<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............. to .............
Commission file number 0-7949
------------------------
BANCWEST CORPORATION
(Exact name of registrant as specified in its charter)
------------------------
DELAWARE 99-0156159
(State of incorporation) (I.R.S. Employer
Identification No.)
999 BISHOP STREET, HONOLULU, HAWAII 96813
(Address of principal executive offices) (Zip Code)
(808) 525-7000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or l5(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of each of the issuer's classes of
common stock as of July 30, 1999 was:
<TABLE>
<CAPTION>
Class Outstanding
----------------------------- -----------------
<S> <C>
Common Stock, $1.00 Par Value 36,358,619 Shares
Class A Common Stock, $1.00 Par Value 25,814,768 Shares
</TABLE>
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<PAGE> 2
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1999, December 31, 1998
and June 30, 1998 2
Consolidated Statements of Income for the quarter and six months ended
June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity for the six months ended
June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
EXHIBIT INDEX
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BancWest Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
JUNE 30, December 31, June 30,
1999 1998 1998
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 618,642 $ 615,184 $ 278,458
Interest-bearing deposits in other banks 276,054 274,641 216,748
Federal funds sold and securities purchased
under agreements to resell 89,784 52,100 141,000
Investment securities:
Held-to-maturity 208,492 290,922 --
Available-for-sale 1,319,785 1,346,994 715,600
Loans and leases:
Loans and leases 11,709,564 11,339,580 6,304,829
Less allowance for credit losses 151,778 149,585 85,749
------------ ------------ ------------
Net loans and leases 11,557,786 11,189,995 6,219,080
------------ ------------ ------------
Premises and equipment 263,301 266,984 238,275
Customers' acceptance liability 1,463 1,377 746
Core deposit intangible 69,077 73,430 23,501
Goodwill 621,866 635,245 94,304
Other real estate owned and repossessed
personal property 31,107 33,381 25,795
Other assets 306,428 269,642 217,757
------------ ------------ ------------
TOTAL ASSETS $ 15,363,785 $ 15,049,895 $ 8,171,264
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Domestic:
Noninterest-bearing demand $ 1,379,993 $ 2,018,561 $ 844,961
Interest-bearing demand 275,915 318,756 274,082
Savings 4,619,937 3,886,714 2,283,470
Time 5,089,318 4,779,726 2,509,759
Foreign 229,956 256,563 286,055
------------ ------------ ------------
Total deposits 11,595,119 11,260,320 6,198,327
------------ ------------ ------------
Short-term borrowings 752,303 922,867 635,670
Acceptances outstanding 1,463 1,377 746
Other liabilities 504,042 467,486 267,155
Long-term debt 688,216 629,959 214,725
Guaranteed preferred beneficial interests
in Company's junior subordinated debentures 100,000 100,000 100,000
------------ ------------ ------------
TOTAL LIABILITIES 13,641,143 13,382,009 7,416,623
------------ ------------ ------------
Stockholders' equity:
Preferred stock -- -- --
Class A common stock 25,815 25,815 --
Common stock 33,190 33,190 165,952
Surplus 1,143,726 1,141,639 148,168
Retained earnings 558,202 511,525 497,246
Accumulated other comprehensive income 500 6,171 6,295
Treasury stock (38,791) (50,454) (63,020)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,722,642 1,667,886 754,641
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,363,785 $ 15,049,895 $ 8,171,264
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
BancWest Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in thousands, except number of shares and per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 205,518 $ 131,433 $ 411,205 $ 261,379
Lease financing income 27,465 4,287 54,349 9,174
Interest on investment securities:
Taxable interest income 22,577 11,829 45,940 24,349
Exempt from Federal income taxes 17 25 34 50
Other interest income 5,077 5,020 9,233 8,965
------------ ------------ ------------ ------------
Total interest income 260,654 152,594 520,761 303,917
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits 83,414 51,798 165,390 102,831
Short-term borrowings 7,925 8,756 17,034 17,863
Long-term debt 11,750 5,591 22,925 11,196
------------ ------------ ------------ ------------
Total interest expense 103,089 66,145 205,349 131,890
------------ ------------ ------------ ------------
Net interest income 157,565 86,449 315,412 172,027
Provision for credit losses 12,845 7,516 22,470 11,912
------------ ------------ ------------ ------------
Net interest income after provision for
credit losses 144,720 78,933 292,942 160,115
------------ ------------ ------------ ------------
NONINTEREST INCOME
Trust and investment services income 8,274 6,258 16,818 13,427
Service charges on deposit accounts 15,851 7,419 31,171 14,691
Other service charges and fees 15,051 8,078 28,498 16,298
Securities losses, net (8) -- (20) (5)
Other 7,200 9,684 12,610 12,416
------------ ------------ ------------ ------------
Total noninterest income 46,368 31,439 89,077 56,827
------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and wages 43,084 27,847 85,635 55,371
Employee benefits 11,561 7,345 22,425 15,301
Occupancy expense 14,120 9,772 28,495 19,531
Equipment expense 7,259 6,675 14,524 13,121
Intangible amortization 8,866 2,878 17,732 4,348
Other 36,374 21,924 72,989 42,187
------------ ------------ ------------ ------------
Total noninterest expense 121,264 76,441 241,800 149,859
------------ ------------ ------------ ------------
Income before income taxes 69,824 33,931 140,219 67,083
Provision for income taxes 27,820 12,263 57,959 24,187
------------ ------------ ------------ ------------
NET INCOME $ 42,004 $ 21,668 $ 82,260 $ 42,896
============ ============ ============ ============
PER SHARE DATA (1) :
BASIC EARNINGS $ .73 $ .70 $ 1.43 $ 1.38
============ ============ ============ ============
DILUTED EARNINGS $ .73 $ .69 $ 1.43 $ 1.37
============ ============ ============ ============
CASH DIVIDENDS $ .31 $ .31 $ .62 $ .62
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING (1) 57,452,636 31,143,766 57,419,064 31,162,875
============ ============ ============ ============
</TABLE>
(1) Per share data and average shares outstanding were computed on a combined
basis using average Class A common stock and common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
BancWest Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD $ 615,184 $ 282,905
--------- ---------
Cash flows from operating activities:
Net income 82,260 42,896
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 22,470 11,912
Net (gain) loss on disposition of assets 1,277 (6,022)
Depreciation and amortization 32,032 16,511
Income taxes 50,357 19,828
Decrease (increase) in interest receivable 1,035 (2,867)
Increase in interest payable 1,453 1,408
Decrease (increase) in prepaid expenses (8,493) 2,131
Other (39,041) 6,173
--------- ---------
Net cash provided by operating activities 143,350 91,970
--------- ---------
Cash flows from investing activities:
Net increase in interest-bearing deposits
in other banks (1,413) (78,818)
Net increase in Federal funds sold and
securities purchased under agreements to resell (37,684) (6,726)
Proceeds from maturity of held-to-maturity
investment securities 121,467 --
Purchase of held-to-maturity investment securities (39,037) --
Proceeds from maturity of available-for-sale
investment securities 365,296 229,852
Purchase of available-for-sale investment securities (347,503) (156,476)
Net increase in loans and leases to customers (394,416) (80,152)
Proceeds from the sale of assets -- 11,402
Purchase of premises and equipment (5,511) (6,920)
Other (1,750) (1,009)
--------- ---------
Net cash used in investing activities (340,551) (88,847)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 334,799 109,127
Net decrease in short-term borrowings (155,564) (90,195)
Proceeds from (payments on) long-term debt, net 43,257 (10)
Cash dividends paid (35,583) (19,309)
Proceeds from issuance of common stock 12,972 --
Issuance (repurchase) of treasury stock, net 778 (7,183)
--------- ---------
Net cash provided by (used in) financing activities 200,659 (7,570)
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 618,642 $ 278,458
========= =========
Supplemental disclosures:
Interest paid $ 203,897 $ 130,482
========= =========
Income taxes paid $ 7,602 $ 4,359
========= =========
Supplemental schedule of noncash investing
and financing activities:
Loans converted into other real estate owned and
repossessed personal property $ 7,521 $ 6,203
========= =========
Loans made to facilitate the sale of other real estate owned $ 3,366 $ 958
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
BancWest Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Class A
Common Common Retained
Stock Stock Surplus Earnings
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ 25,815 $ 33,190 $ 1,141,639 $ 511,525
Comprehensive income:
Net income -- -- -- 82,260
Unrealized valuation adjustment,
net of tax and reclassification
adjustment -- -- -- --
----------- ----------- ----------- -----------
Comprehensive income -- -- -- 82,260
----------- ----------- ----------- -----------
Cash dividends ($.62 per share) -- -- -- (35,583)
Issuance of common stock -- -- 2,164 --
Incentive Plan for Key Executives -- -- -- --
Issuance of treasury stock under
Stock Incentive Plan -- -- (77) --
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1999 $ 25,815 $ 33,190 $ 1,143,726 $ 558,202
=========== =========== =========== ===========
Balance, December 31, 1997 $ -- $ 165,952 $ 148,165 $ 473,659
Comprehensive income:
Net income -- -- -- 42,896
Unrealized valuation adjustment,
net of tax and reclassification
adjustment -- -- -- --
----------- ----------- ----------- -----------
Comprehensive income -- -- -- 42,896
----------- ----------- ----------- -----------
Purchase of treasury stock -- -- -- --
Cash dividends ($.62 per share) -- -- -- (19,309)
Incentive Plan for Key Executives -- -- -- --
Issuance of treasury stock under
Stock Incentive Plan -- -- 3 --
----------- ----------- ----------- -----------
Balance, June 30, 1998 $ -- $ 165,952 $ 148,168 $ 497,246
=========== =========== =========== ===========
<CAPTION>
Accumulated
Other
Comprehensive Treasury
Income Stock Total
------------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C>
Balance, December 31, 1998 $ 6,171 $ (50,454) $ 1,667,886
Comprehensive income:
Net income -- -- 82,260
Unrealized valuation adjustment,
net of tax and reclassification
adjustment (5,671) -- (5,671)
----------- ----------- -----------
Comprehensive income (5,671) -- 76,589
----------- ----------- -----------
Cash dividends ($.62 per share) -- -- (35,583)
Issuance of common stock -- 10,808 12,972
Incentive Plan for Key Executives -- (63) (63)
Issuance of treasury stock under
Stock Incentive Plan -- 918 841
----------- ----------- -----------
BALANCE, JUNE 30, 1999 $ 500 $ (38,791) $ 1,722,642
=========== =========== ===========
Balance, December 31, 1997 $ (241) $ (55,834) $ 731,701
Comprehensive income:
Net income -- -- 42,896
Unrealized valuation adjustment,
net of tax and reclassification
adjustment 6,536 -- 6,536
----------- ----------- -----------
Comprehensive income 6,536 -- 49,432
----------- ----------- -----------
Purchase of treasury stock -- (7,342) (7,342)
Cash dividends ($.62 per share) -- -- (19,309)
Incentive Plan for Key Executives -- 27 27
Issuance of treasury stock under
Stock Incentive Plan -- 129 132
----------- ----------- -----------
Balance, June 30, 1998 $ 6,295 $ (63,020) $ 754,641
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of BancWest Corporation and
Subsidiaries (the "Company") conform with generally accepted accounting
principles and practices within the banking industry. The following is a summary
of significant accounting policies:
CONSOLIDATION
The consolidated financial statements of the Company include the
accounts of BancWest Corporation ("BWE") and its wholly owned subsidiaries:
First Hawaiian Bank and its wholly owned subsidiaries ("First Hawaiian"); Bank
of the West and its wholly owned subsidiaries ("Bank of the West"); FHL Lease
Holding Company, Inc. and its wholly owned subsidiary; First Hawaiian Capital I
(of which BWE owns all the common securities); and FHI International, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. In the opinion of management, all adjustments (which included
only normal recurring adjustments) necessary for a fair presentation are
reflected in the consolidated financial statements.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements for 1998 have
been reclassified to conform with the 1999 presentation. Such reclassifications
had no effect on the consolidated net income as previously reported.
