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 September 30, 2001
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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) 537-8430
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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 _____
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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 October 31, 2001 - 76,793,524
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shares
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Index
Pacific Century Financial Corporation and Subsidiaries
Part I. - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three months and Nine months ended
September 30, 2001 and 2000
Consolidated Balance Sheets - September 30, 2001, December 31, 2000,
and September 30, 2000
Consolidated Statements of Shareholders' Equity - Nine months ended
September 30, 2001 and 2000
Consolidated Statements of Cash Flows - Nine months ended September
30, 2001 and 2000
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Part II. - Other Information
Item 1. Exhibits and Reports on Form 8-K
Signatures
Pacific Century Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
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Three Months Ended Nine Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
(dollars in thousands except per share amounts) 2001 2000 2001 2000
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Interest Income
Interest and Fees on Loans and Leases $ 143,407 $ 203,858 $ 496,381 $ 593,240
Interest and Dividends on Investment Securities 10,002 13,184 32,824 41,263
Income on Investment Securities Available for Sale 30,779 41,772 106,226 123,966
Deposits 9,410 3,319 19,527 10,917
Funds Sold and Security Resale Agreements 1,781 632 4,231 1,606
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Total Interest Income 195,379 262,765 659,189 770,992
Interest Expense
Deposits 50,167 73,162 182,247 212,440
Security Repurchase Agreements 17,576 26,941 63,049 75,915
Funds Purchased 1,279 8,960 9,735 25,321
Short-Term Borrowings 2,019 4,739 8,013 15,785
Long-Term Debt 12,459 16,164 42,232 42,171
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Total Interest Expense 83,500 129,966 305,276 371,632
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Net Interest Income 111,879 132,799 353,913 399,360
Provision for Loan Losses 919 20,145 59,798 117,074
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Net Interest Income After Provision for Loan Losses 110,960 112,654 294,115 282,286
Non-Interest Income
Trust and Asset Management 13,999 15,874 45,041 49,078
Mortgage Banking 10,307 3,086 19,990 7,964
Service Charges on Deposit Accounts 9,594 10,074 29,412 29,811
Fees, Exchange, and Other Service Charges 17,912 25,398 61,505 74,883
Gain on Sale of Banking Operations 49,422 - 149,630 -
Gain on Settlement of Pension Obligation - - - 11,900
Investment Securities Gains (Losses) 935 (82) 32,819 (315)
Other Operating Income 11,780 12,676 34,663 41,348
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Total Non-Interest Income 113,949 67,026 373,060 214,669
Non-Interest Expense
Salaries 47,069 45,220 142,674 137,227
Pensions and Other Employee Benefits 12,180 12,303 39,076 37,721
Net Occupancy Expense 12,090 12,577 36,702 36,873
Net Equipment Expense 13,042 13,365 40,150 37,498
Goodwill and Other Intangibles Amortization 3,333 4,139 10,916 12,479
Restructuring and Other Related Costs 823 - 83,012 -
Minority Interest 76 110 239 286
Other Operating Expense 34,726 36,476 105,045 108,685
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Total Non-Interest Expense 123,339 124,190 457,814 370,769
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Income Before Income Taxes 101,570 55,490 209,361 126,186
Provision for Income Taxes 70,511 20,887 117,886 45,111
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Net Income $ 31,059 $ 34,603 $ 91,475 $ 81,075
====================================================================================================================================
Basic Earnings Per Share $ 0.39 $ 0.44 $ 1.14 $ 1.02
Diluted Earnings Per Share $ 0.37 $ 0.44 $ 1.11 $ 1.02
Dividends Declared Per Share $ 0.18 $ 0.18 $ 0.54 $ 0.53
Basic Weighted Average Shares 80,539,330 79,455,040 80,261,610 79,566,807
Diluted Weighted Average Shares 83,418,955 79,525,474 82,497,107 79,791,250
===================================================================================================================================
See accompanying notes to consolidated financial statements.
Pacific Century Financial Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
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Sept 30 December 31 Sept 30
(dollars in thousands) 2001 2000 2000
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Assets
Interest Bearing Deposits $ 1,227,817 $ 188,649 $ 185,312
Investment Securities - Held to Maturity
(Market Value of $558,561, $676,621 and $714,920, respectively) 547,443 670,038 716,392
Investment Securities - Available for Sale 2,065,894 2,507,076 2,484,482
Securities Purchased Under Agreements to Resell 7,639 3,969 5,560
Funds Sold 162,830 134,644 28,323
Loans Held for Sale 228,056 179,229 139,139
Loans 6,766,663 9,235,158 9,339,303
Allowance for Loan Losses (182,541) (246,247) (244,966)
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Net Loans 6,584,122 8,988,911 9,094,337
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Total Earning Assets 10,823,801 12,672,516 12,653,545
Cash and Non-Interest Bearing Deposits 426,162 523,969 438,312
Premises and Equipment 223,304 254,621 251,240
Customers' Acceptance Liability 1,310 14,690 10,956
Accrued Interest Receivable 56,003 68,585 86,109
Foreclosed Assets 37,462 4,526 5,128
Goodwill and Other Intangibles 67,618 176,069 179,149
Mortgage Servicing Rights 23,899 16,195 15,269
Other Assets 284,614 282,645 300,153
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Total Assets $11,944,173 $14,013,816 $13,939,861
====================================================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $ 1,428,454 $ 1,707,724 $ 1,626,426
- Interest Bearing 1,792,155 2,008,730 2,039,325
Savings 813,427 665,239 671,437
Time 2,186,849 2,836,083 2,801,947
Foreign Deposits
Demand - Non-Interest Bearing 321,706 385,366 343,828
Time Due to Banks 269,757 535,126 571,576
Other Savings and Time 587,389 942,313 766,129
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Total Deposits 7,399,737 9,080,581 8,820,668
Securities Sold Under Agreements to Repurchase 1,833,091 1,655,173 1,791,983
Funds Purchased 129,715 413,241 377,069
Short-Term Borrowings 154,910 211,481 365,407
Bank's Acceptances Outstanding 1,310 14,690 10,956
Accrued Retirement Expense 36,632 37,868 37,796
Accrued Interest Payable 49,092 72,460 80,792
Accrued Taxes Payable 224,915 130,766 97,597
Minority Interest 4,381 4,536 4,154
Other Liabilities 60,927 94,512 103,634
Long-Term Debt 678,408 997,152 999,736
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Total Liabilities 10,573,118 12,712,460 12,689,792
Shareholders' Equity
Common Stock ($.01 par value), authorized 500,000,000 shares;
issued / outstanding: Sept 2001 - 81,365,600 / 79,195,668 ;
December 2000 - 80,558,811 / 79,612,178; Sept 2000 - 80,556,883 / 79,503,301 806 806 806
Capital Surplus 367,394 346,045 346,016
Accumulated Other Comprehensive Income 25,426 (25,079) (56,620)
Retained Earnings 1,044,039 996,791 979,007
Deferred Stock Grants (15,526) - -
Treasury Stock, at Cost - (Shares: Sept 2001 - 2,169,932; December 2000 - 946,633;
and Sept 2000 - 1,053,582) (51,084) (17,207) (19,140)
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Total Shareholders' Equity 1,371,055 1,301,356 1,250,069
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Total Liabilities and Shareholders' Equity $11,944,173 $14,013,816 $13,939,861
===================================================================================================================================
See accompanying notes to consolidated financial statements.
