First Hawaiian(FHB) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Unaudited) This section presents the unaudited consolidated financial statements of First Hawaiian, Inc. and its subsidiary for the three months ended March 31, 2022 and 2021, including statements of income, comprehensive loss, balance sheets, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, investment securities, loans, credit losses, and other financial instruments Consolidated Statements of Income For the three months ended March 31, 2022, First Hawaiian, Inc. reported a net income of $57.7 million, a slight increase from $57.7 million in the prior year. Net interest income increased, while noninterest income decreased and noninterest expense rose | Metric (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :-------------------- | :---------------------------- | :---------------------------- | | Net Income | $57,719 | $57,693 | | Basic EPS | $0.45 | $0.44 | | Diluted EPS | $0.45 | $0.44 | | Total Interest Income | $136,621 | $134,576 | | Total Interest Expense| $2,749 | $5,418 | | Net Interest Income | $133,872 | $129,158 | | Provision for Credit Losses | $(5,747) | $0 | | Total Noninterest Income | $41,380 | $43,868 | | Total Noninterest Expense | $104,042 | $96,306 | Consolidated Statements of Comprehensive Loss The company reported a total comprehensive loss of $(338.1) million for the three months ended March 31, 2022, significantly higher than the $(17.3) million loss in the prior year, primarily driven by a substantial net change in investment securities | Metric (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :-------------------- | :---------------------------- | :---------------------------- | | Net Income | $57,719 | $57,693 | | Net Change in Investment Securities | $(394,551) | $(75,039) | | Net Change in Cash Flow Derivative Hedges | $(1,258) | $0 | | Total Comprehensive Loss | $(338,090) | $(17,346) | Consolidated Balance Sheets As of March 31, 2022, total assets increased slightly to $25.04 billion from $24.99 billion at December 31, 2021. Total liabilities also increased, while total stockholders' equity decreased significantly due to accumulated other comprehensive loss | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | Total Assets | $25,042,720 | $24,992,410 | | Total Liabilities | $22,757,571 | $22,335,498 | | Total Stockholders' Equity | $2,285,149 | $2,656,912 | | Investment Securities, at fair value | $8,062,384 | $8,428,032 | | Loans and Leases | $12,891,743 | $12,961,999 | | Total Deposits | $22,270,430 | $21,816,146 | Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $2.66 billion at December 31, 2021, to $2.29 billion at March 31, 2022, primarily due to a significant increase in accumulated other comprehensive loss, net of tax, which offset net income and was further impacted by cash dividends | Metric (in thousands) | Balance as of Dec 31, 2021 | 3 Months Ended March 31, 2022 | | :-------------------- | :------------------------- | :---------------------------- | | Total Stockholders' Equity | $2,656,912 | $2,285,149 | | Net Income | - | $57,719 | | Cash Dividends Declared | - | $(33,151) | | Other Comprehensive Loss, net of tax | $(121,693) (Dec 31, 2021) | $(395,809) (3 Months Ended) | Consolidated Statements of Cash Flows Net cash provided by operating activities decreased significantly to $66.3 million for the three months ended March 31, 2022, from $154.2 million in the prior year. Investing activities used less cash, while financing activities provided less cash, resulting in a higher net increase in cash and cash equivalents | Metric (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :-------------------- | :---------------------------- | :---------------------------- | | Net Cash Provided by Operating Activities | $66,262 | $154,200 | | Net Cash Used in Investing Activities | $(116,507) | $(792,564) | | Net Cash Provided by Financing Activities | $417,936 | $860,230 | | Net Increase in Cash and Cash Equivalents | $367,691 | $221,866 | | Cash and Cash Equivalents at End of Period | $1,626,160 | $1,262,810 | Notes to Consolidated Financial Statements (Unaudited) The notes provide detailed disclosures on the company's accounting policies, financial instruments, credit quality, regulatory capital, and segment performance, highlighting the adoption of new accounting standards, changes in investment securities, and the impact of economic conditions on credit losses and revenue recognition Note 1. Organization and Basis of Presentation First Hawaiian, Inc. (FHI) is a bank holding company that wholly owns First Hawaiian Bank (FHB), offering a comprehensive suite of banking services. The interim financial statements are prepared in accordance with GAAP and Form 10-Q instructions, with management making necessary estimates. The company adopted ASU No. 2021-05 on January 1, 2022, with no material impact, and is evaluating ASU No. 2022-01 and ASU No. 2022-02 for future periods - FHI is a bank holding company, owning 100% of First Hawaiian Bank (FHB), which provides a full range of banking services to consumer and commercial customers[25] - The company adopted ASU No. 2021-05 (Leases) on January 1, 2022, which did not have a material impact on its consolidated financial statements[30] - FHI is currently evaluating the impact of ASU No. 2022-01 (Derivatives and Hedging – Portfolio Layer Method) and ASU No. 2022-02 (Financial Instruments – Credit Losses) for future reporting periods, effective after December 15, 2022[32][35][36] Note 2. Investment Securities As of March 31, 2022, all investment securities were classified as available-for-sale, with a fair value of $8.06 billion, down from $8.43 billion at December 31, 2021. The decrease was primarily due to increased unrealized losses, driven by changes in interest rates rather than credit quality. The portfolio mainly consists of U.S. Treasury, government agency, and mortgage-backed securities | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | Total Available-for-Sale Securities (Fair Value) | $8,062,384 | $8,428,032 | | Total Amortized Cost | $8,733,170 | $8,560,733 | | Total Unrealized Gains | $568 | $24,595 | | Total Unrealized Losses | $(671,354) | $(157,296) | - The unrealized losses on investment securities were primarily due to changes in interest rates, not credit quality, and the company does not expect any credit losses[48][52] | Interest Income Source (in millions) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :----------------------------------- | :---------------------------- | :---------------------------- | | Taxable Investment Securities | $29.2 | $22.1 | | Non-Taxable Investment Securities | $2.9 | $1.0 | Note 3. Loans and Leases Total loans and leases decreased slightly to $12.89 billion as of March 31, 2022, from $12.96 billion at December 31, 2021. This was mainly due to decreases in commercial and industrial loans (including PPP loans) and construction loans, partially offset by increases in commercial real estate and residential mortgage loans. A significant portion of loans are pledged as collateral for borrowing capacity | Loan Category (in thousands) | March 31, 2022 | December 31, 2021 | | :--------------------------- | :------------- | :---------------- | | Commercial and Industrial | $1,923,534 | $2,087,099 | | Commercial Real Estate | $3,759,980 | $3,639,623 | | Construction | $708,300 | $813,969 | | Residential Mortgage | $4,153,824 | $4,083,367 | | Home Equity Line | $918,101 | $876,608 | | Consumer | $1,204,834 | $1,229,939 | | Lease Financing | $223,170 | $231,394 | | Total Loans and Leases | $12,891,743 | $12,961,999 | - Residential real estate loans totaling $2.3 billion were pledged to FHLB, and various other loans totaling $1.7 billion were pledged to FRB as of March 31, 2022[57] - The loan and lease portfolio is primarily located in Hawaii, with smaller exposures in the U.S. Mainland, Guam, and Saipan, making it susceptible to regional economic conditions[58] Note 4. Allowance for Credit Losses The Allowance for Credit Losses (ACL) for loans and leases decreased to $150.3 million as of March 31, 2022, from $157.3 million at December 31, 2021, primarily due to a negative provision for credit losses reflecting improved credit quality and economic outlook. The reserve for unfunded commitments also decreased. The company uses internal grading and FICO scores to monitor credit quality and details changes in TDRs and past-due loans | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | ACL for Loans and Leases | $150,280 | $157,262 | | Reserve for Unfunded Commitments | $28,958 | $30,322 | | Net Charge-offs | $(4,858) | $(7,668) | | Recoveries | $2,259 | $3,080 | | Increase (decrease) in Provision | $(4,383) | $(3,500) | - The decrease in ACL was driven by a negative provision for credit losses of $(4.4) million for the three months ended March 31, 2022, reflecting improved credit quality and economic outlook[61] | Past Due Status (in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | >= 90 Days Past Due | Total Past Due | | :----------------------------- | :------------------ | :------------------ | :------------------ | :------------- | | March 31, 2022 | $22,588 | $6,830 | $11,467 | $40,885 | | December 31, 2021 | $23,090 | $6,101 | $12,416 | $41,607 | | TDRs (in thousands) | Number of Contracts (2022) | Recorded Investment (2022) | Related ACL (2022) | Number of Contracts (2021) | Recorded Investment (2021) | Related ACL (2021) | | :------------------ | :------------------------- | :------------------------- | :----------------- | :------------------------- | :------------------------- | :----------------- | | Commercial & Industrial | 0 | $0 | $0 | 17 | $2,945 | $1,648 | | Construction | 0 | $0 | $0 | 2 | $716 | $342 | | Residential Mortgage | 0 | $0 | $0 | 10 | $4,916 | $374 | | Consumer | 144 | $1,759 | $202 | 1,690 | $15,763 | $11,832 | | Total | 144 | $1,759 | $202 | 1,719 | $24,340 | $14,196 | Note 5. Mortgage Servicing Rights Mortgage Servicing Rights (MSRs) net carrying value decreased to $7.65 million at March 31, 2022, from $8.30 million at December 31, 2021, primarily due to amortization exceeding originations. Servicing fees also decreased year-over-year. No impairment of MSRs was recorded | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | Net Carrying Value | $7,650 | $8,302 | | Gross Carrying Amount | $69,187 | $69,103 | | Accumulated Amortization | $61,537 | $60,801 | | Metric (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :-------------------- | :---------------------------- | :---------------------------- | | Servicing Fees | $1.0 million | $1.3 million | | Amortization of MSRs | $0.7 million | $0.5 million | - No impairment of MSRs was recorded for the three months ended March 31, 2022 and 2021[103] Note 6. Transfers of Financial Assets The company pledges financial assets as collateral for public deposits, borrowing arrangements (FHLB, FRB), ACH transactions, and interest rate swaps. Total carrying amounts of pledged assets decreased to $5.91 billion at March 31, 2022, from $6.18 billion at December 31, 2021. The company maintains significant borrowing capacity with FHLB and FRB | Pledged Asset Category (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------- | :---------------- | | Public Deposits | $1,783,882 | $1,913,369 | | Federal Home Loan Bank | $2,269,584 | $2,380,042 | | Federal Reserve Bank | $1,725,291 | $1,724,279 | | ACH Transactions | $112,800 | $115,038 | | Interest Rate Swaps | $20,889 | $48,430 | | Total | $5,912,446 | $6,181,158 | - As of March 31, 2022, the company had borrowing capacity of $1.7 billion from the FHLB and an undrawn line of credit of $1.3 billion from the FRB[109] Note 7. Deposits Total deposits increased to $22.27 billion at March 31, 2022, from $21.82 billion at December 31, 2021, driven by growth in interest-bearing and noninterest-bearing deposits in the U.S. Time certificates of deposit in denominations of $250,000 or more decreased | Deposit Category (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------ | :------------- | :---------------- | | U.S. Interest-bearing | $11,642,353 | $11,553,298 | | U.S. Noninterest-bearing | $8,855,088 | $8,498,187 | | Foreign Interest-bearing | $862,468 | $868,985 | | Foreign Noninterest-bearing | $910,521 | $895,676 | | Total Deposits | $22,270,430 | $21,816,146 | | Time Certificates of Deposit (in thousands) | Under $250,000 | $250,000 or More | Total | | :------------------------------------------ | :------------- | :--------------- | :---- | | Three months or less | $228,660 | $155,546 | $384,206 | | Over three through six months | $152,926 | $119,732 | $272,658 | | Over six through twelve months | $360,870 | $409,218 | $770,088 | | One to two years | $80,002 | $20,850 | $100,852 | | Two to three years | $50,970 | $10,126 | $61,096 | | Three to four years | $41,724 | $19,291 | $61,015 | | Four to five years | $42,545 | $9,206 | $51,751 | | Thereafter | $172 | $0 | $172 | | Total | $957,869 | $743,969 | $1,701,838 | Note 8. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss significantly increased to $(517.5) million at March 31, 2022, from $(121.7) million at December 31, 2021. This was primarily due to substantial unrealized net losses on investment securities and cash flow derivative hedges arising during the period | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | Accumulated Other Comprehensive Loss, Net of Tax | $(517,502) | $(121,693) |\ | Unrealized Net Losses on Investment Securities (period change) | $(394,551) | $(75,039) |\ | Unrealized Net Losses on Cash Flow Derivative Hedges (period change) | $(1,258) | $0 | Note 9. Regulatory Capital Requirements As of March 31, 2022, the company and its bank remained 'well-capitalized,' exceeding all minimum regulatory capital requirements, including the capital conservation buffer. CET1 capital ratio increased slightly to 12.27% from 12.24% at December 31, 2021, primarily due to earnings | Capital Ratio | March 31, 2022 | December 31, 2021 | Minimum Capital Ratio | Well Capitalized Ratio | | :-------------- | :------------- | :---------------- | :-------------------- | :--------------------- | | Common Equity Tier 1 | 12.27% | 12.24% | 4.50% | 6.50% | | Tier 1 Capital | 12.27% | 12.24% | 6.00% | 8.00% | | Total Capital | 13.48% | 13.49% | 8.00% | 10.00% | | Tier 1 Leverage | 7.50% | 7.24% | 4.00% | 5.00% | - The company and the Bank were classified as 'well-capitalized' as of March 31, 2022, meeting all regulatory capital requirements, including the 2.5% capital conservation buffer[120] Note 10. Derivative Financial Instruments The company uses derivatives primarily to manage interest rate risk and for customer accommodation. As of March 31, 2022, notional amounts for hedging instruments increased, while those for non-hedging instruments remained high. Fair value hedges generated net losses, and cash flow hedges resulted in a $1.7 million loss in OCI. The Visa derivative liability increased, and the company manages counterparty credit risk through collateral agreements | Derivative Type (in thousands) | Notional Amount (Mar 31, 2022) | Fair Value Asset (Mar 31, 2022) | Fair Value Liability (Mar 31, 2022) | | :----------------------------- | :----------------------------- | :------------------------------ | :---------------------------------- | | Interest Rate Swaps (Hedging) | $267,500 | $301 | $(1,716) | | Interest Rate Swaps (Non-Hedging) | $2,908,144 | $16,107 | $(11,697) | | Visa Derivative | $100,887 | $0 | $(5,794) | | Foreign Exchange Contracts | $1,005 | $6 | $0 | | Fair Value Hedges (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :------------------------------- | :---------------------------- | :---------------------------- | | Gains (losses) on interest rate swap | $1,512 | $193 | | Gains (losses) on hedged item | $(1,617) | $(249) | - Cash flow hedges resulted in a $1.7 million loss recognized in other comprehensive income (loss) for the three months ended March 31, 2022[135] - The Visa derivative liability, classified as Level 3, increased to $5.8 million at March 31, 2022, from $5.5 million at December 31, 2021, due to changes in the Class B conversion rate[139][182] Note 11. Commitments and Contingent Liabilities The company faces various legal proceedings, including a lawsuit related to credit facilities, but management does not expect a material adverse effect. Off-balance sheet risks include commitments to extend credit ($6.55 billion) and standby/commercial letters of credit ($189.57 million) as of March 31, 2022, which represent potential future credit risk - A lawsuit was filed in Hawaii Circuit Court on November 2, 2020, against the Bank for interference with contract and business opportunity, and unfair competition. The outcome is uncertain, and no liability has been recognized[143] | Financial Instrument (in thousands) | March 31, 2022 | December 31, 2021 | | :---------------------------------- | :------------- | :---------------- | | Commitments to Extend Credit | $6,546,389 | $6,490,301 | | Standby Letters of Credit | $182,423 | $182,447 | | Commercial Letters of Credit | $7,149 | $3,307 | - The company sells residential mortgage loans in the secondary market with potential repurchase obligations under certain conditions, but management does not anticipate material losses[151] Note 12. Revenue from Contracts with Customers The company recognizes revenue from contracts with customers by following a five-step model, primarily for services like deposit account charges, credit/debit card fees, trust and investment services, and other fees. Most revenues under Topic 606 are recognized at a point in time. Total revenue for Q1 2022 was $175.25 million, with net interest income being the largest component - Revenue recognition follows a five-step model under Topic 606, with most revenues recognized at a point in time[154][155][159] | Revenue Category (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :------------------------------ | :---------------------------- | :---------------------------- | | Net Interest Income | $133,872 | $129,158 | | Service Charges on Deposit Accounts | $7,501 | $6,718 | | Credit and Debit Card Fees | $14,242 | $13,953 | | Other Service Charges and Fees | $7,713 | $6,391 | | Trust and Investment Services Income | $8,883 | $8,492 | | Total Revenue | $175,252 | $173,026 | - Contract liabilities, primarily from vendor signing bonuses, decreased by approximately $0.3 million in Q1 2022 due to the passage of time[165] Note 13. Earnings per Share Basic and diluted earnings per share for the three months ended March 31, 2022, were $0.45, a slight increase from $0.44 in the prior year, reflecting stable net income with a decrease in weighted-average outstanding shares | Metric | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :----- | :---------------------------- | :---------------------------- | | Net Income | $57,719 | $57,693 | | Basic Weighted-Average Shares Outstanding | 127,556,242 | 129,933,104 | | Diluted Weighted-Average Shares Outstanding | 128,121,126 | 130,589,878 | | Basic EPS | $0.45 | $0.44 | | Diluted EPS | $0.45 | $0.44 | Note 14. Noninterest Income and Noninterest Expense This section details the components of net periodic benefit cost for the company's pension and postretirement benefit plans, which totaled $1.85 million for pension and $0.26 million for other benefits in Q1 2022. It also reports operating lease income and variable lease income | Benefit Plan (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :-------------------------- | :---------------------------- | :---------------------------- | | Total Net Periodic Pension Benefit Cost | $1,846 | $2,185 | | Total Net Periodic Other Benefits Cost | $258 | $395 | - Operating lease income was $1.5 million and variable lease income was $1.6 million for the three months ended March 31, 2022[171] Note 15. Fair Value The company measures fair value using a three-level hierarchy (Level 1: quoted prices, Level 2: observable inputs, Level 3: unobservable inputs). Available-for-sale securities and most derivatives are classified as Level 2. The Visa derivative is a Level 3 liability due to significant unobservable inputs. There were no transfers between fair value hierarchy levels during the period - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs)[174] - All available-for-sale securities are classified as Level 2, and most derivatives are classified as Level 2[180][181] - The Visa derivative liability of $5.8 million (March 31, 2022) and $5.5 million (December 31, 2021) is classified as Level 3 due to significant unobservable inputs like potential future changes in conversion rate, expected term, and growth rate of Visa Class A common shares[182][187] - There were no transfers between fair value hierarchy levels for the three months ended March 31, 2022 and 2021[189] Note 16. Reportable Operating Segments The company operates through three segments: Retail Banking, Commercial Banking, and Treasury and Other. Segment performance is evaluated based on discrete financial information, including allocations of income, expense, and capital. PPP loan balances were reclassified from Retail to Commercial Banking in Q2 2021 for better alignment - The company's three business segments are Retail Banking, Commercial Banking, and Treasury and Other[198] - PPP loan balances were reclassified from the Retail Banking segment to the Commercial Banking segment in Q2 2021 to align with direct management, impacting net interest income, provision for credit losses, noninterest expense, and net income[204] | Segment (in thousands) | Net Income (Loss) 3 Months Ended March 31, 2022 | Net Income (Loss) 3 Months Ended March 31, 2021 | | :--------------------- | :---------------------------------------------- | :---------------------------------------------- | | Retail Banking | $36,834 | $42,484 | | Commercial Banking | $22,527 | $25,515 | | Treasury and Other | $(1,642) | $(10,306) | | Total | $57,719 | $57,693 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Note Regarding Forward-Looking Statements This section warns readers that the report contains forward-looking statements based on current expectations and estimates, which are subject to various risks and uncertainties. Actual results may differ materially due to factors such as economic conditions, interest rate fluctuations, credit quality, regulatory changes, and the ongoing impact of the COVID-19 pandemic - Forward-looking statements are based on current expectations, estimates, and projections, and are subject to inherent uncertainties and risks[214] - Key factors that could cause actual results to differ include financial market conditions, economic conditions in Hawaii, Guam, and Saipan, interest rate fluctuations, credit quality deterioration, regulatory changes, and the impact of the COVID-19 pandemic[215] Company Overview First Hawaiian, Inc. (FHI) is a bank holding company that owns First Hawaiian Bank (FHB), established in 1858. FHB operates through three segments: Retail Banking, Commercial Banking, and Treasury and Other - FHI is a bank holding company, owning 100% of First Hawaiian Bank (FHB), which was founded in 1858[218] - FHB operates through three segments: Retail Banking, Commercial Banking, and Treasury and Other[218] Basis of Presentation The unaudited interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, reflecting normal recurring adjustments. They should be read in conjunction with the company's 2021 Annual Report on Form 10-K - Unaudited interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[221] - Statements include normal recurring adjustments and should be read with the 2021 Annual Report on Form 10-K[221][222] Recent Developments Regarding Hawaii and the Global Economy Hawaii's economy shows improvement with declining COVID-19 cases and lifted restrictions, leading to increased domestic visitor arrivals and home sales. However, economic uncertainty persists due to supply chain issues, labor shortages, rising inflation, and geopolitical risks. The company expects continued improvement in local consumption but remains cautious about potential market destabilization - Hawaii's economy is improving, with COVID-19 restrictions lifted and domestic