1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 -------------------- FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 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 0-7949 -------------------- FIRST HAWAIIAN, INC. (Exact name of registrant as specified in its charter) -------------------- <TABLE> <S> <C> DELAWARE 99-0156159 (State of incorporation) (I.R.S. Employer Identification No.) 1132 BISHOP STREET, HONOLULU, HAWAII 96813 (Address of principal executive offices) (Zip Code) </TABLE> (808) 525-7000 (Registrant's telephone number, including area code) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of each of the issuer's classes of common stock as of April 30, 1996 was: <TABLE> <CAPTION> Class Outstanding ------------------------------ ------------------ <S> <C> Common Stock, $5 Par Value 31,127,897 Shares </TABLE> ===============================================================================
2 Part I. FINANCIAL INFORMATION <TABLE> <S> <C> <C> Item 1. Financial Statements (Unaudited) Page ---- Consolidated Balance Sheets at March 31, 1996, December 31, 1995 and March 31, 1995 2 Consolidated Statements of Income for the three months ended March 31, 1996 and 1995 3 Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and 1995 4 Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 1996 and 1995 5 Notes to Consolidated Financial Statements 5 - 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 </TABLE> EXHIBIT INDEX 1
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (Unaudited) First Hawaiian, Inc. and Subsidiaries <TABLE> <CAPTION> MARCH 31, December 31, March 31, ------------ --------------- ---------- 1996 1995 1995 ------------ --------------- ---------- (in thousands) <S> <C> <C> <C> ASSETS Interest-bearing deposits in other banks $ 206,670 $ 244,570 $ 8,770 Federal funds sold and securities purchased under agreements to resell 162,000 169,803 285,904 Investment securities: Held-to-maturity (fair value of $817,206) -- -- 823,649 Available-for-sale 1,098,091 1,175,293 161,877 Loans and leases: Loans and leases 5,206,288 5,259,545 5,713,570 Less allowance for loan and lease losses 79,585 78,733 61,236 ------------ ------------ ------------ Net loans and leases 5,126,703 5,180,812 5,652,334 ------------ ------------ ------------ Total earning assets 6,593,464 6,770,478 6,932,534 Cash and due from banks 329,951 304,051 267,313 Premises and equipment 241,800 241,987 245,320 Customers' acceptance liability 695 1,995 2,107 Core deposit premium 16,092 16,665 13,312 Goodwill 74,410 75,309 77,993 Other assets 170,317 154,024 164,848 ------------ ------------ ------------ TOTAL ASSETS $ 7,426,729 $ 7,564,509 $ 7,703,427 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 817,220 $ 913,228 $ 833,175 Interest-bearing demand 1,130,067 1,073,136 1,128,513 Savings 1,106,610 1,147,997 1,155,446 Time 1,990,851 1,927,011 1,640,479 Foreign 242,392 296,941 467,543 ------------ ------------ ------------ Total deposits 5,287,140 5,358,313 5,225,156 Short-term borrowings 1,013,178 1,083,179 1,395,182 Acceptances outstanding 695 1,995 2,107 Other liabilities 226,736 232,733 214,738 Long-term debt 241,751 238,752 228,283 ------------ ------------ ------------ Total liabilities 6,769,500 6,914,972 7,065,466 ------------ ------------ ------------ Stockholders' equity: Common stock 162,713 162,713 162,713 Surplus 133,933 133,925 133,820 Retained earnings 396,999 385,976 355,675 Unrealized valuation adjustment 2,371 5,489 (197) Treasury stock (38,787) (38,566) (14,050) ------------ ------------ ------------ Total stockholders' equity 657,229 649,537 637,961 ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,426,729 $ 7,564,509 $ 7,703,427 ============ ============ ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 2
4 CONSOLIDATED STATEMENTS OF INCOME (Unaudited) First Hawaiian, Inc. and Subsidiaries <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------------------------ 1996 1995 ---------------- ----------------- (in thousands, except shares and per share data) <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 110,252 $ 118,656 Lease financing income 2,837 3,592 Interest on investment securities: Taxable interest income 16,798 11,360 Exempt from Federal income taxes 860 1,654 Other interest income 5,032 3,332 ---------------- ----------------- Total interest income 135,779 138,594 ---------------- ----------------- INTEREST EXPENSE Deposits 42,049 42,149 Short-term borrowings 13,834 20,513 Long-term debt 3,876 3,179 ---------------- ----------------- Total interest expense 59,759 