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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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, 1996
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
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FIRST HAWAIIAN, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 99-0156159
(State of incorporation) (I.R.S. Employer
Identification No.)
999 BISHOP STREET,
HONOLULU, HAWAII 96813
(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (808) 525-7000
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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)
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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
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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 21, 1997 was $618,343,000.
The number of shares outstanding of each of the
registrant's classes of common stock
as of February 21, 1997 was:
Title of Class Number of Shares Outstanding
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Common Stock, $5.00 Par Value 31,774,840 Shares
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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 1996 Parts I and II
First Hawaiian, Inc. Proxy Statement dated
March 3, 1997 for the Annual Meeting
of Stockholders Part III
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INDEX
PART I
PAGE
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 11
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . 13
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . 14
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . 14
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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PART I
ITEM 1. BUSINESS
FIRST HAWAIIAN, INC. -
First Hawaiian, Inc. (the "Corporation"), a Delaware corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956 (the
"BHCA"), 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 FHL Lease Holding Company, Inc.
("FHL"), each a financial services loan company; Pioneer Federal Savings Bank
("Pioneer"), a federally chartered savings bank; Pacific One Bank ("Pacific
One"), a State of Oregon chartered bank with authority to operate branches in
Idaho; ANB Financial Corporation ("ANB"), a registered bank holding company
under the BHCA and Pacific One Bank, National Association ("Pacific One Bank,
N.A."), a national banking association and wholly-owned subsidiary of ANB. The
Bank, Creditcorp, FHL, Pioneer, Pacific One and ANB are wholly-owned
subsidiaries of the Corporation. At December 31, 1996, the Corporation had
consolidated total assets of $8.0 billion, total deposits of $5.9 billion and
total stockholders' equity of $705.9 million.
Based on assets as of June 30, 1996, the Corporation was the 67th 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. The Bank is a State of Hawaii- chartered bank that
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 "FDIA").
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,
cash management services, mutual funds and annuities; issuing letters of
credit; handling domestic and foreign collections; providing safe deposit and
night depository facilities; offering lease financing; and investing in U.S.
Treasury securities and securities of other U.S. government agencies and
corporations and state and municipal securities.
At December 31, 1996, the Bank had total deposits of $4.5 billion and total
assets of $6.0 billion, making it the second largest bank in Hawaii.
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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 1996, the Bank had 56 other banking offices in
Hawaii. All but two 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. Forty
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.
Lending Activities -
The Bank engages in a broad range of lending activities, including making real
estate, commercial and consumer loans. At December 31, 1996, the Bank's loans
totalled $4.2 billion, representing 70.0% of total assets. At that date, 49.2%
of the loans were construction, commercial and residential real estate loans,
28.5% were commercial loans, 12.2% were consumer loans, 6.8% 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, 1996, approximately 8.6% 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,
1996, approximately 37.5% 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, 1996, approximately 53.9% 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.
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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 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, 1996, the Trust and Investments Division had 5,321
accounts with a market value of $8.5 billion. Of this total, $6.3 billion
represented assets in nonmanaged accounts and $2.2 billion were managed assets.
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.
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 FDIA.
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, 1996, 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 $2.4 million in this regional facility. As
of December 31, 1996, Creditcorp's investment in the capital stock of the FHLB
of Seattle totalled $7.8 million and advances from the FHLB of Seattle
aggregated $23.5 million.
At December 31, 1996, Creditcorp had total deposits of $358.3 million, total
loans of $408.3 million and total assets of $438.3 million.
FHL LEASE HOLDING COMPANY, 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.
At December 31, 1996, FHL's net investment in leases amounted to $100.4 million
and total assets were $128.6 million. FHL's primary source of funds is
borrowings from the Corporation.
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PIONEER FEDERAL SAVINGS BANK -
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, 1996, Pioneer had total
assets of $777.0 million. Based on total assets at December 31, 1996, Pioneer
was the fourth largest of six Savings Association Insurance Fund ("SAIF") -
insured institutions operating in the State of Hawaii.
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,
1996, 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 $7.1
million in this regional facility. As of December 31, 1996, Pioneer's
investment in the capital stock of the FHLB of Seattle totalled $31.1 million
and advances from the FHLB of Seattle aggregated $142.0 million.
On May 31, 1996, Pioneer acquired five branches in the State of Washington
which were being divested by U.S. Bancorp and West One Bancorp, as a result of
their merger, at a purchase price of $4.9 million. Pioneer operated these
branches under the name Pacific One Bank, FSB until November 8, 1996, when they
were sold to American National Bank at book value (see "ANB Financial
Corporation" below).
In October 1996, Pioneer's residential lending operations were merged with the
Bank. Pioneer's remaining operations are scheduled to be merged with and into
the Bank in April 1997.
At December 31, 1996, Pioneer had total deposits of $404.0 million, total loans
of $569.1 million and total assets of $777.0 million.
PACIFIC ONE BANK -
On May 31, 1996, the Corporation acquired 31 branches located in the States of
Oregon, Washington, and Idaho (including the five branches acquired by
Pioneer), which were being divested by U.S. Bancorp and West One Bancorp as a
result of their merger, at an aggregate purchase price of $36 million. Of the
31 branches acquired by the Corporation, the 26 Oregon and Idaho branches are
being operated as Pacific One Bank, which is headquartered in Portland, Oregon.
Pacific One Bank is a State of Oregon-chartered bank and is not a member of the
Federal Reserve System. Its deposits are insured by the BIF of the FDIC to the
extent and subject to the limitations set forth in the FDIA.
Pacific One Bank is a full-service bank offering personal and commercial
banking services including demand, savings and time deposits; making
commercial, agricultural, real estate and consumer loans; offering
international banking products and cash management services; and selling mutual
funds and annuities.
At December 31, 1996, Pacific One Bank had total deposits of $563.0 million,
total loans of $427.3 million and total assets of $692.8 million.
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ANB FINANCIAL CORPORATION-
On July 31, 1996, for a purchase price of $17.5 million, the Corporation
acquired ANB Financial Corporation, a bank holding company registered under the
BHCA and headquartered in Kennewick, Washington, and its wholly-owned
subsidiary, American National Bank. On November 8, 1996, American National
Bank acquired five branches from Pioneer and changed its name to Pacific One
Bank, N.A.
Pacific One Bank, N.A. is a national banking association and its deposits are
insured by the BIF of the FDIC to the extent and subject to the limitations set
forth in the FDIA. Pacific One Bank, N.A. offers a variety of financial
services including demand, savings and time accounts for personal and
commercial accounts. It also offers commercial, agricultural, real estate and
consumer loan products, cash management services and mutual funds and
annuities.
At December 31, 1996, Pacific One Bank, N.A. had total deposits of $142.5
million, total loans of $106.8 million and total assets of $184.7 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 -
At December 31, 1996, the Corporation had 3,384 full-time equivalent employees.
The Bank employed 2,691 persons and the other subsidiaries employed 693
persons. None are represented by any collective bargaining agreements and
relations with employees are considered excellent.
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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 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, 1996 amounted to approximately $24 billion. The principal
subsidiaries of the two largest bank holding companies, Bancorp Hawaii, Inc.
and the Corporation, accounted for 31% 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 9% and 8%, 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. Effective June 1, 1997, Hawaii
law will permit out-of-state banks to acquire branches located in Hawaii by
purchasing or merging with a Hawaii state bank or a national banking
association having its headquarters located in Hawaii. However, out-of-state
banks will not be permitted to establish de novo branches or purchase
individual branches located in Hawaii. The State of Washington, where Pacific
One Bank, N.A. operates, and the States of Oregon and Idaho, where Pacific One
operates, each have adopted similar legislation. The new federal and state
laws may increase competition within the markets in which the Corporation now
operates, but the Corporation cannot predict whether and to what extent
competition will increase in those markets.
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SUPERVISION AND REGULATION -
As a bank holding company, the Corporation is subject to supervision and
examination by the Federal Reserve Board under the BHCA. The Corporation will
also be regulated and supervised by the OTS as a savings and loan holding
company until Pioneer is merged into the Bank, scheduled for April 1997. The
various subsidiaries of the Corporation are subject to regulation and
supervision by the state banking authorities of Hawaii, Oregon and Idaho, as
well as the FDIC, the Office of the Comptroller of the Currency (the "OCC"), the
OTS and various other regulatory agencies.
Holding Company Structure. In general, the BHCA 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 BHCA 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, Creditcorp,
Pacific One and Pacific One Bank, N.A. are also subject to regulatory
limitations on the amount of dividends they may declare and pay. At December
31, 1996, the aggregate amount of dividends that such subsidiaries could pay to
the Corporation under the foregoing limitations without prior regulatory
approval was $345.6 million. There are also statutory limits on the transfer
of funds to the Corporation and certain of its nonbanking subsidiaries by the
Bank, Pioneer, Creditcorp, Pacific One and Pacific One Bank, N.A., 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, Creditcorp, Pacific One and Pacific
One Bank, N.A. 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, OCC and 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, FDIC, OCC and 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 one of its subsidiary
banks would be
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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.
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, Creditcorp,
Pacific One and Pacific One Bank, N.A.): "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 4% 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, 1996, 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.
8
11
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 may not make any payments of interest
or principal on their subordinated debt and 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). Depository institutions insured by the BIF which are
ranked in the top risk classification category currently have no annual
assessment for deposit insurance while all other banks are required to pay
premiums ranging from .03% to .27% of domestic deposits. As a result of the
enactment on September 30, 1996 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "Deposit Funds Act"), the deposit insurance premium
assessment rates for depository institutions insured by the SAIF were reduced,
effective January 1, 1997, to the same rates as apply to depository
institutions insured by the BIF. The Deposit Funds Act also provided for a
one-time assessment of 65.7 basis points on all SAIF-insured deposits in order
to fully recapitalize the SAIF (which assessment was paid by the Corporation in
1996), and imposes annual assessments on all depository institutions to pay
interest on bonds issued by the Financing Corporation (the "FICO") in
connection with the resolution of savings association insolvencies occurring
prior to 1991. The FICO assessment rate for 1997 will be 1.3 basis points in
the case of BIF-insured institutions, and 6.4 basis points in the case of
SAIF-insured institutions. 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, subject to certain limitations specified in the
Deposit Funds Act.
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 "Note 11. Regulatory Capital Requirements" (page 54) in the
Financial Review section of the Corporation's Annual Report 1996, 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 concentrations 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.
In August 1996, the federal banking regulators adopted amendments to 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 these amendments, which become effective at year-end 1997,
banks with relatively large trading activities will be required to 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. As a result, certain
institutions will be required to hold capital based on the measure of their
market risk exposure in addition to existing capital requirements for credit
risk. These institutions will be able to satisfy this additional requirement,
in part, by issuing short-term subordinated debt that qualifies as Tier 3
capital. The Corporation does not expect these amendments to have a material
effect on its business or operations.
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
(the "SEC"). The statistical information required is presented in the tables
shown below in the Corporation's Annual Report 1996, 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
1996, and is incorporated herein by reference thereto:
PAGE NUMBERS IN
---------------------------
FIRST HAWAIIAN, INC.
ANNUAL REPORT 1996
DISCLOSURE REQUIREMENTS (EXHIBIT 13)
----------------------- -----------------------------
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential -
A. Average balance sheets 26 - 27
B. Analysis of net interest earnings 26 - 27
C. Dollar amount of change in interest income and interest expense 28
II. Investment Portfolio -
A. Book value of investment securities 50 - 51
B. Investment securities by maturities and weighted average yields 41
C. Investment securities in excess of 10% of stockholders' equity 51
III. Loan Portfolio -
A. Types of loans 34
B. Maturities and sensitivities of loans to changes in interest rates 35, 39
C. Risk elements
1. Nonaccrual, past due and restructured loans 36 - 37, 47 - 48
2. Foreign outstandings 58
3. Loan concentrations 34 - 35
IV. Summary of Loan Loss Experience -
A. Analysis of loss experience 29 - 31, 48
B. Breakdown of the allowance for loan losses 30, 32
V. Deposits -
A. Average amount and average rate paid on deposits 37
D. Maturity distribution of domestic time certificates of deposits
of $100,000 or more 37
E. Time certificates of deposit in denominations of $100,000 or more
issued by foreign offices 52
VI. Return on Equity and Assets 23
VII. Short-Term Borrowings 52 - 53
10
13
ITEM 2. PROPERTIES
The Bank indirectly (through two subsidiaries), owns all of a city block in
downtown Honolulu containing 55,775 square feet. The administrative
headquarters of the Corporation and the Bank, and main branch of the Bank were
formerly located on a portion of the city block. The buildings were demolished
and the Bank began construction of a modern banking center on this city block.
The headquarters building was completed in September 1996 and includes 418,000
square feet of gross office space. Information about the lease financing of
the headquarters building is included in "Note 17. Lease Commitments" (pages 58
through 59) in the Financial Review section of the Corporation's Annual Report
1996, which is incorporated herein by reference thereto.
Seventeen of the Bank's offices in Hawaii are located on land owned in fee
simple by the Bank. Twenty-five of the fifty-three branches operated by
Pioneer, Pacific One and Pacific One Bank, N.A. are located on land owned in
fee simple by the respective companies. The other branches of the Bank,
Pioneer, Pacific One, Pacific One Bank, N.A. and Creditcorp are situated in
leasehold premises or in buildings constructed by the respective companies on
leased land (see "Note 17. Lease Commitments" (pages 58 through 59) in the
Financial Review section of the Corporation's Annual Report 1996, which is
incorporated herein by reference thereto). In addition, the Bank owns an
operations center which is 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 this four-story building.
The Bank owns a five-story, 75,000 square foot office building, including a
branch, which is situated on property owned in fee simple in Maite, Guam.
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings are pending against the Corporation or its
subsidiaries. The ultimate liability of the Corporation, if any, cannot be
determined at this time. Based upon consultation with counsel, management does
not expect that the aggregate liability, if any, resulting from these
proceedings would have a material effect on the Corporation's consolidated
financial position.
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, 1996.
11
14
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:
OFFICER AGE BUSINESS EXPERIENCE DURING LAST 5 YEARS
- ---------------------------------------- ------ ----------------------------------------------------------------------
Walter A. Dods, Jr. 55 Chairman of the Board and Chief Executive Officer of the Corporation
Chairman, Chief Executive since 1989; President of the Corporation from 1989 - 1991; Executive
Officer and Director 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 58 President and Director of the Corporation since April and July 1995,
President and Director respectively; Director, President and Chief Operating Officer of the
Bank since July 1994; Chairman of FHL since 1995; Director and Chief
Executive Officer of FHL since September 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 46 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 54 Executive Vice President and Treasurer of the Corporation since 1990;
Executive Vice President and Vice President and Treasurer of the Corporation from 1978 - 1990;
Treasurer 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.
12
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Required information is included in "Common Stock Information" (page 22) in the
Financial Review section of the Corporation's Annual Report 1996, and is
incorporated herein by reference thereto.
ITEM 6. SELECTED FINANCIAL DATA
Required information is included in "Summary of Selected Consolidated Financial
Data" (page 23) in the Financial Review section of the Corporation's Annual
Report 1996, 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 24 through 41) in the
Financial Review section of the Corporation's Annual Report 1996, 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 1996, which is incorporated herein by reference
thereto as follows:
PAGE NUMBER
-----------
Report of Independent Accountants 42
First Hawaiian, Inc. and Subsidiaries:
Consolidated Balance Sheets at December 31, 1996 and 1995 43
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 44
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 45
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 46
First Hawaiian, Inc. (Parent Company):
Balance Sheets at December 31, 1996 and 1995 61
Statements of Income for the years ended December 31, 1996,
1995 and 1994 61
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 45
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 62
Notes to Financial Statements 47 - 62
Summary of Quarterly Financial Data (Unaudited) 40
Supplementary Data 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
16
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 9 through 19) 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.
14
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE NUMBER IN
--------------------
FIRST HAWAIIAN,
INC. ANNUAL
REPORT 1996
(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 42
First Hawaiian, Inc. and Subsidiaries:
Consolidated Balance Sheets at December 31, 1996 and 1995 43
Consolidated Statements of Income for the
years ended December 31, 1996, 1995 and 1994 44
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 45
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 46
First Hawaiian, Inc. (Parent Company):
Balance Sheets at December 31, 1996 and 1995 61
Statements of Income for the years ended
December 31, 1996, 1995 and 1994 61
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 45
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 62
Notes to Financial Statements 47 - 62
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 -
o Certificate of Amendment of Certificate of
Incorporation filed May 9, 1996.
o Certificate of Incorporation of First Hawaiian,
Inc. as amended through May 9, 1996.
(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
SEC.
15
18
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 SEC.
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
SEC.
(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 SEC.
(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 SEC.
(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 SEC.
(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 SEC.
16
19
(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 SEC.
(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 SEC.
(viii) First Hawaiian, Inc. Supplemental Executive Retirement
Plan, as amended and restated as of January 1, 1996 is
incorporated by reference to Exhibit 10 to the
Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the
SEC.
(ix) First Hawaiian, Inc. Deferred Compensation Plan, as
amended and restated as of January 1, 1996 is
incorporated by reference to Exhibit 10 to the
Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the
SEC.
(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
SEC.
(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
SEC.
Exhibit 12 Statement re: computation of ratios.
Exhibit 13 Annual report to security holders - Corporation's
Annual Report 1996.
Exhibit 21 Subsidiaries of the registrant.
Exhibit 23 Consent of independent accountants.
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, 1996.
(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.
