First Hawaiian, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. First Hawaiian is a bank holding company whose wholly owned subsidiary, First Hawaiian Bank, provides consumer and commercial banking and related services, principally in Hawaii and also in Guam, Saipan and the U.S. mainland. Unaudited results are compared with the corresponding 2020 periods.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $131.5m | $127.8m | $260.6m | $266.5m |
| Provision for credit losses | $(35.0)m | $55.4m | $(35.0)m | $96.6m |
| Noninterest income | $49.4m | $45.7m | $93.2m | $94.9m |
| Noninterest expense | $99.4m | $91.5m | $195.7m | $187.9m |
| Net income | $86.7m | $20.0m | $144.4m | $58.9m |
| Diluted EPS | $0.67 | $0.15 | $1.11 | $0.45 |
| Net interest margin | 2.46% | 2.58% | 2.50% | 2.84% |
| Efficiency ratio | 54.74% | 52.70% | 55.12% | 51.99% |
The negative provision represents a release of credit-loss reserves. Management attributed it mainly to improved expected credit losses as the economy recovered; it was the primary driver of the increase in reported earnings. Revenue, defined in the segment disclosure as net interest income plus noninterest income, was $180.9m in Q2 2021 versus $173.5m in Q2 2020, and $353.9m for the first half versus $361.4m a year earlier.
Balance sheet, liquidity and capital
- At June 30, 2021, total assets were $24.25bn, up from $22.66bn at year-end 2020. Total deposits increased 8% to $20.84bn; loans and leases declined 1% to $13.10bn.
- Cash and cash equivalents were $1.91bn, compared with $1.04bn at December 31, 2020. Available-for-sale securities totaled $6.95bn, up 15%. Management reported $1.8bn of remaining FHLB borrowing capacity and an undrawn $1.1bn FRB line.
- Long-term borrowings were $200m, essentially unchanged, consisting of FHLB advances maturing in 2023–2024. The bank’s funding remains predominantly deposits.
- Operating cash flow was $248.2m for the first half, versus $108.6m in 2020; investing activities used $888.0m, while financing activities provided $1.51bn. Cash increased by $865.4m. Deposit growth was the main financing inflow.
- The allowance for credit losses was $169.1m, or 1.29% of loans, down from $208.5m and 1.57% at year-end. First-half net charge-offs were $5.7m, compared with $29.5m a year earlier. Nonaccrual loans were $8.9m, and nonperforming assets were 0.07% of loans and leases.
- Common Equity Tier 1 was 12.76%, total capital was 14.01%, and the Tier 1 leverage ratio was 7.68%. The company and bank were classified as well-capitalized. Stockholders’ equity was $2.73bn, down $12.8m since year-end, reflecting dividends, share repurchases and a securities-related unrealized loss, partly offset by earnings.
Changes and management commentary
- Q2 net income rose $66.7m year over year; first-half net income increased $85.5m. The principal factor was the shift from substantial credit-loss provisioning in 2020 to a $35m reserve release in 2021.
- Q2 net interest income rose 3%, but margin fell 12 basis points. First-half net interest income fell 2% and margin declined 34 basis points, as lower loan balances and yields outweighed lower deposit funding costs and growth in securities balances. PPP fees contributed $8.1m of Q2 and $14.0m of first-half net interest income; $23m of PPP fees remained unrecognized at June 30.
- Q2 noninterest income rose 8%, led by card fees and other service charges, while first-half noninterest income declined 2%. Noninterest expense rose 9% in Q2 and 4% for the first half; increases included compensation, technology-related costs and professional services. Q2 expense included $1.2m of nonrecurring severance costs.
- COVID-19 restrictions were easing and management anticipated continued improvement in commercial and consumer activity, but stated that the pandemic’s ultimate impact remained materially uncertain. Hawaii’s tourism recovery, new virus variants and customer financial distress remained risks. At June 30, loans that had received COVID-related payment deferrals totaled $2.38bn, or 18.1% of loans.
- Management said a sustained low-rate environment could pressure margin; its sensitivity analysis estimates that an immediate parallel 100-basis-point rate increase would raise 12-month net interest income 13.4%, while a 100-basis-point decrease would reduce it 5.0%. These are modeled sensitivities, not forecasts. LIBOR transition is also a risk for affected loans, securities and derivatives.
- The company authorized up to $75m of 2021 share repurchases; $43.1m remained authorized at June 30. A quarterly dividend of $0.26 per share was declared in July. No numerical earnings guidance was provided in the filing text.
Risks, contingencies and unusual items
- Business and credit exposure is concentrated in Hawaii, where tourism, real estate and local economic conditions are important drivers. Management retained a COVID-19-related credit-loss overlay despite releasing reserves.
- The filing describes two lawsuits, including a Hawaii customer action and a complaint filed in Washington in July 2021. The company disputes wrongdoing; it could not estimate potential losses and recorded no liability for either matter. Management did not expect other pending or threatened proceedings, in aggregate, to have a material effect.
- Unfunded commitments to extend credit were $6.33bn; standby letters of credit were $180.0m and commercial letters of credit were $3.4m. These are contractual exposures, not funded loans.
- Unrealized securities losses increased from $10.7m at year-end to $59.6m at June 30, primarily due to higher interest rates. The company attributed these losses to rate changes rather than credit deterioration and reported no expected credit losses on the securities portfolio.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $35m reserve release and further credit-quality improvement are sustainable, especially as COVID-related deferrals and borrower relief programs unwind.
- Loan and deposit trends, including the decline in commercial and industrial and consumer loans, growth in real estate lending, deposit mix and concentration in Hawaii.
- Net interest margin and PPP fee recognition, including the timing of the remaining $23m in deferred PPP fees and sensitivity to interest-rate and benchmark transitions.
- Credit exposure within commercial real estate, tourism-sensitive industries, modified loans and the $2.38bn of loans reported as having received deferrals.
- Interest-rate-driven changes in securities fair value, capital and tangible equity, as well as the pace of share repurchases and dividend payments.
- Developments and potential financial exposure in the disclosed legal proceedings and off-balance-sheet commitments.