UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2004
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
Commission file number 0-7949
BANCWEST CORPORATION
Registrant’s telephone number, including area code: (808) 525-7000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
(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 No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No ü
As of August 1, 2004 the number of outstanding shares of each of the issuer’s classes of common stock (all of which were beneficially owned by BNP Paribas) was:
BANCWEST CORPORATION AND SUBSIDIARIES
FORM 10-QJune 30, 2004
INDEX
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 the Company’s 2003 Annual Report on Form 10-K.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BancWest Corporation and SubsidiariesCONSOLIDATED STATEMENTS OF INCOME (Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
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BancWest Corporation and SubsidiariesCONSOLIDATED BALANCE SHEETS (Unaudited)
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BancWest Corporation and SubsidiariesCONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME (Unaudited)
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BancWest Corporation and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Summary of Significant Accounting Policies
Descriptions of Operations
BancWest Corporation is a financial holding company headquartered in Honolulu, Hawaii and incorporated under the laws of the State of Delaware. Through our principal subsidiaries, Bank of the West and First Hawaiian Bank, we provide commercial and consumer banking services, engage in commercial, equipment and vehicle leasing and offer trust, investment and insurance products. BancWest Corporation’s subsidiaries operate 357 branches in the states of California, Hawaii, Oregon, Washington, Idaho, New Mexico and Nevada and in Guam and Saipan. In this report BancWest Corporation and Subsidiaries is referred to as “the Company,” “we” or “our.” BancWest Corporation alone is referred to as “the Parent.”
Basis of Presentation
We have prepared the accompanying financial data for the three and six months ended June 30, 2004 and 2003 in accordance with accounting principles generally accepted in the United States.
In the opinion of management, the accompanying consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our consolidated financial position as of June 30, 2004, December 31, 2003 and June 30, 2003, consolidated results of operations for the three and six months ended June 30, 2004 and 2003, and cash flows for the six months ended June 30, 2004 and 2003.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our 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 the Company are included in Note 1 (Summary of Significant Accounting Policies) to the audited consolidated financial statements included in the Company’s 2003 Annual Report on Form 10-K. There have been no significant changes to these policies.
Reclassifications
Certain amounts in the financial statements for prior periods have been reclassified to conform with the current financial statement presentation. Such reclassifications did not have a material effect on the Consolidated Financial Statements.
2. 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 six months ended June 30, 2004 and 2003.
Fair Value Hedges
The Company has various derivative instruments that hedge the fair values of recognized assets or liabilities or of unrecognized firm commitments (fair value hedges). At June 30, 2004, the Company carried an interest rate swap of $2.7 million with a fair market value loss of $0.5 million that was a hedge for a commercial loan. The Company receives 1-month LIBOR and pays a fixed rate of 8.32%. At June 30, 2003, the Company carried $2.8 million of such swaps with a fair market value loss of $0.9 million. In addition, at June 30, 2004, the Company carried interest rate swaps totaling $78.6 million with a market value loss of $2.4 million that were categorized as fair value hedges for commercial and commercial real estate loans. The Company receives 6-month LIBOR and pays fixed rates from 3.56% to 7.99%. At June 30, 2003, the Company carried $126.1 million of such swaps with a market value loss of $12.6 million.
At November 20, 2002, BancWest Corporation executed a $150 million interest rate swap agreement with BNP Paribas to hedge the fair value of the 9.5% BancWest Capital I Quarterly Income Preferred Securities (the BWE Capital Securities) issued by
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BancWest Capital I. Following the adoption of FIN 46, BancWest Capital I was deconsolidated, resulting in recognition of $150 million of subordinated debt instead of the BWE Capital Securities. The terms of the subordinated debt mirror those of the BWE Capital Securities. Concurrent with the deconsolidation of BancWest Capital I, the Bank redesignated the interest rate swap to hedge the subordinated debt. The derivative instrument is highly effective and all changes in the fair value of the hedge were recorded in current-period earnings together with the offsetting change in fair value of the hedged item attributable to the risk being hedged. We pay 3-month LIBOR plus 3.69% and receive fixed payments at 9.5%. The fair market value loss of the swap was $0.5 million at June 30, 2004 while the fair market value gain was $5.3 million at June 30, 2003.
At June 30, 2004, the Company carried interest rate swaps and swaptions totaling $8.6 million with a market value gain of $0.5 million that were categorized as fair value hedges for repurchase agreements. The Company pays 3-month LIBOR and receives fixed rates ranging from 8.29% to 8.37%. At June 30, 2003, the Company carried $8.6 million of such swaps and swaptions with a market value gain of $0.9 million.
Cash Flow Hedges
At June 30, 2004, the Company carried interest rate swaps of $600 million with a fair market value gain of $28.2 million which are categorized as cash flow hedges, to hedge LIBOR-based commercial loans. The hedges had a fair market value gain of $64.6 million at June 30, 2003. The interest rate swaps were entered into during 2001 and mature in 2006. We pay 3-month LIBOR and receive fixed rates ranging from 5.64% to 5.87%. The net settlement on the $600 million swaps has increased commercial loan interest income by $12.2 million for the six months ended June 30, 2004 and by $11.7 million for the six months ended June 30, 2003. The Company estimates net settlement gains, recorded as commercial loan interest income, of $19.1 million over the next twelve months resulting from these hedges.
At June 30, 2004, the Company carried interest rate swaps totaling $100 million with a fair market value gain of $8.4 million in order to reduce exposure to interest rate increases associated with short-term fixed rate liabilities. The swaps hedge forecasted transactions associated with short-term fixed rate liabilities. The swaps mature as follows: $70 million in 2013, $20 million in 2018 and $10 million in 2023. We pay fixed rates ranging from 3.65% to 4.58% and receive 3-month LIBOR. The effect on pretax income from these swaps for the six months ended June 30, 2004 was a loss of $1.6 million. At June 30, 2003, the Company carried $50 million of such swaps with a market value gain of $0.8 million. The Company estimates a net increase to interest expense of $2.3 million over the next twelve months resulting from these hedges.
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Free-standing Derivative Instruments
Free-standing derivative instruments include derivative transactions entered into for risk management purposes that do not otherwise qualify for hedge accounting. Interest rate lock commitments issued on residential mortgage loans intended to be held for resale are considered free-standing derivative instruments. Such commitments are stratified by rates and terms and are valued based on market quotes for similar loans. Adjustments, including discounting the historical fallout rate, are then applied to estimate fair market value. Trading activities primarily involve providing various free-standing interest rate and foreign exchange derivative products to customers. Interest-rate derivative instruments utilized by the Company in its trading operations include interest-rate swaps, caps, floors and collars.
The following table summarizes derivatives held by the Company as of June 30, 2004, December 31, 2003 and June 30, 2003:
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BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
3. Operating Segments
Our reportable segments are the operating segments that we use in our internal reporting at Bank of the West and First Hawaiian Bank. Bank of the West’s segments operate primarily in California, Oregon, Washington, Idaho, New Mexico and Nevada. As discussed below, certain Bank of the West segments conduct business nationwide. Although First Hawaiian Bank’s segments operate primarily in Hawaii, it also has operations outside the state, such as leveraged leases, international banking and branches in Guam and Saipan.
The results of each segment are determined by our management accounting process, which assigns balance sheet and income statement items to each reporting segment. The net interest income of each segment includes the results of the respective bank’s transfer pricing process, which assesses an internal funds charge on all segment assets and a funds credit on all segment liabilities. The internal charges and credits assigned to each asset and liability are intended to match the maturity, repayment and interest rate characteristics of that asset or liability. With the exception of goodwill, assets are allocated to each business segment on the basis of assumed benefit to their business operations. Goodwill is assigned on the basis of projected future earnings of the segments. The process of management accounting is dynamic and subjective. There is no comprehensive or authoritative guidance which can be followed. Changes in management structure and/or the allocation process may result in changes in allocations and transfers. In that case, results for prior periods would be (and have been) reclassified for comparability. Results for 2003 have been reclassified to reflect changes in the transfer pricing methodology and noninterest income and expense allocation methodology applied in 2004.
Bank of the West
Bank of the West manages its operations through three operating segments: Regional Banking, Commercial Banking and Consumer Finance.
Regional Banking
Regional Banking seeks to serve a broad customer base by offering a wide range of retail and commercial banking products. Deposit products offered by this segment include checking accounts, savings deposits, market rate accounts, individual retirement accounts and time deposits. Regional Banking utilizes these deposits as its principal funding source. Bank of the West’s telephone banking service, a network of automated teller machines and the online eTimeBanker service provide retail customers with other means of accessing and managing their accounts.