17
20
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 20, 1997
18
21
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 20, 1997
- --------------------------------------------- Chief Executive Officer -------------------------
Walter A. Dods, Jr. & Director Date
/s/ JOHN W. A. BUYERS Director March 20, 1997
- --------------------------------------------- -------------------------
John W. A. Buyers Date
/s/ JOHN C. COUCH Director March 20, 1997
- --------------------------------------------- -------------------------
John C. Couch Date
/s/ JULIA ANN FROHLICH Director March 20, 1997
- --------------------------------------------- -------------------------
Julia Ann Frohlich Date
/s/ PAUL MULLIN GANLEY Director March 20, 1997
- --------------------------------------------- -------------------------
Paul Mullin Ganley Date
/s/ DAVID M. HAIG Director March 20, 1997
- --------------------------------------------- -------------------------
David M. Haig Date
/s/ JOHN A. HOAG Director March 20, 1997
- --------------------------------------------- -------------------------
John A. Hoag Date
/s/ BERT T. KOBAYASHI, JR. Director March 20, 1997
- --------------------------------------------- -------------------------
Bert T. Kobayashi, Jr. Date
/s/ RICHARD T. MAMIYA Director March 20, 1997
- --------------------------------------------- -------------------------
Richard T. Mamiya Date
/s/ FUJIO MATSUDA Director March 20, 1997
- --------------------------------------------- -------------------------
Fujio Matsuda Date
/s/ RODERICK F. McPHEE Director March 20, 1997
- --------------------------------------------- -------------------------
Roderick F. McPhee Date
/s/ GEORGE P. SHEA, JR. Director March 20, 1997
- --------------------------------------------- -------------------------
George P. Shea, Jr. Date
/s/ JOHN K. TSUI President March 20, 1997
- --------------------------------------------- & Director -------------------------
John K. Tsui Date
/s/ FRED C. WEYAND Director March 20, 1997
- --------------------------------------------- -------------------------
Fred C. Weyand Date
/s/ ROBERT C. WO Director March 20, 1997
- --------------------------------------------- -------------------------
Robert C. Wo Date
/s/ HOWARD H. KARR Executive Vice President March 20, 1997
- --------------------------------------------- & Treasurer -------------------------
Howard H. Karr (Principal financial and accounting officer) Date
19
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3 (i) Certificate of Incorporation -
o Certificate of Amendment of Certificate of Incorporation filed May 9, 1996.
o Certificate of Incorporation of First Hawaiian, Inc. as amended through May 9, 1996.
(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 SEC.
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 SEC.
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 SEC.
(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 SEC.
(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 SEC.
20
23
(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 SEC.
(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 SEC.
(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 SEC.
(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 SEC.
(viii) First Hawaiian, Inc. Supplemental Executive Retirement Plan, as amended and restated as of January
1, 1996 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 as filed with the SEC.
(ix) First Hawaiian, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1996 is
incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the SEC.
(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 SEC.
(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 SEC.
12 Statement re: computation of ratios.
13 Annual report to security holders - Corporation's Annual
Report 1996.
21 Subsidiaries of the registrant.
23 Consent of independent accountants.
27 Financial data schedule.
21
1
EXHIBIT 3(i)
CERTIFICATE OF INCORPORATION
2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FIRST HAWAIIAN, INC.
* * * * *
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
* * * * *
First Hawaiian, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (hereinafter,
the "Corporation"), DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Corporation
held on January 18, 1996, resolutions were adopted setting forth proposed
amendments to the Certificate of Incorporation of the Corporation, declaring
said amendments to be advisable, and directing that said amendments be
considered at the annual meeting of the stockholders of the Corporation. The
resolution setting forth the proposed amendments is as follows:
"RESOLVED, that the Board of Directors of the Corporation
hereby declares it advisable that Article Fourth of the Certificate of
Incorporation of the Corporation be amended by deleting said article
in its entirety and by substituting in lieu thereof the following:
'Fourth. The total number of shares of stock which this
corporation shall have authority to issue is One Hundred Fifty
Million (150,000,000) shares having a par value of Five
Dollars ($5.00) per share, divided into two classes: One
Hundred Million (100,000,000) shares designated as Common
Stock (hereinafter, the "Common Stock"); and Fifty Million
(50,000,000) shares designated as Preferred Stock
(hereinafter, the "Preferred Stock"). The Board of Directors
of the corporation is authorized to fix, by resolution or
resolutions, the designation of each series of Preferred Stock
and the voting rights, preferences as to dividends and in
liquidation, conversion and other rights, qualifications,
limitations and restrictions thereof and such other subjects
or matters as may be fixed by resolution or resolutions of the
Board
3
of Directors under the General Corporation Law of the State
of Delaware.'
SECOND: That thereafter, pursuant to resolution of the Board of
Directors of the Corporation, a meeting of the stockholders of the Corporation
was duly called and held, upon notice in accordance with Section 222 of the
General Corporation Law of the State of Delaware, at which meeting the
necessary number of shares as required by statute and the Certificate of
Incorporation was voted in favor of the amendments.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to
be affixed and this Certificate to be signed by its Chairman and Chief
Executive Officer and attested to by its Secretary this 30th day of April 1996.
FIRST HAWAIIAN, INC.
By: /s/ WALTER A. DODS, JR.
--------------------------------------
Name: Walter A. Dods, Jr.
Title: Chairman and Chief Executive Officer
ATTEST:
/s/ HERBERT E. WOLFF
- ------------------------------
Name: Herbert E. Wolff
Title: Secretary
2
4
CERTIFICATE OF INCORPORATION
OF
FIRST HAWAIIAN, INC.
AS AMENDED THROUGH MAY 9, 1996
First. The name of the corporation is "First Hawaiian, Inc."
Second. The address of the corporation's registered office in the
State of Delaware is No. 100 West Tenth Street, in the City of Wilmington,
County of New Castle. The name and address of its resident agent is The
Corporation Trust Company, No. 100 West Tenth Street, Wilmington, Delaware.
Third. The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
Fourth. The total number of shares of stock which this corporation
shall have authority to issue is One Hundred Fifty Million (150,000,000) shares
having a par value of Five Dollars ($5.00) per share, divided into two classes:
One Hundred Million (100,000,000) shares designated as Common Stock
(hereinafter, the "Common Stock"); and Fifty Million (50,000,000) shares
designated as Preferred Stock (hereinafter, the "Preferred Stock"). The Board
of Directors of the corporation is authorized to fix, by resolution or
resolutions, the designation of each series of Preferred Stock and the voting
rights, preferences as to dividends and in liquidation, conversion and other
rights, qualifications, limitations and restrictions thereof and such other
subjects or matters as may be fixed by resolution or resolutions of the Board
of Directors under the General Corporation Law of the State of Delaware.
Fifth. The name and mailing address of each incorporator is as
follows:
Name Address
---- -------
John D. Bellinger 165 South King Street
Honolulu, Hawaii 96813
Hugh R. Pingree 165 South King Street
Honolulu, Hawaii 96813
G. Harry Hutaff 165 South King Street
Honolulu, Hawaii 96813
5
Sixth. The powers of the incorporators shall terminate upon the filing of
the Certificate of Incorporation. The names and mailing addresses of the
persons who are to serve as directors of the corporation until the first annual
meeting of shareholders or until their successors are elected and qualified are
as follows:
Name Address
- ---- -------
John D. Bellinger 165 South King Street
Honolulu, Hawaii 96813
Hugh R. Pingree 165 South King Street
Honolulu, Hawaii 96813
G. Harry Hutaff 165 South King Street
Honolulu, Hawaii 96813
There shall be a Board of Directors of the corporation consisting of not less
than three (3) nor more than twenty-five (25) members. The members of the
Board of Directors shall be elected or appointed at such times, in such manner,
and for such terms as may be prescribed by the Bylaws, which may also provide
for the filling of vacancies on the Board of Directors. All of the powers of
the corporation, exercisable by authority of law or under this Certificate of
Incorporation, or otherwise, shall be vested in and exercised by, or by the
authority of, the Board of Directors, except as limited by law or the
Certificate of Incorporation or the Bylaws of the corporation. The Board of
Directors may, by resolution or otherwise, create, or the Bylaws may provide
for, such committees of the Board of Directors as the Board shall see fit or
the Bylaws shall provide for, and such committees shall have and may exercise
any and all such powers as the Board of Directors, by resolution, or the
Bylaws, may provide.
Seventh. The officers of the corporation shall be a President, one or more
Vice Presidents (one or more of whom may be designated an Executive Vice
President and one or more of whom may be designated a Senior Vice President),
Treasurer, Secretary, and such other officers as may be authorized pursuant to
the authority conferred by the Bylaws, all of whom shall be appointed by or by
the authority of the Board of Directors and serve at its pleasure. There may
be a Chairman of the Board of Directors who shall be appointed by the Board of
Directors from its own members and who shall have such powers as may be
prescribed by the Bylaws or, if and to the extent that the Bylaws shall not so
prescribe, by the Board of Directors.
Eighth. The corporation is to have perpetual existence.
2
6
Ninth. Upon any increase in the authorized capital stock of the corporation,
unless the resolution of the shareholders of the corporation authorizing said
increase shall otherwise provide, the Board of Directors shall first offer the
additional authorized stock pro rata to all shareholders of record at such
price and on such terms as the Board of Directors may in each instance fix.
Any shares still remaining unsold thirty (30) days after said offer may then be
sold to any person or persons, on the same terms or terms more favorable to the
corporation, as the Board of Directors may determine. In the event of the
issue of any additional stock of the corporation for the purposes of
accomplishing the merger with, or of acquiring, any other corporation, bank or
trust company, the directors may issue said stock without preferential
subscription rights to such extent and on such terms as the Board of Directors
may in each instance deem proper.
Tenth. Meetings of shareholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in law) outside the State of Delaware at
such place or places as may be designated from time to time by the Board of
Directors or in the Bylaws of the corporation.
Eleventh. The Board of Directors shall have the authority to make, alter or
repeal the Bylaws of the corporation.
Twelfth. No contract or other transaction between the corporation and any
other person, firm, corporation, association or other organization, and no act
of the corporation, shall in any way be affected or invalidated by the fact
that any of the directors or officers of the corporation are parties to such
contract, transaction or act or are pecuniarily or otherwise interested in the
same or are directors or officers or members of any such other firm,
corporation, association or other organization, provided that the interest of
such director shall be disclosed or shall have been known to the Board of
Directors authorizing or approving the same, or to a majority thereof. Any
director of the corporation who is a party to such transaction, contract, or
act or who is pecuniarily or otherwise interested in the same or is a director
or officer or member of such other firm, corporation, association or other
organization, may be counted in determining a quorum of any meeting of the
Board of Directors which shall authorize or approve any such contract,
transaction or act, and may vote thereon with like force and effect as if he
were in no way interested therein. Neither any director nor any officer of the
corporation, being so interested in any such contract, transaction or act of
the corporation which shall be approved by the Board of Directors of the
corporation, nor any such other person, firm, corporation, association or other
organization in which such director may be a director,
3
7
officer or member, shall be liable or accountable to the corporation, or to any
shareholder thereof, solely by reason of being an interested person, for any
loss incurred by the corporation pursuant to or by reason or such contract,
transaction or act, or for any gain received by any such other party pursuant
thereto or by reason thereof.
Thirteenth. To the fullest extent permitted by the Delaware General
Corporation Law as it exists or may hereafter be amended, a director of this
corporation shall not be liable to the corporation or its stockholders for
monetary damages for breach of a fiduciary duty as a director.
4
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,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------ ------------ ------------ ------------
(dollars in thousands)
Income before income taxes
and cumulative effect of a
change in accounting principle $ 115,834 $ 122,138 $ 111,501 $ 119,105 $ 127,880
---------- ----------- ---------- ---------- -----------
Fixed charges:(1)
Interest expense 252,795 265,297 179,688 163,541 217,693
Rental expense 4,932 4,600 5,355 4,013 5,801
---------- ----------- ---------- ---------- -----------
257,727 269,897 185,043 167,554 223,494
Less interest on deposits 182,402 176,048 120,289 129,719 186,725
---------- ----------- ---------- ---------- -----------
Net fixed charges 75,325 93,849 64,754 37,835 36,769
---------- ----------- ---------- ---------- -----------
Earnings, excluding
interest on deposits $ 191,159 $ 215,987 $ 176,255 $ 156,940 $ 164,649
========== =========== ========== ========== ===========
Earnings, including
interest on deposits $ 373,561 $ 392,035 $ 296,544 $ 286,659 $ 351,374
========== =========== ========== ========== ===========
Ratio of earnings to
fixed charges:
Excluding interest
on deposits 2.54x 2.30x 2.72x 4.15x 4.48x
Including interest
on deposits 1.45x 1.45x 1.60x 1.71x 1.57x
(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
CONSOLIDATED FINANCIAL HIGHLIGHTS
First Hawaiian, Inc. and Subsidiaries 1
(dollars in thousands, except per share data) 1996 1995 Change
- ------------------------------------------------------------------------------------------
Year Ended December 31
EARNINGS AND DIVIDENDS
Net income................................ $ 80,296 $ 77,005 4.3%
Cash dividends............................ 37,579 37,368 .6
- ------------------------------------------------------------------------------------------
PER SHARE
Net income................................ $ 2.56 $ 2.43 5.3%
Cash dividends............................ 1.195 1.18 1.3
Book value................................ 22.22 20.86 6.5
- ------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average total assets............ 1.04% 1.02% 2.0%
Return on average stockholders' equity.... 11.88 12.03 (1.2)
- ------------------------------------------------------------------------------------------
FINANCIAL POSITION AT DECEMBER 31
Total assets.............................. $ 8,002,174 $ 7,564,509 5.8%
Loans..................................... 5,806,732 5,259,545 10.4
Deposits.................................. 5,936,708 5,358,313 10.8
Stockholders' equity...................... 705,884 649,537 8.7
Risk-based capital ratios:
Tier 1.................................. 8.42% 9.03% (6.8)%
Total................................... 11.85 11.88 (.3)
Tier 1 leverage ratio..................... 7.32 7.72 (5.2)
==========================================================================================
NET INCOME NET INCOME AND RETURN ON AVERAGE RETURN ON AVERAGE
($ in millions) CASH DIVIDENDS PER SHARE TOTAL ASSETS STOCKHOLDERS' EQUITY
($) (%) (%)
1992.........86.9 1992.........2.70 1992.........1.33 1992.........16.52
1993.........81.9 1993.........2.52 1993.........1.21 1993.........14.01
1994.........72.5 1994.........2.25 1994.........1.01 1994.........11.73
1995.........77.0 1995.........2.43 1995.........1.02 1995.........12.03
1996.........80.3 1996.........2.56 1996.........1.04 1996.........11.88
2
SENIOR ADMINISTRATIVE OFFICERS First Hawaiian, Inc. and Subsidiaries 18
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
Gerald M. Pang
Senior Vice President & Chief Credit Officer
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
Robert A. Alm
Senior Vice President,
Financial Management Group
Gary L. Caulfield
Executive Vice President,
Information Management Group
Anthony R. Guerrero, Jr.
Executive Vice President,
Branch Banking Group
Thomas P. Huber
Executive Vice President,
General Counsel & Assistant Secretary,
Legal Group
Gerald M. Pang
Executive Vice President &
Chief Credit Officer
N. W. "Red" Pope
Executive Vice President,
Marketing Group
Barbara S. Tomber
Executive Vice President,
Wholesale Loan Group
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
Dean K. Hirata
Senior Vice President & Controller,
Controller's Division
Charles L. Jenkins
Vice President,
Corporate & International Banking Division
William B. Johnstone, III
Executive 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
Senior Vice President & General Auditor,
Audit Division
David W. Madison
Executive Vice President,
Branch Loan Administration Division
Vernon T. Omori
Senior Vice President,
Residential Real Estate Division
Curt T. Otaguro
Senior 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
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
Senior Vice President/Bank Secrecy Officer,
Operations Division
FIRST HAWAIIAN LEASING, INC./
FHL LEASE HOLDING COMPANY, INC.
John K. Tsui
Chairman & Chief Executive Officer
Stephen J. Marcuccilli
President
PACIFIC ONE BANK
Walter A. Dods, Jr.
Chairman
Richard C. Williamson
President & Chief Executive Officer
PACIFIC ONE BANK, N. A.
Walter A. Dods, Jr.
Chairman
Richard C. Williamson
Vice Chairman
Richard C. Emery
President & Chief Executive Officer
3
BOARDS OF DIRECTORS First Hawaiian, Inc. and Subsidiaries 19
John W. A. Buyers (FHI, FHB)
Chairman & Chief Executive Officer,
C. Brewer & Co., Ltd.
Dr. Albert C. K. Chun-Hoon (FHB)
Orthopedic Surgeon
John C. Couch (FHI, FHB)
Chairman, President & Chief Executive Officer,
Alexander & Baldwin, Inc.;
Chairman, A&B - Hawaii, Inc.
Walter A. Dods, Jr. (FHI, FHB)
Chairman & Chief Executive Officer,
First Hawaiian, Inc. and First Hawaiian Bank;
Trustee, Estate of S. M. Damon
Craig D. Eerkes (FHB)
Chairman and Chief Executive Officer,
Tri-City Oil Company
Dr. Julia Ann Frohlich (FHI, FHB)
President, Blood Bank of Hawaii
Paul Mullin Ganley (FHI, FHB)
Trustee, Estate of S. M. Damon;
Partner, Carlsmith, Ball, Wichman, Case & Ichiki
David M. Haig (FHI, FHB)
Trustee, Estate of S. M. Damon
Warren H. Haruki (FHB)
President, GTE Hawaiian Tel
Howard K. Hiroki (FHB)
Partner (Retired), Coopers & Lybrand, L. L. P.
John A. Hoag (FHI, FHB)
President (Retired), First Hawaiian, Inc.;
Vice Chairman (Retired), First Hawaiian Bank
Chairman, Hawaii Reserves, Inc.
Glenn A. Kaya (FHB)
President, Hawaii Seiyu, Ltd.
Dr. Richard R. Kelley (FHB)
Chairman, Outrigger Enterprises
Bert T. Kobayashi, Jr. (FHI, FHB)
Principal, Kobayashi, Sugita & Goda
Dr. Richard T. Mamiya (FHI, FHB)
Heart Surgeon, Richard Mamiya, MD, Inc.
Dr. Fujio Matsuda (FHI, FHB)
Chairman and Chief Executive Officer,
Pacific International Center for
High Technology Research
Dr. Roderick F. McPhee (FHI, FHB)
President (Retired), Punahou School
George P. Shea, Jr. (FHI, FHB)
Chairman, President &
Chief Executive Officer (Retired),
First Insurance Company of Hawaii, Ltd.
R. Dwayne Steele (FHB)
Chairman, Grace Pacific Corp.
John K. Tsui (FHI, FHB)
President, First Hawaiian, Inc.;
President & Chief Operating Officer,
First Hawaiian Bank
Jenai Sullivan Wall (FHB)
President, Foodland Super Market, Ltd.
Fred C. Weyand (FHI, FHB)
Trustee, Estate of S. M. Damon;
General (Retired), U. S. Army
James C. Wo (FHB)
Chairman & Chief Executive Officer,
Bojim Investments;
Vice President & Treasurer,
BJ Management Corp.
Robert C. Wo (FHI, FHB)
President & Secretary, BJ Management Corp.;
Chairman, C. S. Wo & Sons, Ltd.
Lily K. Yao (FHB)
Chairman & Chief Executive Officer,
Pioneer Federal Savings Bank
PIONEER FEDERAL SAVINGS BANK
Lily K. Yao
Chairman & Chief Executive Officer
Albert M. Yamada
President & Chief Operating Officer
Walter A. Dods, Jr.
