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, 1999
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
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(Exact name of registrant as specified in its charter)
Delaware 99-0148992
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(State of incorporation) (IRS Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
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(Address of principal executive offices) (Zip Code)
(808) 643-3888
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(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 30, 1999 -
80,256,963 shares
PACIFIC CENTURY FINANCIAL CORPORATION and subsidiaries
June 30, 1999
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) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------------
Assets
Interest-Bearing Deposits $411,239 $453,527 $542,966
Investment Securities - Held to Maturity
(Market Value of $825,434, $668,068 and $927,753, respectively) 828,350 652,802 912,648
Investment Securities - Available for Sale 2,721,765 3,018,403 2,800,772
Securities Purchased Under Agreements to Resell 4,325 - -
Funds Sold 34,995 45,683 31,715
Loans 9,610,980 9,854,000 9,464,901
Unearned Income (219,717) (225,915) (207,742)
Reserve for Loan Losses (209,573) (211,276) (204,049)
- -------------------------------------------------------------------------------------------------------------------------
Net Loans 9,181,690 9,416,809 9,053,110
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Total Earning Assets 13,182,364 13,587,224 13,341,211
Cash and Non-Interest Bearing Deposits 493,483 564,243 575,553
Premises and Equipment 288,955 293,591 297,392
Customers' Acceptance Liability 14,802 8,227 6,162
Accrued Interest Receivable 79,384 85,485 90,348
Other Real Estate 6,009 5,648 11,555
Intangibles, including Goodwill 214,997 216,106 218,933
Other Assets 271,464 256,039 189,956
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $14,551,458 $15,016,563 $14,731,110
=========================================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $1,699,343 $1,745,747 $1,578,978
- Interest Bearing 2,176,931 2,385,285 2,219,187
Savings 725,010 740,378 761,688
Time 2,456,318 2,637,746 2,838,522
Foreign Deposits
Demand - Non-Interest Bearing 442,102 489,672 413,393
Time Due to Banks 632,626 685,137 514,662
Other Savings and Time 1,153,825 892,377 1,179,538
- -------------------------------------------------------------------------------------------------------------------------
Total Deposits 9,286,155 9,576,342 9,505,968
Securities Sold Under Agreements to Repurchase 1,990,178 2,008,399 2,313,784
Funds Purchased 715,398 942,062 366,066
Short-Term Borrowings 353,177 356,822 379,129
Bank's Acceptances Outstanding 14,802 8,227 6,162
Accrued Retirement Expense 40,892 39,811 38,266
Accrued Interest Payable 49,376 55,694 53,903
Accrued Taxes Payable 123,720 114,443 132,567
Minority Interest 4,374 7,394 6,851
Other Liabilities 104,325 136,159 122,834
Long-Term Debt 654,847 585,616 665,106
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,337,244 13,830,969 13,590,636
Shareholders' Equity
Common Stock ($.01 par value), authorized 500,000,000 shares;
issued / outstanding; June 1999 - 80,544,104 / 80,287,805;
December 1998 - 80,512,372 / 80,325,998; June 1998 - 80,385,041 / 80,385,041 805 805 804
Capital Surplus 345,468 342,932 340,872
Accumulated Other Comprehensive Income (39,245) (22,476) (25,958)
Retained Earnings 912,686 867,852 824,756
Treasury Stock, at Cost - (June 1999 - 256,299 and December 1998 - 186,374 Shares) (5,500) (3,519) -
- -------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,214,214 1,185,594 1,140,474
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,551,458 $15,016,563 $14,731,110
=========================================================================================================================
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) 1999 1998 1999 1998
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Interest Income
Interest on Loans $171,636 $187,949 $347,636 $371,362
Loan Fees 11,717 11,846 21,298 22,578
Income on Lease Financing 6,448 6,608 14,716 12,491
Interest and Dividends on Investment Securities
Taxable 14,912 18,071 28,591 38,035
Non-taxable 276 308 552 602
Income on Investment Securities Available for Sale 41,918 42,568 83,700 84,038
Interest on Deposits 6,465 10,712 14,691 17,195
Interest on Security Resale Agreements 67 - 168 -
Interest on Funds Sold 1,598 872 4,151 1,962
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Total Interest Income 255,037 278,934 515,503 548,263
Interest Expense
Interest on Deposits 63,460 78,659 129,787 154,800
Interest on Security Repurchase Agreements 24,393 32,345 48,809 62,943
Interest on Funds Purchased 8,743 6,810 21,511 13,720
Interest on Short-Term Borrowings 3,321 3,469 6,570 6,278
Interest on Long-Term Debt 10,720 10,799 20,582 21,952
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Total Interest Expense 110,637 132,082 227,259 259,693
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Net Interest Income 144,400 146,852 288,244 288,570
Provision for Loan Losses 13,948 41,982 26,538 60,285
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Net Interest Income After Provision for Loan Losses 130,452 104,870 261,706 228,285
Non-Interest Income
Trust Income 14,408 13,871 29,983 27,831
Service Charges on Deposit Accounts 7,675 8,680 17,070 16,894
Fees, Exchange, and Other Service Charges 22,618 18,735 44,616 37,645
Other Operating Income 12,094 8,557 24,449 16,956
Investment Securities Gains 6,818 (45) 8,665 3,336
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Total Non-Interest Income 63,613 49,798 124,783 102,662
Non-Interest Expense
Salaries 50,483 49,445 101,325 95,710
Pensions and Other Employee Benefits 14,907 12,725 29,950 27,632
Net Occupancy Expense 11,810 10,799 24,078 21,907
Net Equipment Expense 11,685 12,112 23,812 22,867
Other Operating Expense 43,147 46,886 87,500 85,302
Restructuring Charge - 19,400 - 19,400
Minority Interest 96 349 303 601
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Total Non-Interest Expense 132,128 151,716 266,968 273,419
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Income Before Income Taxes 61,937 2,952 119,521 57,528
Provision for Income Taxes 23,475 (144) 45,642 20,412
- -------------------------------------------------------------------------------------------------------------------------
Net Income $38,462 $3,096 $73,879 $37,116
=========================================================================================================================
Basic Earnings Per Share $0.48 $0.04 $0.92 $0.47
Diluted Earnings Per Share $0.47 $0.04 $0.91 $0.46
Dividends Declared Per Share $0.17 $0.1625 $0.34 $0.325
Basic Weighted Average Shares 80,302,154 80,258,217 80,361,529 80,070,764
Diluted Weighted Average Shares 81,121,840 81,416,341 81,263,475 81,170,893
=========================================================================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
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Accumulated
Other
Common Capital Comprehensive Retained Treasury Comprehensive
(in thousands of dollars) Total Stock Surplus Income Earnings Stock Income
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Balance at December 31, 1998 $1,185,594 $805 $342,932 ($22,476) $867,852 ($3,519)
Comprehensive Income
Net Income 73,879 0 - - 73,879 - $73,879
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment (16,470) - - (16,470) - - (16,470)
Foreign Currency Translation Adjustment (299) - - (299) - - (299)
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Total Comprehensive Income $57,110
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Common Stock Issued
81 Profit Sharing Plan 370 - 3 0 (9) 376
21,196 Stock Option Plan 4,952 - 2,264 0 (1,653) 4,341
4,276 Dividend Reinvestment Plan 2,335 - 136 0 (47) 2,246
6,179 Directors' Restricted Shares and
Deferred Compensation Plan 133 - 133 0 0 0
Treasury Stock Purchased (8,944) - 0 0 0 (8,944)
Cash Dividends Paid (27,336) - 0 0 (27,336) 0
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $1,214,214 $805 $345,468 ($39,245) $912,686 ($5,500)
=====================================================================================================================
Balance at December 31, 1997 $1,117,207 $159,369 $168,920 ($24,766) $813,684 $-
Comprehensive Income
Net Income 37,116 - - - 37,116 - $37,116
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment 502 - - 502 - - 502
Foreign Currency Translation Adjustment (1,694) - - (1,694) - - (1,694)
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Total Comprehensive Income $35,924
=======
Common Stock Issued
125,889 Profit Sharing Plan 2,851 224 2,627 - - -
431,140 Stock Option Plan 7,188 529 6,659 - - -
138,738 Dividend Reinvestment Plan 3,233 199 3,034 - - -
4,721 Directors' Restricted Shares and
Deferred Compensation Plan 115 2 113 - - -
Change in par value of common stock from
$2.00 per share to $.01 per share 0 (159,519) 159,519 - - -
Cash Dividends Paid (26,044) - - - (26,044) -
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $1,140,474 $804 $340,872 ($25,958) $824,756 $-
=====================================================================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Six Months ended June 30
(in thousands of dollars) 1999 1998
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Operating Activities
Net Income $73,879 $37,116
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, depreciation, and amortization of income and expense 29,151 58,936
Deferred income taxes 12,033 147
Realized and unrealized investment security gains (8,771) (3,549)
Other assets and liabilities, net (46,954) 6,242
Net cash provided by operating activities 59,338 98,892
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Investing Activities
Proceeds from redemptions of investment securities held to maturity 169,514 380,782
Purchases of investment securities held to maturity (345,061) (73,215)
Proceeds from sales of investment securities available for sale 1,083,400 1,101,307
Purchases of investment securities available for sale (803,809) (1,246,336)
Net decrease (increase) in interest-bearing deposits 48,788 (180,067)
Net decrease in funds sold 6,363 48,742
Net decrease in loans and lease financing 253,071 256,805
Premises and equipment, net (13,311) (24,093)
Purchase of Paribas Bank, net of cash and non-interest
bearning deposits acquired -- 6,327
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 by investing activities 395,497 270,252
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Financing Activities
Net decrease in demand, savings, and time deposits (315,977) (372,670)
Proceeds from lines of credit and long-term debt 276,789 --
Principal payments on lines of credit and long-term debt (207,688) (41,726)
Net decrease in short-term borrowings (248,965) (160,176)
Net proceeds (payments) from sale of stock (1,154) 13,387
Cash dividends (27,336) (26,044)
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Net cash used by financing activities (524,331) (587,229)
Effect of exchange rate changes on cash (1,264) (1,694)
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Decrease in cash and non-interest bearing deposits (70,760) (219,779)
Cash and non-interest bearing deposits at beginning of year 564,243 795,332
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Cash and non-interest bearing deposits at end of period $493,483 $575,553
==================================================================================================================
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements
of Pacific Century Financial Corporation (Pacific Century) have
been prepared in accordance with generally accepted accounting
principles 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 generally accepted accounting principles
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 1998
Annual Report to Shareholders. Operating results for the six
months ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31,
1999.
