UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended |
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission file number 0-7949
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:
None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or l5(d)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. Yes oNoo
Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes oNox
As of November 1, 2003April 30, 2004 the number of outstanding shares of each of the issuer’s classes of
common stock (all of which were beneficially owned by BNP Paribas) was:
| Class | Outstanding | |
| Class A Common Stock, $0.01 Par Value | 85,759,123 Shares |
BANCWEST CORPORATION AND SUBSIDIARIES
FORM 10-QSeptember 30, 2003March 31, 2004
INDEX
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| Financial Statements(Unaudited) | 2 | |||||||||||||
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | |||||||||||||
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| Quantitative and Qualitative Disclosures About Market Risk | 38 | |||||||||||||
| Controls and Procedures | 40 | |||||||||||||
| Exhibits and Reports on Form 8-K | ||||||||||||||
| 41 | ||||||||||||||
| 42 | ||||||||||||||
CERTIFICATIONS | 44 | |||||||||||||
| EXHIBIT 2 | ||||||||||||||
| EXHIBIT 31.1 | ||||||||||||||
| EXHIBIT 31.2 | ||||||||||||||
| EXHIBIT 32.1 | ||||||||||||||
EXHIBIT 32.2 | ||||||||||||||
Exhibit 2 Agreement and Plan of Merger dated as of March 15, 2004 among BancWest Corporation, BW Newco, Inc. and Community First
Bankshares, Inc.
Exhibit 12 Statement Regarding Computation of Ratios
Exhibit 31 Section 302 Certifications
Exhibit 32 Section 1350 Certifications
The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with BancWest Corporation’s 20022003 Annual Report on Form 10-K.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BancWest Corporation and Subsidiaries Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 (in thousands) Interest and fees on loans $ 343,610 $ 365,886 $ 1,021,733 $ 992,123 Lease financing income 32,809 34,894 102,151 107,860 Interest on investment securities: Taxable interest income 46,118 40,704 131,986 114,881 Exempt from Federal income taxes 153 126 490 360 Other interest income 1,580 2,938 4,750 6,298 Total interest income 424,270 444,548 1,261,110 1,221,522 Deposits 39,835 76,477 140,706 218,884 Short-term borrowings 9,230 10,430 16,464 26,486 Long-term debt 43,843 36,907 136,014 109,044 Total interest expense 92,908 123,814 293,184 354,414 Net interest income 331,362 320,734 967,926 867,108 Provision for credit losses 24,145 26,300 65,695 69,209 Net interest income after provision for credit losses 307,217 294,434 902,231 797,899 Service charges on deposit accounts 39,512 39,183 115,102 101,718 Trust and investment services income 9,461 9,883 28,826 28,275 Other service charges and fees 38,535 34,032 113,380 89,442 Securities gains, net 555 282 3,913 966 Other 11,563 8,259 33,813 22,291 Total noninterest income 99,626 91,639 295,034 242,692 Salaries and wages 86,269 89,486 252,908 236,043 Employee benefits 34,091 28,340 111,127 87,497 Occupancy expense 22,239 24,008 67,153 63,117 Outside services 18,002 17,472 53,843 48,532 Intangible amortization 5,763 5,763 17,290 14,283 Equipment expense 11,563 14,043 35,156 36,252 Restructuring and integration costs — 6,213 — 14,966 Other 45,036 39,039 135,935 111,592 Total noninterest expense 222,963 224,364 673,412 612,282 Income before income taxes and cumulative effect of accounting change 183,880 161,709 523,853 428,309 Provision for income taxes 69,268 64,651 199,498 169,256 Income before cumulative effect of accounting change 114,612 97,058 324,355 259,053 Cumulative effect of accounting change, net of tax 2,370 — 2,370 — $ 112,242 $ 97,058 $ 321,985 $ 259,053 Three Months Ended March 31, 2004 2003 (in thousands) Loans $ 332,576 $ 338,259 Lease financing 31,180 36,028 Investment securities: Taxable 51,871 41,506 Exempt from Federal income taxes 94 154 Other 1,431 1,529
Total interest income 417,152 417,476
Deposits 43,436 53,147 Short-term borrowings 5,413 3,696 Long-term debt 47,277 45,394
Total interest expense 96,126 102,237
Net interest income 321,026 315,239 Provision for loan and lease losses 18,865 22,690
Net interest income after provision for loan and lease losses 302,161 292,549
Service charges on deposit accounts 40,829 37,029 Trust and investment services income 10,302 9,507 Other service charges and fees 38,026 31,655 Securities gains, net 367 1,892 Other 11,914 14,751
Total noninterest income 101,438 94,834
Salaries and wages 83,455 84,662 Employee benefits 36,237 37,646 Occupancy 21,615 22,320 Outside services 18,261 17,567 Intangible amortization 5,763 5,763 Equipment 12,133 11,156 Other 41,418 41,546
Total noninterest expense 218,882 220,660
Income before income taxes 184,717 166,723 Provision for income taxes 71,665 64,642
$ 113,052 $ 102,081
The accompanying notes are an integral part of these consolidated financial statements.
2
BancWest Corporation and Subsidiaries September 30, December 31, September 30, 2003 2002 2002 (in thousands) Cash and due from banks $ 1,385,335 $ 1,761,261 $ 1,308,653 Interest-bearing deposits in other banks 369,217 2,098 272,082 Federal funds sold and securities purchased under agreements to resell 340,920 430,056 351,925 Trading assets 58,612 43,430 54,020 Available-for-sale investment securities 5,412,369 3,940,769 3,708,473 Loans held for sale 79,300 85,274 69,824 Loans and leases: Loans and leases 25,264,537 24,146,087 24,071,689 Less allowance for credit losses 390,194 384,081 385,190 Net loans and leases 24,874,343 23,762,006 23,686,499 Premises and equipment, net 537,171 380,272 394,800 Customers’ acceptance liability 38,790 25,945 28,200 Core deposit intangible, net 193,120 210,411 216,174 Goodwill 3,226,851 3,229,200 3,383,877 Other real estate owned and repossessed personal property 19,237 19,613 15,523 Other assets 890,237 858,932 766,450 $ 37,425,502 $ 34,749,267 $ 34,256,500 Deposits: Domestic: Interest-bearing $ 17,545,258 $ 16,720,767 $ 16,930,452 Noninterest-bearing 7,709,616 7,144,929 6,779,247 Foreign 665,728 691,783 647,163 Total deposits 25,920,602 24,557,479 24,356,862 Federal funds purchased and securities sold under agreements to repurchase 1,072,759 791,476 617,470 Short-term borrowings 930,000 733,274 1,549,713 Acceptances outstanding 38,790 25,945 28,200 Long-term debt 3,962,279 3,376,947 2,325,513 Guaranteed preferred beneficial interests in Company’s junior subordinated debentures 257,479 259,191 259,893 Other liabilities 1,086,071 1,137,473 1,187,070 $ 33,267,980 $ 30,881,785 $ 30,324,721 March 31, 2004 December 31, 2003 March 31, 2003 (Dollars in thousands, except per share data) Cash and due from banks $ 1,328,783 $ 1,538,004 $ 1,587,513 Interest-bearing deposits in other banks 309,198 189,687 166,680 Federal funds sold and securities purchased under agreements to resell 469,998 444,100 110,000 Trading assets 10,043 19,109 67,042 Investment securities available-for-sale 6,030,393 5,927,762 4,528,484 Loans held for sale 62,646 51,007 82,563 Loans and leases: Loans and leases 26,229,432 25,722,079 24,056,267 Less allowance for loan and lease losses 396,487 391,699 396,049
Net loans and leases 25,832,945 25,330,380 23,660,218
Premises and equipment, net 528,652 530,153 378,985 Operating lease equipment, net 43,515 — — Customers’ acceptance liability 21,001 30,078 29,728 Core deposit intangible, net 181,593 187,357 204,647 Goodwill 3,228,371 3,226,871 3,226,829 Other real estate owned and repossessed personal property 15,571 17,387 18,544 Other assets 851,384 860,320 854,856
$ 38,914,093 $ 38,352,215 $ 34,916,089
Deposits: Domestic: Interest-bearing $ 17,584,115 $ 17,738,246 $ 16,645,026 Noninterest-bearing 7,617,332 7,910,845 6,986,600 Foreign 1,541,750 754,026 706,967
Total deposits 26,743,197 26,403,117 24,338,593
Federal funds purchased and securities sold under agreements to repurchase 1,344,471 1,174,877 830,388 Short-term borrowings 970,000 1,197,809 949,012 Acceptances outstanding 21,001 30,078 29,728 Long-term debt 4,282,717 4,221,025 3,313,368 Guaranteed preferred beneficial interests in Company’s junior subordinated debentures — — 258,476 Other liabilities 1,154,885 1,062,437 1,227,705
$ 34,516,271 $ 34,089,343 $ 30,947,270
Commitments and contingent liabilities Stockholder’s equity: Class A common stock, par value $.01 per share Authorized - 150,000,000 shares Issued - 85,759,123 shares $ 858 $ 858 $ 858 Surplus 3,419,927 3,419,927 3,419,927 Retained earnings 919,250 806,198 471,715 Accumulated other comprehensive income, net 57,787 35,889 76,319
4,397,822 4,262,872 3,968,819
$ 38,914,093 $ 38,352,215 $ 34,916,089
The accompanying notes are an integral part of these consolidated financial statements.
3
BancWest Corporation and SubsidiariesBALANCE SHEETS, ContinuedSTATEMENTS OF CHANGES IN
STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME(Unaudited) September 30, December 31, September 30, 2003 2002 2002 (in thousands, except per share data) Commitments and contingent liabilities Stockholder’s equity: Class A common stock, par value $.01 per share at September 30, 2003, December 31, 2002 and September 30, 2002 Authorized – 150,000,000 shares at September 30, 2003, December 31, 2002 and September 30, 2002 Issued – 85,759,123 shares at September 30, 2003, December 31, 2002 and September 30, 2002 $ 858 $ 858 $ 858 Surplus 3,419,927 3,419,927 3,587,403 Retained earnings 691,619 369,634 267,355 Accumulated other comprehensive income, net 45,118 77,063 76,163 4,157,522 3,867,482 3,931,779 $ 37,425,502 $ 34,749,267 $ 34,256,500 Accumulated Class A Other Common Stock Retained Comprehensive Shares Amount Surplus Earnings Income, net Total (in thousands, except per share data) Balance, December 31, 2003 85,759,123 $ 858 $ 3,419,927 $ 806,198 $ 35,889 $ 4,262,872 Comprehensive income: Net income — — — 113,052 — 113,052 Unrealized net gains on securities available-for-sale arising during the period — — — — 24,752 24,752 Reclassification of net realized gains on securities available-for-sale included in net income — — — — (367 ) (367 ) Unrealized net gains on cash flow derivative hedges arising during the quarter — — — — 646 646 Reclassification of net realized gains on cash flow derivative hedges included in net income — — — — (3,133 ) (3,133 )
Comprehensive income — — — 113,052 21,898 134,950
85,759,123 $ 858 $ 3,419,927 $ 919,250 $ 57,787 $ 4,397,822
Balance, December 31, 2002 85,759,123 $ 858 $ 3,419,927 $ 369,634 $ 77,063 $ 3,867,482 Comprehensive income: Net income — — — 102,081 — 102,081 Unrealized net losses on securities available-for-sale arising during the period — — — — (197 ) (197 ) Reclassification of net realized gains on securities available-for-sale included in net income — — — — (1,892 ) (1,892 ) Unrealized net gains on cash flow derivative hedges arising during the quarter — — — — 3,517 3,517 Reclassification of net realized gains on cash flow derivative hedges included in net income — — — — (2,172 ) (2,172 )
Comprehensive income — — — 102,081 (744 ) 101,337
Balance, March 31, 2003 85,759,123 $ 858 $ 3,419,927 $ 471,715 $ 76,319 $ 3,968,819
The accompanying notes are an integral part of these consolidated financial statements.
4
BancWest Corporation and SubsidiariesCHANGES IN STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME CASH FLOWS(Unaudited) Accumulated Class A Other Common Stock Retained Comprehensive Shares Amount Surplus Earnings Income, net Total (in thousands, except share data) Balance, December 31, 2002 85,759,123 $ 858 $ 3,419,927 $ 369,634 $ 77,063 $ 3,867,482 Comprehensive income: Net income — — — 321,985 — 321,985 Net unrealized loss on investment securities available for sale, net of tax and reclassification adjustment — — — — (32,997 ) (32,997 ) Net unrealized loss on cash-flow derivative hedges, net of tax and reclassification adjustment — — — — 1,052 1,052 Comprehensive income — — — 321,985 (31,945 ) 290,040 Balance, September 30, 2003 85,759,123 $ 858 $ 3,419,927 $ 691,619 $ 45,118 $ 4,157,522 Balance, December 31, 2001 56,074,874 $ 561 $ 1,985,275 $ 8,302 $ 7,782 $ 2,001,920 Comprehensive income: Net income — — — 259,053 — 259,053 Net unrealized gain on investment securities available for sale, net of tax and reclassification adjustment — — — — 38,384 38,384 Net unrealized gain on cash-flow derivative hedges, net of tax and reclassification adjustment — — — — 29,997 29,997 Comprehensive income — — — 259,053 68,381 327,434 Issuance of Class A common stock 29,684,249 297 1,599,703 — — 1,600,000 Discounted Share Purchase Plan — — 2,425 — — 2,425 Balance, September 30, 2002 85,759,123 $ 858 $ 3,587,403 $ 267,355 $ 76,163 $ 3,931,779 Three Months Ended March 31, 2004 2003 (in thousands) Net income $ 113,052 $ 102,081 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,504 17,531 Deferred income taxes 1,205 63,437 Provision for loan and lease losses 18,865 22,690 Decrease (increase) in trading assets 9,066 (23,612 ) Decrease (increase) in loans held for sale (11,639 ) 2,711 Gains realized on the sale of investment securities (367 ) (1,892 ) Decrease (increase) in interest receivable 3,242 (5,686 ) Increase in interest payable 44,470 24,981 Decrease (increase) in prepaid expense (4,442 ) 5,125 Other 36,723 5,452
226,679 212,818
Proceeds from maturity of available-for-sale investment securities 453,616 465,100 Proceeds from the sale of available-for-sale securities 56,372 101,053 Purchase of available-for-sale investment securities (570,754 ) (1,154,535 ) Proceeds from sale of loans 83,026 227,045 Purchase of loans (439,608 ) (26,510 ) Net increase in loans and leases resulting from originations and collections (163,178 ) (118,592 ) Net increases in origination of vehicle operating leases (43,515 ) — Purchase of premises and equipment (5,463 ) (8,003 ) Other (1,618 ) 932
(631,122 ) (513,510 )
Net increase (decrease) in deposits 340,080 (218,886 ) Net increase (decrease) in Federal funds purchased and securities sold under agreements to repurchase 169,594 38,912 Net increase (decrease) in short-term borrowings (227,809 ) 215,738 Proceeds from long-term debt 200,000 75,000 Repayments on long-term debt (141,234 ) (139,294 )
340,631 (28,530 )
(63,812 ) (329,222 ) 2,171,791 2,193,415
$ 2,107,979 $ 1,864,193
Interest paid $ 51,656 $ 77,256
Income taxes paid $ 2,653 $ 1,205
Loans converted into other real estate owned and repossessed personal property $ 177 $ 1,036
Loans made to facilitate the sale of other real estate owned $ 33 $ 216
The accompanying notes are an integral part of these consolidated financial statements.
5
BancWest Corporation and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
| Nine Months Ended September 30, | ||||||||||
| 2003 | 2002 | |||||||||
| (in thousands) | ||||||||||
Cash flows from operating activities: | ||||||||||
| Net income | $ | 321,985 | $ | 259,053 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Cumulative effect of accounting change, net of tax | 2,370 | — | ||||||||
| Provision for credit losses | 65,695 | 69,209 | ||||||||
| Depreciation and amortization | 47,797 | 46,837 | ||||||||
| (Decrease) increase in deferred income taxes | (35,475 | ) | 156,843 | |||||||
| Decrease (increase) in interest receivable | 23,896 | (45,483 | ) | |||||||
| Increase in interest payable | 35,804 | 28,658 | ||||||||
| Increase in prepaid expenses | (4,979 | ) | (30,712 | ) | ||||||
| Increase in accrued restructuring and integration costs | — | 14,966 | ||||||||
| Increase in trading assets | (15,182 | ) | (54,020 | ) | ||||||
| Decrease (increase) in loans held for sale | 5,974 | (23,765 | ) | |||||||
| Securities gains, net | (3,913 | ) | (966 | ) | ||||||
| Other | (55,978 | ) | 31,353 | |||||||
Net cash provided by operating activities | 387,994 | 451,973 | ||||||||
Cash flows from investing activities: | ||||||||||
| Net increase in interest-bearing deposits in other banks | (367,119 | ) | (162,147 | ) | ||||||
| Net decrease (increase) in Federal funds sold and securities purchased under agreements to resell | 89,136 | (82,925 | ) | |||||||
| Proceeds from sale of available-for-sale investment securities | 416,667 | 167,079 | ||||||||
| Proceeds from the maturity of available-for-sale securities | 1,656,995 | 533,736 | ||||||||
| Purchase of available-for-sale investment securities | (3,596,807 | ) | (1,319,598 | ) | ||||||
| Net increase in loans and leases from originations and collections | (773,059 | ) | (593,200 | ) | ||||||
| Purchase of loans and leases | (1,086,957 | ) | (24,949 | ) | ||||||
| Proceeds from the sale of loans | 681,877 | 370,167 | ||||||||
| Net cash paid for acquisitions | — | (1,793,000 | ) | |||||||
| Purchase of premises and equipment | (25,895 | ) | (23,349 | ) | ||||||
| Other | 10,190 | (345 | ) | |||||||
Net cash used in investing activities | (2,994,972 | ) | (2,928,531 | ) | ||||||
Cash flows from financing activities: | ||||||||||
| Net increase in deposits | 1,363,123 | 674,764 | ||||||||
| Net increase (decrease) in Federal funds purchased and securities sold under agreements to repurchase | 281,283 | (404,914 | ) | |||||||
| Net increase in other short-term borrowings | 196,726 | 1,155,777 | ||||||||
| Proceeds from long-term debt | 565,000 | 440,000 | ||||||||
| Repayment of long-term and subordinated debt | (175,080 | ) | (417,678) | |||||||
| Proceeds from issuance of Class A common stock | — | 1,600,000 | ||||||||
Net cash provided by financing activities | 2,231,052 | 3,047,949 | ||||||||
Net (decrease) increase in cash and due from banks | (375,926 | ) | 571,391 | |||||||
Cash and due from banks at beginning of period | 1,761,261 | 737,262 | ||||||||
Cash and due from banks at end of period | $ | 1,385,335 | $ | 1,308,653 | ||||||
Supplemental disclosures: | ||||||||||
| Interest paid | $ | 257,380 | $ | 325,756 | ||||||
| Income taxes paid | $ | 156,928 | $ | 12,413 | ||||||
Supplemental schedule of noncash investing and financing activities: | ||||||||||
| Loans converted into other real estate owned and repossessed personal property | $ | 8,263 | $ | 13,131 | ||||||
| Loans made to facilitate the sale of other real estate owned | $ | 1,795 | $ | 7,765 | ||||||
| Total increase in assets from accounting change | $ | 159,910 | $ | — | ||||||
| Total increase in liabilities from accounting change | $ | 162,280 | $ | — | ||||||
In connection with acquisitions, the following liabilities were assumed: | ||||||||||
| Fair value of assets acquired | $ | — | $ | 10,959,000 | ||||||
| Cash paid | — | (1,793,000 | ) | |||||||
Liabilities assumed | $ | — | $ | 9,166,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
| 1. | Summary of Significant Accounting Policies |
DescriptionDescriptions of Operations
BancWest Corporation is a bankfinancial holding company through itsheadquartered in Honolulu, Hawaii and incorporated under the laws of the State of Delaware. Through our principal subsidiaries, operates a general commercial banking business and other businesses related to banking. Its principal assets are its investments in Bank of the West a State of California-chartered bank; and First Hawaiian a State of Hawaii-chartered bank. WeBank, we provide a wide range of general commercial and consumer banking services, providing retailengage in commercial, equipment and corporate banking,vehicle leasing and offer trust, investment and insurance services to individuals, institutions, businessesproducts. BancWest Corporation’s subsidiaries operate 357 branches in the states of California, Hawaii, Oregon, Washington, Idaho, New Mexico and governments.Nevada and in Guam and Saipan.
Basis of Presentation
We have prepared the accompanying financial data for the three and nine months ended September 30,March 31, 2004 and 2003 and 2002 pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our condensed consolidated financial position as of September 30, 2003,March 31, 2004, December 31, 20022003 and September 30, 2002,March 31, 2003, condensed consolidated results of operations for the three and nine months ended September 30,March 31, 2004 and 2003, and 2002, and cash flows activities for the ninethree months ended September 30, 2003March 31, 2004 and 2002.2003.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our condensed 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 current events and actions 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 involve difficult, subjective or complex judgments by management.
Descriptions of the significant accounting policies of BancWest Corporation and Subsidiaries (BancWest,subsidiaries (“BancWest,” the Company“Company” or we/our)“we/our”) are included in Note 1 (Summary of Significant Accounting Policies) to the audited consolidated financial statements included in the Company’s 20022003 Annual Report on Form 10-K. There have been no significant changes to these policies exceptpolicies.
Reclassifications
Certain amounts in the financial statements for prior periods have been reclassified to conform with the current financial statement presentation. Such reclassifications did not have a material effect on the Consolidated Financial Statements.
| 2. | Mergers and Acquisitions |
Community First Acquisition
On March 16, 2004, BancWest announced that it signed an agreement to acquire Community First Bankshares, Inc. (Community First), a holding company that operates Community First National Bank (CFB). It is anticipated that the purchase transaction will close in the third quarter of 2004, subject to approval from Community First shareholders and federal and state banking regulators. Subsequently, CFB will be merged with and into Bank of the West and its branches will be integrated into Bank of the West’s branch network system. The acquisition of Community First will add 10 new states to Bank of the West’s footprint, as well as to our market share in California and New Mexico. CFB operates 155 branches in 12 states in the Southwest, Rocky Mountains, Great Plains and east to Minnesota, Iowa and Wisconsin. CFB’s retail operations in growing states will complement the Bank’s existing network in California, Nevada, New Mexico and the Pacific Northwest. At March 31, 2004 CFB had total assets of $5.5 billion, total deposits of $4.4 billion and loans of $3.3 billion. Following the acquisition, results of operations of Community First will be included in our Consolidated Financial Statements. The purchase price of approximately $1.2 billion will be paid in cash and accounted for as a purchase.
6
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
| 3. | Derivative Financial Instruments |
Any portion of the 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 three months ended March 31, 2004 and 2003.
Fair Value Hedges
The Company has various derivative instruments that hedge the fair values of recognized assets or liabilities or of unrecognized firm commitments (“fair value” hedges). At March 31, 2004, the Company carried an interest rate swap of $2.7 million with a fair market value loss of $0.7 million that was categorized as a fair value hedge for a commercial loan. The Company receives 1-month LIBOR and pays a fixed rate of 8.32%. At March 31, 2003, the Company carried $2.8 million of such swaps with a fair market value loss of $0.8 million.
At November 20, 2002, BancWest Corporation executed a $150 million interest rate swap agreement with BNP Paribas to hedge the fair value of the 9.5% BancWest Capital I Quarterly Income Preferred Securities (the BWE Capital Securities) issued by BancWest Capital I. Following the adoption of FIN 46 (see Note 7), BancWest Capital I was deconsolidated, resulting in recognition of $150 million subordinated debt instead of the BWE Capital Securities. The terms of the subordinated debt mirror those of the BWE Capital Securities. Concurrent with the deconsolidation of BancWest Capital I, the Bank redesignated the interest rate swap to hedge the subordinated debt. The derivative instrument is highly 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 of the swap was $0.5 million and a gain of $1.2 million at March 31, 2004 and 2003, respectively.
In addition, at March 31, 2004, the Company carried interest rate swaps totaling $77.9 million with a market value loss of $6.7 million that were categorized as fair value hedges for commercial and commercial real estate loans. The Company receives 6-month LIBOR and pays fixed rates from 3.56% to 7.99%. At March 31, 2003, the Company carried $126.6 million of such swaps with a market value loss of $11.8 million.
At March 31, 2004, the Company carried interest rate swaps and swaptions totaling $8.6 million with a market value gain of $0.6 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 March 31, 2003, the Company carried $8.6 million of such swaps and swaptions with a market value gain of $0.8 million.
