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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
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 1-6887
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BANCORP HAWAII, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
HAWAII 99-0148992
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
130 MERCHANT STREET 96813
HONOLULU, HAWAII
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (808) 537-8111
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, $2 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of said stock on the New York Stock
Exchange on January 31, 1994 ($46.75 per share): $1,320,646,874.
As of January 31, 1994, 28,425,038 shares of Common Stock, $2 par value, of
the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 27, 1994, are incorporated by reference into Part
III of this Report.
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PART I
ITEM 1. BUSINESS
Bancorp Hawaii, Inc., (Bancorp) was organized on August 12, 1971, as the
first bank holding company in the State of Hawaii.
Bancorp provides varied financial services to customers in Hawaii, other
areas of the Pacific Basin, and selected markets with economies similar to
those in the Pacific Basin. It is the largest of the bank holding companies
headquartered in the State of Hawaii. The principal subsidiaries of Bancorp are
Bank of Hawaii and Bancorp Pacific, Inc. (formerly known as FirstFed America,
Inc.)
In 1993, Bank of Hawaii finalized its acquisition of American Financial
Services of Hawaii, Inc. (AFS), a trust holding company. AFS has two
subsidiaries, American Trust Company of Hawaii, Inc. and Bishop Trust Company,
Limited. The total assets under administration of these two trust companies
were approximately $2.7 billion at the May 7, 1993 acquisition date. Bank of
Hawaii's strategy is to integrate the operations of these companies into its
other trust subsidiary--Hawaiian Trust Company, Limited.
In December 1993, the final approvals were received allowing Bank of Hawaii
International, Inc. to purchase 80% of Banque Indosuez Vanuatu, Ltd. Upon
finalization of the purchase, the name was changed to Banque d'Hawaii
(Vanuatu), Limited. Total assets were $70.1 million at year-end 1993 and for
1993 have been accounted for under the equity method. Future financial
reporting will consolidate these assets and operations.
At December 31, 1993, Bancorp and its subsidiaries employed 4,424 persons on
a full-time or part-time basis.
The following is a description of each of Bancorp's subsidiaries.
Bank of Hawaii was organized under the laws of Hawaii on December 17, 1897,
and has been continuously in business since. Its headquarters are in Honolulu,
Hawaii, and its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC). It is not a member of the Federal Reserve System.
Bancorp and the 19 directors of Bank of Hawaii (each of whom holds 125
qualifying shares) own 100% of the outstanding shares.
Bank of Hawaii provides customary commercial banking services through branch
offices in the State of Hawaii and branches or representative offices in
American Samoa, Bahamas (Nassau), Commonwealth of the Northern Mariana Islands
(Saipan), Federated States of Micronesia (Pohnpei, Kosrae, and Yap), Guam, Hong
Kong, Japan (Tokyo), Korea (Seoul), Philippines (Manila, Davao, and Cebu),
Republic of Fiji (Suva), Republic of Palau (Koror), Republic of the Marshall
Islands (Majuro), Singapore, and Taiwan (Taipei). Bank of Hawaii also has
affiliates in New Caledonia, Tahiti, Tonga, Vanuatu and Western Samoa.
Bank of Hawaii owns all of the outstanding stock of Hawaiian Trust Company,
Limited; Bancorp Leasing of Hawaii, Inc.; Bank of Hawaii International, Inc.;
Bank of Hawaii International Corporation, New York; Bankoh Investment Advisory
Services Limited; American Financial Services, Inc.; Realty and Mortgage
Investors of the Pacific, Limited and Hawaiian Hong Kong Holdings, Ltd. The
operations of Bankoh Corporation were merged into the Bank and Bankoh
Corporation was dissolved in December 1993. A brief discussion of each of the
Bank's other subsidiaries follows:
Hawaiian Trust Company, Limited (HTCo) was acquired by Bancorp in 1985. HTCo
was incorporated in Hawaii on August 10, 1898. It offers trust services
primarily in Hawaii and Guam. In 1987, Bancorp contributed the stock of HTCo to
Bank of Hawaii after receiving approval to do so from the appropriate
regulatory agencies. As a result, HTCo became a wholly owned subsidiary of Bank
of Hawaii. At year-end 1993, trust assets under administration were $8.4
billion for HTCo.
1
Bancorp Leasing of Hawaii, Inc. (BLH), formed in 1973, provides leasing and
leasing services, mainly to the commercial sector in Hawaii. BLH has several
subsidiaries that are "specific purpose leasing vehicles." These subsidiaries
include Bankoh Equipment Leasing Corporation; S.I.L., Inc.; and Arbella
Leasing Corporation. In 1990, BLH organized two new subsidiaries, Bancorp
Leasing of America, Inc., and Bancorp Leasing International, Inc., to
segregate U.S. mainland and international leasing activities. Bancorp Leasing
of America, Inc. remains inactive. On a consolidated basis, BLH's assets
represented 1.1% of Bancorp's total assets at year-end 1993.
Bank of Hawaii International, Inc. (BOHI) was formed in 1968. BOHI holds
equity interests in the following foreign financial institutions (in the
percentages indicated): Bank of Tonga--30%; Banque de Nouvelle Caledonie, New
Caledonia--21%; Banque de Tahiti--38%; Pacific Commercial Bank, Limited,
Western Samoa--43%; and Hawaii Financial Corporation (Hong Kong) Limited--
100%, which is a registered deposit-taking company and owns 100% of Bonsphere,
Ltd., a trade re-invoicing company. In 1993, BOHI acquired 80% of Banque
Indosuez Vanuatu, Limited whose name was immediately changed to Banque
d'Hawaii (Vanuatu), Limited. BOHI's total assets represented 1.1% of Bancorp's
total assets at year-end 1993.
Bank of Hawaii International Corporation, New York (BOHICNY), was organized
in 1982 as an Edge Act corporation. Bank of Hawaii International Corporation,
New York, provides payment, clearing, and settlement services with the New
York Clearing House and Clearing House Interbank Payment Service (CHIPS) for
both affiliated and unaffiliated banks. BOHICNY had total assets representing
0.8% of Bancorp's total assets at year-end 1993.
Bankoh Investment Advisory Services, Limited (formerly known as Bankoh
Advisory Corporation) was reactivated in 1991 to provide advisory services for
businesses seeking to operate in Hawaii. The activity of this company has been
very limited during the year.
Hawaiian Hong Kong Holdings, Ltd. was incorporated in 1984 to acquire
certain foreign real estate expected to be obtained through foreclosure. The
transaction never took place and the company remains inactive.
Realty and Mortgage Investors of the Pacific, Limited (RAMPAC), a wholly
owned subsidiary, was organized in 1992. Its activity is focused on commercial
real estate lending in Hawaii, but does not accept deposits. Total assets at
year-end 1993 were $82.8 million.
Bancorp also holds all of the outstanding stock, except as noted, of the
corporations listed below:
Bancorp Pacific, Inc., formerly known as FirstFed America, Inc., was
incorporated under Delaware law in July 1986 for the purpose of becoming a
savings and loan holding company to own the outstanding stock of First Federal
Savings and Loan Association (First Federal) upon its conversion from a
federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association.
Bancorp Pacific Inc.'s only significant business is conducted through its
wholly owned subsidiary, First Federal, and First Federal's second-tier
subsidiary, First Savings and Loan Association of America (First Savings).
First Federal, a federally chartered stock savings and loan association, has
been in operation since 1904. First Federal in 1978 merged with Island Federal
Savings and Loan Association of Honolulu, Hawaii, and during the 1980s
acquired several smaller savings and loan associations. First Federal operates
24 full service offices throughout Hawaii. Its deposits are also insured by
the FDIC. Total assets for First Federal represented 7.9% of Bancorp's total
assets at year-end 1993.
First Savings operates in a market area that includes the entire island of
Guam and the island of Saipan in the Commonwealth of the Northern Mariana
Islands (located approximately 120 miles northeast of Guam). First Savings
operates three full-service offices in Guam and one in Saipan. Its deposits
are insured
2
by the FDIC. The stock of Bancorp Finance of Hawaii--(Guam), Inc. (BFH-Guam)
was contributed to First Savings in 1991. BFH-Guam, which changed its name from
Bankoh Finance, Inc., in 1984, was formed in 1979 through the purchase of the
assets of an industrial loan company based in Guam. BFH-Guam has deposit-taking
authority under Guam law, but in 1984, BFH-Guam discontinued accepting new
deposits and has had no deposit liabilities since 1987. On a consolidated
basis, First Savings' assets represented 1.2% of Bancorp's total assets.
First National Bank of Arizona (FNBA) was acquired by Bancorp in October
1987. Bancorp and the directors of FNBA (each of whom holds 1,000 qualifying
shares) own 100% of the outstanding shares of FNBA. FNBA was organized under
the laws of the United States. Its deposits are insured by the FDIC, and it is
a member of the Federal Reserve System. FNBA provides customary commercial
banking services through four branch offices located in the State of Arizona.
FNBA had total assets representing 0.7% of Bancorp's total assets at year-end
1993.
Bancorp Life Insurance Company of Hawaii, Inc., was incorporated in 1981 in
the State of Arizona to underwrite as a reinsurer the credit life and credit
accident and health insurance sold in conjunction with Bank of Hawaii's short-
term consumer lending activities. Bancorp Insurance Agency of Hawaii, Inc., was
formed in 1982 to act as an agent for the sale of all credit life and credit
accident and health insurance that is reinsured with Bancorp Life Insurance
Company of Hawaii, Inc.
In 1989, Bancorp established a wholly owned captive insurance company,
Bancorp Hawaii Insurance Services, Ltd. (BHISL). With BHISL's formation,
Bancorp became the first Hawaii corporation to establish a Hawaii captive
insurance company for its self-insurance needs. BHISL provides bankers
professional liability insurance exclusively to Bancorp and its subsidiaries
and affiliates. In 1992, BHISL began providing workers compensation insurance
for Bancorp and its subsidiaries. BHISL's formation provides Bancorp with
greater flexibility and stability in controlling insurance coverages and
premium costs. BHISL also provides Bancorp with the opportunity to design self-
insurance programs not otherwise available in the conventional insurance
market.
Bancorp Hawaii Small Business Investment Company, Inc., was formed in
September 1983 in the State of Hawaii as a small business investment company.
Its investment and lending activities were very limited in 1993.
Bancorp Investment Group, Limited was formed in 1991 to provide full service
brokerage and other investment services. The Federal and State regulatory
approvals were received and the company has been operational since February of
1992.
Other Bancorp subsidiaries remained inactive in 1993. These subsidiaries are
Bancorp Business Systems of Hawaii, Inc., Bancorp Hawaii Service Corp., Bancorp
Investment Advisory Services, Inc., and Investors Pacific Limited. These
subsidiaries are expected to be dissolved in 1994.
REGULATION AND COMPETITION
EFFECT OF GOVERNMENTAL POLICIES
The earnings of Bancorp and its principal subsidiaries are affected not only
by general economic conditions, both domestic and foreign, but also by the
monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve System, and foreign governments and their
agencies. The monetary policies of the Federal Reserve System influence to a
significant extent the overall growth of loans, investments, deposits, interest
rates charged on loans, and interest rates paid on deposits. The nature and
impact of future changes in monetary policies are often not predictable.
Flexibility is a key attribute in successfully responding to these varied
forces.
3
COMPETITION
The financial services industry has become highly competitive. Bancorp, Bank
of Hawaii, and First Federal compete with local financial institutions as well
as institutions located in the major financial centers of the world. Such
financial institutions include not only banks and savings associations, but
also insurance companies, brokerage houses, mortgage companies, merchandise
retailers, consumer finance companies, credit unions, and diversified
financial services companies that provide many or all of the services offered
by commercial banks and savings institutions but operate without a banking
charter and thus free of most of the associated regulatory requirements.
The State of Hawaii is served by eight commercial banks, six savings
associations, approximately one dozen deposit-taking financial services loan
companies, approximately 130 credit unions, and scores of mortgage companies
and other financial services firms as noted previously. The State is also
served by a large number of out-of-state institutions and foreign banks. Bank
of Hawaii is the largest Hawaii based financial services firm operating in the
market. Outside of Hawaii, Bank of Hawaii's primary competition in the Pacific
Basin comes from several major U.S. mainland and foreign banks that operate in
those areas. First Federal is the third largest savings association in Hawaii.
There is no assurance that additional financial institution holding
companies or their subsidiaries will not enter markets served by Bancorp and
thereby provide additional competition. Likewise, there is no assurance that
if Bancorp, Bank of Hawaii, First Federal, and their subsidiaries pursue
additional business opportunities, they will not encounter significant
competition from other businesses, including ones not associated with banks or
financial institution holding companies.
SUPERVISION AND REGULATION
Bancorp is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), and as such, is subject to
the Act and regulations promulgated thereunder by the Board of Governors of
the Federal Reserve System (the "Board of Governors").
The BHC Act requires prior approval of the Board of Governors of the
acquisition by Bancorp of more than 5% of the voting shares of any bank or any
other bank holding company. As applied to Bancorp, the BHC Act also prohibits
the acquisition of more than 5% of the stock of Bancorp by a bank holding
company whose operations are principally conducted in a state other than
Hawaii, and the acquisition by Bancorp of more than 5% of the stock of any
bank located in a state other than Hawaii unless the statutory law of the
state in which such bank is located specifically authorizes such acquisition
by language to that effect (as, for example, does Arizona) and not merely by
implication. Certain aspects of this prohibition may be relaxed in the event
of supervised takeovers of troubled financial institutions under the Federal
Deposit Insurance Act. Also, various proposals are currently under
consideration in the United States Congress (and, with respect to the
acquisition of more than 5% of the stock of banks and bank holding companies
located in Hawaii, in the Hawaii Legislature) to ease or eliminate this
prohibition, but it is not possible to predict at the present time whether any
of these proposals will become law.
The BHC Act also prohibits, with certain exceptions, Bancorp from acquiring
direct or indirect ownership or control of more than 5% of the voting shares
of any company that is not a bank or bank holding company and from engaging
directly or indirectly in any activity other than those of banking, managing
or controlling banks or other subsidiaries authorized under the Act, or
furnishing services to or performing services for its subsidiaries. Among the
permitted activities is the ownership of shares of any company the activities
of which the Board of Governors determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
such determination, the Board of Governors is required to weigh the expected
benefits to the public, such as greater convenience, increased competition, or
gains in efficiency, against the risks of possible adverse effects, such as
undue concentration of resources, decreased or unfair competition, conflicts
of interest, or unsound banking practices. The Board of Governors has adopted
regulations (Reg. Y, as amended) that specify various activities as being so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. The exact nature and scope of such activities has been the
subject of intense national debate, and thus, they may change and become more
broad as they evolve over time.
4
A significant expansion of the scope of such activities occurred in 1989
when Congress enacted the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"). FIRREA expanded the authority of bank
holding companies to acquire savings associations, subject to approval by the
Board of Governors. In accordance with FIRREA, bank holding companies may
acquire healthy as well as failed or failing savings associations in any
state, without regard to whether the bank holding company can operate a bank
in that state.
In addition to restructuring the regulation of the savings and loan industry
and its deposit insurance and to providing a new regulatory structure for the
resolution of troubled and insolvent savings associations, FIRREA contained
several provisions that affect commercial banks, including provisions that,
among other things, increase the insurance premiums paid by FDIC-insured
institutions, enhance federal banking agencies' enforcement authority over the
operations of all insured institutions, increase civil and criminal penalties
that may be imposed in connection with violations of laws and regulations, and
permit the FDIC to impose cross-guarantee liability on insured institutions
for any cost or loss incurred by the FDIC in connection with the default by,
or assistance to, a commonly controlled institution.
By virtue of Section 23A of the Federal Reserve Act and Section 18(j) of the
Federal Deposit Insurance Act, Bancorp and its subsidiaries are "affiliates"
of Bank of Hawaii and FNBA and are subject to the provisions of Section 23A,
which limit the amount of and require substantial security for loans and
extensions of credit by Bank of Hawaii or FNBA to, and investments in, Bancorp
or certain of its subsidiaries and the amount of advances to third parties
collateralized by the securities and obligations of Bancorp or certain of its
subsidiaries. The general purpose of Sections 23A and 18(j) is to assure that
the capital of depository institutions such as Bank of Hawaii and FNBA is not
put at risk to support their non-bank affiliates. A similar provision, Section
11 of the Home Owners' Loan Act, subjects the thrift subsidiaries of Bancorp
to essentially the same limitations in their transactions with their
"affiliates," including Bancorp.
Bank of Hawaii is subject to supervision and examination by the FDIC and the
Department of Commerce and Consumer Affairs of the State of Hawaii. FNBA is
subject to supervision and examination by the Comptroller of the Currency and
the FDIC.
Bancorp Pacific, as a savings and loan holding company, is subject to the
regulatory supervision of the Office of Thrift Supervision ("OTS"), and its
thrift subsidiaries are subject to the regulatory supervision of the OTS and
in certain respects the FDIC.
As owner of all of the stock of Bancorp Pacific, Bancorp is itself
registered with the OTS as a savings and loan holding company and in such
capacity is subject to various OTS regulations, examinations, and reporting
requirements.
The Home Owners' Loan Act and regulations promulgated thereunder generally
prohibit a savings and loan holding company, directly or indirectly, or
through one or more subsidiaries, from (i) acquiring control of, or acquiring
by merger or purchase of assets, an insured savings institution or holding
company thereof, without prior written OTS approval; (ii) acquiring more than
5% of the voting shares of an insured savings institution or holding company
thereof that is not a subsidiary; or (iii) acquiring or retaining control of
an uninsured savings institution. No director or officer of a savings and loan
holding company or person owning or controlling, by proxy or otherwise, more
than 25% of such holding company's voting shares, may, except with the prior
written approval of the OTS, acquire control of an insured savings association
that is not a subsidiary of such holding company.
Savings associations, including First Federal, are subject to extensive
federal regulations that significantly affect their business and activities.
In general, savings associations must file reports with the OTS concerning
their activities and financial condition and obtain regulatory approval to
enter into certain transactions. Savings associations are also subject to
periodic OTS examinations to ascertain compliance with various regulatory
requirements. Other applicable statutes and regulations relate to insurance of
deposits, allowable investments, loans, payments of dividends, capital
requirements, reserves against deposits, establishment of branches,
limitations on loans to one borrower, limitations on credit to subsidiaries
and other transactions with affiliates, and other aspects of the business of
savings associations.
5
FIRREA provides for separately funded and maintained deposit insurance funds
operated and administered by the FDIC for savings associations and banks. The
Savings Association Insurance Fund ("SAIF") was established by FIRREA and
generally insures the deposits of savings associations, which were insured by
the Federal Savings and Loan Insurance Corporation prior to the enactment of
FIRREA. The Bank Insurance Fund ("BIF") insures the deposits of banks, which
were insured by the FDIC prior to the enactment of FIRREA. Congress adopted
legislation in 1991 to permit the FDIC to increase assessment rates for
insured banks and to levy emergency special assessments against insured
institutions. In response, the FDIC adopted a risk-based premium schedule
which has increased the assessment rates for most FDIC-insured depository
institutions. The premiums range from $.23 to $.31 for every $100 of deposits.
The actual assessment rate applicable to a particular institution depends in
part upon the risk classification assigned to the institution by the FDIC. The
FDIC may raise insurance premiums or terminate insurance altogether upon a
finding that the institution has engaged in unsafe and unsound practices. The
United States Congress may consider further measures in the future to
strengthen the insurance funds administered by the FDIC or to defray the costs
of FDIC operations, or for other purposes. Implementation of such measures may
result in further increases to assessment rates as well as further
modifications in the extent or nature of insurance coverage.
In addition, FIRREA requires that the capital standards for savings
associations be no less stringent than the capital standards applicable to
national banks and further restricts the investment authority and business
activities of savings associations in connection with loans to one borrower,
nonresidential real property loans, investments in high-yield corporate bonds,
activities of subsidiaries, and acceptance of brokered deposits. FIRREA, as
amended by the Qualified Thrift Lender Reform Act of 1991, requires that, on a
monthly average basis in nine out of every twelve months, 65% of the
"portfolio assets" of a savings association be investments in the form of
certain home mortgage loans and consumer-related assets or alternatively, the
institution either convert to a bank charter or face severe restrictions
regarding operations. None of the foregoing restrictions is expected to have a
material effect on the operations of Bancorp Pacific as it is operated.
The Federal Deposit Insurance Corporation Improvements Act of 1991
("FDICIA") requires the federal banking regulators to take "prompt corrective
action" in respect of depository institutions that do not meet minimum capital
requirements and imposes certain restrictions upon banks which meet minimum
capital requirements but are not "well capitalized" for purposes of FDICIA.
FDICIA establishes five capital tiers: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Implementing regulations adopted by the federal
banking agencies define the capital categories which will determine the
necessity for prompt corrective action by the federal banking agencies. A
depository institution may be deemed to be in a capitalization category that
is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. In addition, undercapitalized depository institutions are
required to submit capital restoration plans including limited guarantees from
their holding companies. Undercapitalized institutions are subject to
regulatory monitoring and may be required to divest themselves of or liquidate
subsidiaries under certain circumstances. Holding companies of such
institutions may be required to divest themselves of such institutions or
divest themselves of or liquidate nondepository affiliates under certain
circumstances. Critically undercapitalized institutions are also prohibited
from making payments of principal and interest on debt subordinated to the
claims of general creditors and are generally subject to the mandatory
appointment of a conservator or receiver.
Further, a bank that is not well capitalized is generally subject to various
restrictions on "pass through" insurance coverage for certain of its accounts
and is generally prohibited from accepting brokered deposits and offering
interest rates on any deposits significantly higher than the prevailing rate
in its normal market area or nationally (depending upon where the deposits are
solicited). Such banks and their holding companies are also required to obtain
regulatory approval prior to their retention of senior executive officers.
6
FDICIA (as modified by the Housing and Community Development Act of 1992)
also contains provisions which restrict investments and activities as
principal by state nonmember banks (including Bank of Hawaii) to those
eligible for national banks, and require the federal banking regulators to
prescribe or modify standards for extensions of credit secured by real estate
or made for the purpose of financing construction of a building or other
improvements to real estate, loans to bank insiders, regulatory accounting and
reports, internal control reports, independent audits, and other matters, and
to require that insured depository institutions generally be examined on-site
by federal or state personnel at least once every twelve months.
The Depository Institutions Disaster Relief Act of 1992 affords the federal
banking agencies limited discretion to provide relief from certain regulatory
requirements to depository institutions doing business or seeking to do
business in an emergency or major disaster area.
The Omnibus Budget Reconciliation Act of 1993 affects the amortization of
intangible assets by banks, requires securities dealers (including banks) to
adopt mark-to-market accounting with respect to certain of their securities in
calculating income taxes, and establishes a preference for depositors in
liquidations of FDIC-insured banks.