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 located in Japan, South Korea,
Singapore, Hong Kong, Taiwan, French Polynesia, New Caledonia,
Papua New Guinea and Vanuatu.
Certain amounts in prior period financial statements have
been reclassified to conform to the 1999 presentation.
Note 2. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement standardizes the accounting for
derivative instruments by requiring the recognition of those
instruments as assets or liabilities in the statement of
financial condition, measured at fair value. 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.
In June 1999, the FASB issued SFAS No. 137 "Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 defers
the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. 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. Acquisitions
In January 1999, Pacific Century acquired Triad Insurance
Agency, Inc. (Triad), a major Hawaii-based property/casualty
insurance agency. In Hawaii, Triad represents a number of large
U.S. property/casualty insurance companies for whom it acts as a
servicing agent. The merger, accounted for as a purchase, will
expand Pacific Century's range of financial services, which it
can offer to customers. Goodwill of approximately $4 million is
being amortized over 15 years on a straight-line basis.
In June 1999, Pacific Century agreed to increase its
ownership in the Bank of Queensland by acquiring 5.8 million
shares, or approximately 10%, of that company's outstanding
common stock. This will bring Pacific Century's ownership stake
in the Bank of Queensland to approximately 17%. The transaction
is expected to close in the third quarter of this year, pending
regulatory approval, and will strengthen and enhance the
strategic alliance between the two banks that began in 1997.
Note 4. Earnings Per Share
For the three and six months ended June 30, 1999 and 1998,
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, 1999
and 1998 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 819,686 and 1,158,124 shares
for the three months ended June 30, 1999 and 1998, respectively,
and 901,946 and 1,100,129 for the first six months ended June 30,
1999 and 1998, 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, bank owned
life insurance income and tax credits for low income housing,
foreign taxes and investment tax credits.
Note 6. Restructuring Charge
In the second quarter of 1998, Pacific Century recognized a
pre-tax restructuring charge of $19.4 million in connection with
its strategic actions to accelerate expense reduction and improve
efficiency. These actions primarily included the merger in
Hawaii of First Federal Savings and Loan Association of America
with Bank of Hawaii, and the merger of Pacific Century Bank, N.A.
and California United Bank into a single nationally chartered
entity. In August 1998, the consolidation of Pacific Century's
two U.S. Mainland banks was consummated under the name Pacific
Century Bank, N.A. The merger of the two Hawaii-based companies
was completed as of September 30, 1998 and resulted in the
closing of 19 thrift branches and eight Bank of Hawaii branches
during 1998. Also, as part of the restructuring plan, Bank of
Hawaii's credit card services activities were outsourced in the
fourth quarter of 1998 to a third party vendor.
The restructuring charge included expected direct and
incremental costs associated with these consolidations and
initiatives and consisted of $9.1 million for lease termination
costs, $5.4 million for disposal of fixed assets, $1.6 million
for staff reduction, and $3.3 million for data processing and
other costs. As of December 31, 1998, the balance in the
restructuring accrual was $9.6 million, of which $7.8 million
related to termination of lease obligations. During the first
six months of 1999, the amount utilized from the restructuring
accrual totaled $2.1 million, leaving the balance of the
restructuring accrual at $7.5 million, most of which related to
the termination of lease obligations.
Since the establishment of the restructuring accrual, no
adjustments have been made to revise the accrual. Pacific
Century believes that the restructuring accrual as of June 30,
1999 remains adequate to complete the planned initiatives.
Note 7. Business Segments
Pacific Century is a financial services organization that
maintains a broad presence throughout the Pacific region.
Pacific Century has aligned its operations into the following
four major geographic business 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. Descriptions of these
business segments are included in Pacific Century's 1998 Annual
Report to Shareholders on pages 93-95. There have been no
significant changes to Pacific Century's business segments since
year-end 1998.
Line of business 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 units. In
measuring line of business financial performance, Pacific Century
utilizes certain accounting practices that differ from generally
accepted accounting principles. Accordingly, certain balances
reflected in the line of business report differ from the
corresponding amounts in the Consolidated Financial Statements.
Accounting practices and other key elements of Pacific Century's
line of business financial management reporting is discussed in
Pacific Century's 1998 Annual Report to Shareholders.
From time to time, Pacific Century's line of business
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 lines 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 major market segments for the three and six
months ended June 30, 1999 and 1998.
Line of Business Selected Financial Information
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Treasury
U. S. and Other Consolidated
(in thousands of dollars) Hawaii Pacific Asia Mainland Corporate Total
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1999
Net Interest Income $72,727 $28,893 $9,674 $25,779 $7,327 $144,400
Economic Provision (1) (7,950) (3,406) (1,169) (2,662) 1,239 (13,948)
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Risk-Adjusted Net Interest Income 64,777 25,487 8,505 23,117 8,566 130,452
Non-Interest Income 31,222 9,870 4,419 7,010 11,092 63,613
- -----------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 95,999 35,357 12,924 30,127 19,658 194,065
Non-Interest Expense 71,382 26,461 6,399 17,255 10,631 132,128
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 24,617 8,896 6,525 12,872 9,027 61,937
Income Taxes (3) (10,847) (3,895) (2,682) (649) (5,402) (23,475)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $13,770 $5,001 $3,843 $12,223 $3,625 $38,462
===================================================================================================================================
Total Assets $5,111,287 $2,377,871 $1,148,773 $2,722,478 $3,191,049 $14,551,458
===================================================================================================================================
Three Months Ended June 30, 1998
Net Interest Income $69,624 $32,157 $10,485 $25,478 $9,108 $146,852
Economic Provision (1) (9,152) (3,124) (1,253) (2,754) (25,699) (41,982)
- -----------------------------------------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 60,472 29,033 9,232 22,724 (16,591) 104,870
Non-Interest Income 30,453 11,305 2,686 2,874 2,480 49,798
- -----------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 90,925 40,338 11,918 25,598 (14,111) 154,668
Non-Interest Expense (2) 70,305 30,273 5,988 18,011 27,139 151,716
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 20,620 10,065 5,930 7,587 (41,250) 2,952
Income Taxes (3) (8,415) (3,867) (2,222) (29) 14,677 144
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $12,205 $6,198 $3,708 $7,558 ($26,573) $3,096
===================================================================================================================================
Total Assets $5,245,751 $2,503,244 $867,966 $2,733,337 $3,380,812 $14,731,110
===================================================================================================================================
(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) Non-interest expense for the Treasury and Other Corporate segment included a restructuring charge of $19.4 million.
(3) Tax benefits are allocated to the business segment to which they relate. In the quarters ended June 30, 1999 and 1998, income
taxes for the U. S. Mainland segment included $3.5 million and $2.9 million, respectively, in tax benefits from low income housing
tax credits and investment tax credits.
