UNITED STATES
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-7949
BANCWEST CORPORATION
Delaware | 99-0156159 | |
(State of incorporation) | (I.R.S. Employer |
Identification No.) | ||
999 Bishop Street, Honolulu, Hawaii | 96813 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (808) 525-7000
Securities registered pursuant to Section 12(b) of the Act:9.50% Quarterly Income Preferred SecuritiesNone
Securities registered pursuant to Section 12(g) 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 (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. Yeso Noo
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [N/A]o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yeso Noþ
The aggregate market value of the common stock held by nonaffiliates of the registrant
as of January 31, 2002the last business day of the registrant’s most recently completed second fiscal quarter was $0.$0.
The number of shares outstanding of each of the registrant’s classes of common stock
as of January 31, 2002March 15, 2005 was:
Title of Class | Number of Shares Outstanding | |
Class A Common Stock, $0.01 Par Value |
DOCUMENTS INCORPORATED BY REFERENCE
Index
Directors and Executive Officers | 95 | ||||||||
Executive Compensation | 99 | ||||||||
Security Ownership of Certain Beneficial Owners and Management | 103 | ||||||||
Certain Relationships and Related Transactions | 104 | ||||||||
Principal Accountant Fees and Services | 105 | ||||||||
Exhibits and Financial Statement Schedules | 106 | ||||||||
109 | |||||||||
EXHIBITS | 112 | ||||||||
GLOSSARY OF FINANCIAL TERMS | |||||||||
EXHIBIT 12 | |||||||||
EXHIBIT 21 | |||||||||
EXHIBIT 32 |
2i
BancWest Corporation and Subsidiaries
PART I
PART I
Item 1. Business
GENERAL
BancWest Corporation
BancWest Corporation, a Delaware corporation (“BancWest,” the “Corporation,” the “Company”(the “Parent” or “we/our”“BancWest”), is a registered financial holding company under the Gramm-Leach-Bliley Act (the “GLBA”).and is a wholly owned subsidiary of BNP Paribas. As a financial holding company, we arethe Parent is allowed to acquire or invest in the securities of companies in a broad range of financial activities. The Corporation,Parent, through its subsidiaries, operates a general commercial banking business and other businesses related to banking. Its principal assets are its investments in Bank of the West, (“Bank of the West” or “BOW”) a State of California-chartered bank; First Hawaiian Bank (��(“First Hawaiian” or “FHB”), a State of Hawaii-chartered bank; and FHL Lease Holding Company, Inc. (“FHL”), a financial services loan company; BancWest Capital I (“BWE Trust”) andcompany. First Hawaiian Capital I (“FH Trust”), both Delaware business trusts.and FHL are wholly owned subsidiaries of the Parent. At December 31, 2004 BancWest held 87.721% of the outstanding common stock of Bank of the West, First Hawaiian, FHL, BWE Trust and FH Trust are wholly-owned subsidiariesWest. The balance of Bank of the Corporation.West’s common stock is held by BNP Paribas as collateral for debt. See Note 4 (Transactions with Affiliates) to the Consolidated Financial Statements for additional information. In this report BancWest Corporation and subsidiaries is referred to as the “Company,” “we” or “our.” At December 31, 2001,2004, the CorporationCompany had consolidated total assets of $21.6$50.1 billion, total loans and leases of $15.2$32.7 billion, total deposits of $15.3$33.6 billion and total stockholder’s equity of $2$5.7 billion. Based on assets as of December 31, 2001, BancWest Corporation was the 32nd largest bank holding company in the United States.
On December 20, 2001, Chauchat L.L.C., a Delaware limited liability company (“Merger Sub”November 1, 2004, the Company acquired Community First Bankshares, Inc.(“Community First”), merged (the “BNP Paribas Merger”) with and into BancWest pursuant to an Agreement and Plan of Merger, dated as of May 8, 2001, as amended and restated as of July 19, 2001, by and among BancWest, BNP Paribas, a société anonyme or limited liability banking corporation organized under the laws of the Republic of France (“BNP Paribas”), and Merger Sub (the “Merger Agreement”). Merger Sub was a wholly-owned subsidiary of BNP Paribas.
At the effective time of the BNP Paribas Merger, all outstanding shares of common stock, par value $1 per share (“Company Common Stock”), of BancWest were cancelled and converted solely into the right to receive $35 per share in cash, without interest thereon.
Pursuant to the Merger Agreement,for $32.25 for each share of Class ACommunity First’s common stock par value $1 per share, of BancWest owned by BNP Paribas and French American Banking Corporation, a wholly-owned subsidiary of BNP Paribas, remained outstanding as one share of Class A Common Stock and all of the units of Merger Sub were cancelled without any consideration becoming payable therefor. Concurrent with the BNP Paribas Merger, the par value of the Class A common stock was changed to $.01. As a result of the Merger, BancWest became a wholly-owned subsidiary of BNP Paribas.
In December 2001, BNP Paribas signed a definitive agreement with Tokyo-headquartered UFJBank Ltd. to acquire its wholly-owned subsidiary, United California Bank (“UCB”), forin a cash purchase pricetransaction valued at $1.2 billion. The branches of $2.4 billion. On February 20, 2002, BNP Paribas and the Company received approval from the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) for the acquisition. The transaction closed on March 15, 2002. Following the acquisition, BancWest had $34 billion in assets, 1.5 million customers and more than 350 branches in California, six other Western states, Guam and Saipan. United California Bank branches will become part ofCommunity First were fully merged into Bank of the West.
West in the fourth quarter of 2004. Also on November 1, 2004, the Company acquired USDB Bancorp (“USDB”). The branches of USDB were fully merged into Bank of the West in January 2005.
Bank of the West
Bank of the West is a State of California-chartered bank that is not a member of the Federal Reserve System. The deposits of Bank of the West are insured by the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) of the Federal Deposit Insurance Corporation (“FDIC”) to the extent and subject to the limitations set forth in the Federal Deposit Insurance Act (“FDIA”). The predecessor of Bank of the West, “The Farmers“Farmers National Gold Bank,” was chartered as a national banking association in 1874 in San Jose, California.
On July 1, 1999, SierraWest Bancorp and SierraWest Bank were merged with and into Bank of the West. As a result of the SierraWest merger, 20 SierraWest branches in California and Nevada became branches of Bank of the West.
In the first quarter of 2001,At December 31, 2004, Bank of the West acquired 23 branches in New Mexico and seven branches in Nevada that were being divested as part ofwas the merger between First Security Corporation and Wells Fargo & Company. These branches became branches of Bank of the West.
At December 31, 2001, Bank of the West is the fourththird largest commercial bank headquartered in California, with total assets of approximately $13.4$38.8 billion, total loans and leases of $10.1$26.6 billion, total deposits of approximately $9.2$25.1 billion and total stockholder’sstockholders’ equity of $1.8$6.5 billion. Bank of the West conducts a general commercial banking business, providing retail and corporate banking, trust and trustinsurance services to individuals, institutions, businesses and governments through 193480 banking locations (466 full service retail branches and 14 limited service retail offices) and other commercial banking offices located primarily in the San Francisco Bay area and elsewhere in the Northern and Central Valley regions ofArizona, California, and in Oregon, Washington,Colorado, Idaho, Iowa, Minnesota, Nebraska, Nevada, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin and Nevada.Wyoming. Bank of the West also originates indirect automobile loans and leases, recreational
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Part I(continued)
vehicle loans, recreational marine vessel loans, equipment leases and deeds of trust on single-family residences through a network of manufacturers, dealers, representatives and brokers in all 50 states. Bank of the West’s principal subsidiary is Essex Credit Corporation (“Essex”), is a Connecticut corporation. Essex isBank of the West subsidiary engaged primarily in the business of originating and selling consumer loans on a nationwide basis, such loans being made for the purpose of acquiring or refinancing pleasure boats or recreational vehicles. Essex generally sells the loans that it makes to various banks and other financial institutions, on a servicing released basis. In 2004 Essex began retaining certain types of loans in its own portfolio. Essex has a network of 11 regional direct lending offices located in the following states: California, Connecticut, Florida, Maryland, Massachusetts, New Jersey, New York, Texas and Washington.
Trinity Capital Corporation is a leasing subsidiary that specializes in nationwide vendor leasing programs for manufacturers in specific markets. Bank of the West also offers various insurance products through BW Insurance Agency, Inc., (“BWI”, formerly Community Banking
The focusFirst Insurance), which was acquired as part of the acquisition of Community First. BWI engages in the sale of property, casualty, life, accident and crop hail insurance. In February 2005, BancWest Investment Services, Inc. (“BWIS”) became a subsidiary of Bank of the West’s community banking strategy is primarily in Northern California, Nevada,West. BWIS was previously a direct subsidiary of BancWest Corporation. BWIS sells mutual funds and annuities to the Pacific Northwest region and New Mexico. The Northern California market region is comprisedgeneral public from branches of the San Francisco Bay area and the Central Valley area of California. The San Francisco Bay area is one of California’s wealthiest regions, and the Central Valley of California is an area which has been experiencing rapid transition from a largely agricultural base to a mix of agricultural and commercial enterprises. The Pacific Northwest region includes Oregon, Washington and Idaho. The SierraWest Merger expanded the region Bank of the West services into Nevada. Theand First Security Corporation branch acquisition expanded our presence to Las Vegas, Nevada and New Mexico.Hawaiian.
Bank of the West utilizes its branch network as its principal funding source. A key element of Bankhas been a leader in the improvement of the West’s community banking strategy is to seek to distinguish itself as the providersocial and economic health of the “best value”communities in community banking services. To this end,which it operates. The Bank has a long commitment to the development of the West seeks to position itself within its marketshousing for low-to-moderate income people through loans, investment in
1
BancWest Corporation and Subsidiaries
PART I
intermediaries and volunteer participation in such organizations as an alternative to both the higher-priced, smaller “boutique” commercial banksCalifornia Community Reinvestment Corporation, California Environmental Redevelopment Fund and the larger money center commercial banks, which may be perceived as offering lower service and lower prices on a “mass market” basis.Low Income Housing Fund.
In pursuing the California, Pacific Northwest, Nevada and New Mexico community banking markets, Bank of the West seeks to serve a broad customer base by furnishing a wide range of retail and commercial banking products. Through its branch network, Bank of the West originates a variety of consumer loans, including direct vehicle loans, lines of credit and second mortgages. In addition, Bank of the West originates and holds a small portfolio of first mortgage loans on one-to-four-family residences. Through its commercial banking operations conducted from its branch network, Bank of the West offers a wide range of basic commercial banking products intended to serve the needs of smaller community-based businesses. These loan products include in-branch originations of standardized products for businesses with relatively simple banking and financing needs. More complex and customized commercial banking services are offered through Bank of the West’s regional banking centers, which serve clusters of branches and provide lending, deposit and cash management services to companies operating in the relevant market areas. Bank of the West also provides a number of fee-based products and services such as annuities, insurance and securities brokerage.
Professional Banking, Trust Services
The Professional Banking and Trust & Investment Services areas within the Community Banking Division provide a wide range of products to targeted markets. The Professional Banking Group, headquartered in San Francisco, serves the banking needs of attorneys, doctors and other working professionals. The Trust & Investment Services Group, headquartered in San Francisco, and with offices in San Jose, Sacramento and Portland, provides a full range of trust services and individual investment management services.
Commercial Banking
Bank of the West’s Business Banking Division supports commercial lending activities for middle market business customers through 13 regional lending centers located in Northern California, Central California, Oregon, Nevada, New Mexico, Idaho and Washington. Each regional office provides a wide range of loan and deposit services to medium-sized companies with borrowing needs of $500,000 to $25 million. Lending services include receivable and inventory financing, equipment term loans, letters of credit, agricultural loans and trade finance. Other banking services include cash management, insurance products, trust, investment, foreign exchange and various international banking services.
The Specialty Lending Division seeks to provide focused banking services and products to specifically targeted markets where Bank of the West’s resources, experience and technical expertise give it a competitive advantage. Through operations conducted in this division, Bank of the West has established itself as the national leader among those commercial banks which are lenders to religious organizations. In addition, leasing operations within Specialty Lending have made Bankset a goal of the West a significant provider of equipment lease
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Part I(continued)
financing, including both standard and tax-oriented products, to a wide array of clients. To support the cash management needs of both Bank of the West’s corporate banking customers and large private and public deposit relationships maintained with Bank of the West, the Specialty Lending Division operates a Cash Management Group which provides a full range of innovative and relationship-focused cash management services.
The Real Estate Industries Division, whose primary markets are Northern and Central California, Nevada and Oregon, originates$30 billion in loans, investments, contributions and services construction, short-termto low- and permanent loans to residential developers, commercial buildersmoderate-income individuals, small businesses and investors. The division is particularly activecommunity-based organizations over a 10-year period. Since the announcement of this initiative in financing the construction of detached residential subdivisions. Other construction lending activities include low-income housing, industrial development, apartment, retail and office projects. The division also originates single-family home loans sourced through Bank of the West’s Community Bank branch network.
Consumer Finance
The Consumer Finance Division targets the production of auto loans and leases in the Western United States, and recreational vehicle and marine loans nationwide, with emphasis on originating credits at the high end of the credit spectrum. The Consumer Finance Division originates recreational vehicle and marine credits on a nationwide basis through sales representatives located throughout the country servicing a network of over 1,900 recreational vehicle and marine dealers and brokers. Essex primarily focuses on the origination and sale of loans in the broker marine market and also originates and sells loans to finance the acquisition of recreational vehicles.
The division’s auto lending activity is primarily focused in the Western United States. Bank of the West originates loans and leases to finance the purchase of new and used autos, light trucks and vans through a network of more than 2,000 dealers and brokers in California, Nevada, New Mexico, Oregon, Arizona, Washington, Utah and Colorado.
Small Business Administration Lending
Bank of the West operates in California, Nevada, Oregon, Arizona, Florida, Georgia, Illinois and Tennessee under the Preferred Lender Program of the Small Business Administration (“SBA”), which is headquartered in Washington, D.C. This designation is the highest lender status granted by the SBA.March 2002, Bank of the West has over 18 years of experience and expertise in the generation and sale of SBA guaranteed loans.
Community Reinvestmentcontributed $18 billion.
Bank of the West provided direct capital investments and grants that totaled more than $34 million to organizations that provide benefits to low-and-moderate-income areas and people in the form of affordable housing and small business opportunity. It also made grants and/or contributions of $550,000 to a variety of qualifying community development organizations, which provide a wide array of benefits and services for low-and-moderate-income areas and people within Bank of the West’s assessment areas.
In addition, Bank of the West has funded, both on its own and through lender consortia, numerous construction, short-term and permanent loans for affordable housing, economic development and community facilities. Bank of the West is also an active participant in the Federal Home Loan Bank of San Francisco’s Affordable Housing Program. As previously stated, Bank of the West is the nation’s largest bank lender to religious organizations. Most, if not all of these loans are community development loans as they finance facilities for various community services.
First Hawaiian Bank
First Hawaiian Bank is a State of Hawaii-chartered bank that is not a member of the Federal Reserve System. At December 31, 2004, First Hawaiian was the largest bank in Hawaii in terms of total assets and total deposits. The deposits of First Hawaiian are insured by the BIF and the SAIF of the FDIC to the extent and subject to the limitations set forth in the FDIA. First Hawaiian, the oldest financial institution in Hawaii, was established as Bishop & Co. in 1858 in Honolulu.
At December 31, 2001,2004, First Hawaiian had total assets of $8.7$10.6 billion, total loans and leases of $5.1$5.5 billion, total deposits of $6.2$7.7 billion and stockholder’s equity of $1.6 billion, making it the largest bank in Hawaii based on domestic deposits from individuals, corporations and partnerships.$2.0 billion.
First Hawaiian is a full-service bank conducting a general commercial and consumer banking business and offering trust and insurance services to individuals, institutions, businesses and governments.
On November 9, 2001, First Hawaiian completed its acquisition of Union Bank of California’s network in Guam and Saipan, along with associated loan and deposit accounts.
Retail Community Banking
First Hawaiian’s Retail Banking Group operates its main banking office in Honolulu, Hawaii, and 55 other banking offices located throughout Hawaii. First Hawaiian also operates twogovernments through 61 branches in Guam and two branches in Saipan.
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Part I(continued)
The focus of First Hawaiian’s retail/community banking strategy is primarily in Hawaii, where it has a significant market share — 41% of the domestic bank deposits by individuals, corporations and partnerships in the state. The predominant economic force in Hawaii is tourism, although there have been significant recent efforts to diversify the economy into high-tech and other industries.
In pursuing the community banking markets in Hawaii, Guam and Saipan, First Hawaiian seeks to serve a broad customer base by furnishing a range of retail and commercial banking products. Through its branch network, First Hawaiian generates first-mortgage loans on residences and a variety of consumer loans, consumer lines of credit and second mortgages. Through commercial banking operations conducted from its branch network, First Hawaiian offers a wide range of banking products intended to serve the needs of smaller, community-based businesses. First Hawaiian also provides a number of fee-based products and services such as annuities and mutual funds, insurance and securities brokerage.Saipan.
First Hawaiian’s principal funding source is its 60-branch network. Thanks to its significant market share in Hawaii, First Hawaiian already has product or service relationships with a majority of the households in the state. Therefore, a key goal of its retail community banking strategy is to build those relationships by cross-selling additional products and services to existing individual and business customers.
First Hawaiian’s goal is to become each customer’s primary bank, using core products such as demand deposit (checking) accounts as entry points to generate cross-sales and develop a multi-product relationship with individual and business customers. Toward this goal, employees in First Hawaiian’s branch network focuses on selling bank, trust, investment and insurance products to meet customers’ needs and build on those existing relationships.
To complement its branch network and serve these customers, First Hawaiian operates a system of automated teller machines, a 24-hour Phone Center in Honolulu and a full-service Internet banking system.
Private Banking Services
The Private Banking Department within First Hawaiian’s Retail Banking Group provides a wide range of products to high-net-worth individuals.
Lending Activities
First Hawaiian engages in a broad range of lending activities. The majority of First Hawaiian’s loans are for construction, commercial, and residential real estate. Commercial loans also comprise a major portion of the loan portfolio, with consumer and foreign loans and leases accounting for the balance of the portfolio.
Real Estate Lending — Construction.First Hawaiian provides construction financing for a variety of commercial and residential single-family subdivision and multi-family developments.
Real Estate Lending — Commercial.First Hawaiian provides permanent financing for a variety of commercial developments, such as retail facilities, warehouses and office buildings.
Real Estate Lending — Residential.First Hawaiian makes residential real estate loans, including home equity loans, to enable borrowers to purchase, refinance or improve residential real property. The loans are collateralized by mortgage liens on the related property, substantially all located in Hawaii.
Commercial Lending.First Hawaiian is a major lender to small- and medium-sized businesses in Hawaii and Guam. Lending services include receivable and inventory financing, equipment term loans, letters of credit, dealer vehicle flooring financing and trade financing. Other banking services include insurance products, trust, investment, foreign exchange and various international banking services. To support the cash management needs of both commercial banking customers and large private and public deposit relationships maintained with the bank, First Hawaiian operates a Cash Management Department which provides a full range of innovative and relationship-focused cash management services.
Syndicated and Media Lending.First Hawaiian, through its Wholesale Loan Group, participates in syndicated lending to primarily large corporate entities on the Mainland United States. The Wholesale Loan Group also participates in syndicated lending to the media and telecommunications industries located in the Mainland United States, a targeted specialty market where First Hawaiian’s resources, experience and technical expertise give it a competitive advantage.
Consumer Lending.First Hawaiian offers many types of loans and credits to consumers, including lines of credit (uncollateralized or collateralized) and various types of personal and automobile loans. First Hawaiian also provides indirect consumer automobile financing on new and used autos by purchasing finance contracts from dealers. First Hawaiian’s Dealer Center is the largest commercial bank automobile lender in the state of Hawaii. First Hawaiian is the largest issuer of MasterCard® credit cards and VISA® credit cards in Hawaii.
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Part I(continued)
International Banking Services
First Hawaiian maintains an International Banking Division which provides international banking products and services through First Hawaiian’s branch system, its international banking headquarters in Honolulu, a Grand Cayman branch, two Guam branches, two branches in Saipan and a representative office in Tokyo, Japan. First Hawaiian maintains a network of correspondent banking relationships throughout the world.
First Hawaiian’s international banking activities are primarily trade-related and are concentrated in the Asia-Pacific area.
Trust and Investment Services
First Hawaiian’s Financial Management Group offers a full range of trust and investment management services, and also seeks to reinforce customer relationships developed by or in conjunction with the Retail Banking Group. The Financial Management Group provides asset management, advisory and administrative services for estates, trusts and individuals. It also acts as trustee and custodian of retirement and other employee benefit plans. At December 31, 2001, the Trust and Investments Division had over 5,000 accounts with a market value of $9.6 billion. Of this total, $7.0 billion represented assets in nonmanaged accounts and $2.6 billion were managed assets.
The Trust and Investments Division maintains custodial accounts pursuant to which it acts as agent for customers in rendering a variety of services, including dividend and interest collection, collection under installment obligations and rent collection.
Securities and Insurance Services
First Hawaiian, through a wholly-owned subsidiary, First Hawaiian Insurance, Inc., provides personal, business and estate insurance to its customers. First Hawaiian Insurance offers insurance needs analysis for individuals, families and businesses, as well as life, disability and long-term care insurance products. In association with an independent registered broker-dealer, First Hawaiian offers mutual funds, annuities and other securities in its branches.
Other Subsidiaries
First Hawaiian also conducts business through the following wholly-owned subsidiaries:subsidiaries include:
• | Bishop Street Capital Management Corporation,a registered investment adviser | |||
• | ||||
• | ||||
First Hawaiian Leasing, Inc.,which engages in commercial equipment and vehicle leasing. | ||||
FHL Lease Holding Company, Inc.
FHL primarily finances and leases personal and real property, including equipment and vehicles. FHL is in a run-off mode and all new leveraged and direct financing leases are recorded by First Hawaiian Leasing, Inc. At December 31, 2001, FHL’s net investment in leases amounted to $57 million and total assets were $59 million.
BancWest Capital I
BWE Trust is a Delaware business trust which was formed in November 2000. BWE Trust exchanged $150 million of its BancWest Capital I Quarterly Income Preferred Securities (the “BWE Capital Securities”), as well as all outstanding common securities of BWE Trust, for 9.5% junior subordinated deferrable interest debentures of the Corporation. The Corporation sold to the public $150 million of BWE Capital Securities. The BWE Capital Securities qualify as Tier 1 capital of the Corporation and are solely, fully and unconditionally guaranteed by the Corporation. All of the common securities of the BWE Trust are owned by the Corporation.
At December 31, 2001, the BWE Trust’s total assets were $155.9 million, comprised primarily of the Corporation’s junior subordinated debentures.
First Hawaiian Capital I
FH Trust is a Delaware business trust which was formed in 1997. FH Trust issued $100 million of its Capital Securities (the “FH Capital Securities”) and used the proceeds therefrom to purchase junior subordinated deferrable interest debentures of the Corporation. The FH Capital Securities qualify as Tier 1 capital of the Corporation and are solely, fully and unconditionally guaranteed by the Corporation. All of the common securities of the FH Trust are owned by the Corporation.
At December 31, 2001, the FH Trust’s total assets were $107.4 million, comprised primarily of the Corporation’s junior subordinated debentures.
Hawaii Community Reinvestment Corporation
In an effort to To support affordable housing and as part of First Hawaiian’sits community reinvestment program, First Hawaiian is a member of the Hawaii Community Reinvestment Corporation (the “HCRC”(“HCRC”). The HCRC is, a nonprofit consortium of localHawaii financial institutions that provides $50 million in permanent long-term financ-
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Part I(continued)
ingfinancing for affordable housing rental projects throughout Hawaii for low- and moderate-income residents.
The $50 million loan pool is funded by the member financial institutions, which participate pro rata (based on deposit size) in each HCRC loan. First Hawaiian’s participation in these HCRC loans is included in its loan portfolio.
Hawaii Investors for Affordable Housing, Inc.
To further enhance First Hawaiian’s community reinvestment program and provide support for the development of additional affordable-housing rental units in Hawaii, First Hawaiian and other HCRC member institutions have subscribed toto: (i) a $19.7-million-tax credit equity fund (“Hawaii Affordable Housing Fund I”) and a $20$20.0 million tax-credit equity fund (“Hawaii Affordable Housing Fund II”). Efforts are now underway to create, (ii) a third$12.5 million tax-credit equity fund to continue the support of additional affordable housing projects.(“Hawaii Affordable Housing Fund III”), and (iii) a $15.15 million tax-credit equity fund (“Hawaii Equity Fund IV, LLC (Class A)”). In addition, a subscription in a $35.9 million tax-credit equity fund (“Hawaii Equity Fund IV, LLC (Class B)”) is being finalized.
Hawaii Affordable Housing Fund I andII, Hawaii Affordable Housing Fund IIIII, and Hawaii Equity Fund IV, LLC (Class A) (the “Funds”) have been established to invest in qualified low-income housing tax credit rental projects and to ensure that these projects are maintained as low-income housing throughout the required compliance period. First Hawaiian’s investments in these Funds are included in other assets. The investment in projects associated with the Affordable Housing Fund I was sold in 2003.
EmployeesFHL Lease Holding Company, Inc. (“FHL”)
FHL, a direct subsidiary of BancWest, primarily finances and leases personal and real property, including equipment and vehicles. FHL is in a run-off mode and has ceased entering into new leases. At December 31, 2004, FHL’s net investment in leases amounted to $34.7 million and its total assets were $35.6 million.
2
BancWest Corporation and Subsidiaries
PART I
EMPLOYEES
At December 31, 2001,2004, the Corporation had 5,4679,829 full-time equivalent employees. Bank of the West and First Hawaiian employed 3,230Bank had 8,049 and 2,237 persons,2,227 employees, including part-time employees, respectively. None of our employees are represented by any collective bargaining agreements and our relations with employees are considered excellent.
Monetary Policy and Economic ConditionsMONETARY POLICY AND ECONOMIC CONDITIONS
Our earnings and businesses are affected not only by general economic conditions (both domestic and international), but also by the monetary policies of various governmental regulatory authorities of (i) the United States and foreign governments and (ii) international agencies. In particular, our earnings and growth may be affected by actions of the Federal Reserve Board in connection with its implementation of national monetary policy through its open market operations in United States Government securities, control of the discount rate and establishment of reserve requirements against both member and non-member financial institutions’ deposits. These actions may have a significant effect on the overall growth and distribution of loans and leases, investments and deposits, as well as on the rates earned on investment securities, loans and leases or paid on deposits. It is difficult to predict future changes in monetary policies.
CompetitionCOMPETITION
Competition in the financial services industry is intense. We compete with a large number of commercial banks (including domestic, foreign and foreign-affiliated banks), savings institutions, finance companies, leasing companies, credit unions and other entities that provide financial services such as mutual funds, insurance companies and brokerage firms.brokerage. Many of these competitors are significantly larger and have greater financial resources than the Corporation.resources. In addition, the increasing use of the Internet and other electronic distribution channels has resulted in increased competition with respect to many of the products and services that we offer. As a result, we compete with financial service providers located not only in our home markets but also those elsewhere in the United States that are able to offer their products and services through electronic and other non-conventional distribution channels.
Changes in federal law over the past several years have also made it easier for out-of-state banks to enter and compete in the states in which our bank subsidiaries operate. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”), among other things, eliminated substantially all state law barriers to the acquisition of banks by out-of-state bank holding companies. A bank holding company may now acquire banks in states other than its home state, without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the acquired bank has been organized and operating for a minimum period of time (not to exceed five years), and the requirement that the acquiring bank holding company, prior to or following the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent of such deposits in that state (or such lesser or greater amount as may be established by state law).
The Riegle-Neal Act also permits interstate branching by banks in all states other than those which have “opted out.” Since June 1, 1997, the Riegle-Neal Act has allowed banks to acquire branches located in another state by purchasing or merging with a bank chartered in that state or a national banking association having its headquarters located in that state. However, banks are not permitted to establishde novobranches or purchase individual branches located in other states unless expressly permitted by the laws of those other states. None of the states in which our banking subsidiaries operate have elected to “opt out” of the provisions of the Riegle-Neal Act permitting interstate branching through acquisition or mergers, although most do not permitde novobranching.
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Part ISUPERVISION AND REGULATION(continued)
Supervision and Regulation
As a registered financial holding company, we are subject to regulation and supervision by the Federal Reserve Board. Our subsidiaries are subject to regulation and supervision by the banking authorities of Arizona, California, Colorado, Hawaii, Idaho, Iowa, Minnesota, Nebraska, Nevada, Washington, Oregon, Idaho, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin, Wyoming, Guam and the Commonwealth of the Northern Mariana Islands, as well as by the FDIC (which is the primary federal regulator of our two bank subsidiaries) and various other regulatory agencies.
The consumer lending and finance activities of the Corporation’sParent’s subsidiaries are also subject to extensive regulation under various Federal laws, including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practice and Electronic Funds Transfer Acts, as well as various state laws. These statutes impose requirements on the making, enforcement and collection of consumer loans and on the types of disclosures that need to be made in connection with such loans.
Holding Company Structure.On November 12, 1999, the GLBAGramm-Leach-Bliley Act (“GLBA”) was signed into law. The GLBA permits bank holding companies that qualify for, and elect to be regulated as, financial holding companies, to engage in a wide range of financial activities, including certain activities, such as insurance, merchant banking and real estate investment that are not permissible for other bank holding companies. Each activity is to be conducted in a separate subsidiary that is regulated by a functional regulator: a state insurance regulator in the case of an insurance subsidiary,activities, the Securities and Exchange Commission in the case of a broker-dealer or investment advisory subsidiary,activities, or the appropriate federal banking regulator in the case of a bank or thrift institution. The Federal Reserve Board is the “umbrella” supervisor of financial holding companies. Section 23A of the Federal Reserve Act, which severely restricts lending by an insured bank subsidiary to nonbank affiliates, remains in place.
Financial holding companies are permitted to acquire nonbank companies without the prior approval of the Federal Reserve Board, but approval of the Federal Reserve Board continues to be required before acquiring more than 5% of the voting shares of another bank or bank holding company, before merging or consolidating with another bank holding company andor before acquiring substantially all the assets of any additional bank.bank or savings association. In addition, all acquisitions are reviewed by the Department of Justice for antitrust considerations. In conjunction with the 2001 BNP Paribas Merger, we elected to become a financial holding corporation.company.
3
BancWest Corporation and Subsidiaries
PART I
Dividend Restrictions.As a holding company, the principal source of our cash revenue has been dividends and interest received from our bank subsidiaries. Each of the bank subsidiaries is subject to various federal regulatory restrictions relating to the payment of dividends. For example, if, in the opinion of the FDIC, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which depending on the financial condition of the bank, could include the payment of dividends), the FDIC may require, after notice and hearing, that such bank cease and desist from such practice. In addition, the Federal Reserve Board has issued a policy statement which provides that, as a general matter, insured banks and bank holding companies should only pay dividends out of current operating earnings. The regulatory capital requirements of the Federal Reserve Board and the FDIC also may limit the ability of the Corporation and its insured depository subsidiaries to pay dividends. See “Prompt Corrective Action” and “Capital Requirements” below.
There are also statutory limits on the transfer of funds to the Corporation and its nonbanking subsidiaries by its banking subsidiaries, whether in the form of loans or other extensions of credit, investments or asset purchases. Such transfers by a bank subsidiary to any single affiliate are limited in amount to 10% of the bank’s capital and surplus, or 20% in the aggregate to all affiliates. Furthermore, such loans and extensions of credit are required to be collateralized in specified amounts.
Under Federal Reserve Board policy, a bankfinancial holding company is expected to act as a source of financial strength to each subsidiary bank and to make capital infusions into a troubled subsidiary bank. The Federal Reserve Board may charge a bankfinancial holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. This capital infusion may be required at times when a bankfinancial holding company may not have the resources to provide it. Any capital loansloan by us to one of our subsidiary banks would be subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank.
In addition, depository institutions insured by the FDIC can be held liable for any losses incurred, or reasonably expected to be incurred, by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. “Default” is defined generally as the appointment of a conservator or receiver and “in danger of default” is
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Part I(continued)
defined generally as the existence of certain conditions indicating that a “default” is likely to occur in the absence of regulatory assistance. Accordingly, in the event that any insured subsidiary of the Corporation causes a loss to the FDIC, other insured subsidiaries of the Corporation could be required to compensate the FDIC by reimbursing it for the amount of such loss. Any such obligation by our insured subsidiaries to reimburse the FDIC would rank senior to their obligations, if any, to the Corporation.
Prompt Corrective Action.Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal banking agencies are required to take “prompt corrective action” with respect to insured depository institutions that do not meet minimum capital requirements. FDICIA established a five-tier framework for measuring the capital adequacy of insured depository institutions (including Bank of the West and First Hawaiian)Hawaiian Bank), with each depository institution being classified into one of the following categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”
Under the regulations adopted by the federal banking agencies to implement these provisions of FDICIA (commonly referred to as the “prompt corrective action” rules), a depository institution is “well capitalized” if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure. An “adequately capitalized” depository institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank rated a composite 1 under the Uniform Financial Institution Rating System, “CAMELS rating,” established by the Federal Financial Institution Examinations Council). A depository institution is considered (i) “undercapitalized” if it has (A) a total risk-based capital ratio of less than 8%, (B) a Tier 1 risk-based capital ratio of less than 4% or (C) a leverage ratio of less than 4% (or 3% in the case of an institution with a CAMELS rating of 1), (ii) “significantly undercapitalized” if it has (A) a total risk-based capital ratio of less than 6%, (B) a Tier 1 risk-based capital ratio of less than 3% or (C) a leverage ratio of less than 3% and (iii) “critically undercapitalized” if it has a ratio of tangible equity to total assets equal to or less than 2%. An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating. At December 31, 2001,2004, all of the Corporation’s subsidiary depository institutions were “well capitalized.”
FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a cash dividend) or paying any management fees to its holding company if the depository institution is, or would thereafter be, undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic
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BancWest Corporation and Subsidiaries
PART I
assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company under such guarantee is limited to the lesser of (i) an amount equal to 5% of the depository institution’s total assets at the time it became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of other requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions may not make any payments of interest or principal on their subordinated debt and are subject to the appointment of a conservator or receiver, generally within 90 days of the date such institution becomes critically undercapitalized. In addition, the FDIC has adopted regulations under FDICIA prohibiting an insured depository institution from accepting brokered deposits (as defined by the regulations) unless the institution is “well capitalized” or is “adequately capitalized” and receives a waiver from the FDIC.
FDIC Insurance Assessments.The FDIC has implemented a risk-based deposit insurance assessment system under which the assessment rate for an insured institution may vary according to the regulatory capital levels of the institution and other factors (including supervisory evaluations). Depository institutions insured
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Part I(continued)
by the BIF which are ranked in the least risky category currently have no annual assessment for deposit insurance while all other banks are required to pay premiums ranging from .03%3 to .27%27 basis points of domestic deposits. As a result of the enactment on September 30, 1996 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the “Deposit(“the Deposit Funds Act”), the deposit insurance premium assessment rates for depository institutions insured by the SAIF were reduced, effective January 1, 1997, to the same rates that were applied to depository institutions insured by the BIF. The Deposit Funds Act also provided for a one-time assessment of 65.7 basis points on all SAIF-insured deposits in order to fully recapitalize the SAIF (which assessment was paid by the Corporation in 1996), and imposes annual assessments on all depository institutions to pay interest on bonds issued by the Financing Corporation (the “FICO”) in connection with the resolution of savings association insolvencies occurring prior to 1991. The FICO assessment rate for the first quarter of 20022005 was 1.81.44 basis points.points annualized. These rate schedules are adjusted quarterly by the FDIC. In addition, the FDIC has authority to impose special assessments from time to time, subject to certain limitations specified in the Deposit Funds Act.
Capital Requirements.Under the GLBA, our insured depository institutions are subject to regulatory capital guidelines issued by the federal banking agencies. Information with respect to the applicable capital requirements is included in Note 1316, Regulatory Capital Requirements, on pages 59 and 60.Requirements.
FDICIA required each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risk of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multi-family mortgages. The federal banking agencies have adopted amendments to their respective risk-based capital requirements that explicitly identify concentrations of credit risk and certain risks arising from nontraditional activities, and the management of such risks, as important factors to consider in assessing an institution’s overall capital adequacy. The amendments do not, however, mandate any specific adjustments to the risk-based capital calculations as a result of such factors.
In August 1996, the federal banking regulators adopted amendments to their risk-based capital rules to incorporate a measure for market risk in foreign exchange and commodity activities and in the trading of debt and equity instruments. Under these amendments, which became effective in 1997, banking institutions with relatively large trading activities are required to calculate their capital charges for market risk using their own internal value-at-risk models (subject to parameters set by the regulators) or, alternatively, risk management techniques developed by the regulators. As a result, these institutions are required to hold capital based on the measure of their market risk exposure in addition to existing capital requirements for credit risk. These institutions are able to satisfy this additional requirement, in part, by issuing short-term subordinated debt that qualifies as Tier 3 capital. The adoption of these amendments did not have a material effect on the Corporation’s business or operations.
On November 29, 2001, the federal bank regulatory agencies published a final regulation that addresses the capital treatment of recourse arrangements, direct credit substitutes and residual interests. “Recourse” means any retained credit risk associated with any asset transferred by a banking organization that exceeds a pro rata share of the banking organization’s remaining claim on the asset, if any. “Direct credit substitute” means any assumed credit risk associated with any asset or other claim not previously owned by a banking organization that exceeds the banking organization’s pro rata share of the asset or claim, if any. “Residual interest” means any on-balanceon-
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BancWest Corporation and Subsidiaries
PART I
balance sheet asset that representrepresents interests retained by a banking organization after a transfer of financial assets that qualifies as a sale for purposes of generally accepted accounting principles, which interests are structured to absorb more than a pro rata share of credit loss relating to the transferred assets. “Residual interests” do not include interests purchased from a third party, except for credit-enhancing interest-only strips (credit-enhancing I/O strips).
The new regulation assesses risk-based capital requirements on recourse obligations, residual interests (except credit-enhancing I/O strips), direct credit substitutes, and senior and subordinated securities in asset securitizations based on ratings assigned by nationally recognized statistical rating agencies. The risk weights range from 20% for a position that is rated AA or better, to 200% for a position that is rated BB. A banking organization that holds a recourse obligation or a direct credit substitute (other than a residual interest) that does not qualify for the ratings-based approach is required by the new regulation to maintain capital against that position and all senior positions in the securitization, but is not required to hold more capital than if assets had not been transferred. A banking organization that holds a residual interest that does not qualify for the ratings-based approach is required to hold capital on a dollar-for-dollar basis against the position and all senior positions, even if
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Part I(continued)
the capital charge exceeds the full risk-based capital charge that would have been held against the transferred assets.
The new regulation limits credit-enhancing I/O strips, whether retained or purchased, to 25% of Tier 1 capital, with any excess amount to be deducted from Tier 1 capital and from assets. (The deducted amount is not subject to the dollar-for-dollar capital charge discussed above.) Credit-enhancing I/O strips are not aggregated with non-mortgage servicing assets and purchased credit card relationships for purposes of calculating the 25% limit. The new regulation became effective on January 1, 2002 for transactions settled on or after that date and becomesbecame effective December 31, 2002 for all other transactions. The Corporation doesregulation did not believe the new regulation will have a material effect on itsthe Corporation’s operations or financial position.
On January 16, 2001,The U.S. federal bank regulatory agencies’ risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the “Committee”“Basel Committee”) proposed. The Basel Committee is a committee of central banks and bank supervisors from the major industrialized countries that develops broad policy guidelines that each country’s supervisors can use to determine the supervisory policies they apply. The Basel Committee released a proposal to replace the 1988 capital accord with a new capital adequacy frameworkaccord titled “Basel II.” The goal for Basel II is to replacepromote the framework adoptedadequate capitalization of banks and to encourage improvements in 1988. Underrisk management. The Basel Committee believes the new framework, risk weights for certain typesstandards are necessary due to the adoption of claims, including corporate credits, would be based on ratings assigned by rating agencies. Certain low quality exposures would be assigned a risk weight greater than 100%. Short-term commitments to lend, which currently do not require capital, would be subject to a 20% conversion factor. In addition to this “standardized” approach, banks with more advanced risk management capabilities, which can meet rigorous supervisory standards, can makemeasurement techniques and the use of an internal ratings-based approach under which some of the key elements of creditsophisticated risk such as the probability of default,management practices. Basel II will be estimated internally by a bank.accomplished through the introduction of three pillars that reinforce each other, while creating incentives for banks to enhance the quality of their control processes. The Committee also proposesthree pillars are as follows: (1) minimum capital charges for operational risk.requirements (2) supervisory oversight and (3) heightened market discipline. The Committee indicatedUnited States bank regulatory agencies recently stated that it intends to finalize the proposed new capital adequacy requirement by the end of 2001, with implementation in 2005. If adopted by the Committee,they anticipate that the new accord would then bebecome effective in the subjectUnited States in January 2008. The new capital requirements could increase minimum capital requirements applicable to the Company.
In order for us to remain a financial holding company, Bank of rulemakingthe West and First Hawaiian Bank (as well as each foreign bank that is controlled by BNP Paribas and that has a branch, agency or bank subsidiary in the United States) must remain “well capitalized” and “well managed.” In the case of Bank of the West and First Hawaiian Bank, “well capitalized” has the same meaning as under the “prompt corrective action” guidelines described above and “well managed” means that at their most recent examination the banks received at least a satisfactory composite rating and at least a satisfactory rating for management.
The USA PATRIOT Act.On October 26, 2001, President Bush signed into law the USA PATRIOT Act of 2001 (the “Act”). The Act includes numerous provisions designed to fight international money laundering and to block terrorist access to the U.S. bank regulatory agencies. Because the timing and final contentfinancial system. The provisions of the proposal are not yet clear,Act generally affect banking institutions, broker-dealers and certain other financial institutions, and require all “financial institutions,” as defined in the Corporation cannot predict at this timeAct, to establish anti-money laundering compliance and due diligence programs. The Act also grants the potential effect thatSecretary of the adoption of such a proposal will have on its regulatory capitalTreasury broad authority to establish regulations and to impose requirements and financial position.restrictions on subsidiary operations. We believe the Corporation’s programs satisfy the requirements of the Act.
Real Estate Activities.The FDIC adopted regulations, effective January 1, 1999, that make it significantly easier for state non-member banks to engage in a variety of real estate investment activities. These regulations generally allow a majority-owned corporate subsidiary of a state non-member bank to make equity investments in real estate if the bank complies with certain investment and transaction limits and satisfies certain capital requirements (after giving effect to its investment in the majority-owned subsidiary). In addition, the regulations permit a subsidiary of an insured state non-member bank to act as a lessor under a real property lease that is the equivalent of a financing transaction, meets certain criteria applicable to the lease and the underlying real estate and does not represent a significant risk to the deposit insurance funds.
Future Legislation6
BancWest Corporation and Subsidiaries
PART I
FUTURE LEGISLATION
Legislation relating to banking and other financial services has been introduced from time to time in Congress and is likely to be introduced in the future. If enacted, such legislation could significantly change the competitive environment in which we and our subsidiaries operate. Management cannot predict whether these or any other proposals will be enacted or the ultimate impact of any such legislation on our competitive situation, financial condition or results of operations.
Foreign OperationsFOREIGN OPERATIONS
Foreign outstandings are defined as the balances outstanding of cross-border loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets. At December 31, 2001, 20002004, 2003 and 1999,2002, we had no foreign outstandings to any country which exceeded 1% of total assets. Additional information concerning foreign operations is also included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 20 International Operations, on pages 65 and 66.
Operating SegmentsOPERATING SEGMENTS
Information regarding the Corporation’s operating segments is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 19 Operating Segments,20 (Operating Segments) to the Consolidated Financial Statements.
We make available free of charge on pages 20our website (www.bancwestcorp.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and 64amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. These reports are posted on our website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and 65, respectively.
Item 2. Properties
Bank of the West leases a site in Walnut Creek, California, which is its primary administrative headquarters. The administrative headquarters office is a 132,000-square-foot,133,000-square-foot, three-story building. Bank of the West also leases 48,382approximately 64,000 square feet of executive office space in downtown San Francisco in the same building that houses its San Francisco Main Branch at 180 Montgomery Street. See Note 21 Lease Commitments (page 66). Approximately 30,396
Through the acquisition of Community First Bankshares, Inc., Bank of the West acquired two large facilities in Fargo, North Dakota. One office is located at 520 Main Avenue, consists of approximately 105,000 square feet, of leasedand is currently utilized as a branch, regional headquarters for our Midwest operations and space at 180 Montgomery Streetfor sublease. The second office is subleased to BNP Paribas.approximately 47,000 square feet and is used as a data center.
As of December 31, 2001, 662004, 236 of Bank of the West’s active branches arewere located on land owned by Bank of the West. The remaining 127214 active branches arewere located on leasehold properties. Bank of the West also has 12
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14 surplus branch properties, 11seven of which are currently leasedsubleased to others. In addition, Bank of the West leases 2541 properties that are utilized for administrative (including warehouses), lease support, management information systems and regional management services. See Note 21 Lease Commitments (page 66).purposes.
First Hawaiian indirectly (through two subsidiaries) owns allIn addition, through the acquisition of a city block in downtown Honolulu.USDB Bancorp (USDB), we acquired 19 branches and four administrative facilities. In January 2005, when USDB was merged into Bank of the West, three branches and three administrative facilities were closed.
The administrative headquarters of theBancWest Corporation and First Hawaiian, as well as the First Hawaiian main branch, of First Hawaiian are located in a modern banking center situated on thisa city block. The headquarters building includes 418,000 square feet of gross office space. Information about the lease financing of the headquarters building is includedblock in Note 21 Lease Commitments (page 66).
As of December 31, 2001, 19 of First Hawaiian’s offices in Hawaii are located on landdowntown Honolulu owned in fee simple by First Hawaiian. The other branches ofThat headquarters building, First Hawaiian in Hawaii and one branch each in Guam and Saipan are situated on leasehold premises or in buildings constructed on leased land. See Note 21 Lease Commitments (page 66). In addition,Center, includes 418,000 square feet of office space. First Hawaiian owns an operations center which is located on 125,919approximately 126,000 square feet of land owned in fee simple by First Hawaiianland in an industrial area near downtown Honolulu. First Hawaiian occupies most of this four-story building.
On Guam, First Hawaiian owns a five-story, 75,000-square-foot office building, including a branch, which is situated on propertyfee simple property.
As of December 31, 2004, 21 of First Hawaiian Bank offices in Hawaii and in Guam are located on land owned in fee simple by First Hawaiian. It had 40 branches in Maite,Hawaii, in Guam where it maintains a branch.and in Saipan situated on leasehold premises or in buildings constructed on leased land.
See Note 10 (Premises and Equipment) to the Consolidated Financial Statements for further information.
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Item 3. Legal Proceedings
BancWest Corporation and Subsidiaries
PART I
The information required by this Item is set forth in Note 2221 (Litigation) to the Consolidated Financial Statements on page 67 of this Form 10-K, and is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2001.2004.
PART II
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
BancWest is a wholly-ownedwholly owned subsidiary of BNP Paribas and there is no public trading market for BancWest’s common equity. BancWest has no compensation plans that provide for issuance of its equity securities.
State regulations place restrictions on the ability of our bank subsidiaries to pay dividends. Under Hawaii law, First Hawaiian Bank is prohibited from declaring or paying any dividends in excess of its retained earnings. California law generally prohibits Bank of the West from paying cash dividends to the extent such payments exceed the lesser of retained earnings and net income for the three most recent fiscal years (less any distributions to stockholders during such three-year period). At December 31, 2001,2004, the aggregate amount of dividends that such subsidiaries could pay to the CorporationParent under the foregoing limitations without prior regulatory approval was $10.5$823.2 million.
Here are During the years ended December 31, 2004, 2003 and 2002, no quarterly andor annual cash dividends were paid per share data, computed usingon the common stock and Class A common shares and restated for the effects of a two-for-one stock split:
Cash | |||||
Dividends | |||||
Paid | |||||
2001 | |||||
First Quarter | $ | .19 | |||
Second Quarter | .19 | ||||
Third Quarter | .19 | ||||
Fourth Quarter | .23 | ||||
Annual | $ | .80 | |||
2000 | |||||
First Quarter | $ | .17 | |||
Second Quarter | .17 | ||||
Third Quarter | .17 | ||||
Fourth Quarter | .17 | ||||
Annual | $ | .68 | |||
1999 | $ | .62 | |||
1998 | $ | .58 | |||
1997 | $ | .58 | |||
On July 1, 1999, we acquired SierraWest Bancorp. That merger was accounted for as a pooling of interests. Therefore, all financial information has been restated for all periods presented.8
As we no longer have outstanding shares of common stock, future dividends will be paid only on Class A common shares. The declaration and payment of cash dividends are subject to future earnings, capital requirements, financial condition and certain limitations as described in Note 14 to the Consolidated Financial Statements on page 60.
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Part II(continued)
Item 6. Selected Financial Data
Year Ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
Earnings: | ||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Interest income | $ | 1,795,163 | $ | 1,678,790 | $ | 1,656,185 | $ | 1,323,649 | $ | 1,309,856 | ||||||||||
Interest expense | 442,825 | 385,207 | 465,330 | 507,135 | 562,922 | |||||||||||||||
Net interest income | 1,352,338 | 1,293,583 | 1,190,855 | 816,514 | 746,934 | |||||||||||||||
Provision for loan and lease losses | 49,219 | 81,295 | 95,356 | 103,050 | 60,428 | |||||||||||||||
Noninterest income | 431,500 | 392,179 | 335,901 | 308,398 | 216,076 | |||||||||||||||
Noninterest expense | 962,549 | 892,835 | 836,074 | 595,746 | 533,961 | |||||||||||||||
Income before income taxes and cumulative effect of accounting change | 772,070 | 711,632 | 595,326 | 426,116 | 368,621 | |||||||||||||||
Provision for income taxes | 298,693 | 272,698 | 233,994 | 171,312 | 152,227 | |||||||||||||||
Income before cumulative effect of accounting change | 473,377 | 438,934 | 361,332 | 254,804 | 216,394 | |||||||||||||||
Cumulative effect of accounting change, net of tax(1) | — | 2,370 | — | — | — | |||||||||||||||
Net income | $ | 473,377 | $ | 436,564 | $ | 361,332 | $ | 254,804 | $ | 216,394 | ||||||||||
Cash dividends | $ | — | $ | — | $ | — | $ | 99,772 | $ | 84,731 | ||||||||||
Balance Sheet Data Averages: | ||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Average assets | $ | 41,307 | $ | 35,898 | $ | 31,370 | $ | 19,461 | $ | 17,600 | ||||||||||
Average securities available for sale at cost | 6,324 | 4,737 | 3,154 | 2,267 | 2,089 | |||||||||||||||
Average loans and leases(2) | 27,752 | 24,756 | 22,340 | 14,586 | 13,286 | |||||||||||||||
Average deposits | 28,454 | 24,911 | 22,300 | 14,550 | 13,380 | |||||||||||||||
Average long-term debt and capital securities | 4,988 | 3,880 | 2,541 | 1,074 | 817 | |||||||||||||||
Average stockholder’s equity | 4,631 | 4,063 | 3,441 | 2,079 | 1,903 | |||||||||||||||
Balance Sheet Data At Year End: | ||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Assets | $ | 50,054 | $ | 38,352 | $ | 34,749 | $ | 21,647 | $ | 18,457 | ||||||||||
Securities available for sale | 7,955 | 5,773 | 3,941 | 2,542 | 1,961 | |||||||||||||||
Loans and leases(2) | 32,760 | 25,773 | 24,231 | 15,224 | 13,972 | |||||||||||||||
Deposits | 33,614 | 26,403 | 24,557 | 15,334 | 14,128 | |||||||||||||||
Long-term debt and capital securities | 6,305 | 4,221 | 3,636 | 2,463 | 882 | |||||||||||||||
Stockholder’s equity | 5,730 | 4,263 | 3,867 | 2,002 | 1,989 | |||||||||||||||
Selected Financial Ratios For the Year Ended: | ||||||||||||||||||||
Return on average total assets (ROA) | 1.15 | % | 1.22 | % | 1.15 | % | 1.31 | % | 1.23 | % | ||||||||||
Return on average stockholder’s equity (ROE) | 10.22 | 10.74 | 10.50 | 12.25 | 11.37 | |||||||||||||||
Net interest margin (taxable-equivalent basis) | 3.88 | 4.31 | 4.57 | 4.73 | 4.75 | |||||||||||||||
Net loans and leases charged off to average loans and leases | 0.23 | 0.30 | 0.53 | 0.56 | 0.37 | |||||||||||||||
Efficiency ratio(3) | 53.96 | 52.96 | 54.76 | 52.96 | 55.45 | |||||||||||||||
Average equity to average total assets | 11.21 | 11.32 | 10.97 | 10.68 | 10.81 | |||||||||||||||
At year end: | ||||||||||||||||||||
Allowance for loan and lease losses to total loans and leases | 1.33 | 1.52 | 1.59 | 1.28 | 1.24 | |||||||||||||||
Nonperforming assets to total loans and leases and other real estate owned and repossessed personal property | 0.45 | 0.59 | 1.02 | 0.79 | 0.87 | |||||||||||||||
Allowance for loan and lease losses to nonaccruing loans and leases | 3.49 | x | 2.93 | x | 1.70 | x | 2.00 | x | 1.84 | x | ||||||||||
Regulatory Capital Ratios: | ||||||||||||||||||||
Leverage Ratio(4): | ||||||||||||||||||||
Bank of the West | 9.69 | % | 9.55 | % | 9.17 | % | 7.18 | % | 7.95 | % | ||||||||||
First Hawaiian Bank | 10.39 | 9.91 | 9.21 | 8.39 | 8.99 | |||||||||||||||
Union Safe Deposit Bank(5) | 8.16 | — | — | — | — | |||||||||||||||
Tier 1 capital (risk-based): | ||||||||||||||||||||
Bank of the West | 10.57 | 10.72 | 9.93 | 7.85 | 8.78 | |||||||||||||||
First Hawaiian Bank | 13.62 | 12.85 | 11.19 | 9.52 | 9.19 | |||||||||||||||
Union Safe Deposit Bank(5) | 11.02 | — | — | — | — | |||||||||||||||
Total capital (risk-based): | ||||||||||||||||||||
Bank of the West | 12.41 | 12.94 | 12.23 | 10.90 | 11.72 | |||||||||||||||
First Hawaiian Bank | 15.86 | 15.21 | 13.56 | 11.81 | 11.27 | |||||||||||||||
Union Safe Deposit Bank(5) | 11.83 | — | — | — | — | |||||||||||||||
On December 20, 2001, BNP Paribas acquired all of the outstanding common shares of BancWest. As a result of the transaction, BancWest became a wholly-owned subsidiary of BNP Paribas. The business combination was accounted for as a purchase with BNP Paribas’ accounting basis being “pushed down” to BancWest. See Note 2 to the Consolidated Financial Statements for additional information regarding this business combination. It is generally not appropriate to combine pre- and post-“push down” periods; however, for purposes of comparison only, the following tables combine our results of operations from December 20, 2001 through December 31, 2001 with those for the period January 1, 2001 through December 19, 2001. The combined results will generally serve as comparable amounts to the 12-month period ended December 31, 2000 and will be utilized for purposes of providing discussion and analysis of results of operations.
(dollars in thousands) | 2001 | 2000 | 1999 | 1998 | 1997 | |||||||||||||||
Income Statements and Dividends | ||||||||||||||||||||
Interest income | $ | 1,323,649 | $ | 1,309,856 | $ | 1,135,711 | $ | 749,541 | $ | 651,048 | ||||||||||
Interest expense | 507,135 | 562,922 | 446,877 | 315,822 | 281,232 | |||||||||||||||
Net interest income | 816,514 | 746,934 | 688,834 | 433,719 | 369,816 | |||||||||||||||
Provision for credit losses | 103,050 | 60,428 | 55,262 | 30,925 | 20,010 | |||||||||||||||
Noninterest income | 308,398 | 216,076 | 197,632 | 134,182 | 110,550 | |||||||||||||||
Noninterest expense | 595,746 | 533,961 | 535,075 | 392,075 | 322,171 | |||||||||||||||
Income before income taxes | 426,116 | 368,621 | 296,129 | 144,901 | 138,185 | |||||||||||||||
Provision for income taxes | 171,312 | 152,227 | 123,751 | 60,617 | 44,976 | |||||||||||||||
Net income | $ | 254,804 | $ | 216,394 | $ | 172,378 | $ | 84,284 | $ | 93,209 | ||||||||||
Cash dividends | $ | 99,772 | $ | 84,731 | $ | 77,446 | $ | 40,786 | $ | 41,116 | ||||||||||
Supplemental Non-GAAP Data (1) | ||||||||||||||||||||
Operating earnings (2) | $ | 257,146 | $ | 217,149 | $ | 184,008 | $ | 106,150 | $ | 93,209 | ||||||||||
Cash earnings (3) | $ | 291,610 | $ | 249,131 | $ | 204,886 | $ | 95,366 | $ | 99,832 | ||||||||||
Operating cash earnings (2), (3) | $ | 293,952 | $ | 249,886 | $ | 216,516 | $ | 117,232 | $ | 99,832 | ||||||||||
On July 1, 1999, we acquired SierraWest Bancorp. That merger was accounted for as a pooling of interests. Therefore, all financial information has been restated for all periods presented.
14
Part II(continued)
Item 6. Selected Financial Data(continued)
2001 | 2000 | 1999 | 1998 | 1997 | |||||||||||||||||
Balance Sheets(in millions) | |||||||||||||||||||||
Average balances: | |||||||||||||||||||||
Total assets | $ | 19,461 | $ | 17,600 | $ | 16,294 | $ | 10,033 | $ | 8,635 | |||||||||||
Total earning assets | 17,297 | 15,742 | 14,492 | 9,036 | 7,768 | ||||||||||||||||
Loans and leases | 14,586 | 13,286 | 12,291 | 7,659 | 6,477 | ||||||||||||||||
Deposits | 14,550 | 13,380 | 12,517 | 7,710 | 6,541 | ||||||||||||||||
Long-term debt and capital securities | 1,074 | 817 | 790 | 354 | 279 | ||||||||||||||||
Stockholder’s equity | 2,079 | 1,903 | 1,793 | 938 | 786 | ||||||||||||||||
At December 31: | |||||||||||||||||||||
Total assets | 21,647 | 18,457 | 16,681 | 15,929 | 8,880 | ||||||||||||||||
Loans and leases | 15,224 | 13,972 | 12,524 | 11,965 | 6,792 | ||||||||||||||||
Deposits | 15,334 | 14,128 | 12,878 | 12,043 | 6,790 | ||||||||||||||||
Long-term debt and capital securities | 2,463 | 882 | 802 | 734 | 324 | ||||||||||||||||
Stockholder’s equity | 2,002 | 1,989 | 1,843 | 1,746 | 801 | ||||||||||||||||
Selected Ratios | |||||||||||||||||||||
Return on average: | |||||||||||||||||||||
Total assets | 1.31 | % | 1.23 | % | 1.06 | % | .84 | % | 1.08 | % | |||||||||||
Stockholder’s equity | 12.25 | 11.37 | 9.61 | 8.99 | 11.86 | ||||||||||||||||
Supplemental Non-GAAP Data (1) | |||||||||||||||||||||
Return on average: | |||||||||||||||||||||
Tangible total assets (2) | 1.56 | % | 1.48 | % | 1.39 | % | 1.19 | % | 1.17 | % | |||||||||||
Tangible stockholder’s equity (2) | 22.53 | 20.32 | 19.70 | 16.31 | 15.14 | ||||||||||||||||
Other Selected Data | |||||||||||||||||||||
Average stockholder’s equity to average total assets | 10.68 | % | 10.81 | % | 11.00 | % | 9.35 | % | 9.10 | % | |||||||||||
Year ended December 31: | |||||||||||||||||||||
Net interest margin | 4.73 | 4.75 | 4.76 | 4.81 | 4.77 | ||||||||||||||||
Net loans and leases charged off to average loans and leases | .55 | .37 | .42 | .31 | .33 | ||||||||||||||||
Efficiency ratio (3) | 51.24 | 51.53 | 54.47 | 62.50 | 65.53 | ||||||||||||||||
At December 31: | |||||||||||||||||||||
Allowance for credit losses to total loans and leases | 1.28 | 1.23 | 1.29 | 1.32 | 1.33 | ||||||||||||||||
Nonperforming assets to total loans and leases and other real estate owned and repossessed personal property | .78 | .86 | 1.01 | 1.11 | 1.42 | ||||||||||||||||
Allowance for credit losses to nonperforming loans and leases | 2.00 | x | 1.84 | x | 1.64 | x | 1.61 | x | 1.40 | x | |||||||||||
On July 1, 1999, we acquired SierraWest Bancorp. That merger was accounted for as a pooling of interests. Therefore, all financial information has been restated for all periods presented.
159
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part II(continued)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking StatementsFORWARD-LOOKING STATEMENTS
Certain matters contained in this filing are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements (such as those concerning itsour plans, expectations, estimates, strategies, projections and goals) involve risks and uncertainties that could cause actual results to differ materially from those discussed in the statements. Readers should carefully consider those risks and uncertainties in reading this report. FactorsIn addition to factors discussed elsewhere in this report, other factors that could cause or contributeour results to such differencesdiffer include, but are not limited to:
(1) | global, national and local economic and market conditions, specifically with respect to changes in the United States | |||
(2) | the level and volatility of interest rates and currency values; | |||
(3) | government fiscal and monetary policies; | |||
(4) | credit risks inherent in the lending process; | |||
(5) | loan and deposit demand in the geographic regions where we conduct business; | |||
(6) | the impact of intense competition in the rapidly evolving banking and financial services business; | |||
(7) | extensive federal and state regulation of our business, including the | |||
(8) | whether expected revenue enhancements and cost savings are realized within expected time frames; | |||
(9) |
matters relating to the integration of our business with that of past and future merger partners, including the impact of combining these businesses on revenues, expenses, deposit attrition, customer retention and financial performance; | ||||
(10) | our reliance on third parties to provide certain critical services, including data processing; | |||
(11) | the proposal or adoption of changes in accounting standards by the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission (“SEC”) or other standard setting bodies; | |||
(12) | technological changes; | |||
(13) | other risks and uncertainties discussed in this document or detailed from time to time in other SEC filings that we make; and | |||
(14) | management’s ability to manage risks that result from these and other factors. |
Our forward-looking statements are based on management’s current views about future events. Those statements speak only as of the date on which they are made. We do not intend to update forward-looking statements, and, except as required by law, we disclaim any obligation or undertaking to update or revise any such statements to reflect any change in our expectations or any change in events, conditions, circumstances or assumptions on which forward-looking statements are based.
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
10
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Glossary
See “Glossary of Financial Terms” on page 70 for definitions of certain terms used in this annual report.
GAAP, Operating and Cash EarningsOVERVIEW
We analyze our performance onBancWest Corporation (www.bancwestcorp.com) is a net income basis determinedfinancial holding company with assets of $50.1 billion. It is a wholly owned subsidiary of Paris-based BNP Paribas. The Company is headquartered in accordanceHonolulu, Hawaii, with generally accepted accounting principles (“GAAP”), as well as on an operating basis before merger-related, integration and other nonrecurring costs and/or the effectsadministrative headquarters in San Francisco, California. As of December 31, 2004, its principal subsidiaries were Bank of the amortization of intangible assets. We refer to the results as “operating” and “cash” earnings, respectively. Operating earnings, cash earnings and operating cash earnings (the combinationWest (Bank of the effect of adjustments for both cashWest or BOW) (466 full service retail branches and operating results),14 limited service retail offices in Arizona, California, Colorado, Idaho, Iowa, Minnesota, Nebraska, Nevada, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin and Wyoming) and First Hawaiian Bank (First Hawaiian or FHB) (61 branches in Hawaii, Guam and Saipan). In this report, BancWest Corporation and Subsidiaries is referred to as well“the Company,” “we” or “our.” BancWest Corporation alone is referred to as information calculated from them and related discussions, are presented as supplementary information in this analysis. This presentation is intended to enhance the readers’ understanding of, and highlight trends in, our core financial results excluding the effects of discrete business acquisitions and other transactions. We include these additional disclosures because this information is both relevant and useful in understanding the performance“the Parent.”
Acquisitions
Community First Bankshares Acquisition
On November 1, 2004, we acquired 100 percent of the Company as management views it. Operating earningsoutstanding stock of Community First Bankshares, Inc., (Community First) a holding company that operated Community First National Bank (CFB). The purchase price of approximately $1.2 billion was paid in cash and cash earnings should not be viewed as a substitute for net income, among other gauges of performance, as determined in accordance with GAAP. Merger-related, integration and other nonrecurring costs, amortization of intangible assets and other items excluded from net income to derive operating and cash earnings may be significant and may not be comparable to those of other companies.
Basis of Presentation
The BNP Paribas Merger was accounted for as a purchase in accordance with BNP Paribas’ accounting basis being “pushed down”Statement of Financial Accounting Standard No. 141 “Business Combinations” (FAS 141). Accordingly, the purchase price was allocated to BancWest Corporation. Although the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. We recorded $913 million of goodwill and $97 million of identifiable intangibles related to the Community First acquisition.
The final allocation of the purchase price will be established after completing the analysis to determine the fair values of Community First’s tangible assets and liabilities and identifiable intangible assets and final decisions regarding integration activities have been made. The acquisition of Community First added 10 states to the Company’s footprint, and added to our market share in California and New Mexico. CFB operated 166 banking locations (153 full service retail branches and 13 limited service retail offices) in Arizona, California, Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wisconsin and Wyoming. Community First’s retail operations complement BOW’s existing network in California, Nevada, New Mexico and the Pacific Northwest. At October 31, 2004, Community First had total assets of $5.5 billion, total deposits of $4.5 billion and loans of $3.4 billion. Beginning November 1, 2004, the results of operations of Community First were included in our Consolidated Financial Statements. Branches of CFB were fully integrated into BOW’s network in the fourth quarter of 2004.
The Company adopted formal restructuring plans in the fourth quarter of 2004. These restructuring plans targeted areas where there is a significant amount of overlap between the two companies. This includes consolidating administrative and support services including data processing and marketing and to focus the Company’s resources on activities that will promote growth in the business. We will be consolidating excess facilities and evaluating areas where we will be able to take advantage of existing facilities. We have estimated net cost savings of approximately $50 million per year beginning in 2006 from restructuring efforts. In 2005, the Company expects to realize net cost savings of more than $35 million. Exit costs related to Community First activities are expected to approximate $25 million and are accrued as a liability. Approximately 200 employees have been or will be displaced in conjunction with the acquisition. We are also expecting to incur conversion and restructuring expenses totaling approximately $18 million. In 2004, the Company incurred approximately $14 million of restructuring expenses related to the Community First acquisition. We anticipate that cash outlays for exit and restructuring costs should be substantially completed by the end of 2005.
USDB Bancorp Acquisition
On November 1, 2004, we also acquired USDB Bancorp (USDB), parent company of Union Safe Deposit Bank. USDB was a holding company headquartered in Stockton, California, and operated 19 Union Safe Deposit Bank branches in San Joaquin and Stanislaus Counties in the Central Valley of California. The purchase price of approximately $245 million was paid in cash to acquire 100% of the outstanding stock of USDB and was accounted for as a purchase in accordance with FAS 141. Accordingly, the purchase price was preliminarily allocated to the assets acquired and the liabilities assumed based on their estimated fair values. In addition, the
11
BancWest Corporation wasand Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Company expects to accrue approximately $25 million related to change of control payments. We recorded $170 million of goodwill and $15 million of identifiable intangibles related to the surviving entityUSDB acquisition.
As of October 31, 2004, USDB had total assets of $1.2 billion, total deposits of $899 million and total loans of $676 million. Exit costs related to USDB activities are expected to be approximately $7 million and are accrued as a liability. Approximately 160 employees have been or will be displaced in conjunction with the acquisition. The Company is also expecting to incur conversion and restructuring expenses totaling approximately $4 million. In 2004, the Company incurred approximately $2 million in restructuring expenses. We anticipate that cash outlays for exit and restructuring costs should be substantially completed by the end of 2005.
The conversion and merger of Union Safe Deposit Bank into Bank of the West occurred in January of 2005. Expanding Bank of the West’s presence in California has been one of the Company’s strategic goals. This acquisition gives us the opportunity to service a broader region of the Central Valley. The Company has estimated net cost savings of approximately $20 million per year beginning in 2006 from restructuring efforts. In 2005, the Company expects to realize net cost savings of more than $15 million.
Strategic Initiatives
The Company has continued to implement a series of initiatives that are designed to improve customer service and expand our physical footprint through branch expansion and acquisitions. The focus of the Company is to promote long-lasting customer service relationships through upgrading technology and implementing new training vehicles. The Company strives for a “high touch” personalized marketing position, promoting brand recognition through logos and community outreach. The Company is expanding its line of financial services to its customers through internal initiatives as well as acquisitions. This includes insurance services that it attained through its acquisition of Community First. Bank of the West currently operates 57 insurance agencies in eight states and is planning to expand the insurance operations through acquisitions.