5
<PAGE> 7
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2. NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires the recognition of all derivative instruments
in the statement of financial position as either assets or liabilities and the
measurement of derivative instruments at fair value. In June of 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." The
original effective date for SFAS No. 133 was for all fiscal years beginning
after June 15, 1999. As a result of SFAS No. 137, the effective date for SFAS
No. 133 is for all fiscal quarters of all fiscal years beginning after June 15,
2000. The adoption of SFAS No. 133, as amended by SFAS No. 137, is not expected
to have a material effect on the Company's consolidated financial statements.
Effective January 1, 1999, the Company adopted SFAS No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an amendment of
SFAS No. 65." SFAS No. 134 requires mortgage banking enterprises to classify
loans held for sale that they have securitized, based on their intent to sell or
hold these investments. The adoption of SFAS No. 134 did not have a material
effect on the Company's consolidated financial statements.
3. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators
used to calculate the Company's basic and diluted earnings per share for the
periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
------------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ------------------------------------------
INCOME AVERAGE SHARES PER SHARE Income Average Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) Amount
----------- --------------- ---------- ----------- -------------- ----------
(in thousands, except number of shares and per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income $ 42,004 57,452,636 $ .73 $ 21,668 31,143,766 $ .70
Effect of dilutive securities -
Stock Incentive
Plan options -- 195,716 -- -- 194,003 --
---------- ---------- ---------- ---------- ---------- ----------
Diluted:
Net income and
assumed conversions $ 42,004 57,648,352 $ .73 $ 21,668 31,337,769 $ .69
========== ========== ========== ========== ========== ==========
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ------------------------------------------
INCOME AVERAGE SHARES PER SHARE Income Average Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) Amount
----------- --------------- ---------- ----------- -------------- ----------
(in thousands, except number of shares and per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income $ 82,260 57,419,064 $ 1.43 $ 42,896 31,162,875 $ 1.38
Effect of dilutive securities -
Stock Incentive
Plan options -- 262,714 -- -- 190,498 --
---------- ---------- ---------- ---------- ---------- ----------
Diluted:
Net income and
assumed conversions $ 82,260 57,681,778 $ 1.43 $ 42,896 31,353,373 $ 1.37
========== ========== ========== ========== ========== ==========
</TABLE>
4. IMPAIRED LOANS
The following table summarizes impaired loan information as of and for
the six months ended June 30, 1999 and 1998 and as of and for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1999 December 31, 1998 June 30, 1998
------------- ----------------- -------------
(in thousands)
<S> <C> <C> <C>
Impaired loans $104,353 $100,704 $ 74,688
Impaired loans with related allowance for credit
losses calculated under SFAS No. 114 $ 71,290 $ 67,849 $ 51,547
Total allowance for credit losses on impaired loans $ 19,039 $ 18,610 $ 13,176
Average impaired loans $102,716 $ 81,436 $ 75,491
Interest income recognized on impaired loans $ 314 $ 2,876 $ 498
</TABLE>
Impaired loans without a related allowance for credit losses are
generally collateralized by assets with fair values in excess of the recorded
investment in the loans. Interest payments on impaired loans are generally
applied to reduce the outstanding principal amounts of such loans.
6
<PAGE> 8
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. MERGER WITH BANCWEST CORPORATION
On November 1, 1998, the merger of the former BancWest Corporation
("Old BancWest"), parent company of Bank of the West, with and into First
Hawaiian, Inc. ("FHI") was consummated (the "BancWest Merger"). At that date,
Bank of the West, headquartered in San Francisco, was California's fifth largest
bank with approximately $6.1 billion in assets and 103 branches in 21 counties
in Northern and Central California.
Prior to the consummation of the BancWest Merger, Old BancWest was
wholly owned by Banque Nationale de Paris ("BNP"), France's second largest
banking group. In the BancWest Merger, BNP received approximately 25.8 million
shares of the Company's newly authorized Class A common stock (representing
approximately 45% of the then outstanding voting stock). The transaction was
accounted for using the purchase method of accounting and results of operations
were included in the Consolidated Statements of Income from the date of
acquisition. The excess of cost over fair value of net assets acquired amounted
to approximately $599.0 million. FHI, the surviving corporation of the BancWest
Merger, changed its name to "BancWest Corporation" on November 1, 1998.
On July 19, 1999 the Company announced plans to consolidate its three
existing data centers into a single data center in Honolulu. The consolidation
will be accomplished through a facilities management contract with a service
provider assuming management of First Hawaiian's existing information technology
center. As a result of the consolidation effort, the Company expects to record
pre-tax restructuring and other nonrecurring costs of approximately $6.9 million
in the third quarter of 1999, primarily for severance and write-off of
capitalized information technology costs.
6. SUBSIDIARY MERGERS
On June 19, 1998, First Hawaiian Creditcorp, Inc. ("Creditcorp"), a
wholly owned subsidiary of the Company, was merged with and into First Hawaiian.
All 13 Creditcorp branches were closed as a result of this merger.
On November 1, 1998, Pacific One Bank, a wholly owned subsidiary of the
Company, was merged with and into Bank of the West.
7. MERGER WITH SIERRAWEST BANCORP
On July 1, 1999, the Company completed its acquisition of SierraWest
Bancorp ("SierraWest"). SierraWest and its subsidiary, SierraWest Bank, were
merged into Bank of the West, resulting in issuance of approximately 4.40
million shares of the Company's common stock. The acquisition will be accounted
for using the pooling-of-interests method of accounting. As a result of the
SierraWest merger, the Company expects to record pre-tax restructuring and other
nonrecurring costs of approximately $9.3 million in the third quarter of 1999.
Historical financial information presented in future reports will be restated to
include SierraWest. No material adjustments were recorded to conform
SierraWest's accounting policies with that of the Company. The following
summarized operating data gives effect to the acquisition as if it had been
consummated on January 1, 1998:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net interest income $ 168,879 $ 95,981 $ 337,401 $ 191,352
Net income $ 44,518 $ 21,589 $ 87,023 $ 44,837
Basic earnings per share $ .72 $ .61 $ 1.41 $ 1.26
Diluted earnings per share $ .72 $ .60 $ 1.40 $ 1.25
</TABLE>
8. OPERATING SEGMENTS
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosure about
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not affect the Company's consolidated results of operations or
consolidated financial position as previously reported.
The Company has determined that its reportable segments are those that
are based on the Company's method of internal reporting. As of June 30, 1999,
the Company had two reportable operating segments: First Hawaiian and Bank of
the West. The First Hawaiian segment operates primarily in the State of Hawaii.
The Bank of the West segment operates primarily on the mainland United States.
The financial results on the Company's operating segments are presented
on an accrual basis. There are no significant differences between the accounting
policies of the segments as compared to the Company's consolidated financial
statements. The Company evaluates the performance of its segments and allocates
resources to them based on net interest income and net income. There are no
material intersegment revenues.
7
<PAGE> 9
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The tables below present information about the Company's operating
segments as of or for the quarter and six months ended June 30, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
Quarter Ended June 30,
-------------------------------------------------------------------------------------
Bank
First of the Reconciling Consolidated
Hawaiian West Other Items Totals
---------- ---------- ---------- ----------- ------------
(in millions)
<S> <C> <C> <C> <C> <C>
1999
NET INTEREST INCOME $ 76.6 $ 82.9 $ (1.8) $ (0.1) $ 157.6
NET INCOME 24.5 19.1 (1.0) (0.6) 42.0
SEGMENT ASSETS 7,098.0 8,206.0 2,590.0 (2,530.0) 15,364.0
1998
Net interest income $ 79.9 $ 10.2 $ (3.8) $ 0.1 $ 86.4
Net income 22.6 1.4 (2.2) (0.1) 21.7
Segment assets 7,090.0 940.0 1,476.0 (1,335.0) 8,171.0
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------------------------
Bank
First of the Reconciling Consolidated
Hawaiian West Other Items Totals
---------- ---------- ---------- ----------- ------------
(in millions)
<S> <C> <C> <C> <C> <C>
1999
NET INTEREST INCOME $ 154.7 $ 164.5 $ (3.9) $ 0.1 $ 315.4
NET INCOME 48.5 36.8 (2.4) (0.6) 82.3
SEGMENT ASSETS 7,098.0 8,206.0 2,590.0 (2,530.0) 15,364.0
1998
Net interest income $ 159.0 $ 20.2 $ (7.3) $ 0.1 $ 172.0
Net income 44.8 2.7 (4.5) (0.1) 42.9
Segment assets 7,090.0 940.0 1,476.0 (1,335.0) 8,171.0
</TABLE>
The reconciling items in the tables above are principally inter-company
eliminations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters contained herein are forward-looking statements that involve
certain risks and uncertainties that could cause the Company's actual results to
differ materially from those discussed in the forward-looking statements.