Cash Flow Hedges
At March 31, 2004, the Company carried interest rate swaps of $600 million with a fair market value gain of $48.3 million which are categorized as cash flow hedges, to hedge our LIBOR-based commercial loans. The hedges had a fair market value gain of $59.9 million at March 31, 2003. The interest rate swaps were entered into during 2001 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 has increased commercial loan interest income by $6.1 million from January 1, 2004 through March 31, 2004 and by $5.8 million from January 1, 2003 through March 31, 2003. The Company estimates net settlement gains, recorded as commercial loan interest income, of $23.5 million over the next twelve months resulting from these hedges.
At March 31, 2004, the Company carried interest rate swaps totaling $100 million with a fair market value gain of $1.3 million in 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. The swaps mature as follows: $70 million in 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 pre-tax income from these swaps for the one listed below.three months ended March 31, 2004 was a loss of $0.8 million. The Company estimates a net increase to interest expense of $3.1 million over the next twelve months resulting from these hedges.
7
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
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. 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 summarizes derivatives held by the Company as of March 31, 2004, December 31, 2003 and March 31, 2003:
| March 31, 2004 | December 31, 2003 | March 31, 2003 | ||||||||||||||||||||||||||||||||||
| Contractual Amounts Which | Credit | Credit | Credit | |||||||||||||||||||||||||||||||||
| Represent | Notional | Risk | Net Fair | Notional | Risk | Net Fair | Notional | Risk | Net Fair | |||||||||||||||||||||||||||
| Credit Risk: | Amount | Amount | Value | Amount | Amount | Value | Amount | Amount | Value | |||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Held for hedge purposes: | ||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 934,888 | $ | 51,183 | $ | 42,083 | $ | 944,110 | $ | 54,821 | $ | 44,885 | $ | 882,295 | $ | 61,569 | $ | 48,989 | ||||||||||||||||||
| Swaptions | 4,329 | 206 | 206 | 4,329 | 178 | 178 | 5,639 | 391 | 391 | |||||||||||||||||||||||||||
| Held for trading or free-standing: | ||||||||||||||||||||||||||||||||||||
| Interest rate swaps | 1,427,642 | 31,511 | 6,517 | 1,375,018 | 22,113 | 5,224 | 1,405,290 | 26,055 | 2,764 | |||||||||||||||||||||||||||
| Purchased interest rate options | 71,923 | 117 | 117 | 22,318 | 187 | 187 | 81,488 | 220 | 220 | |||||||||||||||||||||||||||
| Written interest rate options | 131,942 | — | (218 | ) | 62,946 | — | (187 | ) | 179,438 | 1,526 | 1,309 | |||||||||||||||||||||||||
| Forward interest rate options | 30,000 | 41 | 41 | 217,930 | 782 | 732 | 63,500 | — | (318 | ) | ||||||||||||||||||||||||||
| Commitments to purchase and sell foreign currencies | 523,037 | 6,691 | 476 | 421,130 | 8,592 | (48 | ) | 445,731 | 6,030 | (63 | ) | |||||||||||||||||||||||||
| Purchased foreign exchange options | 41,234 | 422 | 422 | 55,791 | 597 | 597 | 31,964 | 274 | 274 | |||||||||||||||||||||||||||
| Written foreign exchange options | 41,234 | — | (422 | ) | 55,791 | — | (597 | ) | 31,964 | — | (274 | ) | ||||||||||||||||||||||||
8
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
| 4. | Operating Segments |
Our reportable segments are the ones we use in our internal reporting at Bank of the West and First Hawaiian Bank. Bank of the West’s segments operate primarily in California, Oregon, Washington, Idaho, New Mexico and Nevada. As discussed below, certain Bank of the West segments conduct business nationwide. Although First Hawaiian Bank’s segments operate primarily in Hawaii, it also has significant operations outside the state, such as leveraged leases, international banking and branches in Guam and Saipan.
The results of each segment are determined by our management accounting process, which assigns balance sheet and income statement items to each reporting segment. The 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 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 is no 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, results for prior periods would be (and have been) reclassified for comparability. Results for 2003 have been reclassified to reflect changes in the transfer pricing methodology and noninterest income and expense allocation methodology applied in 2004.
Bank of the West
Bank of the West manages its operations through three business segments: Regional Banking, Commercial Banking and Consumer Finance.
Regional Banking
Regional Banking seeks to serve a broad customer base by furnishing 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 as its principal funding source. Bank of the West’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.
Through its branch network, this business segment originates a variety of consumer loans, including direct vehicle loans, lines of credit and second mortgages. In addition, Regional Banking originates and holds a portfolio of first mortgage loans on one- to four-family residences. Through its 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 in-branch 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 relevant 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, New Mexico.
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. The Commercial Banking Division focuses 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.
9
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
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, brokers across the nation and its subsidiary, Trinity Capital. Trinity specializes in nationwide vendor leasing and servicing programs for manufacturers in specific markets.
All areas within the Commercial Banking Segment focus on cross-sell opportunities. 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 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 Bank of the West’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. Essex has office locations throughout the United States.
First Hawaiian Bank
First Hawaiian manages its operations through the following business segments: Retail Banking, Consumer Finance, Commercial Banking and Financial Management.
Retail Banking
First Hawaiian Bank’s Retail Banking Segment operates through 56 banking offices located throughout Hawaii. First Hawaiian Bank also operates three branches in Guam and two branches in Saipan.
The focus of First Hawaiian Bank’s retail/community banking strategy is primarily in Hawaii, where it had a 40% market share of the domestic bank deposits of individuals, corporations and partnerships in the state as of December 31, 2003. Thanks to its significant market share in Hawaii, First Hawaiian Bank 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, First Hawaiian Bank seeks to serve a broad customer base by furnishing a range of retail and commercial banking products. Through its branch network, First Hawaiian Bank 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 Bank offers a wide range of banking products intended to serve the needs of smaller, community-based businesses. First Hawaiian Bank also provides a number of fee-based products and services such as annuities and mutual funds, insurance and securities brokerage. The First Investment Center department of First Hawaiian Bank makes available annuities, mutual funds and other securities through BancWest Investment Services, Inc., a registered broker-dealer, member NASD/SIPC. Both First Hawaiian Bank and BancWest Investment Services are affiliates under the common control of BancWest Corporation.
To complement its branch network and serve these customers, First Hawaiian Bank operates a system of automated teller machines, a 24-hour phone center in Honolulu and a full-service internet banking system.
Consumer Finance
Consumer Lending 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 Bank also provides indirect consumer automobile financing on new and used autos by purchasing finance contracts from dealers. First Hawaiian Bank’s Dealer Center is the largest commercial bank automobile lender in the State of Hawaii. First Hawaiian Bank is the largest issuer of MasterCard® credit cards and VISA® credit cards in Hawaii.
10
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
Real Estate Lending-Residential 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. First Hawaiian Bank also originates residential real estate loans for sale on the secondary market.
Commercial Banking
Commercial Lending is a major lender to small and medium-sized businesses in Hawaii and Guam. Lending services include receivable and inventory financing, term loans, for equipment acquisition and facilities expansion and trade financing letters of credit. To support the cash management needs of both commercial banking customers and large private and public deposit relationships maintained with the Company, First Hawaiian Bank 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. The Bank also does lease-to-fee conversion financing for condominium associations and cooperatives.
International Banking Services provides international banking products and services through First Hawaiian Bank’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. First Hawaiian Bank maintains a network of correspondent banking relationships throughout the world. First Hawaiian Bank’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.
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 March 31, 2004, the Trust and Investments Division had approximately 3,965 accounts with a market value of $8.8 billion. Of this total, $6.5 billion represented assets in nonmanaged accounts and $2.3 billion were managed assets.
Securities and Insurance Services, through a wholly-owned subsidiary of First Hawaiian Bank, First Hawaiian Insurance, Inc., provides insurance brokerage services for personal, business and estate insurance needs 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.
The Private Banking Department within First Hawaiian Bank’s Financial Management Segment provides a wide range of private banking service products to high-net-worth individuals.
11
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
The table below presents information about the Company’s operating segments as of or for the periods indicated. The “Other BancWest” category in the table below consists principally of BancWest Corporation (Parent Company), FHL Lease Holding Company, Inc. and BancWest Investment Services (“BWIS”). The reconciling items are principally consolidating entries to eliminate intercompany balances and transactions. The following table summarizes significant financial information, as of March 31, 2004 and 2003 for our reportable segments:
| Bank of the West | ||||||||||||||||
| Regional | Commercial | Consumer | ||||||||||||||
| (in millions) | Banking | Banking | Finance | Other(1) | ||||||||||||
Three Months Ended March 31, 2004: | ||||||||||||||||
| Net interest income | $ | 123.4 | $ | 77.5 | $ | 53.0 | $ | 20.7 | ||||||||
| Noninterest income | 43.0 | 14.0 | 2.7 | 5.2 | ||||||||||||
| Noninterest expense | 107.8 | 29.1 | 17.0 | 6.3 | ||||||||||||
| Provision for loan and lease losses | 0.5 | 0.4 | 14.9 | — | ||||||||||||
| Tax provision (benefit) | 22.9 | 24.4 | 9.4 | 7.7 | ||||||||||||
| Net income (loss) | $ | 35.2 | $ | 37.6 | $ | 14.4 | $ | 11.9 | ||||||||
| Segment assets at March 31 | $ | 7,841 | $ | 8,708 | $ | 8,213 | $ | 4,804 | ||||||||
| Segment goodwill at March 31 | 1,214 | 707 | 308 | — | ||||||||||||
| Average assets | $ | 7,822 | $ | 8,648 | $ | 8,110 | $ | 4,614 | ||||||||
| Average loans and leases | 5,795 | 7,327 | 7,760 | — | ||||||||||||
| Average deposits | 14,391 | 3,380 | 6 | 1,623 | ||||||||||||
Three Months Ended March 31, 2003: | ||||||||||||||||
| Net interest income | $ | 121.9 | $ | 80.7 | $ | 49.7 | $ | 12.7 | ||||||||
| Noninterest income | 38.7 | 11.3 | 2.7 | 5.5 | ||||||||||||
| Noninterest expense | 105.9 | 30.0 | 15.3 | 7.3 | ||||||||||||
| Provision for loan and lease losses | 3.6 | 0.3 | 12.8 | — | ||||||||||||
| Tax provision (benefit) | 20.3 | 24.5 | 9.7 | 4.3 | ||||||||||||
| Net income (loss) | $ | 30.8 | $ | 37.2 | $ | 14.6 | $ | 6.6 | ||||||||
| Segment assets at March 31 | $ | 7,176 | $ | 8,201 | $ | 7,179 | $ | 3,741 | ||||||||
| Segment goodwill at March 31 | 1,214 | 706 | 308 | — | ||||||||||||
| Average assets | $ | 7,325 | $ | 8,249 | $ | 7,097 | $ | 3,123 | ||||||||
| Average loans and leases | 5,295 | 6,923 | 6,753 | — | ||||||||||||
| Average deposits | 13,533 | 2,918 | 14 | 1,071 | ||||||||||||
[Continued from above table, first column(s) repeated]
| First Hawaiian Bank | ||||||||||||||||||||||||||||||||
| Retail | Consumer | Commercial | Financial | Other | Reconciling | Consolidated | ||||||||||||||||||||||||||
| (in millions) | Banking | Finance | Banking | Management | Other(2) | BancWest(3) | Items(4) | Totals | ||||||||||||||||||||||||
Three Months Ended March 31, 2004: | ||||||||||||||||||||||||||||||||
| Net interest income | $ | 56.3 | $ | 20.7 | $ | 8.6 | $ | — | $ | (4.3 | ) | $ | (34.9 | ) | $ | — | $ | 321.0 | ||||||||||||||
| Noninterest income | 17.7 | 7.9 | 1.9 | 7.7 | 0.9 | 0.5 | — | 101.5 | ||||||||||||||||||||||||
| Noninterest expense | 44.9 | 11.4 | 2.0 | 6.5 | (8.1 | ) | 2.0 | — | 218.9 | |||||||||||||||||||||||
| Provision for loan and lease losses | 1.1 | 1.7 | 0.1 | — | 0.1 | — | — | 18.8 | ||||||||||||||||||||||||
| Tax provision (benefit) | 11.3 | 6.2 | 2.4 | 0.5 | 1.8 | (14.9 | ) | — | 71.7 | |||||||||||||||||||||||
| Net income (loss) | $ | 16.7 | $ | 9.3 | $ | 6.0 | $ | 0.7 | $ | 2.8 | $ | (21.5 | ) | $ | — | $ | 113.1 | |||||||||||||||
| Segment assets at March 31 | $ | 3,620 | $ | 1,512 | $ | 1,081 | $ | 24 | $ | 3,619 | $ | 7,083 | $ | (7,591 | ) | $ | 38,914 | |||||||||||||||
| Segment goodwill at March 31 | 650 | 216 | 118 | 10 | — | 5 | — | 3,228 | ||||||||||||||||||||||||
| Average assets | $ | 3,581 | $ | 1,471 | $ | 1,114 | $ | 24 | $ | 3,419 | $ | 7,019 | $ | (7,486 | ) | $ | 38,336 | |||||||||||||||
| Average loans and leases | 2,582 | 1,279 | 974 | 9 | 204 | 49 | (37 | ) | 25,942 | |||||||||||||||||||||||
| Average deposits | 6,838 | 7 | 19 | 30 | 200 | — | (62 | ) | 26,432 | |||||||||||||||||||||||
Three Months Ended March 31, 2003: | ||||||||||||||||||||||||||||||||
| Net interest income | $ | 57.2 | $ | 18.5 | $ | 8.3 | $ | 0.1 | $ | (0.7 | ) | $ | (34.3 | ) | $ | 1.2 | $ | 315.3 | ||||||||||||||
| Noninterest income | 17.3 | 10.1 | 1.6 | 7.4 | 1.4 | — | (1.2 | ) | 94.8 | |||||||||||||||||||||||
| Noninterest expense | 43.6 | 11.3 | 2.2 | 6.3 | (2.5 | ) | 1.3 | — | 220.7 | |||||||||||||||||||||||
| Provision for loan and lease losses | 1.4 | 1.9 | (0.1 | ) | — | 0.8 | 2.0 | — | 22.7 | |||||||||||||||||||||||
| Tax provision (benefit) | 11.2 | 5.8 | 2.3 | 0.5 | 1.4 | (15.4 | ) | — | 64.6 | |||||||||||||||||||||||
| Net income (loss) | $ | 18.3 | $ | 9.6 | $ | 5.5 | $ | 0.7 | $ | 1.0 | $ | (22.2 | ) | $ | — | $ | 102.1 | |||||||||||||||
| Segment assets at March 31 | $ | 3,287 | $ | 1,472 | $ | 1,198 | $ | 14 | $ | 3,320 | $ | 7,603 | $ | (8,275 | ) | $ | 34,916 | |||||||||||||||
| Segment goodwill at March 31 | 650 | 216 | 118 | 10 | — | 5 | — | 3,227 | ||||||||||||||||||||||||
| Average assets | $ | 3,265 | $ | 1,428 | $ | 1,182 | $ | 14 | $ | 3,269 | $ | 6,516 | $ | (7,051 | ) | $ | 34,417 | |||||||||||||||
| Average loans and leases | 2,420 | 1,227 | 1,043 | 1 | 353 | 2 | 29 | 24,046 | ||||||||||||||||||||||||
| Average deposits | 6,392 | 10 | 21 | 51 | 155 | — | (19 | ) | 24,146 | |||||||||||||||||||||||
| (1) | The material net interest income and noninterest income items in the Other column are related to Treasury activities of $24.6 million and unallocated other income of $1.3 million for March 31, 2004. The material net interest income and noninterest income items in the Other column resulted substantially from Treasury activities of $13.2 million and unallocated other income of $5.0 million for March 31, 2003. | |
| The material noninterest expense items in the Other column is substantially derived from Treasury activities of $4.2 million and unallocated administrative items of $2.1 million for March 31, 2004. The material noninterest expense items in the Other column primarily resulted from Treasury activities and unallocated administrative items of $7.3 million for March 31, 2003. | ||
| 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. | ||
| (2) | Other is composed of Administrative and Syndicated and Media Lending. Administrative represents administrative support areas including Information Management and Operations and Finance and Investment. | |
| The material items in the Other column related to net interest income and noninterest expense in March 31, 2004 and 2003 include unallocated other and Treasury activities. | ||
| The material items in the Other column related to average assets are unallocated Treasury securities for the periods presented. The material items in the Other column related to average deposits are unallocated balances for the periods presented. | ||
| (3) | The Other BancWest category consists primarily of BancWest Corporation (Parent Company), FHL Lease Holding Company, Inc. and BancWest Investment Services (BWIS). | |
| (4) | The reconciling items in the above table are principally intercompany eliminations. |
12
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
| 5. | Operating Lease Assets |
Prior to February 2004, leases of vehicles to customers were treated as finance leases, as they qualified for such treatment under Statement of Financial Accounting PrinciplesStandards (SFAS) No. 13,Accounting for Leases. Beginning in February 2004, our automobile leases are treated as operating leases, as we no longer obtain residual insurance on an individual lease basis.
Consolidation 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 leased assets exceeds 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. 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 March 31, 2004: Rental Income (in thousands) 2004 $ 10,077 2005 14,125 2006 13,909 2007 9,269 2008 8,203 2009 and thereafter 15,928
Total minimum payments $ 71,511
| 6. | Goodwill and Intangible Assets |
We performed the impairment testing of goodwill required under SFAS No. 142 in the fourth quarter of 2003. No impairment of goodwill was found. The impairment analysis was performed using a discounted cash flows model. The table below provides the breakdown of goodwill by reportable segment and the change during the year.
| Bank of the West | First Hawaiian Bank | |||||||||||||||||||||||||||||||||||
| Regional | Commercial | Consumer | Retail | Consumer | Commercial | Financial | Consolidated | |||||||||||||||||||||||||||||
| (in millions) | Banking | Banking | Finance | Banking | Finance | Banking | Management | BancWest | Totals | |||||||||||||||||||||||||||
| Balance as of January 1, 2004: | $ | 1,214 | $ | 706 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 10 | $ | 5 | $ | 3,227 | ||||||||||||||||||
| Purchase accounting adjustment: | ||||||||||||||||||||||||||||||||||||
| Trinity Capital | — | 1 | — | — | — | — | — | — | 1 | |||||||||||||||||||||||||||
Balance as of March 31, 2004: | $ | 1,214 | $ | 707 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 10 | $ | 5 | $ | 3,228 | ||||||||||||||||||
Amortization of intangible assets was $5.8 million for each of the three-month periods ended March 31, 2004 and 2003. The estimated annual amortization expense for finite-lived intangible assets, primarily core deposit intangibles arising from previous mergers, is approximately $23 million (pre-tax) for each of the years from 2004 to 2008.
Our finite-lived intangible assets substantially consist of core deposit tangible assets. The gross carrying amount, accumulated amortization and net book value of these intangible assets are detailed below.
| March 31, 2004 | December 31, 2003 | March 31,2003 | ||||||||||
| (in thousands) | ||||||||||||
| Gross carrying amount | $ | 230,538 | $ | 230,538 | $ | 230,538 | ||||||
| Accumulated amortization | 48,945 | 43,181 | 25,891 | |||||||||
| Net book value | $ | 181,593 | $ | 187,357 | $ | 204,647 | ||||||
13
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
| 7. | Financial Interpretation No. 46: Consolidation of Variable Interest Entities |
In January 2003, the FASB issued Financial Accounting Standards Board (FASB) issued Interpretation No. (FIN) 46,Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51. FIN 46 established new guidance on the accounting and reporting for the consolidation of variable interest entities (VIEs). In December 2003, the FASB issued Financial Interpretation No. (FIN) 46 (Revised December 2003),Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51 (FIN 46R).The application of FIN 46R replaces FIN 46 and applies to companies who have not adopted FIN 46 with VIEs for financial statement periods ending after December 15, 2003. The principal objective of FIN 46 is to require the primary beneficiary of a VIE to consolidate the VIE’s assets, liabilities and results of operations in the primary beneficiary’s own financial statements. The Company adopted the consolidation provisions of FIN 46 on July 1, 2003 consolidating one VIE formed prior to February 1, 2003. However in December 2003, our relationship with this VIE changed and it is no longer being consolidated. In the fourth quarter of 2003, BancWest also ceased consolidating two trusts, which were included in the consolidated financial statements presented prior to October 1, 2003.
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, these trusts have been consolidated and the related trust preferred securities have been treated as Tier 1 capital under Federal Reserve rules and regulations. The Company began deconsolidating the Trusts as a result of the adoption of FIN 46 in the preparation of its financial statements on October 1, 2003.
BWE 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 of BWE Trust, for 9.5% junior subordinated deferrable interest debentures of the Corporation. The Corporation sold the $150 million of BWE Capital Securities to the public. At March 31, 2004, the BWE Trust’s total assets were $155.9 million, comprised primarily of the Corporation’s junior subordinated debentures. 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. They are solely, fully and unconditionally guaranteed by the Corporation, representing the Company’s maximum liability for the securities.
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 the Corporation. 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 March 31, 2004, the FH Trust’s total assets were $105.2 million, comprised primarily of the Corporation’s junior subordinated debentures. The debentures and the associated interest expense make up the Company’s maximum exposure to losses for this trust.
As of October 2003, effective with the adoption of Financial Interpretation No. 46,Consolidation of Variable Interest Entities (FIN(FIN 46). FIN 46 provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests and results of operations of a variable interest entity should be consolidated. The recognition and measurement provisions of FIN 46 apply at inception to any variable interest entity formed after January 31, 2003, and becomes effective for existing variable interest entities on the first interim or annual reporting period ending after December 15, 2003. The Company adopted the consolidation provisions of FIN 46 in the third quarter for one variable interest entity formed prior to February 1, 2003, REFIRST, Inc. Please refer to Note 6 Financial Interpretation No. 46: Consolidation of Variable Interest Entities for details.
Reclassifications
Amounts in the condensed consolidated financial statements for the periods ended September 30, 2002 and December 31, 2002 have been reclassified to conform to the current period’s presentation.
United California Bank Acquisition
7
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
On March 15, 2002, BancWest completed its acquisition of all outstanding common stock of United California Bank (UCB) from UFJ Bank Ltd. of Japan (UFJ). UCB was subsequently merged with and into Bank of the West in April 2002 and its branches were integrated into the Company’s branch network system in the third quarter of 2002. On 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 $8.2 billion. The preceding amounts do not include purchase price adjustments. UCB’s strong presence in Southern California complements BancWest’s existing network in Northern California, Nevada, New Mexico and the Pacific Northwest. 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 and lending the Company $800 million.
The following table provides an allocation of the purchase price:
| (in thousands) | |||||
| Total purchase price of UCB, including transaction costs | $ | 2,406,268 | |||
| Equity of UCB prior to acquisition by BancWest | 1,083,000 | ||||
| Excess of pushed down equity over the carrying value of net assets acquired | 1,323,268 | ||||
| Purchase accounting adjustments related to assets and liabilities acquired: | |||||
| Sublease loss reserve | 25,645 | ||||
| Premises and equipment | 7,645 | ||||
| Severance and employee relocation | 44,513 | ||||
| Contract cancellations | 12,862 | ||||
| New core deposit intangible | (120,219 | ) | |||
| Other assets | 3,354 | ||||
| Deposits | 8,047 | ||||
| Deferred cost on pension and retirement benefits | 49,349 | ||||
| Other liabilities and taxes | (28,062 | ) | |||
| Goodwill resulting from acquisition of and merger with UCB | $ | 1,326,402 | |||
BancWest incurred expenses associated with exiting certain branches, operational centers and technology platforms of the pre-merged Bank of the West, as well as certain other conversion and restructuring expenses, totaling approximately $18 million. Exit costs associated with UCB were considered as part of the purchase accounting for the acquisition. BancWest established a severance reserve of approximately $40.5 million. Approximately 750 employees throughout the combined organization have been or will be displaced in conjunction with the acquisition. This initiative is substantially complete. In addition to the severance reserve, we recorded the following accruals: $34.5 million for losses on subleases, $8.0 million for contract cancellations, $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. In addition, since the date of acquisition, the reserves were decreased as follows: $41.6 million for severance payments, $10.1 million for sublease loss amortization, $9.3 million for contract cancellation payments and $1.1 million for relocation and other payments.
The following unaudited pro forma financial information for the nine months ended September 30, 2002, assumes that the UCB acquisition occurred as of January 1, 2002, 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 UCB acquisition been consummated as of January 1, 2002:
| Pro Forma Financial Information for the nine month period | ||||
| Ended September 30, 2002 | ||||
| (in thousands) | ||||
| Net Interest Income | $ | 954,325 | ||
| Provision for Credit Losses | 85,628 | |||
| Noninterest Income | 262,618 | |||
| Noninterest Expense | 674,220 | |||
| Income Tax Expense | 178,990 | |||
| Net Income | $ | 278,105 | ||
8
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
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 its 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 credit 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.
Any portion of the 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 three and nine months ended September 30, 2003.
