First Hawaiian, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet figures are as of March 31, 2022, compared with December 31, 2021. First Hawaiian is a bank holding company whose principal subsidiary, First Hawaiian Bank, serves customers primarily in Hawaii, Guam, and Saipan. Results are unaudited.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net interest income | $133.9 million | $129.2 million | +4% |
| Net interest margin | 2.42% | 2.55% | Down 13 basis points |
| Noninterest income | $41.4 million | $43.9 million | Down $2.5 million |
| Noninterest expense | $104.0 million | $96.3 million | Up $7.7 million |
| Net income | $57.7 million | $57.7 million | Approximately flat |
| Diluted EPS | $0.45 | $0.44 | Up $0.01 |
| Efficiency ratio | 59.04% | 55.53% | Higher |
Net interest income benefited mainly from higher average investment-securities balances and lower funding costs, partly offset by lower loan balances and yields. Noninterest income fell principally because of lower bank-owned life insurance (BOLI) income and other income. Expense growth was led by salaries and benefits (+$4.3 million) and card rewards (+$2.0 million). The reported provision for credit losses was a $5.7 million benefit, versus no provision in Q1 2021.
Balance sheet, liquidity, and capital
- Assets: $25.04 billion, broadly unchanged from $24.99 billion at year-end.
- Loans and leases: $12.89 billion, down $70.3 million (1%). Declines in PPP, construction, and consumer loans were partly offset by growth in commercial real estate and residential mortgages.
- Deposits: $22.27 billion, up $454.3 million (2%), driven by demand and savings deposits. Core deposits were $21.5 billion, or 97% of total deposits; uninsured deposits were $15.1 billion.
- Cash and cash equivalents: $1.63 billion, up from $1.26 billion at year-end. The company reported operating cash flow of $66.3 million, investing cash outflow of $116.5 million, and financing cash inflow of $417.9 million for the quarter.
- Borrowing and funding access: Average borrowings were nil in Q1 2022. Available secured borrowing capacity was $1.7 billion from the FHLB and $1.3 billion from the Federal Reserve, subject to pledged collateral. Management said liquidity was high and existing resources were sufficient for expected cash requirements.
- Credit quality: Allowance for credit losses was $150.3 million, or 1.17% of loans, down from $157.3 million and 1.21% at year-end. Annualized net charge-offs were 0.08%, versus 0.14% in Q1 2021. Nonaccrual loans and leases were $8.6 million; nonperforming assets were 0.07% of loans and leases plus other real estate owned.
- Equity and capital: Stockholders’ equity fell $371.8 million to $2.29 billion, largely due to the after-tax unrealized securities loss and dividends. CET1 was 12.27% and the leverage ratio was 7.50%; the company and bank were classified as well-capitalized.
Material changes and unusual items
- Investment-securities fair value declined $365.6 million to $8.06 billion as market interest rates rose. Gross unrealized losses increased to $671.4 million from $157.3 million at year-end; the filing attributes these losses to interest-rate changes, not credit deterioration, and reports no securities credit-loss allowance.
- Other comprehensive loss was $395.8 million, producing a total comprehensive loss of $338.1 million despite net income of $57.7 million. The main driver was the after-tax securities valuation loss of $394.6 million.
- The negative credit-loss provision reflected release of the COVID-19 overlay in the residential portfolio, improving credit quality, and a moderately improved economic outlook.
- Management reported ending consumer COVID-19 modification programs effective April 1, 2022. The filing reports 515 PPP loans totaling $106.2 million at quarter-end, down from $216.4 million at year-end.
- The board had authorized up to $75 million in 2022 share repurchases; none of that authorization had been used as of March 31. A quarterly dividend of $0.26 per share was declared in April.
Outlook, commentary, and risks
Management described Hawaii’s economy as improving: domestic visitor arrivals had returned to pre-pandemic levels, unemployment had fallen, and state COVID-19 restrictions had been removed. It expected local consumption to continue improving. Management also said rising interest rates could benefit net interest income because assets were expected to reprice faster and more than liabilities. Its modeled 12-month net interest income impact at March 31 was +9.8% for an immediate +100-basis-point parallel rate shift and −6.1% for an immediate −100-basis-point shift; these are simulations, not forecasts, and depend on assumptions.
The filing provides no specific full-year earnings or revenue guidance. Key risks include inflation, labor shortages, supply-chain disruption, geopolitical uncertainty, pandemic-related setbacks, interest-rate and securities-value changes, deposit outflows, credit deterioration, and the company’s concentration in Hawaii and real estate-related lending. The company had ceased using U.S. dollar LIBOR in new contracts by December 31, 2021 and continued its transition to alternative rates, including SOFR and BSBY.
A Hawaii customer lawsuit concerning the sale of credit facilities remained unresolved. The company said it could not reasonably estimate a potential loss and had recorded no liability; it disputes the claims and is defending the case. Management did not expect other pending or threatened proceedings, in aggregate, to have a material effect.
Important facts for investors to verify
- Whether rising rates improve net interest income as modeled, and how deposit pricing, deposit retention, and asset repricing evolve.
- The securities portfolio’s unrealized losses, future valuation and capital effects, and management’s ability to hold securities through recovery.
- Loan growth and mix, especially commercial real estate and construction exposure, plus trends in nonaccrual loans, charge-offs, and credit-loss reserves.
- Concentration and liquidity implications of $15.1 billion in uninsured deposits and $6.7 billion in commitments, letters of credit, and related off-balance-sheet exposures.
- Developments in the customer lawsuit, LIBOR transition, and the status and use of the $75 million repurchase authorization.