<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
(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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
---------------- ----------------
Commission file number 0-7949
----------------
FIRST HAWAIIAN, INC.
(Exact name of registrant as specified in its charter)
----------------
DELAWARE 99-0156159
(State of Incorporation) (I.R.S. Employer
Identification No.)
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
------------------- ------------------------
None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $5.00 Par Value
(Title of class)
-------------------------
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of February 27, 1998 was $735,704,000.
The number of shares outstanding of each of the registrant's
classes of common stock as of February 27, 1998 was:
Title of Class Number of Shares Outstanding
- ----------------------------- ----------------------------
Common Stock, $5.00 Par Value 31,140,577 Shares
----------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated
by reference in this Form 10-K:
DOCUMENTS FORM 10-K REFERENCE
First Hawaiian, Inc. Annual Report 1997 Parts I and II
First Hawaiian, Inc. Proxy Statement dated
March 4, 1998 for the Annual Meeting
of Stockholders Part III
================================================================================
<PAGE> 2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST HAWAIIAN, INC.
(Registrant)
By /s/ HOWARD H. KARR
--------------------------------------
HOWARD H. KARR
EXECUTIVE VICE PRESIDENT AND TREASURER
Date: March 19, 1998
21
<PAGE> 3
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.
<TABLE>
<S> <C> <C>
/s/ WALTER A. DODS, JR. Chairman, March 19, 1998
- ---------------------------------- Chief Executive Officer -------------------
Walter A. Dods, Jr. & Director Date
/s/ JOHN W. A. BUYERS Director March 19, 1998
- ---------------------------------- -------------------
John W. A. Buyers Date
/s/ JOHN C. COUCH Director March 19, 1998
- ---------------------------------- -------------------
John C. Couch Date
/s/ JULIA ANN FROHLICH Director March 19, 1998
- ---------------------------------- -------------------
Julia Ann Frohlich Date
/s/ PAUL MULLIN GANLEY Director March 19, 1998
- ---------------------------------- -------------------
Paul Mullin Ganley Date
/s/ DAVID M. HAIG Director March 19, 1998
- ---------------------------------- -------------------
David M. Haig Date
/s/ JOHN A. HOAG Director March 19, 1998
- ---------------------------------- -------------------
John A. Hoag Date
/s/ BERT T. KOBAYASHI, JR. Director March 19, 1998
- ---------------------------------- -------------------
Bert T. Kobayashi, Jr. Date
/s/ RICHARD T. MAMIYA Director March 19, 1998
- ---------------------------------- -------------------
Richard T. Mamiya Date
/s/ FUJIO MATSUDA Director March 19, 1998
- ---------------------------------- -------------------
Fujio Matsuda Date
/s/ RODERICK F. McPHEE Director March 19, 1998
- ---------------------------------- -------------------
Roderick F. McPhee Date
/s/ GEORGE P. SHEA, JR. Director March 19, 1998
- ---------------------------------- -------------------
George P. Shea, Jr. Date
/s/ JOHN K. TSUI President March 19, 1998
- ---------------------------------- & Director -------------------
John K. Tsui Date
/s/ FRED C. WEYAND Director March 19, 1998
- ---------------------------------- -------------------
Fred C. Weyand Date
/s/ ROBERT C. WO Director March 19, 1998
- ---------------------------------- -------------------
Robert C. Wo Date
/s/ HOWARD H. KARR Executive Vice President March 19, 1998
- ---------------------------------- & Treasurer -------------------
Howard H. Karr (Principal financial and accounting officer) Date
</TABLE>
22
<PAGE> 1
EXHIBIT 13
INVESTMENT SECURITIES BY MATURITIES AND WEIGHTED AVERAGE YIELDS
The following table presents the maturities of available-for-sale investment
securities, excluding securities which have no stated maturity at December 31,
1997, 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.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------------------------------------------
After One After Five
Within but Within but Within After
One Year Five Years Ten Years Ten Years Total
(dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. TREASURY AND
OTHER U.S.
GOVERNMENT AGENCIES
AND CORPORATIONS .... $271 5.89% $114 6.02% $ -- --% $305 7.92% $690 6.81%
COLLATERALIZED MORTGAGE
OBLIGATIONS ......... -- -- -- -- -- -- 1 5.83 1 5.83
STATES AND POLITICAL
SUBDIVISIONS ........ 1 7.54 1 9.65 -- -- 1 8.82 3 8.78
OTHER ................. 15 7.41 -- -- -- -- -- -- 15 7.41
- ----------------------- ---- ---- ---- ---- ----
TOTAL ............. $287 5.98% $115 6.05% $ -- --% $307 7.92% $709 6.83%
================================================================================================================================
</TABLE>
Note: The weighted average yields were calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security.
35
<PAGE> 2
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly financial data for 1997 and 1996 is
presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Quarter
------------------------------------------- Annual
(in thousands, except per share data) First Second Third Fourth Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 LOAN LOSSES ...... 3,752 4,261 3,817 5,381 17,211
TOTAL NONINTEREST INCOME ....... 23,854 26,361 23,913 24,385 98,513
TOTAL NONINTEREST EXPENSE ...... 73,010 74,865 72,126 72,209 292,210
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ..... 29,606 32,892 32,552 28,514 123,564
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
==================================================================================================
1996
Interest income ................ $135,779 $138,606 $150,013 $149,742 $574,140
Interest expense ............... 59,759 60,548 66,379 66,109 252,795
- --------------------------------------------------------------------------------------------------
Net interest income ............ 76,020 78,058 83,634 83,633 321,345
Provision for loan losses ...... 3,322 5,191 4,649 10,465 23,627
Total noninterest income ....... 20,295 23,732 21,910 21,518 87,455
Total noninterest expense ...... 63,733 64,268 71,508 69,830 269,339
- --------------------------------------------------------------------------------------------------
Income before income taxes ..... 29,260 32,331 29,387 24,856 115,834
Income taxes ................... 9,057 11,587 10,386 4,508 35,538
- --------------------------------------------------------------------------------------------------
Net income ..................... $ 20,203 $ 20,744 $ 19,001 $ 20,348 $ 80,296
==================================================================================================
Basic earnings per share ....... $ .65 $ .67 $ .60 $ .64 $ 2.56
==================================================================================================
Diluted earnings per share...... $ .65 $ .67 $ .60 $ .63 $ 2.55
==================================================================================================
</TABLE>
38
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS First Hawaiian, Inc. and Subsidiaries
To the Stockholders
First Hawaiian, Inc.
We have audited the accompanying consolidated balance sheets of First
Hawaiian, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Hawaiian,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
January 15, 1998
39
<PAGE> 4
CONSOLIDATED BALANCE SHEETS First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------
(in thousands, except number of shares and per share data) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Interest-bearing deposits in other banks ......................................... $ 137,930 $ 70,130
Federal funds sold and securities purchased under agreements to resell ........... 134,274 148,370
Available-for-sale investment securities (note 3) ................................ 778,124 1,140,719
Loans:
Loans (note 4) ................................................................. 6,238,681 5,806,732
Less allowance for loan losses (note 5) ........................................ 82,596 85,248
- -----------------------------------------------------------------------------------------------------------------
Net loans ........................................................................ 6,156,085 5,721,484
- -----------------------------------------------------------------------------------------------------------------
Total earning assets ............................................................. 7,206,413 7,080,703
Cash and due from banks .......................................................... 282,905 333,511
Premises and equipment (note 6) .................................................. 245,999 249,573
Customers' acceptance liability .................................................. 867 824
Core deposit premium (net of accumulated amortization of
$13,605 in 1997 and $10,163 in 1996) (note 1) .................................. 25,347 28,877
Goodwill (net of accumulated amortization of
$22,815 in 1997 and $17,838 in 1996) (note 1) .................................. 96,030 101,218
Other assets ..................................................................... 235,531 207,468
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ..................................................................... $ 8,093,092 $ 8,002,174
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand ..................................................... $ 903,195 $ 969,620
Interest-bearing demand ........................................................ 1,387,629 1,328,354
Savings ........................................................................ 1,013,752 1,070,338
Time (fair value of $2,499,390 in 1997 and $2,331,890 in 1996) (note 7) ........ 2,490,915 2,330,704
Foreign (fair value of $293,769 in 1997 and $237,744 in 1996) (note 7) ........ 293,709 237,692
- -----------------------------------------------------------------------------------------------------------------
Total deposits ................................................................... 6,089,200 5,936,708
- -----------------------------------------------------------------------------------------------------------------
Short-term borrowings (note 8) ................................................... 721,865 929,560
Acceptances outstanding .......................................................... 867 824
Other liabilities ................................................................ 230,723 223,455
Long-term debt (note 9) .......................................................... 218,736 205,743
Guaranteed preferred beneficial interests in Company's junior
subordinated debentures (note 9) ............................................... 100,000 --
- -----------------------------------------------------------------------------------------------------------------
Total liabilities ................................................................ 7,361,391 7,296,290
- -----------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (notes 13, 17 and 18)
Stockholders' equity (note 11):
Preferred stock $5 par value
Authorized and unissued -- 50,000,000 shares
in 1997 and 1996 ........................................................... -- --
Common stock $5 par value (notes 10 and 13)
Authorized -- 100,000,000 shares
Issued -- 33,190,374 shares in 1997 and 1996 ................................. 165,952 165,952
Surplus ........................................................................ 148,165 148,196
Retained earnings (note 12) .................................................... 473,659 428,693
Unrealized valuation adjustment ................................................ (241) 1,850
Treasury stock, at cost -- 1,845,217 shares in 1997 and 1,415,954 shares
in 1996 .................................................................... (55,834) (38,807)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity ....................................................... 731,701 705,884
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................................... $ 8,093,092 $ 8,002,174
=================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
(in thousands, except number of shares and per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans ........................ $ 504,347 $ 468,517 $ 470,110
Lease financing income ............................ 14,437 10,494 11,334
Interest on investment securities:
Taxable interest income ......................... 59,188 72,813 57,890
Exempt from Federal income taxes ................ 647 2,692 4,893
Other interest income ............................. 13,864 19,624 15,730
- ---------------------------------------------------------------------------------------------------------
Total interest income ............................. 592,483 574,140 559,957
- ---------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits (note 7) ................................. 197,619 182,402 176,048
