To Our Shareholders:
Second quarter earnings at Pacific Century Financial Corporation
reflected the impact of a previously-announced restructuring
charge and increased provisioning to the reserve for loan losses.
Because of these special items, your company reported a nominal
net income of $3.1 million for this year's second quarter.
Diluted earnings per share for the quarter were $0.04.
Pacific Century's total assets at June 30, 1998 were $14.7
billion, up 4.0 percent from $14.2 billion at June 30, 1997.
Total deposits stood at $9.5 billion, up 6.6 percent from $8.9
billion at second quarter-end 1997. Net loans increased to $9.0
billion, up 4.5 percent from $8.7 billion at June 30, 1997. These
year-to-year comparisons are impacted by the acquisition of
California United Bank in the third quarter of 1997 and the
Banque Paribas institutions in the South Pacific this quarter.
Pacific Century's board of directors declared a quarterly cash
dividend of 16 1/4 cents per share on the outstanding common
stock. This dividend will be payable on September 15, 1998 to
shareholders of record at the close of business on August 21,
1998.
On July 1, 1998, Pacific Century announced two special items
relative to the second quarter. The first item was a $19.4
million restructuring charge related to previously announced
merger of First Federal Savings & Loan Association (FFSL) and
Bank of Hawaii, and the merger of our two bank subsidiaries on
the U.S. Mainland. Once completed, Pacific Century's branch
rationalization and consolidation program is intended to reduce
annual operating expense by as much as $22 million.
The second item involved an increase in the quarterly
provisioning to the reserve for loan losses to $42.0 million, up
from $18.3 million in the first quarter of 1998. This $42
million in provisioning exceeded net loan charge-offs of $26
million and increased the reserve for loan losses in recognition
of the continuing financial volatility in Asia. Loan charge-offs
related to Asia totaled $17.0 million, including $3.0 million in
Indonesian loans and $14.0 million in Thai loans. This
provisioning is consistent with our traditionally conservative
credit philosophy.
I want to emphasize that these are positive steps which will
enable us to move ahead focused on our financial objectives as
well as our redesign initiatives. These actions were taken to
improve the performance of our Hawaii and Asia markets in the
future and to position all four of our markets to take advantage
of the growth opportunities throughout the Pacific region.
In the second quarter, Pacific Century completed the acquisition
of Banque Paribas Pacifique in New Caledonia and Banque Paribas
Polynesie in French Polynesia. Together, these banks increased
total assets by $300 million as of June 30, 1998. In addition,
Pacific Century further expanded its Asia-Pacific presence by
concluding a strategic alliance with the Bank of Queensland in
Australia.
Your company has made significant progress on the key initiatives
that were identified earlier this year to improve performance and
achieve our financial targets. In April, Pacific Century
reincorporated in the state of Delaware. The planned merger of
Pacific Century's two mainland banks and the consolidation of
Hawaii's FFSL and Bank of Hawaii are on track for completion in
the third quarter. Plans are underway for several outsourcing
initiatives, including the trust accounting function (to begin in
August) and credit card processing (set to begin in November).
And customers have been notified of planned branch consolidations
in Hilo, Hanalei, Aiea, Enchanted Lake and at Waterfront Plaza.
Branches at Barbers Point, Waialua and Kukui Grove have already
been consolidated this year.
At the same time, Pacific Century continues to capitalize on the
strength and cost efficiencies of its electronic delivery
network. Recently e-bankoh, Bank of Hawaii's Internet banking
channel, was ranked among the top five on-line banks nationwide
and #1 in ease of use by Gomez Advisors, a leading independent
on-line financial services authority services. e-bankoh now
serves approximately 1% of Bank of Hawaii's customer base.
These are times which challenge us to make tough decisions and
take bold actions that will set your company on course for future
success. I want to assure you that Pacific Century's management
team is committed to doing what it takes to accomplish the
performance goals and achieve the financial objectives that we
have set.
We remain staunchly confident in the strength of this company as
well as in the ability of our people to do the job that needs to
be done in the months ahead. We remain steadfastly committed to
achieving our performance objectives. We are prepared to take
the necessary actions to achieve our goals. And we count on your
continuing support as we guide your company into the future.
