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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended
December 31, 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
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FIRST HAWAIIAN, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 99-0156159
(State of incorporation) (I.R.S. Employer
Identification No.)
999 BISHOP STREET, HONOLULU, HAWAII 96813
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (808) 525-7000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $5.00 Par Value
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ 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
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Form
10-K:
DOCUMENTS FORM 10-K REFERENCE
First Hawaiian, Inc. Annual Report 1997 Parts I and II
First Hawaiian, Inc. Proxy Statement dated
March 4, 1998 for the Annual Meeting
of Stockholders Part III
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INDEX
PART I
<TABLE>
<CAPTION>
PAGE
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Item 1. Business............................................................... 1
Item 2. Properties............................................................. 12
Item 3. Legal Proceedings...................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................... 12
Executive Officers of the Registrant............................................... 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................................... 14
Item 6. Selected Financial Data................................................ 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 14
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.............. 14
Item 8. Financial Statements and Supplementary Data............................ 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 17
Item 11. Executive Compensation................................................. 17
Item 12. Security Ownership of Certain Beneficial Owners and Management......... 17
Item 13. Certain Relationships and Related Transactions......................... 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................................ 18
Signatures . ..................................................................... 21
Exhibit Index...................................................................... 23
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PART I
ITEM 1. BUSINESS
FIRST HAWAIIAN, INC. -
First Hawaiian, Inc. (the "Corporation"), a Delaware corporation, is a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). As a bank holding company, the Corporation is allowed to
acquire or invest in the securities of companies that are engaged in banking or
in activities closely related to banking as authorized by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board"). The Corporation,
through its subsidiaries, operates a general commercial banking business and
other businesses related to banking. Its principal assets are its investments in
First Hawaiian Bank (the "Bank"), a State of Hawaii chartered bank; First
Hawaiian Creditcorp, Inc. ("Creditcorp") and FHL Lease Holding Company, Inc.
("FHL"), each a financial services loan company; Pacific One Bank ("Pacific
One"), a State of Oregon chartered bank with authority to operate interstate
branches in Washington and Idaho; and First Hawaiian Capital I (the "Trust"), a
Delaware business trust. The Bank, Creditcorp, FHL, Pacific One and the Trust
are wholly-owned subsidiaries of the Corporation. At December 31, 1997, the
Corporation had consolidated total assets of $8.1 billion, total deposits of
$6.1 billion and total stockholders' equity of $731.7 million.
Based on assets as of June 30, 1997, the Corporation was the 68th largest bank
holding company in the United States as reported in the American Banker.
FIRST HAWAIIAN BANK -
The Bank, the oldest financial institution in Hawaii, was established as Bishop
& Co. in 1858 in Honolulu. The Bank is a State of Hawaii-chartered bank that is
not a member of the Federal Reserve System. The deposits of the Bank are insured
by the Bank Insurance Fund (the "BIF") and the Savings Association Insurance
Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC") to
the extent and subject to the limitations set forth in the Federal Deposit
Insurance Act, as amended (the "FDIA").
On April 18, 1997, Pioneer Federal Savings Bank ("Pioneer"), a former
wholly-owned subsidiary of the Corporation, was merged with and into the Bank.
As a result of the merger, five Pioneer branches became branches of the Bank and
14 branches were closed.
The Bank is a full-service bank conducting a general commercial and consumer
banking business and offering trust and insurance services. Its banking
activities include receiving demand, savings and time deposits for personal and
commercial accounts; making commercial, agricultural, real estate and consumer
loans; acting as a United States tax depository facility; providing money
transfer and cash management services; selling traveler's checks, personal money
orders, cash management services, insurance products, mutual funds and
annuities; issuing letters of credit; handling domestic and foreign collections;
providing safe deposit and night depository facilities; offering lease
financing; and investing in U.S. Treasury securities and securities of other
U.S. government agencies and corporations and state and municipal securities.
At December 31, 1997, the Bank had total deposits of $5.0 billion and total
assets of $6.6 billion, making it the second largest bank in Hawaii.
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DOMESTIC SERVICES -
The domestic operations of the Bank are carried out through its main banking
office located in Honolulu, Hawaii, with 59 other banking offices located
throughout the State of Hawaii. All but two of the banking offices are equipped
with automatic teller machines that provide 24-hour service to customers wishing
to make withdrawals from and deposits to their personal checking accounts, to
transfer funds between checking and savings accounts, to make balance inquiries,
to obtain interim bank statements and to make utility and loan payments.
Fifty-three automatic teller machines at nonbranch locations provide balance
inquiry and withdrawal transaction services only. The Bank is a member of the
CIRRUS(R)/MasterCard(R), Plus(R)/VISA(R) and Star System(R) automatic teller
machine networks, which provide the Bank's customers with access to their funds
nationwide and in selected foreign countries.
LENDING ACTIVITIES -
The Bank engages in a broad range of lending activities, including making real
estate, commercial and consumer loans. At December 31, 1997, the Bank's loans
totalled $5.1 billion, representing 76.3% of total assets. At that date, 50.7%
of the loans were construction, commercial and residential real estate loans,
26.2% were commercial loans, 11.9% were consumer loans, 6.2% were foreign loans
and 5.0% were leases.
REAL ESTATE LENDING--CONSTRUCTION. The Bank provides construction financing for
a variety of commercial and residential single-family subdivision and
multi-family developments. At December 31, 1997, 5.1% of the Bank's total real
estate loans were collateralized by properties under construction.
REAL ESTATE LENDING--COMMERCIAL. The Bank provides permanent financing for a
variety of commercial developments, such as various retail facilities,
warehouses and office buildings. At December 31, 1997, 30.4% of the Bank's total
real estate loans were collateralized by commercial properties.
REAL ESTATE LENDING--RESIDENTIAL. The Bank makes residential real estate loans,
including home equity loans, to enable borrowers to purchase, refinance or
improve residential real property. The loans are collateralized by mortgage
liens on the related property, substantially all of which is located in Hawaii.
At December 31, 1997, 64.5% of the Bank's total real estate loans were
collateralized by single-family and multi-family residences.
COMMERCIAL LENDING. The Bank is a major lender to primarily small- and
medium-sized businesses (including local subsidiaries and operations of foreign
companies) in Hawaii and Hawaii companies doing business overseas (with
particular emphasis on those companies with operations in the Asia-Pacific
region).
CONSUMER LENDING. The Bank offers many types of loans and credits to consumers.
The Bank provides lines of credit, uncollateralized or collateralized, and
provides various types of personal and automobile loans. The Bank also provides
indirect consumer automobile financing on new and used autos by purchasing
finance contracts from dealers. The Bank's Dealer Center is the largest
commercial bank automobile lender in the State of Hawaii. The Bank is the
largest issuer of MasterCard(R) credit cards and the second largest issuer of
VISA(R) credit cards in Hawaii.
INTERNATIONAL BANKING SERVICES -
The Bank maintains an International Banking Division which provides
international banking products and services through the Bank's branch system,
international banking headquarters in Honolulu, a Grand Cayman branch, two Guam
branches, a branch in Saipan and a representative office in Tokyo, Japan. The
Bank maintains a network of correspondent banking relationships throughout the
world.
The Bank's international banking activities are primarily trade-related and are
concentrated in the Asia-Pacific area.
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TRUST SERVICES -
The Bank's Trust and Investments Division offers a full range of trust and
investment management services. The Trust and Investments Division provides
asset management, advisory and administrative services for estates, trusts and
individuals. It also acts as trustee and custodian of retirement and other
employee benefit plans. At December 31, 1997, the Trust and Investments Division
had 5,305 accounts with a market value of $9.2 billion. Of this total, $6.9
billion represented assets in nonmanaged accounts and $2.3 billion were managed
assets.
The Trust and Investments Division maintains custodial accounts pursuant to
which it acts as agent for customers in rendering a variety of services,
including dividend and interest collection, collection under installment
obligations and rent collection.
INSURANCE SERVICES -
The Bank, through a wholly-owned subsidiary, offers insurance needs analysis for
individuals, families and businesses as well as insurance products such as life,
disability and long-term care.
FIRST HAWAIIAN CREDITCORP, INC. -
Creditcorp is a financial services loan company with 12 branch offices located
throughout the four major islands of the State of Hawaii, a branch in Guam and a
loan subsidiary in Oregon. The Corporation plans to merge Creditcorp with and
into the Bank in mid-1998. In the process, the 12 branches in Hawaii and one
branch in Guam are expected to be closed.
The lending activities of Creditcorp are concentrated in both consumer and
commercial financings which are primarily collateralized by real estate.
Creditcorp's primary source of funds is time and savings deposits from the
general public. The deposits are insured by the BIF of the FDIC to the extent
and subject to the limitations set forth in the FDIA.
Creditcorp also utilizes borrowings as an additional source of funding for its
loan portfolio and is a member of the Federal Home Loan Bank of Seattle (the
"FHLB of Seattle"), which provides a central credit facility for member
institutions. At December 31, 1997, Creditcorp was required, in accordance with
the rules and regulations of the FHLB of Seattle, to maintain a minimum level of
capital stock ownership of $2.4 million in this regional facility. At December
31, 1997, Creditcorp's investment in the capital stock of the FHLB of Seattle
totalled $8.5 million and advances from the FHLB of Seattle aggregated $11.0
million.
At December 31, 1997, Creditcorp had total deposits of $361.8 million, total
loans of $385.4 million and total assets of $430.4 million.
FHL LEASE HOLDING COMPANY, INC. -
FHL, a financial services loan company, primarily finances and leases personal
property including equipment and vehicles, and acts as an agent, broker or
advisor in the leasing or financing of such property for affiliates as well as
third parties. On January 1, 1997, FHL sold certain leases to the Bank through a
new subsidiary of the Bank. FHL is in a runoff mode and all new leveraged and
direct financing leases are recorded by the new subsidiary of the Bank.
At December 31, 1997, FHL's net investment in leases amounted to $74.2 million
and total assets were $102.3 million. FHL's primary source of funds is
borrowings from the Corporation.
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PACIFIC ONE BANK -
Pacific One is a full-service bank conducting general commercial and consumer
banking services, including receiving demand, savings and time deposits; making
commercial, agricultural, real estate and consumer loans; selling international
and cash management services and mutual funds and annuities. On December 31,
1997, Pacific One Bank, National Association, another wholly-owned subsidiary of
the Corporation, was merged with and into Pacific One.
Pacific One, headquartered in Portland, Oregon, is a State of Oregon-chartered
bank with authority to operate interstate branches in Washington and Idaho and
is not a member of the Federal Reserve System. Its deposits are insured by the
BIF and SAIF of the FDIC to the extent, and subject to the limitations, set
forth in the FDIA.
At December 31, 1997, Pacific One had total deposits of $723.5 million, total
loans of $702.0 million and total assets of $915.6 million.
FIRST HAWAIIAN CAPITAL I -
The Trust is a Delaware business trust which was formed in 1997. The Trust
issued $100,000,000 aggregate liquidation amount of its Capital Securities (the
"Capital Securities") in 1997 and used the proceeds therefrom to purchase junior
subordinated deferrable interest debentures of the Corporation. The Capital
Securities qualify as Tier 1 Capital of the Corporation and are fully and
unconditionally guaranteed by the Corporation.
At December 31, 1997, the Trust's total assets were $107.4 million.
HAWAII COMMUNITY REINVESTMENT CORPORATION -
In an effort to support affordable housing and as part of the Bank's and
Creditcorp's community reinvestment program, the Bank and Creditcorp are members
of the Hawaii Community Reinvestment Corporation (the "HCRC"). The HCRC is a
consortium of local financial institutions that provides $50 million in
permanent long-term financing for affordable housing rental projects throughout
Hawaii for low and moderate income residents.
The $50 million loan pool is funded by the member financial institutions which
participate pro rata (based on deposit size) in each HCRC loan. The Bank's and
Creditcorp's participations in these HCRC loans are included in these companies'
respective loan portfolios.
HAWAII INVESTORS FOR AFFORDABLE HOUSING, INC. -
To further enhance the Bank's and Creditcorp's community reinvestment program
and provide support for the development of additional affordable housing rental
units in Hawaii, the Bank and Creditcorp, together with other HCRC member
institutions, have subscribed to a $19.7 million tax credit equity fund ("Hawaii
Affordable Housing Fund I"). The Bank and other HCRC members have also
subscribed to a $20.0 million tax credit equity fund ("Hawaii Affordable Housing
Fund II").
Hawaii Affordable Housing Fund I and Hawaii Affordable Housing Fund II (the
"Funds") have been established to invest in qualified low income housing tax
credit rental projects and to ensure that these projects are maintained as low
income housing throughout the required compliance period. The Bank's and
Creditcorp's investments in these Funds are included in these companies'
respective investment portfolios.
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EMPLOYEES -
At December 31, 1997, the Corporation had 3,199 full-time equivalent employees.
The Bank employed 2,672 persons and the Corporation's other subsidiaries
employed 527 persons. None are represented by any collective bargaining
agreements and relations with employees are considered excellent.
MONETARY POLICY AND ECONOMIC CONDITIONS -
The earnings and business of the Corporation are affected not only by general
economic conditions (both domestic and international), but also by the monetary
policies of various governmental regulatory authorities of (i) the United States
and foreign governments and (ii) international agencies. In particular, the
Corporation's earnings and growth may be affected by actions of the Federal
Reserve Board in connection with its implementation of national monetary policy
through its open market operations in United States Government securities,
control of the discount rate and establishment of reserve requirements against
both member and nonmember financial institutions' deposits. These actions have a
significant effect on the overall growth and distribution of loans, investments
and deposits as well as on the rates earned on loans or paid on deposits.
It is not possible to predict the effect of future changes in monetary policies
upon the operating results of the Corporation.
COMPETITION -
Competition in the financial services industry in Hawaii is intense.
Hawaii-based commercial banks, savings institutions, financial services loan
companies and credit unions compete against one another. Based upon the latest
available figures, total deposits of all financial institutions in Hawaii as of
September 30, 1997 amounted to approximately $24 billion. The principal
subsidiaries of the two largest bank holding companies, Pacific Century
Financial Corporation and the Corporation, accounted for 35% and 22% of total
deposits (including domestic, foreign and public deposits), respectively. The
next largest competitors were American Savings Bank, F.S.B. and Bank of America,
F.S.B., with 9% and 8%, respectively, of total deposits. In December 1997,
American Savings Bank, F.S.B. acquired the Hawaii assets and deposits of Bank of
America, F.S.B. In addition, out-of-state mutual funds, insurance companies,
brokerage firms and other financial services providers also compete for consumer
and commercial business in Hawaii.
Foreign (non-Hawaii) banks and other financial institutions are able to make
loans in Hawaii through Edge Act subsidiaries, finance and mortgage company
subsidiaries and by loan participations with local banks. United States domestic
banks and other financial institutions may make loans directly in Hawaii by
qualifying as "foreign lenders" in Hawaii. Foreign banks currently conduct
various banking activities in Hawaii, except for retail deposit-taking. Banks
and bank holding companies organized under the laws of Pacific Ocean
jurisdictions with United States dollar- based economies may acquire Hawaii
banks or establish branches in Hawaii, although none has done so to date. Banks
and similar financial institutions of countries other than the United States may
and do have representative offices or agencies in Hawaii.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, among
other things, eliminated substantially all state law barriers to the acquisition
of banks by out-of-state bank holding companies, effective September 29, 1995.
The law also permits interstate branching by banks in all states other than
those which have "opted out". Effective June 1, 1997, Hawaii law permits
out-of-state banks to acquire branches located in Hawaii by purchasing or
merging with a Hawaii state bank or a national banking association having its
headquarters located in Hawaii. However, out-of-state banks are not permitted to
establish de novo branches or purchase individual
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branches located in Hawaii. The States of Washington, Oregon and Idaho (where
Pacific One operates) each have adopted similar legislation. These new federal
and state laws may increase competition within the markets in which the
Corporation now operates, but the Corporation cannot predict whether and to what
extent competition will increase in those markets.
SUPERVISION AND REGULATION -
As a registered bank holding company, the Corporation is subject to supervision
and examination by the Federal Reserve Board under the BHCA. The various
subsidiaries of the Corporation are subject to regulation and supervision by the
state banking authorities of Hawaii, Washington, Oregon and Idaho, as well as
the FDIC and various other regulatory agencies.
HOLDING COMPANY STRUCTURE. In general, the BHCA limits the business of bank
holding companies to owning or controlling banks and engaging in such other
activities as the Federal Reserve Board may determine to be so closely related
to banking as to be a proper incident thereto. The Corporation must obtain the
prior approval of the Federal Reserve Board before acquiring direct or indirect
ownership or control of any voting shares of any bank if after such acquisition
it would own or control, directly or indirectly, more than 5% of the voting
shares of such bank; before merging or consolidating with another bank holding
company; and before acquiring substantially all of the assets of any additional
bank. With certain exceptions, the BHCA prohibits bank holding companies from
acquiring direct or indirect ownership or control of more than 5% of any class
of voting shares in any company which is not a bank or a bank holding company,
unless the Federal Reserve Board determines that the activities of such company
are so closely related to banking as to be a proper incident thereto. In making
such determinations, the Federal Reserve Board considers, among other things,
whether the performance of such activities by a bank holding company would offer
benefits to the public that outweigh possible adverse effects. In addition, all
acquisitions are reviewed by the Department of Justice for antitrust
considerations.
As a holding company, the principal source of the Corporation's cash revenue has
been dividends and interest received from the Bank and other subsidiaries of the
Corporation. Under Hawaii law, the Bank is prohibited from declaring or paying
any dividends in excess of its retained earnings. Creditcorp and Pacific One are
also subject to regulatory limitations on the amount of dividends they may
declare and pay. At December 31, 1997, the aggregate amount of dividends that
such subsidiaries could pay to the Corporation under the foregoing limitations
without prior regulatory approval was $261.8 million. There are also statutory
limits on the transfer of funds to the Corporation and certain of its nonbanking
subsidiaries by the Bank, Creditcorp and Pacific One, whether in the form of
loans or other extensions of credit, investments or asset purchases. Such
transfers by the Bank to the Corporation or any such nonbanking subsidiary are
limited in amount to 10% of the Bank's capital and surplus, or 20% in the
aggregate. Creditcorp and Pacific One are subject to comparable limitations.
