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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, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _________________ to __________________
COMMISSION FILE NUMBER 1-6887
BANCORP HAWAII, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
HAWAII 99-0148992
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
130 MERCHANT STREET, HONOLULU, HAWAII 96813
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(808) 643-3888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $2 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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. [X]
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, 1996 ($42.00 per share): $1,651,661,298
As of February 21, 1997, 39,750,880 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 25, 1997, 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, Asia, and the U.S. Mainland. 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.
In 1996, Bank of Hawaii International, Inc. (BOHI), a wholly-owned
subsidiary of Bank of Hawaii, finalized its acquisition of majority ownership
of two of its affiliate banks, acquiring an additional 48% and 54% of the
shares of Banque de Tahiti (BDT) and Banque de Nouvelle Caledonie (BNC),
respectively in May 1996. During the year, other minority shareholders
interests were purchased, and BOHI's ownerships totaling 92.4% of BDT and
91.5% of BNC at year-end 1996. The financial results of BDT and BNC have been
included in Bank of Hawaii's and Bancorp Hawaii, Inc.'s consolidated financial
statements since June 1996.
In 1996, Bank of Hawaii also expanded its presence in Asia upgrading its
Taiwan office to a branch in June 1996 and entering into an agreement with
Capital Trust Limited to provide representative services for Bank of Hawaii in
India. Capital Trust Limited, one of India's leading merchant banks, is
headquartered in New Delhi with offices in Bombay, Calcutta, Madras and
Bangalore.
In August 1996, First National Bank of Arizona entered into an agreement to
acquire four branches of Home Savings of America in Arizona. The branches have
deposits of approximately $250 million. As of year-end 1996 all applications
have been filed and approval is pending. The acquisition is expected to close
in the first quarter of 1997.
Bancorp's organization chart at December 31, 1996 is included as Exhibit
21.1. 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 included in the consolidated
financial statements of Bancorp, except Bank of Tonga and Pacific Commercial
Bank which are accounted for under the equity method.
At December 31, 1996, Bancorp and its subsidiaries employed 5,023 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 15 directors of Bank of Hawaii (each of whom holds 125
qualifying shares each) own 100% of the outstanding shares. There are four
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),
2
Republic of the Marshall Islands (Majuro), Republic of Palau (Koror), Japan
(Tokyo), Singapore, and Taiwan (Taipei). Bank of Hawaii also provides
representative services in India through Capital Trust Limited, a leading
merchant bank in India. 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; Bancorp Leasing of Hawaii, Inc.; BOHI; Bank of Hawaii International
Corporation, New York; Bancorp Investment Group, Limited; Pan Ocean Insurance
Agency, Inc.; Pacific Capital Asset Management, Inc.; Bankoh Investment
Advisory Services Limited; Realty and Mortgage Investors of the Pacific,
Limited; and 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 making it 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 1996, 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 1.1% of Bancorp's total assets at
year-end 1996.
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--91%; Banque de Tahiti--92%; 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 7.0% of Bancorp's
total assets at year-end 1996.
Bank of Hawaii International Corporation, New York (BOHICNY), was organized
in 1982 as an Edge Act corporation. BOHICNY 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 2.2% of Bancorp's total assets at year-
end 1996.
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. Gross revenues for
Bancorp Investment Group, Limited exceeded $2.8 million in 1996.
Pacific Capital Asset Management, Inc. was incorporated in 1994 to provide
high-end, performance-oriented portfolio management services to the
institutional marketplace, which includes pension funds, endowments,
foundations, and insurance companies. This company has had limited activity
through 1996.
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 remained
very limited during 1996.
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 since its name change.
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 1996 were
$52.4 million.
3
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 activity in 1996.
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
25 full service offices throughout Hawaii. Its deposits are also insured by
the FDIC. Total assets for First Federal represented 8.0% of Bancorp's total
assets at year-end 1996.
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, was originally
formed in 1979 as Bankoh Finance, Inc. through the purchase of the assets of
an industrial loan company based in Guam. BFH-Guam has deposit-taking
authority under Guam law, but discontinued accepting new deposits in 1984 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 1996.
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. At year-end 1996, FNBA provides
customary commercial banking services through six branch offices located in
the State of Arizona. The acquisition mentioned earlier will increase the
number of branches to ten. FNBA had total assets representing 1.1% of
Bancorp's total assets at year-end 1996.
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. In 1996, activity remained limited.
Total assets of Bancorp Hawaii Small Business Investment Company, Inc. was
$2.5 million at year-end 1996.
4
REGULATION 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 117 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 allows 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 acquisition may
not be approved, however, if immediately before the acquisition the acquirer
controls an FDIC-insured institution
5
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.
Hawaii has enacted a statute, effective June 1, 1997, which will authorize
out-of-state banks to engage in "interstate merger transactions" with (mergers
and consolidations with and purchases of all or substantially all of the
assets and branches of) Hawaii banks, followed which any such out-of-state
bank may operate the branches of the Hawaii bank it has acquired. The Hawaii
bank must have been in continuous operation for at least five years prior to
such an acquisition, unless it is subject to or in danger of becoming subject
to certain types of supervisory action. This statute does not permit out-of-
state banks to acquire branches of Hawaii banks other than through an
"interstate merger transaction" (except in the case of a bank that is subject
to or in danger of becoming subject to certain types of supervisory action)
nor to open branches in Hawaii on a de novo basis.
The BHC Act 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.
6
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. 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. On September 30, 1996, legislation was signed
into law to recapitalize the Savings Association
7
Insurance Fund administered by the FDIC (SAIF), which generally insures the
deposits of savings associations. The legislation required the FDIC to impose
a one-time special assessment on SAIF-assessable deposits, including the
deposits of First Federal.
The Federal Deposit Insurance Corporation Improvements Act of 1991
("FDICIA") requires the federal banking regulators to take "prompt corrective
action" in respect to 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, credit unions and other financial institutions. Some of these
bills would reduce the extent of federal deposit insurance, broaden the powers
of bank holding companies, reduce regulatory burdens on financial
institutions, address aspects of competitive imbalance between credit unions
and other regulated financial institutions, promote more open financial
markets for U.S. banks and financial companies in foreign nations, 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, permit affiliations
among banks, insurance companies, and securities firms or between banks and
nonfinancial companies, 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 55 to 57.
8
ITEM 3. LEGAL PROCEEDINGS
Note J to the Audited Financial Statements on page 63.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1996 to a vote of
security holders through the solicitation of proxies or otherwise.
Executive Officers of Registrant:
The following table lists the names, ages and positions held with the
Registrant of all executive officers of the Registrant as of December 31,
1996. Executive officers serve at the discretion of the Board of Directors.
NAME AGE POSITION
---- --- --------
Lawrence M. Johnson....... 56 Chairman and Chief Executive Officer of
Bancorp and the Bank since August 1994;
President of Bancorp and the Bank March
1989 to July 1994; Executive Vice President
of Bancorp August 1980 to February 1989,
Director of the Bank since April 1989.
Richard J. Dahl........... 45 President of Bancorp and the Bank since
August 1994 and Chief Operating Officer of
the Bank since August 1995; Executive Vice
President and Chief Financial Officer of
Bancorp April 1987 to January 1994; Vice
Chairman of the Bank December 1989 to July
1994, Director of the Bank since April
1994.
Alton T. Kuioka........... 53 Executive Vice President of Bancorp since
October 1994; Director of the Bank since
November 1996; Vice Chairman of the Bank
since June 1994; and Chief Lending Officer
of the Bank since August 1995; Executive
Vice President of the Bank November 1991 to
May 1994; Senior Vice President of the Bank
October 1988 to October 1991.
Thomas C. Leppert......... 42 Executive Vice President of Bancorp and Vice
Chairman of the Bank since December 1996;
President and Chief Executive Officer of
Castle & Cooke Properties, Inc. since 1989;
Director of Castle & Cooke 1995 to November
1996; President of Residential Operations
and Hawaii Commercial Operations Castle &
Cooke, Inc. since 1995.
David A. Houle............ 49 Senior Vice President, Treasurer and Chief
Financial Officer of Bancorp since 1992;
Executive Vice President and Chief
Financial Officer of the Bank since
February 1994; Senior Vice President and
Investment Manager at Comerica Incorporated
January 1985 to September 1992.
Denis K. Isono............ 45 Vice President and Controller of Bancorp
since 1988; Senior Vice President of the
Bank since 1993, and Controller of the Bank
since 1986.
9
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 12.
ITEM 6. SELECTED FINANCIAL DATA
Year-End Summary--Table 23 on page 41.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PERFORMANCE HIGHLIGHTS
Bancorp Hawaii, Inc. (Bancorp) reported earnings of $133.1 million for 1996,
up 9.3% from $121.8 million reported for 1995. Earnings per share were $3.23
for 1996 compared to $2.90 for 1995 and $2.75 for 1994. The improvement in
profitability was driven by asset growth attributable to the acquisitions in
the South Pacific, and improved net interest margin.
Bancorp has adopted a goal to increase its annual performance to a targeted
1.20% return on average assets (ROAA) and 17.5% return on average equity
(ROAE) by the year 2000. In 1996, ROAA improved to 0.99% and ROAE to 12.43%.
Comparatively, ROAA in 1995 was 0.98% and ROAE was 11.87%. Bancorp targets an
average equity to average assets ratio of at least 6.00% and maintains its
capital at levels considered by regulators as a "well capitalized" financial
institution. In 1996, Bancorp's average equity to average asset ratio was
7.95% and reported capital at $1.1 billion, exceeding the levels necessary to
be considered "well capitalized."
In May 1996, Bank of Hawaii International, Inc. (a wholly-owned subsidiary
of Bank of Hawaii) finalized its purchase of a majority ownership of Banque de
Tahiti (BDT) and Banque de Nouvelle Caledonie (BNC) and their related consumer
credit affiliates, Credipac Polynesie and Credipac New Caledonie. The
acquisitions were accounted for as purchases with ownership percentages of
92.4% for BDT and 91.5% for BNC at year-end 1996. Bank of Hawaii
International, Inc. (consolidated) owns 100% of Credipac Polynesie and 100% of
Credipac New Caledonie. BDT and BNC reported net income of $5.3 million for
the eight month period since the acquisition of majority ownership after the
impact of goodwill. For the first four months of 1996, BDT and BNC were
accounted for using the equity method, producing $3.7 million in "other
income" for Bancorp. Throughout this report, the impact of the acquisition is
disclosed to allow the reader to understand its effect on Bancorp.
Net interest income increased 12.3% from 1995 to $482.3 million (on a
taxable equivalent basis) for 1996. Analyzing this increase, about $39 million
was attributed to an increase in average earning assets, while $14 million was
to a widening in net interest margin to 3.84% from 3.72% in 1995.
Comparatively, net interest margin was 3.82% in 1994.
Bancorp's net overhead (non-interest expense less non-interest income before
securities transactions) increased to $250.6 million for 1996 compared with
$220.2 million in 1995 and $214.2 million in 1994. About $18.3 million of the
increase between 1995 and 1996 was due to the BDT and BNC acquisition.
Additionally, the $5.0 million (pre-tax) Savings Association Insurance Fund
(SAIF) assessment recognized by Bancorp Pacific, Inc. and an expense
associated with the early termination of a leveraged lease ($2.8 million) also
contributed to the increase. These changes are further discussed in the "net
overhead" section of this report.
10
Total Non-Performing Assets, plus loans 90+ days past due, increased to
$117.9 million, 1.36% of total loans at year-end 1996, compared to $77.6
million or 0.95% of total loans reported at year-end 1995 and $64.8 million or
0.82% of total loans at year-end 1994. As a percentage of outstanding loans,
Non-Performing Assets (NPA) increased to 0.96% as of year-end, up from 0.70% at
year-end 1995 and 0.67% at year-end 1994. The change in the level of NPA and
past due loans is affected by the BDT and BNC acquisition. For 1996, BDT and
BNC reported $22.3 million in NPA and $9.5 million in 90 day past due loans.
Without these loans, Bancorp's NPA and 90 day past due loans would have been
$60.9 million and $25.2 million, respectively.
Bancorp has historically maintained a level of NPA to outstanding loans under
1%, reflecting sound lending practices, aggressive management of NPA, and a
conservative charge-off strategy (Table 7). During 1996, recoveries totaled
$30.8 million, compared to $14.4 million in 1995 and $25.3 million in 1994. Net
charge-offs in 1996 were $13.3 million or 0.16% of average loans, compared with
net charge-offs of $13.5 million, 0.18% of average loans in 1995 and net
charge-offs of $0.1 million in 1994. Finally, the reserve for loan losses
totaled $167.8 million at the end of 1996, representing 1.97% of loans
outstanding, compared with $152.0 million and 1.90%, respectively at year-end
1995.
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
1996, Bancorp completed its program approved in 1994 to repurchase up to 2
million of its common shares. In 1996, about 1.3 million shares were
repurchased to fulfill the 1994 share repurchase program. In the fourth quarter
of 1996, a new program authorizing the repurchase of up to an additional 2
million shares of Bancorp common shares was approved by Bancorp's Board. About
100,000 shares had been purchased under the new plan as of year-end 1996.
Additionally there is an ongoing program to repurchase common shares to meet
the annual needs of various Bancorp benefit and dividend reinvestment plans.
Finally, in December 1996, Bancorp issued $100 million of 8.25% Capital
Securities through Bancorp Hawaii Capital Trust I, a grantor trust formed and
controlled by Bancorp. The issue is junior to any outstanding subordinated
notes, has a 30-year term and bears a cumulative fixed interest rate of 8.25%.
The issue also contains a call provision triggered by certain changes in tax
laws. The debt, which qualifies as Tier I Capital for regulatory capital
purposes, provides funds to Bancorp for general corporate purposes.
PERFORMANCE HIGHLIGHTS
TABLE 1
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
1996 1995 FIVE-
----------------- --------- YEAR
PERCENT COMPOUND
EARNINGS MEASURES AMOUNT CHANGE AMOUNT GROWTH
- ----------------- --------- ------- --------- --------
Net Income................................. $ 133.12 9.3% $ 121.80 3.4%
Earnings Per Common Share.................. 3.23 11.4 2.90 3.7
Average Assets............................. 13,468.0 8.6 12,405.9 4.5
Average Loans.............................. 8,353.6 9.1 7,654.9 5.2
Average Deposits........................... 8,182.4 16.3 7,036.5 (1.1)
Average Shareholders' Equity............... 1,070.9 4.4 1,026.0 9.4
FIVE-
YEAR
PERFORMANCE RATIOS 1996 1995 AVERAGE
- ------------------ ----- ----- -------
Return on Average Assets.................................. 0.99% 0.98% 1.01%
Return on Average Equity.................................. 12.43 11.87 13.51
Average Equity to Average Assets Ratio.................... 7.95 8.27 7.55
Loss Reserve to Loans Outstanding......................... 1.97 1.90 1.89
Tier I Capital Ratio...................................... 10.57 10.25
Total Capital Ratio....................................... 12.96 12.74
Leverage Ratio Requirement................................ 7.98 7.82
11
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
- ---- ------ ------ --------------- ---------- --------
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
====== ====== ====== === =====
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
1996.......................... $44.00 $33.13 $26.68 165% $1.16
First Quarter................. 36.25 33.25 .28
Second Quarter................ 37.63 33.13 .28
Third Quarter................. 39.75 34.13 .30
Fourth Quarter................ 44.00 38.38 .30
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. In 1996, Bank of Hawaii furthered its expansion
acquiring majority ownership in Banque de Tahiti and Banque de Nouvelle
Caledonie. 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 1996 included the Mileage
Access Card, a debit card that provides mileage points for usage of the card
instead of writing checks. Also Bancorp broadened its ATM services, enhancing a
number of machines to dispense postage stamps, gift certificates and discount
coupons. Trust and Investment Services continued its marketing of the Pacific
Capital Fund family and as of year-end 1996, the funds exceeded $1.5 billion.
The total increases to $2.2 billion when the Hawaiian Tax Free Trust funds are
included.
The degree of strength in the Hawaii economy has a substantial impact on
Bancorp's performance. After 0.4 percent real annual gross state product (GSP)
growth from 1991-94 and 0.5% (revised) in 1995, Hawaii's GSP rose an estimated
1.0% during 1996. The 1996 growth rate came in at the low end of previous
forecasts of 1-2% growth. The current consensus forecast among economists is
for Hawaii's 1997 GSP to grow by 2%. Growth in tourism continued to exert the
strongest recovery impetus on Hawaii's economy during 1996, while construction
spending stabilized during 1996--after four years of cyclical contraction. With
that stabilization, the largest negative factor hindering Hawaii's economic
recovery turned neutral during the year. Missing from the 1996 economic
acceleration, modest as it was, were recoveries in real estate investment
activity and a relaxation of fiscal austerity policies across state and county
governments. Slow growth in 1997, likely below the national average, will
reflect those missing elements of a stronger recovery. In addition, federal
government spending in both defense and non-defense areas is expected to remain
fairly stable for the remainder of the decade.
12
In 1996, Hawaii's economy was also impacted by the strengthening of the U.S.
dollar, which rose from 103(Yen)/$ at the end of 1995 to 115(Yen)/$ at the end
of 1996. This reduced Japanese tourists' purchasing power considerably during
1996. As a result, despite a record 2 million Japanese tourist arrivals in
Hawaii during 1996, retail sales growth slowed in the second half of the year.
Still, adverse exchange-rate effects on Japanese tourism seemed concentrated
in retail outlays, as hotel revenues surged more than 13% in 1996, following a
6% increase in 1995.
Bancorp has been a player in the Intra-Pacific region for nearly four
decades beginning in the late 1950's. This market has grown over the years and
now spans island nations across the South and West Pacific which have
developed as 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.
Bank of Hawaii maintains 15 branch locations in the West Pacific with its
largest and most established presence on Guam. Bancorp serves Guam with three
branches of Bank of Hawaii and three branches of First Savings and Loan
Association of America (a wholly-owned subsidiary of First Federal Savings and
Loan Association of America). Bank of Hawaii also has branches in the
Commonwealth of the Northern Marianas (Saipan), the Federated States of
Micronesia (Yap, Pohnpei and Kosrae), the Marshall Islands (Majuro) and Palau
(Koror).
Bancorp's representation in the South Pacific includes branches of Bank of
Hawaii located in American Samoa and Fiji. In addition, through its subsidiary
Bank of Hawaii International, Inc. (BOHI), Bank of Hawaii owns interests in
Banque d'Hawaii (Vanuatu) Ltd. (100%), Banque de Tahiti (92.4%), Banque de
Nouvelle Caledonie (91.5%) and National Bank of Solomon Islands (51%), all of
which are included in Bancorp's consolidated financial statements. BOHI also
has equity investments in the Bank of Tonga (30%) and Pacific Commercial Bank
(43%) in Western Samoa. These latter two investments are accounted for under
the equity method.
The Asian Rim is another market that Bancorp has developed over the last
three decades, beginning with Japan in the 1970s. Bancorp started 1996 with
offices or branches in Hong Kong, Korea, Philippines, Singapore and Taiwan.
During the year, the Taiwan office was upgraded to branch status and at year-
end had grown to $75 million in assets. Also in 1996, Bank of Hawaii entered
into an agreement with Capital Trust Limited to act as its representative in
India. With this arrangement, Bank of Hawaii is represented in the cities of
New Delhi, Bombay, Calcutta, Madras and Bangalore. Activities in this market
focus primarily on trade finance products, such as letters of credit. Bancorp
has been successful in meeting the needs of its customers interested in
participating in Asia's growth. Bancorp also provides correspondent banking,
lending, and investment advisory services to this market through the
International Banking Group'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
lending activity. Bancorp's focus in this market continues to be Fortune 1000
companies, businesses that have interests in the Pacific, businesses in the
media and communications industry and lending in Arizona through its
subsidiary, First National Bank of Arizona (FNBA). For Fortune 1000 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 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 consolidated assets of $12.5 billion at year-end 1996, about 89% 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.
13
Bancorp Pacific, 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 $12.2 million for 1996, a
decrease of 16.9% from 1995's total earnings of $14.7 million. These lower
earnings were mainly due to the one time SAIF assessment of $5.0 million
recognized in the third quarter. Bancorp Pacific produced an ROAA of 0.92% in
1996 (1.15% excluding the impact of the SAIF assessment). Net loans grew 1.4%
to $1.1 billion at year-end 1996, while deposits grew 15.4% over the same
period. The growth in loans was affected by $80 million in mortgage loans
securitized in the second quarter of 1996. Excluding the securitization, loans
would have increased 8.6% over last year-end. At year-end 1996, NPA increased
to 1.13% of total loans outstanding (primarily secured by residential real
estate) from 0.76% at year-end 1995. Bancorp Pacific's reserve ratio was 0.85%
of outstanding loans at year-end 1996, similar to a year ago. At year-end 1996,
First Federal reported a total risk-based capital ratio of 17.0% exceeding
statutory minimums and ratios at many peer savings and loan companies.
In Arizona, FNBA reported net income for 1996 of $2.3 million, an increase of
9.5% from 1995. The improvement in results was driven by a resurgent Arizona
economy. FNBA reported ROAA of 1.35% for 1996 compared to 1.81% for 1995.
Deposits at FNBA grew to $187.2 million at year-end 1996 from $132.2 million a
year ago. In 1996, FNBA entered into an agreement to purchase more than $250
million of deposits and four branch locations from Home Savings of America. The
transaction is expected to close in the first quarter of 1997.
Lending activity at FNBA also increased with gross loans growing to $122.0
million at year-end 1996, an increase of 7.9% for the year. Loan quality
continues to improve at FNBA. NPA, as a percent of total loans outstanding,
were 0.75% at year-end 1996, compared to 1.04% at the end of 1995. NPA totaled
$0.9 million at year-end 1996 with $0.2 million of NPA being foreclosed real
estate. The ratio of reserves to loans outstanding was 7.07% at year-end 1996,
compared to 7.46% at year-end 1995. FNBA's risk-based capital ratios at year-
end 1996 exceeded regulatory minimums at 10.64% and 11.95% for Tier 1 and Total
Capital, respectively.
Hawaiian Trust Company, Limited (HTCo), a subsidiary of Bank of Hawaii,
reported trust income for 1996 of $49.8 million, a modest increase of 0.6% from
1995. The results reflect the level of competition faced from mainland
providers of trust services. Trust assets under administration have increased
to $12.2 billion at year-end 1996 from $12.0 billion at year-end 1995. Activity
in Pacific Capital Funds (PCF) has continued to grow; at year-end 1996, PCF and
the Hawaiian Tax Free Trust (also advised by HTCo) advised funds with
investments totaling $2.2 billion, an increase from $2.0 billion at year-end
1995. The offshore trust company in the Bahamas organized by Hawaiian Trust
through Banque d'Hawaii (Vanuatu)'s trust subsidiary has seen modest activity
in 1996 with total assets under management of about $7.0 million at year-end.
The following sections will cover in more detail Bancorp's performance and
activities during 1996. 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
14
RISK ELEMENTS INVOLVED IN LENDING ACTIVITIES
Risk Profile of Lending Activity
Loans outstanding at year-end 1996 grew to $8.7 billion, a 6.7% increase from
$8.2 billion at year-end 1995. This growth factor was affected by the
securitization of $350 million of residential mortgage loans in the second
quarter of 1996 and the acquisition of BDT and BNC. Loans securitized were from
both Bank of Hawaii and Bancorp Pacific, Inc. Without the securitization and
the loans acquired with BDT and BNC, loans outstanding would have increased by
2.6%.
Bancorp indicated in its 1995 Annual Report that the lending environment in
Hawaii for the last several years had been challenging. The interest rate
environment and the Hawaii economy have limited the rate of increases of the
loan portfolio and yields on loans. In 1996, much of the same continued with
the BDT and BNC acquisition providing much of the growth.
Certain sections of the loan portfolio, however, saw increased activity and
positive growth in 1996. Residential mortgage lending, real estate construction
lending, consumer installment loans, leasing and foreign loans all reported
increases from year-end 1995. Residential mortgage lending balances increased
after considering the securitization completed in the second quarter of 1996.
Table 3 presents the year-end loan portfolio broken down into the various
categories. The acquisition and securitization mentioned earlier has changed
the mix of loans at Bancorp. While real estate loans continue to comprise the
largest portion of the loan portfolio, their level of representation has
declined. Real estate loans made up 47.1% of total loans at year-end 1996
compared with 52.1% at year-end 1995. Within the real estate category,
residential mortgage loans represented 64.3% of total loans, while commercial
mortgage loans represented 30.0% of total loans at year-end 1996. Reflecting
the BDT and BNC acquisition, foreign loans have increased to $1.5 billion,
17.3% of the total loan portfolio compared to $0.8 billion and 9.8% of the
total at year-end 1995. Table 4 presents the geographic distribution of the
loan portfolio based on the major markets in which Bancorp operates. The loans
in BDT and BNC have changed the geographic mix between 1996 and 1995.
LOAN PORTFOLIO BALANCES
TABLE 3
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic Loans
Commercial and Industrial... $1,806.7 $1,902.2 $1,830.8 $1,709.2 $1,864.1
Real Estate
Construction--Commercial.. 212.3 199.6 114.2 141.9 248.0
Residential........ 23.6 33.7 39.7 51.4 18.0
Mortgage--Commercial...... 1,227.8 1,308.8 1,241.0 1,230.6 991.9
Residential.......... 2,635.3 2,702.4 2,849.9 2,454.0 2,183.7
Installment................. 849.3 817.3 741.6 676.2 655.9
Lease Financing............. 437.8 392.9 378.1 401.6 393.4
-------- -------- -------- -------- --------
Total Domestic.......... 7,192.8 7,356.9 7,195.3 6,664.9 6,355.0
Foreign Loans
Banks and Other Financial
Institutions............... 281.8 268.7 299.0 295.8 285.6
Commercial and Industrial... 923.2 513.6 364.2 259.4 288.5
All Others.................. 301.5 13.2 33.5 38.3 34.5
-------- -------- -------- -------- --------
Total Foreign........... 1,506.5 795.5 696.7 593.5 608.6
-------- -------- -------- -------- --------
Total Loans............. $8,699.3 $8,152.4 $7,892.0 $7,258.4 $6,963.6
======== ======== ======== ======== ========
15
The following sections discuss the loan categories.
Commercial and Industrial Loans
As shown in Table 3, the commercial and industrial loan (C&I) portfolio,
which includes commercial, financial and agricultural loans, was $1.8 billion,
down 5.0% from year-end 1995. This portfolio, which made up 20.8% of the total
loans, involves 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. Most of these loans are
included in Table 4 in the C&I category on the U.S. Mainland. Balances
outstanding to these companies as of year-end 1996 and 1995 were $876.4 million
and $918.5 million, respectively. Bancorp's communication/media portfolio is
considered a selected niche. Total loans and leases of this type stood at
$562.4 million at year-end 1996, a decrease of 4.4% from year-end 1995. Total
commitments in this portfolio were $774 million at year-end 1996. This category
can be segmented further into cable television, publishing and
telecommunications, which represented 34.9%, 20.1% and 9.9%, respectively, of
the total C&I loan portfolio at year-end 1996. At year-end 1996, there were no
loans in the communication/media portfolio which were classified as NPA.
C&I loans that were classified as non-performing totaled $20.9 million or
25.1% of total NPA at year-end 1996. For comparative purposes, $16.9 million
and $20.3 million were classified as NPA at year-end 1995 and 1994,
respectively.
Real Estate Loans
At year-end 1996, Bancorp's total real estate loan portfolio stood at $4.1
billion, 3.4% lower than year-end 1995. Real estate loans represented 47.1% of
the total loan portfolio at year-end 1996, down from 52.1% at year-end 1995. As
mentioned earlier, in the second quarter of 1996, $350 million in mortgage
loans were securitized distorting the comparison between 1996 and 1995. Without
the securitization, real estate loan growth would have been about 4.8% over
1995. 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 $2.6 billion, this group
represented 64.3% of total real estate loans at year-end 1996 and 30.3% of
total loans outstanding. More than 91% of these loans are secured by real
estate in Hawaii (see Table 4). A majority of the 1-to-4 family residential
mortgage loans (approximately 88%) are underwritten on a floating rate basis.
The average 1-to-4 family mortgage loan has been outstanding about 6.0 years
with an average outstanding balance of $141,000. Residential mortgage loan
originations for Bancorp in 1996 totaled $825.7 million, representing 4,500
individual loans, or about 20% of the total originations in Hawaii.
Comparatively, $570.8 million and $729.6 million in loans were originated in
1995 and 1994, respectively. For 1996, Bancorp's average principal mortgage
loan amount originated was $185,000, compared to the $191,000 average for 1995
and the $187,000 average for 1994. The 1996 average loan origination at First
Federal was $159,000 compared with $198,000 for Bank of Hawaii. The median
single family home price on Oahu was $335,000, $349,000 and $360,000 in 1996,
1995 and 1994, respectively.
Also included in the real estate portfolio are home equity creditlines.
Available credit under these lines was $489.7 million at year-end 1996,
compared to $490.0 million at year-end 1995. Outstandings have declined to
$285.6 million at year-end 1996 from $312.0 million at year-end 1995. These
creditlines are underwritten based on repayment ability rather than the value
of the underlying property. Additionally, home equity creditlines are generally
limited to 75% of the value of the collateral minus prior liens. At year-end,
home equity creditline balances past due 90 days or more totaled $0.6 million,
compared with $0.7 million at year-end 1995, and $0.8 million at year-end 1994.
16
At year-end 1996, NPAs in the mortgage-residential category (excluding
construction loans) totaled $23.6 million, or 28.4% of total NPA.
Comparatively, mortgage-residential NPA totaled $14.7 million and $15.1 million
at year-end 1995 and 1994, respectively. Foreclosed real estate at year-end
1996 was $10.7 million, which consisted of properties most of which are in
Hawaii. There are a total of 31 properties in the foreclosed real estate
category.
The commercial real estate portfolio (excluding construction loans) totaled
$1.2 billion at year-end 1996, a decrease of 6.2% from year-end 1995. 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
76.0% were located in Hawaii.
The commercial real estate portfolio is diversified in the types of property
securing the obligations. Of the total commercial real estate loans at year-end
1996, 23.7% of these loans were secured by shopping centers; 14.2% by
commercial/industrial/warehouse facilities; 12.5% by office buildings and 5.2%
by hotels. 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 1996 decreased to
$4.1 million or 4.9% of total NPA. Comparatively, commercial real estate NPA at
year-end 1995 and 1994 totaled $14.9 million and $14.1 million, respectively.
Foreclosed real estate at year-end 1996 included one commercial property.
Total commercial construction loans increased to $212.3 million at year-end
1996, compared with year-end 1995 when $199.6 million were outstanding. Bancorp
maintains a conservative underwriting policy, as these loans by their nature
have greater risk. For the majority of these loans, Bancorp emphasizes 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 1996 shows tract and land
development for residential housing, $103.2 million; hotels, $40.0 million;
retail facilities, $23.8 million; industrial projects, $6.7 million and
commercial offices, $13.5 million. These loans were concentrated in property
located in Hawaii ($179.8 million).
At the end of 1996, construction non-performing loans totaled $0.3 million or
0.4% of total NPA. Comparable figures for years ended 1995 and 1994 were $0.3
million and $1.5 million, respectively.
Consumer Loans
Total consumer loans (excluding residential mortgage and home equity loans)
increased to $849.3 million, up 3.9% from year-end 1995. Beginning in 1994,
Bancorp focused an effort to increase this category of loans implementing
programs directly targeted to increase credit card balances. Looking to Table 3
and the five year trend, the growth reflects Bancorp's effort in this category,
particularly in the last three years.
At year-end 1996, Bancorp's base of credit cardholders increased about 4% to
165,800 cardholders from year-end 1995. The co-branding of Bank of Hawaii's
VISA card with Continental Airlines, which includes frequent flyer credits, is
available in Hawaii, Guam and the Federated States of Micronesia. A no annual
fee Mastercard was launched in 1995 and grew in 1996 with more than 21,800
cards outstanding as of year-end. A third initiative, the Contiki card program,
began in 1996. The program, focused on college students, has created 141,300
new accounts as of year-end 1996. Outstanding balances for the credit card
portfolio totaled $290.9 million at year-end 1996, an increase of 11.2% from
year-end 1995. The average credit limit on all card accounts was $3,700 for
1996 with an average outstanding balance of $2,300, compared with an average
outstanding balance of $1,650 for 1995 and $1,600 for 1994. At year-end 1996,
0.8% of the accounts (based on balances) were delinquent more than 90 days,
compared with 1.4% and 0.9%, at year-end 1995 and 1994, respectively.
17
Leasing Activities
Equipment leases have been an important component of the overall loan
portfolio by providing customers with an alternative to traditional lending
products. Leases outstanding increased to $437.8 million, up 11.4% from year-
end 1995. Much of the increase in lease activity has been several larger single
investor leases in 1996. These new equipment leases in 1996 include a fleet of
trucks, a jet aircraft and a satellite. The lease portfolio remains
diversified. In addition to the above, leased equipment also includes autos,
ships, office equipment, computers and others. There were no NPA in the leasing
category at both year-end 1996 and 1995. At year-end 1994, $0.8 million in NPA
was outstanding.
