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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
COMMISSION FILE NUMBER 1-6887
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BANCORP HAWAII, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
HAWAII 99-0148992
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
130 MERCHANT STREET 96813
HONOLULU, HAWAII
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (808) 537-8111
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, $2 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of said stock on the New York Stock
Exchange on January 31, 1994 ($46.75 per share): $1,320,646,874.
As of January 31, 1994, 28,425,038 shares of Common Stock, $2 par value, of
the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 27, 1994, are incorporated by reference into Part
III of this Report.
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PART I
ITEM 1. BUSINESS
Bancorp Hawaii, Inc., (Bancorp) was organized on August 12, 1971, as the
first bank holding company in the State of Hawaii.
Bancorp provides varied financial services to customers in Hawaii, other
areas of the Pacific Basin, and selected markets with economies similar to
those in the Pacific Basin. It is the largest of the bank holding companies
headquartered in the State of Hawaii. The principal subsidiaries of Bancorp are
Bank of Hawaii and Bancorp Pacific, Inc. (formerly known as FirstFed America,
Inc.)
In 1993, Bank of Hawaii finalized its acquisition of American Financial
Services of Hawaii, Inc. (AFS), a trust holding company. AFS has two
subsidiaries, American Trust Company of Hawaii, Inc. and Bishop Trust Company,
Limited. The total assets under administration of these two trust companies
were approximately $2.7 billion at the May 7, 1993 acquisition date. Bank of
Hawaii's strategy is to integrate the operations of these companies into its
other trust subsidiary--Hawaiian Trust Company, Limited.
In December 1993, the final approvals were received allowing Bank of Hawaii
International, Inc. to purchase 80% of Banque Indosuez Vanuatu, Ltd. Upon
finalization of the purchase, the name was changed to Banque d'Hawaii
(Vanuatu), Limited. Total assets were $70.1 million at year-end 1993 and for
1993 have been accounted for under the equity method. Future financial
reporting will consolidate these assets and operations.
At December 31, 1993, Bancorp and its subsidiaries employed 4,424 persons on
a full-time or part-time basis.
The following is a description of each of Bancorp's subsidiaries.
Bank of Hawaii was organized under the laws of Hawaii on December 17, 1897,
and has been continuously in business since. Its headquarters are in Honolulu,
Hawaii, and its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC). It is not a member of the Federal Reserve System.
Bancorp and the 19 directors of Bank of Hawaii (each of whom holds 125
qualifying shares) own 100% of the outstanding shares.
Bank of Hawaii provides customary commercial banking services through branch
offices in the State of Hawaii and branches or representative offices in
American Samoa, Bahamas (Nassau), Commonwealth of the Northern Mariana Islands
(Saipan), Federated States of Micronesia (Pohnpei, Kosrae, and Yap), Guam, Hong
Kong, Japan (Tokyo), Korea (Seoul), Philippines (Manila, Davao, and Cebu),
Republic of Fiji (Suva), Republic of Palau (Koror), Republic of the Marshall
Islands (Majuro), Singapore, and Taiwan (Taipei). Bank of Hawaii also has
affiliates in New Caledonia, Tahiti, Tonga, Vanuatu and Western Samoa.
Bank of Hawaii owns all of the outstanding stock of Hawaiian Trust Company,
Limited; Bancorp Leasing of Hawaii, Inc.; Bank of Hawaii International, Inc.;
Bank of Hawaii International Corporation, New York; Bankoh Investment Advisory
Services Limited; American Financial Services, Inc.; Realty and Mortgage
Investors of the Pacific, Limited and Hawaiian Hong Kong Holdings, Ltd. The
operations of Bankoh Corporation were merged into the Bank and Bankoh
Corporation was dissolved in December 1993. A brief discussion of each of the
Bank's other subsidiaries follows:
Hawaiian Trust Company, Limited (HTCo) was acquired by Bancorp in 1985. HTCo
was incorporated in Hawaii on August 10, 1898. It offers trust services
primarily in Hawaii and Guam. In 1987, Bancorp contributed the stock of HTCo to
Bank of Hawaii after receiving approval to do so from the appropriate
regulatory agencies. As a result, HTCo became a wholly owned subsidiary of Bank
of Hawaii. At year-end 1993, trust assets under administration were $8.4
billion for HTCo.
1
Bancorp Leasing of Hawaii, Inc. (BLH), formed in 1973, provides leasing and
leasing services, mainly to the commercial sector in Hawaii. BLH has several
subsidiaries that are "specific purpose leasing vehicles." These subsidiaries
include Bankoh Equipment Leasing Corporation; S.I.L., Inc.; and Arbella
Leasing Corporation. In 1990, BLH organized two new subsidiaries, Bancorp
Leasing of America, Inc., and Bancorp Leasing International, Inc., to
segregate U.S. mainland and international leasing activities. Bancorp Leasing
of America, Inc. remains inactive. On a consolidated basis, BLH's assets
represented 1.1% of Bancorp's total assets at year-end 1993.
Bank of Hawaii International, Inc. (BOHI) was formed in 1968. BOHI holds
equity interests in the following foreign financial institutions (in the
percentages indicated): Bank of Tonga--30%; Banque de Nouvelle Caledonie, New
Caledonia--21%; Banque de Tahiti--38%; Pacific Commercial Bank, Limited,
Western Samoa--43%; and Hawaii Financial Corporation (Hong Kong) Limited--
100%, which is a registered deposit-taking company and owns 100% of Bonsphere,
Ltd., a trade re-invoicing company. In 1993, BOHI acquired 80% of Banque
Indosuez Vanuatu, Limited whose name was immediately changed to Banque
d'Hawaii (Vanuatu), Limited. BOHI's total assets represented 1.1% of Bancorp's
total assets at year-end 1993.
Bank of Hawaii International Corporation, New York (BOHICNY), was organized
in 1982 as an Edge Act corporation. Bank of Hawaii International Corporation,
New York, provides payment, clearing, and settlement services with the New
York Clearing House and Clearing House Interbank Payment Service (CHIPS) for
both affiliated and unaffiliated banks. BOHICNY had total assets representing
0.8% of Bancorp's total assets at year-end 1993.
Bankoh Investment Advisory Services, Limited (formerly known as Bankoh
Advisory Corporation) was reactivated in 1991 to provide advisory services for
businesses seeking to operate in Hawaii. The activity of this company has been
very limited during the year.
Hawaiian Hong Kong Holdings, Ltd. was incorporated in 1984 to acquire
certain foreign real estate expected to be obtained through foreclosure. The
transaction never took place and the company remains inactive.
Realty and Mortgage Investors of the Pacific, Limited (RAMPAC), a wholly
owned subsidiary, was organized in 1992. Its activity is focused on commercial
real estate lending in Hawaii, but does not accept deposits. Total assets at
year-end 1993 were $82.8 million.
Bancorp also holds all of the outstanding stock, except as noted, of the
corporations listed below:
Bancorp Pacific, Inc., formerly known as FirstFed America, Inc., was
incorporated under Delaware law in July 1986 for the purpose of becoming a
savings and loan holding company to own the outstanding stock of First Federal
Savings and Loan Association (First Federal) upon its conversion from a
federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association.
Bancorp Pacific Inc.'s only significant business is conducted through its
wholly owned subsidiary, First Federal, and First Federal's second-tier
subsidiary, First Savings and Loan Association of America (First Savings).
First Federal, a federally chartered stock savings and loan association, has
been in operation since 1904. First Federal in 1978 merged with Island Federal
Savings and Loan Association of Honolulu, Hawaii, and during the 1980s
acquired several smaller savings and loan associations. First Federal operates
24 full service offices throughout Hawaii. Its deposits are also insured by
the FDIC. Total assets for First Federal represented 7.9% of Bancorp's total
assets at year-end 1993.
First Savings operates in a market area that includes the entire island of
Guam and the island of Saipan in the Commonwealth of the Northern Mariana
Islands (located approximately 120 miles northeast of Guam). First Savings
operates three full-service offices in Guam and one in Saipan. Its deposits
are insured
2
by the FDIC. The stock of Bancorp Finance of Hawaii--(Guam), Inc. (BFH-Guam)
was contributed to First Savings in 1991. BFH-Guam, which changed its name from
Bankoh Finance, Inc., in 1984, was formed in 1979 through the purchase of the
assets of an industrial loan company based in Guam. BFH-Guam has deposit-taking
authority under Guam law, but in 1984, BFH-Guam discontinued accepting new
deposits and has had no deposit liabilities since 1987. On a consolidated
basis, First Savings' assets represented 1.2% of Bancorp's total assets.
First National Bank of Arizona (FNBA) was acquired by Bancorp in October
1987. Bancorp and the directors of FNBA (each of whom holds 1,000 qualifying
shares) own 100% of the outstanding shares of FNBA. FNBA was organized under
the laws of the United States. Its deposits are insured by the FDIC, and it is
a member of the Federal Reserve System. FNBA provides customary commercial
banking services through four branch offices located in the State of Arizona.
FNBA had total assets representing 0.7% of Bancorp's total assets at year-end
1993.
Bancorp Life Insurance Company of Hawaii, Inc., was incorporated in 1981 in
the State of Arizona to underwrite as a reinsurer the credit life and credit
accident and health insurance sold in conjunction with Bank of Hawaii's short-
term consumer lending activities. Bancorp Insurance Agency of Hawaii, Inc., was
formed in 1982 to act as an agent for the sale of all credit life and credit
accident and health insurance that is reinsured with Bancorp Life Insurance
Company of Hawaii, Inc.
In 1989, Bancorp established a wholly owned captive insurance company,
Bancorp Hawaii Insurance Services, Ltd. (BHISL). With BHISL's formation,
Bancorp became the first Hawaii corporation to establish a Hawaii captive
insurance company for its self-insurance needs. BHISL provides bankers
professional liability insurance exclusively to Bancorp and its subsidiaries
and affiliates. In 1992, BHISL began providing workers compensation insurance
for Bancorp and its subsidiaries. BHISL's formation provides Bancorp with
greater flexibility and stability in controlling insurance coverages and
premium costs. BHISL also provides Bancorp with the opportunity to design self-
insurance programs not otherwise available in the conventional insurance
market.
Bancorp Hawaii Small Business Investment Company, Inc., was formed in
September 1983 in the State of Hawaii as a small business investment company.
Its investment and lending activities were very limited in 1993.
Bancorp Investment Group, Limited was formed in 1991 to provide full service
brokerage and other investment services. The Federal and State regulatory
approvals were received and the company has been operational since February of
1992.
Other Bancorp subsidiaries remained inactive in 1993. These subsidiaries are
Bancorp Business Systems of Hawaii, Inc., Bancorp Hawaii Service Corp., Bancorp
Investment Advisory Services, Inc., and Investors Pacific Limited. These
subsidiaries are expected to be dissolved in 1994.
REGULATION AND COMPETITION
EFFECT OF GOVERNMENTAL POLICIES
The earnings of Bancorp and its principal subsidiaries are affected not only
by general economic conditions, both domestic and foreign, but also by the
monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve System, and foreign governments and their
agencies. The monetary policies of the Federal Reserve System influence to a
significant extent the overall growth of loans, investments, deposits, interest
rates charged on loans, and interest rates paid on deposits. The nature and
impact of future changes in monetary policies are often not predictable.
Flexibility is a key attribute in successfully responding to these varied
forces.
3
COMPETITION
The financial services industry has become highly competitive. Bancorp, Bank
of Hawaii, and First Federal compete with local financial institutions as well
as institutions located in the major financial centers of the world. Such
financial institutions include not only banks and savings associations, but
also insurance companies, brokerage houses, mortgage companies, merchandise
retailers, consumer finance companies, credit unions, and diversified
financial services companies that provide many or all of the services offered
by commercial banks and savings institutions but operate without a banking
charter and thus free of most of the associated regulatory requirements.
