U N I T E D S T A T E S
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported) July 14, 1995
B A N C O R P H A W A I I, I N C.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Hawaii 1-6887 99-0148992
- ------------------------ ----------- -------------
(State of incorporation) (Commission (IRS Employer
File Number) Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code) (808) 537-8111
-1-
Item 5.Other Events
Exhibits are filed herewith in connection with a proposed
offering of subordinated notes by Bank of Hawaii, a subsidiary of
Bancorp Hawaii, Inc.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
EXHIBITS
(23) Consent of Ernst & Young LLP
(24) Consolidated Financial Statements of
Bank of Hawaii and Subsidiaries for the
Years ended December 31, 1994, 1993 and
1992 with Report of Independent Auditors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date July 14, 1995 BANCORP HAWAII, INC.
RICHARD J. DAHL
(Signature)
Richard J. Dahl
President and Director
-2-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
BANCORP HAWAII, INC.
EXHIBITS TO CURRENT REPORT ON
FORM 8-K DATED July 14, 1995
Commission File Number 1-6887
-3-
Exhibit Index
Exhibit No. Description Page
(23) Consent of Ernst & Young LLP. . . . . . . . . 5
(99) Consolidated Financial Statements of
Bank of Hawaii and Subsidiaries for
the Years ended December 31, 1994,
1993 and 1992 with Report of
Independent Auditors . . . . . . . . . . . . 6
-4-
EXHIBIT 23
Consent of Independent Auditors
We consent to the use of our report dated January 19, 1995, with
respect to the consolidated financial statements of Bank of
Hawaii and subsidiaries, included in this Form 8-K of Bancorp
Hawaii, Inc. dated July 14, 1995.
ERNST & YOUNG LLP
Honolulu, Hawaii
July 13, 1995
-5-
EXHIBIT 99
Consolidated Financial Statements
Bank of Hawaii and subsidiaries
Years ended December 31, 1994, 1993 and 1992
with Report of Independent Auditors
-6-
Bank of Hawaii and subsidiaries
Consolidated Financial Statements
Years ended December 31, 1994, 1993 and 1992
Contents
Report of Independent Auditors. . . . . . . . . . . . . . .8
Consolidated Statements of Condition. . . . . . . . . . . .9
Consolidated Statements of Income . . . . . . . . . . . . 11
Consolidated Statements of Shareholder's Equity . . . . . 12
Consolidated Statements of Cash Flows . . . . . . . . . . 13
Notes to Consolidated Financial Statements. . . . . . . . 15
-7-
Report of Independent Auditors
Board of Directors
Bank of Hawaii
We have audited the accompanying consolidated statements of
condition of Bank of Hawaii and subsidiaries as of December
31, 1994, 1993 and 1992, and the related consolidated
statements of income, shareholder's equity, and cash flows for
the years then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Bank of Hawaii and subsidiaries at
December 31, 1994, 1993 and 1992, and the consolidated results
of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 11 to the financial statements, in
1993 and 1992 the Company changed its method of accounting for
certain investments in debt and equity securities and income
taxes, respectively.
ERNST & YOUNG LLP
January 19, 1995
-8-
Bank of Hawaii and subsidiaries
Consolidated Statements of Condition
December 31
1994 1993 1992
(In Thousands)
Assets
Interest-bearing deposits $ 718,458 $ 821,043 $ 1,340,257
Investment securities
-Held to maturity (market value of
$1,654,344, $2,723,968, and
$3,013,263, in 1994, 1993 and
1992, respectively) 1,703,085 2,687,091 2,941,497
-Available for sale 1,340,163 870,495 -
Securities purchased under agreements
to resell - - 420,000
Funds sold 55,899 57,699 195,569
Loans: 6,743,547 6,247,134 6,098,532
Unearned income (127,524) (131,501) (124,244)
Reserve for possible loan losses (131,323) (107,568) (112,018)
------------- ------------- -------------
Net loans 6,484,700 6,008,065 5,862,270
------------- ------------- -------------
Total earning assets 10,302,305 10,444,393 10,759,593
Cash and non-interest bearing deposits 497,692 388,454 384,510
Advances to affiliates 28,000 - -
Premises and equipment 203,696 148,035 136,655
Customers' acceptance liability 17,776 8,475 26,041
Accrued interest receivable 69,984 75,934 87,351
Other real estate 165 3,093 3,820
Goodwill 52,784 55,980 262
Trading securities 13,224 73,476 111,820
Other assets 102,736 94,331 102,719
------------- ------------- -------------
Total assets $11,288,362 $11,292,171 $11,612,771
============= ============= =============
-9-
December 31
1994 1993 1992
(In Thousands)
Liabilities and shareholder's equity
Domestic deposits:
Demand--non-interest bearing $ 1,416,679 $ 1,390,657 $ 1,243,751
Demand--interest bearing 1,489,716 1,643,251 1,741,224
Savings 998,613 1,088,165 1,008,124
Time 1,259,082 1,279,191 1,936,063
Foreign deposits 1,230,047 980,918 1,164,177
------------- ------------- -------------
Total deposits 6,394,137 6,382,182 7,093,339
Securities sold under agreements to
repurchase 2,133,099 2,508,850 2,294,608
Funds purchased 609,574 748,500 1,113,356
Other short-term borrowings 406,711 390,689 165,857
Bank's acceptances outstanding 17,776 8,475 26,041
Accrued pension costs 23,353 24,367 25,324
Accrued interest payable 47,154 32,736 30,790
Income taxes payable 116,996 136,194 107,928
Other liabilities 62,268 69,400 70,791
Long-term debt 698,172 224,370 -
------------- ------------- -------------
Total liabilities 10,509,240 10,525,763 10,928,034
Shareholder's equity:
Capital stock ($8 par value),
authorized 1,875,000 shares;
outstanding 1,863,516.5 shares
each year 14,908 14,908 14,908
Surplus 420,341 419,820 419,820
Unrealized valuation adjustments (18,326) (152) (3,248)
Retained earnings 362,199 331,832 253,257
------------- ------------- -------------
Total shareholder's equity 779,122 766,408 684,737
------------- ------------- -------------
Total liabilities and shareholder's
equity $11,288,362 $11,292,171 $11,612,771
============= ============= =============
See accompanying notes.
-10-
Bank of Hawaii and subsidiaries
Consolidated Statements of Income
Year ended December 31
1994 1993 1992
(In Thousands)
Interest income
Interest on loans $454,257 $410,373 $421,033
Loan fees 28,351 33,548 30,283
Income on lease financing 13,212 16,611 16,957
Interest and dividends on investment securities:
Taxable 129,933 197,055 185,720
Nontaxable 1,561 2,257 4,258
Income on investment securities available for
sale 53,960 5,947 -
Interest on deposits 35,807 41,220 48,997
Interest on security resale agreements - 2,934 12,507
Interest on funds sold 2,367 2,269 8,180
------------- ------------- -------------
Total interest income 719,448 712,214 727,935
Interest expense
Interest on deposits 170,598 174,496 264,084
Interest on security repurchase agreements 98,507 87,839 39,206
Interest on funds purchased 25,376 24,365 28,868
Interest on short-term borrowings 12,300 8,504 10,877
Interest on long-term debt 21,427 5,745 32
------------- ------------- -------------
Total interest expense 328,208 300,949 343,067
Net interest income 391,240 411,265 384,868
Provision for possible loan losses 21,764 52,009 48,503
------------- ------------- -------------
Net interest income after provision for
possible loan losses 369,476 359,256 336,365
Non-interest income
Trust income 48,658 40,925 30,519
Service charges on deposit accounts 27,461 25,637 24,113
Fees, exchange and other service charges 42,549 38,690 35,956
Other operating income 23,098 12,968 17,231
Investment securities gains (losses) (17,693) 9,219 2,566
------------- ------------- -------------
Total non-interest income 124,073 127,439 110,385
Non-interest expense
Salaries 127,058 123,023 114,701
Pensions and other employee benefits 39,228 39,205 36,370
Net occupancy expense of premises 34,124 33,491 29,866
Net equipment expense 29,539 26,260 23,577
Other operating expense 96,488 78,633 73,200
------------- ------------- -------------
Total non-interest expense 326,437 300,612 277,714
------------- ------------- -------------
Income before income taxes 167,112 186,083 169,036
Provision for income taxes 67,330 70,909 65,501
------------- ------------- -------------
Income before cumulative effect of
accounting change 99,782 115,174 103,535
Cumulative effect of accounting change - - 10,762
------------- ------------- -------------
Net income $ 99,782 $115,174 $114,297
============= ============= =============
See accompanying notes.
