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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                             ----------------------


                                    FORM 10-Q

(Mark One)


[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934 
     For the quarterly period ended September 30, 1997
                                       OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     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 executive offices)                         (Zip Code)

                                 (808) 525-7000
              (Registrant's telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports required
    to be filed by Section 13 or l5(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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The number of shares outstanding of each of the issuer's classes of common stock
                          as of October 31, 1997 was:


         Class                                                  Outstanding
- --------------------------                                   -----------------
Common Stock, $5 Par Value                                   31,840,778 Shares



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PART I.        FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited) Page ---- Consolidated Balance Sheets at September 30, 1997, December 31, 1996 and September 30, 1996 2 Consolidated Statements of Income for the quarter and nine months ended September 30, 1997 and 1996 3 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 4 Consolidated Statements of Changes in Stockholders' Equity for the quarter and nine months ended September 30, 1997 and 1996 5 Notes to Consolidated Financial Statements 5 - 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 EXHIBIT INDEX
1 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (Unaudited) First Hawaiian, Inc. and Subsidiaries
SEPTEMBER 30, December 31, September 30, 1997 1996 1996 ------------ ------------ ------------- (in thousands) ASSETS Interest-bearing deposits in other banks $ 183,730 $ 70,130 $ 174,130 Federal funds sold and securities purchased under agreements to resell 156,962 148,370 145,167 Available-for-sale investment securities 700,464 1,140,719 1,240,578 Loans: Loans 6,022,244 5,806,732 5,786,006 Less allowance for loan losses 83,575 85,248 83,542 ----------- ----------- ----------- Net loans 5,938,669 5,721,484 5,702,464 ----------- ----------- ----------- Total earning assets 6,979,825 7,080,703 7,262,339 Cash and due from banks 329,552 333,511 320,639 Premises and equipment 245,178 249,565 254,448 Customers' acceptance liability 531 824 640 Core deposit premium 26,309 28,877 35,492 Goodwill 97,234 101,218 96,000 Other assets 216,419 207,476 183,007 ----------- ----------- ----------- TOTAL ASSETS $ 7,895,048 $ 8,002,174 $ 8,152,565 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 846,813 $ 969,620 $ 1,008,027 Interest-bearing demand 1,371,877 1,328,354 1,309,360 Savings 1,000,933 1,070,338 1,055,465 Time 2,442,574 2,330,704 2,395,231 Foreign 295,092 237,692 254,216 ----------- ----------- ----------- Total deposits 5,957,289 5,936,708 6,022,299 Short-term borrowings 644,241 929,560 925,917 Acceptances outstanding 531 824 640 Other liabilities 222,965 223,455 249,780 Long-term debt 328,742 205,743 259,744 ----------- ----------- ----------- TOTAL LIABILITIES 7,153,768 7,296,290 7,458,380 ----------- ----------- ----------- Stockholders' equity: Preferred stock -- -- -- Common stock 165,952 165,952 165,952 Surplus 148,198 148,196 148,219 Retained earnings 463,247 428,693 418,187 Unrealized valuation adjustment 1,142 1,850 606 Treasury stock (37,259) (38,807) (38,779 ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 741,280 705,884 694,185 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,895,048 $ 8,002,174 $ 8,152,565 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 2 4 CONSOLIDATED STATEMENTS OF INCOME (Unaudited) First Hawaiian, Inc. and Subsidiaries
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------- -------------------------------- 1997 1996 1997 1996 ---------- ---------- ----------- ----------- (in thousands, except shares and per share data) INTEREST INCOME Interest and fees on loans $ 126,770 $ 122,218 $ 375,023 $ 345,202 Lease financing income 5,234 2,600 12,931 7,939 Interest on investment securities: Taxable interest income 13,369 19,493 46,775 53,750 Exempt from Federal income taxes 132 706 554 2,339 Other interest income 3,927 4,996 8,997 15,168 ---------- ---------- ----------- ----------- Total interest income 149,432 150,013 444,280 424,398 ---------- ---------- ----------- ----------- INTEREST EXPENSE Deposits 50,292 48,798 146,105 133,802 Short-term borrowings 9,118 13,090 32,522 40,126 Long-term debt 5,440 4,491 12,900 12,758 ---------- ---------- ----------- ----------- Total interest expense 64,850 66,379 191,527 186,686 ---------- ---------- ----------- ----------- Net interest income 84,582 83,634 252,753 237,712 Provision for loan losses 3,817 4,649 11,830 13,162 ---------- ---------- ----------- ----------- Net interest income after provision for loan losses 80,765 78,985 240,923 224,550 ---------- ---------- ----------- ----------- NONINTEREST INCOME Trust and investment services income 6,294 6,036 19,192 18,362 Service charges on deposit accounts 7,348 6,965 21,366 19,162 Other service charges and fees 12,255 10,322 34,926 30,220 Securities gains, net 68 9 287 36 Other 2,042 2,446 10,280 9,376 ---------- ---------- ----------- ----------- Total noninterest income 28,007 25,778 86,051 77,156 ---------- ---------- ----------- ----------- NONINTEREST EXPENSE Salaries and wages 28,246 27,358 85,481 76,499 Employee benefits 8,723 8,078 26,454 26,034 Occupancy expense 9,141 7,044 29,282 19,861 Equipment expense 5,898 5,653 18,468 16,775 Other 24,212 27,243 72,239 71,559 ---------- ---------- ----------- ----------- Total noninterest expense 76,220 75,376 231,924 210,728 ---------- ---------- ----------- ----------- Income before income taxes 32,552 29,387 95,050 90,978 Income taxes 11,201 10,386 30,918 31,030 ---------- ---------- ----------- ----------- NET INCOME $ 21,351 $ 19,001 $ 64,132 $ 59,948 ========== ========== =========== =========== PER SHARE DATA NET INCOME $ .67 $ .60 $ 2.02 $ 1.92 ========== ========== =========== =========== CASH DIVIDENDS $ .31 $ .295 $ .93 $ .885 ========== ========== =========== =========== AVERAGE SHARES OUTSTANDING 31,826,803 31,564,554 31,797,540 31,272,264 ========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 5 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) First Hawaiian, Inc. and Subsidiaries