Fair Value Hedges
The Company has various derivative instruments that hedge the fair values of recognized assets or liabilities or of unrecognized firm commitments (fair value hedges). At September 30, 2003, the Company carried an interest rate swap of $2.7 million with a fair market value loss of $0.7 million that was categorized as a fair value hedge for a commercial loan. The Company receives 1-month LIBOR and pays a fixed rate of 8.32%.
At September 30, 2003, we carried a $150 million interest rate swap with BNP Paribas to hedge obligations under the 9.5% BancWest Capital I Quarterly Income Preferred Securities. We pay 3-month LIBOR plus 3.69% and receive fixed payments at 9.5%. The fair market value gain of the swap at September 30, 2003 was $0.5 million.
Cash Flow Hedges
At September 30, 2003, the Company carried interest rate swaps of $600 million with a fair market value gain of $55.3 million which were categorized as cash flow hedges, to hedge our LIBOR-based commercial loans. 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 has increased commercial loan interest income by $17.9 million from January 1, 2003 through September 30, 2003. The Company estimates net settlement gains, recorded as commercial loan interest income, of $24.6 million over the next twelve months resulting from these hedges.
During 2003, the Company entered into interest rate swaps totaling $75 million with a fair value gain of $2.7 million in 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. The swaps mature as follows: $45 million in 2013, $20 million in 2018 and $10 million in 2023. We pay fixed rates ranging from 3.64% to 4.58% and receive 3-month LIBOR. The effect on net income from these swaps year-to-date 2003 was $0.4 million. The Company estimates a net increase to interest expense of $2.1 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. 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 summarizes derivatives held by the Company as of September 30, 2003 and 2002:
9
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
| 2003 | 2002 | |||||||||||||||||||||||
| Contractual Amounts Which | Credit | Credit | ||||||||||||||||||||||
| Represent | Notional | Risk | Net Fair | Notional | Risk | Net Fair | ||||||||||||||||||
| Credit Risk: | Amount | Amount | Value | Amount | Amount | Value | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Held for hedge purposes: | ||||||||||||||||||||||||
| Interest rate swaps | $ | 827,747 | $ | 58,494 | $ | 57,754 | $ | 603,715 | $ | 61,200 | $ | 60,311 | ||||||||||||
| Held for trading or free-standing: | ||||||||||||||||||||||||
| Interest rate swaps | 1,527,965 | 27,900 | (3,324 | ) | 1,406,334 | 36,560 | (9,023 | ) | ||||||||||||||||
| Purchased interest rate options | 34,213 | 468 | 468 | 70,266 | 1,135 | 1,135 | ||||||||||||||||||
| Written interest rate options | 50,917 | — | (285 | ) | 63,401 | — | (588 | ) | ||||||||||||||||
| Forward interest rate options | 43,000 | 11 | 11 | 21,000 | 73 | 73 | ||||||||||||||||||
| Rate locks | 66,400 | 1,111 | 1,111 | — | — | — | ||||||||||||||||||
| Commitments to purchase and sell foreign currencies | 458,570 | 9,400 | 222 | 400,607 | 2,860 | 76 | ||||||||||||||||||
| Purchased foreign exchange options | 43,187 | 533 | 533 | 11,984 | 143 | 143 | ||||||||||||||||||
| Written foreign exchange options | 43,187 | — | (533 | ) | 11,984 | — | (143 | ) | ||||||||||||||||
Our reportable segments are the ones we use in our internal reporting at Bank of the West and First Hawaiian Bank (First Hawaiian). Bank of the West’s segments operate primarily in California, Oregon, Washington, Idaho, New Mexico and Nevada. As discussed below, certain Bank of the West segments conduct business nationwide. Although First Hawaiian’s segments operate primarily in Hawaii, First Hawaiian also has significant operations outside the state, such as leveraged leases, international banking and branches in Guam and Saipan.
The results of each segment are determined by our management accounting process, which assigns balance sheet and income statement items to each reporting segment. The net interest income of each segment includes the results of the Bank’s transfer pricing process, which assesses an internal funds charge on all segment assets and 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 is no comprehensive or authoritative guidance which can be followed.
Bank of the West
Bank of the West manages its operations through three business segments: Regional Banking, Commercial Banking and Consumer Finance.
Regional Banking:
Regional Banking seeks to serve a broad customer base by furnishing 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 as its principal funding source. Bank of the West’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.
Through its branch network, this business segment originates a variety of consumer loans, including direct vehicle loans, lines of credit and second mortgages. In addition, Regional Banking originates and holds a portfolio of first mortgage loans on one- to four-family residences. Through its 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 in-branch originations of standardized loan and deposit 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. Regional Banking also provides a number of fee-based products and services such as annuities, insurance and securities brokerage.
The Regional Banking Segment includes a Business Banking Division which supports commercial lending activities for middle market business customers through Business Banking centers located throughout California, as well as Portland, Oregon, Reno and Las Vegas, Nevada and Albuquerque, New Mexico. 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:
10
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
The Commercial Banking Segment supports business clients with revenues between $25 million and $350 million. This segment’s clients include those engaged in agribusiness, real estate industries, as well as, churches, Small Business Administration (SBA) and equipment leasing clients. Equipment leasing is available through the Bank’s commercial offices, branches, brokers across the nation and its subsidiary, Trinity Capital. Trinity specializes in nationwide vendor leasing and servicing programs for manufacturers in specific markets.
Services offered include cash management, trade finance, correspondent banking services and syndication of commercial credits exceeding $30 million.
Consumer Finance:
The Consumer Finance Segment targets the origination 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. 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 Bank of the West’s wholly-owned subsidiary, Essex Credit Corporation, which focuses on the origination of marine and recreational vehicle loans directly with customers. Essex has office locations throughout the United States and sells substantially all of its loans to investors.
First Hawaiian Bank
First Hawaiian manages its operations through the following business segments: Retail Banking, Consumer Banking, Commercial Banking and Financial Management.
Retail Banking:
First Hawaiian’s Retail Banking Segment operates its main banking office in Honolulu, Hawaii, and 55 other banking offices located throughout Hawaii. First Hawaiian also operates three branches in Guam and two branches in Saipan.
The focus of First Hawaiian’s retail/community banking strategy is primarily in Hawaii, where it has a 40% market share of the domestic bank deposits of individuals, corporations and partnerships in the state as of September 30, 2003. 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.
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.
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.
Consumer Banking:
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 one of the largest commercial bank automobile lenders in the State of Hawaii. First Hawaiian is the largest issuer of MasterCard® credit cards and VISA® credit cards in Hawaii.
Real Estate Lending-Residential: First Hawaiian 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. First Hawaiian also originates residential real estate loans for sale on the secondary market.
11
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
Commercial Banking:
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. 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.
Real Estate Lending-Commercial: First Hawaiian provides permanent financing for a variety of commercial developments, such as retail facilities, warehouses and office buildings.
International Banking Services: First Hawaiian provides international banking products and services through First Hawaiian’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. First Hawaiian maintains a network of correspondent banking relationships throughout the world. First Hawaiian’s trade-related international banking activities are concentrated in the Asia-Pacific area.
Financial Management:
Trust and Investment Services: First Hawaiian’s 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 September 30, 2003, the Trust and Investments Division had approximately 4,000 accounts with a market value of $8.2 billion. Of this total, $5.9 billion represented assets in nonmanaged accounts and $2.3 billion were managed assets.
Securities and Insurance Services: First Hawaiian, through a wholly-owned subsidiary, First Hawaiian Insurance, Inc., provides insurance brokerage services for personal, business or 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.
Private Banking Services: The Private Banking Department within First Hawaiian’s Financial Management Segment provides a wide range of products to high-net-worth individuals.
12
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
The tables below present information about the Company’s operating segments as of or for the periods indicated:
| Bank of the West | First Hawaiian Bank | |||||||||||||||||||||||||||||||||||
| Regional | Commercial | Consumer | Retail | Consumer | Commercial | Financial | ||||||||||||||||||||||||||||||
| (in millions) | Banking | Banking | Finance | Other(1) | Banking | Banking | Banking | Management | Other(2) | |||||||||||||||||||||||||||
| Three Months Ended September 30, 2003: | ||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 127.7 | $ | 78.5 | $ | 53.0 | $ | 20.1 | $ | 68.2 | $ | 22.5 | $ | 7.9 | $ | — | $ | (11.5 | ) | |||||||||||||||||
| Noninterest income | 42.7 | 13.0 | 2.9 | 5.1 | 17.9 | 5.4 | 3.1 | 7.9 | 1.7 | |||||||||||||||||||||||||||
| Noninterest expense | 107.9 | 28.2 | 15.0 | 6.0 | 45.9 | 11.7 | 2.0 | 6.0 | (2.3 | ) | ||||||||||||||||||||||||||
| Provision for credit losses | 4.3 | 2.2 | 13.6 | — | 1.3 | 2.4 | 0.1 | — | 0.2 | |||||||||||||||||||||||||||
| Tax provision (benefit) | 23.0 | 24.1 | 10.8 | 6.3 | 14.2 | 5.0 | 2.2 | 0.8 | (1.8 | ) | ||||||||||||||||||||||||||
| Income before cumulative effect of accounting change | 35.2 | 37.0 | 16.5 | 12.9 | 24.7 | 8.8 | 6.7 | 1.1 | (5.9 | ) | ||||||||||||||||||||||||||
| Cumulative effect of accounting change, net of tax | — | — | — | — | — | — | — | — | (2.4 | ) | ||||||||||||||||||||||||||
| Net income (loss) | $ | 35.2 | $ | 37.0 | $ | 16.5 | $ | 12.9 | $ | 24.7 | $ | 8.8 | $ | 6.7 | $ | 1.1 | $ | (8.3 | ) | |||||||||||||||||
| Segment assets at September 30 | $ | 7,635 | $ | 8,469 | $ | 7,842 | $ | 4,446 | $ | 3,470 | $ | 1,354 | $ | 989 | $ | 19 | $ | 3,862 | ||||||||||||||||||
| Segment goodwill at September 30 | 1,214 | 706 | 308 | — | 650 | 216 | 118 | 10 | — | |||||||||||||||||||||||||||
| Average assets | $ | 7,720 | $ | 8,356 | $ | 7,777 | $ | 4,070 | $ | 3,472 | $ | 1,379 | $ | 1,036 | $ | 18 | $ | 3,650 | ||||||||||||||||||
| Average loans | 5,698 | 7,070 | 7,460 | — | 2,472 | 1,183 | 895 | 3 | 407 | |||||||||||||||||||||||||||
| Average deposits | 13,834 | 2,926 | 12 | 1,819 | 6,621 | 11 | 27 | 56 | 173 | |||||||||||||||||||||||||||
| Three Months Ended September 30, 2002: | ||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 135.4 | $ | 73.5 | $ | 47.7 | $ | 14.7 | $ | 64.1 | $ | 18.0 | $ | 7.0 | $ | 0.1 | $ | (7.8 | ) | |||||||||||||||||
| Noninterest income | 40.7 | 8.6 | 2.8 | 7.5 | 15.7 | 7.8 | 1.7 | 7.2 | (0.3 | ) | ||||||||||||||||||||||||||
| Noninterest expense | 109.4 | 27.8 | 13.5 | 14.8 | 43.6 | 10.4 | 1.9 | 5.8 | (3.9 | ) | ||||||||||||||||||||||||||
| Provision for credit losses | 6.8 | 1.9 | 12.9 | — | 2.1 | 2.5 | 0.3 | — | (0.2 | ) | ||||||||||||||||||||||||||
| Tax provision (benefit) | 24.8 | 21.6 | 10.0 | 2.3 | 13.0 | 4.8 | 2.0 | 0.6 | (1.0 | ) | ||||||||||||||||||||||||||
| Net income (loss) | $ | 35.1 | $ | 30.8 | $ | 14.1 | $ | 5.1 | $ | 21.1 | $ | 8.1 | $ | 4.5 | $ | 0.9 | $ | (3.0 | ) | |||||||||||||||||
| Segment assets at September 30 | $ | 7,597 | $ | 7,821 | $ | 6,869 | $ | 3,477 | $ | 3,199 | $ | 1,315 | $ | 1,098 | $ | 13 | $ | 3,309 | ||||||||||||||||||
| Segment goodwill at September 30 | 1,208 | 703 | 306 | — | 650 | 216 | 118 | 10 | — | |||||||||||||||||||||||||||
| Average assets | $ | 7,915 | $ | 7,963 | $ | 6,804 | $ | 2,867 | $ | 3,206 | $ | 1,300 | $ | 1,083 | $ | 13 | $ | 3,201 | ||||||||||||||||||
| Average loans | 5,907 | 6,767 | 6,447 | — | 2,355 | 1,093 | 944 | — | 533 | |||||||||||||||||||||||||||
| Average deposits | 13,652 | 2,434 | — | 1,685 | 6,131 | 9 | 19 | 32 | 169 | |||||||||||||||||||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated] Other Reconciling Consolidated (in millions) BancWest(3) Items(4) Totals Three Months Ended September 30, 2003: Net interest income $ (35.0 ) $ — $ 331.4 Noninterest income (0.2 ) 0.1 99.6 Noninterest expense 2.3 0.3 223.0 Provision for credit losses — — 24.1 Tax provision (benefit) (15.4 ) 0.1 69.3 Income before cumulative effect of accounting change (22.1 ) (0.3 ) 114.6 Cumulative effect of accounting change, net of tax — — (2.4 ) Net income (loss) $ (22.1 ) $ (0.3 ) $ 112.2 Segment assets at September 30 $ 6,947 $ (7,607 ) $ 37,426 Segment goodwill at September 30 5 — 3,227 Average assets $ 6,877 $ (7,557 ) $ 36,798 Average loans 55 (44 ) 25,199 Average deposits — (57 ) 25,422 Three Months Ended September 30, 2002: Net interest income $ (31.8 ) $ (0.2 ) $ 320.7 Noninterest income (0.1 ) — 91.6 Noninterest expense 1.2 (0.2 ) 224.3 Provision for credit losses — — 26.3 Tax provision (benefit) (13.4 ) (0.1 ) 64.6 Net income (loss) $ (19.7 ) $ 0.1 $ 97.1 Segment assets at September 30 $ 7,572 $ (8,013 ) $ 34,257 Segment goodwill at September 30 173 — 3,384 Average assets $ 7,466 $ (7,881 ) $ 33,937 Average loans 22 — 24,068 Average deposits (36 ) — 24,095
13
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
| Bank of the West | First Hawaiian Bank | ||||||||||||||||||||||||||||||||||||||||||||||||
| Regional | Commercial | Consumer | Retail | Consumer | Commercial | Financial | Other | Reconciling | Consolidated | ||||||||||||||||||||||||||||||||||||||||
| (in millions) | Banking | Banking | Finance | Other(1) | Banking | Banking | Banking | Management | Other(2) | BancWest(3) | Items(4) | Totals | |||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2003: | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 370.3 | $ | 234.4 | $ | 153.4 | $ | 55.5 | $ | 199.4 | $ | 63.8 | $ | 23.3 | $ | 0.2 | $ | (28.7 | ) | $ | (103.8 | ) | $ | 0.1 | $ | 967.9 | |||||||||||||||||||||||
| Noninterest income | 123.0 | 38.4 | 9.1 | 15.7 | 51.7 | 22.8 | 6.3 | 22.7 | 5.5 | (0.2 | ) | — | 295.0 | ||||||||||||||||||||||||||||||||||||
| Noninterest expense | 323.9 | 88.1 | 46.0 | 18.7 | 134.7 | 34.5 | 6.4 | 19.2 | (8.1 | ) | 9.8 | 0.2 | 673.4 | ||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 12.2 | (1.6 | ) | 43.2 | — | 4.8 | 7.0 | 0.1 | — | — | — | — | 65.7 | ||||||||||||||||||||||||||||||||||||
| Tax provision (benefit) | 62.2 | 73.7 | 29.0 | 18.0 | 41.7 | 16.8 | 6.4 | 1.5 | (3.5 | ) | (46.3 | ) | (0.1 | ) | 199.4 | ||||||||||||||||||||||||||||||||||
| Income before cumulative effect of an accounting change | 95.0 | 112.6 | 44.3 | 34.5 | 69.9 | 28.3 | 16.7 | 2.2 | (11.6 | ) | (67.5 | ) | — | 324.4 | |||||||||||||||||||||||||||||||||||
| Cumulative effect of accounting change, net of tax | — | — | — | — | — | — | — | — | (2.4 | ) | — | — | (2.4 | ) | |||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 95.0 | $ | 112.6 | $ | 44.3 | $ | 34.5 | $ | 69.9 | $ | 28.3 | $ | 16.7 | $ | 2.2 | $ | (14.0 | ) | $ | (67.5 | ) | $ | — | $ | 322.0 | |||||||||||||||||||||||
| Segment assets at September 30 | $ | 7,635 | $ | 8,469 | $ | 7,842 | $ | 4,446 | $ | 3,470 | $ | 1,354 | $ | 989 | $ | 19 | $ | 3,862 | $ | 6,947 | $ | (7,607 | ) | $ | 37,426 | ||||||||||||||||||||||||
| Segment goodwill at September 30 | 1,214 | 706 | 308 | — | 650 | 216 | 118 | 10 | — | 5 | — | 3,227 | |||||||||||||||||||||||||||||||||||||
| Average assets | $ | 7,461 | $ | 8,252 | $ | 7,432 | $ | 3,629 | $ | 3,343 | $ | 1,416 | $ | 1,040 | $ | 15 | $ | 3,491 | $ | 6,760 | $ | (7,398 | ) | $ | 35,441 | ||||||||||||||||||||||||
| Average loans | 5,447 | 6,973 | 7,108 | — | 2,448 | 1,217 | 897 | 2 | 441 | 58 | (43 | ) | 24,548 | ||||||||||||||||||||||||||||||||||||
| Average deposits | 13,719 | 2,754 | 13 | 1,470 | 6,493 | 10 | 22 | 52 | 159 | — | (60 | ) | 24,632 | ||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2002: | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 356.0 | $ | 182.4 | $ | 132.9 | $ | 40.5 | $ | 196.5 | $ | 53.1 | $ | 20.5 | $ | 0.2 | $ | (23.9 | ) | $ | (91.1 | ) | $ | — | $ | 867.1 | |||||||||||||||||||||||
| Noninterest income | 105.5 | 20.2 | 8.2 | 16.4 | 46.8 | 19.3 | 4.9 | 22.3 | (0.9 | ) | — | — | 242.7 | ||||||||||||||||||||||||||||||||||||
| Noninterest expense | 291.8 | 66.4 | 41.9 | 35.9 | 130.5 | 30.9 | 5.5 | 17.7 | (11.6 | ) | 3.3 | — | 612.3 | ||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 11.3 | 5.3 | 37.7 | — | 6.2 | 7.0 | 0.6 | — | 1.1 | — | — | 69.2 | |||||||||||||||||||||||||||||||||||||
| Tax provision (benefit) | 64.5 | 53.2 | 25.0 | 7.0 | 40.9 | 13.1 | 6.1 | 1.9 | (4.3 | ) | (38.2 | ) | 0.1 | 169.3 | |||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 93.9 | $ | 77.7 | $ | 36.5 | $ | 14.0 | $ | 65.7 | $ | 21.4 | $ | 13.2 | $ | 2.9 | $ | (10.0 | ) | $ | (56.2 | ) | $ | (0.1 | ) | $ | 259.0 | ||||||||||||||||||||||
| Segment assets at September 30 | $ | 7,597 | $ | 7,821 | $ | 6,869 | $ | 3,477 | $ | 3,199 | $ | 1,315 | $ | 1,098 | $ | 13 | $ | 3,309 | $ | 7,572 | $ | (8,013 | ) | $ | 34,257 | ||||||||||||||||||||||||
| Segment goodwill at September 30 | 1,208 | 703 | 306 | — | 650 | 216 | 118 | 10 | — | 173 | — | 3,384 | |||||||||||||||||||||||||||||||||||||
| Average assets | $ | 6,545 | $ | 6,659 | $ | 6,548 | $ | 2,341 | $ | 3,341 | $ | 1,345 | $ | 1,007 | $ | 13 | $ | 2,985 | $ | 6,749 | $ | (7,119 | ) | $ | 30,414 | ||||||||||||||||||||||||
| Average loans | 4,788 | 5,682 | 6,181 | — | 2,482 | 1,128 | 890 | — | 566 | 22 | — | 21,739 | |||||||||||||||||||||||||||||||||||||
| Average deposits | 12,211 | 1,711 | 9 | 1,516 | 5,990 | 10 | 21 | 45 | 184 | (33 | ) | — | 21,664 | ||||||||||||||||||||||||||||||||||||
(1) The material net interest income and noninterest income items in the Other column relate to Treasury activities of $22.6 million and $55.1 million and unallocated other income of $2.6 million and $16.1 million for the three and nine months ended September 30, 2003, respectively. The material net interest income and noninterest income items in the Other column for the three and nine months ended September 30, 2002 resulted substantially from Treasury activities of $11.9 million and $30.0 million and unallocated other income of $10.3 million and $26.9 million, respectively.
The material noninterest expense items in the Other column for the three and nine months ended September 30, 2003, are substantially derived from Treasury activities and unallocated administrative items. The noninterest expense items in the Other column for the three months ended September 30, 2002 are mostly the result of unallocated merger-related costs of $6.2 million, Treasury activities of $4.7 million and unallocated administrative items of $3.9 million. The material noninterest expense items in the Other column for the nine months ended September 30, 2002 resulted primarily from Treasury activities of $11.8 million, unallocated merger-related costs of $15.0 million and unallocated administrative items of $9.1 million.
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 three and nine months ended September 30, 2003 and 2002.
(2) Other is composed of Administrative and Syndicated and Media Lending. Administrative represents administrative support areas including Information Management and Operations and Finance and Investment.
14
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
The material items in the other column related to net interest income for the three and nine months ended September 30, 2003 resulted from $7.9 million and $29.1 million, respectively, in transfer pricing adjustments.
The material items in the other column related to noninterest income for the three and nine months ended September 30, 2003 resulted primarily from a $0.7 million and $4.1 million gain on sale of a leveraged lease, respectively.
The material items in the other column related to noninterest expense for the three and nine months ended September 30, 2003 resulted from unallocated Treasury activities of $5.1 million and $11.6 million, respectively, partially offset by a pre-tax $2.6 million reduction in net investment in leveraged leases in September 2003.
The material items in the Other column related to average assets are unallocated Treasury securities for the periods presented. The material items in the Other column related to average deposits are unallocated balances for the three and nine months ended September 30, 2003 and 2002.
(3) The Other BancWest category in the table above consists primarily of BancWest Corporation (Parent Company), FHL Lease Holding Company, Inc., BancWest Capital I and First Hawaiian Capital I.
(4) The reconciling items in the above table are principally intercompany eliminations.
15
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
The Company adopted SFAS 142 on January 1, 2002. The most significant changes made by SFAS 142 are that goodwill and other indefinite-lived intangible assets are no longer amortized and will be tested for impairment at least annually. As of September 30, 2003, the Company had goodwill of $3.2 billion. The table below provides the breakdown of goodwill by reportable segment and the change during the year.
| Bank of the West | First Hawaiian Bank | ||||||||||||||||||||||||||||||||||||
| Regional | Commercial | Consumer | Retail | Consumer | Commercial | Financial | Consolidated | ||||||||||||||||||||||||||||||
| (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 adjustment: | |||||||||||||||||||||||||||||||||||||
| UCB | (1 | ) | — | — | — | — | — | — | — | (1 | ) | ||||||||||||||||||||||||||
| Trinity Capital | — | (1 | ) | — | — | — | — | — | — | (1 | ) | ||||||||||||||||||||||||||
Balance as of September 30, 2003: | $ | 1,214 | $ | 706 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 10 | $ | 5 | $ | 3,227 | |||||||||||||||||||
The estimated annual amortization expense for finite-lived intangible assets, primarily core deposit intangibles arising from the BNP Paribas merger and the acquisition of UCB, is approximately $23 million (pre-tax) for each of the years from 2003 to 2007. The details of our intangible assets are depicted below:
| Gross | |||||||||||||
| Carrying | Accumulated | Net Book | |||||||||||
| Amount | Amortization | Value | |||||||||||
| (in thousands) | |||||||||||||
| Balance as of September 30, 2003: | |||||||||||||
| Core Deposits | $ | 230,538 | $ | 37,418 | $ | 193,120 | |||||||
| Total | $ | 230,538 | $ | 37,418 | $ | 193,120 | |||||||
| Balance as of December 31, 2002: | |||||||||||||
| Core Deposits | $ | 230,538 | $ | 20,127 | $ | 210,411 | |||||||
| Total | $ | 230,538 | $ | 20,127 | $ | 210,411 | |||||||
| Balance as of September 30, 2002: | |||||||||||||
| Core Deposits | $ | 230,538 | $ | 14,364 | $ | 216,174 | |||||||
| Total | $ | 230,538 | $ | 14,364 | $ | 216,174 | |||||||
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 provides guidance on how to identify a variable interest entity and determine when the assets, liabilities, noncontrolling interests and results of operations of a variable interest entity should be consolidated by the primary beneficiary. FIN 46 requires that a variable interest entity (VIE) be consolidated by a company if that company meets the definition of the VIE’s primary beneficiary. The primary beneficiary is the enterprise that will absorb a majority of the risk of loss from the VIE’s activities or is entitled to receive a majority of the VIE’s residual returns or both. The recognition and measurement provisions of FIN 46 apply at inception to any variable interest entity formed after January 31, 2003, and becomes effective for existing variable interest entities on the first interim or annual reporting period ending after December 15, 2003. The Company adopted the consolidation provisions of FIN 46 in the third quarter for one variable interest entity formed prior to February 1, 2003, REFIRST, Inc.
