1
================================================================================

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                            ----------------------
                                   FORM 10-K
         (Mark One)
          /x/    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                 For the fiscal year ended December 31, 1995
                                       OR

          / /    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                 For the transition period from ............. to ...............

                         Commission file number 0-7949
                             ----------------------
                              FIRST HAWAIIAN, INC.
             (Exact name of registrant as specified in its charter)
                             ----------------------

                                                           
            DELAWARE                                              99-0156159
    (State of incorporation)                                   (I.R.S. Employer
                                                              Identification No.)  
 
  1132 BISHOP STREET, HONOLULU, HAWAII                               96813
(Address of principal executive offices)                          (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (808) 525-7000 ---------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on Title of each class which registered ------------------- ------------------------ None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $5.00 Par Value (Title of class) ---------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 26, 1996 was $525,935,000. The number of shares outstanding of each of the registrant's classes of common stock as of February 26, 1996 was:
Title of Class Number of Shares Outstanding ----------------------------- ---------------------------- Common Stock, $5.00 Par Value 31,117,863 Shares
---------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in this Form 10-K:
DOCUMENTS FORM 10-K REFERENCE First Hawaiian, Inc. Annual Report 1995 Parts I and II First Hawaiian, Inc. Proxy Statement dated March 1, 1996 for the Annual Meeting of Stockholders Part III
================================================================================ 2 INDEX PART I
PAGE ---- Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 12 Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . 15 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . 15 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . 15
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3 PART I ITEM 1. BUSINESS FIRST HAWAIIAN, INC. - First Hawaiian, Inc. (the "Corporation"), a Delaware corporation, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. As a bank holding company, the Corporation is allowed to acquire or invest in the securities of companies that are engaged in banking or in activities closely related to banking as authorized by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Corporation is also a registered savings and loan holding company under section 10 of the Home Owner's Loan Act, as amended. The Corporation, through its subsidiaries, operates a general commercial banking business and other businesses related to banking. Its principal assets are its investments in First Hawaiian Bank (the "Bank"), a State of Hawaii chartered bank; First Hawaiian Creditcorp, Inc. ("Creditcorp") and First Hawaiian Leasing, Inc. ("FHL"), each a financial services loan company; and Pioneer Federal Savings Bank ("Pioneer"), a federally chartered savings bank. The Bank, Creditcorp, FHL and Pioneer are wholly-owned subsidiaries of the Corporation. At December 31, 1995, the Corporation had consolidated total assets of $7.6 billion, total deposits of $5.4 billion and total stockholders' equity of $649.5 million. Based on assets as of June 30, 1995, the Corporation was the 77th largest bank holding company in the United States as reported in the American Banker. FIRST HAWAIIAN BANK - The Bank, the oldest financial institution in Hawaii, was established as Bishop & Co. in 1858 in Honolulu. After several corporate mergers and other changes, the Bank is now a state chartered bank. The Bank is not a member of the Federal Reserve System. The deposits of the Bank are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC") to the extent and subject to the limitations set forth in the Federal Deposit Insurance Act, as amended. The Bank is a full-service bank conducting a general commercial and consumer banking business and offering trust services. Its banking activities include receiving demand, savings and time deposits for personal and commercial accounts; making commercial, agricultural, real estate and consumer loans; acting as a United States tax depository facility; providing money transfer and cash management services; selling traveler's checks, personal money orders, mutual funds and annuities; issuing letters of credit; handling domestic and foreign collections; providing safe deposit and night depository facilities; lease financing; and investing in U.S. Treasury securities and securities of other U.S. government agencies and corporations and state and municipal securities. As of December 31, 1995, the Bank had total deposits of $4.5 billion and total assets of $6.2 billion, making it the second largest bank in Hawaii. DOMESTIC SERVICES - The domestic operations of the Bank are carried out through its main banking office located in Honolulu, Hawaii and other banking offices located throughout the State of Hawaii. During 1995, the Bank had 60 other banking offices in Hawaii. On March 15, 1996, the Bank closed three of these branch offices after transferring a substantial portion of the branches' loans and deposits to Finance Factors, Limited. The sale completed a commitment to the Federal Reserve Board and the United States Department of Justice to divest the branches. The agreement was reflected in a final judgment entered by stipulation with the United States Department of Justice in 1991 to resolve an antitrust lawsuit arising out of the Corporation's acquisition of First Interstate of Hawaii, Inc. All but one of the banking offices are equipped with automatic teller machines which provide 24-hour service to customers wishing to make withdrawals from and deposits to their personal checking accounts, to transfer funds between checking and savings accounts, to make balance inquiries, to obtain interim bank statements, and to make utility and loan payments. Twenty-nine nonbranch locations provide balance inquiry and withdrawal transaction services only. The Bank is a member of the CIRRUS(R)/MasterCard(R), Plus(R)/VISA(R) and Star System(R) automatic teller machine networks, providing its customers with access to their funds nationwide and in selected foreign countries. 1 4 LENDING ACTIVITIES - The Bank engages in a broad range of lending activities, including making real estate, commercial and consumer loans and leases. At December 31, 1995, the Bank's loans totalled $4.2 billion, representing 67.0% of total assets. At that date, 51.6% of the loans were construction, commercial and residential real estate loans, 25.3% were commercial loans, 12.9% were consumer loans, 6.9% were foreign loans and 3.3% were leases. REAL ESTATE LENDING--CONSTRUCTION. The Bank provides construction financing for a variety of commercial and residential single-family subdivision and multi-family developments. At December 31, 1995, approximately 11.2% of the Bank's total real estate loans were collateralized by properties under construction. REAL ESTATE LENDING--COMMERCIAL. In the commercial real estate area, the Bank provides permanent financing for a variety of commercial developments, such as various retail facilities, warehouses, and office buildings. At December 31, 1995, approximately 36.4% of the Bank's total real estate loans were collateralized by commercial properties. REAL ESTATE LENDING--RESIDENTIAL. The Bank makes residential real estate loans, including home equity loans, to enable borrowers to purchase, refinance or improve residential real property. The loans are collateralized by mortgage liens on the related property, substantially all of which is located in Hawaii. At December 31, 1995, approximately 52.4% of the Bank's total real estate loans were collateralized by single-family and multi-family residences. COMMERCIAL LENDING. The Bank is a major lender to primarily small- and medium-sized businesses (including local subsidiaries and operations of foreign companies) in Hawaii and Hawaii companies doing business overseas with particular emphasis on those companies in the Asia-Pacific region. CONSUMER LENDING. The Bank offers many types of loans and credits to consumers. The Bank provides lines of credit, uncollateralized or collateralized, and provides various types of personal and automobile loans. The Bank also provides indirect consumer automobile financing on new and used autos by purchasing finance contracts from dealers. The Bank's Dealer Center is the largest commercial bank automobile lender in the State of Hawaii. The Bank is the largest issuer of MasterCard(R) credit cards and the second largest issuer of VISA(R) credit cards in Hawaii. INTERNATIONAL BANKING SERVICES - The Bank maintains an International Banking Division which provides international banking products and services through the Bank's branch system, international banking headquarters in Honolulu, a Grand Cayman branch, two Guam branches and a representative office in Tokyo, Japan. The Bank maintains a network of correspondent banking relationships throughout the world. The Bank's international banking activities are primarily trade-related and are concentrated in the Asia-Pacific area. The Bank has no loans to lesser developed countries. TRUST SERVICES - The Bank's Trust and Investments Division (formerly known as the Asset Management Division) offers a full range of trust and investment management services. The Division provides asset management, advisory and administrative services for estates, trusts and individuals. It also acts as trustee and custodian of retirement and other employee benefit plans. As of December 31, 1995, the Trust and Investments Division had 5,451 accounts with a market value of $7.2 billion. Of this total, $5.2 billion represented assets in nonmanaged accounts and $2.0 billion were managed assets. 2 5 The Trust and Investments Division maintains custodial accounts under which it acts as agent for customers in rendering a variety of services, including dividend and interest collection, collection under installment obligations, and rent collection. The Trust and Investments Division also acts as corporate trustee or co-trustee for bond issues totaling $2.0 billion in principal amount. However, the Division is in the process of transferring substantially all of these trustee accounts to Bank of New York. The transfer, subject to approval or consent of the issuers in some cases, is expected to be completed in 1996. FIRST HAWAIIAN CREDITCORP, INC. - Creditcorp is a financial services loan company with 12 branch offices located throughout the four major islands of the State of Hawaii, a commercial loan production office in Honolulu and a loan production office in Guam. The lending activities of Creditcorp are concentrated in both consumer and commercial financing which are primarily collateralized by real estate. Creditcorp's primary source of funds is time and savings deposits from the general public. The deposits are insured by the FDIC to the extent and subject to the limitations set forth in the Federal Deposit Insurance Act, as amended. Creditcorp also utilizes borrowings as an additional source of funding for its loan portfolio and is a member of the Federal Home Loan Bank of Seattle (the "FHLB of Seattle") which provides a central credit facility for member institutions. As of December 31, 1995, Creditcorp was required, in accordance with the rules and regulations of the FHLB of Seattle, to maintain a minimum level of capital stock ownership of $2.7 million in this regional facility. As of December 31, 1995, Creditcorp's investment in the capital stock of the FHLB of Seattle totalled $7.3 million and advances from the FHLB of Seattle aggregated $34.5 million. At December 31, 1995, Creditcorp had total deposits of $353.9 million, total loans and leases of $413.7 million and total assets of $441.1 million. FIRST HAWAIIAN LEASING, INC. - FHL, a financial services loan company, primarily finances and leases personal property including equipment and vehicles, and acts as an agent, broker or advisor in the leasing or financing of such property for affiliates as well as third parties. Through a special purpose subsidiary, FHL finances and leases selected real property. As of December 31, 1995, FHL's net investment in leases amounted to $104.4 million and total assets were $130.9 million. FHL's primary source of funds is borrowings from the Corporation and the Bank. PIONEER FEDERAL SAVINGS BANK - On August 6, 1993, the Corporation acquired for cash all of the outstanding stock of Pioneer Fed BanCorp, Inc. ("Pioneer Holdings") at a purchase price of $87 million through the merger of Pioneer Holdings with and into the Corporation (the "Merger"). As a result of the Merger, Pioneer became a wholly-owned subsidiary of the Corporation (see "Note 1. Acquisitions - Pioneer Federal Savings Bank" (page 45) in the Financial Review section of the Corporation's Annual Report 1995, which is incorporated herein by reference thereto). Pioneer is a federally chartered savings bank operating in the State of Hawaii. Pioneer, the oldest savings bank in Hawaii, was chartered in 1890 by King David Kalakaua. Presently, Pioneer maintains 19 branch offices located on the four major islands of the State of Hawaii. At December 31, 1995, Pioneer had total assets of $800.4 million. Based on total assets at December 31, 1995, Pioneer was the fourth largest of six Savings Association Insurance Fund ("SAIF") - insured institutions operating in the State of Hawaii. 3 6 Pioneer is primarily engaged in attracting deposits from the general public through a variety of deposit products. Together with borrowings, principally from the FHLB of Seattle, and funds from ongoing operations, these resources are invested in the origination of conventional adjustable and fixed rate, 1-4 family residential mortgage loans. Pioneer is also engaged in other types of mortgage lending, including home equity loans, loans on smaller multi-family projects and, to a lesser extent, in other consumer lending activities. Mortgage lending activity, both origination and purchases, has been limited to loans collateralized by property in the State of Hawaii. As of December 31, 1995, Pioneer was required, in accordance with the rules and regulations of the FHLB of Seattle, to maintain a minimum level of capital stock ownership of $8.1 million in this regional facility. As of December 31, 1995, Pioneer's investment in the capital stock of the FHLB of Seattle totalled $28.8 million and advances from the FHLB of Seattle aggregated $166.0 million. At December 31, 1995, Pioneer had total deposits of $462.5 million, total loans of $565.0 million and total assets of $800.4 million. HAWAII COMMUNITY REINVESTMENT CORPORATION - In an effort to support affordable housing and as part of the Bank's, Creditcorp's and Pioneer's community reinvestment program, the Bank, Creditcorp and Pioneer are members of the Hawaii Community Reinvestment Corporation (the "HCRC"). The HCRC is a consortium of local financial institutions and provides $50 million in permanent long-term financing for affordable housing rental projects throughout Hawaii for low and moderate income residents. The $50 million loan pool is funded by the member financial institutions which participate pro rata (based on deposit size) in each HCRC loan. The Bank's, Creditcorp's and Pioneer's participations in these HCRC loans are included in each of these companies' loan portfolio. HAWAII INVESTORS FOR AFFORDABLE HOUSING INC. - To further enhance the Bank's, Creditcorp's and Pioneer's community reinvestment program and provide support for the development of additional affordable housing rental units in Hawaii, the Bank, Creditcorp, and Pioneer, together with eight other HCRC member institutions, have subscribed to a $19.7 million tax credit equity fund. The $19.7 million Hawaii Affordable Housing Fund I (the "Fund") has been established to invest in qualified low income housing tax credit rental projects and insure that these projects are maintained as low income housing throughout the required compliance period. The Bank's, Creditcorp's and Pioneer's investments in this Fund will be included in each of the companies' investment portfolio. EMPLOYEES - As of December 31, 1995, the Corporation had 2,990 full-time equivalent employees. The Bank employed 2,662 persons and nonbank subsidiaries employed 328 persons. None are represented by any collective bargaining agreements and relations with employees are considered excellent. MONETARY POLICY AND ECONOMIC CONDITIONS - The earnings and growth of the Corporation are affected not only by general economic conditions, but also by the monetary policies of various governmental regulatory authorities, particularly the Federal Reserve Board. The 4 7 Federal Reserve Board implements national monetary policy by its open market operations in United States Government securities, control of the discount rate, and establishment of reserve requirements against both member and nonmember financial institutions' deposits. These actions have a significant effect on the overall growth and distribution of loans, investments and deposits as well as the rates earned on loans, or paid on deposits. It is not possible to predict the effect of future changes in monetary policies upon the operating results of the Corporation. COMPETITION - Competition in the financial services industry in Hawaii is intense. Hawaii-based commercial banks, savings institutions, financial services loan companies and credit unions compete against one another. Based upon the latest available figures, total deposits of all financial institutions in Hawaii as of September 30, 1995 amounted to approximately $22 billion. The two largest bank holding companies, Bancorp Hawaii, Inc. and the Corporation, accounted for 27% and 19% of total deposits (including domestic, foreign and public deposits), respectively. The next largest competitors were American Savings Bank, F.S.B. and Bank of America, F.S.B., with 10% and 7%, respectively, of total deposits. In addition, out-of-state mutual funds, insurance companies, brokerage firms and other financial services providers also compete for consumer and commercial business in Hawaii. Foreign (non-Hawaii) banks and other financial institutions are able to make loans in Hawaii through Edge Act subsidiaries, finance and mortgage company subsidiaries and by loan participations with local banks. United States domestic banks and other financial institutions may make loans directly in Hawaii by qualifying as "foreign lenders" in Hawaii. Foreign banks currently conduct various banking activities in Hawaii, except for retail deposit-taking. Banks and bank holding companies organized under the laws of Pacific Ocean jurisdictions with United States dollar-based economies may acquire Hawaii banks or establish branches in Hawaii, although none have done so to date. Banks and similar financial institutions of countries other than the United States may and do have representative offices or agencies in Hawaii. Under the rules of the Office of Thrift Supervision (the "OTS"), federally-chartered savings associations may open branches in, or merge with another savings association located in, any state (including Hawaii), subject to certain conditions. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, among other things, eliminated substantially all state law barriers to the acquisition of banks by out-of-state bank holding companies, effective September 29, 1995. The law will also permit interstate branching by banks effective as of June 1, 1997, subject to the ability of states to opt-out completely or to set an earlier effective date. The Hawaii State Legislature has not taken any action on the opt-out or early opt-in elections. The effect of the new law may be to increase competition within the markets in which the Corporation now operates, although the Corporation cannot predict whether and to what extent competition will increase in these markets. SUPERVISION AND REGULATION - As a bank holding company, the Corporation is subject to supervision and examination by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Corporation is also regulated and supervised by the OTS as a savings and loan holding company by virtue of its ownership of Pioneer. The various subsidiaries of the Corporation are subject to regulation and supervision by the state banking authorities of Hawaii, the Federal Reserve Board, the FDIC, the OTS and various other regulatory agencies. 5 8 HOLDING COMPANY STRUCTURE. In general, the Bank Holding Company Act of 1956, as amended, limits the business of bank holding companies to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be so closely related to banking as to be a proper incident thereto. The Corporation must obtain the prior approval of the Federal Reserve Board before acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank; before merging or consolidating with another bank holding company; and before acquiring substantially all of the assets of any additional bank. With certain exceptions, the Bank Holding Company Act of 1956, as amended, prohibits bank holding companies from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares in any company which is not a bank or a bank holding company, unless the Federal Reserve Board determines that the activities of such company are so closely related to banking as to be a proper incident thereto. In making such determinations, the Federal Reserve Board considers, among other things, whether the performance of such activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. In addition, all acquisitions are reviewed by the Department of Justice for antitrust considerations. As a holding company, the principal source of the Corporation's cash revenue has been dividends and interest received from the Bank and other subsidiaries of the Corporation. Under Hawaii law, the Bank is prohibited from declaring or paying any dividends in excess of its retained earnings. Pioneer and Creditcorp are also subject to regulatory limitations on the amount of dividends they may declare and pay. At December 31, 1995, the aggregate amount of dividends that such subsidiaries could pay to the Corporation under the foregoing limitations without prior regulatory approval was $316.0 million. There are also statutory limits on the transfer of funds to the Corporation and certain of its nonbanking subsidiaries by the Bank, Pioneer or Creditcorp, whether in the form of loans or other extensions of credit, investments or asset purchases. Such transfers by the Bank to the Corporation or any such nonbanking subsidiary are limited in amount to 10% of the Bank's capital and surplus, or 20% in the aggregate. Pioneer and Creditcorp are subject to comparable limitations. Furthermore, such loans and extensions of credit are required to be collateralized in specified amounts. If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The Federal Reserve Board and the FDIC have issued policy statements which provide that, as a general matter, insured banks and bank holding companies should only pay dividends out of current operating earnings. In addition, the regulatory capital requirements of the Federal Reserve Board, the FDIC and the OTS may limit the ability of the Corporation and its insured depository subsidiaries to pay dividends. See "Federal Deposit Insurance Corporation Improvement Act of 1991" and "Capital Requirements," below. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to make capital infusions into a troubled subsidiary bank, and the Federal Reserve Board may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. This capital infusion may be required at times when the Corporation may not have the resources to provide it. Any capital loans by the Corporation to its subsidiary bank would be subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In connection with its application to the Federal Reserve Board for authority to acquire Pioneer, the Corporation committed that Pioneer will meet all present and future minimum capital ratios adopted for savings associations by the OTS or the FDIC. In the event of the bankruptcy of the Corporation, this commitment would be assumed by the bankruptcy trustee and be entitled to a priority of payment. 6 9 In addition, depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. Accordingly, in the event that any insured subsidiary of the Corporation causes a loss to the FDIC, other insured subsidiaries of the Corporation could be required to compensate the FDIC by reimbursing it for the amount of such loss. Any such obligation by the Corporation's insured subsidiaries to reimburse the FDIC would rank senior to their obligations, if any, to the Corporation. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. A central feature of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") is the requirement that the federal banking agencies take "prompt corrective action" with respect to insured depository institutions that do not meet minimum capital requirements. FDICIA established five capital levels applicable to such institutions (including the Bank, Pioneer and Creditcorp): "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under the regulations adopted by the federal banking agencies to implement these provisions of FDICIA, a depository institution is "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMEL rating of 1). A depository institution is considered (i) "undercapitalized" if it has (A) a total risk-based capital ratio of less than 8%, (B) a Tier 1 risk-based capital ratio of less than 4% or (C) a leverage ratio of less than 4% (or 3% in the case of an institution with a CAMEL rating of 1), (ii) "significantly undercapitalized" if it has (A) a total risk-based capital ratio of less than 6%, (B) a Tier 1 risk-based capital ratio of less than 3% or (C) a leverage ratio of less than 3% and (iii) "critically undercapitalized" if it has a ratio of tangible equity to total assets equal to or less than 2%. An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating. At December 31, 1995, all of the Corporation's subsidiary depository institutions were "well capitalized". FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a cash dividend) or paying any management fees to its holding company if the depository institution is, or would thereafter be, undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company under such guarantee is limited to the lesser of (i) an amount equal to 5% of the depository institution's total assets at the time it became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. 7 10 Significantly undercapitalized depository institutions may be subject to a number of other requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator, generally within 90 days of the date such institution becomes critically undercapitalized. In addition, the FDIC has adopted regulations under FDICIA prohibiting an insured depository institution from accepting brokered deposits (as defined by the regulations) unless the institution is "well capitalized" or is "adequately capitalized" and receives a waiver from the FDIC. The FDIC has implemented a risk-based deposit insurance assessment system under which the assessment rate for an insured institution may vary according to the regulatory capital levels of the institution and other factors (including supervisory evaluations). Effective January 1, 1996, depository institutions insured by the BIF which are ranked in the top risk classification category are required to pay only the statutory minimum assessment of $2,000 annually for deposit insurance while all other banks are required to pay premiums ranging from .03% to .30% of domestic deposits. Depository institutions insured by the SAIF will continue to be assessed at rates ranging from .23% to .31% of domestic deposits, depending upon their risk classification. These rate schedules are subject to future adjustments by the FDIC. In addition, the FDIC has authority to impose special assessments from time to time. Because of the disparity between assessment rates for BIF and SAIF insured institutions, and because the SAIF has been unable to attain its statutorily mandated reserve ratio of 1.25% of insured deposits, Congress has considered proposals to require all SAIF member institutions to pay a one-time special assessment (currently estimated to be approximately 80 - 85 basis points of insured deposits) which would be sufficient to bring the reserve ratio of the SAIF to the statutorily mandated level. Legislation providing for a recapitalization of the SAIF by means of such a special assessment was passed by Congress in late 1995, but vetoed by the President for reasons unrelated to the SAIF recapitalization. The Corporation cannot predict at this time whether or when legislation will be adopted to recapitalize the SAIF or what the terms of such legislation will be. CAPITAL REQUIREMENTS. The Corporation and certain of its subsidiaries are subject to regulatory capital guidelines issued by the federal banking agencies. Information with respect to the applicable capital requirements is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" (page 35) in the Financial Review section of the Corporation's Annual Report 1995, and is incorporated herein by reference thereto. FDICIA required each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risk of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multi-family mortgages. On December 15, 1994, the federal banking agencies adopted amendments to their respective risk-based capital requirements that explicitly identify concentration of credit risk and certain risks arising from nontraditional activities, and the management of such risks, as important factors to consider in assessing an institution's overall capital adequacy. The amendments do not, however, mandate any specific adjustments to the risk-based capital calculations as a result of such factors. On August 2, 1995, the federal banking agencies published amendments to their risk-based capital rules that, effective September 1, 1995, include interest rate risk as a qualitative factor to be considered in assessing capital adequacy. Concurrent with the publication of the amendments, the federal banking agencies proposed a system for measuring interest rate risk and announced their intention, after a trial period to evaluate the reliability and accuracy of the proposed system, to initiate a rulemaking process for the purpose of amending the risk-based capital rules to include an explicit capital charge for interest rate risk that will be based upon the level of a bank's measured interest rate risk exposure. 8 11 On July 14, 1995, the federal banking regulators issued a proposal to amend their risk-based capital rules to incorporate a measure for market risk in foreign exchange and commodity activities and in the trading of debt and equity instruments. Under the proposal, banks with relatively large trading activities would calculate their capital charges for market risk using their own internal value-at-risk models (subject to parameters set by the regulators) or, alternatively, risk management techniques developed by the regulators. The effect of the proposed rules would be that, in addition to existing capital requirements for credit risk, certain institutions would be required to hold capital based on the measure of their market risk exposure. These institutions would be able to satisfy this additional requirement, in part, by issuing short-term subordinated debt that qualifies as Tier 3 capital. The proposed rule would go into effect at the end of 1997. 9 12 STATISTICAL DISCLOSURES - Guide 3 of the "Guides for the Preparation and Filing of Reports and Registration Statements" under the Securities Act of 1933 sets forth certain statistical disclosures to be included in the "Description of Business" section of bank holding company filings with the Securities and Exchange Commission. Except for the Schedule of Investment Securities by Book Value on the following page, the balance of the statistical information required is presented in the tables shown below in the Corporation's Annual Report 1995, which tables are incorporated herein by reference thereto. The tables and information contained therein have been prepared by the Corporation and have not been audited or reported upon by the Corporation's independent accountants. Information in response to the following applicable sections of Guide 3 is included in the Financial Review section of the Corporation's Annual Report 1995, and is incorporated herein by reference thereto:
PAGE NUMBERS IN ------------------- FIRST HAWAIIAN, INC. ANNUAL REPORT 1995 DISCLOSURE REQUIREMENTS (EXHIBIT 13) ----------------------- -------------------- I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential - A. Average balance sheets 23 - 24 B. Analysis of net interest earnings 23 - 24 C. Dollar amount of change in interest income and interest expense 25 II. Investment Portfolio - B. Investment securities by maturities and weighted average yields 37 C. Investment securities in excess of 10% of stockholders' equity 46 III. Loan and Lease Portfolio - A. Types of loans and leases 30 B. Maturities and sensitivities of loans to changes in interest rates 31, 34 C. Risk elements 1. Nonaccrual, past due and restructured loans and leases 31 - 32, 43 2. Foreign outstandings 53 3. Loan concentrations 30 - 31 IV. Summary of Loan and Lease Loss Experience - A. Analysis of loss experience 26 - 27, 44 B. Breakdown of the allowance for loan and lease losses 28 V. Deposits - A. Average amount and average rate paid on deposits 32 D. Maturity distribution of domestic time certificates of deposits of $100,000 or more 32 E. Time certificates of deposit in denominations of $100,000 or more issued by foreign offices 48 VI. Return on Equity and Assets 20 VII. Short-Term Borrowings 48
10 13 II. INVESTMENT SECURITIES PORTFOLIO Table I presents Item II.A of Guide 3, the book value of investment securities, by the following major categories at year-end for the years indicated. FIRST HAWAIIAN, INC. AND SUBSIDIARIES TABLE I SCHEDULE OF INVESTMENT SECURITIES BY BOOK VALUE
DECEMBER 31, ---------------------------------------------- 1995 1994 1993 ------ ------ ------ (in millions) U.S. Treasury and other U.S. Government agencies and corporations $ 859 $ 844 $ 918 States and political subdivisions 55 166 204 Other 261 138 108 ------ ------ ------ Total $1,175 $1,148 $1,230 ====== ====== ======
11 14 ITEM 2. PROPERTIES A subsidiary of the Bank is the sole general partner in a Hawaii limited partnership which owns all of a city block in downtown Honolulu containing 55,775 square feet. The Bank's interest in the limited partnership is 99.25%. The administrative headquarters of the Corporation and the main branch of the Bank were formerly located on a portion of the city block. The buildings were demolished and the Bank has begun construction of a modern banking center on this city block. The new headquarters building will include 418,000 square feet of gross office space, including the Bank's main branch and administrative headquarters of the Corporation and the Bank. The new building is anticipated to be completed in 1996. Information about the lease financing of the new headquarters building is included in "Note 15. Lease Commitments" (page 53) in the Financial Review section of the Corporation's Annual Report 1995, which is incorporated herein by reference thereto. Commencing in March 1993, the Bank leased approximately 119,000 square feet in another office building for use as an interim administrative headquarters and main branch until completion of the new structure. The interim office building is approximately a block and a half from the old administrative headquarters and main branch. Seventeen of the Bank's offices in Hawaii are located on land owned in fee simple by the Bank. The other branches of the Bank, Pioneer and Creditcorp are situated in leasehold premises or in buildings constructed by the Bank or Creditcorp on leased land (see "Note 15. Lease Commitments" (pages 53 through 54) in the Financial Review section of the Corporation's Annual Report 1995, which is incorporated herein by reference thereto). In early 1993, the Bank completed construction of an operations center located on 125,919 square feet of land owned in fee simple by the Bank in an industrial area near downtown Honolulu. The Bank occupies all of the four-story building. The Bank completed construction of a new five-story, 75,000 square foot office building, including a branch, on property owned in fee simple in Maite, Guam to replace its Agana, Guam Branch in late 1994. ITEM 3. LEGAL PROCEEDINGS Various legal proceedings are pending against the Corporation or its subsidiaries. In the opinion of management, based upon advice of counsel, the aggregate liability, if any, resulting from these proceedings would not have a material effect on the Corporation's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1995. 12 15 EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the executive officers of the Corporation with their positions, age and business experience during the past five years:
BUSINESS EXPERIENCE DURING LAST 5 YEARS (ALL WITH THE CORPORATION AND THE BANK OFFICER AGE EXCEPT AS OTHERWISE INDICATED) ---------------------------------- --- --------------------------------------------------------------- Walter A. Dods, Jr. 54 Chairman of the Board and Chief Executive Officer of the Chairman, Chief Executive Corporation since 1989; President of the Corporation from 1989 Officer and Director -1991; Executive Vice President of the Corporation from 1982 - 1989; Director of the Corporation since 1983; Chairman of the Board and Chief Executive Officer of the Bank since 1989; President of the Bank from 1984 - 1989; Director of the Bank since 1979. Mr. Dods has been with the Bank since 1968. John K. Tsui 57 President and Director of the Corporation since April and July President and Director 1995, respectively; Director, President and Chief Operating Officer of the Bank since July 1994; Director, Chairman and Chief Executive Officer of FHL since December 1994. Mr. Tsui was Executive Vice President of Bancorp Hawaii, Inc. from 1986 - June 1994 and was Vice Chairman of Bank of Hawaii from 1989 - June 1994. Mr. Tsui was with Bancorp Hawaii, Inc. from 1984 - June 1994. Donald G. Horner 45 Executive Vice President of the Corporation since 1989; Vice Executive Vice President President of the Corporation from 1987 - 1989; Vice Chairman of the Bank since July 1994; Executive Vice President of the Bank from 1993 - 1994; Chairman of Creditcorp since 1993; Chairman and Chief Executive Officer of Creditcorp from 1992 - 1993; Director of Creditcorp since 1985; President of Creditcorp from 1985 - 1992; Director of FHL since 1983; President of FHL from 1985 - 1994. Mr. Horner has been with the Bank since 1978. Howard H. Karr 53 Executive Vice President and Treasurer of the Corporation Executive Vice President and since 1990; Vice President and Treasurer of the Corporation Treasurer from 1978 - 1990; Vice Chairman, Chief Financial Officer and Treasurer of the Bank since September 1993; Vice Chairman and Chief Financial Officer of the Bank from 1992 - 1993; Executive Vice President and Chief Financial Officer of the Bank from 1989 - 1991; Senior Vice President and Controller of the Bank from 1979 - 1989. Mr. Karr has been with the Bank since 1973.
There are no family relationships among any of the executive officers of the Corporation. There is no arrangement or understanding between any such executive officer and another person pursuant to which he was elected as an officer. The term of office of each officer is at the pleasure of the Board of Directors of the Corporation. 13 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Required information is included in "Common Stock Information" (page 19) in the Financial Review section of the Corporation's Annual Report 1995, and is incorporated herein by reference thereto. ITEM 6. SELECTED FINANCIAL DATA Required information is included in "Summary of Selected Consolidated Financial Data" (page 20) in the Financial Review section of the Corporation's Annual Report 1995, and is incorporated herein by reference thereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Required information is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" (pages 21 through 35) in the Financial Review section of the Corporation's Annual Report 1995, and is incorporated herein by reference thereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following information is included in the Financial Review section of the Corporation's Annual Report 1995, which is incorporated herein by reference thereto as follows:
PAGE NUMBER ----------- Report of Independent Accountants 38 First Hawaiian, Inc. and Subsidiaries: Consolidated Balance Sheets at December 31, 1995 and 1994 39 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 40 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 41 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 42 First Hawaiian, Inc. (Parent Company): Balance Sheets at December 31, 1995 and 1994 56 Statements of Income for the years ended December 31, 1995, 1994 and 1993 56 Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 41 Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 57 Notes to Financial Statements 43 - 57 Summary of Quarterly Financial Data (Unaudited) 36 Supplementary Data 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Required information relating to directors is included in "Election of Directors" and "Directors Continuing in Office and Executive Officers" (pages 3 through 8) of the Corporation's Proxy Statement, and is incorporated herein by reference thereto. Required information relating to executive officers is included in Part I of this Form 10-K in the section entitled "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Required information is included in "Compensation of Directors" and "Executive Compensation" (pages 8 through 20) of the Corporation's Proxy Statement, and is incorporated herein by reference thereto. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Required information is included in "Outstanding Shares; Voting Rights," "Election of Directors" and "Directors Continuing in Office and Executive Officers" (pages 2 through 8) of the Corporation's Proxy Statement, and is incorporated herein by reference thereto. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Required information is included in "Certain Transactions" (pages 20 and 21) of the Corporation's Proxy Statement, and is incorporated herein by reference thereto. 15 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE NUMBER IN --------------- FIRST HAWAIIAN, INC. ANNUAL REPORT 1995 (EXHIBIT 13) --------------- (a) 1. Financial Statements The following financial statements are incorporated by reference in Part II (Item 8) of this Form 10-K: Report of Independent Accountants 38 First Hawaiian, Inc. and Subsidiaries: Consolidated Balance Sheets at December 31, 1995 and 1994 39 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 40 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 41 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 42 First Hawaiian, Inc. (Parent Company): Balance Sheets at December 31, 1995 and 1994 56 Statements of Income for the years ended December 31, 1995, 1994 and 1993 56 Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 41 Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 57 Notes to Financial Statements 43 - 57 2. Financial Statement Schedules Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions, or the information is included in the consolidated financial statements, or are inapplicable, and therefore have been omitted. 3. Exhibits Exhibit 3 (i) Certificate of Incorporation - Incorporated by reference to Exhibit 3 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 as filed with the Securities and Exchange Commission. (ii) Bylaws - Incorporated by reference to Exhibit 3 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 as filed with the Securities and Exchange Commission.
16 19 Exhibit 4 Instruments defining rights of security holders, including indentures. (i) Equity - Incorporated by reference to Exhibit 3(i) hereto. (ii) Debt - Indenture, dated as of August 9, 1993 between First Hawaiian, Inc. and The First National Bank of Chicago, Trustee is incorporated by reference to Exhibit 4(ii) to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as filed with the Securities and Exchange Commission. Exhibit 10 Material contracts (i) Lease dated September 13, 1967, as amended April 21, 1987, between the Trustees under the Will and of the Estate of Samuel M. Damon, Deceased, and First National Bank of Hawaii (predecessor of the Bank) is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 as filed with the Securities and Exchange Commission. (ii) Lease dated May 20, 1982, as amended April 23, 1987, between the Trustees under the Will and of the Estate of Samuel M. Damon, Deceased, and First Hawaiian Bank is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Forms 10-K for the fiscal years ended December 31, 1987, 1985 and 1980 as filed with the Securities and Exchange Commission. (iii) Lease Agreement dated as of December 1, 1993 between REFIRST, Inc. and First Hawaiian Bank is incorporated by reference to Exhibit 10(iii) to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as filed with the Securities and Exchange Commission. (iv) Construction Management, Escrow and Development Agreement dated as of December 1, 1993 among REFIRST, Inc., First Hawaiian Bank and First Fidelity Bank, N.A., Pennsylvania is incorporated by reference to Exhibit 10(iv) to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as filed with the Securities and Exchange Commission. (v) Ground Lease dated as of December 1, 1993 among First Hawaiian Center Limited Partnership, FH Center, Inc. and REFIRST, Inc. is incorporated by reference to Exhibit 10(v) to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as filed with the Securities and Exchange Commission.
17 20 (vi) Stock Incentive Plan of First Hawaiian, Inc. dated November 22, 1991 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 as filed with the Securities and Exchange Commission. (vii) Long-Term Incentive Plan of First Hawaiian, Inc. effective January 1, 1992 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 as filed with the Securities and Exchange Commission. (viii) First Hawaiian, Inc. Supplemental Executive Retirement Plan, as amended and restated as of January 1, 1996. (ix) First Hawaiian, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1996. (x) First Hawaiian, Inc. Incentive Plan for Key Executives, as amended through December 13, 1989 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 as filed with the Securities and Exchange Commission. (xi) Directors' Retirement Plan, effective as of January 1, 1992 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 as filed with the Securities and Exchange Commission. Exhibit 12 Statement re: computation of ratios. Exhibit 13 Annual report to security holders - Corporation's Annual Report 1995. Exhibit 21 Subsidiaries of the registrant. Exhibit 27 Financial data schedule. (b) Reports on Form 8-K - No reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 1995. (c) The exhibits listed in Item 14(a)3 are incorporated by reference or attached hereto. (d) Response to this item is the same as Item 14(a)2.
18 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST HAWAIIAN, INC. (Registrant) By /s/ HOWARD H. KARR -------------------------------------- HOWARD H. KARR EXECUTIVE VICE PRESIDENT AND TREASURER Date: March 21, 1996 19 22 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ WALTER A. DODS, JR. Chairman, March 21, 1996 - ---------------------------------------------------- Chief Executive Officer ------------------------- Walter A. Dods, Jr. & Director Date /s/ JOHN W. A. BUYERS Director March 21, 1996 - ---------------------------------------------------- ------------------------- John W. A. Buyers Date /s/ JOHN C. COUCH Director March 21, 1996 - ---------------------------------------------------- ------------------------- John C. Couch Date /s/ JULIA ANN FROHLICH Director March 21, 1996 - ---------------------------------------------------- ------------------------- Julia Ann Frohlich Date /s/ PAUL MULLIN GANLEY Director March 21, 1996 - ---------------------------------------------------- ------------------------- Paul Mullin Ganley Date /s/ DAVID M. HAIG Director March 21, 1996 - ---------------------------------------------------- ------------------------- David M. Haig Date /s/ JOHN A. HOAG Director March 21, 1996 - ---------------------------------------------------- ------------------------- John A. Hoag Date /s/ BERT T. KOBAYASHI, JR. Director March 21, 1996 - ---------------------------------------------------- ------------------------- Bert T. Kobayashi, Jr. Date /s/ RICHARD T. MAMIYA Director March 21, 1996 - ---------------------------------------------------- ------------------------- Richard T. Mamiya Date /s/ FUJIO MATSUDA Director March 21, 1996 - ---------------------------------------------------- ------------------------- Fujio Matsuda Date /s/ RODERICK F. McPHEE Director March 21, 1996 - ---------------------------------------------------- ------------------------- Roderick F. McPhee Date /s/ GEORGE P. SHEA, JR. Director March 21, 1996 - ---------------------------------------------------- ------------------------- George P. Shea, Jr. Date /s/ JOHN K. TSUI President March 21, 1996 - ---------------------------------------------------- & Director ------------------------- John K. Tsui Date /s/ FRED C. WEYAND Director March 21, 1996 - ---------------------------------------------------- ------------------------- Fred C. Weyand Date /s/ ROBERT C. WO Director March 21, 1996 - ---------------------------------------------------- ------------------------- Robert C. Wo Date /s/ HOWARD H. KARR Executive Vice President March 21, 1996 - ---------------------------------------------------- & Treasurer ------------------------- Howard H. Karr (Principal financial and Date accounting officer)
20 23 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 3 (i) Certificate of Incorporation - Incorporated by reference to Exhibit 3 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 as filed with the Securities and Exchange Commission. (ii) Bylaws - Incorporated by reference to Exhibit 3 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 as filed with the Securities and Exchange Commission. 4 Instruments defining rights of security holders, including indentures. (i) Equity - Incorporated by reference to Exhibit 3(i) hereto. (ii) Debt - Indenture, dated as of August 9, 1993 between First Hawaiian, Inc. and The First National Bank of Chicago, Trustee is incorporated by reference to Exhibit 4(ii) to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as filed with the Securities and Exchange Commission. 10 Material contracts (i) Lease dated September 13, 1967, as amended April 21, 1987, between the Trustees under the Will and of the Estate of Samuel M. Damon, Deceased, and First National Bank of Hawaii (predecessor of the Bank) is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 as filed with the Securities and Exchange Commission. (ii) Lease dated May 20, 1982, as amended April 23, 1987, between the Trustees under the Will and of the Estate of Samuel M. Damon, Deceased, and First Hawaiian Bank is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Forms 10-K for the fiscal years ended December 31, 1987, 1985 and 1980 as filed with the Securities and Exchange Commission. (iii) Lease Agreement dated as of December 1, 1993 between REFIRST, Inc. and First Hawaiian Bank is incorporated by reference to Exhibit 10(iii) to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as filed with the Securities and Exchange Commission.
21 24 (iv) Construction Management, Escrow and Development Agreement dated as of December 1, 1993 among REFIRST, Inc., First Hawaiian Bank and First Fidelity Bank, N.A., Pennsylvania is incorporated by reference to Exhibit 10(iv) to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as filed with the Securities and Exchange Commission. (v) Ground Lease dated as of December 1, 1993 among First Hawaiian Center Limited Partnership, FH Center, Inc. and REFIRST, Inc. is incorporated by reference to Exhibit 10(v) to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as filed with the Securities and Exchange Commission. (vi) Stock Incentive Plan of First Hawaiian, Inc. dated November 22, 1991 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 as filed with the Securities and Exchange Commission. (vii) Long-Term Incentive Plan of First Hawaiian, Inc. effective January 1, 1992 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 as filed with the Securities and Exchange Commission. (viii) First Hawaiian, Inc. Supplemental Executive Retirement Plan, as amended and restated as of January 1, 1996. (ix) First Hawaiian, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1996. (x) First Hawaiian, Inc. Incentive Plan for Key Executives, as amended through December 13, 1989 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 as filed with the Securities and Exchange Commission. (xi) Directors' Retirement Plan, effective as of January 1, 1992 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 as filed with the Securities and Exchange Commission. 12 Statement re: computation of ratios. 13 Annual report to security holders - Corporation's Annual Report 1995. 21 Subsidiaries of the registrant. 27 Financial data schedule.
22
   1
                                                               Exhibit 10(viii)