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, 1999
Net Interest Income $145,545 $59,794 $18,425 $51,964 $12,516 $288,244
Economic Provision (1) (16,864) (6,789) (2,396) (5,613) 5,124 (26,538)
- -----------------------------------------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 128,681 53,005 16,029 46,351 17,640 261,706
Non-Interest Income 62,043 21,208 8,640 9,839 23,053 124,783
- -----------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 190,724 74,213 24,669 56,190 40,693 386,489
Non-Interest Expense 143,901 54,363 13,159 34,727 20,818 266,968
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 46,823 19,850 11,510 21,463 19,875 119,521
Income Taxes (3) (20,452) (8,436) (4,644) (2,369) (9,741) (45,642)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $26,371 $11,414 $6,866 $19,094 $10,134 $73,879
===================================================================================================================================
Total Assets $5,111,287 $2,377,871 $1,148,773 $2,722,478 $3,191,049 $14,551,458
===================================================================================================================================
Six Months Ended June 30, 1998
Net Interest Income $144,358 $58,107 $18,470 $50,374 $17,261 $288,570
Economic Provision (1) (18,275) (6,196) (2,531) (5,486) (27,797) (60,285)
- -----------------------------------------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 126,083 51,911 15,939 44,888 (10,536) 228,285
Non-Interest Income 57,726 20,753 7,884 5,667 10,632 102,662
- -----------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 183,809 72,664 23,823 50,555 96 330,947
Non-Interest Expense (2) 141,104 53,265 12,219 35,476 31,355 273,419
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 42,705 19,399 11,604 15,079 (31,259) 57,528
Income Taxes (3) (17,912) (7,708) (4,485) (988) 10,681 (20,412)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $24,793 $11,691 $7,119 $14,091 ($20,578) $37,116
===================================================================================================================================
Total Assets $5,245,751 $2,503,244 $867,966 $2,733,337 $3,380,812 $14,731,110
===================================================================================================================================
(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) Non-interest expense for the Treasury and Other Corporate segment included a restructuring charge of $19.4 million.
(3) Tax benefits are allocated to the business segment to which they relate. For the six months ended June 30, 1999 and 1998,
income taxes for the U. S. Mainland segment included $6.3 million and $5.6 million, respectively, in tax benefits from low income
housing tax credits and investment tax credits.
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, 1999 of
$38.5 million, significantly higher than the $3.1 million
reported for the same period in 1998. Earnings for the second
quarter of 1999 included a non-recurring pre-tax gain resulting
from sale of newly issued equity securities acquired in
conjunction with leasing transactions. Basic and diluted
earnings per share in the second quarter of 1999 were $0.48 and
$0.47, respectively. Comparatively, both basic and diluted
earnings per share were $0.04 for the same period last year.
Earnings in the first six months of 1999 totaled $73.9
million, a 99% increase from $37.1 million in the same year
earlier period. Basic earnings per share were $0.92 in the first
six months of 1999, up from $0.47 in the comparable 1998 period.
Diluted earnings per share were $0.91 for the six months ended
June 30, 1999, compared to $0.46 in the like year ago period.
Year-over-year comparability in earnings is impacted by
special charges in the second quarter of 1998, that included a
pre-tax restructuring charge of $19.4 million and a significant
increase in the provision for loan losses.
Performance ratios for the three and six months ended June
30, 1999 reflected significant improvement over 1998. In the
second quarter of 1999, return on average assets (ROAA) and
return on average equity (ROAE) increased to 1.05% and 12.72%,
respectively from 0.08% and 1.08% in the like 1998 period. For
the six months ended June 30, 1999, ROAA and ROAE were 1.01% and
12.36%, compared to 0.50% and 6.53%, respectively, in the same
year ago period. For the full year of 1998, ROAA was 0.72% and
ROAE was 9.21%.
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 1999 were $42.3 million, up
from $7.4 million for the same quarter in 1998. Tangible
earnings in the first half of 1999 and 1998 were $81.5 million
and $43.9 million, respectively. On a per share basis, tangible
diluted earnings per share were $0.52 and $0.09 in the second
quarters of 1999 and 1998, respectively, and were $1.00 and $0.54
in the first six months of 1999 and 1998, respectively.
Second quarter tangible ROAA for Pacific Century was 1.18%
in 1999 and 0.20% in 1998. Tangible ROAE was 17.01% and 3.25%
for the similar quarters of 1999 and 1998, respectively. In the
first six months of 1999 tangible ROAA and ROAE were 1.13% and
16.62%, respectively, compared to 0.60% and 9.58%, respectively,
in the first half of 1998.
On a taxable equivalent basis, net interest income for the
three and six months ended June 30, 1999 were $144.6 million and
$288.5 million, respectively, reflecting a slight decline from
$147.0 million and $288.9 million in the same year ago periods.
The decline in net interest income is attributed to a decrease in
average earning assets that was partially offset by a rise in net
interest margin between the periods.
Total assets at June 30, 1999 stood at $14.6 billion
relative to $14.7 billion at June 30, 1998 and $15.0 billion at
December 31, 1998. 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 1999 were down 5.4% and 1.4%, respectively,
from the same year-earlier periods.
Non-performing assets (NPAs), exclusive of accruing loans
past due 90 days or more, ended 1999's second quarter at $149.4
million, or 1.55% of total loans, down $13.9 million from $163.3
million at the March 1999 quarter-end. Comparatively, NPAs were
$139.3 million, or 1.47% of total loans at June 30, 1998.
The reserve for loan losses totaled $209.6 million at the
end of June 1999, representing 2.23% of loans outstanding,
compared to $204.0 million and 2.20%, respectively, on the same
date in 1998. Net charge-offs for the second quarter of 1999
were $12.7 million, or 0.54% of average loans, compared to $10.8
million and 0.46%, respectively, in 1999's first quarter and
$26.0 million, or 1.08% in the second quarter of 1998. For the
first six months of 1999 net charge-offs were $23.5 million, down
from $43.9 million in the like period last year. In the current
quarter, provisions for loan losses of $13.9 million were charged
to income, up from $12.6 million for the quarter ended March 31,
1999 and down from $42.0 million in the same 1998 period. For
the six months ended June 30, 1999 and 1998 provision for loan
losses were $26.5 million and $60.3 million, respectively. The
higher 1998 loan loss provision reflects a build up in reserves
during the second quarter of 1998 to cover the increase in NPAs
and net charge-offs.
Performance Highlights
Table 1
- ------------------------------------------------------------------------
(in millions of dollars except per share amounts)
Percentage
Earnings Highlights and Performance Ratios 1999 1998 Change
- ------------------------------------------------------------------------
Three Months Ended June 30
Net Income $38.5 $3.1 1142.3%
Basic Earnings Per Share 0.48 0.04 1100.0%
Diluted Earnings Per Share 0.47 0.04 1075.0%
Cash Dividends 13.6 13.1
Return on Average Assets 1.05% 0.08%
Return on Average Equity 12.72% 1.08%
Average Spread on Earning Assets 4.28% 4.21%
Efficiency Ratio 65.67% 77.13%
Six Months Ended June 30
Net Income $73.9 $37.1 99.0%
Basic Earnings Per Share 0.92 0.47 95.7%
Diluted Earnings Per Share 0.91 0.46 97.8%
Cash Dividends 27.3 26.0
Return on Average Assets 1.01% 0.50%
Return on Average Equity 12.36% 6.53%
Average Spread on Earning Assets 4.26% 4.25%
Efficiency Ratio 66.02% 70.49%
Summary of Results Excluding the Effect of Intangibles (a)
- ------------------------------------------------------------------------
Three Months Ended June 30
Tangible Net Income $42.3 $7.4 470.0%
Tangible Basic Earnings per Share 0.53 0.09 488.9%
Tangible Diluted Earnings per Shar 0.52 0.09 477.8%
Tangible Return on Average Assets 1.18% 0.20%
Tangible Return on Average Equity 17.01% 3.25%
Tangible Efficiency Ratio 63.53% 75.19%
Six Months Ended June 30
Tangible Net Income $81.5 $43.9 85.7%
Tangible Basic Earnings per Share 1.01 0.55 83.6%
Tangible Diluted Earnings per Shar 1.00 0.54 85.2%
Tangible Return on Average Assets 1.13% 0.60%
Tangible Return on Average Equity 16.62% 9.58%
Tangible Efficiency Ratio 63.89% 68.52%
- ------------------------------------------------------------------------
(a) Intangibles include goodwill, core deposit and trust intangibles, and other intangibles.
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 Overview, International
Operations, Market Risk and Year 2000. 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 changes in applicable federal, state,
and foreign income tax laws and regulatory and monetary policies,
and the nature and level of competition. Additional forward-
looking statements that could significantly differ from estimates
include uncertainties relating to Pacific Century's efforts to
prepare its systems and technology for Year 2000 readiness, as
well as uncertainties relating to the ability of third parties
with whom Pacific Century has business relationships to address
Year 2000 issues in a timely and adequate manner.
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.
Pacific Century's activities are conducted primarily through
approximately 180 branches and representative and extension
offices (including branches of affiliate banks). Its staff of
approximately 5,000 employees provide 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
areas of operations. For business segment reporting, Pacific
Century has aligned its operations into the following four major
geographic segments: Hawaii, the Pacific, Asia, and the U.S.
Mainland. In addition, there is also a segment for Treasury and
Other Corporate. A further discussion of these segments and the
reporting process is included in the 1998 Annual Report to
Shareholders.
Note 7 to the Consolidated Financial Statements presents the
line of business financial reports for Pacific Century's major
market segments for the three and six months ended June 30, 1999
and 1998. Because the market segment financial report is
prepared in accordance with accounting practices that could
differ from generally accepted accounting principles, 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.
In addition to the performance measurements in the line of
business financial report, Pacific Century also utilizes risk-
adjusted return on capital (RAROC) to assess business segment
performance. RAROC is the ratio of net income to risk-adjusted
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.
