Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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
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, HONOLULU, HAWAII 96813
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(808) 847-8888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 December 31, 1995 ($35.88 per share): $1,461,789,089
As of February 20, 1996, 41,216,183 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 26, 1996, are incorporated by reference into
Part III of this Report.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 1995, Bank of Hawaii International, Inc. (BOHI), a wholly-owned
subsidiary of Bank of Hawaii, finalized its acquisition for $1.8 million of
the remaining 20% equity interest it did not already own in Banque d'Hawaii
(Vanuatu) Limited. Additionally, in furtherance of the establishment of a new
Hong Kong branch of Bank of Hawaii, BOHI liquidated its wholly-owned
subsidiary, Hawaii Financial Corporation (Hong Kong) Limited, whose assets and
liabilities were transferred to the new branch.
During 1995, Bank of Hawaii also activated its wholly-owned subsidiary,
Pacific Capital Asset Management, Inc. (PCAM), a registered investment adviser
organized in 1994 to provide investment advisory services primarily to
institutional investors. These activities are expected to increase in 1996.
Bancorp's organization chart at December 31, 1995 is included as Exhibit
21.1. The percentages indicate the proportion of total assets that each group
of entities contributed to Bancorp's consolidated financial position at
December 31, 1995. All of the subsidiaries are wholly owned except as
otherwise noted for the Pacific affiliate banks and except for those entities
whose directors own qualifying shares. All the entities are consolidated with
the immediate parent company except as otherwise noted for the Pacific
affiliate banks. BOHI's investments in Pacific affiliate banks are accounted
for under the equity method, except Banque d'Hawaii (Vanuatu) Limited and
National Bank of Solomon Islands which are included in the consolidated
financial statements of Bancorp.
At December 31, 1995, Bancorp and its subsidiaries employed 4,391 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 18 directors of Bank of Hawaii (each of whom holds 125
qualifying shares) own 100% of the outstanding shares. There are three (3)
directors of Bank of Hawaii who do not hold qualifying shares. The legal
requirement for directors of Hawaii banks to hold qualifying shares was
eliminated in 1993. It is anticipated that directors currently holding such
shares will retain them until they retire or resign from the Board of Bank of
Hawaii.
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, Korea (Seoul), Philippines (Manila, Davao, and Cebu), Republic of
Fiji (Suva, Nadi and Lautoka opening in 1996), Republic of the Marshall
Islands (Majuro), Republic of Palau (Koror), Japan (Tokyo), Singapore, and
Taiwan (Taipei). Bank of Hawaii also has affiliates in New Caledonia, Solomon
Islands, Tahiti, Tonga, Vanuatu and Western Samoa.
Bank of Hawaii owns all of the outstanding stock of Hawaiian Trust Company,
Limited; Pacific Capital Asset Management, Inc.; Bancorp Leasing of Hawaii,
Inc.; BOHI; Bank of Hawaii International Corporation,
2
New York; Bancorp Investment Group, Limited; Pan Ocean Insurance Agency, Inc.;
Bankoh Investment Advisory Services Limited; Realty and Mortgage Investors of
the Pacific, Limited; and Bankoh Corporation (formerly known as Hawaiian Hong
Kong Holdings, Ltd.). The operations of the original Bankoh Corporation were
merged into the Bank and the original Bankoh Corporation was dissolved in
December 1993. In 1994, Hawaiian Hong Kong Holdings, Ltd. (an inactive
corporation) was renamed Bankoh Corporation. A brief discussion of other Bank
subsidiaries not described above 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. As a result, HTCo became a wholly owned subsidiary of Bank
of Hawaii. In 1994, American Financial Services of Hawaii, Inc. (AFS), which
the Bank had acquired during the previous year, along with its subsidiaries
Bishop Trust and American Trust Company of Hawaii, were all merged into HTCo.
At year-end 1995, trust assets under administration were $12.2 billion for
HTCo.
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.; Arbella Leasing
Corporation; Bancorp Leasing of America, Inc.; and Bancorp Leasing
International, Inc. Bancorp Leasing of America, Inc. remains inactive. On a
consolidated basis, BLH's assets represented 1.0% of Bancorp's total assets at
year-end 1995.
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%; Banque d'Hawaii (Vanuatu), Limited-100%; and National Bank of
Solomon Islands-51%. BOHI's total assets represented 1.3% of Bancorp's total
assets at year-end 1995.
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
1.5% of Bancorp's total assets at year-end 1995.
Bancorp Investment Group, Limited was formed in 1991 to provide full service
brokerage and other investment services. The company has been operational
since February of 1992. In 1994, Bancorp contributed the stock of Bancorp
Investment Group, Limited to Bank of Hawaii. As a result, Bancorp Investment
Group, Limited became a wholly owned subsidiary of Bank of Hawaii.
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 1995.
Bankoh Corporation was originally incorporated in 1984 as Hawaiian Hong Kong
Holdings, Ltd. and remained inactive until 1994. In 1994, the name was changed
to Bankoh Corporation, with very limited activity in 1994 and 1995.
Realty and Mortgage Investors of the Pacific, Limited (RAMPAC), a wholly
owned subsidiary, was organized in 1992 as a financial services company in the
State of Hawaii. Its activity is focused on commercial real estate lending in
Hawaii, and it does not accept deposits. Total assets at year-end 1995 were
$50.6 million.
In 1994, Bank of Hawaii organized Pan-Ocean Insurance Agency, Inc. (Pan-
Ocean) as a wholly owned subsidiary. Pan-Ocean engages in a general insurance
agency, insurance sub agency and general insurance brokerage business to the
extent permitted under applicable federal and state laws. Business activity
began in late 1995 with limited results. Activity is anticipated to increase
in 1996.
3
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 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 1995.
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 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 1.3% of
Bancorp's total assets at year-end 1995.
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 is 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 five branch offices located in the State of Arizona.
FNBA had total assets representing 1.0% of Bancorp's total assets at year-end
1995.
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 reactivated in 1995 with several
new investments made during the year. The company also realized a gain ($1.4
million) on the liquidation of one of its early investments.
Investors Pacific Limited, an inactive Bancorp subsidiary, was dissolved in
1995.
4
REGULATIONS AND COMPETITION
Effect of Governmental Policies
The earnings of Bancorp and its principal subsidiaries are affected not only
by general economic conditions, both domestically and internationally, 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.
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. These
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 six commercial banks, six savings
associations, approximately nine deposit-taking financial services loan
companies, approximately 124 credit unions, and scores of mortgage companies
and other financial services firms. 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.
Additional financial institution holding companies or their subsidiaries may
enter markets served by Bancorp and thereby provide additional competition.
Likewise, if Bancorp, Bank of Hawaii, First Federal, and their subsidiaries
pursue additional business opportunities, they will 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 issued thereunder by the Board of Governors of the
Federal Reserve System (the "Board of Governors"). Bancorp is also registered
as a bank holding company under the Hawaii Code of Financial Institutions (the
"Code") and, as such, is subject to the registration, reporting, and
examination requirements of the Code.
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. The statute has been eliminated, effective
September 29, 1995, which had prohibited 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 authorized such acquisition. Accordingly, at the present time and
subject to certain limits, the BHC Act will allow adequately capitalized and
adequately managed bank holding companies to acquire control of banks in any
state. Thus, assuming it is judged to be adequately capitalized and adequately
managed, Bancorp is no longer disabled by the BHC Act from acquiring control
of banks in any state, and bank holding companies whose operations are
principally conducted in states other than Hawaii are no longer disabled by
the BHC Act from acquiring control of Bancorp. An interstate
5
acquisition may not be approved, however, if immediately before the
acquisition the acquirer controls an FDIC-insured institution or branch in the
state of the institution to be acquired, and if immediately following the
acquisition the acquirer would control 30 percent or more of the total FDIC-
insured deposits in that state; but a state may waive the 30 percent
limitation by statute, regulation, or order, or by certain nondiscriminatory
administrative approvals.
Beginning on June 1, 1997, and earlier if expressly permitted by a
nondiscriminatory state law, an adequately capitalized and adequately managed
bank may apply for permission to merge with an out-of-state bank and convert
all branches of both parties into branches of a single bank. States retain the
authority to prohibit such mergers if between September 29, 1994 and June 1,
1997 they enact a statute expressly prohibiting them and that statute applies
equally to all out-of-state banks. An interstate merger may not be approved,
however, if immediately before the acquisition the acquirer controls an FDIC-
insured institution or branch in the state of the institution to be acquired,
and if immediately following the acquisition the acquirer would control 30
percent or more of the total FDIC-insured deposits in that state; but a state
may waive the 30 percent limitation by statute, regulation, or order, or by
certain nondiscriminatory administrative approvals. Banks are also permitted
to open newly-established branches in any state that expressly permits all
out-of-state banks to open newly-established branches, if the law applies
equally to all banks.
The BHC Act also prohibits, with certain exceptions, Bancorp from acquiring
direct or indirect 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 BHC 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
this 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 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 have been the subject of intense
national debate, and thus, they may change and become more broad as they
evolve over time.
Under the policies of the Board of Governors, Bancorp is expected to act as
a source of financial strength to its subsidiary banks and to commit resources
to support its subsidiary banks in circumstances where it might not do so
absent such a policy. It is the policy of the Board of Governors that in
serving as a source of strength to its subsidiary banks, a bank holding
company should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial adversity
and should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks.
In 1989 Congress expanded the authority of bank holding companies to acquire
savings associations, subject to approval by the Board of Governors. Bank
holding companies may acquire healthy as well as failed or failing savings
associations in any state.
Congress in 1989 restructured the regulation of the savings and loan
industry and its deposit insurance and provided a new regulatory structure for
the resolution of troubled and insolvent savings associations. Congress in
1989 also permitted 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.
6
Sections 23A and 18(j) are designed 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.
Also, Bancorp and its subsidiaries are prohibited from engaging in certain
"tie-in" arrangements in connection with extensions of credit or provision of
property or services.
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
in certain respects the FDIC.
Banks, including Bank of Hawaii and FNBA, are subject to extensive federal
and (in the case of Bank of Hawaii) state statutes and regulations that
significantly affect their business and activities. Banks must file reports
with their regulators concerning their activities and financial condition and
obtain regulatory approval to enter into certain transactions. Banks are also
subject to periodic examinations by their regulators to ascertain compliance
with various regulatory requirements. Other applicable statutes and
regulations relate to insurance of deposits, allowable investments, loans,
acceptance of deposits, trust activities, mergers, consolidations, payment of
dividends, capital requirements, reserves against deposits, establishment of
branches and certain other facilities, foreign and international operations,
limitations on loans to one borrower and loans to affiliated persons, and
other aspects of the business of banks. Recent federal legislation has
instructed federal agencies to adopt standards or guidelines governing banks'
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits, asset quality, earnings and stock valuation, and
other matters. Similar provisions subject savings associations, including
First Federal, to comparable requirements and restrictions. Legislation
adopted in 1994 gives the federal banking agencies greater flexibility in
implementing standards on asset quality, earnings, and stock valuation.
Regulatory authorities have broad authority to initiate proceedings designed
to prohibit banks and savings associations from engaging in unsafe and unsound
banking practices.
Bancorp Pacific, as a savings and loan holding company, is subject to
supervision by the Office of Thrift Supervision ("OTS"), and its thrift
subsidiaries are subject to supervision by 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 issued thereunder generally
prohibit a savings and loan holding company, directly or indirectly, from (i)
acquiring control of an insured savings institution or its holding company
without prior OTS approval; (ii) acquiring more than 5% of the voting shares
of an insured savings institution or holding company that is not a subsidiary;
or (iii) acquiring control of an uninsured savings institution. No director or
officer of a savings and loan holding company or person owning or controlling
more than 25% of its voting shares may, except with the prior approval of the
OTS, acquire control of an insured savings association that is not a
subsidiary of that holding company.
Congress adopted legislation in 1991 to permit the FDIC to increase deposit
insurance assessment rates for insured banks and to levy emergency special
assessments against insured institutions. In response, the FDIC adopted a
premium schedule under which the actual assessment rate for a particular
institution depends in part upon the risk classification the FDIC assigns to
that institution. The FDIC may raise an institution's 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 to strengthen the Savings Association Insurance Fund
administered by the FDIC which generally insures the deposits of savings
associations, or to merge the Savings Association Insurance Fund with the Bank
Insurance Fund which generally insures the deposits of banks, or to defray the
costs of FDIC operations, or for other purposes. Implementation of such
measures may change assessment rates, give rise to one-time assessments
against savings associations (including First Federal), or modify the extent
or nature of insurance coverage.
7
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 generally prohibits a depository institution from paying any dividend
or making any capital distribution or paying any management fee to its holding
company if the depository institution would thereafter be undercapitalized.
Undercapitalized institutions are subject to regulatory monitoring and may be
required to divest themselves of or liquidate subsidiaries. Holding companies
of such institutions may be required to divest themselves of such institutions
or divest themselves of or liquidate nondepository affiliates. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt 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.
Such banks and their holding companies are also required to obtain regulatory
approval before retaining senior executive officers.
Subject to certain exceptions, FDICIA (as modified in 1992) restricts
certain investments and activities as principal by state nonmember banks
(including Bank of Hawaii) and requires the federal banking regulators to
prescribe standards for extensions of credit secured by real estate or made to
finance improvements to real estate, loans to bank insiders, regulatory
accounting and reports, internal control reports, independent audits, and
other matters, and requires that insured depository institutions generally be
examined on-site by federal or state personnel at least once every twelve
months.
Federal legislation enacted in 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,
these bills could increase or decrease the cost of doing business, limit or
expand permissible activities (including activities in the insurance and
securities fields), or affect 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 of bank
holding companies, promote more open financial markets for U.S. banks and
financial companies in foreign nations, regulate banks' derivatives activities
and sales of investment products such as mutual fund shares, limit the
prerogative of regulators to expand the range of permissible activities for
banks, particularly in the field of insurance, eliminate or revise the
features of the specialized savings-association charter, 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 52 to 54.
ITEM 3. LEGAL PROCEEDINGS
Note J to the Audited Financial Statements on page 57.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1995 to a vote of
security holders through the solicitation of proxies or otherwise.
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 23 on page 38.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PERFORMANCE HIGHLIGHTS
Bancorp Hawaii, Inc. (Bancorp) reported earnings of $121.8 million for 1995,
up 3.5% from $117.7 million reported for 1994. The improvement, in spite of a
very sluggish Hawaii economy, was attributable to good asset quality, control
over costs and a reduction in FDIC insurance premiums.
Bancorp has adopted a long term goal to increase the annual targets to 1.20%
return on average assets (ROAA) and 17.5% return on average equity (ROAE) by
the year 2000. In 1995, ROAA was 0.98% and ROAE was 11.87%. Bancorp's average
equity to average assets minimum target of 6.00% was exceeded for 1995 at
8.27% and it easily maintained its regulatory designation as a "well
capitalized" financial institution.
Asset quality remained strong in 1995. Total Non-Performing Assets,
including loans 90+ days past due, were $77.6 million, 0.95% of total loans at
year-end 1995, compared to $64.8 million or 0.82% of total loans reported at
year-end 1994. As a percentage of outstanding loans, Non-Performing Assets
(NPA) (excluding loans 90+ days past due) increased slightly to 0.70% as of
year-end, up from 0.67% at year-end 1994, but lower than 0.95% at year-end
1993. Bancorp has generally maintained a level of NPA to outstanding loans
under 1%, reflecting sound lending practices, aggressive management of NPA,
and an aggressive charge-off strategy. The effects of that strategy, while
conservative, have a positive affect on recovery levels. Recoveries totaled
$14.4 million for the year, compared to $25.3 million in 1994. Net charge-offs
in 1995 were $13.5 million or 0.18% of average loans, compared with net
charge-offs of $0.1 million in 1994. Finally, the reserve for loan losses
totaled $152.0 million at the end of 1995, representing 1.90% of loans
outstanding, compared with $148.5 million and 1.92%, respectively at year-end
1994.
Bancorp recognized non-interest income, excluding securities gains and
losses, of $143.9 million, representing a decrease from $146.2 million
reported for 1994. The decrease was caused by a reduction in service charges
on deposit accounts and other income. Trust income grew a disappointing 1.8%
over 1994. However, at Hawaiian Trust Company, Limited (HTCo) net income
increased by 19.9% over 1994. The increase was driven by effective management
of expenses and an improvement in investment income.
Bancorp's emphasis on controlling non-interest expense is reflected in the
minimal growth for 1995. Total non-interest expense grew 1.0% between 1994 and
1995. The restructuring of the retirement plans and the early retirement
program offered to certain staff members helped keep salaries and benefits
growth to less than 3%. The savings from the reduction of FDIC insurance
premiums helped other operating expenses end 1995 at 5.8% below 1994 reported
levels.
9
Bancorp has recognized that in situations where opportunities to employ
incremental capital at attractive returns are not plentiful, its best
alternative use for the capital may be the purchase of Bancorp common stock.
In 1995, Bancorp continued its two programs to repurchase its common shares.
The first program is ongoing and is designed to repurchase common shares to
meet the annual needs of various Bancorp plans. The second program was
approved by the Board of Directors in 1994 and authorized the repurchase of up
to 2 million common shares. Under the terms of the second program,
approximately 700,000 shares have been repurchased as of year-end.
PERFORMANCE HIGHLIGHTS
TABLE 1
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
1995
---------------- FIVE-
1994 YEAR
PERCENT -------- COMPOUND
EARNINGS MEASURES AMOUNT CHANGE AMOUNT GROWTH
- ----------------- -------- ------- -------- --------
Net Income................................... $ 121.80 +3.5% $ 117.74 4.9%
Earnings Per Common Share.................... 2.90 +5.5 2.75 3.7
Average Assets............................... 12,405.9 -1.5 12,596.6 6.2
Average Loans................................ 7,654.9 +3.5 7,393.7 6.7
Average Deposits............................. 7,036.5 -3.5 7,295.2 (2.2)
Average Shareholders' Equity................. 1,026.0 +5.7 970.9 12.8
FIVE-YEAR
PERFORMANCE RATIOS 1995 1994 AVERAGE
- ------------------ ----- ----- ---------
Return on Average Assets................................ 0.98% 0.93% 1.02%
Return on Average Equity................................ 11.87 12.13 14.32
Average Equity to Average Assets Ratio.................. 8.27 7.71 7.22
Loss Reserve to Loans Outstanding....................... 1.90 1.92 1.84
Tier I Capital Ratio.................................... 10.25 10.39
Total Capital Ratio..................................... 12.74 12.99
Leverage Ratio Requirement.............................. 7.82 7.28
MARKET PRICES, BOOK VALUES AND COMMON STOCK DIVIDENDS
TABLE 2
MARKET PRICE (MP) RANGE HIGH MP AS
----------------------------- A PERCENT
YEAR HIGH LOW BOOK VALUE (BV) OF BV DIVIDEND
- ---- ------ ------ --------------- ---------- --------
1991.......................... $31.83 $18.89 $17.45 182% $ .78
====== ====== ====== ==== =====
1992.......................... $34.67 $26.83 $19.68 176% $ .85
====== ====== ====== ==== =====
1993.......................... $35.92 $26.67 $22.00 163% $ .90
====== ====== ====== ==== =====
1994.......................... $34.75 $24.13 $23.10 150% $1.04
First Quarter................. 31.88 26.92 .26
Second Quarter................ 34.75 29.38 .26
Third Quarter................. 34.00 29.25 .26
Fourth Quarter................ 30.38 24.13 .26
1995 $37.13 $24.88 $25.51 146% $1.08
First Quarter................. 28.50 24.88 .26
Second Quarter................ 30.88 27.63 .27
Third Quarter................. 36.75 29.38 .27
Fourth Quarter................ 37.13 32.50 .28
10
Bancorp's Markets
Bank of Hawaii, Bancorp's primary subsidiary, has continued to expand its
operations beyond Hawaii since it opened its first branch in the Republic of
the Marshall Islands in 1959. Bancorp's presence across the Asia-Pacific Rim
has expanded steadily and developed into distinct markets, each of which
contributes to the company's overall performance. Foremost among these markets
is Hawaii. Other markets include the Intra-Pacific Region, Asian Rim and the
U.S. Mainland.
Hawaii is Bancorp's oldest and largest market. Since 1897, Bank of Hawaii
has provided financial services to the people of Hawaii and earned its
position as Hawaii's largest financial institution. Throughout the years,
Bancorp has continued to offer financial products and services to meet the
needs of Hawaii's growing economy. Products introduced in 1995 included Bank
of Hawaii's Cash Advantage Account--a sweep account, Bank of Hawaii's
Mastercard and its first co-branded VISA card with Continental Airlines. Trust
and Investment Services were expanded with the introduction of several new
funds from the Pacific Capital Fund Family and the commencement of Pacific
Capital Asset Management, Inc., an institutional investment advisor.
In contrast to the latter half of the 1980s, when Hawaii registered economic
growth above the national average, Hawaii's economy in the early 1990s was one
of slower growth. The estimated growth in real Gross State Product (GSP) for
1995 of 0.8% and the projected 1996 real GSP growth between 1 and 2%,
indicates a gradual recovery. Of the state's three largest economic sectors,
tourism, construction and federal expenditures, tourism's performance was the
strongest in 1995. For 1995, the Hawaii Visitors Bureau (HVB) reported an
increase in arrivals of 3.2%. The positive outlook extends to 1996 with the
HVB expecting 2 to 3% growth in visitor arrivals which would bring
approximately 6.8 million tourists to Hawaii. The HVB reports 1995 to be a
record year for Eastbound tourists to Hawaii, with more than 2.6 million
visitors. Westbound (mainly U.S. Mainland) tourists declined about 0.5% or
about 24,000 visitors. With the gradual recovery of tourism, hotel occupancy
levels were 76.3% in 1995 and are forecast to rise to 78% in 1996. These
positive trends also point to an estimated increase in visitor expenditures
from approximately $10.8 billion in 1995 to roughly $11.1 billion in 1996.