                              FIRST HAWAIIAN, INC.

                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

                  (Amended and Restated as of January 1, 1996)

   2
                               TABLE OF CONTENTS

Page ---- PROLOGUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE I - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE II - PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE III - SUPPLEMENTAL ACCOUNTS Section 3.1 Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.2 Time of Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.3 Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.4 Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.5 Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.6 No Withdrawals Or Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IV - SUPPLEMENTAL ACCRUED BENEFIT Section 4.1 Amount of Supplemental Accrued Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.2 Vesting in Supplemental Accrued Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.3 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.4 Pre-Retirement Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
i 3
Page ---- Section 4.5 Actuarial Equivalence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 4.6 No Withdrawals Or Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE V - NO CONTRIBUTIONS Section 5.1 No Contributions By Participating Employers . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.2 Benefits Payable From General Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE VI - CERTAIN CONTRACTS AND PRIOR EMPLOYERS Section 6.1 Additional Benefits Under Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.2 First Interstate Bank of Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.3 Pioneer Federal Savings Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE VII - ADMINISTRATION Section 7.1 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.2 Indemnification, Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.3 Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VIII - AMENDMENT, TERMINATION, MERGER Section 8.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 8.2 Termination or Partial Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ii 4
Page ---- Section 8.3 Merger or Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 8.4 Change In Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE IX - MISCELLANEOUS Section 9.1 Rights of Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.2 Misc. Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 EXHIBIT I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
iii 5 FIRST HAWAIIAN, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PROLOGUE The First Hawaiian, Inc. Supplemental Executive Retirement Plan is hereby amended and restated in its entirety effective as of January 1, 1996. Unless otherwise specifically provided for herein or by law, the provisions set forth herein shall determine as of January 1, 1996 the rights and benefits of all participants who terminate employment on or after said date. Unless otherwise specifically provided herein or by law, the rights and benefits of participants who terminated employment on or before December 31, 1995 shall be determined in accordance with the provisions of this Plan as in effect on the date their employment terminated. 1 6 ARTICLE I DEFINITIONS As used herein the following terms shall have the following meanings unless the context clearly requires otherwise. 1.1 "Accrued Benefit" means an annual retirement allowance commencing on the Participant's Normal Retirement Date (as defined in the Retirement Plan) determined at any time in accordance with the Retirement Plan. 1.2 "Affiliate" means an Affiliate as defined in the Profit Sharing Plan. 1.3 "Beneficiary" means the person or persons designated by the Participant in writing on a form furnished by and filed with the Committee. The form of such Beneficiary designation is attached as Exhibit I. If a Participant fails to make any designation, the person so designated shall not survive the Participant, or the legal entity so designated shall no longer be in existence or shall be legally incapable of receiving benefits hereunder, Beneficiary shall mean the estate of the Participant. 1.4 "Board" means the Board of Directors of the Company. 1.5 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or such other provision of law of similar purport as may at any time be substituted therefor. 1.6 "Committee" means the Executive Compensation Committee of the Company. 1.7 "Company" means First Hawaiian, Inc. 2 7 1.8 "Compensation" means the base salary or wages plus any commissions, overtime pay, shift and other premiums, short-term incentive pay, and the annual bonus earned under the Company's Incentive Plan for Key Employees (or any successor to such plan) paid by a Participating Employer to an Employee while he is an active member of the Profit Sharing Plan and/or the Retirement Plan. Such items of Compensation shall include any amount that is contributed by a Participating Employer pursuant to a salary reduction agreement and is not includible in the Participant's gross income under Section 125, 402(e)(3), 402(h)(1)(B), or 403(b) of the Code and any salary reduction elected by a Participant under a nonqualified plan. Such items of Compensation shall not include the cash portion of the Company's broad-based annual profit sharing program, contributions to employee benefit plans, lump sum vacation cashouts, and other extraordinary items not specifically included as Compensation in this Section 1.8. 1.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any other provision of law of similar purport as may at any time be substituted therefor. 1.10 "Participant" means any person who has satisfied the eligibility requirements of Article II. 1.11 "Participating Employer" means the Company and any other employer which, with the Company's permission, elects to adopt the Plan for the benefit of some or all of its Employees. 1.12 "Plan" means the First Hawaiian, Inc. Supplemental Executive Retirement Plan as set forth herein and any amendments hereto as may be made from time to time. 3 8 1.13 "Profit Sharing Account" means an account maintained for a Participant under the Profit Sharing Plan that represents the value of his proportion of the value of the assets of the Trust Fund arising from Profit Sharing Contributions. 1.14 "Profit Sharing Contribution" means a contribution to the Profit Sharing Plan pursuant to Section 4.4 thereof. 1.15 "Profit Sharing Plan" means the First Hawaiian, Inc. Profit Sharing Plan, including such amendments as may be made from time to time. 1.16 "Plan Year" means the calendar year. 1.17 "Retirement Plan" means the Employees' Retirement Plan of First Hawaiian, Inc., including such amendments as may be made from time to time. 1.18 "Supplemental Account" means an account recording the amount allocated to a Participant pursuant to Section 4.2 of this Plan as it existed as of December 31, 1995 and such additional amounts as may be allocated to a Participant under 3.1 herein, as adjusted from time to time pursuant to the provisions of this Plan. 1.19 "Supplemental Accrued Benefit" means a benefit determined pursuant to Section 4.1 of this Plan. 4 9 ARTICLE II PARTICIPATION An employee who was a Participant in this Plan as of December 31, 1995 shall remain a Participant in this Plan. No other person shall become a Participant in this Plan. 5 10 ARTICLE III SUPPLEMENTAL ACCOUNTS Section 3.1 Allocations. (a) For each Plan Year commencing after December 31, 1995, the Participating Employers shall allocate to the Supplemental Account of a Participant the amount, if any, equal to the difference between (i) the amount of the Profit Sharing Contributions allocable to him for such Plan Year without giving effect to Sections 401(a)(17) and 415 of the Code and using the definition of Compensation in this Plan and (ii) the amount of the Profit Sharing Contributions actually allocated to him under the Profit Sharing Plan for such Plan Year. The amount to be allocated to any of the Supplemental Accounts shall not be reduced by the amount the Participating Employers are required by law to pay to a governmental taxing authority as the Participant's portion of any withholding taxes, including taxes imposed on employees by the Federal Insurance Contributions Act of Chapter 21 of the Code. (b) A Participant shall be entitled to an allocation under this Section 3.1 for a Plan Year only if one of the following conditions is satisfied: (1) He is employed by a Participating Employer or an Affiliate as of the last day of such Plan Year; (2) He died while in the employ of a Participating Employer or an Affiliate during such Plan Year; (3) He terminated employment due to a Disability (as defined in the Profit Sharing Plan) during such Plan Year; or 6 11 (4) He was on a leave of absence at the close of such Plan Year and received Compensation during such Plan Year. Section 3.2 Time of Allocation. The Participating Employers shall make allocations to the Participants' Supplemental Accounts for a Plan Year as of the last day of such Plan Year. Section 3.3 Vesting. A Participant's vested interest in his Supplemental Account shall be the same percentage as his vested interest in his Profit Sharing Account. Section 3.4 Valuations. As of the last day of each Plan Year the Committee shall adjust the balance, if any, of the Participant's Supplemental Account as follows: (a) First, the balance of the Participant's Supplemental Account as of the last day of the preceding Plan Year shall be adjusted by multiplying such balance by a number equal to one plus the decimal equivalent of the percentage yield as of the first week of the Plan Year on Treasury notes having five year maturities. The amount so credited shall not be reduced by the amount, if any, the Participating Employers are required by law to pay to a governmental taxing authority as the Participant's portion of any withholding taxes, including taxes imposed on employees by the Federal Insurance Contributions Act of Chapter 21 of the Code. (b) Second, the Committee shall credit such adjusted balance with the allocation, if any, to the Participant's Supplemental 7 12 Account under Section 3.1 for such Plan Year. Section 3.5 Distribution. (a) A Participant shall be entitled to commence distribution of his Supplemental Account during the Plan Year following his termination of employment with the Participating Employers and the Affiliates. In the case of the death of a Participant, distribution of the vested balance of a Participant's Supplemental Account shall be made to his Beneficiary as soon as practicable after the Participant's death. (b) A Participant's Supplemental Account shall be distributed in such form (including, but not limited to, a lump sum or periodic payments) as the Committee shall determine in its sole discretion. A Participant may request in a writing filed with the Committee prior to his termination of employment with the Participating Employers and the Affiliates that the Committee authorize a distribution of his Supplemental Account in a specific form. A Beneficiary may make a similar request prior to commencement of distribution of the Participant's Supplement Account. The Committee, in its sole discretion, shall determine whether to grant any such request. (c) All distributions under the Plan shall be reduced by any amount of withholding taxes that the Participating Employers are required by law to withhold. Section 3.6 No Withdrawals Or Loans. Withdrawals and loans shall not be permitted from any Supplemental Accounts. 8 13 ARTICLE IV SUPPLEMENTAL ACCRUED BENEFIT Section 4.1 Amount of Supplemental Accrued Benefit. A Participant shall be credited with a Supplemental Accrued Benefit equal to the difference, if any, between (i) the amount of the Participant's vested Accrued Benefit under the Retirement Plan prior to application of Sections 401(a)(17) and 415 of the Code and using the definition of Compensation in this Plan and (ii) the amount of the Participant's vested Accrued Benefit under the Retirement Plan. Clause (i) of the prior sentence shall be determined as though Section 1.2 of the Retirement Plan had not been amended by the Board on September 21, 1995. Section 4.2 Vesting in Supplemental Accrued Benefit. A Participant's vested interest in his Supplemental Accrued Benefit shall be the same percentage as the Participant's vested interest in his Accrued Benefit. Section 4.3 Distributions. (a) (1) A Participant shall be entitled to commence distribution of his Supplemental Accrued Benefit as soon as practicable after the later of age 65 or his Late Retirement Date (as defined in the Retirement Plan). (2) If a Participant is eligible to retire on an Early Retirement Date (as defined in the Retirement Plan), he may request in writing filed with the Committee to have his Supplemental Accrued Benefit commence at a designated date before his 65th birthday. The Committee, in its sole discretion, shall determine whether to grant such request. 9 14 (b) A Participant's Supplemental Accrued Benefit shall be distributed in such form (including, but not limited to, a lump sum or periodic payments, with or without survivor rights) as the Committee shall determine in its sole discretion. A Participant may request in a writing filed with the Committee prior to his termination of employment with the Participating Employers and the Affiliates that the Committee authorize a distribution of his Supplemental Accrued Benefit in a specific form. The Committee, in its sole discretion, shall determine whether to grant such a request. (c) All distributions under the Plan shall be reduced by any amount of withholding taxes that the Participating Employers are required by law to withhold. Section 4.4 Pre-Retirement Death Benefit. (a) If a married Participant with a vested interest in his Supplemental Accrued Benefit dies prior to commencement of the distribution thereof, his surviving spouse shall be entitled to one-half of the Participant's Supplemental Accrued Benefit that would have been payable to the Participant if the Participant had retired on the day before his death. (b) A surviving spouse's interest in the Participant's Supplemental Accrued Benefit shall be distributed in such form (including, but not limited to, a lump sum or periodic payments) as the Committee shall determine in its sole discretion. A surviving spouse may request in a writing filed with the Committee that the Committee authorize such a distribution in a specific form. The Committee, in its sole discretion, shall determine whether to grant such a request. 10 15 (c) All distributions under the Plan shall be reduced by any amount of withholding taxes that the Participating Employers are required by law to withhold. Section 4.5 Actuarial Equivalence. For purposes of determining an actuarial equivalent form of a Supplemental Accrued Benefit, the definition of "Actuarial Equivalent" in the Retirement Plan shall apply, provided that the amount of lump sum payments under this Plan shall be determined by using the applicable mortality table and the applicable interest rate. The term "applicable mortality table" means the table prescribed by the Secretary of the Treasury, which table shall be based on the prevailing commissioners' standard table (described in Section 807(d)(5)(A) of the Code) used to determine reserves for group annuity contracts issued on the date as of which present value is being determined (without regard to any other subparagraph of Section 807(d)(5) of the Code). The term "applicable interest rate" means the annual rate of interest on 30-year Treasury securities for the first full calendar month preceding the first day of the Plan Year in which the lump sum distribution occurs. Section 4.6 No Withdrawals Or Loans. Withdrawals and loans shall not be permitted from any Supplemental Accrued Benefit. 11 16 ARTICLE V NO CONTRIBUTIONS Section 5.1 No Contributions By Participating Employers. No contributions to a trust fund shall be required of or made by any Participating Employer. No contributions shall be required or permitted of Participants. Section 5.2 Benefits Payable From General Assets. The amount of any of the Supplemental Account benefit or the Supplemental Accrued Benefit payable to a Participant shall remain part of the general funds of the Participating Employers. No Participant or Beneficiary shall acquire any property interest in his Supplemental Account, Supplemental Accrued Benefit, or any other assets of any Participating Employer. A Participant's or Beneficiary's right hereunder shall be limited to receiving from the Participating Employer deferred payments measured as set forth in this Plan, which right is conditioned upon continued compliance with the terms and conditions of this Plan. To the extent that any Participant or Beneficiary acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of a Participating Employer. 12 17 ARTICLE VI CERTAIN CONTRACTS AND PRIOR EMPLOYERS Section 6.1 Additional Benefits Under Contracts. In addition to the benefits described in Articles III and IV, this Plan incorporates the provisions of any individual contract between a Participating Employer and a Participant to the extent such contract provides earlier vesting or additional benefits for the Participant under this Plan. This Section 6.1 shall be interpreted and administered so that it neither conflicts with the contractual provisions that promise earlier vesting or additional benefits under this Plan nor results in the payment of duplicate benefits when payments under this Plan and under the contractual provision are considered together. Section 6.2 First Interstate Bank of Hawaii. As of July 1, 1992, the First Interstate Bank of Hawaii Supplemental Retirement Plan (the "FIHI Plan") was merged into this Plan. Benefits accrued under the FIHI Plan prior to its merger into this Plan shall be preserved under a separate benefit schedule of this Plan maintained by the Committee and shall be coordinated with other Plan benefits as follows. After the merger of the FIHI Plan into this Plan, no new benefits shall accrue under the provisions of the FIHI Plan or the separate benefit schedule pertaining to it hereunder. In addition, there shall be no duplication of the benefits accrued under the FIHI Plan prior to the merger and benefits that are provided for the same period of service to the same individuals under this Plan. To this end, any payments owed under the separate benefit schedule for the former FIHI Plan shall be determined when Plan benefits are about to commence, and the determination shall be made after reducing the tentative amount of such payments (but not below zero) by the 13 18 amount of any benefits that are payable to the same individual for the same period of service under other provisions of this Plan. Section 6.3 Pioneer Federal Savings Bank. If a Participant's Accrued Benefit includes amounts that accrued prior to January 1, 1994 under the Retirement Pension Plan of Pioneer Federal Savings Bank, his Supplemental Accrued Benefit shall be determined under Section 4.1, provided that the Participant's Accrued Benefit and Supplemental Accrued Benefit shall be based only on Credited Service (as defined in the Retirement Plan) earned after December 31, 1993. 14 19 ARTICLE VII ADMINISTRATION Section 7.1 Committee. Subject to the limitations of this Plan and unless otherwise determined by the Board, the Committee shall have the power and the duty to take all actions and to make all decisions necessary or proper to administer this Plan, including: (1) To require as a condition to receiving any benefits under this Plan, any person to furnish such information that the Committee may reasonably request for the purpose of the proper administration of this Plan; (2) To make and enforce such rules and regulations and prescribe the use of such forms as it shall deem necessary for the efficient administration of this Plan; (3) To decide questions concerning the interpretation of this Plan, including the eligibility of any person for benefits under this Plan; (4) To determine the amount of benefits that shall be payable to any person in accordance with the provisions of this Plan; (5) To delegate responsibility for performance of ministerial functions necessary for the administration of the Plan to such employees of the Company or a Participating Employer, including Participants, as the Committee shall deem appropriate; and 15 20 (6) To employ the services of such other persons as the Committee may deem necessary or desirable in connection with this Plan, including but not limited to an actuary, legal counsel, an independent accountant, agents, and such clerical, medical, and accounting services as it may require in carrying out the provisions of this Plan or in complying with the requirements of ERISA. Section 7.2 Indemnification, Insurance. The Participating Employers shall indemnify and save harmless and/or insure each fiduciary who is an employee or a director of a Participating Employer or an Affiliate against any and all claims, loss, damages, expense, and liability arising from their responsibilities in connection with this Plan, if the fiduciary acted in good faith and in a manner the fiduciary reasonably believed to be in or not opposed to the best interests of the Plan. Section 7.3 Claims Procedure. The procedure for claiming benefits under this Plan shall be as follows: (a) The Committee shall determine the benefits due hereunder to a Participant or his beneficiary or beneficiaries, but a Participant or his beneficiary or beneficiaries may file a claim for benefits by written notice to the Committee. (b) If a claim is denied in whole or in part, the Committee shall give the claimant written notice of such denial, within a reasonable period of time following the filing of the claim. Such notice shall (i) specify the reason or reasons for the denial, (ii) refer to the pertinent Plan provisions on which the denial is based, (iii) describe any additional material or information necessary to perfect the claim and explain the need therefor, and 16 21 (iv) explain the review procedure described in subparagraph (c) hereof. (c) The claimant may then appeal the denial of the claim to the Committee by filing written notice of such appeal with the Committee within 90 days after receipt of the notice of denial. The claimant or any authorized representative may, before or after filing notice of appeal, review any documents pertinent to the claim and submit issues and comments in writing. The Committee shall make its decision on such appeal within 60 days after receipt of the appeal (unless a longer period is requested by the claimant), and shall forthwith give written notice of such decision. 17 22 ARTICLE VIII AMENDMENT, TERMINATION, MERGER Section 8.1 Amendment. (a) The Board may at any time amend this Plan. (b) No Plan amendment shall adversely affect Participants who shall have retired under this Plan prior to such action, nor shall any such amendment have the effect of decreasing the vested percentage or the amount of a Participant's Supplemental Account or Supplemental Accrued Benefit. Section 8.2 Termination or Partial Termination. (a) This Plan may be terminated in full or in part by the Board. The board of directors of a Participating Employer may terminate this Plan as to such Participating Employer. (b) Upon a full or partial termination of this Plan, (i) the Supplemental Account and Supplemental Accrued Benefit of each Participant or retired Participant (or if the Participant or retired Participant has died, the portion of his Supplemental Account and Supplemental Accrued Benefit to which his spouse or other beneficiary is entitled) shall become vested and nonforfeitable and (ii) the value of his Supplemental Account and the Actuarial Equivalent value of his Supplemental Accrued Benefit shall be distributed in a lump sum to the Participant or retired Participant (or if the Participant or retired Participant has died, his spouse or other beneficiary) within 30 days of the date of the resolution that terminates this Plan. 18 23 Section 8.3 Merger or Consolidation. If this Plan is merged into or consolidated with, or if its assets or liabilities are transferred to, any other plan, the provisions of such subsequent plan must provide that each Participant of this Plan would, if the subsequent plan then terminated, receive a benefit immediately after the merger, consolidation, or transfer, that is equal to or greater than the benefit he would have been entitled to immediately before the merger, consolidation, or transfer. Section 8.4 Change In Control. If the terms of a Change in Control provide that this Plan shall be assumed by the successor organization, then this Plan shall continue in accordance with its terms. If, however, the terms of a Change in Control do not so provide, then immediately prior to the occurrence of such a Change in Control the Plan shall automatically terminate and each Participant shall receive immediately prior to such Change in Control a lump sum distribution of his Supplemental Account and Supplemental Accrued Benefit. For purposes of this Section 8.4, "Change in Control" is as defined in the First Hawaiian, Inc. Stock Incentive Plan. 19 24 ARTICLE IX MISCELLANEOUS Section 9.1 Rights of Participants. (a) No Participant shall, by reason of his participation in this Plan, have any interest in (i) any specific asset or assets of a Participating Employer or an Affiliate or (ii) any stock rights of any kind. (b) Neither the adoption of this Plan, the making of any allocation or accrual under this Plan, nor any action of a board of directors or the Committee in connection with the Plan shall be held or construed to confer upon any person any legal right to be continued as an officer or employee of a Participating Employer or an Affiliate. (c) No Participant shall have the right to assign, pledge, encumber, or otherwise dispose of (except to a Beneficiary upon his death) any of his interest in this Plan; nor shall his interest be subject to garnishment, attachment, transfer by operation of law, or any legal process. Section 9.2 Misc. Rules. (a) Wherever used herein the masculine gender shall include the feminine and the singular number shall include the plural, unless the context clearly indicates otherwise. (b) The headings of articles and sections are included herein solely for convenience of reference, and if there is any conflict between such headings and the text of the Plan, the text shall be controlling. 20 25 (c) Wherever a Participating Employer, the Company, or a board of directors is permitted or required to do or perform any act, matter, or thing under the terms of the Plan, it may be done and performed by any officer of a Participating Employer or the Company thereunto duly authorized. (d) To the extent not preempted by ERISA, the Plan shall be governed, construed, administered, and regulated according to the laws of the State of Hawaii. (e) All consents, elections, applications, designations, etc. required or permitted under the Plan must be made on forms prescribed by the Committee, and shall be recognized only if properly completed, executed, and filed with the Committee. TO RECORD the adoption of this document, First Hawaiian, Inc. has executed this document this 15th day of February, 1996. FIRST HAWAIIAN, INC. By /s/ HERBERT E. WOLFF -------------------------------------- Its Senior Vice President & Secretary By --------------------------------------- Its 21 26 EXHIBIT I FORM OF BENEFICIARY DESIGNATION FIRST HAWAIIAN, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN I hereby direct that, if I die prior to the payment in full of my vested interest in my Supplemental Account in the First Hawaiian, Inc. Supplemental Executive Retirement Plan (hereinafter the "Plan"), any unpaid balance be paid to: Name: ______________________________ Address: ______________________________ ______________________________ This beneficiary designation revokes any and all other beneficiary designations under the Plan made prior to the date of this designation. Dated:__________________ _________________________ Participant Receipt acknowledged: Committee By______________________ Dated:__________________ 22
   1
                                                                Exhibit 10(ix)