65,841 ---------------- ----------------- Net interest income 76,020 72,753 Provision for loan and lease losses 3,322 3,340 ---------------- ----------------- Net interest income after provision for loan and lease losses 72,698 69,413 ---------------- ----------------- NONINTEREST INCOME Trust income 6,497 6,354 Service charges on deposit accounts 5,986 6,306 Other service charges and fees 9,817 8,254 Securities gains, net 20 1 Other 1,648 2,068 ---------------- ----------------- Total noninterest income 23,968 22,983 ---------------- ----------------- NONINTEREST EXPENSES Salaries and wages 24,194 23,227 Employee benefits 9,178 7,234 Occupancy expense 6,445 6,426 Equipment expense 5,481 6,386 Other 22,108 20,072 ---------------- ----------------- Total noninterest expenses 67,406 63,345 ---------------- ----------------- Income before income taxes 29,260 29,051 Income taxes 9,057 10,281 ---------------- ----------------- NET INCOME $ 20,203 $ 18,770 ================ ================= PER SHARE DATA NET INCOME $ .65 $ .59 ================ ================= CASH DIVIDENDS $ .295 $ .295 ================ ================= AVERAGE SHARES OUTSTANDING 31,119,485 32,021,262 ================ ================= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
5 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) First Hawaiian, Inc. and Subsidiaries <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------------------------- 1996 1995 ---------------- --------------- (in thousands) <S> <C> <C> CASH AND DUE FROM BANKS AT BEGINNING OF YEAR $ 304,051 $ 262,894 ---------------- --------------- Cash flows from operating activities: Net income 20,203 18,770 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 3,322 3,340 Depreciation and amortization 8,094 6,757 Income taxes 8,314 8,265 Decrease (increase) in interest receivable 4,036 (3,333) Increase (decrease) in interest payable (6,427) 7,921 Decrease in prepaid expenses 114 1,304 Other (27,428) (42,084) ---------------- --------------- Net cash provided by operating activities 10,228 940 ---------------- --------------- Cash flows from investing activities: Net decrease in interest-bearing deposits in other banks 37,900 2,900 Net decrease (increase) in Federal funds sold and securities purchased under agreements to resell 7,803 (105,904) Purchase of held-to-maturity investment securities -- (44,031) Proceeds from maturity of held-to-maturity investment securities -- 216,269 Purchase of available-for-sale investment securities (168,232) (10,962) Proceeds from maturity of available-for-sale investment securities 240,257 1,077 Net decrease (increase) in loans and leases to customers 50,059 (183,860) Capital expenditures (3,247) (4,579) Other (1,300) (5,103) ---------------- --------------- Net cash provided by (used in) investing activities 163,240 (134,193) ---------------- --------------- Cash flows from financing activities: Net increase (decrease) in deposits (71,173) 72,943 Net increase (decrease) in short-term borrowings (70,001) 65,366 Proceeds from long-term debt 3,000 8,955 Payments on long-term debt (1) (3) Cash dividends paid (9,180) (9,434) Repurchased common stock (213) (155) ---------------- --------------- Net cash provided by (used in) financing activities (147,568) 137,672 ---------------- --------------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 329,951 $ 267,313 ================ =============== Supplemental disclosures: Interest paid $ 66,186 $ 57,920 ================ =============== Net income taxes paid $ 743 $ 2,016 ================ =============== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) First Hawaiian, Inc. and Subsidiaries <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------------------------- 1996 1995 ---------------- ----------------- (in thousands) <S> <C> <C> BALANCE, BEGINNING OF PERIOD $ 649,537 $ 627,944 Net income 20,203 18,770 Purchase of treasury stock (213) (155) Unrealized valuation adjustment (3,118) 836 Cash dividends paid (9,180) (9,434) ---------------- ---------------- BALANCE, END OF PERIOD $ 657,229 $ 637,961 ================ ================ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) First Hawaiian, Inc. and Subsidiaries 1. BASIS OF PRESENTATION The consolidated financial statements of the Company include the accounts of First Hawaiian, Inc. and its wholly-owned subsidiaries - First Hawaiian Bank and its wholly-owned subsidiaries; Pioneer Federal Savings Bank and its wholly-owned subsidiary; First Hawaiian Creditcorp, Inc.; First Hawaiian Leasing, Inc.; and FHI International, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the consolidated financial statements for 1995 have been reclassified to conform with the 1996 presentation. Such reclassifications had no effect on the consolidated net income as previously reported. In the opinion of management, all adjustments (which included only normal recurring adjustments) necessary for a fair presentation are reflected in the consolidated financial statements. 