First Hawaiian(FHB) - 2023 Q2 - Quarterly Report

Part I Financial Information This section provides the company's interim consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited interim consolidated financial statements for First Hawaiian, Inc. as of June 30, 2023. It includes the Consolidated Statements of Income, Comprehensive Income, Balance Sheets, Stockholders' Equity, and Cash Flows, along with detailed Notes to the Financial Statements covering accounting policies, segment information, and specifics on financial instruments Consolidated Statements of Income This statement details the company's revenues, expenses, and net income for the second quarter and first half of 2023 compared to the prior year Consolidated Income Statement Highlights (Q2 & H1 2023 vs 2022) | Metric | Q2 2023 | Q2 2022 | YoY Change | H1 2023 | H1 2022 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $159.9M | $145.1M | +10.2% | $327.2M | $279.0M | +17.3% | | Provision for Credit Losses | $5.0M | $1.0M | +400% | $13.8M | ($4.7M) | N/A | | Noninterest Income | $47.3M | $44.1M | +7.3% | $96.4M | $85.5M | +12.7% | | Noninterest Expense | $120.9M | $109.2M | +10.7% | $239.4M | $213.2M | +12.3% | | Net Income | $62.4M | $59.4M | +5.1% | $129.3M | $117.1M | +10.4% | | Diluted EPS | $0.49 | $0.46 | +6.5% | $1.01 | $0.91 | +11.0% | Consolidated Statements of Comprehensive Income (Loss) This statement presents the total comprehensive income, including net income and other comprehensive income components, for the second quarter and first half of 2023 - Total comprehensive income for Q2 2023 was $61.4 million, slightly below the net income of $62.4 million, due to a minor net comprehensive loss of $1.1 million from changes in investment securities and derivative hedges[14] - For the six months ended June 30, 2023, total comprehensive income was $155.8 million, which was $26.5 million higher than net income. This was driven by a significant positive net change in investment securities values during the period, reversing some of the prior year's large unrealized losses[14] Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and stockholders' equity as of June 30, 2023, compared to December 31, 2022 Balance Sheet Summary (as of June 30, 2023 vs. Dec 31, 2022) | Account | June 30, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $24.51B | $24.58B | -0.3% | | Net Loans and Leases | $14.21B | $13.95B | +1.9% | | Total Investment Securities | $7.09B | $7.47B | -5.1% | | Goodwill | $0.995B | $0.995B | 0.0% | | Total Liabilities | $22.15B | $22.31B | -0.7% | | Total Deposits | $21.08B | $21.69B | -2.8% | | Borrowings (Short & Long-term) | $0.50B | $0.075B | +567% | | Total Stockholders' Equity | $2.36B | $2.27B | +4.0% | Consolidated Statements of Stockholders' Equity This statement details the changes in the company's equity accounts, including net income, dividends, and other comprehensive income, for the six months ended June 30, 2023 - For the six months ended June 30, 2023, total stockholders' equity increased by $90.7 million, from $2.27 billion to $2.36 billion. The increase was primarily driven by net income of $129.3 million and a $26.5 million positive change in other comprehensive income, partially offset by cash dividends of $66.3 million[19] Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 Cash Flow Summary (Six Months Ended June 30) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $187.6M | $165.7M | | Net Cash from Investing Activities | $99.1M | ($599.0M) | | Net Cash from Financing Activities | ($255.2M) | $708.4M | | Net Increase in Cash | $31.5M | $275.2M | - The significant shift in financing activities from a large inflow in H1 2022 to an outflow in H1 2023 was primarily due to a net decrease in deposits of $610.9 million in 2023, compared to a net increase of $785.3 million in 2022. This was partially offset by proceeds from long-term borrowings of $500 million in 2023[23] Notes to Consolidated Financial Statements This section provides detailed explanations of the company's significant accounting policies and other relevant financial information supporting the consolidated financial statements - The company adopted ASU No. 2022-02 on January 1, 2023, which eliminated the accounting guidance for Troubled Debt Restructurings (TDRs) and added enhanced disclosure requirements for loan modifications to borrowers experiencing financial difficulty[44] - The Allowance for Credit Losses (ACL) methodology utilizes a one-year reasonable and supportable forecast period for all loan classes, after which it reverts immediately to the long-run average loss rates[35] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for the second quarter and first half of 2023. Key themes include net income growth driven by higher net interest income from the rising rate environment, which offset increased noninterest expenses and a higher provision for credit losses. The analysis covers detailed performance of operating segments, changes in the balance sheet including loan growth and deposit outflows, and management of credit, market, and liquidity risks. The economic environment in Hawaii shows stability, though uncertainties remain Financial Highlights This section summarizes the key financial performance indicators and balance sheet changes for