1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
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
---------------------------
BANCWEST CORPORATION
(Exact name of registrant as specified in its charter)
---------------------------
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (808) 525-7000
---------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $1.00 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(Title of class)
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 26, 1999 was $724,177,000.
The number of shares outstanding of each of the registrant's classes of common
stock as of February 26, 1999 was:
Title of Class Number of Shares Outstanding
-------------- ----------------------------
Common Stock, $1.00 Par Value 31,577,390 Shares
Class A Common Stock, $1.00 Par Value 25,814,768 Shares
---------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by
reference in this Form 10-K:
DOCUMENTS FORM 10-K REFERENCE
--------- -------------------
BancWest Corporation Annual Report 1998 Parts I and II
BancWest Corporation Proxy Statement dated
March 1, 1999 for the Annual Meeting
of Stockholders Part III
================================================================================
2
INDEX
PART I
PAGE
----
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 14
Item 3. Legal Proceedings...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 14
Executive Officers of the Registrant................................................................. 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................................................... 17
Item 6. Selected Financial Data................................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 17
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.............................. 18
Item 8. Financial Statements and Supplementary Data............................................ 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 21
Item 11. Executive Compensation................................................................. 21
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 21
Item 13. Certain Relationships and Related Transactions......................................... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................................................ 22
Signatures ....................................................................................... 25
Exhibit Index ....................................................................................... 28
3
PART I
ITEM 1. BUSINESS
BANCWEST CORPORATION (FORMERLY KNOWN AS FIRST HAWAIIAN, INC.) -
BancWest Corporation, a Delaware corporation (the "Corporation"), is a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). 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,
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 ("First Hawaiian"), a State of Hawaii-chartered bank; Bank
of the West, a State of California-chartered bank with authority to operate
interstate branches in Oregon, Washington and Idaho; FHL Lease Holding Company,
Inc. ("FHL"), a financial services loan company; and First Hawaiian Capital I
(the "Trust"), a Delaware business trust. First Hawaiian, Bank of the West, FHL
and the Trust are wholly-owned subsidiaries of the Corporation. At December 31,
1998, the Corporation had consolidated total assets of $15.0 billion, total
deposits of $11.3 billion and total stockholders' equity of $1.7 billion. Based
on assets as of December 31, 1998, the Corporation was the 49th largest bank
holding company in the United States as reported in the American Banker.
On November 1, 1998, the former BancWest Corporation ("Old BancWest"), parent
company of Bank of the West, merged (the "Merger") with and into First Hawaiian,
Inc. ("FHI"). Upon consummation of the Merger, FHI, the surviving corporation,
changed its name to "BancWest Corporation". Prior to the consummation of the
Merger, Old BancWest was wholly owned by Banque Nationale de Paris ("BNP"). BNP
received approximately 25.8 million shares of the Corporation's newly-authorized
Class A Common Stock representing approximately 45% of the then outstanding
total voting stock of the Corporation in the Merger (a purchase price of
approximately $905.7 million). As a result of the Merger, Bank of the West is
now a wholly-owned subsidiary of the Corporation. Additional information
regarding the Merger is included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (pages 28 through 49), "Note 2.
Mergers and Acquisitions" (pages 60 and 61), "Note 3. Restructuring,
Merger-Related and Other Nonrecurring Costs" (page 61) and "Note 12. Common
Stock and Earnings Per Share" (pages 65 and 66) in the Financial Review Section
of the Corporation's Annual Report 1998, and is incorporated herein by reference
thereto.
FIRST HAWAIIAN BANK -
First Hawaiian, the oldest financial institution in Hawaii, was established as
Bishop & Co. in 1858 in Honolulu. First Hawaiian is a State of Hawaii-chartered
bank that is not a member of the Federal Reserve System. The deposits of First
Hawaiian are insured by the Bank Insurance Fund (the "BIF") and the Savings
Association Insurance Fund (the "SAIF") 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").
First Hawaiian is a full-service bank conducting a general commercial and
consumer banking business and offering trust and insurance 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 cash management services,
insurance products, mutual funds and annuities, traveler's checks and personal
money orders; 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.
1
4
At December 31, 1998, First Hawaiian had total assets of $7.2 billion and total
deposits of $5.5 billion, making it the second largest bank in Hawaii.
On June 19, 1998, First Hawaiian Creditcorp, Inc. ("Creditcorp"), a former
wholly-owned subsidiary of the Corporation, was merged with and into First
Hawaiian. As a result of the merger, all 13 Creditcorp branches were closed.
DOMESTIC SERVICES -
The domestic operations of First Hawaiian are carried out through its main
banking office located in Honolulu, Hawaii, with 55 other banking offices
located throughout the State of Hawaii. All but one of the banking offices are
equipped with automatic teller machines that provide 24-hour service to
customers wishing to make withdrawals from and deposits to their personal
checking and savings accounts, to make balance inquiries, to obtain interim bank
statements and to make utility and loan payments. Sixty-three automatic teller
machines at nonbranch locations provide balance inquiry, withdrawal transaction
and account transfer services. At selected non-branch locations, interim bank
statements are also available. First Hawaiian is a member of the
CIRRUS(R)/MasterCard(R), Plus(R)/VISA(R) and Star System(R), AFFN(R), American
Express(R), Discover(R) and JCB(R) automatic teller machine networks, which
provide First Hawaiian's customers with access to their funds nationwide and in
selected foreign countries.
LENDING ACTIVITIES -
First Hawaiian engages in a broad range of lending activities, including making
real estate, commercial and consumer loans. At December 31, 1998, First
Hawaiian's loans totalled $5.6 billion, representing 76.7% of total assets. At
that date, 47.2% of the loans were construction, commercial and residential real
estate loans, 27.6% were commercial loans, 13.0% were consumer loans, 6.8% were
foreign loans and 5.4% were leases.
REAL ESTATE LENDING--CONSTRUCTION. First Hawaiian provides construction
financing for a variety of commercial and residential single-family subdivision
and multi-family developments. At December 31, 1998, 3.4% of First Hawaiian's
total real estate loans were collateralized by properties under construction.
REAL ESTATE LENDING--COMMERCIAL. First Hawaiian provides permanent financing for
a variety of commercial developments, such as various retail facilities,
warehouses and office buildings. At December 31, 1998, 36.1% of First Hawaiian's
total real estate loans were collateralized by commercial properties.
REAL ESTATE LENDING--RESIDENTIAL. First Hawaiian 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 located in Hawaii. At December
31, 1998, 60.5% of First Hawaiian's total real estate loans were collateralized
by single-family and multi-family residences.
COMMERCIAL LENDING. First Hawaiian is a major lender to primarily small- and
medium-sized businesses in Hawaii. First Hawaiian also participates in
syndication lending to highly rated large corporate entities and to the media
and telecommunications industry located on the mainland U.S.
CONSUMER LENDING. First Hawaiian offers many types of loans and credits to
consumers including lines of credit, uncollateralized or collateralized and
various types of personal and automobile loans. First Hawaiian also provides
indirect consumer automobile financing on new and used autos by purchasing
finance contracts from dealers. First Hawaiian's Dealer Center is the largest
commercial bank automobile lender in the State of Hawaii. First Hawaiian is the
largest issuer of MasterCard(R) credit cards and the second largest issuer of
VISA(R) credit cards in Hawaii.
2
5
INTERNATIONAL BANKING SERVICES -
First Hawaiian maintains an International Banking Division which provides
international banking products and services through First Hawaiian's branch
system, international banking headquarters in Honolulu, a Grand Cayman branch,
two Guam branches, a branch in Saipan and a representative office in Tokyo,
Japan. First Hawaiian maintains a network of correspondent banking relationships
throughout the world.
First Hawaiian's international banking activities are primarily trade-related
and are concentrated in the Asia-Pacific area.
TRUST SERVICES -
First Hawaiian's Trust and Investments Division offers a full range of trust and
investment management services. The Trust and Investments 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. At December 31, 1998, the Trust and Investments Division
had 5,696 accounts with a market value of $9.7 billion. Of this total, $7.0
billion represented assets in nonmanaged accounts and $2.7 billion were managed
assets.
The Trust and Investments Division maintains custodial accounts pursuant to
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.
SECURITIES AND INSURANCE SERVICES -
First Hawaiian, through a wholly-owned subsidiary, offers insurance needs
analysis for individuals, families and businesses as well as insurance products
such as life, disability and long-term care. In association with an independent
registered broker-dealer, First Hawaiian offers mutual funds, annuities and
other securities in its branches.
BANK OF THE WEST -
Bank of the West is a State of California-chartered bank that is not a member of
the Federal Reserve System. The deposits of Bank of the West are insured by the
BIF and the SAIF of the FDIC to the extent and subject to the limitations set
forth in the FDIA. The predecessor of Bank of the West, "The Farmers National
Gold Bank," was chartered as a national banking association in 1874 in San Jose,
California.
On November 1, 1998, Pacific One Bank, a former wholly-owned subsidiary of the
Corporation, was merged with and into Bank of the West. As a result of the
merger, 39 Pacific One Bank branches in Oregon, Washington and Idaho became
branches of Bank of the West.
Bank of the West is the fifth largest bank in the State of California, with
total assets of approximately $7.7 billion and total deposits of approximately
$5.8 billion at December 31, 1998. Bank of the West conducts a general
commercial banking business, providing retail and corporate banking and trust
services to individuals, institutions, businesses and governments through 142
branches and other commercial banking offices located primarily in the San
Francisco Bay area and elsewhere in the Northern and Central Valley regions of
California and in Oregon, Washington and Idaho. Bank of the West also generates
indirect automobile loans and leases, recreational vehicle loans, recreational
marine vessel loans, equipment leases and deeds of trust on single-family
residences through a network of manufacturers, dealers, representatives and
brokers in all 50 states. Bank of the West's principal subsidiary is Essex
Credit Corporation ("Essex"), a Connecticut corporation. Essex is engaged
primarily in the business of originating and selling consumer loans on a
nationwide basis, such loans being made for the purpose of acquiring or
refinancing pleasure boats or recreational vehicles. Essex generally sells the
loans that it makes to various banks and other financial institutions, which
banks and institutions thereafter service such loans. Essex has a network of 11
regional direct lending offices located in the following states: California,
Connecticut, Florida, Maryland, Massachusetts, New Jersey, New York, North
Carolina, Texas and Washington.
3
6
COMMUNITY BANKING -
The focus of Bank of the West's community banking strategy has been Northern
California and now, with the merger with Pacific One Bank, the Pacific Northwest
region. The Northern California market region is comprised of the San Francisco
Bay area and the Central Valley area of California. The San Francisco Bay area
is one of the State of California's wealthiest regions, and the Central Valley
of California is an area which has been experiencing rapid transition from a
largely agricultural base to a mix of agricultural and commercial enterprises.
The Pacific Northwest region includes the states of Oregon, Washington and
Idaho.
Bank of the West utilizes its 142-branch network as its principal funding
source. A key element of Bank of the West's community banking strategy is to
seek to distinguish itself as the provider of the "best value" in community
banking services. To this end, Bank of the West seeks to position itself within
its markets as an alternative to both the higher-priced, smaller "boutique"
commercial banks as well as the larger commercial banks, which may be perceived
as offering lower service and lower prices on a "mass market" basis.
In pursuing the Northern California and Pacific Northwest community banking
markets, Bank of the West seeks to serve a broad customer base by furnishing a
range of retail and commercial banking products. Through its branch network,
Bank of the West generates a variety of consumer loans, including direct vehicle
loans, consumer lines of credit and second mortgages. In addition, Bank of the
West generates and holds a small portfolio of first mortgage loans on one- to
four-family residences. Through its commercial banking operations conducted from
its branch network, Bank of the West offers a wide range of basic commercial
banking products intended to serve the needs of smaller community-based
businesses. These loan products include in-branch originations of standardized
products for businesses with relatively simple banking and financing needs. More
complex and customized commercial banking services are offered through Bank of
the West's regional banking centers which serve clusters of branches and provide
lending, deposit and cash management services to companies operating in the
relevant market areas. Bank of the West also provides a number of fee-based
products and services such as annuities, insurance and securities brokerage.
PROFESSIONAL BANKING, TRUST SERVICES -
The Professional Banking and Trust & Investment Services areas within the
Community Banking division provide a wide range of products to targeted markets.
Professional Banking, located in San Francisco, serves the banking needs of
attorneys, doctors and other working professionals. The Trust & Investment
Services area, headquartered in San Jose, and with offices in San Francisco,
provides a full range of individual and corporate trust services.
COMMERCIAL BANKING -
Bank of the West's Business Banking division supports commercial lending
activities for larger business customers through six regional lending centers
located in Northern and Central California. Each regional office provides a wide
range of loan and deposit services to mid-sized companies with borrowing needs
of $500,000 to $25 million. Lending services include receivable and inventory
financing, equipment term loans, letters of credit, agricultural loans and trade
finance. Other banking services include cash management, insurance products,
trust, investment, foreign exchange and various international banking services.
The Specialty Lending division seeks to provide focused banking services and
products to specifically targeted markets where Bank of the West's resources,
experience and technical expertise give it a competitive advantage. Through
operations conducted in this division, Bank of the West has established a
significant national market niche among those commercial banks which are lenders
to religious organizations. In addition, leasing operations within Specialty
Lending have made Bank of the West a significant provider of equipment leasing
financing, including both standard and tax-oriented products, to a wide array of
clients. To support the cash management needs of both Bank of the West's
corporate banking customers and large private and public deposit relationships
maintained with Bank of the West, the Specialty Lending division operates a Cash
Management group which provides a full range of innovative and
relationship-focused cash management services.
4
7
The Real Estate Industries division, whose primary markets are Northern and
Central California and Nevada, originates and services construction, short-term
and permanent loans to residential developers, commercial builders and
investors. The division is particularly active in financing the construction of
detached residential subdivisions in Northern California. Other construction
lending activities include low-income housing, industrial development,
apartment, retail and office projects. The division also originates and services
single-family home loans sourced through the Bank's Community Bank branch
network.
CONSUMER FINANCE -
The Consumer Finance division targets the production of auto loans and leases in
the Western United States, and recreational vehicle and marine loans nationwide,
with emphasis on originating credits at the high end of the credit spectrum. The
Consumer Finance division originates recreational vehicle and marine credits on
a nationwide basis through sales representatives located throughout the country
servicing a network of over 1,900 recreational vehicle and marine dealers and
brokers. During the fourth quarter of 1997, Bank of the West acquired Essex to
complement its dealer marine and recreational vehicle presence. Essex primarily
focuses on the origination and sale of loans in the broker marine market and
also originates and sells loans to finance the acquisition of recreational
vehicles.
The division's auto lending activity is primarily focused in the Western United
States. Bank of the West originates loans and leases to finance the purchase of
new and used autos, light trucks and vans through a network of more than 2,000
dealers and brokers in California, Nevada, Oregon and Arizona.
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. On January 1, 1997, FHL sold certain leases to First Hawaiian
Leasing, Inc., a subsidiary of First Hawaiian. FHL is in a runoff mode and all
new leveraged and direct financing leases are recorded by First Hawaiian
Leasing, Inc.
At December 31, 1998, FHL's net investment in leases amounted to $66.6 million
and total assets were $93.2 million.
FIRST HAWAIIAN CAPITAL I -
The Trust is a Delaware business trust which was formed in 1997. The Trust
issued $100,000,000 of its Capital Securities (the "Capital Securities") and
used the proceeds therefrom to purchase junior subordinated deferrable interest
debentures of the Corporation. The Capital Securities qualify as Tier 1 Capital
of the Corporation and are fully and unconditionally guaranteed by the
Corporation. All of the common securities of the Trust are owned by the
Corporation.
At December 31, 1998, the Trust's total assets were $107.4 million.
5
8
HAWAII COMMUNITY REINVESTMENT CORPORATION -
In an effort to support affordable housing and as part of First Hawaiian's
community reinvestment program, First Hawaiian is a member of the Hawaii
Community Reinvestment Corporation (the "HCRC"). The HCRC is a consortium of
local financial institutions that 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. First Hawaiian's
participations in these HCRC loans are included in its loan portfolio.
HAWAII INVESTORS FOR AFFORDABLE HOUSING, INC. -
To further enhance First Hawaiian's community reinvestment program and provide
support for the development of additional affordable housing rental units in
Hawaii, First Hawaiian, and other HCRC member institutions, have subscribed to a
$19.7 million tax credit equity fund ("Hawaii Affordable Housing Fund I") and a
$20.0 million tax credit equity fund ("Hawaii Affordable Housing Fund II").
Hawaii Affordable Housing Fund I and Hawaii Affordable Housing Fund II (the
"Funds") have been established to invest in qualified low-income housing tax
credit rental projects and to ensure that these projects are maintained as
low-income housing throughout the required compliance period. First Hawaiian's
investments in the Funds are included in its investment portfolio.
EMPLOYEES -
At December 31, 1998, the Corporation had 4,851 full-time equivalent employees.
First Hawaiian and Bank of the West employed 2,470 and 2,381 persons,
respectively. None are represented by any collective bargaining agreements and
relations with employees are considered excellent.
MONETARY POLICY AND ECONOMIC CONDITIONS -
The earnings and business of the Corporation are affected not only by general
economic conditions (both domestic and international), but also by the monetary
policies of various governmental regulatory authorities of (i) the United States
and foreign governments and (ii) international agencies. In particular, the
Corporation's earnings and growth may be affected by actions of the Federal
Reserve Board in connection with its implementation of national monetary policy
through its open market operations in United States Government securities,
control of the discount rate and establishment of reserve requirements against
both member and non-member financial institutions' deposits. These actions have
a significant effect on the overall growth and distribution of loans,
investments and deposits as well as on 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 is intense. The Corporation
competes with a large number of commercial banks (including domestic, foreign
and foreign-affiliated banks), savings institutions, finance companies, leasing
companies, credit unions and other entities that provide financial services such
as mutual funds, insurance companies and brokerage firms. Many of these
competitors are significantly larger and have greater financial resources than
the Corporation. In addition, the increasing use of the Internet and other
electronic distribution channels has resulted in increased competition with
respect to many of the products and services that the Corporation offers. As a
result, the Corporation competes with financial service providers located not
only in its home markets but also those located elsewhere in the United States
that are able to offer their products and services through electronic and other
non-conventional distribution channels.
6
9
Recent changes in federal law have also made it easier for out-of-state banks to
enter and compete in the states in which the Corporation's bank subsidiaries
operate. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), 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. A bank holding company may now acquire banks in
states other than its home state, without regard to the permissibility of such
acquisitions under state law, but subject to any state requirement that the
acquired bank has been organized and operating for a minimum period of time (not
to exceed five years), and the requirement that the acquiring bank holding
company, prior to or following the proposed acquisition, controls no more than
10 percent of the total amount of deposits of insured depository institutions in
the United States and no more than 30 percent of such deposits in that state (or
such lesser or greater amount as may be established by state law).
The Riegle-Neal Act also permits interstate branching by banks in all states
other than those which have "opted out." Effective June 1, 1997, the Riegle-Neal
Act permits banks to acquire branches located in another state by purchasing or
merging with a bank chartered in that state or a national banking association
having its headquarters located in that state. However, banks are not permitted
to establish de novo branches or purchase individual branches located in other
states unless expressly permitted by the laws of those other states. None of the
states in which the Corporation's banking subsidiaries operate have elected to
"opt out" of the provisions of the Riegle-Neal Act permitting interstate
branching through acquisition or mergers, although most do not permit de novo
branching. The Corporation anticipates that the effect of the Riegle-Neal Act
will be to increase competition within the markets in which the Corporation now
operates, but the Corporation cannot predict when and to what extent competition
will increase in these markets.
SUPERVISION AND REGULATION -
As a registered bank holding company, the Corporation is subject to regulation
and supervision by the Federal Reserve Board under the BHCA. The various
subsidiaries of the Corporation are subject to regulation and supervision by the
banking authorities of Hawaii, California, Washington, Oregon, Idaho, Guam and
the Commonwealth of the Northern Mariana Islands, as well as by the FDIC (which
is the primary federal regulator of the Corporation's two bank subsidiaries) and
various other regulatory agencies.
The consumer lending and finance activities of the Corporation's subsidiaries
are also subject to extensive regulation under various Federal laws including
the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt
Collection Practice and Electronic Funds Transfer Acts, as well as various state
laws. These statutes impose requirements on the making, enforcement and
collection of consumer loans and on the types of disclosures that need to be
made in connection with such loans.
Holding Company Structure. In general, the BHCA limits the business of the
Corporation 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 more than 5% of the voting shares of another bank or
bank holding company; 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
engaging in any nonbanking business or acquiring direct or indirect ownership or
control of more than 5% of any class of voting shares of any company which is
engaged in a nonbanking business, unless the Federal Reserve Board determines
that such nonbanking business or activity is so closely related to banking as to
be a proper incident thereto. In making such determination, 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.
7
10
Dividend Restrictions. As a holding company, the principal source of the
Corporation's cash revenue has been dividends and interest received from the
Corporation's bank subsidiaries. Each of the bank subsidiaries is subject to
various federal regulatory restrictions relating to the payment of dividends.
For example, if, in the opinion of the FDIC, 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), the FDIC may require, after notice and hearing, that such bank cease
and desist from such practice. In addition, the Federal Reserve Board has issued
a policy statement which provides that, as a general matter, insured banks and
bank holding companies should only pay dividends out of current operating
earnings. The regulatory capital requirements of the Federal Reserve Board and
the FDIC also may limit the ability of the Corporation and its insured
depository subsidiaries to pay dividends. See "Prompt Corrective Action" and
"Capital Requirements" below.
State regulations also place restrictions on the ability of the Corporation's
bank subsidiaries to pay dividends. Under Hawaii law, First Hawaiian is
prohibited from declaring or paying any dividends in excess of its retained
earnings. California law generally prohibits Bank of the West from paying cash
dividends to the extent such payments exceed the lesser of retained earnings and
net income for the three most recent fiscal years (less any distributions to
stockholders during such three-year period). At December 31, 1998, the aggregate
amount of dividends that such subsidiaries could pay to the Corporation under
the foregoing limitations without prior regulatory approval was $368.3 million.
There are also statutory limits on the transfer of funds to the Corporation and
its nonbanking subsidiaries by its banking subsidiaries, whether in the form of
loans or other extensions of credit, investments or asset purchases. Such
transfers to any single affiliate are limited in amount to 10% of the bank's
capital and surplus, or 20% in the aggregate to all affiliates. Furthermore,
such loans and extensions of credit are required to be collateralized in
specified amounts.
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
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank.
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 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.
Prompt Corrective Action. Pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the federal banking agencies are required to
take "prompt corrective action" with respect to insured depository institutions
that do not meet minimum capital requirements. FDICIA established a five-tier
framework for measuring the capital adequacy of insured depository institutions
(including First Hawaiian and Bank of the West), with each depository
institution being classified into one of the following categories: "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, (commonly referred to as the "prompt corrective action"
rules), a depository institution is "well capitalized" if it has (i) a total
8
11
risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any written agreement, order or directive to meet and maintain a
specific capital level for any capital measure. An "adequately capitalized"
depository 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 CAMELS 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
CAMELS 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, 1998, all the Corporation's subsidiary depository
institutions was "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.
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
conservator or receiver, 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.
FDIC Insurance Assessments. 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 1998 was 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.
9
12
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 13. Regulatory Capital Requirements" (pages 66 and 67) in the Financial
Review section of the Corporation's Annual Report 1998, 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. The federal banking agencies have 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 became effective in 1997, banking
institutions with relatively large trading activities are 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, these
institutions are required to hold capital based on the measure of their market
risk exposure in addition to existing capital requirements for credit risk.
These institutions are able to satisfy this additional requirement, in part, by
issuing short-term subordinated debt that qualifies as Tier 3 capital. The
adoption of these amendments did not have a material effect on the Corporation's
business or operations.
On November 5, 1997, the federal banking regulators proposed for comment
regulations establishing new risk-based capital requirements for recourse
arrangements and direct credit substitutes. "Recourse" for this purpose means
any retained risk of loss associated with any transferred asset that exceeds a
pro rata share of the bank's or bank holding company's remaining claim on the
asset, if any. Under existing regulations, banks and bank holding companies have
to maintain capital against the full amount of any assets for which risk of loss
is retained, unless the resulting capital amount would exceed the maximum
contractual liability or exposure retained, in which case the capital required
would equal, dollar-for-dollar, such maximum contractual liability or exposure.
The proposal would extend this treatment to direct credit substitutes. "Direct
credit substitute" means any assumed risk of loss associated with any asset or
other claim that exceeds the bank's or bank holding company's pro rata share of
the asset or claim, if any. The proposal also included a multi-level approach to
assessing capital charges based upon the relative credit risk of the bank's or
bank holding company's position in a securitization (i.e., recourse
arrangements, direct credit substitute or asset-backed security) and the rating
assigned to such position by a nationally recognized statistical rating agency.
The Corporation does not believe the adoption of this proposal will have a
material adverse effect on its operations or financial position.
Real Estate Activities. The FDIC recently adopted new regulations, effective
January 1, 1999, that will make it significantly easier for state non-member
banks to engage in a variety of real estate investment activities. These new
regulations generally allow a majority-owned corporate subsidiary of a state
non-member bank to make equity investments in real estate if the bank complies
with certain investment and transaction limits and satisfies certain capital
requirements (after giving effect to its investment in the majority-owned
subsidiary). In addition, a subsidiary of an insured state non-member bank will
be permitted to act as a lessor under a real property lease that is the
equivalent of a financing transaction, meets certain criteria applicable to the
lease and the underlying real estate and does not represent a significant risk
to the deposit insurance funds.
10
13
FUTURE LEGISLATION -
Legislation relating to banking and other financial services has been introduced
from time to time in Congress and is likely to be introduced in the future.
Recent proposals include legislation that would (i) reformulate the bank
regulatory system, (ii) allow banking organizations to engage in a broader range
of activities, (iii) allow affiliations among banking, securities, insurance and
commercial organizations, (iv) change or eliminate charters for thrift
organizations, (v) impose examination fees on state-chartered banking
institutions and (vi) allow banks to pay interest on corporate checking
accounts. If enacted, such legislation could significantly change the
competitive environment in which the Corporation and its subsidiaries operate.
Management cannot predict whether these or any other proposals will be enacted
or the ultimate impact of any such legislation on the Corporation's competitive
situation, financial condition or results of operations.
FOREIGN OPERATIONS -
Information regarding the Corporation's foreign operations is included in Table
III-C (3) on page 13 of the Corporation's Annual Report on this Form 10-K for
the fiscal year ended December 31, 1998 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Financial
Review section of the Corporation's Annual Report 1998 (page 42), and is
incorporated herein by reference thereto.
OPERATING SEGMENTS -
Information regarding the Corporation's operating segments is included in "Note
18. Operating Segments" (pages 71 and 72) in the Financial Review section of the
Corporation's Annual Report 1998, and is incorporated herein by reference
thereto.
11
14
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 1998, which tables are incorporated
herein by reference thereto and Table III-C (3) on page 13 of the Corporation's
Annual Report on this Form 10-K for the fiscal year ended December 31, 1998. 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
1998, and is incorporated herein by reference thereto:
PAGE NUMBERS IN
BANCWEST CORPORATION
ANNUAL REPORT 1998
DISCLOSURE REQUIREMENTS (EXHIBIT 13)
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential -
A. Average balance sheets 31 - 32
B. Analysis of net interest earnings 31 - 32
C. Dollar amount of change in interest income and interest expense 33
II. Investment Portfolio -
A. Book value of investment securities 61 - 62
B. Investment securities by maturities and weighted average yields 43
C. Investment securities in excess of 10% of stockholders' equity 62
III. Loan Portfolio -
A. Types of loans 39
B. Maturities and sensitivities of loans to changes in interest rates 40, 45
C. Risk elements
1. Nonaccrual, past due and restructured loans 41 - 42, 55 - 56
2. Potential problem loans 42
4. Loan concentrations 40
IV. Summary of Loan Loss Experience -
A. Analysis of loss experience 34 - 36, 56 - 57, 63
B. Breakdown of the allowance for loan losses 37
V. Deposits -
A. Average amount and average rate paid on deposits 43
D. Maturity distribution of domestic time certificates of deposits
of $100,000 or more 64
E. Time certificates of deposit in denominations of $100,000 or more
issued by foreign offices 64
VI. Return on Equity and Assets 27
VII. Short-Term Borrowings 64
12
15
III. LOAN PORTFOLIO
Table III-C (3) presents a summary of the Corporation's foreign outstandings to
each country which exceeded 1% of total assets for the years indicated. Foreign
outstandings are defined as the balances outstanding of cross-border loans,
acceptances, interest-bearing deposits with other banks, other interest-bearing
investments and any other monetary assets. At December 31, 1998 and 1996, the
Corporation had no foreign outstandings to any country which exceeded 1% of
total assets. At December 31, 1997, Japan was the only country to which the
Corporation had outstandings in excess of 1% of total assets.
BANCWEST CORPORATION AND SUBSIDIARIES
TABLE III-C (3)
FOREIGN OUTSTANDINGS TO EACH COUNTRY WHICH EXCEEDS 1% OF TOTAL ASSETS
GOVERNMENTS COMMERCIAL
AND OFFICIAL AND
INSTITUTIONS INDUSTRIAL OTHER TOTAL
------------ ---------- ----- -----
(in millions)
AT DECEMBER 31, 1997
JAPAN $ - $ 17 $ 74 $ 91
=========== ============ =========== =============
At December 31, 1998, 1997 and 1996, there were no foreign outstandings to any
country between .75% and 1.0% of total assets.
13
16
ITEM 2. PROPERTIES
First Hawaiian indirectly (through two subsidiaries) owns all of a city block in
downtown Honolulu. The administrative headquarters of the Corporation and First
Hawaiian as well as the main branch of First Hawaiian are located in a modern
banking center on this city block. The headquarters building includes 418,000
square feet of gross office space. Information about the lease financing of the
headquarters building is included in "Note 20. Lease Commitments" (pages 72 and
73) in the Financial Review section of the Corporation's Annual Report 1998,
which is incorporated herein by reference thereto.
Eighteen of First Hawaiian's offices in Hawaii are located on land owned in fee
simple by First Hawaiian. The other branches of First Hawaiian in Hawaii and one
branch each in Guam and Saipan are situated in leasehold premises or in
buildings constructed by the respective companies on leased land (see "Note 20.
Lease Commitments" (pages 72 and 73) in the Financial Review section of the
Corporation's Annual Report 1998, which is incorporated herein by reference
thereto). In addition, First Hawaiian owns an operations center which is located
on 125,919 square feet of land owned in fee simple by First Hawaiian in an
industrial area near downtown Honolulu. First Hawaiian occupies all of this
four-story building.
First Hawaiian 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 where
it maintains a branch.
Bank of the West leases two adjacent sites in Walnut Creek, California, which
are its primary administrative headquarters. The administrative headquarters
office is a 132,000 square foot, 3-story building. Bank of the West also leases
48,382 square feet of executive office space in downtown San Francisco in the
same building that houses its San Francisco Main Branch at 180 Montgomery Street
(see "Note 20. Lease Commitments" (pages 72 and 73) in the Financial Review
section of the Corporation's Annual Report 1998, which is incorporated herein by
reference thereto). Approximately 30,396 square feet of leased space at 180
Montgomery Street is subleased to BNP.
Forty-eight of Bank of the West's active branches are located on land owned by
Bank of the West. The remaining 94 active branches are located on leasehold
properties. Bank of the West also has 11 surplus branch properties, ten of which
are currently leased to others. In addition, Bank of the West leases 18
properties that are utilized for administrative, lease support, management
information systems and regional management services (see "Note 20. Lease
Commitments" (pages 72 and 73) in the Financial Review section of the
Corporation's Annual Report 1998, which is incorporated herein by reference
thereto).
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, results of operations or liquidity.
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, 1998.
14
17
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. 57 Chairman of the Board and Chief
Chairman, Chief Executive Executive Officer of the Corporation and
Officer and Director First Hawaiian since 1989; President of
the Corporation from 1989 - 1991;
Executive Vice President of the
Corporation from 1982 - 1989; Director of
the Corporation since 1983; President of
First Hawaiian from 1984 - 1989;
Director and Vice Chairman of Bank of
the West since November 1998. Mr. Dods
has been with First Hawaiian since 1968.
Don J. McGrath 50 Director, President and Chief Operating
President, Chief Officer of the Corporation since
Operating Officer November 1998; Director of Bank of the
and Director West since 1989; President and Chief
Executive Officer of Bank of the West
since 1996; President and Chief
Operating Officer of Bank of the West
from 1991 - 1996; Director and Vice
Chairman of First Hawaiian since
November 1998. Mr. McGrath has been with
Bank of the West since 1975.
John K. Tsui 60 Vice Chairman and Chief Credit Officer
Vice Chairman, of the Corporation since November 1998;
Chief Credit Officer President of the Corporation from April
and Director 1995 - October 1998; Director of the
Corporation since July 1995; Director,
President and Chief Operating Officer of
First Hawaiian since July 1994; Vice
Chairman of Bank of the West since
November 1998. Mr. Tsui was Executive
Vice President of Bancorp Hawaii, Inc.
(now known as Pacific Century Financial
Corporation) from 1986 - June 1994 and
Vice Chairman of Bank of Hawaii from
1984 - June 1994.