2. ACCOUNTING CHANGES Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights." SFAS 122 amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require that mortgage banking enterprises recognize as separate assets rights to service mortgage loans for others. SFAS No. 122 also requires that mortgage banking enterprises assess capitalized mortgage servicing rights based on the fair value of those rights on a disaggregated basis. The adoption of this standard did not have a material effect on the consolidated financial statements of the Company. Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. The adoption of SFAS No. 114 did not result in additional provisions for loan and lease losses primarily because the majority of impaired loan valuations continue to be based on the fair value of the collateral. The provision for loan and lease losses charged to expense is based upon the Company's historical loss experience and estimates of future loan and lease losses in the current loan and lease portfolio, including the evaluation of impaired loans in accordance with SFAS No. 114. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. Impairment is primarily measured based on the fair value of the collateral. Impairment losses are included in the provision for loan and lease losses. SFAS No. 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, except for those loans restructured under a troubled debt structuring. Loans collectively evaluated for impairment include certain smaller balance commercial loans, consumer loans and residential real estate loans, and are not included in the data that follows. 5
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) First Hawaiian, Inc. and Subsidiaries <TABLE> <CAPTION> The following table summarizes impaired loan information as of March 31, 1996: (in thousands) <S> <C> Impaired loans $78,334 Impaired loans with related allowance for loan and lease losses calculated under SFAS No. 114 48,975 </TABLE> Interest payments on impaired loans are applied to principal. 6
8 <TABLE> <S> <C> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS </TABLE> NET INCOME The Company recorded consolidated net income for the first quarter of 1996 of $20,203,000 compared to $18,770,000 for the first quarter of 1995, an increase of 7.6%. On a per share basis, consolidated net income for the first quarter of 1996 was $.65, an increase of 10.2% over the same period in 1995. The proportionately greater increase in earnings per share was attributable to the fewer average number of shares outstanding in 1996 as compared to 1995, as a result of the Company's stock repurchase plan which authorized the total repurchase of up to 1.6 million shares, or five percent of the Company's approximately 31 million shares outstanding. On an annualized basis, the Company's return on average total assets for the first quarter of 1996 was 1.11% compared to 1.00% for the same period in 1995 and return on average stockholders' equity was 12.44% compared to 12.07% for the same period in 1995. The increase in return on average total assets was primarily attributable to the increase in earnings, coupled with a 3.3% decrease in average total assets. The increase in return on average stockholders' equity was due to the increase in earnings and the stock repurchase plan previously discussed. NET INTEREST INCOME Net interest income, on a fully taxable equivalent basis, increased $2,265,000, or 3.0%, to $76,606,000 for the three months ended March 31, 1996, up from $74,341,000 for the same period in 1995. The net interest margin was 4.58% for the first quarter of 1996, up 24 basis points (1% equals 100 basis points) over the first quarter of 1995. Both the yield on average earning assets and rate paid on funding sources decreased during the first quarter of 1996 as compared with the same period in 1995 due to a lower interest rate environment. However, the 27 basis point decrease in the rate paid on funding sources outpaced the decrease in the yield on average earning assets of 3 basis points, resulting in a favorable impact on the net interest margin. The decrease in the rate paid on