Furthermore, such loans and extensions of credit are required to be
collateralized in specified amounts.
If, in the opinion of the applicable regulatory authority, a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), such authority may require, after notice and hearing,
that such bank cease and desist from such practice. The Federal Reserve Board
and the FDIC have issued policy statements which provide that, as a general
matter, insured banks and bank holding companies should only pay dividends out
of current operating earnings. In addition, the regulatory capital requirements
of the Federal Reserve Board and the FDIC may limit the ability of the
Corporation and its insured depository subsidiaries to pay dividends. See
"Federal Deposit Insurance Corporation Improvement Act of 1991" and "Capital
Requirements," below.
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Under Federal Reserve Board policy, a bank holding company is expected to act as
a source of financial strength to each subsidiary bank and to make capital
infusions into a troubled subsidiary bank, and the Federal Reserve Board may
charge the bank holding company with engaging in unsafe and unsound practices
for failure to commit resources to a subsidiary bank. This capital infusion may
be required at times when the Corporation may not have the resources to provide
it. Any capital loans by the Corporation to one of its subsidiary banks would be
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank.
In addition, depository institutions insured by the FDIC can be held liable for
any losses incurred by, or reasonably expected to be incurred by, the FDIC after
August 9, 1989 in connection with (i) the default of a commonly controlled
FDIC-insured depository institution or (ii) any assistance provided by the FDIC
to a commonly controlled FDIC-insured depository institution in danger of
default. "Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a "default" is likely to occur in the absence
of regulatory assistance. Accordingly, in the event that any insured subsidiary
of the Corporation causes a loss to the FDIC, other insured subsidiaries of the
Corporation could be required to compensate the FDIC by reimbursing it for the
amount of such loss. Any such obligation by the Corporation's insured
subsidiaries to reimburse the FDIC would rank senior to their obligations, if
any, to the Corporation.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. A central feature
of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
is the requirement that the federal banking agencies take "prompt corrective
action" with respect to insured depository institutions that do not meet minimum
capital requirements. FDICIA established five capital levels applicable to such
institutions (including the Bank, Creditcorp and Pacific One): "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under the regulations
adopted by the federal banking agencies to implement these provisions of FDICIA,
a depository institution is "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
written agreement, order or directive to meet and maintain a specific capital
level for any capital measure. An "adequately capitalized" depository
institution is defined as one that has (i) a total risk-based capital ratio of
8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii)
a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a
composite CAMEL rating of 1). A depository institution is considered (i)
"undercapitalized" if it has (A) a total risk-based capital ratio of less than
8%, (B) a Tier 1 risk-based capital ratio of less than 4% or (C) a leverage
ratio of less than 4% (or 3% in the case of an institution with a CAMEL rating
of 1), (ii) "significantly undercapitalized" if it has (A) a total risk-based
capital ratio of less than 6%, (B) a Tier 1 risk-based capital ratio of less
than 3% or (C) a leverage ratio of less than 3% and (iii) "critically
undercapitalized" if it has a ratio of tangible equity to total assets equal to
or less than 2%. An institution may be deemed by the regulators to be in a
capitalization category that is lower than is indicated by its actual capital
position if, among other things, it receives an unsatisfactory examination
rating. At December 31, 1997, all of the Corporation's subsidiary depository
institutions were "well capitalized."
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution is, or would
thereafter be, undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit a capital restoration
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company under such guarantee is limited to the lesser of (i) an amount
equal to 5% of the depository institution's total assets at the time it became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable to such institution as of the time it fails to comply with the plan.
If a depository institution fails to submit an acceptable plan, it is treated as
if it is significantly undercapitalized.
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Significantly undercapitalized depository institutions may be subject to a
number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions may not make any payments of interest
or principal on their subordinated debt and are subject to the appointment of a
receiver or conservator, generally within 90 days of the date such institution
becomes critically undercapitalized. In addition, the FDIC has adopted
regulations under FDICIA prohibiting an insured depository institution from
accepting brokered deposits (as defined by the regulations) unless the
institution is "well capitalized" or is "adequately capitalized" and receives a
waiver from the FDIC.
The FDIC has implemented a risk-based deposit insurance assessment system under
which the assessment rate for an insured institution may vary according to the
regulatory capital levels of the institution and other factors (including
supervisory evaluations). Depository institutions insured by the BIF which are
ranked in the top risk classification category currently have no annual
assessment for deposit insurance while all other banks are required to pay
premiums ranging from .03% to .27% of domestic deposits. As a result of the
enactment on September 30, 1996 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "Deposit Funds Act"), the deposit insurance premium
assessment rates for depository institutions insured by the SAIF were reduced,
effective January 1, 1997, to the same rates as apply to depository institutions
insured by the BIF. The Deposit Funds Act also provided for a one-time
assessment of 65.7 basis points on all SAIF-insured deposits in order to fully
recapitalize the SAIF (which assessment was paid by the Corporation in 1996),
and imposes annual assessments on all depository institutions to pay interest on
bonds issued by the Financing Corporation (the "FICO") in connection with the
resolution of savings association insolvencies occurring prior to 1991. The FICO
assessment rate for 1997 was 1.3 basis points in the case of BIF-insured
institutions, and 6.4 basis points in the case of SAIF-insured institutions.
These rate schedules are subject to future adjustments by the FDIC. In addition,
the FDIC has authority to impose special assessments from time to time, subject
to certain limitations specified in the Deposit Funds Act.
CAPITAL REQUIREMENTS. The Corporation and certain of its subsidiaries are
subject to regulatory capital guidelines issued by the federal banking agencies.
Information with respect to the applicable capital requirements is included in
"Note 11. Regulatory Capital Requirements" (pages 52 and 53) in the Financial
Review section of the Corporation's Annual Report 1997, and is incorporated
herein by reference thereto.
FDICIA required each federal banking agency to revise its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risk of nontraditional activities, as
well as reflect the actual performance and expected risk of loss on multi-family
mortgages. On December 15, 1994, the federal banking agencies adopted amendments
to their respective risk-based capital requirements that explicitly identify
concentrations of credit risk and certain risks arising from nontraditional
activities, and the management of such risks, as important factors to consider
in assessing an institution's overall capital adequacy. The amendments do not,
however, mandate any specific adjustments to the risk-based capital calculations
as a result of such factors.
8
<PAGE> 11
In August 1996, the federal banking regulators adopted amendments to their
risk-based capital rules to incorporate a measure for market risk in foreign
exchange and commodity activities and in the trading of debt and equity
instruments. Under these amendments, which became effective in 1997, banking
institutions with relatively large trading activities will be required to
calculate their capital charges for market risk using their own internal
value-at- risk models (subject to parameters set by the regulators) or,
alternatively, risk management techniques developed by the regulators. As a
result, these institutions will be required to hold capital based on the measure
of their market risk exposure in addition to existing capital requirements for
credit risk. These institutions will be able to satisfy this additional
requirement, in part, by issuing short-term subordinated debt that qualifies as
Tier 3 capital. The adoption of these amendments did not have a material effect
on the Corporation's business or operations.
On November 5, 1997, the federal banking regulators proposed for comment
regulations establishing new risk-based capital requirements for recourse
arrangements and direct credit substitutes. "Recourse" for this purpose means
any retained risk of loss associated with any transferred asset that exceeds a
pro rata share of the bank's or bank holding company's remaining claim on the
asset, if any. Under existing regulations, banks and bank holding companies have
to maintain capital against the full amount of any assets for which risk of loss
is retained, unless the resulting capital amount would exceed the maximum
contractual liability or exposure retained, in which case the capital required
would equal, dollar-for-dollar, such maximum contractual liability or exposure.
The proposal would extend this treatment to direct credit substitutes. "Direct
credit substitute" means any assumed risk of loss associated with any asset or
other claim that exceeds the bank's or bank holding company's pro rata share of
the asset or claim, if any. The proposal also included a multi-level approach to
assessing capital charges based upon the relative credit risk of the bank's or
bank holding company's position in a securitization (i.e., recourse
arrangements, direct credit substitute or asset-backed security) and the rating
assigned to such position by a nationally recognized statistical rating agency.
The Corporation does not believe the adoption of this proposal will have a
material adverse effect on its operations or financial position.
FUTURE LEGISLATION -
Legislation relating to banking and other financial services institutions has
been introduced from time to time in Congress and is likely to be introduced in
the future. Recent proposals include legislation that would (i) reformulate the
bank regulatory system, (ii) allow banking organizations to engage in a broader
range of activities, (iii) allow affiliations among banking, securities,
insurance and commercial organizations, (iv) change or eliminate charters for
thrift organizations, (v) impose examination fees on state-chartered banking
institutions and (vi) allow banks to pay interest on corporate checking
accounts. Management cannot predict whether these or any other proposals will be
enacted or the ultimate impact of any such legislation on the Corporation's
competitive situation, financial condition or results of operations.
FOREIGN OPERATIONS -
Information regarding the Corporation's foreign operations is included in Table
III-C (3) on page 11 of the Corporation's Annual Report on this Form 10-K for
the fiscal year ended December 31, 1997 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Financial
Review section of the Corporation's Annual Report 1997 (page 34), and is
incorporated herein by reference thereto.
9
<PAGE> 12
STATISTICAL DISCLOSURES -
Guide 3 of the "Guides for the Preparation and Filing of Reports and
Registration Statements" under the Securities Act of 1933 sets forth certain
statistical disclosures to be included in the "Description of Business" section
of bank holding company filings with the Securities and Exchange Commission (the
"SEC"). The statistical information required is presented in the tables shown
below in the Corporation's Annual Report 1997, which tables are incorporated
herein by reference thereto. The tables and information contained therein have
been prepared by the Corporation and have not been audited or reported upon by
the Corporation's independent accountants.
Information in response to the following applicable sections of Guide 3 is
included in the Financial Review section of the Corporation's Annual Report
1997, and is incorporated herein by reference thereto:
<TABLE>
<CAPTION>
PAGE NUMBERS IN
--------------------
FIRST HAWAIIAN, INC.
ANNUAL REPORT 1997
DISCLOSURE REQUIREMENTS (EXHIBIT 13)
----------------------- --------------------
<S> <C>
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential -
A. Average balance sheets 23 - 24
B. Analysis of net interest earnings 23 - 24
C. Dollar amount of change in interest income and interest expense 25
II. Investment Portfolio -
A. Book value of investment securities 49 - 50
B. Investment securities by maturities and weighted average yields 35
C. Investment securities in excess of 10% of stockholders' equity 50
III. Loan Portfolio -
A. Types of loans 31
B. Maturities and sensitivities of loans to changes in interest rates 32, 37
C. Risk elements
1. Nonaccrual, past due and restructured loans 33 - 34, 44 - 45
2. Potential problem loans 34
4. Loan concentrations 31 - 32
IV. Summary of Loan Loss Experience -
A. Analysis of loss experience 26 - 28, 45
B. Breakdown of the allowance for loan losses 29
V. Deposits -
A. Average amount and average rate paid on deposits 35
D. Maturity distribution of domestic time certificates of deposits
of $100,000 or more 35
E. Time certificates of deposit in denominations of $100,000 or more
issued by foreign offices 51
VI. Return on Equity and Assets 20
VII. Short-Term Borrowings 51 - 52
</TABLE>
10
<PAGE> 13
III. LOAN PORTFOLIO
Table III-C (3) presents a summary of the Corporation's foreign outstandings to
each country which exceeded 1% of total assets for the years indicated. Foreign
outstandings are defined as the balances outstanding of cross-border loans,
acceptances, interest-bearing deposits with other banks, other interest-bearing
investments and any other monetary assets. At December 31, 1997, the
Corporation's total foreign outstandings amounted to $105 million. At December
31, 1996 and 1995, the Corporation had no foreign outstandings to any country
which exceeded 1% of total assets.
FIRST HAWAIIAN, INC. AND SUBSIDIARIES
TABLE III-C (3)
FOREIGN OUTSTANDINGS TO EACH COUNTRY WHICH EXCEEDS 1% OF TOTAL ASSETS
<TABLE>
<CAPTION>
GOVERNMENTS COMMERCIAL
AND OFFICIAL AND
INSTITUTIONS INDUSTRIAL OTHER TOTAL
------------- ------------ ----------- -------------
(in millions)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1997
JAPAN $ - $ 17 $ 75 $ 92
============= ============ =========== =============
</TABLE>
At December 31, 1997, there were no foreign outstandings to any country between
.75% and 1.0% of total assets.
11
<PAGE> 14
ITEM 2. PROPERTIES
The Bank indirectly (through two subsidiaries) owns all of a city block in
downtown Honolulu containing 55,775 square feet. The administrative headquarters
of the Corporation and the Bank and main branch of the Bank are located in a
modern banking center on this city block. The headquarters building includes
418,000 square feet of gross office space. Information about the lease financing
of the headquarters building is included in "Note 17. Lease Commitments" (page
57) in the Financial Review section of the Corporation's Annual Report 1997,
which is incorporated herein by reference thereto.
Eighteen of the Bank's offices in Hawaii are located on land owned in fee simple
by the Bank. Twenty-three of the thirty-eight branches operated by Pacific One
are located on land owned in fee simple by Pacific One. The other branches of
the Bank, Pacific One and Creditcorp are situated in leasehold premises or in
buildings constructed by the respective companies on leased land (see "Note 17.
Lease Commitments" (page 57) in the Financial Review section of the
Corporation's Annual Report 1997, which is incorporated herein by reference
thereto). In addition, the Bank owns an operations center which is located on
125,919 square feet of land owned in fee simple by the Bank in an industrial
area near downtown Honolulu. The Bank occupies all of this four-story building.
The Bank owns a five-story, 75,000 square foot office building, including a
branch, which is situated on property owned in fee simple in Maite, Guam.
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings are pending against the Corporation or its
subsidiaries. The ultimate liability of the Corporation, if any, cannot be
determined at this time. Based upon consultation with counsel, management does
not expect that the aggregate liability, if any, resulting from these
proceedings would have a material effect on the Corporation's consolidated
financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
12
<PAGE> 15
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers of the Corporation with their positions,
age and business experience during the past five years:
<TABLE>
<CAPTION>
OFFICER AGE BUSINESS EXPERIENCE DURING LAST 5 YEARS
- ----------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Walter A. Dods, Jr. 56 Chairman of the Board and Chief Executive Officer of the
Chairman, Chief Executive Corporation since 1989; President of the Corporation from 1989 -
Officer and Director 1991; Executive Vice President of the Corporation from 1982 -
1989; Director of the Corporation since 1983; Chairman of the
Board and Chief Executive Officer of the Bank since 1989;
President of the Bank from 1984 - 1989; Director of the Bank
since 1979. Mr. Dods has been with the Bank since 1968.
John K. Tsui 59 President and Director of the Corporation since April and July
President and Director 1995, respectively; Director, President and Chief Operating
Officer of the Bank since July 1994; Chairman of FHL since 1995;
Director and Chief Executive Officer of FHL since September 1994.
Mr. Tsui was Executive Vice President of Bancorp Hawaii, Inc.
from 1986 - June 1994 and was Vice Chairman of Bank of Hawaii
from 1989 - June 1994. Mr. Tsui was with Bancorp Hawaii, Inc.
from 1984 - June 1994.
Donald G. Horner 47 Executive Vice President of the Corporation since 1989; Vice
Executive Vice President President of the Corporation from 1987 - 1989; Vice Chairman of
the Bank since July 1994; Executive Vice President of the Bank
from 1993 - 1994; Chairman of Creditcorp since 1993; Chairman and
Chief Executive Officer of Creditcorp from 1992 - 1993; Director
of Creditcorp since 1985; President of Creditcorp from 1985 -
1992; Director of FHL since 1983; President of FHL from 1985 -
1994. Mr. Horner has been with the Bank since 1978.
Howard H. Karr 55 Executive Vice President and Treasurer of the Corporation since
Executive Vice President and 1990; Vice President and Treasurer of the Corporation from 1978 -
Treasurer 1990; Vice Chairman of the Bank since 1997; Vice Chairman, Chief
Financial Officer and Treasurer of the Bank from September 1993 -
1997; Vice Chairman and Chief Financial Officer of the Bank from
1992 - 1993; Executive Vice President and Chief Financial Officer
of the Bank from 1989 - 1991; Senior Vice President and
Controller of the Bank from 1979 - 1989. Mr. Karr has been with
the Bank since 1973.
</TABLE>
There are no family relationships among any of the executive officers of the
Corporation. There is no arrangement or understanding between any such executive
officer and another person pursuant to which he was elected as an officer. The
term of office of each officer is at the pleasure of the Board of Directors of
the Corporation.
13
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Required information is included in "Common Stock Information" (page 19) in the
Financial Review section of the Corporation's Annual Report 1997, and is
incorporated herein by reference thereto.
ITEM 6. SELECTED FINANCIAL DATA
Required information is included in "Summary of Selected Consolidated Financial
Data" (page 20) in the Financial Review section of the Corporation's Annual
Report 1997, and is incorporated herein by reference thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Required information is included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (pages 21 through 38) in the
Financial Review section of the Corporation's Annual Report 1997, and is
incorporated herein by reference thereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Required information is included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (page 36) and "Notes to Financial
Statements" (page 47) in the Financial Review section of the Corporation's
Annual Report 1997, and is incorporated herein by reference thereto.
INTEREST RATE RISK MEASUREMENT AND MANAGEMENT
The net interest income of the Corporation is subject to interest rate risk to
the extent the Corporation's interest-bearing liabilities (primarily deposits
and borrowings) mature or reprice on a different basis than its interest-earning
assets (primarily loans and investment securities). When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets during a
given period, an increase in interest rates could reduce net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, a decrease in interest rates could have a negative
impact on net interest income. In addition, the impact of interest rate swings
may be exacerbated by factors such as our customers' propensity to manage their
demand deposit balances more or less aggressively or to refinance mortgage loans
depending on the interest rate environment.