Pacific Century Financial Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
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Accumulated
Other
Compre- Deferred Compre-
Common Capital hensive Retained Stock Treasury Hensive
(dollars in thousands) Total Stock Surplus Income Earnings Grants Stock Income
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Balance at December 31, 2000 $1,301,356 $806 $346,045 $(25,079) $ 996,791 $ - $(17,207)
Comprehensive Income
Net Income 91,475 - - - 91,475 - - $ 91,475
Other Comprehensive Income, Net of Tax
Investment Securities 23,906 - - 23,906 - - - 23,906
Foreign Currency Translation Adjustment 25,911 - - 25,911 - - - 25,911
Pension Liability Adjustments (159) - - (159) - - - (159)
Stock Compensation 847 - - 847 - - - 847
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Total Comprehensive Income $141,980
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Common Stock Issued
46,408 Profit Sharing Plan 1,065 - 257 - - - 808
604,264 Stock Option Plan 10,313 - 892 - (812) - 10,233
91,764 Dividend Reinvestment Plan 2,103 - 483 - - - 1,620
4,248 Directors' Restricted Shares and
Deferred Compensation Plan 341 - 95 - - - 246
724,600 Employees' Restricted Shares 2,797 - 18,323 - - (15,526) -
65,146 Hawaii Insurance Network 1,299 - 1,299 - - - -
Treasury Stock Purchased (46,784) - - - - - (46,784)
Cash Dividends Paid (43,415) - - - (43,415) - -
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Balance at September 30, 2001 $1,371,055 $806 $367,394 $ 25,426 $1,044,039 $(15,526) $(51,084)
====================================================================================================================================
Balance at December 31, 1999 $1,212,330 $806 $345,851 $(66,106) $ 942,177 $ - $(10,398)
Comprehensive Income
Net Income 81,075 - - - 81,075 - - $ 81,075
Other Comprehensive Income, Net of Tax
Investment Securities 9,960 - - 9,960 - - - 9,960
Foreign Currency Translation Adjustment (474) - - (474) - - - (474)
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Total Comprehensive Income $ 90,561
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Common Stock Issued
62,102 Profit Sharing Plan 1,096 - 18 - (167) - 1,245
195,094 Stock Option Plan 2,610 - - - (1,500) - 4,110
142,421 Dividend Reinvestment Plan 2,481 - 52 - (431) - 2,860
4,973 Directors' Restricted Shares and
Deferred Compensation Plan 95 - 95 - - - -
Treasury Stock Purchased (16,957) - - - - - (16,957)
Cash Dividends Paid (42,147) - - - (42,147) - -
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Balance at September 30, 2000 $1,250,069 $806 $346,016 $(56,620) $ 979,007 $ - $(19,140)
====================================================================================================================================
See accompanying notes to consolidated financial statements
Pacific Century Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Nine Months ended September 30
(dollars in thousands) 2001 2000
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Operating Activities
Net Income $ 91,475 $ 81,075
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan losses 59,798 117,074
Depreciation and amortization 65,012 36,709
Amortization of deferred loan fees and leasing income (31,965) (35,333)
Amortization of deferred stock grants 3,644 -
Deferred income taxes 4,349 (35,743)
Investment security (gains) losses (32,819) 315
Proceeds from sales of loans held for sale 798,922 186,151
Originations of loans held for sale (847,749) (189,193)
Gain on sale of banking operations (149,630) -
Net change in other assets and liabilities (44,113) 27,707
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Net cash (used) provided by operating activities (83,076) 188,762
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Investing Activities
Proceeds from redemptions of investment securities held to maturity 565,422 106,539
Purchases of investment securities held to maturity (442,827) (26,609)
Proceeds from sales and redemptions of investment securities available for sale 1,100,076 152,122
Purchases of investment securities available for sale (602,169) (84,727)
Net decrease (increase) in loans and lease financing 1,291,318 (31,327)
Proceeds from sale of banking operations 657,476 -
Premises and equipment, net (13,222) (8,474)
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Net cash provided by investing activities 2,556,074 107,524
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Financing Activities
Net decrease in demand, savings, and time deposits (968,392) (573,550)
Proceeds from lines of credit and long-term debt 4,572 300,072
Repayments of long-term debt (323,316) (27,993)
Net decrease in short-term borrowings (162,179) (255,120)
Proceeds from issuance of common stock, net of common stock repurchased (32,962) (10,675)
Cash dividends (43,415) (42,147)
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Net cash used by financing activities (1,525,692) (609,413)
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Effect of exchange rate changes on cash 25,911 (474)
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Increase (Decrease) in cash and cash equivalents 973,217 (313,601)
Cash and cash equivalents at beginning of year 851,231 971,108
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Cash and cash equivalents at end of period $ 1,824,448 $ 657,507
====================================================================================================================================
See accompanying notes to consolidated financial statements.
Pacific Century Financial Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Pacific Century
Financial Corporation and subsidiaries (the Company) have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, the consolidated financial statements reflect all normal recurring
adjustments necessary for a fair presentation of the results for the interim
periods. Certain prior period amounts have been reclassified to conform to
current period classifications.
These statements should be read in conjunction with the audited consolidated
financial statements and related notes included in the Company's 2000 Annual
Report on Form 10-K. Operating results for the three and nine months ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001.
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 (First Savings) located in the West and South Pacific that are
denominated in U.S. dollars are classified as domestic. The Company's
international operations are primarily concentrated in Japan, Singapore, South
Korea, Taiwan, French Polynesia, Fiji, New Caledonia, Papua New Guinea and
Vanuatu.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include: cash
and non-interest bearing deposits, interest bearing deposits, securities
purchased under agreements to resell and funds sold. All amounts are readily
convertible to cash and have maturities less than ninety days.
Income Taxes
The provision for income taxes is computed by applying statutory federal,
foreign, 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 tax-exempt interest income, bank owned life insurance income
and goodwill written off in the second and third quarters of 2001. The write-off
was associated with the Company's divestiture of its California bank subsidiary.
The tax provision is also reduced by low-income housing and investment tax
credits.
Regulatory Matters
The Company continues to comply with the terms of the previously disclosed
Memorandum of Understanding. The Company obtained regulatory approval for
dividend payments for the first, second and third quarters of 2001. In October
2001, regulatory approval was obtained for a $200 million share repurchase
program, which has begun. This is in addition to the $70 million share
repurchase program, which began on July 26, 2001 and was completed in October
2001.
Note 2. Restructuring
On April 23, 2001 the Company announced a strategic plan designed to maximize
shareholder value by strengthening its Hawaii and West Pacific operations and
divesting most other holdings. The Company is divesting or winding down its
operations in California, the South Pacific and Asia. It will maintain its
operations in Hawaii, the West Pacific, American Samoa, a representative office
in Japan, and a leasing office in Arizona.
On August 31, 2001, the Company closed its Bank of Hawaii Hong Kong branch and
its representative and two extension offices in the Philippines. The remaining
Asian branches no longer accept business and will be closed for business by the
end of 2001.
On September 7, 2001, the Company completed the sale of Pacific Century Bank,
N.A's California branches, (the California Bank subsidiary). The sale of all 20
branches included approximately $700 million in deposits, $500 million in loans
and 300 employees.
On October 3, 2001 the Company reached a definitive agreement to sell its
operations in Papua New Guinea, Vanuatu, and Fiji to Australia-based Australia
and New Zealand Banking Group Limited (ANZ). Completion of the sale, which is
subject to regulatory approvals, is expected before the end of the year. The
approximately $50 million purchase transaction, includes total assets of about
$180 million. The divested operations will include two branches in Papua New
Guinea, two in Vanuatu and three in Fiji.
On October 29, 2001 the Company announced that it has entered into exclusive
negotiations to sell its approximately 95% share interest in its French
Polynesia and New Caledonia operations to France-based Caisse Nationale des
Casisses d'Epargne (CNCE).
In connection with these divestitures, the Company incurred restructuring and
related costs as follows:
(in millions) Three-Months Ended Nine-Months Ended
September 30, 2001 September 30, 2001
Foreign Currency Translation Losses $ - $ 30.2
Write-down of goodwill - 15.5
Employee Termination Costs (0.2) 15.7
Unrealizable Foreign Tax Credit - 5.0
Unrecoverable Investments - 6.1
Contract and Lease Terminations (2.0) 1.1
Consulting Fees 1.7 3.8
Other 1.3 5.6
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Total $ 0.8 $ 83.0
===== ======
In addition, accelerated amortization and depreciation expenses related to the
closure of the Asian branches of $1.3 million and $2.5 million were recorded for
the three and nine months ended September 30, 2001, respectively.
The third quarter expense of $0.8 million includes the reversal $2.0 million in
accruals for previously estimated costs that were resolved favorably during the
third quarter. In addition, originally estimated severance payments of
approximately $2.0 million were reversed offsetting $1.8 million of expense
during the quarter. Expenses for the nine months included the write-off of
foreign currency translation losses and the related deferred tax assets
associated with countries that the Company planned to exit and the write-off of
an investment in an unconsolidated subsidiary. A $15.5 million goodwill
impairment charge was recorded in the second quarter of 2001 in anticipation of
the sale of the California Bank subsidiary that took place in the third quarter.
Activity in the Restructuring Accrual
(in millions)
Balance at December 31, 2000 $ -
Restructuring Charges 2.3
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Balance at March 31, 2001 2.3
Restructuring Charges 17.4
Payments (1.2)
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Balance at June 30, 2001 18.4
Restructuring Charges 1.0
Payments (6.5)
Reversals (4.0)
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Balance at September 30, 2001 $ 8.9
======
The $8.9 million is comprised of $7.5 million in severance for 93 employees
primarily in the Asia Division, $0.6 million for lease terminations and $0.8
million for other costs associated with the divesting businesses.
