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 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | |
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] | ||
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
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) 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 oNoüx
As of April 30,November 1, 2003 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
FORM 10-QMarch 31,September 30, 2003
INDEX
Page | ||||||||
PART I. FINANCIAL INFORMATION | ||||||||
Item 1. | Financial Statements(Unaudited) | 2 | ||||||
Consolidated Statements of Income for the three and nine months ended | 2 | |||||||
Consolidated Balance Sheets at | 3 | |||||||
Consolidated Statements of Changes in Stockholder’s Equity and Comprehensive Income for the | 5 | |||||||
Consolidated Statements of Cash Flows for the | 6 | |||||||
Notes to Consolidated Financial Statements | 7 | |||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
Overview | 18 | |||||||
New Pronouncements | 18 | |||||||
Forward Looking Statements | 19 | |||||||
Monetary Policy and Economic Conditions | 19 | |||||||
Critical Accounting Policies | 19 | |||||||
Consolidated Financial Highlights | 21 | |||||||
Net Interest Income | 22 | |||||||
Noninterest Income | 25 | |||||||
Noninterest Expense | 25 | |||||||
Operating Segment Results | 26 | |||||||
Investment Securities | 30 | |||||||
Loans and Leases | 31 | |||||||
Nonperforming Assets and Restructured Loans | 32 | |||||||
Provision and Allowance for Credit Losses | 34 | |||||||
Deposits | 36 | |||||||
Liquidity Management | 36 | |||||||
Capital | 36 | |||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||||
Item 4. | Controls and Procedures | |||||||
PART II. OTHER INFORMATION | ||||||||
Item 6. | Exhibits and Reports on Form 8-K | |||||||
SIGNATURE | ||||||||
EXHIBIT INDEX | ||||||||
Exhibit 12 | Statement Regarding Computation of Ratios | |||||||
Exhibit 31 | Section 302 Certifications | |||||||
Exhibit 32 | Section 1350 Certifications |
Exhibit 12 Statement Regarding Computation of Ratios.
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 2002 Annual Report on Form 10-K.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BancWest Corporation and Subsidiaries
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||
Interest income | Interest income | Interest income | ||||||||||||||||||||||||||||
Interest and fees on loans | Interest and fees on loans | $ | 338,259 | $ | 256,229 | Interest and fees on loans | $ | 343,610 | $ | 365,886 | $ | 1,021,733 | $ | 992,123 | ||||||||||||||||
Lease financing income | Lease financing income | 36,028 | 36,726 | Lease financing income | 32,809 | 34,894 | 102,151 | 107,860 | ||||||||||||||||||||||
Interest on investment securities: | Interest on investment securities: | Interest on investment securities: | ||||||||||||||||||||||||||||
Taxable interest income | 41,797 | 34,262 | Taxable interest income | 46,118 | 40,704 | 131,986 | 114,881 | |||||||||||||||||||||||
Exempt from Federal income taxes | 154 | 44 | Exempt from Federal income taxes | 153 | 126 | 490 | 360 | |||||||||||||||||||||||
Other interest income | Other interest income | 1,238 | 2,023 | Other interest income | 1,580 | 2,938 | 4,750 | 6,298 | ||||||||||||||||||||||
Total interest income | 417,476 | 329,284 | Total interest income | 424,270 | 444,548 | 1,261,110 | 1,221,522 | |||||||||||||||||||||||
Interest expense | Interest expense | Interest expense | ||||||||||||||||||||||||||||
Deposits | Deposits | 53,147 | 63,629 | Deposits | 39,835 | 76,477 | 140,706 | 218,884 | ||||||||||||||||||||||
Short-term borrowings | Short-term borrowings | 3,696 | 5,793 | Short-term borrowings | 9,230 | 10,430 | 16,464 | 26,486 | ||||||||||||||||||||||
Long-term debt | Long-term debt | 45,394 | 35,382 | Long-term debt | 43,843 | 36,907 | 136,014 | 109,044 | ||||||||||||||||||||||
Total interest expense | 102,237 | 104,804 | Total interest expense | 92,908 | 123,814 | 293,184 | 354,414 | |||||||||||||||||||||||
Net interest income | 315,239 | 224,480 | Net interest income | 331,362 | 320,734 | 967,926 | 867,108 | |||||||||||||||||||||||
Provision for credit losses | Provision for credit losses | 22,690 | 20,007 | Provision for credit losses | 24,145 | 26,300 | 65,695 | 69,209 | ||||||||||||||||||||||
Net interest income after provision for credit losses | 292,549 | 204,473 | Net interest income after provision for credit losses | 307,217 | 294,434 | 902,231 | 797,899 | |||||||||||||||||||||||
Noninterest income | Noninterest income | Noninterest income | ||||||||||||||||||||||||||||
Service charges on deposit accounts | Service charges on deposit accounts | 37,029 | 25,974 | Service charges on deposit accounts | 39,512 | 39,183 | 115,102 | 101,718 | ||||||||||||||||||||||
Trust and investment services income | Trust and investment services income | 9,507 | 8,140 | Trust and investment services income | 9,461 | 9,883 | 28,826 | 28,275 | ||||||||||||||||||||||
Other service charges and fees | Other service charges and fees | 35,615 | 23,498 | Other service charges and fees | 38,535 | 34,032 | 113,380 | 89,442 | ||||||||||||||||||||||
Securities gains, net | Securities gains, net | 1,892 | 228 | Securities gains, net | 555 | 282 | 3,913 | 966 | ||||||||||||||||||||||
Other | Other | 10,791 | 4,784 | Other | 11,563 | 8,259 | 33,813 | 22,291 | ||||||||||||||||||||||
Total noninterest income | 94,834 | 62,624 | Total noninterest income | 99,626 | 91,639 | 295,034 | 242,692 | |||||||||||||||||||||||
Noninterest expense | Noninterest expense | Noninterest expense | ||||||||||||||||||||||||||||
Salaries and wages | Salaries and wages | 84,662 | 60,094 | Salaries and wages | 86,269 | 89,486 | 252,908 | 236,043 | ||||||||||||||||||||||
Employee benefits | Employee benefits | 37,646 | 23,482 | Employee benefits | 34,091 | 28,340 | 111,127 | 87,497 | ||||||||||||||||||||||
Occupancy expense | Occupancy expense | 22,320 | 15,614 | Occupancy expense | 22,239 | 24,008 | 67,153 | 63,117 | ||||||||||||||||||||||
Outside services | Outside services | 17,567 | 13,252 | Outside services | 18,002 | 17,472 | 53,843 | 48,532 | ||||||||||||||||||||||
Intangible amortization | Intangible amortization | 5,763 | 2,757 | Intangible amortization | 5,763 | 5,763 | 17,290 | 14,283 | ||||||||||||||||||||||
Equipment expense | Equipment expense | 11,156 | 7,729 | Equipment expense | 11,563 | 14,043 | 35,156 | 36,252 | ||||||||||||||||||||||
Restructuring and integration costs | Restructuring and integration costs | — | 6,015 | Restructuring and integration costs | — | 6,213 | — | 14,966 | ||||||||||||||||||||||
Other | Other | 41,546 | 30,155 | Other | 45,036 | 39,039 | 135,935 | 111,592 | ||||||||||||||||||||||
Total noninterest expense | 220,660 | 159,098 | Total noninterest expense | 222,963 | 224,364 | 673,412 | 612,282 | |||||||||||||||||||||||
Income before income taxes | 166,723 | 107,999 | ||||||||||||||||||||||||||||
Income before income taxes and cumulative effect of accounting change | Income before income taxes and cumulative effect of accounting change | 183,880 | 161,709 | 523,853 | 428,309 | |||||||||||||||||||||||||
Provision for income taxes | Provision for income taxes | 64,642 | 42,582 | Provision for income taxes | 69,268 | 64,651 | 199,498 | 169,256 | ||||||||||||||||||||||
Income before cumulative effect of accounting change | Income before cumulative effect of accounting change | 114,612 | 97,058 | 324,355 | 259,053 | |||||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | Cumulative effect of accounting change, net of tax | 2,370 | — | 2,370 | — | |||||||||||||||||||||||||
Net income | Net income | $ | 102,081 | $ | 65,417 | Net income | $ | 112,242 | $ | 97,058 | $ | 321,985 | $ | 259,053 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
BancWest Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS(Unaudited)
March 31, | December 31, | March 31, | September 30, | December 31, | September 30, | |||||||||||||||||||||||
2003 | 2002 | 2002 | 2003 | 2002 | 2002 | |||||||||||||||||||||||
(in thousands, except per share data) | (in thousands) | |||||||||||||||||||||||||||
Assets | Assets | Assets | ||||||||||||||||||||||||||
Cash and due from banks | Cash and due from banks | $ | 1,591,999 | $ | 1,761,261 | $ | 1,338,866 | Cash and due from banks | $ | 1,385,335 | $ | 1,761,261 | $ | 1,308,653 | ||||||||||||||
Interest-bearing deposits in other banks | Interest-bearing deposits in other banks | 162,194 | 2,098 | 182,930 | Interest-bearing deposits in other banks | 369,217 | 2,098 | 272,082 | ||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | Federal funds sold and securities purchased under agreements to resell | 110,000 | 430,056 | 149,500 | Federal funds sold and securities purchased under agreements to resell | 340,920 | 430,056 | 351,925 | ||||||||||||||||||||
Trading assets | Trading assets | 67,042 | 43,430 | 10,165 | Trading assets | 58,612 | 43,430 | 54,020 | ||||||||||||||||||||
Available-for-sale investment securities | Available-for-sale investment securities | 4,528,484 | 3,940,769 | 3,161,922 | Available-for-sale investment securities | 5,412,369 | 3,940,769 | 3,708,473 | ||||||||||||||||||||
Loans held for sale | Loans held for sale | 82,563 | 85,274 | 44,642 | Loans held for sale | 79,300 | 85,274 | 69,824 | ||||||||||||||||||||
Loans and leases: | Loans and leases: | Loans and leases: | ||||||||||||||||||||||||||
Loans and leases | 24,056,267 | 24,146,087 | 24,070,667 | Loans and leases | 25,264,537 | 24,146,087 | 24,071,689 | |||||||||||||||||||||
Less allowance for credit losses | 396,049 | 384,081 | 383,003 | Less allowance for credit losses | 390,194 | 384,081 | 385,190 | |||||||||||||||||||||
Net loans and leases | Net loans and leases | 23,660,218 | 23,762,006 | 23,687,664 | Net loans and leases | 24,874,343 | 23,762,006 | 23,686,499 | ||||||||||||||||||||
Premises and equipment, net | Premises and equipment, net | 378,985 | 380,272 | 410,429 | Premises and equipment, net | 537,171 | 380,272 | 394,800 | ||||||||||||||||||||
Customers’ acceptance liability | Customers’ acceptance liability | 29,728 | 25,945 | 11,292 | Customers’ acceptance liability | 38,790 | 25,945 | 28,200 | ||||||||||||||||||||
Core deposit intangible, net | Core deposit intangible, net | 204,647 | 210,411 | 231,925 | Core deposit intangible, net | 193,120 | 210,411 | 216,174 | ||||||||||||||||||||
Goodwill | Goodwill | 3,226,829 | 3,229,200 | 3,380,392 | Goodwill | 3,226,851 | 3,229,200 | 3,383,877 | ||||||||||||||||||||
Other real estate owned and repossessed personal property | Other real estate owned and repossessed personal property | 18,544 | 19,613 | 24,393 | Other real estate owned and repossessed personal property | 19,237 | 19,613 | 15,523 | ||||||||||||||||||||
Other assets | Other assets | 854,856 | 858,932 | 690,373 | Other assets | 890,237 | 858,932 | 766,450 | ||||||||||||||||||||
Total assets | Total assets | $ | 34,916,089 | $ | 34,749,267 | $ | 33,324,493 | Total assets | $ | 37,425,502 | $ | 34,749,267 | $ | 34,256,500 | ||||||||||||||
Liabilities and Stockholder’s Equity | Liabilities and Stockholder’s Equity | Liabilities and Stockholder’s Equity | ||||||||||||||||||||||||||
Deposits: | Deposits: | Deposits: | ||||||||||||||||||||||||||
Domestic: | Domestic: | |||||||||||||||||||||||||||
Interest-bearing | $ | 16,645,026 | $ | 16,720,767 | $ | 17,146,357 | Interest-bearing | $ | 17,545,258 | $ | 16,720,767 | $ | 16,930,452 | |||||||||||||||
Noninterest-bearing | 6,986,600 | 7,144,929 | 6,200,071 | Noninterest-bearing | 7,709,616 | 7,144,929 | 6,779,247 | |||||||||||||||||||||
Foreign | 706,967 | 691,783 | 737,492 | Foreign | 665,728 | 691,783 | 647,163 | |||||||||||||||||||||
Total deposits | Total deposits | 24,338,593 | 24,557,479 | 24,083,920 | Total deposits | 25,920,602 | 24,557,479 | 24,356,862 | ||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase | Federal funds purchased and securities sold under agreements to repurchase | 830,388 | 791,476 | 810,192 | Federal funds purchased and securities sold under agreements to repurchase | 1,072,759 | 791,476 | 617,470 | ||||||||||||||||||||
Short-term borrowings | Short-term borrowings | 949,012 | 733,274 | 1,330,673 | Short-term borrowings | 930,000 | 733,274 | 1,549,713 | ||||||||||||||||||||
Acceptances outstanding | Acceptances outstanding | 29,728 | 25,945 | 11,292 | Acceptances outstanding | 38,790 | 25,945 | 28,200 | ||||||||||||||||||||
Long-term debt | Long-term debt | 3,313,368 | 3,376,947 | 2,120,993 | Long-term debt | 3,962,279 | 3,376,947 | 2,325,513 | ||||||||||||||||||||
Guaranteed preferred beneficial interests in Company’s junior subordinated debentures | 258,476 | 259,191 | 261,261 | |||||||||||||||||||||||||
Guaranteed preferred beneficial interests in Company’s | Guaranteed preferred beneficial interests in Company’s | |||||||||||||||||||||||||||
junior subordinated debentures | 257,479 | 259,191 | 259,893 | |||||||||||||||||||||||||
Other liabilities | Other liabilities | 1,227,705 | 1,137,473 | 1,041,529 | Other liabilities | 1,086,071 | 1,137,473 | 1,187,070 | ||||||||||||||||||||
Total liabilities | Total liabilities | $ | 30,947,270 | $ | 30,881,785 | $ | 29,659,860 | Total liabilities | $ | 33,267,980 | $ | 30,881,785 | $ | 30,324,721 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
BancWest Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS, Continued(Unaudited)
March 31, | December 31, | March 31, | September 30, | December 31, | September 30, | ||||||||||||||||||||||||
2003 | 2002 | 2002 | 2003 | 2002 | 2002 | ||||||||||||||||||||||||
(in thousands, except per share data) | (in thousands, except per share data) | ||||||||||||||||||||||||||||
Commitments and contingent liabilities | Commitments and contingent liabilities | Commitments and contingent liabilities | |||||||||||||||||||||||||||
Stockholder’s equity: | Stockholder’s equity: | Stockholder’s equity: | |||||||||||||||||||||||||||
Class A common stock, par value $.01 per share at March 31, 2003, December 31, 2002 and March 31, 2002 | 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 March 31, 2003, December 31, 2002 and March 31, 2002 | Authorized – 150,000,000 shares at September 30, 2003, December 31, 2002 and September 30, 2002 | ||||||||||||||||||||||||||||
