First Hawaiian, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. First Hawaiian, Inc. is a bank holding company whose wholly owned subsidiary, First Hawaiian Bank, operates primarily in Hawaii, with business also in Guam, Saipan and the U.S. Mainland. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $159.9 | $145.1 | $327.2 | $279.0 |
| Noninterest income | $47.3 | $44.1 | $96.4 | $85.5 |
| Net income | $62.4 | $59.4 | $129.3 | $117.1 |
| Diluted EPS | $0.49 | $0.46 | $1.01 | $0.91 |
| Net interest margin | 2.91% | 2.60% | 3.01% | 2.51% |
| Noninterest expense | $120.9 | $109.2 | $239.4 | $213.2 |
- Q2 pretax income was $81.4 million; provision for income taxes was $19.0 million. The reported effective tax rate was 23.30%, versus 24.96% a year earlier.
- For the six months, operating cash flow was $187.6 million, investing cash flow was positive $99.1 million and financing cash flow was negative $255.2 million. Cash and cash equivalents ended the period at $558.1 million, compared with $526.6 million at December 31, 2022.
- At June 30, total assets were $24.5 billion, loans and leases $14.4 billion, deposits $21.1 billion, borrowings $500 million and stockholders’ equity $2.36 billion. There were no short-term borrowings; the $500 million of FHLB advances carried a 4.71% weighted-average rate and mature in September 2024.
- Regulatory capital remained above minimums: CET1 was 12.05%, total capital 13.17% and Tier 1 leverage 8.30%. The Company and Bank were classified as well-capitalized.
Changes versus comparable periods
- Q2 net income rose 5% year over year; first-half net income rose 10%. Management attributed the improvement primarily to higher net interest income amid rising rates and higher noninterest income, including BOLI income.
- Higher asset yields and loan balances lifted net interest income, but funding costs rose sharply. Q2 interest expense was $69.3 million versus $4.6 million a year earlier; interest-bearing deposit cost averaged 1.82% versus 0.14%. The six-month figures were $115.6 million versus $7.3 million of interest expense, with deposit costs averaging 1.60% versus 0.12%.
- Q2 noninterest expense increased 11%, including higher salaries and benefits, equipment costs and regulatory assessments. First-half expense increased 12%. The Q2 efficiency ratio was 57.96% versus 57.33%; the first-half ratio improved to 56.17% from 58.15%.
- Loans grew $270.8 million, or 2%, from year-end, led by commercial real estate, construction, residential real estate and lease financing. Deposits declined $610.9 million, or 3%, including lower demand and savings balances, partly offset by time-deposit growth. Total borrowings shifted from $75 million short-term at year-end to $500 million long-term at June 30.
- The allowance for loan and lease credit losses increased to $148.6 million from $143.9 million; its ratio to loans was 1.03% versus 1.02%. Net charge-offs were $6.8 million in the first half, compared with $4.9 million a year earlier.
Outlook, commentary and risks
- The filing gives no specific numerical earnings or revenue guidance. Management said Hawaii’s economy had grown in the first half but the outlook remained highly uncertain given interest-rate increases and banking-sector liquidity concerns. Domestic visitor arrivals were near pre-pandemic levels; Oahu home and condominium sales volumes and median prices were lower year over year.
- Management reported maintaining higher-than-normal liquidity as a precaution. Available borrowing capacity at June 30 was $2.9 billion from the FHLB and $3.8 billion from the Federal Reserve. Core deposits were $18.9 billion, or 90% of deposits. Estimated uninsured deposits were $10.7 billion, or 51% of total deposits; excluding public deposits, the estimate was $8.5 billion, or 40%.
- The investment portfolio had $870.8 million of gross unrealized losses at June 30. The filing attributes losses to interest-rate changes and reports no expected credit losses on the securities. The held-to-maturity portfolio’s fair value was $3.70 billion versus $4.18 billion amortized cost. These valuation differences and the ability to retain securities are important rate and liquidity considerations.
- The FDIC proposed a special assessment to replenish the deposit insurance fund. If adopted as proposed, the Company said it expected to accrue the total assessment when the rule is adopted; final cost and timing were not yet known.
- Unusual expenses included $2.0 million accrued for separation agreements with two executives and $0.9 million of severance for other employee terminations. The Company had authorized a 2023 repurchase program of up to $40 million but made no repurchases during the first half. A quarterly dividend of $0.26 per share was declared in July.
- A Hawaii customer lawsuit concerning previously extended credit facilities remains unresolved; the Company said it could not reasonably estimate a potential loss and recorded no liability. Management stated other pending or threatened proceedings were not expected to have a material effect. Commitments to extend credit and letters of credit totaled approximately $7.0 billion.
- Key risks include deposit competition and outflows, rising funding costs, interest-rate and securities valuation exposure, credit losses—particularly in construction, home equity and consumer lending—commercial real estate conditions, higher FDIC assessments, operational and cybersecurity risks, and the Hawaii-centered geographic concentration. The filing also describes the continuing transition of remaining LIBOR-linked instruments.
Important facts for investors to verify
- Deposit trends, uninsured-deposit levels, time-deposit maturities and the cost of retaining or replacing deposits.
- Whether net interest margin and earnings hold up as deposit rates reprice and loan yields respond to rate changes.
- Credit performance, especially consumer net charge-offs, home-equity nonaccruals, construction exposure and allowance adequacy.
- The market value, liquidity and rate sensitivity of securities, including the held-to-maturity portfolio and accumulated unrealized losses.
- The final FDIC special-assessment rule and its financial impact, as well as any developments in the customer lawsuit.
- Execution of the stated capital-return plans, including the dividend and any future stock repurchases.