-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QZ4TARM5kQ2Z8Bs3jc/uG2WqI2u6WEQ4tOoHytvV0UqngEyOpXYeWttFUO4m+0Mk a/ViCBqfYfCSGSk4sN9irg== 0000950150-98-000814.txt : 19980514 0000950150-98-000814.hdr.sgml : 19980514 ACCESSION NUMBER: 0000950150-98-000814 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST HAWAIIAN INC CENTRAL INDEX KEY: 0000036377 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 990156159 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07949 FILM NUMBER: 98618932 BUSINESS ADDRESS: STREET 1: 999 BISHOP ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8088443703 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED 3/31/98 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------------------- FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . . . . . . . . . to . . . . . . . . . Commission file number 0-7949 --------------------------- FIRST HAWAIIAN, INC. (Exact name of registrant as specified in its charter) --------------------------- DELAWARE 99-0156159 (State of incorporation) (I.R.S. Employer Identification No.) 999 BISHOP STREET, HONOLULU, HAWAII 96813 (Address of principal executive offices) (Zip Code) (808) 525-7000 (Registrant's telephone number, including area code) --------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of each of the issuer's classes of common stock as of April 30, 1998 was: Class Outstanding - ----------------------------- ----------------- Common Stock, $5.00 Par Value 31,143,923 Shares ================================================================================ 2 PART I. FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at March 31, 1998, December 31, 1997 and March 31, 1997 2 Consolidated Statements of Income for the three months ended March 31, 1998 and 1997 3 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 4 Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 1998 and 1997 5 Notes to Consolidated Financial Statements 5 - 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 - 20 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 EXHIBIT INDEX
1 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (Unaudited) First Hawaiian, Inc. and Subsidiaries
MARCH 31, December 31, March 31, 1998 1997 1997 ----------- ----------- ----------- (in thousands) ASSETS Interest-bearing deposits in other banks $ 142,353 $ 137,930 $ 76,529 Federal funds sold and securities purchased under agreements to resell 160,000 134,274 167,800 Available-for-sale investment securities 725,688 778,124 1,061,976 Loans: Loans 6,293,908 6,238,681 5,947,296 Less allowance for loan losses 83,154 82,596 85,136 ----------- ----------- ----------- Net loans 6,210,754 6,156,085 5,862,160 ----------- ----------- ----------- Total earning assets 7,238,795 7,206,413 7,168,465 Cash and due from banks 288,260 282,905 341,295 Premises and equipment 242,170 245,999 250,001 Customers' acceptance liability 673 867 745 Core deposit premium 24,464 25,347 28,282 Goodwill 94,825 96,030 99,868 Other assets 241,789 235,531 206,791 ----------- ----------- ----------- TOTAL ASSETS $ 8,130,976 $ 8,093,092 $ 8,095,447 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 793,956 $ 903,195 $ 878,289 Interest-bearing demand 1,606,955 1,387,629 1,530,795 Savings 957,580 1,013,752 894,192 Time 2,475,012 2,490,915 2,381,044 Foreign 304,993 293,709 265,712 ----------- ----------- ----------- Total deposits 6,138,496 6,089,200 5,950,032 ----------- ----------- ----------- Short-term borrowings 695,660 721,865 960,583 Acceptances outstanding 673 867 745 Other liabilities 243,166 230,723 221,992 Long-term debt 216,731 218,736 246,443 Guaranteed preferred beneficial interests in Company's junior subordinated debentures 100,000 100,000 -- ----------- ----------- ----------- TOTAL LIABILITIES 7,394,726 7,361,391 7,379,795 ----------- ----------- ----------- Stockholders' equity: Preferred stock -- -- -- Common stock 165,952 165,952 165,952 Surplus 148,158 148,165 148,208 Retained earnings 485,233 473,659 439,359 Accumulated other comprehensive income 37 (241) 869 Treasury stock (63,130) (55,834) (38,736) ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 736,250 731,701 715,652 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,130,976 $ 8,093,092 $ 8,095,447 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 2 4 CONSOLIDATED STATEMENTS OF INCOME (Unaudited) First Hawaiian, Inc. and Subsidiaries
THREE MONTHS ENDED MARCH 31, ------------------------------------------------ 1998 1997 ------------ ------------ (in thousands, except shares and per share data) INTEREST INCOME Interest and fees on loans $ 129,946 $ 121,552 Lease financing income 4,887 3,231 Interest on investment securities: Taxable interest income 12,520 17,525 Exempt from Federal income taxes 25 232 Other interest income 3,945 2,855 ------------ ------------ Total interest income 151,323 145,395 ------------ ------------ INTEREST EXPENSE Deposits 51,033 47,207 Short-term borrowings 9,107 12,004 Long-term debt 5,605 3,670 ------------ ------------ Total interest expense 65,745 62,881 ------------ ------------ Net interest income 85,578 82,514 Provision for loan losses 4,396 3,752 ------------ ------------ Net interest income after provision for loan losses 81,182 78,762 ------------ ------------ NONINTEREST INCOME Trust and investment services income 7,169 6,755 Service charges on deposit accounts 7,272 6,797 Other service charges and fees 8,365 7,563 Securities losses, net (5) (2) Other 2,806 2,741 ------------ ------------ Total noninterest income 25,607 23,854 ------------ ------------ NONINTEREST EXPENSE Salaries and wages 27,524 28,702 Employee benefits 7,956 8,708 Occupancy expense 9,759 10,625 Equipment expense 6,446 6,086 Other 21,952 18,889 ------------ ------------ Total noninterest expense 73,637 73,010 ------------ ------------ Income before income taxes 33,152 29,606 Income taxes 11,924 9,090 ------------ ------------ NET INCOME $ 21,228 $ 20,516 ============ ============ PER SHARE DATA: BASIC EARNINGS $ .68 $ .65 ============ ============ DILUTED EARNINGS $ .68 $ .64 ============ ============ CASH DIVIDENDS $ .31 $ .31 ============ ============ AVERAGE SHARES OUTSTANDING 31,176,312 31,775,597 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 5 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) First Hawaiian, Inc. and Subsidiaries
THREE MONTHS ENDED MARCH 31, ----------------------------- 1998 1997 --------- --------- (in thousands) CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD $ 282,905 $ 333,511 --------- --------- Cash flows from operating activities: Net income 21,228 20,516 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 4,396 3,752 Depreciation and amortization 8,241 8,030 Income taxes 11,224 7,667 Decrease (increase) in interest receivable (2,124) 2,039 Increase (decrease) in interest payable (2,661) 193 Decrease (increase) in prepaid expenses (133) 3,072 Other 3,238 (12,933) --------- --------- Net cash provided by operating activities 43,409 32,336 --------- --------- Cash flows from investing activities: Net increase in interest-bearing deposits in other banks (4,423) (6,399) Net increase in Federal funds sold and securities purchased under agreements to resell (25,726) (19,430) Purchase of available-for-sale investment securities (92,791) (37,676) Proceeds from sale of available-for-sale investment securities -- 20,020 Proceeds from maturity of available-for-sale investment securities 145,689 94,769 Net increase in loans to customers (64,421) (147,684) Capital expenditures (3,810) (3,861) Other 3,299 428 --------- --------- Net cash used in investing activities (42,183) (99,833) --------- --------- Cash flows from financing activities: Net increase in deposits 49,296 13,324 Net increase (decrease) in short-term borrowings (28,205) 31,023 Proceeds from (payments on) long-term debt, net (5) 40,700 Cash dividends paid (9,654) (9,850) Issuance (repurchase) of treasury stock, net (7,303) 84 --------- --------- Net cash provided by financing activities 4,129 75,281 --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 288,260 $ 341,295 ========= ========= Supplemental disclosures: Interest paid $ 68,406 $ 62,570 ========= ========= Income taxes paid $ 700 $ 1,422 ========= ========= Supplemental schedule of noncash investing and financing activities: Loans converted into other real estate owned $ 2,311 $ 2,487 ========= ========= Loans made to facilitate the sale of other real estate owned $ 793 $ 150 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4 6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) First Hawaiian, Inc. and Subsidiaries