The State of Hawaii is served by eight commercial banks, six savings
associations, approximately one dozen deposit-taking financial services loan
companies, approximately 130 credit unions, and scores of mortgage companies
and other financial services firms as noted previously. The State is also
served by a large number of out-of-state institutions and foreign banks. Bank
of Hawaii is the largest Hawaii based financial services firm operating in the
market. Outside of Hawaii, Bank of Hawaii's primary competition in the Pacific
Basin comes from several major U.S. mainland and foreign banks that operate in
those areas. First Federal is the third largest savings association in Hawaii.
There is no assurance that additional financial institution holding
companies or their subsidiaries will not enter markets served by Bancorp and
thereby provide additional competition. Likewise, there is no assurance that
if Bancorp, Bank of Hawaii, First Federal, and their subsidiaries pursue
additional business opportunities, they will not encounter significant
competition from other businesses, including ones not associated with banks or
financial institution holding companies.
SUPERVISION AND REGULATION
Bancorp is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), and as such, is subject to
the Act and regulations promulgated thereunder by the Board of Governors of
the Federal Reserve System (the "Board of Governors").
The BHC Act requires prior approval of the Board of Governors of the
acquisition by Bancorp of more than 5% of the voting shares of any bank or any
other bank holding company. As applied to Bancorp, the BHC Act also prohibits
the acquisition of more than 5% of the stock of Bancorp by a bank holding
company whose operations are principally conducted in a state other than
Hawaii, and the acquisition by Bancorp of more than 5% of the stock of any
bank located in a state other than Hawaii unless the statutory law of the
state in which such bank is located specifically authorizes such acquisition
by language to that effect (as, for example, does Arizona) and not merely by
implication. Certain aspects of this prohibition may be relaxed in the event
of supervised takeovers of troubled financial institutions under the Federal
Deposit Insurance Act. Also, various proposals are currently under
consideration in the United States Congress (and, with respect to the
acquisition of more than 5% of the stock of banks and bank holding companies
located in Hawaii, in the Hawaii Legislature) to ease or eliminate this
prohibition, but it is not possible to predict at the present time whether any
of these proposals will become law.
The BHC Act also prohibits, with certain exceptions, Bancorp from acquiring
direct or indirect ownership or control of more than 5% of the voting shares
of any company that is not a bank or bank holding company and from engaging
directly or indirectly in any activity other than those of banking, managing
or controlling banks or other subsidiaries authorized under the Act, or
furnishing services to or performing services for its subsidiaries. Among the
permitted activities is the ownership of shares of any company the activities
of which the Board of Governors determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
such determination, the Board of Governors is required to weigh the expected
benefits to the public, such as greater convenience, increased competition, or
gains in efficiency, against the risks of possible adverse effects, such as
undue concentration of resources, decreased or unfair competition, conflicts
of interest, or unsound banking practices. The Board of Governors has adopted
regulations (Reg. Y, as amended) that specify various activities as being so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. The exact nature and scope of such activities has been the
subject of intense national debate, and thus, they may change and become more
broad as they evolve over time.
4
A significant expansion of the scope of such activities occurred in 1989
when Congress enacted the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"). FIRREA expanded the authority of bank
holding companies to acquire savings associations, subject to approval by the
Board of Governors. In accordance with FIRREA, bank holding companies may
acquire healthy as well as failed or failing savings associations in any
state, without regard to whether the bank holding company can operate a bank
in that state.
In addition to restructuring the regulation of the savings and loan industry
and its deposit insurance and to providing a new regulatory structure for the
resolution of troubled and insolvent savings associations, FIRREA contained
several provisions that affect commercial banks, including provisions that,
among other things, increase the insurance premiums paid by FDIC-insured
institutions, enhance federal banking agencies' enforcement authority over the
operations of all insured institutions, increase civil and criminal penalties
that may be imposed in connection with violations of laws and regulations, and
permit the FDIC to impose cross-guarantee liability on insured institutions
for any cost or loss incurred by the FDIC in connection with the default by,
or assistance to, a commonly controlled institution.
By virtue of Section 23A of the Federal Reserve Act and Section 18(j) of the
Federal Deposit Insurance Act, Bancorp and its subsidiaries are "affiliates"
of Bank of Hawaii and FNBA and are subject to the provisions of Section 23A,
which limit the amount of and require substantial security for loans and
extensions of credit by Bank of Hawaii or FNBA to, and investments in, Bancorp
or certain of its subsidiaries and the amount of advances to third parties
collateralized by the securities and obligations of Bancorp or certain of its
subsidiaries. The general purpose of Sections 23A and 18(j) is to assure that
the capital of depository institutions such as Bank of Hawaii and FNBA is not
put at risk to support their non-bank affiliates. A similar provision, Section
11 of the Home Owners' Loan Act, subjects the thrift subsidiaries of Bancorp
to essentially the same limitations in their transactions with their
"affiliates," including Bancorp.
Bank of Hawaii is subject to supervision and examination by the FDIC and the
Department of Commerce and Consumer Affairs of the State of Hawaii. FNBA is
subject to supervision and examination by the Comptroller of the Currency and
the FDIC.
Bancorp Pacific, as a savings and loan holding company, is subject to the
regulatory supervision of the Office of Thrift Supervision ("OTS"), and its
thrift subsidiaries are subject to the regulatory supervision of the OTS and
in certain respects the FDIC.
As owner of all of the stock of Bancorp Pacific, Bancorp is itself
registered with the OTS as a savings and loan holding company and in such
capacity is subject to various OTS regulations, examinations, and reporting
requirements.
The Home Owners' Loan Act and regulations promulgated thereunder generally
prohibit a savings and loan holding company, directly or indirectly, or
through one or more subsidiaries, from (i) acquiring control of, or acquiring
by merger or purchase of assets, an insured savings institution or holding
company thereof, without prior written OTS approval; (ii) acquiring more than
5% of the voting shares of an insured savings institution or holding company
thereof that is not a subsidiary; or (iii) acquiring or retaining control of
an uninsured savings institution. No director or officer of a savings and loan
holding company or person owning or controlling, by proxy or otherwise, more
than 25% of such holding company's voting shares, may, except with the prior
written approval of the OTS, acquire control of an insured savings association
that is not a subsidiary of such holding company.
Savings associations, including First Federal, are subject to extensive
federal regulations that significantly affect their business and activities.
In general, savings associations must file reports with the OTS concerning
their activities and financial condition and obtain regulatory approval to
enter into certain transactions. Savings associations are also subject to
periodic OTS examinations to ascertain compliance with various regulatory
requirements. Other applicable statutes and regulations relate to insurance of
deposits, allowable investments, loans, payments of dividends, capital
requirements, reserves against deposits, establishment of branches,
limitations on loans to one borrower, limitations on credit to subsidiaries
and other transactions with affiliates, and other aspects of the business of
savings associations.
5
FIRREA provides for separately funded and maintained deposit insurance funds
operated and administered by the FDIC for savings associations and banks. The
Savings Association Insurance Fund ("SAIF") was established by FIRREA and
generally insures the deposits of savings associations, which were insured by
the Federal Savings and Loan Insurance Corporation prior to the enactment of
FIRREA. The Bank Insurance Fund ("BIF") insures the deposits of banks, which
were insured by the FDIC prior to the enactment of FIRREA. Congress adopted
legislation in 1991 to permit the FDIC to increase assessment rates for
insured banks and to levy emergency special assessments against insured
institutions. In response, the FDIC adopted a risk-based premium schedule
which has increased the assessment rates for most FDIC-insured depository
institutions. The premiums range from $.23 to $.31 for every $100 of deposits.
The actual assessment rate applicable to a particular institution depends in
part upon the risk classification assigned to the institution by the FDIC. The
FDIC may raise insurance premiums or terminate insurance altogether upon a
finding that the institution has engaged in unsafe and unsound practices. The
United States Congress may consider further measures in the future to
strengthen the insurance funds administered by the FDIC or to defray the costs
of FDIC operations, or for other purposes. Implementation of such measures may
result in further increases to assessment rates as well as further
modifications in the extent or nature of insurance coverage.
In addition, FIRREA requires that the capital standards for savings
associations be no less stringent than the capital standards applicable to
national banks and further restricts the investment authority and business
activities of savings associations in connection with loans to one borrower,
nonresidential real property loans, investments in high-yield corporate bonds,
activities of subsidiaries, and acceptance of brokered deposits. FIRREA, as
amended by the Qualified Thrift Lender Reform Act of 1991, requires that, on a
monthly average basis in nine out of every twelve months, 65% of the
"portfolio assets" of a savings association be investments in the form of
certain home mortgage loans and consumer-related assets or alternatively, the
institution either convert to a bank charter or face severe restrictions
regarding operations. None of the foregoing restrictions is expected to have a
material effect on the operations of Bancorp Pacific as it is operated.
The Federal Deposit Insurance Corporation Improvements Act of 1991
("FDICIA") requires the federal banking regulators to take "prompt corrective
action" in respect of depository institutions that do not meet minimum capital
requirements and imposes certain restrictions upon banks which meet minimum
capital requirements but are not "well capitalized" for purposes of FDICIA.
FDICIA establishes five capital tiers: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Implementing regulations adopted by the federal
banking agencies define the capital categories which will determine the
necessity for prompt corrective action by the federal banking agencies. A
depository institution may be deemed to be in a capitalization category that
is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. In addition, undercapitalized depository institutions are
required to submit capital restoration plans including limited guarantees from
their holding companies. Undercapitalized institutions are subject to
regulatory monitoring and may be required to divest themselves of or liquidate
subsidiaries under certain circumstances. Holding companies of such
institutions may be required to divest themselves of such institutions or
divest themselves of or liquidate nondepository affiliates under certain
circumstances. Critically undercapitalized institutions are also prohibited
from making payments of principal and interest on debt subordinated to the
claims of general creditors and are generally subject to the mandatory
appointment of a conservator or receiver.
Further, a bank that is not well capitalized is generally subject to various
restrictions on "pass through" insurance coverage for certain of its accounts
and is generally prohibited from accepting brokered deposits and offering
interest rates on any deposits significantly higher than the prevailing rate
in its normal market area or nationally (depending upon where the deposits are
solicited). Such banks and their holding companies are also required to obtain
regulatory approval prior to their retention of senior executive officers.
6
FDICIA (as modified by the Housing and Community Development Act of 1992)
also contains provisions which restrict investments and activities as
principal by state nonmember banks (including Bank of Hawaii) to those
eligible for national banks, and require the federal banking regulators to
prescribe or modify standards for extensions of credit secured by real estate
or made for the purpose of financing construction of a building or other
improvements to real estate, loans to bank insiders, regulatory accounting and
reports, internal control reports, independent audits, and other matters, and
to require that insured depository institutions generally be examined on-site
by federal or state personnel at least once every twelve months.
The Depository Institutions Disaster Relief Act of 1992 affords the federal
banking agencies limited discretion to provide relief from certain regulatory
requirements to depository institutions doing business or seeking to do
business in an emergency or major disaster area.
The Omnibus Budget Reconciliation Act of 1993 affects the amortization of
intangible assets by banks, requires securities dealers (including banks) to
adopt mark-to-market accounting with respect to certain of their securities in
calculating income taxes, and establishes a preference for depositors in
liquidations of FDIC-insured banks.