Bills are now pending or expected to be introduced in the United States
Congress that contain proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. If enacted
into law, these pending bills could have the effect of increasing or
decreasing the cost of doing business, limiting or expanding permissible
activities (including activities in the insurance and securities fields), or
affecting the competitive balance among banks, savings associations, and other
financial institutions. Some of these bills would reduce the extent of federal
deposit insurance, broaden the powers or the geographical range of operations
of bank holding companies, modify interstate branching restrictions applicable
to national banks, regulate bank involvement in derivatives activities, and
realign the structure and jurisdiction of various financial institution
regulatory agencies. Whether or in what form any such legislation may be
adopted or the extent to which the business of Bancorp might be affected
thereby cannot be predicted.
ITEM 2. PROPERTIES
Note D to the Audited Financial Statements on pages 51 to 52.
ITEM 3. LEGAL PROCEEDINGS
Note J to the Audited Financial Statements on page 55.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1993 to a vote of
security holders through the solicitation of proxies or otherwise.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Listing
The common stock of Bancorp Hawaii, Inc., is traded over the counter on the
New York Stock Exchange and quoted daily in leading financial publications.
NYSE Symbol: BOH
Market Prices, Book Values, and Common Stock Dividends--Table 2 on page 10.
ITEM 6. SELECTED FINANCIAL DATA
Year-End Summary--Table 22 on page 38.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PERFORMANCE HIGHLIGHTS
Bancorp Hawaii, Inc. (Bancorp) reported earnings of $132.6 million for 1993,
marking the 17th consecutive year of increased earnings. Earnings for 1993
were 4.0% above 1992 income of $127.5 million.
On January 26, 1994, Bancorp's Board of Directors declared a 50% stock
dividend to shareholders of record February 17, 1994 payable on March 15,
1994. The per share information throughout this report has been restated to
reflect this dividend. In addition, an increase of 13% for the pre-split
quarterly dividend was also declared. Earnings per share were $3.09, compared
with $3.00 and $2.69 for 1992 and 1991, respectively. The increase in earnings
per share was 3.0% over 1992. The increase reported between 1991 and 1992 was
11.4%. Growth in earnings per share was adversely affected primarily by
additional provisions for loan losses, higher funding costs as compared to
asset yields, and to a lesser degree, by the slowed Hawaii economy. The
additional provisions for loan losses were recorded mainly due to the
circumstances surrounding loans secured by certain commercial leasehold
property (details can be found in the following Risk Elements section).
The challenges that Bancorp faced during 1993 have abated somewhat, but
forecasts for 1994 remain modest. As the economy improves, Bancorp will
continue to focus on asset quality, productivity and cost control to maintain
its high performance objectives.
Bancorp's objective for return on average assets (ROAA) is a minimum of
1.00%. For 1993, ROAA was 1.05% compared to 1.10% and 1.04% for 1992 and 1991,
respectively. The objective for return on average equity (ROAE) is a minimum
of 16.00%. Bancorp fell short of this objective with a ROAE of 14.85% for
1993, compared to 16.25% and 16.50% for 1992 and 1991, respectively. This
shortfall reflects the slowdown in earnings and earning asset growth, as well
as, the accumulation of capital.
A balance to these two objectives is the ratio of average equity to average
assets target of 6%. Bancorp's 1993 ratio was 7.09%, compared to 6.74% and
6.31% for 1992 and 1991, respectively, reflecting an accumulation of capital
presently faster than the growth in earning assets. These objectives were
originally established in 1979 and over the years have been ratios indicative
of a high performing bank. Prior to 1993, Bancorp consistently met all of
these objectives, but the measures of performance over the last few years have
changed. Although those changes may eventually require a reassessment of the
high performance standards, only sustainability over the long term will
determine whether the measures of high performance have changed. Therefore,
our targets have been reestablished for Bancorp in 1994.
Total consolidated assets at year-end 1993 stood at $12.5 billion, a
decrease of 1.6% from year-end 1992. Decreased assets were reported in
interest bearing deposits, which are mainly Eurodollar placements. As rates
have remained low, the interest margin in this activity has narrowed.
Investment securities have increased to $3.6 billion supported by the increase
in Securities Sold under Agreements to Repurchase (see Liquidity Management
section for further discussion).
Total loans increased 4.2% from year-end 1992 to $7.3 billion at year-end
1993. Bancorp has historically maintained a level of non-performing assets
(NPA) to outstanding loans under 1% of total loans. In 1992, the ratio grew to
1.34% and Bancorp increased its emphasis on monitoring and aggressively
managing NPA. At year-end 1993, NPA were $68.8 million, representing 0.95% of
total loans. The improvement for 1993 reflects the results of this aggressive
management via the large charge-off of the non-performing credit involving the
commercial leasehold property recognized in the third quarter. The details of
that transaction are included in the Risk Elements section following.
Deposits and Securities Repurchase Agreements (Repos) totaled $9.5 billion
as of December 31, 1993, a decrease of 5.9% from the year-end 1992 total of
$10.1 billion. The mix of deposits and Repos has changed with Repos increasing
and deposits decreasing. The Repo program, which began in 1991, shifts
governmental
9
entities from deposits to Repos. A further discussion of this program appears
in the Liquidity Management section. Non-interest and interest bearing demand
deposits stood at $3.3 billion at year-ends 1993 and 1992. Savings deposits
stood at $1.3 billion as of December 31, 1993, an increase of 7.2% from year-
end 1992. Time deposits have declined to $1.6 billion from $2.2 billion at
year-end 1992. The current low interest rate environment has caused depositors
to seek higher yielding investments.
PERFORMANCE HIGHLIGHTS
TABLE 1
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
1993 1992 1991
------------------ ------------------ ---------
FIVE-
YEAR
PERCENT PERCENT COMPOUND
EARNINGS MEASURES AMOUNT CHANGE AMOUNT CHANGE AMOUNT GROWTH
----------------- --------- ------- --------- ------- --------- --------
Net Income.............. $ 132.57 + 4.0% $ 127.52 13.2% $112.69 +12.1%
Earnings Per Common
Share(1)............... 3.09 + 3.0 3.00 11.5 2.69 + 8.0
Average Assets.......... 12,585.8 + 8.1 11,645.0 7.6 10,826.20 +16.1
Average Loans........... 6,991.0 + 5.9 6,601.9 1.8 6,484.10 +14.0
Average Deposits........ 7,532.4 -10.5 8,417.7 -2.5 8,630.70 + 8.4
Average Shareholders'
Equity................. 892.9 +13.8 784.6 14.9 682.90 +18.8
FIVE-YEAR
PERFORMANCE RATIOS OBJECTIVE 1993 1992 1991 AVERAGE
------------------ --------- ------- --------- ------- ---------
Return on Average As-
sets................... 1.0% 1.05% 1.10% 1.04% 1.07%
Return on Average Equi-
ty..................... 16.0 14.85 16.25 16.50 16.52
Average Equity to Aver-
age Assets Ratio....... 6.0 7.09 6.74 6.31 6.52
Loss Reserve to Loans
Outstanding............ 1.76 1.89 1.74 1.74
Tier I Capital Ratio.... 6.0 10.79 10.23 9.27
Total Capital Ratio..... 10.0 13.60 11.49 10.53
Leverage Ratio Require-
ment................... 5.0 6.89 6.37 6.17
- --------
(1) Adjusted for 50% stock dividend declared January 26, 1994.
MARKET PRICES, BOOK VALUES AND COMMON STOCK DIVIDENDS(1)
TABLE 2
MARKET PRICE (MP) RANGE HIGH MP AS
----------------------------- A PERCENT
YEAR HIGH LOW BOOK VALUE (BV) OF BV DIVIDEND
---- ------ ------ --------------- ---------- --------
1989.......................... $25.25 $15.55 $12.98 195% $.59
1990.......................... $24.55 $14.00 $15.38 160 $.70
1991.......................... $31.83 $18.89 $17.45 182 $.78
1992.......................... $34.67 $26.83 $19.68 176% $.85
First Quarter............... 34.67 29.17 .20
Second Quarter.............. 32.67 27.59 .21
Third Quarter............... 31.83 27.59 .22
Fourth Quarter.............. 30.83 26.83 .22
1993.......................... $35.92 $26.67 $22.00 163% $.90
First Quarter............... 35.92 28.83 .21
Second Quarter.............. 35.59 28.42 .23
Third Quarter............... 30.17 26.67 .23
Fourth Quarter.............. 30.00 26.75 .23
- --------
(1) Adjusted for 50% stock dividend declared January 26, 1994.
10
Established in 1991, Bancorp Investment Group, Limited provides full
brokerage services to assist customers seeking such alternative investments. In
November 1993, Bancorp introduced its family of proprietary mutual funds,
Pacific Capital Funds, for which Hawaiian Trust Company, Limited (HTCo) is the
investment advisor. At year-end 1993, these funds, consisting of one stock
fund, two fixed income funds, along with a companion group of funds (begun
several years prior), consisting of three money market funds totaled $600
million. Including the Hawaiian Tax Free Trust, the funds for which HTCo is the
investment advisor was $1.3 billion at year-end 1993. Other non-traditional
investment products, such as annuities, continue to grow and meet customer
needs.
BANCORP'S MARKETS
Bancorp's largest market is its operations in Hawaii. Growth of the Gross
State Product (GSP) is forecasted to be flat for 1993, with 1994 forecasts
ranging from a zero percent to 0.5 percent increase. A major segment of the
economy is tourism. According to the Hawaii Visitors Bureau, total visitor
arrivals through November of 1993 were 5.6 million, of which 61.7% were
visitors Westbound (mainly from the U.S. Mainland) and 38.3% were Eastbound
visitors (mainly from Japan). These arrival numbers represent a 6.3% decline
from 1992. As a corollary, the number of visitor days (calculated using visitor
counts and length of stay) on a year-to-date basis was down 4.0% from 1992.
However, Eastbound visitor days have increased 0.5% in 1993. The visitor days
calculation is an important statistic in that it includes both visitor counts
and length of stay; it can be used to indicate visitor expenditure trends.
Hawaii Visitors Bureau forecasts for the visitor industry in 1994 remain
modest, with total arrivals expected to remain close to 1993 levels and a
slight increase in visitor expenditures.
Another segment of the Hawaii economy is Federal expenditures. Federal
expenditures for 1993 are estimated to be $6.7 billion, an increase of 5.6%
compared to 1992 expenditures. Federal expenditures are segmented into defense
and non-defense spending. The announced closure of the Barbers Point Naval Air
Station on Oahu, with approximately 3,200 military personnel, is not expected
to have a material impact on the defense segment. The short term outlook for
this segment is stable. While 1993 federal defense expenditures are expected to
remain close to 1992 levels, federal non-defense expenditures are estimated to
total $3.8 billion, a 5.0% increase compared to 1992 expenditures of $3.6
billion. Included in this segment are federally funded activities such as the
Pacific regional headquarters for the social security system, the FAA, the IRS,
as well as grant programs and direct benefit payments.
Another noteworthy statistic in the Hawaii market includes the continuation
of one of the lowest unemployment rates in the nation, 4.0% reported for
November 1993. Although a low unemployment rate is generally positive, this low
rate also places a strain on the pool of available labor and creates a
challenge for Bancorp's effort to control costs and emphasize productivity.
The rebuilding efforts on the island of Kauai, where Hurricane Iniki hit in
September, 1992 have progressed well. Several hotels have reopened and tourist
counts are improving. The funding from insurance and governmental agencies to
help with the reconstruction activity will be economically positive over the
next several years.
Bancorp also operates in the Intra-Pacific region, which includes the island
nations in the South and West Pacific. This market has shown marked growth in
the last few years. One of Bank of Hawaii's largest branches and First Savings
and Loan Association of America, a subsidiary of Bancorp Pacific, Inc., are
located in Guam where increased visitor industry and economic development has
led to more demand for financial services. In November, Bank of Hawaii,
Bancorp's lead bank opened a branch in Suva, Fiji. Bank of Hawaii is currently
the only U.S. bank to operate a branch in Fiji and plans are already in place
to expand the number of branches. In December, Bank of Hawaii received all
necessary approvals, and finalized the acquisition of Banque Indosuez Vanuatu,
Ltd. The 80% owned bank has been renamed Banque d'Hawaii (Vanuatu), Ltd.
Bancorp's management continues to seek out opportunities in this market area
and be a part of the economic growth occurring in this part of the world.
11
The Asian Rim is another Bancorp market area where assets totaled $706.9
million at year-end 1993. Bank of Hawaii's Taiwan office reported its first
full year of operations in 1993 and has exceeded expectations in building
Bancorp's trade activities. In Korea, applications have been submitted to open
a second branch in Taegu to complement our Seoul Branch. Bancorp's emphasis in
the Asian Rim is mainly trade oriented. Trade financing activity typically
involves the flow of funds from letters of credit to the ultimate collection.
Bancorp handles transactions for both import and export customers. Fee income
from these activities continues to grow.
The activities in the U.S. Mainland market have been elevated as loan
opportunities are pursued. Bancorp continues to focus on industry niches such
as media and communication as well as companies with a Pacific business
orientation. In 1993, the focus was expanded to include Fortune 1000
companies. In this expansion, Bancorp's strict lending standards remain in
force and are not being sacrificed for loan growth. The new business generated
in 1993 is reflected, not only in the outstandings, but also in commitments
for lines of credit. Total outstandings for the U.S. Mainland at year-end 1993
were $1.3 billion, a 3.0% increase from year-end 1992.
SUBSIDIARY ACTIVITY
Bank of Hawaii is the largest of Bancorp's subsidiaries. Bank of Hawaii
reported total assets of$11.3 billion at year-end 1993, 90.6% of Bancorp's
total assets. Since Bank of Hawaii represents a large component of Bancorp,
the discussion following largely reflects the Bank's operations.
The blending of the recently acquired American Financial Services, Inc.
(AFS) into HTCo continues to proceed smoothly. The integration of accounting
systems, trust procedures and staff have progressed ahead of schedule. The
critical mass of assets under administration has reached a combined $11.1
billion and allows more flexibility of product offerings.
Bancorp Pacific, Inc. (formerly known as FirstFed America, Inc.), a thrift
subsidiary, continues to be a strong contributor to Bancorp's earnings through
its subsidiary First Federal Savings and Loan Association of America (First
Federal). First Federal's earnings for 1993 were $18.9 million, an increase of
1.6% from 1992's total earnings of $18.6 million. This was accomplished with
an asset base of $1.0 billion at year-end 1993, which translates into ROAA of
1.93%. At year-end 1993, First Federal reported a total risk-based capital
ratio of 22.2%, which far exceeds statutory minimums and peer savings and loan
companies. Credit quality remained strong, with NPA of only 1.47% of total
loans outstanding (primarily secured by residential real estate) and a reserve
ratio of 1.04% of outstanding loans at year-end 1993.
First National Bank of Arizona (FNBA) reported improved results during 1993,
driven by improved loan quality. Net income for 1993 was $735,000, compared to
$75,000 for 1992. Lending activity at FNBA in Arizona has been strong. Total
loans have grown to $87.5 million at year-end 1993. The focus on lending in
Arizona remains in the commercial/small business area. NPA as a percent of
total loans outstanding were 1.83% at year-end 1993 compared to 4.0% at the
end of 1992. The ratio of reserves to loans outstanding remained strong at
9.64% at year-end 1993, compared to 9.87% at year-end 1992. FNBA's total risk-
based capital ratio remained strong at 10.69%.
The following sections will cover in more detail Bancorp's performance and
activities during 1993. The areas that will be covered include:
Risk Elements Involved in Lending Activities
Asset-Liability Management
Capital Adequacy
Interest Rate Risk
Liquidity Management
Control of Net Overhead
Income Taxes
Fourth Quarter Results
12
RISK ELEMENTS INVOLVED IN LENDING ACTIVITIES
RISK PROFILE OF LENDING ACTIVITY
The lending environment over the last year has been challenging. The
lackluster economic recovery on the U.S. Mainland, the slowed Hawaiian economy
and the financial restructuring in Japan have all affected Bancorp's lending
activities. The effects are evident in two elements: the slowed rate of
increase of the loan portfolio and the level of NPA. The slow economic recovery
on the U.S. Mainland has resulted in an interesting set of challenges that
Bancorp faces, along with many financial institutions across the nation. U.S.
Mainland lending opportunities focused on Fortune 1000 companies are being
pursued in various regions of the U.S. At year-end 1993, $1.3 billion, or 17.3%
of Bancorp's total loan portfolio was to U.S. Mainland based companies as
compared to $1.2 billion at year-end 1992 and $1.1 billion at year-end 1991.
Many of these companies are active in Hawaii and the Pacific.
In 1993, certain sections of the loan portfolio saw increased activity and
growth. Mortgage lending, both commercial and residential, reported good growth
with residential loan volume very brisk, as both refinancing and new loan
activity continued in 1993. Realty and Mortgage Investors of the Pacific,
Limited (RAMPAC), a subsidiary of Bank of Hawaii formed in 1993, had a
portfolio of $75.5 million at year-end 1993, mainly in the mortgage-commercial
category. The loans booked by RAMPAC carry a relatively higher risk, and
therefore bear enhanced yields. All are secured by real estate in Hawaii. The
loans typically allow for some form of shared profits based on the performance
of the property or its ultimate sale. Utilizing a separate subsidiary for this
operation allows for closer monitoring and eventual sale, if appropriate.
Table 3 presents the year-end balances broken down into the various loan
categories. The mix of loans in Bancorp's portfolio has changed. At year-end
1993, real estate loans made up 53.4% of the total compared with 49.4% at year-
end 1992. At year-end 1993, mortgage-residential loans represented 34.1% of
total loans, while mortgage-commercial loans represented 17.0% of total loans.
Table 4 presents the geographic distribution of the loan portfolio based on the
major markets in which Bancorp operates.
LOAN PORTFOLIO BALANCES
TABLE 3
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic Loans
Commercial and Industrial....... $1,709.2 $1,864.1 $1,746.9 $1,639.8 $1,536.4
Real Estate
Construction--Commercial........ 136.2 220.2 229.4 205.6 177.4
--Residential....... 35.1 40.4 42.0 69.3 42.4
Mortgage--Commercial............ 1,230.6 991.9 1,021.9 952.4 783.2
--Residential........... 2,476.0 2,189.1 2,003.5 1,937.3 1,086.1
Installment..................... 676.2 655.9 651.3 712.0 665.2
Lease Financing................. 401.6 393.4 357.1 341.5 289.6
-------- -------- -------- -------- --------
Total Domestic................ 6,664.9 6,355.0 6,052.1 5,857.9 4,580.3
Foreign Loans
Government and Official
Institutions................... -- -- -- 0.4 2.8
Bank and Other Financial
Institutions................... 295.8 285.6 384.3 390.9 132.2
Commercial and Industrial....... 259.4 288.5 284.6 234.9 178.0
All Others...................... 38.3 34.5 38.1 29.1 83.1
-------- -------- -------- -------- --------
Total Foreign................. 593.5 608.6 707.0 655.3 396.1
-------- -------- -------- -------- --------
TOTAL LOANS................. $7,258.4 $6,963.6 $6,759.1 $6,513.2 $4,976.4
======== ======== ======== ======== ========
13
The following sections discuss the different loan categories.
COMMERCIAL AND INDUSTRIAL LOANS
As shown on Table 3, the commercial and industrial loan (C&I) portfolio,
which includes commercial, financial and agricultural loans, was $1.7 billion,
down 8.3% from year-end 1992. This portfolio which makes up 23.5% of the total
loans consists of lending to individuals and companies on both a secured and
unsecured basis for business purposes. Customers and collateral vary based on
the type of business involved. The portfolio is made up of approximately 6,900
loans. Approximately 6,400 loans have balances less than $500,000, most of
which would be classified as small and middle market customers. Larger
customers, such as multi-national corporations and large U.S. mainland
companies represent approximately 79% of the total C&I loan balance.
Bancorp's focus in lending to companies on the U.S. Mainland is to Fortune
1000 companies, companies with a Pacific orientation and selected niches where
lending expertise has developed over the years. The communication/media
portfolio is considered such a niche. Total loans and leases of this type stood
at $429.7 million at year-end 1993, a decrease of 6.3% from year-end 1992. The
balances in this category represented 25.1% of the total commercial and
industrial loan portfolio at year-end 1993. At year-end 1993, there were no
loans in the communication/media portfolio which were classified as NPA.
During the third quarter of 1993, Bancorp reported a $25.7 million charge-off
of loans, which in part were secured by commercial leasehold property (a
hotel). The loans had been placed on non-performing status with $20 million
charged-off during the fourth quarter of 1992. In the fourth quarter of 1993,
the property was sold for an undisclosed amount to foreign and Hawaii-based
investors. As a result of the sale, Bancorp received $14.5 million in cash
which was applied against the balance of loans left on non-performing status.
In connection with the transaction, Bancorp obtained substantial additional
collateral to secure the losses incurred in the fourth quarter of 1992 and the
third quarter of 1993. As the collateral is liquidated by the borrower,
proceeds are expected to be recognized as recoveries over the next several
years.
The situation concerning leasehold properties in the State of Hawaii has
settled somewhat, but continues to be monitored. The rate of growth of land
values has slowed and lease rent increases have paralleled the change. In
total, Bancorp's loans secured by commercial leasehold mortgages totaled
approximately $290.6 million at year-end 1993, 4.0% of the total loan
portfolio. There were $45.3 million of loan balances in this category whose
ground rent for the underlying collateral will be renegotiated in the next five
years.
Commercial and industrial loans that were classified as non-performing
totaled $16.7 million or 24.3% of total non-performing assets at year-end 1993.
For comparative purposes, $52.6 million and $7.6 million were classified as NPA
at year-ends 1992 and 1991, respectively.
LEASING ACTIVITIES
Equipment leases have been an increasingly important component of the overall
loan portfolio by providing customers with an alternative to traditional
lending products. The tax benefit received by Bancorp is also an important
component of Bancorp's tax planning strategy. Growth in the leasing portfolio
during 1993 has also been limited by the slowing economy and strong
competition. Leases outstanding grew modestly to $401.6 million, up 2.1% from
year-end 1992. The lease portfolio is diversified, with the types of equipment
under lease including aircraft, ships, automobiles and trucks, office
equipment, computers and others. NPA in the leasing category were $0.3 million
at year-end 1993.
REAL ESTATE LOANS
At year-end 1993, Bancorp's total real estate loan portfolio stood at $3.9
billion, up 12.7% from year-end 1992. Real estate loans represent 53.4% of the
total loan portfolio at year-end 1993. The real estate loan portfolio is
divided into construction and mortgages as shown on Table 3.
14
The largest component in the mortgage segment of the real estate loan
portfolio are loans secured by 1-to-4 family residential property. At $2.5
billion, this group represented 63.8% of total real estate loans at year-end
1993 and 34.1% of total loans outstanding. About 88.1% of these loans are
secured by real estate in Hawaii (see Table 4). Approximately 66.5% of the 1-
to-4 family residential mortgage loans are underwritten on a floating rate
basis. Only $46.7 million in the Real Estate, Mortgage category (both
residential and commercial) have rates that adjust more than five years into
the future. The average 1-to-4 family mortgage loan has been outstanding about
5.7 years with an outstanding balance of $116,000. For 1993, Bancorp's average
principal loan amount originated was $166,000, down from the $181,000 average
for 1992. The 1993 average loan origination at First Federal was $144,000
compared with $183,000 for Bank of Hawaii. The median single family home price
on Oahu was $358,000 in 1993, compared to $349,000 in 1992. As property values
have increased in Hawaii, loan to value ratios on the existing loans are
generally lower than the original underwriting standards, which typically use
80% as a maximum.