Joel Sibrac 51 Director and Vice Chairman of the
Vice Chairman Corporation since November 1998; Senior
and Director Executive Vice President, Commercial
Banking Group of Bank of the West since
1996; Director of Bank of the West since
1995; General Manager, North American
Desk of BNP from 1994 - 1996; General
Manager of BNP Italy from 1990 - 1994.
Mr. Sibrac has been with BNP since 1974
and Bank of the West since 1996.
15
18
OFFICER AGE BUSINESS EXPERIENCE DURING LAST 5 YEARS
------- --- ---------------------------------------
Howard H. Karr 56 Executive Vice President and Chief
Executive Vice President and Financial Officer of the Corporation
Chief Financial Officer since November 1998; Executive Vice
President, Chief Financial Officer and
Treasurer of the Corporation from April
1998 - November 1998; Executive Vice
President and Treasurer of the
Corporation from 1990 - April 1998; Vice
Chairman of First Hawaiian since 1997;
Vice Chairman, Chief Financial Officer
and Treasurer of First Hawaiian from
September 1993 - 1997. Mr. Karr has been
with First Hawaiian since 1973.
Douglas C. Grigsby 46 Executive Vice President and Treasurer
Executive Vice President of the Corporation since November 1998;
and Treasurer Chief Financial Officer of Bank of the
West since 1989. Mr. Grigsby has been
with Bank of the West since 1977.
Bernard Brasseur 60 Executive Vice President and Risk
Executive Vice President Manager of the Corporation since
and Risk Manager November 1998; Risk Manager of Bank of
the West since 1983; Vice Chairman of
First Hawaiian since November 1998. Mr.
Brasseur has been with BNP since 1966
and Bank of the West since 1983.
Donald G. Horner 48 Executive Vice President of the
Executive Vice President Corporation since 1989; Vice Chairman of
First Hawaiian since July 1994;
Executive Vice President of First
Hawaiian from 1993 - 1994. Mr. Horner
has been with First Hawaiian since 1978.
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.
16
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Required information is included in "Common Stock Information" (page 26),
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (page 28) and "Notes to Consolidated Financial Statements" (pages 65
and 66) in the Financial Review section of the Corporation's Annual Report 1998,
and is incorporated herein by reference thereto.
In connection with the Merger, certain amendments were made to the certificate
of incorporation and bylaws of the Corporation that modify or otherwise affect
the rights of holders of the Corporation's common stock (the "Common Stock").
These amendments primarily relate to the issuance to the shareholders of Old
BancWest of shares of newly authorized class A common stock of the Corporation
(the "Class A Common Stock") in an amount equal to approximately 45% of the
total number of shares of the Class A Common Stock and the Common Stock that
were outstanding immediately after the Merger. In addition, in connection with
the closing of the Merger on November 1, 1998, the Corporation entered into a
Standstill and Governance Agreement and Registration Rights Agreement with BNP,
which owned directly and through a subsidiary, all of the voting stock of Old
BancWest immediately prior to the Merger. These agreements govern most aspects
of the relationship between the Corporation and BNP after the Merger. The
above-referenced amendments to the Corporation's certificate and bylaws and the
agreements that the Corporation entered into with BNP in connection with the
Merger and the issuance of the Class A Common Stock are described in the
Corporation's proxy statement filed with the SEC on July 17, 1998, and the
Corporation's Form 8-A filed with the SEC on October 30, 1998, which are hereby
incorporated herein by reference thereto. Copies of such amendments and
agreements are included as exhibits to this Form 10-K.
On November 1, 1998, the Corporation issued 25,814,768 shares of its Class A
Common Stock to BNP in exchange for all of the outstanding shares of common
stock of Old BancWest in connection with the Merger, as set forth above. As of
December 31, 1998, BNP continued to own all of the outstanding shares of Class A
Common Stock. The Class A Common Stock was issued pursuant to the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"), in a transaction by the issuer not involving a public
offering. Shares of Class A Common Stock may in certain circumstances convert
into shares of Common Stock as described in the agreements and amendments
referred to in the paragraph above.
Also in connection with the Merger, the Corporation issued, pursuant to the
exemption from registration set forth in Section 4(2) of the Securities Act, an
aggregate of 131,236 options to acquire shares of common stock, par value $1 per
share, of the Corporation and 411,049 shares of restricted Common Stock of the
Corporation, to certain employees of Old BancWest in exchange for the
termination of certain Old BancWest stock appreciation rights that were held by
such employees.
ITEM 6. SELECTED FINANCIAL DATA
Required information is included in "Summary of Selected Consolidated Financial
Data" (page 27) and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (page 28) in the Financial Review section of the
Corporation's Annual Report 1998, 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 28 through 49) in the
Financial Review section of the Corporation's Annual Report 1998, and is
incorporated herein by reference thereto.
On February 25, 1999, the Corporation signed a definitive agreement to acquire
all of the outstanding stock of SierraWest Bancorp ("SierraWest"), parent
company of SierraWest Bank, for a purchase price expected to be approximately
$194 million. SierraWest, with total assets of $879 million, has 20 branches in
California and
17
20
Nevada. The acquisition will be accounted for using the pooling method of
accounting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Required information is included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (page 44) and "Notes to
Consolidated Financial Statements" (pages 58 and 59) in the Financial Review
section of the Corporation's Annual Report 1998, and is incorporated herein by
reference thereto.
INTEREST RATE RISK MEASUREMENT AND MANAGEMENT
The net interest income of the Corporation is subject to interest rate risk to
the extent the Corporation's interest-bearing liabilities (primarily deposits
and borrowings) mature or reprice on a different basis than its interest-earning
assets (primarily loans and investment securities). When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets during a
given period, an increase in interest rates could reduce net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, a decrease in interest rates could have a negative
impact on net interest income. In addition, the impact of interest rate swings
may be exacerbated by factors such as our customers' propensity to manage their
demand deposit balances more or less aggressively or to refinance mortgage and
other consumer loans depending on the interest rate environment.
The Asset/Liability Committees of each of the Corporation's subsidiary companies
are responsible for managing interest rate risk. Oversight for the Corporation
taken as a whole and individual subsidiary companies is also provided by the
Asset/Liability Committee of the Corporation. The frequency of the various
Asset/Liability Committee meetings range from weekly to quarterly.
Recommendations for changes to a particular subsidiary's interest rate profile,
should they be deemed necessary and exceed established policies, are made to its
Board of Directors. Other than loans that are originated and held for sale and
commitments to purchase and sell foreign currencies and mortgage-backed
securities, the Corporation's interest rate derivatives and other financial
instruments are not entered into for trading purposes.
The Corporation's exposure to interest rate risk is managed primarily by taking
actions that impact certain balance sheet accounts (e.g., lengthening or
shortening maturities in the investment portfolio, changing asset and/or
liability mix -- including increasing or decreasing the amounts of fixed and/or
variable instruments held by the Corporation -- to adjust sensitivity to
interest rate changes) and/or utilizing off-balance sheet instruments such as
interest rate swaps, caps, floors, options, or forwards.
The Corporation models its net interest income in order to quantify its exposure
to changes in interest rates. Generally, the size of the balance sheet is held
constant and then subjected to interest rate shocks up and down of 100 and 200
basis points (1% equals 100 basis points) each. Each account-level item is
repriced according to its respective contractual characteristics, including any
imbedded options which might exist (e.g., periodic interest rate caps or floors
or loans which permit the borrower to prepay the principal balance of the loan
prior to maturity without penalty). Off-balance sheet instruments such as
interest rate swaps, caps or floors are included as part of the modeling
process. For each interest rate shock scenario, net interest income over a 12-
month horizon is compared against the results of a scenario in which no interest
rate change occurs (a "flat rate scenario") to determine the level of interest
rate risk at that time.
18
21
The projected impact of 100 and 200 basis point increases and decreases in
interest rates on the Corporation's consolidated net interest income over the
next 12 months beginning January 1, 1999 and 1998 is shown below.
1999
----
+2% +1% Flat -1% -2%
--- --- ---- --- ---
(dollars in millions)
Net Interest Income $639.2 $643.3 $635.6 $621.0 $609.0
Difference from Flat $ 3.6 $ 7.7 $(14.6) $(26.6)
% Variance .6% 1.2% (2.3)% (4.2)%
1998
----
+2% +1% Flat -1% -2%
--- --- ---- --- ---
(dollars in millions)
Net Interest Income $330.9 $338.1 $341.7 $340.8 $337.1
Difference from Flat $(10.8) $ (3.6) $ (.9) $ (4.6)
% Variance (3.2)% (1.1)% (.3)% (1.3)%
The variances of the projected impact of 100 and 200 basis point increases and
decreases in interest rates on the Corporation's consolidated net interest
income, as illustrated above, are primarily due to the effects of the Merger.
SIGNIFICANT ASSUMPTIONS UTILIZED AND INHERENT LIMITATIONS
The significant net interest income changes for each interest rate scenario
presented above include assumptions based on accelerating or decelerating
mortgage prepayments in declining or rising scenarios, respectively, and
adjusting deposit levels and mix in the different interest rate scenarios. The
magnitude of changes to both areas in turn are based upon analyses of customers'
behavior in differing rate environments. However, these analyses may differ from
actual future customer behavior. For example, actual prepayments may differ from
current assumptions as prepayments are affected by many variables which cannot
be predicted with certainty (e.g., prepayments of mortgages may differ on fixed
and adjustable loans depending upon current interest rates, expectations of
future interest rates, availability of refinancing, economic benefit to
borrower, financial viability of borrower, etc.).
As with any model for analyzing interest rate risk, certain limitations are
inherent in the method of analysis presented above. For example, the actual
impact on net interest income due to certain interest rate shocks may differ
from those projections presented should market conditions vary from assumptions
used in the analysis. Furthermore, the analysis does not consider the effects of
a changed level of overall economic activity that could exist in certain
interest rate environments. Moreover, the method of analysis used does not take
into account the actions that management might take to respond to changes in
interest rates because of inherent difficulties in determining the likelihood or
impact of any such response.
FORWARD-LOOKING STATEMENTS
Certain matters contained in this Item 7A. are forward-looking statements that
involve certain risks and uncertainties that could cause the Corporation's
actual results to differ materially from those discussed in the forward-looking
statements. A discussion of some of these risks and uncertainties is included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (page 28) in the Financial Review section of the Corporation's
Annual Report 1998 and is incorporated herein by reference thereto.
19
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information is included in the Financial Review section of the
Corporation's Annual Report 1998, which is incorporated herein by reference
thereto as follows:
PAGE NUMBER
-----------
Report of Independent Accountants 50
BancWest Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 1998 and 1997 51
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 52
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 53
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 54
BancWest Corporation (Parent Company):
Balance Sheets at December 31, 1998 and 1997 74
Statements of Income for the years ended December 31, 1998,
1997 and 1996 75
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 53
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996 75
Notes to Consolidated Financial Statements 55 - 75
Summary of Quarterly Financial Data (Unaudited) 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Required information relating to directors is included in "Election of
Directors" (pages 4 through 7) of the Corporation's Proxy Statement and is
incorporated herein by reference thereto. Required information relating to
executive officers is included in Part I on pages 15 and 16 of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1998 in the section
entitled "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Required information is included in "Executive Compensation" (pages 12 through
23) 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 "Security Ownership of Directors, Named
Executive Officers and Others" (pages 8 through 11) 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 24 through 26)
of the Corporation's Proxy Statement and is incorporated herein by reference
thereto.
21
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE NUMBER IN
----------------
BANCWEST CORPORA-
TION ANNUAL
REPORT 1998
(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 50
BancWest Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 1998 and 1997 51
Consolidated Statements of Income for the
years ended December 31, 1998, 1997 and 1996 52
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 53
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 54
BancWest Corporation (Parent Company):
Balance Sheets at December 31, 1998 and 1997 74
Statements of Income for the years ended
December 31, 1998, 1997 and 1996 75
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 53
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 75
Notes to Consolidated Financial Statements 55 - 75
Summary of Quarterly Financial Data (Unaudited) 49
2. Financial Statement Schedules
Schedules to the consolidated financial statements required by this Item
14(a)2 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 of BancWest
Corporation (formerly known as First Hawaiian,
Inc.) - Incorporated by reference to Exhibit 3(i)
of the Corporation's Current Report on Form 8-K as
filed with the SEC on November 5, 1998.
(ii) Amended and Restated Bylaws of BancWest
Corporation (formerly known as First Hawaiian,
Inc.) - Incorporated by reference to Exhibit 3(ii)
of the Corporation's Current Report on Form 8-K as
filed with the SEC on November 5, 1998.
22
25
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.
(iii) Debt - Indenture, dated as of June 30, 1997,
between First Hawaiian, Inc. and The First
National Bank of Chicago, Trustee, is incorporated
by reference to the Corporation's Registration
Statement on Form S-4 as filed with the SEC on
October 17, 1997.
(iv) Standstill and Governance Agreement between First
Hawaiian, Inc. and Banque Nationale de Paris,
dated as of November 1, 1998, is incorporated by
reference to Exhibit 4(i) to the Corporation's
Current Report on Form 8-K as filed with the SEC
on November 5, 1998.
(v) Registration Rights Agreements between First
Hawaiian, Inc. and Banque Nationale de Paris,
dated as of November 1, 1998, is incorporated by
reference to the Corporation's Current Report on
Form 8-K as filed with the SEC on November 5,
1998.
Exhibit 10 Material contracts
(i) 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.
(ii) 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.
(iii) Stock Incentive Plan of First Hawaiian, Inc.,
dated as of November 22, 1991, is incorporated by
reference to Exhibit 10 to the Corporation's Form
10-Q for the quarterly period ended June 30, 1998
as filed with the SEC.
(iv) Long-Term Incentive Plan of First Hawaiian, Inc.,
effective as of January 1, 1992, is incorporated
by reference to Exhibit 10 to the Corporation's
Form 10-Q for the quarterly period ended June 30,
1998 as filed with the SEC.
23
26
(v) First Hawaiian, Inc. Supplemental Executive
Retirement Plan, as amended and restated as of
January 1, 1998, is incorporated by reference to
Exhibit 10 to the Corporation's Form 10-Q for the
quarterly period ended June 30, 1998 as filed with
the SEC.
(vi) First Hawaiian, Inc. Deferred Compensation Plan,
as amended and restated as of January 1, 1998, is
incorporated by reference to Exhibit 10 to the
Corporation's Form 10-Q for the quarterly period
ended June 30, 1998 as filed with the SEC.
(vii) 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 Form 10-Q for the quarterly period
ended June 30, 1998 as filed with the SEC.
(viii) Directors' Retirement Plan, effective as of
January 1, 1992, is incorporated by reference to
Exhibit 10 to the Corporation's Form 10-Q for the
quarterly period ended June 30, 1998 as filed with
the SEC.
(ix) First Hawaiian, Inc. 1998 Stock Incentive Plan,
effective as of January 1, 1998, is incorporated by
reference to Exhibit 10 to the Corporation's Form
10-Q for the quarterly period ended June 30, 1998 as
filed with the SEC.
(x) Amendment No. 1 to First Hawaiian, Inc.
Supplemental Executive Retirement Plan, effective
November 1, 1998, filed herewith.
(xi) Sublease made as of November 1, 1993, between Bank
of the West and Banque Nationale de Paris, filed
herewith.
Exhibit 12 Statement re: computation of ratios.
Exhibit 13 Annual report to security holders - Corporation's
Annual Report 1998.
Exhibit 21 Subsidiaries of the registrant.
Exhibit 23 Consent of independent accountants.
Exhibit 27 Financial data schedule.
(b) Reports on Form 8-K
The Corporation's Current Report, as filed with the SEC on November 5,
1998 (as amended by the Corporation's Current Report on Form 8-K/A as
filed with the SEC on December 30, 1998): (i) announcing the
consummation of the Merger and amendments to the certificate and bylaws
of the Corporation to: (a) create the Class A Common Stock and a
related class of directors, (b) change the name of the corporation to
"BancWest Corporation" and (c) provide for various corporate governance
and other related matters; and (ii) filing financial statements of Old
BancWest and pro forma financial information relating to the Merger.
(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 the response to Item 14(a)2.
24
27
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.
BANCWEST CORPORATION
(Registrant)
By /s/ HOWARD H. KARR
----------------------------------
HOWARD H. KARR
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: March 11, 1999
25
28
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 11, 1999
Walter A. Dods, Jr. Chief Executive Officer Date
& Director
/s/ JACQUES ARDANT
- ---------------------------------- Director March 11, 1999
Jacques Ardant Date
/s/ JOHN W. A. BUYERS
- ---------------------------------- Director March 11, 1999
John W. A. Buyers Date
/s/ JULIA ANN FROHLICH
- ---------------------------------- Director March 11, 1999
Julia Ann Frohlich Date
/s/ ROBERT A. FUHRMAN
- ---------------------------------- Director March 11, 1999
Robert A. Fuhrman Date
/s/ PAUL MULLIN GANLEY
- ---------------------------------- Director March 11, 1999
Paul Mullin Ganley Date
/s/ DAVID M. HAIG
- ---------------------------------- Director March 11, 1999
David M. Haig Date
/s/ JOHN A. HOAG
- ---------------------------------- Director March 11, 1999
John A. Hoag Date
/s/ BERT T. KOBAYASHI, JR.
- ---------------------------------- Director March 11, 1999
Bert T. Kobayashi, Jr. Date
/s/ MICHEL LARROUILH
- ---------------------------------- Director March 11, 1999
Michel Larrouilh Date
/s/ VIVIEN LEVY-GARBOUA
- ---------------------------------- Director March 11, 1999
Vivien Levy-Garboua Date
/s/ YVES MARTRENCHAR
- ---------------------------------- Director March 11, 1999
Yves Martrenchar Date
/s/ FUJIO MATSUDA
- ---------------------------------- Director March 11, 1999
Fujio Matsuda Date
/s/ DON J. MCGRATH
- ---------------------------------- President, March 11, 1999
Don J. McGrath Chief Operating Officer Date
& Director
/s/ RODNEY R. PECK
- ---------------------------------- Director March 11, 1999
Rodney R. Peck Date
/s/ JOEL SIBRAC
- ---------------------------------- Vice Chairman March 11, 1999
Joel Sibrac & Director Date
26
29
/s/ JOHN K. TSUI
- ---------------------------------- Vice Chairman, March 11, 1999
John K. Tsui Chief Credit Officer Date
& Director
/s/ JACQUES HENRI WAHL
- ---------------------------------- Director March 11, 1999
Jacques Henri Wahl Date
/s/ FRED C. WEYAND
- ---------------------------------- Director March 11, 1999
Fred C. Weyand Date
/s/ ROBERT C. WO
- ---------------------------------- Director March 11, 1999
Robert C. Wo Date
/s/ HOWARD H. KARR
- ---------------------------------- Executive Vice President March 11, 1999
Howard H. Karr & Chief Financial Officer Date
(Principal financial and
accounting officer)
27
30
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3 (i) Certificate of Incorporation of BancWest Corporation (formerly
known as First Hawaiian, Inc.) - Incorporated by reference to
Exhibit 3(i) of the Corporation's Current Report on Form 8-K as
filed with the SEC on November 5, 1998.
(ii) Amended and Restated Bylaws of BancWest Corporation (formerly
known as First Hawaiian, Inc.) - Incorporated by reference to
Exhibit 3(ii) of the Corporation's Current Report on Form 8-K as
filed with the SEC on November 5, 1998.
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.
(iii) Debt - Indenture, dated as of June 30, 1997, between First
Hawaiian, Inc. and The First National Bank of Chicago, Trustee,
is incorporated by reference to the Corporation's Registration
Statement on Form S-4 as filed with the SEC on October 17, 1997.
(iv) Standstill and Governance Agreement between First Hawaiian, Inc.
and Banque Nationale de Paris, dated as of November 1, 1998, is
incorporated by reference to Exhibit 4(i) to the Corporation's
Current Report on Form 8-K as filed with the SEC on November 5,
1998.
(v) Registration Rights Agreements between First Hawaiian, Inc. and
Banque Nationale de Paris, dated as of November 1, 1998, is
incorporated by reference to the Corporation's Current Report on
Form 8-K as filed with the SEC on November 5, 1998.
10 Material contracts
(i) 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.
28
31
(ii) 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.
(iii) Stock Incentive Plan of First Hawaiian, Inc., dated as of
November 22, 1991, is incorporated by reference to Exhibit 10 to
the Corporation's Form 10-Q for the quarterly period ended June
30, 1998 as filed with the SEC.
(iv) Long-Term Incentive Plan of First Hawaiian, Inc., effective as of
January 1, 1992, is incorporated by reference to Exhibit 10 to
the Corporation's Form 10-Q for the quarterly period ended June
30, 1998 as filed with the SEC.
(v) First Hawaiian, Inc. Supplemental Executive Retirement Plan, as
amended and restated as of January 1, 1998, is incorporated by
reference to Exhibit 10 to the Corporation's Form 10-Q for the
quarterly period ended June 30, 1998 as filed with the SEC.
(vi) First Hawaiian, Inc. Deferred Compensation Plan, as amended and
restated as of January 1, 1998, is incorporated by reference to
Exhibit 10 to the Corporation's Form 10-Q for the quarterly
period ended June 30, 1998 as filed with the SEC.
(vii) 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 Form 10-Q for the quarterly
period ended June 30, 1998 as filed with the SEC.
(viii) Directors' Retirement Plan, effective as of January 1, 1992, is
incorporated by reference to Exhibit 10 to the Corporation's Form
10-Q for the quarterly period ended June 30, 1998 as filed with
the SEC.
(ix) First Hawaiian, Inc. 1998 Stock Incentive Plan, effective as of
January 1, 1998, is incorporated by reference to Exhibit 10 to
the Corporation's Form 10-Q for the quarterly period ended June
30, 1998 as filed with the SEC.
(x) Amendment No. 1 to First Hawaiian, Inc. Supplemental Executive
Retirement Plan, effective November 1, 1998, filed herewith.
(xi) Sublease made as of November 1, 1993, between Bank of the West
and Banque Nationale de Paris, filed herewith.
12 Statement re: computation of ratios.
13 Annual report to security holders - Corporation's Annual Report
1998.
21 Subsidiaries of the registrant.
23 Consent of independent accountants.
27 Financial data schedule.
29
1
EXHIBIT 10(X)
AMENDMENT NO. 1 TO
FIRST HAWAIIAN, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In accordance with Section 9.1 of the First Hawaiian, Inc. Supplemental
Executive Retirement Plan (hereinafter the "Plan"), the Plan is hereby amended
in the following respects:
1. Section 1.8 of the Plan is hereby amended to read in its entirety as
follows:
1.8 "Company" means BancWest Corporation, formerly known as First
Hawaiian, Inc.
2. Section 1.23 of the Plan is hereby amended to read in its entirety as
follows:
1.23 "Plan" means the BancWest Corporation Supplemental Executive
Retirement Plan as set forth herein and any amendments hereto as may
be made from time to time.
3. Article VII of the Plan is hereby amended by adding a new Section 7.4
at the end thereof to read in its entirety as follows:
Section 7.4 Certain Bank of the West Employees
(a) A Section 7.4 Participant shall be entitled to receive a Minimum
Benefit if, at the time he retires from the service of the
Participating Employers, his annual rate of Earnings exceeds the
limitation imposed under Section 401(a)(17) of the Code, he has
completed 20 Years of Eligibility Service, and he has attained
age 55. The amount of the Minimum Benefit shall be equal to the
amount, if any, by which one-twelfth of his Final Pay multiplied
by the applicable Replacement Percentage exceeds:
(1) His monthly benefit payment under (i) the BNP US Retirement
Plan or any successor plan into which his interest in the
BNP US Retirement Plan is transferred or merged and (ii) any
other defined benefit plan maintained by a Participating
Employer that is qualified under Section 401(a) of the Code;
and
(2) His monthly benefit payment under (i) the Bank of the West
Excess-Benefit Plan, (ii) this Plan (other than under this
Section 7.4), and (ii) any other nonqualified defined
benefit plan maintained by a Participating Employer.
(B) For purpose of this Section 7.4:
(1) "Earnings" means for any Plan Year the Section 7.4
Participant's annual base rate of pay from the
Participating Employers as in effect on the first day
of such Plan Year.
(2) "Final Pay" means the Section 7.4 Participant's base
salary at the annual rate in effect on the date he
retires from the service of the Participating
Employers.
2
(3) "Minimum Benefit" means the benefit determined
pursuant to Section 7.4(a).
(4) "Replacement Percentage" means (i) 50% in the case of
a Section 7.4 Participant who has attained age 60 at
the time he retires from the service of the
Participating Employers or (ii) 30% in the case of a
Section 7.4 Participant who has attained age 55 but
not age 60 at the time he retires from the service of
the Participating Employers.
(5) "Section 7.4 Participant" means Don J. McGrath,
Douglas C. Grigsby, Richard T. McGoldrick, or
Stephen C. Glenn.
(6) "Year of Eligibility Service" means (i) the 7.4
Participant's Years of Eligibility Service in the BNP
US Retirement Plan as of the date BancWest
Corporation, a California corporation, is merged with
and into the Company plus (ii) his period of
continuous service with the Company and its
Affiliates that begins on such date and ends on the
date he severs employment with the Company and its
Affiliates. Eligibility Service shall include any
leaves of absence authorized by the Company.
The amendments set forth herein shall be effective as of the date
BancWest Corporation, a California corporation, is merged with and
into First Hawaiian, Inc., a Delaware corporation.
TO RECORD the adoption of these amendments, First Hawaiian, Inc. has
executed this document this 15th day of October, 1998.
FIRST HAWAIIAN, INC.
By /s/ Herbert E. Wolff
----------------------------------
Its Senior Vice President
and Secretary
1
EXHIBIT 10(XI)
SUBLEASE
(180 Montgomery Street, San Francisco)
THIS SUBLEASE, made as of November 1, 1993, by and between BANK OF THE
WEST, a California corporation ("Sublandlord"), and BANQUE NATIONALE DE PARIS, a
French corporation ("Subtenant"),
W I T N E S S E T H:
Recital of Facts:
A. One Eighty Montgomery, Ltd., a California limited partnership
("Landlord"), as landlord, and Sublandlord, as tenant, entered into the
Commercial Office Lease (the "Master Lease") dated December 22, 1993. Words
defined in the Master Lease have the same meanings when used in this Sublease.
B. The Premises under the Master Lease comprises the basement vault, the
first floor, the second floor, the third floor (the "Third Floor Space"), the
fourth floor (the "Fourth Floor Space") and the twenty-fifth floor in the
Building located at 180 Montgomery Street, San Francisco, California. The Third
Floor Space and the Fourth Floor Space are collectively the "Subleased Space."
According to Section 43 of the Master Lease, the Premises comprises forty-eight
thousand three hundred eighty-two (48,382) square feet and the Subleased Space
comprises thirty thousand three hundred ninety-six (30,396) square feet, which
is sixty-two and eight-tenths percent (62.8%) of the Premises. As used in this
Sublease, "Subtenant's Percentage Share" shall mean sixty-two and eight-tenths
percent (62.8%). The term of the Master Lease commences on November 1, 1993, and
expires on October 31, 2003.
C. Sublandlord and Subtenant agreed at the time the Master Lease was
entered into that Subtenant would sublease the Subleased Space from Sublandlord
and on the basis reflected in this Sublease, and now desire to formally confirm
such agreement.
NOW, THEREFORE, in consideration of the covenants in this Sublease,
Sublandlord and Subtenant agree as follows:
1. Subleased Space. Sublandlord hereby leases to Subtenant, and
Subtenant hereby leases from Sublandlord, the Subleased Space for the term and
on the covenants set forth in this Sublease, to each and all of which
Sublandlord and Subtenant agree.
2. Term. The term of this Sublease shall commence on November 1, 1993,
and, unless sooner terminated as hereinafter provided, shall end on October 31,
2003.
-1-
2
3. Improvements. Subtenant shall accept the Subleased Space in its "as
is" condition on the commencement date. Sublandlord shall have no obligation to
construct or install any improvements in the Subleased Space for Subtenant.
4. Rent. Subtenant shall pay to Sublandlord, as rent for the Subleased
Space, during the entire term of this Sublease, the following:
(a) Subtenant shall pay to Sublandlord, as base rent, the amount
of forty-four thousand nine hundred ninety-two and sixty-nine hundredths
dollars ($44,992.69) per month. Subtenant shall pay such amounts in
advance on November 1, 1993, and on the first day of each successive
month thereafter during the term of this Sublease.
(b) Subtenant shall pay to Sublandlord, as additional rent, (i)
Subtenant's Percentage Share of the increases in Operating Expenses
excluding janitorial and security service expenses payable by
Sublandlord to Landlord pursuant to Section 3(b) of the Master Lease,
(ii) sixty-six and one-tenth percent (66.1%) of the increases in
janitorial and security services expenses payable by Sublandlord to
Landlord pursuant Section 3(b) of the Master Lease, and (iii)
Subtenant's Percentage Share of the increases in Property Taxes payable
by Sublandlord to Landlord pursuant to Section 3(c) of the Master Lease.
Subtenant shall pay such additional rent to Sublandlord at the times and
in the manner that Sublandlord is obligated to pay the additional rent
provided under Sections 3(b) and 3(c) of the Master Lease to Landlord in
accordance with the procedures set forth in Section 3(d) of the Master
Lease.
(c) All amounts of money payable by Subtenant to Sublandlord in
accordance with this Sublease shall constitute "rent." Subtenant shall
pay all rent to Sublandlord at such address as Sublandlord may from time
to time designate in a written notice to Subtenant.
5. Master Lease. This Sublease is subject to the Master Lease. A copy of
the Master Lease is attached to this Sublease. The Master Lease is incorporated
in and made a part of this Sublease and, during the term of this Sublease, the
Master Lease shall apply to Sublandlord, Subtenant and the Subleased Space under
this Sublease, except for the following provisions of the Master Lease, which
are excluded from this Sublease: Sections 1, 2, 3(a), 3(b), 3(c), 3(d), 33, 38,
39, 40, 41, 42, 43, 44, 46, 48 (except to the extent the rent payable by
Sublandlord to Landlord is abated), 49 and 50. Insofar as the Master Lease is
incorporated in this Sublease, references to Landlord in the Master Lease shall
mean Sublandlord under this Sublease, references to Tenant in the Master Lease
shall mean Subtenant under this Sublease, and references to the Premises in the
Master Lease shall mean the Subleased Space under this Sublease. During the term
of this Sublease, Subtenant assumes and agrees to pay, perform and discharge all
of the obligations of Sublandlord as Tenant under the Master Lease to the full
extent that such obligations are incorporated in this Sublease. During the term
of this Sublease, Subtenant shall be bound by all of the
-2-
3
covenants in the Master Lease that are incorporated in this Sublease and
Subtenant shall not commit or permit to be committed any act or omission that
will breach or violate any such covenant. In all provisions of the Master Lease
incorporated in this Sublease requiring the approval or consent of Landlord,
Subtenant shall obtain the approval or consent of both Sublandlord and Landlord.
In all provisions of the Master Lease incorporated in this Sublease requiring
Tenant to submit, exhibit to, supply or provide Landlord with evidence,
certificates or any other matter or thing, Subtenant shall submit, exhibit to,
supply or provide, as the case may be, the same to both Sublandlord and
Landlord.
6. Subtenant's Obligations. Subtenant agrees that all obligations of
Sublandlord as Tenant under the Master Lease incorporated in this Sublease shall
be performed by Subtenant at Subtenant's cost, and Subtenant's obligations shall
run to Sublandlord. Subtenant agrees to indemnify and defend Sublandlord against
and hold Sublandlord harmless from any and all claims, damages, losses, expenses
and liabilities (including reasonable attorneys' fees) incurred as a result of
the nonperformance or nonpayment of any of Sublandlord's obligations as Tenant
under the Master Lease which, as a result of this Sublease, are an obligation of
Subtenant. Subtenant shall not do, nor permit to be done, any act or thing which
is, or with notice or the passage of time would be, a default under this
Sublease or the Master Lease.
7. Sublandlord's Obligations. Sublandlord agrees that Subtenant shall be
entitled to receive all services to be provided by Landlord to Sublandlord under
the Master Lease and the benefit of all covenants of Landlord under the Master
Lease insofar as such services and covenants apply to the Subleased Space.
Subtenant shall look solely to Landlord for all such services and benefits and
shall not, under any circumstances, require Sublandlord to perform any of such
services or covenants, nor shall Subtenant make any claim upon Sublandlord for
any damages which may arise by reason of Landlord's default under the Master
Lease. Sublandlord shall take all reasonable action to obtain the performance of
Landlord's obligations under, and the furnishing of services by Landlord
pursuant to, the Master Lease, and, upon request by Subtenant and at Subtenant's
sole cost, Sublandlord shall diligently seek to enforce the obligations of
Landlord under the Master Lease. Any condition resulting from a default by
Landlord shall not constitute, as between Sublandlord and Subtenant, an
eviction, actual or constructive, of Subtenant, and no such default shall excuse
Subtenant from the performance of any obligations of Subtenant under this
Sublease or entitle Subtenant to receive any reduction in or abatement of the
rent. In furtherance of the foregoing, Subtenant does hereby waive any cause of
action and any right to bring any action against Sublandlord by reason of any
act or omission of Landlord under the Master Lease other than an action relating
to Sublandlord's failure, after notice from Subtenant and at Subtenant's sole
cost, to diligently seek to enforce Landlord's obligations under the Master
Lease. Sublandlord shall not do any act or thing which constitutes a default by
Sublandlord as Tenant under the Master Lease. Sublandlord agrees to indemnify
and defend Subtenant against and hold Subtenant harmless from any and all
claims, damages, losses, expenses and liabilities (including reasonable
attorneys' fees) incurred as a result of any breach by Sublandlord of its
obligations as Tenant under the Master Lease except obligations that are assumed
by Subtenant under this Sublease.