Sincerely,
LAWRENCE M. JOHNSON
Lawrence M. Johnson
Chairman and Chief Executive Officer
Corporate Offices:
Financial Plaza of the Pacific
130 Merchant Street
Honolulu, Hawaii 96813
Investor or Analyst Inquiries:
David A. Houle, Executive Vice President, Treasurer and Chief
Financial Officer
(808) 537-8288
or
Sharlene K. Bliss
Investor Relations
(808) 537-8037
or
Cori C. Weston
Corporate Secretary
(808) 537-8272
Highlights (Unaudited) Pacific Century Financial Corporation and subsidiaries
- ------------------------------------------------------------------------------------------------------
June 30 June 30
1998 1997
- ------------------------------------------------------------------------------------------------------
Return on Average Assets 0.50% 1.04%
- ------------------------------------------------------------------------------------------------------
Return on Average Equity 6.53% 13.37%
- ------------------------------------------------------------------------------------------------------
Average Spread on Earning Assets 4.25% 3.94%
- ------------------------------------------------------------------------------------------------------
Average Equity/Average Assets 7.63% 7.75%
- ------------------------------------------------------------------------------------------------------
Book Value Per Common Share $14.19 $13.75
- ------------------------------------------------------------------------------------------------------
Loss Reserve/Loans and Leases Outstanding 2.21% 1.90%
- ------------------------------------------------------------------------------------------------------
Common Stock Price Range High Low Dividend
- ------------------------------------------------------------------------------------------------------
1997 $28.06 $20.31 $0.625
- ------------------------------------------------------------------------------------------------------
1998 First Quarter $25.13 $20.31 $0.1625
- ------------------------------------------------------------------------------------------------------
1998 Second Quarter $25.88 $23.56 $0.1625
- ------------------------------------------------------------------------------------------------------
Consolidated Statements of Income (Unaudited)
- ------------------------------------------------------------------------------------------------------
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) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------
Total Interest Income $281,036 $255,539 $554,102 $505,708
Total Interest Expense 134,274 130,540 265,622 255,674
- ------------------------------------------------------------------------------------------------------
Net Interest Income 146,762 124,999 288,480 250,034
Provision for Possible Loan Losses 41,982 7,286 60,285 12,374
- ------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 104,780 117,713 228,195 237,660
Total Non-Interest Income 52,171 46,260 105,035 87,961
Total Non-Interest Expense 153,999 108,956 275,702 215,017
- ------------------------------------------------------------------------------------------------------
Income Before Income Taxes 2,952 55,017 57,528 110,604
Provision (Credit) for Income Taxes (144) 19,411 20,412 39,517
- ------------------------------------------------------------------------------------------------------
Net Income $3,096 $35,606 $37,116 $71,087
======================================================================================================
Basic Earnings Per Share $0.04 $0.45 $0.47 $0.90
Diluted Earnings Per Share $0.04 $0.44 $0.46 $0.88
Basic - Weighted Average Shares 80,258,217 78,799,958 80,070,764 79,117,490
Diluted - Weighted Average Shares 81,416,341 79,771,362 81,170,893 80,115,918
- ------------------------------------------------------------------------------------------------------
Consolidated Statements of Condition (Unaudited)
- ------------------------------------------------------------------------------------------------------
June 30 December 31 June 30
(in thousands of dollars 1998 1997 1997
- ------------------------------------------------------------------------------------------------------
Assets
Interest-Bearing Deposits $542,966 $335,847 $547,715
Investment Securities
(Market Value of $3,728,525, $3,874,505,
and $3,707,927 respectively) 3,713,420 3,871,485 3,705,731
Securities Purchased Under Agreements to Resell - - 1,600
Funds Sold 31,715 80,457 85,758
Loans 9,449,351 9,498,408 9,018,809
Unearned Income (199,613) (209,721) (197,967)
Reserve for Loan Losses (204,049) (174,362) (167,842)
- ------------------------------------------------------------------------------------------------------
Net Loans 9,045,689 9,114,325 8,653,000
- ------------------------------------------------------------------------------------------------------
Total Earning Assets 13,333,790 13,402,114 12,993,804
Cash and Non-Interest Bearing Deposits 575,553 795,332 484,239
Premises and Equipment 304,813 288,358 272,080
Other Assets 516,954 509,660 418,623
- ------------------------------------------------------------------------------------------------------
Total Assets $14,731,110 $14,995,464 $14,168,746
======================================================================================================
Liabilities
Deposits $9,505,968 $9,607,695 $8,916,155
Securities Sold Under Agreements to Repurchase 2,313,784 2,279,124 2,146,713
Funds Purchased 366,066 710,472 471,956
Short-Term Borrowings 379,129 226,127 490,770
Other Liabilities 360,583 349,050 359,350
Long-Term Debt 665,106 705,789 701,633
- ------------------------------------------------------------------------------------------------------
Total Liabilities 13,590,636 13,878,257 13,086,577
Shareholders' Equity
Common Stock ($.01 par value at June 30, 1998 and $2.00 par value
at December 31, 1997 and June 30, 1997), authorized 500,000,000
shares; issued and outstanding, June 1998 - 80,385,041;
December 1997 - 79,684,553; June 1997 - 39,363,421; 804 159,369 78,727
Capital Surplus 340,872 168,920 160,375
Accumulated Other Comprehensive Income (25,958) (24,766) (7,836)
Retained Earnings 824,756 813,684 850,903
- ------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,140,474 1,117,207 1,082,169
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,731,110 $14,995,464 $14,168,746
- ------------------------------------------------------------------------------------------------------
/TABLE