                              FIRST HAWAIIAN, INC.

                           DEFERRED COMPENSATION PLAN

                 (Amended and Restated as of January 1, 1996)
   2

                               TABLE OF CONTENTS

Page ---- PROLOGUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE I - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II - PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE III - DEFERRALS Section 3.1 Deferral Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 3.2 Length of Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 3.3 Memorandum Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.4 Discretionary Investment by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.5 Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.6 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE IV - NO CONTRIBUTIONS Section 4.1 No Contributions By Participating Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.2 Benefits Payable From General Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE V - ADMINISTRATION Section 5.1 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.2 Indemnification, Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.3 Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
i 3
Page ---- ARTICLE VI - AMENDMENT, TERMINATION, MERGER Section 6.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6.2 Termination or Suspension . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6.3 Merger or Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE VII - MISCELLANEOUS Section 7.1 Rights of Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.2 Misc. Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 EXHIBIT I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ii 4 FIRST HAWAIIAN, INC. DEFERRED COMPENSATION PLAN PROLOGUE The First Hawaiian, Inc. Deferred Compensation Plan (this "Plan") permits eligible employees to defer payment of certain compensation. This Plan is an unfunded deferred compensation arrangement solely for a select group of management or highly compensated employees of First Hawaiian, Inc. and its affiliates. This Plan is hereby amended and restated in its entirety. Unless otherwise specifically provided for herein or by law, the provisions set forth herein shall be effective as of January 1, 1996. ARTICLE I DEFINITIONS As used herein the following terms shall have the following meanings unless the context clearly requires otherwise. 1.1 "Affiliate" means Affiliate as defined in the First Hawaiian, Inc. Profit Sharing Plan. 1.2 "Beneficiary" means the person, persons, or legal entity designated by the Participant to receive his benefits under this Plan in the event of his death. If a Participant fails to make any designation, the person so designated shall not survive the Participant, or the legal entity so designated shall no longer be in existence or shall be legally incapable of receiving benefits hereunder, Beneficiary shall mean the 1 5 Participant's surviving spouse, or if there is no surviving spouse, the estate of the Participant. 1.3 "Board" means the Board of Directors of the Company. 1.4 "Change in Control" means Change in Control as defined in the First Hawaiian, Inc. Stock Incentive Plan. 1.5 "Committee" means the Executive Compensation Committee of the Board. 1.6 "Company" means First Hawaiian, Inc. 1.7 "Disability" means Disability as defined in the First Hawaiian, Inc. Profit Sharing Plan. 1.8 "IPKE" means the First Hawaiian, Inc. Incentive Plan for Key Executives, as amended from time to time. 1.9 "LTIP" means the First Hawaiian, Inc. Long-Term Incentive Plan, as amended from time to time. 1.10 "Memorandum Account" means an account recording the amount allocated to a Participant pursuant to Article III of this Plan, as adjusted from time to time pursuant to the provisions of this Plan. 1.11 "Participant" means any person selected for participation pursuant to Article II. 1.12 "Participating Employer" means the Company or 2 6 any other employer which, with the Company's permission, elects to adopt the Plan. 1.13 "Plan" means the First Hawaiian, Inc. Deferred Compensation Plan, as set forth herein and as amended from time to time. 1.14 "Special Deferral" means a deferral pursuant to Section 3.2 that is payable on a specified date other than the Participant's termination of employment. ARTICLE II PARTICIPATION The Committee shall select the employees of a Participating Employer eligible to be Participants. Participants shall be selected from executive and other key employees who because of their management or staff positions have the principal responsibility for the management, direction, and success of the Company or a Participating Employer. A director of a Participating Employer who is a full-time employee of the Participating Employer shall be eligible to participate in the Plan. ARTICLE III DEFERRALS Section 3.1 Deferral Election. (a) A Participant may elect one or more of the following deferrals for which he is eligible. (1) On a date prior to December 1 of each year, a Participant who is eligible for IPKE may elect to defer the payment of all or a portion of his IPKE cash bonus for the 3 7 then current fiscal year. (2) On a date that is at least three months before the end of a "Performance Period" under the LTIP, a Participant who may become entitled to receive payment of an award for such period under such plan may elect to defer all or part of any payment of such award. (3) On a date prior to January 1, a Participant may elect to defer the payment of a percentage (not in excess of 25 percent) of his base salary for the next calendar year. (b) The deferral election shall be irrevocable and shall be made on a form prescribed by the Committee. Any annual cash bonus under IPKE, any base salary, and any award under the LTIP for which a Participant has not elected to defer under this Plan shall be paid without regard to this Plan. (c) The amount to be credited to a Memorandum Account shall be subject to reduction by the amount the Participating Employer is required by law to pay to a governmental taxing authority as the Participant's portion of any withholding taxes, including taxes imposed on employees by the Federal Insurance Contributions Act of Chapter 21 of the Internal Revenue Code. The Committee may authorize a Participant to satisfy such withholding tax payment in a manner that does not reduce the amount credited to his Memorandum Account. Section 3.2 Length of Deferrals. (a) If a deferral is elected, the period of deferral shall (except as provided in Section 3.2(b)) end with the Participant's retirement, death, Disability, resignation, or 4 8 other termination of employment with the Company, the Participating Employers, and the Affiliates. (b) The Committee may, in its sole discretion, approve Special Deferrals. Such Special Deferrals shall be subject to the same rules as in Section 3.1 above, except for the time of payment. Section 3.3 Memorandum Account. (a) The Committee shall cause a Participating Employer to establish a Memorandum Account for each Participant employed by it who has elected a deferral under this Plan. A Participant shall be fully vested in his Memorandum Account at all times. A separate Memorandum Account shall be kept for any deferral that may be paid in a different manner or may be paid commencing on a different date from other deferrals. The Memorandum Account balances of a Participant shall represent the Participating Employer's obligation to pay the deferred amount to the Participant or his Beneficiary. (b) A Memorandum Account shall be credited with assumed earnings in accordance with this Section 3.3(b). In general, assumed earnings shall be credited once annually, as of December 31 of each year, so that the earnings for the current year are part of the opening balance of the next calendar year. The Committee may, however, authorize the crediting of assumed earnings at other dates during a calendar year, provided that any later calculation of earnings during or at the end of the same calendar year shall be made in a manner designed to produce approximately the same total earnings for the year as would a one-time, December 31 calculation. Notwithstanding the foregoing, earnings for a partial year 5 9 shall be credited for the period up to the distribution date for a payment that is made at any date during a year other than in January. (c) In determining the balances on which earnings are credited, once-a-year deferrals, such as deferrals of IPKE or LTIP awards, shall be credited to the Memorandum Account as of the first of the month coinciding with or following the cash payment date that would have applied absent the deferral. Recurring deferrals, such as for base salary, shall be deemed to occur evenly throughout the year (or the portion thereof) during which such deferrals are occurring, and for purposes of crediting assumed earnings, 50% of the total of such deferrals for the period may be treated as having been in the Memorandum Account for the entire deferral period. (d) The rate to be used in crediting assumed earnings for each calendar year or partial year shall be the First Hawaiian Bank Prime Rate as in effect at the beginning of the calendar year. When earnings are credited during a year in conjunction with a payment at a time other than in January of less than the entire remaining Memorandum Account balance, the determination of such interim earnings shall be made in an administratively feasible manner that prevents or minimizes the possibility of crediting additional earnings on the interim earnings at the end of the year. Section 3.4 Discretionary Investment by Company. (a) The deferred amounts to be paid to Participants constitute an unfunded obligation of the Participating Employer. The Committee may, however, annually direct that an amount equal to the deferred amounts for that year be invested 6 10 by the Participating Employers as the Committee, in its sole discretion, shall determine. (b) The Committee may, in its sole discretion, determine that all or a portion of the deferred amounts be paid into one or more grantor trusts that may be established by the Participating Employer for the purpose of providing a potential source of funds to pay Plan benefits. Moreover, such payment of all previously deferred amounts to a grantor trust shall be required in connection with a Change in Control. (c) The Committee may designate an investment advisor to direct the investment of funds that may be used to pay benefits, including the investment of the assets of any grantor trusts hereunder. Section 3.5 Change in Control. If the terms of a Change in Control provide that this Plan shall be assumed by the successor organization, then this Plan shall (subject to Section 3.4(b)) continue in accordance with its terms. If, however, the terms of a Change in Control do not so provide, then immediately prior to the occurrence of such a Change in Control, the Plan shall automatically terminate and each Participant shall receive immediately prior to such Change in Control a lump sum distribution of his Memorandum Account or Memorandum Accounts. Section 3.6 Payment. (a) Upon the retirement, death, Disability, resignation, or other termination of employment of a Participant or upon a 7 11 Special Deferral payment date, the Participant, or in the case of his death, his Beneficiary, shall be paid an amount equal to the balance of the Participant's Memorandum Account, plus assumed earnings (determined pursuant to Section 3.3) to the date of distribution. (b) Payment shall be made in cash in (i) a single lump sum or (ii) installments payable once each calendar year over a specified period of up to 12 years. The first installment shall be paid as soon as practicable after the Participant's termination of employment and each subsequent installment shall be paid in the January following the immediately preceding payment. Such installments shall be in substantially equal payments, except that the first installment shall be prorated so that it bears the same proportion to a full annual installment as the remainder of the year following the calculation date bears to the full year. (c) (1) Payment of a Special Deferral shall be made in a lump sum on the specified payment date; installment payment of a Special Deferral shall not be permitted. (2) The Committee shall determine the form of payment of any other deferrals, and prior to doing so, may consider an expression of the Participant's preference that is made at any time up to one year before the triggering event for the payment. Payment of such other deferrals shall be made or commence as soon as practicable following the Participant's retirement, death, Disability, resignation, or other termination of employment. (d) The Committee, in its sole discretion, may accelerate 8 12 the payment of the unpaid balance of a Participant's Memorandum Account in the event of the Participant's retirement, death, Disability, resignation, or termination of employment or upon its determination that the Participant (or his Beneficiary in the case of his death) has incurred a severe, unforeseeable financial hardship creating an immediate and heavy need for cash that cannot reasonably be satisfied from sources other than an accelerated payment from this Plan. The Committee in making its determination may consider such factors and require such information as it deems appropriate. (e) All payments under the Plan shall be subject to withholding taxes that the Participating Employer is required by law to withhold. ARTICLE IV NO CONTRIBUTIONS Section 4.1 No Contributions By Participating Employers. No contributions to a trust fund shall be required of or made by any Participating Employer. Section 4.2 Benefits Payable From General Assets. The amount of any Memorandum Account payable to a Participant shall remain part of the general funds of the Participating Employers. No Participant or Beneficiary shall acquire any property interest in his Memorandum Account or any other assets of any Participating Employer. A Participant's or Beneficiary's right hereunder shall be limited to receiving from the Participating Employer deferred payments measured as set forth in this Plan. To the extent that any Participant or 9 13 Beneficiary acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of a Participating Employer. ARTICLE V ADMINISTRATION Section 5.1 Committee. Subject to the limitations of this Plan and unless otherwise determined by the Board, the Committee shall have the power and the duty to take all actions and to make all decisions necessary or proper to administer this Plan, including: (1) To require as a condition to receiving any benefits under this Plan, any person to furnish such information that the Committee may reasonably request for the purpose of the proper administration of this Plan; (2) To make and enforce such rules and regulations and prescribe the use of such forms as it shall deem necessary for the efficient administration of this Plan; (3) To decide questions concerning the interpretation of this Plan, including the eligibility of any person for benefits under this Plan; (4) To determine the amount of benefits that shall be payable to any person in accordance with the provisions of this Plan; (5) To delegate responsibility for performance of ministerial functions necessary for the administration of the 10 14 Plan to such employees of the Company or a Participating Employer, including Participants, as the Committee shall deem appropriate; and (6) To employ the services of such other persons as the Committee may deem necessary or desirable in connection with this Plan, including but not limited to an actuary, legal counsel, an independent accountant, agents, and such clerical, medical, and accounting services as it may require in carrying out the provisions of this Plan or in complying with the requirements of ERISA. Section 5.2 Indemnification, Insurance. The Participating Employers shall indemnify and save harmless and/or insure each fiduciary who is an employee or a director of a Participating Employer or an Affiliate against any and all claims, loss, damages, expense, and liability arising from their responsibilities in connection with this Plan, if the fiduciary acted in good faith and in a manner the fiduciary reasonably believed to be in or not opposed to the best interests of the Plan. Section 5.3 Claims Procedure. (a) The procedure for claiming benefits under this Plan shall be as follows: (1) The Committee shall determine the benefits due hereunder to a Participant or his beneficiary or beneficiaries, but a Participant or his beneficiary or beneficiaries may file a claim for benefits by written notice to the Committee. 11 15 (2) If a claim is denied in whole or in part, the Committee shall give the claimant written notice of such denial, within a reasonable period of time following the filing of the claim. Such notice shall (i) specify the reason or reasons for the denial, (ii) refer to the pertinent Plan provisions on which the denial is based, (iii) describe any additional material or information necessary to perfect the claim and explain the need therefor, and (iv) explain the review procedure described in subparagraph (3) hereof. (3) The claimant may then appeal the denial of the claim to the Committee by filing written notice of such appeal with the Committee within 90 days after receipt of the notice of denial. The claimant or any authorized representative may, before or after filing the notice of appeal, review any documents pertinent to the claim and submit issues and comments in writing. The Committee shall make its decision on such appeal within 60 days after receipt of the appeal (unless a longer period is requested by the claimant), and shall forthwith give written notice of such decision. (b) (1) Notwithstanding Section 5.3(a), in the event of a Change in Control a Participant may submit any claim for payment to arbitration as follows. On or after the second day following the termination of the Participant's employment or other event triggering a right to payment, a claim may be filed orally with an arbitrator of the Participant's choice and thereafter the Company shall be notified orally. (2) The arbitrator must be (i) a member of the National Academy of Arbitrators or a person who currently appears on arbitration panels issued by the Federal Mediation 12 16 and Conciliation Service or the American Arbitration Association or (ii) a retired judge of the State of Hawaii who served at the appellate level. (3) The arbitration hearing shall be held within 24 hours (or as soon thereafter as possible) after filing of the claim unless the Participant and the Company agree to a later date. No continuance of said hearing shall be allowed without the mutual consent of the Participant and the Company. Absence from or nonparticipation at the hearing by either party shall not prevent the issuance of an award. Hearing procedures that expedite the hearing may be ordered at the arbitrator's discretion, and the arbitrator may close the hearing in his sole discretion upon deciding he has heard sufficient evidence to satisfy issuance of an award. In reaching a decision, the arbitrator shall be limited to interpreting this Plan; he shall have no authority to ignore, change, modify, add to, or delete from any provision of this Plan. (4) The arbitrator's award shall be rendered as expeditiously as possible, and in no event, later than seven days after the close of the hearing. If the arbitrator finds that any payment is due to the Participant under the Plan, the arbitrator shall order the Company or Participating Employers to pay that amount to the Participant within 48 hours after the decision is rendered. The award of the arbitrator shall be final and binding upon the Participant and the Company and the Participating Employers. Judgment upon the award rendered by the arbitrator may be entered in any court in the State of Hawaii or in any other court of competent jurisdiction. (5) In the case of any arbitration regarding this Agreement, the Participant shall be awarded the Participant's 13 17 costs, including attorney's fees. The Company shall pay the arbitrator's fee and all necessary expenses of the hearing, including any stenographic reporter so employed. ARTICLE VI AMENDMENT, TERMINATION, MERGER Section 6.1 Amendment. The Board may at any time amend this Plan. No Plan amendment shall decrease the amount of a Participant's Memorandum Account or his right thereto. Section 6.2 Termination or Suspension. The Board may at any time terminate or suspend further deferrals to this Plan. No termination or suspension shall decrease the Participant's Memorandum Account or his right thereto. Section 6.3 Merger or Consolidation. If this Plan is merged into or consolidated with, or if its assets or liabilities are transferred to, any other plan, the provisions of such subsequent plan must provide that each Participant of this Plan would, if the subsequent plan then terminated, receive a benefit immediately after the merger, consolidation, or transfer, that is equal to or greater than the benefit he would have been entitled to immediately before the merger, consolidation, or transfer. 14 18 ARTICLE VII MISCELLANEOUS Section 7.1 Rights of Participants. (a) No Participant shall, by reason of his participation in this Plan, have any interest in (i) any specific asset or assets of a Participating Employer or an Affiliate or (ii) any stock rights of any kind. (b) Neither the adoption of this Plan, the making of any deferrals under this Plan, nor any action of the Board or the Committee in connection with the Plan shall be held or construed to confer upon any person any legal right to be continued as an officer or employee of a Participating Employer or an Affiliate. (c) No Participant shall have the right to assign, pledge, encumber, or otherwise dispose of (except to a Beneficiary upon his death) any of his interest in this Plan; nor shall his interest be subject to garnishment, attachment, transfer by operation of law, or any legal process. Section 7.2 Misc. Rules. (a) Wherever used herein the masculine gender shall include the feminine and the singular number shall include the plural, unless the context clearly indicates otherwise. (b) The headings of articles and sections are included herein solely for convenience of reference, and if there is any conflict between such headings and the text of the Plan, the text shall be controlling. 15 19 (c) Wherever a Participating Employer, the Company, or the Board is permitted or required to do or perform any act, matter, or thing under the terms of the Plan, it may be done and performed by any officer of a Participating Employer or the Company thereunto duly authorized. (d) To the extent not preempted by ERISA, the Plan shall be governed, construed, administered, and regulated according to the laws of the State of Hawaii. (e) All consents, elections, applications, designations, etc. required or permitted under the Plan must be made on forms prescribed by the Committee, and shall be recognized only if properly completed, executed, and filed with the Committee. (f) (1) Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of age until the date on which the Committee receives a written notice, in a form and manner acceptable to the Committee, that such person is incompetent or a minor for whom a guardian or other person legally vested with the care of his person or estate has been appointed. If, however, the Committee finds that any person to whom a benefit is payable under the Plan is unable to care for his affairs because of incompetency or because he or she is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent, a brother or sister, or to any person or institution considered by the Committee to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under the Plan. 16 20 (2) If a guardian of the estate of any person receiving or claiming benefits under the Plan is appointed by a court of competent jurisdiction, benefit payments may be made to such guardian provided that proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Committee. In the event a person claiming or receiving benefits under the Plan is a minor, payment may be made to the custodian of an account for such person under the Uniform Gifts to Minors Act. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor under the Plan. TO RECORD the adoption of this document, First Hawaiian, Inc. has executed this document this 15th day of February, 1996. FIRST HAWAIIAN, INC. By /s/ HERBERT E. WOLFF ------------------------------------- Its Senior Vice President & Secretary By ------------------------------------- Its 17 21 EXHIBIT I FORM OF BENEFICIARY DESIGNATION FIRST HAWAIIAN, INC. DEFERRED COMPENSATION PLAN I hereby direct that, if I die prior to the payment in full of my vested interest in my Memorandum Account in the First Hawaiian, Inc. Deferred Compensation Plan (hereinafter the "Plan"), any unpaid balance be paid to: Name: ______________________________ Address: ______________________________ ______________________________ This beneficiary designation revokes any and all other beneficiary designations under the Plan made prior to the date of this designation. Dated:__________________ _________________________ Participant Receipt acknowledged: Committee By______________________ Dated:__________________ 18
   1