Issued – 85,759,123 shares at March 31, 2003, December 31, 2002 and March 31, 2002 | $ | 858 | $ | 858 | $ | 858 | 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 | 3,584,978 | Surplus | 3,419,927 | 3,419,927 | 3,587,403 | ||||||||||||||||||||||
Retained earnings | 471,715 | 369,634 | 73,719 | Retained earnings | 691,619 | 369,634 | 267,355 | ||||||||||||||||||||||
Accumulated other comprehensive income, net | 76,319 | 77,063 | 5,078 | Accumulated other comprehensive income, net | 45,118 | 77,063 | 76,163 | ||||||||||||||||||||||
Total stockholder’s equity | Total stockholder’s equity | 3,968,819 | 3,867,482 | 3,664,633 | Total stockholder’s equity | 4,157,522 | 3,867,482 | 3,931,779 | |||||||||||||||||||||
Total liabilities and stockholder’s equity | Total liabilities and stockholder’s equity | $ | 34,916,089 | $ | 34,749,267 | $ | 33,324,493 | Total liabilities and stockholder’s equity | $ | 37,425,502 | $ | 34,749,267 | $ | 34,256,500 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
BancWest Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME(Unaudited)
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||
Class A | Other | Class A | Other | |||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Retained | Comprehensive | Common Stock | Retained | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Surplus | Earnings | Income, net | Total | Shares | Amount | Surplus | Earnings | Income, net | Total | |||||||||||||||||||||||||||||||||||||||||
(in thousands, except per share data) | (in thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2002 | Balance, December 31, 2002 | 85,759,123 | $ | 858 | $ | 3,419,927 | $ | 369,634 | $ | 77,063 | $ | 3,867,482 | Balance, December 31, 2002 | 85,759,123 | $ | 858 | $ | 3,419,927 | $ | 369,634 | $ | 77,063 | $ | 3,867,482 | ||||||||||||||||||||||||||||
Comprehensive income: | Comprehensive income: | Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 102,081 | — | 102,081 | Net income | — | — | — | 321,985 | — | 321,985 | |||||||||||||||||||||||||||||||||||||||
Net unrealized loss on investment securities available for sale, net of tax and reclassification adjustment | — | — | — | — | (2,089 | ) | (2,089 | ) | Net unrealized loss on investment securities available for sale, net of tax and reclassification adjustment | — | — | — | — | (32,997 | ) | (32,997 | ) | |||||||||||||||||||||||||||||||||||
Net unrealized gain on cash-flow derivative hedges, net of tax and reclassification adjustment | 1,345 | 1,345 | Net unrealized loss on cash-flow derivative hedges, net of tax and reclassification adjustment | — | — | — | — | 1,052 | 1,052 | |||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | 102,081 | (744 | ) | 101,337 | Comprehensive income | — | — | — | 321,985 | (31,945 | ) | 290,040 | |||||||||||||||||||||||||||||||||||||
Balance, March 31, 2003 | 85,759,123 | $ | 858 | $ | 3,419,927 | $ | 471,715 | $ | 76,319 | $ | 3,968,819 | |||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2003 | Balance, September 30, 2003 | 85,759,123 | $ | 858 | $ | 3,419,927 | $ | 691,619 | $ | 45,118 | $ | 4,157,522 | ||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2001 | Balance, December 31, 2001 | 56,074,874 | $ | 561 | $ | 1,985,275 | $ | 8,302 | $ | 7,782 | $ | 2,001,920 | Balance, December 31, 2001 | 56,074,874 | $ | 561 | $ | 1,985,275 | $ | 8,302 | $ | 7,782 | $ | 2,001,920 | ||||||||||||||||||||||||||||
Comprehensive income: | Comprehensive income: | Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 65,417 | — | 65,417 | Net income | — | — | — | 259,053 | — | 259,053 | |||||||||||||||||||||||||||||||||||||||
Net unrealized loss on investment securities available for sale, net of tax and reclassification adjustment | — | — | — | — | (1,885 | ) | (1,885 | ) | Net unrealized gain on investment securities available for sale, net of tax and reclassification adjustment | — | — | — | — | 38,384 | 38,384 | |||||||||||||||||||||||||||||||||||||
Net unrealized loss on cash-flow derivative hedges, net of tax and reclassification adjustment | (819 | ) | (819 | ) | Net unrealized gain on cash-flow derivative hedges, net of tax and reclassification adjustment | — | — | — | — | 29,997 | 29,997 | |||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | 65,417 | (2,704 | ) | 62,713 | Comprehensive income | — | — | — | 259,053 | 68,381 | 327,434 | ||||||||||||||||||||||||||||||||||||||
Issuance of Class A common stock | Issuance of Class A common stock | 29,684,249 | 297 | 1,599,703 | — | — | 1,600,000 | Issuance of Class A common stock | 29,684,249 | 297 | 1,599,703 | — | — | 1,600,000 | ||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2002 | 85,759,123 | $ | 858 | $ | 3,584,978 | $ | 73,719 | $ | 5,078 | $ | 3,664,633 | |||||||||||||||||||||||||||||||||||||||||
Discounted Share Purchase Plan | Discounted Share Purchase Plan | — | — | 2,425 | — | — | 2,425 | |||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2002 | Balance, September 30, 2002 | 85,759,123 | $ | 858 | $ | 3,587,403 | $ | 267,355 | $ | 76,163 | $ | 3,931,779 | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
BancWest Corporation and Subsidiaries
Three Months Ended March 31, | Nine Months Ended September 30, | ||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||||||
(in thousands) | (in thousands) | ||||||||||||||||||||
Cash flows from operating activities: | Cash flows from operating activities: | Cash flows from operating activities: | |||||||||||||||||||
Net income | $ | 321,985 | $ | 259,053 | |||||||||||||||||
Net income | $ | 102,081 | $ | 65,417 | Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
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 | 22,690 | 20,007 | Provision for credit losses | 65,695 | 69,209 | ||||||||||||||||
Depreciation and amortization | 17,531 | 11,511 | Depreciation and amortization | 47,797 | 46,837 | ||||||||||||||||
Increase in deferred income taxes | 63,437 | 4,941 | (Decrease) increase in deferred income taxes | (35,475 | ) | 156,843 | |||||||||||||||
Increase in interest receivable | (5,686 | ) | (75,333 | ) | Decrease (increase) in interest receivable | 23,896 | (45,483 | ) | |||||||||||||
Increase in interest payable | 24,981 | 49,285 | Increase in interest payable | 35,804 | 28,658 | ||||||||||||||||
Decrease (increase) in prepaid expenses | 5,125 | (27,844 | ) | Increase in prepaid expenses | (4,979 | ) | (30,712 | ) | |||||||||||||
Increase in trading assets | (23,612 | ) | (1,885 | ) | Increase in accrued restructuring and integration costs | — | 14,966 | ||||||||||||||
Decrease (increase) in loans held for sale | 2,711 | 1,417 | Increase in trading assets | (15,182 | ) | (54,020 | ) | ||||||||||||||
Securities gains, net | (1,892 | ) | (228 | ) | Decrease (increase) in loans held for sale | 5,974 | (23,765 | ) | |||||||||||||
Increase in accrued restructuring and integration costs | — | 6,015 | Securities gains, net | (3,913 | ) | (966 | ) | ||||||||||||||
Other | 5,452 | 61,652 | Other | (55,978 | ) | 31,353 | |||||||||||||||
Net cash provided by operating activities | Net cash provided by operating activities | 212,818 | 114,955 | Net cash provided by operating activities | 387,994 | 451,973 | |||||||||||||||
Cash flows from investing activities: | Cash flows from investing activities: | Cash flows from investing activities: | |||||||||||||||||||
Net increase in interest-bearing deposits in other banks | (160,096 | ) | (72,995 | ) | 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 | 320,056 | 119,500 | Net decrease (increase) in Federal funds sold and securities purchased under agreements to resell | 89,136 | (82,925 | ) | |||||||||||||||
Proceeds from maturity of available-for-sale investment securities | 465,100 | 142,825 | Proceeds from sale of available-for-sale investment securities | 416,667 | 167,079 | ||||||||||||||||
Proceeds from the sale of available-for-sale securities | 101,053 | 60,062 | Proceeds from the maturity of available-for-sale securities | 1,656,995 | 533,736 | ||||||||||||||||
Purchase of available-for-sale investment securities | (1,154,535 | ) | (306,995 | ) | Purchase of available-for-sale investment securities | (3,596,807 | ) | (1,319,598 | ) | ||||||||||||
Net increase in loans and leases from originations and collections | (118,592 | ) | (284,522 | ) | Net increase in loans and leases from originations and collections | (773,059 | ) | (593,200 | ) | ||||||||||||
Purchase of loans | (26,510 | ) | — | Purchase of loans and leases | (1,086,957 | ) | (24,949 | ) | |||||||||||||
Proceeds from the sale of loans | 227,045 | 69,694 | Proceeds from the sale of loans | 681,877 | 370,167 | ||||||||||||||||
Net cash provided by (paid for) acquisitions | — | (1,793,000 | ) | Net cash paid for acquisitions | — | (1,793,000 | ) | ||||||||||||||
Purchase of premises and equipment | (8,003 | ) | 6,854 | Purchase of premises and equipment | (25,895 | ) | (23,349 | ) | |||||||||||||
Other | 932 | (311 | ) | Other | 10,190 | (345 | ) | ||||||||||||||
Net cash provided by (used) in investing activities | (353,550 | ) | (2,058,888 | ) | |||||||||||||||||
Net cash used in investing activities | Net cash used in investing activities | (2,994,972 | ) | (2,928,531 | ) | ||||||||||||||||
Cash flows from financing activities: | Cash flows from financing activities: | Cash flows from financing activities: | |||||||||||||||||||
Net increase (decrease) in deposits | (218,886 | ) | 401,822 | Net increase in deposits | 1,363,123 | 674,764 | |||||||||||||||
Net increase (decrease) in Federal funds purchased and securities sold under agreements to repurchase | 38,912 | (212,902 | ) | 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 | 215,738 | 937,447 | Net increase in other short-term borrowings | 196,726 | 1,155,777 | ||||||||||||||||
Proceeds from long-term debt | 75,000 | 40,000 | Proceeds from long-term debt | 565,000 | 440,000 | ||||||||||||||||
Repayment of long-term and subordinate debt | (139,294 | ) | (220,830 | ) | Repayment of long-term and subordinated debt | (175,080 | ) | (417,678) | |||||||||||||
Proceeds from issuance of Class A common stock | — | 1,600,000 | Proceeds from issuance of Class A common stock | — | 1,600,000 | ||||||||||||||||
Net cash provided by (used in) financing activities | (28,530 | ) | 2,545,537 | ||||||||||||||||||
Net cash provided by financing activities | Net cash provided by financing activities | 2,231,052 | 3,047,949 | ||||||||||||||||||
Net increase (decrease) in cash and due from banks | (169,262 | ) | 601,604 | ||||||||||||||||||
Net (decrease) increase in cash and due from banks | Net (decrease) increase in cash and due from banks | (375,926 | ) | 571,391 | |||||||||||||||||
Cash and due from banks at beginning of period | Cash and due from banks at beginning of period | 1,761,261 | 737,262 | Cash and due from banks at beginning of period | 1,761,261 | 737,262 | |||||||||||||||
Cash and due from banks at end of period | Cash and due from banks at end of period | $ | 1,591,999 | $ | 1,338,866 | Cash and due from banks at end of period | $ | 1,385,335 | $ | 1,308,653 | |||||||||||
Supplemental disclosures: | Supplemental disclosures: | Supplemental disclosures: | |||||||||||||||||||
Interest paid | $ | 77,256 | $ | 55,159 | Interest paid | $ | 257,380 | $ | 325,756 | ||||||||||||
Income taxes paid | $ | 1,205 | $ | 3,503 | Income taxes paid | $ | 156,928 | $ | 12,413 | ||||||||||||
Supplemental schedule of noncash investing and financing activities: | Supplemental schedule of noncash investing and financing activities: | Supplemental schedule of noncash investing and financing activities: | |||||||||||||||||||
Loans converted into other real estate owned and repossessed personal property | $ | 1,036 | $ | 4,161 | 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 | $ | 216 | $ | 57 | 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: | In connection with acquisitions, the following liabilities were assumed: | In connection with acquisitions, the following liabilities were assumed: | |||||||||||||||||||
Fair value of assets acquired | $ | — | $ | 10,959,000 | Fair value of assets acquired | $ | — | $ | 10,959,000 | ||||||||||||
Cash (paid) received | — | (1,793,000 | ) | Cash paid | — | (1,793,000 | ) | ||||||||||||||
Liabilities assumed | Liabilities assumed | $ | — | $ | 9,166,000 | Liabilities assumed | $ | — | $ | 9,166,000 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
BancWest Corporation and Subsidiaries
1. | Summary of Significant Accounting Policies |
Description of Operations
BancWest, a bank holding company, 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.
Basis of Presentation
We have prepared the accompanying financial data for the three and nine months ended September 30, 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, December 31, 2002 and September 30, 2002, condensed consolidated results of operations for the three and nine months ended September 30, 2003 and 2002, and cash flows activities for the nine months ended September 30, 2003 and 2002.
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,”(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 2002 Annual Report on Form 10-K. There have been no significant changes to these policies.policies except for the one listed below.
Changes in Accounting Principles
Consolidation
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 (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
TheAmounts in the condensed consolidated financial statements for the periods ended September 30, 2002 Consolidated Financial Statements wereand December 31, 2002 have been reclassified in certain respects to conform to the 2003current period’s presentation. Such reclassifications did not have a material effect on the Consolidated Financial Statements.
2. | Mergers and Acquisitions |
United California Bank Acquisition
7
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
On March 15, 2002, BancWest completed its acquisition of all outstanding common stock of United California Bank (“UCB”)(UCB) from UFJ Bank Ltd. of Japan.Japan (UFJ). UCB was subsequently merged with and into Bank of the West in April 2002 and its branches were integrated into the Bank’sCompany’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 Statementsconsolidated 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. We expect to achieve cost savings for the combined company of approximately $75-80 million per year beginning in 2003. These anticipated cost savings primarily involve compensation and occupancy-related expenses.
