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First Hawaiian(FHB) - 2019 Q3 - Quarterly Report
First HawaiianFirst Hawaiian(US:FHB)2019-10-24 23:36

FORM 10-Q Cover Page This section provides filing details for FIRST HAWAIIAN, INC.'s Quarterly Report on Form 10-Q for the period ended September 30, 2019 Filing Information This chapter details the report type, registrant, and filer status as a large accelerated filer - Report Type: Quarterly Report on Form 10-Q for the period ended September 30, 20191 - Registrant: FIRST HAWAIIAN, INC. (Commission File Number 001-14585)1 - Filer Status: Large Accelerated Filer1 Shares Outstanding This chapter states the number of common stock shares outstanding as of October 17, 2019 - 130,977,395 shares of Common Stock, par value $0.01 per share, were outstanding as of October 17, 20192 TABLE OF CONTENTS This section indexes the unaudited consolidated financial statements and other information included in the report Financial Statements Index This chapter lists the consolidated financial statements and Part II disclosures - Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 20184 - Consolidated Balance Sheets as of September 30, 2019 and December 31, 20184 - Notes to Consolidated Financial Statements (unaudited) and Management's Discussion and Analysis of Financial Condition and Results of Operations4 PART I. FINANCIAL INFORMATION This part contains the company's unaudited interim consolidated financial statements and related notes ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited interim consolidated financial statements for First Hawaiian, Inc. and its subsidiary, including the Statements of Income, Comprehensive Income, Balance Sheets, Stockholders' Equity, and Cash Flows for the specified periods CONSOLIDATED STATEMENTS OF INCOME For the three months ended September 30, 2019, net income increased to $74.2 million from $67.4 million in 2018, driven by higher net interest income and lower provision for loan and lease losses, with diluted EPS rising to $0.56 from $0.50 | Metric (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :-------------------- | :------------------------------ | :------------------------------ | | Total interest income | $170,181 | $164,052 | | Total interest expense| $27,100 | $22,794 | | Net interest income | $143,081 | $141,258 | | Provision for loan and lease losses | $— | $4,460 | | Total noninterest income | $49,980 | $47,405 | | Total noninterest expense | $93,466 | $93,147 | | Net income | $74,199 | $67,388 | | Diluted earnings per share | $0.56 | $0.50 | | Metric (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :-------------------- | :----------------------------- | :----------------------------- | | Total interest income | $516,560 | $478,007 | | Total interest expense| $82,777 | $55,674 | | Net interest income | $433,783 | $422,333 | | Provision for loan and lease losses | $9,550 | $16,430 | | Total noninterest income | $145,825 | $145,902 | | Total noninterest expense | $279,379 | $275,599 | | Net income | $216,556 | $204,399 | | Diluted earnings per share | $1.61 | $1.48 | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Total comprehensive income significantly increased for both the three and nine months ended September 30, 2019, primarily due to a substantial positive net change in investment securities, contrasting with losses in the prior year | Metric (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :-------------------- | :------------------------------ | :------------------------------ | | Net income | $74,199 | $67,388 | | Net change in investment securities | $13,210 | $(22,420) | | Total comprehensive income | $87,409 | $45,099 | | Metric (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :-------------------- | :----------------------------- | :----------------------------- |\ | Net income | $216,556 | $204,399 | | Net change in investment securities | $114,015 | $(89,236) | | Total comprehensive income | $329,977 | $116,151 | CONSOLIDATED BALANCE SHEETS As of September 30, 2019, total assets slightly decreased to $20.6 billion from $20.7 billion at December 31, 2018, mainly due to a reduction in investment securities and net loans and leases, partially offset by an increase in interest-bearing deposits in other banks | Asset (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :------------------- | :----------- | :----------- | | Cash and due from banks | $358,863 | $396,836 | | Interest-bearing deposits in other banks | $985,154 | $606,801 | | Investment securities | $4,157,082 | $4,498,342 | | Net loans and leases | $12,710,432 | $12,934,473 | | Total assets | $20,598,220 | $20,695,678 | | Liability & Equity (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :----------- | :----------- | | Total deposits | $16,857,246 | $17,150,068 | | Short-term borrowings | $400,000 | $— | | Long-term borrowings | $200,018 | $600,026 | | Total liabilities | $17,943,662 | $18,170,839 | | Total stockholders' equity | $2,654,558 | $2,524,839 | CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Total stockholders' equity increased to $2.65 billion as of September 30, 2019, from $2.52 billion at December 31, 2018, primarily due to net income and other comprehensive income, partially offset by cash dividends and common stock repurchases | Metric (in thousands) | Balance as of Dec 31, 2018 | Net Income | Cash Dividends Declared | Equity-based Awards | Common Stock Repurchased | Other Comprehensive Income, net of tax | Balance as of Sep 30, 2019 | | :-------------------- | :------------------------- | :--------- | :---------------------- | :------------------ | :----------------------- | :------------------------------------- | :------------------------- | | Total Stockholders' Equity | $2,524,839 | $216,556 | $(104,392) | $2,943 | $(98,809) | $113,421 | $2,654,558 | - Cash dividends declared for the nine months ended September 30, 2019, were $0.78 per share, totaling $104.392 million18 - Common stock repurchased for the nine months ended September 30, 2019, amounted to $98.809 million, representing 3,799,138 shares18 CONSOLIDATED STATEMENTS OF CASH FLOWS Net cash provided by operating activities decreased significantly to $171.1 million for the nine months ended September 30, 2019, from $265.5 million in 2018; net cash provided by investing activities substantially increased to $667.1 million from $122.3 million, while net cash used in financing activities decreased to $497.8 million from $723.0 million | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $171,067 | $265,511 | | Net cash provided by investing activities | $667,110 | $122,321 | | Net cash used in financing activities | $(497,797) | $(722,983) | | Net increase (decrease) in cash and cash equivalents | $340,380 | $(335,151) | | Cash and cash equivalents at end of period | $1,344,017 | $699,493 | - Investing activities saw significant proceeds from maturities, principal repayments, calls, and sales of available-for-sale securities, totaling $1.48 billion in 2019, compared to $637.5 million in 201823 - Financing activities included a net decrease in deposits of $292.8 million in 2019, compared to $922.8 million in 2018, and common stock repurchases of $98.8 million in 2019 versus $131.8 million in 201823 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) This section provides detailed notes to the unaudited interim consolidated financial statements, covering the company's organization, accounting policies, significant financial instruments, and other relevant disclosures 1. Organization and Basis of Presentation First Hawaiian, Inc. (FHI) is a bank holding company that wholly owns First Hawaiian Bank (FHB), offering comprehensive banking services; the interim financial statements are prepared in accordance with GAAP and SEC regulations, with management's estimates; BNPP fully exited its ownership interest in FHI common stock on February 1, 2019; several new accounting standards were adopted in 2019, including ASU No. 2016-02 (Leases) which resulted in recognizing a $50.3 million lease liability and a $50.6 million right-of-use asset, and ASU No. 2018-15 (Cloud Computing) which led to capitalizing $6.3 million in implementation costs - FHI is a bank holding company, owning 100% of First Hawaiian Bank (FHB), which offers comprehensive banking services to consumer and commercial customers25 - BNP Paribas (BNPP) fully exited its ownership interest in FHI common stock on February 1, 2019, following a series of secondary offerings30 - Adopted ASU No. 2016-02 (Leases) on January 1, 2019, recognizing a $50.3 million lease liability and a $50.6 million right-of-use asset3234 - Early adopted ASU No. 2018-15 (Cloud Computing) on January 1, 2019, capitalizing $6.3 million related to hosting arrangements that are service contracts for the nine months ended September 30, 201937 - The adoption of the CECL standard (ASU No. 2016-13) in 2020 is estimated to result in an increase in the Allowance for Credit Losses (ACL) of approximately 10% to 15% based on September 30, 2019, portfolio balances and economic forecasts4142 2. Investment Securities The company's investment securities, primarily available-for-sale, decreased in fair value to $4.16 billion as of September 30, 2019, from $4.50 billion at December 31, 2018, largely due to the sale of 48 securities in January 2019; unrealized losses significantly decreased from $142.2 million to $13.7 million, reflecting lower market interest rates; the company also holds Visa Class B restricted shares, which are carried at $0 cost basis, and recorded an estimated $0.3 million liability related to a reduction in the Visa Class B conversion rate | Investment Category (in thousands) | Amortized Cost (Sep 30, 2019) | Fair Value (Sep 30, 2019) | Amortized Cost (Dec 31, 2018) | Fair Value (Dec 31, 2018) | | :--------------------------------- | :---------------------------- | :------------------------ | :---------------------------- | :------------------------ | | U.S. Treasury securities | $29,653 | $29,738 | $389,470 | $389,470 | | Government-sponsored enterprises debt securities | $126,696 | $126,649 | $248,372 | $241,594 | | Government agency mortgage-backed securities | $342,326 | $343,905 | $426,710 | $411,536 | | Collateralized mortgage obligations | $3,253,716 | $3,260,369 | $3,399,957 | $3,285,041 | | Total available-for-sale securities | $4,143,124 | $4,157,082 | $4,640,419 | $4,498,342 | - Gross unrealized losses on available-for-sale securities decreased from $142.2 million at December 31, 2018, to $13.7 million at September 30, 2019, primarily due to lower market interest rates5960386 - The company sold 48 investment securities in January 2019, resulting in a net loss of $2.6 million for the nine months ended September 30, 2019, and a non-credit related OTTI write-down of $24.1 million in December 20185162348387 - An estimated $0.3 million liability was recorded as of September 30, 2019, to be paid to the buyer of Visa Class B restricted shares due to a reduction in the conversion rate65 3. Loans and Leases Total loans and leases decreased by 2% to $12.84 billion as of September 30, 2019, from $13.08 billion