                                                                      EXHIBIT 12
     Statement re:  Computation of Ratios

                     FIRST HAWAIIAN, INC. AND SUBSIDIARIES
        COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES



YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ------------ ------------ ------------ ------------ ------------ (dollars in thousands) Income before income taxes and cumulative effect of a change in accounting principle $ 122,138 $ 111,501 $ 119,105 $ 127,880 $ 120,200 ---------- ----------- ---------- ---------- ----------- Fixed charges:(1) Interest expense 265,297 179,688 163,541 217,693 270,851 Rental expense 4,600 5,355 4,013 5,801 2,914 ---------- ----------- ---------- ---------- ----------- 269,897 185,043 167,554 223,494 273,765 Less interest on deposits 176,048 120,289 129,719 186,725 255,099 ---------- ----------- ----------- ----------- ----------- Net fixed charges 93,849 64,754 37,835 36,769 18,666 ---------- ----------- ---------- ---------- ----------- Earnings, excluding interest on deposits $ 215,987 $ 176,255 $ 156,940 $ 164,649 $ 138,866 ========== =========== ========== ========== =========== Earnings, including interest on deposits $ 392,035 $ 296,544 $ 286,659 $ 351,374 $ 393,965 ========== =========== ========== ========== =========== Ratio of earnings to fixed charges: Excluding interest on deposits 2.30 X 2.72 x 4.15 x 4.48 x 7.44 x Including interest on deposits 1.45 X 1.60 x 1.71 x 1.57 x 1.44 x
(1) For purposes of computing the above ratios, earnings represent income before income taxes and cumulative effect of a change in accounting principle plus fixed charges. Fixed charges, excluding interest on deposits, include interest (other than on deposits), whether expensed or capitalized, and that portion of rental expense (generally one third) deemed representative of the interest factor. Fixed charges, including interest on deposits, include all interest, whether expensed or capitalized, and that portion of rental expense (generally one third) deemed representative of the interest factor.
   1
                                                                      EXHIBIT 13