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. InSince the twelve months ended March 31, 2003,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: $28.2$41.6 million for severance payments, $6.0$10.1 million for sublease loss amortization, $7.6$9.3 million for contract cancellation payments and $1.1 million for relocation and other payments.
7
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
The following unaudited pro forma financial information for the threenine months ended March 31,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 on the date indicated: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
Pro Forma Financial Information for the Three Months EndedBancWest Corporation and SubsidiariesMarch 31, 2002NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
(in thousands) | ||||
Net Interest Income | $ | 313,014 | ||
Provision for Credit Losses | 36,426 | |||
Noninterest Income | 82,550 | |||
Noninterest Expense | 229,909 | |||
Income Tax Expense | 49,256 | |||
Net Income | $ | 79,973 | ||
In conjunction with the purchase of UCB from UFJ, Bank Ltd. of Japan (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.
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 and nine months ended March 31,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”(fair value hedges). At March 31,September 30, 2003, the Company carried an interest rate swap of $2.8$2.7 million with a fair market value (loss)loss of $0.8$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,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)gain of the swap at March 31,September 30, 2003 was $1.2$0.5 million.
Cash Flow Hedges
At March 31,September 30, 2003, the Company carried interest rate swaps of $600 million with a fair market value (gain)gain of $59.9$55.3 million which arewere 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 $5.8$17.9 million from January 1, 2003 through March 31,September 30, 2003. The Company estimates net settlement gains, recorded as commercial loan interest income, of $23.2$24.6 million over the next twelve months resulting from these hedges.
8
BancWest Corporation 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 SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)$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. The interest rate exposure on these commitments is economically hedged primarily with best efforts forward sale contracts. The commitments and free-standing derivative instruments are marked to market and recorded as a component of noninterest income in the consolidated statement of income. Once a loan commitment is funded, the same forward sale contract is designated as a fair value hedge of the loan held for sale, as described above. Trading activities primarily involve providing various free-standing interest rate and foreign exchange derivative products to customers. Interest-rateInterest rate derivative instruments utilized by the Company in its trading operations include interest-rateinterest rate swaps, caps, floors and collars.
The following table summarizes derivatives held by the Company as of March 31,September 30, 2003 and 2002:
9
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Contractual Amounts Which | Credit | Credit | Credit | Credit | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Represent | Notional | Risk | Net Fair | Notional | Risk | Net Fair | Notional | Risk | Net Fair | Notional | Risk | Net Fair | ||||||||||||||||||||||||||||||||||||||||||||
Credit Risk: | Amount | Amount | Value | Amount | Amount | Value | Amount | Amount | Value | Amount | Amount | Value | ||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Held for Hedge Purposes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Held for hedge purposes: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 752,798 | $ | 61,128 | $ | 60,346 | $ | 600,000 | $ | 10,845 | $ | 10,845 | $ | 827,747 | $ | 58,494 | $ | 57,754 | $ | 603,715 | $ | 61,200 | $ | 60,311 | ||||||||||||||||||||||||||||||||
Held for Trading or Free-standing: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Held for trading or free-standing: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 1,534,787 | 26,496 | (8,593 | ) | 1,215,206 | 14,703 | (2,837 | ) | 1,527,965 | 27,900 | (3,324 | ) | 1,406,334 | 36,560 | (9,023 | ) | ||||||||||||||||||||||||||||||||||||||||
Purchased interest rate options | 87,127 | 611 | 611 | 66,105 | 675 | 675 | 34,213 | 468 | 468 | 70,266 | 1,135 | 1,135 | ||||||||||||||||||||||||||||||||||||||||||||
Written interest rate options | 81,738 | — | (217 | ) | 57,813 | — | (292 | ) | 50,917 | — | (285 | ) | 63,401 | — | (588 | ) | ||||||||||||||||||||||||||||||||||||||||
Forward interest rate options | 63,500 | — | (318 | ) | — | — | — | 43,000 | 11 | 11 | 21,000 | 73 | 73 | |||||||||||||||||||||||||||||||||||||||||||
Rate Locks | 97,700 | 1,526 | 1,526 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Rate locks | 66,400 | 1,111 | 1,111 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments to purchase and sell foreign currencies | 445,731 | 6,030 | (63 | ) | 432,480 | 4,180 | 316 | 458,570 | 9,400 | 222 | 400,607 | 2,860 | 76 | |||||||||||||||||||||||||||||||||||||||||||
Purchased foreign exchange options | 31,964 | 274 | 274 | — | — | — | 43,187 | 533 | 533 | 11,984 | 143 | 143 | ||||||||||||||||||||||||||||||||||||||||||||
Written foreign exchange options | 31,964 | — | (274 | ) | — | — | — | 43,187 | — | (533 | ) | 11,984 | — | (143 | ) |
4. | Operating Segments |
Our reportable segments are the ones we use in our internal reporting at Bank of the West and First Hawaiian Bank (“First Hawaiian”)(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 nation wide.nationwide. Although First Hawaiian’s segments operate primarily in Hawaii, First Hawaiian also has significant operations outside the state, such as leveraged leases, and 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’s primary markets include California, Nevada, the Pacific Northwest region and New Mexico. The Northern California Division is comprisedBanking seeks to serve a broad customer base by furnishing a wide range of the Greater San Francisco Bay area. The San Francisco Bay area is one of California’s wealthiest regions. The Southern California Division stretches from Santa Barbara in the north through the L.A. Metro
9
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
area to San Diego in the South. The largest portion of California’s population resides in this geographic region. The Valley/ Nevada Division contains the Central Valley area of California and the state of Nevada. The Central Valley of California is an area that has been experiencing rapid transition from a largely agricultural base to a mix of agriculturalretail and commercial enterprises. Nevada has been the fastest growing state in the country for the past decade. The Pacific Northwest Division includes Oregon, Washingtonbanking products. Deposit products offered by this segment include checking accounts, savings deposits, market rate accounts, individual retirement accounts and Idaho. The New Mexico Division is centered in the Albuquerque metropolitan area where we have the third largest market share. The senior executives in the divisions are responsible for both retail and business banking activities in their markets.
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. A key element of Bank of the West’s strategy is to seek to distinguish itself as the provider of the best value in banking services. To this end, Regional Banking seeks to position itself within its markets as an alternative to both the higher-priced, smaller “boutique” commercial banks and the larger money center commercial banks, which may be perceived as offering lower service and lower prices on a “mass market” basis.
Regional Banking seeks to serve a broad customer base by furnishing a wide range of retail and commercial banking products. Deposit products offered by Regional Banking include checking accounts, savings deposits, market rate accounts, Individual Retirement Accounts and time deposits. 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 basic commercial banking products intended to serve the needs of smaller community-based businesses. These loan products 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 14 Business Banking centers located throughout California, as well as Portland, Oregon, Reno and Las Vegas, Nevada and Albuquerque, New Mexico. Each Business Banking Center provides a wide range of loan and deposit services to medium-sized companies with borrowing needs of $500,000 to $25 million. Lending services include receivable and inventory financing, equipment term loans, letters of credit, agricultural loans and trade finance. Other banking services include cash management, insurance products, trust, investment, foreign exchange and various international banking services.
The Regional Banking Segment also includes a Pacific Rim Division which offers multilingual services through an 18-brancha branch network in predominately Asian American communities in California, with specialized domestic and international products and services for both individuals and companies. The Pacific Rim Division has a largely commercial clientele.
Commercial Banking:
10
BancWest Corporation and Subsidiaries
NOTES 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”)(SBA) and equipment leasing clients. Services offered include cash management, trade finance, correspondent banking services and syndication of commercial credits exceeding $30 million.
This segment lends to agricultural clients including dairies, nurseries and growers of row crops among others. Offices serving agribusiness are located in Central California, Oregon and Washington. This segment also provides construction and commercial mortgage funding for developers of single-family and apartment residences, offices, retail space, hotels and industrial facilities. There are nine real estate industry lending offices located throughout California, as well as in Las Vegas, Reno and Portland. The Commercial Banking Segment provides SBA lending nationwide to meet the real estate, construction, equipment financing and operating expense requirements of businesses qualifying for government guaranteed SBA programs. 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.
CashServices offered include cash management, trade finance, correspondent banking services include account analysis and reconcilement, armored car and cash vault services, investment sweep accounts, lock box and wire transfer services among others. Business customers can access their accounts in real time via WebDirect.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 approximately 2,000 auto dealers and 2,000 recreational vehicle and marine dealers serviced by sales representatives located throughout the country. Collateral supporting these loans includes new and used automobiles, light duty trucks, vans, motor homes, travel trailers and boats. This segment also includes Bank of the West’s wholly-owned subsidiary,
10
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
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 servicing released for a fee.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 March 31,September 30, 2003. The predominant economic forceThanks 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 tourism, although there have been significant recent efforts to diversify the economy into high-techbuild those relationships by cross-selling additional products and other industries.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.
First Hawaiian’s principal funding source is its 61-branch network. Thanks to its significant market share in Hawaii, First Hawaiian already has product or service relationships with a majority of the households in the state. Therefore, a key goal of its retail community banking strategy is to build those relationships by cross-selling additional products and services to existing individual and business customers.
First Hawaiian’s goal is to become each customer’s primary bank, using core products such as demand deposit (checking) accounts as entry points to generate cross-sales and develop a multi-product relationship with individual and business customers. Toward this goal, employees in First Hawaiian’s branch network focus on selling bank, trust, investment and insurance products to meet customers’ needs and build on those existing relationships.
To complement its branch network and serve these customers, First Hawaiian operates a system of automated teller machines, a 24-hour Phone Centerphone center in Honolulu and a full-service Internetinternet 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 stateState of Hawaii. First Hawaiian is the largest issuer of MasterCard®MasterCard® credit cards and VISA®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 Subsidiaries
NOTES 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 maintains an International Banking Division which provides international banking products and services through First Hawaiian’s branch system, its international banking headquartersJapan 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 primarily trade-related and 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
11
BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
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,September 30, 2003, the Trust and Investments Division had approximately 4,000 accounts with a market value of $8.4$8.2 billion. Of this total, $5.8$5.9 billion represented assets in nonmanaged accounts and $2.6$2.3 billion were managed assets.
The Trust and Investments Division maintains custodial accounts pursuant to which it acts as agent for customers in rendering a variety of services, including dividend and interest collection, collection under installment obligations and rent collection.
Securities and Insurance Services: First Hawaiian, through a wholly-owned subsidiary, First Hawaiian Insurance, Inc., provides 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 Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
The tables below present information about the Company’s operating segments as of or for the periods indicated:
Bank of the West | Bank of the West | First Hawaiian Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||
Regional | Commercial | Consumer | Regional | Commercial | Consumer | Retail | Consumer | Commercial | Financial | |||||||||||||||||||||||||||||||||||||||||||
(in millions) | Banking | Banking | Finance | Other(1) | Banking | Banking | Finance | Other(1) | Banking | Banking | Banking | Management | Other(2) | |||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2003: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2003: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 121.9 | $ | 77.7 | $ | 49.7 | $ | 15.6 | $ | 127.7 | $ | 78.5 | $ | 53.0 | $ | 20.1 | $ | 68.2 | $ | 22.5 | $ | 7.9 | $ | — | $ | (11.5 | ) | |||||||||||||||||||||||||
Noninterest income | 38.7 | 11.4 | 2.7 | 5.5 | 42.7 | 13.0 | 2.9 | 5.1 | 17.9 | 5.4 | 3.1 | 7.9 | 1.7 | |||||||||||||||||||||||||||||||||||||||
Noninterest expense | 106.6 | 29.9 | 15.4 | 6.5 | 107.9 | 28.2 | 15.0 | 6.0 | 45.9 | 11.7 | 2.0 | 6.0 | (2.3 | ) | ||||||||||||||||||||||||||||||||||||||
Provision for credit losses | 3.6 | 0.3 | 12.8 | — | 4.3 | 2.2 | 13.6 | — | 1.3 | 2.4 | 0.1 | — | 0.2 | |||||||||||||||||||||||||||||||||||||||
Tax Provision (benefit) | 20.0 | 23.4 | 9.6 | 5.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
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) | $ | 30.4 | $ | 35.5 | $ | 14.6 | $ | 8.8 | $ | 35.2 | $ | 37.0 | $ | 16.5 | $ | 12.9 | $ | 24.7 | $ | 8.8 | $ | 6.7 | $ | 1.1 | $ | (8.3 | ) | |||||||||||||||||||||||||
