U N I T E D S T A T E S
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transition
period from _____________ to _____________
Commission File Number 1-6887
PACIFIC CENTURY FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 99-0148992
------------------------ ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
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(Address of principal executive offices) (Zip Code)
(888) 643-3888
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value; outstanding at July 31, 2000 -
79,411,621 shares
PACIFIC CENTURY FINANCIAL CORPORATION and subsidiaries
June 30, 2000
PART I. - Financial Information
Item 1. Financial Statements
Consolidated Statements of Condition (Unaudited) Pacific Century Financial Corporation and subsidiaries
- --------------------------------------------------------------------------------------------------------------------
June 30 December 31 June 30
(in thousands of dollars) 2000 1999 1999
- --------------------------------------------------------------------------------------------------------------------
Assets
Interest-Bearing Deposits $199,020 $278,473 $411,239
Investment Securities - Held to Maturity
(Market Value of $721,617, $787,720 and $825,434, respectively) 730,445 796,322 828,350
Investment Securities - Available for Sale 2,493,066 2,542,232 2,721,765
Securities Purchased Under Agreements to Resell 0 0 4,325
Funds Sold 50,646 52,740 34,995
Loans 10,071,517 9,717,556 9,610,980
Unearned Income (327,520) (242,503) (219,717)
Reserve for Loan Losses (246,559) (194,205) (209,573)
- --------------------------------------------------------------------------------------------------------------------
Net Loans 9,497,438 9,280,848 9,181,690
- --------------------------------------------------------------------------------------------------------------------
Total Earning Assets 12,970,615 12,950,615 13,182,364
Cash and Non-Interest Bearing Deposits 473,950 639,895 493,483
Premises and Equipment 259,037 271,728 288,955
Customers' Acceptance Liability 9,406 7,236 14,802
Accrued Interest Receivable 75,883 78,974 79,384
Other Real Estate 4,915 4,576 6,009
Intangibles, including Goodwill 198,363 205,904 214,997
Other Assets 302,456 281,387 271,464
- --------------------------------------------------------------------------------------------------------------------
Total Assets $14,294,625 $14,440,315 $14,551,458
====================================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $1,696,106 $1,676,425 $1,699,343
- Interest Bearing 2,091,074 2,076,358 2,176,931
Savings 684,572 700,720 725,010
Time 2,781,868 2,761,650 2,456,318
Foreign Deposits
Demand - Non-Interest Bearing 378,497 401,613 442,102
Time Due to Banks 442,678 597,675 632,626
Other Savings and Time 1,034,351 1,179,777 1,153,825
- --------------------------------------------------------------------------------------------------------------------
Total Deposits 9,109,146 9,394,218 9,286,155
Securities Sold Under Agreements to Repurchase 1,573,980 1,490,655 1,990,178
Funds Purchased 663,234 839,962 715,398
Short-Term Borrowings 530,231 458,962 353,177
Bank's Acceptances Outstanding 9,406 7,236 14,802
Accrued Retirement Expense 37,214 40,360 40,892
Accrued Interest Payable 64,579 64,588 49,376
Accrued Taxes Payable 83,343 85,022 123,720
Minority Interest 4,350 4,435 4,374
Other Liabilities 107,569 114,890 104,325
Long-Term Debt 902,174 727,657 654,847
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,085,226 13,227,985 13,337,244
Shareholders' Equity
Common Stock ($.01 par value), authorized 500,000,000 shares;
issued / outstanding; June 2000 - 80,555,424 / 79,399,919;
December 1999 - 80,550,728 / 80,036,417; June 1999 - 80,544,104 / 80,287,805 806 806 805
Capital Surplus 346,018 345,851 345,468
Accumulated Other Comprehensive Income (75,462) (66,106) (39,245)
Retained Earnings 959,041 942,177 912,686
Treasury Stock, at Cost - (June 2000 - 1,155,505; December 1999 - 514,311
and June 1999 - 256,299 shares) (21,004) (10,398) (5,500)
- --------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,209,399 1,212,330 1,214,214
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,294,625 $14,440,315 $14,551,458
====================================================================================================================
Consolidated Statements of Income (Unaudited) Pacific Century Financial Corporation and subsidiaries
- --------------------------------------------------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30 June 30 June 30 June 30
(in thousands of dollars except per share amounts) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Interest Income
Interest on Loans $185,584 $171,636 $365,986 $347,636
Loan Fees 8,977 11,717 17,223 21,298
Income on Lease Financing 9,747 6,448 17,726 14,716
Interest and Dividends on Investment Securities
Taxable 13,321 14,912 27,557 28,591
Non-taxable 243 276 522 552
Income on Investment Securities Available for Sale 41,161 41,918 82,194 83,700
Interest on Deposits 3,551 6,465 7,315 14,691
Interest on Security Resale Agreements 6 67 16 168
Interest on Funds Sold 485 1,598 958 4,151
- --------------------------------------------------------------------------------------------------------------------
Total Interest Income 263,075 255,037 519,497 515,503
Interest Expense
Interest on Deposits 70,781 63,460 138,995 129,787
Interest on Security Repurchase Agreements 26,021 24,393 48,974 48,809
Interest on Funds Purchased 7,834 8,743 16,361 21,511
Interest on Short-Term Borrowings 6,514 3,321 11,046 6,570
Interest on Long-Term Debt 13,319 10,720 26,007 20,582
- --------------------------------------------------------------------------------------------------------------------
Total Interest Expense 124,469 110,637 241,383 227,259
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income 138,606 144,400 278,114 288,244
Provision for Loan Losses 83,407 13,948 96,929 26,538
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 55,199 130,452 181,185 261,706
Non-Interest Income
Trust Income 16,317 14,408 33,204 29,983
Service Charges on Deposit Accounts 10,180 7,675 19,737 17,070
Fees, Exchange, and Other Service Charges 22,586 22,618 44,212 44,616
Other Operating Income 13,097 12,094 28,672 24,449
Gain on Settlement of Pension Obligation 11,900 0 11,900 0
Investment Securities Gains (Losses) (515) 6,818 (233) 8,665
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 73,565 63,613 137,492 124,783
Non-Interest Expense
Salaries 44,460 50,483 92,007 101,325
Pensions and Other Employee Benefits 10,788 14,907 25,418 29,950
Net Occupancy Expense 12,480 11,810 24,296 24,078
Net Equipment Expense 12,066 11,685 24,133 23,812
Other Operating Expense 41,998 43,147 81,951 87,500
Minority Interest 107 96 176 303
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 121,899 132,128 247,981 266,968
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 6,865 61,937 70,696 119,521
Provision for Income Taxes 158 23,475 24,224 45,642
- --------------------------------------------------------------------------------------------------------------------
Net Income $6,707 $38,462 $46,472 $73,879
====================================================================================================================
Basic Earnings Per Share $0.08 $0.48 $0.58 $0.92
Diluted Earnings Per Share $0.08 $0.47 $0.58 $0.91
Dividends Declared Per Share $0.18 $0.17 $0.35 $0.34
Basic Weighted Average Shares 79,425,245 80,302,154 79,623,305 80,361,529
Diluted Weighted Average Shares 80,002,989 81,121,840 79,975,904 81,263,475
====================================================================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Capital Comprehensive Retained Treasury Comprehensive
(in thousands of dollars) Total Stock Surplus Income Earnings Stock Income
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $1,212,330 $806 $345,851 ($66,106) $942,177 ($10,398)
Comprehensive Income
Net Income 46,472 - - - 46,472 - $46,472
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjus (10,696) - - (10,696) - - (10,696)
Foreign Currency Translatio 1,340 - - 1,340 - - 1,340
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Total Comprehensive Income $37,116
=======
Common Stock Issued
39,382 Profit Sharing Plan 723 - 18 - (128) 833
140,260 Stock Option Plan 2,018 - 3 - (1,019) 3,034
115,574 Dividend Reinvestment Plan 1,899 - 52 - (616) 2,463
4,696 Directors' Restricted Shares and
Deferred Compensation 94 - 94 - - -
Treasury Stock Purchased (16,936) - - - - (16,936)
Cash Dividends Paid (27,845) - - - (27,845) -
- --------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $1,209,399 $806 $346,018 ($75,462) $959,041 ($21,004)
==============================================================================================================
Balance at December 31, 1998 $1,185,594 $805 $342,932 ($22,476) $867,852 ($3,519)
Comprehensive Income
Net Income 73,879 - - - 73,879 - $73,879
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjus (16,470) - - (16,470) - - (16,470)
Foreign Currency Translatio (299) - - (299) - - (299)
-------
Total Comprehensive Income $57,110
=======
Common Stock Issued
81 Profit Sharing Plan 370 - 3 - (9) 376
21,196 Stock Option Plan 4,952 - 2,264 - (1,653) 4,341
4,276 Dividend Reinvestment Plan 2,335 - 136 - (47) 2,246
6,179 Directors' Restricted Shares and
Deferred Compensation 133 - 133 - - -
Treasury Stock Purchased (8,944) - - - - (8,944)
Cash Dividends Paid (27,336) - - - (27,336) -
- --------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $1,214,214 $805 $345,468 ($39,245) $912,686 ($5,500)
==============================================================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
- ----------------------------------------------------------------------------------------------------------------
Six Months ended June 30
(in thousands of dollars) 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income 46,472 73,879
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, depreciation, and amortization of income and expense 102,786 29,151
Deferred income taxes (24,685) 12,033
Realized and unrealized investment security (gains) losses 78 (8,771)
Other assets and liabilities, net (942) (46,954)
-------- --------
Net cash provided by operating activities 123,709 59,338
- ----------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from redemptions of investment securities held to maturity 84,074 169,514
Purchases of investment securities held to maturity (18,197) (345,061)
Proceeds from sales of investment securities available for sale 86,216 1,083,400
Purchases of investment securities available for sale (54,955) (803,809)
Net decrease in interest-bearing deposits 79,453 48,788
Net decrease in funds sold 2,094 6,363
Net decrease (increase) in loans (290,468) 253,071
Premises and equipment, net (6,475) (13,311)
Purchase of Triad Insurance Agency, Inc.
net of cash and non-interest bearing deposits acquired -- (2,183)
Purchase of additional interest in Bank of Hawaii Nouvelle Caledonie,
net of cash and non-interest bearing deposits acquired -- (642)
Purchase of additional interest in Banque de Tahiti,
net of cash and non-interest bearing deposits acquired -- (633)
-------- --------
Net cash provided (used) by investing activities (118,258) 395,497
- ----------------------------------------------------------------------------------------------------------------
Financing Activities
Net decrease in demand, savings, and time deposits (285,072) (315,977)
Proceeds from lines of credit and long-term debt 200,048 276,789
Principal payments on lines of credit and long-term debt (25,531) (207,688)
Net decrease in short-term borrowings (22,134) (248,965)
Net common stock repurchased (12,202) (1,154)
Cash dividends (27,845) (27,336)
-------- --------
Net cash used by financing activities (172,736) (524,331)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 1,340 (1,264)
-------- --------
Decrease in cash and non-interest bearing deposits (165,945) (70,760)
Cash and non-interest bearing deposits at beginning of year 639,895 564,243
-------- --------
Cash and non-interest bearing deposits at end of period 473,950 493,483
================================================================================================================
Pacific Century Financial Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements
of Pacific Century Financial Corporation (Pacific Century) have
been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. In the opinion of management, the consolidated
financial statements reflect all adjustments of a normal and
recurring nature, including adjustments related to completed
acquisitions, which are necessary for a fair presentation of the
results for the interim periods, and should be read in
conjunction with the audited consolidated financial statements
and related notes included in Pacific Century's 1999 Annual
Report on Form 10-K. Operating results for the six months ended
June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000.