at December 31, 2018, primarily driven by a significant decrease in commercial and industrial loans due to a $408.9 million sale, partially offset by growth in commercial real estate and residential mortgage portfolios | Loan Category (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------- | :----------- | :----------- | | Commercial and industrial | $2,654,077 | $3,208,760 | | Commercial real estate | $3,309,389 | $2,990,783 | | Construction | $486,977 | $626,757 | | Residential mortgage | $3,671,424 | $3,527,101 | | Home equity line | $916,106 | $912,517 | | Consumer | $1,637,549 | $1,662,504 | | Lease financing | $167,874 | $147,769 | | Total loans and leases | $12,843,396 | $13,076,191 | - Commercial and industrial loans decreased by $554.7 million (17%) to $2.65 billion, primarily due to the sale of $408.9 million in loans67391 - Commercial real estate loans increased by $318.6 million (11%) to $3.31 billion, reflecting strong demand for new real estate assets67396 - Residential real estate loans increased by $147.9 million (3%) to $4.59 billion, benefiting from continued demand for new housing in a low interest rate environment67398 4. Allowance for Loan and Lease Losses The Allowance for Loan and Lease Losses (Allowance) decreased by $8.8 million (6%) to $133.0 million as of September 30, 2019, from $141.7 million at December 31, 2018, primarily due to the sale of commercial and industrial loans; the Allowance-to-total-loans-and-leases ratio was 1.04%; the company segments its portfolio into commercial, residential, and consumer lending for loss estimation, using specific and pooled allocation methodologies, along with qualitative adjustments and an unallocated portion for inherent risks | Metric (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :----------- | :----------- | | Allowance for loan and lease losses | $132,964 | $141,718 | | Ratio of Allowance to total loans and leases | 1.04% | 1.08% | - The decrease in the Allowance was partially due to the sale of $408.9 million commercial and industrial loans during the nine months ended September 30, 2019318339 - Net charge-offs for the nine months ended September 30, 2019, were $18.3 million (0.19% of average total loans and leases), up from $12.4 million (0.13%) in 2018, primarily due to a $2.0 million full charge-off of one commercial and industrial loan339441 - Impaired loans decreased to $26.6 million as of September 30, 2019, from $30.6 million at December 31, 2018, with a related allowance of $0.4 million and $0.5 million, respectively102425 - Loans modified in a troubled debt restructuring (TDR) decreased to $23.0 million as of September 30, 2019, from $24.7 million at December 31, 2018, with 97% performing in accordance with modified terms130427 5. Mortgage Servicing Rights Mortgage Servicing Rights (MSRs) net carrying value decreased to $13.6 million as of September 30, 2019, from $16.2 million at December 31, 2018; the unpaid principal amount of residential real estate loans serviced for others also decreased to $2.4 billion from $2.7 billion; servicing fees and MSR amortization both saw slight decreases for the three and nine months ended September 30, 2019, compared to 2018 | Metric (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :----------- | :----------- | | Gross carrying amount | $63,401 | $63,342 | | Less: accumulated amortization | $49,771 | $47,187 | | Net carrying value | $13,630 | $16,155 | - The unpaid principal amount of residential real estate loans serviced for others decreased to $2.4 billion as of September 30, 2019, from $2.7 billion as of December 31, 2018117 | Metric (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Servicing fees | $1,600 | $1,700 | $4,800 | $5,300 | | Amortization of MSRs | $1,000 | $1,000 | $2,600 | $3,000 | 6. Transfers of Financial Assets The company pledges assets as collateral for public deposits, borrowing capacity at FHLB and FRB, ACH transactions, and interest rate swaps; total pledged assets increased to $5.51 billion as of September 30, 2019, from $5.38 billion at December 31, 2018, with significant pledges to FHLB and FRB | Pledged Asset Category (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :------------------------------------ | :----------- | :----------- | | Public deposits | $1,775,871 | $1,749,726 | | Federal Home Loan Bank | $2,858,513 | $2,497,030 | | Federal Reserve Bank | $675,347 | $957,017 | | ACH transactions | $151,014 | $150,903 | | Interest rate swaps | $47,129 | $28,843 | | Total | $5,507,874 | $5,383,519 | - The company enters into bilateral agreements to pledge investment securities as collateral for public deposits and repurchase agreements, and loans as collateral for FHLB and FRB borrowing capacity124 7. Deposits Total deposits decreased by 2% to $16.86 billion as of September 30, 2019, from $17.15 billion at December 31, 2018, primarily due to decreases in time and demand deposit balances, partially offset by an increase in money market deposit balances | Deposit Category (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :------------------------------ | :----------- | :----------- | | Interest-bearing (U.S.) | $10,352,703 | $10,393,449 | | Noninterest-bearing (U.S.) | $5,067,812 | $5,368,729 | | Interest-bearing (Foreign) | $783,721 | $748,678 | | Noninterest-bearing (Foreign) | $653,010 | $639,212 | | Total deposits | $16,857,246 | $17,150,068 | - The decrease in total deposits was driven by a $384.6 million decrease in time deposit balances and a $287.1 million decrease in demand deposit balances, partially offset by a $332.7 