Readers should carefully consider these risks and uncertainties in reading this
report. Factors that could cause or contribute to such differences include, but
are not limited to: (1) global, national and local economic and market
conditions; (2) the level and volatility of interest rates and currency values;
(3) fiscal and monetary policies of government agencies; (4) credit risks
inherent in the lending processes; (5) loan and deposit demand in the geographic
regions in which the Company conducts business; (6) the impact of intense
competition in the rapidly evolving banking and financial services business; (7)
the effect of current and pending government legislation and regulations; (8)
the extensive regulation of the Company's business at both the federal and state
levels; (9) whether expected revenue enhancements and cost savings from the
merger with Old BancWest are realized within expected time frames; (10) matters
relating to the integration of the business of the Company and Old BancWest,
including the impact of combining these businesses on revenues, expenses,
deposit attrition, customer retention and financial performance; (11) unforeseen
costs and/or complications relating to year 2000 compliance and euro conversion
efforts of the Company and third parties with whom the Company has business
relationships; (12) other risks discussed below; and (13) management's ability
to manage these risks.
The Company expressly disclaims any obligation or undertaking to update or
revise any forward-looking statement contained herein to reflect any change in
the Company's expectations with regard thereto or any change in events,
conditions or circumstances on which any statement is based.
8
<PAGE> 10
BancWest Corporation and Subsidiaries
CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
(dollars in thousands, except per share data) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS AND DIVIDENDS
Net income $42,004 $21,668 $82,260 $42,896
Cash dividends $17,791 $ 9,655 $35,583 $19,309
PER SHARE DATA
Diluted:
Earnings $ .73 $ .69 $ 1.43 $ 1.37
Cash earnings $ .86 $ .74 $ 1.70 $ 1.47
Cash dividends $ .31 $ .31 $ .62 $ .62
Book value (at June 30) $ 29.83 $ 24.23
Market price (close at June 30) $ 37.13 $ 36.38
SELECTED FINANCIAL RATIOS
Return on average total assets (ROA) 1.10% 1.07%
Return on average tangible assets 1.37% 1.17%
Return on average stockholders' equity (ROE) 9.81% 11.73%
Return on average tangible stockholders' equity 20.01% 15.07%
Net interest margin (fully taxable equivalent basis) 4.72% 4.77%
Allowance for credit losses to total loans and leases (at June 30) 1.30% 1.36%
Nonperforming assets to total assets (at June 30) .80% 1.05%
Allowance for credit losses to nonperforming loans and leases (at June 30) 165.4% 142.1%
</TABLE>
MERGER
On November 1, 1998, for a purchase price of $905.7 million, the merger (the
"BancWest Merger") of the former BancWest Corporation, parent company of Bank of
the West, with and into First Hawaiian, Inc. ("FHI") was consummated. FHI, the
surviving corporation of the BancWest Merger, changed its name to "BancWest
Corporation." Prior to the consummation of the BancWest Merger, the former
BancWest Corporation was wholly owned by Banque Nationale de Paris ("BNP"), BNP
received approximately 25.8 million shares of the Company's newly authorized
Class A common stock (representing approximately 45% of the then outstanding
voting stock) in the BancWest Merger. The excess of cost over fair value of net
assets acquired amounted to approximately $599.0 million. The transaction was
accounted for using the purchase method of accounting.
The Company recorded restructuring, BancWest Merger-related and other
nonrecurring costs totaling $25,527,000 in 1998. Restructuring and BancWest
Merger-related costs of $20,043,000 included: (1) severance and termination
payments to employees of $2,211,000; (2) data processing contract termination
penalties of $2,083,000; (3) write-off of capitalized software costs of
$2,755,000; (4) write-downs or losses associated with excess leased commercial
properties of $8,179,000; (5) write-off of signage, forms, prepaid expenses and
other miscellaneous assets totaling $3,828,000; and (6) other integration costs
of $987,000. The severance and contract termination penalties are being paid
throughout 1999. Other nonrecurring costs recorded in 1998 included impairment
charges of $5,484,000 related to intangible assets associated with earlier
acquisitions. On July 19, 1999, the Company announced an additional pre-tax
restructuring charge of approximately $6,900,000, related to the consolidation
of its three data centers into a single facility in Honolulu. The charge will be
taken in the third quarter of 1999. The charge is primarily composed of
severance expense and write-off of capitalized information technology expenses.
As a result of the facilities management agreement signed for the consolidation
of the data centers, the Company expects annual cost savings of approximately
$10 million annually. The expected cost savings for the consolidation of the
data centers is included in the total expected cost savings for 1999 and 2000.
Apart from the additional restructuring charge related to the consolidation of
the Company's data centers, the Company has recorded no significant new
restructuring or nonrecurring charges related to the BancWest Merger.
Although no assurance can be given either that any specific level of cost
savings will be achieved or as to the timing thereof, the Company currently
expects to achieve approximately $19.2 million and $41.0 million, inclusive of
expected data center consolidation savings, in pre-tax annual cost savings in
1999 and 2000, respectively, as a result of the BancWest Merger. These cost
savings are expected to be derived principally from the merger of our
subsidiary, Pacific One Bank, with and into Bank of the West (which occurred as
of November 1, 1998), integrating data processing and back-office operations,
eliminating duplicative operations and consolidating certain retail and
wholesale operations.
9
<PAGE> 11
In substantially all of the Company's income and expense categories, the
BancWest Merger is the principal reason for the change in the amounts reported
for the quarter and six months ended June 30, 1999 as compared to the amounts
reported in the quarter and six months ended June 30, 1998. The BancWest Merger
was also the cause of increases in substantially all of the categories of the
Company's Consolidated Balance Sheets between amounts reported at June 30, 1999
and those reported at June 30, 1998. Other significant factors affecting the
Company's results of operations and financial position are described in the
applicable sections below.
MERGER WITH SIERRAWEST
On July 1, 1999, the acquisition of SierraWest and its subsidiary SierraWest
Bank was consummated. At July 1, 1999, SierraWest Bank had $906 million in total
assets and 20 branches along the Interstate 80 corridor in Northern California
and Nevada, from Sacramento to Lake Tahoe. The Company expects to convert the
branch and support operations of the former SierraWest Bank into those of Bank
of the West in September 1999. In connection with this merger, the Company
expects to record pre-tax restructuring and other nonrecurring costs in the
third quarter of 1999 of $9.3 million.
NET INCOME
The Company recorded consolidated net income for the first six months of 1999 of
$82,260,000, an increase of $39,364,000, or 91.8%, over the first six months of
1998. For the second quarter of 1999, the consolidated net income of $42,004,000
represented a $20,336,000, or 93.9%, increase over the same quarter in 1998. The
increase is primarily due to the effects of the BancWest Merger.
Basic and diluted earnings per share for the first six months of 1999 was $1.43,
an increase of 3.6% and 4.4%, respectively, over the same period of 1998. The
percentage increase in consolidated net income on a per share basis was less
than the percentage increase in consolidated net income because of the issuance
of 25.8 million shares of Class A common stock in connection with the BancWest
Merger. The issuance resulted in a higher average number of outstanding shares
in 1999 as compared to 1998.
Diluted cash earnings per share (defined as earnings per share plus after-tax
amortization of goodwill and core deposit intangibles) for the first six months
of 1999 was $1.70, an increase of 15.6% over the same period in 1998. The
increase is primarily due to the effects of the BancWest Merger, partially
offset by higher amortization of goodwill and core deposit intangibles.
On an annualized basis, the Company's return on average total assets for the
first six months of 1999 and 1998 was 1.10% and 1.07%, respectively. Its return
on average stockholders' equity for the first six months of 1999 was 9.81%, a
decrease of 16.4% compared to the same period in 1998. The decrease in the
return on average stockholders' equity is principally a result of the issuance
of the Company's Class A common stock on November 1, 1998 and the increase in
the amount of amortization of intangible assets.
The return on average tangible assets and the return on average tangible
stockholders' equity, on an annualized basis, increased by 17.09% and 32.78%,
respectively, over the first six months of 1998. These increases resulted
primarily from the effects of the BancWest Merger. The return on average
tangible assets and the return on average tangible stockholders' equity are
defined as cash earnings as a percentage of average total assets and average
stockholders' equity minus average goodwill and core deposit intangibles,
respectively.
10
<PAGE> 12
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent basis, increased
$143,339,000, or 83.3%, to $315,441,000 for the first six months of 1999 from
$172,102,000 for the same period in 1998. The increase in net interest income
for the first six months of 1999 over the same period in 1998 was primarily due
to the BancWest Merger.
In comparison to the same period in 1998, net interest margin for the first six
months of 1999 decreased from 4.77% to 4.72%. The decrease was primarily
attributable to a 62 basis point (1% equals 100 basis points) decrease in the
yield on average earning assets for the first six months of 1999 compared to the
same period in 1998. The decrease in the yield of average earning assets was
partially offset by a 57 basis point decrease in the rate paid on funding
sources for the first six months of 1999 over the same period in 1998. The
decrease in both the yield on average earning assets and the rate paid on
funding sources can be primarily attributed to a declining interest rate
environment.
