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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
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COMMISSION FILE NUMBER 1-6887
BANCORP HAWAII, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
HAWAII 99-0148992
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
130 MERCHANT STREET, HONOLULU, HAWAII 96813
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(808) 847-8888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $2 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of said stock on the New York Stock
Exchange on December 31, 1995 ($35.88 per share): $1,461,789,089
As of February 20, 1996, 41,216,183 shares of Common Stock, $2 par value, of
the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 26, 1996, are incorporated by reference into
Part III of this Report.
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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 1995, Bank of Hawaii International, Inc. (BOHI), a wholly-owned
subsidiary of Bank of Hawaii, finalized its acquisition for $1.8 million of
the remaining 20% equity interest it did not already own in Banque d'Hawaii
(Vanuatu) Limited. Additionally, in furtherance of the establishment of a new
Hong Kong branch of Bank of Hawaii, BOHI liquidated its wholly-owned
subsidiary, Hawaii Financial Corporation (Hong Kong) Limited, whose assets and
liabilities were transferred to the new branch.
During 1995, Bank of Hawaii also activated its wholly-owned subsidiary,
Pacific Capital Asset Management, Inc. (PCAM), a registered investment adviser
organized in 1994 to provide investment advisory services primarily to
institutional investors. These activities are expected to increase in 1996.
Bancorp's organization chart at December 31, 1995 is included as Exhibit
21.1. The percentages indicate the proportion of total assets that each group
of entities contributed to Bancorp's consolidated financial position at
December 31, 1995. All of the subsidiaries are wholly owned except as
otherwise noted for the Pacific affiliate banks and except for those entities
whose directors own qualifying shares. All the entities are consolidated with
the immediate parent company except as otherwise noted for the Pacific
affiliate banks. BOHI's investments in Pacific affiliate banks are accounted
for under the equity method, except Banque d'Hawaii (Vanuatu) Limited and
National Bank of Solomon Islands which are included in the consolidated
financial statements of Bancorp.
At December 31, 1995, Bancorp and its subsidiaries employed 4,391 persons on
a full-time or part-time basis.
The following is a description of each of Bancorp's subsidiaries.
Bank of Hawaii was organized under the laws of Hawaii on December 17, 1897,
and has been continuously in business since. Its headquarters are in Honolulu,
Hawaii, and its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC). It is not a member of the Federal Reserve System.
Bancorp and 18 directors of Bank of Hawaii (each of whom holds 125
qualifying shares) own 100% of the outstanding shares. There are three (3)
directors of Bank of Hawaii who do not hold qualifying shares. The legal
requirement for directors of Hawaii banks to hold qualifying shares was
eliminated in 1993. It is anticipated that directors currently holding such
shares will retain them until they retire or resign from the Board of Bank of
Hawaii.
Bank of Hawaii provides customary commercial banking services through branch
offices in the State of Hawaii and branches or representative offices in
American Samoa, Bahamas (Nassau), Commonwealth of the Northern Mariana Islands
(Saipan), Federated States of Micronesia (Pohnpei, Kosrae, and Yap), Guam,
Hong Kong, Korea (Seoul), Philippines (Manila, Davao, and Cebu), Republic of
Fiji (Suva, Nadi and Lautoka opening in 1996), Republic of the Marshall
Islands (Majuro), Republic of Palau (Koror), Japan (Tokyo), Singapore, and
Taiwan (Taipei). Bank of Hawaii also has affiliates in New Caledonia, Solomon
Islands, Tahiti, Tonga, Vanuatu and Western Samoa.
Bank of Hawaii owns all of the outstanding stock of Hawaiian Trust Company,
Limited; Pacific Capital Asset Management, Inc.; Bancorp Leasing of Hawaii,
Inc.; BOHI; Bank of Hawaii International Corporation,
2
New York; Bancorp Investment Group, Limited; Pan Ocean Insurance Agency, Inc.;
Bankoh Investment Advisory Services Limited; Realty and Mortgage Investors of
the Pacific, Limited; and Bankoh Corporation (formerly known as Hawaiian Hong
Kong Holdings, Ltd.). The operations of the original Bankoh Corporation were
merged into the Bank and the original Bankoh Corporation was dissolved in
December 1993. In 1994, Hawaiian Hong Kong Holdings, Ltd. (an inactive
corporation) was renamed Bankoh Corporation. A brief discussion of other Bank
subsidiaries not described above follows:
Hawaiian Trust Company, Limited (HTCo) was acquired by Bancorp in 1985. HTCo
was incorporated in Hawaii on August 10, 1898. It offers trust services
primarily in Hawaii and Guam. In 1987, Bancorp contributed the stock of HTCo
to Bank of Hawaii. As a result, HTCo became a wholly owned subsidiary of Bank
of Hawaii. In 1994, American Financial Services of Hawaii, Inc. (AFS), which
the Bank had acquired during the previous year, along with its subsidiaries
Bishop Trust and American Trust Company of Hawaii, were all merged into HTCo.
At year-end 1995, trust assets under administration were $12.2 billion for
HTCo.
Bancorp Leasing of Hawaii, Inc. (BLH), formed in 1973, provides leasing and
leasing services, mainly to the commercial sector in Hawaii. BLH has several
subsidiaries that are "specific purpose leasing vehicles." These subsidiaries
include Bankoh Equipment Leasing Corporation; S.I.L., Inc.; Arbella Leasing
Corporation; Bancorp Leasing of America, Inc.; and Bancorp Leasing
International, Inc. Bancorp Leasing of America, Inc. remains inactive. On a
consolidated basis, BLH's assets represented 1.0% of Bancorp's total assets at
year-end 1995.
Bank of Hawaii International, Inc. (BOHI) was formed in 1968. BOHI holds
equity interests in the following foreign financial institutions (in the
percentages indicated): Bank of Tonga-30%; Banque de Nouvelle Caledonie, New
Caledonia-21%; Banque de Tahiti-38%; Pacific Commercial Bank, Limited, Western
Samoa-43%; Banque d'Hawaii (Vanuatu), Limited-100%; and National Bank of
Solomon Islands-51%. BOHI's total assets represented 1.3% of Bancorp's total
assets at year-end 1995.
Bank of Hawaii International Corporation, New York (BOHICNY), was organized
in 1982 as an Edge Act corporation. Bank of Hawaii International Corporation,
New York, provides payment, clearing, and settlement services with the New
York Clearing House and Clearing House Interbank Payment Service (CHIPS) for
both affiliated and unaffiliated banks. BOHICNY had total assets representing
1.5% of Bancorp's total assets at year-end 1995.
Bancorp Investment Group, Limited was formed in 1991 to provide full service
brokerage and other investment services. The company has been operational
since February of 1992. In 1994, Bancorp contributed the stock of Bancorp
Investment Group, Limited to Bank of Hawaii. As a result, Bancorp Investment
Group, Limited became a wholly owned subsidiary of Bank of Hawaii.
Bankoh Investment Advisory Services, Limited (formerly known as Bankoh
Advisory Corporation) was reactivated in 1991 to provide advisory services for
businesses seeking to operate in Hawaii. The activity of this company has been
very limited during 1995.
Bankoh Corporation was originally incorporated in 1984 as Hawaiian Hong Kong
Holdings, Ltd. and remained inactive until 1994. In 1994, the name was changed
to Bankoh Corporation, with very limited activity in 1994 and 1995.
Realty and Mortgage Investors of the Pacific, Limited (RAMPAC), a wholly
owned subsidiary, was organized in 1992 as a financial services company in the
State of Hawaii. Its activity is focused on commercial real estate lending in
Hawaii, and it does not accept deposits. Total assets at year-end 1995 were
$50.6 million.
In 1994, Bank of Hawaii organized Pan-Ocean Insurance Agency, Inc. (Pan-
Ocean) as a wholly owned subsidiary. Pan-Ocean engages in a general insurance
agency, insurance sub agency and general insurance brokerage business to the
extent permitted under applicable federal and state laws. Business activity
began in late 1995 with limited results. Activity is anticipated to increase
in 1996.
3
Bancorp also holds all of the outstanding stock, except as noted, of the
corporations listed below:
Bancorp Pacific, Inc., formerly known as FirstFed America, Inc., was
incorporated under Delaware law in July 1986 for the purpose of becoming a
savings and loan holding company to own the outstanding stock of First Federal
Savings and Loan Association (First Federal) upon its conversion from a
federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association.
Bancorp Pacific Inc.'s only significant business is conducted through its
wholly owned subsidiary, First Federal, and First Federal's subsidiary, First
Savings and Loan Association of America (First Savings).
First Federal, a federally chartered stock savings and loan association, has
been in operation since 1904. First Federal in 1978 merged with Island Federal
Savings and Loan Association of Honolulu, Hawaii, and during the 1980s
acquired several smaller savings and loan associations. First Federal operates
24 full service offices throughout Hawaii. Its deposits are also insured by
the FDIC. Total assets for First Federal represented 7.9% of Bancorp's total
assets at year-end 1995.
First Savings operates in a market area that includes the entire island of
Guam and the island of Saipan in the Commonwealth of the Northern Mariana
Islands (located approximately 120 miles northeast of Guam). First Savings
operates three full-service offices in Guam and one in Saipan. Its deposits
are insured by the FDIC. The stock of Bancorp Finance of Hawaii--(Guam), Inc.
(BFH-Guam) was contributed to First Savings in 1991. BFH-Guam, which changed
its name from Bankoh Finance, Inc., in 1984, was formed in 1979 through the
purchase of the assets of an industrial loan company based in Guam. BFH-Guam
has deposit-taking authority under Guam law, but in 1984, BFH-Guam
discontinued accepting new deposits and has had no deposit liabilities since
1987. On a consolidated basis, First Savings' assets represented 1.3% of
Bancorp's total assets at year-end 1995.
First National Bank of Arizona (FNBA) was acquired by Bancorp in October
1987. Bancorp and the directors of FNBA (each of whom holds 1,000 qualifying
shares) own 100% of the outstanding shares of FNBA. FNBA is organized under
the laws of the United States. Its deposits are insured by the FDIC, and it is
a member of the Federal Reserve System. FNBA provides customary commercial
banking services through five branch offices located in the State of Arizona.
FNBA had total assets representing 1.0% of Bancorp's total assets at year-end
1995.
Bancorp Life Insurance Company of Hawaii, Inc., was incorporated in 1981 in
the State of Arizona to underwrite as a reinsurer the credit life and credit
accident and health insurance sold in conjunction with Bank of Hawaii's short-
term consumer lending activities. Bancorp Insurance Agency of Hawaii, Inc.,
was formed in 1982 to act as an agent for the sale of all credit life and
credit accident and health insurance that is reinsured with Bancorp Life
Insurance Company of Hawaii, Inc.
In 1989, Bancorp established a wholly owned captive insurance company,
Bancorp Hawaii Insurance Services, Ltd. (BHISL). With BHISL's formation,
Bancorp became the first Hawaii corporation to establish a Hawaii captive
insurance company for its self-insurance needs. BHISL provides bankers
professional liability insurance exclusively to Bancorp and its subsidiaries
and affiliates. In 1992, BHISL began providing workers compensation insurance
for Bancorp and its subsidiaries. BHISL's formation provides Bancorp with
greater flexibility and stability in controlling insurance coverages and
premium costs. BHISL also provides Bancorp with the opportunity to design
self-insurance programs not otherwise available in the conventional insurance
market.
Bancorp Hawaii Small Business Investment Company, Inc., was formed in
September 1983 in the State of Hawaii as a small business investment company.
Its investment and lending activities were reactivated in 1995 with several
new investments made during the year. The company also realized a gain ($1.4
million) on the liquidation of one of its early investments.
Investors Pacific Limited, an inactive Bancorp subsidiary, was dissolved in
1995.