million increase in money market deposit balances321449 - Time certificates of deposit in denominations of $250,000 or more aggregated $1.5 billion as of September 30, 2019, down from $1.9 billion at December 31, 2018129 8. Short-Term Borrowings Short-term borrowings increased significantly to $400.0 million as of September 30, 2019, from nil at December 31, 2018, due to the reclassification of $400.0 million in FHLB fixed-rate advances from long-term borrowings, as their maturity dates are now less than one year | Short-term Borrowings (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :----------------------------------- | :----------- | :----------- | | Short-term FHLB fixed-rate advances | $400,000 | $— | | Total short-term borrowings | $400,000 | $— | - The $400.0 million in short-term FHLB fixed-rate advances have a weighted average interest rate of 2.84% and mature in 2020131 9. Long-Term Borrowings Long-term borrowings decreased to $200.0 million as of September 30, 2019, from $600.0 million at December 31, 2018, primarily due to the reclassification of $400.0 million in FHLB fixed-rate advances to short-term borrowings; the remaining FHLB advances have a weighted average interest rate of 2.73% and mature between 2023 and 2024 | Long-term Borrowings (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :---------------------------------- | :----------- | :----------- | | Finance lease | $18 | $26 | | FHLB fixed-rate advances | $200,000 | $600,000 | | Total long-term borrowings | $200,018 | $600,026 | - The decrease in long-term borrowings is mainly due to the reclassification of $400.0 million in FHLB fixed-rate advances to short-term borrowings133453 - Available remaining borrowing capacity with the FHLB was $1.6 billion as of September 30, 2019, up from $1.3 billion at December 31, 2018133 10. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss significantly improved to $(18.8) million as of September 30, 2019, from $(132.2) million at December 31, 2018; this positive change was primarily driven by substantial unrealized net gains on investment securities during the period, partially offset by net actuarial losses on pension and other benefits | Component (in thousands) | Balance as of Dec 31, 2018 | Net Change (Nine Months Ended Sep 30, 2019) | Balance as of Sep 30, 2019 | | :----------------------- | :------------------------- | :------------------------------------------ | :------------------------- | | Pensions and Other Benefits | $(28,379) | $(594) | $(28,973) | | Investment Securities | $(103,816) | $114,015 | $10,199 | | Cash Flow Derivative Hedges | $— | $— | $— | | Total Accumulated Other Comprehensive Loss | $(132,195) | $113,421 | $(18,774) | - Unrealized net gains on investment securities arising during the nine months ended September 30, 2019, amounted to $112.1 million (net of tax)139 - Net actuarial losses on pensions and other benefits for the nine months ended September 30, 2019, were $(0.6) million (net of tax)139 11. Regulatory Capital Requirements The company and its bank subsidiary are subject to federal regulatory capital requirements, including CET1, Tier 1, and Total Capital ratios, as well as a leverage ratio; as of September 30, 2019, both the company and the bank were classified as 'well-capitalized,' exceeding all minimum capital ratios, including the phased-in capital conservation buffer | Capital Ratio | Sep 30, 2019 (FHI) | Sep 30, 2019 (FHB) | Minimum Capital Ratio (1) | Well Capitalized Ratio (1) | | :-------------- | :----------------- | :----------------- | :------------------------ | :------------------------- | | CET1 Capital to Risk-Weighted Assets | 12.15% | 12.04% | 4.50% | 6.50% | | Tier 1 Capital to Risk-Weighted Assets | 12.15% | 12.04% | 6.00% | 8.00% | | Total Capital to Risk-Weighted Assets | 13.11% | 13.00% | 8.00% | 10.00% | | Tier 1 Capital to Average Assets (Leverage Ratio) | 8.68% | 8.61% | 4.00% | 5.00% | - The capital conservation buffer reached 2.5% on January 1, 2019, effectively requiring minimum ratios of 7% CET1, 8.5% Tier 1, and 10.5% Total Capital to risk-weighted assets147 - Both First Hawaiian, Inc. and First Hawaiian Bank were classified as well-capitalized as of September 30, 2019147 12. Derivative Financial Instruments The company uses derivative contracts, primarily interest rate swaps, to manage interest rate risk and for customer accommodation; as of September 30, 2019, the notional amount of derivatives designated as hedging instruments was $23.5 million, while non-designated derivatives, mainly customer swap programs, totaled $2.75 billion; the company also recorded a $0.6 million derivative liability related to Visa Class B restricted shares; counterparty credit risk is managed through collateral agreements, with $29.7 million in financial instruments and $17.4 million in cash pledged as collateral for interest rate swaps | Derivative Type (in thousands) | Notional Amount (Sep 30, 2019) | Asset Derivatives (Sep 30, 2019) | Liability Derivatives (Sep 30, 2019) | | :----------------------------- | :----------------------------- | :------------------------------- | :----------------------------------- | | Interest rate swaps (hedging) | $23,545 | $— | $(927) | | Interest rate swaps (non-hedging) | $2,749,924 | $85,883 | $— | | Funding swap | $69,378 | $— | $(584) | | Foreign exchange contracts | $2,514 | $— | $(31) | - The company's customer swap program, with $2.7 billion in notional amounts, generated $1.9 million in upfront fees for the three months ended September 30, 2019169 - A derivative liability of $0.6 million was