First Hawaiian(FHB) - 2019 Q4 - Annual Report

Part I Item 1. Business First Hawaiian, Inc. operates Hawaii's largest full-service bank, First Hawaiian Bank, offering diverse services across 58 branches under strict regulation General Overview First Hawaiian Bank, Hawaii's largest full-service bank, reported $20.2 billion in assets and $284.4 million net income for 2019 Key Financial Metrics as of December 31, 2019 | Metric | Value (USD) | | :--- | :--- | | Total Assets | $20.2 billion | | Gross Loans and Leases | $13.2 billion | | Total Deposits | $16.4 billion | | Stockholders' Equity | $2.6 billion | | Net Income (FY 2019) | $284.4 million | | Diluted EPS (FY 2019) | $2.13 | - The company operates through a network of 58 branches: 53 in Hawaii, 3 in Guam, and 2 in Saipan[9] - The business is structured into three operating segments: Retail Banking, Commercial Banking, and Treasury and Other[11] Products and Services The Bank offers a full suite of retail, commercial, and wealth management services, holding the largest deposit market share in its operating regions - The Bank has maintained the largest deposit market share in Hawaii for over ten years and also leads in market share in Guam and Saipan[13] Competition The company faces intense competition from diverse financial institutions, including large mainland banks and technology-driven non-banks - Competition comes from a wide range of financial institutions, both within and outside its principal markets, including large mainland U.S. banks[16] - Technology has enabled non-banks to offer products and services traditionally provided by banks, increasing competitive pressure[16] Organizational History and Structure First Hawaiian, Inc. became an independent public company on February 1, 2019, following BNP Paribas' full divestiture of its ownership interest - BNPP, through its subsidiary BWC, completed the sale of its remaining shares of FHI common stock on February 1, 2019, fully exiting its ownership interest[21] Supervision and Regulation The company operates under a comprehensive federal and state regulatory framework, primarily overseen by the Federal Reserve, FDIC, and Hawaii DFI - FHI is a financial holding company regulated by the Federal Reserve, while its subsidiary bank, FHB, is primarily regulated by the FDIC and the Hawaii DFI[27][29] - The Dodd-Frank Act, as amended by EGRRCPA, raised the asset threshold for applying certain enhanced prudential standards from $50 billion to $250 billion, which has resulted in the company no longer being subject to certain stress testing requirements[39][42] - The company is subject to capital rules based on Basel III, requiring minimum ratios for CET1, Tier 1, and Total Capital, plus a capital conservation buffer[56][59] - As of December 31, 2019, both the Company and the Bank were classified as "well-capitalized" under regulatory standards[66] Item 1A. Risk Factors The company faces significant risks from geographic concentration, economic downturns, real estate volatility, interest rate fluctuations, and regulatory changes - A substantial majority of business is concentrated in Hawaii, Guam, and Saipan, making the company's results highly dependent on the local economies, which are influenced by tourism, military spending, and real estate[99][102] - Real estate loans constituted 65% of the total loan portfolio as of December 31, 2019, exposing the company to risks from declines in property values[107] - The company faces interest rate risk, as fluctuations can impact net interest income. The discontinuation of LIBOR after 2021 introduces uncertainty for floating-rate instruments[114][126][128] - The adoption of the new CECL accounting standard, effective January 1, 2020, is expected to increase the Allowance for Credit Losses by 10-15% compared to December 31, 2019 levels[143] - The recent outbreak of coronavirus (COVID-19) is identified as a risk, primarily through potential disruption to the global economy and the transportation and tourism industries vital to the company's markets[149] - The company is subject to extensive regulation, and changes in laws, such as the Tax Cuts and Jobs Act, or rules from bodies like the CFPB, can significantly impact operations and costs[209][220][227] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - Not applicable[250] Item 2. Properties The company owns its Honolulu headquarters and operates 58 branches across Hawaii, Guam, and Saipan, with 34 leased and 24 owned - The company owns its corporate headquarters and main branch in Honolulu[251] - As of December 31, 2019, the company operated 58 branch offices, with 34 leased and 24 owned[251] Item 3. Legal Proceedings The company is involved in routine litigation but reports no legal proceedings expected to have a material adverse effect on its operations - The company is not presently party to any legal proceedings that it believes would have a material adverse effect on its business or financial condition[254] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[255] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities FHI common stock trades on NASDAQ (FHB); the company repurchased 1.34 million shares in 2019 and announced