Note 3. Business Segments
The Company is a financial services organization that has maintained a broad
presence throughout the Pacific region. This presence will change over the
remainder of the year in conjunction with management's announced intention to
divest non-core holdings. Operations in Hawaii, the West Pacific, American Samoa
and Japan will be retained, as well as an office in Arizona for its leasing
operations and technology support. During the first quarter of 2001, the Company
realigned its business from geographic segments into the following segments:
Retail Banking, Commercial Banking, Financial Services Group, Treasury and Other
Corporate and Divestiture Businesses. Corporate Restructuring Related Activities
have been segregated for the current year due to their non-recurring nature.
Business segment results are determined based on the Company's internal
financial management organizational structure. The Company uses a variety of
techniques to assign and transfer balance sheet and income statement amounts
between business segments including allocations of common costs and capital.
Accounting principles generally accepted in the United States do not cover these
techniques and accounting practices. The Company is continuing to develop its
business segment accounting practices and, during 2001 has implemented changes
in the way that segment results are measured and used by management.
Accordingly, the previously presented operating results for the periods ended
September 30, 2000 have been reclassified to be consistent with the periods
ended September 30, 2001. Amounts reported for the nine months ended September
30, 2001 also include reclassification of 2001 prior quarter information to
conform to third quarter's presentation. It is possible that further revision of
segment accounting practices may be made in future periods; accordingly prior
segment information may be reclassified.
The financial results for the three and nine months ended September 30, 2001 and
2000 are presented below for each of the Company's principal segments.
Business Segment Selected Financial Information
CORPORATE
FINANCIAL TREASURY RESTRUCTURING
SERVICES AND OTHER DIVESTITURE RELATED CONSOLIDATED
RETAIL COMMERCIAL GROUP CORPORATE BUSINESSES ACTIVITIES TOTAL
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Three Months Ended: September 30, 2001
Net Interest Revenue $ 39,808 $ 38,053 $ 2,414 $ 10,733 $ 20,871 $ - $ 111,879
GAAP Provision for Loan Loss (2,050) (4,371) - - 5,502 - (919)
Net Interest Income after Provision 37,758 33,682 2,414 10,733 26,373 - 110,960
Gains from Divestitures - - - - - 49,422 49,422
Other Non-Interest Income 22,752 6,129 20,946 3,904 8,627 2,169 64,527
Total Revenue 60,510 39,811 23,360 14,637 35,000 51,591 224,909
Restructuring & Other related costs - - - - - 823 823
Non-Interest Expense 46,431 19,024 19,291 6,177 29,510 2,083 122,516
Net Income (Loss) Before Income Taxes 14,079 20,787 4,069 8,460 5,490 48,685 101,570
Income Taxes (5,913) (8,159) (1,709) (2,859) (2,806) (49,065) (70,511)
GAAP Net Income (Loss) $ 8,166 $ 12,628 $ 2,360 $ 5,601 $ 2,684 $ (380) $ 31,059
==========================================================================================
Total Assets $ 3,237,441 $3,315,570 $282,165 $3,459,596 $1,649,401 $ - $ 11,944,173
CORPORATE
FINANCIAL TREASURY RESTRUCTURING
SERVICES AND OTHER DIVESTITURE RELATED CONSOLIDATED
RETAIL COMMERCIAL GROUP CORPORATE BUSINESSES ACTIVITIES TOTAL
--------------------------------------------------------------------------------------------
Three Months Ended: September 30, 2000
Net Interest Revenue $ 45,225 $ 47,179 $ 1,229 $ (1,519) $ 40,685 $ - $ 132,799
GAAP Provision for Loan Loss (1,833) (9,884) (45) (548) (7,835) - (20,145)
Net Interest Income after Provision 43,392 37,295 1,184 (2,067) 32,850 - 112,654
Gains from Divestitures - - - - - - -
Other Non-Interest Income 17,654 8,201 20,759 9,890 10,522 - 67,026
Total Revenue 61,046 45,496 21,943 7,823 43,372 - 179,680
Restructuring & Other related costs - - - - - - -
Non-Interest Expense 42,682 22,614 16,558 7,124 35,212 - 124,190
Net Income (Loss) Before Income Taxes 18,364 22,882 5,385 699 8,160 - 55,490
Income Taxes (7,713) (9,338) (2,262) 2,975 (4,549) - (20,887)
GAAP Net Income (Loss) $ 10,651 $ 13,544 $ 3,123 $ 3,674 $ 3,611 $ - $ 34,603
============================================================================================
Total Assets $ 2,952,990 $4,785,277 $451,226 $2,097,943 $3,652,425 $ - $ 13,939,861
Business Segment Selected Financial Information
CORPORATE
FINANCIAL TREASURY RESTRUCTURING
SERVICES AND OTHER DIVESTITURE RELATED CONSOLIDATED
RETAIL COMMERCIAL GROUP CORPORATE BUSINESSES ACTIVITIES TOTAL
---------------------------------------------------------------------------------------------
Nine Months Ended: September 30, 2001
Net Interest Revenue $ 124,115 $ 122,210 $ 7,809 $ 16,851 $ 85,372 $ (2,444) $ 353,913
GAAP Provision for Loan Loss (6,520) (14,523) - - (2,039) (36,716) (59,798)
Net Interest Income after Provision 117,595 107,687 7,809 16,851 83,333 (39,160) 294,115
Gains from Divestitures - - - - - 181,704 181,704
Other Non-Interest Income 64,724 21,621 62,813 14,121 29,208 (1,131) 191,356
Total Revenue 182,319 129,308 70,622 30,972 112,541 141,413 667,175
Restructuring & Other related costs - - - - - 84,249 84,249
Non-Interest Expense 132,988 65,264 58,315 16,435 98,480 2,083 373,565
Net Income (Loss) Before Income Taxes 49,331 64,044 12,307 14,537 14,061 55,081 209,361
Income Taxes (20,718) (27,876) (5,169) (3,116) (4,229) (56,778) (117,886)
GAAP Net Income (Loss) $ 28,613 $ 36,168 $ 7,138 $ 11,421 $ 9,832 $ (1,697) $ 91,475
===========================================================================================
Total Assets $ 3,237,441 $ 3,315,570 $282,165 $3,459,596 $1,649,401 $ - $ 11,944,173
CORPORATE
FINANCIAL TREASURY RESTRUCTURING
SERVICES AND OTHER DIVESTITURE RELATED CONSOLIDATED
RETAIL COMMERCIAL GROUP CORPORATE BUSINESSES ACTIVITIES TOTAL
---------------------------------------------------------------------------------------------
Nine Months Ended: September 30, 2000
Net Interest Revenue $ 127,054 $ 145,343 $ 5,103 $ 5,027 $ 116,833 $ - $ 399,360
GAAP Provision for Loan Loss (6,310) (74,801) (45) (8,217) (27,701) - (117,074)
Net Interest Income after Provision 120,744 70,542 5,058 (3,190) 89,132 - 282,286
Gains from Divestitures - - - - - - -
Other Non-Interest Income 54,451 23,796 64,965 37,993 33,464 - 214,669
Total Revenue 175,195 94,338 70,023 34,803 122,596 - 496,955
Restructuring & Other related costs - - - - - - -
Non-Interest Expense 123,009 67,639 51,090 22,949 106,082 - 370,769
Net Income (Loss) Before Income Taxes 52,186 26,699 18,933 11,854 16,514 - 126,186
Income Taxes (21,918) (10,145) (7,952) 2,072 (7,168) - (45,111)
GAAP Net Income (Loss) $ 30,268 $ 16,554 $ 10,981 $ 13,926 $ 9,346 $ - $ 81,075
==========================================================================================
Total Assets $ 2,952,990 $ 4,785,277 $451,226 $2,097,943 $3,652,425 $ - $ 13,939,861
Note 4. Recent Accounting Pronouncements
During 2001, the Company adopted the requirements of Statement of Financial
Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS 140). SFAS 140 revised
the criteria for accounting for securitizations and other transfers of financial
assets and collateral, and introduced new disclosures. Adoption of SFAS 140 had
no material effect on the Company's financial statements.