The Asset/Liability Committees of each of the Corporation's subsidiary companies
are responsible for managing interest rate risk. Oversight for the Corporation
taken as a whole and individual subsidiary companies is also provided by the
Treasury & Investment Division and the Asset/Liability Committee of the Bank.
The frequency of the various Asset/Liability Committee meetings range from
weekly to monthly. Recommendations for changes to a particular subsidiary's
interest rate profile, should they be deemed necessary and exceed established
policies, are made to its Board of Directors. Other than loans that are
originated and held for sale, the Corporation's derivatives and other financial
instruments are not entered into for trading purposes.
The Corporation's exposure to interest rate risk is managed primarily by taking
actions that impact certain balance sheet accounts (e.g., lengthening or
shortening maturities in the investment portfolio, changing asset and/or
liability mix -- including by increasing or decreasing the amounts of fixed
and/or variable instruments held by the Corporation -- to adjust sensitivity to
interest rate changes) and/or utilizing off-balance sheet instruments such as
interest rate swaps, caps or floors.
14
<PAGE> 17
The Corporation models its net interest income in order to quantify its exposure
to changes in interest rates. Generally, the size of the balance sheet is held
constant and then subjected to interest rate shocks up and down of 100 and 200
basis points (1% equals 100 basis points) each. Each account-level item is
repriced according to its respective contractual characteristics, including any
imbedded options which might exist (e.g., loans which permit the borrower to
prepay the principal balance of the loan prior to maturity without penalty).
Off-balance sheet instruments such as interest rate swaps, caps or floors are
included as part of the modeling process. For each interest rate shock scenario,
net interest income over a 12-month horizon is compared against the results of a
scenario in which no interest rate change occurs (a "flat rate scenario") to
determine the level of interest rate risk at that time.
The projected impact of 100 and 200 basis point increases and decreases in
interest rates on the Corporation's consolidated net interest income over the
next 12 months beginning January 1, 1998 is shown below.
<TABLE>
<CAPTION>
+2% +1% Flat -1% -2%
------ ------ ------ ------ ------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Net Interest Income $330.9 $338.1 $341.7 $340.8 $337.1
Difference from Flat (10.8) ( 3.6) ( .9) ( 4.6)
% Variance ( 3.2)% ( 1.1)% ( .3)% ( 1.3)%
</TABLE>
SIGNIFICANT ASSUMPTIONS UTILIZED AND INHERENT LIMITATIONS
The significant net interest income changes for each interest rate scenario
presented above include assumptions based on accelerating or decelerating
mortgage prepayments in declining or rising scenarios, respectively, and
adjusting deposit levels and mix in the different interest rate scenarios. The
magnitude of changes to both areas in turn are based upon analyses of customers'
behavior in differing rate environments. However, these analyses may differ from
actual future customer behavior. For example, actual prepayments may differ from
current assumptions as prepayments are affected by many variables which cannot
be predicted with certainty (e.g., prepayments of mortgages may differ on fixed
and adjustable loans depending upon current interest rates, expectations of
future interest rates, availability of refinancing, economic benefit to
borrower, financial viability of borrower, etc.).
As with any model for analyzing interest rate risk, certain limitations are
inherent in the method of analysis presented above. For example, the actual
impact on net interest income due to certain interest rate shocks may differ
from those projections presented should market conditions vary from assumptions
used in the analysis. Furthermore, the analysis does not consider the effects of
a changed level of overall economic activity that could exist in certain
interest rate environments. Moreover, the method of analysis used does not take
into account the actions that management might take to respond to changes in
interest rates because of inherent difficulties in determining the likelihood or
impact of any such response.
FORWARD-LOOKING STATEMENTS
Certain matters contained in this Item 7A. are forward-looking statements that
involve certain risks and uncertainties that could cause the Corporation's
actual results to differ materially from those discussed in the forward-looking
statements. Required information is included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (page 21) in the
Financial Review section of the Corporation's Annual Report 1997 for a
discussion of factors that may cause such differences to occur.
15
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information is included in the Financial Review section of the
Corporation's Annual Report 1997, which is incorporated herein by reference
thereto as follows:
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Report of Independent Accountants 39
First Hawaiian, Inc. and Subsidiaries:
Consolidated Balance Sheets at December 31, 1997 and 1996 40
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 41
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 42
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 43
First Hawaiian, Inc. (Parent Company):
Balance Sheets at December 31, 1997 and 1996 59
Statements of Income for the years ended December 31, 1997,
1996 and 1995 59
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 42
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 60
Notes to Financial Statements 44 - 60
Summary of Quarterly Financial Data (Unaudited) 38
Supplementary Data 35
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Required information relating to directors is included in "Election of
Directors" and "Directors Continuing in Office and Executive Officers" (pages 3
through 8) of the Corporation's Proxy Statement, and is incorporated herein by
reference thereto. Required information relating to executive officers is
included in Part I on page 13 of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997 in the section entitled "Executive Officers
of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Required information is included in "Compensation of Directors" and "Executive
Compensation" (pages 9 through 18) of the Corporation's Proxy Statement, and is
incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Required information is included in "Outstanding Shares; Voting Rights,"
"Election of Directors" and "Directors Continuing in Office and Executive
Officers" (pages 2 through 8) of the Corporation's Proxy Statement, and is
incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Required information is included in "Certain Transactions" (pages 20 and 21) of
the Corporation's Proxy Statement, and is incorporated herein by reference
thereto.
17
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE NUMBER IN
---------------
FIRST HAWAIIAN,
INC. ANNUAL
REPORT 1997
(EXHIBIT 13)
---------------
<S> <C>
(a) 1. Financial Statements
The following financial statements are incorporated by reference in Part II
(Item 8) of this Form 10-K:
Report of Independent Accountants 39
First Hawaiian, Inc. and Subsidiaries:
Consolidated Balance Sheets at December 31, 1997 and 1996 40
Consolidated Statements of Income for the
years ended December 31, 1997, 1996 and 1995 41
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 42
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 43
First Hawaiian, Inc. (Parent Company):
Balance Sheets at December 31, 1997 and 1996 59
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 59
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 42
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 60
Notes to Financial Statements 44 - 60
Summary of Quarterly Financial Data (Unaudited) 38
Supplementary Data 35
</TABLE>
2. Financial Statement Schedules
Schedules to the consolidated financial statements required by Article 9
of Regulation S-X are not required under the related instructions, or
the information is included in the consolidated financial statements, or
are inapplicable, and therefore have been omitted.
3. Exhibits
Exhibit 3 (i) Certificate of Incorporation - Incorporated by
reference to Exhibit 3 to the Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996
as filed with the SEC.
(ii) Bylaws - Incorporated by reference to Exhibit 3 to the
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987 as filed with the SEC.
18
<PAGE> 21
Exhibit 4 Instruments defining rights of security holders, including
indentures.
(i) Equity - Incorporated by reference to Exhibit 3(i) hereto.
(ii) Debt - Indenture, dated as of August 9, 1993 between First
Hawaiian, Inc. and The First National Bank of Chicago,
Trustee, is incorporated by reference to Exhibit 4(ii) to
the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 as filed with the SEC.
(iii) Debt - Indenture, dated as of June 30, 1997 between First
Hawaiian, Inc. and The First National Bank of Chicago,
Trustee, is incorporated by reference to the Corporation's
Registration Statement on Form S-4 as filed with the SEC
on October 17, 1997.
Exhibit 10 Material contracts
(i) Lease Agreement dated as of December 1, 1993 between
REFIRST, Inc. and First Hawaiian Bank is incorporated by
reference to Exhibit 10(iii) to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993 as filed with the SEC.
(ii) Ground Lease dated as of December 1, 1993 among First
Hawaiian Center Limited Partnership, FH Center, Inc. and
REFIRST, Inc. is incorporated by reference to Exhibit
10(v) to the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 as filed with the
SEC.
19
<PAGE> 22
(iii) Stock Incentive Plan of First Hawaiian, Inc. dated
November 22, 1991 is incorporated by reference to Exhibit
10 to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 as filed with the SEC.
(iv) Long-Term Incentive Plan of First Hawaiian, Inc. effective
January 1, 1992 is incorporated by reference to Exhibit 10
to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 as filed with the SEC.
(v) First Hawaiian, Inc. Supplemental Executive Retirement
Plan, as amended and restated as of January 1, 1996 is
incorporated by reference to Exhibit 10 to the
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 as filed with the SEC.
(vi) First Hawaiian, Inc. Deferred Compensation Plan, as
amended and restated as of January 1, 1996 is incorporated
by reference to Exhibit 10 to the Corporation's Annual
Report on Form 10- K for the fiscal year ended December
31, 1995 as filed with the SEC.
(vii) First Hawaiian, Inc. Incentive Plan for Key Executives, as
amended through December 13, 1989 is incorporated by
reference to Exhibit 10 to the Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992
as filed with the SEC.
(viii) Directors' Retirement Plan, effective as of January 1,
1992 is incorporated by reference to Exhibit 10 to the
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 as filed with the SEC.
Exhibit 12 Statement re: computation of ratios.
Exhibit 13 Annual report to security holders - Corporation's Annual
Report 1997.
Exhibit 21 Subsidiaries of the registrant.
Exhibit 23 Consent of independent accountants.
Exhibit 27 Financial data schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the last
quarter of the fiscal year ended December 31, 1997.
(c) The exhibits listed in Item 14(a)3 are incorporated by reference or
attached hereto.
(d) Response to this item is the same as the response to Item 14(a)2.
20
<PAGE> 23
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> 24
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> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
3 (i) Certificate of Incorporation - Incorporated by reference to Exhibit 3 to the
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
as filed with the SEC.
(ii) Bylaws - Incorporated by reference to Exhibit 3 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1987 as filed with the SEC.
4 Instruments defining rights of security holders, including indentures.
(i) Equity - Incorporated by reference to Exhibit 3(i) hereto.
(ii) Debt - Indenture, dated as of August 9, 1993 between First Hawaiian, Inc. and The First
National Bank of Chicago, Trustee, is incorporated by reference to Exhibit 4(ii) to the
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as
filed with the SEC.
(iii) Debt - Indenture, dated as of June 30, 1997 between First Hawaiian, Inc. and The First
National Bank of Chicago, Trustee, is incorporated by reference to the Corporation's
Registration Statement on Form S-4 as filed with the SEC on October 17, 1997.
10 Material contracts
(i) Lease Agreement dated as of December 1, 1993 between REFIRST, Inc. and First Hawaiian Bank
is incorporated by reference to Exhibit 10(iii) to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1993 as filed with the SEC.
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C> <C>
(ii) Ground Lease dated as of December 1, 1993 among First Hawaiian Center Limited Partnership,
FH Center, Inc. and REFIRST, Inc. is incorporated by reference to Exhibit 10(v) to the
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as
filed with the SEC.
(iii) Stock Incentive Plan of First Hawaiian, Inc. dated November 22, 1991 is incorporated by
reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991 as filed with the SEC.
(iv) Long-Term Incentive Plan of First Hawaiian, Inc. effective January 1, 1992 is incorporated
by reference to Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991 as filed with the SEC.
(v) First Hawaiian, Inc. Supplemental Executive Retirement Plan, as amended and restated as of
January 1, 1996 is incorporated by reference to Exhibit 10 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 as filed with the SEC.
(vi) First Hawaiian, Inc. Deferred Compensation Plan, as amended and restated as of January 1,
1996 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 as filed with the SEC.
(vii) First Hawaiian, Inc. Incentive Plan for Key Executives, as amended through December 13,
1989 is incorporated by reference to Exhibit 10 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1992 as filed with the SEC.
(viii) Directors' Retirement Plan, effective as of January 1, 1992 is incorporated by reference to
Exhibit 10 to the Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 as filed with the SEC.
12 Statement re: computation of ratios.
13 Annual report to security holders - Corporation's Annual Report 1997.
21 Subsidiaries of the registrant.
23 Consent of independent accountants.
27 Financial data schedule.
</TABLE>
24
<PAGE> 1
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIOS
FIRST HAWAIIAN, INC. AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income before income taxes
and cumulative effect of a
change in accounting principle $123,564 $115,834 $122,138 $111,501 $119,105
-------- -------- -------- -------- --------
Fixed charges:(1)
Interest expense 258,011 252,795 265,297 179,688 163,541
Rental expense 10,774 4,932 4,600 5,355 4,013
-------- -------- -------- -------- --------
268,785 257,727 269,897 185,043 167,554
Less interest on deposits 197,619 182,402 176,048 120,289 129,719
-------- -------- -------- -------- --------
Net fixed charges 71,166 75,325 93,849 64,754 37,835
-------- -------- -------- -------- --------
Earnings, excluding
interest on deposits $194,730 $191,159 $215,987 $176,255 $156,940
======== ======== ======== ======== ========
Earnings, including
interest on deposits $392,349 $373,561 $392,035 $296,544 $286,659
======== ======== ======== ======== ========
Ratio of earnings to fixed charges:
Excluding interest
on deposits 2.74X 2.54x 2.30x 2.72x 4.15x
Including interest
on deposits 1.46X 1.45x 1.45x 1.60x 1.71x
</TABLE>
(1) For purposes of computing the consolidated ratios of earnings to fixed
charges, earnings represent income before income taxes and cumulative
effect of a change in accounting principle plus fixed charges. Fixed
charges, excluding interest on deposits, include interest (other than on
deposits), whether expensed or capitalized, and that portion of rental
expense (generally one third) deemed representative of the interest
factor. Fixed charges, including interest on deposits, consist of the
foregoing items plus interest on deposits.
<PAGE> 1
EXHIBIT 13
CORPORATION'S
ANNUAL REPORT 1997
<PAGE> 2
EXHIBIT 13
CONSOLIDATED FINANCIAL HIGHLIGHTS First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) 1997 1996 Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
EARNINGS AND DIVIDENDS
Net income...................................... $ 84,261 $ 80,296 4.9%
Cash dividends.................................. 39,295 37,579 4.6
- -----------------------------------------------------------------------------------------------
PER SHARE
Basic earnings.................................. $ 2.66 $ 2.56 3.9%
Diluted earnings................................ 2.64 2.55 3.5
Cash dividends.................................. 1.24 1.195 3.8
Book value...................................... 23.34 22.22 5.0
- -----------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average total assets.................. 1.06% 1.04% 1.9%
Return on average stockholders' equity.......... 11.61 11.88 (2.3)
- -----------------------------------------------------------------------------------------------
FINANCIAL POSITION AT DECEMBER 31
Total assets.................................... $8,093,092 $8,002,174 1.1%
Loans........................................... 6,238,681 5,806,732 7.4
Deposits ....................................... 6,089,200 5,936,708 2.6
Stockholders' equity............................ 731,701 705,884 3.7
Risk-based capital ratios:
Tier 1........................................ 9.51% 8.42% 12.9%
Total......................................... 12.61 11.85 6.4
Tier 1 leverage ratio........................... 9.14 7.32 24.9
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET INCOME
($ in millions)
<S> <C>
1993..................... 81.9
1994..................... 72.5
1995..................... 77.0
1996..................... 80.3
1997..................... 84.3
</TABLE>
<TABLE>
<CAPTION>
DILUTED EARNINGS AND
CASH DIVIDENDS PER SHARE Cash Dividends
($) Per Share
<S> <C> <C>
1993................. 2.52 1.135
1994................. 2.25 1.18
1995................. 2.43 1.18
1996................. 2.55 1.195
1997................. 2.64 1.24
</TABLE>
<TABLE>
<CAPTION>
RETURN ON AVERAGE
TOTAL ASSETS
(%)
<S> <C>
1993.................. 1.21
1994.................. 1.01
1995.................. 1.02
1996.................. 1.04
1997.................. 1.06
</TABLE>
<TABLE>
<CAPTION>
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY
(%)
<S> <C>
1993.............. 14.01
1994.............. 11.73
1995.............. 12.03
1996.............. 11.88
1997.............. 11.61
</TABLE>
1
<PAGE> 3
SENIOR ADMINISTRATIVE OFFICERS First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FIRST HAWAIIAN, INC.
Walter A. Dods, Jr.
Chairman & Chief Executive Officer
John K. Tsui
President
Donald G. Horner
Executive Vice President
Howard H. Karr
Executive Vice President & Treasurer
Gerald M. Pang
Senior Vice President & Chief Credit Officer
Herbert E. Wolff
Senior Vice President & Secretary
FIRST HAWAIIAN BANK
Walter A. Dods, Jr.
Chairman & Chief Executive Officer
John K. Tsui
President & Chief Operating Officer
Donald G. Horner
Vice Chairman,
Retail Banking Group
Howard H. Karr
Vice Chairman,
Administration & Finance Group
Lily K. Yao
Vice Chairman,
Government & Community Relations
Robert A. Alm
Senior Vice President,
Financial Management Group
Gary L. Caulfield
Executive Vice President,
Information Management Group
Anthony R. Guerrero, Jr.
