First Hawaiian, Inc. — Q3 2021 Form 10-Q
Business context and reporting period: First Hawaiian is a bank holding company whose wholly owned subsidiary, First Hawaiian Bank, provides consumer and commercial banking, wealth management, trust, card and related services, primarily in Hawaii. This unaudited filing covers the quarter and nine months ended September 30, 2021; comparisons are with 2020 unless otherwise stated. Results reflect the continuing COVID-19 recovery and reopening of Hawaii’s economy.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $132.6 million | $134.0 million | $393.2 million | $400.5 million |
| Net interest margin | 2.36% | 2.70% | 2.45% | 2.79% |
| Provision for credit losses | ($4.0) million benefit | $5.1 million expense | ($39.0) million benefit | $101.7 million expense |
| Noninterest income | $50.1 million | $48.9 million | $143.3 million | $143.8 million |
| Noninterest expense | $101.0 million | $91.6 million | $296.7 million | $279.5 million |
| Net income | $64.3 million | $65.1 million | $208.7 million | $124.0 million |
| Diluted EPS | $0.50 | $0.50 | $1.61 | $0.95 |
- Quarterly net income decreased 1%; nine-month net income increased 68%, primarily because the 2021 credit-loss provision was a benefit versus a substantial expense in 2020. The nine-month comparison is therefore strongly affected by credit-loss reserve releases.
- Net interest margin fell 34 basis points in both comparisons. Management cited low rates, lower loan balances and yields, and lower securities yields; lower deposit funding costs and growth in securities balances partly offset these pressures.
- Q3 efficiency ratio was 55.07% versus 50.01%; nine-month ratio was 55.10% versus 51.32%. Expense growth, including compensation, equipment, card rewards and other costs, contributed to the deterioration.
- Noninterest income was nearly flat year to date. Higher card fees and other service charges were offset by lower other income, BOLI income, trust income and deposit service charges.
Balance sheet, cash flow and capital
- At September 30, total assets were $25.55 billion, up from $22.66 billion at year-end 2020. Cash and cash equivalents were $2.40 billion, compared with $1.04 billion; available-for-sale securities were $7.95 billion, compared with $6.07 billion.
- Total loans and leases were $12.83 billion, down 3% from year-end. Commercial and industrial loans declined substantially, including as PPP and dealer-flooring balances ran off; residential mortgage, commercial real estate and construction lending grew.
- Deposits increased 15% to $22.12 billion. Core deposits were $21.2 billion, or 96% of total deposits. Long-term borrowings remained $200 million; the filing also reports $1.7 billion of available FHLB capacity and a $1.2 billion undrawn Federal Reserve line.
- Nine-month cash flow: operating activities provided $296.7 million, investing activities used $1.67 billion, and financing activities provided $2.73 billion. Deposit growth was the principal financing inflow; cash and cash equivalents increased $1.36 billion.
- Regulatory capital remained strong: CET1 was 12.63%, total capital was 13.88%, and the leverage ratio was 7.39%. The company and bank were classified as well-capitalized.
- Stockholders’ equity was $2.71 billion, down 1% from year-end, reflecting $100.9 million in dividends, $53.5 million in share repurchases and $93.1 million of after-tax unrealized securities losses, partly offset by earnings of $208.7 million. The reported book value per share was $21.14.
Material changes and asset quality
- The allowance for credit losses on loans and leases fell to $161.2 million from $208.5 million; coverage declined to 1.26% of loans from 1.57%. Management attributed the reduction to improved expected credit losses as the economy recovered, while retaining a COVID-related overlay.
- Year-to-date net charge-offs were $6.3 million, or 0.06% of average loans on an annualized basis, versus $29.4 million and 0.29% in 2020. Nonaccrual loans were $8.6 million, 0.07% of loans. Loans at least 90 days past due and still accruing totaled $5.8 million.
- Loans with COVID-related payment deferrals totaled $2.11 billion, or 16.4% of loans, at September 30. The filing notes that qualifying short-term COVID modifications were not necessarily reported as troubled debt restructurings or past due.
- Net unrealized losses on available-for-sale securities increased as market interest rates rose. Nine-month other comprehensive loss was $93.1 million, and accumulated other comprehensive income turned to a $61.5 million loss. Management attributed securities losses to interest-rate changes, not credit deterioration; it reported no recognized credit losses on the securities portfolio.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no quantified earnings or financial guidance. Management said Hawaii’s tourism recovery remained uncertain, COVID-19 and variants could continue to affect customers and the economy, and the pandemic’s ultimate adverse impact could not be reliably estimated.
- Management expects higher rates to benefit net interest income because assets are projected to reprice faster and more than liabilities; a lower-rate environment could reduce margin. The filing’s modeled 12-month immediate parallel-rate scenarios estimate net interest income changes of +14.0% for +100 basis points and −5.4% for −100 basis points. These are simulations, not forecasts, and depend on assumptions.
- Hawaii concentration, tourism dependence, real estate exposure, borrower credit quality, deposit outflows, interest-rate movements and LIBOR transition are notable risks. The company said it was preparing to transition relevant contracts to alternatives such as SOFR or Prime.
- A vendor lawsuit led to a recorded $2.1 million expense in 2021. Separately, a customer lawsuit concerning previously extended credit facilities remains unresolved; the company disputes wrongdoing and said it could not reasonably estimate any potential loss, so it recorded no liability. Management stated other pending or threatened proceedings were not expected to have a material aggregate effect.
- The company repurchased $53.5 million of stock in the first nine months under a 2021 program authorizing up to $75 million; $21.5 million remained authorized at September 30. The board declared a further $0.26-per-share quarterly dividend in October.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the year-to-date earnings improvement depends on credit-loss reserve releases, and whether the reduced allowance remains appropriate as COVID-related deferrals resolve.
- Trends in net interest margin, loan yields and balances, deposit costs, and the pace and yield of securities growth.
- The scale and performance of deferred-payment loans and exposures to Hawaii tourism, commercial real estate and dealer-flooring borrowers.
- The potential duration and earnings or capital impact of unrealized securities losses if interest rates rise further or securities must be sold.
- Developments and potential exposure in the customer and vendor litigation, as well as the remaining stock-repurchase authorization and dividend capacity.
- The filing’s non-GAAP “core” measures and segment comparisons; segment results were restated to reflect revised allocation of PPP loans.