First Hawaiian, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are primarily with Q1 2020. First Hawaiian is a bank holding company whose wholly owned bank serves customers in Hawaii, Guam, Saipan and, to a lesser extent, the U.S. mainland.
Key financial results
| Metric | Q1 2021 | Q1 2020 or comparison |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $173.0 million | $187.9 million; down 8% |
| Net interest income | $129.2 million | $138.7 million; down 7% |
| Net interest margin | 2.55% | 3.12%; down 57 basis points |
| Provision for credit losses | $0 | $41.2 million |
| Noninterest income | $43.9 million | $49.2 million; down 11% |
| Noninterest expense | $96.3 million | $96.5 million; broadly unchanged |
| Net income; diluted EPS | $57.7 million; $0.44 | $38.9 million; $0.30 |
| Operating cash flow | $154.2 million | $(51.8) million |
Net income increased 48% year over year, mainly because the credit-loss provision was substantially lower than in the pandemic-affected prior-year quarter. Lower loan and investment yields reduced net interest income despite reduced deposit funding costs and growth in average securities balances. The efficiency ratio was 55.53%, versus 51.33%.
Balance sheet, liquidity and capital
- At March 31, 2021, total assets were $23.50 billion, up from $22.66 billion at year-end 2020. Loans and leases were $13.30 billion, nearly unchanged; deposits rose 5% to $20.13 billion.
- Cash and cash equivalents were $1.26 billion, versus $1.04 billion at year-end. The company invested heavily in securities: purchases were $1.18 billion in the quarter, and the available-for-sale portfolio grew to $6.69 billion.
- Financing cash flow was $860.2 million, principally reflecting a $906.0 million net deposit increase. Investing cash outflow was $792.6 million. These cash-flow figures reflect bank balance-sheet activity and should not be read like industrial-company free cash flow.
- Long-term borrowings were $200.0 million, unchanged; the principal consisted of FHLB advances maturing in 2023–2024. Disclosed remaining borrowing capacity was $2.0 billion at the FHLB and $1.2 billion at the Federal Reserve.
- The allowance for credit losses on loans was $200.4 million, or 1.51% of loans, down from $208.5 million and 1.57% at year-end. The reserve for unfunded commitments was $34.1 million, up from $30.6 million. Annualized net charge-offs were 0.14% of average loans, versus 0.19% in Q1 2020.
- Regulatory capital ratios remained above minimums: CET1 was 12.82%, total capital 14.07%, and the leverage ratio 7.90%. The company and bank were classified as well-capitalized.
Material changes and unusual items
- Available-for-sale securities increased $621.1 million from year-end. Rising market rates drove a $75.0 million after-tax unrealized securities loss in other comprehensive income; consequently, comprehensive loss was $17.3 million despite net income of $57.7 million. Stockholders’ equity fell $60.5 million to $2.68 billion.
- The 2020 comparison included a $41.2 million credit-loss provision amid COVID-19 uncertainty. Q1 2021 recorded no provision in the income statement; management attributed the improvement chiefly to lower expected losses in commercial real estate. The loan ACL rollforward included a $3.5 million release, offset by a $3.5 million increase in the unfunded-commitment reserve.
- PPP loans totaled $1.16 billion, or 8.7% of loans, at quarter-end. Total loans grew only slightly as PPP growth was offset by declines in some other lending categories.
- Book value per share decreased to $20.68 from $21.12 at year-end; tangible book value per share was $13.01 versus $13.46. The company declared a $0.26-per-share dividend and repurchased $9.5 million of shares. A $75 million repurchase authorization was announced for 2021; $65.5 million remained at quarter-end.
Outlook, risks and contingencies
- No specific earnings or financial guidance is provided. Management said COVID-19’s ultimate adverse impact could not be reliably estimated and was expected to remain material. It noted uncertainty around Hawaii’s tourism recovery, air travel, employment and the broader local economy.
- Hawaii’s seasonally adjusted unemployment rate was 9.0% in March 2021, versus 2.6% a year earlier; visitor arrivals for Q1 were down 60.1% year over year. Management identified tourism, lodging, restaurants and other in-person businesses as areas of concern.
- At March 31, 22,856 loans and leases totaling $2.68 billion had received COVID-related payment deferrals, equal to 20.1% of the portfolio. Management retained a COVID-related allowance overlay and said it would continue monitoring borrower performance and economic conditions.
- Management expects higher interest rates to benefit net interest income because assets are projected to reprice faster than liabilities; lower rates are expected to pressure it. A modeled immediate 100-basis-point rise increased projected 12-month net interest income by 12.4%, while a 100-basis-point decline reduced it by 4.7%. These are simulations, not forecasts, and depend on assumptions.
- The company cited geographic and real-estate concentration, credit deterioration, interest-rate and securities valuation risk, deposit stability, the LIBOR transition, cybersecurity and operational risks. Most loans are concentrated in Hawaii; the filing notes continued uncertainty about local tourism recovery.
- A customer lawsuit filed in Hawaii in November 2020 concerns the sale of credit facilities. The company disputes the allegations, is defending the case, and cannot reasonably estimate a potential loss. Management said other pending or threatened proceedings were not expected to have a material aggregate effect.
- 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 $2.68 billion of deferred loans resume normal payments and how credit quality, charge-offs and allowance needs evolve as relief programs end.
- How quickly Hawaii tourism and employment recover, and the effect on borrowers in tourism-related and commercial real-estate sectors.
- Whether net interest margin stabilizes after falling to 2.55%, including the effects of low-rate PPP loans, asset repricing and deposit costs.
- How rising rates affect the $6.69 billion securities portfolio and its unrealized losses, capital and tangible book value.
- Progress and spending under the $75 million share repurchase authorization, dividend sustainability, and any developments in the customer lawsuit or LIBOR transition.