                                                                               1

CONSOLIDATED FINANCIAL HIGHLIGHTS          First Hawaiian, Inc. and Subsidiaries

- ------------------------------------------------------------------------------------------------------------ (dollars in thousands, except per share data) 1995 1994 Change - ------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 EARNINGS AND DIVIDENDS Net income $ 77,005 $ 72,511 6.2% Cash dividends 37,368 38,008 (1.7) PER SHARE Net income $ 2.43 $ 2.25 8.0% Cash dividends 1.18 1.18 -- Book value 20.86 19.61 6.4 FINANCIAL RATIOS Return on average total assets 1.02% 1.01% 1.0% Return on average stockholders' equity 12.03 11.73 2.6 FINANCIAL POSITION AT DECEMBER 31 Total assets $7,564,509 $7,535,144 .4% Loans and leases 5,259,545 5,533,565 (5.0) Deposits 5,358,313 5,152,213 4.0 Stockholders' equity 649,537 627,944 3.4 Tier 1 leverage ratio 7.72% 7.51% 2.8 Risk-based capital ratios: Tier 1 9.03 9.31 (3.0) Total 11.88 12.06 (1.5) ============================================================================================================
[GRAPH]
NET INCOME NET INCOME CASH DIVIDENDS RETURN ON AVERAGE RETURN ON AVERAGE (in thousands) PER SHARE PER SHARE TOTAL ASSETS STOCKHOLDERS' EQUITY 1995 $77,005 $2.43 1.18 1.02% 12.03% 1994 $72,511 $2.25 1.18 1.01% 11.73% 1993 $81,857 $2.52 1.135 1.21% 14.01% 1992 $86,900 $2.70 1.06 1.33% 16.52% 1991 $81,710 $2.55 .95 1.36% 17.38%
2 12 SENIOR ADMINISTRATIVE OFFICERS - -------------------------------------------------------------------------------- FIRST HAWAIIAN, INC. Walter A. Dods, Jr. Chairman & Chief Executive Officer John K. Tsui President Donald G. Horner Executive Vice President Howard H. Karr Executive Vice President & Treasurer Herbert E. Wolff Senior Vice President & Secretary FIRST HAWAIIAN BANK Walter A. Dods, Jr. Chairman & Chief Executive Officer John K. Tsui President & Chief Operating Officer Donald G. Horner Vice Chairman, Retail Banking Group Howard H. Karr Vice Chairman, Chief Financial Officer & Treasurer, Administration & Finance Group Gary L. Caulfield Executive Vice President, Information Management Group Anthony R. Guerrero, Jr. Executive Vice President, Branch Banking Group Gerald M. Pang Executive Vice President & Chief Credit Officer N. W. "Red" Pope Executive Vice President, Marketing Group Robert A. Alm Senior Vice President, Financial Management Group Thomas P. Huber Senior Vice President & General Counsel, Legal Group Barbara S. Tomber Senior Vice President & Group Manager, Media Finance, Corporate & International Banking Divisions Sharon S. Brown Senior Vice President, Sales & Service Division Norman K. Y. Ching Senior Vice President & Administrative Assistant to the Chairman Raymond M. H. Choo Senior Vice President, Consumer Service Division Brandt G. Farias Senior Vice President, Marketing Communications Division Mark H. Felmet Senior Vice President, Retail Loan Division Melvin T. Freitas Vice President, Dealer Center Division Gary Y. Fujitani Senior Vice President, Business Services Division Alfred R. Gross Senior Vice President, Corporate & International Banking Division Dean K. Hirata Senior Vice President & Controller, Controller's Division William B. Johnstone, III Senior Vice President, Portfolio Management Division Edmund H. Kajiyama Senior Vice President, Branch Support Division Gerald J. Keir Senior Vice President, Corporate Communications Division Roy E. King, Jr. Senior Vice President, Human Resources Division John W. Landgraf Senior Vice President, Commercial Real Estate Division & Japan Business Development George H. Lumsden Vice President & General Auditor, Audit Division David W. Madison Senior Vice President, Branch Loan Administration Division Vernon T. Omori Senior Vice President, Residential Real Estate Division Curt T. Otaguro Vice President, Operations Research & Development Division Edward Y. W. Pei Senior Vice President, Electronic Banking Division James M. Wayman Senior Vice President, Bank Properties Division Herbert E. Wolff Senior Vice President & Secretary, Corporate Secretary PIONEER FEDERAL SAVINGS BANK Lily K. Yao Chairman & Chief Executive Officer Albert M. Yamada President & Chief Operating Officer Joyce W. Borthwick Senior Vice President, Real Estate Lending Division Janie L. Mishima Senior Vice President, Retail Banking & Marketing Division Ronald L. Texeira Senior Vice President, Real Estate Lending Division FIRST HAWAIIAN CREDITCORP, INC. Donald G. Horner Chairman Harriet M. Aoki President & Chief Executive Officer Winston K. H. Chow Executive Vice President Romeo B. Estepa Senior Vice President & Controller, Controller's Division Calvin H. Umamoto Vice President/Bank Secrecy Officer, Operations Division FIRST HAWAIIAN LEASING, INC. John K. Tsui Chairman & Chief Executive Officer Stephen J. Marcuccilli President PACIFIC ONE BANK (A BANK IN ORGANIZATION) Walter A. Dods, Jr. Chairman-designate Richard C. Williamson President & Chief Executive Officer-designate 3 17 FIRST HAWAIIAN, INC. FINANCIAL REVIEW 1995 Index to Financial Review - -------------------------------------------------------------------------------- 18 Corporate Organization 19 Common Stock Information 20 Summary of Selected Consolidated Financial Data 21 Management's Discussion and Analysis of Financial Condition and Results of Operations 36 Summary of Quarterly Financial Data (Unaudited) 37 Supplementary Data 38 Report of Independent Accountants Financial Statements: 39 Consolidated Balance Sheets 40 Consolidated Statements of Income 41 Consolidated Statements of Changes in Stockholders' Equity 42 Consolidated Statements of Cash Flows 43 Notes to Financial Statements 58 Corporate Addresses 59 Supplemental Information 4 18 CORPORATE ORGANIZATION First Hawaiian, Inc. and Subsidiaries - -------------------------------------------------------------------------------- FIRST HAWAIIAN, INC. First Hawaiian, Inc. (the "Company") is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is incorporated under the laws of the State of Delaware. As a bank holding company, the Company is allowed to acquire or invest in the securities of companies that are engaged in banking or in activities closely related to banking as authorized by the Federal Reserve Board. The Company is also registered with the Office of Thrift Supervision as a savings and loan holding company as a result of its ownership of Pioneer Federal Savings Bank ("Pioneer"). The Company's organization consists of the following wholly-owned subsidiaries: FIRST HAWAIIAN BANK First Hawaiian Bank (the "Bank") was founded in 1858 and is the oldest financial institution in Hawaii. The Bank is a full-service bank conducting general commercial and consumer banking business and offering trust services. The Bank's activities include receiving demand, savings and time deposits; making commercial, agricultural, real estate and consumer loans; selling traveler's checks, personal money orders, mutual funds and annuities; issuing letters of credit; handling domestic and foreign collections; renting safe deposit boxes; and providing data processing services to customers. The Bank's main office is located in Honolulu, Hawaii, with 60 other banking offices located throughout the State of Hawaii. It also has two banking offices in Guam, an offshore branch in Grand Cayman, British West Indies, a representative office in Tokyo, Japan, and a worldwide network of correspondent banks. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent, and subject to the limitations, set forth in the Federal Deposit Insurance Act, as amended (the "Act"). The Bank is a State of Hawaii chartered bank and is not a member of the Federal Reserve System. The Bank also conducts business through the following wholly-owned subsidiaries: o FH CENTER, INC. FH Center, Inc. owns certain real property in connection with the construction of First Hawaiian Center, which will serve as the Company's new headquarters upon completion in late 1996. o FHB PROPERTIES, INC. AND AMERICAN SECURITY PROPERTIES, INC. FHB Properties, Inc. and American Security Properties, Inc. hold title to certain property and premises upon which the Bank's business is conducted. o FIRST HAWAIIAN DEALER CENTER, INC. First Hawaiian Dealer Center, Inc. is engaged in the business of automobile financing and related business activities. o REAL ESTATE DELIVERY, INC. Real Estate Delivery, Inc. holds title to certain real property acquired by the Bank in ordinary business activities. PIONEER FEDERAL SAVINGS BANK Pioneer is a federally chartered savings bank headquartered in Honolulu, Hawaii. Pioneer, chartered in 1890, currently conducts its business through 19 full-service offices located throughout the four major islands of the State of Hawaii. Pioneer's principal business consists of attracting deposits from the general public through a variety of deposit products. The deposits are insured by the Savings Association Insurance Fund ("SAIF") of the FDIC to the extent, and subject to the limitations, set forth in the Act. The deposits, together with borrowings, principally from the Federal Home Loan Bank (the "FHLB") of Seattle, and funds from ongoing operations, are used in the origination of 1-4 family residential mortgage loans and, to a lesser extent, consumer loans and other mortgage loans. FIRST HAWAIIAN CREDITCORP, INC. First Hawaiian Creditcorp, Inc. ("Creditcorp") is a financial services loan company operating in the State of Hawaii and in Guam. The lending activities of Creditcorp are concentrated in both consumer and commercial financing, primarily collateralized by real estate. The primary source of funds for Creditcorp is from savings and time deposits received from the general public. The deposits are insured by the FDIC to the extent, and subject to the limitations, set forth in the Act. Creditcorp has 12 branch offices located throughout the four major islands of the State of Hawaii, a commercial office in Honolulu and a loan production office in Guam. FIRST HAWAIIAN LEASING, INC. First Hawaiian Leasing, Inc. is a financial services loan company in the State of Hawaii primarily engaged in commercial equipment and vehicle leasing and financing. FHI INTERNATIONAL, INC. FHI International, Inc. was organized to engage in consumer financing services and related activities outside the United States. 5 19 COMMON STOCK INFORMATION First Hawaiian, Inc. and Subsidiaries - -------------------------------------------------------------------------------- The common stock of the Company is traded on The Nasdaq Stock Market under the symbol FHWN. As of December 31, 1995, there were 4,966 holders of record of the Company's common stock. A large number of shares are also held in the names of nominees and brokers for individuals and institutions. At December 31, 1995, the Company had 1,397,957 shares of common stock in the treasury stock account. The Board of Directors (the "Board") has authorized the total repurchase of up to 1.6 million shares, or five percent of the Company's 31 million shares outstanding, to be held by the Company or used for corporate purposes as designated by the Board. Through December 31, 1995, the Company had repurchased 1,075,940 shares of common stock under such authorization. Future purchases will be dependent upon authorization by the Board in appropriate circumstances. These purchases are not expected to have a material effect on the Company's liquidity, financial position or results of operations. A compilation of certain quarterly and annual per share data is presented below:
- ---------------------------------------------------------------------------------------------------------------- Market Price Net Dividends ------------------------------------- Income Paid High Low Close - ---------------------------------------------------------------------------------------------------------------- 1995 FIRST QUARTER $ .59 $ .295 $ 27 $ 23 $ 24 1/2 SECOND QUARTER .59 .295 28 24 1/2 26 3/4 THIRD QUARTER .62 .295 31 1/4 24 3/4 29 1/2 FOURTH QUARTER .63 .295 30 27 7/8 30 - ---------------------------------------------------------------- ANNUAL $ 2.43 $ 1.180 31 1/4 23 30 ================================================================ 1994 First Quarter $ .58 $ .295 27 1/4 24 1/4 26 1/4 Second Quarter .59 .295 28 1/2 25 1/2 28 1/2 Third Quarter .61 .295 31 1/4 28 28 Fourth Quarter .47 .295 28 3/4 23 23 3/4 - ---------------------------------------------------------------- Annual $ 2.25 $ 1.180 31 1/4 23 23 3/4 ================================================================ 1993 $ 2.52 $ 1.135 30 3/4 23 3/4 24 3/4 1992 $ 2.70 $ 1.06 29 3/4 23 1/2 28 3/4 1991 $ 2.55 $ .95 31 1/4 17 3/4 27 3/4 ================================================================================================================
The Company expects to continue its policy of paying quarterly cash dividends. The declaration and payment of cash dividends are subject to the Company's future earnings, capital requirements, financial condition and certain limitations as described in Note 10 to the Financial Statements. 6 20
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA First Hawaiian, Inc. and Subsidiaries - --------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------- INCOME STATEMENTS AND DIVIDENDS (in thousands) Total interest income $559,957 $475,760 $428,931 $475,574 $517,019 Total interest expense 265,297 179,688 150,709 206,783 264,043 - --------------------------------------------------------------------------------------------------------------- Net interest income 294,660 296,072 278,222 268,791 252,976 Provision for loan and lease losses 38,107 22,922 13,262 12,812 10,252 Total noninterest income 94,878 86,672 79,587 69,597 61,963 Total noninterest expenses 229,293 248,321 225,442 197,696 184,487 - --------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of a change in accounting principle 122,138 111,501 119,105 127,880 120,200 Income taxes 45,133 38,990 40,898 40,980 38,490 - --------------------------------------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle 77,005 72,511 78,207 86,900 81,710 Cumulative effect of a change in accounting principle -- -- 3,650 -- -- - --------------------------------------------------------------------------------------------------------------- NET INCOME $ 77,005 $ 72,511 $ 81,857 $ 86,900 $ 81,710 =============================================================================================================== CASH DIVIDENDS $ 37,368 $ 38,008 $ 36,821 $ 34,161 $ 30,395 =============================================================================================================== COMMON STOCK DATA Per share: Income before cumulative effect of a change in accounting principle $ 2.43 $ 2.25 $ 2.41 $ 2.70 $ 2.55 Net income 2.43 2.25 2.52 2.70 2.55 Cash dividends 1.18 1.18 1.135 1.06 .95 Book value (at December 31) 20.86 19.61 18.69 17.30 15.53 Market price (close at December 31) 30.00 23.75 24.75 28.75 27.75 Average shares outstanding (in thousands) 31,735 32,259 32,505 32,225 32,079 BALANCE SHEETS (in millions) Average balances: Total assets $7,528 $7,200 $6,755 $6,537 $6,007 Total earning assets 6,876 6,558 6,106 5,966 5,538 Loans and leases 5,461 5,172 4,619 4,358 3,837 Deposits 5,178 5,082 5,069 5,084 5,159 Stockholders' equity 640 618 584 526 470 At December 31: Total assets $7,565 $7,535 $7,269 $6,553 $6,511 Loans and leases 5,260 5,534 5,067 4,396 4,329 Deposits 5,358 5,152 5,220 5,088 5,337 Long-term debt 239 219 222 71 62 Stockholders' equity 650 628 608 562 498 SELECTED RATIOS Return on average: Total assets 1.02% 1.01% 1.21% 1.33% 1.36% Total stockholders' equity 12.03% 11.73% 14.01% 16.52% 17.38% Dividend payout ratio 48.56% 52.44% 45.04% 39.26% 37.25% Average stockholders' equity to average total assets 8.50% 8.58% 8.65% 8.05% 7.82% Year ended December 31: Net interest margin 4.36% 4.63% 4.69% 4.62% 4.74% Net loans and leases charged off to average loans and leases .38% .46% .27% .27% .13% At December 31: Tier 1 leverage ratio 7.72% 7.51% 7.45% 7.72% 6.80% Risk-based capital ratios: Tier 1 9.03% 9.31% 9.80% 10.49% 9.03% Total 11.88% 12.06% 12.84% 11.67% 10.17% Allowance for loan and lease losses to total loans and leases 1.50% 1.11% 1.23% 1.28% 1.27% Nonperforming assets to total loans and leases and other real estate owned 1.75% 1.14% 1.44% 1.65% .90% Allowance for loan and lease losses to nonperforming loans and leases .95x 1.04x 1.03x .79x 1.49x ===============================================================================================================
7 21 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- OVERVIEW The Company recorded consolidated net income for 1995 of $77,005,000, an increase of 6.2%, or $4,494,000, from $72,511,000 in 1994. On a per share basis, consolidated net income for 1995 was $2.43, an increase of 8.0% over 1994. The proportionately greater increase in earnings per share was attributable to the fewer average number of shares outstanding in 1995 as a result of the stock repurchase program previously mentioned. The Company increased its earnings in 1995, while also bolstering its allowance for loan and lease losses to 1.50% of total loans and leases as of December 31, 1995, due to three nonrecurring items. These were: (1) a pre-tax gain of $20,766,000 (recorded as a pension credit in the employee benefits line of the Consolidated Statements of Income) in connection with the curtailment of the Company's noncontributory pension plan; (2) the decrease in FDIC insurance expense of $5,198,000 primarily as a result of a reduction in the insurance premiums from 23 cents to 4 cents per $100 of deposits effective June 1, 1995; and (3) the receipt of insurance proceeds and reversal of accruals totalling $4,700,000 related to losses in the trust area recognized in 1994. In December 1994, the Company recognized a pre-tax charge of $5,000,000 to cover estimated losses attributable to investments in the trust area that were outside of certain clients' express investment guidelines. In recent years, the level of the Company's nonperforming assets and charge-offs has been adversely affected by the prolonged economic downturn in Hawaii and related weakness in the local real estate market. The Company's nonperforming assets, principally real estate assets, increased from 1.14% of total loans and leases and other real estate owned as of December 31, 1994, to 1.75% as of December 31, 1995. Net charge-offs to average loans and leases were .38% for 1995 and .46% for 1994 compared to .27% in 1993. As a result, the provision for loan and lease losses in 1995 was $38,107,000 (including approximately $26,000,000 on a nonrecurring basis), an increase of 66.2% over the provision for loan and lease losses in 1994. Net income for 1994 decreased by $9,346,000, or 11.4%, compared to 1993. Net income per share for 1994 was $2.25 compared to $2.52 in 1993. The decline in earnings was primarily due to a higher provision for loan and lease losses of $9,660,000 attributable to the write-off of certain problem loans and the nonrecurring charge of $5,000,000 in the trust area previously mentioned. In addition, net income for 1993 included a nonrecurring income tax benefit of $3,650,000 attributable to an income tax accounting change and the $5,444,000 write-off of the undepreciated cost of certain structures in connection with the Company's redevelopment of its former downtown headquarters block. At December 31, 1995, the Company's ratios of Tier 1 Capital to risk-weighted assets and Total Capital to risk-weighted assets were 9.03% and 11.88%, respectively, compared with 9.31% and 12.06%, respectively, at December 31, 1994. These ratios are well in excess of the minimum ratios of 4.00% and 8.00%, respectively, specified by the Federal Reserve Board. PROPOSED ACQUISITION On December 4, 1995, the Company entered into certain Branch Purchase and Assumption Agreements to purchase certain assets, principally loans, and assume certain liabilities, principally deposit accounts, of U.S. Bancorp and West One Bancorp as described in Note 1 to the Financial Statements. The Company anticipates that this acquisition will be completed during the second quarter of 1996. [GRAPH]
ASSETS LOANS (in millions) (in millions) 1995 $7,565 $5,260 1994 $7,535 $5,534 1993 $7,269 $5,067 1992 $6,553 $4,396 1991 $6,511 $4,329
8 22 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- NET INTEREST INCOME As reflected in Table 1, net interest income, on a taxable equivalent basis, decreased $3,717,000, or 1.2%, from $303,424,000 in 1994 to $299,707,000 in 1995. This decrease was primarily due to a 27 basis point (1% equals 100 basis points) decrease in the net interest margin, partially offset by a 4.8% increase in average earning assets, reflecting significant growth in loans and leases. Net interest income increased by $17,031,000, or 5.9%, from 1993 to 1994 primarily due to a 7.4% increase in average earning assets (principally as a result of the Pioneer acquisition in August 1993), offset by a 6 basis point decrease in the net interest margin. Tables 1 and 2 present an analysis of the components and changes in net interest income for 1995, 1994 and 1993. The net interest margin was 4.36% for 1995, down 27 basis points compared to 1994. Both the cost of funds and yield on average earning assets increased during 1995 over the prior year due to a higher interest rate environment throughout most of the year and the continuing shift of the Company's assets into loans and leases (excluding the effect of the mortgage securitization described below). However, the 112 basis point increase in the rate paid for sources of funds used for such earning assets (reflecting among other things various deposit programs to fund loan growth and a decrease in average noninterest-bearing demand deposits of $45,211,000, or 5.2%) outpaced the increase in the yield on average earning assets of 85 basis points, resulting in an unfavorable impact on the net interest margin. In 1995, the yield on average earning assets was also adversely impacted by the: (1) reversal of $1,806,000 in previously recognized interest income on certain loans placed on nonaccrual status; (2) write-off of $743,000 in lease finance interest income for the remaining net investment in certain leveraged leases, exclusive of the residual values, as a result of the early termination of these leases; and (3) decrease in loan fees of $5,366,000 as compared to 1994. In 1994, as a result of increases in prevailing interest rates, the yield on average earning assets increased 21 basis points and the rate paid for sources of funds used for such earning assets increased 27 basis points, which resulted in a decrease in the net interest margin from 4.69% to 4.63%. Average earning assets increased by $317,978,000, or 4.8%, in 1995 over 1994. In the second quarter of 1995, the Company securitized approximately $461,449,000 of adjustable rate mortgage loans with the Federal National Mortgage Association ("FNMA") in an effort to increase its funding capacity and liquidity. The securities backed by these loans are held by the Company and were reclassified to the investment security portfolio. Excluding the effect of such securitization, average loans and leases increased 10.1% in 1995 over 1994. The increase was primarily due to efforts to diversify the loan portfolio, both geographically and by industry. Credit extensions to companies in the media and telecommunications industry located on the mainland United States accounted for the majority of the increase. As a result (excluding the effect of the loan securitization), the mix of average earning assets changed, with average loans and leases representing 82.8% of average earning assets for 1995 as compared to 78.9% in 1994. Average earning assets increased by $452,160,000, or 7.4%, in 1994 over 1993. In addition, the mix of earning assets changed slightly, as the Company increased the amount of average loans and leases in its portfolio, from 75.7% of average earning assets in 1993 to 78.9% in 1994. Average loans and leases increased by $552,739,000, or 12.0%, from 1993 to 1994, principally as a result of the Pioneer acquisition. Average interest-bearing deposits and liabilities increased by $294,061,000, or 5.3%, in 1995 over 1994. As a result of depositors seeking higher yields, the mix of average interest-bearing deposits and liabilities changed with higher-yielding average time deposits representing 33.9% of average interest-bearing deposits and liabilities in 1995 as compared to 27.1% in 1994. As reflected in Table 2, the increase in total interest expense of $85,609,000 from 1994 to 1995 consisted of an increase of $63,872,000 due to higher interest rates and an increase of $21,737,000 due to higher average balances. Average interest-bearing deposits and liabilities increased by $469,204,000, or 9.2%, in 1994 over 1993, principally as a result of the Pioneer acquisition. As reflected in Table 2, the increase in total interest expense of $28,979,000 from 1993 to 1994 was comprised of an increase of $22,281,000 due to higher average balances and an increase of $6,698,000 due to higher interest rates. [GRAPH]
NET INTEREST INCOME* AVERAGE EARNING ASSETS (in millions) (in billions) 1995................................... $299.7 $6.88 1994................................... 303.4 6.56 1993................................... 286.4 6.11 1992................................... 275.8 5.97 1991................................... 262.7 5.54
* taxable equivalent basis 9 23 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- TABLE 1: AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND YIELDS AND RATES (TAXABLE EQUIVALENT BASIS) The following table sets forth the condensed consolidated average balance sheets, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing deposits and liabilities for the years indicated on a taxable equivalent basis. The tax equivalent adjustment is made for items exempt from Federal income taxes (assuming a 35% tax rate for 1995, 1994 and 1993) to make them comparable with taxable items before any income taxes are applied.
1995 1994 1993 -------------------------- ------------------------- --------------------------- INTEREST Interest Interest AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate - ----------------------------------------------------------------------------------------------------------------- ASSETS Earning assets: Interest-bearing deposits in other banks: Domestic $ 11,849 $ 771 6.51% $ 12,078 $ 615 5.09% $ 21,098 $ 633 3.00% Foreign 50,613 2,956 5.84 55,214 2,011 3.64 211,543 6,666 3.15 - ----------------------------------------------- ------------------- -------------------- Total interest- bearing deposits in other banks 62,462 3,727 5.97 67,292 2,626 3.90 232,641 7,299 3.14 - ----------------------------------------------- ------------------- -------------------- Federal funds sold and securities purchased under agreements to resell 207,237 12,003 5.79 127,821 5,179 4.05 160,647 5,097 3.17 Held-to-maturity securities: U.S. Treasury and other U.S. Government agencies and corporations 705,996 37,358 5.29 803,544 34,530 4.30 803,096 39,537 4.92 States and political subdivisions 104,336 8,043 7.71 163,769 9,874 6.03 184,678 9,988 5.41 Other 172,725 11,320 6.55 95,793 5,574 5.82 54,476 3,879 7.12 - ----------------------------------------------- ------------------- -------------------- Total held-to-maturity securities 983,057 56,721 5.77 1,063,106 49,978 4.70 1,042,250 53,404 5.12 - ----------------------------------------------- ------------------- -------------------- Available-for-sale securities 162,417 10,485 6.46 127,517 6,354 4.98 50,777 1,950 3.84 Loans and leases: (1) (2) Domestic 5,239,888 461,067 8.80 4,953,951 400,003 8.07 4,412,653 352,045 7.98 Foreign 220,793 21,001 9.51 218,189 18,972 8.69 206,748 17,307 8.37 - ----------------------------------------------- ------------------- -------------------- Total loans and leases 5,460,681 482,068 8.83 5,172,140 418,975 8.10 4,619,401 369,352 8.00 - ----------------------------------------------- ------------------- -------------------- TOTAL EARNING ASSETS 6,875,854 565,004 8.22 6,557,876 483,112 7.37 6,105,716 437,102 7.16 - ----------------------------------------------- ------------------- -------------------- Cash and due from banks 242,412 265,103 298,765 Premises and equipment 243,579 250,391 230,547 Core deposit premium 13,672 14,588 13,156 Goodwill 76,893 79,178 67,678 Other assets 76,086 33,077 39,390 - -------------------------------------- ---------- ---------- TOTAL ASSETS $7,528,496 $7,200,213 $6,755,252 ====================================== ========== ==========
Notes: (1) Nonaccruing loans and leases have been included in the computations of average loan and lease balances. (2) Interest income for loans and leases included loan fees of $23,951, $29,317 and $25,145 for 1995, 1994 and 1993, respectively. 10 24 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - --------------------------------------------------------------------------------
1995 1994 1993 ----------------------------- ----------------------------- ------------------------------------- INTEREST Interest Interest AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits and liabilities: Deposits: Interest-bearing demand $1,114,737 $ 30,034 2.69% $1,206,562 $ 25,383 2.10% $1,247,954 $ 26,652 2.14% Savings 1,177,277 34,272 2.91 1,422,297 30,865 2.17 1,544,694 33,259 2.15 Time 1,707,967 92,942 5.44 1,369,020 56,254 4.11 1,223,151 53,162 4.35 Foreign (interest- bearing) 346,886 18,800 5.42 207,655 7,787 3.75 127,830 3,814 2.98 - ------------------------------------------------ --------------------- ------------------------ Total interest-bearing deposits 4,346,867 176,048 4.05 4,205,534 120,289 2.86 4,143,629 116,887 2.82 Short-term borrowings 1,271,981 74,369 5.85 1,136,361 47,813 4.21 814,843 26,477 3.25 Long-term debt 230,394 14,880 6.46 213,286 11,586 5.43 127,505 7,345 5.76 - ------------------------------------------------ --------------------- ------------------------ TOTAL INTEREST- BEARING DEPOSITS AND LIABILITIES 5,849,242 265,297 4.54 5,555,181 179,688 3.23 5,085,977 150,709 2.96 - ------------------------------------------------ --------------------- ------------------------ Noninterest-bearing demand deposits 831,485 876,696 925,497 Other liabilities 207,619 149,922 159,403 - -------------------------------------- ---------- ---------- Total liabilities 6,888,346 6,581,799 6,170,877 Stockholders' equity 640,150 618,414 584,375 - -------------------------------------- ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,528,496 $7,200,213 $6,755,252 ====================================== ========== ========== NET INTEREST INCOME AND MARGIN ON EARNING ASSETS 299,707 4.36% 303,424 4.63% 286,393 4.69% Tax equivalent adjustment 5,047 7,352 8,171 - --------------------------- -------- -------- -------- NET INTEREST INCOME $294,660 $296,072 $278,222 ==============================================================================================================================
11 25 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- TABLE 2: ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS) The following table analyzes the dollar amount of change (on a taxable equivalent basis) in interest income and expense and the changes in dollar amounts attributable to (a) changes in volume (change in volume times prior year's rates), (b) changes in rates (change in rate times prior year's volume), and (c) changes in rate/volume (change in rate times change in volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately. The tax equivalent adjustment is made for items exempt from Federal income taxes (assuming a 35% tax rate for 1995, 1994 and 1993) to make them comparable with taxable items before any income taxes are applied.
1995 COMPARED TO 1994 -- 1994 Compared to 1993 -- INCREASE (DECREASE) DUE TO: Increase (Decrease) Due to: ------------------------------------- ---------------------------------- NET INCREASE Net Increase (in thousands) VOLUME RATE (DECREASE) Volume Rate (Decrease) - ------------------------------------------------------------------------------------------------------------------ Interest earned on: Interest-bearing deposits in other banks: Domestic $ (12) $ 168 $ 156 $ (494) $ 476 $ (18) Foreign (180) 1,125 945 (5,325) 670 (4,655) - ----------------------------------------------------------------------------------------------------------------- Total interest- bearing deposits in other banks (192) 1,293 1,101 (5,819) 1,146 (4,673) - ----------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 4,035 2,789 6,824 (1,164) 1,246 82 Held-to-maturity securities: U.S. Treasury and other U.S. Government agencies and corporations (4,525) 7,353 2,828 22 (5,029) (5,007) States and political subdivisions (4,148) 2,317 (1,831) (1,195) 1,081 (114) Other 4,967 779 5,746 2,509 (814) 1,695 - ----------------------------------------------------------------------------------------------------------------- Total held-to-maturity securities (3,706) 10,449 6,743 1,336 (4,762) (3,426) - ----------------------------------------------------------------------------------------------------------------- Available-for-sale securities 1,986 2,145 4,131 3,680 724 4,404 Loans and leases: (1) Domestic 23,899 37,165 61,064 43,660 4,298 47,958 Foreign 228 1,801 2,029 980 685 1,665 - ----------------------------------------------------------------------------------------------------------------- Total loans and leases 24,127 38,966 63,093 44,640 4,983 49,623 - ----------------------------------------------------------------------------------------------------------------- Total earning assets 26,250 55,642 81,892 42,673 3,337 46,010 - ----------------------------------------------------------------------------------------------------------------- Interest paid on: Deposits: Interest-bearing demand (2,047) 6,698 4,651 (875) (394) (1,269) Savings (5,926) 9,333 3,407 (2,654) 260 (2,394) Time 15,883 20,805 36,688 6,103 (3,011) 3,092 Foreign (interest-bearing) 6,618 4,395 11,013 2,815 1,158 3,973 - ----------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 14,528 41,231 55,759 5,389 (1,987) 3,402 Short-term borrowings 6,227 20,329 26,556 12,210 9,126 21,336 Long-term debt 982 2,312 3,294 4,682 (441) 4,241 - ----------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits and liabilities 21,737 63,872 85,609 22,281 6,698 28,979 - ----------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS) $ 4,513 $ (8,230) $(3,717) $20,392 $ (3,361) $17,031 =================================================================================================================
Note: (1) Interest income for loans and leases included loan fees of $23,951, $29,317 and $25,145 for 1995, 1994 and 1993, respectively. 12 26 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- NONINTEREST INCOME Total noninterest income increased $8,206,000, or 9.5%, from $86,672,000 in 1994 to $94,878,000 in 1995. Trust fees increased $187,000, or .8%, from 1994 to 1995 and $1,446,000, or 6.8%, from 1993 to 1994. The increase was primarily the result of increases in fees from pension plans and irrevocable trusts and investment management fees resulting from new business. Service charges on deposit accounts increased $136,000, or .6%, from 1994 to 1995 and $2,223,000, or 10.2%, from 1993 to 1994. Excluding a $1,000,000 fee received in 1994 in connection with the renewal of a certain contract, service charges on deposit accounts increased 4.9% over 1994. The increase is attributable to an increase in fees on checks returned and paid. In addition to the fee mentioned above, the increase from 1993 to 1994 was also due to an increase in service charges on checking accounts by Pioneer. Other service charges and fees increased $3,614,000, or 11.3%, from 1994 to 1995 and $4,277,000, or 15.5%, from 1993 to 1994. The increase from 1994 to 1995 was primarily as a result of higher merchant discount fees and commissions from annuity and mutual fund sales. Increases in fee income from loan servicing and credit cards, miscellaneous commissions and the Pioneer acquisition accounted for the increase from 1993 to 1994. Securities gains, net remained relatively constant between 1995 and 1994, but decreased $1,777,000, or 90.9%, from 1993 to 1994. The Company sold its Federal National Mortgage Association and Student Loan Marketing Association stock and recognized a gain of $1,873,000 in 1993. Other noninterest income increased $4,304,000, or 55.9%, from 1994 to 1995 and $916,000, or 13.5%, from 1993 to 1994. The increase from 1994 to 1995 was primarily attributable to the receipt of insurance proceeds and reversal of accruals totalling $4,700,000 in 1995 related to losses in the trust area recognized in 1994. In December 1994, the Company recognized a nonrecurring pre-tax charge of $5,000,000 (recorded in other noninterest expenses) to cover estimated losses attributable to investments made in the trust area that were outside of certain clients' express investment guidelines. Components of and changes in noninterest income are reflected below for the years indicated:
- -------------------------------------------------------------------------------------------------------------- 1995/94 CHANGE 1994/93 Change ----------------- ----------------- (in thousands) 1995 1994 1993 AMOUNT % Amount % - -------------------------------------------------------------------------------------------------------------- Trust income $23,034 $22,847 $21,401 $ 187 .8% $ 1,446 6.8% Service charges on deposit accounts 24,150 24,014 21,791 136 .6 2,223 10.2 Other service charges and fees 35,551 31,937 27,660 3,614 11.3 4,277 15.5 Securities gains, net 144 178 1,955 (34) (19.1) (1,777) (90.9) Other 11,999 7,696 6,780 4,303 55.9 916 13.5 - -------------------------------------------------------------------------------- ------- TOTAL NONINTEREST INCOME $94,878 $86,672 $79,587 $8,206 9.5% $ 7,085 8.9% ==============================================================================================================
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES The provision for loan and lease losses is based upon management's judgment as to the adequacy of the allowance to absorb future losses. In assessing the adequacy of the allowance for loan and lease losses, management's methodology takes into consideration the factors described in the Notes to the Financial Statements. This assessment is performed on a quarterly basis. The provision for loan and lease losses for 1995 was $38,107,000, an increase of 66.2%, or $15,185,000, over 1994. The increase reflects, among other factors, the Company's evaluation of economic conditions and trends in Hawaii (in particular, the relatively slow improvement in the Hawaii economy following the recent recession), the increase in net charge-offs in recent years and higher levels of nonperforming assets that the Company has had over the past several years. Based on these continuing factors, the Company's near-term goal was to increase the allowance for loan and lease losses to 1.50% of total loans and leases, which was accomplished in the fourth quarter of 1995. Net charge-offs in 1995 totalled $20,624,000 compared to $23,925,000 in 1994. Net charge-offs in 1995 and 1994 represented .38% and .46%, respectively, of average outstanding loans and leases. At December 31, 1995, the allowance for loan and lease losses totalled $78,733,000 and represented 1.50% of total outstanding loans and leases compared to $61,250,000 and 1.11% as of December 31, 1994. The allowance for loan and lease losses decreased to 95.0% of nonperforming loans and leases at December 31, 1995 (excluding 90 days or more past due accruing loans and leases) from 103.9% at December 31, 1994, reflecting the increase in nonperforming loans and leases (a majority of which are collateralized by real estate) in 1995 over 1994. In management's judgment, the allowance for loan and lease losses is adequate to absorb potential losses currently inherent in the portfolio, however, changes in prevailing economic conditions in the Company's markets could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the allowance for loan and lease losses. 13 27 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- The provision for loan and lease losses in 1994 was $22,922,000, an increase of 72.8%, or $9,660,000, compared to 1993, reflecting, among other factors the high levels of charge-offs in 1994. Net charge-offs in 1994 totalled $23,925,000 compared to $12,619,000 in 1993. The following sets forth the activity in the allowance for loan and lease losses for the years indicated:
- -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------- Loans and leases outstanding (end of year) $5,259,545 $5,533,565 $5,066,809 $4,396,018 $4,329,321 ========================================================================================================================== Average loans and leases outstanding $5,460,681 $5,172,140 $4,619,401 $4,358,363 $3,836,844 ========================================================================================================================== Allowance for loan and lease losses: Balance at beginning of year $ 61,250 $ 62,253 $ 56,385 $ 55,134 $ 39,847 Allowance applicable to loans of purchased company (1) -- -- 5,225 -- 10,141 Loans and leases charged off: Commercial, financial and agricultural 7,197 11,307 3,004 2,110 758 Real estate: Construction 1,466 7,178 4,506 3,932 -- Commercial 2,763 1,500 125 250 294 Residential 2,707 588 562 -- -- Consumer 8,019 6,542 6,839 7,093 5,481 Lease financing 276 -- 27 25 -- Foreign 417 -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Total loans and leases charged off 22,845 27,115 15,063 13,410 6,533 - -------------------------------------------------------------------------------------------------------------------------- Recoveries on loans and leases previously charged off: Commercial, financial and agricultural 327 1,229 235 349 313 Real estate: Construction -- 205 -- -- 1 Commercial 239 9 321 1 42 Residential 43 92 207 35 -- Consumer 1,596 1,639 1,667 1,456 1,066 Lease financing 16 16 14 8 5 - -------------------------------------------------------------------------------------------------------------------------- Total recoveries on loans and leases previously charged off 2,221 3,190 2,444 1,849 1,427 - -------------------------------------------------------------------------------------------------------------------------- Net charge-offs (20,624) (23,925) (12,619) (11,561) (5,106) Provision charged to expense 38,107 22,922 13,262 12,812 10,252 - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 78,733 $ 61,250 $ 62,253 $ 56,385 $ 55,134 ========================================================================================================================== Net loans and leases charged off to average loans and leases .38% .46% .27% .27% .13% Net loans and leases charged off to allowance for loan and lease losses 26.19% 39.06% 20.27% 20.50% 9.26% Allowance for loan and lease losses to total loans and leases (end of year) 1.50% 1.11% 1.23% 1.28% 1.27% Allowance for loan and lease losses to nonperforming loans and leases: Excluding 90 days or more past due accruing loans and leases .95x 1.04x 1.03x .79x 1.49x Including 90 days or more past due accruing loans and leases .70x .66x .62x .44x .86x ==========================================================================================================================
Note: (1) Allowances of $5,225 in 1993 and $10,141 in 1991 were related to the acquisitions of Pioneer Federal Savings Bank and First Interstate Bank of Hawaii, respectively. 14 28 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- The Company has allocated a portion of the allowance for loan and lease losses according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the various loan and lease categories as of December 31 for the years indicated:
- --------------------------------------------------------------------------------- 1995 1994 -------------------------- -------------------------- PERCENT OF Percent of LOANS/LEASES Loans/Leases IN EACH in Each CATEGORY Category ALLOWANCE TO TOTAL Allowance to Total (in thousands) AMOUNT LOANS/LEASES Amount Loans/Leases - --------------------------------------------------------------------------------- Domestic: Commercial, financial and agricultural $15,325 25% $16,610 23% Real estate: Construction 4,035 5 7,010 6 Commercial 2,320 19 4,700 18 Residential 4,260 34 9,510 37 Consumer 9,550 9 8,040 8 Lease financing 645 4 600 4 Foreign 1,430 4 1,085 4 General allowance 41,168 N/A 13,695 N/A - -------------------------------------------------------------------------------- CONSOLIDATED $78,733 100% $61,250 100% ================================================================================
- ------------------------------------------------------------------------------------------------------- 1993 1992 1991 ---------------------------- ----------------------- -------------------------- Percent of Percent of Percent of Loans/Leases Loans/Leases Loans/Leases in Each in Each in Each Category Category Category Allowance to Total Allowance to Total Allowance to Total (in thousands) Amount Loans/Leases Amount Loans/Leases Amount Loans/Leases - ------------------------------------------------------------------------------------------------------- Domestic: Commercial, financial and agricultural $13,000 24% $14,700 27% $14,335 26% Real estate: Construction 11,850 7 4,400 10 7,719 11 Commercial 3,400 17 5,400 16 1,785 17 Residential 4,700 35 3,000 28 2,626 25 Consumer 7,500 9 7,100 10 7,121 11 Lease financial 1,350 4 1,300 4 1,367 5 Foreign 1,600 4 1,700 5 500 5 General allowance 18,853 N/A 18,785 N/A 19,681 N/A - ------------------------------------------------------------------------------------------------------- CONSOLIDATED $62,253 100% $56,385 100% $55,134 100% =======================================================================================================
[GRAPH] ALLOWANCE AS A % YEAR-END ALLOWANCE OF LOANS AND LEASES FOR LOAN AND LEASE OUTSTANDING LOSSES (in millions) 1995 1.27% 1995 $55.1 1994 1.28% 1994 $56.4 1993 1.23% 1993 $62.3 1992 1.11% 1992 $61.3 1991 1.50% 1991 $78.7
Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," amended in October 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." The adoption of SFAS No. 114 did not result in an increase in the allowance for loan and lease losses primarily because the majority of impaired loan valuations continue to be based on the fair value of the collateral. NONINTEREST EXPENSES Total noninterest expenses for 1995 totalled $229,293,000, a decrease of $19,028,000, or 7.7%, from 1994. Total personnel expenses for 1995 decreased $17,393,000, or 14.7%, compared to 1994. The decrease was primarily due to a nonrecurring gain of $20,766,000 recognized in 1995 in connection with the curtailment of the Company's noncontributory pension plan. The decrease was partially offset by higher salaries and wages reflecting normal merit increases. Occupancy expense increased $2,426,000, or 10.4%, over 1994 primarily as a result of higher depreciation, insurance and rental expenses. The increase in depreciation and insurance expenses was primarily attributable to the construction of a new five-story, 75,000-square-foot office building, including a branch, on property owned in fee simple in Maite, Guam, in late 1994. Equipment expense decreased $905,000, or 3.6%, compared to 1994. The decrease was due to the completion of the Company's migration from a Unisys to an IBM information technology platform and improvements in the delivery and processing systems. Deposit insurance expense decreased $5,198,000, or 45.6%, compared to 1994. The decrease was due to the reduction in the FDIC assessment rate from 23 cents to 4 cents per $100 effective June 1, 1995. In addition, current legislative discussion associated with the undercapitalized SAIF could potentially result in a one-time assessment to the Company's SAIF-insured deposits. Although uncertain, the timing of the assessment may be as early as the first quarter of 1996. In 1994, the Company recognized a nonrecurring charge of $5,000,000 to cover estimated losses attributable to investments made in the trust area that were outside of certain clients' express investment guidelines. Other expenses increased $7,721,000, or 16.0%, over 1994 as a result of higher software depreciation expense in connection with the aforementioned migration from Unisys 15 29 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- to IBM, interchange fees, outside services and legal fees for certain delinquent and/or nonaccrual loans and other real estate owned. Noninterest expenses increased $22,879,000, or 10.1%, from 1993 to 1994. This increase was primarily due to higher personnel expenses and rental expenses, partly as a result of the Pioneer acquisition, higher depreciation, rental expense and maintenance service contracts in connection with the previously mentioned conversion from a Unisys to IBM information technology platform, the previously mentioned trust loss, a loss of $1,409,000 on the disposition of certain other real estate owned, higher outside services, utility charges, professional fees, the Pioneer acquisition and lower interest capitalization on construction in progress. This increase was partially offset by the write-off of $5,444,000 for the undepreciated cost of certain structures on the Company's redevelopment block in 1993. In October 1995, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 provides for, but does not require the use of, an alternative method of accounting for stock-based employee compensation plans (the "fair value based method"). The Company presently utilizes the "intrinsic value based method" of accounting prescribed in Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to Employees." For companies electing to remain with the accounting prescribed in APBO No. 25, certain pro forma disclosures of net income and earnings per share will be required, as if the fair value based method of accounting defined in SFAS No. 123 had been applied. SFAS No. 123 applies to fiscal years beginning after December 15, 1995. The Company does not intend to change its method of accounting and will instead provide pro forma disclosures in the notes to the financial statements as if the fair value based method had been applied. Accordingly, the adoption of this standard will not have an effect on the consolidated financial statements of the Company. Components of and changes in noninterest expenses are reflected below for the years indicated:
- ----------------------------------------------------------------------------------------------------------- 1995/94 CHANGE 1994/93 Change ---------------- ----------------- (in thousands) 1995 1994 1993 AMOUNT % Amount % - ----------------------------------------------------------------------------------------------------------- Personnel: Salaries and wages $ 94,119 $ 92,237 $ 86,011 $ 1,882 2.0 % $ 6,226 7.2% Employee benefits 7,209 26,484 24,783 (19,275) (72.8) 1,701 6.9 - ---------------------------------------------------------------------------- ------- Total personnel expenses 101,328 118,721 110,794 (17,393) (14.7) 7,927 7.2 Occupancy expense 25,706 23,280 20,416 2,426 10.4 2,864 14.0 Equipment expense 23,907 24,812 20,243 (905) (3.6) 4,569 22.6 Deposit insurance 6,190 11,388 11,122 (5,198) (45.6) 266 2.4 Stationery and supplies 8,645 9,055 8,430 (410) (4.5) 625 7.4 Advertising and promotion 7,476 7,745 6,911 (269) (3.5) 834 12.1 Trust loss -- 5,000 -- (5,000) (100.0) 5,000 -- Write-off of building costs -- -- 5,444 -- -- (5,444)(100.0) Other 56,041 48,320 42,082 7,721 16.0 6,238 14.8 - ---------------------------------------------------------------------------- ------- TOTAL NONINTEREST EXPENSES $229,293 $248,321 $225,442 $(19,028) (7.7)% $22,879 10.1% ==========================================================================================================
INCOME TAXES The provision for income taxes as shown in the Consolidated Statements of Income represents 37.0% of pre-tax income for 1995, compared with 35.0% and 34.3% for 1994 and 1993, respectively. On a taxable equivalent basis, the effective tax rate for 1995, 1994 and 1993 was 41.1%, 41.6% and 38.6%, respectively. Additional information on the Company's income taxes is provided in Note 13 to the Financial Statements. Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," the cumulative effect of which was the recognition of an income tax benefit of $3,650,000 in the first quarter of 1993. Under SFAS No. 109, the effect of changes in tax rates is recognized in income in the period that includes the enactment date. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed into law, increasing the Federal corporate tax rate from 34% to 35%, retroactive to January 1, 1993. As a result, the Company recognized retroactive adjustments to its deferred tax liability and current tax provision of $1,520,000 and $402,000, respectively, in 1993. 16 30 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- LOANS The following table sets forth the loan portfolio by major categories and loan mix as of December 31 for the years indicated: - --------------------------------------------------------------------------------
(in millions) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------- Domestic: Commercial, financial and agricultural $1,316 $1,264 $1,166 $1,175 $1,149 Real estate: Construction 257 321 317 438 484 Commercial 997 965 883 720 739 Residential 1,766 2,049 1,829 1,217 1,060 Consumer 307 309 312 326 355 Credit cards 167 159 148 148 142 Lease financing 242 231 201 171 181 Foreign: Governments and official institutions -- 1 2 3 22 Commercial and industrial 19 50 79 78 74 Other 189 185 130 120 123 - -------------------------------------------------------------------------------------------------------------- TOTAL LOANS AND LEASES $5,260 $5,534 $5,067 $4,396 $4,329 ==============================================================================================================