Michael K. Fujimoto
John A. Hoag
Howard H. Karr
Wesley T. Park
H. Fred Mosher
Director Emeritus
FIRST HAWAIIAN CREDITCORP, INC.
Donald G. Horner
Chairman
Harriet M. Aoki
President & Chief Executive Officer
Philip H. Ching
Walter A. Dods, Jr.
Dr. Julia Ann Frohlich
John A. Hoag
David C. Hulihee
Howard H. Karr
Glenn A. Kaya
Leighton S. L. Mau
John K. Tsui
Fred C. Weyand
FHL LEASE HOLDING COMPANY, INC.
John K. Tsui
Chairman & Chief Executive Officer
Stephen J. Marcuccilli
President
Philip H. Ching
Walter A. Dods, Jr.
Dr. Julia Ann Frohlich
Paul Mullin Ganley
John A. Hoag
Donald G. Horner
David C. Hulihee
Howard H. Karr
PACIFIC ONE BANK
Walter A. Dods, Jr.
Chairman
John K. Tsui
Vice Chairman and Chief Credit Officer
Richard C. Williamson
President and Chief Executive Officer
Charles E. Carlbom
Stuart A. Hall
James L. Huffman
PACIFIC ONE BANK, N. A.
Walter A. Dods, Jr.
Chairman
Craig D. Eerkes
Vice Chairman
Richard C. Williamson
Vice Chairman
Richard C. Emery
President and Chief Executive Officer
Russ Dean
Leonard Dietrich
Howard H. Karr
Neal Smiley
John K. Tsui
George Yoshino
4
FIRST HAWAIIAN, INC. FINANCIAL REVIEW Index to Financial Review 20
21 Corporate Organization
22 Common Stock Information
23 Summary of Selected Consolidated Financial Data
24 Management's Discussion and Analysis
of Financial Condition and Results of Operations
42 Report of Independent Accountants
Financial Statements:
43 Consolidated Balance Sheets
44 Consolidated Statements of Income
45 Consolidated Statements of Changes
in Stockholders' Equity
46 Consolidated Statements of Cash Flows
47 Notes to Financial Statements
63 Corporate Addresses
64 Supplemental Information
5
CORPORATE ORGANIZATION First Hawaiian, Inc. and Subsidiaries 21
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, cash management services, 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 56 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 First
Hawaiian Center, the Company's new headquarters, which was completed in
September 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 PACIFIC ONE DEALER CENTER, INC.
Pacific One Dealer Center, Inc. is engaged in the business of automobile
financing and related business activities in California and Oregon.
o FIRST HAWAIIAN LEASING, INC.
First Hawaiian Leasing, Inc. engages in commercial equipment and vehicle
leasing and financing.
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.
In October 1996, Pioneer's residential mortgage lending operations were
merged with the Bank. Pioneer's remaining operations are scheduled to be merged
with and into the Bank in April 1997.
PACIFIC ONE BANK
Pacific One Bank ("Pacific One"), headquartered in Portland, Oregon, was
formed on May 21, 1996 in connection with the acquisition by the Company of 31
branches in Oregon, Washington and Idaho which were being divested by U.S.
Bancorp and West One Bancorp as a result of their merger. Twenty-six of these
branches are being operated as Pacific One. Sixteen of these branches are in the
Portland metropolitan area, five are on the central Oregon coast, four are in
eastern Oregon and one is in Weiser, Idaho.
Four of the acquired branches are now being operated as part of Pacific One
Bank, N.A., in Washington state, which is discussed below. One branch, also in
Washington state, was subsequently closed.
Pacific One is a full-service bank conducting commercial and consumer banking
business. Its activities include receiving demand, savings and time deposits;
making commercial, agricultural, real estate and consumer loans; and selling
international and cash management services and mutual funds and annuities.
Deposits in Pacific One are insured by the FDIC to the extent, and subject to
the limitations, set forth in the Act. Pacific One is chartered as a bank in the
State of Oregon with authority to operate branches in Idaho and is not a member
of the Federal Reserve System.
6
CORPORATE ORGANIZATION (CONTINUED) First Hawaiian, Inc. and Subsidiaries 22
ANB FINANCIAL CORPORATION
ANB Financial Corporation ("ANB"), a bank holding company, and its
subsidiary, Pacific One Bank, N.A. (formerly known as American National Bank),
headquartered in Kennewick, Washington, were acquired by the Company on July 31,
1996. Pacific One Bank, N.A. operates eight branches in southeastern Washington.
Pacific One Bank, N.A. is a full-service bank conducting commercial and
consumer banking business. Its activities include receiving demand, savings and
time deposits; making commercial, agricultural, real estate and consumer loans;
and selling cash management services and mutual funds and annuities.
Deposits in Pacific One Bank, N.A. are insured by the FDIC to the extent, and
subject to the limitations, set forth in the Act. Pacific One Bank, N.A. is a
national bank chartered under Federal law.
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.
FHL LEASE HOLDING COMPANY, INC.
FHL Lease Holding Company, 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. Currently, it is not
actively engaged in business.
COMMON STOCK INFORMATION
The common stock of the Company is traded on The Nasdaq Stock Market under
the symbol FHWN. As of December 31, 1996, there were 4,852 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, 1996, a total of 33,190,374 shares of common stock were
issued, including 1,415,954 shares in the treasury stock account. The Board of
Directors (the "Board") has authorized the total repurchase of up to 1.6 million
shares to be held by the Company or used for corporate purposes as designated by
the Board. Through December 31, 1996, the Company had repurchased 1,075,940
shares of common stock under such authorization.
A compilation of certain quarterly and annual per share data is presented
below:
Market Price
Net Dividends --------------------------------------
Income Paid High Low Close
- --------------------------------------------------------------------------------------------
1996
First Quarter....... $ .65 $ .295 $ 30 $ 26 $ 27 5/8
Second Quarter...... .67 .295 29 3/4 26 1/2 28 1/2
Third Quarter....... .60 .295 31 25 3/4 31
Fourth Quarter...... .64 .310 36 3/4 29 1/4 35
- ----------------------------------------------
Annual........... $ 2.56 $ 1.195 36 3/4 25 3/4 35
==============================================
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 1/4 27 7/8 30
- ----------------------------------------------
Annual........... $ 2.43 $ 1.180 31 1/4 23 30
==============================================
1994 $ 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 $ 1.060 29 3/4 23 1/2 28 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 12 to the Financial Statements on page 54.
7
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS AND DIVIDENDS
(in thousands)
Total interest income $574,140 $559,957 $475,760 $428,931 $475,574
Total interest expense 252,795 265,297 179,688 150,709 206,783
- ----------------------------------------------------------------------------------------------------------------
Net interest income 321,345 294,660 296,072 278,222 268,791
Provision for loan losses 23,627 38,107 22,922 13,262 12,812
Total noninterest income 102,327 94,878 86,672 79,587 69,597
Total noninterest expenses 284,211 229,293 248,321 225,442 197,696
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of a change in accounting principle 115,834 122,138 111,501 119,105 127,880
Income taxes 35,538 45,133 38,990 40,898 40,980
- ----------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of a change in accounting principle 80,296 77,005 72,511 78,207 86,900
Cumulative effect of a change
in accounting principle -- -- -- 3,650 --
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 80,296 $ 77,005 $ 72,511 $ 81,857 $ 86,900
================================================================================================================
CASH DIVIDENDS $ 37,579 $ 37,368 $ 38,008 $ 36,821 $ 34,161
================================================================================================================
COMMON STOCK DATA
Per share:
Income before cumulative effect
of a change in accounting principle $ 2.56 $ 2.43 $ 2.25 $ 2.41 $ 2.70
Net income 2.56 2.43 2.25 2.52 2.70
Cash dividends 1.195 1.18 1.18 1.135 1.06
Book value (at December 31) 22.22 20.86 19.61 18.69 17.30
Market price (close at December 31) 35.00 30.00 23.75 24.75 28.75
Average shares outstanding (in thousands) 31,399 31,735 32,259 32,505 32,225
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEETS (in millions)
Average balances:
Total assets $7,755 $7,528 $7,200 $6,755 $6,537
Total earning assets 7,071 6,876 6,558 6,106 5,966
Loans 5,510 5,461 5,172 4,619 4,358
Deposits 5,618 5,178 5,082 5,069 5,084
Stockholders' equity 676 640 618 584 526
At December 31:
Total assets $8,002 $7,565 $7,535 $7,269 $6,553
Loans 5,807 5,260 5,534 5,067 4,396
Deposits 5,937 5,358 5,152 5,220 5,088
Long-term debt 206 239 219 222 71
Stockholders' equity 706 650 628 608 562
- ----------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average:
Total assets 1.04% 1.02% 1.01% 1.21% 1.33%
Stockholders' equity 11.88 12.03 11.73 14.01 16.52
Dividend payout ratio 46.68 48.56 52.44 45.04 39.26
Average stockholders' equity
to average total assets 8.72 8.50 8.58 8.65 8.05
Year ended December 31:
Net interest margin 4.57 4.36 4.63 4.69 4.62
Net loans charged off to
average loans .44 .38 .46 .27 .27
At December 31:
Risk-based capital ratios:
Tier 1 8.42 9.03 9.31 9.80 10.49
Total 11.85 11.88 12.06 12.84 11.67
Tier 1 leverage ratio 7.32 7.72 7.51 7.45 7.72
Allowance for loan losses to
total loans 1.47 1.50 1.11 1.23 1.28
Nonperforming assets to total loans
and other real estate owned 1.68 1.75 1.14 1.44 1.65
Allowance for loan losses to
nonperforming loans 1.18x .95x 1.04x 1.03x .79x
=================================================================================================================
23
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
OVERVIEW
The Company recorded consolidated net income for 1996 of $80,296,000, an
increase of 4.3%, or $3,291,000, over $77,005,000 in 1995. On a per share basis,
consolidated net income for 1996 was $2.56, an increase of 5.3% over 1995. The
proportionately greater increase in earnings per share was attributable in part
to the fewer average number of shares outstanding in 1996 as compared to 1995,
as a result of the Company's stock repurchase program previously mentioned.
The increase in consolidated net income in 1996 was primarily attributable
to: (1) the purchase of 31 branches in Oregon, Washington and Idaho, which were
being divested by U.S. Bancorp and West One Bancorp as a result of their merger;
and (2) the purchase of ANB Financial Corporation. The above acquisitions
(collectively referred to as the "Pacific Northwest Acquisitions"), reported a
combined net income of $2,282,000 in 1996. In addition, the Company recorded an
income tax benefit of $2,800,000 (resulting primarily from the recognition of
previously unrecognized tax credits) which reduced the overall income tax
expense. These increases were partially offset by an after-tax charge of
$2,309,000 resulting from the Bank Insurance Fund ("BIF")/Savings Association
Insurance Fund ("SAIF") legislation enacted on September 30, 1996. The Deposit
Insurance Funds Act of 1996 imposed a special one-time assessment at a rate of
65.7 cents per $100 of deposits on institutions holding SAIF-insured deposits on
March 31, 1995, in order to recapitalize the SAIF fund. Exclusive of the special
SAIF one-time assessment, consolidated net income for 1996 was $82,605,000, an
increase of 7.3% over 1995.
In recent years, and especially during the latter half of 1995 and
throughout 1996, the level of the Company's nonperforming assets and charge-offs
has increased due to the following adverse economic trends: (1) prolonged
economic downturn in Hawaii and related weakness in the local real estate
market, including declining values in the leasehold real estate sector; and (2)
lingering effects of Hurricane Iniki on the economy of the island of Kauai. The
Company's nonperforming assets, principally loans collateralized by real estate
and other real estate owned, totalled 1.68% and 1.75% of total loans and other
real estate owned as of December 31, 1996 and 1995, respectively, compared to
1.14%, 1.44% and 1.65% at December 31, 1994, 1993 and 1992, respectively. Net
charge-offs to average loans were .44%, .38% and .46% for 1996, 1995 and 1994,
respectively, compared to .27% in 1993 and 1992. As a result, the provision for
loan losses was $23,627,000, $38,107,000 and $22,922,000 for 1996, 1995 and
1994, respectively, compared to $13,262,000 and $12,812,000 in 1993 and 1992,
respectively.
Consolidated net income for 1995 increased by $4,494,000, or 6.2%, over
1994. Consolidated net income per share for 1995 was $2.43 compared to $2.25 in
1994. The increase in earnings was primarily due to: (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 on page 44) 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. The increase in earnings was
partially offset by a higher provision for loan losses of $15,185,000 in 1995
over 1994.
At December 31, 1996, the Company's ratios of Tier 1 Capital to
risk-weighted assets, Total Capital to risk-weighted assets and Tier 1 Capital
to average assets were 8.42%, 11.85% and 7.32%, respectively, compared with
9.03%, 11.88% and 7.72%, respectively, at December 31, 1995. These ratios are
well in excess of the minimum ratios of 4.00%, 8.00% and 3.00%, respectively,
specified by the Federal Reserve Board.
PACIFIC NORTHWEST ACQUISITIONS
On May 31, 1996, for a purchase price of $36 million, the Company acquired
31 branches in Oregon, Washington and Idaho, which were being divested by U.S.
Bancorp and West One Bancorp as a result of their merger. This transaction
included the purchase of loans of $400 million and assumption of deposits of
$687 million.
On July 31, 1996, for a purchase price of $18 million, the Company acquired
ANB Financial Corporation, a bank holding company, and its subsidiary, American
National Bank, which had total loans of $51 million and total deposits of $67
million at the date of acquisition.
ASSETS LOANS
($ in billions) ($ in billions)
1992 6.55 1992 4.40
1993 7.27 1993 5.07
1994 7.54 1994 5.53
1995 7.57 1995 5.26
1996 8.00 1996 5.81
24
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NET INTEREST INCOME
As reflected in Table 1 on page 27, net interest income, on a taxable
equivalent basis, increased $23,548,000, or 7.9%, from $299,707,000 in 1995 to
$323,255,000 in 1996. This increase was primarily due to the Pacific Northwest
Acquisitions and a 21 basis point (1% equals 100 basis points) increase in the
net interest margin. Net interest income decreased by $3,717,000, or 1.2%, from
1994 to 1995 primarily due to a 27 basis point decrease in the net interest
margin, partially offset by a 4.8% increase in average earning assets,
reflecting significant loan growth. Tables 1 and 2 present an analysis of the
components and changes in net interest income for 1996, 1995 and 1994.
The net interest margin was 4.57% for 1996, up 21 basis points over 1995.
The increase was due to a 28 basis point decrease in the rate paid for sources
of funds used for average earning assets, which exceeded a 7 basis point
decrease in the yield on average earning assets. The decrease in the rate paid
for sources of funds reflected, among other things, an increase in average
noninterest-bearing demand deposits of $73,550,000, or 8.8%, and the positive
impact of interest rate swaps designed to stabilize the net interest margin. In
1996, there was a favorable impact of $5,684,000 due to interest rate swaps
which were used to hedge deposit accounts.
The decrease in the yield on average earning assets was affected by the
following events in 1995: (1) the reversal of $1,806,000 in previously
recognized interest income on certain loans placed on nonaccrual status; and (2)
the 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.
As a result of increases in interest rates in 1995, the rate paid for
sources of funds used for earning assets increased 112 basis points and the
yield on average earning assets increased 85 basis points, which resulted in a
decrease in the net interest margin from 4.63% in 1994 to 4.36%. The 112 basis
point increase in the rate paid for sources of funds reflected the general
increase in interest rates as well as a shift in our funding mix toward
higher-cost funding sources.
Average earning assets increased by $194,908,000, or 2.8%, in 1996 over
1995, primarily due to the Pacific Northwest Acquisitions. In addition, 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 order 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 effects of such securitization and
the Pacific Northwest Acquisitions, the investment securities portfolio
reflected a decrease of $208,704,000, or 22.9%, compared to 1995. The decrease
was a reflection of reduced levels of state and local government funds
requiring collateralization and the ongoing adjustments to the investment
portfolio resulting from the securitization in 1995.
Average loans increased by $49,580,000, or .9%, in 1996 over 1995 primarily
due to the Pacific Northwest Acquisitions. Excluding the effects of the Pacific
Northwest Acquisitions and loan securitization, average loans in 1996 remained
relatively constant compared to 1995. The Company continues its 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 offset the decline in the balances of loans
collateralized by real estate. As a result (excluding the effects of the Pacific
Northwest Acquisitions and loan securitization), the mix of average earning
assets continues to change, with average loans representing 84.0% of average
earning assets for 1996 as compared to 82.8% in 1995.
Average earning assets increased by $317,978,000, or 4.8%, in 1995 over
1994. In addition, the mix of earning assets changed slightly, as the Company
increased the average amount of loans in its portfolio, from 78.9% of average
earning assets in 1994 to 82.8% in 1995. Average loans, excluding the impact of
the loan securitization, increased 10.1% from 1994 to 1995.
Average interest-bearing deposits and liabilities increased by
$124,535,000, or 2.1%, in 1996 over 1995 primarily due to the Pacific Northwest
Acquisitions and deposits acquired from a depository financial services company
in the fourth quarter of 1995. In addition, the Company issued $50 million of
long-term subordinated debt during the second quarter of 1996 to fund the
Pacific Northwest Acquisitions. Excluding the impact of the Pacific Northwest
Acquisitions, average interest-bearing deposits and liabilities decreased by
$281,202,000, or 4.8%, in 1996 compared to 1995.
NET INTEREST INCOME* AVERAGE EARNING ASSETS
($ in millions) ($ in billions)
1992 275.8 1992 5.97
1993 286.4 1993 6.11
1994 303.4 1994 6.56
1995 299.7 1995 6.88
1996 323.3 1996 7.07
* taxable equivalent basis
25
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
This decrease reflected the repayment of short-term borrowings from proceeds
received from the run-off of the investment securities portfolio. Depositors
were seeking higher yields, and thus were placing more money into time deposits
as opposed to savings accounts. As a result, the higher-yielding time deposits
represented 39.8% of average interest-bearing deposits and liabilities in 1996,
as compared to 33.9% in 1995. As reflected in Table 2 on page 28, the decrease
in total interest expense for interest-bearing deposits and liabilities of
$12,502,000 from 1995 to 1996 included an increase of $23,765,000 primarily due
to higher average balances in time deposits.