On June 29, 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations (SFAS 141), and SFAS No. 142, Goodwill and Other
Intangible Assets, (SFAS 142). SFAS 141, effective June 30, 2001, requires that
all business combinations initiated after June 30, 2001 be accounted for under
the purchase method of accounting. SFAS 142 eliminates amortization of goodwill
associated with business combinations completed after June 30, 2001. During a
transition period from July 1, 2001 through December 31, 2001, goodwill
associated with business combinations completed prior to July 1, 2001 will
continue to be amortized through the income statement. Effective January 1,
2002, periodic goodwill amortization and expense recognition will be
discontinued and goodwill will be assessed (at least annually) for impairment at
the reporting unit level by applying a fair-value based test. SFAS 142 also
provides additional guidance on acquired intangibles that should be separately
recognized and amortized. Under SFAS 142 intangibles with indefinite lives will
no longer be amortized to the income statement. Beginning January 1, 2002, under
SFAS 142 the elimination of goodwill amortization is expected to increase net
income by approximately $4.7 million, after taking into consideration the
goodwill that will be eliminated with the Company's planned divestitures. The
Company will also perform an initial goodwill assessment to determine if a
transition impairment charge will be recognized under SFAS 142.
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, (SFAS 144). SFAS 144 supercedes FASB Statement
No.121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of (SFAS 121), and certain of the accounting and reporting
provisions of APB Opinion No. 30. For long-lived assets to be held and used,
SFAS 144 retains the requirements of SFAS 121 to (a) recognize an impairment
loss only if the carrying value of long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and fair value of the asset. For long-lived assets
to be disposed of, by sale the SFAS 121 model is also retained which requires an
asset to be measured at the lower of its carrying amount or fair value less cost
to sell and to cease depreciation. SFAS 144 does establish criteria beyond that
previously specified in SFAS 121 to determine when a long-lived asset is held
for sale. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and is generally to be applied prospectively.
The Company is currently evaluating the impact of SFAS 144.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This report contains forward-looking statements regarding the Company's beliefs,
estimates, projections and assumptions, which are provided to assist in the
understanding of certain aspects of the Company's anticipated future financial
performance. The Company cautions readers not to place undue reliance on any
forward-looking statement. Forward-looking statements are subject to significant
risks and uncertainties, many of which are beyond the Company's control.
Although the Company believes that the assumptions underlying its
forward-looking statements are reasonable, any assumption could prove to be
inaccurate and actual results may differ from those contained in or implied by
such forward-looking statements for a variety of reasons. Factors that might
cause differences to occur include, but are not limited to, economic conditions
in the markets that the Company serves including those in Hawaii, the U.S.
Mainland, Asia and the West and South Pacific; shifts in interest rates;
fluctuations in currencies of Asian Rim and South Pacific countries relative to
the U.S. dollar; factors impacting the implementation of the strategic plan
(including restructuring of the Company), which may result in the plan not being
completed within the expected financial and time estimates; credit markets may
deteriorate; credit quality initiatives may fall short of the Company's goals;
the expense reductions may not be achieved; the Company may not be able to
maintain its net interest margin; proposed equity repurchases may not be
implemented within the expected financial and time estimates; implementation of
the strategic plan may cause unanticipated organizational disruptions; customer
acceptance of our business as restructured may be less than expected; changes in
applicable federal, state, and foreign income tax laws and regulatory and
monetary policies; and increases in competitive pressures in the banking and
financial services industry could increase, particularly in connection with
product delivery and pricing. The terrorist attacks of September 11, 2001 and
the reactions to them may have a significant adverse effect on the primary
markets the Company serves. The primary market is heavily dependent on air
transportation and tourism. The government's policy changes as a result of the
September 11, events could have consequences the Company cannot predict. Unless
expressly stated, the Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect events or
circumstances after the date of such statements.
PERFORMANCE HIGHLIGHTS
The Company reported earnings for the three months ended September 30, 2001 of
$31.1 million, compared to $34.6 million for the three months ended September
30, 2000. Diluted earnings per share were $0.37 for the third quarter of 2001
compared to $0.44 in the third quarter of 2000. The Company's net income for the
first nine months of 2001 was $91.5 million, compared to $81.1 million for the
corresponding period of the prior year.
On April 23, 2001 the Company announced a strategic plan designed to maximize
shareholder value by strengthening its Hawaii and West Pacific operations and
divesting most other holdings. In line with its strategic plan, the Company
completed the sale of its California Bank subsidiary on September 7, 2001. On
October 3, 2001 the Company announced it had reached a definitive agreement to
sell its operations in Papua New Guinea, Vanuatu and Fiji to Australia-based
ANZ. The Company also has announced that it has entered into exclusive
negotiations to sell its interest in its French Polynesia and New Caledonia
banks to the French bank, Caisse d'Epargne. These transactions are anticipated
to close by year-end 2001. The Hong Kong branch and representative and extension
offices in the Philippines have been closed during the third quarter and the
remaining Asian branches will be closed by the end of 2001. The Company will
maintain its operations in
Hawaii, the West Pacific, American Samoa, a representative office in Japan and a
leasing office in Arizona. As a consequence of the plan, the Company recognized
pre-tax gains on sales of $49.4 million and $149.6 million in the three-months
and nine months ended September 30, 2001. The related sales costs and tax
obligations largely offset the gain on the sale recognized in the third quarter.
Additionally, the Company recognized restructuring and other related costs of
$2.1 million and $85.5 million during the three and nine months ended September
30, 2001, respectively.
The Company's net interest income for the quarter on a fully taxable equivalent
basis was $112.0 million, down $4.9 million from the previous quarter primarily
due to the sale of the California Bank subsidiary and the continued managed
reduction of loans to improve the Company's credit profile. Net interest income
was down $20.0 million from the same quarter last year primarily due to
reductions in the loan portfolio from divestitures and the declining interest
rate environment.
The Company's net interest margin for the third quarter of 2001 of 3.90 percent
was essentially unchanged from the second quarter of 2001 but was down from 4.02
% in the third quarter last year. The decline from the prior year quarter was
primarily due to loan reductions, including the sale of the credit card
portfolio, and lower returns earned on the increased liquidity of the Company.
The provision for loan and lease losses was $0.9 million for the third quarter
2001, reflecting earlier improvements in the Company's asset quality and its
allowance for loan and lease losses. This compares to a provision for loan and
lease losses in the prior quarter of $6.4 million and $20.1 million in the third
quarter last year. Contributing to the lower provision were continued high
levels of recoveries, which totaled $15.0 million for the quarter, including a
$6.5 million recovery in the Asia business.
Non-performing assets, exclusive of loans past due 90+ days, decreased for the
fourth consecutive quarter to $106.4 million. Compared to the previous quarter,
non-performing assets declined $12.5 million in the third quarter and were down
$113.2 million or 51.5% from the same period last year.
The effective tax rate of 69% for the third quarter of 2001 results from
the effect of non-tax-deductible goodwill and other costs associated with the
divestitures. Excluding the effects of the divested businesses, the effective
tax rate was approximately 38.5%.
In the third quarter of 2001, return on average assets (ROAA) and return on
average equity (ROAE) were 1.00% and 8.88%, respectively, compared to 0.98% and
11.20% in the third quarter of 2000. On a year-to-date basis, ROAA was 0.94% and
0.77% in 2001 and 2000, respectively, and ROAE was 8.96% in 2001 compared to
8.85% in 2000.
Total assets at September 30, 2001 were $11.9 billion, down from $14.0 billion
at December 31, 2000 and $13.9 billion at September 30, 2000. The decrease in
total assets was largely due to reductions in the Company's loan portfolio,
which was $2.6 billion lower at September 30, 2001 as compared to September 30,
2000. The decline in loans was partially due to sales in 2001 of commercial
loans, credit card loans, Pacific Century Bank, N.A.'s Arizona and California
branches (Pacific Century Bank Branches) and planned risk reduction in the
portfolio. In addition, since December 31, 2000, loans in the Company's Asia
branches have declined as the branches are winding down their operations.
As part of its efforts to effectively manage capital during the third quarter
2001 the Company announced a program to repurchase $70 million of common shares.
At September 30, 2001 the Company had repurchased
2.7 million shares at an average price of $23.37. The remainder of this initial
repurchase program was completed in October 2001. The Company has initiated an
additional $200 million repurchase program. At September 30, 2001 the leverage
ratio was 11.37% compared to 10.47% at June 30, 2001 and 8.80% at September 30,
2000.