Also included in the real estate portfolio are home equity creditlines.
Available credit under these lines increased 12.3% to $506.7 million at year-
end 1993. Although available credit has increased, outstandings have declined
from $347.4 million at year-end in 1992 to $334.3 million at year-end 1993.
These creditlines are underwritten based on repayment ability rather than the
value of the underlying property. However, home equity creditlines are
generally limited to 70% of the value of the collateral including prior liens.
At year-end 1993, NPAs in the mortgage-residential category (excluding
construction loans) totaled $16.4 million, or 23.8% of total NPA.
Comparatively, mortgage-residential NPA totaled $17.7 million and $11.2
million at year-ends 1992 and 1991, respectively. Foreclosed real estate, at
year-end 1993, was $4.1 million, which consisted of nine properties.
The commercial real estate portfolio (excluding construction loans) totaled
$1.2 billion at year-end 1993, up 24.1% from year-end 1992. Table 3 presents
the balances outstanding in this portfolio over the last five years. Of the
properties collateralizing Bancorp's commercial real estate loans, about 80.3%
were located in Hawaii.
The commercial real estate loan portfolio is diversified in the types of
property securing the obligations. Of the $1.2 billion in total commercial
real estate loans at year-end 1993, $247.6 million represented loans secured
by shopping centers; $183.1 million represented loans secured by
commercial/industrial/warehouse facilities; and $271.9 million represented
loans secured by office buildings. Generally, loans secured by
commercial/industrial/warehouse facilities and office buildings are either
solely or partially owner-occupied.
Non-performing commercial real estate loans at year-end 1993 totaled $13.1
million or 19.0% of total NPA. Comparatively, commercial real estate NPA at
year-ends 1992 and 1991 totaled $11.4 million and $18.1 million, respectively.
Included in foreclosed real estate, at year-end 1993 were two commercial
properties totaling $2.0 million.
Total commercial construction loans were $136.2 million at year-end 1993,
38.1% below year-end 1992. The trend in this portfolio has been declining
since 1991. Bancorp maintains a conservative underwritingpolicy, as these
loans by their nature have greater risk. For the majority of these loans,
Bancorp looks to the cash flow of the completed projects and committed
permanent financing for repayment, rather than thevalue of the property. A
dissection of the construction lending portfolio at year-end 1993 shows
commercial land development, $19.6 million; housing construction, $34.1
million; tract and land development for residential housing, $54.7 million;
retail facilities, $10.7 million; industrial projects, $18.3 million;
commercial offices, $11.5 million; and hotels, $5.3 million. These loans were
concentrated in property located in Hawaii($126.8 million).
At the end of 1993, construction non-performing loans totaled $17.7 million
or 25.7% of total NPA, compared to year-end 1992 when there were no
construction NPA and 1991 when $2.9 million was reported.
15
CONSUMER LOANS
Total consumer loans (excluding residential mortgage and home equity loans)
increased to $676.2 million, up 3.1% from year-end 1992. Several factors
continue to negatively affect growth in this category, such as the elimination
of tax deductions for interest paid on consumer debt, the programs by
automobile manufacturers to provide aggressive financing, and economic
conditions.
Bancorp issues Classic and Gold VISA credit cards which are held by more than
145,000 cardholders. Outstanding balances for such cards totaled $204.1 million
at year-end 1993, an increase of 6.8% from year-end 1992. The average credit
limit on these accounts was $6,600 for 1993 with an average outstanding balance
of $1,400, compared with an average outstanding balance of $1,320 for 1992. At
year-end 1993, 0.6% of the accounts (based on balances) were delinquent more
than 90 days, compared with 0.6% at year-end 1992, and 0.3% at year-end 1991.
INTERNATIONAL LENDING
Foreign loans at the end of 1993 totaled $593.5 million, down 2.5% from year-
end 1992. Bancorp maintains a cautious approach to the international
marketplace with a lending strategy that focuses primarily on short term trade
finance and working capital loans for companies doing business in the Pacific
and the Asian Rim. The lending activities in Tokyo, Korea and Singapore remain
the most significant with U.S. dollar equivalent loans outstanding at year-end
1993 at these branches of $301.8 million, $82.4 million, and $104.2 million,
respectively. Long term exposure to less developed countries (LDC) remain
modest and stood at $1.0 million at year-end 1993.
NPA in the international portfolio have remained at low levels. At year-end
1993, there were no international NPA. For 1992, international NPA were $5.0
million and none were reported at year-end 1991. As indicated on Table 7,
losses in the international portfolio have increased in 1993 to $7.5 million,
1.3% of outstanding international loans.
16
GEOGRAPHIC DISTRIBUTION OF THE LOAN PORTFOLIO
The distribution of the loan portfolio by geographic areas is presented in
Table 4. The majority of Bancorp's loans (63.8%) were located in Hawaii at
year-end 1993. The balances reflected in the West and South Pacific include
Guam and other Pacific Islands where both Bank of Hawaii and First Federal's
subsidiary, First Savings and Loan Association of America, have branches. The
modest real estate loans in the western U.S. mainly represent mortgage lending
in Arizona.
GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO
TABLE 4
TOTAL WEST &
YEAR-END SOUTH WESTERN EASTERN
1993 HAWAII PACIFIC U.S.(1) U.S.(1) JAPAN(2) OTHER(2)
-------- -------- ------- ------- ------- -------- --------
(IN MILLIONS OF DOLLARS)
Commercial, Financial
and Agricultural................... $1,709.2 $ 689.7 $137.2 $361.8 $471.4 $ 48.3 $ 0.8
Real Estate
Construction--Commercial.......... 136.2 126.8 2.1 7.3 -- -- --
--Residential......... 35.1 25.6 8.5 1.0 -- -- --
Mortgage--Commercial.............. 1,230.6 988.1 67.1 95.4 -- 62.5 17.5
--Residential............. 2,476.0 2,181.2 255.2 32.7 6.9 -- --
Installment......................... 676.2 528.3 144.0 3.6 -- -- 0.3
Foreign............................. 593.5 -- -- -- -- 347.4 246.1
Lease Financing..................... 401.6 90.5 14.1 90.1 181.4 -- 25.5
-------- -------- ------ ------ ------ ------ ------
Total........................... $7,258.4 $4,630.2 $628.2 $591.9 $659.7 $458.2 $290.2
-------- -------- ------ ------ ------ ------ ------
Percentage of Total................. 100.0% 63.8% 8.6% 8.2% 9.1% 6.3% 4.0%
======== ======== ====== ====== ====== ====== ======
- --------
(1) The line of demarcation is the Mississippi River.
(2) Although these loans are considered foreign, certain of the underlying
collateral is domiciled in the U.S. or Guam.
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets (which include non-accrual loans, restructured loans
and foreclosed real estate) totaled $68.8 million at year-end 1993, compared to
$93.0 million at the end of 1992. The decrease from year-end 1992 primarily
reflects the charge-off of the commercial loan involving leasehold commercial
property and an aggressive posture on handling NPA further described below.
Generally, the percentage of NPA to loans outstanding remains below those of
peer banks. Table 6 presents this ratio for the last 5 years.
As indicated earlier in this report, Bancorp strives to identify and handle
potential problem loans at an early stage. This allows time to work with
borrowers and resolve problems before they result in losses. Bancorp's policy
is to place loans on non-accrual as soon as a loan is delinquent over 90 days,
unless unusual treatment is indicated by the type of borrowing agreement and/or
collateral. At the time a loan is placed on non-accrual, all accrued but unpaid
interest is reversed against current earnings.
At year-end 1993, NPA loans secured by real estate totaled $47.2 million or
68.6% of total NPAs; of this total, $35.5 million or 75.2% of these loans were
secured by real estate in Hawaii. NPA in the West and South Pacific and Asia
were relatively minimal. A focus on quality credits and cautious asset growth
remains the objective in Arizona. NPA in Arizona has improved, and represented
2.9% of total NPA or $2.0 million at year-end 1993, compared to $4.6 million
and 4.9% of total NPA at year-end 1992. FNBA's loan quality has improved
considerably over the last three years. At the end of 1993 FNBA's NPA was 1.83%
of total loans outstanding compared with 4.0% at year-end 1992, and 12.0% at
year-end 1991.
17
First Federal's NPA totaled $13.4 million at year-end 1993, up from $9.0
million at year-end 1992. The increase was represented by two credits totaling
$5.7 million. Total NPA at First Federal represented 1.47% of total loans
outstanding at year-end 1993.
Restructured loans totaled $6.3 million at year-end 1993, a decrease of 26.7%
from the year-end 1992 balance. Restructured loans represented 0.09% of total
loans at year-end 1993. The impact of restructured loans on earnings has not
been significant.
Foreclosed real estate for Bancorp totaled $4.1 million. There were only nine
properties in foreclosed real estate. The most significant property is located
in Hawaii and was carried at $1.5 million at year-end 1993.
Loans Past Due 90 Days totaled $10.0 million at year-end 1993. This is less
than half the $24.2 million reported at year-end 1992. The improvement reflects
the return to levels experienced in earlier years as reflected in Table 6.
In 1993, Bancorp recorded $0.7 million in interest reversals relating to non-
accrual loans compared to $0.2 million in 1992. In 1993, $2.5 million in
interest was collected on previously non-accrual and charged off loans, a
decrease from the $3.0 million collected in 1992.
FOREGONE INTEREST ON NON-ACCRUALS
YEARS ENDED DECEMBER 31
TABLE 5
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS)
Interest Income Which Would Have Been Recorded
Under Original Terms:
Domestic............................................ $5.3 $7.0 $4.2 $3.2 $3.4
Foreign............................................. -- 0.3 -- -- --
Interest Income Recorded
During the Current Year on Non-Accruals:
Domestic............................................ 0.9 3.4 1.0 1.3 1.5
Foreign............................................. -- 0.2 -- -- --
18
NON-PERFORMING ASSETS AND ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
TABLE 6
PROFORMA
1993 1992 1991 1990 1989(1)
----- ------ ----- ----- --------
(IN MILLIONS OF DOLLARS)
Non-Accrual Loans
Commercial and Industrial.............. $15.7 $ 47.2 $ 6.5 $ 8.2 $ 8.0
Real Estate
Construction.......................... 17.7 -- 2.9 4.6 6.9
Commercial............................ 7.8 8.2 15.0 8.2 1.4
Residential........................... 16.4 17.7 11.2 4.5 3.6
Other.................................. 0.8 -- -- -- 0.1
Foreign................................ -- 5.0 -- -- 0.2
----- ------ ----- ----- -----
Subtotal.............................. 58.4 78.1 35.6 25.5 20.2
----- ------ ----- ----- -----
Restructured Loans
Commercial and Industrial.............. 1.0 5.4 1.1 0.1 0.3
Real Estate
Construction.......................... -- -- -- -- --
Commercial............................ 5.3 3.2 3.1 4.0 3.7
Residential........................... -- -- -- 3.7 3.4
Other.................................. -- -- 0.2 -- --
Foreign................................ -- -- -- -- --
----- ------ ----- ----- -----
Subtotal.............................. 6.3 8.6 4.4 7.8 7.4
----- ------ ----- ----- -----
Foreclosed Real Estate
Domestic............................... 4.1 6.3 2.0 1.6 0.8
Foreign................................ -- -- -- -- --
----- ------ ----- ----- -----
Subtotal.............................. 4.1 6.3 2.0 1.6 0.8
----- ------ ----- ----- -----
Total Non-Performing Assets.......... $68.8 $ 93.0 $42.0 $34.9 $28.4
----- ------ ----- ----- -----
Loans Past Due 90 Days
Commercial and Industrial.............. 0.3 0.5 2.9 3.8 4.4
Real Estate
Construction.......................... -- -- 0.2 0.2 0.2
Commercial............................ 1.9 5.8 0.3 1.2 0.1
Residential........................... 4.1 13.0 2.0 2.2 2.4
Other.................................. 3.7 4.6 3.0 4.0 5.6
Foreign................................ -- 0.3 -- -- --
----- ------ ----- ----- -----
Subtotal.............................. 10.0 24.2 8.4 11.4 12.7
----- ------ ----- ----- -----
Total................................ $78.8 $117.2 $50.4 $46.3 $41.1
----- ------ ----- ----- -----
Ratio of Non-Performing Assets to Total
Loans (1)............................... 0.95% 1.34% 0.62% 0.54% 0.50%
----- ------ ----- ----- -----
Ratio of Non-Performing Assets and
Accruing Loans Past Due 90 Days or More
to Total Loans (1)...................... 1.09% 1.68% 0.75% 0.71% 0.72%
----- ------ ----- ----- -----
- --------
(1) FirstFed's loans included for comparative purposes for 1989.
19
SUMMARY OF LOAN LOSS EXPERIENCE
At the end of 1993, the reserve for loan losses stood at $125.3 million.
Table 7 shows the activity through the reserve. The levels of the loan loss
reserve are primarily derived from an extensive review of the loan portfolio
with a strong emphasis on the line driven loan grading system for the larger
commercial loans in Bank of Hawaii and FNBA. This loan grading system was
implemented in 1985 and is continuously monitored for accuracy by the Loan
Review department. In addition, delinquency data and historical trends are
considered in the analysis. The ratio of reserves to loans outstanding is one
measure of the adequacy of the reserve; however, the absolute dollar amount of
the reserve and its relationship to non-performing loans and historical charge-
offs are perhaps more valid measures. In the last ten years the reserve to
charge-off ratio has never been less than 1.4 times in any year and has
averaged 3.5 times over the same period. At the end of 1993, the reserve was
1.8 times non-performing loans and 1.9 times charge-offs. The ratio of reserves
to outstanding loans at year-end 1993 was 1.76%, down from the 1.89% reported
at year-end 1992.
Loan loss provisions for 1993 were $54.2 million while gross charge-offs were
$65.7 million. 1993 gross charge-offs represented 0.94% of average outstanding
loans and 52.4% of the reserve at the end of 1993, compared to 0.67% and 34.2%,
respectively at year-end 1992 and 0.34% and 19.2% reported at year-end 1991.
Charge-offs for 1993 increased substantially due to the $25.7 million charge-
off related to the credit discussed in the Risk Elements section. Net charge-
offs for 1993 were $57.5 million, 0.82% of average loans outstanding, compared
with 0.56% for 1992 and 0.24% for 1991.
Recoveries of previously charged-off loans continued to increase. Recoveries
for 1993 totaled $8.2 million, up 17.1% from $7.0 million in 1992. In recent
years recoveries have increased annually. Specifically, total recoveries over
the last five years represented almost 20.3% of total charge-offs for the same
period.
20
SUMMARY OF LOAN LOSS EXPERIENCE
TABLE 7
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Average Amount of Loans Out-
standing.................... $6,991.0 $6,601.9 $6,484.1 $5,532.4 $4,368.6
======== ======== ======== ======== ========
Balance of Reserve for
Possible Loan Losses at
Beginning of Period......... $ 128.6 $ 115.6 $ 101.9 $ 84.4 $ 73.6
Loans Charged-Off
Commercial and Industrial.. 43.9 29.5 11.0 11.6 6.4
Real Estate--
Construction.............. 0.5 -- -- -- 1.2
Mortgage(1)--Commercial... 2.7 4.2 1.8 1.0 0.4
--Residential.. 0.4 0.5 0.9 -- --
Installment................ 8.6 8.7 8.3 7.0 4.7
Foreign.................... 7.5 1.0 -- 0.2 3.6
Leases..................... 2.1 0.1 0.2 0.1 0.1
-------- -------- -------- -------- --------
Total Charged-Off............ 65.7 44.0 22.2 19.9 16.4
Recoveries on Loans Previ-
ously Charged-Off
Commercial and Industrial... 3.9 3.0 2.6 2.7 2.2
Real Estate--
Construction.............. -- -- 0.2 -- --
Mortgage(1)--Commercial... 0.7 0.2 0.1 0.8 0.2
--Residential.. 0.3 0.3 0.5 -- --
Installment................ 3.2 3.0 3.0 2.3 2.0
Foreign.................... -- 0.4 0.4 0.3 1.5
Leases..................... 0.1 0.1 0.1 -- --
-------- -------- -------- -------- --------
Total Recoveries............. 8.2 7.0 6.9 6.1 5.9
-------- -------- -------- -------- --------
Net Loans Charged-Off........ (57.5) (37.0) (15.3) (13.8) (10.5)
-------- -------- -------- -------- --------
Provisions Charged to Operat-
ing Expenses................ 54.2 50.0 29.6 28.0 20.9
Reserves Acquired (Sold)..... -- -- (0.6) 3.3 0.4
Balance at End of Period..... $ 125.3 $ 128.6 $ 115.6 $ 101.9 $ 84.4
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to
Average Loans
Outstanding................. 0.82% 0.56% 0.24% 0.25% 0.24%
Ratio of Reserve to Loans
Outstanding................. 1.76% 1.89% 1.74% 1.60% 1.73%
======== ======== ======== ======== ========
The details of the Foreign Reserve for Loan Losses, which are included in the
table above, are:
Beginning Balance............................. $14.2 $14.0 $13.1 $19.1 $18.8
Charge-Offs................................. 7.5 1.0 -- 0.2 3.6
Recoveries.................................. -- 0.4 0.4 0.3 1.5
----- ----- ----- ----- -----
Net Charge-Offs............................. (7.5) (0.6) 0.4 0.1 (2.1)
Provisions.................................. 3.8 0.8 0.5 0.5 2.4
Excess to General Reserve................... -- -- -- (6.6) --
----- ----- ----- ----- -----
Ending Balance............................ $10.5 $14.2 $14.0 $13.1 $19.1
===== ===== ===== ===== =====
- --------
(1) For years prior to 1991, detailed breakdown not available and is reported
as Commercial.
21
ALLOCATION OF LOAN LOSS RESERVE
TABLE 8
1993 1992 1991 1990 1989
---------------- ---------------- ---------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OUT- OF OUT- OF OUT- OF OUT- OF OUT-
STANDING STANDING STANDING STANDING STANDING
RESERVE LOAN RESERVE LOAN RESERVE LOAN RESERVE LOAN RESERVE LOAN
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(IN MILLIONS OF DOLLARS)
Commercial and Industri-
al..................... $ 51.2 3.00% $ 54.0 2.90% $ 30.5 1.75% $ 27.8 1.70% $23.1 1.50%
Real Estate
Construction........... 4.3 2.51 2.6 1.00 5.4 2.20 5.5 2.00 3.0 1.40
Commercial............ 15.4 1.25 19.8 2.00 25.5 2.50 19.1 2.00 5.1 0.62
Residential........... 18.5 0.75 16.4 0.75 16.0 0.75 9.7 0.50 4.3 0.40
Installment............. 13.5 2.00 10.0 1.55 10.0 1.55 10.7 1.50 10.6 1.60
Foreign................. 10.5 1.77 14.2 2.33 14.0 2.00 13.1 2.00 19.1 4.80
Leases.................. 2.0 0.50 3.9 1.00 5.0 1.40 5.1 1.50 4.3 1.50
Not allocated........... 9.9 -- 7.7 -- 9.2 -- 10.9 -- 14.9 --
------ ---- ------ ---- ------ ---- ------ ---- ----- ----
$125.3 1.76% $128.6 1.89% $115.6 1.74% $101.9 1.60% $84.4 1.73%
====== ==== ====== ==== ====== ==== ====== ==== ===== ====
INTERNATIONAL OPERATIONS
Bancorp's international presence is extensive and provides opportunities to
take part in both lending and deposit-taking activities globally. These
endeavors have proven both profitable and important.
Through the International Division of Bank of Hawaii, Bancorp offers
international banking services to its corporate, financial institution and
individual customers in some of the world's major financial centers. The Taipei
office which opened last year, has been exceptionally successful in developing
trade-related correspondent banking business. In 1993, the office facilitated
more than 35,000 items totaling $1.0 billion for banks in Taiwan. As of year-
end 1993, Bancorp had offices in Hong Kong, the Philippines (Manila, Cebu, and
Davao), Seoul, Singapore, Tokyo, Taiwan and New York, in addition to the
pending new branch in Taegu, Korea.
Bank of Hawaii operates branches and offices in several Pacific Island
locations, offering traditional banking services. These activities are located
in Guam, Saipan, Palau, Yap, Majuro, Kosrae, Pohnpei and American Samoa. Since
the U.S. dollar is used in these locations, all are considered domestic
operations. In 1993, Bank of Hawaii opened a branch in Fiji. Since Fiji uses
its own currency, it is included with the other foreign operations and is
considered international, even though its operations are reflective of
consumer/small business activities much like domestic branches.
Bank of Hawaii also holds investments in unconsolidated affiliate banks in
the South Pacific--in Tahiti, Tonga, New Caledonia, Vanuatu and Western Samoa
(see organization chart). Total assets at year-end 1993 of all such affiliates
were $939.5 million. These investments, most of which were initially made more
than 20 years ago, are in profitable institutions and are mainly accounted for
using the equity method. As mentioned earlier, Bancorp finalized its purchase
of 80% of Banque Indosuez in Vanuatu in December and renamed it Banque d'Hawaii
(Vanuatu), Ltd. For 1993, the investment in Banque d'Hawaii (Vanuatu), Ltd. has
not been consolidated and has been accounted for at present using the equity
method. The total assets in Vanuatu were $70.1 million at year-end 1993 and
will be reported in the consolidated numbers in the future. Bank of Hawaii's
investments in these affiliate banks are all considered international.
22
Table 9 summarizes key totals for the International Operations for 1993. Net
income for 1993 decreased to $8.5 million, compared to the $11.5 million in
1992. This translates into a return on assets for this division of 0.45%, down
from the 0.62% for 1992.
Bancorp continues to focus on trade-related financing activities and lending
to customers with which it has a direct relationship rather than participation
in syndicated loans. Bancorp's foreign lending consists of both local currency
and cross-border lending. Local currency loans are those that are funded and
will be repaid in the currency of the borrower's country and involve the same
types of risk as domestic lending. Cross-border lending, on the other hand,
involves loans that will be repaid in currencies other than that of the
borrower's country. This type of lending involves greater risk because the
borrower's ability to repay is additionally dependent on the availability of
foreign exchange in the host country.
Bancorp controls its exposure to the risks of international lending by
evaluating the political and economic factors that bear on a country's ability
to meet its foreign debt obligations. Based on these analyses, maximum credit
limits (both short and long term) are established for each country to ensure
that the international portfolio is diversified and that exposure is limited in
countries that may experience future problems. These credit limits are reviewed
on a regular basis so that exposures are understood and properly assessed.
Bancorp's strategy for foreign lending is to deal on a direct basis primarily
with countries and companies that have a strong interest in Hawaii, the South
and West Pacific, or the Asian Rim.
At year-end 1993, international assets represented 15.2% of Bancorp's total
average assets, a decrease from 16.0% at year-end 1992. Cross-border interbank
placements accounted for $1.2 billion or 63.2% of total average international
assets at year-end 1993. Table 10 presents cross-border exposures of individual
countries for which Bancorp has cross-border exposures exceeding 0.75% of total
assets, at the respective year-end periods. As table 10 indicates, $978.3
million or 62.8% was with such countries as Japan, Taiwan, Italy, Thailand and
Korea.