Executive Vice President,
Branch Banking Group
Thomas P. Huber
Executive Vice President,
General Counsel & Assistant Secretary,
Legal Group
Gerald M. Pang
Executive Vice President &
Chief Credit Officer
Barbara S. Tomber
Executive Vice President,
Wholesale Loan Group
Albert M. Yamada
Executive Vice President
& Chief Financial Officer
Sharon S. Brown
Senior Vice President,
Sales & Service Division
Brandt G. Farias
Senior Vice President,
Marketing Communications Division
Mark H. Felmet
Senior Vice President,
Retail Loan Division
Melvin T. Freitas
Vice President,
Dealer Center Division
Gary Y. Fujitani
Senior Vice President,
Business Services Division
Dean K. Hirata
Senior Vice President & Controller,
Controller's Division
Charles L. Jenkins
Vice President,
Corporate & International Banking Division
William B. Johnstone, III
Executive Vice President & Treasurer,
Treasury & Investment Division
Edmund H. Kajiyama
Senior Vice President,
Branch Support Division
Gerald J. Keir
Senior Vice President,
Corporate Communications Division
John W. Landgraf
Executive Vice President,
Commercial Real Estate Division &
Japan Business Development
George H. Lumsden
Senior Vice President & General Auditor,
Audit Division
David W. Madison
Executive Vice President,
Branch Loan Administration Division
Miles S. Miyabara
Vice President,
Consumer Credit Division
Vernon T. Omori
Senior Vice President,
Residential Real Estate Division
Curt T. Otaguro
Senior Vice President,
Operations Research & Development Division
Edward Y. W. Pei
Senior Vice President,
Electronic Banking Division
Sheila M. Sumida
Senior Vice President,
Human Resources Division
James M. Wayman
Senior Vice President,
Bank Properties Division
Herbert E. Wolff
Senior Vice President & Secretary,
Corporate Secretary
FIRST HAWAIIAN CREDITCORP, INC.
Donald G. Horner
Chairman
Harriet M. Aoki
President & Chief Executive Officer
Winston K. H. Chow
Executive Vice President
Calvin H. Umamoto
Senior Vice President,
Operations Division
First Hawaiian Leasing, Inc./
FHL Lease Holding Company, Inc.
John K. Tsui
Chairman & Chief Executive Officer
Stephen J. Marcuccilli
President
PACIFIC ONE BANK
Walter A. Dods, Jr.
Chairman
Richard C. Williamson
President & Chief Executive Officer
Fred W. Bergemann
Senior Vice President & Chief Lending Officer
Wallace W. Child
Senior Vice President & Chief Operations Officer
James W. Forsloff
Senior Vice President,
Business Banking
Jane L. Holbrook
Senior Vice President,
Marketing & Technical Services
Richard N. Moffitt
Vice President,
Human Resources
Rolland D. Royce
Senior Vice President & Controller
Calvin Y. Tabata
Senior Vice President,
Retail Markets
15
<PAGE> 4
BOARDS OF DIRECTORS First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
John W. A. Buyers (FHI, FHB)
Chairman & Chief Executive Officer,
C. Brewer & Company, Limited
Dr. Albert C. K. Chun-Hoon (FHB)
Orthopedic Surgeon
John C. Couch (FHI, FHB)
Chairman, President & Chief Executive Officer,
Alexander & Baldwin, Inc.
Walter A. Dods, Jr. (FHI, FHB)
Chairman & Chief Executive Officer,
First Hawaiian, Inc. and First Hawaiian Bank;
Trustee, Estate of S. M. Damon
Dr. Julia Ann Frohlich (FHI, FHB)
President, Blood Bank of Hawaii
Paul Mullin Ganley (FHI, FHB)
Trustee, Estate of S. M. Damon;
Partner, Carlsmith Ball Wichman Case & Ichiki
David M. Haig (FHI, FHB)
Trustee, Estate of S. M. Damon
Warren H. Haruki (FHB)
President, GTE Hawaiian Tel
Howard K. Hiroki (FHB)
Partner (Retired), Coopers & Lybrand L. L. P.
John A. Hoag (FHI, FHB)
President (Retired), First Hawaiian, Inc.;
Vice Chairman (Retired), First Hawaiian Bank
Chairman, Hawaii Reserves, Inc.
David C. Hulihee (FHB)
President & Treasurer,
Royal Contracting Co., Ltd.
Glenn A. Kaya (FHB)
President, Hawaii Seiyu, Ltd.
Dr. Richard R. Kelley (FHB)
Chairman, Outrigger Enterprises
Bert T. Kobayashi, Jr. (FHI, FHB)
Principal, Kobayashi, Sugita & Goda
Dr. Richard T. Mamiya (FHI, FHB)
Heart Surgeon, Richard Mamiya, MD, Inc.
Dr. Fujio Matsuda (FHI, FHB)
Chairman, Pacific International Center for
High Technology Research
Dr. Roderick F. McPhee (FHI, FHB)
President (Retired), Punahou School
Wesley T. Park (FHB)
President & Chief Executive Officer,
Hawaii Dental Service
George P. Shea, Jr. (FHI, FHB)
Chairman, President &
Chief Executive Officer (Retired),
First Insurance Company of Hawaii, Ltd.
R. Dwayne Steele (FHB)
Chairman, Grace Pacific Corp.
John K. Tsui (FHI, FHB)
President, First Hawaiian, Inc.;
President & Chief Operating Officer,
First Hawaiian Bank
Jenai Sullivan Wall (FHB)
President, Foodland Super Market, Ltd.
Fred C. Weyand (FHI, FHB)
Trustee, Estate of S. M. Damon;
General (Retired), U. S. Army
James C. Wo (FHB)
Chairman & Chief Executive Officer,
Bojim Investments;
Vice President & Treasurer,
BJ Management Corp.
Robert C. Wo (FHI, FHB)
President & Secretary, BJ Management Corp.;
Chairman, C. S. Wo & Sons, Ltd.
FIRST HAWAIIAN CREDITCORP, INC.
Donald G. Horner
Chairman
Harriet M. Aoki
President & Chief Executive Officer
Philip H. Ching
Walter A. Dods, Jr.
Dr. Julia Ann Frohlich
Michael K. Fujimoto
Howard H. Karr
Glenn A. Kaya
Leighton S. L. Mau
John K. Tsui
Fred C. Weyand
FIRST HAWAIIAN LEASING, INC./
FHL LEASE HOLDING COMPANY, INC.
John K. Tsui
Chairman & Chief Executive Officer
Stephen J. Marcuccilli
President
Walter A. Dods, Jr.
Donald G. Horner
Howard H. Karr
PACIFIC ONE BANK
Walter A. Dods, Jr.
Chairman
John K. Tsui
Vice Chairman & Chief Credit Officer
Richard C. Williamson
President & Chief Executive Officer
Charles E. Carlbom
Leonard Dietrich
Craig D. Eerkes
Stuart A. Hall
James L. Huffman
Howard H. Karr
16
<PAGE> 5
FIRST HAWAIIAN, INC. FINANCIAL REVIEW 1997
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL REVIEW
18 CORPORATE ORGANIZATION
19 COMMON STOCK INFORMATION
20 SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
39 REPORT OF INDEPENDENT ACCOUNTANTS
FINANCIAL STATEMENTS:
40 Consolidated Balance Sheets
41 Consolidated Statements of Income
42 Consolidated Statements of Changes
in Stockholders' Equity
43 Consolidated Statements of Cash Flows
44 Notes to Financial Statements
61 GLOSSARY OF FINANCIAL TERMS
62 CORPORATE ADDRESSES
63 SUPPLEMENTAL INFORMATION
17
<PAGE> 6
CORPORATE ORGANIZATION First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FIRST HAWAIIAN, INC.
First Hawaiian, Inc. (the "Company") is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended, and is incorporated
under the laws of the State of Delaware. As a bank holding company, the Company
is allowed to acquire or invest in the securities of companies that are engaged
in banking or in activities closely related to banking as authorized by the
Federal Reserve Board.
The Company's organization consists of the following wholly-owned
subsidiaries:
FIRST HAWAIIAN BANK
First Hawaiian Bank (the "Bank") was founded in 1858 and is the oldest
financial institution in Hawaii. The Bank is a full-service bank conducting
general commercial and consumer banking business and offering trust services.
The Bank's activities include receiving demand, savings and time deposits;
making commercial, agricultural, real estate and consumer loans; selling
traveler's checks, personal money orders, cash management services, insurance
products, mutual funds and annuities; issuing letters of credit; handling
domestic and foreign collections; renting safe deposit boxes; and providing data
processing services to customers.
The Bank's main office is located in Honolulu, Hawaii, with 59 other banking
offices located throughout the State of Hawaii. It also has two banking offices
in Guam; a banking office in Saipan, Northern Mariana Islands; an offshore
branch in Grand Cayman, British West Indies; a representative office in Tokyo,
Japan; and a worldwide network of correspondent banks.
Deposits in the Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the extent, and subject to the limitations, set
forth in the Federal Deposit Insurance Act, as amended (the "Act"). The Bank is
a State of Hawaii chartered bank and is not a member of the Federal Reserve
System.
The Bank also conducts business through the following wholly-owned
subsidiaries:
o FH CENTER, INC.
FH Center, Inc. owns certain real property in connection with First
Hawaiian Center, the Company's headquarters.
o FHB PROPERTIES, INC. AND
AMERICAN SECURITY PROPERTIES, INC.
FHB Properties, Inc. and American Security Properties, Inc. hold title
to certain property and premises upon which the Bank's business is
conducted.
o PACIFIC ONE DEALER CENTER, INC.
Pacific One Dealer Center, Inc. engages in the business of automobile
financing and related business activities in California and Oregon.
o FIRST HAWAIIAN LEASING, INC.
First Hawaiian Leasing, Inc. engages in commercial equipment and
vehicle leasing and financing.
o REAL ESTATE DELIVERY, INC.
Real Estate Delivery, Inc. holds title to certain real property
acquired by the Bank in ordinary business activities.
o FIRST HAWAIIAN INSURANCE, INC.
First Hawaiian Insurance, Inc. engages in the business of providing
personal, business and estate insurance to its customers.
PIONEER FEDERAL SAVINGS BANK
On April 18, 1997, Pioneer Federal Savings Bank ("Pioneer"), a former
wholly-owned subsidiary of the Company, was merged with and into the Bank. As a
result of the merger, five Pioneer branches became branches of the Bank and 14
branches were closed.
PACIFIC ONE BANK
Pacific One Bank ("Pacific One"), headquartered in Portland, Oregon, began
operations on June 1, 1996 with 27 branches in Oregon and Idaho. On December 31,
1997, Pacific One Bank, National Association ("Pacific One, N.A."), another
wholly-owned subsidiary bank of the Company, was merged with and into Pacific
One. Pacific One, N.A. was a national bank headquartered in Kennewick,
Washington, operating eight branches in that state. As a result of the merger,
Pacific One now operates 28 branches in Oregon, eight branches in Washington and
two branches in Idaho.
Pacific One is a full-service bank conducting general commercial and
consumer banking business. Its activities include receiving demand, savings and
time deposits; making commercial, agricultural, real estate and consumer loans;
and selling international and cash management services and mutual funds and
annuities.
Deposits in Pacific One are insured by the FDIC to the extent, and subject
to the limitations, set forth in the Act. Pacific One is chartered as a bank in
the State of Oregon with authority to operate interstate branches in Washington
and Idaho and is not a member of the Federal Reserve System.
FIRST HAWAIIAN CREDITCORP, INC.
First Hawaiian Creditcorp, Inc. ("Creditcorp") is a financial services loan
company operating in the States of Hawaii and Oregon and in Guam.
The lending activities of Creditcorp are concentrated in both consumer and
commercial financing, primarily collateralized by real estate.
The primary source of funds for Creditcorp is from savings and time deposits
received from the general public. These deposits are insured by the FDIC to the
extent, and subject to the limitations, set forth in the Act.
Creditcorp has 12 branch offices located throughout the four major islands
of the State of Hawaii, one branch in Guam and a loan subsidiary in Oregon.
The Company plans to merge Creditcorp with and into the Bank in mid-1998. In
the process, the 12
18
<PAGE> 7
CORPORATE ORGANIZATION (CONTINUED) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
branches in Hawaii and one branch in Guam are expected to be closed and the loan
subsidiary is expected to be merged into Pacific One.
FHL LEASE HOLDING COMPANY, INC.
FHL Lease Holding Company, Inc. is a financial services loan company in the
State of Hawaii primarily engaged in commercial equipment and vehicle leasing
and financing.
FHI INTERNATIONAL, INC.
FHI International, Inc. was organized to engage in consumer financing
services and related activities outside the United States. Currently, it is not
actively engaged in business.
FIRST HAWAIIAN CAPITAL I
First Hawaiian Capital I is a Delaware business trust (the "Trust") which
was formed in 1997. The Trust issued $100,000,000 of its Capital Securities (the
"Capital Securities") in 1997, and used the proceeds to purchase junior
subordinated deferrable interest debentures (the "Debentures") of the Company.
The Capital Securities qualify as Tier 1 Capital of the Company and are fully
and unconditionally guaranteed by the Company.
The Capital Securities accrue and pay interest semi-annually at an annual
interest rate of 8.343%. The Capital Securities are mandatorily redeemable upon
maturity of the Debentures on July 1, 2027, or upon earlier redemption in whole
or in part as provided for in the governing indenture.
COMMON STOCK INFORMATION
The common stock of the Company is traded on The Nasdaq Stock Market under
the symbol FHWN. At December 31, 1997, there were 4,513 holders of record of the
Company's common stock. A large number of shares are also held in the names of
nominees and brokers for individuals and institutions.
At December 31, 1997, a total of 33,190,374 shares of common stock were
issued, including 1,845,217 shares in the treasury stock account. The Board of
Directors (the "Board") has authorized the repurchase of up to 3.1 million
shares in total to be held by the Company or used for corporate purposes as
designated by the Board. Through December 31, 1997, the Company had repurchased
1.6 million shares of common stock under such authorization.
A compilation of certain quarterly and annual per share data is presented
below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Market Price
Basic Diluted Dividends ---------------------------------
Earnings Earnings Paid High Low Close
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
FIRST QUARTER .............. $ .65 $ .64 $ .310 $ 36 $ 30 1/2 $ 31 1/8
SECOND QUARTER ............. .70 .70 .310 35 3/4 28 5/8 34 1/8
THIRD QUARTER .............. .67 .67 .310 40 3/4 33 5/8 39 3/4
FOURTH QUARTER ............. .64 .63 .310 43 7/8 36 39 3/4
- --------------------------------------------------------------
ANNUAL .................. $ 2.66 $ 2.64 $ 1.240 43 7/8 28 5/8 39 3/4
==============================================================
1996
First Quarter .............. $ .65 $ .65 $ .295 $ 30 $ 26 $ 27 5/8
Second Quarter ............. .67 .67 .295 29 3/4 26 1/2 28 1/2
Third Quarter .............. .60 .60 .295 31 25 3/4 31
Fourth Quarter ............. .64 .63 .310 36 3/4 29 1/4 35
- -------------------------------------------------------------
Annual .................. $ 2.56 $ 2.55 $ 1.195 36 3/4 25 3/4 35
==============================================================
1995 ....................... $ 2.43 $ 2.43 $ 1.180 31 1/4 23 30
1994 ....................... $ 2.25 $ 2.25 $ 1.180 31 1/4 23 23 3/4
1993 ....................... $ 2.52 $ 2.52 $ 1.135 30 3/4 23 3/4 24 3/4
======================================================================================================
</TABLE>
The Company expects to continue its policy of paying quarterly cash
dividends. The declaration and payment of cash dividends are subject to the
Company's future earnings, capital requirements, financial condition and certain
limitations as described in Note 12 to the Financial Statements on page 53.
19
<PAGE> 8
SUMMARY OF SELECTED CONSOLIDATED
FINANCIAL DATA First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENTS AND DIVIDENDS
(in thousands)
Total interest income ...................... $592,483 $574,140 $559,957 $475,760 $428,931
Total interest expense ..................... 258,011 252,795 265,297 179,688 150,709
- ------------------------------------------------------------------------------------------------------------
Net interest income ........................ 334,472 321,345 294,660 296,072 278,222
Provision for loan losses .................. 17,211 23,627 38,107 22,922 13,262
Total noninterest income ................... 98,513 87,455 82,106 75,512 69,845
Total noninterest expense .................. 292,210 269,339 216,521 237,161 215,700
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of a change in accounting principle 123,564 115,834 122,138 111,501 119,105
Income taxes ............................... 39,303 35,538 45,133 38,990 40,898
- ------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of a change in accounting principle ...... 84,261 80,296 77,005 72,511 78,207
Cumulative effect of a change in accounting
principle ................................ -- -- -- -- 3,650
- ------------------------------------------------------------------------------------------------------------
NET INCOME ................................. $ 84,261 $ 80,296 $ 77,005 $ 72,511 $ 81,857
============================================================================================================
CASH DIVIDENDS ............................. $ 39,295 $ 37,579 $ 37,368 $ 38,008 $ 36,821
============================================================================================================
COMMON STOCK DATA
Per share:
Income before cumulative effect
of a change in accounting principle .... $ 2.66 $ 2.56 $ 2.43 $ 2.25 $ 2.41
Basic earnings ........................... 2.66 2.56 2.43 2.25 2.52
Diluted earnings ......................... 2.64 2.55 2.43 2.25 2.52
Cash dividends ........................... 1.24 1.195 1.18 1.18 1.135
Book value (at December 31) .............. 23.34 22.22 20.86 19.61 18.69
Market price (close at December 31) ...... 39.75 35.00 30.00 23.75 24.75
Average shares outstanding (in thousands) .. 31,726 31,399 31,735 32,259 32,505
- ------------------------------------------------------------------------------------------------------------
BALANCE SHEETS (in millions)
Average balances:
Total assets ............................. $ 7,918 $ 7,755 $ 7,528 $ 7,200 $ 6,755
Total earning assets ..................... 7,128 7,071 6,876 6,558 6,106
Loans .................................... 5,980 5,510 5,461 5,172 4,619
Deposits ................................. 5,903 5,618 5,178 5,082 5,069
Stockholders' equity ..................... 726 676 640 618 584
At December 31:
Total assets ............................. $ 8,093 $ 8,002 $ 7,565 $ 7,535 $ 7,269
Loans .................................... 6,239 5,807 5,260 5,534 5,067
Deposits ................................. 6,089 5,937 5,358 5,152 5,220
Long-term debt and capital securities .... 319 206 239 219 222
Stockholders' equity ..................... 732 706 650 628 608
- ------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average:
Total assets ............................. 1.06% 1.04% 1.02% 1.01% 1.21%
Stockholders' equity ..................... 11.61 11.88 12.03 11.73 14.01
Dividend payout ratio ...................... 46.62 46.68 48.56 52.44 45.04
Average stockholders' equity to average
total assets ............................. 9.17 8.72 8.50 8.58 8.65
Year ended December 31:
Net interest margin ...................... 4.70 4.57 4.36 4.63 4.69
Net loans charged off to average loans ... .33 .44 .38 .46 .27
At December 31:
Risk-based capital ratios:
Tier 1 ................................. 9.51 8.42 9.03 9.31 9.80
Total .................................. 12.61 11.85 11.88 12.06 12.84
Tier 1 leverage ratio .................... 9.14 7.32 7.72 7.51 7.45
Allowance for loan losses to total loans . 1.32 1.47 1.50 1.11 1.23
Nonperforming assets to total loans
and other real estate owned ............ 1.38 1.68 1.75 1.14 1.44
Allowance for loan losses to nonperforming
loans .................................. 1.49x 1.18x .95x 1.04x 1.03x
=============================================================================================================
</TABLE>
20
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Certain matters contained herein are forward-looking statements that involve
certain risks and uncertainties that could cause the Company's actual results to
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, global, national and local economic and market conditions, the level
and volatility of interest rates and currency values, credit risks inherent in
the lending processes, loan and deposit demand in the geographic regions in
which the Company conducts business, the impact of intense competition in the
rapidly evolving banking and financial services business, the effect of current
and pending government legislation and regulations, the extensive regulation of
the Company's businesses at both the federal and state levels and other matters
discussed below. See "Glossary of Financial Terms" on page 61 for definitions of
certain terms used in this annual report.