Bank of the West’s Commercial Banking Group is planning to expand geographically and also increase its product offering for the Commercial Banking Division, the Agribusiness Banking Division and the Real Estate Industries Division. The Commercial Banking Group has created two new departments, National Middle Market Leasing and the Commercial Finance Department. The Government Banking Department is in the BNP Paribas Merger,process of expanding to include a Public Finance program. The geographic expansion plans will include locations in Colorado as a first step, and one or two other states to be determined. Denver will be the initial location for the first office to take advantage of the new footprint as a result of the merger with Community First. National Middle Market Leasing will originate lease transactions nationwide, targeting middle market companies with sales of $25 million - $500 million. The focus will be on leases of $250 thousand - $10 million.
Bank of the West’s Consumer Finance Group is planning to expand geographically and also increase its ownership changedproduct offerings. The geographic expansion includes the Midwest and other states in the new footprint resulting from the merger with Community First. Additional expansion of the auto loan product in adjacent markets is also being considered.
First Hawaiian Bank’s focus is on its core markets of Hawaii, Guam and Saipan. The primary effort is to deepen our relationships with existing customers by offering new products and aggressively attempting to meet their needs. In addition, due to improving economic conditions in Hawaii, Guam and Saipan, First Hawaiian Bank seeks to increase loan and deposit volumes by developing relationships with new customers. Also, as part of the effort to focus on our core markets First Hawaiian Bank’s Commercial Banking Group has nearly completed its planned reduction in the Media Finance and Corporate National areas.
First Hawaiian Bank’s Consumer Banking Group is growing its commercial card business, offering sophisticated credit card products to serve the needs of our business customers at both First Hawaiian Bank and Bank of the West. Investments are being made in this business line to enhance customer service and improve staff efficiencies.
First Hawaiian Bank’s Financial Management Group will also be making investments in technology to enhance customer service and create synergies to develop new business. In addition, on June 1, 2004, Bishop Street Capital Management, the investment management subsidiary of First Hawaiian Bank, acquired CIC/HCM Asset Management, Inc., the largest independent institutional fixed-income specialist in Hawaii with $300 million under management. The acquisition reaffirms First Hawaiian Bank’s commitment to expanding its strong, Hawaii-based investment team.
Key among the elements of the Company’s profitability has been the interest rate environment, from both a deposit and loan pricing standpoint. As an industry, banks and other financial intermediaries have seen net interest margins decline over the past year
12
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
principally as a result of the absolute level and shape of the yield curve. We manage the interest rate and market risks inherent in our asset and liability balances, while ensuring ample liquidity and diverse funding.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our Consolidated Financial Statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances as of December 31, 2004. We have policies and procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. However, given the sensitivity of our Consolidated Financial Statements to these accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.
Our accounting policies are discussed in detail in Note 1 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. We have identified the following accounting estimates that we believe are material due to the transaction. Priorlevels of subjectivity and judgment necessary to the BNP Paribas Merger, BancWest
16
Part II(continued)
Corporation was 55% publicly owned and 45% owned by BNP Paribas (“Predecessor” basis). Starting on December 20, 2001, BancWest Corporation’s financial statements reflected BNP Paribas’ “pushed-down basis.” See Note 2 of the Consolidated Financial Statementsaccount for additional information regarding this business combination.
It is generally not appropriateuncertain matters or where these matters are particularly subject to combine pre- and post-“push-down” periods; however, for purposes of comparison only, certain information presented in this section combines BancWest Corporation’s results of operations from December 20, 2001 through December 31, 2001 with those of the Predecessor for the period from January 1, 2001 through December 19, 2001. The combined results will generally serve as comparable amounts to the 12-month period ended December 31, 2000 and will be utilized for purposes of providing discussion and analysis of results of operations. In addition, annual average balances discussed in this section were computed on a similarly combined basis.
Overview
Thanks to strong performances in both West Coast and Hawaii operations, our operating earnings during 2001 increased 18.4% over 2000 to a record $257.1 million. These were some of the key events affecting our financial statements:
For further information regarding13
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
assumptions are too high, or if the Company’s mergersdiscount rate used is too low, there is a risk that impairment should have been recognized, but was not recorded. We use a two-step process to evaluate possible impairment. The first step compares the fair value of a reporting unit, which is an individual business segment of the Company, to its carrying amount. If the fair value exceeds the carrying amount, no impairment exists. If the carrying amount exceeds the fair value, then a second step is conducted whereby we assign fair values to identifiable assets and acquisitions, see Note 2liabilities, leaving an implied fair value for goodwill. The implied fair value of goodwill is compared with the carrying amount of goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss is recognized. We performed the impairment testing of goodwill required under FAS No. 142 for the year ended December 31, 2004, in the fourth quarter. Due to the Consolidated Financial Statementsinherent imprecision of projections used in the impairment test, a number of different scenarios were used. In addition to using anticipated balance sheet growth, scenarios for 25% more and 20% less than the anticipated growth were used. Furthermore, in projecting cash flows, a continuing value scenario as well as a terminal value scenario were used. Finally, two separate discount rate scenarios were used. The first discount rate used was the weighted average cost of capital, which is a composite of the after-tax cost of debt and cost of equity. The second discount rate was the cost of equity using a capital asset pricing model. The conclusion after testing under each of these scenarios was that there was no impairment of goodwill.
FINANCIAL OVERVIEW
Income Statement Analysis
2004 compared with 2003
The Company reported net income of $473.4 million for the year ended December 31, 2004, compared with $436.6 million for the year ended December 31, 2003. Net interest income was $1,352 million compared with $1,294 million, primarily due to an increase in interest earning assets resulting from organic growth and the acquisitions of Community First and USDB. Average loans increased by $3.0 billion; average securities available for sale increased by $1.6 billion. The Company increased its consumer lending and purchased residential mortgage loans and securities in a year when commercial borrowing was still relatively slow. The acquisitions of Community First and USDB also contributed to the increase in both average loans and leases and average investment securities. The net interest margin decreased 43 basis points (1% equals 100 basis points) as a result of the effects of a flattening yield curve in which short-term rates have risen more quickly than long-term rates. Noninterest income was $431.5 million compared with $392.2 million. The increase was predominately due to the requirement of accounting for certain automobile leases as operating leases rather than direct finance leases, increased service charges on pages 51 through 53. For further information regarding the Company’s restructuring, integration,deposit accounts and other nonrecurring costs, see Note 3service charges and fees as well as increased revenue from the sales of other real estate owned and miscellaneous assets. The increase in noninterest income was also impacted by the acquisitions of Community First and USDB in November 2004. Noninterest expense was $962.5 million compared with $892.8 million, with the increase primarily due to increased salaries and wages expense resulting from a higher full-time equivalent employee count that resulted from the acquisitions, restructuring expenses related to the Consolidated Financial Statements on page 53. For additional information regarding net interest income, see Net Interest Incomeacquisitions of Community First and Table 1 on pages 22USDB and 23, respectively. For additional information on nonperformingvehicle depreciation incurred from the change in accounting for auto leases.
Balance Sheet Analysis
The Company had total assets see Nonperforming Assets and Past Dueof $50.1 billion at December 31, 2004, up 30.5% from a year earlier. Securities available for sale totaled $8.0 billion, an increase of 37.8% from the same date in 2003. Loans and Leases on pages 32leases totaled $32.7 billion, up 27.1% from the prior year. Deposits were $33.6 billion, up 27.3% from a year earlier. The increases were due to both internal growth and 33.
2001 vs. 2000the acquisitions of Community First and USDB.
Nonperforming assets were reduced to 0.45% of loans, leases and foreclosed properties at December 31, 2004, an improvement from 0.59% at December 31, 2003. The table below compares our 2001 financial results to 2000. The improvement in our financial results is primarily attributed to higher net interest income, caused mainly by increasedallowance for loan and lease losses was 1.33% of total loans and deposit volume, increased noninterest income, a result of our continuing effortsleases at December 31, 2004, compared with 1.52% at December 31, 2003. The decrease in nonperforming assets was primarily due to diversify our revenue base,loan repayments and controlled noninterest expense. In addition,sales. Loan and lease charge-offs and workouts also contributed to the gain on the sale ofdecrease.
1714
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part IIRESULTS OF OPERATIONS(continued)
Concord, net of additional provision and other nonrecurring items, contributed $14.9 million to our net and operating income.
(dollars in thousands) | 2001 | 2000 | Change | |||||||||
Consolidated net income | $ | 254,804 | $ | 216,394 | 17.8 | % | ||||||
Operating earnings* | 257,146 | 217,149 | 18.4 | |||||||||
Return on average tangible total assets* | 1.56 | % | 1.48 | % | 5.4 | |||||||
Return on average tangible stockholder’s equity* | 22.53 | 20.32 | 10.9 | |||||||||
*Excludes after-tax restructuring, integration and other nonrecurring costs of $2.3 million and $755,000 in 2001 and 2000, respectively.2004 compared with 2003
2000 vs. 1999
The table below compares our 2000 financial results to 1999. The improvement in our financial results is primarily attributed to higher net Net interest income caused mainly by increased loan and lease and deposit volume, increased noninterest income, a result of our continuing efforts to diversify our revenue base, and controlled noninterest expense. In addition, the $11.6$1,352 million after-tax restructuring, merger-related and other nonrecurring costs that we incurred in 1999 for the SierraWest Merger and the consolidation of data centers are reflected in the results for 1999. The $755,000 in after-tax other nonrecurring costs related to the New Mexico and Nevada branch acquisition are included in the results for 2000.
(dollars in thousands) | 2000 | 1999 | Change | |||||||||
Consolidated net income | $ | 216,394 | $ | 172,378 | 25.5 | % | ||||||
Operating earnings* | 217,149 | 184,008 | 18.0 | |||||||||
Return on average tangible total assets* | 1.48 | % | 1.39 | % | 6.5 | |||||||
Return on average tangible stockholder’s equity* | 20.32 | 19.70 | 3.1 | |||||||||
*Excludes after-tax restructuring, integration and other nonrecurring costs of $755,000 in 2000 and $11.6 million in 1999.
Net Interest Income
2001 vs. 2000
(in thousands) | 2001 | 2000 | Change | |||||||||
Net interest income | $ | 816,514 | $ | 746,934 | 9.3 | % | ||||||
The increase in net interest income was primarily the result of a $4.8 billion, or 16.1%, increase in average earning assets. The increase in our average earning assets was predominately the result of growth in loans (from originations and purchases) and securities available for sale. The effect of the increase from average earning assets was offset by a 43 basis point reduction in our net interest margin. The effect of a flattening yield curve has continued to hold down the yield on earning assets while rates paid on sources of funds fell only slightly from prior year.
2003 compared with 2002
Net interest income for the year ended December 31, 2003 increased 8.6% to $1,294 million as compared with $1,191 million for the prior year.
The increase in 2001net interest income was principally the result of a $1.5$4.0 billion, or 9.7%15.3%, increase in average earning assets. The increase in our average earning assets was primarily athe result of internal growth in ourloans, leases and securities available for sale as well as the earning assets obtained from United California Bank of the West operating segment(“UCB”) contributing for a full year during 2003 versus only nine and branch acquisitions in Nevada, New Mexico, Guam and Saipan.one half months during 2002. The increase in average earning assets was partially offset by a two-basis-point (1% equals 10026 basis points)point reduction in our net interest margin. The Federal Reserve Board’s Federal Open Market Committee has reduced the key Federal Funds rate 11 times by a total of 425 basis points in 2001. Thecontinuing effect of these decreases hashistorically low interest rates reduced the yield on earning assets but also theto a greater extent than rates paid on sources of funds.
2000 vs. 1999
(in thousands) | 2000 | 1999 | Change | |||||||||
Net interest income | $ | 746,934 | $ | 688,834 | 8.4 | % | ||||||
The increase in our net interest income in 2000 was principally the result of a $1.3 billion, or 8.7%, increase in average earning assets. The increase in our average earning assets was primarily a result of growth in our Bank of the West operating segment. This increase was partially offset by a one-basis-point reduction in our net interest margin. The rebound in Hawaii has stopped the nearly decade-long economic decline, leading to a double-digit increase in the earnings of our First Hawaiian operating segment.
Noninterest Income
(in thousands) | 2001 | 2000 | Change | |||||||||
Noninterest income | $ | 308,398 | $ | 216,076 | 42.7 | % | ||||||
Key components of noninterest income that increased in 2001 over 2000 include: (1) a $71.8 million increase in the net gain on sale of investment securities, primarily from the $59.8 million pre-tax gain on the sale of Concord stock and the sale of securities in our available-for-sale investment portfolio; (2) higher service charges and fees for deposits and miscellaneous items, due to higher fees and increased volume from our larger customer base and (3) a $4 million gain on the sale of a leveraged lease. These increases were partially offset by a decrease in trust and investment income, primarily due to the decrease in the equity markets in the United States.
Noninterest Expense
(in thousands) | 2001 | 2000 | Change | |||||||||
Noninterest expense | $ | 595,746 | $ | 533,961 | 11.6 | % | ||||||
The increase in noninterest expense in 2001 was primarily due to the additional costs related to our larger branch network because of branch acquisitions in Nevada, New Mexico, Guam and Saipan. Excluding the pre-tax restructuring, integration and other nonrecurring costs of $3.9 million in 2001 and $1.3 million in 2000, noninterest expense increased by 10.7%, due primarily to an increase in salaries and employee benefits and an increase in occupancy expense, primarily due to continued expansion in our Bank of the West operating segment. The increase in our intangible amortization expense is due to additional amounts of intangible assets recorded related to our branch acquisitions in Nevada, New Mexico, Guam and Saipan.
18
Part II(continued)
Efficiency Ratio
2001 | 2000 | 1999 | ||||||||||
Efficiency ratio* | 51.24 | % | 51.53 | % | 54.47 | % | ||||||
*Calculated as noninterest expense (exclusive of nonrecurring costs) minus the amortization of goodwill and core deposit intangible as a percentage of total operating revenue (net interest income plus noninterest income, exclusive of nonrecurring items).
Our efficiency ratio improved in 2001 over 2000 principally because of increased revenue from higher net interest income, primarily from more earning assets, and higher noninterest income. In addition, the containment of noninterest expense contributed to the improvement in our efficiency ratio.
Credit Quality
The provision for credit losses increased in 2001 over 2000 primarily because of the 9.8% increase in average total loans and leases outstanding in 2001 over 2000 and additional amounts taken in response to macroeconomic trends. The improvement in the ratio of non-performing assets to total loans and leases, OREO and repossessed personal property in 2001 compared to 2000 was primarily due to the increase in average total loans and leases, as well as the reduction of restructured loans and leases and OREO and repossessed personal property, partially offset by an increase in nonaccrual loans and leases. Net charge-offs increased primarily due to increased charge-offs in the commercial, financial and agricultural and consumer loan and lease categories. The overall increase in charge-offs reflect the effects of the slowing national and regional economies.
(dollars in thousands) | 2001 | 2000 | 1999 | |||||||||
Provision for credit losses | $ | 103,050 | $ | 60,428 | $ | 55,262 | ||||||
Net charge-offs to average loans & leases | .55 | % | .37 | % | .42 | % | ||||||
Allowance for credit losses (year end) | $ | 194,654 | $ | 172,443 | $ | 161,418 | ||||||
Allowance for credit losses as % of total loans & leases (year end) | 1.28 | % | 1.23 | % | 1.29 | % | ||||||
Nonperforming assets* as % of total loans & leases, OREO & repossessed personal property (year end) | .78 | .86 | 1.01 | |||||||||
*Principally loans and leases collateralized by real estate.
Net Interest Margin
2001 vs. 2000
2001 | 2000 | Change | ||||||||||
Net interest margin | 4.73 | % | 4.75 | % | -2 basis pts. | |||||||
The net interest margin decreased by 243 basis points due primarily to the effects of the flattening yield curve, which had the effect of reducing our yield on earning assets by 44 basis points to 5.15% from 5.59%, while it decreased our rates paid on sources of funds by only one basis point to 1.27% from 1.28%. The decrease in 2001 from 2000the yield on average earning assets was partially offset by an increase of $1,058 million, or 14.8%, in average noninterest-bearing deposits.
2003 compared with 2002
The net interest margin decreased by 26 basis points due primarily to the effects of the decreasing interest rate environment that was experienced for most of 2001. Althoughcontinued into 2003. While the decreasing rate environment reduced our yield on earning assets by 6676 basis points to 7.66% in 20015.59% from 8.32% in 2000,6.35%, it also decreased our rate paid on sources of funds by 6450 basis points to 2.93% in 20011.28% from 3.57% in 2000. Therefore, our net interest margin decreased by two basis points in 2001. Partially1.78%. Also offsetting the decrease in the yield on average earning assets, average noninterest-bearing deposits maintained by retail and commercial customers in both banks increased by $431 million,$1.4 billion, or 15.8%,25.5%. Higher yielding average domestic time deposits decreased 7.7% due, in 2001 comparedpart, to 2000.
2000 vs. 1999
2000 | 1999 | Change | ||||||||||
Net interest margin | 4.75 | % | 4.76 | % | -1 basis pt. | |||||||
The net interest margin decreased by one basis pointmaturities of certificates originated in 2000 from 1999 primarily due to the effects of the increasinga higher interest rate environment that was experienced for most of 2000. Although the increasing rate environment raised our yield on earning assets by 48 basis points to 8.32% in 2000 over 7.84% in 1999, it also raised our rate paid on sources of funds by 49 basis points to 3.57% in 2000 over 3.08% in 1999. Therefore, our net interest margin decreased by one basis point in 2000. Partially offsetting the increase on the rate paid on sources of funds, average noninterest-bearing deposits increased in 2000 by $262.5 million, or 10.7%, compared to 1999.environment.
Average Earning Assets
2001 vs. 2000
(in thousands) | 2001 | 2000 | Change | |||||||||
Average earning assets | $ | 17,273,697 | $ | 15,752,238 | 9.7 | % | ||||||
The continuing growth of our Bank of the West operating segment and our branch acquisitions in Nevada, New Mexico, Guam and Saipan are primarily responsible for the increase in average earning assets. In particular,assets was predominately due to internal growth in the $1.3average loan and lease portfolio, higher average securities available for sale and the acquisitions of Community First and USDB in the fourth quarter of 2004. The $3.0 billion, or 8.1%12.1%, increase in average total loans and leases was primarily due to increased consumer lending, purchased residential mortgages and loans and leases acquired from Community First and USDB. Consumer loans continue to grow due to the strength in the consumer market and the low interest rates on consumer loans. As growth in commercial lending was relatively low during the Western United States.past year, funds were used to purchase residential mortgages as well as securities available for sale. Average total investment securities also increased by $177.5 million,available for sale were $6.3 billion, up $1.6 billion, or 8.5%33.5%, primarily due to $2.3 billion in 2001 over 2000.internal growth and the two acquisitions.
2000 vs. 1999
(in thousands) | 2000 | 1999 | Change | |||||||||
Average earning assets | $ | 15,752,238 | $ | 14,491,126 | 8.7 | % | ||||||
19
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part II(continued)2003 compared with 2002
The full-year contribution of earning assets from the UCB acquisition, continuing internal growth of our Bank of the West operating segment isWest’s loan and lease portfolio and higher levels of investment securities in both Banks, are primarily responsible for the increase in average earning assets. In particular, the $994.5 million,The $2.4 billion, or 8.1%10.8%, increase in average total loans and leases primarily due to increased consumer lending, purchased residential mortgages and the UCB acquisition. As commercial lending was relatively slow in 2003, funds were used to purchase residential mortgages as well as securities available for sale. Consequently, average total securities available for sale also increased to $4.7 billion, up $1.6 billion, or 50.2%.
Average Loans and Leases
2004 compared with 2003
A significant portion of the increase was due to loans and leases acquired from Community First and USDB. Average consumer loans increased $1.4 billion, or 20.7%, primarily due to growth in financing for autos, recreational vehicles and pleasure boats, while loan purchases increased the Western United States.average residential mortgage portfolio. Average total investment securities alsoresidential real estate loans increased by $370.4 million, or 21.5%,$0.7 billion. The modest increase in commercial, financial and agricultural loans in both banks also contributed to $2.1 billion in 2000 over 1999.the increase.
Average Loans and Leases
2001 vs. 2000
(in thousands) | 2001 | 2000 | Change | |||||||||
Average loans and leases | $ | 14,585,712 | $ | 13,285,586 | 9.8 | % | ||||||
The increase in average loans and leases was primarily due to growth from ourthe full-year contribution of loans acquired through UCB and internal growth. Average consumer loans within Bank of the West operating segment’s consumer loan and lease financing portfolios. In additionincreased approximately $1.0 billion, or 18.9%, primarily due to growth from their existing branch network,in financing for autos, recreational vehicles and pleasure boats, while purchases increased the average loans and leases in the Bank of the West operating segment also increased due to the acquisition of branches in Nevada and New Mexico.residential mortgage portfolio. Average loans and leases in the First Hawaiian operating segmentBank decreased in 2001 as compared to 2000,slightly, primarily due to the planned reduction in certain syndicated national credits, partially offset by loans and leases acquired in the Guam and Saipan branch acquisition.increased consumer loans.
2000 vs. 1999
(in thousands) | 2000 | 1999 | Change | |||||||||
Average loans and leases | $ | 13,285,586 | $ | 12,291,095 | 8.1 | % | ||||||
The increase in average loans and leases was primarily due to growth from our Bank of the West operating segment’s commercial real estate, consumer loan and lease financing portfolios. In addition, the rebounding economy in Hawaii led to a modest increase in average loans and leases in our First Hawaiian operating segment.
Average Interest-Bearing Deposits and Liabilities
2001 vs. 2000
(in thousands) | 2001 | 2000 | Change | |||||||||
Average interest-bearing deposits and liabilities | $ | 13,366,544 | $ | 12,289,972 | 8.8 | % | ||||||
The $3.9 billion, or 16.6%, increase in average interest-bearing deposits and liabilities was substantially due to growth in our customer deposit base and an increase in average long-term debt and average short-term borrowings. Average deposits increased substantially due to internal growth in the regular and money market savings, foreign and time deposits, demand deposit and interest-bearing checking portfolios and partly due to the Community First and USDB acquisitions. Borrowings from the Federal Home Loan Bank increased average long-term debt, while overnight Federal funds purchases were largely responsible for the increase in short-term borrowings.
2003 compared with 2002
The increase in average interest-bearing deposits and liabilities was primarily due to an increase in 2001 over 2000 was principally caused byaverage long-term debt and growth in our customer deposit base, primarily in our Bank of the West operating segment. Our averagebase. Average interest-bearing deposits also increased due to branch acquisitionsthe full-year contribution to averages from the UCB acquisition, as well as internal growth in Nevada, New Mexico, Guamthe demand deposit and Saipan.interest-bearing checking, regular and money market savings portfolios. These increases were partially offset by a decrease in average certificates of deposit. Average long-term debt and capital securities increased in 2001 over 2000short-term borrowings decreased primarily due to the inclusionreplacement of the $150$800 million in BWE Capital Securities for all of 2001, as opposed to only a portion of December 2000. Also affecting average long-term debt was the $1.550 billion in long-term debtshort-term financing, entered into with BNP Paribas in conjunction with the BNP Paribas Merger.
2000 vs. 1999
(in thousands) | 2000 | 1999 | Change | |||||||||
Average interest-bearing deposits and liabilities | $ | 12,289,972 | $ | 11,494,121 | 6.9 | % | ||||||
Merger, with long-term financing in November 2002. The increasereduction of this short-term borrowing for all of 2003, as opposed to only a portion of 2002, is partially responsible for the decrease in average interest-bearing deposits and liabilities in 2000 over 1999 was principally caused by growth in our customer deposit base, primarily in ourshort-term debt, while increasing average long-term debt. Long-term borrowings from the Federal Home Loan Bank of the West operating segment. In addition, we grew deposits by initiating various deposit product programs. Also, wealso increased our utilization of negotiable and brokered time certificates of deposits.average long-term debt.
Operating Segments Results16
As detailed in Note 19 to the Consolidated Financial Statements on pages 64 and 65, our operations are managed principally through our two major bank subsidiaries, Bank of the West and First Hawaiian. Bank of the West operates primarily in California, Oregon, Washington, Idaho, New Mexico and Nevada. It also conducts business nationally through its Consumer Finance Division and its Essex Credit Corporation subsidiary. First Hawaiian’s primary base of operations is in Hawaii, Guam and Saipan. It also has significant operations extending nationally, and to a lesser degree internationally, through its media finance, national corporate lending and leveraged leasing operations. The “other” category in the table below consists principally of BancWest Corporation (Parent Company), FHL Lease Holding Company, Inc., BancWest Capital I and First Hawaiian Capital I. The reconciling items are principally consolidating entries to eliminate intercompany balances and transactions. The following table summarizes significant financial information, as of or for years ended December 31, of our reportable segments:
(in millions) | 2001 | 2000 | 1999 | |||||||||||
Net Interest Income | ||||||||||||||
Bank of the West | $ | 503 | $ | 423 | $ | 384 | ||||||||
First Hawaiian | 330 | 329 | 312 | |||||||||||
Other | (16 | ) | (5 | ) | (7 | ) | ||||||||
Consolidated Total | $ | 817 | $ | 747 | $ | 689 | ||||||||
Net Income | ||||||||||||||
Bank of the West | $ | 140 | $ | 110 | $ | 84 | ||||||||
First Hawaiian | 125 | 112 | 94 | |||||||||||
Other | (10 | ) | (6 | ) | (6 | ) | ||||||||
Consolidated Total | $ | 255 | $ | 216 | $ | 172 | ||||||||
Year End Segment Assets | ||||||||||||||
Bank of the West | $ | 13,412 | $ | 11,159 | $ | 9,571 | ||||||||
First Hawaiian | 8,682 | 7,452 | 7,081 | |||||||||||
Other | 4,759 | 3,215 | 2,747 | |||||||||||
Reconciling items | (5,206 | ) | (3,369 | ) | (2,718 | ) | ||||||||
Consolidated Total | $ | 21,647 | $ | 18,457 | $ | 16,681 | ||||||||
20
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part II(continued)
2001 vs. 2000
2000 vs. 1999
21
Part II(continued)
Table 1: Average Balances, Interest Income and Expense, and Yields and Rates (Taxable-Equivalent Basis)
On December 20, 2001, BNP Paribas acquired all of the outstanding common shares of BancWest Corporation. As a result of the transaction, the Predecessor became a wholly-owned subsidiary of BNP Paribas. The business combination was accounted for as a purchase with BNP Paribas’ accounting basis being “pushed down” to BancWest Corporation. See Note 2 to the Consolidated Financial Statements for additional information regarding this business combination. It is generally not appropriate to combine pre- and post-“push-down” periods; however, for purposes of comparison only, the following tables combine our consolidated results of operations from December 20, 2001 through December 31, 2001 with those for the period January 1, 2001 through December 19, 2001. The combined results will generally serve as comparable amounts to the 12-month period ended December 31, 2000 and will be utilized for purposes of providing discussion and analysis of consolidated results of operations.
The following table sets forthpresents 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 years indicated on a taxable-equivalent basis. The taxable-equivalent adjustment is made for items exempt from Federal income taxes (assuming a 35% tax rate for 2001, 20002004, 2003 and 1999)2002) to make them comparable with taxable items before any income taxes are applied.
2001 | 2000 | 1999 | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest | Interest | Interest | Interest | Interest | Interest | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | ASSETS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earning assets: | Earning assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits in other banks: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | $ | 5,493 | $ | 44 | 0.80 | % | $ | 7,154 | $ | 48 | 0.67 | % | $ | 4,391 | $ | 157 | 3.58 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign | 302,019 | 4,480 | 1.48 | 196,247 | 2,335 | 1.19 | 155,821 | 2,789 | 1.79 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits in other banks | 307,512 | 4,524 | 1.47 | 203,401 | 2,383 | 1.17 | 160,212 | 2,946 | 1.84 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 344,528 | 5,292 | 1.54 | 200,456 | 2,379 | 1.19 | 258,890 | 4,401 | 1.70 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading assets | 7,722 | 171 | 2.21 | 50,598 | 1,329 | 2.63 | 30,018 | 1,160 | 3.86 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale(1): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 6,303,327 | 219,052 | 3.48 | 4,722,007 | 174,187 | 3.69 | 3,141,352 | 146,346 | 4.66 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exempt from Federal income taxes | 21,012 | 665 | 3.16 | 15,233 | 898 | 5.90 | 12,529 | 1,158 | 9.24 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | 6,324,339 | 219,717 | 3.47 | 4,737,240 | 175,085 | 3.70 | 3,153,881 | 147,504 | 4.68 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and leases (2),(3): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 27,387,252 | 1,536,239 | 5.61 | 24,398,117 | 1,468,447 | 6.02 | 21,958,985 | 1,464,188 | 6.67 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign | 364,378 | 24,101 | 6.61 | 357,565 | 24,848 | 6.95 | 380,856 | 28,369 | 7.45 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and leases | 27,751,630 | 1,560,340 | 5.62 | 24,755,682 | 1,493,295 | 6.03 | 22,339,841 | 1,492,557 | 6.68 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other interest earning assets | 173,546 | 6,335 | 3.65 | 123,635 | 5,623 | 4.55 | 135,894 | 8,437 | 6.21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total earning assets | 34,909,277 | 1,796,379 | 5.15 | 30,071,012 | 1,680,094 | 5.59 | 26,078,736 | 1,657,005 | 6.35 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 1,475,906 | 1,386,492 | 1,385,444 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment | 555,859 | 462,804 | 378,991 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other intangibles | 192,853 | 198,681 | 201,238 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | 3,409,012 | 3,227,064 | 3,129,507 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 763,998 | 552,002 | 196,135 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total noninterest-bearing assets | 6,397,628 | 5,827,043 | 5,291,315 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 41,306,905 | $ | 35,898,055 | $ | 31,370,051 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits and liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand | $ | 318,431 | $ | 308 | 0.10 | % | $ | 276,309 | $ | 345 | 0.12 | % | $ | 334,522 | $ | 915 | 0.27 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Savings | 11,459,360 | 66,898 | 0.58 | 10,195,940 | 64,906 | 0.64 | 8,435,637 | 94,327 | 1.12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Time | 7,273,233 | 121,811 | 1.67 | 6,707,813 | 109,622 | 1.63 | 7,265,406 | 177,137 | 2.44 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign | 1,207,794 | 14,390 | 1.19 | 594,351 | 5,359 | 0.90 | 576,862 | 9,087 | 1.58 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 20,258,818 | 203,407 | 1.00 | 17,774,413 | 180,232 | 1.01 | 16,612,427 | 281,466 | 1.69 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Short-term borrowings | 2,179,392 | 29,285 | 1.34 | 1,875,304 | 21,424 | 1.14 | 2,016,947 | 34,152 | 1.69 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt and capital securities | 4,987,503 | 210,133 | 4.21 | 3,879,639 | 183,551 | 4.73 | 2,541,319 | 149,712 | 5.89 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits and | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
liabilities | 27,425,713 | 442,825 | 1.61 | 23,529,356 | 385,207 | 1.64 | 21,170,693 | 465,330 | 2.20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate spread | 3.54 | % | 3.95 | % | 4.15 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | 8,195,163 | 7,137,066 | 5,687,550 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 1,054,894 | 1,168,446 | 1,070,679 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 36,675,770 | 31,834,868 | 27,928,922 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholder’s equity | 4,631,135 | 4,063,187 | 3,441,129 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholder’s equity | $ | 41,306,905 | $ | 35,898,055 | $ | 31,370,051 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of noninterest-bearing sources | 0.34 | % | 0.36 | % | 0.42 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income and margin on total earning assets | 1,353,554 | 3.88 | % | 1,294,887 | 4.31 | % | 1,191,675 | 4.57 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax equivalent adjustment | 1,216 | 1,304 | 820 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 1,352,338 | $ | 1,293,583 | $ | 1,190,855 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits in other banks: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | $ | 7,320 | $ | 405 | 5.54 | % | $ | 5,405 | $ | 233 | 4.30 | % | $ | 3,712 | $ | 156 | 4.22 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign | 188,105 | 8,797 | 4.68 | 172,265 | 11,228 | 6.52 | 291,097 | 15,096 | 5.19 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits in other banks | 195,425 | 9,202 | 4.71 | 177,670 | 11,461 | 6.45 | 294,809 | 15,252 | 5.17 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 226,032 | 9,360 | 4.14 | 199,970 | 13,016 | 6.51 | 186,569 | 9,537 | 5.11 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment securities (1): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 2,257,162 | 136,185 | 6.03 | 2,074,238 | 136,295 | 6.57 | 1,695,460 | 101,706 | 6.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exempt from Federal income taxes | 9,366 | 778 | 8.31 | 14,774 | 1,168 | 7.91 | 23,193 | 1,699 | 7.33 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total investment securities | 2,266,528 | 136,963 | 6.04 | 2,089,012 | 137,463 | 6.58 | 1,718,653 | 103,405 | 6.02 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and leases (2),(3): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 14,238,553 | 1,138,044 | 7.99 | 12,941,488 | 1,117,404 | 8.63 | 11,933,259 | 977,575 | 8.19 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign | 347,159 | 30,409 | 8.76 | 344,098 | 30,934 | 8.99 | 357,836 | 30,553 | 8.54 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and leases | 14,585,712 | 1,168,453 | 8.01 | 13,285,586 | 1,148,338 | 8.64 | 12,291,095 | 1,008,128 | 8.20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total earning assets | 17,273,697 | 1,323,978 | 7.66 | 15,752,238 | 1,310,278 | 8.32 | 14,491,126 | 1,136,322 | 7.84 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 693,489 | 632,780 | 621,964 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment | 286,914 | 277,831 | 280,587 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Core deposit intangible | 73,256 | 60,887 | 69,050 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | 712,198 | 612,284 | 624,886 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 421,887 | 263,959 | 205,902 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 19,461,441 | $ | 17,599,979 | $ | 16,293,515 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes:
(1) | ||||
(2) | Nonaccruing loans and leases, | |||
(3) | Interest income for loans and leases |
2217
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part II(continued) 2001 2000 1999 Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) �� Balance Expense Rate Balance Expense Rate Balance Expense Rate LIABILITIES AND STOCKHOLDER’S EQUITY Interest-bearing deposits and liabilities: Deposits: Domestic: Interest-bearing demand $ 315,997 $ 1,878 .59 % $ 289,317 $ 3,546 1.23 % $ 289,142 $ 3,609 1.25 % Savings 4,576,588 86,082 1.88 4,062,828 98,876 2.43 4,067,056 93,100 2.29 Time 6,281,175 298,353 4.75 6,083,739 345,939 5.69 5,497,583 264,336 4.81 Foreign 222,708 6,951 3.12 222,351 9,843 4.43 203,846 7,576 3.72 Total interest-bearing deposits 11,396,468 393,264 3.45 10,658,235 458,204 4.30 10,057,627 368,621 3.67 Short-term borrowings 896,405 34,955 3.90 814,271 49,298 6.05 646,576 30,326 4.69 Long-term debt and capital securities 1,073,671 78,916 7.35 817,466 55,420 6.78 789,918 47,930 6.07 13,366,544 507,135 3.79 12,289,972 562,922 4.58 11,494,121 446,877 3.89 Interest rate spread 3.87 % 3.74 % 3.95 % Noninterest-bearing deposits 3,153,164 2,721,818 2,459,305 Other liabilities 862,404 685,563 547,128 Total liabilities 17,382,112 15,697,353 14,500,554 Stockholder’s equity 2,079,329 1,902,626 1,792,961 $ 19,461,441 $ 17,599,979 $ 16,293,515 816,843 4.73 % 747,356 4.75 % 689,445 4.76 % Tax-equivalent adjustment 329 422 611 $ 816,514 $ 746,934 $ 688,834
($ in billions) | ||||
1997 | 8.9 | |||
1998 | 15.9 | |||
1999 | 16.7 | |||
2000 | 18.5 | |||
2001 | 21.6 |
($ in billions) | ||||
1997 | 6.8 | |||
1998 | 12.0 | |||
1999 | 12.5 | |||
2000 | 14.0 | |||
2001 | 15.2 |
Noninterest | Net Interest | |||||||
Income | Income | |||||||
($ in millions) | ||||||||
1997 | 110.6 | 369.8 | ||||||
1998 | 134.2 | 433.7 | ||||||
1999 | 197.6 | 688.8 | ||||||
2000 | 216.1 | 746.9 | ||||||
2001 | 308.4 | 816.5 |
(%) | ||||
1997 | 4.77 | |||
1998 | 4.81 | |||
1999 | 4.76 | |||
2000 | 4.75 | |||
2001 | 4.73 |
23
Part II(continued)
Table 2: Analysis of Changes in Net Interest Income (Taxable-Equivalent Basis)
The following table analyzes the dollar amount of change (on a taxable-equivalent basis) in interest income and expense and the changes in dollar amounts attributable to:
(a) | changes in volume (changes in volume times the prior year’s rate), | |||
(b) | changes in rates (changes in rates times the prior year’s volume), and | |||
(c) | changes in rate/volume (change in rate times change in volume). |
In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.
Year Ended December 31, | ||||||||||||||||||||||||
2004 vs. 2003 | 2003 vs. 2002 | |||||||||||||||||||||||
Increase (Decrease) Due To | Increase (Decrease) Due To | |||||||||||||||||||||||
Net Increase | Net Increase | |||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | ||||||||||||||||||
INTEREST INCOME | ||||||||||||||||||||||||
Interest-bearing deposits in other banks: | ||||||||||||||||||||||||
Domestic | $ | (12 | ) | $ | 8 | $ | (4 | ) | $ | 64 | $ | (173 | ) | $ | (109 | ) | ||||||||
Foreign | 1,472 | 673 | 2,145 | 618 | (1,072 | ) | (454 | ) | ||||||||||||||||
Total interest-bearing deposits in other banks | 1,460 | 681 | 2,141 | 682 | (1,245 | ) | (563 | ) | ||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 2,067 | 846 | 2,913 | (865 | ) | (1,157 | ) | (2,022 | ) | |||||||||||||||
Trading assets | (977 | ) | (181 | ) | (1,158 | ) | 622 | (453 | ) | 169 | ||||||||||||||
Securities available for sale(1): | ||||||||||||||||||||||||
Taxable | 55,452 | (10,587 | ) | 44,865 | 62,794 | (34,953 | ) | 27,841 | ||||||||||||||||
Exempt from Federal income taxes | 270 | (503 | ) | (233 | ) | 216 | (476 | ) | (260 | ) | ||||||||||||||
Total securities available for sale | 55,722 | (11,090 | ) | 44,632 | 63,010 | (35,429 | ) | 27,581 | ||||||||||||||||
Loans and leases(2) (3): | ||||||||||||||||||||||||
Domestic | 172,038 | (104,246 | ) | 67,792 | 154,199 | (149,940 | ) | 4,259 | ||||||||||||||||
Foreign | 467 | (1,214 | ) | (747 | ) | (1,679 | ) | (1,842 | ) | (3,521 | ) | |||||||||||||
Total loans and leases | 172,505 | (105,460 | ) | 67,045 | 152,520 | (151,782 | ) | 738 | ||||||||||||||||
Other interest earning assets | 1,969 | (1,257 | ) | 712 | (711 | ) | (2,103 | ) | (2,814 | ) | ||||||||||||||
Total earning assets | 232,746 | (116,461 | ) | 116,285 | 215,258 | (192,169 | ) | 23,089 | ||||||||||||||||
INTEREST EXPENSE | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Domestic: | ||||||||||||||||||||||||
Interest-bearing demand | 48 | (85 | ) | (37 | ) | (138 | ) | (432 | ) | (570 | ) | |||||||||||||
Savings | 7,643 | (5,651 | ) | 1,992 | 16,917 | (46,338 | ) | (29,421 | ) | |||||||||||||||
Time | 9,418 | 2,771 | 12,189 | (12,748 | ) | (54,767 | ) | (67,515 | ) | |||||||||||||||
Foreign | 6,887 | 2,144 | 9,031 | 268 | (3,996 | ) | (3,728 | ) | ||||||||||||||||
Total interest-bearing deposits | 23,996 | (821 | ) | 23,175 | 4,299 | (105,533 | ) | (101,234 | ) | |||||||||||||||
Short-term borrowings | 3,767 | 4,094 | 7,861 | (2,260 | ) | (10,468 | ) | (12,728 | ) | |||||||||||||||
Long-term debt and capital securities | 48,266 | (21,684 | ) | 26,582 | 67,543 | (33,704 | ) | 33,839 | ||||||||||||||||
Total interest-bearing deposits and liabilities | 76,029 | (18,411 | ) | 57,618 | 69,582 | (149,705 | ) | (80,123 | ) | |||||||||||||||
Increase (decrease) in net interest income | $ | 156,717 | $ | (98,050 | ) | $ | 58,667 | $ | 145,676 | $ | (42,464 | ) | $ | 103,212 | ||||||||||
The taxable-equivalent adjustment is made for items exempt from Federal income taxes (assuming a 35% tax rate for 2001, 2000 and 1999) to make them comparable with taxable items before any income taxes are applied.
2001 Compared to 2000— | 2000 Compared to 1999— | |||||||||||||||||||||||||||
Increase (Decrease) Due to: | Increase (Decrease) Due to: | |||||||||||||||||||||||||||
Net Increase | Net Increase | |||||||||||||||||||||||||||
(in thousands) | Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | ||||||||||||||||||||||
Interest earned on: | ||||||||||||||||||||||||||||
Interest-bearing deposits in other banks: | ||||||||||||||||||||||||||||
Domestic | $ | 96 | $ | 76 | $ | 172 | $ | 73 | $ | 4 | $ | 77 | ||||||||||||||||
Foreign | 960 | (3,391 | ) | (2,431 | ) | (7,134 | ) | 3,266 | (3,868 | ) | ||||||||||||||||||
Total interest-bearing deposits in other banks | 1,056 | (3,315 | ) | (2,259 | ) | (7,061 | ) | 3,270 | (3,791 | ) | ||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 1,534 | (5,190 | ) | (3,656 | ) | 724 | 2,755 | 3,479 | ||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||||||
Taxable | 11,510 | (11,620 | ) | (110 | ) | 24,241 | 10,348 | 34,589 | ||||||||||||||||||||
Exempt from Federal income taxes | (447 | ) | 57 | (390 | ) | (657 | ) | 126 | (531 | ) | ||||||||||||||||||
Total investment securities | 11,063 | (11,563 | ) | (500 | ) | 23,584 | 10,474 | 34,058 | ||||||||||||||||||||
Loans and leases (1): | ||||||||||||||||||||||||||||
Domestic | 107,214 | (86,574 | ) | 20,640 | 85,314 | 54,515 | 139,829 | |||||||||||||||||||||
Foreign | 273 | (798 | ) | (525 | ) | (1,199 | ) | 1,580 | 381 | |||||||||||||||||||
Total loans and leases | 107,487 | (87,372 | ) | 20,115 | 84,115 | 56,095 | 140,210 | |||||||||||||||||||||
Total earning assets | 121,140 | (107,440 | ) | 13,700 | 101,362 | 72,594 | 173,956 | |||||||||||||||||||||
Interest paid on: | ||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||
Domestic: | ||||||||||||||||||||||||||||
Interest-bearing demand | 301 | (1,969 | ) | (1,668 | ) | 2 | (65 | ) | (63 | ) | ||||||||||||||||||
Savings | 11,488 | (24,282 | ) | (12,794 | ) | (97 | ) | 5,873 | 5,776 | |||||||||||||||||||
Time | 10,922 | (58,508 | ) | (47,586 | ) | 30,081 | 51,522 | 81,603 | ||||||||||||||||||||
Foreign | 16 | (2,908 | ) | (2,892 | ) | 730 | 1,537 | 2,267 | ||||||||||||||||||||
Total interest-bearing deposits | 22,727 | (87,667 | ) | (64,940 | ) | 30,716 | 58,867 | 89,583 | ||||||||||||||||||||
Short-term borrowings | 4,582 | (18,925 | ) | (14,343 | ) | 8,944 | 10,028 | 18,972 | ||||||||||||||||||||
Long-term debt and capital securities | 18,522 | 4,974 | 23,496 | 1,717 | 5,773 | 7,490 | ||||||||||||||||||||||
Total interest-bearing deposits and liabilities | 45,831 | (101,618 | ) | (55,787 | ) | 41,377 | 74,668 | 116,045 | ||||||||||||||||||||
Increase (decrease) in net interest income | $ | 75,309 | $ | (5,822 | ) | $ | 69,487 | $ | 59,985 | $ | (2,074 | ) | $ | 57,911 | ||||||||||||||
Note:
(1) Debt securities available for sale volume was computed based on historical amortized cost, excluding the effect of FAS No. 115 adjustments. | ||
(2) Nonaccruing loans and leases, and loans held for sale have been included in the computations of volume balances. | ||
(3)Interest income for loans and leases |
2418
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part II(continued)NONINTEREST INCOME
Noninterest Income
Components The following table reflects the key components of and changes in noninterest income are reflected below for the years indicated:
2001/2000 Change | 2000/1999 Change | |||||||||||||||||||||||||||
(dollars in thousands) | 2001 | 2000 | 1999 | Amount | % | Amount | % | |||||||||||||||||||||
Service charges on deposit accounts | $ | 89,175 | $ | 74,718 | $ | 67,674 | $ | 14,457 | 19.3 | % | $ | 7,044 | 10.4 | % | ||||||||||||||
Trust and investment services income | 32,330 | 36,161 | 32,644 | (3,831 | ) | (10.6 | ) | 3,517 | 10.8 | |||||||||||||||||||
Other service charges and fees | 78,787 | 73,277 | 65,484 | 5,510 | 7.5 | 7,793 | 11.9 | |||||||||||||||||||||
Securities gains, net | 71,797 | 211 | 16 | 71,586 | N/M | 195 | 1,218.8 | |||||||||||||||||||||
Other | 36,309 | 31,709 | 31,814 | 4,600 | 14.5 | (105 | ) | (0.3 | ) | |||||||||||||||||||
Total noninterest income | $ | 308,398 | $ | 216,076 | $ | 197,632 | $ | 92,322 | 42.7 | % | $ | 18,444 | 9.3 | % | ||||||||||||||
N/M — Not Meaningful.
2001 vs. 2000
Year Ended December 31 | 2004/2003 Change | 2003/2002 Change | ||||||||||||||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | Amount | % | Amount | % | |||||||||||||||||||||
Service charges on deposit accounts | $ | 163,679 | $ | 155,243 | $ | 139,030 | $ | 8,436 | 5.4 | % | $ | 16,213 | 11.7 | % | ||||||||||||||
Trust and investment services income | 40,580 | 38,045 | 37,198 | 2,535 | 6.7 | 847 | 2.3 | |||||||||||||||||||||
Other service charges and fees | 153,911 | 142,030 | 127,297 | 11,881 | 8.4 | 14,733 | 11.6 | |||||||||||||||||||||
Net gains on securities available for sale | 873 | 4,289 | 1,953 | (3,416 | ) | (79.6 | ) | 2,336 | 119.6 | |||||||||||||||||||
Vehicle and equipment leases income | 17,092 | — | — | 17,092 | — | — | — | |||||||||||||||||||||
Other | 55,365 | 52,572 | 30,423 | 2,793 | 5.3 | 22,149 | 72.8 | |||||||||||||||||||||
Total noninterest income | $ | 431,500 | $ | 392,179 | $ | 335,901 | $ | 39,321 | 10.0 | % | $ | 56,278 | 16.8 | % | ||||||||||||||
AsIncluded in other service charges and fees are loan prepayment fees, substantially all of which are related to commercial loans, of $7.5 million, $8.3 million and $5.2 million for the table above showsyears ended December 31, 2004, 2003 and 2002, respectively. These fees generally arise during a falling interest rate environment as those customers who prefer fixed-rate loans seek to refinance with other lenders. The fees are cyclical and typically lower during an increasing interest rate environment.
2004 compared with 2003
A significant portion of the increase in more detail,service charges on deposit accounts was due to higher fee income from overdraft and nonsufficient fund transactions, the effect of having acquired Community First and USDB deposit accounts in November 2004 and an increase in average deposit balances of approximately 14.2%, offset by lower servicing fee income.
The increase in trust and investment services income was predominately due to higher income from fees on trust accounts acquired from Community First and higher income resulting from new business.
The increase in other service charges and fees was partially attributed to higher merchant services fees resulting from an increase in the number of retail merchant accounts and higher retail sales volume. Higher fees from debit card and ATM transactions also contributed to the increase.
Net gains on securities available for sale totaled $0.9 million, compared with net gains of $4.3 million. The higher gains in 2003 were due to portfolio restructuring activities.
The increase in vehicle and equipment operating lease income was due to accounting for auto leases originated from February through July 2004 as operating leases rather than direct finance leases.
A significant portion of the increase in other noninterest income was attributed to gains on the disposal of certain fixed assets and higher gains on the sale of other real estate owned, partially offset by reduced gains on the sale of residential loans, lower gains on the sale of a leveraged lease and lower income from the sale of loans in the Essex subsidiary as Essex continued to retain loans in its portfolio rather than selling them.
2003 compared with 2002
The increase in service charges on deposit accounts was primarily attributed to an increase in average deposit balances of approximately 11.7%, higher servicing fee income as a result of repricing changes in account analysis, higher fee income from overdraft and nonsufficient fund transactions and the full year effect of acquired UCB deposit accounts instead of only nine and a half months as in 2002.
The increase in other service charges and fees was primarily due to increased $92.3revenue resulting from a concentrated effort in growing the sales of investment products, higher commissions from the issuance of letters of credit, higher merchant services fees resulting from an increase in the number of retail merchant accounts and higher retail sales volume, higher income from debit and
19
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
credit card transactions as a result of increased utilization of existing and new VISA® and MasterCard® accounts, higher income from non yield related fees on commercial loans and higher rental income resulting from surplus properties acquired from UCB.
The increase in net gains on securities available for sale was due to portfolio restructuring activities.
The increase in other noninterest income was partially attributed to higher gains on the sale of lease residual interests, other real estate owned and miscellaneous assets as well as increased revenue from derivative sale activities and the full year impact of the UCB acquisition.
NONINTEREST EXPENSE
The following table reflects the key components of the change in noninterest expense for the years indicated:
Year Ended December 31, | 2004/2003 Change | 2003/2002 Change | ||||||||||||||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | Amount | % | Amount | % | |||||||||||||||||||||
Personnel: | ||||||||||||||||||||||||||||
Salaries and wages | $ | 359,480 | $ | 342,985 | $ | 327,648 | $ | 16,495 | 4.8 | % | $ | 15,337 | 4.7 | % | ||||||||||||||
Employee benefits | 141,104 | 139,198 | 111,810 | 1,906 | 1.4 | 27,388 | 24.5 | |||||||||||||||||||||
Total personnel expense | 500,584 | 482,183 | 439,458 | 18,401 | 3.8 | 42,725 | 9.7 | |||||||||||||||||||||
Occupancy | 91,770 | 87,514 | 85,821 | 4,256 | 4.9 | 1,693 | 2.0 | |||||||||||||||||||||
Outside services | 85,222 | 85,315 | 78,803 | (93 | ) | (0.1 | ) | 6,512 | 8.3 | |||||||||||||||||||
Intangible amortization | 26,535 | 23,054 | 20,047 | 3,481 | 15.1 | 3,007 | 15.0 | |||||||||||||||||||||
Equipment | 49,814 | 47,197 | 48,259 | 2,617 | 5.5 | (1,062 | ) | (2.2 | ) | |||||||||||||||||||
Depreciation-vehicle and equipment operating leases | 15,275 | — | — | 15,275 | — | — | — | |||||||||||||||||||||
Stationery and supplies | 25,054 | 25,416 | 29,016 | (362 | ) | (1.4 | ) | (3,600 | ) | (12.4 | ) | |||||||||||||||||
Advertising and promotions | 26,717 | 23,535 | 27,420 | 3,182 | 13.5 | (3,885 | ) | (14.2 | ) | |||||||||||||||||||
Restructuring and integration costs | 16,144 | — | 17,595 | 16,144 | — | (17,595 | ) | — | ||||||||||||||||||||
Other | 125,434 | 118,621 | 89,655 | 6,813 | 5.7 | 28,966 | 32.3 | |||||||||||||||||||||
Total noninterest expense | $ | 962,549 | $ | 892,835 | $ | 836,074 | $ | 69,714 | 7.8 | % | $ | 56,761 | 6.8 | % | ||||||||||||||
2004 compared with 2003
The increase in salaries and wages expense was attributable to a higher full-time equivalent employee count partly due to the acquisitions of Community First and USDB.
The increase in occupancy expense was substantially due to the acquisitions of Community First and USDB.
The increase in amortization of intangible assets was predominately a result of the amortization of the core deposit and insurance intangibles resulting from the Community First and USDB acquisitions.
The increase in depreciation on vehicle and equipment operating leases was the result of vehicle depreciation costs incurred from the change in accounting for auto leases originated from February through July 2004 as operating leases rather than direct finance leases. See Note 9 (Operating Leases) to the Consolidated Financial Statements for additional information.
The increase in advertising and promotion expenses was due to higher advertising activities in 2004 related to deposit campaigns and campaigns to promote brand recognition.
The $16.1 million in restructuring and integration costs were related to the acquisitions of Community First and USDB ($10.9 million in contracted services, $1.7 million in travel related expenses, $1.6 million in stationery and supplies, $0.6 million in salaries and benefits, $0.6 million in advertising and promotions and $0.7 million in other miscellaneous expenses).
20
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The increase in other noninterest expense was partially due to higher fees resulting from increased transaction volume related to airline branded credit cards, significantly offset by a decrease in the residual value of certain leveraged leases in 2003 and lower split dollar life insurance expenses as a result of marking policies to cash surrender value.
2003 compared with 2002
The increase in salaries and wages expense was primarily attributable to the full year impact of the acquisition of UCB and normal salary increases.
The increase in employee benefits expense was primarily due to higher group healthcare insurance, increased incentive compensation, higher pension and retirement plan expense due to a recognized actuarial loss, and higher worker’s compensation insurance as a result of increased costs as well as the full year impact of UCB.
The increase in outside services expense was primarily due to higher data processing and contracted services expense resulting from the full year effect of the UCB acquisition.
The increase in amortization of intangible assets was primarily a result of the full year amortization of the core deposit intangibles resulting from the acquisition of UCB.
The decrease in advertising and promotion expenses was primarily the result of higher advertising and promotion expenses in 2002 to promote brand recognition and retain the customer base acquired through the acquisition of UCB.
The increase in other noninterest expense was primarily attributable to higher depreciation expense on software incurred as a result of the conversion of UCB operating systems, higher general liability and property insurance, higher co-branded partner fees due to increased transaction volume related to airline branded credit cards, increased charitable contributions, as well as $4.7 million in costs associated with restructuring certain leverage leases in 2003. The increase was partially offset by lower travel and restructuring costs incurred during the UCB integration as well as lower outside legal and professional expense, lower collection and repossession expense, and lower check printing charges.
OPERATING SEGMENTS
Our operations are managed principally through our two major bank subsidiaries, Bank of the West and First Hawaiian Bank. See Note 20 (Operating Segments) to the Consolidated Financial Statements for additional information.
Bank of the West
Regional Banking
2004 compared with 2003
The Regional Banking segment’s net income increased $2.4 million, or 42.7%1.8% from $135.7 million to $138.1 million. Net interest income increased $15.1 million or 3.1% from last year. The increase is primarily related to the larger transfer pricing adjustment in the current year, offset by a 68 basis point decrease in the margin on demand deposits. Noninterest income increased $13.4 million or 8.2%. The increase is primarily due to increased service charges on deposit accounts, an increase in debit card interchange revenue and investment sales fees. Noninterest expense increased $31.2 million or 7.4%. The increase is primarily due to an increase in compensation expenses; direct occupancy costs related to two de novo branches and increased third party vendor contracts.
Average loans and leases increased $806 million or 14.7%. The increase is primarily due to real estate residential loan purchases throughout the year and from the Community First acquisition in the fourth quarter of 2004.
Average deposits increased $1.2 billion or 8.5%. The increase is primarily due to growth in core deposits and the Community First acquisition in 2004.
21
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2003 compared with 2002
The Regional Banking segment’s net income increased $5.9 million in 2003, from $129.8 million in 2002, to $135.7 million . Net interest income increased $11.7 million or 2.4%. This increase included the impact of the acquisition of UCB in March of 2002, offset by margin compression. Noninterest income increased $19.4 million, or 13.5%, from $216.110.9% growth in average deposit balances and repricing of our fee structures. Growth in debit card interchange revenue from increased utilization of existing and new VISA® and MasterCard® accounts contributed to the increase in noninterest income. Noninterest expense increased $28.7 million, or 7.3%, compared to the prior year. Noninterest expense increased in 2003 due to the acquisition of UCB and increases in employee benefit expenses for group insurance. The provision for loan and lease losses decreased $4.0 million, or 26.0%, from the prior year due to higher recoveries of previously charged off loans. The growth in deposit balances was driven by core deposits, offset by a decline in certificates of deposits.
Commercial Banking
2004 compared with 2003
The Commercial Banking segment’s net income decreased to $152.7 million, down $1.2 million, or 0.8%, from $153.9 million. Net interest income increased $2.9 million, or 0.9%. Noninterest income increased $4.7 million, or 9.7%. The increase is partially related to increased commission fees, syndication fees and gains on the sale of SBA loans from the growth in the SBA portfolio, offset by decreased service charges and SBA servicing income. Noninterest expense increased $2.7 million, or 2.3%. The increase is partly due to higher compensation and employee healthcare benefits. Provision for credit losses increased by $2.0 million in 20002004 to $308.4$1.4 million primarily related to a large recovery in 2003.
Average loans and leases in 2004 increased 9.8% from 2003 to $7.7 billion. The increase was partly due to new equipment leases and SBA lending. The interest margin on loans and leases decreased 11 basis points to 2.75% during 2004 due to declining margins in all product categories.
Average deposits increased 17.5% to $3.6 billion in 2004. The increase was partly due to higher core deposits and shorter-term negotiable CD’s. The deposit margin decreased 67 basis points to 1.66% in 2004. The decrease in deposit margin from the prior year is due to a decrease in transfer pricing on demand deposit accounts, which declined by 68 basis points, and a 75 basis point decline in margin on money market savings accounts.
2003 compared with 2002
The Commercial Banking segment’s net income increased to $153.9 million, up $45.0 million, or 41.3%, from $108.9 million. Net interest income increased $54.0 million, or 20.6%. Noninterest income increased $16.6 million, or 52.4%. Noninterest expense increased $15.8 million or 15.6%. The provision for loan and lease losses decreased $15.3 million due to improved credit quality and a large increase in recoveries of loans previously charged off.
Commercial Banking achieved growth in loans, deposits, and net income due to strong performances in SBA lending, church lending, healthcare, and cash management, as well as the acquisitions of UCB and Trinity Capital. Interest margins on loans and leases decreased, as maturing higher yielding loans and leases were replaced by lower yielding loans and leases. Deposit margins decreased due to a declining interest rate environment. Noninterest income growth was driven by the UCB and Trinity acquisitions, loan prepayment fees, lease servicing, and strong growth in cash management, derivatives, and foreign exchange revenues. Commercial Banking pursued a strategy of leveraging efficiencies gained through the expanded resources resulting from the UCB and Trinity Capital acquisitions, while focusing on niche markets where there is a competitive advantage, such as equipment leasing, SBA lending and church lending.
Consumer Finance
2004 compared with 2003
The Consumer Finance segment’s net income increased $12.4 million, or 19.7% to $75.4 million compared to $63.0 million in 2001. Factors causing2003. Net interest income was $212.2 million, compared to $207.1 million in 2003, an increase of 2.5%. Noninterest income
22
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
increased $12.6 million, or 106.8% to $24.4 million. The increase is partially due to recording lease payments as noninterest income for all auto leases booked under the operating method of accounting from February through July 2004. This increase was partially offset by lower gains on sales of loans through our Essex subsidiary, which were down $5.0 million in 2004. In February 2004 Essex began retaining a percentage of new loan originations in its own portfolio. In previous years Essex sold 100% of its loan originations. Noninterest expense increased $21.3 million to $81.6 million in 2004. The increase is due primarily to higher employee salaries and healthcare benefits, a decrease in deferred loan origination costs and higher depreciation expense as a result of the accounting for certain vehicle leases as operating leases. The provision for credit losses decreased $25.1 million from $54.6 million in 2003 to $29.5 million in 2004, due to an improvement in credit quality.
Average assets in 2004 were $8.5 billion compared to $7.6 billion in 2003, an increase of 12.5%. This increase is due to increased indirect loan production and the addition of assets from the acquisition of Community First in the fourth quarter of 2004.
2003 compared with 2002
Net income was $63.0 million compared to $56.0 million. Net interest income was $207.1 million, compared to $183.1 million, an increase of 13.1%. This was the result of increased interest income generated from a larger asset base which resulted from higher loan origination volumes. Noninterest income remained flat from 2002. Essex experienced lower production levels in early 2003 as significant focus was placed on relocation of the operations and staffing changes. Noninterest expense increased $4.5 million, or 8.1%. This increase was primarily due to greater staff and occupancy requirements associated with growth in the loan origination and servicing areas. Additionally, increases in the cost of employee benefits and an increase in the use of outside services related to higher production volumes contributed to the higher expenses in 2003.
The Consumer Finance segment remained very competitive in the indirect lending market and experienced strong production volumes in 2003, which positively impacted the segment’s total assets. Average assets for 2003 were $7.6 billion compared to $6.7 billion, an increase of $0.9 billion, or 13.4% over 2002. This increase is due to both the UCB acquisition that took place in 2002 and increased indirect loan production. The provision for loan and lease losses increased $9.4 million from $45.2 million in 2002 to $54.6 million in 2003. The provision was increased in response to the increase included:in Consumer Finance’s loan and lease credit exposures.
First Hawaiian Bank
Retail Banking
2004 compared with 2003
The Retail Banking segment’s net income increased to $76.5 million, up $6.9 million, or 9.9%. Net interest income increased $14.7 million, or 6.4%, partially due to higher balances in earning assets. Noninterest income increased $0.4 million, or 0.7%. Noninterest expense increased $2.5 million, or 1.5%. Noninterest expense increased due to higher allocated expenses, partially offset by a decrease in occupancy expense corresponding to the purchase of the First Hawaiian Center in December 2003. The provision for credit losses decreased $1.4 million, or 22.2%. The decrease in the provision for credit losses was a result of improved credit quality which has led to a decrease in nonperforming assets and lower net charge offs.
Average assets increased 11.6% to $3.8 billion, primarily due to increases in loans of $313 million. Average deposits increased to $7.1 billion, primarily due to an increase in core deposits.
2003 compared with 2002
Net income decreased to $69.6 million, down $1.7 million, or 2.4%. Net interest income decreased $4.3 million, or 1.8%, primarily due to a decrease in the net interest margin. Noninterest income increased $4.9 million, or 9.4% due to higher account analysis fees. Noninterest expense increased $6.5 million, or 4.0%, primarily the result of higher retirement plan expense.
Average assets increased 1.8% to $3.4 billion, primarily due to higher commercial loan balances. Average deposits increased 8.0% to $6.5 billion, primarily due to an increase in core deposits.
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BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consumer Finance
2004 compared with 2003
Consumer Finance net income decreased to $36.7 million, down $0.6 million, or 1.6%. Net interest income was $87.7 million compared to $81.0 million, an increase of 8.3%. This was the result of increased interest income on higher loan balances. Noninterest income decreased $4.3 million, or 12.7%. The decrease was caused by lower gains on the sale of mortgages in 2004, compared with those of 2003. Noninterest expense increased $0.8 million, or 1.7%, primarily due to an increase in co-branded partner fees in 2004.
Average assets increased 8.2% to $1.5 billion, partly due to increases in consumer and dealer flooring loans.
2003 compared with 2002
Net income increased to $37.3 million, up $7.7 million, or 26.0%. Net interest income increased $8.5 million, or 11.7%, primarily due to higher interest income on mortgage loans. Noninterest income increased $7.2 million, or 27.1%, due to gains on mortgage loan sales and fee income. Noninterest expense increased $4.0 million, or 9.6%, primarily due to higher incentive compensation and higher retirement plan expense.
Average assets increased 4.5% to $1.4 billion, primarily due to higher balances in consumer and real estate mortgage loans.
Commercial Banking
2004 compared with 2003
Commercial Banking’s net income decreased to $20.4 million, down $0.4 million, or 1.9%. Net interest income decreased $4.6 million, or 13.6%, partially due to lower earning assets. Noninterest income increased $0.9 million, or 7.3%, partly due to a $6.9 million fee on the sale of a lease in the second quarter of 2004, partially offset by a $4.1 million net gain on sale of the net investment in a lease and a gain on sale of low-income housing investments in 2003. Noninterest expense decreased $1.5 million, or 11.7%. The provision for credit losses decreased $3.9 million, or 88.6%, due to an improvement in credit quality.
2003 compared with 2002
Net income increased to $20.8 million, up $5.0 million, or 31.6%. Net interest income increased $10.6 million, or 45.5%, primarily due to higher interest income on commercial and mortgage loans. Noninterest income increased $6.2 million, or 100%, primarily due to a $4.1 million net gain on sale of a lease and a gain on sale of low-income housing projects and equipment. Noninterest expense increased $6.1 million, or 91.0%, primarily due to a $4.1 million pretax reduction in net investment of certain leveraged leases.
Average assets increased 30.1% to $1.2 billion due to an increase in loans.
Financial Management
2004 compared with 2003
The Financial Management segment’s net income was $2.7 million in 2004 and $2.6 million in 2003. Net interest income remained flat. Noninterest income increased by $0.5 million, or 1.7%. Noninterest expense increased $0.3 million, or 1.2%.
2003 compared with 2002
Net income increased to $2.6 million, up $0.7 million, or 36.8%. Net interest income remained flat. Noninterest income increased $2.8 million, or 10.4% primarily due to higher investment management fees. Investment fees were positively impacted by the economic upturn in the equity markets. Noninterest expense increased by $1.4 million, or 5.9%, primarily due to higher employee salaries and benefits.
24
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SECURITIES AVAILABLE FOR SALE
The Company focuses on the following four objectives for its available-for-sale portfolio:
• | ||||
• | ||||
• | ||||
• | ||||
2000 vs. 1999 The recent increases in the investment portfolio are directly related to strong deposit growth and slow loan growth in certain loan categories.
LOANS AND LEASES
The following table presents the major categories of the loan and lease portfolio as of December 31 for the years ended:
(dollars in millions) | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
Commercial, financial and agricultural | $ | 6,027 | $ | 4,492 | $ | 4,803 | $ | 2,388 | $ | 2,605 | ||||||||||
Real estate: | ||||||||||||||||||||
Commercial | 6,707 | 5,146 | 4,806 | 2,957 | 2,618 | |||||||||||||||
Construction | 1,494 | 953 | 972 | 464 | 406 | |||||||||||||||
Residential | 6,700 | 5,020 | 4,749 | 2,228 | 2,315 | |||||||||||||||
Total real estate loans | 14,901 | 11,119 | 10,527 | 5,649 | 5,339 | |||||||||||||||
Consumer | 9,244 | 7,345 | 6,021 | 4,462 | 3,593 | |||||||||||||||
Lease financing | 2,133 | 2,417 | 2,399 | 2,293 | 2,038 | |||||||||||||||
Foreign loans | 384 | 349 | 396 | 386 | 345 | |||||||||||||||
Total loans and leases | 32,689 | 25,722 | 24,146 | 15,178 | 13,920 | |||||||||||||||
Less allowance for loan and lease losses | 437 | 392 | 384 | 195 | 172 | |||||||||||||||
Total net loans and leases | $ | 32,252 | $ | 25,330 | $ | 23,762 | $ | 14,983 | $ | 13,748 | ||||||||||
Total loans and leases to: | ||||||||||||||||||||
Total assets | 65.3 | % | 67.1 | % | 69.5 | % | 70.1 | % | 75.4 | % | ||||||||||
Total interest earning assets | 78.0 | % | 79.5 | % | 84.3 | % | 83.8 | % | 85.2 | % | ||||||||||
Total deposits | 97.2 | % | 97.4 | % | 98.3 | % | 99.0 | % | 98.5 | % | ||||||||||
We continue our efforts to diversify our loan and lease portfolio, both geographically and by industry. Our overall growth in loan and lease volume came primarily from internal growth and the acquisitions of Community First and USDB in the fourth quarter of 2004.
The loan and lease portfolio is the largest component of total earning assets and accounts for the greatest portion of total interest income. Total loans and leases increased by 27.1% from December 31, 2003 to December 31, 2004. The increase was substantially due to increases in consumer and real estate loans, with customers taking advantage of the low interest rate environment, and from the acquisitions in the fourth quarter of 2004. Real estate and consumer loans increased 34.0% and 25.9%, or $3.8 billion and $1.9 billion, respectively. Commercial, financial and agricultural loans increased 34.2% from last year. In the context of interest rate trends and the broader economy, we continuously monitor the mix in our loan portfolio.
Total loans and leases increased by 6.5% from December 31, 2002 to December 31, 2003, primarily due to an increase in consumer and real estate loans as a result of the low interest rate environment.
Commercial, Financial and Agricultural Loans
As of December 31, 2004, commercial, financial and agricultural loans represented 18.4% of total loans and leases, compared with 17.5% at December 31, 2003. The increase was mostly due to the table above showsacquisitions of Community First and USDB.
