First Hawaiian(FHB) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited interim consolidated financial statements for Q1 2019 and 2018, including income, comprehensive income, balance sheets, equity, cash flows, and detailed notes on accounting policies and financial instruments Consolidated Statements of Income Consolidated Statements of Income (Q1 2019 vs Q1 2018) | Financial Metric | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :--- | :--- | :--- | | Net Interest Income | $145.1 | $139.7 | | Total Noninterest Income | $47.1 | $48.7 | | Total Noninterest Expense | $92.6 | $90.6 | | Net Income | $69.9 | $68.0 | | Diluted Earnings Per Share | $0.52 | $0.49 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (Q1 2019 vs Q1 2018) | Metric | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :--- | :--- | :--- | | Net Income | $69.9 | $68.0 | | Other Comprehensive Income (Loss) | $53.4 | $(48.2) | | Total Comprehensive Income | $123.4 | $19.7 | - The significant swing in Other Comprehensive Income was driven by a $53.4 million positive net change in investment securities in Q1 2019, compared to a $48.8 million negative change in Q1 2018[9] Consolidated Balance Sheets Consolidated Balance Sheet Highlights | Account | March 31, 2019 (in billions) | December 31, 2018 (in billions) | | :--- | :--- | :--- | | Total Assets | $20.44 | $20.70 | | Net Loans and Leases | $13.06 | $12.93 | | Total Deposits | $16.80 | $17.15 | | Total Liabilities | $17.83 | $18.17 | | Total Stockholders' Equity | $2.61 | $2.52 | Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased from $2.52 billion at the end of 2018 to $2.61 billion as of March 31, 2019. The increase was primarily driven by net income of $69.9 million and other comprehensive income of $53.4 million, partially offset by cash dividends of $35.1 million[19] Consolidated Statements of Cash Flows Cash Flow Summary (Q1 2019 vs Q1 2018) | Cash Flow Activity | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $63.4 | $53.2 | | Net Cash used in Investing Activities | $(57.8) | $(112.5) | | Net Cash used in Financing Activities | $(391.4) | $(282.9) | | Net Decrease in Cash and Cash Equivalents | $(385.8) | $(342.2) | Notes to Consolidated Financial Statements - On February 1, 2019, BancWest Corporation (BWC), an indirect subsidiary of BNP Paribas (BNPP), completed the sale of its remaining shares of FHI common stock, resulting in BNPP fully exiting its ownership interest[28] - The company adopted several new accounting standards in 2019, including ASU No. 2016-02 for leases, which resulted in the recognition of a $50.3 million lease liability and a $50.6 million right-of-use asset on January 1, 2019[30][32] - The company is preparing for the adoption of the Current Expected Credit Loss (CECL) standard (ASU No. 2016-13), which will be effective January 1, 2020. Management is currently unable to reasonably estimate the impact of adopting the new standard[40] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2019 financial condition and results, noting a 3% increase in net income to $69.9 million, driven by net interest income growth, alongside a 1% rise in total loans to $13.2 billion and a 2% decrease in deposits to $16.8 billion Financial Highlights - Net income for Q1 2019 was $69.9 million, a 3% increase from $68.0 million in Q1 2018. Diluted EPS increased 6% to $0.52 from $0.49[287] - The increase in net income was primarily driven by a $5.4 million (4%) increase in net interest income, partially offset by a $2.0 million (2%) increase in noninterest expense[287][289][293] - Total loans and leases grew to $13.2 billion as of March 31, 2019, a 1% increase from year-end 2018, while total deposits decreased by 2% to $16.8 billion[295][298] - Return on average tangible assets was 1.45% and return on average tangible stockholders' equity was 18.35% for Q1 2019[288] Analysis of Results of Operations - Net Interest Income: Increased by $5.4 million (4%) YoY to $145.1 million. Net Interest Margin (NIM) expanded by 10 basis points to 3.23%, driven by higher loan yields and balances, partially offset by increased deposit funding costs[304] - Provision for Loan and Lease Losses: Decreased slightly to $5.7 million from $6.0 million in Q1 2018, reflecting a stable credit risk profile[290][305] - Noninterest Income: Decreased by $1.6 million (3%) YoY to $47.1 million, primarily due to a $2.6 million net loss on the sale of available-for-sale debt securities[291][309] - Noninterest