Through its branch network, this business segment originates a variety of consumer loans, including direct vehicle loans, lines of credit and second mortgages. In addition, Regional Banking originates and holds a portfolio of first mortgage loans on 1-4 family residences. Through its commercial banking operations conducted from its branch network, Regional Banking offers a wide range of commercial banking products intended to serve the needs of smaller community-based businesses. These include originations of standardized loan and deposit products for businesses with relatively simple banking and financing needs. Regional Banking also provides a number of fee-based products and private banking services including trust, insurance and investment services.
More complex and customized commercial banking services are offered through the segment’s Business Banking Centers which serve clusters of branches and provide lending, deposit and cash management services to companies operating in the relevant market areas. Business Banking Centers support commercial lending activities for middle market business customers in locations throughout California, as well as Portland, Oregon, Reno and Las Vegas, Nevada and Albuquerque, New Mexico.
The Regional Banking Segment also includes a Pacific Rim Division which offers multilingual services through a branch network in predominately Asian American communities in California, with specialized domestic and international products and services for both individuals and companies.
Commercial Banking
The Commercial Banking Segment is comprised of several divisions: Commercial Banking Division, Agribusiness Banking Division, Real Estate Industries Division and Specialty areas. The Commercial Banking Division supports business clients with revenues between $25 million and $500 million. The Commercial Banking Division focuses on relationship banking including deposit generation as well as lending activities. The Agribusiness Banking Division serves all agribusiness and rural commercial clients. The Real Estate Industries Division provides construction financing to large regional and national real estate developers for residential and commercial projects. Interim and permanent financing is available on these commercial real estate projects.
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The Commercial Banking Segment also includes specialty areas: Church Lending, Small Business Administration (SBA), Health Care, Leasing, Credit Union, Government, Correspondent Banking, Cash Management Services and Capital Markets. Equipment leasing is available through the Company’s commercial offices, branches, brokers across the nation and its subsidiary, Trinity Capital. Trinity specializes in nationwide vendor leasing and servicing programs for manufacturers in specific markets.
The Commercial Banking Segment also provides trade finance and functions as an agent in commercial, agribusiness and real estate syndication transactions.
Consumer Finance
The Consumer Finance Segment targets the origination of auto loans and leases in the western United States, and recreational vehicle and marine loans nationwide. These loans and leases are originated through a network of auto dealers and recreational vehicle and marine dealers serviced by sales representatives located throughout the country. This segment also includes Bank of the West’s wholly-owned subsidiary, Essex Credit Corporation, which focuses on the origination of marine and recreational vehicle loans directly with customers through office locations throughout the United States. In February 2004, Essex began retaining certain types of loans in its own portfolio. In previous years, Essex sold substantially all of its loans to investors on a servicing released basis.
First Hawaiian Bank
First Hawaiian manages its operations through the following operating segments: Retail Banking, Consumer Finance, Commercial Banking and Financial Management.
Retail Banking
First Hawaiian Bank’s Retail Banking Segment operates through 56 banking offices located throughout Hawaii. First Hawaiian Bank also operates three branches in Guam and two branches in Saipan.
The focus of First Hawaiian Bank’s retail/community banking strategy is primarily in Hawaii, where it had a 40% market share of the domestic bank deposits of individuals, corporations and partnerships in the state as of December 31, 2003. Thanks to its significant market share in Hawaii, First Hawaiian Bank already has product or service relationships with a majority of the households in the state. Therefore, a key goal of its retail community banking strategy is to build those relationships by cross-selling additional products and services to existing individual and business customers.
In pursuing the community banking markets in Hawaii, Guam and Saipan, First Hawaiian Bank seeks to serve a broad customer base by furnishing a range of retail and commercial banking products. Through its branch network, First Hawaiian Bank generates first-mortgage loans on residences and a variety of consumer loans, consumer lines of credit and second mortgages. To complement its branch network and serve these customers, First Hawaiian Bank operates a system of automated teller machines, a 24-hour phone center in Honolulu and a full-service internet banking system. Through commercial banking operations conducted from its branch network, First Hawaiian Bank offers a wide range of banking products intended to serve the needs of smaller, community-based businesses. First Hawaiian Bank also provides a number of fee-based products and services such as annuities and mutual funds, insurance and securities brokerage. The First Investment Center department of First Hawaiian Bank makes available annuities, mutual funds and other securities through BancWest Investment Services, Inc., a registered broker-dealer, member NASD/SIPC, that is a subsidiary of BancWest Corporation.
Consumer Lending offers many types of loans to consumers, including lines of credit (uncollateralized or collateralized) and various types of personal and automobile loans. First Hawaiian Bank also provides indirect consumer automobile financing on new and used autos by purchasing finance contracts from dealers. First Hawaiian Bank’s Dealer Center is the largest commercial bank automobile lender in the State of Hawaii. First Hawaiian Bank is the largest issuer of MasterCard® and VISA® credit cards in Hawaii.
Consumer Finance also makes residential real estate loans, including home-equity loans, to enable borrowers to purchase, refinance, improve or construct residential real property. The loans are collateralized by mortgage liens on the related property, substantially all located in Hawaii. First Hawaiian Bank also originates residential real estate loans for sale on the secondary market.
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Commercial Lending is a major lender to small and medium-sized businesses in Hawaii and Guam. Lending services include receivable and inventory financing, term loans for equipment acquisition and facilities expansion and trade financing letters of credit. To support the cash management needs of both commercial banking customers and large private and public deposit relationships maintained with the Company, First Hawaiian Bank operates a Cash Management Department which provides a full range of innovative and relationship-focused cash management services.
Real Estate Lending-Commercial provides interim construction, residential development and permanent financing for commercial real estate projects, including retail facilities, warehouses and office buildings. The Bank also does lease-to-fee conversion financing for condominium associations and cooperatives.
International Banking Services provides international banking products and services through First Hawaiian Bank’s branch system, its Japan Business Development Department in Honolulu, a Grand Cayman branch, three Guam branches, two branches in Saipan and a representative office in Tokyo, Japan. First Hawaiian Bank maintains a network of correspondent banking relationships throughout the world. First Hawaiian Bank’s trade-related international banking activities are concentrated in the Asia-Pacific area.
Leasing provides leasing services for businesses from heavy equipment to office computer and communication systems.
Financial Management
The Financial Management Segment offers a full range of trust and investment management services, and also seeks to reinforce customer relationships developed by or in conjunction with the Retail Banking Segment. The Financial Management Segment provides asset management, advisory and administrative services for estates, trusts and individuals. It also acts as trustee and custodian of retirement and other employee benefit plans. At June 30, 2004, the Trust and Investments Division had approximately 3,971 accounts with a market value of $8.8 billion. Of this total, $6.0 billion represented assets in nonmanaged accounts and $2.8 billion were managed assets.
Securities and Insurance Services, through a wholly-owned subsidiary of First Hawaiian Bank, First Hawaiian Insurance, Inc., provides insurance brokerage services for personal, business and estate insurance needs. First Hawaiian Insurance offers insurance needs analysis for individuals, families and businesses, as well as life, disability and long-term care insurance products.
The Private Banking Department within First Hawaiian Bank’s Financial Management Segment provides a wide range of private banking service products to high-net-worth individuals.
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BancWest Corporation and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The tables below present information about the Company’s operating segments as of or for the periods indicated:
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4. Operating Lease Assets
Prior to February 2004, leases of vehicles to customers were treated as finance leases, as they qualified for such treatment under Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases. Beginning in February 2004, our automobile leases are treated as operating leases, as we no longer obtain residual insurance on an individual lease basis.
Operating lease rental income for leased assets, primarily vehicles, is recognized on a straight-line basis. Related depreciation expense is recorded on a straight-line basis over the life of the lease taking into account the estimated residual value of the leased asset. On a periodic basis, leased assets are reviewed for impairment. Impairment loss is recognized if the carrying amount of leased assets exceeds fair value and is not recoverable. The carrying amount of leased assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the equipment. Vehicle lease receivables are written off when 120 days past due.
The following table shows future minimum lease receivables under leases with terms in excess of one year as of June 30, 2004:
5. Goodwill and Intangible Assets
We performed the impairment testing of goodwill required under SFAS No. 142 in the fourth quarter of 2003. No impairment of goodwill was found. The impairment analysis was performed using a discounted cash flows model. The table below provides the breakdown of goodwill by reportable segment and the change during the year.