funding sources was due to interest rate swaps designed to mitigate the impact on the net interest margin from declining interest rates. Average earning assets decreased by $219,542,000, or 3.2%, for the first quarter compared to the same period in 1995. In the second quarter of 1995, the Company securitized approximately $490,000,000 of adjustable rate mortgage loans with the Federal National Mortgage Association ("FNMA") in an effort to increase its funding capacity and liquidity. The securities backed by these loans are held by the Company and were reclassified to the investment security portfolio. The investment security portfolio reflected an increase of only $53,174,000 over the same period in 1995 despite the reclassification of the securitized loans. The investment portfolio was allowed to run-off as securities matured since the securitized loans provided the necessary collateral for public deposits. This accounts for the decline in average earning assets for the quarter compared to the same period in 1995. In addition, the increase in the overall yield on the investment security portfolio, compared to the first quarter of 1995, was primarily attributable to the higher percentage of mortgage pass-through certificates in the portfolio. Excluding the effect of such securitization, average loans and leases for the first quarter of 1996 reflected a slight increase over the same period in 1995. The Company continues its efforts to diversify the loan portfolio, both geographically and by industry. Also, the mix of average earning assets continues to change (excluding the effect of the loan securitization), with higher-yielding average loans and leases representing 83.4% of average earning assets for the first quarter of 1996, as compared to 81.0% for the same period in 1995. Average interest-bearing deposits and liabilities decreased by $263,720,000, or 4.4%, for the first quarter of 1996, as compared to the same period in 1995. As a result of depositors seeking higher yields, the mix of average interest-bearing deposits and liabilities changed with higher-yielding average time deposits representing 37.0% of average interest-bearing deposits and liabilities for the first quarter of 1996, up from 31.3% for the same period in 1995. 7
9 The following table sets forth the condensed consolidated average balance sheets, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing deposits and liabilities for the periods indicated on a taxable equivalent basis. The tax equivalent adjustment is made for items exempt from Federal income taxes (assuming a 35% tax rate for 1996 and 1995) to make them comparable with taxable items before any income taxes are applied. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------------------- 1996 1995 --------------------------------- --------------------------------- INTEREST Interest AVERAGE INCOME/ YIELD/ Average Income/ Yield/ BALANCE EXPENSE RATE(1) Balance Expense Rate(1) --------- --------- ------- -------- --------- ------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> ASSETS Earning assets: Interest-bearing deposits in other banks $ 207,550 $ 2,898 5.62% $ 10,462 $ 154 5.97% Federal funds sold and securities purchased under agreements to resell 155,403 2,134 5.52 231,406 3,180 5.57 Investment securities 1,134,107 18,103 6.42 1,080,933 14,441 5.42 Loans and leases(2),(3) 5,232,681 113,230 8.70 5,626,482 122,407 8.82 ------------ ---------- ------------ --------- Total earning assets 6,729,741 136,365 8.15 6,949,283 140,182 8.18 ---------- --------- Nonearning assets 618,078 649,988 ------------ ------------ Total assets $ 7,347,819 $ 7,599,271 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits and liabilities: Deposits $ 4,392,395 $ 42,048 3.85% $ 4,324,658 $ 42,149 3.95% Short-term borrowings 1,045,268 13,834 5.32 1,399,720 20,513 5.94 Long-term debt 246,817 3,877 6.32 223,822 3,179 5.76 ------------ ---------- ------------ --------- Total interest-bearing deposits and liabilities 5,684,480 59,759 4.23 5,948,200 65,841 4.49 ---------- ---- --------- ---- Interest rate spread 3.92% 3.69% ==== ==== Noninterest-bearing demand deposits 830,951 829,667 Other liabilities 179,069 190,889 ------------ ------------ Total liabilities 6,694,500 6,968,756 Stockholders' equity 653,319 630,515 ------------ ------------ Total liabilities and stockholders' equity $ 7,347,819 $ 7,599,271 ============ ============ Net interest income and margin on earning assets 76,606 4.58% 74,341 4.34% ==== ==== Tax equivalent adjustment 586 1,588 ---------- --------- Net interest income $ 76,020 $ 72,753 ========== ========= </TABLE> (1) Annualized. (2) Nonaccruing loans and leases have been included in computations of average loan and lease balances. (3) Interest income for loans and leases included loans fees of $5,618 and $5,915 for 1996 and 1995, respectively. 8