The interest income on earning assets for the first six months of 1999 was
$520,790,000, an increase of $216,798,000, or 71.3%, over the same period of
1998. The interest expense for interest-bearing deposits and liabilities for the
first six months of 1999, was $205,349,000, an increase of $73,459,000, or
55.7%, over the same period of 1998. The increase in interest income earned on
earning assets and the interest expense paid on interest-bearing deposits and
liabilities can be attributed primarily to the BancWest Merger.
Net interest income, on a fully taxable equivalent basis, increased $71,115,000,
or 82.3%, to $157,577,000 for the second quarter of 1999 from $86,462,000 for
the same period in 1998. The increase in net interest income for the second
quarter of 1999 over the same period in 1998 was primarily due to the BancWest
Merger. The decrease in the net interest margin for the second quarter of 1999
was primarily attributable to a decrease in the yield on average earning assets
of 68 basis points, partially offset by a decrease in the rate paid on funding
sources of 58 basis points, compared to the second quarter of 1998. As
previously discussed, the yield on average earning assets and the rate paid on
funding sources have both been negatively impacted by a declining interest rate
environment.
Average earning assets increased by $6,193,342,000, or 85.1%, and
$6,289,166,000, or 85.9%, for the six months and second quarter of 1999,
respectively, over the same periods in 1998, primarily due to the BancWest
Merger.
Average loans for the first six months and second quarter of 1999 increased by
$5,321,504,000, or 85.4%, and $5,423,778,000, or 86.8%, respectively, over the
same periods in 1998. The mix of loans continues to change as the Company
diversifies its loan portfolio, both geographically and by industry. These
efforts have resulted in growth from the Company's banking operations in
California and the Pacific Northwest. The BancWest Merger further enhanced our
loan diversification strategy.
Average interest-bearing deposits and liabilities increased by $5,148,460,000,
or 82.1%, and $5,398,321,000, or 85.6%, for the first six months and second
quarter of 1999, respectively, over the same periods in 1998. The BancWest
Merger was primarily responsible for these increases.
11
<PAGE> 13
The following table sets forth consolidated average balance sheets, an analysis
of interest income/expense and average yield/rate for each major category of
interest-earning assets and interest-bearing liabilities for the periods
indicated on a taxable equivalent basis. The tax equivalent adjustment is made
for items exempt from Federal income taxes (assuming a 35% tax rate for 1999 and
1998) to make them comparable with taxable items before any income taxes are
applied.
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
-------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- -------------------------------------------
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
ASSETS BALANCE EXPENSE RATE(1) Balance Expense Rate(1)
----------- ----------- -------- ----------- ----------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Interest-bearing deposits
in other banks $ 303,989 $ 3,876 5.11% $ 178,476 $ 2,646 5.95%
Federal funds sold and
securities purchased
under agreements to
resell 103,645 1,201 4.65 175,756 2,374 5.42
Investment securities(2) 1,530,356 22,603 5.92 718,370 11,868 6.63
Loans and leases(3),(4) 11,674,093 232,986 8.00 6,250,315 135,719 8.71
----------- ----------- -----------
Total earning assets 13,612,083 260,666 7.68 7,322,917 152,607 8.36
-----------
Nonearning assets 1,672,367 802,840
----------- -----------
Total assets $15,284,450 $ 8,125,757
=========== ===========
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------------
1999 1998
------------------------------------------- -------------------------------------------
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
ASSETS BALANCE EXPENSE RATE(1) Balance Expense Rate(1)
----------- ----------- -------- ----------- ----------- -------
(dollars in thousands)
Earning assets:
Interest-bearing deposits
in other banks $ 267,747 $ 6,814 5.13% $ 156,733 $ 4,724 6.08%
Federal funds sold and
securities purchased
under agreements to
resell 103,200 2,419 4.73 158,674 4,241 5.39
Investment securities(2) 1,546,782 45,992 6.00 730,484 24,426 6.74
Loans and leases(3),(4) 11,552,731 465,565 8.13 6,231,227 270,601 8.76
----------- ----------- ----------- ----------- ----
Total earning assets 13,470,460 520,790 7.80 7,277,118 303,992 8.42
----------- -----------
Nonearning assets 1,675,372 792,508
----------- -----------
Total assets $15,145,832 $ 8,069,626
=========== ===========
</TABLE>
(1) Annualized.
(2) Average balances exclude the effects of fair value adjustments.
(3) Nonaccruing loans and leases have been included in the computations of
average loan and lease balances.
(4) Interest income for loans and leases included loan fees of $7,399 and
$15,881 for the quarter and six months ended June 30, 1999, respectively,
and $6,555 and $13,542 for the quarter and six months ended June 30, 1998,
respectively.
12
<PAGE> 14
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
----------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------ -----------------------------------------------
INTEREST Interest
LIABILITIES AND AVERAGE INCOME/ YIELD/ Average Income/ Yield/
STOCKHOLDERS' EQUITY BALANCE EXPENSE RATE(1) Balance Expense Rate(1)
----------- ----------- ------- ----------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
and liabilities:
Deposits $10,216,624 $ 83,414 3.27% $ 5,316,899 $ 51,798 3.91%
Short-term borrowings 702,456 7,925 4.53 669,174 8,756 5.25
Long-term debt and
capital securities 782,207 11,750 6.03 316,893 5,591 7.08
----------- ----------- ----------- -----------
Total interest-bearing
deposits and
liabilities 11,701,287 103,089 3.53 6,302,966 66,145 4.21
----------- ---- ----------- ----
Interest rate spread 4.15% 4.15%
==== ====
Noninterest-bearing demand
deposits 1,363,468 832,415
Other liabilities 516,783 246,122
----------- -----------
Total liabilities 13,581,538 7,381,503
Stockholders' equity 1,702,912 744,254
----------- -----------
Total liabilities and
stockholders'
equity $15,284,450 $ 8,125,757
=========== ===========
Net interest income
and margin on
earning assets 157,577 4.64% 86,462 4.74%
==== ====
Tax equivalent adjustment 12 13
----------- -----------
Net interest income $ 157,565 $ 86,449
=========== ===========
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------------------------
1999 1998
----------------------------------------------- -----------------------------------------------
INTEREST Interest
LIABILITIES AND AVERAGE INCOME/ YIELD/ Average Income/ Yield/
STOCKHOLDERS' EQUITY BALANCE EXPENSE RATE (1) Balance Expense Rate (1)
----------- ----------- -------- ----------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
and liabilities:
Deposits $ 9,909,120 $ 165,390 3.37% $ 5,277,947 $ 102,831 3.93%
Short-term borrowings 751,524 17,034 4.57 679,356 17,863 5.30
Long-term debt and
capital securities 762,556 22,925 6.06 317,437 11,196 7.11
----------- ----------- ----------- -----------
Total interest-bearing
deposits and
liabilities 11,423,200 205,349 3.63 6,274,740 131,890 4.24
----------- ---- ----------- ----
Interest rate spread 4.17% 4.18%
==== ====
Noninterest-bearing demand
deposits 1,530,447 819,631
Other liabilities 501,760 237,524
----------- -----------
Total liabilities 13,455,407 7,331,895
Stockholders' equity 1,690,425 737,731
----------- -----------
Total liabilities and
stockholders'
equity $15,145,832 $8,069,626
=========== ===========
Net interest income
and margin on
earning assets 315,441 4.72% 172,102 4.77%
==== ====
Tax equivalent adjustment 29 75
----------- -----------
Net interest income $ 315,412 $ 172,027
=========== ===========
</TABLE>
(1) Annualized.
13
<PAGE> 15
INVESTMENT SECURITIES
HELD-TO-MATURITY
The following table presents the amortized cost and fair values of
held-to-maturity investment securities as of the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, December 31, June 30,
1999 1998 1998
--------- ------------ ----------
(in thousands)
<S> <C> <C> <C>
Amortized cost $ 208,492 $ 290,922 $ --
--------- --------- ----------
Unrealized gains 101 1,074 --
Unrealized losses (2,330) (582) --
--------- --------- ---------
Fair value $ 206,263 $ 291,414 $ --
========= ========= =========
</TABLE>
Gross realized gains and losses for the six months ended June 30, 1999 and 1998
were not significant.
AVAILABLE-FOR-SALE
The following table presents the amortized cost and fair values of
available-for-sale investment securities as of the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, December 31, June 30,
1999 1998 1998
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Amortized cost $ 1,318,984 $ 1,337,099 $ 705,103
Unrealized gains 7,303 11,400 10,554
Unrealized losses (6,502) (1,505) (57)
----------- ----------- -----------
Fair value $ 1,319,785 $ 1,346,994 $ 715,600
=========== =========== ===========
</TABLE>
Gross realized gains and losses on available-for-sale investment securities for
the six months ended June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Realized gains $ 2 $ --
Realized losses (22) (5)
---------- ----------
Securities losses, net $ (20) $ (5)
========== ==========
</TABLE>
Gains and losses realized on the sales of available-for-sale investment
securities are determined using the specific identification method.
