First Hawaiian, Inc. — FY 2023 Form 10-K
Reporting period: Year ended December 31, 2023; filed February 28, 2024. This is an annual report, not a standalone fourth-quarter report. First Hawaiian is a bank holding company operating First Hawaiian Bank, with 50 branches in Hawaii, Guam and Saipan and retail, commercial, wealth-management and treasury businesses.
Key financial results
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Net interest income | $636.1 million | $613.5 million | Up 4% |
| Net interest margin | 2.92% | 2.78% | Up 14 basis points |
| Provision for credit losses | $26.6 million | $1.4 million | Up $25.2 million |
| Noninterest income | $200.8 million | $179.5 million | Up 12% |
| Noninterest expense | $501.1 million | $440.5 million | Up 14% |
| Net income | $235.0 million | $265.7 million | Down 12% |
| Diluted earnings per share | $1.84 | $2.08 | Down 12% |
| Net interest margin / efficiency ratio | 2.92% / 59.48% | 2.78% / 55.20% | Efficiency ratio worsened |
Balance sheet, liquidity and capital
- At year-end, assets were $24.9 billion, gross loans and leases $14.4 billion, deposits $21.3 billion and stockholders’ equity $2.5 billion.
- Loans and leases increased 2% year over year. Commercial real estate loans were $4.3 billion; total real-estate loans were approximately $10.7 billion, or 75% of the loan portfolio.
- Deposits declined 2% to $21.3 billion. Noninterest-bearing demand deposits fell, partly offset by growth in time deposits. Estimated uninsured deposits were $10.8 billion, or 51% of total deposits.
- Cash and cash equivalents rose to $1.74 billion from $527 million. The Bank reported $2.5 billion of available FHLB borrowing capacity and $3.3 billion of available Federal Reserve borrowing capacity at year-end.
- Short-term borrowings were $500 million, consisting of FHLB advances at a 4.71% weighted-average rate, due September 2024; the comparable 2022 balance was $75 million.
- Regulatory capital ratios improved: company CET1 was 12.39% and total capital 13.57%; the Bank’s CET1 was 12.30% and total capital 13.48%. Both were reported as well-capitalized.
- Cash-flow statement: operating activities provided $255.0 million; investing activities provided $1.03 billion; financing activities used $66.9 million. Cash and cash equivalents increased $1.21 billion.
Material changes versus FY 2022
- Rising rates increased loan yields and net interest income, but interest expense rose sharply: deposit interest expense increased to $258.2 million from $49.2 million. Total interest expense was $287.5 million versus $49.7 million.
- Higher expenses and credit provisioning more than offset stronger net interest income and noninterest income. The efficiency ratio increased from 55.20% to 59.48%; return on average assets declined from 1.06% to 0.95%.
- The allowance for credit losses increased to $156.5 million, or 1.09% of loans, from $143.9 million, or 1.02%. Net charge-offs were $12.2 million, or 0.09% of average loans, compared with $11.2 million, or 0.08%.
- Nonaccrual loans rose to $18.6 million from $11.9 million; the nonaccrual ratio increased to 0.13% from 0.08%.
- The investment portfolio carrying value declined 16% to $6.3 billion, partly as securities were sold or matured to fund loan growth and deposit outflows. Gross unrealized securities losses were $770.2 million at year-end, although the filing reports no recognized credit losses on these securities.
Outlook, management commentary and notable items
- The filing provides no specific numerical earnings or balance-sheet guidance. Management says it will monitor capital and liquidity amid market volatility, deposit competition, inflation and interest-rate uncertainty.
- The Bank recorded a $16.3 million FDIC special assessment in Q4 2023 related to the 2023 bank failures. Regulatory assessment and fee expense increased $22.5 million for the year.
- Other notable income items included $14.1 million higher bank-owned life insurance income, a $7.9 million gain on sale of a bank property, and an approximately $0.8 million net gain on investment securities. The securities result included a $40.8 million gain on sale of Visa Class B shares offset by $40.0 million of realized losses on available-for-sale securities.
- Noninterest expense included a one-time lawsuit settlement expense; the filing text does not provide a clear separate amount. A settlement agreement was executed in January 2024. Management states other pending or threatened proceedings are not expected to have a material aggregate effect.
- The Maui wildfires affected customers and operations; the Lahaina branch was destroyed. Real-estate-secured loans in the fire zones totaled approximately $112 million at year-end. The eventual effects on rebuilding, insurance recoveries, borrower repayment and tourism remain uncertain.
- The company declared a quarterly dividend of $0.26 per share in January 2024 and authorized a 2024 repurchase program of up to $40 million. No shares were repurchased under the 2023 program.
- Risks include Hawaii/Guam/Saipan geographic concentration; real-estate and commercial-real-estate exposure; deposit outflows and funding costs; rate sensitivity; credit deterioration; securities valuation; cyber and third-party risks; and potential regulatory changes, including proposed overdraft reforms. Approximately 54% of loans were commercial, and the top five dealer relationships represented about 39% of dealer-flooring commitments.
- The auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting. The allowance for credit losses and goodwill valuation were identified as critical audit matters. No goodwill impairment was recorded.
Most important facts for investors to verify
- Whether deposit trends, uninsured-deposit concentration and funding costs remain stable, and how the $500 million FHLB advance is refinanced or repaid in September 2024.
- Whether net interest income and margin can withstand deposit repricing or lower interest rates; reported sensitivity estimates assume a static balance sheet.
- Credit performance and reserve adequacy, particularly commercial real estate, construction, consumer lending and nonaccrual-loan growth.
- Liquidity and capital implications of the $770.2 million gross unrealized securities loss position, including the distinction between available-for-sale and held-to-maturity securities.
- The realized and continuing effects of Maui wildfire-related exposures, borrower assistance, insurance coverage and recovery in local economic activity.
- The ongoing effect of FDIC assessments, the lawsuit settlement, proposed consumer-finance rules and other compliance costs on expenses and earnings.
- Whether the authorized dividend and potential $40 million repurchases remain supported by earnings, capital and regulatory limits.