4
REGULATIONS AND COMPETITION
Effect of Governmental Policies
The earnings of Bancorp and its principal subsidiaries are affected not only
by general economic conditions, both domestically and internationally, but
also by the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve System, and foreign governments and
their agencies. The monetary policies of the Federal Reserve System influence
to a significant extent the overall growth of loans, investments, deposits,
interest rates charged on loans, and interest rates paid on deposits. The
nature and impact of future changes in monetary policies are often not
predictable. Flexibility is a key attribute in successfully responding to
these varied forces.
Competition
The financial services industry has become highly competitive. Bancorp, Bank
of Hawaii, and First Federal compete with local financial institutions as well
as institutions located in the major financial centers of the world. These
financial institutions include not only banks and savings associations, but
also insurance companies, brokerage houses, mortgage companies, merchandise
retailers, consumer finance companies, credit unions, and diversified
financial services companies that provide many or all of the services offered
by commercial banks and savings institutions but operate without a banking
charter and thus free of most of the associated regulatory requirements.
The State of Hawaii is served by six commercial banks, six savings
associations, approximately nine deposit-taking financial services loan
companies, approximately 124 credit unions, and scores of mortgage companies
and other financial services firms. The State is also served by a large number
of out-of-state institutions and foreign banks. Bank of Hawaii is the largest
Hawaii based financial services firm operating in the market. Outside of
Hawaii, Bank of Hawaii's primary competition in the Pacific Basin comes from
several major U.S. Mainland and foreign banks that operate in those areas.
First Federal is the third largest savings association in Hawaii.
Additional financial institution holding companies or their subsidiaries may
enter markets served by Bancorp and thereby provide additional competition.
Likewise, if Bancorp, Bank of Hawaii, First Federal, and their subsidiaries
pursue additional business opportunities, they will encounter significant
competition from other businesses, including ones not associated with banks or
financial institution holding companies.
Supervision and Regulation
Bancorp is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHC Act") and, as such, is subject to
the Act and regulations issued thereunder by the Board of Governors of the
Federal Reserve System (the "Board of Governors"). Bancorp is also registered
as a bank holding company under the Hawaii Code of Financial Institutions (the
"Code") and, as such, is subject to the registration, reporting, and
examination requirements of the Code.
The BHC Act requires prior approval of the Board of Governors of the
acquisition by Bancorp of more than 5% of the voting shares of any bank or any
other bank holding company. The statute has been eliminated, effective
September 29, 1995, which had prohibited the acquisition of more than 5% of
the stock of Bancorp by a bank holding company whose operations are
principally conducted in a state other than Hawaii, and the acquisition by
Bancorp of more than 5% of the stock of any bank located in a state other than
Hawaii unless the statutory law of the state in which such bank is located
specifically authorized such acquisition. Accordingly, at the present time and
subject to certain limits, the BHC Act will allow adequately capitalized and
adequately managed bank holding companies to acquire control of banks in any
state. Thus, assuming it is judged to be adequately capitalized and adequately
managed, Bancorp is no longer disabled by the BHC Act from acquiring control
of banks in any state, and bank holding companies whose operations are
principally conducted in states other than Hawaii are no longer disabled by
the BHC Act from acquiring control of Bancorp. An interstate
5
acquisition may not be approved, however, if immediately before the
acquisition the acquirer controls an FDIC-insured institution or branch in the
state of the institution to be acquired, and if immediately following the
acquisition the acquirer would control 30 percent or more of the total FDIC-
insured deposits in that state; but a state may waive the 30 percent
limitation by statute, regulation, or order, or by certain nondiscriminatory
administrative approvals.
Beginning on June 1, 1997, and earlier if expressly permitted by a
nondiscriminatory state law, an adequately capitalized and adequately managed
bank may apply for permission to merge with an out-of-state bank and convert
all branches of both parties into branches of a single bank. States retain the
authority to prohibit such mergers if between September 29, 1994 and June 1,
1997 they enact a statute expressly prohibiting them and that statute applies
equally to all out-of-state banks. An interstate merger may not be approved,
however, if immediately before the acquisition the acquirer controls an FDIC-
insured institution or branch in the state of the institution to be acquired,
and if immediately following the acquisition the acquirer would control 30
percent or more of the total FDIC-insured deposits in that state; but a state
may waive the 30 percent limitation by statute, regulation, or order, or by
certain nondiscriminatory administrative approvals. Banks are also permitted
to open newly-established branches in any state that expressly permits all
out-of-state banks to open newly-established branches, if the law applies
equally to all banks.
The BHC Act also prohibits, with certain exceptions, Bancorp from acquiring
direct or indirect control of more than 5% of the voting shares of any company
that is not a bank or bank holding company and from engaging directly or
indirectly in any activity other than those of banking, managing or
controlling banks or other subsidiaries authorized under the BHC Act, or
furnishing services to or performing services for its subsidiaries. Among the
permitted activities is the ownership of shares of any company the activities
of which the Board of Governors determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Board of Governors is required to weigh the expected
benefits to the public, such as greater convenience, increased competition, or
gains in efficiency, against the risks of possible adverse effects, such as
undue concentration of resources, decreased or unfair competition, conflicts
of interest, or unsound banking practices. The Board of Governors has adopted
regulations that specify various activities as being so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The exact nature and scope of such activities have been the subject of intense
national debate, and thus, they may change and become more broad as they
evolve over time.
Under the policies of the Board of Governors, Bancorp is expected to act as
a source of financial strength to its subsidiary banks and to commit resources
to support its subsidiary banks in circumstances where it might not do so
absent such a policy. It is the policy of the Board of Governors that in
serving as a source of strength to its subsidiary banks, a bank holding
company should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial adversity
and should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks.
In 1989 Congress expanded the authority of bank holding companies to acquire
savings associations, subject to approval by the Board of Governors. Bank
holding companies may acquire healthy as well as failed or failing savings
associations in any state.
Congress in 1989 restructured the regulation of the savings and loan
industry and its deposit insurance and provided a new regulatory structure for
the resolution of troubled and insolvent savings associations. Congress in
1989 also permitted the FDIC to impose cross-guarantee liability on insured
institutions for any cost or loss incurred by the FDIC in connection with the
default by, or assistance to, a commonly controlled institution.
By virtue of Section 23A of the Federal Reserve Act and Section 18(j) of the
Federal Deposit Insurance Act, Bancorp and its subsidiaries are "affiliates"
of Bank of Hawaii and FNBA and are subject to the provisions of Section 23A,
which limit the amount of and require substantial security for loans and
extensions of credit by Bank of Hawaii or FNBA to, and investments in, Bancorp
or certain of its subsidiaries and the amount of advances to third parties
collateralized by the securities and obligations of Bancorp or certain of its
subsidiaries.
6
Sections 23A and 18(j) are designed to assure that the capital of depository
institutions such as Bank of Hawaii and FNBA is not put at risk to support
their non-bank affiliates. A similar provision, Section 11 of the Home Owners'
Loan Act, subjects the thrift subsidiaries of Bancorp to essentially the same
limitations in their transactions with their "affiliates," including Bancorp.
Also, Bancorp and its subsidiaries are prohibited from engaging in certain
"tie-in" arrangements in connection with extensions of credit or provision of
property or services.
Bank of Hawaii is subject to supervision and examination by the FDIC and the
Department of Commerce and Consumer Affairs of the State of Hawaii. FNBA is
subject to supervision and examination by the Comptroller of the Currency and
in certain respects the FDIC.
Banks, including Bank of Hawaii and FNBA, are subject to extensive federal
and (in the case of Bank of Hawaii) state statutes and regulations that
significantly affect their business and activities. Banks must file reports
with their regulators concerning their activities and financial condition and
obtain regulatory approval to enter into certain transactions. Banks are also
subject to periodic examinations by their regulators to ascertain compliance
with various regulatory requirements. Other applicable statutes and
regulations relate to insurance of deposits, allowable investments, loans,
acceptance of deposits, trust activities, mergers, consolidations, payment of
dividends, capital requirements, reserves against deposits, establishment of
branches and certain other facilities, foreign and international operations,
limitations on loans to one borrower and loans to affiliated persons, and
other aspects of the business of banks. Recent federal legislation has
instructed federal agencies to adopt standards or guidelines governing banks'
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits, asset quality, earnings and stock valuation, and
other matters. Similar provisions subject savings associations, including
First Federal, to comparable requirements and restrictions. Legislation
adopted in 1994 gives the federal banking agencies greater flexibility in
implementing standards on asset quality, earnings, and stock valuation.
Regulatory authorities have broad authority to initiate proceedings designed
to prohibit banks and savings associations from engaging in unsafe and unsound
banking practices.
Bancorp Pacific, as a savings and loan holding company, is subject to
supervision by the Office of Thrift Supervision ("OTS"), and its thrift
subsidiaries are subject to supervision by the OTS and in certain respects the
FDIC. As owner of all of the stock of Bancorp Pacific, Bancorp is itself
registered with the OTS as a savings and loan holding company and in such
capacity is subject to various OTS regulations, examinations, and reporting
requirements.
The Home Owners' Loan Act and regulations issued thereunder generally
prohibit a savings and loan holding company, directly or indirectly, from (i)
acquiring control of an insured savings institution or its holding company
without prior OTS approval; (ii) acquiring more than 5% of the voting shares
of an insured savings institution or holding company that is not a subsidiary;
or (iii) acquiring control of an uninsured savings institution. No director or
officer of a savings and loan holding company or person owning or controlling
more than 25% of its voting shares may, except with the prior approval of the
OTS, acquire control of an insured savings association that is not a
subsidiary of that holding company.
Congress adopted legislation in 1991 to permit the FDIC to increase deposit
insurance assessment rates for insured banks and to levy emergency special
assessments against insured institutions. In response, the FDIC adopted a
premium schedule under which the actual assessment rate for a particular
institution depends in part upon the risk classification the FDIC assigns to
that institution. The FDIC may raise an institution's insurance premiums or
terminate insurance altogether upon a finding that the institution has engaged
in unsafe and unsound practices. The United States Congress may consider
further measures to strengthen the Savings Association Insurance Fund
administered by the FDIC which generally insures the deposits of savings
associations, or to merge the Savings Association Insurance Fund with the Bank
Insurance Fund which generally insures the deposits of banks, or to defray the
costs of FDIC operations, or for other purposes. Implementation of such
measures may change assessment rates, give rise to one-time assessments
against savings associations (including First Federal), or modify the extent
or nature of insurance coverage.
7
The Federal Deposit Insurance Corporation Improvements Act of 1991
("FDICIA") requires the federal banking regulators to take "prompt corrective
action" in respect of depository institutions that do not meet minimum capital
requirements and imposes certain restrictions upon banks which meet minimum
capital requirements but are not "well capitalized" for purposes of FDICIA.
FDICIA generally prohibits a depository institution from paying any dividend
or making any capital distribution or paying any management fee to its holding
company if the depository institution would thereafter be undercapitalized.
Undercapitalized institutions are subject to regulatory monitoring and may be
required to divest themselves of or liquidate subsidiaries. Holding companies
of such institutions may be required to divest themselves of such institutions
or divest themselves of or liquidate nondepository affiliates. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Further, a bank that is not well capitalized is generally subject to various
restrictions on "pass through" insurance coverage for certain of its accounts
and is generally prohibited from accepting brokered deposits and offering
interest rates on any deposits significantly higher than the prevailing rate.
Such banks and their holding companies are also required to obtain regulatory
approval before retaining senior executive officers.