As of December 31, 2003, commercial, financial and agricultural loans totaled 17.5% of total loans and leases, compared with 19.9% at December 31, 2002. The decrease was partially due to a planned reduction in more detail, noninterest income increased $18.4 million, or 9.3%, from $197.6 millionFirst Hawaiian’s media and syndicated national credits. We have also decreased exposures in 1999certain commercial, financial and agricultural loans in response to $216.1 million in 2000. Factors causing the increase included:
(%) | ||||
1997 | 1.33 | |||
1998 | 1.32 | |||
1999 | 1.29 | |||
2000 | 1.23 | |||
2001 | 1.28 |
(%) | ||||
1997 | 0.33 | |||
1998 | 0.31 | |||
1999 | 0.42 | |||
2000 | 0.37 | |||
2001 | 0.55 |
(%) | ||||
1997 | 1.42 | |||
1998 | 1.11 | |||
1999 | 1.01 | |||
2000 | 0.86 | |||
2001 | 0.78 |
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BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part II(continued) We seek to maintain reasonable levels of risk in commercial, financial and agricultural lending by following prudent underwriting guidelines primarily based on cash flow. Most commercial, financial and agricultural loans are collateralized and/or supported by guarantors judged to have adequate net worth. We make unsecured loans to customers based on character, net worth, liquidity and repayment ability.
ProvisionReal Estate Loans
Real estate loans represented 45.6% and Allowance43.2% of total loans and leases at December 31, 2004 and 2003, respectively. Real estate loans increased 34.0%, or $3.8 billion, primarily from the acquisitions in the fourth quarter of 2004. A significant portion of the increase is also due to customers taking advantage of the low interest rate environment and greater loan purchases during the current year.
Real estate loans increased $592 million, or 5.6%, from 2002 to 2003. Real estate loans represented 43.2% and 43.6% of total loans and leases at December 31, 2003 and 2002, respectively. We have maintained the concentration of loans in this area primarily through the purchase of pools of residential loans and the origination of commercial real estate loans.
We seek to maintain reasonable levels of risk in real estate lending by financing projects selectively, by adhering to prudent underwriting guidelines and by closely monitoring general economic conditions affecting local real estate markets. In purchasing existing residential real estate loans, we are able to diversify our geographic exposure.
Multifamily and commercial real estate loans.We analyze each application to assess the project’s economic viability, the loan-to-value ratio of the real estate securing the financing and the underlying financial strength of the borrower. In this type of lending, we will generally: (1) lend no more than 80% of the appraised value of the underlying project or property; and (2) require a minimum debt service ratio of 1.15.
Single-family residential loans.We will generally lend no more than 80% of the appraised value of the underlying property. Although the majority of our loans adhere to that limit, loans made in excess of that limit are generally covered by third-party mortgage insurance that reduces our equivalent risk to an 80% loan-to-appraised-value ratio.
Home equity loans.We generally lend up to 75% of appraised value or tax assessed value for Credit Lossesfirst mortgages, otherwise 80-100% depending on the amount of the loan. The debt-to-income ratio should not exceed 45% and a good credit history is required.
Consumer Loans
Consumer loans consist primarily of open- and closed-end direct and indirect loans for personal, automobile, recreational vehicle, pleasure boat and household purchases. We seek to maintain reasonable levels of risk in consumer lending by following prudent underwriting guidelines which include an evaluation of: (1) personal credit history; (2) personal cash flow; and (3) collateral values based on existing market conditions.
Consumer loans, including financing of automobiles, recreational vehicles and pleasure boats, totaled 28.3% of total loans and leases at December 31, 2004 compared to 28.6% in 2003. The balance increased $1.9 billion or 25.9% from last year. This increase is primarily due to higher confidence in the consumer market and attractive interest rates. A significant portion of the increase is also due to the acquisitions of Community First and USDB. Low interest rates have made purchase financing for automobiles more attractive than leasing.
Consumer loans increased $1.3 billion or 22.0% from 2002 to 2003. The increase was primarily due to confidence in the consumer market and attractive interest rates on consumer lending.
Lease Financing
Lease financing as of December 31, 2004 decreased from last year due to a change in the method of accounting for new vehicle leases from finance leases to operating leases during the period of February through July 2004 as we did not obtain residual insurance on an individual lease basis. These auto leases were accounted for as operating leases that are reflected in other assets on our balance sheet and are depreciated over their useful lives. Income from these auto leases was reported as noninterest income. Prior to February
26
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
and after July 2004, we accounted for vehicle leases as direct financing leases as we obtained residual insurance on an individual lease basis. Unearned income on financing leases is accreted over the lives of the leases to provide a constant periodic rate of return on the net investment in the lease.
In 2004 lease financing represented 6.5% of total loans and leases as compared to 9.4% in 2003, and 9.9% in 2002. Consumer lease financing is declining in response to the decline in interest rates which has changed consumer preferences away from lease financing. The proportionate decrease was also due to the acquisitions of Community First and USDB, in which the lease financing obtained was a small percentage of the total loans acquired.
Loan and Lease Concentrations
Loan and lease concentrations exist when there are loans to multiple borrowers who are engaged in similar activities and thus would be impacted by the same economic or other conditions. At December 31, 2004, we did not have a concentration of loans and leases greater than 10% of total loans and leases which were not otherwise disclosed as a category in the table above.
The loan and lease portfolio is predominately located in California, Hawaii, and other states in the Western United States. We also lend, to a lesser extent, nationally and in Guam and Saipan. The risk inherent in the portfolio is dependent upon both the economic stability of the areas in which we lend and the financial well-being and creditworthiness of the borrowers.
Loan and Lease Maturities
The contractual maturities of loans and leases (shown in the table below) do not necessarily reflect the actual maturities of our loan and lease portfolio. In our experience, the average life of residential real estate and consumer loans is substantially less than their contractual terms because borrowers prepay loans.
In general, the average life of real estate loans tends to increase when current interest rates exceed rates on existing loans. In contrast, borrowers are more likely to prepay loans when current interest rates are below the rates on existing loans. The volume of such prepayments depends upon changes in both the absolute level of interest rates, the relationship between fixed and adjustable-rate loans and the relative values of the underlying collateral. As a result, the average life of our fixed-rate real estate loans has varied widely.
At December 31, 2004, loans and leases with contractual maturities of over one year were comprised of fixed-rate loans totaling $15.9 billion and floating or adjustable-rate loans totaling $9.8 billion.
The following table sets forth the activitycontractual maturities of our loan and lease portfolio by category at December 31, 2004. Demand loans are included as due within one year.
After One | ||||||||||||||||
Within | And Within | After | ||||||||||||||
(dollars in millions) | One Year | Five Years | Five Years | Total | ||||||||||||
Commercial, financial and agricultural | $ | 2,901 | $ | 2,098 | $ | 1,028 | $ | 6,027 | ||||||||
Real estate: | ||||||||||||||||
Commercial | 1,096 | 2,568 | 3,043 | 6,707 | ||||||||||||
Construction | 804 | 600 | 90 | 1,494 | ||||||||||||
Residential | 365 | 1,601 | 4,734 | 6,700 | ||||||||||||
Consumer | 1,269 | 4,108 | 3,867 | 9,244 | ||||||||||||
Lease financing | 509 | 1,177 | 447 | 2,133 | ||||||||||||
Foreign | 84 | 180 | 120 | 384 | ||||||||||||
Total | $ | 7,028 | $ | 12,332 | $ | 13,329 | $ | 32,689 | ||||||||
27
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets and restructured loans are reflected below:
Year Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
Nonperforming assets: | ||||||||||||||||||||
Nonaccrual: | ||||||||||||||||||||
Commercial, financial and agricultural | $ | 51,793 | $ | 66,100 | $ | 145,920 | $ | 37,477 | $ | 43,016 | ||||||||||
Real estate: | ||||||||||||||||||||
Commercial | 47,385 | 41,508 | 48,071 | 30,587 | 22,386 | |||||||||||||||
Construction | 2,386 | — | — | — | 403 | |||||||||||||||
Residential | 6,862 | 8,176 | 5,460 | 9,260 | 12,458 | |||||||||||||||
Total real estate loans | 56,633 | 49,684 | 53,531 | 39,847 | 35,247 | |||||||||||||||
Consumer | 4,477 | 3,634 | 4,769 | 6,144 | 3,257 | |||||||||||||||
Lease financing | 8,138 | 8,038 | 11,532 | 9,570 | 6,532 | |||||||||||||||
Foreign | 4,138 | 6,341 | 10,088 | 4,074 | 5,496 | |||||||||||||||
Total nonaccrual loans and leases | 125,179 | 133,797 | 225,840 | 97,112 | 93,548 | |||||||||||||||
Other real estate owned and repossessed personal property | 21,653 | 17,387 | 19,613 | 22,321 | 27,479 | |||||||||||||||
Total nonperforming assets | $ | 146,832 | $ | 151,184 | $ | 245,453 | $ | 119,433 | $ | 121,027 | ||||||||||
Past due loans and leases(1) : | ||||||||||||||||||||
Commercial, financial and agricultural | $ | 6,140 | $ | 17,545 | $ | 9,005 | $ | 11,134 | $ | 6,183 | ||||||||||
Real estate: | ||||||||||||||||||||
Commercial | 2,119 | 7,410 | 2,952 | 385 | 1,987 | |||||||||||||||
Construction | 506 | — | — | — | — | |||||||||||||||
Residential | 1,112 | 1,084 | 5,743 | 3,770 | 3,886 | |||||||||||||||
Total real estate loans | 3,737 | 8,494 | 8,695 | 4,155 | 5,873 | |||||||||||||||
Consumer | 2,243 | 2,559 | 1,984 | 3,323 | 3,719 | |||||||||||||||
Lease financing | 79 | 127 | 232 | 146 | 113 | |||||||||||||||
Foreign | 216 | 651 | 1,181 | 2,023 | 1,321 | |||||||||||||||
Total past due loans and leases | $ | 12,415 | $ | 29,376 | $ | 21,097 | $ | 20,781 | $ | 17,209 | ||||||||||
Accruing Restructured Loans and Leases: | ||||||||||||||||||||
Commercial, financial and agricultural | 36 | 60 | 69 | 107 | — | |||||||||||||||
Commercial real estate | 429 | 1,616 | 4,570 | 6,301 | 7,316 | |||||||||||||||
Total accruing restructured loans and leases | $ | 465 | $ | 1,676 | $ | 4,639 | $ | 6,408 | $ | 7,316 | ||||||||||
Nonperforming assets to total loans and leases and other real estate owned and repossessed personal property (end of year): | ||||||||||||||||||||
Excluding past due loans and leases | 0.45 | % | 0.59 | % | 1.02 | % | 0.79 | % | 0.87 | % | ||||||||||
Including past due loans and leases | 0.49 | 0.70 | 1.10 | 0.92 | 0.99 | |||||||||||||||
Nonperforming assets to total assets (end of year): | ||||||||||||||||||||
Excluding past due loans and leases | 0.29 | 0.39 | 0.71 | 0.55 | 0.66 | |||||||||||||||
Including past due loans and leases | 0.32 | 0.47 | 0.77 | 0.65 | 0.75 | |||||||||||||||
(1) Represents loans and leases which are past due 90 days or more as to principal and/or interest, are still accruing interest, are adequately collateralized and are in the process of collection. |
Nonperforming Assets
We generally place a loan or lease on nonaccrual status when we believe that collection of principal or interest has become doubtful or when loans or leases are 90 days past due as to principal or interest, unless they are well secured and in the process of collection. We may make an exception to the general 90-day-past-due rule when the fair value of the collateral exceeds our recorded investment in the loan.
Consumer loans and leases are subject to our general policies regarding nonaccrual loans and substantially all past-due consumer loans and leases are charged off upon reaching a predetermined delinquency status varying from 120 to 180 days, depending on product type.
When we place a loan or lease on nonaccrual status, previously accrued and uncollected interest is reversed against interest income of the current period. When we receive a cash payment on a nonaccrual loan, we apply it as a reduction of the principal balance when we have doubts about the ultimate collection of the principal. Otherwise, we record such payments as income.
Nonaccrual loans and leases are generally returned to accrual status when they: (1) become current as to principal and interest and have demonstrated a sustained period of payment performance or (2) become both well secured and in the process of collection.
28
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Nonperforming assets at December 31, 2004 were $146.8 million, or 0.45%, of total loans and leases, other real estate owned, and repossessed personal property, as compared to 0.59% at December 31, 2003 and 1.02% at December 31, 2002. Nonperforming assets at December 31, 2004 were 0.29% of total assets, compared to 0.39% at December 31, 2003 and 0.71% at December 31, 2002.
2004 compared to 2003
Total nonaccrual loans and leases decreased $8.6 million. Nonaccrual loans for commercial, financial and agricultural lending decreased $14.3 million. The decrease from the prior year for nonaccruing commercial, financial and agricultural loans was due to the resolution of problem relationships. Foreign nonaccruing loans decreased by $2.2 million. Our overall foreign loan portfolio, composed primarily of loans in Guam and Saipan, represents a relatively small component (1.2%) of our total loan portfolio. In addition, there was a decrease in nonaccrual residential real estate loans of $1.3 million. The decrease was the result of the resolution of problem relationships. These decreases were partially offset by an increase in total nonaccrual commercial and construction real estate loans of $8.3 million, which was partially due to the acquisitions of Community First and USDB in the fourth quarter of 2004.
2003 compared to 2002
Total nonaccrual loans and leases decreased $92.0 million. Nonaccrual loans for commercial, financial and agricultural lending decreased $79.8 million. The decrease from the prior year for nonaccruing commercial, financial and agricultural loans was due to the resolution of problem relationships. Total nonaccrual real estate loans have decreased $3.8 million. Within the nonaccrual real estate loan category, decreases in commercial real estate loans of $6.6 million were partially offset by increases in nonaccrual residential real estate loans of $2.7 million. These decreases resulted from the resolution of problem relationships.
Foreign nonaccruing loans decreased by $3.7 million. Our overall foreign loan portfolio, composed primarily of loans in Guam and Saipan, represented a relatively small component (1.4%) of our total loan portfolio.
The following table presents information related to nonaccrual and restructured loans and leases as of December 31, 2004:
(dollars in thousands) | Domestic | Foreign | Total | |||||||||
Interest income which would have been recorded if loans had been current | $ | 4,431 | $ | 989 | $ | 5,420 | ||||||
Interest income recorded during the year | $ | 3,661 | $ | 26 | $ | 3,687 | ||||||
First Hawaiian has credit exposure to an airline of $7.7 million (including $60,000 on leases) as of February 28, 2005. As a result of the borrower’s Chapter 11 reorganization filing on December 30, 2004, First Hawaiian has downgraded all of the borrower’s loans and leases to doubtful and placed all loans and leases on nonaccrual status. Based on management’s analysis of the borrower’s collateral, no specific reserve is required on the borrower’s outstanding balances. The borrower remained contractually current on all principal and interest payments through December 2004. The Cash Collateral Order through March 21, 2005, approved by the bankruptcy court requires the borrower to pay currently all interest and fees due First Hawaiian and the other secured lenders.
29
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The changes in the allowance for creditloan and lease losses for the years indicated:
(dollars in thousands) | 2001 | 2000 | 1999 | 1998 | 1997 | |||||||||||||||||||
Loans and leases outstanding (end of year) | $ | 15,223,732 | $ | 13,971,831 | $ | 12,524,039 | $ | 11,964,563 | $ | 6,792,394 | ||||||||||||||
Average loans and leases outstanding | $ | 14,585,712 | $ | 13,285,586 | $ | 12,291,095 | $ | 7,658,998 | $ | 6,476,822 | ||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Balance at beginning of year | $ | 172,443 | $ | 161,418 | $ | 158,294 | $ | 90,487 | $ | 90,895 | ||||||||||||||
Provision for credit losses | 103,050 | 60,428 | 55,262 | 30,925 | 20,010 | |||||||||||||||||||
Loans and leases charged off: | ||||||||||||||||||||||||
Commercial, financial and agricultural | 25,855 | 8,693 | 7,715 | 6,440 | 7,487 | |||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Commercial | 1,193 | 2,715 | 6,385 | 740 | 1,150 | |||||||||||||||||||
Construction | — | 3,480 | 3,646 | — | 180 | |||||||||||||||||||
Residential | 2,920 | 6,589 | 5,539 | 4,217 | 3,731 | |||||||||||||||||||
Consumer | 40,076 | 28,331 | 27,927 | 17,911 | 13,994 | |||||||||||||||||||
Lease financing | 21,658 | 10,202 | 9,111 | 1,385 | 105 | |||||||||||||||||||
Foreign | 1,438 | 2,121 | 1,222 | 458 | 197 | |||||||||||||||||||
Total loans and leases charged off | 93,140 | 62,131 | 61,545 | 31,151 | 26,844 | |||||||||||||||||||
Recoveries on loans and leases previously charged off: | ||||||||||||||||||||||||
Commercial, financial and agricultural | 1,045 | 1,954 | 1,761 | 1,314 | 1,830 | |||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Commercial | 137 | 178 | 311 | 821 | 310 | |||||||||||||||||||
Construction | 321 | 751 | 18 | 1,244 | — | |||||||||||||||||||
Residential | 618 | 1,143 | 1,101 | 250 | 985 | |||||||||||||||||||
Consumer | 7,028 | 6,261 | 5,681 | 3,040 | 2,347 | |||||||||||||||||||
Lease financing | 2,459 | 2,018 | 1,397 | 253 | 26 | |||||||||||||||||||
Foreign | 693 | 423 | 163 | 124 | 64 | |||||||||||||||||||
Total recoveries on loans and leases previously charged off | 12,301 | 12,728 | 10,432 | 7,046 | 5,562 | |||||||||||||||||||
Net charge-offs | (80,839 | ) | (49,403 | ) | (51,113 | ) | (24,105 | ) | (21,282 | ) | ||||||||||||||
Transfer of allowance allocated to securitized loans | — | — | (1,025 | ) | — | — | ||||||||||||||||||
Allowances of subsidiaries purchased (1) | — | — | — | 60,987 | 864 | |||||||||||||||||||
Balance at end of year | $ | 194,654 | $ | 172,443 | $ | 161,418 | $ | 158,294 | $ | 90,487 | ||||||||||||||
Net loans and leases charged off to average loans and leases | .55 | % | .37 | % | .42 | % | .31 | % | .33 | % | ||||||||||||||
Net loans and leases charged off to allowance for credit losses | 41.53 | 28.65 | 31.66 | 15.23 | 23.52 | |||||||||||||||||||
Allowance for credit losses to total loans and leases (end of year) | 1.28 | 1.23 | 1.29 | 1.32 | 1.33 | |||||||||||||||||||
Allowance for credit losses to nonperforming loans and leases (end of year): | ||||||||||||||||||||||||
Excluding 90 days or more past due accruing loans and leases | 2.00x | 1.84x | 1.64x | 1.61x | 1.40x | |||||||||||||||||||
Including 90 days or more past due accruing loans and leases | 1.65 | 1.56 | 1.39 | 1.16 | .91 | |||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
Allowance for loan and lease losses: | ||||||||||||||||||||
Balance at beginning of year | $ | 391,699 | $ | 384,081 | $ | 194,654 | $ | 172,443 | $ | 161,418 | ||||||||||
Allowance arising from business combinations(1) | 59,392 | — | 212,660 | — | — | |||||||||||||||
Provision for loan and lease losses | 49,219 | 81,295 | 95,356 | 103,050 | 60,428 | |||||||||||||||
Loans and leases charged off: | ||||||||||||||||||||
Commercial, financial and agricultural | 15,521 | 38,621 | 68,497 | 25,855 | 8,693 | |||||||||||||||
Real estate: | ||||||||||||||||||||
Commercial | 2,704 | 1,622 | 3,287 | 1,193 | 2,715 | |||||||||||||||
Construction | — | — | — | — | 3,480 | |||||||||||||||
Residential | 761 | 930 | 1,307 | 2,920 | 6,589 | |||||||||||||||
Consumer | 58,608 | 56,489 | 50,155 | 40,076 | 28,331 | |||||||||||||||
Lease financing | 21,196 | 26,338 | 22,399 | 21,658 | 10,202 | |||||||||||||||
Foreign | 1,649 | 2,498 | 1,741 | 1,438 | 2,121 | |||||||||||||||
Total loans and leases charged off | 100,439 | 126,498 | 147,386 | 93,140 | 62,131 | |||||||||||||||
Recoveries on loans and leases: | ||||||||||||||||||||
Commercial, financial and agricultural | 11,444 | 31,843 | 10,479 | 1,045 | 1,954 | |||||||||||||||
Real estate: | ||||||||||||||||||||
Commercial | 412 | 568 | 999 | 137 | 178 | |||||||||||||||
Construction | 1,016 | 132 | 306 | 321 | 751 | |||||||||||||||
Residential | 806 | 1,264 | 608 | 618 | 1,143 | |||||||||||||||
Consumer | 13,950 | 12,041 | 10,331 | 7,028 | 6,261 | |||||||||||||||
Lease financing | 8,344 | 6,429 | 5,582 | 2,459 | 2,018 | |||||||||||||||
Foreign | 548 | 544 | 492 | 693 | 423 | |||||||||||||||
Total recoveries on loans and leases | 36,520 | 52,821 | 28,797 | 12,301 | 12,728 | |||||||||||||||
Net charge-offs | (63,919 | ) | (73,677 | ) | (118,589 | ) | (80,839 | ) | (49,403 | ) | ||||||||||
Balance at end of year | $ | 436,391 | $ | 391,699 | $ | 384,081 | $ | 194,654 | $ | 172,443 | ||||||||||
Net loans and leases charged off to average loans and leases | 0.23 | % | 0.30 | % | 0.53 | % | 0.56 | % | 0.37 | % | ||||||||||
Net loans and leases charged off to allowance for loan and lease losses | 14.65 | 18.81 | 30.88 | 41.53 | 28.65 | |||||||||||||||
Allowance for loan and lease losses to total loans and leases (end of year) | 1.33 | 1.52 | 1.59 | 1.28 | 1.24 | |||||||||||||||
Allowance for loan and lease losses to nonaccruing loans and leases (end of year): | ||||||||||||||||||||
Excluding 90 days past due accruing loans and leases | 3.49 | x | 2.93 | x | 1.70 | x | 2.00 | x | 1.84 | x | ||||||||||
Including 90 days past due accruing loans and leases | 3.17 | x | 2.40 | x | 1.56 | x | 1.65 | x | 1.56 | x | ||||||||||
Note:
(1) |
2630
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part II(continued)
We have allocated a portion of the allowance for creditloan and lease losses according to the amount deemed to be reasonably necessary to provide for the possibility ofinherent losses being incurred within the various loan and lease categories as of December 31 for the years indicated:
2001 | 2000 | 1999 | 1998 | 1997 | ||||||||||||||||||||||||||||||||||||||
Percent of | Percent of | Percent of | Percent of | Percent of | ||||||||||||||||||||||||||||||||||||||
Loans/Leases | Loans/Leases | Loans/Leases | Loans/Leases | Loans/Leases | ||||||||||||||||||||||||||||||||||||||
in Each | in Each | in Each | in Each | in Each | ||||||||||||||||||||||||||||||||||||||
Category | Category | Category | Category | Category | ||||||||||||||||||||||||||||||||||||||
Allowance | to Total | Allowance | to Total | Allowance | to Total | Allowance | to Total | Allowance | to Total | |||||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Loans/Leases | Amount | Loans/Leases | Amount | Loans/Leases | Amount | Loans/Leases | Amount | Loans/Leases | ||||||||||||||||||||||||||||||||
Domestic: | ||||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 42,130 | 16 | % | $ | 22,185 | 19 | % | $ | 19,175 | 18 | % | $ | 28,988 | 19 | % | $ | 17,113 | 25 | % | ||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||||
Commercial | 17,575 | 19 | 11,030 | 19 | 10,275 | 19 | 13,245 | 19 | 5,829 | 22 | ||||||||||||||||||||||||||||||||
Construction | 2,820 | 3 | 3,780 | 3 | 4,755 | 3 | 4,899 | 4 | 570 | 3 | ||||||||||||||||||||||||||||||||
Residential | 6,320 | 15 | 7,055 | 17 | 12,305 | 19 | 12,009 | 22 | 8,779 | 30 | ||||||||||||||||||||||||||||||||
Consumer | 45,210 | 29 | 39,025 | 26 | 34,200 | 24 | 32,251 | 22 | 15,464 | 10 | ||||||||||||||||||||||||||||||||
Lease financing | 22,315 | 15 | 16,295 | 14 | 12,855 | 14 | 9,992 | 11 | 546 | 5 | ||||||||||||||||||||||||||||||||
Foreign | 2,915 | 3 | 1,400 | 2 | 850 | 3 | 1,435 | 3 | 1,405 | 5 | ||||||||||||||||||||||||||||||||
Unallocated | 55,369 | N/A | 71,673 | N/A | 67,003 | N/A | 55,475 | N/A | 40,781 | N/A | ||||||||||||||||||||||||||||||||
Total | $ | 194,654 | 100 | % | $ | 172,443 | 100 | % | $ | 161,418 | 100 | % | $ | 158,294 | 100 | % | $ | 90,487 | 100 | % | ||||||||||||||||||||||
December 31, | ||||||||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
Commercial, financial and agricultural | $ | 83,293 | $ | 81,248 | $ | 96,171 | $ | 42,130 | $ | 22,185 | ||||||||||
Real estate: | ||||||||||||||||||||
Commercial | 66,420 | 24,189 | 22,524 | 17,575 | 11,030 | |||||||||||||||
Construction | 8,824 | 6,016 | 4,572 | 2,820 | 3,780 | |||||||||||||||
Residential | 38,673 | 11,995 | 9,378 | 6,320 | 7,055 | |||||||||||||||
Consumer | 94,415 | 64,192 | 66,388 | 45,210 | 39,025 | |||||||||||||||
Lease financing | 24,906 | 35,512 | 19,588 | 22,315 | 16,295 | |||||||||||||||
Foreign | 6,652 | 9,191 | 256 | 2,915 | 1,400 | |||||||||||||||
Total Allocated | 323,183 | 232,343 | 218,877 | 139,285 | 100,770 | |||||||||||||||
Unallocated | 113,208 | 159,356 | 165,204 | 55,369 | 71,673 | |||||||||||||||
Total | $ | 436,391 | $ | 391,699 | $ | 384,081 | $ | 194,654 | $ | 172,443 | ||||||||||
December 31, | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||||||
Alloc. | Loan | Alloc. | Loan | Alloc. | Loan | Alloc. | Loan | Alloc. | Loan | |||||||||||||||||||||||||||||||
allow. | catgry | allow. | catgry | allow. | catgry | allow. | catgry | allow. | catgry | |||||||||||||||||||||||||||||||
as % | as % | as % | as % | as % | as % | as % | as % | as % | as % | |||||||||||||||||||||||||||||||
of loan | of total | of loan | of total | of loan | of total | of loan | of total | of loan | of total | |||||||||||||||||||||||||||||||
catgry | loans | catgry | loans | catgry | loans | catgry | loans | catgry | loans | |||||||||||||||||||||||||||||||
Commercial, financial and agricultural | 1.4 | % | 18.4 | % | 1.8 | % | 17.5 | % | 2.0 | % | 19.9 | % | 1.8 | % | 15.7 | % | 0.9 | % | 18.7 | % | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||
Commercial | 1.0 | 20.5 | 0.5 | 20.0 | 0.5 | 19.9 | 0.6 | 19.5 | 0.4 | 18.8 | ||||||||||||||||||||||||||||||
Construction | 0.6 | 4.6 | 0.6 | 3.7 | 0.5 | 4.0 | 0.6 | 3.1 | 0.9 | 2.9 | ||||||||||||||||||||||||||||||
Residential | 0.6 | 20.5 | 0.2 | 19.5 | 0.2 | 19.7 | 0.3 | 14.7 | 0.3 | 16.7 | ||||||||||||||||||||||||||||||
Consumer | 1.0 | 28.3 | 0.9 | 28.6 | 1.1 | 24.9 | 1.0 | 29.4 | 1.1 | 25.8 | ||||||||||||||||||||||||||||||
Lease financing | 1.2 | 6.5 | 1.5 | 9.4 | 0.8 | 9.9 | 1.0 | 15.1 | 0.8 | 14.6 | ||||||||||||||||||||||||||||||
Foreign | 1.7 | 1.2 | 2.6 | 1.3 | 0.1 | 1.7 | 0.8 | 2.5 | 0.4 | 2.5 | ||||||||||||||||||||||||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||||||
The provision for creditloan and lease losses is based on management’s judgment as to the adequacy of the allowance for credit losses (the “Allowance”).Allowance. Management uses a systematic methodology to determine the related provision for creditloan and lease losses to be reported for financial statement purposes. The determination of the adequacy of the Allowance is ultimately one of management judgment, which includes consideration of many factors such as: (1) the amount of problem and potential problem loans and leases; (2) net charge-off experience; (3) changes in the composition of the loan and lease portfolio by type and location of loans and leases; (4) changes in overall loan and lease risk profile and quality; (5) general economic factors; (6) specific regional economic factors; and (7) the fair value of collateral.
Using this methodology, we allocate the Allowance to individual loans and leases and to categories of loans and leases representing probable losses based on available information. At least quarterly, we conduct internal credit analyses to determine which loans and leases are impaired. As a result, we allocate specific amounts of the Allowance to individual loan and lease relationships. Each impaired relationship over $1,000,000 and classified substandard or doubtful is evaluated quarterly on a case-by-case basis. Note 1 to the Consolidated Financial Statements on pages 45 through 51 describes how we evaluate loans for impairment. Note 78 to the Consolidated Financial Statements on page 56 details additional information regarding the Allowance and impaired loans.
Some categories of loans and leases are not subjected to a loan-by-loan credit analysis. Management makes an allocation to these categories based on our statistical analysis of historic trends of impairment and charge-offs of such loans and leases. Additionally, we allocate a portion of the Allowance based on risk classifications of certain loan types. Some of the Allowance is not allocated to specific impaired loans because of the subjective nature of the process of estimating an adequate allowance for creditloan and lease losses, economic uncertainties and other factors.
AsThe allocated component of the tableallowance increased $90.8 million from 2003 to 2004. The increase reflected management’s ongoing process of refining its allocation methodology with respect to specific loan products and risk pools. Changes in the allocated
31
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
loan and lease loss allowance reflect management’s judgment concerning the effect of trends in borrower performance and recent economic activity on page 26 illustrates,portfolio performance.
The unallocated component of the provision forallowance decreased $46.1 million from 2003 to 2004, primarily due to the improvement in our loan portfolio’s credit losses for 2001 was $103.1 million, an increasequality, which required less reliance on judgmental assumptions built into the unallocated component of $42.6 million, or 70.5%, over 2000.the allowance.
Although we have taken substantial effort toWe continually analyze our processes and portfolio in an attempt to mitigate risk within our loan portfolio, a confluence of events in 2001 has made it prudent to increase our provision for credit losses.portfolio. While we have not specifically identified creditsloans or leases that are currently losses or potential problem loans (other than those identified in our discussion of nonperforming assets on page 33)assets), certain events make it probable that there are losses inherent in our portfolio. These events include:
• | ||||
• |
27
Part II(continued)
• |
Net Charge-Offs
2001 vs. 2000
(in thousands) | 2001 | 2000 | Change | |||||||||
Net charge-offs | $ | 80,839 | $ | 49,403 | 63.6 | % | ||||||
In 2001, net charge-offs increased by $31.4 million compared to 2000 due to the following factors:
• | ||||
These increases were partially offset byWe will continue to closely monitor the following:
2000 vs. 1999
(in thousands) | 2000 | 1999 | Change | |||||||||
Net charge-offs | $ | 49,403 | $ | 51,113 | (3.3 | )% | ||||||
In 2000, net charge-offs decreased by $1.7 million compared to 1999 due tocurrent and potential impact that these factors have on our loan and lease portfolio. Worsening economic conditions may warrant additional amounts for the following factors:
Allowance for Credit Losses
2001 vs. 2000
(dollars in thousands) | 2001 | 2000 | Change | |||||||||
Allowance for credit losses (year end) | $ | 194,654 | $ | 172,443 | 12.9 | % | ||||||
Allowance for credit losses as a % of total loans and leases (year end) | 1.28 | % | 1.23 | % | 4.1 | % | ||||||
Allowance for credit losses to nonperforming loans and leases, excluding 90 days or more past due accruing loans and leases (year end) | 2.00 | x | 1.84 | x | 8.7 | % | ||||||
The percentage of the Allowance compared to total loans and leases increased in 2001 from 2000, primarily due to additional provisioning done in response to negative macroeconomic trends in 2001. The ratio of the Allowance to nonperforming loans and leases increased to 2.00x in 2001 compared to 1.84x in 2000. The increase is primarily attributable to an increase in the allowanceprovision for credit losses in 2001.future periods.
Net Charge-Offs
2004 compared to 2003
Net charge-offs were $63.9 million, a decrease of $9.8 million. Total loans and leases charged off decreased $26.1 million. This decrease was primarily due to a $23.1 million decrease in charge-offs for commercial, financial and agricultural loans partially offset by an increase of $2.1 million in consumer loan charge-offs, which was primarily due to the increased size of the overall consumer loan portfolio.
Net charge-offs were 0.23% of average loans and leases compared to 0.30%.
2003 compared to 2002
Net charge-offs were $73.7 million, a decrease of $44.9 million. Total loans and leases charged off decreased $20.9 million. This decrease was primarily due to a $29.9 million decrease in charge-offs for commercial, financial and agricultural loans partially offset by an increase of $6.3 million in consumer loan charge-offs, which was primarily due to the increased size of the overall consumer loan portfolio, and a $3.9 million increase in lease financing charge-offs. Recoveries increased by $24.0 million. Charge-offs were higher in 2002 primarily due to charge-offs required in late March 2002 on the acquired UCB portfolio. These charge-offs were contested with UFJ and settled in the first quarter of 2003, resulting in $13.6 million of recoveries primarily in commercial, financial and agricultural loans. For more information on this see Note 2 (Mergers and Acquisitions) to the Consolidated Financial Statements.
Net charge-offs were 0.30% of average loans and leases compared to 0.53%.
32
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Allowance for Loan and Lease Losses
The Company uses a systematic methodology to determine the adequacy of the Allowance and related provision for loan and lease losses to be reported for financial statement purposes. The determination of the adequacy of the Allowance is ultimately one of judgment, which includes consideration of many factors, including, among other things, the amount of problem and potential problem loans and leases, net charge-off experience, changes in the composition of the loan and lease portfolio by type and location, changes in overall risk profile and quality, general economic factors and the fair value of collateral.
In management’sour judgment, the Allowance iswas adequate to absorb losses inherent in the loan and lease portfolio at December 31, 2001.2004. However, ifchanges in prevailing economic conditions in our markets change,could result in changes in the Allowance,level of nonperforming assets and charge-offs could change as a result.in the future and, accordingly, changes in the Allowance. We will continue to closely monitor economic developments and make adjustments to the Allowance accordingly.
28
Part II(continued)
Noninterest Expense
The table below shows the categories of noninterest expense and how they have changed between 2001 and 2000, and between 2000 and 1999: 2001/2000 Change 2000/99 Change (in thousands) 2001 2000 1999 Amount % Amount % Personnel: Salaries and wages $ 207,054 $ 184,901 $ 181,914 $ 22,153 12.0 % $ 2,987 1.6 % Employee benefits 72,442 55,362 52,103 17,080 30.9 3,259 6.3 Total personnel expense 279,496 240,263 234,017 39,233 16.3 6,246 2.7 Occupancy expense 66,233 62,715 60,056 3,518 5.6 2,659 4.4 Outside services 47,658 45,924 44,697 1,734 3.8 1,227 2.7 Intangible amortization 43,618 36,597 35,760 7,021 19.2 837 2.3 Equipment expense 30,664 29,241 30,422 1,423 4.9 (1,181 ) (3.9 ) Stationery and supplies 22,004 20,286 21,275 1,718 8.5 (989 ) (4.6 ) Advertising and promotion 17,066 16,950 15,788 116 0.7 1,162 7.4 Restructuring, integration and other nonrecurring costs 3,935 1,269 17,534 2,666 210.1 (16,265 ) (92.8 ) Other 85,072 80,716 75,526 4,356 5.4 5,190 6.9 $ 595,746 $ 533,961 $ 535,075 $ 61,785 11.6 % $ (1,114 ) (0.2 )%
Total noninterest expenseThe allowance for 2001loan and lease losses was $595.7$436.4 million, an increase of $61.8 million,$44.7 million. The increase was due to the acquisitions of Community First and USDB, offset by a reduction in the BancWest level due to improvement in credit quality.
The Allowance increased to 3.49 times nonaccruing loans and leases (excluding 90 days or 11.6%, over 2000. Significant factors for the increase included:
2000 vs. 1999
Total noninterest expense for 2000 was $534 million, a decrease of $1.1 million, or 0.2%, from 1999. The main factor causing the decrease was pre-tax restructuring, merger-relatedin nonaccruing loans and other nonrecurring costs of $1.3 million in 2000leases.
2003 compared to $17.52002
The allowance for loan and lease losses was $391.7 million, in 1999. Excluding pre-tax restructuring, merger-related and other nonrecurring costs, noninterest expense was $532.7 million in 2000, an increase of $15.2 million, or 2.9%, over $517.5 million in 1999. Significant factors for the difference included:
29
Part II(continued)
Loans and Leases
The following table shows the major categories in the loan and lease portfolio as of December 31 for the years indicated:
(in millions) | 2001 | 2000 | 1999 | 1998 | 1997 | ||||||||||||||||||
Domestic: | |||||||||||||||||||||||
Commercial, financial and agricultural | $ | 2,388 | $ | 2,605 | $ | 2,213 | $ | 2,233 | $ | 1,710 | |||||||||||||
Real estate: | |||||||||||||||||||||||
Commercial | 2,957 | 2,618 | 2,467 | 2,284 | 1,509 | ||||||||||||||||||
Construction | 464 | 406 | 408 | 430 | 228 | ||||||||||||||||||
Residential | 2,264 | 2,360 | 2,363 | 2,692 | 1,980 | ||||||||||||||||||
Consumer | 4,472 | 3,600 | 2,987 | 2,583 | 689 | ||||||||||||||||||
Lease financing | 2,293 | 2,038 | 1,738 | 1,361 | 338 | ||||||||||||||||||
Foreign: | |||||||||||||||||||||||
Commercial and industrial | 81 | 66 | 65 | 81 | 68 | ||||||||||||||||||
Other | 305 | 279 | 283 | 301 | 270 | ||||||||||||||||||
Total loans and leases | $ | 15,224 | $ | 13,972 | $ | 12,524 | $ | 11,965 | $ | 6,792 | |||||||||||||
Income Taxes$7.6 million.
The provision for income taxes as shown in the Consolidated Statements of Income on page 42 represents 40.2%, 41.3% and 41.8% of pre-tax income for 2001, 2000 and 1999, respectively. Additional information on our consolidated income taxes is provided in Note 18Allowance increased to the Consolidated Financial Statements on pages 63 and 64.
Loans and Leases
We continue our efforts to diversify our loan and lease portfolio, both geographically and by industry. Our overall growth in loan and lease volume was primarily in our Mainland United States operations.
The loan and lease portfolio is the largest component of total earning assets and accounts for the greatest portion of total interest income. As the table above shows, total2.93 times nonaccruing loans and leases increased by 9.0% at December 31, 2001 over December 31, 2000. The increase was(excluding 90 days or more past due accruing loans and leases) from 1.70 times primarily due to increasesthe resolution of certain higher risk factors inherent in the volume ofUCB’s commercial real estate, consumer loans and leases, mainly due to the increased lending in the Western United States and the Nevada and New Mexico branch acquisitions. The increase was partially offset by decreases in the amount of residential real estate loans and commercial, financial and agricultural loans in the First Hawaiian operating segment. The decrease in the real estate residential loan category in the First Hawaiian operating segment relates primarily to increased refinancing activity due to the lower interest rate environment. The decrease in commercial, financial and agricultural loans in the First Hawaiian operating segment primarily reflects a planned reduction in syndicated national credits.
Commercial, Financial and Agricultural Loans
As of December 31, 2001, commercial, financial and agricultural loans totaled 15.7% of total loans and leases. Loan volume in this category was lower in 2001 than in 2000.
We seek to maintain reasonable levels of risk in commercial and financial lending by following prudent underwriting guidelines primarily based on cash flow. Most commercial and financial loans are collateralized and/or supported by guarantors judged to have adequate net worth. We make unsecured loans to customers based on character, net worth, liquidity and repayment ability.
Real Estate Loans
Real estate loans represented 37.3% and 38.5% of total loans and leases at December 31, 2001 and 2000, respectively. The decrease was primarily due to lower production resulting from the slowdown of the economy after September 11, 2001.
We seek to maintain reasonable levels of risk in real estate lending by financing projects selectively, by adhering to prudent underwriting guidelines and by closely monitoring general economic conditions affecting local real estate markets.
Multifamily and commercial real estate loans.We analyze each application to assess the project’s economic viability, the loan-to-value ratio of the real estate securing the financing and the underlying financial strength of the borrower. In this type of lending, we will generally: (1) lend no more than 75% of the appraised value of the underlying project or property; and (2) require a minimum debt service ratio of 1.20.portfolios.
Single-family residential loans.We will generally lend no more than 80% of the appraised value of the underlying property. Although the majority of our loans
30
Part II(continued)
adhere to that limit, loans made in excess of that limit are generally covered by third-party mortgage insurance that reduces our equivalent risk to an 80% loan-to appraised-value ratio.
Home equity loans. We generally lend up to 75% of appraised value or tax assessed value for fee simple properties. This includes any senior mortgages. Debt-to-income ratio should not exceed 45% and good credit is required.
Consumer Loans
Consumer loans, including credit cards, totaled 29.4% of total loans and leases at December 31, 2001. Balances in this category increased 24.2% from a year earlier, primarily due to the growth in the Bank of the West operating segment. Despite a decline in the level of economic growth in Bank of the West’s area of operation, the demand for consumer credit remained strong in 2001.
Consumer loans consist primarily of open- and closed-end direct and indirect credit facilities for personal, automobile and household purchases. We seek to maintain reasonable levels of risk in consumer lending by following prudent underwriting guidelines which include an evaluation of: (1) personal credit history; (2) personal cash flow; and (3) collateral values based on existing market conditions.
Lease Financing
Lease financing as of December 31, 2001 increased 12.5% from 2000. The increase was primarily due to an increased volume of consumer leases in the Bank of the West operating segment.
Loan and Lease Concentrations
Loan and lease concentrations exist when there are loans to multiple borrowers who are engaged in similar activities and thus would be impacted by the same economic or other conditions. At December 31, 2001, we did not have a concentration of loans and leases greater than 10% of total loans and leases which were not otherwise disclosed as a category in the table on page 30.
The loan and lease portfolio is principally located in California and Hawaii and, to a lesser extent, Oregon, Washington, Idaho, Nevada, New Mexico, Guam and Saipan. The risk inherent in the portfolio is dependent upon both the economic stability of those states and the financial well-being and creditworthiness of the borrowers.
Loan and Lease Maturities
The contractual maturities of loans and leases (shown in the table below) do not necessarily reflect the actual term of our loan and lease portfolio. In our experience, the average life of residential real estate and consumer loans is substantially less than their contractual terms because borrowers prepay loans.
In general, the average life of real estate loans tends to increase when current interest rates exceed rates on existing loans. In contrast, borrowers are more likely to prepay loans when current interest rates are below the rates on existing loans. The volume of such prepayments depends upon changes in both the absolute level of interest rates, the relationship between fixed and adjustable-rate loans and the relative values of the underlying collateral. As a result, the average life of our fixed-rate real estate loans has varied widely.
We generally sell our fixed-rate residential loans on the secondary market, but retain variable-rate residential loans in our portfolio.
At December 31, 2001, loans and leases with maturities over one year were comprised of fixed-rate loans totaling $7.9 billion and floating or adjustable-rate loans totaling $3.1 billion.
The following table sets forth the contractual maturities of our loan and lease portfolio by category at December 31, 2001. Demand loans are included as due within one year.
Within | After One But | After | ||||||||||||||||
(in millions) | One Year | Within Five Years | Five Years | Total | ||||||||||||||
Commercial, financial and agricultural | $ | 1,268 | $ | 879 | $ | 241 | $ | 2,388 | ||||||||||
Real estate: | ||||||||||||||||||
Commercial | 1,205 | 1,207 | 545 | 2,957 | ||||||||||||||
Construction | 438 | 23 | 3 | 464 | ||||||||||||||
Residential | 365 | 437 | 1,462 | 2,264 | ||||||||||||||
Consumer | 508 | 1,954 | 2,010 | 4,472 | ||||||||||||||
Lease financing | 390 | 1,461 | 442 | 2,293 | ||||||||||||||
Foreign | 72 | 200 | 114 | 386 | ||||||||||||||
Total | $ | 4,246 | $ | 6,161 | $ | 4,817 | $ | 15,224 | ||||||||||
31
Part II(continued)
Nonperforming Assets and Past Due Loans and Leases
Nonperforming assets and past due loans and leases as of December 31 are reflected below for the years indicated:
(dollars in thousands) | 2001 | 2000 | 1999 | 1998 | 1997 | |||||||||||||||||||
Nonperforming assets: | ||||||||||||||||||||||||
Nonaccrual: | ||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 35,908 | $ | 42,089 | $ | 22,222 | $ | 21,951 | $ | 10,372 | ||||||||||||||
Real estate: | ||||||||||||||||||||||||
Commercial | 27,568 | 15,331 | 25,790 | 23,128 | 9,941 | |||||||||||||||||||
Construction | — | 403 | 2,990 | 485 | — | |||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Insured, guaranteed, or conventional | 9,003 | 11,521 | 18,174 | 10,137 | 6,478 | |||||||||||||||||||
Home equity credit lines | — | — | 940 | 527 | 50 | |||||||||||||||||||
Total real estate loans | 36,571 | 27,255 | 47,894 | 34,277 | 16,469 | |||||||||||||||||||
Consumer | 6,144 | 3,257 | 1,625 | 2,416 | 139 | |||||||||||||||||||
Lease financing | 9,570 | 6,532 | 3,391 | 1,816 | 10 | |||||||||||||||||||
Foreign | 4,074 | 5,496 | 2,162 | 1,174 | — | |||||||||||||||||||
Total nonaccrual loans and leases | 92,267 | 84,629 | 77,294 | 61,634 | 26,990 | |||||||||||||||||||
Restructured: | ||||||||||||||||||||||||
Commercial, financial and agricultural | 1,569 | 927 | 1,004 | 3,894 | 1,532 | |||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Commercial | 3,019 | 7,055 | 7,905 | 17,161 | 18,241 | |||||||||||||||||||
Construction | — | — | 11,024 | 14,524 | 14,524 | |||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Insured, guaranteed, or conventional | 257 | 937 | 1,100 | 1,100 | 2,626 | |||||||||||||||||||
Home equity credit lines | — | — | — | — | 559 | |||||||||||||||||||
Total real estate loans | 3,276 | 7,992 | 20,029 | 32,785 | 35,950 | |||||||||||||||||||
Total restructured loans and leases | 4,845 | 8,919 | 21,033 | 36,679 | 37,482 | |||||||||||||||||||
Total nonperforming loans and leases | 97,112 | 93,548 | 98,327 | 98,313 | 64,472 | |||||||||||||||||||
Other real estate owned and repossessed personal property | 22,321 | 27,479 | 28,429 | 34,440 | 32,294 | |||||||||||||||||||
Total nonperforming assets | $ | 119,433 | $ | 121,027 | $ | 126,756 | $ | 132,753 | $ | 96,766 | ||||||||||||||
Past due loans and leases (1): | ||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 11,134 | $ | 6,183 | $ | 1,280 | $ | 1,578 | $ | 3,158 | ||||||||||||||
Real estate: | ||||||||||||||||||||||||
Commercial | 385 | 1,987 | 1,436 | 5,212 | 866 | |||||||||||||||||||
Construction | — | — | — | 440 | 447 | |||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Insured, guaranteed, or conventional | 3,303 | 3,387 | 7,751 | 23,413 | 25,002 | |||||||||||||||||||
Home equity credit lines | 467 | 499 | 575 | 1,710 | 2,077 | |||||||||||||||||||
Total real estate loans | 4,155 | 5,873 | 9,762 | 30,775 | 28,392 | |||||||||||||||||||
Consumer | 3,323 | 3,719 | 2,043 | 3,552 | 3,769 | |||||||||||||||||||
Lease financing | 146 | 113 | 113 | 74 | 24 | |||||||||||||||||||
Foreign | 2,023 | 1,321 | 4,824 | 1,816 | — | |||||||||||||||||||
Total past due loans and leases | $ | 20,781 | $ | 17,209 | $ | 18,022 | $ | 37,795 | $ | 35,343 | ||||||||||||||
Nonperforming assets to total loans and leases and other real estate owned and repossessed personal property (end of year): | ||||||||||||||||||||||||
Excluding past due loans and leases | .78 | % | .86 | % | 1.01 | % | 1.11 | % | 1.42 | % | ||||||||||||||
Including past due loans and leases | .92 | .99 | 1.15 | 1.42 | 1.94 | |||||||||||||||||||
Nonperforming assets to total assets (end of year): | ||||||||||||||||||||||||
Excluding past due loans and leases | .55 | .66 | .76 | .83 | 1.09 | |||||||||||||||||||
Including past due loans and leases | .65 | .75 | .87 | 1.07 | 1.49 | |||||||||||||||||||
Note: |
32
Part II(continued)
Nonperforming Assets
As shown in the table on page 32, nonperforming assets decreased by 1.3%, or $1.6 million, between December 31, 2000 and December 31, 2001. The decrease was principally due to the following:
These decreases were partially offset by:
Loans and Leases Past Due, Still Accruing
Loans and leases past due 90 days or more and still accruing interest increased 20.8% between December 31, 2000 and December 31, 2001. All 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.
Potential Problem Loans
Other than the loans listed in the table on page 32, at December 31, 2001, we were not aware of any significant potential problem loans where possible credit problems of the borrower caused us to seriously question the borrower’s ability to repay the loan on existing terms.
The following table presents information related to nonaccrual and nonaccrual restructured loans and leases as of December 31, 2001:
(in thousands) | Domestic | Foreign | Total | |||||||||
Interest income which would have been recorded if loans had been current | $ | 5,829 | $ | — | $ | 5,829 | ||||||
Interest income recorded during the year | $ | 1,628 | $ | — | $ | 1,628 | ||||||
DepositsDEPOSITS
Deposits are the largest component of our total liabilities and accountaccounted for the greatest portion45.9% of total interest expense.expense during the year ended December 31, 2004. At December 31, 2001,2004, total deposits were $15.3$33.6 billion, an increase of 8.5%27.3% over December 31, 2000.2003. The increase was primarily due to theour acquisitions of Community First and USDB, and growth inwithin our customer deposit base, primarily in the Bank of the West operating segment, and branch acquisitions in Nevada, New Mexico, Guam and Saipan. The decrease in all of thebase. In recent periods, rates paid on deposits reflects thewere reflective of a lower interest rate environment, caused primarily by rate decreases byenvironment. However, as evidenced in the Federal Reserve’s Open Market Committee.third and fourth quarters of 2004, rates paid on deposits have increased slightly based on new market conditions. Additional information on our average deposit balances and rates paid is provided in Table 1: Average Balances, Interest Income and Expense, and Yields and Rates (Taxable-Equivalent Basis).
CAPITAL
BancWest uses capital to fund organic growth and acquire banks and other financial services companies. In 2004, no dividends were paid.
INCOME TAXES
The provision for income taxes represented 38.7%, 38.3%, and 39.3% of pretax income for 2004, 2003 and 2002, respectively. Further information on pages 22our income taxes is provided in Note 19 (Income Taxes) to the Consolidated Financial Statements.
33
BancWest Corporation and 23.Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Accounting DevelopmentsOFF-BALANCE SHEET ARRANGEMENTS
Commitments and Guarantees
In the normal course of 2001,business, we are a party to various off-balance sheet commitments entered into to meet the financing needs of our customers. These financial instruments include commitments to extend credit; standby and commercial letters of credit; and commitments to purchase or sell foreign currencies. These commitments involve, to varying degrees, elements of credit, interest rate and foreign exchange rate risks. We also enter into commitments which provide funding for our balance sheet and operations. These commitments include time deposits, short-term and long-term borrowings, leases and other financial obligations.
The Company issues standby letters of credit, which include performance and financial guarantees, on behalf of customers in connection with contracts between the customers and third parties whereby the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. Standby letters of credit totaled $824.2 million at December 31, 2004, including financial guarantees of $774.9 million that the Company had issued or in which it purchased participations. A major portion of all fees received from the issuance of standby letters of credit are deferred and, at December 31, 2004, were immaterial to the Company’s financial statements. If the counterparty to a commitment to extend credit or to a standby or commercial letter of credit fails to perform, our exposure to loan and lease losses would be the contractual notional amount. Since these commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flows. For more information on our credit extension commitments please refer to Note 7 (Loans and Leases) to the Consolidated Financial Statements.
The Company enters into indemnification agreements in the ordinary course of business under which the Company agrees to indemnify third parties against any damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with the Company. These relationships or transactions include those arising from service as a director or officer of the Company, underwriting agreements relating to the Company’s securities, securities lending, acquisition agreements, and various other business transactions or arrangements. Because the extent of the Company’s obligations under these indemnification agreements depends entirely upon the occurrence of future events, the Company’s potential future liability under these agreements is not determinable.
Retained or Contingent Interest
The Company has provided liquidity facilities for our SBA loans. We retained a portion of the interest in the loans providing a cushion to the senior interests in the event that a portion of the receivables becomes uncollectible. Total outstanding risk is $1.4 million and has been recorded in the Company’s Consolidated Financial Statements.
While not a major liquidity source, the Company sells residential mortgages and other loans and has in prior years sold securitized mortgage loans. Retained interests in securitized assets including debt securities, are initially recorded at their allocated carrying amounts based on the relative fair value of assets sold and retained. Retained interests in interest only strips are subsequently carried at fair value, which is generally estimated based on the present value of expected cash flows, calculated using management’s best estimates of key assumptions, including loan and lease losses, loan repayment speeds and discount rates commensurate with risks involved. Gains and losses related to the sales of retained interests are recorded in noninterest income.
Off-balance sheet agreements are subject to the same credit and market risk limitations as those recorded on the balance sheet. Our testing to measure and monitor this risk, using net interest income simulations and market value of equity analysis, is conducted quarterly.
Variable Interest Entities
The Company holds variable interests in certain special purpose entities that are not required to be consolidated. See Note 5 (Variable Interest Entities (VIEs)) to the Consolidated Financial Statements for additional information.
34
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTRACTUAL OBLIGATIONS
The following table provides the amounts due under specified contractual obligations for the periods indicated as of December 31, 2004:
Less than one | One to three | Three to five | More than five | |||||||||||||||||
(dollars in millions) | year | years | years | years | Total | |||||||||||||||
Time deposits(1) | $ | 8,079 | $ | 1,675 | $ | 143 | $ | 10 | $ | 9,907 | ||||||||||
Borrowings(2) | 4,950 | 1,058 | 878 | 2,777 | 9,663 | |||||||||||||||
Capital lease obligations | 3 | 1 | 1 | 1 | 6 | |||||||||||||||
Operating lease obligations | 65 | 92 | 67 | 108 | 332 | |||||||||||||||
Purchase obligations | 73 | 95 | 64 | 31 | 263 | |||||||||||||||
Other liabilities | 17 | 34 | 33 | 317 | 401 | |||||||||||||||
Total | $ | 13,187 | $ | 2,955 | $ | 1,186 | $ | 3,244 | $ | 20,572 | ||||||||||
(1) | Excludes purchase accounting adjustments of $8 million. | |
(2) | Excludes purchase accounting adjustments of $17 million. |
In the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Obligations that are legally binding agreements whereby we agree to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time are defined as purchase obligations. These obligations are categorized by their contractual due dates. We may, at our option, prepay certain borrowings prior to their maturity date.
The most significant of our vendor contracts include communication services, marketing and software contracts. Other liabilities include our obligations related to funded pension plans. Obligations to these plans are based on the current and projected obligations of the plans and performance of the plans’ assets. The “Other” category also includes a commitment to pay the former shareholders of Trinity one payment of $1.5 million in 2006, finalizing our obligations under the purchase agreement.
First Hawaiian Bank processes credit card transactions and has loans outstanding to an airline, which filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code on December 30, 2004.
Under the rules of VisaÒ and MasterCardÒ, First Hawaiian has certain contingent liabilities for transactions processed and could become responsible to pay charge backs with respect to tickets and coupons purchased should the airline not honor those tickets and coupons. Since the filing of its Chapter 11 petition, the airline has continued to operate and honor all tickets and coupons issued before its filing.
As of February 28, 2005, First Hawaiian estimates that the cost of tickets and coupons purchased by the airline customers through VisaÒ and MasterCardÒ, but as yet unused, is approximately $47.4 million. As of February 28, 2005, First Hawaiian held cash or cash equivalents as collateral security for its potential charge back exposure to the airline customers in the amount of approximately $20.1 million. Based on the current circumstances of the airline and other information currently available to First Hawaiian, management does not believe it is probable that the Company will incur material loss as a result of charge backs from customers of the airline. A reserve for a portion of the exposure has been recorded in the Company’s financial statements as of December 31, 2004.
LIQUIDITY MANAGEMENT
Liquidity refers to our ability to provide sufficient short- and long-term cash flows to fund operations and to meet obligations and commitments, including depositor withdrawals and debt service, on a timely basis at reasonable costs. We achieve our liquidity objectives with both assets and liabilities. Further, while liquidity positions are managed separately by the Company and its two subsidiary Banks, both short-term and long-term activities are usually coordinated between the two subsidiary Banks.
We obtain secondary liquidity through our investment securities portfolio principally short-term securities which can be readily converted to cash. These liquid assets consist of cash and due from banks, interest-bearing deposits in other banks, Federal Funds sold,
35
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
trading assets, securities purchased under agreements to resell, securities available for sale and loans held for sale. Such assets represented 21.3% of total assets at the end of 2004 compared with 20.9% at the end of 2003.
Intermediate- and longer-term asset liquidity is primarily provided by regularly scheduled maturities and cash flows from loans and securities. Additional liquidity is available from certain assets that can be sold, securitized or used as collateral for borrowings from the Federal Home Loan Banks such as consumer and mortgage loans.
We obtain short-term, liability-based liquidity primarily from deposits. Average total deposits for 2004 increased 14.2% to $28.5 billion, primarily due to continued expansion of our customer base in the Western United States. Average total deposits funded 68.9% of average total assets for 2004 and 69.4% in 2003.
We also obtain short-term and long-term liquidity from ready access to regional and national wholesale funding sources, including purchasing Federal funds, selling securities under agreements to repurchase, lines of credit from other banks and credit facilities from the Federal Home Loan Banks. The following table reflects immediately available borrowing capacity at the Federal Reserve Discount Window and the Federal Home Loan Banks and securities available for sale under repurchase agreements:
December 31, | ||||||||
(dollars in millions) | 2004 | 2003 | ||||||
Federal Reserve Discount Window | $ | 681 | $ | 574 | ||||
Federal Home Loan Banks | 1,223 | 1,679 | ||||||
Securities Available for Repurchase Agreements | 3,048 | 2,987 | ||||||
Total | $ | 4,952 | $ | 5,240 | ||||
Further information on short-term borrowings is provided in Note 13 (Short-term Borrowings) to the Consolidated Financial Statements. Offshore deposits in the international market provide another available source of funds.
Funds raised in the intermediate and longer-term markets are structured to avoid concentration of maturities and to reduce refinancing risk. We also attempt to diversify the types of instruments issued to avoid undue reliance on any one market or funding source.
Liquidity for the Parent is primarily provided by dividend and interest income from its subsidiaries. Short-term cash requirements are met through liquidation of short-term investments. Longer-term liquidity is provided by access to the capital markets or from transactions with BancWest’s parent company, BNP Paribas.
The Parent’s ability to pay dividends to BNP Paribas depends primarily upon dividends and other payments from its subsidiaries, which are subject to certain limitations as described in Note 17 (Limitation on Payments of Dividends) to the Consolidated Financial Statements.
Our borrowing costs and ability to raise funds are a function of our credit ratings and any change in those ratings. The following table reflects the ratings of Bank of the West and First Hawaiian Bank:
Bank of the West/First Hawaiian Bank | |||||
Short-Term Deposit | Long-Term Deposit | ||||
Moody’s | P-1 | Aa3 | |||
S & P | A-1 | A+ | |||
Fitch, Inc. | F1+ | AA- | |||
36
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CREDIT MANAGEMENT
Our approach to managing exposure to credit risk involves an integrated program of setting appropriate standards for credit underwriting and diversification, monitoring trends that may affect the risk profile of the credit portfolio and making appropriate adjustments to reflect changes in economic and financial conditions that could affect the quality of the portfolio and loss probability. The components of this integrated program include:
• | Setting Underwriting and Grading Standards.Our loan grading system uses ten different principal risk categories where 1 is no risk and 10 is loss. We continue efforts to decrease our exposure to customers in the weaker credit categories. The cost of credit risk is an integral part of the pricing and evaluation of credit decisions and the setting of portfolio targets. | |||
• | Diversification.We actively manage our credit portfolio to avoid excessive concentration by obligor, risk grade, industry, product and geographic location. As part of this process, we also monitor changes in risk correlation among concentration categories. In addition, we seek to reduce our exposure to concentrations by actively participating portions of our commercial and commercial real estate loans to other banks. | |||
• | Risk Mitigation.We manage our exposure to higher risk areas through application of prudent underwriting policies. | |||
• | Emphasis on Consumer Lending.Consumer loans represent our single largest category of loans and leases. We use formula-based approaches to calculate appropriate reserve levels that reflect historical loss experience. We generally do not participate in subprime lending activities. We also seek to reduce our credit exposures where feasible by obtaining third-party insurance or similar protections. For example, in our vehicle lease portfolio (which represents approximately 39.7% of our lease financing portfolio and 7.4% of our combined lease financing and consumer loans at December 31, 2004), we obtain third-party insurance for the estimated residual value of the leased vehicle, and set aside reserves to cover the uninsured portion. |
RECENT ACCOUNTING STANDARDS
We have adopted numerous new or modifications to existing standards, rules or regulations promulgated by various standard setting and regulatory bodies. Chief among these are the Federal financial institutions regulators, the SEC and the FASB. The following section highlights important developments in the area of accounting and disclosure requirements. This discussion is not intended to be a comprehensive listing of the impact of all standards and rules adopted in 2001. Additional informationadopted.
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 153,Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29, Accounting for new accounting pronouncements canNonmonetary Transactions,(FASB 153). This statement is based upon the principle that transactions involving nonmonetary assets should be found in Note 1 tomeasured based upon their fair market value. This statement is effective for fiscal years beginning after June 15, 2005. We do not believe this statement will have a material impact on our financial statements, as we do not frequently enter into nonmonetary transactions.
In December 2004, the Consolidated Financial Statements on pages 50 and 51.
We have adoptedFASB, issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting123 (revised 2004)Accounting for Derivative InstrumentsShare-Based Payment.This statement requires stock options awarded to employees to be expensed over the vesting period of the option, at the fair value at the grant date using an option-pricing model. This statement is effective for annual and Hedging Activities,”interim periods beginning after June 15, 2005. The Company currently accounts for stock based compensation under Accounting Principles Board Opinion No. 25 (APB 25)Accounting for Stock Issued to Employeesand related Interpretations, as amended, in 2001. Essentially SFAS No. 133, as amended, required thatallowed under FASB Statement 123,Accounting for Stock-Based Compensation. This pronouncement increases the amount of compensation expense per period, by the amount outlined within Note 1 (Summary of Significant Accounting Policies) to our Consolidated Financial Statements. However, we record previously off-balance-sheet derivative financial instruments used for risk management inbelieve this amount will have an immaterial effect on our financial statements. We do not extensively use derivative instruments
On July 16, 2004, the FASB ratified the decisions reached by the Emerging Issues Task Force (EITF) with respect to Issue 02-14,Whether the Equity Method of Accounting Applies When an Investor Does Not Have an Investment in Voting Stock of an Investee but Exercises Significant Influence through Other Means.The EITF reached a consensus that an investor should apply the equity method of accounting when it has investments in either common stock or “in-substance common stock” of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. In-substance common stock, as defined in the consensus, is an investment that has risk and reward characteristics, among other factors, that are substantially the same as common stock. The equity method of accounting must be applied for risk management. Therefore, the transition adjustment,all investments in which we recorded the fair values of the derivative instrument and the items that they hedged, was not material. After the initial adoption of SFAS No. 133, we are required to mark-to-market the fair value of both the derivative and the hedged item as of each measurement date. Conceptually, the fair value of an effective hedge derivative will be adjusted for an amount that closely correlates to the change in the fair value of the hedged item. Due to the nature of our derivatives, any difference between the fair value of the derivative and the hedged item is reflected in our Consolidated Statements of Income. For 2001, the effect of the adoption of SFAS No. 133 was not material.investor
3337
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part II(continued)exercises significant influence over the investee and that qualify as in-substance common stock for reporting periods beginning after September 15, 2004. The adoption of this statement did not have a material effect on our financial statements.
We adopted SFAS No. 141, “Business Combinations”In June 2004, the EITF published EITF 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments(EITF 03-1). EITF 03-1 clarifies the impairment methodology used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. EITF 03-1 applies to all investments accounted for in July 2001. SFAS No. 141 encompasses all business combinations initiated after June 30, 2001accordance with the provisions of FAS 115, certain debt and also business combinationsequity securities within the scope of Statement 124, and equity securities that are not subject to the scope of Statement 115 and not accounted for under the purchase method of accounting after July 1, 2001. Therefore, the BNP Paribas Merger was accounted for under the guidance in SFAS No. 141. A principal feature of SFAS No. 141 was the ending of the use of the pooling-of-interestequity method of accounting. On September 30, 2004, the FASB staff published FASB Staff Position (FSP) EITF 03-1-1. FSP EITF 03-1-1 delays the effective date for the measurement and recognition guidance contained in Paragraphs 10–20 of EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,while the FASB considers application guidance. We havewill evaluate any new guidance on the above mentioned paragraphs upon final issuance.
On March 9, 2004 the SEC released a Staff Accounting Bulletin: No. 105,Application of Accounting Principles to Loan Commitments (SAB 105), which provides guidance pertaining to interest rate locks of loan commitments accounted for as derivative instruments. It states that cash flows pertaining to mortgage servicing should not be included in the past usedvalue of the pooling-of-interest methodderivative. We account for such rate locks in accordance with SAB 105.
In December 2003, the Accounting Standards Executive Committee of accountingthe American Institute of Certified Public Accountants, (AICPA) issued Statement of Position No. 03-3 (“SOP 03-3”),Accounting for certain of our mergers and acquisitions, namely the acquisition of SierraWest BancorpCertain Loans or Debt Securities Acquired in 1999. SFAS No. 141 does not require retroactive restatement of our financial statements.
Concurrently with the adoption of SFAS No. 141, we also adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 replaces existing standards ona Transfer. SOP 03-3 addresses the accounting for goodwilldifferences between the contractual cash flows and other intangible assets. In summary, SFAS No. 142 eliminates the amortizationcash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of goodwillthe cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and replaces it with annual tests for impairment. Priordebt securities acquired after December 15, 2004. The Company is not able to estimate the impact that the SOP will have on its financial statements as the effect will be specific to potential future loan purchases.
On December 8, 2003 President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to plan sponsors that provide a benefit that is at least equivalent to Medicare. On May 19, 2004, the FASB issued staff Position 106-2,Accounting and Disclosure Requirements Related to the BNP Paribas Merger, we had a substantial amountMedicare Prescription Drug, Improvement and Modernization Act of intangible assets, mainly goodwill and core deposit intangibles. These intangible assets arose from previous mergers and acquisitions and were being amortized into net income. The total goodwill amortization expense for2003.There was no impact on the period from January 1, 2001 through December 19, 2001 was $31 million. As a result of the BNP Paribas Merger, we recorded $2.062 billion in goodwill, which will not be amortizing into net income. Had SFAS No. 142 not been adopted and assuming a 20-year amortization period, we would have recorded pre-tax goodwill amortization of approximately $103 million annually. Core deposit intangibles recorded as a result of the BNP Paribas Merger of $110.2 million will continue to be amortized.Company’s consolidated financial statements.
We will perform the impairment testing of goodwill required under SFAS No. 142 by March 31, 2002, principally through the use of discounted cash flow modeling. In addition, SFAS No. 142 may require impairment analysis and disclosure of intangible balances at a level lower than the operating segments which we currently report, i.e. we may be required to test for impairment and report the intangibles of units within Bank of the West and First Hawaiian. We are in the process of determining the application of this part of SFAS No. 142.
Investment Securities by Maturities and Weighted Average Yields
At December 31, 2001, the Company had no held-to-maturity investment securities. The following table presents the maturities of our available-for-sale investment securities and the weighted average yields (for obligations exempt from Federal income taxes on a taxable-equivalent basis assuming a 35% tax rate) of such securities at December 31, 2001. The tax-equivalent adjustment is made for items exempt from Federal income taxes to make them comparable with taxable items before any income taxes are applied.