Construction in Hawaii is expected to stabilize in 1996. Within this sector,
residential housing demand remains strong despite the changing interest rate
environment. A few large projects, like the $175 million convention center in
Honolulu, will support the stabilization. In 1995, federal government
expenditures in Hawaii are expected to remain at or near current levels,
estimated to be $7.6 billion. Of this amount, approximately $4.4 billion are
federal civilian expenditures while federal military expenditures totaled
approximately $3.2 billion in 1995. The total federal workforce is about
31,000 in Hawaii. Although national reductions in military spending continue,
Hawaii has had minimal cuts to date. As long as Hawaii remains a significant
and strategic location for military presence in the Pacific, this spending
level will likely continue.
Bancorp has been a player in the Intra-Pacific region for nearly four
decades. This market spans island nations across the South and West Pacific
that have become participants in the economic growth occurring within the
Asia-Pacific Rim. Bancorp is the only Hawaii-based financial organization to
have such a broad presence in this region. With 13 office locations and six
Pacific Island affiliates, Bancorp continues to see opportunities for growth
and expansion. The largest and most established of our operations are
Bancorp's branches on Guam, which have greatly benefited from the economic
growth in Asia. In 1995, Bancorp acquired the remaining 20% of Banque d'Hawaii
(Vanuatu) it had not previously owned and now owns 100% of the Bank. In
January 1996, Bancorp announced it had entered into an agreement to increase
its ownership in Banque de Tahiti and Banque de Nouvelle Caledonia to majority
interests in both these banks. This expansion, as well as a new branch opened
in Lautoka, Fiji in January 1996, is an important addition to Bancorp's Intra-
Pacific strategy.
The Asian Rim is another market that Bancorp has developed over the last
three decades. Beginning with Japan in the 1970s, Bancorp's Asian foothold now
includes Hong Kong, Korea, Philippines, Singapore and Taiwan. Activities in
this market focus primarily on trade financing which involves flows of funds,
such as letters
11
of credit. Bancorp has been successful in meeting the trade financing needs of
its customers interested in participating in Asia's growth. In 1995, Bancorp
obtained regulatory approvals to upgrade the Taiwan office to branch status
with the opening expected by mid-year 1996. Bancorp also provides
correspondent banking, lending, and investment advisory services to this
market through the International Banking Division's specific units such as the
Japan, China, Korea and Philippine Marketing Groups. These groups are located
in Hawaii and provide new customers with bankers who speak their language and
understand their culture, thus making business transactions flow more
smoothly.
The U.S. Mainland is a market that provides opportunities for continued loan
growth. Bancorp's focus in this market continues to be companies that have
interests in the Pacific, Fortune 1000 companies, and those in the media and
communications industry. For companies that have a Pacific orientation,
Bancorp's presence throughout the Pacific is invaluable. In working with these
borrowers, Bancorp continues to adhere to its strict lending policies. In the
media and communications industry, Bancorp has developed a niche market and
established itself as a knowledgeable and responsive lender. Additionally,
through its subsidiary, First National Bank of Arizona (FNBA), Bancorp
provides financial services to small to middle market customers in the greater
metropolitan Phoenix market.
Subsidiary Activity
Bank of Hawaii is the largest of Bancorp's subsidiaries. Bank of Hawaii
reported total assets of $11.8 billion at year-end 1995, 89.0% of Bancorp's
total assets. Since Bank of Hawaii represents such a large component of
Bancorp, much of the discussion in the following sections reflects its
operations. The following paragraphs are discussions of the other major
subsidiaries.
Hawaiian Trust Company, Limited (HTCo), a subsidiary of Bank of Hawaii,
reported trust income for 1995 of $49.5 million, an increase of 1.8% from
1994. Trust assets under administration have increased to $12.2 billion at
year-end 1995 from $11.9 billion at year-end 1994. Activity in Pacific Capital
Funds (PCF) has continued to grow; at year-end 1995, PCF and the Hawaiian Tax
Free Trust (also advised by HTCo) advised funds with investments totaling $2.0
billion. During 1995, Hawaiian Trust also organized an offshore trust company
in the Bahamas through Banque d'Hawaii (Vanuatu)'s trust subsidiary. Activity
is expected to increase in 1996.
Bancorp Pacific, Inc. (formerly known as FirstFed America, Inc.), a thrift,
has two subsidiaries, First Federal Savings and Loan Association of America
(First Federal) located in the State of Hawaii and First Savings and Loan
Association of America (First Savings) located in Guam and Saipan. Bancorp
Pacific reported earnings of $14.7 million for 1995, a decrease of 20.2% from
1994's total earnings of $18.4 million. These lower earnings were due to a
decrease in net interest margin as deposits shifted to higher cost time
deposits. In spite of the lower earnings, performance ratios remained strong
with ROAA of 1.26% and ROAE of 12.46%. Loans grew 9.2% to $1.1 billion at
year-end 1995, while deposits grew 9.8% over the same period. NPA of 0.76% of
total loans outstanding (primarily secured by residential real estate) and a
reserve ratio of 0.86% of outstanding loans at year-end 1995 remained
consistent over the year. At year-end 1995, First Federal reported risk-based
total capital ratio of 17.66% exceeding statutory minimums and ratios at peer
savings and loan companies.
FNBA reported net income for 1995 of $2.1 million, an increase of 22.2% from
1994. The improvement in results was driven by a resurgent Arizona economy.
Deposits at FNBA have grown by more than 55% to $132.2 million at year-end
1995 from $84.6 million a year ago, creating a valuable source of funding for
Bancorp. Lending activity at FNBA has increased with gross loans growing to
$113.0 million at year-end 1995, an increase of 20% for the year. Loan quality
continues to improve at FNBA. NPA, as a percent of total loans outstanding,
were 1.04% at year-end 1995, compared to 1.48% at the end of 1994. NPA totaled
$1.2 million at year-end 1995 and included no foreclosed real estate. The
ratio of reserves to loans outstanding was 7.46% at year-end 1995, compared to
8.89% at year-end 1994. FNBA's risk-based capital ratios at year-end 1995
exceeded regulatory minimums at 10.69% and 12.02% for Tier 1 and Total
Capital, respectively.
12
The following sections will cover in more detail Bancorp's performance and
activities during 1995. The areas that will be covered include:
. Risk Elements Involved in Lending Activities
. Asset-Liability Management
. Capital Adequacy
. Interest Rate Risk and Derivatives
. Liquidity Management
. Control of Net Overhead
. Income Taxes
. Fourth Quarter Results
RISK ELEMENTS INVOLVED IN LENDING ACTIVITIES
Risk Profile of Lending Activity
Loans outstanding at year-end 1995 grew to $8.2 billion, a 3.3% increase
from $7.9 billion at year-end 1994. This growth factor was affected by the
securitization of $412 million of residential mortgage loans in the first
quarter. Without the securitization, loans outstanding would have increased by
more than 8%.
The lending environment in Hawaii for the last several years has been
challenging. The interest rate environment and the Hawaii economy have
negatively affected a large part of Bancorp's lending activities and is
reflected in the rate of increase of the loan portfolio and yields on loans.
In 1995, certain sections of the loan portfolio, however, saw increased
activity and positive growth. Mortgage lending, mainly residential, began 1995
reduced by the securitization, but quickly began to re-build the portfolio as
rates declined; by year-end 65% of the securitized balances had been replaced.
Table 3 presents the year-end loan portfolio broken down into the various
categories. The securitization mentioned earlier has changed the mix of loans
at Bancorp. Real estate loans continue to comprise the largest portion of the
loan portfolio. Real estate loans made up 52.1% of total loans at year-end
1995 compared with 53.8% at year-end 1994. Within the real estate category,
residential mortgage loans represented 33.6% of total loans, while commercial
mortgage loans represented 18.5% of total loans at year-end 1995. Table 4
presents the geographic distribution of the loan portfolio based on the major
markets in which Bancorp operates. The distribution remained similar between
1995 and 1994.
LOAN PORTFOLIO BALANCES
TABLE 3
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic Loans
Commercial and Industrial....... $1,902.2 $1,830.8 $1,709.2 $1,864.1 $1,746.9
Real Estate
Construction--Commercial...... 198.5 113.1 136.2 220.2 229.4
Residential..... 9.8 17.9 35.1 40.4 42.0
Mortgage--Commercial.......... 1,308.8 1,241.0 1,230.6 991.9 1,021.9
Residential..... 2,727.4 2,872.8 2,476.0 2,189.1 2,003.5
Installment..................... 817.3 741.6 676.2 655.9 651.3
Lease Financing................. 392.9 378.1 401.6 393.4 357.1
-------- -------- -------- -------- --------
Total Domestic.............. 7,356.9 7,195.3 6,664.9 6,355.0 6,052.1
Foreign Loans
Banks and Other Financial
Institutions................... 268.7 299.0 295.8 285.6 384.3
Commercial and Industrial....... 513.6 364.2 259.4 288.5 284.6
All Others...................... 13.2 33.5 38.3 34.5 38.1
-------- -------- -------- -------- --------
Total Foreign............... 795.5 696.7 593.5 608.6 707.0
-------- -------- -------- -------- --------
Total Loans................. $8,152.4 $7,892.0 $7,258.4 $6,963.6 $6,759.1
======== ======== ======== ======== ========
13
The following sections discuss the 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 $1.9 billion,
up 3.9% from year-end 1994. This portfolio, which makes up 23.3% of the total
loans, consists of lending to companies and individuals on both a secured and
unsecured basis for business purposes. Customers and collateral vary based on
the type of business involved.
Bancorp's focus in lending to companies on the U.S. Mainland is Fortune 1000
companies, companies with a Pacific orientation and selected niches where
lending expertise has developed over the years. Lending activity to Fortune
1000 companies includes loans and lines of credit. Balances outstanding to
these companies as of year-ends 1995 and 1994 were $918.5 million and $893.6
million, respectively. As previously reported, Bancorp's communication/media
portfolio is considered a selected niche. Total loans and leases of this type
stood at $588.0 million at year-end 1995, an increase of 11.7% from year-end
1994. This category can be segmented further into cable television, publishing
and telecommunications, which represented 11.3%, 6.0% and 6.2%, respectively,
of the total C&I loan portfolio at year-end 1995. At year-end 1995, there were
no loans in the communication/media portfolio which were classified as NPA.
C&I loans that were classified as non-performing totaled $16.9 million or
29.7% of total NPA at year-end 1995. For comparative purposes, $20.3 million
and $16.7 million were classified as NPA at year-ends 1994 and 1993,
respectively.
Real Estate Loans
At year-end 1995, Bancorp's total real estate loan portfolio stood at $4.2
billion, level with year-end 1994. Real estate loans represented 52.1% of the
total loan portfolio at year-end 1995. As mentioned earlier, in the first
quarter of 1995, $412 million in mortgage loans were securitized distorting
the comparison between 1994 and 1995. Considering the securitization, real
estate loan growth would have been more than 9% over 1994. The real estate
loan portfolio is divided into construction loans and amortizing mortgages as
shown in Table 3.
The largest individual component of the real estate loan portfolio is loans
secured by 1-to-4 family residential property. At $2.7 billion, this group
represented 64.3% of total real estate loans at year-end 1995 and 33.5% of
total loans outstanding. More than 90% of these loans are secured by real
estate in Hawaii (see Table 4). Approximately 63.1% of the 1-to-4 family
residential mortgage loans are underwritten on a floating rate basis. The
average 1-to-4 family mortgage loan has been outstanding about 6.0 years with
an outstanding balance of $135,000. Residential mortgage loan originations for
Bancorp in 1995 totaled $527.1 million, representing 2,800 individual loans,
or about 15% of the total originations in Hawaii. Comparatively, $672.4
million in loans were originated in 1994, representing approximately 10% of
the total loans originated in Hawaii. For 1995, Bancorp's average principal
mortgage loan amount originated was $191,000, up from the $186,000 average for
1994 and the $166,000 average for 1993. The 1995 average loan origination at
First Federal was $162,000 compared with $214,000 for Bank of Hawaii. The
median single family home price on Oahu was $349,000, $360,000 and $358,000 in
1995, 1994 and 1993, respectively.
Also included in the real estate portfolio are home equity creditlines.
Available credit under these lines was $490.0 million at year-end 1995,
similar to the $490.4 million at year-end 1994. Outstandings have declined to
$312.0 million at year-end 1995 from $323.4 million at year-end 1994. These
creditlines are underwritten based on repayment ability rather than the value
of the underlying property. However, home equity creditlines are generally
limited to 75% of the value of the collateral including prior liens. At year-
end, home equity creditline balances past due 90 days or more totaled $0.7
million, compared with $0.8 million at year-end 1994, and $0.4 million at
year-end 1993.
At year-end 1995, NPAs in the mortgage-residential category (excluding
construction loans) totaled $14.7 million, or 25.8% of total NPA.
Comparatively, mortgage-residential NPA totaled $15.1 million and $16.4
14
million at year-ends 1994 and 1993, respectively. Foreclosed real estate at
year-end 1995 was $9.3 million, which consisted of properties most of which
are in Hawaii. A large parcel was added to foreclosed real estate in the
fourth quarter of 1995. The fee simple property has been listed for sale and
is being actively marketed. It had previously been reported as a non-accrual
loan.
The commercial real estate portfolio (excluding construction loans) totaled
$1.3 billion at year-end 1995, an increase of 5.5% from year-end 1994. 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 77.1% were located in Hawaii.
The commercial real estate portfolio is diversified in the types of property
securing the obligations. Of the $1.3 billion in total commercial real estate
loans at year-end 1995, 22.9% of these loans were secured by shopping centers;
14.6% were secured by commercial/industrial/warehouse facilities; and 15.0%
were 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 1995 remained near
1994 levels ending 1995 at $14.9 million or 26.2% of total NPA. Comparatively,
commercial real estate NPA at year-ends 1994 and 1993 totaled $14.1 million
and $13.1 million, respectively. Foreclosed real estate at year-ends 1994 and
1995 included no commercial properties.
Total commercial construction loans were $198.5 million at year-end 1995, an
increase from year-end 1994 when $113.1 million was outstanding. The increase
reflects a growth in lending to tract and land development for residential
housing projects in Hawaii. Bancorp maintains a conservative underwriting
policy, 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 the value of the
property. A dissection of the commercial construction lending portfolio at
year-end 1995 shows commercial land development, $3.0 million; tract and land
development for residential housing, $106.3 million; retail facilities, $16.2
million; industrial projects, $26.8 million and commercial offices, $9.5
million. These loans were concentrated in property located in Hawaii ($178.0
million).
At the end of 1995, construction non-performing loans totaled $0.3 million
or 0.5% of total NPA, compared to year-end 1994 when $1.5 million was reported
and year end 1993 when $17.7 million was reported as NPA.
Consumer Loans
Total consumer loans (excluding residential mortgage and home equity loans)
increased to $817.3 million, up 10.2% from year-end 1994. Beginning in 1994,
Bancorp opportunistically sought to increase this category of loans
implementing programs directly targeted to increase credit card balances and
consumer installment loans. Looking to Table 3 and the five year trend, the
growth reflects Bancorp's effort in this category, particularly in the last
two years.
At year-end 1995, Bancorp's base of credit cardholders increased almost 10%
to 160,000 cardholders from year-end 1994. In January 1995, Bank of Hawaii
announced the co-branding of its VISA card with Continental Airlines. The
card, which includes frequent flyer credits, is available in Hawaii, Guam and
the Federated States of Micronesia. It has been well received in those markets
with more than 6,000 new accounts opened in 1995. In August 1995, Bancorp
began issuing Mastercards. The program was launched with no annual fee for the
first two years and the response exceeded expectations. As of year-end 1995,
more than 15,000 accounts have been opened. Outstanding balances for
Mastercard and VISA cards totaled $261.6 million at year-end 1995, an increase
of 9.3% from year-end 1994. The average credit limit on all card accounts was
$5,850 for 1995 with an average outstanding balance of $1,650, compared with
an average outstanding balance of $1,600 for 1994 and $1,400 for 1993. At
year-end 1995, 1.4% of the accounts (based on balances) were delinquent more
than 90 days, compared with 0.9% and 0.6%, at year-ends 1994 and 1993,
respectively.
15
Leasing Activities
Equipment leases have been an important component of the overall loan
portfolio by providing customers with an alternative to traditional lending
products. Activity in the leasing portfolio has been limited by the interest
rate environment and strong competition. Despite this, leases outstanding
increased to $392.9 million, up 3.9% from year-end 1994. The lease portfolio
remains diversified, with various types of equipment under lease. Leased
equipment includes aircraft, ships, automobiles and trucks, office equipment,
computers and others. There were no NPA in the leasing category at year-end
1995, compared with $0.8 million, and $0.3 million at year-ends 1994 and 1993,
respectively.
International Lending
Foreign loans at the end of 1995 totaled $795.5 million, up 14.2% from year-
end 1994. 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 Japan, Korea and Singapore remain
the most significant with U.S. dollar equivalent loans outstanding at year-end
1995 at branches in these countries of $344.4 million, $103.3 million, and
$160.2 million, respectively. Foreign loan totals include the U.S. dollar
equivalent loans of Fiji branches of Bank of Hawaii, National Bank of Solomon
Islands (NBSI) and Banque d'Hawaii (Vanuatu) Limited which totaled $60.8
million at year-end 1995.
Table 10 presents the outstanding cross-border exposures that exceed 0.75%
of Bancorp's total assets at year-end 1995.
NPA in international lending have remained at low levels. At year-ends 1995
and 1993, there were no loans reported as NPA. At year-end 1994, $0.3 million
were reported as NPA. As indicated in Table 7, losses in the international
portfolio have increased in 1995 to $0.9 million, 0.1% of outstanding
international loans. For 1995, recoveries of foreign loans totaled $2.5
million.
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 (64.7%) were located in Hawaii at
year-end 1995. 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. U.S.
dollar equivalent loans of NBSI and Banque d'Hawaii (Vanuatu) Limited are also
included in these totals. The modest real estate loan portfolio in the
mainland U.S. represents mortgage lending in Arizona.
GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO (1)
TABLE 4
TOTAL WEST &
YEAR-END SOUTH MAINLAND
1995 HAWAII PACIFIC U.S. JAPAN OTHER
-------- -------- ------- -------- ------ ------
(IN MILLIONS OF DOLLARS)
Commercial, Financial and
Agricultural............ $1,902.2 $ 838.8 $144.0 $ 918.5 $ -- $ 0.9
Real Estate
Construction--
Commercial............ 198.5 178.0 0.1 20.4 -- --
Residential...... 9.8 5.9 3.9 -- -- --
Mortgage--Commercial... 1,308.8 1,008.5 198.7 101.6 -- --
Residential....... 2,727.4 2,499.7 207.9 19.8 -- --
Installment.............. 817.3 651.9 161.9 3.5 -- --
Foreign.................. 795.5 -- 60.8 -- 344.5 390.2
Lease Financing.......... 392.9 87.4 8.3 275.0 -- 22.2
-------- -------- ------ -------- ------ ------
Total................ $8,152.4 $5,270.2 $785.6 $1,338.8 $344.5 $413.3
-------- -------- ------ -------- ------ ------
Percentage of Total...... 100.0% 64.7% 9.6% 16.4% 4.2% 5.1%
======== ======== ====== ======== ====== ======
- --------
(1) Loans classified based upon geographic location of borrowers.
16
Non-Performing Assets and Past Due Loans
Non-performing assets (which include non-accrual loans, restructured loans
and foreclosed real estate) totaled $56.9 million at year-end 1995, compared
to $53.2 million at the end of 1994, and $68.8 million at the end of 1993. The
level of NPA reflects the aggressive posture on handling NPA further described
below. The ratio of NPA to loans outstanding was 0.70% at year-end 1995, 0.67%
at year-end 1994 and 0.95% at year-end 1993. Table 6 presents this ratio for
the last five years with the accompanying graph depicting the ratio of the
Montgomery Securities Regional Bank Proxy for the same period.
Bancorp strives to identify and handle potential problem loans at an early
stage. This allows time to work with borrowers to resolve problems in order to
avoid or minimize 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 1995, NPA secured by real estate totaled $29.9 million or 52.5%
of total NPAs; with the majority secured by real estate in Hawaii. NPA in Asia
and the West and South Pacific were minimal. A focus on quality credits and
cautious asset growth remains the objective in Arizona. NPA in Arizona has
continued to decline totaling $1.2 million at year-end 1995, compared to $1.4
million, and $2.0 million at year-ends 1994 and 1993, respectively. FNBA's
loan quality has improved considerably over the last several years. At the end
of 1995, NPA, including loans 90 days past due, represented 1.07% of total
loans outstanding, compared with 1.48% and 1.83% at year-ends 1994 and 1993,
respectively.
First Federal's NPA was $8.7 million at year-end 1995, compared with $4.8
million and $13.4 million reported at year-ends 1994 and 1993, respectively.
Total NPA at First Federal represented 0.77%, 0.46% and 1.47% of total loans
outstanding at year-ends 1995, 1994 and 1993, respectively. The levels of NPA
for First Federal remain good. Moreover, each loan is secured by real estate
generally with a 70-80% loan to value at origination.
Foreclosed real estate has increased to $9.3 million at year-end 1995. The
increase from minimal levels in 1994 was driven by the addition of one large
residential property. The remaining foreclosed real estate is comprised of 19
properties with an average book value of $144,500. In 1995, losses on the sale
of foreclosed real estate were minimal at $276,000, compared with $700,000 for
1994.