Accumulated Other Common Retained Comprehensive Treasury Stock Surplus Earnings Income Stock Total ---------- ---------- ---------- ------------- ---------- ---------- (in thousands, except per share data) Balance, December 31, 1997 $ 165,952 $ 148,165 $ 473,659 $ (241) $ (55,834) $ 731,701 Comprehensive income: Net income -- -- 21,228 -- -- 21,228 Unrealized valuation adjustment -- -- -- 278 -- 278 ---------- ---------- ---------- ---------- ---------- ---------- Comprehensive income -- -- 21,228 278 -- 21,506 ---------- ---------- ---------- ---------- ---------- ---------- Purchase of treasury stock -- -- -- -- (7,342) (7,342) Cash dividends ($.31 per share) -- -- (9,654) -- -- (9,654) Incentive Plan for Key Executives -- (7) -- -- 46 39 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, MARCH 31, 1998 $ 165,952 $ 148,158 $ 485,233 $ 37 $ (63,130) $ 736,250 ========== ========== ========== ========== ========== ========== Balance, December 31, 1996 $ 165,952 $ 148,196 $ 428,693 $ 1,850 $ (38,807) $ 705,884 Comprehensive income: Net income -- -- 20,516 -- -- 20,516 Unrealized valuation adjustment -- -- -- (981) -- (981) ---------- ---------- ---------- ---------- ---------- ---------- Comprehensive income -- -- 20,516 (981) -- 19,535 ---------- ---------- ---------- ---------- ---------- ---------- Cash dividends ($.31 per share) -- -- (9,850) -- -- (9,850) Incentive Plan for Key Executives -- 12 -- -- 71 83 ---------- ---------- ---------- ---------- ---------- ---------- Balance, March 31, 1997 $ 165,952 $ 148,208 $ 439,359 $ 869 $ (38,736) $ 715,652 ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) First Hawaiian, Inc. and Subsidiaries 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of First Hawaiian, Inc. and Subsidiaries (the "Company") conform with generally accepted accounting principles and practices within the banking industry. The following is a summary of significant accounting policies: CONSOLIDATION The consolidated financial statements of the Company include the accounts of First Hawaiian, Inc. and its wholly-owned subsidiaries - First Hawaiian Bank and its wholly-owned subsidiaries (the "Bank"); First Hawaiian Creditcorp, Inc. and its wholly-owned subsidiary ("Creditcorp"); Pacific One Bank ("Pacific One"); FHL Lease Holding Company, Inc.; First Hawaiian Capital I; and FHI International, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (which included only normal recurring adjustments) necessary for a fair presentation are reflected in the consolidated financial statements. RECLASSIFICATIONS Certain amounts in the consolidated financial statements for 1997 have been reclassified to conform with the 1998 presentation. Such reclassifications had no effect on the consolidated net income as previously reported. 2. ACCOUNTING CHANGES The provisions of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," that were deferred by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 - An Amendment of FASB Statement No. 125," became effective as to repurchase agreements, dollar rolls, securities lending and certain other transactions after December 31, 1997. The Company requires delivery of collateral or other security as a condition to entering into repurchase or reverse-repurchase transactions. For all reverse-repurchase transactions entered into after January 1, 1998, the Company did not take control of the collateral. Accordingly, the Company did not record the collateral along with the obligation to return such collateral in its Consolidated Balance Sheet at March 31, 1998. The Company has not relinquished control of securities transferred in repurchase transactions for the three month period ended March 31, 1998; thus, the Company did not record the collateral transfer or a receivable from the counterparty. As of December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which specifies the computation, presentation and disclosure requirements for earnings per share. By adopting SFAS No. 128, the Company was required to restate and expand its presentation for prior period earnings per share data. The basic and diluted earnings per share data of the Company reported under SFAS No. 128 did not differ materially from the primary and fully diluted earnings per share data previously reported by the Company under Accounting Principles Board Opinion No. 15, "Earnings Per Share." 5 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) First Hawaiian, Inc. and Subsidiaries The following is a reconciliation of the numerator and denominators of the Company's basic and diluted earnings per share data for the three months ended March 31, 1998 and 1997:
1998 1997 ------------------------------------------- ---------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- ---------- (in thousands, except number of shares and per share data) Basic: Net income $ 21,228 31,176,312 $ .68 $ 20,516 31,775,597 $ .65 Effect of dilutive securities - Stock incentive plan options -- 197,410 -- -- 100,702 -- -------- ----------- ----- -------- ----------- ----- Diluted: Net income and assumed conversions $ 21,228 31,373,722 $ .68 $ 20,516 31,876,299 $ .64 ======== ========== ===== ======== ========== =====
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which established standards for reporting comprehensive income, which is defined to include net income, unrealized gains and losses on available-for-sale investment securities, foreign currency adjustments, as well as certain other items not included in the income statement. The Company's Consolidated Statement of Changes in Stockholders' Equity has been reformatted in the current period and restated for the prior periods in compliance with SFAS No. 130. Earlier this year, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which standardized the disclosure requirements for pensions and other post-retirement benefits. The Company plans to implement SFAS No. 132 (which does not change existing measurement or recognition standards) in its consolidated financial statements for the year ending December 31, 1998. 3. IMPAIRED LOANS The following table summarizes impaired loan information as of and for the three months ended March 31, 1998, as of and for the year ended December 31, 1997 and as of and for the three months ended March 31, 1997:
MARCH 31, 1998 December 31, 1997 March 31, 1997 -------------- ----------------- -------------- (in thousands) Impaired loans $ 77,230 $ 74,751 $ 107,744 Impaired loans with related allowance for loan losses calculated under SFAS No. 114 $ 51,905 $ 38,278 $ 70,565 Total allowance for impaired loans $ 12,249 $ 9,257 $ 12,720 Average impaired loans $ 76,545 $ 90,901 $ 104,895 Interest income recorded during the period $ 110 $ 835 $ 199