International Lending
Foreign loans at the end of 1996 totaled $1.5 billion, almost double the
total at year-end 1995. The acquisition of BDT and BNC increased loans by $676
million. With the acquisition, a new element has been added to the
international lending strategy. The lending strategy in the South Pacific is
closely related to traditional branch operations, with both lending and deposit
taking activity. Customers in the South Pacific include both retail and
commercial customers. Lending activity on the Asian Rim involves 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 1996 in
these countries of $274.1 million, $85.7 million, and $151.2 million,
respectively. Foreign loan totals include the U.S. dollar equivalent loans of
Fiji branches of Bank of Hawaii, BDT, BNC, National Bank of Solomon Islands
(NBSI) and Banque d'Hawaii (Vanuatu) Limited which in aggregate totaled $781.1
million at year-end 1996.
Table 10 presents the outstanding cross-border exposures that exceed 0.75% of
Bancorp's total assets at year-end 1996.
NPA in international lending have increased due to the NPAs in the South
Pacific. At year-end 1996, $22.3 million were reported as NPA, all of which
were in the South Pacific. At year-end 1995, there were no NPAs reported, but
NPA at year-end 1994 totaled $0.3 million. As indicated in Table 7, losses in
the international portfolio have remained at nominal levels. It is anticipated
that the level will change as the recognition of losses in the South Pacific
are reflected in the future. For 1996, recoveries of foreign loans previously
charged-off totaled $1.5 million, compared to $2.5 million in 1995.
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 (58.6%) were located in Hawaii at
year-end 1996. The balances reflected in the West Pacific include Guam and
other Western Pacific Islands where both Bank of Hawaii and First Federal's
subsidiary, First Savings and Loan Association of America, have branches. Loan
balances in the South Pacific reflect the U.S. dollar equivalent balances of
BDT, BNC, NBSI, Vanuatu and Bank of Hawaii branches in Fiji and Bank of Hawaii
branches in American Samoa where U.S. currency is used. The modest real estate
loan portfolio in the mainland U.S. represents mortgage lending in Arizona.
18
GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO (1)
TABLE 4
TOTAL
YEAR-END WEST SOUTH MAINLAND
1996 HAWAII PACIFIC PACIFIC U.S. JAPAN OTHER
-------- -------- ------- ------- -------- ------ ------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial............. $1,806.7 $ 736.5 $171.4 $ 9.4 $ 876.4 $ -- $ 13.0
Real Estate
Construction--
Commercial........... 212.3 179.8 -- -- 32.5 -- --
Residential........... 23.6 21.1 2.5 -- -- -- --
Mortgage--Commercial.. 1,227.8 933.1 178.0 8.8 107.9 -- --
Residential........... 2,635.3 2,400.3 211.6 2.5 20.9 -- --
Installment............. 849.3 677.6 144.5 22.8 4.4 -- --
Foreign................. 1,506.5 26.6 -- 741.3 -- 274.1 464.5
Lease Financing......... 437.8 125.5 6.8 -- 284.7 -- 20.8
-------- -------- ------ ------ -------- ------ ------
Total............... $8,699.3 $5,100.5 $714.8 $784.8 $1,326.8 $274.1 $498.3
-------- -------- ------ ------ -------- ------ ------
Percentage of Total..... 100.0% 58.6% 8.2% 9.0% 15.3% 3.2% 5.7%
======== ======== ====== ====== ======== ====== ======
- --------
(1) Loans classified based upon geographic location of borrowers.
Non-Performing Assets and Past Due Loans
Non-performing assets (which include non-accrual loans and foreclosed real
estate) totaled $83.2 million at year-end 1996, compared to $56.9 million at
the end of 1995, and $53.2 million at the end of 1994. The level of NPA
includes the BDT and BNC NPA which were $22.3 million at year-end 1996. The
ratio of NPA to loans outstanding was 0.96% at year-end 1996, 0.70% at year-end
1995 and 0.67% at year-end 1994. Without the BDT and BNC NPA, the ratio of NPA
to loans outstanding would have been 0.70% at year-end 1996. 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 1996, NPA loans secured by real estate totaled $28.0 million or
33.6% of total NPAs; with the majority secured by real estate in Hawaii. NPA in
Asia and the West Pacific were minimal. As noted earlier, the NPA in the
foreign category increased due to the BDT and BNC acquisition.
A focus on quality credits and cautious asset growth remains the objective in
Arizona. NPA in Arizona has continued to decline totaling $0.9 million at year-
end 1996, compared to $1.2 million, and $1.4 million at year-end 1995 and 1994,
respectively. FNBA's loan quality has improved over the last several years. At
the end of 1996, NPA represented 0.75% of total loans outstanding, compared
with 1.07% and 1.48% at year-end 1995 and 1994, respectively.
First Federal's NPA increased to $12.8 million at year-end 1996, compared
with $8.7 million and $4.8 million reported at year-end 1995 and 1994,
respectively. The largest single loan classified as NPA at First Federal was
about $700,000, reflecting the smaller individual loans in the portfolio. Total
NPA at First Federal represented 1.13%, 0.77% and 0.46% of total loans
outstanding at year-end 1996, 1995 and 1994, respectively. The levels of NPA
for First Federal have increased over the last few years. However, the risk
generally remains lower as each loan is secured by real estate with between a
70-80% loan to value ratio at origination.
Foreclosed real estate has increased to $10.7 million at year-end 1996.
Foreclosed real estate has remained at lower levels averaging $6.2 million over
the last five years. The foreclosed real estate portfolio is comprised of 31
properties with two properties representing more than 70% of the total. In
1996, losses on the sale of foreclosed real estate were $380,000, compared to
$276,000 for 1995 and $700,000 for 1994.
Loans past due 90 days totaled $34.7 million at year-end 1996, an increase
from year-end 1995 when $20.7 million was reported. The increase is mainly due
to the inclusion of the past due loans from BDT and BNC which were $9.5 million
at year-end 1996. There was also an increase in delinquencies in the consumer
19
installment loan portfolio, reflecting the prolonged lower economic activity in
Hawaii and its affect on consumers. At year-end 1996, installment loans more
than 90 days past due totaled 1.06% of outstanding installment loans. The
remaining increase in delinquent loans is distributed throughout the remaining
loan categories. Table 6 presents a five year history of loans past due 90
days.
In 1996, Bancorp recorded $2.6 million in cash basis interest on previously
non-accrual and charged-off loans, compared to $1.3 million in 1995. In 1996,
$216,000 in interest reversals were recorded on non-accrual loans, an increase
from the $156,000 reversed in 1995 and $79,000 in 1994.
FOREGONE INTEREST ON NON-ACCRUALS
YEARS ENDED DECEMBER 31
TABLE 5
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS)
Interest Income Which Would Have Been Recorded Under
Original Terms:
Domestic........................................... $6.3 $7.6 $5.4 $5.3 $7.0
Foreign............................................ 2.3 -- 0.1 -- 0.3
Interest Income Recorded During the Current Year on
Non-Accruals:
Domestic........................................... 1.6 0.6 1.0 0.9 3.4
Foreign............................................ 0.6 -- 0.1 -- 0.2
NON-PERFORMING ASSETS AND ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
TABLE 6
1996 1995 1994 1993 1992
------ ----- ----- ----- ------
(IN MILLIONS OF DOLLARS)
Non-Accrual Loans
Commercial and Industrial................. $ 20.9 $16.9 $20.3 $15.7 $ 47.2
Real Estate
Construction.............................. 0.3 0.3 1.5 17.7 --
Commercial................................ 4.1 14.9 14.1 7.8 8.2
Residential............................... 23.6 14.7 15.1 16.4 17.7
Installment............................... 1.3 0.8 0.5 0.5 --
Foreign.................................. 22.3 -- 0.3 -- 5.0
Leases.................................... -- -- 0.8 0.3 --
------ ----- ----- ----- ------
Subtotal.................................. 72.5 47.6 52.6 58.4 78.1
------ ----- ----- ----- ------
Restructured Loans
Commercial and Industrial................. -- -- -- 1.0 5.4
Real Estate
Commercial................................ -- -- -- 5.3 3.2
Leases.................................... -- -- -- -- --
------ ----- ----- ----- ------
Subtotal.................................. -- -- -- 6.3 8.6
------ ----- ----- ----- ------
Foreclosed Real Estate
Domestic.................................. 10.7 9.3 0.6 4.1 6.3
Foreign................................... -- -- -- -- --
------ ----- ----- ----- ------
Subtotal.................................. 10.7 9.3 0.6 4.1 6.3
------ ----- ----- ----- ------
Total Non-Performing Assets............... $ 83.2 $56.9 $53.2 $68.8 $ 93.0
====== ===== ===== ===== ======
Loans Past Due 90 Days
Commercial and Industrial................. 2.0 1.8 1.1 0.4 0.5
Real Estate
Construction.............................. 0.4 -- -- -- --
Commercial................................ 6.8 2.4 0.7 1.9 5.8
Residential............................... 6.8 5.8 3.9 4.1 13.0
Installment............................... 9.0 10.5 5.9 3.5 4.6
Foreign................................... 9.5 -- -- -- 0.3
Leases.................................... 0.2 0.2 -- 0.1 --
------ ----- ----- ----- ------
Subtotal.................................. 34.7 20.7 11.6 10.0 24.2
------ ----- ----- ----- ------
Total..................................... $117.9 $77.6 $64.8 $78.8 $117.2
====== ===== ===== ===== ======
Ratio of Non-Performing Assets to Total
Loans.................................... 0.96% 0.70% 0.67% 0.95% 1.34%
Ratio of Non-Performing Assets and
Accruing Loans Past Due 90 Days or More
to Total Loans........................... 1.36% 0.95% 0.82% 1.09% 1.68%
20
Summary of Loan Loss Experience
At the end of 1996, the reserve for loan losses stood at $167.8 million,
compared with $152.0 million at year-end 1995 and $148.5 million at year-end
1994. The ratio of reserves to outstanding loans at year-end 1996 was 1.97%,
compared with the 1.90% reported at year-end 1995 and 1.92% at year-end 1994.
Loan loss provisions for 1996 were $22.2 million, compared with $17.0 million
and $21.9 million for 1995 and 1994, respectively. The level of the reserve for
loan losses at year-end 1996 reflects the $30.8 million recoveries recognized
during the year. Table 7 shows the activity through the reserve for the last
five years.
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 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. BDT and BNC also maintain a
loan grading system to monitor credit quality.
The ratio of reserves to loans outstanding is generally the main 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. 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 1996, the reserve was 2.02 times non-performing
loans and 3.8 times gross charge-offs.
Gross charge-offs for 1996 totaled $44.1 million and presented 0.53% of
average outstanding loans. Comparatively, the ratio was 0.36% and 0.34%,
respectively at year-end 1995 and 1994. Gross charge-offs as a percentage of
the reserve were 26.3%, 18.4% and 17.1% for 1996, 1995 and 1994, respectively.
Average annual charge-offs for the five years ended in December 1996 were $41.4
million and $29.8 million for the last ten years.
Recoveries of previously charged-off loans increased to $30.8 million.
Recoveries were $14.4 million in 1995 and $25.3 million for 1994. Recoveries in
1996 reflect approximately $19.3 million recovered of the $45.7 million real
estate loan charged-off in 1992 and 1993. Recoveries on this credit have
accumulated to $34.3 million as of year-end 1996. Net charge-offs for 1996 were
$13.3 million, compared with $13.5 million for 1995 and $0.1 million for 1994.
21
SUMMARY OF LOAN LOSS EXPERIENCE
TABLE 7
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(MILLIONS OF DOLLARS)
Average Amount of Loans
Outstanding................. $8,353.6 $7,654.9 $7,393.7 $6,991.0 $6,601.9
======== ======== ======== ======== ========
Balance of Reserve for
Possible Loan Losses at
Beginning of Period......... $ 152.0 $ 148.5 $ 125.3 $ 128.6 $ 115.6
Loans Charged--Off
Commercial and Industrial.. 8.7 7.8 11.3 43.9 29.5
Real Estate--
Construction............. -- 2.1 0.1 0.5 --
Mortgage--Commercial..... 3.3 2.3 3.5 2.7 4.2
--Residential.... 1.9 1.1 0.7 0.4 0.5
Installment................ 28.9 13.3 8.7 8.6 8.7
Foreign.................... 0.9 0.9 0.7 7.5 1.0
Leases..................... 0.4 0.4 0.4 2.1 0.1
-------- -------- -------- -------- --------
Total Charged-Off............ 44.1 27.9 25.4 65.7 44.0
Recoveries on Loans
Previously Charged-Off
Commercial and Industrial. 21.8 6.1 19.5 3.9 3.0
Real Estate--
Construction............. 0.7 -- 0.2 -- --
Mortgage--Commercial..... 1.1 1.4 0.9 0.7 0.2
--Residential.... 0.4 0.1 0.2 0.3 0.3
Installment................ 4.7 3.3 3.2 3.2 3.0
Foreign.................... 1.5 2.5 0.5 -- 0.4
Leases..................... 0.6 1.0 0.8 0.1 0.1
-------- -------- -------- -------- --------
Total Recoveries............. 30.8 14.4 25.3 8.2 7.0
-------- -------- -------- -------- --------
Net Loans Charged-Off........ (13.3) (13.5) (0.1) (57.5) (37.0)
Provisions Charged to
Operating Expenses.......... 22.2 17.0 21.9 54.2 50.0
Reserves Acquired (Sold)..... 6.9 -- 1.4 -- --
-------- -------- -------- -------- --------
Balance at End of Period..... $ 167.8 $ 152.0 $ 148.5 $ 125.3 $ 128.6
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to
Average Loans Outstanding... 0.16% 0.18% -- 0.82% 0.56%
Ratio of Reserve to Loans
Outstanding................. 1.97% 1.90% 1.92% 1.76% 1.89%
The details of the Foreign Reserve for Loan Losses, which are included in the
table above, are:
Beginning Balance............ $ 15.1 $ 12.9 $ 10.5 $ 14.2 $ 14.0
Charge-Offs................ 0.9 0.9 0.7 7.5 1.0
Recoveries................. 1.5 2.5 0.5 -- 0.4
-------- -------- -------- -------- --------
Net Charge-Offs............ 0.6 1.6 (0.2) (7.5) (0.6)
Provisions................. 5.8 0.6 1.2 3.8 0.8
Reserves Acquired.......... 6.9 -- 1.4 -- --
-------- -------- -------- -------- --------
Ending Balance............... $ 28.4 $ 15.1 $ 12.9 $ 10.5 $ 14.2
======== ======== ======== ======== ========
22
ALLOCATION OF LOAN LOSS RESERVE
TABLE 8
1996 1995 1994 1993 1992
------------------- ------------------- ------------------- ------------------- -------------------
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........ $ 60.0 3.32% $ 61.9 3.25% $ 59.5 3.25% $ 51.2 3.00% $ 54.0 2.90%
Real Estate---
Construction...... 4.5 1.91 4.2 2.00 2.6 2.00 4.3 2.51 2.6 1.00
Commercial........ 18.5 1.51 19.6 1.50 18.6 1.50 15.4 1.25 19.8 2.00
Residential....... 20.0 0.76 20.5 0.75 21.6 0.75 18.5 0.75 16.4 0.75
Installment........ 26.0 3.06 20.4 2.50 18.5 2.50 13.5 2.00 10.0 1.55
Foreign............ 28.4 1.89 15.1 1.90 12.9 1.85 10.5 1.77 14.2 2.33
Leases............. 2.0 0.46 2.0 0.50 1.9 0.50 2.0 0.50 3.9 1.00
Not allocated...... 8.4 -- 8.3 -- 12.9 -- 9.9 -- 7.7 --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
$167.8 1.97% $152.0 1.90% $148.5 1.92% $125.3 1.76% $128.6 1.89%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
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 activities are facilitated through representative
offices, branches and full service subsidiary banks. This network of locations
has proven important in the strategy of bridging customers across the Pacific
to the U.S. Mainland, Europe and within Asia itself.
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. Bancorp pursues its
international strategy on three fronts: the International Group; the South
Pacific Division; and the West 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 and New York
supported by its Honolulu operations. Bank of Hawaii's branches and offices
offering these services are located in Hong Kong, the Philippines (Manila,
Cebu, and Davao), Korea, Singapore, Japan, Taiwan, India 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.
The South Pacific Region is made up of the investments in affiliated banks
in the South Pacific and Bank of Hawaii branch operations in Fiji and American
Samoa. In May 1996, Bancorp expanded its investments in this area of the world
by acquiring majority interest in Banque de Tahiti and Banque de Nouvelle
Caledonie from Credit Lyonnais. The acquisitions were accounted for as a
purchase; goodwill of $12.2 million was recognized
23
and is being amortized over 15 years. Other investments in banks in the South
Pacific include majority owned banks in Vanuatu and Solomon Islands (see
organization chart). The financial results of these banks are included in
Bancorp's consolidated financial statements. Additionally, Bank of Hawaii has
investments in affiliate banks located in Tonga and Western Samoa which are
accounted for using the equity method.
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 retail and small business activities much like
domestic branches. As of year-end 1996, three branches were operating in Suva,
Nadi and Lautoka, Fiji. Total assets in Fiji were $73.4 million at year-end
1996. The operations in American Samoa are similar to domestic full service
branches with two locations in operation, but since the U.S. dollar is used,
it is not considered foreign for reporting purposes. Total assets in American
Samoa were $42.8 million as of year-end 1996.
The operations in the South Pacific are managed through a separate division
of Bank of Hawaii. Bank of Hawaii has expatriate staff in locations like
Vanuatu and the Solomon Islands. The Banks in the French territories are
currently operating under a management contract with Credit Lyonnais. The
countries in which the subsidiaries and affiliates are located are evaluated
on a regular basis. Exposure, in terms of foreign currency fluctuations, is
limited as each affiliate primarily deals in its own currency. For these
consolidated subsidiaries, combined assets of $1.1 billion were included in
Bancorp's consolidated statements as of year-end 1996 and $130.9 million at
year-end 1995. The carrying value of the investments in affiliates, accounted
for using the equity method, was $77.1 million at year-end 1996.
Bank of Hawaii's West Pacific Division 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
1996. Net income for 1996 increased to $10.2 million, compared to the $4.8
million in 1995. This translates into a return on assets for these operations
of 0.36%, up from the 0.28% for 1995. The impact in income for international
operations was largely due to the BDT and BNC acquisitions which increased
average international assets to $2.8 billion as of year-end 1996 compared to
$1.7 billion at year-end 1995.
Cross-border interbank placements accounted for $0.9 billion or 33.3% of
total average international assets at year-end 1996. 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, $0.9
billion was with such countries as Japan, Taiwan, Thailand and Korea.
SUMMARY OF INTERNATIONAL ASSETS, LIABILITIES, AND INCOME AND PERCENT OF
CONSOLIDATED TOTALS
TABLE 9
1996 1995 1994
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS OF DOLLARS)
Average Assets............... $2,795.5 20.8% $1,724.3 13.9% $1,699.2 13.5%
Average Liabilities.......... 2,700.3 21.8 1,585.2 13.9 1,647.9 14.2
Operating Revenue............ 194.3 16.8 107.9 10.3 97.1 10.1
Net Income................... 10.2 7.6 4.8 3.9 7.1 6.1
24
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, 1996
Japan.................. $ -- $ 196.0 $115.8 $ 311.8
Korea.................. -- 253.0 122.4 375.4
Taiwan................. -- 108.6 18.2 126.8
Thailand............... -- 74.2 47.4 121.6
All Others............. 1.0 300.0 69.8 370.8
----- -------- ------ --------
$ 1.0 $ 931.8 $373.6 $1,306.4
===== ======== ====== ========
at December 31, 1995
Japan.................. $ -- $ 296.4 $198.1 $ 494.5
Korea.................. -- 181.8 125.8 307.6
Taiwan................. -- 260.0 11.0 271.0
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
===== ======== ====== ========
- --------
(1) Includes U.S. dollar advances to foreign branches and affiliate banks
which were used to fund local currency transactions. Totals for 1996,
1995, and 1994 were $327.9 million, $293.2 million and $203.8 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, the 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 reasonableness 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 maximize earnings performance and market value of equity, while
limiting the volatility of each. This process is carried out through regular
meetings of divisional management.
25
Capital Adequacy
At year-end 1996, Bancorp's equity grew to $1.07 billion, a modest increase
from $1.05 billion at year-end 1995. Bancorp has managed the rate of increase
of capital through its share repurchase program discussed later in this
section. Bancorp's capital ratios at year-end 1996 were: Tier 1 Capital Ratio
of 10.57%, Total Capital Ratio of 12.96%, and Leverage Ratio of 7.98%. 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.
In December 1996, Bancorp issued $100 million in 8.25% Capital Securities
through a newly organized grantor trust called Bancorp Hawaii Capital Trust I.
The 8.25% Capital Securities will mature in 30 years and will bear cumulative
dividends at 8.25% payable semi-annually. The proceeds of this issue will be
used for general corporate purposes which includes advances to its
subsidiaries and the repurchase of Bancorp shares. These 8.25% Capital
Securities, while qualifying as Tier I Capital for regulatory accounting
purposes, have been classified as long term debt on the Statement of Condition
as of December 31, 1996.
As mentioned earlier, Bancorp's strategy is to maintain its capital at a
level to qualify as well capitalized for regulatory purposes. In 1996, lower
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 1.8 million shares were
repurchased in 1996, with another 2.7 million shares repurchased in 1994 and
1995. Prior share repurchase authorization completed, Bancorp's Board of
Directors approved a new 2.0 million shares repurchase program in the fourth
quarter of 1996. This new program will run concurrently with the existing
authorization to repurchase Bancorp shares in the market to offset the needs
of the plans previously mentioned.
26
EQUITY CAPITAL
TABLE 11
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Source of Common Equity
Net Income...................... $ 133.1 $ 121.8 $ 117.7 $ 132.6 $ 127.5
Dividends Paid.................. (47.4) (45.2) (44.0) (38.4) (35.4)
Dividend Reinvestment
Program........................ 6.8 7.1 7.4 7.7 8.1
Stock Repurchases............... (70.4) (40.0) (44.3) (2.0) (0.6)
Other (1)....................... (10.4) 43.9 (8.1) 9.9 4.7
--------- -------- -------- -------- --------
Annual Increase in Equity....... $ 11.7 $ 87.6 $ 28.7 $ 109.8 $ 104.3
Year-End Common Equity.......... $ 1,066.1 $1,054.4 $ 966.8 $ 938.1 $ 828.3
Add: 8.25% Capital
Securities of Bancorp
Hawaii Capital Trust I.... 100.0 -- -- -- --
Minority Interest.......... 9.3 -- -- -- --
Less: Intangibles............. 68.9 60.2 64.6 72.0 18.8
Unrealized Valuation
Adjustments.................... 2.2 11.3 (17.3) 3.9 --
--------- -------- -------- -------- --------
Tier I Capital.................. 1,104.3 982.9 919.5 862.2 809.5
Allowable Loan Loss
Reserve...................... 131.1 120.2 111.1 100.2 99.3
Subordinated Debt............. 118.7 118.7 118.6 124.6 --
--------- -------- -------- -------- --------
Total Capital.............. $ 1,354.1 $1,221.8 $1,149.2 $1,087.0 $ 908.8
========= ======== ======== ======== ========
Risk Weighted Assets............ $10,452.1 $9,587.0 $8,848.6 $7,990.4 $7,911.8
========= ======== ======== ======== ========
Key Ratios
Growth in Common Equity......... 1.1% 9.1% 3.1% 13.3% 14.4%
Average Equity/Average
Assets Ratio................... 7.95% 8.27% 7.71% 7.09% 6.74%
Tier I Capital Ratio............ 10.57% 10.25% 10.39% 10.79% 10.23%
Total Capital Ratio............. 12.96% 12.74% 12.99% 13.60% 11.49%
Leverage Ratio.................. 7.98% 7.82% 7.28% 6.89% 6.37%
- --------
(1) Includes profit-sharing; stock options; directors restricted shares and
deferred compensation plan; and valuation adjustments for investment
securities and foreign exchange translation.
INTEREST RATE RISK AND DERIVATIVES
For financial institutions, interest rate movements can have an impact on
earnings depending on the structure 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 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 1996. The distribution in the interest rate
sensitivity table consists of a combination of maturities, call provisions,
re-pricing 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, 1996, Bancorp's one year cumulative asset sensitive gap
totaled $0.4 billion representing 2.6% of total assets. This position
gradually changed from year-end 1995, when Bancorp's gap position was
liability sensitive by $0.1 billion or 1.0% of total assets. The one year gap
is a commonly used benchmark of interest rate risk. In addition, Bancorp uses
computer simulations to estimate the potential effects of changing
27
interest rates. These measurements display a balance sheet profile which shows
that rising rates would cause a small compression on margins. Taken together,
all these measures of interest rate sensitivity for Bancorp would indicate a
nearly balanced position.
Bancorp's net interest margin during 1996 remained relatively stable
throughout the year averaging 3.84%. This was an improvement over the net
interest margin for 1995 that averaged 3.72%.
Bancorp has used interest rate swaps as a cost effective risk management
tool for dealing with movements in interest rates. However, no new swaps were
entered into in 1996. Notional amounts of interest rate swaps at year-end 1996
totaled $.7 billion compared with $1.1 billion at year-end 1995 and $1.6
billion at year-end 1994. 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.
28
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.
INTEREST RATE SENSITIVITY
TABLE 12
0-90 91-365 1-5 OVER 5 NON-INT.
DECEMBER 31, 1996 DAYS DAYS YEARS YEARS BEARING
- ----------------- -------- -------- -------- -------- ---------
(IN MILLIONS OF DOLLARS)
Assets(1)
Investment Securities..... $1,387.4 $ 939.4 $ 815.1 $ 489.8 $ --
Short-Term Investments.... 140.9 1.0 -- -- --
International Assets...... 1,248.0 370.0 229.4 102.5 24.3
Domestic Loans(2)......... 2,694.4 1,913.1 1,744.1 793.0 48.2
Trading Assets............ -- -- 1.7 -- --
Other Assets.............. 93.0 46.5 325.5 601.9 --
-------- -------- -------- -------- ---------
Total Assets............ $5,563.7 $3,270.0 $3,115.8 $1,987.2 $ 72.5
======== ======== ======== ======== =========
Liabilities and Capital(1)
Non-Interest Bearing
Demand(3)................ $ 298.6 $ 177.9 $ 723.2 $ 235.4 $ --
Interest-Bearing
Demand(3)................ 329.2 258.6 799.3 337.0 --
Savings(3)................ 104.0 104.0 485.2 173.3 --
Time Deposits............. 756.7 1,142.9 627.6 44.3 --
Foreign Deposits.......... 1,322.8 301.4 65.8 49.7 347.2
Short-Term Borrowings..... 1,883.6 987.1 98.1 -- --
Long-Term Debt............ 210.1 188.9 313.8 219.4 --
Other Liabilities......... -- -- -- -- 358.0
Capital................... -- -- -- -- 1,066.1
-------- -------- -------- -------- ---------
Total Liabilities and
Capital................ $4,905.0 $3,160.8 $3,113.0 $1,059.1 $ 1,771.3
======== ======== ======== ======== =========
Interest Rate Swaps......... $ (499.0) $ 99.4 $ 399.6 $ -- $ --
-------- -------- -------- -------- ---------
Interest Sensitivity Gap.. $ 159.7 $ 208.7 $ 402.4 $ 928.1 $(1,698.8)
Cumulative Gap............ $ 159.7 $ 368.3 $ 770.7 $1,698.8 $ --
Percentage of Total
Assets................... 1.14% 2.63% 5.50% 12.13% --
- --------
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.
29
CONSOLIDATED AVERAGE BALANCES, INCOME AND EXPENSE
SUMMARY, AND YIELDS AND RATES
(TAXABLE EQUIVALENT)
TABLE 13
1996 1995 1994
------------------------- ------------------------- -------------------------
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.............. $ 752.6 $ 38.0 5.06% $ 661.4 $ 39.4 5.97% $ 812.6 $ 36.4 4.48%
Investment
Securities--Held to
Maturity
--Taxable............ 1,078.1 70.4 6.53 1,516.5 92.3 6.09 2,463.3 135.0 5.48
--Tax-Exempt......... 13.0 1.8 14.08 15.9 2.1 13.25 18.7 2.6 14.03
Investment
Securities--Available
for Sale.............. 2,288.7 146.4 6.40 1,639.0 107.9 6.58 1,064.0 54.0 5.07
Funds Sold............. 92.1 4.0 4.39 68.5 3.8 5.57 52.5 2.3 4.33
Loans (1)--Domestic.... 7,099.9 584.2 8.23 6,908.9 572.8 8.29 6,725.9 517.6 7.70
--Foreign..... 1,253.7 107.6 8.58 746.0 51.5 6.90 667.8 35.2 5.27
Loan Fees.............. 29.7 28.5 31.7
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Earning
Assets............ 12,578.1 982.1 7.81 11,556.2 898.3 7.77 11,804.8 814.8 6.90
Cash and Due From Banks. 462.8 460.6 449.1
Other Assets............ 427.1 389.1 342.7
--------- --------- ---------
Total Assets....... $13,468.0 $12,405.9 $12,596.6
========= ========= =========
Interest-Bearing
liabilities
Domestic Deposits
--Demand............. $ 1,726.6 47.2 2.73 $ 1,752.4 50.9 2.91 $ 1,895.4 41.1 2.17
--Savings............ 937.0 23.7 2.53 1,058.5 30.6 2.89 1,232.3 29.1 2.36
--Time............... 2,465.1 133.5 5.42 1,839.9 98.5 5.36 1,544.8 65.9 4.27
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Domestic..... 5,128.7 204.4 3.98 4,650.8 180.0 3.87 4,672.5 136.1 2.91
Foreign Deposits
--Time Due to Banks.. 692.2 38.1 5.50 652.7 37.8 5.79 896.5 37.8 4.22
--Other Time and
Savings............. 795.8 46.2 5.81 329.6 21.7 6.59 340.2 15.6 4.59
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Foreign...... 1,488.0 84.3 5.67 982.3 59.5 6.06 1,236.7 53.4 4.32
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Deposits..... 6,616.7 288.7 4.36 5,633.1 239.5 4.25 5,909.2 189.5 3.21
Short-Term Borrowings... 2,809.6 150.2 5.35 3,155.1 174.0 5.52 3,600.6 143.9 4.00
Long-Term Debt.......... 1,146.2 60.9 5.31 983.8 54.6 5.55 526.8 30.3 5.76
--------- ------ ----- --------- ------ ----- --------- ------ -----
Total Interest-
Bearing
Liabilities....... 10,572.5 499.8 4.73 9,772.0 468.1 4.79 10,036.6 363.7 3.62
--------- ------ ----- --------- ------ ----- --------- ------ -----
Net Interest Income..... 482.3 3.08 430.2 2.98 451.1 3.28
------ ----- ------ ----- ------ -----
Spread on Earning
Assets................. 3.84% 3.72% 3.82%
----- ----- -----
Demand Deposits
--Domestic........... 1,371.5 1,391.6 1,373.2
--Foreign............ 194.2 11.8 12.8
--------- --------- ---------
Total Demand
Deposits.......... 1,565.7 1,403.4 1,386.0
Other Liabilities....... 258.9 204.5 203.1
Shareholders' Equity.... 1,070.9 1,026.0 970.9
--------- --------- ---------
Total Liabilities &
Equity............ $13,468.0 $12,405.9 $12,596.6
========= ========= =========
Provision for Loan
Losses................. 22.2 17.0 21.9
Net Overhead............ 249.2 217.7 232.0
------ ------ ------
Income Before Income
Taxes.................. 210.9 195.5 197.2
Provision for Income
Taxes.................. 76.7 72.0 77.7
Tax Equivalency
Adjustment (2)......... 1.1 1.7 1.8
------ ------ ------
Net Income.............. $133.1 $121.8 $117.7
====== ====== ======
- --------
(1) Includes non-accrual loans.
(2) Based upon a statutory tax rate of 35%.
30
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 1996, deposits increased to $8.7 billion from $7.6 billion at
the end of 1995. Average deposits for 1996 were also higher than the average
for 1995. Table 21 presents the average deposits by category. The year-to-year
increase reflected the positive impact of the South Pacific acquisitions in
the second quarter. The strategy to grow through acquisitions has helped to
counteract the continuous competitive pressure in the Hawaii market as
customers continue to seek alternative investment products such as mutual
funds from both banks and others.
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. Over the years, much of these deposits were converted
to Securities Sold Under Agreements to Repurchase (Repos). Repos are supported
by the same type of collateral that supports governmental deposits, but are
not insured by the FDIC. At year-end 1996 repos totaled $2.1 billion compared
to $1.9 billion at year-end 1995 and $2.1 billion at year-end 1994.
In 1996 Bancorp issued commercial paper only in the Hawaii marketplace. As
an alternative, Bancorp maintains access to the mainland market through its
pre-selected agent for issuing commercial paper. At year-end 1996 commercial
paper outstanding totaled $69.7 million compared to $73.5 million at year-end
1995. The short term notes are rated "P-1" by Moody's and "A-2" by Standard &
Poor'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. During the year, the line was not drawn upon.
In January 1997, the line amount was reduced to $35 million.
Bank of Hawaii, First Federal and First Savings are all members of the
Federal Home Loan Bank (FHLB), providing these entities with an additional
source of short to intermediate term funding. At year-end 1996, Bank of Hawaii
had outstanding debt to the FHLB of $125 million, as compared to $60 million
at year-end 1995. Bancorp Pacific also increased its borrowings from the FHLB,
which at year-end 1996 totaled $273.0 million, compared to $271.5 million at
year-end 1995. Borrowings from the FHLB are collateralized by mortgage loans
and FHLB stock.