10 INVESTMENT SECURITIES Comparative book and fair values of held-to-maturity investment securities at March 31, 1995 were as follows: <TABLE> <CAPTION> March 31, 1995 -------- (in thousands) <S> <C> Book value $ 823,649 Unrealized gains 2,243 Unrealized losses (8,686) ----------- Fair value $ 817,206 =========== </TABLE> In December 1995, the Company made a one-time reclassification of its investment securities portfolio from held-to-maturity to available-for-sale as allowed by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The following table presents the amortized cost and fair values of available-for-sale investment securities for the periods indicated: <TABLE> <CAPTION> MARCH 31, December 31, March 31, 1996 1995 1995 ------------- ------------- ------------- (in thousands) <S> <C> <C> <C> Amortized cost $ 1,094,152 $ 1,166,178 $ 162,205 Unrealized gains 5,311 9,920 43 Unrealized losses (1,372) (805) (371) ------------- ------------- ------------ Fair value $ 1,098,091 $ 1,175,293 $ 161,877 ============= ============= ============ </TABLE> Gross realized gains and losses for the three months ended March 31, 1996 and 1995 were as follows: <TABLE> <CAPTION> 1996 1995 ---- ---- (in thousands) <S> <C> <C> Realized gains $ 29 $ 3 Realized losses (9) (2) --------- --------- Securities gains, net $ 20 $ 1 ========= ========= </TABLE> Gains and losses realized on the sales of investment securities are determined using the specific identification method. 9
11 LOANS The following table sets forth the loan portfolio by major categories and loan mix at March 31, 1996, December 31, 1995 and March 31, 1995: <TABLE> <CAPTION> MARCH 31, 1996 December 31, 1995 March 31, 1995 ------------------- ------------------- ------------------- AMOUNT % Amount % Amount % -------- ----- ---------- ----- -------- ----- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Commercial, financial and agricultural $1,303,453 25.0% $1,315,736 25.0% $1,461,574 25.6% Real estate: Commercial 1,065,006 20.5 996,715 18.9 947,867 16.6 Construction 204,052 3.9 256,943 4.9 308,521 5.4 Residential: Insured, guaranteed or conventional 1,298,390 24.9 1,334,063 25.4 1,671,164 29.2 Home equity credit lines 420,711 8.1 432,229 8.2 384,332 6.8 --------- ---- ---------- ---- --------- ----- Total real estate loans 2,988,159 57.4 3,019,950 57.4 3,311,884 58.0 --------- ---- ---------- ---- --------- ----- Consumer 477,082 9.2 473,909 9.0 465,534 8.1 Lease financing 224,259 4.3 241,721 4.6 228,859 4.0 Foreign 213,335 4.1 208,229 4.0 245,719 4.3 --------- ---- ---------- ---- --------- ----- Total loans and leases 5,206,288 100.0% 5,259,545 100.0% 5,713,570 100.0% ===== ===== ===== Less allowance for loan and lease losses 79,585 78,733 61,236 --------- ---------- ---------- Total net loans and leases $5,126,703 $5,180,812 $5,652,334 ========= ========== ========== </TABLE> The loan and lease portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. At March 31, 1996, total loans and leases were $5,206,288,000, a decrease of 1.0% from December 31, 1995. The decrease was primarily due to paydown of a large real estate - construction loan. In June 1995, the Company securitized $490,000,000 in adjustable rate mortgage loans in an effort to increase its funding capacity and liquidity. These loans were reclassified in the investment securities portfolio at March 31, 1996 and December 31, 1995. If these securitized loans had been included in the loan category at March 31, 1996, total loans and leases at that date would have reflected a slight decrease from March 31, 1995. Total loans and leases at March 31, 1996, represented 70.1% of total assets, 79.0% of total earning assets and 98.5% of total deposits compared to 69.5% of total assets, 77.7% of total earning assets and 98.2% of total deposits at December 31, 1995. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At March 31, 1996, commercial real estate loans totalled $1,065,006,000, or 20.5%, of total loans and leases. The Company has selectively participated as a lender on commercial properties on the mainland United States, principally on the west coast. Such loans totalled $47,541,000 at March 31, 1996, a slight decrease from December 31, 1995. At March 31, 1996, the largest concentration of commercial real estate loans to a single borrower was $34,524,000. 10