Bills are now pending or expected to be introduced in the United States
Congress that contain proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. If enacted
into law, these pending bills could have the effect of increasing or
decreasing the cost of doing business, limiting or expanding permissible
activities (including activities in the insurance and securities fields), or
affecting the competitive balance among banks, savings associations, and other
financial institutions. Some of these bills would reduce the extent of federal
deposit insurance, broaden the powers or the geographical range of operations
of bank holding companies, modify interstate branching restrictions applicable
to national banks, regulate bank involvement in derivatives activities, and
realign the structure and jurisdiction of various financial institution
regulatory agencies. Whether or in what form any such legislation may be
adopted or the extent to which the business of Bancorp might be affected
thereby cannot be predicted.
ITEM 2. PROPERTIES
Note D to the Audited Financial Statements on pages 51 to 52.
ITEM 3. LEGAL PROCEEDINGS
Note J to the Audited Financial Statements on page 55.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1993 to a vote of
security holders through the solicitation of proxies or otherwise.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Listing
The common stock of Bancorp Hawaii, Inc., is traded over the counter on the
New York Stock Exchange and quoted daily in leading financial publications.
NYSE Symbol: BOH
Market Prices, Book Values, and Common Stock Dividends--Table 2 on page 10.
ITEM 6. SELECTED FINANCIAL DATA
Year-End Summary--Table 22 on page 38.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PERFORMANCE HIGHLIGHTS
Bancorp Hawaii, Inc. (Bancorp) reported earnings of $132.6 million for 1993,
marking the 17th consecutive year of increased earnings. Earnings for 1993
were 4.0% above 1992 income of $127.5 million.
On January 26, 1994, Bancorp's Board of Directors declared a 50% stock
dividend to shareholders of record February 17, 1994 payable on March 15,
1994. The per share information throughout this report has been restated to
reflect this dividend. In addition, an increase of 13% for the pre-split
quarterly dividend was also declared. Earnings per share were $3.09, compared
with $3.00 and $2.69 for 1992 and 1991, respectively. The increase in earnings
per share was 3.0% over 1992. The increase reported between 1991 and 1992 was
11.4%. Growth in earnings per share was adversely affected primarily by
additional provisions for loan losses, higher funding costs as compared to
asset yields, and to a lesser degree, by the slowed Hawaii economy. The
additional provisions for loan losses were recorded mainly due to the
circumstances surrounding loans secured by certain commercial leasehold
property (details can be found in the following Risk Elements section).
The challenges that Bancorp faced during 1993 have abated somewhat, but
forecasts for 1994 remain modest. As the economy improves, Bancorp will
continue to focus on asset quality, productivity and cost control to maintain
its high performance objectives.
Bancorp's objective for return on average assets (ROAA) is a minimum of
1.00%. For 1993, ROAA was 1.05% compared to 1.10% and 1.04% for 1992 and 1991,
respectively. The objective for return on average equity (ROAE) is a minimum
of 16.00%. Bancorp fell short of this objective with a ROAE of 14.85% for
1993, compared to 16.25% and 16.50% for 1992 and 1991, respectively. This
shortfall reflects the slowdown in earnings and earning asset growth, as well
as, the accumulation of capital.
A balance to these two objectives is the ratio of average equity to average
assets target of 6%. Bancorp's 1993 ratio was 7.09%, compared to 6.74% and
6.31% for 1992 and 1991, respectively, reflecting an accumulation of capital
presently faster than the growth in earning assets. These objectives were
originally established in 1979 and over the years have been ratios indicative
of a high performing bank. Prior to 1993, Bancorp consistently met all of
these objectives, but the measures of performance over the last few years have
changed. Although those changes may eventually require a reassessment of the
high performance standards, only sustainability over the long term will
determine whether the measures of high performance have changed. Therefore,
our targets have been reestablished for Bancorp in 1994.
Total consolidated assets at year-end 1993 stood at $12.5 billion, a
decrease of 1.6% from year-end 1992. Decreased assets were reported in
interest bearing deposits, which are mainly Eurodollar placements. As rates
have remained low, the interest margin in this activity has narrowed.
Investment securities have increased to $3.6 billion supported by the increase
in Securities Sold under Agreements to Repurchase (see Liquidity Management
section for further discussion).
Total loans increased 4.2% from year-end 1992 to $7.3 billion at year-end
1993. Bancorp has historically maintained a level of non-performing assets
(NPA) to outstanding loans under 1% of total loans. In 1992, the ratio grew to
1.34% and Bancorp increased its emphasis on monitoring and aggressively
managing NPA. At year-end 1993, NPA were $68.8 million, representing 0.95% of
total loans. The improvement for 1993 reflects the results of this aggressive
management via the large charge-off of the non-performing credit involving the
commercial leasehold property recognized in the third quarter. The details of
that transaction are included in the Risk Elements section following.
Deposits and Securities Repurchase Agreements (Repos) totaled $9.5 billion
as of December 31, 1993, a decrease of 5.9% from the year-end 1992 total of
$10.1 billion. The mix of deposits and Repos has changed with Repos increasing
and deposits decreasing. The Repo program, which began in 1991, shifts
governmental
9
entities from deposits to Repos. A further discussion of this program appears
in the Liquidity Management section. Non-interest and interest bearing demand
deposits stood at $3.3 billion at year-ends 1993 and 1992. Savings deposits
stood at $1.3 billion as of December 31, 1993, an increase of 7.2% from year-
end 1992. Time deposits have declined to $1.6 billion from $2.2 billion at
year-end 1992. The current low interest rate environment has caused depositors
to seek higher yielding investments.
PERFORMANCE HIGHLIGHTS
TABLE 1
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
1993 1992 1991
------------------ ------------------ ---------
FIVE-
YEAR
PERCENT PERCENT COMPOUND
EARNINGS MEASURES AMOUNT CHANGE AMOUNT CHANGE AMOUNT GROWTH
----------------- --------- ------- --------- ------- --------- --------
Net Income.............. $ 132.57 + 4.0% $ 127.52 13.2% $112.69 +12.1%
Earnings Per Common
Share(1)............... 3.09 + 3.0 3.00 11.5 2.69 + 8.0
Average Assets.......... 12,585.8 + 8.1 11,645.0 7.6 10,826.20 +16.1
Average Loans........... 6,991.0 + 5.9 6,601.9 1.8 6,484.10 +14.0
Average Deposits........ 7,532.4 -10.5 8,417.7 -2.5 8,630.70 + 8.4
Average Shareholders'
Equity................. 892.9 +13.8 784.6 14.9 682.90 +18.8
FIVE-YEAR
PERFORMANCE RATIOS OBJECTIVE 1993 1992 1991 AVERAGE
------------------ --------- ------- --------- ------- ---------
Return on Average As-
sets................... 1.0% 1.05% 1.10% 1.04% 1.07%
Return on Average Equi-
ty..................... 16.0 14.85 16.25 16.50 16.52
Average Equity to Aver-
age Assets Ratio....... 6.0 7.09 6.74 6.31 6.52
Loss Reserve to Loans
Outstanding............ 1.76 1.89 1.74 1.74
Tier I Capital Ratio.... 6.0 10.79 10.23 9.27
Total Capital Ratio..... 10.0 13.60 11.49 10.53
Leverage Ratio Require-
ment................... 5.0 6.89 6.37 6.17
- --------
(1) Adjusted for 50% stock dividend declared January 26, 1994.
MARKET PRICES, BOOK VALUES AND COMMON STOCK DIVIDENDS(1)
TABLE 2
MARKET PRICE (MP) RANGE HIGH MP AS
----------------------------- A PERCENT
YEAR HIGH LOW BOOK VALUE (BV) OF BV DIVIDEND
---- ------ ------ --------------- ---------- --------
1989.......................... $25.25 $15.55 $12.98 195% $.59
1990.......................... $24.55 $14.00 $15.38 160 $.70
1991.......................... $31.83 $18.89 $17.45 182 $.78
1992.......................... $34.67 $26.83 $19.68 176% $.85
First Quarter............... 34.67 29.17 .20
Second Quarter.............. 32.67 27.59 .21
Third Quarter............... 31.83 27.59 .22
Fourth Quarter.............. 30.83 26.83 .22
1993.......................... $35.92 $26.67 $22.00 163% $.90
First Quarter............... 35.92 28.83 .21
Second Quarter.............. 35.59 28.42 .23
Third Quarter............... 30.17 26.67 .23
Fourth Quarter.............. 30.00 26.75 .23
- --------
(1) Adjusted for 50% stock dividend declared January 26, 1994.
10
Established in 1991, Bancorp Investment Group, Limited provides full
brokerage services to assist customers seeking such alternative investments. In
November 1993, Bancorp introduced its family of proprietary mutual funds,
Pacific Capital Funds, for which Hawaiian Trust Company, Limited (HTCo) is the
investment advisor. At year-end 1993, these funds, consisting of one stock
fund, two fixed income funds, along with a companion group of funds (begun
several years prior), consisting of three money market funds totaled $600
million. Including the Hawaiian Tax Free Trust, the funds for which HTCo is the
investment advisor was $1.3 billion at year-end 1993. Other non-traditional
investment products, such as annuities, continue to grow and meet customer
needs.
BANCORP'S MARKETS
Bancorp's largest market is its operations in Hawaii. Growth of the Gross
State Product (GSP) is forecasted to be flat for 1993, with 1994 forecasts
ranging from a zero percent to 0.5 percent increase. A major segment of the
economy is tourism. According to the Hawaii Visitors Bureau, total visitor
arrivals through November of 1993 were 5.6 million, of which 61.7% were
visitors Westbound (mainly from the U.S. Mainland) and 38.3% were Eastbound
visitors (mainly from Japan). These arrival numbers represent a 6.3% decline
from 1992. As a corollary, the number of visitor days (calculated using visitor
counts and length of stay) on a year-to-date basis was down 4.0% from 1992.
However, Eastbound visitor days have increased 0.5% in 1993. The visitor days
calculation is an important statistic in that it includes both visitor counts
and length of stay; it can be used to indicate visitor expenditure trends.
Hawaii Visitors Bureau forecasts for the visitor industry in 1994 remain
modest, with total arrivals expected to remain close to 1993 levels and a
slight increase in visitor expenditures.
Another segment of the Hawaii economy is Federal expenditures. Federal
expenditures for 1993 are estimated to be $6.7 billion, an increase of 5.6%
compared to 1992 expenditures. Federal expenditures are segmented into defense
and non-defense spending. The announced closure of the Barbers Point Naval Air
Station on Oahu, with approximately 3,200 military personnel, is not expected
to have a material impact on the defense segment. The short term outlook for
this segment is stable. While 1993 federal defense expenditures are expected to
remain close to 1992 levels, federal non-defense expenditures are estimated to
total $3.8 billion, a 5.0% increase compared to 1992 expenditures of $3.6
billion. Included in this segment are federally funded activities such as the
Pacific regional headquarters for the social security system, the FAA, the IRS,
as well as grant programs and direct benefit payments.
Another noteworthy statistic in the Hawaii market includes the continuation
of one of the lowest unemployment rates in the nation, 4.0% reported for
November 1993. Although a low unemployment rate is generally positive, this low
rate also places a strain on the pool of available labor and creates a
challenge for Bancorp's effort to control costs and emphasize productivity.
The rebuilding efforts on the island of Kauai, where Hurricane Iniki hit in
September, 1992 have progressed well. Several hotels have reopened and tourist
counts are improving. The funding from insurance and governmental agencies to
help with the reconstruction activity will be economically positive over the
next several years.