Long term debt on December 31, 1996, was $0.9 billion, compared to $1.1
billion at year-end 1995, and $0.9 billion at year-end 1994. Certain amounts
of the long term debt were private placements, which totaled $110 million, $60
million, and $90 million at year-end 1996, 1995 and 1994, respectively.
Bancorp's access to such private placement counterparties enhances its balance
sheet liquidity. In 1996, Bancorp negotiated a private placement denominated
in French Francs to finance the South Pacific acquisitions. The borrowing
being denominated in French Francs will effectively protect Bancorp against
changes in currency exchange rates.
Additionally, Bank of Hawaii continued its $1.0 billion revolving medium
term note program established in 1995. Notes outstanding under this facility,
represented in both long term and short term debt, decreased to $350.0 million
at year-end 1996 from $849.7 million in 1995. The bank notes have been rated
"Aa-3" by Moody's and "A" by Standard and Poor's.
On December 30, 1996, Bancorp completed the issuance of $100 million Bancorp
Hawaii Capital Trust I, 8.25% Capital Securities. These securities, which are
classified as long term debt, are junior to subordinated notes. The Federal
Reserve Bank has recognized these securities as eligible for Tier I capital
treatment. These securities have a term of 30 years and are assigned a rating
of "a2" by Moodys and "BBB" by Standard & Poor's.
31
Control of Net Overhead
Bancorp's emphasis on control of net overhead has two measurement
indicators. These indicators are its net overhead ratio and its efficiency
ratio which are 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. For 1996, Bancorp's net overhead ratio was 2.47,
compared with 2.53 and 2.47 in 1995 and 1994, respectively. The BDT/BNC
acquisition helped improve this ratio as the net overhead ratio for these
banks was 2.43 times for 1996.
Trust operations, electronic financial services, insurance and annuity
sales, and brokerage sales continue to grow, although at varying rates. These
areas are discussed in more detail in the non-interest income section of this
report.
In 1995, Bancorp announced the restructuring of its defined benefit plan and
coincident early retirement program. The early retirement option reduced
salary expense while the restructuring of the benefit plans was intended to be
expense neutral or to modestly reduce expenses. For 1996, after considering
the effect of changes, these results have been attained. A further discussion
follows in the non-interest expense section of this report.
Other initiatives have been announced to demonstrate Bancorp's effort to
control net overhead. In December 1996, HTCo announced the planned outsourcing
of trust accounting activity. This change, which would replace staffing costs
with service costs, provides HTCo with more flexibility in meeting the
constantly changing needs of the customers we serve. The transition is
expected to be completed by the third quarter of 1997.
Other activities have been outsourced, such as servicing of our student loan
portfolio, certain charge card processes and merchant servicing activities.
In addition to these outsourcing activities, Bancorp continues to progress
toward streamlining its data processing operations. Consolidating deposit
accounting systems from several software vendors continued in 1996. Further
conversions are planned in 1997 with the migration to be completed by mid-
1998.
A discussion of the two components of the net overhead ratio, non-interest
income and non-interest expense follows.
Non-Interest Income
For 1996, total non-interest income was $172.0 million, compared with $146.4
million in 1995 and $128.4 million in 1994. Excluding securities transactions,
non-interest income for 1996 increased 18.6% from 1995. The level of non-
interest income for 1996 was affected by the acquisition of BDT and BNC
mentioned earlier. For 1996, BDT and BNC contributed $12.8 million in non-
interest income. Without the increase due to the BDT/BNC acquisitions, non-
interest income would have increased 8.8% from 1995. Table 14 presents the
details of non-interest income for the last five years.
Trust income for 1996 totaled $49.8 million, up from $49.5 million in 1995
and $48.6 million in 1994. For the last two years, the growth rate has been
disappointing. Aggressive competition from non-Hawaii based trust service
vendors has hampered the growth in market share and fees. Converting to the
new outsourced accounting system should help in providing a better reporting
product. While fee income showed modest increases, total assets being
administered by Hawaiian Trust Company, Limited again increased to $12.2
billion at year-end 1996 from $12.0 billion at year-end 1995 and $11.9 billion
at year-end 1994.
Service charges on deposit accounts rebounded to $28.9 million, compared
with $25.9 million in 1995 and $28.3 million in 1994. Approximately $1.8
million of the total reported by BDT and BNC accounted for much of the
increase. To a certain extent, the packaging of services like "Bankohana
Accounts," had an impact on
32
these fees as the multiple accounts are aggregated and provided with more free
services. Bancorp regularly reviews its fee schedules (including exchange and
service charges on deposit accounts) to assure competitive pricing and
acceptable levels of profitability.
Fees, exchange and other service charges increased to $56.7 million in 1996,
from $47.3 million in 1995 and $42.5 million in 1994. Approximately $5.1
million of the increase was due to the BDT/BNC acquisition. Bancorp's
involvement in trade finance in the Asian Rim countries has steadily increased
fees over the years as its network of offices and branches in the area has
grown. Reflecting the continuing increase in international activity, fees for
letters of credit, export bill collection, and acceptances have increased to
$10.1 million in 1996, compared with $8.8 million and $7.8 million in 1995 and
1994, respectively. Also, related to international activity, profits on
foreign currency increased to $8.9 million in 1996 compared to $6.5 million in
1995 and $4.3 million in 1994.
Mortgage servicing fees increased to $6.6 million in 1996 from $4.3 million
in 1995 and $2.9 million in 1994. The increase in this category was positively
impacted by the securitization of $350 million in mortgage loans in 1996 which
are serviced by Bancorp. Fees earned for servicing these loans were about $0.7
million in 1996. By year-end 1996, Bancorp's mortgage servicing portfolio grew
to $1.5 billion. Historically, Bancorp's servicing portfolio has grown mainly
as a result of loan originations by Bank of Hawaii and Bancorp Pacific, Inc.,
although, occasionally, relatively small servicing portfolios have been
purchased.
Also included in fees, exchange and other service charges are fees earned
through Bancorp's ATM network. During 1996, Bancorp's ATM network increased
ending the year with 401 machines, an increase from 344 at year-end 1995. The
fees generated by this network totaled $8.6 million in 1996, $7.7 million in
1995, and $6.6 million in 1994. The majority of Bancorp's ATMs are located in
Hawaii (356) with 24 in the Western Pacific, 19 in the South Pacific and two
in Arizona. The ATMs have high usage by tourists visiting Hawaii using many
ATM networks. The volumes of transactions handled by these ATMs have increased
steadily over the years. For 1996, on average more than 1.7 million
transactions were processed per month compared with more than 1.5 million
transactions per month in 1995.
Bancorp has been actively providing new products to migrate our customer
base toward electronic transactions. In this effort, Bancorp introduced a
"Mileage Access Card." The Mileage Access Card allows customers to access
their checking accounts at all VISA merchant locations instead of writing
checks. The use of the Mileage Access Card is rewarded with mileage points
that can be redeemed at designated travel agencies in Hawaii. Bancorp has two
other specific products currently in use. Access Card and Isle Pay cards are
point of sale cards which continue to report increased acceptance. At year-end
1996, the base of cards in these programs has increased to more than 240,000.
The volume of transactions has also continued to increase. The combined cards
have averaged more than 340,000 transactions per month in 1996, compared with
275,000 in 1995 and about 225,000 in 1994. This card base has generated fees
in 1996 of $773,000, compared with $620,000 in 1995 and $516,000 in 1994.
Cash management products are also provided through electronic means.
Products like lock box services, payroll processing services and touch tone
phone transfers are among the cash management products. In 1996, Bank of
Hawaii also launched several direct banking products. "Marketplace Hawaii," a
"cybermall" on the internet, is envisioned as the major shopping, business,
entertainment, tourist and cultural center for Hawaii on the internet. Bank of
Hawaii is a partner in this venture and will handle all credit card
transactions. A PC product, announced in 1996, called PC Home Banking,
utilizes the VISA interactive service. Bank of Hawaii also launched Bankoh
Bill Pay, an electronic bill payment service. Limited to electronic bill
payment in 1996, Bankoh Bill Pay will be expanding to add more features in
1997.
Other operating income ended 1996 at $35.2 million, a strong increase from
the $21.2 million in 1995 and $26.8 million in 1994. In 1996, BDT and BNC
contributed $5.9 million of the increase. With the level of recoveries
recorded in 1996, cash basis interest rebounded to $2.6 million in 1996, up
from $1.3 million in 1995, but still below the $3.4 million reported in 1994.
The income recorded as cash basis generally includes interest collected on
loans written off or interest collected on non-accrual loans that relate to
prior years.
33
Investment securities activity for 1996 resulted in a net (pre-tax)
securities gain of $1.4 million for the year, compared to a $2.5 million gain
in 1995 and a $17.8 million loss in 1994. The loss recorded in 1994 reflected
the restructuring of the available for sale portfolio to reduce the liability
sensitivity of Bancorp.
NON-INTEREST INCOME
TABLE 14
YEARS ENDED DECEMBER 31
-----------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
Trust Income............... $ 49.8 + 0.6% $ 49.5 + 1.8% $ 48.6 $ 40.9 $ 30.5
Service Charges on Deposit
Accounts.................. 28.9 + 11.6 25.9 - 8.5 28.3 26.5 24.9
Fees, Exchange and Other
Service Charges
Card Fees................ 10.7 + 46.6 7.3 - 12.0 8.3 7.4 6.1
Letters of Credit and
Acceptance Fees......... 10.1 + 14.8 8.8 + 12.8 7.8 7.3 7.1
Profit on Foreign
Currency................ 8.9 + 36.9 6.5 + 51.2 4.3 4.6 5.9
ATM...................... 8.6 + 11.7 7.7 + 16.7 6.6 5.3 3.9
Mortgage Servicing Fees.. 6.6 + 53.5 4.3 + 48.3 2.9 2.4 2.3
Exchange Fees............ 3.4 - 12.8 3.9 - 2.5 4.0 2.9 2.9
Payroll Services......... 2.4 + 14.3 2.1 -- 2.1 1.8 1.7
Cash Management.......... 0.8 - 20.0 1.0 - 9.1 1.1 1.1 0.8
Other Fees............... 8.2 + 43.9 5.7 + 5.6 5.4 4.9 5.2
Other Operating Income..... 29.6 + 48.7 19.9 - 15.0 23.4 17.9 19.8
Cash Basis Interest........ 2.6 +100.0 1.3 - 61.8 3.4 2.4 2.9
Investment Securities Gains
(Losses).................. 1.4 - 44.0 2.5 +114.0 (17.8) 10.0 3.4
------ ------ ------ ------ ------ ------ ------
Total.................. $172.0 + 17.5% $146.4 + 14.0% $128.4 $135.4 $117.4
====== ====== ====== ====== ====== ====== ======
Non-Interest Expense
The control of expense is a key part of Bancorp's financial strategy. A
lower percentage of non-interest expense to net operating revenue (net
interest income plus non-interest income before securities transactions) is a
productivity indicator, commonly called an efficiency ratio. For 1996,
Bancorp's percentage was 64.6% compared to 63.6% and 60.5% for 1995 and 1994,
respectively. The Salomon Brothers Inc 1996 50-bank composite percentage was
58.8%.
Total non-interest expense for 1996, 1995 and 1994 was $421.3 million,
$364.1 million and $360.4 million, respectively. The largest component of non-
interest expense is salary expense, which was $159.2 million, $142.1 million
and $138.0 million in 1996, 1995 and 1994, respectively. The acquisition of
BDT and BNC affects the comparability of salary expense as $10.1 million of
salary expense was reported for BDT and BNC in 1996. Excluding BDT and BNC,
total salary expense would have increased 4.9% over 1995. Bancorp's average
annual salary per full time equivalent staff was $33,500 in 1996. For 1995 and
1994, the average was $33,300 and $31,900, respectively.
Pension and other employee benefits expense for 1996 totaled $48.8 million,
an increase of 12.1% over 1995 expense of $43.6 million. Part of the increase
in 1996 expense was due to the BDT and BNC acquisition which reported $2.6
million in pension and benefit expense for the year. Excluding the BDT and BNC
expense for 1996, the increase would have been $2.6 million or 6.1% over 1995.
The restructuring of the retirement plan was effective January 1, 1996.
Retirement Plan (both qualified and excess) expense decreased from $8.9
million in 1995 to $0.3 million in 1996. The decrease was largely offset by
the cost of the new defined contribution
34
Money Purchase Plan ($4.8 million) and the company match of 401(k)
contribution ($2.7 million). Both were initiated on January 1, 1996.
Occupancy expense for 1996 decreased to $39.4 million from $41.1 million in
1995 and $37.4 million in 1994. The change between 1996 and 1995 reflects the
occupancy cost savings as the new Bancorp Hale O Kapolei facility was placed
in service in late 1995. Hale O Kapolei is a 248,000 square foot facility that
houses many back office operational functions. Departments located in downtown
Honolulu began to move to Kapolei in late 1995 and the moves continued into
1996.
Net equipment expense increased 7.2% over 1995. Net equipment expense was
$34.0 million, $31.7 million and $30.5 million in 1996, 1995 and 1994,
respectively. The increase reflects Bancorp's continuing investment in
technological enhancements to maintain the appropriate level of efficiency.
Bancorp's ongoing commitment to upgrade its information systems continued in
1996. Providing staff members with access to much more information to service
customers more accurately and efficiently remains Bancorp's focus. The costs
of software and hardware maintenance costs were again aggressively challenged
in 1996. Overall costs were controlled through prudent cancellation of certain
equipment maintenance contracts and aggressive renegotiation with vendors upon
service contract renewals.
The BDT and BNC acquisition did not increase this expense significantly, but
current systems are being reviewed for upgrading in the future.
The other expense category increased to $138.4 million in 1996 from $104.4
million in 1995 and $111.6 million in 1994. About $17.5 million of the 1996
increase in this expense was due to the BDT and BNC acquisition. Bancorp
Pacific, Inc., Bancorp's thrift holding company also incurred the one time
FDIC assessment of $5.0 million during the third quarter. FDIC insurance
expense for Bancorp was $6.8 million in 1996, $7.6 million in 1995 and $13.6
million in 1994. Early in the year, one of Bancorp's leverage leases was
terminated by the lessee prior to maturity resulting in the recognition (for
book purposes) of a loss of $2.8 million which is included in this category of
expenses. These early terminations occur occasionally. In this transaction,
the loss was almost entirely matched with a tax benefit recorded
simultaneously.
Legal and professional fees increased to $17.7 million in 1996 from $15.6
million in 1995 and $18.2 million in 1994. The increase was due to
professional fees incurred to assist with various computer system conversion
projects. Reflecting acquisitions made in 1996, the amortization of
intangibles increased to $9.3 million for 1996, $8.4 million for 1995 and $9.3
million for 1994.
NON-INTEREST EXPENSE
TABLE 15
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
Salaries.................... $159.2 +12.0% $142.1 + 3.0% $138.0 $134.6 $126.0
Pension and Other Employee
Benefits................... 48.8 +11.9 43.6 + 2.8 42.4 42.4 39.2
Net Occupancy Expense....... 39.4 - 4.1 41.1 + 9.9 37.4 37.0 33.7
Net Equipment Expense....... 34.0 + 7.3 31.7 + 3.9 30.5 27.3 24.8
Other Operating Expense
Legal and Professional.... 17.7 +13.5 15.6 - 14.3 18.2 11.9 11.8
Advertising............... 11.4 + 1.8 11.2 + 8.7 10.3 9.7 8.4
Stationery and Supplies... 10.7 +15.1 9.3 + 5.7 8.8 7.5 7.2
FDIC Insurance............ 6.8 -10.5 7.6 - 44.1 13.6 15.1 17.2
Other..................... 91.9 +51.2 60.8 - 0.2 60.7 50.6 46.3
Minority Interest......... 1.4 +27.3 1.1 +120.0 0.5 -- --
------ ----- ------ ------ ------ ------ ------
Total................... $421.3 +15.7% $364.1 + 1.0% $360.4 $336.1 $314.6
====== ===== ====== ====== ====== ====== ======
35
INCOME TAXES
The 1996 tax provision reflects a decrease in the effective tax rate to
36.6% from 37.2% and 39.7% in 1994 and 1993, respectively. The change in the
effective tax rate is partly due to the early termination of the leveraged
lease mentioned earlier, the acquisition of BDT and BNC which creates more
foreign tax credits and the change in Hawaii tax laws reported last year.
The tax-exempt securities portfolio continues to decline as minimal
additions are being made. For 1996, average tax exempt securities totaled
$13.0 million, minimally impacting Bancorp's effective tax rate. Low income
housing credits remain the one avenue for reducing the effective tax rate. In
1996, Bancorp's low income housing credit investments increased by $43.7
million to $66.3 million at year-end 1996 compared to $22.6 million at year-
end 1995. Bancorp predominantly considers low income housing investments in
Hawaii but has transactions outside of Hawaii to manage its tax liability.
Bancorp also continues to pursue lease financing as a method by which to
defer taxes. During 1996, the leasing portfolio increased to $437.8 million at
year-end 1996. While much of this activity is smaller traditional leasing
transactions, in 1996 several large single investor lease transactions were
recorded. There were no leveraged leases recorded in 1996. Bancorp's tax
planning also tries to avoid the impact of the alternative minimum tax (AMT).
At the end of 1996, Bancorp was not subject to the AMT.
FOURTH QUARTER RESULTS
Earnings for the fourth quarter of 1996 totaled $34.5 million, an increase
of 7.4% from the $32.1 million reported in the same quarter of 1995. Earnings
per share were $0.84 and $0.77 for the fourth quarter of 1996 and 1995,
respectively.
Spread for the fourth quarter of 1996 was 3.84%, compared to 3.72% for the
fourth quarter of 1995. The improvement in spread was partly due to the BDT
and BNC acquisition as the yield recognized by the subsidiaries are marginally
higher. The earning asset yield decreased to 7.83% from 7.87% comparing the
fourth quarters of 1996 and 1995. The cost of funds rate also decreased to
4.81% from 4.87% between the same periods.
The provision for loan losses totaled $9.9 million for the quarter, higher
than the $4.0 million in the fourth quarter of 1995. The fourth quarter 1996
provision reflected the higher net charge-offs recognized in the quarter.
CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS
TABLE 16
THREE MONTHS ENDED
--------------------------------------------------------
1996 1995
---------------------------- ---------------------------
MAR. JUN. SEPT. DEC. MAR. JUN. SEPT. DEC.
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Total Interest Income... $231.1 $244.0 $250.3 $255.7 $214.6 $221.8 $226.3 $234.0
Total Interest Expense.. 118.3 123.2 127.9 130.4 112.3 114.7 117.8 123.4
Net Interest Income..... 112.8 120.8 122.4 125.3 102.3 107.1 108.5 110.6
Provision for Possible
Loan Losses............ 4.4 4.2 3.7 9.9 4.5 4.1 4.4 4.0
Investment Securities
Gains (Losses)......... (0.1) 0.1 0.2 1.1 1.8 0.3 0.2 0.2
Other Non-Interest
Income................. 37.7 42.6 43.2 47.1 38.0 35.7 35.7 34.5
Total Non-Interest
Expense................ 97.5 103.8 112.6 107.3 91.0 93.7 87.9 91.5
------ ------ ------ ------ ------ ------ ------ ------
Income Before Income
Taxes.................. 48.5 55.5 49.5 56.3 46.6 45.3 52.1 49.8
Provision for Income
Taxes.................. 15.8 20.9 18.2 21.8 18.3 16.8 19.2 17.7
------ ------ ------ ------ ------ ------ ------ ------
Net Income.............. $ 32.7 $ 34.6 $ 31.3 $ 34.5 $ 28.3 $ 28.5 $ 32.9 $ 32.1
====== ====== ====== ====== ====== ====== ====== ======
Earnings Per Common
Share.................. $ 0.79 $ 0.84 $ 0.76 $ 0.84 $ 0.67 $ 0.68 $ 0.78 $ 0.77
36
SUPPLEMENTARY DATA
MATURITY DISTRIBUTION, MARKET VALUE AND WEIGHTED-AVERAGE YIELD TO MATURITY OF
SECURITIES
TABLE 17
WITHIN 1-5 5-10 OVER APPROXIMATE
AT YEAR-END DECEMBER 31 1 YEAR YEARS YEARS 10 YEARS TOTAL MARKET VALUE
----------------------- -------- -------- ------ -------- -------- ------------
(IN MILLIONS OF DOLLARS)
Maturity Distribution
Based on Book Value
U.S. Treasury
Securities........... $ 1.0 $ 80.0 $ -- $ -- $ 81.0 $ 75.0
Obligations of Other
U.S. Government
Agencies and
Corporations......... 10.0 257.1 -- -- 267.1 272.2
Obligations of States
and Political
Subdivisions......... 4.0 4.7 3.8 0.2 12.7 14.1
Corporate Securities.. -- -- -- 57.2 57.2 57.2
Mortgage-Backed
Securities........... 86.9 245.6 13.3 420.3 766.1 766.0
Other................. 72.9 1.8 -- -- 74.7 76.6
Securities Available
for Sale (1)......... 135.3 792.8 77.5 1,363.5 2,369.1 2,372.9
-------- -------- ------ -------- -------- --------
Total--1996......... $ 310.1 $1,382.0 $ 94.6 $1,841.2 $3,627.9 $3,634.0
--1995 $ 382.9 $1,195.1 $ 75.6 $1,706.6 $3,360.2 $3,366.3
--1994 $1,168.4 $ 828.6 $169.1 $ 998.6 $3,164.6 $3,115.3
-------- -------- ------ -------- -------- --------
Weighted-Average Yield
(2) to Maturity
U.S. Treasury
Securities........... 5.7% 5.2% -- % -- % 5.2%
Obligations of Other
U.S. Government
Agencies and
Corporations......... 6.4 6.2 -- -- 6.2
Obligations of States
and Political
Subdivisions......... -- 10.2 10.0 6.8 6.9
Corporate Securities.. -- -- -- 6.0 6.0
Mortgage-Backed
Securities........... 6.4 5.7 8.3 6.8 6.4
Other................. 9.2 10.9 -- -- 9.2
Securities Available
for Sale............. 8.8 6.4 6.9 6.3 6.5
-------- -------- ------ -------- --------
Total--1996......... 8.0% 6.2% 7.2% 6.4% 6.5%
======== ======== ====== ======== ========
Tax Equivalent
Adjustment Amount...... $ -- $ 0.1 $ 0.1 $ -- $ 0.2
- --------
(1) Reports current balance at contractual maturity and does not anticipate
reductions for periodic paydowns.
(2) Tax equivalent at 35% tax rate.
37
AVERAGE ASSETS
TABLE 18
1996 1995 1994 1993 1992
--------------- --------------- --------- --------- ---------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
--------- ----- --------- ----- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
Interest-Bearing
Deposits............... $ 752.6 5.6% $ 661.4 5.3% $ 812.6 $ 1,140.1 $ 1,200.6
Investment Securities
--Held to Maturity.... 1,091.1 8.1 1,532.4 12.4 2,482.0 3,542.3 2,679.1
--Available for Sale.. 2,288.7 17.0 1,639.0 13.2 1,064.0 69.1 15.9
Funds Sold.............. 92.1 0.7 68.5 0.6 52.5 146.0 463.1
Loans................... 8,353.6 62.0 7,654.9 61.7 7,393.7 6,991.0 6,601.9
--------- ----- --------- ----- --------- --------- ---------
Total Earning
Assets............. 12,578.1 93.4 11,556.2 93.2 11,804.8 11,888.5 10,960.6
Non-Earning Assets...... 889.9 6.6 849.7 6.8 791.8 697.3 684.4
--------- ----- --------- ----- --------- --------- ---------
Total............... $13,468.0 100.0% $12,405.9 100.0% $12,596.6 $12,585.8 $11,645.0
========= ===== ========= ===== ========= ========= =========
AVERAGE LOANS
TABLE 19
1996 1995 1994 1993 1992
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial............. $1,784.0 21.4% $1,850.3 24.2% $1,681.1 $1,695.5 $1,738.2
Real Estate
Construction.......... 229.6 2.7 164.2 2.1 145.2 181.1 266.3
Mortgage.............. 3,863.2 46.2 3,765.8 49.2 3,840.1 3,419.2 3,019.0
Installment............. 814.8 9.8 754.4 9.9 686.7 639.5 629.8
Foreign (1)............. 1,253.7 15.0 745.9 9.7 667.8 666.1 590.0
Lease Financing......... 408.3 4.9 374.2 4.9 372.8 389.6 358.6
-------- ----- -------- ----- -------- -------- --------
Total............... $8,353.6 100.0% $7,654.8 100.0% $7,393.7 $6,991.0 $6,601.9
======== ===== ======== ===== ======== ======== ========
- --------
(1)See section entitled International Operations for definition of Foreign.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES (1)
TABLE 20
DUE IN DUE IN DUE AFTER
DECEMBER 31, 1996 ONE YEAR OR LESS ONE TO FIVE YEARS (2) FIVE YEARS (2) TOTAL
- ----------------- ---------------- --------------------- -------------- --------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial............. $ 987.2 $ 675.5 $ 144.0 $1,806.7
Real Estate--
Construction........... 152.8 61.4 21.7 235.9
Other Loans............. 1,628.3 1,570.2 1,951.7 5,150.2
Foreign Loans........... 1,176.2 227.7 102.6 1,506.5
-------- -------- -------- --------
Total............... $3,944.5 $2,534.8 $2,220.0 $8,699.3
======== ======== ======== ========
- --------
(1)Based on contractual maturities.
(2) As of December 31, 1996, of the loans maturing after one year, $2,702.7
million have floating rates and $2,052.1 million have fixed rates.
38
AVERAGE DEPOSITS
TABLE 21
1996 1995 1994 1993 1992
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic
Non-Interest Bearing
Demand............... $1,371.5 16.8% $1,391.6 19.8% $1,373.2 $1,312.1 $1,205.8
Interest-Bearing
Demand............... 1,726.6 21.1 1,752.4 24.9 1,895.4 2,032.3 2,039.6
Regular Savings....... 937.0 11.5 1,058.5 15.0 1,232.3 1,239.4 1,035.3
Private Time
Certificates of
Deposit ($100,000 or
More)................ 719.2 8.8 581.5 8.3 476.8 489.4 547.6
Public Time
Certificates of
Deposit ($100,000 or
More)................ 310.7 3.8 89.3 1.3 64.6 143.4 1,573.2
Bearer Certificates of
Deposit.............. 1.3 -- 5.0 0.1 5.0 5.0 5.0
All Other Time and
Savings Certificates. 1,433.9 17.5 1,164.1 16.5 998.4 1,074.1 1,168.2
-------- ----- -------- ----- -------- -------- --------
Total Domestic...... 6,500.2 79.4 6,042.4 85.9 6,045.7 6,295.7 7,574.7
-------- ----- -------- ----- -------- -------- --------
Foreign Deposits (1)
Non-Interest Bearing
Demand............... 194.2 2.4 11.8 0.2 12.8 12.8 26.1
Time Due to Banks..... 692.2 8.5 652.7 9.2 896.5 1,032.7 629.9
Other Time and
Savings.............. 795.8 9.7 329.6 4.7 340.2 191.2 187.0
-------- ----- -------- ----- -------- -------- --------
Total Foreign....... 1,682.2 20.6 994.1 14.1 1,249.5 1,236.7 843.0
-------- ----- -------- ----- -------- -------- --------
Total............... $8,182.4 100.0% $7,036.5 100.0% $7,295.2 $7,532.4 $8,417.7
======== ===== ======== ===== ======== ======== ========
- --------
(1) See section entitled International Operations for definition of Foreign.
39
INTEREST DIFFERENTIAL
TABLE 22
1996 COMPARED TO 1995 1995 COMPARED TO 1994
-------------------------- --------------------------
VOLUME (1) RATE (1) TOTAL VOLUME (1) RATE (1) TOTAL
---------- -------- ------ ---------- -------- ------
(IN MILLIONS OF DOLLARS)
Change in Interest
Income:
Interest Bearing
Deposits:
Foreign............. $ 5.1 $ (6.5) $ (1.4) $ (7.6) $ 10.6 $ 3.0
Investment
Securities--Held to
Maturity Taxable... (28.2) 6.3 (21.9) (56.4) 13.7 (42.7)
Tax-Exempt.......... (0.4) 0.1 (0.3) (0.4) (0.2) (0.6)
Investment
Securities--Available
for Sale............. 41.6 (3.0) 38.6 34.7 19.2 53.9
Funds Sold............ 1.1 (0.9) 0.2 0.8 0.8 1.6
Loans, Net of Unearned
Income:
Domestic............ 16.1 (3.6) 12.5 15.4 36.7 52.1
Foreign............. 41.3 14.8 56.1 4.5 11.8 16.3
------ ------ ------ ------ ------ ------
Total Interest
Income........... $ 76.6 $ 7.2 $ 83.8 $ (9.0) $ 92.6 $ 83.6
====== ====== ====== ====== ====== ======
Change in Interest
Expense:
Interest Bearing
Deposits:
Demand Deposits..... $ (0.7) $ (3.0) $ (3.7) $ (3.3) $ 13.1 $ 9.8
Savings Deposits.... (3.3) (3.6) (6.9) (4.5) 5.9 1.4
Time Deposits....... 33.8 1.1 34.9 14.0 18.7 32.7
Deposits in Foreign
Offices............ 28.9 (4.1) 24.8 (12.4) 18.6 6.2
Short-Term Borrowings. (18.6) (5.2) (23.8) (19.4) 49.6 30.2
Long-Term Debt........ 8.7 (2.4) 6.3 25.3 (1.1) 24.2
------ ------ ------ ------ ------ ------
Total Interest
Expense.......... $ 48.8 $(17.2) $ 31.6 $ (0.3) $104.8 $104.5
====== ====== ====== ====== ====== ======
Net Interest
Differential:
Domestic.............. $ 10.3 $ 12.0 $ 22.3 $(18.0) $(16.0) $(34.0)
Foreign............... 17.5 12.4 29.9 9.3 3.8 13.1
------ ------ ------ ------ ------ ------
Total Interest
Differential..... $ 27.8 $ 24.4 $ 52.2 $ (8.7) $(12.2) $(20.9)
====== ====== ====== ====== ====== ======
- --------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
40
YEAR-END SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
TABLE 23
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET TOTALS
Net Loans............. $ 8,347.9 $ 7,853.0 $ 7,599.5 $ 6,983.1 $ 6,691.7
Assets................ 14,009.2 13,206.8 12,586.4 12,462.1 12,713.1
Deposits.............. 8,684.1 7,576.8 7,115.1 7,005.0 7,890.5
Long-Term Debt........ 932.1 1,063.4 861.6 378.2 119.4
Shareholders' Equity.. 1,066.1 1,054.4 966.8 938.1 828.3
OPERATING RESULTS
Total Interest Income. $ 981.0 $ 896.7 $ 813.0 $ 802.6 $ 822.6
Net Interest Income... 481.3 428.5 449.3 467.2 436.1
Provision for Possible
Loan Losses.......... 22.2 17.0 21.9 54.2 50.1
Net Income............ 133.1 121.8 117.7 132.6 127.5
Earnings Per Share.... $ 3.23 $ 2.90 $ 2.75 $ 3.09 $ 3.00
Cash Dividends Paid
Per Common Share..... $ 1.16 $ 1.08 $ 1.04 $ 0.90 $ 0.85
NON-FINANCIAL DATA
Common Shareholders of
Record at Year-End... 7,120 7,439 6,947 8,315 5,814
Average Common Shares
Outstanding.......... 41,212,262 42,027,456 42,824,531 42,967,790 42,527,466
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Quarterly Results of Operations--Table 16 and narrative on page
36.
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Bancorp Hawaii, Inc.
We have audited the accompanying consolidated statements of condition of
Bancorp Hawaii, Inc., and subsidiaries as of December 31, 1996, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bancorp
Hawaii, Inc., and subsidiaries at December 31, 1996, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Honolulu, Hawaii
January 22, 1997
42
BANCORP HAWAII, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
Interest Income
Interest on Loans.......................... $ 664,175 $ 610,959 $ 538,725
Loan Fees.................................. 29,692 28,560 31,666
Income on Lease Financing.................. 27,124 12,384 13,218
Interest and Dividends on Investment
Securities
Taxable.................................. 70,401 92,295 135,040
Non-Taxable.............................. 1,193 1,371 1,710
Income on Investment Securities Available
for Sale.................................. 146,378 107,870 53,960
Interest on Deposits....................... 38,044 39,454 36,408
Interest on Security Resale Agreements..... -- 448 --
Interest on Funds Sold..................... 4,039 3,365 2,270
---------- ---------- ----------
Total Interest Income.................. 981,046 896,706 812,997
Interest Expense
Interest on Deposits....................... 288,716 239,537 189,513
Interest on Security Repurchase Agreements. 100,085 122,030 98,625
Interest on Funds Purchased................ 29,020 32,176 25,303
Interest on Short-Term Borrowings.......... 21,110 19,854 19,954
Interest on Long-Term Debt................. 60,842 54,560 30,330
---------- ---------- ----------
Total Interest Expense................. 499,773 468,157 363,725
---------- ---------- ----------
Net Interest Income.......................... 481,273 428,549 449,272
Provision for Possible Loan Losses........... 22,227 16,967 21,921
---------- ---------- ----------
Net Interest Income After Provision for
Possible Loan Losses.................. 459,046 411,582 427,351
Non-Interest Income
Trust Income............................... 49,761 49,468 48,591
Service Charges on Deposit Accounts........ 28,919 25,886 28,303
Fees, Exchange and Other Service Charges... 56,746 47,311 42,492
Other Operating Income..................... 35,244 21,234 26,769
Investment Securities Gains (Losses)....... 1,364 2,457 (17,761)
---------- ---------- ----------
Total Non-Interest Income.............. 172,034 146,356 128,394
Non-Interest Expense
Salaries................................... 159,213 142,143 137,968
Pensions and Other Employee Benefits....... 48,811 43,550 42,421
Net Occupancy Expense of Premises.......... 39,416 41,108 37,436
Net Equipment Expense...................... 34,017 31,729 30,502
Other Operating Expense.................... 138,359 104,444 111,587
Minority Interest.......................... 1,444 1,116 452
---------- ---------- ----------
Total Non-Interest Expense............. 421,260 364,090 360,366
---------- ---------- ----------
Income Before Taxes.......................... 209,820 193,848 195,379
Provision for Taxes.......................... 76,696 72,048 77,641
---------- ---------- ----------
Net Income............................. $ 133,124 $ 121,800 $ 117,738
========== ========== ==========
Earnings Per Common Share and Common Share
Equivalents................................. $ 3.23 $ 2.90 $ 2.75
========== ========== ==========
Average Common Shares and Average Common
Share Equivalents........................... 41,212,262 42,027,456 42,824,531
========== ========== ==========
See Notes to Consolidated Financial Statements.