Over the past few years the cost of capital has fluctuated
between 12% to 15%.
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 72 branches in Hawaii, including
both traditional full-service branches and in-store locations.
Within the Hawaii segment, line of business results are
divided into 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).
For the quarter ended June 30, 1999, the Hawaii segment
contributed $13.8 million in net income an increase from the
$12.2 million reported for the second quarter of 1998. RAROC for
this segment rose to 15% for the second quarter of 1999 from 13%
in the same quarter of 1998. Year-over-year total assets in the
Hawaii segment declined to $5.1 billion at June 30, 1999 from
$5.2 billion at June 30, 1998 and $5.3 billion at year-end 1998.
For the six months ended June 30, 1999, net income for the
Hawaii segment was up 6.4% to $26.4 million from $24.8 million in
the same year-earlier period. RAROC rose to 14% in the first six
months of 1999 from 13% in the comparable 1998 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. Principal subsidiaries in the South Pacific are located
in French Polynesia and New Caledonia. The 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 $5.0 million for the
quarter ended June 30, 1999 compared with $6.2 million in the
second quarter of 1998. The higher 1998 net income is attributed
to the June 1998 Banque Paribas acquisitions, which called for
the recognition of income from the beginning of 1998. RAROC,
including the amortization of intangibles for this segment,
declined to 10% in the second quarter of 1999 from 14% for the
same quarter in 1998. Total assets in the Pacific segment
decreased to $2.4 billion at the end of June 1999, from $2.5
billion a year ago. Comparatively total assets at year-end 1998
were $2.4 billion.
For the first six months of 1999, net income for the Pacific
segment was $11.4 million, almost level with the $11.7 million
reported in the same period last year. Year-to-date RAROC for
the Pacific segment decreased to 11% in 1999 from 13% for the
first six months of 1998.
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 short-
term loans based on cash flows. 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, 1999, net income in the Asia
segment was $3.8 million, compared to $3.7 million for the same
quarter in 1998. RAROC for this segment was 18% in the second
quarter of 1999, compared to 16% for the same quarter in 1998.
As of June 30, 1999, June 30, 1998 and December 31, 1998, total
assets in the Asia segment were $1.1 billion, $0.9 billion and
$1.0 billion, respectively.
For the six months ended June 30, 1999, net income for the
Asia segment was $6.9 million, compared to $7.1 million in the
first half of 1998. RAROC for the Asia segment was 16% and 15%
for the six months ended June 30, 1999 and 1998, respectively.
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. (PCB) and Bank of Hawaii operating units for
large corporate lending and leasing.
In the second quarter of 1999, the U.S. Mainland segment
contributed net income of $12.2 million, up from $7.6 million in
the same year ago quarter. Comparison between 1999 and 1998
reflect a pretax security gain of $6.5 million relative to the
sale of newly issued equity securities acquired in conjunction
with leasing transactions. Net income for the three months ended
June 30, 1999 and 1998, included tax benefits of $3.5 million and
$2.8 million, respectively, from low income housing tax credits
and investment tax credits. RAROC, including the amortization of
intangibles for this segment was 17% in the second quarter of
1999, improving significantly from 11% for the same quarter in
1998. As of June 30, 1999, June 30, 1998 and December 31, 1998,
total assets in the U.S. Mainland segment were $2.7 billion, $2.7
billion and $2.6 billion, respectively.
For the first six months of 1999, net income for the U.S.
Mainland segment was $19.1 million, a 35.5% increase over $14.1
million in the like 1998 period. Included in net income were tax
benefits from low income housing tax credits and investment tax
credits of $6.3 million and $5.6 million for the six months ended
June 30, 1999 and 1998, respectively. RAROC for the U.S.
Mainland segment was 14% and 10% in the first six months of 1999
and 1998, 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 net
income of $3.6 million in the second quarter of 1999, compared to
a net loss of $26.6 million for the same quarter in 1998. The
second quarter 1998 loss reflected an increase in the
consolidated provision for loan losses that exceeded the economic
provision and a pre-tax restructuring charge of $19.4 million.
At June 30, 1999, June 30, 1998 and year-end 1998 this segment
held assets of $3.2 billion, $3.4 billion, and $3.7 billion,
respectively.
For the six months ended June 30, 1999 and 1998, net income
for the Treasury and Other Corporate segment was $10.1 million,
compared to a net loss of $20.6 million. As previously
mentioned, the 1998 loss reflected special charges.
STATEMENT OF INCOME ANALYSIS
Comparability between periods in the Consolidated Statements
of Income is impacted by the timing of the January 1999
acquisition of Triad and the restructuring charge recognized in
the second quarter of 1998.
Net Interest Income
In the second quarter of 1999, net interest income on a
taxable equivalent basis was $144.6 million, down from $147.0
million in the same year-earlier quarter. For the six months
ended June 30, 1999, tax equivalent net interest income was
$288.5 million almost equivalent to the $288.9 million in the
first half of 1998. The decline in 1999's net interest income
reflected a year-over-year drop in average earning assets of $453
million and $48 million in the second quarter and first six
months of 1999, respectively. The large second quarter decline
in average earning assets is attributed to the accounting method
used in recording the June 1998 Banque Paribas acquisitions.
In the second quarter of 1999, the average net interest
margin on earning assets improved to 4.28% from 4.21% for the
same quarter in 1998 and edged up in the first six months of 1999
to 4.26% from 4.25% in the comparable year ago period. The
improvement in net interest margin was driven by lower cost of
funds, which declined 57 basis points in the second quarter of
1999 to 4.04% from 4.61%. For the first six months of 1999, the
cost of funds was 4.11% reflecting a decrease of 50 basis points
from 4.61% in the same period last year. During these same
periods, the yield on earning assets also fell, but by a lesser
amount. The year-over-year decline in the yield on earning
assets was 44 and 46 basis points in 1999's June quarter and
first six months, respectively. Presented in Table 2 are average
balances, yields, and rates paid for the three and six months
ended June 30, 1999 and 1998.
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
- ------------------------------------------------------------------------------------------------
Table 2 Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
Average IncomeYield/ Average IncomeYield/
(in millions of dollars) Balance Expens Rate Balance Expens Rate
- ------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $458.9 $6.5 5.65% $593.7 $10.7 7.24%
Investment Securities Held to Maturity
-Taxable 831.8 14.9 7.19 933.2 18.1 7.77
-Tax-Exempt 11.7 0.4 14.55 12.0 0.5 15.87
Investment Securities Available for Sale 2,715.0 41.9 6.19 2,763.7 42.6 6.18
Funds Sold 155.0 1.7 4.31 75.8 0.9 4.62
Net Loans
-Domestic 7,696.3 150.0 7.82 7,622.5 160.2 8.43
-Foreign 1,676.7 28.1 6.71 1,997.2 34.4 6.91
Loan Fees 11.7 11.8
- ------------------------------------------------------------------------------------------------
Total Earning Assets 13,545.4 255.2 7.56 13,998.1 279.2 8.00
Cash and Due From Banks 485.1 619.2
Other Assets 596.5 837.3
--------- ---------
Total Assets $14,627.0 $15,454.6
========= =========
Interest Bearing Liabilities
Domestic Dep- Demand $2,145.7 12.0 2.25 $2,192.0 14.1 2.57
- Savings 728.7 3.7 2.03 794.9 4.9 2.46
- Time 2,499.7 30.0 4.81 2,770.9 36.6 5.30
- ------------------------------------------------------------------------------------------------
Total Domestic 5,374.1 45.7 3.41 5,757.8 55.6 3.87
Foreign Deposits
- Time Due to Banks 681.1 8.3 4.89 510.7 10.2 7.99
- Other Time and Savings 1,155.2 9.5 3.28 1,328.0 13.0 3.91
- ------------------------------------------------------------------------------------------------
Total Foreign 1,836.3 17.8 3.88 1,838.7 23.2 5.04
- ------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 7,210.4 63.5 3.53 7,596.5 78.8 4.15
Short-Term Borrowings 3,107.3 36.4 4.71 3,189.8 42.6 5.36
Long-Term Debt 654.3 10.7 6.57 700.8 10.8 6.18
- ------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 10,972.0 110.6 4.04 11,487.1 132.2 4.61
- ------------------------------------------------------------------------------------------------
Net Interest Income 144.6 3.52 147.0 3.39
Average Spread on Earning Assets 4.28% 4.21%
Demand Deposit- Domestic 1,669.5 1,681.6
- Foreign 396.1 460.8
--------- ---------
Total Demand Deposits 2,065.6 2,142.4
Other Liabilities 376.5 671.1
Shareholders' Equity 1,212.9 1,154.0
--------- ---------
Total Liabilities and Shareholders' Equity $14,627.0 $15,454.6
========= =========
Provision for Loan Losses 13.9 42.0
Net Overhead 68.5 101.9
----- -----
Income Before Income Taxes 62.2 3.1
Provision for Income Taxes 23.5 (0.1)
Tax-Equivalent Adjustment 0.2 0.1
----- -----
Net Income $38.5 $3.1
===== =====
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
- ---------------------------------------------------------------------------------------------