-11-
Bank of Hawaii and subsidiaries
Consolidated Statements of Shareholder's Equity
Unrealized
Capital Valuation Retained
Total Stock Surplus Adjustment Earnings
(In Thousands Except Per Share Amounts)
Balance at December 31, 1991
(1,863,516.5 shares) $605,793 $14,908 $419,820 $(2,370) $173,435
Changes during 1992:
Net income 114,297 - - - 114,297
Foreign exchange translation
adjustment (878) - - (878) -
Cash dividends paid of $18.50 per
share (34,475) - - - (34,475)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1992
(1,863,516.5 shares) 684,737 14,908 419,820 (3,248) 253,257
Changes during 1993:
Net income 115,174 - - - 115,174
Unrealized valuation adjustments:
Investment securities 3,166 - - 3,166 -
Foreign exchange translation
adjustment (70) - - (70) -
Cash dividends paid of $19.64 per
share (36,599) - - - (36,599)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1993
(1,863,516.5 shares) 766,408 14,908 419,820 (152) 331,832
Changes during 1994:
Net income 99,782 - - - 99,782
Unrealized valuation adjustments:
Investment securities (20,634) - - (20,634) -
Foreign exchange translation
adjustment 2,460 - - 2,460 -
Cash dividends paid of $37.25 per
share (69,415) - - - (69,415)
Contribution of Bancorp
Investment Group from Bancorp
Hawaii, Inc. 521 - 521 - -
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994
(1,863,516.5 shares) $779,122 $14,908 $420,341 $(18,326) $362,199
========== ========== ========== ========== ==========
See accompanying notes.
-12-
Bank of Hawaii and subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1994 1993 1992
(In Thousands)
Operating activities
Net income $ 99,782 $ 115,174 $ 114,297
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 21,764 52,009 48,503
Depreciation and amortization 24,361 19,787 15,519
Deferred income taxes (15,734) 20,640 6,915
Realized and unrealized investment
security losses (gains) - 737 (2,107)
Realized losses (gains) on investment
securities available for sale 14,902 (9,025) -
Net decrease (increase) in trading
securities 252 (2,482) (641)
Amortization of lease income (25,720) (29,108) (19,887)
Amortization of loan fee income (10,583) (12,983) (12,296)
Decrease (increase) in interest receivable 5,950 11,417 (1,236)
Increase (decrease) in interest payable 14,418 1,946 (12,434)
Decrease (increase) in other assets 9,569 13,110 (29,642)
Decrease in other liabilities (5,063) (8,235) (5,834)
------------- ------------- -------------
Net cash provided by operating activities 133,898 172,987 101,157
Investing activities
Proceeds from redemptions of investment securities
held to maturity 1,488,678 909,192 879,217
Purchases of investment securities held to maturity (504,672) (1,522,665) (1,362,422)
Proceeds from sales of investment securities
available for sale 565,870 849,853 -
Proceeds from redemptions of investment securities
available for sale 95,000 - -
Purchases of investment securities available for sale (1,091,975) (697,892) (100,043)
Net decrease (increase) in interest-bearing deposits
placed in other banks 102,585 519,214 (280,072)
Net decrease (increase) in funds sold 1,800 454,977 (282,433)
Net increase in loans (433,998) (155,713) (201,627)
Purchases of premises and equipment (74,049) (28,102) (29,708)
Proceeds from sale of premises and equipment 2,518 336 757
Purchase of American Financial Services of Hawaii, Inc.,
net of cash acquired - (48,990) -
Purchase of Banque d'Hawaii (Vanuatu), Ltd., net of
cash and non-interest bearing deposits acquired 39,963 - -
Purchase of National Bank of Solomon Islands, net of
cash and non-interest bearing deposits acquired (315) - -
Contribution of Bancorp Investment Group from
Bancorp Hawaii, Inc. 521 - -
------------- ------------- -------------
Net cash provided (used) by investing activities 191,926 280,210 (1,376,331)
------------- ------------- -------------
Carry forward 325,824 453,197 (1,275,174)
See accompanying notes.
-13-
Year ended December 31
1994 1993 1992
(In Thousands)
Brought forward $ 325,824 $ 453,197 $(1,275,174)
Financing activities
Net decrease in demand, savings and time deposits (96,778) (711,157) (759,175)
Proceeds from lines of credit and long-term debt 480,122 224,846 -
Principal payments on lines of credit and long-term
debt (6,320) (476) (921)
Net (decrease) increase in short-term borrowings (498,655) 74,203 1,975,303
Net increase in advance to affiliates (28,000) - -
Cash dividends (69,415) (36,599) (34,475)
------------- ------------- -------------
Net cash (used) provided by financing activities (219,046) (449,183) 1,180,732
Effect of exchange rate changes on cash 2,460 (70) (878)
------------- ------------- -------------
Increase (decrease) in cash and non-interest bearing
deposits 109,238 3,944 (95,320)
Cash and non-interest bearing deposits at beginning
of year 388,454 384,510 479,830
------------- ------------- -------------
Cash and non-interest bearing deposits at end of year $ 497,692 $ 388,454 $ 384,510
============= ============= =============
See accompanying notes.
-14-
Bank of Hawaii and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994, 1993 and 1992
1. Summary of Significant Accounting Policies
The accounting principles followed by Bank of Hawaii (a subsidiary
of Bancorp Hawaii, Inc. "Bancorp") and its subsidiaries and the
methods of applying those principles conform with generally
accepted accounting principles and with general practice within the
banking industry. Certain accounts have been reclassified to
conform with the 1994 presentation. The significant policies are
summarized below.
Consolidation
The consolidated financial statements include the accounts of Bank
of Hawaii and its subsidiaries (the Bank). Significant
intercompany accounts have been eliminated in consolidation.
Accounting Changes
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement No. 114, "Accounting by Creditors for Impairment of a
Loan." The statement addresses the accounting by creditors for
impairment of certain loans and requires these loans be measured
based on the present value of expected future cash flows or if the
loan is collateral dependent, the fair value of the collateral.
This is a significant change from the currently applied rules for
both generally accepted accounting principles and regulatory
reporting. In October 1994, the FASB issued Statement No. 118,
"Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," that amended Statement No. 114 by
eliminating provisions for reporting income on impaired loans by
Creditors and clarifying disclosure requirements. The Bank has
elected to implement the provisions of Statement No 114, as
amended, effective January 1, 1995. At this time, the impact of
adopting the new rules on the Bank's financial position or results
of operation is not expected to be material.