Subject to certain exceptions, FDICIA (as modified in 1992) restricts
certain investments and activities as principal by state nonmember banks
(including Bank of Hawaii) and requires the federal banking regulators to
prescribe standards for extensions of credit secured by real estate or made to
finance improvements to real estate, loans to bank insiders, regulatory
accounting and reports, internal control reports, independent audits, and
other matters, and requires that insured depository institutions generally be
examined on-site by federal or state personnel at least once every twelve
months.
Federal legislation enacted in 1992 affords the federal banking agencies
limited discretion to provide relief from certain regulatory requirements to
depository institutions doing business or seeking to do business in an
emergency or major disaster area. The Omnibus Budget Reconciliation Act of
1993 affects the amortization of intangible assets by banks, requires
securities dealers (including banks) to adopt mark-to-market accounting with
respect to certain of their securities in calculating income taxes, and
establishes a preference for depositors in liquidations of FDIC-insured banks.
Bills are now pending or expected to be introduced in the United States
Congress that contain proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. If enacted,
these bills could increase or decrease the cost of doing business, limit or
expand permissible activities (including activities in the insurance and
securities fields), or affect the competitive balance among banks, savings
associations, and other financial institutions. Some of these bills would
reduce the extent of federal deposit insurance, broaden the powers of bank
holding companies, promote more open financial markets for U.S. banks and
financial companies in foreign nations, regulate banks' derivatives activities
and sales of investment products such as mutual fund shares, limit the
prerogative of regulators to expand the range of permissible activities for
banks, particularly in the field of insurance, eliminate or revise the
features of the specialized savings-association charter, and realign the
structure and jurisdiction of various financial institution regulatory
agencies. Whether or in what form any such legislation may be adopted or the
extent to which the business of Bancorp might be affected thereby cannot be
predicted.
ITEM 2. PROPERTIES
Note D to the Audited Financial Statements on pages 52 to 54.
ITEM 3. LEGAL PROCEEDINGS
Note J to the Audited Financial Statements on page 57.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1995 to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK LISTING
The common stock of Bancorp Hawaii, Inc., is traded over the counter on the
New York Stock Exchange and quoted daily in leading financial publications.
NYSE Symbol: BOH
Market Prices, Book Values, and Common Stock Dividends--Table 2 on page 10.
ITEM 6. SELECTED FINANCIAL DATA
Year-End Summary--Table 23 on page 38.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PERFORMANCE HIGHLIGHTS
Bancorp Hawaii, Inc. (Bancorp) reported earnings of $121.8 million for 1995,
up 3.5% from $117.7 million reported for 1994. The improvement, in spite of a
very sluggish Hawaii economy, was attributable to good asset quality, control
over costs and a reduction in FDIC insurance premiums.
Bancorp has adopted a long term goal to increase the annual targets to 1.20%
return on average assets (ROAA) and 17.5% return on average equity (ROAE) by
the year 2000. In 1995, ROAA was 0.98% and ROAE was 11.87%. Bancorp's average
equity to average assets minimum target of 6.00% was exceeded for 1995 at
8.27% and it easily maintained its regulatory designation as a "well
capitalized" financial institution.
Asset quality remained strong in 1995. Total Non-Performing Assets,
including loans 90+ days past due, were $77.6 million, 0.95% of total loans at
year-end 1995, compared to $64.8 million or 0.82% of total loans reported at
year-end 1994. As a percentage of outstanding loans, Non-Performing Assets
(NPA) (excluding loans 90+ days past due) increased slightly to 0.70% as of
year-end, up from 0.67% at year-end 1994, but lower than 0.95% at year-end
1993. Bancorp has generally maintained a level of NPA to outstanding loans
under 1%, reflecting sound lending practices, aggressive management of NPA,
and an aggressive charge-off strategy. The effects of that strategy, while
conservative, have a positive affect on recovery levels. Recoveries totaled
$14.4 million for the year, compared to $25.3 million in 1994. Net charge-offs
in 1995 were $13.5 million or 0.18% of average loans, compared with net
charge-offs of $0.1 million in 1994. Finally, the reserve for loan losses
totaled $152.0 million at the end of 1995, representing 1.90% of loans
outstanding, compared with $148.5 million and 1.92%, respectively at year-end
1994.
Bancorp recognized non-interest income, excluding securities gains and
losses, of $143.9 million, representing a decrease from $146.2 million
reported for 1994. The decrease was caused by a reduction in service charges
on deposit accounts and other income. Trust income grew a disappointing 1.8%
over 1994. However, at Hawaiian Trust Company, Limited (HTCo) net income
increased by 19.9% over 1994. The increase was driven by effective management
of expenses and an improvement in investment income.
Bancorp's emphasis on controlling non-interest expense is reflected in the
minimal growth for 1995. Total non-interest expense grew 1.0% between 1994 and
1995. The restructuring of the retirement plans and the early retirement
program offered to certain staff members helped keep salaries and benefits
growth to less than 3%. The savings from the reduction of FDIC insurance
premiums helped other operating expenses end 1995 at 5.8% below 1994 reported
levels.
9
Bancorp has recognized that in situations where opportunities to employ
incremental capital at attractive returns are not plentiful, its best
alternative use for the capital may be the purchase of Bancorp common stock.
In 1995, Bancorp continued its two programs to repurchase its common shares.
The first program is ongoing and is designed to repurchase common shares to
meet the annual needs of various Bancorp plans. The second program was
approved by the Board of Directors in 1994 and authorized the repurchase of up
to 2 million common shares. Under the terms of the second program,
approximately 700,000 shares have been repurchased as of year-end.
PERFORMANCE HIGHLIGHTS
TABLE 1
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
1995
---------------- FIVE-
1994 YEAR
PERCENT -------- COMPOUND
EARNINGS MEASURES AMOUNT CHANGE AMOUNT GROWTH
- ----------------- -------- ------- -------- --------
Net Income................................... $ 121.80 +3.5% $ 117.74 4.9%
Earnings Per Common Share.................... 2.90 +5.5 2.75 3.7
Average Assets............................... 12,405.9 -1.5 12,596.6 6.2
Average Loans................................ 7,654.9 +3.5 7,393.7 6.7
Average Deposits............................. 7,036.5 -3.5 7,295.2 (2.2)
Average Shareholders' Equity................. 1,026.0 +5.7 970.9 12.8
FIVE-YEAR
PERFORMANCE RATIOS 1995 1994 AVERAGE
- ------------------ ----- ----- ---------
Return on Average Assets................................ 0.98% 0.93% 1.02%
Return on Average Equity................................ 11.87 12.13 14.32
Average Equity to Average Assets Ratio.................. 8.27 7.71 7.22
Loss Reserve to Loans Outstanding....................... 1.90 1.92 1.84
Tier I Capital Ratio.................................... 10.25 10.39
Total Capital Ratio..................................... 12.74 12.99
Leverage Ratio Requirement.............................. 7.82 7.28
MARKET PRICES, BOOK VALUES AND COMMON STOCK DIVIDENDS
TABLE 2
MARKET PRICE (MP) RANGE HIGH MP AS
----------------------------- A PERCENT
YEAR HIGH LOW BOOK VALUE (BV) OF BV DIVIDEND
- ---- ------ ------ --------------- ---------- --------
1991.......................... $31.83 $18.89 $17.45 182% $ .78
====== ====== ====== ==== =====
1992.......................... $34.67 $26.83 $19.68 176% $ .85
====== ====== ====== ==== =====
1993.......................... $35.92 $26.67 $22.00 163% $ .90
====== ====== ====== ==== =====
1994.......................... $34.75 $24.13 $23.10 150% $1.04
First Quarter................. 31.88 26.92 .26
Second Quarter................ 34.75 29.38 .26
Third Quarter................. 34.00 29.25 .26
Fourth Quarter................ 30.38 24.13 .26
1995 $37.13 $24.88 $25.51 146% $1.08
First Quarter................. 28.50 24.88 .26
Second Quarter................ 30.88 27.63 .27
Third Quarter................. 36.75 29.38 .27
Fourth Quarter................ 37.13 32.50 .28
10
Bancorp's Markets
Bank of Hawaii, Bancorp's primary subsidiary, has continued to expand its
operations beyond Hawaii since it opened its first branch in the Republic of
the Marshall Islands in 1959. Bancorp's presence across the Asia-Pacific Rim
has expanded steadily and developed into distinct markets, each of which
contributes to the company's overall performance. Foremost among these markets
is Hawaii. Other markets include the Intra-Pacific Region, Asian Rim and the
U.S. Mainland.
Hawaii is Bancorp's oldest and largest market. Since 1897, Bank of Hawaii
has provided financial services to the people of Hawaii and earned its
position as Hawaii's largest financial institution. Throughout the years,
Bancorp has continued to offer financial products and services to meet the
needs of Hawaii's growing economy. Products introduced in 1995 included Bank
of Hawaii's Cash Advantage Account--a sweep account, Bank of Hawaii's
Mastercard and its first co-branded VISA card with Continental Airlines. Trust
and Investment Services were expanded with the introduction of several new
funds from the Pacific Capital Fund Family and the commencement of Pacific
Capital Asset Management, Inc., an institutional investment advisor.
In contrast to the latter half of the 1980s, when Hawaii registered economic
growth above the national average, Hawaii's economy in the early 1990s was one
of slower growth. The estimated growth in real Gross State Product (GSP) for
1995 of 0.8% and the projected 1996 real GSP growth between 1 and 2%,
indicates a gradual recovery. Of the state's three largest economic sectors,
tourism, construction and federal expenditures, tourism's performance was the
strongest in 1995. For 1995, the Hawaii Visitors Bureau (HVB) reported an
increase in arrivals of 3.2%. The positive outlook extends to 1996 with the
HVB expecting 2 to 3% growth in visitor arrivals which would bring
approximately 6.8 million tourists to Hawaii. The HVB reports 1995 to be a
record year for Eastbound tourists to Hawaii, with more than 2.6 million
visitors. Westbound (mainly U.S. Mainland) tourists declined about 0.5% or
about 24,000 visitors. With the gradual recovery of tourism, hotel occupancy
levels were 76.3% in 1995 and are forecast to rise to 78% in 1996. These
positive trends also point to an estimated increase in visitor expenditures
from approximately $10.8 billion in 1995 to roughly $11.1 billion in 1996.
Construction in Hawaii is expected to stabilize in 1996. Within this sector,
residential housing demand remains strong despite the changing interest rate
environment. A few large projects, like the $175 million convention center in
Honolulu, will support the stabilization. In 1995, federal government
expenditures in Hawaii are expected to remain at or near current levels,
estimated to be $7.6 billion. Of this amount, approximately $4.4 billion are
federal civilian expenditures while federal military expenditures totaled
approximately $3.2 billion in 1995. The total federal workforce is about
31,000 in Hawaii. Although national reductions in military spending continue,
Hawaii has had minimal cuts to date. As long as Hawaii remains a significant
and strategic location for military presence in the Pacific, this spending
level will likely continue.
Bancorp has been a player in the Intra-Pacific region for nearly four
decades. This market spans island nations across the South and West Pacific
that have become participants in the economic growth occurring within the
Asia-Pacific Rim. Bancorp is the only Hawaii-based financial organization to
have such a broad presence in this region. With 13 office locations and six
Pacific Island affiliates, Bancorp continues to see opportunities for growth
and expansion. The largest and most established of our operations are
Bancorp's branches on Guam, which have greatly benefited from the economic
growth in Asia. In 1995, Bancorp acquired the remaining 20% of Banque d'Hawaii
(Vanuatu) it had not previously owned and now owns 100% of the Bank. In
January 1996, Bancorp announced it had entered into an agreement to increase
its ownership in Banque de Tahiti and Banque de Nouvelle Caledonia to majority
interests in both these banks. This expansion, as well as a new branch opened
in Lautoka, Fiji in January 1996, is an important addition to Bancorp's Intra-
Pacific strategy.