Long-term cross-border outstandings to lesser developed countries (LDC) at
year-end 1993 was $1.0 million. Such exposure was entirely in the Philippines.
The foreign reserve for losses is considered by management to be adequate to
absorb any credit or country risk of the remaining LDC exposure (both term and
trade credits).
SUMMARY OF INTERNATIONAL ASSETS, LIABILITIES, AND INCOME AND PERCENT OF
CONSOLIDATED TOTALS
TABLE 9
1993 1992 1991
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS OF DOLLARS)
Average Assets........... $1,908.9 15.2% $1,864.9 16.0% $1,640.6 15.2%
Average Liabilities...... 1,863.3 15.9 1,793.4 16.5 1,591.7 15.7
Operating Revenue........ 94.1 10.0 105.7 11.2 127.2 12.4
Net Income............... 8.5 6.4 11.5 9.0 11.1 9.8
-------- ---- -------- ---- -------- ----
23
GEOGRAPHIC DISTRIBUTION OF CROSS-BORDER INTERNATIONAL ASSETS
TABLE 10
GOVERNMENT BANKS AND COMMERCIAL
AND OTHER OTHER AND
OFFICIAL FINANCIAL INDUSTRIAL
INSTITUTIONS INSTITUTIONS INSTITUTIONS TOTAL
------------ ------------ ------------ --------
(IN MILLIONS OF DOLLARS)
at December 31, 1993
Japan......................... $ -- $ 166.8 $178.3 $ 345.1
Taiwan........................ -- 271.3 -- 271.3
Korea......................... -- 61.6 79.8 141.4
Thailand...................... -- 110.5 -- 110.5
Italy......................... -- 110.0 -- 110.0
All Others.................... 1.0 465.2 114.1 580.3
----- -------- ------ --------
$ 1.0 $1,185.4 $372.2 $1,558.6
===== ======== ====== ========
at December 31, 1992
Japan......................... $ -- $ 237.8 $189.5 $ 427.3
Taiwan........................ -- 195.6 -- 195.6
France........................ -- 149.0 9.4 158.4
Italy......................... -- 142.0 -- 142.0
Australia..................... -- 69.1 32.1 101.2
Canada........................ -- 100.0 -- 100.0
Sweden........................ -- 100.0 -- 100.0
All Others.................... 13.0 671.3 65.4 749.7
----- -------- ------ --------
$13.0 $1,664.8 $296.4 $1,974.2
===== ======== ====== ========
at December 31, 1991
Japan......................... $ -- $ 326.2 $232.2 $ 558.4
Taiwan........................ 22.0 142.5 -- 164.5
Italy......................... -- 149.5 -- 149.5
France........................ -- 115.7 9.9 125.6
Korea......................... -- 11.4 101.1 112.5
All Others.................... 11.0 616.6 65.7 693.3
----- -------- ------ --------
$33.0 $1,361.9 $408.9 $1,803.8
===== ======== ====== ========
POTENTIAL PROBLEM LOANS
Bancorp's management emphasizes the importance of early recognition and
monitoring of loans as a means to control delinquency. Demonstrating this
commitment, management continuously reviews loans to various borrowers and
industry segments that may be experiencing financial difficulties even if these
loans have been generally current as to their terms. As mentioned earlier, a
loan grading system, which has been in place for several years, provides the
process for this early warning system. Loans are graded by lending officers and
validated by an independent Loan Review department to assure accuracy in the
grades. This process is also utilized to determine the adequacy of the reserve
for losses.
24
ASSET AND LIABILITY MANAGEMENT
Assets and liabilities are managed to maximize long term risk adjusted
returns to our shareholders. The asset and liability management process is one
of financial risk management. Risk in the form of capital adequacy, interest
rate sensitivity, liquidity and operating efficiency is balanced with expected
return so as to yield high relative earnings performance and market value of
equity, while limiting the volatility of each. This process is carried out
through regular meetings of executive and senior management.
CAPITAL ADEQUACY
At year-end 1993, Bancorp's equity was $938.1 million, a 13.3% increase from
the $828.3 million at year-end 1992. Market capitalization stood at $1.2
billion at the end of 1993. This growth in equity has been largely the result
of increased earnings and Bancorp's Dividend Reinvestment and Stock Purchase
Plan. In 1993, the discount on the Dividend Reinvestment Plan was discontinued,
but the Plan added $7.7 million in capital. In the fourth quarter, Bancorp
repurchased 48,600 shares of stock. The strategy is to utilize these shares to
meet the needs of the Dividend Reinvestment and Stock Purchase Plan, Profit
Sharing Plan and Stock Option Plan. In the fourth quarter, 31,280 shares were
reissued. This strategy will modestly slow the growth of Bancorp's capital.
Table 11 presents an analysis of the changes in equity over the last five
years.
In 1989, the Federal Reserve Board established risk-based capital guidelines.
As defined in those guidelines, capital is reduced by goodwill and in certain
situations, increased by portions of the reserve for loan losses. Capital is
categorized at two levels: Tier 1 (which is mainly common stock and qualifying
preferred stock) and Total Capital (which is Tier 1 Capital plus qualifying
debt and a portion of the reserve for loan losses). The risk-based capital
ratio is calculated using a risk-weighted asset base, which includes off-
balance sheet exposures.
In 1993, the regulators implemented new thresholds for determining the
adequacy of capital levels. The formulas for calculating the capital ratios
remained the same. To qualify as a well capitalized institution, all three of
these thresholds must be exceeded--Tier 1 Capital 6%; Total Capital 10% and the
leverage ratio 5%. Bancorp's strategy is to maintain its capital at a level to
qualify as well capitalized. The financial and regulatory impact of maintaining
this status is important to Bancorp. At year-end 1993, Bancorp's Tier 1 Capital
ratio was 10.79%, Total Capital ratio 13.60% and leverage ratio was 6.89%. All
three exceeded the minimum levels to qualify as well capitalized.
25
EQUITY CAPITAL
TABLE 11
1993 1992 1991 1990 1989
-------- -------- -------- -------- ------
(IN MILLIONS OF DOLLARS)
Source of Common Equity
Net Income..................... $ 132.6 $ 127.5 $ 112.7 $ 95.7 $ 79.9
Dividends Paid................. (38.4) (35.4) (32.4) (27.6) (21.6)
Dividend Reinvestment Program.. 7.7 8.1 6.3 4.8 8.3
Stock Repurchases.............. (2.0) (0.6) -- (1.6) (0.5)
1.5 Million Share Public Offer-
ing........................... -- -- -- 72.5 --
Other(1)....................... 9.9 4.7 7.2 3.8 16.6
-------- -------- -------- -------- ------
Annual Increase in Equity...... $ 109.8 $ 104.3 $ 93.8 $ 147.6 $ 82.7
Year-End Common Equity......... $ 938.1 $ 828.3 $ 724.0 $ 630.3 $482.7
Less: Intangibles............ 72.0 18.8 20.6 21.0 --
Unrealized Valuation Adjust-
ments....................... 3.9 -- -- -- --
-------- -------- -------- -------- ------
Tier I Capital................. 862.2 809.5 703.4 609.3 --
Allowable Loan Loss Reserve.. 100.2 99.3 95.1 85.6 --
Subordinated Debt............ 124.6 -- -- -- --
-------- -------- -------- -------- ------
Total Capital............... $1,087.0 $ 908.8 $ 798.5 $ 694.9 --
======== ======== ======== ======== ======
Risk Weighted Assets....... $7,990.4 $7,911.8 $7,585.1 $6,830.5 --
======== ======== ======== ======== ======
Key Ratios Growth in Common Eq-
uity.......................... 13.3% 14.4% 14.9% 30.6% 20.7%
Average Equity/Average Assets
Ratio......................... 7.09% 6.74% 6.31% 6.09% 6.35%
Tier I Capital Ratio........... 10.79% 10.23% 9.27% 8.92% --
Total Capital Ratio............ 13.60% 11.49% 10.53% 10.17% --
Leverage Ratio................. 6.89% 6.37% 6.17% 5.70% --
Regulatory Total Capital to
Year-End Assets............... -- -- -- 6.78% 6.75%
Average Long-Term Debt/Equity.. 21.43% 11.82% 13.30% 13.30% 10.65%
======== ======== ======== ======== ======
- --------
(1) Includes profit-sharing, stock options and valuation adjustments for
investment securities and foreign exchange translation.
INTEREST RATE RISK
For financial institutions, interest rate movements can have a very positive
impact on earnings if the balance sheet is positioned to anticipate the
changes. At Bancorp, interest sensitivity analysis is coupled with computer
simulation techniques to measure the exposure of our earnings to interest rate
movements. The major factors used to manage interest rate risk include the mix
of fixed and floating interest rates, pricing, and maturity patterns for all
asset and liability accounts, as well as off-balance sheet interest rate
swaps. The objective of this process is to position the balance sheet for
certain opportunities without unduly increasing risk.
Table 12 presents the possible exposure to interest rate movements for the
various time frames at year-end 1993. The distribution in the interest rate
sensitivity table consists of a combination of maturities, call provisions,
repricing frequency and prepayment patterns. Bancorp constantly analyzes and
estimates, based on historic data, the interest rate sensitivity
characteristics of all balance sheet items. For example, management has
estimated that a substantial portion of its interest bearing demand and
savings balances are relatively insensitive to changes in interest rates.
Consequently, it has allocated significant portions of those balances to
longer term rate sensitivity periods. In 1992, those balances were all
classified as rate sensitive within 90 days.
At December 31, 1993, Bancorp's one year cumulative liability sensitive gap
totaled $0.7 billion, representing 5.5% of total assets. The one year gap is a
commonly referred to time frame for benchmarking interest rate risk. Bancorp
maintained a similar liability sensitive gap position throughout the year.
This
26
balance sheet structure produced a modestly favorable impact on net interest
income. Nevertheless, average net interest margin declined modestly from 4.06%
in 1992 to 4.00% in 1993, reflecting an increase in non-accrual loans and a
change in the earning asset mix from higher spread business (loans) to lower
spread business (securities and interest bearing deposits).
In 1993, Bancorp expanded its use of interest rate swaps to manage interest
rate risk. Interest rate swaps at year-end 1993 totaled $1.4 billion, relative
to $185.5 million at year-end 1992. Bancorp uses swaps only to hedge, and not
to speculate, on movements in interest rates. They are not only conservative
and flexible instruments, but also cost effective risk management tools.
Furthermore, credit exposure on interest rate swaps is determined and monitored
according to the same strict standards and policies applied to Bancorp's
commercial lending activity. Interest rate swaps compliment discretionary
balance sheet management and are incorporated in overall interest rate risk
analyses.
INTEREST RATE SENSITIVITY
TABLE 12
DECEMBER 31, 1993
-------------------------------------------------
NON-
91-365 1-5 OVER INTEREST
0-90 DAYS DAYS YEARS 5 YEARS BEARING
--------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Assets(1)
Investment Securities..... $ 764.4 $1,130.9 $1,434.3 $ 314.8 $ 2.6
Short-Term Investments.... 74.4 -- -- -- --
International Assets...... 974.5 425.2 14.7 0.1 --
Domestic Loans
Commercial, Financial
and Agricultural....... 1,053.1 380.3 230.0 30.1 15.7
Real Estate--Construc-
tion................... 48.4 62.4 37.4 5.4 17.7
Other Loans(2).......... 1,527.3 1,671.4 868.5 692.3 24.9
Trading Securities........ 0.1 60.0 7.1 6.2 0.9
Other Assets.............. -- -- -- -- 587.0
--------- -------- -------- -------- --------
Total Assets............ $ 4,442.2 $3,730.2 $2,592.0 $1,048.9 $ 648.8
========= ======== ======== ======== ========
Liabilities and Capital(1)
Non-Interest Bearing De-
mand..................... $ 379.5 $ 323.3 $ 702.7 $ -- $ --
Interest-Bearing Demand... 463.6 463.6 1,004.6 -- --
Savings................... 225.3 225.3 801.3 -- --
Time Deposits............. 554.2 603.8 375.0 48.5 --
Foreign Deposits.......... 800.9 20.5 -- -- 12.8
Short-Term Borrowings..... 2,692.8 912.4 248.5 -- --
Long-Term Debt............ 129.8 -- 73.5 154.6 --
Other Liabilities......... -- -- -- -- 307.5
Capital................... -- -- -- -- 938.1
--------- -------- -------- -------- --------
Total Liabilities and
Capital................ $ 5,246.1 $2,548.9 $3,205.6 $ 203.1 $1,258.4
========= ======== ======== ======== ========
Interest Rate Swaps......... $(1,158.9) $ 100.0 $1,058.9 $ -- $ --
--------- -------- -------- -------- --------
Interest Sensitivity Gap.... $(1,962.8) $1,281.3 $ 445.3 $ 845.8 $ (609.6)
--------- -------- -------- -------- --------
Cumulative Gap.............. $(1,962.8) $ (681.5) $ (236.2) $ 609.6 $ --
Percentage of Total Assets.. 15.8% 5.5% 1.9% 4.9% --
--------- -------- -------- -------- --------
Fixed-Rate Loan Maturities.. $ 482.6 $ 470.5 $ 632.8 $ 781.8 $ 1.3
--------- -------- -------- -------- --------
Variable-Rate Loan Maturi-
ties....................... $ 1,649.8 $ 684.2 $ 695.5 $1,802.9 $ 57.0
========= ======== ======== ======== ========
- --------
(1) Based on repricing date.
(2) Includes the effect of estimated amortization.
27
CONSOLIDATED AVERAGE BALANCES, INCOME AND EXPENSE SUMMARY, AND YIELDS AND RATES
(TAXABLE EQUIVALENT)
TABLE 13
1993 1992 1991
------------------------- ------------------------- -------------------------
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
--------- ------- ------- --------- ------- ------- --------- ------- -------
(IN MILLIONS OF DOLLARS)
Earning Assets
Interest-Bearing
Deposits.............. $ 1,140.1 $ 43.0 3.77% $ 1,200.6 $ 53.1 4.43% $ 923.8 $ 61.0 6.60%
Investments
--Taxable............ 3,513.0 203.0 5.78 2,622.0 191.0 7.29 2,225.2 186.5 8.38
-- Tax-Exempt........ 29.3 3.6 12.25 57.1 6.6 11.54 97.8 10.0 10.23
Assets Held for Sale... 69.1 5.9 8.61 15.9 0.6 3.49 -- -- --
Funds Sold............. 146.0 5.2 3.56 463.1 20.5 4.43 434.3 25.6 5.88
Loans (1)
--Domestic........... 6,324.9 482.5 7.63 6,011.9 492.8 8.20 5,824.4 573.6 9.85
-- Foreign........... 666.1 29.9 4.48 590.0 33.2 5.63 659.7 52.1 7.90
Loan Fees.............. 37.9 33.3 24.5
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Earning Assets. 11,888.5 811.0 6.82 10,960.6 831.1 7.58 10,165.2 933.3 9.18
Cash and Due From
Banks................. 413.2 396.0 383.7
Other Assets........... 284.1 288.4 277.3
--------- --------- ---------
Total Assets......... $12,585.8 $11,645.0 $10,826.2
========= ========= =========
Interest-Bearing Liabil-
ities
Domestic Deposits
--Demand............. $ 2,032.3 45.1 2.22 $ 2,039.6 64.4 3.16 $ 1,927.4 91.4 4.74
-- Savings........... 1,239.4 32.6 2.63 1,035.3 39.5 3.81 734.5 37.0 5.04
-- Time.............. 1,711.9 77.7 4.54 3,294.0 159.4 4.84 4,012.0 262.0 6.53
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Domestic.......... 4,983.6 155.4 3.12 6,368.9 263.3 4.13 6,673.9 390.4 5.85
Total Foreign........... 1,223.9 43.2 3.52 816.9 36.3 4.45 822.2 51.8 6.30
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Deposits....... 6,207.5 198.6 3.20 7,185.8 299.6 4.17 7,496.1 442.2 5.90
Short-Term Borrowings.. 3,763.3 124.6 3.31 2,072.7 81.9 3.95 1,148.0 71.8 6.26
Long-Term Debt......... 191.3 12.1 6.32 92.8 5.0 5.33 90.8 7.1 7.74
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Interest-Bear-
ing Liabilities..... 10,162.1 335.3 3.30 9,351.3 386.5 4.13 8,734.9 521.1 5.97
========= ====== ===== ========= ====== ===== ========= ====== =====
Net Interest Income..... 475.7 3.52 444.6 3.45 412.2 3.21
------ ----- ------ ----- ------ -----
Spread on Earning As-
sets................... 4.00% 4.06% 4.05%
Spread on Earning Assets
(net of fees).......... 3.68% 3.75% 3.81%
----- ----- -----
Demand Deposits
--Domestic............. 1,324.9 1,231.9 1,134.6
Other Liabilities....... 205.9 277.2 273.8
Shareholders' Equity.... 892.9 784.6 682.9
--------- --------- ---------
Total Liabilities &
Equity.............. $12,585.8 $11,645.0 $10,826.2
========= ========= =========
Provision for Loan Loss-
es..................... 54.2 50.1 29.6
Net Overhead............ 206.8 202.3 194.1
------ ------ ------
Income Before Income
Taxes.................. 214.7 192.2 188.5
Provision for Income
Taxes.................. 79.8 72.2 71.3
Tax Equivalency Adjust-
ment(2)................ 2.3 3.3 4.5
------ ------ ------
Income Before Cumulative
Effect of
Accounting Change...... 132.6 116.7 112.7
Cumulative Effect of Ac-
counting Change........ -- 10.8 --
------ ------ ------
Net Income.............. $132.6 $127.5 $112.7
====== ====== ======
- -------
(1) Includes non-accrual loans.
(2) Based upon a statutory tax rate of 35% for 1993 and 34% for 1992 and 1991.
28
LIQUIDITY MANAGEMENT
Liquidity is managed to ensure that Bancorp has continuous access to
sufficient, reasonably priced funding to conduct its normal course of business.
At year-end 1993, deposits declined to $7.0 billion from $7.9 billion at the
end of 1992. This decline was partially offset by an increase in securities
sold under agreements to repurchase (Repos). The change in mix reflects the
continued preference of our local governmental customers for repos as an
alternative to collateralized deposits. Repos are supported by the same type of
collateral that supports governmental deposits, but are not insured by the
FDIC. At year-end 1993 repos totaled $2.5 billion compared to $2.2 billion at
year-end 1992 and $0.5 billion at year-end 1991.
At year-end 1993, the ratio of net purchased liabilities to net assets (short
term borrowings less short term assets divided by total assets less short term
assets) was 37.0%. This proxy for liquidity is tracked by Salomon Brothers Inc,
which publishes bank comparative figures annually. For the five years ending
December 31, 1992, their 50-Bank Composite ratio averaged 32.1%. Bancorp's
ratio is higher than the average, due to the level of state and local
government funds. Historically, these governmental customers have been a stable
source of funds.
Bancorp issues commercial paper in the Hawaii market-place. At year-end 1993
commercial paper outstanding totaled $141.6 million compared to $89.0 million
at year-end 1992. The short term notes are rated A-1 by Standard and Poor's and
P-1 by Moody's.
Long term debt on December 31, 1993 was $357.9 million compared to $84.1
million at year-end 1992. Considering the favorable interest rate environment,
Bank of Hawaii, in the second quarter of 1993 issued $125 million in
subordinated debt, proceeds of which were used for general corporate purposes.
The ten year notes qualify for inclusion as regulatory total capital and bear
interest at 6.88%. The issue was rated A-2 by Standard and Poor's and A by
Moody's. In addition, during the third quarter the Bank finalized a bank note
program allowing for the issuance of up to $750 million to be used for general
corporate purposes. At December 31, 1993, there were $100 million two year
floating rate notes outstanding under this program. The bank notes have been
rated A+ by Standard and Poor's and AA3 by Moody's.
CONTROL OF NET OVERHEAD
At Bancorp, net overhead is defined as the ratio of non-interest expense to
non-interest income. Bancorp's objective is to continually improve this ratio
by controlling expenses and taking advantage of fee income opportunities. This
ratio, which was 3.66 in 1984, has declined to 2.60 for 1993.
Bancorp's long term goal is to have a ratio of 2 to 1, where fee income
offsets at least half of the cost of operations. With the slowdown in the
economy of Hawaii, and increased competition, the efficient managing of the net
overhead ratio grows in importance. Trust operations, electronic financial
services, insurance and annuity sales, and brokerage services are expected to
make significant contributions to this process.
The challenge of rising staff costs for salaries and benefits have focused
Bancorp's management on the ratio of net income per full-time equivalent staff
(FTE). Bancorp's objective is to improve productivity with existing staff
levels. This emphasis balances Bancorp's tight expense control philosophy with
the commitment to still spend money on staffing and technology if such
expenditures will produce greater productivity and revenues. For 1993, net
income per FTE was $31,000, compared to $31,100 in 1992 and $27,600 for 1991.
NON-INTEREST INCOME
For 1993, total non-interest income was $129.3 million, a 14.6% increase over
1992. Excluding securities transactions, non-interest income increased 9.1%
over 1992. During the second quarter, Bank of Hawaii
29
acquired AFS, the parent of Bishop and American Trust Companies. The blending
of AFS with HTCo, both subsidiaries of Bank of Hawaii, is progressing smoothly.
The synergies gained in this acquisition are expected to enhance non-interest
income opportunities. The staffing level at AFS on the merger date was 241.
Through placement in other Bancorp companies and attrition, the staffing level
was reduced by 50% at year-end 1993 demonstrating the progress of the
consolidation. HTCo and AFS reported a 33.9% increase in trust income over 1992
to $40.9 million, while administering an $11.1 billion trust asset portfolio at
year-end 1993. The growth in non-interest income has been consistent for
Bancorp (excluding unusual gains) over the past ten years, with the compound
growth rate of 16.5% over the same period. This improvement has been largely
fueled by the growth in trust income since HTCo was acquired in 1985. Table 14
presents the details of non-interest income for the last five years.
Service charges on deposit accounts increased to $26.5 million, a 6.7%
increase over 1992. Account analysis charges have increased for commercial
accounts due to the low interest rate environment. These fees are earned from
customers who are charged for actual services provided to maintain their
accounts. With lower rates, the offset for earnings credits have been reduced
and have resulted in increased analysis fees.
Bancorp's involvement in trade finance in the Asian Rim countries has
steadily increased over the years as its network of offices and branches in the
area has grown. Reflecting the continuing increase in international activity,
fees for letters of credit, export bill collection, and acceptances have
increased to $7.3 million, 2.8% over 1992. These fees are included in the total
fees, exchange and other service charges which grew to $31.6 million, a 0.9%
increase over 1992.
