15. Benefit Plans

Qualified Pension Plan

The Company’s employees participated in BancWest’s employee retirement plan (“BancWest’s ERP”), a qualified noncontributory defined benefit pension plan that was frozen as of December 31, 1995. As a result of that freeze, there are no further benefit accruals for the Company’s employees. However, employees retained rights to the benefits accrued as of the date of the freeze. During 2016, the board of directors of BancWest agreed to spin off the assets and liabilities attributable to BOW participants under BancWest’s ERP to another qualified noncontributory defined benefit pension plan sponsored by BOW. To meet the requirements of Section 414(I) of the Internal Revenue Code, the ratio of assets to liabilities after the spinoff must be the same for each plan. As a result, the Company made a contribution to BancWest’s ERP of $26.0 million prior to the spinoff of the assets and liabilities attributable to the BOW participants in December 2016. BancWest’s ERP was renamed as the Employees’ Retirement Plan of First Hawaiian, Inc. (“FHI ERP”).

No contributions to the pension trust are expected to be made during 2019 for the Company’s participants in the FHI ERP. However, should contributions be required in accordance with the funding rules under the Employee Retirement Income Security Act of 1974 (“ERISA”), including the impact of the Pension Protection Act of 2006, the Company would make those required contributions.

Nonqualified Pension and Other Postretirement Benefit Plans

The Company also sponsors an unfunded supplemental executive retirement plan for certain key executives (“SERP”). In addition, the Company sponsors a directors’ retirement plan (“Directors’ Plan”), a non‑qualified pension plan for eligible FHI and FHB directors that qualify for retirement benefits based on their years of service as a director. Both the SERP and the Directors’ Plan were frozen as of January 1, 2005 to new participants.

A postretirement benefit plan is also offered to eligible employees that provides life insurance and healthcare benefits upon retirement. The Company provides access to medical coverage for eligible retirees under age 65 at active employee premium rates and a monthly stipend to both retiree and retiree’s spouse after age 62.

The Company expects to contribute $0.2 million to its Directors’ Plan and $1.2 million to its postretirement medical and life insurance plans in 2019. These contributions reflect the estimated benefit payments for the unfunded plans and may vary depending on retirements during 2019.

Defined Contribution Plans

401(k) Savings Plan

The Company matched employee contributions to the First Hawaiian, Inc. 401(k) Savings Plan, a qualified defined contribution plan, up to 5% of the employee’s pay in 2018 and 2017. The plan covers all employees who satisfy eligibility requirements. A select group of key executives who participate in an unqualified grandfathered supplemental executive retirement plan may participate in the 401(k) plan but are not eligible to receive the matching contribution.

The matching employer contributions to the 401(k) plan for the years ended December 31, 2018, 2017 and 2016 were $4.9 million, $4.6 million and $4.3 million, respectively, and are included in salaries and employee benefits within the consolidated statements of income.

Annual Incentive Awards for Key Executives

The Company makes cash-based annual incentive awards under the First Hawaiian, Inc. Bonus Plan (the “Bonus Plan”) and, prior to 2016, made such awards under the Incentive Plan for Key Executives (the “IPKE”). The Bonus Plan and the IPKE limit the aggregate and individual value of the awards that could be issued in any one fiscal year. The Bonus Plan and the IPKE expenses totaled $14.3 million, $13.3 million and $13.3 million for the years ended December 31, 2018, 2017 and 2016, respectively, and are included in salaries and employee benefits within the consolidated statements of income.

The following table details the amounts recognized in other comprehensive income during the years presented. Pension benefits include benefits from the qualified and non‑qualified plans. Other benefits include life insurance and healthcare benefits from the postretirement benefit plan.


	Pension Benefits						Other Benefits
(dollars in thousands)	2018		2017		2016		2018		2017		2016
Amounts arising during the year:
Net loss (gain) on pension assets	$	12,209	$	(8,619)	$	3,350	$	—	$	—	$	—
Net (gain) loss on pension obligations		(6,619)		9,757		9,653		(2,755)		(34)		(337)
Change due to the Reorganization Transactions		—		—		81		—		—		—
Reclassification adjustments recognized as components of net periodic benefit cost during the year:
Net loss		(7,315)		(8,625)		(7,629)		—		—		—
Prior service credit		—		—		—		429		429		429
Amount recognized in other comprehensive income	$	(1,725)	$	(7,487)	$	5,455	$	(2,326)	$	395	$	92

The following table shows the amounts within accumulated other comprehensive loss that had not yet been recognized as components of net periodic benefit cost as of December 31, 2018 and 2017:


