<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . to . . . . . . . . .
Commission file number 0-7949
---------------------------
FIRST HAWAIIAN, INC.
(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)
(808) 525-7000
(Registrant's telephone number, including area code)
---------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or l5(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of
common stock as of April 30, 1998 was:
Class Outstanding
- ----------------------------- -----------------
Common Stock, $5.00 Par Value 31,143,923 Shares
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 1998, December 31, 1997
and March 31, 1997 2
Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders' Equity for the
three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7 - 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 - 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT INDEX
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited)
First Hawaiian, Inc. and Subsidiaries
<TABLE>
<CAPTION>
MARCH 31, December 31, March 31,
1998 1997 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
ASSETS
Interest-bearing deposits in other banks $ 142,353 $ 137,930 $ 76,529
Federal funds sold and securities purchased
under agreements to resell 160,000 134,274 167,800
Available-for-sale investment securities 725,688 778,124 1,061,976
Loans:
Loans 6,293,908 6,238,681 5,947,296
Less allowance for loan losses 83,154 82,596 85,136
----------- ----------- -----------
Net loans 6,210,754 6,156,085 5,862,160
----------- ----------- -----------
Total earning assets 7,238,795 7,206,413 7,168,465
Cash and due from banks 288,260 282,905 341,295
Premises and equipment 242,170 245,999 250,001
Customers' acceptance liability 673 867 745
Core deposit premium 24,464 25,347 28,282
Goodwill 94,825 96,030 99,868
Other assets 241,789 235,531 206,791
----------- ----------- -----------
TOTAL ASSETS $ 8,130,976 $ 8,093,092 $ 8,095,447
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 793,956 $ 903,195 $ 878,289
Interest-bearing demand 1,606,955 1,387,629 1,530,795
Savings 957,580 1,013,752 894,192
Time 2,475,012 2,490,915 2,381,044
Foreign 304,993 293,709 265,712
----------- ----------- -----------
Total deposits 6,138,496 6,089,200 5,950,032
----------- ----------- -----------
Short-term borrowings 695,660 721,865 960,583
Acceptances outstanding 673 867 745
Other liabilities 243,166 230,723 221,992
Long-term debt 216,731 218,736 246,443
Guaranteed preferred beneficial interests
in Company's junior subordinated
debentures 100,000 100,000 --
----------- ----------- -----------
TOTAL LIABILITIES 7,394,726 7,361,391 7,379,795
----------- ----------- -----------
Stockholders' equity:
Preferred stock -- -- --
Common stock 165,952 165,952 165,952
Surplus 148,158 148,165 148,208
Retained earnings 485,233 473,659 439,359
Accumulated other comprehensive income 37 (241) 869
Treasury stock (63,130) (55,834) (38,736)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 736,250 731,701 715,652
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,130,976 $ 8,093,092 $ 8,095,447
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
First Hawaiian, Inc. and Subsidiaries
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
1998 1997
------------ ------------
(in thousands, except shares and per share data)
INTEREST INCOME
<S> <C> <C>
Interest and fees on loans $ 129,946 $ 121,552
Lease financing income 4,887 3,231
Interest on investment securities:
Taxable interest income 12,520 17,525
Exempt from Federal income taxes 25 232
Other interest income 3,945 2,855
------------ ------------
Total interest income 151,323 145,395
------------ ------------
INTEREST EXPENSE
Deposits 51,033 47,207
Short-term borrowings 9,107 12,004
Long-term debt 5,605 3,670
------------ ------------
Total interest expense 65,745 62,881
------------ ------------
Net interest income 85,578 82,514
Provision for loan losses 4,396 3,752
------------ ------------
Net interest income after provision for
loan losses 81,182 78,762
------------ ------------
NONINTEREST INCOME
Trust and investment services income 7,169 6,755
Service charges on deposit accounts 7,272 6,797
Other service charges and fees 8,365 7,563
Securities losses, net (5) (2)
Other 2,806 2,741
------------ ------------
Total noninterest income 25,607 23,854
------------ ------------
NONINTEREST EXPENSE
Salaries and wages 27,524 28,702
Employee benefits 7,956 8,708
Occupancy expense 9,759 10,625
Equipment expense 6,446 6,086
Other 21,952 18,889
------------ ------------
Total noninterest expense 73,637 73,010
------------ ------------
Income before income taxes 33,152 29,606
Income taxes 11,924 9,090
------------ ------------
NET INCOME $ 21,228 $ 20,516
============ ============
PER SHARE DATA:
BASIC EARNINGS $ .68 $ .65
============ ============
DILUTED EARNINGS $ .68 $ .64
============ ============
CASH DIVIDENDS $ .31 $ .31
============ ============
AVERAGE SHARES OUTSTANDING 31,176,312 31,775,597
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
First Hawaiian, Inc. and Subsidiaries
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD $ 282,905 $ 333,511
--------- ---------
Cash flows from operating activities:
Net income 21,228 20,516
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 4,396 3,752
Depreciation and amortization 8,241 8,030
Income taxes 11,224 7,667
Decrease (increase) in interest receivable (2,124) 2,039
Increase (decrease) in interest payable (2,661) 193
Decrease (increase) in prepaid expenses (133) 3,072
Other 3,238 (12,933)
--------- ---------
Net cash provided by operating activities 43,409 32,336
--------- ---------
Cash flows from investing activities:
Net increase in interest-bearing deposits
in other banks (4,423) (6,399)
Net increase in Federal funds sold and securities
purchased under agreements to resell (25,726) (19,430)
Purchase of available-for-sale investment securities (92,791) (37,676)
Proceeds from sale of available-for-sale
investment securities -- 20,020
Proceeds from maturity of available-for-sale
investment securities 145,689 94,769
Net increase in loans to customers (64,421) (147,684)
Capital expenditures (3,810) (3,861)
Other 3,299 428
--------- ---------
Net cash used in investing activities (42,183) (99,833)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 49,296 13,324
Net increase (decrease) in short-term borrowings (28,205) 31,023