recorded for the Visa funding swap agreement as of September 30, 2019, due to a reduction in the Visa Class B conversion rate170 - The company pledged $29.7 million in financial instruments and $17.4 million in cash as collateral for interest rate swaps as of September 30, 2019153 13. Commitments and Contingent Liabilities The company faces various legal proceedings, including a class action lawsuit settled for $4.1 million in August 2019; off-balance sheet risks include $6.0 billion in unfunded commitments to extend credit and letters of credit as of September 30, 2019; the company also has guarantees related to residential mortgage loans sold in the secondary market, but does not anticipate material losses from repurchase requests - A class action lawsuit regarding overdraft fees was settled in August 2019, with the company funding a $4.1 million settlement account176 | Financial Instrument (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :---------------------------------- | :----------- | :----------- | | Commitments to extend credit | $5,814,078 | $5,549,591 | | Standby letters of credit | $183,992 | $204,324 | | Commercial letters of credit | $5,024 | $7,535 | - The unpaid principal balance of residential mortgage loans sold in the secondary market was $2.4 billion as of September 30, 2019, with potential repurchase obligations under certain conditions140469 14. Revenue from Contracts with Customers The company recognizes revenue from contracts with customers by following a five-step model, primarily for performance obligations satisfied at a point in time; total noninterest income was $50.0 million for the three months and $145.8 million for the nine months ended September 30, 2019; key revenue sources include service charges on deposit accounts, credit and debit card fees, and trust and investment services income, which all saw increases; contract liabilities related to vendor signing bonuses decreased by approximately $0.6 million for the nine months ended September 30, 2019 | Noninterest Income (in thousands) | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :------------------------------ | :----------------------------- | | Service charges on deposit accounts | $8,554 | $24,737 | | Credit and debit card fees | $16,839 | $50,123 | | Other service charges and fees | $8,903 | $27,435 | | Trust and investment services income | $8,698 | $26,247 | | Bank-owned life insurance | $5,743 | $12,946 | | Total noninterest income | $49,980 | $145,825 | - Service charges on deposit accounts increased by $0.6 million (8%) for the three months and $1.1 million (5%) for the nine months ended September 30, 2019, primarily due to overdraft and checking account fees343 - Trust and investment services income increased by $1.2 million (16%) for the three months and $2.8 million (12%) for the nine months ended September 30, 2019, driven by business cash management and investment management fees346 - Contract liabilities decreased by approximately $0.6 million for the nine months ended September 30, 2019, due to the amortization of vendor signing bonuses199 15. Earnings per Share Basic and diluted earnings per share increased for both the three and nine months ended September 30, 2019, compared to the same periods in 2018, with no adjustments made to net income for computation and no antidilutive securities | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $74,199 | $67,388 | $216,556 | $204,399 | | Basic earnings per share | $0.56 | $0.50 | $1.62 | $1.48 | | Diluted earnings per share | $0.56 | $0.50 | $1.61 | $1.48 | - Basic weighted-average outstanding shares decreased to 132,583,902 for the three months ended September 30, 2019, from 135,466,669 in 2018203 16. Leases The company adopted ASU No. 2016-02 (Leases) on January 1, 2019, recognizing operating lease right-of-use assets of $46.1 million and corresponding liabilities of $45.6 million; net lease expense for the nine months ended September 30, 2019, was $8.3 million; the weighted average remaining lease term for operating leases is 15.6 years with a weighted average discount rate of 3.34% | Lease Expense Component (in thousands) | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :------------------------------------- | :------------------------------ | :----------------------------- | | Operating lease expense | $2,284 | $6,887 | | Short-term lease expense | $111 | $365 | | Variable lease expense | $795 | $1,842 | | Total finance lease expense | $1 | $3 | | Less: Sublease income | $(268) | $(766) | | Net lease expense | $2,923 | $8,331 | - Operating lease right-of-use assets were $46.1 million and operating lease liabilities were $45.6 million as of September 30, 2019208 - The weighted average remaining lease term for operating leases is 15.6 years, with a weighted average discount rate of 3.34%208 | Future Minimum Operating Lease Payments (in thousands) | Net Operating Lease Payments | | :----------------------------------------------------- | :--------------------------- | | 2019 (remaining) | $1,635 | | 2020 | $8,799 | | 2021 | $8,107 | | 2022 | $5,477 | | 2023 | $2,964 | | Thereafter | $34,948 | | Total | $45,641 | 17. Benefit Plans The company sponsors various benefit plans, including a frozen supplemental executive retirement plan (SERP); net periodic benefit costs for pension plans were $2.4 million for the three months and $7.3 million for the nine months ended September 30, 2019, while other benefits costs were $0.18 million and $0.54 million, respectively - The Supplemental Executive Retirement Plan (SERP) was frozen effective July 1, 