REFIRST, Inc. is a VIE that was created by a nonrelated third party to construct, finance and hold title to our administrative headquarters building in Honolulu, First Hawaiian Center (FHC). We entered into a noncancelable operating lease for FHC with REFIRST, Inc. that terminates on December 1, 2003. Our intention is to purchase FHC at the end of the lease term. Prior to July 1, 2003, we were not required to consolidate REFIRST, Inc. into our consolidated financial statements. However, upon our
16
implementation of FIN 46, REFIRST, Inc. was consolidated into BancWest effective July 1, 2003, including the depreciation expense of FHC and interest expense on the financing. The provisions of FIN 46 required us to record a cumulative effect of an accounting change upon its implementation. The amount of such cumulative effect, (essentially, a retrospective depreciation charge for an 18-month period covering the time in which the building was last revalued for purchase-accounting purposes) as it relates to the consolidation of REFIRST, Inc., recognized in July 2003 was an after-tax charge to earnings of approximately $2.4 million. Additionally, we increasedTrusts, BancWest no longer consolidates the Trusts. This deconsolidation had no material impact on the total assets by approximately $160 million (principally due to the additionor liabilities of the FHC building), increased debt by approximately $193.9 million, reducedCorporation. The Federal Reserve Board issued temporary guidance which indicated that the deferred tax liability by approximately $1.7 millionpreferred capital securities can still be included as part of Tier 1 Capital. The Federal Reserve Board will review the regulatory implications of any accounting treatment changes and decreased the reserve for the guaranteed residual value upon lease termination of $30 million.will provide further guidance if necessary or warranted.
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 shalldo not participate in the control of the Partnership’s business.partnerships’ businesses. The general partner exercises the day-to-day control and management of the projects. The general partner haspartners have exclusive control over the Partnership’s businesspartnerships’ businesses and shall have all of the rights, powers, and authority generally conferred by law or necessary, advisable or consistent with accomplishing the Partnership’s business.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 defactode facto agent for the general partner and cannot sellwhere BancWest has a limited partnership interest over 50%. BancWest is not the investments without the general partners’ consent.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. Our current pledgesubscription amount for these investments as of March 31, 2004 is approximately $77$93.4 million with approximately $30$30.4 million as the residual contribution outstanding. We are not obligated to fund deficiencies of the limited partnerships and our maximum exposure to losses is limited to our pledgesubscription amount. A bargainBargain purchase option isoptions are available for
14
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
the general partnerpartners to purchase the Company’s portion of interestinterests in the limited partnerships. These partnershipscommitments were entered into from 19891991 through 2003.2004.
| 8. | Pension and Other Postretirement Benefit Plans |
On June 23, 1997The 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 October 20, 2000,life insurance plans, and, for certain key executives, an unfunded supplemental executive retirement plan (“SERP”).
In connection with the March 2002 acquisition of United California Bank (“UCB”), the Company formed two trusts, First Hawaiian Capital I (FH Trust)assumed the pension and BancWest Capital I (BWE Trust) (the Trusts), respectively.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 Trusts issued preferred and common capital securities.UCB plans were curtailed on June 30, 2003. The preferred capital securitiesCompany integrated UCB employees into the Company’s existing benefit plan structure on July 1, 2003. UCB employees were soldguaranteed the benefits they acquired through the UCB plans up to the public; BancWest ownscurtailment date. The curtailment reduced the common securities.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 purpose of these entities is to allow for the issuance of preferred capital securities that qualify for inclusion in Tier 1 regulatory capital. At the Trusts’ inception, we issued junior subordinated deferrable interest debenturesprojected benefit obligation related to the TrustsUCB supplemental plan decreased by $2.9 million due to the curtailment. This exceeded the unrecognized loss in return for either capital securities,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 casepension liability. The special benefits were accounted for as an adjustment to goodwill as a purchase accounting adjustment due to the business combination of BWE Trust, orUCB with Bank of the proceeds from capital securities that were issued from FH Trust. Historically, these trustsWest. The benefit obligations assumed by the Company in connection with the acquisition and the effect of the curtailment have been consolidatedreflected in the table below.
The following table sets forth the components of the net periodic benefit cost (credit) for March 31, 2004 and 2003:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Service cost | $ | 2,260 | $ | 3,498 | $ | 552 | $ | 595 | ||||||||
| Interest cost | 6,568 | 9,166 | 654 | 720 | ||||||||||||
| Expected return on plan assets | (8,159 | ) | (10,923 | ) | — | — | ||||||||||
| Amortization of transition (asset)/obligation | — | — | — | — | ||||||||||||
| Amortization of prior service cost | — | — | — | — | ||||||||||||
| Recognized net actuarial (gain) loss | 1,515 | 4,007 | 117 | (3 | ) | |||||||||||
Total benefit cost (credit) | $ | 2,184 | $ | 5,748 | $ | 1,323 | $ | 1,312 | ||||||||
The following table sets forth the related trust preferred securities have been treated as Tier 1 capital under Federal Reserve rulescomponents of the net periodic benefit cost (credit) for our funded plans for March 31, 2004 and regulations. The Company is still assessing the impact of FIN 46 on the Trusts and may no longer be permitted to consolidate them in preparing its financial statements. The Company plans to complete this assessment during the fourth quarter of 2003.2003:
| Funded Pension Benefits | ||||||||
| 2004 | 2003 | |||||||
| (in thousands) | ||||||||
| Service cost | $ | 1,760 | $ | 3,085 | ||||
| Interest cost | 5,531 | 8,222 | ||||||
| Expected return on plan assets | (8,159 | ) | (10,923 | ) | ||||
| Amortization of transition (asset)/obligation | — | — | ||||||
| Amortization of prior service cost | — | — | ||||||
| Recognized net actuarial (gain) loss | 1,275 | 3,868 | ||||||
| Net periodic benefit cost (credit) | $ | 407 | $ | 4,252 | ||||
1715
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Continued)
Contributions
BancWest expects to contribute $2.5 million to its defined benefit pension plans and $2.5 million to its other post retirement benefit plans in 2004.
| 9. | Subsequent Event |
On April 27, 2004, BancWest announced that it signed an agreement to acquire USDB Bancorp in a cash transaction valued at $245 million. USDB Bancorp is a holding company that operates Union Safe Deposit Bank, which has 19 branches in California. It is anticipated that the purchase transaction will close in the third quarter of 2004, subject to approval from USDB Bancorp shareholders and federal and state banking regulators. Subsequently, Union Safe Deposit Bank will be merged into Bank of the West. As a purchase transaction, the results of operations of Union Safe Deposit Bank will be included with that of BancWest subsequent to the consummation of the transaction.
16
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Headquartered in Honolulu, Hawaii, with offices in San Francisco, BancWest is a financial holding company with assets of $37.4 billion at September 30, 2003. BancWest, 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, a State of California-chartered bank; and First Hawaiian, a State of Hawaii-chartered bank. We provide a wide range of general commercial banking services, providing retail and corporate banking, trust and insurance services to individuals, institutions, businesses and governments.
Net income for the third quarter of 2003 was $112.2 million, compared with $97.1 million for the same period in 2002. Net income for the first nine months of 2003 was $322.0 million compared with $259.1 million for the same period in 2002. Net interest income was $331.4 million for the third quarter of 2003 and $967.9 million for the first nine months of 2003 compared with $320.7 million and $867.1 million for the same periods of 2002. Noninterest income was $99.6 million and $295.0 million for the third quarter and first nine months of 2003, respectively, compared with $91.6 million and $242.7 million for the same periods in 2002. Noninterest expense totaled $223.0 million and $673.4 million for the third quarter and first nine months of 2003, respectively, compared with $224.4 million and $612.3 million for the same periods of 2002.
BancWest had total assets of $37.4 billion at September 30, 2003, up 9.3% from a year earlier. Investment securities totaled $5.4 billion, an increase of 45.9% as compared to the same period in 2002. Loans and leases totaled $25.3 billion, an increase of 5.0% compared to the same period in 2002. Deposits were $25.9 billion, up 6.4% from a year earlier.
BancWest’s nonperforming assets were reduced significantly to 0.71% of loans and foreclosed properties at September 30, 2003, an improvement from 1.12% at September 30, 2002. The provision for credit losses was $24.1 million for the third quarter of 2003 compared to $26.3 million for the same period in 2002. BancWest’s allowance for credit losses was 1.54% of total loans and leases at September 30, 2003, compared to 1.59% at December 31, 2002 and 1.60% at September 30, 2002.
NEW PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 provides guidance on consolidation and how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests and results of operations of a variable interest entity should be consolidated. The recognition and measurement provisions of FIN 46 apply at inception to any variable interest entity formed after January 31, 2003, and become effective for existing variable interest entities on the first interim or annual reporting period ending after December 15, 2003. The Company consolidated one variable interest entity, REFIRST, Inc., during the third quarter. REFIRST, Inc. finances and holds title to our administrative headquarters building in Honolulu, First Hawaiian Center (FHC). Upon adoption, the Company recognized an after-tax charge to earnings of approximately $2.4 million accounted for as a cumulative effect of an accounting change. Additionally, we increased total assets by approximately $160 million (principally due to the addition of the FHC building), increased debt by approximately $193.9 million, reduced the deferred tax liability by approximately $1.7 million and decreased the reserve for the guaranteed residual value upon lease termination of $30 million. Please refer to Note 6 Financial Interpretation No. 46: Consolidation of Variable Interest Entities for details.
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting. SFAS 149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150). SFAS 150 establishes standards for the classification and measurement of financial instruments with
18
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
characteristics of both liabilities and equity. This standard is effective beginning in the third quarter of 2003. The adoption of this standard did not have a material impact on our consolidated financial position, results of operations or cash flows.
FORWARD-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 our 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. Factors that could cause or contribute to such differences include, but are not limited to: (1) global, national and local economic and market conditions, specifically with respect to changes in the United States economy and geopolitical uncertainties; (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 effect of current and pending legislation and regulations; (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 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)
| (1) | global, national and local economic and market conditions, specifically with respect to changes in the United States economy and geopolitical uncertainty; | |||
| (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 effects of current and pending legislation and regulations; | |||
| (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 Form 10-Q. Our actual results could differ from the results contemplated by these forward-looking statements due to certain factors, including those discussed in Item 2 and elsewhere in this report.
17
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
OVERVIEW
BancWest Corporation (www.bancwestcorp.com) is a financial holding company with assets of $38.9 billion. It is a wholly owned subsidiary of Paris-based BNP Paribas. BancWest is headquartered in Honolulu, Hawaii, with an administrative headquarters in San Francisco, California. Its principal subsidiaries are Bank of the West (296 branches in California, Oregon, New Mexico, Nevada, Washington state and Idaho) and First Hawaiian Bank (61 branches in Hawaii, Guam and Saipan).
Acquisitions
On April 27, 2004, BancWest announced that it signed an agreement to acquire USDB Bancorp in a cash transaction valued at $245 million. USDB Bancorp is a holding company that operates Union Safe Deposit Bank, which has 19 branches in California. It is anticipated that the purchase transaction will close in the third quarter of 2004, subject to approval from USDB Bancorp shareholders and federal and state banking regulators. Subsequently, Union Safe Deposit Bank will be merged into Bank of the West. As a purchase transaction, the results of operations of Union Safe Deposit Bank will be included with that of BancWest subsequent to the consummation of the transaction.
On March 16, 2004, BancWest announced that it signed an agreement to acquire Community First Bankshares, Inc. (Community First), a holding company that operates Community First National Bank (CFB) in a cash transaction valued at $1.2 billion. It is anticipated that the purchase transaction will close in the third quarter of 2004, subject to approval from Community First shareholders and federal and state banking regulators. Subsequently, CFB will be merged with and into Bank of the West and its branches will be integrated into Bank of the West’s branch network system. See Note 2 of the Company’s Notes to Unaudited Consolidated Financial Statements.
Initiatives
BancWest has continued to implement a series of initiatives that are designed to improve customer service and expand our physical footprint by branch expansion and mergers and acquisitions. The focus of the Company is to promote long-lasting customer service relationships through upgrading technology and enhancing existing and implementing new training vehicles. BancWest strives for a “high touch” personalized marketing position, promoting brand recognition through logos and community outreach. BancWest is expanding its line of financial services to its customers through internal initiatives as well as mergers and acquisitions. This includes insurance services that it will attain through Community First.
To remain competitive, Bank of the West’s Regional Banking segment offers “Free Checking” to assist in business development and customer experience activities. This product was developed to assure that customers are finding the right checking product to meet their needs. Bank of the West has also launched a new electronic check service (“ECS”) for merchant services through its relationship with NOVA Information Systems. Merchant Services is the process of accepting, processing and settling payments for businesses. The Company provides the payment processing equipment, technology, reporting and reconciliation services merchants need to conduct business. ECS offers almost instant verification of fund availability when checks are swiped through the merchant’s check reader. ECS offers next day funding to merchants without having to make deposits in a branch.
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 principally as a result of the absolute level and shape of the yield curve. We manage the interest rate and market risks intrinsic in our asset and liability balances, while ensuring ample liquidity and diverse funding.
Financial Overview
First quarter 2004 as compared to first quarter 2003
BancWest reported net income of $113.1 million, compared with $102.1 million, an increase of 10.7%. Net interest income was $321.0 million, up 1.8% compared to $315.2 million. This increase was primarily due to growth in average earning assets, partially offset by a lower net interest margin for the quarter. Average loans and leases increased by $1.9 billion; average investment securities increased by $1.9 billion. The Company increased its consumer lending and purchased residential mortgage loans and securities while commercial borrowing was still relatively slow. The net interest margin decreased 51 basis points (1% equals 100 basis points) from
18
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
4.49% last year to 3.98% as a declining interest rate environment caused rates on interest earning assets to decrease more rapidly than rates paid on funding sources. Noninterest income was $101.4 million, an increase of 7.0% compared to $94.8 million in the first quarter of 2003. The increase was primarily due to increased service charges on deposit accounts and other service charges and fees. The Company’s strategy to increase noninterest income included growth in average deposit balances, repricing efforts in account analysis as well as growth in investment product sales and merchant services. The Company also focused on niche markets where the Company would have a competitive advantage in growing its portfolio related to equipment leasing, SBA, church and healthcare lending. Noninterest expense was $218.9 million compared to $220.7 million, a decrease of 0.8%. Cost savings from staff reductions, offset by the increased cost of healthcare , resulted in a decrease in noninterest expense of $1.8 million from the first quarter of 2003.
BancWest had total assets of $38.9 billion at March 31, 2004, an increase of 1.5% from December 31, 2003 and 11.5% from March 31, 2003. Investment securities totaled $6.0 billion, an increase of 1.7% from December 31, 2003 and 33.2% from the same period in 2003. Loans and leases totaled $26.2 billion, up 2.0% from December 31, 2003 and 9.0% from a year ago. Deposits were $26.7 billion, up 1.3% from December 31, 2003 and 9.9% from a year ago.
BancWest’s nonperforming assets were 0.58% of loans, leases and foreclosed properties at March 31, 2004, an improvement from 0.59% at December 31, 2003 and 0.98% at March 31, 2003. The provision for loan and lease losses was $18.9 million for the first quarter of 2004, compared to $22.7 million for the quarter ended a year ago. BancWest’s allowance for loan and lease losses was 1.51% of total loans and leases at March 31, 2004, compared to 1.52% of total loans and leases at December 31, 2003 and 1.65% at March 31, 2003.
MONETARY 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 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 loans and leases or paid on deposits. It is difficult to predict future changes in monetary policies.
CRITICAL ACCOUNTING POLICIESESTIMATES
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 statementsConsolidated Financial Statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our consolidated financial statementsConsolidated Financial Statements are appropriate given the factual circumstances as of September 30, 2003.March 31, 2004. We have established 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 statementsConsolidated Financial Statements to these critical 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 the notes to the consolidated financial statements,Consolidated Financial Statements, Note 1 (Summary of Significant Accounting Policies) of our 20022003 Annual Report on Form 10-K. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, weWe have identified two policiesthe following accounting estimates that we believe are material due to the judgments, estimateslevels of subjectivity and assumptionsjudgment necessary to account for uncertain matters or where these matters are particularly subject to change.
19
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
| • | |||
20
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
CONSOLIDATED FINANCIAL HIGHLIGHTS(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| (dollars in thousands) | ||||||||||||||||||
Earnings: | ||||||||||||||||||
| Net interest income | $ | 331,362 | $ | 320,734 | $ | 967,926 | $ | 867,108 | ||||||||||
| Provision for credit losses | 24,145 | 26,300 | 65,695 | 69,209 | ||||||||||||||
| Noninterest income | 99,626 | 91,639 | 295,034 | 242,692 | ||||||||||||||
| Noninterest expense | 222,963 | 224,364 | 673,412 | 612,282 | ||||||||||||||
| Tax provision | 69,268 | 64,651 | 199,498 | 169,256 | ||||||||||||||
| Income before cumulative effect of accounting change | 114,612 | 97,058 | 324,355 | 259,053 | ||||||||||||||
| Cumulative effect of accounting change, net of tax | 2,370 | — | 2,370 | — | ||||||||||||||
Net Income | $ | 112,242 | $ | 97,058 | $ | 321,985 | $ | 259,053 | ||||||||||
Selected Financial Ratios: | ||||||||||||||||||
| Return on average total assets (ROA) | 1.21 | % | 1.13 | % | 1.21 | % | 1.14 | % | ||||||||||
| Return on average stockholder’s equity (ROE) | 10.83 | 9.99 | 10.70 | 10.50 | ||||||||||||||
| Net interest margin (taxable-equivalent basis) | 4.26 | 4.52 | 4.37 | 4.58 | ||||||||||||||
| Allowance for credit losses to total loans and leases (at September 30) | 1.54 | 1.60 | 1.54 | 1.60 | ||||||||||||||
| Nonperforming assets to total assets (at September 30) | 0.48 | 0.79 | 0.48 | 0.79 | ||||||||||||||
| Allowance for credit losses to nonperforming loans and leases (at September 30) | 2.44 | x | 1.52 | x | 2.44 | x | 1.52 | x | ||||||||||
| Average equity to average total assets | 11.17 | % | 11.36 | % | 11.35 | % | 10.85 | % | ||||||||||
Regulatory Capital Ratios: | ||||||||||||||||||
Leverage Ratio(1): | ||||||||||||||||||
| Bank of the West | 9.36 | % | 8.94 | % | 9.36 | % | 8.94 | % | ||||||||||
| First Hawaiian Bank | 9.68 | 9.08 | 9.68 | 9.08 | ||||||||||||||
| Tier 1 capital (risk-based): | ||||||||||||||||||
| Bank of the West | 10.56 | 9.84 | 10.56 | 9.84 | ||||||||||||||
| First Hawaiian Bank | 12.51 | 11.06 | 12.51 | 11.06 | ||||||||||||||
| Total capital (risk-based): | ||||||||||||||||||
| Bank of the West | 12.81 | 12.16 | 12.81 | 12.16 | ||||||||||||||
| First Hawaiian Bank | 14.88 | 13.47 | 14.88 | 13.47 | ||||||||||||||
Balance Sheet Data Averages: | ||||||||||||||||||
| Average assets | 36,797,885 | 33,937,459 | 35,441,404 | 30,414,475 | ||||||||||||||
Average loans(2) | 25,199,215 | 24,067,661 | 24,548,196 | 21,739,282 | ||||||||||||||
| Average deposits | 25,422,161 | 24,095,238 | 24,631,586 | 21,663,686 | ||||||||||||||
| Average stockholder’s equity | 4,110,928 | 3,854,560 | 4,023,643 | 3,299,628 | ||||||||||||||
Balance Sheet Data At Period End: | ||||||||||||||||||
| Assets | 37,425,502 | 34,256,500 | 37,425,502 | 34,256,500 | ||||||||||||||
Loans(2) | 25,343,837 | 24,141,513 | 25,343,837 | 24,141,513 | ||||||||||||||
| Deposits | 25,920,602 | 24,356,862 | 25,920,602 | 24,356,862 | ||||||||||||||
| Stockholder’s equity | 4,157,522 | 3,931,779 | 4,157,522 | 3,931,779 | ||||||||||||||
| Three Months Ended March 31, | ||||||||
| 2004 | 2003 | |||||||
Earnings: | ||||||||
| (Dollars in thousands) | ||||||||
| Interest income | $ | 417,152 | $ | 417,476 | ||||
| Interest expense | 96,126 | 102,237 | ||||||
| Net interest income | 321,026 | 315,239 | ||||||
| Provision for loan and lease losses | 18,865 | 22,690 | ||||||
| Noninterest income | 101,438 | 94,834 | ||||||
| Noninterest expense | 218,882 | 220,660 | ||||||
| Income before income taxes | 184,717 | 166,723 | ||||||
| Tax provision | 71,665 | 64,642 | ||||||
Net income | $ | 113,052 | $ | 102,081 | ||||
Balance Sheet Data Averages: | ||||||||
| (Dollars in millions) | ||||||||
| Average assets | 38,336 | 34,417 | ||||||
| Average securities available-for-sale | 5,991 | 4,113 | ||||||
Average loans and leases(1) | 25,942 | 24,046 | ||||||
| Average deposits | 26,432 | 24,146 | ||||||
| Average long-term debt and capital securities | 4,323 | 3,580 | ||||||
| Average stockholder’s equity | 4,327 | 3,926 | ||||||
Balance Sheet Data At Period End: | ||||||||
| (Dollars in millions) | ||||||||
| Assets | 38,914 | 34,916 | ||||||
| Securities available-for-sale | 6,030 | 4,528 | ||||||
Loans and leases(1) | 26,292 | 24,139 | ||||||
| Deposits | 26,743 | 24,339 | ||||||
| Long-term debt and capital securities | 4,283 | 3,572 | ||||||
| Stockholder’s equity | 4,398 | 3,969 | ||||||
Selected Financial Ratios For the Period Ended: | ||||||||
Return on average total assets (ROA)(2) | 1.19 | % | 1.20 | % | ||||
Return on average stockholder’s equity (ROE)(2) | 10.51 | 10.54 | ||||||
Net interest margin (taxable-equivalent basis)(2) | 3.98 | 4.49 | ||||||
Net loans and leases charged off to average loans and leases(2) | 0.22 | 0.18 | ||||||
Efficiency ratio(3) | 51.81 | 53.81 | ||||||
| Average equity to average total assets | 11.29 | 11.41 | ||||||
At Period End: | ||||||||
| Allowance for loan and lease losses to total loans and leases | 1.51 | 1.65 | ||||||
| Nonperforming assets to total loans and leases and other real estate owned and repossessed personal property | 0.58 | 0.98 | ||||||
| Allowance for loan and lease losses to nonperforming loans and leases | 2.88 | x | 1.83 | x | ||||
Regulatory Capital Ratios: | ||||||||
Leverage Ratio(4): | ||||||||
| Bank of the West | 9.58 | % | 9.48 | % | ||||
| First Hawaiian Bank | 10.19 | 9.38 | ||||||
| Tier 1 capital (risk-based): | ||||||||
| Bank of the West | 10.92 | 10.29 | ||||||
| First Hawaiian Bank | 13.28 | 11.66 | ||||||
| Total capital (risk-based): | ||||||||
| Bank of the West | 13.13 | 12.59 | ||||||
| First Hawaiian Bank | 15.64 | 14.05 | ||||||
| (1) | ||
| These balances include loans held-for-sale and are not adjusted for | ||
| (2) | Annualized. | |
| (3) | The efficiency ratio is noninterest expense as a percentage of total operating revenue (net interest income plus noninterest income). | |
| (4) | The capital leverage ratios are based on quarterly averages. |
21
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
NET INTEREST INCOMERESULTS OF OPERATIONS
Net Interest Income
First quarter 2004 as compared to first quarter 2003
Net interest income increased 3.3%1.8% to $321.0 million as compared to $315.2 million.