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 ---- ---- (in thousands) CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD $ 333,511 $ 304,051 --------- --------- Cash flows from operating activities: Net income 64,132 59,948 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 11,830 13,162 Depreciation and amortization 23,269 23,327 Income taxes 12,867 21,296 Decrease (increase) in interest receivable 4,779 (2,029) Increase (decrease) in interest payable 3,818 (4,339) Decrease (increase) in prepaid expenses 1,685 (7,026) Other 21,564 (5,363) --------- --------- Net cash provided by operating activities 143,944 98,976 --------- --------- Cash flows from investing activities: Net decrease (increase) in interest-bearing deposits in other banks (113,600) 70,440 Net decrease (increase) in Federal funds sold and securities purchased under agreements to resell (8,592) 35,336 Purchase of available-for-sale investment securities (137,008) (510,420) Proceeds from sale of available-for-sale investment securities 280,416 19,998 Proceeds from maturity of available-for-sale investment securities 295,672 424,301 Net increase in loans to customers (243,523) (85,371) Net cash provided by Pacific Northwest Acquisitions -- 218,966 Purchase of bank owned life insurance on certain officers (30,000) -- Capital expenditures (14,593) (10,089) Other (6,908) 7,854 --------- --------- Net cash provided by investing activities 21,864 171,015 --------- --------- Cash flows from financing activities: Net increase (decrease) in deposits 20,581 (89,191) Net decrease in short-term borrowings (295,319) (186,262) Proceeds from long-term debt 192,705 53,000 Payments on long-term debt (59,706) (3,008) Cash dividends paid (29,578) (27,737) Issuance (repurchase) of treasury stock, net 1,550 (205) --------- --------- Net cash used in financing activities (169,767) (253,403) --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 329,552 $ 320,639 ========= ========= Supplemental disclosures: Interest paid $ 187,709 $ 191,025 ========= ========= Income taxes paid $ 18,051 $ 9,734 ========= ========= Supplemental schedule of noncash investing and financing activities: Loans converted into other real estate owned $ 9,515 $ 10,636 ========= ========= Loans made to facilitate the sale of other real estate owned $ 861 $ 1,745 ========= ========= In connection with the Pacific Northwest Acquisitions, the following liabilities were assumed: 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. 4 6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) First Hawaiian, Inc. and Subsidiaries
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, --------------------------- ------------------------------- 1997 1996 1997 1996 --------- --------- --------- --------- (in thousands) BALANCE, BEGINNING OF PERIOD $ 728,851 $ 666,629 $ 705,884 $ 649,537 Net income 21,351 19,001 64,132 59,948 Issuance of common stock -- 17,525 -- 17,525 Issuance (purchase) of treasury stock, net 637 -- 1,477 (213) Cash dividends (9,875) (9,374) (29,578) (27,737) Unrealized valuation adjustment 316 404 (708) (4,883) Incentive plan for key executives -- -- 73 8 --------- --------- --------- --------- BALANCE, END OF PERIOD $ 741,280 $ 694,185 $ 741,280 $ 694,185 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 significant accounting policies: CONSOLIDATION The consolidated financial statements of the Company include the accounts of First Hawaiian, Inc. and its wholly-owned subsidiaries - First Hawaiian Bank and its wholly-owned subsidiaries; First Hawaiian Creditcorp, Inc. and its wholly-owned subsidiary; Pacific One Bank; ANB Financial Corporation and its wholly-owned subsidiary; FHL Lease Holding Company, Inc.; First Hawaiian Capital I; and FHI International, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (which included only normal recurring adjustments) necessary for a fair presentation are reflected in the consolidated financial statements. RECLASSIFICATIONS Certain amounts in the consolidated financial statements for 1996 have been reclassified to conform with the 1997 presentation. Such reclassifications had no effect on the consolidated net income as previously reported. DERIVATIVES The criteria that must be satisfied for accrual accounting treatment are as follows: (1) the transaction to be hedged exposes the Company to interest rate risk; (2) the hedge acts to reduce the interest rate risk by moving closer to being insensitive to interest rate changes; and (3) the derivative is designed and effective as a hedge of the transaction. The following additional criteria apply to hedges of anticipated transactions: (1) the significant characteristics and expected terms of the anticipated transaction must be identified and (2) it must be probable that the anticipated transaction will occur. Derivative products that do not satisfy the hedging criteria described above would be carried at market value. Any changes in market value would be recognized in noninterest income. As of September 30, 1997, all derivative product instruments met the criteria for accrual accounting treatment. Gains or losses resulting from early termination of derivatives and the designated hedged item are recorded to income or expense at the date of termination. Gains or losses on termination of anticipatory hedges are amortized over the life of the hedged item. 2. ACCOUNTING CHANGES As of January 1, 1997, the Company adopted those provisions of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," which were not deferred by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." The nondeferred provisions specify the criteria for recognizing and measuring servicing assets and liabilities as well as financial assets subject to prepayment, and did not have a significant impact to the Company's financial statements as of September 30, 1997. SFAS No. 127 defers the effective date of certain provisions of SFAS No. 125 until January 1, 1998. The provisions of SFAS No. 125 that the Company has not yet adopted (in accordance with SFAS No. 127) will not have a significant effect on the Company's consolidated financial statements. In February 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of Information About Capital Structure," both of which improve the earnings per share information provided in financial statements by simplifying the existing computational guidelines and revising the disclosure requirements. These statements are effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes the standards for reporting and displaying comprehensive income, and SFAS No. 131, "Disclosures about Segments of 5 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) First Hawaiian, Inc. and Subsidiaries an Enterprise and Related Information," which establishes standards for identifying operating segments and disclosing certain information relating to such segments. SFAS Nos. 130 and 131 are both effective for fiscal periods beginning after December 15, 1997. None of the statements discussed in this paragraph is expected to have a significant impact on the Company's current disclosures. 3. IMPAIRED LOANS The following table summarizes impaired loan information as of and for the nine months ended September 30, 1997, as of and for the year ended December 31, 1996 and as of and for the nine months ended September 30, 1996:
SEPTEMBER 30, 1997 December 31, 1996 September 30, 1996 ------------------ ----------------- ------------------ (in thousands) Impaired loans $89,544 $128,446 $ 68,040 Impaired loans with related allowance for loan losses calculated under SFAS No. 114 $38,503 $ 35,517 $ 51,402 Total allowance for impaired loans $10,613 $ 9,690 $ 15,653 Average impaired loans $96,084 $ 87,289 $101,004 Interest income recorded during the period $ 874 $ 980 $ 673
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 generally applied to reduce the outstanding principal amounts of such loans. 4. BUSINESS COMBINATIONS On April 18, 1997, Pioneer Federal Savings Bank ("Pioneer"), a former wholly-owned subsidiary of the Company, was merged into First Hawaiian Bank. In the process, 14 of 19 Pioneer branches were closed (the remaining branches are now operated as branches of First Hawaiian Bank). On May 31, 1996, for a purchase price of $36 million, the Company acquired 31 branches in the States of 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 Company's 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 the State of Washington were originally (see current operations described below) operated as branches of Pioneer under the name "Pacific One Bank, FSB." On July 31, 1996, for a purchase price of $18 million, the Company acquired ANB Financial Corporation ("ANB"), a bank holding company, and its wholly-owned subsidiary, American National Bank, which had total loans of $51 million and total deposits of $67 million at the date of acquisition. American National Bank had a total of four branches located in the State of Washington. The acquisition was accounted for using the purchase method of accounting and the results of operations of ANB were included in the Company's Consolidated Statements of Income from the date of acquisition. On November 8, 1996, American National Bank changed its name to Pacific One Bank, N. A. and acquired the five branches in the State of Washington from Pioneer. Pacific One Bank, N.A. presently operates eight of the nine branches acquired in the State of Washington; the remaining branch was closed. Hereafter, the acquisitions discussed in the immediately preceding two paragraphs will be collectively referred to as the "Pacific Northwest Acquisitions." 5. FIRST HAWAIIAN CAPITAL I On June 23, 1997, the Company formed First Hawaiian Capital I, a wholly-owned Delaware business trust (the "Trust"). The Trust issued $100,000,000 of its Capital Securities, Series A, net of discount (the "Capital Securities"), and used the proceeds therefrom to purchase a like series of junior subordinated deferrable interest debentures (the "Debentures") of the Company. The Debentures are the sole assets of the Trust. The Capital Securities qualify as Tier 1 Capital of the Company and are fully and unconditionally guaranteed by the Company. The Capital Securities accrue and pay interest semi-annually at an annual interest rate of 8.343% of the liquidation amount of $1,000 per Capital Security. The Capital Securities are mandatorily redeemable upon maturity of the Debentures on July 1, 2027, or upon earlier redemption in whole or in part as provided for in the governing indenture. 6 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET INCOME The Company recorded consolidated net income for the first nine months of 1997 of $64,132,000, an increase of $4,184,000, or 7.0%, over the first nine months of 1996. For the third quarter of 1997, the consolidated net income of $21,351,000 represented an increase of 12.4% over the same quarter in 1996. Consolidated net income for the first nine months and third quarter of 1996 was negatively impacted by a pre-tax charge of $3,849,000 (after-tax charge of $2,309,000) resulting from the Bank Insurance Fund ("BIF")/Savings Association Insurance Fund ("SAIF") legislation enacted by Congress on September 30, 1996. The legislation imposed a special one-time assessment on institutions holding SAIF-insured deposits in order to recapitalize the SAIF fund. Exclusive of the special SAIF one-time assessment, consolidated net income for the first nine months and quarter ended September 30, 1997 increased $1,875,000, or 3.0%, and $41,000, or .2%, respectively, over the same periods in 1996. The modest increase in consolidated net income reflects the continuing sluggish economy in Hawaii. On a per share basis, consolidated net income for the nine months and quarter ended September 30, 1997 were $2.02 and $.67, respectively, representing increases of 5.2% and 11.7%, respectively, over the same periods in 1996. Exclusive of the aforementioned special one-time SAIF assessment, consolidated net income per share for the first nine months and third quarter of 1997, increased 1.5% and remained flat, respectively, compared to the same periods in 1996. The greater percentage increases in consolidated net income, as compared to the increases in consolidated net income on a per share basis were attributable to the higher average number of shares outstanding in 1997 as compared to 1996. This increase in average number of shares was a result of the issuance of common stock of the Company for the acquisition of ANB Financial Corporation in July 1996 and the exercise of common stock options by certain individuals. On an annualized basis, the Company's return on average total assets for the first nine months of 1997 was 1.08%, an increase of 3.8% over the same period in 1996, and its return on average stockholders' equity was 11.88%, a decrease of .9% compared to the same period in 1996. The decrease in return on average stockholders' equity was primarily attributable to the Pacific Northwest Acquisitions in mid-1996 and the issuance of stock related thereto. NET INTEREST INCOME Net interest income, on a fully taxable equivalent basis, increased $13,995,000, or 5.8%, to $253,316,000 for the first nine months of 1997 from $239,321,000 for the same period in 1996. Net interest income increased $611,000, or .7%, to $84,731,000 for the third quarter of 1997 from $84,120,000 for the same period in 1996. The increase in net interest income for the first nine months of 1997 over the same period in 1996 was primarily due to increases in the net interest margin and average earning assets. The increase in net interest income for the third quarter of 1997 over the same period in 1996 was due to an increase in the net interest margin, which was partially offset by a decrease in average earning assets. The net interest margin for the first