Short-term borrowings ............................. 41,527 53,977 74,370
Long-term debt .................................... 18,865 16,416 14,879
- ---------------------------------------------------------------------------------------------------------
Total interest expense ............................ 258,011 252,795 265,297
- ---------------------------------------------------------------------------------------------------------
Net interest income ............................... 334,472 321,345 294,660
Provision for loan losses (note 5) ................ 17,211 23,627 38,107
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 317,261 297,718 256,553
- ---------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and investment services income .............. 25,115 23,857 23,034
Service charges on deposit accounts ............... 28,776 26,284 24,150
Other service charges and fees .................... 31,509 24,976 22,779
Securities gains, net (note 3) .................... 270 118 144
Other ............................................. 12,843 12,220 11,999
- ---------------------------------------------------------------------------------------------------------
Total noninterest income .......................... 98,513 87,455 82,106
- ---------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and wages ................................ 113,179 104,572 94,119
Employee benefits (note 13) ....................... 34,251 34,144 7,209
Occupancy expense (notes 6 and 17) ................ 38,715 27,045 25,706
Equipment expense (notes 6 and 17) ................ 25,146 22,680 23,907
Other (note 14) ................................... 80,919 80,898 65,580
- ---------------------------------------------------------------------------------------------------------
Total noninterest expense ......................... 292,210 269,339 216,521
- ---------------------------------------------------------------------------------------------------------
Income before income taxes ........................ 123,564 115,834 122,138
Income taxes (note 15) ............................ 39,303 35,538 45,133
- ---------------------------------------------------------------------------------------------------------
NET INCOME ........................................ $ 84,261 $ 80,296 $ 77,005
=========================================================================================================
PER SHARE DATA
BASIC EARNINGS .................................... $ 2.66 $ 2.56 $ 2.43
DILUTED EARNINGS .................................. $ 2.64 $ 2.55 $ 2.43
=========================================================================================================
CASH DIVIDENDS .................................... $ 1.24 $ 1.195 $ 1.18
=========================================================================================================
AVERAGE SHARES OUTSTANDING ........................ 31,725,534 31,398,978 31,734,669
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 6
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
First Hawaiian, Inc. and Subsidiaries and First Hawaiian, Inc. (Parent Company)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Unrealized
(in thousands, except number of ------------------------ Retained Valuation Treasury
shares and per share data) Shares Amount Surplus Earnings Adjustment Stock Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ...... 32,542,797 $ 162,713 $ 133,820 $ 346,339 $ (1,033) $ (13,895) $ 627,944
Net income -- 1995 .............. -- -- -- 77,005 -- -- 77,005
Purchase of treasury stock ...... -- -- -- -- -- (24,671) (24,671)
Cash dividends ($1.18 per share)
(note 12) ..................... -- -- -- (37,368) -- -- (37,368)
Unrealized valuation adjustment
(note 3) ...................... -- -- -- -- 6,522 -- 6,522
Incentive Plan for Key Executives
(note 13) ..................... -- -- 105 -- -- -- 105
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 ...... 32,542,797 162,713 133,925 385,976 5,489 (38,566) 649,537
Net income -- 1996 .............. -- -- -- 80,296 -- -- 80,296
Issuance of common stock
(note 10) ..................... 647,577 3,239 14,286 -- -- -- 17,525
Cash dividends ($1.195 per share)
(note 12) ..................... -- -- -- (37,579) -- -- (37,579)
Unrealized valuation adjustment
(note 3) ...................... -- -- -- -- (3,639) -- (3,639)
Incentive Plan for Key Executives
(note 13) ..................... -- -- (15) -- -- (241) (256)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ...... 33,190,374 165,952 148,196 428,693 1,850 (38,807) 705,884
Net income -- 1997 .............. -- -- -- 84,261 -- -- 84,261
Purchase of treasury stock ...... -- -- -- -- -- (18,953) (18,953)
Cash dividends ($1.24 per share)
(note 12) ..................... -- -- -- (39,295) -- -- (39,295)
Unrealized valuation adjustment
(note 3) ...................... -- -- -- -- (2,091) -- (2,091)
Incentive Plan for Key Executives
(note 13) ..................... -- -- (31) -- -- 1,926 1,895
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 ...... 33,190,374 $ 165,952 $ 148,165 $ 473,659 $ (241) $ (55,834) $ 731,701
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR ....................... $ 333,511 $ 304,051 $ 262,894
Cash flows from operating activities:
Net income ....................................................... 84,261 80,296 77,005
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses .................................... 17,211 23,627 38,107
Depreciation and amortization ................................ 31,568 31,252 27,798
Gain on curtailment of noncontributory pension plan .......... -- -- (20,766)
Income taxes ................................................. 20,071 20,580 20,953
Decrease (increase) in interest receivable ................... 4,096 (2,571) (5,154)
Increase (decrease) in interest payable ...................... 10,010 (5,840) 7,655
Decrease (increase) in prepaid expense ....................... 1,663 (8,222) (48)
Other ........................................................ 11,356 (21,054) (5,431)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities .......................... 180,236 118,068 140,119
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits
in other banks ................................................. (67,800) 174,440 (232,900)
Net decrease in Federal funds sold and securities
purchased under agreements to resell ........................... 14,096 32,133 10,197
Purchase of held-to-maturity investment securities ............... -- -- (247,559)
Proceeds from maturity of held-to-maturity investment securities . -- -- 690,357
Purchase of available-for-sale investment securities ............. (367,595) (567,143) (29,921)
Proceeds from sale of available-for-sale investment securities ... 387,986 81,159 15,000
Proceeds from maturity of available-for-sale investment securities 338,732 521,787 17,020
Net increase in loans to customers ............................... (482,097) (137,281) (220,553)
Net cash provided by Pacific Northwest Acquisitions .............. -- 218,966 --
Purchase of bank owned life insurance on certain officers ........ (30,000) -- --
Capital expenditures ............................................. (18,792) (20,634) (13,072)
Other ............................................................ (6,809) 7,210 (4,376)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities ................ (232,279) 310,637 (15,807)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits .............................. 152,492 (174,782) 206,100
Net decrease in short-term borrowings ............................ (227,695) (236,619) (246,637)
Proceeds from long-term debt ..................................... 192,700 53,000 19,447
Payments on long-term debt ....................................... (59,707) (3,009) (26)
Cash dividends paid .............................................. (39,295) (37,579) (37,368)
Repurchased common stock ......................................... (17,058) (256) (24,671)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ................ 1,437 (399,245) (83,155)
- -------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR ............................. $ 282,905 $ 333,511 $ 304,051
===================================================================================================================
Supplemental disclosures:
Interest paid .................................................... $ 248,001 $ 258,635 $ 256,906
Income taxes paid ................................................ $ 19,232 $ 20,580 $ 24,181
Supplemental schedule of noncash investing and financing activities:
Loans converted into other real estate owned ..................... $ 23,753 $ 26,764 $ 10,279
Loans exchanged for mortgage-backed securities ................... $ -- $ -- $ 461,449
Transfer of securities from held-to-maturity to
available-for-sale, at estimated fair value .................... $ -- $ -- $ 1,023,144
===================================================================================================================
In connection with the Pacific Northwest Acquisitions,
the following liabilities were assumed:
Fair value of assets acquired ...................................... $ -- $ 552,582 $ --
Cash received ...................................................... -- 218,966 --
Issuance of common stock ........................................... -- (17,525) --
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES ASSUMED ................................................ $ -- $ 754,023 $ --
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Hawaiian, Inc. and
Subsidiaries (the "Company") conform with generally accepted accounting
principles and practices within the banking industry. The following is a summary
of the significant accounting policies:
CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
First Hawaiian, Inc. (the "Parent") and its wholly-owned subsidiary companies --
First Hawaiian Bank and its wholly-owned subsidiaries (the "Bank"); Pacific One
Bank ("Pacific One"); First Hawaiian Creditcorp, Inc. and its wholly-owned
subsidiary ("Creditcorp"); 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 1996 and 1995 Financial
Statements to conform to the 1997 presentation. Such reclassifications did not
have a material effect on the 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 1997,
1996 and 1995, the average amount of these reserve balances was $91,918,000,
$127,399,000 and $123,648,000, 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.
Investments in and obligations to individual counterparties are presented as
net amounts in the consolidated financial statements of the Company only if the
conditions specified in Financial Accounting Standards Board ("FASB")
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," are
met. No such netting occurred as of December 31, 1997 and 1996.
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 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
Loans are stated at their principal outstanding amounts, net of any unearned
discounts. Interest income on loans is accrued and recognized on the principal
amount outstanding.
Loan origination fees and substantially all loan commitment fees are
generally deferred and accounted for as an adjustment of the yield.
Lease financing transactions consist of two types:
(1) Equipment without outside financing is accounted for using the direct
financing method with income recognized over the life of the lease based upon a
constant periodic rate of return on the net investment in the lease.
(2) Leveraged lease transactions are subject to outside financing through
one or more participants, without recourse to the Company. These transactions
are accounted for by recording as the net investment in each lease the aggregate
of rentals receivable (net of principal and interest on the related nonrecourse
debt) and estimated residual value of the equipment less the unearned income.
Income from these lease transactions is recognized during the periods in which
the net investment is positive.
Loans are placed on nonaccrual status when serious doubt exists as to the
collectibility of the principal and/or interest. When loans are placed on
nonaccrual status, any accrued and unpaid interest is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a
44
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
reduction of the principal when concern exists as to the ultimate collection of
the principal; otherwise, such payments are recorded as income. Loans are
removed from nonaccrual status when they become current as to both principal and
interest and when concern no longer exists as to the collectibility of principal
and interest.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," which
amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." This
statement requires that a mortgage banking enterprise recognize as separate
assets the rights to service mortgage loans for others, however those rights are
acquired. The adoption of this standard did not have a material effect on the
consolidated financial statements of the Company.