Amortization of finite-lived intangible assets was $5.8 million for each of the three-month periods ended June 30, 2004 and 2003 and $11.5 million for each of the six-month periods ending June 30, 2004 and 2003. The estimated annual amortization expense for finite-lived intangible assets, primarily core deposit intangibles arising from previous mergers, is approximately $23 million (pretax) for each of the years from 2004 to 2008.
Our finite-lived intangible assets substantially consist of core deposit intangible assets. The gross carrying amount, accumulated amortization and net book value of these intangible assets are detailed below.
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6. Financial Interpretation No. 46 (FIN 46): Consolidation of Variable Interest Entities (VIE)
On June 23, 1997 and October 20, 2000, the Company formed two trusts, First Hawaiian Capital I (FH Trust) and BancWest Capital I (BWE Trust) (the Trusts), respectively. The Trusts issued preferred and common capital securities. The purpose of these entities is to allow for the issuance of preferred capital securities that qualify for inclusion in Tier 1 regulatory capital. Historically, these trusts have been consolidated and the related trust preferred securities have been treated as Tier 1 capital under Federal Reserve rules and regulations. The Company began deconsolidating the Trusts as a result of the adoption of FIN 46 in the preparation of its financial statements on October 1, 2003.
BWE Trust is a Delaware business trust, which was formed in 2000 and exchanged $150 million of its BWE Capital Securities as well as all outstanding common securities of BWE Trust, for 9.5% junior subordinated deferrable interest debentures of the Corporation. The Corporation sold the $150 million of BWE Capital Securities to the public. At June 30, 2004, the BWE Trust’s total assets were $155.9 million, comprised primarily of the Corporation’s junior subordinated debentures. The BWE Capital Securities and the debentures will mature on December 1, 2030, but on or after December 1, 2005 are subject to redemption in whole or in part at par plus accrued interest. They are solely, fully and unconditionally guaranteed by the Parent, representing the Company’s maximum liability for the securities. All of the common securities of the Trust are owned by the Parent.
FH Trust is a Delaware business trust which was formed in 1997, issued $100 million of its Capital Securities (the “FH Capital Securities”) and used the proceeds to purchase junior subordinated deferrable interest debentures of the Corporation. The FH Capital Securities accrue and pay interest semiannually at an annual interest rate of 8.343%. The FH Capital Securities are mandatorily redeemable upon maturity date of July 1, 2027. However, they are subject to redemption on or after July 1, 2007, in whole or in part (subject to a prepayment penalty) as provided for in the governing indenture. At June 30, 2004, the FH Trust’s total assets were $107.4 million, comprised primarily of the Corporation’s junior subordinated debentures. The debentures and the associated interest expense make up the Company’s maximum exposure to losses for this trust. They are solely, fully and unconditionally guaranteed by the Parent, representing the Company’s maximum liability for the securities. All of the common securities of the Trust are owned by the Parent.
As of October 2003, effective with the adoption of FIN 46 as it relates to the Trusts, BancWest no longer consolidates the Trusts. This deconsolidation had no material impact on the total assets or liabilities of the Corporation. The Federal Reserve Board issued temporary guidance which indicated that the preferred capital securities can still be included as part of Tier 1 Capital. The Federal Reserve Board is reviewing the regulatory implications of any accounting treatment changes and will provide further guidance if necessary or warranted.
The Company has identified investments that meet the definition of a VIE under FIN 46 but do not meet the requirements for consolidation. The Company owns several limited partnership interests in low-income housing developments in conjunction with the Community Reinvestment Act. Limited partners do not participate in the control of the partnerships’ businesses. The general partner exercises the day-to-day control and management of the projects. The general partners have exclusive control over the partnerships’ businesses and have all of the rights, powers, and authority generally conferred by law or necessary, advisable or consistent with accomplishing the partnerships’ businesses. FIN 46 indicates that if an entity (e.g., limited partner) cannot sell, transfer, or encumber its interests in the VIE without the prior approval of an enterprise (e.g., general partner), the limited partner is deemed to be a de facto agent for the general partner. BancWest is considered to be a de facto agent for the general partner where BancWest has a limited partnership interest over 50%. BancWest is not the primary beneficiary for these partnerships or for those where its interest is less than 50%. The business purpose of these entities is to provide affordable housing within the Company’s service area in return for tax credits and tax loss deductions. Our subscription amount for these investments as of June 30, 2004 is approximately $94.8 million with approximately $31.8 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 subscription amount. Bargain purchase options are available for the general partners to purchase the Company’s portion of interests in the limited partnerships. These commitments were entered into from 1991 through 2004.
7. Pension and Other Postretirement Benefit Plans
The Company sponsors two noncontributory defined benefit pension plans, a cash balance plan and an unfunded excess benefit pension plan.
The postretirement benefit plans were amended for eligible employees who retire after June 30, 2004. The amendment places a cap on the funding of the plan, however, it does not change the benefit options available to the retirees.
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The following table sets forth the components of the net periodic benefit cost (credit) for the three months ending June 30, 2004 and 2003:
The following table sets forth the components of the net periodic benefit cost (credit) for the six months ending June 30, 2004 and 2003:
The following table sets forth the components of the net periodic benefit cost (credit) for our funded plans for:
Contributions
The Company expects to contribute $2.5 million to its defined benefit pension plans and $3.0 million to its other postretirement benefit plans in 2004.
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BancWest Corporation and SubsidiariesMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS (Continued)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Certain matters contained in this report 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 this report. 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:
Our forward-looking statements are based on management’s current views about future events. Those statements speak only as of the date on which they are made. We do not intend to update forward-looking statements, and, except as required by law, we disclaim any obligation or undertaking to update or revise any such statements to reflect any change in our expectations or any change in events, conditions, circumstances or assumptions on which forward-looking statements are based.
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.
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OVERVIEW
BancWest Corporation (www.bancwestcorp.com) is a financial holding company with assets of $40.3 billion. It is a wholly-owned subsidiary of Paris-based BNP Paribas. The Company is headquartered in Honolulu, Hawaii, with an administrative headquarters in San Francisco, California. Its principal subsidiaries are Bank of the West (296 branches in California, Oregon, New Mexico, Nevada, Washington and Idaho) and First Hawaiian Bank (61 branches in Hawaii, Guam and Saipan). In this report, BancWest Corporation and Subsidiaries is referred to as “the Company,” “we” or “our.” BancWest Corporation alone is referred to as “the Parent.”
Acquisitions
Community First Bankshares Acquisition
On March 16, 2004, BancWest announced that it signed an agreement to acquire Community First Bankshares, Inc. (Community First), a holding company that operates Community First National Bank (CFB). The transaction received approval from Community First’s shareholders on June 30, 2004. It is anticipated that the purchase transaction will close in the third quarter of 2004, subject to regulatory approval. Subsequently, CFB will be merged with and into Bank of the West and its branches will be integrated into Bank of the West’s branch network system. The acquisition of Community First will add 10 new states to Bank of the West’s footprint, as well as to our market share in California and New Mexico. CFB operates 155 branches in 12 states in the Southwest, Rocky Mountains, Great Plains and east to Minnesota, Iowa and Wisconsin. CFB’s retail operations will complement the Bank’s existing network in California, Nevada, New Mexico and the Pacific Northwest. At June 30, 2004, CFB had total assets of $5.6 billion, total deposits of $4.4 billion and loans of $3.4 billion. Following the acquisition, results of operations of Community First will be included in our Consolidated Financial Statements. The purchase price of approximately $1.2 billion will be paid in cash and accounted for as a purchase.
In connection with the acquisition, management is in the process of assessing and formulating restructuring plans. These restructuring plans will target areas where there is a significant amount of overlap between the two companies. This includes consolidating administrative and support services including sales and marketing and to focus the Company’s resources on activities that will promote growth in the business in the near future. We will be consolidating excess facilities and evaluating areas where we will be able to take advantage of existing facilities. Conversion and restructuring expenses incurred to date totaling $2.7 million have been included in noninterest expense for the six months ended June 30, 2004. As management is still in the process of developing the plans, estimates of associated exit costs and other restructuring costs yet to be incurred have not been determined at this time.