visitor arrivals at pre-pandemic levels[223][228] - The statewide unemployment rate in Hawaii decreased to 4.1% in March 2022 from 9.0% in March 2021[225] - Home sales volume on Oahu increased for condominiums (16.8%) but slightly decreased for single-family homes (2.6%) in Q1 2022 YoY, while median prices rose significantly (20.2% for single-family, 12.1% for condominiums)[229] - Economic uncertainty remains high due to supply chain and labor shortages, rising inflation, market volatility, and geopolitical risks[224] Overview The global economy faces unprecedented challenges from the COVID-19 pandemic, with Hawaii experiencing a peak in cases in early 2022 but subsequently lifting all state-sanctioned restrictions. Economic uncertainty persists due to supply chain issues, labor shortages, inflation, and geopolitical risks - Hawaii experienced a peak of COVID-19 cases in early January 2022 but lifted all state-sanctioned restrictions by the end of March 2022[223] - Economic uncertainty remains high due to supply chain and labor shortage concerns, rising inflationary pressures, market volatility, rising oil prices, and geopolitical risks from the Russia-Ukraine conflict[224] Hawaii Economy Hawaii's economy continues to improve, with the unemployment rate dropping to 4.1% in March 2022. Domestic visitor arrivals have reached pre-pandemic levels, and home sales on Oahu show increasing median prices despite a slight decrease in single-family home volume. Labor shortages, however, continue to constrain business activity - Hawaii's seasonally adjusted unemployment rate was 4.1% in March 2022, down from 9.0% in March 2021[225] - Domestic visitor arrivals are at approximately 108% of pre-pandemic levels (Q1 2019), with a gradual increase in Japanese visitors expected[228] | Oahu Home Sales (Q1 2022 vs Q1 2021) | Volume Change | Median Price Change | | :----------------------------------- | :------------ | :------------------ | | Single-Family Homes | -2.6% | +20.2% | | Condominiums | +16.8% | +12.1% | - State general excise and use tax revenues increased by 28.1% for the three months ended March 31, 2022, compared to the same period in 2021[229] Ongoing Impact of the COVID-19 Pandemic The company has updated its COVID-19 policies, removing mask mandates and social distancing, and ended consumer modification programs. Despite economic improvements, the lingering uncertainty from the pandemic, coupled with inflation and labor shortages, could still destabilize financial markets and impact borrower creditworthiness - The company removed mask mandates and social distancing requirements in its facilities as of March 26, 2022[230] - Consumer COVID-19 modification programs formally ended on April 1, 2022, with many customers resuming normal payments[231] - Net interest income, before the provision for credit losses, increased by $4.7 million to $133.9 million for Q1 2022 compared to Q1 2021[231] Effect of Inflation and Changing Prices Accelerated inflation, driven by supply chain disruptions and geopolitical events, is increasing operating costs. However, rising interest rates are expected to benefit net interest income as assets reprice faster than liabilities. The company maintains a 'well-capitalized' status and high liquidity levels to navigate market volatility - Inflation is accelerating due to global supply chain disruptions and rising commodity prices from the Russia-Ukraine conflict, increasing operating costs[233] - Rising interest rates are expected to increase net interest margins and benefit net interest income, as assets are projected to reprice faster and to a greater degree than liabilities[235] - As of March 31, 2022, the company was 'well-capitalized' with a Common Equity Tier 1 capital ratio of 12.27%, exceeding the minimum requirement of 4.50%, and maintains high liquidity levels[237] Selected Financial Data This section provides a summary of key financial highlights and performance ratios for the three months ended March 31, 2022 and 2021, including income statement, balance sheet, asset quality, and capital data. It also includes a reconciliation of non-GAAP financial measures | Metric (in thousands, except per share) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :-------------------------------------- | :---------------------------- | :---------------------------- | | Net Income | $57,719 | $57,693 | | Basic EPS | $0.45 | $0.44 | | Diluted EPS | $0.45 | $0.44 | | Net Interest Margin | 2.42% | 2.55% | | Efficiency Ratio | 59.04% | 55.53% | | Return on Average Total Assets | 0.93% | 1.02% | | Return on Average Total Stockholders' Equity | 9.19% | 8.58% | | Total Assets | $25,042,720 | $24,992,410 | | Total Deposits | $22,270,430 | $21,816,146 | | Total Stockholders' Equity | $2,285,149 | $2,656,912 | | Common Equity Tier 1 Capital Ratio | 12.27% | 12.24% | - Non-GAAP measures like Return on Average Tangible Assets (0.97% in 2022 vs 1.07% in 2021) and Return on Average Tangible Stockholders' Equity (15.08% in 2022 vs 13.51% in 2021) are provided for evaluating financial performance and capital adequacy[244][248] Financial Highlights Net income remained flat at $57.7 million for Q1 2022, with basic and diluted EPS increasing by $0.01 to $0.45. This was influenced by a negative provision for credit losses, increased net interest income, but offset by higher noninterest expense and lower noninterest income. Asset quality improved, and the company maintained strong capital and liquidity positions - Net income was $57.7 million for Q1 2022, approximately flat compared to Q1 2021, with basic and diluted EPS increasing by $0.01 to $0.45[250] - Net interest income increased by $4.7 million (4%) to $133.9 million, while noninterest income decreased by $2.5 million (6%) and noninterest expense increased by $7.7 million (8%)[250][253][255][256] - A negative provision for credit losses of $5.7 million was recorded in Q1 2022, compared to nil in Q1 2021, due to improved credit quality and economic outlook[250][254] - Total loans and leases decreased by $70.3 million (1%) to $12.9 