Loans past due 90 days totaled $20.7 million at year-end 1995, an increase
from year-end 1994 when $11.6 million was reported. The increase is mainly in
the consumer installment loan portfolio, reflecting the slowdown in the Hawaii
economy and the affect on consumers. As a percentage of outstanding loans, the
90 days past due installment loans represent 1.28% of total installment loans.
The remaining increase in loans is distributed throughout the remaining
categories. Residential mortgage loans reported $5.8 million in past due
loans, 0.21% of outstanding residential mortgages at year-end 1995. Table 6
presents a five year history of loans past due 90 days.
In 1995, Bancorp recorded $1.3 million in cash basis interest on previously
non-accrual and charged-off loans, compared to $4.0 million in 1994. In 1995,
$156,000 in interest reversals were recorded on non-accrual loans, an increase
from the $79,000 reversed in 1994.
FOREGONE INTEREST ON NON-ACCRUALS
YEARS ENDED DECEMBER 31
TABLE 5
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS)
Interest Income Which Would Have Been Recorded Under
Original Terms:
Domestic........................................... $7.6 $5.4 $5.3 $7.0 $4.2
Foreign............................................ -- 0.1 -- 0.3 --
Interest Income Recorded During the Current Year on
Non-Accruals:
Domestic........................................... 0.6 1.0 0.9 3.4 1.0
Foreign............................................ -- 0.1 -- 0.2 --
17
NON-PERFORMING ASSETS AND ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
TABLE 6
1995 1994 1993 1992 1991
----- ----- ----- ------ -----
(IN MILLIONS OF DOLLARS)
Non-Accrual Loans
Commercial and Industrial................ $16.9 $20.3 $15.7 $ 47.2 $ 6.5
Real Estate
Construction........................... 0.3 1.5 17.7 -- 2.9
Commercial............................. 14.9 14.1 7.8 8.2 15.0
Residential............................ 14.7 15.1 16.4 17.7 11.2
Installment.............................. 0.8 0.5 0.5 -- --
Foreign.................................. -- 0.3 -- 5.0 --
Leases................................... -- 0.8 0.3 -- --
----- ----- ----- ------ -----
Subtotal............................. 47.6 52.6 58.4 78.1 35.6
----- ----- ----- ------ -----
Restructured Loans
Commercial and Industrial................ -- -- 1.0 5.4 1.1
Real Estate
Commercial............................. -- -- 5.3 3.2 3.1
Leases................................... -- -- -- -- 0.2
----- ----- ----- ------ -----
Subtotal............................. -- -- 6.3 8.6 4.4
----- ----- ----- ------ -----
Foreclosed Real Estate
Domestic................................. 9.3 0.6 4.1 6.3 2.0
Foreign.................................. -- -- -- -- --
----- ----- ----- ------ -----
Subtotal............................. 9.3 0.6 4.1 6.3 2.0
----- ----- ----- ------ -----
Total Non-Performing Assets.......... $56.9 $53.2 $68.8 $ 93.0 $42.0
===== ===== ===== ====== =====
Loans Past Due 90 Days
Commercial and Industrial................ 1.8 1.1 0.4 0.5 2.9
Real Estate
Construction........................... -- -- -- -- 0.2
Commercial............................. 2.4 0.7 1.9 5.8 0.3
Residential............................ 5.8 3.9 4.1 13.0 2.0
Installment.............................. 10.5 5.9 3.5 4.6 2.9
Foreign.................................. -- -- -- 0.3 --
Leases................................... 0.2 -- 0.1 -- 0.1
----- ----- ----- ------ -----
Subtotal............................. 20.7 11.6 10.0 24.2 8.4
----- ----- ----- ------ -----
Total................................ $77.6 $64.8 $78.8 $117.2 $50.4
===== ===== ===== ====== =====
Ratio of Non-Performing Assets to Total
Loans..................................... 0.70% 0.67% 0.95% 1.34% 0.62%
Ratio of Non-Performing Assets and Accruing
Loans Past Due 90 Days or More to Total
Loans..................................... 0.95% 0.82% 1.09% 1.68% 0.75%
Summary of Loan Loss Experience
At the end of 1995, the reserve for loan losses stood at $152.0 million,
compared with $148.5 million at year-end 1994 and $125.3 million at year-end
1993. The ratio of reserves to outstanding loans at year-end 1995 was 1.90%,
comparable with the 1.92% reported at year-end 1994. At year-end 1993, the
ratio of reserves to outstanding loans was 1.76%. Loan loss provisions for
1995 were $17.0 million, compared with $21.9 million
18
and $54.2 million for 1994 and 1993, respectively. The reduction in the
provisions for loan loss in 1995 reflects the stabilization of loan quality
measured by the level of NPA and the general level of net charge-offs. 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 Credit Review department. In addition, actual charge-offs,
delinquency data, recoveries and historical trends are considered in the
analysis.
The ratio of reserves to loans outstanding is one indicator 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 also need to
be considered. Gross charge-offs for 1995 represented 0.36% of average
outstanding loans, compared to 0.34% and 0.94%, respectively at year-ends 1994
and 1993. Gross charge-offs as a percentage of the reserve were 18.4%, 17.1%
and 52.4% for 1995, 1994 and 1993, respectively. Charge-offs for 1995 totaled
$27.9 million, compared with $25.4 million in 1994 and $65.7 million in 1993.
Recoveries of previously charged-off loans remained at higher levels in 1995
and 1994 (see Table 7). Recoveries were $14.4 million in 1995, compared with
$25.3 million for 1994 and $8.2 million in 1993. Recoveries in 1995 have
remained at higher levels as approximately $2.5 million was additionally
recovered of the $45.7 million real estate loan charged-off in 1992 and 1993.
Recoveries on this credit have accumulated to $14.8 million as of year-end
1995. Although difficult to determine the amount of any future recovery,
aggressive efforts continue to collect on loans charged-off. Net charge-offs
for 1995 were $13.5 million, compared with $0.1 million for 1994 and $57.5
million for 1993. In the last ten years the reserve to charge-off ratio has
never been less than 1.9 times in any year and has averaged 4.3 times over the
same period. At the end of 1995, the reserve was 2.7 times non-performing
loans and 5.4 times charge-offs.
19
SUMMARY OF LOAN LOSS EXPERIENCE
TABLE 7
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(MILLIONS OF DOLLARS)
Average Amount of Loans
Outstanding................. $7,654.9 $7,393.7 $6,991.0 $6,601.9 $6,484.1
======== ======== ======== ======== ========
Balance of Reserve for
Possible Loan Losses at
Beginning of Period......... $ 148.5 $ 125.3 $ 128.6 $ 115.6 $ 101.9
Loans Charged-Off
Commercial and Industrial.. 7.8 11.3 43.9 29.5 11.0
Real Estate--
Construction............. 2.1 0.1 0.5 -- --
Mortgage--Commercial..... 2.3 3.5 2.7 4.2 1.8
--Residential.... 1.1 0.7 0.4 0.5 0.9
Installment................ 13.3 8.7 8.6 8.7 8.3
Foreign.................... 0.9 0.7 7.5 1.0 --
Leases..................... 0.4 0.4 2.1 0.1 0.2
-------- -------- -------- -------- --------
Total Charged-Off............ 27.9 25.4 65.7 44.0 22.2
Recoveries on Loans
Previously Charged-Off
Commercial and Industrial.. 6.1 19.5 3.9 3.0 2.6
Real Estate--
Construction............. -- 0.2 -- -- 0.2
Mortgage--Commercial..... 1.4 0.9 0.7 0.2 0.1
--Residential.... 0.1 0.2 0.3 0.3 0.5
Installment................ 3.3 3.2 3.2 3.0 3.0
Foreign.................... 2.5 0.5 -- 0.4 0.4
Leases..................... 1.0 0.8 0.1 0.1 0.1
-------- -------- -------- -------- --------
Total Recoveries............. 14.4 25.3 8.2 7.0 6.9
-------- -------- -------- -------- --------
Net Loans Charged-Off........ (13.5) (0.1) (57.5) (37.0) (15.3)
Provisions Charged to
Operating Expenses.......... 17.0 21.9 54.2 50.0 29.6
Reserves Acquired (Sold)..... -- 1.4 -- -- (0.6)
-------- -------- -------- -------- --------
Balance at End of Period..... $ 152.0 $ 148.5 $ 125.3 $ 128.6 $ 115.6
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to
Average Loans Outstanding... 0.18% -- 0.82% 0.56% 0.24%
Ratio of Reserve to Loans
Outstanding................. 1.90% 1.92% 1.76% 1.89% 1.74%
The details of the Foreign Reserve for Loan Losses, which are included in the
table above, are:
Beginning Balance............ $ 12.9 $ 10.5 $ 14.2 $ 14.0 $ 13.1
Charge-Offs................ 0.9 0.7 7.5 1.0 --
Recoveries................. 2.5 0.5 -- 0.4 0.4
-------- -------- -------- -------- --------
Net Charge-Offs............ 1.6 (0.2) (7.5) (0.6) 0.4
Provisions................. 0.6 1.2 3.8 0.8 0.5
Reserves Acquired.......... -- 1.4 -- -- --
-------- -------- -------- -------- --------
Ending Balance............... $ 15.1 $ 12.9 $ 10.5 $ 14.2 $ 14.0
======== ======== ======== ======== ========
20
ALLOCATION OF LOAN LOSS RESERVE
TABLE 8
1995 1994 1993 1992 1991
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
RESERVE OUTSTANDING RESERVE OUTSTANDING RESERVE OUTSTANDING RESERVE OUTSTANDING RESERVE OUTSTANDING
AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT
------- ----------- ------- ----------- ------- ----------- ------- ----------- ------- -----------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial........ $ 61.9 3.25% $ 59.5 3.25% $ 51.2 3.00% $ 54.0 2.90% $ 30.5 1.75%
Real Estate--
Construction...... 4.2 2.00 2.6 2.00 4.3 2.51 2.6 1.00 5.4 2.20
Commercial........ 19.6 1.50 18.6 1.50 15.4 1.25 19.8 2.00 25.5 2.50
Residential....... 20.5 0.75 21.6 0.75 18.5 0.75 16.4 0.75 16.0 0.75
Installment........ 20.4 2.50 18.5 2.50 13.5 2.00 10.0 1.55 10.0 1.55
Foreign............ 15.1 1.90 12.9 1.85 10.5 1.77 14.2 2.33 14.0 2.00
Leases............. 2.0 0.50 1.9 0.50 2.0 0.50 3.9 1.00 5.0 1.40
Not allocated...... 8.3 -- 12.9 -- 9.9 -- 7.7 -- 9.2 --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
$152.0 1.90% $148.5 1.92% $125.3 1.76% $128.6 1.89% $115.6 1.74%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
International Operations
Bancorp's international presence is extensive and provides opportunities to
take part in lending, correspondent banking and deposit-taking activities
mainly in the Pacific. These endeavors have proven important in the strategy
of bridging customers across the Pacific to the U.S. Mainland, Europe and
within Asia itself. Bancorp pursues this strategy on three fronts: the
International Group; the South Pacific Division; and the Western Pacific
Division.
Through the International Group of Bank of Hawaii, Bancorp offers
international banking services to its corporate, financial institution and
individual customers in most of the major Asian financial centers supported by
its Honolulu operations. As of year-end 1995, the International Group of Bank
of Hawaii had offices in Hong Kong, the Philippines (Manila, Cebu, and Davao),
Korea, Singapore, Japan, Taiwan and New York.
The International Group of Bank of Hawaii continues to focus on trade-
related financing activities and lending to customers with which it has a
direct relationship. 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 and the stability of the host country's currency.
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.
The South Pacific Region is made up of the investments in affiliated banks
in the South Pacific and Bancorp's operations in Fiji and American Samoa.
Investments in affiliate banks in the South Pacific include banks in Tahiti,
Tonga, New Caledonia, Vanuatu, Solomon Islands and Western Samoa (see
organization chart). Total assets at year-end 1995 of all such affiliates were
$1.1 billion. All of these investments in affiliate banks, except those in
Vanuatu and the Solomon Islands, are accounted for using the equity method.
Both NBSI's and Banque d'Hawaii (Vanuatu) Limited's financial statements are
consolidated with Bancorp's financial statements.
21
In 1995, Bancorp expanded its investments in this area of the world by
acquiring the remaining 20% of the Banque d'Hawaii (Vanuatu) Limited, creating
Banque d'Hawaii (Vanuatu), a wholly-owned subsidiary of the Bancorp family.
Bank of Hawaii's investments in these affiliate banks are all considered
international.
In January 1996, Bancorp entered into an acquisition agreement, subject to
regulatory approvals, under which its ownership interest in Banque de Tahiti
and Banque de Nouvelle Caledonie would increase to approximately 86% and 75%,
respectively from 38% and 21%, respectively. The acquisition would require
these affiliates to be consolidated in Bancorp's financial statements once the
transaction is finalized. The combined assets of these entities at year-end
1995, converted to U.S. dollars, were approximately $1.0 billion.
Bank of Hawaii operates branches in the South Pacific region in Fiji and
American Samoa. 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. The level of activity in Fiji exceeded expectations. By
year-end 1994, branches were opened in Suva and Nadi with a third branch in
Lautoka, Fiji opened in January 1996. The operations in American Samoa are
similar to Fiji, but since the U.S. dollar is used, it is not considered
foreign for reporting purposes.
The operations of the South Pacific Region, since they are largely
investments, are monitored on a regular basis. The countries in which the
affiliates are located are also evaluated on a periodic basis. Exposure, in
terms of foreign currency fluctuations, is limited as each affiliate primarily
deals in its own currency. The carrying value of the investments in
affiliates, accounted for using the equity method, was $30.4 million at year-
end 1995. For NBSI and Banque d'Hawaii (Vanuatu) Limited, combined assets of
$130.7 million are included in the consolidated totals.
Bank of Hawaii also operates branches and offices in several Pacific Island
locations, offering traditional banking services. West Pacific Division
provides customary commercial banking services through branches in
Commonwealth of the Northern Mariana Islands (Saipan), Federated States of
Micronesia (Pohnpei, Kosrae, and Yap), Guam, Republic of the Marshall Islands
(Majuro), and the Republic of Palau (Koror). Since the U.S. dollar is used in
these locations, they are not considered foreign for reporting purposes and
are included in domestic operations.
Table 9 summarizes key totals for International Operations of Bancorp for
1995. Net income for 1995 decreased to $4.8 million, compared to the $7.1
million in 1994. This translates into a return on assets for these operations
of 0.28%, down from the 0.42% for 1994. The reduction in income for
international operations was due to declines in net interest margin and a
decline in total earning assets.
At year-end 1995, international assets represented 13.9% of Bancorp's total
average assets, an increase from 13.5% at year-end 1994. Cross-border
interbank placements accounted for $1.2 billion or 67.3% of total average
international assets at year-end 1995. Table 10 presents individual countries
for which Bancorp has cross-border exposures exceeding 0.75% of total assets
for the last three years. As Table 10 indicates, $1.2 billion was with such
countries as Japan, Taiwan, Thailand and Korea.
Long-term cross-border outstandings to lesser developed countries (LDC) at
year-end 1995 were $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
1995 1994 1993
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS OF DOLLARS)
Average Assets............... $1,724.3 13.9% $1,699.2 13.5% $1,908.9 15.2%
Average Liabilities.......... 1,585.2 13.9 1,647.9 14.2 1,863.3 15.9
Operating Revenue............ 107.9 10.3 97.1 10.1 94.1 10.0
Net Income................... 4.8 3.9 7.1 6.1 8.5 6.4
22
GEOGRAPHIC DISTRIBUTION OF CROSS-BORDER INTERNATIONAL ASSETS
TABLE 10
GOVERNMENT
AND OTHER BANKS AND COMMERCIAL
OFFICIAL OTHER FINANCIAL AND INDUSTRIAL
INSTITUTIONS INSTITUTIONS(1) COMPANIES TOTAL
------------ --------------- -------------- --------
(IN MILLIONS OF DOLLARS)
at December 31, 1995
Japan.................... $ -- $ 296.4 $198.1 $ 494.5
Taiwan................... -- 260.0 11.0 271.0
Korea.................... -- 181.8 125.8 307.6
Thailand................. -- 169.7 -- 169.7
All Others............... 1.0 253.2 68.5 322.7
----- -------- ------ --------
$ 1.0 $1,161.1 $403.4 $1,565.5
===== ======== ====== ========
at December 31, 1994
Japan.................... $ -- $ 118.2 $185.1 $ 303.3
Taiwan................... -- 259.5 4.4 263.9
Korea.................... -- 98.3 104.5 202.8
Thailand................. -- 113.4 -- 113.4
All Others............... 1.0 396.0 90.7 487.7
----- -------- ------ --------
$ 1.0 $ 985.4 $384.7 $1,371.1
===== ======== ====== ========
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
===== ======== ====== ========
- --------
(1) Includes U.S. dollar advances to foreign branches and affiliate banks
which were used to fund local currency transactions. Totals for 1995,
1994, and 1993 were $293.2 million, $203.8 million, and $218.6 million,
respectively.
Potential Problem Assets
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 provides the process for this early warning
system. Loans are graded by lending officers and validated by an independent
Credit Review department to ensure accuracy in the grades and timely re-
grading. This process is also utilized to determine the adequacy of the
reserve for loan losses.
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
returns 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 divisional management.
23
Capital Adequacy
At year-end 1995, Bancorp's equity has grown to $1.1 billion, a 9.1%
increase from $966.8 million at year-end 1994. Bancorp's capital ratios at
year-end 1995 were: Tier 1 Capital ratio of 10.25%, Total Capital ratio of
12.74%, and leverage ratio of 7.82%. All three exceeded the minimum threshold
levels to qualify as well capitalized. Under those minimum threshold levels
implemented in 1993 by bank regulators, capital must exceed the following
standards--Tier 1 Capital 6%; Total Capital 10%; and the leverage ratio 5%.
Table 11 presents a five year history of activity and balances in capital
accounts as well as capital ratios for Bancorp. 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. The
financial impact is reflected in lower deposit insurance premiums, while the
regulatory impact allows for fewer restrictions on activities.
Bancorp's strategy is to be well capitalized, but not significantly
overcapitalized. The lesser loan demand and asset growth diminished the need
for building capital levels. Rather than disrupting long established programs,
including the dividend reinvestment plan, profit sharing plan, and stock
option plan, which provide a consistent source of new capital, Bancorp
embarked on a stock repurchase program several years ago. This program to
repurchase stock has had the benefit of enhancing shareholder value while
still maintaining capital ratios that exceed well capitalized guidelines. More
than 1.4 million shares were repurchased in 1994, with another 1.3 million
shares repurchased in 1995. In 1995, repurchases of 0.5 million shares were
made under the program approved in 1994 by Bancorp's Board to repurchase up to
2.0 million shares of Bancorp stock. The remaining 0.8 million shares were
repurchased under an existing strategy to repurchase Bancorp shares in the
market to offset the needs of the plans previously mentioned.
EQUITY CAPITAL
TABLE 11
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Source of Common Equity
Net Income................... $ 121.8 $ 117.7 $ 132.6 $ 127.5 $ 112.7
Dividends Paid............... (45.2) (44.0) (38.4) (35.4) (32.4)
Dividend Reinvestment
Program..................... 7.1 7.4 7.7 8.1 6.3
Stock Repurchases............ (40.0) (44.3) (2.0) (0.6) --
Other(1)..................... 43.9 (8.1) 9.9 4.7 7.2
-------- -------- -------- -------- --------
Annual Increase in Equity.... $ 87.6 $ 28.7 $ 109.8 $ 104.3 $ 93.8
Year-End Common Equity....... 1,054.4 966.8 $ 938.1 $ 828.3 $ 724.0
Less:Intangibles........... 60.2 64.6 72.0 18.8 20.6
Unrealized Valuation
Adjustments............. 11.3 (17.3) 3.9 -- --
-------- -------- -------- -------- --------
Tier I Capital............... 982.9 919.5 862.2 809.5 703.4
Allowable Loan Loss
Reserve................... 120.2 111.1 100.2 99.3 95.1
Subordinated Debt.......... 118.7 118.6 124.6 -- --
-------- -------- -------- -------- --------
Total Capital............ $1,221.8 $1,149.2 $1,087.0 $ 908.8 $ 798.5
======== ======== ======== ======== ========
Risk Weighted Assets......... $9,587.0 $8,848.6 $7,990.4 $7,911.8 $7,585.1
======== ======== ======== ======== ========
Key Ratios
Growth in Common Equity...... 9.1% 3.1% 13.3% 14.4% 14.9%
Average Equity/Average Assets
Ratio....................... 8.27% 7.71% 7.09% 6.74% 6.31%
Tier I Capital Ratio......... 10.25% 10.39% 10.79% 10.23% 9.27%
Total Capital Ratio.......... 12.74% 12.99% 13.60% 11.49% 10.53%
Leverage Ratio............... 7.82% 7.28% 6.89% 6.37% 6.17%
- --------
(1) Includes profit-sharing, stock options and valuation adjustments for
investment securities and foreign exchange translation.
24
INTEREST RATE RISK AND DERIVATIVES
For financial institutions, interest rate movements can have an impact on
earnings depending on the position of the balance sheet. 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 to optimize earnings without
unduly increasing risk.
Table 12 presents the possible exposure to interest rate movements for
various time frames at year-end 1995. 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, a portion of
Bancorp's interest bearing demand and savings balances are relatively
insensitive to changes in interest rates. Consequently, Bancorp has allocated
portions of those balances to longer term interest rate sensitivity periods.