International operations include certain activities located
domestically in Hawaii, as well as branches and subsidiaries
domiciled outside the United States. The operations of Bank of
Hawaii and First Savings and Loan Association of America located
in the West and South Pacific that are denominated in U.S.
dollars are classified as domestic. Pacific Century's
international operations are primarily concentrated in Hong Kong,
Japan, Singapore, South Korea, Taiwan, French Polynesia, Fiji,
New Caledonia, Papua New Guinea and Vanuatu.
Certain amounts in prior period financial statements have
been reclassified to conform to the 2000 presentation.
Note 2. Recent Accounting Pronouncements
In July 1999, the Financial Accounting Standards Board
issued SFAS No. 137 "Deferral of the Effective Date of SFAS No.
133," that delays the effective date of SFAS No. 133 until fiscal
years beginning after June 15, 2000. SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" standardizes
the accounting for derivative instruments by requiring the
recognition of those instruments as assets or liabilities
measured at fair value in the statement of financial condition.
Gains or losses resulting from changes in the fair values of
derivatives would be accounted for depending on the use of the
derivatives and whether they qualify for hedge accounting. In
order to qualify for hedge accounting, the hedging relationship
must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 requires matching the timing
of gain or loss recognition on derivative instruments with the
recognition of the changes in the fair value of the hedged asset
or liability that is attributed to the hedged risk or the effect
on earnings of the hedged forecasted transaction. The adoption
of SFAS No. 133 is not expected to have a material impact on
Pacific Century's financial position or results of operations.
Note 3. Gain on Settlement of Pension Obligation
In the second quarter of 2000, the Employees Retirement Plan
of Bank of Hawaii, a defined benefit plan, purchased an annuity
for retirees currently receiving benefits from the Plan. Benefits
for approximately 880 retirees were settled eliminating about $36
million of the projected benefit obligation of the Plan. This
partial settlement caused the recognition of a gain of
$11,900,000 for Bank of Hawaii as the Plan sponsor.
Note 4. Earnings Per Share
For the three and six months ended June 30, 2000 and 1999,
there were no adjustments to net income (the numerator) for
purposes of computing basic and diluted earnings per share (EPS).
The weighted average shares (the denominator) for computing basic
and diluted EPS for the three and six months ended June 30, 2000
and 1999 are presented in the Consolidated Statements of Income.
Included in the weighted average shares for computing EPS is the
dilutive effect of stock options of 577,744 and 819,686 shares
for the three months ended June 30, 2000 and 1999, respectively
and 352,599 and 901,946 for the six months ended June 30, 2000
and 1999, respectively.
Note 5. Income Taxes
The provision for income taxes is computed by applying
statutory federal and state income tax rates to income before
income taxes as reported in the Consolidated Statements of Income
after adjusting for non-taxable items, principally from certain
state tax adjustments, tax exempt interest income, income from
bank owned life insurance policies, low income housing tax
credits, foreign tax credits and investment tax credits.
Note 6. Business Segments
Pacific Century is a financial services organization that
maintains a broad presence throughout the Pacific region.
Pacific Century assesses the financial performance of its
operating components in accordance with geographic and functional
areas of operations. Geographically, Pacific Century has aligned
its operations into four principal segments: Hawaii, the Pacific,
Asia, and the U.S. Mainland. In addition, the Treasury and Other
Corporate segment includes corporate asset and liability
management activities and the unallocated portion of various
administrative and support units.
Business segment results are determined based on Pacific
Century's internal financial management reporting process and
organization structure. The financial management reporting
process uses various techniques to assign and transfer balance
sheet and income statement amounts between business segments
including allocations for overhead, economic provision and
capital. In its business segment financial reporting process,
Pacific Century utilizes certain accounting practices that could
differ from accounting principles generally accepted in the
United States. Accordingly, certain balances reflected in the
business segment report may not agree with corresponding amounts
in the Consolidated Financial Statements. For example, the
economic provision for loan losses differs from the provision
determined under generally accepted accounting principles. The
economic provision for loan losses reflects the expected
normalized loss factor determined by a statistically applied
approach that considers risk factors, including historical loss
experience, within a given portfolio. This approach eliminates
the unusual loss provisions which allows for a normalized
perspective in managing the line of business.
From time to time, Pacific Century's business segment
management reporting process may change based on refinements in
segment reporting policies or changes in accounting systems,
information systems, organizational structure, or product lines.
These changes could result in a realignment of business segments
or modifications to allocation and transfer methodologies.
Should material changes be made to the financial management
reporting process, prior period reports would be restated.
Presented below are the financial results for each of
Pacific Century's principal market segments for the three and six
months ended June 30, 2000 and 1999.
Line of Business Selected Financial Information
- -----------------------------------------------------------------------------------------------------------
Treasury
U. S. and Other Consolidated
(in thousands of dollars) Hawaii Pacific Asia Mainland Corporate Total
- -----------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2000
Net Interest Income $68,184 $30,198 $5,259 $30,259 $4,704 $138,604
Economic Provision (1) (7,272) (3,209) (4,238) (2,901) (65,786) (83,406)
- -----------------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 60,912 26,989 1,021 27,358 (61,082) 55,198
Non-Interest Income 37,005 8,733 4,854 3,734 19,239 73,565
- -----------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 97,917 35,722 5,875 31,092 (41,843) 128,763
Non-Interest Expense 65,913 23,622 6,298 17,744 8,321 121,898
- -----------------------------------------------------------------------------------------------------------
Net Income (Loss) Before Income Tax 32,004 12,100 (423) 13,348 (50,164) 6,865
Income Taxes (2) (15,337) (5,686) 187 (4,178) 24,856 (158)
- -----------------------------------------------------------------------------------------------------------
Net Income (Loss) $16,667 $6,414 ($236) $9,170 ($25,308) $6,707
===========================================================================================================
Total Assets $5,059,146 $2,301,368 $1,222,733 $3,093,442 $2,617,936 $14,294,625
===========================================================================================================
Three Months Ended June 30, 1999
Net Interest Income $72,727 $28,894 $5,301 $25,779 $11,699 $144,400
Economic Provision (1) (3) (7,949) (3,406) (4,875) (2,662) 4,944 (13,948)
- -----------------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 64,778 25,488 426 23,117 16,643 130,452
Non-Interest Income 31,222 9,870 4,419 7,010 11,092 63,613
- -----------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 96,000 35,358 4,845 30,127 27,735 194,065
Non-Interest Expense 71,382 26,461 6,399 17,255 10,631 132,128
- -----------------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 24,618 8,897 (1,554) 12,872 17,104 61,937
Income Taxes (2) (10,847) (3,895) 576 (649) (8,660) (23,475)
- -----------------------------------------------------------------------------------------------------------
Net Income $13,771 $5,002 ($978) $12,223 $8,444 $38,462
===========================================================================================================
Total Assets $5,111,287 $2,377,871 $1,377,583 $2,722,478 $2,962,239 $14,551,458
===========================================================================================================
(1) The economic provision for loan losses reflects the expected normalized loss factor determined by a
statistically applied approach that considers risk factors, including historical loss experience, within a
given portfolio. The economic provision differs from the provision determined under generally accepted
accounting principles. The difference between the sum of the economic provision for business segments and
the provision in the consolidated financial statements is included in Treasury and Other Corporate.
(2) Tax benefits are allocated to the business segment to which they relate. In the quarters ended June 30,
2000 and 1999, income taxes for the U. S. Mainland segment included $3.5 million in tax benefits for each
period from low income housing tax credits and investment tax credits.
(3) The 1999 results were retroactively adjusted to reflect the economic provision for Asia which was
adjusted upwards from the amount reported previously to reflect the normalized loss factors resulting from
the company's assessment of reform measures initiated to deal with the financial turmoil in the region.
Previously, economic provisions for uncertainty in the region were reflected in the provision for Treasury.
Line of Business Selected Financial Information
- -----------------------------------------------------------------------------------------------------------
Treasury
U. S. and Other Consolidated
(in thousands of dollars) Hawaii Pacific Asia Mainland Corporate Total
- -----------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2000
Net Interest Income $136,953 $60,107 $10,969 $58,404 $11,679 $278,112
Economic Provision (1) (14,078) (6,708) (9,099) (5,681) (61,362) (96,928)
- -----------------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 122,875 53,399 1,870 52,723 (49,683) 181,184
Non-Interest Income 73,571 17,468 10,051 7,094 29,308 137,492
- -----------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 196,446 70,867 11,921 59,817 (20,375) 318,676
Non-Interest Expense 133,732 49,990 13,158 35,456 15,644 247,980
- -----------------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 62,714 20,877 (1,237) 24,361 (36,019) 70,696
Income Taxes (2) (28,268) (9,404) 511 (6,302) 19,239 (24,224)
- -----------------------------------------------------------------------------------------------------------
Net Income $34,446 $11,473 ($726) $18,059 ($16,780) $46,472
===========================================================================================================
Total Assets $5,059,146 $2,301,368 $1,222,733 $3,093,442 $2,617,936 $14,294,625
===========================================================================================================
Six Months Ended June 30, 1999
Net Interest Income $145,545 $59,794 $11,174 $51,964 $19,767 $288,244
Economic Provision (1) (3) (16,864) (6,789) (9,750) (5,613) 12,478 (26,538)
- -----------------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 128,681 53,005 1,424 46,351 32,245 261,706
Non-Interest Income 62,043 21,208 8,640 9,839 23,053 124,783
- -----------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 190,724 74,213 10,064 56,190 55,298 386,489
Non-Interest Expense 143,901 54,363 13,159 34,727 20,818 266,968
- -----------------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 46,823 19,850 (3,095) 21,463 34,480 119,521
Income Taxes (2) (20,452) (8,436) 1,249 (2,369) (15,634) (45,642)
- -----------------------------------------------------------------------------------------------------------
Net Income $26,371 $11,414 ($1,846) $19,094 $18,846 $73,879
===========================================================================================================
Total Assets $5,111,287 $2,377,871 $1,377,583 $2,722,478 $2,962,239 $14,551,458
===========================================================================================================
(1) The economic provision for loan losses reflects the expected normalized loss factor determined by a
statistically applied approach that considers risk factors, including historical loss experience, within a
given portfolio. The economic provision differs from the provision determined under generally accepted
accounting principles. The difference between the sum of the economic provision allocated to business
segments and the provision in the consolidated financial statements is included in Treasury and Other
Corporate.