Proceeds from (payments on) long-term debt, net (5) 40,700
Cash dividends paid (9,654) (9,850)
Issuance (repurchase) of treasury stock, net (7,303) 84
--------- ---------
Net cash provided by financing activities 4,129 75,281
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 288,260 $ 341,295
========= =========
Supplemental disclosures:
Interest paid $ 68,406 $ 62,570
========= =========
Income taxes paid $ 700 $ 1,422
========= =========
Supplemental schedule of noncash investing
and financing activities:
Loans converted into other real estate owned $ 2,311 $ 2,487
========= =========
Loans made to facilitate the sale of other real estate owned $ 793 $ 150
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
First Hawaiian, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
---------- ---------- ---------- ------------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 165,952 $ 148,165 $ 473,659 $ (241) $ (55,834) $ 731,701
Comprehensive income:
Net income -- -- 21,228 -- -- 21,228
Unrealized valuation adjustment -- -- -- 278 -- 278
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income -- -- 21,228 278 -- 21,506
---------- ---------- ---------- ---------- ---------- ----------
Purchase of treasury stock -- -- -- -- (7,342) (7,342)
Cash dividends ($.31 per share) -- -- (9,654) -- -- (9,654)
Incentive Plan for Key Executives -- (7) -- -- 46 39
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 1998 $ 165,952 $ 148,158 $ 485,233 $ 37 $ (63,130) $ 736,250
========== ========== ========== ========== ========== ==========
Balance, December 31, 1996 $ 165,952 $ 148,196 $ 428,693 $ 1,850 $ (38,807) $ 705,884
Comprehensive income:
Net income -- -- 20,516 -- -- 20,516
Unrealized valuation adjustment -- -- -- (981) -- (981)
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income -- -- 20,516 (981) -- 19,535
---------- ---------- ---------- ---------- ---------- ----------
Cash dividends ($.31 per share) -- -- (9,850) -- -- (9,850)
Incentive Plan for Key Executives -- 12 -- -- 71 83
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 1997 $ 165,952 $ 148,208 $ 439,359 $ 869 $ (38,736) $ 715,652
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
First Hawaiian, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Hawaiian, Inc. and
Subsidiaries (the "Company") conform with generally accepted accounting
principles and practices within the banking industry. The following is a summary
of significant accounting policies:
CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
First Hawaiian, Inc. and its wholly-owned subsidiaries - First Hawaiian Bank and
its wholly-owned subsidiaries (the "Bank"); First Hawaiian Creditcorp, Inc. and
its wholly-owned subsidiary ("Creditcorp"); Pacific One Bank ("Pacific One");
FHL Lease Holding Company, Inc.; First Hawaiian Capital I; and FHI
International, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation. In the opinion of management, all adjustments
(which included only normal recurring adjustments) necessary for a fair
presentation are reflected in the consolidated financial statements.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements for 1997 have been
reclassified to conform with the 1998 presentation. Such reclassifications had
no effect on the consolidated net income as previously reported.
2. ACCOUNTING CHANGES
The provisions of Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," that were deferred by SFAS No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125 - An
Amendment of FASB Statement No. 125," became effective as to repurchase
agreements, dollar rolls, securities lending and certain other transactions
after December 31, 1997. The Company requires delivery of collateral or other
security as a condition to entering into repurchase or reverse-repurchase
transactions. For all reverse-repurchase transactions entered into after
January 1, 1998, the Company did not take control of the collateral.
Accordingly, the Company did not record the collateral along with the
obligation to return such collateral in its Consolidated Balance Sheet at March
31, 1998. The Company has not relinquished control of securities transferred in
repurchase transactions for the three month period ended March 31, 1998; thus,
the Company did not record the collateral transfer or a receivable from the
counterparty.
As of December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share," which specifies the computation, presentation and disclosure
requirements for earnings per share. By adopting SFAS No. 128, the Company was
required to restate and expand its presentation for prior period earnings per
share data. The basic and diluted earnings per share data of the Company
reported under SFAS No. 128 did not differ materially from the primary and fully
diluted earnings per share data previously reported by the Company under
Accounting Principles Board Opinion No. 15, "Earnings Per Share."
5
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
First Hawaiian, Inc. and Subsidiaries
The following is a reconciliation of the numerator and denominators of the
Company's basic and diluted earnings per share data for the three months ended
March 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- ----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ----------
(in thousands, except number of shares and per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income $ 21,228 31,176,312 $ .68 $ 20,516 31,775,597 $ .65
Effect of dilutive
securities -
Stock incentive
plan options -- 197,410 -- -- 100,702 --
-------- ----------- ----- -------- ----------- -----
Diluted:
Net income and
assumed conversions $ 21,228 31,373,722 $ .68 $ 20,516 31,876,299 $ .64
======== ========== ===== ======== ========== =====
</TABLE>
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for reporting comprehensive
income, which is 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 Statement of Changes in Stockholders' Equity has been reformatted
in the current period and restated for the prior periods in compliance with SFAS
No. 130.
Earlier this year, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which standardized the disclosure requirements for
pensions and other post-retirement benefits. The Company plans to implement SFAS
No. 132 (which does not change existing measurement or recognition standards) in
its consolidated financial statements for the year ending December 31, 1998.