The increase in the three months ended September 30, 2003 to $331.4 million from $320.7 million in the corresponding period last year. Netnet interest income increased to $967.9 million,was principally the result of a growth of 11.6%$3.9 billion, or 13.8%, increase in the nine months ending September 30, 2003 from $867.1 millionaverage earning assets. The increase in the same nine-month period last year. The margins in the three and nine-month periods ending September 30, 2003 decreased in a record low interest rate environment in which the yields on our average earning assets declined faster thanwas primarily the rates on our funding sources. Increasesresult of growth in loans from originations and purchases, leases and investment securities within Bank of the West and First Hawaiian Bank. The increase in average earning assets was partially offset by a 51 basis point reduction in our net interest margin. The continuing effect of historically low interest rates has reduced the yield on earning assets as well as rates paid on sources of funds.
Net Interest Margin
First quarter 2004 as compared to first quarter 2003
The net interest margin decreased by 51 basis points due primarily to the effects of the decreasing interest rate environment. While the decreasing rate environment reduced our yield on earning assets by 76 basis points to 5.17% from 5.93%, it also decreased our rate paid on sources of funds by 25 basis points to 1.19% from 1.44%. 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 $0.8 billion, or 12.6%. Higher yielding average domestic time deposits decreased $0.1 billion, or 1.8% due to the low interest rate environment.
Average Earning Assets
First quarter 2004 as compared to first quarter 2003
Growth in Bank of the West’s loan and lease portfolio and higher levels of investment securities in both banks, are primarily responsible for the increase in average earning assets. Higher levels of foreign interest bearing deposits in other banks also contributed to the increase in average earning assets. The $1.9 billion, or 7.9%, increase in average total loans and leases was primarily due to increased consumer lending and residential mortgages. Consumer loans continue to grow due to strength in the consumer market and the low interest rates on consumer products. As commercial lending was relatively slow during the past year, funds were used to purchase residential mortgages as well as investment securities. Consequently, average total investment securities also increased to $6.0 billion, up $1.9 billion, or 45.7%.
Average Loans and Leases
First quarter 2004 as compared to first quarter 2003
The increase in average loans and leases was primarily due to growth in Bank of the West. Average consumer loans within Bank of the West increased approximately $1.2 billion, or 22.7%, primarily due to growth in financing for autos, recreational vehicles and pleasure boats, while loan purchases increased the average residential mortgage portfolio. Bank of the West’s average residential real estate loans have increased by $0.6 billion.
Average Interest-Bearing Deposits and Liabilities
First quarter 2004 as compared to first quarter 2003
The increase in average interest-bearing deposits and liabilities was primarily due to an increase in average long-term debt, average short-term borrowings and growth in our customer deposit base. Average deposits increased due to growth in the demand deposit and interest-bearing checking, regular, money market savings and foreign deposit portfolios. These increases were partially offset by the impact of the decreased margin.
Average earning assets increased by $2.7 billiona decrease in average time deposits. Short and $4.3 billion or 9.7% and 17.0%, respectively, in the three and nine months ended September 30, 2003long term borrowings from the corresponding periods last year. These increases were primarily driven by purchases of investment securities, residential real estate loansFederal Home Loan Bank also increased average short-term borrowings and originations of consumer loans. In addition, our March 2002 acquisition of United California Bank (UCB) increased both our investment securities and loans and leases. We significantly increased our purchasing of investment securities in the three months ended September 30, 2003 from the comparable period last year. Average investment securities increased $1.7 billion and $1.5 billion or 49.1% and 47.7%, respectively, in the three and nine month periods ended September 30, 2003 compared to the corresponding periods last year. Average loans and leases outstanding grew by $1.1 billion or 4.7% during the three-month period ended September 30, 2003 and 12.9% or $2.8 billion during the nine-month period ended September 30, 2003 compared to the same periods last year.
For the three and nine months ended September 30, 2003 interest-bearing demand deposits decreased 23.3% and 23.4% or $82.6 million and $83.7 million. Savings deposits increased $1.1 billion and $1.9 billion or 12.4% and 23.9%, respectively for the three and nine months ended September 30, 2003 compared to last year. Short-term borrowing decreased 13.3% and 9.8% or $314.2 million and $199.2 million, respectively, offset by a significant increase inaverage long-term borrowing of 66.0% and 57.6% or $1.6 billion and $1.4 billion in the three and nine-month periods, respectively, ending September 30, 2003 from the same periods in 2002. The shift from short-term to long-term debt was primarily a result of finalizing the long-term financing for the portion of the UCB acquisition ($800 million) that had been financed during the interim with short-term debt.
In addition to a falling interest rate environment, our cost of funds was lowered by an increase in average noninterest-bearing deposits of $948.1 million and $1.6 billion, or 14.9% and 30.5% in the three and nine months ended September 30, 2003, respectively as compared to the same periods in 2002. The percentage of average noninterest-bearing deposits to total average deposits for the three and nine months ended September 30, 2003 increased to 28.7% and 28.3%, respectively, from 26.4% and 24.7% for the same periods in 2002.22
The following table sets forth consolidated average balance sheets, as well as an analysis of interest income/expense and yield/rate for each major category of interest-earning assets and interest-bearing liabilities for the periods indicated on a taxable equivalent basis. The tax equivalent adjustment is made for items exempt from federal income taxes (assuming a 35% tax rate for 2003 and 2002) to make them comparable with taxable items before any income taxes are applied.
22
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
| Three Months Ended September 30, | ||||||||||||||||||||||||||||
| 2003 | 2002 | |||||||||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||||||
| Balance | Expense | Rate (1) | Balance | Expense | Rate (1) | |||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||
| Earning assets: | ||||||||||||||||||||||||||||
| Interest-bearing deposits in other banks | $ | 273,327 | $ | 748 | 1.09 | % | $ | 173,466 | $ | 822 | 1.88 | % | ||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | 153,472 | 406 | 1.05 | 392,523 | 1,724 | 1.74 | ||||||||||||||||||||||
| Trading assets | 59,350 | 426 | 2.85 | 42,409 | 392 | 3.67 | ||||||||||||||||||||||
Investment securities:(2) | ||||||||||||||||||||||||||||
| Taxable investment securities | 5,218,770 | 46,118 | 3.51 | 3,495,137 | 40,704 | 4.62 | ||||||||||||||||||||||
| Non-taxable investment securities | 15,663 | 240 | 6.08 | 15,001 | 228 | 6.03 | ||||||||||||||||||||||
Loans and leases(3),(4) | 25,199,215 | 376,696 | 5.93 | 24,067,661 | 400,825 | 6.61 | ||||||||||||||||||||||
| Total earning assets | 30,919,797 | 424,634 | 5.45 | % | 28,186,197 | 444,695 | 6.26 | % | ||||||||||||||||||||
| Non-earning assets | 5,878,088 | 5,751,262 | ||||||||||||||||||||||||||
| Total assets | $ | 36,797,885 | $ | 33,937,459 | ||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||||||||||||||
| Interest-bearing deposits and liabilities: | ||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||
| Domestic: | ||||||||||||||||||||||||||||
| Interest-bearing | ||||||||||||||||||||||||||||
| Demand | $ | 271,111 | $ | 44 | 0.06 | % | $ | 353,668 | $ | 267 | 0.30 | % | ||||||||||||||||
| Savings | 10,399,436 | 13,637 | 0.52 | 9,255,123 | 29,013 | 1.24 | ||||||||||||||||||||||
| Time | 6,838,840 | 24,868 | 1.44 | 7,513,111 | 44,753 | 2.36 | ||||||||||||||||||||||
| Foreign | 615,304 | 1,286 | 0.83 | 623,987 | 2,444 | 1.55 | ||||||||||||||||||||||
| Total interest-bearing deposits | 18,124,691 | 39,835 | 0.87 | 17,745,889 | 76,477 | 1.71 | ||||||||||||||||||||||
| Short-term borrowings | 2,041,899 | 9,230 | 1.79 | 2,356,097 | 10,430 | 1.76 | ||||||||||||||||||||||
| Long-term debt and capital securities | 4,139,256 | 43,843 | 4.20 | 2,494,038 | 36,907 | 5.87 | ||||||||||||||||||||||
| Total interest-bearing deposits and liabilities | 24,305,846 | 92,908 | 1.52 | 22,596,024 | 123,814 | 2.17 | ||||||||||||||||||||||
| Interest rate spread | 3.93 | % | 4.09 | % | ||||||||||||||||||||||||
| Noninterest-bearing deposits | 7,297,470 | 6,349,349 | ||||||||||||||||||||||||||
| Other liabilities | 1,083,641 | 1,137,526 | ||||||||||||||||||||||||||
| Total liabilities | 32,686,957 | 30,082,899 | ||||||||||||||||||||||||||
| Stockholder’s equity | 4,110,928 | 3,854,560 | ||||||||||||||||||||||||||
| Total liabilities and stockholder’s equity | $ | 36,797,885 | $ | 33,937,459 | ||||||||||||||||||||||||
| Impact of noninterest-bearing sources | 0.33 | % | 0.43 | % | ||||||||||||||||||||||||
| Net interest income and margin on total earning assets | 331,726 | 4.26 | % | 320,881 | 4.52 | % | ||||||||||||||||||||||
| Tax equivalent adjustment | 364 | 147 | ||||||||||||||||||||||||||
| Net interest income | $ | 331,362 | $ | 320,734 | ||||||||||||||||||||||||
Table 1: Average Balances, Interest Income and Expense, and Yields and Rates (Taxable-Equivalent Basis)
The following table sets forth the condensed consolidated average balance sheets, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing deposits and liabilities for the 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 March 31, 2004 and 2003) to make them comparable with taxable items before any income taxes are applied.
| Three Months Ended March 31, | ||||||||||||||||||||||||
| 2004 | 2003 | |||||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
| Balance | Expense | Rate(1) | Balance | Expense | Rate(1) | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
| Earning assets: | ||||||||||||||||||||||||
| Interest-bearing deposits in other banks: | ||||||||||||||||||||||||
| Domestic | $ | 7,194 | $ | 8 | 0.45 | % | $ | 5,127 | $ | 8 | 0.63 | % | ||||||||||||
| Foreign | 295,879 | 807 | 1.10 | 103,249 | 407 | 1.60 | ||||||||||||||||||
| Total interest-bearing deposits in other banks | 303,073 | 815 | 1.08 | 108,376 | 415 | 1.55 | ||||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | 233,895 | 602 | 1.04 | 249,634 | 823 | 1.34 | ||||||||||||||||||
| Trading assets | 15,018 | 14 | 0.37 | 32,279 | 291 | 3.66 | ||||||||||||||||||
Investment securities(2): | ||||||||||||||||||||||||
| Taxable | 5,983,546 | 51,871 | 3.49 | 4,098,266 | 41,506 | 4.11 | ||||||||||||||||||
| Exempt from Federal income taxes | 7,427 | 135 | 7.31 | 14,865 | 234 | 6.38 | ||||||||||||||||||
| Total investment securities | 5,990,973 | 52,006 | 3.49 | 4,113,131 | 41,740 | 4.12 | ||||||||||||||||||
Loans and leases(3),(4): | ||||||||||||||||||||||||
| Domestic | 25,593,879 | 358,186 | 5.63 | 23,677,033 | 368,153 | 6.31 | ||||||||||||||||||
| Foreign | 347,744 | 5,787 | 6.69 | 369,161 | 6,438 | 7.07 | ||||||||||||||||||
| Total loans and leases | 25,941,623 | 363,973 | 5.64 | 24,046,194 | 374,591 | 6.32 | ||||||||||||||||||
| Total earning assets | 32,484,582 | $ | 417,410 | 5.17 | 28,549,614 | $ | 417,860 | 5.93 | ||||||||||||||||
| Non-interest bearing assets: | ||||||||||||||||||||||||
| Cash and due from banks | 1,374,349 | 1,444,905 | ||||||||||||||||||||||
| Premises and equipment | 541,319 | 381,140 | ||||||||||||||||||||||
| Core deposit intangible | 184,359 | 207,344 | ||||||||||||||||||||||
| Goodwill | 3,228,346 | 3,227,710 | ||||||||||||||||||||||
| Other assets | 523,518 | 606,368 | ||||||||||||||||||||||
| Total non-interest bearing assets | 5,851,891 | 5,867,467 | ||||||||||||||||||||||
| Total assets | $ | 38,336,473 | $ | 34,417,081 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||||||||||
| Interest-bearing deposits and liabilities: | ||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||
| Domestic: | ||||||||||||||||||||||||
| Interest-bearing demand | $ | 314,032 | $ | 69 | 0.09 | $ | 266,838 | $ | 119 | 0.18 | ||||||||||||||
| Savings | 10,820,570 | 15,741 | 0.59 | 9,696,019 | 18,239 | 0.76 | ||||||||||||||||||
| Time | 6,717,222 | 25,482 | 1.53 | 6,839,649 | 33,231 | 1.97 | ||||||||||||||||||
| Foreign | 997,080 | 2,144 | 0.86 | 608,316 | 1,558 | 1.04 | ||||||||||||||||||
| Total interest-bearing deposits | 18,848,904 | 43,436 | 0.93 | 17,410,822 | 53,147 | 1.24 | ||||||||||||||||||
| Short-term borrowings | 2,130,573 | 5,413 | 1.02 | 1,373,035 | 3,696 | 1.09 | ||||||||||||||||||
| Long-term debt and capital securities | 4,323,264 | 47,277 | 4.40 | 3,580,283 | 45,394 | 5.14 | ||||||||||||||||||
| Total interest-bearing deposits and liabilities | 25,302,741 | 96,126 | 1.53 | 22,364,140 | 102,237 | 1.85 | ||||||||||||||||||
| Interest rate spread | 3.64 | % | 4.08 | % | ||||||||||||||||||||
| Noninterest-bearing deposits | 7,583,455 | 6,735,524 | ||||||||||||||||||||||
| Other liabilities | 1,123,351 | 1,391,324 | ||||||||||||||||||||||
| Total liabilities | 34,009,547 | 30,490,988 | ||||||||||||||||||||||
| Stockholder’s equity | 4,326,926 | 3,926,093 | ||||||||||||||||||||||
| Total liabilities and stockholder’s equity | $ | 38,336,473 | $ | 34,417,081 | ||||||||||||||||||||
| Impact of noninterest-bearing sources | 0.34 | % | 0.41 | % | ||||||||||||||||||||
| Net interest income and margin on total earning assets | 321,284 | 3.98 | % | 315,623 | 4.49 | % | ||||||||||||||||||
| Tax equivalent adjustment | 258 | 384 | ||||||||||||||||||||||
| Net interest income | $ | 321,026 | $ | 315,239 | ||||||||||||||||||||
| (1) | Annualized. | |
| (2) | ||
| (3) | Nonaccruing loans and leases, and loans | |
| (4) | Interest income for loans and leases included loan fees of |
23
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
| Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| 2003 | 2002 | |||||||||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||||||
| Balance | Expense | Rate (1) | Balance | Expense | Rate (1) | |||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||
| Earning assets: | ||||||||||||||||||||||||||||
| Interest-bearing deposits in other banks | $ | 177,077 | $ | 1,632 | 1.23 | % | $ | 142,777 | $ | 2,057 | 1.93 | % | ||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | 212,842 | 1,947 | 1.22 | 279,109 | 3,650 | 1.75 | ||||||||||||||||||||||
| Trading assets | 55,877 | 1,171 | 2.80 | 23,507 | 591 | 3.36 | ||||||||||||||||||||||
Investment securities:(2) | ||||||||||||||||||||||||||||
| Taxable investment securities | 4,616,617 | 131,986 | 3.82 | 3,124,281 | 114,881 | 4.92 | ||||||||||||||||||||||
| Non-taxable investment securities | 15,380 | 753 | 6.55 | 11,809 | 736 | 8.33 | ||||||||||||||||||||||
Loans and leases(3),(4) | 24,548,196 | 1,124,709 | 6.13 | 21,739,282 | 1,100,121 | 6.77 | ||||||||||||||||||||||
| Total earning assets | 29,625,989 | $ | 1,262,198 | 5.70 | % | 25,320,765 | $ | 1,222,036 | 6.45 | % | ||||||||||||||||||
| Non-earning assets | 5,815,415 | 5,093,710 | ||||||||||||||||||||||||||
| Total assets | $ | 35,441,404 | $ | 30,414,475 | ||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||||||||||||||
| Interest-bearing deposits and liabilities: | ||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||
| Domestic: | ||||||||||||||||||||||||||||
| Interest-bearing | ||||||||||||||||||||||||||||
| Demand | $ | 274,221 | $ | 271 | 0.13 | % | $ | 357,969 | $ | 749 | 0.28 | % | ||||||||||||||||
| Savings | 10,047,001 | 49,613 | 0.66 | 8,108,901 | 73,248 | 1.21 | ||||||||||||||||||||||
| Time | 6,737,313 | 86,625 | 1.72 | 7,280,520 | 137,799 | 2.53 | ||||||||||||||||||||||
| Foreign | 594,578 | 4,197 | 0.94 | 568,272 | 7,088 | 1.67 | ||||||||||||||||||||||
| Total interest-bearing deposits | 17,653,113 | 140,706 | 1.07 | 16,315,662 | 218,884 | 1.79 | ||||||||||||||||||||||
| Short-term borrowings | 1,841,025 | 16,464 | 1.20 | 2,040,197 | 26,486 | 1.74 | ||||||||||||||||||||||
| Long-term debt and capital securities | 3,777,603 | 136,014 | 4.81 | 2,396,453 | 109,044 | 6.08 | ||||||||||||||||||||||
| Total interest-bearing deposits and liabilities | 23,271,741 | 293,184 | 1.68 | 20,752,312 | 354,414 | 2.28 | ||||||||||||||||||||||
| Interest rate spread | 4.02 | % | 4.17 | % | ||||||||||||||||||||||||
| Noninterest-bearing deposits | 6,978,473 | 5,348,024 | ||||||||||||||||||||||||||
| Other liabilities | 1,167,547 | 1,014,511 | ||||||||||||||||||||||||||
| Total liabilities | 31,417,761 | 27,114,847 | ||||||||||||||||||||||||||
| Stockholder’s equity | 4,023,643 | 3,299,628 | ||||||||||||||||||||||||||
| Total liabilities and stockholder’s equity | $ | 35,441,404 | $ | 30,414,475 | ||||||||||||||||||||||||
| Impact of noninterest-bearing sources | 0.35 | % | 0.41 | % | ||||||||||||||||||||||||
| Net interest income and margin on total earning assets | 969,014 | 4.37 | % | 867,622 | 4.58 | % | ||||||||||||||||||||||
| Tax equivalent adjustment | 1,088 | 514 | ||||||||||||||||||||||||||
| Net interest income | $ | 967,926 | $ | 867,108 | ||||||||||||||||||||||||
24
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS(Continued)
NONINTEREST INCOMENoninterest Income
The following table reflects the key components of the change in noninterest income for the three and nine months ended September 30, 2003,March 31, 2004, as compared to the same periodsperiod in 2002:
| 2003 | 2002 | % Change | ||||||||||||
| (in thousands) | ||||||||||||||
Three Months Ended September 30, | ||||||||||||||
| Service charges on deposit accounts | $ | 39,512 | $ | 39,183 | 0.8 | % | ||||||||
| Trust and investment services income | 9,461 | 9,883 | (4.3 | ) | ||||||||||
| Other service charges and fees | 38,535 | 34,032 | 13.2 | |||||||||||
| Securities gains, net | 555 | 282 | 96.8 | |||||||||||
| Other | 11,563 | 8,259 | 40.0 | |||||||||||
| Total noninterest income | $ | 99,626 | $ | 91,639 | 8.7 | % | ||||||||
| 2003 | 2002 | % Change | ||||||||||||
| (in thousands) | ||||||||||||||
Nine Months Ended September 30, | ||||||||||||||
| Service charges on deposit accounts | $ | 115,102 | $ | 101,718 | 13.2 | % | ||||||||
| Trust and investment services income | 28,826 | 28,275 | 1.9 | |||||||||||
| Other service charges and fees | 113,380 | 89,442 | 26.8 | |||||||||||
| Securities gains, net | 3,913 | 966 | 305.1 | |||||||||||
| Other | 33,813 | 22,291 | 51.7 | |||||||||||
| Total noninterest income | $ | 295,034 | $ | 242,692 | 21.6 | % | ||||||||
| Three Months Ended March 31, | Change | |||||||||||||||
| 2004 | 2003 | $ | % | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Service charges on deposit accounts | $ | 40,829 | $ | 37,029 | $ | 3,800 | 10.3 | % | ||||||||
| Trust and investment services income | 10,302 | 9,507 | 795 | 8.4 | ||||||||||||
| Other service charges and fees | 38,026 | 31,655 | 6,371 | 20.1 | ||||||||||||
| Securities gains, net | 367 | 1,892 | (1,525 | ) | (80.6 | ) | ||||||||||
| Other | 11,914 | 14,751 | (2,837 | ) | (19.2 | ) | ||||||||||
Total noninterest income | $ | 101,438 | $ | 94,834 | $ | 6,604 | 7.0 | % | ||||||||
First quarter 2004 as compared to first quarter 2003
As detailed in the table above, shows in detail,total noninterest income increased by 8.7% and 21.6% for the three and nine months ended September 30, 2003, respectively, compared to the same periods in 2002. These increases were driven by a numberwas $101.4 million, an increase of different causes.$6.6 million or 7.0%.
Service charges on deposit accounts for the quarter did notwere $40.8 million, an increase materially, but increased $13.4 million or 13.2% in the nine months ended September 30, 2003. This was due in large partof $3.8 million. The increase is primarily attributed to an increase in average deposit balances of approximately 5.5%9.5%, higher fee income from overdraft and 13.7% for the threenonsufficient fund transactions and nine months, respectively, compared to the same periodshigher servicing fee income as a result of repricing efforts in the prior year. Part of the year-to-date increase is attributable to the acquisition of UCB in March 2002.account analysis.
Other service charges and fees increased 13.2% in the quarter and 26.8% in the nine months year-to-date.were $38.0 million, an increase of $6.4 million. The increase in other service charges and fees compared to the same period last year is primarily due to increased revenue resulting from a concentrated effort in growing the sales of investment products, higher rental income from automobile operating leases as we began accounting for our auto leases as operating leases beginning in February 2004 (see Note 5 to the Consolidated Financial Statements), higher non-yield-related fees on commercial loans, higher lease servicing income from the acquisition of Trinity Capital in November 2002, higher commission from issuing letters of credit, higher brokerloan servicing fees and increased debit card usage.higher merchant services fees resulting from an increase in the number of retail merchant accounts and higher retail sales volume.
Net securities gains totaled $0.4 million, compared to a net gain of $1.9 million. The higher gains in 2003 were due to portfolio restructuring activities.
Other noninterest income increased 40.0% intotaled $11.9 million, a decrease of $2.8 million, primarily attributed to lower gains on the third quartersale of residential loans due to lower loan volume, lower gains on the sale of foreclosed property and 51.7% in the nine-month period compared to the corresponding periods in 2002. These increases are primarily gainslower income from the sale of loans and leases.
Approximately $0.6 million and $3.9 million in net gains on the sale of investment securities were recognized in the threeEssex subsidiary as Essex began to keep specific types of loans in its portfolio rather than selling them. These decreases were partially offset by increased revenue from derivative sale activities and nine months ended September 30, 2003, respectively.miscellaneous assets.