The loan and lease portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. At December 31, 1995, total loans and leases were $5,259,545,000, a decrease of 5.0% from December 31, 1994. In 1995, the Company securitized $461,449,000 in adjustable rate mortgage loans in an effort to increase its funding capacity and liquidity. These securitized loans were classified in the investment securities portfolio at December 31, 1995. If these securitized loans had been included within the loan category at December 31, 1995, the loan growth over December 31, 1994 would have been 2.7%. Total loans and leases at December 31, 1995, represented 69.5% of total assets, 77.7% of total earning assets and 98.2% of total deposits compared to 73.4% of total assets, 81.2% of total earning assets and 107.4% of total deposits at December 31, 1994. The decreases in percentages compared to December 31, 1994 were due to the aforementioned loan securitization. Governmental and certain other time deposits were shifted into security repurchase agreements at December 31, 1995 and 1994 to reduce the Company's deposit insurance premiums. If these repurchase agreements had been included in the deposit base, total loans and leases as a percentage of total deposits would represent 85.7% and 92.6%, respectively, at such dates. Commercial, financial and agricultural loans as of December 31, 1995, increased $51,579,000, or 4.1%, to $1,315,736,000 from 1994. The increase reflects efforts to diversify the loan portfolio, both geographically and by industry. Credit extensions in the media and telecommunications industry located on the mainland United States accounted for the majority of the increase. The Company's real estate loans totalled $3,019,950,000, or 57.4% of total loans at December 31, 1995 and represented a decrease of 9.5% compared to December 31, 1994. Excluding the loan securitization mentioned above, real estate loan growth over December 31, 1994 would have been 3.3%. The Company's primary goal in real estate lending is to maintain reasonable levels of risk by avoiding speculative real estate transactions, such as the financing of raw land acquisitions, by adhering to underwriting guidelines and by closely monitoring general economic conditions impacting local real estate markets. The Company's multifamily and commercial real estate loans, both construction and permanent, are analyzed on the basis of the economic viability of the specific project or property for which financing is sought as well as the loan-to-value ratio of the real estate securing the financing and the underlying financial strength of the borrower. In its multifamily and commercial real estate lending, the Company will generally not lend in excess of 75% of the appraised value of the underlying project or property; it generally also requires a debt service ratio of 1.20. In its single-family residential lending, the Company will generally not lend in excess of 80% of the appraised value of the underlying property. Loans made in excess of that limit are generally covered by third-party mortgage insurance that reduces the Company's equivalent risk to an 80% loan-to-appraised value ratio. Consumer loans consist primarily of automobile secured loans supported by underwriting guidelines which management believes to be conservative and which are based primarily on satisfactory credit history, down payment, and sufficient income to service the monthly payments. 17 31 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At December 31, 1995, commercial real estate loans totalled $996,715,000, or 19.0%, of total loans and leases, an increase of $31,957,000, or 3.3%, over December 31, 1994. The Company has selectively participated as a lender on commercial properties on the mainland United States, principally on the west coast. Such loans totalled $47,606,000 and $58,421,000 at December 31, 1995 and 1994, respectively. At December 31, 1995, the largest concentration of commercial real estate loans to a single borrower was $34.3 million. At December 31, 1995, commercial, financial and agricultural, real estate-construction and foreign loans with maturities over one year were comprised of fixed rate loans totalling $115,339,000 and floating or adjustable rate loans totalling $869,435,000. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS 122 amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require that mortgage banking enterprises recognize as separate assets rights to service mortgage loans for others. SFAS No. 122 also requires that mortgage banking enterprises assess capitalized mortgage servicing rights based on the fair value of those rights on a disaggregated basis. SFAS No. 122 applies to fiscal years beginning after December 15, 1995. The adoption of this standard is not expected to have a material effect on the consolidated financial statements of the Company. NONPERFORMING ASSETS AND PAST DUE LOANS Nonperforming assets and past due loans and leases are reflected below for the years indicated:
- -------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------- Nonperforming loans and leases: Nonaccrual: Commercial, financial and agricultural $16,229 $ 7,972 $13,823 $24,563 $11,389 Real estate: Construction 9,697 7,038 28,571 41,018 23,298 Commercial 40,664 35,290 12,145 3,250 2,199 Residential: Insured, guaranteed, or conventional 12,238 4,649 5,473 2,221 -- Home equity credit lines 496 520 255 269 -- - -------------------------------------------------------------------------------------------------------------- Total real estate loans 63,095 47,497 46,444 46,758 25,497 Consumer 390 143 45 106 86 Lease financing 19 212 -- 27 -- - -------------------------------------------------------------------------------------------------------------- Total nonaccrual loans and leases 79,733 55,824 60,312 71,454 36,972 Renegotiated: Commercial real estate 2,500 3,128 -- -- -- Commercial, financial and agricultural 682 -- 20 77 136 - -------------------------------------------------------------------------------------------------------------- Total nonperforming loans and leases 82,915 58,952 60,332 71,531 37,108 Other real estate owned 9,312 4,160 13,034 1,211 1,811 - -------------------------------------------------------------------------------------------------------------- TOTAL NONPERFORMING ASSETS $92,227 $63,112 $73,366 $72,742 $38,919 ============================================================================================================== PAST DUE LOANS AND LEASES (1) $28,790 $33,367 $40,285 $55,704 $26,726 ============================================================================================================== Nonperforming assets to total loans and leases and other real estate owned (end of year): Excluding past due loans and leases 1.75% 1.14% 1.44% 1.65% .90% Including past due loans and leases 2.30% 1.74% 2.24% 2.92% 1.52% Nonperforming assets to total assets (end of year): Excluding past due loans and leases 1.22% .84% 1.01% 1.11% .60% Including past due loans and leases 1.60% 1.28% 1.56% 1.96% 1.01% ==============================================================================================================
Note: (1) Represents loans and leases which are past due 90 days or more as to principal or interest and which are still accruing interest. 18 32 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- Nonperforming assets at December 31, 1995 were $92,227,000, or 1.75% of total loans and leases and other real estate owned ("OREO") and 1.22% of total assets. These levels compared to total nonperforming assets at December 31, 1994 of $63,112,000, or 1.14% of total loans and leases and OREO and .84% of total assets. The increase in nonperforming assets of $29,115,000, or 46.1%, was principally experienced in the Company's two largest portfolios, the commercial, financial and agricultural portfolio, increasing $8,257,000, or 103.6% and the real estate portfolio increasing $15,598,000, or 32.8%. In recent years, the level of the Company's nonperforming assets and charge-offs has been adversely affected by the prolonged economic downturn in Hawaii and related weakness in the local real estate market. Although the Company believes that the Hawaii economy has begun to show signs of improvement, and certain local real estate sectors evidence signs of having stabilized, the recovery of the Hawaii economy has been slow and the effects of the economic downturn may continue to affect the level of nonperforming assets and related charge-offs in future periods. Loans and leases past due 90 days or more and still accruing interest totalled $28,790,000 at December 31, 1995, a decrease of 13.7% from December 31, 1994. All of the loans which are past due 90 days or more and still accruing interest are in management's judgment adequately collateralized and in the process of collection. The following table presents information related to loans and leases on a nonaccrual basis for the year ended December 31, 1995:
- -------------------------------------------------------- (in thousands) Domestic Foreign Total - -------------------------------------------------------- Interest income which would have been recorded if loans and leases had been current $9,435 $ -- $9,435 ======================================================== Interest income recorded during the year $2,366 $ -- $2,366 ========================================================
DEPOSITS Deposits are the largest component of the Company's liabilities and account for the greatest portion of total interest expense. At December 31, 1995, total deposits were $5,358,313,000, an increase of $206,100,000, or 4.0%, from December 31, 1994. The increase was primarily due to the purchase of deposits of $180,388,000 in November 1995 from a local financial services loan company. For 1995, average deposits increased $96,122,000, or 1.9%, over 1994. For 1994, average deposits increased $13,104,000, or .3%, over 1993. Exclusive of the average deposits of Pioneer for the year ended December 31, 1994, average deposits decreased $213,559,000, or 4.4%. The following table presents the average amount and average rate paid on deposits for the years indicated:
- --------------------------------------------------------------------------------------------------------- 1995 1994 1993 --------------------- ---------------------- ------------------ (dollars in millions) AMOUNT RATE Amount Rate Amount Rate - --------------------------------------------------------------------------------------------------------- Domestic: Noninterest- bearing demand $ 831 --% $ 877 --% $ 925 --% Interest-bearing demand 1,115 2.69 1,207 2.10 1,248 2.14 Savings 1,177 2.91 1,422 2.17 1,545 2.15 Time 1,708 5.44 1,369 4.11 1,223 4.35 Foreign 347 5.42 207 3.75 128 2.98 - ----------------------------------------- ------ ------ TOTAL $5,178 4.05% $5,082 2.86% $5,069 2.82% ===========================================================================================================
The following table presents the maturity distribution of domestic time certificates of deposits of $100,000 or more at December 31 for the years indicated:
- ---------------------------------------------------------------------------- (in millions) 1995 1994 1993 - ---------------------------------------------------------------------------- 3 months or less $337 $236 $231 Over 3 months through 6 months 177 104 66 Over 6 months through 12 months 183 189 97 Over 12 months 164 83 129 - ---------------------------------------------------------------------------- TOTAL $861 $612 $523 ============================================================================
[GRAPH] DEPOSITS (in millions) 1995 $5,337 1994 $5,088 1993 $5,220 1992 $5,152 1991 $5,358 19 33 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- LIQUIDITY MANAGEMENT Liquidity refers to the Company's ability to provide sufficient cash flows to fund operations and to meet obligations and commitments on a timely basis at reasonable costs. The Company achieves its liquidity objectives from both assets and liabilities. Asset-based liquidity is derived from its investment securities portfolio and short-term investments which can be readily converted to cash. These liquid assets consist of cash and due from banks, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell and investment securities. The aggregate of these assets represented 25.0% of total assets at the end of 1995 compared to 21.3% at the end of 1994. Additional information related to the Company's off-balance sheet instruments at December 31, 1995 and 1994 is included in Note 16 to the Financial Statements. Liability-based liquidity is provided primarily from deposits. Average total deposits for 1995 increased $96,122,000, or 1.9%, to $5,178,352,000. Average total deposits for 1995 and 1994 funded 68.8% and 70.6%, respectively, of average total assets. Additional liquidity was provided from short-term borrowings, which consisted of commercial paper issued by the Company, Federal funds purchased and securities sold under agreements to repurchase, lines of credit from other banks and credit facilities from the FHLB. Additional information on short-term borrowings is provided in Note 7 to the Financial Statements. Also, the Company has access to offshore deposits in the international market which provides another available source of funds. The Company's commercial paper is assigned a rating of A2 by Standard & Poor's ("S&P"). The Company's subordinated debt is assigned a rating of Baa-1 by Moody's Investors Service and BBB by S&P. The Company currently has a Thomson BankWatch, Inc. rating of B. As indicated in the Consolidated Statements of Cash Flows, net cash provided by operating activities was $129,840,000 and net cash used in investing and financing activities was $88,683,000 for 1995. For 1994, net cash provided by operating and financing activities was $305,940,000 and net cash used in investing activities was $479,175,000. For 1993, net cash provided by operating and financing activities was $197,721,000 and net cash used in investing activities was $87,251,000. The Company's ability to pay dividends depends primarily upon dividends and other payments from its subsidiaries, which are subject to certain limitations as described in Note 10 to the Financial Statements. ASSET/LIABILITY MANAGEMENT The Company actively measures and manages its exposure to interest rate risk in order to maintain a relatively stable net interest margin and to allow it to take advantage of profitable business opportunities. Interest rate risk refers to the exposure to earnings and capital arising from changes in future interest rates. The Company carefully measures and monitors its interest rate risk exposure using gap analysis, market value of equity analysis, and net interest income simulations. The net interest income simulations are usually done on a quarterly basis, or more frequently if there have been major changes to the balance sheet or interest rates. These simulations look at how the Company's net interest income is affected from flat, rising, or declining rates using the current balance sheet and simulating net interest income going forward two years. Under these simulations, at December 31, 1995, the Company's exposure to changes in interest rates was well within current guidelines which allow for no more than a 10% adverse change in net interest income for a 1% change in rates over one year. Interest rate risk exposure is managed through the use of off-balance sheet instruments such as swaps or floors and through extending or shortening the duration of the investment securities portfolio. 20 34 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY The Company's interest rate sensitivity position as of December 31, 1995, is presented below. The interest rate sensitivity gap, shown at the bottom of the table, refers to the difference between assets and liabilities subject to repricing, maturity, runoff and/or volatility during a specified period. The gap is adjusted for interest rate swaps which are hedging certain assets or liabilities on the balance sheet. (For ease of analysis, all of the off-balance sheet adjustments are consolidated into one line on the gap table.) Since all interest rates and yields do not adjust at the same velocity or magnitude, and since volatility is subject to change, the gap is only a general indicator of interest rate sensitivity. At December 31, 1995, the cumulative one-year gap for the Company was a negative $226.2 million, representing 2.99% of total assets. This remains well within the Company's current guidelines of +/-10% of total assets for the cumulative one-year gap.
- -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 0-3 Months 4-12 Months 1-5 Years Over 5 Years Total - -------------------------------------------------------------------------------------------------------------------------- Assets: Interest-bearing deposits in other banks $ 244,570 $ -- $ -- $ -- $ 244,570 Federal funds sold and securities purchased under agreements to resell 169,803 -- -- -- 169,803 Investment securities 435,778 324,380 270,727 144,408 1,175,293 Net loans and leases: Commercial, financial and agricultural 925,697 198,018 73,911 65,936 1,263,562 Real estate -- construction 223,334 11,670 19,662 2,445 257,111 Foreign 75,263 62,021 70,572 11,151 219,007 Other 1,228,975 1,119,876 699,539 392,741 3,441,131 - -------------------------------------------------------------------------------------------------------------------------- Total earning assets 3,303,420 1,715,965 1,134,411 616,681 6,770,477 Noninterest-earning assets 238,377 -- -- 555,655 794,032 - -------------------------------------------------------------------------------------------------------------------------- Total assets $3,541,797 $1,715,965 $1,134,411 $1,172,336 $7,564,509 ========================================================================================================================== Liabilities and stockholders' equity: Interest-bearing deposits $3,207,653 $ 841,345 $ 324,712 $ 30,315 $4,404,025 Noninterest-bearing deposits 184,053 -- -- 770,235 954,288 Short-term borrowings 812,995 263,334 6,850 -- 1,083,179 Long-term debt 50,000 -- 88,000 100,752 238,752 Stockholders' equity -- -- -- 649,537 649,537 Off-balance sheet adjustment 126,187 (59,077) (139,828) 72,718 -- Noninterest-bearing liabilities 57,426 -- -- 177,302 234,728 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $4,438,314 $1,045,602 $ 279,734 $1,800,859 $7,564,509 ========================================================================================================================== Interest sensitivity gap $ (896,517) $ 670,363 $ 854,677 $ (628,523) Cumulative gap $ (896,517) $ (226,154) $ 628,523 $ -- Cumulative gap as a percent of total assets (11.85)% (2.99)% 8.31% --% ==========================================================================================================================
21 35 First Hawaiian, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- LEASE COMMITMENT In December 1993, the Company entered into a noncancelable agreement to lease a certain office building that is currently under construction on the site of its former downtown headquarters block, which it owns in fee simple. Concurrently, the Company entered into a ground lease of the land to the lessor of the building. Rent obligation for the building will commence on December 1, 1996 and will expire on December 1, 2003. The lease agreement is not anticipated to have a material impact on the results of operations in the future. Additional information on the lease agreement is provided in Note 15 to the Financial Statements. CAPITAL REQUIREMENTS Bank holding companies are required to comply with risk-based capital guidelines as established by the Federal Reserve Board. The guidelines define qualifying capital (Tier 1 Capital and Total Capital) and risk-weighted assets. Tier 1 Capital includes stockholders' equity less unrealized valuation adjustment and goodwill and, beginning in 1993, all other intangibles, subject to certain exceptions described below. Total Capital includes, in addition to Tier 1 Capital, subordinated and other qualifying term debt and a portion of the allowance for loan and lease losses. The Tier 1 component must comprise at least 50% of qualifying Total Capital. Risk-based capital ratios are calculated with reference to risk-weighted assets which include both on- and off-balance sheet exposures. A company's risk-based capital ratio is calculated by dividing its qualifying capital (the numerator of the ratio) by its risk-weighted assets (the denominator). The minimum required qualifying Total Capital ratio is 8%, of which at least 4% must consist of Tier 1 Capital. In addition, bank holding companies are required to maintain a minimum leverage ratio of Tier 1 Capital to average quarterly total assets (net of goodwill and other intangibles, subject to certain exceptions). The Federal Reserve Board has stated that the minimum leverage ratio is 3% for the most highly-rated banking organizations which are not experiencing or anticipating significant growth. Other banking organizations are expected to maintain leverage ratios of at least one to two percent higher. The following tables present the Company's regulatory capital position at December 31, 1995: RISK-BASED CAPITAL RATIOS
- ---------------------------------------------------------------------------------- (dollars in thousands) AMOUNT RATIO - ---------------------------------------------------------------------------------- Tier 1 Capital $ 565,366 9.03% Tier 1 Capital minimum requirement 250,301 4.00 - ---------------------------------------------------------------------------------- EXCESS $ 315,065 5.03% ================================================================================== Total Capital $ 743,585 11.88% Total Capital minimum requirement 500,602 8.00 - ---------------------------------------------------------------------------------- EXCESS $ 242,983 3.88% ================================================================================== RISK-WEIGHTED ASSETS $6,257,529 ===================================================================
LEVERAGE RATIO
- ---------------------------------------------------------------------------------- (dollars in thousands) AMOUNT RATIO - ---------------------------------------------------------------------------------- Tier 1 Capital to average quarterly total assets (net of certain intangibles) (Tier 1 Leverage Ratio) $ 565,366 7.72% Minimum leverage requirement 219,829 3.00 - ---------------------------------------------------------------------------------- EXCESS $ 345,537 4.72% ================================================================================== AVERAGE QUARTERLY TOTAL ASSETS (NET OF CERTAIN INTANGIBLES) $7,327,647 ===================================================================
22 36 First Hawaiian, Inc. and Subsidiaries SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) - -------------------------------------------------------------------------------- FOURTH QUARTER RESULTS Earnings for the fourth quarter of 1995 were $19,696,000, an increase of $4,699,000, or 31.3%, over the $14,997,000 earned during the same quarter in 1994. Earnings per share for the fourth quarter of 1995 were up 34.0% to $.63, compared to $.47 for the year-earlier period. Earnings increased while also increasing the provision for loan and lease losses by approximately $17,500,000, due to two nonrecurring items. These were: (1) a pre-tax gain of $20,766,000 (recorded as a pension credit in total noninterest expenses below) in connection with the curtailment of the Company's noncontributory pension plan; and (2) the decrease in FDIC insurance expense of $2,228,000 primarily as a result of a reduction in the insurance premiums from 23 cents to 4 cents per $100. The earnings for the fourth quarter of 1994 included a pre-tax loss of $5,000,000 related to estimated losses attributable to investments made in the trust area that were outside of certain clients' express investment guidelines. A summary of unaudited quarterly financial data for 1995 and 1994 is presented below:
- ------------------------------------------------------------------------------------------------------------- Quarter --------------------------------------------------- Annual (in thousands, except per share data) First Second Third Fourth Total - ------------------------------------------------------------------------------------------------------------- 1995 INTEREST INCOME $138,594 $141,645 $140,024 $139,694 $559,957 INTEREST EXPENSE 65,841 70,228 65,026 64,202 265,297 - ------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 72,753 71,417 74,998 75,492 294,660 PROVISION FOR LOAN AND LEASE LOSSES 3,340 3,341 10,699 20,727 38,107 TOTAL NONINTEREST INCOME 22,983 21,700 27,466 22,729 94,878 TOTAL NONINTEREST EXPENSES 63,345 60,335 61,457 44,156 229,293 - ------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 29,051 29,441 30,308 33,338 122,138 INCOME TAXES 10,281 10,573 10,637 13,642 45,133 - ------------------------------------------------------------------------------------------------------------- NET INCOME $ 18,770 $ 18,868 $ 19,671 $ 19,696 $ 77,005 ============================================================================================================= NET INCOME PER SHARE $.59 $.59 $.62 $.63 $2.43 ============================================================================================================= 1994 Interest income $110,044 $114,560 $120,925 $130,231 $475,760 Interest expense 38,961 41,560 44,649 54,518 179,688 - ------------------------------------------------------------------------------------------------------------- Net interest income 71,083 73,000 76,276 75,713 296,072 Provision for loan and lease losses 3,843 3,288 6,548 9,243 22,922 Total noninterest income 23,069 21,099 21,105 21,399 86,672 Total noninterest expenses 61,404 61,578 60,489 64,850 248,321 - ------------------------------------------------------------------------------------------------------------- Income before income taxes 28,905 29,233 30,344 23,019 111,501 Income taxes 10,168 10,233 10,567 8,022 38,990 - ------------------------------------------------------------------------------------------------------------- Net income $ 18,737 $ 19,000 $ 19,777 $ 14,997 $ 72,511 ============================================================================================================= Net income per share $.58 $.59 $.61 $.47 $2.25 =============================================================================================================
23 37 First Hawaiian, Inc. and Subsidiaries SUPPLEMENTARY DATA - -------------------------------------------------------------------------------- INVESTMENT SECURITIES BY MATURITIES AND WEIGHTED AVERAGE YIELDS In December 1995, the Company made a one-time reclassification of its investment securities portfolio from held-to-maturity to available-for-sale as allowed by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The following table presents the maturities of available-for-sale investment securities, excluding securities which have no stated maturity at December 31, 1995, and the weighted average yields (for obligations exempt from Federal income taxes on a taxable equivalent basis assuming a 35% tax rate) of such securities. The tax equivalent adjustment is made for items exempt from Federal income taxes to make them comparable with taxable items before any income taxes are applied.
MATURITY -------------------------------------------------------------- AFTER ONE AFTER FIVE WITHIN BUT WITHIN BUT WITHIN AFTER ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL ------------- ------------ ------------- ------------- ------------- (dollars in millions) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - -------------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. Government agencies and corporations $ 193 5.11% $ 227 5.88% $ 1 6.75% $ 335 7.45% $ 756 6.38% States and political subdivisions 22 8.01 31 7.13 -- -- 1 5.71 54 7.44 Collateralized mortgage obligations -- -- 28 4.51 -- -- 69 5.18 97 4.99 Other 12 6.22 -- -- -- -- 191 6.33 203 6.32 - ------------------------------------ ----- ---- ----- ------ Total $ 227 5.45% $ 286 5.88% $ 1 6.75% $ 596 6.82% $1,110 6.30% ==============================================================================================================
Note: The weighted average yields were calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. 24 38 REPORT OF INDEPENDENT ACCOUNTANTS First Hawaiian, Inc. and Subsidiaries - -------------------------------------------------------------------------------- TO THE STOCKHOLDERS FIRST HAWAIIAN, INC. We have audited the accompanying consolidated balance sheets of First Hawaiian, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Hawaiian, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 13 to the financial statements, the Company changed its method of accounting for income taxes in 1993. [COOPERS & LYBRAND SIG] Honolulu, Hawaii January 17, 1996 25 39 CONSOLIDATED BALANCE SHEETS First Hawaiian, Inc. and Subsidiaries
DECEMBER 31, ---------------------------- (in thousands, except number of shares and per share data) 1995 1994 - -------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits in other banks $ 244,570 $ 11,670 Federal funds sold and securities purchased under agreements to resell 169,803 180,000 Investment securities: Held-to-maturity (fair value of $981,651 in 1994) (note 2) -- 995,887 Available-for-sale (note 2) 1,175,293 151,992 Loans and leases: Loans and leases (note 3) 5,259,545 5,533,565 Less allowance for loan and lease losses (note 4) 78,733 61,250 - -------------------------------------------------------------------------------------------------------------- Net loans and leases 5,180,812 5,472,315 - -------------------------------------------------------------------------------------------------------------- Total earning assets 6,770,478 6,811,864 Cash and due from banks 304,051 262,894 Premises and equipment (note 5) 241,987 245,338 Customers' acceptance liability 1,995 732 Core deposit premium (net of accumulated amortization of $6,634 in 1995 and $4,889 in 1994) (note 1) 16,665 13,722 Goodwill (net of accumulated amortization of $13,453 in 1995 and $9,866 in 1994) (note 1) 75,309 78,896 Other assets 154,024 121,698 - -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $7,564,509 $7,535,144 ============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 913,228 $ 861,869 Interest-bearing demand 1,073,136 1,160,219 Savings 1,147,997 1,226,877 Time (fair value of $1,937,858 in 1995 and $1,508,630 in 1994) (note 6) 1,927,011 1,503,347 Foreign (fair value of $297,984 in 1995 and $400,900 in 1994) (note 6) 296,941 399,901 - -------------------------------------------------------------------------------------------------------------- Total deposits 5,358,313 5,152,213 - -------------------------------------------------------------------------------------------------------------- Short-term borrowings (note 7) 1,083,179 1,329,816 Acceptances outstanding 1,995 732 Other liabilities 232,733 205,108 Long-term debt (note 8) 238,752 219,331 - -------------------------------------------------------------------------------------------------------------- Total liabilities 6,914,972 6,907,200 ============================================================================================================== Commitments and contingent liabilities (notes 11, 15 and 16) Stockholders' equity: Common stock $5 par value (notes 9 and 11) Authorized -- 100,000,000 shares Issued -- 32,542,797 shares in 1995 and 1994 162,713 162,713 Surplus 133,925 133,820 Retained earnings (note 10) 385,976 346,339 Unrealized valuation adjustment 5,489 (1,033) Treasury stock, at cost -- 1,397,957 shares in 1995 and 516,623 shares in 1994 (38,566) (13,895) - -------------------------------------------------------------------------------------------------------------- Total stockholders' equity 649,537 627,944 - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,564,509 $7,535,144 ==============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 26 40
CONSOLIDATED STATEMENTS OF INCOME First Hawaiian, Inc. and Subsidiaries - -------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------- (in thousands, except number of shares and per share data) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $470,110 $407,531 $355,961 Lease financing income 11,334 10,844 12,722 Interest on investment securities: Taxable interest income 57,890 45,248 44,667 Exempt from Federal income taxes 4,893 4,332 3,185 Other interest income 15,730 7,805 12,396 - -------------------------------------------------------------------------------------------------------------- Total interest income 559,957 475,760 428,931 - -------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits (note 6) 176,048 120,289 116,887 Short-term borrowings 74,370 47,813 26,477 Long-term debt 14,879 11,586 7,345 - -------------------------------------------------------------------------------------------------------------- Total interest expense 265,297 179,688 150,709 - -------------------------------------------------------------------------------------------------------------- Net interest income 294,660 296,072 278,222 Provision for loan and lease losses (note 4) 38,107 22,922 13,262 - -------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan and lease losses 256,553 273,150 264,960 - -------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust income 23,034 22,847 21,401 Service charges on deposit accounts 24,150 24,014 21,791 Other service charges and fees 35,551 31,937 27,660 Securities gains, net (note 2) 144 178 1,955 Other 11,999 7,696 6,780 - -------------------------------------------------------------------------------------------------------------- Total noninterest income 94,878 86,672 79,587 - -------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Salaries and wages 94,119 92,237 86,011 Employee benefits (note 11) 7,209 26,484 24,783 Occupancy expense (notes 5 and 15) 25,706 23,280 20,416 Equipment expense (notes 5 and 15) 23,907 24,812 20,243 Other (note 12) 78,352 81,508 73,989 - -------------------------------------------------------------------------------------------------------------- Total noninterest expenses 229,293 248,321 225,442 - -------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of a change in accounting principle 122,138 111,501 119,105 - -------------------------------------------------------------------------------------------------------------- INCOME TAXES (note 13) Provision before effect of change in tax rate 45,133 38,990 38,976 Adjustment to deferred tax liability and current tax provision for change in tax rate -- -- 1,922 - -------------------------------------------------------------------------------------------------------------- Total income taxes 45,133 38,990 40,898 - -------------------------------------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle 77,005 72,511 78,207 Cumulative effect of a change in accounting principle (note 13) -- -- 3,650 - -------------------------------------------------------------------------------------------------------------- Net income $ 77,005 $ 72,511 $ 81,857 ============================================================================================================== PER SHARE DATA Income before cumulative effect of a change in accounting principle $2.43 $2.25 $2.41 Cumulative effect of a change in accounting principle -- -- .11 - -------------------------------------------------------------------------------------------------------------- NET INCOME $2.43 $2.25 $2.52 ============================================================================================================== CASH DIVIDENDS $1.18 $1.18 $1.135 ============================================================================================================== AVERAGE SHARES OUTSTANDING 31,734,669 32,259,321 32,505,109 ==============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 27 41 First Hawaiian, Inc. and Subsidiaries and First Hawaiian, Inc. (Parent Company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Unrealized (in thousands, except number of ------------------- Retained Valuation Treasury shares and per share data) Shares Amount Surplus Earnings Adjustment Stock Total - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 32,501,611 $162,507 $132,889 $266,800 $ -- $ -- $562,196 Net income -- 1993 -- -- -- 81,857 -- -- 81,857 Incentive Plan for Key Executives (note 11) -- -- 137 -- -- -- 137 Cash dividends ($1.135 per share) (note 10) -- -- -- (36,821) -- -- (36,821) Issuance of common stock (note 9) 41,186 206 794 -- -- -- 1,000 - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 32,542,797 162,713 133,820 311,836 -- -- 608,369 Net income -- 1994 -- -- -- 72,511 -- -- 72,511 Purchase of treasury stock -- -- -- -- -- (13,895) (13,895) Cash dividends ($1.18 per share) (note 10) -- -- -- (38,008) -- -- (38,008) Unrealized valuation adjustment (note 2) -- -- -- -- (1,033) -- (1,033) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 32,542,797 162,713 133,820 346,339 (1,033) (13,895) 627,944 Net income -- 1995 -- -- -- 77,005 -- -- 77,005 Purchase of treasury stock -- -- -- -- -- (24,671) (24,671) Cash dividends ($1.18 per share) (note 10) -- -- -- (37,368) -- -- (37,368) Unrealized valuation adjustment (note 2) -- -- -- -- 6,522 -- 6,522 Incentive Plan for Key Executives (note 11) -- -- 105 -- -- -- 105 - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 32,542,797 $162,713 $133,925 $385,976 $ 5,489 $(38,566) $649,537 ==========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 28 42 First Hawaiian, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------
Year Ended December 31, ------------------------------------------ (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ CASH AND DUE FROM BANKS AT BEGINNING OF YEAR $ 262,894 $ 436,129 $ 325,659 - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income 77,005 72,511 81,857 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 38,107 22,922 13,262 Depreciation and amortization 27,798 24,766 20,765 Gain on curtailment of noncontributory pension plan (20,766) -- -- Income taxes 20,953 6,826 (5,415) Adjustment to deferred tax liability and current tax provision for change in tax rate -- -- 1,922 Cumulative effect of a change in accounting principle -- -- (3,650) Decrease (increase) in interest receivable (5,154) (7,646) 170 Increase (decrease) in interest payable 7,655 7,956 1,424 Decrease (increase) in prepaid expenses (48) 2,184 (1,031) Write-off of building costs -- -- 5,444 Other (15,710) 36,204 20,136 - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 129,840 165,723 134,884 - ------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Net decrease (increase) in interest-bearing deposits in other banks (232,900) 105,066 39,580 Net decrease (increase) in Federal funds sold and securities purchased under agreements to resell 10,197 (145,000) 370,000 Purchase of held-to-maturity investment securities (247,559) (240,706) (940,385) Proceeds from maturity of held-to-maturity investment securities 690,357 376,844 821,173 Purchase of available-for-sale investment securities (29,921) (115,032) (263,828) Proceeds from sale of available-for-sale investment securities 15,000 15,195 137,709 Proceeds from maturity of available-for-sale investment securities 17,020 45,265 27,666 Net increase in loans and leases to customers (210,274) (493,871) (166,146) Capital expenditures (13,072) (36,634) (60,067) Purchase of Pioneer Fed BanCorp, Inc., net of cash acquired of $18,157 -- -- (68,950) Other (4,376) 9,698 15,997 - ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (5,528) (479,175) (87,251) - ------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase (decrease) in deposits 206,100 (67,915) (293,973) Net increase (decrease) in short-term borrowings (246,637) 237,134 309,631 Proceeds from long-term debt 19,447 21,500 108,000 Payments on long-term debt (26) (936) (21,525) Cash dividends paid (37,368) (38,008) (36,821) Repurchased common stock (24,671) (11,558) (2,475) - ------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (83,155) 140,217 62,837 - ------------------------------------------------------------------------------------------------------------ CASH AND DUE FROM BANKS AT END OF YEAR $ 304,051 $ 262,894 $ 436,129 ============================================================================================================ Supplemental disclosures: Interest paid $ 256,906 $ 171,732 $ 160,551 Net income taxes paid $ 24,181 $ 24,311 $ 40,945 Supplemental schedule of noncash investing activities: Loans exchanged for mortgage-backed securities $ 461,449 $ -- $ -- Transfer of securities from held-to-maturity to available-for-sale, at estimated fair value $1,023,144 $ -- $ -- ============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 29 43 NOTES TO FINANCIAL STATEMENTS First Hawaiian, Inc. and Subsidiaries - -------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of First Hawaiian, Inc. and Subsidiaries (the "Company") conform with generally accepted accounting principles and practices within the banking industry. The following is a summary of the significant accounting policies: RECLASSIFICATIONS Certain reclassifications were made to the 1994 and 1993 Financial Statements to conform to the 1995 presentation. Such reclassifications did not have a material effect on the Financial Statements. CONSOLIDATION The consolidated financial statements of the Company include the accounts of First Hawaiian, Inc. (the "Parent") and its wholly-owned subsidiary companies - -- First Hawaiian Bank and its wholly-owned subsidiaries (the "Bank"); Pioneer Federal Savings Bank ("Pioneer") and its wholly-owned subsidiary; First Hawaiian Creditcorp, Inc. ("Creditcorp"); First Hawaiian Leasing, Inc. ("Leasing"); and FHI International, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT SECURITIES Investment securities consist principally of debt instruments issued by the U.S. Treasury and other U.S. Government agencies and corporations, state and local government units and asset-backed securities. Investments in and obligations to individual counterparties are presented as net amounts in the consolidated financial statements of the Company only if the conditions specified in Financial Accounting Standards Board ("FASB") Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," are met. No such netting occurred as of December 31, 1995. As of December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS No. 115, investment securities are classified in three categories and accounted for as follows: (1) held-to-maturity securities are debt securities, which the Company has the positive intent and ability to hold to maturity, and are reported at amortized cost; (2) trading securities are debt securities that are bought and held principally for the purpose of selling them in the near term and are reported at fair value, with unrealized gains and losses included in current earnings; and (3) available-for-sale securities are debt securities not classified as either held-to-maturity securities or trading securities and are reported at fair value, with unrealized gains and losses excluded from current earnings and reported in a separate component of stockholders' equity. In December 1995, the Company made a one-time reclassification of its investment securities portfolio from held-to-maturity to available-for-sale as allowed by SFAS No. 115 which resulted in an unrealized gain of $8,606,000. Gains and losses realized on the sales of investment securities are determined using the specific identification method. LOANS AND LEASE FINANCING Loans are stated at their principal outstanding amounts, net of any unearned discounts. Interest income on loans is accrued and recognized on the principal amount outstanding. Loan origination fees and substantially all loan commitment fees are deferred and accounted for as an adjustment of the yield. Lease financing transactions consist of two types: (1) Equipment without outside financing is accounted for using the direct financing method with income recognized over the life of the lease based upon a constant periodic rate of return on the net investment in the lease. (2) Leveraged lease transactions are subject to outside financing through one or more participants, without recourse to the Company. These transactions are accounted for by recording as the net investment in each lease the aggregate of rentals receivable (net of principal and interest on the related nonrecourse debt) and estimated residual value of the equipment less the unearned income. Income from these lease transactions is recognized during the periods in which the net investment is positive. Loans and leases are placed on nonaccrual status when serious doubt exists as to the collectibility of the principal and/or interest. When loans are placed on nonaccrual status, any accrued and unpaid interest is reversed against interest income of the current period. Interest payments received on nonaccrual loans and leases are applied as a reduction of the principal when concern exists as to the ultimate collection of the principal; otherwise, such payments are recorded as income. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectibility of principal and interest. 30 44 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) ALLOWANCE FOR LOAN AND LEASE LOSSES Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," amended in October 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." Under the new standard, a loan is impaired, based on current information and events, if it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. Impairment is based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Impairment losses are included in the provision for loan and lease losses. The adoption of SFAS No. 114 did not result in an additional provision for loan and lease losses primarily because the majority of impaired loan valuations continue to be based on the fair value of the collateral. The allowance for loan and lease losses (the "Allowance") is maintained at a level which, in management's judgment, is adequate to absorb future losses. Estimates of future loan and lease losses involve judgment and assumptions as to various factors which, in management's judgment, deserve current recognition in estimating such losses and in determining the adequacy of the Allowance. Principal factors considered by management include the historical loss experience, the value and adequacy of collateral, the level of nonperforming (nonaccrual and renegotiated) loans and leases, loan concentrations, the growth and composition of the portfolio, the review of monthly delinquency reports, the results of examinations of individual loans and leases and/or evaluation of the overall portfolio by senior credit personnel, internal auditors, and Federal and State regulatory agencies, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay and general economic conditions. The Allowance is reduced by loans and leases charged off when collectibility becomes doubtful and the underlying collateral, if any, is considered inadequate to liquidate the outstanding debt. Recoveries on loans and leases previously charged off are added to the Allowance. OTHER REAL ESTATE OWNED Other real estate owned, included in other assets, is comprised of properties acquired primarily through foreclosure proceedings. When acquired, these properties are valued at fair value which establishes the new cost basis of other real estate owned. Losses arising at the time of acquisition of such properties are charged against the Allowance. Subsequent to acquisition, such properties are carried at the lower of cost or fair value less estimated selling costs. Write-downs or losses from the disposition of such properties subsequent to the date of acquisition are included in other noninterest expenses. PREMISES AND EQUIPMENT Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of 10-40 years for premises, 3-13 years for equipment and the lease term for leasehold improvements. CORE DEPOSIT PREMIUM AND GOODWILL The core deposit premium is being amortized on the straight-line method over various lives ranging from 9 to 20 years. The excess of the purchase price over the fair value of the net assets acquired is accounted for as goodwill and is being amortized on the straight-line method over 25 years. In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 applies to fiscal years beginning after December 15, 1995. The adoption of this standard is not expected to have a material effect on the Company's financial position or results of operations. INCOME TAXES Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Excise tax credits relating to premises and equipment are accounted for under the flow-through method which recognizes the benefit in the year the asset is placed in service. The investment and excise tax credits related to lease equipment, except for investment and excise tax credits that are passed on to lessees, are recognized during the periods in which the net investment is positive. A consolidated Federal income tax return is filed for the Company. Amounts equal to income tax benefits of those companies having taxable losses or credits are reimbursed by other companies which would have incurred current income tax liabilities. INTEREST RATE SWAPS AND FLOORS The Company engages in interest rate swap and floor activities in managing its interest rate risk. Premiums for purchased floors are amortized over the life of the con- 31 45 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) tracts. Since the contracts represent an exchange of interest payments and the underlying principal balances are not affected, there is no effect on the total assets or liabilities of the Company. The income or expense from these contracts is included as part of the interest income or expense for the corresponding asset or liability being hedged. PER SHARE DATA Net income per share is computed by dividing net income by the average number of shares outstanding during the year. The impact of common stock equivalents, such as stock options, is not material; therefore, they are not included in the computation. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating the fair value of financial instruments: Cash and due from banks: The carrying amounts reported in the Consolidated Balance Sheets of cash and short-term instruments approximate fair values. Investment securities (including mortgage-backed securities): Fair values of investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans and leases: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values of commercial and industrial loans, financial institution loans, agricultural loans, certain mortgage loans (e.g. 1-4 family residential, commercial real estate and rental property), credit card loans, and other consumer loans are estimated using discounted cash flow analyses, which utilize interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. Off-balance sheet commitments and contingent liabilities: Fair values of off-balance sheet commitments and contingent liabilities are based upon quoted market prices of comparable instruments (interest rate floors); fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing (letters of credit and commitments to extend credit); or, pricing models based upon brokers' quoted markets, current levels of interest rates, and specific cash flow schedules (interest rate swaps). Deposits: The fair values of demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The carrying amounts of overnight Federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings approximate their fair values. Long-term debt: The fair values of the Company's long-term debt (other than deposits) are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 1. ACQUISITIONS PACIFIC NORTHWEST On December 4, 1995, the Company entered into certain Branch Purchase and Assumption Agreements to purchase certain assets, principally loans, and assume certain liabilities, principally deposit accounts, of U.S. Bancorp and West One Bancorp. Under the agreement, the Company will purchase a total of 31 branches, 25 in Oregon, five in Washington and one in Idaho and will pay a deposit premium of 5.25% on approximately $741 million in deposits. Total loans to be purchased approximate $426 million. The Company will account for the proposed acquisition utilizing the purchase method. The proposed acquisition is contingent on the approval of certain regulatory agencies, including but not limited to, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and state regulatory authorities. The Company anticipates that this acquisition will be completed during the second quarter of 1996. PIONEER FEDERAL SAVINGS BANK On August 6, 1993, the Company acquired for cash all of the outstanding stock of Pioneer Fed BanCorp, Inc. ("Pioneer Holdings") at a purchase price of $87 million through the merger of Pioneer Holdings with and into the Company (the "Merger"). As a result of the Merger, Pioneer Federal Savings Bank, a savings bank with 19 branches statewide, became a wholly-owned subsidiary of the Company. The acquisition was accounted for using the purchase method of accounting and the results of operations of Pioneer are included in the Consolidated Statements of Income from the date of acquisition. The excess of cost over fair value of net assets acquired amounted to approximately $22 million. 32 46 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- The following unaudited pro forma information shows the consolidated results of operations as though the above acquisition of Pioneer Holdings, including the related purchase accounting adjustments, had been made at the beginning of 1993:
- ------------------------------------------------------------------ (in thousands, except per share data) 1993 - ------------------------------------------------------------------ Interest income $469,413 Interest expense $183,860 Noninterest income $ 72,313 Noninterest expenses $227,473 Net income $ 81,419 Earnings per share $ 2.50 ==================================================================