43
BANCORP HAWAII, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
ASSETS
Interest-Bearing Deposits............... $ 635,519 $ 789,050 $ 727,016
Investment Securities
--Held to Maturity (Market Value of
$1,261,146, $1,172,228 and
$1,736,659, respectively)............ 1,258,756 1,166,115 1,785,960
--Available for Sale.................. 2,372,897 2,194,038 1,364,925
Funds Sold.............................. 141,920 116,173 54,167
Loans................................... 8,699,286 8,152,406 7,891,993
Unearned Income....................... (183,586) (147,404) (144,034)
Reserve for Possible Loan Losses...... (167,795) (151,979) (148,508)
----------- ----------- -----------
Net Loans........................... 8,347,905 7,853,023 7,599,451
----------- ----------- -----------
Total Earning Assets................ 12,756,997 12,118,399 11,531,519
Cash and Non-Interest Bearing Deposits.. 581,221 469,031 508,762
Premises and Equipment.................. 273,122 246,515 221,806
Customers' Acceptance Liability......... 21,178 16,825 17,776
Accrued Interest Receivable............. 88,074 84,669 77,340
Other Real Estate....................... 10,711 9,306 594
Intangibles, Including Goodwill......... 96,456 87,673 94,515
Trading Securities...................... 1,687 29 13,696
Other Assets............................ 179,721 174,337 120,342
----------- ----------- -----------
Total Assets........................ $14,009,167 $13,206,784 $12,586,350
=========== =========== ===========
LIABILITIES
Domestic Deposits
Demand--Non-Interest Bearing............ $ 1,435,091 $ 1,549,302 $ 1,436,794
--Interest Bearing................... 1,724,105 1,592,533 1,747,514
Savings............................... 866,453 1,004,550 1,140,402
Time.................................. 2,571,569 2,204,242 1,639,497
Foreign Deposits
Demand--Non-Interest Bearing.......... 553,274 46,056 72,149
Time Due to Banks..................... 804,818 664,269 812,218
Other Savings and Time................ 728,769 515,818 266,480
----------- ----------- -----------
Total Deposits...................... 8,684,079 7,576,770 7,115,054
Securities Sold Under Agreements to
Repurchase............................. 2,075,571 1,926,540 2,136,204
Funds Purchased......................... 599,994 787,437 609,574
Short-Term Borrowings................... 293,257 476,867 594,475
Bank's Acceptances Outstanding.......... 21,178 16,825 17,776
Accrued Pension Costs................... 17,309 21,261 23,454
Accrued Interest Payable................ 69,545 49,473 49,253
Accrued Taxes Payable................... 154,984 160,306 133,720
Minority Interest....................... 9,307 2,961 3,131
Other Liabilities....................... 85,678 70,472 75,349
Long-Term Debt.......................... 932,143 1,063,436 861,572
----------- ----------- -----------
Total Liabilities................... 12,943,045 12,152,348 11,619,562
----------- ----------- -----------
Shareholders' Equity
Common Stock ($2 par value), authorized
100,000,000 shares; issued and
outstanding, 39,959,234; 41,340,817;
and 41,851,466, respectively........... 79,918 82,682 83,703
Surplus................................. 186,391 240,080 260,040
Unrealized Valuation Adjustments........ (3,722) 13,902 (18,122)
Retained Earnings....................... 803,535 717,772 641,167
----------- ----------- -----------
Total Shareholders' Equity.......... 1,066,122 1,054,436 966,788
----------- ----------- -----------
Total Liabilities and Shareholders'
Equity............................. $14,009,167 $13,206,784 $12,586,350
=========== =========== ===========
See Notes to Consolidated Financial Statements.
44
BANCORP HAWAII, INC. AND SUBSIDIARIES
(AND PARENT COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED
COMMON VALUATION RETAINED
TOTAL STOCK SURPLUS ADJUSTMENT EARNINGS
---------- ------- -------- ---------- --------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE
AMOUNTS)
Balance at December 31,
1993...................... $ 938,104 $56,850 $284,886 $ 537 $595,831
Changes During 1994
Net Income............... 117,738 -- -- -- 117,738
Sale of Common Stock
250,286 Profit Sharing
Plan.................. 7,708 501 7,207 -- --
204,909 Stock Option
Plan.................. 2,907 410 2,497 -- --
239,211 Dividend
Reinvestment Plan..... 7,401 478 6,923 -- --
Stock Repurchased........ (44,297) (2,824) (41,473) -- --
Unrealized Valuation
Adjustments
Investment Securities.. (21,119) -- -- (21,119) --
Foreign Exchange
Translation
Adjustment............ 2,460 -- -- 2,460 --
50 Percent Stock Dividend.. (59) 28,288 -- -- (28,347)
Cash Dividends Paid of
$1.04 Per Share........... (44,055) -- -- -- (44,055)
---------- ------- -------- -------- --------
Balance at December 31,
1994...................... $ 966,788 $83,703 $260,040 $(18,122) $641,167
Changes During 1995
Net Income............... 121,800 -- -- -- 121,800
Sale of Common Stock
96,251 Profit Sharing
Plan.................. 2,637 192 2,445 -- --
443,879 Stock Option
Plan.................. 9,291 888 8,403 -- --
228,321 Dividend
Reinvestment Plan..... 7,095 457 6,638 -- --
Stock Repurchased........ (40,004) (2,558) (37,446) -- --
Unrealized Valuation
Adjustments
Investment Securities.. 28,630 -- -- 28,630 --
Foreign Exchange
Translation
Adjustment............ 3,394 -- -- 3,394 --
Cash Dividends Paid of
$1.08 Per Share........... (45,195) -- -- -- (45,195)
---------- ------- -------- -------- --------
Balance at December 31,
1995...................... $1,054,436 $82,682 $240,080 $ 13,902 $717,772
Changes During 1996
Net Income............... 133,124 -- -- -- 133,124
Sale of Common Stock
37,220 Profit Sharing
Plan.................. 1,288 74 1,214 -- --
245,437 Stock Option
Plan.................. 5,491 491 5,000 -- --
170,577 Dividend
Reinvestment Plan..... 6,756 341 6,415 -- --
11,483 Directors'
Restricted Shares and
Deferred Compensation
Plan.................. 456 23 433 -- --
Stock Repurchased........ (70,444) (3,693) (66,751) -- --
Unrealized Valuation
Adjustments
Investment Securities.. (9,114) -- -- (9,114) --
Foreign Exchange
Translation
Adjustment............ (8,510) -- -- (8,510) --
Cash Dividends Paid of
$1.16 Per Share........... (47,361) -- -- -- (47,361)
---------- ------- -------- -------- --------
Balance at December 31,
1996...................... $1,066,122 $79,918 $186,391 $ (3,722) $803,535
========== ======= ======== ======== ========
See Notes to Consolidated Financial Statements.
45
BANCORP HAWAII, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Operating Activities(1)
Net Income............................... $ 133,124 $ 121,800 $ 117,738
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Provision for Loan Losses.............. 22,227 16,967 21,921
Depreciation and Amortization.......... 38,956 33,165 30,321
Deferred Income Taxes.................. (7,857) 25,431 (16,034)
Realized (Gains) Losses on Investment
Securities Available for Sale......... (1,193) (1,707) 14,980
Net Decrease (Increase) in Trading
Securities............................ (1,658) 13,667 655
Amortization of Deferred Lease Income.. (26,326) (25,482) (26,425)
Amortization of Deferred Loan Fee
Income................................ (8,318) (12,174) (13,813)
Decrease (Increase) in Interest
Receivable............................ (286) (7,329) 4,683
Increase in Interest Payable........... 14,116 220 14,906
Decrease (Increase) in Other Assets.... (19,300) (70,707) 765
Decrease in Other Liabilities.......... (5,361) (26,284) (6,067)
--------- ----------- -----------
Net Cash Provided by Operating
Activities.......................... 138,124 67,567 143,630
--------- ----------- -----------
Investing Activities
Proceeds from Redemptions of Investment
Securities Held to Maturity............. 594,894 956,491 1,514,596
Purchases of Investment Securities Held
to Maturity............................. (665,427) (535,499) (546,966)
Proceeds from Sales of Investment
Securities Available for Sale........... 703,899 655,269 573,057
Proceeds from Redemptions of Investment
Securities Available for Sale........... 81,757 150,507 96,019
Purchases of Investment Securities
Available for Sale...................... (978,512) (1,379,626) (1,102,871)
Net Increase (Decrease) in Interest-
bearing Deposits Placed in Other Banks.. 409,619 (62,034) 110,688
Decrease (Increase) in Funds Sold........ (25,747) (62,006) 3,532
Increase in Loans, Net................... 95,118 (229,536) (569,901)
Purchases of Premises and Equipment...... (38,665) (49,893) (72,798)
Proceeds from Sale of Premises and
Equipment............................... -- 2,061 1,178
Purchase of Additional Interest in
Credipac Polynesie and Creditpac
Nouvelle Caledonie, Net of Cash and
Non-Interest Bearing Deposits Acquired.. (4,114) -- --
Purchase of Banque de Tahiti and Banque
de Nouvelle Caledonie, Net of Cash and
Non-Interest Bearing Deposits Acquired.. 18,090 -- --
Purchase of Banque d'Hawaii (Vanuatu),
Ltd., Net of Cash and Non-Interest
Bearing Deposits Acquired............... -- 6,808 39,963
Purchase of National Bank of Solomon
Islands, Net of Cash and Non-Interest
Bearing Deposits Acquired............... -- -- (315)
--------- ----------- -----------
Net Cash Provided (Used) by Investing
Activities.......................... 190,912 (547,458) 46,182
--------- ----------- -----------
Financing Activities
Net Increase (Decrease) in Demand,
Savings, and Time Deposits.............. 248,793 450,487 1,346
Proceeds from Lines of Credit and Long-
Term Debt............................... 512,787 854,779 510,049
Principal Payments on Lines of Credit
and Long-Term Debt...................... (644,080) (652,915) (26,647)
Net Increase (Decrease) in Short-Term
Borrowings.............................. (222,022) (149,409) (493,178)
Proceeds from Sale of Common Stock....... 13,991 19,023 18,016
Stock Repurchased........................ (70,444) (40,004) (44,297)
Cash Dividends........................... (47,361) (45,195) (44,114)
--------- ----------- -----------
Net Cash Provided (Used) by Financing
Activities.......................... (208,336) 436,766 (78,825)
--------- ----------- -----------
Effect of Exchange Rate Changes on Cash.. (8,510) 3,394 2,460
--------- ----------- -----------
Increase (Decrease) in Cash and Non-
Interest Bearing Deposits........... 112,190 (39,731) 113,447
--------- ----------- -----------
Cash and Non-Interest Bearing Deposits
at Beginning of Year.................... 469,031 508,762 395,315
--------- ----------- -----------
Cash and Non-Interest Bearing
Deposits at End of Year............. $ 581,221 $ 469,031 $ 508,762
========= =========== ===========
- --------
(1) During the years ended December 31, 1996, 1995, and 1994, Bancorp made
interest payments of $479,701,000, $467,937,000, and $348,819,000,
respectively, and made income tax payments of $75,055,000, $64,803,000,
and $86,194,000, respectively.
See Notes to Consolidated Financial Statements.
46
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting principles followed by Bancorp Hawaii, Inc. and its
subsidiaries (Bancorp), and the methods of applying those principles conform
with generally accepted accounting principles and with general practice within
the banking industry. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the statements
and accompanying notes. Actual results sometimes differ from those estimates.
Certain accounts have been reclassified to conform with the 1996 presentation.
The significant policies are summarized below.
Organization/Consolidation
Bancorp Hawaii, Inc. is a bank holding company providing varied financial
services to customers in Hawaii, other areas of the Pacific Basin and other
selected markets. It is the largest of the bank holding companies
headquartered in the State of Hawaii. The majority of Bancorp's operations
consist of customary commercial and consumer banking services including, but
not limited to, lending, leasing, deposit services, trust and investment
activities and trade financing. The principal subsidiaries of Bancorp are Bank
of Hawaii and Bancorp Pacific, Inc. The consolidated financial statements
include the accounts of Bancorp and its principal subsidiaries including any
majority-owned entities. Significant intercompany accounts have been
eliminated and minority interests recognized in consolidation.
Accounting Changes
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan." The statement addresses the accounting by
creditors for impairment of certain loans and requires that 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 SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures," that amended SFAS No. 114 by eliminating
provisions for reporting income on impaired loans by creditors and clarifying
disclosure requirements. Bancorp elected to implement the provisions of SFAS
No. 114, as amended, effective January 1, 1995.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of SFAS No. 65." The statement requires
mortgage companies and banks to recognize as separate assets the mortgage
servicing rights on loans that are expected to be sold with servicing
retained, regardless of whether the rights are purchased or originated. As
permitted under the statement, Bancorp elected to adopt the provision of the
new standard effective January 1, 1996. The impact of adopting the new
standard on Bancorp's financial position and results of operations has been
included in the financial statements for 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The statement provides an alternative to the current rules
under Accounting Principles Board Opinion (APB) No. 25 in accounting for
stock-based compensation plans. Bancorp's disclosures for its stock-based
compensation plans have been included in footnote L for stock-based
compensation accounts under APB No. 25 and SFAS No. 123.
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 primarily deals with transfers of financial assets where the transferor
has retained some continuing involvement with the asset transferred. Examples
of continuing involvement include repurchase agreements, recourse
arrangements, and servicing obligations which may be accounted for as a sale
if the transferor has surrendered control over the asset.
47
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SFAS No. 125 also requires the recognition of a servicing asset or a
servicing liability whenever an entity agrees to service financial assets and
eliminates the previous treatment of an in-substance defeasance by specifying
that a debtor shall extinguish a liability if and only if it has been
extinguished. SFAS No. 125 is effective for transfers, servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996,
and shall be only applied prospectively. However, the effective date of
certain parts of this statement has been delayed for one year. The impact of
adopting the new statement on Bancorp's financial position or results of
operations is not expected to be material.
Acquisitions
In May 1996, Bancorp finalized its purchase of majority ownership of Banque
de Tahiti (BDT), Banque de Nouvelle Caledonie (BNC), and two smaller finance
companies. Prior to the acquisition, Bancorp owned 38% and 21% of BDT and BNC,
respectively, which were accounted for under the equity method. These
companies have been included in Bancorp's consolidated financial statements
since the acquisition. The acquisition was accounted for using the purchase
method. The cost of the acquisition was $60.5 million with $12.2 million
recognized as goodwill. The goodwill is being amortized over 15 years on a
straight line basis. Total assets of BDT and BNC were $981.4 million at year-
end 1996.
In March 1995, Bancorp acquired the remaining 20% of the shares of Banque
d'Hawaii (Vanuatu), Limited. This residual acquisition, like the original 80%
purchase of Banque Indosuez Vanuatu, Limited, in 1993, was accounted for using
the purchase method. The goodwill recorded in this transaction was $1.1
million and is being amortized over 15 years. The combined purchase price
totaled $13.8 million. Banque d'Hawaii (Vanuatu), Limited financial results
are included in the consolidated financial statements. Total assets were $89.5
million and $74.2 million at year-end 1996 and 1995, respectively.
In December 1994, Bancorp acquired a 51% interest in the National Bank of
Solomon Islands (NBSI) for $4.8 million. The acquisition has been accounted
for using the purchase method. NBSI financial results have been included in
the consolidated totals since 1994. Total assets of NBSI were $67.5 million,
$56.5 million and $50.3 million at year-ends 1996, 1995 and 1994,
respectively. Goodwill recorded in this transaction was $2.4 million and is
being amortized over 15 years.
In conjunction with these acquisitions, liabilities were assumed as follows:
1996 1995 1994
-------- ------- --------
(IN THOUSANDS OF DOLLARS)
Assets Acquired............................... $552,657 $14,127 $132,855
Cash Paid for Capital Stock................... (60,583) (1,786) (16,913)
-------- ------- --------
Liabilities Assumed........................... $492,074 $12,341 $115,942
======== ======= ========
Advertising Costs
The nature of Bancorp's marketing programs generally do not include direct-
response advertising. Bancorp, therefore, recognizes its advertising costs as
incurred.
Credit Card Costs
Bancorp issues its own VISA and Mastercard credit cards for which all costs
are recognized as period costs. In 1996, Bancorp entered into certain
arrangements with third parties to originate VISA cards in specific target
markets. As of year-end, the unamortized capitalized origination costs totaled
$3,740,000. These costs are being amortized over the anticipated life of the
cards, currently five years. As cards are canceled, the unamortized costs are
expensed.
48
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Non-Interest Bearing Deposits
Cash and non-interest bearing deposits include the amounts due from other
financial institutions as well as in-transit clearings. Under the terms of the
Depository Institutions Deregulation and Monetary Control Act, Bancorp is
required to place reserves with the Federal Reserve Bank based on the amount
of deposits held. For 1996, 1995 and 1994, the average amount of these reserve
balances was $131,061,000; $149,104,000 and $157,486,000, respectively.
Earnings Per Share
The earnings per common share of Bancorp are based on the average common
shares outstanding and the average common share equivalents. The earnings per
common share of Bancorp are based on average shares of 41,212,262, 42,027,456
and 42,824,531 in 1996, 1995 and 1994, respectively.
Income Taxes
Bancorp files a consolidated federal income tax return with the Bank of
Hawaii, Bancorp Pacific, Inc., and its other domestic subsidiaries. Deferred
income taxes are provided to reflect the tax effect of temporary differences
between financial statement carrying amounts and the corresponding tax bases
of assets and liabilities.
Bancorp's tax sharing policy provides for the settlement of income taxes
between each subsidiary as if each subsidiary had filed a separate return.
Payments are made to Bancorp by each subsidiary with tax liabilities, and
subsidiaries which generate tax benefits receive payments for the benefits as
used. Deferred taxes are recorded on the books of the subsidiary which
generated the temporary differences.
For lease arrangements, which are accounted for by the financing method,
investment tax credits are deferred and amortized over the lives of the
respective leases.
Intangible Assets and Amortization
The excess of the cost over the fair market value of tangible assets and
liabilities purchased in various transactions by Bancorp is being amortized
using the straight-line method over various periods not exceeding 15 years.
Intangibles are reviewed periodically for other than temporary impairment. The
amortization expense of these intangibles was $9,344,000; $8,405,000 and
$9,315,000 for 1996, 1995 and 1994, respectively. As of December 31, 1996, the
accumulated amortization totaled $42,240,000.
Interest Rate/Foreign Currency Risk Management
Bancorp has entered into various off-balance sheet transactions, primarily
interest rate swap agreements, for interest rate risk exposure management
purposes. A primary objective of Bancorp in managing interest-rate exposure is
to maintain a targeted mix of assets and liabilities that mature or reprice
over a one year time horizon. However, the extent of rate sensitivity can vary
within the intervening time periods. Interest rate swaps are primarily used to
modify the interest rate sensitivity of short term assets or long term
liabilities (both deposits and debt).
As a result of having various foreign operations, Bancorp is exposed to the
effect of foreign exchange rate fluctuations on the value of the U.S. dollar.
Bancorp has purchased foreign currency forward contracts to minimize the
effect of fluctuating foreign currencies on its reported income. The forward
contracts qualify as hedges for financial reporting purposes as they are tied
to specific foreign assets and liabilities. Although the volatility of income
over the entire twelve-month period is reduced, increased volatility may be
reported during interim periods.
49
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Banking Group, as well as branches and subsidiaries
domiciled outside the United States. The operations of Bank of Hawaii and
Bancorp Pacific, Inc. located in the Southern and Western Pacific which are
denominated in U.S. dollars are classified as domestic.
Investment Securities
Bancorp adopted the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," affecting the Statement of
Condition as of December 31, 1993. Pursuant to the transition provisions of
the FASB's Special Report on Statement 115, in December 1995, Bancorp
transferred $235,099,000 of investment securities classified as held to
maturity to the available for sale category. The unrealized gains and losses
relating to these securities were $2,082,000 and $2,491,000, respectively. The
primary reason for selecting these securities for reclassification was to
further enhance Bancorp's flexibility in managing its investment portfolio.
Investment Securities Held to Maturity are securities intended to be held
for the full term of the security. These securities are stated at cost
adjusted for amortization of premium and accretion of discount. Restricted
equity securities represent Federal Home Loan Bank and Federal Reserve Bank
shares, recorded at par, which is fair value. In 1996, there were no transfers
from Investment Securities Held to Maturity.
Investment Securities Available for Sale are recorded at market value with
unrealized gains and losses recorded as an unrealized valuation adjustment in
equity, net of taxes. The market value of mortgage-backed securities is based
on quoted market prices.
Trading Securities are securities purchased and held principally for the
purpose of selling them in the near term. The trading securities portfolio was
comprised of debt securities and mutual fund investments which have been
recorded at market value. Changes in market value are recognized as a
securities gain or loss through the income statement. During 1996, 1995 and
1994, the net gain (loss) from the trading securities portfolio was $823,000,
$623,000 and $(740,000), respectively, and is recognized as a component of
investment securities gains/losses in the income statement. Income from
trading securities was $16,000, $323,000 and $604,000 for 1996, 1995 and 1994,
respectively, and is included as part of other operating income.
The method followed in determining the cost of all investments sold was
based on the specific identification method for each of the three years ending
December 31, 1996, 1995 and 1994.
Loans
Loans are carried at the principal amount outstanding. Interest income is
generally recognized on the accrual basis. Net loan fees are deferred and
amortized as an adjustment to yield.
Bancorp's policy is to place loans on non-accrual as soon as a loan is
delinquent over 90 days, unless unusual treatment is indicated by the type of
borrowing agreement and/or collateral. At the time a loan is placed on non-
accrual, all accrued but unpaid interest is reversed against current earnings.
Subsequent payments received are generally applied to reduce the principal
balance.
50
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Real Estate
Other real estate is comprised of properties acquired through foreclosure
proceedings, acceptance of a deed-in-lieu of foreclosure, abandoned bank
premises and loans for which possession of the collateral has been taken.
These properties are carried at the lower of cost or fair market value based
on current appraisals less selling costs. Losses arising at the time of
acquisition of such property acquired are charged against the reserve for
possible loan losses. Subsequent re-evaluation of the properties, which
indicate reduced value and carrying costs, are recognized through charges to
operating expenses.
Premises and Equipment
Premises and equipment includes the cost of land, buildings, machinery and
equipment, and significant improvements thereto. They are stated on the basis
of cost less allowances for depreciation and amortization.
The annual provisions for depreciation on premises and improvements, and
equipment, have been computed using lives of two to fifty years and three to
ten years, respectively, under the straight-line method.
Reserve for Possible Loan Losses
The reserve for possible loan losses is established through provisions for
possible loan losses charged against income. Loans deemed to be uncollectible
are charged against the reserve for possible loan losses, and subsequent
recoveries, if any, are credited to the reserve.
Beginning in 1995, Bancorp adopted SFAS No. 114. Under the new standard, the
reserve for loan losses related to loans that are identified for evaluation in
accordance with SFAS No. 114 is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans. Prior to 1995, the reserve for possible
loan losses related to these loans was based on undiscounted cash flows, the
fair value of the collateral for collateral dependent loans or other factors
specific to the credit situation.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on Bancorp's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows
expected to be received on loans that may be susceptible to significant
change.
51
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--INVESTMENT SECURITIES
The following presents the details of the investment portfolio:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AGGREGATE
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
AT DECEMBER 31, 1996
Securities Held to Maturity:
Restricted Equity Securities..... $ 57,220 $ -- $ -- $ 57,220
Debt Securities Issued by the
U.S. Treasury and Agencies...... 348,116 570 (1,453) 347,233
Debt Securities Issued by State
and Municipalities of the United
States.......................... 12,632 1,474 -- 14,106
Debt Securities Issued by Foreign
Governments..................... 74,685 1,922 (7) 76,600
Mortgage-Backed Securities....... 766,103 5,035 (5,151) 765,987
Other Debt Securities............ -- -- -- --
---------- ------- -------- ----------
Totals......................... $1,258,756 $ 9,001 $ (6,611) $1,261,146
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................ $ 12,509 $ 893 $ (100) $ 13,302
Debt Securities Issued by the
U.S. Treasury and Agencies...... 984,534 5,509 (4,309) 985,734
Debt Securities Issued by State
and Municipalities of the United
States.......................... 6,401 177 (3) 6,575
Corporate Debt Securities........ 67,204 18 (12) 67,210
Mortgage-Backed Securities....... 1,267,238 8,894 (7,284) 1,268,848
Other Debt Securities............ 31,228 -- -- 31,228
---------- ------- -------- ----------
Totals......................... $2,369,114 $15,491 $(11,708) $2,372,897
========== ======= ======== ==========
AT DECEMBER 31, 1995
Securities Held to Maturity:
Restricted Equity Securities..... $ 52,926 $ -- $ -- $ 52,926
Debt Securities Issued by the
U.S. Treasury and Agencies...... 507,298 1,108 (833) 507,573
Debt Securities Issued by State
and Municipalities of the United
States.......................... 33,812 1,808 -- 35,620
Debt Securities Issued by Foreign
Governments..................... 29,091 325 -- 29,416
Mortgage-Backed Securities....... 540,461 5,122 (1,394) 544,189
Other Debt Securities............ 2,527 1 (24) 2,504
---------- ------- -------- ----------
Totals......................... $1,166,115 $ 8,364 $ (2,251) $1,172,228
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................ $ 33,494 $ 1,827 $ -- $ 35,321
Debt Securities Issued by the
U.S. Treasury and Agencies...... 670,980 9,186 (120) 680,046
Debt Securities Issued by State
and Municipalities of the United
States.......................... 6,200 208 -- 6,408
Debt Securities Issued by Foreign
Governments..................... 26,201 -- -- 26,201
Corporate Debt Securities........ 2,891 21 (16) 2,896
Mortgage-Backed Securities....... 1,434,038 12,502 (4,717) 1,441,823
Other Debt Securities............ 1,317 26 -- 1,343
---------- ------- -------- ----------
Totals......................... $2,175,121 $23,770 $ (4,853) $2,194,038
========== ======= ======== ==========
52
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AGGREGATE
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
AT DECEMBER 31, 1994
Securities Held to Maturity:
Restricted Equity Securities..... $ 49,200 $ -- $ -- $ 49,200
Debt Securities Issued by the
U.S. Treasury and Agencies...... 1,019,903 316 (21,124) 999,095
Debt Securities Issued by State
and Municipalities of the United
States.......................... 37,578 1,367 (805) 38,140
Debt Securities Issued by Foreign
Governments..................... 35,672 533 -- 36,205
Mortgage-Backed Securities....... 623,565 1,718 (31,219) 594,064
Other Debt Securities............ 20,042 12 (99) 19,955
---------- ------ -------- ----------
Totals......................... $1,785,960 $3,946 $(53,247) $1,736,659
========== ====== ======== ==========
Securities Available for Sale:
Equity Securities................ $ 1,113 $ 390 $ -- $ 1,503
Debt Securities Issued by the
U.S. Treasury and Agencies...... 615,001 201 (9,359) 605,843
Debt Securities Issued by State
and Municipalities of the United
States.......................... 3,560 8 (151) 3,417
Corporate Debt Securities........ 3,878 2 (141) 3,739
Mortgage-Backed Securities....... 716,581 50 (20,903) 695,728
Other Debt Securities............ 53,637 1,552 (494) 54,695
---------- ------ -------- ----------
Totals......................... $1,393,770 $2,203 $(31,048) $1,364,925
========== ====== ======== ==========
The following presents an analysis of the contractual maturities of the
investment securities portfolio as of December 31, 1996:
AGGREGATE
COST FAIR VALUE
---------- ----------
(IN THOUSANDS OF
DOLLARS)
Securities Held to Maturity
Due in One Year or Less................................ $ 87,847 $ 89,824
Due After One Year Through Five Years.................. 343,606 343,348
Due After Five Years Through Ten Years................. 3,760 4,539
Due After Ten Years.................................... 220 228
---------- ----------
435,433 437,939
Mortgage-Backed Securities............................... 766,103 765,987
Restricted Equity Securities............................. 57,220 57,220
---------- ----------
$1,258,756 $1,261,146
========== ==========
Securities Available for Sale
Due in One Year or Less................................ $ 135,147 $ 136,960
Due After One Year Through Five Years.................. 780,562 778,789
Due After Five Years Through Ten Years................. 46,894 46,974
Due After Ten Years.................................... 126,764 128,024
---------- ----------
1,089,367 1,090,747
Mortgage-Backed Securities............................... 1,267,238 1,268,848
Equity Securities........................................ 12,509 13,302
---------- ----------
$2,369,114 $2,372,897
========== ==========
53
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proceeds from sales and maturities of investment securities available for
sale during 1996 were $785,005,000. Gross gains of $1,507,000 and gross losses
of $314,000 were realized on those sales. Taxes related to these gains and
losses were $418,000 for 1996. The cumulative investment valuation reserve was
$2,252,000 (net of taxes) as of December 31, 1996.
Investment securities carried at $3,255,203,000, $3,170,854,000 and
$3,056,198,000 were pledged to secure deposits of certain public
(governmental) entities, repurchase agreements and swap agreements at December
31, 1996, 1995 and 1994, respectively. The December 31, 1996 amount included
investment securities with a carrying value of $2,304,618,000 and a market
value of $2,306,480,000 which were pledged solely for repurchase agreements.
NOTE C--LOANS
Loans consisted of the following at year-end:
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Domestic Loans
Commercial and Industrial.............. $1,806,699 $1,902,189 $1,830,803
Real Estate
Construction--Commercial............. 212,324 199,552 114,140
Residential............ 23,599 33,722 39,683
Mortgage--Commercial................. 1,227,845 1,308,779 1,240,959
Residential................ 2,635,313 2,702,438 2,849,972
Installment............................ 849,259 817,337 741,612
---------- ---------- ----------
Total Domestic Loans............... 6,755,039 6,964,017 6,817,169
---------- ---------- ----------
Foreign Loans............................ 1,506,447 795,477 696,734
---------- ---------- ----------
Subtotal........................... 8,261,486 7,759,494 7,513,903
---------- ---------- ----------
Lease Financing
Direct................................. 181,666 124,753 103,462
Leveraged.............................. 256,134 268,159 274,628
---------- ---------- ----------
Lease Financing.................... 437,800 392,912 378,090
---------- ---------- ----------
Total Loans........................ $8,699,286 $8,152,406 $7,891,993
========== ========== ==========
Commercial and mortgage loans totaling $1,000,531,000 were pledged to secure
certain public deposits and Federal Home Loan Bank advances at December 31,
1996.
As of December 31, 1996, $49,567,000 of loans included in the Mortgage--
Residential category above are maintained in an available for sale portfolio.
The portfolio was recorded at the lower of cost or market on an aggregate
basis.
During 1996, Bancorp capitalized $4,100,000 in mortgage servicing rights;
approximately $1,200,000 for loans purchased and $2,900,000 for loans
originated. As of December 31, 1996, Bancorp's capitalized mortgage servicing
rights totaled $5,200,000. The fair value of the servicing rights was
established through review of costs and servicing right values being assessed
in the market place. The capitalized servicing rights are being amortized over
the expected life of the portfolio. For the purpose of measuring impairment,
mortgage servicing rights are stratified based on the predominant risk
characteristics of the underlying loans. The impairment analysis is performed
on a periodic basis and includes a review of prepayment trends, delinquency,
and market analysis. In
54
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996, $524,000 in amortized mortgage servicing rights was recognized as
expense. As of December 31, 1996, Bancorp's servicing portfolio totaled
$1,543,985,000.
Certain directors and executive officers of Bancorp, its subsidiary
companies, companies in which they are principal owners, and trusts in which
they are involved, were loan customers of Bancorp subsidiaries during 1996,
1995 and 1994. These loans were made in the ordinary course of business at
normal credit terms, including interest rate and collateral requirements, and
do not represent more than a normal risk of collection. Such loans at
December 31, 1996, 1995 and 1994 amounted to $27,593,000, $37,335,000 and
$79,244,000, respectively. During 1996, the activity in these loans included
new borrowings of $32,269,000, repayments of $40,863,000, and other changes of
$1,148,000. Other changes relate to new and retiring directors or companies
and trusts in which they are involved.