ALLOWANCE FOR LOAN LOSSES
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures." SFAS No. 114
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price, or at the fair value of the collateral if the
loan is collateral dependent. The adoption of SFAS No. 114 did not change
management's existing methodology for measuring impairment primarily because the
majority of impaired loan valuations continue to be based on the fair value of
the collateral.
The provision for loan losses charged to expense is based upon, among other
things, the Company's historical loss experience and estimates of future loan
losses inherent in the current loan portfolio, including the evaluation of
impaired loans in accordance with SFAS No. 114. A loan is considered to be
impaired when, based upon current information and events, it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the loan. Impairment is primarily measured based on the
fair value of the collateral. Impairment losses are included in the provision
for loan losses. SFAS No. 114 does not apply to large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment, except for
those loans restructured under a troubled debt structuring. Smaller balance
homogeneous loans include credit card and consumer loans, which are charged off
at a predetermined delinquency status.
Management periodically analyzes each commercial, financial and agricultural
and real estate loan past due 90 days or more and still accruing interest on a
loan-by-loan basis. If management expects that the borrower will shortly bring
the loan current and/or that the fair value of the collateral exceeds the
recorded investment in the loan, the loan is not placed on nonaccrual status.
Consumer and credit card loans are not placed on nonaccrual status because they
are charged off when they reach a predetermined delinquency status.
The allowance for loan losses (the "Allowance") is maintained at a level
which, in management's judgment, is adequate to absorb future loan losses.
Estimates of future loan losses involve judgment and assumptions as to various
factors which deserve current recognition in estimating such losses and in
determining the adequacy of the Allowance. Principal factors considered by
management include the historical loss experience, the value and adequacy of
collateral, the level of nonperforming (nonaccrual and restructured) loans, loan
concentrations, the growth and composition of the portfolio, the review of
monthly delinquency reports, the results of examinations of individual loans
and/or evaluation of the overall portfolio by senior credit personnel, internal
auditors, and Federal and State regulatory agencies, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay and general economic conditions.
The Allowance is reduced by loans charged off when collectibility becomes
doubtful and the underlying collateral, if any, is considered inadequate to
liquidate the outstanding debt. Recoveries on loans previously charged off are
added to the Allowance.
OTHER REAL ESTATE OWNED
Other real estate owned, included in other assets, is comprised of
properties acquired primarily through foreclosure proceedings. When acquired,
these properties are valued at fair value, which establishes the new cost basis
of other real estate owned. Losses arising at the time of acquisition of such
properties are charged against the Allowance. Subsequent to acquisition, such
properties are carried at the lower of cost or fair value less estimated selling
costs. Write-downs or losses from the disposition of such properties subsequent
to the date of acquisition are included in other noninterest 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 PREMIUM AND GOODWILL
The core deposit premium is being amortized on the straight-line method over
various lives ranging from 9 to 20 years. The excess of the purchase price over
the fair value of the net assets acquired is accounted for as
45
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
goodwill and is being amortized on the straight-line method over 25 years.
Goodwill represents the cost of acquired companies in excess of the fair
value of net assets acquired. In compliance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which the Company adopted on January 1, 1996, it is the Company's policy to
review goodwill for impairment whenever events or changes in circumstances
indicate that its investment in the underlying assets/businesses which gave rise
to such goodwill may not be recoverable. Should such an evaluation of impairment
become necessary, the Company will evaluate the performance of such acquired
business on an undiscounted basis. The Company does not believe that there is
any current impairment of goodwill.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Company adopted 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 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 specify its rights to request additional
collateral. All collateral is held by the Company or a custodian.
In those reverse repurchase and securities-borrowed transactions where the
securities received qualify for collateral recognition under SFAS No. 125, the
securities are recorded at fair value, and a corresponding liability which
reflects the obligation to return such securities is also recorded. As of
December 31, 1997, there were no such transactions.
SERVICING ASSETS
In accordance with SFAS No. 125, the Company records a separate asset or
liability representing the right or obligation, respectively, to service loans
(or other financial assets that are being serviced) for others. A servicing
asset is determined by allocating the loans' previous carrying amount between
the servicing asset and the loans that were sold, based on their relative fair
values at the date of sale. The fair value of the servicing assets is calculated
based on an analysis of discounted cash flows that incorporates estimates of:
(1) market servicing costs; (2) projected ancillary servicing revenue; (3)
projected prepayment rates that are based on changes in interest rates; and (4)
market profit margins.
Servicing assets are amortized in proportion to, and over the period of,
estimated net servicing income.
Impairment of servicing assets is evaluated through an assessment of the
fair value of those assets via a discounted cash-flows method in which the
assets are disaggregated into various strata based on predominant risk
characteristics. The net carrying value of each stratum is compared to its
discounted estimated future net cash flows to determine whether adjustments
should be made to carrying values or amortization schedules. Impairment of a
servicing asset is recognized either through: (1) a valuation allowance and a
charge to current-period earnings if it is considered to be temporary; or (2) a
direct write-down of the asset and a charge to current-period earnings if it is
considered other than temporary. The predominant risk characteristics of the
underlying loans that are used to stratify servicing assets for measurement
purposes include: (1) loan origination date; (2) loan interest rate;
46
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(3) loan type and size; (4) loan maturity date; and (5) geographic location.
The estimated rate of prepayment of loans serviced is the most significant
factor involved in the measurement process. Management's future prepayment rate
estimates are based on the Company's historical rate of loan repayment, industry
trends and other considerations. Actual prepayment rates may differ from those
projected by management due to changes in a variety of economic factors,
including prevailing interest rates and the availability of alternative
financing sources to borrowers. If actual prepayments of the loans being
serviced were to occur more quickly than projected, the carrying value of
servicing assets might have to be written down through a charge to earnings in
the current period. If actual prepayments of the loans being serviced were to
occur more slowly than projected, the carrying value of the servicing assets
could increase, and servicing income would exceed previously projected amounts.
Accordingly, the servicing assets actually realized could differ from the
amounts initially recorded.
Changes in the balance of servicing assets for the years ended December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------
(in thousands) 1997 1996
- ----------------------------------------------------
<S> <C> <C>
Balance at beginning of the year $ 962 $ --
Servicing asset additions ...... 1,029 1,162
Less amortization .............. 310 200
- ----------------------------------------------------
BALANCE AT END OF THE YEAR ..... $1,681 $ 962
====================================================
</TABLE>
The valuation allowance on originated servicing assets at December 31, 1997
and 1996 was not material. Additionally, there were no unrecognized servicing
assets or assets for which it was not practicable to estimate fair value. There
were no mortgage servicing liabilities at December 31, 1997 and 1996.
INCOME TAXES
The Company has adopted SFAS No. 109, "Accounting for Income Taxes," which
requires recognition of deferred income tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Excise tax credits relating to premises and equipment are accounted for
under the flow-through method which recognizes the benefit in the year the asset
is placed in service. The 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.
DERIVATIVES
The Company enters into interest rate swap and floor contracts in managing
its interest rate risk. The criteria that must be satisfied for accrual
accounting treatment are as follows: (1) the transaction to be hedged exposes
the Company to interest rate risk; (2) the hedge acts to reduce the interest
rate risk by moving closer to being insensitive to interest rate changes; and
(3) the derivative is designed and effective as a hedge of the transaction. The
following additional criteria apply to hedges of anticipated transactions: (1)
the significant characteristics and expected terms of the anticipated
transaction must be identified; and (2) it must be probable that the anticipated
transaction will occur. Derivative products that do not satisfy the hedging
criteria described above would be carried at market value. Any changes in market
value would be recognized in noninterest income. As of December 31, 1997, all
derivative product instruments met the criteria for accrual accounting
treatment.
Premiums for purchased floors are amortized over the life of the contracts.
Since the contracts represent an exchange of interest payments and the
underlying principal balances are not affected, there is no material effect on
the total assets or liabilities of the Company. The related income or expense
from these contracts is included as part of the interest income or expense for
the corresponding asset or liability being hedged. Changes in fair value are not
reflected in the financial statements.
Gains or losses resulting from early termination of derivatives and the
designated hedged items are recorded to income or expense at the date of
termination. Gains or losses on termination of anticipatory hedges are amortized
over the life of the designated hedged items.
PER SHARE DATA
In 1997, the Company adopted SFAS No. 128, "Earnings per Share," which
specifies the computation, presentation and disclosure requirements for earnings
per share. Prior period earnings per share data has been expanded to comply with
the provisions of SFAS No. 128.
47
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1997
---------------------------------------------
(in thousands, except
number of shares and Income Shares Per Share
per share data) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1996
---------------------------------------------
(in thousands, except
number of shares and Income Shares Per Share
per share data) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1995
---------------------------------------------
(in thousands, except
number of shares and Income Shares Per Share
per share data) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic:
Net income .................. $ 77,005 31,734,669 $ 2.43
Effect of dilutive
securities --
Stock incentive
plan options .............. -- 3,554 --
- ------------------------------------------------------------------------------------
Diluted:
Net income and
assumed
conversions ............... $ 77,005 31,738,223 $ 2.43
====================================================================================
</TABLE>
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
requires the Company to disclose estimated fair values for its financial
instruments. The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Cash and due from banks: The carrying amounts reported in the Consolidated
Balance Sheets of cash and short-term instruments approximate fair values.
Investment securities (including mortgage-backed securities): Fair values
of investment securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values of commercial and industrial loans, financial institution
loans, agricultural loans, certain mortgage loans (e.g., 1-4 family
residential, commercial real estate and rental property), credit card loans,
and other consumer loans are estimated using discounted cash flow analyses,
which utilize interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The carrying amount of accrued
interest approximates its fair value.
Off-balance sheet commitments and contingent liabilities: Fair values of
off-balance sheet commitments and contingent liabilities are based upon: (1)
quoted market prices of comparable instruments (interest rate floors); (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).