Average interest-bearing deposits and liabilities increased by
$294,061,000, or 5.3%, in 1995 over 1994, principally as a result of an increase
in average interest-bearing deposits. As reflected in Table 2, the increase in
total interest expense for interest-bearing deposits and liabilities of
$85,609,000 from 1994 to 1995 was comprised of an increase of $63,872,000 due to
higher interest rates and an increase of $21,737,000 due to higher average
balances.
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 1996, 1995 and 1994) to make them comparable with taxable items
before any income taxes are applied.
1996 1995 1994
--------------------------- ------------------------------ -----------------------------
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 $ 13,666 $ 790 5.78% $ 11,849 $ 771 6.51% $ 12,078 $ 615 5.09%
Foreign 182,680 10,392 5.69 50,613 2,956 5.84 55,214 2,011 3.64
- ------------------------------------------------- --------------- ------------------
Total interest-
bearing deposits
in other banks 196,346 11,182 5.69 62,462 3,727 5.97 67,292 2,626 3.90
- ------------------------------------------------- --------------- ------------------
Federal funds sold and
securities purchased under
agreements to resell 153,499 8,442 5.50 207,237 12,003 5.79 127,821 5,179 4.05
Investment securities (1):
Taxable 1,169,110 72,813 6.23 1,029,183 57,890 5.62 1,008,448 45,248 4.49
Exempt from Federal
taxes 41,546 4,063 9.78 116,291 9,316 8.01 182,175 11,084 6.08
- ------------------------------------------------- ------------------- ------------------
Total investment
securities 1,210,656 76,876 6.35 1,145,474 67,206 5.87 1,190,623 56,332 4.73
- ------------------------------------------------- ------------------- ------------------
Loans (2) (3):
Domestic 5,272,503 456,741 8.66 5,239,888 461,067 8.80 4,953,951 400,003 8.07
Foreign 237,758 22,809 9.59 220,793 21,001 9.51 218,189 18,972 8.69
- ------------------------------------------------- ------------------- ------------------
Total loans 5,510,261 479,550 8.70 5,460,681 482,068 8.83 5,172,140 418,975 8.10
- ------------------------------------------------- ------------------- ------------------
Total earning assets 7,070,762 576,050 8.15 6,875,854 565,004 8.22 6,557,876 483,112 7.37
- ------------------------------------------------- ------------------- ------------------
Cash and due from banks 250,456 242,412 265,103
Premises and equipment 253,502 243,579 250,391
Core deposit premium 27,272 13,672 14,588
Goodwill 84,965 76,893 79,178
Other assets 68,427 76,086 33,077
- ---------------------------------------- ---------- ----------
Total assets $7,755,384 $7,528,496 $7,200,213
======================================== ========== ==========
Notes:
(1) Average balances exclude the effects of the fair value adjustments.
(2) Nonaccruing loans have been included in the computations of average loan
balances.
(3) Interest income for loans included loan fees of $24,189, $23,951 and
$29,317 for 1996, 1995 and 1994, respectively.
26
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
/
1996 1995 1994
--------------------------- -------------------------- --------------------------
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 $1,387,849 $ 36,104 2.60% $1,114,737 $ 30,034 2.69% $1,206,562 $ 25,383 2.10%
Savings 921,310 20,679 2.24 1,177,277 34,272 2.91 1,422,297 30,865 2.17
Time 2,197,868 116,707 5.31 1,707,967 92,942 5.44 1,369,020 56,254 4.11
Foreign (interest-
bearing) 205,547 8,912 4.34 346,886 18,800 5.42 207,655 7,787 3.75
- ------------------------------------------------ -------------------- --------------------
Total interest-bearing
deposits 4,712,574 182,402 3.87 4,346,867 176,048 4.05 4,205,534 120,289 2.86
Short-term borrowings 1,011,958 53,977 5.33 1,271,981 74,369 5.85 1,136,361 47,813 4.21
Long-term debt 249,245 16,416 6.59 230,394 14,880 6.46 213,286 11,586 5.43
- ------------------------------------------------ -------------------- --------------------
TOTAL INTEREST-
BEARING DEPOSITS
AND LIABILITIES 5,973,777 252,795 4.23 5,849,242 265,297 4.54 5,555,181 179,688 3.23
- ------------------------------------------------ -------------------- --------------------
Noninterest-bearing
demand deposits 905,035 831,485 876,696
Other liabilities 200,636 207,619 149,922
- -------------------------------------- ---------- ----------
Total liabilities 7,079,448 6,888,346 6,581,799
Stockholders' equity 675,936 640,150 618,414
- -------------------------------------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $7,755,384 $7,528,496 $7,200,213
====================================== ========== ==========
NET INTEREST INCOME
AND MARGIN ON TOTAL
EARNING ASSETS 323,255 4.57% 299,707 4.36% 303,424 4.63%
Tax equivalent
adjustment 1,910 5,047 7,352
- --------------------------- -------- -------- --------
Net interest income $321,345 $294,660 $296,072
=====================================================================================================================
27
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 1996, 1995 and 1994) to make
them comparable with taxable items before any income taxes are applied.
1996 COMPARED TO 1995-- 1995 Compared to 1994--
---------------------------------- ------------------------------
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 $ 111 $ (92) $ 19 $ (12) $ 168 $ 156
Foreign 7,515 (79) 7,436 (180) 1,125 945
- ----------------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits
in other banks 7,626 (171) 7,455 (192) 1,293 1,101
- ----------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell (2,981) (580) (3,561) 4,035 2,789 6,824
Investment securities:
Taxable 8,342 6,581 14,923 948 11,693 12,641
Exempt from Federal income taxes (6,973) 1,720 (5,253) (4,685) 2,917 (1,768)
- ----------------------------------------------------------------------------------------------------------------
Total investment securities 1,369 8,301 9,670 (3,737) 14,610 10,873
- ----------------------------------------------------------------------------------------------------------------
Loans (1):
Domestic 2,858 (7,184) (4,326) 23,899 37,165 61,064
Foreign 1,626 182 1,808 229 1,801 2,030
- ----------------------------------------------------------------------------------------------------------------
Total loans 4,484 (7,002) (2,518) 24,128 38,966 63,094
- ----------------------------------------------------------------------------------------------------------------
Total earning assets 10,498 548 11,046 24,234 57,658 81,892
- ----------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits:
Interest-bearing demand 7,136 (1,066) 6,070 (2,047) 6,698 4,651
Savings (6,621) (6,972) (13,593) (5,926) 9,333 3,407
Time 26,064 (2,299) 23,765 15,883 20,805 36,688
Foreign (interest-bearing) (6,632) (3,256) (9,888) 6,618 4,395 11,013
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 19,947 (13,593) 6,354 14,528 41,231 55,759
Short-term borrowings (14,269) (6,123) (20,392) 6,227 20,329 26,556
Long-term debt 1,236 300 1,536 982 2,312 3,294
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits
and liabilities 6,914 (19,416) (12,502) 21,737 63,872 85,609
- ----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS) $ 3,584 $19,964 $23,548 $ 2,497 $ (6,214) $ (3,717)
================================================================================================================
Note:
(1) Interest income for loans included loan fees of $24,189, $23,951 and
$29,317 for 1996, 1995 and 1994, respectively.
28
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Total noninterest income increased $7,449,000, or 7.9%, from $94,878,000 in
1995 to $102,327,000 in 1996. Excluding the Pacific Northwest Acquisitions,
total noninterest income increased $4,054,000, or 4.3%.
Trust fees increased $823,000, or 3.6%, from 1995 to 1996 and $187,000, or
.8%, from 1994 to 1995. The increase was primarily the result of increases in
fees from irrevocable trusts and investment management fees resulting from new
business.
Service charges on deposit accounts increased $2,134,000, or 8.8%, from
1995 to 1996 and $136,000, or .6%, from 1994 to 1995. Excluding the Pacific
Northwest Acquisitions, service charges on deposit accounts increased $500,000,
or 2.1%, from 1995 to 1996. The increase was attributable to an increase in fees
on checks returned and paid.
Other service charges and fees increased $4,297,000, or 12.1%, from 1995 to
1996 and $3,614,000, or 11.3%, from 1994 to 1995. The increase from 1995 to 1996
was primarily as a result of the Pacific Northwest Acquisitions, higher merchant
discount fees, commissions from annuity and mutual fund sales and mortgage
brokerage fees. Increases in fee income from higher merchant discount fees and
commissions from annuity and mutual fund sales accounted for the increase from
1994 to 1995.
Other noninterest income increased $221,000, or 1.8%, from 1995 to 1996 and
$4,303,000, or 55.9%, from 1994 to 1995. The modest increase from 1995 to 1996
was attributable to a commission paid to the Company for renewal of an agreement
to sell disability insurance to loan product customers. 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:
- ----------------------------------------------------------------------------------------------------------------
1996/95 Change 1995/94 Change
---------------- --------------
(in thousands) 1996 1995 1994 AMOUNT % Amount %
- ----------------------------------------------------------------------------------------------------------------
Trust and investment services income $ 23,857 $23,034 $22,847 $ 823 3.6% $ 187 .8%
Service charges on deposit accounts 26,284 24,150 24,014 2,134 8.8 136 .6
Other service charges and fees 39,848 35,551 31,937 4,297 12.1 3,614 11.3
Securities gains, net 118 144 178 (26) (18.1) (34) (19.1)
Other 12,220 11,999 7,696 221 1.8 4,303 55.9
- ------------------------------------------------------------------------------------ ------
Total noninterest income $102,327 $94,878 $86,672 $7,449 7.9% $8,206 9.5%
================================================================================================================
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon management's judgment as to the
adequacy of the allowance for loan losses (the "Allowance") to absorb future
losses. The Company uses a systematic methodology to determine the adequacy of
the Allowance and provision for loan losses to be reported for financial
statement purposes. The determination of the adequacy of the Allowance is
ultimately one of management judgment, which includes consideration of many
factors, including the amount of problem and potential problem loans, net
charge-off experience, changes in the composition of the loan portfolio quality,
general economic factors and the fair value of collateral securing the loans.
Each quarter, specific allocations of the Allowance are assigned to
individual loan relationships when periodic status reports indicate that a
future loss is probable. In accordance with 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 measurement process compares
the loan balance to: (1) the present value of expected future cash flows
discounted at the loan's effective interest rate; (2) the loan's observable
market price; and/or (3) the fair value of the collateral as established by
appraisal. The total amount allocated also includes an allocation for loans
which are not reviewed on a loan by loan basis based on a three-year moving
average historical ratio of net charge-offs to average loans outstanding by loan
category.
29
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
As the table on page 31 illustrates, the provision for loan losses for 1996
was $23,627,000, a decrease of 38.0%, or $14,480,000, compared to 1995. In 1995,
the Company increased its provision for loan losses by $15,185,000, or 66.2%,
over 1994. The 1995 increase reflected, among other factors, the Company's
evaluation of the impact of adverse economic conditions and trends in Hawaii (in
particular, events reflecting the prolonged effect of the 1992 recession on the
Hawaii economy) and loan concentrations.
The first and most important of these adverse economic trends was the
continuing weakness of the Hawaii economy's recovery from the 1992 recession. In
contrast to the mainland economy, Hawaii's recovery from the recession has been
slow and protracted; Hawaii continued to show weaknesses in its local real
estate market, especially during the latter half of 1995, including declining
values in the leasehold real estate sector.
The second significant adverse economic trend was the nagging effect of
Hurricane Iniki in September 1992. The island of Kauai has never totally
recovered from the damage to resort, hotel and agricultural property and the
extended insurance claim period that followed. In addition, in the third quarter
of 1995, a major sugar plantation on Kauai closed, further exacerbating the
existing high levels of unemployment.
The provision for loan losses in 1996 decreased from 1995, partly as a
result of the decrease in nonperforming loans, but remained relatively high in
comparison to the Company's historical trend prior to 1994 due to, among other
factors, the continuing impact of the adverse economic conditions and trends in
Hawaii, the increase in net charge-offs and nonperforming assets over 1995, as
well as the potential problem loans as discussed in the section titled
"Nonperforming Assets and Past Due Loans" on page 37.
Net charge-offs in 1996 totalled $24,218,000 compared to $20,624,000 in
1995. Net charge-offs in 1996 and 1995 represented .44% and .38%, respectively,
of average outstanding loans. The increase in commercial, financial and
agricultural loan charge-offs was primarily due to the charge-off of three
loans, partially collateralized by real estate, totalling $4,318,000 in the
fourth quarter of 1996. The increase in consumer loan charge-offs was primarily
attributable to the record number of personal bankruptcies in the state of
Hawaii, which resulted in a 25% increase in write-offs of credit card loans.
However, charge-offs in this profitable line of business remain well below
national average rates. The anticipated amount of net charge-offs in 1997 is
estimated to be 30-40 basis points of average outstanding loans.
At December 31, 1996, the Allowance totalled $85,248,000 and represented
1.47% of total outstanding loans compared to $78,733,000 and 1.50% as of
December 31, 1995.
The Allowance increased to 117.7% of nonperforming loans at December 31,
1996 (excluding 90 days or more past due accruing loans) from 95.0% at December
31, 1995, reflecting the decrease in nonperforming loans in 1996 compared to
1995. In management's judgment, the Allowance is adequate to absorb potential
losses currently inherent in the portfolio at December 31, 1996. However,
changes in prevailing economic conditions in the Company's markets could result
in changes in the level of nonperforming assets and charge-offs in the future
and, accordingly, changes in the Allowance.
ALLOWANCE AS A % YEAR-END ALLOWANCE FOR LOAN LOSSES
OF LOANS OUTSTANDING ($ in millions)
1992 1.28 1992 56.4
1993 1.23 1993 62.3
1994 1.11 1994 61.3
1995 1.50 1995 78.7
1996 1.47 1996 85.2
30
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following sets forth the activity in the allowance for loan losses for
the years indicated:
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
LOANS OUTSTANDING (END OF YEAR) $5,806,732 $5,259,545 $5,533,565 $5,066,809 $4,396,018
=================================================================================================================
AVERAGE LOANS OUTSTANDING $5,510,261 $5,460,681 $5,172,140 $4,619,401 $4,358,363
=================================================================================================================
Allowance for loan losses:
Balance at beginning of year $ 78,733 $ 61,250 $ 62,253 $ 56,385 $ 55,134
Allowance of subsidiaries purchased (1) 7,106 -- -- 5,225 --
Loans charged off:
Commercial, financial and agricultural 10,003 7,197 11,307 3,004 2,110
Real estate:
Commercial 1,619 2,763 1,500 125 250
Construction 1,450 1,466 7,178 4,506 3,932
Residential 2,937 2,707 588 562 --
Consumer 10,884 8,019 6,542 6,839 7,093
Lease financing 33 276 -- 27 25
Foreign 415 417 -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total loans charged off 27,341 22,845 27,115 15,063 13,410
- -----------------------------------------------------------------------------------------------------------------
Recoveries on loans previously charged off:
Commercial, financial and agricultural 929 327 1,229 235 349
Real estate:
Commercial 86 239 9 321 1
Construction 117 -- 205 -- --
Residential 234 43 92 207 35
Consumer 1,690 1,596 1,639 1,667 1,456
Lease financing 3 16 16 14 8
Foreign 64 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total recoveries on loans previously
charged off 3,123 2,221 3,190 2,444 1,849
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs (24,218) (20,624) (23,925) (12,619) (11,561)
Provision charged to expense 23,627 38,107 22,922 13,262 12,812
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 85,248 $ 78,733 $ 61,250 $ 62,253 $ 56,385
=================================================================================================================
Net loans charged off to average loans .44% .38% .46% .27% .27%
Net loans charged off to allowance for loan
losses 28.41% 26.19% 39.06% 20.27% 20.50%
Allowance for loan losses to total loans
(end of year) 1.47% 1.50% 1.11% 1.23% 1.28%
Allowance for loan losses to nonperforming loans:
Excluding 90 days or more past due
accruing loans 1.18x .95x 1.04x 1.03x .79x
Including 90 days or more past due
accruing loans .83x .70x .66x .62x .44x
==================================================================================================================
Note:
(1) Allowances of $7,106 and $5,225 in 1996 and 1993, respectively, were related
to the Pacific Northwest Acquisitions and the acquisition of Pioneer Federal
Savings Bank, respectively.
31
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The Company has allocated a portion of the allowance for loan losses
according to the amount deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the various loan categories as of
December 31 for the years indicated:
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans Loans Loans Loans Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- --------------------------------------------------------------------------------------------------------------------------------
Domestic:
Commercial, financial
and agricultural $13,730 24% $15,325 25% $16,610 23% $13,000 24% $14,700 27%
Real estate:
Commercial 6,620 20 2,320 19 4,700 18 3,400 17 5,400 16
Construction 120 4 4,035 5 7,010 6 11,850 7 4,400 10
Residential 6,130 33 4,260 34 9,510 37 4,700 35 3,000 28
Consumer 11,040 10 9,550 9 8,040 8 7,500 9 7,100 10
Lease financing 760 4 645 4 600 4 1,350 4 1,300 4
Foreign 1,540 5 1,430 4 1,085 4 1,600 4 1,700 5
General allowance 45,308 N/A 41,168 N/A 13,695 N/A 18,853 N/A 18,785 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Total $85,248 100% $78,733 100% $61,250 100% $62,253 100% $56,385 100%
================================================================================================================================
NONINTEREST EXPENSES
Total noninterest expenses for 1996 totalled $284,211,000, an increase of
$54,918,000, or 24.0%, over 1995. Excluding the Pacific Northwest Acquisitions
in 1996 and a nonrecurring gain of $20,766,000 recognized in 1995 in connection
with the curtailment of the Company's noncontributory pension plan, total
noninterest expenses increased $17,208,000, or 6.9%, over 1995.
Total personnel expense for 1996 increased $37,388,000, or 36.9%, over
1995. The increase was primarily due to the aforementioned nonrecurring gain of
$20,766,000 in 1995 and the Pacific Northwest Acquisitions. Excluding the
previously mentioned nonrecurring gain and Pacific Northwest Acquisitions, total
personnel expense increased $7,872,000, or 6.4%. The increase was primarily due
to an increase in employee benefit costs associated with the curtailment of a
noncontributory pension plan in the fourth quarter of 1995, which was replaced
with a defined contribution money purchase plan and enhanced matching to an
existing 401K plan, effective January 1, 1996. Also, higher salaries and wages
reflecting normal merit increases contributed to the increase.