Acquisition
In December 1994, Bank of Hawaii acquired a 51% interest in the
National Bank of Solomon Islands (NBSI) for $4.8 million. The
acquisition has been accounted for using the purchase method. At
year-end, NBSI financial results have been included in the
consolidated totals. Total assets of NBSI were $50.3 million at
year-end 1994. Goodwill recorded in this transaction was $2.4
million and is being amortized over 15 years.
-15-
On May 7, 1993, Bank of Hawaii finalized the purchase of 100% of
the shares of American Financial Services of Hawaii, Inc. (AFS), a
trust holding company whose wholly owned subsidiaries are Bishop
Trust Company, Limited and American Trust Company of Hawaii, Inc.
AFS administered $2.7 billion in trust assets at the acquisition
date. The acquisition has been accounted for under the purchase
method for the approximately $4 million of assets of AFS. Goodwill
recorded in this transaction is being amortized on a straight-line
basis over 15 years. In 1994, AFS was merged into Hawaiian Trust
Company, Limited.
Also in December 1993, Bank of Hawaii purchased 80% of Banque
Indosuez Vanuatu, Limited for $12.1 million. Its name was changed
to Banque d'Hawaii (Vanuatu), Limited. For 1994, the Banque
d'Hawaii (Vanuatu), Limited's financial results have been included
in the consolidated financial statements and effective January 1,
1994, Vanuatu was accounted for as a purchase.
In conjunction with these acquisitions, liabilities were assumed as
follows:
1994 1993 1992
(In Thousands)
Assets acquired $132,855 $65,002 $ -
Cash paid for capital stock (16,913) (51,500) -
------------- ------------- -------------
Liabilities assumed $115,942 $13,502 $ -
============= ============= =============
Cash and Non-Interest Bearing Deposits
Cash and non-interest bearing deposits include the amounts due from
other financial institutions as well as in-transit clearings.
Under the terms of the Depository Institution Deregulation and
Monetary Control Act, the Bank is required to place reserves with
the Federal Reserve Bank based on the amount of deposits held. The
Bank, along with the other banks in the State of Hawaii, was
allowed to phase into this reserve requirement, with such phase-in
to be completed by 1993. For 1994, 1993 and 1992, the average
amount of these reserve balances were $156,892,000, $165,041,000,
and $134,592,000, respectively.
Income Taxes
The Bank files a consolidated federal income tax return with
Bancorp Hawaii, Inc. and its domestic subsidiaries. Deferred
income taxes are provided to reflect the tax effect of temporary
differences between financial statement carrying amounts and the
corresponding tax bases of assets and liabilities.
-16-
The Bank's tax sharing policy provides for the settlement of income
taxes between each entity as if each one had filed a separate
return. Payments are made to Bancorp by each entity with tax
liabilities, and entities which generate tax benefits receive
payments for the benefits as used. Deferred taxes are recorded on
the books of the entity which generated the temporary difference.
For lease arrangements, which are accounted for by the financing
method, investment tax credits are deferred and amortized over the
lives of the respective leases.
Intangible Assets and Amortization
The excess of cost over the fair market value of tangible assets
and liabilities purchased in various transactions by the Bank is
being amortized using the straight-line method over various periods
not exceeding 15 years. The amortization expense of these
intangibles was $4,559,000 $2,260,000 and $36,000 for 1994, 1993
and 1992, respectively. As of December 31, 1994, the accumulated
amortization totaled $6,945,000.
Interest Rate and Foreign Currency Risk Management
The Bank has entered into various off-balance-sheet transactions,
primarily interest rate swap agreements, for interest rate risk
exposure management purposes. The Bank's objective in managing
interest-rate exposure is to maintain a targeted mix of assets and
liabilities that mature or reprice over a one year time horizon.
However, the extent of rate sensitivity can vary within the
intervening time periods. Management's asset/liability management
strategy is intended to limit the impact of changes in interest
rates on net income. Interest rate swaps are primarily used to
modify the interest rate sensitivity of short term assets or long
term liabilities (both deposits and debt).
As a result of having various foreign operations, the Bank is
exposed to the effect of foreign exchange rate fluctuations on the
U.S. dollar value. The Bank has purchased foreign currency forward
contracts to minimize the effect of fluctuating foreign currencies
on its reported income. The forward contracts qualify as hedges
for financial reporting purposes as they are tied to specific
foreign loans and their repayment. Although the volatility of
income over the entire twelve month period is reduced, increased
volatility may be reported during interim periods.
-17-
Valuation adjustments on foreign exchange swap and forward
contracts are recognized through the income statement as a
component of foreign currency gain or loss.
International Operations
International operations include certain activities located
domestically in the International Division, as well as branches and
subsidiaries domiciled outside the United States. The activities
of branches located in the Southern and Western Pacific which are
denominated in U.S. dollars are classified as domestic.
Investment Securities
The method followed in determining the cost of investments sold was
based on identified certificates for each of the three years ending
December 31, 1994.
The Bank adopted the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," affecting the
statement of condition as of December 31, 1993, by reclassifying
investment securities into the following categories.
Investment Securities Held to Maturity are securities intended to
be held for the full term of the security. These securities are
stated at cost adjusted for amortization of premium and accretion
of discount. Restricted equity securities represent Federal Home
Loan Bank shares recorded at par, which is also fair value.
Investment Securities Available for Sale are recorded at market
value with the unrealized gains and losses recorded as a valuation
adjustment in equity, net of taxes. The market value of mortgage-
backed securities are based on quoted market prices. In 1992 and
1993, these assets were recorded at the lower of cost or market
with valuation adjustments reflected as a charge against income.
Trading Securities are securities purchased and held principally
for the purpose of selling them in the near term. The trading
securities portfolio was comprised primarily of debt securities
which have been recorded at market value. Changes in market value
are recognized as a securities gain or loss through the income
statement. During 1994 and 1993, the net gain (loss) from the
trading securities portfolio was ($750,000) and $980,000,
respectively, and is recognized as a component of investment
securities gains/losses in the income statement. Income from the
trading securities was $576,000 and $655,000 for 1994 and 1993,
respectively, and is included as part of other operating income.
-18-
Loans
Loans are carried at the principal amount outstanding. Interest
income is generally recognized on the accrual basis. Loan fees are
considered in the yields and amortized.
The Bank's policy is to place loans on nonaccrual 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 nonaccrual, all accrued but unpaid interest is
reversed against current earnings. Subsequent payments received
are generally applied to reduce the principal balance.
Other Real Estate
Other real estate is comprised of properties acquired through
foreclosure proceedings. These properties are carried at the lower
of cost or fair market value based on current appraisals. Losses
arising at the time of acquisition of such property acquired
through foreclosure are charged against the reserve for possible
loan losses. Subsequent re-evaluation of the properties, which
indicate reduced value and carrying costs, are recognized through
charges to operating expenses.
Premises and Equipment
Premises and equipment include the cost of land, buildings,
machinery and equipment, and significant improvements thereto.
They are stated on the basis of cost less allowances for
depreciation and amortization.
The annual provisions for depreciation on premises and
improvements, and equipment have been computed using lives of two
to fifty years and three to ten years, respectively, under the
straight-line method.