Segment Assets at March 31 | $ | 7,189 | $ | 8,139 | $ | 7,179 | $ | 3,791 | ||||||||||||||||||||||||||||||||||||||||||||
Segment goodwill at March 31 | 1,214 | 706 | 308 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
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 | $ | 7,325 | $ | 8,189 | $ | 7,097 | $ | 3,182 | $ | 7,720 | $ | 8,356 | $ | 7,777 | $ | 4,070 | $ | 3,472 | $ | 1,379 | $ | 1,036 | $ | 18 | $ | 3,650 | ||||||||||||||||||||||||||
Average loans | 5,298 | 6,916 | 6,757 | — | 5,698 | 7,070 | 7,460 | — | 2,472 | 1,183 | 895 | 3 | 407 | |||||||||||||||||||||||||||||||||||||||
Average deposits | 13,533 | 2,588 | 14 | 1,401 | 13,834 | 2,926 | 12 | 1,819 | 6,621 | 11 | 27 | 56 | 173 | |||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2002: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2002: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 74.8 | $ | 31.4 | $ | 41.8 | $ | 22.2 | $ | 135.4 | $ | 73.5 | $ | 47.7 | $ | 14.7 | $ | 64.1 | $ | 18.0 | $ | 7.0 | $ | 0.1 | $ | (7.8 | ) | |||||||||||||||||||||||||
Noninterest income | 25.4 | 1.9 | 2.5 | 1.2 | 40.7 | 8.6 | 2.8 | 7.5 | 15.7 | 7.8 | 1.7 | 7.2 | (0.3 | ) | ||||||||||||||||||||||||||||||||||||||
Noninterest expense | 70.6 | 10.5 | 14.3 | 6.2 | 109.4 | 27.8 | 13.5 | 14.8 | 43.6 | 10.4 | 1.9 | 5.8 | (3.9 | ) | ||||||||||||||||||||||||||||||||||||||
Provision for credit losses | 1.9 | 1.3 | 11.1 | — | 6.8 | 1.9 | 12.9 | — | 2.1 | 2.5 | 0.3 | — | (0.2 | ) | ||||||||||||||||||||||||||||||||||||||
Tax Provision (benefit) | 11.1 | 8.6 | 7.6 | 6.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
Tax provision (benefit) | 24.8 | 21.6 | 10.0 | 2.3 | 13.0 | 4.8 | 2.0 | 0.6 | (1.0 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 16.6 | $ | 12.9 | $ | 11.3 | $ | 10.3 | $ | 35.1 | $ | 30.8 | $ | 14.1 | $ | 5.1 | $ | 21.1 | $ | 8.1 | $ | 4.5 | $ | 0.9 | $ | (3.0 | ) | |||||||||||||||||||||||||
Segment Assets at March 31 | $ | 6,903 | $ | 7,100 | $ | 8,879 | $ | 2,242 | ||||||||||||||||||||||||||||||||||||||||||||
Segment goodwill at March 31 | 1,205 | 703 | 305 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
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 | $ | 3,740 | $ | 3,750 | $ | 6,547 | $ | 1,600 | $ | 7,915 | $ | 7,963 | $ | 6,804 | $ | 2,867 | $ | 3,206 | $ | 1,300 | $ | 1,083 | $ | 13 | $ | 3,201 | ||||||||||||||||||||||||||
Average loans | 2,413 | 3,170 | 6,125 | — | 5,907 | 6,767 | 6,447 | — | 2,355 | 1,093 | 944 | — | 533 | |||||||||||||||||||||||||||||||||||||||
Average deposits | 9,271 | 335 | 17 | 1,195 | 13,652 | 2,434 | — | 1,685 | 6,131 | 9 | 19 | 32 | 169 |
[Additional columns below]
[Continued from above table, first column(s) repeated]
First Hawaiian Bank | ||||||||||||||||||||||||||||||||||||||||||||
Retail | Commercial | Financial | Other | Reconciling | Consolidated | Other | Reconciling | Consolidated | ||||||||||||||||||||||||||||||||||||
(in millions) | Banking | Consumer | Banking | Management | Other(2) | BancWest(3) | Items(4) | Totals | BancWest(3) | Items(4) | Totals | |||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2003: | ||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2003: | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 64.9 | $ | 20.0 | $ | 7.7 | $ | 0.1 | $ | (8.1 | ) | $ | (34.3 | ) | $ | 0.1 | $ | 315.3 | $ | (35.0 | ) | $ | — | $ | 331.4 | |||||||||||||||||||
Noninterest income | 17.8 | 8.9 | 1.6 | 6.9 | 1.4 | — | (0.1 | ) | 94.8 | (0.2 | ) | 0.1 | 99.6 | |||||||||||||||||||||||||||||||
Noninterest expense | 43.5 | 11.3 | 2.1 | 6.3 | (2.3 | ) | 1.3 | 0.1 | 220.7 | 2.3 | 0.3 | 223.0 | ||||||||||||||||||||||||||||||||
Provision for credit losses | 1.7 | 2.2 | — | — | 0.1 | 2.0 | — | 22.7 | — | — | 24.1 | |||||||||||||||||||||||||||||||||
Tax Provision (benefit) | 14.1 | 5.8 | 2.1 | 0.3 | (1.2 | ) | (15.3 | ) | — | 64.6 | ||||||||||||||||||||||||||||||||||
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) | $ | 23.4 | $ | 9.6 | $ | 5.1 | $ | 0.4 | $ | (3.3 | ) | $ | (22.3 | ) | $ | (0.1) | $ | 102.1 | $ | (22.1 | ) | $ | (0.3 | ) | $ | 112.2 | ||||||||||||||||||
Segment Assets at March 31 | $ | 3,287 | $ | 1,472 | $ | 1,066 | $ | 14 | $ | 3,452 | $ | 7,603 | $ | (8,276 | ) | $ | 34,916 | |||||||||||||||||||||||||||
Segment goodwill at March 31 | 650 | 216 | 118 | 10 | — | 5 | — | 3,227 | ||||||||||||||||||||||||||||||||||||
Segment assets at September 30 | $ | 6,947 | $ | (7,607 | ) | $ | 37,426 | |||||||||||||||||||||||||||||||||||||
Segment goodwill at September 30 | 5 | — | 3,227 | |||||||||||||||||||||||||||||||||||||||||
Average assets | $ | 2,615 | $ | 1,212 | $ | 937 | $ | 4 | $ | 4,390 | $ | 6,516 | $ | (7,050 | ) | $ | 34,417 | $ | 6,877 | $ | (7,557 | ) | $ | 36,798 | ||||||||||||||||||||
Average loans | 2,389 | 1,189 | 905 | 1 | 560 | 2 | 29 | 24,046 | 55 | (44 | ) | 25,199 | ||||||||||||||||||||||||||||||||
Average deposits | 6,392 | 10 | 21 | 51 | 155 | — | (19 | ) | 24,146 | — | (57 | ) | 25,422 | |||||||||||||||||||||||||||||||
Three Months Ended March 31, 2002: | ||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2002: | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 67.2 | $ | 17.5 | $ | 5.9 | $ | 0.1 | $ | (7.8 | ) | $ | (27.5 | ) | $ | (1.1 | ) | $ | 224.5 | $ | (31.8 | ) | $ | (0.2 | ) | $ | 320.7 | |||||||||||||||||
Noninterest income | 16.2 | 5.9 | 1.5 | 7.3 | (0.4 | ) | 0.1 | 1.0 | 62.6 | (0.1 | ) | — | 91.6 | |||||||||||||||||||||||||||||||
Noninterest expense | 43.4 | 10.2 | 1.6 | 6.0 | (4.6 | ) | 0.9 | — | 159.1 | 1.2 | (0.2 | ) | 224.3 | |||||||||||||||||||||||||||||||
Provision for credit losses | 2.2 | 2.1 | — | — | 1.4 | — | — | 20.0 | — | — | 26.3 | |||||||||||||||||||||||||||||||||
Tax Provision (benefit) | 14.6 | 4.3 | 1.8 | 0.6 | (1.6 | ) | (11.2 | ) | (0.1 | ) | 42.6 | |||||||||||||||||||||||||||||||||
Tax provision (benefit) | (13.4 | ) | (0.1 | ) | 64.6 | |||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 23.2 | $ | 6.8 | $ | 4.0 | $ | 0.8 | $ | (3.4 | ) | $ | (17.1 | ) | $ | — | $ | 65.4 | $ | (19.7 | ) | $ | 0.1 | $ | 97.1 | |||||||||||||||||||
Segment Assets at March 31 | $ | 3,519 | $ | 1,376 | $ | 850 | $ | 12 | $ | 2,833 | $ | 7,179 | $ | (7,569) | $ | 33,324 | ||||||||||||||||||||||||||||
Segment goodwill at March 31 | 650 | 216 | 118 | 10 | — | 173 | — | 3,380 | ||||||||||||||||||||||||||||||||||||
Segment assets at September 30 | $ | 7,572 | $ | (8,013 | ) | $ | 34,257 | |||||||||||||||||||||||||||||||||||||
Segment goodwill at September 30 | 173 | — | 3,384 | |||||||||||||||||||||||||||||||||||||||||
Average assets | $ | 2,884 | $ | 1,123 | $ | 725 | $ | 3 | $ | 3,850 | $ | 4,750 | $ | (5,179 | ) | $ | 23,793 | $ | 7,466 | $ | (7,881 | ) | $ | 33,937 | ||||||||||||||||||||
Average loans | 2,651 | 1,098 | 697 | — | 683 | 3 | 21 | 16,861 | 22 | — | 24,068 | |||||||||||||||||||||||||||||||||
Average deposits | 5,850 | 11 | 27 | 59 | 199 | — | (31 | ) | 16,933 | (36 | ) | — | 24,095 |
13
BancWest Corporation and Subsidiaries
NOTES 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 items in the other column related to net interest income and noninterest income consist ofitems in the Other column relate to Treasury activities of $16.9$22.6 million and $55.1 million and unallocated other income of $4.2$2.6 million and $16.1 million for March 31, 2003.the three and nine months ended September 30, 2003, respectively. The material net interest income and noninterest income items in the otherOther column for March 31,the three and nine months ended September 30, 2002 resulted substantially from Treasury activities of $19.7$11.9 million and $30.0 million and unallocated other income of $3.7 million.$10.3 million and $26.9 million, respectively.
The material noninterest expense items in the otherOther column related to noninterest expense for March 31,the three and nine months ended September 30, 2003, resultedare substantially derived from Treasury activities and unallocated administrative items of $6.5 million.items. The material itemnoninterest expense items in the otherOther column resultedfor the three months ended September 30, 2002 are mostly fromthe result of unallocated merger-related costs of $6.0$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 March 31, 2002.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 otherOther column relatedrelate to average assets are unallocated Treasury securities for March 31, 2003 and 2002.the periods presented:
The material average deposit items in the otherOther column relatedrelate to average deposits are unallocated Treasury balances for March 31,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.
The material items in Other were related to the following for March 31, 2003:14
The material items in noninterest income resulted primarily from unallocated Treasury activities.
The material items in noninterest expense consists primarily of unallocated costs.
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
The material items in the other column related to average assets are unallocated Treasury securitiesnet interest income for March 31,the three and nine months ended September 30, 2003 resulted from $7.9 million and 2002.$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 March 31,the three and nine months ended September 30, 2003 and 2002.
(3) The “Other BancWest”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 Lease Holding Capital I.
(4) The reconciling items in the above table are principally intercompany eliminations.
13
15
BancWest Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Continued)
5. | Intangible Assets |
The Company adopted SFAS 142 on January 1, 2002. The most significant changes made by SFAS 142 are that goodwill and other indefinite livedindefinite-lived intangible assets are no longer amortized and will be tested for impairment at least annually. As of March 31,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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank of the West | First Hawaiian Bank | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail | Financial | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Regional | Commercial | Consumer | Banking | Commercial | Management | Consolidated | Regional | Commercial | Consumer | Retail | Consumer | Commercial | Financial | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions) | (in millions) | Banking | Banking | Finance | Group | Consumer | Banking | Group | BancWest | Totals | (in millions) | Banking | Banking | Finance | Banking | Banking | Banking | Management | BancWest | Totals | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2003: | Balance as of January 1, 2003: | $ | 1,215 | $ | 707 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 10 | $ | 5 | $ | 3,229 | Balance as of January 1, 2003: | $ | 1,215 | $ | 707 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 10 | $ | 5 | $ | 3,229 | ||||||||||||||||||||||||||||||||||||
Purchase accounting adjustment: | Purchase accounting adjustment: | Purchase accounting adjustment: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UCB | (1 | ) | — | — | — | — | — | — | — | (1 | ) | UCB | (1 | ) | — | — | — | — | — | — | — | (1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Trinity Capital | — | (1 | ) | — | — | — | — | — | — | (1 | ) | Trinity Capital | — | (1 | ) | — | — | — | — | — | — | (1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2003: | $ | 1,214 | $ | 706 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 10 | $ | 5 | $ | 3,227 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2003: | Balance as of September 30, 2003: | $ | 1,214 | $ | 706 | $ | 308 | $ | 650 | $ | 216 | $ | 118 | $ | 10 | $ | 5 | $ | 3,227 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
14 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 |
6. | Financial Interpretation No. 46: Consolidation of Variable Interest Entities |
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 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.
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 shall not participate in the control of the Partnership’s business. The general partner exercises the day-to-day control and management of the projects. The general partner has exclusive control over the Partnership’s business 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. BancWest is considered a defacto agent for the general partner and cannot sell the investments without the general partners’ consent. 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 pledge amount for these investments is approximately $77 million with approximately $30 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 pledge amount. A bargain purchase option is available for the general partner to purchase the Company’s portion of interest in the limited partnerships. These partnerships were entered into from 1989 through 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 preferred capital securities were sold to the public; BancWest owns the common 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. At the Trusts’ inception, we issued junior subordinated deferrable interest debentures to the Trusts in return for either capital securities, in the case of BWE Trust, or the proceeds from capital securities that were issued from FH Trust. 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 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.
17
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
New PronouncementsOVERVIEW
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 FASBFinancial Accounting Standards Board (FASB) issued SFASStatement 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 StatementSFAS 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting. StatementSFAS 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 isdid not expected to have a material effectimpact on our consolidated financial position, results of operations or cash flows.
In May 2003, the Company’s ConsolidatedFASB issued SFAS 150, “Accounting for Certain Financial Statements.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 Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 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 Financial Accounting Standards Board (“FASB”),FASB, the Securities and Exchange Commission (“SEC”)(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.
Monetary Policy and Economic ConditionsMONETARY POLICY AND ECONOMIC CONDITIONS
Our earnings and businesses are affected not only by general economic conditions (both domestic and international), but also by the monetary policies of various governmental regulatory authorities of (i) the United States and foreign governments and (ii) international agencies. In particular, our earnings and growth may be affected by actions of the Federal Reserve Board in connection with its implementation of national monetary policy through its open market operations in United States Government securities, control of the discount rate and establishment of reserve requirements against both member and non-member financial institutions’ deposits. These actions 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 PoliciesCRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our consolidated financial statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances as of March 31,September 30, 2003. 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
15
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS (Continued)
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, in particular, Note 1 (Summary of Significant Accounting Policies) of our 2002 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, we have identified threetwo policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements.
