First Hawaiian, Inc. — Q3 2023 Form 10-Q
Business context and period. First Hawaiian, Inc. is the bank holding company for First Hawaiian Bank, serving consumer and commercial customers primarily in Hawaii, as well as Guam, Saipan and the U.S. mainland. This unaudited report covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022.
Financial performance and position
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Net interest income | $157.1 million | $162.7 million in Q3 2022 |
| Net interest margin | 2.86% | 2.93% in Q3 2022 |
| Provision for credit losses | $7.5 million | $3.2 million in Q3 2022 |
| Noninterest income | $46.1 million | $45.9 million in Q3 2022 |
| Noninterest expense | $119.4 million | $113.3 million in Q3 2022 |
| Net income and diluted EPS | $58.2 million; $0.46 | $69.0 million; $0.54 in Q3 2022 |
- Nine-month results: Net interest income was $484.3 million, up 10%; net income was $187.5 million, up 1%; diluted EPS was $1.47, versus $1.45. Net interest margin was 2.96%, up 31 basis points year over year.
- Balance sheet at September 30: Assets were $24.9 billion; loans and leases were $14.3 billion, up 2% from year-end; deposits were $21.5 billion, down 1%. Stockholders’ equity was $2.35 billion.
- Credit quality: Allowance for credit losses on loans and leases was $154.8 million, or 1.08% of loans, versus $143.9 million, or 1.02%, at year-end. Nonaccrual loans were $14.6 million, or 0.10% of loans, versus $11.9 million, or 0.08%. Nine-month net charge-offs were $6.5 million, an annualized 0.06% of average loans.
- Cash flow and liquidity: For the first nine months, operating cash flow was $213.8 million, investing cash flow was $328.0 million and financing cash flow was $145.0 million. Cash and cash equivalents ended at $1.21 billion, up from $526.6 million at year-end. The bank reported $2.8 billion of available FHLB capacity and $3.8 billion of available Federal Reserve capacity; it had $500 million of FHLB advances outstanding.
- Capital and shareholder returns: The company reported a 12.21% CET1 ratio and 13.38% total capital ratio and remained classified as well-capitalized. It declared $0.26 per share in quarterly dividends; $99.5 million of dividends were paid in the first nine months. No shares were repurchased under the 2023 $40 million authorization through September 30.
Material changes versus prior periods
- Q3 net income declined 16% year over year as higher deposit and borrowing costs, a larger credit-loss provision and increased expenses outweighed higher loan interest income. Deposit interest expense rose to $74.7 million from $13.7 million; the reported average rate on interest-bearing deposits increased to 2.23% from 0.43%.
- For the nine months, higher loan yields and balances lifted net interest income, but interest expense also rose sharply. Noninterest expense increased 10%, led by salaries and benefits, equipment and regulatory assessments. The quarterly efficiency ratio increased to 58.31% from 53.98%.
- Deposits shifted toward time accounts: total deposits fell $177.5 million, including a $965.7 million decline in noninterest-bearing balances, partly offset by a $1.2 billion increase in time deposits. Estimated deposits exceeding FDIC insurance limits were $11.1 billion, or 52% of total deposits; public deposits were collateralized.
- The investment portfolio’s carrying value declined 9% to $6.8 billion. Gross unrealized losses were approximately $1.1 billion, primarily attributed to higher market interest rates. Management reported no expected credit losses on the securities and no AFS securities it intended or expected to be forced to sell before recovery.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management said it expects existing cash, investments and operating cash generation to meet requirements over the next 12 months and beyond, while continuing to monitor liquidity and capital. Its interest-rate simulation estimated that, over 12 months, an immediate parallel +100-basis-point shift would increase net interest income 4.3%, while a -100-basis-point shift would reduce it 4.8%; management cautioned that actual results may differ materially from these modeled scenarios.
- Maui wildfires: Real-estate-secured loans in the fire zones totaled approximately $116 million. The company said the extent of collateral damage, insurance coverage, government assistance and borrower repayment impacts remained uncertain. It provided payment deferrals and other assistance, donated $250,000, and reported that its Lahaina branch and ATM were destroyed; other Maui branches remained operational.
- Funding and interest-rate risks: Management cited ongoing deposit-cost pressure, possible deposit outflows, market volatility and elevated funding costs. The company took $500 million of FHLB advances as a precaution amid banking-sector volatility. The investment securities’ unrealized losses and the effects of rate changes on asset values and margins remain relevant risks.
- FDIC assessment: The FDIC had proposed a special assessment to replenish the deposit insurance fund. If adopted as proposed, the company expected to recognize the full amount as a loss when the rule is adopted; final amount and timing were undetermined.
- Contingencies and unusual expenses: A customer lawsuit concerning previously extended credit facilities remains unresolved; the company could not reasonably estimate a potential loss and recorded no liability. Nine-month salaries and benefits included $2.0 million accrued under executive separation agreements and $0.9 million in other severance. The filing also reports a $5.1 million nine-month loss on the Visa derivative.
Important facts for investors to verify
- Whether Maui wildfire-related borrower stress, collateral damage and insurance recoveries change loan-loss estimates or activity on the island.
- Whether deposit balances stabilize and funding costs moderate, especially given the decline in noninterest-bearing deposits and growth in time deposits.
- How unrealized securities losses, interest-rate movements and deposit repricing affect capital, liquidity and net interest margin; distinguish available-for-sale marks from held-to-maturity valuations.
- Whether credit deterioration develops in commercial real estate, construction, residential mortgage or consumer loans, and how allowance coverage and nonaccrual balances evolve.
- The final FDIC special-assessment rule and any loss recognized, as well as developments in the customer lawsuit for which the filing states no estimable loss range.