Also included in non-interest income are fees earned through Bancorp's ATM
network. During 1993, 72 new ATMs were added to Bancorp's network, making
Bancorp the largest provider of electronic financial services in Hawaii. The
additional ATMs brought the total in service to 245 at year-end 1993. The fees
generated by this network totaled $6.3 million in 1993, an increase of 23.5%
over the $5.1 million reported in 1992. Most of Bancorp's ATMs are located in
Hawaii and the Western Pacific. The ATMs in Hawaii have high percentage of
usage by visitors through the American Express, Armed Forces Financial Network,
Cirrus, Discover Card, Plus Network, STAR and VISA networks, all of which
Bancorp is a member.
Bancorp introduced IslePay in 1992, a direct debit point-of-sale product
currently available in the grocery industry. Bancorp is the first in Hawaii to
have developed a point-of-sale network which allows a customer to have
purchases made at participating stores directly charged to his deposit account.
In 1993, participation was expanded to include 12 financial institutions in
Hawaii. The merchant group has also expanded outside the grocery industry and
at year-end 1993, over 500 IslePay terminals were in use. Fee opportunities
will grow in this area as the network of merchants increases.
The annuity and insurance sales groups are beginning to affect the increase
in non-interest income. For 1993, fees earned by these groups totaled $7.2
million, a 29.6% increase over 1992. The full service brokerage subsidiary,
Bancorp Investment Group, contributed more than $1.2 million in other operating
income in 1993, its first full year of operations.
Securities gains for the year had a substantial impact on non-interest
income. Total securities gains were $10.0 million for 1993, compared to gains
of $3.4 million and $2.8 million recognized in 1992 and 1991, respectively. The
securities gains in 1993 were primarily derived from the sale of certain held
for sale securities and long term holdings of stock of the Federal National
Mortgage Association (FNMA). The sale of the FNMA stock, which was acquired
more than 20 years ago, resulted in a pre tax gain of $6.9 million.
30
NON-INTEREST INCOME
TABLE 14
YEARS ENDED DECEMBER 31
----------------------------------------------------
1993 1992 1991 1990 1989
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
Trust Income.............. $ 40.9 + 34.1% $ 30.5 + 15.1% $26.5 $25.2 $23.9
Service Charges on Deposit
Accounts................. 26.5 + 6.4 24.9 + 11.2 22.4 18.4 16.7
Fees Exchange Other
Service Charges Letters
of Credit and Acceptance
Fees..................... 7.3 + 2.8 7.1 + 20.3 5.9 5.0 3.8
Profit on Foreign
Currency................ 4.6 -- 22.0 5.9 -- 13.2 6.8 4.2 4.2
Exchange Fees............ 2.9 -- 2.9 + 3.6 2.8 3.5 2.3
Escrow Fees.............. 1.0 -- 1.0 + 25.0 0.8 1.8 1.4
Mortgage Servicing Fees.. 2.4 + 4.3 2.3 + 15.0 2.0 1.5 1.5
ATM Fees/Charge Card
Processing Fees......... 6.3 + 23.5 5.1 + 34.2 3.8 2.6 1.3
Cash Basis Interest...... 2.4 -- 17.2 2.9 +190.0 1.0 1.2 5.7
Other Fees............... 4.7 + 14.6 4.1 -- 25.5 5.5 6.2 0.1
Other Operating Income... 20.3 -- 10.6 22.7 + 68.1 13.5 12.9 14.7
Investment Securities
Gains.................... 10.0 +194.1 3.4 + 21.4 2.8 0.7 0.5
------ ------- ------ ------- ----- ----- -----
Total................... $129.3 + 14.6% $112.8 + 20.3% $93.8 $83.2 $76.1
====== ======= ====== ======= ===== ===== =====
NON-INTEREST EXPENSE
Total non-interest expense for 1993 was $336.1 million, up 6.8% from 1992.
This increase includes eight months of operating expenses for AFS in 1993.
Excluding these expenses from 1993 totals, the increase in non-interest expense
would have been approximately 5.8% over 1992. The control of expenses is a key
part of Bancorp's financial strategy. A lower percentage of non-interest
expense to net operating revenue (net interest income plus non-interest income)
is a productivity indication. For 1993, Bancorp's percentage was 55.8% compared
to 56.8% and 57.4% for 1992 and 1991, respectively. The Salomon Brothers Inc
1992 50-bank composite percentage was 64.12%.
The largest component of non-interest expense is salary expense, which was
$134.6 million or 40.0% of total non-interest expense. For 1993, Bancorp's
average annual salary per full time equivalent staff was $31,400, a 2.3%
increase over the 1992 average of $30,700. Bancorp controls salary expense in
several ways. One way is to improve the productivity of existing staff. Another
way is to control the growth of staff through careful review of requests to add
staff and consideration of whether staff members who leave need to be replaced.
Additionally, with operations across the Pacific and Asia, the cost of staffing
foreign offices with expatriates would be high. Bancorp's strategy has been to
identify and develop local staff to manage operations at these locations to
manage this cost. At year-end 1993, Bancorp had only 17 expatriates at foreign
locations. At the end of 1993, total FTE staff count was 4,354. Even with the
impact of Hurricane Iniki, and the slowdown in the tourist industry,
unemployment levels in Hawaii were 4.0% for November 1993, still well below
national averages. As a result, Bancorp must emphasize productivity both
because of a desire to control cost as well as having to make do with available
trained personnel.
Pension and other benefit costs increased to $42.4 million, up 8.2% from 1992
levels. Retirement plan accruals increased as certain retirees were provided an
increase in benefits and more staff qualified for the plan, including the staff
of FNBA. In 1993, Bancorp implemented the SFAS No. 106 ("Employer's Accounting
for Postretirement Benefits Other than Pensions"). The expense recorded for
these benefits was $3.5 million in 1993. This expense recognized the cost of
providing health care and life insurance for both active employees and retirees
over the period earned. In anticipation of these requirements, Bancorp has
modified its benefit programs to maintain a meaningful benefit, but still allow
a certain degree of control over these expenses.
31
Occupancy expense for 1993 increased to $37.0 million, up 9.8% from 1992. The
increase reflects the impact of the new branches opened in 1992 and 1993. Nine
branches were opened in the past two years, the largest expansion in recent
history. Branches were opened on Oahu (four branches), Hawaii, Maui, as well as
Suva, Fiji and a representative office in Taipei, Taiwan. In addition, rental
costs and property taxes for buildings and sites have increased as overall land
values have risen.
Net equipment expense increased 10.1% over 1992 to $27.3 million. The
increase in net equipment expense largely reflects Bancorp's continuing
investment in technological enhancements to maintain the appropriate level of
efficiency.
The other expense category increased from $90.9 million in 1992 to $94.8
million in 1993. This expense category includes both discretionary and non-
discretionary expenses. Bancorp has always tried to manage both very
aggressively. The increase in this expense category of 4.2% for 1993 is
reflective of Bancorp's effort during the year. The most significant non-
discretionary expenditure is FDIC insurance. For 1993, as insurance rates
remained constant, FDIC insurance expense decreased 12.2% to $15.1 million,
consistent with the decline in deposit balances. The risk based assessment
system announced by the FDIC provides certain relief for well capitalized
institutions. Premiums under the new program start at $0.23 per $100 of
deposits for well capitalized institutions to as much as $0.31 per $100 of
deposits for poorly capitalized institutions. Both Bank of Hawaii and First
Federal have been considered well capitalized and have been assessed the lowest
rate of $0.23 per $100 for 1993. For 1994, both have been advised that the
status will remain the same for the first half of 1994.
Table 15 presents the larger discretionary expenses included in the other
category. Legal and professional fees were $11.9 million, $11.8 million and
$10.8 million for 1993, 1992 and 1991, respectively. The level of the expense
was affected by litigation and collection efforts, as well as general corporate
needs. Communication costs remain a meaningful expense as our operations span
the Pacific and the U.S. Mainland. Total communication costs which included
telephone services, cable communication, and postage expense were $8.1 million
for 1993, compared with $7.9 million for 1992 and $6.9 million for 1991.
NON-INTEREST EXPENSE
TABLE 15
YEARS ENDED DECEMBER 31
--------------------------------------------------
1993 1992 1991 1990 1989
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
Salaries.................... $134.6 + 6.8% $126.0 + 8.8% $115.8 $102.4 $ 90.5
Pension and Other Employee
Benefits................... 42.4 + 8.2 39.2 +10.1 35.6 30.4 26.8
Net Occupancy Expense....... 37.0 + 9.8 33.7 +19.5 28.2 24.1 21.0
Net Equipment Expense....... 27.3 +10.1 24.8 + 9.7 22.6 18.9 19.4
Other Operating Expense
FDIC Insurance............ 15.1 -12.2 17.2 + 6.8 16.1 7.8 4.1
Legal and Professional.... 11.9 + 0.8 11.8 + 9.3 10.8 12.5 10.2
Advertising............... 9.7 +15.5 8.4 -- 8.4 8.0 6.0
Stationery and Supplies... 7.5 + 4.2 7.2 + 2.9 7.0 7.0 5.8
Other..................... 50.6 + 9.3 46.3 + 6.2 43.6 36.8 30.2
------ ----- ------ ----- ------ ------ ------
Total................... $336.1 + 6.8% $314.6 + 9.2% $288.1 $247.9 $214.0
====== ===== ====== ===== ====== ====== ======
32
INCOME TAXES
The 1993 tax provision reflects an effective tax rate of 37.6% compared with
38.2% in 1992. The increase in statutory rate to 35% during 1993 had a minimal
impact on Bancorp, as much of Bancorp's tax liability was created by leveraged
leases which, under SFAS 13 "Accounting for Leases," is adjusted differently
than SFAS 109. The decrease in effective rate reflects the benefit of the low
income housing credit for a loan booked during the year. Bancorp adopted FAS
109--Accounting for Income Taxes in 1992. The cumulative effect of the change
in accounting of $10.8 million has been reported as a separate line in the 1992
income statement.
The tax-exempt securities portfolio has been reduced to less than $21.5
million and continues to have a diminishing impact on Bancorp's effective tax
rate. In prior years, leasing activities created a large benefit as investment
tax credits (ITC) reduced the effective tax rate. With the elimination of ITC,
Bancorp's leasing activity provided shelter by deferring taxes rather than
creating credits, thereby increasing Bancorp's effective tax rate.
Bancorp's tax planning also tries to minimize the alternative minimum tax
(AMT). At the end of 1993, Bancorp was not subject to the AMT. Bancorp
continuously seeks opportunities for managing its tax liability.
33
FOURTH QUARTER RESULTS
Earnings for the fourth quarter of 1993 totaled $35.7 million, a significant
increase of 58.9% over the same quarter in 1992. This improvement is due to the
large provision for loan loss recorded in the fourth quarter of 1992
recognizing the $20 million charge-off on the large credit previously
mentioned. Earnings per share (restated for the 50% stock dividend) were $0.83
and $0.53 for the fourth quarter of 1993 and 1992, respectively.
Spread for the fourth quarter was 4.02%, compared to 4.03% for the fourth
quarter of 1992. The slight decline in spread is reflected in the earning asset
yield which decreased to 6.68% from 7.15% comparing the fourth quarters of 1993
and 1992. The cost of funds rate also declined to 3.15% from 3.68% between the
same periods.
The provision for loan losses totaled $9.1 million for the quarter,
significantly less than the $24.0 million in the fourth quarter of 1992, which
was influenced by the large charge-off discussed earlier.
CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS
TABLE 16
THREE MONTHS ENDED
-------------------------------------------------------
1993 1992
--------------------------- ---------------------------
MAR. JUN. SEPT. DEC. MAR. JUN. SEPT. DEC.
------ ------ ------ ------ ------ ------ ------ ------
Total Interest Income... $204.2 $202.2 $203.3 $199.1 $214.3 $208.0 $202.1 $202.8
Total Interest Expense.. 88.5 85.2 82.1 79.6 105.3 100.6 91.2 89.3
Net Interest Income..... 115.7 117.0 121.2 119.5 109.0 107.4 110.9 113.5
Provision for Possible
Loan Losses............ 9.0 12.2 23.8 9.1 10.2 9.4 6.5 24.0
Investment Securities
Gains (Losses)......... 1.3 1.6 6.7 0.4 0.1 2.5 0.3 0.4
Other Non-Interest In-
come................... 27.5 28.4 31.6 31.6 25.4 27.2 27.3 29.5
Total Non-Interest Ex-
pense.................. 83.5 81.7 85.0 85.8 75.2 75.6 80.7 83.0
------ ------ ------ ------ ------ ------ ------ ------
Income Before Income
Taxes.................. 52.0 53.1 50.7 56.6 49.1 52.1 51.3 36.4
Provision for Income
Taxes.................. 19.0 19.3 20.5 20.9 18.5 20.1 19.6 14.0
------ ------ ------ ------ ------ ------ ------ ------
Income Before Cumulative
Effect of Accounting
Change................. 33.0 33.8 30.2 35.7 30.6 32.0 31.7 22.4
Cumulative Effect of Ac-
counting Change........ -- -- -- -- 10.8 -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net Income.............. $ 33.0 $ 33.8 $ 30.2 $ 35.7 $ 41.4 $ 32.0 $ 31.7 $ 22.4
====== ====== ====== ====== ====== ====== ====== ======
Earnings Per Common
Share(1)............... $ 0.77 $ 0.79 $ 0.70 $ 0.83 $ 0.97 $ 0.75 $ 0.75 $ 0.53
====== ====== ====== ====== ====== ====== ====== ======
- --------
(1) Adjusted for 50% stock dividend declared January 26, 1994.
34
SUPPLEMENTARY DATA
MATURITY DISTRIBUTION, MARKET VALUE AND WEIGHTED-AVERAGE YIELD TO MATURITY OF
SECURITIES
TABLE 17
AT YEAR-END DECEMBER 31
------------------------------------------------------------
APPROXIMATE
WITHIN 1-5 5-10 OVER MARKET
1 YEAR YEARS YEARS 10 YEAR TOTAL VALUE
-------- -------- ------ ------- -------- -----------
(IN MILLIONS OF DOLLARS)
Maturity Distribution
Based on Book Value
U.S. Treasury Securi-
ties................... $1,201.3 $ 631.4 $ -- $ -- $1,832.7 $1,851.1
Obligations of Other
U.S. Government
Agencies and
Corporations........... 100.0 95.0 30.4 86.1 311.5 317.3
Obligations of States
and Political
Subdivisions........... 1.1 30.7 8.2 0.5 40.5 43.8
Corporate Securities.... -- -- -- 13.7 13.7 13.7
Mortgage Backed Securi-
ties................... 17.4 181.4 168.9 148.3 516.0 525.1
Other................... 4.0 35.2 -- -- 39.2 40.3
Securities Available for
Sale(2)................ 1.4 238.1 8.9 645.0(2) 893.4 893.4
Trading Securities...... 60.0 7.2 6.2 1.0 74.4 74.4
-------- -------- ------ ------ -------- --------
Total--1993........... $1,385.2 $1,219.0 $222.6 $894.6 $3,721.4 $3,759.1
--1992........... $ 677.2 $1,772.9 $148.3 $437.8 $3,036.2 $3,109.2
--1991........... $ 576.5 $1,333.6 $179.4 $455.8 $2,545.3 $2,657.3
-------- -------- ------ ------ -------- --------
Weighted-Average
Yield(1) to Maturity
U.S. Treasury
Securities............. 5.5% 4.8% --% --% 5.2%
Obligations of Other
U.S. Government
Agencies and
Corporations........... 7.8 6.3 9.0 4.5 6.6
Obligations of States
and Political
Subdivisions........... 5.9 7.5 12.5 11.4 8.5
Corporate Securities.... -- -- -- 11.9 11.9
Mortgage Backed
Securities............. 5.7 5.9 6.1 7.1 6.3
Other................... 2.2 7.5 -- -- 7.0
Securities Available for
Sale................... 6.3 6.2 6.1 5.2 5.5
Trading Securities...... 3.4 6.5 6.6 2.6 4.0
-------- -------- ------ ------ --------
Total--1993........... 5.6% 5.5% 6.7% 5.6% 5.6%
======== ======== ====== ====== ========
Tax Equivalent Adjust-
ment Amount............ $ -- $ 0.3 $ 0.3 $ -- $ 0.6
- --------
(1) Tax equivalent at 35% tax rate.
(2) Reports current balance at contractual maturity and does not anticipate
reductions for periodic paydowns.
AVERAGE ASSETS
TABLE 18
1993 1992 1991 1990 1989
--------------- --------------- --------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
--------- ----- --------- ----- --------- -------- --------
(IN MILLIONS OF DOLLARS)
Interest-Bearing
Deposits............... $ 1,140.1 9.1% $ 1,200.6 10.3% $ 923.8 $ 787.9 $ 602.1
Investment Securities... 3,542.3 28.1 2,679.1 23.0 2,332.2 1,681.2 1,079.6
Assets Held for Sale.... 69.1 0.5 15.9 0.1 -- -- --
Funds Sold.............. 146.0 1.2 463.1 4.0 434.3 610.2 485.9
Net Loans............... 6,991.0 55.6 6,601.9 56.7 6,484.1 5,532.5 4,368.6
Total Earning Assets.. 11,888.5 94.5 10,960.6 94.1 10,174.4 8,611.8 6,536.2
Non-Earning Assets...... 697.3 5.5 684.4 5.9 651.8 590.0 473.7
--------- ----- --------- ----- --------- -------- --------
Total............... $12,585.8 100.0% $11,645.0 100.0% $10,826.2 $9,201.8 $7,009.9
========= ===== ========= ===== ========= ======== ========
35
AVERAGE LOANS
TABLE 19
1993 1992 1991 1990 1989
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial............. $1,695.5 24.3% $1,738.2 26.3% $1,617.6 $1,496.8 $1,292.3
Real Estate
Construction.......... 181.1 2.6 266.3 4.0 272.7 229.0 266.5
Mortgage.............. 3,419.2 48.9 3,019.0 45.7 2,953.8 2,334.5 1,630.0
Installment............. 639.5 9.1 629.8 9.6 641.3 669.4 607.3
Foreign(1).............. 666.1 9.5 590.0 9.0 659.7 496.1 303.1
Lease Financing......... 389.6 5.6 358.6 5.4 339.0 306.7 269.4
-------- ----- -------- ----- -------- -------- --------
Total............... $6,991.0 100.0% $6,601.9 100.0% $6,484.1 $5,532.5 $4,368.6
======== ===== ======== ===== ======== ======== ========
- --------
(1) See section entitled International Operations for definition of Foreign.
AVERAGE DEPOSITS
TABLE 20
1993 1992 1991 1990 1989
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic
Non-Interest Bearing
Demand Accounts...... $1,324.9 17.6% $1,231.9 14.6% $1,134.6 $1,103.4 $ 945.0
Interest-Bearing
Demand Accounts...... 2,032.3 27.0 2,039.6 24.2 1,927.4 1,682.2 1,355.8
Regular Savings
Accounts............. 1,239.4 16.5 1,035.3 12.3 734.5 613.8 522.4
Private Time
Certificates of
Deposit ($100,000 or
More)................ 489.4 6.5 547.6 6.5 652.6 619.9 448.3
Public Time
Certificates of
Deposit ($100,000 or
More)................ 143.4 1.9 1,573.2 18.7 2,066.2 1,671.7 1,186.1
Bearer Certificates of
Deposit.............. 5.0 0.1 5.0 0.1 5.0 5.0 5.0
All Other Time and
Savings Certificates. 1,074.1 14.2 1,168.2 13.9 1,288.2 1,070.0 860.1
-------- ----- -------- ----- -------- -------- --------
Total Domestic...... 6,308.5 83.8 7,600.8 90.3 7,808.5 6,766.0 5,322.7
-------- ----- -------- ----- -------- -------- --------
Foreign (1)............. 1,223.9 16.2 816.9 9.7 822.2 1,085.8 588.7
-------- ----- -------- ----- -------- -------- --------
Total............... $7,532.4 100.0% $8,417.7 100.0% $8,630.7 $7,851.8 $5,911.4
======== ===== ======== ===== ======== ======== ========
- --------
(1) See section entitled International Operations for definition of Foreign.
36
INTEREST DIFFERENTIAL
TABLE 21
1993 COMPARED TO 1992 1992 COMPARED TO 1991
------------------------- --------------------------
VOLUME(1) RATE(1) TOTAL VOLUME(1) RATE(1) TOTAL
--------- ------- ------ --------- ------- -------
(IN MILLIONS OF DOLLARS)
Change in Interest In-
come:
Interest Bearing
Deposits:
Foreign............... $ (2.6) $ (7.5) $(10.1) $ 15.6 $ (23.5) $ (7.9)
Taxable Investment
Securities:
Domestic.............. 56.6 (44.6) 12.0 30.8 (26.2) 4.6
Foreign............... -- -- -- -- -- --
Tax-Exempt Investment
Securities............ (3.4) 0.4 (3.0) (4.6) 1.2 (3.4)
Assets Held for Sale... 3.7 1.6 5.3 0.6 -- 0.6
Funds Sold............. (11.3) (4.5) (15.8) 1.6 (6.6) (5.0)
Loans, Net of Unearned
Income:
Domestic.............. 26.6 (32.3) (5.7) 18.7 (90.8) (72.1)
Foreign............... 3.9 (7.2) (3.3) (5.1) (13.9) (19.0)
------ ------ ------ ------ ------- -------
Total Interest
Income.............. $ 73.5 $(94.1) $(20.6) $ 57.6 $(159.8) $(102.2)
====== ====== ====== ====== ======= =======
Change in Interest
Expense:
Interest Bearing
Deposits:
Demand Deposits....... $ (0.2) $(19.1) $(19.3) $ 5.1 $ (32.1) $ (27.0)
Savings Deposits...... 6.8 (13.7) (6.9) 12.8 (10.4) 2.4
Time Deposits......... (72.4) (9.3) (81.7) (41.9) (60.6) (102.5)
Deposits in Foreign
Offices.............. 15.5 (8.6) 6.9 (0.3) (15.2) (15.5)
Short-Term Borrowings.. 57.6 (15.4) 42.2 43.2 (33.1) 10.1
Long-Term Debt......... 6.1 1.0 7.1 0.1 (2.2) (2.1)
------ ------ ------ ------ ------- -------
Total Interest
Expense............. $ 13.4 $(65.1) $(51.7) $ 19.0 $(153.6) $(134.6)
====== ====== ====== ====== ======= =======
Net Interest
Differential:
Domestic............... $ 74.3 $(22.9) $ 51.4 $ 27.8 $ 16.0 $ 43.8
Foreign................ (14.2) (6.1) (20.3) 10.8 (22.2) (11.4)
------ ------ ------ ------ ------- -------
Total Interest
Differential......... $ 60.1 $(29.0) $ 31.1 $ 38.6 $ (6.2) $ 32.4
====== ====== ====== ====== ======= =======
- --------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
37
YEAR-END SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
TABLE 22
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET TOTALS
Net Loans............... $ 6,983.1 $ 6,691.7 $ 6,517.2 $ 6,286.1 $ 4,806.3
Assets.................. 12,462.1 12,713.1 11,409.3 10,683.0 8,317.1
Deposits................ 7,005.0 7,890.5 8,666.2 8,785.0 7,024.3
Long-Term Debt.......... 357.9 84.1 75.5 117.1 47.6
Shareholders' Equity.... 938.1 828.3 724.0 630.3 482.7
OPERATING RESULTS
Total Interest Income... $ 808.8 $ 827.2 $ 929.0 $ 871.0 $ 685.4
Net Interest Income..... 473.4 440.7 407.9 350.1 286.3
Provision for Possible
Loan Losses............ 54.2 50.1 29.6 28.0 20.9
Net Income.............. 132.6 127.5 112.7 95.7 79.9
Earnings Per Share(1)... $ 3.09 $ 3.00 $ 2.69 $ 2.42 $ 2.15
Cash Dividends Paid--
Common Stock(1)........ $ 0.90 $ 0.85 $ 0.78 $ 0.70 $ 0.59
NON-FINANCIAL DATA
Common Shareholders of
Record at Year-End..... 8,315 5,814 5,553 5,378 4,940
Average Common Shares
Outstanding(1)......... 42,967,790 42,527,466 41,846,234 39,502,790 37,075,874
- --------
(1) Adjusted for 50% stock dividend declared January 26, 1994.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Quarterly Results of Operations--Table 16 on page 34.