Deposits: The fair values of deposits with no maturity date (e.g.,
interest and noninterest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair values of
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Short-term borrowings: The carrying amounts of overnight Federal funds
purchased, borrowings under repurchase agreements, and other short-term
borrowings approximate their fair values.
Long-term debt 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.
NEW PRONOUNCEMENTS
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 states that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 131 requires disclosures regarding segments
of an
48
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
enterprise and related information that reflects the different types of business
activities in which the enterprise engages and the different economic
environments in which it operates. The adoption of these standards is not
expected to have a material effect on the Company's consolidated financial
statements.
2. PACIFIC NORTHWEST ACQUISITIONS
On May 31, 1996, for a purchase price of $36 million, the Company acquired
31 branches in Oregon, Washington and Idaho, which were being divested by U.S.
Bancorp and West One Bancorp as a result of their merger. This transaction
included the purchase of loans of $400 million and the assumption of deposits of
$687 million. The acquisition was accounted for using the purchase method of
accounting and the results of operations were included in the Consolidated
Statements of Income from the date of acquisition. Of the 31 branches acquired
by the Company, the 27 Oregon and Idaho branches are being operated as Pacific
One Bank, a 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 wholly-owned subsidiary
of the Company that was merged into the Bank in 1997 (see current operations
described below).
On July 31, 1996, for a purchase price of $18 million, the Company acquired
ANB Financial Corporation, a bank holding company, and its subsidiary, American
National Bank ("ANB"), which had total loans of $51 million and deposits of $67
million at the date of acquisition. American National Bank had a total of four
branches in Washington state. The acquisition was accounted for using the
purchase method of accounting and the results of operations of ANB were included
in the Consolidated Statements of Income from the date of acquisition. On
November 8, 1996, American National Bank acquired the 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 into Pacific One Bank.
Currently, Pacific One operates 28 branches in Oregon, eight branches in
Washington and two branches in Idaho.
3. AVAILABLE-FOR-SALE INVESTMENT SECURITIES
Amortized cost and fair values of available-for-sale investment securities
at December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
------------------------------------------------
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY
AND OTHER U.S.
GOVERNMENT
AGENCIES AND
CORPORATIONS ............. $689,221 $ 989 $ 1,197 $689,013
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
================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1996
--------------------------------------------------
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
and other U.S.
Government
agencies and
corporations ............. $1,025,699 $ 4,626 $ 1,666 $1,028,659
Collateralized
mortgage
obligations .............. 14,531 41 14 14,558
States and political
subdivisions ............. 30,124 317 221 30,220
Other ...................... 67,286 -- 4 67,282
- ----------------------------------------------------------------------------------
Total available-for-
sale investment
securities ............... $1,137,640 $ 4,984 $ 1,905 $1,140,719
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1995
--------------------------------------------------
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
and other U.S.
Government
agencies and
corporations ............. $ 895,327 $ 8,790 $ 187 $ 903,930
Collateralized
mortgage
obligations .............. 97,360 1 386 96,975
States and political
subdivisions ............. 54,176 1,129 224 55,081
Other ...................... 119,315 -- 8 119,307
- ----------------------------------------------------------------------------------
Total available-for-
sale investment
securities ............... $1,166,178 $ 9,920 $ 805 $1,175,293
==================================================================================
</TABLE>
49
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The amortized cost and fair values of available-for-sale investment
securities at December 31, 1997, by contractual maturity, excluding securities
which have no stated maturity, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amortized Fair
(in thousands) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
DUE WITHIN ONE YEAR ............................ $286,265 $286,163
DUE AFTER ONE BUT WITHIN FIVE YEARS ............ 115,132 115,408
DUE AFTER FIVE BUT WITHIN TEN YEARS ............ 243 245
DUE AFTER TEN YEARS ............................ 307,208 306,632
- --------------------------------------------------------------------------------
TOTAL AVAILABLE-FOR-SALE
INVESTMENT SECURITIES ........................ $708,848 $708,448
================================================================================
</TABLE>
The Company held no trading or held-to-maturity securities at December 31,
1997, 1996 and 1995.
Investment securities with an aggregate book value of $644,397,000 at
December 31, 1997 were pledged to secure public deposits and repurchase
agreements as required by law.
The Company did not hold investment securities of any single issuer (other
than the U.S. Government and its agencies) which were in excess of 10% of
stockholders' equity at December 31, 1997.
Gross gains of $1,088,000, $131,000 and $224,000 and gross losses of
$818,000, $13,000 and $80,000 were realized on sales of investment securities
during 1997, 1996 and 1995, respectively.
At December 31, 1997, collateralized mortgage obligations were comprised of
floating rate bonds with an estimated average life of 2.3 years.
4. LOANS
At December 31, 1997 and 1996, loans were comprised of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
------------------------ ------------------------
(in thousands) Book Value Fair Value Book Value Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial,
financial and
agricultural ......... $1,582,698 $1,599,112 $1,381,824 $1,390,768
Real estate:
Commercial ........... 1,193,538 1,258,439 1,172,124 1,173,697
Construction ......... 166,482 168,154 213,195 207,921
Residential .......... 1,944,611 1,871,172 1,935,920 1,923,668
Consumer ............... 678,984 680,046 583,060 577,241
Lease financing ........ 333,270 330,318 240,898 236,586
Foreign ................ 339,098 340,898 279,711 284,048
- --------------------------------------------------------------------------------
TOTAL LOANS ............ $6,238,681 $6,248,139 $5,806,732 $5,793,929
================================================================================
</TABLE>
At December 31, 1997 and 1996, loans aggregating $55,601,000 and
$72,408,000, respectively, were on a nonaccrual basis or restructured.
In the normal course of business, the Company makes loans to its executive
officers and directors and to companies and individuals affiliated with
executive officers and directors of the Company. Changes in the loans to such
parties were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year ............. $ 260,888 $ 257,404
New loans made ......................... 51,490 28,909
Repayments ............................. (65,409) (25,425)
- --------------------------------------------------------------------------------
BALANCE AT END OF YEAR ................... $ 246,969 $ 260,888
================================================================================
</TABLE>
At December 31, 1997 and 1996, loans to such parties by the Parent were
$9,811,000 and $11,731,000, respectively, and the income related to these loans
was $782,000, $1,045,000 and $1,143,000 for 1997, 1996 and 1995, respectively.
Real estate loans totalling $1,243,274,000 were pledged to collateralize
Federal Home Loan Bank of Seattle advances at December 31, 1997.
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows for the years
indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year ......... $ 85,248 $ 78,733 $ 61,250
Provision charged to expense ....... 17,211 23,627 38,107
Net charge-offs:
Loans charged off ................ (25,130) (27,341) (22,845)
Recoveries on loans
charged off .................... 5,267 3,123 2,221
- --------------------------------------------------------------------------------
Net charge-offs .............. (19,863) (24,218) (20,624)
- --------------------------------------------------------------------------------
Allowance of subsidiaries
purchased ........................ -- 7,106 --
- --------------------------------------------------------------------------------
BALANCE AT END OF YEAR ............... $ 82,596 $ 85,248 $ 78,733
================================================================================
</TABLE>
The following table presents information related to impaired loans as of and
for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans ....................... $ 74,751 $128,446 $ 97,915
Impaired loans with related
allowance for loan losses
calculated under SFAS
No. 114 ............................ 38,278 41,778 65,430
Total allowance on impaired
loans .............................. 9,257 9,690 15,380
Average impaired loans ............... 90,901 87,289 82,304
Interest income recorded during
the year ........................... 835 980 3,454
================================================================================
</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.
50
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
At December 31, 1997 and 1996, premises and equipment were comprised of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Premises ................................... $244,221 $240,910
Equipment .................................. 154,497 145,527
- --------------------------------------------------------------------------------
398,718 386,437
Less accumulated depreciation
and amortization ......................... 152,719 136,864
- --------------------------------------------------------------------------------
NET BOOK VALUE ............................. $245,999 $249,573
================================================================================
</TABLE>
Occupancy and equipment expense include depreciation and amortization
expense of $18,057,000, $17,541,000 and $17,649,000 for 1997, 1996 and 1995,
respectively.