Table 2 Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
Average Income/Yield/ Average Income/Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $462.7 $14.7 6.40% $481.8 $17.2 7.20%
Investment Securities Held to Maturity
-Taxable 811.0 28.6 7.11 1,025.5 38.0 7.48
-Tax-Exempt 11.7 0.8 14.64 12.0 0.9 15.56
Investment Securities Available for Sale 2,764.9 83.7 6.10 2,663.8 84.0 6.36
Funds Sold 181.5 4.3 4.80 101.3 2.0 3.91
Net Loans
-Domestic 7,737.0 307.0 8.00 7,656.5 322.7 8.50
-Foreign 1,695.1 55.4 6.59 1,771.4 61.2 6.97
Loan Fees 21.3 22.6
- ---------------------------------------------------------------------------------------------
Total Earning Assets 13,663.9 515.8 7.61 13,712.3 548.6 8.07
Cash and Due From Banks 501.2 589.8
Other Assets 645.2 718.7
--------- ---------
Total Assets $14,810.3 $15,020.8
========= =========
Interest Bearing Liabilities
Domestic Dep- Demand $2,154.8 24.0 2.25 $2,181.8 28.0 2.59
- Savings 731.9 7.4 2.02 809.2 10.0 2.47
- Time 2,554.9 61.5 4.86 2,821.9 75.4 5.39
- ---------------------------------------------------------------------------------------------
Total Domestic 5,441.6 92.9 3.44 5,812.9 113.4 3.93
Foreign Deposits
- Time Due to Banks 667.0 16.9 5.12 566.0 19.6 6.99
- Other Time and Savings 1,157.6 20.0 3.48 1,171.5 21.8 3.76
- ---------------------------------------------------------------------------------------------
Total Foreign 1,824.6 36.9 4.08 1,737.5 41.4 4.81
- ---------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 7,266.2 129.8 3.60 7,550.4 154.8 4.13
Short-Term Borrowings 3,261.2 76.9 4.75 3,115.1 82.9 5.37
Long-Term Debt 631.1 20.6 6.58 697.4 22.0 6.35
- ---------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 11,158.5 227.3 4.11 11,362.9 259.7 4.61
- ---------------------------------------------------------------------------------------------
Net Interest Income 288.5 3.50 288.9 3.46
Average Spread on Earning Assets 4.26% 4.25%
Demand Deposit- Domestic 1,657.0 1,689.8
- Foreign 422.0 366.9
--------- ---------
Total Demand Deposits 2,079.0 2,056.7
Other Liabilities 367.9 454.7
Shareholders' Equity 1,204.9 1,146.5
Total Liabilities and Shareholders' --------- ---------
Equity $14,810.3 $15,020.8
Provision for Loan Losses 26.5 60.3
Net Overhead 142.2 170.7
------ ------
Income Before Income Taxes 119.8 57.9
Provision for Income Taxes 45.6 20.4
Tax-Equivalent Adjustment 0.3 0.4
------ ------
Net Income $73.9 $37.1
====== ======
Provision for Loan Losses
The provision for loan losses was $13.9 million in the
second quarter of 1999, down from $42.0 million for the same
quarter in 1998. For the first six months of 1999, the provision
for loan losses totaled $26.5 million, compared to $60.3 million
in the like year ago period. The smaller 1999 provisions reflect
a decline in net loan charge-offs. The provisions for loan
losses in 1998 primarily reflected higher levels of gross loan
charge-offs and an increase in NPAs. For further information 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 1999, was
$63.6 million, compared to $49.8 million for the same quarter in
1998, an increase of 29.5%. For the first six months of 1999,
total non-interest income was $124.8 million, up 21.5% over the
same year-earlier period. Incremental non-interest income
attributed to the Triad acquisition was approximately $2.0
million in the second quarter of 1999 and $4.2 million in the
first half of 1999.
Non-Interest Income
Table 3
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended
(in millions) June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- ---------------------------------------------------------------------------------------------------
Trust Income $14.4 $13.9 $30.0 $27.8
Service Charges on Deposit Accounts 7.7 8.7 17.1 16.9
Fees, Exchange and Other Service
Charges 22.6 18.7 44.6 37.7
Other Operating Income 12.1 8.6 24.4 17.0
Investment Securities Gains 6.8 (0.1) 8.7 3.3
- ---------------------------------------------------------------------------------------------------
Total Non-Interest Income $63.6 $49.8 $124.8 $102.7
===================================================================================================
Trust income for the second quarter of 1999 increased to
$14.4 million, up 3.9% from the same quarter last year. Year-to-
date trust income totaled $30.0 million, reflecting a 7.7%
increase over the first half of 1998. 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 growth. The growth in these funds has contributed
to the rise in 1999 trust income.
Service charges on deposit accounts for the June 1999
quarter decreased to $7.7 million, from $8.7 million in the
second quarter of 1998. However, for the first six months of
1999, service charges from deposit accounts were ahead of the
same year ago period by $0.2 million.
Fees, exchange and other service charges increased to $22.6
million for the second quarter of 1999, from $18.7 million in the
same 1998 quarter. The year-to-date total for this category was
$44.6 million in 1999, an increase of nearly $7.0 million, or
18.5%, over the first six months of 1998. Income generated from
international activities including letter of credit and
acceptance fees, profit on foreign currency, and exchange fees
totaled $12.3 million for the first half of 1999, up $1.8
million, or 17.7% increase over the same period in 1998.
Mortgage servicing fees increased to $4.3 million in the
first six months of 1999, up 12.4% from $3.8 million for the same
period in 1998. This increase is due to the growth in Pacific
Century's mortgage servicing portfolio to $2.4 billion at June
30, 1999 from $1.8 billion at June 30, 1998. The growth in the
servicing portfolio reflected Bank of Hawaii's record level of
residential loan originations in 1998 that totaled $1.06 billion,
and the effects of continuing strong loan demand in 1999.
Also, included in fees, exchange and other service charges
are fees earned through Pacific Century's ATM network. Pacific
Century's ATM network at the end of June 1999 comprised 494
machines, compared to 492 at year-end 1998 and 489 a year ago.
Fees generated by this network totaled $7.5 million in the first
six months of 1999, up 59.4% from $4.7 million for the same
quarter in 1998.
Other operating income in the second quarter of 1999 was
$12.1 million, a 41.3% increase over the $8.6 million reported in
the same quarter of 1998. Year-to-date other income increased
44.2% over the first half of 1998. This growth partly reflected
the 1999 acquisition of Triad. For the three and six months
ended June 30, 1999 Triad reported insurance commissions of
approximately $2.0 million and $4.2 million, respectively.
Sales of investment securities during the second quarter of
1999 resulted in net investment securities gains of $6.8 million,
compared to a small net loss in the same quarter last year.
Approximately $6.5 million of the 1999 gain resulted from the
sale of newly issued equity securities acquired in conjunction
with leasing transactions. For the first six months of 1999,
investment securities gains were $8.7 million, compared to $3.3
million in the same year-earlier period.
Non-Interest Expense
Total non-interest expense for the June 1999 quarter was
$132.1 million, compared to $151.7 million in the similar quarter
of 1998, a decrease of $19.6 million. Year-to-date total non-
interest expense was $267.0 million, down 2.4% from the first six
months of 1998. Comparisons between 1999 and 1998 reflect the
restructuring charge recognized in the second quarter of 1998.
Incremental non-interest expense attributed to the Triad
acquisition was $1.7 million and $3.5 million for the three and
six months ended June 30, 1999.
Non-Interest Expense
Table 4
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended
(in millions) June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- ---------------------------------------------------------------------------------------------------
Salaries $50.5 $49.5 $101.3 $95.7
Pension and Other Employee Benefits 14.9 12.7 30.0 27.6
Net Occupancy Expense 11.8 10.8 24.1 21.9
Net Equipment Expense 11.7 12.1 23.8 22.9
Other Operating Expense 43.1 46.9 87.5 85.3
Restructuring Charge - 19.4 - 19.4
Minority Interest 0.1 0.3 0.3 0.6
- ---------------------------------------------------------------------------------------------------
Total Non-Interest Expense $132.1 $151.7 $267.0 $273.4
===================================================================================================
On February 17, 1998, Pacific Century announced a
restructuring and redesign program to accelerate expense
reduction, improve efficiency and enhance revenues. The program
is described in Pacific Century's 1998 Annual Report to
Shareholders.
In connection with the restructuring program, a pre-tax
restructuring charge of $19.4 million was taken in the second
quarter of 1998. The restructuring charge consists of direct and
incremental costs that are primarily associated with closing
facilities and reducing staff. Through June 30, 1999, $11.9
million of the restructuring accrual had been utilized leaving an
unutilized balance of $7.5 million. During the first six months
of 1999, $2.1 million was charged to the accrual. Pacific
Century believes that the restructuring accrual as of June 30,
1999 remains adequate to complete the planned initiatives.
Pacific Century's restructuring program has continued in
1999 with a comprehensive redesign process to increase revenues
and further improve efficiency. Pacific Century has contracted
with a nationally recognized corporate redesign specialist to
assist in this activity. The redesign timeline calls for a six-
month process review and idea development phase that began in
March 1999 followed by a twelve-month implementation phase.