Expense: Increased by $2.0 million (2%) YoY to $92.6 million, mainly due to higher salaries and employee benefits ($2.7 million increase) and contracted services fees ($1.4 million increase). This was partially offset by a $2.5 million decrease in regulatory assessment fees[293][317] Analysis of Financial Condition Loan and Lease Portfolio Composition (as of March 31, 2019) | Loan Category | Balance (in billions) | % of Total | | :--- | :--- | :--- | | Commercial and industrial | $3.20 | 24.3% | | Commercial real estate | $3.15 | 23.8% | | Residential | $4.45 | 33.7% | | Consumer | $1.65 | 12.5% | | Other (Construction, Lease) | $0.74 | 5.6% | | Total Loans and Leases | $13.20 | 100.0% | - Total loans increased by $121.3 million (1%) from year-end 2018, led by growth in commercial real estate loans[353] - The Allowance for Loan and Lease Losses was $141.5 million, or 1.07% of total loans, as of March 31, 2019, slightly down from 1.08% at year-end 2018[307][395] - Total deposits decreased by $354.8 million (2%) from year-end 2018 to $16.8 billion, mainly due to declines in time deposits and demand deposits[404] - Total stockholders' equity increased by $88.4 million (3%) from year-end 2018 to $2.6 billion, driven by net income and a positive change in the fair value of investment securities, partially offset by dividends[299][415] Risk Governance and Quantitative and Qualitative Disclosures About Market Risk - Credit Risk: The company manages credit risk through defined underwriting criteria, portfolio diversification, and an independent credit review process. The loan portfolio is concentrated in Hawaii, making it dependent on local economic conditions like tourism and real estate[426][428][431] - Market Risk: The primary market risk is interest rate risk. The company uses net interest income simulation analysis to measure this risk. As of March 31, 2019, a static forecast showed that an immediate +100 basis point parallel shift in rates would increase net interest income by 5.6% over 12 months, while a -100 basis point shift would decrease it by 6.9%[436][440][444] - Operational Risk: The company has a framework to manage operational risk, including reporting and assessment of events across seven categories defined by the Basel Committee, such as external fraud, system failures, and business disruption[455] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section directs readers to the detailed market risk disclosures within Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - The report directs readers to the MD&A section for detailed disclosures regarding market risk[457] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls were effective as of March 31, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[457] - No material changes to the internal control over financial reporting were identified during the quarter ended March 31, 2019[458] Part II. Other Information Item 1. Legal Proceedings The company is involved in various legal proceedings, none expected to have a material adverse effect, and funded a $4.1 million settlement for an overdraft fee class action - The company states that it is not party to any legal proceedings expected to have a material adverse effect on its business or financial condition[459] - Reference is made to Note 12, which details a class action lawsuit concerning overdraft fees. The company funded a $4.1 million settlement account in Q1 2019 in connection with this matter[162] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - There are no material changes from the risk factors disclosed in the company's 2018 Form 10-K[460] Item 5. Other Information This section discloses activities of former affiliate BNP Paribas related to Iran, as required by Section 13(r) of the Exchange Act, including legacy financing and clearing system participation - Disclosure is provided regarding activities of its affiliate (until February 2019), BNP Paribas (BNPP), related to Iran, as required by Section 13(r) of the Exchange Act[461][463] - BNPP reported receiving approximately €1.0 million in gross revenues during Q1 2019 from legacy guarantees and financing arrangements related to projects in Iran[465] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including incentive plans, retirement plans, CEO/CFO certifications, and XBRL data files - A list of exhibits filed with the Form 10-Q is provided, including certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002[470][471]