The terrorist attacks of September 11, 2001 had both indirect and direct effects
on the Company and its customers. The more direct impact did not have
significant financial consequences. The Company's New York office was
unavailable and business activities were moved to other locations and service
providers. As with many companies, some business processes and transactions were
interrupted. These activities were subsequently returned to customary levels,
without adverse financial consequences. The indirect impact may affect many
customers. The impact on customers of the subsequent slowing of economic
activity, including reduced tourist arrivals in Hawaii, will depend upon the
extent and length of the slowdown. The Company has evaluated the initial impact
on customers and has adjusted its estimates of credit risk. These risks have
been considered in determining the level of allowance for loan losses at
September 30, 2001. The Company continues to monitor the indirect impact of the
terrorist attacks and related events. The Company will make appropriate
adjustments to its allowance for loan losses or other accounts when the indirect
financial impact is more clearly determinable.
Highlights (Unaudited)
- --------------------------------------------------------------------------------
(dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
------------------------------------------ -----------------------------------------
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
Earnings Highlights and Performance
Ratios
Net Income $31,059 $34,603 $ 91,475 $ 81,075
Basic Earnings Per Share 0.39 0.44 1.14 1.02
Diluted Earnings Per Share 0.37 0.44 1.11 1.02
Cash Dividends 14,625 14,302 43,415 42,147
Return on Average Assets 1.00% 0.98% 0.94% 0.77%
Return on Average Equity 8.88% 11.20% 8.96% 8.85%
Net Interest Margin 3.90% 4.02% 3.91% 4.08%
Core Efficiency Ratio (a) 69.12% 62.15% 67.68% 61.58%
Cash Basis Financial Data
Net Income $34,392 $38,743 $ 102,391 $ 93,554
Basic Earnings per Share $ 0.43 $ 0.49 $ 1.28 $ 1.18
Diluted Earnings per Share $ 0.41 $ 0.49 $ 1.24 $ 1.17
Return on Average Assets 1.12% 1.12% 1.06% 0.90%
Return on Average Equity 11.17% 14.88% 11.52% 12.22%
Core Efficiency Ratio (a) (b) 67.21% 60.08% 65.70% 59.50%
(a) Excludes the effect of restructuring activities and non-recurring
transactions.
(b) Excludes the effect of intangibles which include goodwil, core deposit and
trust intangibles.
- --------------------------------------------------------------------------------
September 30, September 30,
Statement of Condition Highlights and Performance Ratios 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $11,944,173 $13,939,861
Net Loans 6,584,122 9,094,337
Total Deposits 7,399,737 8,820,668
Total Shareholders' Equity 1,371,055 1,250,069
Book Value Per Common Share $ 17.31 $ 15.72
Allowance / Loans Outstanding 2.70% 2.62%
Average Equity / Average Assets 10.47% 8.65%
Employees (FTE) 3,881 4,182
Branches 140 171
Market Price Per Share of Common Stock Quarter Ended
Closing $ 23.37 $ 17.13
High $ 28.30 $ 17.50
Low $ 20.20 $ 13.13
STATEMENT OF INCOME ANALYSIS
The income statement presentation was revised in 2001 and accordingly prior
periods have been reclassified. The revisions include: presenting income from
mortgage banking related activities as a separate financial statement line,
combining Interest on Loans, Loan Fees and Income on Lease Financing into one
financial statement line, reclassifying interchange and other fees to Fees,
Exchange, and Other Service charges, and separately classifying goodwill and
other intangible amortization. The following illustrates the reclassifications
for the three and nine months ended September 30, 2000.
Three Months Ended Sept. 30, 2000 Nine Months Ended Sept. 30, 2000
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Previously Amounts after Previously Amounts after
Reported Reclassification Reported Reclassification
- ------------------------------------------------------------------------------------------------------------------
Interest & Fees on Loans &
Leases $192,749 $203,858 $558,735 $593,240
Loan Fees 7,679 - 24,902 -
Income from Lease Financing 9,935 - 27,661 -
Mortgage Banking - 3,086 - 7,964
Fees, Exchange, and Other
Service Charges 22,714 25,398 66,926 74,883
Goodwill & Other Intangible
Amortization - 4,139 - 12,479
Other Operating Expense 41,350 36,476 123,301 108,685
Net Interest Income
Taxable-equivalent net interest income was $112.0 million for the third quarter
of 2001, down $20.0 million, or 15.2% from the comparable period in 2000.
Taxable-equivalent net interest income was $354.1 million for the nine-months
ended September 30, 2001, down $46.0 million, or 11.5% from the same period in
2000. The decline in net interest income was attributable to: 1) decreases in
the Company's loan portfolio, in particular the sale of the credit card
portfolio and Pacific Century Bank Branches which portfolios were higher
yielding than the portfolios that remain, and 2) interest rate reductions during
2001 as a result of actions taken by the Federal Reserve. During the third
quarter of 2001, the Federal Reserve reduced Prime interest rates by 75 basis
points. Since the end of the third quarter 2000, interest rates have been
reduced by 350 basis points.
The Company's net interest margin was 3.90% in the quarter ended September 30,
2001, a decrease of 12 basis points from the comparable period a year ago. For
the first nine-months of the year, the net interest margin was 3.91%, compared
to 4.08% for the comparable period in 2000. The net interest margin is expected
to remain near the current level. Presented in Table 2 are average balances,
yields earned, and rates paid for the three and nine month periods ended
September 30, 2001 and September 30, 2000.
Consolidated Average Balances and Interest Rates Taxable Equivalent
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
Average Income/ Yield/ Average Income/ Yield/
(dollars in millions) Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $ 938.7 $ 9.4 3.98% $ 197.3 $ 3.3 6.69%
Investment Securities Held to Maturity
-Taxable 602.1 9.9 6.53 711.7 12.9 7.23
-Tax-Exempt 3.7 0.2 23.14 8.4 0.4 17.70
Investment Securities Available for 2,139.6 30.8 5.71 2,490.1 41.8 6.67
Sale
Funds Sold 194.2 1.8 3.64 38.8 0.6 6.48
Net Loans
-Domestic 6,663.8 126.6 7.57 8,193.4 177.7 8.63
-Foreign 920.4 16.8 7.23 1,435.2 25.2 7.00
-------------------------- --------------------------
Total Loans 7,584.2 143.4 7.53 9,628.6 202.9 8.38
-------------------------- --------------------------
Total Earning Assets 11,462.5 195.5 6.79 13,074.9 261.9 7.97
Cash and Due From Banks 347.3 418.2
Other Assets 488.9 523.6
--------- ---------
Total Assets $12,298.7 $14,016.7
========= =========
Interest Bearing Liabilities
Domestic Deposits - Demand $ 1,892.6 8.3 1.74 $ 2,043.7 12.0 2.34
- Savings 794.9 4.6 2.29 680.4 3.4 1.99
- Savings
- Time 2,432.0 29.5 4.82 2,799.4 40.3 5.73
- Time
-------------------------- --------------------------
Total Domestic 5,119.5 42.4 3.29 5,523.5 55.7 4.01
Foreign Deposits
- Time Due to Banks 235.3 2.2 3.78 552.6 8.5 6.12
- Other Time and Savings 640.7 5.5 3.41 821.4 8.8 4.26
-------------------------- --------------------------
Total Foreign 876.0 7.7 3.51 1,374.0 17.3 5.01
-------------------------- --------------------------
Total Interest Bearing Deposits 5,995.5 50.1 3.32 6,897.5 73.0 4.21
Short-Term Borrowings 2,012.6 20.9 4.11 2,599.4 40.7 6.23
Long-Term Debt 746.0 12.5 6.63 963.4 16.2 6.69
-------------------------- --------------------------
Total Interest Bearing Liabilities 8,754.1 83.5 3.78 10,460.3 129.9 4.94
-------------------------- --------------------------
Net Interest Income 112.0 132.0
Interest Rate Spread 3.01% 3.03%
Net Interest Margin 3.90% 4.02%
Demand Deposits - Domestic 1,509.0 1,619.8
- Foreign 330.7 345.6
--------- ---------
Total Demand Deposits 1,839.7 1,965.4
Other Liabilities 316.6 361.6
Shareholders' Equity 1,388.3 1,229.4
--------- ---------
Total Liabilities and Shareholders'
Equity $12,298.7 $14,016.7
========= =========
Provision for Loan Losses 0.9 20.2
Net Overhead 9.4 56.1
------ ------
Income Before Income Taxes 101.7 55.7
Provision for Income Taxes 70.5 20.9
Tax-Equivalent Adjustment 0.1 0.2
------ ------
Net Income $ 31.1 $ 34.6
====== ======
Consolidated Average Balances and Interest Rates Taxable Equivalent Table 2
- ---------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
Average Income/ Yield/ Average Income/ Yield/
(dollars in millions) Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $ 564.0 $ 19.5 4.63% $ 216.4 $ 10.9 6.74%
