10-K: First Hawaiian Inc. Reports 2023 Financial Results, Cites Strong Capital Position

First Hawaiian Inc. reports a net income of $235 million for 2023, a decrease compared to the previous year, while maintaining a strong capital position.

Summary

• First Hawaiian Inc. (FHI) reported a net income of $235 million for the year ended December 31, 2023, which translates to diluted earnings per share of $1.84.
• This represents a decrease in net income compared to the $265.7 million reported in 2022.
• The decrease in net income was primarily due to a $60.7 million increase in noninterest expense and a $25.2 million increase in the provision for credit losses.
• These negative impacts were partially offset by a $22.6 million increase in net interest income, a $21.3 million increase in noninterest income and an $11.3 million decrease in the provision for income taxes.
• The company's total assets were $24.9 billion, with gross loans and leases at $14.4 billion and deposits at $21.3 billion as of December 31, 2023.
• The company operates 50 branches across Hawaii, Guam and Saipan.
• The company's Common Equity Tier 1 capital ratio was 12.39% as of December 31, 2023, which is well above the regulatory minimum.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While the company maintains a strong capital position and saw growth in some areas, the decrease in net income and increase in expenses raise concerns. The document also highlights several risks and uncertainties that could impact future performance.

Positives

• Net interest income increased by $22.6 million to $636.1 million due to higher yields and average balances in the loan and lease portfolio and higher yields on interest-bearing deposits in other banks.
• Noninterest income increased by $21.3 million to $200.8 million, driven by increases in bank-owned life insurance income, other noninterest income, trust and investment services income, service charges on deposits accounts and net gains on the sale of investment securities.
• The company maintains a strong capital position with a Common Equity Tier 1 capital ratio of 12.39%.

Negatives

• Net income decreased by $30.7 million to $235 million compared to 2022.
• Noninterest expense increased by $60.7 million to $501.1 million, primarily due to increases in salaries and employee benefits, regulatory assessment and fees, and equipment expense.
• The provision for credit losses increased by $25.2 million to $26.6 million.
• Total deposits decreased by $356.4 million to $21.3 billion.

Risks

• The company's performance is heavily dependent on economic conditions in Hawaii, Guam and Saipan.
• A sustained period of high inflation could pose a risk to the economy and the financial performance of the Bank.
• The company's business is significantly dependent on the real estate markets in which it operates.
• The company is subject to interest rate risk and fluctuations in interest rates may adversely affect earnings.
• The value of the investment securities the company owns may decline in the future.
• The company might underestimate the credit losses inherent in its loan and lease portfolio.
• Loss of deposits could increase the company's funding costs.
• The occurrence of fraudulent activity, breaches or failures of the company's information security controls or cybersecurity-related incidents could have a material adverse effect on the company's business.
• The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a significant adverse effect on the company's operations.
• Severe weather, hurricanes, tsunamis, natural disasters, pandemics, acts of war or terrorism or other external events could significantly impact the company's business.
• Climate change could have a material negative impact on the company and its customers.

Future Outlook

The company expects to continue to meet the requirements of the Capital Rules, but may fail to do so. The company also anticipates increased regulatory scrutiny and new regulations in response to recent negative developments in the banking industry, which may increase the cost of doing business and reduce profitability.

Management Comments

• Management believes that the ACL was adequate as of December 31, 2023, but there is no assurance that it will be sufficient to cover all incurred credit losses.
• Management expects that the aftermath of the wildfires will continue to impact commercial activity throughout the island of Maui, but there remains much uncertainty as to how long it will take Maui to rebuild, return tourism to historic levels, and recover economically.

Industry Context

The document highlights the challenges faced by the banking industry, including increased regulatory scrutiny, the impact of inflation and interest rate fluctuations, and the need to manage credit and cybersecurity risks. The company's performance is also affected by the economic conditions in its primary markets, particularly Hawaii, which is heavily reliant on tourism and military spending.

Comparison to Industry Standards

• The company's Common Equity Tier 1 capital ratio of 12.39% is well above the regulatory minimum, indicating a strong capital position compared to industry benchmarks.
• The company's net interest margin of 2.92% is within the range of regional banks, but is subject to fluctuations based on interest rate changes.
• The company's efficiency ratio of 59.48% is higher than some of its peers, indicating a need to manage expenses more effectively.
• The company's return on average assets of 0.95% is slightly below some of its peers, indicating a need to improve profitability.
• The company's return on average tangible equity of 17.39% is within the range of regional banks, but is subject to fluctuations based on market conditions.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and diluted earnings per share.
• Employees may be affected by changes in compensation and benefits.
• Customers may be impacted by changes in interest rates and fees.
• The company's performance may affect its ability to attract and retain skilled employees.

Next Steps

• The company will continue to monitor the impact of the Maui wildfires on its customers and adjust its assistance as needed.
• The company will continue to monitor its capital and liquidity positions in light of ongoing volatility in the capital markets and economic disruptions.
• The company will continue to evaluate its investment securities portfolio in response to changing economic and market conditions.
• The company will continue to monitor factors that drive expected credit losses including the uncertainty of the economy, inflation and geopolitical instability.

Key Dates

Keywords

financial results, net income, capital position, loans, deposits, interest rates, credit losses, regulatory capital, Hawaii, banking