19
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
• | Allowance for Credit | ||
• | Fair Value of Assets: Certain assets and liabilities are reflected at their estimated fair value in the consolidated financial statements. Such amounts are based on either quoted market prices or estimated values derived by utilizing dealer quotes, market comparisons or internally generated modeling techniques. Our internal models generally involve present value of cash flow techniques. | ||
One of the most significant assets for which we estimate fair value is goodwill. As of | |||
1620
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
CONSOLIDATED FINANCIAL HIGHLIGHTS(Unaudited)
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||
Earnings: | Earnings: | Earnings: | ||||||||||||||||||||||||||||
Net interest income | Net interest income | $ | 315,239 | $ | 224,480 | Net interest income | $ | 331,362 | $ | 320,734 | $ | 967,926 | $ | 867,108 | ||||||||||||||||
Provision for credit losses | Provision for credit losses | 22,690 | 20,007 | Provision for credit losses | 24,145 | 26,300 | 65,695 | 69,209 | ||||||||||||||||||||||
Noninterest income | Noninterest income | 94,834 | 62,624 | Noninterest income | 99,626 | 91,639 | 295,034 | 242,692 | ||||||||||||||||||||||
Noninterest expense | Noninterest expense | 220,660 | 159,098 | Noninterest expense | 222,963 | 224,364 | 673,412 | 612,282 | ||||||||||||||||||||||
Tax provision | Tax provision | 64,642 | 42,582 | Tax provision | 69,268 | 64,651 | 199,498 | 169,256 | ||||||||||||||||||||||
Net income | $ | 102,081 | $ | 65,417 | ||||||||||||||||||||||||||
Income before cumulative effect of accounting change | Income before cumulative effect of accounting change | 114,612 | 97,058 | 324,355 | 259,053 | |||||||||||||||||||||||||
Cumulative effect of accounting change, net of tax | Cumulative effect of accounting change, net of tax | 2,370 | — | 2,370 | — | |||||||||||||||||||||||||
Net Income | Net Income | $ | 112,242 | $ | 97,058 | $ | 321,985 | $ | 259,053 | |||||||||||||||||||||
Selected Financial Ratios: | Selected Financial Ratios: | Selected Financial Ratios: | ||||||||||||||||||||||||||||
Return on average total assets (ROA) | Return on average total assets (ROA) | 1.20 | % | 1.12 | % | Return on average total assets (ROA) | 1.21 | % | 1.13 | % | 1.21 | % | 1.14 | % | ||||||||||||||||
Return on average stockholder’s equity (ROE) | Return on average stockholder’s equity (ROE) | 10.54 | 11.51 | Return on average stockholder’s equity (ROE) | 10.83 | 9.99 | 10.70 | 10.50 | ||||||||||||||||||||||
Net interest margin (taxable-equivalent basis) | Net interest margin (taxable-equivalent basis) | 4.49 | 4.57 | Net interest margin (taxable-equivalent basis) | 4.26 | 4.52 | 4.37 | 4.58 | ||||||||||||||||||||||
Allowance for credit losses to total loans and leases (at March 31) | 1.65 | 1.59 | ||||||||||||||||||||||||||||
Nonperforming assets to total assets (at March 31) | 0.67 | 0.77 | ||||||||||||||||||||||||||||
Allowance for credit losses to nonperforming loans and leases (at March 31) | 1.83 | x | 1.65 | x | ||||||||||||||||||||||||||
Allowance for credit losses to total loans and leases (at September 30) | 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) | 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) | 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 | Average equity to average total assets | 11.17 | % | 11.36 | % | 11.35 | % | 10.85 | % | |||||||||||||||||||||
Regulatory Capital Ratios: | Regulatory Capital Ratios: | Regulatory Capital Ratios: | ||||||||||||||||||||||||||||
Leverage Ratio: | ||||||||||||||||||||||||||||||
Bank of the West | 9.48 | % | 7.37 | % | ||||||||||||||||||||||||||
United California Bank | N/A | 10.08 | ||||||||||||||||||||||||||||
First Hawaiian Bank | 9.38 | 8.64 | Leverage Ratio(1): | |||||||||||||||||||||||||||
Tier 1 capital (risk-based): | Bank of the West | 9.36 | % | 8.94 | % | 9.36 | % | 8.94 | % | |||||||||||||||||||||
Bank of the West | 10.29 | 8.11 | First Hawaiian Bank | 9.68 | 9.08 | 9.68 | 9.08 | |||||||||||||||||||||||
United California Bank | N/A | 10.83 | Tier 1 capital (risk-based): | |||||||||||||||||||||||||||
First Hawaiian Bank | 11.66 | 9.95 | Bank of the West | 10.56 | 9.84 | 10.56 | 9.84 | |||||||||||||||||||||||
Total capital (risk-based): | First Hawaiian Bank | 12.51 | 11.06 | 12.51 | 11.06 | |||||||||||||||||||||||||
Bank of the West | 12.59 | 11.11 | Total capital (risk-based): | |||||||||||||||||||||||||||
United California Bank | N/A | 12.09 | Bank of the West | 12.81 | 12.16 | 12.81 | 12.16 | |||||||||||||||||||||||
First Hawaiian Bank | 14.05 | 12.29 | First Hawaiian Bank | 14.88 | 13.47 | 14.88 | 13.47 | |||||||||||||||||||||||
Balance Sheet Data Averages: | Balance Sheet Data Averages: | Balance Sheet Data Averages: | ||||||||||||||||||||||||||||
Average assets | Average assets | 34,417,081 | 23,792,836 | Average assets | 36,797,885 | 33,937,459 | 35,441,404 | 30,414,475 | ||||||||||||||||||||||
Average loans | Average loans | 24,046,194 | 16,861,211 | Average loans | 25,199,215 | 24,067,661 | 24,548,196 | 21,739,282 | ||||||||||||||||||||||
Average deposits | Average deposits | 24,146,346 | 16,932,851 | Average deposits | 25,422,161 | 24,095,238 | 24,631,586 | 21,663,686 | ||||||||||||||||||||||
Average stockholder’s equity | Average stockholder’s equity | 3,926,093 | 2,305,697 | Average stockholder’s equity | 4,110,928 | 3,854,560 | 4,023,643 | 3,299,628 | ||||||||||||||||||||||
Balance Sheet Data At Period End: | Balance Sheet Data At Period End: | Balance Sheet Data At Period End: | ||||||||||||||||||||||||||||
Assets | Assets | 34,916,089 | 33,324,493 | Assets | 37,425,502 | 34,256,500 | 37,425,502 | 34,256,500 | ||||||||||||||||||||||
Loans | Loans | 24,056,267 | 24,070,667 | Loans | 25,343,837 | 24,141,513 | 25,343,837 | 24,141,513 | ||||||||||||||||||||||
Deposits | Deposits | 24,338,593 | 24,083,920 | Deposits | 25,920,602 | 24,356,862 | 25,920,602 | 24,356,862 | ||||||||||||||||||||||
Stockholder’s equity | Stockholder’s equity | 3,968,819 | 3,664,633 | Stockholder’s equity | 4,157,522 | 3,931,779 | 4,157,522 | 3,931,779 |
17
(1) | The capital leverage rates are based on quarterly averages. | |
(2) | These balances include loans held-for-sale and are not adjusted for credit losses. |
21
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
NET INTEREST INCOME
The increase in netNet interest income forincreased 3.3% in the three months ended September 30, 2003 to $331.4 million from $320.7 million in the corresponding period last year. Net interest income increased to $967.9 million, a growth of 11.6% in the nine months ending September 30, 2003 from $867.1 million 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 earning assets declined faster than the rates on our funding sources. Increases in average earning assets were partially offset by the impact of the decreased margin.
Average earning assets increased by $2.7 billion and $4.3 billion or 9.7% and 17.0%, respectively, in the three and nine months ended September 30, 2003 from the corresponding periods last year. These increases were primarily driven by purchases of investment securities, residential real estate loans 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 March 31,September 30, 2003 overand 12.9% or $2.8 billion during the same period in 2002 was primarily due to an increase in average earning assets of 43.4%, or $8.6 billion, and a 68-basis-point decrease (1% equals 100 basis points) in the rate paid on interest-bearing funding sources, partially offset by a 78-basis point decline in the yield on average earning assets. In addition, higher average noninterest-bearing deposits, which increased by $2.9 billion or 76.4% in the first quarter of 2003 over the same period in 2002, contributed to a decline in the overall cost of funds of 70 basis points. The increase in average earning assets is primarily due to the acquisition of UCB. The decline in yields is primarily attributable to the continued effects of the interest rate reductions implemented by the Federal Reserve Bank in the previous two years.
In the three-monthnine-month period ended March 31,September 30, 2003 as compared to the same period in 2002,periods last year.
For the net interest marginthree and nine months ended September 30, 2003 interest-bearing demand deposits decreased by 8 basis points due23.3% 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 a decrease in the yield on average earning assets of 78 basis points substantiallylast year. Short-term borrowing decreased 13.3% and 9.8% or $314.2 million and $199.2 million, respectively, offset by a declinesignificant increase in long-term borrowing of 66.0% and 57.6% or $1.6 billion and $1.4 billion in the rate paid on funding sourcesthree 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 70 basis points. The continuing effectsfinalizing the long-term financing for the portion of the reduction of keyUCB acquisition ($800 million) that had been financed during the interim with short-term debt.
In addition to a falling interest rates by the Federal Reserve Bank are primarily responsible for the declines in yields and rates.
Ourrate 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 March 31,September 30, 2003, respectively as compared to the same periodperiods in 2002. The percentage of average noninterest-bearing deposits to total average deposits increased to 27.9% for the three and nine months ended March 31,September 30, 2003 comparedincreased to 22.6%28.7% and 28.3%, respectively, from 26.4% and 24.7% for the same periodperiods in 2002.
The increase in average earning assets was primarily due to an increase in average loans and leases of $7.2 billion, or 42.6%, and an increase in investment securities of $1.5 billion, or 53.8%. These increases are primarily due to the acquisition of UCB. Also contributing to the increase in average loans and leases was the acquisition of Trinity Capital in the fourth quarter of 2002.
The increase in average interest-bearing deposits and liabilities was primarily due to an increase in average interest-bearing deposits of $4.3 billion, or 32.8%, and a $1.2 billion, or 50.5%, increase in long-term debt. Expansion of our customer deposit base, primarily due to the acquisition of UCB, contributed to the increase in average interest-bearing deposits. To facilitate the purchase of UCB, BancWest borrowed $800 million from BNP Paribas. This amount was initially recorded as short-term debt under a bridge financing arrangement. In November, 2002, permanent financing was put in place and classified as long-term debt. The remaining increase of approximately $400 million in average long-term debt is primarily due to increased borrowing from the Federal Home Loan Bank.
18
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth consolidated average balance sheets, as well as an analysis of interest income/expense and average 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 March 31, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest | Interest | Interest | Interest | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||||||||||||||||||||||||||||
Balance | Expense | Rate (1) | Balance | Expense | Rate (1) | Balance | Expense | Rate (1) | Balance | Expense | Rate (1) | |||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earning assets: | Earning 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 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits in other banks | $ | 108,376 | $ | 415 | 1.55 | % | $ | 152,079 | $ | 742 | 1.98 | % | Investment securities:(2) | |||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 249,634 | 823 | 1.34 | 205,067 | 866 | 1.71 | Taxable investment securities | 5,218,770 | 46,118 | 3.51 | 3,495,137 | 40,704 | 4.62 | |||||||||||||||||||||||||||||||||||||||||||
Investment securities (2),(3) | 4,149,668 | 42,587 | 4.16 | 2,697,438 | 34,787 | 5.23 | Non-taxable investment securities | 15,663 | 240 | 6.08 | 15,001 | 228 | 6.03 | |||||||||||||||||||||||||||||||||||||||||||
Loans and leases (4),(5) | 24,046,194 | 374,287 | 6.31 | 16,861,211 | 292,966 | 7.05 | Loans and leases(3),(4) | 25,199,215 | 376,696 | 5.93 | 24,067,661 | 400,825 | 6.61 | |||||||||||||||||||||||||||||||||||||||||||
Total earning assets | 28,553,872 | $ | 418,112 | 5.93 | 19,915,795 | $ | 329,361 | 6.71 | Total earning assets | 30,919,797 | 424,634 | 5.45 | % | 28,186,197 | 444,695 | 6.26 | % | |||||||||||||||||||||||||||||||||||||||
Non-earning assets | Non-earning assets | 5,863,209 | 3,877,041 | Non-earning assets | 5,878,088 | 5,751,262 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 34,417,081 | $ | 23,792,836 | Total assets | $ | 36,797,885 | $ | 33,937,459 | |||||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | LIABILITIES AND STOCKHOLDER’S EQUITY | LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits and liabilities: | Interest-bearing deposits and liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits: | Deposits: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic: | Domestic: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand | $ | 266,838 | $ | 119 | 0.18 | $ | 336,207 | $ | 219 | 0.26 | Interest-bearing | |||||||||||||||||||||||||||||||||||||||||||||
Savings | 9,696,019 | 18,239 | 0.76 | 5,742,800 | 16,231 | 1.15 | Demand | $ | 271,111 | $ | 44 | 0.06 | % | $ | 353,668 | $ | 267 | 0.30 | % | |||||||||||||||||||||||||||||||||||||
Time | 6,839,649 | 33,231 | 1.97 | 6,664,839 | 45,250 | 2.75 | Savings | 10,399,436 | 13,637 | 0.52 | 9,255,123 | 29,013 | 1.24 | |||||||||||||||||||||||||||||||||||||||||||
Foreign | 608,316 | 1,558 | 1.04 | 370,124 | 1,929 | 2.11 | 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 | 17,410,822 | 53,147 | 1.24 | 13,113,970 | 63,629 | 1.97 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Short-term borrowings | 1,373,035 | 3,696 | 1.09 | 1,330,766 | 5,793 | 1.77 | Total interest-bearing deposits | 18,124,691 | 39,835 | 0.87 | 17,745,889 | 76,477 | 1.71 | |||||||||||||||||||||||||||||||||||||||||||
Long-term debt and capital securities | 3,580,283 | 45,394 | 5.14 | 2,378,244 | 35,382 | 6.03 | 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 | 22,364,140 | 102,237 | 1.85 | 16,822,980 | 104,804 | 2.53 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits and liabilities | 24,305,846 | 92,908 | 1.52 | 22,596,024 | 123,814 | 2.17 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate spread | 4.08 | % | 4.18 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate spread | 3.93 | % | 4.09 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | 6,735,524 | 3,818,881 | Noninterest-bearing deposits | 7,297,470 | 6,349,349 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 1,391,324 | 845,278 | Other liabilities | 1,083,641 | 1,137,526 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 30,490,988 | 21,487,139 | Total liabilities | 32,686,957 | 30,082,899 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholder’s equity | 3,926,093 | 2,305,697 | Stockholder’s equity | 4,110,928 | 3,854,560 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholder’s equity | $ | 34,417,081 | $ | 23,792,836 | Total liabilities and stockholder’s equity | $ | 36,797,885 | $ | 33,937,459 | |||||||||||||||||||||||||||||||||||||||||||||||
Impact of noninterest-bearing sources | Impact of noninterest-bearing sources | 0.41 | % | 0.39 | % | Impact of noninterest-bearing sources | 0.33 | % | 0.43 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Net interest income and margin on total earning assets | 315,875 | 4.49 | % | 224,557 | 4.57 | % | Net interest income and margin on total earning assets | 331,726 | 4.26 | % | 320,881 | 4.52 | % | |||||||||||||||||||||||||||||||||||||||||||
Tax equivalent adjustment | 364 | 147 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax equivalent adjustment | 636 | 77 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 331,362 | $ | 320,734 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 315,239 | $ | 224,480 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) | Annualized. | |
(2) | Average | |
(3) | ||
Nonaccruing loans and leases, and loans | ||
Interest income for loans and leases included loan fees of |
1923
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 | ||||||||||||||||||||||||
(1) | Annualized. | |
(2) | Average investment securities were computed based on historical amortized cost, excluding the effects of SFAS No. 115 adjustments. | |
(3) | Nonaccruing loans and leases, and loans held-for-sale have been included in the computations of average loan and lease balances. | |
(4) | Interest income for loans and leases included loan fees of $46.8 million and $39.4 million for the nine months ended September 30, 2003 and 2002, respectively. |
24
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NONINTEREST INCOME
The following table reflects the key components of the change in noninterest income for the three and nine months ended March 31,September 30, 2003, as compared to the same periodperiods in 2002:
2003 | 2002 | % Change | ||||||||||||
(in thousands) | ||||||||||||||
Three Months Ended March 31, | ||||||||||||||
Service charges on deposit accounts | $ | 37,029 | $ | 25,974 | 42.6 | % | ||||||||
Trust and investment services income | 9,507 | 8,140 | 16.8 | |||||||||||
Other service charges and fees | 35,615 | 23,498 | 51.6 | |||||||||||
Securities gains, net | 1,892 | 228 | 729.8 | |||||||||||
Other | 10,791 | 4,784 | 125.6 | |||||||||||
Total noninterest income | $ | 94,834 | $ | 62,624 | 51.4 | % | ||||||||
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 | % | ||||||||
As the table above shows in detail, noninterest income increased by 51.4%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 number of different causes. Service charges on deposit accounts for the quarter did not increase materially, but increased $13.4 million or 13.2% in the nine months ended September 30, 2003. This was due in large part to an increase in average deposit balances of approximately 5.5% and 13.7% for the three and nine months, respectively, compared to the same periods in the prior year. Part of the year-to-date increase is attributable to the acquisition of UCB in March 31, 2003,2002.