nine months and third quarter of 1997 increased 18 and 21 basis points (1% equals 100 basis points), respectively, over the same periods in 1996. The net interest margin was 4.76% and 4.77% for the first nine months and third quarter of 1997, respectively, up 3.9% and 4.6%, respectively, over the same periods in 1996. The increase in the net interest margin was primarily attributable to an increase in the yield on average earning assets, which increased 21 and 27 basis points for the first nine months and third quarter of 1997, respectively, over the same periods in 1996 principally as a result of the reduction in the level of lower yielding investment securities held by the Company. The increase in the yield on average earning assets was partially offset by an increase in the rate paid on funding sources, which increased 3 and 5 basis points for the first nine months and third quarter of 1997, respectively, over the same periods in 1996. Average earning assets increased by $131,110,000, or 1.9%, for the first nine months of 1997, over the same period in 1996. The increase was primarily due to the Pacific Northwest Acquisitions. Excluding the Pacific Northwest Acquisitions, average earning assets for the first nine months of 1997 decreased $298,393,000, or 4.5%, as compared to the same period in 1996. This decrease was primarily due to the reduced levels of state and local government funds requiring collateralization and the partial liquidation of investment securities upon the merger of First Hawaiian Bank and Pioneer. Average earning assets decreased by $291,203,000, or 4.0%, for the third quarter of 1997, compared to the same period in 1996. This decrease was primarily due to the aforementioned liquidation of excess investment securities. 7 9 Average loans for the first nine months and third quarter of 1997 increased by $515,938,000, or 9.5%, and $298,622,000, or 5.3%, respectively, over the same periods in 1996, primarily due to the Pacific Northwest Acquisitions. Excluding the effect of the Pacific Northwest Acquisitions, average loans for the first nine months and third quarter of 1997 increased 2.5% and 2.6%, respectively, over the same periods in 1996. Also, the mix of loans continues to change as the Company diversifies its loan portfolio, both geographically and by industry. These efforts have included the Pacific Northwest Acquisitions and credit extensions to companies in the media and telecommunications industry located on the mainland United States. Average interest-bearing deposits and liabilities increased by $203,302,000, or 3.4%, for the first nine months of 1997 over the same period in 1996. The increase was primarily due to the Pacific Northwest Acquisitions (including the issuance of $50 million of long-term subordinated debt during the third quarter of 1996 to fund the Pacific Northwest Acquisitions) and the issuance by First Hawaiian Capital I of $100,000,000 of 8.343% Series A capital securities on June 30, 1997. Excluding the impact of the Pacific Northwest Acquisitions and the Series A capital securities issuance, average interest-bearing deposits and liabilities for the first nine months of 1997 decreased $167,189,000, or 3.0%, compared to the same period in 1996. Excluding the impact of the Series A capital securities issuance, average interest-bearing deposits and liabilities for the third quarter of 1997 decreased $279,263,000, or 4.5%, compared to the same period in 1996. These decreases reflect the repayment of short-term borrowings in 1997 using proceeds received from the liquidation of a portion of the investment securities portfolio as described above. 8 10 The following table sets forth consolidated average balance sheets, an analysis of interest income/expense, and average yield/rate for each major category of interest-earning assets and interest-bearing liabilities for the periods 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 1997 and 1996) to make them comparable with taxable items before any income taxes are applied.
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------- -------------------------------------- 1997 1996 1997 --------------------------- ----------------------------- ---------------------------- --------- INTEREST Interest INTEREST AVERAGE INCOME/ YIELD/ Average Income/ Yield/ AVERAGE INCOME/ YIELD/ Average ASSETS BALANCE EXPENSE RATE(1) Balance Expense Rate(1) BALANCE EXPENSE RATE(1) Balance --------- --------- ------- --------- --------- ------- --------- --------- ------- --------- (dollars in thousands) Earning assets: Interest-bearing deposits in other banks $128,025 $ 2,024 6.27% $ 232,579 $ 3,384 5.79% $ 72,568 $ 3,274 6.03% $ 213,708 Federal funds sold and securities purchased under agreements to resell 141,780 1,903 5.33 118,877 1,612 5.39 143,106 5,723 5.35 149,113 Investment securities (2) 798,572 13,567 6.74 1,306,746 20,553 6.26 962,179 47,607 6.62 1,199,860 Loans (3),(4) 5,973,862 132,087 8.77 5,675,240 124,950 8.76 5,936,912 388,239 8.74 5,420,974 --------- ------- --------- ------- --------- ------- --------- Total earning assets 7,042,239 149,581 8.43 7,333,442 150,499 8.16 7,114,765 444,843 8.36 6,983,655 ------- ------- ------- Nonearning assets 776,307 749,136 795,545 680,065 ----------- --------- --------- --------- Total assets $7,818,546 $8,082,578 $7,910,310 $7,663,720 ========== ========== ========== ==========
------------------- 1996 ------------------- Interest Income/ Yield/ ASSETS Expense Rate(1) -------- -------- Earning assets: Interest-bearing deposits in other banks $ 9,036 5.65% Federal funds sold and securities purchased under agreements to resell 6,132 5.49 Investment securities (2) 57,289 6.38 Loans (3),(4) 353,550 8.71 ------- Total earning assets 426,007 8.15 ------- Nonearning assets Total assets
(1) Annualized. (2) Average balances exclude the effects of fair value adjustments. (3) Nonaccruing loans have been included in the computations of average loan balances. (4) Interest income for loans included loan fees of $6,180 and $18,161 for the quarter and nine months ended September 30, 1997, respectively, and $6,548 and $18,349 for the quarter and nine months ended September 30, 1996, respectively. 9 11