At December 31, 1995, Bancorp's one year cumulative liability sensitive gap
totaled $0.1 billion, representing 1.0% of total assets. This position was
very similar to year-end 1994, when Bancorp's cumulative liability sensitive
gap totaled $0.2 billion or 1.8% of total assets. The one year gap is a
commonly used benchmark of interest rate risk. Throughout 1995, Bancorp's
liability sensitive gap position remained relatively stable. Unlike 1994, when
net interest margin declined from a first quarter average of 3.99% to a fourth
quarter average of 3.61%, 1995 net interest margin averaged 3.72% throughout
the year.
Bancorp uses interest rate swaps as a cost effective risk management tool
for dealing with movements in interest rates. Notional amounts of interest
rate swaps at year-end 1995 totaled $1.1 billion compared with $1.6 billion at
year-end 1994 and $1.4 billion at year-end 1993. No new swaps were entered
into in 1995. 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.
25
Bancorp's policy is to utilize interest rate swaps for purposes other than
trading. Bancorp utilizes interest rate swaps to alter the interest rate
characteristics of identified groups of assets or liabilities. Limits on the
total notional amounts of contracts outstanding at any time have been
established. Limits have also been established for each counter party.
Activity is monitored on a monthly basis in conjunction with normal
asset/liability management committee meetings. Further disclosure of Bancorp's
interest rate swap activity is included in the footnotes to its financial
statements following.
INTEREST RATE SENSITIVITY
TABLE 12
1-5 OVER NON-INT.
DECEMBER 31, 1995 0-90 DAYS 91-365 DAYS YEARS 5 YEARS BEARING
- ----------------- --------- ----------- -------- -------- ---------
(IN MILLIONS OF DOLLARS)
Assets(1)
Investment Securities. $ 1,265.0 $ 791.9 $ 916.0 $ 387.3 $ --
Short-Term
Investments.......... 116.2 -- -- -- --
International Assets.. 1,200.6 214.3 41.8 83.4 29.7
Domestic Loans(2)..... 2,666.5 2,178.0 1,695.1 623.2 56.9
Other Assets.......... 84.4 84.4 300.2 471.9 --
--------- -------- -------- -------- ---------
Total Assets........ $ 5,332.7 $3,268.6 $2,953.1 $1,565.8 $ 86.6
========= ======== ======== ======== =========
Liabilities and
Capital(1)
Non-Interest Bearing
Demand(3)............ $ 278.9 $ 278.9 $ 991.5 $ -- $ --
Interest-Bearing
Demand(3)............ 335.3 335.3 921.9 -- --
Savings(3)............ 221.0 221.0 562.6 -- --
Time Deposits......... 703.6 892.2 512.0 96.4 --
Foreign Deposits...... 1,125.5 81.5 2.4 -- 16.7
Short-Term Borrowings. 2,509.7 673.9 7.3 -- --
Long-Term Debt........ 449.7 49.5 444.9 119.4 --
Other Liabilities..... -- -- -- -- 321.3
Capital............... -- -- -- -- 1,054.4
--------- -------- -------- -------- ---------
Total Liabilities
and Capital........ $ 5,623.7 $2,532.3 $3,442.6 $ 215.8 $ 1,392.4
========= ======== ======== ======== =========
Interest Rate Swaps..... $ (906.4) $ 333.5 $ 572.9 $ -- $ --
--------- -------- -------- -------- ---------
Interest Sensitivity
Gap.................. $(1,197.4) $1,069.8 $ 83.4 $1,350.0 $(1,305.8)
Cumulative Gap........ $(1,197.4) $ (127.6) $ (44.2) $1,305.8 $ --
Percentage of Total
Assets............... (9.07)% (0.97)% (0.33)% 9.89% --
- --------
Assumptions used:
(1) Based on repricing date.
(2) Includes the effect of estimated amortization.
(3) Historical analysis shows that these deposit categories, while technically
subject to immediate withdrawal, actually display sensitivity
characteristics that generally fall within one and five years. The
allocation presented is based on that historic analysis.
26
CONSOLIDATED AVERAGE BALANCES, INCOME AND EXPENSE
SUMMARY, AND YIELDS AND RATES
(TAXABLE EQUIVALENT)
TABLE 13
1995 1994 1993
------------------------- ------------------------- -------------------------
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.............. $ 661.4 $ 39.4 5.97% $ 812.6 $ 36.4 4.48% $ 1,140.1 $ 43.0 3.77%
Investment
Securities--Held to
Maturity
--Taxable............ 1,516.5 92.3 6.09 2,463.3 135.0 5.48 3,513.0 203.0 5.78
--Tax-Exempt......... 15.9 2.1 13.25 18.7 2.6 14.03 29.3 3.6 12.25
Investment
Securities--Available
for Sale.............. 1,639.0 107.9 6.58 1,064.0 54.0 5.07 69.1 5.9 8.61
Funds Sold............. 68.5 3.8 5.57 52.5 2.3 4.33 146.0 5.2 3.56
Loans (1)--Domestic.... 6,908.9 572.8 8.29 6,725.9 517.6 7.70 6,324.9 476.3 7.53
--Foreign..... 746.0 51.5 6.90 667.8 35.2 5.27 666.1 29.9 4.48
Loan Fees.............. 28.5 31.7 37.9
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Earning
Assets............ 11,556.2 898.3 7.77 11,804.8 814.8 6.90 11,888.5 804.8 6.77
Cash and Due From Banks. 460.6 449.1 413.2
Other Assets............ 389.1 342.7 284.1
--------- --------- ---------
Total Assets....... $12,405.9 $12,596.6 $12,585.8
========= ========= =========
Interest-Bearing
Liabilities
Domestic Deposits
--Demand............. $ 1,752.4 50.9 2.91 $ 1,895.4 41.1 2.17 $ 2,032.3 45.1 2.22
--Savings............ 1,058.5 30.6 2.89 1,232.3 29.1 2.36 1,239.4 32.6 2.63
--Time............... 1,839.9 98.5 5.36 1,544.8 65.9 4.27 1,711.9 77.7 4.54
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Domestic..... 4,650.8 180.0 3.87 4,672.5 136.1 2.91 4,983.6 155.4 3.12
Total Foreign...... 982.2 59.5 6.06 1,236.7 53.4 4.32 1,223.9 43.2 3.52
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Deposits..... 5,633.0 239.5 4.25 5,909.2 189.5 3.21 6,207.5 198.6 3.20
Short-Term Borrowings... 3,155.1 174.0 5.52 3,600.6 143.9 4.00 3,725.5 122.9 3.30
Long-Term Debt.......... 983.8 54.6 5.55 526.8 30.3 5.76 250.4 13.8 5.50
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Interest-
Bearing
Liabilities....... 9,771.9 468.1 4.79 10,036.6 363.7 3.62 10,183.4 335.3 3.29
--------- ------ ----- --------- ------ ----- --------- ------ -----
Net Interest Income..... 430.2 2.98 451.1 3.28 469.5 3.48
Spread on Earning
Assets................. 3.72% 3.82% 3.95%
Demand Deposits--
Domestic............... 1,403.4 1,386.0 1,324.9
Other Liabilities....... 204.6 203.1 184.6
Shareholders' Equity.... 1,026.0 970.9 892.9
--------- --------- ---------
Total Liabilities &
Equity............ $12,405.9 $12,596.6 $12,585.8
========= ========= =========
Provision for Loan
Losses................. 17.0 21.9 54.2
Net Overhead............ 217.7 232.0 200.6
------ ------ ------
Income Before Income
Taxes.................. 195.5 197.2 214.7
Provision for Income
Taxes.................. 72.0 77.7 79.8
Tax Equivalency
Adjustment (2)......... 1.7 1.8 2.3
------ ------ ------
Net Income.............. $121.8 $117.7 $132.6
====== ====== ======
- --------
(1) Includes non-accrual loans.
(2) Based upon a statutory tax rate of 35%.
27
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 1995, deposits increased to $7.6 billion from $7.1 billion at
the end of 1994. Although reflecting a modest year-to-year increase, average
deposits for 1995 were below the average for 1994. Table 21 presents the
average deposits by category. The decline in average deposits reflects the
competitive nature of the market as bank and nonbank banks continue to
actively pursue deposit bases for alternative investment products such as
mutual funds.
Securities Sold Under Agreements to Repurchase (Repos) are supported by the
same type of collateral that supports governmental deposits, but are not
insured by the FDIC. At year-end 1995 repos totaled $1.9 billion compared to
$2.1 billion at year-end 1994 and $2.5 billion at year-end 1993. With the
lowering of the FDIC premiums in 1995, some governmental investments in repos
migrated back to deposits.
Bancorp's balance sheet is unique given the high level of state and local
government funds. Historically, these governmental customers have been a
stable source of funds.
Bancorp presently issues commercial paper only in the Hawaii market-place.
However, as an alternative, Bancorp can access the mainland market through its
pre-selected agent for issuing commercial paper. At year-end 1995 commercial
paper outstanding totaled $73.5 million compared to $69.1 million at year-end
1994. The short term notes are rated A-2 by Standard and Poor's and P-1 by
Moody's.
Bancorp also maintains a line of credit for working capital purposes. The
line is for $50 million and is subject to annual renewals. Fees are paid on
the unused balance of the line. At year-end, there was no outstanding balance.
Both Bank of Hawaii and First Federal are members of the Federal Home Loan
Bank (FHLB), providing both entities with an additional source of short to
intermediate term funding. At year-end 1995, Bank of Hawaii had outstanding
debt to the FHLB of $60 million, as compared to $25 million at year-end 1994.
Bancorp Pacific also increased its borrowings from the FHLB, which at year-end
1995 totaled $271.5 million, compared to $227.1 million at year-end 1994.
Borrowings from the FHLB are collateralized by mortgage loans and FHLB stock.
Long term debt on December 31, 1995, was $1.1 billion, compared to $861.6
million at year-end 1994. In 1995, the Bank finalized a $1.0 billion revolving
medium term note program. This program replaces the original $750 million
medium term note facility. Notes outstanding under this facility, represented
in both long term and short term debt, increased from $649.4 million in 1994,
to $849.7 million in 1995. The bank notes have been rated A by Standard and
Poor's and Aa-3 by Moody's. During 1995, Bancorp also negotiated the private
placement of long term debt with three separate counterparties to replace
maturing debt. These negotiated placements totaled $60 million and were all
issued for a term of three years. Bancorp's access to such private placement
counterparties further enhances its balance sheet liquidity.
Control of Net Overhead
Bancorp's emphasis on control of net overhead has several measurement
indicators. These indicators are its net overhead ratio, its net income per
employee and its efficiency ratio. Each of these is discussed in the following
paragraphs.
Bancorp defines its net overhead ratio as the ratio of non-interest expense
to non-interest income (without securities transactions). 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 for deposits, the efficient managing of the net overhead
ratio grows in importance. Trust operations, electronic
28
financial services, insurance and annuity sales, and brokerage services are
expected to make significant contributions to this process. For 1995,
Bancorp's net overhead ratio was 2.53, compared with 2.47 and 2.68 in 1994 and
1993, respectively.
In January 1995, Bancorp announced a restructuring of its retirement program
which called for the curtailment of the defined benefit plan and freezing
benefits as of December 31, 1995. The plan has been replaced by a new money
purchase plan and an enhancement to an existing 401(k) plan. This plan became
effective January 1, 1996 and Bancorp contributes for staff members meeting
certain eligibility requirements, 4% of their eligible compensation each
quarter. Membership in the plan calls for a one year waiting period from the
date of hire and vesting after five years of service. Staff members already
meeting those eligibility requirements became plan participants as of January
1, 1996.
A significant enhancement to the 401(k) plan is being referred to as a
"super match." Bancorp will match $1.25 for every dollar contributed by the
staff member to their 401(k) account up to 2% of their compensation limited to
normal statutory maximums. For both plans, compensation has been revised to
include certain commissions, overtime pay and incentives in the definition of
compensation.
As part of the restructuring of the benefit plans, Bancorp also provided
staff members meeting certain qualifications (age 50 and nine years of
service) an early retirement option. The early retirements began in April and
ended in August with 75% of the qualifying staff taking the retirement option.
At the end of the third quarter the curtailment adjustment was recorded for
the qualified and non-qualified retirement plans, netting to income of
$160,000. The curtailment of the post retirement benefits for the medical
benefits was recorded in the fourth quarter, resulting in the recognition of a
$772,000 expense.
Non-Interest Income
For 1995, total non-interest income was $146.4 million, compared with $128.4
million in 1994 and $135.4 million in 1993. The low level of non-interest
income for 1994 was the result of a securities loss incurred as the available
for sale investment portfolio was restructured. Excluding securities
transactions, non-interest income for 1995 decreased 1.6% from 1994. Table 14
presents the details of non-interest income for the last five years.
Trust fee income for the past few years has grown as the synergies gained
through the American Financial Services acquisition were realized. In 1995,
the growth in trust fees slowed to a 1.8% increase over 1994. While fee income
showed a modest increase, total assets being administered by Hawaiian Trust
Company, Limited increased to $12.2 billion at year-end 1995, from $11.9
billion at year-end 1994 and $11.1 billion at year-end 1993.
Service charges on deposit accounts declined to $25.9 million, an 8.5%
decrease from 1994. The decline in service charges on deposits is directly
related to the higher interest rates experienced in 1995. As rates rise, many
commercial deposit customers pay for deposit services with deposit balances,
rather than fee payments. The decline totaled $1.9 million between 1995 and
1994. Bancorp regularly reviews its fee schedules (including exchange and
service charges on deposit accounts) to assure competitive pricing and
acceptable levels of profitability.
Fees, exchange and other service charges increased to $47.3 million in 1995,
from $42.5 million in 1994 and $37.7 million in 1993. Bancorp's involvement in
trade finance in the Asian Rim countries has steadily increased fees 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 $8.8 million in
1995, compared with $7.8 million and $7.3 million in 1994 and 1993,
respectively. Also, related to international activity, profits on foreign
currency increased 51.2% in 1995 to $6.5 million. Comparatively, $4.3 million
and $4.6 million were reported in foreign currency profits for 1994 and 1993,
respectively.
Mortgage servicing fees increased 48.3% from 1994 to $4.3 million in 1995.
The increase in this category was positively impacted by the securitization of
mortgage loans in January 1995. As of year-end 1995, Bancorp serviced $1.1
billion in mortgage loans.
29
Also included in fees, exchange and other service charges are fees earned
through Bancorp's ATM network. During 1995, 62 new ATMs were added to
Bancorp's network, bringing the total in service to 344 at year-end 1995. The
fees generated by this network totaled $7.7 million in 1995, an increase of
16.7% over the $6.6 million reported in 1994. The majority of Bancorp's ATMs
are located in Hawaii (315) with 28 in the Western Pacific and one in Arizona.
The ATMs in Hawaii have high 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. The volumes of transactions
handled by these ATMs have increased steadily over the years and for 1995
averaged more than 1.5 million transactions per month.
Bancorp has been actively providing new products to migrate our customer
base toward electronic transactions. In this effort, Bancorp has two specific
products currently in use. Access Card, reintroduced in 1991, and Isle Pay
cards, introduced in 1992, are point of sale cards and are reporting increased
acceptance as transaction volumes have grown. At year-end 1995, the base of
cards in these programs has increased to more than 300,000. The volume of
transactions has also increased dramatically, averaging more than 275,000
transactions per month in 1995, an increase of 17% over 1994. This card base
has generated fees in 1995 exceeding $600,000, an increase of about 20% over
1994.
Cash management products are also utilized to allow the processing of
electronic transactions. Products like lock box services, payroll processing
services and touch tone phone transfers are among the cash management
products.
Cash basis interest recognized in 1995 totaled $1.3 million, declining from
$3.4 million in 1994. The income recorded as cash basis generally includes
interest collected on loans written off or interest collected on non-accrual
loans that relate to prior years.
Investment securities activity for 1995 resulted in a net (pre-tax)
securities gain of $2.5 million for the year. The net securities gain reported
for 1995 is a return to historic levels. The loss recorded in 1994 reflected
the restructuring of the available for sale portfolio to reduce the liability
sensitivity of Bancorp.
NON-INTEREST INCOME
TABLE 14
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
-------------- --------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
Trust Income............... $ 49.5 + 1.8% $ 48.6 + 18.8% $ 40.9 $ 30.5 $ 26.5
Service Charges on Deposit
Accounts.................. 25.9 - 8.5 28.3 + 6.8 26.5 24.9 22.4
Fees, Exchange and Other
Service Charges
Letters of Credit and
Acceptance Fees......... 8.8 + 12.8 7.8 + 6.8 7.3 7.1 5.9
Profit on Foreign
Currency................ 6.5 + 51.2 4.3 - 6.5 4.6 5.9 6.8
Exchange Fees............ 3.9 - 2.5 4.0 + 37.9 2.9 2.9 2.8
Escrow Fees.............. 0.4 - 50.0 0.8 - 20.0 1.0 1.0 0.8
Mortgage Servicing Fees.. 4.3 + 48.3 2.9 + 20.8 2.4 2.3 2.0
Card Fees................ 7.3 - 12.0 8.3 + 12.2 7.4 6.1 8.6
Payroll Services......... 2.1 -- 2.1 + 16.7 1.8 1.7 1.7
ATM...................... 7.7 + 16.7 6.6 + 24.5 5.3 3.9 2.7
Cash Management.......... 1.0 - 9.1 1.1 -- 1.1 0.8 0.5
Other Fees............... 5.3 + 15.2 4.6 + 17.9 3.9 4.2 3.3
Other Operating Income..... 19.9 - 15.0 23.4 + 30.7 17.9 19.8 12.6
Cash Basis Interest........ 1.3 - 61.8 3.4 + 41.7 2.4 2.9 1.0
Investment Securities Gains
(Losses).................. 2.5 +114.0 (17.8) -278.0 10.0 3.4 2.8
------ ------ ------ ------ ------ ------ ------
Total.................. $146.4 + 14.0% $128.4 - 5.2% $135.4 $117.4 $100.4
====== ====== ====== ====== ====== ====== ======
30
Non-Interest Expense
The control of expense 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 before securities transactions) is a
productivity indicator, commonly called an efficiency ratio. For 1995,
Bancorp's percentage was 63.6% compared to 60.5% and 56.7% for 1994 and 1993,
respectively. The Salomon Brothers Inc 1995 50-bank composite percentage was
60.5%.
Total non-interest expense for 1995, 1994 and 1993 was $364.1 million,
$360.4 million and $336.1 million, respectively. The largest component of non-
interest expense is salary expense, which was $142.1 million, $138.0 million
and $134.6 million in 1995, 1994 and 1993, respectively. Bancorp's average
annual salary per full time equivalent staff was $33,300 in 1995. For 1994 and
1993, the average was $31,900 and $31,400, respectively.
As mentioned earlier, Bancorp restructured its retirement benefit plans in
1995. In conjunction with this change, Bancorp offered staff members meeting
certain eligibility requirements an option to elect early retirement. Almost
75% of the eligible staff members elected the early retirement option.
Offsetting this staff reduction was an increase in staffing attributable to
the expansion of certain business segments like Bank of Hawaii's In Store
Banking locations, the expansion of the brokerage services through Bancorp
Investment Group, and the acquisition of Pacific Capital Asset Management,
Inc.'s first investment management team.
For 1995, total average FTE staff count was 4,271 compared with the year-end
1994 total FTE of 4,324, reflecting the impact of staff members electing the
early retirement option in 1995.
Occupancy expense for 1995 increased to $41.1 million from $37.4 million in
1994. The change reflects the costs of expansion for the In Store Branches and
the placement in service of the new Kapolei facility. The Kapolei facility,
named "Hale O Kapolei," is a 248,000 square foot facility that will house many
operational functions. A migration strategy began several years ago as the
available office space in downtown Honolulu decreased and rental costs rose.
Departments located in downtown Honolulu began to move to Kapolei in 1995 and
the moves will continue into 1996.
Net equipment expense increased 3.9% over 1994 to $31.7 million. The
increase was the lowest in net equipment expense for the last five years.
Bancorp continues its investment in technological enhancements to maintain the
appropriate level of efficiency. The modest increase reflects an effort to
manage maintenance expense for Bancorp's equipment. Software, hardware and
office equipment maintenance costs were challenged in 1995 and reduced through
prudent cancellation of maintenance contracts for equipment and renegotiation
with vendors upon service contract renewals. Bancorp's ongoing commitment to
upgrade its information systems continued in 1995 with much of it still in
progress at year-end 1995. Providing staff members with access to much more
information to service customers more accurately and efficiently remains
Bancorp's focus.
The other expense category decreased from $112.1 million in 1994 to $105.6
million in 1995. For 1993, other expenses totaled $94.8 million. The decrease
in this expense category of 5.8% for 1995 is mainly due to the reduction in
FDIC insurance premiums of $6 million between 1994 and 1995. Legal and
professional fees declined to $15.6 million in 1995 from $18.2 million in 1994
and $11.9 million in 1993. Reflecting the acquisitions made in recent years,
the amortization of intangibles was $8.4 million for 1995, $9.3 million for
1994 and $7.2 million for 1993.
31
NON-INTEREST EXPENSE
TABLE 15
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993 1992 1991
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
Salaries.................... $142.1 + 3.0% $138.0 + 2.5% $134.6 $126.0 $115.8
Pension and Other Employee
Benefits.................... 43.6 + 2.8 42.4 -- 42.4 39.2 35.6
Net Occupancy Expense....... 41.1 + 9.9 37.4 + 1.1 37.0 33.7 28.2
Net Equipment Expense....... 31.7 + 3.9 30.5 +11.7 27.3 24.8 22.6
Other Operating Expense
FDIC Insurance............ 7.6 -44.1 13.6 - 9.9 15.1 17.2 16.1
Legal and Professional.... 15.6 -14.3 18.2 +52.9 11.9 11.8 10.8
Advertising............... 11.2 + 8.7 10.3 + 6.2 9.7 8.4 8.4
Stationery and Supplies... 9.3 + 5.7 8.8 +17.3 7.5 7.2 7.0
Other..................... 61.9 + 1.1 61.2 +20.9 50.6 46.3 43.6
------ ----- ------ ----- ------ ------ ------
Total................... $364.1 + 1.0% $360.4 + 7.2% $336.1 $314.6 $288.1
====== ===== ====== ===== ====== ====== ======
INCOME TAXES
The 1995 tax provision reflects a reduction in the effective tax rate to
37.2% from 39.7% and 37.6% in 1994 and 1993, respectively. The change in the
effective tax rate is partly due to the change in tax laws for the State of
Hawaii which lowered the tax rate, allowed the filing of consolidated returns
for Hawaii corporations and subjected certain income to excise taxes.