3. IMPAIRED LOANS
The following table summarizes impaired loan information as of and for the
three months ended March 31, 1998, as of and for the year ended December 31,
1997 and as of and for the three months ended March 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1998 December 31, 1997 March 31, 1997
-------------- ----------------- --------------
(in thousands)
<S> <C> <C> <C>
Impaired loans $ 77,230 $ 74,751 $ 107,744
Impaired loans with related allowance for loan
losses calculated under SFAS No. 114 $ 51,905 $ 38,278 $ 70,565
Total allowance for impaired loans $ 12,249 $ 9,257 $ 12,720
Average impaired loans $ 76,545 $ 90,901 $ 104,895
Interest income recorded during the period $ 110 $ 835 $ 199
</TABLE>
Impaired loans without a related allowance for loan losses are generally
collateralized by assets with fair values in excess of the recorded investment
in the loans. Interest payments on impaired loans are generally applied to
reduce the outstanding principal amounts of such loans.
4. SUBSIDIARY MERGERS
On April 18, 1997, Pioneer Federal Savings Bank ("Pioneer"), a wholly-owned
subsidiary of the Company, was merged with and into the Bank. Five Pioneer
branches became branches of the Bank and 14 branches were closed in connection
with the merger.
On December 31, 1997, Pacific One Bank, National Association ("Pacific One,
N.A."), another wholly-owned subsidiary of the Company, was merged with and into
Pacific One. Pacific One currently operates Pacific One, N.A.'s eight branches,
all of which are located in the State of Washington.
5. 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") in 1997, and used the proceeds therefrom to purchase
junior subordinated deferrable interest debentures (the "Debentures") of the
Company. In addition, the Trust also purchased $3,093,000 of Debentures in
connection with the acquisition by the Company of common securities of the
Trust. The Debentures (aggregate principal amount $103,093,000) are the sole
assets of the Trust. The Capital Securities qualify as Tier 1 capital of the
Company and are fully and unconditionally guaranteed by the Company.
The Capital Securities accrue and pay interest semi-annually at an annual
interest rate of 8.343%. The Capital Securities are mandatorily redeemable upon
maturity of the Debentures on July 1, 2027, or upon earlier redemption in whole
or in part as provided for in the governing indenture.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
Factors that could cause or contribute to such differences include, but are not
limited to, global, national and local economic and market conditions, the level
and volatility of interest rates and currency values, credit risks inherent in
the lending processes, loan and deposit demand in the geographic regions in
which the Company conducts business, the impact of intense competition in the
rapidly evolving banking and financial services business, the effect of current
and pending government legislation and regulations, the extensive regulation of
the Company's businesses at both the federal and state levels and other matters
discussed below.
The Company expressly disclaims any obligation or undertaking to release any
update or revision to 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.
NET INCOME
The Company recorded consolidated net income for the first three months of 1998
of $21,228,000, an increase of $712,000, or 3.5%, over the first three months of
1997. The modest increase in consolidated net income reflects the continuing
effects of the sluggish economy in Hawaii.
Basic and diluted earnings per share for the first three months of 1998 were
$.68 and $.68, respectively, representing increases of 4.6% and 6.3%,
respectively, over the same period in 1997. The percentage increases in
consolidated net income on a per share basis were greater than the percentage
increase in consolidated net income because acquisition of shares under the
Company's stock repurchase program, pursuant to which the Company is authorized
to repurchase up to 3.1 million shares of the Company's common stock (of which
1.8 million shares were repurchased through March 31, 1998), resulted in a lower
average number of outstanding shares in the first quarter of 1998 as compared to
the first quarter of 1997.
On an annualized basis, the Company's return on average total assets for the
first three months of 1998 was 1.07%, an increase of 2.9% over the same period
in 1997, and its return on average stockholders' equity was 11.78%, an increase
of .5% over the same period in 1997.
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent basis, increased $2,895,000,
or 3.5%, to $85,640,000 for the first three months of 1998 from $82,745,000 for
the same period in 1997. The increase in net interest income was primarily due
to a 12 basis point (1% equals 100 basis points) increase in the net interest
margin and an increase in average earning assets of $54,136,000, or .8%.
The net interest margin was 4.80% for the first three months of 1998, an
increase of 2.6% over the same period in 1997. The increase in the net interest
margin was primarily attributable to an increase of 26 basis points in the yield
on average earning assets for the first three months of 1998 over the same
period in 1997, principally as a result of the partial liquidation of
lower-yielding investment securities held by the Company. The Company used the
proceeds from the partial liquidation to reduce its short-term borrowings and to
fund higher-yielding loans. The increase in the yield on average earning assets
was partially offset by an increase of 14 basis points in the rate paid on
funding sources, for the first three months of 1998 over the same period in
1997. The increase in the rate paid on funding sources reflects, among other
things, the issuance by First Hawaiian Capital I of $100,000,000 of its capital
securities (the "Capital Securities") in June 1997 and a decrease in average
noninterest-bearing demand deposits of $56,963,000, or 6.6%.
Average earning assets increased by $54,136,000, or .8%, for the first three
months of 1998 over the same period in 1997, primarily due to higher levels of
interest-bearing deposits and loans. The increase was partially offset by the
partial liquidation of investment securities in connection with the merger of
the Bank and Pioneer in April 1997.
7
<PAGE> 9
Average loans for the first three months of 1998 increased by $352,269,000, or
6.0%, over the same period in 1997. The mix of loans continues to change as the
Company diversifies its loan portfolio, both geographically and by industry.
These efforts have resulted in growth in the Company's banking operations in the
Pacific Northwest, 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 representing 85.9% of average earning
assets for the first three months of 1998 as compared to 81.6% for the same
period in 1997.
Average interest-bearing deposits and liabilities increased by $73,705,000, or
1.2%, for the first three months of 1998, over the same period in 1997. The
increase was primarily due to the issuance of the Capital Securities and an
increase in deposits of $233,140,000, or 4.7%, primarily from a shifting of
public funds from repurchase agreements to deposits. These increases were
partially offset by a decrease in short-term borrowings which were repaid using
proceeds received from the partial liquidation of the investment securities
portfolio as described above.