Transactions in the reserve for possible loan losses were as follows:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Balance at Beginning of Year................. $151,979 $148,508 $125,284
Provision Charged to Operations.............. 22,227 16,967 21,921
Reserves Acquired............................ 6,881 -- 1,437
Charge-Offs.................................. (44,084) (27,857) (25,437)
Recoveries................................... 30,792 14,361 25,303
-------- -------- --------
Net Charge-Offs............................ (13,292) (13,496) (134)
-------- -------- --------
Balance at End of Year..................... $167,795 $151,979 $148,508
======== ======== ========
The table presents information on loans considered impaired and the interest
related to those loans. Interest income on impaired loans may be recognized on
a cash basis.
DECEMBER 31
---------------
1996 1995
------- -------
(IN THOUSANDS
OF DOLLARS)
Recorded Investment in Impaired Loans Not Requiring an
Allowance for Credit Losses as Determined in Accordance
with SFAS No. 114........................................ $20,918 $36,388
Recorded Investment in Impaired Loans Requiring an
Allowance for Certain Losses as Determined in Accordance
with SFAS No. 114........................................ 5,239 7,500
------- -------
Recorded Investment in Impaired Loans..................... $26,157 $43,888
======= =======
Reserve for Losses on Impaired Loans...................... $ 2,763 $ 700
Average Recorded Investment in Impaired Loans............. $47,085 $21,902
Cash Basis Income Recognized on Impaired Loans............ $ -- $ --
======= =======
NOTE D--PREMISES AND EQUIPMENT
Bancorp and its subsidiaries own and lease premises primarily consisting of
operating facilities, the majority of which are located in Hawaii. Bank of
Hawaii owns four significant properties, the largest of which are condominium
units in the Financial Plaza of the Pacific (FPP) in which the Bank's main
branch and administrative offices are located. Portions of the FPP are owned
in fee simple or leased. The capital leases are
55
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for portions (less than 12%) of the FPP. Details of the capital leases are
included in the long term debt footnote. Additionally, Bank of Hawaii owns a
two-story building near downtown Honolulu which houses data processing and
certain other operational functions; a five-story building in downtown
Honolulu which houses administrative departments; and Bancorp Hale O Kapolei,
a 248,000 square foot operations facility in the Kapolei area on Oahu. Hale O
Kapolei was completed and placed in service in 1995. Interest expense of
$1,500,000 was capitalized while Hale O Kapolei was under construction in
1995. Bancorp Pacific, Inc. owns a fifth property, its five-story
administrative offices in downtown Honolulu.
The following is a summary of data for major categories of premises and
equipment:
ACCUMULATED NET
DEPRECIATION AND BOOK
COST AMORTIZATION VALUE
-------- ---------------- --------
(IN THOUSANDS OF DOLLARS)
December 31, 1996
Premises.............................. $294,664 $ (96,090) $198,574
Capital Leases........................ 4,464 (714) 3,750
Equipment............................. 177,800 (107,002) 70,798
-------- --------- --------
$476,928 $(203,806) $273,122
======== ========= ========
December 31, 1995
Premises.............................. $267,724 $ (76,543) $191,181
Capital Leases........................ 4,464 (536) 3,928
Equipment............................. 136,965 (85,559) 51,406
-------- --------- --------
$409,153 $(162,638) $246,515
======== ========= ========
December 31, 1994
Premises.............................. $236,619 $ (67,792) $168,827
Capital Leases........................ 4,464 (357) 4,107
Equipment............................. 122,678 (73,806) 48,872
-------- --------- --------
$363,761 $(141,955) $221,806
======== ========= ========
The amounts of depreciation and amortization (including capital lease
amortization) included in consolidated expense were $29,612,000, $24,760,000
and $21,006,000 in 1996, 1995 and 1994, respectively.
Bancorp's operating leases are for certain branch premises and data
processing equipment. The majority of the premise leases provide for a base
rent for a stipulated period with various renewal options. Portions of certain
properties are subleased to others for periods expiring in various years
through 2000. Lease terms generally provide for the lessee to pay operating
costs such as taxes and maintenance.
56
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum payments, by year and in the aggregate, for noncancelable
operating leases with initial or remaining terms of one year or more and
capital leases consisted of the following at December 31, 1996:
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS OF DOLLARS)
1997..................................................... $ 7 $ 12,601
1998..................................................... 7 11,488
1999..................................................... 7 9,926
2000..................................................... 7 9,087
2001..................................................... 7 8,232
Thereafter............................................... 34,931 101,463
------- --------
Total Minimum Lease Payments............................. $34,966 $152,797
Amounts Representing Interest............................ 29,087 --
------- --------
Present Value of Net Minimum Lease Payments.............. $ 5,879 $ --
======= ========
Minimum future rentals receivable under subleases for noncancelable
operating leases at December 31, 1996, amounted to $1,700,000.
Rental expense for all operating leases consisted of:
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF DOLLARS)
Minimum Rentals................................. $20,164 $21,573 $21,219
Sublease Rental Income.......................... (657) (606) (634)
------- ------- -------
$19,507 $20,967 $20,585
======= ======= =======
57
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE E--DEPOSITS
Interest on deposit liabilities in 1996, 1995 and 1994 consisted of the
following:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Domestic Interest-Bearing Demand Accounts...... $ 47,167 $ 50,913 $ 42,321
Domestic Savings Accounts...................... 23,713 30,558 27,910
Domestic Time Accounts......................... 133,493 98,528 65,908
Foreign Deposits............................... 84,343 59,538 53,374
-------- -------- --------
$288,716 $239,537 $189,513
======== ======== ========
Time deposits with balances of $100,000 or more were $2,309,689,000 in 1996.
Of this amount, $243,929,000 represents deposits of public (governmental)
entities which require collaterization by acceptable securities. The majority
of deposits in the foreign category are time deposits in denominations of
$100,000 or more.
Maturities of time deposits of $100,000 or more at December 31, 1996, are
summarized as follows:
DOMESTIC FOREIGN
-------- ----------
(IN THOUSANDS OF DOLLARS)
Under 3 Months................................. $386,412 $1,033,391
3 to 6 Months.................................. 283,829 106,095
7 to 12 Months................................. 212,332 98,168
Greater than 1 to 2 Years...................... 82,753 20,092
Greater than 2 to 3 Years...................... 14,275 530
Greater than 3 to 4 Years...................... 12,811 --
Greater than 4 to 5 Years...................... 3,667 2,332
Greater than 5 Years........................... 3,326 49,676
-------- ----------
$999,405 $1,310,284
58
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--SHORT-TERM BORROWINGS
Details of short-term borrowings for 1996, 1995 and 1994 were as follows:
SECURITIES
SOLD UNDER OTHER
FUNDS AGREEMENTS COMMERCIAL SHORT-TERM
PURCHASED TO REPURCHASE PAPER BORROWINGS
--------- ------------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
1996
Amounts Outstanding December
31......................... $599,994 $2,075,571 $ 69,727 $223,530
Average Amount Outstanding
During Year................ 533,647 1,857,286 83,181 335,509
Maximum Amount Outstanding
at Any Month's End......... 643,988 2,075,571 114,446 477,697
Weighted Average Interest
Rate During Year*.......... 5.44% 5.39% 5.03% 5.04%
Weighted Average Interest
Rate on Balance Outstanding
at End of Year............. 5.77% 5.38% 4.95% 4.91%
1995
Amounts Outstanding December
31......................... $787,437 $1,926,540 $ 73,509 $403,358
Average Amount Outstanding
during Year................ 532,787 2,120,220 69,002 433,046
Maximum Amount Outstanding
at Any Month's End......... 787,437 2,263,425 85,600 601,990
Weighted Average Interest
Rate During Year*.......... 6.04% 5.76% 5.08% 3.78%
Weighted Average Interest
Rate on Balance Outstanding
at End of Year............. 5.57% 5.57% 5.18% 4.99%
1994
Amounts Outstanding December
31......................... $609,574 $2,136,204 $ 69,113 $525,362
Average Amount Outstanding
during Year................ 593,019 2,404,401 107,537 495,673
Maximum Amount Outstanding
at Any Month's End......... 655,026 2,730,270 176,072 557,293
Weighted Average Interest
Rate During Year*.......... 4.27% 4.10% 3.44% 3.28%
Weighted Average Interest
Rate on Balance Outstanding
at End of Year............. 5.79% 5.26% 4.24% 3.92%
- --------
* Average rates for the year are computed by dividing actual interest
expense on borrowings by average daily borrowings.
Funds purchased generally mature on the day following the date of purchase.
Commercial paper is issued by the parent corporation in various denominations
generally maturing 90 days or less from date of issuance.
59
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Securities sold under agreements to repurchase are treated as financings and
the obligations to repurchase the identical securities sold are reflected as a
liability with the dollar amount of securities underlying the agreements
remaining in the asset accounts. The securities are held in collateral
accounts with third party trustees and not under the control of Bancorp. At
December 31, 1996, the weighted average contractual maturity of these
agreements was 114 days and represent investments by public (governmental)
entities, primarily the State of Hawaii ($1.4 billion) and a local
municipality ($0.7 billion). A schedule of maturities of these agreements is
as follows:
DECEMBER 31, 1996
-----------------
(IN THOUSANDS
OF DOLLARS)
Overnight........................................... $ --
Less than 30 days................................... 378,149
30 to 90 days....................................... 757,863
Over 90 days........................................ 939,559
----------
$2,075,571
==========
A line of credit totaling $50,000,000 is used to back up commercial paper
issued in the name of Bancorp. At December 31, 1996 there was no balance
outstanding. Fees on the unused amount of this line were $47,500 in 1996.
Other short-term borrowings consist mainly of Foreign Call Deposits,
Treasury Tax and Loan balances, Bank Notes, and Federal Home Loan Bank
Advances. The Foreign Call Deposits generally mature in 90 days and bear
interest rates reflecting such maturities. The Treasury Tax and Loan balances
represent tax payments collected on behalf of the U.S. government and are
callable at any time, and bear market interest rates. The Bank note, which
totaled $150.0 million at December 31, 1996, bears a fixed interest rate of
5.63% and matures in November 1997. The Federal Home Loan Bank advances, which
were outstanding at December 31, 1995, were secured by certain mortgage loans
and FHLB stock and bore interest rates between 5.60% and 5.98%. These advances
matured in 1996.
NOTE G--LONG-TERM DEBT
Amounts outstanding as of year-end were as follows:
1996 1995 1994
-------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Medium Term Notes............................ $259,956 $ 709,747 $604,441
Federal Home Loan Bank Advances.............. 398,045 229,545 133,400
Subordinated Notes........................... 118,707 118,657 118,609
8.25% Capital Securities..................... 100,000 -- --
Foreign Debt................................. 49,556 -- --
Capitalized Lease Obligations................ 5,879 5,487 5,122
-------- ---------- --------
$932,143 $1,063,436 $861,572
======== ========== ========
In December 1996, Bancorp completed a $100 million offering of 8.25% Capital
Securities (the "Securities"). The offering was issued by Bancorp Hawaii
Capital Trust I, a grantor trust wholly-owned by Bancorp. The Securities issue
bears a cumulative fixed interest rate of 8.25% and matures on December 15,
2026. Interest payments are semi-annual with the first payment due June 15,
1997. In addition, Bancorp has entered into an expense agreement with the
trust obligating Bancorp to pay any costs, expenses or liabilities of the
trust, other than obligations of the trust to pay amounts due pursuant to the
terms of the Securities. The sole assets of
60
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the trust are Junior Subordinated Debt Securities (the "Debt") issued by
Bancorp to the trust. The Debt is redeemable prior to the stated maturity at
Bancorp's option. The Securities are subject to mandatory redemption upon
repayment of the related Debt at their stated maturity dates or their earlier
redemption at a redemption price equal to their liquidation amount plus
accrued distributions to the date fixed for redemption and the premium, if
any, paid by Bancorp upon concurrent repayment of the related Debt. Bancorp
has issued guarantees for the payment of distributions and payments on
liquidation or redemption of the Securities, but only to the extent of funds
held by the trust. The guarantees are junior subordinated obligations of
Bancorp. Distributions to Securities holders may be deferred for up to five
consecutive years. During any such deferred period Bancorp's ability to pay
dividends on its common shares will be restricted. The Federal Reserve has
announced that certain cumulative preferred securities, having the
characteristics of the Securities, qualify as minority interest, which is
included in Tier 1 capital for bank holding companies. There is an agreement
with the initial Securities holders to file an Exchange Offer Registration
Statement. The distribution rate on the Securities may be increased if the
terms of the registration agreement are not achieved.
In 1996, Bank of Hawaii borrowed the equivalent of $50.0 million USD in
French Francs through a private placement. The debt has a fixed interest rate
of 5.16% and matures in 1999.
In 1995, Bank of Hawaii incorporated its existing medium term note program
into a $1.0 billion revolving note program. Under the terms of this program,
upon repayment of outstanding notes, the Bank may issue additional notes
provided that the aggregate amount outstanding does not exceed $1.0 billion.
At December 31, 1996, there was a total of $349,964,000 outstanding under this
program, of which $199,957,000 was classified as long-term. The notes, which
were issued in 1995, are unsecured, carry thirteen month terms, and have a
fixed interest rate of 5.5%.
Privately placed medium term notes issued by Bancorp totaled $60.0 million
at December 31, 1996. The notes, which were issued in 1995, carry three year
terms and bear interest at rates from 6.08% to 6.48%.
The Federal Home Loan Bank (FHLB) advances bear interest at rates from 4.86%
to 8.00%. The advances mature from 1997 through 2002. At December 31, 1996,
loans totaling $477,654,000 were pledged to secure these advances along with
FHLB stock.
The subordinated notes, which were issued in 1993, bear fixed interest rates
of 6.875%. The notes, which were issued by Bank of Hawaii, mature in 2003.
The capitalized lease obligations are for certain condominium units in the
Financial Plaza of the Pacific. The lease began in 1993 and has a 60 year
term. 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, 1996,
are $299,000,000 in 1997; $188,000,000 in 1998; $135,056,000 in 1999;
$38,875,000 in 2000 and $46,000,000 in 2001.
Interest paid on long-term debt in 1996 totaled $51,272,000.
NOTE H--SHAREHOLDERS' EQUITY
Certain of Bancorp's consolidated subsidiaries (including Bank of Hawaii,
Bancorp Pacific, Inc., and First National Bank of Arizona) are subject to
regulatory restrictions that limit cash dividends and loans to Bancorp. As of
December 31, 1996, approximately $370,790,000 of undistributed earnings of
Bancorp's consolidated subsidiaries were available for distribution to Bancorp
without prior regulatory approval.
61
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a breakdown of the unrealized valuation adjustment
component of shareholders' equity as of December 31:
1996 1995 1994
------- ------- --------
(IN THOUSANDS OF
DOLLARS)
Foreign Exchange Translation Adjustment........ $(5,974) $ 2,536 $ (858)
Investment Securities.......................... 2,252 11,366 (17,264)
------- ------- --------
Unrealized Valuation Adjustments............... $(3,722) $13,902 $(18,122)
======= ======= ========
Bancorp is required to maintain certain minimum levels of capital to meet
regulatory guidelines. There are three ratios established by the regulators
which Bancorp needs to maintain at certain levels. Tier 1 Capital (common
equity reduced by certain intangibles and increased for qualifying preferred
shares and minority interests) expressed as a percentage of average risk
weighted assets is the Tier 1 Capital Ratio. Total Capital (Tier 1 capital
plus qualifying portions of the reserve for loan losses) expressed as a
percentage of average risk weighted assets is the Total Capital Ratio. The
third ratio is the Leverage Ratio which is Tier 1 Capital divided by average
assets. The table below presents the minimum levels to qualify an institution
as "well capitalized" as it applies to Bancorp and its subsidiaries Bank of
Hawaii, Bancorp Pacific, Inc, and First National Bank of Arizona.
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.
Undercapitalized institutions are subject to regulatory monitoring and may be
required to divest themselves of or liquidate subsidiaries. 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.
Bancorp, Bank of Hawaii, Bancorp Pacific, Inc. and First National Bank of
Arizona have all been notified by their respective regulators of their status
as "well capitalized." All four companies' capital ratios exceeded the "well
capitalized" minimums at December 31, 1996.
BANCORP
HAWAII, BANK OF BANCORP
MINIMUM INC. HAWAII PACIFIC, INC. FNBA
------- ---------- ---------- ------------- -------
(IN THOUSANDS OF DOLLARS)
Common Equity........... $1,066,122 $ 865,761 $123,560 $14,120
Tier 1 Capital.......... 1,104,304 815,983 123,512 14,120
Total Capital........... 1,354,120 1,054,089 132,297 15,864
Tier 1 Capital Ratio.... 6% 10.57% 8.57% 9.08% 10.64%
Total Capital Ratio..... 10% 12.96% 11.07% 16.96% 11.95%
Leverage Ratio.......... 5% 7.98% 6.63% 9.08% 7.28%
62
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--INTERNATIONAL OPERATIONS
The following table provides certain selected financial data for Bancorp's
international operations for the years ended:
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
International Average Assets............. $2,795,514 $1,724,347 $1,699,168
Average Loans.......................... 1,253,695 745,948 667,828
Average Deposits....................... 1,682,287 994,102 1,249,429
Operating Revenue...................... 194,258 107,884 97,134
Income Before Taxes.................... 17,347 9,353 12,000
Net Income............................. 10,170 4,805 7,137
Average assets consist primarily of short-term interest-bearing deposits
with foreign branches of U.S. banks and large international banks. On average,
these deposits were $584,622,000, $648,473,000 and $802,833,000 during 1996,
1995 and 1994, respectively.
To measure international profitability, Bancorp maintains an internal
transfer pricing system for the use of domestic funds and makes certain income
and expense allocations. Interest rates used in determining charges on
advances of funds are based on prevailing deposit rates. Overhead is allocated
to reflect services rendered by administrative units to profit centers.
NOTE J--CONTINGENT LIABILITIES
Bancorp is a defendant in various legal proceedings and, in addition, there
are various other contingent liabilities arising in the normal course of
business. After consultation with legal counsel, management does not
anticipate that the disposition of these proceedings and contingent
liabilities will have a material effect upon the consolidated financial
statements.
NOTE K--PROFIT-SHARING, RETIREMENT AND POSTRETIREMENT BENEFITS PLANS
Bancorp provides a deferred-compensation profit-sharing plan (Profit Sharing
Plan) for the benefit of all employees of Bancorp and its subsidiaries who
have met the Profit Sharing Plan's eligibility requirements. The Profit
Sharing Plan provides for annual contributions based on a schedule of
performance levels. The schedule establishes the percentage of adjusted net
income to be contributed based on Adjusted Returns on Equity. Members of the
Profit Sharing Plan receive up to 50% of their annual allocation in cash. The
remaining amounts are deferred and may be invested in several mutual funds,
along with a fund invested in shares of common shares of Bancorp Hawaii, Inc.
Bancorp contributions amounted to $9,098,000 in 1996; $7,629,000 in 1995 and
$7,344,000 in 1994.
Effective January 1, 1996, the Profit Sharing Plan was enhanced with a
company match of $1.25 for each $1.00 in 401(k) contributions made by staff
members up to 2% of compensation. For 1996, matching contributions totaled
$2,671,000.
Bancorp established a new defined-contribution money purchase plan for which
it will contribute 4% of compensation to staff members meeting certain
eligibility and vesting requirements as of January 1, 1996. The money purchase
plan has a one year eligibility requirement and a five year vesting period.
Staff members meeting these requirements as of January 1, 1996 immediately
became participants. Participants select from several investment options,
including various mutual funds similar to the Profit Sharing Plan. For 1996,
the money purchase plan contribution totaled $4,839,000.
63
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1995, Bancorp froze its non-contributory, qualified defined-benefit
retirement plan (Retirement Plan) and related liability of the excess
retirement plan (Excess Plan) which covered salaried employees of Bancorp and
participating subsidiaries who met the Retirement Plan's eligibility
requirements. Benefits were based on years of service and an average of the
five highest years of annual compensation. In freezing this Plan as of
December 31, 1995, all participants were fully vested in the Plan and final
benefits were determined. In conjunction with this change, qualifying staff
were offered an early retirement option. The option for staff members who were
at least 50 years of age with 9 years or more of eligible service provided an
extra 5 years of service and 5 years of age for benefit calculation purposes.
In addition, the staff member received $250.00 per month until age 65 to
defray medical benefit costs. The early retirement option was elected by 340
staff members, almost 75% of those eligible. The curtailment gain for the
retirement plan was $2,971,000 and the curtailment loss for the excess
retirement plan was $2,811,000 in 1995. Additionally, qualifying staff members
as of December 31, 1995 whose combined age and years of service exceeded 60,
were provided a transition benefit. The benefit allows the increase in benefit
for salary changes until the year 2000. Bancorp's funding policy is to
contribute annually an amount that falls within the minimum and maximum range
deductible for income tax purposes. Retirement Plan assets are managed by
investment advisors in accordance with investment policies established by the
Retirement Plan Trustees. Investments are generally marketable securities
including stocks, bonds and money market funds.
The Excess Plan is a non-qualified excess benefit plan which covers all
employees of Bancorp and participating subsidiaries who have met eligibility
requirements. The unfunded Excess Plan recognizes the liability to Excess Plan
participants for amounts exceeding those allowed to be included in the
Retirement Plan.
The following table sets forth both the Retirement Plan and Excess Plan's
funded status and amounts recognized in Bancorp's statement of condition at
December 31.
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Actuarial Present Value of Benefit
Obligations:
Vested Benefit Obligation................. $ 71,406 $ 71,159 $ 59,208
======== ======== ========
Accumulated Benefit Obligation............ $ 74,550 $ 75,725 $ 63,445
======== ======== ========
Projected Benefit Obligation.............. $ 81,479 $ 82,443 $ 98,443
Plan Assets (Primarily Marketable
Securities) at Fair Value.................. 71,271 63,519 78,689
-------- -------- --------
Projected Benefit Obligation in Excess of
Plan Assets................................ (10,208) (18,924) (19,754)
Unrecognized Net (Gain)/Loss................ (6,150) (836) (3,766)
Unrecognized Net Obligation at January 1,
1985 Being Recognized Over 15 Years........ -- -- (1,841)
Unrecognized Net Asset at December 31....... 951 (1,501) --
Prior Service Cost Not Yet Recognized in Net
Periodic Pension Cost...................... -- -- 1,907
-------- -------- --------
Accrued Pension Liability Recognized in the
Statement of Condition..................... $(17,309) $(21,261) $(23,454)
======== ======== ========
64
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension costs included the following components:
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF
DOLLARS)
Service Cost--Benefits Earned During the
Period....................................... $ -- $ 6,881 $ 7,561
Interest Cost on Projected Benefit Obligation. 6,046 8,000 7,299
Actual Return on Assets....................... (7,187) (6,122) 1,533
Net Amortization and Deferral................. 1,422 111 (8,080)
------- ------- -------
Net Periodic Pension Cost..................... $ 281 $ 8,870 $ 8,313
======= ======= =======
Assumptions used in the accounting were as follows:
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
Weighted-Average Discount Rates.......................... 7.75% 7.50% 8.25%
Rates of Increase in Compensation Levels................. 5.00% 5.00% 5.00%
Expected Long-Term Rate of Return on Assets.............. 9.00% 8.50% 8.50%
Bancorp adopted SFAS No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions" as of January 1, 1993. Bancorp's postretirement
benefit provides group life, dental and medical insurance coverage for
retirees. The cost of benefits provided are "shared costs" where both the
employer and employees pay a portion of the premium cost. Most of the
employees of Bancorp and its subsidiaries who have met the eligibility
requirements are covered. Bancorp elected to recognize the transition
obligation over 20 years as allowed upon adoption of SFAS No. 106. Bancorp has
no segregated assets to provide postretirement benefits.
The curtailment of the defined benefit plans described earlier also affected
the post retirement benefit plan. A curtailment loss of $772,000 was recorded
in 1995 to reflect the change.
The following schedule presents the funded status of the liability as of
December 31, 1996, 1995 and 1994.
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Accumulated Postretirement Benefit
Obligation
Retirees.................................. $(15,163) $(14,515) $ (8,785)
Other Fully Eligible Plan Participants.... (3,228) (3,054) (6,243)
Other Active Plan Participants............ (8,457) (11,095) (8,863)
-------- -------- --------
Total................................... (26,848) (28,664) (23,891)
Plan Assets................................. -- -- --
-------- -------- --------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets........ (26,848) (28,664) (23,891)
Unrecognized Transition Obligation Being
Amortized Over 20 Years.................... 11,142 11,838 13,166
Unrecognized Net Gain/(Loss)................ (4,494) (459) (2,833)
-------- -------- --------
Accrued Postretirement Benefit Liability.... $(20,200) $(17,285) $(13,558)
======== ======== ========
65
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Net Periodic Postretirement Benefit Cost was:
1996 1995 1994
------ ------ ------
(IN THOUSANDS OF
DOLLARS)
Service Cost......................................... $1,262 $1,046 $1,089
Interest Cost........................................ 2,057 1,912 1,820
Amortization of Transition Obligation................ 696 647 731
------ ------ ------
Net Periodic Postretirement Benefit Cost............. $4,015 $3,605 $3,640
====== ====== ======
The following table presents the assumptions utilized to determine the
expense and liability:
1996 1995 1994
---- ----- -----
Health Care Cost Trend Rate............................ 9.00% 15.00% 15.00%
Dental Care Cost Trend Rate............................ 7.00% 7.50% 7.50%
Weighted Average Discount Rate......................... 7.50% 7.50% 8.25%
Rate of Increase in Compensation Level................. 5.00% 5.00% 5.00%
The health care cost trend rate has been revised to project at 9.0% per year
until the year 2000 leveling to the ultimate 7.0%. A one percent increase in
that trend rate of assumption (with all other assumptions remaining constant)
would increase the service and interest cost components of the net periodic
postretirement cost from $3,319,000 to $3,786,000. The impact of this one
percent increase in the trend rates on the accumulated postretirement benefit
obligation would be an increase to $29,667,000 at December 31, 1996.
NOTE L--STOCK OPTION PLANS
The Bancorp Stock Option Plans (the Plans) are administered by the
Compensation Committee appointed by Bancorp's Board of Directors. The options
allow participants to purchase shares of common stock for a specified exercise
price anytime beginning one year after the option has been granted and
expiring 10 years thereafter. The exercise price is equal to the fair market
value of the stock on the date the option was granted. The Plans also provide
certain participants with tandem stock appreciation rights (SAR). The SAR can
be exercised in lieu of the exercise of the options. The Compensation
Committee has limited the exercise of SARs to $1 million per year, allocated
among the participants. The expense for the SARs recognized in the income
statement was $1,000,000 in 1996.
66
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1996, Bancorp shareholders approved a Director's Stock Option Plan to
grant options for restricted common shares of Bancorp Hawaii, Inc. The plan
grants 1,000 options to each Bancorp director who is also a director of Bank
of Hawaii and 500 options to directors who are directors of Bancorp or Bank of
Hawaii only. The exercise price of the option is based on the closing market
price on the date of the grant and expires 10 years thereafter. Options
granted are generally not transferable. If an optionee ceases to be a director
for any reason other than death, the option immediately terminates. Shares
purchased upon exercise of options granted are restricted shares. The shares
are restricted while the individual remains a director and is redeemable at
the purchase price or forfeited if the director terminates before retirement
or expiration of his or her appropriate term. The 13,000 options outstanding
under this plan are included in the table below.
The following information relates to options outstanding as of December 31,
1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF
RANGE OF SHARES WEIGHTED AVERAGE REMAINING SHARES WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
$12.09--$25.00.......... 302,589 $18.04 32.9 months 302,589 $18.04
25.75-- 29.50.......... 761,806 28.24 80.3 months 761,806 28.24
30.00-- 32.50.......... 52,500 30.59 88.7 months 52,500 30.59
35.50-- 43.75.......... 842,000 39.69 115.2 months 381,500 36.75
--------- ------ ------------ --------- ------
Total................. 1,958,895 $31.65 88.2 months 1,498,395 $28.44
The following table presents the activity of Stock Option Plans for the
years indicated:
1996 1995 1994
------------------------------ --------------------------- ---------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES
--------- ---------------- --------- ---------------- ---------
Outstanding at January
1...................... 1,822,453 $27.45 1,842,039 $23.53 1,340,967
Granted............... 460,500 42.13 566,000 34.11 150,000
Stock Dividends....... -- -- 662,685
Exercised............. (264,779)(1) 22.17 (447,876) 20.74 (240,496)
Forfeited............. (58,817) 25.03 (137,710) 19.91 (71,117)
Expired............... (462) 13.13 -- -- --
--------- ------ --------- ------ ---------
Outstanding at December
31..................... 1,958,895 $31.65 1,822,453 $27.45 1,842,039
--------- ------ --------- ------ ---------
Options Exercisable at
December 31............ 1,498,395 1,278,953 1,721,288
--------- --------- ---------
Shares Available for
Future Grants.......... 994,373 1,396,056 1,820,346
--------- --------- ---------
- --------
(1) The price (per share) range of options exercised during 1996 was between
$12.08 and $29.50 on an actual exercise price basis.
67
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the pro-forma disclosures of the impact that
the 1996 and 1995 option grants would have had on net income and earnings per
share had the grants been measured using the fair value of accounting
prescribed by SFAS No. 123 (1):
1996 1995
-------- --------
(IN THOUSANDS
EXCEPT PER SHARE
AND OPTION DATA)
Net Income......................................... $130,605 $120,902
Earnings per share................................. $ 3.17 $ 2.88
Weighted Average Fair Value of Options
Granted During the Year........................... $ 11.71 $ 9.36
Assumptions Average Risk Free Interest Rate........ 6.47% 6.51%
Average Expected Volatility...................... 17.73% 17.90%
Expected Dividend Yield.......................... 2.75% 2.75%
Expected Life.................................... 10 years 10 years
- --------
(1) The Black-Scholes option pricing model was used to develop the fair values
of the grants.
NOTE M--OTHER OPERATING EXPENSE
Other operating expense at year-end was as follows:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
FDIC Insurance................................. $ 6,781 $ 7,632 $ 13,592
Legal and Other Professional Fees.............. 17,642 15,623 18,209
Advertising.................................... 11,407 11,144 10,288
Stationery and Supplies........................ 10,678 9,247 8,769
Other.......................................... 91,851 60,798 60,729
-------- -------- --------
Total...................................... $138,359 $104,444 $111,587
======== ======== ========
NOTE N--INCOME TAXES
The significant components of the provision for income taxes are as follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF
DOLLARS)
Current:
Federal....................................... $54,960 $49,171 $60,424
State......................................... 10,548 8,881 14,992
Foreign....................................... 12,082 6,073 5,241
------- ------- -------
$77,590 $64,125 $80,657
======= ======= =======
Deferred:
Federal....................................... $(1,060) $ 7,520 $(1,810)
State......................................... 166 403 (1,206)
Foreign....................................... -- -- --
------- ------- -------
$ (894) $ 7,923 $(3,016)
======= ======= =======
Provision for Income Taxes...................... $76,696 $72,048 $77,641
======= ======= =======
68
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The current provision also includes taxes on the gains and losses on the
sale of securities of $507,000, $975,000 and $(7,051,000) for 1996, 1995 and
1994, respectively. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1996, 1995 and 1994 reclassified based on the tax returns as
filed, are as follows:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Deferred Tax Liabilities:
Lease Transactions........................ $181,846 $181,612 $175,801
Deferred Investment Tax Credits........... 6,003 6,851 7,318
Accelerated Depreciation.................. 1,462 1,445 1,773
Core Deposit Intangible................... 9,141 10,206 11,270
-------- -------- --------
Total Deferred Tax Liabilities.......... 198,452 200,114 196,162
-------- -------- --------
Deferred Tax Assets:
Reserve for Loan Losses................... 56,201 54,426 53,886
Accrued Pension Cost...................... 4,423 4,507 6,502
Net Operating Loss Carry Forwards......... 385 1,299 2,245
Securities Valuation Reserve.............. (1,440) (7,470) 11,871
Post Retirement Benefits.................. 7,497 6,343 5,166
Other--Net................................ (7,443) (4,763) (1,792)
-------- -------- --------
Total Deferred Tax Assets............... 59,623 54,342 77,878
-------- -------- --------
Valuation Allowance for Deferred Tax
Assets................................... (385) (1,299) (1,523)
-------- -------- --------
Net Deferred Tax Assets................. 59,238 53,043 76,355
-------- -------- --------
Net Deferred Tax Liabilities................ $139,214 $147,071 $119,807
======== ======== ========
For financial statement purposes, Bancorp had deferred investment tax
credits for property purchased for lease to customers of $6,003,000,
$6,851,000 and $7,318,0000 at December 31, 1996, 1995 and 1994, respectively.
In 1996, 1995 and 1994, investment tax credits included in the computation of
the provision for income taxes were $848,000, $467,000 and $334,000,
respectively.