(2) Tax benefits are allocated to the business segment to which they relate. For the six months ended June
30, 2000 and 1999, income taxes for the U. S. Mainland segment included $6.8 million and $6.3 million,
respectively, in tax benefits from low income housing tax credits and investment tax credits.
(3) The 1999 results were retroactively adjusted to reflect the economic provision for Asia which was
adjusted upwards from the amount reported previously to reflect the normalized loss factors resulting from
the company's assessment of reform measures initiated to deal with the financial turmoil in the region.
Previously, economic provisions for uncertainty in the region were reflected in the provision for Treasury.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PERFORMANCE HIGHLIGHTS
Pacific Century Financial Corporation (Pacific Century)
reported earnings for the three months ended June 30, 2000 of
$6.7 million, significantly lower than the $38.5 million reported
for the same period in 1999. Earnings for the second quarter of
2000 included the impact of a significant increase in the
provision for loan losses responding to an increase in loan
charge-offs and non-performing assets. Partially offsetting the
larger loss provision was the recognition of an $11.9 million
gain on the settlement of certain obligations of the defined
benefit pension plan. These transactions are discussed later in
this report. Both basic and diluted earnings per share in the
second quarter of 2000 were $0.08. Comparatively, basic and
diluted earnings per share were $0.48 and $0.47, respectively,
for the same period last year.
Earnings in the first six months of 2000 totaled $46.5
million, a 37.1% decrease from $73.9 million in the same year
earlier period. Basic earnings per share were $0.58 in the first
six months of 2000, down from $0.92 in the comparable 1999
period. Diluted earnings per share were also $0.58 for the six
months ended June 30, 2000, compared to $0.91 in the like year
ago period.
Performance ratios for the three and six months ended June
30, 2000 reflected significant decline from 1999. In the second
quarter of 2000, return on average assets (ROAA) and return on
average equity (ROAE) decreased to 0.19% and 2.19%, respectively
from 1.05% and 12.72% in the like 1999 periods. For the six
months ended June 30, 2000, ROAA and ROAE were 0.66% and 7.65%,
compared to 1.01% and 12.36%, respectively, in the same year ago
period. For the full year of 1999, ROAA was 0.91% and ROAE was
10.99%.
Pacific Century has accounted for all of its business
acquisitions under the purchase method, which has resulted in the
recognition of goodwill and other intangible assets. These
intangible assets are amortized over various periods as a non-
cash charge to operating income. Operating results under a
tangible performance basis excludes from reported earnings the
after tax impact of amortization of all intangibles, including
goodwill. On a tangible performance basis, Pacific Century's
earnings in the second quarter of 2000 were $11.0 million, down
from $42.3 million for the same quarter in 1999. Tangible
earnings in the first half of 2000 and 1999 were $54.9 million
and $81.5 million, respectively. On a per share basis, tangible
diluted earnings per share were $0.14 and $0.52 in the second
quarters of 2000 and 1999, respectively, and were $0.69 and $1.00
in the first six months of 2000 and 1999, respectively.
Second quarter tangible ROAA for Pacific Century was 0.32%
in 2000 and 1.18% in 1999. Tangible ROAE was 4.30% and 17.01%
for the similar quarters of 2000 and 1999, respectively. In the
first six months of 2000 tangible ROAA and ROAE were 0.79% and
10.84%, respectively, compared to 1.13% and 16.62%, respectively,
in the first half of 1999.
On a taxable equivalent basis, net interest income for the
three and six months ended June 30, 2000 were $139.3 million and
$279.1 million, respectively, reflecting a slight decline from
$144.6 million and $288.5 million in the same year ago periods.
The decline in net interest income is attributed to a decrease in
average earning assets while net interest margin has been
relatively stable between the periods.
Total assets at June 30, 2000 declined to $14.3 billion
relative to $14.6 billion at June 30, 1999 and $14.4 billion at
December 31, 1999. The decline in total assets is the result of
managed reductions in less productive assets such as cash and
non-interest bearing deposits and short-term interest bearing
deposits and securities. Average assets in the second quarter
and first half of 2000 were down 2.8% and 4.1%, respectively,
from the same year-earlier periods.
Non-performing assets (NPAs), exclusive of accruing loans
past due 90 days or more, ended 2000's second quarter at $210.6
million, or 2.09% of total loans, up from $136.4 million at the
March 2000 quarter-end. The June 30, 2000 total has been revised
from $199.4 million reported in the July 19, 2000 earnings
release. Updated information caused a change in classification
on one commercial real estate credit of $11.2 million.
Comparatively, NPAs were $149.4 million, or 1.55% of total loans
at June 30, 1999. The increase in NPAs were primarily from
syndicated loans and commercial real estate loans in Hawaii.
The reserve for loan losses totaled $246.6 million at the
end of June 2000, representing 2.53% of loans outstanding,
compared to $209.6 million and 2.23%, respectively, on the same
date in 1999. Net charge-offs for the second quarter of 2000
were $32.9 million, or 1.37% (annualized) of average loans,
compared to $11.3 million and 0.48% (annualized), respectively,
in 2000's first quarter and $12.7 million, or 0.54% (annualized)
in the second quarter of 1999. For the first six months of 2000
net charge-offs were $44.2 million, up from $23.5 million in the
like period last year. In the second quarter, provisions for
loan losses of $83.4 million were charged to income, up
significantly from $13.5 million for the quarter ended March 31,
2000 and $13.9 million in the same 1999 period. For the six
months ended June 30, 2000 and 1999 provision for loan losses
were $96.9 million and $26.5 million, respectively. The higher
2000 loan loss provision reflects the significant increase in
NPAs and net charge-offs.
In September 1999, Pacific Century announced its redesign
program to improve the delivery of financial services in Hawaii
and the West Pacific, generate revenue growth from new and
existing sources, and reduce expenses by simplifying and
streamlining processes. The implementation phase of the redesign
began in fourth quarter of 1999 and is expected to be
substantially completed in twelve months. When fully implemented
at the beginning of the fourth quarter of 2000, the redesign is
expected to contribute an annualized pretax increase in revenue
of $21 million and annualized reduction in operating expenses of
$43 million. To date, results associated with implementing
redesign initiatives have been in line with expectations.
Highlights
- -------------------------------------------------------------------------------------------
Table 1
(in thousands of dollars except per share amounts)
Percentage
Earnings Highlights and Performance Ratios 2000 1999 Change
- -------------------------------------------------------------------------------------------
Three Months Ended June 30
Net Income $6,707 $38,462 -82.6%
Basic Earnings Per Share 0.08 0.48 -83.3%
Diluted Earnings Per Share 0.08 0.47 -83.0%
Cash Dividends 14,305 13,645
Return on Average Assets 0.19% 1.05%
Return on Average Equity 2.19% 12.72%
Net Interest Margin 4.27% 4.28%
Efficiency Ratio 57.31% 65.67%
Six Months Ended June 30
Net Income $46,472 $73,879 -37.1%
Basic Earnings Per Share 0.58 0.92 -37.0%
Diluted Earnings Per Share 0.58 0.91 -36.3%
Cash Dividends 27,845 27,336
Return on Average Assets 0.66% 1.01%
Return on Average Equity 7.65% 12.36%
Net Interest Margin 4.28% 4.26%
Efficiency Ratio 59.63% 66.02%
Summary of Results Excluding the Effect of Intangibles (a)
- -------------------------------------------------------------------------------------------
Three Months Ended June 30
Net Income $10,995 $42,291 -74.0%
Basic Earnings per Share $0.14 $0.53 -73.6%
Diluted Earnings per Share $0.14 $0.52 -73.1%
Return on Average Assets 0.32% 1.18%
Return on Average Equity 4.30% 17.01%
Efficiency Ratio 54.96% 63.53%
Six Months Ended June 30
Net Income $54,884 $81,543 -32.7%
Basic Earnings per Share $0.69 $1.01 -31.7%
Diluted Earnings per Share $0.69 $1.00 -31.0%
Return on Average Assets 0.79% 1.13%
Return on Average Equity 10.84% 16.62%
Efficiency Ratio 57.29% 63.89%
(a) Intangibles include goodwill, core deposit and trust intangibles, and other intangibles.
June 30 June 30 Percentage
Statement of Condition Highlights and Performance 2000 1999 Change
- -------------------------------------------------------------------------------------------
Total Assets $14,294,625 $14,551,458 -1.8%
Net Loans 9,497,438 9,181,690 3.4%
Total Deposits 9,109,146 9,286,155 -1.9%
Total Shareholders' Equity 1,209,399 1,214,214 -0.4%
Book Value Per Common Share $15.23 $15.12
Loss Reserve / Loans Outstanding 2.53% 2.23%
Average Equity / Average Assets 8.59% 8.14%
Common Stock Price Range High Low
1999 .................................... $24.94 $17.38
2000 First Quarter....................... $20.38 $14.35
Second Quarter...................... $23.19 $14.63
Forward-Looking Statements
This report contains forward-looking statements regarding
Pacific Century's beliefs, estimates, projections and
assumptions. Although Pacific Century believes that its
expectations are based on reasonable assumptions, there can be no
assurance that such assumptions will ultimately materialize.
Forward-looking statements are contained in various sections of
this report including those covering the Performance Highlights,
International Operations and Corporate Risk Profile. These
forward-looking statements are subject to risks and
uncertainties, and accordingly, actual results could differ
significantly from those stated or implied by such forward-
looking statements. Factors that might cause differences to
occur include, but are not limited to, economic conditions in the
markets Pacific Century serves and those that impact Hawaii, the
U.S. Mainland and Asian economies, fluctuations in interest
rates, changes in currencies of Asian Rim and South Pacific
countries relative to the U.S. dollar, credit quality and
possible changes resulting from the ongoing credit evaluation
process, changes in applicable federal, state, and foreign income
tax laws, changes in regulatory and monetary policies, the nature
and level of competition, and successful implementation of the
New Era redesign program.
LINE OF BUSINESS FINANCIAL REVIEW
Pacific Century is a financial services organization that
maintains a broad presence throughout the Pacific region and
operates through a unique trans-Pacific network of locations.
Its activities are conducted primarily through more than 180
branches and representative and extension offices (including
branches of affiliate banks). Pacific Century provides diverse
financial products and services to individuals, businesses,
governmental agencies and financial institutions.
Pacific Century assesses the financial performance of its
operating components primarily in accordance with geographic and
functional areas of operations. Geographically, Pacific Century
has aligned its operations into four principal geographic
segments: Hawaii, the Pacific, Asia, and the U.S. Mainland. In
addition, there is also a segment for Treasury and Other
Corporate.