Bancorp also operates in the Intra-Pacific region, which includes the island
nations in the South and West Pacific. This market has shown marked growth in
the last few years. One of Bank of Hawaii's largest branches and First Savings
and Loan Association of America, a subsidiary of Bancorp Pacific, Inc., are
located in Guam where increased visitor industry and economic development has
led to more demand for financial services. In November, Bank of Hawaii,
Bancorp's lead bank opened a branch in Suva, Fiji. Bank of Hawaii is currently
the only U.S. bank to operate a branch in Fiji and plans are already in place
to expand the number of branches. In December, Bank of Hawaii received all
necessary approvals, and finalized the acquisition of Banque Indosuez Vanuatu,
Ltd. The 80% owned bank has been renamed Banque d'Hawaii (Vanuatu), Ltd.
Bancorp's management continues to seek out opportunities in this market area
and be a part of the economic growth occurring in this part of the world.
11
The Asian Rim is another Bancorp market area where assets totaled $706.9
million at year-end 1993. Bank of Hawaii's Taiwan office reported its first
full year of operations in 1993 and has exceeded expectations in building
Bancorp's trade activities. In Korea, applications have been submitted to open
a second branch in Taegu to complement our Seoul Branch. Bancorp's emphasis in
the Asian Rim is mainly trade oriented. Trade financing activity typically
involves the flow of funds from letters of credit to the ultimate collection.
Bancorp handles transactions for both import and export customers. Fee income
from these activities continues to grow.
The activities in the U.S. Mainland market have been elevated as loan
opportunities are pursued. Bancorp continues to focus on industry niches such
as media and communication as well as companies with a Pacific business
orientation. In 1993, the focus was expanded to include Fortune 1000
companies. In this expansion, Bancorp's strict lending standards remain in
force and are not being sacrificed for loan growth. The new business generated
in 1993 is reflected, not only in the outstandings, but also in commitments
for lines of credit. Total outstandings for the U.S. Mainland at year-end 1993
were $1.3 billion, a 3.0% increase from year-end 1992.
SUBSIDIARY ACTIVITY
Bank of Hawaii is the largest of Bancorp's subsidiaries. Bank of Hawaii
reported total assets of$11.3 billion at year-end 1993, 90.6% of Bancorp's
total assets. Since Bank of Hawaii represents a large component of Bancorp,
the discussion following largely reflects the Bank's operations.
The blending of the recently acquired American Financial Services, Inc.
(AFS) into HTCo continues to proceed smoothly. The integration of accounting
systems, trust procedures and staff have progressed ahead of schedule. The
critical mass of assets under administration has reached a combined $11.1
billion and allows more flexibility of product offerings.
Bancorp Pacific, Inc. (formerly known as FirstFed America, Inc.), a thrift
subsidiary, continues to be a strong contributor to Bancorp's earnings through
its subsidiary First Federal Savings and Loan Association of America (First
Federal). First Federal's earnings for 1993 were $18.9 million, an increase of
1.6% from 1992's total earnings of $18.6 million. This was accomplished with
an asset base of $1.0 billion at year-end 1993, which translates into ROAA of
1.93%. At year-end 1993, First Federal reported a total risk-based capital
ratio of 22.2%, which far exceeds statutory minimums and peer savings and loan
companies. Credit quality remained strong, with NPA of only 1.47% of total
loans outstanding (primarily secured by residential real estate) and a reserve
ratio of 1.04% of outstanding loans at year-end 1993.
First National Bank of Arizona (FNBA) reported improved results during 1993,
driven by improved loan quality. Net income for 1993 was $735,000, compared to
$75,000 for 1992. Lending activity at FNBA in Arizona has been strong. Total
loans have grown to $87.5 million at year-end 1993. The focus on lending in
Arizona remains in the commercial/small business area. NPA as a percent of
total loans outstanding were 1.83% at year-end 1993 compared to 4.0% at the
end of 1992. The ratio of reserves to loans outstanding remained strong at
9.64% at year-end 1993, compared to 9.87% at year-end 1992. FNBA's total risk-
based capital ratio remained strong at 10.69%.
The following sections will cover in more detail Bancorp's performance and
activities during 1993. The areas that will be covered include:
Risk Elements Involved in Lending Activities
Asset-Liability Management
Capital Adequacy
Interest Rate Risk
Liquidity Management
Control of Net Overhead
Income Taxes
Fourth Quarter Results
12
RISK ELEMENTS INVOLVED IN LENDING ACTIVITIES
RISK PROFILE OF LENDING ACTIVITY
The lending environment over the last year has been challenging. The
lackluster economic recovery on the U.S. Mainland, the slowed Hawaiian economy
and the financial restructuring in Japan have all affected Bancorp's lending
activities. The effects are evident in two elements: the slowed rate of
increase of the loan portfolio and the level of NPA. The slow economic recovery
on the U.S. Mainland has resulted in an interesting set of challenges that
Bancorp faces, along with many financial institutions across the nation. U.S.
Mainland lending opportunities focused on Fortune 1000 companies are being
pursued in various regions of the U.S. At year-end 1993, $1.3 billion, or 17.3%
of Bancorp's total loan portfolio was to U.S. Mainland based companies as
compared to $1.2 billion at year-end 1992 and $1.1 billion at year-end 1991.
Many of these companies are active in Hawaii and the Pacific.
In 1993, certain sections of the loan portfolio saw increased activity and
growth. Mortgage lending, both commercial and residential, reported good growth
with residential loan volume very brisk, as both refinancing and new loan
activity continued in 1993. Realty and Mortgage Investors of the Pacific,
Limited (RAMPAC), a subsidiary of Bank of Hawaii formed in 1993, had a
portfolio of $75.5 million at year-end 1993, mainly in the mortgage-commercial
category. The loans booked by RAMPAC carry a relatively higher risk, and
therefore bear enhanced yields. All are secured by real estate in Hawaii. The
loans typically allow for some form of shared profits based on the performance
of the property or its ultimate sale. Utilizing a separate subsidiary for this
operation allows for closer monitoring and eventual sale, if appropriate.
Table 3 presents the year-end balances broken down into the various loan
categories. The mix of loans in Bancorp's portfolio has changed. At year-end
1993, real estate loans made up 53.4% of the total compared with 49.4% at year-
end 1992. At year-end 1993, mortgage-residential loans represented 34.1% of
total loans, while mortgage-commercial loans represented 17.0% of total loans.
Table 4 presents the geographic distribution of the loan portfolio based on the
major markets in which Bancorp operates.
LOAN PORTFOLIO BALANCES
TABLE 3
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic Loans
Commercial and Industrial....... $1,709.2 $1,864.1 $1,746.9 $1,639.8 $1,536.4
Real Estate
Construction--Commercial........ 136.2 220.2 229.4 205.6 177.4
--Residential....... 35.1 40.4 42.0 69.3 42.4
Mortgage--Commercial............ 1,230.6 991.9 1,021.9 952.4 783.2
--Residential........... 2,476.0 2,189.1 2,003.5 1,937.3 1,086.1
Installment..................... 676.2 655.9 651.3 712.0 665.2
Lease Financing................. 401.6 393.4 357.1 341.5 289.6
-------- -------- -------- -------- --------
Total Domestic................ 6,664.9 6,355.0 6,052.1 5,857.9 4,580.3
Foreign Loans
Government and Official
Institutions................... -- -- -- 0.4 2.8
Bank and Other Financial
Institutions................... 295.8 285.6 384.3 390.9 132.2
Commercial and Industrial....... 259.4 288.5 284.6 234.9 178.0
All Others...................... 38.3 34.5 38.1 29.1 83.1
-------- -------- -------- -------- --------
Total Foreign................. 593.5 608.6 707.0 655.3 396.1
-------- -------- -------- -------- --------
TOTAL LOANS................. $7,258.4 $6,963.6 $6,759.1 $6,513.2 $4,976.4
======== ======== ======== ======== ========
13
The following sections discuss the different loan categories.
COMMERCIAL AND INDUSTRIAL LOANS
As shown on Table 3, the commercial and industrial loan (C&I) portfolio,
which includes commercial, financial and agricultural loans, was $1.7 billion,
down 8.3% from year-end 1992. This portfolio which makes up 23.5% of the total
loans consists of lending to individuals and companies on both a secured and
unsecured basis for business purposes. Customers and collateral vary based on
the type of business involved. The portfolio is made up of approximately 6,900
loans. Approximately 6,400 loans have balances less than $500,000, most of
which would be classified as small and middle market customers. Larger
customers, such as multi-national corporations and large U.S. mainland
companies represent approximately 79% of the total C&I loan balance.
Bancorp's focus in lending to companies on the U.S. Mainland is to Fortune
1000 companies, companies with a Pacific orientation and selected niches where
lending expertise has developed over the years. The communication/media
portfolio is considered such a niche. Total loans and leases of this type stood
at $429.7 million at year-end 1993, a decrease of 6.3% from year-end 1992. The
balances in this category represented 25.1% of the total commercial and
industrial loan portfolio at year-end 1993. At year-end 1993, there were no
loans in the communication/media portfolio which were classified as NPA.
During the third quarter of 1993, Bancorp reported a $25.7 million charge-off
of loans, which in part were secured by commercial leasehold property (a
hotel). The loans had been placed on non-performing status with $20 million
charged-off during the fourth quarter of 1992. In the fourth quarter of 1993,
the property was sold for an undisclosed amount to foreign and Hawaii-based
investors. As a result of the sale, Bancorp received $14.5 million in cash
which was applied against the balance of loans left on non-performing status.
In connection with the transaction, Bancorp obtained substantial additional
collateral to secure the losses incurred in the fourth quarter of 1992 and the
third quarter of 1993. As the collateral is liquidated by the borrower,
proceeds are expected to be recognized as recoveries over the next several
years.
The situation concerning leasehold properties in the State of Hawaii has
settled somewhat, but continues to be monitored. The rate of growth of land
values has slowed and lease rent increases have paralleled the change. In
total, Bancorp's loans secured by commercial leasehold mortgages totaled
approximately $290.6 million at year-end 1993, 4.0% of the total loan
portfolio. There were $45.3 million of loan balances in this category whose
ground rent for the underlying collateral will be renegotiated in the next five
years.
Commercial and industrial loans that were classified as non-performing
totaled $16.7 million or 24.3% of total non-performing assets at year-end 1993.
For comparative purposes, $52.6 million and $7.6 million were classified as NPA
at year-ends 1992 and 1991, respectively.
LEASING ACTIVITIES
Equipment leases have been an increasingly important component of the overall
loan portfolio by providing customers with an alternative to traditional
lending products. The tax benefit received by Bancorp is also an important
component of Bancorp's tax planning strategy. Growth in the leasing portfolio
during 1993 has also been limited by the slowing economy and strong
competition. Leases outstanding grew modestly to $401.6 million, up 2.1% from
year-end 1992. The lease portfolio is diversified, with the types of equipment
under lease including aircraft, ships, automobiles and trucks, office
equipment, computers and others. NPA in the leasing category were $0.3 million
at year-end 1993.
REAL ESTATE LOANS
At year-end 1993, Bancorp's total real estate loan portfolio stood at $3.9
billion, up 12.7% from year-end 1992. Real estate loans represent 53.4% of the
total loan portfolio at year-end 1993. The real estate loan portfolio is
divided into construction and mortgages as shown on Table 3.
14
The largest component in the mortgage segment of the real estate loan
portfolio are loans secured by 1-to-4 family residential property. At $2.5
billion, this group represented 63.8% of total real estate loans at year-end
1993 and 34.1% of total loans outstanding. About 88.1% of these loans are
secured by real estate in Hawaii (see Table 4). Approximately 66.5% of the 1-
to-4 family residential mortgage loans are underwritten on a floating rate
basis. Only $46.7 million in the Real Estate, Mortgage category (both
residential and commercial) have rates that adjust more than five years into
the future. The average 1-to-4 family mortgage loan has been outstanding about
5.7 years with an outstanding balance of $116,000. For 1993, Bancorp's average
principal loan amount originated was $166,000, down from the $181,000 average
for 1992. The 1993 average loan origination at First Federal was $144,000
compared with $183,000 for Bank of Hawaii. The median single family home price
on Oahu was $358,000 in 1993, compared to $349,000 in 1992. As property values
have increased in Hawaii, loan to value ratios on the existing loans are
generally lower than the original underwriting standards, which typically use
80% as a maximum.