7. DEPOSITS
Interest expense related to deposits for the years indicated was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing demand ........... $ 41,885 $ 36,104 $ 30,034
Savings ........................... 19,457 20,679 34,272
Time -- Under $100 ................ 76,444 67,714 52,260
Time -- $100 and over ............. 50,484 48,993 40,682
Foreign ........................... 9,349 8,912 18,800
- --------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE
ON DEPOSITS ..................... $197,619 $182,402 $176,048
================================================================================
</TABLE>
Time deposits in denominations of $100,000 or more at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Domestic ......................... $1,052,491 $906,220
Foreign .......................... $ 87,402 $ 73,563
================================================================================
</TABLE>
8. SHORT-TERM BORROWINGS
At December 31, 1997, 1996 and 1995, short-term borrowings were comprised of
the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
First Hawaiian Bank:
Federal funds purchased ......... $ 87,475 $ 49,980 $ 19,586
Securities sold under
agreements to repurchase ...... 495,054 685,064 838,026
Advances from Federal
Home Loan Bank of
Seattle ....................... 81,000 97,237 184,290
First Hawaiian, Inc. (Parent):
Commercial paper ................ 1,800 4,409 13,777
Notes payable ................... -- 50,000 --
Other subsidiaries:
Advances from Federal
Home Loan Bank of
Seattle ....................... 18,000 16,500 27,500
Securities sold under
agreements to repurchase ...... 38,536 26,370 --
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM BORROWINGS ....... $721,865 $929,560 $1,083,179
================================================================================
</TABLE>
Average rates and average and maximum balances for these short-term
borrowings were as follows for the years indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Average interest rate at
December 31 .................. 5.7% 5.8% 5.9%
Highest month-end balance ...... $116,450 $123,608 $270,927
Average daily outstanding
balance ...................... $ 76,164 $ 49,210 $161,602
Average daily interest
rate paid .................... 6.2% 5.6% 6.3%
Securities sold under
agreements to repurchase:
Average interest rate at
December 31 .................. 5.3% 5.0% 5.4%
Highest month-end balance ...... $715,554 $818,527 $909,867
Average daily outstanding
balance ...................... $593,061 $785,144 $823,506
Average daily interest
rate paid .................... 5.0% 5.2% 5.6%
Commercial paper:
Average interest rate at
December 31 .................. 5.2% 5.1% 5.3%
Highest month-end balance ...... $ 6,226 $ 13,509 $ 49,102
Average daily outstanding
balance ...................... $ 5,017 $ 9,854 $ 26,875
Average daily interest
rate paid .................... 5.3% 5.2% 6.2%
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% --%
Advances from Federal Home
Loan Bank of Seattle:
Average interest rate at
December 31 .................. 5.7% 5.7% 5.9%
Highest month-end balance ...... $100,500 $212,016 $322,661
Average daily outstanding
balance ...................... $ 87,658 $155,182 $259,998
Average daily interest
rate paid .................... 5.5% 5.7% 6.8%
============================================================================
</TABLE>
51
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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, 1997, the weighted average
maturity of these agreements was 74 days and primarily represents investments by
public (governmental) entities. A schedule of maturities of these agreements was
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(in thousands)
- -------------------------------------------------------------------
<S> <C>
OVERNIGHT .............................................. $ 34,161
LESS THAN 30 DAYS ...................................... 229,777
30 TO 90 DAYS .......................................... 120,254
OVER 90 DAYS ........................................... 149,398
- -------------------------------------------------------------------
TOTAL .................................................. $533,590
===================================================================
</TABLE>
The Parent had $50,000,000 in unused lines of credit with unaffiliated banks
to support its commercial paper borrowings as of December 31, 1997.
9. LONG-TERM DEBT AND CAPITAL SECURITIES
At December 31, 1997 and 1996, long-term debt was comprised of the
following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
1997 1996
------------------ ---------------------
BOOK FAIR Book Fair
(dollars in thousands) VALUE VALUE Value Value
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Hawaiian, Inc.
(Parent):
6.188% note due
2004 ................ $ 50,000 $ 50,018 $ -- $ --
6.25% subordinated
notes due 2000..... 100,000 100,090 100,000 98,610
7.375% subordinated
notes due 2006 .... 50,000 52,575 50,000 50,575
Other subsidiaries --
5.50%-6.08% notes
due through 2000 .. 18,736 18,801 55,743 55,989
- -----------------------------------------------------------------------
TOTAL LONG-TERM
DEBT ................ $218,736 $221,484 $205,743 $205,174
=======================================================================
</TABLE>
FIRST HAWAIIAN, INC. (PARENT)
The 6.188% note due in 2004 is unsecured and accrues interest at London
Interbank Offered Rates ("LIBOR") plus 0.25% per annum (6.188% per annum at
December 31, 1997). 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.
OTHER SUBSIDIARIES
The 5.50%-6.08% notes due through 2000 represent advances from the Federal
Home Loan Bank of Seattle to the Company's other subsidiaries (Bank and
Creditcorp) with interest payable monthly.
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, 1997, the principal payments due on long-term debt and
capital securities were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
FIRST FIRST
HAWAIIAN, INC. HAWAIIAN OTHER
(in thousands) (PARENT) CAPITAL I SUBSIDIARIES TOTAL
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 $ -- $ -- $14,018 $ 14,018
2000 100,000 -- 4,020 104,020
2001 -- -- 22 22
2002 -- -- 24 24
2003 AND
THEREAFTER 100,000 100,000 652 200,652
- ------------------------------------------------------------------------
TOTAL $200,000 $100,000 $18,736 $318,736
========================================================================
</TABLE>
10. COMMON STOCK
On July 31, 1996, the Company acquired ANB Financial Corporation, a bank
holding company, and its subsidiary, American National Bank, for $17,525,000 in
the form of an exchange of shares of ANB Financial Corporation's common stock
for 647,577 newly-issued shares of the Company's common stock.
11. REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain discretionary (and, in the case of the
Company's depository institution subsidiaries, mandatory) actions by regulators
that, if undertaken, could have a 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.
52
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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, 1997 and 1996) of Tier 1 and Total capital to
risk-weighted assets, and of Tier 1 capital to average assets.
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------
MINIMUM
FOR CAPITAL TO BE
ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED
-----------------------------------------------------------------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TIER 1 CAPITAL TO
RISK-WEIGHTED
ASSETS ........ $714,891 9.51% $300,533 4.00% $450,799 6.00%
TOTAL CAPITAL TO
RISK-WEIGHTED
ASSETS ........ $947,487 12.61% $601,065 8.00% $751,331 10.00%
TIER 1 CAPITAL TO
AVERAGE ASSETS $714,891 9.14% $234,760 3.00% $ -- --%
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------
Minimum
For Capital To Be
Actual Adequacy Purposes Well Capitalized
-----------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital to
Risk-Weighted
Assets ........ $578,454 8.42% $274,736 4.00% $412,104 6.00%
Total Capital to
Risk-Weighted
Assets ........ $813,702 11.85% $549,472 8.00% $686,840 10.00%
Tier 1 Capital to
Average Assets $578,454 7.32% $237,084 3.00% $ -- --%
=================================================================================================
</TABLE>
As of December 31, 1997 and 1996, 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, 1997, that would cause a change
in the Company's category.
12. LIMITATIONS ON PAYMENT OF DIVIDENDS
The primary source of funds for the dividends paid by the Company to its
stockholders is dividends received from its subsidiaries. The Bank, Creditcorp
and Pacific One are subject to regulatory limitations on the amount of dividends
they may declare or pay. At December 31, 1997, the aggregate amount available
for payment of dividends by such subsidiaries without prior regulatory approval
was $261,840,000.
13. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a noncontributory pension plan which was "frozen" as of
December 31, 1995. This plan was replaced by a money purchase plan and
enhancements to an existing 401(k) plan. As a result of the "freeze," there will
be no future accruals and no additional participants in the noncontributory
pension plan. In addition, the Company has an unfunded supplemental executive
retirement plan for a "frozen" group of key executives.
The net pension credit for 1997, 1996 and 1995 included the following
components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period .................. $ 1,141 $ 1,236 $ 4,018
Interest cost on projected
benefit obligation ................. 6,596 6,321 6,862
Actual return on plan assets ......... (21,002) (16,419) (18,476)
Net amortization and deferral ........ 11,068 7,817 10,197
Curtailment gain due to
pension plan freeze ................ -- -- (20,766)
- --------------------------------------------------------------------------------
NET PENSION CREDIT ................... $ (2,197) $ (1,045) $(18,165)
================================================================================
</TABLE>
No further contributions are anticipated because the pension plan is heavily
overfunded and there will be no future benefit accruals.
The following table sets forth the reconciliation of the funded status of
the plans at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits ................................ $ 86,365 $ 83,000
Nonvested benefits ............................. 1,643 1,764
- --------------------------------------------------------------------------------
Accumulated benefit obligation ................... $ 88,008 $ 84,764
================================================================================
Plan assets at fair value (primarily listed
stocks and fixed income securities) ............ $ 125,293 $ 110,309
Projected benefit obligation ..................... 98,684 95,460
- --------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation ............................. 26,609 14,849
Unrecognized net gain ............................ (15,182) (5,659)
Unrecognized prior service cost .................. 6,321 6,972
Unrecognized net asset ........................... (4,800) (6,000)
- --------------------------------------------------------------------------------
PREPAID PENSION COST ............................. $ 12,948 $ 10,162
================================================================================
</TABLE>
Plan assets included 587,856 shares of common stock of the Company with a
fair value of $23,367,000 and $20,575,000 at December 31, 1997 and 1996,
respectively.
For both December 31, 1997 and 1996, the weighted average discount rate was
7.0%; the rate of increase in future compensation used in determining the
projected benefit obligation was 7.0% for the unfunded supplemental executive
retirement plan; and the expected long-term rate of return on plan assets was
8.5%. Due to the "freeze" of the qualified pension plan, the rate of increase in
future compensation is no longer applicable for that plan.
The Company has unfunded postretirement medical and life insurance plans
which are available to retirees who have satisfied age and length of service
requirements.
53
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth the reconciliation of the status of these
plans at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Retirees ......................................... $ 3,815 $ 3,710
Other fully eligible plan participants ........... 1,478 1,387
Other active plan participants ................... 2,763 2,285
- --------------------------------------------------------------------------------
TOTAL .............................................. $ 8,056 $ 7,382
================================================================================
Unfunded benefit obligation ........................ $ 8,056 $ 7,382
Unrecognized transition obligation ................. (2,143) (2,286)
Unrecognized prior service cost .................... (379) (64)
Unrecognized net loss .............................. (394) (540)
- --------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST ................ $ 5,140 $ 4,492
================================================================================
Service cost ....................................... $ 305 $ 239
Interest cost ...................................... 519 475
Amortization of:
Transition obligation ............................ 143 143
Unrecognized prior service cost .................. 26 6
- --------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST ........... $ 993 $ 863
================================================================================
</TABLE>
The assumed health care cost trend is not applicable since the medical plan
provides a flat dollar commitment. Thus, there is no effect on postretirement
benefit costs due to a one-percentage-point increase in the trend rate.
For both December 31, 1997 and 1996, the weighted average discount rate was
7.0% and the rate of increase in future compensation used in determining the
accumulated postretirement benefit obligation was 5.0%.
MONEY PURCHASE AND 401(k) MATCH PLANS
Effective January 1, 1996, the Company began contributing to a defined
contribution money purchase plan and matching employees' contributions (up to 3%
of pay) to an existing 401(k) component of the Company's profit sharing plan.
The plans replace the pension plan which was "frozen" as of December 31, 1995.