The Asian Rim is another market that Bancorp has developed over the last
three decades. Beginning with Japan in the 1970s, Bancorp's Asian foothold now
includes Hong Kong, Korea, Philippines, Singapore and Taiwan. Activities in
this market focus primarily on trade financing which involves flows of funds,
such as letters
11
of credit. Bancorp has been successful in meeting the trade financing needs of
its customers interested in participating in Asia's growth. In 1995, Bancorp
obtained regulatory approvals to upgrade the Taiwan office to branch status
with the opening expected by mid-year 1996. Bancorp also provides
correspondent banking, lending, and investment advisory services to this
market through the International Banking Division's specific units such as the
Japan, China, Korea and Philippine Marketing Groups. These groups are located
in Hawaii and provide new customers with bankers who speak their language and
understand their culture, thus making business transactions flow more
smoothly.
The U.S. Mainland is a market that provides opportunities for continued loan
growth. Bancorp's focus in this market continues to be companies that have
interests in the Pacific, Fortune 1000 companies, and those in the media and
communications industry. For companies that have a Pacific orientation,
Bancorp's presence throughout the Pacific is invaluable. In working with these
borrowers, Bancorp continues to adhere to its strict lending policies. In the
media and communications industry, Bancorp has developed a niche market and
established itself as a knowledgeable and responsive lender. Additionally,
through its subsidiary, First National Bank of Arizona (FNBA), Bancorp
provides financial services to small to middle market customers in the greater
metropolitan Phoenix market.
Subsidiary Activity
Bank of Hawaii is the largest of Bancorp's subsidiaries. Bank of Hawaii
reported total assets of $11.8 billion at year-end 1995, 89.0% of Bancorp's
total assets. Since Bank of Hawaii represents such a large component of
Bancorp, much of the discussion in the following sections reflects its
operations. The following paragraphs are discussions of the other major
subsidiaries.
Hawaiian Trust Company, Limited (HTCo), a subsidiary of Bank of Hawaii,
reported trust income for 1995 of $49.5 million, an increase of 1.8% from
1994. Trust assets under administration have increased to $12.2 billion at
year-end 1995 from $11.9 billion at year-end 1994. Activity in Pacific Capital
Funds (PCF) has continued to grow; at year-end 1995, PCF and the Hawaiian Tax
Free Trust (also advised by HTCo) advised funds with investments totaling $2.0
billion. During 1995, Hawaiian Trust also organized an offshore trust company
in the Bahamas through Banque d'Hawaii (Vanuatu)'s trust subsidiary. Activity
is expected to increase in 1996.
Bancorp Pacific, Inc. (formerly known as FirstFed America, Inc.), a thrift,
has two subsidiaries, First Federal Savings and Loan Association of America
(First Federal) located in the State of Hawaii and First Savings and Loan
Association of America (First Savings) located in Guam and Saipan. Bancorp
Pacific reported earnings of $14.7 million for 1995, a decrease of 20.2% from
1994's total earnings of $18.4 million. These lower earnings were due to a
decrease in net interest margin as deposits shifted to higher cost time
deposits. In spite of the lower earnings, performance ratios remained strong
with ROAA of 1.26% and ROAE of 12.46%. Loans grew 9.2% to $1.1 billion at
year-end 1995, while deposits grew 9.8% over the same period. NPA of 0.76% of
total loans outstanding (primarily secured by residential real estate) and a
reserve ratio of 0.86% of outstanding loans at year-end 1995 remained
consistent over the year. At year-end 1995, First Federal reported risk-based
total capital ratio of 17.66% exceeding statutory minimums and ratios at peer
savings and loan companies.
FNBA reported net income for 1995 of $2.1 million, an increase of 22.2% from
1994. The improvement in results was driven by a resurgent Arizona economy.
Deposits at FNBA have grown by more than 55% to $132.2 million at year-end
1995 from $84.6 million a year ago, creating a valuable source of funding for
Bancorp. Lending activity at FNBA has increased with gross loans growing to
$113.0 million at year-end 1995, an increase of 20% for the year. Loan quality
continues to improve at FNBA. NPA, as a percent of total loans outstanding,
were 1.04% at year-end 1995, compared to 1.48% at the end of 1994. NPA totaled
$1.2 million at year-end 1995 and included no foreclosed real estate. The
ratio of reserves to loans outstanding was 7.46% at year-end 1995, compared to
8.89% at year-end 1994. FNBA's risk-based capital ratios at year-end 1995
exceeded regulatory minimums at 10.69% and 12.02% for Tier 1 and Total
Capital, respectively.
12
The following sections will cover in more detail Bancorp's performance and
activities during 1995. The areas that will be covered include:
. Risk Elements Involved in Lending Activities
. Asset-Liability Management
. Capital Adequacy
. Interest Rate Risk and Derivatives
. Liquidity Management
. Control of Net Overhead
. Income Taxes
. Fourth Quarter Results
RISK ELEMENTS INVOLVED IN LENDING ACTIVITIES
Risk Profile of Lending Activity
Loans outstanding at year-end 1995 grew to $8.2 billion, a 3.3% increase
from $7.9 billion at year-end 1994. This growth factor was affected by the
securitization of $412 million of residential mortgage loans in the first
quarter. Without the securitization, loans outstanding would have increased by
more than 8%.
The lending environment in Hawaii for the last several years has been
challenging. The interest rate environment and the Hawaii economy have
negatively affected a large part of Bancorp's lending activities and is
reflected in the rate of increase of the loan portfolio and yields on loans.
In 1995, certain sections of the loan portfolio, however, saw increased
activity and positive growth. Mortgage lending, mainly residential, began 1995
reduced by the securitization, but quickly began to re-build the portfolio as
rates declined; by year-end 65% of the securitized balances had been replaced.
Table 3 presents the year-end loan portfolio broken down into the various
categories. The securitization mentioned earlier has changed the mix of loans
at Bancorp. Real estate loans continue to comprise the largest portion of the
loan portfolio. Real estate loans made up 52.1% of total loans at year-end
1995 compared with 53.8% at year-end 1994. Within the real estate category,
residential mortgage loans represented 33.6% of total loans, while commercial
mortgage loans represented 18.5% of total loans at year-end 1995. Table 4
presents the geographic distribution of the loan portfolio based on the major
markets in which Bancorp operates. The distribution remained similar between
1995 and 1994.
LOAN PORTFOLIO BALANCES
TABLE 3
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic Loans
Commercial and Industrial....... $1,902.2 $1,830.8 $1,709.2 $1,864.1 $1,746.9
Real Estate
Construction--Commercial...... 198.5 113.1 136.2 220.2 229.4
Residential..... 9.8 17.9 35.1 40.4 42.0
Mortgage--Commercial.......... 1,308.8 1,241.0 1,230.6 991.9 1,021.9
Residential..... 2,727.4 2,872.8 2,476.0 2,189.1 2,003.5
Installment..................... 817.3 741.6 676.2 655.9 651.3
Lease Financing................. 392.9 378.1 401.6 393.4 357.1
-------- -------- -------- -------- --------
Total Domestic.............. 7,356.9 7,195.3 6,664.9 6,355.0 6,052.1
Foreign Loans
Banks and Other Financial
Institutions................... 268.7 299.0 295.8 285.6 384.3
Commercial and Industrial....... 513.6 364.2 259.4 288.5 284.6
All Others...................... 13.2 33.5 38.3 34.5 38.1
-------- -------- -------- -------- --------
Total Foreign............... 795.5 696.7 593.5 608.6 707.0
-------- -------- -------- -------- --------
Total Loans................. $8,152.4 $7,892.0 $7,258.4 $6,963.6 $6,759.1
======== ======== ======== ======== ========
13
The following sections discuss the loan categories.
Commercial and Industrial Loans
As shown on Table 3, the commercial and industrial loan (C&I) portfolio,
which includes commercial, financial and agricultural loans, was $1.9 billion,
up 3.9% from year-end 1994. This portfolio, which makes up 23.3% of the total
loans, consists of lending to companies and individuals on both a secured and
unsecured basis for business purposes. Customers and collateral vary based on
the type of business involved.
Bancorp's focus in lending to companies on the U.S. Mainland is Fortune 1000
companies, companies with a Pacific orientation and selected niches where
lending expertise has developed over the years. Lending activity to Fortune
1000 companies includes loans and lines of credit. Balances outstanding to
these companies as of year-ends 1995 and 1994 were $918.5 million and $893.6
million, respectively. As previously reported, Bancorp's communication/media
portfolio is considered a selected niche. Total loans and leases of this type
stood at $588.0 million at year-end 1995, an increase of 11.7% from year-end
1994. This category can be segmented further into cable television, publishing
and telecommunications, which represented 11.3%, 6.0% and 6.2%, respectively,
of the total C&I loan portfolio at year-end 1995. At year-end 1995, there were
no loans in the communication/media portfolio which were classified as NPA.
C&I loans that were classified as non-performing totaled $16.9 million or
29.7% of total NPA at year-end 1995. For comparative purposes, $20.3 million
and $16.7 million were classified as NPA at year-ends 1994 and 1993,
respectively.
Real Estate Loans
At year-end 1995, Bancorp's total real estate loan portfolio stood at $4.2
billion, level with year-end 1994. Real estate loans represented 52.1% of the
total loan portfolio at year-end 1995. As mentioned earlier, in the first
quarter of 1995, $412 million in mortgage loans were securitized distorting
the comparison between 1994 and 1995. Considering the securitization, real
estate loan growth would have been more than 9% over 1994. The real estate
loan portfolio is divided into construction loans and amortizing mortgages as
shown in Table 3.
The largest individual component of the real estate loan portfolio is loans
secured by 1-to-4 family residential property. At $2.7 billion, this group
represented 64.3% of total real estate loans at year-end 1995 and 33.5% of
total loans outstanding. More than 90% of these loans are secured by real
estate in Hawaii (see Table 4). Approximately 63.1% of the 1-to-4 family
residential mortgage loans are underwritten on a floating rate basis. The
average 1-to-4 family mortgage loan has been outstanding about 6.0 years with
an outstanding balance of $135,000. Residential mortgage loan originations for
Bancorp in 1995 totaled $527.1 million, representing 2,800 individual loans,
or about 15% of the total originations in Hawaii. Comparatively, $672.4
million in loans were originated in 1994, representing approximately 10% of
the total loans originated in Hawaii. For 1995, Bancorp's average principal
mortgage loan amount originated was $191,000, up from the $186,000 average for
1994 and the $166,000 average for 1993. The 1995 average loan origination at
First Federal was $162,000 compared with $214,000 for Bank of Hawaii. The
median single family home price on Oahu was $349,000, $360,000 and $358,000 in
1995, 1994 and 1993, respectively.
Also included in the real estate portfolio are home equity creditlines.
Available credit under these lines was $490.0 million at year-end 1995,
similar to the $490.4 million at year-end 1994. Outstandings have declined to
$312.0 million at year-end 1995 from $323.4 million at year-end 1994. These
creditlines are underwritten based on repayment ability rather than the value
of the underlying property. However, home equity creditlines are generally
limited to 75% of the value of the collateral including prior liens. At year-
end, home equity creditline balances past due 90 days or more totaled $0.7
million, compared with $0.8 million at year-end 1994, and $0.4 million at
year-end 1993.
At year-end 1995, NPAs in the mortgage-residential category (excluding
construction loans) totaled $14.7 million, or 25.8% of total NPA.
Comparatively, mortgage-residential NPA totaled $15.1 million and $16.4
14
million at year-ends 1994 and 1993, respectively. Foreclosed real estate at
year-end 1995 was $9.3 million, which consisted of properties most of which
are in Hawaii. A large parcel was added to foreclosed real estate in the
fourth quarter of 1995. The fee simple property has been listed for sale and
is being actively marketed. It had previously been reported as a non-accrual
loan.