Also included in the real estate portfolio are home equity creditlines.
Available credit under these lines increased 12.3% to $506.7 million at year-
end 1993. Although available credit has increased, outstandings have declined
from $347.4 million at year-end in 1992 to $334.3 million at year-end 1993.
These creditlines are underwritten based on repayment ability rather than the
value of the underlying property. However, home equity creditlines are
generally limited to 70% of the value of the collateral including prior liens.
At year-end 1993, NPAs in the mortgage-residential category (excluding
construction loans) totaled $16.4 million, or 23.8% of total NPA.
Comparatively, mortgage-residential NPA totaled $17.7 million and $11.2
million at year-ends 1992 and 1991, respectively. Foreclosed real estate, at
year-end 1993, was $4.1 million, which consisted of nine properties.
The commercial real estate portfolio (excluding construction loans) totaled
$1.2 billion at year-end 1993, up 24.1% from year-end 1992. Table 3 presents
the balances outstanding in this portfolio over the last five years. Of the
properties collateralizing Bancorp's commercial real estate loans, about 80.3%
were located in Hawaii.
The commercial real estate loan portfolio is diversified in the types of
property securing the obligations. Of the $1.2 billion in total commercial
real estate loans at year-end 1993, $247.6 million represented loans secured
by shopping centers; $183.1 million represented loans secured by
commercial/industrial/warehouse facilities; and $271.9 million represented
loans secured by office buildings. Generally, loans secured by
commercial/industrial/warehouse facilities and office buildings are either
solely or partially owner-occupied.
Non-performing commercial real estate loans at year-end 1993 totaled $13.1
million or 19.0% of total NPA. Comparatively, commercial real estate NPA at
year-ends 1992 and 1991 totaled $11.4 million and $18.1 million, respectively.
Included in foreclosed real estate, at year-end 1993 were two commercial
properties totaling $2.0 million.
Total commercial construction loans were $136.2 million at year-end 1993,
38.1% below year-end 1992. The trend in this portfolio has been declining
since 1991. Bancorp maintains a conservative underwritingpolicy, as these
loans by their nature have greater risk. For the majority of these loans,
Bancorp looks to the cash flow of the completed projects and committed
permanent financing for repayment, rather than thevalue of the property. A
dissection of the construction lending portfolio at year-end 1993 shows
commercial land development, $19.6 million; housing construction, $34.1
million; tract and land development for residential housing, $54.7 million;
retail facilities, $10.7 million; industrial projects, $18.3 million;
commercial offices, $11.5 million; and hotels, $5.3 million. These loans were
concentrated in property located in Hawaii($126.8 million).
At the end of 1993, construction non-performing loans totaled $17.7 million
or 25.7% of total NPA, compared to year-end 1992 when there were no
construction NPA and 1991 when $2.9 million was reported.
15
CONSUMER LOANS
Total consumer loans (excluding residential mortgage and home equity loans)
increased to $676.2 million, up 3.1% from year-end 1992. Several factors
continue to negatively affect growth in this category, such as the elimination
of tax deductions for interest paid on consumer debt, the programs by
automobile manufacturers to provide aggressive financing, and economic
conditions.
Bancorp issues Classic and Gold VISA credit cards which are held by more than
145,000 cardholders. Outstanding balances for such cards totaled $204.1 million
at year-end 1993, an increase of 6.8% from year-end 1992. The average credit
limit on these accounts was $6,600 for 1993 with an average outstanding balance
of $1,400, compared with an average outstanding balance of $1,320 for 1992. At
year-end 1993, 0.6% of the accounts (based on balances) were delinquent more
than 90 days, compared with 0.6% at year-end 1992, and 0.3% at year-end 1991.
INTERNATIONAL LENDING
Foreign loans at the end of 1993 totaled $593.5 million, down 2.5% from year-
end 1992. Bancorp maintains a cautious approach to the international
marketplace with a lending strategy that focuses primarily on short term trade
finance and working capital loans for companies doing business in the Pacific
and the Asian Rim. The lending activities in Tokyo, Korea and Singapore remain
the most significant with U.S. dollar equivalent loans outstanding at year-end
1993 at these branches of $301.8 million, $82.4 million, and $104.2 million,
respectively. Long term exposure to less developed countries (LDC) remain
modest and stood at $1.0 million at year-end 1993.
NPA in the international portfolio have remained at low levels. At year-end
1993, there were no international NPA. For 1992, international NPA were $5.0
million and none were reported at year-end 1991. As indicated on Table 7,
losses in the international portfolio have increased in 1993 to $7.5 million,
1.3% of outstanding international loans.
16
GEOGRAPHIC DISTRIBUTION OF THE LOAN PORTFOLIO
The distribution of the loan portfolio by geographic areas is presented in
Table 4. The majority of Bancorp's loans (63.8%) were located in Hawaii at
year-end 1993. The balances reflected in the West and South Pacific include
Guam and other Pacific Islands where both Bank of Hawaii and First Federal's
subsidiary, First Savings and Loan Association of America, have branches. The
modest real estate loans in the western U.S. mainly represent mortgage lending
in Arizona.
GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO
TABLE 4
TOTAL WEST &
YEAR-END SOUTH WESTERN EASTERN
1993 HAWAII PACIFIC U.S.(1) U.S.(1) JAPAN(2) OTHER(2)
-------- -------- ------- ------- ------- -------- --------
(IN MILLIONS OF DOLLARS)
Commercial, Financial
and Agricultural................... $1,709.2 $ 689.7 $137.2 $361.8 $471.4 $ 48.3 $ 0.8
Real Estate
Construction--Commercial.......... 136.2 126.8 2.1 7.3 -- -- --
--Residential......... 35.1 25.6 8.5 1.0 -- -- --
Mortgage--Commercial.............. 1,230.6 988.1 67.1 95.4 -- 62.5 17.5
--Residential............. 2,476.0 2,181.2 255.2 32.7 6.9 -- --
Installment......................... 676.2 528.3 144.0 3.6 -- -- 0.3
Foreign............................. 593.5 -- -- -- -- 347.4 246.1
Lease Financing..................... 401.6 90.5 14.1 90.1 181.4 -- 25.5
-------- -------- ------ ------ ------ ------ ------
Total........................... $7,258.4 $4,630.2 $628.2 $591.9 $659.7 $458.2 $290.2
-------- -------- ------ ------ ------ ------ ------
Percentage of Total................. 100.0% 63.8% 8.6% 8.2% 9.1% 6.3% 4.0%
======== ======== ====== ====== ====== ====== ======
- --------
(1) The line of demarcation is the Mississippi River.
(2) Although these loans are considered foreign, certain of the underlying
collateral is domiciled in the U.S. or Guam.
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets (which include non-accrual loans, restructured loans
and foreclosed real estate) totaled $68.8 million at year-end 1993, compared to
$93.0 million at the end of 1992. The decrease from year-end 1992 primarily
reflects the charge-off of the commercial loan involving leasehold commercial
property and an aggressive posture on handling NPA further described below.
Generally, the percentage of NPA to loans outstanding remains below those of
peer banks. Table 6 presents this ratio for the last 5 years.
As indicated earlier in this report, Bancorp strives to identify and handle
potential problem loans at an early stage. This allows time to work with
borrowers and resolve problems before they result in losses. Bancorp's policy
is to place loans on non-accrual as soon as a loan is delinquent over 90 days,
unless unusual treatment is indicated by the type of borrowing agreement and/or
collateral. At the time a loan is placed on non-accrual, all accrued but unpaid
interest is reversed against current earnings.
At year-end 1993, NPA loans secured by real estate totaled $47.2 million or
68.6% of total NPAs; of this total, $35.5 million or 75.2% of these loans were
secured by real estate in Hawaii. NPA in the West and South Pacific and Asia
were relatively minimal. A focus on quality credits and cautious asset growth
remains the objective in Arizona. NPA in Arizona has improved, and represented
2.9% of total NPA or $2.0 million at year-end 1993, compared to $4.6 million
and 4.9% of total NPA at year-end 1992. FNBA's loan quality has improved
considerably over the last three years. At the end of 1993 FNBA's NPA was 1.83%
of total loans outstanding compared with 4.0% at year-end 1992, and 12.0% at
year-end 1991.
17
First Federal's NPA totaled $13.4 million at year-end 1993, up from $9.0
million at year-end 1992. The increase was represented by two credits totaling
$5.7 million. Total NPA at First Federal represented 1.47% of total loans
outstanding at year-end 1993.
Restructured loans totaled $6.3 million at year-end 1993, a decrease of 26.7%
from the year-end 1992 balance. Restructured loans represented 0.09% of total
loans at year-end 1993. The impact of restructured loans on earnings has not
been significant.
Foreclosed real estate for Bancorp totaled $4.1 million. There were only nine
properties in foreclosed real estate. The most significant property is located
in Hawaii and was carried at $1.5 million at year-end 1993.
Loans Past Due 90 Days totaled $10.0 million at year-end 1993. This is less
than half the $24.2 million reported at year-end 1992. The improvement reflects
the return to levels experienced in earlier years as reflected in Table 6.
In 1993, Bancorp recorded $0.7 million in interest reversals relating to non-
accrual loans compared to $0.2 million in 1992. In 1993, $2.5 million in
interest was collected on previously non-accrual and charged off loans, a
decrease from the $3.0 million collected in 1992.
FOREGONE INTEREST ON NON-ACCRUALS
YEARS ENDED DECEMBER 31
TABLE 5
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS)
Interest Income Which Would Have Been Recorded
Under Original Terms:
Domestic............................................ $5.3 $7.0 $4.2 $3.2 $3.4
Foreign............................................. -- 0.3 -- -- --
Interest Income Recorded
During the Current Year on Non-Accruals:
Domestic............................................ 0.9 3.4 1.0 1.3 1.5
Foreign............................................. -- 0.2 -- -- --
18
NON-PERFORMING ASSETS AND ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
TABLE 6
PROFORMA
1993 1992 1991 1990 1989(1)
----- ------ ----- ----- --------
(IN MILLIONS OF DOLLARS)
Non-Accrual Loans
Commercial and Industrial.............. $15.7 $ 47.2 $ 6.5 $ 8.2 $ 8.0
Real Estate
Construction.......................... 17.7 -- 2.9 4.6 6.9
Commercial............................ 7.8 8.2 15.0 8.2 1.4
Residential........................... 16.4 17.7 11.2 4.5 3.6
Other.................................. 0.8 -- -- -- 0.1
Foreign................................ -- 5.0 -- -- 0.2
----- ------ ----- ----- -----
Subtotal.............................. 58.4 78.1 35.6 25.5 20.2
----- ------ ----- ----- -----
Restructured Loans
Commercial and Industrial.............. 1.0 5.4 1.1 0.1 0.3
Real Estate
Construction.......................... -- -- -- -- --
Commercial............................ 5.3 3.2 3.1 4.0 3.7
Residential........................... -- -- -- 3.7 3.4
Other.................................. -- -- 0.2 -- --
Foreign................................ -- -- -- -- --
----- ------ ----- ----- -----
Subtotal.............................. 6.3 8.6 4.4 7.8 7.4
----- ------ ----- ----- -----
Foreclosed Real Estate
Domestic............................... 4.1 6.3 2.0 1.6 0.8
Foreign................................ -- -- -- -- --
----- ------ ----- ----- -----
Subtotal.............................. 4.1 6.3 2.0 1.6 0.8
----- ------ ----- ----- -----
Total Non-Performing Assets.......... $68.8 $ 93.0 $42.0 $34.9 $28.4
----- ------ ----- ----- -----
Loans Past Due 90 Days
Commercial and Industrial.............. 0.3 0.5 2.9 3.8 4.4
Real Estate
Construction.......................... -- -- 0.2 0.2 0.2
Commercial............................ 1.9 5.8 0.3 1.2 0.1
Residential........................... 4.1 13.0 2.0 2.2 2.4
Other.................................. 3.7 4.6 3.0 4.0 5.6
Foreign................................ -- 0.3 -- -- --
----- ------ ----- ----- -----
Subtotal.............................. 10.0 24.2 8.4 11.4 12.7
----- ------ ----- ----- -----
Total................................ $78.8 $117.2 $50.4 $46.3 $41.1
----- ------ ----- ----- -----
Ratio of Non-Performing Assets to Total
Loans (1)............................... 0.95% 1.34% 0.62% 0.54% 0.50%
----- ------ ----- ----- -----
Ratio of Non-Performing Assets and
Accruing Loans Past Due 90 Days or More
to Total Loans (1)...................... 1.09% 1.68% 0.75% 0.71% 0.72%
----- ------ ----- ----- -----
- --------
(1) FirstFed's loans included for comparative purposes for 1989.