12 NONPERFORMING ASSETS A summary of nonperforming assets at March 31, 1996, December 31, 1995 and March 31, 1995 follows: <TABLE> <CAPTION> MARCH 31, December 31, March 31, 1996 1995 1995 --------- ------------ --------- (dollars in thousands) <S> <C> <C> <C> Nonperforming loans and leases: Nonaccrual: Commercial, financial and agricultural $ 16,800 $ 16,229 $ 7,915 Real estate: Commercial 36,789 40,664 38,673 Construction 7,544 9,697 2,260 Residential: Insured, guaranteed, or conventional 12,073 12,238 5,023 Home equity credit lines 694 496 519 --------- ---------- --------- Total real estate loans 57,100 63,095 46,475 --------- ---------- --------- Consumer 377 390 216 Lease financing 8 19 210 --------- ---------- --------- Total nonaccrual loans and leases 74,285 79,733 54,816 Renegotiated: Real estate - commercial 2,500 2,500 2,500 Commercial, financial and agricultural 628 682 -- --------- ---------- --------- Total nonperforming loans and leases 77,413 82,915 57,316 Other real estate owned 12,947 9,312 9,082 --------- ---------- --------- Total nonperforming assets $ 90,360 $ 92,227 $ 66,398 ========= ========== ========= Loans and leases past due 90 days or more and still accruing interest $ 22,360 $ 28,790 $ 44,701 ========= ========== ========= Nonperforming assets to total loans and leases and other real estate owned (end of period): Excluding 90 days past due accruing loans and leases 1.73% 1.75% 1.16% Including 90 days past due accruing loans and leases 2.16% 2.30% 1.94% Nonperforming assets to total assets (end of period): Excluding 90 days past due accruing loans and leases 1.22% 1.22% .86% Including 90 days past due accruing loans and leases 1.52% 1.60% 1.44% </TABLE> 11
13 NONPERFORMING ASSETS, Continued Nonperforming assets decreased from $92,227,000 at December 31, 1995 to $90,360,000 at March 31, 1996. The decrease in the nonaccrual real estate - commercial category and corresponding increase in the other real estate owned category were due to the foreclosure of a real estate - commercial loan with a carrying value of $4,064,000 in March 1996. In addition, partial paydowns on two nonaccrual real estate - commercial loans totalling $6,552,000 contributed to the decrease in nonperforming assets. Loans and leases past due 90 days or more and still accruing interest totalled $22,360,000 at March 31, 1996, a decrease of $6,430,000, or 22.3%, compared to December 31, 1995. The decrease was primarily due to various loans totalling $6,376,000 which were placed on nonaccrual status at March 31, 1996. All of the loans which are past due 90 days or more and still accruing interest are in management's judgment adequately collateralized and in the process of collection. In recent years, the level of the Company's nonperforming assets and charge-offs has been adversely affected by the prolonged economic downturn in Hawaii and related weakness in the local real estate market. Although the Company believes that the Hawaii economy has begun to show signs of improvement, and certain local real estate sectors evidence signs of having stabilized, the recovery of the Hawaii economy has been slow and the effects of the economic downturn may continue to affect the level of nonperforming assets and related charge-offs in future periods. 12
14 DEPOSITS The following table sets forth the average balances and the average rates paid on deposits for the periods indicated: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------------------------------------------- 1996 1995 -------------------------- ------------------------- AVERAGE AVERAGE Average Average BALANCE RATE(1) Balance Rate(1) ----------- -------- ----------- --------- (dollars in thousands) <S> <C> <C> <C> <C> Interest-bearing demand $ 1,125,142 2.60% $ 1,185,041 2.68% Savings 1,163,995 2.13 1,274,973 3.22 Time 2,103,258 5.47 1,864,644 5.26 ------------ ------------ Total interest-bearing deposits 4,392,395 3.85 4,324,658 3.95 Noninterest-bearing demand 830,951 -- 829,667 -- ------------ ------------ Total deposits $ 5,223,346 3.24% $ 5,154,325 3.32% ============ ============ </TABLE> Average interest-bearing deposits increased $67,737,000, or 1.6%, over the first quarter of 1995. The increase in average interest-bearing deposits was due to the purchase of deposits from a financial services loan company in the fourth quarter of 1995 and various deposit product programs initiated by the Company in the latter part of 1995 and the first quarter of 1996, both of which increased the overall interest rates paid on time certificate of deposits. With the purchase of deposits and depositors seeking higher yields through the aforementioned deposit product programs, the mix of average interest-bearing deposits changed, with higher yielding average time certificate of deposits representing 47.9% of average interest-bearing deposits in the first quarter of 1996 as compared to 43.1% in the first quarter of 1995. (1) Annualized. 13