Investment Securities Held to Maturity
-Taxable 630.9 32.4 6.86 736.7 40.5 7.34
-Tax-Exempt 3.7 0.7 23.40 8.9 1.1 17.67
Investment Securities Available for 2,311.4 106.2 6.13 2,510.6 124.0 6.60
Sale
Funds Sold 132.1 4.2 4.22 35.4 1.6 6.07
Net Loans
-Domestic 7,325.5 438.5 7.99 8,065.7 518.4 8.59
-Foreign 1,110.4 57.9 6.97 1,517.6 75.2 6.62
Total Loans 8,435.9 496.4 7.86 9,583.3 593.6 8.27
-------------------------- ---------------------------
Total Earning Assets 12,078.0 659.4 7.29 13,091.3 771.7 7.87
Cash and Due From Banks 384.0 456.1
Other Assets 579.3 597.7
--------- ---------
Total Assets $13,041.3 $14,145.1
========= =========
Interest Bearing Liabilities
Domestic Deposits - Demand $ 1,934.9 29.3 2.02 $ 2,085.6 36.6 2.34
- Savings 720.3 11.7 2.16 690.6 10.5 2.03
- Savings
- Time 2,661.2 109.9 5.52 2,769.5 111.7 5.39
- Time
-------------------------- --------------------------
Total Domestic 5,316.4 150.9 3.79 5,545.7 158.8 3.83
Foreign Deposits
- Time Due to Banks 346.4 12.4 4.79 487.7 21.7 5.95
- Other Time and Savings 716.4 19.0 3.54 1,024.9 31.9 4.15
-------------------------- --------------------------
Total Foreign 1,062.8 31.4 3.95 1,512.6 53.6 4.73
-------------------------- --------------------------
Total Interest Bearing Deposits 6,379.2 182.3 3.82 7,058.3 212.4 4.02
Short-Term Borrowings 2,160.5 80.8 5.00 2,651.2 117.0 5.90
Long-Term Debt 841.6 42.2 6.71 848.3 42.2 6.64
-------------------------- --------------------------
Total Interest Bearing Liabilities 9,381.3 305.3 4.35 10,557.8 371.6 4.70
-------------------------- --------------------------
Net Interest Income 354.1 400.1
Interest Rate Spread 2.94% 3.17%
Net Interest Margin 3.91% 4.08%
Demand Deposits - Domestic 1,570.7 1,649.9
- Foreign 352.0 376.9
--------- ---------
Total Demand Deposits 1,922.7 2,026.8
Other Liabilities 372.4 336.7
Shareholders' Equity 1,364.9 1,223.8
--------- ---------
Total Liabilities and Shareholders'
Equity $13,041.3 $14,145.1
========= =========
Provision for Loan Losses 59.8 117.1
Net Overhead 84.8 156.1
------ ------
Income Before Income Taxes 209.5 126.9
Provision for Income Taxes 117.8 45.1
Tax-Equivalent Adjustment 0.2 0.7
------ ------
Net Income $ 91.5 $ 81.1
====== ======
Provision for Loan Losses
The provision for loan losses was $0.9 million and $59.8 million for the three
and nine-month periods ended September 30, 2001, compared to $20.1 million and
$117.1 million for the same respective periods in 2000. Contributing to the
lower provision were continued high levels of recoveries, which totaled $15.0
million for the quarter, including a $6.5 million recovery in the Asia business.
For further information on credit quality, refer to the section on "Corporate
Risk Profile - Credit Risk - Allowance for Loan Losses" in this report.
Non-Interest Income
Non-interest income was $113.9 million and $373.1 million for the three and
nine-month periods ended September 30, 2001, compared to $67.0 million and
$214.7 million for the comparable periods in 2000. Several transactions that
resulted in gains impacted non-interest income in 2001, including the sales of
Pacific Century Bank's Branches, the credit card portfolio and the sale of
investment securities. There was also an increase in the mortgage banking
income. After excluding non-recurring gains in 2001 and in 2000, core
non-interest income was $62.3 million in the third quarter of 2001, compared to
$67.0 million in the third quarter of 2000, and core non-interest income for the
first nine months of 2001 was $192.5 million, compared to $202.8 million in the
same period of 2000.
The decrease in core non-interest income was largely due to the implementation
of the Company's strategic plan, which called for a scale-back in certain
businesses. The $4.7 million decrease in the third quarter 2001 from the third
quarter 2000 was due to a reduction in interchange fees, resulting from the sale
of the Company's credit card portfolio, and foreign exchange, trading and letter
of credit fees, resulting from the decision to reduce business in Asia.
Trust and asset management income declined to $14.0 million in the third quarter
of 2001, from $15.9 million in the third quarter of 2000. Trust and asset
management income was $45.0 million for the first nine months of 2001, also down
from the corresponding period of the prior year. The decreases were primarily
attributable to reduced fees resulted from declines in asset values of assets
under administration.
Mortgage banking income was $10.3 million in third quarter of 2001, an increase
of 234% from $3.1 million in the third quarter of 2000. For the nine-months
ended September 30, 2001 and 2000, mortgage banking income was $20.0 million and
$8.0 million, respectively. The increase in 2001 was due to increased mortgage
originations and increased gains on the sale of mortgage loans and the held for
sale valuation reserve was reversed. Also in the third quarter of 2001, $3.8
million in fees deferred from prior period loan sales were reversed, which
increased income.
Service charges on deposit accounts declined by 4.8% to $9.6 million in the
third quarter of 2001 compared to $10.1 million in the third quarter of 2000.
This was primarily attributable to changes in deposit rate structures and the
sale of Pacific Century Bank Branches. Service charges were $29.4 million for
the nine months ended September 30, 2001, down 1.3% from the comparative prior
year period.
Fees, exchanges, and other service charges were $17.9 million and $61.5 million
for the three months and nine months ended September 30, 2001 compared to $25.4
million and $74.9 million for the same prior year period. The decrease was
mainly due to decreased letter of credit and trade fees from the winding down of
the Asia business and decreased interchange fees due to the sale of the credit
card portfolio.
Sales of investment securities during the three and nine-months ended September
30, 2001 resulted in net investment security gains of $0.9 million and $32.8
million, respectively. These results compare to slight losses on the sale of
securities in the same periods of 2000. Year-to-date gains on sales included
$28.3 million related to the sale of the Company's ownership interest in Concord
EFS, Inc./Star Systems and $3.7 million from the sale of the Company's holdings
in the Bank of Queensland.
Other operating income was $11.8 million for the third quarter of 2001, down
$0.9 million from the third quarter in 2000. For the nine months ended September
30, 2001, other operating income was $34.7 million compared to $41.3 million for
the same period in the prior year. The year over year decline is attributable to
$6.8 in write-downs taken on an equity investment. This was offset by a $1.9
gain recognized on the sale of leveraged leases. The winding down of Asia
operations also contributed to the decrease in other income.
Non-Interest Expenses
Non-interest expenses were $123.3 million and $457.8 million for the three and
nine-month periods ended September 30, 2001, compared to $124.2 million and
$370.8 million for the comparable periods in 2000. After excluding restructuring
and related costs, core non-interest expenses were $120.4 million in the third
quarter of 2001, compared to $124.2 million in the third quarter of 2000, and
core non-interest expenses for the first nine months of 2001 were $371.5
million, compared to $370.8 million in the same period of 2000.
The restructuring and related costs totaled $0.8 million and $83.0 million for
the three and nine-month periods ended September 30, 2001. These expenses
primarily related to severance costs, foreign exchange losses, and other
expenses related to exiting certain businesses. Also included was a $15.5
million write-down of goodwill recorded in the second quarter in anticipation of
the Company's pending sale of the California Bank subsidiary. Refer to Note 2 to
the Consolidated Financial Statements for further discussion of restructuring
and related costs.
Salaries and pension and other employee benefits expense totaled $59.2 million
and $181.8 million in the three and nine-month periods of 2001, compared to
$57.5 million and $174.9 million for the corresponding periods of 2000. The
increased expenses were primarily attributable to higher commission and
incentive plan costs due to the increased mortgage origination volume. In
addition, the grants of restricted stock to employees increased costs by
slightly less than $1.0 million per quarter. The reduction in employees due to
the sale of the Pacific Century Bank N.A.'s Arizona branches was offset by the
addition of employees to improve service levels in Hawaii.