19
SUMMARY OF LOAN LOSS EXPERIENCE
At the end of 1993, the reserve for loan losses stood at $125.3 million.
Table 7 shows the activity through the reserve. The levels of the loan loss
reserve are primarily derived from an extensive review of the loan portfolio
with a strong emphasis on the line driven loan grading system for the larger
commercial loans in Bank of Hawaii and FNBA. This loan grading system was
implemented in 1985 and is continuously monitored for accuracy by the Loan
Review department. In addition, delinquency data and historical trends are
considered in the analysis. The ratio of reserves to loans outstanding is one
measure of the adequacy of the reserve; however, the absolute dollar amount of
the reserve and its relationship to non-performing loans and historical charge-
offs are perhaps more valid measures. In the last ten years the reserve to
charge-off ratio has never been less than 1.4 times in any year and has
averaged 3.5 times over the same period. At the end of 1993, the reserve was
1.8 times non-performing loans and 1.9 times charge-offs. The ratio of reserves
to outstanding loans at year-end 1993 was 1.76%, down from the 1.89% reported
at year-end 1992.
Loan loss provisions for 1993 were $54.2 million while gross charge-offs were
$65.7 million. 1993 gross charge-offs represented 0.94% of average outstanding
loans and 52.4% of the reserve at the end of 1993, compared to 0.67% and 34.2%,
respectively at year-end 1992 and 0.34% and 19.2% reported at year-end 1991.
Charge-offs for 1993 increased substantially due to the $25.7 million charge-
off related to the credit discussed in the Risk Elements section. Net charge-
offs for 1993 were $57.5 million, 0.82% of average loans outstanding, compared
with 0.56% for 1992 and 0.24% for 1991.
Recoveries of previously charged-off loans continued to increase. Recoveries
for 1993 totaled $8.2 million, up 17.1% from $7.0 million in 1992. In recent
years recoveries have increased annually. Specifically, total recoveries over
the last five years represented almost 20.3% of total charge-offs for the same
period.
20
SUMMARY OF LOAN LOSS EXPERIENCE
TABLE 7
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Average Amount of Loans Out-
standing.................... $6,991.0 $6,601.9 $6,484.1 $5,532.4 $4,368.6
======== ======== ======== ======== ========
Balance of Reserve for
Possible Loan Losses at
Beginning of Period......... $ 128.6 $ 115.6 $ 101.9 $ 84.4 $ 73.6
Loans Charged-Off
Commercial and Industrial.. 43.9 29.5 11.0 11.6 6.4
Real Estate--
Construction.............. 0.5 -- -- -- 1.2
Mortgage(1)--Commercial... 2.7 4.2 1.8 1.0 0.4
--Residential.. 0.4 0.5 0.9 -- --
Installment................ 8.6 8.7 8.3 7.0 4.7
Foreign.................... 7.5 1.0 -- 0.2 3.6
Leases..................... 2.1 0.1 0.2 0.1 0.1
-------- -------- -------- -------- --------
Total Charged-Off............ 65.7 44.0 22.2 19.9 16.4
Recoveries on Loans Previ-
ously Charged-Off
Commercial and Industrial... 3.9 3.0 2.6 2.7 2.2
Real Estate--
Construction.............. -- -- 0.2 -- --
Mortgage(1)--Commercial... 0.7 0.2 0.1 0.8 0.2
--Residential.. 0.3 0.3 0.5 -- --
Installment................ 3.2 3.0 3.0 2.3 2.0
Foreign.................... -- 0.4 0.4 0.3 1.5
Leases..................... 0.1 0.1 0.1 -- --
-------- -------- -------- -------- --------
Total Recoveries............. 8.2 7.0 6.9 6.1 5.9
-------- -------- -------- -------- --------
Net Loans Charged-Off........ (57.5) (37.0) (15.3) (13.8) (10.5)
-------- -------- -------- -------- --------
Provisions Charged to Operat-
ing Expenses................ 54.2 50.0 29.6 28.0 20.9
Reserves Acquired (Sold)..... -- -- (0.6) 3.3 0.4
Balance at End of Period..... $ 125.3 $ 128.6 $ 115.6 $ 101.9 $ 84.4
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to
Average Loans
Outstanding................. 0.82% 0.56% 0.24% 0.25% 0.24%
Ratio of Reserve to Loans
Outstanding................. 1.76% 1.89% 1.74% 1.60% 1.73%
======== ======== ======== ======== ========
The details of the Foreign Reserve for Loan Losses, which are included in the
table above, are:
Beginning Balance............................. $14.2 $14.0 $13.1 $19.1 $18.8
Charge-Offs................................. 7.5 1.0 -- 0.2 3.6
Recoveries.................................. -- 0.4 0.4 0.3 1.5
----- ----- ----- ----- -----
Net Charge-Offs............................. (7.5) (0.6) 0.4 0.1 (2.1)
Provisions.................................. 3.8 0.8 0.5 0.5 2.4
Excess to General Reserve................... -- -- -- (6.6) --
----- ----- ----- ----- -----
Ending Balance............................ $10.5 $14.2 $14.0 $13.1 $19.1
===== ===== ===== ===== =====
- --------
(1) For years prior to 1991, detailed breakdown not available and is reported
as Commercial.
21
ALLOCATION OF LOAN LOSS RESERVE
TABLE 8
1993 1992 1991 1990 1989
---------------- ---------------- ---------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OUT- OF OUT- OF OUT- OF OUT- OF OUT-
STANDING STANDING STANDING STANDING STANDING
RESERVE LOAN RESERVE LOAN RESERVE LOAN RESERVE LOAN RESERVE LOAN
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(IN MILLIONS OF DOLLARS)
Commercial and Industri-
al..................... $ 51.2 3.00% $ 54.0 2.90% $ 30.5 1.75% $ 27.8 1.70% $23.1 1.50%
Real Estate
Construction........... 4.3 2.51 2.6 1.00 5.4 2.20 5.5 2.00 3.0 1.40
Commercial............ 15.4 1.25 19.8 2.00 25.5 2.50 19.1 2.00 5.1 0.62
Residential........... 18.5 0.75 16.4 0.75 16.0 0.75 9.7 0.50 4.3 0.40
Installment............. 13.5 2.00 10.0 1.55 10.0 1.55 10.7 1.50 10.6 1.60
Foreign................. 10.5 1.77 14.2 2.33 14.0 2.00 13.1 2.00 19.1 4.80
Leases.................. 2.0 0.50 3.9 1.00 5.0 1.40 5.1 1.50 4.3 1.50
Not allocated........... 9.9 -- 7.7 -- 9.2 -- 10.9 -- 14.9 --
------ ---- ------ ---- ------ ---- ------ ---- ----- ----
$125.3 1.76% $128.6 1.89% $115.6 1.74% $101.9 1.60% $84.4 1.73%
====== ==== ====== ==== ====== ==== ====== ==== ===== ====
INTERNATIONAL OPERATIONS
Bancorp's international presence is extensive and provides opportunities to
take part in both lending and deposit-taking activities globally. These
endeavors have proven both profitable and important.
Through the International Division of Bank of Hawaii, Bancorp offers
international banking services to its corporate, financial institution and
individual customers in some of the world's major financial centers. The Taipei
office which opened last year, has been exceptionally successful in developing
trade-related correspondent banking business. In 1993, the office facilitated
more than 35,000 items totaling $1.0 billion for banks in Taiwan. As of year-
end 1993, Bancorp had offices in Hong Kong, the Philippines (Manila, Cebu, and
Davao), Seoul, Singapore, Tokyo, Taiwan and New York, in addition to the
pending new branch in Taegu, Korea.
Bank of Hawaii operates branches and offices in several Pacific Island
locations, offering traditional banking services. These activities are located
in Guam, Saipan, Palau, Yap, Majuro, Kosrae, Pohnpei and American Samoa. Since
the U.S. dollar is used in these locations, all are considered domestic
operations. In 1993, Bank of Hawaii opened a branch in Fiji. Since Fiji uses
its own currency, it is included with the other foreign operations and is
considered international, even though its operations are reflective of
consumer/small business activities much like domestic branches.
Bank of Hawaii also holds investments in unconsolidated affiliate banks in
the South Pacific--in Tahiti, Tonga, New Caledonia, Vanuatu and Western Samoa
(see organization chart). Total assets at year-end 1993 of all such affiliates
were $939.5 million. These investments, most of which were initially made more
than 20 years ago, are in profitable institutions and are mainly accounted for
using the equity method. As mentioned earlier, Bancorp finalized its purchase
of 80% of Banque Indosuez in Vanuatu in December and renamed it Banque d'Hawaii
(Vanuatu), Ltd. For 1993, the investment in Banque d'Hawaii (Vanuatu), Ltd. has
not been consolidated and has been accounted for at present using the equity
method. The total assets in Vanuatu were $70.1 million at year-end 1993 and
will be reported in the consolidated numbers in the future. Bank of Hawaii's
investments in these affiliate banks are all considered international.
22
Table 9 summarizes key totals for the International Operations for 1993. Net
income for 1993 decreased to $8.5 million, compared to the $11.5 million in
1992. This translates into a return on assets for this division of 0.45%, down
from the 0.62% for 1992.
Bancorp continues to focus on trade-related financing activities and lending
to customers with which it has a direct relationship rather than participation
in syndicated loans. Bancorp's foreign lending consists of both local currency
and cross-border lending. Local currency loans are those that are funded and
will be repaid in the currency of the borrower's country and involve the same
types of risk as domestic lending. Cross-border lending, on the other hand,
involves loans that will be repaid in currencies other than that of the
borrower's country. This type of lending involves greater risk because the
borrower's ability to repay is additionally dependent on the availability of
foreign exchange in the host country.
Bancorp controls its exposure to the risks of international lending by
evaluating the political and economic factors that bear on a country's ability
to meet its foreign debt obligations. Based on these analyses, maximum credit
limits (both short and long term) are established for each country to ensure
that the international portfolio is diversified and that exposure is limited in
countries that may experience future problems. These credit limits are reviewed
on a regular basis so that exposures are understood and properly assessed.
Bancorp's strategy for foreign lending is to deal on a direct basis primarily
with countries and companies that have a strong interest in Hawaii, the South
and West Pacific, or the Asian Rim.