USDB Bancorp Acquisition
On April 27, 2004 the Company announced that it signed an agreement to acquire USDB Bancorp, parent company of Union Safe Deposit Bank, in a cash transaction valued at $245 million. USDB Bancorp is a holding company headquartered in Stockton, California, and operates 19 Union Safe Deposit Bank branches in San Joaquin and Stanislaus Counties in the Central Valley of California. As of June 30, 2004, USDB Bancorp had total assets of $1.1 billion, deposits of $850.7 million and net loans of $654.8 million. During the first half of 2004, the company reported net income of $5.7 million. Union Safe Deposit Bank has about 398 full time equivalent employees. The merger requires approval from federal and state banking regulators. Upon approval, the transaction will close during the third quarter of 2004, with the conversion and merger of Union Safe Deposit Bank into Bank of the West projected for the fourth quarter. Expanding Bank of the West’s presence in California has been one of the Company’s strategic goals. The acquisition will give us the opportunity to service additional parts of the Central Valley.
Initiatives
The Company has continued to implement a series of initiatives that are designed to improve customer service and expand our physical footprint through branch expansion and mergers and acquisitions. The focus of the Company is to promote long-lasting customer service relationships through upgrading technology and implementing new training vehicles. The Company strives for a “high touch” personalized marketing position, promoting brand recognition through logos and community outreach. The Company is expanding its line of financial services to its customers through internal initiatives as well as mergers and acquisitions. This includes insurance services that it will attain through its acquisition of Community First Bankshares.
Bank of the West’s Commercial Banking Segment is planning on increasing its product offering for the Commercial Banking Division, the Agribusiness Banking Division and the Real Estate Industries Division. The Commercial Banking Segment has created
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two new departments, National Middle Market Leasing and the Corporate Finance Department. The National Middle Market Leasing Department will originate lease transactions nationwide, targeting middle market companies with sales of $25 million-$500 million. The Corporate Finance Department offers commercial loans and extensions of credit on a secured basis only. Secured loan products offered will include asset-based lending, loan syndications and cash flow/business value lending.
Key among the elements of the Company’s profitability has been the interest rate environment, from both a deposit and loan pricing standpoint. As an industry, banks and other financial intermediaries have seen net interest margins decline over the past year principally as a result of the absolute level and shape of the yield curve. We manage the interest rate and market risks inherent in our asset and liability balances, while ensuring ample liquidity and diverse funding.
Financial Overview
Income Statement Analysis
Second quarter 2004 as compared with second quarter 2003
The Company reported net income of $114.8 million, compared with $107.7 million, an increase of 6.6%. Net interest income was $322.3 million, up 0.8% compared with $319.9 million. This increase was primarily due to growth in average earning assets, partially offset by a lower net interest margin for the quarter. Average loans and leases increased by $2.3 billion; average investment securities increased by $1.6 billion. The Company increased its consumer lending and purchased residential mortgage loans and securities while commercial borrowing was relatively slow. The net interest margin decreased 49 basis points (1% equals 100 basis points) from 4.37% last year to 3.88% as a result of the continued low interest rate environment. Noninterest income was $110.0 million, an increase of 7.7% compared with $102.1 million in the second quarter of 2003. The increase was partly due to the requirement of accounting for new automobile leases as operating leases rather than direct finance leases. Another significant factor in the increase in noninterest income was related to the sales of the net investment in certain equipment leases. Noninterest expense was $232.2 million compared with $229.9 million in the second quarter of 2003, an increase of 1.0%. The increase was primarily the result of vehicle depreciation costs incurred from the operating method of accounting for leases, increased merger-related contract services and increased costs of employee long-term incentive and workers’ compensation benefits, partially offset by cost savings from lower pension and postretirement expenses.
Six-month period 2004 as compared with six-month period 2003
The Company reported net income of $227.8 million, compared with $209.7 million, an increase of 8.6%. Net interest income was $643.3 million, up 1.5% compared with $633.9 million. This increase was primarily due to growth in average earning assets, partially offset by a lower net interest margin for the period. Average loans and leases increased by $2.1 billion; average investment securities increased by $1.7 billion. The Company increased its consumer lending and purchased residential mortgage loans and securities while commercial borrowing was relatively slow. The net interest margin decreased 49 basis points from 4.42% last year to 3.93% as a result of the continued low interest rate environment. Noninterest income was $211.5 million, an increase of 6.7% compared with $198.2 million. The increase was primarily due to increased service charges on deposits and other service charges and fees, as well as accounting for new automobile leases as operating leases rather than direct finance leases. The Company’s strategy to increase noninterest income included growth in average deposit balances, repricing efforts in account analysis as well as growth in investment product sales and merchant services. The Company also focused on niche markets where the Company would have a competitive advantage in growing its vehicle and equipment leasing, SBA, church and healthcare lending portfolios. Noninterest expense was $451.1 million compared with $450.6 million. The slight increase was primarily the result of vehicle depreciation costs incurred from the operating method of accounting for new leases, increased merger-related contract services and increased costs of employee healthcare benefits, partially offset by cost savings from staff reductions and lower pension and postretirement benefit expenses.
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Balance Sheet Analysis
The Company had total assets of $40.3 billion at June 30, 2004, an increase of 5.0% from December 31, 2003 and 10.5% from June 30, 2003. Investment securities totaled $5.8 billion, an increase of 0.8% from December 31, 2003 and 16.1% from the same period in 2003. Loans and leases totaled $27.2 billion, up 5.7% from December 31, 2003 and 8.7% from a year ago. Deposits were $28.0 billion, up 6.0% from December 31, 2003 and 11.7% from a year ago.
The Company’s nonperforming assets were 0.52% of loans, leases and foreclosed properties at June 30, 2004, an improvement from 0.59% at December 31, 2003 and 0.75% at June 30, 2003. The provision for loan and lease losses was $11.9 million for the second quarter of 2004, compared with $18.9 million for the same period in 2003. The allowance for loan and lease losses was 1.46% of total loans and leases at June 30, 2004, compared with 1.52% of total loans and leases at December 31, 2003 and 1.57% at June 30, 2003.
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are fundamental to understanding our financial position and results of operations and are discussed in detail in Note 1 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements in our 2003 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. We have identified three accounting estimates that we believe are critical due to the levels of subjectivity and judgment necessary and because it is likely that materially different results would be reported if different judgments, assumptions and estimates were used. These estimates relate to the allowance for loan and lease losses, goodwill and lease financing. These estimates are described in more detail in our 2003 Annual Report on Form 10-K in the “Critical Accounting Estimates” section of Management’s Discussion and Analysis.
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CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)
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RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased to $322.3 million as compared with $319.9 million.
The increase in net interest income was principally the result of a $4.0 billion, or 13.6%, increase in average earning assets. The increase in our average earning assets was primarily the result of growth in loans (from originations and purchases), leases and investment securities within Bank of the West and First Hawaiian Bank. The effect of the increase from average earning assets was partially offset by a 49 basis point reduction in our net interest margin. The continuing effect of historically low interest rates has reduced the yield on earning assets more rapidly than rates paid on sources of funds.
Net interest income increased 1.5% to $643.3 million as compared with $633.9 million.
The increase in net interest income was principally the result of a $4.0 billion, or 13.7%, increase in average earning assets. The increase in our average earning assets was primarily the result of growth in loans (from originations and purchases), leases and investment securities within Bank of the West and First Hawaiian Bank. The effect of the increase from average earning assets was partially offset by a 49 basis point reduction in our net interest margin. The continuing effect of historically low interest rates has reduced the yield on earning assets more rapidly than rates paid on sources of funds.
Net Interest Margin
The net interest margin decreased by 49 basis points due primarily to the effects of the continued low interest rate environment. While the low rate environment reduced our yield on earning assets by 64 basis points to 5.06% from 5.70%, it also decreased our rate paid on sources of funds by 15 basis points to 1.18% from 1.33%. Also offsetting the decrease in the yield on average earning assets, average noninterest-bearing deposits maintained by retail and commercial customers increased by $1.0 billion, or 14.9%.
The net interest margin decreased by 49 basis points due primarily to the effects of the continued low interest rate environment. While the low rate environment reduced our yield on earning assets by 70 basis points to 5.11% from 5.81%, it also decreased our rate paid on sources of funds by 21 basis points to 1.18% from 1.39%. Also offsetting the decrease in the yield on average earning assets, average noninterest-bearing deposits maintained by retail and commercial customers increased by $0.9 billion, or 13.9%.
Average Earning Assets
Growth in Bank of the West’s loan and lease portfolio and higher levels of investment securities in both banks are primarily responsible for the increase in average earning assets. The $2.3 billion, or 9.6%, increase in average total loans and leases was primarily due to increased consumer lending and residential mortgages. Consumer loans continue to grow due to strength in the consumer market and the low interest rates on consumer products. As commercial lending was relatively slow during the past year, funds were used to purchase residential mortgages as well as investment securities. Consequently, average total investment securities were $6.0 billion, up $1.6 billion, or 35.6%.