2019, ceasing new accruals of benefits218 | Component of Net Periodic Benefit Cost (in thousands) | Three Months Ended Sep 30, 2019 (Pension) | Three Months Ended Sep 30, 2019 (Other Benefits) | Nine Months Ended Sep 30, 2019 (Pension) | Nine Months Ended Sep 30, 2019 (Other Benefits) | | :---------------------------------------------------- | :---------------------------------------- | :----------------------------------------------- | :--------------------------------------- | :---------------------------------------------- | | Service cost | $18 | $160 | $52 | $478 | | Interest cost | $2,044 | $203 | $6,132 | $615 | | Expected return on plan assets | $(1,195) | $— | $(3,585) | $— | | Recognized net actuarial loss (gain) | $1,564 | $(76) | $4,692 | $(228) | | Total net periodic benefit cost | $2,431 | $180 | $7,291 | $544 | 18. Fair Value The company measures financial instruments at fair value using a three-level hierarchy based on observable inputs; available-for-sale securities and most derivatives are classified as Level 2, while the Visa derivative and impaired loans are Level 3 due to significant unobservable inputs; total assets measured at fair value on a recurring basis were $4.24 billion as of September 30, 2019, with Level 3 liabilities totaling $(0.58) million, primarily from the Visa derivative - Fair value hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs requiring significant management judgment)221223 - Available-for-sale securities are classified as Level 2, and most derivatives are classified as Level 2, using proprietary valuation models with market observable inputs228230 - The Visa derivative, with a fair value of $(0.58) million as of September 30, 2019, is classified as Level 3 due to significant unobservable inputs like expected conversion rate, term, and growth rate of Visa Class A shares231237250 | Asset/Liability (in thousands) | Level 1 (Sep 30, 2019) | Level 2 (Sep 30, 2019) | Level 3 (Sep 30, 2019) | Total (Sep 30, 2019) | | :----------------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------- | | Total available-for-sale securities | $— | $4,157,082 | $— | $4,157,082 | | Other assets (derivative assets) | $— | $85,883 | $— | $85,883 | | Other liabilities (derivative liabilities) | $— | $(958) | $(584) | $(1,542) | - Impaired loans and other real estate owned are measured at fair value on a nonrecurring basis, primarily using collateral values (Level 3)246247 19. Reportable Operating Segments The company operates through three segments: Retail Banking, Commercial Banking, and Treasury and Other; Retail Banking's net income increased by 6% for the three months and 5% for the nine months ended September 30, 2019, driven by lower loan loss provision and higher noninterest income; Commercial Banking's net income increased by 6% for the three months but remained flat for the nine months, benefiting from lower loan loss provision; Treasury and Other's net loss decreased by 37% for the three months and 21% for the nine months, primarily due to increased net interest income and BOLI income - Retail Banking offers financial products and services to consumers and small businesses, including residential and commercial mortgage loans, home equity lines, auto loans, deposit products, and wealth management256 - Commercial Banking provides corporate banking, real estate loans, commercial lease financing, auto dealer financing, business deposits, and credit cards to middle-market and large companies257 - Treasury and Other manages corporate asset and liability activities, including interest rate risk, investment securities, and borrowings, with primary noninterest income from bank-owned life insurance and foreign exchange258 Net Income by Business Segment (in thousands) | Segment (in thousands) | Net Income (Three Months Ended Sep 30, 2019) | Net Income (Three Months Ended Sep 30, 2018) | Net Income (Nine Months Ended Sep 30, 2019) | Net Income (Nine Months Ended Sep 30, 2018) | | :--------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Retail Banking | $58,557 | $55,201 | $174,066 | $165,408 | | Commercial Banking | $19,651 | $18,574 | $55,762 | $55,734 | | Treasury and Other | $(4,009) | $(6,387) | $(13,272) | $(16,743) | | Total | $74,199 | $67,388 | $216,556 | $204,399 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and operating results Cautionary Note Regarding Forward-Looking Statements This section advises readers that the report contains forward-looking statements subject to various risks and uncertainties, including economic conditions, interest rate changes, credit losses, and regulatory impacts; actual results may differ materially from projections, and the company does not undertake to update these statements - Forward-looking statements are based on current expectations and are subject to risks such as geographic concentration, economic conditions, interest rate changes, and potential underestimation of credit losses264265 - The estimated impact of the CECL approach on the allowance for credit losses is subject to refinement and changes in macroeconomic conditions267 Company Overview First Hawaiian, Inc. (FHI) is a bank holding company that wholly owns First Hawaiian Bank (FHB), established in 1858 - FHI is the parent company of First Hawaiian Bank (FHB), which was founded in 1858 and operates through Retail Banking, Commercial Banking, and Treasury and Other segments269 Transition to an Independent Public Company BNP Paribas (BNPP) fully divested its ownership interest in First Hawaiian, Inc. (FHI) on February 1, 2019, following a series of secondary