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------- ------------------------------- 1997 1996 1997 -------------------------------- ----------------------------- ------------------------------- INTEREST INTEREST INTEREST LIABILITIES AND AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ STOCKHOLDERS' EQUITY BALANCE EXPENSE RATE (1) BALANCE EXPENSE RATE (1) BALANCE EXPENSE RATE (1) ------- ------- -------- ------- ------- -------- ------- ------- -------- (dollars in thousands) Interest-bearing deposits and liabilities: Deposits $5,057,511 $ 50,292 3.95% $4,958,542 $ 48,798 3.91% $5,022,011 $ 146,105 3.89% Short-term borrowings 685,811 9,118 5.28 996,377 13,090 5.23 834,889 32,522 5.21 Long-term debt 293,758 5,440 7.35 261,424 4,491 6.83 249,803 12,900 6.90 ---------- ---------- ---------- -------- ---------- --------- Total interest-bearing deposits and liabilities 6,037,080 64,850 4.26 6,216,343 66,379 4.25 6,106,703 191,527 4.19 ---------- ---- -------- ---- -------- ---- Interest rate spread 4.17% 3.91% 4.17% ==== ==== ==== Noninterest-bearing demand deposits 844,846 950,929 856,460 Other liabilities 201,854 228,104 225,162 --------- --------- --------- Total liabilities 7,083,780 7,395,376 7,188,325 Stockholders' equity 734,766 687,202 721,985 --------- --------- --------- Total liabilities and stockholders' equity $7,818,546 $8,082,578 $7,910,310 ========== ========== ========== Net interest income and margin on earning assets 84,731 4.77% 84,120 4.56% 253,316 4.76% ==== ==== ===== Tax equivalent adjustment 149 486 563 ---------- --------- -------- Net interest income $ 84,582 $ 83,634 $252,753 ======== ========= ========
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1996 ------------------------------- INTEREST LIABILITIES AND AVERAGE INCOME/ YIELD/ STOCKHOLDERS' EQUITY BALANCE EXPENSE RATE (1) ------- ------- -------- Interest-bearing deposits and liabilities: Deposits $4,634,603 $ 133,802 3.86% Short-term borrowings 1,005,890 40,126 5.33 Long-term debt 262,908 12,758 6.48 ---------- --------- Total interest-bearing deposits and liabilities 5,903,401 186,686 4.22 -------- ---- Interest rate spread 3.93% ==== Noninterest-bearing demand deposits 885,044 Other liabilities 207,601 ---------- Total liabilities 6,996,046 Stockholders' equity 667,674 ---------- Total liabilities and stockholders' equity $7,663,720 ========== Net interest income and margin on earning assets 239,321 4.58% ===== Tax equivalent adjustment 1,609 -------- Net interest income $237,712 ========
(1) Annualized. 10 12 INVESTMENT SECURITIES The following table presents the amortized cost and fair values of available-for-sale investment securities as of the dates indicated:
SEPTEMBER 30, December 31, September 30, 1997 1996 1996 ------------- ----------- ------------- (in thousands) Amortized cost $ 698,560 $ 1,137,640 $ 1,240,314 Unrealized gains 2,131 4,984 2,954 Unrealized losses (227) (1,905) (2,690) ----------- ----------- ----------- Fair value $ 700,464 $ 1,140,719 $ 1,240,578 =========== =========== ===========
Gross realized gains and losses for the nine months ended September 30, 1997 and 1996 were as follows:
1997 1996 ---- ---- (in thousands) Realized gains $ 1,060 $ 46 Realized losses (773) (10) ------- ------- Securities gains, net $ 287 $ 36 ======= =======
Gains and losses realized on the sales of investment securities are determined using the specific identification method. 11 13 LOANS The following table sets forth the loan portfolio by major categories and loan mix at September 30, 1997, December 31, 1996 and September 30, 1996:
September 30, 1997 December 31, 1996 September 30, 1996 ------------------ ----------------- ------------------ Amount % Amount % Amount % ------ - ------ - ------ - (dollars in thousands) Commercial, financial and agricultural $1,463,948 24.3% $1,381,824 23.8% $1,423,206 24.6% Real estate: Commercial 1,201,825 20.0 1,172,124 20.2 1,164,496 20.1 Construction 169,166 2.8 213,195 3.7 207,080 3.6 Residential: Insured, guaranteed or conventional 1,482,876 24.6 1,473,803 25.4 1,457,046 25.2 Home equity credit lines 458,347 7.6 462,117 8.0 462,288 8.0 ---------- ------ ---------- ------ ---------- ------ Total real estate loans 3,312,214 55.0 3,321,239 57.3 3,290,910 56.9 ---------- ------ ---------- ------ ---------- ------ Consumer 624,303 10.4 583,060 10.0 580,011 10.0 Lease financing 296,181 4.9 240,898 4.1 236,483 4.1 Foreign 325,598 5.4 279,711 4.8 255,396 4.4 ---------- ------ ---------- ------ ---------- ------ Total loans 6,022,244 100.0% 5,806,732 100.0% 5,786,006 100.0% ====== ====== ====== Less allowance for loan losses 83,575 85,248 83,542 ---------- ---------- ---------- Total net loans $5,938,669 $5,721,484 $5,702,464 ========== ========== ==========
The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. At September 30, 1997, total loans were $6,022,244,000, representing increases of 3.7% and 4.1% over December 31, 1996 and September 30, 1996, respectively. The increases over December 31, 1996 and September 30, 1996 were primarily due to increased loan production by the Pacific Northwest subsidiaries. Total loans at September 30, 1997, represented 76.3% of total assets, 86.3% of total earning assets and 101.1% of total deposits, compared to 72.6% of total assets, 82.0% of total earning assets and 97.8% of total deposits at December 31, 1996, and 71.0% of total assets, 79.7% of total earning assets and 96.1% of total deposits at September 30, 1996. 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 September 30, 1997, the Company did not have a concentration of loans greater than 10% of total loans which is not otherwise disclosed as a category of loans in the above table. 12 14 NONPERFORMING ASSETS A summary of nonperforming assets at September 30, 1997, December 31, 1996 and September 30, 1996 follows:
SEPTEMBER 30, December 31, September 30, 1997 1996 1996 ------- ------- ------- (dollars in thousands) Nonperforming loans: Nonaccrual: Commercial, financial and agricultural $12,876 $21,398 $16,655 Real estate: Commercial 8,970 6,156 24,555 Construction -- 1,700 6,924 Residential: Insured, guaranteed, or conventional 6,695 13,815 10,869 Home equity credit lines -- 451 331 ------- ------- ------- Total real estate loans 15,665 22,122 42,679 ------- ------- ------- Lease financing 34 27 33 ------- ------- ------- Total nonaccrual loans 28,575 43,547 59,367 ------- ------- ------- Restructured: Commercial, financial and agricultural 1,879 3,429 616 Real estate: Commercial 39,142 24,604 2,500 Residential: Insured, guaranteed, or conventional 2,812 267 -- Home equity credit lines 559 561 -- ------- ------- ------- Total restructured loans 44,392 28,861 3,116 ------- ------- ------- Total nonperforming loans 72,967 72,408 62,483 Other real estate owned 18,527 25,574 11,868 ------- ------- ------- Total nonperforming assets $91,494 $97,982 $74,351 ======= ======= ======= Past due loans: Commercial, financial and agricultural $ 5,535 $ 7,765 $ 3,244 Real estate: Commercial 1,373 7,676 8,114 Residential: Insured, guaranteed, or conventional 15,912 9,812 10,084 Home equity credit lines 2,402 2,220 3,475 ------- ------- ------- Total real estate loans 19,687 19,708 21,673 ------- ------- ------- Consumer 3,204 2,869 2,495 Lease financing 26 40 43 ------- ------- ------- Total past due loans (1) $28,452 $30,382 $27,455 ======= ======= ======= Nonperforming assets to total loans and other real estate owned (end of period): Excluding 90 days past due accruing loans 1.51% 1.68% 1.28% Including 90 days past due accruing loans 1.99% 2.20% 1.76% Nonperforming assets to total assets (end of period): Excluding 90 days past due accruing loans 1.16% 1.22% .91% Including 90 days past due accruing loans 1.52% 1.60% 1.25%