Since Pacific Century is still in the development stages of this
redesign program, opportunities have not been quantified or
realized. It is anticipated that the results of the redesign
plan, along with any restructuring charge, will be announced in
the third quarter of 1999.
Salaries and pension and other employee benefits expense
totaled $65.4 million in the second quarter of 1999 compared to
$62.2 million in the same quarter last year. For the first six
months, total salaries and benefits rose 6.4% to $131.3 million
from $123.3 million in the same period last year. Approximately
$1.6 million of the year-to-date increase is attributed to the
Triad acquisition. The Year 2000 project also continues to
affect salaries and benefits for 1999.
Net occupancy and equipment expense in the June 1999 quarter
increased to $23.5 million from $22.9 million for the same period
in 1998. For the first six months of 1999, net occupancy and
equipment expense totaled $47.9 million, up 7.0% from $44.8
million in the similar period last year.
Other operating expense decreased to $43.1 million in the
second quarter of 1999, an 8.0% decline from $46.9 million for
the same quarter in 1998. Year-to-date other operating expense,
however, increased $2.2 million to $87.5 million from $85.3
million in the first half of 1998. Approximately $1.7 million of
the 1999 year-to-date increase was due to the Triad acquisition.
Also contributing to the increase were consulting and other
professional fees including those related to the Year 2000
project.
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
1999, the efficiency ratio was 65.7% and 66.0%, respectively.
Comparatively, this ratio was 77.1% in the same quarter last year
and 70.5% in the first half of 1998. Excluding the restructuring
charge the efficiency ratio was 65.5% for the six months ended
June 30, 1998.
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, 1999, loans outstanding were $9.6 billion, compared to
$9.9 billion at year-end 1998 and $9.5 billion at June 30, 1998.
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, 1999, December 31, 1998 and
June 30, 1998.
Loan Portfolio Balances
Table 5
- ----------------------------------------------------------------------------------
June 30 December 31 June 30
(in millions of dollars) 1999 1998 1998
- ----------------------------------------------------------------------------------
Domestic Loans
Commercial and Industrial $2,406.5 $2,579.7 $2,241.7
Real Estate
Construction-- Commercial 262.8 276.3 261.7
-- Residential 64.1 23.5 14.9
Mortgage --Commercial 1,259.8 1,139.1 1,323.5
-- Residential 2,559.1 2,699.4 2,678.1
Installment 736.7 763.0 843.8
Lease Financing 548.2 554.5 497.8
- ----------------------------------------------------------------------------------
Total Domestic 7,837.2 8,035.5 7,861.5
- ----------------------------------------------------------------------------------
Foreign Loans 1,773.8 1,818.5 1,587.9
- ----------------------------------------------------------------------------------
Total Loans $9,611.0 $9,854.0 $9,449.4
==================================================================================
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 June 30, 1999, the available-
for-sale securities decreased to $2.7 billion from $2.8 billion a
year ago and $3.0 billion at year-end 1998. Securities held to
maturity were $0.8 billion at June 30, 1999, down from $0.9
billion a year ago but up from $0.7 billion at year-end 1998.
Deposits
As of June 30, 1999, deposits totaled $9.3 billion, down
from $9.5 billion from June 30, 1998 and $9.6 billion at year-end
1998. As of June 30, 1999, the mix of deposits has changed with
domestic deposits decreasing and foreign deposits increasing. At
$7.1 billion, domestic deposits at June 30, 1999 were $451
million lower than year-end 1998, while foreign deposits
increased $161 million. Lower levels of time and interest-
bearing demand accounts accounted for most of the decline in
domestic deposits. Pacific Century has been aggressive in
building and extending relationships rather than pursuing rate
sensitive single relationship deposit accounts. The present
environment characterized by low domestic interest rates and high
competition for deposits among banks and other financial
institutions, including securities brokerage firms, continues to
impact the ability to attract and retain deposits.
Table 6 presents average deposits by type for the second
quarters of 1999 and 1998 and the full year 1998.
Average Deposits
Table 6
- ---------------------------------------------------------------------------------------------------
Quarter Ended Year Ended Quarter Ended
June 30, 1999 December 31, 1998 June 30, 1998
(in millions of dollars) Amount Mix Amount Mix Amount Mix
- ---------------------------------------------------------------------------------------------------
Domestic
Non-Interest Bearing Demand $1,669.5 18.0% $1,650.4 17.3% $1,681.6 17.3%
Interest-Bearing Demand 2,145.7 23.1 2,114.8 22.1 2,192.0 22.5
Regular Savings 728.7 7.9 783.9 8.2 794.9 8.2
Time Certificates
of Deposit
($100,000 or More) 1,028.0 11.1 1,028.2 10.8 998.1 10.2
All Other Time and
Savings Certificates 1,471.7 15.9 1,752.5 18.4 1,772.8 18.2
- ---------------------------------------------------------------------------------------------------
Total Domestic 7,043.6 75.9 7,329.8 76.8 7,439.4 76.4
- ---------------------------------------------------------------------------------------------------
Foreign
Non-Interest Bearing Demand 396.1 4.3 447.7 4.7 460.8 4.7
Time Due to Banks 681.1 7.3 596.1 6.2 510.7 5.2
Other Time and Savings 1,155.2 12.5 1,176.1 12.3 1,328.0 13.6
- ---------------------------------------------------------------------------------------------------
Total Foreign 2,232.4 24.1 2,219.9 23.2 2,299.5 23.6
- ---------------------------------------------------------------------------------------------------
Total $9,276.0 100.0% $9,549.7 100.0% $9,738.9 100.0%
===================================================================================================
Borrowings
Short-term borrowings, including funds purchased and
securities sold under agreements to repurchase, totaled $3.1
billion at June 30, 1999, $3.3 billion at year-end 1998 and $3.1
billion at June 30, 1998.
Long-term debt on June 30, 1999 increased to $0.7 billion
from $0.6 billion at year-end 1998. This increase was due to
$125 million in subordinated notes issued by Bank of Hawaii in
the first quarter of 1999. The notes bear a fixed rate of
interest at 6.875%, mature in 10 years (March 1, 2009), and
qualify as Tier 2 capital.
INTERNATIONAL OPERATIONS
Pacific Century maintains an extensive international
presence in the Asia-Pacific region that provides opportunities
to take part in lending, correspondent banking and deposit-taking
activities in these markets. Pacific Century divides its
international business into two areas: the Asia Market and the
Pacific Market, 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 International Banking Group
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 1998
Annual Report to Shareholders. There has been no significant
change to that process during the quarter. Pacific Century
continues to monitor its exposure in international lending with
particular attention provided to Asia and the South Pacific.
The countries in Asia to which Pacific Century maintains its
largest credit exposure on a cross border basis include South
Korea, Japan and Taiwan. Within Asia, the two most
problematic economies for Pacific Century remain Thailand and
Indonesia. The financial and liquidity problems in Thailand and
Indonesia required the intervention of the International Monetary
Fund. Pacific Century's cross-border credit assets in Thailand
and Indonesia at June 30, 1999 were approximately $20 million and
$16 million, respectively, compared to approximately $24 million
and $17 million, respectively at December 31, 1998.
Table 7 presents as of June 30, 1999, December 31, 1998, and
June 30, 1998 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, 1999 December 31, 1998 June 30, 1998
- -----------------------------------------------------------------------------------------------------------
Japan $272.0 $354.8 $363.6
South Korea 295.3 264.9 329.6
Taiwan 64.5 123.9 162.0
France 129.1 35.5 42.5
All Others 647.7 593.6 553.7
----------- ----------- -----------
$1,408.6 $1,372.7 $1,451.4
=========== =========== ===========
(1) In this table, 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. Monetary assets include loans, acceptances, and
interest-bearing deposits with other banks.
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 $149.4 million at June 30, 1999 from $139.3 million
a year ago and $137.5 million at the end of 1998. Compared with
the prior quarter-end, NPAs ended the current quarter at $13.9
million below the $163.3 million reported at March 31, 1999.
At June 30, 1999, the ratio of NPAs to outstanding loans was
1.55%. Comparatively the ratio was 1.40% at year-end 1998 and
1.47% at June 30, 1998. Table 8 presents Pacific Century's NPAs
and ratio of NPAs to total loans.
In order to minimize credit losses, Pacific Century strives
to maintain high underwriting standards, identify potential
problem loans and work with borrowers to cure delinquencies.
Moreover, charge-offs, if required, are taken promptly and
reserve levels are maintained at adequate levels. 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.
Total non-accrual loans rose to $143.4 million at June 30,
1999, up from $131.9 million and $126.1 million at year-end 1998
and June 30, 1998, respectively. Higher non-accrual balances in
the commercial real estate, commercial and industrial loan, and
lease categories accounted for most of the increase relative to
year-end 1998 and June 1998. Foreign non-accrual loans at June
30, 1999 declined $10.0 million from year-end 1998 and reflected
reductions in both Asia and the South Pacific Markets. Non-
accrual loans as of June 30, 1999 decreased $13.7 million from
the $157.1 million reported at 1999's first quarter-end.