At year-end 1993, international assets represented 15.2% of Bancorp's total
average assets, a decrease from 16.0% at year-end 1992. Cross-border interbank
placements accounted for $1.2 billion or 63.2% of total average international
assets at year-end 1993. Table 10 presents cross-border exposures of individual
countries for which Bancorp has cross-border exposures exceeding 0.75% of total
assets, at the respective year-end periods. As table 10 indicates, $978.3
million or 62.8% was with such countries as Japan, Taiwan, Italy, Thailand and
Korea.
Long-term cross-border outstandings to lesser developed countries (LDC) at
year-end 1993 was $1.0 million. Such exposure was entirely in the Philippines.
The foreign reserve for losses is considered by management to be adequate to
absorb any credit or country risk of the remaining LDC exposure (both term and
trade credits).
SUMMARY OF INTERNATIONAL ASSETS, LIABILITIES, AND INCOME AND PERCENT OF
CONSOLIDATED TOTALS
TABLE 9
1993 1992 1991
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS OF DOLLARS)
Average Assets........... $1,908.9 15.2% $1,864.9 16.0% $1,640.6 15.2%
Average Liabilities...... 1,863.3 15.9 1,793.4 16.5 1,591.7 15.7
Operating Revenue........ 94.1 10.0 105.7 11.2 127.2 12.4
Net Income............... 8.5 6.4 11.5 9.0 11.1 9.8
-------- ---- -------- ---- -------- ----
23
GEOGRAPHIC DISTRIBUTION OF CROSS-BORDER INTERNATIONAL ASSETS
TABLE 10
GOVERNMENT BANKS AND COMMERCIAL
AND OTHER OTHER AND
OFFICIAL FINANCIAL INDUSTRIAL
INSTITUTIONS INSTITUTIONS INSTITUTIONS TOTAL
------------ ------------ ------------ --------
(IN MILLIONS OF DOLLARS)
at December 31, 1993
Japan......................... $ -- $ 166.8 $178.3 $ 345.1
Taiwan........................ -- 271.3 -- 271.3
Korea......................... -- 61.6 79.8 141.4
Thailand...................... -- 110.5 -- 110.5
Italy......................... -- 110.0 -- 110.0
All Others.................... 1.0 465.2 114.1 580.3
----- -------- ------ --------
$ 1.0 $1,185.4 $372.2 $1,558.6
===== ======== ====== ========
at December 31, 1992
Japan......................... $ -- $ 237.8 $189.5 $ 427.3
Taiwan........................ -- 195.6 -- 195.6
France........................ -- 149.0 9.4 158.4
Italy......................... -- 142.0 -- 142.0
Australia..................... -- 69.1 32.1 101.2
Canada........................ -- 100.0 -- 100.0
Sweden........................ -- 100.0 -- 100.0
All Others.................... 13.0 671.3 65.4 749.7
----- -------- ------ --------
$13.0 $1,664.8 $296.4 $1,974.2
===== ======== ====== ========
at December 31, 1991
Japan......................... $ -- $ 326.2 $232.2 $ 558.4
Taiwan........................ 22.0 142.5 -- 164.5
Italy......................... -- 149.5 -- 149.5
France........................ -- 115.7 9.9 125.6
Korea......................... -- 11.4 101.1 112.5
All Others.................... 11.0 616.6 65.7 693.3
----- -------- ------ --------
$33.0 $1,361.9 $408.9 $1,803.8
===== ======== ====== ========
POTENTIAL PROBLEM LOANS
Bancorp's management emphasizes the importance of early recognition and
monitoring of loans as a means to control delinquency. Demonstrating this
commitment, management continuously reviews loans to various borrowers and
industry segments that may be experiencing financial difficulties even if these
loans have been generally current as to their terms. As mentioned earlier, a
loan grading system, which has been in place for several years, provides the
process for this early warning system. Loans are graded by lending officers and
validated by an independent Loan Review department to assure accuracy in the
grades. This process is also utilized to determine the adequacy of the reserve
for losses.
24
ASSET AND LIABILITY MANAGEMENT
Assets and liabilities are managed to maximize long term risk adjusted
returns to our shareholders. The asset and liability management process is one
of financial risk management. Risk in the form of capital adequacy, interest
rate sensitivity, liquidity and operating efficiency is balanced with expected
return so as to yield high relative earnings performance and market value of
equity, while limiting the volatility of each. This process is carried out
through regular meetings of executive and senior management.
CAPITAL ADEQUACY
At year-end 1993, Bancorp's equity was $938.1 million, a 13.3% increase from
the $828.3 million at year-end 1992. Market capitalization stood at $1.2
billion at the end of 1993. This growth in equity has been largely the result
of increased earnings and Bancorp's Dividend Reinvestment and Stock Purchase
Plan. In 1993, the discount on the Dividend Reinvestment Plan was discontinued,
but the Plan added $7.7 million in capital. In the fourth quarter, Bancorp
repurchased 48,600 shares of stock. The strategy is to utilize these shares to
meet the needs of the Dividend Reinvestment and Stock Purchase Plan, Profit
Sharing Plan and Stock Option Plan. In the fourth quarter, 31,280 shares were
reissued. This strategy will modestly slow the growth of Bancorp's capital.
Table 11 presents an analysis of the changes in equity over the last five
years.
In 1989, the Federal Reserve Board established risk-based capital guidelines.
As defined in those guidelines, capital is reduced by goodwill and in certain
situations, increased by portions of the reserve for loan losses. Capital is
categorized at two levels: Tier 1 (which is mainly common stock and qualifying
preferred stock) and Total Capital (which is Tier 1 Capital plus qualifying
debt and a portion of the reserve for loan losses). The risk-based capital
ratio is calculated using a risk-weighted asset base, which includes off-
balance sheet exposures.
In 1993, the regulators implemented new thresholds for determining the
adequacy of capital levels. The formulas for calculating the capital ratios
remained the same. To qualify as a well capitalized institution, all three of
these thresholds must be exceeded--Tier 1 Capital 6%; Total Capital 10% and the
leverage ratio 5%. Bancorp's strategy is to maintain its capital at a level to
qualify as well capitalized. The financial and regulatory impact of maintaining
this status is important to Bancorp. At year-end 1993, Bancorp's Tier 1 Capital
ratio was 10.79%, Total Capital ratio 13.60% and leverage ratio was 6.89%. All
three exceeded the minimum levels to qualify as well capitalized.
25
EQUITY CAPITAL
TABLE 11
1993 1992 1991 1990 1989
-------- -------- -------- -------- ------
(IN MILLIONS OF DOLLARS)
Source of Common Equity
Net Income..................... $ 132.6 $ 127.5 $ 112.7 $ 95.7 $ 79.9
Dividends Paid................. (38.4) (35.4) (32.4) (27.6) (21.6)
Dividend Reinvestment Program.. 7.7 8.1 6.3 4.8 8.3
Stock Repurchases.............. (2.0) (0.6) -- (1.6) (0.5)
1.5 Million Share Public Offer-
ing........................... -- -- -- 72.5 --
Other(1)....................... 9.9 4.7 7.2 3.8 16.6
-------- -------- -------- -------- ------
Annual Increase in Equity...... $ 109.8 $ 104.3 $ 93.8 $ 147.6 $ 82.7
Year-End Common Equity......... $ 938.1 $ 828.3 $ 724.0 $ 630.3 $482.7
Less: Intangibles............ 72.0 18.8 20.6 21.0 --
Unrealized Valuation Adjust-
ments....................... 3.9 -- -- -- --
-------- -------- -------- -------- ------
Tier I Capital................. 862.2 809.5 703.4 609.3 --
Allowable Loan Loss Reserve.. 100.2 99.3 95.1 85.6 --
Subordinated Debt............ 124.6 -- -- -- --
-------- -------- -------- -------- ------
Total Capital............... $1,087.0 $ 908.8 $ 798.5 $ 694.9 --
======== ======== ======== ======== ======
Risk Weighted Assets....... $7,990.4 $7,911.8 $7,585.1 $6,830.5 --
======== ======== ======== ======== ======
Key Ratios Growth in Common Eq-
uity.......................... 13.3% 14.4% 14.9% 30.6% 20.7%
Average Equity/Average Assets
Ratio......................... 7.09% 6.74% 6.31% 6.09% 6.35%
Tier I Capital Ratio........... 10.79% 10.23% 9.27% 8.92% --
Total Capital Ratio............ 13.60% 11.49% 10.53% 10.17% --
Leverage Ratio................. 6.89% 6.37% 6.17% 5.70% --
Regulatory Total Capital to
Year-End Assets............... -- -- -- 6.78% 6.75%
Average Long-Term Debt/Equity.. 21.43% 11.82% 13.30% 13.30% 10.65%
======== ======== ======== ======== ======
- --------
(1) Includes profit-sharing, stock options and valuation adjustments for
investment securities and foreign exchange translation.
INTEREST RATE RISK
For financial institutions, interest rate movements can have a very positive
impact on earnings if the balance sheet is positioned to anticipate the
changes. At Bancorp, interest sensitivity analysis is coupled with computer
simulation techniques to measure the exposure of our earnings to interest rate
movements. The major factors used to manage interest rate risk include the mix
of fixed and floating interest rates, pricing, and maturity patterns for all
asset and liability accounts, as well as off-balance sheet interest rate
swaps. The objective of this process is to position the balance sheet for
certain opportunities without unduly increasing risk.
Table 12 presents the possible exposure to interest rate movements for the
various time frames at year-end 1993. The distribution in the interest rate
sensitivity table consists of a combination of maturities, call provisions,
repricing frequency and prepayment patterns. Bancorp constantly analyzes and
estimates, based on historic data, the interest rate sensitivity
characteristics of all balance sheet items. For example, management has
estimated that a substantial portion of its interest bearing demand and
savings balances are relatively insensitive to changes in interest rates.
Consequently, it has allocated significant portions of those balances to
longer term rate sensitivity periods. In 1992, those balances were all
classified as rate sensitive within 90 days.
At December 31, 1993, Bancorp's one year cumulative liability sensitive gap
totaled $0.7 billion, representing 5.5% of total assets. The one year gap is a
commonly referred to time frame for benchmarking interest rate risk. Bancorp
maintained a similar liability sensitive gap position throughout the year.
This
26
balance sheet structure produced a modestly favorable impact on net interest
income. Nevertheless, average net interest margin declined modestly from 4.06%
in 1992 to 4.00% in 1993, reflecting an increase in non-accrual loans and a
change in the earning asset mix from higher spread business (loans) to lower
spread business (securities and interest bearing deposits).
In 1993, Bancorp expanded its use of interest rate swaps to manage interest
rate risk. Interest rate swaps at year-end 1993 totaled $1.4 billion, relative
to $185.5 million at year-end 1992. Bancorp uses swaps only to hedge, and not
to speculate, on movements in interest rates. They are not only conservative
and flexible instruments, but also cost effective risk management tools.
Furthermore, credit exposure on interest rate swaps is determined and monitored
according to the same strict standards and policies applied to Bancorp's
commercial lending activity. Interest rate swaps compliment discretionary
balance sheet management and are incorporated in overall interest rate risk
analyses.