OVERVIEW
Consolidated net income for 1997 was $84,261,000, an increase of 4.9%, or
$3,965,000, over $80,296,000 in 1996. Basic earnings per share for 1997 was
$2.66, an increase of 3.9% over 1996, and diluted earnings per share for 1997
was $2.64, an increase of 3.5% over 1996.
The increase in consolidated net income in 1997 was primarily attributable
to: (1) a full year's operation of Pacific One and Pacific One, N.A., which
reported a combined net income of $5,048,000 in 1997, an increase of $2,766,000,
or 121.2%, over 1996; and (2) an after-tax charge of $2,309,000 in 1996,
resulting from the Bank Insurance Fund ("BIF")/Savings Association Insurance
Fund ("SAIF") legislation enacted by Congress on September 30, 1996. The
legislation imposed a special one-time assessment on institutions holding
SAIF-insured deposits in order to recapitalize the SAIF fund.
The prolonged economic downturn in Hawaii over the last seven years has
slowed loan and deposit growth, and negatively impacted net interest income.
Excluding the effects of Pacific One and Pacific One, N.A. in 1997, net interest
income decreased by $5,708,000, or 1.9%, compared to 1996.
Despite the economic downturn in Hawaii and related weakness in the local
real estate market, including declining values in the leasehold real estate
sector, the level of nonperforming assets and charge-offs has improved in recent
years. The improvement was primarily due to increased: (1) paydowns of
nonperforming loans; (2) loan volume in the Pacific Northwest; and (3) credit
extensions to companies located on the mainland United States. Nonperforming
assets, principally loans collateralized by real estate and other real estate
owned ("OREO"), totalled 1.38%, 1.68% and 1.75% of total loans and OREO as of
December 31, 1997, 1996 and 1995, respectively. Net charge-offs to average loans
were .33%, .44% and .38% for 1997, 1996 and 1995, respectively. As a result, the
provision for loan losses was $17,211,000, $23,627,000 and $38,107,000 for 1997,
1996 and 1995, respectively.
Consolidated net income for 1996 increased by $3,291,000, or 4.3%, over
1995. Basic earnings per share for 1996 was $2.56 compared to $2.43 in 1995, and
diluted earnings per share for 1996 was $2.55 compared to $2.43 in 1995. The
increase in earnings was primarily due to the aforementioned effects of Pacific
One and Pacific One, N.A. and an income tax benefit of $2,800,000 (resulting
primarily from the recognition of previously unrecognized tax credits) which
reduced the overall income tax expense in 1996. These increases were partially
offset by the previously mentioned special SAIF one-time assessment in 1996.
At December 31, 1997, the Company's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were 9.51% and
12.61%, respectively, compared with 8.42% and 11.85%, respectively, at December
31, 1996. These ratios were in excess of the "well-capitalized" ratios of 6.00%
and 10.00%, respectively, specified by the Federal Reserve Board.
PACIFIC NORTHWEST ACQUISITIONS
On May 31, 1996, for a purchase price of $36 million, the Company acquired
31 branches in Oregon, Washington and Idaho, which were being divested by U.S.
Bancorp and West One Bancorp as a result of their merger. This transaction
included the purchase of loans of $400 million and assumption of deposits of
$687 million.
On July 31, 1996, for a purchase price of $18 million, the Company acquired
ANB Financial Corporation, a bank holding company, and its subsidiary, American
National Bank (subsequently renamed "Pacific One Bank, National Association"),
which had total loans of $51 million and total deposits of $67 million on the
date of acquisition.
Hereafter, the acquisitions discussed in the immediately preceding two
paragraphs will be collectively referred to as the "Pacific Northwest
Acquisitions."
<TABLE>
<CAPTION>
ASSETS
($ in billions)
<S> <C>
1993............ 7.27
1994............ 7.54
1995............ 7.57
1996............ 8.00
1997............ 8.09
</TABLE>
<TABLE>
<CAPTION>
LOANS
($ in billions)
<S> <C>
1993............. 5.07
1994............. 5.53
1995............. 5.26
1996............. 5.81
1997............. 6.24
</TABLE>
21
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NET INTEREST INCOME
As reflected in Table 1 on page 24, net interest income, on a taxable
equivalent basis, increased $11,901,000, or 3.7%, from $323,255,000 in 1996 to
$335,156,000 in 1997. This increase was primarily due to the Pacific Northwest
Acquisitions and a 13 basis point (1% equals 100 basis points) increase in the
net interest margin. Excluding the effects of the Pacific Northwest
Acquisitions, net interest income decreased $5,708,000, or 1.9%, reflecting a
decrease in average earning assets. Net interest income increased by
$23,548,000, or 7.9%, from 1995 to 1996, primarily due to the Pacific Northwest
Acquisitions and a 21 basis point increase in the net interest margin. Tables 1
and 2 on pages 23 to 25 present analyses of the components and changes in net
interest income for 1997, 1996 and 1995.
The net interest margin was 4.70% for 1997, up 13 basis points over 1996.
The increase was due to a 17 basis point increase in the yield on average
earning assets, partially offset by a four basis point increase in the rate paid
for sources of funds used for average earning assets. The increase in the yield
on average earning assets was due to the proportionately greater amount of
higher yielding average loans to average total earning assets in 1997 as
compared to 1996. The increase in the rate paid for sources of funds reflected,
among other things, the issuance by the Trust in 1997 of the Capital Securities
with an aggregate liquidation amount of $100,000,000 and a decrease in average
noninterest-bearing demand deposits of $47,966,000, or 5.3%.
Average earning assets increased by $57,025,000, or .8%, in 1997 over 1996,
primarily due to the Pacific Northwest Acquisitions. Excluding the effects of
the Pacific Northwest Acquisitions, average earning assets decreased
$283,024,000, or 4.2%, compared to 1996. The decrease was primarily due to a
decrease in the average investment securities portfolio of $307,281,000, or
25.4%, compared to 1996. The decrease in the average investment securities
portfolio reflected the reduced levels of state and local government funds
requiring collateralization, a change in the collateral requirements of state
and local government funds and the partial liquidation of excess investment
securities upon the merger of the Bank and Pioneer in 1997.
Average loans increased by $469,928,000, or 8.5%, in 1997 over 1996,
primarily due to the Pacific Northwest Acquisitions. Excluding the effects of
the Pacific Northwest Acquisitions, average loans in 1997 increased
$143,153,000, or 2.7%, over 1996. The Company continues its efforts to diversify
its loan portfolio, both geographically and by industry. These efforts have
included the Pacific Northwest Acquisitions, automobile financing in California
and Oregon and credit extensions to companies in the media and
telecommunications industry located on the mainland United States. In addition,
the mix of average earning assets continues to change, with average loans
representing 83.9% of average earning assets for 1997 as compared to 77.9% for
1996.
Average interest-bearing deposits and liabilities increased by $135,468,000,
or 2.3%, in 1997 over 1996, primarily due to the Pacific Northwest Acquisitions
(including the issuance of $50 million of long-term subordinated debt during the
second quarter of 1996 to fund the Pacific Northwest Acquisitions) and the
issuance of the Capital Securities. Excluding the impact of the Pacific
Northwest Acquisitions and the issuance of the Capital Securities, average
interest-bearing deposits and liabilities decreased by $170,043,000, or 3.0%, in
1997 compared to 1996. This decrease reflected the repayment of short-term
borrowings in 1997 using proceeds received from the liquidation of a portion of
the investment securities portfolio as described above. In addition, depositors
were seeking higher yields and were placing more money into time deposits as
opposed to savings accounts. As a result, the higher-yielding time deposits
represented 41.6% of average interest-bearing deposits and liabilities in 1997,
as compared to 39.8% in 1996. As reflected in Table 2 on page 25, the increase
in total interest expense for interest-bearing deposits and liabilities of
$5,216,000 from 1996 to 1997 included an increase in interest expense of time
deposits of $10,221,000 primarily due to an increase in average time deposits.
The net interest margin in 1996 increased 21 basis points over 1995. The
increase was due to a 28 basis point decrease in the rate paid for sources of
funds used for average earning assets, which exceeded a seven basis point
decrease in the yield on average earning assets. The decrease in the rate paid
for sources of funds was primarily due to an increase in average noninterest-
<TABLE>
<CAPTION>
NET INTEREST INCOME*
($ in millions)
<S> <C>
1993........... 286.4
1994........... 303.4
1995........... 299.7
1996........... 323.3
1997........... 335.2
</TABLE>
- ----------
*taxable equivalent basis
<TABLE>
<CAPTION>
AVERAGE EARNING ASSETS
($ in billions)
<S> <C>
1993............... 6.11
1994............... 6.56
1995............... 6.88
1996............... 7.07
1997............... 7.13
</TABLE>
22
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
bearing demand deposits of $73,550,000, or 8.8%, and the positive impact of
interest rate swaps designed to stabilize the net interest margin.
Average earning assets increased by $194,908,000, or 2.8%, in 1996 over
1995, primarily due to the Pacific Northwest Acquisitions.
Average interest-bearing deposits and liabilities increased by $124,535,000,
or 2.1%, in 1996 over 1995, principally as a result of the Pacific Northwest
Acquisitions. In addition, the Company issued $50 million of long-term
subordinated debt during the second quarter of 1996 to fund the Pacific
Northwest Acquisitions. Excluding the Pacific Northwest Acquisitions, average
interest-bearing deposits and liabilities decreased $281,202,000, or 4.8%, in
1996 compared to 1995. The decrease reflected the repayment of short-term
borrowings from proceeds received from the partial run-off of the investment
securities portfolio as securities matured.
TABLE 1: AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND YIELDS AND RATES
(TAXABLE EQUIVALENT BASIS)
The following table sets forth the condensed consolidated average balance
sheets, an analysis of interest income/expense and average yield/rate for each
major category of earning assets and interest-bearing deposits and liabilities
for the years indicated on a taxable equivalent basis. The tax equivalent
adjustment is made for items exempt from Federal income taxes (assuming a 35%
tax rate for 1997, 1996 and 1995) to make them comparable with taxable items
before any income taxes are applied.
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Interest-bearing deposits
in other banks:
Domestic ............... $ 47,006 $ 2,906 6.18% $ 13,666 $ 790 5.78% $ 11,849 $ 771 6.51%
Foreign ................ 40,315 2,282 5.66 182,680 10,392 5.69 50,613 2,956 5.84
- ------------------------------ ---------- ---------- ---------------------- ---------------------
Total interest-
bearing deposits
in other banks ..... 87,321 5,188 5.94 196,346 11,182 5.69 62,462 3,727 5.97
- ------------------------------ ---------- ---------- ---------------------- ---------------------
Federal funds sold and
securities purchased under
agreements to resell ..... 156,902 8,676 5.53 153,499 8,442 5.50 207,237 12,003 5.79
Available-for-sale
investment securities (1):
Taxable .................. 894,684 59,188 6.62 1,169,110 72,813 6.23 1,029,183 57,890 5.62
Exempt from Federal
taxes .................. 8,691 972 11.18 41,546 4,063 9.78 116,291 9,316 8.01
- ------------------------------ ---------- ---------- ---------------------- ---------------------
Total available-for-
sale investment
securities ......... 903,375 60,160 6.66 1,210,656 76,876 6.35 1,145,474 67,206 5.87
- ------------------------------ ---------- ---------- ---------------------- ---------------------
Loans (2) (3):
Domestic ................. 5,673,588 491,296 8.66 5,272,503 456,741 8.66 5,239,888 461,067 8.80
Foreign .................. 306,601 27,847 9.08 237,758 22,809 9.59 220,793 21,001 9.51
- ------------------------------ ---------- ---------- ---------------------- ---------------------
Total loans .......... 5,980,189 519,143 8.68 5,510,261 479,550 8.70 5,460,681 482,068 8.83
- ------------------------------ ---------- ---------- ---------------------- ---------------------
TOTAL EARNING ASSETS .. 7,127,787 593,167 8.32 7,070,762 576,050 8.15 6,875,854 565,004 8.22
- ------------------------------ ---------- ---------- ---------------------- ---------------------
Cash and due from banks ...... 272,343 250,456 242,412
Premises and equipment 247,583 243,389 243,579
Core deposit premium 27,151 27,272 13,672
Goodwill 98,398 84,965 76,893
Other assets 145,131 78,540 76,086
- ------------------------------ ---------- ---------- ----------
Total assets $7,918,393 $7,755,384 $7,528,496
============================== ========== ========== ==========
</TABLE>
Notes:
(1) Average balances exclude the effects of the fair value adjustments.
(2) Nonaccruing loans have been included in the computations of average loan
balances.
(3) Interest income for loans included loan fees of $24,749, $24,189 and $23,951
for 1997, 1996 and 1995, respectively.
23
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------- ----------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------- ------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
and liabilities:
Deposits:
Interest-bearing
demand .............. $1,638,309 $ 41,885 2.56% $1,387,849 $ 36,104 2.60% $1,114,737 $ 30,034 2.69%
Savings ............... 793,696 19,457 2.45 921,310 20,679 2.24 1,177,277 34,272 2.91
Time .................. 2,399,447 126,928 5.29 2,197,868 116,707 5.31 1,707,967 92,942 5.44
Foreign (interest-
bearing) ............ 214,483 9,349 4.36 205,547 8,912 4.34 346,886 18,800 5.42
- -------------------------- ------------------------ ---------------------- ------------------------
Total interest-
bearing deposits .. 5,045,935 197,619 3.92 4,712,574 182,402 3.87 4,346,867 176,048 4.05
Short-term borrowings ... 793,642 41,527 5.23 1,011,958 53,977 5.33 1,271,981 74,369 5.85
Long-term debt and
capital securities ..... 269,668 18,865 7.00 249,245 16,416 6.59 230,394 14,880 6.46
- -------------------------- ------------------------ ---------------------- ------------------------
TOTAL INTEREST-
BEARING DEPOSITS
AND LIABILITIES .... 6,109,245 258,011 4.22 5,973,777 252,795 4.23 5,849,242 265,297 4.54
- -------------------------- ------------------------ ---------------------- ------------------------
Noninterest-bearing
demand deposits ......... 857,069 905,035 831,485
Other liabilities ......... 226,341 200,636 207,619
- -------------------------- ---------- ---------- ----------
Total liabilities ... 7,192,655 7,079,448 6,888,346
Stockholders' equity ...... 725,738 675,936 640,150
- -------------------------- ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY ............. $7,918,393 $7,755,384 $7,528,496
- -------------------------- ---------- ---------- ----------
NET INTEREST INCOME
AND MARGIN ON
TOTAL EARNING
ASSETS ............. 335,156 4.70% 323,255 4.57% 299,707 4.36%
Tax equivalent
adjustment ........ 684 1,910 5,047
- -------------------------- ---------- ---------- --------
NET INTEREST INCOME . $ 334,472 $ 321,345 $294,660
===================================================================================================================================
</TABLE>
24
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
TABLE 2: ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS)
The following table analyzes the dollar amount of change (on a taxable
equivalent basis) in interest income and expense and the changes in dollar
amounts attributable to (a) changes in volume (change in volume times prior
year's rates), (b) changes in rates (change in rate times prior year's volume),
and (c) changes in rate/volume (change in rate times change in volume). In this
table, the dollar change in rate/volume is prorated to volume and rate
proportionately. The tax equivalent adjustment is made for items exempt from
Federal income taxes (assuming a 35% tax rate for 1997, 1996 and 1995) to make
them comparable with taxable items before any income taxes are applied.