8
<PAGE> 10
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 periods indicated on a taxable equivalent basis. The tax equivalent
adjustment is made for items exempt from Federal income taxes (assuming a 35%
tax rate for 1998 and 1997) to make them comparable with taxable items before
any income taxes are applied.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------
1998 1997
---------------------------- -----------------------------
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE(1) Balance Expense Rate(1)
------- -------- ------ ------- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Interest-bearing deposits
in other banks $ 134,749 $ 2,078 6.25% $ 55,574 $ 763 5.57%
Federal funds sold and
securities purchased
under agreements to resell 141,402 1,867 5.35 157,781 2,092 5.38
Available-for-sale investment
securities (2) 742,732 12,558 6.86 1,103,661 17,873 6.57
Loans (3),(4) 6,211,927 134,882 8.81 5,859,658 124,898 8.64
------------ --------- ------------- ----------
Total earning assets 7,230,810 151,385 8.49 7,176,674 145,626 8.23
--------- ----------
Nonearning assets 782,061 815,877
------------ -------------
Total assets $ 8,012,871 $ 7,992,551
============ =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
and liabilities:
Deposits $ 5,238,562 $ 51,033 3.95% $ 5,005,422 $ 47,207 3.82%
Short-term borrowings 689,651 9,107 5.36 945,137 12,004 5.15
Long-term debt and capital
securities 317,987 5,605 7.15 221,936 3,670 6.71
------------ --------- ------------- ----------
Total interest-bearing
deposits and liabilities 6,246,200 65,745 4.27 6,172,495 62,881 4.13
--------- ---- ---------- ----
Interest rate spread 4.22% 4.10%
==== ====
Noninterest-bearing demand
deposits 806,705 863,668
Other liabilities 228,831 246,559
------------ -------------
Total liabilities 7,281,736 7,282,722
Stockholders' equity 731,135 709,829
------------ -------------
Total liabilities and
stockholders' equity $ 8,012,871 $ 7,992,551
============ =============
Net interest income and
margin on earning assets 85,640 4.80% 82,745 4.68%
==== ====
Tax equivalent adjustment 62 231
--------- ----------
Net interest income $ 85,578 $ 82,514
========= ==========
</TABLE>
(1) Annualized.
(2) Average balances exclude the effects of the fair value adjustments.
(3) Nonaccruing loans have been included in computations of average loan
balances.
(4) Interest income for loans included loan fees of $6,987 and $5,582 for 1998
and 1997, respectively.
9
<PAGE> 11
AVAILABLE-FOR-SALE INVESTMENT SECURITIES
The following table presents the amortized cost and fair values of
available-for-sale investment securities as of the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, December 31, March 31,
1998 1997 1997
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Amortized cost $ 725,627 $ 778,528 $ 1,060,525
Unrealized gains 1,221 1,021 3,481
Unrealized losses (1,160) (1,425) (2,030)
------------- ------------- -------------
Fair value $ 725,688 $ 778,124 $ 1,061,976
============= ============= =============
</TABLE>
Gross realized gains and losses for the three months ended March 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Realized gains $ -- $ --
Realized losses (5) (2)
---------- ----------
Securities losses, net $ (5) $ (2)
========== ==========
</TABLE>
Gains and losses realized on the sales of available-for-sale investment
securities are determined using the specific identification method.
10
<PAGE> 12
LOANS
The following table sets forth the loan portfolio by major categories and loan
mix at March 31, 1998, December 31, 1997 and March 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1998 December 31, 1997 March 31, 1997
------------------ ------------------- -------------------
AMOUNT % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $1,610,315 25.6% $1,582,698 25.4% $1,516,534 25.5%
Real estate:
Commercial 1,195,752 19.0 1,193,538 19.1 1,222,848 20.6
Construction 156,935 2.5 166,482 2.7 200,121 3.4
Residential:
Insured, guaranteed or
conventional 1,478,933 23.5 1,486,887 23.8 1,450,464 24.3
Home equity credit lines 446,746 7.1 457,724 7.4 457,889 7.7
---------- ----- ---------- ----- ---------- -----
Total real estate loans 3,278,366 52.1 3,304,631 53.0 3,331,322 56.0
---------- ----- ---------- ----- ---------- -----
Consumer 704,495 11.2 678,984 10.9 569,466 9.6
Lease financing 333,295 5.3 333,270 5.3 240,732 4.0
Foreign 367,437 5.8 339,098 5.4 289,242 4.9
---------- ----- ---------- ----- ---------- -----
Total loans 6,293,908 100.0% 6,238,681 100.0% 5,947,296 100.0%
====== ===== =====
Less allowance for loan losses 83,154 82,596 85,136
---------- ---------- ----------
Total net loans $6,210,754 $6,156,085 $5,862,160
========== ========== ==========
Total loans to:
Total assets 77.4% 77.1% 73.5%
Total earning assets 86.9% 86.6% 83.0%
Total deposits 102.5% 102.5% 100.0%
</TABLE>
The loan portfolio is the largest component of total earning assets and accounts
for the greatest portion of total interest income. At March 31, 1998, total
loans were $6,293,908,000, representing increases of .9% and 5.8% over December
31, 1997 and March 31, 1997, respectively.
Commercial, financial and agricultural loans as of March 31, 1998 increased
$27,617,000, or 1.7%, over December 31, 1997, and $93,781,000, or 6.2%, over
March 31, 1997. Although the Company continues its efforts to diversify the loan
portfolio, both geographically and by industry, overall loan volume in the State
of Hawaii continues to decline as a result of the sluggish economy. Credit
extensions in the Pacific Northwest and the media and telecommunications
industry located on the mainland United States account for the majority of the
increase in loan balance and geographic and industry diversification.