Available-for-Sale
Maturity | ||||||||||||||||||||||||||||||||||||||||||
Within | After One But | After Five But | After | |||||||||||||||||||||||||||||||||||||||
One Year | Within Five Years | Within Ten Years | Ten Years | Total | ||||||||||||||||||||||||||||||||||||||
(dollars in millions) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||||
U.S. Treasury and other U.S. | ||||||||||||||||||||||||||||||||||||||||||
Government agencies and corporations | $ | 174 | 5.45 | % | $ | 618 | 4.01 | % | $ | — | — | % | $ | 3 | 7.27 | % | $ | 795 | 4.34 | % | ||||||||||||||||||||||
Mortgage and asset-backed securities: | ||||||||||||||||||||||||||||||||||||||||||
Government | — | — | 57 | 5.99 | 122 | 5.25 | 745 | 6.10 | 924 | 5.98 | ||||||||||||||||||||||||||||||||
Other | 1 | 6.47 | 110 | 5.42 | 48 | 6.24 | 95 | 6.25 | 254 | 5.89 | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | — | — | — | — | 56 | 5.68 | 360 | 5.34 | 416 | 5.39 | ||||||||||||||||||||||||||||||||
States and political subdivisions | — | — | — | — | 1 | 3.89 | 1 | 5.95 | 2 | 5.28 | ||||||||||||||||||||||||||||||||
Subtotal | $ | 175 | 5.45 | % | $ | 785 | 4.36 | % | $ | 227 | 5.57 | % | $ | 1,204 | 5.89 | % | 2,391 | 5.32 | % | |||||||||||||||||||||||
Securities with no stated maturity | 138 | |||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,529 | ||||||||||||||||||||||||||||||||||||||||
34
Part II(continued)
Special Purpose Entities
A special purpose entity (“SPE”) is a separate legal entity created by a sponsor to carry out a specified purpose. We are involved in three special purpose entities:
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we assume various types of risk, which include among others, interest rate risk, credit risk and liquidity risk. We have risk management processes designed to provide for risk identification, measurement and monitoring.
Interest Rate Risk Measurement and Management
Interest rate risk, one of the leading risks in terms of potential earnings impact, is an essential element of being a financial intermediary. The Company’s net interest income of the Corporation is subject to interest rate risk to the extent our interest-bearing liabilities (primarily deposits and borrowings) mature or reprice on a different basis than itsour interest-earning assets (primarily loans, and leases and investment securities)securities available for sale). When interest-bearing liabilities mature or reprice more quickly than interest-earning assets during a given period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, a decrease in interest rates could have a negative impact on net interest income. In addition, the impact of interest rate swings may be exacerbated by factors such as our customers’ propensity to manage their demand deposit balances more or less aggressively or to refinance mortgageloans. Short and long-term market rates may change independent of each other consumer loans depending onresulting in changes to the interest rate environment.slope and absolute level of the yield curve.
The Asset/Liability Committees of the CorporationBancWest and its major subsidiary companiessubsidiaries are responsible for managing interest rate risk. The frequency of meetings of the Asset/Liability Committees generally ranges frommeet monthly toor quarterly. Recommendations forThe committees may recommend changes to a particular
38
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
subsidiary’s interest rate profile should they be deemed necessary and exceed established policies, are made to their respective Board of Directors. Other than loansDirectors, should changes be necessary and leases that are originated and held for sale, commitments to purchase and sell foreign currencies and mortgage-backed securities, and certain interest rate swaps, the Corporation’s interest rate derivatives and other financial instruments are not entered into for trading purposes.depart significantly from established policies.
Our exposure to interest rate risk is managed primarily by taking actions that impact certain balance sheet accounts (e.g., lengthening or shortening maturities in the investment portfolio, changing asset and/or liability mix —- including increasing or decreasing the amount of fixed and/or variable instruments held by the Corporation —Company - to adjust sensitivity to interest rate changes) and/or utilizing off-balance-sheet instruments such as interest rate swaps, caps, floors, options or forwards.
Derivatives entered into for trading purposes include commitments to purchase and sell foreign currencies and certain interest rate swaps and options. We also enter into customer accommodation interest rate swaps and foreign exchange spot and forward contracts as well as contracts to offset either the customer’s counter-position or our foreign currency denominated deposits. These contracts basically offset each other and they do not expose us to material losses resulting from interest rate or foreign currency fluctuations.
The CorporationCompany and its subsidiaries use computer simulation models itsto evaluate net interest income in order to quantify its exposure to changes in interest rates. Generally, the size of the balance sheet is held relatively constant and then subjected to interest rate shocks up in 100-basis-point increments and
35
Part II(continued)
down in 100 basis point50 basis-point increments. Each account-level item is repriced according to its respective contractual characteristics, including any imbeddedembedded options which might exist (e.g., periodic interest rate caps or floors or loans and leases which permit the borrower to prepay the principal balance of the loan or lease prior to maturity without penalty). Off-balance-sheetDerivative financial instruments such as interest rate swaps, swaptions, caps floors or forwardsfloors are included as part of the modeling process. For each interest rate shock scenario, net interest income over a 12-month horizon is compared against the results of a scenario in which no interest rate change occurs (a “flat(flat rate scenario”)scenario) to determine the level of interest rate risk at that time.
The projected impact of theincremental increases and decreases in interest rates on ourthe Company’s consolidated net interest income over the next 12 months beginning January 1, 2002 and 20012005 is shown below.
(dollars | ||||||||||||||||||||
in millions) | +3% | +2% | +1% | Flat | -1% | |||||||||||||||
2002 Net interest income | $ | 850.5 | $ | 855.5 | $ | 859.0 | $ | 857.9 | $ | 855.4 | ||||||||||
Difference from flat | $ | (7.4 | ) | $ | (2.4 | ) | $ | 1.1 | $ | — | $ | (2.5 | ) | |||||||
% variance | (0.9 | )% | 0.3 | % | 0.1 | % | — | % | (0.3 | )% | ||||||||||
2001 | +2% | +1% | Flat | -1% | -2% | |||||||||||||||
Net interest income | $ | 816.9 | $ | 829.2 | $ | 825.2 | $ | 811.0 | $ | 793.6 | ||||||||||
Difference from flat | $ | (8.3 | ) | $ | 4.0 | $ | — | $ | (14.2 | ) | $ | (31.6 | ) | |||||||
% variance | (1.0 | )% | 0.5 | % | — | % | (1.7 | )% | (3.8 | )% | ||||||||||
(dollars in millions) | +3% | +2% | +1% | Flat | -0.5% | -1.0% | ||||||||||||||||||
Net interest income | $ | 1,637.8 | $ | 1,648.8 | $ | 1,657.0 | $ | 1,646.3 | $ | 1,625.3 | $ | 1,587.6 | ||||||||||||
Difference from flat | (8.5 | ) | 2.5 | 10.7 | — | (21.0 | ) | (58.7 | ) | |||||||||||||||
% variance | (0.5 | )% | 0.2 | % | 0.6 | % | — | % | (1.3 | )% | (3.6 | )% | ||||||||||||
Because of the relatively low level of interest rates in 2002,2004, modeling below a 200 basis point100-basis-point decrease was deemed impractical.not meaningful. The changes in the models are due to differences in interest rate environments which include the absolute level of interest rates, the shape of the yield curve, and spreads between various benchmark rates.
Significant Assumptions Utilized and Inherent Limitations
The significant net interest income changes for each interest rate scenario presented above include assumptions based on accelerating or decelerating mortgage and non-mortgage consumer loan prepayments in declining or rising scenarios, respectively, and adjusting deposit levels and mix in the different interest rate scenarios. The magnitude of changes to both areas in turn are based upon analyses of customers’ behavior in differing rate environments. However, these analyses may differ from actual future customer behavior. For example, actual prepayments may differ from current assumptions as prepayments are affected by many variables which cannot be predicted with certainty (e.g., prepayments of mortgages may differ on fixed and adjustable loans depending upon current interest rates, expectations of future interest rates, availability of refinancing, economic benefit to borrower, financial viability of borrower, etc.).
As with any model for analyzing interest rate risk, certain limitations are inherent in the method of analysis presented above. For example, the actual impact on net interest income due to certain interest rate shocks may differ from those projections presented should market conditions vary from assumptions used in the analysis. Furthermore, the analysis does not consider the effects of a changed level of overall economic activity that could exist in certain interest rate environments. Moreover, the method of analysis used does not take into account the actions that management might take to respond to changes in interest rates because of inherent difficulties in determining the likelihood or impact of any such response.
Credit Risk Management39
Our approach to managing exposure to credit risk involves an integrated program of setting appropriate standards for credit underwriting and diversification, monitoring trends that may affect the risk profile of the credit portfolio and making appropriate adjustments to reflect changes in economic and financial conditions that could affect the quality of the portfolio and loss probability. The components of this integrated program include:
36
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Part II(continued)
Liquidity Risk Management
Liquidity refers to our ability to provide sufficient short- and long-term cash flows to fund operations and to meet obligations and commitments, including depositor withdrawals and debt service, on a timely basis at reasonable costs. We achieve our liquidity objectives with both assets and liabilities.
We obtain short-term, asset-based liquidity through our investment securities portfolio and short-term investments which can be readily converted to cash. These liquid assets consist of cash and due from banks, interest-bearing deposits in other banks, Federal funds sold, securities purchased under agreements to resell and investment securities. Such assets represented 16.7% of total assets at the end of 2001 compared to 17.6% at the end of 2000.
Intermediate- and longer-term asset liquidity is primarily provided by regularly scheduled maturities and cash flows from our loans and investment securities. Additional liquidity is available from certain assets that can be sold or securitized, such as consumer and mortgage loans.
We obtain short-term, liability-based liquidity primarily from deposits. Average total deposits for 2001 increased 8.7% to $14.5 billion, primarily due to continued expansion of our customer base in the Western United States and our branch acquisitions. Average total deposits funded 75% of average total assets for 2001 and 76% in 2000.
We also obtain short-term liquidity from ready access to regional and national wholesale funding sources, including purchasing Federal funds, selling securities under agreements to repurchase, lines of credit from other banks and credit facilities from the Federal Home Loan Banks. Additional information on short-term borrowings is provided in Note 10 to the Consolidated Financial Statements on pages 57 and 58. Also, offshore deposits in the international market provide another available source of funds.
Funds taken in the intermediate- and longer-term markets are structured to avoid concentration of maturities and to reduce refinancing risk. We also attempt to diversify the types of instruments issued to avoid undue reliance on any one market.
Liquidity for the parent company is primarily provided by dividend and interest income from its subsidiaries. Short-term cash requirements are met through liquidation of short-term investments. Longer-term liquidity is provided by access to the capital markets.
Our ability to pay dividends depends primarily upon dividends and other payments from our subsidiaries, which are subject to certain limitations as described in Note 14 to the Consolidated Financial Statements on page 60.
Our subordinated debt is assigned a rating of A3 by Moody’s and A by S&P.
Contractual Obligations
The following is a table regarding our specific contractual obligations. Additionalestimated net fair value amounts of interest rate derivatives held for trading purposes have been determined by the Company using available market information regarding long-term debt can be found in Note 11 of our Consolidated Financial Statements on pages 58 and 59. Information regarding operating leases can be found in Note 21 on page 66. Information regarding our facilities management agreement can be found in Note 22 of our Consolidated Financial Statements on page 67.
(in thousands) | Within 1 Year | 2 to 3 Years | 4 to 5 Years | After 5 Years | Total | |||||||||||||||
Long-term debt | $ | 319,358 | $ | 171,037 | $ | 52,090 | $ | 1,920,599 | $ | 2,463,084 | ||||||||||
Operating leases | 44,827 | 61,903 | 28,970 | 64,668 | 200,368 | |||||||||||||||
Facilities management agreement | 16,934 | 16,934 | 16,934 | 11,289 | 62,091 | |||||||||||||||
Total contractual cash obligations | $ | 381,119 | $ | 249,874 | $ | 97,994 | $ | 1,996,556 | $ | 2,725,543 | ||||||||||
December 31, 2004 | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Net | Gross | Expected Maturity | |||||||||||||||||||||||||||||||||
Fair | Positive | Notional | After | |||||||||||||||||||||||||||||||||
Interest Rate Contracts | Value | Value | Amount | 2005 | 2006 | 2007 | 2008 | 2009 | 2009 | |||||||||||||||||||||||||||
Pay-Fixed Swaps: | ||||||||||||||||||||||||||||||||||||
Contractual Maturities | $ | (5,145 | ) | $ | 4,425 | $ | 726,383 | $ | 112,381 | $ | 26,280 | $ | 41,684 | $ | 98,298 | $ | 102,343 | $ | 345,397 | |||||||||||||||||
Weighted Avg. Pay Rates | 4.52 | % | 3.99 | % | 4.54 | % | 5.37 | % | 4.02 | % | 4.67 | % | 4.67 | % | ||||||||||||||||||||||
Weighted Avg. Receive Rates | 2.51 | % | 2.41 | % | 2.86 | % | 2.81 | % | 2.14 | % | 2.32 | % | 2.32 | % | ||||||||||||||||||||||
Receive-Fixed Swaps | ||||||||||||||||||||||||||||||||||||
Contractual Maturities | 12,442 | 14,211 | $ | 726,383 | $ | 112,381 | $ | 26,280 | $ | 41,684 | $ | 98,298 | $ | 102,343 | $ | 345,397 | ||||||||||||||||||||
Weighted Avg. Pay Rates | 2.51 | % | 2.39 | % | 2.86 | % | 2.81 | % | 2.14 | % | 2.32 | % | 2.32 | % | ||||||||||||||||||||||
Weighted Avg. Receive Rates | 4.80 | % | 4.26 | % | 4.70 | % | 5.67 | % | 4.36 | % | 5.02 | % | 5.02 | % | ||||||||||||||||||||||
Pay-Fixed Swaps: | ||||||||||||||||||||||||||||||||||||
(Forward Value Dated): | ||||||||||||||||||||||||||||||||||||
Contractual Maturities | (293 | ) | 53 | $ | 24,970 | — | — | — | — | — | $ | 24,970 | ||||||||||||||||||||||||
Weighted Avg. Pay Rates | 4.40 | % | — | — | — | — | — | 4.40 | % | |||||||||||||||||||||||||||
Weighted Avg. Receive Rates | 2.26 | % | — | — | — | — | — | 2.26 | % | |||||||||||||||||||||||||||
Receive-Fixed Swaps | ||||||||||||||||||||||||||||||||||||
(Forward Value Dated): | ||||||||||||||||||||||||||||||||||||
Contractual Maturities | 852 | 869 | $ | 24,970 | — | — | — | — | — | $ | 24,970 | |||||||||||||||||||||||||
Weighted Avg. Pay Rates | 2.26 | % | — | — | — | — | — | 2.26 | % | |||||||||||||||||||||||||||
Weighted Avg. Receive Rates | 4.97 | % | — | — | — | — | — | 4.97 | % | |||||||||||||||||||||||||||
Caps/Collars | ||||||||||||||||||||||||||||||||||||
Contractual Maturities | — | 203 | $ | 261,896 | $ | 3,848 | $ | 239,428 | — | — | $ | 15,000 | $ | 3,620 | ||||||||||||||||||||||
Weighted Avg. Strike Rates | 4.41 | % | 5.85 | % | 4.33 | % | — | — | 4.85 | % | 4.50 | % | ||||||||||||||||||||||||
Weighted Floor Rates | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Total interest rate contracts held for trading purposes | $ | 7,856 | $ | 19,761 | $ | 1,764,602 | ||||||||||||||||||||||||||||||
In addition to these contractual cash obligations, we have off-balance-sheet commitments and contingent liabilities that may or may not be required to be funded, but are current commitments and contingent liabilities. Additional detail for these amounts can be found in Note 22 to our Consolidated Financial Statements on page 67.40
37
BancWest Corporation and Subsidiaries
Part II(continued)REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Cash Flows
The following is a summaryTo the Board of our cash flows for 2001, 2000 and 1999. (There is more detail in the Consolidated Statements of Cash Flows on page 44.)
(in thousands) | 2001 | 2000 | 1999 | |||||||||
Net cash provided by operating and financing activities | $ | 782,286 | $ | 1,839,752 | $ | 847,981 | ||||||
Net cash used in investing activities | $ | 918,623 | $ | 1,776,114 | $ | 702,792 | ||||||
For the year ended December 31, 2001, due primarily to increased loan volume and purchases of investment securities, net cash decreased by $136.3 million compared to the year ended 2000. The net cash provided by operating and financing activities in 2001 was used principally to fund earning assets. In 2000, the increase in net cash of $63.6 million was primarily due to increased deposit volumeDirectors and the issuanceStockholder of $150 million in capital securities by BWE Trust. In 1999, the inclusion of the operations of Bank of the West for the entire year was the primary reason for net cash to increase by $145.2 million.
Interest Rate Sensitivity
The table below presents our interest rate sensitivity position at December 31, 2001. The interest rate sensitivity gap, shown at the bottom of the table, refers to the difference between assets and liabilities subject to repricing, maturity, runoff and/or volatility during a specified period. The gap is adjusted for interest rate swaps, which are hedging certain assets or liabilities on the balance sheet. (For ease of analysis, all of these swap adjustments are consolidated into the “off-balance-sheet adjustment” line on the gap table.)
Since all interest rates and yields do not adjust at the same velocity or magnitude, and since volatility is subject to change, the gap is only a general indicator of interest rate sensitivity. At December 31, 2001, we had a cumulative one-year gap that was a negative $1.2 billion, representing 5.47% of total assets.
Within | After Three | After One | |||||||||||||||||||||
Three | But Within | But Within | After | ||||||||||||||||||||
(dollars in thousands) | Months | 12 Months | Five Years | Five Years | Total | ||||||||||||||||||
Assets: | |||||||||||||||||||||||
Interest-bearing deposits in other banks | $ | 109,835 | $ | 100 | $ | — | $ | — | $ | 109,935 | |||||||||||||
Federal funds sold and securities purchased under agreements to resell | 233,000 | — | — | — | 233,000 | ||||||||||||||||||
Investment securities: | |||||||||||||||||||||||
Held-to-maturity | — | — | — | — | — | ||||||||||||||||||
Available-for-sale | 332,217 | 478,618 | 1,417,525 | 313,813 | 2,542,173 | ||||||||||||||||||
Net loans and leases: | |||||||||||||||||||||||
Commercial, financial and agricultural | 1,885,862 | 185,353 | 302,594 | 13,796 | 2,387,605 | ||||||||||||||||||
Real estate—construction | 462,633 | 1,087 | 514 | 228 | 464,462 | ||||||||||||||||||
Foreign | 129,064 | 84,816 | 161,378 | 10,290 | 385,548 | ||||||||||||||||||
Other | 2,326,580 | 2,528,145 | 5,405,649 | 1,531,089 | 11,791,463 | ||||||||||||||||||
Total earning assets | 5,479,191 | 3,278,119 | 7,287,660 | 1,869,216 | 17,914,186 | ||||||||||||||||||
Nonearning assets | 366,121 | 316,329 | 743,423 | 2,306,455 | 3,732,328 | ||||||||||||||||||
Total assets | $ | 5,845,312 | $ | 3,594,448 | $ | 8,031,083 | $ | 4,175,671 | $ | 21,646,514 | |||||||||||||
Liabilities and Stockholder’s Equity: | |||||||||||||||||||||||
Interest-bearing deposits | $ | 4,730,555 | $ | 2,958,274 | $ | 3,125,598 | $ | 1,004,512 | $ | 11,818,939 | |||||||||||||
Noninterest-bearing deposits | 871,604 | 309,622 | 1,651,316 | 682,570 | 3,515,112 | ||||||||||||||||||
Short-term borrowings | 624,874 | 326,561 | 2,885 | — | 954,320 | ||||||||||||||||||
Long-term debt and capital securities | 309,746 | 2,837 | 224,394 | 1,926,107 | 2,463,084 | ||||||||||||||||||
Stockholder’s equity | 15,630 | — | — | 1,986,290 | 2,001,920 | ||||||||||||||||||
Off-balance-sheet adjustment | (53,396 | ) | (59,699 | ) | 73,559 | 39,536 | — | ||||||||||||||||
Noncosting liabilities | 273,347 | 313,659 | 1,389 | 304,744 | 893,139 | ||||||||||||||||||
Total liabilities and stockholder’s equity | $ | 6,772,360 | $ | 3,851,254 | $ | 5,079,141 | $ | 5,943,759 | $ | 21,646,514 | |||||||||||||
Interest rate sensitivity gap | $ | (927,048 | ) | $ | (256,806 | ) | $ | 2,951,942 | $ | (1,768,088 | ) | ||||||||||||
Cumulative gap | $ | (927,048 | ) | $ | (1,183,854 | ) | $ | 1,768,088 | $ | — | |||||||||||||
Cumulative gap as a percent of total assets | (4.28 | )% | (5.47 | )% | 8.17 | % | — | % | |||||||||||||||
38
Part II(continued)
Fourth Quarter Results
(dollars in thousands) | 2001 | 2000 | Change | |||||||||
Consolidated net income | $ | 63,467 | $ | 56,169 | 13.0 | % | ||||||
Non-GAAP Information * | ||||||||||||
Operating earnings** | 63,467 | 56,924 | 11.5 | |||||||||
Return on average tangible total assets (annualized)** | 1.50 | % | 1.48 | % | 1.4 | |||||||
Return on average tangible stockholder’s equity (annualized)** | 24.22 | 19.89 | 21.8 | |||||||||
Our consolidated net income in the fourth quarter of 2001 increased over the fourth quarter of 2000. Revenue growth was the major factor in the increase of net income and operating earnings for the period. Contribution from our newly acquired branches in Nevada, New Mexico, Guam and Saipan was a significant component for the increase in our revenues. Net interest income increased in the period over the same period last year on a higher volume of loans and leases. Noninterest income also increased in this period over the same period last year due primarily to increased service charges and fees and gains on the sale of securities. Partially offsetting the increase in net interest income and noninterest income was an increase in the provision for credit losses and in noninterest expense, mainly in higher salaries and benefits and occupancy expenses related to our larger branch structure.
Summary of Quarterly Financial Data (Unaudited)
A summary of unaudited quarterly financial data for 2001 and 2000 is presented below:
Quarter | ||||||||||||||||||||
Annual | ||||||||||||||||||||
(in thousands) | First | Second | Third | Fourth | Total | |||||||||||||||
2001 | ||||||||||||||||||||
Interest income | $ | 338,851 | $ | 333,560 | $ | 331,330 | $ | 319,908 | $ | 1,323,649 | ||||||||||
Interest expense | 149,478 | 134,872 | 119,929 | 102,856 | 507,135 | |||||||||||||||
Net interest income | 189,373 | 198,688 | 211,401 | 217,052 | 816,514 | |||||||||||||||
Provision for credit losses | 35,200 | 23,150 | 15,950 | 28,750 | 103,050 | |||||||||||||||
Noninterest income | 98,499 | 79,796 | 61,161 | 68,942 | 308,398 | |||||||||||||||
Noninterest expense | 150,088 | 147,716 | 148,684 | 149,258 | 595,746 | |||||||||||||||
Income before income taxes | 102,584 | 107,618 | 107,928 | 107,986 | 426,116 | |||||||||||||||
Provision for income taxes | 40,837 | 41,677 | 44,279 | 44,519 | 171,312 | |||||||||||||||
Net income | $ | 61,747 | $ | 65,941 | $ | 63,649 | $ | 63,467 | $ | 254,804 | ||||||||||
2000 | ||||||||||||||||||||
Interest income | $ | 301,387 | $ | 324,259 | $ | 338,066 | $ | 346,144 | $ | 1,309,856 | ||||||||||
Interest expense | 122,115 | 137,530 | 148,226 | 155,051 | 562,922 | |||||||||||||||
Net interest income | 179,272 | 186,729 | 189,840 | 191,093 | 746,934 | |||||||||||||||
Provision for credit losses | 12,930 | 16,250 | 14,800 | 16,448 | 60,428 | |||||||||||||||
Noninterest income | 50,037 | 58,208 | 53,567 | 54,264 | 216,076 | |||||||||||||||
Noninterest expense | 131,577 | 135,443 | 131,479 | 135,462 | 533,961 | |||||||||||||||
Income before income taxes | 84,802 | 93,244 | 97,128 | 93,447 | 368,621 | |||||||||||||||
Provision for income taxes | 35,371 | 39,262 | 40,316 | 37,278 | 152,227 | |||||||||||||||
Net income | $ | 49,431 | $ | 53,982 | $ | 56,812 | $ | 56,169 | $ | 216,394 | ||||||||||
39
Part II(continued)
Item 8. Financial Statements and Supplementary Data
To the Stockholders
BancWest Corporation
In our opinion, the accompanying consolidated balance sheetsheets and the related consolidated statements of income, changes in stockholders’stockholder’s equity and comprehensive income and cash flows present fairly, in all material respects, the consolidated financial position of BancWest Corporation and its subsidiaries (a wholly owned subsidiary of BNP Paribas) at December 31, 2000,2004, and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period from January 1, 2001 to December 19, 2001 and for the years ended December 31, 2000 and 19992004; in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; ourmanagement. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted inof the United States of America, whichPublic Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, on November 1, 1998 BNP Paribas acquired approximately 45% of the Company’s outstanding common stock. On December 20, 2001 BNP Paribas acquired the remaining shares of the Company’s outstanding common stock that it did not already own. The consolidated financial statements for the period subsequent to December 19, 2001 have been prepared on the basis of accounting arising from these acquisitions. The consolidated financial statements for the period from January 1, 2001 to December 19, 2001 and for the years ended December 31, 2000 and 1999 are presented on the Company’s previous basis of accounting./s/ PricewaterhouseCoopers LLP
San Francisco, California
March 22, 2005
41
Honolulu, HawaiiJanuary 16, 2002
To the StockholderBancWest Corporation
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, changes in stockholder’s equity and cash flows present fairly, in all material respects, the consolidated financial position of BancWest Corporation and its subsidiaries (a wholly-owned subsidiary of BNP Paribas) at December 31, 2001, and the consolidated results of their operations and their cash flows for the period from December 20, 2001 to December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, on November 1, 1998 BNP Paribas acquired approximately 45% of the Company’s outstanding common stock. On December 20, 2001 BNP Paribas acquired the remaining shares of the Company’s outstanding common stock that it did not already own. The consolidated financial statements for the period subsequent to December 19, 2001 have been prepared on the basis of accounting arising from these acquisitions. The consolidated financial statements for the period from January 1, 2001 to December 19, 2001 and for the years ended December 31, 2000 and 1999 are presented on the Company’s previous basis of accounting.
Honolulu, HawaiiJanuary 16, 2002
40
BancWest Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, | ||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | |||||||||
Interest Income | ||||||||||||
Loans | $ | 1,444,629 | $ | 1,358,146 | $ | 1,347,373 | ||||||
Lease financing | 114,693 | 134,098 | 145,020 | |||||||||
Securities available for sale | 219,519 | 174,832 | 146,848 | |||||||||
Other | 16,322 | 11,714 | 16,944 | |||||||||
Total interest income | 1,795,163 | 1,678,790 | 1,656,185 | |||||||||
Interest expense | ||||||||||||
Deposits | 203,407 | 180,232 | 281,466 | |||||||||
Short-term borrowings | 29,285 | 21,424 | 34,152 | |||||||||
Long-term debt | 210,133 | 183,551 | 149,712 | |||||||||
Total interest expense | 442,825 | 385,207 | 465,330 | |||||||||
Net interest income | 1,352,338 | 1,293,583 | 1,190,855 | |||||||||
Provision for loan and lease losses | 49,219 | 81,295 | 95,356 | |||||||||
Net interest income after provision for loan and lease losses | 1,303,119 | 1,212,288 | 1,095,499 | |||||||||
Noninterest income | ||||||||||||
Service charges on deposit accounts | 163,679 | 155,243 | 139,030 | |||||||||
Trust and investment services income | 40,580 | 38,045 | 37,198 | |||||||||
Other service charges and fees | 153,911 | 142,030 | 127,297 | |||||||||
Net gains on securities available for sale | 873 | 4,289 | 1,953 | |||||||||
Vehicle and equipment operating lease income | 17,092 | — | — | |||||||||
Other | 55,365 | 52,572 | 30,423 | |||||||||
Total noninterest income | 431,500 | 392,179 | 335,901 | |||||||||
Noninterest expense | ||||||||||||
Salaries and wages | 359,480 | 342,985 | 327,648 | |||||||||
Employee benefits | 141,104 | 139,198 | 111,810 | |||||||||
Occupancy | 91,770 | 87,514 | 85,821 | |||||||||
Outside services | 85,222 | 85,315 | 78,803 | |||||||||
Intangible amortization | 26,535 | 23,054 | 20,047 | |||||||||
Equipment | 49,814 | 47,197 | 48,259 | |||||||||
Depreciation-vehicle and equipment operating leases | 15,275 | — | — | |||||||||
Restructuring and integration costs | 16,144 | — | 17,595 | |||||||||
Stationery and supplies | 25,054 | 25,416 | 29,016 | |||||||||
Advertising and promotions | 26,717 | 23,535 | 27,420 | |||||||||
Other | 125,434 | 118,621 | 89,655 | |||||||||
Total noninterest expense | 962,549 | 892,835 | 836,074 | |||||||||
Income before income taxes and cumulative effect of accounting change | 772,070 | 711,632 | 595,326 | |||||||||
Provision for income taxes | 298,693 | 272,698 | 233,994 | |||||||||
Income before cumulative effect of accounting change | 473,377 | 438,934 | 361,332 | |||||||||
Cumulative effect of accounting change, net of tax | — | 2,370 | — | |||||||||
Net income | $ | 473,377 | $ | 436,564 | $ | 361,332 | ||||||
Consolidated Balance Sheets
Company | Predecessor | |||||||||
December 31, | ||||||||||
(in thousands) | 2001 | 2000 | ||||||||
Assets | ||||||||||
Cash and due from banks | $ | 737,262 | $ | 873,599 | ||||||
Interest-bearing deposits in other banks | 109,935 | 5,972 | ||||||||
Federal funds sold and securities purchased under agreements to resell | 233,000 | 307,100 | ||||||||
Investment securities (note 5): | ||||||||||
Held-to-maturity (fair value of $91,625 in 2000) | — | 92,940 | ||||||||
Available-for-sale | 2,542,173 | 1,960,780 | ||||||||
Loans and leases: | ||||||||||
Loans and leases (note 6) | 15,223,732 | 13,971,831 | ||||||||
Less allowance for credit losses (note 7) | 194,654 | 172,443 | ||||||||
Net loans and leases | 15,029,078 | 13,799,388 | ||||||||
Premises and equipment, net (note 8) | 273,035 | 276,012 | ||||||||
Customers’ acceptance liability | 1,498 | 1,080 | ||||||||
Core deposit intangible (net of accumulated amortization of $458 in 2001 and $33,882 in 2000) | 110,239 | 56,640 | ||||||||
Goodwill (net of accumulated amortization of $88,766 in 2000) | 2,061,805 | 599,139 | ||||||||
Other real estate owned and repossessed personal property | 22,321 | 27,479 | ||||||||
Other assets | 526,168 | 456,937 | ||||||||
Total assets | $ | 21,646,514 | $ | 18,457,066 | ||||||
Liabilities and Stockholder’s Equity | ||||||||||
Deposits: | ||||||||||
Domestic: | ||||||||||
Interest-bearing | $ | 11,453,882 | $ | 10,899,009 | ||||||
Noninterest-bearing | 3,407,209 | 2,955,880 | ||||||||
Foreign | 472,960 | 273,250 | ||||||||
Total deposits | 15,334,051 | 14,128,139 | ||||||||
Short-term borrowings (note 10) | 954,320 | 669,068 | ||||||||
Acceptances outstanding | 1,498 | 1,080 | ||||||||
Long-term debt (note 11) | 2,197,954 | 632,423 | ||||||||
Guaranteed preferred beneficial interests in Company’s junior subordinated debentures (note 11) | 265,130 | 250,000 | ||||||||
Other liabilities | 891,641 | 786,863 | ||||||||
Total liabilities | 19,644,594 | 16,467,573 | ||||||||
Commitments and contingent liabilities (notes 15, 21 and 22) | ||||||||||
Stockholder’s equity: | ||||||||||
Class A common stock, par value $.01 per share in 2001 and $1 per share in 2000 (note 2) Authorized— 150,000,000 shares in 2001 and 75,000,000 shares in 2000 Issued— 56,074,874 shares in 2001 and 2000 | 561 | 56,075 | ||||||||
Common stock, par value $1 per share (notes 2 and 16) Authorized— 200,000,000 shares in 2000 Issued— 71,041,450 shares in 2000 | — | 71,041 | ||||||||
Surplus | 1,985,275 | 1,125,652 | ||||||||
Retained earnings (note 14) | 8,302 | 770,350 | ||||||||
Accumulated other comprehensive income, net (note 12) | 7,782 | 7,601 | ||||||||
Treasury stock, at cost—2,565,581 shares in 2000 | — | (41,226 | ) | |||||||
Total stockholder’s equity | 2,001,920 | 1,989,493 | ||||||||
Total liabilities and stockholder’s equity | $ | 21,646,514 | $ | 18,457,066 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.statements
4142
BancWest Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
(dollars in thousands, except share data) | 2004 | 2003 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 1,676,056 | $ | 1,538,004 | ||||
Interest-bearing deposits in other banks | 16,531 | 189,687 | ||||||
Federal funds sold and securities purchased under agreements to resell | 937,875 | 444,100 | ||||||
Trading assets | 4,685 | 19,109 | ||||||
Securities available for sale | 7,954,563 | 5,772,679 | ||||||
Loans held for sale | 71,402 | 51,007 | ||||||
Loans and leases: | ||||||||
Loans and leases | 32,688,843 | 25,722,079 | ||||||
Less allowance for loan and lease losses | 436,391 | 391,699 | ||||||
Net loans and leases | 32,252,452 | 25,330,380 | ||||||
Vehicle and equipment operating leases, net | 132,539 | — | ||||||
Premises and equipment, net | 684,783 | 530,153 | ||||||
Customers’ acceptance liability | 12,841 | 30,078 | ||||||
Other intangibles, net | 272,490 | 187,357 | ||||||
Goodwill | 4,312,800 | 3,226,871 | ||||||
Other real estate owned and repossessed personal property | 21,653 | 17,387 | ||||||
Other assets | 1,703,356 | 1,015,403 | ||||||
Total assets | $ | 50,054,026 | $ | 38,352,215 | ||||
Liabilities and Stockholder’s Equity | ||||||||
Deposits: | ||||||||
Interest-bearing | $ | 23,553,861 | $ | 18,347,730 | ||||
Noninterest-bearing | 10,059,918 | 8,055,387 | ||||||
Total deposits | 33,613,779 | 26,403,117 | ||||||
Federal funds purchased and securities sold under agreements to repurchase | 2,050,344 | 1,174,877 | ||||||
Short-term borrowings | 1,330,845 | 1,197,809 | ||||||
Acceptances outstanding | 12,841 | 30,078 | ||||||
Long-term debt | 6,305,040 | 4,221,025 | ||||||
Other liabilities | 1,011,142 | 1,062,437 | ||||||
Total liabilities | $ | 44,323,991 | $ | 34,089,343 | ||||
Stockholder’s equity: | ||||||||
Class A common stock, par value $.01 per share Authorized – 150,000,000 shares Issued and outstanding – 106,859,123 shares at December 31, 2004 and 85,759,123 shares at December 31, 2003 | $ | 1,069 | $ | 858 | ||||
Additional paid-in capital | 4,475,006 | 3,419,927 | ||||||
Retained earnings | 1,279,575 | 806,198 | ||||||
Accumulated other comprehensive income | (25,615 | ) | 35,889 | |||||
Total stockholder’s equity | 5,730,035 | 4,262,872 | ||||||
Total liabilities and stockholder’s equity | $ | 50,054,026 | $ | 38,352,215 | ||||
Consolidated Statements of Income
Company | Predecessor | ||||||||||||||||
December 20, 2001 | January 1, 2001 | ||||||||||||||||
through | through | Year Ended December 31, | |||||||||||||||
(in thousands) | December 31, 2001 | December 19, 2001 | 2000 | 1999 | |||||||||||||
Interest income | |||||||||||||||||
Interest and fees on loans | $ | 31,385 | $ | 989,200 | $ | 1,019,301 | $ | 895,079 | |||||||||
Lease financing income | 4,875 | 142,990 | 129,032 | 113,035 | |||||||||||||
Interest on investment securities: | |||||||||||||||||
Taxable interest income | 4,390 | 131,795 | 136,295 | 101,706 | |||||||||||||
Exempt from Federal income taxes | 7 | 445 | 751 | 1,102 | |||||||||||||
Other interest income | 221 | 18,341 | 24,477 | 24,789 | |||||||||||||
Total interest income | 40,878 | 1,282,771 | 1,309,856 | 1,135,711 | |||||||||||||
Interest expense | |||||||||||||||||
Deposits (note 9) | 8,466 | 384,797 | 458,204 | 368,621 | |||||||||||||
Short-term borrowings | 1,160 | 33,796 | 49,298 | 30,326 | |||||||||||||
Long-term debt | 5,341 | 73,575 | 55,420 | 47,930 | |||||||||||||
Total interest expense | 14,967 | 492,168 | 562,922 | 446,877 | |||||||||||||
Net interest income | 25,911 | 790,603 | 746,934 | 688,834 | |||||||||||||
Provision for credit losses (note 7) | 2,419 | 100,631 | 60,428 | 55,262 | |||||||||||||
Net interest income after provision for credit losses | 23,492 | 689,972 | 686,506 | 633,572 | |||||||||||||
Noninterest income | |||||||||||||||||
Service charges on deposit accounts | 2,912 | 86,263 | 74,718 | 67,674 | |||||||||||||
Trust and investment services income | 830 | 31,500 | 36,161 | 32,644 | |||||||||||||
Other service charges and fees | 2,248 | 76,539 | 73,277 | 65,484 | |||||||||||||
Securities gains, net (note 5) | (31 | ) | 71,828 | 211 | 16 | ||||||||||||
Other | 878 | 35,431 | 31,709 | 31,814 | |||||||||||||
Total noninterest income | 6,837 | 301,561 | 216,076 | 197,632 | |||||||||||||
Noninterest expense | |||||||||||||||||
Salaries and wages | 6,991 | 200,063 | 184,901 | 181,914 | |||||||||||||
Employee benefits (note 15) | 2,199 | 70,243 | 55,362 | 52,103 | |||||||||||||
Occupancy expense (notes 8 and 21) | 1,652 | 64,581 | 62,715 | 60,056 | |||||||||||||
Outside services | 1,523 | 46,135 | 45,924 | 44,697 | |||||||||||||
Intangible amortization | 458 | 43,160 | 36,597 | 35,760 | |||||||||||||
Equipment expense (notes 8 and 21) | 887 | 29,777 | 29,241 | 30,422 | |||||||||||||
Restructuring, integration and other nonrecurring costs (note 3) | — | 3,935 | 1,269 | 17,534 | |||||||||||||
Other (note 17) | 3,610 | 120,532 | 117,952 | 112,589 | |||||||||||||
Total noninterest expense | 17,320 | 578,426 | 533,961 | 535,075 | |||||||||||||
Income before income taxes | 13,009 | 413,107 | 368,621 | 296,129 | |||||||||||||
Provision for income taxes (note 18) | 4,707 | 166,605 | 152,227 | 123,751 | |||||||||||||
Net income | $ | 8,302 | $ | 246,502 | $ | 216,394 | $ | 172,378 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.statements
4243
BancWest Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME
Accumulated | ||||||||||||||||||||||||
Class A | Additional | Other | ||||||||||||||||||||||
Common Stock | Paid-in- | Retained | Comprehensive | |||||||||||||||||||||
(dollars in thousands, except share data) | Shares | Amount | Capital | Earnings | Income | Total | ||||||||||||||||||
BALANCE, DECEMBER 31, 2001 | 56,074,874 | $ | 561 | $ | 1,985,275 | $ | 8,302 | $ | 7,782 | $ | 2,001,920 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 361,332 | — | 361,332 | |||||||||||||||||||
Unrealized net gains on securities available for sale arising during the year | — | — | — | — | 41,723 | 41,723 | ||||||||||||||||||
Reclassification of net realized gain on securities available for sale included in net income | — | — | — | — | (1,166 | ) | (1,166 | ) | ||||||||||||||||
Unrealized net gains on cash flow derivative hedges arising during the year | — | — | — | — | 40,230 | 40,230 | ||||||||||||||||||
Reclassification of net realized gains on cash flow derivative hedges included in net income | — | — | — | (11,506 | ) | (11,506 | ) | |||||||||||||||||
Comprehensive income | — | — | — | 361,332 | 69,281 | 430,613 | ||||||||||||||||||
Class A common stock issued | 29,684,249 | 297 | 1,599,703 | — | — | 1,600,000 | ||||||||||||||||||
Adjustment to pushdown of parent company’s basis | — | — | (167,476 | ) | — | — | (167,476 | ) | ||||||||||||||||
Discounted share purchase plan | — | — | 2,425 | — | — | 2,425 | ||||||||||||||||||
BALANCE, DECEMBER 31, 2002 | 85,759,123 | $ | 858 | $ | 3,419,927 | $ | 369,634 | $ | 77,063 | $ | 3,867,482 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | — | 436,564 | — | 436,564 | ||||||||||||||||||
Unrealized net losses on securities available for sale arising during the period | — | — | — | — | (37,854 | ) | (37,854 | ) | ||||||||||||||||
Reclassification of net realized gains on securities available for sale included in net income | — | — | — | — | (2,552 | ) | (2,552 | ) | ||||||||||||||||
Unrealized net gains on cash flow derivative hedges arising during the year | — | — | — | — | 12,777 | 12,777 | ||||||||||||||||||
Reclassification of net realized gains on cash flow derivative hedges included in net income | — | — | — | — | (13,545 | ) | (13,545 | ) | ||||||||||||||||
Comprehensive income | — | — | — | 436,564 | (41,174 | ) | 395,390 | |||||||||||||||||
BALANCE, DECEMBER 31, 2003 | 85,759,123 | $ | 858 | $ | 3,419,927 | $ | 806,198 | $ | 35,889 | $ | 4,262,872 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | — | 473,377 | — | 473,377 | ||||||||||||||||||
Minimum pension liability adjustment | — | — | — | — | (5,139 | ) | (5,139 | ) | ||||||||||||||||
Unrealized net losses on securities available for sale arising during the year | — | — | — | — | (39,504 | ) | (39,504 | ) | ||||||||||||||||
Reclassification of net realized gains on securities available for sale included in net income | — | — | — | — | (515 | ) | (515 | ) | ||||||||||||||||
Unrealized net losses on cash flow derivative hedges arising during the year | — | — | — | — | (4,845 | ) | (4,845 | ) | ||||||||||||||||
Reclassification of net realized gains on cash flow derivative hedges included in net income | — | — | — | (11,501 | ) | (11,501 | ) | |||||||||||||||||
Comprehensive income | — | — | — | 473,377 | (61,504 | ) | 411,873 | |||||||||||||||||
Other | — | — | 290 | — | — | 290 | ||||||||||||||||||
Class A common stock issued | 21,100,000 | 211 | 1,054,789 | — | — | 1,055,000 | ||||||||||||||||||
BALANCE, DECEMBER 31, 2004 | 106,859,123 | $ | 1,069 | $ | 4,475,006 | $ | 1,279,575 | $ | (25,615 | ) | $ | 5,730,035 | ||||||||||||
Consolidated Statements of ChangesIn Stockholder’s Equity
(note 12) | |||||||||||||||||||||||||||||||||||||
Class A | Accumulated | ||||||||||||||||||||||||||||||||||||
(in thousands, except | Common Stock | Common Stock | Other Com- | ||||||||||||||||||||||||||||||||||
number of shares and | Retained | prehensive | Treasury | ||||||||||||||||||||||||||||||||||
per share data) | Shares | Amount | Shares | Amount | Surplus | Earnings | Income, net | Stock | Total | ||||||||||||||||||||||||||||
Predecessor: | |||||||||||||||||||||||||||||||||||||
Balance, December 31, 1998 | 25,814,768 | $ | 25,815 | 37,537,814 | $ | 37,538 | $ | 1,183,274 | $ | 543,755 | $ | 6,228 | $ | (50,454 | ) | $ | 1,746,156 | ||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 172,378 | — | — | 172,378 | ||||||||||||||||||||||||||||
Unrealized valuation adjustment, net of tax and reclassification adjustment | — | — | — | — | — | — | (16,101 | ) | — | (16,101 | ) | ||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | 172,378 | (16,101 | ) | — | 156,277 | |||||||||||||||||||||||||||
Issuance of common stock for two-for-one stock split | 25,814,768 | 25,815 | 37,708,200 | 37,708 | (63,523 | ) | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock | — | — | 172,836 | 173 | 4,887 | — | — | 10,808 | 15,868 | ||||||||||||||||||||||||||||
Issuance of treasury stock | — | — | — | — | (126 | ) | — | — | 2,001 | 1,875 | |||||||||||||||||||||||||||
Cash dividends ($.62 per share) (note 14) | — | — | — | — | — | (77,446 | ) | — | — | (77,446 | ) | ||||||||||||||||||||||||||
Balance, December 31, 1999 | 51,629,536 | 51,630 | 75,418,850 | 75,419 | 1,124,512 | 638,687 | (9,873 | ) | (37,645 | ) | 1,842,730 | ||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 216,394 | — | — | 216,394 | ||||||||||||||||||||||||||||
Unrealized valuation adjustment, net of tax and reclassification adjustment | — | — | — | — | — | — | 17,474 | — | 17,474 | ||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | 216,394 | 17,474 | — | 233,868 | ||||||||||||||||||||||||||||
Conversion of common stock to Class A common stock | 4,445,338 | 4,445 | (4,445,338 | ) | (4,445 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Issuance of common stock | — | — | 67,938 | 67 | 518 | — | — | — | 585 | ||||||||||||||||||||||||||||
Issuance of treasury stock | — | — | — | — | (475 | ) | — | — | 3,901 | 3,426 | |||||||||||||||||||||||||||
Purchase of treasury stock, net | — | — | — | — | — | — | — | (7,482 | ) | (7,482 | ) | ||||||||||||||||||||||||||
Income tax benefit from stock-based compensation | — | — | — | — | 1,097 | — | — | — | 1,097 | ||||||||||||||||||||||||||||
Cash dividends ($.68 per share) (note 14) | — | — | — | — | — | (84,731 | ) | — | — | (84,731 | ) | ||||||||||||||||||||||||||
Balance, December 31, 2000 | 56,074,874 | 56,075 | 71,041,450 | 71,041 | 1,125,652 | 770,350 | 7,601 | (41,226 | ) | 1,989,493 | |||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 246,502 | — | — | 246,502 | ||||||||||||||||||||||||||||
Unrealized valuation adjustment, net of tax and reclassification adjustment | — | — | — | — | — | — | (5,129 | ) | — | (5,129 | ) | ||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | 246,502 | (5,129 | ) | — | 241,373 | |||||||||||||||||||||||||||
Issuance of common stock | — | — | 63,952 | 64 | (95 | ) | — | — | — | (31 | ) | ||||||||||||||||||||||||||
Issuance of treasury stock, net | — | — | — | — | (141 | ) | — | — | 3,531 | 3,390 | |||||||||||||||||||||||||||
Income tax benefit from stock-based compensation | — | — | — | — | 2,435 | — | — | — | 2,435 | ||||||||||||||||||||||||||||
Cash dividends ($.80 per share) (note 14) | — | — | — | — | — | (99,772 | ) | — | — | (99,772 | ) | ||||||||||||||||||||||||||
Balance, December 19, 2001 | 56,074,874 | $ | 56,075 | 71,105,402 | $ | 71,105 | $ | 1,127,851 | $ | 917,080 | $ | 2,472 | $ | (37,695 | ) | $ | 2,136,888 | ||||||||||||||||||||
Company: | |||||||||||||||||||||||||||||||||||||
Balance, December 20, 2001 | — | $ | 561 | — | $ | — | $ | 1,985,275 | $ | — | $ | — | $ | — | $ | 1,985,836 | |||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 8,302 | — | — | 8,302 | ||||||||||||||||||||||||||||
Unrealized valuation adjustment, net of tax and reclassification adjustment | — | — | — | — | — | — | 7,782 | — | 7,782 | ||||||||||||||||||||||||||||
Balance, December 31, 2001 | — | $ | 561 | — | $ | — | $ | 1,985,275 | $ | 8,302 | $ | 7,782 | $ | — | $ | 2,001,920 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.statements
4344
BancWest Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 473,377 | $ | 436,564 | $ | 361,332 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Cumulative effect of accounting change, net of tax | — | 2,370 | — | |||||||||
Depreciation and amortization | 94,756 | 64,381 | 67,987 | |||||||||
Deferred income taxes | (6,357 | ) | 5,873 | 138,003 | ||||||||
Provision for loan and lease losses | 49,219 | 81,295 | 95,356 | |||||||||
Decrease (increase) in trading assets | 14,424 | 24,321 | (43,430 | ) | ||||||||
Decrease (increase) in loans held for sale | (20,395 | ) | 34,267 | (39,215 | ) | |||||||
Gains on sales of securities available for sale | (873 | ) | (4,289 | ) | (1,953 | ) | ||||||
Increase in accrued income taxes payable | 17,320 | 37,140 | 12,840 | |||||||||
Decrease (increase) in interest receivable | (47,268 | ) | 8,298 | (58,027 | ) | |||||||
Increase (decrease) in interest payable | (8,013 | ) | 13,621 | 14,291 | ||||||||
Increase in prepaid expense | (56,892 | ) | (2,484 | ) | (32,582 | ) | ||||||
Cash paid for BNP Paribas’ cancellation of stock options | — | — | (83,347 | ) | ||||||||
Other | (144,698 | ) | (84,845 | ) | (198,865 | ) | ||||||
Net cash provided by operating activities | 364,600 | 616,512 | 232,390 | |||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from maturity of securities available for sale | 1,960,483 | 2,303,050 | 911,748 | |||||||||
Proceeds from sale of securities available for sale | 715,296 | 446,515 | 323,321 | |||||||||
Purchases of securities available for sale | (3,114,398 | ) | (4,800,194 | ) | (2,044,022 | ) | ||||||
Proceeds from sale of loans | 330,869 | 826,776 | 581,176 | |||||||||
Purchases of loans | (1,616,077 | ) | (1,212,644 | ) | (60,745 | ) | ||||||
Net increase in loans resulting from originations and collections | (1,630,656 | ) | (1,263,569 | ) | (734,517 | ) | ||||||
Net increase in origination of vehicle and equipment operating leases | (147,753 | ) | — | — | ||||||||
Net cash paid for acquisitions | (1,166,933 | ) | — | (1,724,563 | ) | |||||||
Purchases of premises and equipment | (59,330 | ) | (42,795 | ) | (15,466 | ) | ||||||
Other | (347,957 | ) | 16,496 | (538 | ) | |||||||
Net cash used in investing activities | (5,076,456 | ) | (3,726,365 | ) | (2,763,606 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Net increase in deposits | 1,798,802 | 1,845,638 | 1,016,493 | |||||||||
Net increase (decrease) in short-term borrowings | 592,489 | 847,936 | (5,391 | ) | ||||||||
Proceeds from issuance of long-term debt and capital securities | 2,982,305 | 765,310 | 1,503,718 | |||||||||
Repayments of long-term debt | (1,258,069 | ) | (370,655 | ) | (472,811 | ) | ||||||
Proceeds from issuance of common stock | 1,055,000 | — | 1,600,000 | |||||||||
Discounted share purchase plan | — | — | 2,425 | |||||||||
Net cash provided by financing activities | 5,170,527 | 3,088,229 | 3,644,434 | |||||||||
Net increase (decrease) in cash and cash equivalents | 458,671 | (21,624 | ) | 1,113,218 | ||||||||
Cash and cash equivalents at beginning of period | 2,171,791 | 2,193,415 | 1,080,197 | |||||||||
Cash and cash equivalents at end of period | $ | 2,630,462 | $ | 2,171,791 | $ | 2,193,415 | ||||||
Supplemental disclosures: | ||||||||||||
Interest paid | $ | 450,839 | $ | 371,586 | $ | 451,039 | ||||||
Income taxes paid | 427,592 | 217,463 | 84,730 | |||||||||
Supplemental schedule of noncash investing and financing activities: | ||||||||||||
Transfers from loans to foreclosed properties | 12,163 | 9,154 | 16,815 | |||||||||
Financed acquisition of building: | ||||||||||||
Fixed asset acquired | — | 159,910 | — | |||||||||
Debt assumed | — | 193,900 | — | |||||||||
In connection with acquisitions, the following liabilities were assumed: | ||||||||||||
Fair value of assets acquired | 7,742,237 | — | 11,719,382 | |||||||||
Cash (paid) received | (1,439,891 | ) | — | (2,418,208 | ) | |||||||
Fair value of liabilities assumed | $ | 6,302,346 | $ | — | $ | 9,301,174 | ||||||
Consolidated Statements of Cash Flows
Company | Predecessor | |||||||||||||||||
December 20, 2001 | January 1, 2001 | |||||||||||||||||
through | through | Year Ended December 31, | ||||||||||||||||
(in thousands) | December 31, 2001 | December 19, 2001 | 2000 | 1999 | ||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||
Net income | $ | 8,302 | $ | 246,502 | $ | 216,394 | $ | 172,378 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||
Provision for credit losses | 2,419 | 100,631 | 60,428 | 55,262 | ||||||||||||||
Net gain on sale of assets | — | — | (1,218 | ) | (3,675 | ) | ||||||||||||
Depreciation and amortization | 1,016 | 75,339 | 70,142 | 67,484 | ||||||||||||||
Deferred income taxes | 1,971 | 69,762 | 112,848 | 95,231 | ||||||||||||||
Increase in accrued income taxes payable | 2,736 | 18,178 | 3,295 | 16,054 | ||||||||||||||
Decrease (increase) in interest receivable | (4,688 | ) | 16,457 | (16,868 | ) | (6,848 | ) | |||||||||||
Increase (decrease) in interest payable | (9,893 | ) | (39,371 | ) | 14,497 | 28,145 | ||||||||||||
Decrease (increase) in prepaid expense | 24,127 | (7,044 | ) | (16,208 | ) | (15,264 | ) | |||||||||||
Restructuring, integration and other nonrecurring costs | — | 3,935 | 1,269 | 17,534 | ||||||||||||||
Other | 1,187 | 4,001 | (12,534 | ) | (2,231 | ) | ||||||||||||
Net cash provided by operating activities | 27,177 | 488,390 | 432,045 | 424,070 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||
Net decrease (increase) in interest-bearing deposits in other banks | (42,806 | ) | (61,157 | ) | 3,163 | 269,320 | ||||||||||||
Net decrease (increase) in Federal funds sold and securities purchased under agreements to resell | (77,988 | ) | 442,100 | (236,000 | ) | (4,600 | ) | |||||||||||
Proceeds from maturity of held-to-maturity investment securities | — | 35,066 | 49,928 | 163,906 | ||||||||||||||
Purchase of held-to-maturity investment securities | — | (33,079 | ) | — | (15,852 | ) | ||||||||||||
Proceeds from maturity of available-for-sale investment securities | 28,669 | 1,120,487 | 809,692 | 526,621 | ||||||||||||||
Proceeds from sale of available-for-sale investment securities | — | 559,220 | 136,345 | 27,828 | ||||||||||||||
Purchase of available-for-sale investment securities | (24,795 | ) | (2,312,508 | ) | (1,009,802 | ) | (968,209 | ) | ||||||||||
Proceeds from sale of Concord stock | — | 45,359 | — | — | ||||||||||||||
Purchase of bank-owned life insurance | — | (109,360 | ) | — | (50,000 | ) | ||||||||||||
Net increase in loans to customers | (42,381 | ) | (1,049,984 | ) | (1,509,172 | ) | (627,239 | ) | ||||||||||
Net cash provided by acquisitions | — | 632,965 | — | — | ||||||||||||||
Purchase of premises and equipment | (1,012 | ) | (20,369 | ) | (10,120 | ) | (38,823 | ) | ||||||||||
Other | (37 | ) | (7,013 | ) | (10,148 | ) | 14,256 | |||||||||||
Net cash used in investing activities | (160,350 | ) | (758,273 | ) | (1,776,114 | ) | (702,792 | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||||||
Net increase (decrease) in deposits | 356,822 | (406,479 | ) | 1,250,187 | 835,080 | |||||||||||||
Net increase (decrease) in short-term borrowings | 114,575 | 170,677 | 80,091 | (418,890 | ) | |||||||||||||
Proceeds from long-term debt and capital securities | — | 337,579 | 265,949 | 94,483 | ||||||||||||||
Payments on long-term debt | (245,684 | ) | (50,140 | ) | (100,318 | ) | (27,059 | ) | ||||||||||
Cash dividends paid | — | (99,772 | ) | (84,731 | ) | (77,446 | ) | |||||||||||
Cash received from BNP Paribas for cancellation of stock options | 83,347 | — | — | — | ||||||||||||||
Proceeds from issuance (payments on exercise) of common stock | — | (31 | ) | 585 | 4,934 | |||||||||||||
Issuance (purchase) of treasury stock, net | — | 5,825 | (4,056 | ) | 12,809 | |||||||||||||
Net cash provided by (used in) financing activities | 309,060 | (42,341 | ) | 1,407,707 | 423,911 | |||||||||||||
Net increase (decrease) in cash and due from banks | 175,887 | (312,224 | ) | 63,638 | 145,189 | |||||||||||||
Cash and due from banks at beginning of period | 561,375 | 873,599 | 809,961 | 664,772 | ||||||||||||||
Cash and due from banks at end of period | $ | 737,262 | $ | 561,375 | $ | 873,599 | $ | 809,961 | ||||||||||
Supplemental disclosures: | ||||||||||||||||||
Interest paid | $ | 24,860 | $ | 525,003 | $ | 548,425 | $ | 418,732 | ||||||||||
Income taxes paid | $ | — | $ | 78,665 | $ | 36,084 | $ | 12,466 | ||||||||||
Supplemental schedule of noncash investing and financing activities: | ||||||||||||||||||
Loans converted into other real estate owned and repossessed personal property | $ | 298 | $ | 13,152 | $ | 5,800 | $ | 10,931 | ||||||||||
In connection with acquisitions, the following liabilities were assumed: | ||||||||||||||||||
Fair value of assets acquired | $ | — | $ | 14,682 | $ | — | $ | — | ||||||||||
Cash received | — | 632,965 | — | — | ||||||||||||||
Liabilities assumed | $ | — | $ | 647,647 | $ | — | $ | — | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.statements
4445
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Description of Operations
BancWest Corporation is a financial holding company headquartered in Honolulu, Hawaii and incorporated under the laws of the State of Delaware. Through our principal subsidiaries, Bank of the West and First Hawaiian Bank, we provide commercial and consumer banking services, engage in commercial, and equipment and vehicle leasing and offer trust and insurance products. BancWest Corporation’s subsidiaries operate 253 offices527 branches in the states of Arizona, California, Colorado, Hawaii, Oregon, Washington, Idaho, Iowa, Minnesota, Nebraska, Nevada, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin and NevadaWyoming and in Guam and Saipan. BancWest Corporation and Subsidiaries is referred to as the “Company,” “we” or “our.” BancWest Corporation alone is referred to as “the Parent” or “BancWest.” BancWest Corporation is a wholly owned subsidiary of Paris-based BNP Paribas (BNPP).
The accounting and reporting policies of BancWest Corporation and Subsidiaries (the “Company” or “we/our”)the Company conform with generally accepted accounting principles (GAAP) and practices within the banking industry. The following is a summary of the significant accounting policies:
Consolidation
The consolidated financial statementsConsolidated Financial Statements of the Company include the accounts of BancWest Corporation (the “Parent”) and its wholly-owned subsidiary companies:
• | Bank of the West and its | |||
• | First Hawaiian Bank and its | |||
• | USDB Bancorp and its wholly owned subsidiaries; | |||
• | FHL Lease Holding Company, Inc. and its | |||
• |
All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of PresentationReclassifications
On December 20, 2001, BNP Paribas, a société anonyme or limited liability banking corporation organized underCertain amounts in the laws offinancial statements for prior years have been reclassified to conform with the Republic of France, acquired all of the outstanding common stock of the Parent. As a result of the transaction, the Parent became a wholly-owned subsidiary of BNP Paribas. The business combination wascurrent financial statement presentation.
Business Combinations
Business combinations are accounted for using the purchase method of accounting with BNP Paribas’ accounting basis being “pushed down” to the Parent. Prior to the close of business on December 19, 2001, the Parent was 55% publicly owned and 45% owned by BNP Paribas (“Predecessor” basis). Starting on December 20, 2001, the Company’s financial statements reflected BNP Paribas’ “pushed-down basis.” See Note 2 of the consolidated financial statements for additional information regarding this business combination.
It is generally not appropriate to combine pre- and post- “push-down” periods; however, for items that were clearly not material, certain information presented in this section combines the Company’s consolidated results of operations from December 20, 2001 to December 31, 2001 with those of the Predecessor for the period from January 1, 2001 to December 19, 2001.
Reclassifications
The 2000 and 1999 Consolidated Financial Statements were reclassified in certain respects to conform to the 2001 presentation. Such reclassifications did not have a material effect on the Consolidated Financial Statements.
Business Combinations
In business combinations accounted for as a pooling of interests, the financial position and results of operations and cash flows of the respective companies are restated as though the companies were combined for all historical periods.
In business combinations accounted for using the purchase method of accounting, the net assets of the companies acquired are recorded at their fair values at the date of acquisition. The results of operations of the acquired companies are included from the date of acquisition.
See also “New Pronouncements” below for more discussion.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformityaccordance with accounting principles generally accepted accounting principlesin the United States requires management to make estimates and assumptions that affect the amounts reported amountsin our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of assetscurrent events and liabilitiesactions that may impact the Company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and disclosures of contingent assetsinvolve difficult, subjective or complex judgments by management.
46
BancWest Corporation and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Due from Banks
Cash and due from banks includeincludes amounts from other financial institutions as well as in-transit clearings. Under the terms of the Depository Institutions Deregulation and Monetary Control Act, the Company is required to place reserves with the Federal Reserve Bank based on the amount of deposits held. The average amount of these reserve balances were $226.8including coin and currency was $562.3 million for 2001, $205.32004, $528.0 million for 20002003 and $192$307.9 million for 1999.
Investment Securities2002.
InvestmentFor purposes of the consolidated statements of cash flows, the Company considers cash and due from banks, interest-bearing deposits in other banks, Federal Funds sold and securities purchased under agreements to resell (with original maturities of less than three months) to be cash equivalents.
Securities
Securities consist principallypredominately of debt and asset-backed securities issued by the U.S. Treasury, and other U.S. Government agencies and corporations, government sponsored agencies and state and local government units. These securities have
45
Notes to Consolidated Financial Statements(continued)
been adjusted for amortization of premiums or accretion of discounts using the constant yieldinterest method.
Investment All securities are recorded on a trade date basis. Securities are classified into three categories and accounted for in accordance to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These categories are as follows:
(1) | Held-to-maturity securities are debt securities | |||
(2) | Trading securities are debt and equity securities | |||
(3) |
Gains and losses realized on the sales of investment securities are determined using the specific identification method.
Loans Held for Sale
Loans held for sale are recorded at the lower of aggregate cost or fair value.
Loans and Leases
Loans and leasesheld in portfolio are statedrecorded at the principal amountsamount outstanding, net of deferred loan costs or fees and any unearned incomediscounts or discounts.premiums on purchased loans. Deferred costs or fees, discounts and premiums are amortized using the interest method over the contractual term of the loan adjusted for actual prepayments.
We recognize unamortized fees and premiums on loans and leases paid in full as a component of interest income. Interest income is accrued and recognized on the principal amount outstanding unless the loan is determined to be impaired and placed on nonaccrual status. (See Impaired and Nonaccrual Loans and Leases below.) Loans identified
We also charge other loan and lease fees consisting of delinquent payment charges and other common loan and lease servicing fees, including fees for servicing loans sold to third parties. We recognize these fees as held-for-sale are carried at the lower of cost or market value and are included in other assets on the Consolidated Balance Sheets.income when earned.
We provide lease financing under a variety of arrangements, primarily consumer automobile leases, commercial equipment leases and leveraged leases.
• | ||||
• | Leveraged lease transactions are subject to outside financing through one or more participants, without recourse to the Company. These transactions are accounted for by recording as the net investment in each lease the aggregate of rentals receivable (net of |
47
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
principal and interest on the related nonrecourse debt) and the estimated residual value of the equipment less the unearned income. Income from these lease transactions is recognized during the periods in which the net investment is positive.
Impaired and Nonaccrual Loans and Leases
We evaluate certain loans and leases for impairment on a case-by-case basis. Examples of such loans and leases include commercial loans, commercial real estate loans and construction loans. We consider a loan or lease to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan or lease.loan. We measure impairment based on the present value of the expected future cash flows discounted at the loan or lease’sloan’s effective interest rate, except for collateral-dependent loans and leases.loans.
For collateral-dependent loans, and leases, we measure impairment based on the fair value of the collateral. On a case-by-case basis, we may measure impairment based upon a loan or lease’sloan’s observable market price.
Based primarily on historical loss experience for each portfolio, weWe collectively evaluate for impairment large groups or pools of homogeneous loans and leases with smaller balances that are not evaluated on a case-by-case basis. Examples of such small balance portfolios are credit cards and consumer loans, and leases, including 1-4 familyresidential mortgage loans with balances less than $250,000.and small business loans. The risk assessment process includes the use of estimates to determine the inherent loss in these portfolios. Loss forecast estimates are utilized for consumer products which consider a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends and delinquencies. These factors are updated frequently to capture changes in the characteristics of subject portfolios and changes in the Company’s business strategies.
We generally place a loan or lease on nonaccrual status:
• | When management believes that collection of principal or income has become doubtful; or | |||
• | When loans or leases are 90 days past due as to principal or |
While the majority of consumerNot all impaired loans and leases are subject to our general policies regarding nonaccrual loans and leases, certain past-due consumer loans and leases are notnecessarily placed on nonaccrual status because theystatus; for example, restructured loans performing under restructured terms beyond a specific period may be classified as accruing, but may still be deemed impaired. Impaired loans without a related allowance for loan and lease losses are charged off upon reaching a predetermined delinquency status varying from 120generally collateralized by assets with fair values in excess of the recorded investment in the loans. We generally apply interest payments on impaired loans to 180 days, depending on product type.reduce the outstanding principal amount of such loans.
When we place a loan or lease on nonaccrual status, previously accrued and uncollected interest is reversed against interest income of the current period. When we receive a cash interest payment on a nonaccrual loan or lease, we apply it as a reduction of the principal balance when we have doubts about the ultimate collection of the principal. Otherwise, we record such payments as income.
Nonaccrual loans and leases are generally returned to accrual status when they: (1) become current as to principal and interest;interest and have demonstrated a sustained period of payment performance; or (2) become both well secured and in the process of collection.
Allowance for Loan and Lease Fees
We generally charge fees for originating loans and leases and for commitments to extend credits.
46
Notes to Consolidated Financial Statements(continued)
Origination fees (net of direct costs of underwriting, closing costs and premiums) are deferred and amortized to interest income, using methods which approximate a level yield, adjusted for actual prepayment experience. We recognize unamortized fees and premiums on loans and leases paid in full as a component of interest income.
We also charge other loan and lease fees consisting of delinquent payment charges and other common loan and lease servicing fees, including fees for servicing loans sold to third parties. We recognize these fees as income when earned.
Allowance for Credit Losses
We maintain the allowance for creditloan and lease losses (the “Allowance”) at a level which, in management’s judgment, is adequate to absorb probable losses in the Company’s loan and lease portfolio. While the Company has a formalized methodology for determining an adequate and appropriate level of the Allowance, estimates of inherent creditloan and lease losses involve judgment and assumptions as to various factors which deserve current recognition in the Allowance. Principal factors considered by management in determining the Allowance include historical loss experience, the value and adequacy of collateral, the level of nonperforming loans and leases, the growth and composition of the portfolio, periodic review of loan and lease delinquencies, results of examinations of individual loans and leases and/or evaluation of the overall portfolio by senior credit personnel, internal auditors and regulators, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay and general economic conditions.
The Allowance consists of two components, allocated and unallocated. The allocated portion of the allowance includes reserves that are allocated based on impairment analyses of specific loans or pools of loans as described under “Impaired and Nonaccrual Loans and Leases” above. The unallocated portion of the allowance for loan and lease losses is maintained to cover uncertainties in the range of probable outcomes inherent in the estimate of inherent losses. These uncertainties include the imprecision inherent in the forecasting methodologies and certain industry and geographic concentrations (including global economic uncertainty). Management
48
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assesses each of these components to determine the overall level of the unallocated portion. The relationship of the unallocated component to the total allowance for loan and lease losses may fluctuate from period to period. Management evaluates the adequacy of the allowance for loan and lease losses based on the combined total of allocated and unallocated components.