billion, primarily due to a decrease in PPP loans and construction loans, partially offset by increases in commercial real estate and residential mortgage loans[259] - Total stockholders' equity decreased by $371.8 million (14%) to $2.3 billion, mainly due to a net unrealized loss in investment securities of $394.6 million, net of tax[264] Analysis of Results of Operations The analysis of operations reveals a 4% increase in net interest income to $134.8 million (taxable-equivalent basis) for Q1 2022, despite a 13 basis points decrease in net interest margin. This was driven by higher investment securities balances and lower funding costs, partially offset by lower loan balances and yields. A negative provision for credit losses was recorded, while noninterest income decreased and noninterest expense increased Net Interest Income Net interest income, on a fully taxable-equivalent basis, increased by $5.2 million (4%) to $134.8 million for Q1 2022, despite a 13 basis points decrease in net interest margin to 2.42%. This growth was primarily due to higher average balances in investment securities and lower borrowing/deposit funding costs, partially offset by lower average loan balances and yields. PPP loan fees contributed $3.2 million to net interest income in Q1 2022 - Net interest income (taxable-equivalent basis) increased by $5.2 million (4%) to $134.8 million for Q1 2022[270] - Net interest margin decreased by 13 basis points to 2.42% for Q1 2022[270] - The increase in net interest income was primarily due to higher average balances in investment securities ($8.4 billion, +35% YoY) and lower borrowing/deposit funding costs, partially offset by lower average loan balances ($12.8 billion, -3% YoY) and yields[270][271][272] - PPP loan fees contributed $3.2 million to net interest income in Q1 2022, down from $5.9 million in Q1 2021[270] - The prime rate increased by 25 basis points to 3.50% in March 2022, and the Federal Reserve expects further increases in the federal funds rate[274] Provision for Credit Losses A negative provision for credit losses of $5.7 million was recorded for Q1 2022, compared to nil in Q1 2021. This was driven by the release of the COVID-19 overlay in the residential portfolio, improved credit quality, and a moderately better economic outlook. Net charge-offs decreased to $2.6 million, and the ACL decreased to $150.3 million (1.17% of total loans and leases) - A negative provision for credit losses of $5.7 million was recorded for Q1 2022, compared to nil in Q1 2021[275] - This decrease was primarily due to the release of the COVID-19 overlay in the residential portfolio, continued improvement in credit quality, and a moderate improvement in the economic outlook[275] - Net charge-offs of loans and leases were $2.6 million (0.08% annualized) for Q1 2022, down from $4.6 million (0.14% annualized) in Q1 2021[275] - The ACL was $150.3 million (1.17% of total loans and leases) as of March 31, 2022, a decrease from $157.3 million (1.21%) at December 31, 2021[275] Noninterest Income Total noninterest income decreased by $2.5 million (6%) to $41.4 million for Q1 2022. This was mainly due to a $2.8 million decrease in Bank-owned life insurance (BOLI) income and a $2.0 million decrease in other noninterest income, partially offset by increases in service charges on deposit accounts, other service charges and fees, and trust and investment services income | Noninterest Income (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | Dollar Change | Percent Change | | :-------------------------------- | :---------------------------- | :---------------------------- | :------------ | :------------- | | Service Charges on Deposit Accounts | $7,501 | $6,718 | $783 | 12% | | Credit and Debit Card Fees | $14,850 | $14,551 | $299 | 2% | | Other Service Charges and Fees | $9,654 | $8,846 | $808 | 9% | | Trust and Investment Services Income | $8,883 | $8,492 | $391 | 5% | | Bank-Owned Life Insurance | $(417) | $2,389 | $(2,806) | n/m | | Other | $909 | $2,872 | $(1,963) | (68)% | | Total Noninterest Income | $41,380 | $43,868 | $(2,488) | (6)% | - The decrease in BOLI income was due to market volatility leading to mark-to-market losses[281] - Other noninterest income decreased primarily due to increased net losses on derivative contracts, decreased gains on residential loan sales, and lower net mortgage servicing rights income[282] Noninterest Expense Total noninterest expense increased by $7.7 million (8%) to $104.0 million for Q1 2022. This was primarily driven by a $4.3 million increase in salaries and employee benefits, a $2.0 million increase in card rewards program expense, and increases in equipment, advertising, and occupancy expenses | Noninterest Expense (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | Dollar Change | Percentage Change | | :--------------------------------- | :---------------------------- | :---------------------------- | :------------ | :---------------- | | Salaries and Employee Benefits | $48,226 | $43,936 | $4,290 | 10% | | Contracted Services and Professional Fees | $17,147 | $17,188 | $(41) | 0% | | Occupancy | $7,410 | $7,170 | $240 | 3% | | Equipment | $5,977 | $5,491 | $486 | 9% | | Regulatory Assessment and Fees | $2,224 | $2,034 | $190 | 9% | | Advertising and Marketing | $2,028 | $1,591 | $437 | 27% | | Card Rewards Program | $6,883 | $4,835 | $2,048 | 42% | | Other | $14,147 | $14,061 | $86 | 1% | | Total Noninterest Expense | $104,042 | $96,306 | $7,736 | 8% | - The increase in salaries and employee benefits was primarily due to a $2.5 million decrease in deferred loan origination costs, a $2.0 million increase in incentive compensation, and a $1.3 million increase in base salaries[284] - Card rewards program expense increased by $2.0 million (42%) due to higher redemptions[289] Provision for Income Taxes The provision for income taxes increased slightly to $19.2 million for Q1 2022, with an effective tax rate of 25.00%, up from 24.80% in Q1 2021. This increase in the effective tax rate was partially due to nondeductible BOLI losses | Metric (in