<TABLE>
<CAPTION>
1997 Compared to 1996 -- 1996 Compared to 1995 --
Increase (Decrease) Due to: Increase (Decrease) Due to:
------------------------------------ -------------------------------------
Net Increase Net Increase
(in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits in other banks:
Domestic ............................ $ 2,057 $ 59 $ 2,116 $ 111 $ (92) $ 19
Foreign ............................. (8,060) (50) (8,110) 7,515 (79) 7,436
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits
in other banks .................. (6,003) 9 (5,994) 7,626 (171) 7,455
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell .................. 188 46 234 (2,981) (580) (3,561)
Available-for-sale investment securities:
Taxable ............................... (17,932) 4,307 (13,625) 8,342 6,581 14,923
Exempt from Federal income taxes ...... (3,601) 510 (3,091) (6,973) 1,720 (5,253)
- ---------------------------------------------------------------------------------------------------------------------------
Total available-for-sale
investment securities ........... (21,533) 4,817 (16,716) 1,369 8,301 9,670
- ---------------------------------------------------------------------------------------------------------------------------
Loans (1):
Domestic .............................. 34,732 (177) 34,555 2,858 (7,184) (4,326)
Foreign ............................... 6,307 (1,269) 5,038 1,626 182 1,808
- ---------------------------------------------------------------------------------------------------------------------------
Total loans ....................... 41,039 (1,446) 39,593 4,484 (7,002) (2,518)
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets .............. 13,691 3,426 17,117 10,498 548 11,046
- ---------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits:
Interest-bearing demand ............... 6,413 (632) 5,781 7,136 (1,066) 6,070
Savings ............................... (3,023) 1,801 (1,222) (6,621) (6,972) (13,593)
Time .................................. 10,665 (444) 10,221 26,064 (2,299) 23,765
Foreign (interest-bearing) ............ 389 48 437 (6,632) (3,256) (9,888)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits ... 14,444 773 15,217 19,947 (13,593) 6,354
Short-term borrowings ................... (11,441) (1,009) (12,450) (14,269) (6,123) (20,392)
Long-term debt and capital securities ... 1,393 1,056 2,449 1,236 300 1,536
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits
and liabilities ................. 4,396 820 5,216 6,914 (19,416) (12,502)
- ---------------------------------------------------------------------------------------------------------------------------
Increase in net interest income
(taxable equivalent basis) ....... $ 9,295 $ 2,606 $ 11,901 $ 3,584 $ 19,964 $ 23,548
===========================================================================================================================
</TABLE>
Note:
(1) Interest income for loans included loan fees of $24,749, $24,189 and $23,951
for 1997, 1996 and 1995, respectively.
25
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Total noninterest income increased $11,058,000, or 12.6%, from $87,455,000
in 1996 to $98,513,000 in 1997. Excluding the Pacific Northwest Acquisitions,
total noninterest income increased $6,688,000, or 8.0%. Total noninterest income
for 1996 was $87,455,000, an increase of $5,349,000, or 6.5%, over 1995.
Excluding the Pacific Northwest Acquisitions, total noninterest income increased
$1,945,000, or 2.4%.
Trust and investment services income increased $1,258,000, or 5.3%, from
1996 to 1997 and $823,000, or 3.6%, from 1995 to 1996. These increases were
primarily the result of increases in fees from irrevocable trusts and investment
management fees resulting from new business.
Service charges on deposit accounts increased $2,492,000, or 9.5%, from 1996
to 1997 and $2,134,000, or 8.8%, from 1995 to 1996. Excluding the Pacific
Northwest Acquisitions, service charges on deposit accounts increased $691,000,
or 2.8%, from 1996 to 1997 and $492,000, or 2.0%, from 1995 to 1996. These
increases were attributable to an increase in fees on checks returned and paid.
Other service charges and fees increased by $6,533,000, or 26.2%, from 1996
to 1997 and $2,197,000, or 9.6%, from 1995 to 1996. Excluding the Pacific
Northwest Acquisitions, other service charges and fees increased by $4,401,000,
or 18.7%, from 1996 to 1997 and $715,000, or 3.1%, from 1995 to 1996. The
increase from 1996 to 1997 was primarily a result of higher merchant discount
fees, commissions from annuity and mutual fund sales and mortgage servicing
rights for mortgage loans that were originated and sold with servicing retained.
Increases in fee income from higher merchant discount fees, commissions from
annuity and mutual fund sales and mortgage brokerage fees were the principal
reasons for the increase from 1995 to 1996.
Other noninterest income increased $623,000, or 5.1%, from 1996 to 1997 and
$221,000, or 1.8%, from 1995 to 1996. The increase from 1996 to 1997 was
primarily due to: (1) the Pacific Northwest Acquisitions; (2) a gain on the sale
of a leasehold interest in a former Pioneer branch of $2,500,000; (3) higher
foreclosed property income; and (4) income earned on bank-owned life insurance
on certain officers. The increase was partially offset by a gain on sale of
other real estate owned of $3,029,000 in the second quarter of 1996. The modest
increase from 1995 to 1996 was primarily attributable to a commission paid to
the Company for renewal of an agreement to sell disability insurance to loan
customers.
Components of and changes in noninterest income are reflected below for the
years indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1997/96 Change 1996/95 Change
------------------- -------------------
(in thousands) 1997 1996 1995 Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment services income $25,115 $23,857 $23,034 $ 1,258 5.3% $ 823 3.6%
Service charges on deposit accounts 28,776 26,284 24,150 2,492 9.5 2,134 8.8
Other service charges and fees ..... 31,509 24,976 22,779 6,533 26.2 2,197 9.6
Securities gains, net .............. 270 118 144 152 128.8 (26) (18.1)
Other .............................. 12,843 12,220 11,999 623 5.1 221 1.8
- --------------------------------------------------------------------- ------- -------
Total noninterest income ........... $98,513 $87,455 $82,106 $11,058 12.6% $ 5,349 6.5%
=================================================================================================================
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon management's judgement as to the
adequacy of the allowance for loan losses (the "Allowance") to absorb future
losses. The Company uses a systematic methodology to determine the adequacy of
the Allowance and related provision for loan losses to be reported for financial
statement purposes. The determination of the adequacy of the Allowance is
ultimately one of management judgment, which includes consideration of many
factors, including the amount of problem and potential problem loans, net
charge-off experience, changes in the composition of the loan portfolio by type
and location of loans and in overall loan risk profile and quality, general
economic factors and the fair value of collateral.
Each quarter, specific allocations of the Allowance are assigned to
individual loan relationships when periodic status reports indicate that a
future loss is probable. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," the measurement process compares the
loan balance to: (1) the present value of expected future cash flows discounted
at the loan's effective interest rate; (2) the loan's observable market price;
and/or (3) the fair value of the collateral as established by appraisal. The
total amount allocated also includes an allocation for loans,
26
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
which are not reviewed on a loan-by-loan basis, based on a three-year moving
average historical ratio of net charge-offs to average loans outstanding by loan
category.
As the table on page 28 illustrates, the provision for loan losses for 1997
was $17,211,000, a decrease of $6,416,000, or 27.2%, compared to 1996. In 1996,
the Company decreased its provision for loan losses by $14,480,000, or 38.0%,
compared to the prior year. These decreases were consistent with the decrease in
the level of nonperforming loans from 1996 to 1997 and from 1995 to 1996 as
discussed in the section titled "Nonperforming Assets and Past Due Loans" on
pages 33 and 34, but remained relatively high in comparison to the Company's
historical trend prior to 1994 due to, among other factors, the continuing
impact of the adverse economic conditions and trends in Hawaii and the
weaknesses in the local real estate market.
Net charge-offs decreased $4,355,000, or 18.0%, from 1996 to 1997 and
increased $3,594,000, or 17.4%, from 1995 to 1996. Net charge-offs in 1997, 1996
and 1995 represented .33%, .44% and .38%, respectively, of average outstanding
loans. The decrease in commercial, financial and agricultural loan charge-offs
in 1997 was primarily due to the charge-off of three loans partially
collateralized by real estate, totalling $4,318,000 in the fourth quarter of
1996. The increase in consumer loan charge-offs in 1997 was primarily
attributable to the record number of personal bankruptcies in the State of
Hawaii, which resulted in a 20% increase in write-offs of credit card loans.
However, charge-offs in this profitable line of business remain well below
national average rates.
Net charge-offs in 1996 totalled $24,218,000 compared to $20,624,000 in
1995. The increase in commercial, financial and agricultural loan charge-offs
was primarily due to the charge-off of three loans, partially collateralized by
real estate, totalling $4,318,000 in the fourth quarter of 1996.
At December 31, 1997, the Allowance totalled $82,596,000 and represented
1.32% of total outstanding loans compared to $85,248,000 and 1.47%,
respectively, as of December 31, 1996.
The Allowance increased to 1.49 times nonperforming loans at December 31,
1997 (excluding 90 days or more past due accruing loans) from 1.18 times at
December 31, 1996, reflecting the decrease in nonperforming loans and a lower
net charge-off rate during 1997. In management's judgment, the Allowance is
adequate to absorb potential losses currently inherent in the loan portfolio at
December 31, 1997. However, it should be noted that changes in prevailing
economic conditions in the Company's markets could result in changes in the
level of nonperforming assets and charge-offs in the future and, accordingly,
changes in the Allowance.
<TABLE>
<CAPTION>
ALLOWANCE AS A %
OF LOANS OUTSTANDING
<S> <C>
1993.............. 1.23
1994.............. 1.11
1995.............. 1.50
1996.............. 1.47
1997.............. 1.32
</TABLE>
<TABLE>
<CAPTION>
YEAR-END ALLOWANCE
FOR LOANS LOSSES
($ in millions)
<S> <C>
1993............. 62.3
1994............. 61.3
1995............. 78.7
1996............. 85.2
1997............. 82.6
</TABLE>
27
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following sets forth the activity in the allowance for loan losses for
the years indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LOANS OUTSTANDING (END OF YEAR) ............. $6,238,681 $5,806,732 $5,259,545 $5,533,565 $5,066,809
===========================================================================================================================
AVERAGE LOANS OUTSTANDING ................... $5,980,189 $5,510,261 $5,460,681 $5,172,140 $4,619,401
===========================================================================================================================
Allowance for loan losses:
Balance at beginning of year .............. $ 85,248 $ 78,733 $ 61,250 $ 62,253 $ 56,385
- ---------------------------------------------------------------------------------------------------------------------------
Allowances of subsidiaries purchased(1) ... -- 7,106 -- -- 5,225
Loans charged off:
Commercial, financial and agricultural .. 5,986 10,003 7,197 11,307 3,004
Real estate:
Commercial ............................ 1,120 1,619 2,763 1,500 125
Construction .......................... 180 1,450 1,466 7,178 4,506
Residential ........................... 3,731 2,937 2,707 588 562
Consumer ................................ 13,825 10,884 8,019 6,542 6,839
Lease financing ......................... 91 33 276 -- 27
Foreign ................................. 197 415 417 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total loans charged off ............... 25,130 27,341 22,845 27,115 15,063
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries on loans previously charged off:
Commercial, financial and agricultural .. 1,614 929 327 1,229 235
Real estate:
Commercial ............................ 297 86 239 9 321
Construction .......................... -- 117 -- 205 --
Residential ........................... 985 234 43 92 207
Consumer ................................ 2,287 1,690 1,596 1,639 1,667
Lease financing ......................... 20 3 16 16 14
Foreign ................................. 64 64 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries on loans previously
charged off ......................... 5,267 3,123 2,221 3,190 2,444
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs ....................... (19,863) (24,218) (20,624) (23,925) (12,619)
Provision charged to expense .............. 17,211 23,627 38,107 22,922 13,262
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR .................... $ 82,596 $ 85,248 $ 78,733 $ 61,250 $ 62,253
===========================================================================================================================
Net loans charged off to average loans ...... .33% .44% .38% .46% .27%
Net loans charged off to allowance for loan
losses .................................... 24.05% 28.41% 26.19% 39.06% 20.27%
Allowance for loan losses to total loans
(end of year) ............................. 1.32% 1.47% 1.50% 1.11% 1.23%
Allowance for loan losses to nonperforming
loans (end of year):
Excluding 90 days or more past due
accruing loans .......................... 1.49x 1.18x .95x 1.04x 1.03x
Including 90 days or more past due
accruing loans .......................... .92x .83x .70x .66x .62x
===========================================================================================================================
</TABLE>
Note:
(1) Allowances of $7,106 and $5,225 in 1996 and 1993, respectively, were related
to the Pacific Northwest Acquisitions and the acquisition of Pioneer,
respectively.
28
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The Company has allocated a portion of the allowance for loan losses
according to the amount deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the various loan categories as of
December 31 for the years indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------- -------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Loans Loans Loans Loans Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial
and agricultural .. $12,390 25% $13,730 24% $15,325 25% $16,610 23% $13,000 24%
Real estate:
Commercial ........ 3,845 19 6,620 20 2,320 19 4,700 18 3,400 17
Construction ...... 180 3 120 4 4,035 5 7,010 6 11,850 7
Residential ....... 8,350 31 6,130 33 4,260 34 9,510 37 4,700 35
Consumer ............ 15,285 11 11,040 10 9,550 9 8,040 8 7,500 9
Lease financing ..... 360 5 760 4 645 4 600 4 1,350 4
Foreign ............... 1,405 6 1,540 5 1,430 4 1,085 4 1,600 4
General allowance ..... 40,781 N/A 45,308 N/A 41,168 N/A 13,695 N/A 18,853 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ............... $82,596 100% $85,248 100% $78,733 100% $61,250 100% $62,253 100%
====================================================================================================================================
</TABLE>
NONINTEREST EXPENSE
Total noninterest expense for 1997 totalled $292,210,000, an increase of
$22,871,000, or 8.5%, over 1996. Excluding the Pacific Northwest Acquisitions,
total noninterest expense increased $5,426,000, or 2.1%.
Total personnel expense for 1997 increased $8,714,000, or 6.3%, over 1996.
The increase was primarily due to the Pacific Northwest Acquisitions. Excluding
the Pacific Northwest Acquisitions, total personnel expense remained relatively
constant compared to 1996.
Occupancy expense increased $11,670,000, or 43.2%, over 1996 primarily due
to costs associated with the Company's new administrative headquarters building
(see additional information in Note 17 to the Financial Statements on page 57)
and the Pacific Northwest Acquisitions.
Equipment expense increased $2,466,000, or 10.9%, over 1996. Excluding the
Pacific Northwest Acquisitions, equipment expense increased $1,639,000, or 7.5%,
over 1996. The increase was due to higher service contracts expense,
depreciation expense on furniture and equipment and data processing equipment
rental expense.
Deposit insurance expense decreased $4,470,000, or 84.7%, compared to 1996.
The decrease was primarily due to the special SAIF one-time assessment of
$3,849,000 in 1996.
Outside services expense increased $1,684,000, or 31.0%, over 1996. The
increase was primarily due to expenses incurred to prepare the Company's
computer systems and applications for the year 2000. For information regarding
anticipated conversion expenses in future periods, see "Year 2000 Issues" on
pages 37 and 38.
Other expense increased $1,601,000, or 3.3%, over 1996 as a result of, among
other things, the Pacific Northwest Acquisitions, a loss on sale of a certain
loan of $1,427,000 in the second quarter of 1997 and higher depreciation -
software expense. The increase was partially offset by: (1) a loss of $1,945,000
(which actually resulted in an after-tax gain of $399,000 due to a net tax
benefit of $2,344,000 recognized through the reversal of the related tax
liability) recognized on the sale of a certain leveraged lease in the first
quarter of 1996; and (2) an increase in the cash surrender value of certain
executive life insurance policies (recorded as a credit to insurance expense) in
1997.
Total noninterest expense increased $52,818,000, or 24.4%, from 1995 to
1996. Excluding the Pacific Northwest Acquisitions and a nonrecurring gain of
$20,766,000 recognized in 1995 in connection with
29
<PAGE> 18
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
the curtailment of the Company's noncontributory pension plan, total noninterest
expense increased $15,108,000, or 6.4%, over 1995. This increase was primarily
due to: (1) an increase in employee benefit costs associated with the
curtailment of the noncontributory pension plan in the fourth quarter of 1995,
which was replaced with a defined contribution money purchase plan and enhanced
matching to an existing 401(k) plan, effective January 1, 1996; (2) higher
salaries and wages reflecting normal merit increases; and (3) the decrease in
the FDIC assessment rate from 23 cents to 4 cents per $100 of deposits effective
June 1, 1995 and from 4 cents to zero effective January 1, 1996.
Components of and changes in noninterest expense are reflected below for the
years indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997/96 Change 1996/95 Change
------------------- --------------------
(in thousands) 1997 1996 1995 Amount % Amount %
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Personnel:
Salaries and wages .... $113,179 $104,572 $ 94,119 $ 8,607 8.2% $ 10,453 11.1%
Employee benefits ..... 34,251 34,144 7,209 107 .3 26,935 373.6
- ------------------------------------------------------------- -------- --------
Total personnel expense . 147,430 138,716 101,328 8,714 6.3 37,388 36.9
Occupancy expense ....... 38,715 27,045 25,706 11,670 43.2 1,339 5.2
Equipment expense ....... 25,146 22,680 23,907 2,466 10.9 (1,227) (5.1)
Stationery and supplies . 12,216 11,193 11,443 1,023 9.1 (250) (2.2)
Advertising and promotion 11,174 10,991 8,532 183 1.7 2,459 28.8
Outside services ........ 7,110 5,426 4,175 1,684 31.0 1,251 30.0
Deposit insurance ....... 810 5,280 6,190 (4,470) (84.7) (910) (14.7)
Other ................... 49,609 48,008 35,240 1,601 3.3 12,768 36.2
- ------------------------------------------------------------- -------- --------
TOTAL NONINTEREST EXPENSE $292,210 $269,339 $216,521 $ 22,871 8.5% $ 52,818 24.4%
=============================================================================================================
</TABLE>
INCOME TAXES
The provision for income taxes as shown in the Consolidated Statements of
Income on page 41 represents 31.8% of pre-tax income for 1997, compared with
30.7% and 37.0% for 1996 and 1995, respectively.
On a taxable equivalent basis, the effective tax rate for 1997, 1996 and
1995 was 32.4%, 32.3% and 41.1%, respectively. Additional information on the
Company's income taxes is provided in Note 15 to the Financial Statements on
pages 55 and 56.
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.