The Allowance is increased by provisions for creditloan and lease losses and reduced by charge-offs, net of recoveries. Charge-offs for loans and leases that are evaluated for impairment are made based on impairment evaluations as described above. Consumer loans and leases are generally charged off upon reaching a predetermined delinquency status that ranges from 120 to 180 days and varies by product type. Other loans and leases aremay be charged off to the extent they are classified as loss, either internally or by the Company’s regulators. Recoveries of amounts that have previously been charged off are credited to the Allowance and are generally recorded only to the extent that cash is received.
The provision for creditloan and lease losses reflects management’s judgment of the current period cost of credit risk inherent in the Company’s loan and lease portfolio. Specifically, the provision for creditloan and lease losses represents the amount charged against current period earnings to achieve an allowance for creditloan and lease losses that in management’s judgment is adequate to absorb probable losses inherent in the Company’s loan and lease portfolio. Accordingly, the provision for creditloan and lease losses will vary from period to period based on management’s ongoing assessment of the adequacy of the Allowance.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of 10-50 years for premises, 3-25 years for equipment and the lower of the lease term or remaining life for leasehold improvements.
Operating Lease Assets
Operating lease rental income for leased assets, generally automobiles, is recognized on a straight-line basis. Related depreciation expense is recorded on a straight-line basis over the life of the lease taking into account the estimated residual value of the leased asset. On a periodic basis, leased assets are reviewed for impairment. Impairment loss is recognized if the carrying amount of leased assets exceeds their fair value and is not recoverable. The carrying amount of leased assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the equipment. Auto lease receivables are written off when 120 days past due.
Core Deposit and Other Identifiable Intangible Assets
Core deposit and other identifiable intangible assets are amortized over the period of benefit. In September 2001, the FASB issued SFAS No. 141,Business Combinationswhich supersedes Accounting Principles Board (“APB”) Opinion No. 16,Business Combinations, and addresses financial accounting and reporting for business combinations. All business combinations in the scope of SFAS No. 141 are to be accounted for using the purchase method of accounting. We follow the guidance set forth in SFAS No. 141 for initial recognition of goodwill and intangible assets acquired in a business combination. Included in the provisions of SFAS No. 141 are criteria for identifying and recognizing intangible assets apart from goodwill and additional disclosure requirements concerning the primary reasons for a business combination and the allocation of the purchase price for the assets acquired and liabilities assumed. After initial recognition, intangible assets are accounted for under the provisions of SFAS No. 142, which supersedes APB Opinion No. 17,Intangible Assets, and addresses the accounting and reporting for goodwill and other intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at and subsequent to acquisition. Under the provisions of SFAS No. 142, goodwill and certain other intangible assets, which do not possess finite lives, are no longer amortized into net income over an estimated life but rather will be tested at least annually for impairment. Intangible assets determined to have finite lives continue to be amortized over their estimated useful lives and also continue to be subject to impairment testing. We review core deposit and other identifiable intangible assets for impairment whenever events or changes in circumstances indicate that we may not recover our investment in the underlying assets or liabilities which gave rise to such core deposit and other identifiable intangible assets.
Goodwill
Goodwill represents the cost of acquired companies in excess of the fair value of net assets of those acquired companies. Goodwill is subject to a two-step impairment test in accordance with SFAS 142,Goodwill and Other Intangible Assets.The first step of impairment testing compares the fair value of the reporting unit, which is an individual business segment of the Company (refer to
49
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20), to the carrying amount. If the carrying amount exceeds the fair value, then a second step is conducted whereby we assign fair values to identifiable assets and liabilities, leaving an implied fair value for goodwill. The implied fair value is compared with the carrying amount of the goodwill. If the implied fair value of the goodwill is less than the carrying amount, an impairment loss is recognized. Goodwill is tested for impairment on an annual basis, and between annual tests if circumstances change that would reduce the fair value of goodwill below its carrying value. Goodwill was subjected to a transitional impairment test during the quarter ended March 31, 2002 and none was identified. The Company’s goodwill was subsequently tested for impairment as of October 31, 2004, 2003 and 2002 and none was identified.
Other Real Estate Owned and Repossessed Personal Property
Other real estate owned (“OREO”) and repossessed personal property (“OREO”) is primarily comprised of properties that we acquired through foreclosure proceedings. We value these properties at the lower of cost or fair value at the time we acquire them, which establishes their new cost basis. We charge against the Allowance any losses arising at the time of acquisition of such properties. After we acquire them, we carry such properties at the lower of cost or fair value less estimated selling costs. If we record any write-downs or losses from the disposition of such properties after acquiring them, we include this amount in other noninterest expense.
PremisesTransfers and EquipmentServicing of Financial Assets
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed onA transfer of financial assets is accounted for as a straight-line basissale when control is surrendered over the estimated useful lives of 10-40 years for premises, 3-25 years for equipment and up to the lease term for leasehold improvements.
Core Deposit and Other Identifiable Intangible Assets
Core depositassets transferred. Servicing rights and other identifiable intangibleretained interests in the assets sold are recorded by allocating the previously recorded investment between the asset sold and the interest retained based on their relative fair values, if practicable to determine, at the date of transfer. Fair values of servicing rights and other retained interests are determined using present value of estimated future cash flows valuation techniques, incorporating assumptions that market participants would use in their estimates of values.
The Company recognizes as assets the retained rights to service loans for others resulting from sales of loan originations. These rights are periodically assessed for impairment. Any such indicated impairment is recognized in income, during the period in which it occurs. Servicing rights are amortized on the straight-line method over the period of benefit, generally 10 years. We review core depositestimated net servicing income. The amortization takes into account prepayment assumptions and is included in the consolidated statement of income under the caption, “other service charges and fees.” For the years presented, servicing assets, the related amortization and other identifiable intangible assets for impairment whenever events or changes in circumstances indicate that we may not recover our investment in the underlying assets or liabilities which gave rise to such core deposit and other identifiable intangible assets.
Goodwill
Goodwill represents the cost of acquired companies in excess of the fair value of net assets acquired. It is our policy to review goodwill for impairment whenever events or changes in circumstances indicate that we may not recover our investment in the underlying assets/businesses which gave rise to such goodwill.
Repurchase and Reverse Repurchase Agreements
We apply a control-oriented, financial-components approach to financial-asset-transfer transactions by: (1) recognizing the financial and servicing assets we control and the liabilities we have incurred; (2) derecognizing financial assets only when control has been surrendered; and (3) derecognizing liabilities once they are extinguished.
Control is considered to have been surrendered only if: (i) the transferred assets have been isolated from the trans-
47
Notes to Consolidated Financial Statements(continued)
feror and its creditors, even in bankruptcy or other receivership; (ii) the transferee has the unconditional right to pledge or exchange the transferred assets, or is a qualifying special-purpose entity and the holders of beneficialretained interests in that entity have the unconditional right to pledge or exchange those interests; and (iii) the transferor does not maintain effective control over the transferred assets through: (a) an agreement that both entitles and obligates it to repurchase or redeem those assets prior to maturity; or (b) an agreement which both entitles and obligates it to repurchase or redeem those assets if they were not readily obtainable elsewhere. If none of these conditions are met, we account for the transfer as a secured borrowing.material.
Securities purchased under agreements to resell and securities sold under agreements to repurchase generally qualify as financing transactions under generally accepted accounting principles. We carry such securities at the amounts at which they subsequently will be resold or reacquired as specified in the respective agreements, including accrued interest.
Repurchase and reverse-repurchase agreements are presented in the accompanying Consolidated Balance Sheets where net presentation is consistent with generally accepted accounting principles. It is our policy to take possession of securities purchased under agreements to resell. We monitor the fair value of the underlying securities as compared to the related receivable, including accrued interest and as necessary we request additional collateral. Where deemed appropriate, our agreements with third parties specify our rightsright to request additional collateral. All collateral is held by theThe Company or a custodian.custodian holds all collateral.
Servicing Assets
Servicing assets primarily consist of originated mortgage servicing rights which are capitalized and included in other assets in the accompanying Consolidated Balance Sheets. These rights are recorded based on the relative fair values of the servicing rights and the underlying loan. They are amortized over the period of the related loan-servicing income stream. We reflect amortization of these rights in our Consolidated Statements of Income under the caption “other service charges and fees.” We evaluate servicing assets for impairment in accordance with generally accepted accounting principles. For the years presented, servicing assets and the related amortization were not material.
Trust Property
We do not include in our Consolidated Balance Sheets trust property, other than cash deposits which we hold as fiduciaries or agents for our customers, because such items are not assets of the Company.
Income Taxes
We recognize deferred income tax liabilities and assets for the expected future tax consequences of events that we include in our financial statements or tax returns. Under this method, we determine deferred income tax liabilities and assets based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
We account for excise tax credits relating to premises and equipment under the flow-through method, recognizing the benefit in the year the asset is placed in service. The excise tax credits related to leaseleased equipment, except for excise tax credits that are passed on to lessees, are recognized during the periods in which the net investment is positive.
We file a consolidated Federal income tax return. Amounts equal to income tax benefits of those subsidiaries having taxable losses or credits are reimbursed by other subsidiaries which would have incurred current income tax liabilities. We follow a similar arrangement for state taxes where we file consolidated or combined income tax returns. Separate state tax liabilities are borne by the entities filing in those states.
50
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
Statement of Financial Accounting Standards, (FAS) No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements to include prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
As allowed under the provisions of FAS No. 123,Accounting for Stock-Based Compensation,the Company has chosen to recognize compensation expense using the intrinsic value-based method of valuing stock options prescribed in Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employeesand related interpretations. Under the intrinsic value-based method, compensation cost is measured as the amount by which the quoted market price at the date of grant exceeds the stock option exercise price.
Certain members of BancWest’s senior management team received stock option awards from BNPP on March 24, 2004 and March 21, 2003. The options do not vest until after the fourth year, at which time they are exercisable from the fourth anniversary through the tenth anniversary date. Stock options awarded under the 2003 plan have been reflected in compensation expense. No compensation expense was recognized for the 2004 plan, as the grant price was greater than the market price.
The following table is a summary of our stock option activity.
Weighted | ||||||||||||
Weighted | average | |||||||||||
average | remaining | |||||||||||
exercise | contractual life | |||||||||||
Number | price | (in years) | ||||||||||
Options outstanding as of December 31, 2002 | — | $ | — | |||||||||
2003: | ||||||||||||
Granted | 275,000 | 39.07 | ||||||||||
Options outstanding as of December 31, 2003 | 275,000 | $ | 39.07 | 9.22 | ||||||||
2004: | ||||||||||||
Granted | 80,000 | 60.45 | ||||||||||
Forfeited | (1,000 | ) | 39.07 | |||||||||
Options outstanding as of December 31, 2004 | 354,000 | $ | 43.90 | 8.44 | ||||||||
The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of FAS No. 123 to stock-based employee compensation.
Year Ended December 31, | ||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | |||||||||
Net Income (as reported) | $ | 473,377 | $ | 436,564 | $ | 361,332 | ||||||
Add: Stock-based compensation expense recognized during period, net of tax effects | 96 | 75 | — | |||||||||
Less: Stock-based employee compensation expense determined under fair value-based method, net of taxes | (960 | ) | (681 | ) | — | |||||||
Pro Forma Net Income | $ | 472,513 | $ | 435,958 | $ | 361,332 | ||||||
51
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each stock option was estimated on the date of grant using a trinomial tree pricing model. The fair value of the 2004 and 2003 grants was $10.57 and $21.26, respectively. The following table presents the weighted-average assumptions used.
Year Ended December 31, | ||||||||
2004 | 2003 | |||||||
Dividend yield | 3.02 | % | 3.18 | % | ||||
Expected volatility | 17.18 | 48.16 | ||||||
Risk free interest rate | 3.80 | 4.30 | ||||||
Expected life (in years) | 10 | 10 | ||||||
Discounted Share Purchase Plan
The 2002 Discounted Share Purchase Plan (“2002 DSPP”) provided to U.S. resident employees of BNP Paribas, including employees of the Company, an opportunity to acquire shares in BNP Paribas. The purpose of the plan is to provide an increased incentive for these employees to contribute to the future success and prosperity of BNP Paribas. Eligible U.S. employees were those who were employed on March 6, 2002 and remained employed until at least June 3, 2002. Participants were allowed to purchase shares, up to specified limits, at a discount of 20% of the market value on February 28, 2002. In addition, the participants were granted shares, based on the number they purchased, paid for by the Company.
The shares under the DSPP plan must be held by the participants for a minimum of five years or until employment is terminated. In June 2002, a total of 124,763 shares were purchased by the Company’s employees, and an additional 30,490 shares were granted to these participants. The fair value of each share on the issue date was $51.81. The Company recognized a related compensation and benefits expense of $4.4 million in 2002.
Derivative Instruments and Hedging Activities
The Company maintains an overall interest rate risk management strategy that incorporatesDerivatives are recognized on the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company’s goal is to manage interest rate sensitivity by modifying the re-pricing or maturity characteristics of certain assets and liabilities so that the Company’s net interest margin is not, on a material basis, adversely affected by movements in interest rates. The Company considers its limited use of derivatives to be a prudent method of managing interest rate sensitivity, as it prevents earnings from being exposed to undue risk posed by changes in interest rates.
By using derivative instruments, the Company exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Company’s credit risk will equal theconsolidated balance sheet at fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes the Company, thus creating a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, assumes no repayment risk. Derivative instruments must meet the same criteria of acceptable risk established for our lending and other financing activities. We manage the credit risk of counterparty defaults in these transactions by: (1) Limiting the total amount of outstanding arrangements, both by the individual counterparty and in the aggregate; (2) Monitoring the size and
48
Notes to Consolidated Financial Statements(continued)
maturity structure of the derivative instruments; and (3) Applying the uniform credit standards maintained for all of our credit activities, including, in some cases, taking collateral to secure the counterparty obligations.
value. On the date that the Company enters into a derivative contract, itthe Company designates the derivative instrument as (1) a hedge of the fair value of a recognized asset or liability (a “fairor of an unrecognized firm commitment (“fair value” hedge);, (2) a hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection withrelated to a recognized asset or liability (a “cash(“cash flow” hedge); or (3) a foreign currency fair value or cash flow hedge (a “foreign currency” hedge); or (4) an instrument that is held for trading, customer accommodation or non-hedging purposes (a “trading” or “non-hedging” instrument)not qualifying for hedge accounting (“free-standing derivative instruments”). ChangesFor a fair value hedge, changes in the fair value of athe derivative that is highly effective as a fair value hedge, along withinstrument and changes in the fair value of the hedged asset or liability that areor of an unrecognized firm commitment attributable to the hedged risk are recorded in current period earnings. Changesincome. For a cash flow hedge, changes in the fair value of athe derivative that is highly effective as a cash flow hedge,instrument to the extent that the hedgeit is effective are recorded in other comprehensive income until earningswithin stockholder’s equity and subsequently reclassified to net income in the same period(s) that the hedged transaction impacts net income in the same financial statement category as the hedged item. For freestanding derivative instruments, changes in the fair values are affected byreported in current period income. The Company formally documents the variability of cash flowsrelationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as hedges to specific assets and liabilities on the consolidated balance sheet, an unrecognized firm commitment or a forecasted transaction. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether the derivative instruments used are highly effective in offsetting changes in fair values of hedged transaction.items. Any portion of the changes in fair value of derivatives designated as a hedge ineffectivenessthat is deemed ineffective is recorded in current period earnings. Changesearnings; this amount was not material in 2004, 2003 or 2002.
The Company occasionally purchases or originates financial instruments that contain an embedded derivative instrument. At the inception of the financial instrument, the Company assesses whether the economic characteristics of the embedded derivative instrument are clearly and closely related to the economic characteristics of the financial instrument (host contract), whether the financial instrument that embodies both the embedded derivative instrument and the host contract is currently measured at fair value with changes in fair value reported in earnings and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative thatinstrument. If the embedded derivative instrument is highly effectivedetermined not to be clearly and closely related to the host contract, is not currently measured at fair value with changes in fair value reported in earnings, and the embedded derivative instrument would qualify as a foreign currency hedgederivative instrument, the embedded derivative instrument is recorded in either current period earnings or other comprehensive income, depending on whetherseparated from the hedging relationship satisfies the criteria for ahost contract and carried at fair value or cash flow hedge. Changes in the fair value of derivative trading and non-hedging instruments are reportedwith changes recorded in current period earnings.
During the year ended December 31, 2001, the Company used interest rate swaps to hedge the fair values of certain loans against changes in interest rates. The Company entered into interest rate swaps to convert the characteristics of certain non-prepayable fixed rate loans to variable rate loans. For the year ended December 31, 2001, the amount of hedge ineffectiveness recorded in the Company’s consolidated statement of income was not material. Furthermore, for the year ended December 31, 2001, there was no gain or loss recorded by the Company as a result of fair value hedges that no longer qualified as fair value hedge items.
During the year ended December 31, 2001, the Company also used interest rate swaps for trading purposes. Trading activities, which do not qualify for hedge accounting, primarily involve derivative products to accommodate customers. For the year ended December 31, 2001, the change in the fair value of the Company’s derivative trading instruments was not material.52
During the year ended December 31, 2001, the Company held certain options on interest rate swaps and options on securities purchased under agreements to resell as non-hedging derivatives. The change in the fair value of the Company’s non-hedging derivatives for the year ended December 31, 2001 was not material.
The Company held no cash flow or foreign currency hedges during the year ended December 31, 2001.
Off-Balance-Sheet Commitments
In the normal course of business, we are a party to various off-balance sheet commitments entered into to meet the financing needs of our customers. These financial instruments include commitments to extend credit; standby and commercial letters of credit; and commitments to purchase or sell foreign currencies. These commitments involve, to varying degrees, elements of credit, interest rate and foreign exchange rate risk.
If a counterparty to a commitment to extend credit or to a standby or commercial letter of credit fails to perform, our exposure to credit losses would be the contractual notional amount. Since these commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flows.
Commitments to purchase or sell foreign currencies obligate us to take or make delivery of a foreign currency. Risks in such instruments arise from fluctuations in foreign exchange rates and the ability of counterparties to fulfill the terms of the contracts.
We enter into commitments to purchase or sell foreign currencies for our own account and on behalf of our customers. These commitments are generally matched through offsetting positions. Foreign exchange positions are valued monthly with the resulting gain or loss recognized as incurred.
We monitor and manage interest rate and market risk in conjunction with our overall interest rate risk position. Off-balance-sheet agreements are not entered into if they would increase our interest rate risk above approved guidelines. Our testing to measure and monitor this risk, using net interest income simulations and market value of equity analysis, is usually conducted quarterly.
Advertising and Promotions
Expenditures for advertising and promotions are expensed as incurred. Such expenses are included under the caption “other noninterest expense” in the accompanying Consolidated Statements of Income.
Fair Value of Financial Instruments
Financial instruments include such items as loans, deposits, investment securities, interest rate and foreign exchange contracts and swaps.
Disclosure of fair values is not required for certain items such as lease financing, investments accounted for
49
NotesBancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Mergers and Acquisitions
During 2004, the Company acquired Community First Bankshares, Inc. and USDB Bancorp. BNPP funded these acquisitions by providing short-term debt financing of $590 million. In addition, BNPP and one of its subsidiaries contributed capital of $1,055 million to the Company.
Community First Bankshares Acquisition
On November 1, 2004, the Company completed its acquisition of 100 percent of the outstanding stock of Community First Bankshares, Inc. (Community First), a holding company that operated Community First National Bank (CFB). At the date of the acquisition, CFB operated 166 banking locations (153 full service retail branches and 13 limited service retail offices) in Arizona, California, Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wisconsin and Wyoming. Community First’s retail operations expanded the Company’s existing network in California, Hawaii, Nevada, New Mexico and the Pacific Northwest. The results of operations of Community First were included in our Consolidated Financial Statements(continued)
under the equity method beginning November 1, 2004. Branches of accounting, obligations for pension and other postretirement benefits, premises and equipment, OREO, prepaid expenses, core deposit intangibles and other customer relationships, other intangible assets and income tax assets and liabilities. Accordingly, the aggregate fair value amounts presented do not purport to represent, and should not be considered representativeCFB were fully integrated into Bank of the underlying “market” or franchise valueWest’s branch network in the fourth quarter of 2004, at which time Community First merged with and into Bank of the Company.
Because the standard permits many alternative calculation techniques and because numerous assumptions have been used to estimate our fair values, reasonable comparisonsWest. The purchase price of our fair value information with that of other financial institutions cannot necessarily be made.
We use the following methods and assumptions to estimate the fair value of our financial instruments:
Cash and due from banks:The carrying amounts reportedapproximately $1.2 billion was paid in the Consolidated Balance Sheets of cash and short-term instruments approximate fair values.
Investment securities:Fair values of 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 are estimatedwas accounted for portfolios of performing loans with similar characteristics. For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. We use discounted cash flow analyses, which utilize interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, to estimate the fair values of: (1) fixed-rate commercial and industrial loans; (2) financial institution loans; (3) agricultural loans; (4) certain mortgage loans (e.g., 1-4 family residential, commercial real estate and rental property); (5) credit card loans; and (6) other consumer loans. For certain loans, we may estimate fair value based uponas a loan’s observable market price. The carrying amount of accrued interest approximates its fair value.
Deposits:The fair value of deposits with no maturity date (e.g., interest and noninterest-bearing checking, passbook savings, and certain types of money market accounts) are, according to generally accepted accounting principles, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings:The carrying amounts of overnight Federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values.
Long-term debt and capital securities:The fair values of our long-term debt (other than deposits) and capital securities are estimated using quoted market prices or discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements.
Derivative, Off-balance-sheet commitments and contingent liabilities:Fair values are based upon: (1) quoted market prices of comparable instruments (options on mortgage-backed securities and commitments to buy or sell foreign currencies); (2) fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing (letters of credit and commitments to extend credit); or (3) pricing models based upon quoted markets, current levels of interest rates and specific cash flow schedules (interest rate swaps and options on interest rate swaps).
New Pronouncementspurchase.
On JanuaryThe following table summarizes the Community First Balance Sheet on November 1, 2001,2004, including the Company adoptedeffects of purchase accounting adjustments:
(dollars in thousands) | ||||
Assets | ||||
Cash and cash equivalents | $ | 228,233 | ||
Securities available for sale | 1,458,677 | |||
Net loans and leases | 3,394,490 | |||
Intangibles | 1,010,255 | |||
Other assets | 313,041 | |||
Total Assets | $ | 6,404,696 | ||
Liabilities and Stockholder’s Equity | ||||
Deposits | 4,511,754 | |||
Debt | 604,275 | |||
Other liabilities | 93,761 | |||
Total Liabilities | 5,209,790 | |||
Stockholder’s equity | 1,194,906 | |||
Total Liabilities and Stockholder’s Equity | $ | 6,404,696 | ||
The acquisition is being accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”)Standard No. 133, “Accounting for Derivative Instruments141 “Business Combinations” (FAS 141). Accordingly, the purchase price was preliminarily allocated to the assets acquired and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities— Deferral of the Effective Date of FASB Statement No. 133” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities— An Amendment of FASB Statement No. 133.” At the time of adoption, the Predecessor designated certain derivative instruments used for risk management into hedging relationships in accordance with the requirements of the new standard. The transition adjustment resulting from the adoption of SFAS No. 133, as amended by SFAS Nos. 137 and 138, associated with establishing theliabilities assumed based on their estimated fair values of derivatives and hedged items onat the Company’s consolidated balance sheet was not material because the Company does not engage in significant transactions using derivative financial instruments.
In September 2000, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (a replacement of SFAS No. 125).acquisition date as summarized below. The provisions in SFAS No. 140, while not changing most of the guidance originally issued in SFAS No. 125, revised the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures related to transferred assets. Certain provisions of the statement, related to the recognition, reclassification and disclosure of collateral, as well as the disclosure of securitization transactions, became effective for fiscal years ending after December 15, 2000. Other
50
Notes to Consolidated Financial Statements(continued)
provisions related to the transfer and servicing of financial assets and extinguishments of liabilities became effective for transactions occurring after March 31, 2001. The adoption of SFAS No. 140 did not have a material effect on the Company’s Consolidated Financial Statements.
In July 2001, the FASB issued SFAS No. 141, “Business Combinations.” SFAS No. 141, which supersedes Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations,” addresses financial accounting and reporting for business combinations. All business combinations in the scope of SFAS No. 141 are to be accounted for using the purchase method of accounting. Also included in the provisions of SFAS No. 141 are new criteria for identifying and recognizing intangible assets apart from goodwill and additional disclosure requirements concerning the primary reasons for a business combination and thefinal allocation of the purchase price will be determined after completion of a final analysis to determine the fair values of Community First’s tangible assets and liabilities and identifiable intangible assets, as well as final decisions regarding integration activities.
53
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) | ||||||||
Total purchase price of Community First, including transaction costs | $ | 1,199,173 | ||||||
Equity of Community First prior to acquisition by BancWest | 352,693 | |||||||
Excess of pushed down equity over the carrying value of net assets acquired | 846,480 | |||||||
Estimated adjustments to reflect assets acquired and liabilities assumed at fair value: | ||||||||
Sublease loss reserve | 1,196 | |||||||
Loans and leases | 27,104 | |||||||
Premises and equipment | (4,053 | ) | ||||||
Other assets | 3,648 | |||||||
Severance and employee relocation | 9,614 | |||||||
Contract cancellations | 5,810 | |||||||
Identifiable intangibles | (4,218 | ) | ||||||
Deposits | 8,985 | |||||||
Debt | 16,050 | |||||||
Other liabilities and taxes | 2,618 | |||||||
Estimated fair value adjustments related to net assets acquired | 66,754 | |||||||
Estimated goodwill resulting from the merger with Community First | $ | 913,234 | ||||||
The following unaudited proforma condensed financial information presents the results of operations of the Company had the Community First acquisition occurred as of January 1, 2003, after giving effect to certain adjustments. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations which may occur in the future or which would have occurred had the Community First acquisition been consummated as of January 1, 2003.
(Unaudited) | (Unaudited) | |||||||
Year Ended | Year Ended | |||||||
(dollars in thousands) | December 31, 2004 | December 31, 2003 | ||||||
Net interest income | $ | 1,553,212 | $ | 1,553,802 | ||||
Provision for loan and lease losses | 56,626 | 93,897 | ||||||
Noninterest income | 507,660 | 484,872 | ||||||
Noninterest expense | 1,128,849 | 1,156,147 | ||||||
Income before income taxes and cumulative effect of accounting change | 875,397 | 788,630 | ||||||
Provision for income taxes | 338,667 | 302,204 | ||||||
Income before cumulative effect of accounting change | $ | 536,730 | $ | 486,426 | ||||
As of December 31, 2004, $25.2 million of exit costs related to Community First activities were recorded as purchase accounting adjustments resulting in an increase to Goodwill. Included in the $25.2 million were $7.4 million for severance and relocation charges, $5.8 million for contract terminations, $1.2 million for sublease loss reserves and $10.8 million for write downs to equipment and prepaids. Approximately 200 employees have been or will be displaced in conjunction with the acquisition.
We anticipate that cash outlays for exit and restructuring costs should be substantially completed by the end of 2005.
USDB Bancorp Acquisition
On November 1, 2004, the Company completed its acquisition of USDB Bancorp (USDB), parent company of Union Safe Deposit Bank. USDB was a holding company headquartered in Stockton, California, and operated 19 Union Safe Deposit Bank branches in San Joaquin and Stanislaus Counties in the Central Valley of California. The purchase price of $245 million was paid in cash to acquire 100% of the outstanding stock of USDB and was accounted for as a purchase in accordance with FAS 141. Accordingly, the purchase price was preliminarily allocated to the assets acquired and the liabilities assumed.assumed based on their estimated fair values. The provisionsfinal allocation of SFAS No. 141 applythe purchase price will be determined after completion of a final analysis to all business combinations initiated after June 30, 2001,determine the fair values of USDB's tangible assets and liabilities and identifiable assets, as well as to all business combinations accounted for usingfinal decisions regarding integration activities. The fair value of assets acquired was approximately $1.2 billion, the purchase methodfair value of accounting for which the dateloans was approximately $670 million and fair value of acquisition is July 1, 2001 or later. The Company adopted the provisionsdeposits was approximately $895 million. We recorded $170 million of SFAS No. 141 concurrent with the acquisition of the Parent by BNP Paribas. See further discussion in Note 2.
In July 2001, the FASB also issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142, which supersedes APB Opinion No. 17, “Intangible Assets,” addresses the accounting and reporting for goodwill, and other intangible assets acquired individuallyapproximately $15 million of identifiable intangibles related to this acquisition. Approximately 160 employees have been or with a group of other assets (but not those acquired in a business combination) at and subsequent to acquisition. Under the provisions of SFAS No. 142, goodwill and certain other intangible assets which do not possess finite lives will no longer be amortized into net income over an estimated life but rather will be tested at least annuallydisplaced in conjunction with this acquisition.
We anticipate that cash outlays for impairment based on specific guidance provided in the new standard. Intangible assets determined to have finite lives will continue toexit and restructuring costs should be amortized over their estimated useful lives and also continue to be subject to impairment testing. The provisions of SFAS No. 142 will be appliedsubstantially completed by the Company beginning January 1, 2002, except with regard to any goodwillend of 2005.
54
BancWest Corporation and intangible assets acquired after June 30, 2001, which will be subjectSubsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating results for USDB Bancorp were not significant to the new provisions of the standard immediately from the date of acquisition. Goodwill and other indefinite lived intangible assets will be subjected to a transitional impairment test within the first half of 2002 and any related impairment losses will be reported as a cumulative effect of a change in accounting principle. Application of the non-amortization provisions of this statement was effective with the acquisition of the Parent by BNP Paribas. The amortization of goodwill arising from the BNP Paribas Merger of approximately $3.4 million (assuming an amortization period of 20 years) wasconsolidated operating results; therefore, proforma results are not recorded on the Company’s consolidated financial statements from December 20, 2001 to December 31, 2001. For the period from January 1, 2001 to December 19, 2001, the Company recognized goodwill amortization expense of $31 million. Such expense will not be recorded in fiscal 2002 under this new standard. Management has not yet determined what the effect, if any, of the required impairment tests will be on the Company’s consolidated results of operations and financial position.presented.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. The scope of SFAS No. 144 excludes goodwill and other non-amortizable intangible assets to be held and used as well as goodwill associated with a reporting unit to be disposed of. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 is not expected to have a material effect on the Company’s Consolidated Financial Statements.
2. Mergers and Acquisitions
United California Bank Acquisition
On March 15, 2002, BancWest Corporation (“BancWest”), a wholly-owned subsidiary of BNP Paribas, completed its acquisition of all the outstanding common stock of United California Bank (“UCB”) from UFJ Bank Ltd. of Japan. UCB was subsequently merged with and into Bank of the West in April 2002 and its branches were integrated into Bank of the West’s branch network system in the third quarter of 2002. On March 15, 2002,the date of acquisition by BancWest, UCB had 115 branches (located exclusively in California), total assets of $10.1 billion, net loans of $8.5 billion and total deposits of $8.3 billion and a total of 115 branches.$8.2 billion. The preceding amounts do not include final purchase price accounting adjustments. Results of operations of UCB are included in our Consolidated Financial Statements beginning on March 15, 2002. The purchase price of approximately $2.4 billion was paid in cash and accounted for as a purchase. BNP Paribas funded BancWest’s acquisition of UCB by providing $1.6 billion of additional capital to BancWest and by lending it $800 million.
BancWest incurred expenses associated with exiting certain branches, operational centers and technology platforms, as well as other conversion and restructuring expense of $18 million. In conjunction with the acquisition, approximately 750 employees throughout the combined organization have been displaced. Exit costs associated with UCB were considered as part of the purchase accounting for the acquisition and we established a severance reserve of $40.5 million. In addition to the severance reserve, we recorded the following accruals: $34.5 million for losses on subleases, $8.0 million for contract cancellations and $1.3 million for relocation and other. Since the date of acquisition, we made the following adjustments to the reserves: $6.9 million increase for severance, $7.5 million decrease for losses on subleases, $4.9 million increase for contract cancellations and $0.2 million decrease for relocation. As of December 31, 2004, these initiatives are complete except for the remaining accrual for sublease losses of $8.7 million, which is expectedbeing amortized over the lease period.
The following unaudited pro forma financial information for the year December 31, 2002, assumes that the UCB acquisition occurred as of January 1, 2002, after giving effect to be mergedcertain adjustments. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations which may occur in the future or which would have occurred had the UCB acquisition been consummated as of January 1, 2002:
(Unaudited) | ||||||||
Pro Forma Financial Information | ||||||||
for The Year Ended | ||||||||
(dollars in thousands) | December 31, 2002 | |||||||
Net Interest Income | $ | 1,280,585 | ||||||
Provision for Loan and Lease Losses | 111,775 | |||||||
Noninterest Income | 352,290 | |||||||
Noninterest Expense | 895,305 | |||||||
Income Tax Expense | 244,410 | |||||||
Net Income | $ | 381,385 | ||||||
In conjunction with the purchase of UCB from UFJ, there were certain items that were in dispute. The disputed items were related to UCB’s loan charge-offs and intoits deferred tax liability. In March 2003, an arbitrator decided in favor of BancWest on both matters. Interest on the disputed amounts totaled $0.8 million, which was recognized in other income during the first quarter of 2003. The resolution of the loan charge-off issue was a receivable due from UFJ of $8.9 million, an increase to our allowance for loan and lease losses of $13.6 million, representing recoveries of loans charged off by BancWest, and a related decrease to our deferred tax liability of $4.7 million. Upon resolution of the deferred tax issue during the first quarter of 2003, we reassessed the adequacy of UCB’s deferred tax liability and reduced the related goodwill by $14.9 million. All cash due from UFJ as a result of the arbitrator’s decision was received in April 2003.
Trinity Capital Corporation Acquisition
On November 8, 2002, Bank of the West acquired Trinity Capital Corporation (“Trinity”), a subsidiaryprivately held equipment leasing company specializing in nationwide vendor leasing programs for manufacturers in specific markets. The purchase price was approximately $18.3 million including $7.3 million of BancWest Corporation, in the second quarter of 2002. Branches of UCB are expected to be fully integrated into thegoodwill. In addition, Bank of the West branch network system by late 2002.
BNP Paribas Merger
On December 20, 2001, Chauchat L.L.C., a Delaware limited liability company (“Merger Sub”), merged (the “BNP Paribas Merger”) with and into the Parent pursuantwas obligated to an Agreement and Planmake two contingent payments based on performance, of Merger, dated as of May 8, 2001, as amended and restated as of July 19, 2001, by and among the Parent, BNP Paribas, and Merger Sub (the “Merger Agreement”).$1.5 million. The Merger Sub was a wholly-owned subsidiary of BNP Paribas.
At the effective timefirst of the BNP Paribas Merger, all outstanding sharestwo contingent payments was paid on January 2, 2004. The second payment of common stock, par value $1 per
51
Notes to Consolidated Financial Statements(continued)
share (“Company Common Stock”), of the Parent were cancelled and converted solely into the right to receive $35 per share in cash, without interest thereon (except for shares held in the treasury of the Parent or by any wholly-owned subsidiary of the Parent and shares held in respect of a debt previously contracted which were cancelled without any consideration being payable therefor).
Pursuant to the Merger Agreement, each share of Class A common stock, par value $1 per share, of the Parent owned by BNP Paribas and French American Banking Corporation, a wholly-owned subsidiary of BNP Paribas, remained outstanding as one share of Class A Common Stock and all of the units of the Merger Sub were cancelled without any consideration becoming payable therefor. Concurrent with the BNP Paribas Merger, the par value of the Class A common stock was changed to $.01. As a result of the BNP Paribas Merger, the Parent became a wholly-owned subsidiary of BNP Paribas. BNP Paribas believes that by acquiring full ownership of BancWest Corporation, it can increase its international retail banking franchise, permit it to benefit fully from our growth, diversify its earnings base, increase synergies and simplify its ownership structure, among other things.
$1.5 million will be paid on January 2, 2006. The BNP Paribas Merger significantly affected our financial statements. “Push-down” accounting was required for this business combination. Essentially, this resulted in three major changes to our balance sheet:
New Mexico, Nevada, Guam and Saipan Branch Acquisitions
In the third quarter of 2000, we entered into an agreement to acquire 30 branches in New Mexico and Nevada being divested by First Security Corporation in connection with its merger with Wells Fargo & Company. At that date, those branches had approximately $1.1 billion in deposits and approximately $200 million in loans. The acquisition of the Nevada branches was completed in January 2001 and the acquisition of the New Mexico branches was completed in February 2001. The cash transaction was accounted for using the purchase method of accounting. We incurred pre-tax integration
55
BancWest Corporation and other nonrecurring costsSubsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating results for Trinity were not significant to the consolidated operating results; therefore, proforma results are not presented.
3. Derivative Financial Instruments
�� Any portion of $3.9the changes in the fair value of a derivative designated as a hedge that is deemed ineffective is recorded in current period earnings; this amount was not material in the years ended December 31, 2004, 2003 and 2002.
Fair Value Hedges
The Company has various derivative instruments that hedge the fair values of recognized assets or liabilities or of unrecognized firm commitments. At December 31, 2004, the Company carried an interest rate swap of $2.7 million with a fair market value loss of $0.6 million that was categorized as a hedge for a commercial loan. The Company receives 1-month LIBOR and pays a fixed rate of 8.32%. At December 31, 2003, the Company carried $2.7 million of such swaps with a fair market value loss of $0.7 million. In addition, at December 31, 2004, the Company carried interest rate swaps totaling $77.3 million with market value gains of $0.2 million and $1.3fair value losses of $4.0 million in 2001that were categorized as fair value hedges for commercial and 2000, respectively, as described in Note 3.
On November 9, 2001,commercial real estate loans. The Company receives 6-month LIBOR and pays fixed rates from 3.56% to 7.99%. At December 31, 2003, the Company completed its acquisitioncarried $87 million of Union Banksuch swaps with market value gains of California’s network in Guam and Saipan, along with associated loan and deposit accounts. First Hawaiian assumed branch deposits of approximately $200$0.1 million and also bought various loans frommarket value losses of $5.8 million.
In November 20, 2002, BancWest Corporation executed a $150 million interest rate swap agreement with BNP Paribas to hedge the branches.
SierraWest Bancorp
On July 1, 1999, the Company completed its acquisition of SierraWest Bancorp (“SierraWest”). SierraWest was merged with and into the Company and its subsidiary, SierraWest Bank, was merged with and into Bankfair value of the West9.5% BancWest Capital I Quarterly Income Preferred Securities (the “SierraWest Merger”)BWE Capital Securities) issued by BancWest Capital I. Following the adoption of FIN 46, BancWest Capital I was deconsolidated resulting in recognition of $150 million subordinated debt instead of the issuanceBWE Capital Securities. The terms of approximately 4.4 million shares (8.8 million shares, after adjustment for the two-for-one stock split in December 1999) of our common stock to the shareholders of SierraWest. The acquisition was accounted for using the pooling-of-interests method of accounting. No material adjustments were required to conform SierraWest’s accounting policies withsubordinated debt mirror those of the Company.
In connectionBWE Capital Securities. Concurrent with the SierraWest Merger,deconsolidation of BancWest Capital I, the Bank redesignated the interest rate swap to hedge the subordinated debt. The derivative instrument is effective and all changes in the fair value of the hedge were recorded in current-period earnings together with the offsetting change in fair value of the hedged item attributable to the risk being hedged. We pay 3-month LIBOR plus 3.69% and receive fixed payments at 9.5%. The fair market value loss on the swap was $2.7 million and $3.5 million at December 31, 2004 and 2003, respectively.
At December 31, 2004, the Company carried interest rate swaps totaling $8.6 million with a market value gain of $0.4 million that were categorized as fair value hedges for repurchase agreements. The Company pays 3-month LIBOR and receives fixed rates ranging from 8.29% to 8.37%. At December 31, 2003, the Company carried $8.6 million of such swaps with a market value gain of $0.7 million.
Cash Flow Hedges
At December 31, 2004, the Company carried interest rate swaps of $600 million with a fair market value gain of $20.7 million which hedged our LIBOR-based commercial loans. The hedges had a fair market value gain of $47.0 million at December 31, 2003. The interest rate swaps were entered into during 2001 by UCB and mature in 2006. We pay 3-month LIBOR and receive fixed rates ranging from 5.64% to 5.87%. The net settlement on the $600 million swaps increased commercial loan interest income by $22.3 million during 2004 and by $24.0 million during 2003. The Company estimates net settlement gains, recorded pre-tax restructuring, merger-relatedas commercial loan interest income, of $13.0 million over the next twelve months resulting from these hedges.
At December 31, 2004, the Company carried interest rate swaps totaling $100 million with fair market value gains of $3.5 million and other nonrecurring costs totaling $10.7fair market value losses of $0.2 million in 1999,order to reduce exposure to interest rate increases associated with short-term fixed rate liabilities. The swaps hedge forecasted transactions associated with short-term fixed rate liabilities. These swaps had a fair market value gain of $7.2 million at December 31, 2003. The swaps mature as describedfollows: $70 million in Note 3.2013, $20 million in 2018 and $10 million in 2023. We pay fixed rates ranging from 3.65% to 4.58% and receive 3-month LIBOR. The effect on pretax income from these swaps was a loss of $2.8 million and $1.2 million for the years ended December 31, 2004 and 2003, respectively. The Company estimates a net increase to interest expense of $1.9 million over the next twelve months resulting from these hedges.
Free-standing Derivative Instruments
Free-standing derivative instruments include derivative transactions entered into for risk management purposes that do not otherwise qualify for hedge accounting. Interest rate lock commitments issued on residential mortgage loans intended to be held for resale are considered free-standing derivative instruments. Such commitments are stratified by rates and terms and are valued based on
56
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
market quotes for similar loans. Adjustments, including discounting the historical fallout rate, are then applied to estimated fair market value. Trading activities primarily involve providing various free-standing interest rate and foreign exchange derivative products to customers. Interest rate derivative instruments utilized by the Company in its trading operations include interest rate swaps, caps, floors and collars.
The following table sets forth the results of operations of SierraWest andsummarizes derivatives held by the Company for the six months ended June 30, 1999. These six-month results are included in the consolidated results of operations for the year ended December 31, 1999, presented in the accompanying Consolidated Statements of Income.
Six Months Ended June 30, 1999
(in thousands) | SierraWest | Company | Combined | |||||||||
Net interest income | $ | 21,703 | $ | 315,412 | $ | 337,115 | ||||||
Net income | $ | 4,765 | $ | 82,260 | $ | 87,025 | ||||||
52
Notes to Consolidated Financial Statements(continued)
BancWest Corporation
On November 1, 1998, for a purchase price of $905.7 million, BancWest Corporation (“Old BancWest”), parent company of Bank of the West, was merged with and into First Hawaiian, Inc. (“FHI”) (the “BancWest Merger”). At that date, Bank of the West, headquartered in San Francisco, was California’s fifth-largest bank with approximately $6.1 billion in assets and 103 branches in 21 counties in Northern and Central California.
Prior to the BancWest Merger, Old BancWest was wholly-owned by Banque Nationale de Paris, now BNP Paribas, one of the largest commercial banks in France and among the largest in Europe. In the BancWest Merger, BNP Paribas received approximately 25.815 million shares (51.630 million shares after adjustment for the two-for-one stock split in December 1999) of the Company’s newly authorized Class A common stock (representing approximately 45% of the outstanding voting stock). The transaction was accounted for using the purchase method of accounting. The excess of cost over fair value of net assets acquired amounted to approximately $599.0 million. FHI, the surviving corporation of the BancWest Merger, changed its name to “BancWest Corporation” on November 1, 1998.
The Company recorded pre-tax restructuring, merger-related and other nonrecurring costs totaling $25.5 million in 1998, as described in Note 3.
3. Restructuring, Integration and Other Nonrecurring Costs
New Mexico and Nevada Branch Acquisitions
In connection with the acquisition of 30 branches in New Mexico and Nevada, the Company recorded pre-tax integration costs of $1.3 million in 2000 and $3.9 million in 2001.
SierraWest Bancorp Merger
In connection with the SierraWest Merger, the Company recorded pre-tax restructuring, merger-related and other nonrecurring costs of $10.7 million in 1999. These costs were comprised of: (1) $3.4 million in severance and other employee benefits; (2) $1.6 million in equipment and occupancy expense; (3) $4.2 million in expenses for legal and other professional services; and (4) $1.5 million in other nonrecurring costs. During 1999, we wrote off $1.6 million of capitalized equipment and occupancy expense, paid $2.7 million in accrued severance and other employee benefits and paid $5.4 million in legal and other professional services and other nonrecurring costs. At December 31, 1999, $682,000 of severance and other employee benefits and $267,000 in other nonrecurring costs remained accrued. During 2000, we paid $479,000 in severance and other employee benefits and paid $267,000 in other nonrecurring costs. As of December 31, 2000, accrued expenses related to the SierraWest Merger had been substantially paid.31:
2004 | 2003 | |||||||||||||||||||||||
Credit | Credit | |||||||||||||||||||||||
Notional | Risk | Net Fair | Notional | Risk | Net Fair | |||||||||||||||||||
Amount | Amount | Value | Amount | Amount | Value | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Held for hedge purposes: | ||||||||||||||||||||||||
Interest rate swaps | $ | 938,534 | $ | 24,790 | $ | 17,327 | $ | 948,439 | $ | 54,999 | $ | 45,063 | ||||||||||||
Held for trading or free-standing: | ||||||||||||||||||||||||
Interest rate swaps | 1,502,706 | 19,558 | 7,856 | 1,375,018 | 22,113 | 5,224 | ||||||||||||||||||
Purchased interest rate options | 143,251 | 203 | 203 | 22,318 | 187 | 187 | ||||||||||||||||||
Written interest rate options | 152,645 | — | (203 | ) | 62,946 | — | (187 | ) | ||||||||||||||||
Forward interest rate options | 22,000 | — | (20 | ) | 217,930 | 782 | 732 | |||||||||||||||||
Commitments to purchase and sell foreign currencies | 401,057 | 9,533 | 1,046 | 421,130 | 8,592 | (48 | ) | |||||||||||||||||
Purchased foreign exchange options | 4,876 | 217 | 217 | 55,791 | 597 | 597 | ||||||||||||||||||
Written foreign exchange options | 4,876 | — | (217 | ) | 55,791 | — | (597 | ) | ||||||||||||||||
BancWest Merger and Related Matters
The Company recorded pre-tax restructuring, BancWest Merger-related and other nonrecurring costs totaling $25.5 million in 1998. As a result of these costs of $25.5 million, a liability of $11.3 million was recorded in 1998. During 1999, this liability was reduced by a total of $6.6 million, as a result of: (1) $2 million for the payment of data processing contract termination penalties; (2) $2 million for severance payments; (3) $2 million related to excess leased commercial properties; and (4) $600,000 for payments on other nonrecurring costs. The remaining amount accrued was $4.7 million at December 31, 1999. During 2000, this liability was reduced by a total of $2.2 million, as a result of: (1) $58,000 for the reversal of accrued data processing contract termination penalties; (2) $175,000 for reversal of accrued severance payments; (3) $1.9 million related to excess leased commercial properties; and (4) $30,000 for reversal of other accrued costs. The remaining amount accrued at December 31, 2000 was $2.5 million, primarily related to excess leased com- mercial properties. During 2001, this remaining amount was further amortized by $1.8 million, resulting in a balance of $700,000 at December 31, 2001. The majority of the amount related to excess leased commercial property will be fully amortized in 2002.
On July 19, 1999, the Company announced plans to consolidate its three existing data centers into a single data center in Honolulu. The consolidation was accomplished through a facilities management contract with a service provider which has assumed management of First Hawaiian’s existing data center. As a result of this consolidation effort, the Company recorded pre-tax restructuring and other nonrecurring costs of $6.9 million in the third quarter of 1999. Those costs were comprised of: (1) $3.8 million for the write-off of capitalized information technology costs; (2) $1.5 million for employee severance costs; and (3) $1.6 million in other nonrecurring costs. During 1999, we wrote off $3.8 million in capitalized information technology costs and paid $459,000 in other nonrecurring costs. At December 31, 1999, the remaining amount accrued for these costs was $2.6 million. During 2000, we paid $970,000 in employee severance costs and $1 million in other nonrecurring costs. In addition, we reversed $465,000 in accrued employee severance costs and $135,000 in other nonrecurring costs. As of December 31, 2000, the amounts accrued related to the data center consolidation had been substantially paid. See Note 22 to the Consolidated Financial Statements on page 67 for additional information.
53
Notes to Consolidated Financial Statements(continued)
4. Transactions with Affiliates
The Company and its subsidiaries participate in various transactions with BNP Paribas and its affiliates. Except for theThe $1.550 billion term note, $800 million repurchase agreement, $590 million short-term debt, $400 million of structured repurchase agreements and a $150 million swap that is used to hedge the subordinated debt related to trust preferred securities are between Parent and BNP Paribas. On March 17, 2005 the $590 million of short-term debt was extended to a maturity date of April 1, 2005 with a stated interest rate of 2.78%. It is the Company’s intent to convert the $590 million of short-term debt to long-term financing. Subordinated debt of $370 million is owed to the First Hawaiian Capital I, BancWest Capital I, CFB Capital III and CFB Capital IV trusts (see Note 14). The subordinated notes included in long-term debt were sold directly to BNP Paribas by Bank of the West. They are subordinated to the claims of depositors and BancWest Corporation, thecreditors and qualify for inclusion as a component of risk-based capital under current FDIC guidelines for assessing capital adequacy. The other items listed in the table below are between our banking subsidiaries and BNP Paribas and its affiliates. Transactions involving the Company’s bank subsidiaries and their non-banknonbank affiliates (including BancWest and BNP Paribas) are subject to review by the Federal Deposit Insurance Corporation (the “FDIC”) and other regulatory authorities. These transactions are required to be on terms at least as favorable to the bank as those prevailing at the time for similar non-affiliate transactions. Transactions have included the sales and purchases of assets, foreign exchange activities, financial guarantees, international services, interest rate swaps and intercompany deposits and borrowings.
57
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts due to and from affiliates and off-balance-sheet transactions at December 31, 20012004 and 20002003 were as follows:
(in thousands) | 2001 | 2000 | |||||||
Cash and due from banks | $ | 4,071 | $ | 1,278 | |||||
Noninterest-bearing demand deposits | 2,494 | 3,529 | |||||||
Short-term borrowings | 8,000 | 50,000 | |||||||
Time certificates of deposit | 255,000 | 467,000 | |||||||
Other liabilities | 252 | 121 | |||||||
Term note | 1,550,000 | — | |||||||
Subordinated capital notes included in long-term debt | 52,828 | 51,595 | |||||||
Off-balance-sheet transactions: | |||||||||
Standby letters of credit | 2,501 | 7,473 | |||||||
Guarantees received | 280 | 15,987 | |||||||
Commitments to purchase foreign currencies | 35,808 | 20,144 | |||||||
Commitments to sell foreign currencies | — | 2,680 | |||||||
Year Ended December 31, | ||||||||
(dollars in thousands) | 2004 | 2003 | ||||||
Cash and due from banks | $ | 540 | $ | 470 | ||||
Noninterest-bearing demand deposits | 1,124 | 2,662 | ||||||
Short-term borrowings | 590,000 | 150,000 | ||||||
Time certificates of deposit | 20,427 | 420,750 | ||||||
Other liabilities | 8,077 | 36,228 | ||||||
Term note | 1,550,000 | 1,550,000 | ||||||
Subordinated notes included in long-term debt | 51,848 | 52,193 | ||||||
Subordinated notes issued to trusts(1) | 384,158 | 252,785 | ||||||
Repurchase agreement | 800,000 | 800,000 | ||||||
Structured repurchase agreements | 400,000 | — | ||||||
Off-balance sheet transactions: | ||||||||
Standby letters of credit | 26,611 | 8,121 | ||||||
Guarantees received | 2,683 | 615 | ||||||
Commitments to purchase foreign currencies(2) | 125,466 | 58,403 | ||||||
Commitments to sell foreign currencies(2) | 39,968 | 133,038 | ||||||
Interest rate contracts(2) | 662,071 | 398,174 | ||||||
Foreign exchange options(2) | 4,876 | 55,791 | ||||||
(1) | Includes purchase accounting adjustments of $13.8 million. | |
(2) | Represents the notional amount of derivatives financial instruments that are carried on our balance sheet at fair value. |
In March 2002, BancWest borrowed $800 million from BNP Paribas under an interim financing arrangement as part of the United California Bank acquisition. In November 2002, the Corporation sold BNP Paribas 485,413 shares of the outstanding common stock of Bank of the West for $800 million, and used the proceeds to repay the interim debt. The subordinated capital notes wereCorporation and BNP Paribas also entered into a Stockholder’s Agreement that included put and call options. The call option gives BancWest the right on specified dates or events to repurchase all or a portion of the Bank of the West stock sold directly to BNP Paribas at a price equal (in the case of a purchase of all such shares) to $800 million, plus 4.39% per annum, less the aggregate amount of distributions paid on such shares to BNP Paribas (together with interest paid on such amounts at 4.39% per annum, compounded quarterly), plus $5.0 million. If BancWest does not exercise its call option by December 2011, or within 90 days after certain specified events or agreements, BNP Paribas can require the Corporation to repurchase the Bank of the West. They are subordinatedWest shares at a price equal to (in case of a purchase of all such shares) $800 million, plus 4.39% per annum, less the aggregate amount of distributions paid on such shares to BNP Paribas (together with interest on such amounts at 4.39% per annum, compounded quarterly), plus $50 million. Due to the claimsput and call arrangement, the $800 million repurchase agreement is considered a redeemable security and accordingly classified as debt. The Stockholder’s Agreement contains provisions for pro rata allocation of depositorsthe formula described above in the event the call option is exercised for less than the full amount of the Bank of the West stock. The specified events referred to above include potential changes in ownership of Bank of the West as well as legislative, regulatory or other related changes that could affect the transactions referred to above. The Stockholder’s Agreement also limits the transferability of the Bank of the West shares. No value has been attributed to the call or put options in the Company’s financial statements and creditorsthe Company does not expect to attribute a value to these options during the term of the Stockholder’s Agreement.
At December 31, 2004, BancWest’s obligation to BNP Paribas under the Agreement (assuming the Call Option could have been exercised as of that date) would be calculated as $806.2 million. This obligation represents the original amount of $800 million, accrued interest of $1.2 million, plus the $5.0 million Call Option premium. At 2003, the obligation was $836.7 million, which included the original amount of $800 million, accrued interest of $31.7 million and the $5.0 million Call Option premium. The average balance of the obligation to BNP Paribas under the Agreement using the same calculation was $850.8 million and $820.8 million for the years ended December 31, 2004 and 2003, respectively.
BNP Paribas received a tax opinion that this cross-border transaction should be treated for U.S. Federal tax purposes as a loan from BNP Paribas to the Company secured by the Bank of the West shares. Accordingly, the Company recognizes a U.S. tax benefit for the current deduction for interest paid under the terms of the Stockholder’s Agreement.
At December 31, 2004, we carried a $150 million interest rate swap with BNP Paribas. See Note 3 for additional information.
58
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense to affiliates for 2004, 2003 and 2002 was $174.6 million, $156.2 million and $131.9 million, respectively. Income from affiliate transactions was $6.4 million for 2004, $6.7 million for 2003 and was not material for 2002.
5. Variable Interest Entities (VIEs)
On June 23, 1997 and October 20, 2000, the Company formed two trusts, First Hawaiian Capital I (FH Trust) and BancWest Capital I (BWE Trust) (the Trusts), respectively. The Trusts issued preferred and common capital securities. The purpose of these entities is to allow for the issuance of preferred capital securities that qualify for inclusion in Tier 1 regulatory capital. Historically, the Trusts were consolidated and the related trust preferred securities have been treated as Tier 1 capital under Federal Reserve rules and regulations. The Company deconsolidated the Trusts as a componentresult of risk-basedthe adoption of FIN 46 in the preparation of its financial statements in October 2003. This deconsolidation had no material impact on the total assets or liabilities of BancWest. On March 1, 2005 the Federal Reserve Board issued final rules that will allow trust preferred securities to continue to be treated as Tier 1 capital, under current FDIC guidelinesbut in reduced amounts. After a five year transition period, the quantitative limitations for assessingthe amount of trust preferred securities that may be included in Tier 1 capital adequacy.
5. Investment Securities
Held-to-Maturityfor domestic bank holding companies will be reduced to 25% of core capital elements, net of goodwill less any associated deferred tax liability. In addition, during the last five years before maturity trust preferred securities will be treated as Tier 2 capital and require the same phase-out of capital credit as limited-life preferred stock.
There were no held-to-maturity investmentBWE Trust is a Delaware business trust, which was formed in 2000 and exchanged $150 million of its BWE Capital Securities, as well as all outstanding common securities atof BWE Trust, for 9.5% junior subordinated deferrable interest debentures of BancWest. The Corporation sold the $150 million of BWE Capital Securities to the public. At December 31, 2001. Upon2004, BWE Trust’s total assets were $155.9 million, comprised predominately of BancWest’s junior subordinated debentures. The BWE Capital Securities and the purchasedebentures will mature on December 1, 2030, but on or after December 1, 2005 are subject to redemption in whole or in part at par plus accrued interest. They are solely, fully and unconditionally guaranteed by BNP Paribasthe Parent, representing the Company’s maximum liability for the securities. All of the remaining 55%common securities of outstanding common stock it did not already own, all securities previously considered held-to-maturity were reclassified to available-for-sale at their fair value. The amortized cost of securities reclassified at that time was $91 million,BWE Trust are owned by the Parent.
FH Trust is a Delaware business trust which was formed in 1997, issued $100 million of its Capital Securities (the “FH Capital Securities”) and used the proceeds to purchase junior subordinated deferrable interest debentures of BancWest. The FH Capital Securities accrue and pay interest semiannually at an annual interest rate of 8.343%. The FH Capital Securities are mandatorily redeemable upon maturity date of July 1, 2027. However, they are subject to redemption on or after July 1, 2007, in whole or in part (subject to a prepayment penalty) as provided for in the governing indenture. At December 31, 2004, FH Trust’s total assets were $107.4 million, comprised predominately of BancWest’s junior subordinated debentures. The debentures and the associated interest expense make up the Company’s maximum exposure to losses for this trust. They are solely, fully and unconditionally guaranteed by the Parent, representing the Company’s maximum liability for the securities. All of the common securities of FH Trust are owned by the Parent.
CFB Capital III Trust is a Delaware business trust which was formed in 2002 and issued $60 million of 8.125% Cumulative Capital Securities. The proceeds of the offering were invested by CFB Capital III in junior subordinated debentures of Community First, which were later assumed by BOW following the merger of Community First with and into BOW. At December 31, 2004, CFB Capital III Trust’s total assets were $62.9 million, comprised predominately of BOW’s junior subordinated debentures. The debentures and the associated interest expense make up BOW’s maximum exposure to losses for this trust. With regulatory approval, the debentures can be redeemed no earlier than April 15, 2007, and mature April 15, 2032. All of the common securities of CFB Capital III are owned by BOW, and therefore the preferred securities do not qualify as Tier 1 capital.
CFB Capital IV Trust is a Delaware business trust which was formed in 2003 and issued $60 million of 7.60% Cumulative Capital Securities. The proceeds of the offering were invested by CFB Capital IV in junior subordinated debentures of Community First, which were later assumed by BOW following the merger of Community First with and into BOW. At December 31, 2004, CFB Capital IV Trust’s total assets were $62.5 million, comprised predominately of BOW’s junior subordinated debentures. The debentures and the associated interest expense make up BOW’s maximum exposure to losses for this trust. With regulatory approval, the new debentures may be redeemed no earlier than March 15, 2008, and mature March 15, 2033. All of the common securities of CFB Capital IV are owned by BOW, and therefore the preferred securities do not qualify as Tier 1 capital.
The Company has identified investments that meet the definition of a VIE under FIN 46 but do not meet the requirements for consolidation. The Company owns several limited partnership interests in low-income housing developments in conjunction with the Community Reinvestment Act. Limited partners do not participate in the control of the partnerships’ businesses. The general partner exercises the day-to-day control and management of the projects. The general partners have exclusive control over the partnerships’ businesses and have all of the rights, powers, and authority generally conferred by law or necessary, advisable or consistent with
59
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accomplishing the partnerships’ businesses. FIN 46 indicates that if an entity (e.g., limited partner) cannot sell, transfer, or encumber its interests in the VIE without the prior approval of an enterprise (e.g., general partner), the limited partner is deemed to be a de facto agent for the general partner. BancWest is considered to be a de facto agent for the general partner where BancWest has a limited partnership interest over 50%. BancWest is not the primary beneficiary for these partnerships or for those where its interest is less than 50%. The business purpose of these entities is to provide affordable housing within the Company’s service area in return for tax credits and tax loss deductions. At December 31, 2004 our subscription amount for these investments is approximately equal$112.0 million with approximately $37.5 million as the residual contribution outstanding. We are not obligated to their fair value.fund deficiencies of the limited partnerships and our maximum exposure to losses is limited to our subscription amount. Bargain purchase options are available for the general partners to purchase the Company’s portion of interests in the limited partnerships. These commitments were entered into from 1991 through 2004.
6. Securities Available for Sale
Amortized cost and fair value of held-to-maturity investment securities available for sale at December 31, 20002004 and 19992003 were as follows: 2000 Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value U.S. Treasury and other U.S. Government agencies and corporations $ 15,990 $ — $ 99 $ 15,891 Other asset-backed securities 38,233 11 524 37,720 Collateralized mortgage obligations 38,717 4 707 38,014 Total held-to-maturity investment securities $ 92,940 $ 15 $ 1,330 $ 91,625 1999 Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value U.S. Treasury and other U.S. Government agencies and corporations $ 15,985 $ — $ 543 $ 15,442 Other asset-backed securities 72,388 — 1,557 70,831 Collateralized mortgage obligations 54,495 2 1,668 52,829 Total held-to-maturity investment securities $ 142,868 $ 2 $ 3,768 $ 139,102
2004 | 2003 | |||||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Amortized | Unrealized | Unrealized | |||||||||||||||||||||||||||
(dollars in thousands) | Cost | Gains | Losses | Fair Value | Cost | Gains | Losses(1) | Fair Value | ||||||||||||||||||||||||
U.S. Treasury and other U.S. Government agencies and corporations | $ | 266,174 | $ | 263 | $ | (1,745 | ) | $ | 264,692 | $ | 187,468 | $ | 512 | $ | (478 | ) | $ | 187,502 | ||||||||||||||
Government sponsored agencies | 2,372,319 | 1,374 | (14,868 | ) | 2,358,825 | 1,400,848 | 13,598 | (1,778 | ) | 1,412,668 | ||||||||||||||||||||||
Mortgage and asset-backed securities: | ||||||||||||||||||||||||||||||||
Government agencies | 229,827 | 1,741 | (450 | ) | 231,118 | 126,701 | 1,411 | (55 | ) | 128,057 | ||||||||||||||||||||||
Government sponsored agencies | 3,185,857 | 10,733 | (37,208 | ) | 3,159,382 | 2,229,914 | 21,986 | (23,824 | ) | 2,228,076 | ||||||||||||||||||||||
Other | 487,250 | 3,177 | (2,512 | ) | 487,915 | 691,510 | 7,990 | (1,425 | ) | 698,075 | ||||||||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||||||||
Government agencies | 181,502 | — | (2,311 | ) | 179,191 | 190,449 | 331 | (2,246 | ) | 188,534 | ||||||||||||||||||||||
Government sponsored agencies | 603,173 | 420 | (6,907 | ) | 596,686 | 601,543 | 1,784 | (4,381 | ) | 598,946 | ||||||||||||||||||||||
Other | 568,724 | 154 | (5,565 | ) | 563,313 | 274,686 | 496 | (1,492 | ) | 273,690 | ||||||||||||||||||||||
State and political subdivisions | 56,081 | 627 | (297 | ) | 56,411 | 15,925 | 355 | (61 | ) | 16,219 | ||||||||||||||||||||||
Other | 59,311 | 103 | (2,384 | ) | 57,030 | 41,367 | 173 | (628 | ) | 40,912 | ||||||||||||||||||||||
Total securities available for sale | $ | 8,010,218 | $ | 18,592 | $ | (74,247 | ) | $ | 7,954,563 | $ | 5,760,411 | $ | 48,636 | $ | (36,368 | ) | $ | 5,772,679 | ||||||||||||||
Available-for-Sale
(1) At December 31, 2003, the Company held no securities that had been in a continuous unrealized loss position for 12 months or more. |
Amortized cost and fair value of available-for-sale investment securities at December 31, 2001, 2000 and 1999 were as follows:60 2001 Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value $ 794,991 $ 7,971 $ 2,777 $ 800,185 923,468 8,704 5,747 926,425 253,939 3,796 745 256,990 416,401 3,196 1,160 418,437 1,793 — 158 1,635 138,541 5 45 138,501 $ 2,529,133 $ 23,672 $ 10,632 $ 2,542,173
54
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes The following table presents the unrealized gross losses and fair values of securities in the securities available for sale portfolio by length of time that individual securities in each category have been in a continuous loss position. Because the declines in fair value were a result of changes in market interest rates and the Company has both the ability and the intent to Consolidated Financial Statements(continued)hold the securities until maturity or the fair value at least equals the recorded cost, no other-than-temporary impairment was recorded at December 31, 2004. 2000 Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value U.S. Treasury and other U.S. Government agencies and corporations $ 766,905 $ 3,868 $ 641 $ 770,132 Mortgage and asset-backed securities: Government 619,791 8,550 1,539 626,802 Other 345,229 3,251 676 347,804 Collateralized mortgage obligations 77,529 243 144 77,628 States and political subdivisions 9,871 22 183 9,710 Other 128,704 — — 128,704 Total available-for-sale investment securities $ 1,948,029 $ 15,934 $ 3,183 $ 1,960,780 1999 Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value U.S. Treasury and other U.S. Government agencies and corporations $ 775,778 $ 38 $ 7,672 $ 768,144 Mortgage and asset-backed securities: Government 556,735 5,043 6,746 555,032 Other 384,378 118 4,244 380,252 Collateralized mortgage obligations 16,374 6 334 16,046 States and political subdivisions 22,104 205 670 21,639 Other 126,896 3 9 126,890 Total available-for-sale investment securities $ 1,882,265 $ 5,413 $ 19,675 $ 1,868,003
December 31, 2004 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
(dollars in thousands) | Losses | Fair Value | Losses | Fair Value | Losses | Fair Value | ||||||||||||||||||
U.S. Treasury and other U.S. Government agencies and corporations | $ | (1,455 | ) | $ | 223,980 | $ | (290 | ) | $ | 32,851 | $ | (1,745 | ) | $ | 256,831 | |||||||||
Government sponsored agencies | (13,142 | ) | 1,945,187 | (1,726 | ) | 73,230 | (14,868 | ) | 2,018,417 | |||||||||||||||
Mortgage and asset-backed securities: | ||||||||||||||||||||||||
Government agencies | (450 | ) | 71,905 | — | — | (450 | ) | 71,905 | ||||||||||||||||
Government sponsored agencies | (18,230 | ) | 1,984,473 | (18,978 | ) | 526,501 | (37,208 | ) | 2,510,974 | |||||||||||||||
Other | (1,788 | ) | 323,410 | (724 | ) | 58,762 | (2,512 | ) | 382,172 | |||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||
Government agencies | (1,580 | ) | 138,412 | (731 | ) | 40,109 | (2,311 | ) | 178,521 | |||||||||||||||
Government sponsored agencies | (3,585 | ) | 404,057 | (3,322 | ) | 157,403 | (6,907 | ) | 561,460 | |||||||||||||||
Other | (5,556 | ) | 412,785 | (9 | ) | 2,693 | (5,565 | ) | 415,478 | |||||||||||||||
State and political subdivisions | (284 | ) | 36,694 | (13 | ) | 395 | (297 | ) | 37,089 | |||||||||||||||
Other | (2,070 | ) | 30,948 | (314 | ) | 5,686 | (2,384 | ) | 36,634 | |||||||||||||||
Total securities available for sale | $ | (48,140 | ) | $ | 5,571,851 | $ | (26,107 | ) | $ | 897,630 | $ | (74,247 | ) | $ | 6,469,481 | |||||||||
Gross realized gains and losses on sales of securities available for sale for the periods indicated were as follows: Year Ended December 31, (dollars in thousands) 2004 2003 2002 Realized gains $ 1,058 $ 4,289 $ 2,084 Realized losses (185 ) — (131 ) Realized net gains $ 873 $ 4,289 $ 1,953
61
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost, and fair value and yield of available-for-sale investment securities available for sale at December 31, 2001,2004, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowersdebt issuers may have the right to call or prepay obligations.
