First Hawaiian, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the supplied text does not provide a clear standalone fourth-quarter income statement. First Hawaiian, Inc. is the parent of First Hawaiian Bank, a full-service bank operating 51 branches in Hawaii, Guam and Saipan. The company reported $24.6 billion in assets and $21.7 billion in deposits at year-end.
Financial results and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $613.5 million | $530.6 million |
| Net interest margin | 2.78% | 2.43% |
| Provision for credit losses | $1.4 million expense | $39.0 million benefit |
| Noninterest income | $179.5 million | $184.9 million |
| Noninterest expense | $440.5 million | $405.5 million |
| Net income | $265.7 million | $265.7 million |
| Diluted EPS | $2.08 | $2.05 |
| Efficiency ratio | 55.20% | 56.45% |
| Return on average assets | 1.06% | 1.09% |
| Cash from operating activities | $430.6 million | $417.1 million |
- Net interest income rose 16%, primarily on higher asset yields as rates increased; higher deposit funding costs partly offset the benefit.
- Net income was essentially flat year over year. Expense growth and lower noninterest income offset the higher net interest income and the absence of the substantial 2021 credit-loss benefit.
- Loans and leases grew 9% to $14.1 billion; deposits declined 1% to $21.7 billion. Assets fell to $24.6 billion from $25.0 billion.
- Cash and cash equivalents declined to $526.6 million from $1.26 billion. Operating cash flow was $430.6 million; investing activities used $965.1 million and financing activities used $197.4 million, resulting in a $731.8 million decrease in cash and cash equivalents.
- Stockholders’ equity fell 15% to $2.27 billion. A $517.6 million after-tax comprehensive loss, primarily from investment-security valuation declines, was the main factor; the company also paid $132.6 million in dividends.
- Regulatory capital remained above required levels: company CET1 ratio was 11.82% and Bank CET1 was 11.71%. The Bank was categorized as well-capitalized.
Credit, liquidity and funding
- Allowance for credit losses on loans and leases was $143.9 million, or 1.02% of loans, versus $157.3 million, or 1.21%, a year earlier. Net charge-offs were 0.08% of average loans, compared with 0.10%.
- Nonaccrual loans and leases increased to $11.9 million from $7.1 million; nonperforming assets were $12.0 million, or 0.09% of loans and leases plus OREO. The overall reported level remained low.
- Real estate loans represented about 73% of the loan portfolio, and 69% of total loans were located in Hawaii. Commercial real estate loans were $4.1 billion, about 29% of loans.
- Core deposits were $20.2 billion, 93% of total deposits. Uninsured deposits were $13.3 billion. The filing identifies deposit outflows and higher deposit costs as liquidity risks.
- Year-end short-term borrowings were $75 million in federal funds purchased, maturing in January 2023; the company reported no long-term borrowings. Available secured borrowing capacity was $2.5 billion from the FHLB and $1.2 billion from the Federal Reserve.
- Management said cash, investments and expected operating cash flow should be sufficient to meet cash requirements over the next 12 months and beyond. The parent’s liquidity depends substantially on dividends from the Bank, which are subject to regulatory and legal limits.
Material changes, outlook and risks
- In 2022, the company reclassified approximately $4.6 billion of available-for-sale securities to held-to-maturity. The securities’ fair value was $3.8 billion at year-end against $4.3 billion amortized cost; the related after-tax unrealized loss remains in accumulated other comprehensive loss and is amortized over the securities’ estimated lives. Management stated it had the intent and ability to hold them to maturity.
- Investment securities carried at $7.5 billion had $904.3 million of gross unrealized losses at year-end, primarily reflecting higher market interest rates. The company reported no credit-loss allowance on its securities portfolio.
- Noninterest expense increased 9%, including higher salaries, technology-related equipment costs, contracted services and card rewards expense. Noninterest income fell 3%, largely because bank-owned life insurance income declined $11.9 million.
- Management described Hawaii’s economy as growing, with unemployment at 3.2% at year-end and domestic visitor arrivals near pre-pandemic levels. It also cited inflation, rising rates, slower home-sale volumes and the ongoing recovery in international tourism as relevant conditions. The filing provides no formal earnings or margin guidance.
- Key risks include interest-rate and deposit repricing, concentrated exposure to Hawaii and real estate, commercial real estate and dealer-financing concentrations, credit deterioration, securities valuation losses, inflation and recession, cybersecurity and vendor disruptions, and regulatory or compliance costs. The filing also discusses the transition away from LIBOR; new U.S. dollar LIBOR contracts had ceased by year-end 2021, with remaining settings scheduled to end after June 30, 2023.
- The board authorized a 2023 share repurchase program of up to $40 million; timing and amounts are discretionary. A quarterly dividend of $0.26 per share was declared in January 2023. In 2022, the company repurchased $9.5 million of shares and declared $1.04 per share in dividends.
- A customer lawsuit concerning previously sold credit facilities remained pending. The company said it could not reasonably estimate a potential loss and had not accrued a liability; management disputes wrongdoing and is defending the matter. Management said other proceedings were not expected to have a material effect. The auditor issued unqualified opinions on the financial statements and internal control; the allowance for credit losses was identified as a critical audit matter.
Important facts for investors to verify
- Whether deposit balances and funding costs remain stable as interest rates and competition for deposits change, including the trend in uninsured deposits.
- Whether asset yields continue to outpace deposit repricing, and how changes in rates affect net interest margin and borrowers’ repayment capacity.
- Whether the allowance remains adequate as loan growth, inflation, real estate conditions and local economic risks evolve.
- The fair-value and capital effects of the securities portfolio, including the held-to-maturity classification, accumulated unrealized losses and the company’s ability to hold transferred securities as intended.
- Whether credit quality changes in commercial real estate, consumer lending and dealer financing, and whether nonaccrual balances or charge-offs rise.
- The outcome and potential financial exposure of the pending customer lawsuit and any material tax or other contingencies.
- The actual execution of the 2023 repurchase program and dividend, subject to regulatory limits, liquidity needs and capital requirements.