Other service charges and fees increased 13.2% in the quarter and 26.8% in the nine months year-to-date. The increase in other service charges and fees compared to the same period in 2002. The increase in noninterest incomelast year is substantiallyprimarily due to higher levelsincome from 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 broker servicing fees and increased debit card usage. Other noninterest income increased 40.0% in the third quarter and 51.7% in the nine-month period compared to the corresponding periods in 2002. These increases are primarily gains from the sale of loans and deposits resulting from the expansion of our customer loanleases.
Approximately $0.6 million and deposit base$3.9 million in Bank of the West, especially those resulting from the UCB acquisition.
Approximately $1.9 million innet gains on the sale of investment securities waswere recognized in the three and nine months ended March 31,September 30, 2003, primarily from the sale of FHLB bonds and U.S. Treasury Notes.respectively.
NONINTEREST EXPENSE
The following table reflects the key components of the change in noninterest expense for the three and nine months ended March 31,September 30, 2003 as compared to the same periodperiods in 2002:
2003 | 2002 | % Change | ||||||||||||
(in thousands) | ||||||||||||||
Three Months Ended March 31, | ||||||||||||||
Salaries and wages | $ | 84,662 | $ | 60,094 | 40.9 | % | ||||||||
Employee benefits | 37,646 | 23,482 | 60.3 | |||||||||||
Occupancy expense | 22,320 | 15,614 | 42.9 | |||||||||||
Outside services | 17,567 | 13,252 | 32.6 | |||||||||||
Intangible amortization | 5,763 | 2,757 | 109.0 | |||||||||||
Equipment expense | 11,156 | 7,729 | 44.3 | |||||||||||
Stationery and supplies | 7,018 | 5,685 | 23.4 | |||||||||||
Advertising and promotion | 5,203 | 4,657 | 11.7 | |||||||||||
Restructuring and integration costs | — | 6,015 | — | |||||||||||
Other | 29,325 | 19,813 | 48.0 | |||||||||||
Total noninterest expense | $ | 220,660 | $ | 159,098 | 38.7 | % | ||||||||
As the table above shows in detail, noninterest expense increased by 38.7% for the three months ended March 31, 2003, compared to the same period in 2002. The increase in noninterest expense is predominately due to the UCB acquisition. Significant items include the following:
2025
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 | % | ||||||||
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 million, or 22.1% in the current year. This decrease was the result of higher advertising and promotion expenses in 2002 to promote brand recognition and maintain customer base after the acquisition of UCB. Increases in other expenses include certain fees and software depreciation that we incurred this year that were not incurred in 2002 as well as a leveraged lease restructuring charge from the second quarter.
As a result of the consolidation of operations subsequent 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 compensation and occupancy-related expenses.
OPERATING SEGMENT RESULTS
Bank of the West
Regional Bankingsegment’s net income was $30.4 million in the first quarter, compared with $16.6 million for the same period in 2002, an increase of 83%. Net interest income increased by $47.1 million, or 63%, compared with the first quarter of 2002. The increase is primarily due to the UCB acquisition, which added over 100 branches and over $3 billion in loans to the segment. Noninterest income was up $13.3 million, or 52%,remained nearly flat in the three months ended March 31,September 30, 2003 from the same period in the prior year at $35.2 million. Net interest income decreased $7.7 million or 5.7% in the third quarter compared to the same period in the
26
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
prior year. Noninterest income increased $2.0 million or 4.9% and noninterest expense decreased $1.5 million or 1.4% this quarter from the quarter ended September 30, 2002. The provision for credit losses decreased $2.5 million or 36.8%.
Net interest income decreased 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. Noninterest income increased due to debit card interchange revenue associated with increased volume usage and an additional MasterCard® product. Noninterest expense decreased in the three month period compared to the prior year due to lower salary and wage expenses this quarter. This decrease in expenses was coupled with savings from the consolidation of branch facilities subsequent to the acquisition 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% in the year to date period. Noninterest income increased $17.5 million or 16.6% and noninterest expense increased $32.1 million or 11.0% in the nine months ended September 30, 2003 compared with 2002 primarily due to higher service charges on a larger deposit base, primarily attributable to deposits acquired through UCB, and higher other service charges. Noninterest expense increased by $36.0 million, or 51%, over 2002 primarily due to higher staffing and operating costs associated with the larger branch network discussed above.prior year. The provision for credit losses increased by $1.7$0.9 million or 89%, as8.0% in the nine months ended September 30, 2003 compared with 2002.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 Bankingsegment’s net income was $35.5 million in the first quarter, compared with $12.9 million for the same period in 2002, an increase of 175%. Net interest income increased by $46.3$6.2 million or 147%, compared with the first quarter of 2002 primarily due to a larger average loan balance for the quarter, which is primarily attributable to the UCB acquisition. Noninterest income was up $9.5 million, or 500%,20.1% in the three months ended March 31,September 30, 2003 compared with 2002 due to higher service charges on a larger deposit base, due to UCB, and higher other service charges. Noninterest expense increased by $19.4from $30.8 million or 185%, over 2002 due to higher operating costs associated with running a larger segment after the UCB acquisition. The provision for Credit Losses decreased by $1 million or 77%, as compared with 2002. A lower provision was required forin the three months ended March 31,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 compared with 2002 primarilydespite 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 recognitionacquisition 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 recoveriesincrease in Marchthe 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 arbitration settlement with UFJ.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 points due to a declining interest rate environment. Noninterest income growth was driven by the UCB and Trinity acquisitions, nonyield related loan fees and lease servicing, as well as aggressive efforts to sell cash management, derivatives, and foreign exchange services. While the Trinity Capital acquisition increased full-time equivalents (FTE) by 86, FTE in legacy Bank of the West and UCB businesses has declined by 73 from September 2002 to September 2003. Commercial Banking continues to pursue a strategy of leveraging efficiencies gained through the expanded resources resulting from the UCB and Trinity Capital acquisitions, while focusing on niche markets where there is a competitive advantage, such as equipment leasing, SBA loans and Church Lending.
27
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Financesegment’s net income for the three months ended September 30, 2003 was $14.6$16.5 million compared to $14.1 million a year ago. Net interest income in the third quarter 2003 was $53.0 million, compared with $47.7 million for the same period 2002, an increase of 11.1%. Noninterest income increased $0.1 million for the quarter compared to the prior year. Noninterest expense increased from $13.5 million in the firstthree 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 $11.3$2.8 million for the same period 2002. This increase was primarily due to an increase in loan servicing related fees. Noninterest expense for the third quarter 2003 increased by 11.1% over the same period in 2002. This increase was primarily due to an increase in the cost of employee salaries and benefits. Other expense categories experienced a decrease due to efficiency gains.
Net income for the nine months ended September 30, 2003 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 29%15.4%. Net interestNoninterest income increased by $7.911.0% 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 $5.5 million or 19%,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 first quarter of 2002 primarily due to higher loan volume, particularlysame period in automobile, recreational vehicle and marine lending, and wider margins. Noninterest income2002. This increase was up $0.2 million, or 8%, in the three months ended March 31, 2003 compared with 2002 primarily due to gains on the salesales of loans through our Essex subsidiary, increases in installment non-yield related loan fees, and extension fees.other retail service charges. Noninterest expense for the nine months ended September 30, 2003 increased by $1.1$4.1 million or 8%, over 2002from the same period 2002. This increase was primarily due to highergreater staff and occupancy requirements associated with growth and the UCB acquisition. The provisionAdditionally, 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 credit lossesthe 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 by $1.7 million or 15%, as compared with 2002.indirect loan production.
First Hawaiian Bank
Retail Bankingsegment’s net income was $23.4for the third quarter ended September 30, 2003 increased $3.6 million, in the first quarter,or 17.1% compared with $23.2 million forto the same period in 2002, an increase of 0.9%.2002. Net interest income decreasedfor the third quarter increased by $2.3$4.1 million, or 3%,6.4% compared withto the first quarter of 2002. Thisprior year. The increase was primarily due to the transfer of loans to the Commercial Banking Group in April 2002.higher commercial loan and mortgage loan fees. Noninterest income was up $1.6 million, or 10%, infor the three months ended March 31,September 30, 2003 increased by $2.2 million, or 14.0% compared with 2002to prior year. The increase was primarily due to higher account analysis fees. Noninterest expense for the third quarter increased by $0.1 million over 2002. The provision for credit losses decreased by $0.5$2.3 million, or 23%, as5.3% compared with 2002.
Consumersegment’s net incometo prior year. The increase was $9.6 million in the first quarter, compared with $6.8 million for the same period in 2002, an increase of 41%. Net interest income increased by $2.5 million, or 14%, compared with the first quarter of 2002 primarily as a result of higher loan volume and a wider margin. Noninterest income was up $3.0 million, or 51%, in the three months ended March 31, 2003 compared with 2002, primarily due to higher merchant service income and higher gains on the sale of loans. Noninterest expense increased by $1.1 million, or 11%, over 2002. The provisionretirement plan expense. Provision for credit losses increasedfor the third quarter decreased by $0.1$0.8 million, or 5%, as38.1% compared with 2002.to prior year.
Commercial Bankingsegment’s netNet income was $5.1 million in the first quarter, compared with $4.0 million for the nine months ended September 30, 2003 increased $4.2 million, or 6.4% compared to the same periodperiods in 2002, an increase of 28%.2002. Net interest income for nine months ended September 30, 2003 increased by $1.8$2.9 million, or 31%,1.5% compared with the first quarter of 2002 primarily due to the transfer of loans from the Regional Banking Segment, higher volume, a wider margin and beneficial change in the loan mix. Noninterest incomeprior year. The increase was up $0.1 million, or 7%, in the three months ended March 31, 2003 compared with 2002. Noninterest expense increased by $0.5 million, or 31%, over 2002.
Financial Managementsegment’s net income was $0.4 million in the first quarter, compared with $0.8 million for the same period in 2002, a decrease of 50%. Net interest income did not change from the first quarter of 2002. Noninterest income was down $0.4 million, or 5%, in the three months ended March 31, 2003 compared with 2002. Noninterest expense increased by $0.3 million, or 5%, over 2002 primarily due to higher salariescommercial loan 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.
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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 income for 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 $1.3 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 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, 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.
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 Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INVESTMENT SECURITIES
Available-for-Sale
The fair value of available-for-sale securities at March 31,September 30, 2003 increased by approximately $1.4$1.7 billion, or 43.2%45.9%, compared to March 31,the value at September 30, 2002 and increased by approximately $621 million,$1.5 billion, or 15.9%37.3%, compared to December 31, 2002. These increases are primarily attributableWhile we still continue to originate and purchase loans, we have increased our purchases of investment securities as the purchase of asset-backed securities, mortgage securitiesslow economy has not been conducive to significant loan originations.
The following table provides the cost and securities issued by government-sponsored agencies, includingfair value for the Government National Mortgage Association (GNMA) and the Federal National Mortgage Association (FNMA). The purchasemajor components of securities issued directly by the U.S. Treasury and other governmental agencies and corporations also contributed to the increase.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:
March 31, | December 31, | March 31, | September 30, | December 31, | September 30, | |||||||||||||||||||
2003 | 2002 | 2002 | 2003 | 2002 | 2002 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Amortized cost | $ | 4,451,712 | $ | 3,860,297 | $ | 3,152,914 | $ | 5,387,627 | $ | 3,860,297 | $ | 3,631,395 | ||||||||||||
Unrealized gains | 78,957 | 82,838 | 20,834 | 55,922 | 82,838 | 79,265 | ||||||||||||||||||
Unrealized losses | (2,185 | ) | (2,366 | ) | (11,826 | ) | (31,180 | ) | (2,366 | ) | (2,187 | ) | ||||||||||||
Fair value | $ | 4,528,484 | $ | 3,940,769 | $ | 3,161,922 | $ | 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 March 31,September 30, 2003 and 2002 were as follows:
Three months Ended | Nine months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Realized gains | $ | 1,892 | $ | 241 | $ | 555 | $ | 402 | $ | 3,913 | $ | 1,124 | ||||||||||||
Realized losses | — | (13 | ) | — | (120 | ) | — | (158 | ) | |||||||||||||||
Securities gains, net | $ | 1,892 | $ | 228 | $ | 555 | $ | 282 | $ | 3,913 | $ | 966 | ||||||||||||
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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 March 31,September 30, 2003, December 31, 2002 and March 31,September 30, 2002:
March 31, 2003 | December 31, 2002 | March 31, 2002 | September 30, 2003 | December 31, 2002 | September 30, 2002 | |||||||||||||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | Commercial, financial and agricultural | $ | 4,636,502 | 19.3 | % | $ | 4,802,581 | 19.9 | % | $ | 5,079,888 | 21.1 | % | Commercial, financial and agricultural | $ | 4,446,197 | 17.6 | % | $ | 4,802,581 | 19.9 | % | $ | 4,764,805 | 19.8 | % | ||||||||||||||||||||||||||
Real estate: | Real estate: | Real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | 4,871,097 | 20.3 | 4,806,220 | 19.9 | 4,846,071 | 20.1 | Commercial | 5,023,284 | 19.9 | 4,806,220 | 19.9 | 4,785,058 | 19.9 | |||||||||||||||||||||||||||||||||||||||
Construction | 944,222 | 3.9 | 971,861 | 4.0 | 1,161,303 | 4.8 | Construction | 919,115 | 3.6 | 971,861 | 4.0 | 1,042,011 | 4.3 | |||||||||||||||||||||||||||||||||||||||
Residential: | Residential: | |||||||||||||||||||||||||||||||||||||||||||||||||||
Insured, guaranteed or conventional | 3,850,906 | 16.0 | 4,022,810 | 16.7 | 3,767,094 | 15.7 | Insured, guaranteed or conventional | 4,326,332 | 17.1 | 4,022,810 | 16.7 | 4,241,750 | 17.6 | |||||||||||||||||||||||||||||||||||||||
Home equity credit lines | 716,949 | 3.0 | 726,535 | 3.0 | 1,046,134 | 4.3 | Home equity credit lines | 705,736 | 2.8 | 726,535 | 3.0 | 718,143 | 3.0 | |||||||||||||||||||||||||||||||||||||||
Total real estate loans | 10,383,174 | 43.2 | 10,527,426 | 43.6 | 10,820,602 | 44.9 | Total real estate loans | 10,974,467 | 43.4 | 10,527,426 | 43.6 | 10,786,962 | 44.8 | |||||||||||||||||||||||||||||||||||||||
Consumer | Consumer | 6,305,507 | 26.2 | 6,021,510 | 25.0 | 5,458,094 | 22.7 | Consumer | 7,124,576 | 28.2 | 6,021,510 | 25.0 | 5,858,098 | 24.3 | ||||||||||||||||||||||||||||||||||||||
Lease financing | Lease financing | 2,344,341 | 9.7 | 2,398,681 | 9.9 | 2,326,056 | 9.7 | Lease financing | 2,365,395 | 9.4 | 2,398,681 | 9.9 | 2,272,232 | 9.5 | ||||||||||||||||||||||||||||||||||||||
Foreign | Foreign | 386,743 | 1.6 | 395,889 | 1.6 | 386,027 | 1.6 | Foreign | 353,902 | 1.4 | 395,889 | 1.6 | 389,592 | 1.6 | ||||||||||||||||||||||||||||||||||||||
Total loans and leases | 24,056,267 | 100.0 | % | 24,146,087 | 100.0 | % | 24,070,667 | 100.0 | % | Total loans and leases | 25,264,537 | 100.0 | % | 24,146,087 | 100.0 | % | 24,071,689 | 100.0 | % | |||||||||||||||||||||||||||||||||
Less allowance for credit losses | Less allowance for credit losses | 396,049 | 384,081 | 383,003 | Less allowance for credit losses | 390,194 | 384,081 | 385,190 | ||||||||||||||||||||||||||||||||||||||||||||
Total net loans and leases | $ | 23,660,218 | $ | 23,762,006 | $ | 23,687,664 | Total net loans and leases | $ | 24,874,343 | $ | 23,762,006 | $ | 23,686,499 | |||||||||||||||||||||||||||||||||||||||
Total loans and leases to: | Total loans and leases to: | Total loans and leases to: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | 68.9 | % | 69.5 | % | 72.2 | % | Total assets | 67.5 | % | 69.5 | % | 70.3 | % | |||||||||||||||||||||||||||||||||||||||
Total earning assets | 83.2 | % | 84.5 | % | 87.2 | % | Total earning assets | 80.1 | % | 84.3 | % | 84.4 | % | |||||||||||||||||||||||||||||||||||||||
Total deposits | 98.8 | % | 98.3 | % | 99.9 | % | Total deposits | 97.5 | % | 98.3 | % | 98.8 | % |
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 slight decrease$1.2 billion, or 5.0% increase in total loans and leases as of March 31, 2003, asfrom September 30, 2002 and a $1.1 billion, or 4.6% increase compared to December 31, 2002.