Amortized | Fair | |||||||
(in thousands) | Cost | Value | ||||||
Due within one year | $ | 174,534 | $ | 177,031 | ||||
Due after one but within five years | 785,049 | 789,641 | ||||||
Due after five but within ten years | 226,937 | 226,072 | ||||||
Due after ten years | 1,204,072 | 1,210,928 | ||||||
Subtotal | 2,390,592 | 2,403,672 | ||||||
Securities with no stated maturity | 138,541 | 138,501 | ||||||
Total available-for-sale investment securities | $ | 2,529,133 | $ | 2,542,173 | ||||
December 31, 2004 | |||||||||||||||||||||||||||||||||||||||||
Remaining Contractual Principal Maturity | |||||||||||||||||||||||||||||||||||||||||
Weighted | After One But | After Five Years But | |||||||||||||||||||||||||||||||||||||||
Total | Average | Within One Year | Within Five Years | Within Ten Years | After Ten Years | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||
U.S. Treasury and other U.S. Government agencies and corporations | $ | 264,692 | 2.14 | % | $ | 160,935 | 1.62 | % | $ | 79,981 | 3.02 | % | $ | 13,491 | 2.83 | % | $ | 10,285 | 2.41 | % | |||||||||||||||||||||
Government sponsored agencies | 2,358,825 | 3.06 | 295,716 | 2.77 | 1,905,950 | 3.03 | 157,159 | 3.92 | — | — | |||||||||||||||||||||||||||||||
Mortgage and asset-backed securities: | |||||||||||||||||||||||||||||||||||||||||
Government agencies | 231,118 | 3.45 | 31 | 3.39 | 77 | 3.19 | 178 | 8.66 | 230,832 | 3.64 | |||||||||||||||||||||||||||||||
Government sponsored agencies | 3,159,382 | 4.11 | — | — | 223,069 | 3.93 | 422,811 | 4.04 | 2,513,502 | 4.14 | |||||||||||||||||||||||||||||||
Other | 487,915 | 3.12 | 678 | 4.14 | 246,563 | 3.03 | 9,161 | 2.53 | 231,513 | 3.24 | |||||||||||||||||||||||||||||||
Collateralized mortgage obligations: | |||||||||||||||||||||||||||||||||||||||||
Government agencies | 179,191 | 1.52 | — | — | — | — | — | — | 179,191 | 1.52 | |||||||||||||||||||||||||||||||
Government sponsored agencies | 596,686 | 3.19 | — | — | 20,173 | 4.31 | 73,139 | 3.08 | 503,374 | 3.19 | |||||||||||||||||||||||||||||||
Other | 563,313 | 3.96 | — | — | 10,358 | 6.62 | — | — | 552,955 | 3.91 | |||||||||||||||||||||||||||||||
State and political subdivisions(1) | 56,411 | 4.79 | 427 | 6.63 | 4,780 | 3.91 | 20,711 | 4.52 | 30,493 | 5.09 | |||||||||||||||||||||||||||||||
Estimated fair value of debt securities(2) | $ | 7,897,533 | 3.52 | % | $ | 457,787 | 2.37 | % | $ | 2,490,951 | 3.14 | % | $ | 696,650 | 3.88 | % | $ | 4,252,145 | 3.81 | % | |||||||||||||||||||||
Total cost of debt securities | $ | 7,950,907 | $ | 459,191 | $ | 2,505,429 | $ | 698,067 | $ | 4,288,220 | |||||||||||||||||||||||||||||||
(1) The weighted average yields were calculated on a taxable equivalent basis. | ||
(2) The weighted average yield, except for yields of state and political subdivisions, were calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. |
The Company held no trading securities at December 31, 2001, 2000 and 1999.
Investment securitiesSecurities with an aggregate carrying value of $2.0$6.0 billion at December 31, 2001,and $4.3 billion were pledged to secure public deposits, repurchase agreements and Federal Home Loan Bank advances.advances at December 31, 2004 and 2003, respectively. Of these amounts the secured party had the right to repledge or resell $0.3 billion and zero at December 31, 2004 and 2003, respectively.
We held no investment securities of any single issuer (other than the U.S. Government and itsgovernment sponsored agencies) which were in excess of 10% of consolidated stockholder’s equity at December 31, 2001.2004 and 2003.
Gross gains62
BancWest Corporation and gross losses of $30.5 million and $51,000, respectively, were realized on the sales of investment securities during the period from January 1, 2001 to December 19, 2001. Gross realized gains and losses were $30,000 and $61,000, respectively, for the period from December 20, 2001 to December 31, 2001. Gross gains of $865,000 and $38,000 and gross losses of $654,000 and $22,000 were realized on sales of investment securities during 2000 and 1999, respectively.Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.7. Loans and Leases
As part of the application of purchase price accounting, a discount of $26.5 million was recorded as a fair value adjustment and will be amortized on a level-yield basis over the average life of the loans and leases.
At December 31, 20012004 and 2000,2003, loans and leases were comprised of the following:
(in thousands) | 2001 | 2000 | |||||||
Commercial, financial and agricultural | $ | 2,387,605 | $ | 2,604,590 | |||||
Real estate: | |||||||||
Commercial | 2,957,194 | 2,618,312 | |||||||
Construction | 464,462 | 405,542 | |||||||
Residential | 2,263,827 | 2,360,167 | |||||||
Consumer | 4,471,897 | 3,599,954 | |||||||
Lease financing | 2,293,199 | 2,038,516 | |||||||
Foreign | 385,548 | 344,750 | |||||||
Total loans and leases | $ | 15,223,732 | $ | 13,971,831 | |||||
December 31, | ||||||||||||||||
2004 | 2003 | |||||||||||||||
(dollars in thousands) | Outstanding | Commitments(1) | Outstanding | Commitments(1) | ||||||||||||
Commercial, financial and agricultural | $ | 6,027,376 | $ | 4,699,369 | $ | 4,492,319 | $ | 4,300,273 | ||||||||
Real estate: | ||||||||||||||||
Commercial | 6,706,882 | 550,343 | 5,146,077 | 379,044 | ||||||||||||
Construction | 1,493,723 | 1,241,585 | 952,818 | 826,368 | ||||||||||||
Residential | 6,700,462 | 1,354,046 | 5,019,625 | 1,084,614 | ||||||||||||
Total real estate | 14,901,067 | 3,145,974 | 11,118,520 | 2,290,026 | ||||||||||||
Consumer | 9,243,731 | 1,427,566 | 7,344,620 | 1,070,012 | ||||||||||||
Lease financing | 2,132,578 | 12,923 | 2,417,310 | 8,793 | ||||||||||||
Foreign | 384,091 | 43,531 | 349,310 | 33,015 | ||||||||||||
Total loans and leases | $ | 32,688,843 | $ | 9,329,363 | $ | 25,722,079 | $ | 7,702,119 | ||||||||
(1) | Commitments to extend credit represent unfunded amounts and are reported net of participations sold to other lenders. |
The loan and lease portfolio is principally located in California, and Hawaii and other states in the Western United States. We also lend to a lesser extent Oregon, Washington, Nevada, New Mexico, Idaho,nationally and in Guam and Saipan. The risk inherent in the portfolio depends upon both the economic stability of those states,regions, which affects property values, and the financial well being and creditworthiness of the borrowers.
Outstanding loan balances at December 31, 2004 and 2003 are net of unearned income, including net deferred loan fees, of $283.0 million and $386.4 million, respectively.
Our leasing activities consist primarily of leasing automobiles, commercial equipment and leveraged leases. Lessees are responsible for all maintenance, taxes and insurance on the leased property. The leases are reported net of unearned income of $333.0 million and $393.1 million at December 31, 2004 and 2003, respectively.
��The following table lists the components of the net investment in financing leases:
December 31, | ||||||||
(dollars in millions) | 2004 | 2003 | ||||||
Total minimum lease payments to be received | $ | 1,839 | $ | 1,970 | ||||
Estimated residual values of leased property | 627 | 840 | ||||||
Less: Unearned income | 333 | 393 | ||||||
Net investment in financing leases | $ | 2,133 | $ | 2,417 | ||||
63
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2001 and 2000, loans and2004, minimum lease receivables for the five succeeding years were as follows:
Year Ended | ||||
(dollars in millions) | December 31, 2004 | |||
Lease Receivables: | ||||
2005 | $ | 617.0 | ||
2006 | 537.8 | |||
2007 | 397.4 | |||
2008 | 264.5 | |||
2009 | 111.8 | |||
Thereafter | 537.1 | |||
Gross minimum payments | 2,465.6 | |||
Less: unearned income | 333.0 | |||
Net minimum receivable | $ | 2,132.6 | ||
Our consolidated investment in leveraged leases of $97.1totaled approximately $368 million and $93.5$399 million respectively, wereat December 31, 2004 and 2003, respectively. For federal income tax purposes, we retain the tax benefit of depreciation on nonaccrual status or restructured.the entire leased unit and interest on the related long-term debt, which is non-recourse to the Company. Deferred tax liabilities arising from leveraged leases totaled approximately $327 million and $357 million at December 31, 2004 and 2003.
Real estate loans totaling $1.4$4.3 billion were pledged to collateralize the Company’s borrowing capacity at the Federal Home Loan Bank at December 31, 2001.2004.
Our leasing activities consist primarily of: (1) leasing automobiles and commercial equipment; and (2) leveraged leases. Lessees are responsible for all maintenance,
55
Notes to Consolidated Financial Statements(continued)
taxes and insurance on the leased property. The leases are reported net of unearned income of $490.2 million at December 31, 2001, and $452.2 million at December 31, 2000. At December 31, 2001, minimum lease receivables for the five succeeding years were as follows:
In the normal course of business, the Company makes loans to executive officers and directors of the Company and to entities and individuals affiliated with those executive officers and directors. Those loans were made on terms no less favorable to the Company than those prevailing at the time for comparable transactions with other persons or, in the case of certain residential real estate loans, on terms that were widely available to employees of the Company who were not directors or executive officers. Changes in the loans to such executive officers, directors and affiliates during 20012004 and 20002003 were as follows:
(in thousands) | 2001 | 2000 | |||||||
Balance at beginning of year | $ | 263,835 | $ | 267,245 | |||||
New loans made | 19,470 | 34,763 | |||||||
Less repayments | 138,972 | 38,173 | |||||||
Balance at end of year | $ | 144,333 | $ | 263,835 | |||||
Year Ended December 31, | ||||||||
(dollars in thousands) | 2004 | 2003 | ||||||
Balance at beginning of year | $ | 116,469 | $ | 112,955 | ||||
New loans made | 31,709 | 22,021 | ||||||
Less repayments | 41,369 | 18,507 | ||||||
Balance at end of year | $ | 106,809 | $ | 116,469 | ||||
In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management may require a certain amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company has the same collateral policy for loans whether they are funded immediately or on a delayed basis (commitment).
A commitment to extend credit is a legally binding agreement to lend funds to a customer usually at a stated interest rate and for a specified purpose. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Company will experience will be lower than the contractual amount of commitments to extend credit because a significant portion of those commitments are expected to expire without being drawn upon. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans.
In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate, by monitoring the size and maturity structure of these portfolios, and by applying the same credit standards maintained for all of its related credit activities. At December 31, 2001,2004 and 2003, the Company did not have a concentration in any loan category or industry that exceeded 10% of total loans to such parties by and unfunded commitments that are not
64
BancWest Corporation were $402,000;and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
already reflected in the table above. The loan and lease portfolio is principally located in California, Hawaii and other states in the Western United States. The risk inherent in the portfolio depends upon both the economic stability of those states, which affects property values, and the financial well being and creditworthiness of the borrowers.
Standby letters of credit totaled $824.2 million and $667.7 million at December 31, 2000, $1.6 million. Interest income related2004 and 2003, respectively. Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to these loans was $82,000meet their contractual obligations. The liquidity risk to the Company arises from its obligation to make payment in 2001, $112,000 in 2000the event of a customer’s contractual default. Standby letters of credit are reported net of participations sold to other institutions. The Company also had commitments for commercial and $109,000 in 1999.similar letters of credit of $77.0 million and $84.3 million at December 31, 2004 and 2003, respectively. The commitments outstanding as of December 31, 2004 have maturities ranging from January 1, 2005 to November 15, 2017. Substantially all fees received from the issuance of such commitments are deferred and amortized on a straight-line basis over the term of the commitment.
7. Provision and8. Allowance for CreditLoan and Lease Losses
Changes in the allowance for creditloan and lease losses were as follows for the periods indicated:for: Company Predecessor Year ended Dec. 20, 2001 Jan. 1, 2001 December 31, through through (in thousands) Dec. 31, 2001 Dec. 19, 2001 2000 1999 Balance at beginning of year $ 199,860 $ 172,443 $ 161,418 $ 158,294 Provision for credit losses 2,419 100,631 60,428 55,262 Net charge-offs: Loans and leases charged off (7,929 ) (85,211 ) (62,131 ) (61,545 ) Recoveries on loans and leases previously charged off 304 11,997 12,728 10,432 Net charge-offs (7,625 ) (73,214 ) (49,403 ) (51,113 ) Transfer of allowance allocated to securitized loans — — — (1,025 ) $ 194,654 $ 199,860 $ 172,443 $ 161,418
Year Ended December 31, | ||||||||||||
(dollars in thousands) | 2004 | 2003 | 2003 | |||||||||
Balance at beginning of year | $ | 391,699 | $ | 384,081 | $ | 194,654 | ||||||
Allowance arising from business combinations | 59,392 | — | 212,660 | |||||||||
Provision for loan and lease losses | 49,219 | 81,295 | 95,356 | |||||||||
Loans and leases charged off: | ||||||||||||
Commercial, financial and agricultural | 15,521 | 38,621 | 68,497 | |||||||||
Real estate: | ||||||||||||
Commercial | 2,704 | 1,622 | 3,287 | |||||||||
Construction | — | — | — | |||||||||
Residential | 761 | 930 | 1,307 | |||||||||
Total real estate | 3,465 | 2,552 | 4,594 | |||||||||
Consumer | 58,608 | 56,489 | 50,155 | |||||||||
Lease financing | 21,196 | 26,338 | 22,399 | |||||||||
Foreign | 1,649 | 2,498 | 1,741 | |||||||||
Total loans and leases charged off | 100,439 | 126,498 | 147,386 | |||||||||
Recoveries on loans and leases: | ||||||||||||
Commercial, financial and agricultural | 11,444 | 31,843 | 10,479 | |||||||||
Real estate: | ||||||||||||
Commercial | 412 | 568 | 999 | |||||||||
Construction | 1,016 | 132 | 306 | |||||||||
Residential | 806 | 1,264 | 608 | |||||||||
Total real estate | 2,234 | 1,964 | 1,913 | |||||||||
Consumer | 13,950 | 12,041 | 10,331 | |||||||||
Lease financing | 8,344 | 6,429 | 5,582 | |||||||||
Foreign | 548 | 544 | 492 | |||||||||
Total recoveries on loans and leases previously charged off | 36,520 | 52,821 | 28,797 | |||||||||
Net charge-offs | (63,919 | ) | (73,677 | ) | (118,589 | ) | ||||||
Balance at end of year | $ | 436,391 | $ | 391,699 | $ | 384,081 | ||||||
65
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information related to impaired loans as of and for the years ended December 31, 2001, 2000 and 1999:
(in thousands) | 2001 | 2000 | 1999 | |||||||||
Impaired loans with related allowance | $ | 89,279 | $ | 77,518 | $ | 72,258 | ||||||
Impaired loans with no related allowance | 8,253 | 35,358 | 23,163 | |||||||||
Total impaired loans | $ | 97,532 | $ | 112,876 | $ | 95,421 | ||||||
Total allowance for credit losses on impaired loans | $ | 24,745 | $ | 14,702 | $ | 15,833 | ||||||
Average impaired loans | 118,497 | 93,572 | 107,948 | |||||||||
Interest income recognized on impaired loans | 2,462 | 5,099 | 4,349 | |||||||||
Year Ended December 31, | ||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | |||||||||
Impaired loans with related allowance | $ | 16,903 | $ | 82,272 | $ | 148,533 | ||||||
Impaired loans with no related allowance | 39,869 | 3,522 | 43,438 | |||||||||
Total impaired loans | $ | 56,772 | $ | 85,794 | $ | 191,971 | ||||||
Total allowance for loan and lease losses on impaired loans | $ | 4,087 | $ | 21,377 | $ | 39,197 | ||||||
Average impaired loans | 72,839 | 139,301 | 164,038 | |||||||||
Interest income recognized on impaired loans | 3,687 | 5,491 | 1,350 | |||||||||
Impaired loans without the related allowance for creditloan and lease losses are generally collateralized by assets with fair values in excess of the recorded investment in the loans. Interest paymentsPayments on impaired loans are generally applied to reduce the outstanding principal balance of such loans.
8. Total nonaccrual loans and leases were $125.2 million and $133.8 million for the years ended December 31, 2004 and 2003, respectively. Loans and leases that were 90 days or more past due, but still accruing were $12.4 million and $29.4 million for the same respective periods.
9. Operating Leases
Prior to February 2004 and after July 2004, leases of vehicles to customers were treated as finance leases, as they qualified for such treatment under Statement of Financial Accounting Standards No. 13,Accounting for Leases. From February through July 2004, our automobile leases were treated as operating leases, as we did not obtain residual insurance on an individual lease basis.
Operating lease rental income for leased assets, primarily vehicles, is recognized on a straight-line basis. Related depreciation expense is recorded on a straight-line basis over the life of the lease taking into account the estimated residual value of the leased asset. On a periodic basis, leased assets are reviewed for impairment. Impairment loss is recognized if the carrying amount of a leased asset exceeds its fair value and is not recoverable. The carrying amount of a leased asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the equipment. Vehicle lease receivables are written off when 120 days past due.
The following table shows future minimum lease receivables under leases with terms in excess of one year as of December 31, 2004:
(dollars in thousands) | Rental Income | |||
2005 | $ | 29,328 | ||
2006 | 29,378 | |||
2007 | 25,239 | |||
2008 | 26,726 | |||
2009 | 52,042 | |||
2010 and thereafter | 1,518 | |||
Total minimum payments | $ | 164,231 | ||
66
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Premises and Equipment
As part of the application of purchase price accounting, a discount of $9.4 million was recorded as a fair value adjustment on certain facilities and will be amortized over their remaining lives using the straight-line method.
At December 31, 20012004 and 2000,2003, premises and equipment were comprised of the following:
(in thousands) | 2001 | 2000 | ||||||
Premises | $ | 282,761 | $ | 278,979 | ||||
Equipment | 178,559 | 194,404 | ||||||
Total premises and equipment | 461,320 | 473,383 | ||||||
Less accumulated depreciation and amortization | 188,285 | 197,371 | ||||||
Net book value | $ | 273,035 | $ | 276,012 | ||||
Year Ended December 31, | ||||||||
(dollars in thousands) | 2004 | 2003 | ||||||
Premises | $ | 827,639 | $ | 624,350 | ||||
Equipment | 339,503 | 287,926 | ||||||
Total premises and equipment | 1,167,142 | 912,276 | ||||||
Less accumulated depreciation and amortization | 482,359 | 382,123 | ||||||
Net book value | $ | 684,783 | $ | 530,153 | ||||
Occupancy and equipment expenses include depreciation and amortization expenses of $27.6$43.2 million for 2001, $25.52004, $41.3 million for 20002003 and $24.3$41.0 million for 1999.
9. Deposits2002.
As partThe Company is obligated under a number of capital and noncancelable operating leases for premises and equipment with terms, including renewal options, up to 35 years, many of which provide for periodic adjustment of rent based on changes in various economic indicators. Under the premises leases, we are also required to pay real property taxes, insurance and maintenance. The following table shows future minimum payments under leases with terms in excess of one year as of December 31, 2004:
Less | Net | |||||||||||||||||||
Capital | Operating | Sublease | Lease | Rental | ||||||||||||||||
(dollars in thousands) | Leases | Leases | Income | Payments | Income(1) | |||||||||||||||
2005 | $ | 544 | $ | 64,483 | $ | (6,134 | ) | $ | 58,893 | $ | 7,485 | |||||||||
2006 | 526 | 49,719 | (3,377 | ) | 46,868 | 7,216 | ||||||||||||||
2007 | 526 | 42,427 | (2,213 | ) | 40,740 | 2,555 | ||||||||||||||
2008 | 488 | 36,296 | (1,255 | ) | 35,529 | 479 | ||||||||||||||
2009 | 385 | 30,708 | (514 | ) | 30,579 | 324 | ||||||||||||||
2010 and thereafter | 2,176 | 108,448 | (526 | ) | 110,098 | 1,334 | ||||||||||||||
Total minimum payments | $ | 4,645 | $ | 332,081 | $ | (14,019 | ) | $ | 322,707 | $ | 19,393 | |||||||||
Minimum payments related to acquisitions(2) | 2,679 | |||||||||||||||||||
Less: interest on capital leases | 1,524 | |||||||||||||||||||
Total principal payable on capital leases | $ | 5,800 | ||||||||||||||||||
(1) | Excludes income from vehicle operating leases; see Note 9 for additional information. | |
(2) | Payments related to leases terminated in January 2005. These leases were scheduled to be terminated as a result of the acquisition of Community First.. |
Rental expense, net of rental income, for all noncancelable operating leases was $41.0 million, $45.9 million and $53.8 million for 2004, 2003 and 2002, respectively.
In most cases, leases for premises provide for periodic renegotiation of rents based upon a percentage of the applicationappraised value of purchase price accounting,the leased property. The renegotiated annual rent is usually not less than the annual amount paid in the previous period. Where future commitments are subject to appraisals, the minimum annual rental commitments are based on the latest annual rents.
67
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Goodwill and Intangible Assets
We performed the impairment testing of goodwill required under SFAS No. 142 for the years ended December 31, 2004, 2003 and 2002 in the fourth quarter of each year. No impairment of goodwill was found. The impairment analysis was performed using a premiumdiscounted cash flows model. The table below provides the breakdown of $29goodwill by reportable segment and the change during the year.
Bank of the West | First Hawaiian Bank | |||||||||||||||||||||||||||||||||||
Regional | Commercial | Consumer | Retail | Consumer | Commercial | Financial | Consolidated | |||||||||||||||||||||||||||||
(dollars in millions) | Banking | Banking | Finance | Banking | Banking | Banking | Management | BancWest | Totals | |||||||||||||||||||||||||||
Balance as of January 1, 2003: | $ | 1,215 | $ | 707 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 10 | 5 | $ | 3,229 | |||||||||||||||||||
Purchase accounting adjustments: | ||||||||||||||||||||||||||||||||||||
UCB | (1 | ) | — | — | — | — | — | — | — | (1 | ) | |||||||||||||||||||||||||
Trinity Capital | — | (1 | ) | — | — | — | — | — | — | (1 | ) | |||||||||||||||||||||||||
Balance as of December 31, 2003: | $ | 1,214 | $ | 706 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 10 | $ | 5 | $ | 3,227 | ||||||||||||||||||
Purchase accounting adjustments: | ||||||||||||||||||||||||||||||||||||
Trinity Capital | — | 2 | — | — | — | — | — | — | 2 | |||||||||||||||||||||||||||
CIC/HCM Asset Management, Inc. | — | — | — | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||
Community First | 913 | — | — | — | — | — | — | — | 913 | |||||||||||||||||||||||||||
USDB | — | — | — | — | — | — | — | 170 | 170 | |||||||||||||||||||||||||||
Balance as of December 31, 2004: | $ | 2,127 | $ | 708 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 11 | $ | 175 | $ | 4,313 | ||||||||||||||||||
Amortization for intangible assets was $26.5 million was recorded as a fair value adjustment on certainin 2004, $23.1 million in 2003 and $20.0 million in 2002. The estimated annual amortization expense for finite-lived intangible assets, primarily core deposit intangibles was:
(dollars in thousands) | ||||
Estimate for year ended December 31, | ||||
2005 | $ | 41,559 | ||
2006 | 38,474 | |||
2007 | 35,756 | |||
2008 | 33,532 | |||
2009 | 31,709 | |||
The details of our finite-lived intangible assets are presented below:
Gross Carrying | Accumulated | Net Book | ||||||||||
(dollars in thousands) | Amount | Amortization | Value | |||||||||
Balance as of December 31, 2004: | ||||||||||||
Core Deposits | $ | 330,206 | $ | 69,141 | $ | 261,065 | ||||||
Other Intangible Assets | 12,000 | 575 | 11,425 | |||||||||
Total | $ | 342,206 | $ | 69,716 | $ | 272,490 | ||||||
Balance as of December 31, 2003: | ||||||||||||
Core Deposits | $ | 230,538 | $ | 43,181 | $ | 187,357 | ||||||
Total | $ | 230,538 | $ | 43,181 | $ | 187,357 | ||||||
68
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Deposits
The aggregate amount of time certificates of deposit and other time deposits issued by domestic offices was $8,750 million and will be amortized using$6,679 million at December 31, 2004 and 2003, respectively. Substantially all of those deposits were interest bearing. The contractual maturities of those deposits are shown in the straight-line method over the average remaining maturity of the certificates.following table.
Greater than | ||||||||||||
or equal to | Less than | |||||||||||
(dollars in thousands) | $100,000 | $100,000 | Total | |||||||||
Three months or less | $ | 3,351,763 | $ | 840,830 | $ | 4,192,593 | ||||||
After three months through six months | 547,867 | 633,589 | 1,181,456 | |||||||||
After six months through twelve months | 714,183 | 853,369 | 1,567,552 | |||||||||
2006 | 573,544 | 720,853 | 1,294,397 | |||||||||
2007 | 160,960 | 194,605 | 355,565 | |||||||||
2008 | 31,031 | 43,370 | 74,401 | |||||||||
2009 | 19,451 | 47,136 | 66,587 | |||||||||
2010 and thereafter | 8,044 | 1,639 | 9,683 | |||||||||
Total | $ | 5,406,843 | $ | 3,335,391 | $ | 8,742,234 | (1) | |||||
(1) | Excludes purchase accounting adjustments of $7.9 million. |
Interest expense related to deposits for the periods
56
Notes to Consolidated Financial Statements(continued)
indicated was as follows: Company Predecessor Years Ended Dec. 20, 2001 Jan. 1, 2001 December 31, through through (in thousands) Dec. 31,2001 Dec. 19, 2001 2000 1999 Domestic: Interest-bearing demand $ 23 $ 1,855 $ 3,546 $ 3,609 Savings 1,784 84,278 98,876 93,100 Time— under $100 3,386 153,926 150,797 136,797 Time— $100 and over 3,035 138,026 195,142 127,539 Foreign 238 6,712 9,843 7,576 $ 8,466 $ 384,797 $ 458,204 $ 368,621
The following table presents the maturity distribution of domestic timeTime certificates of deposit and other time deposits issued by foreign offices with a denomination of $100,000 or more represent substantially all of the foreign deposit liabilities of $1,165 million and $395 million at December 31, for the years indicated:
(in millions) | 2001 | 2000 | |||||||
3 months or less | $ | 2,103 | $ | 2,029 | |||||
Over 3 months through 6 months | 546 | 917 | |||||||
Over 6 months through 12 months | 363 | 435 | |||||||
Over 1 year through 2 years | 286 | 179 | |||||||
Over 2 years through 3 years | 38 | 23 | |||||||
Over 3 years through 4 years | 15 | 6 | |||||||
Over 4 years through 5 years | 7 | 4 | |||||||
Over 5 years | 1 | 1 | |||||||
Total | $ | 3,359 | $ | 3,594 | |||||
Time certificates of deposits in denominations of $100,000 or more Demand deposit overdrafts that have been reclassified as loan balances were $20.9 million and $24.4 million at December 31, 20012004 and 2000 were as follows:
(in thousands) | 2001 | 2000 | ||||||
Domestic | $ | 3,358,569 | $ | 3,593,563 | ||||
Foreign | 146,384 | 87,990 |
10.13. Short-Term Borrowings
At December 31 for the years indicated, short-term Short-term borrowings were comprised of the following:
(in thousands) | 2001 | 2000 | 1999 | ||||||||||
BancWest Corporation (Parent): | |||||||||||||
Commercial paper | $ | — | $ | 5,477 | $ | 2,600 | |||||||
Bank of the West: | |||||||||||||
Securities sold under agreements to repurchase | 246,480 | 215,767 | 142,842 | ||||||||||
Federal funds purchased | 217,575 | 115,000 | 2,095 | ||||||||||
Advances from Federal Home Loan Bank of San Francisco | 240,000 | 85,000 | — | ||||||||||
Other short-term borrowings | 936 | 306 | 16,274 | ||||||||||
First Hawaiian: | |||||||||||||
Securities sold under agreements to repurchase | 238,279 | 241,929 | 301,571 | ||||||||||
Federal funds purchased | 11,050 | 5,589 | 38,595 | ||||||||||
Total short-term borrowings | $ | 954,320 | $ | 669,068 | $ | 503,977 | |||||||
Year Ended December 31, | ||||||||
(dollars in thousands) | 2004 | 2003 | ||||||
Federal funds purchased and securities sold under agreements to repurchase | $ | 2,050,344 | $ | 1,174,877 | ||||
Advances from Federal Home Loan Banks and other short-term borrowings | 1,330,845 | 1,197,809 | ||||||
Total short-term borrowings | $ | 3,381,189 | $ | 2,372,686 | ||||
Weighted average interest rates69
BancWest Corporation and weighted average and maximum balancesSubsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below shows selected information for these short-term borrowings were as follows for the years indicated:borrowings: (dollars in thousands) 2001 2000 1999 Commercial paper: Weighted average interest rate at December 31 — % 6.0 % 6.1 % Highest month-end balance $ 6,102 $ 8,424 $ 9,400 Weighted average daily outstanding balance $ 3,307 $ 5,541 $ 4,962 Weighted average daily interest rate paid 4.2 % 6.0 % 4.9 % Securities sold under agreements to repurchase: Weighted average interest rate at December 31 2.0 % 6.1 % 5.1 % Highest month-end balance $ 523,631 $ 503,936 $ 564,207 Weighted average daily outstanding balance $ 492,044 $ 439,886 $ 499,728 Weighted average daily interest rate paid 3.7 % 5.8 % 4.6 % Federal funds purchased: Weighted average interest rate at December 31 1.5 % 6.4 % 4.7 % Highest month-end balance $ 437,405 $ 370,889 $ 392,325 Weighted average daily outstanding balance $ 266,224 $ 217,447 $ 138,101 Weighted average daily interest rate paid 3.6 % 6.3 % 4.9 % Advances from Federal Home Loan Banks of Seattle and San Francisco: Weighted average interest rate at December 31 5.2 % 6.2 % — % Highest month-end balance $ 240,000 $ 358,481 $ 1,000 Weighted average daily outstanding balance $ 131,694 $ 146,462 $ 414 Weighted average daily interest rate paid 5.2 % 6.2 % 6.3 % Other short-term borrowings: Weighted average interest rate at December 31 1.5 % 6.5 % 5.5 % Highest month-end balance $ 24,601 $ 22,071 $ 25,085 Weighted average daily outstanding balance $ 3,135 $ 4,935 $ 2,959 Weighted average daily interest rate paid 3.2 % 8.2 % 5.6 %
Year Ended December 31, | ||||||||
(dollars in thousands) | 2004 | 2003 | ||||||
Federal funds purchased and securities sold under agreements to repurchase: | ||||||||
Weighted average interest rate at December 31 | 1.7 | % | 0.8 | % | ||||
Highest month-end balance | $ | 2,050,344 | $ | 1,386,714 | ||||
Weighted average daily outstanding balance | $ | 1,281,809 | $ | 1,021,248 | ||||
Weighted average daily interest rate paid | 1.2 | % | 1.0 | % | ||||
Advances from Federal Home Loan Banks and other short-term borrowings | ||||||||
Weighted average interest rate at December 31 | 2.5 | % | 1.2 | % | ||||
Highest month-end balance | $ | 1,330,845 | $ | 1,197,809 | ||||
Weighted average daily outstanding balance | $ | 897,583 | $ | 955,417 | ||||
Weighted average daily interest rate paid | 1.5 | % | 1.3 | % | ||||
We treat securities sold under agreements to repurchase as collateralized financings. We reflect the obligations to repurchase the identical securities sold as liabilities, with the dollar amount of securities underlying the agreements remaining in the asset accounts.
At December 31, 2001,2004, the weighted average maturity of these agreements was 4516 days and primarily represented investments by public
57
Notes to Consolidated Financial Statements(continued)
(governmental)non-governmental entities. Maturities of these agreements were as follows:
(in thousands) | ||||
Overnight | $ | 241,215 | ||
Less than 30 days | 64,598 | |||
30 through 90 days | 89,682 | |||
Over 90 days | 89,264 | |||
Total | $ | 484,759 | ||
(dollars in thousands) | ||||
Overnight | $ | 562,115 | ||
Less than 30 days | 124,831 | |||
30 through 90 days | 27,987 | |||
Over 90 days | 38,661 | |||
Total | $ | 753,594 | ||
11.70
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Long-Term Debt and Capital Securities
Year Ended December 31, | ||||||||||||||||
(dollars in thousands) | Maturity Date(s) | Interest Rate(s) | 2004 | 2003 | ||||||||||||
Parent: | ||||||||||||||||
Subordinated notes (1)(7) | 2006 | 7.375 | % | $ | 51,041 | $ | 51,772 | |||||||||
Term note(2)(7) | 2010 | 6.54 | % | 1,550,000 | 1,550,000 | |||||||||||
Repurchase agreement (2)(6) | 2011 | 4.39 | % | 800,000 | 800,000 | |||||||||||
Junior subordinated notes (1)(2)(3)(7) | 2027 | 8.343 | % | 100,000 | 100,000 | |||||||||||
Junior subordinated notes (1)(2)(3)(6) | 2030 | 9.50 | % | 150,378 | 152,785 | |||||||||||
Total Parent | 2,651,419 | 2,654,557 | ||||||||||||||
Bank of the West: | ||||||||||||||||
Subordinated notes (1)(2)(7) | 2009 | 7.35 | % | 51,848 | 52,193 | |||||||||||
Subordinated notes (1)(7) | 2011 | 8.30 | % | 54,337 | 54,904 | |||||||||||
Federal Home Loan Bank advances (5)(6)(7) | 2005-2034 | 1.34-7.96 | % | 2,749,368 | 1,457,469 | |||||||||||
Junior subordinated notes (2)(4)(6) | 2032 | 8.125 | % | 66,312 | — | |||||||||||
Junior subordinated notes (2)(4)(6) | 2033 | 7.60 | % | 67,468 | — | |||||||||||
Structured repurchase agreements (6) | 2009 | 2.34 | % | 100,000 | — | |||||||||||
Structured repurchase agreements (2)(6) | 2009 | 2.366 | % | 400,000 | — | |||||||||||
Capital leases (5) (Note 10) | 2005-2012 | 5,416 | 1,502 | |||||||||||||
Total Bank of the West | 3,494,749 | 1,566,068 | ||||||||||||||
Union Safe Deposit Bank Federal Home Loan Bank advances (5) | 2005-2008 | 1.31-2.74 | % | 158,488 | — | |||||||||||
First Hawaiian Bank: | ||||||||||||||||
Capital leases (5) (Note 10) | 2005-2022 | 384 | 400 | |||||||||||||
Total long-term debt | $ | 6,305,040 | $ | 4,221,025 | ||||||||||||
(1) | This debt is unsecured | |
(2) | Affiliate transactions. See Note 4 for additional information. | |
(3) | These notes are related to the BWE and FH Trusts. See Note 5 for additional information. | |
(4) | These notes are related to the CFB Trusts. See Note 5 for additional information. | |
(5) | Interest is payable monthly | |
(6) | Interest is payable quarterly | |
(7) | Interest is payable semi-annually |
As part of the application of purchase accounting, a premium of $33.1 million was recorded on certain long-term debt obligations and capital securities as a fair value adjustment. This premium will be amortized on a level-yield basis over the remaining maturity of the debt.
short-term borrowing arrangements, we were subject to various financial and operational covenants. At December 31, for the years indicated, long-term debt and capital securities2004, we were comprised of the following:
(dollars in thousands) | 2001 | 2000 | |||||||
BancWest Corporation (Parent): | |||||||||
7.375% subordinated notes due 2006 | $ | 50,000 | $ | 50,000 | |||||
7.00% note | — | 50,000 | |||||||
6.54% term note due 2010 | 1,550,000 | — | |||||||
Bank of the West: | |||||||||
6.33%-8.30% notes due through 2014 | 597,012 | 531,340 | |||||||
Capital leases due through 2012 | 480 | 613 | |||||||
First Hawaiian: | |||||||||
Capital leases due through 2022 | 462 | 470 | |||||||
Total long-term debt | 2,197,954 | 632,423 | |||||||
Capital Securities | 265,130 | 250,000 | |||||||
Total long-term debt and Capital Securities | $ | 2,463,084 | $ | 882,423 | |||||
BancWest Corporation (Parent)
The 7.375% subordinated notes due in 2006 are unsecured obligationscompliance with interest payable semiannually.
The 7.00% note was paid in full in 2001.
The 6.54% term note due in 2010 is an unsecured obligation to BNP Paribas with interest payable semi- annually.
Bank of the West
The 6.33%-8.30% notes due through 2014 primarily represent advances from the Federal Home Loan Bank of San Francisco and $52.8 million in subordinated capital notes sold to BNP Paribas. Interest on the Federal Home Loan Bank of San Francisco advances are payable monthly. Interest on the subordinated capital notes sold to BNP Paribas is payable semiannually.
BancWest Capital I
In November 2000, the Company sold to the public $150 million in aggregate liquidation amount of BancWest Capital I Quarterly Income Preferred Securities (the “BWE Capital Securities”) issued by the BWE Trust, a Delaware business trust. The Company received the BWE Capital Securities (as well as all outstanding common securities of BancWest Capital I) in exchange for the Company’s 9.50% junior subordinated deferrable interest debentures, which are the sole assets of the BWE Trust. Holders of BWE Capital Securities are entitled to cumulative cash dividends at an annual rate of 9.50%, subject to possible deferral. The BWE Capital Securities and the debentures will mature on December 1, 2030, but on or after December 1, 2005 are subject to redemption in whole or in part at par plus accrued interest. The BWE Capital Securities qualify as Tier 1 capital of the Company, which has solely, fully and unconditionally guaranteed payment of all amounts due on the BWE Capital Securities to the extent the BWE Trust has funds available for payment of such distributions.
First Hawaiian Capital I
In 1997, FH Trust, a Delaware business trust, issued capital securities (the “FH Capital Securities”) with an aggregate liquidation amount of $100 million. The proceeds were used to purchase junior subordinated deferrable interest debentures of the Company. These debentures are the sole assets of the FH Trust. The FH Capital Securities qualify as Tier 1 capital of the Company and are solely, fully and unconditionally guaranteed by the Company. The Company owns all the common securities issued by the FH Trust.covenants.
The FH Capital Securities accrue and pay interest semi-annually at an annual interest rate of 8.343%. The FH Capital Securities are mandatorily redeemable upon maturity date of July 1, 2027, or upon earlier redemption in whole or in part (subject to a prepayment penalty) as provided for in the governing indenture.71
Under the terms of both the BWE Capital Securities and the FH Capital Securities, the interest on the junior subordinated debentures is deferrable. If we defer interest payments on the capital securities, BWE Trust and FH Trust will also defer distributions on the capital securities. During any period in which we defer interest payments on the junior subordinated debentures, we will not and our subsidiaries will not do any of the following, with certain limited exceptions:
58
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements(continued)
rities that rank equally with or junior to the junior subordinated debentures; or
As of December 31, 2001,2004, the principal payments due on long-term debt and capital securities were as follows: BancWest Bank First Corporation of the First BancWest Hawaiian (in thousands) (Parent) West Hawaiian Capital I Capital I Total 2002 $ — $ 319,345 $ 13 $ — $ — $ 319,358 2003 — 168,640 15 — — 168,655 2004 — 2,366 16 — — 2,382 2005 — 993 18 — — 1,011 2006 50,000 1,060 19 — — 51,079 2007 and thereafter 1,550,000 105,088 381 165,130 100,000 1,920,599 $ 1,600,000 $ 597,492 $ 462 $ 165,130 $ 100,000 $ 2,463,084
BancWest | ||||||||||||||||||||
Corporation | Bank of the | First Hawaiian | Union Safe Deposit | |||||||||||||||||
(dollars in thousands) | (Parent) | West | Bank | Bank | Total | |||||||||||||||
2005 | — | 1,443,928 | 18 | 128,000 | 1,571,946 | |||||||||||||||
2006 | 50,000 | 899,274 | 19 | 8,000 | 957,293 | |||||||||||||||
2007 | — | 93,810 | 21 | 7,000 | 100,831 | |||||||||||||||
2008 | — | 71,313 | 24 | 14,200 | 85,537 | |||||||||||||||
2009 | — | 793,249 | 26 | — | 793,275 | |||||||||||||||
2010 and thereafter | 2,600,000 | 178,450 | 276 | — | 2,778,726 | |||||||||||||||
Total | $ | 2,650,000 | $ | 3,480,024 | $ | 384 | $ | 157,200 | $ | 6,287,608 | (1) | |||||||||
12.(1) Excludes purchase accounting adjustments of $17.4 million.
15. Accumulated Other Comprehensive Income, Net
Comprehensive income is defined as the change in equity from all transactions other than those with stockholders and it includesis comprised of net income and other comprehensive income. The Company’s only significant itemitems of other comprehensive income isare net unrealized gains or losses on certain debt and equity securities, net unrealized gains or losses on cash flow hedges and the related reclassification adjustments.a minimum pension liability adjustment. Reclassification adjustments include the gains or losses realized in the current period on certain assets that have been reclassified to net income that were previously included in accumulated other comprehensive income. Accumulated other comprehensive income atfor the beginning ofyears ending 2004, 2003 and 2002 are presented in the period.table below: Income Tax Before-tax (Expense) After-tax (dollars in thousands) Amount Benefit Amount Accumulated other comprehensive income, December 31, 2001 $ 13,040 $ (5,258 ) $ 7,782 Unrealized net gains on securities available for sale arising during the year 67,432 (25,709 ) 41,723 Reclassification of net gains on securities available for sale included in net income (1,953 ) 787 (1,166 ) Unrealized net gains on cash flow derivative hedges arising during the year 67,613 (27,383 ) 40,230 Reclassification of net gains on cash flow derivative hedges included in net income (19,337 ) 7,831 (11,506 ) Other comprehensive income 113,755 (44,474 ) 69,281 Accumulated other comprehensive income, December 31, 2002 $ 126,795 $ (49,732 ) $ 77,063 Unrealized net losses on securities available for sale arising during the year (63,620 ) 25,766 (37,854 ) Reclassification of net gains on securities available for sale included in net income (4,289 ) 1,737 (2,552 ) Unrealized net gains on cash flow derivative hedges arising during the year 21,474 (8,697 ) 12,777 Reclassification of net gains on cash flow derivative hedges included in net income (22,765 ) 9,220 (13,545 ) Other comprehensive income (69,200 ) 28,026 (41,174 ) Accumulated other comprehensive income, December 31, 2003 $ 57,595 $ (21,706 ) $ 35,889 (8,711 ) 3,572 (5,139 ) (63,722 ) 24,218 (39,504 ) (873 ) 358 (515 ) (8,212 ) 3,367 (4,845 ) (19,493 ) 7,992 (11,501 ) (101,011 ) 39,507 (61,504 ) $ (43,416 ) $ 17,801 $ (25,615 )
Accumulated other comprehensive income, net of tax, consisted of net unrealized gains (losses) on securities available for the periods presented below is as follows:sale of $(32,086), $7,933 and $48,339 at December 31, 2004, 2003 and 2002, respectively; and net unrealized gains (losses) on cash flow derivative hedges of $11,610, $27,956 and $28,724 at December 31, 2004, 2003 and 2002, respectively; and a net minimum pension liability adjustment of $(5,139) at December 31, 2004. Income Tax Pre-tax (Expense) After-tax (in thousands) Amount Benefit Amount Predecessor: Accumulated other comprehensive income, net, December 31, 1998 $ 10,520 $ (4,292 ) $ 6,228 Unrealized net holding loss arising in 1999 (27,119 ) 11,009 (16,110 ) Reclassification adjustment for gains and losses realized in net income 16 (7 ) 9 Accumulated other comprehensive income, net, December 31, 1999 (16,583 ) 6,710 (9,873 ) Unrealized net holding gain arising in 2000 29,123 (11,773 ) 17,350 Reclassification adjustment for gains and losses realized in net income 211 (87 ) 124 Accumulated other comprehensive income, net, December 31, 2000 12,751 (5,150 ) 7,601 30,528 (12,292 ) 18,236 (39,138 ) 15,773 (23,365 ) $ 4,141 $ (1,669 ) $ 2,472 $ — $ — $ — 13,071 (5,270 ) 7,801 (31 ) 12 (19 ) $ 13,040 $ (5,258 ) $ 7,782
13.72
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Regulatory Capital Requirements
Due to the election to become a financial holding company done concurrent with the BNP Paribas Merger, only theThe Company’s depository institution subsidiaries are subject to various regulatory capital requirements administered by the Federal banking agencies. If they fail to meet minimum capital requirements, these agencies can initiate certain mandatory actions. Such regulatory actions could have a material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company’s depository institution subsidiaries must each meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. These capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company’s depository institution subsidiaries to maintain minimum amounts and ratios of Tier 1 and Total capital to risk-weighted assets, and of Tier 1 capital to average assets. The table below sets forth those ratios at December 31, 20012004 and 2000. To Be Well- Capitalized Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio $ 878,252 7.85 % $ 447,542 4.00 % $ 671,312 6.00 % 632,719 9.52 265,871 4.00 398,807 6.00 $ 1,219,482 10.90 % $ 895,083 8.00 % $ 1,118,854 10.00 % 785,148 11.81 531,742 8.00 664,678 10.00 $ 878,252 7.18 % $ 489,540 4.00 %(1) $ 611,926 5.00 % 632,719 8.39 301,818 4.00 (1) 377,272 5.00
59
Notes to Consolidated Financial Statements(continued)2003. To Be Well- Capitalized Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2000: Tier 1 Capital to Risk-Weighted Assets: BancWest Corporation $ 1,597,992 9.73 % $ 656,617 4.00 % Bank of the West 820,691 8.78 373,878 4.00 $ 560,818 6.00 % First Hawaiian 648,751 9.19 282,500 4.00 423,750 6.00 Total Capital to Risk-Weighted Assets: BancWest Corporation $ 1,870,435 11.39 % $ 1,313,234 8.00 % Bank of the West 1,095,240 11.72 747,757 8.00 $ 934,696 10.00 % First Hawaiian 795,657 11.27 564,999 8.00 706,249 10.00 Tier 1 Capital to Average Assets: BancWest Corporation $ 1,597,992 9.09 % $ 703,305 4.00 %(1) Bank of the West 820,691 7.95 413,174 4.00 (1) $ 516,468 5.00 % First Hawaiian 648,751 8.99 288,756 4.00 (1) 360,945 5.00
To Be Well- Capitalized | ||||||||||||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
As of December 31, 2004: | ||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||
Bank of the West | $ | 3,183,632 | 10.57 | % | $ | 1,204,520 | 4.00 | % | $ | 1,806,780 | 6.00 | % | ||||||||||||
First Hawaiian Bank | 966,141 | 13.62 | 283,698 | 4.00 | 425,548 | 6.00 | ||||||||||||||||||
Union Safe Deposit Bank | 96,890 | 11.02 | 35,175 | 4.00 | 52,762 | 6.00 | ||||||||||||||||||
Total capital to risk-weighted assets: | ||||||||||||||||||||||||
Bank of the West | $ | 3,738,401 | 12.41 | % | $ | 2,409,040 | 8.00 | % | $ | 3,011,300 | 10.00 | % | ||||||||||||
First Hawaiian Bank | 1,124,566 | 15.86 | 567,397 | 8.00 | 709,246 | 10.00 | ||||||||||||||||||
Union Safe Deposit Bank | 103,991 | 11.83 | 70,350 | 8.00 | 87,937 | 10.00 | ||||||||||||||||||
Tier 1 capital to average assets(leverage ratio) (1): | ||||||||||||||||||||||||
Bank of the West | $ | 3,183,632 | 9.69 | % | $ | 1,314,000 | 4.00 | % | $ | 1,642,500 | 5.00 | % | ||||||||||||
First Hawaiian Bank | 966,141 | 10.39 | 372,014 | 4.00 | 465,017 | 5.00 | ||||||||||||||||||
Union Safe Deposit Bank | 96,890 | 8.16 | 47,487 | 4.00 | 59,359 | 5.00 | ||||||||||||||||||
As of December 31, 2003: | ||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||
Bank of the West | $ | 2,486,220 | 10.72 | % | $ | 927,778 | 4.00 | % | $ | 1,391,667 | 6.00 | % | ||||||||||||
First Hawaiian Bank | 848,320 | 12.85 | 263,994 | 4.00 | 395,991 | 6.00 | ||||||||||||||||||
Total capital to risk-weighted assets: | ||||||||||||||||||||||||
Bank of the West | $ | 3,001,394 | 12.94 | % | $ | 1,855,556 | 8.00 | % | $ | 2,319,445 | 10.00 | % | ||||||||||||
First Hawaiian Bank | 1,004,127 | 15.21 | 527,988 | 8.00 | 659,986 | 10.00 | ||||||||||||||||||
Tier 1 capital to average assets (leverage ratio)(1) | ||||||||||||||||||||||||
Bank of the West | $ | 2,486,220 | 9.55 | % | $ | 1,040,985 | 4.00 | % | $ | 1,301,231 | 5.00 | % | ||||||||||||
First Hawaiian Bank | 848,320 | 9.91 | 342,328 | 4.00 | 427,911 | 5.00 | ||||||||||||||||||
(1)The leverage ratio consists of a ratio of Tier 1 capital to average |
73
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to applicable laws and regulations, each of the depository institution subsidiaries have been notified by the Federal Deposit Insurance Corporation (“FDIC”) that each of them is deemed to be well-capitalized. To be well-capitalized, a bank must have a total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or greater, a leverage ratio of 5.00% or greater and not be subject to any agreement, order or directive to meet a specific capital level for any capital measure. Management believes that no conditions or events have occurred since the respective notifications to change the capital category of either of its depository institution subsidiaries.
14.17. Limitations on Payment of Dividends
The primary sourcesources of funds that we may use to pay dividends to stockholdersBNP Paribas are dividends the Parent receives from its subsidiaries. Regulations limit the amount of dividends Bank of the West and First Hawaiian Bank may declare or pay. At December 31, 2001,2004, the aggregate amount available for payment of dividends by such subsidiaries without prior regulatory approval was $10.5$823.2 million.
15.18. Benefit Plans
Pension and Other Postretirement Benefit Plans
The Company sponsors a noncontributory defined benefit pension plan, which is a merger of two separate plans. The first plan, for First Hawaiian employees, was frozen at December 31, 1995. As a result of that freeze, there are no further benefit accruals for First Hawaiian employees in the merged plan. The second plan, for Bank of the West employees, was a cash balance pension plan. The merged employee retirement plan (“ERP”) continues to provide cash balance benefit accruals for eligible Bank of the West employees.
The Company also sponsors an unfunded excess benefit pension plan covering employees whose pay or benefits exceed certain regulatory limits, unfunded postretirement medical and life insurance plans, and, for certain key executives, an unfunded supplemental executive retirement plan.plan (“SERP”).
In addition,connection with the acquisition of United California Bank (“UCB”), the Company assumed the pension and postretirement obligations of UCB. UCB employees participated in a noncontributory final pay defined benefit pension plan, an unfunded excess benefit pension plan covering employees whose pay or benefits exceed certain regulatory limits, an unfunded postretirement medical plan, and a 401(k) savings plan. In addition, certain key executives were eligible for a supplemental pension benefit if they met certain age and service conditions. The UCB plans were curtailed on June 30, 2003. The Company integrated UCB employees into the Company’s existing benefit plan structure on July 1, 2003. UCB employees were guaranteed the benefits they acquired through the UCB plans up to the curtailment date. The curtailment reduced the projected benefit obligation of the UCB retirement plan by $29.5 million measured as of July 1, 2003, which did not exceed the unrecognized net loss as of that date. The projected benefit obligation related to the UCB supplemental plan decreased by $2.9 million due to the curtailment. This exceeded the unrecognized loss in that plan resulting in a curtailment gain of $0.15 million during 2003. Special benefits were provided to UCB participants meeting certain age and service requirements; this is reflected as a termination benefit and is included in the pension liability. The special benefits were accounted for as an adjustment to goodwill as a purchase accounting adjustment due to the business combination of UCB with Bank of the West. The benefit obligations assumed by the Company in connection with the acquisition and the effect of the curtailment have been reflected in the table below.
BancWest also has a non-qualified pension plan (the “Director’s“Directors’ Retirement Plan”) that provides for eligible directors to qualify for retirement benefits based on their years of service as a director.
The Director’s Retirement Plan’sCompany uses a December 31st measurement date for its pension and post retirement plans.
Accounting for defined benefit obligations have been reflectedpension plans involves four key variables that are utilized in the following table.calculation of the Company’s annual pension costs. These factors include (1) size of the employee population and their estimated compensation increases, (2) actuarial assumptions and estimates, (3) expected long-term rate of return on plan assets and (4) the discount rate. Pension expense is directly affected by the number of employees eligible for pension benefits and their estimated compensation increases. Management is able to estimate compensation increases by reviewing the Company’s salary increases each year and comparing these figures with industry averages. In estimating the projected benefit obligation, actuaries base assumptions on factors such as the mortality rate, turnover rate, retirement rate, disability rate and other assumptions related to the population of individuals in the pension plan. The
74
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company calculates the expected return on plan assets each year based on the balance of the pension asset portfolio at the beginning of the year and the expected long-term rate of return on that portfolio in accordance with SFAS 87,Employers’ Accounting for Pensions. The long-term rate of return on assets was based on the compound average growth rate of the plan assets, excluding contributions, during the last fifteen years. The expected return on plan assets reflects asset allocations, investment strategy, historical returns and the views of managers and other large pension plan sponsors with regard to future return expectations.
The following tables summarize changes to the benefit obligation and fair value of plan assets for the years indicated:assets: Pension Benefits Other Benefits (in thousands) 2001 2000 2001 2000 Benefit obligation at beginning of year $ 159,556 $ 142,101 $ 18,414 $ 16,651 Service cost 4,039 3,594 1,269 888 Interest cost 11,064 10,268 1,346 1,174 Amendments 1,516 8,619 — (42 ) Actuarial loss 1,406 5,467 3,747 729 Benefit payments (9,076 ) (10,493 ) (1,030 ) (986 ) $ 168,505 $ 159,556 $ 23,746 $ 18,414 Pension Benefits Other Benefits (in thousands) 2001 2000 2001 2000 Fair value of plan assets at beginning of year $ 175,970 $ 196,481 $ — $ — Actual return on plan assets (14,397 ) (11,035 ) — — Employer contributions 815 1,017 1,030 986 Benefit payments (9,076 ) (10,493 ) (1,030 ) (986 ) $ 153,312 $ 175,970 $ — $ —
Pension Benefits | Other Benefits | |||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Benefit obligation at beginning of year | $ | 429,813 | $ | 408,059 | $ | 42,489 | $ | 41,765 | ||||||||
Service cost | 8,583 | 10,316 | 1,705 | 2,066 | ||||||||||||
Interest cost | 26,558 | 26,817 | 2,630 | 2,501 | ||||||||||||
Amendments | — | — | (9,593 | ) | — | |||||||||||
Actuarial (gain)loss | 39,162 | 28,765 | 7,910 | (1,505 | ) | |||||||||||
Termination of benefits | 239 | 6,597 | — | — | ||||||||||||
Curtailment of UCB plan | — | (32,409 | ) | — | — | |||||||||||
Benefit payments | (20,680 | ) | (18,332 | ) | (2,986 | ) | (2,338 | ) | ||||||||
Benefit obligation at end of year | $ | 483,675 | $ | 429,813 | $ | 42,155 | $ | 42,489 | ||||||||
Pension Benefits | Other Benefits | |||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Fair value of plan assets at beginning of year | $ | 372,176 | $ | 325,862 | $ | — | $ | — | ||||||||
Actual return on plan assets | 17,016 | 52,578 | — | — | ||||||||||||
Employer contributions | 51,520 | 12,068 | 2,986 | 2,338 | ||||||||||||
Benefit payments | (20,680 | ) | (18,332 | ) | (2,986 | ) | (2,338 | ) | ||||||||
Fair value of plan assets at end of year | $ | 420,032 | $ | 372,176 | $ | — | $ | — | ||||||||
60
Notes to Consolidated Financial Statements(continued)
The following table summarizes the funded status of the plans and amounts recognized/unrecognized in the Consolidated Balance Sheets:
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||
(in thousands) | 2001 | 2000 | 2001 | 2000 | ||||||||||||||||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||||||||||||||
Funded status | $ | (15,193 | ) | $ | 16,414 | $ | (23,746 | ) | $ | (18,414 | ) | $ | (63,643 | ) | $ | (57,637 | ) | $ | (42,155 | ) | $ | (42,489 | ) | |||||||||
Unrecognized net (gain) loss | 1,012 | 1,008 | (1 | ) | 1,627 | 98,401 | 50,305 | 11,412 | 3,991 | |||||||||||||||||||||||
Unrecognized prior service cost | — | 14,117 | — | 454 | — | — | (8,938 | ) | — | |||||||||||||||||||||||
Unrecognized transition (asset) obligation | — | (1,200 | ) | — | 3 | — | — | — | — | |||||||||||||||||||||||
Prepaid (accrued) benefit cost | $ | (14,181 | ) | $ | 30,339 | $ | (23,747 | ) | $ | (16,330 | ) | $ | 34,758 | $ | (7,332 | ) | $ | (39,681 | ) | $ | (38,498 | ) | ||||||||||
Amounts recognized in the Consolidated Statements of Income consist of:
Pension Benefits | Other Benefits | |||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Prepaid benefit cost | $ | 100,511 | $ | 52,674 | $ | — | $ | — | ||||||||
Accrued benefit liability | (74,464 | ) | (60,006 | ) | (39,681 | ) | (38,498 | ) | ||||||||
Accumulated other comprehensive income | 8,711 | — | — | — | ||||||||||||
Net amount recognized | $ | 34,758 | $ | (7,332 | ) | $ | (39,681 | ) | $ | (38,498 | ) | |||||
Unrecognized net gains or losses that exceed 5% of the greater of the projected benefit obligation or the market-related value of plan assets as of the beginning of the year, are amortized on a straight-line basis over five years. Amortization of the unrecognized net gain or loss is included as a component of net pension cost. If amortization results in an amount less than the minimum amortization required under generally accepted accounting principles, the minimum required amount is recorded.
75
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004 and 2003, no BancWest stock was held by the pension plans.
As part of the application of purchase price accounting for the UCB acquisition, a liability for the BancWest plans of $46$15.6 million was recorded as a fair value adjustment.adjustment in 2003.
Pension plan assetsThe accumulated benefit obligation for all defined benefit pension plans was $473.8 million and $420.7 million at December 31, 2000 consisted of 1,175,712 shares of the Predecessor’s common stock with an aggregate fair value of $30.7 million.2004 and 2003, respectively.
Key provisions for the merged pension planplans, excluding the unfunded plans, as of December 31, 20012004 and 20002003 were as follows:
(in thousands) | 2001 | 2000 | ||||||
Projected benefit obligation | $ | 128,795 | $ | 125,608 | ||||
Accumulated benefit obligation | 127,553 | 124,745 | ||||||
Fair value of plan assets for the retirement plan with plan assets in excess of accumulated benefit obligations | 153,312 | 175,970 | ||||||
Prepaid benefit cost for the overfunded plan | 25,545 | 57,601 | ||||||
December 31, | ||||||||
(dollars in thousands) | 2004 | 2003 | ||||||
Projected benefit obligation | $ | 399,756 | $ | 361,846 | ||||
Accumulated benefit obligation | 399,756 | 361,846 | ||||||
Fair value of plan assets for the retirement plan with plan assets in excess of accumulated benefit obligations | 420,032 | 372,176 | ||||||
Except for the mergedfunded pension plan,plans, the remaining plans had an accrued benefit liability. The projected benefit obligations for the unfunded plans were $83.9 million and $68.0 million at December 31, 2004 and 2003, respectively. The accumulated benefit obligation for the unfunded plans were $74.0 million and $58.8 million at December 31, 2004 and 2003, respectively.
The weighted average discount rate was 7% asfollowing table sets forth the components of December 31, 2001 and 2000. In determining the 2001 net periodic benefit cost the expected return on plan assets was 9.5% for the funded defined benefit pension plan; the rate of increase in future compensation used in determining the projected benefit obligation averaged 4.5% for the unfunded supplemental executive retirement plan and 4% for the defined benefit pension plan.(credit):
Pension Benefits | Other Benefits | |||||||||||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||
Service cost | $ | 8,583 | $ | 10,316 | $ | 10,223 | $ | 1,705 | $ | 2,066 | $ | 1,913 | ||||||||||||
Interest cost | 26,558 | 26,817 | 22,451 | 2,630 | 2,501 | 2,135 | ||||||||||||||||||
Expected return on plan assets | (32,708 | ) | (30,196 | ) | (27,869 | ) | — | — | — | |||||||||||||||
Amortization of prior service cost | — | — | — | (655 | ) | — | — | |||||||||||||||||
Recognized net actuarial (gain) loss | 6,755 | 11,296 | — | 489 | (9 | ) | (62 | ) | ||||||||||||||||
Termination benefit | 239 | — | — | — | — | — | ||||||||||||||||||
Curtailment gain recognized | — | (150 | ) | — | — | — | — | |||||||||||||||||
Total benefit cost | $ | 9,427 | $ | 18,083 | $ | 4,805 | $ | 4,169 | $ | 4,558 | $ | 3,986 | ||||||||||||
For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5% after 8 years and remain at 5% thereafter.
The following table sets forth the components of the net periodic benefit cost (credit) for 2001, 2000our funded plans: Funded Pension Benefits (dollars in thousands) 2004 2003 2002 Service cost $ 6,629 $ 8,527 $ 8,134 Interest cost 22,170 22,730 19,355 Expected return on plan assets (32,708 ) (30,196 ) (27,869 ) Recognized net actuarial (gain) loss 5,073 10,694 — Net periodic benefit cost (credit) $ 1,164 $ 11,755 $ (380 )
76
BancWest Corporation and 1999:Subsidiaries Pension Benefits Other Benefits (in thousands) 2001 2000 1999 2001 2000 1999 Service cost $ 4,039 $ 3,594 $ 3,295 $ 1,269 $ 888 $ 945 Interest cost 11,064 10,268 9,909 1,346 1,174 1,000 Expected return on plan assets (16,182 ) (18,333 ) (15,773 ) — — — Amortization of transition (asset) obligation (1,100 ) (1,200 ) (1,200 ) — — 3 Amortization of prior service cost 1,528 1,278 851 93 51 — Recognized net actuarial (gain) loss (6 ) (4,723 ) (3,934 ) 96 159 129 Curtailment loss — — — — — 139 $ (657 ) $ (9,116 ) $ (6,852 ) $ 2,804 $ 2,272 $ 2,216
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assumptions
Weighted-average assumptions used to determine benefit obligations were as follows at December 31:
ERP Pension Benefits | SERP Pension Benefits | Other Benefits | ||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Discount rate | 5.75 | % | 6.25 | % | 5.75 | % | 6.25 | % | 5.75 | % | 6.25 | % | ||||||||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | NA | NA | ||||||||||||||
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31,
ERP Pension Benefits | SERP Pension Benefits | Other Benefits | ||||||||||||||||||||||||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||
Discount rate | 6.25 | % | 6.75 | % | 7.00 | % | 6.25 | % | 6.75 | % | 7.00 | % | 6.25 | % | 6.75 | % | 7.00 | % | ||||||||||||||||||
Expected long-term return on plan assets | 9.00 | % | 9.50 | % | 9.50 | % | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.50 | % | NA | NA | NA | |||||||||||||||||||||
Assumed health care cost trend rates at December 31,
Bank of the West | First Hawaiian Bank | |||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Health care cost trend rate assumed for next year | 8 | % | 8 | % | 9 | % | 9 | % | ||||||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 5 | % | 5 | % | 5 | % | 5 | % | ||||||||
Year that the rate reaches the ultimate trend rate | 2010 | 2010 | 2011 | 2011 | ||||||||||||
Assumed health care cost trend rates have an impact on the amounts reported for the health care plans. A one-percentage-pointone percentage point change in the assumed health care cost trend rates would have the following pre-taxpre tax effect:
One-Percentage- | One-Percentage- | |||||||
(in thousands) | Point Increase | Point Decrease | ||||||
Effect on 2001 total of service and interest cost components | $ | 221 | $ | (190 | ) | |||
Effect on postretirement benefit obligation at December 31, 2001 | 1,527 | (1,181 | ) | |||||
One Percentage | One Percentage | |||||||
(dollars in thousands) | Point Increase | Point Decrease | ||||||
Effect on 2004 total of service and interest cost components | $ | 124 | $ | (111 | ) | |||
Effect on postretirement benefit obligation at December 31, 2004 | $ | 1,567 | $ | (1,410 | ) | |||
77
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan Assets
BancWest’s pension plan asset allocations at December 31, 2004 and 2003 were as follows:
BancWest Plan Assets | UCB Plan Assets | |||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Equity securities | 69 | % | 71 | % | 38 | % | 52 | % | ||||||||
Debt securities | 26 | % | 20 | % | 48 | % | 30 | % | ||||||||
Cash and cash equivalents | 2 | % | 5 | % | 14 | % | 18 | % | ||||||||
Other | 3 | % | 4 | % | — | % | — | % | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Equity securities in the BancWest and UCB plans did not include BancWest common stock at December 31, 2004 and 2003.
The assets within the BancWest Employee Retirement Plan and the UCB Retirement Plan (“the Plans”) are managed in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). The objective of the Plans is to achieve, over full market cycles, a compounded annual rate of return equal to or greater than the Plans’ expected long-term rates of return. The Plans’ committees recognize that capital markets can be unpredictable and that any investment could result in periods where the market value of the Plans’ assets will decline in value. The asset allocation is likely to be the primary determinant of the Plans’ return and the associated volatility of returns for the Plans. The Plans’ expected long-term rate of return was estimated to be 9.0% and 9.5% at December 31, 2004 and December 31, 2003, respectively.
The UCB Retirement Plan assets are managed with a focus on asset allocation. Management’s assessment of the plan’s long-term needs for liquidity and income drives the asset allocation parameters. Asset allocation is also used to manage and limit volatility and risk within the plan. Given the curtailment of the UCB Retirement Plan, a more risk averse management approach was approved by management effective in November of 2003 and will be employed by the plan’s investment advisor henceforth. The UCB Retirement Plan uses proprietary mutual funds and a collective investment fund to invest in the equity and debt markets. The equity funds provide broad market exposure to both large and small cap, domestic and international stocks, while the debt fund provides exposure to the investment grade domestic bond market. The plan has not used derivative instruments in the past, and has no plans to utilize them in the future.
The target asset allocations for the two plans for December 31, 2005 are as follows:
BancWest | UCB | |||||||
Plan | Plan | |||||||
Equity securities | 50 – 70 | % | 30 – 50 | % | ||||
Debt securities | 20 – 40 | % | 50 – 70 | % | ||||
Real estate | 0 – 15 | % | 0 | % | ||||
Cash | 0 | % | 0 | % | ||||
Other | 0 – 15 | % | 0 | % | ||||
Contributions
BancWest expects to contribute $4.2 million to its defined benefit pension plans and $3.4 million to its other post retirement benefit plans in 2005. These contributions are estimated needs for the unfunded plans and may vary depending on retirements during 2005. No contributions to the pension trust for funded plans are expected to be made during 2005.
78
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
(dollars in thousands) | Pension Benefits | Other Benefits | ||||||
2005 | $ | 21,614 | $ | 3,382 | ||||
2006 | 22,149 | 3,367 | ||||||
2007 | 23,714 | 3,420 | ||||||
2008 | 24,922 | 3,390 | ||||||
2009 | 26,918 | 3,475 | ||||||
2010 - 2014 | 168,072 | 18,683 | ||||||
Money Purchase and 401(k) Match Plans
The Company contributes to a defined contribution money purchase plan. The Company also matches employees’employee contributions (upup to 3% of pay)pay to athe BancWest Corporation 401(k) component of theSavings Plan, a defined contribution plan. The plans cover substantiallyplan covers all employees who satisfy applicable age and length-of-service requirements, except foreligibility requirements. There is a select group of key executives who are participants in an unqualified grandfathered supplemental executive retirement plan who may participate in the 401(k) plan, but who are not eligible for the Company’s unfunded supplemental executive retirement plan.match.
The Company also contributes to another defined contribution plan, a money purchase plan called the BancWest Corporation Future Plan. This plan covers all employees who satisfy the eligibility requirements at First Hawaiian Bank and subsidiaries, and a small group of Bank of the West employees in the Northwest Region who were former First Hawaiian Bank employees and who were fully vested in the plan at the time of the BNP Paribas merger.
For 2001, 20002004, 2003 and 1999,2002, the money purchase plan contribution was $4.7$3.9 million, $4.5$3.9 million and $5$4.6 million, respectively. The matching employer contributions to the 401(k) plan for 2001, 20002004, 2003 and 19992002 were $4.1$7.7 million, $3.9$7.7 million and $2$5.4 million, respectively. Matching employer contributions for 20012003 and 20002002 reflect the addition of the Bank of the WestWest’s contributions to the United California Bank Premiere Savings Plan participants tofor the Company’s defined contribution plan.
Effectiveperiod September 1, 2002 through June 30, 2003. As of July 1, 1999,2003, UCB employees were merged into the BancWest Corporation 401(k) Savings Plan. As of January 1, 2005 Community First and USDB employees were integrated into the BancWest Corporation 401(k) Savings Plans. Matching employer contributions for 2004 include Bank of the West Savings Plan was merged into the Company’s defined contribution
61
Notes to Consolidated Financial Statements(continued)
plan. Effective June 30, 1999, SierraWest amended the SierraWest Bancorp KSOP Plan (the “KSOP”) to cease all contributions. Effective July 1, 1999, all eligible employees who participated in the KSOP became eligible to participate in the Company’s defined contribution plan.