an $80 million program for 2020 - The company's common stock is listed on the NASDAQ under the ticker symbol "FHB"[258] Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Shares Purchased | Average Price Paid ($) | Approx. Dollar Value Remaining ($) | | :--- | :--- | :--- | :--- | | Oct 2019 | 453,505 | 26.97 | 38,961,524 | | Nov 2019 | 717,000 | 28.39 | 18,607,194 | | Dec 2019 | 170,367 | 28.47 | 13,757,598 | | Total Q4 | 1,340,872 | 27.92 | - | - The 2019 share repurchase program of up to $150 million expired on December 31, 2019, with $13.8 million remaining. A new $80 million share repurchase program was announced for 2020[260] Item 6. Selected Financial Data Selected financial data shows 2019 net income of $284.4 million, diluted EPS of $2.13, total assets of $20.2 billion, and a 3.20% net interest margin Selected Financial Highlights (2018 vs. 2019) | Metric (in thousands, except per share data) | 2019 | 2018 | | :--- | :--- | :--- | | Income Statement | | | | Net Interest Income | $573,402 | $566,318 | | Provision for Loan and Lease Losses | $13,800 | $22,180 | | Net Income | $284,392 | $264,394 | | Diluted Earnings Per Share | $2.13 | $1.93 | | Dividends Declared Per Share | $1.04 | $0.96 | | Balance Sheet (End of Period) | | | | Total Assets | $20,166,734 | $20,695,678 | | Loans and Leases | $13,211,650 | $13,076,191 | | Total Deposits | $16,444,994 | $17,150,068 | | Total Stockholders' Equity | $2,640,258 | $2,524,839 | | Performance Ratios | | | | Net Interest Margin | 3.20% | 3.16% | | Return on Average Total Assets | 1.40% | 1.31% | | Return on Average Total Stockholders' Equity | 10.90% | 10.76% | | Efficiency Ratio | 48.36% | 48.96% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights 2019 net income growth to $284.4 million, driven by noninterest income and lower loan loss provisions, with strong capital levels maintained Financial Highlights 2019 financial highlights include an 8% net income increase to $284.4 million and 10% diluted EPS growth to $2.13, driven by noninterest income and lower loan loss provisions Year-over-Year Performance (2019 vs 2018) | Metric | 2019 | 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Income | $284.4M | $264.4M | +$20.0M | +8% | | Diluted EPS | $2.13 | $1.93 | +$0.20 | +10% | | Net Interest Income | $573.4M | $566.3M | +$7.1M | +1% | | Provision for Loan Losses | $13.8M | $22.2M | -$8.4M | -38% | | Noninterest Income | $192.5M | $179.0M | +$13.5M | +8% | | Noninterest Expense | $370.4M | $365.0M | +$5.5M | +2% | Analysis of Results of Operations 2019 net interest income rose 1% to $573.4 million, with margin at 3.20%; loan loss provision decreased 38%, and noninterest income grew 8% - Net interest income increased to $573.4 million in 2019, a 1% rise from 2018, with the net interest margin increasing by 4 basis points to 3.20%[318] - The provision for loan and lease losses decreased by $8.4 million (38%) to $13.8 million in 2019, partly due to the sale of $408.9 million in commercial and industrial loans[304][321] - Noninterest income increased by $13.5 million (8%) in 2019, primarily because 2018 included a $24.1 million OTTI loss on securities, which did not recur in 2019[323][331] - Noninterest expense increased by $5.5 million (2%) in 2019, mainly due to higher costs for contracted services, professional fees, salaries, and card rewards programs[336] Analysis of Business Segments In 2019, Retail Banking net income was stable, Commercial Banking decreased 2%, and Treasury and Other significantly improved its net loss Net Income by Business Segment (in thousands) | Segment | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Retail Banking | $204,520 | $204,865 | $138,549 | | Commercial Banking | $92,632 | $94,344 | $69,571 | | Treasury and Other | $(12,760) | $(34,815) | $(24,438) | | Total | $284,392 | $264,394 | $183,682 | Analysis of Financial Condition As of December 31, 2019, total assets were $20.2 billion, loans grew 1% to $13.2 billion, deposits decreased 4% to $16.4 billion, and capital remained strong - Total loans and leases increased by 1% to $13.2 billion at year-end 2019, driven by a 16% increase in commercial real estate loans and a 5% increase in residential real estate loans[388][390][392] - Total deposits decreased by 4% to $16.4 billion, primarily due to a $582.0 million (19%) decrease in time deposits[444] - The Allowance for Loan and Lease Losses was $130.5 million, or 0.99% of total loans, down from 1.08% in 2018[434] - Non-performing assets (NPAs) decreased 21% to $5.8 million, representing just 0.04% of total loans and OREO[411] Regulatory Capital Ratios | Ratio | Dec 31, 2019 | Dec 31, 2018 | Well-Capitalized Minimum | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 11.88% | 11.97% | 6.50% | | Tier 1 Capital | 11.88% | 11.97% | 8.00% | | Total Capital | 12.81% | 12.99% | 10.00% | | Tier 1 Leverage | 8.79% | 8.72% | 5.00% | Risk Governance and Quantitative and Qualitative Disclosures About Market Risk The company manages credit, market, liquidity, capital, and operational risks, with market risk primarily interest rate risk, showing asset sensitivity to rising rates - The company's most prominent risk exposures are identified