(1) Represents loans which are past due 90 days or more as to principal and interest and still accruing interest. 13 15 NONPERFORMING ASSETS, CONTINUED Nonperforming assets decreased from $97,982,000, or 1.68% of total loans and other real estate owned ("OREO") at December 31, 1996, to $91,494,000, or 1.51% of total loans and OREO at September 30, 1997. The percentage of nonperforming assets to total assets decreased from 1.22% at December 31, 1996 to 1.16% at September 30, 1997, primarily due to the decrease in nonperforming assets described below and a 1.3% decrease in total assets. In addition, certain components of total nonperforming assets changed from December 31, 1996 as compared to September 30, 1997. Nonaccrual loans at September 30, 1997 decreased $14,972,000, or 34.4%, from the balance at December 31, 1996, primarily due to decreases in commercial, financial and agricultural loans and real estate - residential loans of $8,522,000 and $7,571,000, respectively. The decrease in nonaccrual loans was primarily attributable to pay-offs and partial pay-downs of nonaccrual loans. In addition, OREO at September 30, 1997 decreased by $7,047,000 from the balance at December 31, 1996, due to the sale of property with a carrying value of $7,200,000 in the second quarter of 1997. These decreases were partially offset by an increase of $14,538,000 in the commercial component of restructured real estate loans, principally due to the addition of a loan previously identified as a potential problem loan at December 31, 1996. Moreover, certain potential problem loans have been classified as nonperforming assets by management in connection with its continuing review of the loan portfolio. Nonperforming assets decreased $6,381,000, or 6.5%, from $97,875,000 at June 30, 1997 to $91,494,000 at September 30, 1997. This decrease was primarily attributable to decreases in commercial, financial and agricultural loans and real estate loans. Loans past due 90 days or more and still accruing interest totalled $28,452,000 at September 30, 1997, a decrease of $1,930,000, or 6.4%, compared to December 31, 1996. 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. In recent years, the level of the Company's nonperforming assets and charge-offs has been affected by the impact of adverse economic conditions and trends in Hawaii. The most important of these adverse economic trends is the continuing weakness of Hawaii's economy. In contrast to the mainland economy, Hawaii's recovery from its 1992 recession continues to be slow and protracted. In addition, Hawaii continues to show weaknesses in its local real estate market, including declining values in the leasehold real estate sector. These trends may continue to affect the level of nonperforming assets and related charge-offs in future periods. 14 16 DEPOSITS The following table sets forth the average balances and the average rates paid on deposits for the periods indicated:
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------- --------------------------------------------- 1997 1996 1997 1996 -------------------- --------------------- --------------------- --------------------- AVERAGE AVERAGE Average Average AVERAGE AVERAGE Average Average BALANCE RATE (1) Balance Rate (1) BALANCE RATE (1) Balance Rate (1) --------- -------- --------- -------- -------- -------- --------- --------- (dollars in thousands) Interest-bearing demand $1,649,476 2.57% $1,371,192 2.83% $1,590,104 2.58% $1,223,388 2.72% Savings 863,366 2.43 1,092,076 2.11 918,260 2.34 1,134,889 2.11 Time 2,544,669 5.35 2,495,274 5.30 2,513,647 5.28 2,276,326 5.34 ---------- ---------- ---------- ---------- Total interest-bearing deposits 5,057,511 3.95 4,958,542 3.91 5,022,011 3.89 4,634,603 3.86 Noninterest-bearing demand 844,846 -- 950,929 -- 856,460 -- 885,044 -- ---------- ---------- ---------- ---------- Total deposits $5,902,357 3.38% $5,909,471 3.29% $5,878,471 3.32% $5,519,647 3.24% ========== ========== ========== ==========
Average interest-bearing deposits increased $387,408,000, or 8.4%, and $98,969,000, or 2.0%, for the first nine months and third quarter of 1997, respectively, over the same periods in 1996. The increase in average interest-bearing deposits was primarily due to the Pacific Northwest Acquisitions and various deposit product programs initiated by the Company throughout 1996 and 1997. (1) Annualized. 15 17 PROVISION AND ALLOWANCE FOR LOAN LOSSES The following table sets forth the activity in the allowance for loan losses for the periods indicated:
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ------------------------------ 1997 1996 1997 1996 ----------- ----------- ----------- ----------- (dollars in thousands) Loans outstanding (end of period) $ 6,022,244 $ 5,786,006 $ 6,022,244 $ 5,786,006 =========== =========== =========== =========== Average loans outstanding $ 5,973,862 $ 5,675,240 $ 5,936,912 $ 5,420,974 =========== =========== =========== =========== Allowance for loan losses summary: Balance at beginning of period $ 84,189 $ 84,531 $ 85,248 $ 78,733 ----------- ----------- ----------- ----------- Allowance due to Pacific Northwest Acquisitions -- 306 -- 6,506 Loans charged off: Commercial, financial and agricultural 967 1,926 4,320 4,322 Real estate: Commercial 10 39 353 1,325 Construction -- 500 61 500 Residential 615 833 2,650 2,023 Consumer 3,688 3,126 10,199 8,737 Lease financing -- -- 16 -- Foreign 16 62 36 139 ----------- ----------- ----------- ----------- Total loans charged off 5,296 6,486 17,635 17,046 ----------- ----------- ----------- ----------- Recoveries on loans charged off: Commercial, financial and agricultural 130 77 1,449 660 Real estate: Commercial 76 1 140 8 Construction -- 3 -- 3 Residential 122 44 784 181 Consumer 532 412 1,730 1,315 Lease financing -- -- 11 2 Foreign 5 5 18 18 ----------- ----------- ----------- ----------- Total recoveries on loans previously charged off 865 542 4,132 2,187 ----------- ----------- ----------- ----------- Net charge-offs (4,431) (5,944) (13,503) (14,859) Provision charged to expense 3,817 4,649 11,830 13,162 ----------- ----------- ----------- ----------- Balance at end of period $ 83,575 $ 83,542 $ 83,575 $ 83,542 =========== =========== =========== =========== Net loans charged off to average loans .29%(1) .42%(1) .30%(1) .37%(1) Net loans charged off to allowance for loan losses 21.03%(1) 28.31%(1) 21.60%(1) 23.76%(1) Allowance for loan losses to total loans (end of period) 1.39% 1.44% 1.39% 1.44% Allowance for loan losses to nonperforming loans (end of period): Excluding 90 days past due accruing loans 1.15X 1.34x 1.15X 1.34x Including 90 days past due accruing loans .82X .93x .82X .93x