Consumer loans as of March 31, 1998 increased $25,511,000, or 3.8%, over
December 31, 1997, and $135,029,000, or 23.7%, over March 31, 1997. The increase
was primarily due to an increase in direct and indirect automobile financing in
California and Oregon.
Lease financing as of March 31, 1998 increased $92,563,000, or 38.5%, over March
31, 1997. The increase was primarily due to an increase in leveraged and direct
financing leases on equipment located on the mainland United States.
The Company's international operations, principally in Guam and Grand Cayman,
British West Indies, involve foreign banking and international financing
activities, including short-term investments, loans, acceptances, letters of
credit financing and international funds transfers. International activities are
identified on the basis of the domicile of the Company's customer. Foreign loans
as of March 31, 1998, increased $28,339,000, or 8.4%, over December 31, 1997,
and $78,195,000, or 27.0%, over March 31, 1997. The increase in foreign loans
was primarily due to an increase in loan balances in Guam.
Loan concentrations are considered to exist when there are amounts loaned to
multiple borrowers engaged in similar activities which would cause them to be
similarly impacted by economic or other conditions. At March 31, 1998, the
Company did not have a concentration of loans greater than 10% of total loans
which is not otherwise disclosed as a category of loans as shown in the above
table.
11
<PAGE> 13
NONPERFORMING ASSETS
A summary of nonperforming assets at March 31, 1998, December 31, 1997 and March
31, 1997 follows:
<TABLE>
<CAPTION>
MARCH 31, December 31, March 31,
1998 1997 1997
--------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Nonperforming loans:
Nonaccrual:
Commercial, financial and agricultural $ 6,825 $ 9,038 $ 19,775
Real estate:
Commercial 4,568 4,590 4,208
Construction -- -- 1,908
Residential:
Insured, guaranteed, or conventional 10,590 6,353 12,188
Home equity credit lines 90 50 751
--------- ---------- ---------
Total real estate loans 15,248 10,993 19,055
--------- ---------- ---------
Lease financing 63 10 22
Foreign 218 -- --
--------- ---------- ---------
Total nonaccrual loans 22,354 20,041 38,852
--------- ---------- ---------
Restructured:
Commercial, financial and agricultural 1,532 1,532 3,428
Real estate:
Commercial 30,811 30,843 41,310
Residential:
Insured, guaranteed, or conventional 2,412 2,626 1,384
Home equity credit lines 659 559 559
--------- ---------- ---------
Total real estate loans 33,882 34,028 43,253
--------- ---------- ---------
Total restructured loans 35,414 35,560 46,681
--------- ---------- ---------
Total nonperforming loans 57,768 55,601 85,533
Other real estate owned 31,226 30,760 23,707
--------- ---------- ---------
Total nonperforming assets $ 88,994 $ 86,361 $ 109,240
========= ========== =========
Past due loans:
Commercial, financial and agricultural $ 2,616 $ 2,521 $ 5,278
Real estate:
Commercial 1,494 567 9,418
Residential:
Insured, guaranteed, or conventional 25,326 25,002 10,086
Home equity credit lines 2,073 2,077 2,822
--------- ---------- ---------
Total real estate loans 28,893 27,646 22,326
--------- ---------- ---------
Consumer 3,241 3,589 3,034
Lease financing 33 11 60
Foreign 717 -- --
--------- ---------- ---------
Total past due loans (1) $ 35,500 $ 33,767 $ 30,698
========= ========== =========
Nonperforming assets to total loans
and other real estate owned (end of period):
Excluding 90 days past due accruing loans 1.41% 1.38% 1.83%
Including 90 days past due accruing loans 1.97% 1.92% 2.34%
Nonperforming assets to total assets (end of period):
Excluding 90 days past due accruing loans 1.09% 1.07% 1.35%
Including 90 days past due accruing loans 1.53% 1.48% 1.73%
</TABLE>
(1) Represents loans which are past due 90 days or more as to principal
and/or interest, are still accruing interest and are in the process of
collection.
12
<PAGE> 14
NONPERFORMING ASSETS, CONTINUED
Nonperforming assets decreased from $109,240,000, or 1.83% of total loans and
other real estate owned ("OREO"), at March 31, 1997, to $88,994,000, or 1.41% of
total loans and OREO, at March 31, 1998. The percentage of nonperforming assets
to total assets decreased from 1.35% at March 31, 1997 to 1.09% at March 31,
1998.
The decrease in nonperforming assets of $20,246,000, or 18.5%, from March 31,
1997 to March 31, 1998 was primarily due to decreases in: (1) commercial,
financial and agricultural nonaccrual loans of $12,950,000, or 65.5%; and (2)
commercial real estate restructured loans of $10,499,000, or 25.4%. These
decreases in nonperforming loans were partially offset by an increase in OREO of
$7,519,000, or 31.7%. The decrease in commercial, financial and agricultural
nonaccrual loans was primarily due to the transfer of three loans totalling
$4,488,000 to OREO, a partial pay-off of a loan of $1,784,000 and a charge-off
of $755,000. The decrease in real estate - commercial loans was primarily due to
the transfer of a loan totalling $8,279,000 to OREO. These transfers to OREO
were partially offset by the sale of a commercial real estate property totalling
$7,200,000.
At March 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 12) 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.
Loans past due 90 days or more and still accruing interest totalled $35,500,000
at March 31, 1998, an increase of $4,802,000, or 15.6%, over March 31, 1997. The
increase was primarily due to certain real estate - residential loans sold with
recourse which were repurchased in the fourth quarter of 1997 and the first
quarter of 1998. All of the loans which are past due 90 days or more and still
accruing interest are, in management's judgment, adequately collateralized and
in the process of collection.
