First Hawaiian, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
First Hawaiian, Inc. is the bank holding company for First Hawaiian Bank, which provides retail, commercial, and treasury banking services, primarily in Hawaii. This unaudited filing covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Dollar amounts below are in millions unless stated.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $216.3 | $175.3, Q1 2022 |
| Net interest income | $167.2 | $133.9, Q1 2022 |
| Net interest margin | 3.11% | 2.42%, Q1 2022 |
| Net income; diluted EPS | $66.8; $0.52 | $57.7; $0.45, Q1 2022 |
| Noninterest income / expense | $49.0 / $118.6 | $41.4 / $104.0, Q1 2022 |
| Efficiency ratio | 54.46% | 59.04%, Q1 2022 |
| Operating cash flow | $82.6 | $66.3, Q1 2022 |
| Cash and cash equivalents | $865.6 | $526.6, December 31, 2022 |
| Loans and leases | $14,221.3 | $14,092.0, December 31, 2022 |
| Deposits | $21,281.5 | $21,689.0, December 31, 2022 |
| Short- and long-term borrowings | $250.0 and $500.0 | $75.0 and zero, December 31, 2022 |
| Stockholders’ equity; CET1 ratio | $2,329.0; 11.97% | $2,269.0; 11.82%, December 31, 2022 |
Q1 investing cash flow was $25.1 million and financing cash flow was $231.2 million; cash and cash equivalents increased by $339.0 million during the quarter. The allowance for credit losses on loans and leases was $147.1 million, or 1.03% of loans, and the reserve for unfunded commitments was $36.2 million. Net charge-offs were $3.2 million, or 0.09% annualized. Nonaccrual loans and leases were $13.7 million (0.10% of loans), up from $11.9 million at year-end.
Material changes versus comparable periods
- Net income rose 16%, mainly as net interest income increased 25% amid higher interest rates. Loan yields increased, while deposit costs also rose substantially: interest expense was $46.3 million versus $2.7 million in Q1 2022.
- Noninterest income increased 18%, chiefly due to a $5.5 million increase in bank-owned life insurance income, including death benefit proceeds, and higher card and trust fees.
- Noninterest expense rose 14%, including higher salaries and benefits, equipment costs, regulatory assessments, and card rewards expense.
- The provision for credit losses was $8.8 million, compared with a $5.7 million provision benefit in Q1 2022. The increase primarily reflected consumer credit and unfunded construction and home-equity commitments.
- Deposits declined $407.5 million from year-end, while loans grew $129.3 million. The securities portfolio’s carrying value declined $156.1 million to approximately $7.3 billion.
- Accumulated other comprehensive loss improved to $611.7 million from $639.3 million at year-end, including $27.6 million of quarterly other comprehensive income. The securities portfolio still had $810.4 million of gross unrealized losses; management attributed these to interest rates, reported no expected credit losses, and stated it had no intent or requirement to sell the securities before recovery.
Outlook, management commentary, risks, and unusual items
- No formal earnings or financial guidance is provided. Management says rising rates may benefit net interest income because assets are expected to reprice faster than liabilities, but warns that higher rates also increase deposit costs and can affect asset values and loan demand. A static model estimates a 6.4% increase in 12-month net interest income under an immediate +100-basis-point parallel rate shift and a 6.9% decrease under −100 basis points; these are scenarios, not forecasts.
- Management reported high liquidity and well-capitalized status. In March, the Bank obtained $500 million of FHLB advances as a precaution amid banking-sector volatility. Available borrowing capacity at March 31 was $1.7 billion from the FHLB and $1.2 billion from the Federal Reserve, subject to collateral. Core deposits were 93% of deposits; estimated uninsured deposits were $10.7 billion, or 50% of total deposits.
- The FDIC was expected to propose a special assessment to replenish the deposit insurance fund following bank failures. Its timing and amount were uncertain, and management said the resulting expense could be material.
- The loan portfolio is concentrated in Hawaii (69%); management identifies economic, real-estate, tourism, interest-rate, inflation, and credit conditions as relevant risks. The filing also highlights deposit retention, securities valuation, cybersecurity, regulatory, operational, and natural-disaster risks.
- A customer lawsuit concerning previously extended credit facilities remains unresolved. The Company cannot reasonably estimate a potential loss and has recorded no liability; management disputes the claims and is defending the case. Other pending or threatened legal matters are not expected to have a material aggregate effect, according to management.
- The Company declared a $0.26-per-share quarterly dividend in April, payable June 2, 2023. A 2023 repurchase authorization of up to $40 million remained unused as of March 31; repurchases are discretionary. The filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Deposit trends and funding costs, including the composition and stability of the estimated $10.7 billion in uninsured deposits.
- Available liquidity and collateral capacity, as well as the status and cost of the $500 million FHLB advances and the $250 million short-term advance that matured in April 2023.
- Net interest margin and deposit betas as rates change; compare actual results with the filing’s rate-sensitivity scenarios and their stated assumptions.
- Credit quality, especially consumer charge-offs, nonaccrual and past-due loans, commercial real estate and construction exposures, and changes to credit-loss reserves.
- The path of unrealized securities losses and tangible capital, including the distinction between available-for-sale and held-to-maturity securities and the ability to hold securities as intended.
- Any FDIC special assessment, updates to the customer lawsuit, and the execution of the dividend and authorized share-repurchase program.