Non-performing residential mortgages (excluding construction
loans) totaled $35.2 million at June 30, 1999, compared to $36.4
million at year-end 1998 and $35.2 million a year ago. Because
residential mortgages are secured by real estate, the credit risk
on these loans are lower than for unsecured lending. Most of
Pacific Century's residential loans are owner-occupied first
mortgages and were generally underwritten to provide a loan-to-
value ratio of no more than 80% at origination.
Foreclosed real estate totaled $6.0 million at June 30, 1999
compared to $5.6 million at year-end 1998 and $11.6 million a
year ago. At June 30, 1999, the foreclosed real estate portfolio
consisted of 45 properties, mostly located in Hawaii. The
largest property represented 16% of the total.
Accruing loans past due 90 days or more has remained
relatively constant over the last year. Accruing loans past due
90 days or more totaled $21.4 million at June 30, 1999, $20.8
million at year-end 1998, and $22.1 million at June 30, 1998.
Non-Performing Assets and Accruing Loans Past Due 90 Days or More
Table 8
- ----------------------------------------------------------------------------------------
June 30 December 31 June 30
(in millions of dollars) 1999 1998 1998
- ----------------------------------------------------------------------------------------
Non-Accrual Loans
Commercial and Industrial $37.5 $28.2 $23.7
Real Estate
Construction 0.8 2.9 2.2
Commercial 17.2 5.4 3.4
Residential 35.2 36.4 35.2
Installment 0.8 0.8 1.9
Leases 4.4 0.7 -
Foreign 47.5 57.5 59.7
- ----------------------------------------------------------------------------------------
Subtotal 143.4 131.9 126.1
Restructured Loans
Real Estate
Commercial - - 1.6
- ----------------------------------------------------------------------------------------
Subtotal - - 1.6
Foreclosed Real Estate
Domestic 5.8 5.5 11.6
Foreign 0.2 0.1 -
- ----------------------------------------------------------------------------------------
Subtotal 6.0 5.6 11.6
- ----------------------------------------------------------------------------------------
Total Non-Performing Assets 149.4 137.5 139.3
- ----------------------------------------------------------------------------------------
Accruing Loans Past Due 90 Days or More
Commercial and Industrial 3.9 0.4 2.4
Real Estate
Construction 0.2 0.4 4.2
Commercial 0.2 - 0.9
Residential 3.7 4.5 2.4
Installment 5.2 7.3 6.4
Leases - 0.3 0.9
Foreign 8.2 7.9 4.9
- ----------------------------------------------------------------------------------------
Subtotal 21.4 20.8 22.1
- ----------------------------------------------------------------------------------------
Total $170.8 $158.3 $161.4
========================================================================================
Ratio of Non-Performing Assets
to Total Loans 1.55% 1.40% 1.47%
- ----------------------------------------------------------------------------------------
Ratio of Non-Performing Assets
and Accruing Loans Past Due
90 Days or More to Total Loans 1.78% 1.61% 1.71%
- ----------------------------------------------------------------------------------------
Reserve for Loan Losses
Pacific Century maintains the reserve for loan losses at a
level that it believes is adequate to absorb estimated future
losses on all loans. 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. Pacific Century's credit administration
procedures emphasizes the early recognition and monitoring of
problem loans in order to control delinquencies and minimize
losses. This process and the quarterly analysis to determine the
adequacy of its reserve for loan losses is described in Pacific
Century's 1998 Annual Report to Shareholders.
The reserve for loan losses ended the second quarter of 1999
at $209.6 million, a $1.7 million decrease from year-end 1998 and
a $5.6 million increase over the same date last year. Net
charge-offs for the second quarter of 1999 were $12.7 million or
0.54% of average loans, compared to $26.0 million, or 1.08% of
average loans for the same quarter last year and $65.7 million,
or 0.70% of average loans for all of 1998. For the six months
ended June 30, 1999, net charge-offs were $23.5 million, or 0.50%
of average loans, compared to $43.9 million and 0.93%,
respectively in same 1998 period. The ratio of reserves to loans
outstanding at June 30, 1999 was 2.23%, compared to 2.20% at this
date last year and 2.19% at year-end 1998. A summary of the
activity in the reserve for loan losses is presented in Table 9.
At June 30, 1999, the reserve for loan losses provided
coverage of 140% of non-performing loans, compared to 154%
coverage at year-end 1998 and 146% at June 30, 1998.
Additionally, the annualized ratio of reserves to gross charge-
offs was 2.6 times for the second half of 1999, compared to 2.6
times for all of 1998 and 2.0 times for the second half of 1998.
For the first six months of 1999, recoveries totaled $16.7
million 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. Comparatively, recoveries
were $6.2 million in the first six months of 1998 and $16.3
million for all of 1998.
Reserve for Loan Losses
Table 9
- ----------------------------------------------------------------------------------------------
Second Second First Six First Six
Quarter Quarter Months Months
(in millions of dollars) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
Average Amount of Loans Outstanding $9,373.0 $9,619.7 $9,432.1 $9,427.9
- ----------------------------------------------------------------------------------------------
Balance of Reserve for Loan Losses
at Beginning of Period $209.3 $175.2 $211.3 $174.4
Loans Charged-Off
Commercial and Industrial 7.6 7.2 15.4 9.5
Real Estate
Construction 0.2 0.0 0.2 0.0
Commercial 0.2 0.2 2.2 0.2
Residential 1.6 0.2 3.6 0.8
Installment 6.9 6.0 12.9 13.2
Foreign 2.8 16.0 5.8 26.2
Leases 0.1 0.1 0.1 0.2
- ----------------------------------------------------------------------------------------------
Total Charged-Off 19.4 29.7 40.2 50.1
Recoveries on Loans Previously Charged-Off
Commercial and Industrial 1.5 1.0 9.5 1.6
Real Estate
Construction 0.0 0.0 0.0 0.0
Commercial 0.1 1.0 0.2 1.0
Residential 0.2 0.1 0.2 0.2
Installment 2.0 1.5 3.6 3.0
Foreign 2.9 0.1 3.2 0.4
- ----------------------------------------------------------------------------------------------
Total Recoveries 6.7 3.7 16.7 6.2
- ----------------------------------------------------------------------------------------------
Net Charge-Offs (12.7) (26.0) (23.5) (43.9)
Provision Charged to Operating Expenses 13.9 42.0 26.5 60.3
Other Net Additions (Reductions)* (0.9) 12.8 (4.7) 13.2
- ----------------------------------------------------------------------------------------------
Balance at End of Period $209.6 $204.0 $209.6 $204.0
==============================================================================================
Ratio of Net Charge-Offs to
Average Loans Outstanding (annualized) 0.54% 1.08% 0.50% 0.93%
- ----------------------------------------------------------------------------------------------
Ratio of Reserve to Loans Outstanding 2.23% 2.20% 2.23% 2.20%
- ----------------------------------------------------------------------------------------------
* 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 to maximize earnings performance and shareholder
value, while limiting the volatility of each. A detailed
discussion of these risks and Pacific Century's approach to
managing the risks are described in its 1998 Annual Report to
Shareholders.
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, 1999, December 31, 1998 and
June 30, 1998, 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. A liability sensitive exposure would imply
a favorable short-term impact on NII in periods of declining
interest rates.
Market Risk Exposure to Interest Rate Changes
Table 10
June 30, 1999 December 31, 1998 June 30, 1998
- ------------------------------------------------------------------------------------------------------
Interest Rate Change Interest Rate ChangeInterest 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 1.4% (0.6)% 1.9% (2.1)% 2.1% (1.8)%
- ------------------------------------------------------------------------------------------------------
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,
1999, the remainder of these capital positions which aggregated
$102.2 million, was not hedged. The comparative unhedged
position at year-end 1998 was $93.0 million.
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, 1999, December 31, 1998 and
June 30, 1998 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, 1999 December 31, 1998 June 30, 1998
(in millions of dollars)Book Value Value-at-Risk Book Value Value-at-Risk Book Value Value-at-Risk
- ------------------------------------------------------------------------------------------------------
Net Investments in Foreign
Subsidiaries and Branches
Japanese Yen $ 9.7 $ 2.0 $ 9.6 $ 2.7 $11.4 $ 3.2
Korean Won 42.8 5.8 44.2 7.9 35.9 12.1
Pacific Franc (1) 22.1 4.3 22.8 3.6 22.3 2.6
Other Currencies 27.6 15.9 16.4 15.3 23.5 12.2
------- ------- ------- ------- ------- -------
Total $102.2 $28.0 $93.0 $29.5 $93.1 $30.1
======= ======= ======= ======= ======= =======
(1) Net of a $41 million, $46 million and $42 million borrowing at June 30, 1999, December 31, 1998 and
June 30, 1998, respectively, denominated in French francs and foreign exchange hedge transactions of $24
million, $26 million and $25 million at June 30, 1999, December 31, 1998 and June 30, 1998.
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, 1999.
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 1998 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
1999, 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 remain at similar levels to
those reported at year-end 1998 ending the second quarter of 1999
at $173 million.