2. INVESTMENT SECURITIES AVAILABLE-FOR-SALE Amortized cost and fair values of available-for-sale investment securities at December 31, 1995 and 1994 were as follows:
1995 -------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR (in thousands) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------- U.S. TREASURY AND OTHER U.S. GOVERNMENT AGENCIES AND CORPORATIONS $ 755,322 $6,931 $101 $ 762,152 COLLATERALIZED MORTGAGE OBLIGATIONS 97,360 1 386 96,975 STATES AND POLITICAL SUBDIVISIONS 54,176 1,129 224 55,081 OTHER 259,320 1,859 94 261,085 - -------------------------------------------------------------------------------------------------- TOTAL AVAILABLE-FOR- SALE INVESTMENT SECURITIES $1,166,178 $9,920 $805 $1,175,293 ================================================================================================== 1994 -------------------------------------------------------------- Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. Government agencies and corporations $ 50,047 $ -- $ 922 $ 49,125 Collateralized mortgage obligations 25,961 -- 371 25,590 States and political subdivisions 11,700 -- 423 11,277 Other 66,000 -- -- 66,000 - -------------------------------------------------------------------------------------------------- Total available-for- sale investment securities $153,708 $ -- $1,716 $151,992 ==================================================================================================
The amortized cost and fair values of available-for-sale investment securities at December 31, 1995, by contractual maturity, excluding securities which have no stated maturity, were as follows:
- ------------------------------------------------------------------------------------ AMORTIZED FAIR (in thousands) COST VALUE - ------------------------------------------------------------------------------------ DUE WITHIN ONE YEAR $ 226,580 $ 227,101 DUE AFTER ONE BUT WITHIN FIVE YEARS 286,126 288,876 DUE AFTER FIVE BUT WITHIN TEN YEARS 1,204 1,197 DUE AFTER TEN YEARS 595,787 601,638 - ------------------------------------------------------------------------------------ TOTAL AVAILABLE-FOR-SALE INVESTMENT SECURITIES $1,109,697 $1,118,812 ====================================================================================
The Company held no trading securities as of December 31, 1995 and 1994. Investment securities with an aggregate book value of $1,064,987,000 at December 31, 1995 were pledged to secure public deposits and repurchase agreements as required by law. The Company did not hold investment securities of any single issuer (other than the U.S. Government and its agencies) which were in excess of 10% of stockholders' equity at December 31, 1995. Gross gains of $224,000, $180,000 and $2,038,000 and gross losses of $80,000, $2,000 and $83,000 were realized on sales of investment securities during 1995, 1994 and 1993, respectively. At December 31, 1995, collateralized mortgage obligations were comprised of $77,311,000 planned amortization class bonds with an estimated average life of .2 years and $20,049,000 floating rate bonds with an estimated average life of 2.2 years. HELD-TO-MATURITY At December 31, 1995 there were no investment securities classified as held-to-maturity. Book and fair values of held-to-maturity investment securities at December 31, 1994 were as follows:
1994 ------------------------------------------------------------ Book Unrealized Unrealized Fair (in thousands) Value Gains Losses Value - -------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. Government agencies and corporations $568,894 $ -- $10,924 $557,970 Collateralized mortgage obligations 200,420 -- 5,689 194,731 States and political subdivisions 154,493 3,600 1,087 157,006 Other 72,080 -- 136 71,944 - -------------------------------------------------------------------------------------------------- Total held-to-maturity investment securities $995,887 $ 3,600 $17,836 $981,651 ==================================================================================================
33 47 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- 3. LOANS AND LEASES At December 31, 1995 and 1994, loans and leases were comprised of the following:
- --------------------------------------------------------------------------------------------------- 1995 1994 ------------------------ ------------------------ (in thousands) BOOK VALUE FAIR VALUE Book Value Fair Value - --------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $1,315,736 $1,308,078 $1,264,157 $1,216,000 Real estate: Construction 256,943 257,033 320,783 319,575 Commercial 996,715 1,026,412 964,758 1,073,744 Residential 1,766,292 1,745,777 2,049,489 1,998,346 Consumer 473,909 480,452 467,827 467,792 Lease financing 241,721 242,402 230,587 230,598 Foreign 208,229 209,481 235,964 230,455 - --------------------------------------------------------------------------------------------------- TOTAL LOANS AND LEASES $5,259,545 $5,269,635 $5,533,565 $5,536,510 ==================================================================================================
At December 31, 1995 and 1994, loans and leases aggregating $82,915,000 and $58,952,000, respectively, were on a nonaccrual basis. In the normal course of business, the Company makes loans to its executive officers and directors, and to companies and individuals affiliated with executive officers and directors of the Company. Changes in the loans to such parties were as follows:
- ------------------------------------------------------------------------------- (in thousands) 1995 1994 - ------------------------------------------------------------------------------- Balance at beginning of year $296,248 $314,988 New loans made 54,623 53,734 Repayments (53,889) (72,474) - ------------------------------------------------------------------------------- BALANCE AT END OF YEAR $296,982 $296,248 ===============================================================================
At December 31, 1995 and 1994, loans to such parties by the Parent were $15,480,000 and $17,005,000, respectively, and the income related to these loans was $1,143,000, $1,089,000 and $920,000 for 1995, 1994 and 1993, respectively. 4. ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses were as follows for the years indicated:
- -------------------------------------------------------------------------------------- (in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------- Balance at beginning of year $61,250 $62,253 $56,385 Provision charged to expense 38,107 22,922 13,262 Net charge-offs: Loans and leases charged off (22,845) (27,115) (15,063) Recoveries on loans and leases charged off 2,221 3,190 2,444 - -------------------------------------------------------------------------------------- Net charge-offs (20,624) (23,925) (12,619) - -------------------------------------------------------------------------------------- Allowance applicable to loans of purchased company -- -- 5,225 - -------------------------------------------------------------------------------------- BALANCE AT END OF YEAR $78,733 $61,250 $62,253 ======================================================================================
The following table presents information related to impaired loans as of and for the year ended December 31, 1995:
- ---------------------------------------------------------------------------------- (in thousands) - ---------------------------------------------------------------------------------- IMPAIRED LOANS $97,915 IMPAIRED LOANS WITH RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES CALCULATED UNDER SFAS NO. 114 65,430 AVERAGE IMPAIRED LOANS 82,304 INTEREST INCOME RECORDED DURING THE YEAR 3,454 ==================================================================================
Interest payments on impaired loans are applied to principal. 5. PREMISES AND EQUIPMENT At December 31, 1995 and 1994, premises and equipment were comprised of the following:
- ------------------------------------------------------------------------ (in thousands) 1995 1994 - ------------------------------------------------------------------------ Premises $229,629 $227,277 Equipment 136,062 126,207 - ------------------------------------------------------------------------ 365,691 353,484 Less accumulated depreciation and amortization 123,704 108,146 - ------------------------------------------------------------------------ NET BOOK VALUE $241,987 $245,338 ========================================================================
Occupancy and equipment expenses include depreciation and amortization expenses of $17,649,000, $17,572,000 and $15,133,000 for 1995, 1994 and 1993, respectively. 34 48 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) 6. DEPOSITS For 1995, 1994 and 1993, interest expense related to deposits was as follows:
- --------------------------------------------------------------------------------- (in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------- Interest-bearing demand $ 30,034 $ 25,383 $ 26,652 Savings 34,272 30,865 33,259 Time -- Under $100 52,260 31,666 29,581 Time -- $100 and over 40,682 24,588 23,581 Foreign 18,800 7,787 3,814 - --------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE ON DEPOSITS $176,048 $120,289 $116,887 =================================================================================
Time deposits in denominations of $100,000 or more at December 31, 1995 and 1994 were as follows:
- ---------------------------------------------------- (in thousands) 1995 1994 - ---------------------------------------------------- Domestic $861,409 $611,757 Foreign $166,404 $270,234 ====================================================
7. SHORT-TERM BORROWINGS At December 31, 1995 and 1994, short-term borrowings were comprised of the following:
- ----------------------------------------------------------------------------- (in thousands) 1995 1994 - ----------------------------------------------------------------------------- First Hawaiian Bank: Federal funds purchased $ 19,586 $ 195,859 Securities sold under agreements to repurchase 838,026 823,248 Advances from Federal Home Loan Bank of Seattle 100,000 50,000 First Hawaiian, Inc. (Parent) -- Commercial paper 13,777 46,723 Nonbank subsidiaries -- Advances from Federal Home Loan Bank of Seattle 111,790 213,986 - ----------------------------------------------------------------------------- TOTAL SHORT-TERM BORROWINGS $1,083,179 $1,329,816 =============================================================================
Average rates and average and maximum balances for these short-term borrowings were as follows for the years indicated:
- -------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------- Federal funds purchased: Average interest rate at December 31 5.9% 5.8% 2.7% Highest month-end balance $270,927 $217,535 $172,215 Average daily outstanding balance $161,602 $155,852 $ 98,042 Average daily interest rate paid 6.3% 4.4% 2.8% Securities sold under agreements to repurchase: Average interest rate at December 31 5.4% 5.4% 3.2% Highest month-end balance $909,867 $883,036 $871,891 Average daily outstanding balance $823,506 $792,790 $660,474 Average daily interest rate paid 5.6% 4.0% 3.2% Commercial paper: Average interest rate at December 31 5.3% 6.2% 4.0% Highest month-end balance $ 49,102 $ 46,723 $ 11,271 Average daily outstanding balance $ 26,875 $ 14,092 $ 8,430 Average daily interest rate paid 6.2% 4.7% 3.1% Advances from Federal Home Loan Bank of Seattle: Average interest rate at December 31 5.9% 6.0% 4.3% Highest month-end balance $322,661 $279,437 $111,265 Average daily outstanding balance $259,998 $153,008 $ 43,499 Average daily interest rate paid 6.8% 5.5% 4.6% ======================================================================================
Securities sold under agreements to repurchase were treated as financings and the obligations to repurchase the identical securities sold were reflected as liabilities with the dollar amount of securities underlying the agreements remaining in the asset accounts. At December 31, 1995, the weighted average maturity of these agreements was 131 days and primarily represents investments by public (governmental) entities. A schedule of maturities of these agreements is as follows:
- ---------------------------------------------------- (in thousands) - ---------------------------------------------------- OVERNIGHT $ -- LESS THAN 30 DAYS 408,128 30 TO 90 DAYS 225,714 OVER 90 DAYS 204,184 - ---------------------------------------------------- TOTAL $838,026 ====================================================
The Parent had $70,000,000 in unused lines of credit with unaffiliated banks to support its commercial paper borrowings as of December 31, 1995. 35 49 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) 8. LONG-TERM DEBT At December 31, 1995 and 1994, long-term debt was comprised of the following:
First Hawaiian, Inc. (Parent): Note due 1997 $ 50,000 $ 50,015 $ 50,000 $ 49,988 6.25% subordinated notes due 2000 100,000 97,364 100,000 97,555 Nonbank subsidiaries -- 4.45%-7.70% notes due through 2000 88,752 87,873 69,331 68,959 - ---------------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $238,752 $235,252 $219,331 $216,502 ===============================================================================================
FIRST HAWAIIAN, INC. (PARENT) The note due in 1997 represents two separate drawings of $24,000,000 and $26,000,000 on a $50,000,000 unsecured commitment with interest payable at preselected intervals of one, two, three or six months at London Interbank Offered Rate ("LIBOR") plus .225% ($24,000,000 at 6.0375% and $26,000,000 at 6.19375% at December 31, 1995). The 6.25% subordinated notes due in 2000 are unsecured obligations with interest payable semiannually. NONBANK SUBSIDIARIES The 4.45%-7.70% notes due through 2000 represent advances from the Federal Home Loan Bank of Seattle to the Company's nonbank subsidiaries (Creditcorp and Pioneer) with interest payable monthly. As of December 31, 1995, the principal payments due on these borrowed funds were as follows:
- ------------------------------------------------------------------------------- First Hawaiian, Inc. Nonbank (in thousands) (Parent) Subsidiaries Total - ------------------------------------------------------------------------------- 1997 $ 50,000 $46,028 $ 96,028 1998 -- 36,016 36,016 1999 -- 2,018 2,018 2000 100,000 4,690 104,690 - ------------------------------------------------------------------------------- TOTAL $150,000 $88,752 $238,752 ===============================================================================
9. COMMON STOCK On December 1, 1993, the Bank purchased certain assets and assumed certain liabilities of GKN, Inc., which did business as Phoenix Financial Services ("Phoenix"), for $1,000,000 in the form of an exchange for 41,186 newly-issued shares of the Company's common stock. In May 1995, the operations of Phoenix were merged into the Bank. 10. LIMITATIONS ON PAYMENT OF DIVIDENDS The primary source of funds for the dividends paid by the Company to its stockholders is dividends received from its subsidiaries. The Bank, Pioneer and Creditcorp are subject to regulatory limitations on the amount of dividends they may declare or pay. At December 31, 1995, the aggregate amount available for payment of dividends by such subsidiaries without prior regulatory approval was $315,965,000. 11. EMPLOYEE BENEFIT PLANS PENSION PLANS The Company has a noncontributory pension plan which was frozen as of December 31, 1995. The curtailment gain due to the freeze of the pension plan was $20,766,000. As a result of the freeze, there will be no future accruals and no additional participants. The pension plan was replaced with a 401(k) match and a money purchase plan to which the Company will begin contributing in 1996. These plans cover all employees who satisfy the age and length of service requirements except for key executives who are eligible for the Company's unfunded supplemental employee retirement plan. The net pension expense (credit) for 1995, 1994 and 1993 included the following components:
- ---------------------------------------------------------------------------- (in thousands) 1995 1994 1993 - ---------------------------------------------------------------------------- Service cost-benefits earned during the period $ 4,018 $ 3,832 $3,955 Interest cost on projected benefit obligation 6,862 6,294 6,553 Actual loss (return) on plan assets (18,476) 3,593 (3,810) Net amortization and deferral 10,197 (12,123) (3,577) Curtailment gain due to pension plan freeze (20,766) -- -- - ---------------------------------------------------------------------------- NET PENSION EXPENSE (CREDIT) $(18,165) $ 1,596 $3,121 ============================================================================
No further contributions should be required because the pension plan is heavily overfunded and there will be no future benefit accruals. 36 50 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- The following table sets forth the reconciliation of the funded status of the plans at December 31, 1995 and 1994:
- ------------------------------------------------------------------------------------- (in thousands) 1995 1994 - ------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Vested benefits $78,182 $62,900 Nonvested benefits 100 3,100 - ------------------------------------------------------------------------------------- Accumulated benefit obligation $78,282 $66,000 ===================================================================================== Plan assets at fair value (primarily listed stocks and fixed income securities) $98,220 $84,044 Projected benefit obligation 88,784 91,944 - ------------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 9,436 (7,900) Unrecognized net gain (1,232) (736) Unrecognized prior service cost 7,623 6,959 Unrecognized net asset (7,199) (8,264) - ------------------------------------------------------------------------------------- PREPAID PENSION COST (PENSION LIABILITY) $ 8,628 $(9,941) =====================================================================================
Plan assets included 587,856 shares of common stock of the Company with a fair value of $17,636,000 and $13,962,000 at December 31, 1995 and 1994, respectively. The weighted average discount rate was 7.0% as of December 31, 1995, and 7.5% as of December 31, 1994. For both years, the rate of increase in future compensation used in determining the projected benefit obligation was 5.0% for the qualified pension plan and 7.0% for the unfunded supplemental retirement plan. The expected long-term rate of return on plan assets was 8.5% for both years. The Company has unfunded postretirement medical and life insurance plans which are available to retirees who have satisfied age and length of service requirements. The following table sets forth the reconciliation of the funded status of the plan at December 31, 1995 and 1994:
- ------------------------------------------------------------------------------------- (in thousands) 1995 1994 - ------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Retirees $ 3,528 $ 3,196 Other fully eligible plan participants 1,382 1,248 Other active plan participants 2,076 1,775 - ------------------------------------------------------------------------------------- TOTAL $ 6,986 $ 6,219 ===================================================================================== Funded status $ 6,986 $ 6,219 Unrecognized transition obligation (2,429) (2,572) Unrecognized prior service cost (71) (77) Unrecognized net loss (575) (214) - ------------------------------------------------------------------------------------- ACCRUED POSTRETIREMENT BENEFIT COST $ 3,911 $ 3,356 ===================================================================================== Service cost $ 189 $ 187 Interest cost 453 430 Amortization of: Transition obligation 143 143 Unrecognized prior service cost 6 6 - ------------------------------------------------------------------------------------- NET PERIODIC POSTRETIREMENT BENEFIT COST $ 791 $ 766 =====================================================================================
The assumed health care cost trend is not applicable since the medical plan provides a flat dollar commitment. Thus, there is no effect due to a one-percentage-point increase in the trend rate. The weighted average discount rate was 7.0% as of December 31, 1995, and 7.5% as of December 31, 1994. For both years, the rate of increase in future compensation used in determining the accumulated postretirement benefit obligation was 5.0%. PROFIT SHARING AND CASH BONUS PLANS The profit sharing and cash bonus plans cover substantially all employees, after satisfying age and length of service requirements. Annual contributions to the plans are based upon a formula and are limited to the total amount deductible under the applicable provisions of the Internal Revenue Code. The profit sharing and cash bonus formula provides that 50% of the Company's contribution be paid directly to eligible members as a year-end cash bonus and the other 50%, less forfeitures, be paid into the profit sharing trust fund. The profit sharing contribution and cash bonus (reflected in salaries and wages) for 1995, 1994 and 1993 totalled $5,545,000, $5,127,000 and $4,328,000, respectively. INCENTIVE PLAN FOR KEY EXECUTIVES The Company has an Incentive Plan for Key Executives (the "IPKE"), under which awards of cash or common stock of the Company, or both, are made to key executives. The IPKE limits the aggregate and individual value of the awards that could be issued in any one fiscal year. Shares awarded under the Plan are held in escrow and key executives concerned may not, under any circumstances, voluntarily dispose or transfer such shares prior to the earliest of attaining 60 years of age, completion of 20 full years of employment with the Company, retirement, death or termination of employment prior to retirement with the approval of the Company. Additionally, there is a five year restriction from the date of all subsequent shares awarded to those key executives who had previously met the minimum restrictions of completion of 20 full years of employment or attaining 60 years of age. 37 51 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) STOCK INCENTIVE PLAN In 1992, the stockholders approved a Stock Incentive Plan (the "SIP"), which authorized the granting of up to 1,000,000 shares of common stock to key employees. The purpose of the SIP is to promote the success and enhance the value of the Company by providing additional incentives to selected key employees in a way that links their interests with those of stockholders and provides those employees with an incentive for outstanding performances. The SIP is administered by the Executive Compensation Committee of the Board of Directors. The SIP provides for grants of restricted stock, incentive stock options, non-qualified stock options and reload options. Options are granted at exercise prices not less than the fair market value of the common stock on the date of grant. Options vest 25% per year after the date of grant. Stock options have exercise periods no longer than ten years from the date of grant and may not be exercised for six months after the date of grant and/or vesting. Stock options can be exercised, in whole or in part, by payment of the option price in cash or, if allowed under the option agreement, shares of common stock already owned by the optionee (reload options). Upon the occurrence of a change in control of the Company, as defined in the SIP, all options granted and held at least six months become immediately vested and exercisable. The following table summarizes activity under the SIP for 1995, 1994 and 1993 and the status at December 31, 1995:
Balance at December 31, 1992 112,932 $26.00 -- $ -- Options granted 106,060 30.25 -- -- Became exercisable -- -- 28,422 26.00 Exercised (60) 26.00 (60) 26.00 Forfeitures (433) 26.00 -- -- - -------------------------------------------------------------------------------------- Balance at December 31, 1993 218,499 28.06 28,362 26.00 Options granted 139,380 26.60 -- -- Became exercisable -- -- 54,938 28.05 Forfeitures (11,67) 27.53 -- -- - -------------------------------------------------------------------------------------- Balance at December 31, 1994 346,204 27.49 83,300 27.35 Options granted 149,420 25.50 -- -- Became exercisable -- -- 89,782 27.49 Exercised (2,115) 26.09 (2,115) 26.09 Forfeitures (12,353) 27.28 -- -- - -------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 481,156 $26.88 170,967 $27.44 ======================================================================================
At December 31, 1995, 516,669 stock options were available for future grants under the SIP. LONG-TERM INCENTIVE PLAN The Company has a Long-Term Incentive Plan (the "LTIP") designed to reward key executives for the Company's and individuals' performances measured over three-year cycles; that is, 1993-1995, 1994-1996, 1995-1997 and so on. The first three-year performance cycle (1991-1993) ended on December 31, 1993. The threshold level specified in the LTIP was achieved during this cycle. In 1994, payouts totalling $1,195,000 were made to various key executives for the 1991-1993 cycle. The threshold levels specified in the LTIP were not achieved for the 1992-1994 and 1993-1995 cycles. POSTEMPLOYMENT BENEFITS Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which requires that the estimated cost of benefits provided by an employer to former or inactive employees after employment, but before retirement, be accounted for on an accrual basis. The adoption of SFAS 112 did not have a material effect on the financial position or results of operations of the Company. 12. OTHER NONINTEREST EXPENSES For the years ended December 31, 1995, 1994 and 1993, other noninterest expenses included the following:
- -------------------------------------------------------------------------------------- (in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------- Deposit insurance $ 6,190 $11,388 $11,122 Stationery and supplies 8,645 9,055 8,430 Advertising and promotion 7,476 7,745 6,911 Write-off of building costs -- -- 5,444 Trust loss -- 5,000 -- Other 56,041 48,320 42,082 - -------------------------------------------------------------------------------------- TOTAL OTHER NONINTEREST EXPENSES $78,352 $81,508 $73,989 ======================================================================================
13. INCOME TAXES Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," the cumulative effect of which was the recognition of an income tax benefit of $3,650,000, or $.11 per share, in the first quarter of 1993. Such amount has been reflected in the Consolidated Statements of Income as the cumulative effect of a change in accounting principle. Under SFAS No. 109, the effect of changes in tax rates is recognized in income in the period that includes the enactment date. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed into law, increasing the Federal corporate tax rate from 34% to 35%, retroactive to January 1, 1993. As a result, the Company recognized retroactive adjustments to its deferred tax liability and current tax provision of $1,520,000 and $402,000, respectively, in 1993. 38 52 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- For the years ended December 31, 1995, 1994 and 1993, the provision for income taxes was comprised of the following:
- -------------------------------------------------------------------------------------- (in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------- Current: Federal $15,164 $24,822 $19,755 States and other 3,698 4,989 4,776 - -------------------------------------------------------------------------------------- Total current 18,862 29,811 24,531 - -------------------------------------------------------------------------------------- Deferred: Federal 21,430 6,175 12,116 States and other 4,841 3,004 4,251 - -------------------------------------------------------------------------------------- Total deferred 26,271 9,179 16,367 - -------------------------------------------------------------------------------------- TOTAL INCOME TAX PROVISION $45,133 $38,990 $40,898 ======================================================================================
The provision for income taxes has been reduced by investment, excise tax and low income housing credits of $2,140,000, $1,769,000 and $1,000,000 in 1995, 1994 and 1993, respectively. The Company also has foreign tax credit carryforwards amounting to $5,770,000 at December 31, 1995 which may be used to offset future Federal income tax expense. The foreign tax credit carryover of $1,040,000, $1,526,000, $1,597,000 and $1,607,000 will expire at the end of 1997, 1998, 1999 and 2000, respectively. The components of net deferred income tax liabilities at December 31, 1995 and 1994 were as follows:
- --------------------------------------------------------------------------------- DECEMBER 31 ---------------------------- (in thousands) 1995 1994 - --------------------------------------------------------------------------------- ASSETS Federal and State income tax credit carryovers $ 5,003 $ 3,180 Employee benefit deductions 3,489 10,340 Provision for loan and lease losses 36,897 32,706 Loan fees and other income 8,117 8,853 Hawaii State franchise taxes 6,628 5,007 - --------------------------------------------------------------------------------- Total deferred income tax assets 60,134 60,086 - --------------------------------------------------------------------------------- LIABILITIES Lease expenses 152,799 120,933 Depreciation expense 12,705 19,975 Intangible assets-net premiums 2,502 3,429 Marketable securities-available for sale 3,626 683 Other 6,465 3,132 - --------------------------------------------------------------------------------- Total deferred income tax liabilities 178,097 148,152 - --------------------------------------------------------------------------------- NET DEFERRED INCOME TAX LIABILITIES $(117,963) $(88,066) =================================================================================
Net deferred income tax liabilities are included in other liabilities in the Consolidated Balance Sheets. At December 31, 1995 and 1994, Federal income taxes had not been provided on $2,832,000 of thrift bad debt deductions. If in the future, these amounts are used for any purpose other than to absorb losses on bad debts, a tax liability will be imposed on the Company for these amounts at the then current income tax rates. Effective January 1, 1996, the Hawaii Revised Statutes were amended to require the apportionment and allocation of income according to the state where the income has been generated. As such, 1996 and future state income and franchise taxes will be computed accordingly. Management has not yet determined the effect this change will have on the calculation and allocation of future income tax provisions. The following analysis reconciles the Federal statutory income tax rate to the effective income tax rate for the years indicated:
- ------------------------------------------------------------------------------- 1995 1994 1993 - ------------------------------------------------------------------------------- Federal statutory income tax rate 35.0% 35.0% 35.0% Municipal and other tax- exempt income (2.7) (4.0) (4.4) Hawaii State income and franchise taxes, net of Federal tax benefit 4.5 4.7 4.9 Other .2 (0.7) (1.2) - ------------------------------------------------------------------------------- EFFECTIVE INCOME TAX RATE 37.0% 35.0% 34.3% ===============================================================================
39 53 First Hawaiian, Inc., and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- 14. INTERNATIONAL OPERATIONS The Company's international operations, principally Guam and Grand Cayman, British West Indies, involve foreign banking and international financing activities, including short-term investments, loans, acceptances, letters of credit financing and international funds transfers. International activities are identified on the basis of the domicile of the Company's customer. Total revenue, income before income taxes, net income and total assets for foreign, domestic and consolidated operations at and for the years ended December 31, 1995, 1994 and 1993 were as follows:
- ------------------------------------------------------------------------------------- (in thousands) Foreign Domestic Consolidated - ------------------------------------------------------------------------------------- 1995 TOTAL REVENUE $ 38,669 $ 616,166 $ 654,835 INCOME BEFORE INCOME TAXES $ 582 $ 121,556 $ 122,138 NET INCOME $ 379 $ 76,626 $ 77,005 TOTAL ASSETS $478,790 $7,085,719 $7,564,509 ==================================================================================== 1994 Total revenue $ 26,533 $ 535,899 $ 562,432 Income before income taxes $ 1,496 $ 110,005 $ 111,501 Net income $ 972 $ 71,539 $ 72,511 Total assets $251,697 $7,283,447 $7,535,144 ==================================================================================== 1993 Total revenue $ 26,586 $ 481,932 $ 508,518 Income before income taxes $ 2,726 $ 116,379 $ 119,105 Net income $ 1,772 $ 80,085 $ 81,857 Total assets $326,197 $6,942,934 $7,269,131 ====================================================================================
Under current intercompany pricing procedures, transfers of funds are priced at prevailing market rates. In general, the Company has allocated all direct expenses and a proportionate share of general and administrative expenses to the income derived from loans and transactions by the Company's international operations. The following presents the percentages of average total assets and total liabilities attributable to foreign operations. For this purpose, assets attributable to foreign operations are defined as assets in foreign offices and loans and leases to and investments in customers domiciled outside the United States. Deposits received and other liabilities are classified on the basis of domicile of the creditor.
- -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Average foreign assets to average total assets 3.61% 3.80% 6.19% Average foreign liabilities to average total liabilities 5.04% 3.15% 2.07% ================================================================================
The Company did not have any foreign outstandings to any individual country which exceeded 1% of total assets at December 31, 1995, 1994 and 1993. 15. LEASE COMMITMENTS Future minimum lease payments by year and in the aggregate under all noncancelable operating leases having initial or remaining terms in excess of one year consisted of the following at December 31, 1995:
- -------------------------------------------------------------------------------- Less Net Operating Sublease Operating (in thousands) Leases Income Leases - -------------------------------------------------------------------------------- 1996 $ 10,981 $ 1,236 $ 9,745 1997 24,137 4,490 19,647 1998 24,263 4,383 19,880 1999 24,573 4,450 20,123 2000 24,567 4,929 19,638 2001 and thereafter 118,101 15,936 102,165 - -------------------------------------------------------------------------------- TOTAL $226,622 $35,424 $191,198 ================================================================================
These premises and equipment leases extend for varying periods up to 39 years and some of them may be renewed for periods ranging from 1 to 39 years. The premises' leases also provide for payments of real property taxes, insurance and maintenance. In most cases, leases for the premises provide for periodic renegotiation of the rents based upon a percentage of the appraised value of the leased property. The renegotiated annual rent is usually not less than the annual amount paid in the previous period. Where future commitments are subject to appraisals, the minimum annual rental commitments are based on the latest annual rents. In December 1993, the Company entered into a noncancelable agreement to lease a certain office building to be constructed on land owned in fee simple by the Company. Concurrently, the Company entered into a ground lease of the land to the lessor of the building. Rent obligation for the building will commence on December 1, 1996 and will expire on December 1, 2003 (the "Primary Term"). The Company is obligated to pay all taxes, insurance, maintenance and other operating costs associated with the building during the Primary Term and to assume certain responsibilities during the construction period. The Company plans to occupy approximately 40% of the building and sublease the remaining 60% to third parties. As of December 31, 1995, the Company has executed certain noncancelable subleases with third parties. These amounts are included in sublease income in the above table. At the end of the Primary Term, the Company may, at its option: (1) extend the lease term at rents based on the lessor's cost of funds at the time of renewal; (2) purchase the building for an amount approximately equal to that expended by the lessor to construct the building; or (3) arrange for the sale of the building to a third party on behalf of the lessor and pay to lessor any shortfall between the sales proceeds and a specified residual value, 40 54 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) such payment not to exceed $161,990,000. This lease is accounted for as an operating lease. For 1995, 1994 and 1993, rental expense was $14,525,000, $13,699,000 and $8,782,000, respectively. 16. COMMITMENTS AND CONTINGENT LIABILITIES FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Company is a party to various financial instruments to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby and commercial letters of credit and interest rate swaps. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated and Parent Company Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual notional amount of those instruments. Since these commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flows. For interest rate swap transactions, the contract or notional amounts do not represent exposure to credit losses. Off-balance sheet instruments must meet the same criteria of acceptable risk established for the Company's lending and other financing activities. The Company manages the credit risk of counterparty defaults in these transactions by limiting the total amount of outstanding arrangements, both by the individual counterparty and in the aggregate, by monitoring the size and maturity structure of the off-balance sheet portfolio, and by applying the uniform credit standards maintained for all of its credit activities. Off-balance sheet commitments and contingent liabilities at December 31, 1995 and 1994 were as follows:
- ---------------------------------------------------------------------------- 1995 1994 ----------- ----------- NOTIONAL/ Notional/ CONTRACT Contract (in thousands) AMOUNT Amount - ---------------------------------------------------------------------------- Commitments to extend credit $3,363,822 $2,801,502 Standby letters of credit $ 145,278 $ 154,221 Commercial letters of credit $ 18,028 $ 10,207 Interest rate swaps $1,093,867 $1,035,113 ============================================================================
The Company enters into interest rate swap agreements as an end-user only. These instruments are used as hedges against various balance sheet accounts. Credit exposure is monitored under the same credit guidelines as are followed for other extensions of credit. Interest rate and/or market risk is monitored and managed in conjunction with the total interest rate risk position of the Company as a whole. Off-balance sheet agreements are not entered into if they would increase the Company's interest rate risk above approved guidelines. Sensitivity testing to measure and monitor this risk is done quarterly using net interest income simulations. Variable rates for interest rate swap agreements are based either on LIBOR or commercial paper rates as published by the Federal Reserve Board Statistical Release H.15. The following is a summary of the interest rate swap activity for 1995 and 1994: ROLLFORWARD SCHEDULE
- -------------------------------------------------------------------------------------------------------------- Caps, Receive Pay Floors or Variable/ (in millions) Fixed Fixed Collars Variable Total - -------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 $361 $257 $300 $ -- $ 918 Additions -- 9 -- 700 709 Maturities/ amortizations 253 31 300 -- 584 Terminations -- 9 -- -- 9 - -------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 108 226 -- 700 1,034 Additions 200 32 -- -- 232 Maturities/ amortizations 48 124 -- -- 172 Terminations -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 $260 $134 $ -- $700 $1,094 ==============================================================================================================
41 55 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- The following is additional hedging information related to the Company's interest rate swaps as of December 31, 1995: HEDGING SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------- Asset Yield/ Net Remain- Notional Pay Receive Liability Yield/ Original ing (dollars in millions) Amount Rate Rate Cost Cost Maturity Maturity - ----------------------------------------------------------------------------------------------------------------------------- ASSET HEDGES: Variable rate loans $ 200 5.9% 5.6% 7.1% 6.8% 2.0 yrs. 1.9 yrs. Fixed rate loans 96 6.4 5.8 8.3 7.7 9.4 7.7 Construction fund investments 59 5.9 4.3 5.7 4.1 3.0 0.9 Municipal security 15 5.7 6.0 5.9 6.2 5.0 1.8 - ---------------------------------------- Subtotal 370 6.0 5.5 7.1 6.6 4.2 3.2 - ---------------------------------------- LIABILITY HEDGES: Savings deposits 700 5.4 6.0 3.0 2.4 2.6 0.8 Term debt 24 8.8 5.9 6.0 8.9 7.0 1.9 - ---------------------------------------- Subtotal 724 5.5 6.0 3.1 2.6 2.7 0.8 - ---------------------------------------- TOTAL $1,094 5.7% 5.8% N/A N/A 3.2 YRS. 1.6 YRS. ==============================================================================================================================
The following summarizes the impact of the Company's interest rate swap activities on its weighted average borrowing rate and on interest income and expense for the years ended December 31, 1995, 1994 and 1993:
- ------------------------------------------------------------------------------ (dollars in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------ Average borrowing rate: Without interest rate swaps 4.49% 3.26% 3.11% With interest rate swaps 4.54% 3.23% 2.96% ============================================================================== Decrease in interest income $ 3,827 $10,352 $12,664 (Increase) decrease in interest expense (2,926) 1,351 7,436 - ------------------------------------------------------------------------------ Interest rate swap expense, net $ 6,753 $ 9,001 $ 5,228 ==============================================================================
LITIGATION Various legal proceedings are pending against the Company. In the opinion of management, based upon advice of counsel, the aggregate liability, if any, resulting from these proceedings would not have a material effect on the Company's consolidated financial position or results of operations. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents a summary of the book and fair values of the Company's financial instruments at December 31, 1995 and 1994:
- -------------------------------------------------------------------------------------------------- 1995 ---------------------------------- (in thousands) BOOK VALUE FAIR VALUE - -------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks $ 304,051 $ 304,051 Interest-bearing deposits in other banks 244,570 244,570 Federal funds sold and securities purchased under agreements to resell 169,803 169,803 Investment securities: Available-for-sale (note 2) 1,175,293 1,175,293 Loans and leases (note 3) 5,259,545 5,269,635 Customers' acceptance liability 1,995 1,195 - -------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES Deposits $5,358,313 $5,370,203 Short-term borrowings (note 7) 1,083,179 1,083,179 Acceptances outstanding 1,995 1,995 Long-term debt (note 8) 238,752 235,252 ==================================================================================================
- -------------------------------------------------------------------------------------------------- 1994 ---------------------------------- (in thousands) Book Value Fair Value - -------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks $ 262,894 $ 262,894 Interest-bearing deposits in other banks 11,670 11,670 Federal funds sold and securities purchased under agreements to resell 180,000 180,000 Investment securities: Held-to-maturity (note 2) 995,887 981,651 Available-for-sale (note 2) 151,992 151,992 Loans and leases (note 3) 5,533,565 5,536,510 Customers' acceptance liability 732 732 - -------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES Deposits $5,152,213 $5,158,495 Short-term borrowings (note 7) 1,329,816 1,329,816 Acceptances outstanding 732 732 Long-term debt (note 8) 219,331 216,502 ==================================================================================================
The following table presents a summary of the fair values of the Company's off-balance sheet financial instruments (note 16) at December 31, 1995 and 1994:
- -------------------------------------------------------------------------------------------------- FAIR VALUE ------------------------------ (in thousands) 1995 1994 - -------------------------------------------------------------------------------------------------- Commitments to extend credit $13,596 $11,489 Letters of credit 1,435 1,523 Interest rate swaps (1,158) (21,154) ==================================================================================================
42 56 First Hawaiian, Inc. and Subsidiaries NOTES TO FINANCIAL STATEMENTS (Continued) 18. FIRST HAWAIIAN, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS BALANCE SHEETS
- ------------------------------------------------------------------------------------------------ DECEMBER 31, (in thousands, except number of ------------------------------- shares and per share data) 1995 1994 - ------------------------------------------------------------------------------------------------ ASSETS Cash on deposit with First Hawaiian Bank $ 144 $ 110 Loans, net of allowance for loan losses of $100 in 1995 15,480 17,005 Securities purchased from First Hawaiian Bank 9,930 6,180 Investment in subsidiaries: First Hawaiian Bank 587,009 597,252 Other subsidiaries 160,833 155,113 Due from: First Hawaiian Bank 91,273 83,604 Other subsidiaries 59,102 61,825 Other assets 1,718 2,257 - ------------------------------------------------------------------------------------------------ TOTAL ASSETS $925,489 $923,346 ================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper $ 13,777 $ 46,723 Current and deferred income taxes 109,468 95,795 Other liabilities 2,707 2,884 Long-term debt 150,000 150,000 - ------------------------------------------------------------------------------------------------ Total liabilities 275,952 295,402 - ------------------------------------------------------------------------------------------------ Commitments and contingent liabilities (notes 11, 15 and 16) Stockholders' equity: Common stock $5 par value Authorized -- 100,000,000 shares Issued -- 32,542,797 shares in 1995 and 1994 162,713 162,713 Surplus 133,925 133,820 Retained earnings 385,976 346,339 Unrealized valuation adjustment 5,489 (1,033) Treasury stock, 1,397,957 shares in 1995 and 516,623 shares in 1994, at cost (38,566) (13,895) - ------------------------------------------------------------------------------------------------ Total stockholders' equity 649,537 627,944 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $925,489 $923,346 ================================================================================================
STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ----------------------------------------- (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------ INCOME Dividends from: First Hawaiian Bank $84,660 $34,660 $33,551 Other subsidiaries 8,300 7,560 4,590 Interest from First Hawaiian Bank 520 448 419 Interest and fees from other subsidiaries 3,043 799 321 Other interest and dividends 1,359 1,149 1,148 - ------------------------------------------------------------------------------------------------ Total income 97,882 44,616 40,029 - ------------------------------------------------------------------------------------------------ EXPENSES Interest expense: Commercial paper 1,669 663 259 Long-term debt 10,299 9,711 5,514 Other 114 107 254 Provision for loan losses 100 -- -- Professional services 494 289 493 Other 339 351 381 - ------------------------------------------------------------------------------------------------ Total expenses 13,015 11,121 6,901 - ------------------------------------------------------------------------------------------------ Income before income tax benefit and equity in undistributed income of subsidiaries 84,867 33,495 33,128 Income tax benefit 3,178 3,344 1,763 - ------------------------------------------------------------------------------------------------ Income before equity in undistributed income of subsidiaries 88,045 36,839 34,891 Equity in undistributed income of subsidiaries: First Hawaiian Bank (15,634) 26,713 38,620 Other subsidiaries 4,594 8,959 8,346 - ------------------------------------------------------------------------------------------------ NET INCOME $77,005 $72,511 $81,857 ================================================================================================
43 57 NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------- (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------- CASH AT BEGINNING OF YEAR $ 110 $ 250 $ 985 Cash flows from operating activities: Net income 77,005 72,511 81,857 Excess of equity in earnings of subsidiaries over dividends received 11,040 (35,672) (46,966) Other 449 (630) (439) - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 88,494 36,209 34,452 - ----------------------------------------------------------------------------------------------- Cash flows from investing activities: Net change in: Securities sold to (purchased from) First Hawaiian Bank (3,750) 6,945 (2,545) Loans made to directors and executive officers 1,525 (1,246) (657) Repayments from (advances to) subsidiaries 8,750 (34,600) (100) Sale of investment securities 43,490 5,000 -- Purchase of investment securities (43,490) -- (5,000) Purchase of Pioneer Fed BanCorp, Inc. -- -- (87,107) Other -- -- (343) - ----------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 6,525 (23,901) (95,752) - ----------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in commercial paper balances (32,946) 37,118 (632) Proceeds from long-term debt -- -- 100,000 Cash dividends paid (37,368) (38,008) (36,821) Issuance of common stock under IPKE -- -- 493 Repurchase of common stock (24,671) (11,558) (2,475) - ----------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (94,985) (12,448) 60,565 - ----------------------------------------------------------------------------------------------- CASH AT END OF YEAR $ 144 $ 110 $ 250 ================================================================================================ Supplemental disclosures: Interest paid $ 12,251 $ 10,338 $ 3,740 Net income taxes refunded $ (3,211) $ (2,502) $ (375) ================================================================================================
44 58 First Hawaiian, Inc. and Subsidiaries CORPORATE ADDRESSES FIRST HAWAIIAN, INC. 1132 Bishop Street Honolulu, Hawaii 96813 or P.O. Box 3200 Honolulu, Hawaii 96847 FIRST HAWAIIAN CREDITCORP, INC. Interstate Building, Second Floor 1314 South King Street Honolulu, Hawaii 96814 Telephone: (808) 593-5500 FIRST HAWAIIAN LEASING, INC. Interstate Building, Second Floor 1314 South King Street Honolulu, Hawaii 96814 Telephone: (808) 593-5300 PIONEER FEDERAL SAVINGS BANK 900 Fort Street Honolulu, Hawaii 96813 Telephone: (808) 522-6777 FIRST HAWAIIAN BANK 1132 Bishop Street Honolulu, Hawaii 96813 or P.O. Box 3200 Honolulu, Hawaii 96847 Telephone: (808) 525-7000 Cable Address: FIRSTBANK (Honolulu, Hawaii) S.W.I.F.T.: FHBKUS77 FedWire: ABA 121301015 FST HAW HONO Internet's World Wide Web Address: http://www.fhb.com/ Japan Representative Office Yasutaka P. Onodera Senior Vice President and Representative Ohtemachi Building 6-1, Room 202 Ohtemachi 1-Chome, Chiyoda-Ku, Tokyo 100, Japan Telephone: (03) 3201-6081 Facsimile: (03) 3215-0566 45 59 First Hawaiian, Inc. and Subsidiaries SUPPLEMENTAL INFORMATION First Hawaiian, Inc.'s shares are traded on The Nasdaq Stock Market under the Nasdaq symbol: FHWN. TRANSFER AGENT American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, New York 10005 FORM 10-K AND OTHER FINANCIAL INFORMATION The Company's 1995 Form 10-K annual report, which is to be filed with the Securities and Exchange Commission by March 30, 1996, will be available to stockholders after that date. Analysts, investors and others seeking a copy of the Form 10-K or any other financial information should write to: Howard H. Karr Executive Vice President and Treasurer First Hawaiian, Inc. P.O. Box 3200 Honolulu, Hawaii 96847 GENERAL INFORMATION News media representatives and others seeking general information should contact: Gerry Keir Senior Vice President Corporate Communications (808) 525-7086 ANNUAL MEETING The annual meeting of stockholders of First Hawaiian, Inc. will be held on Thursday, April 18, 1996 at 9:30 A.M. in the 20th floor Dining Room of The Plaza Club, 900 Fort Street, Honolulu, Hawaii. DIVIDEND REINVESTMENT PLAN Stockholders may reinvest their dividends in additional shares of the First Hawaiian, Inc. common stock through the Dividend Reinvestment Plan. Stockholders wishing to participate in the Plan can receive a descriptive brochure and authorization card by writing to: American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, New York 10005 or calling toll free at 1-800-937-5449
   1
60