When comparing the current period to December 31, 2002 decreases of $166 million in Commercial lending and $144 million in Real Estate loans were substantially offset bythere was an increase of $284 million$1.1 billion, or 4.7 percent18.3% in Consumer loans. When comparingconsumer loans due to continued strength in the current period to March 31, 2002, decreases of $443 million in Commercial lending and $437 million in Real Estate loans were substantially offset by an increase of $847 million or 15.5% in Consumer loans.consumer market. Consumer loans consist primarily of direct and indirect automobile, recreational vehicle, marine, credit card and unsecured financing.
Our Foreign loans are principally in Guam and Saipan. Foreign loans as This increase was partially offset by a decrease of March 31, 2003 decreased $9.1$356.4 million or 2.3%7.4%, in commercial lending resulting from December 31,run off. Total real estate loans increased primarily due to the origination of commercial real estate loans and the purchase of approximately $935 million in residential loans which was substantially offset by run off due to refinancing of residential real estate loans with other institutions.
When comparing the current period to September 30, 2002 andconsumer loans increased $716 thousand,by $1.3 billion, or 0.2%21.6%, over March 31, 2002.due to the continued strength in the consumer market. This increase was partially offset by a decrease of $318.6 million, or 6.7%, in commercial lending.
Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. At March 31,September 30, 2003, we did not have a 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.
23Off-balance-sheet commitments were as follows at September 30, 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 Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Off-balance-sheet commitments were as follows at March 31, for the years indicated:
Notional/Contract Amount | |||||||||
2003 | 2002 | ||||||||
(in thousands) | |||||||||
Contractual Amounts Which Represent Credit Risk: | |||||||||
Commitments to extend credit | $ | 7,313,461 | $ | 8,883,179 | |||||
Standby letters of credit | 806,596 | 788,565 | |||||||
Commercial letters of credit | 78,294 | 56,773 |
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets and restructured loans at March 31,September 30, 2003, December 31, 2002 and March 31,September 30, 2002 arewere as follows:
March 31, | December 31, | March 31, | September 30, | December 31, | September 30, | |||||||||||||||||||||||||||
2003 | 2002 | 2002 | 2003 | 2002 | 2002 | |||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
Nonperforming Assets: | Nonperforming Assets: | Nonperforming Assets: | ||||||||||||||||||||||||||||||
Nonaccrual: | ||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 129,248 | $ | 145,222 | $ | 151,028 | ||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||
Commercial | 51,185 | 47,377 | 45,043 | |||||||||||||||||||||||||||||
Construction | — | — | 3,000 | |||||||||||||||||||||||||||||
Residential: | ||||||||||||||||||||||||||||||||
Insured, guaranteed, or conventional | 7,909 | 5,460 | 12,094 | |||||||||||||||||||||||||||||
Total real estate loans | 59,094 | 52,837 | 60,137 | |||||||||||||||||||||||||||||
Consumer | 4,459 | 4,769 | 3,919 | |||||||||||||||||||||||||||||
Lease financing | 13,527 | 11,532 | 9,900 | |||||||||||||||||||||||||||||
Foreign | 8,758 | 10,088 | 3,968 | |||||||||||||||||||||||||||||
Nonaccrual: | ||||||||||||||||||||||||||||||||
Total nonaccrual loans and leases | 215,086 | 224,448 | 228,952 | Commercial, financial and agricultural | $ | 89,698 | $ | 145,920 | $ | 177,988 | ||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||
Restructured: | Commercial | 40,694 | 48,071 | 46,720 | ||||||||||||||||||||||||||||
Commercial, financial and agricultural | 693 | 698 | 1,502 | Residential: | ||||||||||||||||||||||||||||
Real estate: | Insured, guaranteed, or conventional | 8,132 | 5,460 | 8,223 | ||||||||||||||||||||||||||||
Commercial | 667 | 694 | 1,094 | |||||||||||||||||||||||||||||
Residential: | Total real estate loans | 48,826 | 53,531 | 54,943 | ||||||||||||||||||||||||||||
Insured, guaranteed, or conventional | — | — | — | |||||||||||||||||||||||||||||
Consumer | 2,083 | 4,769 | 3,175 | |||||||||||||||||||||||||||||
Total real estate loans | 667 | 694 | 1,094 | Lease financing | 12,047 | 11,532 | 8,937 | |||||||||||||||||||||||||
Foreign | 7,210 | 10,088 | 9,069 | |||||||||||||||||||||||||||||
Total restructured loans and leases | 1,360 | 1,392 | 2,596 | |||||||||||||||||||||||||||||
Total nonaccrual loans and leases | 159,864 | 225,840 | 254,112 | |||||||||||||||||||||||||||||
Total nonperforming loans and leases | 216,446 | 225,840 | 231,548 | |||||||||||||||||||||||||||||
Other real estate owned and repossessed personal property | 18,545 | 19,613 | 24,393 | Other real estate owned and repossessed personal property | 19,237 | 19,613 | 15,523 | |||||||||||||||||||||||||
Total nonperforming assets | $ | 234,991 | $ | 245,453 | $ | 255,941 | Total nonperforming assets | $ | 179,101 | $ | 245,453 | $ | 269,635 | |||||||||||||||||||
Past due loans and leases(1): | Past due loans and leases(1): | Past due loans and leases(1): | ||||||||||||||||||||||||||||||
Commercial, financial and agricultural | $ | 11,387 | $ | 9,005 | $ | 17,432 | Commercial, financial and agricultural | $ | 15,792 | $ | 9,005 | $ | 9,591 | |||||||||||||||||||
Real estate: | Real estate: | |||||||||||||||||||||||||||||||
Commercial | 5,613 | 2,952 | 1,192 | Commercial | 6,226 | 2,952 | 8,142 | |||||||||||||||||||||||||
Construction | 907 | — | 2,217 | Residential: | ||||||||||||||||||||||||||||
Residential: | Insured, guaranteed, or conventional | 1,499 | 5,082 | 3,263 | ||||||||||||||||||||||||||||
Insured, guaranteed, or conventional | 2,046 | 5,082 | 2,347 | Home equity credit lines | 334 | 661 | 685 | |||||||||||||||||||||||||
Home equity credit lines | 737 | 661 | 160 | |||||||||||||||||||||||||||||
Total real estate loans | 8,059 | 8,695 | 12,090 | |||||||||||||||||||||||||||||
Total real estate loans | 9,303 | 8,695 | 5,916 | |||||||||||||||||||||||||||||
Consumer | 2,536 | 1,984 | 2,214 | |||||||||||||||||||||||||||||
Consumer | 1,792 | 1,984 | 2,603 | 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: | 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): | 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): | 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 | % |
24
(1) | Represents loans and leases which are past due 90 days or more as to the principal and/or interest, are still accruing interest and are adequately collateralized and in the process of collection. |
32
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
March 31, | December 31, | March 31, | ||||||||||||||
2003 | 2002 | 2002 | ||||||||||||||
(dollars in thousands) | ||||||||||||||||
Lease financing | 393 | 232 | 84 | |||||||||||||
Foreign | 563 | 1,181 | 4,291 | |||||||||||||
Total past due loans and leases | $ | 23,438 | $ | 21,097 | $ | 30,326 | ||||||||||
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 | 0.98 | % | 1.02 | % | 1.06 | % | ||||||||||
Including past due loans and leases | 1.07 | % | 1.10 | % | 1.19 | % | ||||||||||
Nonperforming assets to total assets (end of period): | ||||||||||||||||
Excluding past due loans and leases | 0.67 | % | 0.71 | % | 0.77 | % | ||||||||||
Including past due loans and leases | 0.74 | % | 0.77 | % | 0.86 | % |
Nonperforming assets at March 31,September 30, 2003 were $235$179.1 million, or 0.98%0.71%, of total loans and leases and other real estate owned (“OREO”), and repossessed personal property, (“OREO”), compared to 1.02% at December 31, 2002 and 1.06%1.12% at March 31,September 30, 2002. Nonperforming assets at March 31,September 30, 2003 were 0.67%0.48% of total assets, compared to 0.71% at December 31, 2002 and 0.77%0.79% at March 31,September 30, 2002.
Nonperforming assets at March 31,September 30, 2003 decreased by $10$66.4 million, or 4.3%27.0%, from December 31, 2002. The decrease in nonaccrual loans was primarily due to resolution of problem relationships in commercial lending, partially offset by increases in nonaccrual real estate loans. Nonperforming assets at March 31, 20032002 and decreased by $21$90.5 million, or 8.2%33.6%, from March 31,September 30, 2002. The decrease was primarily attributable to decreases in nonaccrualNonaccrual 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 whichhave decreased $4.7 million or 8.8% since December 31, 2002 and $6.1 million or 11.1% since September 30, 2002. Within the nonaccrual real estate loans category, decreases in commercial real estate loans of $7.4 million or 15.3% from December 31, 2002 were partially offset by increases in nonaccrual residential real estate-commercialestate loans of $2.7 million or 48.9%. Total nonaccrual loans and lease financing. 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 assetsloans decreased at March 31,September 30, 2003 by $1$2.9 million, or 13.2%28.5% from December 31, 2002 but increasedand by $5$1.9 million, or 120.7%20.5% from March 31, 2002, primarily due to loans in Guam. However, ourSeptember 30, 2002. Our overall foreign loan portfolio, composed primarily of loans in Guam and Saipan, represents a relatively small component (1.6%)1.4% of our total loan portfolio at March 31,September 30, 2003.
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 or when other factors indicate that the borrower will shortly bring the loan current.loan.
While the majority of consumer loans and leases are subject to our general policies regarding nonaccrual loans, certain 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 $23$26.7 million at March 31,September 30, 2003 an increase of $2$5.6 million, or 11.1%26.4%, from December 31, 2002 butand a decrease of $7$0.5 million, or 22.7%1.9%, from March 31,September 30, 2002. The increase at March 31,September 30, 2003 compared to December 31, 2002 was primarily due to real estate-commercial and commercial, financial and agricultural loans.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 decreases in residential 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 March 31,September 30, 2003 compared to March 31,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 and foreign loans partially offset by real estate-commercial loans.which increased $6.2 million or 64.7% from last year. 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.