Provision for Possible Loan Losses
The provision for possible loan losses is maintained at a level
considered adequate to provide for potential losses. The provision
charged to operating expenses is based on management's evaluation
of potential losses in the loan and lease portfolios and
consideration of economic conditions.
-19-
Shareholder's Equity
The Bank is subject to regulatory restrictions that limit cash
dividends and loans to Bancorp. As of December 31, 1994,
$343,872,000 of undistributed earnings of the Bank was available
for distribution to Bancorp without prior regulatory approval.
The following is a breakdown of the unrealized valuation adjustment
component of shareholder's equity as of December 31:
1994 1993 1992
(In Thousands)
Foreign exchange translation
adjustment $ (858) $(3,318) $(3,248)
Investment securities (17,468) 3,166 -
---------- ---------- ----------
Unrealized valuation
adjustments $(18,326) $ (152) $(3,248)
========== ========== ==========
2. Investment Securities
The following presents the details of the investment portfolio as
of December 31, 1994:
Gross Gross
Amortized Unrealized Unrealized Aggregate
Cost Gains Losses Fair Value
(In Thousands)
Securities held to maturity
Restricted equity securities $ 34,303 $ - $ - $ 34,303
Debt securities issued by the
United States Treasury and
agencies 969,005 316 (20,482) 948,839
Debt securities issued by state
and municipalities of the
United States 37,353 1,367 (796) 37,924
Debt securities issued by foreign
governments 35,672 533 - 36,205
Corporate debt securities - - - -
Mortgage back-securities 606,710 1,600 (31,192) 577,118
Other debt securities 20,042 12 (99) 19,955
------------- ------------- ------------- -------------
$ 1,703,085 $3,828 $(52,569) $1,654,344
============= ============= ============= =============
-20-
Gross Gross
Amortized Unrealized Unrealized Aggregate
Cost Gains Losses Fair Value
(In Thousands)
Securities available for sale
Equity securities $ - $ - $ - $ -
Debt securities issued by the
United States Treasury and
agencies 600,551 191 (8,421) 592,321
Debt securities issued by state
and municipalities of the
United States - - - -
Debt securities issued by foreign
governments - - - -
Corporate debt securities - - - -
Mortgage backed-securities 716,343 50 (20,874) 695,519
Other debt securities 52,383 - (60) 52,323
------------- ------------- ------------- -------------
$1,369,277 $ 241 $(29,355) $1,340,163
============= ============= ============= =============
The following presents the details of the investment portfolio as
of December 31, 1993:
GrossGross
Amortized Unrealized Unrealized Aggregate
Cost Gains Losses Fair Value
(In Thousands)
Securities held to maturity
Debt securities issued by the
United States Treasury and
agencies $2,110,735 $24,014 $ - $2,134,749
Debt securities issued by state
and municipalities of the
United States 40,566 3,260 (3) 43,823
Debt securities issued by foreign
governments 9,175 - - 9,175
Mortgage-backed securities 496,601 9,502 (989) 505,114
Other debt securities 30,014 1,093 - 31,107
------------- ------------- ------------- -------------
$2,687,091 $37,869 $ (992) $2,723,968
============= ============= ============= =============
-21-
Gross Gross
Amortized Unrealized Unrealized Aggregate
Cost Gains Losses Fair Value
(In Thousands)
Securities available for sale
Debt securities issued by the
United States Treasury and
agencies $ 216,162 $ 7,162 $ - $ 223,324
Corporate securities - - - -
Mortgage-backed securities 649,094 2,139 (4,062) 647,171
------------- ------------- ------------- -------------
$ 865,256 $ 9,301 $ (4,062) $ 870,495
============= ============= ============= =============
The book values and estimated market values of investment
securities as of December 31, 1992 are as follows:
Gross Gross Estimated
Unrealized Unrealized Market
Book Value Gains Losses Value
(In Thousands)
United States Treasury securities $1,773,715 $ 39,002 $ (523) $1,812,194
Securities of other United States
government agencies and
corporations 578,970 12,390 (901) 590,459
Obligations of states and political
subdivisions 57,485 2,464 (293) 59,656
Debt securities issued by foreign
governments 1,897 - - 1,897
Corporate securities 494 6,711 - 7,205
Mortgage-backed securities 468,039 13,463 (3,115) 478,387
Other securities 60,897 2,568 - 63,465
------------- ------------- ------------- -------------
$2,941,497 $ 76,598 $(4,832) $3,013,263
============= ============= ============= =============
-22-
The following presents an analysis of the contractual maturities
of the investment securities portfolio as of December 31, 1994:
Estimated Fair
Cost Value
(In Thousands)
Securities held to maturity
Due in one year or less $ 607,915 $ 604,421
Due after one year through five years 369,122 352,444
Due after five years through ten years 8,230 9,523
Due after ten years 76,805 76,535
------------- -------------
1,062,072 1,042,923
Mortgage-backed securities 606,710 577,118
Restricted equity securities 34,303 34,303
------------- -------------
$1,703,085 $1,654,344
============= =============
Securities available for sale
Due in one year or less $ 515,727 $ 514,737
Due after one year through five years 137,207 129,908
Due after five years through ten years - -
Due after ten years - -
------------- -------------
652,934 644,645
Mortgage-backed securities 716,343 695,518
Equity securities - -
------------- -------------
$1,369,277 $1,340,163
============= =============
Proceeds from sales of investment securities during 1994 were
$516,906,000. Gross gains of $244,000 and gross losses of
$17,235,000 were realized on those sales. The cumulative
investment valuation reserve was $17,468,000 (net of taxes) as of
December 31, 1994.
Investment securities carried at $3,010,907,000, $3,369,036,000,
and $3,418,254,000, were pledged to secure deposits of public
(governmental) entities, repurchase agreements and swap agreements
at December 31, 1994, 1993 and 1992, respectively. The December
31, 1994 amount included investment securities with a carrying
value of $2,365,226,000 and a market value of $2,327,239,000 which
were pledged solely for repurchase agreements.
-23-
3. Loans
Loans consisted of the following at year-end:
1994 1993 1992
(In Thousands)
Domestic loans:
Commercial and industrial $1,798,430 $1,672,512 $1,835,674
Real estate:
Construction - Commercial 105,505 128,041 214,226
- Residential 1,180 5,839 27,808
Mortgage - Commercial 1,122,802 1,116,396 921,438
- Residential 1,951,670 1,698,454 1,486,150
Installment 695,840 639,930 624,830
------------- ------------- -------------
Total domestic loans 5,675,427 5,261,172 5,110,126
Foreign loans 696,734 593,497 608,633
------------- ------------- -------------
Subtotal 6,372,161 5,854,669 5,718,759
Lease financing:
Direct 96,758 110,698 115,518
Leveraged 274,628 281,767 264,255
------------- ------------- -------------
Total lease financing 371,386 392,465 379,773
------------- ------------- -------------
Total loans $6,743,547 $6,247,134 $6,098,532
============= ============= =============
Transactions in the reserve for possible loan losses were as
follows:
1994 1993 1992
(In Thousands)
Balance at beginning of year $107,568 $112,018 $100,118
Provision charged to operations 21,764 52,009 48,503
Reserves acquired 1,437 - -
Charge-offs (23,316) (62,686) (41,797)
Recoveries 23,870 6,227 5,194
------------- ------------- -------------
Net recoveries (charge-offs) 554 (56,459) (36,603)
------------- ------------- -------------
Balance at end of year $131,323 $107,568 $112,018
============= ============= =============
Certain commercial and mortgage loans totaling $303,873,000 were
pledged to secure certain public deposits and the Federal Home Loan
Bank advance at December 31, 1994.