Impaired loans without a related allowance for loan losses are generally collateralized by assets with fair values in excess of the recorded investment in the loans. Interest payments on impaired loans are generally applied to reduce the outstanding principal amounts of such loans. 4. SUBSIDIARY MERGERS On April 18, 1997, Pioneer Federal Savings Bank ("Pioneer"), a wholly-owned subsidiary of the Company, was merged with and into the Bank. Five Pioneer branches became branches of the Bank and 14 branches were closed in connection with the merger. On December 31, 1997, Pacific One Bank, National Association ("Pacific One, N.A."), another wholly-owned subsidiary of the Company, was merged with and into Pacific One. Pacific One currently operates Pacific One, N.A.'s eight branches, all of which are located in the State of Washington. 5. FIRST HAWAIIAN CAPITAL I First Hawaiian Capital I is a Delaware business trust (the "Trust") which was formed in 1997. The Trust issued $100,000,000 of its capital securities (the "Capital Securities") in 1997, and used the proceeds therefrom to purchase junior subordinated deferrable interest debentures (the "Debentures") of the Company. In addition, the Trust also purchased $3,093,000 of Debentures in connection with the acquisition by the Company of common securities of the Trust. The Debentures (aggregate principal amount $103,093,000) are the sole assets of the Trust. The Capital Securities qualify as Tier 1 capital of the Company and are fully and unconditionally guaranteed by the Company. The Capital Securities accrue and pay interest semi-annually at an annual interest rate of 8.343%. The Capital Securities are mandatorily redeemable upon maturity of the Debentures on July 1, 2027, or upon earlier redemption in whole or in part as provided for in the governing indenture. 6 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters contained herein are forward-looking statements that involve certain risks and uncertainties that could cause the Company's actual results to differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, global, national and local economic and market conditions, the level and volatility of interest rates and currency values, credit risks inherent in the lending processes, loan and deposit demand in the geographic regions in which the Company conducts business, the impact of intense competition in the rapidly evolving banking and financial services business, the effect of current and pending government legislation and regulations, the extensive regulation of the Company's businesses at both the federal and state levels and other matters discussed below. The Company expressly disclaims any obligation or undertaking to release any update or revision to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. NET INCOME The Company recorded consolidated net income for the first three months of 1998 of $21,228,000, an increase of $712,000, or 3.5%, over the first three months of 1997. The modest increase in consolidated net income reflects the continuing effects of the sluggish economy in Hawaii. Basic and diluted earnings per share for the first three months of 1998 were $.68 and $.68, respectively, representing increases of 4.6% and 6.3%, respectively, over the same period in 1997. The percentage increases in consolidated net income on a per share basis were greater than the percentage increase in consolidated net income because acquisition of shares under the Company's stock repurchase program, pursuant to which the Company is authorized to repurchase up to 3.1 million shares of the Company's common stock (of which 1.8 million shares were repurchased through March 31, 1998), resulted in a lower average number of outstanding shares in the first quarter of 1998 as compared to the first quarter of 1997. On an annualized basis, the Company's return on average total assets for the first three months of 1998 was 1.07%, an increase of 2.9% over the same period in 1997, and its return on average stockholders' equity was 11.78%, an increase of .5% over the same period in 1997. NET INTEREST INCOME Net interest income, on a fully taxable equivalent basis, increased $2,895,000, or 3.5%, to $85,640,000 for the first three months of 1998 from $82,745,000 for the same period in 1997. The increase in net interest income was primarily due to a 12 basis point (1% equals 100 basis points) increase in the net interest margin and an increase in average earning assets of $54,136,000, or .8%. The net interest margin was 4.80% for the first three months of 1998, an increase of 2.6% over the same period in 1997. The increase in the net interest margin was primarily attributable to an increase of 26 basis points in the yield on average earning assets for the first three months of 1998 over the same period in 1997, principally as a result of the partial liquidation of lower-yielding investment securities held by the Company. The Company used the proceeds from the partial liquidation to reduce its short-term borrowings and to fund higher-yielding loans. The increase in the yield on average earning assets was partially offset by an increase of 14 basis points in the rate paid on funding sources, for the first three months of 1998 over the same period in 1997. The increase in the rate paid on funding sources reflects, among other things, the issuance by First Hawaiian Capital I of $100,000,000 of its capital securities (the "Capital Securities") in June 1997 and a decrease in average noninterest-bearing demand deposits of $56,963,000, or 6.6%. Average earning assets increased by $54,136,000, or .8%, for the first three months of 1998 over the same period in 1997, primarily due to higher levels of interest-bearing deposits and loans. The increase was partially offset by the partial liquidation of investment securities in connection with the merger of the Bank and Pioneer in April 1997. 7 9 Average loans for the first three months of 1998 increased by $352,269,000, or 6.0%, over the same period in 1997. The mix of loans continues to change as the Company diversifies its loan portfolio, both geographically and by industry. These efforts have resulted in growth in the Company's banking operations in the Pacific Northwest, automobile financing in California and Oregon and credit extensions to companies in the media and telecommunications industry located on the mainland United States. In addition, the mix of average earning assets continues to change, with average loans representing 85.9% of average earning assets for the first three months of 1998 as compared to 81.6% for the same period in 1997. Average interest-bearing deposits and liabilities increased by $73,705,000, or 1.2%, for the first three months of 1998, over the same period in 1997. The increase was primarily due to the issuance of the Capital Securities and an increase in deposits of $233,140,000, or 4.7%, primarily from a shifting of public funds from repurchase agreements to deposits. These increases were partially offset by a decrease in short-term borrowings which were repaid using proceeds received from the partial liquidation of the investment securities portfolio as described above. 8 10 The following table sets forth the condensed consolidated average balance sheets, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing deposits and liabilities for the periods indicated on a taxable equivalent basis. The tax equivalent adjustment is made for items exempt from Federal income taxes (assuming a 35% tax rate for 1998 and 1997) to make them comparable with taxable items before any income taxes are applied.
THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------------- 1998 1997 ---------------------------- ----------------------------- INTEREST Interest AVERAGE INCOME/ YIELD/ Average Income/ Yield/ BALANCE EXPENSE RATE(1) Balance Expense Rate(1) ------- -------- ------ ------- -------- ------ (dollars in thousands) ASSETS Earning assets: Interest-bearing deposits in other banks $ 134,749 $ 2,078 6.25% $ 55,574 $ 763 5.57% Federal funds sold and securities purchased under agreements to resell 141,402 1,867 5.35 157,781 2,092 5.38 Available-for-sale investment securities (2) 742,732 12,558 6.86 1,103,661 17,873 6.57 Loans (3),(4) 6,211,927 134,882 8.81 5,859,658 124,898 8.64 ------------ --------- ------------- ---------- Total earning assets 7,230,810 151,385 8.49 7,176,674 145,626 8.23 --------- ---------- Nonearning assets 782,061 815,877 ------------ ------------- Total assets $ 8,012,871 $ 7,992,551 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits and liabilities: Deposits $ 5,238,562 $ 51,033 3.95% $ 5,005,422 $ 47,207 3.82% Short-term borrowings 689,651 9,107 5.36 945,137 12,004 5.15 Long-term debt and capital securities 317,987 5,605 7.15 221,936 3,670 6.71 ------------ --------- ------------- ---------- Total interest-bearing deposits and liabilities 6,246,200 65,745 4.27 6,172,495 62,881 4.13 --------- ---- ---------- ---- Interest rate spread 4.22% 4.10% ==== ==== Noninterest-bearing demand deposits 806,705 863,668 Other liabilities 228,831 246,559 ------------ ------------- Total liabilities 7,281,736 7,282,722 Stockholders' equity 731,135 709,829 ------------ ------------- Total liabilities and stockholders' equity $ 8,012,871 $ 7,992,551 ============ ============= Net interest income and margin on earning assets 85,640 4.80% 82,745 4.68% ==== ==== Tax equivalent adjustment 62 231 --------- ---------- Net interest income $ 85,578 $ 82,514 ========= ==========
(1) Annualized. (2) Average balances exclude the effects of the fair value adjustments. (3) Nonaccruing loans have been included in computations of average loan balances. (4) Interest income for loans included loan fees of $6,987 and $5,582 for 1998 and 1997, respectively. 9 11 AVAILABLE-FOR-SALE INVESTMENT SECURITIES The following table presents the amortized cost and fair values of available-for-sale investment securities as of the dates indicated:
MARCH 31, December 31, March 31, 1998 1997 1997 ------------- ------------- ------------- (in thousands) Amortized cost $ 725,627 $ 778,528 $ 1,060,525 Unrealized gains 1,221 1,021 3,481 Unrealized losses (1,160) (1,425) (2,030) ------------- ------------- ------------- Fair value $ 725,688 $ 778,124 $ 1,061,976 ============= ============= =============
Gross realized gains and losses for the three months ended March 31, 1998 and 1997 were as follows:
1998 1997 ---------- ---------- (in thousands) Realized gains $ -- $ -- Realized losses (5) (2) ---------- ---------- Securities losses, net $ (5) $ (2) ========== ==========
Gains and losses realized on the sales of available-for-sale investment securities are determined using the specific identification method. 10 12 LOANS The following table sets forth the loan portfolio by major categories and loan mix at March 31, 1998, December 31, 1997 and March 31, 1997:
MARCH 31, 1998 December 31, 1997 March 31, 1997 ------------------ ------------------- ------------------- AMOUNT % Amount % Amount % ---------- ----- ---------- ----- ---------- ----- (dollars in thousands) Commercial, financial and agricultural $1,610,315 25.6% $1,582,698 25.4% $1,516,534 25.5% Real estate: Commercial 1,195,752 19.0 1,193,538 19.1 1,222,848 20.6 Construction 156,935 2.5 166,482 2.7 200,121 3.4 Residential: Insured, guaranteed or conventional 1,478,933 23.5 1,486,887 23.8 1,450,464 24.3 Home equity credit lines 446,746 7.1 457,724 7.4 457,889 7.7 ---------- ----- ---------- ----- ---------- ----- Total real estate loans 3,278,366 52.1 3,304,631 53.0 3,331,322 56.0 ---------- ----- ---------- ----- ---------- ----- Consumer 704,495 11.2 678,984 10.9 569,466 9.6 Lease financing 333,295 5.3 333,270 5.3 240,732 4.0 Foreign 367,437 5.8 339,098 5.4 289,242 4.9 ---------- ----- ---------- ----- ---------- ----- Total loans 6,293,908 100.0% 6,238,681 100.0% 5,947,296 100.0% ====== ===== ===== Less allowance for loan losses 83,154 82,596 85,136 ---------- ---------- ---------- Total net loans $6,210,754 $6,156,085 $5,862,160 ========== ========== ========== Total loans to: Total assets 77.4% 77.1% 73.5% Total earning assets 86.9% 86.6% 83.0% Total deposits 102.5% 102.5% 100.0%
The loan portfolio is the largest component of total earning assets and accounts for the greatest portion of total interest income. At March 31, 1998, total loans were $6,293,908,000, representing increases of .9% and 5.8% over December 31, 1997 and March 31, 1997, respectively. Commercial, financial and agricultural loans as of March 31, 1998 increased $27,617,000, or 1.7%, over December 31, 1997, and $93,781,000, or 6.2%, over March 31, 1997. Although the Company continues its efforts to diversify the loan portfolio, both geographically and by industry, overall loan volume in the State of Hawaii continues to decline as a result of the sluggish economy. Credit extensions in the Pacific Northwest and the media and telecommunications industry located on the mainland United States account for the majority of the increase in loan balance and geographic and industry diversification. Consumer loans as of March 31, 1998 increased $25,511,000, or 3.8%, over December 31, 1997, and $135,029,000, or 23.7%, over March 31, 1997. The increase was primarily due to an increase in direct and indirect automobile financing in California and Oregon. Lease financing as of March 31, 1998 increased $92,563,000, or 38.5%, over March 31, 1997. The increase was primarily due to an increase in leveraged and direct financing leases on equipment located on the mainland United States. The Company's international operations, principally in Guam and Grand Cayman, British West Indies, involve foreign banking and international financing activities, including short-term investments, loans, acceptances, letters of credit financing and international funds transfers. International activities are identified on the basis of the domicile of the Company's customer. Foreign loans as of March 31, 1998, increased $28,339,000, or 8.4%, over December 31, 1997, and $78,195,000, or 27.0%, over March 31, 1997. The increase in foreign loans was primarily due to an increase in loan balances in Guam. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At March 31, 1998, the Company did not have a concentration of loans greater than 10% of total loans which is not otherwise disclosed as a category of loans as shown in the above table. 11 13 NONPERFORMING ASSETS A summary of nonperforming assets at March 31, 1998, December 31, 1997 and March 31, 1997 follows:
MARCH 31, December 31, March 31, 1998 1997 1997 --------- ---------- --------- (dollars in thousands) Nonperforming loans: Nonaccrual: Commercial, financial and agricultural $ 6,825 $ 9,038 $ 19,775 Real estate: Commercial 4,568 4,590 4,208 Construction -- -- 1,908 Residential: Insured, guaranteed, or conventional 10,590 6,353 12,188 Home equity credit lines 90 50 751 --------- ---------- --------- Total real estate loans 15,248 10,993 19,055 --------- ---------- --------- Lease financing 63 10 22 Foreign 218 -- -- --------- ---------- --------- Total nonaccrual loans 22,354 20,041 38,852 --------- ---------- --------- Restructured: Commercial, financial and agricultural 1,532 1,532 3,428 Real estate: Commercial 30,811 30,843 41,310 Residential: Insured, guaranteed, or conventional 2,412 2,626 1,384 Home equity credit lines 659 559 559 --------- ---------- --------- Total real estate loans 33,882 34,028 43,253 --------- ---------- --------- Total restructured loans 35,414 35,560 46,681 --------- ---------- --------- Total nonperforming loans 57,768 55,601 85,533 Other real estate owned 31,226 30,760 23,707 --------- ---------- --------- Total nonperforming assets $ 88,994 $ 86,361 $ 109,240 ========= ========== ========= Past due loans: Commercial, financial and agricultural $ 2,616 $ 2,521 $ 5,278 Real estate: Commercial 1,494 567 9,418 Residential: Insured, guaranteed, or conventional 25,326 25,002 10,086 Home equity credit lines 2,073 2,077 2,822 --------- ---------- --------- Total real estate loans 28,893 27,646 22,326 --------- ---------- --------- Consumer 3,241 3,589 3,034 Lease financing 33 11 60 Foreign 717 -- -- --------- ---------- --------- Total past due loans (1) $ 35,500 $ 33,767 $ 30,698 ========= ========== ========= Nonperforming assets to total loans and other real estate owned (end of period): Excluding 90 days past due accruing loans 1.41% 1.38% 1.83% Including 90 days past due accruing loans 1.97% 1.92% 2.34% Nonperforming assets to total assets (end of period): Excluding 90 days past due accruing loans 1.09% 1.07% 1.35% Including 90 days past due accruing loans 1.53% 1.48% 1.73%
(1) Represents loans which are past due 90 days or more as to principal and/or interest, are still accruing interest and are in the process of collection. 12 14 NONPERFORMING ASSETS, CONTINUED Nonperforming assets decreased from $109,240,000, or 1.83% of total loans and other real estate owned ("OREO"), at March 31, 1997, to $88,994,000, or 1.41% of total loans and OREO, at March 31, 1998. The percentage of nonperforming assets to total assets decreased from 1.35% at March 31, 1997 to 1.09% at March 31, 1998. The decrease in nonperforming assets of $20,246,000, or 18.5%, from March 31, 1997 to March 31, 1998 was primarily due to decreases in: (1) commercial, financial and agricultural nonaccrual loans of $12,950,000, or 65.5%; and (2) commercial real estate restructured loans of $10,499,000, or 25.4%. These decreases in nonperforming loans were partially offset by an increase in OREO of $7,519,000, or 31.7%. The decrease in commercial, financial and agricultural nonaccrual loans was primarily due to the transfer of three loans totalling $4,488,000 to OREO, a partial pay-off of a loan of $1,784,000 and a charge-off of $755,000. The decrease in real estate - commercial loans was primarily due to the transfer of a loan totalling $8,279,000 to OREO. These transfers to OREO were partially offset by the sale of a commercial real estate property totalling $7,200,000. At March 31, 1998, the Company was not aware of any significant potential problem loans (not otherwise classified as nonperforming or past due in the table on page 12) where possible credit problems of the borrower caused management to have serious concerns as to the ability of such borrower to comply with the present loan repayment terms. Loans past due 90 days or more and still accruing interest totalled $35,500,000 at March 31, 1998, an increase of $4,802,000, or 15.6%, over March 31, 1997. The increase was primarily due to certain real estate - residential loans sold with recourse which were repurchased in the fourth quarter of 1997 and the first quarter of 1998. All of the loans which are past due 90 days or more and still accruing interest are, in management's judgment, adequately collateralized and in the process of collection. In recent years, the level of the Company's nonperforming assets and charge-offs has been affected by the impact of adverse economic conditions and trends in Hawaii. The most important of these adverse economic trends is the prolonged economic downturn over the last seven years. In contrast to the mainland economy, Hawaii's recovery from its 1991 recession continues to be slow and protracted. In addition, Hawaii continues to show weaknesses in its local real estate market, including declining real estate values. Recently, a number of countries in the Asia Pacific