The average tax-exempt securities portfolio continued to decline and was
$15.9 million for 1995, minimally impacting Bancorp's effective tax rate.
Currently, low income housing credits are one avenue for reducing the
effective tax rate. In 1995, Bancorp's low income housing credit investments
increased by $15.8 million to $22.6 million at year-end 1995. Since the amount
of credits available in Hawaii remain limited, Bancorp has made its first low
income housing investments outside Hawaii to manage its tax liability.
However, Hawaii remains Bancorp's focus for low income housing credits.
Bancorp also continues to provide lease financing as a method by which to
defer taxes. However, with the current interest rate environment and
competitive market, many opportunities require the lessor to take on much more
tax risk and, therefore, Bancorp has not been as active in this market as in
the past. Bancorp's tax planning also tries to avoid the impact of the
alternative minimum tax (AMT). At the end of 1995, Bancorp was not subject to
the AMT. Bancorp continuously seeks opportunities for managing its tax
liability.
FOURTH QUARTER RESULTS
Earnings for the fourth quarter of 1995 totaled $32.1 million, a significant
increase from the $17.2 million reported in the same quarter of 1994. This
increase is mainly due to the large loss in investment securities recorded in
the fourth quarter of 1994 and the modest improvement of spread during the
fourth quarter of 1995. Earnings per share were $0.77 and $0.41 for the fourth
quarter of 1995 and 1994, respectively.
Spread for the fourth quarter of 1995 was 3.72%, compared to 3.61% for the
fourth quarter of 1994. The improvement in spread was gradual over the year
with the change in interest rates and the migration of Bancorp's balance sheet
to a less liability sensitive position in 1995. The earning asset yield
increased to 7.87% from 7.17% comparing the fourth quarters of 1995 and 1994.
The cost of funds rate increased to 4.87% from 4.19% between the same periods.
32
The provision for loan losses totaled $4.0 million for the quarter, lower
than the $4.6 million in the fourth quarter of 1994. The fourth quarter 1995
provision, consistent with the focus for 1995, roughly matched net charge-offs.
CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS
TABLE 16
THREE MONTHS ENDED
----------------------------------------------------------
1995 1994
--------------------------- ------------------------------
MAR. JUN. SEPT. DEC. MAR. JUN. SEPT. DEC.
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Total Interest Income... $214.6 $221.8 $226.3 $234.0 $193.7 $201.5 $204.3 $213.4
Total Interest Expense.. 112.3 114.7 117.8 123.4 77.8 85.3 94.5 106.1
Net Interest Income..... 102.3 107.1 108.5 110.6 115.9 116.2 109.8 107.3
Provision for Possible
Loan Losses............ 4.5 4.1 4.4 4.0 8.3 6.0 3.0 4.6
Investment Securities
Gains (Losses)......... 1.8 0.3 0.2 0.2 (1.0) (0.6) (0.7) (15.5)
Other Non-Interest
Income................. 38.0 35.7 35.7 34.5 37.0 35.1 36.5 37.6
Total Non-Interest
Expense................ 91.0 93.7 87.9 91.5 88.3 89.7 88.9 93.4
------ ------ ------ ------ ------ ------ ------ ------
Income Before Income
Taxes.................. 46.6 45.3 52.1 49.8 55.3 55.0 53.7 31.4
Provision for Income
Taxes.................. 18.3 16.8 19.2 17.7 20.9 20.8 21.7 14.2
------ ------ ------ ------ ------ ------ ------ ------
Net Income.............. $ 28.3 $ 28.5 $ 32.9 $ 32.1 $ 34.4 $ 34.2 $ 32.0 $ 17.2
====== ====== ====== ====== ====== ====== ====== ======
Earnings Per Common
Share.................. $ 0.67 $ 0.68 $ 0.78 $ 0.77 $ 0.80 $ 0.79 $ 0.75 $ 0.41
33
SUPPLEMENTARY DATA
MATURITY DISTRIBUTION, MARKET VALUE AND WEIGHTED-AVERAGE YIELD TO MATURITY OF
SECURITIES
TABLE 17
WITHIN 1-5 5-10 OVER APPROXIMATE
AT YEAR-END DECEMBER 31 1 YEAR YEARS YEARS 10 YEARS TOTAL MARKET VALUE
----------------------- -------- -------- ------ -------- -------- ------------
(IN MILLIONS OF DOLLARS)
Maturity Distribution
Based on Book Value
U.S. Treasury
Securities........... $ 182.4 $ 75.9 $ -- $ -- $ 258.3 $ 258.7
Obligations of Other
U.S. Government
Agencies and
Corporations......... 10.0 239.0 -- -- 249.0 248.9
Obligations of States
and Political
Subdivisions......... 24.6 5.1 3.9 0.2 33.8 35.6
Corporate Securities.. -- -- -- 16.1 16.1 16.1
Mortgage Backed
Securities........... 14.7 305.3 30.8 189.7 540.5 544.2
Other................. 17.6 14.0 -- -- 31.6 31.9
Securities Available
for Sale (1)......... 133.6 555.8 40.9 1,500.6 2,230.9 2,230.9
-------- -------- ------ -------- -------- --------
Total--1995......... $ 382.9 $1,195.1 $ 75.6 $1,706.6 $3,360.2 $3,366.3
--1994 $1,168.4 $ 828.6 $169.1 $ 998.6 $3,164.6 $3,115.3
--1993 $1,385.2 $1,219.0 $222.6 $ 894.6 $3,721.4 $3,759.1
-------- -------- ------ -------- -------- --------
Weighted-Average Yield
(2) to Maturity
U.S. Treasury
Securities........... 5.2% 5.2% -- % -- % 5.2%
Obligations of Other
U.S. Government
Agencies and
Corporations......... 6.2 6.4 -- -- 6.4
Obligations of States
and Political
Subdivisions......... 6.8 11.6 11.7 8.0 8.1
Corporate Securities.. -- -- -- 7.3 7.3
Mortgage Backed
Securities........... 8.0 5.8 8.3 7.5 6.6
Other................. 9.3 6.8 -- -- 8.2
Securities Available
for Sale............. 7.6 6.6 6.9 6.5 6.6
-------- -------- ------ -------- --------
Total--1995......... 6.5% 6.3% 7.7% 6.6% 6.5%
======== ======== ====== ======== ========
Tax Equivalent
Adjustment Amount...... $ 0.1 $ 0.2 $ 0.2 $ -- $ 0.5
- --------
(1) Reports current balance at contractual maturity and does not anticipate
reductions for periodic paydowns.
(2) Tax equivalent at 35% tax rate.
34
AVERAGE ASSETS
TABLE 18
1995 1994 1993 1992 1991
--------------- --------------- --------- --------- ---------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
--------- ----- --------- ----- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
Interest-Bearing
Deposits............... $ 661.4 5.3% $ 812.6 6.5% $ 1,140.1 $ 1,200.6 $ 923.8
Investment Securities
--Held to Maturity.... 1,532.4 12.4 2,482.1 19.7 3,542.3 2,679.1 2,332.2
--Available for Sale.. 1,639.0 13.2 1,063.9 8.4 69.1 15.9 --
Funds Sold.............. 68.5 0.6 52.5 0.4 146.0 463.1 434.3
Loans................... 7,654.9 61.7 7,393.7 58.7 6,991.0 6,601.9 6,484.1
--------- ----- --------- ----- --------- --------- ---------
Total Earning
Assets............. 11,556.2 93.2 11,804.8 93.7 11,888.5 10,960.6 10,174.4
Non-Earning Assets...... 849.7 6.8 791.8 6.3 697.3 684.4 651.8
--------- ----- --------- ----- --------- --------- ---------
Total............... $12,405.9 100.0% $12,596.6 100.0% $12,585.8 $11,645.0 $10,826.2
========= ===== ========= ===== ========= ========= =========
AVERAGE LOANS
TABLE 19
1995 1994 1993 1992 1991
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial............. $1,850.3 24.2% $1,681.1 22.7% $1,695.5 $1,738.2 $1,617.6
Real Estate
Construction.......... 164.2 2.1 145.2 2.0 181.1 266.3 272.7
Mortgage.............. 3,765.8 49.2 3,840.1 52.0 3,419.2 3,019.0 2,953.8
Installment............. 754.4 9.9 686.7 9.3 639.5 629.8 641.3
Foreign (1)............. 745.9 9.7 667.8 9.0 666.1 590.0 659.7
Lease Financing......... 374.2 4.9 372.8 5.0 389.6 358.6 339.0
-------- ----- -------- ----- -------- -------- --------
Total............... $7,654.8 100.0% $7,393.7 100.0% $6,991.0 $6,601.9 $6,484.1
======== ===== ======== ===== ======== ======== ========
- --------
(1)See section entitled International Operations for definition of Foreign.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES (1)
TABLE 20
DUE IN DUE IN DUE AFTER
DECEMBER 31, 1995 ONE YEAR OR LESS ONE TO FIVE YEARS (2) FIVE YEARS (2) TOTAL
----------------- ---------------- --------------------- -------------- --------
(IN MILLIONS OF DOLLARS)
Commercial, Financial
and Agricultural....... $1,111.1 $ 670.7 $ 120.4 $1,902.2
Real Estate--
Construction........... 88.9 91.2 28.2 208.3
Other Loans............. 1,639.6 1,793.6 1,813.2 5,246.4
Foreign Loans........... 667.5 43.3 84.7 795.5
-------- -------- -------- --------
Total............... $3,507.1 $2,598.8 $2,046.5 $8,152.4
======== ======== ======== ========
- --------
(1) Based on contractual maturities.
(2) As of December 31, 1995, of the loans maturing after one year, $3,514.8
million have floating rates and $1,130.5 million have fixed rates.
35
AVERAGE DEPOSITS
TABLE 21
1995 1994 1993 1992 1991
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic
Non-Interest Bearing
Demand Accounts...... $1,403.4 19.9% $1,386.0 19.0% $1,324.9 $1,231.9 $1,134.6
Interest-Bearing
Demand Accounts...... 1,752.4 24.9 1,895.4 26.0 2,032.3 2,039.6 1,927.4
Regular Savings
Accounts............. 1,058.5 15.0 1,232.3 16.9 1,239.4 1,035.3 734.5
Private Time
Certificates of
Deposit ($100,000 or
More)................ 581.5 8.3 476.8 6.5 489.4 547.6 652.6
Public Time
Certificates of
Deposit ($100,000 or
More)................ 89.3 1.3 64.6 0.9 143.4 1,573.2 2,066.2
Bearer Certificates of
Deposit.............. 5.0 0.1 5.0 0.1 5.0 5.0 5.0
All Other Time and
Savings Certificates. 1,164.1 16.5 998.4 13.6 1,074.1 1,168.2 1,288.2
-------- ----- -------- ----- -------- -------- --------
Total Domestic...... 6,054.2 86.0 6,058.5 83.0 6,308.5 7,600.8 7,808.5
Foreign(1).............. 982.3 14.0 1,236.7 17.0 1,223.9 816.9 822.2
-------- ----- -------- ----- -------- -------- --------
Total............... $7,036.5 100.0% $7,295.2 100.0% $7,532.4 $8,417.7 $8,630.7
======== ===== ======== ===== ======== ======== ========
- --------
(1) See section entitled International Operations for definition of Foreign.
36
INTEREST DIFFERENTIAL
TABLE 22
1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------- -------------------------
VOLUME(1) RATE(1) TOTAL VOLUME(1) RATE(1) TOTAL
--------- ------- ------ --------- ------- ------
(IN MILLIONS OF DOLLARS)
Change in Interest Income:
Interest Bearing
Deposits:
Foreign................ $ (7.6) $ 10.6 $ 3.0 $(13.7) $ 7.2 $ (6.5)
Investment Securities--
Held to Maturity (56.4) 13.7 (42.7) (58.0) (10.0) (68.0)
Taxable................
Tax-Exempt............. (0.4) (0.2) (0.6) (1.4) 0.4 (1.0)
Investment Securities--
Available for Sale...... 34.7 19.2 53.9 51.4 (3.4) 48.0
Funds Sold............... 0.8 0.8 1.6 (3.8) 0.9 (2.9)
Loans, Net of Unearned
Income:
Domestic............... 15.4 36.7 52.1 32.5 2.5 35.0
Foreign................ 4.5 11.8 16.3 0.1 5.2 5.3
------ ------ ------ ------ ------ ------
Total Interest
Income.............. $ (9.0) $ 92.6 $ 83.6 $ 7.1 $ 2.8 $ 9.9
====== ====== ====== ====== ====== ======
Change in Interest Expense:
Interest Bearing
Deposits:
Demand Deposits........ $ (3.3) $ 13.1 $ 9.8 $ (3.0) $ (1.0) $ (4.0)
Savings Deposits....... (4.5) 5.9 1.4 (0.2) (3.4) (3.6)
Time Deposits.......... 14.0 18.7 32.7 (7.3) (4.5) (11.8)
Deposits in Foreign
Offices............... (12.4) 18.6 6.2 0.4 9.8 10.2
Short-Term Borrowings.... (19.4) 49.6 30.2 (4.3) 25.2 20.9
Long-Term Debt........... 25.3 (1.1) 24.2 15.9 0.7 16.6
------ ------ ------ ------ ------ ------
Total Interest
Expense............. $ (0.3) $104.8 $104.5 $ 1.5 $ 26.8 $ 28.3
====== ====== ====== ====== ====== ======
Net Interest Differential:
Domestic................. $(18.0) $(16.0) $(34.0) $ 19.6 $(26.6) $ (7.0)
Foreign.................. 9.3 3.8 13.1 (14.0) 2.6 (11.4)
------ ------ ------ ------ ------ ------
Total Interest
Differential........ $ (8.7) $(12.2) $(20.9) $ 5.6 $(24.0) $(18.4)
====== ====== ====== ====== ====== ======
- --------
(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 23
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET TOTALS
Net Loans............. $ 7,853.0 $ 7,599.5 $ 6,983.1 $ 6,691.7 $ 6,517.2
Assets................ 13,206.8 12,586.4 12,462.1 12,713.1 11,409.3
Deposits.............. 7,576.8 7,115.1 7,005.0 7,890.5 8,666.2
Long-Term Debt........ 1,063.4 861.6 378.2 119.4 119.4
Shareholders' Equity.. 1,054.4 966.8 938.1 828.3 724.0
OPERATING RESULTS
Total Interest Income. $ 896.7 $ 813.0 $ 802.6 $ 822.6 $ 922.4
Net Interest Income... 428.5 449.3 467.2 436.1 401.3
Provision for Possible
Loan Losses.......... 17.0 21.9 54.2 50.1 29.6
Net Income............ 121.8 117.7 132.6 127.5 112.7
Earnings Per Share.... $ 2.90 $ 2.75 $ 3.09 $ 3.00 $ 2.69
Cash Dividends Paid--
Common Stock......... $ 1.08 $ 1.04 $ 0.90 $ 0.85 $ 0.78
NON-FINANCIAL DATA
Common Shareholders of
Record at Year-End... 7,439 6,947 8,315 5,814 5,553
Average Common Shares
Outstanding.......... 42,027,456 42,824,531 42,967,790 42,527,466 41,847,234
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Quarterly Results of Operations--Table 16 on page 33 and
narrative on page 32.
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, 1995, 1994 and 1993,
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, 1995, 1994 and 1993, 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 Note A to the consolidated financial statements, in 1993 and
1995 the Company changed its methods of accounting for certain investments in
debt and equity securities and for impaired loans.
/s/ Ernst & Young, LLP
Honolulu, Hawaii
January 22, 1996
39
BANCORP HAWAII, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
Interest Income
Interest on Loans.......................... $ 610,959 $ 538,725 $ 488,530
Loan Fees.................................. 28,560 31,666 37,900
Income on Lease Financing.................. 12,384 13,218 16,632
Interest and Dividends on Investment
Securities
Taxable.................................. 92,295 135,040 203,068
Non-Taxable.............................. 1,371 1,710 2,331
Income on Investment Securities Available
for Sale.................................. 107,870 53,960 5,947
Interest on Deposits....................... 39,454 36,408 42,974
Interest on Security Resale Agreements..... 448 -- 2,934
Interest on Funds Sold..................... 3,365 2,270 2,265
---------- ---------- ----------
Total Interest Income.................. 896,706 812,997 802,581
Interest Expense
Interest on Deposits....................... 239,537 189,513 198,657
Interest on Security Repurchase Agreements. 122,030 98,625 87,229
Interest on Funds Purchased................ 32,176 25,303 24,136
Interest on Short-Term Borrowings.......... 19,854 19,954 11,565
Interest on Long-Term Debt................. 54,560 30,330 13,781
---------- ---------- ----------
Total Interest Expense................. 468,157 363,725 335,368
---------- ---------- ----------
Net Interest Income.......................... 428,549 449,272 467,213
Provision for Possible Loan Losses........... 16,967 21,921 54,188
---------- ---------- ----------
Net Interest Income After Provision for
Possible Losses....................... 411,582 427,351 413,025
Non-Interest Income
Trust Income............................... 49,468 48,591 40,855
Service Charges on Deposit Accounts........ 25,886 28,303 26,518
Fees, Exchange and Other Service Charges... 47,311 42,492 37,788
Other Operating Income..................... 21,234 26,769 20,338
Investment Securities Gains (Losses)....... 2,457 (17,761) 9,985
---------- ---------- ----------
Total Non-Interest Income.............. 146,356 128,394 135,484
Non-Interest Expense
Salaries................................... 142,143 137,968 134,568
Pensions and Other Employee Benefits....... 43,550 42,421 42,399
Net Occupancy Expense of Premises.......... 41,108 37,436 37,026
Net Equipment Expense...................... 31,729 30,502 27,347
Other Operating Expense.................... 105,560 112,039 94,762
---------- ---------- ----------
Total Non-Interest Expense............. 364,090 360,366 336,102
---------- ---------- ----------
Income Before Taxes.......................... 193,848 195,379 212,407
Provision for Taxes.......................... 72,048 77,641 79,840
---------- ---------- ----------
Net Income............................. $ 121,800 $ 117,738 $ 132,567
========== ========== ==========
Earnings Per Common Share and Common Share
Equivalents................................. $ 2.90 $ 2.75 $ 3.09
========== ========== ==========
Average Common Shares and Average Common
Share Equivalents........................... 42,027,456 42,824,531 42,967,790
========== ========== ==========
See Notes to Consolidated Financial Statements.