Net equipment expense was $13.0 million in the third quarter of 2001, a decrease
of 2.4% from $13.4 million for the same period in 2000, and was $40.2 million
for the first nine months of 2001, an increase from $37.5 million for the same
period last year. The year to date increase was mainly due to higher software
and equipment maintenance costs incurred in 2001 and $1.3 million of accelerated
depreciation on assets to be abandoned upon closure of the Asian branches.
Other operating expenses decreased to $34.7 million in the third quarter of 2001
from $36.5 million for the same quarter in 2000. On a year-to-date basis, other
operating expenses decreased from $108.7 million in 2000 to $105.0 million in
2001. These decreases were primarily due to an adjustment to the insurance
claims reserve of the Company's captive insurance company in the second quarter
2001. Other operating expenses were also lower due to a decrease in processing
costs resulting from the sale of the credit card portfolio.
The quarter's core efficiency ratio of 67.2%, excluding intangible amortization,
was negatively impacted by the divesting businesses, where revenue declined more
quickly than the related expenses. The Company anticipates that the efficiency
ratio will return to a more normal level during 2002. Expense control will be a
key focus going forward.
Income Tax Provision
The Company's effective tax rate was 69.4% for the third quarter 2001 and 56.3%
for the first nine-months of 2001. These effective rates compare to 37.6% and
35.7% in the corresponding periods of last year. The increases in 2001 were
attributable to higher provisioning for state and foreign taxes, a higher level
of non-deductible costs associated with the divestitures, the most significant
of which was $83.6 million of goodwill associated with the divestiture of the
California Bank subsidiary, and the write-off of $2 million of foreign tax
assets.
Continuing versus Divesting Businesses
Another way the Company looks at financial results is distinguishing between
continuing and divesting businesses, which include Pacific Century Bank N.A.,
Asia Division, South Pacific Division and the credit card business. The
continuing businesses benefited from an increase of $1.0 million in revenue and
$2.0 million less expense. However, credit losses, which returned closer to a
normal rate, increased to $6.0 million. The result was net income of $29.0
million. This compares to $30.0 million on the same basis last quarter. The
divesting businesses produced a net income of $2.0 million, largely due to the
effect of higher than expected recoveries on prior loan losses taken in Asia.
The revenues of the divesting businesses have decreased before the expenses,
largely due, again, to the wind down of the Asia business.
BALANCE SHEET ANALYSIS
Loans
As of September 30, 2001, loans outstanding, excluding loans held for sale, had
declined to $6.8 billion, from $9.2 billion at year-end 2000 and $9.3 billion at
September 30, 2000. Consistent with the Company's strategic plan, during the
first nine months of 2001, the Company sold $166.8 million of commercial loans,
its $209.3 million credit card portfolio, and $725.7 million in Pacific Century
Bank Branch loans. In addition, during the first nine months of 2001 loans
outstanding in Asia have declined $414 million to $142 million and syndicated
loans outstanding have declined $519 million to $585 million at September 30,
2001. The remaining decline was attributable to other strategic risk reductions
in the portfolio. The Company still anticipates reducing the mortgage portfolio
as outlined in the Strategic Plan. Originations have continued to outpace sales
during the first nine months of the year.
Table 3 presents the composition of the loan portfolio by major loan categories
as of September 30, 2001, June 30, 2001, December 31, 2000 and September 30,
2000.
Loan Portfolio Balances Table 3
- ------------------------------------------------------------------------------------------------------------------------------
Sept 30 June 30 Dec 31 Sept 30
(dollars in millions) 2001 2001 2000 2000
- ------------------------------------------------------------------------------------------------------------------------------
Domestic Loans
Commercial and Industrial $1,410.9 $1,715.2 $2,326.6 $2,423.9
Real Estate
Construction -- Commercial 144.4 213.6 282.4 284.7
-- Residential 31.3 32.4 25.0 22.3
Mortgage -- Commercial 667.9 866.3 1,125.5 1,169.3
-- Residential 2,748.3 2,767.5 2,841.3 2,750.0
Installment 429.0 475.5 719.4 725.0
Lease Financing 503.0 554.5 539.8 537.3
- ------------------------------------------------------------------------------------------------------------------------------
Total Domestic 5,934.8 6,625.0 7,860.0 7,912.5
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Loans 831.9 993.4 1,375.2 1,426.8
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans $6,766.7 $7,618.4 $9,235.2 $9,339.3
==============================================================================================================================
Loans Held for Sale
Loans held for sale totaled $228.1 million at September 30, 2001, compared to
$179.2 million at December 31, 2000, an increase of $48.9 million, and $139.1
million at September 30, 2000, and an increase of $89.0 million. The loans held
for sale primarily residential mortgage loans and resulted from increased
mortgage production throughout 2001.
Investment Securities
The Company's investment portfolio is managed to meet strategic asset/liability
positioning, to provide both interest income and balance sheet liquidity and to
collateralize customer deposits. Available-for-sale securities at September 30,
2001 were $2.1 billion, down 17.6% from $2.5 billion at December 31 and
September 30, 2000. Securities held to maturity were $547.4 million at September
30, 2001, declining from $670.0 million at year-end 2000 and $716.4 million a
year ago. These decreases were largely due to maturities. Other short-term
interest-earning assets totaled $1.4 billion at the end of the third quarter,
compared to $327.3 million and $219.2 million at December 31, 2000 and September
30, 2000, respectively. This increase resulted from the proceeds of the branch
divestitures and loan portfolio sales during the first nine months of 2001, and
has enabled the Company to improve its liquidity. At September 30, 2001 and
December 31, 2000 investment securities with a book value of $2.1 billion and
$2.3 billion, respectively, were pledged as collateral for repurchase
agreements.
Deposits
As of September 30, 2001, deposits totaled $7.4 billion, down $1.7 billion from
$9.1 billion at December 31, 2000 and down $1.4 billion from $8.8 billion at
September 30, 2000. During 2001, domestic deposits decreased $996.9 million,
primarily due to the sale of Pacific Century Bank Branches, while foreign
deposits declined by $684.0 million. The decline in foreign deposits is
attributable to the Company's planned exit from many of its foreign markets and
decreased funding needs.
Table 4 presents average deposits by type as of September 30, 2001, December 31,
2000 and September 30, 2000.
Average Deposits Table 4
- -----------------------------------------------------------------------------------------------------------------------------
Sept 30, 2001 December 31, 2000 Sept 30, 2000
---------------------------------------------------------------------------------
(dollars in millions) Amount Mix Amount Mix Amount Mix
- -----------------------------------------------------------------------------------------------------------------------------
Domestic
Non-Interest Bearing Demand $1,509.0 19.3% $1,640.0 18.2% $1,619.8 18.3%
Interest-Bearing Demand 1,892.6 24.2% 2,061.9 22.9% 2,043.7 23.1%
Regular Savings 794.9 10.1% 684.8 7.6% 680.4 7.7%
Time Certificates
of Deposit
($100,000 or More) 1,202.7 15.3% 1,212.1 13.5% 1,233.5 13.9%
All Other Time and
Savings Certificates 1,229.3 15.7% 1,569.0 17.4% 1,565.9 17.7%
- -----------------------------------------------------------------------------------------------------------------------------
Total Domestic 6,628.5 84.6% 7,167.8 79.6% 7,143.3 80.7%
- -----------------------------------------------------------------------------------------------------------------------------
Foreign
Non-Interest Bearing Demand 330.7 4.2% 371.4 4.1% 345.6 3.9%
Time Due to Banks 235.3 3.0% 505.4 5.6% 552.6 6.2%
Other Time and Savings 640.7 8.2% 960.5 10.7% 821.4 9.2%
- -----------------------------------------------------------------------------------------------------------------------------
Total Foreign 1,206.7 15.4% 1,837.3 20.4% 1,719.6 19.3%
- -----------------------------------------------------------------------------------------------------------------------------
Total $7,835.2 100.0% $9,005.1 100.0% $8,862.9 100.0%
=============================================================================================================================
Borrowings
Short-term borrowings, including funds purchased and securities sold under
agreements to repurchase, totaled $2.1 billion at September 30, 2001, $2.3
billion at December 31, 2000 and $2.5 billion at September 30, 2000. The decline
in short-term borrowings reflected the lower funding needs resulting from the
decrease in the Company's assets.
Similarly, long-term debt at September 30, 2001 decreased to $678.4 million from
$997.2 million at December 31, 2000 and $999.7 million at September 30, 2000.