-3-
4
8. Notices. All notices under this Sublease shall be properly given only
if made in writing and either mailed by certified mail, postage prepaid, return
receipt requested, or delivered by hand (including messenger or nationally
recognized air express service, which regularly maintains records of items
delivered) to the party at the address set forth in this paragraph or such other
address as such party may designate by notice to the other parties. Such notices
shall be effective on the date of delivery to the address of the party. If any
such notice is not delivered or cannot be delivered because the receiving party
changed the address of the receiving party and did not previously give notice of
such change to the sending party, or due to a refusal to accept the notice by
the receiving party, such notice shall be effective on the date delivery is
attempted. Any notice under this Agreement may be given on behalf of a party by
the attorney for such party.
(a) The address of Sublandlord is
Bank of the West
180 Montgomery Street, 25th Floor
San Francisco, CA 94104
Attention: President
(b) The address of Subtenant is
Banque Nationale de Paris
San Francisco Branch
180 Montgomery Street, 3rd Floor
San Francisco, CA 94104
Attention: General Manager
9. Attorneys' Fees. If there is any legal action or proceeding between
Sublandlord and Subtenant arising from or based on this Sublease or to enforce
this Sublease, the unsuccessful party to such action or proceeding shall pay to
the prevailing party all costs and expenses, including reasonable attorneys'
fees and disbursements, incurred by such prevailing party in such action or
proceeding and in any appeal in connection therewith. If such prevailing party
recovers a judgment in any such action, proceeding or appeal, such costs,
expenses and attorneys' fees and disbursements shall be included in and as a
part of such judgment.
10. Miscellaneous. This Sublease shall benefit and bind Sublandlord and
Subtenant and their respective successors and assigns. Time is of the essence of
this Sublease. This Sublease may be executed in counterparts, each of which
shall be an original, but all of which shall constitute one and the same
Sublease. This Sublease may not be amended or modified except by a written
agreement signed by Sublandlord and Subtenant. This Sublease constitutes the
entire and integrated agreement between Sublandlord and Subtenant relating to
the Subleased Space as set forth in this Sublease and
-4-
5
supersedes all prior agreements, understandings, offers and negotiations, oral
or written, with respect to the Subleased Space.
IN WITNESS WHEREOF, Sublandlord and Subtenant have executed and
delivered this Sublease on October __, 1998, confirming the agreement of the
parties hereto previously made effective as of the date first hereinabove
written.
BANK OF THE WEST, a California
corporation
By /s/ PHILIP METZGER
-----------------------------------
Title Vice President
By /s/ PENNY JASPAR
-----------------------------------
Title Vice President
BANQUE NATIONALE DE PARIS, a
French corporation
By /s/ THOMAS KUNZ
-----------------------------------
Title Vice President - Operations &
Administration
-5-
1
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIOS
BANCWEST CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(dollars in thousands)
Income before income taxes $131,456 $123,564 $115,834 $122,138 $111,501
-------- -------- -------- -------- --------
Fixed charges:(1)
Interest expense 290,202 258,011 252,795 265,297 179,688
Rental expense 11,764 10,774 4,932 4,600 5,355
-------- -------- -------- -------- --------
301,966 268,785 257,727 269,897 185,043
Less interest on deposits 228,920 197,619 182,402 176,048 120,289
-------- -------- -------- -------- --------
Net fixed charges 73,046 71,166 75,325 93,849 64,754
-------- -------- -------- -------- --------
Earnings, excluding
interest on deposits $204,502 $194,730 $191,159 $215,987 $176,255
======== ======== ======== ======== ========
Earnings, including
interest on deposits $433,422 $392,349 $373,561 $392,035 $296,544
======== ======== ======== ======== ========
Ratio of earnings to fixed charges:
Excluding interest
on deposits 2.80X 2.74x 2.54x 2.30x 2.72x
Including interest
on deposits 1.44X 1.46x 1.45x 1.45x 1.60x
(1) For purposes of computing the consolidated ratios of earnings to fixed
charges, earnings represent income before income taxes and 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.
1
EXHIBIT 13
CORPORATION'S
ANNUAL REPORT 1998
2
EXHIBIT 13
Consolidated Financial Highlights BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR:
Net income ................................................. $ 76,606 $ 84,261 $ 80,296
Net income before restructuring, merger-related
and other nonrecurring costs (1) ......................... 98,472 84,261 80,296
Cash earnings (1), (2) ..................................... 109,302 90,740 85,958
Return on average total assets (1) ......................... 1.07% 1.06% 1.04%
Return on average tangible assets (1), (3) ................. 1.22 1.17 1.13
Return on average stockholders' equity (1) ................. 11.39 11.61 11.88
Return on average tangible stockholders' equity (1), (3) ... 16.88 15.14 15.25
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE
Diluted earnings ........................................... $ 2.15 $ 2.64 $ 2.55
Diluted earnings - adjusted (1) ............................ 2.76 2.64 2.55
Diluted cash earnings (1), (2) ............................. 3.06 2.83 2.73
Cash dividends ............................................. 1.24 1.24 1.20
- ---------------------------------------------------------------------------------------------------------------------------------
AT YEAR END:
Assets ..................................................... $ 15,049,895 $ 8,093,092 $ 8,002,174
Loans and leases ........................................... 11,339,580 6,238,681 5,806,732
Deposits ................................................... 11,260,320 6,089,200 5,936,708
Stockholders' equity ....................................... 1,667,886 731,701 705,884
- ---------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital ratio ....................................... 8.17% 9.51% 8.42%
Total risk-based capital ratio ............................. 10.06 11.81 11.85
Leverage ratio ............................................. 9.16 9.14 7.32
- ---------------------------------------------------------------------------------------------------------------------------------
Market price per share ..................................... $ 48.00 $ 39.75 $ 35.00
Book value per share ....................................... 29.07 23.34 22.22
Market capitalization ...................................... 2,753,748 1,245,970 1,112,105
=================================================================================================================================
DILUTED EARNINGS PER SHARE($) GRAPH
94 = 2.25 95 = 2.43 96 = 2.55 97 = 2.64 98(1) = 2.76
DILUTED CASH EARNINGS PER SHARE($)(2) GRAPH
94 = 2.37 95 = 2.56 96 = 2.73 97 = 2.83 98(1) = 3.06
RETURN ON AVERAGE TANGIBLE STOCKHOLDERS' EQUITY(%)(3) GRAPH
94 = 14.58 95 = 14.77 96 = 15.25 97 = 15.14 98(1) = 16.88
MARKET PRICE AND BOOK VALUE PER SHARE($) GRAPH
94 = 23.75 95 = 30.00 96 = 35.00 97 = 39.75 98 = 48.00
As of December 31, 1994 = 19.61
95 = 20.86
96 = 22.22
97 = 23.34
98 = 29.07
(1) Excluding after-tax restructuring, merger-related and other nonrecurring
costs of $21.9 million in connection with the merger of the former BancWest
Corporation with and into First Hawaiian, Inc. on November 1, 1998.
(2) Excluding amortization of goodwill and core deposit intangible.
(3) Defined as cash earnings as a percentage of average total assets or average
stockholders' equity minus average goodwill and core deposit intangible.
1
3
BANCWEST CORPORATION BOARD OF DIRECTORS
Jacques Ardant John A. Hoag Rodney R. Peck
Director, International Banking & Chairman, Hawaii Reserves, Inc. Senior Partner,
Finance, North America Area, Vice Chairman (Retired), Pillsbury, Madison & Sutro LLP
Banque Nationale de Paris First Hawaiian Bank
Joel Sibrac
John W. A. Buyers Bert T. Kobayashi, Jr. Vice Chairman, BancWest Corporation
Chairman & Chief Executive Officer, Principal, Senior Executive Vice President,
C. Brewer & Company, Limited Kobayashi, Sugita & Goda Commercial Banking Group,
Bank of the West
Walter A. Dods, Jr. Michel Larrouilh
Chairman & Chief Executive Officer, Chairman & Chief Executive Officer John K. Tsui
BancWest Corporation & (Retired), Old BancWest Corporation Vice Chairman & Chief Credit Officer,
First Hawaiian Bank Chief Executive Officer (Retired), BancWest Corporation
Bank of the West President & Chief Operating Officer,
Dr. Julia Ann Frohlich First Hawaiian Bank
President, Vivien Levy-Garboua
Blood Bank of Hawaii Chief Executive, International & Jacques Henri Wahl
Finance, Banque Nationale de Paris Director & Senior Advisor to the
Robert A. Fuhrman Chief Executive Officer,
Chairman, Bank of the West Yves Martrenchar Banque Nationale de Paris
Vice Chairman, President & Executive Vice President,
Chief Operating Officer (Retired), Products and Markets, General Fred C. Weyand
Lockheed Corporation Banque Nationale de Paris Trustee, Estate of S. M. Damon
General (Retired), U.S. Army
Paul Mullin Ganley Dr. Fujio Matsuda
Trustee, Estate of S. M. Damon Chairman, Pacific International Center Robert C. Wo
Partner, Carlsmith Ball for High Technology Research President and Secretary,
BJ Management Corporation
David M. Haig Don J. McGrath Chairman, C. S. Wo & Sons, Ltd.
Trustee, President & Chief Operating Officer,
Estate of S. M. Damon BancWest Corporation
President & Chief Executive Officer,
Bank of the West
FIRST HAWAIIAN BANK BANK OF THE WEST
BOARD OF DIRECTORS BOARD OF DIRECTORS
John W. A. Buyers Dr. Richard T. Mamiya Jacques Ardant
John C. Couch Dr. Fujio Matsuda Walter A. Dods, Jr.
Walter A. Dods, Jr. Leighton S. L. Mau Robert A. Fuhrman
Dr. Julia Ann Frohlich Don J. McGrath Stuart A. Hall
Michael K. Fujimoto Dr. Roderick F. McPhee Michel Larrouilh
Paul Mullin Ganley Wesley T. Park Vivien Levy-Garboua
David M. Haig George P. Shea, Jr. A. Ewan Macdonald
Warren H. Haruki R. Dwayne Steele Yves Martrenchar
Howard K. Hiroki John K. Tsui Don J. McGrath
John A. Hoag Jenai Sullivan Wall Otis W. Mitchell
David C. Hulihee General Fred C. Weyand Rodney R. Peck
Glenn A. Kaya James C. Wo Donald A. Pelton
Dr. Richard R. Kelley Robert C. Wo Joel Sibrac
Bert T. Kobayashi, Jr. Jean Thomazeau
Robert L. Toney
Jacques Henri Wahl
21
4
[PICTURE] [PICTURE] [PICTURE] [PICTURE]
John K. Tsui Donald G. Horner Howard H. Karr Lily K. Yao
President & Vice Chairman, Vice Chairman, Vice Chairman, Government &
Chief Operating Officer Retail Banking Group Administration & Finance Group Community Relations
FIRST HAWAIIAN BANK
SENIOR ADMINISTRATIVE OFFICERS SENIOR VICE PRESIDENTS
Walter A. Dods, Jr. Sharon S. Brown
Chairman & Sales & Service Division
Chief Executive Officer
Winston K. H. Chow
John K. Tsui Retail Real Estate Loan Division
President &
Chief Operating Officer Linda B. Cornejo
Branch Loan Administration Division
Donald G. Horner
Vice Chairman, Brandt G. Farias
Retail Banking Group Marketing Communications Division
Howard H. Karr Mark H. Felmet
Vice Chairman, Retail Loan Division
Administration & Finance Group
Robert T. Fujioka
Lily Yao Main Banking Center
Vice Chairman,
Government & Community Relations Gary Y. Fujitani
Business Services Division
EXECUTIVE VICE PRESIDENTS Gisela O. Gere
Cash Management Services
Robert A. Alm
Financial Management Group Anthony D. Goo
Trust Portfolio Management
Gary L. Caulfield
Information Management Group Alfred R. Gross
Managed Assets Department
Anthony R. Guerrero, Jr.
Branch Banking Group Dean K. Hirata
Controller
Thomas P. Huber
General Counsel & Edmund H. Kajiyama
Assistant Secretary, Legal Group Branch Support Division
William B. Johnstone, III Corbett A. K. Kalama
Treasurer Branch Banking-Oahu
John W. Landgraf Gerald J. Keir
Commercial Real Estate Division Corporate Communications Division
David W. Madison John K. Lee, Jr.
Branch Loan Administration Division Branch Banking-Guam
Gerald M. Pang George H. Lumsden
Chief Credit Officer General Auditor
Barbara S. Tomber Roger P. MacArthur
Wholesale Loan Group Branch Banking-Maui
Albert M. Yamada Kristi L. Maynard
Chief Financial Officer Treasury & Investment Division
Melvin W. Y. Mow
Kapiolani Banking Center
Michael J. Murakoshi
Relationship Banking Center
Francis T. Natori
Information Technology Division
Vernon T. Omori
Residential Real Estate Division
Raymond S. Ono
University Banking Center
Curt T. Otaguro
Operations Research & Development
Division
Kenneth C. S. Pai
Commercial Real Estate Division
Edward Y. W. Pei
Electronic Banking Division
Ronald Pellegrino
First Investment Center
Frederick J. Shine, III
Managed Assets Department
Sheila M. Sumida
Human Resources Division
Michael G. Taylor
First Hawaiian Insurance, Inc.
James M. Wayman
Bank Properties Division
Thomas P. Whittemore
Branch Banking-Hawaii
Gary D. Williams
Corporate Services Department
Steve J. Williams
Branch Banking-Kauai
Douglas D. Wilson
Trust Business Development
Herbert E. Wolff
Corporate Secretary
FIRST HAWAIIAN LEASING, INC/
FHL LEASE HOLDING CO., INC.
John K. Tsui
Chairman & Chief Executive Officer
Stephen J. Marcuccilli
President
- --------------------------------------------------------------------------------
BANCWEST CORPORATION
SENIOR ADMINISTRATIVE OFFICERS
Walter A. Dods, Jr. Howard H. Karr
Chairman & Executive Vice President &
Chief Executive Officer Chief Financial Officer
Don J. McGrath Douglas C. Grigsby
President & Executive Vice President &
Chief Operating Officer Treasurer
John K. Tsui Bernard Brasseur
Vice Chairman & Executive Vice President &
Chief Credit Officer Risk Manager
Joel Sibrac Donald G. Horner
Vice Chairman Executive Vice President
- --------------------------------------------------------------------------------
22
5
[PICTURE] [PICTURE] [PICTURE] [PICTURE]
Frank J. Bonetto Joel Sibrac Bernard Brasseur Douglas C. Grigsby
Senior Executive Vice President, Senior Executive Vice President, Risk Manager Chief Financial Officer
Community Banking Group Commercial Banking Group
BANK OF THE WEST
SENIOR ADMINISTRATIVE OFFICERS
Don J. McGrath Lawrence A. Heaton
President & Chief Executive Officer Human Resources
Frank J. Bonetto Jane L. Holbrook
Senior Executive Vice President, Community Banking Administration
Community Banking Group -Northwest
Joel Sibrac Shirley A. Horeff
Senior Executive Vice President, Operations & Systems
Commercial Banking Group
James R. Kennedy
Bernard Brasseur Cash Management
Risk Manager
Koren K. Kubota
Douglas C. Grigsby Real Estate Industries-Northwest
Chief Financial Officer
James L. Loos
Christian A. Morio Consumer Credit
Chief Inspector
Daniel A. Mikes
EXECUTIVE VICE PRESIDENTS Church Loans
Thomas J. Burns Paul H. Nakae
Credit Administration Real Estate Industries
Scott J. Germer James G. Newell
Business Banking Leasing
Stephen C. Glenn Robert S. Raye
Chief Administrative Officer Marketing
James R. Henry Michael R. Robinson
Specialty Lending Community Banking-Valley
Richard T. McGoldrick W. Gordon Smith
Consumer Credit Group Compliance
Donald R. Ward Jerrold B. Smith
Operations & Systems Community Banking-Idaho
Donald E. Weyant Calvin Y. Tabata
Real Estate Industries Community Banking-Oregon
Richard C. Williamson Norma J. Waters
Northwest Regional Executive Community Banking-North Bay
SENIOR VICE PRESIDENTS Susan L. Wheeler
Risk Management Administration
Kevin F. Ames
Controller Paul T. Wible
Consumer Credit Operations
Richard W. Aubrey
Treasurer Gina M. Wolley
Chief Auditor
Mark R. Beecher
Consumer Credit Loan Production Michael V. Wood
Community Banking-East Bay
Fred W. Bergemann
Credit Administration-Northwest William L. Zillman
General Counsel
Bradley J. Bleything
Community Banking-Oregon ESSEX CREDIT CORPORATION
Arthur J. Crawford Gene Schiavone
Consumer Credit Asset Recovery Chairman & Chief Executive Officer
John H. Dimalanta Alan Swimmer
Trust President & Chief Operating Officer
James W. Forsloff
Business Banking-Northwest
Kenneth T. Fujihara
Community Banking-South Bay
Robert J. Galli
Business Banking-South Bay
Wendy J. Grande
Operations & Systems
23
6
BANCWEST CORPORATION FINANCIAL REVIEW 1998 BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL REVIEW
25 CORPORATE ORGANIZATION
26 COMMON STOCK INFORMATION
27 SUMMARY OF SELECTED CONSOLIDATED
FINANCIAL DATA
28 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
50 REPORT OF INDEPENDENT ACCOUNTANTS
CONSOLIDATED FINANCIAL STATEMENTS:
51 Consolidated Balance Sheets
52 Consolidated Statements of Income
53 Consolidated Statements of
Changes in Stockholders' Equity
54 Consolidated Statements of
Cash Flows
55 Notes to Consolidated Financial
Statements
76 GLOSSARY OF FINANCIAL TERMS
INSIDE BACK COVER:
CORPORATE ADDRESSES
SUPPLEMENTAL INFORMATION
24
7
CORPORATE ORGANIZATION BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------
BANCWEST CORPORATION
BancWest Corporation (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's organization consists of the following wholly-owned
subsidiaries:
FIRST HAWAIIAN BANK
First Hawaiian Bank ("First Hawaiian") was founded in 1858 and is the
oldest financial institution in Hawaii. First Hawaiian is a full-service bank
conducting general commercial and consumer banking business and offering trust
services. First Hawaiian is Hawaii's second largest bank with approximately $7.2
billion and $5.5 billion in total assets and total deposits, respectively, at
December 31, 1998. First Hawaiian's activities include receiving demand, savings
and time deposits; making commercial, agricultural, real estate and consumer
loans; selling cash management services, insurance products, mutual funds and
annuities, traveler's checks and personal money orders; issuing letters of
credit; handling domestic and foreign collections; and renting safe deposit
boxes.
First Hawaiian's main office is located in Honolulu, Hawaii, with 55 other
banking offices located throughout the State of Hawaii. It also has two banking
offices in Guam; a banking office in Saipan, Northern Mariana Islands; an
offshore branch in Grand Cayman, British West Indies; a representative office in
Tokyo, Japan; and a worldwide network of correspondent banks.
First Hawaiian 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 headquarters.
o FHB PROPERTIES, INC.
FHB Properties, Inc. holds title to certain property and premises
upon which First Hawaiian's business is conducted.
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 First Hawaiian in ordinary business activities.
o FIRST HAWAIIAN INSURANCE, INC.
First Hawaiian Insurance, Inc. engages in the business of
providing personal, business and estate insurance to its customers.
BANK OF THE WEST
Bank of the West was founded in 1874 and is the third oldest bank in
California. Bank of the West is California's fifth largest bank, with total
assets of approximately $7.7 billion and total deposits of approximately $5.8
billion at December 31, 1998. The executive office is located in San Francisco,
California, with 142 branch offices located throughout California and the
Pacific Northwest. Bank of the West conducts a general commercial banking
business and provides retail and corporate banking and trust services to
individuals, businesses and governments through its 103 branches in Northern
California, 28 branches in Oregon, eight branches in Washington state and three
branches in Idaho. Bank of the West also generates indirect automobile loans and
leases, recreational vehicle loans, recreational marine vessel loans and
equipment leases through a network of manufacturers, dealers, representatives
and brokers in all 50 states.
Bank of the West, through its principal subsidiary, Essex Credit
Corporation ("Essex"), originates and sells consumer loans on a nationwide
basis, such loans being made for the purpose of acquiring or refinancing
pleasure boats or recreational vehicles. Essex has a network of 11 regional
offices located in Northern California, Southern California, Connecticut,
Florida, Maryland, Massachusetts, New York, New Jersey, North Carolina, Texas
and Washington.
PACIFIC ONE BANK
On November 1, 1998, Pacific One Bank ("Pacific One"), a former
wholly-owned subsidiary of the Company, was merged with and into Bank of the
West. As a result of the merger, 39 Pacific One branches became branches of Bank
of the West.
FIRST HAWAIIAN CREDITCORP, INC.
On June 19, 1998, First Hawaiian Creditcorp, Inc. ("Creditcorp"), a former
wholly-owned subsidiary of the Company, was merged with and into First Hawaiian.
All 13 Creditcorp branches were closed in connection with the merger.
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.
25
8
CORPORATE ORGANIZATION (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------
FHI INTERNATIONAL, INC.
FHIInternational, Inc. was organized to engage in consumer financing
services and related activities outside the United States. Currently, it is not
actively engaged in business.
FIRST HAWAIIAN CAPITAL I
First Hawaiian Capital I is a Delaware business trust (the "Trust") which
was formed in 1997. The Trust issued $100,000,000 of its Capital Securities (the
"Capital Securities") and used the proceeds to purchase junior subordinated
deferrable interest debentures (the "Debentures") of the Company. 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%. 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.
COMMON STOCK INFORMATION
- --------------------------------------------------------------------------------
The common stock (the "Common Stock") of the Company is traded on the New
York Stock Exchange under the symbol BWE. At December 31, 1998, there were 4,736
holders of record of the Common Stock. A large number of shares are also held in
the names of nominees and brokers for individuals and institutions.
At December 31, 1998, a total of 33,190,374 shares of Common Stock were
issued, including 1,635,397 shares in the treasury stock account. The Board of
Directors (the "Board") has authorized the repurchase of up to 3.1 million
shares in total to be held by the Company or used for corporate purposes as
designated by the Board. Through December 31, 1998, the Company had repurchased
1.8 million shares of Common Stock under such authorization.
On November 1, 1998, in connection with the merger of the former BancWest
Corporation with and into First Hawaiian, Inc. as described in Note 2 to the
Consolidated Financial Statements on page 60, the Company issued 25,814,768
shares of Class A Common Stock. All of these shares remained outstanding at
December 31, 1998.
A compilation of certain quarterly and annual per share data is presented
below:
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Market Price
Diluted Dividends ----------------------------------------
Earnings Paid High Low Close
- -------------------------------------------------------------------------------------------------------------
1998
FIRST QUARTER ................ $ .68 $ .31 $ 42 $ 34 5/8 $ 40
SECOND QUARTER ............... .69 .31 41 34 5/16 36 3/8
THIRD QUARTER ................ .72 .31 38 27 5/8 34
FOURTH QUARTER ............... .06(1) .31 48 31 1/4 48
- ---------------------------------------------------------------
ANNUAL .................... $ 2.15(1) $ 1.24 48 27 5/8 48
===============================================================
1997
First Quarter ................ $ .64 $ .31 $ 36 $ 30 1/2 $ 31 1/8
Second Quarter ............... .70 .31 35 3/4 28 5/8 34 1/8
Third Quarter ................ .67 .31 40 3/4 33 5/8 39 3/4
Fourth Quarter ............... .63 .31 43 7/8 36 39 3/4
- ---------------------------------------------------------------
Annual .................... $ 2.64 $ 1.24 43 7/8 28 5/8 39 3/4
===============================================================
1996 ......................... $ 2.55 $ 1.20 36 3/4 25 3/4 35
1995 ......................... $ 2.43 $ 1.18 31 1/4 23 30
1994 ......................... $ 2.25 $ 1.18 31 1/4 23 23 3/4
================================================================================================================
(1) Excluding after-tax restructuring, merger-related and other nonrecurring
costs of $21.9 million in connection with the merger of the former BancWest
Corporation with and into First Hawaiian, Inc. on November 1, 1998, the
adjusted diluted earnings per share was $.67 and $2.76 for the fourth
quarter and year ended December 31, 1998, respectively.
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 14 to the Consolidated Financial Statements on
page 67.
26
9
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA BancWest Corporation & Subsidiaries
- ------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS AND DIVIDENDS
(in thousands)
Total interest income ............................................ $684,439 $592,483 $574,140 $559,957 $475,760
Total interest expense ........................................... 290,202 258,011 252,795 265,297 179,688
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income .............................................. 394,237 334,472 321,345 294,660 296,072
Provision for credit losses ...................................... 28,555 17,211 23,627 38,107 22,922
Total noninterest income ......................................... 119,581 98,513 87,455 82,106 75,512
Total noninterest expense ........................................ 353,807 292,210 269,339 216,521 237,161
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes ....................................... 131,456 123,564 115,834 122,138 111,501
Provision for income taxes ....................................... 54,850 39,303 35,538 45,133 38,990
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME ....................................................... $ 76,606 $ 84,261 $ 80,296 $ 77,005 $ 72,511
==================================================================================================================================
NET INCOME-ADJUSTED (1) .......................................... $ 98,472 $ 84,261 $ 80,296 $ 77,005 $ 72,511
==================================================================================================================================
CASH EARNINGS (1), (2) ........................................... $109,302 $ 90,740 $ 85,958 $ 81,182 $ 76,486
==================================================================================================================================
CASH DIVIDENDS ................................................... $ 38,740 $ 39,295 $ 37,579 $ 37,368 $ 38,008
==================================================================================================================================
COMMON STOCK DATA
Per share:
Diluted earnings ............................................... $ 2.15 $ 2.64 $ 2.55 $ 2.43 $ 2.25
Diluted earnings-adjusted (1) .................................. 2.76 2.64 2.55 2.43 2.25
Diluted cash earnings per share (1), (2) ....................... 3.06 2.83 2.73 2.56 2.37
Cash dividends ................................................. 1.24 1.24 1.20 1.18 1.18
Book value (at December 31) .................................... 29.07 23.34 22.22 20.86 19.61
Market price (close at December 31) ............................ 48.00 39.75 35.00 30.00 23.75
Average shares outstanding (in thousands) ........................ 35,534 31,726 31,399 31,735 32,259
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS (in millions)
Average balances:
Total assets ................................................... $ 9,199 $ 7,918 $ 7,755 $ 7,528 $ 7,200
Total earning assets ........................................... 8,289 7,128 7,071 6,876 6,558
Loans and leases ............................................... 7,105 5,980 5,510 5,461 5,172
Deposits ....................................................... 6,967 5,903 5,618 5,178 5,082
Stockholders' equity ........................................... 865 726 676 640 618
At December 31:
Total assets ................................................... $ 15,050 $ 8,093 $ 8,002 $ 7,565 $ 7,535
Loans and leases ............................................... 11,340 6,239 5,807 5,260 5,534
Deposits ....................................................... 11,260 6,089 5,937 5,358 5,152
Long-term debt and capital securities .......................... 730 319 206 239 219
Stockholders' equity ........................................... 1,668 732 706 650 628
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average:
Total assets ................................................... .83% 1.06% 1.04% 1.02% 1.01%
Tangible assets (1), (3) ....................................... 1.22 1.17 1.13 1.09 1.08
Stockholders' equity ........................................... 8.86 11.61 11.88 12.03 11.73
Tangible stockholders' equity (1), (3) ......................... 16.88 15.14 15.25 14.77 14.58
Dividend payout ratio ............................................ 57.41 46.62 46.68 48.56 52.44
Average stockholders' equity to average total assets ............. 9.40 9.17 8.72 8.50 8.58
Year ended December 31:
Net interest margin ............................................ 4.76 4.70 4.57 4.36 4.63
Net loans and leases charged off to average loans and leases ... .32 .33 .44 .38 .46
Efficiency ratio (1), (2) ...................................... 61.21 65.84 63.54 61.55 60.06
At December 31:
Risk-based capital ratios:
Tier 1 ....................................................... 8.17 9.51 8.42 9.03 9.31
Total ........................................................ 10.06 11.81 11.85 11.88 12.06
Tier 1 leverage ratio .......................................... 9.16 9.14 7.32 7.72 7.51
Allowance for credit losses to total loans and leases .......... 1.32 1.32 1.47 1.50 1.11
Nonperforming assets to total loans and leases
and other real estate owned .................................. 1.08 1.38 1.68 1.75 1.14
Allowance for credit losses to nonperforming loans
and leases ................................................... 1.67X 1.49x 1.18x .95x 1.04x
==================================================================================================================================
(1) Excluding after-tax restructuring, merger-related and other nonrecurring
costs of $21.9 million in connection with the merger of the former BancWest
Corporation with and into First Hawaiian, Inc. on November 1, 1998.
(2) Excluding amortization of goodwill and core deposit intangible.
(3) Defined as cash earnings as a percentage of average total assets or average
stockholders' equity minus average goodwill and core deposit intangible.
27
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
Certain matters contained herein are forward-looking statements that
involve certain risks and uncertainties that could cause the Company's actual
results to differ materially from those discussed in the forward-looking
statements. Readers should carefully consider these risks and uncertainties in
reading this report. Factors that could cause or contribute to such differences
include, but are not limited to: (1) global, national and local economic and
market conditions; (2) the level and volatility of interest rates and currency
values; (3) fiscal and monetary policies of government agencies; (4) credit
risks inherent in the lending processes; (5) loan and deposit demand in the
geographic regions in which the Company conducts business; (6) the impact of
intense competition in the rapidly evolving banking and financial services
business; (7) the effect of current and pending government legislation and
regulations; (8) the extensive regulation of the Company's business at both the
federal and state levels; (9) whether expected revenue enhancements and cost
savings from the merger with the former BancWest Corporation are realized within
expected time frames; (10) matters relating to the integration of the business
of the Company and the former BancWest Corporation, including the impact of
combining these businesses on revenues, expenses, deposit attrition, customer
retention and financial performance; (11) unforeseen costs and/or complications
relating to year 2000 compliance and euro conversion efforts of the Company, the
former BancWest Corporation and third parties with whom the Company has business
relationships; (12) other risks discussed below; and (13) management's ability
to manage these risks.
The Company expressly disclaims any obligation or undertaking to update or
revise any forward-looking statement contained herein to reflect any change in
the Company's expectations with regard thereto or any change in events,
conditions or circumstances on which any statement is based. See "Glossary of
Financial Terms" on page 76 for definitions of certain terms used in this annual
report.
OVERVIEW
On November 1, 1998, for a purchase price of $905.7 million, the merger
(the "Merger") of the former BancWest Corporation, parent company of Bank of the
West, with and into First Hawaiian, Inc. ("FHI") was consummated. FHI, the
surviving corporation of the Merger, changed its name to "BancWest Corporation."
Prior to the consummation of the Merger, the former BancWest Corporation was
wholly-owned by Banque Nationale de Paris ("BNP"), which received approximately
25.8 million shares of the Company's newly-authorized Class A Common Stock
(representing approximately 45% of the total voting stock). The excess of cost
over fair value of net assets acquired amounted to approximately $599.0 million.
The transaction was accounted for using the purchase method of accounting. As a
result, the financial information presented in this annual report at and for the
year ended December 31, 1998 includes the effects of the Merger from November 1,
1998.
In substantially all of the Company's income and expense categories, the
increases in the amounts reported for the year ended December 31, 1998 compared
to the amounts reported in the prior year resulted from the Merger. The
increases in substantially all of the categories of the Company's Consolidated
Balance Sheets between amounts reported at December 31, 1998 and those reported
at December 31, 1997 also resulted from the Merger. Other significant factors
affecting the Company's results of operations and financial position are
described in the applicable sections below.
Consolidated net income for 1998 was $76,606,000, a decrease of $7,655,000,
or 9.1%, compared to $84,261,000 in 1997. Diluted earnings per share for 1998
was $2.15, a decrease of 18.6% compared to 1997.
Operating earnings (defined as consolidated net income excluding after-tax
restructuring, merger-related and other nonrecurring costs) was $98,472,000 in
1998, an increase of 16.9%, or $14,211,000, over $84,261,000 in 1997. Diluted
operating earnings per share for 1998 was $2.76, an increase of 4.5% over 1997.
Diluted operating cash earnings per share (defined as operating earnings
per share before amortization of goodwill and core deposit intangible) was $3.06
in 1998, an increase of 8.1%, over last year. On the same basis, return on
average tangible assets was 1.22% and return on average tangible stockholders'
equity was 16.88% in 1998, as compared to 1.17% and 15.14%, respectively, in
1997.