-24-
Non-performing assets, including non-accrual and restructured loans
and foreclosed real estate, totaled $47,026,000, $53,717,000 and
$81,246,000 as of December 31, 1994, 1993, and 1992, respectively.
Certain directors and executive officers of the Bank, its
subsidiary companies, companies in which they are principal owners,
and trusts and estates in which they are involved, were loan
customers during 1994, 1993 and 1992. These loans were made in the
ordinary course of business at the Bank's normal credit terms,
including interest rate and collateral requirements, and do not
represent more than a normal risk of collection. Such loans at
December 31, 1994, 1993 and 1992 amounted to $70,472,000,
$75,931,000 and $84,026,000, respectively. During 1994, the
activity in these loans included new borrowings of $27,741,000 and
repayments of $29,345,000 and other adjustments of $3,855,000
relating to the changes in directors and the companies and trusts
in which they are involved.
4. Premises and Equipment
The Bank owns and leases premises consisting primarily of operating
facilities, the great majority of which are located in Hawaii. The
Bank has three significant properties, all of which are in downtown
Honolulu. The largest is the condominium units in the Financial
Plaza of the Pacific in which the Bank's head office is situated.
The capital leases are for portions (less than 12.0%) of the
Financial Plaza of the Pacific. The terms of the leases are 60
years, further details of the capital leases are included in the
long-term debt foot note. In addition, the Bank owns a two-story
building on the outskirts of downtown Honolulu which houses data
processing and certain operational functions and a five-story
building which houses administrative departments. In 1993, the
Bank entered into a contract to build a 248,000 square foot
facility in the Kapolei area on Oahu. The building will be
primarily used as an operations facility and will also house a Bank
of Hawaii branch. The contracts for construction of the building
total $43 million, $33.7 of which has been included as part of
premises and equipment. Depreciation will commence when the
building is placed in service in late 1995.
-25-
The following is a summary of data for major categories of premises
and equipment:
Accumulated
Depreciation
and
Cost Amortization Net Book Value
(In Thousands)
December 31, 1994
Capital leases $ 4,464 $ (357) $ 4,107
Premises 217,940 (65,676) 152,264
Equipment 119,277 (71,952) 47,325
------------- ------------- -------------
$341,681 $(137,985) $203,696
============= ============= =============
December 31, 1993
Premises $167,943 $ (58,680) $109,263
Equipment 103,507 (64,735) 38,772
------------- ------------- -------------
$271,450 $(123,415) $148,035
============= ============= =============
December 31, 1992
Premises $153,011 $ (52,332) $100,679
Equipment 97,205 (61,229) 35,976
------------- ------------- -------------
$250,216 $(113,561) $136,655
============= ============= =============
The amounts of depreciation and amortization (including capital
lease amortization) included in consolidated expense were
$19,802,000, $17,527,000 and $15,519,000 in 1994, 1993 and 1992,
respectively.
The Bank's operating leases are for certain branch premises and
data processing equipment. The majority of the premises' leases
provide for a base rent for a stipulated period with various
renewal options. Portions of certain properties are subleased to
others for periods expiring in various years through 2000. Lease
terms generally provide for the lessee to pay operating costs such
as taxes and maintenance.
-26-
Future minimum payments, by year and in the aggregate, for
noncancelable operating leases with initial or remaining terms of
one year or more and capital leases consisted of the following at
December 31, 1994:
Capital Leases Operating Leases
(In Thousands)
1995 $ 7 $ 11,162
1996 7 8,670
1997 7 7,668
1998 7 7,299
1999 7 6,326
Thereafter 34,945 92,543
------------- -------------
Total minimum lease payments 34,980 $133,668
Amounts representing interest 29,858 =============
-------------
Present value of net minimum
lease payments $ 5,122
=============
Minimum future rentals receivable under subleases for noncancelable
operating leases at December 31, 1994 amounted to $765,000.
Rental expense for all operating leases consisted of:
1994 1993 1992
(In Thousands)
Minimum rentals $19,194 $20,589 $17,874
Sublease rental income (282) (229) (235)
------------- ------------- -------------
$18,912 $20,360 $17,639
============= ============= =============
-27-
5. Deposits
Interest on deposit liabilities in 1994, 1993 and 1992 consisted of
the following:
1994 1993 1992
(In Thousands)
Domestic interest bearing demand
accounts $ 36,031 $ 37,560 $ 53,209
Domestic savings accounts 24,064 28,041 34,312
Domestic time accounts 52,256 63,784 139,314
Foreign accounts 58,247 45,111 37,249
------------- ------------- -------------
$170,598 $174,496 $264,084
============= ============= =============
Time deposits with balances of $100,000 or more in domestic banking
offices were $505,925,000 in 1994. Of this amount, $27,472,000
represents deposits of public (governmental) entities which require
collateralization by acceptable securities. The majority of
deposits in the foreign category are time deposits in denominations
of $100,000 or more.
Maturities of domestic time deposits of $100,000 or more at
December 31, 1994 are summarized as follows:
Domestic
(In Thousands)
Under 3 months $264,724
4 to 6 months 85,790
7 to 12 months 67,557
Over 12 months 87,854
-------------
$505,925
=============
-28-
6. Short-term Borrowings
Details of short-term borrowings for 1994, 1993 and 1992 were as
follows:
Securities Sold
Other Short- Under
Funds term Agreements to
Purchased Borrowings Repurchase
(In Thousands)
1994
Amounts outstanding December 31 $ 609,574 $406,711 $2,133,099
Average amount outstanding during year $ 595,187 $415,166 $2,401,099
Maximum amount outstanding at any
month's end $ 660,301 $509,643 $2,728,370
Weighted-average interest rate during
year * 4.26% 2.96% 4.10%
Weighted-average interest rate on
balance outstanding at end of year 5.79% 3.22% 5.26%
1993
Amounts outstanding December 31 $ 748,500 $390,689 $2,508,850
Average amount outstanding during year $ 761,521 $223,468 $2,666,354
Maximum amount outstanding at any
month's end $ 970,311 $468,356 $3,041,525
Weighted-average interest rate during
year * 3.20% 3.81% 3.29%
Weighted-average interest rate on
balance outstanding at end of year 3.15% 2.72% 3.35%
1992
Amounts outstanding December 31 $1,113,356 $165,857 $2,294,608
Average amount outstanding during year $ 755,675 $178,572 $1,064,292
Maximum amount outstanding at any
month's end $1,113,356 $229,724 $2,294,608
Weighted-average interest rate during
year * 3.82% 6.09% 3.68%
Weighted-average interest rate on
balance outstanding at end of year 3.38% 3.74% 3.37%
*Average rates for the year are computed by dividing actual interest expense on borrowings by average daily
borrowings.
-29-
Funds purchased generally mature on the day following the date of
purchase. Other short-term borrowings consist mainly of foreign
call deposits which generally mature in 90 days and bear interest
rates reflecting such maturities. There was also a one year Bank
note for $100 million bearing a fixed interest rate of $3.55% which
matured in January 1995.
Securities sold under agreements to repurchase were treated as
financings and the obligations to repurchase the identical
securities sold were reflected as a liability with the dollar
amount of securities underlying the agreements remaining in the
asset accounts. At December 31, 1994, the weighted average
contractual maturity of these agreements was 90 days and represent
investments by public (governmental) entities, primarily the State
of Hawaii ($1.3 billion) and a local municipality ($0.6 billion).