Effective January 1, 2000, the KSOP was divided into two separate plans: (1) the SierraWest Bancorp Employee Stock Ownership Plan (the “ESOP”); and (2) the SierraWest Bancorp Savings Plan (the “SierraWest Savings Plan”) (together, the “Plans”). On August 15, 2000, the Plans were separately submittedWest’s contributions to the Internal Revenue Service (the “IRS”) for determination letters that they remain qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended.
On June 19, 2001, favorable determination letters were received from the IRS that approved the qualification status of theCommunity First and USDB 401(k) Plans. OnEffective March 1, 2002, the2005 and April 2005, USDB and Community First 401(k) assets, of the SierraWest Savings Plan wererespectively, will be transferred into the Company’s defined contribution plan. The ESOP will be terminated and its assets distributed to participants before the end of 2002.
On December 21, 2001, all share balances in the BancWest Corporation Stock Fund were liquidated and reinvested in the Putnam Stable Value Fund at the rate of $35 per share. On December 28, 2001, residual dividend balances were also liquidated and reinvested in the Putnam Stable Value Fund at the rate of $35 per share.401(k) Savings Plan.
Incentive Plan for Key Executives
The Company has an Incentive Plan for Key Executives (the “IPKE”), under which cash awards are made to key executives. Prior to 2001, awards of cash or our common stock or both were made to key executives. Due to the BNP Paribas Merger, all shares of common stock awarded under the IPKE cashed out for $35 per share. The IPKE limits the aggregate and individual value of the awards that could be issued in any one fiscal year. Salary and employee benefits expense includes IPKE expense of $25 million for 2004, $23 million for 2003 and $17 million for 2002.
Long-Term Incentive Plan
We have aThe Long-Term Incentive Plan (the “LTIP”) designedpays cash awards to reward selected key executives for theirif the Corporation achieves specified performance and the Company’s performance measuredlevels over multi-year performance cycles. Due to the timingchange-in-control provisions of the BancWest Merger,LTIP plan, as a result of the cycle that ended December 31, 2000 ran for two years (1999-2000).
The threshold earnings per share level for the Company and specified levels relative to peer banks were achieved during this cycle. A payment of $5 million was made to participants in February 2001.
The BNP Paribas Merger, constitutedthe Company paid a “Changemaximum award to the participants in Control” as defined by the LTIP. Aseach of the effective date of an LTIP Change in Control, the LTIP provides that participants will be deemed to have fully earned the maximum target values attainable for the entire performance period, regardless of whether the Company met the target levels. Accordingly, a payment of $19.9 million was made to participants in January 2002 for the three-year performance periodsthree open cycles that began in 1999, 2000 and 2001. New three-year LTIP cycles began on January 1, 2002, 2003 and 2004. Salary and employee benefits expense for the Company includes LTIP expense of $4 million for 2004, $4 million for 2003 and $5 million for 2002.
16. Stock-Based CompensationDiscounted Share Purchase Plan
We previously had two Stock Incentive Plans, (the “SIP”). The SIP authorized the grant of upSee Note 1 to 6,000,000 shares of common stock to selected key employees. The SIP aimed to enhance our value by providing additional incentivesfinancial statements for outstanding performance to selected key employees. The SIP was administered by the Executive Compensation Committee of the Board.further information.
We also began administering the Sierra Tahoe Bancorp 1996 Stock Option Plan, the Sierra Tahoe Bancorp 1998 Stock Option Plan, the California Community BancShares Corporation 1993 Stock Option Plan and the Continental Pacific Bank 1990 Amended Stock Option Plan (the “SierraWest Option Plans”) as a result of the SierraWest Merger. No options were granted under the SierraWest Option Plans after the SierraWest Merger.79
The SIP provided for grants of restricted stock, incentive stock options and non-qualified stock options. Options were granted at exercise prices that were not less than the fair market value of the common stock on the date of grant. The exercise price for stock options could be paid in whole or in part in cash, by delivery or withholding of shares (if allowed by the option agreement) or by various other methods. Options generally vested at a rate of 25% per year after the date of grant and generally expired within ten years from the date of grant.
In connection with the two-for-one stock split in December 1999, the number of shares of the Predecessor’s common stock available for grants under the SIP was doubled. Outstanding options under the SIP and SierraWest Option Plans were adjusted by doubling the aggregate number of shares issuable under each outstanding option and by halving their per share exercise price.
Due to the BNP Paribas Merger, each vested and unvested option outstanding under our option plans was cancelled. We became obligated to pay our option holders $35 per share less the applicable option exercise price. Those payments were made in January 2002.
62
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements(continued)19. Income Taxes
The following table summarizes activity underbelow excludes $1.7 million of tax expense resulting from the SIP and SierraWest Option Plans for 2001, 2000 and 1999:
Options Outstanding | ||||||||||||
Weighted | ||||||||||||
Average | ||||||||||||
Exercise | ||||||||||||
Shares | Price | |||||||||||
Balance at December 31, 1998 | 1,495,185 | $ | 14.61 | |||||||||
Granted | 2,183,567 | 20.08 | ||||||||||
Exercised | (234,661 | ) | 10.00 | |||||||||
Forfeited | (8,981 | ) | 19.71 | |||||||||
Balance at December 31, 1999 | 3,435,110 | 18.31 | ||||||||||
Granted | 1,330,761 | 15.13 | ||||||||||
Exercised | (297,678 | ) | 14.67 | |||||||||
Forfeited | (43,953 | ) | 20.52 | |||||||||
Balance at December 31, 2000 | 4,424,240 | 16.66 | ||||||||||
Granted | 919,643 | 24.75 | ||||||||||
Exercised | (283,620 | ) | 15.28 | |||||||||
Forfeited | (73,561 | ) | 20.37 | |||||||||
Balance at December 19, 2001 | 4,986,702 | 18.49 | ||||||||||
Cancellation of options | (4,986,702 | ) | 18.49 | |||||||||
Balance at December 31, 2001 | — | |||||||||||
In accounting for our option plans, we applied APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. There has been no compensation cost charged against income for the option plans, as options were granted at exercise prices no less than the fair market valuecumulative effect of the common stock on the dateadoption of grant. Had compensation cost for the option plans been determinedFIN 46 in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Predecessor’s net income would have been reduced to the pro forma amounts indicated below:
(in thousands) | 2001 | 2000 | 1999 | ||||||||||
Net income: | |||||||||||||
As reported | $ | 246,502 | $ | 216,394 | $ | 172,378 | |||||||
Pro forma | 239,835 | 214,978 | 171,543 | ||||||||||
Under SFAS No. 123, the fair value of each grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants:
2001 | 2000 | 1999 | ||||||||||
Expected dividend yield | 3.04 | % | 3.27 | % | 3.32 | % | ||||||
Expected common stock volatility | 27.67 | 24.76 | 22.58 | |||||||||
Risk-free interest rate | 6.22 | 6.66 | 5.47 | |||||||||
Expected life of the options | 6 years | 6 years | 6 years | |||||||||
The weighted average grant date fair value of options granted was $6.98 in 2001, $3.98 in 2000 and $4.45 in 1999.
17. Other Noninterest Expense
For the periods indicated, other noninterest expense included the following: Company Predecessor Year Ended Dec. 20, 2001 Jan. 1, 2001 December 31, through through (in thousands) Dec. 31, 2001 Dec. 19, 2001 2000 1999 Stationery and supplies $ 928 $ 21,076 $ 20,286 $ 21,275 Advertising and promotions 666 16,400 16,950 15,788 Other 2,016 83,056 80,716 75,526 $ 3,610 $ 120,532 $ 117,952 $ 112,589
18. Income Taxes
2003. For the periods indicated, the provision for income taxes was comprised of the following: Company Predecessor Year Ended Dec. 20, 2001 Jan. 1, 2001 December 31, through through (in thousands) Dec. 31, 2001 Dec. 19, 2001 2000 1999 Current: Federal $ 2,140 $ 75,733 $ 30,164 $ 22,075 States and other 596 21,110 9,215 6,445 Total current 2,736 96,843 39,379 28,520 Deferred: Federal 1,589 56,254 89,451 76,184 States and other 382 13,508 23,397 19,047 Total deferred 1,971 69,762 112,848 95,231 $ 4,707 $ 166,605 $ 152,227 $ 123,751
63
Notes to Consolidated Financial Statements(continued)
Year Ended December 31, | ||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | |||||||||
Current: | ||||||||||||
Federal | $ | 249,674 | $ | 214,911 | $ | 70,535 | ||||||
States and other | 55,376 | 51,914 | 25,456 | |||||||||
Total current | 305,050 | 266,825 | 95,991 | |||||||||
Deferred: | ||||||||||||
Federal | (8,277 | ) | (3,127 | ) | 113,558 | |||||||
States and other | 1,920 | 9,000 | 24,445 | |||||||||
Total deferred | (6,357 | ) | 5,873 | 138,003 | ||||||||
Total provision for income taxes | $ | 298,693 | $ | 272,698 | $ | 233,994 | ||||||
At December 31, 2001,2004, the Company had no Federal or statefederal alternative minimum tax credit carryforwards and no state general business credit carryforwards.
There was a separate state net operating loss carryforward of $141,000 resulting from the acquisition of USDB. The components of the Company’s net deferred income tax liabilities at December 31, 20012004 and 20002003 were as follows:
(in thousands) | 2001 | 2000 | ||||||||
Assets | ||||||||||
Allowance for credit losses and nonperforming assets | $ | 86,765 | $ | 76,183 | ||||||
Deferred compensation expenses | 75,171 | 4,325 | ||||||||
Intangible assets | 60,505 | — | ||||||||
State income and franchise taxes | 5,966 | 2,749 | ||||||||
Total deferred income tax assets | 228,407 | 83,257 | ||||||||
Liabilities | ||||||||||
Leases | 649,733 | 561,009 | ||||||||
Intangible assets | — | 11,893 | ||||||||
Investment securities | 23,837 | 26,966 | ||||||||
Depreciation expense | 9,955 | 15,761 | ||||||||
Other | 10,207 | 13,977 | ||||||||
Total deferred income tax liabilities | 693,732 | 629,606 | ||||||||
Net deferred income tax liabilities | $ | 465,325 | $ | 546,349 | ||||||
(dollars in thousands) | 2004 | 2003 | ||||||
Assets | ||||||||
Allowance for loan and lease losses and nonperforming assets | $ | 211,315 | $ | 181,844 | ||||
Deferred compensation expenses | 88,291 | 61,065 | ||||||
Securities available for sale | 814 | — | ||||||
State income and franchise taxes | 17,535 | 11,951 | ||||||
Other | — | 22,732 | ||||||
Total deferred income tax assets | 317,955 | 277,592 | ||||||
Liabilities | ||||||||
Leases | 739,417 | 771,395 | ||||||
Securities available for sale | — | 37,340 | ||||||
Depreciation expense | 32,006 | 18,498 | ||||||
Intangible assets | 4,136 | 10,303 | ||||||
Other | 2,500 | — | ||||||
Total deferred income tax liabilities | 778,059 | 837,536 | ||||||
Net deferred income tax liabilities | $ | 460,104 | $ | 559,944 | ||||
Net deferred income tax liabilities are included in other liabilities in the Consolidated Balance Sheets.
80
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following analysis reconciles the Federal statutory income tax expenses and rate to the effective income tax expenses and rate for the periods indicated: Company Predecessor Dec. 20, 2001 Jan. 1, 2001 through through (in thousands) Dec. 31, 2001 Dec. 19, 2001 % $ 4,098 $ 145,043 35.0 % 700 24,780 6.0 — 10,866 2.5 (211 ) (7,454 ) (1.8 ) 120 (6,630 ) (1.5 ) $ 4,707 $ 166,605 40.2 %
Year Ended | ||||||||
December 31, 2000 | ||||||||
(dollars in thousands) | Amount | % | ||||||
Federal statutory income tax rate | $ | 129,017 | 35.0 | % | ||||
Foreign, state and local taxes, net of Federal income tax benefit | 22,113 | 6.0 | ||||||
Goodwill amortization | 10,784 | 2.9 | ||||||
Tax credits | (7,467 | ) | (2.0 | ) | ||||
Other | (2,220 | ) | (.6 | ) | ||||
Effective income tax rate | $ | 152,227 | 41.3 | % | ||||
Year Ended | ||||||||
December 31, 1999 | ||||||||
(dollars in thousands) | Amount | % | ||||||
Federal statutory income tax rate | $ | 103,644 | 35.0 | % | ||||
Foreign, state and local taxes, net of Federal income tax benefit | 17,678 | 6.0 | ||||||
Goodwill amortization | 10,469 | 3.5 | ||||||
Tax credits | (6,214 | ) | (2.1 | ) | ||||
Other | (1,826 | ) | (.6 | ) | ||||
Effective income tax rate | $ | 123,751 | 41.8 | % | ||||
Year Ended December 31, | ||||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||
(dollars in thousands) | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
Federal statutory income tax expense and rate | $ | 270,225 | 35.0 | % | $ | 249,071 | 35.0 | % | $ | 208,364 | 35.0 | % | ||||||||||||
Foreign, state and local taxes, net of Federal income tax benefit | 40,330 | 5.2 | 39,945 | 5.6 | 36,027 | 6.1 | ||||||||||||||||||
Tax credits | (3,766 | ) | (0.5 | ) | (9,374 | ) | (1.3 | ) | (14,407 | ) | (2.4 | ) | ||||||||||||
Other | (8,096 | ) | (1.0 | ) | (6,944 | ) | (1.0 | ) | 4,010 | 0.6 | ||||||||||||||
Effective income tax expense and rate | $ | 298,693 | 38.7 | % | $ | 272,698 | 38.3 | % | $ | 233,994 | 39.3 | % | ||||||||||||
19. Operating Segments
Lease-in/lease-out (LILO) transactions have recently been subject to review on a nationwide basis by the Internal Revenue Service (IRS) to determine whether the tax deductions connected with such transactions are allowable for U.S. Federal income tax purposes. The Company has determinedentered into several LILO transactions, which have been the subject of an audit by the IRS. In April 2004, the Company received a Revenue Agent’s Report (RAR) which disallowed all deductions associated with the LILO transactions. In order to avoid potential future interest and penalties, the Company has paid, under protest, the amounts claimed by the IRS and other tax authorities in the RAR. The Company continues to believe that ourit properly reported its LILO transactions and will contest the results of the IRS’s audit. Recently the IRS has identified sale-in/lease-out (SILO) transactions as listed transactions and is in the process of reviewing them to determine whether the deductions are allowable for tax purposes. The Company has entered into several SILOs, which are currently being audited by the IRS. At the present time, the Company cannot predict the outcome of these issues.
20. Operating Segments
Our reportable segments are the onesoperating segments that we use in our internal reporting:reporting at Bank of the West and First Hawaiian. TheHawaiian Bank. Bank of the West’s segments operate primarily in Arizona, California, Colorado, Idaho, Iowa, Minnesota, Nebraska, Nevada, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin and Wyoming. As discussed below, certain Bank of the West segment operates primarily in California, Oregon, Washington, Idaho, New Mexico and Nevada.segments conduct business nationwide. Although the First Hawaiian segment operatesBank’s segments operate primarily in Hawaii, it also has significant operations outside the state, such as media finance, leveraged leases, and international banking and branches in Guam and Saipan.
The financial results of these operating segmentseach segment are presented on an accrual basis. There are no significant differences among thedetermined by our management accounting policies of the segments as comparedprocess, which assigns balance sheet and income statement items to the Consolidated Financial Statements.each reporting segment. The Company evaluates the performance of its segments and allocates resources to them based on net interest income of each segment includes the results of the respective bank’s transfer pricing process, which assesses an internal funds charge on all segment assets and net income.a funds credit on all segment liabilities. The internal charges and credits assigned to each asset and liability are intended to match the maturity, repayment and interest rate characteristics of that asset or liability. With the exception of goodwill, assets are allocated to each business segment on the basis of assumed benefit to their business operations. Goodwill is assigned on the basis of projected future earnings of the segments. The process of management accounting is dynamic and subjective. There areis no material intersegment revenues.comprehensive or authoritative guidance which can be followed. Changes in management structure and/or the allocation process may result in changes in allocations and transfers. In that case, amounts for prior periods would be reclassified for comparability. Amounts for 2003 and 2002 have been reclassified to reflect changes in the transfer pricing methodology and noninterest income and expense allocation methodology applied in 2004.
64Bank of the West
BOW manages its operations through three operating segments: Regional Banking, Commercial Banking and Consumer Finance.
Regional Banking
Regional Banking seeks to serve a broad customer base by offering a wide range of retail and commercial banking products. Deposit products offered by this segment include checking accounts, savings deposits, market rate accounts, individual retirement accounts and time deposits. Regional Banking utilizes its branch network in sixteen states as its principal funding source. BOW’s telephone banking service, a network of automated teller machines and the online eTimeBanker service provide retail customers with other means of accessing and managing their accounts.
81
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes Through its branch network, this business segment originates a variety of consumer loans, including real estate secured installment loans and lines of credit and, to Consolidateda lesser extent, other collateralized and non-collateralized installment loans. In addition, Regional Banking originates and holds a portfolio of first mortgage loans on 1-4 family residences. Through commercial banking operations conducted from its branch network, Regional Banking offers a wide range of commercial banking products intended to serve the needs of smaller community-based businesses. These include originations of standardized loan and deposit products for businesses with relatively simple banking and financing needs. Regional Banking also provides a number of fee-based products and private banking services including trust, insurance and investment services.
More complex and customized commercial banking services are offered through the segment’s Business Banking Centers which serve clusters of branches and provide lending, deposit and cash management services to companies operating in the respective market areas. Business Banking Centers support commercial lending activities for middle market business customers in locations throughout California, as well as Portland, Oregon, Reno and Las Vegas, Nevada and Albuquerque and Las Cruces, New Mexico, and Salt Lake City, Utah.
Through its insurance subsidiary, BW Insurance Agency, Regional Banking offers a wide variety of insurance services for both individuals and small businesses. The BW Insurance Agency product set includes auto, home and life, as well as numerous commercial insurance options. The company operates 57 insurance agencies in eight states including Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota, Utah and Wyoming.
The Regional Banking Segment also includes a Pacific Rim Division which offers multilingual services through a branch network in predominately Asian American communities in California, with specialized domestic and international products and services for both individuals and companies.
Commercial Banking
The Commercial Banking Segment is comprised of several divisions: Commercial Banking Division, Agribusiness Banking Division, Real Estate Industries Division and Specialty areas. The Commercial Banking Division supports business clients with revenues between $25 million and $500 million, focusing on relationship banking including deposit generation as well as lending activities. The Agribusiness Banking Division serves all agribusiness and rural commercial clients. The Real Estate Industries Division provides construction financing to large regional and national real estate developers for residential and commercial projects. Interim and permanent financing is available on these commercial real estate projects.
The Commercial Banking Segment also includes specialty areas: Church Lending, Small Business Administration (SBA), Health Care, Leasing, Credit Union, Government, Correspondent Banking, Cash Management Services and Capital Markets. Equipment leasing is available through the Company’s commercial offices, branches and brokers across the nation. Its subsidiary, Trinity Capital, specializes in nationwide vendor leasing and servicing programs for manufacturers in specific markets.
The Commercial Banking Segment also provides trade finance and functions as an agent in commercial, agribusiness and real estate syndication transactions.
Consumer Finance
The Consumer Finance Segment targets the origination of auto loans and leases in the western and mid-western United States, and recreational vehicle and marine loans nationwide, with emphasis on originating credits at the high end of the credit spectrum. These loans and leases are originated through a network of auto dealers and recreational vehicle and marine dealers serviced by sales representatives located throughout the country. This segment also includes BOW’s wholly owned subsidiary, Essex Credit Corporation, which focuses on the origination of marine and recreational vehicle loans directly with customers. In February 2004, Essex began retaining certain types of loans in its own portfolio. In previous years, Essex sold substantially all of its loans to investors on a servicing released basis.
First Hawaiian Bank
FHB manages its operations through the following business segments: Retail Banking, Consumer Finance, Commercial Banking and Financial Statements(continued)Management.
82
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retail Banking
FHB’s Retail Banking Segment operates through 56 banking offices located throughout Hawaii. FHB also operates three branches in Guam and two branches in Saipan.
The tablesfocus of FHB’s retail/community banking strategy is primarily in Hawaii. Thanks to its significant market share in Hawaii, FHB already has product or service relationships with a majority of the households in the state. Therefore, a key goal of its retail community banking strategy is to build those relationships by cross-selling additional products and services to existing individual and business customers.
In pursuing the community banking markets in Hawaii, Guam and Saipan, FHB seeks to serve a broad customer base by furnishing a full range of retail and commercial banking products. Through its branch network, FHB generates first-mortgage loans on residences and a variety of consumer loans, consumer lines of credit and second mortgages. To complement its branch network and serve these customers, FHB operates a system of automated teller machines, a 24-hour phone center in Honolulu and a full-service internet banking system. Through commercial banking operations conducted from its branch network, FHB offers a wide range of banking products intended to serve the needs of smaller, community-based businesses. FHB also provides a number of fee-based products and services such as annuities and mutual funds, insurance and securities brokerage. The First Investment Center of FHB makes available annuities, mutual funds and other securities through BancWest Investment Services, Inc., a registered broker-dealer, member NASD/SIPC.
The private banking department within FHB’s Retail Banking Segment provides a wide range of private banking services and products to high-net-worth individuals.
Consumer Finance
Consumer Finance offers many types of loans to consumers, including lines of credit (uncollateralized or collateralized) and various types of personal and automobile loans. FHB also provides indirect consumer automobile financing on new and used autos by purchasing finance contracts from dealers.
Consumer Finance also makes residential real estate loans, including home-equity loans, to enable borrowers to purchase, refinance, improve or construct residential real property. The loans are collateralized by mortgage liens on the related property, substantially all located in Hawaii. FHB also originates residential real estate loans for sale on the secondary market.
Commercial Banking
Commercial Banking is a major lender to small and medium-sized businesses in Hawaii, Guam and Saipan. Lending services include receivable and inventory financing, term loans for equipment acquisition and facilities expansion and trade finance letters of credit. To support the funds management needs of both commercial banking customers and large private and public deposit relationships maintained with the Company, FHB operates a Cash Management Department which provides a full range of innovative and relationship-focused cash management services.
Real Estate Lending-Commercial provides interim construction, residential development and permanent financing for commercial real estate projects, including retail facilities, warehouses and office buildings. FHB also does lease-to-fee conversion financing for condominium associations and cooperatives.
International Banking Services provides international banking products and services through FHB’s branch system, its Japan Business Development Department in Honolulu, a Grand Cayman branch, three Guam branches, two branches in Saipan and a representative office in Tokyo, Japan. FHB maintains a network of correspondent banking relationships throughout the world. FHB’s trade-related international banking activities are concentrated in the Asia-Pacific area.
Leasing provides leasing services for businesses from heavy equipment to office computer and communication systems.
83
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Management
The Financial Management Segment offers a full range of trust and investment management services, and also seeks to reinforce customer relationships developed by or in conjunction with the Retail Banking Segment. The Financial Management Segment provides asset management, advisory and administrative services for estates, trusts and individuals. It also acts as trustee and custodian of retirement and other employee benefit plans. At December 31, 2004, the Trust and Investments Division had approximately 4,000 accounts with a market value of $8.9 billion. In the asset total, $3.8 billion in assets are actively managed.
Insurance services are provided through First Hawaiian Insurance, Inc., a wholly owned subsidiary of FHB. First Hawaiian Insurance provides insurance brokerage services for personal, business and estate insurance needs. It offers insurance needs analysis for individuals, families and businesses, as well as life, disability and long-term care insurance products.
84
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presentpresents information about the Company’s operating segments as of or for the periods indicated:indicated Bank of the First Reconciling Consolidated (in millions) West Hawaiian Other Items Totals $ 19 $ 11 $ (4 ) $ — $ 26 2 — — — 2 1 — — — 1 4 3 (2 ) — 5 6 4 (2 ) — 8 13,412 8,682 4,759 (5,206 ) 21,647 895 994 173 — 2,062 1 — — — 1 $ 484 $ 319 $ (12 ) $ — $ 791 70 31 — — 101 52 25 — — 77 4 — — — 4 101 71 (5 ) — 167 134 121 (8 ) — 247 23 9 — — 32 Year ended December 31, 2000: Net interest income $ 423 $ 329 $ (5 ) $ — $ 747 Provision for credit losses 38 22 — — 60 Depreciation and amortization 43 27 — — 70 Restructuring, merger-related and other nonrecurring costs 1 — — — 1 Provision for income taxes 85 71 (4 ) — 152 Net income 110 112 (6 ) — 216 Segment assets (year end) 11,159 7,452 3,215 (3,369 ) 18,457 Capital expenditures 24 7 — — 31 Year ended December 31, 1999: Net interest income $ 384 $ 312 $ (7 ) $ — $ 689 Provision for credit losses 28 27 — — 55 Depreciation and amortization 41 26 — — 67 Restructuring, merger-related and other nonrecurring costs 11 7 — — 18 Provision for income taxes 72 56 (4 ) — 124 Net income 84 94 (6 ) — 172 Segment assets (year end) 9,571 7,081 2,747 (2,718 ) 16,681 Capital expenditures 18 21 — — 39
Bank of the West | First Hawaiian Bank | |||||||||||||||||||||||||||||||||||||||||||||||
Regional | Commercial | Consumer | Retail | Consumer | Commercial | Financial | Other | Reconciling | Consolidated | |||||||||||||||||||||||||||||||||||||||
(dollars in millions) | Banking | Banking | Finance | Other(1) | Banking | Finance | Banking | Management | Other(2) | BancWest(3) | Items(4) | Total | ||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2004: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 510.1 | $ | 319.1 | $ | 212.2 | $ | 107.9 | $ | 244.7 | $ | 87.7 | $ | 29.3 | $ | (0.3 | ) | $ | (22.1 | ) | $ | (136.3 | ) | $ | — | $ | 1,352.3 | |||||||||||||||||||||
Noninterest income | 176.5 | 53.0 | 24.4 | 28.9 | 57.6 | 29.5 | 13.3 | 30.1 | 15.1 | 3.1 | — | 431.5 | ||||||||||||||||||||||||||||||||||||
Noninterest expense | 454.5 | 119.7 | 81.6 | 56.8 | 170.8 | 46.6 | 11.3 | 25.4 | (18.6 | ) | 14.4 | — | 962.5 | |||||||||||||||||||||||||||||||||||
Provision for loan and lease losses | 3.4 | 1.4 | 29.5 | (0.2 | ) | 4.9 | 9.8 | 0.5 | — | (0.4 | ) | 0.3 | — | 49.2 | ||||||||||||||||||||||||||||||||||
Tax provision (benefit) | 90.6 | 98.3 | 50.1 | 29.5 | 50.1 | 24.1 | 10.4 | 1.7 | 4.7 | (60.8 | ) | — | 298.7 | |||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 138.1 | $ | 152.7 | $ | 75.4 | $ | 50.7 | $ | 76.5 | $ | 36.7 | $ | 20.4 | $ | 2.7 | $ | 7.3 | $ | (87.1 | ) | $ | — | $ | 473.4 | |||||||||||||||||||||||
Assets at December 31 | 12,679 | 9,994 | 9,279 | 6,815 | 4,021 | 1,595 | 1,181 | 20 | 3,792 | 10,393 | (9,715 | ) | 50,054 | |||||||||||||||||||||||||||||||||||
Goodwill at December 31 | 2,127 | 708 | 308 | — | 650 | 216 | 118 | 11 | — | 175 | — | 4,313 | ||||||||||||||||||||||||||||||||||||
Average assets | 8,510 | 9,073 | 8,507 | 5,555 | 3,761 | 1,527 | 1,135 | 24 | 3,481 | 7,701 | (7,967 | ) | 41,307 | |||||||||||||||||||||||||||||||||||
Average loans and leases | 6,283 | 7,737 | 8,099 | 310 | 2,772 | 1,340 | 956 | 7 | 134 | 149 | (35 | ) | 27,752 | |||||||||||||||||||||||||||||||||||
Average deposits | 15,091 | 3,609 | 10 | 2,323 | 7,087 | 9 | 30 | 28 | 202 | 154 | (89 | ) | 28,454 | |||||||||||||||||||||||||||||||||||
Year Ended December 31, 2003: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 495.0 | $ | 316.2 | $ | 207.1 | $ | 75.8 | $ | 230.0 | $ | 81.0 | $ | 33.9 | $ | (0.1 | ) | $ | (6.4 | ) | $ | (138.9 | ) | $ | — | $ | 1,293.6 | |||||||||||||||||||||
Noninterest income | 163.1 | 48.3 | 11.8 | 22.6 | 57.2 | 33.8 | 12.4 | 29.6 | 13.3 | 0.1 | — | 392.2 | ||||||||||||||||||||||||||||||||||||
Noninterest expense | 423.3 | 117.0 | 60.3 | 31.0 | 168.3 | 45.8 | 12.8 | 25.1 | (4.3 | ) | 13.5 | — | 892.8 | |||||||||||||||||||||||||||||||||||
Provision for loan and lease losses | 11.4 | (0.6 | ) | 54.6 | — | 6.3 | 9.5 | 4.4 | — | (4.3 | ) | — | — | 81.3 | ||||||||||||||||||||||||||||||||||
Tax provision (benefit) | 87.7 | 94.2 | 41.0 | 29.1 | 43.0 | 22.2 | 8.3 | 1.8 | 7.4 | (62.0 | ) | — | 272.7 | |||||||||||||||||||||||||||||||||||
Income before cumulative effect of accounting change | 135.7 | 153.9 | 63.0 | 38.3 | 69.6 | 37.3 | 20.8 | 2.6 | 8.1 | (90.3 | ) | — | 439.0 | |||||||||||||||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | — | — | — | — | — | — | — | — | (2.4 | ) | — | — | (2.4 | ) | ||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 135.7 | $ | 153.9 | $ | 63.0 | $ | 38.3 | $ | 69.6 | $ | 37.3 | $ | 20.8 | $ | 2.6 | $ | 5.7 | $ | (90.3 | ) | $ | — | $ | 436.6 | |||||||||||||||||||||||
Assets at December 31 | 7, 644 | 8,806 | 8,030 | 4,820 | 3,541 | 1,479 | 1,150 | 21 | 3,742 | 6,960 | (7,841 | ) | 38,352 | |||||||||||||||||||||||||||||||||||
Goodwill at December 31 | 1,214 | 706 | 308 | — | 650 | 216 | 118 | 10 | — | 5 | — | 3,227 | ||||||||||||||||||||||||||||||||||||
Average assets | 7,501 | 8,377 | 7,564 | 3,728 | 3,369 | 1,411 | 1,154 | 17 | 3,412 | 6,743 | (7,378 | ) | 35,898 | |||||||||||||||||||||||||||||||||||
Average loans and leases | 5,477 | 7,047 | 7,234 | — | 2,459 | 1,216 | 1,013 | 3 | 292 | 57 | (42 | ) | 24,756 | |||||||||||||||||||||||||||||||||||
Average deposits | 13,910 | 3,071 | 12 | 1,202 | 6,540 | 9 | 22 | 49 | 163 | — | (67 | ) | 24,911 | |||||||||||||||||||||||||||||||||||
Year Ended December 31, 2002: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 483.3 | $ | 262.2 | $ | 183.1 | $ | 59.0 | $ | 234.3 | $ | 72.5 | $ | 23.3 | $ | 0 | $ | 1.0 | $ | (127.8 | ) | $ | — | $ | 1,190.9 | |||||||||||||||||||||||
Noninterest income | 143.7 | 31.7 | 11.7 | 21.1 | 52.3 | 26.6 | 6.2 | 26.8 | 12.4 | 3.4 | — | 335.9 | ||||||||||||||||||||||||||||||||||||
Noninterest expense | 394.6 | 101.2 | 55.8 | 47.0 | 161.8 | 41.8 | 6.7 | 23.7 | (1.1 | ) | 4.6 | — | 836.1 | |||||||||||||||||||||||||||||||||||
Provision for loan and lease losses | 15.4 | 14.7 | 45.2 | — | 9.0 | 9.5 | 0.2 | — | 1.4 | — | — | 95.4 | ||||||||||||||||||||||||||||||||||||
Tax provision (benefit) | 87.2 | 69.1 | 37.8 | 14.9 | 44.5 | 18.2 | 6.8 | 1.2 | 6.6 | (52.3 | ) | — | 234.0 | |||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 129.8 | $ | 108.9 | $ | 56.0 | $ | 18.2 | $ | 71.3 | $ | 29.6 | $ | 15.8 | $ | 1.9 | $ | 6.5 | $ | (76.7 | ) | $ | — | $ | 361.3 | |||||||||||||||||||||||
The “other” category in the table above consists primarily of the Parent, Leasing, BWE Trust and FH Trust.85
The Company also identifies business units based on the products or services offered and the channels through which the products or services are delivered. In addition to the operating segment information, the table below presents selected Company-wide information regarding business units for the respective periods indicated: Reconciling Consolidated (in millions) Wholesale Retail Other Items Totals Interest income: $ 12 $ 26 $ 7 $ (4 ) $ 41 356 775 198 (46 ) 1,283 Year ended December 31, 2000 397 750 188 (25 ) 1,310 Year ended December 31, 1999 352 657 149 (22 ) 1,136
Wholesale banking primarily provides commercial, financial, and agricultural, small business and commercial and construction real estate loans. It also includes equipment lease financing. Retail banking is primarily composed of consumer and residential real estate loans, credit card services and automobile leases. The “other” category is composed primarily of interest income from investments.
The reconciling items in the above tables are principally intercompany eliminations.
20. International Operations
The Company’s international operations are principally in Guam, Saipan and Grand Cayman, British West Indies. These operations involve foreign banking and international financing activities, including short-term investments, loans and leases, acceptances, letters of credit financing and international funds transfers.
We identify international activities on the basis of the domicile of the customer.
65
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements(continued)
The table below presents information about the Company’s foreign, domestic and consolidated operations as of or for the years ended December 31: (in thousands) Foreign Domestic Consolidated $ 1,324 $ 46,391 $ 47,715 260 12,749 4,707 189 8,113 8,302 535,950 21,110,564 21,646,514 43,949 1,540,383 1,584,332 8,805 404,302 413,107 5,623 240,879 246,502 2000: Total revenue $ 47,747 $ 1,478,185 $ 1,525,932 Income before income taxes 6,674 361,947 368,621 Net income 4,271 212,123 216,394 Total assets 389,589 18,067,477 18,457,066 1999: Total revenue $ 50,730 $ 1,282,613 $ 1,333,343 Income before income taxes 6,270 289,859 296,129 Net income 4,013 168,365 172,378 Total assets 404,666 16,276,356 16,681,022
Our current procedure is to price intercompany transfers of funds at prevailing market rates. In general, we have allocated all direct expenses and a proportionate share of general and administrative expenses to the income derived from loans and leases and transactions by the Company’s international operations.
The following table presents the percentages of assets and liabilities attributable to foreign operations. For this purpose, assets attributable to foreign operations are defined as: (1) assets in foreign offices; and (2) loans and leases to and investments in customers domiciled outside the United States. Deposits received and other liabilities are classified on the basis of domicile of the depositor/creditor.
2001 | 2000 | 1999 | ||||||||||
Average foreign assets to average total assets | 2.75 | % | 2.93 | % | 3.98 | % | ||||||
Average foreign liabilities to average total liabilities | 1.67 | 1.79 | 1.75 | |||||||||
21. Lease Commitments
At December 31, 2001, we had the following future minimum lease payments (by year and in the aggregate) under noncancelable operating leases having initial or remaining terms in excess of one year:
Less | Net | |||||||||||
Operating | Sublease | Operating | ||||||||||
(in thousands) | Leases | Income | Leases | |||||||||
2002 | $ | 44,827 | $ | 10,296 | $ | 34,531 | ||||||
2003 | 39,988 | 8,411 | 31,577 | |||||||||
2004 | 21,915 | 6,700 | 15,215 | |||||||||
2005 | 17,907 | 6,270 | 11,637 | |||||||||
2006 | 11,063 | 5,487 | 5,576 | |||||||||
2007 and thereafter | 64,668 | 478 | 64,190 | |||||||||
Total | $ | 200,368 | $ | 37,642 | $ | 162,726 | ||||||
These leases of premises and equipment extend for varying periods up to 41 years. Some of them may be renewed for periods ranging from one to 41 years. Under the premises’ leases, we are also required to pay real property taxes, insurance and maintenance.
In most cases, leases for premises provide for periodic renegotiation of rents based upon a percentage of the appraised value of the leased property. The renegotiated annual rent is usually not less than the annual amount paid in the previous period. Where future commitments are subject to appraisals, the minimum annual rental commitments are based on the latest annual rents.
In 2001, as part of the application of purchase accounting, a liability of $15.3 million was recorded as a fair value adjustment and will be amortized on a straight-line basis over the life of the related lease.
Rental expense for the years indicated was:
(1) | The net interest income and noninterest income items in the Other column are related to Treasury activities of $106.6 million, $80.9 million and $43.6 million and unallocated other income of $3.5 million, $17.5 million and $36.5 million for 2004, 2003 and 2002, respectively. | |
The noninterest expense items in the Other column are primarily from Treasury activities of $18.6 million, | ||
In addition, amounts of $26.7 million for net interest income and noninterest income, and $18.2 million for noninterest expense are included in the other column relating to November operations of Community First in 2004. | ||
The material average asset items in the Other column relate to unallocated Treasury securities for the periods presented. | ||
The material average deposit items in the Other column relate to unallocated Treasury balances for the periods presented. | ||
(2) | The net interest income and noninterest income items in the Other column are related to Treasury activities of $12.5 million, $10.6 million and $9.5 million and unallocated other income and transfer pricing charges of $(19.5) million, $(3.7) million and $3.9 million for 2004, 2003 and 2002, respectively. | |
The noninterest expense items in the Other column are primarily from Treasury activities of $2.0 million, $2.1 million and $1.8 million and unallocated administrative items of $(20.6) million, $(6.4) million and $(2.9) million for 2004, 2003 and 2002, respectively. | ||
The material average asset items in the Other column are related to unallocated Treasury securities for the periods presented. | ||
The material average deposit items in the Other column are related to unallocated Treasury balances for the periods presented. | ||
(3) | The Other BancWest column consists primarily of BancWest Corporation (Parent Company), FHL Lease Holding Company, Inc., and BancWest Investment Services. It also contains the results for USDB Bancorp from November 1, 2004 through December 31, 2004. | |
(4) | The reconciling items are intercompany eliminations. |
In December 1993, the Company entered into a noncancelable agreement to lease its administrative headquarters building on land owned in fee simple by the Company. (Construction of the building was completed in September 1996.) Also in December 1993, the Company entered into a ground lease of the land to the lessor of the building.86
Rent obligation for the building commenced on December 1, 1996 and will expire on December 1, 2003 (the “Primary Term”). We are obligated to pay all taxes, insurance, maintenance and other operating costs associated with the building during the Primary Term. As of December 31, 2001, the Company has executed certain noncancelable subleases with third parties. These amounts are included in sublease income in the above table.
At the end of the Primary Term, the Company may decide whether to: (1) extend the lease term at rents based on the lessor’s cost of funds at the time of renewal; (2) purchase the building for an amount approximately equal to that expended by the lessor to construct the building; or (3) arrange for the sale of the building to a third party on behalf of the lessor. If we choose option (3), we must pay to the lessor any shortfall between the sales proceeds and a specified residual value, such payment not to exceed $162 million. This lease is accounted for as an operating lease.
66
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements(continued)
22. Commitments and Contingent Liabilities
Off-balance-sheet commitments were as follows at December 31 for the years indicated:
2001 | 2000 | ||||||||
Notional/ | Notional/ | ||||||||
Contract | Contract | ||||||||
(in thousands) | Amount | Amount | |||||||
Contractual Amounts Which Represent Credit Risk: | |||||||||
Commitments to extend credit | $ | 5,420,200 | $ | 5,573,817 | |||||
Standby letters of credit | 315,775 | 305,970 | |||||||
Commercial letters of credit | 9,461 | 10,543 | |||||||
Contractual Amounts Where Credit Risk is Less Than Contractual Amount: | |||||||||
Commitments to purchase foreign currencies | 43,862 | 23,842 | |||||||
Commitments to sell foreign currencies | 40,114 | 25,285 | |||||||
Facilities Management Agreement
In August 1999, the Company signed a six-year facilities management agreement in connection with the consolidation of its three data centers. At December 31, 2001, the Company had the following future minimum payments under this noncancelable agreement:
(in thousands) | Minimum Payments | |||
2002 | $ | 16,934 | ||
2003 | 16,934 | |||
2004 | 16,934 | |||
2005 | 11,289 | |||
Total | $ | 62,091 | ||
Expenses under this facilities management agreement for the years ended December 31, 2001, 2000 and 1999 were approximately $20.4 million, $18.2 million and $7.7 million, respectively.
21. Litigation
In the course of normal business, the Company is subject to numerous pending and threatened lawsuits, some forof which seek substantial relief or damages are sought.damages. While the Company is not able to predict whether the outcome of such actions will materially affect our results of operation for a particular period, based upon consultation with counsel, management does not expect that the aggregate liability, if any, resulting from these proceedings would have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
23.22. Fair Value of Financial Instruments
SFAS 107,Disclosures about Fair Value of Financial Instruments, requires that we disclose estimated fair values for certain financial instruments. Financial instruments include such items as loans, deposits, securities, interest rate and foreign exchange contracts, swaps and other instruments as defined by the standard.
Disclosure of fair values is not required for certain items such as lease financing, investments accounted for under the equity method of accounting, obligations for pension and other postretirement benefits, premises and equipment, other real estate owned, prepaid expenses, core deposit intangibles and other customer relationships, other intangible assets and income tax assets and liabilities. Accordingly, the aggregate fair value amounts presented do not purport to represent, and should not be considered representative of, the underlying “market” or franchise value of the Company.
Because the standard permits many alternative calculation techniques and because numerous assumptions have been used to estimate our fair values, reasonable comparisons of our fair value information with that of other financial institutions cannot necessarily be made.
We use the following methods and assumptions to estimate the fair value of our financial instruments:
Short-term Financial Assets:Short-term financial assets include cash and due from banks, federal funds sold and securities purchased under resale agreements and due from customers on acceptances. The followingcarrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Trading Assets:Trading assets are carried at fair value. Fair values of trading assets 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.
Securities:Fair values of 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. See Note 6 for information related to fair value.
Loans:Fair values are estimated for portfolios of performing loans with similar characteristics. We use discounted cash flow analyses, which utilize interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, to estimate the fair values of: (1) commercial and industrial loans; (2) financial institution loans; (3) agricultural loans; (4) certain mortgage loans (e.g., 1 - 4 family residential, commercial real estate and rental property); and (5) consumer loans. For certain loans, we may estimate fair value based upon a loan’s observable market price. The carrying amount of accrued interest approximates its fair value.
Deposits:The fair value of deposits with no maturity date (e.g., interest and noninterest-bearing checking, regular savings, and certain types of money market savings accounts) are, according to GAAP, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings:The fair values of short-term borrowings are estimated using quoted market prices or discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements.
Long-term debt:The fair values of our long-term debt (other than deposits) are estimated using quoted market prices or discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements.
87
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Off-balance sheet and derivative financial instruments:Fair values are based upon: (1) quoted market prices of comparable instruments (e.g., options on mortgage-backed securities and commitments to buy or sell foreign currencies); (2) fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing (letters of credit and commitments to extend credit); or (3) pricing models based upon quoted markets, current levels of interest rates and specific cash flow schedules (e.g., interest rate swaps).
As discussed above, some of our financial instruments are short-term, and therefore, the carrying amounts in the Consolidated Balance Sheets approximate fair value. Other significant assets and liabilities, which are not considered financial assets or liabilities and for which fair values have not been estimated, include premises and equipment, goodwill and other intangibles, deferred taxes and other liabilities. This table presentsis a summary of the bookfinancial instruments, as defined by FAS 107, excluding leases, short-term financial assets and liabilities, for which carrying amounts approximate fair value, of the Company’s financial instruments, excluding leases,trading assets, which are carried at December 31fair value, securities available for the years indicated:
2001 | ||||||||||
(in thousands) | Book Value | Fair Value | ||||||||
Financial Assets: | ||||||||||
Cash and due from banks | $ | 737,262 | $ | 737,262 | ||||||
Interest-bearing deposits in other banks | 109,935 | 110,022 | ||||||||
Federal funds sold and securities purchased under agreements to resell | 233,000 | 233,000 | ||||||||
Investment securities (note 5): | ||||||||||
Available-for-sale | 2,542,173 | 2,542,173 | ||||||||
Loans | 12,930,926 | 12,804,649 | ||||||||
Customers’ acceptance liability | 1,498 | 1,498 | ||||||||
Financial Liabilities: | ||||||||||
Deposits | $ | 15,334,051 | $ | 15,344,410 | ||||||
Short-term borrowings | 954,320 | 954,320 | ||||||||
Acceptances outstanding | 1,498 | 1,498 | ||||||||
Long-term debt | 2,197,954 | 2,199,261 | ||||||||
Guaranteed preferred beneficial interests in junior subordinated debentures | 265,130 | 264,140 | ||||||||
2000 | ||||||||||
(in thousands) | Book Value | Fair Value | ||||||||
Financial Assets: | ||||||||||
Cash and due from banks | $ | 873,599 | $ | 873,599 | ||||||
Interest-bearing deposits in other banks | 5,972 | 6,329 | ||||||||
Federal funds sold and securities purchased under agreements to resell | 307,100 | 307,100 | ||||||||
Investment securities (note 5): | ||||||||||
Held-to-maturity | 92,940 | 91,625 | ||||||||
Available-for-sale | 1,960,780 | 1,960,780 | ||||||||
Loans | 11,920,001 | 11,904,583 | ||||||||
Customers’ acceptance liability | 1,080 | 1,080 | ||||||||
Financial Liabilities: | ||||||||||
Deposits | $ | 14,128,139 | $ | 14,149,011 | ||||||
Short-term borrowings | 669,068 | 669,068 | ||||||||
Acceptances outstanding | 1,080 | 1,080 | ||||||||
Long-term debt | 632,423 | 646,864 | ||||||||
Guaranteed preferred beneficial interests in junior subordinated debentures | 250,000 | 251,650 | ||||||||
December 31, | ||||||||||||||||
2004 | 2003 | |||||||||||||||
(dollars in thousands) | Book Value | Fair Value | Book Value | Fair Value | ||||||||||||
Financial Assets: | ||||||||||||||||
Loans held for sale | $ | 71,402 | $ | 72,372 | $ | 51,007 | $ | 51,188 | ||||||||
Loans, net(1) | 30,144,780 | 30,219,249 | 22,948,582 | 25,523,306 | ||||||||||||
Financial Liabilities: | ||||||||||||||||
Deposits | $ | 33,613,779 | $ | 33,666,915 | $ | 26,403,117 | $ | 26,432,808 | ||||||||
Short-term borrowings | 3,381,189 | 3,378,501 | 2,372,686 | 2,373,412 | ||||||||||||
Long-term debt(2) | 6,299,240 | 6,497,229 | 4,219,123 | 4,458,831 | ||||||||||||
(1) Excludes net leases of $2,108 million and $2,382 million at December 31, 2004 and 2003, respectively. (2) Excludes capital leases of $5.8 million and $1.9 million at December 31, 2004 and 2003 respectively.
The following table presents a summary of the fair value of the Company’s off-balance-sheet financial instruments,off-balance sheet commitments and letters of credit excluding leases, (Note 22) at December 31, 2001 and 2000:
(in thousands) | 2001 | 2000 | ||||||
Commitments to extend credit | $ | 25,015 | $ | 26,565 | ||||
Standby letters of credit | 3,091 | 2,988 | ||||||
Commercial letters of credit | 94 | 105 | ||||||
Commitments to purchase foreign currencies | (420 | ) | 978 | |||||
Commitments to sell foreign currencies | 347 | (936 | ) | |||||
December 31, | ||||||||
(dollars in thousands) | 2004 | 2003 | ||||||
Commitments to extend credit | $ | 56,520 | $ | 43,019 | ||||
Standby letters of credit | 8,592 | 7,327 | ||||||
Commercial letters of credit | 339 | 792 | ||||||
6788
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements(continued)
23. BancWest Corporation (Parent Company Only) Financial Statements |
In the financial statements presented below, the investment in subsidiaries is accounted for under the equity method.
Balance Sheets
December 31, | ||||||||||
(in thousands, except number of | ||||||||||
shares and per share data) | 2001 | 2000 | ||||||||
Assets: | ||||||||||
Cash on deposit with First Hawaiian | $ | 184 | $ | 246 | ||||||
Loans, net of allowance for credit losses of $120 in 2001 and 2000 | 2,626 | 3,875 | ||||||||
Available-for-sale investment securities | — | 300 | ||||||||
Securities purchased from | ||||||||||
First Hawaiian | 99,061 | 15,665 | ||||||||
Investment in subsidiaries: | ||||||||||
Bank of the West | 1,824,165 | 1,384,600 | ||||||||
First Hawaiian | 1,649,383 | 729,548 | ||||||||
Other subsidiaries | 20,646 | 19,636 | ||||||||
Due from: | ||||||||||
Bank of the West | 312,291 | 307,783 | ||||||||
First Hawaiian | 312,932 | 351,654 | ||||||||
Other subsidiaries | 38,453 | 54,569 | ||||||||
Goodwill | 172,682 | — | ||||||||
Other assets | 4,491 | 7,744 | ||||||||
Total assets | $ | 4,436,914 | $ | 2,875,620 | ||||||
Liabilities and Stockholder’s Equity: | ||||||||||
Short-term borrowings (note 10) | $ | — | $ | 5,477 | ||||||
Current and deferred income taxes | 452,850 | 515,271 | ||||||||
Due to subsidiaries | 272,862 | 257,732 | ||||||||
Other liabilities | 109,282 | 7,647 | ||||||||
Long-term debt (note 11) | 1,600,000 | 100,000 | ||||||||
Total liabilities | 2,434,994 | 886,127 | ||||||||
Commitments and contingent liabilities (notes 15, 21 and 22) | ||||||||||
Stockholder’s equity: | ||||||||||
Class A common stock, par value $.01 per share in 2001 and $1 in 2000 (note 2) Authorized— 150,000,000 shares in 2001 and 75,000,000 shares in 2000 Issued— 56,074,874 shares in 2001 and 2000 | 561 | 56,075 | ||||||||
Common stock, par value $1 per share (notes 2 and 16) Authorized— 200,000,000 shares in 2000 Issued— 71,041,450 shares in 2000 | — | 71,041 | ||||||||
Surplus | 1,985,275 | 1,125,652 | ||||||||
Retained earnings (note 14) | 8,302 | 770,350 | ||||||||
Accumulated other comprehensive income, net (note 12) | 7,782 | 7,601 | ||||||||
Treasury stock, at cost— 2,565,581 shares in 2000 | — | (41,226 | ) | |||||||
Total stockholder’s equity | 2,001,920 | 1,989,493 | ||||||||
Total liabilities and stockholder’s equity | $ | 4,436,914 | $ | 2,875,620 | ||||||
Statements of Income Company Predecessor Year Ended Dec. 20, 2001 Jan. 1, 2001 December 31, through through (in thousands) Dec. 31, 2001 Dec. 19, 2001 2000 1999 Dividends from: Bank of the West $ — $ 54,756 $ 41,140 $ 31,366 First Hawaiian — 77,444 147,384 54,267 Other subsidiaries — 1,991 1,558 1,558 Interest and fees from: Bank of the West 261 7,826 8,087 7,182 First Hawaiian 217 5,064 6,066 5,543 Other subsidiaries — — 37 435 Other interest and dividends 6 673 527 354 Total income 484 147,754 204,799 100,705 Interest expense: Short-term borrowings — 160 360 254 Long-term debt 4,243 28,385 20,749 21,434 Professional services — 249 147 491 Other 65 3,353 5,120 2,580 Total expense 4,308 32,147 26,376 24,759 Income (loss) before income tax benefit and equity in undistributed income (loss) of subsidiaries (3,824 ) 115,607 178,423 75,946 Income tax benefit 1,516 7,253 4,487 4,282 Income (loss) before equity in undistrib- uted income (loss) of subsidiaries (2,308 ) 122,860 182,910 80,228 Equity in undistributed income (loss) of subsidiaries: Bank of the West 6,168 79,497 68,959 52,537 First Hawaiian 4,377 43,202 (35,035 ) 40,108 Other subsidiaries 65 943 (440 ) (495 ) $ 8,302 $ 246,502 $ 216,394 $ 172,378
Year Ended December 31, | ||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | |||||||||
Income: | ||||||||||||
Dividends from: | ||||||||||||
Bank of the West | $ | 117,040 | $ | 57,667 | $ | 57,281 | ||||||
First Hawaiian Bank | 22,068 | 22,068 | 28,072 | |||||||||
Other subsidiaries | — | 349 | 698 | |||||||||
Interest and fees from subsidiaries | 12,862 | 13,110 | 12,775 | |||||||||
Other interest and dividends | 623 | 479 | 699 | |||||||||
Total income | 152,593 | 93,673 | 99,525 | |||||||||
Expense: | ||||||||||||
Interest expense: | ||||||||||||
Short-term borrowings | 2,187 | — | 11,625 | |||||||||
Long-term debt | 156,925 | 155,797 | 129,627 | |||||||||
Salaries and benefits | 3,292 | 2,897 | 1,884 | |||||||||
Professional services | 221 | 1,109 | 877 | |||||||||
Other | 2,401 | 1,953 | 1,482 | |||||||||
Total expense | 165,026 | 161,756 | 145,495 | |||||||||
Income (loss) before income tax benefit and equity in undistributed income (loss) of subsidiaries | (12,433 | ) | (68,083 | ) | (45,970 | ) | ||||||
Income tax benefit | 62,132 | 59,866 | 52,918 | |||||||||
Income (loss) before equity in undistributed income (loss) of subsidiaries | 49,699 | (8,217 | ) | 6,948 | ||||||||
Equity in undistributed income (loss) of subsidiaries: | ||||||||||||
Bank of the West | 299,902 | 333,199 | 255,633 | |||||||||
First Hawaiian Bank | 121,507 | 114,008 | 97,087 | |||||||||
USDB Bancorp | 2,004 | — | — | |||||||||
Other subsidiaries | 265 | (2,426 | ) | 1,664 | ||||||||
Net income | $ | 473,377 | $ | 436,564 | $ | 361,332 | ||||||
6889
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial StatementsBalance Sheets(continued)
December 31, | ||||||||
(dollars in thousands, except share data) | 2004 | 2003 | ||||||
Assets: | ||||||||
Cash on deposit with subsidiary banks | $ | 31,957 | $ | 23,767 | ||||
Interest-bearing deposits in other banks | 153 | 151 | ||||||
Loans, net of allowance for loan and lease losses of $120 in 2004 and 2003 | 31 | 404 | ||||||
Investment in subsidiaries: | ||||||||
Bank of the West | 6,452,229 | 4,834,983 | ||||||
First Hawaiian Bank | 1,970,803 | 1,869,027 | ||||||
USDB Bancorp | 281,139 | — | ||||||
Other subsidiaries | 15,071 | 12,880 | ||||||
Due from: | ||||||||
Bank of the West | 126,009 | 125,084 | ||||||
First Hawaiian Bank | 78,973 | 75,781 | ||||||
Other subsidiaries | — | 3,026 | ||||||
Goodwill | 5,206 | 5,206 | ||||||
Current and deferred income taxes | 24,032 | 12,086 | ||||||
Other assets | 2,522 | 2,633 | ||||||
Total assets | $ | 8,988,125 | $ | 6,965,028 | ||||
Liabilities and Stockholder’s Equity: | ||||||||
Short-term borrowings | $ | 590,000 | $ | — | ||||
Other liabilities | 16,671 | 47,599 | ||||||
Long-term debt | 2,651,419 | 2,654,557 | ||||||
Total liabilities | $ | 3,258,090 | $ | 2,702,156 | ||||
Commitments and contingent liabilities | ||||||||
Stockholder’s equity: | ||||||||
Class A common stock, par value $.01 per share | ||||||||
Authorized-150,000,000 shares | ||||||||
Issued and outstanding-106,859,123 shares at December 31, 2004 and 85,759,123 shares at December 31, 2003 | $ | 1,069 | $ | 858 | ||||
Additional paid-in capital | 4,475,006 | 3,419,927 | ||||||
Retained earnings | 1,279,575 | 806,198 | ||||||
Accumulated other comprehensive income | (25,615 | ) | 35,889 | |||||
Total stockholder’s equity | 5,730,035 | 4,262,872 | ||||||
Total liabilities and stockholder’s equity | $ | 8,988,125 | $ | 6,965,028 | ||||
90
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows Company Predecessor Year Ended Dec. 20, 2001 Jan. 1, 2001 December 31, through through (in thousands) Dec. 31, 2001 Dec. 19, 2001 2000 1999 Net income $ 8,302 $ 246,502 $ 216,394 $ 172,378 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (10,610 ) (123,642 ) (33,484 ) (92,150 ) Other 2,221 134 (5,795 ) 3,071 (87) 122,994 177,115 83,299 Net change in: Interest-bearing deposits in other banks — — — 5,000 Securities sold under agreements to repurchase (83,400 ) 4 689 6,526 Loans repaid by directors and executive officers 1 1,249 463 1,318 Repayments from (advances to) subsidiaries — (25,015 ) 6,000 (25,000 ) Investment in Bank of the West — — (150,000 ) — Proceeds from available-for-sale investment securities — 300 — — Investment in BancWest Capital I — — (4,639 ) — (83,399 ) (23,462 ) (147,487 ) (12,156 ) Company Predecessor Year Ended Dec. 20, 2001 Jan. 1, 2001 December 31, through through (in thousands) Dec. 31, 2001 Dec. 19,2001 2000 1999 Cash received from BNP Paribas for cancellation of stock options 83,347 — — — Net increase (decrease) in short-term borrowings — (5,477 ) 2,877 (11,303 ) Proceeds from (payments on) long-term debt and junior subordinated debentures — — 154,639 — Payment on long-term debt — — (100,000 ) — Cash dividends paid — (99,772 ) (84,731 ) (77,446 ) Proceeds from (payment on) issuance of common stock — (31 ) 585 4,934 Issuance (purchase) of treasury stock, net — 3,390 (4,056 ) 12,809 Income tax benefit from stock-based compensation — 2,435 1,097 — 83,347 (99,455 ) (29,589 ) (71,006 ) (139 ) 77 39 137 323 246 207 70 $ 184 $ 323 $ 246 $ 207 Interest paid $ 237 $ 29,167 $ 34,914 $ 21,422 Income taxes refunded $ 184 $ 6,766 $ 5,186 $ 6,535
Year Ended December 31, | ||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 473,377 | $ | 436,564 | $ | 361,332 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Equity in undistributed income of subsidiaries | (423,678 | ) | (444,780 | ) | (348,402 | ) | ||||||
Cash paid for BNP Paribas cancellation of stock options | — | — | (83,347 | ) | ||||||||
Other | (45,891 | ) | 12,009 | (3,379 | ) | |||||||
Net cash provided by (used in) operating activities | 3,808 | 3,793 | (73,796 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||
Loans repaid by directors and executive officers | 373 | 1,701 | 50 | |||||||||
Advances to subsidiaries | (1,100 | ) | (2,985 | ) | — | |||||||
Investment in subsidiaries | (1,639,889 | ) | — | (2,402,978 | ) | |||||||
Proceeds from sales of securities available for sale | — | 22,073 | 76,988 | |||||||||
Investment in BancWest Investment Services | — | (766 | ) | — | ||||||||
Net cash provided by (used in) investing activities | (1,640,616 | ) | 20,023 | (2,325,940 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
Net increase (decrease) in short-term borrowings | 590,000 | — | — | |||||||||
Proceeds from issuance of long-term debt and junior subordinated debentures | — | — | 1,600,000 | |||||||||
Repayment of long-term debt | — | — | (802,771 | ) | ||||||||
Proceeds from issuance of common stock | 1,055,000 | — | 1,600,000 | |||||||||
Discounted share purchase plan | — | — | 2,425 | |||||||||
Net cash provided by (used in) financing activities | 1,645,000 | — | 2,399,654 | |||||||||
Net increase (decrease) in cash | 8,192 | 23,816 | (82 | ) | ||||||||
Cash at beginning of period | 23,918 | 102 | 184 | |||||||||
Cash at end of period | $ | 32,110 | $ | 23,918 | $ | 102 | ||||||
Supplemental disclosures: | ||||||||||||
Interest paid | $ | 189,307 | $ | 128,210 | $ | 34,568 | ||||||
Income taxes refunded | 50,197 | 47,879 | 65,600 | |||||||||
6991
BancWest Corporation and Subsidiaries
SUMMARY OF QUARTERLY FINANCIAL DATA (Unaudited)
A summary of unaudited quarterly financial data for 2004 and 2003 is presented below: Quarter (dollars in thousands) First Second Third Fourth Interest income $ 417,152 $ 419,868 $ 441,769 $ 516,374 Interest expense 96,126 97,607 111,127 137,965 Net interest income 321,026 322,261 330,642 378,409 Provision for loan and lease losses 18,865 11,900 10,600 7,854 Noninterest income 101,134 109,717 104,517 116,132 Noninterest expense 218,578 231,920 234,192 277,859 Income before income taxes 184,717 188,158 190,367 208,828 Provision for income taxes 71,665 73,401 73,141 80,486 Net income $ 113,052 $ 114,757 $ 117,226 $ 128,342 Interest income $ 417,476 $ 417,908 $ 423,093 $ 420,313 Interest expense 102,237 98,047 92,908 92,015 Net interest income 315,239 319,861 330,185 328,298 Provision for loan and lease losses 22,690 18,860 24,145 15,600 Noninterest income 94,834 102,127 100,803 94,415 Noninterest expense 220,660 229,878 222,963 219,334 Income before income taxes and cumulative effect of accounting change 166,723 173,250 183,880 187,779 Provision for income taxes 64,642 65,588 69,268 73,200 Income before cumulative effect of accounting change 102,081 107,662 114,612 114,579 Cumulative effect of accounting change, net of tax — — 2,370 — Net income $ 102,081 $ 107,662 $ 112,242 $ 114,579
92
BancWest Corporation and Subsidiaries
Glossary of Financial Terms
Balance sheet:Basis point: A statement of financial position reflecting our assets, liabilities and stockholder’s equity at a particular point in time in accordance with generally accepted accounting principles.
Basis-point:A measure of the yield on a bond, note or other indebtedness equal to 1/100th of a percentage point. For example, a yield of 5% is 500 basis points.
Cash earnings: Earnings before amortization of goodwill and core deposit intangible.
Collateral:An asset or property pledged to secure the payment of a debt or performance of an obligation.
Depreciation:A charge against our earnings that writes off the cost of a capital asset over its estimated useful life.
Derivatives:Financial instruments where the performance is derived from the performance of another financial instrument or an interest rate, currency or other index. Derivative instruments are used for asset and liability management and to mitigate risks associated with other instruments that are reflected on the balance sheet.
Dividend:Effectiveness/ineffectiveness (of derivatives): UsuallyEffectiveness is the amount of gain or loss on a cash distribution to our stockholdershedging instrument that exactly offsets the loss or gain on the hedged item. Any difference that does arise would be the effect of a portion of ourhedge ineffectiveness, which consequently is recognized currently in earnings.
Earnings per share: Basic earnings per share— earnings for the period divided by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share— earnings for the period divided by the weighted-average number of shares of common stock outstanding for the period, including the treatment of all dilutive securities, such as options, warrants and convertible debt.
Efficiency ratio:Noninterest expense (exclusive of nonrecurring costs) minus the amortization of goodwill and core deposit intangible as a percentage of total operating revenue (net interest income plus noninterest income).income.)
Hedge:A strategy used to avoid, reduce or transfer risk.
Income statement: A financial statement that reflects our performance by measuring our revenues and expenses for the period.
Interest rate risk:The risk to earnings or capital arising from the movement of interest rates.
Interest rate swap:A contract used for the purpose of interest rate risk management in which two parties agree to exchange interest payments of a different character over a specified period based on an underlying notional amount of principal. The term “notional principal” is the amount on which the interest payments are calculated, as the swap contracts generally involve no exchange of the principal.
Leverage ratio:Tier 1 Capital divided by the sum of average total assets minus average allowance for credit losses and certain intangible assets.
Liquidity:The ability of an entity to provide sufficient cash to fund its operations and to pay its debts on a timely basis at a reasonable cost.
Net interest income:Interest income plus loan fees minus interest expense.
Net interest margin:Net interest income divided by average earning assets (e.g., loans and leases and investment securities).
Nonaccrual loans and leases:Loans and leases on which interest is not being accrued for income statement purposes. Payments received on nonaccrual loans and leases are applied against the principal balance.
Noninterest expense:Expenses for such items as salaries, benefits, building occupancy and supplies, as opposed to interest expense paid for deposits and other interest-bearing liabilities.
Noninterest income:Income received from such sources as fees, charges and commissions, as opposed to interest income received from loans and leases, and investment securities.
Nonperforming assets:Nonaccrual loans and leases plus restructured loans and leases plus OREO (other real estate owned) and repossessed personal property.
Operating earnings: Earnings before restructuring, merger-related and other nonrecurring costs.
Operating cash earnings: Earnings before restructuring, merger-related and other nonrecurring costs and amortization of goodwill and core deposit intangible.
OREO:Other real estate owned. Primarily includesOREO consists primarily of foreclosed assets and assets taken in lieu of foreclosure.assets.
Repurchase agreements, also called “repos”:Agreement between a seller and a buyer in which the seller agrees to repurchase the securities at an agreed-upon price at a stated time. A repo is similar to a secured borrowing and lending of funds equal to the sales price of the related collateral.
Return on average total assets (ROA):Measures the productivity of assets. Calculated by dividing net income by average total assets.
Return on average tangible total assets: Calculated by dividing cash earnings by average total assets minus average goodwill93
BancWest Corporation and core deposit intangible.Subsidiaries
Return on average stockholder’s equity (ROE):Measures the rate of return on the stockholder’s investment in the Company. Calculated by dividing net income by average total stockholder’s equity.
Return on average tangible stockholder’s equity: Calculated by dividing cash earnings by average stockholder’s equity minus average goodwill and core deposit intangible.
Risk-based capital ratios:Equity measurements used by regulatory agencies to assess capital adequacy. These ratios are: Tier 1 Capital divided by risk-weighted assets; and Total Capital divided by risk-weighted assets.
Statement of cash flows:A financial statement that reflects cash flows from operating, investing and financing activities, providing a comprehensive view of changes in our cash and cash equivalents for the period.
Stock option:Form of employee incentive and compensation in which the employee of the Company is given the right to purchase our shares of stock at a determinable price within a specified period of years.
Taxable equivalent basis:Basis of presentation of net interest income and the net interest margin adjusted to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% marginal tax rate. The yield that tax-free investment would provide to an investor if the tax-free yield was “grossed up” by the amount of taxes not paid.
Tier 1 Capital:Common stockholder’s equity plus perpetual preferred stock and certain minority equity interests in subsidiaries, minus goodwill and certain qualifying intangible assets.
Total Capital:Tier 1 Capital plus the allowance for creditloan and lease losses (not to exceed 1.25% of risk-weighted assets) plus qualifying subordinated debt, trust preferred stock, convertible debt securities and certain hybrid investments.
70Variable interest entity (VIE):An entity in which (1) the equity investors do not have controlling financial interest or (2) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from any parties, including the equity holders.
Part II(continued)Yield curve (shape of the yield curve, flat yield curve):A graph showing the relationship between the yields on bonds of the same credit quality with different maturities. For example, a “normal” or “positive” yield curve exists when long-term bonds have higher yields than short-term bonds. A “flat” yield curve exists when yields are the same for short-term and long-term bonds. A “steep” yield curve exists when yields on long-term bonds are significantly higher than on short-term bonds.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and its chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, its chief executive officer and its chief financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
No change in the Company’s internal control over financial reporting was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) or Rule 15d-15(d) during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
94
BancWest Corporation and Subsidiaries
PART III
Directors
Set forth below are the ages, principal occupations, and certain other information regarding the current directors of BancWest Corporation (the “Corporation”).
Jacques Ardant,Frank Bonetto, 49,54, has been a director and an Executive Vice President of the Corporation since January 2005. He has served as Vice Chairman, Regional Banking Group, of Bank of the West since 2002, and prior to 2002 was a Senior Executive Vice President of Bank of the West. He joined Bank of the West in 1992 as head of the bank’s retail branch network, and was previously a senior executive with Citibank and with American Savings Bank.
Francois Dambrine,56, has been a director of the Corporation and Bank of the West since August 2003. He has been Head of Retail Banking in the USA for BNP Paribas since June 2003, and is also a director of the BNP Paribas Lease Group. He was Chairman and Chief Executive Officer of Arval PHH, a subsidiary of BNP Paribas engaged in leasing and fleet management of corporate cars in Europe, from 2000 to 2003, and served as Chairman and Chief Executive Officer of UFB Locabail, a subsidiary of BNP Paribas engaged in business equipment leasing, from 1993 to 2000.