The plans cover substantially all employees who satisfy the age and length of
service requirements, except for key executives who are eligible for the
Company's unfunded supplemental executive retirement plan.
For 1997 and 1996, the money purchase contribution was $5,351,000 and
$5,126,000, respectively, and the employer matching contribution to the 401(k)
plan was $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 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 1997, 1996 and
1995 totalled $5,537,000, $6,579,000 and $5,545,000, respectively.
INCENTIVE PLAN FOR KEY EXECUTIVES
The Company has an Incentive Plan for Key Executives (the "IPKE"), under
which awards of cash or common stock of the Company, or both, are made to key
executives. The IPKE limits the aggregate and individual value of the awards
that could be issued in any one fiscal year. Shares awarded under the IPKE are
held in escrow and key executives concerned may not, under any circumstances,
voluntarily dispose or transfer such shares prior to the earliest of attaining
60 years of age, completion of 20 full years of employment with the Company,
retirement, death or termination of employment prior to retirement with the
approval of the Company. Additionally, there is a five-year restriction from the
date of all subsequent shares awarded to those key executives who had previously
met the minimum restrictions of completion of 20 full years of employment or
attaining 60 years of age.
STOCK INCENTIVE PLAN
The Company has a Stock Incentive Plan (the "SIP"), which authorizes the
granting of up to 1,000,000 shares of common stock to key employees. The purpose
of the SIP is to promote the success and enhance the value of the Company by
providing additional incentives 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.
54
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table summarizes activity under the SIP for 1997, 1996 and
1995 and the status at December 31, 1997:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Options
----------------------------------------------------
Outstanding Exercisable
------------------------ ------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1994 ...... 346,204 $ 27.49 83,300 $ 27.35
Options granted .......... 149,420 25.50 -- --
Became exercisable ....... -- -- 89,782 27.49
Exercised ................ (2,115) 26.09 (2,115) 26.09
Forfeitures .............. (12,353) 27.28 -- --
- -------------------------- ------- --------
Balance at
December 31, 1995 ...... 481,156 26.88 170,967 27.44
Options granted .......... 139,660 28.26 -- --
Became exercisable ....... -- -- 127,138 26.90
Exercised ................ (2,167) 25.91 (2,167) 25.91
Forfeitures .............. (2,716) 26.33 -- --
- -------------------------- ------- --------
Balance at
December 31, 1996 ...... 615,933 27.20 295,938 27.22
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 $ 29.39 358,240 $ 27.35
===================================================================================
</TABLE>
At December 31, 1997, 76,979 stock options (net of exercised options of
75,670)were available for future grants under the SIP.
At December 31, 1997, the 847,351 SIP options outstanding under the plan
have exercise prices between $25.50 and $33.25 and a weighted average remaining
contractual life of 7.5 years.
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 value of the common stock
on the date of grant. Had compensation cost for the Company's stock-based
compensation plan been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported .................. $ 84,261 $ 80,296 $ 77,005
Pro forma .................... $ 83,426 $ 79,812 $ 76,636
Basic earnings per share:
As reported .................. $ 2.66 $ 2.56 $ 2.43
Pro forma .................... $ 2.63 $ 2.54 $ 2.41
================================================================================
</TABLE>
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 1997, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield ................. 3.69% 3.80% 4.60%
Expected volatility ..................... 18.07% 22.69% 23.50%
Risk-free interest rate ................. 6.49% 5.65% 7.20%
Expected life of the options ............ 6 years 6 years 6 years
===================================================================================
</TABLE>
The weighted-average grant-date fair value of options granted in 1997, 1996
and 1995 were $6.67, $5.93 and $5.61, respectively.
Due to the inclusion of only those grants made since 1995, the effect of
applying SFAS No. 123 for pro forma disclosures is not likely to be
representative of the effects on reported net income in future years. Options
vest over several years and additional awards generally are made each year.
LONG-TERM INCENTIVE PLAN
The Company has a Long-Term Incentive Plan (the "LTIP") designed to reward
key executives for the Company's and individuals' performances measured over
three-year performance cycles; that is, 1993-1995, 1994-1996, 1995-1997 and so
on. The threshold Company performance levels specified in the LTIP were not
achieved for the 1993-1995, 1994-1996 and 1995-1997 performance cycles.
14. OTHER NONINTEREST EXPENSE
For the years ended December 31, 1997, 1996 and 1995, other noninterest
expense included the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Stationery and supplies .............. $12,216 $11,193 $11,443
Advertising and promotion ............ 11,174 10,991 8,532
Deposit insurance .................... 810 5,280 6,190
Other ................................ 56,719 53,434 39,415
- --------------------------------------------------------------------------------
TOTAL OTHER NONINTEREST
EXPENSE ............................ $80,919 $80,898 $65,580
================================================================================
</TABLE>
15. INCOME TAXES
For the years ended December 31, 1997, 1996 and 1995, the provision for
income taxes was comprised of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ............................ $ 7,894 $20,147 $15,164
States and other ................... 2,962 4,572 3,698
- --------------------------------------------------------------------------------
Total current .................... 10,856 24,719 18,862
- --------------------------------------------------------------------------------
Deferred:
Federal ............................ 27,060 10,114 21,430
States and other ................... 1,387 705 4,841
- --------------------------------------------------------------------------------
Total deferred ................... 28,447 10,819 26,271
- --------------------------------------------------------------------------------
TOTAL INCOME TAX PROVISION ........... $39,303 $35,538 $45,133
================================================================================
</TABLE>
55
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The provision for income taxes has been reduced by general business tax
credits of $4,360,000, $4,188,000 and $2,140,000 in 1997, 1996 and 1995,
respectively. The Company also has alternative minimum tax credit, general
business tax credit and foreign tax credit carryforwards totalling $2,468,000,
$1,117,000 and $428,000, respectively, at December 31, 1997, which may be used
to offset future Federal income tax expense. The general business tax credits
and foreign tax credit carryforwards will expire at the end of 2012 and 2001,
respectively. 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.
The components of net deferred income tax liabilities at December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
--------- ---------
ASSETS
<S> <C> <C>
Federal and State income
tax credit carryovers ......................... $ 4,013 $ 6,283
Employee benefit deductions ..................... 1,977 3,625
Provision for loan losses ....................... 20,649 38,467
Loan fees and other income ...................... 2,861 5,397
State franchise taxes ........................... 5,990 8,013
--------- ---------
Total deferred income tax assets ................ 35,490 61,785
--------- ---------
LIABILITIES
Lease expenses .................................. 173,709 167,240
Depreciation expense ............................ 4,331 6,784
Intangible assets-net premiums .................. 1,433 1,715
Marketable securities-available-for-sale ........ (160) 1,229
Other ........................................... 8,448 10,353
--------- ---------
Total deferred income tax liabilities ........... 187,761 187,321
--------- ---------
NET DEFERRED INCOME TAX LIABILITIES ............. $ 152,271 $ 125,536
========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory income tax rate .......... 35.0% 35.0% 35.0%
Municipal and other tax-
exempt income ............................ (.3) (1.2) (2.7)
State income and franchise
taxes, net of Federal tax benefit ........ 3.1 3.0 4.5
General business tax credits ............... (3.5) (6.0) (1.8)
Other ...................................... (2.5) (0.1) 2.0
----- ----- -----
EFFECTIVE INCOME TAX RATE .................. 31.8% 30.7% 37.0%
===== ===== ====
</TABLE>
The 1997 effective tax rate reflects the recognition of previously
unrecognized tax credits of $3,585,000.
The decrease in the 1996 effective tax rate as compared to 1995 was
primarily due to the: (1) recognition of previously unrecognized tax credits of
$2,800,000; (2) reversal of deferred tax liabilities (reflecting a change in the
State tax laws) relating to the sale of a certain leveraged lease of $2,344,000;
and (3) reversal of deferred tax liabilities (reflecting legislation enacted in
1996) relating to the provision for thrift bad debt deductions of $1,500,000.
16. INTERNATIONAL OPERATIONS
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.
Total revenue, income before income taxes, net income and total assets for
foreign, domestic and consolidated operations at and for the years ended
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(in thousands) Foreign Domestic Consolidated
- -------------- ------- -------- ------------
<S> <C> <C> <C>
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
========== ========== ==========
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
========== ========== ==========
1995
Total revenue ............ $ 38,669 $ 603,394 $ 642,063
Income before
income taxes ........... $ 582 $ 121,556 $ 122,138
Net income ............... $ 379 $ 76,626 $ 77,005
Total assets ............. $ 478,790 $7,085,719 $7,564,509
========== ========== ==========
</TABLE>
Under current intercompany pricing procedures, transfers of funds are priced
at prevailing market rates. In general, the Company has allocated all direct
expenses and a proportionate share of general and administrative expenses to the
income derived from loans and transactions by the Company's international
operations.
The following presents the percentages of average total assets and total
liabilities attributable to foreign operations. For this purpose, assets
attributable to foreign operations are defined as assets in foreign offices and
loans and leases to and investments in customers domiciled outside the United
States. Deposits received and other liabilities are classified on the basis of
domicile of the creditor.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average foreign assets to
average total assets ........ 4.38% 5.42% 3.61%
Average foreign liabilities to
average total liabilities ... 3.70% 3.55% 5.04%
==== ==== ====
</TABLE>
56
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
17. LEASE COMMITMENTS
Future minimum lease payments by year and in the aggregate under all
noncancelable operating leases having initial or remaining terms in excess of
one year consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
Less Net
Operating Sublease Operating
(in thousands) Leases Income Leases
- -------------- --------- -------- ---------
<S> <C> <C> <C>
1998 ............. $ 29,878 $ 8,069 $ 21,809
1999 ............. 26,503 8,025 18,478
2000 ............. 25,546 8,452 17,094
2001 ............. 23,402 8,364 15,038
2002 ............. 20,792 7,634 13,158
2003 AND
THEREAFTER.... 71,256 24,436 46,820
-------- -------- --------
TOTAL ............. $197,377 $ 64,980 $132,397
======== ======== ========
</TABLE>
These premises and equipment leases extend for varying periods up to 44
years and some of them may be renewed for periods ranging from 1 to 44 years.