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, 1999, there was $125 million issued and outstanding under
this program.
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, 1999, Pacific Century's shareholders' equity
grew to $1.2 billion, an increase of 6.5% over the same date in
1998. The source of growth in shareholders' equity during the
first six months of 1999 included retention of earnings, and
issuance of common stock under various stock-based plans.
Offsetting these increases were cash dividends paid of $27.3
million, net treasury stock purchases of $8.9 million and
unrealized valuation adjustments of $16.8 million.
Pacific Century's regulatory capital ratios at June 30, 1999
were: Tier 1 Capital Ratio of 10.04%, Total Capital Ratio of
12.97%, and Leverage Ratio of 7.96%. 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 presents the activities and balances in
Pacific Century's capital accounts along with key capital ratios.
Equity Capital
Table 12
- -------------------------------------------------------------------------------------------
Quarter Ended Year Ended Quarter Ended
June 30 December 31 June 30
(in millions of dollars) 1999 1998 1998
- -------------------------------------------------------------------------------------------
Source of Common Equity
Net Income $38.5 $107.0 $3.1
Dividends Paid (13.6) (52.8) (13.0)
Dividend Reinvestment Program 0.8 5.4 1.2
Stock Repurchases (5.0) (7.3) -
Other (1) (14.1) 16.1 5.9
- -------------------------------------------------------------------------------------------
Annual Increase in Equity $6.6 $68.4 ($2.8)
===========================================================================================
Common Equity $1,214.2 $1,185.6 $1,140.5
Add: 8.25% Capital Securities of
Bancorp Hawaii Capital
Trust I 100.0 100.0 100.0
Minority Interest 4.4 7.4 6.9
Less: Intangibles 182.9 186.2 191.2
Unrealized Valuation and Other
Adjustments (13.6) 3.6 6.4
- -------------------------------------------------------------------------------------------
Tier I Capital 1,149.3 1,103.2 1,049.8
Allowable Loan Loss Reserve 144.0 147.2 138.1
Subordinated Debt 195.8 95.0 95.0
Investment in Unconsolidated
Subsidiary (3.7) (2.5) (2.6)
- -------------------------------------------------------------------------------------------
Total Capital $1,485.4 $1,342.9 $1,280.3
===========================================================================================
Risk Weighted Assets $11,450.2 $11,708.5 $10,979.2
===========================================================================================
Key Ratios
Tier I Capital Ratio 10.04% 9.42% 9.56%
Total Capital Ratio 12.97% 11.47% 11.66%
Leverage Ratio 7.96% 7.48% 6.88%
===========================================================================================
(1) Includes profit sharing; stock options and directors' restricted shares and deferred
compensation plans; and unrealized valuation adjustments for investment securities,
foreign currency translation and pension liability.
Year 2000
A significant issue facing all banks nationwide is the
transition to the new millennium. Year 2000 concerns arise
primarily from past date-coding practices in both software and
hardware that used two-digits rather than four-digits to
represent years. If not corrected, systems that use the two-
digit format will be unable to correctly distinguish dates after
December 31, 1999. This problem could cause these systems to
fail or produce inaccurate information.
State of Readiness
The resolution of Year 2000 issues is a top priority at
Pacific Century. Recognizing the importance of having its
systems ready for the Year 2000, Pacific Century Financial
Corporation established Project 2000 as an enterprise-wide
initiative in 1996. Project 2000 is a global strategic plan
supported by senior management and approved by the Board of
Directors.
As described in Pacific Century's 1998 Annual Report to
Shareholders, Pacific Century's Year 2000 project plan includes
five phases: awareness, assessment, renovation, validation
testing and implementation. As of June 30, 1999, Pacific Century
has completed the awareness, assessment, renovation and
validation testing phases of its Year 2000 plan for critical
systems. For all internally maintained critical systems, the
programming code, including vendor-provided code, have been
renovated and successfully tested for Year 2000 readiness. In
the implementation phase, systems that have been tested as Year
2000 compliant are migrated into production. As of June 30,
1999, Pacific Century had completed 95% of the implementation
phase for all critical systems. Additionally, as of June 30,
1999 Pacific Century was substantially complete in developing
Year 2000 contingency plans for critical functions. During the
remainder of 1999, Pacific Century will focus on validating its
Year 2000 contingency plans and monitoring the readiness of third
parties that it relies on to conduct business and serve
customers.
Pacific Century understands that successfully addressing
Year 2000 issues extends well beyond the remediation of internal
systems. Pacific Century has a detailed and extensive process to
ascertain and monitor the Year 2000 readiness of its vendors and
service providers. Additionally, Pacific Century has embarked on
a Year 2000 risk assessment program to determine the Year 2000
readiness of all material customers, counterparties and business
partners.
Notwithstanding these actions, Pacific Century recognizes
there can be no assurances that significant customers or critical
third parties will adequately address their Year 2000 issues in a
timely manner. Consequently, Pacific Century has developed a
"Year 2000 event plan" as part of its contingency planning
process to cover all critical business operations in the event
that circumstances outside of its control causes business
disruptions.
Estimated Year 2000 Costs
Pacific Century estimates that costs directly related to
Project 2000 issues will approximate $41 million, including $30
million in estimated incremental cost. Costs associated with
Project 2000 primarily include estimates for technology and
program management staff, staff retention, consultant fees, and
software and hardware costs, as well as, costs for customer
education and public relations. Through December 31, 1998,
cumulative costs for Project 2000 totaled approximately $25.4
million of which approximately $22.2 million were incurred in
1998. During the first six months of 1999, additional
expenditures aggregating $7.2 million were incurred, bringing the
total Project 2000 cost to $32.6 million at June 30, 1999. As
Project 2000 progresses, the cost estimate could change depending
on a number of factors, including the failure of third party
vendors to address Year 2000 issues in a timely manner. Year
2000 compliance costs are expected to be funded from operating
cash flow.
Forward-looking statements contained in the above Year 2000
disclosure should be read in conjunction with the cautionary
statements included in the introductory section of this report
under "Forward-Looking Statements."
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 23, 1999.
(b) Omitted per instructions.
(c) A brief description of each matter voted upon at the
Annual Shareholders' Meeting held on April 23, 1999 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 I directors for terms
expiring in 2002.
Peter D. Baldwin -
Votes cast for: 66,385,908
Votes cast against: 0
Votes withheld: 843,446
Richard J. Dahl -
Votes cast for: 66,520,698
Votes cast against: 0
Votes withheld: 708,656
Donald M. Takaki -
Votes cast for: 66,456,513
Votes cast against: 0
Votes withheld: 789,415
J. Richard Fredericks -
Votes cast for: 66,456,513
Votes cast against: 0
Votes withheld: 772,841
(2) Election of one Class III director for term
expiring in 2001.
Martin A. Stein -
Votes cast for: 66,361,782
Votes cast against: 0
Votes withheld: 867,569
(3) Proposal to approve an amendment to the
Certificate of Incorporation to reduce the
percentage of shares required to remove a
director.
Votes cast for: 60,420,228
Votes cast against: 377,673
Votes abstained: 173,469
(4) Proposal to approve an amendment to the
Certificate of Incorporation to permit ten percent
of the shareholders to call a special meeting.
Votes cast for: 60,186,854
Votes cast against: 535,795
Votes abstained: 245,301
(5) Proposal to approve an amendment to Pacific
Century Financial Corporation Stock Option Plan of
1994 to increase the number of shares of common
stock available for grant under the Option Plan.
Votes cast for: 60,729,635
Votes cast against: 6,173,005
Votes abstained: 326,712
(6) Proposal to approve certain performance-based
compensation provisions of the Option Plan for
purposes of Section 162(m).
Votes cast for: 64,252,300
Votes cast against: 2,539,601
Votes abstained: 437,450
(7) Proposal to approve certain material terms of the
One-Year Incentive Plan for purposes of Section
162(m).
Votes cast for: 63,917,446
Votes cast against: 2,819,028
Votes abstained: 493,778
(8) Proposal to approve certain material terms of the
Long-Term Incentive Plan for purposes of Section
162(m).
Votes cast for: 63,990,879
Votes cast against: 2,751,617
Votes abstained: 488,855
(9) Election of Ernst & Young LLP as Auditor.
Votes cast for: 66,731,925
Votes cast against: 367,031
Votes abstained: 130,397
(d) None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Number
3.1 Amendment to the Company's Certificate of
Incorporation to reduce the percentage of
shares required to remove a director for
cause (incorporated by reference to Proposal
3 of the March 8, 1999 Proxy Statement)
3.2 Amendment to the Company's Certificate of
Incorporation to permit ten percent of the
shareholders to call a special meeting
(incorporated by reference to Proposal 4 of
the March 8, 1999 Proxy Statement)
3.2 Amendment 99-1 to the Pacific Century
Financial Corporation Stock Option Plan of
1994 (incorporated by reference to Proposal 5
of the March 8, 1999 Proxy Statement)
20 Quarterly Report to Shareholders
27 Financial Data Schedule
99 Statement of Ratios
(b) No Form 8-K was filed during the quarter.
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 13, 1999 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