In recent years, the level of the Company's nonperforming assets and charge-offs
has been affected by the impact of adverse economic conditions and trends in
Hawaii. The most important of these adverse economic trends is the prolonged
economic downturn over the last seven years. In contrast to the mainland
economy, Hawaii's recovery from its 1991 recession continues to be slow and
protracted. In addition, Hawaii continues to show weaknesses in its local real
estate market, including declining real estate values.
Recently, a number of countries in the Asia Pacific region, including Japan,
have experienced significant weaknesses in their economies. Outstanding
commitments and loans to debtors in Asian countries, excluding Japan,
represented approximately .13% of total assets and 1.4% of total stockholders'
equity and, including Japan, approximately 1.25% of total assets and 13.8% of
total stockholders' equity, in each case at March 31, 1998. These commitments
and loans are primarily collateralized by certificates of deposit, Hawaii real
estate, standby letters of credit issued by Asian banks and/or guarantees by
credit-worthy Asian individuals and corporations. 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.
13
<PAGE> 15
DEPOSITS
The following table sets forth the average balances and the average rates paid
on deposits for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
1998 1997
----------------------- -----------------------
AVERAGE AVERAGE Average Average
BALANCE RATE(1) Balance Rate(1)
----------- -------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing demand $ 1,786,470 2.60% $ 1,540,455 2.57%
Savings 827,069 2.47 990,061 2.16
Time 2,625,023 5.33 2,474,906 5.27
------------- ---- ------------
Total interest-bearing deposits 5,238,562 3.95 5,005,422 3.82
Noninterest-bearing demand 806,705 -- 863,668 --
------------- ---- ------------
Total deposits $ 6,045,267 3.42% $ 5,869,090 3.26%
============ ==========
</TABLE>
Average interest-bearing deposits increased $233,140,000, or 4.7%, over the
first quarter of 1997. The increase in average interest-bearing deposits was due
primarily to a higher level of public deposits and various deposit product
programs initiated by the Company. As a result of depositors seeking higher
yields through the deposit product programs, the mix of average interest-bearing
deposits changed, with higher yielding average time certificates of deposits
representing 50.1% of average interest-bearing deposits in the first three
months of 1998, as compared to 49.4% in the same period in 1997. In addition,
average noninterest-bearing demand deposits for the first three months of 1998
decreased $56,963,000, or 6.6%, as compared to the same period in 1997.
Consequently, the overall cost of total deposits increased by 16 basis points in
the first three months of 1998 as compared to the same period in 1997.
(1) Annualized.
14
<PAGE> 16
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The following table sets forth the activity in the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Loans outstanding (end of period) $ 6,293,908 $ 5,947,296
=========== ===========
Average loans outstanding $ 6,211,927 $ 5,859,658
=========== ===========
Allowance for loan losses summary:
Balance at beginning of period $ 82,596 $ 85,248
----------- -----------
Loans charged off:
Commercial, financial and agricultural 915 14
Real estate:
Commercial 1 255
Construction -- 61
Residential 719 1,075
Consumer 3,856 3,075
Foreign 107 4
----------- -----------
Total loans charged off 5,598 4,484
----------- -----------
Recoveries on loans charged off:
Commercial, financial and agricultural 618 48
Real estate:
Commercial 395 12
Residential 1 15
Consumer 709 534
Lease financing -- 4
Foreign 37 7
----------- -----------
Total recoveries on loans previously
charged off 1,760 620
----------- -----------
Net charge-offs (3,838) (3,864)
Provision charged to expense 4,396 3,752
----------- -----------
Balance at end of period $ 83,154 $ 85,136
=========== ===========
Net loans charged off to average loans .25% (1) .27% (1)
Net loans charged off to allowance for
loan losses 18.72% (1) 18.41% (1)
Allowance for loan losses to total
loans (end of period) 1.32% 1.43%
Allowance for loan losses to nonperforming
loans (end of period):
Excluding 90 days past due
accruing loans 1.44x 1.00x
Including 90 days past due
accruing loans .89X .73x
</TABLE>
(1) Annualized.
15
<PAGE> 17
PROVISION AND ALLOWANCE FOR LOAN LOSSES, CONTINUED
For the first three months of 1998, the provision for loan losses was
$4,396,000, an increase of $644,000, or 17.2%, over the same period in 1997. The
provision for loan losses is based upon management's judgment as to the adequacy
of the allowance for loan losses (the "Allowance") to absorb future losses. The
Company uses a systematic methodology to determine the adequacy of the Allowance
and related provision for loan losses to be reported for financial statement
purposes. The determination of the adequacy of the Allowance is ultimately one
of management judgment, which includes consideration of many factors, including,
among other things, the amount of problem and potential problem loans, net
charge-off experience, changes in the composition of the loan portfolio by type
and location of loans and in overall loan risk profile and quality, general
economic factors and the fair value of collateral.
Net charge-offs were $3,838,000 for the first three months of 1998, a decrease
of $26,000, or .7%, compared to the same period in 1997. The decrease in net
charge-offs for the first three months of 1998 was primarily due to an increase
in commercial, financial and agricultural, real estate - commercial, and
consumer loan recoveries, partially offset by an increase in commercial,
financial and agricultural, and consumer loan charge-offs. The increase in loan
recoveries was primarily due to a $548,000 recovery on a commercial, financial
and agricultural loan. The increase in charge-offs was primarily due to
charge-offs on three commercial, financial and agricultural loans totalling
$857,000. For the first three months of 1998, consumer loan charge-offs
increased $781,000, or 25.4%, over the same period in 1997. In addition,
consumer loan charge-offs was negatively impacted by the ongoing sluggish Hawaii
economy and continued increase in personal bankruptcies. Smaller balance
homogeneous credit card and consumer loans are charged off at a predetermined
delinquency status or earlier if the Company determines that the loan is
uncollectible.