The following analysis reconciles the Federal statutory income tax rate to
the effective consolidated income tax rate:
1996 1995 1994
---- ---- ----
Statutory Federal Income Tax Rate.................... 35.0 % 35.0 % 35.0 %
Increase (Decrease) in Tax Rate Resulting From:
State Taxes, Net of Federal Income Tax and Foreign
Tax Adjustments................................... 3.3 3.1 4.6
Tax-Exempt Interest Income......................... (0.3) (0.5) (0.5)
Low Income Housing and Investment Tax Credit....... (1.2) (0.7) (0.4)
Other.............................................. (0.2) 0.3 1.0
---- ---- ----
Effective Tax Rate................................... 36.6 % 37.2 % 39.7 %
==== ==== ====
For financial statement purposes, no deferred income tax liability has been
recorded by Bancorp Pacific, Inc. for tax bad debt reserves that arose in tax
years beginning before December 31, 1987. Such tax bad debt
69
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reserves total approximately $18.2 million for which no provision for federal
income taxes has been provided. If these amounts are used for purposes other
than to absorb bad debt losses, they will be subject to federal income taxes
at the then applicable rates.
NOTE O--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Bancorp is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to manage its own exposure to fluctuations in interest and foreign exchange
rates. These financial instruments include commitments to extend credit,
foreign exchange contracts, standby letters of credit, and interest rate
swaps. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statements of
condition. The contract or notional amounts of those instruments reflect the
extent of involvement Bancorp has in particular classes of financial
instruments. The FASB has segregated certain of these off-balance sheet
financial instruments that include foreign exchange and interest rate swap
type of instruments, as derivative financial instruments. FASB has further
categorized these derivative financial instruments into "held or issued for
purposes other than trading" or "trading." Bancorp has not utilized these
derivative financial instruments for trading purposes.
Bancorp's exposure to credit risk is the loss in the event of nonperformance
by the other party to the transaction. Credit risks associated with off-
balance sheet financial instruments are similar to those relating to on-
balance sheet financial instruments. Bancorp manages off-balance sheet credit
risk with the same standards and procedures applied to Bancorp's commercial
lending activity.
Descriptions of these financial instruments with off-balance sheet risks
follow:
Traditional Off-Balance Sheet Risk Instruments
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any terms or conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since commitments may expire without being
drawn, the total commitment amounts do not necessarily represent future cash
requirements. Bancorp evaluates each customer's credit worthiness on an
individual basis. The amount of collateral obtained is based on management's
credit evaluation of the customer. Collateral held varies, but may include
cash, accounts receivable, inventory, and property, plant, and equipment.
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support borrowing agreements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Bancorp holds cash and deposits as
collateral supporting those commitments for which collateral is deemed
necessary.
Derivative Financial Instruments Held or Issued for Other Than Trading
Foreign exchange contracts are contracts for delayed delivery of a foreign
currency in which the seller agrees to make delivery at a specified future
date at a specified price. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
exchange rates and interest rates. Collateral is generally not required for
these transactions. Net revenue (loss) on foreign exchange contracts totaled
$(1.1) million, $0.3 million and $0.2 million for 1996, 1995 and 1994,
respectively.
Bancorp entered into various interest-rate swaps in managing its interest-
rate risk. In these arrangements, Bancorp agreed to exchange, at specified
intervals, the difference between fixed- and floating-interest amounts
calculated on an agreed-upon notional principal amount. Bancorp used swap
agreements to effectively convert portions of its floating rate loans to a
fixed rate basis. At December 31, 1996, $673 million of such "receive-fixed"
swaps were in effect. The net amount payable or receivable from interest-rate
swap agreements is accrued as an adjustment to interest income. The related
amount payable or receivable from counterparties is included in accrued
interest payable or receivable. The fair value of the swap agreements are not
recognized in the financial statements.
70
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Bancorp's current credit exposure on swaps is equal to the market value of
the interest-rate swaps plus or minus the market value of any collateral
exchanged with swap counterparties. The aggregate credit exposure on swaps at
year-end 1996 was $0.9 million. The market value of all positions at year-end
1996 was $(7.7) million compared with $(8.3) million at year-end 1995. Net
revenue (expense) on interest rate swap agreements totaled $(4.2) million,
$(11.7) million and $7.7 million for 1996, 1995 and 1994, respectively.
The table below summarizes by notional amounts the activity for each major
category of swaps in 1996. Bancorp had no deferred gains or losses relating to
terminated swap contracts in 1996.
RECEIVE
FIXED PAY FIXED
---------- ---------
(IN THOUSANDS OF DOLLARS)
Balance, December 31, 1993................. $1,278,769 $ 119,821
Additions................................ 350,000 --
Maturities/Amortizations................. (156,719) (524)
---------- ---------
Balance, December 31, 1994................. $1,472,050 $ 119,297
Additions................................ -- --
Maturities/Amortizations................. (376,814) (100,524)
---------- ---------
Balance, December 31, 1995................. $1,095,236 $ 18,773
Additions................................ -- --
Maturities/Amortizations................. (421,999) (18,773)
---------- ---------
Balance, December 31, 1996................. $ 673,237 $ 0
========== =========
The approximate annual maturities of swap agreements outstanding as of
December 31, 1996 were:
NOTIONAL PRINCIPAL EXPECTED TO
MATURE IN
-------------------------------------
1997 1998 1999 TOTAL
-------- -------- ------- --------
(IN THOUSANDS OF DOLLARS)
Receive-Fixed Interest Rate Swaps:
Fixed Maturity......................... $140,000 $100,000 $ -- $240,000
Pay Rate............................. 5.69% -- -- --
Receive Rate......................... 5.34% 5.37% -- --
Amortizing (1)......................... 133,622 201,906 97,709 433,237
Pay Rate............................. 5.76% -- -- --
Receive Rate......................... 5.17% 5.22% 5.30% --
- --------
(1) Amortization estimated utilizing average prepayment speeds provided by
various dealers in these instruments.
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of Bancorp.
71
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following methods and assumptions were used by Bancorp in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheet for cash and short-term investments approximate those assets' fair
values.
Investment Securities Held to Maturity, Investment Securities Available
for Sale and Trading Securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Loans: Fair values for loans are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type such as
commercial, real estate, consumer, and foreign. Each loan category is
further segmented into fixed and adjustable rate interest terms and by
performing and non-performing categories. Fair values are calculated by
discounting scheduled cash flows through the estimated maturity using
estimated discount rates which reflect credit and interest rate risks
inherent in the loan.
Deposit Liabilities: Fair values for non-interest bearing and interest
bearing demand deposits and savings are, by definition, equal to the amount
payable on demand at their reporting date (i.e., their carrying amounts).
Fair values for time deposits are estimated using discounted cash flow
analyses. Discount rates reflect rates currently offered for deposits of
similar remaining maturities.
Short-Term Borrowings: The carrying amounts of securities sold under
agreements to repurchase, funds purchased, commercial paper, and other
short-term borrowings approximate their fair values.
Long-Term Debt: Fair values for long-term debt are estimated using
discounted cash flow analyses, based on Bancorp's current incremental
borrowing rates for similar types of borrowings.
Off-Balance Sheet Instruments: Fair values for off-balance sheet
instruments (e.g., commitments to extend credit, standby letters of credit,
commercial letters of credit, foreign exchange and swap contracts, and
interest rate swap agreements) are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing, current settlement
values or quoted market prices of comparable instruments.
72
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the fair values of Bancorp's financial
instruments at December 31, 1996, 1995 and 1994.
1996 1995 1994
--------------------- --------------------- ---------------------
BOOK OR BOOK OR BOOK OR
NOTIONAL FAIR NOTIONAL FAIR NOTIONAL FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
FINANCIAL INSTRUMENTS--ASSETS
Loans (1)................... $7,988,400 $8,123,400 $7,565,800 $7,741,700 $7,327,700 $7,364,800
Investment Securities (2)... 3,631,700 3,634,000 3,360,200 3,366,300 3,150,900 3,101,600
Other Financial Assets (3).. 779,100 779,100 905,300 905,300 794,900 794,900
FINANCIAL INSTRUMENTS--
LIABILITIES
Deposits.................... 8,677,100 8,681,800 7,576,800 7,627,600 7,115,100 7,055,900
Short-Term Borrowings (4)... 2,968,800 2,968,800 3,190,800 3,190,800 3,340,300 3,340,300
Long-Term Debt (5).......... 926,300 861,500 1,057,900 1,053,500 856,500 821,300
FINANCIAL INSTRUMENTS--
OFF-BALANCE SHEET
Financial Instruments Whose
Contract Amounts Represent
Credit Risk:
Commitments to Extend
Credit................... 3,840,187 10,152 3,615,188 9,582 3,187,455 9,548
Standby Letters of Credit. 257,370 4,853 224,398 4,224 233,276 4,416
Commercial Letters of
Credit................... 239,718 361 244,776 374 144,319 210
Financial Instruments Whose
Notional or Contract
Amounts Exceed the Amount
of Credit Risk:
Foreign Exchange and Swap
Contracts................ 631,313 861 510,759 1,203 285,390 229
Interest Rate Swap
Agreements............... 673,237 (7,717) 1,114,009 (8,310) 1,591,347 (91,420)
- --------
(1) Includes all loans, net of reserve for loan losses, and excludes leases.
(2) Includes both held to maturity and available for sale securities.
(3) Includes interest bearing deposits, securities purchased under agreements
to resell, funds sold and trading securities.
(4) Includes securities sold under agreements to repurchase, funds purchased
and short term borrowings.
(5) Excludes capitalized lease obligations.
73
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q--PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial statements of Bancorp Hawaii, Inc. (Parent only) follow:
Condensed Statements of Income
YEARS ENDED DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Dividends From
Bank Subsidiaries................................ $106,165 $ 44,426 $ 69,416
Other Subsidiaries............................... 15,000 7,000 34,000
Interest Income
From Subsidiaries................................ 5,415 6,059 4,873
From Others...................................... 1,919 939 1,029
Other Income....................................... 143 48 47
Securities Gains................................... 661 136 10
-------- -------- --------
Total Income................................... 129,303 58,608 109,375
Interest Expense................................... 8,036 7,110 6,505
Other Expense...................................... 5,950 6,015 7,323
-------- -------- --------
Total Expense.................................. 13,986 13,125 13,828
Income Before Income Taxes and Equity in
Undistributed Income of Subsidiaries.............. 115,317 45,483 95,547
Income Tax Benefits................................ 2,024 2,484 2,084
-------- -------- --------
Income Before Equity in Undistributed Income....... 117,341 47,967 97,631
Equity in Undistributed Income of Subsidiaries
Bank Subsidiaries................................ 15,539 61,372 32,044
Other Subsidiaries............................... 244 12,461 (11,937)
-------- -------- --------
15,783 73,833 20,107
-------- -------- --------
Net Income......................................... $133,124 $121,800 $117,738
======== ======== ========
74
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Condensed Statements of Condition
DECEMBER 31
--------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Assets
Cash in Bank of Hawaii...................... $ 134 $ 245 $ 160
Investment Securities Available for Sale.... 11,931 12,740 1,503
Equity in Net Assets of Bank Subsidiaries... 868,066 881,160 788,864
Equity in Net Assets of Other Subsidiaries.. 162,446 147,491 134,810
Interest Bearing Deposits from Bank......... 200,300 89,446 79,200
Net Loans................................... 10,298 12,638 12,963
Trading Securities.......................... 1,663 -- 472
Other Assets................................ 57,782 54,006 84,367
---------- ---------- ----------
Total Assets.............................. $1,312,620 $1,197,726 $1,102,339
========== ========== ==========
Liabilities and Shareholders' Equity
Commercial Paper and Short-Term Borrowings.. $ 70,827 $ 74,559 $ 69,114
Long-Term Debt.............................. 163,093 60,000 55,000
Other Liabilities........................... 12,578 8,731 11,437
Shareholders' Equity........................ 1,066,122 1,054,436 966,788
---------- ---------- ----------
Total Liabilities and Shareholders'
Equity................................... $1,312,620 $1,197,726 $1,102,339
========== ========== ==========
75
BANCORP HAWAII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Condensed Statements of Cash Flows
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- -------- ---------
(IN THOUSANDS OF DOLLARS)
Operating Activities
Net Income................................... $ 133,124 $121,800 $ 117,738
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Provision for Loan Losses and Amortization
Expense................................... 3,943 3,943 4,730
Realized Investment Securities Gains....... (653) -- --
Undistributed Income from Subsidiaries..... (15,783) (73,833) (20,107)
Net Decrease (Increase) in Trading
Securities................................ (1,663) 472 403
Other Assets and Liabilities, Net.......... (3,468) 23,052 (35,349)
--------- -------- ---------
Net Cash Provided by Operating
Activities.............................. 115,500 75,434 67,415
Investing Activities
Investment Securities Transactions, Net...... 449 (9,800) --
Interest Bearing Deposits, Net............... (110,854) (10,246) 67,500
Loan Transactions, Net....................... 2,340 411 3,214
Capital Contributions to Subsidiaries, Net... (3,093) 17 (249)
--------- -------- ---------
Net Cash Provided (Used) by Investing
Activities.............................. (111,158) (19,618) 70,465
Financing Activities
Net Proceeds (Repayments) from Borrowings.... 99,361 10,445 (67,513)
Proceeds from Sale of Stock.................. 13,991 19,023 18,016
Stock Repurchased............................ (70,444) (40,004) (44,297)
Cash Dividends Paid.......................... (47,361) (45,195) (44,114)
--------- -------- ---------
Net Cash Used by Financing Activities.... (4,453) (55,731) (137,908)
Increase (Decrease) in Cash.............. (111) 85 (28)
Cash at Beginning of Year.................... 245 160 188
--------- -------- ---------
Cash at End of Year.......................... $ 134 $ 245 $ 160
========= ======== =========
76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The following information required by the Instructions to Form 10-K is
(except as otherwise indicated below) incorporated herein by reference from
various pages of the Bancorp Hawaii, Inc. Proxy Statement for the annual
meeting of shareholders to be held on April 25, 1997, as summarized below:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Election of Directors on pages 2-7. Disclosure of Compliance with
section 16 (a) of the Securities Exchange Act on page 8.
For information concerning executive officers of the Registrant, see
"Executive Officers of the Registrant" at the end of Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation on pages 11-16.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Securities and Principal Holders Thereof and Election of
Directors on pages 1-8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others on pages 23-24.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The following consolidated financial statements of Bancorp Hawaii, Inc.
and subsidiaries are included in Item 8:
Consolidated statements of condition--December 31, 1996, 1995, and
1994
Consolidated statements of income--Years ended December 31, 1996,
1995, and 1994
Consolidated statements of shareholders' equity--Years ended
December 31, 1996, 1995, and 1994
Consolidated statements of cash flows--Years ended December 31,
1996, 1995, and 1994
Notes to consolidated financial statements--December 31, 1996
All other schedules to the consolidated financial statements
stipulated by Article 9 of Regulation S-X and all other schedules to
the financial statements of the registrant required by Article 5 of
Regulation S-X are not required under the related instructions or
are inapplicable and therefore have been omitted.
Financial statements (and summarized financial information) of (1)
unconsolidated subsidiaries or (2) 50% or less owned persons
accounted for by the equity method have been omitted because they do
not, considered individually or in the aggregate, constitute a
significant subsidiary.
77
EXHIBIT INDEX
EXHIBIT
NUMBER
-------
3.1 Articles of Incorporation and (incorporated herein by reference to
Exhibit #3 of Form 10-K for fiscal year ended December 31, 1990)
3.2 Revised By-laws dated July 26, 1996
4.1 Instruments Defining the Rights of Holders of Long-Term Debt
10.1 Bancorp Hawaii, Inc., One-Year Incentive Plan Effective January 1,
1997*
10.2 Bancorp Hawaii, Inc., One-Year Executive Incentive Plan Effective
January 1, 1997*
10.3 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective January
1, 1997*
10.4 Bancorp Hawaii, Inc. Key Executive Severance Plan dated April 27, 1983
(incorporated herein by reference to Exhibit 10.4 of Form 10K for the
fiscal year ended December 31, 1995)*
10.5 Bancorp Hawaii, Inc. Stock Option Plan of 1983 (incorporated herein by
reference to Exhibit 4(a) of Registration No. 2-84164)*
10.6 Bancorp Hawaii, Inc. Stock Option Plan of 1988 (incorporated herein by
reference to Exhibit 4(a) of Registration No. 33-23495)*
10.7 Bancorp Hawaii, Inc. Stock Option Plan of 1994 (incorporated herein by
reference to Exhibit 4(a) of Registration No. 33-54777)*
10.8 Bancorp Hawaii, Inc., One-Year Executive Incentive Plan Effective
January 1, 1996 (incorporated herein by reference to Exhibit 10.2 of
Form 10K for the fiscal year ended December 31, 1995)*
10.9 Bancorp Hawaii, Inc., One-Year Incentive Plan Effective January 1,
1996 (incorporated herein by reference to Exhibit 10.1 of Form 10K for
the fiscal year ended December 31, 1995)*
10.10 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective January
1, 1994 (incorporated herein by reference to Exhibit C of Bancorp
Hawaii, Inc. 1994 Proxy Statement dated March 10, 1994)*
10.11 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective January
1, 1995 (incorporated herein by reference to Exhibit 10(d) of Bancorp
Hawaii, Inc. Form 10K for the fiscal year ended December 31, 1994)*
10.12 Form of Key Executive Severance Agreement (incorporated herein by
reference to Exhibit 19(e) of Bancorp Hawaii, Inc. Form 10K for the
fiscal year ended December 31, 1989 for L. M. Johnson)*
10.13 Form of Amended Key Executive Change-in-Control Severance Agreement
(incorporated herein by reference to Exhibit 10(e) of Bancorp Hawaii,
Inc. 10K for the fiscal year ended December 31, 1994--October 3, 1994
for R. J. Dahl)*
10.14 Form of Key Executive Change-in-Control Severance Agreement
(incorporated herein by reference to Exhibit 10(f) of Bancorp Hawaii,
Inc. 10K for the fiscal year ended December 31, 1994--October 3, 1994
for A. Kuioka)*
10.15 Form of Executive Change-in-Control Severance Agreement (incorporated
herein by reference to Exhibit 10(g) of Bancorp Hawaii, Inc. 10K for
the fiscal year ended December 31, 1994--for D. Houle)*
10.16 Bancorp Hawaii, Inc. Directors' Deferred Compensation Plan
(Restatement Effective 1/1/96) with Amendment No. 96-1; Trust
Agreement (Effective 9/1/96) (incorporated by reference herein to
Exhibit (4) of Registration No. 333-14929).*
10.17 Bancorp Hawaii Inc. Directors Stock Compensation Program (Incorporated
herein by reference to Exhibit (4) of Registration No. 333-02835).*
11.1 Statement Regarding Computation of Per Share Earnings
12.1 Statement Regarding Computation of Ratios
19.1 Report to Shareholders for Quarter ended September 30, 1996
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
78
* Management contract or compensatory plan or arrangement.
(b) Registrant filed two Form 8-Ks during the quarter ended December 31,
1996 to report Thomas Leppert joining Bank of Hawaii as a Vice Chairman and a
private offering of $100 million issued by Bancorp Hawaii Capital Trust I.
(c) Response to this item is the same as Item 14(a).
(d) Response to this item is the same as Item 14(a).
79
STATISTICAL DISCLOSURES
CONTENTS AND REFERENCE
The following statistical disclosures required by the Instructions to Form
10-K are summarized below:
ITEM I. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
Interest Differential--Table 22 on page 40.
Consolidated Average Balances, Income and Expense Summary, and Yields
and Rates--Taxable Equivalent--Table 13 on page 30.
Average Loans--Table 19 on page 38.
Average Deposits--Table 21 on page 39.
ITEM II. INVESTMENT PORTFOLIO
Note B to the Audited Financial Statements on pages 52-54.
Maturity Distribution--Table 17 on page 37.
ITEM III. LOAN PORTFOLIO
Loan Portfolio Balances--Table 3 on page 15.
Maturities and Sensitivities of Loans to Changes in Interest Rates--
Table 20 on page 38.
Non-Performing Assets and Accruing Loans Past Due 90 Days or More--
Table 6 on page 20.
Foregone Interest on Non-Accruals--Table 5 on page 20.
Potential Problem Assets--Narrative on page 25.
Geographic Distribution of Cross-Border International Assets--Table 10
on page 25.
ITEM IV. SUMMARY OF LOAN LOSS EXPERIENCE
Summary of Loan Loss Experience--Table 7 on page 22.
Allocation of Loan Loss Reserve--Table 8 on page 23.
Narrative on page 21.
ITEM V. DEPOSITS
Consolidated Average Balances, Income and Expense Summary, and Yields
and Rates--Taxable Equivalent--Table 13 on page 30.
Note E to the Audited Financial Statements on page 58.
ITEM VI. RETURN ON EQUITY AND ASSETS
1996 1995 1994
----- ----- -----
Return on Assets..................................... 0.99% 0.98% 0.93%
Return on Equity..................................... 12.43% 11.87% 12.13%
Dividend Payout Ratio................................ 35.91% 37.24% 37.82%
Equity to Assets Ratio............................... 7.95% 8.27% 7.71%
ITEM VII. SHORT-TERM BORROWINGS
Note F to the Audited Financial Statements on pages 59 to 60.
80
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: February 26, 1997 Bancorp Hawaii, Inc.
/s/ Lawrence M. Johnson
By:___________________________________
Lawrence M. Johnson
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATE INDICATED.
Date: February 26, 1997
/s/ Lawrence M. Johnson /s/ H. Howard Stephenson
- ------------------------------------- -------------------------------------
Lawrence M. Johnson H. Howard Stephenson
Director Director
/s/ Peter D. Baldwin /s/ Fred E. Trotter
- ------------------------------------- -------------------------------------
Peter D. Baldwin Fred E. Trotter
Director Director
/s/ Mary G. F. Bitterman /s/ Stanley S. Takahashi
- ------------------------------------- -------------------------------------
Mary G. F. Bitterman Stanley S. Takahashi
Director Director
/s/ Richard J. Dahl /s/ K. Tim Yee
- ------------------------------------- -------------------------------------
Richard J. Dahl K. Tim Yee
Director Director
/s/ David A. Heenan /s/ David A. Houle
- ------------------------------------- -------------------------------------
David A. Heenan David A. Houle
Director Chief Financial Officer
/s/ Stuart T. K. Ho /s/ Denis K. Isono
- ------------------------------------- -------------------------------------
Stuart T. K. Ho Denis K. Isono
Director Chief Accounting Officer
/s/ Herbert M. Richards, Jr.
- -------------------------------------
Herbert M. Richards, Jr.
Director
81
Exhibit 3.2
BY-LAWS
OF
BANCORP HAWAII, INC.
HONOLULU, HAWAII
JULY 26, 1996
BY-LAWS
OF
BANCORP HAWAII, INC.
(As Amended July 26, 1996)
ARTICLE I
OFFICES AND SEAL
SECTION 1.01. Offices. The principal office of the corporation shall
be located at Honolulu, City and County of Honolulu, State of Hawaii. The
corporation may have such other offices either within or without the State of
Hawaii as the Board of Directors may designate or as the business of the
corporation may require from time to time.
SECTION 1.02. Corporate Seal. The corporation shall have a corporate
seal of such form and device as the Board of Directors shall from time to time
determine. Duplicate seals may be kept and used as the business of the
corporation may require from time to time.
ARTICLE II
STOCKHOLDERS' MEETINGS
SECTION 2.01. Annual Meeting. The annual meeting of the stockholders
shall be held at such place in Hawaii and on such date in the month not more
than thirteen months subsequent to the prior annual meeting of stockholders
asthe Chairman of the Board or President shall designate for the purpose of
electing directors and an auditor and, subject to any requirements of law or of
the Articles of Incorporation or of these By-Laws with respect to notice, for
the transaction of such other business as may properly come before the meeting.
SECTION 2.02. Special Meetings. Special meetings of the
stockholders, to consider any business and/or nomination unless otherwise
prescribed by statute, may be called by the Chairman of the Board, by the
President, by a majority of the whole Board of Directors or, to the extent
permitted by applicable law, by a stockholder or stockholders. At any special
meeting the business brought before and transacted by the stockholders shall be
limited to that specified in the notice of the. Special meetings of
stockholders shall be held at such place in Hawaii and at such time as shall be
designated in the call of the meeting.
SECTION 2.03. Notice of Meetings. Written notice specifying the time
and place of the stockholders' meeting,
1
whether annual or special, and if a special meeting the general nature of the
business to be considered, shall be mailed not less than ten ( 10) nor more than
seventy (70) days before such meeting, postage prepaid, addressed to each
stockholder of record entitled to vote at such meeting at his address as it
appears on the records of the corporation. Non-receipt of such notice by any
stockholder shall not invalidate any business done at any meeting, either annual
or special, at which a quorum is present. Any stockholder may, prior to, at the
meeting, or subsequent thereto, waive notice of any meeting in writing signed by
himself or his duly authorized attorney-in-fact. Any previously scheduled
meeting of the stockholders may be postponed, and any special meeting of the
stockholders may be cancelled, by resolution of the Board of Directors upon
public notice given prior to the date previously scheduled for such meeting of
stockholders.
SECTION 2.04. Quorum. A majority of the outstanding shares of the
corporation entitled to vote at the meeting, represented in person or by proxy,
shall constitute a quorum at a meeting of stockholders, except that when
specified business is to be voted on by a class or series of stock voting as a
class, the holders of a majority of the shares of such class or series shall
constitute a quorum of such class or series for the transaction of such
business. The Chairman of the meeting may adjourn the meeting from time to
time, whether or not there is such a quorum, and, if less than a majority of the
outstanding shares entitled to vote at the meeting are represented at a meeting,
a majority of the shares so represented may adjourn the meeting from time to
time without further notice. No notice of the time and place of adjourned
meetings need be given except as required by law. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified. The
stockholders present or represented at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum. Any decision of a majority of the
outstanding shares of the corporation entitled to vote represented at a duly
organized meeting shall be valid and binding upon the corporation except as
otherwise specifically provided by law, the Articles of Incorporation or these
By-Laws, or by the resolution of the Board of Directors creating any series of
preferred stock.
The Chairman of any meeting of stockholders shall be the Chairman of
the Board, unless the Board of Directors shall by resolution prior to such
meeting designate another person as Chairman of such meeting.
SECTION 2.05. Voting. At all meetings of stockholders, a stockholder
may vote in person or by proxy executed in writing by the stockholder or by his
duly authorized attorney-in-fact. Each outstanding share entitled to vote shall
be entitled to one vote upon each matter submitted to a vote at a
2
meeting of stockholders; cumulative voting shall not be permitted. The holders
of the outstanding shares from time to time of the common stock and of any
preferred stock which has voting rights shall vote together on all matters
referred to the stockholders, including the election of directors; provided,
however, that the foregoing is subject to any provisions of law or the Articles
of Incorporation or the resolution of the Board of Directors creating any series
of preferred stock requiring with respect to any matter the approval or consent
of the holders of any designated percentage of the outstanding shares of stock
of any class or any series of any class. All provisions of these By-Laws which
specify or relate to the power of the stockholders or to action which may be
taken by the stockholders at or in connection with a meeting thereof shall be
interpreted as referring to the holders of shares of voting stock of the
corporation. Elections of directors at all meeting of the stockholders at which
directors are to be elected shall be by ballot. Except as otherwise provided by
law, the Articles of Incorporation, or these By-Laws, in all mattes other than
the election of directors, the affirmative vote of a majority of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the matter shall be the act of the stockholders. At any meeting of
stockholders, the Chairman of the meeting shall fix and announce at the meeting
the date and time of the opening and the closing of the polls for each matter
upon which the stockholders will vote at such meeting. Any action required to
be taken at a meeting of the stockholders, or any other action which may be
taken at a meeting of the stockholders, may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the stockholders entitled to vote with respect to the subject matter thereof.
SECTION 2.06. Business at Meetings. To be properly brought before
any stockholders' meeting, business and nominations of persons for election to
the Board of Directors of the corporation must be (a) specified in the notice of
meeting given by or at the direction of the Chairman of the Board or the
President or a majority of the whole Board of Directors, (b) otherwise properly
brought before such meeting by or at the direction of the Board of Directors, or
(c) otherwise properly brought before such meeting by a stockholder or
stockholders who was a stockholder or were stockholders, respectively, of record
at the time of giving notice provided for in this By-Law, who is entitled to
vote for the election of Directors at such meeting and who complies with the
notice procedures set forth in this By-Law.
For business to be properly brought before any stockholders' meeting
by a stockholder or stockholders, the stockholder or stockholders must have
given timely notice thereof in writing to the Secretary of the corporation and
such business must otherwise be a proper matter for stockholder action. To be
timely, a stockholder's or stockholders' notice shall be delivered to or
received at the principal executive offices of
3
the corporation not later than eighty (80) days nor earlier than ninety (90)
days prior to (a) in the case of a special meeting called by such stockholder or
stockholders, the date the stockholder has, or the stockholders have, as
applicable, selected for such special meeting, and (b) in the case of an annual
meeting, the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than
thirty (30) days before or more than sixty (60) days after such anniversary
date, notice by such stockholder or stockholders to be timely must be so
received by the Secretary of the corporation (i) not later than the close of
business on the later of the eightieth (80th) day prior to such annual meeting
or the tenth (10th) day following the day on which public announcement of the
date of such annual meeting is first made by the corporation and (ii) not
earlier than the ninetieth (90th) day prior to such annual meeting. In the
event that the number of directors to be elected to the Board of Directors of
the corporation is increased and there is no public announcement by the
corporation naming all of the nominees for director or specifying the size of
the increased Board of Directors at least ninety (90) days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's or
stockholders' notice required by this By-Law shall also be considered timely,
but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the corporation not later than the close of business on the tenth
(10th) day following the day on which such pubic announcement is first made by
the corporation. In the event the corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the corporation's
notice of meeting, if the stockholder's notice required by this By-Law shall be
delivered to the Secretary at the principal executive offices of the corporation
(i) not later than the close of business on the later of the eightieth (80th)
day prior to such special meeting or the tenth (10th) day following the day on
which public announcement is first made of the date of the special meeting and
of the nominees proposed by the Board of Directors to be elected at such meeting
and (ii) not earlier than the close of business on the ninetieth (90th) day
prior to such special meeting. In no event shall the public announcement of an
adjournment of a meeting commence a new time period for the giving of a
stockholder's notice as described above.
A stockholder's notice to the Secretary of the corporation shall set
forth as to each matter that the stockholder proposes to bring before such
meeting (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the
4
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-
11 thereunder (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before such meeting and
the reasons for conducting such business at such meeting of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made; (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf such nomination or proposal of business is made(i) the name and address
of such stockholder, as they appear on the corporation's books, and of such
beneficial owner, (ii) the class and number of shares of the securities of the
corporation that are beneficially owned by such stockholder and such beneficial
owner; and (d) any material interest of such stockholder and such beneficial
owner in such nomination and such business.
Only such persons who are nominated in accordance with the procedures
set forth in this By-Law shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
By-Law. Except as otherwise provided by law, the Chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that the nomination
or business that the stockholder proposes to bring before such meeting was not
properly brought before such meeting in accordance with the foregoing procedure,
and if he should so determine, he shall so declare to the meeting, and the
defective proposal or nomination shall be disregarded.
For purposes of this By-Law:
(a) "public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or comparable national
news service or in a document publicly filed by the corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the
Exchange Act.
(b) calculating the number of days elapsed between (a) the date on
which a notice is given and (b) (i) the date on which a special meeting is to be
held, (ii) the date that is the anniversary of an annual meeting, or (iii) the
date that is the tenth (10th) day following the day on which public announcement
of the date of an annual meeting is first made, shall be made inclusive of dates
between which such calculation is made.
Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
By-Law. Nothing in this By-Law shall be deemed to affect any rights (i)
5
of stockholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of preferred stock to elect directors under specified
circumstances.
ARTICLE III
DIRECTORS
SECTION 3.01. Number. The number of directors of the corporation
(exclusive of directors to be elected by the holders of any one or more series
of preferred stock voting separately as a class or classes) shall be fixed from
time to time exclusively pursuant to a resolution adopted by a majority of the
whole Board.
As used in these By-Laws, the term "whole Board" and "whole Board of
Directors" means the total number of directors which the corporation would have
if there were no vacancies.
SECTION 3.02. Classification and Election. The Board of Directors
shall be divided into three classes, as nearly equal in number as the then total
number of directors constituting the whole Board permits, with the terms of
office of one class expiring each year.
At the annual meeting of stockholders in 1983, the stockholders shall
elect three classes of directors: four members of the Board of Directors for
terms of three years; four members of the Board of Directors for terms of two
years; and three members of the Board of Directors for terms of one year.
Thereafter, the stockholders at each annual meeting shall elect members of the
Board of Directors for each class for terms of three years to succeed those
members of the Board of Directors whose terms shall have expired. Each member
of the Board of Directors shall hold office until the date of the annual meeting
of the stockholders in the calendar year in which his or her term of office
expires and thereafter until his or her successor is duly elected; provided that
no member shall be eligible for election or re-election as a member of the Board
of Directors after his or her 70th birthday and provided further that, effective
with members elected or re-elected subsequent to the annual meeting of
stockholders held on April 23, 1986, no member shall continue in office past the
date of the annual meeting of the stockholders that is held subsequent to his of
her 70th birthday.
Any vacancies in the Board of Directors for any reason other than a
vacancy created by a member not continuing in office past the date of the annual
meeting of the stockholders that is held subsequent to his or her 70th birthday
may be filled only by the Board of Directors, acting by a majority of the
directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the class for
6
which such director shall have been chosen and until their successors shall be
elected and qualified. In the case of a vacancy created by a member not
continuing in office past the date of the annual meeting of the stockholders
that is held subsequent to his or her 70th birthday, the stockholders at such
annual meeting shall elect a director to succeed such member, and any director
so chosen shall hold office until the next election of the class for which such
director shall have been chosen and until his or her successor shall be elected
and qualified. No decrease in the number of directors shall shorten the term of
an incumbent director.