Note 6 to the Consolidated Financial Statements presents
Pacific Century's business segment financial reports for the
three and six months ended June 30, 2000 and 1999. Because
business segment financial reports are prepared in accordance
with accounting practices that could differ from accounting
principles generally accepted in the United States, the amounts
reflected therein may not agree with the corresponding amounts
reported in the Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations. For example, the economic provision for
loan losses differs from the provision determined under generally
accepted accounting principles. The economic provision for loan
losses reflects the expected normalized loss factor determined by
a statistically applied approach that considers risk factors,
including historical loss experience, within a given portfolio.
This approach eliminates the unusual loss provisions which allows
for a normalized perspective in managing the line of business.
In addition to the performance measurements in the business
segment financial report, Pacific Century also utilizes risk-
adjusted return on capital (RAROC) to assess segment performance.
RAROC is the ratio of risk-adjusted net income to equity. Equity
is allocated to business units based on various risk factors
inherent in the operations of each unit. A second performance
measurement is net income after capital charge (NIACC). NIACC is
net income available to common shareholders less a charge for
allocated capital. The cost of capital is based on the estimated
minimum rate of return expected by the financial markets. The
minimum rate of return consists of the following components: the
long-term government bond rate plus an additional level of return
for the average risk premium of an equity investment adjusted for
Pacific Century's market risk.
Hawaii Market
Pacific Century's oldest and largest market is Hawaii, where
operations are conducted primarily through its principal
subsidiary, Bank of Hawaii. Bank of Hawaii was established in
1897, and is the largest bank headquartered in the State of
Hawaii offering a wide array of financial products and services.
Bank of Hawaii operates through 76 branches in Hawaii, including
both traditional full-service branches and in-store locations.
The Hawaii segment includes retail and commercial operating
units. Retail operating units service and sell a broad line of
consumer financial products. These units include consumer
deposits, consumer lending, residential real estate lending, auto
financing, credit cards, and private and institutional services
(trust, mutual funds, and stock brokerage).
In the business banking area, Bank of Hawaii is a major
commercial lender and maintains a significant presence throughout
the State. Commercial operating units in the Hawaii market
include small business, Hawaii commercial banking, commercial
products and commercial real estate.
For the quarter ended June 30, 2000, the Hawaii segment
contributed $16.7 million in net income an increase of 21% from
the $13.8 million reported for the second quarter of 1999. The
increase in the quarter's results was primarily driven by the
continued implementation of redesign initiatives during the
quarter which resulted in a $5.8 million increase in non-interest
income and a $5.5 million reduction in non-interest expense. In
addition, the absence of Year 2000 remediations costs expended
last year contributed to the decline in non-interest expense.
RAROC for this segment rose to 19% for the second quarter of 2000
from 15% in the same quarter of 1999. Total assets in the Hawaii
segment were $5.1 billion at June 30, 2000, $5.3 billion at year-
end 1999 and $5.1 billion at June 30, 1999.
For the six months ended June 30, 2000, net income for the
Hawaii segment was up 30.6% to $34.4 million from $26.4 million
in the same year-earlier period. RAROC rose to 20% in the first
six months of 2000 from 14% in the comparable 1999 period.
Pacific Market
Pacific Century's Intra-Pacific region spans island nations
across the West and South Pacific. Pacific Century is the only
United States financial institution to have such a broad presence
in this region.
Pacific Century serves the West Pacific through branches of
both Bank of Hawaii and First Savings and Loan Association of
America (First Savings).
Pacific Century's presence in the South Pacific includes
various subsidiary and affiliate banks and branches of Bank of
Hawaii. Subsidiaries in the South Pacific are located in French
Polynesia, New Caledonia, Papua New Guinea and Vanuatu, and
affiliates are located in Samoa, Solomon Islands, and Tonga.
Bank of Hawaii locations in this region consist of three branches
in Fiji and two branches in American Samoa.
Net income in the Pacific segment was $6.4 million for the
quarter ended June 30, 2000, up from $5.0 million in the second
quarter of 1999. In addition to implementing redesign
initiatives which enhanced the performance of the West Pacific
operations during the second quarter, net interest income
increased as the net interest margin improved for that
marketplace. In the South Pacific, 2000 results were lower
primarily due to unfavorable fluctuations in currency exchange
rates. RAROC, including the amortization of intangibles for this
segment, increased to 12% in the second quarter of 2000 from 10%
for the same quarter in 1999. Total assets in the Pacific
segment were $2.3 billion at the end of June 2000, down from $2.5
billion and $2.4 billion from year-end 1999 and the same year ago
date, respectively.
For the first six months of 2000, net income for the Pacific
segment was $11.5 million, a slight increase from $11.4 million
reported in the same period last year. Year-to-date RAROC for
the Pacific segment remained at 11% in 2000 from 11% for the
first six months of 1999.
Asia Market
Pacific Century operates in Asia through Bank of Hawaii
branches in Hong Kong, Japan, Singapore, South Korea and Taiwan
and a representative office with extensions in the Philippines.
Pacific Century's business focus in Asia is correspondent
banking and trade financing. The lending emphasis is on credits
relating to and resulting from trade activities, trade finance
and working capital loans for companies that have business
interests in the Asia-Pacific markets. Pacific Century's network
of locations in the Pacific and its presence on the U.S. Mainland
help customers facilitate the flow of business and investment
transactions across Asia-Pacific.
For the quarter ended June 30, 2000, the Asia segment
reflected a net loss of $0.2 million, compared to net loss of
$1.0 million for the same quarter in 1999. RAROC for this
segment was (1)% in the second quarter of 2000, compared to (4)%
for the same quarter in 1999. As of June 30, 2000, December 31,
1999 and June 30, 1999, total assets in the Asia segment were
$1.2 billion, $1.4 billion and $1.1 billion, respectively.
For the six months ended June 30, 2000, net loss for the
Asia segment was $0.7 million, compared to a loss of $1.8 million
in the comparable 1999 period. RAROC for the Asia segment was
(2)% and (4)% for the six months ended June 30, 2000 and 1999.
For additional information on Asia, see the "International
Operations" section in this report.
U.S. Mainland Market
Pacific Century's U.S. Mainland segment includes Pacific
Century Bank, N.A. and Bank of Hawaii operating units for large
corporate lending and leasing.
In the second quarter of 2000, the U.S. Mainland segment
contributed net income of $9.2 million, down from $12.2 million
in the same year ago quarter. Comparison between periods reflect
a pretax security gain of $6.5 million in 1999 relative to the
sale of newly issued equity securities acquired in conjunction
with leasing transactions. Net income for the three months ended
June 30, 2000 and 1999, included tax benefits of $3.5 million for
each period, from low income housing tax credits and investment
tax credits. RAROC, including the amortization of intangibles
for this segment was 13% in the second quarter of 2000, declining
from 17% for the same quarter in 1999. As of June 30, 2000,
December 31, 2000 and June 30, 1999, total assets in the U.S.
Mainland segment were $3.1 billion, $2.7 billion and $2.7
billion, respectively.
For the first six months of 2000, net income for the U.S.
Mainland segment was $18.1 million, a 5.4% decrease from $19.1
million in the like 1999 period. Included in net income were tax
benefits from low income housing tax credits and investment tax
credits of $6.8 million and $6.3 million for the six months ended
June 30, 2000 and 1999, respectively. RAROC for the U.S.
Mainland segment was 13% and 14% in the first six months of 2000
and 1999, respectively.
Treasury and Other Corporate
The primary operations in this segment is Treasury, which
consists of corporate asset and liability management activities
including investment securities, federal funds purchased and
sold, government deposits, short and long-term borrowings, and
derivative activities for managing interest rate and foreign
currency risks. Additionally, the net residual effect of
transfer pricing assets and liabilities is included in Treasury,
as is any corporate-wide interest rate risk.
The Treasury and Other Corporate segment reflected a second
quarter 2000 loss of $25.3 million, compared to net income of
$8.4 million in the same quarter in 2000. The economic provision
for loan losses reflects the expected normalized loss factor
determined by a statistically applied approach that considers
risk factors, including historical loss experience, within a
given portfolio. The economic provision differs from the
provision determined under generally accepted accounting
principles. The difference between the sum of the economic
provision for business segments and the provision in the
consolidated financial statements is included in Treasury and
Other Corporate. During the quarter, Pacific Century recorded
loan loss provisions totaling $65.8 million to cover losses
sustained in certain credit portfolios. At June 30, 2000, year-
end 2000 and June 30, 1999 this segment held assets of $2.6
billion, $2.6 billion, and $3.2 billion, respectively. The year-
over-year reduction in assets is primarily due to a decline in
investment securities and other short-term interest earning
assets.
For the six months ended June 30, 2000, net loss for the
Treasury and Other Corporate segment was $16.8 million, compared
to net income of $18.8 million in the same 1999 period.
STATEMENT OF INCOME ANALYSIS
Net Interest Income
In the second quarter of 2000, net interest income on a
taxable equivalent basis was $139.3 million, down from $144.6
million in the same year-earlier quarter. For the six months
ended June 30, 2000, tax equivalent net interest income was
$279.1 million about 3% lower than the $288.5 million in the
first half of 1999. The decline in 2000's net interest income
reflected a year-over-year drop in average earning assets of $410
million and $564 million compared with the second quarter and
first six months of 2000, respectively. The decline in average
earning assets is attributed to the decline in investment
securities and interest bearing deposits.
In the second quarter of 2000, the average net interest
margin on earning assets was 4.27% similar to 4.28% for the same
quarter in 1999 and edged up in the first six months of 2000 to
4.28% from 4.26% in the comparable year ago period. The
improvement in net interest margin was driven by the changes in
the mix of earning assets, previously referred to in the
discussion on total assets. The year-over-year improvement in
the yield on earning assets was 52 and 38 basis points in 2000's
June quarter and first six months, respectively. Comparatively,
the cost of funds was 4.71% and 4.58% for the second quarter of
2000 and year-to-date, respectively, an increase of 67 and 47
basis points over the same periods last year. Presented in Table
2 are average balances, yields, and rates paid for the three and
six months ended June 30, 2000 and 1999.