The allowance for loan losses increased to 1.44 times nonperforming loans
(excluding 90 days past due accruing loans) at March 31, 1998 from 1.00 times at
March 31, 1997 as a result of a 32.5% decrease in nonperforming loans.
In management's judgment, the Allowance was adequate to absorb potential losses
currently inherent in the loan portfolio at March 31, 1998. However, changes in
prevailing economic conditions in the Company's markets could result in changes
in the level of nonperforming assets and charge-offs in the future and,
accordingly, changes in the Allowance.
NONINTEREST INCOME
Noninterest income totalled $25,607,000 for the first three months of 1998, an
increase of $1,753,000, or 7.3%, over the same period in 1997.
Trust and investment services income increased $414,000, or 6.1%, for the first
three months of 1998 over the same period in 1997. The increase was primarily
due to increases in personal trust and investment management fees resulting from
an increase in the customer base and additional investment volume.
Service charges on deposit accounts increased $475,000, or 7.0%, for the first
three months of 1998 over the same period in 1997. The increase was primarily
due to increases in service charges on checks paid and returned and higher fees
on analyzed accounts.
Other service charges and fees increased $802,000, or 10.6%, for the first three
months of 1998 over the same period in 1997. The increase was primarily due to
higher: (1) merchant discount fees; (2) income earned from annuity and mutual
fund sales; and (3) mortgage servicing fees for mortgage loans that were
originated and sold with servicing retained.
Other noninterest income increased $65,000, or 2.4%, for the first three months
of 1998 over the same period in 1997. The increase was primarily due to higher:
(1) interest recoveries on loans previously charged off; and (2) income earned
on bank owned life insurance on certain officers. The increase was partially
offset by lower foreclosed property income.
16
<PAGE> 18
NONINTEREST EXPENSE
Noninterest expense totalled $73,637,000 for the first three months of 1998, an
increase of .9% over the same period in 1997.
Total personnel expense (salaries and wages and employee benefits) decreased
$1,930,000, or 5.2%, for the first three months of 1998, compared to the same
period in 1997. The decrease was primarily due to: (1) lower salaries and wages
expense as a result of the Company's re-engineering and consolidation efforts;
and (2) higher pension credits.
Occupancy expense for the first three months of 1998 decreased $866,000, or
8.2%, compared to the same period in 1997. The decrease was primarily due to
higher sublease rental income on bank-owned premises.
Equipment expense increased $360,000, or 5.9%, for the first three months of
1998, over the same period in 1997. The increase was a result of: (1) higher
data processing equipment rental expense; and (2) higher depreciation expense on
furniture and equipment.
Other noninterest expense increased $3,063,000 for the first three months of
1998, an increase of 16.2% over the same period in 1997. This increase was the
result of higher outside service expenses primarily related to the Year 2000
project (see Year 2000 disclosure on pages 18 to 19), depreciation - software
expense, real property taxes, foreclosed property expenses, and miscellaneous
losses and charge-offs. In addition, the cash surrender value of certain
executive life insurance policies increased (recorded as a credit to insurance
expense) in March 1997. This increase was partially offset by a loss on the sale
of a certain loan and a loss on the sale of certain other real estate owned
property in March 1997.
INCOME TAXES
The Company's effective income tax rate (exclusive of the tax equivalent
adjustment) for the first three months of 1998 was 36.0%, as compared to 30.7%
for the same period in 1997. The effective tax rate for the first three months
of 1997 was positively impacted by the: (1) recognition of certain previously
unrecognized tax credits; (2) partial reversal of an overaccrual of State of
Hawaii income taxes; and (3) donation of real property to a non-profit
organization.
17
<PAGE> 19
LIQUIDITY AND CAPITAL
Stockholders' equity was $736,250,000 at March 31, 1998, an increase of .6% over
$731,701,000 at December 31, 1997. The ratio of average stockholders' equity to
average total assets was 9.12% for the first three months of 1998 compared to
8.88% for the same period in 1997.
The primary source of funds for the dividends paid by the Company to its
stockholders is dividends received from its subsidiaries. The Bank, Creditcorp
and Pacific One are subject to regulatory limitations on the amount of dividends
they may declare or pay. At March 31, 1998, the aggregate amount available for
payment of dividends by such subsidiaries without prior regulatory approval was
$273,875,000.
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 consolidated 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 March 31, 1998) of Tier 1 and Total capital to risk-weighted
assets, and of Tier 1 capital to average assets.
<TABLE>
<CAPTION>
Minimum
For Capital To Be
Actual Adequacy Purposes Well Capitalized
------------------- --------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital to
Risk-Weighted
Assets $721,145 9.54% $302,278 4.00% $453,417 6.00%
Total Capital to
Risk-Weighted
Assets $954,299 12.63% $604,556 8.00% $755,696 10.00%
Tier 1 Capital to
Average Assets $721,145 9.13% $236,934 3.00% N/A N/A
</TABLE>
As of March 31, 1998, 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 March 31, 1998, that would cause a change in the Company's
category.
YEAR 2000 ISSUES
Many computer programs use only two digits to identify entries in the date code
field. If not corrected, these programs may fail or create erroneous results
because of the date change in the year 2000.
In 1995, management commenced a comprehensive program to address this problem
and ensure that the Company's computer software and hardware will continue to
function properly in the year 2000 and thereafter. Internal and external costs
in connection with this program, currently estimated at a total of $9 million
over a three-year period, are not anticipated to materially impact the Company's
operations. However, even though the Company's planned software modifications
and system upgrades should adequately address year 2000 issues, there can be no
assurance that unforeseen difficulties will not arise. The Company's program
includes the identification of third-party service providers, customers and
other external parties upon which the Company relies or with whom the Company
must interface on mission critical systems or applications. The program also
includes determination of and coordination with the compliance efforts of such
external parties on year 2000 issues. There is no assurance that the failure of
any such external party to resolve its year 2000 issues would not have an
adverse effect on the Company.