14
<PAGE> 16
LOANS AND LEASES
The following table sets forth the loan and lease portfolio by major categories
and loan and lease mix at June 30, 1999, December 31, 1998 and June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1999 December 31, 1998 June 30, 1998
------------------------- ------------------------- -------------------------
AMOUNT % Amount % Amount %
---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 2,175,011 18.6% $ 2,089,351 18.4% $ 1,624,529 25.8%
Real estate:
Commercial 2,010,643 17.2 1,928,741 17.0 1,254,752 19.9
Construction 368,669 3.1 359,220 3.2 163,078 2.6
Residential:
Insured, guaranteed or
conventional 2,001,117 17.1 2,176,995 19.2 1,382,921 21.9
Home equity credit lines 453,530 3.9 475,280 4.2 427,620 6.8
----------- ----------- ----------- ----------- ----------- -----------
Total real estate loans 4,833,959 41.3 4,940,236 43.6 3,228,371 51.2
----------- ----------- ----------- ----------- ----------- -----------
Consumer 2,777,670 23.7 2,572,873 22.6 724,002 11.5
Lease financing 1,569,751 13.4 1,355,538 12.0 345,576 5.5
Foreign 353,173 3.0 381,582 3.4 382,351 6.0
----------- ----------- ----------- ----------- ----------- -----------
Total loans and leases 11,709,564 100.0% 11,339,580 100.0% 6,304,829 100.0%
=========== =========== ===========
Less allowance for credit losses 151,778 149,585 85,749
----------- ----------- -----------
Total net loans and leases $11,557,786 $11,189,995 $6,219,080
=========== =========== ===========
Total loans and leases to:
Total assets 76.2% 75.3% 77.2%
Total earning assets 87.0% 86.2% 86.5%
Total deposits 101.0% 100.7% 101.7%
</TABLE>
The loan and lease portfolio is the largest component of total earning assets
and accounts for the greatest portion of total interest income. At June 30,
1999, total loans and leases were $11,709,564,000, representing increases of
3.3% and 85.7% over December 31, 1998 and June 30, 1998, respectively. The
increase in substantially all loan and lease categories from June 30, 1998 is
primarily due to the BancWest Merger.
Commercial, financial and agricultural loans as of June 30, 1999 increased
$85,660,000, or 4.1%, over December 31, 1998, and $550,482,000, or 33.9%, over
June 30, 1998. Although the Company continues its efforts to diversify its loan
and lease portfolio, both geographically and by industry, during the quarter
ended June 30, 1999 overall loan volume in the State of Hawaii continued to
decline as a result of the sluggish economy. The BancWest Merger and credit
extensions in California and the Pacific Northwest account for the majority of
the increase in loan and lease balances and geographic and industry
diversification.
Insured, guaranteed or conventional residential real estate loans decreased
$175,878,000, or 8.1%, from December 31, 1998, and increased $618,196,000, or
44.7% over June 30, 1998. The increase from June 30, 1998 primarily reflects the
effects of the BancWest Merger. The rising interest rate environment, which has
resulted in a decrease in the production of new loans, is the primary reason for
the decrease from December 31, 1998.
15
<PAGE> 17
LOANS AND LEASES, CONTINUED
Consumer loans as of June 30, 1999 increased $204,797,000, or 8.0%, over
December 31, 1998, and $2,053,668,000, or 283.7%, over June 30, 1998. Consumer
loans consist primarily of direct and indirect automobile, credit card and
unsecured financing. The increase over June 30, 1998 is primarily due to the
BancWest Merger and automobile financing in California and Oregon. The increase
in consumer loans at June 30, 1999 as compared to December 31, 1998 is primarily
a result of growth in the Company's California and Pacific Northwest portfolio.
Lease financing as of June 30, 1999 increased $214,213,000, or 15.8%, over June
30, 1998, and $1,224,175,000, or 354.2%, over June 30, 1998. The increase in
lease financing from June 30, 1998 was primarily due to the BancWest Merger and
an increase in the automobile lease portfolio in California. The increase in
lease financing at June 30, 1999, as compared to December 31, 1998, is primarily
due to an increase in the Company's California and Pacific Northwest consumer
lease portfolio.
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, letter of
credit financing and international funds transfer. International activities are
identified on the basis of the domicile of the applicable customer. Foreign
loans as of June 30, 1999, decreased $28,409,000, or 7.4%, compared to December
31, 1998.
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 June 30, 1999, the
Company did not have a concentration of loans greater than 10% of total loans
which is not otherwise disclosed as a category of loans as shown in the above
table.
16
<PAGE> 18
NONPERFORMING ASSETS
Nonperforming assets at June 30, 1999, December 31, 1998 and June 30, 1998 are
as follows:
<TABLE>
<CAPTION>
JUNE 30, December 31, June 30,
1999 1998 1998
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Nonperforming loans and leases:
Nonaccrual:
Commercial, financial and agricultural $ 23,755 $ 21,719 $ 11,348
Real estate:
Commercial 21,021 17,457 5,178
Construction 1,006 -- --
Residential:
Insured, guaranteed, or conventional 15,667 9,543 9,139
Home equity credit lines 391 333 90
-------- -------- --------
Total real estate loans 38,085 27,333 14,407
-------- -------- --------
Consumer 2,163 2,366 92
Lease financing 2,573 1,816 121
Foreign 1,515 1,174 331
-------- -------- --------
Total nonaccrual loans and leases 68,091 54,408 26,299
-------- -------- --------
Restructured:
Commercial, financial and agricultural 2,137 3,894 579
Real estate:
Commercial 20,421 30,247 32,348
Residential:
Insured, guaranteed, or conventional 1,101 1,100 1,116
Home equity credit lines -- -- --
-------- -------- --------
Total real estate loans 21,522 31,347 33,464
-------- -------- --------
Total restructured loans and leases 23,659 35,241 34,043
-------- -------- --------
Total nonperforming loans and leases 91,750 89,649 60,342
Other real estate owned and repossessed personal property 31,107 33,381 25,795
-------- -------- --------
Total nonperforming assets $122,857 $123,030 $ 86,137
======== ======== ========
Past due loans and leases(1):
Commercial, financial and agricultural $ 1,361 $ 1,569 $ 982
Real estate:
Commercial 3,218 2,379 3,547
Construction -- 440 --
Residential:
Insured, guaranteed, or conventional 12,586 23,250 23,489
Home equity credit lines 1,501 1,710 2,001
-------- -------- --------
Total real estate loans 17,305 27,779 29,037
-------- -------- --------
Consumer 2,257 3,443 3,242
Lease financing 636 -- 175
Foreign 1,666 1,816 1,348
-------- -------- --------
Total past due loans and leases $ 23,225 $ 34,607 $ 34,784
======== ======== ========
Nonperforming assets to total loans and leases and other
real estate owned and repossessed personal
property (end of period):
Excluding past due loans and leases 1.05% 1.08% 1.36%
Including past due loans and leases 1.24% 1.39% 1.91%
Nonperforming assets to total assets (end of period):
Excluding past due loans and leases .80% .82% 1.05%
Including past due loans and leases .95% 1.05% 1.48%
</TABLE>
(1) Represents loans and leases which are past due 90 days or more as to
principal and/or interest, are still accruing interest and are adequately
collateralized and in the process of collection.
17
<PAGE> 19
NONPERFORMING ASSETS, CONTINUED
Nonperforming assets at June 30, 1999 were $122,857,000, or 1.05% of total loans
and leases and other real estate owned ("OREO") and repossessed personal
property and .80% of total assets, as compared to 1.36% and 1.05%, respectively,
at June 30, 1998.
Nonperforming assets at June 30, 1999 increased by $36,720,000, or 42.6%, over
June 30, 1998. The increase was primarily due to the BancWest Merger, to two
commercial, financial and agricultural loans and to three real estate-commercial
loans placed on nonaccrual status subsequent to the second quarter of 1998. The
increase was partially offset by partial or full payoffs of three restructured
loans and sales and partial write-downs of OREO subsequent to the second quarter
of 1998.
The Company generally places loans and leases on nonaccrual status when they are
90 days past due as to principal or income unless well secured and in the
process of collection, or when management believes that collection of principal
or income has become doubtful, or when a loan is first classified as impaired.
Exceptions are made to the general rules regarding loans 90 days past due when
the fair value of the collateral exceeds the Company's recorded investment in
the loan or when other factors are present which indicate that the borrower will
shortly bring the loan current. While the majority of consumer loans and leases
are subject to the Company's general policies regarding nonaccrual loans,
certain past due consumer loans and leases are not placed on nonaccrual status
because they are generally charged off upon reaching a predetermined delinquency
status that ranges from 120 to 180 days and varies by product type. When loans
and leases are placed on nonaccrual status, previously accrued and uncollected
interest is reversed against interest income of the current period. Cash
interest payments received on nonaccrual loans are applied as a reduction of the
principal balance when doubt exists as to the ultimate collection of the
principal; otherwise, such payments are recorded as income. Nonaccrual loans and
leases are generally returned to accrual status when they become current as to
principal and interest or become both well secured and in the process of
collection. At June 30, 1999, the Company was not aware of any significant
potential problem loans (not otherwise classified as nonperforming or past due
in the table on page 17) where possible credit problems of the borrower caused
management to have serious concerns as to the ability of such borrower to comply
with the present loan repayment terms.
Loans past due 90 days or more and still accruing interest totaled $23,225,000
at June 30, 1999, a decrease of $11,559,000, or 33.2%, compared to June 30,
1998. All of the loans which are past due 90 days or more and still accruing
interest are, in management's judgment, adequately collateralized and in the
process of collection.
Although Hawaii's recovery from its 1991 recession continues to be slow, the
economies in California and the Pacific Northwest continue to expand. This is
evidenced by the decline in the ratios of nonperforming assets to total loans
and leases including OREO and repossessed personal property and of nonperforming
assets to total assets as of June 30, 1999, which includes the impact of the
California-based operations of Bank of the West, as compared to June 30, 1998.
18
<PAGE> 20
DEPOSITS
The following table sets forth the average balances and the average rates paid
on deposits for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
-----------------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
AVERAGE AVERAGE Average Average
BALANCE RATE(1) Balance Rate(1)
----------- -------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing demand $ 292,967 1.14% $ 521,455 2.57%
Savings 4,737,187 1.86 2,118,145 2.55
Time 5,186,470 4.69 2,677,299 5.24
----------- -----------
Total interest-bearing deposits 10,216,624 3.27 5,316,899 3.91
Noninterest-bearing demand 1,363,468 -- 832,415 --
----------- -----------
Total deposits $11,580,092 2.89% $ 6,149,314 3.38%
=========== ===========
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
AVERAGE AVERAGE Average Average
BALANCE RATE(1) Balance Rate(1)
----------- -------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing demand $ 300,378 1.16% $ 502,798 2.65%
Savings 4,509,094 1.94 2,123,843 2.54
Time 5,099,648 4.75 2,651,306 5.29
----------- -----------
Total interest-bearing deposits 9,909,120 3.37 5,277,947 3.93
Noninterest-bearing demand 1,530,447 -- 819,631 --
----------- -----------
Total deposits $11,439,567 2.92% $ 6,097,578 3.40%
=========== ===========
</TABLE>
Average interest-bearing deposits increased $4,631,173,000, or 87.7%, and
$4,899,725,000, or 92.2%, for the first six months and second quarter of 1999,
respectively, over the same periods in 1998. The increases in nearly all deposit
categories over the same periods in the prior year are primarily due to the
BancWest Merger. The decrease in average interest-bearing demand deposits is a
result of depositors seeking higher yields through deposit product programs.