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
- ------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
Average Income/ Yield/ Average Income/ Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $220.0 $3.6 6.49% $458.9 $6.5 5.65%
Investment Securities Held to Maturity
-Taxable 723.3 13.3 7.41 831.8 14.9 7.19
-Tax-Exempt 8.3 0.4 18.04 11.7 0.4 14.55
Investment Securities Available for Sale 2,514.8 41.2 6.58 2,715.0 41.9 6.19
Funds Sold 32.2 0.5 6.13 155.0 1.7 4.31
Net Loans
-Domestic 8,104.4 170.8 8.48 7,696.3 150.0 7.82
-Foreign 1,532.5 25.0 6.58 1,676.7 28.1 6.71
Loan Fees 9.0 11.7
------------------------ ------------------------
Total Earning Assets 13,135.5 263.8 8.08 13,545.4 255.2 7.56
Cash and Due From Banks 444.0 485.1
Other Assets 638.9 596.5
-------- --------
Total Assets $14,218.4 $14,627.0
======== ========
Interest Bearing Liabilities
Domestic Dep- Demand $2,097.8 12.3 2.36 $2,145.7 12.0 2.25
- Savings 691.5 3.5 2.03 728.7 3.7 2.03
- Time 2,744.0 36.4 5.33 2,499.7 30.0 4.81
------------------------ ------------------------
Total Domestic 5,533.3 52.2 3.79 5,374.1 45.7 3.41
Foreign Deposits
- Time Due to Banks 422.0 6.2 5.90 681.1 8.3 4.89
- Other Time and Savings 1,133.8 12.4 4.42 1,155.2 9.5 3.28
------------------------ ------------------------
Total Foreign 1,555.8 18.6 4.82 1,836.3 17.8 3.88
------------------------ ------------------------
Total Interest Bearing Deposits 7,089.1 70.8 4.02 7,210.4 63.5 3.53
Short-Term Borrowings 2,728.1 40.4 5.95 3,107.3 36.4 4.71
Long-Term Debt 807.2 13.3 6.64 654.3 10.7 6.57
------------------------ ------------------------
Total Interest Bearing Liabilities 10,624.4 124.5 4.71 10,972.0 110.6 4.04
------------------------ ------------------------
Net Interest Income 139.3 144.6
Interest Rate Spread 3.37% 3.52%
Net Interest Margin 4.27% 4.28%
Demand Deposit- Domestic 1,666.5 1,669.5
- Foreign 366.0 396.1
-------- --------
Total Demand Deposits 2,032.5 2,065.6
Other Liabilities 331.5 376.5
Shareholders' Equity 1,230.0 1,212.9
-------- --------
Total Liabilities and Shareholders' Equity $14,218.4 $14,627.0
======== ========
Provision for Loan Losses 83.4 13.9
Net Overhead 48.3 68.5
---- ----
Income Before Income Taxes 7.6 62.2
Provision for Income Taxes 0.2 23.5
Tax-Equivalent Adjustment 0.7 0.2
---- ----
Net Income $6.7 $38.5
==== ====
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
- ------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
Average Income/ Yield/ Average Income/ Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $226.0 $7.3 6.51% $462.7 $14.7 6.40%
Investment Securities Held to Maturity
-Taxable 749.4 27.6 7.40 811.0 28.6 7.11
-Tax-Exempt 9.1 0.8 17.65 11.7 0.8 14.64
Investment Securities Available for Sale 2,520.9 82.2 6.56 2,764.9 83.7 6.10
Funds Sold 33.6 1.0 5.83 181.5 4.3 4.80
Net Loans
-Domestic 8,001.2 334.5 8.41 7,737.0 307.0 8.00
-Foreign 1,559.3 49.9 6.44 1,695.1 55.4 6.59
Loan Fees 17.2 21.3
------------------------ ------------------------
Total Earning Assets 13,099.5 520.5 7.99 13,663.9 515.8 7.61
Cash and Due From Banks 475.3 501.2
Other Assets 635.1 645.2
-------- --------
Total Assets $14,209.9 $14,810.3
======== ========
Interest Bearing Liabilities
Domestic Dep- Demand $2,106.7 24.5 2.34 $2,154.8 24.0 2.25
- Savings 695.8 7.0 2.03 731.9 7.4 2.02
- Time 2,754.4 71.5 5.22 2,554.9 61.5 4.86
------------------------ -----------------------
Total Domestic 5,556.9 103.0 3.73 5,441.6 92.9 3.44
Foreign Deposits
- Time Due to Banks 454.9 13.2 5.84 667.0 16.9 5.12
- Other Time and Savings 1,127.7 22.8 4.06 1,157.6 20.0 3.48
------------------------ ------------------------
Total Foreign 1,582.6 36.0 4.57 1,824.6 36.9 4.08
------------------------ ------------------------
Total Interest Bearing Deposits 7,139.5 139.0 3.92 7,266.2 129.8 3.60
Short-Term Borrowings 2,677.4 76.4 5.74 3,261.2 76.9 4.75
Long-Term Debt 790.1 26.0 6.62 631.1 20.6 6.58
------------------------ ------------------------
Total Interest Bearing Liabilities 10,607.0 241.4 4.58 11,158.5 227.3 4.11
------------------------ ------------------------
Net Interest Income 279.1 288.5
Interest Rate Spread 3.41% 3.50%
Net Interest Margin 4.28% 4.26%
Demand Deposit- Domestic 1,665.0 1,657.0
- Foreign 392.8 422.0
-------- --------
Total Demand Deposits 2,057.8 2,079.0
Other Liabilities 324.1 367.9
Shareholders' Equity 1,221.0 1,204.9
-------- --------
Total Liabilities and Shareholders' Equity $14,209.9 $14,810.3
======== ========
Provision for Loan Losses 96.9 26.5
Net Overhead 110.5 142.2
----- -----
Income Before Income Taxes 71.7 119.8
Provision for Income Taxes 24.2 45.6
Tax-Equivalent Adjustment 1.0 0.3
----- -----
Net Income $46.5 $73.9
===== =====
Provision for Loan Losses
The provision for loan losses was $83.4 million in the
second quarter of 2000, up substantially from $13.9 million for
the same quarter in 1999. For the first six months of 2000, the
provision for loan losses totaled $96.9 million, compared to
$26.5 million in the like year ago period. For further
discussion on credit quality, refer to the section on "Credit
Risk - Reserve for Loan Losses."
Non-Interest Income
Total non-interest income in the second quarter of 2000, was
$73.6 million, compared to $63.6 million for the same quarter in
1999, an increase of 15.6%. For the first six months of 2000,
total non-interest income was $137.5 million, up 10.2% over the
same year-earlier period. The changes between periods are
discussed in each section following.
Non-Interest Income
Table 3
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended
(in millions) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
- -------------------------------------------------------------------------------------------------------------------
Trust Income $16.3 $14.4 $33.2 $30.0
Service Charges on Deposit Accounts 10.2 7.7 19.7 17.1
Fees, Exchange and Other Service
Charges 22.6 22.6 44.2 44.6
Other Operating Income 13.1 12.1 28.7 24.4
Gain on Settlement of Pension Obligation 11.9 - 11.9 -
Investment Securities Gains (0.5) 6.8 (0.2) 8.7
- -------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $73.6 $63.6 $137.5 $124.8
===================================================================================================================
Trust income for the second quarter of 2000 increased to
$16.3 million, up 13.2% from the same quarter last year. Year-
to-date trust income totaled $33.2 million, reflecting a 10.7%
increase over the first half of 1999. Pacific Century continues
to show growth in the trust category due in part, to
organizational changes that have allowed relationship officers to
deliver a wider array of financial services to customers. The
Pacific Capital family of mutual funds and Hawaiian Tax Free
Trust, which are managed by Pacific Century Trust, have continued
to experience strong growth. At the end of June 2000, the
Pacific Capital fund family of investments totaled $4.1 billion
compared to $3.5 billion on the same date in 1999.
Service charges on deposit accounts for the June 2000
quarter increased to $10.2 million, from $7.7 million in the
second quarter of 1999. The increase largely reflecting the
pricing changes developed in the New Era Redesign project.
Pricing changes developed in New Era were to realign fees
commensurate with the cost to provide the service as well as
influence customer behavior to lower cost products and service.
For the year-to-date, service charges on deposit accounts
increased to $19.7 million, 15.6% increase over the same period
in 1999.
Fees, exchange and other service charges remained level at
$22.6 million for both the second quarters of 2000 and 1999. The
year-to-date total for this category was $44.2 million in 2000, a
decrease of $0.4 million, or 0.9%, from the first six months of
1999. The change between year-to-date 2000 and 1999 was the net
of increases in fees reflecting New Era changes offset by a
decline in fees earned in the South Pacific banks. The decline
in the South Pacific fees is partly due to the weakening of the
exchange rate against the dollar.
Other operating income in the second quarter of 2000 was
$13.1 million, an 8.3% increase over the $12.1 million reported
in the same quarter of 1999. Year-to-date other income increased
17.3% over the first half of 1999. The year-over-year growth in
other income is attributed to the growth in brokerage commissions
and annuity fees between years. The year-over-year growth is
also affected by the non-recurring gain ($2.0 million) on the
sale of shares received as an insurance company demutualized in
the first quarter.
During the quarter, Pacific Century recognized a gain on the
partial settlement of its pension obligation of $11.9 million.
The gain reflects the purchase of an annuity by the defined
benefit Employees Retirement Plan of Bank of Hawaii (Plan).
Annuities were purchased for all retirees receiving a
distribution from the Plan as of July 1, 2000. The annuity
reduced the Plan's projected benefit obligation and assets by
about $36 million.
Securities transaction for the second quarter of 2000
resulted in a loss of $0.5 million compared to a gain of $6.8
million for the same quarter in 1999. The gain in the second
quarter of 1999 reflected the sale of newly issued equity
securities received in conjunction with certain lease
transactions. For the year-to-date 2000, securities losses of
$0.2 million were recognized, compared with gains of $8.7 million
for the same period in 1999.
Non-Interest Expense
Total non-interest expense for the June 2000 quarter was
$121.9 million, compared to $132.1 million in the similar quarter
of 1999, a decrease of $10.2 million. Year-to-date total non-
interest expense was $248.0 million, down 7.1% from the first six
months of 1999. Comparisons between 2000 and 1999 largely
reflect the impact of the implementation of New Era ideas on the
redesign of processes and procedures. The implementation of New
Era had its greatest impact on salaries and benefits which is
discussed in further detail following. The lower expense levels
also reflect the Year 2000 remediation expenses incurred in 1999.
Non-Interest Expense
Table 4
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended
(in millions) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
- --------------------------------------------------------------------------------------------------------------------
Salaries $44.5 $50.5 $92.0 $101.3
Pension and Other Employee Benefits 10.8 14.9 25.4 30.0
Net Occupancy Expense 12.5 11.8 24.3 24.1
Net Equipment Expense 12.0 11.7 24.1 23.8
Other Operating Expense 42.0 43.1 82.0 87.5
Minority Interest 0.1 0.1 0.2 0.3
- -------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $121.9 $132.1 $248.0 $267.0
===================================================================================================================
Salaries and pension and other employee benefits expense
totaled $55.3 million in the second quarter of 2000 compared to
$65.4 million in the same quarter last year. For the first six
months, total salaries and benefits declined 10.6% to $117.4
million from $131.3 million in the same period last year. This
significant change in salary and benefit expense largely reflects
the implementation of the process changes in the New Era
redesign. The implementation of changes in processes and
procedures identified in New Era allowed the reduction of staff
and, along with it, lower salary and benefit costs. In addition,
the lower results for the quarter caused certain benefits like
incentives and profit sharing accruals to also lower as they are
based on profitability.