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Growth in Bank of the West’s loan and lease portfolio and higher levels of investment securities in both banks are primarily responsible for the increase in average earning assets. The $2.1 billion, or 8.8%, increase in average total loans and leases was primarily due to increased consumer lending and residential mortgages. Consumer loans continue to grow due to strength in the consumer market and the low interest rates on consumer products. As commercial lending was relatively slow during the past year, funds were used to purchase residential mortgages as well as investment securities. Consequently, average total investment securities were $5.9 billion, up $1.7 billion, or 40.4%.
Average Loans and Leases
The increase in average loans and leases was primarily due to growth in Bank of the West. Average consumer loans within Bank of the West increased approximately $1.3 billion, or 21.8%, primarily due to growth in financing for autos, recreational vehicles and pleasure boats, while loan purchases increased the average residential mortgage portfolio. Bank of the West’s average residential real estate loans increased by $0.5 billion.
The increase in average loans and leases was primarily due to growth in Bank of the West. Average consumer loans within Bank of the West increased approximately $1.2 billion, or 21.9%, primarily due to growth in consumer loans, while real estate loan purchases increased the average residential mortgage portfolio. Bank of the West’s average residential real estate loans increased by $0.6 billion.
Average Interest-Bearing Deposits and Liabilities
The $3.0 billion, or 13.0%, increase in average interest-bearing deposits and liabilities was primarily due to growth in our customer deposit base and an increase in average long-term debt and average short-term borrowings. Average deposits increased due to growth in the demand deposit, interest-bearing checking, regular and money market savings, foreign and time deposit portfolios. Short-and long-term borrowings from the Federal Home Loan Bank also increased average short-term borrowings and average long-term debt.
The $2.9 billion, or 12.6%, increase in average interest-bearing deposits and liabilities was primarily due to growth in our customer deposit base and an increase in average long-term debt and average short-term borrowings. Average deposits increased due to growth in the demand deposit, interest-bearing checking, regular and money market savings, foreign and time deposit portfolios. Short-and long-term borrowings from the Federal Home Loan Bank also increased average short-term borrowings and average long-term debt.
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Table 1: Average Balances, Interest Income and Expense, and Yields and Rates (Taxable-Equivalent Basis)
The following table presents consolidated average balances, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing deposits and liabilities for the years indicated on a taxable-equivalent basis. The taxable-equivalent adjustment is made for items exempt from Federal income taxes (assuming a 35% tax rate for June 30, 2004 and 2003) to make them comparable with taxable items before any income taxes are applied.
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Noninterest Income
The following tables reflect the key components of the changes in noninterest income for the three and six months ended June 30, 2004, as compared with the same period in 2003:
Service charges on deposit accounts were $40.5 million, an increase of $2.0 million. The increase is primarily attributed to an increase in average deposit balances of approximately 11.4% and higher fee income from overdraft and nonsufficient fund transactions, partially offset by lower servicing fee income as a result of repricing efforts in account analysis.
Vehicle and equipment operating lease income totaled $4.2 million. The increase was due to accounting for new auto leases as operating leases rather than direct finance leases. See Note 4 to the Consolidated Financial Statements for additional information.
Other noninterest income totaled $17.7 million, an increase of $3.0 million, primarily attributed to higher income related to the sales of the net investment in certain equipment leases, a reclassification of the amortization of low income housing investments in late 2003 and proceeds from a bankruptcy settlement. The increases were partially offset by lower gains on the sale of residential loans, losses on the disposal of certain fixed assets and lower income from the sale of loans in the Essex subsidiary as Essex began to retain loans in its portfolio rather than selling them.
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Service charges on deposit accounts were $81.4 million, an increase of $5.8 million. The increase is primarily attributed to an increase in average deposit balances of approximately 10.5% and higher fee income from overdraft and nonsufficient fund transactions.
Other service charges and fees were $74.0 million, an increase of $3.6 million. The increase is primarily due to higher revenue from the sale of investment products, higher credit card fees resulting from an increase in retail sales volume, partially offset by lower fee income from debit cards and lower gains on the sale of residential loans.
Net gains on securities available for sale totaled $1.1 million, compared with net gains of $3.4 million. The higher gains in 2003 were due to portfolio restructuring activities.
Vehicle and equipment operating lease income totaled $5.1 million. The increase was due to accounting for new auto leases as operating leases rather than direct finance leases.
Noninterest Expense
The following tables reflect the key components of the changes in noninterest expense for the three and six months ended June 30, 2004 as compared with the same period in 2003:
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Employee benefits expense was $34.7 million, a decrease of $3.3 million, primarily due to lower pension and postretirement plan expense as a result of reduced costs from consolidating benefit plans and lower recognized actuarial losses. The decrease was partially offset by increases in other benefits, primarily long-term incentive and workers’ compensation.
Outside services expense was $20.7 million, an increase of $2.5 million, substantially due to an increase in contracted services related to the CFB acquisition.
Depreciation on vehicle and equipment operating leases totaled $4.2 million. The increase was the result of vehicle depreciation costs incurred from the change in accounting for new auto leases as operating leases rather than direct finance leases.
Advertising and promotion expenses were $6.4 million, a decrease of $1.6 million, primarily the result of higher advertising expenses in 2003 related to certificate of deposit campaigns to promote brand recognition.
Other noninterest expense was $37.0 million, an increase of $1.6 million. The increase is primarily due to higher fees due to increased transaction volume related to airline branded credit cards, increased write-offs related to OREOs and higher legal expenses, partially offset by lower split dollar life insurance expense as a result of marking policies to cash surrender value.
Salaries and wages expense was $166.9 million, a decrease of $2.0 million. The decrease is primarily attributable to a decrease in full-time equivalent staff.
Employee benefits expense was $70.9 million, a decrease of $3.6 million, primarily due to lower pension and postretirement plan expense as a result of reduced costs from consolidating benefit plans and lower recognized actuarial losses. The decrease was partially offset by increases in other benefits, primarily healthcare and workers’ compensation.
Outside services expense was $38.9 million, an increase of $3.1 million, primarily due to an increase in contracted and data processing services related to the CFB acquisition.
Depreciation in vehicle and equipment operating leases totaled $4.9 million. The increase in expense was the result of vehicle depreciation costs incurred from the change in accounting for new auto leases.
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OPERATING SEGMENTS
Our operations are managed principally through our two major bank subsidiaries, Bank of the West and First Hawaiian Bank. Bank of the West operates primarily in California, Oregon, Washington, Idaho, New Mexico and Nevada. It also conducts business nationally through its Consumer Finance Division as well as its Essex Credit Corporation and Trinity Capital subsidiaries. First Hawaiian Bank’s primary base of operations is in Hawaii, Guam and Saipan. It also has significant operations extending to California through its automobile dealer flooring and financing activities.
The Regional Banking Segment’s net income increased $3.6 million, from $30.8 million to $34.4 million. Net interest income increased $1.1 million or 0.9%. This increase was driven by an 11.4% increase in average loans and transfer pricing credits provided on higher deposit balances. Noninterest income increased $3.0 million, or 7.2%, primarily due to increases in commissions and other fees and service fees on deposit accounts. Noninterest expense was flat quarter over quarter, primarily due to a decrease in staff, offset by an increase in benefits. The provision for loan and lease losses decreased $2.7 million due to the improved credit quality of its loan and lease portfolio. The growth in average deposits of 6.2% was driven by core deposits, offset by a decline in certificates of deposits.
The Regional Banking Segment’s net income increased $7.8 million, from $62.0 million to $69.8 million. Net interest income increased $2.5 million or 1.0%. This increase was driven by a 10.4% increase in average loans and transfer pricing credits provided on higher deposit balances. Noninterest income increased $7.4 million, or 9.2%, as a result of an increase in commissions on sale of investment products. Noninterest expense increased $2.2 million, or 1.0%. The increase was primarily due to an increase in occupancy related to five de novo branches and higher costs associated with employee benefits. The provision for loan and lease losses decreased $5.7 million due to the improvement in credit quality. The growth in average deposits was driven by core deposits, offset by a decline in certificates of deposits.
The Commercial Banking Segment’s net income decreased $0.8 million or 2.1% from $38.6 million to $37.8 million, primarily due to a negative provision for credit losses in second quarter 2003. Net interest income increased $3.6 million or 4.7%. The increase in net interest income was due to an increase in average loans.