The commercial real estate portfolio (excluding construction loans) totaled
$1.3 billion at year-end 1995, an increase of 5.5% from year-end 1994. Table 3
presents the balances outstanding in this portfolio over the last five years.
Of the properties collateralizing Bancorp's commercial real estate loans,
about 77.1% were located in Hawaii.
The commercial real estate portfolio is diversified in the types of property
securing the obligations. Of the $1.3 billion in total commercial real estate
loans at year-end 1995, 22.9% of these loans were secured by shopping centers;
14.6% were secured by commercial/industrial/warehouse facilities; and 15.0%
were secured by office buildings. Generally, loans secured by
commercial/industrial/warehouse facilities and office buildings are either
solely or partially owner-occupied.
Non-performing commercial real estate loans at year-end 1995 remained near
1994 levels ending 1995 at $14.9 million or 26.2% of total NPA. Comparatively,
commercial real estate NPA at year-ends 1994 and 1993 totaled $14.1 million
and $13.1 million, respectively. Foreclosed real estate at year-ends 1994 and
1995 included no commercial properties.
Total commercial construction loans were $198.5 million at year-end 1995, an
increase from year-end 1994 when $113.1 million was outstanding. The increase
reflects a growth in lending to tract and land development for residential
housing projects in Hawaii. Bancorp maintains a conservative underwriting
policy, as these loans by their nature have greater risk. For the majority of
these loans, Bancorp looks to the cash flow of the completed projects and
committed permanent financing for repayment, rather than the value of the
property. A dissection of the commercial construction lending portfolio at
year-end 1995 shows commercial land development, $3.0 million; tract and land
development for residential housing, $106.3 million; retail facilities, $16.2
million; industrial projects, $26.8 million and commercial offices, $9.5
million. These loans were concentrated in property located in Hawaii ($178.0
million).
At the end of 1995, construction non-performing loans totaled $0.3 million
or 0.5% of total NPA, compared to year-end 1994 when $1.5 million was reported
and year end 1993 when $17.7 million was reported as NPA.
Consumer Loans
Total consumer loans (excluding residential mortgage and home equity loans)
increased to $817.3 million, up 10.2% from year-end 1994. Beginning in 1994,
Bancorp opportunistically sought to increase this category of loans
implementing programs directly targeted to increase credit card balances and
consumer installment loans. Looking to Table 3 and the five year trend, the
growth reflects Bancorp's effort in this category, particularly in the last
two years.
At year-end 1995, Bancorp's base of credit cardholders increased almost 10%
to 160,000 cardholders from year-end 1994. In January 1995, Bank of Hawaii
announced the co-branding of its VISA card with Continental Airlines. The
card, which includes frequent flyer credits, is available in Hawaii, Guam and
the Federated States of Micronesia. It has been well received in those markets
with more than 6,000 new accounts opened in 1995. In August 1995, Bancorp
began issuing Mastercards. The program was launched with no annual fee for the
first two years and the response exceeded expectations. As of year-end 1995,
more than 15,000 accounts have been opened. Outstanding balances for
Mastercard and VISA cards totaled $261.6 million at year-end 1995, an increase
of 9.3% from year-end 1994. The average credit limit on all card accounts was
$5,850 for 1995 with an average outstanding balance of $1,650, compared with
an average outstanding balance of $1,600 for 1994 and $1,400 for 1993. At
year-end 1995, 1.4% of the accounts (based on balances) were delinquent more
than 90 days, compared with 0.9% and 0.6%, at year-ends 1994 and 1993,
respectively.
15
Leasing Activities
Equipment leases have been an important component of the overall loan
portfolio by providing customers with an alternative to traditional lending
products. Activity in the leasing portfolio has been limited by the interest
rate environment and strong competition. Despite this, leases outstanding
increased to $392.9 million, up 3.9% from year-end 1994. The lease portfolio
remains diversified, with various types of equipment under lease. Leased
equipment includes aircraft, ships, automobiles and trucks, office equipment,
computers and others. There were no NPA in the leasing category at year-end
1995, compared with $0.8 million, and $0.3 million at year-ends 1994 and 1993,
respectively.
International Lending
Foreign loans at the end of 1995 totaled $795.5 million, up 14.2% from year-
end 1994. Bancorp maintains a cautious approach to the international
marketplace with a lending strategy that focuses primarily on short term trade
finance and working capital loans for companies doing business in the Pacific
and the Asian Rim. The lending activities in Japan, Korea and Singapore remain
the most significant with U.S. dollar equivalent loans outstanding at year-end
1995 at branches in these countries of $344.4 million, $103.3 million, and
$160.2 million, respectively. Foreign loan totals include the U.S. dollar
equivalent loans of Fiji branches of Bank of Hawaii, National Bank of Solomon
Islands (NBSI) and Banque d'Hawaii (Vanuatu) Limited which totaled $60.8
million at year-end 1995.
Table 10 presents the outstanding cross-border exposures that exceed 0.75%
of Bancorp's total assets at year-end 1995.
NPA in international lending have remained at low levels. At year-ends 1995
and 1993, there were no loans reported as NPA. At year-end 1994, $0.3 million
were reported as NPA. As indicated in Table 7, losses in the international
portfolio have increased in 1995 to $0.9 million, 0.1% of outstanding
international loans. For 1995, recoveries of foreign loans totaled $2.5
million.
Geographic Distribution of the Loan Portfolio
The distribution of the loan portfolio by geographic areas is presented in
Table 4. The majority of Bancorp's loans (64.7%) were located in Hawaii at
year-end 1995. The balances reflected in the West and South Pacific include
Guam and other Pacific Islands where both Bank of Hawaii and First Federal's
subsidiary, First Savings and Loan Association of America, have branches. U.S.
dollar equivalent loans of NBSI and Banque d'Hawaii (Vanuatu) Limited are also
included in these totals. The modest real estate loan portfolio in the
mainland U.S. represents mortgage lending in Arizona.
GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO (1)
TABLE 4
TOTAL WEST &
YEAR-END SOUTH MAINLAND
1995 HAWAII PACIFIC U.S. JAPAN OTHER
-------- -------- ------- -------- ------ ------
(IN MILLIONS OF DOLLARS)
Commercial, Financial and
Agricultural............ $1,902.2 $ 838.8 $144.0 $ 918.5 $ -- $ 0.9
Real Estate
Construction--
Commercial............ 198.5 178.0 0.1 20.4 -- --
Residential...... 9.8 5.9 3.9 -- -- --
Mortgage--Commercial... 1,308.8 1,008.5 198.7 101.6 -- --
Residential....... 2,727.4 2,499.7 207.9 19.8 -- --
Installment.............. 817.3 651.9 161.9 3.5 -- --
Foreign.................. 795.5 -- 60.8 -- 344.5 390.2
Lease Financing.......... 392.9 87.4 8.3 275.0 -- 22.2
-------- -------- ------ -------- ------ ------
Total................ $8,152.4 $5,270.2 $785.6 $1,338.8 $344.5 $413.3
-------- -------- ------ -------- ------ ------
Percentage of Total...... 100.0% 64.7% 9.6% 16.4% 4.2% 5.1%
======== ======== ====== ======== ====== ======
- --------
(1) Loans classified based upon geographic location of borrowers.
16
Non-Performing Assets and Past Due Loans
Non-performing assets (which include non-accrual loans, restructured loans
and foreclosed real estate) totaled $56.9 million at year-end 1995, compared
to $53.2 million at the end of 1994, and $68.8 million at the end of 1993. The
level of NPA reflects the aggressive posture on handling NPA further described
below. The ratio of NPA to loans outstanding was 0.70% at year-end 1995, 0.67%
at year-end 1994 and 0.95% at year-end 1993. Table 6 presents this ratio for
the last five years with the accompanying graph depicting the ratio of the
Montgomery Securities Regional Bank Proxy for the same period.
Bancorp strives to identify and handle potential problem loans at an early
stage. This allows time to work with borrowers to resolve problems in order to
avoid or minimize losses. Bancorp's policy is to place loans on non-accrual as
soon as a loan is delinquent over 90 days, unless unusual treatment is
indicated by the type of borrowing agreement and/or collateral. At the time a
loan is placed on non-accrual, all accrued but unpaid interest is reversed
against current earnings.
At year-end 1995, NPA secured by real estate totaled $29.9 million or 52.5%
of total NPAs; with the majority secured by real estate in Hawaii. NPA in Asia
and the West and South Pacific were minimal. A focus on quality credits and
cautious asset growth remains the objective in Arizona. NPA in Arizona has
continued to decline totaling $1.2 million at year-end 1995, compared to $1.4
million, and $2.0 million at year-ends 1994 and 1993, respectively. FNBA's
loan quality has improved considerably over the last several years. At the end
of 1995, NPA, including loans 90 days past due, represented 1.07% of total
loans outstanding, compared with 1.48% and 1.83% at year-ends 1994 and 1993,
respectively.
First Federal's NPA was $8.7 million at year-end 1995, compared with $4.8
million and $13.4 million reported at year-ends 1994 and 1993, respectively.
Total NPA at First Federal represented 0.77%, 0.46% and 1.47% of total loans
outstanding at year-ends 1995, 1994 and 1993, respectively. The levels of NPA
for First Federal remain good. Moreover, each loan is secured by real estate
generally with a 70-80% loan to value at origination.
Foreclosed real estate has increased to $9.3 million at year-end 1995. The
increase from minimal levels in 1994 was driven by the addition of one large
residential property. The remaining foreclosed real estate is comprised of 19
properties with an average book value of $144,500. In 1995, losses on the sale
of foreclosed real estate were minimal at $276,000, compared with $700,000 for
1994.
Loans past due 90 days totaled $20.7 million at year-end 1995, an increase
from year-end 1994 when $11.6 million was reported. The increase is mainly in
the consumer installment loan portfolio, reflecting the slowdown in the Hawaii
economy and the affect on consumers. As a percentage of outstanding loans, the
90 days past due installment loans represent 1.28% of total installment loans.
The remaining increase in loans is distributed throughout the remaining
categories. Residential mortgage loans reported $5.8 million in past due
loans, 0.21% of outstanding residential mortgages at year-end 1995. Table 6
presents a five year history of loans past due 90 days.
In 1995, Bancorp recorded $1.3 million in cash basis interest on previously
non-accrual and charged-off loans, compared to $4.0 million in 1994. In 1995,
$156,000 in interest reversals were recorded on non-accrual loans, an increase
from the $79,000 reversed in 1994.