region, including Japan, have experienced significant weaknesses in their economies. Outstanding commitments and loans to debtors in Asian countries, excluding Japan, represented approximately .13% of total assets and 1.4% of total stockholders' equity and, including Japan, approximately 1.25% of total assets and 13.8% of total stockholders' equity, in each case at March 31, 1998. These commitments and loans are primarily collateralized by certificates of deposit, Hawaii real estate, standby letters of credit issued by Asian banks and/or guarantees by credit-worthy Asian individuals and corporations. The economic downturn in Asia may adversely affect the volume and spending level of Asian visitors to Hawaii, which in turn may adversely affect the Hawaii economy. The Company does not foresee a major improvement in Hawaii's economic conditions in the near term and believes that these trends may continue to affect the level of nonperforming assets and related charge-offs in future periods. 13 15 DEPOSITS The following table sets forth the average balances and the average rates paid on deposits for the periods indicated:
THREE MONTHS ENDED MARCH 31, ---------------------------------------------------------- 1998 1997 ----------------------- ----------------------- AVERAGE AVERAGE Average Average BALANCE RATE(1) Balance Rate(1) ----------- -------- ----------- --------- (dollars in thousands) Interest-bearing demand $ 1,786,470 2.60% $ 1,540,455 2.57% Savings 827,069 2.47 990,061 2.16 Time 2,625,023 5.33 2,474,906 5.27 ------------- ---- ------------ Total interest-bearing deposits 5,238,562 3.95 5,005,422 3.82 Noninterest-bearing demand 806,705 -- 863,668 -- ------------- ---- ------------ Total deposits $ 6,045,267 3.42% $ 5,869,090 3.26% ============ ==========
Average interest-bearing deposits increased $233,140,000, or 4.7%, over the first quarter of 1997. The increase in average interest-bearing deposits was due primarily to a higher level of public deposits and various deposit product programs initiated by the Company. As a result of depositors seeking higher yields through the deposit product programs, the mix of average interest-bearing deposits changed, with higher yielding average time certificates of deposits representing 50.1% of average interest-bearing deposits in the first three months of 1998, as compared to 49.4% in the same period in 1997. In addition, average noninterest-bearing demand deposits for the first three months of 1998 decreased $56,963,000, or 6.6%, as compared to the same period in 1997. Consequently, the overall cost of total deposits increased by 16 basis points in the first three months of 1998 as compared to the same period in 1997. (1) Annualized. 14 16 PROVISION AND ALLOWANCE FOR LOAN LOSSES The following table sets forth the activity in the allowance for loan losses for the periods indicated:
THREE MONTHS ENDED MARCH 31, ------------------------------------- 1998 1997 ----------- ----------- (dollars in thousands) Loans outstanding (end of period) $ 6,293,908 $ 5,947,296 =========== =========== Average loans outstanding $ 6,211,927 $ 5,859,658 =========== =========== Allowance for loan losses summary: Balance at beginning of period $ 82,596 $ 85,248 ----------- ----------- Loans charged off: Commercial, financial and agricultural 915 14 Real estate: Commercial 1 255 Construction -- 61 Residential 719 1,075 Consumer 3,856 3,075 Foreign 107 4 ----------- ----------- Total loans charged off 5,598 4,484 ----------- ----------- Recoveries on loans charged off: Commercial, financial and agricultural 618 48 Real estate: Commercial 395 12 Residential 1 15 Consumer 709 534 Lease financing -- 4 Foreign 37 7 ----------- ----------- Total recoveries on loans previously charged off 1,760 620 ----------- ----------- Net charge-offs (3,838) (3,864) Provision charged to expense 4,396 3,752 ----------- ----------- Balance at end of period $ 83,154 $ 85,136 =========== =========== Net loans charged off to average loans .25% (1) .27% (1) Net loans charged off to allowance for loan losses 18.72% (1) 18.41% (1) Allowance for loan losses to total loans (end of period) 1.32% 1.43% Allowance for loan losses to nonperforming loans (end of period): Excluding 90 days past due accruing loans 1.44x 1.00x Including 90 days past due accruing loans .89X .73x
(1) Annualized. 15 17 PROVISION AND ALLOWANCE FOR LOAN LOSSES, CONTINUED For the first three months of 1998, the provision for loan losses was $4,396,000, an increase of $644,000, or 17.2%, over the same period in 1997. The provision for loan losses is based upon management's judgment as to the adequacy of the allowance for loan losses (the "Allowance") to absorb future losses. The Company uses a systematic methodology to determine the adequacy of the Allowance and related provision for loan losses to be reported for financial statement purposes. The determination of the adequacy of the Allowance is ultimately one of management judgment, which includes consideration of many factors, including, among other things, the amount of problem and potential problem loans, net charge-off experience, changes in the composition of the loan portfolio by type and location of loans and in overall loan risk profile and quality, general economic factors and the fair value of collateral. Net charge-offs were $3,838,000 for the first three months of 1998, a decrease of $26,000, or .7%, compared to the same period in 1997. The decrease in net charge-offs for the first three months of 1998 was primarily due to an increase in commercial, financial and agricultural, real estate - commercial, and consumer loan recoveries, partially offset by an increase in commercial, financial and agricultural, and consumer loan charge-offs. The increase in loan recoveries was primarily due to a $548,000 recovery on a commercial, financial and agricultural loan. The increase in charge-offs was primarily due to charge-offs