The prolonged economic downturn in Hawaii over the last eight years has
slowed loan and lease and deposit growth, and negatively impacted the growth in
net interest income. Excluding the effects of the Merger in 1998, net interest
income increased by $13,991,000, or 4.2%, over 1997.
Noninterest income increased from $98,513,000 in 1997 to $119,581,000 in
1998, an increase of 21.4%. In addition to the effects of the Merger, the
increase was primarily due to gains on sales of a corporate aircraft and a
regional manager's residence of $3,907,000 and $2,115,000, respectively,
partially offset by a gain on sale of a leasehold interest in a former branch of
$2,500,000 in 1997.
Noninterest expense increased from $292,210,000 in 1997 to $353,807,000 in
1998, an increase of 21.1%. In addition to the effects of the Merger, including
the results of operations of Bank of the West from the date of the Merger, the
increase reflected restructuring, merger-related and other nonrecurring costs of
$25,527,000 (after-tax, $21,866,000). The increase was also the result of
write-downs of certain other real estate owned ("OREO") of $4,126,000, higher
outside service expenses primarily related to the Year 2000 project (see Year
2000 disclosure on pages 45 to 48) and higher foreclosed property expenses. This
increase was partially offset by losses on sales of a certain loan and certain
OREO in 1997.
28
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
The Company's efficiency ratio (calculated as noninterest expense minus
amortization of goodwill and core deposit intangible as a percentage of total
operating revenue and exclusive of nonrecurring items) was 61.21%, 65.84% and
63.54% in 1998, 1997 and 1996, respectively.
The provision for credit losses was $28,555,000, $17,211,000 and
$23,627,000 for 1998, 1997 and 1996, respectively. Net charge-offs to average
loans and leases were .32%, .33% and .44% for 1998, 1997 and 1996, respectively.
The allowance for credit losses was $149,585,000, or 1.32% of total loans and
leases, at December 31, 1998, compared with $82,596,000, or 1.32%, at December
31, 1997. Nonperforming assets, principally loans and leases collateralized by
real estate, and OREO and repossessed personal property, totalled 1.08%, 1.38%
and 1.68% of total loans and leases and OREO and repossessed personal property
as of December 31, 1998, 1997 and 1996, respectively. The improvement in the
nonperforming assets ratio was primarily due to the Merger.
At December 31, 1998, the Company's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were 8.17% and
10.06%, respectively, compared with 9.51% and 11.81%, respectively, at December
31, 1997. These ratios were in excess of the "well-capitalized" ratios of 6.00%
and 10.00%, respectively, specified by the Federal Reserve Board.
Consolidated net income for 1997 increased $3,965,000, or 4.9%, over 1996.
Diluted earnings per share for 1997 was $2.64 compared to $2.55 in 1996. The
increase in consolidated net income was primarily due to: (1) income from a full
year's operations of Pacific One Bank of $5,048,000 in 1997, an increase of
$2,766,000, or 121.2%, over 1996; and (2) an after-tax charge of $2,309,000 in
1996, 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.
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 (subsequently renamed "Pacific One Bank, National Association"),
which had total loans of $51 million and total deposits of $67 million on the
date of acquisition.
Hereafter, the acquisitions discussed in the immediately preceding two
paragraphs will be collectively referred to as the "Pacific Northwest
Acquisitions."
On November 1, 1998, the assets and businesses acquired in the Pacific
Northwest Acquisitions were merged with and into Bank of the West.
29
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
NET INTEREST INCOME
As reflected in Table 1 on page 32, net interest income, on a taxable
equivalent basis, increased $59,208,000, or 17.7%, from $335,156,000 in 1997 to
$394,364,000 in 1998. This increase was primarily due to the Merger. Excluding
the effects of the Merger, net interest income, on a taxable equivalent basis,
increased $13,475,000, or 4.0%, over 1997. This increase was primarily due to a
$195,539,000, or 2.7%, increase in average earning assets and a six basis point
(1% equals 100 basis points) increase in the net interest margin. Net interest
income, on a taxable equivalent basis, increased $11,901,000, or 3.7%, from 1996
to 1997, primarily due to the Pacific Northwest Acquisitions and a 13 basis
point increase in the net interest margin. Tables 1 and 2 on pages 31 to 33
present analyses of the components and changes in net interest income for 1998,
1997 and 1996.
The net interest margin was 4.76% for 1998, up six basis points over 1997.
The increase was due to a 12 basis point decrease in the rate paid for sources
of funds used for average earning assets, partially offset by a six basis point
decrease in the yield on average earning assets. The decrease in the rate paid
for sources of funds used for average earning assets and yield on average
earning assets was attributable to the overall decline in the interest rate
environment in 1998 compared to 1997. The net interest margin in 1998 was not
significantly impacted by the Merger.
Average earning assets increased $1,161,227,000, or 16.3%, in 1998 over
1997, primarily due to the Merger. Excluding the effects of the Merger, average
earning assets increased $195,539,000, or 2.7%, over 1997. This increase was
primarily due to an increase in average loans and leases of $311,296,000, or
5.2%, over 1997. The increase was partially offset by a decrease in the average
investment securities portfolio of $185,576,000, or 20.5%, compared to 1997. The
decrease in the average investment securities portfolio reflected the change in
the collateral requirements for state and local government funds.
Average loans and leases increased $1,125,053,000, or 18.8%, in 1998 over
1997, primarily due to the Merger. Excluding the effects of the Merger, average
loans and leases in 1998 increased $311,296,000, or 5.2%, over 1997. This
increase was primarily due to automobile financing in California and Oregon and
credit extensions to companies in the media and telecommunications industry
located on the mainland United States. In addition, the mix of average earning
assets continues to change, with average loans and leases representing 85.7% of
average earning assets for 1998 as compared to 83.9% for 1997.
Average interest-bearing deposits and liabilities increased $876,035,000,
or 14.3%, in 1998 over 1997, primarily due to the Merger and the issuance of the
Capital Securities in mid-1997 with an aggregate liquidation amount of
$100,000,000. Excluding the impact of the Merger and the issuance of the Capital
Securities, average interest-bearing deposits and liabilities increased
$69,548,000, or 1.1%, in 1998 over 1997. The increase in 1998 over 1997 was
primarily due to an increase in average interest-bearing deposits which
increased $235,702,000, or 4.6%, partially offset by a $110,998,000, or 14.0%,
decrease in short-term borrowings.
The net interest margin in 1997 increased 13 basis points over 1996. The
increase was due to a 17 basis point increase in the yield on average earning
assets, partially offset by a four basis point increase in the rate paid for
sources of funds used for average earning assets. The increase in the yield on
average earning assets was due to the proportionately greater amount of higher
yielding average loans and leases to average total earning assets in 1997 as
compared to 1996. The increase in the rate paid for sources of funds reflected,
among other things, the issuance of the Capital Securities and a decrease in
average noninterest-bearing demand deposits of $47,966,000, or 5.3%.
Average earning assets increased $57,025,000, or .8%, in 1997 over 1996,
primarily due to the Pacific Northwest Acquisitions. Excluding the effects of
the Pacific Northwest Acquisitions, average earning assets decreased
$283,024,000, or 4.2%, compared to 1996.
Average loans and leases increased $469,928,000, or 8.5%, in 1997 over
1996, primarily due to the Pacific Northwest Acquisitions. Excluding the effects
of the Pacific Northwest Acquisitions, average loans and leases in 1997
increased $143,153,000, or 2.7%, over 1996.
Average interest-bearing deposits and liabilities increased $135,468,000,
or 2.3%, in 1997 over 1996, primarily due to the Pacific Northwest Acquisitions
(including the issuance of $50 million of long-term subordinated debt during the
second quarter of 1996 to fund the Pacific Northwest Acquisitions) and the
issuance of the Capital Securities. Excluding the impact of the Pacific
Northwest Acquisitions and the issuance of the Capital Securities, average
interest-bearing deposits and liabilities decreased $170,043,000, or 3.0%, in
1997 compared to 1996.
30
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
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 taxable equivalent
adjustment is made for items exempt from Federal income taxes (assuming a 35%
tax rate for 1998, 1997 and 1996) to make them comparable with taxable items
before any income taxes are applied.
1998 1997
------------------------------------ -------------------------------------
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning assets:
Interest-bearing deposits
in other banks:
Domestic ................... $ 55,666 $ 3,378 6.07% $ 47,006 $ 2,906 6.18%
Foreign .................... 115,576 6,448 5.58 40,315 2,282 5.66
- ---------------------------------- -------------------------- -------------------------
Total interest-
bearing deposits
in other banks ......... 171,242 9,826 5.74 87,321 5,188 5.94
- ---------------------------------- -------------------------- -------------------------
Federal funds sold and
securities purchased under
agreements to resell ......... 146,109 7,942 5.44 156,902 8,676 5.53
- ---------------------------------- -------------------------- -------------------------
Investment securities (1):
Taxable ...................... 864,768 55,560 6.42 894,684 59,188 6.62
Exempt from Federal
taxes ...................... 1,653 131 7.92 8,691 972 11.18
- ---------------------------------- -------------------------- -------------------------
Total investment
securities ............. 866,421 55,691 6.43 903,375 60,160 6.66
- ---------------------------------- -------------------------- -------------------------
Loans and leases (2) (3):
Domestic ..................... 6,727,533 577,654 8.59 5,673,588 491,296 8.66
Foreign ...................... 377,709 33,453 8.86 306,601 27,847 9.08
- ---------------------------------- -------------------------- -------------------------
Total loans and
leases ................. 7,105,242 611,107 8.60 5,980,189 519,143 8.68
- ---------------------------------- -------------------------- -------------------------
TOTAL EARNING ASSETS ..... 8,289,014 684,566 8.26 7,127,787 593,167 8.32
- ---------------------------------- -------------------------- -------------------------
Cash and due from banks .......... 303,512 272,343
Premises and equipment ........... 246,118 247,583
Core deposit intangible .......... 21,352 27,151
Goodwill ......................... 195,746 98,398
Other assets ..................... 142,839 145,131
- ---------------------------------- ---------- ----------
TOTAL ASSETS $9,198,581 $7,918,393
================================== ========== ==========
1996
------------------------------------
Interest
Average Income/ Yield/
(dollars in thousands) Balance Expense Rate
- -------------------------------------------------------------------------------
ASSETS
Earning assets:
Interest-bearing deposits
in other banks:
Domestic ................... $ 13,666 $ 790 5.78%
Foreign .................... 182,680 10,392 5.69
- ---------------------------------- -------------------------
Total interest-
bearing deposits
in other banks ......... 196,346 11,182 5.69
- ---------------------------------- -------------------------
Federal funds sold and
securities purchased under
agreements to resell ......... 153,499 8,442 5.50
- ---------------------------------- -------------------------
Investment securities (1):
Taxable ...................... 1,169,110 72,813 6.23
Exempt from Federal
taxes ...................... 41,546 4,063 9.78
- ---------------------------------- -------------------------
Total investment
securities ............. 1,210,656 76,876 6.35
- ---------------------------------- -------------------------
Loans and leases (2) (3):
Domestic ..................... 5,272,503 456,741 8.66
Foreign ...................... 237,758 22,809 9.59
- ---------------------------------- -------------------------
Total loans and
leases ................. 5,510,261 479,550 8.70
- ---------------------------------- -------------------------
TOTAL EARNING ASSETS ..... 7,070,762 576,050 8.15
- ---------------------------------- -------------------------
Cash and due from banks .......... 250,456
Premises and equipment ........... 243,389
Core deposit intangible .......... 27,272
Goodwill ......................... 84,965
Other assets ..................... 78,540
- ---------------------------------- ----------
TOTAL ASSETS $7,755,384
================================== ==========
Notes:
(1) Average balances exclude the effects of the fair value adjustments.
(2) Nonaccruing loans and leases have been included in the computations of
average loan and lease balances.
(3) Interest income for loans and leases included loan fees of $30,919, $24,749
and $24,189 for 1998, 1997 and 1996, respectively.
31
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
1998 1997
------------------------------------ -------------------------------------
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
and liabilities:
Deposits:
Domestic:
Interest-bearing
demand ................... $ 283,721 $ 4,358 1.54% $ 303,444 $ 4,814 1.59%
Savings .................... 2,539,889 65,162 2.57 2,163,764 56,528 2.61
Time ....................... 2,894,153 149,808 5.18 2,399,447 126,928 5.29
Foreign (interest-bearing) ... 228,333 9,592 4.20 214,482 9,349 4.36
- ---------------------------------- -------------------------- --------------------------
Total interest-bearing
deposits ................. 5,946,096 228,920 3.85 5,081,137 197,619 3.89
Short-term borrowings .......... 726,119 36,727 5.06 793,642 41,527 5.23
Long-term debt and
capital securities ............ 348,267 24,555 7.05 269,668 18,865 7.00
- ---------------------------------- -------------------------- --------------------------
TOTAL INTEREST-BEARING
DEPOSITS AND LIABILITIES .. 7,020,482 290,202 4.13 6,144,447 258,011 4.20
- ---------------------------------- -------------------------- --------------------------
Noninterest-bearing
demand deposits ................ 1,021,343 821,867
Other liabilities ................ 291,943 226,341
- ---------------------------------- ---------- ----------
Total liabilities .......... 8,333,768 7,192,655
Stockholders' equity ............. 864,813 725,738
- ---------------------------------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ...... $9,198,581 $7,918,393
================================== ========== ==========
NET INTEREST INCOME
AND MARGIN ON
TOTAL EARNING ASSETS ...... 394,364 4.76% 335,156 4.70%
Tax equivalent
adjustment ............... 127 684
- ---------------------------------- -------- --------
NET INTEREST INCOME ........ 394,237 $334,472
==========================================================================================================================
1996
-----------------------------------
Interest
Average Income/ Yield/
(dollars in thousands) Balance Expense Rate
- ------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
and liabilities:
Deposits:
Domestic:
Interest-bearing
demand ................... $ 597,386 $ 9,258 1.55%
Savings .................... 1,711,773 47,525 2.78
Time ....................... 2,197,868 116,707 5.31
Foreign (interest-bearing) ... 205,547 8,912 4.34
- ---------------------------------- --------------------------
Total interest-bearing
deposits ................. 4,712,574 182,402 3.87
Short-term borrowings .......... 1,011,958 53,977 5.33
Long-term debt and
capital securities ............ 249,245 16,416 6.59
- ---------------------------------- --------------------------
TOTAL INTEREST-BEARING
DEPOSITS AND LIABILITIES .. 5,973,777 252,795 4.23
- ---------------------------------- --------------------------
Noninterest-bearing
demand deposits ................ 905,035
Other liabilities ................ 200,636
- ---------------------------------- ----------
Total liabilities .......... 7,079,448
Stockholders' equity ............. 675,936
- ---------------------------------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ...... $7,755,384
================================== ==========
NET INTEREST INCOME
AND MARGIN ON
TOTAL EARNING ASSETS ...... 323,255 4.57%
Tax equivalent
adjustment ............... 1,910
- ---------------------------------- --------
NET INTEREST INCOME ........ $321,345
===============================================================================
ASSETS
($ in billions)
DECEMBER 31
-----------
1994 7.54
1995 7.57
1996 8.00
1997 8.09
1998 15.05
LOANS AND LEASES
($ in billions)
DECEMBER 31
-----------
1994 5.53
1995 5.26
1996 5.81
1997 6.24
1998 11.34
NET INTEREST INCOME*
($ in millions)
DECEMBER 31
-----------
1994 303.4
1995 299.7
1996 323.3
1997 335.2
1998 394.4
* taxable equivalent basis
AVERAGE EARNING ASSETS
($ in billions)
1994 6.56
1995 6.88
1996 7.07
1997 7.13
1998 8.29
32
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & 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 taxable equivalent adjustment is made for items exempt from
Federal income taxes (assuming a 35% tax rate for 1998, 1997 and 1996) to make
them comparable with taxable items before any income taxes are applied.
1998 COMPARED TO 1997-- 1997 Compared to 1996--
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 ............................... $ 526 $ (54) $ 472 $ 2,057 $ 59 $ 2,116
Foreign ................................ 4,200 (34) 4,166 (8,060) (50) (8,110)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits
in other banks ..................... 4,726 (88) 4,638 (6,003) 9 (5,994)
- --------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell ..................... (590) (144) (734) 188 46 234
- --------------------------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable .................................. (1,947) (1,681) (3,628) (17,932) 4,307 (13,625)
Exempt from Federal income taxes ......... (620) (221) (841) (3,601) 510 (3,091)
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities .......... (2,567) (1,902) (4,469) (21,533) 4,817 (16,716)
- --------------------------------------------------------------------------------------------------------------------------------
Loans and leases (1):
Domestic ................................. 90,529 (4,171) 86,358 34,732 (177) 34,555
Foreign .................................. 6,314 (708) 5,606 6,307 (1,269) 5,038
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and leases ............... 96,843 (4,879) 91,964 41,039 (1,446) 39,593
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets ................. 98,412 (7,013) 91,399 13,691 3,426 17,117
- --------------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits:
Domestic:
Interest-bearing demand ................ (306) (150) (456) (4,658) 214 (4,444)
Savings ................................ 9,665 (1,031) 8,634 11,943 (2,940) 9,003
Time ................................... 25,660 (2,780) 22,880 10,665 (444) 10,221
Foreign (interest-bearing) ............... 591 (348) 243 389 48 437
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits ...... 35,610 (4,309) 31,301 18,339 (3,122) 15,217
Short-term borrowings ...................... (3,449) (1,351) (4,800) (11,441) (1,009) (12,450)
Long-term debt and capital securities ...... 5,540 150 5,690 1,393 1,056 2,449
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits
and liabilities .................... 37,701 (5,510) 32,191 8,291 (3,075) 5,216
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST
INCOME (TAXABLE EQUIVALENT BASIS) .. $60,711 $(1,503) $59,208 $ 5,400 $ 6,501 $ 11,901
================================================================================================================================
Note:
(1) Interest income for loans and leases included loan fees of $30,919, $24,749
and $24,189 for 1998, 1997 and 1996, respectively.
33
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Total noninterest income increased $21,068,000, or 21.4%, from $98,513,000
in 1997 to $119,581,000 in 1998. Excluding the effects of the Merger, total
noninterest income increased $11,058,000, or 11.2%. Total noninterest income for
1997 increased $11,058,000, or 12.6%, over 1996. Excluding the Pacific Northwest
Acquisitions, total noninterest income in 1997 increased $6,688,000, or 8.0%
over 1996.
Trust and investment services income increased $1,856,000, or 7.4%, from
1997 to 1998 and increased $1,258,000, or 5.3%, from 1996 to 1997. Excluding the
effects of the Merger, trust and investment services income increased
$1,209,000, or 4.8%, from 1997 to 1998. These increases were primarily the
result of an increase in investment management fees resulting from new business
and an increase in the market value of managed assets.
Service charges on deposit accounts increased $7,416,000, or 25.8%, from
1997 to 1998 and increased $2,492,000, or 9.5%, from 1996 to 1997. Excluding the
effects of the Merger, service charges on deposit accounts increased $2,202,000,
or 7.7%, from 1997 to 1998. Excluding the effects of the Pacific Northwest
Acquisitions, service charges on deposit accounts increased $691,000, or 2.8%,
from 1996 to 1997. These increases were attributable to an increase in fees on
checks returned and paid.
Other service charges and fees increased $4,065,000, or 12.9%, from 1997 to
1998 and $6,533,000, or 26.2%, from 1996 to 1997. Excluding the effects of the
Merger in 1998 and Pacific Northwest Acquisitions in 1997, other service charges
and fees increased $2,235,000, or 7.1%, from 1997 to 1998 and $4,401,000, or
18.7%, from 1996 to 1997, respectively. The increase from 1997 to 1998 was
primarily a result of higher commissions from annuity and mutual fund sales. The
increase from 1996 to 1997 was primarily a result of higher merchant discount
fees, commissions from annuity and mutual fund sales and mortgage servicing
rights for mortgage loans that were originated and sold with servicing retained.
Other noninterest income increased $7,877,000, or 61.3%, from 1997 to 1998
and $623,000, or 5.1%, from 1996 to 1997. The increase from 1997 to 1998 was
primarily due to: (1) the effects of the Merger; (2) gains on sales of a
corporate aircraft and a regional manager's residence of $3,907,000 and
$2,115,000, respectively; and (3) income earned on bank-owned life insurance on
certain officers (a program started in May 1997). The increase was partially
offset by a gain on the sale of a leasehold interest in a former branch of
$2,500,000 in 1997. The increase from 1996 to 1997 was primarily due to: (1) the
effects of the Pacific Northwest Acquisitions; (2) a gain on the sale of a
leasehold interest in a former branch of $2,500,000; (3) higher foreclosed
property income; and (4) income earned on bank-owned life insurance on certain
officers. The increase was partially offset by a gain on sale of other real
estate owned of $3,029,000 in 1996.
Components of and changes in noninterest income are reflected below for the
years indicated:
- -----------------------------------------------------------------------------------------------------------------------------
1998/97 CHANGE 1997/96 Change
------------------ ------------------
(in thousands) 1998 1997 1996 AMOUNT % Amount %
- -----------------------------------------------------------------------------------------------------------------------------
Trust and investment services income ..... $ 26,971 $25,115 $23,857 $ 1,856 7.4% $ 1,258 5.3%
Service charges on deposit accounts ...... 36,192 28,776 26,284 7,416 25.8 2,492 9.5
Other service charges and fees ........... 35,574 31,509 24,976 4,065 12.9 6,533 26.2
Securities gains, net .................... 124 270 118 (146) (54.1) 152 128.8
Other .................................... 20,720 12,843 12,220 7,877 61.3 623 5.1
- ----------------------------------------------------------------------------- ------- -------
TOTAL NONINTEREST INCOME ................. $119,581 $98,513 $87,455 $21,068 21.4% $11,058 12.6%
=============================================================================================================================
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses is based upon management's judgment as to
the adequacy of the allowance for credit losses (the "Allowance") to absorb
losses. The Company uses a systematic methodology to determine the adequacy of
the Allowance and related provision for credit 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 and leases,
net charge-off experience, changes in the composition of the loan and lease
portfolio by type and location of loans and leases and in overall loan and lease
risk profile and quality, general economic factors and the fair value of
collateral.
The Company's systematic methodology results in allocations of the
Allowance to individual loans and leases and to categories of loans and leases,
representing losses that are considered probable based on available information.
Specific allocations of the Allowance are assigned to individual loan and lease
relationships based on internal credit analyses. Such allocations are made based
on the Company's impairment analysis that occurs at least quarterly. Measurement
of impairment is described in Note 1 to the Consolidated Financial Statements on
page 56. The Company also makes allocations of the Allowance with respect to
loans and leases that are not subject to a loan-by-loan credit analysis. These
allocations are based on migration analysis,
34
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
correlation of the three-year moving average historic charge-off rates to the
underlying asset balances, and other statistical procedures. Additionally, the
Company also allocates a portion of the Allowance based on risk classifications
of certain loan types. The unallocated portion of the Allowance is intended to
compensate for the subjective nature of estimating an adequate allowance for
credit losses, economic uncertainties, and other factors.
As the table on page 36 illustrates, the provision for credit losses for
1998 was $28,555,000, an increase of $11,344,000, or 65.9%, over 1997. Excluding
the effects of the Merger, the provision for credit losses for 1998 increased
$7,344,000 over 1997. The increase was consistent with the increase in the
amount of nonperforming loans and leases from 1997 to 1998 as discussed in the
section titled "Nonperforming Assets and Past Due Loans and Leases" on pages 41
and 42. The level of the provision for credit losses remained relatively high
due to, among other factors, the continuing impact of the adverse economic
conditions and trends and the weaknesses in the Hawaii economy and local real
estate markets.
Net charge-offs increased $2,690,000, or 13.5%, from 1997 to 1998. Net
charge-offs in 1998 and 1997 represented .32% and .33%, respectively, of average
loans and leases. Excluding the effects of the Merger, the increase was
primarily due to an increase in consumer loan charge-offs of $1,516,000, or
11.0%, over 1997. The high level of consumer loan charge-offs in 1996, 1997 and
1998 was primarily attributable to the ongoing sluggish Hawaii economy and a
continued increase in personal bankruptcies in the State of Hawaii, which
resulted in an increase in write-offs of credit card loans. However, charge-offs
in this profitable line of business remain well below national average rates.
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.
Net charge-offs in 1997 decreased $4,355,000, or 18.0%, from 1996. Net
charge-offs in 1997 and 1996 represented .33% and .44%, respectively, of average
loans and leases. The decrease in commercial, financial and agricultural loan
charge-offs in 1997 was primarily due to the charge-off of three loans,
partially collateralized by real estate, totaling $4,318,000 in 1996. The
increase in consumer loan charge-offs in 1997 was primarily attributable to the
increase in personal bankruptcies as previously mentioned.
At December 31, 1998, the Allowance totaled $149,585,000 and represented
1.32% of total outstanding loans and leases compared to $82,596,000 and 1.32%,
respectively, as of December 31, 1997. The increase in the Allowance was
primarily due to the effects of the Merger.
The Allowance increased to 1.67 times nonperforming loans and leases at
December 31, 1998 (excluding 90 days or more past due accruing loans and leases)
from 1.49 times at December 31, 1997, reflecting the low level of nonperforming
assets of Bank of the West relative to its Allowance. In management's judgment,
the Allowance is adequate to absorb potential losses currently inherent in the
loan and lease portfolio at December 31, 1998. However, it should be noted that
changes in prevailing economic conditions in the Company's markets, principally
the states of Hawaii and California and, to a lesser extent, the states of
Oregon, Washington and Idaho, could result in changes in the level of
nonperforming assets and charge-offs and, accordingly, changes in the Allowance.
ALLOWANCE AS A % OF LOANS AND LEASES OUTSTANDING GRAPH
1994 1.11
1995 1.50
1996 1.47
1997 1.32
1998 1.32
YEAR-END ALLOWANCE FOR CREDIT LOSSES GRAPH
($ in millions)
1994 61.3
1995 78.7
1996 85.2
1997 82.6
1998 149.6
35
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
The following sets forth the activity in the allowance for credit losses
for the years indicated:
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
LOANS AND LEASES OUTSTANDING (END OF YEAR) ....... $11,339,580 $6,238,681 $5,806,732 $5,259,545 $5,533,565
==============================================================================================================================
AVERAGE LOANS AND LEASES OUTSTANDING ............. $ 7,105,242 $5,980,189 $5,510,261 $5,460,681 $5,172,140
==============================================================================================================================
Allowance for credit losses:
Balance at beginning of year ................... $ 82,596 $ 85,248 $ 78,733 $ 61,250 $ 62,253
- ------------------------------------------------------------------------------------------------------------------------------
Allowances of subsidiaries purchased (1) ....... 60,987 -- 7,106 -- --
Loans and leases charged off:
Commercial, financial and agricultural ....... 4,847 5,986 10,003 7,197 11,307
Real estate:
Commercial ................................. 684 1,120 1,619 2,763 1,500
Construction ............................... -- 180 1,450 1,466 7,178
Residential ................................ 4,217 3,731 2,937 2,707 588
Consumer ..................................... 17,626 13,825 10,884 8,019 6,542
Lease financing .............................. 1,252 91 33 276 --
Foreign ...................................... 458 197 415 417 --
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and leases charged off ......... 29,084 25,130 27,341 22,845 27,115
- ------------------------------------------------------------------------------------------------------------------------------
Recoveries on loans and leases previously
charged off:
Commercial, financial and agricultural ....... 830 1,614 929 327 1,229
Real estate:
Commercial ................................. 820 297 86 239 9
Construction ............................... 1,244 -- 117 -- 205
Residential ................................ 250 985 234 43 92
Consumer ..................................... 3,010 2,287 1,690 1,596 1,639
Lease financing .............................. 253 20 3 16 16
Foreign ...................................... 124 64 64 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total recoveries on loans and leases
previously charged off ................... 6,531 5,267 3,123 2,221 3,190
- ------------------------------------------------------------------------------------------------------------------------------
Net charge-offs ............................ (22,553) (19,863) (24,218) (20,624) (23,925)
Provision for credit losses .................... 28,555 17,211 23,627 38,107 22,922
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR ......................... $ 149,585 $ 82,596 $ 85,248 $ 78,733 $ 61,250
==============================================================================================================================
Net loans and leases charged off to
average loans and leases ....................... .32% .33% .44% .38% .46%
Net loans and leases charged off to allowance
for credit losses .............................. 15.08% 24.05% 28.41% 26.19% 39.06%
Allowance for credit losses to total
loans and leases (end of year) ................. 1.32% 1.32% 1.47% 1.50% 1.11%
Allowance for credit losses to
nonperforming loans and leases (end of year):
Excluding 90 days or more past due
accruing loans and leases .................... 1.67X 1.49x 1.18x .95x 1.04x
Including 90 days or more past due
accruing loans and leases .................... 1.20X .92x .83x .70x .66x
==============================================================================================================================
Note:
(1) Allowance for credit losses of $60,987 in 1998 and $7,106 in 1996 were
related to the Merger and the Pacific Northwest Acquisitions, respectively.
36
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
The Company has allocated a portion of the allowance for credit losses
according to the amount deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the various loan and lease
categories as of December 31 for the years indicated:
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------- --------------------------
PERCENT OF Percent of Percent of
LOANS/LEASES Loans/Leases Loans/Leases
IN EACH in Each in Each
CATEGORY Category Category
ALLOWANCE TO TOTAL Allowance to Total Allowance to Total
(dollars in thousands) AMOUNT LOANS/LEASES Amount Loans/Leases Amount Loans/Leases
- ------------------------------------------------------------------------------------------------------------------
Domestic:
Commercial, financial
and agricultural ...... $ 24,745 19% $ 12,390 25% $ 13,730 24%
Real estate:
Commercial ............ 10,120 17 3,845 19 6,620 20
Construction .......... 4,285 3 180 3 120 4
Residential ........... 11,585 23 8,350 31 6,130 33
Consumer ................ 32,095 23 15,285 11 11,040 10
Lease financing ......... 9,845 12 360 5 760 4
Foreign ................... 1,435 3 1,405 6 1,540 5
Unallocated ............... 55,475 N/A 40,781 N/A 45,308 N/A
- ------------------------------------------------------------------------------------------------------------------
TOTAL ................... $149,585 100% $ 82,596 100% $ 85,248 100%
==================================================================================================================
- -------------------------------------------------------------------------------------
1995 1994
------------------------- -------------------------
Percent of Percent of
Loans/Leases Loans/Leases
in Each in Each
Category Category
Allowance to Total Allowance to Total
(dollars in thousands) Amount Loans/Leases Amount Loans/Leases
- -------------------------------------------------------------------------------------
Domestic:
Commercial, financial
and agricultural ...... $ 15,325 25% $ 16,610 23%
Real estate:
Commercial ............ 2,320 19 4,700 18
Construction .......... 4,035 5 7,010 6
Residential ........... 4,260 34 9,510 37
Consumer ................ 9,550 9 8,040 8
Lease financing ......... 645 4 600 4
Foreign ................... 1,430 4 1,085 4
Unallocated ............... 41,168 N/A 13,695 N/A
- -------------------------------------------------------------------------------------
TOTAL ................... $ 78,733 100% $ 61,250 100%
=====================================================================================
NONINTEREST EXPENSE
Total noninterest expense for 1998 totaled $353,807,000, an increase of
$61,597,000, or 21.1%, over 1997. Excluding the effects of the Merger and
restructuring and other nonrecurring costs, total noninterest expense increased
$2,874,000, or 1.0%, over 1997.
Total personnel expense for 1998 increased $1,617,000, or 1.1%, over 1997.
Excluding the effects of the Merger, total personnel expense decreased
$12,069,000, or 8.2%, compared to 1997. The decrease was primarily due to:
(1) lower salaries and wages expense as a result of the Company's continued
re-engineering and consolidation efforts; and (2) higher pension credits.
Occupancy expense increased $4,547,000, or 11.7%, over 1997. Excluding the
effects of the Merger, total occupancy expense increased $773,000, or 2.0%, over
1997.
Equipment expense increased $1,073,000, or 4.3%, over 1997. Excluding the
Merger, equipment expense remained relatively flat compared to the prior year.
The Company recorded restructuring, merger-related and other nonrecurring
costs totaling $25,527,000 in 1998. Restructuring and merger-related costs of
$20,043,000 included: (1) severance and termination payments to employees of
$2,211,000; (2) data processing contract termination penalties of $2,083,000;
(3) the write-off of capitalized software costs of $2,755,000; (4) write-downs
or losses associated with excess leased commercial property of $8,179,000; (5)
write-off of signage, forms, prepaid expenses and other miscellaneous assets
totaling $3,828,000; and (6) other integration costs of $987,000. Other
nonrecurring costs included impairment charges of $5,484,000 related to
intangible assets associated with earlier acquisitions.
Outside services expense increased $5,798,000, or 81.5%, over 1997.
Excluding the effects of the Merger, total outside services increased
$4,110,000, or 57.8%, over 1997. The increase was primarily due to expenses
incurred to prepare the Company's computer systems and applications for the year
2000. For information regarding anticipated conversion expenses in future
periods, see "Year 2000 Issues" on pages 45 to 48.
Goodwill and core deposit intangible expense increased $5,133,000, or
61.1%, over 1997, primarily due to the Merger.