40
BANCORP HAWAII, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
ASSETS
Interest-Bearing Deposits............... $ 789,050 $ 727,016 $ 837,704
Investment Securities
--Held to Maturity (Market Value of
$1,135,364, $1,736,659 and
$2,791,328, respectively)............ 1,129,251 1,785,960 2,753,590
--Available for Sale.................. 2,230,902 1,364,925 893,453
Funds Sold.............................. 116,173 54,167 57,699
Loans................................... 8,152,406 7,891,993 7,258,368
Unearned Income....................... (147,404) (144,034) (149,949)
Reserve for Possible Loan Losses...... (151,979) (148,508) (125,284)
----------- ----------- -----------
Net Loans........................... 7,853,023 7,599,451 6,983,135
----------- ----------- -----------
Total Earning Assets................ 12,118,399 11,531,519 11,525,581
Cash and Non-Interest Bearing Deposits.. 469,031 508,762 395,315
Premises and Equipment.................. 246,515 221,806 167,260
Customers' Acceptance Liability......... 16,825 17,776 8,475
Accrued Interest Receivable............. 84,669 77,340 82,023
Other Real Estate....................... 9,306 594 4,123
Intangibles, Including Goodwill......... 87,673 94,515 102,929
Trading Securities...................... 29 13,696 74,351
Other Assets............................ 174,337 120,342 102,070
----------- ----------- -----------
Total Assets........................ $13,206,784 $12,586,350 $12,462,127
=========== =========== ===========
LIABILITIES
Domestic Deposits
Demand--Non-Interest Bearing.......... $ 1,549,302 $ 1,436,794 $ 1,405,540
--Interest Bearing.............. 1,592,533 1,747,514 1,931,807
Savings............................... 1,004,550 1,140,402 1,251,876
Time.................................. 2,204,242 1,639,497 1,581,534
Foreign Deposits........................ 1,226,143 1,150,847 834,218
----------- ----------- -----------
Total Deposits...................... 7,576,770 7,115,054 7,004,975
Securities Sold Under Agreements to
Repurchase............................. 1,926,540 2,136,204 2,509,550
Funds Purchased......................... 787,437 609,574 743,915
Short-Term Borrowings................... 476,867 594,475 579,966
Bank's Acceptances Outstanding.......... 16,825 17,776 8,475
Accrued Pension Costs................... 21,145 23,510 24,367
Accrued Interest Payable................ 49,473 49,253 34,347
Accrued Taxes Payable................... 160,306 133,720 154,291
Other Liabilities....................... 73,549 78,424 85,967
Long-Term Debt.......................... 1,063,436 861,572 378,170
----------- ----------- -----------
Total Liabilities................... 12,152,348 11,619,562 11,524,023
----------- ----------- -----------
Shareholders' Equity
Common Stock ($2 par value), authorized
100,000,000 shares; issued and
outstanding, 41,340,817; 41,851,466;
and 28,425,038, respectively........... 82,682 83,703 56,850
Surplus................................. 240,080 260,040 284,886
Unrealized Valuation Adjustments........ 13,902 (18,122) 537
Retained Earnings....................... 717,772 641,167 595,831
----------- ----------- -----------
Total Shareholders' Equity.......... 1,054,436 966,788 938,104
----------- ----------- -----------
Total Liabilities and Shareholders'
Equity............................. $13,206,784 $12,586,350 $12,462,127
=========== =========== ===========
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,
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
Reinvestment Plan..... 7,729 361 7,368 -- --
Stock Repurchased........ (2,052) (97) (1,955) -- --
Unrealized Valuation
Adjustments
Investment Securities.. 2,878 -- -- 2,878 --
Foreign Exchange
Translation
Adjustment............ (70) -- -- (70) --
Cash Dividends Paid of
$0.90 Per Share........... (38,413) -- -- -- (38,413)
---------- ------- -------- -------- --------
Balance at December 31,
1993...................... $ 938,104 $56,850 $284,886 $ 537 $595,831
Changes During 1994
Net Income............... 117,738 -- -- -- 117,738
Sale of Common Stock
250,286 Profit Sharing
Plan.................. 7,708 501 7,207 -- --
204,909 Stock Option
Plan.................. 2,907 410 2,497 -- --
239,211 Dividend
Reinvestment Plan..... 7,401 478 6,923 -- --
Stock Repurchased........ (44,297) (2,824) (41,473) -- --
Unrealized Valuation
Adjustments
Investment Securities.. (21,119) -- -- (21,119) --
Foreign Exchange
Translation
Adjustment............ 2,460 -- -- 2,460 --
50 Percent Stock Dividend.. (59) 28,288 -- -- (28,347)
Cash Dividends Paid of
$1.04 Per Share........... (44,055) -- -- -- (44,055)
---------- ------- -------- -------- --------
Balance at December 31,
1994...................... $ 966,788 $83,703 $260,040 $(18,122) $641,167
Changes During 1995
Net Income............... 121,800 -- -- -- 121,800
Sale of Common Stock
96,251 Profit Sharing
Plan.................. 2,637 192 2,445 -- --
443,879 Stock Option
Plan.................. 9,291 888 8,403 -- --
228,321 Dividend
Reinvestment Plan..... 7,095 457 6,638 -- --
Stock Repurchased........ (40,004) (2,558) (37,446) -- --
Unrealized Valuation
Adjustments
Investment Securities.. 28,630 -- -- 28,630 --
Foreign Exchange
Translation
Adjustment............ 3,394 -- -- 3,394 --
Cash Dividends Paid of
$1.08 Per Share........... (45,195) -- -- -- (45,195)
---------- ------- -------- -------- --------
Balance at December 31,
1995...................... $1,054,436 $82,682 $240,080 $ 13,902 $717,772
========== ======= ======== ======== ========
See Notes to Consolidated Financial Statements.
42
BANCORP HAWAII, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Operating Activities
Net Income................................ $ 121,800 $ 117,738 $ 132,567
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Provision for Loan Losses............... 16,967 21,921 54,188
Depreciation and Amortization........... 33,165 30,321 25,681
Deferred Income Taxes................... 25,431 (16,034) 21,865
Realized and Unrealized Investment
Security Gains......................... -- -- (97)
Realized (Gains) Losses on Investment
Securities Available for Sale.......... (1,707) 14,980 (9,025)
Net Decrease (Increase) in Trading
Securities............................. 13,667 655 (2,482)
Amortization of Deferred Lease Income... (25,482) (26,425) (30,196)
Amortization of Deferred Loan Fee
Income................................. (12,174) (13,813) (15,945)
Decrease (Increase) in Interest
Receivable............................. (7,329) 4,683 12,386
Increase in Interest Payable............ 220 14,906 2,573
Decrease (Increase) in Other Assets..... (70,707) 765 10,921
Decrease in Other Liabilities........... (26,284) (6,067) (7,797)
---------- ---------- ----------
Net Cash Provided by Operating
Activities........................... 67,567 143,630 194,639
---------- ---------- ----------
Investing Activities
Proceeds from Redemptions of Investment
Securities Held to Maturity.............. 956,491 1,514,596 957,408
Purchases of Investment Securities Held
to Maturity.............................. (535,499) (546,966) (1,565,051)
Proceeds from Sales of Investment
Securities Available for Sale............ 655,269 573,057 849,853
Proceeds from Redemptions of Investment
Securities Available for Sale............ 150,507 96,019 --
Purchases of Investment Securities
Available for Sale....................... (1,379,626) (1,102,871) (697,892)
Net Increase (Decrease) in Interest-
Bearing Deposits Placed in Other Banks... (62,034) 110,688 594,794
Decrease (Increase) in Funds Sold......... (62,006) 3,532 443,882
Increase in Loans, Net.................... (229,536) (569,901) (299,491)
Purchases of Premises and Equipment....... (49,893) (72,798) (28,426)
Proceeds from Sale of Premises and
Equipment................................ 2,061 1,178 170
Purchase of American Financial Services
of Hawaii, Inc., Net of Cash and Non-
Interest Bearing Deposits Acquired....... -- -- (48,990)
Purchase of Banque d'Hawaii (Vanuatu),
Ltd., Net of Cash and Non-Interest
Bearing Deposits Acquired................ 6,808 39,963 --
Purchase of National Bank of Solomon
Islands, Net of Cash and Non-Interest
Bearing Deposits Acquired................ -- (315) --
---------- ---------- ----------
Net Cash Provided (Used) by Investing
Activities........................... (547,458) 46,182 206,257
---------- ---------- ----------
Financing Activities
Net Increase (Decrease) in Demand,
Savings, and Time Deposits............... 450,487 1,346 (885,516)
Proceeds from Lines of Credit and Long-
Term Debt................................ 854,779 510,049 294,846
Principal Payments on Lines of Credit and
Long-Term Debt........................... (652,915) (26,647) (21,076)
Net Increase (Decrease) in Short-Term
Borrowings............................... (149,409) (493,178) 238,279
Proceeds from Sale of Common Stock........ 19,023 18,016 14,866
Stock Repurchased......................... (40,004) (44,297) (2,052)
Cash Dividends............................ (45,195) (44,114) (38,413)
---------- ---------- ----------
Net Cash Provided (Used) by Financing
Activities........................... 436,766 (78,825) (399,066)
---------- ---------- ----------
Effect of Exchange Rate Changes on Cash... 3,394 2,460 (70)
---------- ---------- ----------
Increase (Decrease) in Cash and Non-
Interest Bearing Deposits............ (39,731) 113,447 1,760
---------- ---------- ----------
Cash and Non-Interest Bearing Deposits at
Beginning of Year........................ 508,762 395,315 393,555
---------- ---------- ----------
Cash and Non-Interest Bearing Deposits
at End of Year....................... $ 469,031 $ 508,762 $ 395,315
========== ========== ==========
See Notes to Consolidated Financial Statements.
43
BANCORP HAWAII, INC. AND SUBSIDIARIES
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 preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Certain accounts have been reclassified to conform with the 1995
presentation. The significant policies are summarized below.
Organization/Consolidation
Bancorp is a bank holding company providing varied financial services to
customers in Hawaii, other areas of the Pacific Basin, and other selected
markets. It is the largest of the bank holding companies headquartered in the
State of Hawaii. The majority of Bancorp's operations consist of customary
commercial and consumer banking services including, but not limited to,
lending, leasing, deposit services, trust and investment activities and trade
financing. The principal subsidiaries of Bancorp are Bank of Hawaii and
Bancorp Pacific, Inc. The consolidated financial statements include the
accounts of Bancorp and its principal subsidiaries including any majority
owned entities. Significant intercompany accounts have been eliminated and
minority interests recognized in consolidation.
Accounting Changes
In May 1993, the Financial Accounting Standards Board (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. In October 1994, the FASB issued Statement No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures," that
amended Statement No. 114 by eliminating provisions for reporting income on
impaired loans by creditors and clarifying disclosure requirements. Bancorp
elected to implement the provisions of Statement No. 114, as amended,
effective January 1, 1995.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights an amendment of FASB Statement No. 65." The statement requires mortgage
companies and banks to recognize as separate assets the mortgage servicing
rights on loans that are expected to be sold with servicing retained,
regardless of whether the rights are purchased or originated. As permitted
under the statement, Bancorp has elected to adopt the provision of the new
standard effective January 1, 1996. The impact of adopting the new statement
on Bancorp's financial position or results of operation is not expected to be
material.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The statement provides an alternative to the current rules
under APB No. 25 in accounting for stock based compensation plans. Bancorp
currently makes its disclosures for its stock based compensation plans in
footnote L and will continue to account for stock based compensation accounts
under APB No. 25. Proforma disclosures required by Statement No. 123 will be
included in the financial statements for 1996.
See Investment Securities for discussion of implementation of Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
44
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Acquisition
In January 1996, Bancorp announced the execution of an agreement, subject to
regulatory approvals, to purchase most of Credit Lyonnais' interest in Banque
de Tahiti, Banque de Nouvelle Caledonie, and two smaller finance companies.
The acquisition will give Bancorp a majority interest in these entities which
are currently accounted for using the equity method. Applications for
regulatory approval are in process. Once all approvals have been received and
the transaction is closed, these companies will be included in Bancorp's
consolidated financial statements. As of September 30, 1995, total assets
converted to U.S. dollars was approximately $1 billion for the four entities.
The purchase price converted to U.S. dollars is approximately $53 million.
In March 1995, Bancorp acquired the remaining 20% of the shares of Banque
d'Hawaii (Vanuatu), Limited. This residual acquisition, like the original 80%
purchase of Banque Indosuez Vanuatu, Limited in 1993, was accounted for using
the purchase method. The goodwill recorded in this transaction was $1.1
million and is being amortized over 15 years. The combined purchase price
totaled $13.8 million with unamortized goodwill totaling $10.1 million at
year-end 1995. For year-end 1993, Banque d'Hawaii (Vanuatu), Limited was
accounted for under the equity method. Since then, Banque d'Hawaii (Vanuatu),
Limited has been included in the consolidated financial statements.
In December 1994, Bancorp acquired a 51% interest in the National Bank of
Solomon Islands (NBSI) for $4.8 million. The acquisition has been accounted
for using the purchase method. At year-end, NBSI financial results have been
included in the consolidated totals. Total assets of NBSI were $56.5 million
and $50.3 million at year-ends 1995 and 1994, respectively. Goodwill recorded
in this transaction was $2.4 million and is being amortized over 15 years.
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 were 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.
In 1994, AFS was merged into Hawaiian Trust Company, Limited.
In conjunction with these acquisitions, liabilities were assumed as follows:
1995 1994 1993
------- -------- --------
(IN THOUSANDS OF DOLLARS)
Assets Acquired.............................. $14,127 $132,855 $ 65,002
Cash Paid for Capital Stock.................. (1,786) (16,913) (51,500)
------- -------- --------
Liabilities Assumed.......................... $12,341 $115,942 $ 13,502
======= ======== ========
Advertising Costs
The nature of Bancorp's marketing programs generally do not include direct-
response advertising. Bancorp, therefore, recognizes its advertising costs as
incurred. Advertising expenses were $11,144,000, $10,288,000 and $9,675,000
for 1995, 1994 and 1993, respectively.
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,
45
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Bancorp is required to place reserves with the Federal Reserve Bank based on
the amount of deposits held. For 1995, 1994 and 1993, the average amount of
these reserve balances was $149,104,000; $157,486,000 and $165,616,000,
respectively.
Earnings Per Share
The earnings per common share of Bancorp are based on the average common
shares outstanding and the average common share equivalents. The earnings per
common share of Bancorp are based on shares of 42,027,456, 42,824,531 and
42,967,790 in 1995, 1994 and 1993, respectively.
Income Taxes
Bancorp files a consolidated federal income tax return with the Bank of
Hawaii, Bancorp Pacific, Inc. 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.
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 is being amortized
using the straight-line method over various periods not exceeding 15 years.
Intangibles are reviewed periodically for other than temporary impairment. The
amortization expense of these intangibles was $8,405,000; $9,315,000 and
$7,161,000 for 1995, 1994 and 1993, respectively. As of December 31, 1995, the
accumulated amortization totaled $32,932,000.
Interest Rate/Foreign Currency Risk Management
Bancorp has entered into various off-balance-sheet transactions, primarily
interest rate swap agreements, for interest rate risk exposure management
purposes. A primary objective of Bancorp in managing interest-rate exposure is
to maintain a targeted mix of assets and liabilities that mature or reprice
over a one year time horizon. However, the extent of rate sensitivity can vary
within the intervening time periods. Interest rate swaps are primarily used to
modify the interest rate sensitivity of short term assets or long term
liabilities (both deposits and debt).
As a result of having various foreign operations, Bancorp is exposed to the
effect of foreign exchange rate fluctuations on the U.S. dollar value. Bancorp
has purchased foreign currency forward contracts to minimize the effect of
fluctuating foreign currencies on its reported income. The forward contracts
qualify as hedges for financial reporting purposes as they are tied to
specific foreign assets and liabilities. Although the volatility of income
over the entire twelve month period is reduced, increased volatility may be
reported during interim periods.
Valuation adjustments on foreign exchange swap and forward contracts are
recognized through the income statement as a component of foreign currency
gain or loss.
46
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Bancorp
Pacific, Inc. located in the Southern and Western Pacific which are
denominated in U.S. dollars are classified as domestic.
Investment Securities
The method followed in determining the cost of investments sold was based on
identified certificates for each of the three years ending December 31, 1995,
1994 and 1993. Bancorp adopted the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," affecting the Statement of
Condition as of December 31, 1993.
Pursuant to the transition provisions of the FASB's Special Report on
Statement 115, in December 1995, Bancorp transferred $235,099,000 of
investment securities classified as held-to-maturity to the available-for-sale
category. The unrealized gains and losses relating to these securities were
$2,082,000 and $2,491,000, respectively. The primary reason for selecting
these securities for reclassification was to further enhance Bancorp's
flexibility in managing its investment portfolio.
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. Restricted
equity securities represent Federal Home Loan Bank and Federal Reserve Bank
shares, recorded at par, which is fair value. In 1995, there were no transfers
from Investment Securities Held to Maturity other than the final transition
adjustment previously mentioned.
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. The market value of mortgage-backed securities are
based on quoted market prices.
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 1995, 1994 and 1993, the net gain (loss)
from the trading securities portfolio was $623,000, $(740,000) and $947,000,
respectively, and is recognized as a component of investment securities
gains/losses in the income statement. Income from trading securities was
$323,000, $604,000 and $660,000 for 1995, 1994 and 1993, respectively, 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. Net loan fees are deferred and
amortized as an adjustment to yield.
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, acceptance of a deed-in-lieu of foreclosure, abandoned bank
premises and loans classified as in-substance foreclosure. A loan is
47
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
classified as in-substance foreclosure when Bancorp has taken possession of
the collateral regardless of whether formal foreclosure proceedings take
place. 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 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.
Reserve for Possible Loan Losses
The reserve for possible loan losses is established through provisions for
possible loan losses charged against income. Loans deemed to be uncollectible
are charged against the reserve for possible loan losses, and subsequent
recoveries, if any, are credited to the reserve.
Beginning in 1995, Bancorp adopted Statement No. 114. Under the new
standard, the 1995 reserve for loan losses related to loans that are
identified for evaluation in accordance with Statement 114 is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans. Prior to
1995, the reserve for possible loan losses related to these loans was based on
undiscounted cash flows, the fair value of the collateral for collateral
dependent loans, or other factors specific to the credit situation.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on Bancorp's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions, and other
relevant factors. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to
significant change.
48
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--INVESTMENT SECURITIES
The following presents the details of the investment portfolio:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AGGREGATE
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
AT DECEMBER 31, 1995
Securities Held to Maturity:
Restricted Equity Securities..... $ 16,062 $ -- $ -- $ 16,062
Debt Securities Issued by the
U.S. Treasury and Agencies...... 507,298 1,108 (833) 507,573
Debt Securities Issued by State
and Municipalities of the United
States.......................... 33,812 1,808 -- 35,620
Debt Securities Issued by Foreign
Governments..................... 29,091 325 -- 29,416
Mortgage Backed-Securities....... 540,461 5,122 (1,394) 544,189
Other Debt Securities............ 2,527 1 (24) 2,504
---------- ------- -------- ----------
Totals......................... $1,129,251 $ 8,364 $ (2,251) $1,135,364
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................ $ 70,358 $ 1,827 $ -- $ 72,185
Debt Securities Issued by the
U.S. Treasury and Agencies...... 670,980 9,186 (120) 680,046
Debt Securities Issued by State
and Municipalities of the United
States.......................... 6,200 208 -- 6,408
Debt Securities Issued by Foreign
Governments..................... 26,201 -- -- 26,201
Corporate Securities............. 2,891 21 (16) 2,896
Mortgage Backed-Securities....... 1,434,038 12,502 (4,717) 1,441,823
Other Debt Securities............ 1,317 26 -- 1,343
---------- ------- -------- ----------
Totals......................... $2,211,985 $23,770 $ (4,853) $2,230,902
========== ======= ======== ==========
AT DECEMBER 31, 1994
Securities Held to Maturity:
Restricted Equity Securities..... $ 49,200 $ -- $ -- $ 49,200
Debt Securities Issued by the
U.S. Treasury and Agencies...... 1,019,903 316 (21,124) 999,095
Debt Securities Issued by State
and Municipalities of the United
States.......................... 37,578 1,367 (805) 38,140
Debt Securities Issued by Foreign
Governments..................... 35,672 533 -- 36,205
Mortgage Backed-Securities....... 623,565 1,718 (31,219) 594,064
Other Debt Securities............ 20,042 12 (99) 19,955
---------- ------- -------- ----------
Totals......................... $1,785,960 $ 3,946 $(53,247) $1,736,659
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................ $ 1,113 $ 390 $ -- $ 1,503
Debt Securities Issued by the
U.S. Treasury and Agencies...... 615,001 201 (9,359) 605,843
Debt Securities Issued by State
and Municipalities of the United
States.......................... 3,560 8 (151) 3,417
Corporate Debt Securities........ 3,878 2 (141) 3,739
Mortgage Backed-Securities....... 716,581 50 (20,903) 695,728
Other Debt Securities............ 53,637 1,552 (494) 54,695
---------- ------- -------- ----------
Totals......................... $1,393,770 $ 2,203 $(31,048) $1,364,925
========== ======= ======== ==========
49
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AGGREGATE
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
AT DECEMBER 31, 1993
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 Issued by Foreign
Governments..................... 9,175 -- -- 9,175
Mortgage Backed-Securities....... 516,001 10,111 (989) 525,123
Other Debt Securities............ 30,014 1,093 -- 31,107
---------- ------- ------- ----------
Totals......................... $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
Corporate Debt 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
---------- ------- ------- ----------
Totals......................... $ 888,112 $ 9,469 $(4,128) $ 893,453
========== ======= ======= ==========
The following presents an analysis of the contractual maturities of the
investment securities portfolio as of December 31, 1995:
ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS OF
DOLLARS)
Securities Held to Maturity
Due in One Year or Less................................ $ 234,577 $ 235,506
Due After One Year Through Five Years.................. 334,014 334,557
Due After Five Years Through Ten Years................. 3,897 4,798
Due After Ten Years.................................... 240 252
---------- ----------
572,728 575,113
Mortgage-Backed Securities............................... 540,461 544,189
Restricted Equity Securities............................. 16,062 16,062
---------- ----------
$1,129,251 $1,135,364
========== ==========
Securities Available for Sale
Due in One Year or Less................................ $ 133,471 $ 133,590
Due After One Year Through Five Years.................. 465,993 473,233
Due After Five Years Through Ten Years................. 37,015 37,449
Due After Ten Years.................................... 71,110 72,622
---------- ----------
707,589 716,894
Mortgage-Backed Securities............................... 1,434,038 1,441,823
Equity Securities........................................ 70,358 72,185
---------- ----------
$2,211,985 $2,230,902
========== ==========
50
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proceeds from sales and maturities of investment securities available for
sale during 1995 were $548,403,000. Gross gains of $339,000 and gross losses
of $454,000 were realized on those sales. The cumulative investment valuation
reserve was $11,366,000 (net of taxes) as of December 31, 1995.
Investment securities carried at $3,170,854,000, $3,056,198,000 and
$3,396,469,000 were pledged to secure deposits of certain public
(governmental) entities, repurchase agreements and swap agreements at December
31, 1995, 1994 and 1993, respectively. The December 31, 1995 amount included
investment securities with a carrying value of $2,139,322,000 and a market
value of $2,142,848,000 which were pledged solely for repurchase agreements.
NOTE C--LOANS
Loans consisted of the following at year-end:
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Domestic Loans
Commercial and Industrial.............. $1,902,189 $1,830,803 $1,709,194
Real Estate
Construction--Commercial............. 198,480 113,089 136,225
Residential............ 9,834 17,882 35,078
Mortgage--Commercial................. 1,308,779 1,240,959 1,230,558
Residential................ 2,727,398 2,872,824 2,475,971
Installment............................ 817,337 741,612 676,170
---------- ---------- ----------
Total Domestic Loans............... 6,964,017 6,817,169 6,263,196
---------- ---------- ----------
Foreign Loans............................ 795,477 696,734 593,497
---------- ---------- ----------
Subtotal........................... 7,759,494 7,513,903 6,856,693
---------- ---------- ----------
Lease Financing
Direct................................. 124,753 103,462 119,908
Leveraged.............................. 268,159 274,628 281,767
---------- ---------- ----------
Lease Financing.................... 392,912 378,090 401,675
---------- ---------- ----------
Total Loans........................ $8,152,406 $7,891,993 $7,258,368
========== ========== ==========
Commercial and mortgage loans totaling $1,055,704,000 were pledged to secure
certain public deposits and Federal Home Loan Bank advances at December 31,
1995.