(1) Annualized. 16 18 PROVISION AND ALLOWANCE FOR LOAN LOSSES, CONTINUED For the first nine months of 1997, the provision for loan losses was $11,830,000, a decrease of $1,332,000, or 10.1%, compared to the same period in 1996. The provision for loan losses was $3,817,000 for the third quarter of 1997, a decrease of $832,000, or 17.9%, compared to the same period in 1996. The provision for loan losses is based upon management's judgment as to the adequacy of the allowance for loan losses 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 for loan losses is ultimately one of management judgment, which includes consideration of many factors, including among others 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. Net charge-offs for the first nine months of 1997 decreased to $13,503,000, a decrease of $1,356,000, or 9.1%, compared to the same period in 1996. Net charge-offs for the third quarter of 1997 were $4,431,000 compared to $5,944,000 for the same period a year ago. The decrease in net charge-offs for the first nine months of 1997 was primarily due to an increase in commercial, financial and agricultural and consumer loan recoveries. The decrease in net charge-offs for the third quarter of 1997 was primarily due to a decrease in commercial, financial and agricultural loan charge-offs. For the first nine months of 1997, consumer loan charge-offs increased $1,462,000, or 16.7%, over the same period in 1996. The increase in consumer loan charge-offs was primarily due to the sluggish Hawaii economy and resultant increase in personal bankruptcies. Smaller balance homogeneous credit card and consumer loans are charged off at a predetermined delinquency status or earlier if the Company determines that the loan is uncollectible. The allowance for loan losses decreased to 115% of nonperforming loans (excluding 90 days past due accruing loans) at September 30, 1997 from 118% at December 31, 1996. In management's judgment, the allowance for loan losses was adequate to absorb potential losses currently inherent in the portfolio at September 30, 1997. However, changes in prevailing economic conditions in the Company's markets could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the allowance for loan losses. NONINTEREST INCOME Excluding securities gains, net, noninterest income totalled $85,764,000 and $27,939,000 for the first nine months and third quarter of 1997, respectively, an increase of 11.2% and 8.4%, respectively, over the same periods in 1996. Excluding the Pacific Northwest Acquisitions and securities gains, net, noninterest income increased $4,496,000 for the first nine months of 1997, an increase of 6.0% over the same period in 1996. Trust and investment services income increased $830,000 and $258,000, or 4.5% and 4.3%, for the first nine months and third quarter of 1997, respectively, over the same periods in 1996. Service charges on deposit accounts increased $2,204,000 and $383,000, or 11.5% and 5.5%, respectively, for the first nine months and third quarter of 1997, respectively, over the same periods in 1996. Excluding the Pacific Northwest Acquisitions, service charges on deposit accounts increased $552,000 for the first nine months of 1997, an increase of 3.0% over the same period in 1996. The increase for the first nine months and third quarter was primarily due to increases in service charges on checks paid and returned and higher fees on analyzed accounts. Other service charges and fees increased $4,706,000 and $1,933,000, or 15.6% and 18.7%, respectively, for the first nine months and third quarter of 1997, respectively, over the same periods in 1996. Excluding the Pacific Northwest Acquisitions, other service charges and fees increased $2,583,000 for the first nine months of 1997, an increase of 8.8% over the same period in 1996. The increase for the first nine months and third quarter of 1997 over the same periods in 1996 was primarily due to higher: (1) merchant discount fees; (2) income earned from annuity and mutual fund sales; and (3) mortgage servicing fees for mortgage loans that were originated and sold with servicing retained. The increase was partially offset by lower mortgage brokerage fees. Other noninterest income increased $904,000, or 9.6%, for the first nine months of 1997 over the same period in 1996. Excluding the Pacific Northwest Acquisitions, other noninterest income increased $531,000 for the first nine months of 1997, an increase of 5.7% over the same period in 1996. The increase for the first nine months of 1997 was primarily due to: (1) a gain on the sale of a leasehold interest in a former Pioneer branch of $2,500,000; (2) higher foreclosed property income; and (3) higher income earned on bank owned life insurance on certain officers. 17 19 Noninterest income in the second quarter of 1996 also included a gain on sale of OREO of $3,029,000 in the second quarter of 1996. Other noninterest income decreased $404,000, or 16.5%, for the third quarter of 1997 compared to the same period in 1996. The decrease in the third quarter of 1997 was primarily attributable to gain on sales of real property in the third quarter of the prior year. NONINTEREST EXPENSE Noninterest expense totalled $231,924,000 for the first nine months of 1997, an increase of 10.1% over the first nine months of 1996. Excluding the Pacific Northwest Acquisitions, noninterest expense increased $6,549,000 for the first nine months of 1997, an increase of 3.3% over the same period in 1996. Noninterest expense totalled $76,220,000 for the third quarter of 1997, an increase of $844,000, or 1.1%, over the same period a year ago. Total personnel expense (salaries and wages and employee benefits) increased $9,402,000 and $1,533,000, or 9.2% and 4.3%, for the first nine months and third quarter of 1997, respectively, over the same periods in 1996. Excluding the Pacific Northwest Acquisitions, personnel expense remained relatively constant for the first nine months of 1997 compared to the same period in 1996. Occupancy expense for the first nine months and third quarter of 1997 increased $9,421,000, or 47.4%, and $2,097,000, or 29.8%, respectively, over the same periods in 1996. Excluding the Pacific Northwest Acquisitions, occupancy expense increased $8,446,000 for the first nine months of 1997, an increase of 43.5% over the same period in 1996. The increase was primarily due to costs associated with the new administrative headquarters building. Equipment expense increased $1,693,000, or 10.1%, and $245,000, or 4.3%, respectively, for the first nine months and third quarter of 1997 over the same periods in 1996. Excluding the Pacific Northwest Acquisitions, equipment expense increased $906,000 for the first nine months of 1997, an increase