Notwithstanding the foregoing, and except as otherwise required by
law, whenever the holders of any one or more series of preferred stock shall
have the right, voting separately as a class, to elect one or more directors of
the corporation, the terms of the director or directors elected by such holders
shall expire at the next succeeding annual meeting of stockholders.
SECTION 3.03. Quorum. A majority of the members of the Board of
Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, but if at any meeting of the Board of
Directors there shall be less than a quorum present, a majority of the directors
present may adjourn the meeting from time to time without further notice. The
act of the majority of the Directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors unless otherwise provided in
these By-Laws.
SECTION 3.04. Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this By-Law immediately after, and at
the same place as, the annual meeting of the stockholders. The Board of
Directors may provide, by resolution, the time and place, either within or
without the State of Hawaii, for the holding of additional regular meetings
without other notice than such resolution. Special meetings of the Board of
Directors may be held at such times as the business of the corporation shall
require according to resolutions of the Board of Directors, or upon the call of
the Chairman of the Board, the President or a majority of the whole Board of
Directors. The person or persons authorized to call special meetings of the
Board of Directors may fix any place, either within or without the State of
Hawaii, as the place for holding any special meeting of the Board of Directors
called by them.
SECTION 3.05. Notice of Special Meetings. Notice of any special
meeting shall be given by written notice delivered personally, first-class or
overnight mail or courier service, telegram or facsimile transmission, or orally
by telephone, to each director at his business address or residence. If mailed
by first-class mail, such notice shall be deemed to be adequately delivered when
deposited in the United States mail so addressed, with postage thereon prepaid
at least five (5) days before such meeting. If notice be given by telegram,
overnight mail or courier service, such notice shall be deemed to be adequately
7
delivered when the telegram is delivered to the telegraph company or the notice
is delivered by the overnight mail or courier service at least twenty four (24)
hours before such meeting. If by facsimile transmission, hand delivery, or
telephone, such notice shall be deemed adequately delivered if such notice is
transmitted, communicated by telephone or delivered by hand at least twelve (12)
hours before the time set for such meeting. Non-receipt of any such notice
shall not invalidate any business done at any meeting at which a quorum is
present. Any director, whether attending a meeting or not, may, prior to, at
the meeting, or subsequent thereto, waive notice of the meeting. The attendance
of a director at a meeting shall constitute a waiver of notice of such meeting.
Section 3.06. Action by Consent of Board of Directors. Any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting if all members of the Board
of Directors or committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors or committee.
Section 3.07. Conference Telephone Meetings. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
SECTION 3.08. Removal of Directors. The stockholders of the
corporation may, at any special meeting called expressly for the purpose, remove
from office any director pursuant to applicable law.
SECTION 3.09. Powers of Directors. The Board of Directors shall have
full power to control, manage and direct the property, business and affairs of
the corporation and to exercise all the powers and perform all the acts which
the corporation may legally exercise and perform.
SECTION 3.10. Notice of Director Nominations. Subject to Section 2.03
and 2.06 of these By-Laws, nominations for the election of directors may be made
by the Board of Directors or by any stockholder entitled to vote for the
election of directors where such stockholder makes such nomination in conformity
with the provisions of Section 2.06 of these By-Laws.
ARTICLE IV
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
SECTION 4.01. Committees Exercising Powers of Board. The Board of
Directors may, by resolution adopted by a majority
8
of the whole Board, designate two or more of its members to constitute an
executive committee and such other committees as the Board of Directors shall
determine, and during the intervals between meetings of the Board of Directors,
each of such committees shall possess and may exercise any powers of the Board
of Directors which are delegated to it in such resolution by the Board of
Directors. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member of
such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not constituting a quorum,
may unanimously appoint another member of the Board to act at the meeting in the
place of any such absent or disqualified member. Each such committee shall keep
regular minutes of its proceedings, and all action by it, and its minutes, shall
be reported to the Board of Directors at its next succeeding meeting for such
action as the Board of Directors deems proper.
SECTION 4.02. General or Special Committees. The Board of Directors
may also create and appoint from its own membership or otherwise such general or
special committees, to which no powers of the Board of Directors shall be
delegated, as it deems desirable.
SECTION 4.03. Meetings of Committees. A majority of any committee
may determine its action and fix the time and place of its meetings, unless the
Board of Directors shall otherwise provide. Notice of such meeting shall be
given to each member of the committee in the manner provided for in Section 3.05
of these By-Laws. The Board of Directors shall have power at any time to fill
vacancies in, to change the membership of, or to dissolve any such committee.
Nothing herein shall be deemed to prevent the Board or Directors from appointing
one or more committees consisting in whole or in part of persons who are not
directors of the corporation; provided, however, that no such committee shall
have or may exercise any authority of the Board of Directors.
ARTICLE V
OFFICERS
SECTION 5.01. Generally. The principal officers of the corporation
shall consist of a Chairman of the Board, a President, one or more Vice
Presidents, one of whom may be designated as the Executive Vice President, a
Treasurer and a Secretary, all of whom shall be appointed annually by the Board
of Directors at the first meeting after the annual or special meeting of the
stockholders at which the Board of Directors is elected and shall hold office
until the next annual meeting and thereafter until their successors shall be
duly appointed and qualified, subject, however, to removal by the Board of
9
Directors. The number of Vice Presidents may be changed from time to time by
the Board of Directors at any meeting or meetings thereof and if increased at
any time the additional Vice President or Vice Presidents shall be appointed by
the Board of Directors. There may also be one or more Assistant Vice
Presidents, Assistant Treasurers, Assistant Secretaries, and other offices who
shall be appointed by the Directors and the number thereof shall be determined
from time to time by the Directors. One person may hold more than one office.
SECTION 5.02. Vacancies. Vacancies which may occur in any office,
and any newly created office, shall be filled by appointment by the Board of
Directors for the remainder of the term of such office. In case of the absence
from the State of Hawaii or other temporary disability of any officer, the Board
of Directors may appoint a temporary officer to serve during such absence or
disability. Any vacancy in an office appointed by the Chairman of the Board or
the President because of death, resignation, or removal may be filled by the
Chairman of the Board or the President.
SECTION 5.03. Removals. The Board of Directors of the corporation
may at any time remove from office or discharge from employment any officer,
subordinate officer, agent or employee appointed by the Board of Directors or by
any person under authority delegated by the Board of Directors.
SECTION 5.04. Chairman of the Board. The Chairman shall preside at
all meetings of the stockholders and Board of Directors at which he is present,
and shall perform such other duties and have such other powers as the Board of
Directors may prescribe.
SECTION 5.05. President. The President shall preside at all meetings
of the Board of Directors and of the stockholders at which the Chairman is
absent. Subject to the control of the Board of Directors, the President shall
have general charge and care of the business and property of the corporation,
shall appoint and discharge employees and agents of the corporation and
determine their compensation and shall do and perform such additional duties as
shall be prescribed by the Board of Directors. When authorized by the Board of
Directors so to do, he may delegate to one of the Vice Presidents the whole or
any part of the general management and care of the business and property of the
corporation including the employment and discharge of agents and employees.
SECTION 5.06. Vice Presidents. It shall be the duty of the Vice
Presidents, in the order determined by the Board of Directors, to assume and
perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. Each Vice President
shall do and perform such additional duties as shall be prescribed by the Board
of Directors.
10
SECTION 5.07. Treasurer. The Treasurer shall be the financial and
accounting officer of the corporation. The Treasurer shall have custody of all
moneys, valuable papers and documents of the corporation, shall keep the same
for safekeeping in such depositories as may be designated by the Board of
Directors and shall expend the funds of the corporation as directed by the Board
of Directors. He shall keep or cause to be kept a book or books setting forth a
true record of the receipts and expenditures, assets and liabilities, losses and
gains of the corporation and shall, when and as required by the Board of
Directors, render a statement of the financial condition of the corporation. He
shall also do and perform such additional duties as shall be prescribed by the
Board of Directors. In the absence or disability of the Treasurer, his duties
shall be performed by the Secretary or by an Assistant Treasurer.
SECTION 5.08. Secretary. The Secretary shall be ex officio secretary
of the Board of Directors, shall give or cause to be given all required notices
of meetings of the stockholders and directors, shall record the proceedings of
meetings of the stockholders and directors in a book or books to be kept for
that purpose, and shall perform such other duties as may be assigned to him from
time to time by the Board of Directors and by the President. In the absence or
disability of the Secretary, his duties shall be performed by the Treasurer or
by an Assistant Secretary.
SECTION 5.09. Subordinate Officers. The powers and duties of the
subordinate officers shall be as prescribed by the Board of Directors.
SECTION 5.10. Stock in Other Corporations. Unless the Board of
Directors otherwise directs with respect to any meeting or meetings of the
stockholders of any corporation shares of the stock of which are owned by this
corporation, whether or not such corporation is a subsidiary of this
corporation: the Chairman of the Board or the President or any Vice President
designated by the Board of Directors, the Chairman of the Board or the President
shall have full authority to attend any meeting of the stockholders of any such
corporation and to vote at such meeting the shares of stock of such corporation
owned by this corporation; and the Chairman of the Board or the President or any
such Vice President shall have full authority to execute on behalf of this
corporation any proxy authorizing any other person or persons to vote the shares
of stock of any such corporation owned by this corporation at any meeting or
meetings of the stockholders of such corporation; and the Chairman of the Board
or the President or any such Vice President, or any such person authorized to
act on behalf of the corporation by any proxy executed by any of the foregoing
director or officers of the corporation, shall have full authority to consent in
writing, in the name of the corporation as owner of shares of stock of any such
corporation, to any action by such other corporation, any may execute or cause
to be executed in the name and on behalf of the corporation and under its
corporate seal or otherwise, all
11
such written proxies and other instruments as the Chairman of the Board, the
President, such Vice President, or such authorized person, as applicable, may
deem necessary or proper in the premises.
ARTICLE VI
AUDITOR
SECTION 6.01. The Auditor shall be elected by the stockholders at
their annual meeting to serve until the next annual meeting and thereafter until
a successor is elected.
ARTICLE VII
EXECUTION OF INSTRUMENTS
SECTION 7.01. All checks, drafts, notes, bonds, acceptances, deeds,
leases, contracts, and all other instruments, shall be signed by such person or
persons as may be designated by general or special resolution of the Board of
Directors, and in the absence of any such general or special resolution
applicable to any such instrument then such instrument shall be signed by the
President and a Vice President or by the President or a Vice President and by
the Treasurer or the Secretary or an Assistant Secretary or an Assistant
Treasurer. The Board of Directors may by resolution provide for the use of
facsimile signatures on any instrument and may also provide that any instrument
may be sealed with the facsimile seal of the corporation.
ARTICLE VIII
CAPITAL STOCK
SECTION 8.01. Certificates. The certificates for shares of the
capital stock of the corporation shall be in such form and not inconsistent with
the Articles of Incorporation as shall be approved by the Board of Directors.
The certificates shall be sealed with the corporate seal and signed by the
President or a Vice President and countersigned by the Treasurer or the
Secretary or an Assistant Treasurer or an Assistant Secretary; provided,
however, that the Board of Directors may provide that certificates shall be
sealed with only the facsimile seal of the corporation and signed only with the
facsimile signature of the President or a Vice President and countersigned only
with the facsimile signature of the Treasurer or the Secretary. The name of the
person owning the shares represented by each certificate, with the number of
such shares and the date of issue, shall be entered on the corporation's stock
books.
SECTION 8.02. Transfer of Shares. Transfer of shares of stock may be
made by endorsement and delivery of the
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certificates. No such transaction shall be valid, except between the parties
thereto, until a new certificate shall have been obtained or the transfer shall
have been recorded on the books of the corporation so as to show the date of
transfer, the parties thereto, and the number and description of the shares
transferred. Upon the surrender of any certificate it shall be cancelled.
SECTION 8.03. Regulations. The Board of Directors shall have power
and authority to make all such rules and regulations as it deems expedient
concerning the issue, transfer and registration of certificates for shares of
the capital stock of the corporation.
SECTION 8.04. Closing of Stock Transfer Books and Record Date. The
books for the transfer of stock may be closed as the Board of Director may from
time to time determine for a period not exceeding seventy (70) days before the
annual or any special meeting of stockholders, before the day appointed for the
payment of any dividend, or before any date on which rights of any kind in or in
connection with the stock of the corporation are to be determined or exercised;
provided, however, that if the books for the transfer of stock shall be closed
for the purpose of determining stockholders entitled to notice of or to vote at
a meeting of stockholders, the books shall be closed at least ten (10) days
immediately preceding the meeting; provided, further, that in lieu of closing
the books for the transfer of stock, the Board of Directors may fix a date as a
record date for the determination of stockholders entitled to notice of and to
vote at any such meeting, to receive any such dividends, or to receive or
exercise any such rights, as the case may be, such record date to be (i) not
more than seventy (70) nor less than ten (10) days prior to the date on which
the particular action requiring the determination of stockholders is to be taken
at any such meeting of stockholders or (ii) more than seventy (70) days prior to
any such payment date or any such date for the determination or exercise of
rights.
SECTION 8.05. Lost Certificates. The Board of Directors, subject to
such rules and regulations as it may from time to time adopt, may order a new
certificate of stock to be issued in the place of any certificate of the
corporation alleged to have been lost, destroyed, stolen or mutilated, subject
to production of such evidence of such loss, destruction, theft or mutilation
and on delivery to the corporation of a bond of indemnity in such amount, upon
such terms and secured by such surety, as the Board of Directors or any
financial officer may in its, his or her discretion require.
SECTION 8.06. Holders of Record. The corporation shall be entitled
to treat the holder of record of any share or shares of its capital stock as the
holder in fact thereof for any purpose whatsoever and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other claimant thereto.
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ARTICLE IX
AMENDMENTS TO THE BY-LAWS
These By-Laws may be amended or repealed, in whole or in part, at any
time at any meeting of the directors by resolution adopted by the affirmative
vote of a majority of the whole Board of Directors.
14
Exhibit 4.1
Instruments defining the rights of holders of long-term debt of the
Registrant are not filed as exhibits because the amount of debt authorized under
any such instrument does not exceed 10% of the total assets of the Registrant
and its consolidated subsidiaries. The Registrant hereby undertakes to furnish
a copy of any such instrument to the Commission upon request.
1
Exhibit 10.1
BANCORP HAWAII, INC.
ONE-YEAR INCENTIVE PLAN
__________
Effective January 1, 1997
SECTION 1. ESTABLISHMENT AND PURPOSES.
--------------------------
1.01 Bancorp Hawaii, Inc. hereby establishes the 1997 One-Year
Incentive Plan.
1.02 The purpose of this Plan is to advance the interests of Bancorp
Hawaii, Inc. by (i) motivating special achievements by Eligible Employees upon
whose judgment, initiative and efforts Bancorp Hawaii, Inc. is largely dependent
upon for the successful conduct of its business through a compensation program
emphasizing performance objectives; (ii) supplementing other compensation plans;
and (iii) assisting Bancorp Hawaii, Inc. in retaining and attracting such
employees.
1.03 This Plan shall be effective as of January 1, 1997 with the term
ending December 31, 1997.
SECTION 2. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings
unless a different meaning is plainly required in the context:
2.01 "Board" shall mean the Board of Directors of the Holding Company.
2.02 "Committee" shall mean the Compensation and Management
Development Committee of the Holding Company.
2.03 "Contingent Award" shall mean an award to an Eligible Employee
expressed as a percentage of Salary for the Incentive Period.
2.04 "Eligible Employees" shall mean officers or other employees of
the Holding Company or any Subsidiary, including directors who are also officers
or other employees of the Holding Company or of a Subsidiary, who, in the
opinion of the Committee, are or give promise of becoming of exceptional
importance to the Holding Company or any Subsidiary, and of making substantial
contributions to the success, growth and profit of the Holding Company and its
Subsidiaries. Eligible Employees shall not include participants of the
---
Executive Officer One-Year Incentive Plan.
2.05 "Ending Value" shall be the amount as defined in Section 5.01.
2.06 "Financial Performance Factor" shall mean an amount ranging from
zero to 2.0, as determined by the Performance Matrix described in Section 6 (or,
in certain events, by Section 9.02 or Section 12).
2.07 "Financial Performance Percentage" shall mean the applicable
percentage as determined in Section 4.03.
2.08 "Holding Company" shall mean Bancorp Hawaii, Inc.
1
2.09 "Incentive Period", with respect to any Contingent Award, shall
mean the Holding Company's fiscal year 1997.
2.10 "Individual Performance Factor" shall mean an amount ranging from
zero to 2.0, as determined by following the procedures described in Section 7
(or, in certain events, by Section 9.02 or Section 12).
2.11 "Individual Performance Percentage" shall mean the applicable
percentage as determined in Section 4.03.
2.12 "Net Income" shall mean the Holding Company's consolidated net
income for the Incentive Period, as reported in the annual report to
shareholders (or as otherwise reported to shareholders) adjusted as described in
this Section 2.12. The Holding Company's reported net income shall be adjusted
for the following:
a. Any extraordinary or unusual gain or loss transaction,
b. Securities gains or losses, and
c. Dividends on preferred shares.
The Committee will, in its sole discretion, determine any adjustments to be made
pursuant to this Section 2.12.
2.13 "Participant" shall mean a person that the Committee, in its sole
discretion, selects from among the Eligible Employees to be awarded a Contingent
Award.
2.14 "Participation Level" shall mean the applicable level as defined
in Section 4.03.
2.15 "Performance Matrix" shall mean the matrix shown in Section 6 by
which the Financial Performance Factor under this Plan is calculated.
2.16 "Plan" shall mean this 1997 One-Year Incentive Plan, as it may be
amended from time to time.
2.17 "Retirement" shall mean the termination of a Participant's
employment with the Holding Company or a Subsidiary under circumstances where
the Participant terminates on or after the retirement dates specified under the
Holding Company's retirement plan and the Participant's withdrawal from any
employment in the financial services industry in the State of Hawaii during the
Incentive Period.
2.18 "Return on Average Assets" (ROAA) shall mean Net Income (as
defined in Section 2.12) of the Holding Company for the Incentive Period divided
by Average Total Assets for the Incentive Period (which Average Total Assets are
reported in the Holding Company's annual report to shareholders or as otherwise
reported to shareholders).
2.19 "Salary" shall mean actual base salary for the Incentive Period.
2.20 "Subsidiary" or "Subsidiaries" shall mean any corporation(s) in
which the Holding Company or any Subsidiary (as defined hereby) owns 50 percent
or more of the total combined voting power of all classes of stock in such
corporation.
SECTION 3. ADMINISTRATION.
--------------
3.01 The Plan shall be administered by the Committee.
3.02 The Committee shall be vested with full authority to make such
rules and regulations as it deems necessary to administer
2
the Plan and to interpret the provisions of the Plan. Any determination,
decision or action of the Committee in connection with the construction,
interpretation, administration or application of the Plan shall be final,
conclusive and binding upon all Eligible Employees, Participants and any and all
persons claiming under or through any Eligible Employee or Participant, unless
otherwise determined by the Board.
3.03 Any determination, decision or action of the Committee provided
for in this Plan may be made or taken by action of the Board if the Board so
determines with the same force and effect as if such determination, decision or
action had been made or taken by the Committee. No member of the Committee or
Board shall be liable for any determination, decision or action made in good
faith with respect to the Plan or any Contingent Award. The fact that a member
of the Board shall at the time be, or shall theretofore have been or thereafter
may be, an Eligible Employee or a Participant shall not disqualify him or her
from taking part in and voting at any time as a member of the Board in favor of
or against any amendment of the Plan.
SECTION 4. CONTINGENT AWARDS AND PARTICIPATION LEVELS.
------------------------------------------
4.01 The Committee may, from time to time, in its sole discretion,
award to each Participant a Contingent Award based on a designated performance
level. The Committee shall cause notice to be given to each Participant of his
or her selection, Contingent Award and Participation Level.
4.02 The Contingent Award that may be awarded to any Participant shall
be a percentage of his or her Salary, which percentage shall be no greater than
the amounts set out in the table below.
CONTINGENT AWARD
BANK OF HAWAII OFFICERS AS A % OF SALARY
----------------------- ----------------
Group Head 40%
Division Manager 35%
Other 5%-30%
OTHER SUBSIDIARY OFFICERS 30%
-------------------------
4.03 The Committee shall also designate one of the following three
Participation Levels for each Participant, under which an Individual Performance
Percentage and a Financial Performance Percentage shall be designated for
weighting of the Individual Performance Factor and the Financial Performance
Factor:
Level 1: 50% Individual Performance Factor / 50% Financial Performance Factor
Level 2: 75% Individual Performance Factor / 25% Financial Performance Factor
Level 3: 90% Individual Performance Factor / 10% Financial Performance Factor
SECTION 5. ENDING VALUE OF CONTINGENT AWARD.
--------------------------------
5.01 The Ending Value of a Contingent Award shall be determined by
multiplying the Contingent Award (as a percentage) by
3
the sum of the "Financial Performance Value" and the "Individual Performance
Value" as determined below in this Section 5.
5.02 The Financial Performance Value is determined by multiplying the
Financial Performance Factor (as determined in accordance with Section 6) by the
Financial Performance Percentage of the Participation Level for the Participant.
5.03 The Individual Performance Value is determined by multiplying the
Individual Performance Factor (as determined in accordance with Section 7) by
the Individual Performance Percentage of the Participation Level for the
Participant.
SECTION 6. FINANCIAL PERFORMANCE FACTOR.
----------------------------
6.01 The Financial Performance Factor shall be determined based on the
following Matrix:
FINANCIAL PERFORMANCE FACTOR
===================================================
R 1.15% 0.8 1.0 1.4 1.6 2.0
O 1.10% 0.6 0.8 1.0 1.4 1.6
A 1.05% 0.4 0.6 0.8 1.0 1.4
A 1.00% 0.2 0.4 0.6 0.8 1.0
0.95% 0.0 0.2 0.4 0.6 0.8
===================================================
$135MM $140MM $145MM $150MM $155MM
==========================================
NET INCOME
==========================================
6.02 Interpolation shall be made on a straight line basis as
calculated by the Controllers Division. In certain unusual cases, either ROAA
or Net Income may be below 0.95% and $135MM, respectively. Proration will still
be performed if at least one of these factors is within the range indicated on
the Performance Matrix. In no case will the Financial Performance Factor exceed
2.0.
SECTION 7. INDIVIDUAL PERFORMANCE FACTOR.
-----------------------------
7.01 The Individual Performance Factor will be established based on
individual performance. This step shall appraise each Participant's performance
on his or her assigned job responsibilities in consideration of the economic and
other circumstances with which each Participant had to cope during the Incentive
Period. For this purpose, a Participant's performance appraisal will consider,
but is not limited to:
a. 1997 Individual Performance Objectives (see Attachment A).
b. How well basic responsibilities were carried out.
c. How well problems were anticipated and avoided or mollified.
d. How well unanticipated problems were overcome.
e. How well opportunities were identified and capitalized on.
The scope of circumstances to be considered shall include economic conditions;
cost considerations; political implications; revenue generation; public,
governmental, customer relations; and the like.
4
A Participant whose individual performance is evaluated as "Below Expectations"
or "Unsatisfactory" will not be eligible for a payout under the conditions of
the Plan (notwithstanding the Financial Performance Value determined in Section
6), and the Ending Value of the Participant's Contingent Award shall be zero.
7.02 The Chairman and the President shall recommend an Individual
Performance Factor for each Participant to the Committee. Individual
Performance Factors will range from zero to a maximum of 2.0. The Committee
shall make the final determination of awards and reserves the right to add to or
withhold all or any portion of an award at its sole discretion.
SECTION 8. DETERMINATION AND PAYMENT OF AWARDS.
-----------------------------------
8.01 If the Ending Value of the Contingent Award as computed in
accordance with Sections 5, 6 and 7 is zero, no payment shall be made, any
Contingent Awards shall terminate, and all rights thereunder shall cease.
8.02 Subject to the provisions of Section 9 and Section 12 hereof, the
Ending Value, if any, of the Contingent Award for each Participant shall be
determined as per Sections 5, 6 and 7. The amount determined for each
Participant shall be paid in cash in a lump sum (subject to withholding
requirements, if applicable) as soon as practical after determination thereof.
However, a Participant may make a request, on a form approved by the
Committee, for the deferral of all or part of any payment he or she may receive,
provided that such request is delivered to the Human Resources Division no later
than November 1 of the Incentive Period.
The Committee may accept or reject any such request for a deferral and
may determine the conditions of such deferral at the Committee's sole
discretion.
SECTION 9. TERMINATION OF EMPLOYMENT.
-------------------------
9.01 Except as otherwise provided in Section 9.02 below, if a
Participant does not remain continuously in the employ of the Holding Company or
a Subsidiary until the expiration of the Incentive Period with respect to any
Contingent Award, such Contingent Award shall terminate and all rights
thereunder shall cease.
9.02 If the employment of a Participant with the Holding Company or a
Subsidiary terminates during the Incentive Period due to his or her death,
disability or Retirement, the Committee shall determine the cash payment to be
made with respect to such Participant under the following method:
Salary shall be the year to date actual salary annualized prior to
the Participant's death, disability, or retirement. The Ending Value
of the Contingent Award calculated under Sections 5, 6, and 7 shall
be multiplied by a fraction, the numerator of which shall be the
number of full months of the Incentive Period during which
Participant was an employee of the Holding
5
Company or Subsidiary, and the denominator of which shall be 12.
This calculation and the payment of any award necessarily must be
paid after the termination of the Incentive Period in accordance with
Section 8.02.
SECTION 10. NON-TRANSFERABILITY OF CONTINGENT AWARD.
---------------------------------------
No Contingent Award shall be sold, assigned, transferred, encumbered,
hypothecated or otherwise anticipated by a Participant, and during the lifetime
of a Participant, any payment shall be payable only to the Participant. The
Committee shall, if it so determines, adopt rules for the designation by a
Participant of a beneficiary to receive cash payments, if any, that may become
due pursuant to this Plan after the death of the Participant.
SECTION 11. AMENDMENT OR TERMINATION OF THE PLAN.
------------------------------------
The Board or the Committee, may, at any time, terminate or at any time
and from time to time amend, modify or suspend this Plan provided that no such
amendment, modification, suspension or termination of the Plan shall in any
manner adversely affect any Contingent Award theretofore made under the Plan
without the consent of the Participant.
SECTION 12. CHANGES IN CAPITALIZATION OR CONTROL.
------------------------------------
In the event of a dissolution or liquidation of the Holding Company,
or a "Change in Control" of the Holding Company, the amount of cash payable with
respect to any Contingent Award for an Incentive Period that will end after such
event shall be determined and payable as if the Incentive Period ended on the
date of such event and an Ending Value of the Contingent Award of two times the
Contingent Award Percentage shall be used in calculating payments under this
Plan, notwithstanding any other provisions of this Plan. All Contingent Awards
shall be calculated based on the actual annualized salary for such shortened
Incentive Period. The Ending Value of the Contingent Award calculated under
this Section 12 shall be multiplied by a fraction, the numerator of which shall
be the number of full months of the Incentive Period, as adjusted under this
Section 12, and the denominator of which shall be 12. The Ending Value of the
Contingent Award under this Section 12 shall be paid to such participants within
ten days of the end of the shortened Incentive Period. For this purpose, a
"Change in Control" of the Holding Company means any one or more of the
following occurrences: (i) Any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the beneficial
owner of shares of the Holding Company having 25 percent or more of the total
number of votes that may be cast for the election of Directors of the Holding
Company; or (ii) As a result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, the
persons who were Directors of the Holding Company before the transaction shall
cease to constitute a majority of the
6
Board of Directors of the Holding Company or any successor to the Holding
Company.
7
Exhibit 10.2
BANCORP HAWAII, INC.
EXECUTIVE OFFICER ONE-YEAR INCENTIVE PLAN
__________
(Operating Document Effective January 1, 1997)
SECTION 1. ESTABLISHMENT AND PURPOSES.
--------------------------
1.01 Bancorp Hawaii, Inc. hereby establishes the Executive Officer
One-Year Incentive Plan.
1.02 The purpose of this Plan is to advance the interests of Bancorp
Hawaii, Inc. by (i) motivating special achievements by Eligible Employees upon
whose judgment, initiative and efforts Bancorp Hawaii, Inc. is largely dependent
for the successful conduct of its business through a compensation program
emphasizing performance objectives; (ii) supplementing other compensation plans;
and (iii) assisting Bancorp Hawaii, Inc. in retaining and attracting such
employees.
1.03 This Plan shall be effective as of January 1, 1997 and shall
operate on the basis of the current and succeeding Incentive Periods until such
time the Plan is amended or terminated under Section 10. This Plan constitutes
the current operating document for the administration of the Plan effective
January 1, 1994, that was disclosed to shareholders and received shareholder
approval on April 27, 1994. As such, the material terms of this Plan have been
approved by shareholders for purposes of the performance-based compensation
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended.
SECTION 2. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings
unless a different meaning is plainly required in the context:
2.01 "Board" shall mean the Board of Directors of the Holding Company.
2.02 "Committee" shall mean the Compensation and Management
Development Committee of the Holding Company.
2.03 "Contingent Award" shall mean an award to an Eligible Employee,
as determined in Section 4.02, expressed as a percentage of Salary for the
Incentive Period.
2.04 "Eligible Employees" shall mean the Executive Officers of the
Holding Company or of a Subsidiary (as described in Section 4.02) who, in the
opinion of the Committee, are or give promise of becoming of exceptional
importance to the Holding Company or any Subsidiary, and of making substantial
contributions to the success, growth and profit of the Holding Company and its
Subsidiaries. Neither members of the Committee nor any member of the Board who
is not an employee of the Holding Company or of a Subsidiary shall be an
Eligible Employee.
2.05 "Ending Value" shall be the amount as defined in
1
Section 5.01.
2.06 "Financial Performance Factor" shall mean an amount ranging from
zero to 2.0, as determined by the Performance Matrix as described in Section 5
(or, in certain events, by Section 7.02 or Section 10).
2.07 "Holding Company" shall mean Bancorp Hawaii, Inc.
2.08 "Incentive Period", with respect to any Contingent Award, shall
mean the Holding Company's fiscal year 1997, and each succeeding fiscal year.
2.09 "Net Income" shall mean the Holding Company's consolidated net
income for the Incentive Period, as reported in the annual report to
shareholders (or as otherwise reported to shareholders) adjusted as described in
this Section 2.09. The Holding Company's reported net income shall be adjusted
for the following:
a. Any extraordinary or unusual gain or loss transaction,
b. Securities gains or losses, and
c. Dividends on preferred shares.
The Committee will, in its sole discretion, determine any adjustments to be made
pursuant to this Section 2.09.
2.10 "Participant" shall mean a person that the Committee, in its sole
discretion, selects from among the Eligible Employees to be awarded a Contingent
Award.
2.11 "Performance Matrix" shall mean the matrix shown in Section 5 by
which the Financial Performance Factor under this Plan is calculated.
2.12 "Plan" shall mean this Executive Officer One-Year Incentive Plan,
as it may be amended from time to time. The Plan constitutes the current
operating document for the administration of the Plan adopted effective January
1, 1994.
2.13 "Retirement" shall mean the termination of a Participant's
employment with the Holding Company or a Subsidiary under circumstances where
the Participant terminates on or after the retirement dates specified under the
Holding Company's retirement plan and the Participant's withdrawal from any
employment in the financial services industry in the State of Hawaii during the
Incentive Period.
2.14 "Return on Average Assets" (ROAA) shall mean Net Income (as
defined in Section 2.09) of the Holding Company for the Incentive Period divided
by Average Total Assets for the Incentive Period (which Average Total Assets are
reported in the Holding Company's annual report to shareholders or as otherwise
reported to shareholders).
2.15 "Salary" shall mean actual base salary for the Incentive Period.
2.16 "Subsidiary" or "Subsidiaries" shall mean any corporation(s) in
which the Holding Company or any Subsidiary (as defined hereby) owns 50 percent
or more of the total combined voting power of all classes of stock in such
corporation.
SECTION 3. ADMINISTRATION.
--------------
3.01 The Plan shall be administered by the Committee.
3.02 The Committee shall be vested with full authority to
2
make such rules and regulations as it deems necessary to administer the Plan and
to interpret the provisions of the Plan. Any determination, decision or action
of the Committee in connection with the construction, interpretation,
administration or application of the Plan shall be final, conclusive and binding
upon all Eligible Employees, Participants and any and all persons claiming under
or through any Eligible Employee or Participant, unless otherwise determined by
the Board.
3.03 Any determination, decision or action of the Committee provided
for in this Plan may be made or taken by action of the Board if the Board so
determines with the same force and effect as if such determination, decision or
action had been made or taken by the Committee. No member of the Committee or
Board shall be liable for any determination, decision or action made in good
faith with respect to the Plan or any Contingent Award. The fact that a member
of the Board shall at the time be, or shall theretofore have been or thereafter
may be, an Eligible Employee or a Participant shall not disqualify him or her
from taking part in and voting at any time as a member of the Board in favor of
or against any amendment of the Plan.