Advertising and promotion expense decreased $362,000, or 3.2%, compared to
1997. Excluding the effects of the Merger, advertising and promotion expense
decreased $999,000, or 8.9%. The decrease was principally due to more stringent
cost controls and lower levels of spending in the areas of advertising, direct
mail, collateral and marketing production.
Other noninterest expense increased $18,191,000, or 43.3%, over 1997.
Excluding the effects of the Merger, other expense increased $10,892,000, or
25.9%, over 1997. The increase was due to higher: (1) foreclosed property
expenses; (2) write-downs of certain OREO; and (3) cash surrender value of
certain executive life insurance policies (recorded as a credit to insurance
expense) in 1997. The increase was partially offset by losses on sales of a loan
and certain OREO in 1997.
Total noninterest expense increased $22,871,000, or 8.5%, from 1996 to
1997. Excluding the effects of the Pacific Northwest Acquisitions, total
noninterest expense
37
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
increased $5,426,000, or 2.0%, over 1996. This increase was primarily due to:
(1) costs associated with the Company's new administrative headquarters
building; (2) higher service contract expense; (3) higher depreciation on
furniture and equipment; (4) higher data processing equipment expense; (5)
higher outside services related to the Year 2000 project; (6) losses on sales of
a loan and certain OREO in 1997; and (7) higher software depreciation expense.
The increase was partially offset by: (1) lower deposit insurance premiums
primarily due to the special SAIF one-time assessment in 1996; (2) a loss on
sale of a certain leveraged lease in 1996; and (3) an increase in the cash
surrender value of certain executive life insurance policies (recorded as a
credit to insurance expense) in 1997.
Components of and changes in noninterest expense are reflected below for
the years indicated:
- ----------------------------------------------------------------------------------------------------------------------------
1998/97 CHANGE 1997/96 Change
-------------------- ------------------
(in thousands) 1998 1997 1996 AMOUNT % Amount %
- ----------------------------------------------------------------------------------------------------------------------------
Personnel:
Salaries and wages .............. $115,860 $113,179 $104,572 $ 2,681 2.4% $ 8,607 8.2%
Employee benefits ............... 33,187 34,251 34,144 (1,064) (3.1) 107 .3
- ---------------------------------------------------------------------- ------- -------
Total personnel expense ........... 149,047 147,430 138,716 1,617 1.1 8,714 6.3
Occupancy expense ................. 43,262 38,715 27,045 4,547 11.7 11,670 43.2
Equipment expense ................. 26,219 25,146 22,680 1,073 4.3 2,466 10.9
Restructuring, merger-related and
other nonrecurring costs ........ 25,527 -- -- 25,527 -- -- --
Outside services .................. 12,908 7,110 5,426 5,798 81.5 1,684 31.0
Stationery and supplies ........... 12,289 12,216 11,193 73 .6 1,023 9.1
Goodwill and core deposit
intangible ...................... 13,537 8,404 7,473 5,133 61.1 931 12.5
Advertising and promotion ......... 10,812 11,174 10,991 (362) (3.2) 183 1.7
Other ............................. 60,206 42,015 45,815 18,191 43.3 (3,800) 8.3
- ---------------------------------------------------------------------- ------- -------
TOTAL NONINTEREST EXPENSE ......... $353,807 $292,210 $269,339 $61,597 21.1% $22,871 8.5%
===========================================================================================================================
INCOME TAXES
The provision for income taxes as shown in the Consolidated Statements of
Income on page 52 represents 41.7% of pre-tax income for 1998, compared with
31.8% and 30.7% for 1997 and 1996, respectively.
On a taxable equivalent basis, the effective tax rate for 1998, 1997 and
1996 was 41.8%, 32.4% and 32.3%, respectively. Additional information on the
Company's consolidated income taxes is provided in Note 17 to the Consolidated
Financial Statements on pages 70 and 71.
The increase in the 1998 effective tax rate as compared to 1997 and 1996
was primarily due to the effects of the Merger which resulted in: (1) the
recognition of increased goodwill amortization, for which the Company receives
no tax benefit; and (2) increased state income taxes, as a result of a higher
apportionment of California versus Hawaii income. Additionally, the recognition
in 1997 and 1996 of previously unrecognized tax credits resulted in lower
effective tax rates for those years.
38
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
LOANS AND LEASES
The following table sets forth the loan and lease portfolio by major
categories and loan and lease mix as of December 31 for the years indicated:
- -----------------------------------------------------------------------------------------------------------------------------
(in millions) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Domestic:
Commercial, financial and agricultural ........... $ 2,089 $1,583 $1,382 $1,316 $1,264
Real estate:
Commercial ..................................... 1,929 1,194 1,172 997 965
Construction ................................... 359 166 213 257 321
Residential .................................... 2,652 1,945 1,936 1,766 2,049
Consumer ......................................... 2,399 504 410 307 309
Credit cards ..................................... 174 175 173 167 159
Lease financing .................................. 1,356 333 241 242 231
Foreign:
Governments and official institutions ............ -- -- -- -- 1
Commercial and industrial ........................ 81 68 55 19 50
Other ............................................ 301 271 225 189 185
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS AND LEASES $11,340 $6,239 $5,807 $5,260 $5,534
=============================================================================================================================
As evidenced by the Merger, the Company continues its efforts to diversify
the loan and lease portfolio, both geographically and by industry. Overall loan
and lease volume in the State of Hawaii continues to decline as a result of the
sluggish economy.
The loan and lease portfolio is the largest component of total earning
assets and accounts for the greatest portion of total interest income. At
December 31, 1998, total loans and leases were $11,339,580,000, an increase of
81.8% over December 31, 1997. The increase was primarily due to increases in the
real estate loan, consumer loan and lease financing categories as a result of
the Merger. Excluding the effects of the Merger, total loans increased 2.8% over
December 31, 1997. The increase was primarily due to increases in commercial,
financial and agricultural and consumer loans. The increase was partially offset
by decreases in real estate commercial and real estate residential loans.
Total loans and leases at December 31, 1998, represented 75.3% of total
assets, 85.2% of total earning assets and 100.7% of total deposits compared to
77.1% of total assets, 85.6% of total earning assets and 102.5% of total
deposits at December 31, 1997, reflecting the effects of the Merger.
Commercial, financial and agricultural loans as of December 31, 1998,
increased $506,653,000, or 32.0%, to $2,089,351,000 from December 31, 1997.
Excluding the effects of the Merger, commercial, financial and agricultural
loans increased $262,962,000, or 16.6%, over 1997. Excluding the effects of the
Merger, credit extensions in the Pacific Northwest and to the media and
telecommunications industry located on the mainland United States accounted for
the majority of the increase in loan and lease balances.
The Company's primary goal in commercial and financial lending is to
maintain reasonable levels of risk by following prudent underwriting guidelines
primarily based on cash flow. Most commercial and financial loans are
collateralized and/or supported by guarantors judged to have adequate net worth.
Unsecured loans are made to customers based on character, net worth, liquidity
and repayment ability.
The Company's real estate loans totaled $4,940,236,000, or 43.6%, of total
loans and leases at December 31, 1998, which represented an increase of 49.5%
over December 31, 1997. Excluding the effects of the Merger, real estate loans
decreased $272,778,000, or 8.3%, compared to 1997 due to decreases in commercial
and residential loans, reflecting Hawaii's sluggish economy.
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
conservative 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 also generally requires a debt service ratio of 1.20. In its
single-family residential lending, the Company will generally not lend in excess
of 80% of the appraised value of the underlying property. Loans made in excess
of that limit are generally covered by third-party mortgage insurance that
reduces
39
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
the Company's equivalent risk to an 80% loan-to-appraised value ratio.
Consumer loans as of December 31, 1998, increased $1,893,889,000, or
278.9%, to $2,572,873,000 from December 31, 1997. Excluding the effects of the
Merger, consumer loans increased $111,297,000, or 16.4%, over December 31, 1997,
primarily due to credit extensions in the Pacific Northwest. Consumer loans
consist primarily of open- and closed-ended direct and indirect credit
facilities for personal, automobile and household purchases. The Company's
primary goal in consumer lending is to maintain reasonable levels of risk by
following prudent underwriting guidelines which include, among other factors, an
evaluation of: (1) personal credit history; (2) personal cash flow; and (3)
collateral values based on existing market conditions.
Lease financing as of December 31, 1998, increased $1,022,268,000, or
306.7%, to $1,355,538,000 from December 31, 1997. Excluding the effects of the
Merger, lease financing increased $38,883,000, or 11.7% over December 31, 1997
due to leveraged lease originations on the mainland United States.
Loan and lease 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, 1998, the Company did not have a concentration of loans and leases greater
than 10% of total loans and leases which were not otherwise disclosed as a
category of loans and leases as shown in the table on page 39. The loan and
lease portfolio is principally located in the states of Hawaii and California
and, to a lesser extent, the states of Oregon, Washington and Idaho. The risk
inherent in the portfolio is dependent not only upon regional and general
economic stability of those states which affect property values, but also the
financial well being and creditworthiness of the borrowers.
- --------------------------------------------------------------------------------
LOAN AND LEASE MATURITIES
The contractual maturities of loans and leases do not necessarily reflect
the actual term of the Company's loan and lease portfolio. The Company's
experience has been that the average life of residential real estate loans is
substantially less than their contractual terms because of loan prepayments and
enforcement of due-on-sale clauses. A due-on-sale clause gives 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, 1998, loans and leases with maturities over one year were
comprised of fixed-rate loans totaling $4,926,964,000 and floating or
adjustable-rate loans totaling $3,974,280,000.
The following table sets forth the contractual maturities of the Company's
loan and lease portfolio by category at December 31, 1998. Demand loans are
included as due within one year.
- -------------------------------------------------------------------------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER
(in millions) ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------
COMMERCIAL, FINANCIAL AND AGRICULTURAL $ 850 $ 809 $ 430 $ 2,089
REAL ESTATE:
COMMERCIAL 432 950 547 1,929
CONSTRUCTION 198 123 38 359
RESIDENTIAL 163 741 1,748 2,652
CONSUMER 413 1,089 897 2,399
CREDIT CARDS 72 97 5 174
LEASE FINANCING 182 845 329 1,356
FOREIGN 129 175 78 382
- -------------------------------------------------------------------------------------------------------------------
TOTAL $2,439 $4,829 $4,072 $11,340
===================================================================================================================
40
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS AND LEASES
Nonperforming assets and past due loans and leases as of December 31 are
reflected below for the years indicated:
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Nonperforming loans and leases:
Nonaccrual:
Commercial, financial and agricultural ................ $ 21,719 $ 9,038 $21,398 $16,229 $ 7,972
Real estate:
Commercial .......................................... 17,457 4,590 6,156 40,664 35,290
Construction ........................................ -- -- 1,700 9,697 7,038
Residential:
Insured, guaranteed, or conventional .............. 9,543 6,353 13,815 12,628 4,792
Home equity credit lines .......................... 333 50 451 496 520
- -----------------------------------------------------------------------------------------------------------------------------
Total real estate loans ......................... 27,333 10,993 22,122 63,485 47,640
- -----------------------------------------------------------------------------------------------------------------------------
Consumer .............................................. 2,366 -- -- -- --
Lease financing ....................................... 1,816 10 27 19 212
Foreign ............................................... 1,174 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans and leases ............... 54,408 20,041 43,547 79,733 55,824
- -----------------------------------------------------------------------------------------------------------------------------
Restructured:
Commercial, financial and agricultural ................ 3,894 1,532 3,429 682 --
Real estate:
Commercial .......................................... 30,247 30,843 24,604 2,500 3,128
Residential:
Insured, guaranteed, or conventional .............. 1,100 2,626 267 -- --
Home equity credit lines .......................... -- 559 561 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total real estate loans ......................... 31,347 34,028 25,432 2,500 3,128
- -----------------------------------------------------------------------------------------------------------------------------
Total restructured loans and leases ............. 35,241 35,560 28,861 3,182 3,128
- -----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans and leases ............ 89,649 55,601 72,408 82,915 58,952
Other real estate owned and repossessed personal property . 33,381 30,760 25,574 9,312 4,160
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS ...................... $123,030 $86,361 $97,982 $92,227 $63,112
=============================================================================================================================
Past due loans and leases:
Commercial, financial and agricultural .................. $ 1,569 $ 2,521 $ 7,765 $13,060 $18,834
Real estate:
Commercial ............................................ 2,379 567 7,676 2,175 4,765
Construction .......................................... 440 -- -- -- --
Residential:
Insured, guaranteed, or conventional ................ 23,250 25,002 9,812 7,502 6,741
Home equity credit lines ............................ 1,710 2,077 2,220 3,005 909
- -----------------------------------------------------------------------------------------------------------------------------
Total real estate loans ......................... 27,779 27,646 19,708 12,682 12,415
- -----------------------------------------------------------------------------------------------------------------------------
Consumer ................................................ 3,443 3,589 2,869 3,020 1,928
Lease financing ......................................... -- 11 40 28 190
Foreign ................................................. 1,816 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL PAST DUE LOANS AND LEASES (1) ............. $ 34,607 $33,767 $30,382 $28,790 $33,367
=============================================================================================================================
Nonperforming assets to total loans and leases and other
real estate owned and repossessed personal property
(end of year):
Excluding past due loans and leases ........................ 1.08% 1.38% 1.68% 1.75% 1.14%
Including past due loans and leases ........................ 1.39% 1.92% 2.20% 2.30% 1.74%
Nonperforming assets to total assets (end of year):
Excluding past due loans and leases ........................ .82% 1.07% 1.22% 1.22% .84%
Including past due loans and leases ........................ 1.05% 1.48% 1.60% 1.60% 1.28%
=============================================================================================================================
Note:
(1) Represents loans and leases which are past due 90 days or more as to
principal and/or interest, are still accruing interest and are adequately
collateralized and in the process of collection.
41
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
As shown in the table on page 41, nonperforming assets at December 31, 1998
were $123,030,000, or 1.08%, of total loans and leases and OREO and repossessed
personal property and .82% of total assets. Excluding the effects of the Merger,
nonperforming assets at December 31, 1998 were $105,035,000, or 1.63%, of total
loans and leases and OREO and 1.25% of total assets. These levels compared to
total nonperforming assets at December 31, 1997 of $86,361,000, or 1.38% of
total loans and leases and OREO and repossessed personal property and 1.07% of
total assets. The increase in nonperforming assets of $18,674,000, or 21.6%, was
principally due to increases in nonaccrual loans and leases as follows: (1)
commercial, financial and agricultural loans of $8,778,000, or 97.1%; and (2)
real estate - commercial loans of $12,722,000, or 277.2%. The increase in
nonaccrual loans and leases was partially offset by decreases in restructured
real estate - commercial loans of $3,609,000, or 11.7%. The increase in
commercial, financial and agricultural loans was primarily due to a loan placed
on nonaccrual status totaling $5,453,000 in the second quarter of 1998. The
increase in real estate - commercial loans was primarily due to two loans
totaling $12,964,000 placed on nonaccrual status in the fourth quarter of 1998,
partially offset by two loans totaling $3,686,000 that were transferred to OREO
in 1998.
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
prolonged economic downturn over the last eight years. Economic growth over the
past year was virtually nil, as was the level of growth in tourism. Although
some improvement was seen in 1998 in certain sectors of the Hawaii real estate
market, overall the local real estate market continues to show weaknesses,
including declining values in the leasehold real estate sector. This was
reflected in the continued increase in residential real estate properties
transferred to OREO in 1998.
Although Hawaii's recovery from its 1991 recession continues to be slow and
protracted, the economy in California and the Pacific Northwest continues to
expand. This is evidenced by the decline in the ratios of nonperforming assets
to total loans and leases and other OREO, and nonperforming assets to total
assets as of December 31, 1998 resulting from the Merger.
Recently, a number of countries in the Asia Pacific region, including
Japan, have experienced significant weaknesses in their economies. While the
Company's aggregate outstanding loans and leases to these countries totaled
$81,003,000 and constituted .54% of the Company's total assets at December 31,
1998, the economic downturn in Asia may adversely affect the volume and spending
level of Asian visitors to Hawaii, which in turn may adversely affect the Hawaii
economy. The Company does not foresee a major improvement in Hawaii's economic
conditions in the near term and believes that these trends may continue to
affect the level of nonperforming assets and related charge-offs in future
periods.
The following table presents the direct claims on or claims guaranteed by
borrowers in the Asian countries indicated below at December 31, 1998:
- --------------------------------------------------------------
OUTSTANDING OUTSTANDING
(in thousands) COMMITMENT BALANCE
- --------------------------------------------------------------
CHINA ............................ $ 442 $ 361
HONG KONG ........................ 2,820 2,345
INDIA ............................ 39 --
INDONESIA ........................ 2,172 796
SOUTH KOREA ...................... 1,059 1,059
PHILIPPINES ...................... 1,377 1,377
SINGAPORE ........................ 1,696 1,391
TAIWAN ........................... 3,652 2,580
- --------------------------------------------------------------
TOTAL NON-JAPAN ................ 13,257 9,909
JAPAN ............................ 85,493 71,094
- --------------------------------------------------------------
TOTAL .......................... $98,750 $81,003
- --------------------------------------------------------------
As of December 31, 1998, there was no exposure to Thailand.
Outstanding exposures of non-Japan, Asian countries represented .09% of
total assets and .79% of total stockholders' equity and including Japan, .66% of
total assets and 5.92% of total stockholders' equity. The above are primarily
collateralized by certificates of deposit, Hawaii real estate, standby letters
of credit issued by Asian banks or guarantees by creditworthy Asian individuals
and corporations.
Loans past due 90 days or more and still accruing interest totaled
$34,607,000 at December 31, 1998, an increase of $840,000, or 2.5%, over
December 31, 1997. The Merger did not have a significant impact on loans past
due 90 days or more and still accruing interest at December 31, 1998. The
continued weakness of the Hawaii economy and its local real estate market has
adversely impacted the Company's ability to reduce past due loans. All 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 December 31, 1998, the Company was not aware of any significant
potential problem loans (not otherwise classified as nonperforming or past due
in the table on page 41) 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.
The following table presents information related to loans and leases on a
nonaccrual basis as of December 31, 1998:
- ------------------------------------------------------------
(in thousands) DOMESTIC FOREIGN TOTAL
- ------------------------------------------------------------
INTEREST INCOME WHICH
WOULD HAVE BEEN RECORDED
IF LOANS HAD BEEN CURRENT .... $6,219 $-- $6,219
============================================================
INTEREST INCOME RECORDED
DURING THE YEAR .............. $1,800 $-- $1,800
============================================================
42
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
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,
1998, total deposits were $11,260,320,000, an increase of $5,171,120,000, or
84.9%, over December 31, 1997. The increase was primarily due to the Merger.
DEPOSITS
($ in billions)
5.15 5.36 5.94 6.09 11.26
94 95 96 97 98
The following table presents the average amount and average rate paid on
deposits for the years indicated:
- -------------------------------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -------------------
(dollars in millions) AMOUNT RATE Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------
Domestic:
Noninterest-
bearing
demand ........... $ 965 --% $ 771 --% $ 860 --%
Interest-bearing
demand ........... 284 1.54 303 1.59 597 1.55
Savings ............ 2,540 2.57 2,164 2.61 1,712 2.78
Time ............... 2,894 5.18 2,399 5.29 2,198 5.31
Foreign .............. 284 3.38 266 3.52 251 3.56
- ---------------------- -------- -------- --------
TOTAL ............ $ 6,967 3.29% $ 5,903 3.35% $ 5,618 3.25%
===========================================================================================
INVESTMENT SECURITIES BY MATURITIES AND WEIGHTED AVERAGE YIELDS
The following table presents the maturities of held-to-maturity investment
securities 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
-------------------------------------------------------------------------
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN 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 ............. $ 80 6.16% $ -- --% $ -- --% $ -- --% $ 80 6.16%
OTHER ASSET-BACKED SECURITIES .. -- -- -- -- -- -- 111 6.30 111 6.30
COLLATERALIZED MORTGAGE
OBLIGATIONS .................. -- -- -- -- 15 5.79 85 6.07 100 6.03
- -------------------------------- ------ ---- ------ ------ ------
TOTAL ...................... $ 80 6.16% $ -- --% $ 15 5.79% $ 196 6.20% $ 291 6.17%
==================================================================================================================================
Note: The weighted average yields were calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security.
The following table presents the maturities of available-for-sale
investment securities, excluding securities which have no stated maturity at
December 31, 1998, 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
------------------------------------------------------------------------
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN 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 ................... $290 5.43% $166 5.40% $-- --% $ 5 5.37% $ 461 5.42%
MORTGAGE AND ASSET-BACKED SECURITIES:
GOVERNMENT ......................... -- -- 50 6.20 7 6.60 623 6.53 680 6.51
OTHER .............................. -- -- -- -- -- -- 21 6.42 21 6.42
COLLATERALIZED MORTGAGE
OBLIGATIONS ........................ -- -- -- -- -- -- 1 6.97 1 6.97
STATES AND POLITICAL SUBDIVISIONS .... 15 5.87 -- -- -- -- 1 6.72 16 5.93
OTHER ................................ -- -- 16 5.64 -- -- 34 6.05 50 5.92
- -------------------------------------- ---- ---- --- ---- ------
TOTAL $305 5.45% $232 5.59% $ 7 6.60% $685 6.49% $1,229 6.06%
====================================================================================================================================
Note: The weighted average yields were calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security.
43
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & 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 the 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 in other
banks, Federal funds sold, securities purchased under agreements to resell and
investment securities. The aggregate of these assets represented 17.1% of total
assets at the end of 1998 compared to 16.5% at the end of 1997. Additional
information related to the Company's off-balance sheet instruments at December
31, 1998 and 1997 is included in Note 21 to the Consolidated Financial
Statements on page 73.
Liability-based liquidity is provided primarily from deposits. Average
total deposits for 1998 increased $1,064,435,000, or 18.0%, to $6,967,439,000,
primarily due to the Merger. Average total deposits for 1998 and 1997 funded
75.7% and 74.5%, respectively, of average total assets. In addition, liquidity
was also 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 Federal Home Loan Banks. Additional information on short-term
borrowings is provided in Note 10 to the Consolidated Financial Statements on
page 64. 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 A3 by
Moody's Investors Service and BBB by S&P. The Company currently has a Thomson
BankWatch, Inc. rating of B/C.
As indicated in the Consolidated Statements of Cash Flows on page 54, net
cash provided by operating and financing activities was $469,479,000 and net
cash used in investing activities was $137,200,000 for 1998. In 1998, there was
a significant change in the Company's cash flow related to the effects of the
Merger which provided $282,454,000 in net cash. For 1997, net cash provided by
operating and financing activities was $179,173,000 and net cash used in
investing activities was $229,779,000. In 1997, the Company's cash flow was
positively impacted by the issuance of $100,000,000 of its Capital Securities by
the Trust, and the related issuance by the Company of junior subordinated
deferrable interest debentures to the Trust. The net cash from these issuances
was utilized to, among other things, reduce short-term borrowings and repurchase
the Company's common stock. For 1996, net cash provided by operating and
investing activities was $428,705,000 and net cash used in financing activities
was $399,245,000. In 1996, there was a significant change in the Company's cash
flow related to the Pacific Northwest Acquisitions, which provided $218,966,000
in net cash.
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 14 to the Consolidated Financial Statements on page 67.
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 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.
The market value of equity analysis examines the change in the economic
value of the Company due to changes in interest rates. At December 31, 1998, 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 by 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, 1998, the Company's exposure to
changes in interest rates was within current guidelines which allow for no more
than a 10% adverse change in net interest income for a 1% change in rates over a
one-year time period.
Interest rate risk exposure is managed primarily through the use of
off-balance sheet instruments such as swaps, caps, floors and options on
mortgage-backed securities and through extending or shortening the duration of
the investment securities portfolio.
44
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
The Company's interest rate sensitivity position at December 31, 1998, 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, 1998, the cumulative
one-year gap for the Company was a positive $176.8 million, representing 1.17%
of total assets.
- -----------------------------------------------------------------------------------------------------------------------------
WITHIN AFTER THREE AFTER ONE
THREE BUT WITHIN BUT WITHIN AFTER
(dollars in thousands) MONTHS 12 MONTHS 5 YEARS 5 YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS:
INTEREST-BEARING DEPOSITS IN OTHER BANKS .......... $ 271,641 $ 3,000 $ -- $ -- $ 274,641
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED
UNDER AGREEMENTS TO RESELL ...................... 52,100 -- -- -- 52,100
INVESTMENT SECURITIES:
HELD-TO-MATURITY ................................ 12,997 109,971 137,963 29,991 290,922
AVAILABLE-FOR-SALE .............................. 434,419 574,048 323,441 15,086 1,346,994
NET LOANS:
COMMERCIAL, FINANCIAL AND AGRICULTURAL .......... 1,681,579 275,323 109,233 23,216 2,089,351
REAL ESTATE--CONSTRUCTION ....................... 256,503 4,399 40,555 57,763 359,220
FOREIGN ......................................... 145,243 80,778 151,184 4,377 381,582
OTHER ........................................... 1,813,627 2,097,631 3,503,423 945,161 8,359,842
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS .......................... 4,668,109 3,145,150 4,265,799 1,075,594 13,154,652
NONEARNING ASSETS ................................. 212,406 279,011 672,465 731,361 1,895,243
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS .................................. $4,880,515 $3,424,161 $4,938,264 $ 1,806,955 $15,049,895
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS ......................... $3,331,694 $2,757,842 $2,138,556 $ 756,943 $ 8,985,035
NONINTEREST-BEARING DEPOSITS ...................... 490,476 210,933 1,124,976 448,900 2,275,285
SHORT-TERM BORROWINGS ............................. 880,142 37,804 4,921 -- 922,867
LONG-TERM DEBT AND CAPITAL SECURITIES ............. 51,028 1,088 426,263 251,580 729,959
STOCKHOLDERS' EQUITY .............................. 6,171 -- -- 1,661,715 1,667,886
OFF-BALANCE SHEET ADJUSTMENT ...................... (40,382) (66,845) 48,204 59,023 --
NONCOSTING LIABILITIES ............................ 162,833 305,088 359 583 468,863
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $4,881,962 $3,245,910 $3,743,279 $ 3,178,744 $15,049,895
=============================================================================================================================
INTEREST RATE SENSITIVITY GAP ....................... $ (1,447) $ 178,251 $1,194,985 $(1,371,789)
CUMULATIVE GAP ...................................... $ (1,447) $ 176,804 $1,371,789 $ --
CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS ......... (.01)% 1.17% 9.11% --%
=============================================================================================================================
YEAR 2000 ISSUES
BACKGROUND
Many computer programs were written, and many computer chips were
programmed, to use only two digits to identify the year. Thus, a computer
program could read the digits "00" as the year 2000 or as the year 1900. If not
corrected, software and computer systems may fail or create erroneous results in
the year 2000. Also, computer chips embedded in many operating facilities--such
as elevators and communication systems--may cause equipment malfunctions because
of the year 2000 date change. These potential software and systems problems may
affect the Company, the outside companies and agencies that the Company relies
upon to conduct its business and to service its customers ("External Parties"),
and the Company's borrowers. Failure by the Company or these third parties to
successfully address year 2000 issues could have a material and adverse effect
on the Company's business or consolidated results of operations or financial
condition.
The Company's programs to address these issues are being carried out by its
subsidiary operating banks, First Hawaiian and Bank of the West. Prior to the
Merger, both FHI and BancWest had established plans and were executing programs
to ensure that their respective company's information management and processing
software and hardware and other date sensitive facilities would continue to
function properly in the year 2000 and thereafter. The
45
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
respective plans and programs will continue to be executed separately by Bank of
the West and First Hawaiian.
In connection with the Merger, Pacific One Bank merged into Bank of the
West, and in February 1999, the accounts and operating systems of the former
Pacific One Bank were converted to Bank of the West's operating systems.
Consequently, Pacific One Bank's year 2000 program will be replaced by Bank of
the West's program, described below.
Each bank has formed management teams to address year 2000 issues. The
teams report to senior management and to the audit committee of the respective
banks. The bank audit committees, in turn, report to the respective banks'
Boards of Directors and to the Audit Committee of the Board of Directors of the
Company.
The Company's year 2000 programs are designed to comply with guidelines
issued by the Federal Financial Institutions Examination Council (the "FFIEC").
The Federal Deposit Insurance Corporation (the "FDIC") and Federal Reserve,
which are members of the FFIEC, conduct year 2000 compliance examinations of the
Company, First Hawaiian and Bank of the West. These examinations result in one
of three ratings: "satisfactory," "needs improvement," or "unsatisfactory," and
institutions that receive a rating of unsatisfactory may be subject to formal
enforcement action, supervisory agreements, cease and desist orders, civil money
penalties, or the appointment of a conservator. Disclosure of these ratings is
not permitted by Federal regulations.
Each bank's program includes five major phases--inventory, assessment,
strategies, solution (remediation or replacement of noncompliant items) and
testing and certification (which includes stand-alone and integration testing).
In the inventory and assessment phases, the banks classified items to be
addressed as "mission critical" or "non-mission critical." Mission-critical
items are those applications or systems that are vital to the successful
continuance of a core business activity of the bank.
First Hawaiian and Bank of the West have substantially different data
processing environments and consequently different approaches to addressing year
2000 issues. While both banks rely heavily on third-party-provided software,
First Hawaiian operates its own data center to meet the majority of its systems'
requirements, while Bank of the West has outsourced its primary data processing
services. Because of this key difference in data processing environments,
implementation of each bank's year 2000 program is discussed separately below.
STATUS OF IMPLEMENTATION OF FIRST HAWAIIAN'S PROGRAM
First Hawaiian has completed the first three phases of the
program--inventory, assessment and strategy. As of December 31, 1998, First
Hawaiian met a major milestone of completing the renovation and stand-alone
testing and certification of a substantial portion of internal mission-critical
systems, meeting a goal established by the FFIEC (over 97% of mission-critical
systems have been certified). For all systems, mission-critical and non-mission
critical, First Hawaiian has completed over 87% of the stand-alone testing and
certification. Integrated testing has begun and First Hawaiian is 72% complete
with this task. Both stand-alone and integrated testing and certification are
planned to be completed by June 30, 1999. Testing with External Parties is
underway and is also expected to be completed in the same time frame.
EXTERNAL PARTIES
First Hawaiian is continuing to assess the year 2000 compliance efforts of
significant External Parties. It has categorized External Parties as follows:
(1) external processors--vendors who provide core business processing services,
such as credit card processing, and vendors who provide information access for
First Hawaiian's customers, such as business and home P.C. banking; (2) external
interfaces--companies and agencies with whom the bank exchanges information by
electronic or nonelectronic media, such as automated clearing house
transactions; and (3) external alliances--vendors, suppliers, providers,
business partners, customers and other third parties that are not covered by any
other category, such as credit bureaus and stock quotation services. Testing
with external processors is underway and testing with mission-critical
processors is planned to be substantially completed by March 31, 1999. Testing
has begun with some parties with external interfaces. Selected testing with
customers is also scheduled for the first and second quarters of 1999.
Completion of testing with external interface parties and customers is planned
by June 30, 1999. Initial contact with External Parties involved in other
alliances with the bank was completed by December 31, 1998, and follow-up
contact will continue throughout 1999 to ensure that year 2000 failures by
External Parties will not materially adversely affect the bank.
BORROWERS
The first stage of First Hawaiian's evaluation of year 2000 compliance by
borrowers included a credit risk survey and assessment process which was
completed by First Hawaiian credit officers in August 1998. Following FFIEC
guidelines and based on management judgment, all aggregate loans and commitments
to a borrower in excess of a fixed threshold were evaluated. In addition, all
applicants for new credits are being evaluated for year 2000 risk among other
underwriting risks. Borrowers are classified as "high risk," "medium risk" and
"low risk" based on year
46
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
2000 status. High-risk credits will be reassessed quarterly and medium-risk and
low-risk credits will be reassessed semi-annually. A reassessment of high-,
medium- and low-risk borrowers was completed in December 1998. First Hawaiian
believes, based on this review, that the exposure to borrowers' year 2000
problems does not represent a material risk at this time.
STATUS OF IMPLEMENTATION OF BANK OF THE WEST'S PROGRAM
Bank of the West has completed the inventory, assessment and strategy
phases of its program. By the end of December 1998, renovation or replacement of
97% of mainframe programs had been completed. By the end of February 1999, all
mainframe computer programs (116) had been either renovated or replaced.
Feature, function and interface testing have been completed for each of the
renovated and replaced systems and they are currently running in the bank's
production environment. Mainframe date testing will occur on a stand-alone
computer provided by the external service provider at its technology center
during the period March 1999 through May 1999, with completion planned by June
30, 1999. Stand-alone and networked personal computers and related programs will
be tested during the same time period on a stand-alone test system being
installed on-site at Bank of the West.
EXTERNAL PARTIES
Bank of the West is also assessing the year 2000 compliance efforts of key
External Parties. The bank has categorized External Parties similarly to First
Hawaiian, as discussed above. The bank has received periodic reports from its
primary external processors which indicate that they are on or ahead of schedule
with their year 2000 plans. Additionally, regulatory agencies are performing
periodic reviews of these service processors' progress on year 2000 readiness
and providing copies of their evaluations to Bank of the West and other banks
serviced by these external processors.