15 PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES The following table sets forth the activity in the allowance for loan and lease losses for the periods indicated: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, -------------------------------------------- 1996 1995 ------------- -------------- (dollars in thousands) <S> <C> <C> Loans and leases outstanding (end of period) $ 5,206,288 $ 5,713,570 ============== ============== Average loans and leases outstanding $ 5,232,681 $ 5,626,482 ============== ============== Allowance for loan and lease losses: Balance at beginning of period $ 78,733 $ 61,250 -------------- -------------- Loans and leases charged off: Commercial, financial and agricultural 418 833 Real estate: Commercial 46 596 Construction -- 827 Residential 210 117 Consumer 2,462 1,482 Foreign 62 -- -------------- -------------- Total loans and leases charged off 3,198 3,855 -------------- -------------- Recoveries on loans and leases previously charged off: Commercial, financial and agricultural 80 28 Real estate: Commercial 1 1 Construction -- 5 Residential 53 17 Consumer 584 450 Lease financing 2 -- Foreign 8 -- -------------- -------------- Total recoveries on loans and leases charged off 728 501 -------------- -------------- Net charge-offs 2,470 3,354 Provision charged to expense 3,322 3,340 -------------- -------------- Balance at end of period $ 79,585 $ 61,236 ============== ============== Net loans and leases charged off to average loans and leases .19%(1) .24%(1) Net loans and leases charged off to allowance for loan and lease losses 12.48%(1) 22.21%(1) Allowance for loan and lease losses to total loans and leases (end of period) 1.52% 1.07% Allowance for loan and lease losses to nonperforming loans and leases (end of period): Excluding 90 days past due accruing loans and leases 1.03X 1.07x Including 90 days past due accruing loans and leases .80X .60x </TABLE> (1)Annualized. 14
16 PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES, Continued For the first quarter of 1996, the provision for loan and lease losses was $3,322,000, a decrease of $18,000, or .5%, as compared to the same period in 1995. Net charge-offs for the first quarter of 1996 were $2,470,000, a decrease of $884,000, or 26.4%, compared to the same period in 1995. The allowance for loan and lease losses increased to 103% of nonperforming loans and leases at March 31, 1996 (excluding 90 days past due accruing loans and leases) compared to 95% at December 31, 1995, reflecting the decrease in nonperforming loans and leases in the first quarter of 1996. In management's judgment, the allowance for loan and lease losses is adequate to absorb potential losses currently inherent in the portfolio, however, changes in prevailing economic conditions in the Company's markets could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the allowance for loan and lease losses. NONINTEREST INCOME Exclusive of securities transactions, noninterest income totalled $23,948,000 for the first quarter of 1996, an increase of 4.2% over the same period in 1995. Trust and Investments Division income increased $143,000, or 2.3%, for the first quarter of 1996 compared to the same period in 1995. Service charges on deposit accounts decreased $320,000, or 5.1%, for the first quarter of 1996 compared to the same period in 1995. This decrease was primarily attributable to a decrease in fees earned on corporate demand deposit accounts in the first quarter of 1996. Other service charges and fees increased $1,563,000, or 18.9%, for the first quarter of 1996 over the same period in 1995. This increase was primarily the result of higher merchant discount fees and annuity and mutual fund sales. Security transactions resulted in net pre-tax gains of $20,000 for the first quarter of 1996 compared to net pre-tax gains of $1,000 for the same period in 1995. Other noninterest income decreased $420,000, or 20.3%, for the first quarter of 1996 compared to the same period in 1995. This decrease was primarily attributable to a decrease in lease termination and origination fee income. 15