thousands) | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :-------------------- | :---------------------------- | :---------------------------- | | Provision for Income Taxes | $19,238 | $19,027 | | Effective Tax Rate | 25.00% | 24.80% | - The increase in the effective tax rate was partially due to nondeductible BOLI losses recognized during the period[290] Analysis of Business Segments The company's three business segments (Retail Banking, Commercial Banking, and Treasury and Other) showed varied performance. Retail Banking's net income decreased by 13%, Commercial Banking's net income decreased by 12%, while Treasury and Other's net loss significantly decreased by 84% due to increased net interest income and decreased provision for credit losses | Segment (in thousands) | Net Income (Loss) 3 Months Ended March 31, 2022 | Net Income (Loss) 3 Months Ended March 31, 2021 | | :--------------------- | :---------------------------------------------- | :---------------------------------------------- | | Retail Banking | $36,834 | $42,484 | | Commercial Banking | $22,527 | $25,515 | | Treasury and Other | $(1,642) | $(10,306) | | Total | $57,719 | $57,693 | - PPP loan balances were reclassified from Retail Banking to Commercial Banking in Q2 2021, impacting segment financial information[292] Retail Banking Net income for the Retail Banking segment decreased by $5.7 million (13%) to $36.8 million for Q1 2022, primarily due to a $7.3 million increase in noninterest expense, partially offset by a $2.0 million decrease in the provision for income taxes - Net income for Retail Banking decreased by $5.7 million (13%) to $36.8 million in Q1 2022[294] - The decrease was mainly due to a $7.3 million increase in noninterest expense, partially offset by a $2.0 million decrease in the provision for income taxes[294] Commercial Banking Net income for the Commercial Banking segment decreased by $3.0 million (12%) to $22.5 million for Q1 2022. This was mainly due to a $4.0 million increase in noninterest expense and a $3.2 million decrease in net interest income, partially offset by a $2.6 million increase in noninterest income - Net income for Commercial Banking decreased by $3.0 million (12%) to $22.5 million in Q1 2022[298] - Key drivers were a $4.0 million increase in noninterest expense and a $3.2 million decrease in net interest income (due to lower PPP loan fees), partially offset by a $2.6 million increase in noninterest income[298] Treasury and Other The Treasury and Other segment's net loss decreased significantly by $8.7 million (84%) to $1.6 million for Q1 2022. This improvement was primarily due to an $8.3 million increase in net interest income and a $4.9 million decrease in the provision for credit losses, partially offset by a $4.8 million decrease in noninterest income - Net loss for Treasury and Other decreased by $8.7 million (84%) to $1.6 million in Q1 2022[301] - The improvement was driven by an $8.3 million increase in net interest income (higher investment securities balances) and a $4.9 million decrease in the provision for credit losses (lower reserve for unfunded commitments)[301] - Offsetting factors included a $4.8 million decrease in noninterest income (lower BOLI income and higher derivative losses) and a $3.3 million decrease in the benefit for income taxes[301] Analysis of Financial Condition The company maintains strong liquidity and capital, with core deposits forming a stable funding base. Total loans and leases decreased slightly, driven by PPP loan payoffs, while investment securities saw a fair value decrease due to rising interest rates. Credit quality improved, leading to a lower ACL. Total deposits increased, but stockholders' equity decreased due to unrealized losses on investment securities Liquidity and Capital Resources The company actively manages liquidity to meet financial obligations, maintaining immediate liquid resources in cash and cash equivalents ($1.6 billion at March 31, 2022). Investment securities ($8.1 billion) and borrowing capacity from FHLB ($1.7 billion) and FRB ($1.3 billion) provide additional liquidity. Core deposits, representing 97% of total deposits, are a stable funding source - Cash and cash equivalents were $1.6 billion as of March 31, 2022, providing immediate liquid resources[306] - Available-for-sale investment securities totaled $8.1 billion, with a weighted average life of approximately 5.8 years, serving as a significant liquidity source[306] - The company has borrowing capacity of $1.7 billion from the FHLB and $1.3 billion from the FRB as of March 31, 2022[306] - Core deposits, defined as all deposits excluding time deposits exceeding $250,000, totaled $21.5 billion (97% of total deposits) as of March 31, 2022, providing a stable and low-cost funding base[307] Potential Demands on Liquidity from Off-Balance Sheet Arrangements The company has off-balance sheet arrangements, including interests in unconsolidated variable interest entities (VIEs) primarily for low-income housing tax credits, and guarantees related to residential mortgage loan sales. While repurchase requests for sold loans have been limited, the company manages this risk through underwriting and servicing practices. Financial instruments with off-balance sheet risk include commitments to extend credit and letters of credit Variable Interest Entities The company holds interests in several unconsolidated variable interest entities (VIEs), primarily low-income housing tax credit investments. The company is not the primary beneficiary and therefore does not consolidate these VIEs. Unfunded commitments to these investments have not materially changed - The company holds interests in unconsolidated VIEs, mainly low-income housing tax credit investments[311] - The company is not the primary beneficiary of these VIEs and does not consolidate them[311] Guarantees The company sells residential mortgage loans to Fannie Mae or Freddie Mac, which may require repurchase under certain conditions if underwriting or documentation standards are not met. As of March 31, 2022, the