Bank of the West will be performing interface testing (tests on the
exchange of data with other systems) with its External Parties during the March
1999 to May 1999 testing period. Additionally, year 2000 readiness
questionnaires have been sent to all key external alliance parties. Responses
will be evaluated and followed up to ensure that no mission-critical
relationships will fail as a result of the year 2000 issue.
CUSTOMERS AND COUNTERPARTIES
Bank of the West has commenced an assessment program with respect to year
2000 compliance by funds providers (such as major depositors) and funds users
(such as borrowers). Credit officers and account managers completed the first
stage of a risk survey and assessment process in October 1998. Customers and
counterparties were selected for review based on FFIEC guidelines and management
judgment. The customers and counterparties were classified as "high risk,"
"medium risk," or "low risk" based on their year 2000 status. All applicants for
new credits at Bank of the West are being evaluated for year 2000 risk among
other underwriting factors, if applicable.
BUDGET
The Company's current estimates of the total cost related solely to
the year 2000 program is $12.4 million through June 30, 2000.
Additionally, it estimates that a total of $5.6 million has been and will
be required for purchase and installation of new or replacement systems
or equipment that were accelerated to address year 2000 issues. The
source of these funds has been and will be the operating cash flow of the
Company. From the beginning of the year 2000 programs through December
31, 1998, an aggregate of $6.4 million has been expended on costs related
solely to year 2000 compliance efforts, and $2.8 million has been spent
on the planning and accelerated installation of systems and applications
to address the year 2000 issues as described above. In 1998, the Company
expended $5.8 million on costs related solely to year 2000 compliance and
$2.6 million on accelerated systems and applications.
CONTINGENCY PLAN
Both First Hawaiian and Bank of the West are preparing contingency plans to
minimize disruption to their respective bank operations due to year 2000 issues.
Included are plans to recover critical business operations and alternatives to
mitigate potential effects of critical External Parties whose own failure to
properly address year 2000 issues may adversely impact the ability to perform
certain functions. Alternative strategies and contingency plans for liquidity
and cash are also included as part of the business resumption plans for both
banks. The contingency plans are expected to be substantially completed for
critical business operations by June 30, 1999. Review and validation of these
plans will continue through the remainder of 1999.
47
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
RISKS
Even though the Company expects that the First Hawaiian and Bank of the
West programs will adequately address year 2000 issues, there can be no
assurance that unforeseen difficulties will not arise and impact the Company's
business or consolidated results of operations or financial condition. There is
an additional risk that may be posed by potential failure of certain parties,
such as power, telecommunication and transportation utilities or governmental
agencies, to resolve year 2000 issues where alternative providers of services
are not available.
Readers are cautioned that forward-looking statements in this discussion of
year 2000 issues should be read in conjunction with the Company's disclaimers on
page 28 as to the risks and uncertainties relating to such forward-looking
statements.
The disclosure contained in this Annual Report as well as the information
in its 1997 Annual Report and 1998 Form 10-Q quarterly reports filed by the
Company with the Securities and Exchange Commission regarding its year 2000
readiness are designated as year 2000 readiness disclosures under the Year 2000
Information and Readiness Disclosure Act.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
(the "Participating Countries") established fixed conversion rates between their
existing sovereign currencies (the "Legacy Currencies") and the euro. The
Participating Countries have adopted the euro as their common legal currency on
that date. On January 1, 1999, the euro also began trading on currency exchanges
and became available for non-cash transactions.
Following the introduction of the euro on January 1, 1999, the Legacy
Currencies are scheduled to remain legal tender in the Participating Countries
as denominations of the euro between January 1, 1999 and January 1, 2002.
Beginning January 1, 2002, the Participating Countries will issue new
euro-denominated bills and coins for use in cash transactions. No later than
July 1, 2002, the Participating Countries will withdraw all bills and coins
denominated in the Legacy Currencies, so that the Legacy Currencies no longer
will be legal tender for any transactions, making conversion to the euro
complete.
As a provider of foreign exchange, custody, cash management and funds
transfer services, the Company has been actively preparing for the introduction
of the euro. Similar to the year 2000 issue, euro preparations have required
conversion of various operating and processing systems to avoid interruption in
the Company's ongoing business activities. The costs associated with the euro
conversion have been expensed in the period in which they were incurred and have
not been material.
The business conducted by the Company in the Participating Countries is not
material to its earnings. Furthermore, all of the Company's derivatives are
based on either domestic interest rates or London Interbank Offered Rates
("LIBOR"). Although the business conducted by the Company in the Participating
Countries is not material, the Company has been actively developing contingency
plans to deal with any liquidity issues that may result if changes in payment,
clearing or settlement procedures result in an increase in misrouted funds.
These plans have also addressed likely problems following conversion in order to
maximize the Company's ability to avoid disruptions. While the Company does not
expect that the impact of the conversion will be material to its consolidated
financial condition or results of operations, it cannot be assured that third
parties on whom it relies will be fully prepared. However, the Company currently
believes that the risk associated with such third parties will not be material.
Readers are cautioned that forward-looking statements in this discussion of
the euro conversion should be read in conjunction with the Company's disclaimers
on page 28 as to the risks and uncertainties relating to such forward-looking
statements.
48
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BancWest Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
FOURTH QUARTER RESULTS
Consolidated net income for the fourth quarter of 1998 was $11,180,000, a
decrease of $8,949,000, or 44.5%, compared to the $20,129,000 earned during the
same quarter in 1997. Diluted earnings per share for the fourth quarter of 1998
was $.06, a decrease of 90.5%, compared to the same quarter in 1997. Diluted
cash earnings per share was $.35, a decrease of 48.5%, compared to the same
quarter in 1997.
Operating earnings (excluding after-tax charges of $21,866,000 related to
restructuring costs, costs related to the Merger and other nonrecurring costs)
for the fourth quarter of 1998 was $33,046,000, an increase of $12,917,000, or
64.2%, over the same quarter in 1997. Diluted operating earnings per share for
the fourth quarter of 1998 was $.67, an increase of 6.3%, over the same quarter
in 1997. Diluted operating cash earnings per share was $.81, an increase of
19.1%, over the same quarter in 1997. Additional information on restructuring,
merger-related and other nonrecurring costs is provided in "Noninterest Expense"
on page 37.
The increase in operating earnings for the fourth quarter of 1998 as
compared to the fourth quarter of 1997 was primarily due to: (1) the effects of
the Merger; (2) the write-down of certain OREO's of $2,025,000; (3) an
adjustment to lease financing income of $2,355,000 in 1997 related to a certain
direct financing lease; and (4) the write-off in 1997 of previously capitalized
organizational costs in connection with the Pacific Northwest Acquisitions of
$1,588,000. The increase was partially offset by: (1) interest earned in 1997 on
a corporate income tax refund of $1,908,000; and (2) an income tax benefit of
$1,458,000 (resulting from the recognition of previously unrecognized general
business credits) which reduced the overall income tax expense in 1997.
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly financial data for 1998 and 1997 is
presented below:
- --------------------------------------------------------------------------------------------------------------------
Quarter
-------------------------------------------------------- Annual
(in thousands, except per share data) First Second Third Fourth Total
- --------------------------------------------------------------------------------------------------------------------
1998
INTEREST INCOME ......................... $151,323 $152,594 $154,973 $225,549 $684,439
INTEREST EXPENSE ........................ 65,745 66,145 66,292 92,020 290,202
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ..................... 85,578 86,449 88,681 133,529 394,237
PROVISION FOR CREDIT LOSSES ............. 4,396 7,516 6,279 10,364 28,555
TOTAL NONINTEREST INCOME ................ 25,607 31,220 26,169 36,585 119,581
TOTAL NONINTEREST EXPENSE ............... 73,637 76,222 73,204 130,744 353,807
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES .............. 33,152 33,931 35,367 29,006 131,456
PROVISION FOR INCOME TAXES .............. 11,924 12,263 12,837 17,826 54,850
- --------------------------------------------------------------------------------------------------------------------
NET INCOME .............................. $ 21,228 $ 21,668 $ 22,530 $ 11,180 $ 76,606
====================================================================================================================
BASIC EARNINGS PER SHARE ................ $ .68 $ .70 $ .72 $ .06 $ 2.16
DILUTED EARNINGS PER SHARE .............. .68 .69 .72 .06 2.15
====================================================================================================================
1997
Interest income ......................... $145,395 $149,453 $149,432 $148,203 $592,483
Interest expense ........................ 62,881 63,796 64,850 66,484 258,011
- --------------------------------------------------------------------------------------------------------------------
Net interest income ..................... 82,514 85,657 84,582 81,719 334,472
Provision for credit losses ............. 3,752 4,261 3,817 5,381 17,211
Total noninterest income ................ 23,412 25,963 23,491 23,998 96,864
Total noninterest expense ............... 72,568 74,467 71,704 71,822 290,561
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes .............. 29,606 32,892 32,552 28,514 123,564
Provision for income taxes .............. 9,090 10,627 11,201 8,385 39,303
- --------------------------------------------------------------------------------------------------------------------
Net income .............................. $ 20,516 $ 22,265 $ 21,351 $ 20,129 $ 84,261
====================================================================================================================
Basic earnings per share ................ $ .65 $ .70 $ .67 $ .64 $ 2.66
Diluted earnings per share .............. .64 .70 .67 .63 2.64
====================================================================================================================
49
32
REPORT OF INDEPENDENT ACCOUNTANTS BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------
TO THE STOCKHOLDERS
BANCWEST CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of BancWest Corporation and Subsidiaries at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Honolulu, Hawaii
January 21, 1999
50
33
CONSOLIDATED BALANCE SHEETS BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------
DECEMBER 31,
-------------------------------
(in thousands, except number of shares and per share data) ..................................... 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks ........................................................................ $ 615,184 $ 282,905
Interest-bearing deposits in other banks ....................................................... 274,641 137,930
Federal funds sold and securities purchased under agreements to resell ......................... 52,100 134,274
Investment securities (note 5)
Held-to-maturity (fair value of $291,414 in 1998) ............................................ 290,922 --
Available-for-sale ........................................................................... 1,346,994 778,124
Loans and leases:
Loans and leases (note 6) .................................................................... 11,339,580 6,238,681
Less allowance for credit losses (note 7) .................................................... 149,585 82,596
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans and leases ........................................................................... 11,189,995 6,156,085
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment (note 8) ................................................................ 266,984 245,999
Customers' acceptance liability ................................................................ 1,377 867
Core deposit intangible (net of accumulated amortization of
$16,227 in 1998 and $13,605 in 1997) (note 1) ................................................ 73,430 25,347
Goodwill (net of accumulated amortization of
$26,823 in 1998 and $22,815 in 1997) (note 1) ................................................ 635,245 96,030
Other real estate owned and repossessed personal property (note 1) ............................. 33,381 30,760
Other assets ................................................................................... 269,642 204,771
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ................................................................................... $ 15,049,895 $ 8,093,092
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Domestic:
Noninterest-bearing demand ................................................................. $ 2,018,561 $ 903,195
Interest-bearing demand .................................................................... 318,756 310,810
Savings .................................................................................... 3,886,714 2,090,571
Time (fair value of $4,795,397 in 1998 and $2,499,390 in 1997) (note 9) .................... 4,779,726 2,490,915
Foreign (fair value of $256,830 in 1998 and $293,769 in 1997) (note 9) ...................... 256,563 293,709
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits ................................................................................. 11,260,320 6,089,200
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (note 10) ................................................................ 922,867 721,865
Acceptances outstanding ........................................................................ 1,377 867
Other liabilities .............................................................................. 467,486 230,723
Long-term debt (note 11) ....................................................................... 629,959 218,736
Guaranteed preferred beneficial interests in Company's junior
subordinated debentures (note 11) ............................................................ 100,000 100,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities .............................................................................. 13,382,009 7,361,391
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (notes 15, 20 and 21)
Stockholders' equity:
Preferred stock, par value $5 per share
Authorized and unissued--50,000,000 shares in 1998 and 1997 ................................ -- --
Class A Common Stock, par value $1 per share in 1998 (notes 2 and 12)
Authorized--75,000,000 shares in 1998
Issued--25,814,768 shares in 1998 .......................................................... 25,815 --
Common stock, par value $1 per share in 1998 and $5 per share in 1997 (notes 2, 12 and 15)
Authorized--200,000,000 shares in 1998 and 100,000,000 shares in 1997
Issued--33,190,374 shares in 1998 and 1997 ................................................. 33,190 165,952
Surplus (note 2) ............................................................................. 1,141,639 148,165
Retained earnings (note 14) .................................................................. 511,525 473,659
Accumulated other comprehensive income ....................................................... 6,171 (241)
Treasury stock, at cost--1,635,397 shares in 1998 and 1,845,217 shares in 1997 ............... (50,454) (55,834)
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ..................................................................... 1,667,886 731,701
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................................... $ 15,049,895 $ 8,093,092
===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
51
34
CONSOLIDATED STATEMENTS OF INCOME BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
(in thousands, except number of shares and per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans ........................................... $ 578,872 $ 504,347 $ 468,517
Lease financing income ............................................... 32,154 14,437 10,494
Interest on investment securities:
Taxable interest income ............................................ 55,560 59,188 72,813
Exempt from Federal income taxes ................................... 85 647 2,692
Other interest income ................................................ 17,768 13,864 19,624
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income ................................................ 684,439 592,483 574,140
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits (note 9) .................................................... 228,920 197,619 182,402
Short-term borrowings ................................................ 36,727 41,527 53,977
Long-term debt ....................................................... 24,555 18,865 16,416
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense ............................................... 290,202 258,011 252,795
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income .................................................. 394,237 334,472 321,345
Provision for credit losses (note 7) ................................. 28,555 17,211 23,627
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses ................ 365,682 317,261 297,718
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and investment services income ................................. 26,971 25,115 23,857
Service charges on deposit accounts .................................. 36,192 28,776 26,284
Other service charges and fees ....................................... 35,574 31,509 24,976
Securities gains, net (note 5) ....................................... 124 270 118
Other ................................................................ 20,720 12,843 12,220
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income ............................................. 119,581 98,513 87,455
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and wages ................................................... 115,860 113,179 104,572
Employee benefits (note 15) .......................................... 33,187 34,251 34,144
Occupancy expense (notes 8 and 20) ................................... 43,262 38,715 27,045
Equipment expense (notes 8 and 20) ................................... 26,219 25,146 22,680
Restructuring, merger-related and other nonrecurring costs (note 3) .. 25,527 -- --
Other (note 16) ...................................................... 109,752 80,919 80,898
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense ............................................ 353,807 292,210 269,339
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes ........................................... 131,456 123,564 115,834
Provision for income taxes (note 17) ................................. 54,850 39,303 35,538
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME ........................................................... $ 76,606 $ 84,261 $ 80,296
============================================================================================================================
PER SHARE DATA
BASIC EARNINGS ....................................................... $ 2.16 $ 2.66 $ 2.56
DILUTED EARNINGS ..................................................... $ 2.15 $ 2.64 $ 2.55
============================================================================================================================
CASH DIVIDENDS ....................................................... $ 1.24 $ 1.24 $ 1.20
============================================================================================================================
AVERAGE SHARES OUTSTANDING ........................................... 35,534,178 31,725,534 31,398,978
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
52
35
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY BancWest Corporation & Subsidiaries and BancWest Corporation (Parent Company)
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
(in thousands, except Common Stock Common Stock
number of shares and ---------------------- -----------------------
per share data) Shares Amount Shares Amount Surplus
- --------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 -- $ -- 32,542,797 $162,713 $ 133,925
Comprehensive income:
Net income -- -- -- -- --
Unrealized valuation
adjustment, net of tax
and reclassification
adjustment (note 5) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Issuance of common
stock (note 12) -- -- 647,577 3,239 14,286
Cash dividends
($1.20 per share)
(note 14) -- -- -- -- --
Incentive Plan for Key
Executives (note 15) -- -- -- -- (15)
- --------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 -- -- 33,190,374 165,952 148,196
Comprehensive income:
Net income -- -- -- -- --
Unrealized valuation
adjustment, net of tax
and reclassification
adjustment (note 5) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Purchase of treasury
stock, net -- -- -- -- (31)
Cash dividends
($1.24 per share)
(note 14) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 -- -- 33,190,374 165,952 148,165
COMPREHENSIVE INCOME:
NET INCOME -- -- -- -- --
UNREALIZED VALUATION
ADJUSTMENT, NET OF TAX
AND RECLASSIFICATION
ADJUSTMENT (NOTE 5) . -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
REDUCTION IN PAR VALUE OF
COMMON STOCK (NOTE 12) -- -- -- (132,762) 132,762
ISSUANCE OF CLASS A
COMMON STOCK
(NOTES 2 AND 12) 25,814,768 25,815 -- -- 858,115
PURCHASE OF TREASURY
STOCK, NET -- -- -- -- (25)
ISSUANCE OF TREASURY STOCK
(NOTE 12) -- -- -- -- 2,622
CASH DIVIDENDS
($1.24 PER SHARE)
(NOTE 14) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1998 25,814,768 $25,815 33,190,374 $ 33,190 $1,141,639
==============================================================================================================
Accumulated
(in thousands, except Other Com-
number of shares and Retained prehensive Treasury
per share data) Earnings Income Stock Total
- ----------------------------------------------------------------------------------------------
Balance,
December 31, 1995 $385,976 $5,489 $(38,566) $ 649,537
Comprehensive income:
Net income 80,296 -- -- 80,296
Unrealized valuation
adjustment, net of tax
and reclassification
adjustment (note 5) -- (3,639) -- (3,639)
- ----------------------------------------------------------------------------------------------
Comprehensive income 80,296 (3,639) -- 76,657
- ----------------------------------------------------------------------------------------------
Issuance of common
stock (note 12) -- -- -- 17,525
Cash dividends
($1.20 per share)
(note 14) (37,579) -- -- (37,579)
Incentive Plan for Key
Executives (note 15) -- -- (241) (256)
- ----------------------------------------------------------------------------------------------
Balance,
December 31, 1996 428,693 1,850 (38,807) 705,884
Comprehensive income:
Net income 84,261 -- -- 84,261
Unrealized valuation
adjustment, net of tax
and reclassification
adjustment (note 5) -- (2,091) -- (2,091)
- ----------------------------------------------------------------------------------------------
Comprehensive income 84,261 (2,091) -- 82,170
- ----------------------------------------------------------------------------------------------
Purchase of treasury
stock, net -- -- (17,027) (17,058)
Cash dividends
($1.24 per share)
(note 14) (39,295) -- -- (39,295)
- ----------------------------------------------------------------------------------------------
Balance,
December 31, 1997 473,659 (241) (55,834) 731,701
COMPREHENSIVE INCOME:
NET INCOME 76,606 -- -- 76,606
UNREALIZED VALUATION
ADJUSTMENT, NET OF TAX
AND RECLASSIFICATION
ADJUSTMENT (NOTE 5) . -- 6,412 -- 6,412
- ----------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME 76,606 6,412 -- 83,018
- ----------------------------------------------------------------------------------------------
REDUCTION IN PAR VALUE OF
COMMON STOCK (NOTE 12) -- -- -- --
ISSUANCE OF CLASS A
COMMON STOCK
(NOTES 2 AND 12) -- -- -- 883,930
PURCHASE OF TREASURY
STOCK, NET -- -- (7,297) (7,322)
ISSUANCE OF TREASURY STOCK
(NOTE 12) -- -- 12,677 15,299
CASH DIVIDENDS
($1.24 PER SHARE)
(NOTE 14) (38,740) -- -- (38,740)
- ----------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1998 $511,525 $6,171 $(50,454) $1,667,886
==============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
53
36
CONSOLIDATED STATEMENTS OF CASH FLOWS BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at beginning of year ........................................ $ 282,905 $ 333,511 $ 304,051
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income ........................................................................ 76,606 84,261 80,296
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses ................................................... 28,555 17,211 23,627
Net gain on sale of assets .................................................... (6,022) (2,500) --
Depreciation and amortization ................................................. 33,115 31,568 31,252
Income taxes .................................................................. 49,560 20,071 20,580
Decrease (increase) in interest receivable .................................... (1,649) 4,096 (2,571)
Increase (decrease) in interest payable ....................................... (2,268) 10,010 (5,840)
Decrease (increase) in prepaid expense ........................................ 522 1,663 (8,222)
Restructuring, merger-related and other nonrecurring costs .................... 25,527 -- --
Other ......................................................................... 24,220 11,356 (21,054)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ........................................... 228,166 177,736 118,068
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits in other banks ............... (136,711) (67,800) 174,440
Net decrease in Federal funds sold and securities
purchased under agreements to resell ............................................ 82,174 14,096 32,133
Proceeds from maturity of held-to-maturity investment securities .................. 13,172 -- --
Purchase of available-for-sale investment securities .............................. (376,528) (367,595) (567,143)
Proceeds from sale of available-for-sale investment securities .................... 34,403 387,986 81,159
Proceeds from maturity of available-for-sale investment securities ................ 388,412 338,732 521,787
Net increase in loans to customers ................................................ (310,397) (482,097) (137,281)
Net cash provided by acquisitions ................................................. 207,454 -- 218,966
Proceeds from sale of premises and equipment ...................................... 11,402 2,500 --
Purchases of premises and equipment ............................................... (16,500) (18,792) (20,634)
Other ............................................................................. (34,081) (36,809) 7,210
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities ................................. (137,200) (229,779) 310,637
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits ............................................... 320,567 152,492 (174,782)
Net decrease in short-term borrowings ............................................. (5,356) (227,695) (236,619)
Proceeds from long-term debt ...................................................... -- 192,700 53,000
Payments on long-term debt ........................................................ (27,836) (59,707) (3,009)
Cash dividends paid ............................................................... (38,740) (39,295) (37,579)
Purchase of treasury stock, net ................................................... (7,322) (17,058) (256)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ................................. 241,313 1,437 (399,245)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR .............................................. $ 615,184 $ 282,905 $ 333,511
==================================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Interest paid ..................................................................... $ 281,379 $ 248,001 $ 258,635
Income taxes paid ................................................................. $ 5,290 $ 19,232 $ 20,580
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Loans converted into other real estate owned and repossessed
personal property ............................................................... $ 16,772 $ 23,753 $ 26,764
==================================================================================================================================
IN CONNECTION WITH THE ACQUISITIONS, THE FOLLOWING LIABILITIES WERE ASSUMED:
- ----------------------------------------------------------------------------------------------------------------------------------
Fair value of assets acquired ....................................................... $ 6,425,007 $ -- $ 552,582
Cash received ....................................................................... 207,454 -- 218,966
Issuance of Class A Common Stock .................................................... (883,930) -- --
Issuance of treasury stock .......................................................... (15,299) -- --
Issuance of common stock ............................................................ -- -- (17,525)
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES ASSUMED ................................................................. $ 5,733,232 $ -- $ 754,023
==================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
54
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
BancWest Corporation (formerly known as First Hawaiian, Inc.) is a bank
holding company headquartered in Honolulu, Hawaii and incorporated under the
laws of the State of Delaware. Through its principal subsidiaries, First
Hawaiian Bank and Bank of the West, BancWest Corporation provides commercial and
consumer banking services, engages in commercial and equipment and vehicle
leasing and offers trust and insurance products. The Company's subsidiaries
operate 201 offices in the states of Hawaii, California, Oregon, Washington, and
Idaho and in Guam and Saipan.
The accounting and reporting policies of BancWest Corporation 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 BancWest Corporation (the "Parent") and its wholly-owned subsidiary
companies--First Hawaiian Bank and its wholly-owned subsidiaries ("First
Hawaiian"); Bank of the West and its wholly-owned subsidiaries ("Bank of the
West"); FHL Lease Holding Company, Inc. and its wholly-owned subsidiary
("Leasing"); First Hawaiian Capital I; and FHI International, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
RECLASSIFICATIONS
Certain reclassifications were made to the 1997 and 1996 Consolidated
Financial Statements to conform to the 1998 presentation. Such reclassifications
did not have a material effect on the Consolidated Financial Statements.
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 amount of deposits held. For 1998,
1997 and 1996, the average amount of these reserve balances was $106,880,000,
$91,918,000 and $127,399,000, 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. These securities have been
adjusted for amortization of premiums or accretion of discounts using the
interest method.
Investment securities are classified into 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 and equity 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.
Gains and losses realized on the sales of investment securities are
determined using the specific identification method.
LOANS AND LEASES
Loans are stated at the principal amounts outstanding, net of any unearned
income or discounts. Interest income is accrued and recognized on the principal
amount outstanding unless the loan is determined to be impaired and placed on
nonaccrual status. See "Impaired and Nonaccrual Loans" below. Loans identified
as held for sale are carried at the lower of cost or market value and are
included in other assets on the Company's Consolidated Balance Sheets.
The Company provides lease financing under a variety of arrangements,
primarily consumer automobile leases, commercial equipment leases and leveraged
leases. Consumer automobile leases and commercial equipment leases are
classified as direct financing leases. Unearned income on direct financing
leases is accreted over the lives of the leases to provide a constant periodic
rate of return on the net investment in the lease. 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
55
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
interest on the related nonrecourse debt) and the 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.
IMPAIRED AND NONACCRUAL LOANS
The Company evaluates loans for impairment on a case-by-case basis and
considers a loan to be impaired when, based on current information, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan. Impairment is measured based on the present
value of the expected future cash flows discounted at the loan's effective
interest rate, except for collateral-dependent loans. For collateral-dependent
loans, impairment is measured based on the fair value of the collateral. On a
case-by-case basis, the Company may measure impairment based upon a loan's
observable market price. Large groups of smaller balance homogenous loans, such
as credit cards and consumer loans and leases, including 1-4 family mortgage
loans with balances less than $250,000, are evaluated collectively for
impairment based primarily on historical loss experience for each portfolio.
Impairment losses are charged against the allowance for credit losses.
The Company generally places loans and leases on nonaccrual status that are
90 days past due as to principal or income unless well secured and in the
process of collection, or when management believes that collection of principal
or income has become doubtful, or when a loan is first classified as impaired.
Exceptions are made to the general rules regarding loans 90 days past due when
the fair value of the collateral exceeds the Company's recorded investment in
the loan or when other factors are present which indicate that the borrower will
shortly bring the loan current. While the majority of consumer loans and leases
are subject to the Company's general policies regarding nonaccrual loans,
certain past due consumer loans and leases are not placed on nonaccrual status
because they are generally charged off upon reaching a predetermined delinquency
status that ranges from 120 to 180 days and varies by product type. When loans
and leases are placed on nonaccrual status, previously accrued and uncollected
interest is reversed against interest income of the current period. Cash
interest payments received on nonaccrual loans are applied as a reduction of the
principal balance when doubt exists as to the ultimate collection of the
principal; otherwise, such payments are recorded as income. Nonaccrual loans and
leases are generally returned to accrual status when they become current as to
principal and interest or become both well secured and in the process of
collection.
LOAN FEES
The Company generally charges fees for originating loans and leases and for
commitments to extend credits. Origination fees (net of direct costs of
underwriting, closing costs and premiums) are deferred and amortized to interest
income using methods which approximate a level yield, adjusted for actual
prepayment experience. Unamortized fees and premiums on loans paid in full are
recognized as a component of interest income. The Company also charges other
loan fees consisting of delinquent payment charges and other common loan
servicing fees, including fees for servicing loans sold to third parties. Such
fees are recognized as income when earned.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses (the "Allowance") is maintained at a level
which, in management's judgment, is adequate to absorb losses in the Company's
loan and lease portfolio. While the Company has a formalized methodology for
determining an adequate and appropriate level of Allowance, estimates of
inherent credit losses involve judgment and assumptions as to various factors
which deserve current recognition in the Allowance. Principal factors considered
by management in determining the Allowance include historical loss experience,
the value and adequacy of collateral, the level of nonperforming loans, loan
concentrations, the growth and composition of the portfolio, periodic review of
loan delinquency, results of examinations of individual loans and/or evaluation
of the overall portfolio by senior credit personnel, internal auditors and
regulators, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, and general economic conditions. The
Company's formalized methodology is also intended to compensate for the
subjective nature of estimating an adequate Allowance, economic uncertainties
and other factors.
The Allowance is increased by provisions for credit losses and reduced by
charge-offs, net of recoveries. Charge-offs for loans and leases that are
evaluated for impairment are made based on impairment evaluations as described
above. Consumer loans and leases are generally charged off upon reaching a
predetermined delinquency status that ranges from 120 to 180 days and varies by
product type. Other loans and leases are charged off to the extent they are
classified as loss, either internally or by the Company's regulators. Recoveries
of amounts that have previously been charged off are credited to the Allowance
and are generally recorded only to the extent that cash is received.
56
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
The provision for credit losses reflects management's judgment of the
current period cost of credit risk inherent in the Company's loan and lease
portfolio. Specifically, the provision for credit losses represents the amount
charged against current period earnings to achieve an allowance for credit
losses that in management's judgment is adequate to absorb losses inherent in
the Company's loan and lease portfolio. Accordingly, the provision for credit
losses will vary from period to period based on management's ongoing assessment
of the adequacy of the Allowance.
OTHER REAL ESTATE OWNED AND REPOSSESSED PERSONAL PROPERTY
Other real estate owned and repossessed personal property is primarily
comprised of properties acquired through foreclosure proceedings. When acquired,
these properties are valued at fair value, which establishes the new cost basis
of other real estate owned or repossessed personal property. 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 expense.
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 AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Core deposit and other identifiable intangible assets are amortized on the
straight-line method over the period of benefit, generally 10 years. It is the
Company's policy to review core deposit and other identifiable intangible assets
for impairment whenever events or changes in circumstances indicate that its
investment in the underlying assets or liabilities which gave rise to such core
deposit and other identifiable intangible assets may not be recoverable.
GOODWILL
Goodwill represents the cost of acquired companies in excess of the fair
value of net assets acquired. 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. 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.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125--An Amendment of
FASB Statement No. 125," on January 1, 1997. SFAS No. 125 applies a
control-oriented, financial components approach to financial-asset-transfer
transactions whereby the Company: (1) recognizes the financial and servicing
assets it controls and the liabilities it has incurred; (2) derecognizes
financial assets only when control has been surrendered; and (3) derecognizes
liabilities once they are extinguished. Under SFAS No. 125, control is
considered to have been surrendered only if: (i) the transferred assets have
been isolated from the transferor and its creditors, even in bankruptcy or other
receivership; (ii) the transferee has the unconditional right to pledge or
exchange the transferred assets, or is a qualifying special-purpose entity and
the holders of beneficial interests in that entity have the unconditional right
to pledge or exchange those interests; and (iii) the transferor does not
maintain effective control over the transferred assets through: (a) an agreement
that both entitles and obligates it to repurchase or redeem those assets prior
to maturity; or (b) an agreement which both entitles and obligates it to
repurchase or redeem those assets if they were not readily obtainable elsewhere.
If any of these conditions are not met, the Company accounts for the transfer as
a secured borrowing.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase generally qualify as financing transactions under SFAS
No. 125, and are carried at the amounts at which the securities subsequently
will be resold or reacquired as specified in the respective agreements; such
amounts include accrued interest. Reverse-repurchase and repurchase agreements
are presented in the accompanying Consolidated Balance Sheets where net
presentation is consistent with Financial Accounting Standards Board ("FASB")
Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and
Reverse Repurchase Agreements." It is the Company's policy to take possession of
securities purchased under agreements to resell. The Company monitors the fair
value of the underlying securities as compared with the related receivable,
including accrued interest, and, as necessary, requests additional collateral.
Where deemed appropriate, the Company's agreements with third parties
57
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
specify its rights to request additional collateral. All collateral is held by
the Company or a custodian.
SERVICING ASSETS
Servicing assets consist of originated mortgage servicing rights which are
capitalized and included in other assets in the Company's Consolidated Balance
Sheets. These rights are recorded based on the relative fair values of the
servicing right and underlying loan and are amortized over the period of the
related loan servicing income stream. Amortization of these rights is reflected
in the Company's Consolidated Statements of Income under the caption other
service charges and fees. The Company evaluates servicing assets for impairment
in accordance with the provision of SFAS No. 125. For the years presented,
servicing assets and the related amortization were not material.
TRUST PROPERTY
Trust property, other than cash deposits held by the Company in fiduciary
or agency capacities for its customers, is not included in the Company's
Consolidated Balance Sheets because such items are not assets of the Company.
INCOME TAXES
The Company recognizes 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 excise tax credits related to lease equipment, except
for 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 subsidiaries having taxable losses or
credits are reimbursed by other subsidiaries which would have incurred current
income tax liabilities.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for reporting comprehensive
income (defined to include net income, unrealized gains and losses on
available-for-sale investment securities, foreign currency adjustments, as well
as certain other items not included in the income statement). The Company's
Consolidated Statements of Changes in Stockholders' Equity have been
reformatted and restated for prior periods in accordance with SFAS No. 130.
Accumulated other comprehensive income consists of unrealized holding gains on
available-for-sale investment securities. The activity for the years presented
(gross unrealized holding gains/losses and realized gains/losses, net of tax
effects) was not significant.