Occupancy expense increased $1,339,000, or 5.2%, over 1995 primarily as a
result of the Pacific Northwest Acquisitions. Excluding the Pacific Northwest
Acquisitions, occupancy expense increased $403,000, or 1.6%, over 1995 primarily
due to higher building maintenance expenses. In the coming year, occupancy
expense is expected to increase by approximately $10.3 million as the Company
will have paid a full year of its rent obligation related to its new
headquarters building. Additional information on the lease agreement is provided
in Note 17 to the Financial Statements on page 58.
Equipment expense decreased $1,227,000, or 5.1%, compared to 1995. The
decrease was due to decreases in service contracts, depreciation on furniture
and equipment and equipment rental expense. These decreases were partially
offset by increased equipment expenses related to the Pacific Northwest
Acquisitions. Excluding the Pacific Northwest Acquisitions, equipment expense
decreased $1,985,000, or 8.3%, compared to 1995.
Deposit insurance expense decreased $910,000, or 14.7%, compared to 1995.
The decrease was due to the reduction in the FDIC assessment rate from 23 cents
to 4 cents per $100 of deposits effective June 1, 1995 and from 4 cents to zero
effective January 1, 1996. The decrease was partially offset by a charge of
$3,849,000 resulting from the aforementioned BIF/SAIF legislation enacted on
September 30, 1996.
32
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Other expenses increased $17,411,000, or 31.1%, over 1995 as a result of
the Pacific Northwest Acquisitions, higher merchant interchange fees, outside
services, legal fees (primarily related to foreclosed property), depreciation on
software and losses in connection with a certain credit card fraud.
Noninterest expenses decreased $19,028,000, or 7.7%, from 1994 to 1995.
This decrease was primarily due to the aforementioned nonrecurring gain of
$20,766,000 in connection with the curtailment of the Company's noncontributory
pension plan and decrease in deposit insurance expense resulting from the
reduction in the FDIC assessment rate effective June 1, 1995. This decrease was
partially offset by higher salaries and wages, depreciation, insurance and
rental expenses.
Effective January 1, 1996, the Company adopted 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." As permitted under SFAS No. 123, the Company has elected
to remain with the accounting prescribed in APBO No. 25 and will instead
present, if material, certain pro forma disclosures of net income and earnings
per share in the notes to the financial statements, as if the fair value based
method of accounting defined in SFAS No. 123 had been applied. Accordingly, the
adoption of this standard did 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:
- -----------------------------------------------------------------------------------------------------------------
1996/95 CHANGE 1995/94 Change
------------------- -------------------
(in thousands) 1996 1995 1994 AMOUNT % Amount %
- -----------------------------------------------------------------------------------------------------------------
Personnel:
Salaries and wages $104,572 $ 94,119 $ 92,237 $ 10,453 11.1% $ 1,882 2.0 %
Employee benefits 34,144 7,209 26,484 26,935 373.6 (19,275) (72.8)
- ------------------------------------------------------------------------------ --------
Total personnel expenses 138,716 101,328 118,721 37,388 36.9 (17,393) (14.7)
Occupancy expense 27,045 25,706 23,280 1,339 5.2 2,426 10.4
Equipment expense 22,680 23,907 24,812 (1,227) (5.1) (905) (3.6)
Deposit insurance 5,280 6,190 11,388 (910) (14.7) (5,198) (45.6)
Stationery and supplies 8,447 8,645 9,055 (198) (2.3) (410) (4.5)
Advertising and promotion 8,591 7,476 7,745 1,115 14.9 (269) (3.5)
Trust loss -- -- 5,000 -- -- (5,000) (100.0)
Other 73,452 56,041 48,320 17,411 31.1 7,721 16.0
- ------------------------------------------------------------------------------ --------
TOTAL NONINTEREST EXPENSES $284,211 $229,293 $248,321 $ 54,918 24.0% $(19,028) (7.7)%
=================================================================================================================
INCOME TAXES
The provision for income taxes as shown in the Consolidated Statements of
Income on page 44 represents 30.7% of pre-tax income for 1996, compared with
37.0% and 35.0% for 1995 and 1994, respectively.
On a taxable equivalent basis, the effective tax rate for 1996, 1995 and
1994 was 32.3%, 41.1% and 41.6%, respectively. Additional information on the
Company's income taxes is provided in Note 15 to the Financial Statements on
page 57.
The decrease in the 1996 effective tax rate was primarily due to the: (1)
recognition of previously unrecognized tax credits of $2,800,000; (2) reversal
of deferred tax liabilities (reflecting a change in the State tax laws) relating
to the sale of a certain leveraged lease of $2,344,000; and (3) reversal of
deferred tax liabilities (reflecting legislation enacted in 1996) relating to
the provision for thrift bad debt deductions of $1,500,000.
33
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
Domestic:
Commercial, financial and agricultural $1,382 $1,316 $1,264 $1,166 $1,175
Real estate:
Commercial 1,172 997 965 883 720
Construction 213 257 321 317 438
Residential 1,936 1,766 2,049 1,829 1,217
Consumer 410 307 309 312 326
Credit cards 173 167 159 148 148
Lease financing 241 242 231 201 171
Foreign:
Governments and official institutions -- -- 1 2 3
Commercial and industrial 55 19 50 79 78
Other 225 189 185 130 120
- ------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $5,807 $5,260 $5,534 $5,067 $4,396
==================================================================================================================
The loan portfolio is the largest component of total earning assets and
accounts for the greatest portion of total interest income. At December 31,
1996, total loans were $5,806,732,000, an increase of 10.4% over December 31,
1995. The increase was primarily attributable to the Pacific Northwest
Acquisitions.
Total loans at December 31, 1996, represented 72.6% of total assets, 82.0%
of total earning assets and 97.8% of total deposits compared to 69.5% of total
assets, 77.7% of total earning assets and 98.2% of total deposits at December
31, 1995. The increases in percentages over December 31, 1995, were primarily
due to the aforementioned Pacific Northwest Acquisitions. Governmental and
certain other time deposits were shifted into security repurchase agreements at
December 31, 1996 and 1995, to reduce the Company's deposit insurance premiums.
If these repurchase agreements had been included in the deposit base, total
loans as a percentage of total deposits would represent 88.0% and 85.7%,
respectively, at such dates.
Commercial, financial and agricultural loans as of December 31, 1996,
increased $66,088,000, or 5.0%, to $1,381,824,000 from December 31, 1995.
Excluding the Pacific Northwest Acquisitions mentioned above, loans in this
category would have decreased 6.0% compared to December 31, 1995. Although the
Company continues its efforts to diversify the loan portfolio, both
geographically and by industry, overall loan volume in the state of Hawaii has
declined as a result of the sluggish economy. Credit extensions in the media and
telecommunications industry located on the mainland United States account for
the majority of the diversification by industry.
The Company's primary goal in commercial and financial lending is to
maintain reasonable levels of risk by following conservative underwriting
guidelines primarily based on cash flow. Most commercial and financial loans are
collateralized and/or supported by viable guarantors with sound net worths.
Unsecured loans are made to customers of good character with sound net worths,
above average liquidity and strong repayment ability.
The Company's real estate loans totalled $3,321,239,000, or 57.2% of total
loans at December 31, 1996, and represented an increase of 10.0% over December
31, 1995. Excluding the Pacific Northwest Acquisitions mentioned above, real
estate loans at December 31, 1996 would have remained relatively constant
compared to December 31, 1995. 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 security
portfolio at December 31, 1995.
The Company's primary goal in real estate lending is to maintain reasonable
levels of risk by financing selective real estate projects, 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 cov-
34
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
ered 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 open and closed ended direct and
indirect credit facilities for personal, automobile and household purchases.
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, 1996, the
Company did not have a concentration of loans greater than 10% of total loans
which were not otherwise disclosed as a category of loans as shown in the table
on page 34.
Effective January 1, 1996, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." SFAS No. 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. The adoption of this standard did not have a material
effect on the consolidated financial statements of the Company.
- --------------------------------------------------------------------------------
LOAN MATURITIES
The contractual maturities of loans do not necessarily reflect the actual
term of the Company's loan portfolio. The Company's experience has been that the
average life of real estate loans is substantially less than their contractual
terms because of loan prepayments and, with respect to fixed-rate loans,
enforcement of due-on-sale clauses. Due-on-sale clauses give the Company the
right to declare a loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. In general, the average life of real estate loans tends
to increase when current interest rates exceed rates on existing real estate
loans. Correspondingly, prepayments tend to increase when current interest rates
are below the rates on existing real estate loans. Because the volume of such
prepayments fluctuates depending upon changes in both the absolute level of
interest rates and the relationship between fixed and adjustable-rate loan
rates, the average life of the Company's fixed-rate real estate loans has varied
widely.
At December 31, 1996, loans with maturities over one year were comprised of
fixed rate loans totalling $1,327,120,000 and floating or adjustable rate loans
totalling $3,081,220,000.
The following table sets forth the contractual maturities of the Company's
loan portfolio by loan categories at December 31, 1996. Demand loans are
included as due within one year.
- -------------------------------------------------------------------------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER FIVE
(IN MILLIONS) ONE YEAR FIVE YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------
COMMERCIAL, FINANCIAL AND AGRICULTURAL $ 575 $ 521 $ 286 $1,382
REAL ESTATE:
COMMERCIAL 254 452 466 1,172
CONSTRUCTION 149 51 13 213
RESIDENTIAL 106 399 1,431 1,936
CONSUMER 123 237 50 410
CREDIT CARDS 97 76 -- 173
LEASE FINANCING 7 36 198 241
FOREIGN 88 94 98 280
- -------------------------------------------------------------------------------------------------------------------
TOTAL $1,399 $1,866 $2,542 $5,807
===================================================================================================================
35
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets and past due loans as of December 31 are reflected
below for the years indicated:
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual:
Commercial, financial and agricultural $21,398 $16,229 $ 7,972 $13,823 $24,563
Real estate:
Commercial 6,156 40,664 35,290 12,145 3,250
Construction 1,700 9,697 7,038 28,571 41,018
Residential:
Insured, guaranteed, or conventional 13,815 12,628 4,792 5,518 2,327
Home equity credit lines 451 496 520 255 269
- ------------------------------------------------------------------------------------------------------------------
Total real estate loans 22,122 63,485 47,640 46,489 46,864
Lease financing 27 19 212 -- 27
- ------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 43,547 79,733 55,824 60,312 71,454
Restructured:
Commercial, financial and agricultural 3,429 682 -- 20 77
Real estate:
Commercial 24,604 2,500 3,128 -- --
Residential:
Insured, guaranteed, or conventional 267 -- -- -- --
Home equity credit lines 561 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total restructured loans 28,861 3,182 3,128 20 77
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 72,408 82,915 58,952 60,332 71,531
Other real estate owned 25,574 9,312 4,160 13,034 1,211
- ------------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $97,982 $92,227 $63,112 $73,366 $72,742
==================================================================================================================
Past due loans:
Commercial, financial, agricultural $ 7,765 $13,060 $18,834 $20,283 $28,275
Real estate:
Commercial 7,676 2,175 4,765 10,308 17,992
Residential:
Insured, guaranteed, or conventional 9,812 7,502 6,741 7,041 6,324
Home equity credit lines 2,220 3,005 909 810 696
- ------------------------------------------------------------------------------------------------------------------
Total real estate loans 19,708 12,682 12,415 18,159 25,012
Consumer 2,869 3,020 1,928 1,814 2,410
Lease financing 40 28 190 29 7
- ------------------------------------------------------------------------------------------------------------------
TOTAL PAST DUE LOANS (1) $30,382 $28,790 $33,367 $40,285 $55,704
==================================================================================================================
Nonperforming assets to total loans and other
real estate owned (end of year):
Excluding past due loans 1.68% 1.75% 1.14% 1.44% 1.65%
Including past due loans 2.20% 2.30% 1.74% 2.24% 2.92%
Nonperforming assets to total assets (end of year):
Excluding past due loans 1.22% 1.22% .84% 1.01% 1.11%
Including past due loans 1.60% 1.60% 1.28% 1.56% 1.96%
==================================================================================================================
Note:
(1) Represents loans which are past due 90 days or more as to principal and/or
interest, are still accruing interest and are deemed to be in the process of
collection.
36
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
As shown in the table on page 36, nonperforming assets at December 31, 1996
were $97,982,000, or 1.68% of total loans and other real estate owned ("OREO")
and 1.22% of total assets. These levels compared to total nonperforming assets
at December 31, 1995 of $92,227,000, or 1.75% of total loans and OREO, and 1.22%
of total assets. The increase in nonperforming assets of $5,755,000, or 6.2%,
was principally due to increases in: (1) restructured commercial real estate
loans, which increased $22,104,000; and (2) OREO, which increased $16,262,000.
The increase in the restructured commercial real estate loan portfolio was due
to the addition of a commercial real estate loan totalling $15,969,000 in the
fourth quarter of 1996. In addition, the increase in OREO and corresponding
decrease in nonaccrual commercial real estate loans were due to foreclosure on
eight commercial real estate loans totalling $17,960,000. In addition, a loan
totalling $10,028,000 was paid in full in 1996. The increase was partially
offset by the sale of two commercial real estate properties in 1996 with book
values totalling $6,443,000.
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 past due 90 days or more and still accruing interest totalled
$30,382,000 at December 31, 1996, an increase of 5.5% over December 31, 1995.
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.
At the end of the fourth quarter of 1996, the Company identified a
potential problem loan of $34,524,000 where possible credit problems of the
borrower caused management to have serious concerns as to the ability of such
borrower to comply with the present loan repayment terms. Such loan consisted of
a commercial real estate loan, which was 30 days past due as of December 31,
1996. If current conditions continue, such loan may be disclosed in future
periods as a nonperforming asset.
The following table presents information related to loans on a nonaccrual
basis for the year ended December 31, 1996:
- --------------------------------------------------------------------------------
(in thousands) Domestic Foreign Total
- --------------------------------------------------------------------------------
Interest income which
would have been recorded
if loans had been current $8,437 $17 $8,454
================================================================================
Interest income recorded
during the year $ 599 $ 4 $ 603
================================================================================
DEPOSITS
Deposits are the largest component of the Company's total liabilities and
account for the greatest portion of total interest expense. At December 31,
1996, total deposits were $5,936,708,000, an increase of $578,395,000, or 10.8%,
over December 31, 1995. The increase was primarily due to deposits acquired in
connection with the Pacific Northwest Acquisitions, which totalled $705,565,000
at December 31, 1996.
DEPOSITS
($ in billions)
1992 5.09
1993 5.22
1994 5.15
1995 5.36
1996 5.94
The following table presents the average amount and average rate paid on
deposits for the years indicated:
- ----------------------------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
(dollars in millions) Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------
Domestic:
Noninterest-
bearing
demand $ 860 -- % $ 792 -- % $ 837 -- %
Interest-bearing
demand 1,388 2.60 1,115 2.69 1,207 2.10
Savings 921 2.24 1,177 2.91 1,422 2.17
Time 2,198 5.31 1,708 5.44 1,369 4.11
Foreign 251 3.56 386 4.87 247 3.15
- --------------------------- ------ ------
Total $5,618 3.25% $5,178 3.40% $5,082 2.37%
============================================================================
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) 1996 1995 1994
- -------------------------------------------------------
3 months or less $384 $337 $236
Over 3 months through 6 months 126 177 104
Over 6 months through 12 months 244 183 189
Over 12 months 152 164 83
- -------------------------------------------------------
Total $906 $861 $612
=======================================================
37
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 21.1% of total assets at
the end of 1996 compared to 25.0% at the end of 1995. Additional information
related to the Company's off-balance sheet instruments at December 31, 1996 and
1995 is included in Note 18 to the Financial Statements on page 59.
Liability-based liquidity is provided primarily from deposits. Average
total deposits for 1996 increased $439,257,000, or 8.5%, to $5,617,609,000,
primarily due to the Pacific Northwest Acquisitions. Average total deposits for
1996 and 1995 funded 72.4% and 68.8%, 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 8 to the Financial Statements on page 52. 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 on page 46, net
cash provided by operating and investing activities was $428,705,000 and net
cash used in financing activities was $399,245,000 for 1996. For 1995, net cash
provided by operating activities was $140,119,000 and net cash used in investing
and financing activities was $98,962,000. For 1994, net cash provided by
operating and financing activities was $311,729,000 and net cash used in
investing activities was $484,964,000. In 1996, there was a significant change
in the Company's cash flow which centered around the Pacific Northwest
Acquisitions. The purchase of 31 branches provided $218,966,000 in cash as
deposits assumed exceeded the purchase price of the branches and loans
purchased. The net cash inflow was utilized to, among other things, fund loan
growth and reduce short-term borrowings. In 1995, the Company utilized deposit
growth and the run-off of the investment security portfolio as the principal
sources of funds for loan production and repayment of short-term borrowings. In
1994, as interest rates declined and deposit volume slowed, the Company utilized
short-term borrowings to fund loan growth.
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 12 to the Financial Statements on page 54.
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 interest rate sensitivity gap
analysis, market value of equity analysis, and net interest income simulations.
The market value of equity analysis and 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. The market value of equity
analysis examines the change in the economic value of the Company due to changes
in interest rates. As of December 31, 1996, the Company remained well within
current guidelines which allow for no more than a decrease in value equal to 1%
of total assets due to a 1% change in interest rates. The net interest income
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, 1996, 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.
38
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
The Company's interest rate sensitivity position as of December 31, 1996,
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 these swap
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, 1996, the cumulative
one-year gap for the Company was a positive $222.1 million, representing 2.78%
of total assets.