on three commercial, financial and agricultural loans totalling $857,000. For the first three months of 1998, consumer loan charge-offs increased $781,000, or 25.4%, over the same period in 1997. In addition, consumer loan charge-offs was negatively impacted by the ongoing sluggish Hawaii economy and continued increase in personal bankruptcies. Smaller balance homogeneous credit card and consumer loans are charged off at a predetermined delinquency status or earlier if the Company determines that the loan is uncollectible. The allowance for loan losses increased to 1.44 times nonperforming loans (excluding 90 days past due accruing loans) at March 31, 1998 from 1.00 times at March 31, 1997 as a result of a 32.5% decrease in nonperforming loans. In management's judgment, the Allowance was adequate to absorb potential losses currently inherent in the loan portfolio at March 31, 1998. However, changes in prevailing economic conditions in the Company's markets could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the Allowance. NONINTEREST INCOME Noninterest income totalled $25,607,000 for the first three months of 1998, an increase of $1,753,000, or 7.3%, over the same period in 1997. Trust and investment services income increased $414,000, or 6.1%, for the first three months of 1998 over the same period in 1997. The increase was primarily due to increases in personal trust and investment management fees resulting from an increase in the customer base and additional investment volume. Service charges on deposit accounts increased $475,000, or 7.0%, for the first three months of 1998 over the same period in 1997. The increase was primarily due to increases in service charges on checks paid and returned and higher fees on analyzed accounts. Other service charges and fees increased $802,000, or 10.6%, for the first three months of 1998 over the same period in 1997. The increase was primarily due to higher: (1) merchant discount fees; (2) income earned from annuity and mutual fund sales; and (3) mortgage servicing fees for mortgage loans that were originated and sold with servicing retained. Other noninterest income increased $65,000, or 2.4%, for the first three months of 1998 over the same period in 1997. The increase was primarily due to higher: (1) interest recoveries on loans previously charged off; and (2) income earned on bank owned life insurance on certain officers. The increase was partially offset by lower foreclosed property income. 16 18 NONINTEREST EXPENSE Noninterest expense totalled $73,637,000 for the first three months of 1998, an increase of .9% over the same period in 1997. Total personnel expense (salaries and wages and employee benefits) decreased $1,930,000, or 5.2%, for the first three months of 1998, compared to the same period in 1997. The decrease was primarily due to: (1) lower salaries and wages expense as a result of the Company's re-engineering and consolidation efforts; and (2) higher pension credits. Occupancy expense for the first three months of 1998 decreased $866,000, or 8.2%, compared to the same period in 1997. The decrease was primarily due to higher sublease rental income on bank-owned premises. Equipment expense increased $360,000, or 5.9%, for the first three months of 1998, over the same period in 1997. The increase was a result of: (1) higher data processing equipment rental expense; and (2) higher depreciation expense on furniture and equipment. Other noninterest expense increased $3,063,000 for the first three months of 1998, an increase of 16.2% over the same period in 1997. This increase was the result of higher outside service expenses primarily related to the Year 2000 project (see Year 2000 disclosure on pages 18 to 19), depreciation - software expense, real property taxes, foreclosed property expenses, and miscellaneous losses and charge-offs. In addition, the cash surrender value of certain executive life insurance policies increased (recorded as a credit to insurance expense) in March 1997. This increase was partially offset by a loss on the sale of a certain loan and a loss on the sale of certain other real estate owned property in March 1997. INCOME TAXES The Company's effective income tax rate (exclusive of the tax equivalent adjustment) for the first three months of 1998 was 36.0%, as compared to 30.7% for the same period in 1997. The effective tax rate for the first three months of 1997 was positively impacted by the: (1) recognition of certain previously unrecognized tax credits; (2) partial reversal of an overaccrual of State of Hawaii income taxes; and (3) donation of real property to a non-profit organization. 17 19 LIQUIDITY AND CAPITAL Stockholders' equity was $736,250,000 at March 31, 1998, an increase of .6% over $731,701,000 at December 31, 1997. The ratio of average stockholders' equity to average total assets was 9.12% for the first three months of 1998 compared to 8.88% for the same period in 1997. The primary source of funds for the dividends paid by the Company to its stockholders is dividends received from its subsidiaries. The Bank, Creditcorp and Pacific One are subject to regulatory limitations on the amount of dividends they may declare or pay. At March 31, 1998, the aggregate amount available for payment of dividends by such subsidiaries without prior regulatory approval was $273,875,000. The Company is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain discretionary (and, in the case of the Company's depository institution subsidiaries, mandatory) actions by regulators that, if undertaken, could have a material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its depository institution subsidiaries must each meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. These capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below, at March 31, 1998) of Tier 1 and Total capital to risk-weighted assets, and of Tier 1 capital to average assets.