A schedule of maturities of these agreements are as follows (in
thousands):
Overnight $ -
Less than 30 days 361,222
30 to 90 days 938,170
Over 90 days 833,707
-------------
$2,133,099
=============
7. Long-term Debt
Amounts outstanding as of year-end were as follows:
1994 1993 1992
(In Thousands)
Subordinated notes $118,609 $124,540 $ -
Medium-term notes 549,441 99,830 -
Federal Home Loan Bank advance 25,000 - -
Capitalized lease obligations 5,122 - -
------------- ------------- -------------
$698,172 $224,370 $ -
============= ============= =============
The subordinated notes, which were issued in 1993, have a fixed
interest rate of 6.875% and mature in 2003. The medium-term notes,
which were issued in 1993 and 1994, are unsecured and carry two
year terms with floating interest rates which are tied to the
three-month LIBOR rate; adjusted quarterly. The Federal Home Loan
Bank advance bears interest at 7.92% and matures in 1996. As of
December 31, 1994, loans totaling $30,000,000 were pledged to
secure the advance along with FHLB stock.
-30-
The capitalized lease obligations are for certain condominium units
in the Financial Plaza of the Pacific. The leases have 60 year
terms. The lease payments allocated to the capital leases are
fixed at $7,000 per year until 2002; $605,000 per year from 2003 to
2007 and $665,000 per year from 2008 to 2012. The rates are
negotiable thereafter.
Long-term debt maturities for the five years succeeding December
31, 1994, are $99,932,000 in 1995; $474,523,000 in 1996; $7,000 in
1997, $7,000 in 1998 and $7,000 in 1999.
Interest paid on long-term debt in 1994 totaled $17,392,000.
8. International Operations
The following table provides certain selected financial data for
the Bank's international operations for the years ended December
31, 1994, 1993 and 1992:
1994 1993 1992
(In Thousands)
Average assets $1,699,168 $1,908,883 $1,864,876
Average loans 667,828 666,091 589,974
Average deposits 1,240,692 1,259,042 860,773
Operating income 97,134 94,096 105,652
Income before taxes 12,000 13,425 17,865
Net income 7,137 8,528 11,457
Average assets primarily consist of short-term, interest-bearing
deposits with foreign branches of U.S. banks and large
international banks. On average, these deposits were $802,833,000,
$1,086,554,000, and $1,118,977,000 during 1994, 1993 and 1992,
respectively.
To measure international profitability, the Bank maintains an
internal transfer pricing system for the use of domestic funds and
makes certain income and expense allocations. Interest rates used
in determining charges on advances of funds are based on prevailing
deposit rates. Overhead is allocated to reflect services rendered
by administration units to profit centers.
-31-
9. Contingent Liabilities
The Bank is a defendant in various legal proceedings and, in
addition, there are various other contingent liabilities arising in
the normal course of business. After consultation with legal
counsel, management does not anticipate that disposition of these
proceedings and contingent liabilities will have a material effect
on the consolidated financial statements.
10. Retirement, Profit Sharing and Other Post Retirement Benefit
Plans
The Bank has a noncontributory, defined-benefit retirement plan
(Plan) which covers salaried employees who have met the Plan's
eligibility requirements. Benefits are based on years of service
and average final compensation. The Bank's funding policy is to
contribute annually an amount that falls within the minimum to
maximum amount that can be deductible for income tax purposes.
Plan assets are managed by investment advisors in accordance with
investment policies established by the Plan Trustees. Investments
are generally marketable securities including stocks, bonds and
money market funds.
The Bank has a nonqualified Excess Benefits Plan which covers all
employees of the Bank and participating subsidiaries who have met
eligibility requirements. The unfunded Excess Benefits Plan
recognizes the liability to Plan participants for amounts exceeding
those allowed to be included in the qualified defined benefit Plan.
The table below includes the status of this Excess Benefit Plan.
In January 1995, the Bank announced a restructuring of these plans.
The benefits provided by the plans will be "frozen" as of December
31, 1995 with a phase out provided to certain groups of staff
members. In conjunction with this restructuring, qualifying staff
have been offered an early retirement option. The option for staff
members who are at least 50 years of age with 10 years or more of
service provides an extra 5 years of service and 5 years of age for
benefit calculation purposes. In addition, the staff member will
receive $250.00 per month until age 65 to defray medical benefit
costs. At this point, it is not certain as to how many of these
qualifying staff members will accept the offer of early retirement
and the ultimate financial impact is not determinable. The
restructuring will be accounted for as a curtailment.
-32-
The following table sets for the Plans' funded status and amounts
recognized in the Bank's statements of condition at December 31,
1994, 1993 and 1992:
1994 1993 1992
(In Thousands)
Actuarial present value
of benefit obligations:
Vested benefit obligation $59,208 $56,553 $44,369
============= ============= =============
Accumulated benefit
obligation $63,445 $61,038 $48,154
============= ============= =============
Projected benefit obligation $98,443 $99,831 $83,614
Plan assets (primarily
marketable securities) at fair
value 78,689 73,064 59,456
------------- ------------- -------------
Projected benefit obligation in
excess of plan assets (19,754) (26,767) (24,158)
Unrecognized net (gain)/loss (3,766) 2,287 (1,892)
Unrecognized net obligation at
January 1, 1985 being
recognized over 15 years (1,841) (2,220) (2,600)
Prior service cost not yet
recognized in net periodic
pension cost 1,907 2,333 3,121
------------- ------------- -------------
Accrued pension liability
recognized in the Statement of
Condition $(23,454) $(24,367) $(25,529)
============= ============= =============
-33-
Net pension costs included the following components:
1994 1993 1992
(In Thousands)
Service cost--benefits earned
during the period $ 7,561 $ 6,803 $ 6,172
Interest cost on projected benefit
obligation 7,299 6,626 5,786
Actual return on assets 1,533 (5,992) (2,548)
Net amortization and deferral (8,080) 557 (2,096)
Net periodic pension costs of
affiliates (635) (703) (598)
------------- ------------- -------------
Net periodic pension costs $ 7,678 $ 7,291 $ 6,716
============= ============= =============
Assumptions used in the accounting were as follows:
December 31
1994 1993 1992
Weighted-average discount rates 8.25% 7.5% 8.0%
Rates of increase in
compensation levels 5.00% 5.0% 5.5%
Expected long-term rate of
return on assets 8.50% 8.5% 8.5%
There is a deferred compensation profit-sharing plan (Profit
Sharing Plan) for the benefit of all employees who have met the
Profit Sharing Plan's eligibility requirements. The Profit Sharing
Plan provides for annual contributions based on a schedule of
performance levels. The schedule establishes the percentage of
adjusted net income to be contributed based on the Bank's adjusted
return on equity. Members of the Profit Sharing Plan are permitted
to elect to invest their annual allocation in shares of common
stock of Bancorp Hawaii, Inc., and to receive up to 50% of their
annual allocation in cash. Contributions amounted to $6,737,000 in
1994, $8,928,000 in 1993, and $9,249,000 in 1992.
-34-
The restructuring of the defined benefit plan, mentioned earlier
will affect the Profit Sharing Plan. The Profit Sharing Plan will
be enhanced with a company matching of the 401(k) contribution of
$1.25 for each $1.00 contributed by the staff member up to 2% of
their compensation. The Bank will also establish a new defined
contribution plan for which it will contribute 4% of annual
compensation to staff members meeting certain eligibility and
vesting requirements. These changes are expected to be implemented
on January 1, 1996.