NONINTEREST EXPENSENoninterest Expense
The following table reflects the key components of the change in noninterest expense for the three and nine months ended September 30, 2003March 31, 2004 as compared to the same periodsperiod in 2002:2003:
2524
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
| 2003 | 2002 | % Change | ||||||||||||
| (in thousands) | ||||||||||||||
Three Months Ended September 30, | ||||||||||||||
| Salaries and wages | $ | 86,269 | $ | 89,486 | (3.6 | )% | ||||||||
| Employee benefits | 34,091 | 28,340 | 20.3 | |||||||||||
| Occupancy expense | 22,239 | 24,008 | (7.4 | ) | ||||||||||
| Outside services | 18,002 | 17,472 | 3.0 | |||||||||||
| Intangible amortization | 5,763 | 5,763 | — | |||||||||||
| Equipment expense | 11,563 | 14,043 | (17.7 | ) | ||||||||||
| Stationery and supplies | 5,962 | 6,990 | (14.7 | ) | ||||||||||
| Advertising and promotion | 5,794 | 12,301 | (52.9 | ) | ||||||||||
| Restructuring and integration costs | — | 6,213 | — | |||||||||||
| Other | 33,280 | 19,748 | 68.5 | |||||||||||
| Total noninterest expense | $ | 222,963 | $ | 224,364 | 0.6 | % | ||||||||
| 2003 | 2002 | % Change | ||||||||||||
| (in thousands) | ||||||||||||||
Nine Months Ended September 30, | ||||||||||||||
| Salaries and wages | $ | 252,908 | $ | 236,043 | 7.1 | % | ||||||||
| Employee benefits | 111,127 | 87,497 | 27.0 | |||||||||||
| Occupancy expense | 67,153 | 63,117 | 6.4 | |||||||||||
| Outside services | 53,843 | 48,532 | 10.9 | |||||||||||
| Intangible amortization | 17,290 | 14,283 | 21.1 | |||||||||||
| Equipment expense | 35,156 | 36,252 | (3.0 | ) | ||||||||||
| Stationery and supplies | 19,396 | 20,017 | (3.1 | ) | ||||||||||
| Advertising and promotion | 19,451 | 24,978 | (22.1 | ) | ||||||||||
| Restructuring and integration costs | — | 14,966 | — | |||||||||||
| Other | 97,088 | 66,597 | 45.8 | |||||||||||
| Total noninterest expense | $ | 673,412 | $ | 612,282 | 10.0 | % | ||||||||
| Three Months Ended March 31, | Change | |||||||||||||||
| 2004 | 2003 | $ | % | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Personnel: | ||||||||||||||||
| Salaries and wages | $ | 83,455 | $ | 84,662 | $ | (1,207 | ) | (1.4 | )% | |||||||
| Employee benefits | 36,237 | 37,646 | (1,409 | ) | (3.7 | ) | ||||||||||
| Total personnel expense | 119,692 | 122,308 | (2,616 | ) | (2.1 | ) | ||||||||||
| Occupancy | 21,615 | 22,320 | (705 | ) | (3.2 | ) | ||||||||||
| Outside services | 18,261 | 17,567 | 694 | 4.0 | ||||||||||||
| Intangible amortization | 5,763 | 5,763 | — | — | ||||||||||||
| Equipment | 12,133 | 11,156 | 977 | 8.8 | ||||||||||||
| Stationery and supplies | 6,164 | 7,018 | (854 | ) | (12.2 | ) | ||||||||||
| Advertising and promotion | 6,336 | 5,203 | 1,133 | 21.8 | ||||||||||||
| Other | 28,918 | 29,325 | (407 | ) | (1.4 | ) | ||||||||||
Total noninterest expense | $ | 218,882 | $ | 220,660 | $ | (1,778 | ) | (0.8 | )% | |||||||
First quarter 2004 as compared to first quarter 2003
As the table above shows in detail, the change in total noninterest expense from the previous year was not material in the third quarter.$218.9 million, a decrease of $1.8 million.
Salaries and wages expenses were $83.5 million, a decrease of $1.2 million. The increase in employee benefits of $5.8 million, or 20.3% in the three months ended September 30, 2003 compared to the same period in the previous yeardecrease is primarily attributable to higher workers’ compensation insurance, higher group healthcare insurancea lower full-time equivalent employee count and increaseda reduction in temporary services.
Employee benefits expense was $36.2 million, a decrease of $1.4 million, primarily due to lower pension and retirement plan expense. Occupancy expenses decreased $1.8 million or 7.4% in the three months ended September 30, 2003 compared to the same period in the prior year due to the consolidationexpense as a result of branches after the UCB acquisition. Advertisingreduced costs and promotion expenses decreasedlower recognized actuarial loss. The decrease was partially offset by $6.5 million in the period due to higher expenses in the third quarter of 2002 to promote brand recognition after the acquisition of UCB. The decreases in the other categories of noninterest expense in the third quarter from the previous year, such as salaries and wages, equipment expense, stationery and supplies are primarily from efficiencies of operations from our restructuring efforts in 2002. The increase of $13.5 million in the other expense category is primarily attributable to higher depreciation expense on software, higher general liability and property insurance, increased charitable contributions and increases in certain administrative costs.other benefits, primarily healthcare.
In the nine months ended September 30, 2003, noninterest expense increased $61.1 million, or 10.0% compared to the same period in 2002. The increase in salaries and wages of $16.9 million, or 7.1% in the nine month period ended September 30, 2003 compared to the prior year is attributable to the acquisition of UCB. The increase of $23.6 million in employee benefits is primarily attributable to higher worker’s compensation insurance, higher group healthcare insurance and increased retirement plan expenses. Intangible amortization increased 21.1% in the nine months ended September 30, 2003 from the prior year due to the acquisition of UCB and the additional intangibles acquired. Advertising and promotion expenses were much higher in the nine-month period in the previous year, decreasing $5.5$6.3 million, or 22.1% in the current year. This decrease wasan increase of $1.1 million, primarily the result of higher advertising expenses related to media outdoor and promotion expenses in 2002CD campaigns to promote brand recognitionrecognition.
OPERATING SEGMENTS
Our operations are managed principally through our two major bank subsidiaries, Bank of the West and maintain customer base afterFirst Hawaiian Bank. Bank of the acquisition of UCB. IncreasesWest operates primarily in other expenses include certain feesCalifornia, Oregon, Washington, Idaho, New Mexico and software depreciation that we incurred this year that were not incurred in 2002Nevada. It also conducts business nationally through its Consumer Finance Division as well as a leveraged lease restructuring charge from the second quarter.
As a result of the consolidationits Essex Credit Corporation and Trinity Capital subsidiaries. First Hawaiian Bank’s primary base of operations subsequentis in Hawaii, Guam and Saipan. It also has significant operations extending to the acquisition of UCB, we expect to achieve cost savings of approximately $75 million per year beginning in 2003. These anticipated cost savings primarily involve compensationCalifornia through its automobile dealer flooring and occupancy-related expenses.financing activities.
OPERATING SEGMENT RESULTS
Bank of the West
• Regional Banking First quarter 2004 as compared to first quarter 2003
The Regional Bankingsegment’s Group’s net income remained nearly flat in the three months ended September 30, 2003increased $4.4 million, from the same period in the prior year at$30.8 million to $35.2 million. Net interest income decreased $7.7increased $1.5 million or 5.7%1.2%. This increase was driven by a 9.4% increase in the third quarter comparedaverage loans, offset by a decline in demand deposit transfer pricing margins. Noninterest income increased $4.3 million, or 11.1%, driven by a repricing in our fee structure, an increase in investment sales volume and increased penalty fees collected on commercial real estate loans in this period. Noninterest expense increased $1.9 million, or 1.8%. Noninterest expense increased due to the same periodhigher costs associated with employee benefits. The provision for loan and lease losses decreased $3.1 million due to higher recoveries of previously charged off loans. The growth in thedeposit balances was driven by core deposits, offset by a decline in certificates of deposits.
2625
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
prior
| • | Commercial Banking | |||
| First quarter 2004 as compared to first quarter 2003 | ||||
The Commercial Banking segment’s net income increased $0.4 million or 1.1% from $37.2 million to $37.6 million. Net interest income decreased $3.2 million or 4.0%. The decrease in net interest income is a result of a 100 basis point drop in the transfer pricing margin for money market savings and demand deposits, despite an increase in average balances. The change in transfer pricing methodology on money market accounts contributed to the margin decrease. The margins on loans and leases remained constant as compared to last year. Noninterest income increased $2.0$2.7 million or 4.9%23.9%. The increase is related to non-yield related loan fees and noninteresttrading derivatives as well as unexpected early lease contract termination fees. Noninterest expense decreased $1.5$ 0.9 million or 1.4% this quarter from the quarter ended September 30, 2002.3.0%.
Average loan and lease balances increased by 5.8% to $7.3 billion, and average deposit balances increased by 15.8% to $3.4 billion.
| • | Consumer Finance | |||
| First quarter 2004 as compared to first quarter 2003 | ||||
The provision for credit losses decreased $2.5Consumer Finance segment’s net income was $14.4 million or 36.8%.
compared to $14.6 million. Net interest income decreasedwas $53.0 million, compared to $49.7 million, an increase of 6.6%. Noninterest income has remained flat. Noninterest expense increased from $15.3 million to $17.0 million.
The Consumer Finance Segment remains very competitively priced in the third quarter compared to the prior year due to interest rate compression. While average deposits have increased slightly, interest margins have shrunk. Demand deposit accounts margins have also declined. Noninterestindirect lending market. Though noninterest income increased due to debit card interchange revenue associated with increased volume usage and an additional MasterCard® product. Noninterest expenseremained flat, income decreased in the three month period compared to the prior year due to lower salary and wage expenses this quarter. This decreasegains on sales of loans through our Essex subsidiary, offset by an increase in expenses was coupled with savings from the consolidationother operating income as a result of branch facilities subsequentoriginating operating leases rather than finance leases (see Note 5 to the acquisitionConsolidated Financial Statements). In 2004, Essex began to keep in its portfolio specific types of UCB and partially offset by higher employee benefit costs.
For the nine months ended September 30, 2003 net income increased $1.1 million or 1.2% compare to the same period last year. Net interest income increased $14.3 million or 4.0%loans, rather than selling substantially all loans as it had done in the year to date period.past. Noninterest income was favorably impacted as a result of recording lease payments as noninterest income on all auto leases recorded as operating leases according to Statement of Financial Accounting Standards No. 13 starting in February 2004. Noninterest expense increased $17.5 million or 16.6% andby 11.1%. However, expenses as a percentage of average assets remained constant. The noninterest expense increased $32.1 million or 11.0%increase was primarily due to an increase in the nine months ended September 30, 2003cost of employee salaries and benefits.
Average assets were $8.1 billion compared to the prior year.$7.1 billion, an increase of 14.3%. This increase is primarily due to increased indirect loan production. The provision for credit losses increased $2.1 million due to a $1.0 billion increase in average loans.
First Hawaiian Bank
| • | Retail Banking | |||
| First quarter 2004 as compared to first quarter 2003 | ||||
The Retail Banking Group’s net income decreased to $16.7 million, down $1.6 million, or 8.7%. Net interest income decreased $0.9 million or 8.0% in the nine months ended September 30, 2003 compared to the same period in the prior year.
Net interest income increased in the nine month period ended September 30, 2003 due to the acquisition of UCB branches partially offset by the interest rate compression. Noninterest income has increased due to growth in deposit balances and the debit card interchange revenue from new VISA® and MasterCard® accounts. Noninterest expense increased in the first three quarters of 2003 compared to the prior year due to the acquisition of UCB and increases in employee benefit expenses for group insurance.
Average deposit balances in the nine months ended September 30, 2003 grew approximately 12.3% over last year.
Commercial Banking segment’s net income increased $6.2 million or 20.1% in the three months ended September 30, 2003 from $30.8 million in the three months ended September 30, 2002 to $37.0 million this year. Net interest income increased $5.0 million or 6.8% in the third quarter compared to the same period in the prior year. Noninterest income increased $4.4 million or 51.2% and noninterest expense increased $0.4 million or 1.4% this quarter from the quarter ended September 30, 2002.
Net interest income increased in the three months ended September 30, 2003 despite a declining interest rate environment that eroded margins on deposits. Margins on loans and leases increased 26 basis point, while average balances grew by 4.5%. Margins on deposits dropped 116 basis points due to lower transfer pricing rates, while average balances grew 20.2%. The increase in loan and lease margins reflects a change in portfolio mix between loans and leases, with higher yielding leases acquired through the acquisition of Trinity Capital and UCB acquisition replacing lower yielding loans. The $4.4 million increase in noninterest income was due to higher nonyield loan fees, derivative sales fees, and foreign exchange fees. The provision for credit losses has increased $0.3 million because of the increase in the volume of loans we administer.
Commercial Banking segment’s net income increased $34.9 million or 44.9% in the nine months ended September 30, 2003 from $77.7 million in the nine months ended September 30, 2002 to $112.6 million this year. Net interest income increased $52.0 million or 28.5%. Noninterest income increased $18.2 million or 90.1%. Noninterest expense increased $21.7 million or 32.7%. Provision for credit losses decreased $6.9 million.
Commercial Banking achieved growth in loans, deposits, and net income due to strong performance in SBA, Church Lending, Healthcare, and Cash Management, and the acquisitions of UCB in April 2002 and Trinity Capital in November 2002. Interest margins on loans and leases increased 24 basis points, as higher yielding leases replaced lower yielding loans in the portfolio. Deposit margins decreased 89 basis points1.6%, primarily due to a decliningdecrease in the net interest margin, which was negatively impacted by the effects of a lower interest rate environment. Noninterest income growth was drivenincreased $0.4 million, or 2.3%, primarily from increased fees on deposit accounts, partially offset by a gain on the UCB and Trinity acquisitions, nonyield relatedsale of foreclosed property in 2003. Noninterest expense increased $1.3 million, or 3.0%, primarily due to increased allocated corporate expenses. The provision for loan fees and lease servicing, as well as aggressive effortslosses decreased $0.3 million or 21.4%. The decrease in nonperforming assets and lower charge offs have reduced the provision for loan and lease losses.
Average assets increased 9.7%, primarily due to sell cash management, derivatives,increases in residential and foreign exchange services. Whilecommercial loans. Average assets also increased due to the Trinity Capital acquisition increased full-time equivalents (FTE) by 86, FTE in legacy Bankpurchase of the West and UCB businesses has declinedFirst Hawaiian Center building. Average deposits increased 7.0% primarily due to an increase in core deposits, partially offset by 73 from September 2002 to September 2003. Commercial Banking continues to pursue a strategydecrease in time certificates 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 loans and Church Lending.deposit.
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BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
Acquisitions of UCB in April 2002 and Trinity Capital in November 2002 resulted in increases of 22.7% in average loans and 61.0% in average deposits in the nine months ended September 30, 2003. The Commercial Banking Segment continues to pursue a strategy of leveraging efficiencies gained through the expanded resources resulting from the UCB acquisition, while focusing on niche markets where there is competitive advantage, such as equipment leasing, SBA loans and religious lending.
| • | Consumer Finance | |||
| First quarter 2004 as compared to first quarter 2003 | ||||
Consumer Finance segment’sFinance’s net income for the three months ended September 30, 2003decreased to $9.3 million, down $0.3 million, or 3.1%. Net interest income was $16.5$20.7 million compared to $14.1$18.5 million, a year ago.an increase of 11.9%. This was the result of increased interest income on higher loan balances. Noninterest income decreased $2.2 million or 21.8%. The decrease was caused by lower gains on the sale of mortgages. Noninterest expense remained flat. The provision for loan and lease losses decreased $0.2 million or 10.5%. The decrease reflects lower charge offs and improved credit quality.
Average assets increased 3.0%, primarily due to increases in consumer and dealer flooring loans.
| • | Commercial Banking | |||
| First quarter 2004 as compared to first quarter 2003 | ||||
Commercial Banking’s net income increased to $6.0 million, up $0.5 million, or 9.1%. Net interest income increased $0.3 million or 3.6%, primarily due to higher fees from loans that were paid off in the third quarter 2003 was $53.0 million, compared with $47.7 million for the same period 2002, an increase of 11.1%.2004. Noninterest income increased $0.1$0.3 million for the quarter compared to the prior year. Noninterest expense increased from $13.5 million in the three months ended September 30, 2002 to $15.0 million this year, an increase of 11.1%. Our provision for credit allowances also increased 5.4% in the third quarter of this year compared to the third quarter of 2002.
The Consumer Finance Segment remains very competitively priced in the indirect lending market. Noninterest income in the three months ended September 30, 2003 was $2.9 million, compared with $2.8 million for the same period 2002. This increase wasor 18.8%, primarily due to an increase in loan servicing related fees. Noninterest expense remained relatively flat. The provision for the third quarter 2003loan and lease losses increased by 11.1% over the same period in 2002. This increase was$0.2 million, primarily due to an increasea recovery on a loan previously charged off in the cost of employee salaries and benefits. Other expense categories experienced2003.
Average assets decreased 5.8%, primarily due to a decrease due to efficiency gains.in loans.
Net
| • | Financial Management | |||
| First quarter 2004 as compared to first quarter 2003 | ||||
The Financial Management Group’s net income for the nine months ended September 30, 2003of $0.7 million was $44.3 million compared to $36.5 million in the same period a year ago. Net interest income for the nine months ended September 30, 2003 was $153.4 million, compared to $132.9 million for the same period in 2002, an increase of 15.4%.unchanged from 2003. Noninterest income increased 11.0% and noninterest expense increased 9.8% in the first three-quarters of 2003 compared to the corresponding period of 2002. The provision for credit losses increased $5.5by $0.3 million, from $37.7 million in the first three quarters of 2002 to $43.2 million in 2003.
Noninterest income for the nine months ended September 30, 2003 was $9.1 million, compared with $8.2 million for the same period in 2002. This increase was primarily due to gains on sales of loans through our Essex subsidiary, increases in installment non-yield related loan fees, and other retail service charges. Noninterest expense for the nine months ended September 30, 2003 increased by $4.1 million from the same period 2002. This increase was primarily due to greater staff and occupancy requirements associated with growth and the UCB acquisition. 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.
Average assets for the nine months ended September 30, 2003 were $7.4 billion, compared to $6.5 billion, an increase of $0.9 billion, or 13.5% in the nine months ended September 30, 2002. This increase is due to both the UCB acquisition that took place in 2002 and increased indirect loan production.
First Hawaiian Bank
Retail Banking segment’s net income for the third quarter ended September 30, 2003 increased $3.6 million, or 17.1% compared to the same period in 2002. Net interest income for the third quarter increased by $4.1 million, or 6.4% compared to the prior year. The increase was primarily due to higher commercial loan and mortgage loaninvestment management fees. Investment fees were positively impacted by the upturn in the equity markets. Noninterest income for the three months ended September 30, 2003expense increased by $2.2$0.2 million, or 14.0% compared to prior year. The increase was primarily due to higher account analysis fees. Noninterest expenseincreases in salaries and employee benefits.
INVESTMENT SECURITIES
The Company focuses on the following four objectives for its investment portfolio:
| • | Support its needs for liquidity to fund loans or to meet unexpected deposit runoffs. Liquidity can be met by having investments with relatively short maturities and/or a high degree of marketability. | |||
| • | Act as a vehicle to make meaningful shifts in the Company’s overall interest rate risk profile. | |||
| • | Provide collateral to secure the Company’s public funds-taking activities. | |||
| • | Provide maximum level of after-tax earnings consistent with the safety factors of quality, maturity, marketability and risk diversification. | |||
The recent and relatively large increases in the third quarter increased by $2.3 million, or 5.3% compared to prior year. The increase was primarily due to higher retirement plan expense. Provision for credit losses for the third quarter decreased by $0.8 million, or 38.1% compared to prior year.
Net income for the nine months ended September 30, 2003 increased $4.2 million, or 6.4% comparedportfolio are directly related to the same periods in 2002. Nethigh deposit growth that has been experienced over the past two years. Because of the resultant high degree of liquidity that must be invested, the current investment strategy is focused primarily on managing overall interest income for nine months ended September 30, 2003 increased $2.9 million, or 1.5% compared to prior year. The increase was primarily due to higher commercial loanrate risk and mortgage loan fees. Noninterest income for the nine months ended September 30, 2003 increased by $4.9 million, or 10.5% compared to prior year. The increase was primarily due to higher account analysis fees. Noninterest expense for the nine months ended September 30, 2003 increased $4.2 million or 3.2% compared to prior year. The increase was primarily due to higher retirement plan expense. Provision for credit losses for the year-to-date period ended September 30, 2003 decreased by $1.4 million, or 22.6% compared to prior year.maximizing earnings.
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BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
Consumer segment’s net incomeHeld-to-Maturity
There were no held-to-maturity investment securities at March 31, 2004, December 31, 2003 or March 31, 2003.
Available-for-Sale
Amortized cost and fair value of available-for-sale investment securities at March 31, 2004, December 31, 2003 and March 31, 2003 were as follows:
| March 31, 2004 | ||||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| Cost | Gains | Losses(1) | Fair Value | |||||||||||||
| (in thousands) | ||||||||||||||||
| U.S. Treasury and other U.S. Government agencies and corporations | $ | 1,557,294 | $ | 17,826 | $ | (580 | ) | $ | 1,574,540 | |||||||
| Mortgage and asset-backed securities: | ||||||||||||||||
| Government | 2,447,891 | 34,362 | (12,342 | ) | 2,469,911 | |||||||||||
| Other | 666,555 | 10,049 | (354 | ) | 676,250 | |||||||||||
| Collateralized mortgage obligations | 1,088,833 | 5,899 | (2,082 | ) | 1,092,650 | |||||||||||
| State and political subdivisions | 7,794 | 523 | (12 | ) | 8,305 | |||||||||||
Other(2) | 208,260 | 598 | (121 | ) | 208,737 | |||||||||||
| Total available-for-sale investment securities | $ | 5,976,627 | $ | 69,257 | $ | (15,491 | ) | $ | 6,030,393 | |||||||
[Continued from above table, first column(s) repeated]
| December 31, 2003 | March 31, 2003 | |||||||||||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Amortized | Unrealized | Unrealized | |||||||||||||||||||||||||||
| Cost | Gains | Losses(1) | Fair Value | Cost | Gains | Losses(1) | Fair Value | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| U.S. Treasury and other U.S. Government agencies and corporations | $ | 1,588,359 | $ | 14,110 | $ | (2,256 | ) | $ | 1,600,213 | $ | 1,411,466 | $ | 22,115 | $ | (107 | ) | $ | 1,433,474 | ||||||||||||||
| Mortgage and asset-backed securities: | ||||||||||||||||||||||||||||||||
| Government | 2,356,615 | 23,397 | (23,879 | ) | 2,356,133 | 1,840,240 | 37,515 | (1,283 | ) | 1,876,472 | ||||||||||||||||||||||
| Other | 691,466 | 7,990 | (1,425 | ) | 698,031 | 558,218 | 13,556 | (298 | ) | 571,476 | ||||||||||||||||||||||
| Collateralized mortgage obligations | 1,066,679 | 2,611 | (8,119 | ) | 1,061,171 | 474,003 | 5,075 | (246 | ) | 478,832 | ||||||||||||||||||||||
| State and political subdivisions | 15,925 | 355 | (61 | ) | 16,219 | 15,346 | 274 | (145 | ) | 15,475 | ||||||||||||||||||||||
Other(2) | 196,450 | 173 | (628 | ) | 195,995 | 152,439 | 422 | (106 | ) | 152,755 | ||||||||||||||||||||||
| Total available-for-sale investment securities | $ | 5,915,494 | $ | 48,636 | $ | (36,368 | ) | $ | 5,927,762 | $ | 4,451,712 | $ | 78,957 | $ | (2,185 | ) | $ | 4,528,484 | ||||||||||||||
| (1) | At March 31, 2004, December 31, 2003 and March 31, 2003, the Company held no securities that had been in a continuous unrealized loss position for 12 months or more. | |
| (2) | Includes investment in restricted stock of the Federal Home Loan Bank of $155.9 million, $153.3 million and $111.3 million as of March 31, 2004, December 31, 2003 and March 31, 2003, respectively. |
Proceeds from the third quarter ended September 30, 2003 increased $0.7 million, or 8.6% compared to prior year. Net interest income for the third quarter increased by $4.5 million, or 25.0% compared to prior year. The increase was primarily due to higher loan volume and higher interchange and mortgage loan fees. Noninterest income for the third quarter of 2003 decreased $2.4 million, or 30.8%, compared to prior year. The decrease was primarily due to large gains on sales of mortgage loans in August 2002. Noninterest expense for the third quarter increased $1.3available-for-sale investment securities portfolio were $56.4 million or 12.5% compared to prior year. The increase was primarily due to higher incentive compensation, temporary help and higher retirement plan expense. Provision for credit losses in the third quarter of 2003 compared to the same period in the prior year decreased $0.1$101.1 million or 4%.
Net income for the nine months ended September 30, 2003 increased $6.9 million, or 32.2% compared to prior year. Net interest income for the nine months ended September 30, 2003 increased by $10.7 million, or 20.2% compared to prior year. Noninterest income for the nine months ended September 30, 2003 was up $3.5 million, or 18.1%, compared to prior year. The increase was primarily due to higher merchant service income and higher gains on sales of loans. Noninterest expense for the nine months ended September 30, 2003 increased $3.6 million, or 11.7% compared to prior year. The increases were primarily due to higher incentive compensation, temporary help and higher retirement plan expense. There was no change in the provision for credit losses in the first nine months of 2003, compared to prior year.
Commercial Bankingsegment’s net income for the third quarter ended September 30, 2003 increased $2.2 million, or 48.9%, compared to the same periods in 2002. Net interest income for the third quarter increased $0.9 million, or 12.9% compared to the same periods in the prior year. Noninterest income for the three months ended September 30,March 31, 2004 and 2003, increased $1.4 million, or 82.4% over the same periods in the prior year. The large increase was primarily due to the gain on sale of low-income housing projects and equipment in July 2003. Noninterest expense for the third quarter was up $0.1 million, or 5.3% compared to the same periods in the prior year. Provision for credit losses for the third quarter decreased by $0.2 million, or 66.7% compared to prior year.respectively.