- -----------------------------------------------------------------------------------------------------------------
After Three After One
Within Three but Within but Within After
(dollars in thousands) Months 12 Months 5 Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------
Assets:
Interest-bearing deposits
in other banks $ 70,130 $ -- $ -- $ -- $ 70,130
Federal funds sold and securities
purchased under agreements
to resell 148,370 -- -- -- 148,370
Investment securities 291,124 620,294 219,733 9,568 1,140,719
Net loans:
Commercial, financial and
agricultural 1,139,219 143,730 78,000 20,875 1,381,824
Real estate--construction 202,214 5,655 4,164 1,162 213,195
Foreign 111,030 63,935 103,494 1,252 279,711
Other 1,215,329 1,033,459 1,120,200 477,766 3,846,754
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 3,177,416 1,867,073 1,525,591 510,623 7,080,703
Nonearning assets 181,115 98,042 247,475 394,839 921,471
- -----------------------------------------------------------------------------------------------------------------
Total assets $3,358,531 $1,965,115 $1,773,066 $ 905,462 $8,002,174
=================================================================================================================
Liabilities and stockholders' equity:
Interest-bearing deposits $1,850,058 $1,620,993 $1,453,147 $ 8,684 $4,932,882
Noninterest-bearing deposits 277,139 94,815 505,687 126,185 1,003,826
Short-term borrowings 779,484 142,410 7,666 -- 929,560
Long-term debt -- -- 55,000 150,743 205,743
Stockholders' equity -- -- -- 705,884 705,884
Off-balance sheet adjustment 426,583 (218,368) (284,518) 76,303 --
Noncosting liabilities 62,130 66,253 -- 95,896 224,279
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $3,395,394 $1,706,103 $1,736,982 $1,163,695 $8,002,174
=================================================================================================================
Interest rate sensitivity gap $ (36,863) $ 259,012 $ 36,084 $ (258,233)
Cumulative gap $ (36,863) $ 222,149 $ 258,233 $ --
Cumulative gap as a percent
of total assets (.46)% 2.78% 3.23% --%
=================================================================================================================
YEAR 2000
Many of the Company's information systems use a two-digit representation
for the year. As a result, the year 2000 may produce erroneous results in
calculations made by affected systems because there is a question as to how
existing application software programs will react when the two-digit year
becomes "00". In anticipation of this, management is currently assessing the
impact of the year 2000 on the Company's operations and is working with the
appropriate application vendors and consultants to formulate and implement the
most cost-effective approach to resolving this issue. The associated cost
requirements to address this issue have not yet been determined.
39
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FOURTH QUARTER RESULTS
Earnings for the fourth quarter of 1996 were $20,348,000, an increase of
$652,000, or 3.3%, over the $19,696,000 earned during the same quarter in 1995.
Earnings per share for the fourth quarter of 1996 were up 1.6% to $.64, compared
to $.63 for the year-earlier period.
Earnings in the fourth quarter of 1996 were negatively impacted by an
additional provision for loan losses of $7,100,000 resulting from the impact of
adverse economic trends, the continued weakness of the local real estate market
and certain commercial real estate loan charge-offs. In addition, the Company
recognized a write-down of other real estate owned of $1,026,000. The above
charges to earnings were partially offset by an income tax benefit of $2,800,000
(resulting primarily from the recognition of previously unrecognized tax
credits) which reduced the overall income tax expense.
The earnings for the fourth quarter of 1995 included: (1) an increase in
the provision for loan losses of $17,500,000; (2) 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 (3) a
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.
- --------------------------------------------------------------------------------
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly financial data for 1996 and 1995 is
presented below:
- ------------------------------------------------------------------------------------------------------------------
Quarter
---------------------------------------------------- Annual
(in thousands, except per share data) First Second Third Fourth Total
- ------------------------------------------------------------------------------------------------------------------
1996
Interest income $135,779 $138,606 $150,013 $149,742 $574,140
Interest expense 59,759 60,548 66,379 66,109 252,795
- ------------------------------------------------------------------------------------------------------------------
Net interest income 76,020 78,058 83,634 83,633 321,345
Provision for loan losses 3,322 5,191 4,649 10,465 23,627
Total noninterest income 23,968 27,410 25,778 25,171 102,327
Total noninterest expenses 67,406 67,946 75,376 73,483 284,211
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 29,260 32,331 29,387 24,856 115,834
Income taxes 9,057 11,587 10,386 4,508 35,538
- ------------------------------------------------------------------------------------------------------------------
Net income $ 20,203 $ 20,744 $ 19,001 $ 20,348 $ 80,296
==================================================================================================================
Net income per share $.65 $.67 $.60 $.64 $2.56
==================================================================================================================
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 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
==================================================================================================================
40
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES BY MATURITIES AND WEIGHTED AVERAGE YIELDS
The following table presents the maturities of available-for-sale
investment securities, excluding securities which have no stated maturity at
December 31, 1996, 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 $ 439 5.74% $ 195 5.71% $-- --% $ 276 7.71% $ 910 6.33%
States and political
subdivisions 27 8.88 1 8.96 -- -- 1 8.71 29 8.86
Collateralized mortgage
obligations -- -- -- -- -- -- 14 6.16 14 6.16
Other 5 5.61 -- -- -- -- 118 7.50 123 7.42
- ----------------------------------------- ------- -------- -------- ---------
Total $ 471 5.92% $ 196 5.74% $-- --% $ 409 7.60% $1,076 6.53%
==================================================================================================================
Note:
The weighted average yields were calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security.
41
26
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
- --------------------------------------
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
January 16, 1997
42
27
CONSOLIDATED BALANCE SHEETS
First Hawaiian, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------
December 31,
--------------------------
(in thousands, except number of shares and per share data) 1996 1995
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing deposits in other banks $ 70,130 $ 244,570
Federal funds sold and securities purchased under agreements to resell 148,370 169,803
Available-for-sale investment securities (note 3) 1,140,719 1,175,293
Loans:
Loans (note 4) 5,806,732 5,259,545
Less allowance for loan losses (note 5) 85,248 78,733
- -----------------------------------------------------------------------------------------------------------------
Net loans 5,721,484 5,180,812
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 7,080,703 6,770,478
Cash and due from banks 333,511 304,051
Premises and equipment (note 6) 261,201 241,987
Customers' acceptance liability 824 1,995
Core deposit premium (net of accumulated amortization of
$10,163 in 1996 and $7,844 in 1995) (note 2) 28,877 16,665
Goodwill (net of accumulated amortization of
$17,838 in 1996 and $13,453 in 1995) (note 2) 101,218 75,309
Other assets 195,840 154,024
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $8,002,174 $7,564,509
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 969,620 $ 913,228
Interest-bearing demand 1,328,354 1,073,136
Savings 1,070,338 1,147,997
Time (fair value of $2,331,890 in 1996 and $1,937,858 in 1995) (note 7) 2,330,704 1,927,011
Foreign (fair value of $237,744 in 1996 and $297,984 in 1995) (note 7) 237,692 296,941
- -----------------------------------------------------------------------------------------------------------------
Total deposits 5,936,708 5,358,313
- -----------------------------------------------------------------------------------------------------------------
Short-term borrowings (note 8) 929,560 1,083,179
Acceptances outstanding 824 1,995
Other liabilities 223,455 232,733
Long-term debt (note 9) 205,743 238,752
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 7,296,290 6,914,972
- -----------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (notes 13, 17 and 18)
Stockholders' equity (note 11):
Preferred stock $5 par value
Authorized and unissued--50,000,000 shares
in 1996 and none in 1995 -- --
Common stock $5 par value (notes 10 and 13)
Authorized--100,000,000 shares
Issued--33,190,374 in 1996 and 32,542,797 shares in 1995 165,952 162,713
Surplus 148,196 133,925
Retained earnings (note 12) 428,693 385,976
Unrealized valuation adjustment 1,850 5,489
Treasury stock, at cost--1,415,954 in 1996 and 1,397,957 shares in 1995 (38,807) (38,566)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 705,884 649,537
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,002,174 $7,564,509
=================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
43
28
CONSOLIDATED STATEMENTS OF INCOME
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
(in thousands, except number of shares and per share data) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $468,517 $470,110 $407,531
Lease financing income 10,494 11,334 10,844
Interest on investment securities:
Taxable interest income 72,813 57,890 45,248
Exempt from Federal income taxes 2,692 4,893 4,332
Other interest income 19,624 15,730 7,805
- ------------------------------------------------------------------------------------------------------------------
Total interest income 574,140 559,957 475,760
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits (note 7) 182,402 176,048 120,289
Short-term borrowings 53,977 74,370 47,813
Long-term debt 16,416 14,879 11,586
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 252,795 265,297 179,688
- ------------------------------------------------------------------------------------------------------------------
Net interest income 321,345 294,660 296,072
Provision for loan losses (note 5) 23,627 38,107 22,922
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 297,718 256,553 273,150
- ------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and investment services income 23,857 23,034 22,847
Service charges on deposit accounts 26,284 24,150 24,014
Other service charges and fees 39,848 35,551 31,937
Securities gains, net (note 3) 118 144 178
Other 12,220 11,999 7,696
- ------------------------------------------------------------------------------------------------------------------
Total noninterest income 102,327 94,878 86,672
- ------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and wages 104,572 94,119 92,237
Employee benefits (note 13) 34,144 7,209 26,484
Occupancy expense (notes 6 and 17) 27,045 25,706 23,280
Equipment expense (notes 6 and 17) 22,680 23,907 24,812
Other (note 14) 95,770 78,352 81,508
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 284,211 229,293 248,321
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 115,834 122,138 111,501
Income taxes (note 15) 35,538 45,133 38,990
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 80,296 $ 77,005 $ 72,511
==================================================================================================================
PER SHARE DATA
NET INCOME $2.56 $2.43 $2.25
==================================================================================================================
CASH DIVIDENDS $1.195 $1.18 $1.18
==================================================================================================================
AVERAGE SHARES OUTSTANDING 31,398,978 31,734,669 32,259,321
==================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
44
29
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
First Hawaiian, Inc. and Subsidiaries and
First Hawaiian, Inc. (Parent company)
- --------------------------------------------------------------------------------
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, 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 12) -- -- -- (38,008) -- -- (38,008)
Unrealized valuation adjustment
(note 3) -- -- -- -- (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 12) -- -- -- (37,368) -- -- (37,368)
Unrealized valuation adjustment
(note 3) -- -- -- -- 6,522 -- 6,522
Incentive Plan for Key Executives
(note 13) -- -- 105 -- -- -- 105
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 32,542,797 162,713 133,925 385,976 5,489 (38,566) 649,537
Net income--1996 -- -- -- 80,296 -- -- 80,296
Issuance of common stock
(note 10) 647,577 3,239 14,286 -- -- -- 17,525
Cash dividends ($1.195 per share)
(note 12) -- -- -- (37,579) -- -- (37,579)
Unrealized valuation adjustment
(note 3) -- -- -- -- (3,639) -- (3,639)
Incentive Plan for Key Executives
(note 13) -- -- (15) -- -- (241) (256)
- -----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 33,190,374 $165,952 $148,196 $428,693 $ 1,850 $(38,807) $705,884
=================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
45
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Hawaiian, Inc. and Subsidiaries
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR $ 304,051 $ 262,894 $ 436,129
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 80,296 77,005 72,511
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 23,627 38,107 22,922
Depreciation and amortization 31,252 27,798 24,766
Gain on curtailment of noncontributory pension plan -- (20,766) --
Income taxes 20,580 20,953 6,826
Increase in interest receivable (2,571) (5,154) (7,646)
Increase (decrease) in interest payable (5,840) 7,655 7,956
Decrease (increase) in prepaid expenses (8,222) (48) 2,184
Other (21,054) (5,431) 41,993
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 118,068 140,119 171,512
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits
in other banks 174,440 (232,900) 105,066
Net decrease (increase) in Federal funds sold and
securities purchased under agreements to resell 32,133 10,197 (145,000)
Purchase of held-to-maturity investment securities -- (247,559) (240,706)
Proceeds from maturity of held-to-maturity investment securities -- 690,357 376,844
Purchase of available-for-sale investment securities (567,143) (29,921) (115,032)
Proceeds from sale of available-for-sale investment securities 81,159 15,000 15,195
Proceeds from maturity of available-for-sale investment securities 521,787 17,020 45,265
Net increase in loans to customers (137,281) (220,553) (499,660)
Net cash provided by Pacific Northwest Acquisitions 218,966 -- --
Capital expenditures (20,634) (13,072) (36,634)
Other 7,210 (4,376) 9,698
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 310,637 (15,807) (484,964)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (174,782) 206,100 (67,915)
Net increase (decrease) in short-term borrowings (236,619) (246,637) 237,134
Proceeds from long-term debt 53,000 19,447 21,500
Payments on long-term debt (3,009) (26) (936)
Cash dividends paid (37,579) (37,368) (38,008)
Repurchased common stock (256) (24,671) (11,558)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (399,245) (83,155) 140,217
- -----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 333,511 $ 304,051 $ 262,894
=================================================================================================================
Supplemental disclosures:
Interest paid $ 258,635 $ 256,906 $ 171,732
Income taxes paid $ 20,580 $ 24,181 $ 24,311
Supplemental schedule of noncash investing and financing activities:
Loans converted into other real estate owned $ 26,764 $ 10,279 $ 5,789
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 $ --
=================================================================================================================
In connection with the Pacific Northwest Acquisitions, liabilities assumed was
as follows:
- -----------------------------------------------------------------------------------------------------------------
Fair value of assets acquired $ 552,582 $ -- $ --
Cash received 218,966 -- --
Issuance of common stock (17,525) -- --
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES ASSUMED $ 754,023 $ -- $ --
=================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
46
31
NOTES TO FINANCIAL STATEMENTS
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1. 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:
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"); Pacific One Bank ("Pacific One"); ANB
Financial Corporation and its wholly-owned subsidiary, Pacific One Bank, N.A.;
First Hawaiian Creditcorp, Inc. ("Creditcorp"); FHL Lease Holding Company, Inc.
and its wholly-owned subsidiary ("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.
CASH AND DUE FROM BANKS
Cash and due from banks include amounts from other financial
institutions as well as in-transit clearings. Under the terms of the Depository
Institutions Deregulation and Monetary Control Act, the Company is required to
place reserves with the Federal Reserve Bank based on the amounts of deposits
held. For 1996, 1995 and 1994, the average amount of these reserve balances were
$134,032,000, $123,648,000 and $127,339,000, respectively.
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, 1996 and 1995.
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, which
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,
which are 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 Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," 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
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
generally 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 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 are
applied as a reduction of the principal when concern exists as to the
47
32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
ultimate collection of the principal; otherwise, such payments are recorded as
income. Loans 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.
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." This statement requires that a mortgage banking
enterprise recognize as separate assets the rights to service mortgage loans for
others, however those rights are acquired. The adoption of this standard did not
have a material effect on the consolidated financial statements of the Company.
ALLOWANCE FOR LOAN LOSSES
Effective January 1, 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures." SFAS No. 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or at the loan's observable market price, or at the fair value of
the collateral if the loan is collateral dependent. The adoption of SFAS No. 114
did not change management's existing methodology for measuring impairment
primarily because the majority of impaired loan valuations continue to be based
on the fair value of the collateral.
The provision for loan losses charged to expense is based upon the
Company's historical loss experience and estimates of future loan losses
inherent in the current loan portfolio, including the evaluation of impaired
loans in accordance with SFAS No. 114. A loan is considered to be impaired when,
based upon current information and events, it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of the
loan. Impairment is primarily measured based on the fair value of the
collateral. Impairment losses are included in the provision for loan losses.
SFAS No. 114 does not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment, except for those loans
restructured under a troubled debt structuring. Smaller balance homogeneous
loans include credit card and consumer loans, which are charged-off at a
predetermined delinquency status.
Management periodically analyzes each commercial, financial and
agricultural and real estate loan past due 90 days or more and still accruing
interest on a loan by loan basis. If management expects that the borrower will
shortly bring the loan current and/or that the fair value of the collateral
exceeds the recorded investment in the loan, the loan is not placed on
nonaccrual status. Consumer and credit card loans are not placed on nonaccrual
status because they are charged off when they reach a predetermined delinquency
status.
The allowance for loan losses (the "Allowance") is maintained at a
level which, in management's judgment, is adequate to absorb future loan losses.
Estimates of future loan 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 restructured) loans, loan concentrations, the growth and
composition of the portfolio, the review of monthly delinquency reports, the
results of examinations of individual loans 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 charged off when collectibility
becomes doubtful and the underlying collateral, if any, is considered inadequate
to liquidate the outstanding debt. Recoveries on loans 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.
Goodwill represents the cost of acquired companies in excess of the
fair value of net assets acquired. In compliance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
48
33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Assets to be Disposed of," which the Company adopted on January 1, 1996, it is
the Company's policy to review goodwill for impairment whenever events or
changes in circumstances indicate that its investment in the underlying
assets/businesses which gave rise to such goodwill may not be recoverable.
Should such an evaluation of impairment become necessary, the Company will
evaluate the performance of such acquired business on an undiscounted basis. The
Company does not believe that there is any current impairment of goodwill.
INCOME TAXES
The Company has 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 enters into interest rate swap and floor contracts in
managing its interest rate risk. Premiums for purchased floors are amortized
over the life of the contracts. 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 related
income or expense from these contracts is included as part of the interest
income or expense for the corresponding asset or liability being hedged. Changes
in fair value are not reflected in the financial statements.
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
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. The following methods and assumptions were used by the Company in
estimating the fair value of its 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: 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 deposits with no maturity date (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
49
34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
on the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
NEW PRONOUNCEMENTS
In 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" and SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." SFAS No. 125 requires that after a transfer of financial assets, an entity
must recognize financial and servicing assets controlled and liabilities
incurred and derecognize financial assets and liabilities in which control is
surrendered or when debt is extinguished. It applies to transfers and servicing
of financial assets and extinguishments of liabilities occurring after December
31, 1996. SFAS No. 127 defers the effective date of certain provisions of SFAS
No. 125 until January 1, 1998. The adoption of these standards is not expected
to have a material effect on the Company's consolidated financial statements.
2. PACIFIC NORTHWEST ACQUISITIONS
On May 31, 1996, for a purchase price of $36 million, the Company
acquired 31 branches in Oregon, Washington and Idaho, which were being divested
by U.S. Bancorp and West One Bancorp as a result of their merger. This
transaction included the purchase of loans of $400 million and the assumption of
deposits of $687 million. The acquisition was accounted for using the purchase
method of accounting and the results of operations were included in the
Consolidated Statements of Income from the date of acquisition. Of the 31
branches acquired by the Company, the 26 Oregon and Idaho branches are being
operated as Pacific One Bank, a wholly-owned subsidiary of the Company. The five
branches acquired in Washington state were originally operated as Pacific One
Bank, FSB as branches of Pioneer (see current operations described below).
On July 31, 1996, for a purchase price of $18 million, the Company
acquired ANB Financial Corporation, a bank holding company, and its subsidiary,
American National Bank ("ANB"), which had total loans of $51 million and
deposits of $67 million at the date of acquisition. American National Bank had a
total of four branches in Washington state. The acquisition was accounted for
using the purchase method of accounting and the results of operations of ANB
were included in the Consolidated Statements of Income from the date of
acquisition. On November 8, 1996, American National Bank acquired the five
branches in Washington state from Pioneer and changed its name to Pacific One
Bank, N.A. Pacific One Bank, N.A. presently operates eight of the nine branches
acquired in Washington state; the remaining branch was closed.
3. INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
Amortized cost and fair values of available-for-sale investment
securities at December 31, 1996, 1995 and 1994 were as follows:
- ---------------------------------------------------------------------
1996
-------------------------------------------------
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------
U.S. Treasury
and other U.S.