18
<PAGE> 20
The Company has completed the awareness and assessment phase of its plan to be
ready for the year 2000. The Company is well underway with its renovation
efforts and is well into testing its mission critical systems. Testing for
individual mission critical systems is scheduled to be substantially completed
by the end of 1998, with integration testing to occur during 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Certain matters contained in this Item 3 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. See Item 2 above for a discussion of the factors that could cause or
contribute to such differences.
INTEREST RATE RISK MEASUREMENT AND MANAGEMENT
The net interest income of the Company is subject to interest rate risk to the
extent the Company'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 also reduce 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 loans
depending on the interest rate environment.
The Asset/Liability Committees of each of the Company's subsidiary companies are
responsible for managing interest rate risk. Oversight for the Company taken as
a whole and individual subsidiary companies is also provided by the Treasury &
Investment Division and the Asset/Liability Committee of the Bank. The frequency
of the various Asset/Liability Committee meetings range from weekly to monthly.
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, the
Company does not enter into derivatives and other financial instruments for
trading purposes.
The Company'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 by increasing or decreasing the amounts of fixed
and/or variable instruments held by the Company -- to adjust sensitivity to
interest rate changes) and/or utilizing off-balance sheet instruments such as
interest rate swaps, caps or floors.
The Company 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 each. Each account-level item is repriced according to its
respective contractual characteristics, including any imbedded options which
might exist (e.g., 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.
The Company continues to monitor the projected impact of increases and decreases
in interest rates on the Company's net interest income. Exposure remains well
within board approved limits.
SIGNIFICANT ASSUMPTIONS UTILIZED AND INHERENT LIMITATIONS
The significant net interest income changes for each interest rate scenario
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.).
19
<PAGE> 21
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 projected 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.
At March 31, 1998, there was no significant change in the Company's market risk
from the information provided with respect to "Quantitative and Qualitative
Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997. Quantitative and qualitative
disclosures regarding the Company's market risk are also included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (page 36) and "Notes to Financial Statements" (page 47) in the
Financial Review section of the Company's Annual Report 1997.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 Statement regarding computation of ratios.
Exhibit 27 Financial data schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the quarter ended March 31, 1998.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST HAWAIIAN, INC.
(REGISTRANT)
Date May 11, 1998 By /s/ HOWARD H. KARR
--------------------------- -------------------------------------
HOWARD H. KARR
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)
21
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
12 Statement regarding computation of ratios.
27 Financial data schedule.
</TABLE>
<PAGE> 1
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIOS
First Hawaiian, Inc. and Subsidiaries
Computation of Consolidated Ratios of Earnings to Fixed Charges
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
------------ -----------
(dollars in thousands)
<S> <C> <C>
Income before income taxes $ 33,152 $ 29,606
------------ -----------
Fixed charges:(1)
Interest expense 65,745 62,881
Rental expense 2,740 2,767
------------ -----------
68,485 65,648
Less interest on deposits 51,033 47,207
------------ -----------
Net fixed charges 17,452 18,441
------------ -----------
Earnings, excluding
interest on deposits $ 50,604 $ 48,047
============ ===========
Earnings, including
interest on deposits $ 101,637 $ 95,254
============ ===========
Ratio of earnings to fixed charges:
Excluding interest on deposits 2.90X 2.61x
Including interest on deposits 1.48X 1.45x
</TABLE>
(1)For purposes of computing the consolidated ratios of earnings to fixed
charges, earnings represent income before income taxes plus fixed charges.
Fixed charges, excluding interest on deposits, include interest (other than
on deposits), whether expensed or capitalized, and that portion of rental
expense (generally one third) deemed representative of the interest factor.
Fixed charges, including interest on deposits, consist of the foregoing items
plus interest on deposits.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S QUARTERLY FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 288,260
<INT-BEARING-DEPOSITS> 142,353
<FED-FUNDS-SOLD> 160,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 725,688
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,293,908
<ALLOWANCE> 83,154
<TOTAL-ASSETS> 8,130,976
<DEPOSITS> 6,138,496
<SHORT-TERM> 695,660
<LIABILITIES-OTHER> 243,166
<LONG-TERM> 316,731
0
0
<COMMON> 165,952
<OTHER-SE> 570,298
<TOTAL-LIABILITIES-AND-EQUITY> 8,130,976
<INTEREST-LOAN> 134,833
<INTEREST-INVEST> 12,545
<INTEREST-OTHER> 3,945
<INTEREST-TOTAL> 151,323
<INTEREST-DEPOSIT> 51,033
<INTEREST-EXPENSE> 65,745
<INTEREST-INCOME-NET> 85,578
<LOAN-LOSSES> 4,396
<SECURITIES-GAINS> (5)
<EXPENSE-OTHER> 73,637
<INCOME-PRETAX> 33,152
<INCOME-PRE-EXTRAORDINARY> 21,228
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,228
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
<YIELD-ACTUAL> 8.49
<LOANS-NON> 22,354
<LOANS-PAST> 35,500
<LOANS-TROUBLED> 35,414
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 82,596
<CHARGE-OFFS> 5,598
<RECOVERIES> 1,760
<ALLOWANCE-CLOSE> 83,154
<ALLOWANCE-DOMESTIC> 42,380
<ALLOWANCE-FOREIGN> 1,675
<ALLOWANCE-UNALLOCATED> 39,099
</TABLE>