Net income for the nine months ended September 30, 2003 increased $3.5 million, or 26.5%, compared to prior year. Net interest income for the nine months ended September 30, 2003 increased $2.8 million, or 13.7%, compared to the same periods in the prior year. Noninterest income for the nine months ended September 30, 2003 increased $1.4 million, or 28.6% over the same periods in the prior year. The large increase was primarily due to the gain on sale of low-income housing projects and equipment in July 2003. Noninterest expense for the nine months ended September 30, 2003 was up $0.9 million, or 16.4% compared to the same periods in the prior year. Provision for credit losses for the nine months ended September 30, 2003 decreased by $0.5 million, or 83.3% compared to prior year.
Financial Managementsegment’s net income was $1.1 million for the third quarter of 2003, compared to $0.9 million for the same period in 2002, an increase of 22.2%. Net interest income for the third quarter of 2003 decreased $0.1 million, compared to the same period in the prior year. Noninterest income was up $0.7 million or 9.7%, for the three months ended September 30, 2003, compared to the same period in the prior year. Noninterest expense for the third quarter was up $0.2 million, or 3.4% compared to prior year. The increases were primarily due to higher salaries and retirement plan expense.
Net income for the nine months ended September 30, 2003 was $2.2 million, a decrease of 24.1%, from $2.9 million for the same period in 2002. There was no change in net interest income for the nine months ended September 30, 2003, compared to prior year. Noninterest income was up $0.4 million, or 1.8%, for the nine months ended September 30, 2003, compared to the same period in the prior year. Noninterest expense for the nine months ended September 30, 2003 was up $1.5 million, or 8.5% compared to prior year. The increases were primarily due to higher salaries and retirement plan expense.
29
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
INVESTMENT SECURITIES
Available-for-Sale
The fair value of available-for-sale securities at September 30, 2003 increased by approximately $1.7 billion, or 45.9%, compared to the value at September 30, 2002 and increased by approximately $1.5 billion, or 37.3%, compared to December 31, 2002. While we still continue to originate and purchase loans, we have increased our purchases of investment securities as the slow economy has not been conducive to significant loan originations.
The following table provides the cost and fair value for the major components of securities available for sale carried at fair value.
| September 30, 2003 | December 31, 2002 | September 30, 2002 | |||||||||||||||||||||||||
| Estimated | Estimated | Estimated | |||||||||||||||||||||||||
| fair | fair | fair | |||||||||||||||||||||||||
| Cost | value | Cost | value | Cost | value | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||
| Securities of U.S. Treasury and federal agencies: | $ | 1,463,688 | $ | 1,479,594 | $ | 1,312,430 | $ | 1,338,310 | $ | 1,096,605 | $ | 1,119,443 | |||||||||||||||
| Securities of U.S. states and political subdivisions | 15,601 | 15,824 | 14,920 | 15,025 | 15,008 | 15,117 | |||||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||||||
| Federal and federally sponsored agencies | 2,175,235 | 2,179,420 | 1,366,656 | 1,403,374 | 1,366,803 | 1,402,292 | |||||||||||||||||||||
| Private collateralized mortgage obligations | 880,570 | 875,807 | 447,176 | 453,331 | 530,223 | 539,719 | |||||||||||||||||||||
| Total mortgage-backed securities | 3,055,805 | 3,055,227 | 1,813,832 | 1,856,705 | 1,897,026 | 1,942,011 | |||||||||||||||||||||
| Total debt securities | 4,535,094 | 4,550,645 | 3,141,182 | 3,210,040 | 3,008,639 | 3,076,571 | |||||||||||||||||||||
| Equity securities | 852,533 | 861,724 | 719,115 | 730,729 | 622,756 | 631,902 | |||||||||||||||||||||
| Total | $ | 5,387,627 | $ | 5,412,369 | $ | 3,860,297 | $ | 3,940,769 | $ | 3,631,395 | $ | 3,708,473 | |||||||||||||||
The following table presents the amortized cost, unrealized gains and losses and fair values of available-for-sale investment securities as of the dates indicated:
| September 30, | December 31, | September 30, | ||||||||||
| 2003 | 2002 | 2002 | ||||||||||
| (in thousands) | ||||||||||||
| Amortized cost | $ | 5,387,627 | $ | 3,860,297 | $ | 3,631,395 | ||||||
| Unrealized gains | 55,922 | 82,838 | 79,265 | |||||||||
| Unrealized losses | (31,180 | ) | (2,366 | ) | (2,187 | ) | ||||||
| Fair value | $ | 5,412,369 | $ | 3,940,769 | $ | 3,708,473 | ||||||
Gains and losses realized on the sales of available-for-sale investment securities are determined using the specific identification method. Gross realized gains and losses on available-for-sale investment securities for the three and nine months ended September 30, 2003 and 2002periods indicated were as follows:
| Three months Ended | Nine months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Realized gains | $ | 555 | $ | 402 | $ | 3,913 | $ | 1,124 | ||||||||
| Realized losses | — | (120 | ) | — | (158 | ) | ||||||||||
| Securities gains, net | $ | 555 | $ | 282 | $ | 3,913 | $ | 966 | ||||||||
| Three Months Ended March 31, | ||||||||
| 2004 | 2003 | |||||||
| (Dollars in thousands) | ||||||||
| Realized gains | $ | 368 | $ | 1,892 | ||||
| Realized losses | (1 | ) | — | |||||
| Securities gains (losses), net | $ | 367 | $ | 1,892 | ||||
3028
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
LOANS AND LEASES
The following table sets forth the loan and lease portfolio by major categories and loan and lease mix at September 30, 2003,March 31, 2004, December 31, 20022003 and September 30, 2002:
| September 30, 2003 | December 31, 2002 | September 30, 2002 | ||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||
| Commercial, financial and agricultural | $ | 4,446,197 | 17.6 | % | $ | 4,802,581 | 19.9 | % | $ | 4,764,805 | 19.8 | % | ||||||||||||||
| Real estate: | ||||||||||||||||||||||||||
| Commercial | 5,023,284 | 19.9 | 4,806,220 | 19.9 | 4,785,058 | 19.9 | ||||||||||||||||||||
| Construction | 919,115 | 3.6 | 971,861 | 4.0 | 1,042,011 | 4.3 | ||||||||||||||||||||
| Residential: | ||||||||||||||||||||||||||
| Insured, guaranteed or conventional | 4,326,332 | 17.1 | 4,022,810 | 16.7 | 4,241,750 | 17.6 | ||||||||||||||||||||
| Home equity credit lines | 705,736 | 2.8 | 726,535 | 3.0 | 718,143 | 3.0 | ||||||||||||||||||||
| Total real estate loans | 10,974,467 | 43.4 | 10,527,426 | 43.6 | 10,786,962 | 44.8 | ||||||||||||||||||||
| Consumer | 7,124,576 | 28.2 | 6,021,510 | 25.0 | 5,858,098 | 24.3 | ||||||||||||||||||||
| Lease financing | 2,365,395 | 9.4 | 2,398,681 | 9.9 | 2,272,232 | 9.5 | ||||||||||||||||||||
| Foreign | 353,902 | 1.4 | 395,889 | 1.6 | 389,592 | 1.6 | ||||||||||||||||||||
| Total loans and leases | 25,264,537 | 100.0 | % | 24,146,087 | 100.0 | % | 24,071,689 | 100.0 | % | |||||||||||||||||
| Less allowance for credit losses | 390,194 | 384,081 | 385,190 | |||||||||||||||||||||||
| Total net loans and leases | $ | 24,874,343 | $ | 23,762,006 | $ | 23,686,499 | ||||||||||||||||||||
| Total loans and leases to: | ||||||||||||||||||||||||||
| Total assets | 67.5 | % | 69.5 | % | 70.3 | % | ||||||||||||||||||||
| Total earning assets | 80.1 | % | 84.3 | % | 84.4 | % | ||||||||||||||||||||
| Total deposits | 97.5 | % | 98.3 | % | 98.8 | % | ||||||||||||||||||||
| March 31, 2004 | December 31, 2003 | March 31, 2003 | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
| Commercial, financial and agricultural | $ | 4,441 | 16.9 | % | $ | 4,492 | 17.5 | % | $ | 4,637 | 19.3 | % | ||||||||||||
| Real estate: | ||||||||||||||||||||||||
| Commercial | 5,163 | 19.7 | 5,146 | 20.0 | 4,871 | 20.3 | ||||||||||||||||||
| Construction | 958 | 3.7 | 953 | 3.7 | 944 | 3.9 | ||||||||||||||||||
| Residential | 5,338 | 20.4 | 5,020 | 19.5 | 4,568 | 19.0 | ||||||||||||||||||
| Total real estate loans | 11,459 | 43.8 | 11,119 | 43.2 | 10,383 | 43.2 | ||||||||||||||||||
| Consumer | 7,659 | 29.2 | 7,345 | 28.6 | 6,305 | 26.2 | ||||||||||||||||||
| Lease financing | 2,321 | 8.8 | 2,417 | 9.4 | 2,344 | 9.7 | ||||||||||||||||||
| Foreign: | ||||||||||||||||||||||||
| Commercial and industrial | 61 | 0.2 | 63 | 0.2 | 80 | 0.3 | ||||||||||||||||||
| Other | 288 | 1.1 | 286 | 1.1 | 307 | 1.3 | ||||||||||||||||||
| Total foreign loans | 349 | 1.3 | 349 | 1.3 | 387 | 1.6 | ||||||||||||||||||
Total loans and leases | $ | 26,229 | 100.0 | % | $ | 25,722 | 100.0 | % | $ | 24,056 | 100.0 | % | ||||||||||||
| Less allowance for loan and lease losses | 396 | 392 | 396 | |||||||||||||||||||||
| Total net loans and leases | $ | 25,833 | $ | 25,330 | $ | 23,660 | ||||||||||||||||||
| Total loans and leases to: | ||||||||||||||||||||||||
| Total assets | 67.4 | % | 67.1 | % | 68.9 | % | ||||||||||||||||||
| Total interest earning assets | 79.2 | % | 79.5 | % | 82.9 | % | ||||||||||||||||||
| Total deposits | 98.1 | % | 97.4 | % | 98.8 | % | ||||||||||||||||||
We continue to diversify our loan and lease portfolio, both geographically and by industry. Our overall growth in loan and lease volume came primarily from our Mainland United States operations. The loan and lease portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. There was a $1.2$2.2 billion, or 5.0%9.0%, increase in total loans and leases from September 30, 2002March 31, 2003 and a $1.1 billion,$507.4 million, or 4.6%2.0% increase compared to December 31, 2002.2003.
When comparing the current period to DecemberMarch 31, 20022003 there was an increase of $1.1$1.4 billion, or 18.3%21.5%, in consumer loans due to continued strength in the consumer market. Consumer loans consist primarily of open-and closed-end direct and indirect credit facilities for personal, automobile, recreational vehicle, marine, credit card and unsecured financing.household purchases. This increase was partially offset by a decrease of $356.4$196 million, or 7.4%4.2%, in commercial lending resulting from run off. Total real estate loans increased $1.1 billion or 10.4% from March 31, 2003 primarily due to the origination offrom growth in residential and commercial real estate lending.
Total loans and the purchase of approximately $935 millionleases increased slightly from December 31, 2003. This increase was mainly driven by increases in residential loans which was substantially offset by run off due to refinancing of residential real estate and consumer lending. Total real estate loans with other institutions.
When comparing the current period to September 30, 2002increased $0.3 million, or 3.1%, and consumer loans increased $0.3 million, or 4.3%, in the period ending March 31, 2004 compared to December 31, 2003. These increases were partially offset by $1.3 billion, or 21.6%,declines in commercial, financial and agricultural lending and lease financing.
Our mix of loans and leases has remained similar to our portfolio in the period ending March 31, 2003 with a few exceptions. We have decreased exposures in certain commercial, financial and agricultural loans in response to concentration levels from 19.3% on March 31, 2003 to 16.9% on March 31, 2004. Our portfolio of consumer loans has increased while lease financing has decreased slightly. This shift is due to the continued strengthchanges in the consumer market. This increase was partially offset by a decrease of $318.6 million, or 6.7%, in commercialmarket and attractive interest rates on consumer lending. Low interest rates on consumer products have turned consumers away from leasing to purchasing.
Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. At September 30, 2003,March 31, 2004, we did not have a
29
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
concentration of loans greater than 10% of total loans which is not otherwise disclosed as a category of loans as shown in the table above.
Off-balance-sheet commitments were as follows at September 30,March 31, for the years indicated:
| Notional/Contract Amount | |||||||||
| 2003 | 2002 | ||||||||
| (in thousands) | |||||||||
| Contractual amounts which represent credit risk: | |||||||||
| Commitments to extend credit | $ | 7,741,817 | $ | 7,893,668 | |||||
| Standby letters of credit | 792,910 | 821,844 | |||||||
| Commercial letters of credit | 69,751 | 77,047 | |||||||
31
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
| Notional/Contract Amount | ||||||||
| 2004 | 2003 | |||||||
| (Dollars in thousands) | ||||||||
| Contractual Amounts Which Represent Credit Risk: | ||||||||
| Commitments to extend credit | $ | 8,435,507 | $ | 7,313,461 | ||||
| Standby letters of credit | 668,888 | 806,596 | ||||||
| Commercial letters of credit | 65,659 | 78,294 | ||||||
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets and restructured loans at September 30, 2003,March 31, 2004, December 31, 20022003 and September 30, 2002 wereMarch 31, 2003 are as follows:
| September 30, | December 31, | September 30, | ||||||||||||||
| 2003 | 2002 | 2002 | ||||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Nonperforming Assets: | ||||||||||||||||
| Nonaccrual: | ||||||||||||||||
| Commercial, financial and agricultural | $ | 89,698 | $ | 145,920 | $ | 177,988 | ||||||||||
| Real estate: | ||||||||||||||||
| Commercial | 40,694 | 48,071 | 46,720 | |||||||||||||
| Residential: | ||||||||||||||||
| Insured, guaranteed, or conventional | 8,132 | 5,460 | 8,223 | |||||||||||||
| Total real estate loans | 48,826 | 53,531 | 54,943 | |||||||||||||
| Consumer | 2,083 | 4,769 | 3,175 | |||||||||||||
| Lease financing | 12,047 | 11,532 | 8,937 | |||||||||||||
| Foreign | 7,210 | 10,088 | 9,069 | |||||||||||||
| Total nonaccrual loans and leases | 159,864 | 225,840 | 254,112 | |||||||||||||
| Other real estate owned and repossessed personal property | 19,237 | 19,613 | 15,523 | |||||||||||||
| Total nonperforming assets | $ | 179,101 | $ | 245,453 | $ | 269,635 | ||||||||||
Past due loans and leases(1): | ||||||||||||||||
| Commercial, financial and agricultural | $ | 15,792 | $ | 9,005 | $ | 9,591 | ||||||||||
| Real estate: | ||||||||||||||||
| Commercial | 6,226 | 2,952 | 8,142 | |||||||||||||
| Residential: | ||||||||||||||||
| Insured, guaranteed, or conventional | 1,499 | 5,082 | 3,263 | |||||||||||||
| Home equity credit lines | 334 | 661 | 685 | |||||||||||||
| Total real estate loans | 8,059 | 8,695 | 12,090 | |||||||||||||
| Consumer | 2,536 | 1,984 | 2,214 | |||||||||||||
| Lease financing | 72 | 232 | 113 | |||||||||||||
| Foreign | 213 | 1,181 | 3,176 | |||||||||||||
| Total past due loans and leases | $ | 26,672 | $ | 21,097 | $ | 27,184 | ||||||||||
| Accruing Restructured Loans: | ||||||||||||||||
| Commercial, financial and agricultural | $ | 33 | $ | 69 | $ | 74 | ||||||||||
| Real estate: | ||||||||||||||||
| Commercial | 1,637 | 4,570 | 4,615 | |||||||||||||
| Total real estate loans | 1,637 | 4,570 | 4,615 | |||||||||||||
| Total accruing restructured loans and leases | $ | 1,670 | $ | 4,639 | $ | 4,689 | ||||||||||
| Nonperforming assets to total loans and leases and other real estate owned and repossessed personal property (end of period): | ||||||||||||||||
| Excluding past due loans and leases | 0.71 | % | 1.02 | % | 1.12 | % | ||||||||||
| Including past due loans and leases | 0.81 | % | 1.10 | % | 1.23 | % | ||||||||||
| Nonperforming assets to total assets (end of period): | ||||||||||||||||
| Excluding past due loans and leases | 0.48 | % | 0.71 | % | 0.79 | % | ||||||||||
| Including past due loans and leases | 0.55 | % | 0.77 | % | 0.87 | % | ||||||||||
| March 31, 2004 | December 31, 2003 | March 31, 2003 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Nonperforming Assets: | ||||||||||||
| Nonaccrual: | ||||||||||||
| Commercial, financial and agricultural | $ | 66,060 | $ | 66,100 | $ | 129,941 | ||||||
| Real estate: | ||||||||||||
| Commercial | 47,897 | 41,508 | 51,852 | |||||||||
| Construction | — | — | — | |||||||||
| Residential | 8,093 | 8,176 | 7,909 | |||||||||
| Total real estate loans | 55,990 | 49,684 | 59,761 | |||||||||
| Consumer | 2,457 | 3,634 | 4,459 | |||||||||
| Lease financing | 7,550 | 8,038 | 13,527 | |||||||||
| Foreign | 5,607 | 6,341 | 8,758 | |||||||||
| Total nonaccrual loans and leases | 137,664 | 133,797 | 216,446 | |||||||||
| Other real estate owned and repossessed personal property | 15,571 | 17,387 | 18,545 | |||||||||
| Total nonperforming assets | $ | 153,235 | $ | 151,184 | $ | 234,991 | ||||||
Past due loans and leases(1): | ||||||||||||
| Commercial, financial and agricultural | $ | 18,520 | $ | 17,545 | $ | 11,387 | ||||||
| Real estate: | ||||||||||||
| Commercial | 6,363 | 7,410 | 5,613 | |||||||||
| Construction | — | — | 907 | |||||||||
| Residential | 1,190 | 1,084 | 2,783 | |||||||||
| Total real estate loans | 7,553 | 8,494 | 9,303 | |||||||||
| Consumer | 2,602 | 2,559 | 1,792 | |||||||||
| Lease financing | 16 | 127 | 393 | |||||||||
| Foreign | 303 | 651 | 563 | |||||||||
| Total past due loans and leases | $ | 28,994 | $ | 29,376 | $ | 23,438 | ||||||
| Accruing Restructured Loans: | ||||||||||||
| Commercial, financial and agricultural | $ | 55 | $ | 60 | $ | 68 | ||||||
| Real estate: | ||||||||||||
| Commercial | 1,596 | 1,616 | 4,523 | |||||||||
| Total real estate loans | 1,596 | 1,616 | 4,523 | |||||||||
| Total accruing restructured loans and leases | $ | 1,651 | $ | 1,676 | $ | 4,591 | ||||||
| Nonperforming assets to total loans and leases and other real estate owned and repossessed personal property (end of period): | ||||||||||||
| Excluding past due loans and leases | 0.58 | % | 0.59 | % | 0.98 | % | ||||||
| Including past due loans and leases | 0.69 | 0.70 | 1.07 | |||||||||
| Nonperforming assets to total assets (end of period): | ||||||||||||
| Excluding past due loans and leases | 0.39 | 0.39 | 0.67 | |||||||||
| Including past due loans and leases | 0.47 | 0.47 | 0.74 | |||||||||
| (1) | Represents loans and leases which are past due 90 days or more as to |
3230
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
Nonperforming assets at September 30, 2003March 31, 2004 were $179.1$153.2 million, or 0.71%,0.58% of total loans and leases and other real estate owned (“OREO”),(OREO) and repossessed personal property, compared to 1.02%0.59% at December 31, 20022003 and 1.12%0.98% at September 30, 2002.March 31, 2003.
Nonperforming assets at September 30, 2003 were 0.48% of total assets, compared to 0.71% at DecemberMarch 31, 2002 and 0.79% at September 30, 2002.
Nonperforming assets at September 30, 20032004 decreased by $66.4$81.8 million, or 27.0%34.8%, from March 31, 2003 and increased $2.1 million, or 1.4%, from December 31, 2002 and decreased by $90.5 million, or 33.6%, from September 30, 2002. Nonaccrual2003. The decrease in nonaccrual loans for commercial, financial and agricultural lending decreased $56.2 million or 38.5% from December 31, 2002 and decreased $88.3 million or 49.6% from the same period last year. Total real estate loans have decreased $4.7 million or 8.8% since December 31, 2002previous year was primarily due to resolution of problem relationships in commercial lending and $6.1 million or 11.1% since September 30, 2002. Within thedecreases in nonaccrual real estate loans category, decreases in commercial real estate loans of $7.4and lease financing. Foreign nonperforming assets decreased at March 31, 2004 by $3.2 million, or 15.3%36.0%, from DecemberMarch 31, 2002 were partially offset by increases in nonaccrual residential real estate loans of $2.7 million or 48.9%. Total nonaccrual loans and leases decreased $66.0 million, or 29.2% since December 31, 2002 and $94.2 million, or 37.1% since September 30, 2002. These decreases resulted from the resolution of problem relationships.
Foreign nonperforming loans decreased at September 30, 2003 by $2.9 million, or 28.5% from December 31, 2002 and by $1.9 million, or 20.5% from September 30, 2002. Our2003. However, our overall foreign loan portfolio, composed primarily of loans in Guam and Saipan, represents a relatively small component 1.4%(1.3%) of our total loan portfolio at September 30, 2003.March 31, 2004. The increase in nonperforming assets from December 31, 2003 is primarily due to an increase in nonperforming commercial real estate loans of $6.4 million or 15.4 %.
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 and 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.
While the majority of consumer loans and leases are subject to our general policies regarding nonaccrual loans, certainsubstantially all past-due consumer loans and leases are not placed on nonaccrual status because they 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 interest 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.
Other than the loans listed, 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 under existing terms. Loans past due 90 days or more and still accruing interest totaled $26.7$29.0 million at September 30,March 31, 2004, a decrease of $0.4 million or 1.3%, from December 31, 2003, but an increase of $5.6 million, or 26.4%23.7%, from DecemberMarch 31, 2002 and a2003. The decrease of $0.5 million, or 1.9%, from September 30, 2002. The increase at September 30, 2003March 31, 2004 compared to December 31, 20022003 was primarily due to commercial real estate loans offset by an increase in commercial, financial and agricultural loans. The increase at March 31, 2004 compared to March 31, 2003 was primarily due to commercial, financial and agricultural lending which increased $6.8 million or 75.4% from December 31, 2002 and real estate-commercial loans, which increased $3.3 million or 110.9%. These increases were partially offset by decreasesa decrease in residentialpast due real estate loans of $3.6 million or 70.5% from December 31, 2002 and decreases in foreign loans of $1.0 million or 82.0% from December 31, 2002. The decrease at September 30, 2003 compared to September 30, 2002 was primarily due to real estate loans that decreased $4.0 million or 33.3% and foreign loans that decreased $3.0 million or 93.3% from last year, partially offset by commercial, financial and agricultural loans which increased $6.2 million or 64.7% from last year.loans. All of the loans that are past due 90 days or more and still accruing interest are, in our judgment, adequately collateralized and in the process of collection.