	Pension Benefits				Other Benefits
(dollars in thousands)	2018		2017		2018		2017
Net actuarial loss (gain)	$	41,822	$	43,547	$	(2,507)	$	248
Prior service credit		—		—		(480)		(909)
Total, pretax effect		41,822		43,547		(2,987)		(661)
Tax impact		(11,260)		(17,201)		804		261
Ending balance in accumulated other comprehensive loss	$	30,562	$	26,346	$	(2,183)	$	(400)

The following table provides the amounts within accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2019:


	Pension		Other
(dollars in thousands)	Benefits		Benefits
Amortization of prior service credit	$	—	$	(429)
Amortization of net actuarial loss (gain)		6,320		(304)
Total to be recognized in 2019	$	6,320	$	(733)

The following tables summarize the changes to projected benefit obligation (“PBO”) and fair value of plan assets for pension benefits and accumulated postretirement benefit obligation (“APBO”) and fair value of plan assets for other benefits:


	Pension Benefits				Other Benefits
(dollars in thousands)	2018		2017		2018		2017
Benefit obligation at beginning of year	$	212,981	$	209,407	$	21,449	$	20,429
Service cost		696		629		750		738
Interest cost		7,362		8,297		739		776
Actuarial (gain) loss		(6,619)		9,757		(2,755)		(34)
Benefit payments		(15,348)		(15,109)		(467)		(460)
Benefit obligation at end of year	$	199,072	$	212,981	$	19,716	$	21,449


	Pension Benefits				Other Benefits
(dollars in thousands)	2018		2017		2018		2017
Fair value of plan assets at beginning of year	$	114,220	$	108,550	$	—	$	—
Actual return on plan assets		(6,936)		13,623		—		—
Benefit payments from trust		(7,703)		(7,953)		—		—
Fair value of plan assets at end of year	$	99,581	$	114,220	$	—	$	—

The following table summarizes the funded status of the Company’s plans and amounts recognized in the Company’s consolidated balance sheets as of December 31, 2018 and 2017:


	Pension Benefits				Other Benefits
(dollars in thousands)	2018		2017		2018		2017
Pension assets for overfunded plans	$	8,702	$	14,008	$	—	$	—
Pension liabilities for underfunded plans		(108,193)		(112,769)		(19,716)		(21,449)
Funded status	$	(99,491)	$	(98,761)	$	(19,716)	$	(21,449)

The following table provides information regarding the PBO, accumulated benefit obligation (“ABO”), and fair value of plan assets as of December 31, 2018 and 2017:


	Funded Pension Plan				Unfunded Pension Plans				Total Pension Plans
(dollars in thousands)	2018		2017		2018		2017		2018		2017
Projected benefit obligation	$	90,879	$	100,212	$	108,193	$	112,769	$	199,072	$	212,981
Accumulated benefit obligation		90,879		100,212		106,357		110,039		197,236		210,251
Fair value of plan assets		99,581		114,220		—		—		99,581		114,220
Overfunded (underfunded) portion of PBO/ABO		8,702		14,008		(108,193)		(112,769)		(99,491)		(98,761)

The Company recognizes the overfunded and underfunded status of its pension plans as an asset and liability in the consolidated balance sheets.

Unrecognized net gains or losses that exceed 5% of the greater of the PBO or the market value of plan assets as of the beginning of the year are amortized on a straight‑line basis over five years in accordance with ASC 715. Amortization of the unrecognized net gain or loss is included as a component of net periodic pension cost. If amortization results in an amount less than the minimum amortization required under GAAP, the minimum required amount is recorded.

The following table summarizes the change in net actuarial loss and amortization for the years ended December 31, 2018 and 2017:


	Pension Benefits				Other Benefits
(dollars in thousands)	2018		2017		2018		2017
Net actuarial loss at beginning of year	$	43,547	$	51,034	$	248	$	282
Amortization cost		(7,315)		(8,625)		—		—
Liability (gain) loss		(6,619)		9,757		(2,755)		(34)
Asset loss (gain)		12,209		(8,619)		—		—
Net actuarial loss (gain) at end of year	$	41,822	$	43,547	$	(2,507)	$	248

The following table sets forth the components of net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016:


	Income line item where recognized in	Pension Benefits						Other Benefits
(dollars in thousands)	the consolidated statements of income	2018		2017		2016		2018		2017		2016
Service cost	Salaries and employee benefits	$	696	$	629	$	944	$	750	$	738	$	697
Interest cost	Other noninterest expense		7,362		8,297		8,784		739		776		812
Expected return on plan assets	Other noninterest expense		(5,273)		(5,003)		(4,698)		—		—		—
Prior service credit	Other noninterest expense		—		—		—		(429)		(429)		(429)
Recognized net actuarial loss	Other noninterest expense		7,315		8,625		7,629		—		—		—
Total net periodic benefit cost		$	10,100	$	12,548	$	12,659	$	1,060	$	1,085	$	1,080