Gérard A. Denot,58, has been a director and Vice Chairman of the Corporation since April 2002, a director of Bank of the West and Vice Chairman of its Commercial Banking Group since March 2002, and a Vice Chairman of First Hawaiian Bank since May 2002. He was Bank of the West’s Chief Inspector from October 2001 to January 2002, and its Senior Executive Vice President, Commercial Banking Group, from January 2002 to March 2002. Mr. Denot was Head of Projects – Development for BNP Paribas International Retail Banking from June 2000 to October 2001, and General Manager of BNP Italy from December 1997 to June 2000.
W. Allen Doane, 57, has been a director of the Corporation since November 1998 and a director of Bank of the West since September 1998. He has been a member of the Executive Committee of International Retail Banking, BNP Paribas since September 1999, and Director for International Banking and Finance, North America Area, of BNP Paribas or Banque Nationale de Paris, the predecessor entity to BNP Paribas (“BNP”), since April 1997. He was Deputy General Manager of BNP Greece from 1994 to April 1997. He was Secretary Generale of BNP Italy from 1989 to 1994. He has been with BNP Paribas or BNP since 1978.
John W. A. Buyers, 73, has been a director of the Corporation since 19942002, and a director of First Hawaiian Bank since 1976. He1999. Since 1998, Mr. Doane has been Chairman of the Board andPresident, Chief Executive Officer and a director of D Buyers Enterprises, LLC, a tropical juice company,Alexander & Baldwin, Inc. (“A&B”), a diversified agriculture company, real estate company,ocean transportation, property development and managing company, since 2001. Hemanagement, and food products company. Mr. Doane has been Vice Chairman of the Board of C. Brewer andA&B’s subsidiary, Matson Navigation Company, Limited, a diversified agribusiness and specialty food company,Inc., since 1982. From 1992January 2004. He was Executive Vice President of A&B from August 1998 to 2002, he was Chairman andOctober 1998; Chief Executive Officer of A&B’s subsidiary, A&B-Hawaii, Inc. (“ABHI”), from January 1997 to December 1999; and President of ABHI from 1975, President and CEO of C. Brewer and Company, Limited, Hawaii’s oldest company. Since 1986, he has been Chairman of ML Resources, Inc., the managing general partner of ML Macadamia Orchards, L.P., a master limited partnership traded on the New York Stock Exchange. From 1993April 1995 to 1999, he served as Chairman and as a director of Hawaii Land and Farming Co., Inc., a publicly traded real estate development company. He is also a director of John B. Sanfilippo & Sons, Inc., a comprehensive nut company located in Elk Grove Village, Illinois.December 1999.
Walter A. Dods, Jr., 60, 63, has been the non-executive Chairman of the Board of the Corporation and of First Hawaiian Bank since January 2005. He has been a director of the Corporation since 1983, a director of First Hawaiian Bank since 1979, and a director of Bank of the West since November 1998. He has beenwas Chairman of the Board and Chief Executive Officer of the Corporation and First Hawaiian Bank sincefrom September 1989 to December 2004, and has been Vice Chairman of the Board of Bank of the West since November 1998. He was President of the Corporation from March 1989 to March 1991. He was1991, President of First Hawaiian Bank from November 1984 to October 1989. He was1989, and an Executive Vice President of the Corporation from 1982 to 1989. He has been with First Hawaiian Bank since 1968. He is a trustee of the Estate of S.M. Damon and a director of Alexander & Baldwin, Inc., a diversified ocean transportation, property development and management, and food products company.
Dr. Julia Ann Frohlich, 61,64, has been a director of the Corporation since 1992 and a director of First Hawaiian Bank since August 1991. She was a director of First Hawaiian Creditcorp, Inc. from 1990 to June 1998 and was a director of FHL Lease Holding Company, Inc. from 1990 to June 1997. She was President of the Blood Bank of Hawaii from 1985 to 2000, and is now its President Emeritus.
Robert A. Fuhrman, 77,80, has been a director of the Corporation since November 1998 and a director of Bank of the West since August 1981. He has been Chairman of the Board of Directors of Bank of the West since April 1991. He is the retired Vice Chairman, President and Chief Operating Officer of Lockheed Corporation.
Paul Mullin Ganley, 62,65, has been a director of the Corporation since 1991 and a director of First Hawaiian Bank since 1986. He is a trustee of the Estate of S.M. Damon and a partner in the law firm of Carlsmith Ball LLP, Honolulu, Hawaii.
David M. Haig, 50,53, has been a director of the Corporation since 1989 and a director of First Hawaiian Bank since 1983. Mr. Haig is a beneficiary and, since 1982, has been a trustee of the Estate of S.M. Damon. He has served as Chairman of the Estate of S.M. Damon since 1993.
John A. Hoag, 69,72, has been a director of the Corporation since 1991 and a director of First Hawaiian Bank since October 1989. He was President of the Corporation from 1991 until April 1995, and was an Executive Vice President of the Corporation from 1982 to 1991. From 1989 until June 1994, Mr. Hoag was President of First Hawaiian Bank. From that date until his retirement in June 1995, he was Vice Chairman of First Hawaiian Bank. Mr. Hoag is Chairman of the Board of Hawaii Reserves, Inc., a land management corporation that is a subsidiary of Deseret Management Corporation.
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Part IIIDonald G. Horner,54, has been a director of the Corporation, and President and Chief Executive Officer of First Hawaiian Bank, since January 2005. He has been an Executive Vice President of the Corporation or its predecessor since 1989, and was President and Chief Operating Officer of First Hawaiian Bank from January 2003 to December 2004. He has been a director of First Hawaiian Bank since May 2002, served as Vice Chairman of First Hawaiian Bank from 1994 to 2002, and was an Executive Vice President of First Hawaiian Bank from 1993 to 1994. Mr. Horner has been with First Hawaiian Bank since 1978.
Bert T. Kobayashi, Jr., 62,65, has been a director of the Corporation since 1991 and a director of First Hawaiian Bank since 1974. He is a principal of the law firm of Kobayashi, Sugita & Goda, Honolulu, Hawaii. He served asis a director of Schuler Homes,Hawaiian Holdings, Inc. from 1992 until that company’s merger with Western Pacific Housing in April 2001.
Michel Larrouilh, 66,69, has been a director of the Corporation since November 1998, and served as a director of Bank of the West since February 1984.from 1984 to 2002. He was Chief Executive Officer of Bank of the West from February 1984 to December 1995. He was Chairman and Chief Executive Officer of Bank of the West’s holding company from January 1996 to December 1997. He was Chairman and Advisor to the Chief Executive Officer of Bank of the West’s holding company from January 1998 to October 1998. Mr. Larrouilh joined BNP Paribas in 1953.
Pierre Mariani, 45,48, has been a director of the Corporation and of Bank of the West since December 1999. Mr. Mariani is Executive Vice President,Head of International Retail Banking,and Financial Services of BNP Paribas.Paribas, and has been a member of the Executive Committee of BNP Paribas since June 2003. He served as Senior Advisor and Chief of Staff of the Minister of Budget and Government Spokesman from 1993 to 1995; Chief Executive Officer and director of Societe D’investissements Immobiliers Et De Gestion, (SEFIMEG), a major French property company, from 1995 to 1996; and Chief Executive Officer and director of BANEXI, the investment bank of Banque Nationale de Paris (“BNP”),BNP, from 1996 to 1999.
Fujio Matsuda, 77,80, has been a director of the Corporation since 1987 and a director of First Hawaiian Bank since 1985. He is a director (and from 1996-2001 was Chairman) of the Pacific International Center for High Technology Research.Research, and also served as Chairman of the Board from 1996 to 2004. He was President of the Japan-America Institute of Management Science from September 1994 to June 1996. He was Executive Director of the Research Corporation of the University of Hawaii from 1984 until 1994, and he was the President of the University of Hawaii from 1974 to 1984.
Don J. McGrath, 53,56, has been President and Chief Executive Officer of the Corporation since January 2005, a director of the Corporation since November 1998, a director of Bank of the West since July 1989, and a director of First Hawaiian Bank since November 1998. He has beenwas President and Chief Operating Officer of the Corporation sincefrom November 1998 to December 2004, and has been President and Chief Executive Officer of Bank of the West since January 1996 and1996. He is Vice Chairman of the Board of First Hawaiian Bank and has served in that or similar capacities since November 1998. He was President and Chief Operating Officer of Bank of the West from 1991 to 1996. He has been with Bank of the West since 1975. Mr. McGrath becamehas been a public member of the Pacific Stock Exchange Board of Governors inDirectors since January 2001.2001, and is chairman of its Compensation Committee.
Rodney R. Peck, 56,59, has been a director of the Corporation since November 1998 and a director of Bank of the West since July 1990. He is a Senior Partner with the law firm of Pillsbury Winthrop LLP, San Francisco, California.California, and New York, New York.
Edouard A. Sautter, 65,68, has been a director of BancWest and Bank of the West since 2001. He was the head of Group Risk Management and a member of the Management Committee of BNP, or BNP Paribas, as the case may be, from October 1994 until his retirement in July 2000. From 1989 until 1994 he served as an Executive Vice President in charge of the Industry Research Department of BNP. He joined BNP in 1967. Mr. Sautter is a citizen of the Republic of France.
Joel Sibrac,Eric K. Shinseki, 54,62, has been a director of the Corporation since November 1998June 2004. General Shinseki retired from the United States Army in 2003, after a distinguished 38-year military career that culminated in a four-year term as the United States Army Chief of Staff. He was born on the island of Kauai in Hawaii, and is the first person of Asian ancestry to lead one of the American military services. General Shinseki is also a director of BankHoneywell International, Inc. and of the West since January 1995. He has been Vice Chairman of the Corporation since November 1998. He has been Senior Executive Vice President, Commercial Banking Group, of Bank of the West since 1996. He was General Manager, North American Desk, of BNP from 1994 to 1996 and General Manager of BNP Italy from 1990 to 1994. He joined BNP in 1974.Grove Farm Company, Incorporated.
John K. Tsui, 64,67, has been a director of the Corporation since July 1995 and a director of First Hawaiian Bank since July 1994. He has beenFrom November 1998 until December 2002, he was Vice Chairman and Chief Credit Officer of the Corporation since November 1998.Corporation. He was President of the Corporation from April 1995 through October 1998. He becameserved as President and Chief Operating Officer of First Hawaiian Bank infrom July 1994 and Vice Chairman of Bank of the West in November 1998.until December 2002. He was Executive Vice President of Bancorp Hawaii, Inc. (now known as Pacific Century Financial Corporation)Bank of Hawaii Corp.) from 1986 to June 1994 and Vice Chairman of Bank of Hawaii from 1984 to June 1994. Mr. Tsui has been Chairman of the Board of Towne Development of Hawaii, Inc. since March 2003. He has been a trustee of the Bishop Street Funds since January 2004.
Jacques Henri Wahl, 70,73, has been a director of the Corporation since November 1998 and a director of Bank of the West since July 1982. He served as Senior Adviser to the Chief Executive Officer of BNP Paribas, and of BNP, from January 1997 until his retirement in February 2001. He was a member of the Managing Committee of the BNP Group, and a director of BNP, from January 1997 until May 2000. He served as Vice Chairman of BNP and Chairman of Banque Nationale de Paris Intercontinentale from 1993 to 1996. He was President and Chief Operating Officer of BNP from 1982 to 1993.
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Part III(continued)
Fred C. Weyand, 85, has been a director of the Corporation since 1986 and a director of First Hawaiian Bank since 1981. He was Vice President of the Corporation from 1976 to 1982, Senior Vice President of First Hawaiian Bank from 1980 to 1982 and Corporate Secretary from 1978 to 1981. He served as a commissioned officer in the United States Army from 1940 to 1976 and held the office of Chief of Staff as a member of the Joint Chiefs of Staff from 1974 to 1976. He is a trustee of the Estate of S.M. Damon.
Robert C. Wo, 77, was80, has served as a director of the Corporation from 1974 to 1989 and again since 1992 and has been a director of First Hawaiian Bank since 1963. He has been President and Secretary of BJ Management Corporation, a management consulting company, since 1979. He has been Chairman of the Board of C.S. Wo & Sons, Ltd., a manufacturer and retailer of home furnishings, since 1973.
Compensation of Directors
The Corporation pays retainers of $3,750$6,000 per quarter to directors who are not employees of the Corporation or its subsidiaries. It pays non-employee directors $800$1,200 for each board meeting attended and $700$1,200 for each committee meeting attended ($2,000 for committee chairs), and reimburses transportation and lodgingother expenses. The Corporation does not pay board or committee fees or retainers to directors who are employees of the Corporation or its subsidiaries. Mr. Dods serves as the non-executive Chairman of the Board of the Corporation and of First Hawaiian Bank, and as a director of the Corporation, Bank of the West and First Hawaiian Bank, pursuant to an agreement with BNP Paribas (an exhibit to this filing incorporated herein by reference) under which he receives an annual retainer of $300,000, normal meeting fees, medical insurance, and various allowances and perquisites he received prior to his retirement as the Corporation’s chief executive officer. The agreement is terminable by Mr. Dods or BNP Paribas on six months’ advance notice. Mr. McGrath’s employment agreement, summarized in Item 11 below, provides among other things that the Corporation will elect him to the Board of Directors of Bank of the West, and will use its best efforts to cause his election to the Corporation’s Board of Directors.
The Corporation has a Directors’ Retirement Plan for directors of the Corporation and First Hawaiian Bank who are not employed by the Corporation or its affiliates and who are not covered by any of the Corporation’s employee retirement programs. Following retirement from one of those boards after reaching age 55 and serving at least 10 years as a director, a retired director or his or her beneficiary is entitled to receive monthly payments for a ten-year period at an annual rate equal to one-half of the annual retainer fee in effect at the time of the director’s retirement.
Audit Committee Members
The Corporation has a standing audit committee, whose members are John A. Hoag (Chairman), W. Allen Doane and Robert A. Fuhrman. The Corporation’s Board of Directors has determined that all members of the committee are “audit committee financial experts” as defined in SEC regulations. All committee members are independent within the meaning of applicable standards.
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Executive Officers
Set forth below are the Corporation’s current executive officers, together with their ages and positions with the Corporation.
Positions and Offices With the | ||
Name, Age | ||
Bernard Brasseur, | Executive Vice President and Risk Manager of the Corporation, and Vice Chairman of First Hawaiian Bank, from 1998-2002 and since | |
Gérard A. Denot, 58 | Please see “Directors.” | |
Stephen C. Glenn, 59 | Executive Vice President-Administration of the Corporation since January 2005; Senior Vice President of the Corporation from 1998 to 2004; Vice Chairman and Chief Administrative Officer of Bank of the West, and Manager of its Wealth Management Division, since 2003; Senior Executive Vice President and Chief Administrative Officer of Bank of the West from 2002 to 2003; Executive Vice President and Chief Administrative Officer from 1992 to 2001. Mr. Glenn joined Bank of the West in 1975. | |
Douglas C. Grigsby, 52 | Chief Financial Officer of the Corporation since August 2002; Executive Vice President and Treasurer of the Corporation since 1998; Vice Chairman of Bank of the West since 2002; Chief Financial Officer of Bank of the West from 1989 to 2002. Mr. Grigsby joined Bank of the West in 1977. | |
Donald G. Horner, | Please see “Directors.” | |
Don J. McGrath, 56 | Please see “Directors”. | |
J. Michael Shepherd, 49 | Executive Vice President, General Counsel and Secretary of the Corporation and of Bank of the West since |
73 The Corporation has adopted a code of ethics that applies to its chief executive officer, chief financial officer, principal accounting officer or controller or persons performing similar functions. The code is posted on the Corporation’s website atwww.bancwestcorp.com.
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PartBancWest Corporation and Subsidiaries
PART III(continued)
Item 11. Executive Compensation
Summary Compensation Table
Long-Term Compensation | |||||||||||||||||||||||||||||||||
Annual Compensation(1) | Awards | Payouts | |||||||||||||||||||||||||||||||
Name | Other | ||||||||||||||||||||||||||||||||
and | Annual | Restricted | Securities | All Other | |||||||||||||||||||||||||||||
Principal | Compen- | Stock | Underlying | LTIP | Compen- | ||||||||||||||||||||||||||||
Position | Year | Salary | Bonus(2) | sation(3) | Awards | Options | Payouts(4) | sation(5) | |||||||||||||||||||||||||
Walter A. Dods, Jr. | 2001 | $ | 1,022,225 | $ | 772,802 | $ | 135,825 | — | 158,600 | $ | 931,361 | $ | 227,469 | ||||||||||||||||||||
Chairman, Chief | 2000 | $ | 973,548 | $ | 637,868 | — | — | 203,914 | — | $ | 154,407 | ||||||||||||||||||||||
Executive Officer | 1999 | $ | 927,188 | $ | 607,493 | — | — | 133,100 | $ | 280,933 | $ | 161,856 | |||||||||||||||||||||
and Director | |||||||||||||||||||||||||||||||||
Don J. McGrath | 2001 | $ | 791,690 | $ | 560,017 | $ | 889 | — | 98,488 | $ | 576,174 | $ | 77,272 | ||||||||||||||||||||
President, Chief | 2000 | $ | 733,346 | $ | 450,014 | $ | 2,077 | — | 128,929 | — | $ | 78,842 | |||||||||||||||||||||
Operating Officer | 1999 | $ | 650,016 | $ | 390,010 | — | — | 89,098 | — | $ | 76,044 | ||||||||||||||||||||||
and Director | |||||||||||||||||||||||||||||||||
John K. Tsui | 2001 | $ | 670,474 | $ | 304,127 | $ | 5,640 | — | 65,016 | $ | 366,994 | $ | 179,956 | ||||||||||||||||||||
Vice Chairman, | 2000 | $ | 638,555 | $ | 289,645 | $ | 4,934 | — | 101,331 | — | $ | 186,474 | |||||||||||||||||||||
Chief Credit | 1999 | $ | 609,721 | $ | 280,875 | $ | 5,637 | — | 73,900 | $ | 131,026 | $ | 197,442 | ||||||||||||||||||||
Officer and Director | |||||||||||||||||||||||||||||||||
Howard H. Karr | 2001 | $ | 408,934 | $ | 185,492 | — | — | 31,723 | $ | 166,276 | $ | 75,939 | |||||||||||||||||||||
Executive Vice | 2000 | $ | 389,476 | $ | 176,659 | — | — | 49,451 | — | $ | 79,144 | ||||||||||||||||||||||
President and | 1999 | $ | 370,643 | $ | 163,940 | — | — | 35,288 | $ | 55,860 | $ | 87,222 | |||||||||||||||||||||
Chief Financial Officer | |||||||||||||||||||||||||||||||||
Donald G. Horner | 2001 | $ | 373,183 | $ | 188,084 | $ | 16,006 | — | 28,950 | $ | 151,568 | $ | 74,789 | ||||||||||||||||||||
Executive Vice | 2000 | $ | 355,356 | $ | 179,128 | $ | 9,933 | — | 45,072 | — | $ | 88,386 | |||||||||||||||||||||
President | 1999 | $ | 337,523 | $ | 149,864 | $ | 10,650 | — | 31,986 | $ | 50,633 | $ | 92,381 |
Long-Term Compensation | ||||||||||||||||||||||||||||||||
Annual Compensation (1) | Awards | Payouts | ||||||||||||||||||||||||||||||
Name | Other | |||||||||||||||||||||||||||||||
and | Annual | Restricted | Securities | All Other | ||||||||||||||||||||||||||||
Principal | Compen- | Stock | Underlying | LTIP | Compen- | |||||||||||||||||||||||||||
Position | Year | Salary | Bonus (2) | sation (3) | Awards | Options (4) | Payouts (5) | sation (6) | ||||||||||||||||||||||||
Walter A. Dods, Jr. (7) | 2004 | $ | 1,081,925 | $ | 1,081,925 | $ | 241,666 | — | — | — | $ | 30,317 | ||||||||||||||||||||
Chairman, Chief | 2003 | $ | 1,081,925 | $ | 1,081,925 | $ | 233,628 | — | 30,000 | — | $ | 121,480 | ||||||||||||||||||||
Executive Officer and Director | 2002 | $ | 1,073,338 | $ | 865,539 | $ | 188,138 | — | — | $ | 2,991,106 | $ | 133,268 | |||||||||||||||||||
Don J. McGrath (7) | 2004 | $ | 985,998 | $ | 1,000,008 | $ | 5,220 | — | — | — | $ | 25,954 | ||||||||||||||||||||
President, Chief | 2003 | $ | 905,961 | $ | 824,353 | $ | 4,871 | — | 30,000 | — | $ | 65,088 | ||||||||||||||||||||
Operating Officer and Director | 2002 | $ | 846,692 | $ | 642,020 | $ | 57,255 | — | — | $ | 1,942,733 | $ | 66,780 | |||||||||||||||||||
Gérard A. Denot | 2004 | $ | 344,146 | $ | 225,568 | $ | 236,302 | — | — | — | $ | 6,150 | ||||||||||||||||||||
Vice Chairman and Director | 2003 | $ | 325,000 | $ | 198,000 | $ | 207,599 | — | 8,000 | — | $ | 10,386 | ||||||||||||||||||||
Donald G. Horner | 2004 | $ | 512,917 | $ | 341,250 | $ | 14,066 | — | — | — | — | |||||||||||||||||||||
Executive Vice | 2003 | $ | 452,500 | $ | 271,500 | $ | 19,116 | — | 8,000 | — | $ | 437,888 | ||||||||||||||||||||
President | 2002 | $ | 398,111 | $ | 248,875 | $ | 28,413 | — | — | $ | 545,814 | $ | 74,343 | |||||||||||||||||||
Douglas C. Grigsby | 2004 | $ | 399,924 | $ | 201,252 | $ | 1,773 | — | — | — | $ | 11,043 | ||||||||||||||||||||
Executive Vice | 2003 | $ | 385,144 | $ | 193,512 | $ | 177 | — | 8,000 | — | $ | 29,812 | ||||||||||||||||||||
President, Chief | 2002 | $ | 352,600 | $ | 187,872 | $ | 7,537 | — | — | $ | 467,679 | $ | 30,440 | |||||||||||||||||||
Financial officer and Treasurer |
Notes to Summary Compensation Table:
Note (1) | Includes amounts earned but deferred under the Corporation’s Deferred Compensation Plan (the “DCP”). | |
Note (2) | Bonuses are reported for the year in which earned, even if paid in the following year, under the Corporation’s Incentive Plan for Key Executives (“IPKE”). | |
Note (3) | The 2004 amounts shown for Mr. McGrath, Mr. | |
Note (4) | ||
Note (5) | Payouts under the Long Term Incentive Plan (the “LTIP”) are reported | |
74
Part III(continued)
Split-Dollar Insurance | ||||||||||||||||||||||||
Profit | ||||||||||||||||||||||||
Life | Term | Interest | Sharing Plan | Vacation | ||||||||||||||||||||
Name | Insurance | Element | Element | Contributions | Payout | Total | ||||||||||||||||||
Dods | $ | 32,395 | $ | 6,541 | $ | 112,633 | — | $ | 75,900 | $ | 227,469 | |||||||||||||
McGrath | — | $ | 6,678 | $ | 65,343 | $ | 5,250 | — | $ | 77,271 | ||||||||||||||
Tsui | — | $ | 8,033 | $ | 171,923 | — | — | $ | 179,956 | |||||||||||||||
Karr | — | $ | 3,331 | $ | 59,583 | — | $ | 13,026 | $ | 75,940 | ||||||||||||||
Horner | — | $ | 1,726 | $ | 73,064 | — | — | $ | 74,790 |
The Corporation has split-dollar insurance agreements with the named executive officers, as well as certain other senior officers. Under each agreement, the Corporation pays all premiums for a policy on the life of the executive. The executive is entitled to a portion of the death benefit equal to three times salary, and the Corporation is entitled to the remainder. If the executive remains employed by the Corporation, the policy splits (typically at age 65) and the executive retains a policy with a death benefit equal to three times final salary, and a portion of the accumulated cash values. The policies are designed so that the Corporation will recover all premiums previously paid plus an interest factor from its share of death benefits or cash values. The amounts under “Split-Dollar Insurance — Term Element” represent the portion of split dollar insurance premiums paid in 2001 corresponding to the insurer’s lowest term insurance rate for the relevant death benefit, plus related gross-ups for income taxes. The amounts under “Split- Dollar Insurance — Interest Element” represent the present values of hypothetical interest-free loans of the non-term elements of 2001 split-dollar insurance premiums. This methodology has also been used in calculating the split-dollar elements of 1999 and 2001 amounts shown under “All Other Compensation.” The Corporation also has a $1,000,000 whole life insurance policy on the life of Mr. Dods. The premium and related gross-up for income taxes on this policy are included under “Life Insurance.” The death benefit under this policy is deducted from the death benefit under Mr. Dods’ split-dollar policy.
Option Grants in Last Fiscal Year
The following table sets forth 2001 option grants to each of the named executive officers under the Corporation’s 1998 Stock Incentive Plan and the potential realizable values of such options calculated as of the time of the grants. However, as described in the note to the table in the next section, all outstanding options were cashed out in connection with the BNP Paribas Merger.
Potential Realizable Value at | ||||||||||||||||||||||||||||
Assumed Annual Rates of | ||||||||||||||||||||||||||||
Stock Price Appreciation | ||||||||||||||||||||||||||||
Individual Grants(1) | for Option Term(2) | |||||||||||||||||||||||||||
Number of | Percent of | |||||||||||||||||||||||||||
Securities | Total Options | Exercise | ||||||||||||||||||||||||||
Underlying | Granted to | or | ||||||||||||||||||||||||||
Options | Employees in | Base Price | Expiration | Dollar Value of | ||||||||||||||||||||||||
Name | Granted | Fiscal Year | Per Share | Date | Options Granted | 5% | 10% | |||||||||||||||||||||
Dods | 158,600 | 17.2 | % | $ | 24.75 | 4/19/11 | $ | 3,925,350 | $ | 2,468,632 | $ | 6,255,997 | ||||||||||||||||
McGrath | 98,488 | 10.7 | % | $ | 24.75 | 4/19/11 | $ | 2,437,578 | $ | 1,532,980 | $ | 3,884,872 | ||||||||||||||||
Tsui | 65,016 | 7.1 | % | $ | 24.75 | 4/19/11 | $ | 1,609,146 | $ | 1,011,983 | $ | 2,564,564 | ||||||||||||||||
Karr | 31,723 | 3.4 | % | $ | 24.75 | 4/19/11 | $ | 785,144 | $ | 493,773 | $ | 1,251,318 | ||||||||||||||||
Horner | 28,950 | 3.1 | % | $ | 24.75 | 4/19/11 | $ | 716,513 | $ | 450,611 | $ | 1,141,936 |
Notes to Option Grants in Last Fiscal Year:
Note | ||
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insurance program. The Corporation did not make any premium payments for their coverage in 2004 because premiums were funded by policy cash values. The split dollar program has been terminated. Remaining participants, including Mr. McGrath and Mr. Grigsby, transferred their split dollar policies (including their interests in cash values) to the Corporation, and became participants in the Executive Life Insurance Plan described below. | ||
Note (7) | Mr. Dods served as Chairman and Chief Executive Officer through December 31, 2004. On January 1, 2005, Mr. McGrath became President and Chief Executive Officer, and Mr. Dods became non-executive Chairman of the Board. |
Part III(continued)
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities | Value of In-the-Money | |||||||||||||||
Shares Acquired | Underlying Options | Money Options at | ||||||||||||||
on Exercise | Value Realized | at December 31, 2001 | December 31, 2001 | |||||||||||||
Name | (#) | ($) | (#)(1) | ($)(1) | ||||||||||||
Dods | 0 | $0 | 953,914 | $ | 16,182,439 | |||||||||||
McGrath | 0 | $0 | 371,957 | $ | 5,734,275 | |||||||||||
Tsui | 0 | $0 | 480,587 | $ | 8,193,654 | |||||||||||
Karr | 0 | $0 | 246,222 | $ | 4,246,366 | |||||||||||
Horner | 0 | $0 | 198,428 | $ | 3,303,597 |
Value of | ||||||||||||||||
Number of Securities | In-the-Money | |||||||||||||||
Underlying Options | Options at | |||||||||||||||
at December 31, 2004 | December 31, 2004 | |||||||||||||||
Shares Acquired | (#) | ($) | ||||||||||||||
on Exercise | Value Realized | Exercisable/ | Exercisable/ | |||||||||||||
Name | (#) | ($) | Nonexercisable | Nonexercisable | ||||||||||||
Dods | — | — | 0/30,000 | 0/$658,724 | ||||||||||||
McGrath | 25 | $ | 472 | 41,975/30,000 | $ | 655,091/$658,724 | ||||||||||
Denot | 500 | $ | 20,435 | 9,000/10,000 | $ | 207,905/$187,316 | ||||||||||
Horner | — | — | 0/8,000 | 0/$175,660 | ||||||||||||
Grigsby | — | — | 0/8,000 | 0/$175,660 |
All securities underlying the options are shares of BNP Paribas. Dollar values were calculated using a December 31, 2004 market price of 53.30 euro per share and an exchange rate of $1.3554 per euro. Outstanding options include 11,000 BNP Paribas options awarded to Mr. Denot prior to commencing service with the Corporation, and 41,975 BNP Paribas options awarded to Mr. McGrath for services prior to the November 1998 merger of “old” BancWest Corporation into the Corporation. No options were granted in 2004.
Long-Term Incentive Plans— Plans–Awards in Last Fiscal Year
In March 2001, theThe Executive Compensation Committee established target awards for the 2001-20032004-2006 LTIP performance cycle that ranged from 10% to 50% of participants’ average annual base salaries, and adopted an award matrix based on two measures of corporate performance — relative average total stockholder return versus the Standard & Poor’s Midcap Regional Bank Index– Return on Average Notional Equity (“TSR”RONE”), and annual compounded growth rate in diluted earnings per sharean Efficiency Ratio (“ACGR”ER”). Target awards were towill be multiplied by a corporate performance factor of 0% to 200% established after the performance period wasis complete by applying the Corporation’s TSRRONE and ACGRER to an array of percentages shown on thean award matrix. One axis of that matrix setsets forth TSRRONE values ranging from the 40th percentile42.1% to the 80th percentile,50.1%, and the other axis setsets forth ACGR valuesER percentages of 8%55.5% to 12%45.5%. The matrix providedprovides a corporate performance factor of 0% if TSR wasRONE is less than 42.1% or the 40th percentile or ACGR was lessER is greater than 8%55.5%; a 100% corporate performance factor if (among other combinations) RONE is 46.1% and the TSR was at the 60th percentile and ACGR was 10%ER is 50.5%; and the maximum corporate performance factor of 200% if the TSR reachedRONE reaches at least 50.1% and the 80th percentile and ACGR was at least 12%.ER is 45.5% or better.
In accordance with Securities and Exchange Commission (“SEC”)SEC rules, the following table shows threshold, target and maximum awards levellevels of the named executive officers for the 2001-20032004-2006 LTIP performance cycle. However, due to change-in-control provisions of the LTIP, all LTIP participants employed by the Estimated Future Payouts Number of Performance or under Non-Stock Shares, Other Period until Price-Based Plans (2) Units or Maturation Name Other Rights or Payout (1) Threshold Target Maximum Dods (3) None 12/31/2006 None $ 180,320 $ 360,641 McGrath None 12/31/2006 None $ 501,907 $ 1,003,814 Denot None 12/31/2006 None $ 116,062 $ 232,125 Horner None 12/31/2006 None $ 198,100 $ 396,200 Grigsby None 12/31/2006 None $ 124,824 $ 249,649
100
BancWest Corporation at the time of the BNP Paribas Merger became entitled to receive their maximum LTIP awards for 2001-2003 and all other open performance cycles. Those awards were paid in January 2002.
Number of | Performance or | Estimated Future Payouts | ||||||||||||||||||
Shares, | Other Period until | under Non-Stock Price-Based Plans(2) | ||||||||||||||||||
Units or | Maturation | |||||||||||||||||||
Name | Other Rights | or Payout(1) | Threshold | Target | Maximum | |||||||||||||||
Dods | None | 12/31/2003 | None | $ | 515,201 | $ | 1,030,403 | |||||||||||||
McGrath | None | 12/31/2003 | None | $ | 340,010 | $ | 680,021 | |||||||||||||
Tsui | None | 12/31/2003 | None | $ | 238,043 | $ | 473,086 | |||||||||||||
Karr | None | 12/31/2003 | None | $ | 103,051 | $ | 206,103 | |||||||||||||
Horner | None | 12/31/2003 | None | $ | 94,042 | $ | 188,084 |
Note (1) | Performance period began on January 1, | |||
Note (2) | Target and Maximum payouts correspond to corporate performance factors of 100% and 200%, and are calculated using estimated average salaries for 2004-2006. | |||
Note (3) | Mr. Dods will participate in 2004-2006 awards on a prorated basis because he retired after completing one-third of the LTIP cycle. |
Executive Life Insurance Plan
The Corporation provides pre-and post-retirement life insurance benefits for approximately 26 executives under the Executive Life Insurance Plan (the “ELIP”), which is an exhibit incorporated herein by reference. The named executive officers who currently participate in the ELIP, which replaced the Corporation’s prior split dollar life insurance program, are Mr. McGrath and Mr. Grigsby. Death benefits under the ELIP are equal to three times current salary while actively employed. Following a “qualified termination,” the Corporation will continue to provide death benefits to ELIP participants equal to three times final salary until their “policy distribution date.” On the policy distribution date, the Corporation will transfer to the participant ownership of a company-owed life insurance policy with sufficient cash value, based on reasonable actuarial assumptions, to provide a death benefit equal to three times final salary until the policy maturity date. At the date the policy is transferred to the participant, the Corporation will also pay a cash bonus sufficient to cover the executive’s estimated income taxes due as a result of transfer of the policy.
A qualified termination includes termination of employment after attaining age 65, termination of employment after attaining age 55 with at least ten years of credited service, termination of those executives entitled to the enhanced SERP benefit described in the following section, or a discretionary determination by the Executive Compensation Committee to treat a termination that does not otherwise qualify as a qualified termination. Mr. McGrath (age 56) and Mr. Grigsby (age 52) have each satisfied the requirements for a “qualified termination.” The policy distribution date is the latest to occur of termination of the participant’s employment, attaining age 65, and completion of seven annual premium payments. However, the Executive Compensation Committee has discretion to authorize distribution of a policy to a participant following termination of service and completion of seven premium payments, but prior to attaining age 65.
Defined Benefit Pension and Supplemental Executive Retirement Plans
The Corporation hassponsors an Employees’ Retirement Plan (the “ERP”) for employees of the Corporation and participating subsidiaries.subsidiaries, which resulted from the merger of two separate plans. The ERP includes a cash balance plan for eligible Bank of the West employees, under which benefits continue to accrue, and a “frozen” defined benefit plan for certain employees of First Hawaiian, Inc. (“FHI”).
Bank of the West’s cash balance plan (previously part of the BNP U.S. Retirement Plan) was merged into the ERP effective January 1, 1999. It provides a benefit at retirement equal to the value of the participant’s cash balance account. The cash balance account consists of: accrued benefits transferred as of January 1, 1999; 5% of base earnings (up to an inflation-adjusted earnings limit established by Internal Revenue Service rules) while a participant for each year following 1998; and interest on the foregoing amounts credited quarterly at an annual rate calculated by reference to 5-year Treasuries. Benefits vest after five years of service, but may not be paid out before age 55. The named executive officers who currently participate in the cash balance plan are Mr. McGrath and Mr. Grigsby. Based on 2% inflation, a 3.25% interest-crediting rate and 5.75% conversion factors, the Corporation currently estimates that the annual benefit payable from this plan to Mr. McGrath and Mr. Grigsby at normal retirement age will be $54,500 and $63,000, respectively.
The FHI defined benefit plan was “frozen” as of December 31, 1995 and none of the named executive officers accrued such benefits under that plan for service after December 31, 1995. Under the ERP,frozen FHI plan, covered compensation includes salary, including overtime, but excludes bonuses. Pension compensation is also limited to the maximum allowable under the Internal Revenue Code. Retirement benefits become payable effective upon an employee’s retirement at the normal retirement age of 65 years. Normal retirement benefits payable under the ERP are based on average compensation and years of credited service.service as of December 31, 1995. Mr. Dods and Mr. Horner have frozen accrued benefits payable at normal retirement of $94,791 and $42,713, respectively. Under specified circumstances, an employee who has attained a certain age and length of service may retire early with reduced
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Part III(continued)
benefits. The ERP was “frozen” as of December 31, 1995 and none of the executive officers named in the Summary Compensation Table accrued such benefits under the ERP for service after December 31, 1995.
Effective as of January 1, 1999, assets attributable to certain Bank of the West employees in the BNP U.S.The Corporation’s Supplemental Executive Retirement Plan (the “BNP Plan”) were merged into the ERP and the ERP was amended to provide eligible Bank of the West employees with accrual of benefits comparable to those provided under the BNP Plan. Benefits accrue based upon an employee’s years of service and compensation over his/her years of employment. Mr. McGrath is the only executive officer named in the Summary Compensation Table eligible to accrue such benefits.
The Corporation also maintains a“SERP,” discussed below) includes grandfathered pension portion of the SERPprovisions under which eligible executive officers (including Mr. Dods Mr. Tsui, Mr. Karr and Mr. Horner) continue to earnwill receive benefits based on the ERP formula.formula used in the frozen FHI defined benefit plan. In determining grandfathered pension benefits under the SERP, the participant’s covered compensation includes base pay, commissions, overtime, short-term incentive pay, and the annual cash bonus earned under IPKE; athe IPKE. A participant’s covered compensation does not include any LTIP bonus. The grandfathered pension benefit payable under the SERP is reduced by the participant’s “frozen” accrued benefit under the ERP.old FHI plan.
In connection with the November 1998 merger of 101
BancWest Corporation and First Hawaiian, Inc., the SERP was amended to provide that certain Bank of the West employees, including Mr. McGrath, would be entitled to a minimum benefit equal to the minimum benefit under the terminated Bank of the West Excess Benefit Plan. To be eligible for such minimum benefit, Mr. McGrath must have completed at least 20 years of service and attained at least age 55 at retirement. The minimum benefit will be 50% of his base salary at the annual rate in effect on the date he retires from service (“final pay”) if he is at least age 60 at retirement and 30% of his final pay if he is at least age 55 but less than 60 at retirement. Mr. McGrath is currently age 53 with 26 years of service and at December 31, 2001 his base salary was $800,024.Subsidiaries
PART III
The following table illustrates the estimated annual pension benefits payable under the grandfathered pension portion of the SERP to eligible executive officers at age 65.65 (including the value of the frozen FHI benefit). Whether these amounts become payable depends on the contingencies and conditions set forth in the ERP and the SERP.
Final Average | ||||||||||||||||||||||||||
Compensation(1) | Years of Service(2) | |||||||||||||||||||||||||
15 | 20 | 25 | 30 | 35 | 40 | |||||||||||||||||||||
$200,000 | 50,082 | 66,777 | 83,471 | 100,165 | 116,859 | 133,553 | ||||||||||||||||||||
300,000 | 76,332 | 101,777 | 127,221 | 152,665 | 178,109 | 203,553 | ||||||||||||||||||||
400,000 | 102,582 | 136,777 | 170,971 | 205,165 | 239,359 | 273,553 | ||||||||||||||||||||
500,000 | 128,832 | 171,777 | 214,721 | 257,665 | 300,609 | 343,553 | ||||||||||||||||||||
600,000 | 155,082 | 206,777 | 258,471 | 310,165 | 361,859 | 413,553 | ||||||||||||||||||||
700,000 | 181,332 | 241,777 | 302,221 | 362,665 | 423,109 | 483,553 | ||||||||||||||||||||
800,000 | 207,582 | 276,777 | 345,971 | 415,165 | 484,359 | 553,553 | ||||||||||||||||||||
900,000 | 233,832 | 311,777 | 389,721 | 467,665 | 545,609 | 623,553 | ||||||||||||||||||||
1,000,000 | 260,082 | 346,777 | 433,471 | 520,165 | 606,859 | 693,553 | ||||||||||||||||||||
1,100,000 | 286,332 | 381,777 | 477,221 | 572,665 | 668,109 | 763,553 | ||||||||||||||||||||
1,200,000 | 312,582 | 416,777 | 520,971 | 625,165 | 729,359 | 833,553 | ||||||||||||||||||||
1,300,000 | 338,832 | 451,777 | 564,721 | 677,665 | 790,609 | 903,553 | ||||||||||||||||||||
1,400,000 | 365,082 | 486,777 | 608,471 | 730,165 | 851,859 | 973,553 | ||||||||||||||||||||
1,500,000 | 391,332 | 521,777 | 652,221 | 782,665 | 913,109 | 1,043,553 | ||||||||||||||||||||
1,600,000 | 417,582 | 556,777 | 695,971 | 835,165 | 974,359 | 1,113,553 | ||||||||||||||||||||
1,700,000 | 443,832 | 591,777 | 739,721 | 887,665 | 1,035,609 | 1,183,553 |
Final Average | Years of Service (2) | |||||||||||||||||||||||
Compensation (1) | 15 | 20 | 25 | 30 | 35 | 40 | ||||||||||||||||||
200,000 | 48,483 | 64,643 | 80,804 | 96,965 | 113,126 | 125,126 | ||||||||||||||||||
300,000 | 74,733 | 99,643 | 124,554 | 149,465 | 174,376 | 192,376 | ||||||||||||||||||
400,000 | 100,983 | 134,643 | 168,304 | 201,965 | 235,626 | 259,626 | ||||||||||||||||||
500,000 | 127,233 | 169,643 | 212,054 | 254,465 | 296,876 | 326,876 | ||||||||||||||||||
600,000 | 153,483 | 204,643 | 255,804 | 306,965 | 358,126 | 394,126 | ||||||||||||||||||
700,000 | 179,733 | 239,643 | 299,554 | 359,465 | 419,376 | 461,376 | ||||||||||||||||||
800,000 | 205,983 | 274,643 | 343,304 | 411,965 | 480,626 | 528,626 | ||||||||||||||||||
900,000 | 232,233 | 309,643 | 387,054 | 464,465 | 541,876 | 595,876 | ||||||||||||||||||
1,000,000 | 258,483 | 344,643 | 430,804 | 516,965 | 603,126 | 663,126 | ||||||||||||||||||
1,100,000 | 284,733 | 379,643 | 474,554 | 569,465 | 664,376 | 730,376 | ||||||||||||||||||
1,200,000 | 310,983 | 414,643 | 518,304 | 621,965 | 725,626 | 797,626 | ||||||||||||||||||
1,300,000 | 337,233 | 449,643 | 562,054 | 674,465 | 786,876 | 864,876 | ||||||||||||||||||
1,400,000 | 363,483 | 484,643 | 605,804 | 726,965 | 848,126 | 932,126 | ||||||||||||||||||
1,500,000 | 389,733 | 519,643 | 649,554 | 779,465 | 909,376 | 999,376 | ||||||||||||||||||
1,600,000 | 415,983 | 554,643 | 693,304 | 831,965 | 970,626 | 1,066,626 | ||||||||||||||||||
1,700,000 | 442,233 | 589,643 | 737,054 | 884,465 | 1,031,876 | 1,133,876 | ||||||||||||||||||
1,800,000 | 468,483 | 624,643 | 780,804 | 936,965 | 1,093,126 | 1,201,126 | ||||||||||||||||||
1,900,000 | 494,733 | 659,643 | 824,554 | 989,465 | 1,154,376 | 1,268,376 | ||||||||||||||||||
2,000,000 | 520,983 | 694,643 | 868,304 | 1,041,965 | 1,215,626 | 1,335,626 |
Notes to Defined Benefit Pension Plans Table:
Note (1) | Final average compensation represents the average annual compensation during the highest 60 consecutive calendar months in the last 120 calendar months of creditable service. Compensation for the purpose of this table includes base salary plus the value of awards under the IPKE as shown on the Summary Compensation Table (but not bonuses under the LTIP). The amount of the IPKE bonus included in compensation for any year for purposes of the SERP is the amount earned for the performance year, though not paid until the following year. The estimated annual benefits are computed on the basis of a straight-life annuity form of payment with no social security offset. |
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Part III(continued)
Note (2) | As of December 31, |
Approximately 90 actively employed senior executives participate in the SERP. SERP participants receive the greater of (i) in the case of grandfathered participants, benefits calculated under the grandfathered SERP provisions, if applicable, and (ii) benefits derived from a target percentage of their qualifying compensation, lessbut only to the extent the target benefit exceeds offsets for grandfathered SERP benefits, and for benefits under the ERP and various other programs.
employer provided benefits (including contributions to defined contribution plans and 50% of the age 65 Social Security benefit). The named executive officers’ maximum target percentage is 60% of qualifying compensation. Ordinarily,Subject to the 2002 amendment discussed below, qualifying compensation for this purpose is the average annual rate of compensation (salary plus annual bonuses under the Incentive Plan for Key Executives) for the 60 consecutive calendar months out of the last 120 calendar months of employment that resultsresult in the highest such average. To qualify for a 60% target, the named executive officers who participate in the SERP must retire on or after their 62nd62nd birthdays with 20 years of credited service. TheirIf they retire before age 62 with the consent of the Executive Compensation Committee, their target percentagesretirement amounts (as defined by the SERP) are reduced by 3% for each year by which benefit commencement precedes the participant’s 62nd62nd birthday. Messrs. Dods, McGrath, Horner and Grigsby participate in the SERP, and each of them has at least 20 years of credited service for SERP purposes.
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BancWest Corporation and Subsidiaries
PART III
The SERP’s change-in-control provisions applySERP was amended in 2002 to participants who are “involuntarily terminated” within 36 months of a change in control, such as the BNP Paribas Merger. (The SERP defineseliminate “involuntary termination” provisions and to include a discharge or resignation in responseprovide certain enhanced SERP benefits to a (1) change in day-to-day duties; (2) reduction in compensation or benefits; (3) downward change of title; or (4) relocation requested by the employer.) Affectedall persons who were SERP participants would beat the time Bancwest was acquired by BNP Paribas. The affected SERP participants (including Messrs. Dods, McGrath, Horner and Grigsby) were granted three extra years of credited service infor purposes of computing their target benefits.benefits under the SERP. Their target benefit computations wouldwill also be based on the greater of covered compensation over the 12 months before termination, or the final average compensation otherwise provided in the SERP. In addition, their SERP benefits wouldwill begin at the later of the date of termination or age 55 though the(though an affected participant couldmay elect to delay receipt of change-in-controlSERP early retirement benefits to a date not beyond age 65.65), and early retirement benefits will be calculated using provisions that apply to retirement with consent of the Executive Compensation Committee.
Mr. Denot participates in a 401(k) plan of the Corporation but not in any of its other pension plans or the SERP. He participates in pension plans of BNP Paribas.
Change-in-Control Arrangements
If there is a change in control of the Corporation, benefits will be accelerated or paid under various compensation plans. Allall LTIP awards that have been outstanding six or more months will automatically be deemed fully earned at the maximum target value; SERP participants will be entitled to additional benefits if “involuntarily terminated” within 36 months following the change in control (as described in the preceding paragraph);value and participants in the Deferred Compensation PlanDCP will be entitled to an immediate lump sum distribution of certain amounts unless (as occurred in thewhen BancWest was acquired by BNP Paribas Merger)Paribas) that plan is assumed by the surviving entity. In addition, the Corporation maintains a rabbi trust with a third-party trustee for the SERP and the Deferred Compensation PlanDCP and if an actual or potential change in control occurs, the Corporation is required to contribute sufficient funds to the trust to fund all benefits payable to participants. The BNP Paribas Merger was a change in control for purposes of the LTIP, the SERP, and the rabbi trust agreement, as well as the 1991 and 1998 option plans. (Those option plans have been terminated.)
Employment Agreements
Mr. Dods has entered into an employment agreement with the Corporation, which became effective at the time of the BNP Paribas Merger and has a term of three years, unless earlier terminated. Under the terms of that agreement, Mr. Dods is entitled to:
Mr. Dods has the opportunity to earn awards under a new long-term incentive plan that are no less favorable than those available prior to the BNP Paribas Merger, with a guaranteed target award of at least 50% of base salary and a maximum award opportunity of 200% of the target award.
Mr. Dods is entitled to receive a lump sum cash severance payment in the following circumstances:
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Part III(continued)
The severance payment would be equal to the sum of:
Mr. Dods would also be entitled by his employment agreement to three additional years of age and service credit under our pension plans. Mr. Dods is also entitled to be grossed up, on an after-tax basis, for any excise taxes imposed under the Internal Revenue Code on any “excess parachute payment” that he receives in connection with benefits and payments provided to him in connection with any change in control, as defined in the Internal Revenue Code, of BancWest.
Mr. McGrath has had an employment agreement with the Corporation since 1998. His agreement, which was last amended in January 2005, has a perpetual term and entitles Mr. McGrath to at least his current base salary, which may be increased annually at BancWest’s discretion after review by the Board of Directors, but may not be decreased.
Mr. McGrath is entitled to receive a lump sum cash severance payment in the following circumstances, whether they occur following a change in control or otherwise:
• | BancWest terminates Mr. McGrath’s employment other than for cause (as defined in the employment agreement) or due to disability, or | |||
• | Mr. McGrath quits for good reason (as defined in the employment agreement). |
This severance payment would be equal to three times the sum of:
(1) | his then current base salary, and | |||
(2) | his average annual bonus, if any, based on the preceding three fiscal years. |
Mr. McGrath is also entitled to be grossed up, on an after-tax basis, for any excise taxes imposed under the Internal Revenue Code on any “excess parachute payment” that he receives in connection with benefits and payments provided to him in connection with any change in control, as defined in the Internal Revenue Code, of BancWest.
Termination Protection Agreements
Mr. Tsui, Mr. Karr and Mr. Horner have entered into termination protection agreements with the Corporation. Each agreement became effective at the time of the BNP Paribas Merger and has a term of three years. In no event, however, will it terminate within two years after any change in control of BNP Paribas or BancWest. Under the terms of each agreement, BancWest will provide the executive officer with the severance benefits discussed below if any of the following events occurs:
The executive’s severance benefits would be a lump sum cash payment equal to:
Under these circumstances, these officers would also be entitled by their termination protection agreements to two years of additional age and service credit under our pension plans (in addition to three years of credited service under the SERP that would affect only Mr. Tsui’s SERP benefits).
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Part III(continued)
Each of Messrs. Tsui, Karr and Horner is also entitled to be grossed up, on an after-tax basis, for any excise taxes imposed under the Internal Revenue Code on any “excess parachute payment” that such executive receives in connection with benefits and payments provided to him in connection with any change in control, as defined in the Internal Revenue Code, of BancWest.
Item 12. Security Ownership Ofof Certain Beneficial Owners Andand Management
All of registrant’s voting securities of BancWest Corporation are beneficially owned by BNP Paribas, whose address is 16, boulevard des Italiens, 75009 Paris, France. BancWest Corporation has no compensation plans providing for issuance of its equity securities.
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BancWest Corporation and Subsidiaries
PART III
Item 13. Certain Relationships and Related Transactions; Compensation Committee Interlocks and Insider ParticipationTransactions
In the ordinary course of business, the Corporation’s bank subsidiaries have made loans to the Corporation’s directors and executive officers, to members of their families, and to entities related to such persons. Those loans were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risks of collectibility or present other unfavorable features.
The following table provides information on loans from Messrs. Haig, Ganley and Dods are directors of the Corporation to its directors and executive officers that had balances exceeding $60,000 at any time during 2001. Each such loan is secured by a real property mortgage. During 2001, the members of the Executive Compensation Committee included Fujio Matsuda (Chairman), Dr. Julia Ann Frohlich, Robert A. Fuhrman, David M. Haig (a trusteetrustees of the Estate of S.M. Damon) and Pierre Mariani (an executive of BNP Paribas)Damon (“Damon Estate”).
Aggregate Indebtedness | ||||||||||||
Largest Aggregate | Outstanding | Interest | ||||||||||
Name and Title | Indebtedness in 2001 | December 31, 2001 | Rate | |||||||||
Howard H. Karr(1) | $ | 187,192 | $ | 184,391 | 8.125%-7.25 | %(2) | ||||||
Executive Vice President | ||||||||||||
and Chief Financial Officer | ||||||||||||
Bert T. Kobayashi, Jr. | $ | 421,905 | $0 | 8.00%-8.625 | %(2) | |||||||
Director | $ | 250,874 | $0 | 5.00 | % | |||||||
Fujio Matsuda | $ | 170,951 | $ | 165,911 | 5.00 | % | ||||||
Director | $ | 52,774 | $ | 51,657 | 8.75%-7.25 | %(2) | ||||||
$ | 49,968 | $0 | 8.75 | % | ||||||||
John K. Tsui | $ | 423,276 | $0 | 8.25 | % | |||||||
Vice Chairman, Chief Credit Officer | ||||||||||||
and Director |
First Hawaiian Bank Damon Estate leases a parcel of land on whichto First Hawaiian Bank used for a branch of the bank is located, from the Estate of S.M. Damon pursuant to abranch. The lease commencingcommenced July 1, 1967. This lease1967, and has a 50-year term. Rent is for a term of 50 years, and requires the payment of a fixed annual rent of $156,800 annually from July 1, 1997 to June 30, 2002 and $179,200 annuallyper year from July 1, 2002 to June 30, 2007. Rents are toRent will be fixed for the next ten-year period by agreement or, failing agreement, by appraisal. Messrs. Haig, Weyand, Ganley and Dods are directors of the Corporation and trustees of the Estate. Management of the Corporation believes that this transaction is as favorable to the Corporation and First Hawaiian Bank as that which would have been obtainable in transactions with persons or companies not affiliated with the Corporation or First Hawaiian Bank.
First Hawaiian Bank leases office space to Damon Estate in First Hawaiian Bank’s headquarters building. In 2004, Damon Estate leased 6,074 square feet and paid rent of office space to$171,287, plus operating expenses. Effective January 1, 2005, the Estatelease includes 6,980 square feet, at an annual rent of S.M. Damon in the downtown Honolulu headquarters building of the bank. The Estate pays rent for the space at the same rate as would be paid by unrelated parties for the same space. The rent is a minimum of $3.12 per square foot per month ($227,410 per annum),$205,036, plus common area maintenance expenses, until December 7, 2002. Rents thereafter are to be fixed by agreement or, failing agreement, by appraisal.operating expenses. The lease will expireexpires in December 2007.
Bank of the West leases approximately 48,382 square feet of office space in San Francisco, California under a commercial office lease (the “Master Lease”) commencing November 1, 1993 and expiring October 31, 2003. Bank of the West has subleased approximately 22,485 square feet of this space2007, subject to BNP Paribas, or approximately 46.5% of the leased premises (the “Subtenant’s Percentage Share”). The sublease term is the same as the Master Lease, and
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Part III(continued)
BNP Paribas pays pro-rata rent and certain expenses directly to the landlord under the Master Lease. BNP Paribas’ share of rent and expenses is based primarily on the Subtenant’s Percentage Share. The subleased premises were leased “as is,” and BNP Paribas must look solely to the landlord under the Master Lease for all services and benefits provided by the Master Lease landlord applicable to the subleased space. Bank of the West indemnifies BNP Paribas against losses incurred by BNP Paribas as a result of any breach by Bank of the West of its obligations as tenant under the Master Lease, except those assumed by BNP Paribas.
In connection with the BNP Paribas Merger, the Corporation became the borrower under a $1,550,000,000, 6.54% term loan from a BNP Paribas subsidiary due December 31, 2010. At December 31, 2001, the outstanding principal balance of that loan was $1,550,000,000. See note 11 to the audited financial statements on page 58.two five-year extension options.
Bank of the West and First Hawaiian Bank participate in various financial transactions with BNP Paribas and its affiliates. These transactions are subject to review by the Federal Deposit Insurance Corporation (the “FDIC”) and other regulatory authorities and are required to be on terms at least as favorable to each bank as those prevailing at the time for similar non-affiliate transactions. For information concerning financial transactions involving BNP Paribas and the Corporation or its banking subsidiaries, see Notes 3, 4, 13 and 14 to the Consolidated Financial Statements.
During 1999, Bank of the West issued to BNP Paribas a $50,000,000,$50 million 7.35% Subordinated Capital Note due June 24, 2009. The maximum principal amount of that note outstanding in 2001,2004, and the outstanding principal balance at December 31, 2001,2004, was $50,000,000.$50 million.
Bank of the West holds deposits and purchases federal funds from BNP Paribas. The deposits generally are for terms up to six months. Federal funds purchases are generally for one to four days. The maximum daily amount owed by Bank of the West to BNP Paribas in 20012004 in connection with such deposits and federal funds purchases was $542$600 million, and the balance outstanding on December 31, 20012004 was $263$20.4 million.
In connection with its acquisition by BNP Paribas, BancWest became the borrower under a $1.55 billion 6.54% term loan from a BNP Paribas subsidiary due December 31, 2010. At December 31, 2004, the outstanding principal balance of that loan was $1.55 billion.
In 2002, the Corporation sold BNP Paribas 485,413 shares of the outstanding common stock of Bank of the West for $800 million. The Corporation used the proceeds of both transactions to repay funds borrowed from BNP Paribas to finance acquisitions. As discussed in Note 4 to the Consolidated Financial Statements, the Corporation and BNP Paribas are parties to a Stockholders’ Agreement that includes put and call options on the Bank of the West stock owned by BNP Paribas.
In October 2004, in connection with the acquisitions of Community First Bankshares, Inc. and USDB Bancorp, BancWest obtained $590 million of short-term debt financing from BNP Paribas.
As discussed in Note 4 and 14 to the Consolidated Financial Statements, the Corporation has entered into $400 million of structured repurchase agreements with BNP Paribas.
As discussed in Notes 3 and 4 to the Consolidated Financial Statements, the Corporation has entered into a $150 million interest rate swap with BNP Paribas to hedge obligations under the junior subordinated debentures issued in connection with the 9.5% BancWest Capital I Quarterly Income Preferred Securities. The swap is accounted for as a fair value hedge. We pay 3-month LIBOR plus 369 basis points and receive fixed payments at 9.5%. The fair value loss of the swap at December 31, 2004 was $2.7 million.
Mr. Kobayashi is a director of the Corporation and First Hawaiian Bank, and his law corporation is a partner in the law firm of Kobayashi, Sugita & Goda. In 2001,2004, the Corporation and its subsidiaries paid legal fees to Kobayashi, Sugita & Goda in the amount of $1,591,230.totaling $676,675. Of this amount, $420,189 is$443,042 was reimbursable by bank customers. Kobayashi, Sugita & Goda leases from First Hawaiian Bank 26,788 square feet of office space in theFirst Hawaiian Bank’s headquarters building. Rent paid in 20012004 was $1,030,944$1,030,985, plus operating expenses and will increase periodically through the lease’s final year, 2006.expenses. The lease term ends in December 2006, subject to two five-year extension options.
Mr. Peck is a director of the Corporation and Bank of the West and a Senior Partner of Pillsbury Winthrop LLP, which provides legal services to the Corporation and its subsidiaries.
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Item 14. Principal Accountant Fees and Services
Audit Fees and Non-Audit Fees
The following table presents fees for professional audit services rendered by our principal accountants, PricewaterhouseCoopers LLP for the audit of BancWest’s annual financial statements for the years ended December 31, 2004 and December 31, 2003, and fees billed for other services rendered by PricewaterhouseCoopers during those periods. Certain amounts from 2003 have been reclassified to conform to the 2004 presentation.
(dollars in thousands) | 2004 | 2003 | ||||||
Audit fees | $ | 1,669 | $ | 1,106 | ||||
Audit-related fees (1) | 188 | 280 | ||||||
Tax fees (2) | 165 | 895 | ||||||
All other fees (3) | 135 | 195 | ||||||
Total | $ | 2,157 | $ | 2,476 | ||||
(1) | Audit related fees consist of assurance and related services that are reasonable related to the performance of the audit of BancWest’s financial statements. This category includes fees related to the performance of audit and attest services not required by statute or regulations. | |
(2) | Tax fees consist of the aggregate fees billed for professional services rendered by PricewaterhouseCoopers for tax compliance and return assistance (IRS, state and local), tax advice and tax planning. | |
(3) | In 2004, all other fees consisted of $120 thousand for the outsourcing of a like-kind exchange system used in auto leasing and $15 thousand for accounting research and audit software. In 2003, all other fees were for the like-kind exchange system. |
Audit Committee Policy for Pre-Approval of Independent Auditor Services
The BancWest Corporation Audit Committee is responsible for the appointment, compensation, retention and oversight of the Corporation’s independent auditor. Beginning in 2003, the audit committee has required that fees for audit and nonaudit services provided to the Corporation by its independent auditor be preapproved by the committee. It has delegated to its chairman authority, between meetings of the committee, to preapprove expenditures that are within the categories of SEC-permitted services, provided the amounts so approved between any two meetings of the committee do not exceed $100,000 per item, or $250,000 in the aggregate, and provided all such approvals are presented to the committee at its next meeting. Since adoption of the committee’s preapproval requirements, the committee has not utilized provisions of applicable SEC rules that permit waiver of preapproval requirements for certain nonaudit services.
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Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8-K
The following financial statements are included in Part II of the 10-K.
(a) 1. Financial Statements
Page | |||||||||||||
Number | |||||||||||||
Report of Independent Registered Public Accounting Firm | 41 | ||||||||||||
Consolidated Statements of Income | 42 | ||||||||||||
Consolidated | 43 | ||||||||||||
Consolidated Statements of | 44 | ||||||||||||
Consolidated Statements of Cash Flows | 45 | ||||||||||||
BancWest Corporation (Parent Company): | |||||||||||||
Statements of Income | |||||||||||||
Balance Sheets | |||||||||||||
Statements of Cash Flows | |||||||||||||
Notes to Consolidated Financial Statements | |||||||||||||
Summary of Quarterly Financial Data |
2. Financial Statement Schedules
Schedules to the Consolidated Financial Statements required by this Item 14(a)2 are not required under the related instructions, or the information is included in the consolidated financial statements, or are inapplicable, and therefore have been omitted.
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3. Exhibits
The registrant’s SEC file number for reports filed before October 30, 1998 was 000-7949, and for reports filed after that date is 001-14585.
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Part IV(continued)
3.1 | Certificate of Incorporation of BancWest Corporation as in effect from December 20, 2001, | ||
3.2 | Amended and Restated Bylaws of BancWest Corporation as in effect from December 20, 2001, | ||
4.1 | Instruments with respect to long-term debt not filed herewith will be furnished to the Commission upon its request. | ||
4.2 | Indenture, dated as of August 9, 1993, between First Hawaiian, Inc. and The First National Bank of Chicago, Trustee, is incorporated by reference to Exhibit 4.2 to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993. | ||
4.3 | Indenture, dated as of June 30, 1997, between First Hawaiian, Inc. and The First National Bank of Chicago, Trustee, is incorporated by reference to the Corporation’s Registration Statement on Form S-4 filed with the SEC on October 17, | ||
4.4 | Form of Indenture relating to Junior Subordinated Debentures entered into between BancWest Corporation and Bank One Trust Company, N.A., as Indenture Trustee, is incorporated by reference to Exhibit 4(a) to the Registration Statement on Form S-3 of BancWest Corporation, BancWest Capital I and BancWest Capital II, filed October 25, 2000 (File No. 333-48552). | ||
Long-Term Incentive Plan of First Hawaiian, Inc., effective as of January 1, 1992, and Amendments No. 1 and 2, are incorporated by reference to Exhibit 10 to the Corporation’s Form 10-Q for the quarterly period ended June 30, 1998.* | |||
10.2 | Amendment No. 3 to the BancWest Corporation Long-Term Incentive Plan, approved March 16, 2000, is incorporated by reference to Exhibit 10 to the Corporation’s Report on Form 10-Q for the quarterly period ended March 31, 2000.* | ||
10.3 | First Hawaiian, Inc. Supplemental Executive Retirement Plan, as amended and restated as of January 1, 1998, is incorporated by reference to Exhibit 10 to the Corporation’s Form 10-Q for the quarterly period ended June 30, 1998.* | ||
10.4 | Amendment No. 1 to First Hawaiian, Inc. Supplemental Executive Retirement Plan, effective November 1, 1998, is incorporated by reference to Exhibit 10(x) to the Corporation’s Form 10-K for the fiscal year ended December 31, 1998.* | ||
10.5 | Amendment No. 2 to BancWest Corporation Supplemental Executive Retirement Plan, effective November 1, 2002, is incorporated by reference to Exhibit 10.8 to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.* | ||
10.6 | First Hawaiian, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1998, and Amendment No. 1, are incorporated by reference to Exhibit 10 to the Corporation’s Form 10-Q for the quarterly period ended June 30, 1998.* | ||
10.7 | Amendment No. 3 to the BancWest Corporation Deferred Compensation Plan is incorporated by reference to Exhibit 10.26 to the Corporation’s Form 10-Q for the quarterly period ended June 30, 2001.* | ||
10.8 | First Hawaiian, Inc. Incentive Plan for Key Executives, and amendments effective January 1, 1998, are incorporated by reference to Exhibit 10 to the Corporation’s Form 10-Q for the quarterly period ended June 30, 1998.* |
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10.9 | Amendment to First Hawaiian, Inc. Incentive Plan for Key Executives | ||
10.10 | |||
10.11 | Directors’ Retirement Plan, effective as of January 1, 1992, and Amendments No. 1 and 2, are incorporated by reference to Exhibit 10 to the Corporation’s Form 10-Q for the quarterly period ended June 30, 1998.* |
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Part IV(continued)
10.12 | |||
BancWest Corporation Umbrella Trust | |||
10.13 | |||
10.14 | Termination of Split Dollar Agreement and Release of Interest, dated December 16, 2003, between First Hawaiian Bank and Donald G. Horner, is incorporated by reference to Exhibit 10.18 to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.* | ||
10.15 | BancWest Corporation Executive Life Insurance Plan, effective April 1, 2004, is incorporated by reference to Exhibit 10.1 to the Corporation’s Report on Form 8-K dated January 20, 2005.* | ||
10.16 | Employment Agreement between Don J. McGrath and the Corporation, effective November 1, 1998, is incorporated by reference to Exhibit 10.17 to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999.* | ||
10.17 | |||
10.18 | Agreement dated February 13, 2004 between BNP Paribas International Retail and Financial Services and Walter A. Dods, Jr. is filed herewith.* | ||
10.19 | Stock Purchase Agreement, dated November | ||
10.20 | |||
| |||
12. | Statement re: computation of ratios, filed herewith. | ||
21. | Subsidiaries of the registrant, filed herewith. | ||
31. | Section 302 Certifications. | ||
32. | Section 1350 Certifications. | ||
* Management contract or compensatory plan or arrangement. |
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Part IV(continued)(b) The exhibits listed in Item 15(a)3 are incorporated by reference or attached hereto.
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.
BANCWEST CORPORATION (Registrant) | ||||
/s/ | ||||
Douglas C. Grigsby | ||||
Executive Vice President, and Treasurer | ||||
Date: March 28, 200225, 2005
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Part IV(continued)
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 and in the capacities and on the date indicated.
/s/ FRANK BONETTO Frank Bonetto | Executive Vice President & Director | March 25, 2005 Date | ||||
/s/ FRANCOIS DAMBRINE Francois Dambrine | Director | March 25, 2005 Date | ||||
/s/ GéRARD DENOT Gérard Denot | Vice Chairman & Director | March 25, 2005 Date | ||||
/s/ W. ALLEN DOANE W. Allen Doane | Director | March 25, 2005 Date | ||||
/s/ WALTER A. DODS, JR. Walter A. Dods, Jr. | Chairman & Director | March 25, 2005 Date | ||||
/s/ JULIA ANN FROHLICH Julia Ann Frohlich | Director | March 25, 2005 Date | ||||
/s/ ROBERT A. FUHRMAN Robert A. Fuhrman | Director | March 25, 2005 Date | ||||
/s/ PAUL MULLIN GANLEY Paul Mullin Ganley | Director | March 25, 2005 Date | ||||
* David M. Haig | Director | March 25, 2005 Date | ||||
/s/ JOHN A. HOAG John A. Hoag | Director | March 25, 2005 Date | ||||
/s/ DONALD G. HORNER Donald G. Horner | Executive Vice President & Director | March 25, 2005 Date | ||||
/s/ BERT T. KOBAYASHI, JR. Bert T. Kobayashi, Jr. | Director | March 25, 2005 Date | ||||
/s/ MICHEL LARROUILH Michel Larrouilh | Director | March 25, 2005 Date | ||||
* Pierre Mariani | Director | March 25, 2005 Date | ||||
/s/ FUJIO MATSUDA Fujio Matsuda | Director | March 25, 2005 Date |
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/s/ DON J. McGRATH Don J. McGrath | President, Chief & Director | March Date | ||
/s/ RODNEY R. PECK Rodney R. Peck | Director | March Date |
86
Edouard A. Sautter | Director | March Date | ||
/s/ ERIC K. SHINSEKI Eric K. Shinseki | ||||
March Date | ||||
/s/ JOHN K. TSUI John K. Tsui | March Date | |||
/s/ JACQUES HENRI WAHL Jacques Henri Wahl | Director | March Date | ||
/s/ ROBERT C. WO Robert C. Wo | Director | March Date | ||
/s/ | Executive Vice President, | March Date |
87* Signature not available
111