Average loan and lease balances increased by 9.5% to $7.6 billion, and average deposit balances increased by 12.9% to $3.5 billion.
The Commercial Banking Segment’s net income decreased to $75.3 million from $75.8 million, primarily due to a negative provision for credit losses in the six month period of 2003. Net interest income remained relatively flat, despite an increase in average assets.
Average loan and lease balances increased by 7.7% to $7.5 billion, and average deposit balances increased by 14.3% to $3.4 billion.
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The Consumer Finance Segment’s net income was $18.3 million compared with $13.7 million. Net interest income was $51.1 million, compared with $50.7 million, an increase of 0.8%. Noninterest income increased to $6.5 million, compared with $3.5 million. Noninterest expense increased from $15.3 million to $20.6 million.
The Consumer Finance Segment remains very competitively priced in the indirect lending market. Net interest income remained relatively flat. Noninterest income was favorably impacted as a result of recording lease payments on auto leases as rental income starting in February 2004. The provision for loan and lease losses was decreased by the improved credit quality in the consumer loan and lease portfolio. These favorable variances were partially offset by lower gains on sales of loans as a result of Essex retaining certain of the loans it originates. Noninterest expense increased by 34.6% to $20.6 million. However, expenses as a percentage of average assets remained relatively constant. The increase in noninterest expense was primarily due to an increase in employee salaries and benefits and an increase in depreciation expense as a result of the accounting for vehicle operating leases.
Average assets were $8.4 billion compared with $7.4 billion, an increase of 13.7%. This increase is primarily due to increased indirect loan production.
The Consumer Finance Segment’s net income was $32.8 million, compared with $28.3 million. Net interest income was $104.2 million, compared with $100.4 million, an increase of 3.8%. Noninterest income increased $3.0 million, or 48.4%. Noninterest expense increased from $30.5 million to $37.5 million. The increase in noninterest income was primarily due to the change in accounting for vehicle operating leases. The increase in noninterest expense was primarily due to an increase in employee salaries and benefits and an increase in depreciation expense as a result of the accounting for vehicle operating leases.
Average assets were $8.3 billion compared with $7.3 billion, an increase of 14.0%. This increase is primarily due to increased indirect loan production. The provision for credit losses decreased $7.8 million due to the improvement in credit quality.
The Retail Banking Segment’s net income increased to $16.4 million, up $0.3 million, or 1.9%. Net interest income increased $2 million or 3.5%, primarily due to higher balances in earning assets. Noninterest income increased $0.9 million, or 6.6%, primarily due to increased fees on deposit accounts. Noninterest expense increased $2.3 million, or 5.4%, primarily due to higher furniture and equipment write-offs. The provision for loan and lease losses decreased $0.8 million or 42.1%. The decrease in the provision for loan and lease losses was a result of improved credit quality which has led to a decrease in nonperforming assets and lower charge offs.
Average assets increased 12.3% to $3.7 billion, primarily due to increases in loans of $241 million. Average deposits increased 8.4% to $7.0 billion, primarily due to an increase in core deposits, partially offset by a decrease in time certificates of deposit.
The Retail Banking Segment’s net income decreased to $33.3 million, down $1.2 million, or 3.5%. Net interest income increased $1.1 million or 1.0%, primarily due to higher earning asset balances. Noninterest income increased $1.1 million, or 3.9%, primarily from increased fees on deposit accounts, partially offset by a gain on the sale of foreclosed property in 2003. Noninterest expense increased $3.4 million, or 4.1%, primarily due to higher furniture and equipment expense, partially offset by a decrease in occupancy expense corresponding to the purchase of First Hawaiian Center in December 2003. The provision for loan and lease losses decreased $1.1 million or 31.4%. The decrease in the provision for loan and lease losses was a result of the improved credit quality which has led to a decrease in nonperforming assets and lower charge offs.
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Average assets increased 11% to $3.6 billion, primarily due to increases in loans. Average assets also increased due to the purchase of First Hawaiian Center. Average deposits increased 7.7% to $6.9 billion, primarily due to an increase in core deposits, partially offset by a decrease in time certificates of deposit.
Consumer Finance’s net income decreased to $8.9 million, down $1 million, or 10.1%. Net interest income was $22.2 million compared with $19.9 million, an increase of 11.6%. This was the result of increased interest income on higher loan balances. Noninterest income decreased $3.4 million or 34.3%. The decrease was caused by lower gains on the sale of mortgages. Noninterest expense remained relatively flat. The provision for loan and lease losses decreased $0.2 million or 8.3%. The decrease reflects lower charge offs and improved credit quality.
Average assets increased 8.0% to $1.6 billion, primarily due to increases in consumer and dealer flooring loans.
Consumer Finance’s net income decreased to $18.2 million, down $1.3 million, or 6.7%. Net interest income was $43.2 million compared with $38.7 million, an increase of 11.6%. This was the result of increased interest income on higher loan balances. Noninterest income decreased $5.6 million or 28.0%. The decrease was caused by lower gains on the sale of mortgages. Noninterest expense remained relatively flat. The provision for loan and lease losses decreased $0.4 million or 8.7%. The decrease reflects lower charge offs and improved credit quality.
Average assets increased 5.5% to $1.5 billion, primarily due to increases in consumer and dealer flooring loans.
Commercial Banking’s net income decreased to $6.7 million, down $0.8 million, or 10.7%. Net interest income decreased $0.8 million or 9.4%, primarily due to lower earning assets. Noninterest income increased $3.5 million or 70.0%, primarily due to a $6.9 million fee on the sale of the net investment in a lease, which was offset by a $3.4 million gain on the sale of a lease in 2003. Noninterest expense increased $3.1 million, or 134.8%, primarily due to a $3.1 million pretax reduction in net investments of certain leveraged leases.
Average assets decreased 2.2% to $1.1 billion, primarily due to a decrease in loans.
Commercial Banking’s net income decreased to $12.7 million, down $0.2 million, or 1.6%. Net interest income decreased $0.5 million or 3.0%, primarily due to lower earning assets. Noninterest income increased $3.7 million or 56.1%, primarily due to a $6.9 million marketing fee on the sale of a lease in the second quarter 2004, partially offset by a $3.4 million net gain on sale of the net investment in a lease in second quarter 2003. Noninterest expense increased $2.8 million or 60.9%, primarily due to a $3.1 million pretax reduction in net investments of certain leveraged leases in second quarter 2004. The provision for loan and lease losses increased $0.2 million.
Average assets decreased 4.0% to $1.1 billion, primarily due to a planned decrease in media and syndicate loans.
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The Financial Management Segment’s net income of $0.6 million increased $0.4 million from 2003. Noninterest expense decreased by $0.5 million or 7.2%, primarily due to a Trust settlement write-off in June 2003.
The Financial Management Segment’s net income of $1.2 million increased $0.2 million from 2003. Noninterest income increased by $0.2 million primarily due to higher investment management fees. Investment fees were positively impacted by the upturn in the equity markets. Noninterest expense decreased by $0.4 million primarily due to a Trust settlement write-off in June 2003.
SECURITIES AVAILABLE FOR SALE
The Company focuses on the following four objectives for its available-for-sale portfolio:
The recent and relatively large increases in the portfolio are directly related to the high deposit growth that has been experienced over the past two years.
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Amortized cost and fair value of securities available for sale at June 30, 2004, December 31, 2003 and June 30, 2003 were as follows:
The following table presents the unrealized gross losses and fair value of securities in the securities available for sale portfolio at June 30, 2004, by length of time that individual securities in each category have been in a continuous loss position. Because the declines in fair value were a result of changes in market interest rates and the Company has both the ability and the intent to hold the securities until maturity or the fair value at least equals the recorded cost, no other-than-temporary impairment was recorded at June 30, 2004.
Proceeds from the sales of securities available for sale were $282.4 million and $339.4 million for the six months ended June 30, 2004 and 2003, respectively.
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Gains and losses realized on the sales of securities available for sale are determined using the specific identification method. Gross realized gains and losses on securities available for sale for the periods indicated were as follows:
LOANS AND LEASES
The following table sets forth the loan and lease portfolio by major categories and loan and lease mix at June 30, 2004, December 31, 2003 and June 30, 2003:
We continue to diversify our loan and lease portfolio, both geographically and by industry. Our overall growth in loan and lease volume came primarily from our Mainland United States operations. The loan and lease portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. There was a $2.2 billion, or 8.7%, increase in total loans and leases from June 30, 2003 and a $1.5 billion, or 5.7% increase compared with December 31, 2003.