The funded pension benefit amounts included in pension benefits for the years ended December 31, 2018, 2017 and 2016 were as follows:


	Funded Pension Benefits
(dollars in thousands)	2018		2017		2016
Interest cost	$	3,420	$	3,922	$	4,182
Expected return on plan assets		(5,273)		(5,003)		(4,698)
Recognized net actuarial loss		2,600		4,316		3,443
Total net periodic benefit cost	$	747	$	3,235	$	2,927

Assumptions

The following weighted‑average assumptions were used to determine benefit obligations at December 31, 2018 and 2017:


	FHI ERP Pension Benefits				SERP Pension Benefits				Other Benefits
	2018		2017		2018		2017		2018		2017
Discount rate	4.30	%	3.51	%	4.30	%	3.51	%	4.30	%	3.51	%
Rate of compensation increase	NA		NA		4.00	%	4.00	%	NA		NA

Weighted‑average assumptions used to determine net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016 were as follows:


	FHI ERP Pension Benefits						SERP Pension Benefits						Other Benefits
	2018		2017		2016		2018		2017		2016		2018		2017		2016
Discount rate	3.51	%	4.05	%	4.40	%	3.51	%	4.05	%	4.40	%	3.51	%	4.05	%	4.40	%
Expected long-term return on plan assets	4.75	%	4.75	%	5.50	%	NA		NA		NA		NA		NA		NA
Rate of compensation increase	NA		NA		NA		4.00	%	4.00	%	4.00	%	NA		NA		NA

To select the discount rate, the Company reviews the yield on high quality corporate bonds. This rate is adjusted to convert the yield to an annual discount rate basis and may be adjusted for the population of plan participants to reflect the expected duration of the benefit payments of the plan.

Assumed healthcare cost trend rates were as follows at December 31, 2018, 2017 and 2016:


	2018		2017		2016
Healthcare cost trend rate assumed for next year	7.00	%	7.00	%	7.25	%
Rate to which the cost trend is assumed to decline (the ultimate trend rate)	5.00	%	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	2026		2026		2026

A one percentage‑point change in the assumed healthcare cost trend rates would have had the following pre‑tax effect:


	One Percentage-		One Percentage-
(dollars in thousands)	Point Increase		Point Decrease
Effect on 2018 total of service and interest cost components	$	77	$	(69)
Effect on postretirement benefit obligation at December 31, 2018		424		(393)

Plan Assets

The Company’s pension plan assets were allocated as follows as of December 31, 2018 and 2017:


	Asset Allocation
	2018		2017
Equity securities	29	%	32	%
Debt securities	69	%	66	%
Other securities	2	%	2	%
Total	100	%	100	%

There were no holdings of FHI or BNPP stock included in equity securities at December 31, 2018 and 2017.

The assets within the pension plan are managed in accordance with ERISA. The objective of the plan is to achieve, over full market cycles, a compounded annual rate of return equal to or greater than the pension plan’s expected long-term rate of return. The pension plan’s participants recognize that capital markets can be unpredictable and that any investment could result in periods where the market value of the pension plan’s assets will decline in value. Asset allocation is likely to be the primary determinant of the pension plan’s return and the associated volatility of returns for the pension plan. The Company estimated the long-term rate of return for 2018 net periodic pension cost to be 4.75%. The return was selected based on a model of U.S. capital market assumptions with expected returns reflecting the anticipated asset allocation of the pension plan.

The target asset allocation for the pension plan at December 31, 2018, was as follows:


	Target
	Allocation
Equity securities	30	%
Debt securities	68	%
Other securities	2	%

Estimated Future Benefit Payments

The following table presents benefit payments that are expected to be paid over the next ten years, giving consideration to expected future service as appropriate:


	Pension		Other
(dollars in thousands)	Benefits		Benefits
2019	$	17,183	$	1,205
2020		16,907		1,318
2021		16,514		1,411
2022		16,096		1,505
2023		15,524		1,592
2024 to 2028		72,761		8,495

Fair Value Measurement of Plan Assets

The Company’s overall investment strategy includes a wide diversification of asset types, fund strategies and fund managers. Investments in mutual funds and exchange‑traded funds consist primarily of investments in large‑cap companies located in the United States. Fixed income securities include U.S. government agencies and corporate bonds of companies from diversified industries.