The Bank adopted SFAS No. 106 "Employer's Accounting for
Postretirement Benefits Other Than Pensions," (SFAS 106) as of
January 1, 1993. The defined benefit plan provides group life,
dental and medical insurance coverage. Over the last several
years, the programs have been modified to provide a "sharing of
costs" where both the employer and employees pay a portion of the
premium costs. Most of the employees of the Bank and its
subsidiaries are covered who have met the eligibility
requirements. The Bank has elected to recognize the transition
obligation over 20 years as allowed upon adoption of SFAS 106.
Bancorp has no segregated assets to provide postretirement benefits
as of December 31, 1994 and 1993.
The following schedule presents the funded status of the liability
as of December 31:
1994 1993
(In Thousands)
Accumulated Postretirement Benefit
Obligation
Retirees $ (8,785) $ (8,869)
Other Fully Eligible Plan Participants (6,243) (6,038)
Other Active Plan Participants (8,863) (9,447)
------------- -------------
Total (23,891) (24,354)
Plan Assets - -
------------- -------------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets (23,891) (24,354)
Unrecognized Transition Obligation Being
Amortized Over 20 years 13,166 13,337
Unrecognized Net Gain/Loss (2,833) 699
------------- -------------
Accrued Postretirement Benefit Liability $(13,558) $(10,318)
============= =============
-35-
The net periodic postretirement benefit cost was:
1994 1993
(In Thousands)
Service Cost $1,089 $1,151
Interest Cost 1,820 1,678
Amortization of Transition Obligation 731 702
------------- -------------
Net Periodic Postretirement Benefit cost $3,640 $3,531
============= =============
The following table presents the assumptions utilized to determine the expense and liability:
1994 1993
Health Care Cost Trend Rate 15.0% 15.0%
Dental Care Cost Trend Rate 7.5% 7.5%
Weighted Average Discount Rate 7.5% 7.5%
Rate of Increase in Compensation Level 5.0% 5.0%
The health care cost trend rate is projected at 15% per year until
the year 2000 leveling to the ultimate 7%. A one percent increase
in that trend rate of assumption (with all other assumptions
remaining constant) would increase the service and interest cost
components of the net periodic postretirement cost from $2,909,000
to $3,336,000. The impact of this one percent increase in the
trend rates on the accumulated postretirement benefit obligation
would be an increase to $26,681,000 at December 31, 1994.
11. Income Taxes
Effective January 1, 1992, the Bank adopted Financial Accounting
Standards Board Statement 109, "Accounting for Income Taxes," and
has reported the cumulative effect of that change in the method of
accounting for income taxes in the 1992 Consolidated Statement of
Income.
-36-
The income tax provision includes the following significant
components:
1994 1993 1992
(In Thousands)
Current $ 83,064 $50,269 $58,586
Deferred (15,734) 20,640 6,915
------------- ------------- -------------
Provision for income taxes $ 67,330 $70,909 $65,501
============= ============= =============
The 1994, 1993, and 1992 tax provision includes state tax expense
of $12,313,000, $13,251,000, and $11,423,000, respectively. The
current provision also includes taxes on the gains and (losses) on
the sale of securities of $(7,130,000), $3,227,000, and $872,000,
for 1994, 1993, and 1992, respectively.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Bank's deferred tax
liabilities and assets as of December 31, 1994, 1993 and 1992,
reclassified based on the tax returns as filed are as follows (in
thousands):
1994 1993 1992
Deferred tax liabilities
Lease transactions $174,892 $165,830 $151,379
Deferred investment tax credits 7,318 7,652 7,809
Accelerated depreciation 1,480 2,225 2,269
------------- ------------- -------------
Total deferred tax liabilities 183,690 175,707 161,457
============= ============= =============
Deferred tax assets
Reserve for loan losses 49,941 40,826 42,666
Accrued pension cost 7,728 7,227 7,968
Net operating loss carryforwards 722 1,963 -
Securities valuation reserve 11,646 (2,110) -
Others - net 11,243 9,657 10,115
------------- ------------- -------------
Total deferred tax assets 81,280 57,563 60,749
------------- ------------- -------------
Net deferred tax liabilities $102,410 $118,144 $100,708
============= ============= =============
For financial statement purposes, the Bank had deferred investment
tax credits for property purchased for lease to customers of
$7,318,000, $7,652,000 and $7,809,000 at December 31, 1994, 1993
and 1992, respectively. In 1994, 1993 and 1992, investment tax
credits included in the computation of the provision for income
taxes were $334,000 $157,000 and $568,000, respectively.
-37-
The following analysis reconciles the federal statutory income tax
rate to the effective consolidated income tax rate:
Statutory federal income tax rate 35.0% 35.0% 34.0%
Increase (decrease) in tax rate resulting from:
State taxes, net of federal income tax and
foreign tax adjustments 4.8 4.6 4.5
Tax-exempt interest income (0.5) (0.7) (1.5)
Effect of tax rate change on deferred tax assets
and liabilities - 0.3 -
Low income housing and investment tax credits (0.6) (0.6) (0.3)
Other 1.6 (0.5) 2.2
------------- ------------- -------------
Effective tax rate 40.3% 38.1% 38.9%
============= ============= =============
12. Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs
of its customers and to manage its own exposure to fluctuations in
interest and foreign exchange rates. These financial instruments
include commitments to extend credit, foreign exchange contracts,
standby letters of credit and interest rate swaps. These
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
statements of condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments. The FASB has
segregated certain of these off balance sheet financial instruments
which includes foreign exchange and interest rate swap type of
instruments as derivative financial instruments. FASB has further
categorized these derivative financial instruments into "held or
issued for purposes other than trading" or "trading." The Bank
does not currently utilize these derivative financial instruments
for trading purposes.
-38-
The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual or notional amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. For
derivative financial instruments the contract or notional amounts
do not represent exposure to credit loss. The Bank controls the
credit risk of these instruments through credit approvals, limits
and monitoring procedures.
Descriptions of these financial instruments with off balance sheet
risks follows:
Traditional Off Balance Sheet Risk Instruments
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any terms or conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's
creditworthiness on an individual basis. The amount of collateral
obtained is based on management's credit evaluation of the
customer. Collateral held varies, but may include cash, accounts
receivable, inventory, and property, plant and equipment.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support borrowing
agreements. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan
facilities to customers. The Bank holds cash and deposits as
collateral supporting those commitments for which collateral is
deemed necessary.
Derivative Financial Instruments Held or Issued for Other Than
Trading
Foreign exchange contracts are contracts for delayed delivery of
foreign currency in which the seller agrees to make delivery at a
specified future date at a specified price. Risks arise from the
possible inability of counterparties to meet the terms of their
contracts and from movements in exchange rates and interest rates.
Collateral is generally not required for these transactions. Net
revenue (loss) on foreign exchange contracts totaled $0.2 million,
$1.2 million and $(1.0) million for 1994, 1993, and 1992,
respectively.