Noninterest-bearing demand deposits decreased $638,568,000, or 31.6%, from
$2,018,561,000 at December 31, 1998 to $1,379,993,000 at June 30, 1999. The
decrease was due to the reclassification of certain portions of
noninterest-bearing demand deposit accounts to the savings deposit category for
reserve requirement purposes.
(1) Annualized.
19
<PAGE> 21
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The following table sets forth the activity in the allowance for credit losses
for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans and leases outstanding (end of period) $ 11,709,564 $ 6,304,829 $ 11,709,564 $ 6,304,829
============ ============ ============ ============
Average loans and leases outstanding $ 11,674,093 $ 6,250,315 $ 11,552,731 $ 6,231,227
============ ============ ============ ============
Allowance for credit losses summary:
Balance at beginning of period $ 150,371 $ 83,154 $ 149,585 $ 82,596
------------ ------------ ------------ ------------
Loans and leases charged off:
Commercial, financial and agricultural 2,094 545 3,686 1,460
Real estate:
Commercial 1,774 419 1,774 420
Construction -- -- -- --
Residential 807 898 1,667 1,617
Consumer 6,741 3,826 13,593 7,682
Lease financing 2,159 5 3,616 5
Foreign 172 109 260 216
------------ ------------ ------------ ------------
Total loans and leases charged off 13,747 5,802 24,596 11,400
------------ ------------ ------------ ------------
Recoveries on loans and leases charged off:
Commercial, financial and agricultural 155 44 216 662
Real estate:
Commercial 144 120 157 515
Construction -- -- 18 --
Residential 133 72 506 73
Consumer 1,476 614 2,656 1,323
Lease financing 400 -- 760 --
Foreign 1 31 6 68
------------ ------------ ------------ ------------
Total recoveries on loans and leases
previously charged off 2,309 881 4,319 2,641
------------ ------------ ------------ ------------
Net charge-offs (11,438) (4,921) (20,277) (8,759)
Provision for credit losses 12,845 7,516 22,470 11,912
------------ ------------ ------------ ------------
Balance at end of period $ 151,778 $ 85,749 $ 151,778 $ 85,749
============ ============ ============ ============
Net loans and leases charged off to average loans .39%(1) .32%(1) .35%(1) .28%(1)
and leases
Net loans and leases charged off to allowance for
credit losses 30.23%(1) 23.02%(1) 26.94%(1) 20.60%(1)
Allowance for credit losses to total
loans and leases (end of period) 1.30% 1.36% 1.30% 1.36%
Allowance for credit losses to nonperforming
loans and leases (end of period):
Excluding 90 days past due
accruing loans and leases 1.65X 1.42x 1.65X 1.42x
Including 90 days past due
accruing loans and leases 1.32X .90x 1.32X .90x
</TABLE>
(1) Annualized.
20
<PAGE> 22
PROVISION AND ALLOWANCE FOR CREDIT LOSSES, CONTINUED
The provision for credit losses for the first six months of 1999 was
$22,470,000, an increase of $10,558,000, or 88.6%, over the same period in 1998.
The increase in the provision for credit losses for the first six months of 1999
over the same period in 1998 primarily reflects the larger loan portfolio
resulting from the BancWest Merger and the prolonged economic downturn in
Hawaii, which has resulted in a higher level of charge-offs.
The provision for credit losses is based upon management's judgment as to the
adequacy of the allowance for credit losses (the "Allowance") to absorb future
losses. The Company uses a systematic methodology to determine the adequacy of
the Allowance and related provision for credit losses to be reported for
financial statement purposes. The determination of the adequacy of the Allowance
is ultimately one of management judgment, which includes consideration of many
factors, including, among other things, the amount of problem and potential
problem loans and leases, net charge-off experience, changes in the composition
of the loan and lease portfolio by type and location of loans and leases and in
overall loan and lease risk profile and quality, general economic factors and
the fair value of collateral.
Charge-offs were $24,596,000 for the first six months of 1999, an increase of
$13,196,000, or 115.8%, over the same period in 1998. The increase was primarily
due to the BancWest Merger and partial charge-offs of three commercial,
financial and agricultural loans and one real estate - commercial loan totaling
$4,252,000 for the first six months of 1999 as compared to partial charge-offs
for four commercial, financial and agricultural loans and one real estate -
residential loan totaling $1,101,000 for the first six months of 1998. Consumer
loan charge-offs were negatively impacted by the ongoing sluggish Hawaii economy
and a continued increase in personal bankruptcies. Smaller balance homogeneous
credit card and consumer loans are charged off at a predetermined delinquency
status or earlier if the Company determines that the loan is uncollectible.
For the first six months of 1999, recoveries increased $1,678,000, or 63.5%,
over the same period in 1998. The increase was primarily due to the BancWest
Merger, partially offset by a $548,000 recovery on a commercial, financial and
agricultural loan and a $272,000 recovery on a real estate - commercial loan in
the first quarter of 1998.
The Allowance increased to 1.65 times nonperforming loans and leases (excluding
90 days or more past due accruing loans and leases) at June 30, 1999 from 1.42
times at June 30, 1998. The increase in the Allowance is principally due to the
BancWest Merger.
In management's judgment, the Allowance was adequate to absorb potential losses
currently inherent in the loan and lease portfolio at June 30, 1999. However,
changes in prevailing economic conditions in the Company's markets could result
in changes in the level of nonperforming assets and charge-offs in the future
and, accordingly, changes in the Allowance.
NONINTEREST INCOME
Noninterest income totaled $89,077,000 and $46,368,000 for the first six months
and second quarter of 1999, respectively, an increase of $32,250,000 and
$14,929,000, or 56.8% and 47.5%, respectively, over the same periods in 1998.
Trust and investment services income increased $3,391,000 and $2,016,000, or
25.3% and 32.2%, for the first six months and second quarter of 1999,
respectively, over the same periods in 1998. These increases were primarily due
to higher investment and trust management fees earned.
Service charges on deposit accounts increased $16,480,000 and $8,432,000, or
112.2% and 113.7% for the first six months and second quarter of 1999,
respectively, over the same periods in 1998. These increases were primarily due
to the BancWest Merger and higher service charges.
Other service charges and fees increased $12,200,000 and $6,973,000, or 74.9%
and 86.3%, for the first six months and second quarter of 1999, respectively,
over the same periods in 1998. These increases were primarily due to: (1) the
BancWest Merger; (2) higher mortgage servicing fees for mortgage loans that were
originated and sold with servicing retained; (3) higher ATM convenience fee
income; and (4) higher merchant discount fees.
Other noninterest income for the first six months of 1999 increased by $194,000,
or 1.6%, over the same period in 1998. Other noninterest income for second
quarter of 1999 decreased by $2,484,000, or 25.7%, compared to the second
quarter of 1998. The decrease in the second quarter was primarily due to gains
on sales in the second quarter of 1998 for a corporate aircraft and the Maui
regional manager's residence of $3,907,000 and $2,115,000, respectively,
partially offset by the effects of the BancWest Merger.
21
<PAGE> 23
NONINTEREST EXPENSE
Noninterest expense totaled $241,800,000 for the first six months of 1999, an
increase of 61.4% over the same period in 1998. Noninterest expense totaled
$121,264,000 for the second quarter of 1999, an increase of 58.6% over the same
period a year ago.
Total personnel expense (salaries and wages and employee benefits) increased
$37,388,000 and $19,453,000, or 52.9% and 55.3% for the first six months and
second quarter of 1999, respectively, over the same periods in 1998. The
increase was primarily due to the larger number of employees resulting from the
BancWest Merger. The increase was partially offset by lower salaries and wages
expense as a result of the Company's re-engineering and consolidation efforts
and higher pension credits.
Occupancy expense for the first six months of 1999 increased $8,964,000, or
45.9%, over the same period in 1998. The occupancy expense for the second
quarter of 1999 increased $4,348,000, or 44.5%, over the same period in 1998.
The primary reason for these increases was the increase in the amount of
facilities resulting from the BancWest Merger.
Equipment expense increased $1,403,000 and $584,000, or 10.7% and 8.7%,
respectively, for the first six months and second quarter of 1999, over the same
periods in 1998. The increase was primarily the result of the increase in the
amount of equipment due to the BancWest Merger, partially offset by lower
depreciation expense on furniture and equipment.
Intangible amortization increased $13,384,000 and $5,988,000, for the first six
months and second quarter, respectively, over the same periods in 1998,
primarily due to increased amortization expense in 1999, resulting from the
$599,000,000 BancWest Merger-related increase in goodwill.
Other noninterest expense increased $30,802,000 and $14,450,000 for the first
six months and second quarter of 1999, respectively, an increase of 73.0% and
65.9% over the same periods in 1998. These increases were the result of: (1) the
BancWest Merger; (2) write-downs and losses on the sale of certain OREO; (3)
higher outside service expenses primarily related to the year 2000 project (see
year 2000 disclosure on pages 23 to 26); (4) higher foreclosed property
expenses; and (5) the charitable donation of a recreational center to a
community group in Hawaii resulting in a pre-tax loss on disposal of $1,277,000.