                                                                   EXHIBIT 21.


        SUBSIDIARIES OF THE REGISTRANT

The Corporation or one of its wholly-owned subsidiaries beneficially owns 100%
of the outstanding capital stock and voting securities of the following
corporations.  The Corporation is indirectly the sole general partner of First
Hawaiian Center Limited Partnership.



STATE OR OTHER JURISDICTION OF NAME INCORPORATION ---- ------------- First Hawaiian Bank Hawaii First Hawaiian Overseas Corporation Hawaii FIH International, Inc. Hawaii American Security Properties, Inc. Hawaii Real Estate Delivery, Inc. Hawaii FH Center, Inc. Hawaii FHB Mortgage Company, Inc. Hawaii FHB Properties, Inc. Hawaii First Hawaiian Center Limited Partnership Hawaii First Hawaiian Dealer Center, Inc. Hawaii OMP, Inc. Hawaii 2200 Main, Inc. Hawaii First Hawaiian Creditcorp, Inc. Hawaii First Hawaiian Leasing, Inc. Hawaii FHL SPC One, Inc. Hawaii FHI International, Inc. Hawaii Pioneer Federal Savings Bank Federal Pioneer Advertising Agency, Inc. Hawaii
All subsidiaries were included in the consolidated financial statements of the Corporation.
 

9 1 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 304,051 244,570 169,803 0 1,175,293 0 0 5,259,545 78,733 7,564,509 5,358,313 1,083,179 232,733 238,752 0 0 162,713 486,824 7,564,509 481,444 62,783 15,730 559,957 176,048 265,297 294,660 38,107 144 229,293 122,138 77,005 0 0 77,005 2.43 2.43 8.22 79,733 28,790 3,182 0 61,250 22,845 2,221 78,733 36,135 1,430 41,168