30
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
LOANS
The following table sets forth the loan portfolio by major categories and
loan mix as of December 31 for the years indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(in millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and agricultural $1,583 $1,382 $1,316 $1,264 $1,166
Real estate:
Commercial ......................... 1,194 1,172 997 965 883
Construction ....................... 166 213 257 321 317
Residential ........................ 1,945 1,936 1,766 2,049 1,829
Consumer ............................. 504 410 307 309 312
Credit cards ......................... 175 173 167 159 148
Lease financing ...................... 333 241 242 231 201
Foreign:
Governments and official institutions -- -- -- 1 2
Commercial and industrial ............ 68 55 19 50 79
Other ................................ 271 225 189 185 130
- ------------------------------------------------------------------------------------------
TOTAL LOANS ...................... $6,239 $5,807 $5,260 $5,534 $5,067
==========================================================================================
</TABLE>
The loan portfolio is the largest component of total earning assets and
accounts for the greatest portion of total interest income. At December 31,
1997, total loans were $6,238,681,000, an increase of 7.4% over December 31,
1996. The increase was primarily due to increases in the commercial, financial
and agricultural loan, consumer loan and lease financing categories by the
Company's non-Hawaii operations.
Total loans at December 31, 1997, represented 77.1% of total assets, 86.6%
of total earning assets and 102.5% of total deposits compared to 72.6% of total
assets, 82.0% of total earning assets and 97.8% of total deposits at December
31, 1996. The increases reflect the overall change in the mix of earning assets
from investment securities to higher yielding loans. Governmental and certain
other time deposits were shifted into security repurchase agreements in 1997 and
1996. If these repurchase agreements had been included in the deposit base,
total loans as a percentage of total deposits would represent 94.8% and 88.0% at
December 31, 1997 and 1996, respectively.
Commercial, financial and agricultural loans as of December 31, 1997,
increased $200,874,000, or 14.5%, to $1,582,698,000 from December 31, 1996.
Although the Company continues its efforts to diversify the loan portfolio, both
geographically and by industry, overall loan volume in the State of Hawaii
continues to decline as a result of the sluggish economy. Credit extensions in
the Pacific Northwest and the media and telecommunications industry located on
the mainland United States account for the majority of the increase in loan
balance and geographic and industry diversification.
The Company's primary goal in commercial and financial lending is to
maintain reasonable levels of risk by following conservative underwriting
guidelines primarily based on cash flow. Most commercial and financial loans are
collateralized and/or supported by guarantors judged to have adequate net worth.
Unsecured loans are made to customers based on character, net worth, liquidity
and repayment ability.
The Company's real estate loans totalled $3,304,631,000, or 53.0%, of total
loans at December 31, 1997, which represented a decrease of .5% compared to
December 31, 1996.
The Company's primary goal in real estate lending is to maintain reasonable
levels of risk by financing selective real estate projects, by adhering to
underwriting guidelines and by closely monitoring general economic conditions
impacting local real estate markets. The Company's multifamily and commercial
real estate loans, both construction and permanent, are analyzed on the basis of
the economic viability of the specific project or property for which financing
is sought as well as the loan-to-value ratio of the real estate securing the
financing and the underlying financial strength of the borrower. In its
multifamily and commercial real estate lending the Company will generally not
lend in excess of 75% of the appraised value of the underlying project or
property; it also generally requires a debt service ratio of 1.20. In its
single-family residential lending, the Company will generally not lend in excess
of 80% of the appraised value of the underlying property. Loans made in excess
of that limit are generally covered by third-party mortgage insurance that
reduces the Company's equivalent risk to an 80% loan-to-appraised value ratio.
31
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consumer loans as of December 31, 1997, increased $94,201,000, or 23.0%, to
$504,190,000 from December 31, 1996. The increase was primarily due to an
increase in direct and indirect automobile financing in California and Oregon.
Consumer loans consist primarily of open and closed ended direct and indirect
credit facilities for personal, automobile and household purchases. The
Company's primary goal in consumer lending is to maintain reasonable levels of
risk by following prudent underwriting guidelines which include, among other
factors, an evaluation of: (1) personal credit history; (2) personal cash flow;
and (3) collateral values based on existing market conditions.
Lease financing as of December 31, 1997, increased $92,372,000, or 38.3%, to
$333,270,000 from December 31, 1996. The increase was primarily due to an
increase in leveraged and direct financing leases on equipment located on the
mainland United States.
Loan concentrations are considered to exist when there are amounts loaned to
multiple borrowers engaged in similar activities which would cause them to be
similarly impacted by economic or other conditions. At December 31, 1997, the
Company did not have a concentration of loans greater than 10% of total loans
which were not otherwise disclosed as a category of loans as shown in the table
on page 31.
LOAN MATURITIES
The contractual maturities of loans do not necessarily reflect the actual
term of the Company's loan portfolio. The Company's experience has been that the
average life of real estate loans is substantially less than their contractual
terms because of loan prepayments and, with respect to fixed-rate loans,
enforcement of due-on-sale clauses. Due-on-sale clauses give the Company the
right to declare a loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. In general, the average life of real estate loans tends
to increase when current interest rates exceed rates on existing real estate
loans. Correspondingly, prepayments tend to increase when current interest rates
are below the rates on existing real estate loans. Because the volume of such
prepayments fluctuates depending upon changes in both the absolute level of
interest rates and the relationship between fixed and adjustable-rate loan
rates, the average life of the Company's fixed-rate real estate loans has varied
widely.
At December 31, 1997, loans with maturities over one year were comprised of
fixed rate loans totalling $1,618,430,000 and floating or adjustable rate loans
totalling $3,205,872,000.
The following table sets forth the contractual maturities of the Company's
loan portfolio by loan categories at December 31, 1997. Demand loans are
included as due within one year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
After One
Within but Within After Five
(in millions) One Year Five Years Years Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL, FINANCIAL AND AGRICULTURAL $ 688 $ 574 $ 321 $1,583
REAL ESTATE:
COMMERCIAL ......................... 233 420 541 1,194
CONSTRUCTION ....................... 131 28 7 166
RESIDENTIAL ........................ 108 389 1,448 1,945
CONSUMER ............................. 73 329 102 504
CREDIT CARDS ......................... 104 71 -- 175
LEASE FINANCING ...................... 6 64 263 333
FOREIGN .............................. 72 144 123 339
- ------------------------------------------------------------------------------------
TOTAL .......................... $1,415 $2,019 $2,805 $6,239
====================================================================================
</TABLE>
32
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets and past due loans as of December 31 are reflected
below for the years indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual:
Commercial, financial and agricultural ........ $ 9,038 $21,398 $16,229 $ 7,972 $13,823
Real estate:
Commercial .................................. 4,590 6,156 40,664 35,290 12,145
Construction ................................ -- 1,700 9,697 7,038 28,571
Residential:
Insured, guaranteed, or conventional ...... 6,353 13,815 12,628 4,792 5,518
Home equity credit lines .................. 50 451 496 520 255
- --------------------------------------------------------------------------------------------------------------
Total real estate loans ................. 10,993 22,122 63,485 47,640 46,489
- --------------------------------------------------------------------------------------------------------------
Lease financing ............................... 10 27 19 212 --
- --------------------------------------------------------------------------------------------------------------
Total nonaccrual loans .................. 20,041 43,547 79,733 55,824 60,312
Restructured:
Commercial, financial and agricultural ........ 1,532 3,429 682 -- 20
Real estate:
Commercial .................................. 30,843 24,604 2,500 3,128 --
Residential:
Insured, guaranteed, or conventional ...... 2,626 267 -- -- --
Home equity credit lines .................. 559 561 -- -- --
- --------------------------------------------------------------------------------------------------------------
Total restructured loans ................ 35,560 28,861 3,182 3,128 20
- --------------------------------------------------------------------------------------------------------------
Total nonperforming loans ............... 55,601 72,408 82,915 58,952 60,332
Other real estate owned ........................... 30,760 25,574 9,312 4,160 13,034
- --------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS .............. $86,361 $97,982 $92,227 $63,112 $73,366
==============================================================================================================
Past due loans:
Commercial, financial and agricultural .......... $ 2,521 $ 7,765 $13,060 $18,834 $20,283
Real estate:
Commercial .................................... 567 7,676 2,175 4,765 10,308
Residential:
Insured, guaranteed, or conventional ........ 25,002 9,812 7,502 6,741 7,041
Home equity credit lines .................... 2,077 2,220 3,005 909 810
- --------------------------------------------------------------------------------------------------------------
Total real estate loans ................. 27,646 19,708 12,682 12,415 18,159
- --------------------------------------------------------------------------------------------------------------
Consumer ........................................ 3,589 2,869 3,020 1,928 1,814
Lease financing ................................. 11 40 28 190 29
- --------------------------------------------------------------------------------------------------------------
TOTAL PAST DUE LOANS (1) ................ $33,767 $30,382 $28,790 $33,367 $40,285
==============================================================================================================
Nonperforming assets to total loans
and other real estate owned (end of year):
Excluding past due loans ...................... 1.38% 1.68% 1.75% 1.14% 1.44%
Including past due loans ...................... 1.92% 2.20% 2.30% 1.74% 2.24%
Nonperforming assets to total assets (end of year):
Excluding past due loans ...................... 1.07% 1.22% 1.22% .84% 1.01%
Including past due loans ...................... 1.48% 1.60% 1.60% 1.28% 1.56%
==============================================================================================================
</TABLE>
Note:
(1) Represents loans which are past due 90 days or more as to principal and/or
interest, are still accruing interest and are in the process of collection.
33
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
As shown in the table on page 33, nonperforming assets at December 31, 1997
were $86,361,000, or 1.38%, of total loans and OREO and 1.07% of total assets.
These levels compared to total nonperforming assets at December 31, 1996 of
$97,982,000, or 1.68% of total loans and OREO and 1.22% of total assets. The
decrease in nonperforming assets of $11,621,000, or 11.9%, was principally due
to decreases in nonaccrual loans as follows: (1) commercial, financial and
agricultural loans of $12,360,000, or 57.8%; and (2) real estate - residential
loans of $7,863,000, or 55.1%. The decrease in nonaccrual loans was partially
offset by increases in: (1) restructured real estate - commercial loans of
$6,239,000, or 25.4%; and (2) OREO of $5,186,000, or 20.3%. The decrease in
nonaccrual commercial, financial and agricultural loans and corresponding
increase in OREO was primarily due to two loans partially collateralized by real
estate totalling $5,007,000 that were transferred to OREO in 1997. The decrease
in nonaccrual real estate - residential loans was due to a number of loans which
were transferred to OREO or paid off. The increase in restructured real estate -
commercial loans was principally due to the addition of a loan of $14,524,000
previously identified as a potential problem loan at December 31, 1996. This
increase was partially offset by the transfer of a loan of $8,279,000 to OREO.
In recent years, the level of the Company's nonperforming assets and
charge-offs has been affected by the impact of adverse economic conditions and
trends in Hawaii. The most important of these adverse economic trends is the
prolonged economic downturn over the last seven years. In contrast to the
mainland economy, Hawaii's recovery from its 1991 recession continues to be slow
and protracted. Economic growth over the past year was virtually nil, as was the
level of tourism. In addition, Hawaii continues to show weaknesses in its local
real estate market, including declining values in the leasehold real estate
sector.
Recently, a number of countries in the Asia Pacific region, including Japan,
have experienced significant weaknesses in their economies. While the Company's
aggregate outstanding loans to these countries constituted 1.25% of the
Company's total assets at December 31, 1997, the economic downturn in Asia may
adversely affect the volume and spending level of Asian visitors to Hawaii,
which in turn may adversely affect the Hawaii economy. The Company does not
foresee a major improvement in Hawaii's economic conditions in the near term and
believes that these trends may continue to affect the level of nonperforming
assets and related charge-offs in future periods.
The following table presents the direct claims on or claims guaranteed by
borrowers of the Asian countries indicated below at December 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
OUTSTANDING OUTSTANDING
(in thousands) COMMITMENT BALANCE
- ----------------------------------------------------------------------------------
<S> <C> <C>
CHINA .................................. $ 860 $ 860
HONG KONG .............................. 3,647 3,297
INDONESIA .............................. 2,920 1,646
PHILIPPINES ............................ 1,087 1,087
SINGAPORE .............................. 351 351
TAIWAN ................................. 4,120 3,223
- ----------------------------------------------------------------------------------
TOTAL NON-JAPAN ...................... 12,985 10,464
JAPAN .................................. 92,206 90,564
- ----------------------------------------------------------------------------------
TOTAL ................................ $105,191 $101,028
==================================================================================
</TABLE>
As of December 31, 1997, there was no exposure to South Korea and Thailand.
Outstanding exposures of non-Japan, Asian countries represent .13% of total
assets and 1.4% of total stockholders' equity and including Japan, 1.25% of
total assets and 13.8% of total stockholders' equity. The claims above are
primarily collateralized by certificates of deposit, Hawaii real estate, standby
letters of credit issued by Asian banks and guarantees by creditworthy Asian
individuals and corporations.
Loans past due 90 days or more and still accruing interest totalled
$33,767,000 at December 31, 1997, an increase of $3,385,000, or 11.1%, over
December 31, 1996. The increase was partially attributable to certain real
estate - residential loans sold with recourse that were repurchased in the
fourth quarter of 1997. All of the loans which are past due 90 days or more and
still accruing interest are, in management's judgment, adequately collateralized
and in the process of collection.
At December 31, 1997, the Company was not aware of any significant potential
problem loans (not otherwise classified as nonperforming or past due in the
table on page 33) where possible credit problems of the borrower caused
management to have serious concerns as to the ability of such borrower to comply
with the present loan repayment terms.
The following table presents information related to loans on a nonaccrual
basis for the year ended December 31, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) DOMESTIC FOREIGN TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME WHICH
WOULD HAVE BEEN RECORDED
IF LOANS HAD BEEN CURRENT ............ $7,282 $ -- $7,282
================================================================================
INTEREST INCOME RECORDED
DURING THE YEAR ...................... $3,044 $ -- $3,044
================================================================================
</TABLE>
34
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
DEPOSITS
Deposits are the largest component of the Company's total liabilities and
account for the greatest portion of total interest expense. At December 31,
1997, total deposits were $6,089,200,000, an increase of $152,492,000, or 2.6%,
over December 31, 1996. The increase was primarily due to increased levels of
state and local government deposits.
<TABLE>
<CAPTION>
DEPOSITS
($ in billions)
<S> <C>
1993............. 5.22
1994............. 5.15
1995............. 5.36
1996............. 5.94
1997............. 6.09
</TABLE>
The following table presents the average amount and average rate paid on
deposits for the years indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1997 1996 1995
----------------- ---------------- ------------------
(dollars in millions) Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Noninterest-
bearing
demand ....... $ 806 --% $ 860 --% $ 792 --%
Interest-bearing
demand ....... 1,638 2.56 1,388 2.60 1,115 2.69
Savings ........ 794 2.45 921 2.24 1,177 2.91
Time ........... 2,399 5.29 2,198 5.31 1,708 5.44
Foreign .......... 266 3.52 251 3.56 386 4.87
- ------------------ ------ ------ ------
TOTAL ........ $5,903 3.35% $5,618 3.25% $5,178 3.40%
=====================================================================================
</TABLE>
The following table presents the maturity distribution of domestic time
certificates of deposits of $100,000 or more at December 31 for the years
indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
3 months or less ........................ $ 392 $ 384 $ 337
Over 3 months through 6 months .......... 188 126 177
Over 6 months through 12 months ......... 294 244 183
Over 12 months .......................... 178 152 164
- --------------------------------------------------------------------------------
TOTAL ............................... $1,052 $ 906 $ 861
================================================================================
</TABLE>
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> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
Liquidity refers to the Company's ability to provide sufficient cash flows
to fund operations and to meet obligations and commitments on a timely basis at
reasonable costs. The Company achieves its liquidity objectives from both assets
and liabilities.
Asset-based liquidity is derived from the investment securities portfolio
and short-term investments which can be readily converted to cash. These liquid
assets consist of cash and due from banks, interest-bearing deposits, Federal
funds sold, securities purchased under agreements to resell and investment
securities. The aggregate of these assets represented 16.5% of total assets at
the end of 1997 compared to 21.2% at the end of 1996. Additional information
related to the Company's off-balance sheet instruments at December 31, 1997 and
1996 is included in Note 18 to the Financial Statements on pages 57 and 58.
Liability-based liquidity is provided primarily from deposits. Average total
deposits for 1997 increased $285,395,000, or 5.1%, to $5,903,004,000, primarily
due to the Pacific Northwest Acquisitions. Average total deposits for 1997 and
1996 funded 74.5% and 72.4%, respectively, of average total assets. In addition,
liquidity was also provided from short-term borrowings, which consisted of
commercial paper issued by the Company, Federal funds purchased and securities
sold under agreements to repurchase, lines of credit from other banks and credit
facilities from the FHLB. Additional information on short-term borrowings is
provided in Note 8 to the Financial Statements on pages 51 and 52. Also, the
Company has access to offshore deposits in the international market which
provides another available source of funds.
The Company's commercial paper is assigned a rating of A2 by Standard &
Poor's ("S&P"). The Company's subordinated debt is assigned a rating of Baa-1 by
Moody's Investors Service and BBB by S&P. The Company currently has a Thomson
BankWatch, Inc. rating of B.
As indicated in the Consolidated Statements of Cash Flows on page 43, net
cash provided by operating and financing activities was $181,673,000 and net
cash used in investing activities was $232,279,000 for 1997. In 1997, the
Company's cash flow was positively impacted by the issuance of $100,000,000 of
its Capital Securities by the Trust, and the related issuance by the Company of
junior subordinated deferrable interest debentures to the Trust. The net cash
from these issuances was utilized to, among other things, reduce short-term
borrowings and repurchase the Company's common stock. For 1996, net cash
provided by operating and investing activities was $428,705,000 and net cash
used in financing activities was $399,245,000. In 1996, there was a significant
change in the Company's cash flow related to the Pacific Northwest Acquisitions,
which provided $218,966,000 in net cash. For 1995, net cash provided by
operating activities was $140,119,000 and net cash used in investing and
financing activities was $98,962,000. In 1995, the Company utilized deposit
growth and the partial run-off of the investment securities portfolio as the
principal sources of funds for loan production and repayment of short-term
borrowings.
The Company's ability to pay dividends depends primarily upon dividends and
other payments from its subsidiaries, which are subject to certain limitations
as described in Note 12 to the Financial Statements on page 53.