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 Bancorp subsidiaries during 1995,
1994 and 1993. 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, 1995, 1994 and 1993 amounted to $37,335,000, $79,244,000 and $83,877,000,
respectively. During 1995, the activity in these loans included new borrowings
of $42,212,000, repayments of $81,931,000, and other changes of $2,190,000.
Other changes relate to new and retiring directors or companies and trusts in
which they are involved.
51
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Transactions in the reserve for possible loan losses were as follows:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Balance at Beginning of Year................ $148,508 $125,284 $128,626
Provision Charged to Operations............. 16,967 21,921 54,188
Reserves Acquired........................... -- 1,437 --
Charge-Offs................................. (27,857) (25,437) (65,732)
Recoveries.................................. 14,361 25,303 8,202
-------- -------- --------
Net Charge-Offs......................... (13,496) (134) (57,530)
-------- -------- --------
Balance at End of Year.................. $151,979 $148,508 $125,284
======== ======== ========
At December 31, 1995, the recorded investment in loans that are considered
to be impaired under Statement 114 was $7,500,000 (all of which were on a non-
accrual basis). The $7,500,000 of impaired loans have a related reserve for
possible loan losses of $700,000. The average recorded investment in impaired
loans during the year ended December 31, 1995 was approximately $21,902,000.
For the year ended December 31, 1995, Bancorp recognized interest income on
those impaired loans of $2,038,000. There was no cash basis interest income
recognized on impaired loans during the year.
NOTE D PREMISES AND EQUIPMENT
Bancorp and its subsidiaries own and lease premises primarily consisting of
operating facilities, the majority of which are located in Hawaii. Bank of
Hawaii owns four significant properties, the largest of which are condominium
units in the Financial Plaza of the Pacific (FPP) in which the Bank's main
branch and administrative offices are located. Portions of the FPP are owned
in fee simple or leased. The capital leases are for portions (less than 12%)
of the FPP. Details of the capital leases are included in the long term debt
footnote. Additionally, Bank of Hawaii owns a two-story building on the
outskirts of downtown Honolulu which houses data processing and certain other
operational functions; a five-story building in downtown Honolulu which houses
administrative departments; and Bancorp Hale O'Kapolei, a 248,000 square foot
operations facility in the Kapolei area on Oahu. Hale O'Kapolei was completed
and placed in service in 1995. Interest expense of $1,500,000 has been
capitalized while Hale O'Kapolei was under construction for 1995. Bancorp
Pacific, Inc. owns the fifth property, its five-story administrative offices
in downtown Honolulu.
52
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of data for major categories of premises and
equipment:
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
(IN THOUSANDS OF DOLLARS)
December 31, 1995
Premises................................. $267,724 $ (76,543) $191,181
Capital Leases........................... 4,464 (536) 3,928
Equipment................................ 136,965 (85,559) 51,406
-------- --------- --------
$409,153 $(162,638) $246,515
======== ========= ========
December 31, 1994
Premises................................. $236,619 $ (67,792) $168,827
Capital Leases........................... 4,464 (357) 4,107
Equipment................................ 122,678 (73,806) 48,872
-------- --------- --------
$363,761 $(141,955) $221,806
======== ========= ========
December 31, 1993
Premises................................. $187,614 $ (60,588) $127,026
Equipment................................ 107,167 (66,933) 40,234
-------- --------- --------
$294,781 $(127,521) $167,260
======== ========= ========
The amounts of depreciation and amortization (including capital lease
amortization) included in consolidated expense were $24,760,000, $21,006,000
and $18,520,000 in 1995, 1994 and 1993, 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.
Future minimum payments, by year and in the aggregate, for noncancelable
operating leases with initial or remaining terms of one year or more and
capital leases consisted of the following at December 31, 1995:
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS OF
DOLLARS)
1996.................................................... $ 7 $ 11,199
1997.................................................... 7 9,936
1998.................................................... 7 9,255
1999.................................................... 7 8,121
2000.................................................... 7 7,587
Thereafter.............................................. 34,938 104,723
------- --------
Total Minimum Lease Payments........................ $34,973 $150,821
Amounts Representing Interest........................... 29,486 --
------- --------
Present Value of Net Minimum Lease Payments............. $ 5,487 $ --
======= ========
Minimum future rentals receivable under subleases for noncancelable
operating leases at December 31, 1995, amounted to $1,563,000.
53
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rental expense for all operating leases consisted of:
1995 1994 1993
------- ------- -------
(IN THOUSANDS OF
DOLLARS)
Minimum Rentals................................ $21,573 $21,219 $22,592
Sublease Rental Income......................... (606) (634) (583)
------- ------- -------
$20,967 $20,585 $22,009
======= ======= =======
NOTE E--DEPOSITS
Interest on deposit liabilities in 1995, 1994 and 1993 consisted of the
following:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Domestic Interest-Bearing Demand Accounts..... $ 50,913 $ 42,321 $ 45,136
Domestic Savings Accounts..................... 30,558 27,910 32,654
Domestic Time Accounts........................ 98,528 65,908 77,736
Foreign Deposits.............................. 59,538 53,374 43,131
-------- -------- --------
$239,537 $189,513 $198,657
======== ======== ========
Time deposits with balances of $100,000 or more in domestic banking offices
were $927,947,000 in 1995. Of this amount, $306,601,000 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,
1995, are summarized as follows:
DOMESTIC
-------------
(IN THOUSANDS
OF DOLLARS)
Under 3 Months.............................................. $420,197
4 to 6 Months............................................... 146,236
7 to 12 Months.............................................. 249,269
Over 12 Months.............................................. 112,245
--------
$927,947
========
54
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--SHORT-TERM BORROWINGS
Details of short-term borrowings for 1995, 1994 and 1993 were as follows:
SECURITIES
SOLD UNDER OTHER
FUNDS AGREEMENTS COMMERCIAL SHORT-TERM
PURCHASED TO REPURCHASE PAPER BORROWINGS
--------- ------------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
1995
Amounts Outstanding December
31......................... $787,437 $1,926,540 $ 73,509 $403,358
Average Amount Outstanding
During Year................ 532,787 2,120,220 69,002 433,046
Maximum Amount Outstanding
at Any Month's End......... 787,437 2,263,425 85,600 601,990
Weighted-Average Interest
Rate During Year*.......... 6.04% 5.76% 5.08% 3.78%
Weighted-Average Interest
Rate on Balance Outstanding
at End of Year............. 5.57% 5.57% 5.18% 4.99%
1994
Amounts Outstanding December
31......................... $609,574 $2,136,204 $ 69,113 $525,362
Average Amount Outstanding
During Year................ 593,019 2,404,401 107,537 495,673
Maximum Amount Outstanding
at Any Month's End......... 655,026 2,730,270 176,072 557,293
Weighted-Average Interest
Rate During Year*.......... 4.27% 4.10% 3.44% 3.28%
Weighted-Average Interest
Rate on Balance Outstanding
at End of Year............. 5.79% 5.26% 4.24% 3.92%
1993
Amounts Outstanding December
31......................... $743,915 $2,509,550 $141,627 $438,339
Average Amount Outstanding
During Year................ 754,051 2,644,935 92,092 234,450
Maximum Amount Outstanding
at Any Month's End......... 967,121 2,995,725 141,627 507,356
Weighted-Average Interest
Rate During Year*.......... 3.20% 3.30% 2.96% 4.49%
Weighted-Average Interest
Rate on Balance Outstanding
at End of Year............. 3.15% 3.35% 2.89% 2.79%
- --------
* 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, 1995, the weighted average
contractual maturity of these agreements was 68 days and represent investments
by public (governmental) entities, primarily the State of Hawaii ($1.4
billion) and a local municipality ($0.4 billion). A schedule of maturities of
these agreements is as follows:
(IN THOUSANDS
OF DOLLARS)
Overnight................................................... $ --
Less than 30 days........................................... 603,474
30 to 90 days............................................... 866,303
Over 90 days................................................ 456,763
----------
$1,926,540
==========
55
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A line of credit totaling $50,000,000 is used to back up commercial paper
issued in the name of Bancorp. At December 31, 1995, there was no balance
outstanding. Fees on the unused amount of this line were $40,000, in 1995.
Other short-term borrowings consist mainly of Foreign Call Deposits,
Treasury Tax and Loan balances, Federal Home Loan Bank Advances, and Bank
Notes. The foreign call deposits generally mature in 90 days and bear interest
rates reflecting such maturities. The Treasury Tax and Loan balances represent
tax payments collected on behalf of the U.S. government and are callable at
any time, and bear market interest rates. The Federal Home Loan Bank advances
(secured by certain mortgage loans and FHLB stock) mature within one year and
bear interest rates between 5.60% and 5.98%. The Bank note, which totaled
$199.9 million at December 31, 1995, bears a fixed interest rate of 5.57% and
matures in November 1996.
NOTE G LONG-TERM DEBT
Amounts outstanding as of year-end were as follows:
1995 1994 1993
---------- -------- --------
(IN THOUSANDS OF DOLLARS)
Medium-Term Notes........................... $ 709,747 $604,441 $149,830
Federal Home Loan Bank Advances............. 229,545 133,400 103,500
Subordinated Notes.......................... 118,657 118,609 124,840
Capitalized Lease Obligations............... 5,487 5,122 --
---------- -------- --------
$1,063,436 $861,572 $378,170
========== ======== ========
In 1995, Bank of Hawaii incorporated its existing medium term note program
into a $1.0 billion revolving note program. Under the terms of this program,
upon repayment of outstanding notes, the Bank may issue additional notes
provided that the aggregate amount outstanding does not exceed $1.0 billion.
At December 31, 1995, there was a total of $849,682,000 outstanding under this
program, of which $649,747,000 was classified as long-term. The notes, which
were issued in 1994 and 1995, are unsecured. The 1994 notes carry two year
terms and have floating interest rates which are tied to the three month LIBOR
rate. These rates are adjusted quarterly. The 1995 notes carry thirteen month
terms and have a fixed interest rate of 5.5%.
Privately placed medium term notes issued by Bancorp totaled $60.0 million
at December 31, 1995. The notes, which were issued in 1995, carry three year
terms and bear interest at rates from 6.08% to 6.48%.
The Federal Home Loan Bank (FHLB) advances bear interest at rates from 4.40%
to 8.00%. The advances mature from 1996 through 2002. At December 31, 1995,
loans totaling $275,500,000 were pledged to secure these advances along with
FHLB stock.
The subordinated notes, which were issued in 1993, have a fixed interest
rate of 6.875% and mature in 2003.
The capitalized lease obligations are for certain condominium units in the
Financial Plaza of the Pacific. The leases began in 1993 and have 60 year
terms. The lease payments allocated to the capital leases are fixed at $7,000
per year until 2002; $605,000 per year from 2003 to 2007 and $665,000 per year
from 2008 to 2012. The rates are negotiable thereafter.
Long-term debt maturities for the five years succeeding December 31, 1995,
are $493,808,000 in 1996; $248,952,000 in 1997; $123,007,000 in 1998;
$54,007,000 in 1999 and $18,882,000 in 2000.
Interest paid on long-term debt in 1995 totaled $53,926,000.
56
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY
Certain of Bancorp's consolidated subsidiaries (including Bank of Hawaii and
Bancorp Pacific, Inc.) are subject to regulatory restrictions that limit cash
dividends and loans to Bancorp. As of December 31, 1995, approximately
$420,581,000 of undistributed earnings of Bancorp's consolidated subsidiaries
were available for distribution to Bancorp without prior regulatory approval.
The following is a breakdown of the unrealized valuation adjustment
component of shareholders' equity as of December 31:
1995 1994 1993
------- -------- -------
(IN THOUSANDS OF
DOLLARS)
Foreign Exchange Translation Adjustment....... $ 2,536 $ (858) $(3,318)
Investment Securities......................... 11,366 (17,264) 3,855
------- -------- -------
Unrealized Valuation Adjustments.............. $13,902 $(18,122) $ 537
======= ======== =======
NOTE I--INTERNATIONAL OPERATIONS
The following table provides certain selected financial data for Bancorp's
international operations for the years ended:
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
International
Average Assets......................... $1,724,347 $1,699,168 $1,908,883
Average Loans.......................... 745,948 667,828 666,091
Average Deposits....................... 1,025,821 1,240,692 1,259,042
Operating Revenue...................... 107,884 97,134 94,096
Income Before Taxes.................... 9,353 12,000 13,425
Net Income............................. 4,805 7,137 8,528
Average assets consist primarily of short-term interest-bearing deposits
with foreign branches of U.S. banks and large international banks. On average,
these deposits were $648,473,000, $802,833,000 and $1,086,554,000 during 1995,
1994 and 1993, 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 administrative 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 (Retirement
Plan) which covers salaried employees of Bancorp and participating
subsidiaries who have met the Retirement Plan's eligibility requirements.
Benefits are based on years of service and an average of the five highest
years of annual
57
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
compensation. Bancorp's funding policy is to contribute annually an amount
that falls within the minimum and maximum range deductible for income tax
purposes. Retirement Plan assets are managed by investment advisors in
accordance with investment policies established by the Retirement Plan
Trustees. Investments are generally marketable securities including stocks,
bonds and money market funds.
Bancorp has a non-qualified excess benefit plan (Excess Plan) which covers
all employees of Bancorp and participating subsidiaries who have met
eligibility requirements. The unfunded Excess Plan recognizes the liability to
Excess Plan participants for amounts exceeding those allowed to be included in
the Retirement Plan. The table following includes the status of this Excess
Plan.
In 1995, Bancorp reevaluated its benefit programs and changed its defined
benefit and defined contribution plans. The benefits provided by both the
qualified and non-qualified defined benefit plans were "frozen" as of December
31, 1995 with a phase out provided to certain groups of staff members. In
conjunction with this restructuring, qualifying staff were offered an early
retirement option. The option for staff members who were at least 50 years of
age with 9 years or more of eligible service provided an extra 5 years of
service and 5 years of age for benefit calculation purposes. In addition, the
staff member received $250.00 per month until age 65 to defray medical benefit
costs. The early retirement option was elected by 340 staff members, almost
75% of those eligible. The curtailment gain for the retirement plan was
$2,971,000 and the curtailment loss for the excess retirement plan was
$2,811,000.
The following table sets forth both the Retirement Plan and Excess Plan's
funded status and amounts recognized in Bancorp's statement of condition at
December 31.
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Actuarial Present Value of Benefit
Obligations:
Vested Benefit Obligation................ $ 71,159 $ 59,208 $ 56,553
======== ======== ========
Accumulated Benefit Obligation........... $ 75,725 $ 63,445 $ 61,038
======== ======== ========
Projected Benefit Obligation............. $ 82,443 $ 98,443 $ 99,831
Plan Assets (Primarily Marketable
Securities) at Fair Value................. 63,519 78,689 73,064
-------- -------- --------
Projected Benefit Obligation in Excess of
Plan Assets............................... (18,924) (19,754) (26,767)
Unrecognized Net (Gain)/Loss............... (836) (3,766) 2,287
Unrecognized Net Obligation at January 1,
1985 Being Recognized Over 15 Years....... 0 (1,841) (2,220)
Unrecognized Net Asset at December 31,
1995...................................... (1,501) 0 0
Prior Service Cost Not Yet Recognized in
Net Periodic Pension Cost................. 0 1,907 2,333
-------- -------- --------
Accrued Pension Liability Recognized in the
Statement of Condition.................... $(21,261) $(23,454) $(24,367)
======== ======== ========
Net pension costs included the following components:
1995 1994 1993
------- ------- -------
(IN THOUSANDS OF
DOLLARS)
Service Cost--Benefits Earned During the
Period....................................... $ 6,881 $ 7,561 $ 6,803
Interest Cost on Projected Benefit
Obligation................................... 8,000 7,299 6,626
Actual Return on Assets...................... (6,122) 1,533 (5,992)
Net Amortization and Deferral................ 111 (8,080) 557
------- ------- -------
Net Periodic Pension Cost.................... $ 8,870 $ 8,313 $ 7,994
======= ======= =======
58
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Assumptions used in the accounting were as follows:
DECEMBER 31,
-----------------
1995 1994 1993
----- ----- -----
Weighted-Average Discount Rates......................... 7.50% 8.25% 7.50%
Rates of Increase in Compensation Levels................ 5.00% 5.00% 5.00%
Expected Long-Term Rate of Return on Assets............. 8.50% 8.50% 8.50%
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 receive up to 50% of their annual allocation in cash.
The amounts deferred may be invested in several mutual funds, along with a
fund invested in shares of common stock of Bancorp Hawaii, Inc. Bancorp
contributions amounted to $7,629,000 in 1995; $7,344,000 in 1994 and
$9,602,000 in 1993.
The reevaluation of Bancorp's benefit plans extended to the Profit Sharing
Plan. Effective January 1, 1996, the Profit Sharing Plan has been enhanced
with a company matching of the 401(k) contribution of $1.25 for each $1.00
contributed by the staff member up to 2% of their compensation.
Bancorp has also established a new defined contribution money purchase plan
for which it will contribute 4% of compensation to staff members meeting
certain eligibility and vesting requirements. The money purchase plan has a
one year eligibility requirement and a five year vesting period. Staff members
meeting these requirements as of January 1, 1996 immediately became
participants. Participants will be allowed to select from several investment
options, including various mutual funds.
Bancorp adopted SFAS No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106) as of January 1, 1993. This
postretirement benefits plan provides group life, dental and medical insurance
coverage for retirees. The benefits provide for a "sharing of costs" where
both the employer and employees pay a portion of the premium cost. Most of the
employees of Bancorp and its subsidiaries who have met the eligibility
requirements are covered. Bancorp 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, 1995,
1994 and 1993.
The curtailment of the defined benefit plans described earlier also affected
the post retirement benefit plan. A curtailment loss of $772,000 was recorded
in 1995 to reflect the change.
The following schedule presents the funded status of the liability as of
December 31, 1995, 1994 and 1993.
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Accumulated Postretirement Benefit
Obligation
Retirees................................. $(14,515) $ (8,785) $ (8,869)
Other Fully Eligible Plan Participants... (3,054) (6,243) (6,038)
Other Active Plan Participants........... (11,095) (8,863) (9,447)
-------- -------- --------
Total.................................. (28,664) (23,891) (24,354)
Plan Assets................................ 0 0 0
-------- -------- --------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets....... (28,664) (23,891) (24,354)
Unrecognized Transition Obligation Being
Amortized Over 20 Years................... 11,838 13,166 13,337
Unrecognized Net Gain/(Loss)............... (459) (2,833) 699
-------- -------- --------
Accrued Postretirement Benefit Liability... $(17,285) $(13,558) $(10,318)
======== ======== ========
59
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Net Periodic Postretirement Benefit Cost was:
1995 1994 1993
------ ------ ------
(IN THOUSANDS OF
DOLLARS)
Service Cost........................................ $1,046 $1,089 $1,151
Interest Cost....................................... 1,912 1,820 1,678
Amortization of Transition Obligation............... 647 731 702
------ ------ ------
Net Periodic Postretirement Benefit Cost............ $3,605 $3,640 $3,531
====== ====== ======
The following table presents the assumptions utilized to determine the
expense and liability:
1995 1994 1993
------ ------ ------
Health Care Cost Trend Rate.......................... 15.00% 15.00% 15.00%
Dental Care Cost Trend Rate.......................... 7.50% 7.50% 7.50%
Weighted Average Discount Rate....................... 7.50% 8.25% 7.50%
Rate of Increase in Compensation Level............... 5.00% 5.00% 5.00%
The health care cost trend rate is projected at 15.0% per year until the
year 2000 leveling to the ultimate 7.0%. 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 $2,958,000 to $3,360,000. The impact of this one
percent increase in the trend rates on the accumulated postretirement benefit
obligation would be an increase to $24,835,000 at December 31, 1995.
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 options
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. 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 $12.09 and
$36.75. The price (per share) range of options exercised during 1995 was
between $10.03 and $29.50 on an actual price basis.
The Plans also provide certain participants with tandem stock appreciation
rights (SAR). The SAR can be exercised in lieu of the exercise of the options.
The Compensation Committee has limited the exercise of SARs to $1 million per
year, allocated among the participants.