The premises' leases also provide for payments of real property taxes, insurance
and maintenance.
In most cases, leases for the premises provide for periodic renegotiation of
the rents based upon a percentage of the appraised value of the leased property.
The renegotiated annual rent is usually not less than the annual amount paid in
the previous period. Where future commitments are subject to appraisals, the
minimum annual rental commitments are based on the latest annual rents.
In December 1993, the Company entered into a noncancelable agreement to
lease its administrative headquarters building (construction of which was
completed in September 1996) on land owned in fee simple by the Company.
Concurrently, the Company entered into a ground lease of the land to the lessor
of the 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, 1997, the Company has executed certain noncancelable
subleases with third parties. These amounts are included in sublease income in
the above table.
At the end of the Primary Term, the Company may, at its option: (1) extend
the lease term at rents based on the lessor's cost of funds at the time of
renewal; (2) purchase the building for an amount approximately equal to that
expended by the lessor to construct the building; or (3) arrange for the sale of
the building to a third party on behalf of the lessor and pay to lessor any
shortfall between the sales proceeds and a specified residual value, such
payment not to exceed $161,990,000. This lease is accounted for as an operating
lease.
For 1997, 1996 and 1995, rental expense was $32,321,000, $14,796,000 and
$14,525,000, respectively.
18. COMMITMENTS AND CONTINGENT LIABILITIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is a party to various
financial instruments to meet the financing needs of its customers and to reduce
its own exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit, standby and commercial letters of credit
and interest rate swaps and floors. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the Consolidated and Parent Company Balance Sheets. The contract
or notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit losses in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby and commercial letters of credit is represented by the contractual
notional amount of those instruments. Since these commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash flows. For interest rate swap and floor transactions, the contract
or notional amounts do not represent exposure to credit losses.
Off-balance sheet instruments must meet the same criteria of acceptable risk
established for the Company's lending and other financing activities. The
Company manages the credit risk of counterparty defaults in these transactions
by limiting the total amount of outstanding arrangements, both by the individual
counterparty and in the aggregate, by monitoring the size and maturity structure
of the off-balance sheet portfolio, and by applying the uniform credit standards
maintained for all of its credit activities.
Off-balance sheet commitments and contingent liabilities at December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
Notional/ Notional/
Contract Contract
(in thousands) Amount Amount
- -------------- ----------- -----------
<S> <C> <C>
Commitments to extend credit ............... $4,408,199 $3,778,028
Standby letters of credit .................. $ 154,848 $ 144,235
Commercial letters of credit ............... $ 11,865 $ 10,478
Interest rate swaps and floors ............. $ 894,427 $1,537,996
========== ==========
</TABLE>
The Company enters into interest rate swap and floor agreements as an
end-user only. These instruments are used as hedges against various balance
sheet accounts. Credit exposure is monitored under the same credit guidelines as
are followed for other extensions of credit. Interest rate and/or market risk is
monitored and
57
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.
ROLLFORWARD SCHEDULE
The following is a summary of the interest rate swap and floor activity for
1997 and 1996:
<TABLE>
<CAPTION>
Caps,
Receive Pay Floors or Variable/
(in millions) Fixed Fixed Collars Variable Total
- ------------- ------- ----- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 ...... $260 $134 $ -- $700 $1,094
Additions ............... 300 8 500 -- 808
Maturities/
amortizations .......... 60 2 -- 300 362
Terminations ............ -- 2 -- -- 2
---- ---- ---- ---- ------
Balance,
December 31, 1996 ...... 500 138 500 400 1,538
ADDITIONS ............... -- 3 -- -- 3
MATURITIES/
AMORTIZATIONS .......... 200 47 -- 400 647
TERMINATIONS ............ -- -- -- -- --
---- ---- ---- ---- ------
BALANCE,
DECEMBER 31, 1997 ...... $300 $ 94 $500 $ -- $ 894
==== ==== ==== ==== ======
</TABLE>
HEDGING SUMMARY
The following is additional hedging information related to the Company's
interest rate swaps and floors as of December 31, 1997:
<TABLE>
<CAPTION>
Asset Yield/ Net Remain-
Notional Pay Receive Liability Yield/ Original ing
(dollars in millions) Amount Rate Rate Cost Cost Maturity Maturity
- --------------------- -------- ---- ------- ------------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET HEDGES:
VARIABLE RATE
LOANS ......... $800 5.78% 5.53% 8.59% 8.34% 2.0 yrs. .4 yrs.
FIXED RATE
LOANS ......... 94 6.46 5.85 8.19 7.58 8.7 5.4
---- ---- ---- ---- ---- -------- --------
TOTAL ........... $894 5.85% 5.56% 8.55% 8.26% 2.7 yrs. .9 yrs.
==== ==== ==== ==== ==== ======= ========
</TABLE>
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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
- ---------------------- ------ ------ -------
<S> <C> <C> <C>
Average borrowing rate:
Without interest rate swaps
and floors ................ 4.22% 4.28% 4.49%
With interest rate swaps
and floors ................ 4.22 4.23 4.54
====== ====== =======
Decrease in interest income ... $3,416 $2,402 $ 3,827
Decrease (increase) in interest
expense ..................... 42 2,636 (2,926)
------ ------ -------
Interest rate swap and floor
expense (income), net ....... $3,374 $ (234) $ 6,753
====== ====== =======
</TABLE>
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.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents a summary of the book and fair values of the
Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
------------------------
(in thousands) Book Value Fair Value
- -------------- ------------ ----------
<S> <C> <C>
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 3) ................ 778,124 778,124
Loans (note 4) ....................... 6,238,681 6,248,139
Customers' acceptance liability ...... 867 867
---------- ---------
Financial Liabilities:
Deposits ............................. $6,089,200 $6,107,195
Short-term borrowings (note 8) ....... 721,865 721,865
Acceptances outstanding .............. 867 867
Long-term debt (note 9) .............. 218,736 221,484
Guaranteed preferred beneficial
interests in junior subordinated
debentures (note 9) ................ 100,000 104,370
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------
(in thousands) Book Value Fair Value
- -------------- ---------- ----------
<S> <C> <C>
Financial Assets:
Cash and due from banks ................ $ 333,511 $ 333,511
Interest-bearing deposits in other banks 70,130 70,130
Federal funds sold and securities
purchased under agreements to resell . 148,370 148,370
Available-for-sale investment
securities (note 3) .................. 1,140,719 1,140,719
Loans (note 4) ......................... 5,806,732 5,793,929
Customers' acceptance liability ........ 824 824
---------- ----------
Financial Liabilities:
Deposits ............................... $5,936,708 $5,950,028
Short-term borrowings (note 8) ......... 929,560 929,560
Acceptances outstanding ................ 824 824
Long-term debt (note 9) ................ 205,743 205,174
========== ==========
</TABLE>
The following table presents a summary of the fair values of the Company's
off-balance sheet financial instruments (note 18) at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- -------------- ------- -------
<S> <C> <C>
Commitments to extend credit ........... $21,606 $20,699
Letters of credit ...................... 1,465 1,444
Interest rate swaps and floors ......... 1,404 2,092
======= =======
</TABLE>
58
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
20. FIRST HAWAIIAN, INC. (PARENT COMPANY ONLY)
FINANCIAL STATEMENTS
In the financial statements presented below, the investment in subsidiaries
is accounted for under the equity method.