ASSET/LIABILITY MANAGEMENT
The Company actively measures and manages its exposure to interest rate risk
in order to maintain a relatively stable net interest margin and to allow it to
take advantage of profitable business opportunities.
Interest rate risk refers to the exposure to earnings and capital arising
from changes in future interest rates. The Company carefully measures and
monitors its interest rate risk exposure using market value of equity analysis
and net interest income simulations. The market value of equity analysis and net
interest income simulations are usually done on a quarterly basis.
The market value of equity analysis examines the change in the economic
value of the Company due to changes in interest rates. At December 31, 1997, the
Company remained well within current guidelines which allow for no more than a
decrease in value equal to 1% of total assets due to a 1% change in interest
rates. The net interest income simulations look at how the Company's net
interest income is affected by flat, rising, or declining rates using the
current balance sheet and simulating net interest income going forward two
years. Under these simulations, at December 31, 1997, the Company's exposure to
changes in interest rates was within current guidelines which allow for no more
than a 10% adverse change in net interest income for a 1% change in rates over a
one-year time period.
Interest rate risk exposure is managed through the use of off-balance sheet
instruments such as swaps or floors and through extending or shortening the
duration of the investment securities portfolio.
36
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
The Company's interest rate sensitivity position at December 31, 1997, is
presented below. The interest rate sensitivity gap, shown at the bottom of the
table, refers to the difference between assets and liabilities subject to
repricing, maturity, runoff and/or volatility during a specified period. The gap
is adjusted for interest rate swaps which are hedging certain assets or
liabilities on the balance sheet. (For ease of analysis, all of these swap
adjustments are consolidated into one line on the gap table.)
Since all interest rates and yields do not adjust at the same velocity or
magnitude, and since volatility is subject to change, the gap is only a general
indicator of interest rate sensitivity. At December 31, 1997, the cumulative
one-year gap for the Company was a positive $257.4 million, representing 3.18%
of total assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
WITHIN AFTER THREE AFTER ONE
THREE BUT WITHIN BUT WITHIN AFTER
(Dollars in thousands) MONTHS 12 MONTHS 5 YEARS 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-BEARING DEPOSITS
IN OTHER BANKS .................... $ 52,430 $ 85,500 $ -- $ -- $ 137,930
FEDERAL FUNDS SOLD AND SECURITIES
PURCHASED UNDER AGREEMENTS
TO RESELL ......................... 134,274 -- -- -- 134,274
AVAILABLE-FOR-SALE INVESTMENT
SECURITIES ........................ 263,462 384,153 119,483 11,026 778,124
NET LOANS:
COMMERCIAL, FINANCIAL AND
AGRICULTURAL .................... 1,339,886 148,609 76,732 17,471 1,582,698
REAL ESTATE -- CONSTRUCTION ....... 135,460 1,160 29,800 62 166,482
FOREIGN ........................... 125,827 83,245 126,217 3,809 339,098
OTHER ............................. 1,105,059 1,015,642 1,467,781 479,325 4,067,807
- ------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS ............ 3,156,398 1,718,309 1,820,013 511,693 7,206,413
NONEARNING ASSETS ................... 167,845 154,392 283,498 280,944 886,679
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS .................... $ 3,324,243 $ 1,872,701 $ 2,103,511 $ 792,637 $ 8,093,092
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS ........... $ 1,922,409 $ 1,747,195 $ 1,341,985 $ 12,227 $ 5,023,816
NONINTEREST-BEARING DEPOSITS ........ 323,496 96,768 516,096 129,024 1,065,384
SHORT-TERM BORROWINGS ............... 516,585 187,149 18,131 -- 721,865
LONG-TERM DEBT AND CAPITAL SECURITIES 8,000 50,000 10,000 250,736 318,736
STOCKHOLDERS' EQUITY ................ -- -- -- 731,701 731,701
OFF-BALANCE SHEET ADJUSTMENT ........ (30,939) (61,228) 22,769 69,398 --
NONCOSTING LIABILITIES .............. 74,120 105,945 507 51,018 231,590
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .......... $ 2,813,671 $ 2,125,829 $ 1,909,488 $ 1,244,104 $ 8,093,092
========================================================================================================================
INTEREST RATE SENSITIVITY GAP ......... $ 510,572 $ (253,128) $ 194,023 $ (451,467)
CUMULATIVE GAP ........................ $ 510,572 $ 257,444 $ 451,467 $ --
CUMULATIVE GAP AS A PERCENT
OF TOTAL ASSETS ..................... 6.31% 3.18% 5.58% -- %
========================================================================================================================
</TABLE>
YEAR 2000 ISSUES
Many computer programs use only two digits to identify entries in the date
code field. If not corrected, these programs may fail or create erroneous
results because of the date change in the year 2000.
In 1995, management commenced a comprehensive program to address this
problem and ensure that the Company's computer software and hardware will
continue to function properly in the year 2000 and thereafter. Internal and
external costs in connection with this program, currently estimated at a total
of $9 million over a three-year period, are not anticipated to materially impact
the Company's operations. However, even though the Company's planned software
modifications and systems upgrades should adequately address year 2000 issues,
there can be no assurance that unforeseen difficulties will not arise. The
Company's program includes the identification of third-party service providers,
customers and other external parties upon which the Company relies or with whom
the Company must interface on mission
37
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
critical systems or applications. The program also includes determination of and
coordination with the compliance efforts of such external parties on year 2000
issues. There is no assurance that the failure of any such external party to
resolve its year 2000 issues would not have an adverse effect on the Company.
FOURTH QUARTER RESULTS
Consolidated net income for the fourth quarter of 1997 was $20,129,000, a
decrease of $219,000, or 1.1%, compared to the $20,348,000 earned during the
same quarter in 1996. Basic earnings per share for the fourth quarter of 1997
and 1996 was $.64 and diluted earnings per share for the fourth quarter of 1997
and 1996 was $.63.
The decrease in consolidated net income in the fourth quarter of 1997 as
compared to the fourth quarter of 1996 was primarily due to: (1) an adjustment
to lease financing income of $2,355,000 in 1997 related to a certain direct
financing lease; (2) higher occupancy expense in 1997 resulting from costs
associated with the new administrative headquarters building as previously
mentioned; (3) the write-off in 1997 of previously capitalized organizational
costs in connection with the Pacific Northwest Acquisitions of $1,588,000; and
(4) an income tax benefit of $2,800,000 (resulting primarily from the
recognition of previously unrecognized research and experimentation and foreign
tax credits) which reduced the overall income tax expense in 1996. This decrease
was partially offset by: (1) a decrease in the provision for loan losses of
$5,084,000 in 1997; (2) interest earned in 1997 on a corporate income tax refund
of $1,908,000; (3) an income tax benefit of $1,458,000 (resulting from the
recognition of previously unrecognized general business credits) which reduced
the overall income tax expense in 1997; and (4) the write-down of certain OREO
of $1,026,000 in 1996.
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> 27
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> 28
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> 29
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 ........................ 331,725,534 31,398,978 31,734,669
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
GLOSSARY OF FINANCIAL TERMS First Hawaiian, Inc. and Subsidiaries
================================================================================
BALANCE SHEET: A statement of financial position reflecting the Company's
assets, liabilities and stockholders' equity at a particular point in time in
accordance with generally accepted accounting principles.
BASIS POINT: A measure of the yield on a bond, note or other indebtedness
equal to 1/100th of a percentage point. For example, a yield of 5% is 500 basis
points.
COLLATERAL: An asset or property pledged to secure the payment of a debt or
performance of an obligation.
DEPRECIATION: A charge against the Company's earnings that writes off the
cost of a capital asset over its estimated useful life.
DIVIDEND: Usually a cash distribution to stockholders of the Company of a
portion of its earnings.
DERIVATIVES: Financial instruments where the performance is derived from the
performance of another financial instrument or an interest rate, currency or
other index. Derivative instruments are used for asset and liability management
and to mitigate risks associated with other instruments that are reflected on
the balance sheet.
EARNINGS PER SHARE: Basic earnings per share -- The Company's earnings for
the period divided by the weighted-average number of shares of common stock
outstanding for the period. Diluted earnings per share -- The Company's earnings
for the period divided by the weighted-average number of shares of common stock
outstanding for the period, including the treatment of all dilutive securities,
such as options, warrants and convertible debt.
HEDGE: A strategy used to avoid, reduce or transfer risk.
INCOME STATEMENT: A financial statement that reflects the Company's
performance by measuring its revenues and expenses for the period.
INTEREST-RATE RISK: The risk to earnings or capital arising from the
movement of interest rates.
INTEREST-RATE SWAP: A contract used for the purpose of interest rate risk
management in which two parties agree to exchange interest payments of a
different character over a specified period based on an underlying notional
amount of principal. The term "notional principal" is the amount on which the
interest payments are calculated, as the swap contracts generally involve no
exchange of the principal.
LEVERAGE RATIO: Tier 1 Capital divided by the sum of total assets minus the
allowance for loan losses and certain intangible assets.
LIQUIDITY: The ability of an entity to provide sufficient cash to fund its
operations and to pay its debts on a timely basis at a reasonable cost.
NET INTEREST INCOME: Interest income plus loan fees minus interest expense.
NET INTEREST MARGIN: Net interest income divided by average earning assets
(e.g., loans and investment securities).
NONACCRUAL LOANS: Loans on which interest is not being accrued for income
statement purposes. Payments received on nonaccrual loans are applied against
the principal balance.
NONINTEREST EXPENSE: Expenses for such items as salaries, benefits, building
occupancy and supplies, as opposed to interest expense paid for deposits and
other liabilities.
NONINTEREST INCOME: Income received from such sources as fees, charges and
commissions, as opposed to interest income received from loans and investment
securities.
NONPERFORMING ASSETS: Nonaccrual loans plus restructured loans plus OREO
(other real estate owned).
OREO: Other real estate owned. Primarily includes foreclosed assets and
assets taken in lieu of foreclosure.
REPURCHASE AGREEMENTS, ALSO CALLED "REPOS": Agreement between a seller and a
buyer in which the seller agrees to repurchase the securities at an agreed-upon
price at a stated time. A repo is similar to a secured borrowing and lending of
funds equal to the sales price of the related collateral.
RISK-BASED CAPITAL RATIOS: Equity measurements used by regulatory agencies
to assess capital adequacy. These ratios are: Tier 1 Capital divided by
risk-weighted assets; and Total Capital (Tier 1 plus Tier 2 Capital) divided by
risk-weighted assets.
ROA (RETURN ON AVERAGE ASSETS): Measures the productivity of assets.
Calculated by dividing net income by average total assets.
ROE (RETURN ON AVERAGE EQUITY): Measures the rate of return on the
stockholders' investment in the Company. Calculated by dividing net income by
average total stockholders' equity.
STATEMENT OF CASH FLOWS: A financial statement that reflects cash flows from
operating, investing and financing activities, providing a comprehensive view of
changes in the Company's cash and cash equivalents for the period.
STOCK OPTION: Form of employee incentive and compensation in which the
employee of the Company is given the right to purchase its shares at a
determinable price within a specified period of years.
TIER 1 CAPITAL: Stockholders' equity plus certain minority equity in
subsidiaries, minus goodwill and certain intangible assets.
TIER 2 CAPITAL: The allowance for loan losses (not to exceed 1.25% of
risk-weighted assets) plus qualifying subordinated debt, perpetual preferred
stock, convertible debt securities and certain hybrid investments.
TOTAL CAPITAL: The sum of Tier 1 plus Tier 2 Capital.
61
<PAGE> 50
CORPORATE ADDRESSES First Hawaiian, Inc. and Subsidiaries
================================================================================
FIRST HAWAIIAN, INC.
999 Bishop Street
Honolulu, Hawaii 96813
or
P.O. Box 3200
Honolulu, Hawaii 96847
FIRST HAWAIIAN CREDITCORP, INC.
Interstate Building, Second Floor
1314 South King Street
Honolulu, Hawaii 96814
Telephone: (808) 593-5500
FIRST HAWAIIAN LEASING, INC./
FHL LEASE HOLDING COMPANY, INC.
Interstate Building, Second Floor
1314 South King Street
Honolulu, Hawaii 96814
Telephone: (808) 593-5300
PACIFIC ONE BANK
401 Southwest Fifth Avenue
Portland, Oregon 97204
Telephone: (503) 221-2122
PACIFIC ONE DEALER CENTER, INC.
5665 Southwest Meadows Road, Suite 250
Lake Oswego, Oregon 97035
Telephone: (503) 684-6388
FIRST HAWAIIAN BANK
999 Bishop Street
Honolulu, Hawaii 96813
or
P.O. Box 3200
Honolulu, Hawaii 96847
Telephone: (808) 525-7000
Cable Address: FIRSTBANK (Honolulu, Hawaii)
S.W.I.F.T.: FHBKUS77
FedWire: ABA 121301015 FST HAW HONO
Internet's World Wide Web Address:
http://www.fhb.com/
Japan Representative Office
Ohtemachi Building 6-1, Room 202
Ohtemachi 1-Chome, Chiyoda-Ku,
Tokyo 100-0004, Japan
Telephone: (03) 3201-6081
Facsimile: (03) 3215-0566
62
<PAGE> 51
SUPPLEMENTAL INFORMATION First Hawaiian, Inc. and Subsidiaries
================================================================================
First Hawaiian, Inc.'s shares are traded on The Nasdaq Stock Market under
the Nasdaq symbol: FHWN.
TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
FORM 10-K AND OTHER FINANCIAL INFORMATION
The Company's 1997 Form 10-K annual report, which is to be filed with the
Securities and Exchange Commission by March 31, 1998, will be available to
stockholders after that date. Analysts, investors and others seeking a copy of
the Form 10-K or any other financial information should write to:
Howard H. Karr
Executive Vice President and Treasurer
First Hawaiian, Inc.
P.O. Box 3200
Honolulu, Hawaii 96847
GENERAL INFORMATION
News media representatives and others seeking general information should
contact:
Gerry Keir
Senior Vice President
Corporate Communications
(808) 525-7086
E-mail: [email protected]
or contact
First Hawaiian Bank
World Wide Web address:
http://www.fhb.com/
ANNUAL MEETING
The annual meeting of stockholders of First Hawaiian, Inc. will be held on
Thursday, April 16, 1998 at 9:30 A.M. in the 30th floor Board Room of First
Hawaiian Center, 999 Bishop Street, Honolulu, Hawaii.
DIVIDEND REINVESTMENT PLAN
Stockholders may reinvest their dividends in additional shares of the First
Hawaiian, Inc. common stock through the Dividend Reinvestment Plan. Stockholders
wishing to participate in the Plan can receive a descriptive brochure and
authorization card by calling toll free at 1-800-937-5449 or writing to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
63
<PAGE> 1
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
The Corporation or one of its wholly-owned subsidiaries beneficially owns 100%
of the outstanding capital stock, voting securities and ownership interests of
each of the corporations and limited partnerships listed below and all of the
common securities of First Hawaiian Capital I. The Corporation is indirectly the
sole general partner of First Hawaiian Center Limited Partnership.
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
NAME INCORPORATION
---- ---------------
<S> <C>
First Hawaiian Bank Hawaii
First Hawaiian Overseas Corporation Hawaii
FIH International, Inc. Hawaii
American Security Properties, Inc. Hawaii
Real Estate Delivery, Inc. Hawaii
FH Center, Inc. Hawaii
FHB Mortgage Company, Inc. Hawaii
FHB Properties, Inc. Hawaii
First Hawaiian Center, L.P. Hawaii
Pacific One Dealer Center, Inc. Hawaii
OMP, Inc. Hawaii
2200 Main, Inc. Hawaii
The Bankers Club, Inc. Hawaii
Center Club, Inc. Hawaii
First Hawaiian Leasing, Inc. Hawaii
First Hawaiian Insurance, Inc. Hawaii
First Hawaiian Creditcorp, Inc. Hawaii
Pacific One Creditcorp, Inc. Hawaii
FHL Lease Holding Company, Inc. Hawaii
FHL SPC One, Inc. Hawaii
FHI International, Inc. Hawaii
Pacific One Bank Oregon
First Hawaiian Capital I Delaware
</TABLE>
All subsidiaries were included in the consolidated financial statements of the
Corporation.
<PAGE> 1
EXHIBIT 23. CONSENT OF INDEPENDENT ACCOUNTANTS
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 this Annual Report on
Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Honolulu, Hawaii
February 20, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 282,905
<INT-BEARING-DEPOSITS> 137,930
<FED-FUNDS-SOLD> 134,274
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 778,124
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,238,681
<ALLOWANCE> 82,596
<TOTAL-ASSETS> 8,093,092
<DEPOSITS> 6,089,200
<SHORT-TERM> 721,865
<LIABILITIES-OTHER> 330,723
<LONG-TERM> 218,736
0
0
<COMMON> 165,952
<OTHER-SE> 565,749
<TOTAL-LIABILITIES-AND-EQUITY> 8,093,092
<INTEREST-LOAN> 518,784
<INTEREST-INVEST> 59,835
<INTEREST-OTHER> 13,864
<INTEREST-TOTAL> 592,483
<INTEREST-DEPOSIT> 197,619
<INTEREST-EXPENSE> 258,011
<INTEREST-INCOME-NET> 334,472
<LOAN-LOSSES> 17,211
<SECURITIES-GAINS> 270
<EXPENSE-OTHER> 292,210
<INCOME-PRETAX> 123,564
<INCOME-PRE-EXTRAORDINARY> 84,261
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,261
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.64
<YIELD-ACTUAL> 8.32
<LOANS-NON> 20,041
<LOANS-PAST> 33,767
<LOANS-TROUBLED> 35,560
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 85,248
<CHARGE-OFFS> 25,130
<RECOVERIES> 5,267
<ALLOWANCE-CLOSE> 82,596
<ALLOWANCE-DOMESTIC> 40,410
<ALLOWANCE-FOREIGN> 1,405
<ALLOWANCE-UNALLOCATED> 40,781
</TABLE>