17 NONINTEREST EXPENSES Noninterest expenses totalled $67,406,000 for the first quarter of 1996, an increase of 6.4% over the first quarter of 1995. Total personnel expenses (salaries and wages and employee benefits) increased $2,911,000, or 9.6%, for the first quarter of 1996 as compared to the same period in 1995. The increase was primarily due to an increase in costs associated with the curtailment of a noncontributory pension plan in the fourth quarter of 1995, which was replaced with a 401(k) match and a money purchase plan, effective January 1, 1996. Also, the higher salaries and wages reflect normal merit increases. Occupancy expense for the first quarter of 1996 increased $19,000, or .3%, over the same period in 1995. Equipment expense decreased $905,000, or 14.2%, for the first quarter of 1996 compared to the same period in 1995, primarily as a result of lower building maintenance and service contract expenses in 1996. Other noninterest expenses for the first quarter of 1996 increased $2,036,000, or 10.1%, over the same period in 1995, primarily as a result of a pre-tax loss of $1,925,000 recognized on the sale of a certain leveraged lease. On an after-tax basis the Company recorded a gain of $399,000 due to a net tax benefit of $2,344,000 resulting from the reversal of the related tax liabilities. Excluding the aforementioned pre-tax loss, other noninterest expenses increased $111,000, or .6%, over the same period in 1995. 16
18 INCOME TAXES The Company's effective income tax rate (exclusive of the tax equivalent adjustment) for the first quarter of 1996 was 31.0% as compared to 35.4% for the same period in 1995. The decrease in the effective income tax rate was primarily due to the reversal of deferred tax benefits (reflecting a change in the State tax laws) related to the aforementioned leveraged lease sale. LIQUIDITY AND CAPITAL Stockholders' equity was $657,229,000 at March 31, 1996, a 1.2% increase from $649,537,000 at December 31, 1995. Average stockholders' equity represented 8.89% of average total assets for the first quarter of 1996 compared to 8.30% in the same quarter last year. There was no significant change in the Company's liquidity position during the first quarter of 1996. The following tables present the Company's regulatory capital position at March 31, 1996: RISK-BASED CAPITAL RATIOS <TABLE> <CAPTION> AMOUNT RATIO ----------- ------ (dollars in thousands) <S> <C> <C> Tier 1 Capital $ 577,183 9.34% Tier 1 Capital minimum requirement (1) 247,172 4.00 ----------- ------ Excess $ 330,011 5.34% =========== ====== Total Capital $ 754,453 12.21% Total Capital minimum requirement (1) 494,344 8.00 ----------- ------ Excess $ 260,109 4.21% =========== ====== Risk-weighted assets $ 6,179,296 =========== </TABLE> LEVERAGE RATIO <TABLE> <CAPTION> AMOUNT RATIO ----------- ------ (dollars in thousands) <S> <C> <C> Tier 1 Capital to average quarterly total assets (net of certain intangibles) Tier 1 Leverage Ratio $ 577,183 7.94% Minimum leverage requirement (2) 218,104 3.00 ----------- ------ Excess $ 359,079 4.94% =========== ====== Average quarterly total assets (net of certain intangibles) $ 7,270,144 =========== </TABLE> (1) Risk-based capital guidelines as established by the Federal Reserve Board for bank holding companies require minimum Tier 1 and Total capital ratios of 4% and 8%, respectively. (2) The Federal Reserve Board has stated that the Leverage Ratio of 3% is the minimum requirement for the most highly rated banking organizations which are not experiencing or anticipating significant growth. Other banking organizations are expected to maintain leverage ratios of at least one to two percent higher. 17
19 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 3(i) Certificate of Incorporation, as amended through May 9, 1996. Exhibit 4(i) Equity - Incorporated by reference to Exhibit 3(i) hereto. Exhibit 12 Statement regarding computation of ratios. Exhibit 27 Financial data schedule (b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter ended March 31, 1996. 18
20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST HAWAIIAN, INC. (REGISTRANT) <TABLE> <S> <C> Date May 13, 1996 By /s/ HOWARD H. KARR ---------------- --------------------------------------------- HOWARD H. KARR EXECUTIVE VICE PRESIDENT AND TREASURER (PRINCIPAL FINANCIAL OFFICER) </TABLE> 19
21 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION <S> <C> 3(i) Certificate of Incorporation, as amended through May 9, 1996. 4(i) Equity - Incorporated by reference to Exhibit 3(i) hereto. 12 Statement regarding computation of ratios. 27 Financial data schedule </TABLE>