INTEREST RATE SENSITIVITY
TABLE 12
DECEMBER 31, 1993
-------------------------------------------------
NON-
91-365 1-5 OVER INTEREST
0-90 DAYS DAYS YEARS 5 YEARS BEARING
--------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Assets(1)
Investment Securities..... $ 764.4 $1,130.9 $1,434.3 $ 314.8 $ 2.6
Short-Term Investments.... 74.4 -- -- -- --
International Assets...... 974.5 425.2 14.7 0.1 --
Domestic Loans
Commercial, Financial
and Agricultural....... 1,053.1 380.3 230.0 30.1 15.7
Real Estate--Construc-
tion................... 48.4 62.4 37.4 5.4 17.7
Other Loans(2).......... 1,527.3 1,671.4 868.5 692.3 24.9
Trading Securities........ 0.1 60.0 7.1 6.2 0.9
Other Assets.............. -- -- -- -- 587.0
--------- -------- -------- -------- --------
Total Assets............ $ 4,442.2 $3,730.2 $2,592.0 $1,048.9 $ 648.8
========= ======== ======== ======== ========
Liabilities and Capital(1)
Non-Interest Bearing De-
mand..................... $ 379.5 $ 323.3 $ 702.7 $ -- $ --
Interest-Bearing Demand... 463.6 463.6 1,004.6 -- --
Savings................... 225.3 225.3 801.3 -- --
Time Deposits............. 554.2 603.8 375.0 48.5 --
Foreign Deposits.......... 800.9 20.5 -- -- 12.8
Short-Term Borrowings..... 2,692.8 912.4 248.5 -- --
Long-Term Debt............ 129.8 -- 73.5 154.6 --
Other Liabilities......... -- -- -- -- 307.5
Capital................... -- -- -- -- 938.1
--------- -------- -------- -------- --------
Total Liabilities and
Capital................ $ 5,246.1 $2,548.9 $3,205.6 $ 203.1 $1,258.4
========= ======== ======== ======== ========
Interest Rate Swaps......... $(1,158.9) $ 100.0 $1,058.9 $ -- $ --
--------- -------- -------- -------- --------
Interest Sensitivity Gap.... $(1,962.8) $1,281.3 $ 445.3 $ 845.8 $ (609.6)
--------- -------- -------- -------- --------
Cumulative Gap.............. $(1,962.8) $ (681.5) $ (236.2) $ 609.6 $ --
Percentage of Total Assets.. 15.8% 5.5% 1.9% 4.9% --
--------- -------- -------- -------- --------
Fixed-Rate Loan Maturities.. $ 482.6 $ 470.5 $ 632.8 $ 781.8 $ 1.3
--------- -------- -------- -------- --------
Variable-Rate Loan Maturi-
ties....................... $ 1,649.8 $ 684.2 $ 695.5 $1,802.9 $ 57.0
========= ======== ======== ======== ========
- --------
(1) Based on repricing date.
(2) Includes the effect of estimated amortization.
27
CONSOLIDATED AVERAGE BALANCES, INCOME AND EXPENSE SUMMARY, AND YIELDS AND RATES
(TAXABLE EQUIVALENT)
TABLE 13
1993 1992 1991
------------------------- ------------------------- -------------------------
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
--------- ------- ------- --------- ------- ------- --------- ------- -------
(IN MILLIONS OF DOLLARS)
Earning Assets
Interest-Bearing
Deposits.............. $ 1,140.1 $ 43.0 3.77% $ 1,200.6 $ 53.1 4.43% $ 923.8 $ 61.0 6.60%
Investments
--Taxable............ 3,513.0 203.0 5.78 2,622.0 191.0 7.29 2,225.2 186.5 8.38
-- Tax-Exempt........ 29.3 3.6 12.25 57.1 6.6 11.54 97.8 10.0 10.23
Assets Held for Sale... 69.1 5.9 8.61 15.9 0.6 3.49 -- -- --
Funds Sold............. 146.0 5.2 3.56 463.1 20.5 4.43 434.3 25.6 5.88
Loans (1)
--Domestic........... 6,324.9 482.5 7.63 6,011.9 492.8 8.20 5,824.4 573.6 9.85
-- Foreign........... 666.1 29.9 4.48 590.0 33.2 5.63 659.7 52.1 7.90
Loan Fees.............. 37.9 33.3 24.5
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Earning Assets. 11,888.5 811.0 6.82 10,960.6 831.1 7.58 10,165.2 933.3 9.18
Cash and Due From
Banks................. 413.2 396.0 383.7
Other Assets........... 284.1 288.4 277.3
--------- --------- ---------
Total Assets......... $12,585.8 $11,645.0 $10,826.2
========= ========= =========
Interest-Bearing Liabil-
ities
Domestic Deposits
--Demand............. $ 2,032.3 45.1 2.22 $ 2,039.6 64.4 3.16 $ 1,927.4 91.4 4.74
-- Savings........... 1,239.4 32.6 2.63 1,035.3 39.5 3.81 734.5 37.0 5.04
-- Time.............. 1,711.9 77.7 4.54 3,294.0 159.4 4.84 4,012.0 262.0 6.53
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Domestic.......... 4,983.6 155.4 3.12 6,368.9 263.3 4.13 6,673.9 390.4 5.85
Total Foreign........... 1,223.9 43.2 3.52 816.9 36.3 4.45 822.2 51.8 6.30
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Deposits....... 6,207.5 198.6 3.20 7,185.8 299.6 4.17 7,496.1 442.2 5.90
Short-Term Borrowings.. 3,763.3 124.6 3.31 2,072.7 81.9 3.95 1,148.0 71.8 6.26
Long-Term Debt......... 191.3 12.1 6.32 92.8 5.0 5.33 90.8 7.1 7.74
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Interest-Bear-
ing Liabilities..... 10,162.1 335.3 3.30 9,351.3 386.5 4.13 8,734.9 521.1 5.97
========= ====== ===== ========= ====== ===== ========= ====== =====
Net Interest Income..... 475.7 3.52 444.6 3.45 412.2 3.21
------ ----- ------ ----- ------ -----
Spread on Earning As-
sets................... 4.00% 4.06% 4.05%
Spread on Earning Assets
(net of fees).......... 3.68% 3.75% 3.81%
----- ----- -----
Demand Deposits
--Domestic............. 1,324.9 1,231.9 1,134.6
Other Liabilities....... 205.9 277.2 273.8
Shareholders' Equity.... 892.9 784.6 682.9
--------- --------- ---------
Total Liabilities &
Equity.............. $12,585.8 $11,645.0 $10,826.2
========= ========= =========
Provision for Loan Loss-
es..................... 54.2 50.1 29.6
Net Overhead............ 206.8 202.3 194.1
------ ------ ------
Income Before Income
Taxes.................. 214.7 192.2 188.5
Provision for Income
Taxes.................. 79.8 72.2 71.3
Tax Equivalency Adjust-
ment(2)................ 2.3 3.3 4.5
------ ------ ------
Income Before Cumulative
Effect of
Accounting Change...... 132.6 116.7 112.7
Cumulative Effect of Ac-
counting Change........ -- 10.8 --
------ ------ ------
Net Income.............. $132.6 $127.5 $112.7
====== ====== ======
- -------
(1) Includes non-accrual loans.
(2) Based upon a statutory tax rate of 35% for 1993 and 34% for 1992 and 1991.
28
LIQUIDITY MANAGEMENT
Liquidity is managed to ensure that Bancorp has continuous access to
sufficient, reasonably priced funding to conduct its normal course of business.
At year-end 1993, deposits declined to $7.0 billion from $7.9 billion at the
end of 1992. This decline was partially offset by an increase in securities
sold under agreements to repurchase (Repos). The change in mix reflects the
continued preference of our local governmental customers for repos as an
alternative to collateralized deposits. Repos are supported by the same type of
collateral that supports governmental deposits, but are not insured by the
FDIC. At year-end 1993 repos totaled $2.5 billion compared to $2.2 billion at
year-end 1992 and $0.5 billion at year-end 1991.
At year-end 1993, the ratio of net purchased liabilities to net assets (short
term borrowings less short term assets divided by total assets less short term
assets) was 37.0%. This proxy for liquidity is tracked by Salomon Brothers Inc,
which publishes bank comparative figures annually. For the five years ending
December 31, 1992, their 50-Bank Composite ratio averaged 32.1%. Bancorp's
ratio is higher than the average, due to the level of state and local
government funds. Historically, these governmental customers have been a stable
source of funds.
Bancorp issues commercial paper in the Hawaii market-place. At year-end 1993
commercial paper outstanding totaled $141.6 million compared to $89.0 million
at year-end 1992. The short term notes are rated A-1 by Standard and Poor's and
P-1 by Moody's.
Long term debt on December 31, 1993 was $357.9 million compared to $84.1
million at year-end 1992. Considering the favorable interest rate environment,
Bank of Hawaii, in the second quarter of 1993 issued $125 million in
subordinated debt, proceeds of which were used for general corporate purposes.
The ten year notes qualify for inclusion as regulatory total capital and bear
interest at 6.88%. The issue was rated A-2 by Standard and Poor's and A by
Moody's. In addition, during the third quarter the Bank finalized a bank note
program allowing for the issuance of up to $750 million to be used for general
corporate purposes. At December 31, 1993, there were $100 million two year
floating rate notes outstanding under this program. The bank notes have been
rated A+ by Standard and Poor's and AA3 by Moody's.
CONTROL OF NET OVERHEAD
At Bancorp, net overhead is defined as the ratio of non-interest expense to
non-interest income. Bancorp's objective is to continually improve this ratio
by controlling expenses and taking advantage of fee income opportunities. This
ratio, which was 3.66 in 1984, has declined to 2.60 for 1993.
Bancorp's long term goal is to have a ratio of 2 to 1, where fee income
offsets at least half of the cost of operations. With the slowdown in the
economy of Hawaii, and increased competition, the efficient managing of the net
overhead ratio grows in importance. Trust operations, electronic financial
services, insurance and annuity sales, and brokerage services are expected to
make significant contributions to this process.
The challenge of rising staff costs for salaries and benefits have focused
Bancorp's management on the ratio of net income per full-time equivalent staff
(FTE). Bancorp's objective is to improve productivity with existing staff
levels. This emphasis balances Bancorp's tight expense control philosophy with
the commitment to still spend money on staffing and technology if such
expenditures will produce greater productivity and revenues. For 1993, net
income per FTE was $31,000, compared to $31,100 in 1992 and $27,600 for 1991.
NON-INTEREST INCOME
For 1993, total non-interest income was $129.3 million, a 14.6% increase over
1992. Excluding securities transactions, non-interest income increased 9.1%
over 1992. During the second quarter, Bank of Hawaii
29
acquired AFS, the parent of Bishop and American Trust Companies. The blending
of AFS with HTCo, both subsidiaries of Bank of Hawaii, is progressing smoothly.
The synergies gained in this acquisition are expected to enhance non-interest
income opportunities. The staffing level at AFS on the merger date was 241.
Through placement in other Bancorp companies and attrition, the staffing level
was reduced by 50% at year-end 1993 demonstrating the progress of the
consolidation. HTCo and AFS reported a 33.9% increase in trust income over 1992
to $40.9 million, while administering an $11.1 billion trust asset portfolio at
year-end 1993. The growth in non-interest income has been consistent for
Bancorp (excluding unusual gains) over the past ten years, with the compound
growth rate of 16.5% over the same period. This improvement has been largely
fueled by the growth in trust income since HTCo was acquired in 1985. Table 14
presents the details of non-interest income for the last five years.
Service charges on deposit accounts increased to $26.5 million, a 6.7%
increase over 1992. Account analysis charges have increased for commercial
accounts due to the low interest rate environment. These fees are earned from
customers who are charged for actual services provided to maintain their
accounts. With lower rates, the offset for earnings credits have been reduced
and have resulted in increased analysis fees.
Bancorp's involvement in trade finance in the Asian Rim countries has
steadily increased over the years as its network of offices and branches in the
area has grown. Reflecting the continuing increase in international activity,
fees for letters of credit, export bill collection, and acceptances have
increased to $7.3 million, 2.8% over 1992. These fees are included in the