3331
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
PROVISION AND ALLOWANCE FOR CREDITLOAN AND LEASE LOSSES
The following table sets forth the activity in the allowance for creditloan and lease losses for the periods indicated:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||
| Loans and leases outstanding (end of period) | $ | 25,264,537 | $ | 24,071,689 | $ | 25,264,537 | $ | 24,071,689 | |||||||||||
| Allowance for credit losses: | |||||||||||||||||||
| Balance at beginning of period | $ | 391,518 | $ | 387,272 | $ | 384,081 | $ | 194,654 | |||||||||||
| Allowance purchased | — | — | — | 210,000 | |||||||||||||||
| Loans and leases charged off: | |||||||||||||||||||
| Commercial, financial and agricultural | 13,344 | 16,512 | 33,213 | 49,956 | |||||||||||||||
| Real estate: | |||||||||||||||||||
| Commercial | 216 | 1,970 | 1,270 | 3,604 | |||||||||||||||
| Residential | 161 | 241 | 757 | 950 | |||||||||||||||
| Consumer | 12,658 | 11,469 | 41,769 | 30,440 | |||||||||||||||
| Lease financing | 5,833 | 5,017 | 18,930 | 22,294 | |||||||||||||||
| Foreign | 537 | 647 | 1,896 | 1,515 | |||||||||||||||
| Total loans and leases charged off | 32,749 | 35,856 | 97,835 | 108,759 | |||||||||||||||
| Recoveries on loans and leases previously charged off: | |||||||||||||||||||
| Commercial, financial and agricultural | 2,156 | 2,912 | 23,017 | 6,413 | |||||||||||||||
| Real estate: | |||||||||||||||||||
| Commercial | 87 | 82 | 288 | 328 | |||||||||||||||
| Construction | 34 | 17 | 98 | 271 | |||||||||||||||
| Residential | 256 | 122 | 864 | 538 | |||||||||||||||
| Consumer | 2,986 | 2,749 | 8,897 | 6,890 | |||||||||||||||
| Lease financing | 1,648 | 1,457 | 4,642 | 5,244 | |||||||||||||||
| Foreign | 113 | 135 | 447 | 402 | |||||||||||||||
| Total recoveries on loans and leases previously charged off | 7,280 | 7,474 | 38,253 | 20,086 | |||||||||||||||
| Net charge-offs | (25,469 | ) | (28,382 | ) | (59,582 | ) | (88,673 | ) | |||||||||||
| Provision for credit losses | 24,145 | 26,300 | 65,695 | 69,209 | |||||||||||||||
| Balance at end of period | $ | 390,194 | $ | 385,190 | $ | 390,194 | $ | 385,190 | |||||||||||
| Net loans and leases charged off to average loans and leases | 0.40 | %(1) | 0.47 | %(1) | 0.32 | %(1) | 0.55 | %(1) | |||||||||||
| Net loans and leases charged off to allowance for credit losses | 25.90 | %(1) | 29.23 | %(1) | 20.42 | %(1) | 30.78 | %(1) | |||||||||||
| Allowance for credit losses to total loans and leases (end of period) | 1.54 | % | 1.60 | % | 1.54 | % | 1.60 | % | |||||||||||
| Allowance for credit losses to nonperforming loans and leases (end of period): | |||||||||||||||||||
| Excluding 90 days past due accruing loans and leases | 2.44 | x | 1.52 | x | 2.44 | x | 1.52 | x | |||||||||||
| Including 90 days past due accruing loans and leases | 2.09 | x | 1.37 | x | 2.09 | x | 1.37 | x | |||||||||||
| Three Months Ended March 31, | ||||||||
| 2004 | 2003 | |||||||
| (Dollars in thousands) | ||||||||
Loans and leases outstanding (end of period) | $ | 26,229,432 | $ | 24,056,267 | ||||
| Allowance for loan and lease losses: | ||||||||
| Balance at beginning of period | $ | 391,699 | $ | 384,081 | ||||
| Provision for loan and lease losses | 18,865 | 22,690 | ||||||
| Loans and leases charged off: | ||||||||
| Commercial, financial and agricultural | 2,136 | 9,257 | ||||||
| Real estate: | ||||||||
| Commercial | 293 | 123 | ||||||
| Residential | 20 | 370 | ||||||
| Consumer | 13,514 | 15,303 | ||||||
| Lease financing | 5,444 | 6,083 | ||||||
| Foreign | 731 | 841 | ||||||
| Total loans and leases charged off | 22,138 | 31,977 | ||||||
| Recoveries on loans and leases previously charged off: | ||||||||
| Commercial, financial and agricultural | 2,454 | 16,432 | ||||||
| Real estate: | ||||||||
| Commercial | 126 | 91 | ||||||
| Construction | 34 | 34 | ||||||
| Residential | 199 | 296 | ||||||
| Consumer | 3,239 | 2,747 | ||||||
| Lease financing | 1,765 | 1,543 | ||||||
| Foreign | 244 | 112 | ||||||
| Total recoveries on loans and leases previously charged off | 8,061 | 21,255 | ||||||
| Net charge-offs | (14,077 | ) | (10,722 | ) | ||||
Balance at end of period | $ | 396,487 | $ | 396,049 | ||||
Net loans and leases charged off to average loans and leases(1) | 0.22 | % | 0.18 | % | ||||
Net loans and leases charged off to allowance for credit losses(1) | 14.28 | 10.83 | ||||||
| Allowance for loan and lease losses to total loans and leases (end of period) | 1.51 | 1.65 | ||||||
| Allowance for loan and lease losses to nonaccruing loans and leases (end of period): | ||||||||
| Excluding 90 days past due accruing loans and leases | 2.88x | 1.83x | ||||||
| Including 90 days past due accruing loans and leases | 2.38x | 1.65x | ||||||
| (1) | Annualized. |
The allowanceprovision for creditloan and lease losses for the first ninethree months ended March 31, 2004 was $18.9 million, a decrease of 2003 was $390.2 million, an increase of $5.0$3.8 million, or 1.3%16.9%, compared to the same period in 2002.2003. The provision for creditloan and lease losses is based upon our judgment as to the adequacy of the allowance for creditloan and lease losses (the “Allowance”) to absorb probable losses inherent in the portfolio as of the balance sheet date. The Company uses a systematic methodology to determine the adequacy of the Allowance and 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 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 of loans and leases and in overall loan and lease risk profile and quality, general economic factors and the fair value of collateral.
34
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
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:
32
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
| • | Setting Underwriting and Grading Standards.Our loan grading system |
| • | 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.Over the past few years, we have reduced our exposure to higher-risk areas such as |
| • |
| • | Emphasis on We set aside reserves to cover the uninsured portion. |
Net Compared to the same quarter a year ago, net charge-offs were $59.6$3.4 million for the nine months ended September 30, 2003, a decrease of $29.1 million, or 32.8%, from the same period in 2002. Charge-offs were higher in the nine months ended September 30, 2002 primarily due to charge-offs required in late March 2002 on the UCB portfolio. These charge-offs were contested with UFJ and settlement, resulting in $13.6 million of recoveries, was reached induring the first quarter as discussedof 2004. While an improvement in Item 1, Note 2 (Mergers and Acquisitions).
For the nine months ended September 30, 2003, recoveries increased by $18.2 million, or 90.4%, compared to the same periodcredit quality resulted in 2002. The increase in recoveries waslower charge-offs, primarily in the commercial, financial and agricultural loans, duecategory, recoveries were higher in 2003. This was the result of a $13.6 million dispute resolution with UFJ Bank Ltd. of Japan in conjunction with charge-offs that were disputed during the acquisition of United California Bank in 2002. See Note 2 to the settlement with UFJ discussed above.Consolidated Financial Statements in the 2003 Form 10-K for further information.
Net charge-offs for the nine months ended September 30, 2003 were 0.32% of average loans and leases (annualized) compared to 0.55% (annualized) for the same period in 2002.
The Allowance increased to 2.44 times nonperforming loans and leases (excluding 90 days or more past due accruing loans and leases) at September 30, 2003 from 1.52 times at September 30, 2002.
In our judgment, the Allowance was adequate to absorb losses inherent in the loan and lease portfolio at September 30, 2003.March 31, 2004. However, changes in prevailing economic conditions in our markets could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the Allowance. We will continue to closely monitor economic developments and make necessary adjustments to the Allowance accordingly.
35DEPOSITS
Deposits are the largest component of our total liabilities and account for 45.2% of total interest expense. At March 31, 2004, total deposits were $26.7 billion, an increase of 1.3% over December 31, 2003 and an increase of 9.9% over March 31, 2003. The increase was primarily due to the growth in our customer deposit base, primarily in Bank of the West, as well as various deposit product programs that we initiated. The decrease in all of the rates paid on deposits reflects the lower interest rate environment, caused primarily by rate decreases by the Federal Reserve’s Open Market Committee. 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
Stockholder’s equity totaled $4.4 billion at March 31, 2004, an increase of $135.0 million, or 3.2%, from December 31, 2003 and $429.0 million, or 10.8%, from March 31, 2003. The increase between December 31, 2003 and March 31, 2004 was primarily due to net income earned by the Company during the first quarter of 2004 and net unrealized gains on securities available-for-sale. The increase between March 31, 2003 and March 31, 2004 was primarily due to net income earned during the twelve month period.
33
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DEPOSITS
Deposits are the largest component of our total liabilities and account for a significant portion of total interest expense. At September 30, 2003, total deposits were $25.9 billion, an increase of 5.6% from December 31, 2002, and an increase of 6.4% over September 30, 2002. The increase was primarily due to the growth in our customer deposit base and various deposit product programs that we initiated.
During the 12-month period from October 1, 2002 to September 30, 2003, the benchmark federal funds rate was decreased by 75 basis points contributing to lower interest rates on deposits.
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. We obtain short-term asset-based liquidity through our investment securities portfolio and short-term investments that 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, trading assets, securities purchased under agreements to resell and investment securities. Such assets represented 20.2% of total assets at September 30, 2003, compared to 17.8% at December 31, 2002 and 16.6% at September 30, 2002.
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 the three months ended September 30, 2003 were $25.4 billion, compared to $22.3 billion for the year ended December 31, 2002. Average total deposits funded 69.3% of average total assets for the nine months ended September 30, 2003 and 71.0% for the year ended December 31, 2002.
We also obtain short-term liquidity from ready access to regional and national wholesale funding sources, including issuing our own certificates of deposit, purchasing federal funds, selling securities under agreements to repurchase, arranging lines of credit from other banks and obtaining credit facilities from the Federal Home Loan Banks. 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 and the ability to obtain resources from BNP Paribas.
CAPITAL
Stockholder’s equity increased to $4.2 billion at September 30, 2003 from $3.9 billion at December 31, 2002, an increase of $290.0 million, or 7.5%. Stockholder’s equity at September 30, 2003 increased as compared to September 30, 2002 by $225.7 million, or 5.7%. The increase from December 31, 2002 to September 30, 2003 was primarily due to net income earned by the Company during the nine-month period. The increase from September 30, 2002 to September 30, 2003 was primarily due to net income earned during the twelve month period and offset by a $167.0 million adjustment to properly reflect BNP Paribas’ accounting basis in BancWest following its purchase on December 19, 2001 of the remaining 55% of outstanding voting stock it did not already own. This adjustment, recognized in the fourth quarter of 2002, was recorded as a decrease in the “surplus” category of the Company’s stockholder’s equity.
36
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
Capital adequacy regulations require the Company’s depository institution subsidiaries to maintain minimum amounts of Tier 1 Capital and Total Capital and minimum ratios of Tier 1 Capital and Total Capital to risk-weighted assets, respectively, and of Tier 1 Capital to average assets (leverage). These amounts and ratios as of September 30, 2003March 31, 2004 are set forth below:
| To Be Well | ||||||||||||||||||||||||||
| Capitalized | ||||||||||||||||||||||||||
| Under Prompt | ||||||||||||||||||||||||||
| For Capital | Corrective Action | |||||||||||||||||||||||||
| Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||
| Tier 1 Capital to Risk-Weighted | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Bank of the West | $ | 2,393,456 | 10.56 | % | $ | 906,245 | 4.00 | % | $ | 1,359,368 | 6.00 | % | ||||||||||||||
| First Hawaiian | 820,493 | 12.51 | 262,282 | 4.00 | 393,423 | 6.00 | ||||||||||||||||||||
| Total Capital to Risk-Weighted | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Bank of the West | $ | 2,901,978 | 12.81 | % | $ | 1,812,490 | 8.00 | % | $ | 2,265,613 | 10.00 | % | ||||||||||||||
| First Hawaiian | 975,535 | 14.88 | 524,563 | 8.00 | 655,704 | 10.00 | ||||||||||||||||||||
| Tier 1 Capital to Average | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Bank of the West | $ | 2,393,456 | 9.36 | % | $ | 1,023,169 | 4.00 | % | $ | 1,278,961 | 5.00 | % | ||||||||||||||
| First Hawaiian | 820,493 | 9.68 | 339,159 | 4.00 | 423,948 | 5.00 | ||||||||||||||||||||
| To Be Well | ||||||||||||||||||||||||
| Capitalized | ||||||||||||||||||||||||
| Under Prompt | ||||||||||||||||||||||||
| For Capital | Corrective Action | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Tier 1 Capital to Risk-Weighted | ||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||
| Bank of the West | $ | 2,573,467 | 10.92 | % | $ | 942,739 | 4.00 | % | $ | 1,414,109 | 6.00 | % | ||||||||||||
| First Hawaiian Bank | 876,810 | 13.28 | 264,184 | 4.00 | 396,276 | 6.00 | ||||||||||||||||||
| Total Capital to Risk-Weighted | ||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||
| Bank of the West | $ | 3,093,532 | 13.13 | % | $ | 1,885,478 | 8.00 | % | $ | 2,356,848 | 10.00 | % | ||||||||||||
| First Hawaiian Bank | 1,032,920 | 15.64 | 528,368 | 8.00 | 660,460 | 10.00 | ||||||||||||||||||
| Tier 1 Capital to Average | ||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||
| Bank of the West | $ | 2,573,467 | 9.58 | % | $ | 1,074,455 | 4.00 | % | $ | 1,343,069 | 5.00 | % | ||||||||||||
| First Hawaiian Bank | 876,810 | 10.19 | 344,175 | 4.00 | 430,219 | 5.00 | ||||||||||||||||||
We elected to become a financial holding company concurrent with the BNP Paribas acquisition.in 2001. Because of this election, only our depository institution subsidiaries are subject to various regulatory capital requirements administered by the Federal banking agencies. If these subsidiaries fail to meet minimum capital requirements, the Federal 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, our depository institution subsidiaries must each meet specific capital guidelines that involve quantitative measures of ourtheir 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.
37INCOME TAXES
Our effective income tax rate (exclusive of the tax equivalent adjustment) for the three months ended March 31, 2004 and 2003 was 38.8%.
Lease-in/lease-out (“LILO”) transactions have recently been subject to review on a nation-wide 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 entered 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 anticipates paying, under protest, the amounts claimed by the IRS in the RAR. The Company continues to believe that it properly reported its LILO transactions and will contest the results of the IRS’s audit. At the present time, the Company cannot predict the outcome of this issue.
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 coordinated between the two subsidiary banks.
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, trading assets, securities purchased under agreements to resell, available-for-sale investment securities and loans held for sale. Such assets represented 21.1% of total assets at the March 31, 2004, compared to 21.3% at December 31, 2003 and 18.7% at March 31, 2003.
34
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
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, securitized or used as collateral for borrowings from the Federal Home Loan Bank such as consumer and mortgage loans.
We obtain short-term, liability-based liquidity primarily from deposits. Average total deposits increased by 9.5% to $26.4 billion at March 31, 2004, primarily due to continued expansion of our customer base in the Western United States. Average total deposits funded 68.9% and 69.4% of average assets for the quarter ended March 31, 2004 and the year ended December 31, 2003, respectively.
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 Bank. The following table reflects immediately available borrowing capacity at the Federal Reserve Discount Window and the Federal Home Loan Bank and securities available for selling under repurchase agreements:
| March 31, | ||||||||
| 2004 | 2003 | |||||||
| (in millions) | ||||||||
| Federal Reserve Discount Window | $ | 626 | $ | 494 | ||||
| Federal Home Loan Bank | 1,851 | 949 | ||||||
| Securities Available for Repurchase Agreements | 3,172 | 2,238 | ||||||
| Total | $ | 5,649 | $ | 3,681 | ||||
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 or funding source.
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 or from transactions with our parent company, BNP Paribas.
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 16 to the Audited Consolidated Financial Statements included in the Company’s 2003 Annual Report on Form 10-K.
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 as of March 31, 2004:
| 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- | ||
35
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
Cash Flows
The following is a summary of our cash flows for the three months ended March 31, 2004 and 2003. (There is more detail in the Consolidated Statements of Cash Flows.)
| Three Months Ended March 31, | ||||||||
| 2004 | 2003 | |||||||
| (in thousands) | ||||||||
| Net cash and cash equivalents provided by operating and financing activities | $ | 567,310 | $ | 184,288 | ||||
| Net cash and cash equivalents used in investing activities | $ | 631,122 | $ | 513,510 | ||||
The decrease in cash and cash equivalents in the first quarter of 2004 was primarily due to increased loan volume, through direct origination and loan purchases, as well as the purchase of investment securities. The increases in these portfolios were primarily funded by an increase in customer deposits of $340.1 million and additional borrowings. The decrease in the first quarter of 2003 was primarily due to the purchase of investment securities.
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.
On March 9, 2004 the SEC released a Staff Accounting Bulletin: No. 105,Application of Accounting Principles to Loan Commitments, 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 value of the derivative.
In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”),Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash 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 the 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 debt securities acquired after December 31, 2004. The Company anticipates that the implementation of SOP 03-3 will require significant loan system and operational changes to track credit related losses on loans purchased starting in 2005. We are still assessing the impact it will have on the Consolidated Financial Statements.
In December 2003 the Financial Accounting Standards Board (FASB) issued SFAS No. 132 (revised 2003)Employers’ Disclosures about Pensions and Other Postretirement Benefits(SFAS 132 (revised 2003)), an amendment of FASB Statements No. 87,Employers’ Accounting for Pensions,No. 88,Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,and No. 106,Employers’ Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in FASB Statement No. 132,Employers’ Disclosures about Pensions and Other Postretirement Benefits,which it replaces. It requires additional disclosures to those in the original Statement 132 about describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement amends APB Opinion No. 28,Interim Financial Reporting, to require interim-period disclosure of the components of net periodic benefit cost and, if significantly different from previously disclosed amounts, the amounts of contributions and projected contributions to fund pension plans and other postretirement benefit plans. This Statement is effective for fiscal years ending after December 15, 2003. The interim-period disclosures required by this Statement are effective for interim periods beginning after December 15, 2003. Disclosure of information about foreign plans and estimated future benefit payments required by SFAS 132 (revised 2003) shall be effective for fiscal years
36
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
ending after June 15, 2004. The adoption of SFAS 132 (revised 2003) required enhanced disclosure and did not impact our consolidated financial position, results of operations or cash flows.
37
BancWest Corporation and Subsidiaries
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK MEASUREMENT AND MANAGEMENTInterest 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 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 ourits interest-earning assets (primarily loans and leases and investment securities). 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 mortgage and other consumer loans depending on the interest rate environment. Short and long-term market rates may change independent of each other resulting in changes to the slope and absolute level of the yield curve.
The Asset/Liability Committees of the Company and our major subsidiaries are responsible for managing interest rate risk. The Asset/Liability Committees generally meet monthly or quarterly. The committees may recommend changes to a particular subsidiary’s interest rate profile to their respective Board of Directors, should changes be necessary and 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 – to adjust sensitivity to interest rate changes) and/or utilizing 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 mortgage-backed securities as well as 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 Company and its subsidiaries use computer simulation models ourto evaluate net interest income in order to quantify our 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-point100-basis-point increments and down in a 50 basis-point increment. Each account-level item is repriced according to its respective contractual characteristics, including any embedded options which might exist (e.g., periodic interest rate caps or floors onor loans and leases which permit the borrower to prepay the principal balance of the loan or lease prior to maturity without penalty). Derivative financial instruments such as interest rate swaps, swaptions, caps or floors 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 (flat rate scenario) to determine the level of interest rate risk at that time.
The projected impact of incremental increases and a 50 basis-point decrease in interest rates on the projected Company’s consolidated net interest income over the 12 months beginning OctoberApril 1, 20032004 is shown below:
| (dollars in millions) | + 3% | +2% | +1% | Flat | -0.5% | |||||||||||||||
| October 1, 2003 | ||||||||||||||||||||
| Net interest income | $ | 1,276.8 | $ | 1,285.2 | $ | 1,290.5 | $ | 1,302.9 | $ | 1,295.6 | ||||||||||
| Difference from flat | (26.1 | ) | (17.7 | ) | (12.4 | ) | — | (7.3 | ) | |||||||||||
| % variance | (2.0 | )% | 1.4 | % | (1.0 | )% | — | % | (0.6 | )% | ||||||||||
| +3% | +2% | +1% | Flat | -0.5% | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Net interest income | 1,282.8 | 1,291.7 | 1,301.4 | 1,313.0 | 1,305.0 | |||||||||||||||
| Difference from flat | (30.2 | ) | (21.3 | ) | (11.6 | ) | — | (8.0 | ) | |||||||||||
| % variance | (2.3 | )% | (1.6 | )% | (0.9 | )% | — | % | (0.6 | )% | ||||||||||
Because of the absolute low level of interest rates in 2004, modeling a 200 and 100-basis-point decrease was deemed impractical. 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.
38
BancWest Corporation and Subsidiaries
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK(Continued)
Significant Assumptions Utilized Andand Inherent Limitations
The significant net interest income changes for each interest rate scenario presented above include assumptions based on accelerating or decelerating mortgage and installmentnon-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 isare based upon analyses of customers’ historic 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
38
BancWest Corporation and SubsidiariesQUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
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.
The following estimated net fair value amounts of interest rate derivatives held for trading purposes have been determined by the Company using available market information and appropriate valuation methodologies:
| March 31, 2004 | ||||||||||||||||||||||||||||||||||||
| Maturity Range | ||||||||||||||||||||||||||||||||||||
| Gross | ||||||||||||||||||||||||||||||||||||
| Net Fair | Positive | Notional | After | |||||||||||||||||||||||||||||||||
| Interest Rate Contracts | Value | Value | Amount | 2004 | 2005 | 2006 | 2007 | 2008 | 2008 | |||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
| Pay-Fixed Swaps: | ||||||||||||||||||||||||||||||||||||
| Contractual Maturities | $ | (24,177 | ) | $ | 523 | $ | 700,915 | 83,495 | 102,500 | 24,681 | 30,540 | 95,430 | 364,269 | |||||||||||||||||||||||
| Weighted Avg. Pay Rates | 4.28 | 3.19 | 1.38 | 4.94 | 5.15 | 5.63 | 4.58 | |||||||||||||||||||||||||||||
| Weighted Avg. Receive Rates | 1.15 | 1.08 | 0.54 | 1.39 | 1.61 | 1.13 | 1.17 | |||||||||||||||||||||||||||||
| Receive-Fixed Swaps: | ||||||||||||||||||||||||||||||||||||
| Contractual Maturities | 30,434 | 30,623 | 700,915 | 83,495 | 102,500 | 24,681 | 30,540 | 95,430 | 364,269 | |||||||||||||||||||||||||||
| Weighted Avg. Pay Rates | 1.15 | 1.07 | 1.01 | 1.61 | 1.61 | 1.13 | 1.13 | |||||||||||||||||||||||||||||
| Weighted Avg. Receive Rates | 4.50 | 3.19 | 3.03 | 2.78 | 2.78 | 5.82 | 4.82 | |||||||||||||||||||||||||||||
| Pay & Receive Variable Swaps: | ||||||||||||||||||||||||||||||||||||
| Contractual Maturities | 260 | 365 | 25,812 | — | — | 4,812 | — | — | 21,000 | |||||||||||||||||||||||||||
| Weighted Avg. Pay Rates | 2.83 | — | — | 3.35 | — | — | 2.71 | |||||||||||||||||||||||||||||
| Weighted Avg. Receive Rates | 3.94 | — | — | 4.03 | — | — | 3.37 | |||||||||||||||||||||||||||||
| Caps/Collars | ||||||||||||||||||||||||||||||||||||
| Contractual Maturities | — | 117 | 164,865 | 38,300 | 25,242 | 101,323 | — | — | — | |||||||||||||||||||||||||||
| Weighted Avg. Strike Rates | 6.72 | 6.90 | 5.86 | 7.28 | — | — | — | |||||||||||||||||||||||||||||
| Weighted Floor Rates | 3.38 | 3.38 | 3.38 | 3.38 | — | — | — | |||||||||||||||||||||||||||||
| Total interest rate contracts held for trading purposes | $ | 6,517 | $ | 31,628 | $ | 1,592,507 | ||||||||||||||||||||||||||||||
39
BancWest Corporation and Subsidiaries
CONTROLS AND PROCEDURES
Item 4. Controls and Procedures
As of the end of the period covered by the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s chairman and chief executive officer and its chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.13a-14. Based upon that evaluation, its chairman and 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.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.
40
BancWest Corporation and Subsidiaries
EXHIBITS AND REPORTS ON FORM 8-K
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Exhibits listed below are filed or incorporated by reference as part of this Report.
| (a) | Exhibits | |||||
| 2 | Agreement and Plan of Merger dated as of March 15, 2004 among Bancwest Corporation, BW Newco, Inc. and Community First Bankshares, Inc. | |||||
| 12 | Statement regarding computation of ratios. | |||||
| 31 | Section 302 | |||||
| 32 | Section 1350 | |||||
| (b) | Reports on Form 8-K | |||||
| On | ||||||
| On March 16, 2004, the Company filed a Report on Form 8-K that provided information under Items 5 and 7 concerning the Company’s definitive agreement to acquire Community First Bankshares, Inc. | ||||||
4041
BancWest Corporation and Subsidiaries
EXHIBITS AND REPORTS ON FORM 8-K(Continued)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BANCWEST CORPORATION (Registrant) | ||||
| Date: May 13, 2004 | By /s/ Douglas C. Grigsby | |||
| (Douglas C. Grigsby | ||||
| Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer) | ||||
42
BancWest Corporation and Subsidiaries
EXHIBITS AND REPORTS ON FORM 8-K(Continued)
EXHIBIT INDEX
| Exhibit | ||||
| 2 | Agreement and Plan of Merger dated as of March 15, 2004 among Bancwest Corporation, BW Newco, Inc. and Community First Bankshares, Inc. | |||
41
EXHIBIT INDEX
| 12 | Statement regarding computation of ratios. | ||||
| 31 | Section 302 | ||||
| 32 | Section 1350 | ||||
43