Net occupancy and equipment expense in the June 2000 quarter
increased to $24.5 million from $23.5 million for the same period
in 1999. For the first six months of 2000, net occupancy and
equipment expense totaled $48.4 million, up 1.1% from $47.9
million in the similar period last year.
Other operating expense decreased to $42.0 million in the
second quarter of 2000, a 2.7% decline from $43.1 million for the
same quarter in 1999. Year-to-date other operating expense
decreased $5.5 million to $82.0 million from $87.5 million for
the first half of 1999. Much of the decrease in other expense is
attributed to the Year 2000 remediation costs incurred in 1999.
For the second quarter of 1999, Year 2000 expenses were $3.7
million and $7.2 million for the first half of 1999.
Pacific Century utilizes the efficiency ratio as a tool to
manage non-interest income and expense. The efficiency ratio is
derived by dividing non-interest expense by net operating revenue
(net interest income plus non-interest income before securities
transactions). For the second quarter and first six months of
2000, the efficiency ratio was 57.3% and 59.6%, respectively.
Excluding the gain recognized on the pension settlement, the
efficiency ratio for the second quarter and year-to-date 2000
would have been 60.7% and 61.4%, respectively. Comparatively,
this ratio was 65.7% in the same quarter last year and 66.0% in
the first half of 1999.
On a tangible basis, the efficiency ratio was 55.0% and
63.5% for the second quarters of 2000 and 1999, respectively.
For the respective years-to-date, the tangible efficiency ratio
was 57.3% and 63.9% for 2000 and 1999.
BALANCE SHEET ANALYSIS
Loans
Loans comprise the largest category of earning assets for
Pacific Century and produce the highest level of earnings. At
June 30, 2000, loans outstanding were $10.1 billion, compared to
$9.7 billion at year-end 1999 and $9.6 billion at June 30, 1999.
Pacific Century's objective is to maintain a diverse loan
portfolio in order to spread credit risk and reduce exposure to
economic downturns that may impact different markets and
industries. The composition of the loan portfolio is regularly
monitored to ensure diversity as to loan type, geographic
distribution, and industry and borrower concentration.
Table 5 presents the composition of the loan portfolio by
major loan categories as of June 30, 2000, December 31, 1999 and
June 30, 1999.
Pacific Century Financial Corporation and subsidiaries
Loan Portfolio Balances
- ----------------------------------------------------------------------------------
Table 5
June 30 December 31 June 30
(in millions of dollars) 2000 1999 1999
- ----------------------------------------------------------------------------------
Domestic Loans
Commercial and Industrial $2,683.8 $2,493.0 $2,406.5
Real Estate
Constructio-- Commercial 294.3 315.1 308.7
-- Residential 21.9 13.8 18.2
Mortgage --Commercial 1,241.2 1,244.8 1,259.8
-- Residential 2,807.4 2,645.4 2,559.1
Installment 750.0 756.1 736.7
Lease Financing 782.7 627.6 548.2
- ----------------------------------------------------------------------------------
Total Domestic 8,581.3 8,095.8 7,837.2
- ----------------------------------------------------------------------------------
Foreign Loans 1,490.2 1,621.8 1,773.8
- ----------------------------------------------------------------------------------
Total Loans $10,071.5 $9,717.6 $9,611.0
==================================================================================
Investment Securities
Pacific Century's investment portfolio is managed to provide
collateral for cash management needs, to meet strategic
asset/liability positioning, and to provide both interest income
and balance sheet liquidity. At $2.5 billion, available-for-sale
securities at June 30, 2000 were almost level with year-end 1999,
but were down from $2.7 billion at the same date last year.
Securities held to maturity were $0.7 billion at June 30, 2000,
declining from $0.8 billion at year-end 1999 and a year ago.
Other short-term interest earning assets totaled $0.2 billion at
the end of the second quarter, down from $0.3 billion and $0.4
billion at December 31, 1999 and June 30, 1999, respectively.
The decline in investment securities and other short-term
interest earning assets relative to year-end 1999 and June 30,
1999, is primarily the result of managed reductions of lower
yielding assets to improve balance sheet efficiency.
Deposits
As of June 30, 2000, deposits totaled $9.1 billion, down
from $9.3 billion from June 30, 1999 and $9.4 billion at year-end
1999. As of June 30, 2000, the mix of deposits has changed with
domestic deposits increasing and foreign deposits decreasing. At
$7.3 billion, domestic deposits at June 30, 2000 were $38.5
million higher than year-end 1999, while foreign deposits
decreased $324 million. Lower levels of time and interest-
bearing demand accounts accounted for most of the decline in
domestic deposits. Foreign deposits are declining in part due to
the impact of exchange rates particularly in French Polynesia and
a reduction in foreign time deposits due to banks (functionally a
form of short-term borrowings). Pacific Century has been
aggressive in building and extending relationships rather than
pursuing rate sensitive single relationship deposit accounts.
Table 6 presents average deposits by type for the second
quarters of 2000 and 1999 and the full year 1999.
Average Deposits
Table 6
- --------------------------------------------------------------------------------------------
Quarter Ended Year Ended Quarter Ended
June 30, 2000 December 31, 1999 June 30, 1999
------------------------------------------------------------
(in millions of dollars) Amount Mix Amount Mix Amount Mix
- --------------------------------------------------------------------------------------------
Domestic
Non-Interest Bearing Demand $1,666.5 18.3% $1,652.6 17.7% $1,669.5 18.0%
Interest-Bearing Demand 2,097.8 23.0 2,137.1 22.9 2,145.7 23.1
Regular Savings 691.5 7.6 723.9 7.8 728.7 7.8
Time Certificates
of Deposit
($100,000 or More) 1,231.0 13.5 1,043.2 11.2 1,028.0 11.1
All Other Time and
Savings Certificates 1,513.0 16.6 1,516.2 16.3 1,471.7 15.9
- --------------------------------------------------------------------------------------------
Total Domestic 7,199.8 79.0 7,073.0 75.9 7,043.6 75.9
- --------------------------------------------------------------------------------------------
Foreign
Non-Interest Bearing Demand 366.0 4.0 435.2 4.7 396.1 4.3
Time Due to Banks 422.0 4.6 641.4 6.9 681.1 7.3
Other Time and Savings 1,133.8 12.4 1,165.7 12.5 1,155.2 12.5
- --------------------------------------------------------------------------------------------
Total Foreign 1,921.8 21.0 2,242.3 24.1 2,232.4 24.1
- --------------------------------------------------------------------------------------------
Total $9,121.6 100.0% $9,315.3 100.0% $9,276.0 100.0%
============================================================================================
Borrowings
Short-term borrowings, including funds purchased and
securities sold under agreements to repurchase, totaled $2.8
billion at both June 30, 2000 and year-end 1999 and $3.1 billion
at June 30, 1999.
Long-term debt on June 30, 2000 increased to $902 million
from $728 million at year-end 1999 and $655 million at June 30,
1999. This increase is primarily attributed to new Federal Home
Loan Bank advances in the second quarter, net of maturities.
INTERNATIONAL OPERATIONS
Pacific Century maintains an extensive international
presence in the Asia-Pacific region that provides opportunities
to take part in lending, correspondent banking, trade financing
and deposit-taking activities in these markets. Pacific Century
divides its international business into two areas: the Asia
Market and the Pacific Market, the latter of which is comprised
of economies located in the South and West Pacific.
Through its Asia Market, Pacific Century offers banking
services to its corporate and financial institution customers in
most of the major Asian financial centers with support from its
New York and Honolulu operations. The Asia Division of Bank of
Hawaii continues to focus on correspondent banking and trade-
related financing activities and lending to customers with which
it has a direct relationship.
The South Pacific Division consists of investments in
subsidiary banks in French Polynesia, New Caledonia, Papua New
Guinea, Vanuatu, and Bank of Hawaii branch operations in Fiji and
American Samoa. Since American Samoa is U.S. dollar based, its
operation is included as domestic. Additionally, Bank of Hawaii
has interests in affiliate banks located in Samoa, Solomon
Islands and Tonga.
The West Pacific Division includes Bank of Hawaii branches
in Guam and in other locations in the region. Since the U.S.
dollar is used in these locations, Pacific Century's operations
in the West Pacific are not considered foreign for financial
reporting purposes.
A detailed description of controls over risk exposure in
international lending is provided in Pacific Century's 1999
Annual Report on Form 10-K. There has been no significant change
to that process during 2000. Pacific Century continues to
monitor its exposure in international lending with particular
attention provided to Asia and the South Pacific.
The foreign countries to which Pacific Century maintains its
largest credit exposure on a cross border basis are Japan, South
Korea and France. Table 7 presents as of June 30, 2000, December
31, 1999, and June 30, 1999 a geographic distribution of Pacific
Century's cross-border assets for each country in which such
assets exceeded 0.75% of total assets.
Geographic Distribution of Cross-Border International Assets (1)
Table 7
(in millions)
Country June 30, 2000 December 31, 1999 June 30, 1999
- -----------------------------------------------------------------------------------------------------
Japan $236.7 $320.4 $272.0
South Korea 299.4 294.3 295.3
France 120.4 195.1 129.1
All Others (2) 537.1 563.4 712.2
-------- -------- --------
$1,193.6 $1,373.2 $1,408.6
======== ======== ========
(1) This table details by country cross-border outstandings that individually amounted to 0.75% or more of
consolidated total assets as of June 30, 2000, December 31, 1999 and June 30, 1999. Cross-border
outstandings are defined as foreign monetary assets that are payable to Pacific Century in U.S. dollars or
other non-local currencies, plus amounts payable in local currency but funded with U.S. dollars or other
non-local currencies. Cross-border outstandings include loans, acceptances, and interest-bearing deposits
with other banks.
(2) At June 30, 2000, the all others category included cross-border outstandings of $55.1 million in French
Polynesia and $46.1 million in New Caledonia. The currency of both of these countries is the Pacific franc.
CORPORATE RISK PROFILE
Credit Risk
Non-Performing Assets and Past Due Loans
Non-performing assets (NPAs) consist of non-accrual loans,
restructured loans and foreclosed real estate. These assets
increased to $210.6 million at June 30, 2000 from $149.4 million
a year ago and $149.9 million at the end of 1999. Compared with
the prior quarter-end, NPAs ended June 30, 2000 at $74.2 million
above the $136.4 million reported at March 31, 2000.