Government
agencies and
corporations $1,025,699 $4,626 $1,666 $1,028,659
Collateralized
mortgage
obligations 14,531 41 14 14,558
States and
political
subdivisions 30,124 317 221 30,220
Other 67,286 -- 4 67,282
- ---------------------------------------------------------------------
Total available-for-
sale investment
securities $1,137,640 $4,984 $1,905 $1,140,719
=====================================================================
1995
-------------------------------------------------
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------
U.S. Treasury
and other U.S.
Government
agencies and
corporations $ 895,327 $ 8,790 $ 187 $ 903,930
Collateralized
mortgage
obligations 97,360 1 386 96,975
States and political
subdivisions 54,176 1,129 224 55,081
Other 119,315 -- 8 119,307
- ---------------------------------------------------------------------
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
====================================================================
50
35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The amortized cost and fair values of available-for-sale investment
securities at December 31, 1996, by contractual maturity, excluding securities
which have no stated maturity, were as follows:
- ------------------------------------------------------
Amortized Fair
(in thousands) Cost Value
- ------------------------------------------------------
Due within one year $ 470,931 $ 471,931
Due after one but within
five years 196,280 196,377
Due after five but within
ten years 263 263
Due after ten years 408,280 410,262
- ------------------------------------------------------
Total available-for-sale
investment securities $1,075,754 $1,078,833
======================================================
The Company held no trading securities as of December 31, 1996, 1995
and 1994.
Investment securities with an aggregate book value of $788,100,000 at
December 31, 1996 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, 1996.
Gross gains of $131,000, $224,000 and $180,000 and gross losses of
$13,000, $80,000 and $2,000 were realized on sales of investment securities
during 1996, 1995 and 1994, respectively.
At December 31, 1996, collateralized mortgage obligations were
comprised of floating rate bonds with an estimated average life of 3.7 years.
HELD-TO-MATURITY
At December 31, 1996 and 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
========================================================
4. LOANS
At December 31, 1996 and 1995, loans were comprised of the following:
- -----------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------
(in thousands) BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
- -----------------------------------------------------------------------------
Commercial,
financial and
agricultural $1,381,824 $1,390,768 $1,315,736 $1,308,078
Real estate:
Commercial 1,172,124 1,173,697 996,715 1,026,412
Construction 213,195 207,921 256,943 257,033
Residential 1,935,920 1,923,668 1,766,292 1,745,777
Consumer 583,060 577,241 473,909 480,452
Lease financing 240,898 236,586 241,721 242,402
Foreign 279,711 284,048 208,229 209,481
- -----------------------------------------------------------------------------
Total loans $5,806,732 $5,793,929 $5,259,545 $5,269,635
=============================================================================
At December 31, 1996 and 1995, loans aggregating $72,408,000 and
$82,915,000, respectively, were on a nonaccrual basis or restructured.
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) 1996 1995
- ------------------------------------------------------
Balance at beginning of year $257,404 $256,670
New loans made 28,909 54,623
Repayments (25,425) (53,889)
- ------------------------------------------------------
Balance at end of year $260,888 $257,404
======================================================
At December 31, 1996 and 1995, loans to such parties by the Parent were
$11,731,000 and $15,480,000, respectively, and the income related to these loans
was $1,045,000, $1,143,000 and $1,089,000 for 1996, 1995 and 1994, respectively.
Real estate loans totalling $257,661,000 were pledged to collateralize
Federal Home Loan Bank of Seattle advances at December 31, 1996.
51
36
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows for the years
indicated:
- ------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------
Balance at beginning of year $78,733 $61,250 $62,253
Provision charged to expense 23,627 38,107 22,922
Net charge-offs:
Loans charged off (27,341) (22,845) (27,115)
Recoveries on loans
charged off 3,123 2,221 3,190
- ------------------------------------------------------------------
Net charge-offs (24,218) (20,624) (23,925)
- ------------------------------------------------------------------
Allowance of subsidiaries
purchased 7,106 -- --
- ------------------------------------------------------------------
BALANCE AT END OF YEAR $85,248 $78,733 $61,250
==================================================================
The following table presents information related to impaired loans as
of and for the year ended December 31, 1996 and 1995:
- ------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------
Impaired loans $128,446 $97,915
Impaired loans with
related allowance for loan
losses calculated under
SFAS No. 114 35,517 65,430
Total allowance on impaired loans 9,690 15,380
Average impaired loans 87,289 82,304
Interest income recorded during
the year 980 3,454
======================================================
Impaired loans without a related allowance for loan losses are
generally collateralized by assets with fair values in excess of the recorded
investment in the loans. Interest payments on impaired loans are applied to
principal.
6. PREMISES AND EQUIPMENT
At December 31, 1996 and 1995, premises and equipment were comprised of
the following:
- ------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------
Premises $252,538 $229,629
Equipment 145,527 136,062
- ------------------------------------------------------
398,065 365,691
Less accumulated depreciation
and amortization 136,864 123,704
- ------------------------------------------------------
NET BOOK VALUE $261,201 $241,987
======================================================
Occupancy and equipment expenses include depreciation and amortization
expenses of $17,541,000, $17,649,000 and $17,572,000 for 1996, 1995 and 1994,
respectively.
7. DEPOSITS
Interest expense related to deposits for the years indicated was as
follows:
- ------------------------------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------
Interest-bearing demand $ 36,104 $ 30,034 $ 25,383
Savings 20,679 34,272 30,865
Time--Under $100 67,714 52,260 31,666
Time--$100 and over 48,993 40,682 24,588
Foreign 8,912 18,800 7,787
- ------------------------------------------------------
Total interest expense
on deposits $182,402 $176,048 $120,289
======================================================
Time deposits in denominations of $100,000 or more at December 31, 1996
and 1995 were as follows:
- ------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------
Domestic $906,220 $861,409
Foreign $ 73,563 $166,404
======================================================
8. SHORT-TERM BORROWINGS
At December 31, 1996, 1995 and 1994, short-term borrowings were
comprised of the following:
- ----------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------
First Hawaiian Bank:
Federal funds purchased $ 49,980 $ 19,586 $ 195,859
Securities sold under
agreements to repurchase 661,422 838,026 823,248
Advances from Federal
Home Loan Bank of
Seattle -- 100,000 50,000
First Hawaiian, Inc. (Parent):
Commercial paper 4,409 13,777 46,723
Notes payable 50,000 -- --
Other subsidiaries:
Advances from Federal
Home Loan Bank of
Seattle 113,737 111,790 213,986
Securities sold under
agreements to repurchase 50,012 -- --
- ----------------------------------------------------------------------
Total short-term borrowings $929,560 $1,083,179 $1,329,816
======================================================================
52
37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Average rates and average and maximum balances for these short-term
borrowings were as follows for the years indicated:
- --------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------
Federal funds purchased:
Average interest rate at
December 31 5.8% 5.9% 5.8%
Highest month-end balance $123,608 $270,927 $217,535
Average daily outstanding
balance $ 49,210 $161,602 $155,852
Average daily interest
rate paid 5.6% 6.3% 4.4%
Securities sold under
agreements to repurchase:
Average interest rate at
December 31 5.0% 5.4% 5.4%
Highest month-end balance $818,527 $909,867 $883,036
Average daily outstanding
balance $785,144 $823,506 $792,790
Average daily interest
rate paid 5.2% 5.6% 4.0%
Commercial paper:
Average interest rate at
December 31 5.1% 5.3% 6.2%
Highest month-end balance $ 13,509 $ 49,102 $ 46,723
Average daily outstanding
balance $ 9,854 $ 26,875 $ 14,092
Average daily interest
rate paid 5.2% 6.2% 4.7%
Notes payable:
Average interest rate at
December 31 5.8% --% --%
Highest month-end balance $ 50,000 $ -- $ --
Average daily outstanding
balance $ 12,568 $ -- $ --
Average daily interest
rate paid 5.9% --% --%
Advances from Federal Home
Loan Bank of Seattle:
Average interest rate at
December 31 5.7% 5.9% 6.0%
Highest month-end balance $212,016 $322,661 $279,437
Average daily outstanding
balance $155,182 $259,998 $153,008
Average daily interest
rate paid 5.7% 6.8% 5.5%
====================================================================
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, 1996, the weighted
average maturity of these agreements was 59 days and primarily represents
investments by public (governmental) entities. A schedule of maturities of these
agreements was as follows:
- ------------------------------------------------------
(in thousands)
- ------------------------------------------------------
Overnight $ 22,076
Less than 30 days 213,960
30 to 90 days 404,363
Over 90 days 71,035
- ------------------------------------------------------
Total $711,434
======================================================
The Parent had $60,000,000 in unused lines of credit with unaffiliated
banks to support its commercial paper borrowings as of December 31, 1996.
9. LONG-TERM DEBT
At December 31, 1996 and 1995, long-term debt was comprised of the
following:
- ---------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------
Book Fair Book Fair
(dollars in thousands) Value Value Value Value
- ---------------------------------------------------------------
First Hawaiian, Inc.
(Parent):
Notes payable $ -- $ -- $ 50,000 $ 50,015
6.25% subordinated
notes due
2000 100,000 98,610 100,000 97,364
7.375% subordinated
notes due 2006 50,000 50,575 -- --
Other subsidiaries--
5.27%-7.07%
notes due
through 2001 55,743 55,989 88,752 87,873
- ---------------------------------------------------------------
Total long-term
debt $205,743 $205,174 $238,752 $235,252
===============================================================
FIRST HAWAIIAN, INC. (PARENT)
The 6.25% subordinated notes due in 2000 and the 7.375% subordinated
notes due in 2006 are unsecured obligations with interest payable semiannually.
53
38
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
OTHER SUBSIDIARIES
The 5.27%-7.07% notes due through 2001 represent advances from the
Federal Home Loan Bank of Seattle to the Company's other subsidiaries
(Creditcorp and Pioneer) with interest payable monthly.
As of December 31, 1996, the principal payments due on these borrowed
funds were as follows:
- -----------------------------------------------------------
First
Hawaiian, Inc. Other
(in thousands) (Parent) Subsidiaries Total
- -----------------------------------------------------------
1998 $ -- $41,016 $ 41,016
1999 -- 9,018 9,018
2000 100,000 4,020 104,020
2001 -- 1,022 1,022
2002 and thereafter 50,000 667 50,667
- -----------------------------------------------------------
Total $150,000 $55,743 $205,743
===========================================================
10. COMMON STOCK
On July 31, 1996, the Company acquired ANB Financial Corporation, a
bank holding company, and its subsidiary, American National Bank, for
$17,525,000 in the form of an exchange of shares of ANB Financial Corporation's
common stock for 647,577 newly-issued shares of the Company's common stock.
11. REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain discretionary (and, in the case of the
Company's depository institution subsidiaries, mandatory) actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and its depository
institution subsidiaries must each meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. These capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set forth
in the table below, as of December 31, 1996 and 1995) of Tier 1 and Total
capital to risk-weighted assets, and of Tier 1 capital to average assets.
- ---------------------------------------------------------------------------------------
1996
-------------------------------------------------------------
Minimum
For Capital To Be
Actual Adequacy Purposes Well Capitalized
--------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------
Tier 1 Capital to
Risk-Weighted
Assets $578,454 8.42% $274,736 4.00% $412,104 6.00%
Total Capital to
Risk-Weighted
Assets $813,702 11.85% $549,472 8.00% $686,840 10.00%
Tier 1 Capital to
Average Assets $578,454 7.32% $237,084 3.00% $316,112 4.00%
=======================================================================================
- ---------------------------------------------------------------------------------------
1995
-------------------------------------------------------------
Minimum
For Capital To Be
Actual Adequacy Purposes Well Capitalized
--------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------
Tier 1 Capital to
Risk-Weighted
Assets $565,366 9.03% $250,301 4.00% $375,452 6.00%
Total Capital to
Risk-Weighted
Assets $743,585 11.88% $500,602 8.00% $625,758 10.00%
Tier 1 Capital to
Average Assets $565,366 7.72% $219,829 3.00% $293,106 4.00%
=======================================================================================
As of December 31, 1996 and 1995, the Company and its depository
institution subsidiaries were categorized as well capitalized under the
applicable federal regulations. To be categorized as well capitalized, the
Company must maintain Tier 1 risk-based, Total risk-based and Tier 1 leverage
ratios of 6%, 10% and 4%, respectively (as set forth in the table above).
Management is not aware of any conditions or events subsequent to December 31,
1996, which would have caused a change in the Company's category.
12. 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,
Creditcorp, Pacific One and Pacific One Bank, N.A. are subject to regulatory
limitations on the amount of dividends they may declare or pay. At December 31,
1996, the aggregate amount available for payment of dividends by such
subsidiaries without prior regulatory approval was $345,604,000.
54
39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
13. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a noncontributory pension plan which was "frozen" as of
December 31, 1995. This plan was replaced by a money purchase plan and
enhancements to an existing 401(k) plan. As a result of the "freeze," there will
be no future accruals and no additional participants in the noncontributory
pension plan. In addition, the Company has an unfunded supplemental executive
retirement plan for a "frozen" group of key executives.
The net pension expense (credit) for 1996, 1995 and 1994 included the
following components:
- ---------------------------------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------
Service cost-benefits
earned during the
period $ 1,236 $ 4,018 $ 3,832
Interest cost on projected
benefit obligation 6,321 6,862 6,294
Actual loss (return) on
plan assets (16,419) (18,476) 3,593
Net amortization and
deferral 7,817 10,197 (12,123)
Curtailment gain due to
pension plan freeze -- (20,766) --
- ---------------------------------------------------------
NET PENSION EXPENSE
(CREDIT) $ (1,045) $(18,165) $ 1,596
=========================================================
No further contributions should be required because the pension plan is
heavily overfunded and there will be no future benefit accruals.
The following table sets forth the reconciliation of the funded status
of the plans at December 31, 1996 and 1995:
- ---------------------------------------------------------
(in thousands) 1996 1995
- ---------------------------------------------------------
Actuarial present value of
benefit obligation:
Vested benefits $ 83,000 $78,182
Nonvested benefits 1,764 100
- ---------------------------------------------------------
Accumulated benefit obligation $ 84,764 $78,282
- ---------------------------------------------------------
Plan assets at fair value
(primarily listed stocks and
fixed income securities) $110,309 $98,220
Projected benefit obligation 95,460 88,784
- ---------------------------------------------------------
Plan assets in excess of projected
benefit obligation 14,849 9,436
Unrecognized net gain (5,659) (1,232)
Unrecognized prior service cost 6,972 7,623
Unrecognized net asset (6,000) (7,199)
- ---------------------------------------------------------
PREPAID PENSION COST $ 10,162 $ 8,628
=========================================================
Plan assets included 587,856 shares of common stock of the Company with
a fair value of $20,575,000 and $17,636,000 at December 31, 1996 and 1995,
respectively.
For both December 31, 1996 and 1995, the weighted average discount rate
was 7.0%; the rate of increase in future compensation used in determining the
projected benefit obligation was 7.0% for the unfunded supplemental executive
retirement plan; and the expected long-term rate of return on plan assets was
8.5%. Due to the "freeze" of the qualified pension plan, the rate of increase in
future compensation is no longer applicable for that plan.
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
status of the plans at December 31, 1996 and 1995:
- -----------------------------------------------------
(in thousands) 1996 1995
- -----------------------------------------------------
Actuarial present value of
benefit obligation:
Retirees $3,710 $3,528
Other fully eligible plan
participants 1,387 1,382
Other active plan participants 2,285 2,076
- -----------------------------------------------------
TOTAL $7,382 $6,986
=====================================================
Unfunded benefit obligation $7,382 $6,986
Unrecognized transition obligation (2,286) (2,429)
Unrecognized prior service cost (64) (71)
Unrecognized net loss (540) (575)
- -----------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $4,492 $3,911
=====================================================
Service cost $239 $189
Interest cost 475 453
Amortization of:
Transition obligation 143 143
Unrecognized prior service cost 6 6
- -----------------------------------------------------
NET PERIODIC POSTRETIREMENT
BENEFIT COST $863 $791
=====================================================
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.
For both December 31, 1996 and 1995, the weighted average discount rate
was 7.0% and the rate of increase in future compensation used in determining the
accumulated postretirement benefit obligation was 5.0%.
MONEY PURCHASE AND 401(k) MATCH PLANS
Effective January 1, 1996, the Company began contributing to a defined
contribution money purchase plan and matching employees' contributions (up to 3%
of pay) to an existing 401(k) component of the Company's profit sharing plan.
The plans replace the pension plan which was "frozen" as of December 31, 1995.
The plans cover substantially all employees who satisfy the age and length of
service requirements, except for key executives who are eligible for the
Company's unfunded supplemental executive retirement plan.
For 1996, the money purchase contribution was $5,126,000 and the
employer matching contribution to the 401(k) plan was $2,270,000.
PROFIT SHARING AND CASH BONUS PLANS
The profit sharing and cash bonus plans cover substantially all
employees who satisfy 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
55
40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 1996, 1995 and 1994 totalled $6,579,000, $5,545,000 and $5,127,000,
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 IPKE 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.
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 1996, 1995
and 1994 and the status at December 31, 1996:
- --------------------------------------------------------
Options
--------------------------------
Outstanding Exercisable
-------------- ----------------
Average Average
Exercise Exercise
(dollars in thousands) Shares Price Shares Price
- --------------------------------------------------------
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 (11,675) 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
Options granted 139,660 28.26 -- --
Became exercisable -- -- 127,138 26.90
Exercised (2,167) 25.91 (2,167) 25.91
Forfeitures (2,716) 26.33 -- --
- --------------------------------------------------------
Balance at
December 31, 1996 615,933 $27.20 295,938 $27.22
========================================================
At December 31, 1996, 379,725 stock options (net of exercised options
of 4,342)were available for future grants under the SIP.
As of December 31, 1996, the 615,933 SIP options outstanding under the
plan have exercise prices between $25.50 and $30.25 and a weighted average
remaining contractual life of 7.5 years.
The Company applies APB Opinion 25 and related interpretations in
accounting for its SIP. There has been no compensation cost charged against
income for the SIP, as options are granted at exercise prices that are not less
than the fair market value of the common stock on the date of grant. Had
compensation cost for the Company's stock-based compensation plan been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the effect on the Company's net income and earnings per share
would have been immaterial.
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for the grants in 1996 and 1995,
respectively: expected dividend yield was 3.8% and 4.6%; expected volatility was
22.69% and 23.50%; risk-free interest rate was 5.65% and 7.20%; and expected
life of the options granted was six years.
