Federal Reserve. Management stated liquidity remained high and existing resources were sufficient for expected cash needs.
• The company reported no long-term borrowings outstanding at quarter-end and no material change in contractual cash requirements. Uninsured deposits totaled $13.7 billion.
• The bank and holding company were classified as well-capitalized. Holding-company CET1 was 11.79%, total capital 12.92%, and leverage ratio 7.78%. CET1 was down 45 basis points from year-end.
• Book value per share was $17.28 versus $20.84 at year-end; tangible book value per share was $9.46 versus $13.03.

Material changes and notable items

• Interest-rate-driven securities losses weighed heavily on equity: nine-month other comprehensive loss was $537.1 million, largely from investment securities. Equity declined 17% from year-end, primarily due to $531.1 million of after-tax unrealized securities losses and $99.5 million in dividends, partly offset by earnings.
• The company reclassified approximately $4.6 billion of available-for-sale securities to held-to-maturity during the first nine months, including $417.4 million in Q3. The related $372.4 million after-tax unrealized loss remained in accumulated other comprehensive loss; no gain or loss was recognized on transfer. Management said it intends and is able to hold the securities to maturity.
• Loans grew chiefly in commercial real estate, residential mortgages, and lease financing. Commercial real estate loans rose 13% from year-end; the portfolio is concentrated in Hawaii, though mainland lending increased.
• Noninterest income fell 8% in both comparison periods. Bank-owned life insurance income was negative $0.3 million in Q3 and negative $1.6 million year to date, versus positive income in 2021, partly reflecting market-related mark-to-market losses.
• Expenses increased 12% in Q3 and 10% year to date, notably from salaries, technology-related equipment costs, card rewards, and contracted services. Deposit interest costs rose as rates increased; the company had terminated long-term borrowings in November 2021.

Outlook, risks, and contingencies

The filing provides no specific earnings or balance-sheet guidance. Management said rising rates may benefit net interest income because assets are expected to reprice faster and more than liabilities, while also warning that higher deposit costs, changing deposit behavior, and other rate movements could alter results. Its rate simulation estimated that a parallel immediate 100-basis-point increase could raise 12-month net interest income by 6.2%; the estimate is hypothetical and assumption-dependent.

• Management cited inflation, recession risk, geopolitical instability, supply-chain disruption, COVID-19 uncertainty, and possible deterioration in borrower credit quality. Hawaii’s economy and tourism were recovering, but Japanese visitor arrivals remained well below pre-pandemic levels.
• Credit quality remained low-loss overall, but Q3 net charge-offs increased to $2.8 million from $0.6 million. Nonperforming assets were $8.4 million; nonaccrual loans were 0.06% of loans. The allowance for credit losses was $148.2 million, or 1.08% of loans, down from 1.21% at year-end; management attributed the reduction partly to release of qualitative overlays and improved credit quality.
• Interest-rate exposure includes substantial unrealized securities losses and potential effects on asset values, loan demand, prepayments, and deposit funding. AFS securities had $384.3 million of gross unrealized losses; HTM securities’ fair value was $3.96 billion versus $4.41 billion amortized cost.
• Most loans and leases are concentrated in Hawaii (70%); risks include local economic and real-estate conditions, tourism exposure, commercial real estate, and natural disasters. The company also cited LIBOR-transition, cybersecurity, operational, regulatory, and third-party risks.
• A customer lawsuit filed in Hawaii in 2020 remains unresolved. The company cannot reasonably estimate a potential loss and has recorded no liability; management disputes the claims and is defending the case. Management does not expect other pending or threatened proceedings to have a material effect.
• Off-balance-sheet commitments to extend credit were $6.73 billion; standby and commercial letters of credit were $236.8 million and $8.4 million, respectively. Management expects actual funding needs to be lower than contractual totals. No material mortgage-loan repurchases or pending repurchase requests were reported.
• The 2022 repurchase authorization was $75 million, with $65.5 million remaining at September 30. The quarterly dividend was $0.26 per share; the board declared another $0.26 dividend in October. Management said the 2023 Inflation Reduction Act provisions were not expected to materially affect the company.

Investor verification priorities

1. Review the securities portfolio’s unrealized losses, duration/prepayment assumptions, and implications of the large AFS-to-HTM transfer for capital and liquidity.
2. Track deposit pricing, uninsured deposit balances, deposit mix, and actual liquidity usage as interest rates change.
3. Assess loan growth and concentration—especially commercial real estate—and monitor delinquency, charge-offs, nonaccrual loans, and adequacy of the allowance and unfunded-commitment reserve.
4. Determine whether expense growth, particularly technology, compensation, and card rewards, is sustainable and whether it pressures future operating leverage.
5. Monitor the unresolved customer litigation, the local Hawaii economic and tourism outlook, and management’s stated interest-rate and credit-risk assumptions.