DERIVATIVES
Periodically, the Company may utilize interest rate swaps, caps and floors
in managing its interest rate risk. Additionally, the Company may utilize
over-the-counter options on mortgage-backed securities and commitments to
purchase or sell foreign currencies to manage its residential mortgage loan
origination pipeline and foreign exchange activities, respectively. 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 or foreign
exchange risk; (2) the hedge acts to reduce the interest rate or foreign
exchange risk by moving closer to being insensitive to interest or foreign
exchange 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 above would be carried at market value. Any changes
in market value would be recognized in noninterest income. For the years
presented, all interest rate derivative products met the criteria for accrual
accounting treatment. All option and forward positions for the years presented
were marked to market and reflected in the Company's Consolidated Statements of
Income.
Gains or losses resulting from early termination of derivatives and the
designated hedge, are recorded to income or expense at the date of termination.
Gains or losses on the termination of anticipatory hedges would be amortized
over the remaining life of the designated hedged item.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is a party to various
financial instruments "designated" or "entered into" to meet the financing needs
of its customers and to reduce its own exposure to fluctuations in interest
rates and foreign exchange rates. These financial instruments include
commitments to extend credit, standby and commercial letters of credit, interest
rate swaps, caps and floors, options on mortgage-backed securities and
commitments to purchase or sell foreign currencies. These instruments involve,
to varying degrees, elements of credit,
58
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
interest rate and foreign exchange 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 counterparty to the financial instrument for commitments to extend credit
and standby and commercial letters of credit is represented by the contractual
notional amount of those instruments. Since these commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash flows. For interest rate swap transactions, the notional amounts do
not represent exposure to credit losses.
Options on mortgage-backed securities allow the Company to decide to make
or take delivery of certain mortgage-backed securities. The notional amount of
securities covered by the amount of the contracts does not represent exposure to
credit losses. Commitments to purchase or sell foreign currencies obligate the
Company to take or make delivery of a foreign currency. Risks in such
instruments arise from fluctuations in foreign exchange rates and the ability of
counterparties to fulfill the terms of the contracts.
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, including, in some cases, the
taking of collateral to secure the counterparty obligations.
The Company enters into interest rate swap agreements as an end-user only.
These instruments are used as hedges against various balance sheet accounts. The
net interest payable or receivable is accrued and recognized as an adjustment to
the interest income or interest expense of the hedged item.
The Company enters into commitments to purchase or sell foreign currencies
on behalf of its customers. These commitments are generally matched through
offsetting positions. Foreign exchange positions are valued monthly with the
resulting gain or loss recognized as incurred.
The Company utilizes short-term (60 days or less) options on
mortgage-backed securities as a means of hedging the market risk associated with
timing differences between the commitment of the interest rate, documentation
and subsequent sale of residential real estate loans. The option contracts are
valued monthly with the gain or loss being recognized in noninterest income, if
the options are exercised.
Interest rate and market risk are monitored and managed in conjunction with
the 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 usually done quarterly using net interest income simulations and
market value of equity analysis.
FAIR VALUES OF 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: Fair values of investment securities are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans and leases: Fair values were estimated for portfolios of
performing loans and leases with similar characteristics. 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
fixed-rate 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, leases 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.
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.
59
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
Long-term debt and capital securities: The fair values of the
Company's long-term debt (other than deposits) and capital securities are
estimated using discounted cash flow analyses based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
Off-balance sheet commitments and contingent liabilities: Fair values
of off-balance sheet commitments and contingent liabilities are based upon:
(1) quoted market prices of comparable instruments (options on
mortgage-backed securities and commitments to buy or sell foreign
currencies); (2) 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 (3) pricing models based upon brokers' quoted markets,
current levels of interest rates and specific cash flow schedules (interest
rate swaps).
NEW PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and other Post-retirement Benefits--An Amendment of SFAS Nos. 87,
88 and 106." SFAS No. 132 standardized the disclosure requirements for pensions
and other post-retirement plans, requires additional information on changes in
the benefit obligations and fair value of plan assets and eliminates certain
disclosures previously required under SFAS Nos. 87, 88 and 106. SFAS No. 132 is
effective for fiscal years beginning after December 31, 1997. The adoption of
SFAS No. 132 did not affect the Company's consolidated results of operations or
consolidated financial position as previously reported.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 requires recognition of all derivative instruments in the statement of
financial position as either assets or liabilities and the measurement of
derivative instruments at fair value. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The adoption of SFAS No. 133 is not expected to
have a material effect on the Company's consolidated financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of SFAS No. 65."
SFAS No. 134 requires mortgage banking enterprises to classify loans held for
sale that they have securitized, based on their intent to sell or hold those
investments. SFAS No. 134 is effective for the first fiscal quarter beginning
after December 15, 1998. The adoption of SFAS No. 134 is not expected to have a
material effect on the Company's consolidated financial statements.
2. MERGERS AND ACQUISITIONS
BANCWEST CORPORATION
On November 1, 1998, for a purchase price of $905.7 million, the merger of
BancWest Corporation ("BancWest"), parent company of Bank of the West, with and
into First Hawaiian, Inc. ("FHI") was consummated (the "Merger"). At that date,
Bank of the West, headquartered in San Francisco, was California's fifth largest
bank with approximately $6.1 billion in assets and 103 branches in 21 counties
in Northern and Central California.
Prior to the consummation of the Merger, BancWest was wholly-owned by
Banque Nationale de Paris ("BNP"), France's second largest banking group. In the
Merger, BNP received approximately 25.8 million shares of the Company's newly
authorized Class A Common Stock (representing approximately 45% of the
outstanding voting stock). The transaction was accounted for using the purchase
method of accounting and results of operations were included in the Consolidated
Statements of Income from the date of acquisition. The excess of cost over fair
value of net assets acquired amounted to approximately $599.0 million. FHI, the
surviving corporation of the Merger, changed its name to "BancWest Corporation"
on November 1, 1998.
The following unaudited pro forma financial information for the years ended
December 31, 1998 and 1997 assumes that the Merger occurred as of January 1,
1997, after giving effect to certain adjustments, including but not limited to
the amortization of intangible assets. The pro forma results have been prepared
for comparative purposes only and are not necessarily indicative of the results
of operations which may occur in the future or that would have occurred had the
Merger been consummated on the date indicated.
- -------------------------------------------------------------------
PRO FORMA FINANCIAL INFORMATION
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(in thousands, (Unaudited)
except per share data) 1998 1997
- -------------------------------------------------------------------
Interest income ................ $1,047,733 $998,005
Interest expense ............... 436,166 421,033
Noninterest income ............. 167,873 143,866
Noninterest expense ............ 520,034 480,017
Net income ..................... 118,119 119,843
===================================================================
Basic earnings per share ....... $ 2.07 $ 2.07
Diluted earnings per share ..... 2.07 2.06
===================================================================
The 1998 amounts include the impact of the restructuring, merger-related
and other nonrecurring costs totaling $25,527,000 as described in Note 3.
60
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
PACIFIC NORTHWEST
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 27 Oregon and Idaho branches were operated as Pacific One
Bank, a former wholly-owned subsidiary of the Company. The four branches
acquired in Washington state were originally operated as Pacific One Bank, FSB
as branches of Pioneer Federal Savings Bank ("Pioneer"), a former wholly-owned
subsidiary of the Company that was merged with and into First Hawaiian on April
17, 1997.
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. ANB 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, ANB acquired the four branches in Washington state from Pioneer and
changed its name to Pacific One Bank, National Association ("Pacific One,
N.A.").
On December 31, 1997, Pacific One, N.A. was merged with and into Pacific
One Bank. On November 1, 1998, Pacific One Bank was merged with and into Bank of
the West.
3. RESTRUCTURING, MERGER-RELATED AND OTHER NONRECURRING COSTS
The Company recorded restructuring, merger-related and other nonrecurring
costs totaling $25,527,000 in 1998. Restructuring and merger-related costs of
$20,043,000 included: (1) severance and termination payments to employees of
$2,211,000; (2) data processing contract termination penalties of $2,083,000;
(3) the write-off of capitalized software costs of $2,755,000; (4) write-downs
or losses associated with excess leased commercial property of $8,179,000; (5)
write-off of signage, forms, prepaid expenses and other miscellaneous assets
totaling $3,828,000; and (6) other integration costs of $987,000. The severance
and contract termination penalties will be paid in 1999. Other nonrecurring
costs included impairment charges of $5,484,000 related to intangible assets
associated with earlier acquisitions.
4. TRANSACTIONS WITH AFFILIATES
Bank of the West has participated and continues to participate in various
transactions with BNP and its affiliates. These transactions are subject to
review by the Federal Deposit Insurance Corporation (the "FDIC") and other
regulatory authorities and are required to be on terms at least as favorable to
Bank of the West as those prevailing at the time for similar non-affiliate
transactions. These transactions have included the sales and purchases of
assets, foreign exchange activities, financial guarantees, international
services, interest rate swaps and intercompany deposits and borrowings. Amounts
due to and from affiliates at December 31, 1998 were included in the Company's
Consolidated Balance Sheets as illustrated below:
- -------------------------------------------------------------
(in thousands)
- -------------------------------------------------------------
CASH AND DUE FROM BANKS ........................... $ 498
NONINTEREST-BEARING DEMAND DEPOSITS ............... 4,189
SHORT-TERM BORROWINGS ............................. 150,000
OTHER LIABILITIES ................................. 1,420
SUBORDINATED CAPITAL NOTES INCLUDED
IN LONG-TERM DEBT ............................... 53,837
OFF-BALANCE SHEET TRANSACTIONS:
STANDBY LETTERS OF CREDIT ISSUED ................ 9,542
=============================================================
The subordinated capital notes were sold directly to BNP, are subordinated
to the claims of depositors and creditors, and qualify for inclusion as a
component of risk-based capital under current FDIC guidelines for assessing
capital adequacy.
5. INVESTMENT SECURITIES
HELD-TO-MATURITY
Amortized cost and fair values of held-to-maturity investment securities at
December 31, 1998 were as follows:
- -----------------------------------------------------------------------
1998
- -----------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------
U.S. TREASURY
AND OTHER U.S.
GOVERNMENT
AGENCIES AND
CORPORATIONS .......... $ 80,174 $ 456 $ -- $ 80,630
OTHER ASSET-BACKED
SECURITIES ............ 111,130 387 141 111,376
COLLATERALIZED
MORTGAGE
OBLIGATIONS ........... 99,618 231 441 99,408
- -----------------------------------------------------------------------
TOTAL HELD-TO-
MATURITY
INVESTMENT
SECURITIES ............ $290,922 $1,074 $582 $291,414
=======================================================================
61
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of held-to-maturity investment
securities at December 31, 1998, by contractual maturity, were as follows:
- -------------------------------------------------------------
AMORTIZED FAIR
(in thousands) COST VALUE
- -------------------------------------------------------------
DUE WITHIN ONE YEAR ................... $ 80,174 $ 80,630
DUE AFTER ONE BUT WITHIN FIVE YEARS ... -- --
DUE AFTER FIVE BUT WITHIN TEN YEARS ... 14,765 14,788
DUE AFTER TEN YEARS ................... 195,983 195,996
- -------------------------------------------------------------
TOTAL HELD-TO-MATURITY
INVESTMENT SECURITIES ............... $290,922 $291,414
=============================================================
The Company held no held-to-maturity securities at December 31, 1997 and
1996.
AVAILABLE-FOR-SALE
Amortized cost and fair values of available-for-sale investment securities
at December 31, 1998, 1997 and 1996 were as follows:
- --------------------------------------------------------------------------------------------
1998
----------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------
U.S. TREASURY
AND OTHER U.S.
GOVERNMENT
AGENCIES AND
CORPORATIONS ........ $ 461,631 $ 2,000 $ 366 $ 463,265
MORTGAGE AND
ASSET-BACKED
SECURITIES:
GOVERNMENT .......... 502,983 6,983 735 509,231
OTHER ............... 198,198 1,222 362 199,058
COLLATERALIZED
MORTGAGE
OBLIGATIONS ......... 685 -- -- 685
STATES AND POLITICAL
SUBDIVISIONS ........ 16,351 324 42 16,633
OTHER ................. 157,251 871 -- 158,122
- --------------------------------------------------------------------------------------------
TOTAL AVAILABLE-FOR-
SALE INVESTMENT
SECURITIES .......... $1,337,099 $ 11,400 $ 1,505 $1,346,994
============================================================================================
1997
---------------------------------------------------------
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
U.S. Treasury
and other U.S.
Government
agencies and
corporations ......... $384,621 $ 470 $ 300 $384,791
Mortgage-backed
securities:
Government ........... 304,600 519 897 304,222
Collateralized
mortgage
obligations .......... 1,399 -- 2 1,397
States and political
subdivisions ......... 2,955 31 196 2,790
Other .................. 84,953 1 30 84,924
- ------------------------------------------------------------------------------------
Total available-for-
sale investment
securities ........... $778,528 $ 1,021 $ 1,425 $778,124
====================================================================================
1996
----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
U.S. Treasury
and other U.S.
Government
agencies and
corporations ......... $ 633,113 $ 1,387 $ 603 $ 633,897
Mortgage-backed
securities:
Government ........... 392,586 3,239 1,063 394,762
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
============================================================================================
The amortized cost and fair values of available-for-sale investment
securities at December 31, 1998, by contractual maturity, excluding securities
which have no stated maturity, were as follows:
- ------------------------------------------------------------------------
AMORTIZED FAIR
(in thousands) COST VALUE
- ------------------------------------------------------------------------
DUE WITHIN ONE YEAR .......................... $ 305,675 $ 306,422
DUE AFTER ONE BUT WITHIN FIVE YEARS .......... 231,500 233,150
DUE AFTER FIVE BUT WITHIN TEN YEARS .......... 7,060 7,145
DUE AFTER TEN YEARS .......................... 684,898 692,311
- ------------------------------------------------------------------------
TOTAL AVAILABLE-FOR-SALE
INVESTMENT SECURITIES ...................... $1,229,133 $1,239,028
========================================================================
The Company held no trading securities at December 31, 1998, 1997 and 1996.
Investment securities with an aggregate book value of $1,262,000,000 at
December 31, 1998 were pledged to secure public deposits, repurchase agreements
and Federal Home Loan Bank advances.
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
consolidated stockholders' equity at December 31, 1998.
Gross gains of $145,000, $1,088,000 and $131,000 and gross losses of
$21,000, $818,000 and $13,000 were realized on sales of investment securities
during 1998, 1997 and 1996, respectively.
At December 31, 1998, collateralized mortgage obligations were comprised of
floating and fixed-rate bonds with an estimated average life of 2.3 years.
62
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
6. LOANS AND LEASES
At December 31, 1998 and 1997, loans and leases were comprised of the
following:
1998 1997
---------------------------- ----------------------------
(in thousands) BOOK VALUE FAIR VALUE Book Value Fair Value
----------- ----------- ----------- -----------
Commercial,
financial and
agricultural ..... $ 2,089,351 $ 2,123,209 $ 1,582,698 $ 1,599,112
Real estate:
Commercial ....... 1,928,741 2,220,268 1,193,538 1,258,439
Construction ..... 359,220 362,084 166,482 168,154
Residential ...... 2,652,275 2,399,920 1,944,611 1,871,172
Consumer ........... 2,572,873 2,570,926 678,984 680,046
Lease financing .... 1,355,538 1,350,717 333,270 330,318
Foreign ............ 381,582 396,640 339,098 340,898
- ----------------------------------------------------------------------------------------
TOTAL LOANS
AND LEASES ....... $11,339,580 $11,423,764 $ 6,238,681 $ 6,248,139
========================================================================================
The loan and lease portfolio is principally located in the states of Hawaii
and California and, to a lesser extent, the states of Oregon, Washington and
Idaho. The risk inherent in the portfolio is dependent not only upon regional
and general economic stability of those states which affects property values,
but also the financial well being and creditworthiness of the borrowers.
At December 31, 1998 and 1997, loans and leases aggregating $89,649,000 and
$55,601,000, respectively, were on a nonaccrual status or restructured.
The Company's leasing activities consist primarily of leasing automobiles
and various types of commercial equipment and leveraged leases. Lessees are
responsible for all maintenance, taxes and insurance on the leased property. The
leases are reported net of unearned income of $371,665,000 and $146,067,000 at
December 31, 1998 and 1997, respectively. At December 31, 1998, minimum lease
receivables for the five succeeding years are $289,589,000 in 1999, $273,147,000
in 2000, $252,876,000 in 2001, $242,521,000 in 2002 and $192,633,000 in 2003.
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. These loans were made on terms
no less favorable to the Company than what could have been obtained from
unrelated third parties or, in the case of certain residential real estate
loans, on terms that are widely available to employees of the Company or its
subsidiaries who are not directors or executive officers. Changes in the loans
to such parties were as follows:
- --------------------------------------------------------------------------------
(in thousands) 1998
- --------------------------------------------------------------------------------
Balance at beginning of year ........................... $ 246,969
Executive officer and director
loans acquired ..................................... 7,986
New loans made ....................................... 30,504
Repayments ........................................... (48,622)
- --------------------------------------------------------------------------------
BALANCE AT END OF YEAR ................................. $ 236,837
================================================================================
At December 31, 1998 and 1997, loans to such parties by the Parent were
$5,776,000 and $9,811,000, respectively, and interest income related to these
loans was $576,000, $782,000 and $1,045,000 for 1998, 1997 and 1996,
respectively.
Real estate loans totaling $1,601,651,000 were pledged to collateralize the
Company's borrowing capacity at the Federal Home Loan Bank at December 31, 1998.
7. PROVISION AND ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows for the years
indicated:
- ---------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------
Balance at beginning of year ........... $ 82,596 $ 85,248 $ 78,733
Provision for credit losses .......... 28,555 17,211 23,627
Net charge-offs:
Loans and leases charged off ....... (29,084) (25,130) (27,341)
Recoveries on loans and leases
previously charged off ........... 6,531 5,267 3,123
- ---------------------------------------------------------------------------------------
Net charge-offs ................ (22,553) (19,863) (24,218)
- ---------------------------------------------------------------------------------------
Allowance of subsidiaries
purchased .......................... 60,987 -- 7,106
- ---------------------------------------------------------------------------------------
BALANCE AT END OF YEAR ................. $ 149,585 $ 82,596 $ 85,248
=======================================================================================
The following table presents information related to impaired loans as of
and for the years ended December 31, 1998, 1997 and 1996:
- --------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Impaired loans ....................... $100,704 $ 74,751 $128,446
Impaired loans with related
allowance for credit losses
calculated under SFAS
No. 114 ............................ 67,849 38,278 41,778
Total allowance for credit losses
on impaired loans .................. 18,610 9,257 9,690
Average impaired loans ............... 81,436 90,901 87,289
Interest income recognized on
impaired loans ..................... 2,876 835 980
================================================================================
Impaired loans without a related allowance for credit 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.
8. PREMISES AND EQUIPMENT
At December 31, 1998 and 1997, premises and equipment were comprised of the
following:
- --------------------------------------------------------------------------------
(in thousands) ............................. 1998 1997
- --------------------------------------------------------------------------------
Premises ................................... $249,352 $244,221
Equipment .................................. 166,770 154,497
- --------------------------------------------------------------------------------
416,122 398,718
Less accumulated depreciation
and amortization ......................... 149,138 152,719
- --------------------------------------------------------------------------------
NET BOOK VALUE ............................. $266,984 $245,999
================================================================================
Occupancy and equipment expense include depreciation and amortization
expense of $20,634,000, $18,057,000 and $17,541,000 for 1998, 1997 and 1996,
respectively.
63
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
9. DEPOSITS
Interest expense related to deposits for the years indicated was as
follows:
- --------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Domestic:
Interest-bearing demand ...... $ 4,358 $ 4,814 $ 9,258
Savings ...................... 65,162 56,528 47,525
Time--Under $100 ............. 85,762 76,002 67,714
Time--$100 and over .......... 64,046 50,926 48,993
Foreign ........................ 9,592 9,349 8,912
- --------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE
ON DEPOSITS .................. $228,920 $197,619 $182,402
================================================================================
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) 1998 1997
- --------------------------------------------------------------------------------
3 months or less ............................. $1,375 $ 567
Over 3 months through 6 months ............... 438 213
Over 6 months through 12 months .............. 317 163
Over 1 year to 2 years ....................... 67 75
Over 2 years to 3 years ...................... 34 12
Over 3 years to 4 years ...................... 6 19
Over 4 years to 5 years ...................... 2 3
Over 5 years ................................. -- --
- --------------------------------------------------------------------------------
TOTAL .................................... $2,239 $1,052
================================================================================
Time certificates of deposits in denominations of $100,000 or more at
December 31, 1998 and 1997 were as follows:
- --------------------------------------------------------------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Domestic ......................... $2,239,464 $1,052,491
Foreign .......................... 89,971 87,402
================================================================================
10. SHORT-TERM BORROWINGS
At December 31, 1998, 1997 and 1996, short-term borrowings were comprised
of the following:
- --------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
BancWest Corporation (Parent):
Commercial paper ................ $ 13,903 $ 1,800 $ 4,409
Notes payable ................... -- -- 50,000
First Hawaiian:
Federal funds purchased ......... 164,462 126,011 76,350
Securities sold under
agreements to repurchase ...... 447,667 495,054 685,064
Advances from Federal Home
Loan Bank of Seattle .......... 14,000 99,000 113,737
Bank of the West:
Federal funds purchased ......... 209,070 -- --
Securities sold under
agreements to repurchase ...... 68,696 -- --
Advances from Federal Home
Loan Bank of San Francisco .... 1,000 -- --
Other short-term borrowings ..... 4,069 -- --
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM BORROWINGS ....... $922,867 $721,865 $929,560
================================================================================
Average rates and average and maximum balances for these short-term
borrowings were as follows for the years indicated:
- ---------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------
Commercial paper:
Average interest rate at
December 31 ..................... 4.9% 5.2% 5.1%
Highest month-end balance ......... $ 13,903 $ 6,226 $ 13,509
Average daily outstanding balance . $ 4,265 $ 5,017 $ 9,854
Average daily interest rate paid .. 5.0% 5.3% 5.2%
Notes payable:
Average interest rate at
December 31 ..................... --% --% 5.8%
Highest month-end balance ......... $ -- $ 50,000 $ 50,000
Average daily outstanding balance . $ -- $ 31,742 $ 12,568
Average daily interest rate paid .. --% 6.0% 5.9%
Federal funds purchased:
Average interest rate at
December 31 ..................... 4.6% 5.7% 5.8%
Highest month-end balance ......... $ 373,532 $ 116,450 $ 123,608
Average daily outstanding balance . $ 85,405 $ 76,164 $ 49,210
Average daily interest rate paid .. 5.2% 6.2% 5.6%
Securities sold under
agreements to repurchase:
Average interest rate at
December 31 ..................... 4.5% 5.3% 5.0%
Highest month-end balance ......... $ 552,921 $ 715,554 $ 818,527
Average daily outstanding balance . $ 505,529 $ 593,061 $ 785,144
Average daily interest rate paid .. 5.1% 5.0% 5.2%
Advances from Federal Home Loan
Banks of Seattle and San Francisco:
Average interest rate at
December 31 ..................... 5.4% 5.7% 5.7%
Highest month-end balance ......... $ 441,089 $ 100,500 $ 212,016
Average daily outstanding balance . $ 130,804 $ 87,658 $ 155,182
Average daily interest rate paid .. 4.8% 5.5% 5.7%
Other short-term borrowings:
Average interest rate at
December 31 ..................... 4.1% --% --%
Highest month-end balance ......... $ 4,069 $ -- $ --
Average daily outstanding balance . $ 116 $ -- $ --
Average daily interest rate paid .. 4.7% --% --%
=======================================================================================
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, 1998, the weighted average
maturity of these agreements was 49 days and primarily represents investments by
public (governmental) entities. A schedule of maturities of these agreements was
as follows:
- --------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------
OVERNIGHT ............................................ $ 65,392
LESS THAN 30 DAYS .................................... 153,428
30 TO 90 DAYS ........................................ 258,714
OVER 90 DAYS ......................................... 38,829
- --------------------------------------------------------------------------------
TOTAL ................................................ $516,363
================================================================================
The Parent had $40,000,000 in unused lines of credit with unaffiliated
banks to support its commercial paper borrowings as of December 31, 1998.
64
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
11. LONG-TERM DEBT AND CAPITAL SECURITIES
At December 31, 1998 and 1997, long-term debt and Capital Securities were
comprised of the following:
- --------------------------------------------------------------------------------------
1998 1997
---------------------- ----------------------
BOOK FAIR Book Fair
(dollars in thousands) VALUE VALUE Value Value
- --------------------------------------------------------------------------------------
BancWest Corporation
(Parent):
5.625% note due 2004 ....... $ 50,000 $ 50,031 $ 50,000 $ 50,018
6.25% subordinated
notes due 2000 ........... 100,000 100,900 100,000 100,090
7.375% subordinated
notes due 2006 ........... 50,000 53,930 50,000 52,575
First Hawaiian:
5.39%-5.84% notes
due through 2002 ......... 29,481 28,850 18,736 18,801
Bank of the West:
4.60%-9.23% notes
due through 2014 ........ 400,478 403,167 -- --
- --------------------------------------------------------------------------------------
Total long-term debt ......... 629,959 636,878 218,736 221,484
Capital Securities ........... 100,000 115,206 100,000 104,370
- --------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT AND
CAPITAL SECURITIES ......... $729,959 $752,084 $318,736 $325,854
======================================================================================
BANCWEST CORPORATION (PARENT)
The 5.625% note due in 2004 is unsecured and accrues interest at London
Interbank Offered Rates ("LIBOR") plus 0.25% per annum (5.625% per annum at
December 31, 1998). Interest is paid on a quarterly basis.
The 6.25% subordinated notes due in 2000 and the 7.375% subordinated notes
due in 2006 are unsecured obligations with interest payable semiannually.
FIRST HAWAIIAN
The 5.39%-5.84% notes due through 2002 primarily represent advances from
the Federal Home Loan Bank of Seattle with interest payable monthly.
BANK OF THE WEST
The 4.60%-9.23% notes due through 2014 primarily represent advances from
the Federal Home Loan Bank of San Francisco and $53,837,000 in subordinated
capital notes sold to BNP. Interest on the Federal Home Loan Bank of San
Francisco advances is payable monthly. Interest on the subordinated capital
notes sold to BNP is payable semi-annually.
FIRST HAWAIIAN CAPITAL I
In 1997, First Hawaiian Capital I, a Delaware business trust (the "Trust"),
issued Capital Securities (the "Capital Securities") with an aggregate
liquidation amount of $100,000,000, and used the proceeds therefrom to purchase
junior subordinated deferrable interest debentures (the "Debentures") of the
Company. Such 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 Company
owns all the common securities issued by the Trust.
The Capital Securities accrue and pay interest semi-annually at an annual
interest rate of 8.343%. The Capital Securities are mandatorily redeemable upon
maturity of the Debentures on July 1, 2027, or upon earlier redemption in whole
or in part (subject to a prepayment penalty) as provided for in the governing
indenture.
As of December 31, 1998, the principal payments due on long-term debt and
Capital Securities were as follows:
- -----------------------------------------------------------------------------------------
BANCWEST BANK FIRST
CORPORATION FIRST OF THE HAWAIIAN
(in thousands) (PARENT) HAWAIIAN WEST CAPITAL I TOTAL
- -----------------------------------------------------------------------------------------
1999 ............... $ -- $ -- $ -- $ -- $ --
2000 ............... 100,000 4,011 243,650 -- 347,661
2001 ............... -- 12 670 -- 682
2002 ............... -- 25,013 153,930 -- 178,943
2003 ............... -- 15 88 -- 103
2004 AND
THEREAFTER ....... 100,000 430 2,140 100,000 202,570
- -----------------------------------------------------------------------------------------
TOTAL .............. $200,000 $ 29,481 $400,478 $100,000 $729,959
=========================================================================================
12. COMMON STOCK AND EARNINGS PER SHARE
The Company issued approximately 25.8 million shares of newly authorized
Class A Common Stock to BNP and 411,049 shares of treasury stock to satisfy
stock appreciation rights of certain Bank of the West employees on November 1,
1998, in connection with the Merger.
A share of Class A Common Stock is generally the same in all respects as a
share of common stock except that holders of the Class A Common Stock will have
the right to elect a separate class of directors (the "Class A Directors"). The
number of Class A Directors will generally be comparable to the percentage of
Class A Common Stock shares in relation to total common stock and Class A Common
Stock outstanding. At the date of the Merger, Class A Common Stock represented
approximately 45% of the outstanding voting stock. Accordingly, 9 of the
Company's 20 directors were considered Class A Directors. These directors have
the same powers and duties as the Company's other directors, except for certain
matters in which a vote of the Class A Directors as a separate class is
required, such as certain major corporate transactions which have not been
approved by two-thirds of the Company's directors.
Shares of Class A Common Stock automatically convert to common stock under
certain circumstances, principally through the transfer of Class A Common Stock
by BNP to a third party. Additionally, BNP is bound by a standstill and
governance agreement that governs most aspects of the relationship between BNP
and the Company. The standstill and governance agreement extends for a four-year
period, with certain provisions continuing beyond the initial four-year period.
Among the key provisions of this agreement are provisions that: (1) limit BNP's
ability to acquire, directly or indirectly, additional common stock that would
result in its
65
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
ownership of more than 45% of the outstanding voting stock of the Company; (2)
restrict BNP's ability to transfer or register its shares; (3) restrict BNP's
ability to exercise control over the Company or the Company's board (other than
through its representation on the Board); and (4) certain other restrictions as
outlined in the agreement.
Additionally, concurrent with the Merger, the Company increased the number
of authorized shares of common stock from 100,000,000 shares to 200,000,000
shares, while reducing the par value of the common stock from $5.00 per share to
$1.00 per share.
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.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share:
- --------------------------------------------------------------------------------
(in thousands, except 1998
------------------------------------------
number of shares and INCOME SHARES PER SHARE
per share data) (NUMERATOR) (DENOMINATOR) AMOUNT
- --------------------------------------------------------------------------------
BASIC:
NET INCOME ................... $ 76,606 35,534,178 $ 2.16
EFFECT OF DILUTIVE
SECURITIES--
STOCK INCENTIVE
PLAN OPTIONS ................ -- 162,085 --
- --------------------------------------------------------------------------------
DILUTED:
NET INCOME
AND ASSUMED
CONVERSIONS ................. $ 76,606 35,696,263 $ 2.15
================================================================================
(in thousands, except 1997
----------------------------------------------
number of shares and Income Shares Per Share
per share data) (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------
Basic:
Net income ............... $ 84,261 31,725,534 $ 2.66
Effect of dilutive
securities--
Stock incentive
plan options ............ -- 149,770 --
- -----------------------------------------------------------------------------------
Diluted:
Net income
and assumed
conversions ............. $ 84,261 31,875,304 $ 2.64
===================================================================================
(in thousands, except 1996
------------------------------------------
number of shares and Income Shares Per Share
per share data) (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Basic:
Net income ................... $ 80,296 31,398,978 $ 2.56
Effect of dilutive
securities--
Stock incentive
plan options ................ -- 43,950 --
- --------------------------------------------------------------------------------
Diluted:
Net income and
assumed conversions ......... $ 80,296 31,442,928 $ 2.55
================================================================================
13. 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 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, at December 31, 1998 and 1997) of Tier 1 and Total capital to
risk-weighted assets, and of Tier 1 capital to average assets.
- -----------------------------------------------------------------------------------------------------------------
TO BE WELL-
CAPITALIZED
UNDER PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
--------------------------------------------------------------------------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998
TIER 1 CAPITAL TO
RISK-WEIGHTED
ASSETS:
BANCWEST
CORPORATION .......... $1,080,353 8.17% $ 528,737 4.00%
FIRST HAWAIIAN ........ 645,842 9.16 281,876 4.00 $ 422,814 6.00%
BANK OF THE
WEST ................. 420,100 6.93 242,554 4.00 363,831 6.00
TOTAL CAPITAL TO
RISK-WEIGHTED
ASSETS:
BANCWEST
CORPORATION $1,329,938 10.06% $1,057,473 8.00%
FIRST HAWAIIAN ........ 796,541 11.30 563,752 8.00 $ 704,689 10.00%
BANK OF THE
WEST ................. 620,580 10.23 485,108 8.00 606,386 10.00
TIER 1 CAPITAL TO
AVERAGE ASSETS:
BANCWEST
CORPORATION .......... $1,080,353 9.16% $ 354,011 3.00%
FIRST HAWAIIAN ........ 645,842 9.08 213,304 3.00 $ 355,507 5.00%
BANK OF THE
WEST ................. 420,100 8.80 143,135 3.00 238,558 5.00
=================================================================================================================
66
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
To Be Well-
Capitalized
Under Prompt
Corrective
For Capital Action
Actual Adequacy Purposes Provisions
--------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
As of December 31, 1997
Tier 1 Capital to
Risk-Weighted
Assets:
BancWest
Corporation ....... $714,891 9.51% $300,533 4.00%
First Hawaiian ...... 653,849 10.16 257,430 4.00 $386,146 6.00%
Total Capital to
Risk-Weighted
Assets:
BancWest
Corporation ....... $887,487 11.81% $601,065 8.00%
First Hawaiian ...... 719,033 11.17 514,861 8.00 $643,576 10.00%
Tier 1 Capital to
Average Assets:
BancWest
Corporation ....... $714,891 9.14% $234,760 3.00%
First Hawaiian ...... 653,849 10.19 192,499 3.00 $320,831 5.00%
==============================================================================================================
As of December 31, 1998 and 1997, 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 and Total risk-based capital ratios of
6% and 10%, respectively (as set forth in the table above). Management is not
aware of any conditions or events subsequent to December 31, 1998, that would
cause a change in the Company's category. As of December 31, 1998, the BancWest
Corporation and Bank of the West Tier 1 capital to average assets ratios reflect
the impact of the Merger from November 1, 1998.
