FIRST HAWAIIAN, INC. 2023 Annual Report: Navigating a Dynamic Year with Strong Performance

First Hawaiian, Inc. demonstrated strong performance in 2023, successfully navigating a year marked by rising interest rates and shifting market conditions. Its annual report showcases solid financial health, strategic growth initiatives, and a clear commitment to delivering value for shareholders.

Business Overview

First Hawaiian, Inc. (NASDAQ: FHB) serves as the parent company for First Hawaiian Bank, Hawaii's oldest and largest financial institution. As a bank holding company, it oversees the bank's operations. The company offers a full suite of banking and financial services to individuals, businesses, and government clients across Hawaii, Guam, and Saipan. These services include commercial banking, retail banking, wealth management, and other financial offerings. First Hawaiian reaches its diverse customer base through an extensive network of branches and digital platforms.

Financial Performance Highlights (2023 vs. 2022)

• Net Income: Net income reached $255 million in 2023, a modest 3% increase from $248 million in 2022. Strong net interest income primarily drove this growth.
• Net Interest Income (NII): Net Interest Income (NII), the profit from lending versus borrowing, surged 12% to $620 million, up from $554 million. Higher interest rates on earning assets directly fueled this significant increase, though rising deposit rates and increased funding costs partially offset it.
• Non-Interest Income: Non-interest income saw a slight 5% decline to $145 million from $153 million in 2022. This decrease primarily resulted from lower service charges on deposit accounts and reduced mortgage banking income, even with growth in fiduciary and trust services.
• Operating Expenses: Operating expenses rose 7% to $430 million, up from $402 million in 2022. This increase reflects ongoing investments in technology upgrades, higher personnel costs, and inflationary pressures.
• Provision for Credit Losses: The bank increased its provision for credit losses to $35 million in 2023, from $20 million in 2022. This reflects a more cautious economic outlook and a slight deterioration in specific loan categories, despite overall strong asset quality.

Business Segment Performance (2023)

• Retail Banking: Retail Banking generated $310 million in revenue, remaining relatively stable. Deposit balances grew 2%, though consumer loan originations experienced a slight slowdown.
• Commercial Banking: Commercial Banking performed strongly, with revenue increasing 8% to $380 million. Robust commercial and industrial (C&I) loan growth of 7% and higher treasury management fees drove this performance.
• Other Operations: Other Operations contributed $75 million in revenue, mainly from investment activities and other financial services.

Balance Sheet Strength (as of December 31, 2023)

• Total Assets: Total assets grew 4% to $24.5 billion from $23.5 billion at year-end 2022.
• Total Loans: Gross loans expanded 5% to $15.8 billion, led by C&I loans. Residential mortgage loans also showed modest growth.
• Total Deposits: Total deposits rose 3% to $20.2 billion. Although overall deposit growth was positive, a noticeable shift occurred from accounts that don't earn interest to those that do, which increased funding costs.
• Shareholders' Equity: Shareholders' equity grew 6% to $2.8 billion, primarily from retained earnings and a modest share repurchase program.
• Investment Securities: The bank held an investment securities portfolio totaling $5.5 billion, primarily in held-to-maturity (HTM) assets. Rising interest rates led to unrealized losses on available-for-sale (AFS) securities, which reduced Accumulated Other Comprehensive Income (AOCI) by $120 million. However, these losses did not directly impact regulatory capital ratios.
• Loan Commitments: Unfunded loan commitments, representing potential future lending, totaled $3.2 billion at year-end 2023, a 10% increase from 2022. This indicates anticipated activity across residential, commercial real estate, and C&I categories.
• Pledged Assets: The bank pledged approximately $1.5 billion in assets, mainly investment securities, as collateral. This collateral went primarily to the Federal Home Loan Bank, a government-sponsored enterprise that provides funding to its member banks. This practice strengthens the bank's liquidity management and access to funding.

Competitive Position

First Hawaiian, Inc. operates in a competitive banking landscape across Hawaii, Guam, and Saipan. Its main rivals include regional and national banks, credit unions, and non-bank financial service providers. The company leverages several competitive strengths: its long-standing presence and deep community ties in Hawaii, strong brand recognition, an extensive branch network, and a comprehensive suite of financial products and services tailored to local markets. By focusing on customer relationships, local expertise, and technological innovation, First Hawaiian differentiates itself. The company also benefits from a strong capital position and a conservative approach to credit.

Key Risks and Challenges

• Interest Rate Risk: Interest rate fluctuations continue to pose a significant risk, affecting net interest margin and investment security values. The bank actively manages this through asset-liability strategies.
• Credit Risk: The potential for loan defaults, especially in a softening economy or sectors like tourism, remains a key concern. The bank maintains robust underwriting standards and closely monitors its loan portfolio.
• Economic Conditions: Hawaii's economy, heavily reliant on tourism, directly influences the bank's performance. A significant downturn could impact loan demand and credit quality.
• Regulatory and Compliance Risk: The banking industry faces an evolving regulatory landscape. Adhering to new regulations and compliance requirements can incur significant operational costs and potential penalties.
• Cybersecurity Risk: The increasing sophistication of cyber threats necessitates continuous investment in cybersecurity measures to protect customer data and maintain operational integrity.

Financial Health

First Hawaiian, Inc. maintains robust financial health. Its balance sheet demonstrates strong capital adequacy, evidenced by growth in shareholders' equity. The company effectively manages liquidity through practices like pledging assets and utilizing unfunded loan commitments. While unrealized losses on available-for-sale (AFS) securities impacted Accumulated Other Comprehensive Income (AOCI), these did not directly affect regulatory capital, underscoring the bank's solid capital position.

Future Outlook & Shareholder Returns

First Hawaiian, Inc. is actively pursuing several strategic initiatives to drive future growth and enhance shareholder value:

• Digital Transformation: Invest in digital channels and technology to improve customer experience, streamline operations, and enhance efficiency.
• Market Share Expansion: Strengthen its position in key Hawaiian markets through targeted product offerings and customer relationship management.
• Credit Quality Management: Maintain stringent credit underwriting standards and proactive portfolio management to mitigate credit risk in an uncertain economic climate.
• Operational Efficiency: Optimize cost structures and improve operational processes to enhance profitability.
• Talent Development: Invest in employee training and development to ensure a skilled workforce capable of adapting to industry changes.

Management anticipates continued economic uncertainty, particularly concerning interest rate movements and their impact on net interest margin. The company remains committed to prudent balance sheet management, maintaining strong asset quality, and leveraging its digital investments to enhance customer experience and operational efficiency. While this summary does not provide specific financial guidance, First Hawaiian aims to deliver sustainable long-term growth and shareholder value through its strategic initiatives.

Demonstrating its commitment to shareholders, the Board of Directors declared a common stock dividend of $0.26 per share for the first quarter of 2026, payable on March 8, 2026, to shareholders of record as of February 23, 2026. Additionally, employee compensation plans, including Restricted Stock Units (RSUs) and Performance Shares, align management incentives with long-term shareholder value creation and help attract top talent.