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Bancorp Hawaii, Inc.
We have audited the accompanying consolidated statements of condition of
Bancorp Hawaii, Inc. and subsidiaries as of December 31, 1993, 1992 and 1991,
and the related consolidated statements of income, shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bancorp Hawaii,
Inc. and subsidiaries at December 31, 1993, 1992 and 1991, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Notes A and N to the financial statements, in 1993 and 1992
the Company changed its method of accounting for certain investments in debt
and equity securities and income taxes, respectively.
Ernst & Young
Honolulu, Hawaii
January 19, 1994
39
BANCORP HAWAII, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1993 1992 1991
---------------- ---------------- ----------------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Interest Income
Interest on Loans......... $ 494,705 $ 507,889 $ 607,379
Loan Fees................. 37,900 33,283 24,460
Income on Lease Financing. 16,632 17,002 17,287
Interest and Dividends on
Investment Securities
Taxable.................. 203,068 191,036 186,464
Non-Taxable.............. 2,331 4,355 6,816
Income on Investment Secu-
rities Available for
Sale..................... 5,947 -- --
Interest on Deposits...... 42,974 53,134 61,012
Interest on Security Re-
sale Agreements.......... 2,934 12,507 19,990
Interest on Funds Sold.... 2,265 8,005 5,564
---------------- ---------------- ----------------
Total Interest Income....... 808,756 827,211 928,972
Interest Expense
Interest on Deposits...... 198,657 299,599 442,243
Interest on Security Re-
purchase Agreements...... 87,229 37,577 7,368
Interest on Funds Pur-
chased................... 24,136 27,977 50,248
Interest on Short-Term
Borrowings............... 13,261 16,379 14,190
Interest on Long-Term
Debt..................... 12,085 4,945 7,032
---------------- ---------------- ----------------
Total Interest Expense...... 335,368 386,477 521,081
---------------- ---------------- ----------------
Net Interest Income......... 473,388 440,734 407,891
Provision for Possible Loan
Losses..................... 54,188 50,071 29,584
---------------- ---------------- ----------------
Net Interest Income After
Provision for Possible
Losses..................... 419,200 390,663 378,307
Non-Interest Income
Trust Income.............. 40,855 30,519 26,526
Service Charges on Deposit
Accounts................. 26,518 24,843 22,414
Fees, Exchange and Other
Service Charges.......... 31,613 31,346 28,530
Other Operating Income.... 20,338 22,712 13,513
Investment Securities
Gains.................... 9,985 3,410 2,803
---------------- ---------------- ----------------
Total Non-Interest Income... 129,309 112,830 93,786
Non-Interest Expense
Salaries.................. 134,568 125,942 115,872
Pensions and Other Em-
ployee Benefits.......... 42,399 39,232 35,565
Net Occupancy Expense of
Premises................. 37,026 33,647 28,164
Net Equipment Expense..... 27,347 24,801 22,631
Other Operating Expense... 94,762 90,937 85,857
---------------- ---------------- ----------------
Total Non-Interest Expense.. 336,102 314,559 288,089
---------------- ---------------- ----------------
Income Before Taxes......... 212,407 188,934 184,004
Provision for Taxes......... 79,840 72,172 71,313
---------------- ---------------- ----------------
Net Income Before Cumulative
Effect of Accounting
Change..................... 132,567 116,762 112,691
---------------- ---------------- ----------------
Cumulative Effect of Ac-
counting Change............ -- 10,762 --
---------------- ---------------- ----------------
Net Income.................. $ 132,567 $ 127,524 $ 112,691
================ ================ ================
Earnings Per Common Share
and Common Share Equiva-
lents Before Cumulative Ef-
fect of Accounting Change
(1)........................ $ 3.09 $ 2.75 $ 2.69
Cumulative Effect of Ac-
counting Change (1)........ -- 0.25 --
Earnings Per Common Share
and Common Share Equiva-
lents (1).................. $ 3.09 $ 3.00 $ 2.69
---------------- ---------------- ----------------
Average Common Shares and
Average Common Share Equiv-
alents (1)................. 42,967,790 42,527,466 41,846,234
---------------- ---------------- ----------------
- --------
(1) Adjusted for 50% stock dividend declared January 26, 1994.
See Notes to Consolidated Financial Statements.
40
BANCORP HAWAII, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31
-------------------------------------
1993 1992 1991
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Assets
Interest-Bearing Deposits............... $ 837,704 $ 1,432,498 $ 1,123,969
Investment Securities
--Held to Maturity (Market Value of
$2,791,328, $3,109,193 and
$2,657,345, respectively)........... 2,753,590 3,036,238 2,545,306
--Available for Sale.................. 893,453 -- --
Securities Purchased Under Agreements to
Resell................................. -- 420,000 240,000
Funds Sold.............................. 57,699 184,474 93,136
Loans................................... 7,258,368 6,963,582 6,759,119
Unearned Income....................... (149,949) (143,265) (126,377)
Reserve for Possible Loan Losses...... (125,284) (128,626) (115,571)
----------- ----------- -----------
Net Loans............................... 6,983,135 6,691,691 6,517,171
----------- ----------- -----------
Total Earning Assets................ 11,525,581 11,764,901 10,519,582
Cash and Non-Interest Bearing Deposits.. 395,315 393,555 485,932
Premises and Equipment.................. 167,260 156,383 144,403
Customers' Acceptance Liability......... 8,475 26,041 22,505
Accrued Interest Receivable............. 82,023 94,409 94,244
Other Real Estate....................... 4,123 6,318 1,995
Intangibles, Including Goodwill......... 102,929 52,971 44,619
Trading Securities...................... 74,351 111,820 14,838
Other Assets............................ 102,070 106,736 81,223
----------- ----------- -----------
Total Assets........................ $12,462,127 $12,713,134 $11,409,341
=========== =========== ===========
Liabilities
Domestic Deposits
Demand--Non-Interest Bearing.......... $ 1,405,540 $ 1,256,617 $ 1,250,568
--Interest Bearing.............. 1,931,807 2,052,599 1,988,296
Savings............................... 1,251,876 1,167,289 933,320
Time.................................. 1,581,534 2,249,809 3,710,469
Foreign Deposits........................ 834,218 1,164,177 783,499
----------- ----------- -----------
Total Deposits...................... 7,004,975 7,890,491 8,666,152
Securities Sold Under Agreements to Re-
purchase............................... 2,509,550 2,232,508 543,582
Funds Purchased......................... 743,915 1,091,556 768,608
Short-Term Borrowings................... 600,266 291,373 342,906
Bank's Acceptances Outstanding.......... 8,475 26,041 22,505
Accrued Pension Costs................... 24,367 25,324 24,670
Accrued Interest Payable................ 34,347 31,774 44,682
Accrued Taxes Payable................... 154,291 126,265 120,524
Other Liabilities....................... 85,967 85,374 76,161
Long-Term Debt.......................... 357,870 84,100 75,521
----------- ----------- -----------
Total Liabilities................... 11,524,023 11,884,806 10,685,311
----------- ----------- -----------
Shareholders' Equity
Common Stock ($2 par value), authorized
50,000,000 shares; issued and
outstanding, 28,425,038; 28,056,190;
and 27,668,483, respectively........... 56,850 56,112 55,337
Surplus................................. 284,886 272,810 260,920
Unrealized Valuation Adjustments........ 537 (2,271) (1,731)
Retained Earnings....................... 595,831 501,677 409,504
----------- ----------- -----------
Total Shareholders' Equity.......... 938,104 828,328 724,030
----------- ----------- -----------
Total Liabilities and Shareholders'
Equity............................. $12,462,127 $12,713,134 $11,409,341
=========== =========== ===========
See Notes to Consolidated Financial Statements.
41
BANCORP HAWAII, INC. AND SUBSIDIARIES (AND PARENT COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED
COMMON VALUATION RETAINED
TOTAL STOCK SURPLUS ADJUSTMENT EARNINGS
-------- ------- -------- ---------- --------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE
AMOUNTS)
Balance at December 31, 1990. $630,266 $36,418 $250,248 $(3,936) $347,536
Changes During 1991
Net Income.................. 112,691 -- -- -- 112,691
Sale of Common Stock
61,821 Profit Sharing Plan. 3,089 123 2,966 -- --
82,830 Stock Option Plan... 1,902 166 1,736 -- --
135,576 Dividend Reinvest-
ment Plan................. 6,254 272 5,982 -- --
Stock Repurchased........... (13) (1) (12) -- --
Unrealized Valuation
Adjustments
Investment Securities...... 3,258 -- -- 3,258 --
Foreign Exchange Transla-
tion Adjustment........... (1,053) -- -- (1,053) --
50 Percent Stock Dividend.... -- 18,359 -- -- (18,359)
Cash Dividends Paid of $0.78
Per Share(1)................ (32,364) -- -- -- (32,364)
-------- ------- -------- ------- --------
Balance at December 31, 1991. $724,030 $55,337 $260,920 $(1,731) $409,504
Changes During 1992
Net Income.................. 127,524 -- -- -- 127,524
Sale of Common Stock
68,409 Profit Sharing Plan. 3,168 138 3,030 -- --
147,534 Stock Option Plan.. 2,059 295 1,764 -- --
185,274 Dividend Reinvest-
ment Plan................. 8,095 370 7,725 -- --
Stock Repurchased........... (657) (28) (629) -- --
Unrealized Valuation
Adjustments
Investment Securities...... 338 -- -- 338 --
Foreign Exchange Transla-
tion Adjustment........... (878) -- -- (878) --
Cash Dividends Paid of $0.85
Per Share(1)................ (35,351) -- -- -- (35,351)
-------- ------- -------- ------- --------
Balance at December 31, 1992. $828,328 $56,112 $272,810 $(2,271) $501,677
Changes During 1993
Net Income.................. 132,567 -- -- -- 132,567
Sale of Common Stock
85,515 Profit Sharing Plan. 3,849 171 3,678 -- --
151,543 Stock Option Plan.. 3,288 303 2,985 -- --
180,390 Dividend Reinvest-
ment Plan................. 7,729 361 7,368 -- --
Stock Repurchased........... (2,052) (97) (1,955) -- --
Unrealized Valuation
Adjustments
Investment Securities...... 2,878 -- -- 2,878 --
Foreign Exchange Transla-
tion Adjustment........... (70) -- -- (70) --
Cash Dividends Paid of $0.90
Per Share(1)................ (38,413) -- -- -- (38,413)
-------- ------- -------- ------- --------
Balance at December 31, 1993. $938,104 $56,850 $284,886 $ 537 $595,831
======== ======= ======== ======= ========
- --------
(1) Adjusted for 50% stock dividend declared January 26, 1994.
See Notes to Consolidated Financial Statements.
42
BANCORP HAWAII, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
-----------------------------------
1993 1992 1991
----------- ----------- ---------
(IN THOUSANDS OF DOLLARS)
Operating Activities
Net Income.............................. $ 132,567 $ 127,524 $ 112,691
Adjustments to Reconcile Net Income to
Net Cash
Provided by Operating Activities:
Provision for Loan Losses.............. 54,188 50,071 29,584
Depreciation and Amortization.......... 25,681 22,631 19,800
Deferred Income Taxes.................. 13,246 8,212 12,300
Realized and Unrealized Investment
Security Gains........................ (97) (1,890) (1,899)
Realized Gains on Assets Held for Sale. (9,025) -- --
Net Increase in Trading Securities..... (2,482) 3,061 (11,462)
Amortization of Lease Income........... (30,196) (21,255) (18,190)
Amortization of Loan Fee Income........ (15,945) (17,358) (13,805)
Decrease (Increase) in Interest
Receivable............................ 12,386 (165) (2,376)
Increase (Decrease) in Interest
Payable............................... 2,573 (12,908) (8,977)
Decrease (Increase) in Other Assets.... 10,921 (44,248) (12,504)
Increase in Other Liabilities.......... 822 7,378 26,036
----------- ----------- ---------
Net Cash Provided by Operating
Activities........................... 194,639 121,053 131,198
----------- ----------- ---------
Investing Activities
Proceeds from Redemptions/Sales of
Investment Securities.................. 957,408 952,816 477,408
Purchases of Investment Securities...... (1,565,051) (1,441,520) (985,705)
Proceeds from Sales of Assets Held for
Sale................................... 849,853 -- --
Purchases of Assets Held for Sale....... (697,892) (100,043) --
Net (Decrease) Increase in Interest-
Bearing Deposits Placed in Other Banks. 594,794 (308,529) (182,312)
Decrease (Increase) in Funds Sold....... 443,882 (271,338) 228,106
Increase in Loans, Net.................. (299,491) (185,978) (254,818)
Purchases of Premises and Equipment..... (28,426) (29,311) (23,504)
Proceeds from Sale of Premises and
Equipment.............................. 170 778 1,323
Purchase of American Financial Services
of Hawaii, Inc., Net of Cash Acquired.. (48,990) -- --
Sale of FirstFed America Bank, Net of
Cash Sold.............................. -- -- 5,181
----------- ----------- ---------
Net Cash Provided (Used) by Investing
Activities........................... 206,257 (1,383,125) (734,321)
----------- ----------- ---------
Financing Activities
Net Decrease in Demand, Savings, and
Time Deposits.......................... (885,516) (775,661) (90,851)
Proceeds from Lines of Credit and Long-
Term Debt.............................. 294,846 47,000 --
Principal Payments on Lines of Credit
and Long-Term Debt..................... (21,076) (38,421) (41,600)
Net Increase in Short-Term Borrowings... 238,279 1,960,341 754,764
Proceeds from Sale of Common Stock...... 14,866 13,322 11,245
Stock Repurchase........................ (2,052) (657) (13)
Cash Dividends.......................... (38,413) (35,351) (32,364)
----------- ----------- ---------
Net Cash Provided (Used) by Financing
Activities........................... (399,066) 1,170,573 601,181
----------- ----------- ---------
Effect of Exchange Rate Changes on Cash. (70) (878) (1,053)
----------- ----------- ---------
Increase (Decrease) in Cash and Non-
Interest Bearing Deposits............ 1,760 (92,377) (2,995)
----------- ----------- ---------
Cash and Non-Interest Bearing Deposits
at Beginning of Year................... 393,555 485,932 488,927
----------- ----------- ---------
Cash and Non-Interest Bearing Deposits
at End of Year....................... $ 395,315 $ 393,555 $ 485,932
=========== =========== =========
See Notes to Consolidated Financial Statements.
43
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting principles followed by Bancorp Hawaii, Inc., and its
subsidiaries (Bancorp), and the methods of applying those principles conform
with generally accepted accounting principles and with general practice within
the banking industry. The significant policies are summarized below.
CONSOLIDATION
The consolidated financial statements include the accounts of Bancorp; its
principal subsidiaries, Bank of Hawaii; Bancorp Pacific, Inc.; and their
subsidiaries. Significant intercompany accounts have been eliminated in
consolidation.
ACCOUNTING CHANGES
The Financial Accounting Standards Board (FASB) has issued two statements
with delayed implementation dates that will affect Bancorp.
In November 1992, the FASB issued new rules that require accrual accounting
for non-accumulating postemployment benefits, such as disability benefits,
instead of recognizing an expense for those benefits when paid. Bancorp will be
required to comply with the new rules beginning in 1994. The effect of adopting
the new rules is not expected to be material to Bancorp's financial position or
results of operations.
In May 1993, the FASB issued Statement No. 114 "Accounting by Creditors for
Impairment of a Loan." The statement addresses the accounting by creditors for
impairment of certain loans and requires these loans be measured based on the
present value of expected future cash flows or if the loan is collateral
dependent, the fair value of the collateral. This is a significant change from
the currently applied rules for both Generally Accepted Accounting Principles
and regulatory reporting. Bancorp has elected to delay implementation until
more specific details are developed. At this time, the impact of adopting the
new rules on Bancorp's financial position or results of operation has not been
determined.
ACQUISITION
On May 7, 1993, Bank of Hawaii finalized the purchase of 100% of the shares
of American Financial Services of Hawaii, Inc. (AFS), a trust holding company
whose wholly owned subsidiaries are Bishop Trust Limited and American Trust
Company of Hawaii, Inc. AFS administered $2.7 billion in trust assets at the
acquisition date. The acquisition has been accounted for under the purchase
method, for the approximately $4 million of assets of AFS. Goodwill recorded in
this transaction is being amortized on a straight line basis over 15 years.
Also in December 1993, Bank of Hawaii purchased 80% of Banque Indosuez
Vanuatu, Limited. Its name was changed to Banque d'Hawaii (Vanuatu), Limited
and for year-end 1993 has been accounted for under the equity method. In future
reporting periods, the Banque d'Hawaii (Vanuatu), Limited will be consolidated.
At year-end 1993, total assets of the Banque d'Hawaii (Vanuatu), Limited was
$70.1 million.
CASH AND NON-INTEREST BEARING DEPOSITS
Cash and non-interest bearing deposits include the amounts due from other
financial institutions as well as in-transit clearings. Under the terms of the
Depository Institutions Deregulation and Monetary Control Act, the Bank is
required to place reserves with the Federal Reserve Bank based on the amount of
deposits held. Bank of Hawaii, along with the other banks in the State of
Hawaii, was allowed to phase into this reserve requirement, with such phase-in
completed in 1993. For 1993, 1992 and 1991, the average amount of these reserve
balances was $165,616,000; $135,010,000 and $126,287,000, respectively.
44
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS PER SHARE
The earnings per common share of Bancorp are based on the average common
shares outstanding and the average common shares equivalents. The earnings per
common share of Bancorp are based on shares of 42,967,790, 42,527,466 and
41,846,234 in 1993, 1992 and 1991, respectively, adjusted for the 50% stock
dividend declared January 26, 1994 to shareholders of record February 17, 1994
payable on March 15, 1994.
FAIR VALUES OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." This statement requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
Statement 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of Bancorp.
The following methods and assumptions were used by Bancorp in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheet for cash and short-term investments approximate those assets' fair
values.
Investment Securities Held to Maturity and Investments Available for Sale
and Trading Securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: Fair values for loans are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type such as
commercial, real estate, consumer, and foreign. Each loan category is
further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories. Fair values are calculated by
discounting scheduled cash flows through the estimated maturity using
estimated discount rates which reflect credit and interest rate risks
inherent in the loan.
Deposit Liabilities: Fair values for non-interest bearing and interest
bearing demand deposits and savings are, by definition, equal to the amount
payable on demand at their reporting date (i.e., their carrying amounts).
Fair values for time deposits are estimated using discounted cash flow
analyses. Discount rates reflect rates currently offered for deposits of
similar remaining maturities.
Short-Term Borrowings: The carrying amounts of funds purchased, securities
sold under agreements to repurchase, commercial paper, and other short-term
borrowings approximate their fair values.
Long-Term Debt: Fair values for long-term debt are estimated using
discounted cash flow analyses, based on Bancorp's current incremental
borrowing rates for similar types of borrowings.
Off-Balance Sheet Instruments: Fair values for off-balance sheet
instruments (e.g., commitments to extend credit, standby letters of credit,
commercial letters of credit, foreign exchange and swap contracts, and
interest rate swap agreements) are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing, current settlement
values, or quoted market prices of comparable instruments.
45
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Bancorp files a consolidated federal income tax return with the Bank of
Hawaii, FirstFed and its other domestic subsidiaries. Deferred income taxes are
provided to reflect the tax effect of temporary differences between financial
statement carrying amounts and the corresponding tax bases of assets and
liabilities. The earnings of foreign subsidiaries recorded through 1987 are not
subject to U.S. income taxes, except to the extent that they are remitted as
dividends. Federal taxes have been provided on the earnings from 1987 for
subsidiaries subject to foreign taxes at rates below federal rates. No federal
taxes have been provided on undistributed earnings prior to December 31, 1987
for these subsidiaries, the total of which was $2,701,000.
Bancorp's tax sharing policy provides for the settlement of income taxes
between each subsidiary as if each subsidiary had filed a separate return.
Payments are made to Bancorp by each subsidiary with tax liabilities and
subsidiaries which generate tax benefits receive payments for the benefits as
used. Deferred taxes are recorded on the books of the subsidiary which
generated the temporary differences.
For lease arrangements, which are accounted for by the financing method,
investment tax credits are deferred and amortized over the lives of the
respective leases.
INTANGIBLE ASSETS AND AMORTIZATION
The excess of the cost over the fair market value of tangible assets and
liabilities purchased in various transactions by Bancorp and the Bank of Hawaii
is being amortized using the straight-line method over various periods not
exceeding 15 years. The amortization expense of these intangibles was
$7,161,000; $5,083,000 and $5,002,000 for 1993, 1992 and 1991, respectively. As
of December 31, 1993, the accumulated amortization totaled $24,543,000.
INTEREST RATE SWAP AGREEMENTS
Bancorp enters into interest rate swap agreements as a means of managing its
interest rate exposure. The differential to be paid or received on these
agreements is recognized over the life of the assets or liabilities being
hedged.
INTERNATIONAL OPERATIONS
International operations include certain activities located domestically in
the International Division, as well as branches and subsidiaries domiciled
outside the United States. The operations of Bank of Hawaii and FirstFed
located in the Southern and Western Pacific which are denominated in U.S.
dollars are classified as domestic.
INVESTMENT SECURITIES
Investment securities were stated at cost adjusted for amortization of
premium and accretion of discount for 1992 and 1991. The method followed in
determining the cost of investments sold was based on identified certificates
for each of the three years ending December 31, 1993.
Bancorp adopted the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115), affecting the balance
sheet and the investment securities were reclassified into these categories at
December 31, 1993.
46
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment Securities Held to Maturity: are securities intended to be held
for the full term of the security. These securities are stated at cost
adjusted for amortization of premium and accretion of discount.
Investment Securities Available for Sale: are recorded at market value with
the unrealized gains and losses recorded as an unrealized valuation
adjustment in equity, net of taxes. In 1992 and 1993, these assets were
recorded at the lower of cost or market with valuation adjustments
reflected as a charge against income. For 1993 and 1992, net gains of
$9,025,000 and $15,000, respectively, were reported and included in
investment securities gain/loss.