Total non-accrual loans rose to $205.7 million at June 30,
2000, up from $145.3 million and $143.4 million at year-end 1999
and June 30, 1999, respectively. The most significant components
of the increase in non-accrual loans were in the Hawaii
commercial real estate and commercial and industrial loan
categories. In the commercial and industrial loan category, the
increase was concentrated in the national syndicated loan
segment. The remaining commercial and industrial loan segments
in Hawaii, California, Arizona and the West Pacific were all
stable or reduced. Foreign non-accrual loans at June 30, 2000
declined from year-end and reflected reductions in both Asia and
the South Pacific.
At June 30, 2000, the ratio of NPAs to outstanding loans was
2.09%. Comparatively the ratio was 1.54% at year-end 1999 and
1.55% at June 30, 1999. Table 8 presents Pacific Century's NPAs
and ratio of NPAs to total loans.
Pacific Century's policy is to place loans on non-accrual
status when a loan is over 90 days delinquent, unless collection
is likely based on specific factors such as the type of borrowing
agreement and/or collateral. At the time a loan is placed on
non-accrual, all accrued but unpaid interest is reversed against
current earnings.
Non-performing residential mortgages (excluding construction
loans) totaled $23.2 million at June 30, 2000, compared to $29.7
million at year-end 1999 and $35.2 million a year ago. This
decreasing trend in 2000 reflects the first quarter sale of
certain non-performing residential loans ($4.8 million), an
aggressive collection effort and an improving residential real
estate market. The trend is encouraging when considered along
with the trend in foreclosed real estate.
Foreclosed real estate totaled $4.9 million at June 30, 2000
compared to $4.6 million at year-end 1999 and $6.0 million a year
ago. At June 30, 2000, the foreclosed real estate portfolio
consisted of 32 properties, mostly residential property located
in Hawaii. The largest property is a commercial property and
represented 16% of the total.
Accruing loans past due 90 days or more was $17.0 million as
of June 30, 2000, the lowest quarter-end balance since December
1995. Accruing loans past due 90 days or more totaled $18.5
million at year-end 1999, and $21.4 million at June 30, 1999.
Potential Problem Loans
There has been much discussion in the media regarding
syndicated national credits. Since quarter-end, the company has
received indications that a loan in its syndicated loan portfolio
may be subject to criticism by shared national credit examiners.
The outstanding balance of that loan was $65 million on June 30,
2000 and the loan was current. Management is monitoring these
circumstances closely.
Non-Performing Assets and Accruing Loans Past Due 90 Days or More
Table 8
- -----------------------------------------------------------------------------------
June 30 December 31 June 30
(in millions of dollars) 2000 1999 1999
- -----------------------------------------------------------------------------------
Non-Accrual Loans
Commercial and Industrial $52.7 $23.7 $37.5
Real Estate
Construction 8.0 1.1 0.8
Commercial 62.2 19.0 17.2
Residential 23.2 29.7 35.2
Installment 0.1 0.5 0.8
Leases 0.3 3.9 4.4
----------------------------------
Total Domestic 146.5 77.9 95.9
Foreign 59.2 67.4 47.5
----------------------------------
Subtotal 205.7 145.3 143.4
Foreclosed Real Estate
Domestic 4.6 4.3 5.8
Foreign 0.3 0.3 0.2
----------------------------------
Subtotal 4.9 4.6 6.0
----------------------------------
Total Non-Performing Assets 210.6 149.9 149.4
----------------------------------
Accruing Loans Past Due 90 Days or More
Commercial and Industrial 4.7 5.9 3.9
Real Estate
Construction 0.0 0.0 0.2
Commercial 2.0 1.9 0.2
Residential 3.5 4.0 3.7
Installment 4.0 4.5 5.2
Leases 1.5 1.2 0.0
----------------------------------
Total Domestic 15.7 17.5 13.2
Foreign 1.3 1.0 8.2
----------------------------------
Subtotal 17.0 18.5 21.4
----------------------------------
Total $227.6 $168.4 $170.8
----------------------------------
- -----------------------------------------------------------------------------------
Ratio of Non-Performing Assets
to Total Loans 2.09% 1.54% 1.55%
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Ratio of Non-Performing Assets
and Accruing Loans Past Due
90 Days or More to Total Loans 2.26% 1.73% 1.78%
- -----------------------------------------------------------------------------------
Reserve for Loan Losses
Pacific Century maintains the reserve for loan losses at a
level that it believes is adequate to absorb estimated inherent
losses in the loan portfolio. The reserve level is determined
based on a continuing assessment of problem credits, recent loss
experience, changes in collateral values, and current and
anticipated economic conditions.
The reserve for loan losses ended the second quarter of 2000
at $246.6 million, a $52.4 million increase from year-end 1999
and a $37.0 million increase over the same date last year. Net
charge-offs for the second quarter of 2000 were $32.9 million or
1.37% (annualized) of average loans, compared to $12.7 million,
or 0.54% (annualized) of average loans for the same quarter last
year and $73.8 million, or 0.78% of average loans for all of
1999. For the six months ended June 30, 2000, net charge-offs
were $44.2 million, or 0.92% (annualized) of average loans,
compared to $23.5 million and 0.50% (annualized), respectively in
same 1999 period. The ratio of reserves to loans outstanding at
June 30, 2000 was 2.53%, compared to 2.23% at this date last year
and 2.05% at year-end 1999. A summary of the activity in the
reserve for loan losses is presented in Table 9.
At June 30, 2000, the reserve for loan losses provided
coverage of 117% of non-performing loans, compared to 130%
coverage at year-end 1999 and 140% at June 30, 1999.
Additionally, the annualized ratio of reserves to gross charge-
offs was 2.3 times for the first half of 2000, compared to 1.9
times for all of 1999 and 2.6 times for the first half of 1999.
For the first six months of 2000, recoveries totaled $8.4
million compared to $16.7 million for the same period last year.
The 1999 total was largely driven by a $7.0 million recovery of a
U.S. mainland loan in the commercial and industrial portfolio and
$3.2 million in foreign loan recoveries.
During the second quarter, the Company recorded a provision
for loan losses of $83.4 million to bolster the reserve to
support increases in non-performing assets and increased risk in
the loan portfolio. The increased risk arose from deterioration
in the quality of the Company's syndicated loan portfolio and
Hawaii commercial real estate loan portfolio, the turmoil in
Fiji, and the preliminary results of a grading reevaluation by
loan officers of all loans in the Bank of Hawaii commercial
portfolios over $250,000 (approximately $8.1 billion in total
loans) that the Company initiated in the second quarter in order
to assess the accuracy of its loan grading system. The Company's
Credit Review Department reviewed and made adjustments to a
significant portion of the reevaluated loans and the results are
reflected in the second quarter financial results. Credit
Review's review of additional loans is still in process.
The Company's Board and Management is in the process of
conducting a comprehensive reexamination of the Company's lending
and credit practices. The Board has established a special Credit
Quality Committee consisting of three outside Directors that is
charged with overseeing this task. The Company has also
appointed a new head of the Hawaii Commercial Real Estate Lending
Department and is in the process of hiring a new Chief Credit
Officer and a new head of the Credit Review Department.
The extent to which these matters will result in further
changes that may materially and adversely impact the Company's
reserve for loan losses and earnings is uncertain at this time.
Pacific Century Financial Corporation and subsidiaries
Reserve for Loan Losses
Table 9
- ---------------------------------------------------------------------------------------------
Second Second First Six First Six
Quarter Quarter Months Months
(in millions of dollars) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------
Average Amount of Loans Outstanding $9,636.9 $9,373.0 $9,560.5 $9,432.1
- ---------------------------------------------------------------------------------------------
Balance of Reserve for Loan Losses
at Beginning of Period $195.4 $209.3 $194.2 $211.3
Loans Charged-Off
Commercial and Industrial 8.3 7.6 9.7 15.4
Real Estate
Construction 0.5 0.2 0.5 0.2
Commercial 7.6 0.2 11.5 2.2
Residential 1.3 1.6 3.7 3.6
Installment 5.2 6.9 9.9 12.9
Leases 0.2 0.1 0.2 0.1
- ---------------------------------------------------------------------------------------------
Total Domestic 23.1 16.6 35.5 34.4
Foreign 13.4 2.8 17.1 5.8
- ---------------------------------------------------------------------------------------------
Total Charged-Off 36.5 19.4 52.6 40.2
Recoveries on Loans Previously Charged-Off
Commercial and Industrial 1.2 1.5 2.9 9.5
Real Estate
Construction 0.0 0.0 0.0 0.0
Commercial 0.1 0.1 0.2 0.2
Residential 0.2 0.2 0.7 0.2
Installment 1.9 2.0 3.6 3.6
- ---------------------------------------------------------------------------------------------
Total Domestic 3.4 3.8 7.4 13.5
Foreign 0.2 2.9 1.0 3.2
- ---------------------------------------------------------------------------------------------
Total Recoveries 3.6 6.7 8.4 16.7
- ---------------------------------------------------------------------------------------------
Net Charge-Offs (32.9) (12.7) (44.2) (23.5)
Provision Charged to Operating Expenses 83.4 13.9 96.9 26.5
Other Net Additions (Reductions)* 0.7 (0.9) (0.3) (4.7)
- ---------------------------------------------------------------------------------------------
Balance at End of Period $246.6 $209.6 $246.6 $209.6
=============================================================================================
Ratio of Net Charge-Offs to
Average Loans Outstanding (annualized) 1.37% 0.54% 0.92% 0.50%
- ---------------------------------------------------------------------------------------------
Ratio of Reserve to Loans Outstanding 2.53% 2.23% 2.53% 2.23%
- ---------------------------------------------------------------------------------------------
* Includes balance transfers, reserves acquired, and foreign currency translation adjustments.
Market Risk
At Pacific Century, assets and liabilities are managed to
maximize long term risk adjusted returns to shareholders.
Pacific Century's asset and liability management process involves
measuring, monitoring, controlling and managing financial risks
that can significantly impact Pacific Century's financial
position and operating results. Financial risks in the form of
interest rate sensitivity, foreign currency exchange
fluctuations, liquidity, and capital adequacy are balanced with
expected returns with the objective to maximize earnings
performance and shareholder value, while limiting the volatility
of each.
The activities associated with these financial risks are
categorized into "other than trading" or "trading."
Other Than Trading Activities
A key element in Pacific Century's ongoing process to
measure and monitor interest rate risk is the utilization of a
net interest income (NII) simulation model. This model is used
to estimate the amount that NII will change over a one-year time
horizon under various interest rate scenarios using numerous
assumptions, which management believes are reasonable. The NII
simulation model provides a sophisticated estimate rather than a
precise prediction of NII's exposure to higher or lower interest
rates.
Table 10 presents as of June 30, 2000, December 31, 1999 and
June 30, 1999, the results from this model. The NII simulation
model provides an estimate of the change in NII from a gradual
200 basis point increase or decrease in interest rates, moving in
parallel fashion over the entire yield curve, over the next 12-
month period relative to what the NII would have been if interest
rates did not change. The resulting estimate in NII exposure is
well within the approved Asset Liability Management Committee
guidelines and presents a balance sheet exposure that is slightly
liability sensitive.