unpaid principal balance of serviced loans sold was $1.6 billion. No material losses are anticipated from these transactions, and no repurchase requests related to servicing activities were pending - The company sells residential mortgage loans to Fannie Mae or Freddie Mac, with potential repurchase obligations if representations and warranties are breached[314] - The unpaid principal balance of residential mortgage loans sold was $1.6 billion as of March 31, 2022[314] - Management believes the exposure from repurchase requests is not material due to historical trends and strong underwriting/servicing practices[316] Financial Instruments with Off-Balance Sheet Risk The company utilizes financial instruments with off-balance sheet risk, including commitments to extend credit and standby/commercial letters of credit, to meet customer financing needs. These instruments are not reflected in the consolidated financial statements but represent potential credit risk managed through credit policies and monitoring - Off-balance sheet financial instruments include commitments to extend credit and standby/commercial letters of credit[317] - These instruments are not reflected in the consolidated financial statements and are managed using the same credit policies as loans[317][318] Investment Securities The fair value of the available-for-sale investment securities portfolio decreased by $365.6 million (4%) to $8.1 billion at March 31, 2022, primarily due to higher market interest rates leading to increased gross unrealized losses ($671.4 million). The portfolio is mainly composed of collateralized mortgage obligations and mortgage-backed securities, with no credit losses recorded | Investment Category (in thousands) | March 31, 2022 | December 31, 2021 | | :--------------------------------- | :------------- | :---------------- | | U.S. Treasury and government agency debt securities | $199,544 | $192,563 | | Mortgage-backed securities | $3,068,233 | $3,385,470 | | Collateralized mortgage obligations | $4,519,488 | $4,700,567 | | Collateralized loan obligations | $220,884 | $105,247 | | Debt securities issued by states and political subdivisions | $54,235 | $44,185 | | Total Available-for-Sale Securities | $8,062,384 | $8,428,032 | - The fair value of the investment securities portfolio decreased by $365.6 million (4%) to $8.1 billion as of March 31, 2022[322] - Gross unrealized losses increased significantly to $671.4 million at March 31, 2022, from $157.3 million at December 31, 2021, primarily due to higher market interest rates[326] - No credit losses related to the investment securities portfolio were recorded for the three months ended March 31, 2022[327] Loans and Leases Total loans and leases decreased by $70.3 million (1%) to $12.9 billion at March 31, 2022. This was primarily due to a $110.3 million decrease in PPP loans and a $105.7 million decrease in construction loans, partially offset by increases in commercial real estate ($120.4 million) and residential mortgage loans ($112.0 million). The portfolio is concentrated in Hawaii, with a significant portion having adjustable interest rates | Loan Category (in thousands) | March 31, 2022 | December 31, 2021 | | :--------------------------- | :------------- | :---------------- | | Commercial and Industrial (excl. PPP) | $1,817,346 | $1,870,657 | | Paycheck Protection Program loans | $106,188 | $216,442 | | Commercial Real Estate | $3,759,980 | $3,639,623 | | Construction | $708,300 | $813,969 | | Residential Mortgage | $4,153,824 | $4,083,367 | | Home Equity Line | $918,101 | $876,608 | | Consumer | $1,204,834 | $1,229,939 | | Lease Financing | $223,170 | $231,394 | | Total Loans and Leases | $12,891,743 | $12,961,999 | - The decrease in total loans and leases was primarily due to a $110.3 million decrease in PPP loans and a $105.7 million decrease in construction loans[331][332][335] - Commercial real estate loans increased by $120.4 million (3%), and residential real estate loans increased by $112.0 million (2%)[334][336] | Loan Rate Type (in thousands) | Total Loans and Leases (Mar 31, 2022) | % of Total | | :---------------------------- | :------------------------------------ | :--------- | | Adjustable Interest Rates | $6,244,065 | 48% | | Hybrid Interest Rates | $981,873 | 8% | | Fixed Interest Rates | $5,665,805 | 44% | | Total | $12,891,743 | 100% | - Lending activities are primarily concentrated in Hawaii, with additional activities on the U.S. mainland, Guam, and Saipan[344] Credit Quality Credit quality improved in Q1 2022, leading to a decrease in the Allowance for Credit Losses (ACL) to $150.3 million (1.17% of total loans and leases). Non-performing assets (NPAs) increased slightly to $8.6 million, mainly due to residential mortgage non-accrual loans. Loans past due 90 days or more and still accruing interest decreased. Impaired loans also decreased, and PPP loans outstanding significantly declined Non-Performing Assets and Loans and Leases Past Due 90 Days or More and Still Accruing Interest Total Non-Performing Assets (NPAs) increased by $1.3 million (19%) to $8.6 million at March 31, 2022, primarily due to an increase in residential mortgage non-accrual loans. Loans and leases past due 90 days or more and still accruing interest decreased by $2.8 million (38%) to $4.4 million | Non-Performing Assets (in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------------------- | :------------- | :---------------- | | Total Non-Accrual Loans and Leases | $8,601 | $7,082 | | Other Real Estate Owned (OREO) | $0 | $175 | | Total Non-Performing Assets | $8,601 | $7,257 | - The ratio of NPAs to total loans and leases and OREO was 0.07% at March 31, 2022, up from 0.06% at December 31, 2021[354] | Accruing Loans Past Due 90+ Days (in thousands) | March 31, 2022 | December 31, 2021 | | :---------------------------------------------- | :------------- | :---------------- | | Total Accruing Loans and Leases Past Due 90 Days or More | $4,444 | $7,208 | Impaired Loans Total impaired loans decreased slightly to $41.4 million at March 31, 202