The Company recorded restructuring, BancWest Merger-related and other
nonrecurring costs totaling $25,527,000, of which $11,302,000 was accrued as a
liability in 1998. During the first six months of 1999, this liability was
reduced by a total of $5,210,000, as a result of: (1) the payment of $1,975,000
for data processing contract termination penalties; (2) $1,740,000 for severance
payments; (3) $527,000 for payments on other integration costs; and (4) $968,000
related to excess leased commercial properties.
INCOME TAXES
The Company's effective income tax rate (exclusive of the tax equivalent
adjustment) for the first six months and second quarter of 1999 was 41.3% and
39.8%, as compared to 36.1% for the same periods in 1998. The higher rates in
1999 primarily reflect the increased amortization of goodwill and intangible
assets resulting from the BancWest Merger, from which the Company receives no
benefit, partially offset by the tax benefit of the charitable donation of the
recreational center.
LIQUIDITY AND CAPITAL
Stockholders' equity was $1,722,642,000 at June 30, 1999, an increase of 3.3%
over $1,667,886,000 at December 31, 1998. Compared to June 30, 1998,
stockholders' equity at June 30, 1999 increased by $968,001,000, or 128.3%. The
increase is primarily due to the issuance of 25,814,768 shares of Class A Common
Stock on November 1, 1998, in connection with the BancWest Merger.
22
<PAGE> 24
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 June 30, 1999) of Tier 1 and Total Capital to risk-weighted
assets, and of Tier 1 Capital to average assets.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
--------------------------- --------------------------
Amount Ratio Amount Ratio
---------- ---- ---------- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 Capital to
Risk-Weighted
Assets $1,157,474 8.54% $ 542,229 4.00%
Total Capital to
Risk-Weighted
Assets $1,427,595 10.53% $1,084,458 8.00%
Tier 1 Capital to
Average Assets $1,157,474 7.92% $ 438,593 3.00%
</TABLE>
As of June 30, 1999, the Company's depository institution subsidiaries were
categorized as well-capitalized under the applicable Federal regulations
regarding the regulatory framework for prompt corrective action. To be
categorized as well-capitalized, the Company's depository institution
subsidiaries must, among other things, maintain Tier 1 risk-based and total
risk-based capital ratios of 6% and 10%, respectively.
YEAR 2000 ISSUES
BACKGROUND
Many computer programs were written, and many computer chips were programmed, to
use only two digits to identify the year. Thus, a computer program could read
the digits "00" as the year 2000 or as the year 1900. If not corrected, software
and computer systems may fail or create erroneous results in the year 2000.
Also, computer chips embedded in many operating facilities--such as elevators
and communication systems--may cause equipment malfunctions because of the year
2000 date change. These potential software and systems problems may affect the
Company, the outside companies and agencies that the Company relies upon to
conduct its business and to service its customers ("External Parties"), and the
Company's borrowers. Failure by the Company or these third parties to
successfully address year 2000 issues could have a material and adverse effect
on the Company's business or consolidated results of operations or financial
condition.
The Company's programs to address these issues are being carried out by its
subsidiary banks, First Hawaiian and Bank of the West. Each bank has formed
management teams to address year 2000 issues. The teams report to the applicable
bank's senior management and to its Board of Directors or audit committee, which
in turn reports to the audit committee of the Company's Board of Directors.
The Company's year 2000 programs are designed to comply with guidelines issued
by the Federal Financial Institutions Examination Council (the "FFIEC"). The
Federal Deposit Insurance Corporation (the "FDIC") and Federal Reserve, which
are members of the FFIEC, conduct year 2000 compliance examinations of the
Company, First Hawaiian and Bank of the West. These examinations result in one
of three ratings: "satisfactory," "needs improvement," or "unsatisfactory," and
institutions that receive a rating of unsatisfactory may be subject to formal
enforcement action, supervisory agreements, cease and desist orders, civil money
penalties, or the appointment of a conservator. Disclosure of these ratings is
not permitted by Federal regulations.
Each bank's program includes the five major phases suggested in FFIEC guidelines
- --awareness, assessment, renovation (remediation or replacement of noncompliant
items), validation (which includes stand-alone and integration testing), and
implementation. In the assessment phase, the banks classified items to be
addressed as "mission critical" or "non-mission critical." Mission critical
items are those applications or systems that are vital to the successful
continuance of a core business activity of the bank.
First Hawaiian and Bank of the West have substantially different data processing
environments and consequently different approaches to addressing year 2000
issues. While both banks rely heavily on third-party-provided software, First
Hawaiian has operated its own data center to meet the majority of its systems'
requirements, while Bank of the West has outsourced its primary data processing
services. Because of this key difference in data processing environments,
implementation of each bank's year 2000 program is discussed separately below.
23
<PAGE> 25
STATUS OF IMPLEMENTATION OF FIRST HAWAIIAN'S PROGRAM
First Hawaiian completed the first three phases of the program for mission
critical systems by December 31, 1998, and by June 30, 1999 had successfully
completed all five phases of the program for mission critical systems, meeting a
goal established by the FFIEC. In addition, by June 30, 1999, First Hawaiian had
completed all five phases of the program for over 99% of non-mission critical
systems.
EXTERNAL PARTIES
First Hawaiian is continuing to assess the year 2000 compliance efforts of
significant External Parties. It has categorized External Parties as follows:
(1) external processors--vendors who provide core business processing services,
such as credit card processing, and vendors who provide information access for
First Hawaiian's customers, such as business and home P.C. banking; (2) external
interfaces--companies and agencies with whom the bank exchanges information by
electronic or nonelectronic media, such as automated clearing house
transactions; and (3) external alliances--vendors, supplies providers, business
partners, customers and other third parties that are not covered by any other
category, such as credit bureaus and stock quotation services. By March 31,
1999, First Hawaiian had completed testing with all mission critical external
processors. As of June 30, 1999, First Hawaiian had substantially completed
testing of external interfaces with mission critical parties and had completed
selected testing with customers. First Hawaiian completed the initial contact
with External Parties involved in other alliances in 1998, and by June 30, 1999
had completed the third round of follow-up contacts. This effort will continue
through the remainder of the year.
CUSTOMERS AND COUNTERPARTIES
The first stage of First Hawaiian's evaluation of year 2000 compliance by
customers included a credit risk survey and assessment process which was
completed by First Hawaiian credit officers in August 1998. Following FFIEC
guidelines and based on management judgment, all aggregate loans and commitments
to a borrower in excess of a fixed threshold were evaluated. In addition, all
applicants for new credits are being evaluated for year 2000 risk among other
underwriting risks. Borrowers are classified as "high risk," "medium risk" and
"low risk" based on year 2000 status. First Hawaiian continually reassesses the
year 2000 credit risk of larger borrowers. As planned, on June 30, 1999 it
completed the re-evaluation of all large borrowers in high-, medium- and
low-risk categories to determine their progress in mitigating their year 2000
risk and whether contingency plans have been developed. Periodic reviews and
reassessments of compliance by counterparties and funds providers (major
depositors) have continued on a regular basis since the completion of the
initial assessment last year, and will be a focus area throughout the second
half of 1999.
STATUS OF IMPLEMENTATION OF BANK OF THE WEST'S PROGRAM
Bank of the West completed all five phases of its year 2000 program for all
mission critical systems prior to June 30, 1999, meeting the goal established by
the FFIEC. Bank of the West's mainframe systems have completed future date
testing and are currently running in production. Testing of non-mission critical
distributed systems is proceeding on plan, with all five phases of the program
completed for approximately 70% of these systems as of June 30, 1999. Testing of
non-mission critical systems will continue throughout the remainder of the year.
EXTERNAL PARTIES
Bank of the West has also assessed the year 2000 compliance efforts of key
External Parties. The bank has categorized External Parties similarly to First
Hawaiian, as discussed above. The bank has received periodic reports from its
primary external processors, which indicate that they are on or ahead of
schedule with their year 2000 plans. Additionally, regulatory agencies are
performing periodic reviews of these service processors' progress on year 2000
readiness and providing copies of their evaluations to Bank of the West and
other banks serviced by these external processors.
As of June 30, 1999, Bank of the West had successfully completed interface
third-party testing with all mission critical external processors and had
substantially completed interface testing with other selected vendors,
processors and customers. Year 2000 readiness questionnaires have been sent to
all key external alliance parties. Responses have been and will continue to be
monitored throughout the remainder of the year.
CUSTOMERS AND COUNTERPARTIES
Bank of the West completed its initial assessment program in October 1998 with
respect to year 2000 compliance by funds providers (such as major depositors),
funds users (such as borrowers) and counterparties. Customers and counterparties
were selected for review based on FFIEC guidelines and management judgment. The
customers and counterparties were classified as "high risk," "medium risk" or
"low risk" based on their year 2000 status. This assessment was updated in
February 1999 and again in June 1999. All applicants for new credits at Bank of
the West are being evaluated for year 2000 risk among other underwriting
factors. Reassessment and review of customer and counterparty risk will continue
throughout 1999.
24
<PAGE> 26
BUDGET
The Company's current estimates of the total cost related solely to the year
2000 program is $12.3 million through June 30, 2000. Additionally, it estimates
that a total of $5.4 million has been and will be required for purchase and
installation of new or replacement systems or equipment that were accelerated to
address year 2000 issues. The source of these funds has been and will be the
operating cash flow of the Company. From the beginning of the year 2000 programs
through June 30, 1999, an aggregate of $8.2 million has been expended on costs
related solely to year 2000 compliance efforts, and $3.8 million has been spent
on the planning and accelerated installation of systems and applications to
address the year 2000 compliance issues as described above. For the six months
ended June 30, 1999, the Company expended $1.9 million on costs related solely
to year 2000 compliance and $.9 million on accelerated systems and applications.
CONTINGENCY PLANS
Both First Hawaiian and Bank of the West have prepared contingency plans to
minimize the possibility of disruptions to their respective bank operations due
to year 2000 issues. The plans address recovery of critical business processes
and alternatives to mitigate potential effects of service interruptions caused
by bank systems, service providers or other External Parties. Alternative
strategies and contingency plans for liquidity and cash are also being developed
as part of the year 2000 readiness plans for both banks. The contingency plans
for critical business operations of both banks were completed by June 30, 1999,
the milestone recommended by FFIEC guidelines. Validation of these plans has
begun, and testing will occur throughout the remainder of 1999.