The following table presents the activity of Stock Option Plans for the
years indicated:
SHARES UNDER STOCK OPTION PLANS
--------------------------------
1995 1994 1993
--------- --------- ---------
Outstanding at beginning of year.... 1,842,039 1,340,967 1,254,880
Add (Deduct):
Granted (Including Stock
Dividends)....................... 566,000 812,685 269,000
Canceled or Surrendered........... (141,710) (71,117) (31,370)
Exercised......................... (443,876) (240,496) (151,543)
--------- --------- ---------
Outstanding at End of Year.......... 1,822,453 1,842,039 1,340,967
--------- --------- ---------
Options Exercisable................. 1,278,953 1,721,288 1,013,451
Shares Available for Future Grants.. 1,396,056 1,820,346 23,173
60
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE M--OTHER OPERATING EXPENSE
Other operating expense at year-end was as follows:
1995 1994 1993
-------- -------- -------
(IN THOUSANDS OF DOLLARS)
FDIC Insurance................................. $ 7,632 $ 13,592 $15,119
Legal and Other Professional Fees.............. 15,623 18,209 11,847
Advertising.................................... 11,144 10,288 9,675
Stationery and Supplies........................ 9,247 8,769 7,485
Other.......................................... 61,914 61,181 50,636
-------- -------- -------
Total...................................... $105,560 $112,039 $94,762
======== ======== =======
NOTE N--INCOME TAXES
The income tax provision includes the following components:
1995 1994 1993
------- -------- -------
(IN THOUSANDS OF
DOLLARS)
Current........................................ $46,617 $ 92,676 $57,975
Deferred....................................... 25,431 (15,035) 21,865
------- -------- -------
Provision for Income Taxes..................... $72,048 $ 77,641 $79,840
======= ======== =======
The 1995, 1994 and 1993 tax provision includes state tax expense of
$9,285,000, $13,786,000 and $14,719,000, respectively. The current provision
also includes taxes on the gains and losses on the sale of securities of
$975,000; $(7,051,000) and $3,495,000 for 1995, 1994 and 1993, 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, 1995,
1994 and 1993 reclassified based on the tax returns as filed, are as follows:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Deferred tax liabilities:
Lease transactions....................... $181,122 $175,801 $166,511
Deferred investment tax credits.......... 6,851 7,318 7,652
Accelerated depreciation................. 1,359 1,773 2,335
Core deposit intangible.................. 10,206 11,270 12,335
-------- -------- --------
Total deferred tax liabilities......... 199,538 196,162 188,833
-------- -------- --------
Deferred tax assets:
Reserve for loan losses.................. 54,390 53,886 45,223
Accrued pension cost..................... 5,821 6,502 7,227
Net operating loss carry forwards........ 1,299 2,245 3,988
Securities valuation reserve............. (7,470) 11,871 (2,110)
Other--net............................... 1,559 3,374 1,690
-------- -------- --------
Total deferred tax assets.............. 55,599 77,878 56,018
Valuation allowance for deferred tax
assets.................................. (1,299) (1,523) (2,026)
-------- -------- --------
Net deferred tax assets................ 54,300 76,355 53,992
-------- -------- --------
Net deferred tax liabilities............... $145,238 $119,807 $134,841
======== ======== ========
For financial statement purposes, Bancorp had deferred investment tax
credits for property purchased for lease to customers of $6,851,000,
$7,318,000 and $7,652,000 at December 31, 1995, 1994 and 1993,
61
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively. In 1995, 1994 and 1993, investment tax credits included in the
computation of the provision for income taxes were $467,000; $334,000 and
$157,000, respectively.
The following analysis reconciles the Federal statutory income tax rate to
the effective consolidated income tax rate:
1995 1994 1993
---- ---- ----
Statutory Federal Income Tax Rate...................... 35.0% 35.0% 35.0%
Increase (Decrease) in Tax Rate Resulting From:
State Taxes, Net of Federal Income Tax and Foreign
Tax Adjustments..................................... 3.1 4.6 4.5
Tax-Exempt Interest Income........................... (0.5) (0.5) (0.6)
Effect of Tax Rate Change on Deferred Tax Assets and
Liabilities......................................... -- -- 0.2
Low Income Housing and Investment Tax Credit......... (0.7) (0.4) (0.5)
Other................................................ 0.3 1.0 (1.0)
---- ---- ----
Effective Tax Rate..................................... 37.2% 39.7% 37.6%
==== ==== ====
Bancorp Pacific, Inc. 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 Bancorp
Pacific, Inc. was 8.0% of taxable income for 1995, 1994 and 1993. 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.
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 manage 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. The FASB has segregated certain of these off-balance sheet
financial instruments which include foreign exchange and interest rate swap
type of instruments, as derivative financial instruments. FASB has further
categorized these derivative financial instruments into "held or issued for
purposes other than trading" or "trading." Bancorp has not utilized these
derivative financial instruments for trading purposes.
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 derivative financial instruments, 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.
62
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Descriptions of these financial instruments with off balance sheet risks
follow:
Traditional Off Balance Sheet Risk Instruments
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, the total commitment amounts do not necessarily represent future cash
requirements. Bancorp evaluates each customer's credit worthiness 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.
Derivative Financial Instruments Held or Issued for Other Than Trading
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. Net revenue (loss) on foreign exchange contracts totaled
$0.3 million, $0.2 million and $1.2 million for 1995, 1994 and 1993,
respectively.
Bancorp enters into various interest-rate swaps in managing its interest-
rate risk. In these arrangements, Bancorp agrees to exchange, at specified
intervals, the difference between fixed- and floating-interest amounts
calculated on an agreed-upon notional principal amount. Bancorp used swap
agreements to effectively convert portions of its floating rate loans to a
fixed rate basis. These swap transactions allowed Bancorp to better match the
funding source which is a portion of Bancorp's core deposit base. The core
deposit base, although subject to immediate withdrawal, displays a longer term
fixed character. At December 31, 1995, $1.1 billion of such "receive-fixed"
swaps were in effect. In addition, Bancorp had entered into "pay fixed" swap
agreements, prior to 1994, that effectively converted a portion of its
floating rate liabilities to a fixed rate basis. These swap transactions were
entered into to fix the funding costs for specific term loans. At December 31,
1995, $18.8 million of such "pay fixed" swaps were in effect. The net amount
payable or receivable from interest-rate swap agreements is accrued as an
adjustment to interest income. The related amount payable or receivable from
counterparties is included in accrued interest payable or receivable. The fair
value of the swap agreements are not recognized in the financial statements.
Bancorp's current credit exposure on swaps is equal to the market value of
the interest-rate swaps plus or minus the market value of any collateral
exchanged with swap counterparties. The aggregate credit exposure on swaps at
year-end 1995 was $2.6 million. At December 31, 1995, the market value of pay
fixed interest-rate swaps was $(7.9) million and the market value of receive
fixed interest-rate swaps was $(0.4) million. The market value of all
positions at year-end 1995 was $(8.3) million compared with $(91.4) million at
year-end 1994. Net revenue (expense) on interest rate swap agreements totaled
$(11.7) million, $7.7 million and $14.1 million for 1995, 1994 and 1993,
respectively.
63
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The table below summarizes by notional amounts the activity for each major
category of swaps in 1995. Bancorp had no deferred gains or losses relating to
terminated swap contracts in 1995.
RECEIVE PAY
FIXED FIXED
---------- --------
(IN THOUSANDS OF
DOLLARS)
Balance, December 31, 1992.......................... $ 150,000 $ 35,476
Additions......................................... 1,250,000 100,000
Maturities/amortizations.......................... (121,231) (15,655)
---------- --------
Balance, December 31, 1993.......................... $1,278,769 $119,821
Additions......................................... 350,000 --
Maturities/amortizations.......................... (156,719) (524)
---------- --------
Balance, December 31, 1994.......................... $1,472,050 $119,297
Additions......................................... -- --
Maturities/amortizations.......................... (376,814) (100,524)
---------- --------
Balance, December 31, 1995.......................... $1,095,236 $ 18,773
========== ========
The approximate annual maturities of swap agreements outstanding as of
December 31, 1995 were:
NOTIONAL PRINCIPAL EXPECTED TO MATURE IN
---------------------------------------------------
1996 1997 1998 1999 2000 TOTAL
-------- -------- -------- ------ ---- --------
(IN THOUSANDS OF DOLLARS)
Pay-Fixed Interest Rate
Swaps:
Fixed Maturity.......... $ 15,000 $ -- $ -- $ -- $-- $ 15,000
Pay Rate.............. 8.35% -- -- -- --
Receive Rate.......... 5.51% -- -- -- --
Amortizing(1)........... 3,773 -- -- -- -- 3,773
Pay Rate.............. 7.49% -- -- -- --
Receive Rate.......... 5.63% -- -- -- --
Receive-Fixed Interest
Rate Swaps:
Fixed Maturity.......... $260,000 $140,000 $100,000 $ -- $-- $500,000
Pay Rate.............. 5.61% -- -- -- --
Receive Rate.......... 5.26% 5.15% 5.14% -- --
Amortizing(1)........... 262,362 166,960 133,115 32,799 -- 595,236
Pay Rate.............. 5.68% -- -- -- --
Receive Rate.......... 5.15% 5.17% 5.21% 5.28% --
- --------
(1) Amortization estimated utilizing average prepayment speeds provided by
various dealers in these instruments.
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
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.
64
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, Investment Securities 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 non-performing 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.
65
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the fair values of Bancorp's financial
instruments at December 31, 1995, 1994 and 1993.
1995 1994 1993
--------------------- --------------------- ---------------------
BOOK OR BOOK OR BOOK OR
NOTIONAL FAIR NOTIONAL FAIR NOTIONAL FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
FINANCIAL INSTRUMENTS--
ASSETS
Loans (1)............. $7,565,800 $7,741,700 $7,327,700 $7,364,800 $6,704,100 $6,901,000
Investment Securities
(2).................. 3,360,200 3,366,300 3,150,900 3,101,600 3,647,000 3,684,800
Other Financial Assets
(3).................. 905,300 905,300 794,900 794,900 969,800 969,800
FINANCIAL INSTRUMENTS--
LIABILITIES
Deposits.............. 7,576,800 7,627,600 7,115,100 7,055,900 7,005,000 7,019,700
Short Term Borrowings
(4).................. 3,190,800 3,190,800 3,340,300 3,340,300 3,833,400 3,833,400
Long Term Debt (5).... 1,057,900 1,053,500 856,500 821,300 378,200 400,200
FINANCIAL INSTRUMENTS--
OFF-BALANCE SHEET
Financial Instruments
Whose Contract
Amounts Represent
Credit Risk:
Commitments to
Extend Credit...... 3,615,188 9,582 3,187,455 9,548 2,692,081 8,113
Standby Letters of
Credit............. 224,398 4,224 233,276 4,416 245,383 4,599
Commercial Letters
of Credit.......... 244,776 374 144,319 210 102,349 177
Financial Instruments
Whose Notional or
Contract Amounts
Exceed the Amount of
Credit Risk:
Foreign Exchange and
Swap Contracts..... 510,759 1,203 285,390 229 339,882 61
Interest Rate Swap
Agreements......... 1,114,009 (8,310) 1,591,347 (91,420) 1,398,590 (277)
- --------
(1) Includes all loans, net of reserve for loan losses, and excludes leases.
(2) Includes both held to maturity and available for sale securities.
(3) Includes interest bearing deposits, securities purchased under agreements
to resell, funds sold and trading securities.
(4) Includes securities sold under agreements to repurchase, funds purchased
and short term borrowings.
(5) Excludes capitalized lease obligations.
66
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q--PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial statements of Bancorp Hawaii, Inc. (Parent only) follow:
Condensed Statements of Income
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Dividends From
Bank Subsidiaries............................... $ 44,426 $ 69,416 $ 36,599
Other Subsidiaries.............................. 7,000 34,000 39,500
Interest Income
From Subsidiaries............................... 6,059 4,873 3,219
From Others..................................... 939 1,029 824
Other Income...................................... 48 47 77
Securities Gains (Losses)......................... 136 10 (67)
-------- -------- --------
Total Income.................................. 58,608 109,375 80,152
Interest Expense.................................. 7,110 6,505 5,914
Other Expense..................................... 6,015 7,323 6,532
-------- -------- --------
Total Expense................................. 13,125 13,828 12,446
Income Before Income Taxes and Equity in
Undistributed Income of Subsidiaries............. 45,483 95,547 67,706
Income Tax Benefits............................... 2,484 2,084 2,427
-------- -------- --------
Income Before Equity in Undistributed Income...... 47,967 97,631 70,133
Equity in Undistributed Income of Subsidiaries
Bank Subsidiaries............................... 61,372 32,044 79,310
Other Subsidiaries.............................. 12,461 (11,937) (16,876)
-------- -------- --------
73,833 20,107 62,434
-------- -------- --------
Net Income........................................ $121,800 $117,738 $132,567
======== ======== ========
Condensed Statements of Condition
DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Assets
Cash in Bank of Hawaii...................... $ 245 $ 160 $ 188
Investment Securities Available for Sale.... 12,740 1,503 1,008
Equity in Net Assets of Bank Subsidiaries... 881,160 788,864 774,493
Equity in Net Assets of Other Subsidiaries.. 147,491 134,810 147,719
Interest Bearing Deposits from Bank......... 89,446 79,200 146,700
Net Loans................................... 12,638 12,963 16,364
Trading Securities.......................... -- 472 876
Other Assets................................ 54,006 84,367 55,160
---------- ---------- ----------
Total Assets.............................. $1,197,726 $1,102,339 $1,142,508
========== ========== ==========
Liabilities and Shareholders' Equity
Commercial Paper and Short-Term Borrowings.. $ 74,559 $ 69,114 $ 141,627
Long-Term Debt.............................. 60,000 55,000 50,000
Other Liabilities........................... 8,731 11,437 12,777
Shareholders' Equity........................ 1,054,436 966,788 938,104
---------- ---------- ----------
Total Liabilities and Shareholders'
Equity................................... $1,197,726 $1,102,339 $1,142,508
========== ========== ==========
67
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Condensed Statements of Cash Flows
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- --------- ---------
(IN THOUSANDS OF DOLLARS)
Operating Activities
Net Income................................... $121,800 $ 117,738 $ 132,567
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities.......
Provision for Loan Losses and Amortization
Expense................................... 3,943 4,730 4,301
Undistributed Income from Subsidiaries..... (73,833) (20,107) (62,434)
Net Decrease (Increase) in Trading
Securities................................ 472 403 (876)
Other Assets and Liabilities, Net.......... 23,052 (35,349) (4,432)
-------- --------- ---------
Net Cash Provided by Operating
Activities.............................. 75,434 67,415 69,126
Investing Activities
Investment Securities Transactions, Net...... (9,800) -- --
Securities Purchased Under Agreements to
Resell, Net................................. -- -- 63,900
Interest Bearing Deposits, Net............... (10,246) 67,500 (146,700)
Loan Transactions, Net....................... 411 3,214 3,852
Capital Contributions to Subsidiaries, Net... 17 (249) (175)
Repayments from Subsidiaries, Net............ -- -- 18,000
-------- --------- ---------
Net Cash Provided (Used) by Investing
Activities.............................. (19,618) 70,465 (61,123)
Financing Activities
Net Proceeds (Repayments) from Borrowings.... 10,445 (67,513) 17,610
Proceeds from Sale of Stock.................. 19,023 18,016 14,866
Stock Repurchased............................ (40,004) (44,297) (2,052)
Cash Dividends Paid.......................... (45,195) (44,114) (38,413)
-------- --------- ---------
Net Cash Used by Financing Activities.... (55,731) (137,908) (7,989)
Increase (Decrease) in Cash.............. 85 (28) 14
Cash at Beginning of Year.................... 160 188 174
-------- --------- ---------
Cash at End of Year.......................... $ 245 $ 160 $ 188
======== ========= =========
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 26,
1996, as summarized below:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Election of Directors on pages 2-6.
Disclosure of Compliance with section 16 (a) of the Securities Exchange
Act on page 7.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation on pages 9-14.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Securities and Principal Holders Thereof and Election of
Directors on pages 1-7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others on pages 20-22.
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, 1995, 1994, and 1993
Consolidated statements of income--Years ended December 31, 1995,
1994, and 1993
Consolidated statements of shareholders' equity--Years ended
December 31, 1995, 1994, and 1993
Consolidated statements of cash flows--Years ended December 31,
1995, 1994, and 1993
Notes to consolidated financial statements--December 31, 1995
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.
69
EXHIBIT INDEX
The following exhibits are submitted herewith:
EXHIBIT
NUMBER
-------
3.1 Articles of Incorporation and By-laws (incorporated herein by
reference to Exhibit #3 of Form 10-K for fiscal year ended
December 31, 1990)
4.1 Instruments Defining the Rights of Holders of Long-Term Debt
10.1 Bancorp Hawaii, Inc., One-Year Incentive Plan Effective January 1,
1996
10.2 Bancorp Hawaii, Inc., One-Year Executive Incentive Plan Effective
January 1, 1996
10.3 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective
January 1, 1996
10.4 Bancorp Hawaii, Inc. Key Executive Severance Plan dated April 27,
1983
10.5 Bancorp Hawaii, Inc. Stock Option Plan of 1983 (incorporated
herein by reference to Exhibit 4(a) of Registration No. 2-84164)
10.6 Bancorp Hawaii, Inc. Stock Option Plan of 1988 (incorporated
herein by reference to Exhibit 4(a) of Registration No. 33-23495)
10.7 Bancorp Hawaii, Inc. Stock Option Plan of 1994 (incorporated
herein by reference to Exhibit 4(a) of Registration No. 33-54777)
10.8 Bancorp Hawaii, Inc. Sustained Profit Growth Plan Effective
January 1, 1993 (incorporated herein by reference to Exhibit 10(b)
of Bancorp Hawaii, Inc. Form 10K for the fiscal year ended
December 31, 1993)
10.9 Bancorp Hawaii, Inc., One-Year Executive Incentive Plan Effective
January 1, 1995 (incorporated herein by reference to Exhibit 10(b)
of Form 10K for the fiscal year ended December 31, 1994)
10.10 Bancorp Hawaii, Inc., One-Year Incentive Plan Effective January 1,
1995 (incorporated herein by reference to Exhibit 10(a) of Form
10K for the fiscal year ended December 31, 1994)
10.11 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective
January 1, 1994 (incorporated herein by reference to Exhibit C of
Bancorp Hawaii, Inc. 1994 Proxy Statement dated March 10, 1994)
10.12 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective
January 1, 1995 (incorporated herein by reference to Exhibit 10(d)
of Bancorp Hawaii, Inc. Form 10K for the fiscal year ended
December 31, 1994)
10.13 Form of Key Executive Severance Agreement (incorporated herein by
reference to Exhibit 19(e) of Bancorp Hawaii, Inc. Form 10K for
the fiscal year ended December 31, 1989 for L. M. Johnson)
10.14 Form of Amended Key Executive Change-in-Control Severance
Agreement (incorporated herein by reference to Exhibit 10(e) of
Bancorp Hawaii, Inc. 10K for the fiscal year ended December 31,
1994--October 3, 1994 for R. J. Dahl)
10.15 Form of Key Executive Change-in-Control Severance Agreement
(incorporated herein by reference to Exhibit 10(f) of Bancorp
Hawaii, Inc. 10K for the fiscal year ended December 31, 1994--
October 3, 1994 for A. Kuioka)
10.16 Form of Executive Change-in-Control Severance Agreement
(incorporated herein by reference to Exhibit 10(g) of Bancorp
Hawaii, Inc. 10K for the fiscal year ended December 31, 1994--for
D. Houle)
70
11.1 Statement Regarding Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
(b) Registrant did not file a Form 8-K during the quarter ended December 31,
1995.
(c) Response to this item is the same as Item 14(a).
(d) Response to this item is the same as Item 14(a).
71
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 22 on page 37.
Consolidated Average Balances, Income and Expense, and Yield and
Rates--Taxable Equivalent--Table 13 on page 27.
Average Loans--Table 19 on page 35.
Average Deposits--Table 21 on page 36.
ITEM II. INVESTMENT PORTFOLIO
Note B to the Audited Financial Statements on page 49.
Maturity Distribution--Table 17 on page 34.
ITEM III. LOAN PORTFOLIO
Loan Portfolio Balances--Table 3 on page 13.
Interest Rate Sensitivity--Table 20 on page 35.
Non-Performing Assets and Accruing Loans Past Due 90 Days or More--
Table 6 on page 18.
Foregone Interest on Non-Accruals--Table 5 on page 17.
Potential Problem Loans--Narrative on page 23.
Geographic Distribution of International Assets--Table 10 on page 23.
ITEM IV. SUMMARY OF LOAN LOSS EXPERIENCE
Summary of Loan Loss Experience--Table 7 on page 20.
Allocation of Loan Loss Reserve--Table 8 on page 21.
Narrative on pages 18 to 19.
ITEM V. DEPOSITS
Consolidated Average Balances, Income and Expense, and Yield and
Rates--Taxable Equivalent--Table 13 on page 27.
Note E to the Audited Financial Statements on page 54.
ITEM VI. RETURN ON EQUITY AND ASSETS
1995 1994 1993
------ ------ ------
Return on Assets..................................... 0.98% 0.93% 1.05%
Return on Equity..................................... 11.87% 12.13% 14.85%
Dividend Payout Ratio................................ 37.24% 37.82% 29.37%
Equity to Assets Ratio............................... 8.27% 7.71% 7.09%
ITEM VII. SHORT-TERM BORROWINGS
Note F to the Audited Financial Statements on pages 55 and 56.
72
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: February 27, 1996 Bancorp Hawaii, Inc.
/s/ Lawrence M. Johnson
by: _________________________________
Lawrence M. Johnson
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: February 27, 1996
/s/ Lawrence M. Johnson /s/ H. Howard Stephenson
- ------------------------------------- -------------------------------------
Lawrence M. Johnson H. Howard Stephenson
Director Director
/s/ Peter D. Baldwin /s/ Fred E. Trotter
- ------------------------------------- -------------------------------------
Peter D. Baldwin Fred E. Trotter
Director Director
/s/ Mary G. F. Bitterman /s/ Charles R. Wichman
- ------------------------------------- -------------------------------------
Mary G. F. Bitterman Charles R. Wichman
Director Director
/s/ Richard J. Dahl /s/ K. Tim Yee
- ------------------------------------- -------------------------------------
Richard J. Dahl K. Tim Yee
Director Director
/s/ David A. Heenan /s/ David A. Houle
- ------------------------------------- -------------------------------------
David A. Heenan David A. Houle
Director Chief Financial Officer
/s/ Stuart T. K. Ho /s/ Denis K. Isono
- ------------------------------------- -------------------------------------
Stuart T. K. Ho Denis K. Isono
Director Chief Accounting Officer
/s/ Herbert M. Richards, Jr.
- -------------------------------------
Herbert M. Richards, Jr.
Director
73