2533
BancWest Corporation and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The following table sets forth the activity in the allowance for credit losses for the periods indicated:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||
Loans and leases outstanding (end of period) | Loans and leases outstanding (end of period) | $ | 24,056,267 | $ | 24,070,667 | Loans and leases outstanding (end of period) | $ | 25,264,537 | $ | 24,071,689 | $ | 25,264,537 | $ | 24,071,689 | ||||||||||||||||
Allowance for credit losses: | Allowance for credit losses: | Allowance for credit losses: | ||||||||||||||||||||||||||||
Balance at beginning of period | $ | 384,081 | $ | 194,654 | ||||||||||||||||||||||||||
Balance at beginning of period | $ | 391,518 | $ | 387,272 | $ | 384,081 | $ | 194,654 | ||||||||||||||||||||||
Allowance purchased | — | 210,000 | Allowance purchased | — | — | — | 210,000 | |||||||||||||||||||||||
Loans and leases charged off: | Loans and leases charged off: | |||||||||||||||||||||||||||||
Commercial, financial and agricultural | 9,257 | 28,685 | Commercial, financial and agricultural | 13,344 | 16,512 | 33,213 | 49,956 | |||||||||||||||||||||||
Real estate: | Real estate: | |||||||||||||||||||||||||||||
Commercial | 123 | 66 | Commercial | 216 | 1,970 | 1,270 | 3,604 | |||||||||||||||||||||||
Residential | 370 | 394 | Residential | 161 | 241 | 757 | 950 | |||||||||||||||||||||||
Consumer | 15,303 | 12,875 | Consumer | 12,658 | 11,469 | 41,769 | 30,440 | |||||||||||||||||||||||
Lease financing | 6,083 | 6,033 | Lease financing | 5,833 | 5,017 | 18,930 | 22,294 | |||||||||||||||||||||||
Foreign | 841 | 475 | Foreign | 537 | 647 | 1,896 | 1,515 | |||||||||||||||||||||||
Total loans and leases charged off | 31,977 | 48,528 | Total loans and leases charged off | 32,749 | 35,856 | 97,835 | 108,759 | |||||||||||||||||||||||
Recoveries on loans and leases previously charged off: | Recoveries on loans and leases previously charged off: | Recoveries on loans and leases previously charged off: | ||||||||||||||||||||||||||||
Commercial, financial and agricultural | 16,432 | 2,724 | Commercial, financial and agricultural | 2,156 | 2,912 | 23,017 | 6,413 | |||||||||||||||||||||||
Real estate: | Real estate: | |||||||||||||||||||||||||||||
Commercial | 91 | 130 | Commercial | 87 | 82 | 288 | 328 | |||||||||||||||||||||||
Construction | 34 | 220 | Construction | 34 | 17 | 98 | 271 | |||||||||||||||||||||||
Residential | 296 | 202 | Residential | 256 | 122 | 864 | 538 | |||||||||||||||||||||||
Consumer | 2,747 | 2,191 | Consumer | 2,986 | 2,749 | 8,897 | 6,890 | |||||||||||||||||||||||
Lease financing | 1,543 | 1,252 | Lease financing | 1,648 | 1,457 | 4,642 | 5,244 | |||||||||||||||||||||||
Foreign | 112 | 151 | Foreign | 113 | 135 | 447 | 402 | |||||||||||||||||||||||
Total recoveries on loans and leases previously charged off | 21,255 | 6,870 | Total recoveries on loans and leases previously charged off | 7,280 | 7,474 | 38,253 | 20,086 | |||||||||||||||||||||||
Net charge-offs | (10,722 | ) | (41,658 | ) | Net charge-offs | (25,469 | ) | (28,382 | ) | (59,582 | ) | (88,673 | ) | |||||||||||||||||
Provision for credit losses | 22,690 | 20,007 | Provision for credit losses | 24,145 | 26,300 | 65,695 | 69,209 | |||||||||||||||||||||||
Balance at end of period | $ | 396,049 | $ | 383,003 | Balance at end of period | $ | 390,194 | $ | 385,190 | $ | 390,194 | $ | 385,190 | |||||||||||||||||
Net loans and leases charged off to average loans and leases | Net loans and leases charged off to average loans and leases | 0.18 | %(1) | 1.00 | %(1) | 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 | Net loans and leases charged off to allowance for credit losses | 10.83 | %(1) | 44.11 | %(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) | Allowance for credit losses to total loans and leases (end of period) | 1.65 | % | 1.59 | % | 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): | Allowance for credit losses to nonperforming loans and leases (end of period): | Allowance for credit losses to nonperforming loans and leases (end of period): | ||||||||||||||||||||||||||||
Excluding 90 days past due accruing loans and leases | 1.83 | x | 1.65 | x | 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 | 1.65 | x | 1.46 | x | Including 90 days past due accruing loans and leases | 2.09 | x | 1.37 | x | 2.09 | x | 1.37 | x |
(1)
| Annualized. |
The provisionallowance for credit losses for the first threenine months of 2003 was $22.7$390.2 million, an increase of $2.7$5.0 million, or 13.4%1.3%, compared to the same period in 2002. The provision for credit losses is based upon our judgment as to the adequacy of the allowance for credit 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 credit 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 Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 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:
• | Setting Underwriting and Grading Standards.Our loan grading system utilizes ten different principal risk categories where “1” is “no risk” and “10” is “loss.” Risk parameters are established so that the cost of credit risk is an integral part of the pricing and evaluation of credit decisions and the setting of portfolio targets. | ||
• | Diversification.We actively manage our credit portfolio to avoid excessive concentration by obligor, risk grade, industry, product and geographic location. As part of this process, we also monitor changes in risk correlation among concentration categories. In addition, we seek to reduce our exposure to concentrations by actively participating portions of our commercial and commercial real estate loans to other banks. | ||
• | Risk Mitigation.Over the past few years, we have reduced our exposure to higher-risk areas such as real estate-construction (which accounted for only | ||
• | Reduced Participation in Syndicated National | ||
• | Emphasis on High Quality Consumer Lending.Consumer loans represent our single largest category of loans and leases. We focus our consumer lending activities on loan grades with what we believe are predictable loss rates. As a result, we are able to use formula-based approaches to calculate appropriate reserve levels that reflect historical experience. We generally do not participate in subprime lending activities. We also seek to reduce our exposures where feasible by obtaining third-party insurance or similar protections. For example, in our vehicle lease portfolio (which represents approximately |
27
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS (Continued)
PROVISION AND ALLOWANCE FOR CREDIT LOSSES, Continued
Charge-offsNet charge-offs were $32.0$59.6 million for the threenine months ended March 31,September 30, 2003, a decrease of $16.6$29.1 million, or 34.1%32.8%, overfrom the same period in 2002. Charge-offs were higher in the threenine months ended March 31,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 thisin the first quarter, as discussed in note 2.Item 1, Note 2 (Mergers and Acquisitions).
For the threenine months ended March 31,September 30, 2003, recoveries increased by $14.4$18.2 million, or 209.4%90.4%, compared to the same period in 2002. The increase in recoveries was primarily in commercial, financial and agricultural loans, due to the settlement with UFJ discussed above.
Net charge-offs for the threenine months ended March 31,September 30, 2003 were 0.18%0.32% of average loans and leases (annualized) compared to 1.00%0.55% (annualized) for the same period in 2002.
The Allowance increased to 1.832.44 times nonperforming loans and leases (excluding 90 days or more past due accruing loans and leases) at March 31,September 30, 2003 from 1.651.52 times at March 31,September 30, 2002. The increase in the ratio is principally due to a decrease in nonperforming loans and leases and the higher allowance resulting from $13.6 million of recoveries recognized from the UFJ settlement.
In our judgment, the Allowance was adequate to absorb losses inherent in the loan and lease portfolio at March 31,September 30, 2003. 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.
35
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 the greatesta significant portion of total interest expense. At March 31,September 30, 2003, total deposits were $24.3$25.9 billion, a decreasean increase of 1%5.6% from December 31, 2002, and an increase of 1%6.4% over March 31,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 AprilOctober 1, 2002 to March 31,September 30, 2003, the benchmark federal funds rate was decreased by 5075 basis points contributing to lower interest rates on deposits.
INCOME TAXES
Our effective income tax rate (exclusive of the tax equivalent adjustment) for the three months ended March 31, 2003 was 38.8%, as compared to 39.4% for the same period in 2002.
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 18.4%20.2% of total assets at March 31,September 30, 2003, compared to 17.7%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 March 31,September 30, 2003 were $24.1$25.4 billion, compared to $22.3 billion for the year ended December 31, 2002. Average total deposits funded 70%69.3% of average total assets for the threenine months ended March 31,September 30, 2003 and 71%71.0% for the year ended December 31, 2002.
28
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS (Continued)
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. Additional information on short-term borrowings is provided in Note 10 to the Consolidated Financial Statements on pages 55 and 56 of our 2002 Annual Report on Form 10-K. 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.
29
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS (Continued)
CAPITAL
Stockholder’s equity increased to $3,969 million$4.2 billion at March 31,September 30, 2003 from $3,867 million$3.9 billion at December 31, 2002, an increase of $102$290.0 million, or 2.6%7.5%. Stockholder’s equity at March 31,September 30, 2003 increased as compared to March 31,September 30, 2002 by $304$225.7 million, or 8.3%5.7%. The increase between March 31, 2003 andfrom December 31, 2002 to September 30, 2003 was primarily due to net income earned by the Company during the three-monthnine-month period. The increase between March 31,2003 and March 31,from September 30, 2002 to September 30, 2003 was primarily due to net income earned during the twelve month period and unrealized gains on investment securities and cash flow hedge derivatives. These increases were partially offset by a $167$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, is reflectedrecognized 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 Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 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 March 31,September 30, 2003 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 | $ | 2,219,050 | 10.29 | % | $ | 862,290 | 4.00 | % | $ | 1,293,435 | 6.00 | % | ||||||||||||||
First Hawaiian | 762,652 | 11.66 | 261,661 | 4.00 | 392,491 | 6.00 | ||||||||||||||||||||
Total Capital to Risk-Weighted Assets: | ||||||||||||||||||||||||||
Bank of the West | $ | 2,714,230 | 12.59 | % | $ | 1,724,580 | 8.00 | % | $ | 2,155,725 | 10.00 | % | ||||||||||||||
First Hawaiian | 918,808 | 14.05 | 523,321 | 8.00 | 654,152 | 10.00 | ||||||||||||||||||||
Tier 1 Capital to Average Assets: | ||||||||||||||||||||||||||
Bank of the West | $ | 2,219,050 | 9.48 | % | $ | 936,225 | 4.00 | % | $ | 1,170,281 | 5.00 | % | ||||||||||||||
First Hawaiian | 762,652 | 9.38 | 325,076 | 4.00 | 406,345 | 5.00 |
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 |
We elected to become a financial holding company concurrent with the BNP Paribas acquisition. 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 theirour 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.
30
BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS (Continued)
SPECIAL PURPOSE ENTITIES
A special purpose entity (“SPE”) is a separate legal entity created by a sponsor to carry out a specified purpose. We are involved in three special purpose entities: BWE Trust and FH Trust are both fully consolidated subsidiaries of BancWest Corporation. The purpose of these entities is to allow for the issuance of capital securities that qualify for inclusion in Tier 1 regulatory capital. We have issued to BWE Trust and FH Trust junior subordinated deferrable interest debentures in return for either capital securities, which we then issued to the public, in the case of BWE Trust, or the proceeds from capital securities that were issued from FH Trust. We report the debt issued to BWE Trust and FH Trust on our Consolidated Balance Sheets as “Guaranteed preferred beneficial interests in Company’s junior subordinated debentures.” We include the interest payments related to these debentures on our Consolidated Statements of Income and Consolidated Statements of Cash Flows as interest expense on long-term debt.
REFIRST, Inc. is an SPE 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. Under current accounting guidance, we do not need to consolidate REFIRST, Inc. into our Consolidated Financial Statements. However, generally accepted accounting principles regarding the consolidation of REFIRST, Inc. into our Consolidated Financial Statements are set to change upon the implementation in July 2003 of FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51.” FIN No. 46 establishes new guidance on the accounting and reporting for the consolidation of variable interest entities. The principal objective of FIN No. 46 is to require the primary beneficiary of a variable interest entity to consolidate the variable interest entity’s assets, liabilities and results of operations in the entity’s own financial statements. Accordingly, FIN No. 46 requires the consolidation of REFIRST, Inc. Upon implementation of FIN No. 46, FHC and the related notes and equity for its financing will be included in our Consolidated Balance Sheets. In addition, the depreciation expense of FHC and interest expense on the financing will be included on our Consolidated Statements of Income and Consolidated Statements Cash Flows on a prospective basis. The provisions of FIN No. 46 require us to record a cumulative effect of an accounting change upon its implementation. The amount of such cumulative effect has not been quantified. We have communicated to FHC’s owners our intent to purchase it at the end of the lease term for a purchase price of approximately $194 million, which is equal to the outstanding notes and equity. For the three months ended March 31, 2003, we recorded approximately $1.9 million in occupancy expense for the lease of FHC.
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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 MANAGEMENT
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 our 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.
The Asset/Liability Committees of the Company and itsour 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. Other thanDerivatives entered into for trading purposes include commitments to purchase and sell foreign currencies and mortgage-backed securities andas well as certain interest ratesrate swaps and options, interest rate derivatives are not entered into for trading purposes.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 models itsour net interest income in order to quantify itsour exposure to changes in interest rates. Generally, the size of the balance sheet is held relatively constant and then subjected to interest rate shocks up in 100 basis-point increments and down in 100a 50 basis-point increments.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 on 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(flat rate scenario”)scenario) to determine the level of interest rate risk at that time.
The projected impact of 100 basis-point incremental increases and decreasesa 50 basis-point decrease in interest rates on the Company’s consolidated net interest income over the 12 months beginning April 1, 2003 and JanuaryOctober 1, 2003 is shown below:
(dollars in millions) | + 3% | +2% | +1% | Flat | -1% | + 3% | +2% | +1% | Flat | -0.5% | ||||||||||||||||||||||||||||||
April 1, 2003 | ||||||||||||||||||||||||||||||||||||||||
Net Interest Income | $ | 1,305.2 | $ | 1,299.2 | $ | 1,289.1 | $ | 1,278.3 | $ | 1,244.3 | ||||||||||||||||||||||||||||||
October 1, 2003 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 1,276.8 | $ | 1,285.2 | $ | 1,290.5 | $ | 1,302.9 | $ | 1,295.6 | ||||||||||||||||||||||||||||||
Difference from flat | 26.9 | 20.9 | 10.8 | — | (34.0 | ) | (26.1 | ) | (17.7 | ) | (12.4 | ) | — | (7.3 | ) | |||||||||||||||||||||||||
% variance | 2.1 | % | 1.6 | % | 0.8 | % | — | % | (2.7 | )% | (2.0 | )% | 1.4 | % | (1.0 | )% | — | % | (0.6 | )% | ||||||||||||||||||||
January 1, 2003 | ||||||||||||||||||||||||||||||||||||||||
Net Interest Income | $ | 1,308.2 | $ | 1,303.3 | $ | 1,294.3 | $ | 1,280.6 | $ | 1,246.3 | ||||||||||||||||||||||||||||||
Difference from flat | 27.6 | 22.7 | 13.7 | — | (34.3 | ) | ||||||||||||||||||||||||||||||||||
% variance | 2.2 | % | 1.8 | % | 1.1 | % | — | % | (2.7 | )% |
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 benchmark rates.
32
BancWest Corporation and SubsidiariesQUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
SIGNIFICANT ASSUMPTIONS UTILIZED AND INHERENT LIMITATIONSSignificant Assumptions Utilized And Inherent Limitations
The net interest income changes for each interest rate scenario presented above include assumptions based on accelerating or decelerating mortgage and installment 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 areis 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 Subsidiaries
QUANTATIVE 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.
3339
BancWest Corporation and Subsidiaries
CONTROLS AND PROCEDURES
Item 4. Controls and Procedures
WithinAs of the 90 days prior toend 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-14.13a-15. 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.
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.
12 | Statement regarding computation of ratios. |
31 | Section 302 Certifications | ||
32 | Section 1350 Certifications | ||
(b) Reports on Form 8-K |
3440
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: | By | |||||
Executive Vice President, Chief | ||||||
Financial Officer and Treasurer | ||||||
(principal financial officer) |
35
CERTIFICATION
I, Walter A. Dods, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of BancWest Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Walter A. Dods, Jr.
Date: May 14, 2003
36
\
CERTIFICATION
I, Douglas C. Grigsby, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BancWest Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Douglas C. Grigsby
Date: May 14, 2003
3741
EXHIBIT INDEX
Exhibit No. | Exhibit | ||||
12 | Statement regarding computation of ratios. | ||||
31 | Section 302 Certifications | ||||
32 | Section 1350 Certifications |