FOREGONE INTEREST ON NON-ACCRUALS
YEARS ENDED DECEMBER 31
TABLE 5
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS)
Interest Income Which Would Have Been Recorded Under
Original Terms:
Domestic........................................... $7.6 $5.4 $5.3 $7.0 $4.2
Foreign............................................ -- 0.1 -- 0.3 --
Interest Income Recorded During the Current Year on
Non-Accruals:
Domestic........................................... 0.6 1.0 0.9 3.4 1.0
Foreign............................................ -- 0.1 -- 0.2 --
17
NON-PERFORMING ASSETS AND ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
TABLE 6
1995 1994 1993 1992 1991
----- ----- ----- ------ -----
(IN MILLIONS OF DOLLARS)
Non-Accrual Loans
Commercial and Industrial................ $16.9 $20.3 $15.7 $ 47.2 $ 6.5
Real Estate
Construction........................... 0.3 1.5 17.7 -- 2.9
Commercial............................. 14.9 14.1 7.8 8.2 15.0
Residential............................ 14.7 15.1 16.4 17.7 11.2
Installment.............................. 0.8 0.5 0.5 -- --
Foreign.................................. -- 0.3 -- 5.0 --
Leases................................... -- 0.8 0.3 -- --
----- ----- ----- ------ -----
Subtotal............................. 47.6 52.6 58.4 78.1 35.6
----- ----- ----- ------ -----
Restructured Loans
Commercial and Industrial................ -- -- 1.0 5.4 1.1
Real Estate
Commercial............................. -- -- 5.3 3.2 3.1
Leases................................... -- -- -- -- 0.2
----- ----- ----- ------ -----
Subtotal............................. -- -- 6.3 8.6 4.4
----- ----- ----- ------ -----
Foreclosed Real Estate
Domestic................................. 9.3 0.6 4.1 6.3 2.0
Foreign.................................. -- -- -- -- --
----- ----- ----- ------ -----
Subtotal............................. 9.3 0.6 4.1 6.3 2.0
----- ----- ----- ------ -----
Total Non-Performing Assets.......... $56.9 $53.2 $68.8 $ 93.0 $42.0
===== ===== ===== ====== =====
Loans Past Due 90 Days
Commercial and Industrial................ 1.8 1.1 0.4 0.5 2.9
Real Estate
Construction........................... -- -- -- -- 0.2
Commercial............................. 2.4 0.7 1.9 5.8 0.3
Residential............................ 5.8 3.9 4.1 13.0 2.0
Installment.............................. 10.5 5.9 3.5 4.6 2.9
Foreign.................................. -- -- -- 0.3 --
Leases................................... 0.2 -- 0.1 -- 0.1
----- ----- ----- ------ -----
Subtotal............................. 20.7 11.6 10.0 24.2 8.4
----- ----- ----- ------ -----
Total................................ $77.6 $64.8 $78.8 $117.2 $50.4
===== ===== ===== ====== =====
Ratio of Non-Performing Assets to Total
Loans..................................... 0.70% 0.67% 0.95% 1.34% 0.62%
Ratio of Non-Performing Assets and Accruing
Loans Past Due 90 Days or More to Total
Loans..................................... 0.95% 0.82% 1.09% 1.68% 0.75%
Summary of Loan Loss Experience
At the end of 1995, the reserve for loan losses stood at $152.0 million,
compared with $148.5 million at year-end 1994 and $125.3 million at year-end
1993. The ratio of reserves to outstanding loans at year-end 1995 was 1.90%,
comparable with the 1.92% reported at year-end 1994. At year-end 1993, the
ratio of reserves to outstanding loans was 1.76%. Loan loss provisions for
1995 were $17.0 million, compared with $21.9 million
18
and $54.2 million for 1994 and 1993, respectively. The reduction in the
provisions for loan loss in 1995 reflects the stabilization of loan quality
measured by the level of NPA and the general level of net charge-offs. Table 7
shows the activity through the reserve.
The levels of the loan loss reserve are primarily derived from an extensive
review of the loan portfolio with a strong emphasis on the line driven loan
grading system for the larger commercial loans in Bank of Hawaii and FNBA.
This loan grading system was implemented in 1985 and is continuously monitored
for accuracy by the Credit Review department. In addition, actual charge-offs,
delinquency data, recoveries and historical trends are considered in the
analysis.
The ratio of reserves to loans outstanding is one indicator of the adequacy
of the reserve; however, the absolute dollar amount of the reserve and its
relationship to non-performing loans and historical charge-offs also need to
be considered. Gross charge-offs for 1995 represented 0.36% of average
outstanding loans, compared to 0.34% and 0.94%, respectively at year-ends 1994
and 1993. Gross charge-offs as a percentage of the reserve were 18.4%, 17.1%
and 52.4% for 1995, 1994 and 1993, respectively. Charge-offs for 1995 totaled
$27.9 million, compared with $25.4 million in 1994 and $65.7 million in 1993.
Recoveries of previously charged-off loans remained at higher levels in 1995
and 1994 (see Table 7). Recoveries were $14.4 million in 1995, compared with
$25.3 million for 1994 and $8.2 million in 1993. Recoveries in 1995 have
remained at higher levels as approximately $2.5 million was additionally
recovered of the $45.7 million real estate loan charged-off in 1992 and 1993.
Recoveries on this credit have accumulated to $14.8 million as of year-end
1995. Although difficult to determine the amount of any future recovery,
aggressive efforts continue to collect on loans charged-off. Net charge-offs
for 1995 were $13.5 million, compared with $0.1 million for 1994 and $57.5
million for 1993. In the last ten years the reserve to charge-off ratio has
never been less than 1.9 times in any year and has averaged 4.3 times over the
same period. At the end of 1995, the reserve was 2.7 times non-performing
loans and 5.4 times charge-offs.
19
SUMMARY OF LOAN LOSS EXPERIENCE
TABLE 7
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(MILLIONS OF DOLLARS)
Average Amount of Loans
Outstanding................. $7,654.9 $7,393.7 $6,991.0 $6,601.9 $6,484.1
======== ======== ======== ======== ========
Balance of Reserve for
Possible Loan Losses at
Beginning of Period......... $ 148.5 $ 125.3 $ 128.6 $ 115.6 $ 101.9
Loans Charged-Off
Commercial and Industrial.. 7.8 11.3 43.9 29.5 11.0
Real Estate--
Construction............. 2.1 0.1 0.5 -- --
Mortgage--Commercial..... 2.3 3.5 2.7 4.2 1.8
--Residential.... 1.1 0.7 0.4 0.5 0.9
Installment................ 13.3 8.7 8.6 8.7 8.3
Foreign.................... 0.9 0.7 7.5 1.0 --
Leases..................... 0.4 0.4 2.1 0.1 0.2
-------- -------- -------- -------- --------
Total Charged-Off............ 27.9 25.4 65.7 44.0 22.2
Recoveries on Loans
Previously Charged-Off
Commercial and Industrial.. 6.1 19.5 3.9 3.0 2.6
Real Estate--
Construction............. -- 0.2 -- -- 0.2
Mortgage--Commercial..... 1.4 0.9 0.7 0.2 0.1
--Residential.... 0.1 0.2 0.3 0.3 0.5
Installment................ 3.3 3.2 3.2 3.0 3.0
Foreign.................... 2.5 0.5 -- 0.4 0.4
Leases..................... 1.0 0.8 0.1 0.1 0.1
-------- -------- -------- -------- --------
Total Recoveries............. 14.4 25.3 8.2 7.0 6.9
-------- -------- -------- -------- --------
Net Loans Charged-Off........ (13.5) (0.1) (57.5) (37.0) (15.3)
Provisions Charged to
Operating Expenses.......... 17.0 21.9 54.2 50.0 29.6
Reserves Acquired (Sold)..... -- 1.4 -- -- (0.6)
-------- -------- -------- -------- --------
Balance at End of Period..... $ 152.0 $ 148.5 $ 125.3 $ 128.6 $ 115.6
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to
Average Loans Outstanding... 0.18% -- 0.82% 0.56% 0.24%
Ratio of Reserve to Loans
Outstanding................. 1.90% 1.92% 1.76% 1.89% 1.74%
The details of the Foreign Reserve for Loan Losses, which are included in the
table above, are:
Beginning Balance............ $ 12.9 $ 10.5 $ 14.2 $ 14.0 $ 13.1
Charge-Offs................ 0.9 0.7 7.5 1.0 --
Recoveries................. 2.5 0.5 -- 0.4 0.4
-------- -------- -------- -------- --------
Net Charge-Offs............ 1.6 (0.2) (7.5) (0.6) 0.4
Provisions................. 0.6 1.2 3.8 0.8 0.5
Reserves Acquired.......... -- 1.4 -- -- --
-------- -------- -------- -------- --------
Ending Balance............... $ 15.1 $ 12.9 $ 10.5 $ 14.2 $ 14.0
======== ======== ======== ======== ========
20
ALLOCATION OF LOAN LOSS RESERVE
TABLE 8
1995 1994 1993 1992 1991
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
RESERVE OUTSTANDING RESERVE OUTSTANDING RESERVE OUTSTANDING RESERVE OUTSTANDING RESERVE OUTSTANDING
AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT
------- ----------- ------- ----------- ------- ----------- ------- ----------- ------- -----------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial........ $ 61.9 3.25% $ 59.5 3.25% $ 51.2 3.00% $ 54.0 2.90% $ 30.5 1.75%
Real Estate--
Construction...... 4.2 2.00 2.6 2.00 4.3 2.51 2.6 1.00 5.4 2.20
Commercial........ 19.6 1.50 18.6 1.50 15.4 1.25 19.8 2.00 25.5 2.50
Residential....... 20.5 0.75 21.6 0.75 18.5 0.75 16.4 0.75 16.0 0.75
Installment........ 20.4 2.50 18.5 2.50 13.5 2.00 10.0 1.55 10.0 1.55
Foreign............ 15.1 1.90 12.9 1.85 10.5 1.77 14.2 2.33 14.0 2.00
Leases............. 2.0 0.50 1.9 0.50 2.0 0.50 3.9 1.00 5.0 1.40
Not allocated...... 8.3 -- 12.9 -- 9.9 -- 7.7 -- 9.2 --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
$152.0 1.90% $148.5 1.92% $125.3 1.76% $128.6 1.89% $115.6 1.74%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
International Operations
Bancorp's international presence is extensive and provides opportunities to
take part in lending, correspondent banking and deposit-taking activities
mainly in the Pacific. These endeavors have proven important in the strategy
of bridging customers across the Pacific to the U.S. Mainland, Europe and
within Asia itself. Bancorp pursues this strategy on three fronts: the
International Group; the South Pacific Division; and the Western Pacific
Division.
Through the International Group of Bank of Hawaii, Bancorp offers
international banking services to its corporate, financial institution and
individual customers in most of the major Asian financial centers supported by
its Honolulu operations. As of year-end 1995, the International Group of Bank
of Hawaii had offices in Hong Kong, the Philippines (Manila, Cebu, and Davao),
Korea, Singapore, Japan, Taiwan and New York.
The International Group of Bank of Hawaii continues to focus on trade-
related financing activities and lending to customers with which it has a
direct relationship. Bancorp's foreign lending consists of both local currency
and cross-border lending. Local currency loans are those that are funded and
will be repaid in the currency of the borrower's country and involve the same
types of risk as domestic lending. Cross-border lending, on the other hand,
involves loans that will be repaid in currencies other than that of the
borrower's country. This type of lending involves greater risk because the
borrower's ability to repay is additionally dependent on the availability of
foreign exchange and the stability of the host country's currency.
Bancorp controls its exposure to the risks of international lending by
evaluating the political and economic factors that bear on a country's ability
to meet its foreign debt obligations. Based on these analyses, maximum credit
limits (both short and long term) are established for each country to ensure
that the international portfolio is diversified and that exposure is limited
in countries that may experience future problems. These credit limits are
reviewed on a regular basis so that exposures are understood and properly
assessed. Bancorp's strategy for foreign lending is to deal, on a direct
basis, primarily with countries and companies that have a strong interest in
Hawaii, the South and West Pacific, or the Asian Rim.
The South Pacific Region is made up of the investments in affiliated banks
in the South Pacific and Bancorp's operations in Fiji and American Samoa.
Investments in affiliate banks in the South Pacific include banks in Tahiti,
Tonga, New Caledonia, Vanuatu, Solomon Islands and Western Samoa (see
organization chart). Total assets at year-end 1995 of all such affiliates were
$1.1 billion. All of these investments in affiliate banks, except those in
Vanuatu and the Solomon Islands, are accounted for using the equity method.
Both NBSI's and Banque d'Hawaii (Vanuatu) Limited's financial statements are
consolidated with Bancorp's financial statements.