14. 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. First Hawaiian and
Bank of the West are subject to regulatory limitations on the amount of
dividends they may declare or pay. At December 31, 1998, the aggregate amount
available for payment of dividends by such subsidiaries without prior regulatory
approval was $368,261,000.
15. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes
disclosure requirements for pensions and other postretirement benefits and
supersedes the disclosure requirements in SFAS No. 87, "Employers' Accounting
for Pensions, SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132 does not change existing measurement or recognition
standards. The adoption of SFAS No. 132 did not affect the Company's
consolidated results of operations or consolidated financial position as
previously reported.
The Company has a noncontributory defined benefit pension plan that was
frozen as of December 31, 1995. As a result of the freeze, there will be no
further benefit accruals and no additional participants in the plan. Employees
are also covered under unfunded postretirement medical and life insurance plans.
In addition, a select group of key executives participates in an unfunded
supplemental executive retirement plan.
In connection with the Merger, the Company assumed the pension and
postretirement benefit obligations of Bank of the West. Bank of the West
employees participate in a noncontributory cash balance defined benefit pension
plan, an unfunded excess benefit pension plan covering employees whose pay or
benefits exceed certain regulatory limits, unfunded postretirement medical and
life insurance plans, and a 401(k) savings plan. In addition, certain key
executives are eligible for a supplemental pension benefit in the excess benefit
pension plan if they meet certain age and service conditions. The Company is in
the process of integrating Bank of the West employees into the Company's
existing benefit plan structure. The benefit obligations assumed by the Company
in connection with the Merger have been reflected in the following table.
The following tables summarize changes to the benefit obligation and fair
value of plan assets for the years indicated:
- ------------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------------- -------------------------
(in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------
Benefit obligation
at beginning
of year ........... $ 98,684 $ 95,460 $ 8,056 $ 7,382
Service cost ........ 1,461 1,141 369 305
Interest cost ....... 7,296 6,596 623 519
Amendments .......... 1,981 -- -- 341
Actuarial (gain) loss 3,986 2,059 (13) (146)
Acquisitions ........ 41,866 -- 7,637 --
Benefit payments .... (7,856) (6,572) (498) (345)
- ------------------------------------------------------------------------------------
BENEFIT OBLIGATION
AT END OF YEAR .... $ 147,418 $ 98,684 $ 16,174 $ 8,056
====================================================================================
- ------------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------- --------------------
(in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------
Fair value of plan
assets at beginning
of year ........... $ 125,293 $ 110,309 $ -- $ --
Actual return on
plan assets ....... 31,180 20,984 -- --
Acquisitions ........ 35,261 -- -- --
Employer
contributions ..... 629 572 498 345
Benefit payments .... (7,856) (6,572) (498) (345)
- ------------------------------------------------------------------------------------
FAIR VALUE OF PLAN
ASSETS AT END
OF YEAR ........... $ 184,507 $ 125,293 $ -- $ --
====================================================================================
67
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
The following table summarizes the funded status of the plans and amounts
recognized/unrecognized in the Consolidated Balance Sheets:
- -------------------------------------------------------------------------------
Pension Benefits Other Benefits
----------------------- -----------------------
(in thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Funded status ...... $ 37,089 $ 26,609 $(16,174) $ (8,056)
Unrecognized net
(gain) loss ...... (28,933) (15,182) 362 394
Unrecognized prior
service cost ..... 7,505 6,321 353 379
Unrecognized
transition (asset)
obligation ....... (3,600) (4,800) 2,000 2,143
- -------------------------------------------------------------------------------
PREPAID (ACCRUED)
BENEFIT COST ..... $ 12,061 $ 12,948 $(13,459) $ (5,140)
===============================================================================
Pension plan assets include 587,856 shares of common stock of the Company
with a fair value of $28,217,000 and $23,367,000 at December 31, 1998 and 1997,
respectively.
For the retirement plans, the projected benefit obligation, accumulated
benefit obligation and fair value of plan assets for the retirement plan with
plan assets in excess of accumulated benefit obligations were $76,345,000,
$76,345,000 and $147,888,000, respectively, as of December 31, 1998 and
$75,308,000, $75,308,000 and $125,293,000, respectively, as of December 31,
1997. The prepaid benefit cost for the overfunded plan was $35,159,000 and
$26,190,000 at December 31, 1998 and 1997, respectively. The remaining plans had
an accrued benefit liability.
The weighted average discount rate was 6.75% and 7% as of December 31, 1998
and 1997, respectively. Interim rates were used as of November 1, 1998 for the
Bank of the West plans. The expected return on plan assets was 8.5% for the
frozen noncontributory defined benefit pension plan and 9.5% for the
noncontributory cash balance defined benefit pension plan; the rate of increase
in future compensation used in determining the projected benefit obligation was
7% for the unfunded supplemental executive retirement plan and 4% for the
noncontributory cash balance defined benefit pension and unfunded excess benefit
plans.
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998. The rate was assumed
to decrease gradually to 4% after 8 years and remain level at 4% thereafter.
The following table sets forth the components of net periodic benefit cost
(credit) for 1998, 1997 and 1996:
- -----------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------------------- --------------------------------
(in thousands) 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------
Service cost ....... $ 1,461 $ 1,141 $ 1,236 $ 369 $ 305 $ 239
Interest cost ...... 7,296 6,596 6,321 623 519 475
Expected return
on plan assets ... (11,004) (9,120) (8,197) -- -- --
Amortization of
transition (asset)
obligation ....... (1,200) (1,200) (1,200) 143 143 143
Amortization of
prior service cost 797 652 652 26 26 6
Recognized
net actuarial
(gain) loss ...... (2,440) (266) 143 -- -- --
- -----------------------------------------------------------------------------------------------
NET PERIODIC
BENEFIT
(CREDIT) COST .... $ (5,090) $ (2,197) $ (1,045) $ 1,161 $ 993 $ 863
===============================================================================================
Assumed health care cost trend rates have an impact on the amounts reported
for the health care plans. A one-percentage point change in the assumed health
care cost trend rates would have the following pre-tax effect:
- ------------------------------------------------------------------------------------
1-PERCENTAGE- 1-PERCENTAGE-
(in thousands) POINT INCREASE POINT DECREASE
- ------------------------------------------------------------------------------------
Effect on total of service and
interest cost components ............ $ 9 $ (7)
Effect on postretirement
benefit obligation .................. 395 (350)
====================================================================================
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 noncontributory defined benefit 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 a select
group of key executives who are eligible for the Company's unfunded supplemental
executive retirement plan.
For 1998, 1997 and 1996, the money purchase plan contribution was
$5,185,000, $5,351,000 and $5,126,000, respectively, and the employer matching
contribution to the 401(k) plan was $2,090,000, $2,154,000 and $2,270,000,
respectively.
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
68
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
provides that 50% of the Company's contribution be paid directly to eligible
members as a year-end cash bonus and the other 50%, less forfeitures, be paid
into the profit sharing trust fund. The profit sharing contribution and cash
bonus (reflected in salaries and wages) for 1998, 1997 and 1996 totaled
$4,287,000, $5,537,000 and $6,579,000, respectively. Contributions to the profit
sharing and cash bonus plans have been terminated for periods commencing after
December 31, 1998.
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 of common stock 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 PLANS
The Company has two Stock Incentive Plans, one effective in 1991 (the "1991
SIP") and one effective in 1998 (the "1998 SIP" and, together with the 1991 SIP,
the "SIP"). The SIP authorized the granting of up to 3,000,000 shares of common
stock to selected key employees. The purpose of the SIP is to promote the
success and enhance the value of the Company by providing additional incentives
for outstanding performance to selected key employees in a way that links their
interests with those of stockholders. 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 that are not less than the fair market value of the common stock on the
date of grant. Options vest at a rate of 25% per year after the date of grant.
Stock options have exercise periods that do not exceed 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. 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. In 1998, concurrent with the
Merger, substantially all options outstanding became immediately vested and
exercisable.
The following table summarizes activity under the SIP for 1998, 1997 and
1996 and the status at December 31, 1998:
- -----------------------------------------------------------------------------------------
Options
------------------------------------------------------------
Outstanding Exercisable
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- -----------------------------------------------------------------------------------------
Balance at
December 31, 1995 481,156 $ 26.88 155,522 $ 27.37
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 (1,749) 26.43
- ------------------------------------ ----------
Balance at
December 31, 1996 615,933 27.20 278,744 27.17
Options granted ... 307,310 33.25 -- --
Became exercisable -- -- 133,630 27.45
Exercised ......... (71,328) 26.98 (71,328) 26.98
Forfeitures ....... (4,564) 32.20 -- --
- ------------------------------------ ----------
Balance at
December 31, 1997 847,351 29.39 341,046 27.32
OPTIONS GRANTED ... 393,146 39.32 -- --
BECAME EXERCISABLE -- -- 767,215 33.57
EXERCISED ......... (13,113) 27.78 (13,113) 27.78
FORFEITURES ....... (7,145) 31.76 (7,145) 31.76
- ------------------------------------ ----------
BALANCE AT
DECEMBER 31, 1998 1,220,239 $ 32.59 1,088,003 $ 31.69
=========================================================================================
At December 31, 1998, 1,690,978 stock options (net of exercised options of
88,783) were available for future grants under the SIP.
The following table summarizes SIP options outstanding and exercisable as
of December 31, 1998:
- ---------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -----------------------------
WEIGHTED
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED
RANGE OF OF AVERAGE REMAINING OF AVERAGE
EXERCISE SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
- ---------------------------------------------------------------------------------------------------------
$25-$30 ........ 528,483 $ 27.23 5.3 YEARS 528,483 $ 27.23
$31-$35 ........ 301,540 33.25 8.0 300,540 33.25
$36-$40 ........ 390,216 39.34 9.0 258,980 39.00
- --------------------------- -------
BALANCE AT
DECEMBER
31, 1998 ...... 1,220,239 $ 32.59 7.2 YEARS 1,088,003 $ 31.69
=========================================================================================================
The Company applies Accounting Principles Board ("APB") Opinion No. 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
69
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
value of the common stock on the date of grant. Had compensation cost for the
SIP been determined in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and basic earnings per share would have
been reduced to the pro forma amounts indicated below:
- --------------------------------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported ..................... $ 76,606 $ 84,261 $ 80,296
Pro forma ....................... 74,002 83,426 79,812
Basic earnings per share:
As reported ..................... $ 2.16 $ 2.66 $ 2.56
Pro forma ....................... 2.08 2.63 2.54
================================================================================
Under SFAS No. 123, the fair value of each 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 1998, 1997 and 1996,
respectively:
- ---------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------
Expected dividend yield ........ 3.20% 3.69% 3.80%
Expected common stock volatility 19.84% 18.07% 22.69%
Risk-free interest rate ........ 5.35% 6.49% 5.65%
Expected life of the options ... 6 YEARS 6 years 6 years
=======================================================================================
The weighted-average grant-date fair value of options granted in 1998, 1997
and 1996 were $8.02, $6.67 and $5.93, respectively.
LONG-TERM INCENTIVE PLAN
The Company has a Long-Term Incentive Plan (the "LTIP") designed to reward
selected key executives for the Company's and individuals' performances measured
over three-year performance cycles; that is, 1994-1996, 1995-1997, 1996-1998 and
so on. The threshold Company performance levels specified in the LTIP were not
achieved for the 1994-1996 and 1995-1997 performance cycles. The Merger
constituted a "Change in Control" within the definition of the LTIP (an "LTIP
Change in Control"). Upon the occurrence of an LTIP Change in Control, the LTIP
provides that the maximum target value attainable by participants will be deemed
to have been fully earned for the entire performance period as of the effective
date of the Change in Control, regardless of the Company's actual financial
performance. Based on actual performance to November 1, 1998, it did not appear
that any payments would be made for either of the three-year performance periods
that began in 1996 and 1997. Implementation of the LTIP Change in Control
provisions, on the other hand, would have resulted in payments under the LTIP
for the three-year performance periods that began on January 1, 1996, 1997 and
1998 even though the Company was the surviving corporation in the Merger. The
Company also recognized that because of the Merger, the performance goals that
were established for the LTIP would no longer be appropriate. As a result, the
Company amended the LTIP to: (1) specify that the Merger would not be considered
an LTIP Change in Control for purposes of the LTIP; and (2) pay the maximum
target value attainable for one year of the three-year performance period that
began on January 1, 1998. A payment of $1,047,000, equal to one-third of the
maximum target value attainable for the three-year 1998-2000 performance cycle,
was made to all participants in the LTIP (based upon 1998 compensation levels)
in January 1999.
16. OTHER NONINTEREST EXPENSE
For the years ended December 31, 1998, 1997 and 1996, other noninterest
expense included the following:
- --------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Outside services ............... $ 12,908 $ 7,110 $ 5,426
Stationery and supplies ........ 12,289 12,216 11,193
Advertising and promotion ...... 10,812 11,174 10,991
Goodwill and core deposit
intangible ................... 13,537 8,404 7,473
Other .......................... 60,206 42,015 45,815
- --------------------------------------------------------------------------------
TOTAL OTHER NONINTEREST
EXPENSE ...................... $109,752 $ 80,919 $ 80,898
================================================================================
17. INCOME TAXES
For the years ended December 31, 1998, 1997 and 1996, the provision for
income taxes was comprised of the following:
- --------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal ............................ $ 2,362 $ 7,894 $20,147
States and other ................... 2,923 2,962 4,572
- --------------------------------------------------------------------------------
Total current .................... 5,285 10,856 24,719
- --------------------------------------------------------------------------------
Deferred:
Federal ............................ 35,709 27,060 10,114
States and other ................... 13,856 1,387 705
- --------------------------------------------------------------------------------
Total deferred ................... 49,565 28,447 10,819
- --------------------------------------------------------------------------------
TOTAL PROVISION FOR INCOME TAXES ..... $54,850 $39,303 $35,538
================================================================================
The provision for income taxes has been reduced by general business tax
credits of $5,436,000, $4,360,000 and $4,188,000 in 1998, 1997 and 1996,
respectively. The Company also has alternative minimum tax credit, general
business tax credit and foreign tax credit carryforwards totaling $2,468,000,
$2,940,000 and $2,550,000, respectively, at December 31, 1998, which may be used
to offset future Federal income tax. The general business tax credit and foreign
tax credit carryforwards will expire at various dates through 2018. There is no
expiration date on the alternative minimum tax credit carryforwards. Management
expects to generate sufficient regular tax liability and foreign source income
to utilize all tax credit carryforwards.
70
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
The components of net deferred income tax liabilities at December 31, 1998
and 1997 were as follows:
- -------------------------------------------------------------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
ASSETS
Federal and State income
tax credit carryovers ..................... $ 7,957 $ 4,013
Employee benefit deductions ................. 11,439 1,977
Provision for credit losses ................. 57,132 20,649
Net deferred loan fees ...................... -- 2,861
State franchise taxes ....................... 1,451 5,990
- -------------------------------------------------------------------------------
Total deferred income tax assets .......... 77,979 35,490
- -------------------------------------------------------------------------------
LIABILITIES
Lease expenses .............................. 363,461 173,709
Depreciation expense ........................ 1,219 4,331
Intangible assets-net premiums .............. 14,370 1,433
Marketable securities-available-for-sale .... 4,148 (160)
Net deferred loan costs ..................... 7,647 --
Other ....................................... 12,385 8,448
- -------------------------------------------------------------------------------
Total deferred income tax liabilities ..... 403,230 187,761
- -------------------------------------------------------------------------------
NET DEFERRED INCOME TAX LIABILITIES ........... $ 325,251 $ 152,271
===============================================================================
Net deferred income tax liabilities are included in other liabilities in
the Consolidated Balance Sheets.
The following analysis reconciles the Federal statutory income tax rate to
the effective income tax rate for the years indicated:
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
Federal statutory income tax rate . 35.0% 35.0% 35.0%
Municipal and other tax-
exempt income ................... (.1) (.3) (1.2)
State income and franchise
taxes, net of Federal tax benefit 5.0 3.1 3.0
Goodwill amortization ............. 1.8 1.0 1.0
General business tax credits ...... (2.3) (3.5) (6.0)
Other ............................. 2.3 (3.5) (1.1)
- ------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATE ......... 41.7% 31.8% 30.7%
==============================================================================
The increase in the 1998 effective tax rate as compared to 1997 and 1996
was primarily due to the effects of the Merger which resulted in: (1) the
recognition of increased goodwill amortization, for which the Company receives
no tax benefit; and (2) increased state income taxes, as a result of a higher
apportionment of California versus Hawaii income. Additionally, the recognition
in 1997 and 1996 of previously unrecognized tax credits resulted in lower
effective tax rates for those years.
18. OPERATING SEGMENTS
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not affect consolidated results of operations or consolidated
financial position as previously reported.
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disaggregates its
business by subsidiary on a geographic basis. As of December 31, 1998, the
Company has two reportable operating segments: First Hawaiian and Bank of the
West. The First Hawaiian segment operates primarily in the State of Hawaii. The
Bank of the West segment operates primarily on the mainland United States. The
Bank of the West segment includes the operations acquired by the Company in the
Pacific Northwest in 1996, which were merged with the operations of Bank of the
West on November 1, 1998.
The financial results of the Company's operating segments are presented on
an accrual basis. There are no significant differences among the accounting
policies of the segments as compared to the Company's consolidated financial
statements. The Company evaluates the performance of its segments and allocates
resources to them based on net interest income and net income. There are no
material intersegment revenues.
The tables below present information about the Company's operating segments
as of or for the years ended December 31, 1998, 1997 and 1996, respectively.
- -----------------------------------------------------------------------------------------------
Bank Consoli-
First of the Reconciling dated
(in millions) Hawaiian West Other Items Totals
- -----------------------------------------------------------------------------------------------
1998
NET INTEREST INCOME .. $ 323 $ 86 $ (15) $ -- $ 394
PROVISION FOR CREDIT
LOSSES ............. 23 6 -- -- 29
DEPRECIATION AND
AMORTIZATION ....... 23 10 -- -- 33
RESTRUCTURING, MERGER-
RELATED AND OTHER
NONRECURRING
COSTS .............. 16 10 -- -- 26
PROVISION FOR
INCOME TAXES ....... 52 9 (6) -- 55
NET INCOME ........... 76 10 (9) -- 77
SEGMENT ASSETS ....... 7,341 7,724 2,365 (2,380) 15,050
CAPITAL
EXPENDITURES ....... 11 6 -- -- 17
===============================================================================================
1997
Net interest income .. $ 310 $ 37 $ (13) $ -- $ 334
Provision for credit
losses ............. 15 2 -- -- 17
Depreciation and
amortization ....... 28 4 -- -- 32
Provision for
income taxes ....... 41 3 (5) -- 39
Net income ........... 87 5 (8) -- 84
Segment assets ....... 7,174 915 1,334 (1,330) 8,093
Capital expenditures . 14 5 -- -- 19
===============================================================================================
71
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Bank Consoli-
First of the Reconciling dated
(in millions) Hawaiian West Other Items Totals
- ---------------------------------------------------------------------------------------------
1996
Net interest income ... $ 312 $ 17 $ (8) $ -- $ 321
Provision for credit
losses .............. 23 1 -- -- 24
Depreciation and
amortization ........ 29 2 -- -- 31
Provision for
income taxes ........ 38 1 (4) -- 35
Net income ............ 84 2 (6) -- 80
Segment assets ........ 7,308 878 1,053 (1,237) 8,002
Capital expenditures .. 18 3 -- -- 21
=============================================================================================
The Company also identifies business units based on the products or
services offered and the channel through which the products or services are
delivered. In addition to the operating segment information, the table below
presents selected Company-wide information regarding business units for the
years ended December 31, 1998, 1997 and 1996, respectively:
- --------------------------------------------------------------------------------------------------------------
Reconciling Consolidated
(in millions) Wholesale Retail Other Items Totals
- --------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
1998 .............. $268 $413 $ 16 $(13) $684
1997 .............. 220 372 10 (10) 592
1996 .............. 213 362 4 (5) 574
==============================================================================================================
The reconciling items in the above tables are principally intercompany
eliminations.
19. INTERNATIONAL OPERATIONS
The Company's international operations, principally in Guam, Saipan and
Grand Cayman, British West Indies, involve foreign banking and international
financing activities, including short-term investments, loans and leases,
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 and net income for the years
ended December 31, 1998, 1997 and 1996 and total assets for foreign, domestic
and consolidated operations at December 31, 1998, 1997 and 1996 were as follows:
- ------------------------------------------------------------------------------
(in thousands) Foreign Domestic Consolidated
- ------------------------------------------------------------------------------
1998
TOTAL REVENUE .......... $ 45,197 $ 758,823 $ 804,020
INCOME BEFORE
INCOME TAXES ......... 4,274 127,182 131,456
NET INCOME ............. 2,735 73,871 76,606
TOTAL ASSETS ........... 695,698 14,354,197 15,049,895
==============================================================================
1997
Total revenue .......... $ 38,056 $ 652,940 $ 690,996
Income before
income taxes ......... 4,666 118,898 123,564
Net income ............. 3,033 81,228 84,261
Total assets ........... 444,016 7,649,076 8,093,092
==============================================================================
- --------------------------------------------------------------------------------
(in thousands) Foreign Domestic Consolidated
- --------------------------------------------------------------------------------
1996
Total revenue ......... $ 37,572 $ 624,023 $ 661,595
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
================================================================================
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 leases and transactions by the Company's
international operations.
The following table presents the percentages of average total assets and
average 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 depositor/creditor.
- ----------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------
Average foreign assets to
average total assets ............... 5.36% 4.38% 5.42%
Average foreign liabilities to
average total liabilities .......... 3.41 3.70 3.55
==================================================================================
20. 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, 1998:
- --------------------------------------------------------------------------------
LESS NET
OPERATING SUBLEASE OPERATING
(in thousands) LEASES INCOME LEASES
- --------------------------------------------------------------------------------
1999 ........................ $ 41,113 $ 8,575 $ 32,538
2000 ........................ 38,673 8,219 30,454
2001 ........................ 35,435 7,976 27,459
2002 ........................ 31,502 7,343 24,159
2003 ........................ 27,655 5,825 21,830
2004 AND THEREAFTER ......... 78,933 17,471 61,462
- --------------------------------------------------------------------------------
TOTAL ....................... $253,311 $ 55,409 $197,902
================================================================================
These premises and equipment leases extend for varying periods up to 43
years and some of them may be renewed for periods ranging from one to 43 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.
72
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
For 1998, 1997 and 1996, rental expense was $35,293,000, $32,321,000 and
$14,796,000, respectively.
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 building. 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, 1998, 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.
21. COMMITMENTS AND CONTINGENT LIABILITIES
Off-balance sheet commitments and contingent liabilities at December 31,
1998 and 1997 were as follows:
- --------------------------------------------------------------------------------
1998 1997
---------- ----------
NOTIONAL/ Notional/
CONTRACT Contract
(in thousands) AMOUNT Amount
- --------------------------------------------------------------------------------
CONTRACTUAL AMOUNTS WHICH
REPRESENT CREDIT RISK
Commitments to extend credit ......... $5,569,202 $4,408,199
Standby letters of credit ............ 187,134 154,848
Commercial letters of credit ......... 16,738 11,865
CONTRACTUAL AMOUNTS WHERE
CREDIT RISK IS LESS THAN
CONTRACTUAL AMOUNT
Commitments to purchase
foreign currencies ................. 16,581 --
Commitments to sell foreign
currencies ......................... 16,515 --
Interest rate swaps and floors ....... 110,291 894,427
Forward-starting contracts ........... 3,962 --
================================================================================
ROLLFORWARD SCHEDULE
The following is a summary of the off-balance sheet financial instruments
for 1998 and 1997:
- -----------------------------------------------------------------------------------------------
Receive Pay Variable/ Forward-
Fixed Fixed Variable Starting
(in millions) Swaps Swaps Swaps Floors Contracts Total
- -----------------------------------------------------------------------------------------------
Balance,
December 31, 1996 $ 500 $ 138 $ 400 $ 500 $ -- $1,538
Additions ....... -- 3 -- -- -- 3
Maturities/
amortizations . 200 47 400 -- -- 647
Terminations .... -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------
Balance,
December 31, 1997 300 94 -- 500 -- 894
ADDITIONS ....... -- 23 -- -- 4 27
MATURITIES/
AMORTIZATIONS .. 300 2 -- 500 -- 802
TERMINATIONS .... -- 5 -- -- -- 5
- -----------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1998 $ -- $ 110 $ -- $ -- $ 4 $ 114
===============================================================================================
HEDGING SUMMARY
The following is additional hedging information related to the Company's
interest rate swaps as of December 31, 1998:
- -----------------------------------------------------------------------------------------------------
ASSET YIELD/ NET REMAIN-
NOTIONAL PAY RECEIVE LIABILITY YIELD/ ORIGINAL ING
(dollars in millions) AMOUNT RATE RATE COST COST MATURITY MATURITY
- -----------------------------------------------------------------------------------------------------
ASSET HEDGES:
FIXED RATE LOANS... $110 6.38% 5.28% 8.15% 7.05% 10.1 YRS. 6.6 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, 1998, 1997 and 1996:
- ------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------
Average borrowing rate:
Without interest rate swaps
and floors .............. 4.13% 4.20% 4.28%
With interest rate swaps
and floors .............. 4.13 4.20 4.23
- ------------------------------------------------------------------------------------
Decrease in interest income . $ 1,126 $ 3,416 $ 2,402
Decrease in interest expense -- 42 2,636
- ------------------------------------------------------------------------------------
INTEREST RATE SWAP AND FLOOR
EXPENSE (INCOME), NET ..... $ 1,126 $ 3,374 $ (234)
====================================================================================
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, results of operations or
liquidity.
73
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BancWest Corporation & Subsidiaries
- --------------------------------------------------------------------------------------------------------------
22. 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, 1998 and 1997:
- --------------------------------------------------------------------------------
1998
----------------------------------
(in thousands) BOOK VALUE FAIR VALUE
- --------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks .......... $ 615,184 $ 615,184
Interest-bearing deposits in
other banks .................... 274,641 275,219
Federal funds sold and securities
purchased under agreements
to resell ...................... 52,100 52,100
Investment securities (note 5):
Held-to-maturity ............... 290,922 291,414
Available-for-sale ............. 1,346,994 1,346,994
Loans and leases (note 6) ........ 11,339,580 11,423,764
Customers' acceptance liability .. 1,377 1,377
- --------------------------------------------------------------------------------
Financial Liabilities:
Deposits ......................... $11,260,320 $11,276,314
Short-term borrowings (note 10) .. 922,867 922,867
Acceptances outstanding .......... 1,377 1,377
Long-term debt (note 11) ......... 629,959 636,878
Guaranteed preferred beneficial
interests in junior subordinated
debentures (note 11) ........... 100,000 115,206
================================================================================
1997
- -------------------------------------------------------------------------------
(in thousands) Book Value Fair Value
- -------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks .......... $ 282,905 $ 282,905
Interest-bearing deposits in other
banks .......................... 137,930 137,891
Federal funds sold and securities
purchased under agreements to
resell ......................... 134,274 134,274
Available-for-sale investment
securities (note 5) ............ 778,124 778,124
Loans and leases (note 6) ........ 6,238,681 6,248,139
Customers' acceptance liability .. 867 867
- ------------------------------------------------------------------------------
Financial Liabilities:
Deposits ......................... $6,089,200 $6,107,195
Short-term borrowings (note 10) .. 721,865 721,865
Acceptances outstanding .......... 867 867
Long-term debt (note 11) ......... 218,736 221,484
Guaranteed preferred beneficial
interests in junior subordinated
debentures (note 11) ........... 100,000 104,370
==============================================================================
The following table presents a summary of the fair
values of the Company's off-balance sheet financial instruments (note 21) at
December 31, 1998 and 1997:
- ---------------------------------------------------------------------------
(in thousands) 1998 1997
- ---------------------------------------------------------------------------
Commitments to extend credit ......... $ 28,282 $ 21,606
Letters of credit .................... 1,956 1,465
Commitments to purchase foreign
currencies ......................... 55 --
Commitments to sell foreign currencies (13) --
Interest rate swaps and floors ....... (5,733) 1,404
Forward-starting contracts ........... (108) --
===========================================================================
23. BANCWEST CORPORATION (PARENT COMPANY ONLY) FINANCIAL STATEMENTS
In the financial statements presented below, the investment in subsidiaries
is accounted for under the equity method.
BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------
(in thousands, except number of DECEMBER 31,
---------------------------------
shares and per share data) 1998 1997
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash on deposit with
First Hawaiian ...................................... $ 70 $ 115
Interest-bearing deposits in other banks .............. 5,000 70,000
Loans, net of allowance for credit
losses of $120 in 1998 and 1997 ..................... 5,656 9,691
Available-for-sale investment securities .............. 300 300
Securities purchased from
First Hawaiian ...................................... 22,880 23,860
Investment in subsidiaries:
First Hawaiian ...................................... 725,812 733,596
Bank of the West .................................... 1,032,583 --
Other subsidiaries .................................. 15,929 186,631
Due from:
First Hawaiian ...................................... 176,592 147,251
Bank of the West .................................... 187,669 --
Other subsidiaries .................................. 82,472 52,050
Other assets .......................................... 2,088 2,532
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS ............................................ $ 2,257,051 $ 1,226,026
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings ................................. $ 13,903 $ 1,800
Current and deferred income taxes ..................... 264,626 181,669
Due to subsidiary ..................................... 103,093 103,093
Other liabilities ..................................... 7,543 7,763
Long-term debt (note 11) .............................. 200,000 200,000
- ----------------------------------------------------------------------------------------------------
Total liabilities ................................... 589,165 494,325
- ----------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
(notes 15, 20 and 21)
Stockholders' equity:
Preferred stock, par value $5 per share
Authorized and unissued--
50,000,000 shares in
1998 and 1997 ..................................... -- --
Class A common stock, par value $1
per share (notes 2 and 12)
Authorized--75,000,000 shares
Issued--25,814,768 shares in 1998 ................... 25,815 --
Common stock, par value $1 per share
in 1998 and $5 per share in 1997 (notes 2, 12 and 15)
Authorized--200,000,000 shares in 1998 and
100,000,000 shares in 1997
Issued--33,190,374 shares in
1998 and 1997 ..................................... 33,190 165,952
Surplus ............................................... 1,141,639 148,165
Retained earnings ..................................... 511,525 473,659
Accumulated other comprehensive
income .............................................. 6,171 (241)
Treasury stock, at cost--1,635,397
shares in 1998 and 1,845,217
shares in 1997 ...................................... (50,454) (55,834)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity .......................... 1,667,886 731,701
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ................................................ $ 2,257,051 $ 1,226,026
====================================================================================================
74
1
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
The Corporation or one of its wholly-owned subsidiaries beneficially owns 100%
of the outstanding capital stock, voting securities and ownership interests of
each of the corporations and limited partnerships listed below and all of the
common securities of First Hawaiian Capital I. 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
Real Estate Delivery, Inc. Hawaii
FH Center, Inc. Hawaii
FHB Properties, Inc. Hawaii
First Hawaiian Center, L.P. Hawaii
Pacific One Dealer Center, Inc. Hawaii
The Bankers Club, Inc. Hawaii
Center Club, Inc. Hawaii
First Hawaiian Leasing, Inc. Hawaii
First Hawaiian Insurance, Inc. Hawaii
Bank of the West California
Oakwood Financial Service Corporation California
First National Bancorporation California
Essex Credit Corporation Connecticut
First National Bancorp, Inc. California
CB Insurance Agency, Inc. California
Church Loan Corporation California
United Communities Corporation California
First Santa Clara Corporation California
Central Valley National Corporation California
FHL Lease Holding Company, Inc. Hawaii
FHL SPC One, Inc. Hawaii
FHI International, Inc. Hawaii
First Hawaiian Capital I Delaware
All subsidiaries were included in the consolidated financial statements of the
Corporation.
1
EXHIBIT 23. CONSENT OF INDEPENDENT ACCOUNTANTS
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
BancWest Corporation (formerly First Hawaiian, Inc.) on Forms S-8 (File Nos.
33-66400 and 333-22107) of our report dated January 21, 1999, on our audits of
the consolidated financial statements of BancWest Corporation and Subsidiaries
as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997
and 1996, which report is incorporated by reference in this Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
Honolulu, Hawaii
February 22, 1999
9
1
YEAR
DEC-31-1998
JAN-01-1998
DEC-31-1998
615,184
274,641
52,100
0
1,346,994
290,922
291,414
11,339,580
149,585
15,049,895
11,260,320
922,867
467,486
629,959
0
0
59,005
1,608,881
15,049,895
578,872
55,645
49,922
684,439
228,920
290,202
394,237
28,555
124
353,807
131,456
76,606
0
0
76,606
2.16
2.15
8.26
54,408
34,607
35,241
0
82,596
29,084
6,531
149,585
92,675
1,435
55,475