Trading Securities: are securities purchased and held principally for the
purpose of selling them in the near term. The trading securities portfolio
was comprised primarily of debt securities which have been recorded at
market value. Changes in market value are recognized as a securities gain
or loss through the income statement. During 1993, the net gain from the
trading securities portfolio was $997,000 and is recognized as a component
of investment securities gains/losses in the income statement. Income from
the trading securities was $660,000 for 1993 and is included as part of
other operating income.
LOANS
Loans are carried at the principal amount outstanding. Interest income is
generally recognized on the accrual basis. Loan fees are considered in the
yields and amortized.
Bancorp's policy is to place loans on non-accrual as soon as a loan is
delinquent over 90 days, unless unusual treatment is indicated by the type of
borrowing agreement and/or collateral. At the time a loan is placed on non-
accrual, all accrued but unpaid interest is reversed against current earnings.
Subsequent payments received are generally applied to reduce the principal
balance.
OTHER REAL ESTATE
Other real estate is comprised of properties acquired through foreclosure
proceedings and abandoned bank premises. These properties are carried at the
lower of cost or fair market value based on current appraisals less selling
costs. Losses arising at the time of acquisition of such property acquired
through foreclosure are charged against the reserve for possible loan losses.
Subsequent re-evaluation of the properties, which indicate reduced value and
carrying costs, are recognized through charges to operating expenses.
PREMISES AND EQUIPMENT
Premises and equipment includes the cost of land, buildings, machinery and
equipment, and significant improvements thereto. They are stated on the basis
of cost less allowances for depreciation and amortization.
The annual provisions for depreciation on premises and improvements, and
equipment, have been computed using lives of two to fifty years and three to
ten years, respectively, under the straight-line method.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses is maintained at a level considered
adequate to provide for potential losses. The provision charged to operating
expenses is based on management's evaluation of potential losses in the loan
and lease portfolios and consideration of economic conditions.
47
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B INVESTMENT SECURITIES
The following presents the details of the investment portfolio as of December
31, 1993:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AGGREGATE
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Securities Held to Maturity
Restricted Equity Securities...... $ 13,654 $ -- $ -- $ 13,654
Debt Securities Issued by the U.S.
Treasury
and Agencies..................... 2,144,180 24,266 -- 2,168,446
Debt Securities Issued by State
and Municipalities
of the United States............. 40,566 3,260 (3) 43,823
Debt Securities of Foreign Govern-
ments............................ 9,175 -- -- 9,175
Corporate Debt Securities......... -- -- -- --
Mortgage-Backed Securities........ 516,001 10,111 (989) 525,123
Other Debt Securities............. 30,014 1,093 -- 31,107
---------- ------- ------- ----------
$2,753,590 $38,730 $ (992) $2,791,328
========== ======= ======= ==========
Securities Available for Sale
Equity Securities................ $ 1,008 $ -- $ -- $ 1,008
Debt Securities Issued by the
U.S. Treasury and Agencies...... 229,314 7,235 (52) 236,497
Debt Securities Issued by State
and Municipalities of the United
States.......................... 881 38 (1) 918
Debt Securities Issued by Foreign
Governments..................... -- -- -- --
Corporate Securities............. 6,201 57 (13) 6,245
Mortgage-Backed Securities....... 649,094 2,139 (4,062) 647,171
Other Debt Securities............ 1,614 -- -- 1,614
---------- ------- ------- ----------
$ 888,112 $ 9,469 $(4,128) $ 893,453
========== ======= ======= ==========
48
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The book value and estimated market values of investment securities are as
follows:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
BOOK VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
At December 1, 1992
United States Treasury Securities.. $1,808,747 $ 39,312 $ (561) $1,847,498
Securities of Other United States
Government Corporations and
Agencies.......................... 589,828 12,430 (901) 601,357
Obligations of States and Political
Subdivisions...................... 59,774 2,549 (302) 62,021
Debt Securities Issued by Foreign
Governments....................... 1,897 -- -- 1,897
Corporate Securities............... 8,358 6,871 (14) 15,215
Mortgage-Backed Securities......... 493,449 14,118 (3,115) 504,452
Other Securities................... 74,185 2,568 -- 76,753
---------- -------- ------- ----------
Totals........................... $3,036,238 $ 77,848 $(4,893) $3,109,193
========== ======== ======= ==========
At December 31, 1991
United States Treasury Securities.. $1,322,927 $ 49,847 $ -- $1,372,774
Securities of Other United States
Government Corporations and
Agencies.......................... 602,556 23,959 (35) 626,480
Obligations of States and Political
Subdivisions...................... 80,593 6,466 (149) 86,910
Debt Securities Issued by Foreign
Governments....................... 1,806 -- -- 1,806
Corporate Securities............... 3,617 6,187 -- 9,804
Mortgage-Backed Securities......... 431,011 22,580 (318) 453,273
Other Securities................... 102,796 3,502 -- 106,298
---------- -------- ------- ----------
Totals........................... $2,545,306 $112,541 $ (502) $2,657,345
========== ======== ======= ==========
The following presents an analysis of the contractual maturities of the
investment securities portfolio as of December 31, 1993:
ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS OF
DOLLARS)
Securities Held to Maturity
Due in One Year or Less.................................. $1,306,425 $1,319,494
Due After One Year Through Five Years.................... 792,291 803,488
Due After Five Years Through Ten Years................... 38,589 42,248
Due After Ten Years...................................... 86,630 87,321
---------- ----------
2,223,935 2,252,551
Mortgage-Backed Securities............................... 516,001 525,123
Restricted Equity Securities............................. 13,654 13,654
---------- ----------
$2,753,590 $2,791,328
========== ==========
Securities Available for Sale
Due in One Year or Less.................................. $ 1,375 $ 1,378
Due After One Year Through Five Years.................... 230,945 238,195
Due After Five Years Through Ten Years................... 3,819 3,819
Due After Ten Years...................................... 1,871 1,882
---------- ----------
238,010 245,274
Mortgage-Backed Securities............................... 649,094 647,171
Equity Securities........................................ 1,008 1,008
---------- ----------
$ 888,112 $ 893,453
========== ==========
49
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proceeds from sales of investment securities during 1993 were $1,068,574,000.
Gross gains of $12,434,000 and gross losses of $3,621,000 were realized on
those sales. The cumulative investment valuation reserve was $3,855,000 (net of
taxes) as of December 31, 1993.
Investment securities carried at $3,396,469,000, $3,418,254,000 and
$2,759,844,000 were pledged to secure deposits of certain public (governmental)
entities and repurchase agreements at December 31, 1993, 1992 and 1991,
respectively. The December 31, 1993 amount included investment securities with
a carrying value of $2,788,703,000 and a market value of $2,817,369,000 which
were pledged solely for repurchase agreements.
NOTE C LOANS
Loans consisted of the following at year-end:
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Domestic Loans
Commercial and Industrial..................... $1,709,194 $1,864,102 $1,746,885
Real Estate
Construction--Commercial..................... 136,225 220,212 229,390
--Residential.................... 35,078 40,422 42,022
Mortgage--Commercial......................... 1,230,558 991,821 1,021,917
--Residential........................ 2,475,971 2,189,098 2,003,464
Installment................................... 676,170 655,861 651,342
---------- ---------- ----------
Total Domestic Loans......................... 6,263,196 5,961,516 5,695,020
---------- ---------- ----------
Foreign Loans.................................. 593,497 608,633 707,029
---------- ---------- ----------
Subtotal...................................... 6,856,693 6,570,149 6,402,049
---------- ---------- ----------
Lease Financing
Direct........................................ 119,908 129,178 152,660
Leveraged..................................... 281,767 264,255 204,410
---------- ---------- ----------
Lease Financing................................ 401,675 393,433 357,070
---------- ---------- ----------
Total Loans................................ $7,258,368 $6,963,582 $6,759,119
========== ========== ==========
Transactions in the reserve for possible loan losses were as follows:
1993 1992 1991
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Balance at Beginning of Year...................... $128,626 $115,571 $101,928
Provision Charged to Operations................... 54,188 50,071 29,584
Reserves Sold..................................... -- -- (625)
Charge-Offs....................................... (65,732) (43,982) (22,211)
Recoveries........................................ 8,202 6,966 6,895
-------- -------- --------
Net Charge-Offs................................. (57,530) (37,016) (15,316)
-------- -------- --------
Balance at End of Year........................ $125,284 $128,626 $115,571
======== ======== ========
Commercial loans totaling $454,106,000 were pledged to secure certain public
deposits and Federal Home Loan Bank advances at December 31, 1993.
50
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Certain directors and executive officers of Bancorp, its subsidiary
companies, companies in which they are principal owners, and trusts in which
they are involved, were loan customers of the Bank of Hawaii during 1993, 1992
and 1991. These loans were made in the ordinary course of business at normal
credit terms, including interest rate and collateral requirements, and do not
represent more than a normal risk of collection. Such loans at December 31,
1993, 1992 and 1991 amounted to $83,877,000; $91,084,000 and $49,716,000,
respectively. During 1993, the activity in these loans included new borrowings
of $32,638,000 and repayments of $25,642,000, and other adjustments of
$14,203,000 relating to the changes in directors and the companies and trusts
in which they are involved.
At December 31, 1993 and 1992, the fair value of loans, excluding leases, was
$6,901,014,000 and $6,403,876,000, respectively.
NOTE D PREMISES AND EQUIPMENT
Bancorp and its affiliates own and lease premises consisting primarily of
operating facilities, the great majority of which are located in Hawaii.
Bancorp has four significant properties all of which are in downtown Honolulu.
The largest is the condominium units in the Financial Plaza of the Pacific in
which the Bank of Hawaii's head office is situated. In addition, Bancorp owns a
two-story building on the outskirts of downtown Honolulu which houses data
processing and certain other operational functions, a five-story building which
houses administrative departments and FirstFed's five-story headquarters
building. In 1993, the Bank entered into a contract to build a 248,000 square
foot facility in the Kapolei area on Oahu. The building will be primarily used
as an operations facility and will also house a Bank of Hawaii branch. The
contracts for construction of the building total $43 million.
The following is a summary of data for major categories of premises and
equipment:
ACCUMULATED NET
DEPRECIATION AND BOOK
COST AMORTIZATION VALUE
-------- ---------------- --------
(IN THOUSANDS OF DOLLARS)
December 31, 1993
Premises..................................... $187,614 $ (60,588) $127,026
Equipment.................................... 107,167 (66,933) 40,234
-------- --------- --------
$294,781 $(127,521) $167,260
======== ========= ========
December 31, 1992
Premises..................................... $172,614 $ (53,762) $118,852
Equipment.................................... 100,554 (63,023) 37,531
-------- --------- --------
$273,168 $(116,785) $156,383
======== ========= ========
December 31, 1991
Premises..................................... $161,867 $ (47,586) $114,281
Equipment.................................... 85,250 (55,128) 30,122
-------- --------- --------
$247,117 $(102,714) $144,403
======== ========= ========
The amounts of depreciation and amortization included in consolidated expense
were $18,520,000, $16,551,000 and $14,798,000 in 1993, 1992 and 1991,
respectively.
Bancorp's operating leases are for certain branch premises and data
processing equipment. The majority of the premise leases provide for a base
rent for a stipulated period with various renewal options. Portions of certain
properties are subleased to others for periods expiring in various years
through 2000. Lease terms generally provide for the lessee to pay operating
costs such as taxes and maintenance.
51
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum payments, by year and in the aggregate, for noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at December 31, 1993:
OPERATING LEASES
-------------------------
(IN THOUSANDS OF DOLLARS)
1994.......................................... $ 12,592
1995.......................................... 11,172
1996.......................................... 8,998
1997.......................................... 7,376
1998.......................................... 6,776
Thereafter.................................... 127,465
--------
Total Minimum Lease Payments................ $174,379
========
Minimum future rentals receivable under subleases for noncancelable operating
leases at December 31, 1993, amounted to $2,119,000.
Rental expense for all operating leases consisted of:
1993 1992 1991
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Minimum Rentals................................... $ 22,592 $ 19,793 $ 17,348
Sublease Rental Income............................ (583) (526) (268)
-------- -------- --------
$ 22,009 $ 19,267 $ 17,080
======== ======== ========
NOTE E DEPOSITS
Interest on deposit liabilities in 1993, 1992 and 1991 consisted of the
following:
1993 1992 1991
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Domestic Interest-Bearing Demand Accounts......... $ 45,136 $ 64,381 $ 91,400
Domestic Savings Accounts......................... 32,654 39,440 37,011
Domestic Time Accounts............................ 77,736 159,433 262,000
Foreign Deposits.................................. 43,131 36,345 51,832
-------- -------- --------
$198,657 $299,599 $442,243
======== ======== ========
Time deposits with balances of $100,000 or more in domestic banking offices
were $492,334,000 in 1993. Of this amount, $60,216,000 represents deposits of
public (governmental) entities which require collaterization by acceptable
securities. The majority of deposits in the foreign category are time deposits
in denominations of $100,000 or more.
Maturities of domestic time deposits of $100,000 or more at December 31,
1993, are summarized as follows:
DOMESTIC
-------------------------
(IN THOUSANDS OF DOLLARS)
Under 3 Months................................ $235,234
4 to 6 Months................................. 84,866
7 to 12 Months................................ 112,096
Over 12 Months................................ 60,138
--------
$492,334
========
At December 31, 1993 and 1992, the fair value of deposits was $7,019,651,000
and $7,895,965,000, respectively.
52
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F SHORT-TERM BORROWINGS
Details of short-term borrowings for 1993, 1992 and 1991 were as follows:
SECURITIES
SOLD UNDER OTHER
FUNDS AGREEMENTS COMMERCIAL SHORT-TERM
PURCHASED TO REPURCHASE PAPER BORROWINGS
---------- ------------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
1993
Amounts Outstanding December
31............................ $ 743,915 $2,509,550 $141,627 $458,639
Average Amount Outstanding
During Year................... 754,051 2,644,935 92,092 272,243
Maximum Amount Outstanding at
Any Month's End............... 967,121 2,995,725 141,627 527,656
Weighted-Average Interest Rate
During Year*.................. 3.20% 3.30% 2.96% 3.87%
Weighted-Average Interest Rate
on Balance Outstanding at End
of Year....................... 3.15% 3.35% 2.89% 2.92%
1992
Amounts Outstanding December
31............................ $1,091,556 $2,232,508 $ 89,017 $202,356
Average Amount Outstanding
During Year................... 766,622 1,019,007 79,958 207,192
Maximum Amount Outstanding at
Any Month's End............... 1,091,556 2,232,508 93,346 275,324
Weighted-Average Interest Rate
During Year*.................. 3.65% 3.69% 4.15% 6.30%
Weighted-Average Interest Rate
on Balance Outstanding at End
of Year....................... 3.37% 3.39% 3.21% 3.78%
1991
Amounts Outstanding December
31............................ $ 768,608 $ 543,582 $113,088 $229,818
Average Amount Outstanding
During Year................... 576,310 186,723 159,069 225,863
Maximum Amount Outstanding at
Any Month's End............... 987,320 607,582 186,565 232,067
Weighted-Average Interest Rate
During Year*.................. 5.94% 5.27% 5.77% 8.23%
Weighted-Average Interest Rate
on Balance Outstanding at End
of Year....................... 4.75% 4.01% 4.29% 6.40%
- --------
* Average rates for the year are computed by dividing actual interest expense
on borrowings by average daily borrowings.
Funds purchased generally mature on the day following the date of purchase.
Commercial paper is issued by the parent corporation in various denominations
generally maturing 90 days or less from date of issuance.
Securities sold under agreements to repurchase were treated as financings and
the obligations to repurchase the identical securities sold were reflected as a
liability with the dollar amount of securities underlying the agreements
remaining in the asset accounts. At December 31, 1993, the weighted average
contractual maturity of these agreements was 137 days and represent investments
by public (governmental) entities. A schedule of maturities of these agreements
are as follows:
(IN THOUSANDS OF DOLLARS)
Overnight..................................... $ --
Less than 30 days............................. 491,677
30 to 90 days................................. 843,045
Over 90 days.................................. 1,174,828
----------
$2,509,550
==========
A line of credit totaling $50,000,000 is used to back up commercial paper
issued in the name of Bancorp. At December 31, 1993, there was no balance
outstanding. Fees on the unused amount of this line and five other lines which
expired in 1993 totaled $165,000.
53
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other short-term borrowings consist mainly of Foreign Call Deposits and long-
term debt scheduled to mature within a year. The maturing long-term debt
consists of a medium-term note totaling $20,000,000 and the remaining balance
of a subordinated debenture payable to the Federal Deposit Insurance
Corporation totaling $300,000. The medium-term note provides for quarterly
interest payments at an interest rate of 5.80%, with the principal due at
maturity on April 29, 1994. The subordinated debenture provides for quarterly
interest payments at a rate based on the average six-month Treasury bill
discount rate and annual installments of $300,000. The final installment is due
on June 15, 1994. Also included in short-term borrowings are two advances from
the Federal Home Loan Bank totaling $47,650,000, whose interest rates are based
on the daily Federal Funds rate. One advance, totaling $3,000,000 matures on
January 28, 1994 and the remaining $44,650,000 advance matures on August 26,
1994.
At December 31, 1993 and 1992, the fair value of short-term borrowings was
$3,853,731,000 and $3,615,437,000.
NOTE G LONG-TERM DEBT
Amounts outstanding as of year-end were as follows:
1993 1992 1991
-------- ------- -------
(IN THOUSANDS OF
DOLLARS)
Medium-Term Notes..................................... $129,830 $50,000 $67,000
Federal Home Loan Bank Advances....................... 103,500 33,500 6,500
Mortgages Payable..................................... -- -- 921
Subordinated Notes.................................... 124,540 600 600
Other Debt............................................ -- -- 500
-------- ------- -------
$357,870 $84,100 $75,521
======== ======= =======
The medium-term notes, which were issued in 1990, 1992, and 1993, are
unsecured. The 1990 notes carry five year terms and the 1993 notes carry two
year terms. Both the 1990 and 1993 notes have floating interest rates which are
tied to the three-month LIBOR rate. These rates are adjusted quarterly. The
1992 notes carry two year terms and have fixed interest rates of 5.80%. At
December 31, 1993, the balance of the 1992 notes were reclassified to short-
term borrowings.
The Federal Home Loan Bank advances bear interest at rates from 5.15% to
8.15%. The advances mature from 1995 through 1998. At December 31, 1993, loans
totaling $124,200,000 were pledged to secure these advances.
The subordinated notes, which were issued in 1993, have a fixed interest rate
of 6.875% and mature in 2003.
Long-term debt maturities for the five years succeeding December 31, 1993,
are $-0- in 1994; $132,331,000 in 1995; $19,000,000 in 1996; $24,000,000 in
1997 and $28,000,000 in 1998.
Interest paid on long-term debt in 1993 totaled $6,689,000.
At December 31, 1993 and 1992, the fair value of long-term debt was
$379,929,000 and $84,024,000, respectively.
54
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H SHAREHOLDERS' EQUITY
Certain of Bancorp's consolidated subsidiaries (including Bank of Hawaii and
FirstFed) are subject to regulatory restrictions that limit cash dividends and
loans to Bancorp. As of December 31, 1993, $359,732,000 of undistributed
earnings of Bancorp's consolidated subsidiaries were available for distribution
to Bancorp without prior regulatory approval.
NOTE I INTERNATIONAL OPERATIONS
The following table provides certain selected financial data for Bancorp's
international operations for the years ended:
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
International
Average Assets............................... $1,908,883 $1,864,876 $1,640,562
Average Loans................................ 666,091 589,974 659,721
Average Deposits............................. 1,259,042 860,773 857,470
Operating Revenue............................ 94,096 105,652 127,186
Income Before Taxes.......................... 13,425 17,865 16,302
Net Income................................... 8,528 11,457 11,056
Average assets primarily consist of short-term interest-bearing deposits with
foreign branches of U.S. banks and large international banks. On average, these
deposits were $1,086,554,000, $1,118,977,000 and $870,734,000 during 1993, 1992
and 1991, respectively.
To measure international profitability, Bancorp maintains an internal
transfer pricing system for the use of domestic funds and makes certain income
and expense allocations. Interest rates used in determining charges on advances
of funds are based on prevailing deposit rates. Overhead is allocated to
reflect services rendered by administration units to profit centers.
NOTE J CONTINGENT LIABILITIES
Bancorp is a defendant in various legal proceedings and, in addition, there
are various other contingent liabilities arising in the normal course of
business. After consultation with legal counsel, management does not anticipate
that disposition of these proceedings and contingent liabilities will have a
material effect upon the consolidated financial statements.
NOTE K RETIREMENT, POSTRETIREMENT BENEFITS AND PROFIT-SHARING PLANS
Bancorp has a non-contributory, defined-benefit retirement plan (Plan) which
covers salaried employees of Bancorp and participating subsidiaries who have
met the Plan's eligibility requirements. Benefits are based on years of service
and average final compensation. Bancorp's funding policy is to contribute
annually an amount that falls within the minimum to maximum amount that can be
deductible for income tax purposes. Plan assets are managed by investment
advisors in accordance with investment policies established by the Plan
Trustees. Investments are generally marketable securities including stocks,
bonds and money market funds.
Bancorp has a non-qualified Excess Benefits Plan which covers all employees
of Bancorp and participating subsidiaries who have met eligibility
requirements. The unfunded Excess Benefits Plan recognizes the liability to
Plan participants for amounts exceeding those allowed to be included in the
qualified defined benefit Plan. The table below includes the status of this
Excess Benefit Plan.
55
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the Plans' funded status and amounts
recognized in Bancorp's statement of condition at December 31.
1993 1992 1991
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Actuarial Present Value of Benefit
Obligations:
Vested Benefit Obligation................ $ 56,553 $ 44,369 $ 32,279
======== ======== ========
Accumulated Benefit Obligation........... $ 61,038 $ 48,154 $ 34,666
======== ======== ========
Projected Benefit Obligation............. $ 99,831 $ 83,614 $ 72,300
Plan Assets (Primarily Marketable
Securities) at Fair Value................. 73,064 59,456 52,320
-------- -------- --------
Projected Benefit Obligation in Excess of
Plan Assets............................... (26,767) (24,158) (19,980)
Unrecognized Net (Gain)/Loss............... 2,287 (1,892) (3,070)
Unrecognized Net Obligation at January 1,
1985 Being Recognized Over 15 Years....... (2,220) (2,600) (2,979)
Prior Service Cost Not Yet Recognized in
Net Periodic Pension Cost................. 2,333 3,121 1,359
-------- -------- --------
Accrued Pension Liability Recognized in the
Statement of Condition.................... $(24,367) $(25,529) $(24,670)
======== ======== ========
Net pension costs included the following components:
1993 1992 1991
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Service Cost--Benefits Earned During the
Period.................................... $ 6,803 $ 6,172 $ 5,585
Interest Cost on Projected Benefit
Obligation................................ 6,626 5,786 5,042
Actual Return on Assets.................... (5,992) (2,548) (7,476)
Net Amortization and Deferral.............. 557 (2,096) 4,038
-------- -------- --------
Net Periodic Pension Cost.................. $ 7,994 $ 7,314 $ 7,189
======== ======== ========
Assumptions used in the accounting were as follows:
DECEMBER 31 DECEMBER 31 DECEMBER 31
1993 1992 1991
----------- ----------- -----------
Weighted-Average Discount Rates............ 7.5% 8.0% 8.0%
Rates of Increase in Compensation Levels... 5.0% 5.5% 5.5%
Expected Long-Term Rate of Return on
Assets.................................... 8.5% 8.5% 8.5%
======== ======== ========
There is a deferred-compensation profit-sharing plan (Profit Sharing Plan)
for the benefit of all employees of Bancorp and its subsidiaries who have met
the Profit Sharing Plan's eligibility requirements. The Profit Sharing Plan
provides for annual contributions based on a schedule of performance levels.