offerings; all BNPP-designated directors subsequently resigned from FHI's board - BNPP fully exited its ownership interest in FHI common stock on February 1, 2019, through a public offering272 - Following the offering, all BNPP-designated directors resigned from the FHI board of directors273 Basis of Presentation The unaudited interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and SEC regulations, reflecting normal recurring adjustments; they should be read in conjunction with the company's 2018 Annual Report on Form 10-K - Unaudited interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and instructions to Form 10-Q and Rule 10-01 of Regulation S-X275 - Statements reflect normal recurring adjustments and should be read with the 2018 Annual Report on Form 10-K275277 Hawaii Economy Hawaii's economy continued to grow in Q3 2019, driven by tourism, real estate, and tax revenues; visitor arrivals increased by 5.2% for the first eight months of 2019, though spending decreased by 0.5%; the statewide unemployment rate rose to 2.7% in September 2019 from 2.2% in 2018; the real estate market on Oahu saw a slight increase in single-family home sales volume (0.8%) but a decrease in condominium sales (6.7%), with median prices slightly declining; the company monitors national and global economic conditions, trade tensions, and local ordinances affecting tourism, which could impact future profitability - Hawaii's economy showed growth in Q3 2019, supported by tourism, real estate, and tax revenues278 - Visitor arrivals increased by 5.2% for the first eight months of 2019 (YoY), while visitor spending decreased by 0.5%278 - The statewide seasonally-adjusted unemployment rate was 2.7% in September 2019, up from 2.2% in September 2018278 - The company monitors U.S. mainland and international economic conditions, interest rate policies, trade tensions, and local ordinances (e.g., vacation rentals on Oahu) for potential impacts on profitability279 Selected Financial Data This section provides a summary of key financial highlights and performance ratios for the three and nine months ended September 30, 2019 and 2018, including GAAP and non-GAAP (core) measures; net income, EPS, and various profitability ratios generally improved, while the efficiency ratio remained prudently managed; balance sheet data shows changes in assets, liabilities, and equity, with capital ratios remaining strong Income Statement Data (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net interest income | $143,081 | $141,258 | $433,783 | $422,333 | | Provision for loan and lease losses | $— | $4,460 | $9,550 | $16,430 | | Noninterest income | $49,980 | $47,405 | $145,825 | $145,902 | | Noninterest expense | $93,466 | $93,147 | $279,379 | $275,599 | | Net income | $74,199 | $67,388 | $216,556 | $204,399 | | Diluted earnings per share | $0.56 | $0.50 | $1.61 | $1.48 | | Dividends declared per share | $0.26 | $0.24 | $0.78 | $0.72 | Performance Ratios | Ratio | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net interest margin | 3.19% | 3.11% | 3.22% | 3.14% | | Efficiency ratio | 48.41% | 49.36% | 48.20% | 48.49% | | Return on average total assets | 1.45% | 1.31% | 1.42% | 1.35% | | Return on average tangible stockholders' equity | 17.81% | 18.66% | 18.04% | 18.60% | Balance Sheet Data (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :------------------------------------ | :----------- | :----------- | | Total assets | $20,598,220 | $20,695,678 | | Total deposits | $16,857,246 | $17,150,068 | | Total stockholders' equity | $2,654,558 | $2,524,839 | | Common Equity Tier 1 Capital Ratio | 12.15% | 11.97% | | Total stockholders' equity to total assets | 12.89% | 12.20% | - Net income for the three months ended September 30, 2019, increased by $6.8 million (10%) to $74.2 million, and for the nine months, it increased by $12.2 million (6%) to $216.6 million301308 Analysis of Results of Operations This section provides a detailed analysis of the company's financial performance, including net interest income, provision for loan and lease losses, noninterest income, noninterest expense, and provision for income taxes, for the three and nine months ended September 30, 2019, compared to the same periods in 2018; it also includes an analysis of performance by business segment Net Interest Income Net interest income (NII) increased by $1.8 million (1%) to $143.1 million for the three months and by $11.5 million (3%) to $433.8 million for the nine months ended September 30, 2019; Net interest margin (NIM) also improved by eight basis points to 3.19% and 3.22% for the respective periods; this growth was primarily driven by higher average balances and yields in most loan categories, partially offset by lower investment securities balances and increased deposit funding costs - Net interest income increased by $1.8 million (1%) for the three months and $11.5 million (3%) for the nine months ended September 30, 2019304312330337 - Net interest margin increased by eight basis points to 3.19% for the three months and 3.22% for the nine months ended September 30, 2019304312330337 - Average loans and leases increased by $436.6 million (3%) to $13.0 billion for the three months and by $622.4 million (5%) to $13.1 billion for the nine months, with yields rising by 15 and 27 basis points, respectively330337 - Deposit funding costs increased by $2.6 million for the three months and $16.9 million for the nine months, with rates paid on interest-bearing deposits rising by 12 and 23 basis points, respectively330337 Provision for Loan and Lease Losses The provision