as credit risk, market risk, liquidity risk, capital management, and operational risk[502] Net Interest Income Sensitivity Profile (Static Forecast) | Immediate Change in Interest Rates (bps) | Estimated % Change in NII (Dec 31, 2019) | Estimated % Change in NII (Dec 31, 2018) | | :--- | :--- | :--- | | +100 | 8.9% | 5.5% | | +50 | 4.4% | 2.7% | | -50 | (4.9)% | (2.8)% | | -100 | (9.6)% | (6.2)% | - The company's interest rate profile is asset-sensitive, projecting that net interest income will benefit from higher interest rates. The sensitivity to rate changes increased in 2019 compared to 2018[520][521] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section refers to market risk disclosures provided in Item 7. MD&A - Risk Governance and Quantitative and Qualitative Disclosures About Market Risk - Information required for this item is provided in the MD&A section under "Risk Governance and Quantitative and Qualitative Disclosures About Market Risk"[536] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2019, with Deloitte & Touche LLP providing an unqualified opinion Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on financial statements and internal controls, highlighting loan loss allowance and CECL adoption as critical audit matters - The auditor, Deloitte & Touche LLP, issued an unqualified opinion on both the financial statements and the company's internal control over financial reporting[537][968] - Critical Audit Matter 1: The Allowance for Loan and Lease Losses was identified as a critical audit matter due to the significant judgment required by management in developing the qualitative component of the allowance[539][541] - Critical Audit Matter 2: The upcoming adoption of the new credit loss standard (CECL) was identified as a critical audit matter due to the significant changes in estimation, new accounting policies, and subjective judgments involved[543][544] Notes to Consolidated Financial Statements Notes detail accounting policies, BNPP divestiture, investment and loan portfolios, loan loss allowance, strong capital ratios, and segment reporting - BNPP completed the full divestiture of its ownership in FHI on February 1, 2019[575] - The company will adopt the new CECL credit loss standard on January 1, 2020, and expects it to increase the Allowance for Credit Losses by 10% to 15%[642] Loan Portfolio Composition (in thousands) | Loan Category | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commercial and industrial | $2,743,242 | $3,208,760 | | Commercial real estate | $3,463,953 | $2,990,783 | | Construction | $519,241 | $626,757 | | Residential | $4,662,175 | $4,439,618 | | Consumer | $1,620,556 | $1,662,504 | | Lease financing | $202,483 | $147,769 | | Total | $13,211,650 | $13,076,191 | - The company's pension plans had a net underfunded status of $121.9 million as of December 31, 2019[451][796] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[960] Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[961] - Management asserted that the company maintained effective internal control over financial reporting as of December 31, 2019, which was audited and attested to by Deloitte & Touche LLP[964][965] Item 9B. Other Information Disclosures include former affiliate BNPP's legacy Iranian activities and the Board's adoption of a majority voting standard for director elections - Due to its affiliation with BNP Paribas (BNPP) until February 1, 2019, the company disclosed that BNPP had legacy financing arrangements with Iranian entities, which generated approximately EUR 1.0 million in gross revenue for BNPP in the first three months of 2019[977][979] - On February 26, 2020, the Board amended the company's bylaws to adopt a majority voting standard for the election of directors in uncontested elections[984] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the 2020 Proxy Statement[988][989][990][991] Item 11. Executive Compensation Information on executive and director compensation is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the 2020 Proxy Statement[992][993] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2020 Proxy Statement, detailing equity compensation plan securities - Information on security ownership is incorporated by reference from the 2020 Proxy Statement[993] Equity Compensation Plan Information as of December 31, 2019 | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 879,817 | N/A | 4,911,647 | | Equity compensation plans not approved by security holders | 0 | N/A | 0 | | Total | 879,817 | N/A | 4,911,647 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the 2020 Proxy Statement[997][998] Item 14. Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the 2020 Proxy Statement[999] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists financial statements included in Item 8, notes the omission of schedules, and provides an index of filed exhibits - The consolidated financial statements are included in Item 8 of the report[1002] - All financial statement schedules have been omitted because the required information is not applicable, not material, or is disclosed elsewhere in the report[1002] Item 16. Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[1004]