Minimum For Capital To Be Actual Adequacy Purposes Well Capitalized ------------------- --------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (dollars in thousands) Tier 1 Capital to Risk-Weighted Assets $721,145 9.54% $302,278 4.00% $453,417 6.00% Total Capital to Risk-Weighted Assets $954,299 12.63% $604,556 8.00% $755,696 10.00% Tier 1 Capital to Average Assets $721,145 9.13% $236,934 3.00% N/A N/A
As of March 31, 1998, the Company and its depository institution subsidiaries were categorized as well capitalized under the applicable Federal regulations. To be categorized as well capitalized, the Company must maintain Tier 1 risk-based and Total risk-based capital ratios of 6% and 10%, respectively (as set forth in the table above). Management is not aware of any conditions or events subsequent to March 31, 1998, that would cause a change in the Company's category. YEAR 2000 ISSUES Many computer programs use only two digits to identify entries in the date code field. If not corrected, these programs may fail or create erroneous results because of the date change in the year 2000. In 1995, management commenced a comprehensive program to address this problem and ensure that the Company's computer software and hardware will continue to function properly in the year 2000 and thereafter. Internal and external costs in connection with this program, currently estimated at a total of $9 million over a three-year period, are not anticipated to materially impact the Company's operations. However, even though the Company's planned software modifications and system upgrades should adequately address year 2000 issues, there can be no assurance that unforeseen difficulties will not arise. The Company's program includes the identification of third-party service providers, customers and other external parties upon which the Company relies or with whom the Company must interface on mission critical systems or applications. The program also includes determination of and coordination with the compliance efforts of such external parties on year 2000 issues. There is no assurance that the failure of any such external party to resolve its year 2000 issues would not have an adverse effect on the Company. 18 20 The Company has completed the awareness and assessment phase of its plan to be ready for the year 2000. The Company is well underway with its renovation efforts and is well into testing its mission critical systems. Testing for individual mission critical systems is scheduled to be substantially completed by the end of 1998, with integration testing to occur during 1999. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Certain matters contained in this Item 3 are forward-looking statements that involve certain risks and uncertainties that could cause the Company's actual results to differ materially from those discussed in the forward-looking statements. See Item 2 above for a discussion of the factors that could cause or contribute to such differences. INTEREST RATE RISK MEASUREMENT AND MANAGEMENT The net interest income of the Company is subject to interest rate risk to the extent the Company's interest-bearing liabilities (primarily deposits and borrowings) mature or reprice on a different basis than its interest-earning assets (primarily loans and investment securities). When interest-bearing liabilities mature or reprice more quickly than interest-earning assets during a given period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, a decrease in interest rates could also reduce net interest income. In addition, the impact of interest rate swings may be exacerbated by factors such as our customers' propensity to manage their demand deposit balances more or less aggressively or to refinance mortgage loans depending on the interest rate environment. The Asset/Liability Committees of each of the Company's subsidiary companies are responsible for managing interest rate risk. Oversight for the Company taken as a whole and individual subsidiary companies is also provided by the Treasury & Investment Division and the Asset/Liability Committee of the Bank. The frequency of the various Asset/Liability Committee meetings range from weekly to monthly. Recommendations for changes to a particular subsidiary's interest rate profile, should they be deemed necessary and exceed established policies, are made to its Board of Directors. Other than loans that are originated and held for sale, the Company does not enter into derivatives and other financial instruments for trading purposes. The Company's exposure to interest rate risk is managed primarily by taking actions that impact certain balance sheet accounts (e.g., lengthening or shortening maturities in the investment portfolio, changing asset and/or liability mix -- including by increasing or decreasing the amounts of fixed and/or variable instruments held by the Company -- to adjust sensitivity to interest rate changes) and/or utilizing off-balance sheet instruments such as interest rate swaps, caps or floors. The Company models its net interest income in order to quantify its exposure to changes in interest rates. Generally, the size of the balance sheet is held constant and then subjected to interest rate shocks up and down of 100 and 200 basis points each. Each account-level item is repriced according to its respective contractual characteristics, including any imbedded options which might exist (e.g., loans which permit the borrower to prepay the principal balance of the loan prior to maturity without penalty). Off-balance sheet instruments such as interest rate swaps, caps or floors are included as part of the modeling process. For each interest rate shock scenario, net interest income over a 12-month horizon is compared against the results of a scenario in which no interest rate change occurs (a "flat rate scenario") to determine the level of interest rate risk at that time. The Company continues to monitor the projected impact of increases and decreases in interest rates on the Company's net interest income. Exposure remains well within board approved limits. SIGNIFICANT ASSUMPTIONS UTILIZED AND INHERENT LIMITATIONS The significant net interest income changes for each interest rate scenario include assumptions based on accelerating or decelerating mortgage prepayments in declining or rising scenarios, respectively, and adjusting deposit levels and mix in the different interest rate scenarios. The magnitude of changes to both areas in turn are based upon analyses of customers' behavior in differing rate environments. However, these analyses may differ from actual future customer behavior. For example, actual prepayments may differ from current assumptions as prepayments are affected by many variables which cannot be predicted with certainty (e.g., prepayments of mortgages may differ on fixed and adjustable loans depending upon current interest rates, expectations of future interest rates, availability of refinancing, economic benefit to borrower, financial viability of borrower, etc.). 19 21 As with any model for analyzing interest rate risk, certain limitations are inherent in the method of analysis presented above. For example, the actual impact on net interest income due to certain interest rate shocks may differ from those projected should market conditions vary from assumptions used in the analysis. Furthermore, the analysis does not consider the effects of a changed level of overall economic activity that could exist in certain interest rate environments. Moreover, the method of analysis used does not take into account the actions that management might take to respond to changes in interest rates because of inherent difficulties in determining the likelihood or impact of any such response. At March 31, 1998, there was no significant change in the Company's market risk from the information provided with respect to "Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. Quantitative and qualitative disclosures regarding the Company's market risk are also included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" (page 36) and "Notes to Financial Statements" (page 47) in the Financial Review section of the Company's Annual Report 1997. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 12 Statement regarding computation of ratios. Exhibit 27 Financial data schedule. (b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter ended March 31, 1998. 20 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST HAWAIIAN, INC. (REGISTRANT) Date May 11, 1998 By /s/ HOWARD H. KARR --------------------------- ------------------------------------- HOWARD H. KARR EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER (PRINCIPAL FINANCIAL OFFICER) 21 23 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 12 Statement regarding computation of ratios. 27 Financial data schedule.
EX-12 2 STATEMENT REGARDING COMPUTATION OF RATIOS 1 EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIOS First Hawaiian, Inc. and Subsidiaries Computation of Consolidated Ratios of Earnings to Fixed Charges
THREE MONTHS ENDED MARCH 31, ------------------------------- 1998 1997 ------------ ----------- (dollars in thousands) Income before income taxes $ 33,152 $ 29,606 ------------ ----------- Fixed charges:(1) Interest expense 65,745 62,881 Rental expense 2,740 2,767 ------------ ----------- 68,485 65,648 Less interest on deposits 51,033 47,207 ------------ ----------- Net fixed charges 17,452 18,441 ------------ ----------- Earnings, excluding interest on deposits $ 50,604 $ 48,047 ============ =========== Earnings, including interest on deposits $ 101,637 $ 95,254 ============ =========== Ratio of earnings to fixed charges: Excluding interest on deposits 2.90X 2.61x Including interest on deposits 1.48X 1.45x
(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. EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S QUARTERLY FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 288,260 142,353 160,000 0 725,688 0 0 6,293,908 83,154 8,130,976 6,138,496 695,660 243,166 316,731 0 0 165,952 570,298 8,130,976 134,833 12,545 3,945 151,323 51,033 65,745 85,578 4,396 (5) 73,637 33,152 21,228 0 0 21,228 .68 .68 8.49 22,354 35,500 35,414 0 82,596 5,598 1,760 83,154 42,380 1,675 39,099
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