The fair values of the Company’s pension plans assets at December 31, 2018 and 2017, by asset class, were as follows:


	December 31, 2018
	Quoted Prices		Significant
	In Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Asset classes:
Cash and cash equivalents	$	2,428	$	—	$	—	$	2,428
Fixed income - U.S. Treasury securities		—		4,450		—		4,450
Fixed income - U.S. government agency securities		—		3,565		—		3,565
Fixed income - U.S. corporate securities		—		53,721		—		53,721
Fixed income - municipal securities		—		451		—		451
Fixed income - mutual funds		6,272		—		—		6,272
Equity - large-cap mutual funds		8,831		—		—		8,831
Equity - large-cap exchange-traded funds		10,482		—		—		10,482
Equity - mid-cap exchange-traded funds		2,544		—		—		2,544
Equity - small-cap exchange-traded funds		1,176		—		—		1,176
Equity - international funds		5,661		—		—		5,661
Total	$	37,394	$	62,187	$	—	$	99,581


	December 31, 2017
	Quoted Prices		Significant
	In Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Asset classes:
Cash and cash equivalents	$	1,942	$	—	$	—	$	1,942
Fixed income - U.S. Treasury securities		—		4,533		—		4,533
Fixed income - U.S. government agency securities		—		4,072		—		4,072
Fixed income - U.S. corporate securities		—		59,786		—		59,786
Fixed income - municipal securities		—		474		—		474
Fixed income - mutual funds		7,044		—		—		7,044
Equity - large-cap mutual funds		10,645		—		—		10,645
Equity - large-cap exchange-traded funds		13,048		—		—		13,048
Equity - mid-cap exchange-traded funds		3,436		—		—		3,436
Equity - small-cap exchange-traded funds		1,618		—		—		1,618
Equity - international funds		7,622		—		—		7,622
Total	$	45,355	$	68,865	$	—	$	114,220

No fair value measurements used Level 3 inputs as of December 31, 2018 and 2017.

The plan’s investments in fixed income securities represent approximately 68.7% and 66.5% of total plan assets as of December 31, 2018 and 2017, respectively, which is the most significant concentration of risk in the plan.

Valuation Methodologies

Cash and cash equivalents — includes investments in money market funds. Carrying value is a reasonable estimate of fair value based on the short‑term nature of the instruments.

U.S. Treasury securities — includes securities issued by the U.S. government valued at fair value based on observable market prices for similar securities or other market observable inputs.

U.S. government agency securities — includes investment‑grade debt securities issued by U.S. government‑sponsored agencies. These securities are valued at fair value based upon the quoted market values of the underlying net assets.

U.S. corporate securities — includes investment‑grade debt securities issued by U.S. corporations. These securities are valued at fair value based on observable market prices for similar securities or other market observable inputs.

Municipal securities — includes bonds issued by a city or other local government, or their agencies. Potential issuers of municipal bonds includes cities, counties, redevelopment agencies, special‑purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) below the state level. Municipal bonds may be general obligations of the issuer or secured by specified revenues. These securities are valued at fair value based on observable market prices for similar securities or other market observable inputs.

Mutual funds — includes an open‑end fixed‑income fund benchmarked to the Barclay’s Capital U.S. Government/Credit Bond Index. At least 80% of its assets are high‑grade corporate bonds and U.S. government debt obligations. The fair value is based upon the quoted market values of the underlying net assets.

Large‑cap mutual funds — includes open‑end equity funds holding a diversified portfolio of large‑cap domestic equity securities. The portfolio has a bias towards stocks with growth characteristics and stocks with high cash flow and growing dividends. The fair value is based upon the quoted market values of the underlying net assets.

Large‑cap exchange‑traded fund — includes an exchange‑traded fund which invests mainly in U.S. large‑cap stocks such as those in the S&P 500 index and in depositary receipts representing stocks in the S&P 500 index. The fair value is based upon the quoted market values of the underlying net assets.

Mid‑cap exchange‑traded funds — includes broadly‑diversified exchange‑traded funds which invest in U.S. mid‑cap stocks such as those in the S&P 400 Mid Cap index. The fair value is based upon the quoted market values of the underlying net assets.

Small‑cap exchange‑traded funds — includes broadly‑diversified exchange‑traded funds which invest in U.S. small‑cap stocks such as those in the S&P 600 Small Cap index. The fair value is based upon the quoted market values of the underlying net assets.

International funds — includes well‑diversified open‑ended mutual funds and exchange‑traded funds tracking broad‑based international equity indexes. The fair value is based upon the quoted market values of the underlying net assets.