<TABLE>
<CAPTION>
BALANCE SHEETS
(in thousands, except number of December 31,
shares and per share data) 1997 1996
- -------------------------- ---- ----
<S> <C> <C>
ASSETS
Cash on deposit with
First Hawaiian Bank .................. $ 115 $ 174
Interest-bearing deposits in other banks 70,000 --
Loans, net of allowance for loan losses
of $120 in 1997 and 1996 ............. 9,691 11,611
Available-for-sale investment securities 300 --
Securities purchased from
First Hawaiian Bank .................. 23,860 7,075
Investment in subsidiaries:
First Hawaiian Bank .................. 733,596 696,286
Other subsidiaries ................... 186,631 159,879
Due from:
First Hawaiian Bank .................. 147,251 109,324
Other subsidiaries ................... 52,050 67,342
Other assets ........................... 2,532 1,254
----------- -----------
TOTAL ASSETS ........................... $ 1,226,026 $ 1,052,945
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings .................. $ 1,800 $ 54,409
Current and deferred income taxes ...... 181,669 138,519
Due to subsidiary ...................... 103,093 --
Other liabilities ...................... 7,763 4,133
Long-term debt (note 9) ................ 200,000 150,000
----------- -----------
Total liabilities ...................... 494,325 347,061
----------- -----------
Commitments and contingent liabilities
(notes 13, 17 and 18)
Stockholders' equity (note 11):
Preferred stock $5 par value
Authorized and unissued --
50,000,000 shares in 1997 and
1996 -- --
Common stock $5 par value
(notes 10 and 13) Authorized
-- 100,000,000 shares
Issued -- 33,190,374 shares in
1997 and 1996 ....................... 165,952 165,952
Surplus .............................. 148,165 148,196
Retained earnings .................... 473,659 428,693
Unrealized valuation adjustment ...... (241) 1,850
Treasury stock, at cost -- 1,845,217
shares in 1997 and 1,415,954
shares in 1996 ..................... (55,834) (38,807)
----------- -----------
Total stockholders' equity ............. 731,701 705,884
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ................. $ 1,226,026 $ 1,052,945
=========== ===========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1997 1996 1995
- -------------- ---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from:
First Hawaiian Bank ........... $ 39,698 $ 52,760 $ 88,660
Other subsidiaries ............ 4,830 13,056 4,300
Interest from First Hawaiian Bank 1,030 507 520
Interest and fees from other
subsidiaries .................. 1,318 2,578 3,043
Other interest and dividends .... 3,312 1,143 1,359
-------- -------- --------
Total income .................... 50,188 70,044 97,882
-------- -------- --------
EXPENSE
Interest expense:
Short-term borrowings ......... 266 509 1,669
Long-term debt ................ 15,585 11,915 10,299
Other ......................... 2,650 817 114
Provision for loan losses ....... -- 20 100
Professional services ........... 418 431 494
Other ........................... 310 441 339
-------- -------- --------
Total expense ................... 19,229 14,133 13,015
-------- -------- --------
Income before income tax
benefit and equity in
undistributed income of
subsidiaries .................. 30,959 55,911 84,867
Income tax benefit .............. 5,246 3,849 3,178
-------- -------- --------
Income before equity in
undistributed income of
subsidiaries .................. 36,205 59,760 88,045
Equity in undistributed income
of subsidiaries:
First Hawaiian Bank ........... 39,135 22,359 (16,193)
Other subsidiaries ............ 8,921 (1,823) 5,153
-------- -------- --------
NET INCOME ...................... $ 84,261 $ 80,296 $ 77,005
======== ======== ========
</TABLE>
59
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
(in thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH AT BEGINNING OF YEAR ........... $ 174 $ 144 $ 110
Cash flows from operating activities:
Net income ........................ 84,261 80,296 77,005
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Excess of equity in earnings
of subsidiaries over
dividends received .......... (48,056) (20,536) 11,040
Other ......................... 463 (1,100) 449
--------- --------- ---------
Net cash provided by operating
activities ........................ 36,668 58,660 88,494
--------- --------- ---------
Cash flows from investing activities:
Net change in:
Interest-bearing deposits
in other banks ................ (70,000) -- --
Securities sold to
(purchased from)
First Hawaiian Bank ........... (16,785) 2,855 (3,750)
Loans repaid by directors
and executive officers ........ 1,920 3,869 1,525
Repayments from
subsidiaries .................. 22,400 5,750 8,750
Purchase of available-for-sale
investment securities ........... (300) -- --
Investment in Pacific
Northwest Acquisitions .......... (15,000) (73,901) --
Investment in
First Hawaiian Capital I ........ (3,093) -- --
--------- --------- ---------
Net cash provided by (used in)
investing activities .............. (80,858) (61,427) 6,525
--------- --------- ---------
Cash flows from financing activities:
Net decrease in short-term
borrowings ...................... (52,609) (9,368) (32,946)
Proceeds from long-term debt
and junior subordinated
debentures ...................... 153,093 50,000 --
Cash dividends paid ............... (39,295) (37,579) (37,368)
Repurchase of common stock ........ (17,058) (256) (24,671)
--------- --------- ---------
Net cash provided by (used in)
financing activities .............. 44,131 2,797 (94,985)
--------- --------- ---------
CASH AT END OF YEAR ................. $ 115 $ 174 $ 144
========= ========= =========
Supplemental disclosures:
Interest paid ..................... $ 14,528 $ 12,272 $ 12,251
Income taxes refunded ............. $ 2,644 $ 4,408 $ 3,211
========= ========= =========
</TABLE>
60
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
First Hawaiian, Inc. and subsidiaries (hereinafter referred to as the
"Company") on Forms S-8 (File Nos. 33-66400 and 333-22107) of our report dated
January 15, 1998, on our audits of the consolidated financial statements of the
Company as of December 31, 1997 and 1996, and for the years ended December 31,
1997, 1996 and 1995, which report is incorporated by reference in the Annual
Report on Form 10-K, as amended on this Form 10-K/A.
/s/ Coopers & Lybrand L.L.P.
Honolulu, Hawaii
April 22, 1998
<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, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 341,295
<INT-BEARING-DEPOSITS> 76,529
<FED-FUNDS-SOLD> 167,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,061,976
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,947,296
<ALLOWANCE> 85,136
<TOTAL-ASSETS> 8,095,447
<DEPOSITS> 5,950,032
<SHORT-TERM> 960,583
<LIABILITIES-OTHER> 221,992
<LONG-TERM> 246,443
0
0
<COMMON> 165,952
<OTHER-SE> 549,700
<TOTAL-LIABILITIES-AND-EQUITY> 8,095,447
<INTEREST-LOAN> 124,783
<INTEREST-INVEST> 17,757
<INTEREST-OTHER> 2,855
<INTEREST-TOTAL> 145,395
<INTEREST-DEPOSIT> 47,207
<INTEREST-EXPENSE> 62,881
<INTEREST-INCOME-NET> 82,514
<LOAN-LOSSES> 3,752
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 77,175
<INCOME-PRETAX> 29,606
<INCOME-PRE-EXTRAORDINARY> 20,516
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,516
<EPS-PRIMARY> .65
<EPS-DILUTED> .64
<YIELD-ACTUAL> 8.23
<LOANS-NON> 38,852
<LOANS-PAST> 30,698
<LOANS-TROUBLED> 46,681
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 85,248
<CHARGE-OFFS> 4,484
<RECOVERIES> 620
<ALLOWANCE-CLOSE> 85,136
<ALLOWANCE-DOMESTIC> 40,470
<ALLOWANCE-FOREIGN> 1,730
<ALLOWANCE-UNALLOCATED> 42,936
</TABLE>
<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 SIX MONTH PERIOD
ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 278,812
<INT-BEARING-DEPOSITS> 55,130
<FED-FUNDS-SOLD> 45,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 893,886
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,031,552
<ALLOWANCE> 84,189
<TOTAL-ASSETS> 7,815,288
<DEPOSITS> 5,875,846
<SHORT-TERM> 766,019
<LIABILITIES-OTHER> 166,337
<LONG-TERM> 276,737
0
0
<COMMON> 165,952
<OTHER-SE> 562,899
<TOTAL-LIABILITIES-AND-EQUITY> 7,815,288
<INTEREST-LOAN> 255,950
<INTEREST-INVEST> 33,828
<INTEREST-OTHER> 5,070
<INTEREST-TOTAL> 294,848
<INTEREST-DEPOSIT> 95,813
<INTEREST-EXPENSE> 126,677
<INTEREST-INCOME-NET> 168,171
<LOAN-LOSSES> 8,013
<SECURITIES-GAINS> 219
<EXPENSE-OTHER> 155,704
<INCOME-PRETAX> 62,498
<INCOME-PRE-EXTRAORDINARY> 42,781
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,781
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 8.33
<LOANS-NON> 33,903
<LOANS-PAST> 29,658
<LOANS-TROUBLED> 45,553
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 85,248
<CHARGE-OFFS> 12,339
<RECOVERIES> 3,267
<ALLOWANCE-CLOSE> 84,189
<ALLOWANCE-DOMESTIC> 39,085
<ALLOWANCE-FOREIGN> 1,795
<ALLOWANCE-UNALLOCATED> 43,309
</TABLE>
<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 NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 329,552
<INT-BEARING-DEPOSITS> 183,730
<FED-FUNDS-SOLD> 156,962
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 700,464
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,022,244
<ALLOWANCE> 83,575
<TOTAL-ASSETS> 7,895,048
<DEPOSITS> 5,957,289
<SHORT-TERM> 644,241
<LIABILITIES-OTHER> 222,965
<LONG-TERM> 328,742
0
0
<COMMON> 165,952
<OTHER-SE> 575,328
<TOTAL-LIABILITIES-AND-EQUITY> 7,895,048
<INTEREST-LOAN> 387,954
<INTEREST-INVEST> 47,329
<INTEREST-OTHER> 8,997
<INTEREST-TOTAL> 444,280
<INTEREST-DEPOSIT> 146,105
<INTEREST-EXPENSE> 191,527
<INTEREST-INCOME-NET> 252,753
<LOAN-LOSSES> 11,830
<SECURITIES-GAINS> 287
<EXPENSE-OTHER> 231,924
<INCOME-PRETAX> 95,050
<INCOME-PRE-EXTRAORDINARY> 64,132
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,132
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.01
<YIELD-ACTUAL> 8.36
<LOANS-NON> 28,575
<LOANS-PAST> 28,452
<LOANS-TROUBLED> 44,392
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 85,248
<CHARGE-OFFS> 17,635
<RECOVERIES> 4,132
<ALLOWANCE-CLOSE> 83,575
<ALLOWANCE-DOMESTIC> 38,905
<ALLOWANCE-FOREIGN> 1,915
<ALLOWANCE-UNALLOCATED> 42,755
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 333,511
<INT-BEARING-DEPOSITS> 70,130
<FED-FUNDS-SOLD> 148,370
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,140,719
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,806,732
<ALLOWANCE> 85,248
<TOTAL-ASSETS> 8,002,174
<DEPOSITS> 5,936,708
<SHORT-TERM> 929,560
<LIABILITIES-OTHER> 223,455
<LONG-TERM> 205,743
0
0
<COMMON> 165,952
<OTHER-SE> 539,932
<TOTAL-LIABILITIES-AND-EQUITY> 8,002,174
<INTEREST-LOAN> 479,011
<INTEREST-INVEST> 75,505
<INTEREST-OTHER> 19,624
<INTEREST-TOTAL> 574,140
<INTEREST-DEPOSIT> 182,402
<INTEREST-EXPENSE> 252,795
<INTEREST-INCOME-NET> 321,345
<LOAN-LOSSES> 23,627
<SECURITIES-GAINS> 118
<EXPENSE-OTHER> 284,211
<INCOME-PRETAX> 115,834
<INCOME-PRE-EXTRAORDINARY> 80,296
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,296
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 2.55
<YIELD-ACTUAL> 8.15
<LOANS-NON> 43,547
<LOANS-PAST> 30,382
<LOANS-TROUBLED> 28,861
<LOANS-PROBLEM> 34,524
<ALLOWANCE-OPEN> 78,733
<CHARGE-OFFS> 27,341
<RECOVERIES> 3,123
<ALLOWANCE-CLOSE> 85,248
<ALLOWANCE-DOMESTIC> 38,400
<ALLOWANCE-FOREIGN> 1,540
<ALLOWANCE-UNALLOCATED> 45,308
</TABLE>