56
41
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The weighted-average grant-date fair value of options granted in 1996
and 1995 were $5.93 and $5.61, respectively.
During the initial phase-in period in 1996, the effects of applying
SFAS No. 123 are not likely to be representative of the effects on reported net
income for future years, because options vest over several years and additional
awards generally are made each year.
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, 1993-1995 and 1994-1996 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.
14. OTHER NONINTEREST EXPENSES
For the years ended December 31, 1996, 1995 and 1994, other noninterest
expenses included the following:
- --------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------
Deposit insurance $ 5,280 $ 6,190 $11,388
Stationery and supplies 8,447 8,645 9,055
Advertising and promotion 8,591 7,476 7,745
Trust loss -- -- 5,000
Other 73,452 56,041 48,320
- --------------------------------------------------------
Total other noninterest
expenses $95,770 $78,352 $81,508
========================================================
15. INCOME TAXES
For the years ended December 31, 1996, 1995 and 1994, the provision for
income taxes was comprised of the following:
- ------------------------------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------
Current:
Federal $20,147 $15,164 $24,822
States and other 4,572 3,698 4,989
- ------------------------------------------------------
Total current 24,719 18,862 29,811
- ------------------------------------------------------
Deferred:
Federal 10,114 21,430 6,175
States and other 705 4,841 3,004
- ------------------------------------------------------
Total deferred 10,819 26,271 9,179
- ------------------------------------------------------
Total income tax provision $35,538 $45,133 $38,990
======================================================
The provision for income taxes has been reduced by general tax credits
of $4,188,000, $2,140,000 and $1,769,000 in 1996, 1995 and 1994, respectively.
The Company also has foreign tax credit carryforwards amounting to $6,283,000 at
December 31, 1996, which may be used to offset future Federal income tax
expense. The foreign tax credit carryovers of $1,141,000, $1,526,000,
$1,597,000, $1,019,000 and $1,000,000 will expire at the end of 1997, 1998,
1999, 2000 and 2001, respectively. Management expects to generate sufficient
foreign source income in 1997 to utilize the foreign tax credit carryovers.
The components of net deferred income tax liabilities at December 31,
1996 and 1995 were as follows:
- ------------------------------------------------------
December 31
------------------
(in thousands) 1996 1995
- ------------------------------------------------------
ASSETS
Federal and State income
tax credit carryovers $ 6,283 $ 5,003
Employee benefit deductions 3,625 3,489
Provision for loan losses 38,467 36,897
Loan fees and other income 5,397 8,117
State franchise taxes 8,013 6,628
- ------------------------------------------------------
Total deferred income tax assets 61,785 60,134
- ------------------------------------------------------
Liabilities
Lease expenses 167,240 152,799
Depreciation expense 6,784 12,705
Intangible assets-net premiums 1,715 2,502
Marketable securities-available-
for-sale 1,229 3,626
Other 10,353 6,465
- ------------------------------------------------------
Total deferred income tax
liabilities 187,321 178,097
- ------------------------------------------------------
Net deferred income tax
liabilities $(125,536) $(117,963)
======================================================
Net deferred income tax liabilities are included in other liabilities
in the Consolidated Balance Sheets.
57
42
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following analysis reconciles the Federal statutory income tax rate
to the effective income tax rate for the years indicated:
- ---------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
Municipal and other tax-
exempt income (1.2) (2.7) (4.0)
State income and franchise
taxes, net of Federal tax benefit 3.0 4.5 4.7
General tax credits (6.0) (1.8) (1.6)
Other (0.1) 2.0 0.9
- ---------------------------------------------------------------------------
Effective income tax rate 30.7% 37.0% 35.0%
===========================================================================
The 1996 effective income tax rate has been reduced by the net tax
benefit resulting from the: (1) recognition of previously unrecognized tax
credits of $2,800,000; (2) reversal of deferred tax liabilities (reflecting a
change in the State tax laws) relating to the sale of a certain leveraged lease
of $2,344,000; and (3) reversal of deferred tax liabilities (reflecting
legislation enacted in 1996) relating to the provision for thrift bad debt
deductions of $1,500,000.
16.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, 1996, 1995 and 1994 were as follows:
- -----------------------------------------------------------
(in thousands) Foreign Domestic Consolidated
- -----------------------------------------------------------
1996
Total revenue $ 37,572 $ 638,895 $ 676,467
Income before
income taxes $ 1,863 $ 113,971 $ 115,834
Net income $ 1,211 $ 79,085 $ 80,296
Total assets $392,063 $7,610,111 $8,002,174
==========================================================
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
==========================================================
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.
- ------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------
Average foreign assets to
average total assets 5.42% 3.61% 3.80%
Average foreign liabilities
to average total
liabilities 3.55% 5.04% 3.15%
======================================================
The Company did not have any foreign outstandings to any individual
country which exceeded 1% of total assets at December 31, 1996, 1995 or 1994.
17. 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, 1996:
- -------------------------------------------------------
Less Net
Operating Sublease Operating
(in thousands) Leases Income Leases
- -------------------------------------------------------
1997 $ 26,739 $ 4,606 $ 22,133
1998 26,373 4,522 21,851
1999 26,122 4,529 21,593
2000 26,000 5,058 20,942
2001 24,527 4,888 19,639
2002 and
thereafter 101,244 10,283 90,961
- -------------------------------------------------------
Total $231,005 $33,886 $197,119
=======================================================
These premises and equipment leases extend for varying periods up to 45
years and some of them may be renewed for periods ranging from 1 to 45 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 its administrative headquarters building (construction of which was
completed in September 1996) 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 build-
58
43
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
ing. Rent obligation for the building commenced 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. The Company plans to occupy approximately 40%
of the building and sublease the remaining 60% to third parties. As of December
31, 1996, 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, such
payment not to exceed $161,990,000. This lease is accounted for as an operating
lease.
For 1996, 1995 and 1994, rental expense was $14,796,000, $14,525,000
and $13,699,000, respectively.
18. 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 and floors. 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 and floor 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, 1996 and 1995 were as follows:
- -------------------------------------------------------
1996 1995
---------- ---------
Notional/ Notional/
Contract Contract
(in thousands) Amount Amount
- -------------------------------------------------------
Commitments to extend credit $3,778,028 $3,363,822
Standby letters of credit $ 144,235 $ 145,278
Commercial letters of credit $ 10,478 $ 18,028
Interest rate swaps and
floors $1,537,996 $1,093,867
=======================================================
The Company enters into interest rate swap and floor 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 and market value of equity analysis.
ROLLFORWARD SCHEDULE
The following is a summary of the interest rate swap and floor activity
for 1996 and 1995:
- ----------------------------------------------------------------------------
Caps,
Receive Pay Floors or Variable/
(in millions) Fixed Fixed Collars Variable Total
- ----------------------------------------------------------------------------
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
Additions 300 8 500 -- 808
Maturities/
amortizations 60 2 -- 300 362
Terminations -- 2 -- -- 2
- ----------------------------------------------------------------------------
Balance,
December 31, 1996 $500 $138 $500 $400 $1,538
============================================================================
59
44
NOTES TO FINANCIAL STATEMENTS (Continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
HEDGING SUMMARY
The following is additional hedging information related to the
Company's interest rate swaps and floors as of December 31, 1996:
- -----------------------------------------------------------------------------------------
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 $1,000 5.6% 5.4% 8.1% 7.9% 2.0 yrs. 1.2 yrs.
Fixed rate loans 99 6.4 5.6 8.2 7.4 8.8 6.2
Municipal
security 15 5.7 5.6 5.9 5.8 5.0 .8
- ------------------------------
Subtotal 1,114 5.7 5.4 8.1 7.8 2.6 1.7
- ------------------------------
Liability hedges:
Savings deposits 400 5.6 6.3 2.5 1.8 3.0 .2
Term debt 24 8.8 5.9 5.8 8.7 7.0 .9
- ------------------------------
Subtotal 424 5.8 6.3 2.7 2.2 3.2 .3
- ------------------------------
Total $1,538 5.7% 5.6% N/A N/A 2.8 yrs. 1.3 yrs.
=========================================================================================
The following summarizes the impact of the Company's interest rate swap
and floor activities on its weighted average borrowing rate and on interest
income and expense for the years ended December 31, 1996, 1995 and 1994:
- ---------------------------------------------------------------
(dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------
Average borrowing rate:
Without interest rate swaps
and floors 4.28% 4.49% 3.26%
With interest rate swaps
and floors 4.23 4.54 3.23
===============================================================
Decrease in interest income $2,402 $3,827 $10,352
Decrease (increase) in interest
expense 2,636 (2,926) 1,351
- ---------------------------------------------------------------
Interest rate swap and floor
expense (income), net $ (234) $6,753 $ 9,001
===============================================================
LITIGATION
Various legal proceedings are pending against the Company. The ultimate
liability of the Company, if any, cannot be determined at this time. Based upon
consultation with counsel, management does not expect that the aggregate
liability, if any, resulting from these proceedings would have a material effect
on the Company's consolidated financial position.
19. 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, 1996 and 1995:
- ------------------------------------------------------
1996
--------------------
(in thousands) Book Value Fair Value
- ------------------------------------------------------
FINANCIAL ASSETS
Cash and due from banks $ 333,511 $ 333,511
Interest-bearing deposits in
other banks 70,130 70,130
Federal funds sold and securities
purchased under agreements
to resell 148,370 148,370
Available-for-sale investment
securities (note 3) 1,140,719 1,140,719
Loans (note 4) 5,806,732 5,793,929
Customers' acceptance liability 824 824
- ------------------------------------------------------
FINANCIAL LIABILITIES
Deposits $5,936,708 $5,950,028
Short-term borrowings (note 8) 929,560 929,560
Acceptances outstanding 824 824
Long-term debt (note 9) 205,743 205,174
======================================================
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
Available-for-sale investment
securities (note 3) 1,175,293 1,175,293
Loans (note 4) 5,259,545 5,269,635
Customers' acceptance liability 1,995 1,995
- ------------------------------------------------------
FINANCIAL LIABILITIES
Deposits $5,358,313 $5,370,203
Short-term borrowings (note 8) 1,083,179 1,083,179
Acceptances outstanding 1,995 1,995
Long-term debt (note 9) 238,752 235,252
======================================================
The following table presents a summary of the fair values of the
Company's off-balance sheet financial instruments (note 18) at December 31, 1996
and 1995:
- ------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------
Commitments to extend credit $20,699 $13,596
Letters of credit 1,444 1,435
Interest rate swaps and floors 2,092 (1,158)
======================================================
60
45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
20. FIRST HAWAIIAN, INC. (PARENT COMPANY ONLY)
FINANCIAL STATEMENTS
BALANCE SHEETS
- ------------------------------------------------------
December 31,
(in thousands, except number of -----------------
shares and per share data) 1996 1995
- ------------------------------------------------------
ASSETS
Cash on deposit with
First Hawaiian Bank $ 174 $ 144
Loans, net of allowance for
loan losses of $120 in 1996
and $100 in 1995 11,611 15,480
Securities purchased from
First Hawaiian Bank 7,075 9,930
Investment in subsidiaries:
First Hawaiian Bank 612,897 587,009
Other subsidiaries 243,268 160,833
Due from:
First Hawaiian Bank 106,862 91,273
Other subsidiaries 69,804 59,102
Other assets 1,254 1,718
- ------------------------------------------------------
Total assets $1,052,945 $925,489
======================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 54,409 $ 13,777
Current and deferred income
taxes 138,519 109,468
Other liabilities 4,133 2,707
Long-term debt 150,000 150,000
- ------------------------------------------------------
Total liabilities 347,061 275,952
- ------------------------------------------------------
Commitments and contingent liabilities
(notes 13, 17 and 18)
Stockholders' equity (note 11):
Preferred stock $5 par value
Authorized and unissued--
50,000,000 shares in 1996 and
none in 1995 -- --
Common stock $5 par value
(notes 10 and 13)
Authorized--100,000,000 shares
Issued--33,190,374 shares in 1996
and 32,542,797 shares in 1995 165,952 162,713
Surplus 148,196 133,925
Retained earnings 428,693 385,976
Unrealized valuation adjustment 1,850 5,489
Treasury stock, at cost--
1,415,954 shares
in 1996 and 1,397,957
shares in 1995 (38,807) (38,566)
- ------------------------------------------------------
Total stockholders' equity 705,884 649,537
- ------------------------------------------------------
Total liabilities and
stockholders' equity $1,052,945 $925,489
======================================================
STATEMENTS OF INCOME
- ------------------------------------------------------------
Year Ended December 31,
---------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------
INCOME
Dividends from:
First Hawaiian Bank $40,210 $84,660 $34,660
Other subsidiaries 25,606 8,300 7,560
Interest from First Hawaiian
Bank 507 520 448
Interest and fees from other
subsidiaries 2,578 3,043 799
Other interest and dividends 1,143 1,359 1,149
- ------------------------------------------------------------
Total income 70,044 97,882 44,616
- ------------------------------------------------------------
EXPENSES
Interest expense:
Short-term borrowings 509 1,669 663
Long-term debt 11,915 10,299 9,711
Other 817 114 107
Provision for loan losses 20 100 --
Professional services 431 494 289
Other 441 339 351
- ------------------------------------------------------------
Total expenses 14,133 13,015 11,121
- ------------------------------------------------------------
Income before income tax
benefit and equity in
undistributed income of
subsidiaries 55,911 84,867 33,495
Income tax benefit 3,849 3,178 3,344
- ------------------------------------------------------------
Income before equity in
undistributed income of
subsidiaries 59,760 88,045 36,839
Equity in undistributed
income of subsidiaries:
First Hawaiian Bank 29,180 (15,634) 26,713
Other subsidiaries (8,644) 4,594 8,959
- ------------------------------------------------------------
NET INCOME $80,296 $77,005 $72,511
============================================================
61
46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------
Year Ended December 31,
---------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------
Cash at beginning of year $ 144 $ 110 $ 250
- ------------------------------------------------------------
Cash flows from operating
activities:
Net income 80,296 77,005 72,511
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Excess of equity in earnings
of subsidiaries over
dividends received (20,536) 11,040 (35,672)
Other (1,100) 449 (630)
- ------------------------------------------------------------
Net cash provided by operating
activities 58,660 88,494 36,209
- ------------------------------------------------------------
Cash flows from investing activities:
Net change in:
Securities sold to (purchased
from) First Hawaiian Bank 2,855 (3,750) 6,945
Loans repaid by (made to)
directors and
executive officers 3,869 1,525 (1,246)
Repayments from (advances
to) subsidiaries 5,750 8,750 (34,600)
Sale of investment securities -- 43,490 5,000
Purchase of investment
securities -- (43,490) --
Investment in Pacific
Northwest Acquisitions (73,901) -- --
- ------------------------------------------------------------
Net cash provided by (used in)
investing activities (61,427) 6,525 (23,901)
- ------------------------------------------------------------
Cash flows from financing activities:
Net change in short-term
borrowings (9,368) (32,946) 37,118
Proceeds from long-term debt 50,000 -- --
Cash dividends paid (37,579) (37,368) (38,008)
Repurchase of common stock (256) (24,671) (11,558)
- ------------------------------------------------------------
Net cash provided by (used in)
financing activities 2,797 (94,985) (12,448)
- ------------------------------------------------------------
Cash at end of year $ 174 $ 144 $ 110
============================================================
Supplemental disclosures:
Interest paid $12,272 $12,251 $ 10,338
Income taxes refunded $(4,408) $(3,211) $ (2,502)
============================================================
62
47
CORPORATE ADDRESSES First Hawaiian, Inc. and Subsidiaries 63
FIRST HAWAIIAN, INC.
999 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./
FHL LEASE HOLDING COMPANY, 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
PACIFIC ONE BANK
401 Southwest Fifth Avenue
Portland, Oregon 97204
Telephone: (503) 221-2122
ANB FINANCIAL CORPORATION/
PACIFIC ONE BANK, N.A.
7525 West Canal Drive
Kennewick, Washington 99336
Telephone: (509) 735-0451
PACIFIC ONE DEALER CENTER, INC.
5665 Southwest Meadows Road, Suite 250
Lake Oswego, Oregon 97035
Telephone: (503) 684-6388
FIRST HAWAIIAN BANK
999 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
48
SUPPLEMENTAL INFORMATION First Hawaiian, Inc. and Subsidiaries 64
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 1996 Form 10-K annual report, which is to be filed with the
Securities and Exchange Commission by March 31, 1997, 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
E-mail: gkeir@aloha.net
or contact
First Hawaiian Bank
World Wide Web address:
http://www.fhb.com/
ANNUAL MEETING
The annual meeting of stockholders of First Hawaiian, Inc. will be held on
Thursday, April 17, 1997 at 9:30 A.M. in the 30th floor Board Room of First
Hawaiian Center, 999 Bishop 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
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 each 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, L.P. Hawaii
Pacific One Dealer Center, Inc. Hawaii
OMP, Inc. Hawaii
2200 Main, Inc. Hawaii
The Bankers Club, Inc. Hawaii
Center Club, Inc. Hawaii
First Hawaiian Leasing, Inc. Hawaii
First Hawaiian Creditcorp, Inc. Hawaii
FHL Lease Holding Company, Inc. Hawaii
FHL SPC One, Inc. Hawaii
FHI International, Inc. Hawaii
Pioneer Federal Savings Bank Federal
Pacific One Bank Oregon
ANB Financial Corporation Washington
Pacific One Bank, National Association Federal
All subsidiaries were included in the consolidated financial statements of the
Corporation.
7
1
EXHIBIT 23. CONSENT OF INDEPENDENT ACCOUNTANTS
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
First Hawaiian, Inc. and subsidiaries (hereinafter referred to as the
"Company") on Form S-8 (File No. 333-22107) of our report dated January 16,
1997, on our audits of the consolidated financial statements of the Company as
of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995
and 1994, which report is incorporated by reference in this Annual Report on
Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Honolulu, Hawaii
February 20, 1997
9
YEAR
DEC-31-1996
JAN-01-1996
DEC-31-1996
333,511
70,130
148,370
0
1,140,719
0
0
5,806,732
85,248
8,002,174
5,936,708
929,560
223,455
205,743
0
0
165,952
539,932
8,002,174
479,011
75,505
19,624
574,140
182,402
252,795
321,345
23,627
118
284,211
115,834
80,296
0
0
80,296
2.56
2.56
8.15
43,547
30,382
28,861
34,524
78,733
27,341
3,123
85,248
38,400
1,540
45,308