When comparing the current period with June 30, 2003, there was an increase of $1.3 billion, or 19.6%, in consumer loans. Consumer loans consist primarily of open- and closed-end direct and indirect loans for personal, automobile, recreational vehicle, marine, and household purchases. Total real estate loans increased $931 million or 8.6% from June 30, 2003 primarily from purchases of residential loans and growth in commercial real estate lending.
The increase in total loans and leases from December 31, 2003 to June 30, 2004 was mainly driven by increases in residential real estate and consumer lending. Total real estate loans increased $684 million, or 6.2%, and consumer loans increased $748 million, or 10.2%, in the period ending June 30, 2004 compared with December 31, 2003. These increases were partially offset by declines in lease financing. The increase in residential loans was a result of purchases. Our portfolio of consumer loans has increased as a result of the Company’s competitive position and competitive interest rates. The decrease in lease financing was due to the change in the accounting for new auto leases as operating leases rather than direct finance leases. See Note 4 to the Consolidated Financial Statements for additional information.
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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 June 30, 2004, 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.
Loan related off-balance-sheet commitments were as follows at June 30, for the years indicated:
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets at June 30, 2004, December 31, 2003 and June 30, 2003 were as follows:
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Nonperforming assets at June 30, 2004 decreased by $47.7 million, or 25.4%, from June 30, 2003 and decreased $10.8 million, or 7.2%, from December 31, 2003. The decrease in nonaccrual loans from the previous year was primarily due to resolution of problem relationships in commercial lending and decreases in nonaccrual real estate loans and lease financing. Foreign nonperforming assets decreased at June 30, 2004 by $2.7 million, or 33.3%, from June 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.
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.
Loans past due 90 days or more and still accruing interest totaled $28.8 million at June 30, 2004, a decrease of $535 thousand or 1.8%, from December 31, 2003, but increased $8.2 million, or 39.5%, from June 30, 2003. The decrease at June 30, 2004 compared with December 31, 2003 was primarily due to consumer and foreign loans partially offset by an increase in commercial, financial and agricultural loans. The increase at June 30, 2004 compared with June 30, 2003 was due to commercial, financial and agricultural loans, partially offset by a decrease in past due real estate loans. All of the loans that are past due 90 days or more and still accruing interest are, in our judgment, adequately collateralized and in the process of collection.
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PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The following table sets forth the activity in the allowance for loan and lease losses for the periods indicated:
The provision for loan and lease losses is based upon our judgment as to the adequacy of the allowance for loan and lease losses (the Allowance) to absorb probable losses inherent in the portfolio as of the balance sheet date. The Company uses a systematic methodology to determine the adequacy of the Allowance and related provision for loan and lease losses to be reported for financial statement purposes. The determination of the adequacy of the Allowance is ultimately one of judgment, which includes consideration of many factors, including, among other things, the amount of problem and potential problem loans and leases, net charge-off experience, changes in the composition of the loan and lease portfolio by type and location of loans and leases and in overall loan and lease risk profile and quality, general economic factors and the fair value of collateral.
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:
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Compared with the same period a year ago, net charge-offs were $7.8 million lower in the six months ended June 30, 2004. While an improvement in credit quality resulted in lower charge-offs, primarily in the commercial, financial and agricultural category, recoveries were higher in 2003. This was the result of a $13.6 million dispute resolution with UFJ Bank Ltd. of Japan in conjunction with charge-offs that were disputed during the acquisition of United California Bank in 2002. See Note 2 to the Consolidated Financial Statements in the 2003 Form 10-K for further information.
In our judgment, the Allowance was adequate to absorb losses inherent in the loan and lease portfolio at June 30, 2004. However, changes in prevailing economic conditions in our markets could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the Allowance. We will continue to closely monitor economic developments and make necessary adjustments to the Allowance accordingly.
DEPOSITS
Deposits are the largest component of our total liabilities and account for 44.7% of total interest expense during the quarter ended June 30, 2004. At June 30, 2004, total deposits were $28.0 billion, an increase of 6.0% over December 31, 2003 and an increase of 11.7% over June 30, 2003. The increase was primarily due to the growth in our customer deposit base, primarily in Bank of the West. The decrease in all of the rates paid on deposits reflects the lower interest rate environment. Additional information on our average deposit balances and rates paid is provided in Table 1: Average Balances, Interest Income and Expense, and Yields and Rates (Taxable-Equivalent Basis).
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CAPITAL
Stockholder’s equity totaled $4.4 billion at June 30, 2004, an increase of $168.1 million, or 3.9%, from December 31, 2003 and $343.4 million, or 8.4%, from June 30, 2003. The increases were primarily due to net income earned by the Company during the first six months of 2004, partially offset by net unrealized losses on securities available-for-sale and cash flow hedges.
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 June 30, 2004 are set forth below:
We elected to become a financial holding company in 2001. Because of this election, only our depository institution subsidiaries are subject to various regulatory capital requirements administered by the Federal banking agencies. If these subsidiaries fail to meet minimum capital requirements, the Federal agencies can initiate certain mandatory actions. Such regulatory actions could have a material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, our depository institution subsidiaries must each meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. These capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
INCOME TAXES
Our effective income tax rate (exclusive of the tax equivalent adjustment) for the six months ended June 30, 2004 and 2003 was 38.9% and 38.3%, respectively.
Lease-in/lease-out (LILO) transactions have recently been subject to review on a nationwide basis by the Internal Revenue Service (IRS) to determine whether the tax deductions connected with such transactions are allowable for U.S. federal income tax purposes. The Company has entered into several LILO transactions, which have been the subject of an audit by the IRS. In April 2004, the Company received a Revenue Agent’s Report (RAR) which disallowed all deductions associated with the LILO transactions. In order to avoid potential future interest and penalties, the Company has paid, under protest, the amounts claimed by the IRS and other tax authorities in the RAR. The Company continues to believe that it properly reported its LILO transactions and will contest the results of the IRS’s audit. At the present time, the Company cannot predict the outcome of this issue.
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LIQUIDITY MANAGEMENT
Liquidity refers to our ability to provide sufficient short- and long-term cash flows to fund operations and to meet obligations and commitments, including depositor withdrawals and debt service, on a timely basis at reasonable costs. We achieve our liquidity objectives with both assets and liabilities. Further, while liquidity positions are managed separately by the Company and its two subsidiary banks, both short-term and long-term activities are coordinated between the two subsidiary banks.
We obtain short-term, asset-based liquidity through our investment securities portfolio and short-term investments which can be readily converted to cash. These liquid assets consist of cash and due from banks, interest-bearing deposits in other banks, federal funds sold, trading assets, securities purchased under agreements to resell, securities available for sale and loans held for sale. Such assets represented 20.1% of total assets at June 30, 2004, compared with 20.9% at December 31, 2003 and 19.2% at June 30, 2003.
Intermediate- and longer-term asset liquidity is primarily provided by regularly scheduled maturities and cash flows from our loans and investment securities. Additional liquidity is available from certain assets that can be sold, securitized or used as collateral for borrowings from the Federal Home Loan Bank such as consumer and mortgage loans.
We obtain short-term, liability-based liquidity primarily from deposits. Average total deposits for the six months ended June 30, 2004 increased by 10.5% to $26.8 billion, primarily due to continued expansion of our customer base in the Western United States. Average total deposits funded 68.9% and 69.4% of average assets for the six months ended June 30, 2004 and the year ended December 31, 2003, respectively.
We also obtain short-term and long-term liquidity from ready access to regional and national wholesale funding sources, including purchasing federal funds, selling securities under agreements to repurchase, lines of credit from other banks and credit facilities from the Federal Home Loan Bank. The following table reflects immediately available borrowing capacity at the Federal Reserve Discount Window and the Federal Home Loan Bank and securities available for selling under repurchase agreements:
Offshore deposits in the international market provide another available source of funds.
Funds taken in the intermediate- and longer-term markets are structured to avoid concentration of maturities and to reduce refinancing risk. We also attempt to diversify the types of instruments issued to avoid undue reliance on any one market or funding source.
Liquidity for the parent company is primarily provided by dividend and interest income from its subsidiaries. Short-term cash requirements are met through liquidation of short-term investments. Longer-term liquidity is provided by access to the capital markets or from transactions with our parent company, BNP Paribas.
Our ability to pay dividends depends primarily upon dividends and other payments from our subsidiaries, which are subject to certain limitations as described in Note 16 to the Audited Consolidated Financial Statements included in the Company’s 2003 Annual Report on Form 10-K.