The schedule establishes the percentage of adjusted net income to be
contributed based on Adjusted Returns on Equity. Members of the Profit Sharing
Plan are permitted to elect to invest their annual allocation in shares of
common stock of Bancorp Hawaii, Inc., and to receive up to 50% of their annual
allocation in cash. Bancorp contributions amounted to $9,602,000 in 1993;
$9,886,000 in 1992 and $8,830,000 in 1991.
Bancorp adopted SFAS No. 106 "Employer's Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106) as of January 1, 1993. The defined
benefit plan provides group life, dental and medical insurance coverage. Over
the last several years, the programs have been modified to provide a "sharing
of
56
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
costs" where both the employer and employees pay a portion of the premium
costs. Most of the employees of Bancorp and its subsidiaries are covered who
have met the eligibility requirements. Bancorp has recognized a portion of this
liability ($7,110,000) over the years and has elected to recognize the
transition obligation over 20 years as allowed upon adoption of SFAS 106.
Bancorp has no segregated assets to provide postretirement benefits as of
December 31, 1993.
The following schedule presents the funded status of the liability as of
December 31, 1993.
(IN THOUSANDS OF DOLLARS)
-------------------------
Accumulated Postretirement Benefit Obligation
Retirees........................................... $ (8,869)
Other Fully Eligible Plan Participants............. (6,038)
Other Active Plan Participants..................... (9,447)
--------
Total............................................ $(24,354)
Plan Assets.......................................... --
--------
Accumulated Postretirement Benefit Obligation in Ex-
cess of Plan Assets................................. $(24,354)
Unrecognized Transition Obligation Being Amortized
Over 20 Years....................................... 13,337
Unrecognized Net Gain/Loss........................... 699
--------
Accrued Postretirement Benefit Liability......... $(10,318)
========
The Net Periodic Postretirement Benefit Cost for 1993 was:
(IN THOUSANDS OF DOLLARS)
-------------------------
Service Cost........................................... $1,151
Interest Cost.......................................... 1,678
Amortization of Transition Obligation.................. 702
------
Net Periodic Postretirement Benefit Cost............. $3,531
======
The following table presents the assumptions utilized to determine the
expense and liability:
Health Care Cost Trend Rate............................................... 15.0%
Dental Care Cost Trend Rate............................................... 7.5%
Weighted Average Discount Rate............................................ 7.5%
Rate of Increase in Compensation Level.................................... 5.0%
The health care cost trend rate is projected at 15% per year until the year
2000 leveling to the ultimate 7%. A one percent increase in that trend rate of
assumption (with all other assumptions remaining constant) would increase the
service and interest cost components of the net periodic postretirement cost
from $2,829,000 to $3,538,000. The impact of this one percent increase in the
trend rates on the accumulated postretirement benefit obligation would be an
increase to $29,357,000 at December 31, 1993.
57
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE L STOCK OPTION PLANS
The Bancorp Stock Option Plans (the Plans) are administered by the
Compensation Committee appointed by Bancorp's Board of Directors. The Plans,
which are identical, allow participants to purchase shares of common stock for
a specified exercise price anytime beginning one year after the option has been
granted and expiring 10 years thereafter. For 1990 and 1991, the options
granted become exercisable prorata over a three year period. The options
granted since 1992 are exercisable one year after grant. The exercise price is
equal to the fair market value of the stock on the date the option was granted.
At year-end, the exercise price (per share) of options outstanding were between
$10.51 and $48.00; $7.01 and $32.00 after adjusting for the 50% stock dividend
declared January 26, 1994. The price (per share) range of options exercised
during 1993 were between $10.10 and $43.50 on an actual price basis. The
following table presents the activity of Stock Option Plans for the years
indicated:
SHARES UNDER STOCK OPTION
PLANS(1)
-------------------------------
1993 1992 1991
--------- --------- ---------
Outstanding at beginning of year............... 1,254,880 1,276,969 816,115
Add (Deduct):
Granted (Including Stock Dividends).......... 269,000 192,000 572,375
Canceled or Surrendered...................... (31,370) (31,305) (27,520)
Exercised.................................... (151,543) (182,784) (84,001)
--------- --------- ---------
Outstanding at End of Year..................... 1,340,967 1,254,880 1,276,969
--------- --------- ---------
Options Exercisable............................ 1,018,775 846,696 784,505
Shares Available for Future Grants............. 23,173 270,293 454,394
--------- --------- ---------
- --------
(1) Before adjustment for 50% stock dividend declared January 26, 1994.
NOTE M OTHER OPERATING EXPENSES
Other operating expenses at year-end were as follows:
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
FDIC Insurance................................. $15,119 $17,162 $16,122
Legal and Other Professional Fees.............. 11,847 11,844 10,789
Advertising.................................... 9,675 8,433 8,425
Stationery and Supplies........................ 7,485 7,199 6,950
Other.......................................... 50,636 46,299 43,571
--------- --------- ---------
Total...................................... $94,762 $90,937 $85,857
========= ========= =========
NOTE N INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Statement 109 requires a change from the deferred method of accounting for
income taxes of APB Opinion 11 to the liability method. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
58
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1992, Bancorp adopted Statement 109 and has reported the
cumulative effect of that change in the method of accounting for income taxes
in the 1992 consolidated statement of income.
The income tax provision includes the following components:
LIABILITY DEFERRED
METHOD METHOD
--------------- --------
1993 1992 1991
------- ------- --------
(IN THOUSANDS OF
DOLLARS)
Current................................................ $66,594 $63,960 $59,013
Deferred............................................... 13,246 8,212 12,300
------- ------- -------
Provision for Income Taxes............................. $79,840 $72,172 $71,313
======= ======= =======
The 1993, 1992 and 1991 tax provision includes state tax expense of
$14,719,000, $13,012,000 and $11,468,000, respectively. The current provision
also includes taxes on the gains on the sale of securities of $3,495,000;
$1,159,000 and $953,000 for 1993, 1992 and 1991, respectively. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of December 31, 1993 and 1992
reclassified based on the tax return as filed, are as follows:
1993 1992
-------- --------
(IN THOUSANDS OF
DOLLARS)
Deferred tax liabilities:
Lease transactions.................................... $167,093 $152,257
Deferred investment tax credits....................... 7,471 7,809
Accelerated depreciation.............................. 1,919 2,244
Core deposit intangible............................... 12,335 13,400
-------- --------
Total deferred tax liabilities...................... 188,818 175,710
-------- --------
Deferred tax assets:
Reserve for loan losses............................... 46,009 46,692
Accrued pension cost.................................. 8,586 7,968
Net operating loss carry forwards..................... 5,266 2,898
Other--net............................................ 4,797 4,869
-------- --------
Total deferred tax assets........................... 64,658 62,427
Valuation allowance for deferred tax assets........... (2,062) (2,898)
-------- --------
Net deferred tax assets............................. 62,596 59,529
-------- --------
Net deferred tax liabilities........................ $126,222 $116,181
======== ========
59
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a listing of the elements of the reclassified 1991 tax
deferrals based on the tax return as filed:
1991
-------------
(IN THOUSANDS
OF DOLLARS)
Lease Transactions............................................ $15,202
Deferred Investment Tax Credit................................ (583)
Provision for Loan Losses..................................... (4,256)
Accelerated Depreciation...................................... (449)
Periodic Pension Cost......................................... 1,141
All Other..................................................... 1,245
-------
Deferred Tax Expense........................................ $12,300
=======
For financial statement purposes, Bancorp had deferred investment tax credits
for property purchased for lease to customers of $7,471,000, $7,809,000 and
$8,377,000 at December 31, 1993, 1992 and 1991, respectively. In 1993, 1992 and
1991, investment tax credits included in the computation of the provision for
income taxes were $338,000; $568,000 and $583,000, respectively. Cumulative
deferred taxes as of December 31, 1991 were $120,639,000.
The following analysis reconciles the Federal statutory income tax rate to
the effective consolidated income tax rate:
DEFERRED
LIABILITY METHOD METHOD
------------------ --------
1993 1992 1991
-------- -------- --------
Statutory Federal Income Tax Rate................. 35.0% 34.0% 34.0%
Increase (Decrease) in Tax Rate
Resulting From:
State Taxes, Net of Federal Income Tax and
Foreign Tax Adjustments....................... 4.5 4.5 4.1
Tax-Exempt Interest Income..................... (0.6) (1.1) (1.3)
Effect of Tax Rate Change on Deferred Tax
Assets and Liabilities........................ 0.2 -- --
Low Income Housing and Investment Tax Credit... (0.5) (0.3) (0.3)
Other.......................................... (1.0) 1.1 2.3
-------- -------- ----
Effective Tax Rate............................. 37.6% 38.2% 38.8%
======== ======== ====
FirstFed has qualified under provisions of the Internal Revenue Code that
permit federal income taxes to be computed after deduction of additions to bad
debt reserves. These deductions are subject to the alternative minimum tax and
are computed as a percentage of taxable income, subject to certain limitations
based on aggregate loans and savings deposits. The percentage of taxable income
bad debt deduction available to FirstFed was 8% of taxable income for 1993,
1992 and 1991. For financial statement purposes, no deferred income tax
liability has been recorded for tax bad debt reserves that arose in tax years
beginning before December 31, 1987. Such tax bad debt reserves total
approximately $18.2 million for which no provision for federal income taxes has
been provided. If these amounts are used for purposes other than to absorb bad
debt losses, they will be subject to federal income taxes at the then
applicable rates.
60
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE O FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Bancorp is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest and foreign exchange
rates. These financial instruments include commitments to extend credit,
foreign exchange contracts, standby letters of credit, and interest rate swaps.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statements of condition.
The contract or notional amounts of those instruments reflect the extent of
involvement Bancorp has in particular classes of financial instruments.
Bancorp's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. Bancorp uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For interest rate swaps and foreign exchange contracts, the
contract or notional amounts do not represent exposure to credit loss. Bancorp
controls the credit risk of these instruments through credit approvals, limits,
and monitoring procedures.
FAIR VALUES CONTRACT OR NOTIONAL AMOUNT
-------------- --------------------------------
1993 1992 1993 1992 1991
------ ------ ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Financial Instruments Whose
Contract Amounts Represent
Credit Risk:
Commitments to Extend
Credit.................... $8,113 $6,438 $2,692,081 $2,211,870 $2,045,645
Standby Letters of Credit.. 4,599 4,759 245,383 254,909 283,244
Commercial Letters of
Credit.................... 177 164 102,349 98,664 85,592
Financial Instruments Whose
Notional or Contract Amounts
Exceed the Amount of Credit
Risk:
Foreign Exchange and Swap
Contracts................. 61 (806) 339,882 407,901 482,537
Interest Rate Swap
Agreements................ (227) (967) 1,398,590 185,476 43,103
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any terms or conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Bancorp evaluates each customer's creditworthiness on an
individual basis. The amount of collateral obtained is based on management's
credit evaluation of the customer. Collateral held varies, but may include
cash, accounts receivable, inventory, and property, plant, and equipment.
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support borrowing agreements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Bancorp holds cash and deposits as collateral
supporting those commitments for which collateral is deemed necessary.
Foreign exchange contracts are contracts for delayed delivery of a foreign
currency in which the seller agrees to make delivery at a specified future date
at a specified price. Risks arise from the possible inability of counterparties
to meet the terms of their contracts and from movements in exchange rates and
interest rates. Collateral is generally not required for these transactions.
61
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Bancorp enters into interest rate swap agreements to hedge its exposure to
changes in interest rates. At December 31, 1993, Bancorp utilized interest rate
swaps to effectively convert floating rate assets and deposits to fixed rates,
primarily to manage interest rate risk within selected time periods. In 1993,
net revenue on interest rate swap agreements totaled $14.1 million.
Because interest rate swap agreements do not involve an exchange of
principal, credit exposure is very limited relative to cash market instruments.
Even so, swap counterparties are evaluated against strict loan underwriting
standards and most swap agreements contain language allowing for
collateralization, if a stipulated threshold has been exceeded.
NOTE P PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial statements of Bancorp Hawaii, Inc. only follow:
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
---------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Dividends From Bank
Subsidiaries..................................... $ 36,599 $ 34,475 $ 31,587
Other Subsidiaries............................... 39,500 2,700 --
Interest Income
From Subsidiaries................................ 3,219 4,048 11,859
From Others...................................... 824 890 684
Other Income....................................... 77 84 646
Securities Gains (Losses).......................... (67) 1,061 33
-------- -------- --------
Total Income..................................... 80,152 43,258 44,809
Interest Expense................................... 5,914 8,418 18,227
Other Expense...................................... 6,532 7,710 7,508
-------- -------- --------
Total Expense.................................... 12,446 16,128 25,735
Income Before Income Taxes and Equity in
Undistributed Income of
Subsidiaries...................................... 67,706 27,130 19,074
Income Tax Benefits................................ 2,427 2,585 3,620
-------- -------- --------
Income Before Equity in Undistributed Income....... 70,133 29,715 22,694
Equity in Undistributed Income of Subsidiaries
Bank Subsidiaries................................ 79,310 79,898 71,485
Other Subsidiaries............................... (16,876) 17,911 18,512
-------- -------- --------
62,434 97,809 89,997
-------- -------- --------
Net Income....................................... $132,567 $127,524 $112,691
======== ======== ========
62
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CONDITION
DECEMBER 31,
------------------------------
1992 1992 1991
---------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Assets
Cash in Bank of Hawaii.......................... $ 188 $ 174 $ 64
Investment Securities Available for Sale........ 1,008 1,008 --
Securities Purchased from Bank Subsidiaries
Under
Agreements to Resell........................... -- 63,900 64,000
Equity in Net Assets of Bank Subsidiaries....... 774,493 692,086 613,067
Equity in Net Assets of Other Subsidiaries...... 147,719 164,708 146,449
Interest Bearing Deposits from Bank............. 146,700 -- --
Advances to Other Subsidiaries.................. -- 18,000 57,830
Net Loans....................................... 16,364 20,216 7,686
Trading Securities.............................. 876 -- 3,702
Other Assets.................................... 55,160 57,709 49,504
---------- ---------- --------
Total Assets.................................. $1,142,508 $1,017,801 $942,302
========== ========== ========
Liabilities and
Shareholders' Equity
Commercial Paper and Short-Term Borrowings...... $ 161,627 $ 124,017 $149,588
Long-Term Debt.................................. 30,000 50,000 67,000
Other Liabilities............................... 12,777 15,456 1,684
Shareholders' Equity............................ 938,104 828,328 724,030
---------- ---------- --------
Total Liabilities and Shareholders' Equity.. $1,142,508 $1,017,801 $942,302
========== ========== ========
63
BANCORP HAWAII, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Operating Activities
Net Income..................................... $132,567 $127,524 $112,691
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Provision for Loan Losses and Amortization
Expense..................................... 4,301 5,047 5,002
Undistributed Income from Subsidiaries....... (62,434) (97,809) (89,997)
Net Decrease (Increase) in Trading
Securities.................................. (876) 3,702 (1,630)
Other Assets and Liabilities, Net............ (4,432) 521 (1,628)
-------- -------- --------
Net Cash Provided by Operating Activities.. 69,126 38,985 24,438
Investing Activities
Investment Securities Transactions, Net........ -- (1,008) 10,396
Securities Purchased Under Agreements to
Resell, Net................................... 63,900 100 (64,000)
Interest Bearing Deposits...................... (146,700) -- --
Loan Transactions, Net......................... 3,852 (12,530) 3,799
Capital Contributions to Subsidiaries, Net..... (175) (10) (10,228)
Repayments from (Advances Made) to
Subsidiaries, Net............................. 18,000 39,830 171,585
-------- -------- --------
Net Cash Provided (Used) by Investing
Activities................................ (61,123) 26,382 111,552
Financing Activities
Net Proceeds (Repayments) from Borrowings...... 17,610 (42,571) (114,915)
Proceeds from Sale of Stock.................... 12,814 12,665 11,232
Cash Dividends Paid............................ (38,413) (35,351) (32,364)
-------- -------- --------
Net Cash Used by Financing Activities...... (7,989) (65,257) (136,047)
-------- -------- --------
Increase (Decrease) in Cash................ 14 110 (57)
Cash at Beginning of Year...................... 174 64 121
-------- -------- --------
Cash at End of Year........................ $ 188 $ 174 $ 64
======== ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
64
PART III
The following information required by the Instructions to Form 10-K is
incorporated herein by reference from various pages of Bancorp Hawaii, Inc.
Proxy Statement for the annual meeting of shareholders to be held on April 27,
1994, as summarized below:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Election of Directors on pages 2-5. Disclosure of Compliance with section
16 (a) of the Securities Exchange Act on page 5.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation on pages 7-16.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Securities and Principal Holders Thereof and Election of Directors
on pages 1-5.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others on pages 18-19.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)Financial Statements and Schedules
The following consolidated financial statements of Bancorp Hawaii, Inc.
and subsidiaries are included in Item 8:
Consolidated balance sheets--December 31, 1993, 1992, and 1991
Consolidated statements of income--Years ended December 31, 1993,
1992, and 1991
Consolidated statements of shareholders' equity--Years ended
December 31, 1993, 1992, and 1991
Consolidated statements of cash flows--Years ended December 31,
1993, 1992, and 1991
Notes to consolidated financial statements--December 31, 1993
All other schedules to the consolidated financial statements stipulated
by Article 9 of Regulation S-X and all other schedules to the financial
statements of the registrant required by Article 5 of Regulation S-X
are not required under the related instructions or are inapplicable and
therefore have been omitted.
Financial statements (and summarized financial information) of (1)
unconsolidated subsidiaries or (2) 50% or less owned persons accounted
for by the equity method have been omitted because they do not,
considered individually or in the aggregate, constitute a significant
subsidiary.
The following exhibits are submitted herewith:
Exhibit #10--Material Contracts
(a) Bancorp Hawaii, Inc., One-Year Incentive Plan Effective
January 1, 1993
(b) Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective
January 1, 1993
Exhibit #11--Statement Regarding Computation of Per Share Earnings.
Exhibit #21--Subsidiaries of the Registrant
Exhibit #23--Consent of Independent Auditors
The following exhibits are incorporated herein by reference:
Exhibit #3--Articles of Incorporation and By-laws Exhibit #3 of Form
10-K for fiscal year ended December 31, 1990.
65
Exhibit #10--Material Contracts
(c) Bancorp Hawaii, Inc. Stock Option Plan Exhibit 4(a) of
Registration No. 2-63615.
(d) Bancorp Hawaii, Inc. Stock Option Plan of 1983 Exhibit 4(a) of
Registration No. 2-841164.
(e) Bancorp Hawaii, Inc. Stock Option Plan of 1988 Exhibit 4(a) of
Registration No. 33-23495.
(b) Registrant filed a Form 8-K during the quarter ended December 31,
1993. The Form 8-K was filed on October 28, 1993 reporting the sale of
certain property involved in the $25.7 million charge-off reported in
the quarter ended September 30, 1993.
(c) Response to this item is the same as Item 14(a).
(d) Response to this item is the same as Item 14(a).
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STATISTICAL DISCLOSURES
CONTENTS AND REFERENCE
The following statistical disclosures required by the Instructions to Form
10-K are summarized below:
ITEM I. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
Interest Differential--Table 21 on page 37.
Consolidated Average Balances, Income and Expense, and Yield and Rates--
Taxable Equivalent--Table 13 on page 28.
Average Loans--Table 19 on page 36.
Average Deposits--Table 20 on page 36.
ITEM II. INVESTMENT PORTFOLIO
Note B to the Audited Financial Statements on pages 48 to 50.
Maturity Distribution--Table 17 on page 35.
ITEM III. LOAN PORTFOLIO
Loan Portfolio Balances--Table 3 on page 13.
Interest Rate Sensitivity--Table 12 on page 27.
Non-Performing Assets and Accruing Loans Past Due 90 Days or More--Table 6
on page 19.
Foregone Interest on Non- Accruals--Table 5 on page 18.
Potential Problem Loans--Narrative on page 24.
Geographic Distribution of International Assets--Table 10 on page 24.
ITEM IV. SUMMARY OF LOAN LOSS EXPERIENCE
Summary of Loan Loss Experience--Table 7 on page 21.
Allocation of Loan Loss Reserve--Table 8 on page 22.
Narrative on page 20.
ITEM V. DEPOSITS
Consolidated Average Balances, Income and Expense, and Yield and Rates--
Taxable Equivalent--Table 13 on page 28.
Note E to the Audited Financial Statements on page 52.
ITEM VI. RETURN ON EQUITY AND ASSETS
1993 1992 1991
----- ----- -----
Return on Assets..................................... 1.05% 1.10% 1.04%
Return on Equity..................................... 14.85% 16.25% 16.50%
Dividend Payout Ratio................................ 29.37% 28.22% 28.96%
Equity to Assets Ratio............................... 7.09% 6.74% 6.31%
67
ITEM VII. SHORT-TERM BORROWINGS
NOTE F TO THE AUDITED FINANCIAL STATEMENTS ON PAGES 53 TO 54.
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
Nos. 33-23495, 2-63615, and 2-84164 (filed August 2, 1988); 33-29872 and 2-
96329 (filed July 11, 1989); and 33-32295 (filed November 28, 1989).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suite, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 10, 1994 Bancorp Hawaii, Inc.
/s/ H. Howard Stephenson
By___________________________________
H. Howard Stephenson Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
Date: March 10, 1994
/s/ H. Howard Stephenson /s/ Frank J. Manaut
_____________________________________ _____________________________________
H. Howard Stephenson Director Frank J. Manaut Director
/s/ Lawrence M. Johnson /s/ Fred E. Trotter
_____________________________________ _____________________________________
Lawrence M. Johnson Director Fred E. Trotter Director
/s/ Peter D. Baldwin /s/ Charles R. Wichman
_____________________________________ _____________________________________
Peter D. Baldwin Director Charles R. Wichman Director
/s/ Sidney I. Hashimoto /s/ K. Tim Yee
_____________________________________ _____________________________________
Sidney I. Hashimoto Director K. Tim Yee Director
/s/ Thomas B. Hayward /s/ David A. Houle
_____________________________________ _____________________________________
Thomas B. Hayward Director David A. Houle Chief Financial
Officer
/s/ David A. Heenan /s/ Denis K. Isono
_____________________________________ _____________________________________
David A. Heenan Director Denis K. Isono Chief Accounting
Officer
/s/ Stuart T. K. Ho
_____________________________________
Stuart T. K. Ho Director
69