21
In 1995, Bancorp expanded its investments in this area of the world by
acquiring the remaining 20% of the Banque d'Hawaii (Vanuatu) Limited, creating
Banque d'Hawaii (Vanuatu), a wholly-owned subsidiary of the Bancorp family.
Bank of Hawaii's investments in these affiliate banks are all considered
international.
In January 1996, Bancorp entered into an acquisition agreement, subject to
regulatory approvals, under which its ownership interest in Banque de Tahiti
and Banque de Nouvelle Caledonie would increase to approximately 86% and 75%,
respectively from 38% and 21%, respectively. The acquisition would require
these affiliates to be consolidated in Bancorp's financial statements once the
transaction is finalized. The combined assets of these entities at year-end
1995, converted to U.S. dollars, were approximately $1.0 billion.
Bank of Hawaii operates branches in the South Pacific region in Fiji and
American Samoa. Since Fiji uses its own currency, it is included with the
other foreign operations and is considered international, even though its
operations are reflective of consumer/small business activities much like
domestic branches. The level of activity in Fiji exceeded expectations. By
year-end 1994, branches were opened in Suva and Nadi with a third branch in
Lautoka, Fiji opened in January 1996. The operations in American Samoa are
similar to Fiji, but since the U.S. dollar is used, it is not considered
foreign for reporting purposes.
The operations of the South Pacific Region, since they are largely
investments, are monitored on a regular basis. The countries in which the
affiliates are located are also evaluated on a periodic basis. Exposure, in
terms of foreign currency fluctuations, is limited as each affiliate primarily
deals in its own currency. The carrying value of the investments in
affiliates, accounted for using the equity method, was $30.4 million at year-
end 1995. For NBSI and Banque d'Hawaii (Vanuatu) Limited, combined assets of
$130.7 million are included in the consolidated totals.
Bank of Hawaii also operates branches and offices in several Pacific Island
locations, offering traditional banking services. West Pacific Division
provides customary commercial banking services through branches in
Commonwealth of the Northern Mariana Islands (Saipan), Federated States of
Micronesia (Pohnpei, Kosrae, and Yap), Guam, Republic of the Marshall Islands
(Majuro), and the Republic of Palau (Koror). Since the U.S. dollar is used in
these locations, they are not considered foreign for reporting purposes and
are included in domestic operations.
Table 9 summarizes key totals for International Operations of Bancorp for
1995. Net income for 1995 decreased to $4.8 million, compared to the $7.1
million in 1994. This translates into a return on assets for these operations
of 0.28%, down from the 0.42% for 1994. The reduction in income for
international operations was due to declines in net interest margin and a
decline in total earning assets.
At year-end 1995, international assets represented 13.9% of Bancorp's total
average assets, an increase from 13.5% at year-end 1994. Cross-border
interbank placements accounted for $1.2 billion or 67.3% of total average
international assets at year-end 1995. Table 10 presents individual countries
for which Bancorp has cross-border exposures exceeding 0.75% of total assets
for the last three years. As Table 10 indicates, $1.2 billion was with such
countries as Japan, Taiwan, Thailand and Korea.
Long-term cross-border outstandings to lesser developed countries (LDC) at
year-end 1995 were $1.0 million. Such exposure was entirely in the
Philippines. The foreign reserve for losses is considered by management to be
adequate to absorb any credit or country risk of the remaining LDC exposure
(both term and trade credits).
SUMMARY OF INTERNATIONAL ASSETS, LIABILITIES, AND INCOME AND PERCENT OF
CONSOLIDATED TOTALS
TABLE 9
1995 1994 1993
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS OF DOLLARS)
Average Assets............... $1,724.3 13.9% $1,699.2 13.5% $1,908.9 15.2%
Average Liabilities.......... 1,585.2 13.9 1,647.9 14.2 1,863.3 15.9
Operating Revenue............ 107.9 10.3 97.1 10.1 94.1 10.0
Net Income................... 4.8 3.9 7.1 6.1 8.5 6.4
22
GEOGRAPHIC DISTRIBUTION OF CROSS-BORDER INTERNATIONAL ASSETS
TABLE 10
GOVERNMENT
AND OTHER BANKS AND COMMERCIAL
OFFICIAL OTHER FINANCIAL AND INDUSTRIAL
INSTITUTIONS INSTITUTIONS(1) COMPANIES TOTAL
------------ --------------- -------------- --------
(IN MILLIONS OF DOLLARS)
at December 31, 1995
Japan.................... $ -- $ 296.4 $198.1 $ 494.5
Taiwan................... -- 260.0 11.0 271.0
Korea.................... -- 181.8 125.8 307.6
Thailand................. -- 169.7 -- 169.7
All Others............... 1.0 253.2 68.5 322.7
----- -------- ------ --------
$ 1.0 $1,161.1 $403.4 $1,565.5
===== ======== ====== ========
at December 31, 1994
Japan.................... $ -- $ 118.2 $185.1 $ 303.3
Taiwan................... -- 259.5 4.4 263.9
Korea.................... -- 98.3 104.5 202.8
Thailand................. -- 113.4 -- 113.4
All Others............... 1.0 396.0 90.7 487.7
----- -------- ------ --------
$ 1.0 $ 985.4 $384.7 $1,371.1
===== ======== ====== ========
at December 31, 1993
Japan.................... $ -- $ 166.8 $178.3 $ 345.1
Taiwan................... -- 271.3 -- 271.3
Korea.................... -- 61.6 79.8 141.4
Thailand................. -- 110.5 -- 110.5
Italy.................... -- 110.0 -- 110.0
All Others............... 1.0 465.2 114.1 580.3
----- -------- ------ --------
$ 1.0 $1,185.4 $372.2 $1,558.6
===== ======== ====== ========
- --------
(1) Includes U.S. dollar advances to foreign branches and affiliate banks
which were used to fund local currency transactions. Totals for 1995,
1994, and 1993 were $293.2 million, $203.8 million, and $218.6 million,
respectively.
Potential Problem Assets
Bancorp's management emphasizes the importance of early recognition and
monitoring of loans as a means to control delinquency. Demonstrating this
commitment, management continuously reviews loans to various borrowers and
industry segments that may be experiencing financial difficulties even if
these loans have been generally current as to their terms. As mentioned
earlier, a loan grading system provides the process for this early warning
system. Loans are graded by lending officers and validated by an independent
Credit Review department to ensure accuracy in the grades and timely re-
grading. This process is also utilized to determine the adequacy of the
reserve for loan losses.
ASSET AND LIABILITY MANAGEMENT
Assets and liabilities are managed to maximize long term risk adjusted
returns to our shareholders. The asset and liability management process is one
of financial risk management. Risk in the form of capital adequacy, interest
rate sensitivity, liquidity and operating efficiency is balanced with expected
returns to yield high relative earnings performance and market value of
equity, while limiting the volatility of each. This process is carried out
through regular meetings of divisional management.
23
Capital Adequacy
At year-end 1995, Bancorp's equity has grown to $1.1 billion, a 9.1%
increase from $966.8 million at year-end 1994. Bancorp's capital ratios at
year-end 1995 were: Tier 1 Capital ratio of 10.25%, Total Capital ratio of
12.74%, and leverage ratio of 7.82%. All three exceeded the minimum threshold
levels to qualify as well capitalized. Under those minimum threshold levels
implemented in 1993 by bank regulators, capital must exceed the following
standards--Tier 1 Capital 6%; Total Capital 10%; and the leverage ratio 5%.
Table 11 presents a five year history of activity and balances in capital
accounts as well as capital ratios for Bancorp. Bancorp's strategy is to
maintain its capital at a level to qualify as well capitalized. The financial
and regulatory impact of maintaining this status is important to Bancorp. The
financial impact is reflected in lower deposit insurance premiums, while the
regulatory impact allows for fewer restrictions on activities.
Bancorp's strategy is to be well capitalized, but not significantly
overcapitalized. The lesser loan demand and asset growth diminished the need
for building capital levels. Rather than disrupting long established programs,
including the dividend reinvestment plan, profit sharing plan, and stock
option plan, which provide a consistent source of new capital, Bancorp
embarked on a stock repurchase program several years ago. This program to
repurchase stock has had the benefit of enhancing shareholder value while
still maintaining capital ratios that exceed well capitalized guidelines. More
than 1.4 million shares were repurchased in 1994, with another 1.3 million
shares repurchased in 1995. In 1995, repurchases of 0.5 million shares were
made under the program approved in 1994 by Bancorp's Board to repurchase up to
2.0 million shares of Bancorp stock. The remaining 0.8 million shares were
repurchased under an existing strategy to repurchase Bancorp shares in the
market to offset the needs of the plans previously mentioned.
EQUITY CAPITAL
TABLE 11
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Source of Common Equity
Net Income................... $ 121.8 $ 117.7 $ 132.6 $ 127.5 $ 112.7
Dividends Paid............... (45.2) (44.0) (38.4) (35.4) (32.4)
Dividend Reinvestment
Program..................... 7.1 7.4 7.7 8.1 6.3
Stock Repurchases............ (40.0) (44.3) (2.0) (0.6) --
Other(1)..................... 43.9 (8.1) 9.9 4.7 7.2
-------- -------- -------- -------- --------
Annual Increase in Equity.... $ 87.6 $ 28.7 $ 109.8 $ 104.3 $ 93.8
Year-End Common Equity....... 1,054.4 966.8 $ 938.1 $ 828.3 $ 724.0
Less:Intangibles........... 60.2 64.6 72.0 18.8 20.6
Unrealized Valuation
Adjustments............. 11.3 (17.3) 3.9 -- --
-------- -------- -------- -------- --------
Tier I Capital............... 982.9 919.5 862.2 809.5 703.4
Allowable Loan Loss
Reserve................... 120.2 111.1 100.2 99.3 95.1
Subordinated Debt.......... 118.7 118.6 124.6 -- --
-------- -------- -------- -------- --------
Total Capital............ $1,221.8 $1,149.2 $1,087.0 $ 908.8 $ 798.5
======== ======== ======== ======== ========
Risk Weighted Assets......... $9,587.0 $8,848.6 $7,990.4 $7,911.8 $7,585.1
======== ======== ======== ======== ========
Key Ratios
Growth in Common Equity...... 9.1% 3.1% 13.3% 14.4% 14.9%
Average Equity/Average Assets
Ratio....................... 8.27% 7.71% 7.09% 6.74% 6.31%
Tier I Capital Ratio......... 10.25% 10.39% 10.79% 10.23% 9.27%
Total Capital Ratio.......... 12.74% 12.99% 13.60% 11.49% 10.53%
Leverage Ratio............... 7.82% 7.28% 6.89% 6.37% 6.17%
- --------
(1) Includes profit-sharing, stock options and valuation adjustments for
investment securities and foreign exchange translation.
24
INTEREST RATE RISK AND DERIVATIVES
For financial institutions, interest rate movements can have an impact on
earnings depending on the position of the balance sheet. At Bancorp, interest
sensitivity analysis is coupled with computer simulation techniques to measure
the exposure of our earnings to interest rate movements. The major factors
used to manage interest rate risk include the mix of fixed and floating
interest rates, pricing, and maturity patterns for all asset and liability
accounts, as well as off-balance sheet interest rate swaps. The objective of
this process is to position the balance sheet to optimize earnings without
unduly increasing risk.
Table 12 presents the possible exposure to interest rate movements for
various time frames at year-end 1995. The distribution in the interest rate
sensitivity table consists of a combination of maturities, call provisions,
repricing frequency and prepayment patterns. Bancorp constantly analyzes and
estimates, based on historic data, the interest rate sensitivity
characteristics of all balance sheet items. For example, a portion of
Bancorp's interest bearing demand and savings balances are relatively
insensitive to changes in interest rates. Consequently, Bancorp has allocated
portions of those balances to longer term interest rate sensitivity periods.