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Our borrowing costs and ability to raise funds are a function of our credit ratings and any change in those ratings. The following table reflects the ratings of Bank of the West and First Hawaiian Bank as of June 30, 2004:
Cash Flows
The following is a summary of our cash flows for the six months ended June 30, 2004 and 2003. (There is more detail in the Consolidated Statements of Cash Flows.)
The increase in cash and cash equivalents in the first six months of 2004 was primarily due to an increase in deposits.
RECENT ACCOUNTING STANDARDS
We have adopted numerous new or modifications to existing standards, rules or regulations promulgated by various standard setting and regulatory bodies. Chief among these are the federal financial institutions regulators, the SEC and the FASB. The following section highlights important developments in the area of accounting and disclosure requirements. This discussion is not intended to be a comprehensive listing of the impact of all standards and rules adopted.
In June 2004, the Emerging Issues Task Force published EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 clarifies the impairment methodology used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. EITF 03-1 applies to all investments accounted for in accordance with the provisions of SFAS 115, certain debt and equity securities within the scope of Statement 124, and equity securities that are not subject to the scope of Statement 115 and not accounted for under the equity method of accounting. We currently conduct quarterly impairment evaluations in accordance with the recognition and guidance of EITF 03-1.
On March 9, 2004 the SEC released a Staff Accounting Bulletin: No. 105,Application of Accounting Principles to Loan Commitments (SAB 105), which provides guidance pertaining to interest rate locks of loan commitments accounted for as derivative instruments. It states that cash flows pertaining to mortgage servicing should not be included in the value of the derivative. We account for such rate locks in accordance with SAB 105.
In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows
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subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. The Company anticipates that the implementation of SOP 03-3 will require significant loan system and operational changes to track credit related losses on loans purchased starting in 2005. We are still assessing the impact it will have on the Consolidated Financial Statements.
In December 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 132 (revised 2003) Employers’ Disclosures about Pensions and Other Postretirement Benefits (SFAS 132 (revised 2003)), an amendment of FASB Statements No. 87, Employers’ Accounting for Pensions, No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in FASB Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement 132 about describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement amends APB Opinion No. 28, Interim Financial Reporting,to require interim-period disclosure of the components of net periodic benefit cost and, if significantly different from previously disclosed amounts, the amounts of contributions and projected contributions to fund pension plans and other postretirement benefit plans. This Statement is effective for fiscal years ending after December 15, 2003. The interim-period disclosures required by this Statement are effective for interim periods beginning after December 15, 2003. Disclosure of information about foreign plans and estimated future benefit payments required by SFAS 132 (revised 2003) shall be effective for fiscal years ending after June 15, 2004. The adoption of SFAS 132 (revised 2003) required enhanced disclosure and did not impact our consolidated financial statements.
On December 8, 2003 President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to plan sponsors that provide a benefit that is at least equivalent to Medicare. On May 19, 2004, the Financial Accounting Standards Board (FASB) issued staff Position 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. At this time, the net periodic postretirement benefit cost in the financial statements does not reflect the effects of the Act on our postretirement health care plans because the Company has not concluded whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act.
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BancWest Corporation and SubsidiariesQUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk Measurement and Management
Interest rate risk, one of the leading risks in terms of potential earnings impact, is an essential element of being a financial intermediary. The Company’s net interest income 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 its interest-earning assets (primarily loans and leases and investment securities). When interest-bearing liabilities mature or reprice more quickly than interest-earning assets during a given period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, a decrease in interest rates could have a negative impact on net interest income. In addition, the impact of interest rate swings may be exacerbated by factors such as our customers’ propensity to manage their demand deposit balances more or less aggressively or to refinance mortgage and other consumer loans depending on the interest rate environment. Short and long-term market rates may change independent of each other resulting in changes to the slope and absolute level of the yield curve.
The Asset/Liability Committees of the Company and our major subsidiaries are responsible for managing interest rate risk. The Asset/Liability Committees generally meet monthly or quarterly. The committees may recommend changes to a particular subsidiary’s interest rate profile to their respective Board of Directors, should changes be necessary and depart significantly from established policies.
Our exposure to interest rate risk is managed primarily by taking actions that impact certain balance sheet accounts (e.g., lengthening or shortening maturities in the investment portfolio, changing asset and/or liability mix - including increasing or decreasing the amount of fixed and/or variable instruments held by the Corporation — to adjust sensitivity to interest rate changes) and/or utilizing instruments such as interest rate swaps, caps, floors, options or forwards.
Derivatives entered into for trading purposes include commitments to purchase and sell foreign currencies as well as certain interest rate swaps and options. We also enter into customer accommodation interest rate swaps and foreign exchange spot and forward contracts as well as contracts to offset either the customer’s counter-position or our foreign currency denominated deposits. These contracts basically offset each other and they do not expose us to material losses resulting from interest rate or foreign currency fluctuations.
The Company and its subsidiaries use computer simulation models to evaluate net interest income in order to quantify exposure to changes in interest rates. Generally, we use a dynamic modeling method which projects balance sheet growth which is then subjected to interest rate shocks up in 100-basis-point increments and down in a 50 basis-point increment. Each account-level item is repriced according to its respective contractual characteristics, including any embedded options which might exist (e.g., periodic interest rate caps or floors or 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, caps or floors are included as part of the modeling process. For each interest rate shock scenario, net interest income over a 12-month horizon is compared against the results of a scenario in which no interest rate change occurs (flat rate scenario) to determine the level of interest rate risk at that time.
The projected impact of incremental increases and a 50 basis-point decrease in interest rates on the projected Company’s consolidated net interest income over the 12 months beginning July 1, 2004 is shown below.
Because of the absolute low level of interest rates in 2004, modeling a 200 and 100-basis-point decrease was deemed impractical. The changes in the models are due to differences in interest rate environments which include the absolute level of interest rates, the shape of the yield curve, and spreads between various benchmark rates.
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BancWest Corporation and SubsidiariesQUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
Significant Assumptions Utilized and Inherent Limitations
The significant net interest income changes for each interest rate scenario presented above include assumptions based on accelerating or decelerating mortgage and non-mortgage consumer loan prepayments in declining or rising scenarios, respectively, and adjusting deposit levels and mix in the different interest rate scenarios. The magnitude of changes to both areas in turn are based upon analyses of customers’ behavior in differing rate environments. However, these analyses may differ from actual future customer behavior. For example, actual prepayments may differ from current assumptions as prepayments are affected by many variables which cannot be predicted with certainty (e.g., prepayments of mortgages may differ on fixed and adjustable loans depending upon current interest rates, expectations of future interest rates, availability of refinancing, economic benefit to borrower, financial viability of borrower, etc.).
As with any model for analyzing interest rate risk, certain limitations are inherent in the method of analysis presented above. For example, the actual impact on net interest income due to certain interest rate shocks may differ from those projections presented should market conditions vary from assumptions used in the analysis. Furthermore, the analysis does not consider the effects of a changed level of overall economic activity that could exist in certain interest rate environments. Moreover, the method of analysis used does not take into account the actions that management might take to respond to changes in interest rates because of inherent difficulties in determining the likelihood or impact of any such response.
The following estimated net fair value amounts of interest rate derivatives held for trading purposes have been determined by the Company using available market information and appropriate valuation methodologies:
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BancWest Corporation and SubsidiariesCONTROLS AND PROCEDURES
Item 4. Controls and Procedures
As of 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. 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.
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BancWest Corporation and SubsidiariesOTHER INFORMATION
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Effective April 15, 2004, BNP Paribas executed consent resolutions re-electing all members of the board of directors and re-electing PricewaterhouseCoopers as the Company’s Independent Registered Public Accounting Firm.
Also on April 15, 2004, the Company’s board of directors adopted resolutions that increased the number of directors from 19 to 20 and elected General Eric K. Shinseki as a director.
During April 2004, the Company’s shareholders executed consent resolutions approving the merger agreement for the Company’s proposed acquisition of Community First Bankshares, Inc., effective March 15, 2004.
Item 6. Exhibits and Reports on Form 8-K
The Exhibits listed below are filed or incorporated by reference as part of this Report.
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BancWest Corporation and SubsidiariesEXHIBITS AND REPORTS ON FORM 8-K
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.
Date: August 12, 2004
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BancWest Corporation and SubsidiariesEXHIBITS AND REPORTS ON FORM 8-K (Continued)
EXHIBIT INDEX
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