3.04 With respect to any Incentive Period, the Performance Matrix
described in Section 5.02 may be modified by the Committee. Specifically, to
measure performance of the Holding Company and to determine the Performance
Matrix for any Incentive Period, the Committee may, no later than 90 days after
the commencement of the Incentive Period, select from among a number of business
criteria or measures, and establish specific objective numeric goals relating to
those measures. The measures may include return on average equity or year-end
equity, return on average of year-end assets, earnings per share, growth in
earnings per share, increase in Holding Company's Common Stock price, total
return to shareholders, growth in net income per employee, growth in noninterest
income, control of net overhead expense, control of nonperforming loans, capital
adequacy, or adequacy of loan loss reserves.
SECTION 4. CONTINGENT AWARDS.
-----------------
4.01 The Committee may, from time to time, in its sole discretion,
award to each Participant a Contingent Award. The Committee shall cause notice
to be given to each Participant of his or her selection.
4.02 The Contingent Award shall be an amount determined by multiplying
the Participant's salary by a percentage as determined by the Committee, which
percentage shall be no greater than the amounts set out in the table below.
CONTINGENT AWARD
BANK OF HAWAII OFFICERS AS A % OF SALARY
----------------------- ----------------
Chairman of the Board/CEO 50%
President or Vice Chairman 45%
4.03 In any event, the maximum payout under this Plan shall be two
times the Contingent Award. For example, if the Participant has a Salary of
$100,000 and the Contingent Award awarded to such Participant is 45%, the
Contingent Award is
3
$45,000. In this example, the maximum payout under this Plan is two times the
Contingent Award, or $90,000.
4.04 For any Participant, assessment of individual performance may
result in a downward adjustment of the maximum award, or the entire elimination
of this award. No upward adjustments based on discretion are permitted beyond
the maximum award for any Participant. An adjustment under this Section 4.04
may be made prior to a final determination of the award under Section 6.
SECTION 5. ENDING VALUE OF CONTINGENT AWARD.
--------------------------------
5.01 The Ending Value of a Contingent Award shall be determined by
multiplying the Contingent Award by the Financial Performance Factor (determined
from the Performance Matrix in this Section 5).
5.02 Performance Matrix:
=========================================================
FINANCIAL PERFORMANCE FACTOR
=========================================================
R 1.15% 1.0 1.3 1.6 1.8 2.0
O 1.10% 0.8 1.1 1.3 1.6 1.8
A 1.05% 0.5 0.8 1.1 1.4 1.6
A 1.00% 0.3 0.5 0.8 1.1 1.4
0.95% 0.0 0.3 0.5 0.8 1.1
=========================================================
$135MM $140MM $145MM $150MM $155MM
NET INCOME
=========================================================
5.03 Interpolation shall be made on a straight line basis as
calculated by the Controllers Division. Proration will still be performed if at
least one of these factors is within the range indicated on the Performance
Matrix. The maximum Financial Performance Factor under all circumstances is
2.000.
SECTION 6. DETERMINATION AND PAYMENT OF AWARDS.
-----------------------------------
6.01 If the Ending Value as computed and adjusted in accordance with
Sections 5 is zero, no payment shall be made, any Contingent Awards shall
terminate and all rights thereunder shall cease.
6.02 Subject to the provisions of Section 7 and Section 10 hereof, the
Ending Value, if any, of the Contingent Award for each Participant shall be
determined as per Section 5. The amount determined for each Participant shall
be paid in cash in a lump sum (subject to withholding requirements, if
applicable) as soon as practicable after determination thereof.
However, a Participant may make a request, on a form approved by the
Committee, for the deferral of all or part of any payment he or she may receive,
provided that such request is delivered to the Human Resources Division no later
than November 1 of the Incentive Period.
The Committee may accept or reject any such request for a deferral and
may determine the conditions of such deferral at the Committee's sole
discretion.
4
SECTION 7. TERMINATION OF EMPLOYMENT.
-------------------------
7.01 Except as otherwise provided in Section 7.02 below, if a
Participant does not remain continuously in the employ of the Holding Company or
a Subsidiary until the expiration of the Incentive Period with respect to any
Contingent Award, such Contingent Award shall terminate and all rights
thereunder shall cease.
7.02 If the employment of a Participant with the Holding Company or a
Subsidiary terminates during the Incentive Period due to his or her death,
disability or Retirement, the Committee shall determine the cash payment to be
made with respect to such Participant under the following method:
Salary shall be the year to date actual salary annualized prior to
the Participant's death, disability, or retirement. The Ending Value
of the Contingent Award calculated under Sections 4, 5 and 6 shall be
multiplied by a fraction, the numerator of which shall be the number
of full months of the Incentive Period during which Participant was
an employee of the Holding Company or Subsidiary, and the denominator
of which shall be 12. This calculation and the payment of any award
necessarily must be paid after the termination of the Incentive
Period in accordance with Section 6.02.
SECTION 8. NON-TRANSFERABILITY OF CONTINGENT AWARD.
---------------------------------------
No Contingent Award shall be sold, assigned, transferred, encumbered,
hypothecated or otherwise anticipated by a Participant, and during the lifetime
of a Participant, any payment shall be payable only to the Participant. The
Committee shall, if it so determines, adopt rules for the designation by a
Participant of a beneficiary to receive cash payments, if any, that may become
due pursuant to this Plan after the death of the Participant.
SECTION 9. AMENDMENT OR TERMINATION OF THE PLAN.
------------------------------------
The Board or the Committee, may, at any time, terminate or at any time
and from time to time amend, modify or suspend this Plan provided that no such
amendment, modification, suspension or termination of the Plan shall in any
manner adversely affect any Contingent Award theretofore made under the Plan
without the consent of the Participant.
SECTION 10. CHANGES IN CAPITALIZATION OR CONTROL.
------------------------------------
In the event of a dissolution or liquidation of the Holding Company,
or a "Change in Control" of the Holding Company, the amount of cash payable with
respect to any Contingent Award for an Incentive Period that will end after such
event shall be determined and payable as if the Incentive Period ended on the
date of such event and a Financial Performance Factor of 2.00 shall be
5
used in calculating payments under this Plan, notwithstanding any other
provisions of this Plan. All Contingent Awards shall be calculated based on the
actual annualized salary for such shortened Incentive Period. The Ending Value
of the Contingent Award calculated under this Section 10 shall be multiplied by
a fraction, the numerator of which shall be the number of full months of the
Incentive Period, as adjusted under this Section 10, and the denominator of
which shall be 12. The Ending Value of the Contingent Award under this Section
10 shall be paid to such participants within ten days of the end of the
shortened Incentive Period. For this purpose, a "Change in Control" of the
Holding Company means any one or more of the following occurrences: (i) Any
person, including a "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, becomes the beneficial owner of shares of the Holding
Company having 25 percent or more of the total number of votes that may be cast
for the election of Directors of the Holding Company; or (ii) As a result of, or
in connection with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions, the persons who were Directors of the Holding Company
before the transaction shall cease to constitute a majority of the Board of
Directors of the Holding Company or any successor to the Holding Company.
6
Exhibit 10.3
BANCORP HAWAII, INC.
SUSTAINED PROFIT GROWTH PLAN
__________
(Operating Document Effective January 1, 1997)
SECTION 1. ESTABLISHMENT AND PURPOSES.
--------------------------
1.01 Bancorp Hawaii, Inc. hereby establishes the Sustained Profit
Growth Plan.
1.02 The purpose of this Plan is to advance the interests of Bancorp
Hawaii, Inc. by (i) motivating special achievements by Eligible Employees upon
whose judgment, initiative and efforts Bancorp Hawaii, Inc. is largely dependent
for the successful conduct of its business through a compensation program
emphasizing long-term performance incentives; (ii) supplementing other
compensation plans; and (iii) assisting Bancorp Hawaii, Inc. in retaining and
attracting such employees.
1.03 This Plan shall be effective as of January 1, 1997 and shall
operate on the basis of the current and succeeding Incentive Periods until such
time the Plan is amended or terminated under Section 10. This Plan constitutes
the current operating document for the administration of the Plan effective
January 1, 1994, that was disclosed to shareholders and received shareholder
approval on April 27, 1994. As such, the material terms of this Plan have been
approved by shareholders for purposes of the performance-based compensation
requirements of Section 162 (m) of the Internal Revenue Code of 1986, as
amended.
SECTION 2. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings
unless a different meaning is plainly required in the context:
2.01 "Base Year" shall mean the fiscal year prior to the Incentive
Period.
2.02 "Board" shall mean the Board of Directors of the Holding Company.
2.03 "Committee" shall mean the Compensation and Management
Development Committee of the Holding Company.
2.04 "Contingent Award" shall mean an award to an Eligible Employee
expressed as a percentage of average annual Salary for the Incentive Period.
2.05 "Eligible Employees" shall mean officers or other employees of
the Holding Company or any Subsidiary, including directors who are also officers
or other employees of the Holding Company or of a Subsidiary, who, in the
opinion of the Committee, are or give promise of becoming of exceptional
importance to the Holding Company or any Subsidiary, and of making substantial
contributions to the success, growth and profit of the Holding Company and its
Subsidiaries. Neither members of the Committee nor
1
any member of the Board who is not an employee of the Holding Company or of a
Subsidiary shall be an Eligible Employee.
2.06 "Earnings Per Share" (EPS) shall mean fully diluted Earnings Per
Share as reported by the Holding Company in its annual report (or as otherwise
reported to shareholders) adjusted as described in this Section 2.06. The
Holding Company's reported net income shall be adjusted for the following in
computing EPS:
a. Any extraordinary or unusual gain or loss transaction,
b. Securities gains or losses, and
c. Dividends on preferred shares.
The Committee will, in its sole discretion, determine any adjustments to be made
to EPS pursuant to this Section 2.06. In the event of a stock dividend or stock
split during the Incentive Period, Earnings Per Share shall be recomputed to
take into account the effects of such stock dividend or stock split. Earnings
Per share will also be recomputed to eliminate the dilution effect of any stock
issued pursuant to any shareholders rights plan or similar program.
2.07 "Earnings Growth Rate" shall mean the growth of EPS during the
Incentive Period. For example, if EPS in the Base Year is $6.00 and EPS for the
third calendar year of the Incentive Period is $7.80, then the Earnings Growth
Rate is 30 percent. For purposes of this Plan, the Earnings Growth Rate shall
be rounded to the nearest one-tenth of one percent. In the event of a stock
dividend or stock split during the Incentive Period, Earnings Growth Rate shall
be restated to take into account the effect of such stock dividend or stock
split.
2.08 "Ending Value" shall be the amount as defined in Section 5.01.
2.09 "Ending Value Multiplier", with respect to any Contingent Award,
shall mean an amount ranging from zero to 2.00 as determined by applying the
Performance Matrix as described in Section 5 (or in certain events, Section 8.02
or Section 11) of the Plan.
2.10 "Holding Company" shall mean Bancorp Hawaii, Inc.
2.11 "Incentive Period", with respect to any Contingent Award, shall
mean the Holding Company's fiscal years 1997 through 1999 inclusive.
2.12 "Participant" shall mean a person that the Committee, in its sole
discretion, selects from among the Eligible Employees to be awarded a Contingent
Award.
2.13 "Performance Matrix" shall mean the matrix shown in Section 5 by
which is used in calculating Ending Value Multipliers under this Plan.
2.14 "Plan" shall mean this Sustained Profit Growth Plan, as it may be
amended from time to time. The Plan constitutes the current operating document
for the administration of the Plan adopted effective January 1, 1994.
2.15 "Retirement" shall mean the termination of a Participant's
employment with the Holding Company or a Subsidiary under circumstances where
the Participant terminates on or after the retirement dates specified under the
Holding Company's retirement plan and the Participant's withdrawal from any
employment in the financial services industry in the State of
2
Hawaii during the Incentive Period.
2.16 "Return on Average Equity" (ROAE) shall mean the result of the
summation of Net Income for the three years included in the Incentive Period
divided by the summation of the adjusted Average Total Equity for the three
years included in the Incentive Period. Net Income shall be the amounts
reported in the Holding Company's annual report to shareholders adjusted as
Earnings Per Share in Section 2.06. Adjusted Average Total Equity shall be the
Average Total Equity (as reported in the Holding Company's annual report to
shareholders) adjusted as appropriate for any preferred shares outstanding.
2.17 "Salary" shall mean base salary only.
2.18 "Subsidiary" or "Subsidiaries" shall mean any corporation(s) in
which the Holding Company or any Subsidiary (as defined hereby) owns 50 percent
or more of the total combined voting power of all classes of stock in such
corporation.
SECTION 3. ADMINISTRATION.
--------------
3.01 The Plan shall be administered by the Committee.
3.02 The Committee shall be vested with full authority to make such
rules and regulations as it deems necessary to administer the Plan and to
interpret the provisions of the Plan. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration or application of the Plan shall be final, conclusive and binding
upon all Eligible Employees, Participants and any and all persons claiming under
or through any Eligible Employee or Participant, unless otherwise determined by
the Board.
3.03 Any determination, decision or action of the Committee provided
for in this Plan may be made or taken by action of the Board if the Board so
determines with the same force and effect as if such determination, decision or
action had been made or taken by the Committee. No member of the Committee or
Board shall be liable for any determination, decision or action made in good
faith with respect to the Plan or any Contingent Award. The fact that a member
of the Board shall at the time be, or shall theretofore have been or thereafter
may be, an Eligible Employee or a Participant shall not disqualify him or her
from taking part in and voting at any time as a member of the Board in favor of
or against any amendment of the Plan.
3.04 With respect to any Incentive Period, the Performance Matrix
described in Section 5.02 may be modified by the Committee. Specifically, to
measure performance of the Holding Company and to determine the Performance
Matrix for any Incentive Period, the Committee may, no later than 90 days after
the commencement of the Incentive Period, select from among a number of business
criteria or measures, and establish specific objective numeric goals relating to
those measures. The measures may include return on average or year-end equity,
return on average or year-end assets, earnings per share, growth in earnings per
share, increase in Holding Company's common stock price, total return to
shareholders, growth in net income per employee, growth in noninterest income,
control of net overhead expense, control of nonperforming loans, capital
adequacy, and adequacy of loan loss
3
reserves.
SECTION 4. CONTINGENT AWARDS.
-----------------
4.01 The Committee may, from time to time, in its sole discretion,
award to each Participant a Contingent Award. The Committee shall cause notice
to be given to each Participant of his or her selection.
4.02 The Contingent Award that may be awarded to any Participant shall
be a percentage of his or her average annual Salary for the Incentive Period,
which percentage shall be no greater than the amounts set out in the following
table:
HOLDING COMPANY/ CONTINGENT AWARD
BANK OF HAWAII OFFICERS AS A % OF SALARY
----------------------- ----------------
Chairman of the Board/CEO 40%
President or Vice Chairman 35%
Executive Vice President 30%
Senior Vice President 25%
OTHER SUBSIDIARY OFFICERS 25%
-------------------------
4.03 The Contingent Award shall be multiplied by the Participant's
average annual Salary for the Incentive Period. In any event, the maximum
payout under this Plan shall be two times the Contingent Award. For example, a
Participant with an average annual Salary of $80,000 might receive a Contingent
Award of 25% or $20,000. In this example, the maximum payout under this Plan
would be two times the Contingent Award, or $40,000.
SECTION 5. ENDING VALUE OF CONTINGENT AWARD.
--------------------------------
5.01 The Ending Value of a Contingent Award shall be determined by
multiplying the Contingent Award by the Ending Value Multiplier determined from
the Performance Matrix in Section 5.02.
5.02 Ending Value Multiplier:
================================================
EARNINGS GROWTH RATE
================================================
ROAE 15% 20% 25% 30% 35%
================================================
18% 1.00 1.25 1.50 1.75 2.00
17% 0.82 1.07 1.32 1.57 1.82
16% 0.65 0.90 1.15 1.40 1.65
15% 0.48 0.73 0.98 1.23 1.48
14% 0.32 0.57 0.82 1.07 1.32
13% 0.16 0.41 0.66 0.91 1.16
12% 0.00 0.25 0.50 0.75 1.00
================================================
5.03 Interpolation between the points shown above shall be made on a
straight line basis as calculated by the Controllers Division. The maximum
Ending Value Multiplier under all circumstances will be 2.00.
SECTION 6. CONDITIONS.
----------
4
The Chairman and the President shall prepare recommendations for the
Committee. The Committee shall make the final determination of the Ending Value
Multiplier and any awards, and reserves the right to add to or withhold all or
any portion of any or all award(s) at its sole discretion. However, with
respect to any Participant subject to the deduction limit of Section 162(m) of
the Internal Revenue Code of 1986, as amended, no upward adjustments based on
discretion are permitted beyond the maximum award for the Participants.
SECTION 7. DETERMINATION AND PAYMENT OF AWARDS.
-----------------------------------
7.01 If the Ending Value as computed and adjusted in accordance with
Sections 4 and 5 is zero, no payment shall be made, any Contingent Awards shall
terminate and all rights thereunder shall cease.
7.02 Subject to the provisions of Section 8 and Section 11 hereof, the
Ending Value, if any, of the Contingent Award for each Participant shall be
determined as per Sections 4 and 5. The amount determined for each Participant
shall be paid in cash in a lump sum (subject to withholding requirements, if
applicable) as soon as practicable after determination thereof.
However, a Participant may make a request, on a form approved by the
Committee, for the deferral of all or part of any payment he or she may receive,
provided that such request is delivered to the Human Resources Division no later
than November 1 of the Incentive Period.
The Committee may accept or reject any such request for a deferral and
may determine the conditions of such deferral at the Committee's sole
discretion.
SECTION 8. TERMINATION OF EMPLOYMENT.
-------------------------
8.01 Except as otherwise provided in Section 8.02 below, if a
Participant does not remain continuously in the employ of the Holding Company or
a Subsidiary until the expiration of the Incentive Period with respect to any
Contingent Award, such Contingent Award shall terminate and all rights
thereunder shall cease.
8.02 If the employment of a Participant with the Holding Company or a
Subsidiary terminates during the Incentive Period due to his or her death,
disability or Retirement, the Committee shall determine the cash payment to be
made with respect to such Participant under the following method:
The Contingent Award payable, if any, shall be based on the average
annual salary of the Participant for the shortened incentive period
ending on the date of the Participant's death, disability, or
retirement. The Ending Value of the Contingent Award calculated under
Sections 4 and 5 shall be multiplied by a fraction, the numerator of
which shall be the number of full months of the Incentive Period
during which Participant was an employee of the
5
Holding Company or Subsidiary, and the denominator of which shall be
36. This calculation and the payment of any award necessarily must
be paid after the termination of the Incentive Period in accordance
with Section 7.02.
SECTION 9. NON-TRANSFERABILITY OF CONTINGENT AWARD.
---------------------------------------
No Contingent Award shall be sold, assigned, transferred, encumbered,
hypothecated or otherwise anticipated by a Participant, and during the lifetime
of a Participant, any payment shall be payable only to the Participant. The
Committee shall, if it so determines, adopt rules for the designation by a
Participant of a beneficiary to receive cash payments, if any, that may become
due pursuant to this Plan after the death of the Participant.
SECTION 10. AMENDMENT OR TERMINATION OF THE PLAN.
------------------------------------
The Board or the Committee, may, at any time, terminate or at any time
and from time to time amend, modify or suspend this Plan provided that no such
amendment, modification, suspension or termination of the Plan shall in any
manner adversely affect any Contingent Award theretofore made under the Plan
without the consent of the Participant.
SECTION 11. CHANGES IN CAPITALIZATION.
-------------------------
In the event of a dissolution or liquidation of the Holding Company,
or a "Change in Control" of the Holding Company, the amount of cash payable with
respect to any Contingent Award for an Incentive Period that will end after such
event shall be determined and payable as if the Incentive Period ended on the
date of such event and an Ending Value Multiplier of 2.00 shall be used in
calculating the award for this Plan, notwithstanding any other provisions of
this Plan. All Contingent Awards shall be calculated based on the average
annual salary of the Participant for the shortened Incentive Period. The Ending
Value of the Contingent Award calculated under this Section 11 shall be
multiplied by a fraction, the numerator of which shall be the number of full
months of the Incentive Period, as adjusted under this Section 11, and the
denominator of which shall be 36. The Ending Value of the Contingent Award
under this Section 11 shall be paid to such Participants within ten days of the
end of the shortened Incentive Period. For this purpose, a "Change in Control"
of the Holding Company means any one or more of the following occurrences: (i)
Any person, including a "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, becomes the beneficial owner of shares of the Holding
Company having 25 percent or more of the total number of votes that may be cast
for the election of Directors of the Holding Company; or (ii) As a result of, or
in connection with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions, the persons who were Directors of the Holding Company
before the transaction shall cease
6
to constitute a majority of the Board of Directors of the Holding Company or any
successor to the Holding Company.
7
Exhibit 11.1
Bancorp Hawaii, Inc.
Statement Regarding Computation of Per Share Earnings
Years Ended December 31
Fully
Primary Diluted
------------ ------------
1996
Net Income $133,124,000 $133,124,000
============ ============
Daily Average Shares Outstanding 40,797,864 40,797,864
Shares Assumed Issued for Stock Options 414,398 436,424
------------ ------------
41,212,262 41,234,288
============ ============
Earnings Per Common Share and
Common Share Equivalents $ 3.23 $ 3.23
============ ============
1995
Net Income $121,800,000 $121,800,000
============ ============
Daily Average Shares Outstanding 41,662,939 41,662,939
Shares Assumed Issued for Stock Options 364,517 399,005
------------ ------------
42,027,456 42,061,944
============ ============
Earnings Per Common Share and
Common Share Equivalents $ 2.90 $ 2.90
============ ============
1994
Net Income $117,738,000 $117,738,000
============ ============
Daily Average Shares Outstanding 42,356,253 42,356,253
Shares Assumed Issued for Stock Options 468,278 468,278
------------ ------------
42,824,531 42,824,531
============ ============
Earnings Per Common Share and
Common Share Equivalents $ 2.75 $ 2.75
============ ============
Exhibit 12.1
Bancorp Hawaii, Inc.
Statement Regarding Computation of Ratios
Year Ended December 31, 1996
(in millions of dollars)
Earnings:
1. Income before income taxes............................ $209.8
2. Plus: fixed charges including interest on deposits... 421.0
3. Earnings including fixed charges...................... 630.8
4. Less: interest on deposits........................... 288.7
5. Earnings excluding interest on deposits............... $342.1
Fixed Charges:
6. Fixed charges including interest on deposits.......... $421.0
7. Less: interest on deposits........................... 288.7
8. Fixed charges excluding interest on deposits.......... $132.3
Ratio of Earnings to Fixed Charges:
Including interest on deposits (line 3 divided by line 6). 1.50 x
Excluding interest on deposits (line 5 divided by line 8). 2.59 x
EXHIBIT 19.1
To Our Shareholders:
We are pleased to report continued steady growth for Bancorp as well as
progress in advancing the company's development and diversification strategies.
Through the first nine months of this year, Bancorp Hawaii posted earnings of
$98.7 million, up from $89.7 million reported for the same period in 1995, an
increase of 10.0 percent. Earnings-per-share for this period were also up at
$2.39 compared with $2.13 at September 30, 1995. Year-to-date return on average
assets was 0.99 percent and return on average equity was 12.35 percent.
As a result of legislation mandated by Congress to fund the Savings
Association Insurance Fund (SAIF), Bancorp Pacific, our thrift affiliate,
expensed a one-time $5.0 million assessment this quarter. The assessment, which
applies to all thrift institutions, had an after-tax impact on Bancorp Hawaii of
about $3.0 million, and the company's third quarter earnings of $31.3 million
include the effect of this charge.
Earnings per share for the quarter were $0.76 relative to $0.78 for the
third quarter of 1995. Bancorp's total assets on September 30, 1996, stood at a
record $13.8 billion, an increase of 10.3 percent from 1995's third quarter
total of $12.5 billion. Net loans increased 9.6 percent to $8.3 billion from
$7.6 billion at the end of last year's third quarter. Deposits and repurchase
agreements were $10.4 billion compared with $9.2 billion at September 30, 1995.
Banque de Tahiti and Banque de Nouvelle Caledonie, subsidiaries acquired
earlier this year and now fully consolidated into Bancorp Hawaii, continue to be
a source of growth in both deposits and loans. These and other Pacific branches
and subsidiaries are yielding good returns and validating your company's
geographical diversification strategy.
In August, Bancorp's Arizona subsidiary, First National Bank of Arizona
(FNBA), entered into an agreement to purchase four Arizona branches of Home
Savings of America. These branches, located in Mesa, Tucson, Green Valley and
Prescott, together have deposits of approximately $270 million. The purchase is
expected to close in the first quarter of 1997 and will bring the number of FNBA
branches to ten.
In September, the company completed the acquisition of more than 4,500
deposit accounts from Commercial Credit Corporation (Hawaii), a transaction that
added approximately $45 million in core deposits and further advances our
strategic goal of growing relationship deposits.
Also, during the third quarter Bancorp entered into an agreement with
Capital Trust, Limited to provide representative services for Bank of Hawaii in
India. Capital Trust, one of
1
India's leading merchant banks, will provide various services to bank customers
interested in doing business in India. This is an important step in advancing
our long range Asian and Pacific strategy.
In October, your company's Board of Directors declared a quarterly dividend
of 30 cents payable on December 13, 1996 to shareholders of record on November
21, 1996. In addition, the Board authorized the repurchase of up to 2 million
shares of Bancorp Hawaii stock. This repurchase, which is in addition to the
ongoing stock repurchase program for dividend reinvestment, stock option and
profit-sharing plans, will allow the company to reallocate capital for maximum
value to shareholders.
As we steer your company on a steady course into the 21st century, your
confidence and continued support are invaluable to us.
Sincerely,
LAWRENCE M. JOHNSON
Lawrence M. Johnson
Chairman and Chief Executive Officer
Corporate Offices:
Financial Plaza of the Pacific
130 Merchant Street
Honolulu, Hawaii 96813
Investor or Analyst Inquiries:
David A. Houle
Senior Vice President, Treasurer and Chief Financial Officer
(808) 537-8288
or
Sharlene K. Bliss
Investor Relations Officer
(808) 537-8037
or
Cori C. Weston
Corporate Secretary
(808) 537-8272
2
Highlights (Unaudited) Bancorp Hawaii, Inc., and subsidiaries
- ---------------------------------------------------------------------------------------
September 30 September 30
1996 1995
- ---------------------------------------------------------------------------------------
Return on Average Assets 0.99% 0.97%
- ---------------------------------------------------------------------------------------
Return on Average Equity 12.35% 11.82%
- ---------------------------------------------------------------------------------------
Average Spread on Earning Assets 3.83% 3.72%
- ---------------------------------------------------------------------------------------
Book Value Per Common Share $26.19 $25.03
- ---------------------------------------------------------------------------------------
Loss Reserve/Loans and Leases Outstanding 1.97% 1.95%
- ---------------------------------------------------------------------------------------
Average Equity/Average Assets 8.01% 8.23%
- ---------------------------------------------------------------------------------------
Common Stock Price Range High Low Dividend
1995........................................ $37.13 $24.88 $1.08
1996 First Quarter.......................... $36.25 $33.25 $0.28
Second Quarter......................... $37.63 $33.13 $0.28
Third Quarter.......................... $39.75 $34.13 $0.30
3
Consolidated Statements of Income (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September 30 September 30 September 30 September 30
(in thousands of dollars except per share amounts) 1996 1995 1996 1995
====================================================================================================================================
Total Interest Income $ 250,255 $ 226,337 $ 725,380 $ 662,752
Total Interest Expense 127,937 117,865 369,396 344,812
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 122,318 108,472 355,984 317,940
Provision for Possible Loan Losses 3,733 4,377 12,320 12,950
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 118,585 104,095 343,664 304,990
Total Non-Interest Income 43,536 35,906 123,828 111,695
Total Non-Interest Expense 112,611 87,875 313,976 272,619
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 49,510 52,126 153,516 144,066
Provision for Income Taxes 18,182 19,206 54,865 54,350
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 31,328 $ 32,920 $ 98,651 $ 89,716
====================================================================================================================================
Earnings Per Common Share and Common Share Equivalents $0.76 $0.78 $2.39 $2.13
- ------------------------------------------------------------------------------------------------------------------------------------
Average Common Shares and Common Share Equivalents Outstanding 41,182,809 41,955,136 41,334,572 42,070,392
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Condition (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-Bearing Deposits $ 623,592 $ 789,050 $ 612,864
Investment Securities (Market Value of $3,607,561, $3,366,266 and
$3,224,418 respectively) 3,613,656 3,360,153 3,228,371
Funds Sold 88,224 116,173 56,660
Loans 8,683,244 8,152,406 7,893,978
Unearned Income (181,719) (147,404) (142,515)
Reserve for Possible Loan Losses (167,770) (151,979) (150,931)
Net Loans 8,333,755 7,853,023 7,600,532
- ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 12,659,227 12,118,399 11,498,427
Cash and Non-Interest Bearing Deposits 457,116 469,031 433,665
Premises and Equipment 273,075 246,515 237,962
Other Assets 391,055 372,839 326,564
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $13,780,473 $13,206,784 $12,496,618
====================================================================================================================================
Liabilities
Deposits $ 8,418,490 $ 7,576,770 $ 6,946,891
Securities Sold Under Agreements to Repurchase 1,996,536 1,926,540 2,262,197
Funds Purchased 479,538 787,437 537,268
Short-Term Borrowings 489,061 476,867 480,857
Other Liabilities 374,668 321,298 330,709
Long-Term Debt 957,431 1,063,436 897,837
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 12,715,724 12,152,348 11,455,759
Shareholders' Equity
Common Stock ($2 par value), authorized 100,000,000 shares;
outstanding, September 1996 - 40,661,103;
December 1995 - 41,340,817; September 1995 - 41,579,607; 81,322 82,682 83,159
Surplus 215,014 240,080 248,818
Unrealized Valuation Adjustments (12,759) 13,902 11,581
Retained Earnings 781,172 717,772 697,301
- -----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,064,749 1,054,436 1,040,859
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $13,780,473 $13,206,784 $12,496,618
====================================================================================================================================
4
Exhibit 21.1
BANCORP HAWAII, INC.
SUBSIDIARIES OF THE REGISTRANT
Bancorp's organizational structure at December 31, 1996 follows. All of the
subsidiaries are wholly owned except for those entities for which directors own
qualifying shares. All the entities are consolidated with the immediate parent
company.
BANCORP HAWAII, INC. (Parent)
Bank Holding Company
Subsidiaries:
BANCORP HAWAII INSURANCE SERVICES, LTD.
Hawaii
BANCORP HAWAII SMALL BUSINESS INVESTMENT COMPANY, INC.
Hawaii
BANCORP INSURANCE AGENCY OF HAWAII, INC.
Hawaii
BANCORP LIFE INSURANCE COMPANY OF HAWAII, INC.
Arizona
FIRST NATIONAL BANK OF ARIZONA
Arizona
BANCORP HAWAII CAPITAL TRUST I
Delaware
BANCORP PACIFIC, INC.
Delaware
Subsidiaries:
First Federal Savings & Loan Association of America
Hawaii
First Savings & Loan Association of America (Guam)
Guam
Subsidiary:
Bancorp Finance of Hawaii-Guam, Inc.
Guam
BANK OF HAWAII
Subsidiaries:
Bank of Hawaii International Corp., New York - (Edge Act Office)
New York
1
Bank of Hawaii International, Inc. - (Foreign Holding Company)
Hawaii
Bancorp Investment Group, Ltd.
Hawaii
Bancorp Leasing of Hawaii, Inc. (Parent) - (Leasing)
Hawaii
Subsidiaries:
Arbella Leasing Corp.
Delaware
Bancorp Leasing International, Inc.
Delaware
Bancorp Leasing of America, Inc.
Delaware
Bankoh Equipment Leasing Corp.
Delaware
BNE Airfleets Corporation
Barbados
S.I.L., Inc.
Delaware
Bankoh Corporation (fka Hawaiian Hong Kong Holdings, Ltd.)
Hawaii
Bankoh Investment Advisory Services, Ltd. - (Advisory Services)
Hawaii
Hawaiian Trust Company, Limited - (Trust Services)
Hawaii
Pacific Capital Asset Management, Inc. - (Investment Advisory Services)
Hawaii
Pan-Ocean Insurance Agency, Inc. - (Insurance)
Hawaii
Realty and Mortgage Investors of the Pacific, Ltd. - (Real Estate Lending)
Delaware
2
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements
(Form S-8 Nos. 2-96329, 33-29872, 2-63615, 2-84164, 33-23495, 33-49836, 33-
54777, 33-57267, 333-02835 and 333-14929) and (Form S-3 Nos. 33-25036, 33-44395
and 33-54775) of Bancorp Hawaii, Inc. and subsidiaries of our report dated
January 22, 1997, with respect to the consolidated financial statements of
Bancorp Hawaii, Inc. and subsidiaries included in this Annual Report (Form 10-K)
for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Honolulu, Hawaii
February 26, 1997
9
1,000
YEAR
DEC-31-1996
DEC-31-1996
581,221
635,519
141,920
1,687
2,372,897
1,258,756
1,261,146
8,699,286
167,795
14,009,167
8,684,079
2,968,822
358,001
932,143
0
0
79,918
986,204
14,009,167
720,991
217,972
42,083
981,046
288,716
499,773
481,273
22,227
1,364
421,260
209,820
209,820
0
0
133,124
3.23
3.23
3.84
72,500
34,700
0
0
151,979
44,084
30,792
167,795
139,400
28,400
8,400