the second quarter and first half of 2023 - Q2 2023 net income was $62.4 million, a 5% increase YoY, driven by a $14.8 million rise in net interest income. Diluted EPS increased 7% to $0.49[270] - H1 2023 net income was $129.3 million, a 10% increase YoY, primarily due to a $48.2 million increase in net interest income. Diluted EPS rose 11% to $1.01[272] - Total loans and leases grew 2% to $14.4 billion as of June 30, 2023, from year-end 2022, while total deposits decreased 3% to $21.1 billion over the same period[277][281] - The company remained well-capitalized with a Common Equity Tier 1 (CET1) ratio of 12.05% as of June 30, 2023, up from 11.82% at year-end 2022[276] Results of Operations This section provides a detailed analysis of the company's net interest income, provision for credit losses, noninterest income, and noninterest expense for the reported periods - Net interest margin for Q2 2023 was 2.91%, up 31 basis points YoY, driven by higher yields on the loan portfolio which increased by 178 basis points to 5.22%[285] - The provision for credit losses was $5.0 million in Q2 2023, up from $1.0 million in Q2 2022, primarily due to increased provisions for construction loans and home equity lines[297] - Noninterest income in Q2 2023 increased by 7% YoY to $47.3 million, mainly due to a $4.1 million positive swing in Bank-owned life insurance (BOLI) income[301][306] - Noninterest expense rose 11% YoY to $120.9 million in Q2 2023, largely due to an $8.0 million increase in salaries and benefits, including severance costs, and a $3.2 million increase in equipment expense[308][309] Analysis of Financial Condition This section analyzes the company's balance sheet components, including loans, deposits, borrowings, and asset quality, and their changes from year-end 2022 - Total loans and leases increased by $270.8 million (2%) since year-end 2022 to $14.4 billion, led by growth in commercial real estate, construction, and residential real estate loans[363] - Total deposits decreased by $610.9 million (3%) to $21.1 billion since year-end 2022, as decreases in demand and savings deposits were only partially offset by an increase in higher-cost time deposits[405] - Uninsured deposits were estimated at $10.7 billion (51% of total deposits) as of June 30, 2023. Excluding fully collateralized public deposits, the uninsured amount was $8.5 billion (40% of total deposits)[406] - The company increased its borrowings, holding $500 million in long-term FHLB advances as of June 30, 2023, compared to $75 million in short-term borrowings at year-end 2022, to enhance liquidity[408][409] - Non-performing assets (NPAs) increased slightly to $13.2 million (0.09% of total loans and OREO) from $12.0 million at year-end 2022, primarily due to an increase in non-accrual home equity lines[383] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section refers to the detailed discussion of market risk within the Management's Discussion and Analysis (MD&A). The company's primary market risk is interest rate risk, which is managed through asset and liability management activities overseen by the ALCO. The company uses Net Interest Income (NII) simulation analysis to measure this risk and is currently positioned to benefit from rising interest rates - The company's primary market risk exposure is interest rate risk, managed by the Asset Liability Management Committee (ALCO)[425][432][447] Net Interest Income Sensitivity (Static Forecast as of June 30, 2023) | Interest Rate Change (basis points) | Estimated % Change in NII (Next 12 Months) | | :--- | :--- | | Gradual Change | | | +100 | +3.2% | | -100 | -3.4% | | Immediate Change | | | +100 | +5.7% | | -100 | -6.1% | Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2023. There were no material changes to the company's internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report (June 30, 2023)[454] - No changes occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[455] Part II Other Information This section provides information on legal proceedings, risk factors, other disclosures, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is involved in various litigation matters incidental to its business but does not expect any of the current proceedings to have a material adverse effect on its financial condition or results of operations - The company is party to various litigation matters incidental to its business but does not believe their resolution will have a material adverse effect[456] Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes have been identified from the risk factors disclosed in the company's 2022 Form 10-K[457] Item 5. Other Information During the second quarter of 2023, no directors or officers adopted or terminated any Rule 10b5-1 trading plans or other non-Rule 10b5-1 trading arrangements - No directors or officers adopted or terminated a Rule 10b5-1 trading plan during the three months ended June 30, 2023[458] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including separation agreements with two executives, CEO/CFO certifications, and XBRL data files - Exhibits filed include separation agreements for Ralph M. Mesick and Lance A. Mizumoto, dated June 28, 2023[460] - Standard CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906 are included as exhibits[460]