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The Bank enters into various interest-rate swaps in managing its
interest-rate risk. In these swaps, the Bank agrees to exchange,
at specified intervals, the difference between fixed-and floating-
interest amounts calculated on an agreed-upon notional principal
amount. The Bank used swap agreements to effectively convert
portions of its floating rate loans to a fixed rate basis. These
swap transactions allowed the Bank to better match the funding
source which is a portion of the Bank's core deposit base. The
core deposit base, although subject to immediate withdrawal,
displays a longer term fixed character. At December 31, 1994, $1.5
billion of such "receive-fixed" swaps were in effect. In addition,
the Bank had entered into "pay fixed" swap agreements, prior to
1994, that effectively converted a portion of its floating rate
liabilities to a fixed rate basis. These swap transactions were
entered into to fix the funding costs for specific term loans. At
December 31, 1994, $119.3 million of such "pay fixed" swaps were in
effect. The net amount payable or receivable from interest-rate
swap agreements is accrued as an adjustment to interest income.
The related amount payable or receivable from counter parties is
included in accrued interest payable or receivable. The fair value
of the swap agreements are not recognized in the financial
statements.
The Bank's current credit exposure on swaps is limited to the value
of interest-rate swaps that have become favorable to the Bank. At
December 31, 1994, the market value of pay fixed interest rate
swaps was $1.8 million and the market value of receive fixed
interest rate swaps was $(93.2) million. The net fair value of all
positions was $(91.4) million. Net revenue on interest rate swap
agreements totaled $7.7 million, $14.1 million and $0.03 million
for 1994, 1993 and 1992, respectively.
The table below summarizes by notional amounts the activity for
each major category of swaps in 1994, 1993 and 1992. The Bank had
no deferred gains or losses relating to terminated swap contracts
in 1994.
Receive Fixed Pay Fixed
(In Thousands)
Balance, December 31, 1991 $ - $ 43,103
Additions 150,000 -
Maturities/amortizations - (7,627)
------------- -------------
Balance, December 31, 1992 150,000 35,476
Additions 1,250,000 100,000
Maturities/amortizations (121,231) (15,655)
------------- -------------
Balance, December 31, 1993 1,278,769 119,821
Additions 350,000 -
Maturities/amortizations (156,719) (524)
------------- -------------
Balance, December 31, 1994 $1,472,050 $119,297
============= =============
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The approximate annual maturities of swap agreements entered into
as of December 31, 1994 were:
Notional Principal Expected to Mature in
1995 1996 1997 1998 1999 Total
(In Thousands)
Pay-fixed interest rate
swaps:
Fixed maturity $100,000 $15,000 $ - $ - $ - $115,000
Pay rate 4.03% 8.35% -% -% -%
Receive rate 6.78% -% -% -% -%
Amortizing (1) $ - $ 4,000 $ - $ - $ - $ 4,000
Pay rate -% 7.49% -% -% -%
Receive rate 6.50% -% -% -% -%
Receive-fixed interest
rate swaps:
Fixed maturity $300,000 $260,000 $240,000 $150,000 $ - $950,000
Pay rate 7.02% -% -% -% -%
Receive rate 6.12% 5.17% 4.94% 5.32% -%
Amortizing (1) $ 61,000 $ 53,000 $ 67,000 $211,000 $130,000 $522,000
Pay rate 6.00% -% -% -% -%
Receive rate 5.09% 5.10% 5.41% 5.05% 5.31%
(1) Amortization estimated utilizing average prepayment speeds provided by various dealers in these
instruments.
13. Fair Values of Financial Instruments
In December 1991, the FASB issued SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments." This statement
requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the
instrument. Statement 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
-41-
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash
and short-term investments approximate those assets' fair
values.
Investment Securities Held to Maturity, Investment Securities
Available for Sale and Trading Securities
Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices
of comparable instruments.
Loans
Fair values for loans are estimated for portfolios of loans
with similar financial characteristics. Loans are segregated
by type such as commercial, real estate, consumer, and
foreign. Each loan category is further segmented into fixed
and adjustable rate interest terms and by performing and
nonperforming categories. Fair values are calculated by
discounting scheduled cash flows through the estimated
maturity using estimated discount rates which reflect credit
and interest rate risks inherent in the loan.
Deposit Liabilities
Fair values for non-interest bearing and interest bearing
demand deposits and savings are, by definition, equal to the
amount payable on demand at their reporting date (i.e., their
carrying amounts). Fair values for time deposits are
estimated using discounted cash flow analyses. Discount rates
reflect rates currently offered for deposits of similar
remaining maturities.
-42-
Short-Term Borrowings
The carrying amounts of funds purchased, securities sold under
agreements to repurchase, and other short-term borrowings
approximate their fair values.
Long-Term Debt
Fair values for long-term debt are estimated using discounted
cash flow analyses, based on the Bank's current incremental
borrowing rates for similar types of borrowings.
Off-Balance Sheet Instruments
Fair values for off-balance sheet instruments (e.g.,
commitments to extend credit, standby letters of credit,
commercial letters of credit, foreign exchange and swap
contracts, and interest rate swap agreements) are based on
fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and
the counterparties' credit standing, current settlement
values, or quoted market prices of comparable instruments.
The following table presents the fair values of Bancorp's
financial instruments at December 31, 1994, 1993 and 1992.
1994 1993 1992
Book or Book or Book or
Notional Notional Notional
Value Fair Value Value Fair Value Value Fair Value
(In Thousands)
Financial Instruments - Assets
Loans (1) $6,212,900 $6,315,300 $5,731,900 $5,894,000 $5,593,600 $5,775,000
Investment securities (2) 3,043,200 2,994,500 3,557,600 3,594,500 2,941,500 3,013,300
Other financial assets (3) 787,600 787,600 952,200 952,200 1,872,077 1,872,077
Financial Instruments - Liabilities
Deposits 6,394,100 6,405,600 6,382,200 6,393,000 7,093,300 7,096,000
Short term borrowings (4) 3,149,400 3,149,400 3,648,000 3,648,000 3,573,800 3,573,800
Long term debt (5) 698,200 678,500 224,400 245,000 - -
-43-
1994 1993 1992
Book or Book or Book or
Notional Notional Notional
Value Fair Value Value Fair Value Value Fair Value
(In Thousands)
Financial Instruments - Off-Balance Sheet
Financial instruments whose contract amounts represent credit risk:
Commitments to
extend credit $3,187,455 $9,548 $2,692,081 $8,113 $2,211,870 $6,438
Standby letters of
credit 233,276 4,416 245,383 4,599 254,909 4,759
Commercial letters of
credit 144,319 210 102,349 177 98,664 164
Financial instruments whose notional or contract amounts exceed the amount of credit risk:
Foreign exchange and
swap contracts 285,390 229 339,882 61 407,901 (806)
Interest rate swap
agreements 1,591,347 (91,420) 1,398,590 (277) 185,476 (967)
(1) Includes all loans, net of reserve for loan losses, and excludes leases
(2) Includes both held to maturity and available for sale securities
(3) Includes interest bearing deposits, securities purchased under agreements to resell, funds sold, and
trading securities
(4) Includes security sold under agreements to repurchase, funds purchased and short term borrowings
(5) Excludes capitalized lease obligations
-44-
14. Related Parties and Related Party Transactions
Included in deposits (foreign, demand non-interest bearing, and
demand interest bearing) are deposits from its parent and various
affiliates (subsidiaries of its parent), of $79,200,000 and
$14,800,000, respectively. Interest paid on these deposits
totaled $4,911,000 in 1994. The advances to affiliates include
an advance of $25,000,000 to Bancorp Pacific, Inc. and $3,000,000
to First National Bank of Arizona. Interest income on these
advances totaled $1,309,000 in 1994. The Bank paid insurance
premiums of $3,566,000 to Bancorp Hawaii Insurance Services,
Ltd., an affiliate, in 1994.
-45-
