Business context and reporting period
First Hawaiian, Inc. (NASDAQ: FHB) filed this Form 10-K for the fiscal year ended December 31, 2021. The company is a bank holding company whose wholly owned subsidiary, First Hawaiian Bank, operates 54 branches in Hawaii, Guam and Saipan and provides consumer, commercial, lending, deposit and wealth-management services. The filing reports annual results; it does not provide a distinct fourth-quarter financial summary.
At year-end, the company reported $25.0 billion in assets, $13.0 billion in gross loans and leases, $21.8 billion in deposits and $2.7 billion in stockholders’ equity.
Financial performance and condition
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net interest income | $530.6 million | $535.7 million | Down 1% |
| Net interest margin | 2.43% | 2.77% | Down 34 basis points |
| Provision for credit losses | Benefit of $39.0 million | Expense of $121.7 million | $160.7 million favorable swing |
| Noninterest income | $184.9 million | $197.4 million | Down 6% |
| Noninterest expense | $405.5 million | $367.7 million | Up 10% |
| Net income | $265.7 million | $185.8 million | Up 43% |
| Diluted earnings per share | $2.05 | $1.43 | Up 43% |
| Operating cash flow | $417.1 million | $209.5 million | Up $207.6 million |
Profit growth was driven chiefly by the credit-loss provision swing as credit conditions improved; it was partly offset by lower net interest income and fee income and higher expenses. Core net income, a non-GAAP measure excluding specified items, was $279.2 million, up 47%. GAAP efficiency ratio worsened to 56.45% from 50.10%.
- Balance sheet: Total assets rose 10% to $25.0 billion. Loans and leases declined 2% to $13.0 billion, principally as PPP loans fell by $584.8 million; residential and commercial real estate lending increased. Investment securities rose 39% to $8.4 billion as excess liquidity was redeployed.
- Credit quality: Allowance for credit losses declined to $157.3 million, or 1.21% of loans, from $208.5 million, or 1.57%. Net charge-offs were $12.5 million (0.10% of average loans), versus $30.9 million (0.23%). Nonaccrual loans were 0.05% of loans. The company retained a COVID-related allowance overlay.
- Funding and debt: Deposits increased 13% to $21.8 billion; noninterest-bearing deposits were $9.4 billion. Uninsured deposits totaled $14.7 billion. The company repaid $200 million of FHLB advances in November, leaving no long-term borrowings; the early repayment incurred $9.0 million in fees. Available borrowing capacity was $1.8 billion at the FHLB and $1.1 billion at the Federal Reserve.
- Liquidity and cash flows: Cash and cash equivalents were $1.26 billion. Investing cash outflow was $2.38 billion, largely reflecting securities purchases; financing cash inflow was $2.18 billion, principally from deposit growth. Management said cash, investments and expected operating cash generation should meet requirements for the next 12 months and beyond.
- Capital and shareholder returns: Company CET1 ratio was 12.24%, total capital ratio 13.49% and Tier 1 leverage ratio 7.24%; the Bank was also classified as well-capitalized. The company paid $134.1 million in dividends and repurchased $75 million of stock in 2021. A further $75 million repurchase authorization was announced for 2022; the board declared a $0.26 quarterly dividend in January 2022.
Material changes versus the prior comparable period
- Net income rebounded from 2020, when pandemic-related credit provisioning was high. The 2021 provision benefit, rather than growth in net interest income, was the principal earnings driver.
- Net interest margin continued to contract, to 2.43% from 2.77%; low asset yields were partly offset by lower deposit costs and a larger securities portfolio.
- Noninterest expense increased $37.8 million, including higher technology and equipment costs, employee costs and card rewards, as well as FHLB prepayment fees and litigation expense. Noninterest income declined $12.5 million, mainly because of lower loan-sale gains and customer swap fees, partly offset by stronger card fees.
- Year-end accumulated other comprehensive income moved from positive $31.6 million to a loss of $121.7 million, primarily reflecting investment-security valuation declines. Gross unrealized securities losses rose to $157.3 million from $10.7 million; management reported no securities credit losses and no intent or expected need to sell before recovery.
- Total stockholders’ equity fell 3% to $2.66 billion despite earnings, reflecting dividends, buybacks and the decline in accumulated other comprehensive income.
Outlook, risks and unusual items
The filing provides no company-specific earnings or revenue guidance. Management described the Hawaii and tourism recovery as uncertain, noted labor shortages, supply-chain disruption and inflation, and said COVID-19 effects could remain material and difficult to estimate. The Federal Reserve’s December 2021 projections implied rate increases in 2022 and later years; these are not company guidance. The company’s static interest-rate simulation estimated a 11.8% increase in 12-month net interest income under an immediate +100-basis-point shift and a 5.7% decrease under a −100-basis-point shift; actual results may differ materially.
- Key exposures include Hawaii’s geographic and tourism concentration, real estate and commercial real estate lending, concentrated dealer relationships, credit deterioration, deposit competition, interest-rate risk and changes to LIBOR benchmarks.
- Operational and regulatory risks include cybersecurity, third-party service providers, technology conversion, consumer-protection and compliance requirements. A new core banking system was expected to be implemented in 2022; the filing warns of potential conversion and service risks.
- COVID-era payment deferrals covered $1.94 billion, or 15% of loans and leases, at year-end. The filing notes that qualifying short-term deferrals were generally not classified as troubled debt restructurings or past due.
- Unusual 2021 items included $9.0 million of FHLB advance prepayment fees, a $6.0 million Visa funding-swap charge, a $2.1 million litigation loss and $1.2 million of severance costs. These items are included in GAAP results; management’s core measures exclude specified adjustments.
- A customer lawsuit filed in 2020 remained unresolved. The company disputes the claims and said it could not reasonably estimate potential loss; no liability was recorded for that action. The filing also reports $204.1 million of unrecognized tax benefits, including matters connected with prior reorganization and tax-refund claims; timing of settlement is unclear.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of December 31, 2021.
Important facts for investors to verify
- Whether the $39.0 million provision benefit and lower allowance remain appropriate as pandemic relief ends and economic conditions, tourism and borrower performance evolve.
- How net interest margin, deposit costs and net interest income respond to higher rates, including the timing and execution of the LIBOR transition.
- The investment portfolio’s duration, unrealized losses and potential effect on accumulated other comprehensive income, capital and liquidity.
- Deposit composition and stability, particularly the $14.7 billion of uninsured deposits, and continued access to collateralized borrowing capacity.
- Progress, costs and execution risks for the core banking system implementation, alongside rising technology and operating expenses.
- Developments in the unresolved customer litigation, tax examinations and $204.1 million unrecognized-tax-benefit balance.
- Actual 2022 buybacks and dividends, and how capital distributions affect regulatory capital and tangible book value.