Market Risk Exposure to Interest Rate Changes
Table 10
June 30, 2000 December 31, 1999 June 30, 1999
- ----------------------------------------------------------------------------------------------------------
Interest Rate Change Interest Rate Change Interest Rate Change
(in basis points) (in basis points) (in basis points)
-200 +200 -200 +200 -200 +200
- ----------------------------------------------------------------------------------------------------------
Estimated Exposure as a
Percent of Net Interest Income 0.0% (2.0)% 1.4% (1.7)% 1.4% (0.6)%
- ----------------------------------------------------------------------------------------------------------
To enhance and complement the results from the NII
simulation model, Pacific Century also reviews other measures of
interest rate risk. These measures include the sensitivity of
market value of equity and the exposure to basis risk and non-
parallel yield curve shifts. There are some inherent limitations
to these measures, but used along with the NII simulation model,
Pacific Century gets a better overall insight for managing its
exposure to changes in interest rates.
In managing interest rate risks, Pacific Century uses
several approaches, both on- and off-balance sheet, to modify its
risk position. Approaches that are used to shift balance sheet
mix or alter the interest rate characteristics of assets and
liabilities include changing product pricing strategies,
modifying investment portfolio strategies, or using financial
derivatives. The use of financial derivatives has been limited
over the past several years. During this period, Pacific Century
has relied more on the use of on-balance sheet alternatives to
manage its interest rate risk position.
Pacific Century's broad area of operations throughout the
South Pacific and Asia has the potential to expose it to foreign
currency risk. In general, however, most foreign currency
denominated assets are funded by like currency liabilities, with
imbalances corrected through the use of various hedge
instruments. By policy, the net exposure in those balance sheet
activities described above is insignificant.
On the other hand, Pacific Century is exposed to foreign
currency exchange rate changes from the capital invested in its
foreign subsidiaries and branches located throughout the South
Pacific and Asian Rim. These investments are designed to
diversify Pacific Century's total balance sheet exposure. A
portion of the capital investment in French Polynesia and New
Caledonia is offset by a borrowing denominated in euro and a
foreign exchange currency hedge transaction. As of June 30,
2000, the remainder of these capital positions which aggregated
$86.1 million, was not hedged. The comparative unhedged position
at year-end 1999 was $87.6 million and $102.2 million at June 30,
1999.
Pacific Century uses a value-at-risk (VAR) calculation to
measure the potential loss from foreign currency exposure.
Pacific Century's VAR is calculated at a 95% confidence interval
and assumes a normal distribution. Pacific Century utilizes the
variance/covariance approach to estimate the probability of
future changes in foreign exchange rates. Under this approach,
equally weighted daily closing prices are used to determine the
daily volatility for the last 10, 30, 50, and 100 days. Pacific
Century uses the highest daily volatility of the four trading
periods in its VAR calculation.
Table 11 presents as of June 30, 2000, December 31, 1999 and
June 30, 1999 Pacific Century's foreign currency exposure from
its net investment in subsidiaries and branch operations that are
denominated in a foreign currency as measured by the VAR.
Market Risk Exposure From Changes in Foreign Exchange Rates
Table 11
- ---------------------------------------------------------------------------------------------------
June 30, 2000 December 31, 1999 June 30, 1999
Book Value Value-at-Risk Book Value Value-at-Risk Book Value Value-at-Risk
(in millions of dollars)
- ---------------------------------------------------------------------------------------------------
Net Investments in Foreign
Subsidiaries and Branches
Japanese Yen $10.2 $ 1.9 $ 9.4 $ 1.8 $ 9.7 $ 2.0
Korean Won 32.3 2.6 34.3 4.2 42.8 5.8
Pacific Franc (1) 28.0 5.8 25.9 4.2 22.1 4.3
Other Currencies 15.6 17.3 18.0 17.0 27.6 15.9
------ ------ ------ ------ ------ ------
Total $86.1 $27.6 $87.6 $27.2 $102.2 $28.0
====== ====== ====== ====== ====== ======
(1) Net of a $37 million, $40 million and $41 million borrowing at June 30, 2000, December 31, 1999 and
June 30, 1999, respectively, denominated in euro and foreign exchange hedge transactions of $22 million, $23
million and $24 million at June 30, 2000, December 31, 1999 and June 30, 1999.
Trading Activities
Trading activities include foreign currency and foreign
exchange contracts that expose Pacific Century to a minor degree
of foreign currency risk. Pacific Century manages its trading
account such that it does not maintain significant foreign
currency open positions. Trading activities remain immaterial as
of June 30, 2000.
Liquidity Management
Liquidity is managed to ensure that Pacific Century has
continuous access to sufficient, reasonably priced funding to
conduct its business in a normal manner. Pacific Century's
liquidity management process is described in the 1999 Annual
Report to Shareholders.
Pacific Century maintained a $25 million annually renewable
line of credit for working capital purposes. Fees are paid on
the unused balance of the line. During the second quarter of
2000, the line was not drawn upon.
Bank of Hawaii and First Savings are both members of the
Federal Home Loan Bank of Seattle. The FHLB provides these
institutions with an additional source for short and long-term
funding. Borrowings from the FHLB ended the second quarter of
2000 at $626 million, compared to $487 million at the prior
quarter-end. This increase is accounted for by net new
borrowings in the second quarter for a term of up to eighteen
months.
Additionally, Bank of Hawaii maintains a $1 billion senior
and subordinated bank note program. Under this facility, Bank of
Hawaii may issue additional notes provided that at any time the
aggregate amount outstanding does not exceed $1 billion. At June
30, 2000, there was $125 million issued and outstanding under
this program represented by the issuance of subordinated notes in
1999.
Capital Management
Pacific Century manages its capital level to optimize
shareholder value, support asset growth, provide protection
against unforeseen losses and comply with regulatory
requirements. Capital levels are reviewed periodically relative
to Pacific Century's risk profile and current and projected
economic conditions. Pacific Century's objective is to hold
sufficient capital on a regulatory basis to exceed the minimum
guidelines of a well capitalized institution.
At June 30, 2000, Pacific Century's shareholders' equity was
$1.2 billion, a similar amount at this date in 1999. The
shareholders' equity remained level, largely the result of the
lower earnings reported for the second quarter of 2000. Table 12
presents the changes in capital by category for all of 1999 and
the six months ended June 30, 1999 and 2000. During the quarter
$8.6 million in treasury shares were purchased, slightly higher
than $8.3 million purchased in the first quarter of 2000.
Pacific Century's regulatory capital ratios at June 30, 2000
were: Tier 1 Capital Ratio of 10.66%, Total Capital Ratio of
13.42%, and Leverage Ratio of 8.51%. All three capital ratios
exceeded the minimum threshold levels that were established by
federal bank regulators to qualify an institution as well
capitalized. The minimum regulatory standards to qualify as well
capitalized are as follows: Tier 1 Capital 6%; Total Capital 10%;
and the Leverage Ratio 5%. These standards are minimum
regulatory guidelines and Pacific Century manages its capital
base in accordance with the attributes noted at the beginning of
this section. Table 12 also presents the activities and balances
in Pacific Century's capital accounts along with key capital
ratios.
Equity Capital
Table 12
- ---------------------------------------------------------------------------------------
Six Months Ended Year Ended Six Months Ended
June 30 December 31 June 30
(in millions of dollars) 2000 1999 1999
- ---------------------------------------------------------------------------------------
Source of Common Equity
Net Income $46.5 $133.0 $73.9
Dividends Paid (27.8) (54.6) (27.3)
Dividend Reinvestment Program 1.9 4.0 2.3
Stock Repurchases (16.9) (21.8) (8.9)
Other (1) (6.6) (33.9) (11.4)
- ---------------------------------------------------------------------------------------
Increase (Decrease) in Equity ($2.9) $26.7 $28.6
=======================================================================================
Common Equity $1,209.4 $1,212.3 $1,214.2
Add: 8.25% Capital Securities of
Bancorp Hawaii Capital
Trust I 100.0 100.0 100.0
Minority Interest 4.3 4.4 4.4
Less: Intangibles 169.6 175.8 182.9
Unrealized Valuation and Other
Adjustments (51.5) (37.9) (13.6)
- ---------------------------------------------------------------------------------------
Tier I Capital 1,195.6 1,178.8 1,149.3
Allowable Loan Loss Reserve 141.5 143.9 144.0
Subordinated Debt 195.9 195.8 195.8
Investment in Unconsolidated
Subsidiary (3.6) (3.2) (3.7)
- ---------------------------------------------------------------------------------------
Total Capital $1,529.4 $1,515.3 $1,485.4
=======================================================================================
Risk Weighted Assets $11,216.5 $11,461.0 $11,450.9
=======================================================================================
Key Ratios
Tier I Capital Ratio 10.66% 10.28% 10.04%
Total Capital Ratio 13.64% 13.22% 12.97%
Leverage Ratio 8.51% 8.31% 7.96%
=======================================================================================
(1) Includes common stock issued under the profit sharing and stock option plans and
unrealized valuation adjustments for investment securities, foreign currency translation
and pension liability.
Part II. - Other Information
Items 1, 2, 3 and 5 omitted pursuant to instructions.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) Pacific Century's Annual Shareholders' Meeting was held
on April 28, 2000.
(b) Omitted per instructions.
(c) A brief description of each matter voted upon at the
Annual Shareholders' Meeting held on April 28, 2000 and
number of votes cast for, against or withheld,
including a separate tabulation with respect to each
nominee for office is presented below:
(1) Election of four Class II directors for terms
expiring in 2003.
David A. Heenan -
Votes cast for: 65,662,414
Votes cast against: 0
Votes withheld: 492,557
Stuart T. K. Ho -
Votes cast for: 65,704,498
Votes cast against: 0
Votes withheld: 450,473
Lawrence M. Johnson -
Votes cast for: 65,503,135
Votes cast against: 0
Votes withheld: 651,836
Fred E. Trotter -
Votes cast for: 65,628,543
Votes cast against: 0
Votes withheld: 526,428
(2) Election of Ernst & Young LLP as Auditor.
Votes cast for: 65,322,601
Votes cast against: 238,066
Votes abstained: 794,302
(d) None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Number
20 Quarterly Report to Shareholders
27 Financial Data Schedule
99 Statement of Ratios
(b) Form 8-K was filed on June 20, 2000. The 8-K announced
an increased provision for loan losses and resulting
lower earnings for the quarter ending June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Date August 11, 2000 PACIFIC CENTURY FINANCIAL
CORPORATION
/s/ Richard J. Dahl
(Signature)
Richard J. Dahl
President and Chief Operating
Officer
/s/ David A. Houle
(Signature)
David A. Houle
Executive Vice President,
Treasurer and Chief
Financial Officer