for loan and lease losses was nil for the three months ended September 30, 2019, a decrease of $4.5 million from 2018, and $9.6 million for the nine months, a decrease of $6.9 million; this reduction was partly due to the sale of $408.9 million in commercial and industrial loans; net charge-offs increased to 0.17% and 0.19% of average loans and leases for the three and nine months, respectively - Provision for loan and lease losses decreased by $4.5 million to nil for the three months and by $6.9 million to $9.6 million for the nine months ended September 30, 2019305313339 - The decrease in provision was partially due to the sale of $408.9 million commercial and industrial loans305313339 - Net charge-offs were 0.17% and 0.19% of average loans and leases (annualized) for the three and nine months ended September 30, 2019, respectively, up from 0.12% and 0.13% in 2018339 Noninterest Income Total noninterest income increased by $2.6 million (5%) to $50.0 million for the three months ended September 30, 2019, but remained relatively flat at $145.8 million for the nine months; key drivers for the three-month increase were BOLI income and trust and investment services income; for the nine months, BOLI and trust income gains were offset by a $6.3 million decrease in other noninterest income and a $2.6 million net loss on investment securities sales Noninterest Income (in thousands) | Component | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Service charges on deposit accounts | $8,554 | $7,933 | $24,737 | $23,609 | | Credit and debit card fees | $16,839 | $16,535 | $50,123 | $48,961 | | Trust and investment services income | $8,698 | $7,487 | $26,247 | $23,429 | | Bank-owned life insurance | $5,743 | $3,692 | $12,946 | $8,131 | | Investment securities losses, net | $— | $— | $(2,592) | $— | | Other | $1,243 | $2,180 | $6,929 | $13,219 | | Total noninterest income | $49,980 | $47,405 | $145,825 | $145,902 | - BOLI income increased by $2.1 million (56%) for the three months and $4.8 million (59%) for the nine months, due to higher earnings and death benefit proceeds306347 - Net losses on investment securities were $2.6 million for the nine months ended September 30, 2019, due to portfolio restructuring and sale of 48 securities314348 - Other noninterest income decreased by $0.9 million (43%) for the three months and $6.3 million (48%) for the nine months, impacted by losses on loan sales and decreased volume-based incentives349 Noninterest Expense Total noninterest expense slightly increased by $0.3 million (less than 1%) to $93.5 million for the three months and by $3.8 million (1%) to $279.4 million for the nine months ended September 30, 2019; key increases were in salaries and employee benefits, contracted services, and card rewards programs, largely offset by significant decreases in regulatory assessment and fees due to the termination of an FDIC surcharge, and lower other noninterest expenses due to a litigation settlement in 2018 Noninterest Expense (in thousands) | Component | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Salaries and employee benefits | $44,955 | $41,959 | $132,000 | $125,755 | | Contracted services and professional fees | $14,649 | $11,478 | $42,597 | $36,770 | | Occupancy | $7,250 | $6,757 | $21,522 | $20,149 | | Regulatory assessment and fees | $1,992 | $3,966 | $5,588 | $12,164 | | Advertising and marketing | $1,647 | $1,060 | $5,593 | $3,126 | | Card rewards program | $6,930 | $5,805 | $21,326 | $17,882 | | Other | $12,019 | $17,941 | $37,901 | $46,649 | | Total noninterest expense | $93,466 | $93,147 | $279,379 | $275,599 | - Salaries and employee benefits increased by $3.0 million (7%) for the three months and $6.2 million (5%) for the nine months, partly due to a nonrecurring payment to a former executive and higher incentive compensation307352 - Regulatory assessment and fees decreased by $2.0 million (50%) for the three months and $6.6 million (54%) for the nine months, due to the end of an FDIC additional surcharge in Q3 2018307357 - Other noninterest expense decreased by $5.9 million (33%) for the three months and $8.7 million (19%) for the nine months, primarily due to a $4.1 million litigation settlement recorded in 2018307360 Provision for Income Taxes The provision for income taxes increased to $25.4 million for the three months and $74.1 million for the nine months ended September 30, 2019, compared to $23.7 million and $71.8 million in 2018, respectively; the effective tax rate remained stable at approximately 25.50% for both periods in 2019 | Metric (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Provision for income taxes | $25,396 | $23,668 | $74,123 | $71,807 | | Effective tax rate | 25.50% | 25.99% | 25.50% | 26.00% | Analysis of Business Segments The company's three business segments—Retail Banking, Commercial Banking, and Treasury and Other—showed varied performance; Retail Banking's net income increased due to lower loan loss provision and higher noninterest income; Commercial Banking's net income saw a slight increase for the three months but was flat for nine months, also benefiting from reduced loan loss provision; Treasury and Other significantly reduced its net loss, driven by increased net interest income and BOLI income Net Income by Business Segment (in thousands) | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Retail Banking | $58,557 | $55,201 | $174,066 | $165,408 | | Commercial Banking | $19,651 | $18,574 | $55,762 | $55,734 | | Treasury and Other | $(4,009) | $(6,387) | $(13,272) | $(16,743) | | Total | $74,199 | $67,388 | $216,