FHB

Business Context and Reporting Period

Company: First Hawaiian, Inc. (FHB)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2024
Overview: First Hawaiian, Inc. is a bank holding company owning 100% of First Hawaiian Bank. The company operates through three segments: Retail Banking, Commercial Banking, and Treasury and Other. Operations are concentrated in Hawaii, with additional presence in Guam, Saipan, and the U.S. Mainland.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income: Increased 6% year-over-year for Q3 2024, driven by a $7.2 million increase in noninterest income and a $3.2 million decrease in income tax provision. For the nine months, net income decreased 5% due to lower net interest income and higher noninterest expenses.
• Net Interest Income (NII): NII remained relatively flat in Q3 (-0.3%) but declined 4% for the nine months. The decline is attributed to higher deposit funding costs and lower investment securities balances, partially offset by higher loan yields.
• Noninterest Income: Increased 16% in Q3 and 10% for the nine months. Growth was led by Bank-Owned Life Insurance (BOLI) income, credit/debit card fees, and other service charges.
• Noninterest Expense: Increased 6% in Q3 and 5% for the nine months. Increases were driven by salaries, equipment expenses, and a $3.8 million adjustment related to liabilities from prior reorganization transactions.
• Balance Sheet: Total loans decreased 1% from year-end 2023, while total deposits decreased 5%. Short-term borrowings were reduced by 50% to $250 million.

Guidance, Outlook, and Risks

• Capital Position: The company remains "well-capitalized" with a Common Equity Tier 1 (CET1) ratio of 13.03% as of September 30, 2024, well above the 7.0% minimum requirement including the conservation buffer.
• Dividends: A quarterly cash dividend of $0.26 per share was declared in October 2024. A stock repurchase program of up to $40 million was announced in January 2024; no shares were repurchased in the first nine months of 2024.
• Interest Rate Environment: The Federal Reserve cut rates by 50 basis points in September 2024. Management notes that net interest income is sensitive to rate changes, with assets repricing faster than liabilities in rising rate scenarios.
• Key Risks:
  • Credit Risk: Concentration in Hawaii's real estate and tourism sectors. Non-accrual loans remain low at 0.13% of total loans.
  • Maui Wildfires: Outstanding real estate-secured loans in fire zones totaled approximately $98 million. Management is monitoring recovery and insurance coverage but notes significant uncertainty.
  • Market Risk: Exposure to interest rate fluctuations affecting net interest margin and the fair value of the investment securities portfolio (which held $614 million in unrealized losses as of Q3 2024).

Investor Verification Checklist

• Deposit Cost Trends: Verify the sustainability of deposit funding costs, which rose significantly (2.58% in Q3 2024 vs. 2.23% in Q3 2023) and pressured net interest income.
• Maui Exposure Impact: Monitor the specific impact of the August 2023 Maui wildfires on the $98 million loan exposure in fire zones and potential future charge-offs.
• Reorganization Adjustments: Confirm the one-time nature of the $3.8 million expense adjustment related to reorganization transaction liabilities to assess core operating expense trends.
• Investment Portfolio Valuation: Review the $614 million in gross unrealized losses on investment securities and the company's strategy for managing these positions in a changing rate environment.
• Consumer Loan Quality: Scrutinize the consumer loan segment, which accounted for the majority of net charge-offs ($8.0 million for the nine months ended Sept 30, 2024).