At December 31, 1995, Bancorp's one year cumulative liability sensitive gap
totaled $0.1 billion, representing 1.0% of total assets. This position was
very similar to year-end 1994, when Bancorp's cumulative liability sensitive
gap totaled $0.2 billion or 1.8% of total assets. The one year gap is a
commonly used benchmark of interest rate risk. Throughout 1995, Bancorp's
liability sensitive gap position remained relatively stable. Unlike 1994, when
net interest margin declined from a first quarter average of 3.99% to a fourth
quarter average of 3.61%, 1995 net interest margin averaged 3.72% throughout
the year.
Bancorp uses interest rate swaps as a cost effective risk management tool
for dealing with movements in interest rates. Notional amounts of interest
rate swaps at year-end 1995 totaled $1.1 billion compared with $1.6 billion at
year-end 1994 and $1.4 billion at year-end 1993. No new swaps were entered
into in 1995. Credit exposure on interest rate swaps is determined and
monitored according to the same strict standards and policies applied to
Bancorp's commercial lending activity.
25
Bancorp's policy is to utilize interest rate swaps for purposes other than
trading. Bancorp utilizes interest rate swaps to alter the interest rate
characteristics of identified groups of assets or liabilities. Limits on the
total notional amounts of contracts outstanding at any time have been
established. Limits have also been established for each counter party.
Activity is monitored on a monthly basis in conjunction with normal
asset/liability management committee meetings. Further disclosure of Bancorp's
interest rate swap activity is included in the footnotes to its financial
statements following.
INTEREST RATE SENSITIVITY
TABLE 12
1-5 OVER NON-INT.
DECEMBER 31, 1995 0-90 DAYS 91-365 DAYS YEARS 5 YEARS BEARING
- ----------------- --------- ----------- -------- -------- ---------
(IN MILLIONS OF DOLLARS)
Assets(1)
Investment Securities. $ 1,265.0 $ 791.9 $ 916.0 $ 387.3 $ --
Short-Term
Investments.......... 116.2 -- -- -- --
International Assets.. 1,200.6 214.3 41.8 83.4 29.7
Domestic Loans(2)..... 2,666.5 2,178.0 1,695.1 623.2 56.9
Other Assets.......... 84.4 84.4 300.2 471.9 --
--------- -------- -------- -------- ---------
Total Assets........ $ 5,332.7 $3,268.6 $2,953.1 $1,565.8 $ 86.6
========= ======== ======== ======== =========
Liabilities and
Capital(1)
Non-Interest Bearing
Demand(3)............ $ 278.9 $ 278.9 $ 991.5 $ -- $ --
Interest-Bearing
Demand(3)............ 335.3 335.3 921.9 -- --
Savings(3)............ 221.0 221.0 562.6 -- --
Time Deposits......... 703.6 892.2 512.0 96.4 --
Foreign Deposits...... 1,125.5 81.5 2.4 -- 16.7
Short-Term Borrowings. 2,509.7 673.9 7.3 -- --
Long-Term Debt........ 449.7 49.5 444.9 119.4 --
Other Liabilities..... -- -- -- -- 321.3
Capital............... -- -- -- -- 1,054.4
--------- -------- -------- -------- ---------
Total Liabilities
and Capital........ $ 5,623.7 $2,532.3 $3,442.6 $ 215.8 $ 1,392.4
========= ======== ======== ======== =========
Interest Rate Swaps..... $ (906.4) $ 333.5 $ 572.9 $ -- $ --
--------- -------- -------- -------- ---------
Interest Sensitivity
Gap.................. $(1,197.4) $1,069.8 $ 83.4 $1,350.0 $(1,305.8)
Cumulative Gap........ $(1,197.4) $ (127.6) $ (44.2) $1,305.8 $ --
Percentage of Total
Assets............... (9.07)% (0.97)% (0.33)% 9.89% --
- --------
Assumptions used:
(1) Based on repricing date.
(2) Includes the effect of estimated amortization.
(3) Historical analysis shows that these deposit categories, while technically
subject to immediate withdrawal, actually display sensitivity
characteristics that generally fall within one and five years. The
allocation presented is based on that historic analysis.
26
CONSOLIDATED AVERAGE BALANCES, INCOME AND EXPENSE
SUMMARY, AND YIELDS AND RATES
(TAXABLE EQUIVALENT)
TABLE 13
1995 1994 1993
------------------------- ------------------------- -------------------------
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
--------- ------- ------- --------- ------- ------- --------- ------- -------
(IN MILLIONS OF DOLLARS)
Earning Assets
Interest-Bearing
Deposits.............. $ 661.4 $ 39.4 5.97% $ 812.6 $ 36.4 4.48% $ 1,140.1 $ 43.0 3.77%
Investment
Securities--Held to
Maturity
--Taxable............ 1,516.5 92.3 6.09 2,463.3 135.0 5.48 3,513.0 203.0 5.78
--Tax-Exempt......... 15.9 2.1 13.25 18.7 2.6 14.03 29.3 3.6 12.25
Investment
Securities--Available
for Sale.............. 1,639.0 107.9 6.58 1,064.0 54.0 5.07 69.1 5.9 8.61
Funds Sold............. 68.5 3.8 5.57 52.5 2.3 4.33 146.0 5.2 3.56
Loans (1)--Domestic.... 6,908.9 572.8 8.29 6,725.9 517.6 7.70 6,324.9 476.3 7.53
--Foreign..... 746.0 51.5 6.90 667.8 35.2 5.27 666.1 29.9 4.48
Loan Fees.............. 28.5 31.7 37.9
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Earning
Assets............ 11,556.2 898.3 7.77 11,804.8 814.8 6.90 11,888.5 804.8 6.77
Cash and Due From Banks. 460.6 449.1 413.2
Other Assets............ 389.1 342.7 284.1
--------- --------- ---------
Total Assets....... $12,405.9 $12,596.6 $12,585.8
========= ========= =========
Interest-Bearing
Liabilities
Domestic Deposits
--Demand............. $ 1,752.4 50.9 2.91 $ 1,895.4 41.1 2.17 $ 2,032.3 45.1 2.22
--Savings............ 1,058.5 30.6 2.89 1,232.3 29.1 2.36 1,239.4 32.6 2.63
--Time............... 1,839.9 98.5 5.36 1,544.8 65.9 4.27 1,711.9 77.7 4.54
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Domestic..... 4,650.8 180.0 3.87 4,672.5 136.1 2.91 4,983.6 155.4 3.12
Total Foreign...... 982.2 59.5 6.06 1,236.7 53.4 4.32 1,223.9 43.2 3.52
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Deposits..... 5,633.0 239.5 4.25 5,909.2 189.5 3.21 6,207.5 198.6 3.20
Short-Term Borrowings... 3,155.1 174.0 5.52 3,600.6 143.9 4.00 3,725.5 122.9 3.30
Long-Term Debt.......... 983.8 54.6 5.55 526.8 30.3 5.76 250.4 13.8 5.50
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Interest-
Bearing
Liabilities....... 9,771.9 468.1 4.79 10,036.6 363.7 3.62 10,183.4 335.3 3.29
--------- ------ ----- --------- ------ ----- --------- ------ -----
Net Interest Income..... 430.2 2.98 451.1 3.28 469.5 3.48
Spread on Earning
Assets................. 3.72% 3.82% 3.95%
Demand Deposits--
Domestic............... 1,403.4 1,386.0 1,324.9
Other Liabilities....... 204.6 203.1 184.6
Shareholders' Equity.... 1,026.0 970.9 892.9
--------- --------- ---------
Total Liabilities &
Equity............ $12,405.9 $12,596.6 $12,585.8
========= ========= =========
Provision for Loan
Losses................. 17.0 21.9 54.2
Net Overhead............ 217.7 232.0 200.6
------ ------ ------
Income Before Income
Taxes.................. 195.5 197.2 214.7
Provision for Income
Taxes.................. 72.0 77.7 79.8
Tax Equivalency
Adjustment (2)......... 1.7 1.8 2.3
------ ------ ------
Net Income.............. $121.8 $117.7 $132.6
====== ====== ======
- --------
(1) Includes non-accrual loans.
(2) Based upon a statutory tax rate of 35%.
27
Liquidity Management
Liquidity is managed to ensure that Bancorp has continuous access to
sufficient, reasonably priced funding to conduct its normal course of
business.
At year-end 1995, deposits increased to $7.6 billion from $7.1 billion at
the end of 1994. Although reflecting a modest year-to-year increase, average
deposits for 1995 were below the average for 1994. Table 21 presents the
average deposits by category. The decline in average deposits reflects the
competitive nature of the market as bank and nonbank banks continue to
actively pursue deposit bases for alternative investment products such as
mutual funds.
Securities Sold Under Agreements to Repurchase (Repos) are supported by the
same type of collateral that supports governmental deposits, but are not
insured by the FDIC. At year-end 1995 repos totaled $1.9 billion compared to
$2.1 billion at year-end 1994 and $2.5 billion at year-end 1993. With the
lowering of the FDIC premiums in 1995, some governmental investments in repos
migrated back to deposits.
Bancorp's balance sheet is unique given the high level of state and local
government funds. Historically, these governmental customers have been a
stable source of funds.
Bancorp presently issues commercial paper only in the Hawaii market-place.
However, as an alternative, Bancorp can access the mainland market through its
pre-selected agent for issuing commercial paper. At year-end 1995 commercial
paper outstanding totaled $73.5 million compared to $69.1 million at year-end
1994. The short term notes are rated A-2 by Standard and Poor's and P-1 by
Moody's.
Bancorp also maintains a line of credit for working capital purposes. The
line is for $50 million and is subject to annual renewals. Fees are paid on
the unused balance of the line. At year-end, there was no outstanding balance.
Both Bank of Hawaii and First Federal are members of the Federal Home Loan
Bank (FHLB), providing both entities with an additional source of short to
intermediate term funding. At year-end 1995, Bank of Hawaii had outstanding
debt to the FHLB of $60 million, as compared to $25 million at year-end 1994.
Bancorp Pacific also increased its borrowings from the FHLB, which at year-end
1995 totaled $271.5 million, compared to $227.1 million at year-end 1994.
Borrowings from the FHLB are collateralized by mortgage loans and FHLB stock.
Long term debt on December 31, 1995, was $1.1 billion, compared to $861.6
million at year-end 1994. In 1995, the Bank finalized a $1.0 billion revolving
medium term note program. This program replaces the original $750 million
medium term note facility. Notes outstanding under this facility, represented
in both long term and short term debt, increased from $649.4 million in 1994,
to $849.7 million in 1995. The bank notes have been rated A by Standard and
Poor's and Aa-3 by Moody's. During 1995, Bancorp also negotiated the private
placement of long term debt with three separate counterparties to replace
maturing debt. These negotiated placements totaled $60 million and were all
issued for a term of three years. Bancorp's access to such private placement
counterparties further enhances its balance sheet liquidity.
Control of Net Overhead
Bancorp's emphasis on control of net overhead has several measurement
indicators. These indicators are its net overhead ratio, its net income per
employee and its efficiency ratio. Each of these is discussed in the following
paragraphs.
Bancorp defines its net overhead ratio as the ratio of non-interest expense
to non-interest income (without securities transactions). Bancorp's long term
goal is to have a ratio of 2 to 1, where fee income offsets at least half of
the cost of operations. With the slowdown in the economy of Hawaii, and
increased competition for deposits, the efficient managing of the net overhead
ratio grows in importance. Trust operations, electronic
28
financial services, insurance and annuity sales, and brokerage services are
expected to make significant contributions to this process. For 1995,
Bancorp's net overhead ratio was 2.53, compared with 2.47 and 2.68 in 1994 and
1993, respectively.
In January 1995,