of 5.5%, over the same period in 1996. The increase was a result of higher service contract and data processing equipment rental expense in 1997. Other noninterest expense increased $680,000 for the first nine months of 1997, an increase of 1.0% over the same period in 1996. Exclusive of certain nonrecurring items as follows: (1) the aforementioned $3,849,000 SAIF one-time assessment recognized in the third quarter of 1996; (2) a loss of $1,945,000 (which actually resulted in an after-tax gain of $399,000 due to a net tax benefit of $2,344,000 recognized through reversal of the related tax liabilities) recognized on the sale of a certain leveraged lease in the first quarter of 1996; (3) a loss on the sale of a certain loan of $1,427,000 in the second quarter of 1997; and (4) the Pacific Northwest Acquisitions, other noninterest expense for the first nine months of 1997 increased $1,087,000, or 1.8%, over the same period in 1996. Other noninterest expense for the first nine months of 1997 increased over the same period of last year as a result of higher interchange settlement fees, outside services expenses, depreciation - software expense and miscellaneous losses and charge-offs. The increase was partially offset by an increase in the cash surrender value of certain executive life insurance policies (recorded as a credit to insurance expense) in 1997. Excluding the aforementioned nonrecurring items, other noninterest expense for the third quarter of 1997 remained relatively constant compared to the same period a year ago. 18 20 INCOME TAXES The Company's effective income tax rate (exclusive of the tax equivalent adjustment) for the first nine months and third quarter of 1997 was 32.5% and 34.4%, respectively, as compared to 34.1% and 35.3%, respectively, for the same periods in 1996. The effective income tax rate for the first nine months of 1997 was positively impacted by income tax benefits resulting from the: (1) recognition of certain tax credits; (2) partial reversal of an overaccrual of State of Hawaii income taxes; and (3) donation of real property to a non-profit organization. The effective tax rate for the first nine months of 1996 was positively impacted by the reversal of deferred tax liabilities (reflecting a change in Hawaii tax laws) related to the leveraged lease sale as discussed previously on page 18. LIQUIDITY AND CAPITAL Stockholders' equity was $741,280,000 at September 30, 1997, an increase of 5.0% over $705,884,000 at December 31, 1996. The ratio of average stockholders' equity to average total assets was 9.40% for the third quarter of 1997 compared to 8.50% for the same quarter last year. The issuance of $100,000,000 of capital securities by First Hawaiian Capital I on June 30, 1997 had a positive impact on the Company's liquidity and regulatory capital position at September 30, 1997. The following tables present the Company's regulatory capital position at September 30, 1997: RISK-BASED CAPITAL RATIOS
AMOUNT RATIO -------- ------- (dollars in thousands) Tier 1 Capital $ 720,581 9.97% Tier 1 Capital minimum requirement (1) 289,188 4.00 ---------- ----- Excess $ 431,393 5.97% ========== ===== Total Capital $ 954,156 13.20% Total Capital minimum requirement (1) 578,376 8.00 ---------- ----- Excess $ 375,780 5.20% ========== ===== Risk-weighted assets $7,229,694 ==========
LEVERAGE RATIO
AMOUNT RATIO -------- ------- (dollars in thousands) Tier 1 Capital to average quarterly total assets (net of certain intangibles) (Tier 1 Leverage Ratio) $ 720,581 9.36% Minimum leverage requirement (2) 230,935 3.00 ---------- ----- Excess $ 489,646 6.36% ========== ===== Average quarterly total assets (net of certain intangibles) $7,697,847 ==========
(1) Risk-based capital guidelines as established by the Federal Reserve Board for bank holding companies require minimum Tier 1 and Total Capital ratios of 4% and 8%, respectively. (2) The Federal Reserve Board has stated that the Leverage Ratio of 3% is the minimum requirement for the most highly rated banking organizations which are not experiencing or anticipating significant growth. Other banking organizations are expected to maintain leverage ratios of at least one to two percent higher. 19 21 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 12 Statement regarding computation of ratios. Exhibit 27 Financial data schedule. (b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter ended September 30, 1997. 20 22 SIGNATURES Pursuant to the requirements 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) Date November 10, 1997 By /s/ HOWARD H. KARR ------------------------------ -------------------------------------- HOWARD H. KARR EXECUTIVE VICE PRESIDENT AND TREASURER (PRINCIPAL FINANCIAL OFFICER) 21 23 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------ ----------- 12 Statement regarding computation of ratios. 27 Financial data schedule.
   1



EXHIBIT 12.    STATEMENT RE:  COMPUTATION OF RATIOS

                      First Hawaiian, Inc. and Subsidiaries
         Computation of Consolidated Ratios of Earnings to Fixed Charges


QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------------ 1997 1996 1997 1996 --------- --------- --------- --------- (dollars in thousands) Income before income taxes $ 32,552 $ 29,387 $ 95,050 $ 90,978 --------- --------- --------- --------- Fixed charges:(1) Interest expense 64,850 66,379 191,527 186,686 Rental expense 2,502 1,168 7,881 3,544 --------- --------- --------- --------- 67,352 67,547 199,408 190,230 Less interest on deposits 50,292 48,798 146,105 133,802 --------- --------- --------- --------- Net fixed charges 17,060 18,749 53,303 56,428 --------- --------- --------- --------- Earnings, excluding interest on deposits $ 49,612 $ 48,136 $ 148,353 $ 147,406 ========= ========= ========= ========= Earnings, including interest on deposits $ 99,904 $ 96,934 $ 294,458 $ 281,208 ========= ========= ========= ========= Ratio of earnings to fixed charges: Excluding interest on deposits 2.91 X 2.57 x 2.78 X 2.61 x Including interest on deposits 1.48 X 1.44 x 1.48 X 1.48 x
(1) For the purpose of computing the consolidated ratios of earnings to fixed charges, earnings represent income before income taxes 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, consist of the foregoing items plus interest on deposits. First Hawaiian, Inc. did not have any preferred stock outstanding during the periods shown above.
 

9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S QUARTERLY FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 329,552 183,730 156,962 0 700,464 0 0 6,022,244 83,575 7,895,048 5,957,289 644,241 222,965 328,742 0 0 165,952 575,328 7,895,048 387,954 47,329 8,997 444,280 146,105 191,527 252,753 11,830 287 231,924 95,050 95,050 0 0 64,132 2.02 2.02 8.36 28,575 28,452 44,392 0 85,248 17,635 4,132 83,575 38,905 1,915 42,755