RISKS
Even though the Company expects that the First Hawaiian and Bank of the West
programs will adequately address year 2000 issues, there can be no assurance
that unforeseen difficulties will not arise and impact the Company's business or
consolidated results of operations or financial condition. There is an
additional risk that may be posed by potential failure of certain parties, such
as power, telecommunication and transportation utilities or governmental
agencies, to resolve year 2000 issues where alternative providers of services
are not available. The Company's exposure to such infrastructure risks varies by
location, in part because operations conducted in Hawaii and other island
locations do not have access to adjacent power grids. For that reason and
others, the Company is closely monitoring the year 2000 status and contingency
plans of island-based utility providers, shippers and other parties that provide
critical infrastructure to such locations.
Readers are cautioned that forward-looking statements in this discussion of year
2000 issues should be read in conjunction with the discussion of the risks and
uncertainties relating to such forward-looking statements on page 8.
The disclosure contained in this Form 10-Q quarterly report, as well as the
information in the Company's 1998 and 1997 Annual Reports and its 1999 and 1998
Form 10-Q quarterly reports filed by the Company with the Securities and
Exchange Commission regarding its year 2000 readiness, are designated as year
2000 readiness disclosures under the Year 2000 Information and Readiness
Disclosure Act.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union (the
"Participating Countries") established fixed conversion rates between their
existing sovereign currencies (the "Legacy Currencies") and the euro. The
Participating Countries have adopted the euro as their common legal currency on
that date. On January 1, 1999, the euro also began trading on currency exchanges
and became available for non-cash transactions.
Following the introduction of the euro on January 1, 1999, the Legacy Currencies
are scheduled to remain legal tender in the Participating Countries as
denominations of the euro between January 1, 1999 and January 1, 2002. Beginning
January 1, 2002, the Participating Countries will issue new euro-denominated
bills and coins for use in cash transactions. No later than July 1, 2002, the
Participating Countries will withdraw all bills and coins denominated in the
Legacy Currencies, so that the Legacy Currencies no longer will be legal tender
for any transactions, making conversion to the euro complete.
As a provider of foreign exchange, custody, cash management and funds transfer
services, the Company has actively prepared for the introduction of the euro.
Similar to the year 2000 issue, euro preparations have required conversion of
various operating and processing systems to avoid interruption in the Company's
ongoing business activities. The costs associated with the euro conversion have
been expensed in the period in which they were incurred and have not been
material.
25
<PAGE> 27
The business conducted by the Company in the Participating Countries is not
material to its earnings. Furthermore, all of the Company's derivatives are
based on either domestic interest rates or London Interbank Offered Rates
("LIBOR"). Although the business conducted by the Company in Participating
Countries is not material, the Company has actively developed contingency plans
to deal with any liquidity issues that may result if changes in payment,
clearing or settlement procedures result in an increase in misrouted funds.
These plans have also addressed likely problems following conversion in order to
maximize the Company's ability to avoid disruptions. While the Company does not
currently expect that the impact of the conversion will be material to its
consolidated financial condition or results of operations, it cannot be assured
that third parties on whom it relies will be fully prepared.
Readers are cautioned that forward-looking statements in this discussion of the
euro conversion should be read in conjunction with the discussion of the risks
and uncertainties relating to such forward-looking statements on page 8.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 1999, there was no significant change in the Company's market risk
from the information provided with respect to "Quantitative and Qualitative
Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998. Quantitative and qualitative
disclosures regarding the Company's market risk are also included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (page 44) and "Notes to Consolidated Financial Statements" (page 58
and 59) in the Financial Review section of the Company's Annual Report 1998.
26
<PAGE> 28
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on April 15, 1999, the
stockholders voted on the following matters:
(a) Election of three Non-Class A Directors for a term of three years
expiring in 2002, or until their successors are elected and
qualified:
<TABLE>
<CAPTION>
Votes
------------------------------------------------------------------------------
Name For Withheld
---- --- --------
<S> <C> <C> <C> <C>
Walter A. Dods, Jr. 28,671,516 (99.8%) 43,597 (.2%)
Paul Mullin Ganley 28,673,243 (99.9%) 41,870 (.1%)
Dr. Fujio Matsuda 28,671,571 (99.8%) 43,542 (.2%)
</TABLE>
There were no abstentions.
The following persons continue as directors for the terms indicated as
follows:
<TABLE>
<CAPTION>
Expiration of
Director Term of Office
-------- --------------
<S> <C>
John W. A. Buyers 2000
David M. Haig 2000
John A. Hoag 2000
John K. Tsui 2000
Dr. Julia Ann Frohlich 2001
Bert T. Kobayashi, Jr. 2001
Fred C. Weyand 2001
Robert C. Wo 2001
</TABLE>
(b) Election of PricewaterhouseCoopers LLP, as the auditor of the
Company to serve for the ensuing year: for - 28,624,593 (99.7%),
against - 22,125 (.1%), abstained - 68,391 (.2%) and unvoted - 9
(less than .1%).
(c) Election of three Class A Directors for a term of three years
expiring in 2002, or until their successors are elected and
qualified:
<TABLE>
<CAPTION>
Votes
---------------------------------------------------------------------------
Name For Withheld
---- --- --------
<S> <C> <C> <C>
Jacques Ardant 25,814,768 (100%) --
Yves Martrenchar 25,814,768 (100%) --
Don J. McGrath 25,814,768 (100%) --
</TABLE>
The following persons continue as Class A Directors for the terms
indicated as follows:
<TABLE>
<CAPTION>
Expiration of
Director Term of Office
-------- --------------
<S> <C>
Michel Larrouilh 2000
Joel Sibrac 2000
Jacques Henri Wahl 2000
Robert A. Fuhrman 2001
Vivien Levy-Garboua 2001
Rodney R. Peck 2001
</TABLE>
27
<PAGE> 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 Statement regarding computation of ratios.
Exhibit 27 Financial data schedule.
(b) Reports on Form 8-K - On June 11, 1999, BancWest filed a
Current Report on Form 8-K disclosing under Item 5 that
BancWest had issued a prospectus supplement, dated June 10,
1999, for a public offering of 350,000 shares of BancWest
common stock at a price of $37.0625 a share under BancWest's
Registration Statement on Form S-3 (as filed on May 19, 1999).
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BANCWEST CORPORATION
(REGISTRANT)
Date August 11, 1999 By /s/ HOWARD H. KARR
-------------------- --------------------------------
HOWARD H. KARR
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
29
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
12 Statement regarding computation of ratios.
27 Financial data schedule.
</TABLE>
<PAGE> 1
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIOS
BancWest Corporation and Subsidiaries
Computation of Consolidated Ratios of Earnings to Fixed Charges
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Income before income taxes $ 69,824 $ 33,931 $140,219 $ 67,083
-------- -------- -------- --------
Fixed charges(1):
Interest expense 103,089 66,145 205,349 131,890
Rental expense 3,672 2,704 7,405 5,444
-------- -------- -------- --------
106,761 68,849 212,754 137,334
Less interest on deposits 83,414 51,798 165,390 102,831
-------- -------- -------- --------
Net fixed charges 23,347 17,051 47,364 34,503
-------- -------- -------- --------
Earnings, excluding
interest on deposits $ 93,171 $ 50,982 $187,583 $101,586
======== ======== ======== ========
Earnings, including
interest on deposits $176,585 $102,780 $352,973 $204,417
======== ======== ======== ========
Ratio of earnings to fixed charges:
Excluding interest on deposits 3.99X 2.99x 3.96X 2.94x
Including interest on deposits 1.65X 1.49x 1.66X 1.49x
</TABLE>
(1) For purposes of computing the consolidated ratios of earnings to fixed
charges, earnings represent income before income taxes plus fixed charges.
Fixed charges, excluding interest on deposits, include interest (other than
on deposits), whether expensed or capitalized, and that portion of rental
expense (generally one third) deemed representative of the interest factor.
Fixed charges, including interest on deposits, consist of the foregoing
items plus interest on deposits.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's quarterly financial statements as of and for the six month period
ended June 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 618,642
<INT-BEARING-DEPOSITS> 276,054
<FED-FUNDS-SOLD> 89,784
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,319,785
<INVESTMENTS-CARRYING> 208,492
<INVESTMENTS-MARKET> 206,263
<LOANS> 11,709,564
<ALLOWANCE> 151,778
<TOTAL-ASSETS> 15,363,785
<DEPOSITS> 11,595,119
<SHORT-TERM> 752,303
<LIABILITIES-OTHER> 504,042
<LONG-TERM> 788,216
0
0
<COMMON> 59,005
<OTHER-SE> 1,663,637
<TOTAL-LIABILITIES-AND-EQUITY> 15,363,785
<INTEREST-LOAN> 465,554
<INTEREST-INVEST> 45,974
<INTEREST-OTHER> 9,233
<INTEREST-TOTAL> 520,761
<INTEREST-DEPOSIT> 165,390
<INTEREST-EXPENSE> 205,349
<INTEREST-INCOME-NET> 315,412
<LOAN-LOSSES> 22,470
<SECURITIES-GAINS> (20)
<EXPENSE-OTHER> 241,800
<INCOME-PRETAX> 140,219
<INCOME-PRE-EXTRAORDINARY> 82,260
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,260
<EPS-BASIC> 1.43
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 7.80
<LOANS-NON> 68,091
<LOANS-PAST> 23,225
<LOANS-TROUBLED> 23,659
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 149,585
<CHARGE-OFFS> 24,596
<RECOVERIES> 4,319
<ALLOWANCE-CLOSE> 151,778
<ALLOWANCE-DOMESTIC> 88,725
<ALLOWANCE-FOREIGN> 1,325
<ALLOWANCE-UNALLOCATED> 61,728
</TABLE>