Shareholders' Equity
The Company's capital position remains strong. Total capital increased to $1.4
billion at September 30, 2001, an increase from $1.3 billion at December 31,
2000 and at September 30, 2000. A further discussion of the Company's capital is
included in the Corporate Risk Profile section of this report.
LINE OF BUSINESS FINANCIAL REVIEW
Beginning in December of 2000 and extending to the end of the first quarter, the
Company performed an analytically rigorous self-assessment of all of its lines
of business. The fundamental objective was to develop a plan to improve
shareholder value. Management evaluated the attractiveness of each of the
Company's businesses, as well as the ability to compete in those businesses in
the future. The performance of each business was assessed in relation to the
risks assumed and the extent to which returns are expected to exceed the cost of
the capital allocated to it. It was concluded that three businesses: Pacific
Century Bank, N.A., the Asia Division, and the South Pacific Division, excluding
American Samoa, would not achieve sufficient returns to create shareholder value
and therefore, would be divested or liquidated.
A new organizational structure was announced in April 2001 as a result of the
assessment process. Businesses have been aligned into the following units:
Retail Banking, Commercial Banking, Financial Services, Treasury and Other
Corporate and Divestiture Businesses. Corporate Restructuring Related Activities
have been segregated in the current year due to their non-recurring nature. The
Line of Business Financial Review in this report is presented in a format that
is consistent with the new organization structure. Note 3 to the Consolidated
Financial Statements include the Company's business segment financial reports
for the three and nine-month periods ended September 30, 2001 and 2000.
Key indicators of performance adopted by the Company include:
Economic:
- - NIACC (Net Income After Capital Charge): The key indicator of creating
value for the shareholder, it is determined by subtracting a charge for
capital from economic net income. Positive value is created by
generating net income above the Company's estimated cost of capital.
- - RAROC (Risk Adjusted Return on Capital): A complementary measure that
indicates the economic return produced by the business on the
risk-adjusted capital assigned to it.
GAAP:
- - Net income after Taxes: Net income generated by the business using
measurement practices consistent with accounting principles generally
accepted in the United States.
The key differences between the derivation of Economic and GAAP results are:
Provision for Loan Losses: The GAAP provision represents the current period
change in reserve requirements. The Economic Provision represents estimated
losses in the credit portfolio assuming a "normalized" economic environment and
loss rate over the business cycle. Consequently, there is no recognition of the
free funds value of the loan loss reserve for Economic accounting.
Goodwill Amortization: Amortization of Goodwill is not reflected in Economic
results since it is assumed to use shareholder funds supported entirely by
capital.
Excess Capital Funding Value: GAAP net income includes the free funding value of
a share of the Company's excess capital not allocated to the segments to cover
risk. Economic results are based on risk-adjusted capital, necessitating
adjustment for the excess capital funding value.
Economic NIACC and RAROC for each segment for the three and nine months ended
September 30, 2001 and 2000 are presented in Table 5.
Economic NIACC and RAROC Table 5
(dollars in thousands)
CORPORATE
FINANCIAL TREASURY RESTRUCTURING
SERVICES AND OTHER DIVESTITURE RELATED
RETAIL COMMERCIAL GROUP CORPORATE BUSINESSES ACTIVITIES
----------- -------------- ------------ -------------- -------------- --------------
Three Months Ended Sept 30, 2001
NIACC (Economic) $ 1,861 $ 2,050 $ 269 $ (9,330) $(14,019) $ (873)
RAROC (Economic) 19% 19% 17% 8% (4)% N/A
===========================================================================================
Three Months Ended Sept 30, 2000
NIACC (Economic) $ 4,177 $(1,669) $1,186 $ 524 $(12,940) $ -
RAROC (Economic) 25% 13% 22% - 3% -
===========================================================================================
Nine Months Ended Sept 30, 2001
NIACC (Economic) $ 9,396 $(4,984) 742 $(23,563) $(34,835) $(5,732)
RAROC (Economic) 22% 13% 16% 0% 2% N/A
===========================================================================================
Nine Months Ended Sept 30, 2000
NIACC (Economic) $12,472 $ 911 $6,150 $(36,217) $(36,726) $ -
RAROC (Economic) 25% 15% 30% (10)% 4% -
===========================================================================================
Retail Banking
The Company's retail banking franchise and market share in Hawaii and American
Samoa are key strengths of the Company. Retail Banking provides checking and
savings products for the consumer and small business segments, merchant
services, installment, home equity and mortgage lending products, as well as
other products and services. The declines in net interest revenue for the three
and nine months ended September 30, 2001 compared to the same periods in 2000
are a result of reduced deposit spread revenue experienced in a year of
significant interest rate reductions. The increase in non-interest income is a
result of increased mortgage origination volumes and increased deposit service
charges. Furthermore, non-interest expense increased as a result of the higher
mortgage origination volumes and higher allocated costs related to systems
charges and new product launches.
As part of the company's overall strategic plan, Bank of Hawaii, on October 1,
2001, launched its new retail banking plan aimed at doubling the Retail Banking
Group's NIACC within three years. The plan focuses on building a strong sales
and service culture which will increase the cross-sell ratios to new and
existing consumer and small business customers. Key initiatives will improve the
capabilities of the sales staff, enhance processes in the branch and call center
channels and broaden expertise in product management areas.
Commercial Banking
The Commercial Banking segment offers corporate banking, commercial products,
leasing, commercial real estate lending and auto finance. The Company's West
Pacific operations are included in this segment. The decline in net income for
the quarter ended September 30, 2001 is due to reduction in interest and fee
revenue attributable to the reductions in the loan portfolio as a result of the
Company's efforts to reduce credit exposures, as well as the declining interest
rate environment. Prior year results were negatively impacted by the additional
loan loss provision of $32.9 million taken in second quarter 2000 to address
weaknesses in the syndicated loan and Hawaii commercial real estate portfolio.
Financial Services Group
The Financial Services Group offers private banking, trust services, asset
management, investments such as mutual funds and stocks, financial planning, and
insurance. A significant portion of this segment's income is derived from fees,
which are based on the market values of assets under management. The decline in
net income is attributable to increased expenses associated with operational
improvements.
Treasury and Other Corporate
The primary component of 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 managing interest rate and foreign currency risks. Additionally,
the net residual effect of transfer pricing of assets and liabilities is
included in Treasury, along with other minor unallocated amounts. Eliminations
of intercompany transactions are also reflected in this segment. The increases
in net interest income for the three and nine months ended September 30, 2001
compared to the same periods in 2000 is due to the increased liquidity of the
Company from the divestitures.
Divestiture Businesses
This segment includes the businesses the Company plans to divest or close. The
Company expects to complete the divestitures and closures by December 31, 2001.
Revenues and expenses in this segment declined from the prior year periods due
to the sale of the credit card portfolio and Pacific Century Bank Branches. In
addition, as the Asia offices wind down their business toward the closures that
are expected to be completed in the fourth quarter, business has declined.
Corporate Restructuring Related Activities
This segment reflects the implementation of the Company's strategic plan to
improve credit quality and to divest underperforming businesses. It includes the
gains and costs of divesting businesses (the credit card portfolio, Pacific
Century Bank Branches, Asia Division and the South Pacific Division) and the
costs of restructuring the Company. It also includes losses associated with
accelerated resolution of credit problems undertaken in the first quarter of
2001.
FOREIGN OPERATIONS
The Company has an international presence in the Asia-Pacific region that
provides lending, correspondent banking, foreign exchange, trade finance and
deposit gathering activities in these markets.
The South Pacific 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. As American Samoa is U.S. dollar based,
its operation is included as domestic for financial reporting purposes. The
Company decided to divest the entire South Pacific operations. On October 3,
2001, the company reached a definitive agreement to sell its operations in Papua
New Guinea, Vanuatu and Fiji to Australia-based ANZ. The sale, which is subject
to regulatory approvals, is expected to be completed before the end of the year.
The Company announced it is in exclusive negotiations to sell its approximately
95% share interest in its French Polynesia and New Caledonia operations to
France-based CNCE. Both transactions are expected to be completed by the end of
2001. On August 31, 2001, the Company closed its Bank of Hawaii Hong Kong branch
and its representative office and two extension offices in the Philippines. The
remaining operations will be closed by year-end. A representative office in
Tokyo will remain.
The West Pacific includes Bank of Hawaii branches in Guam and in other locations
in the West Pacific region. First Savings also operates branches in Guam. Since
the U.S. dollar is used in these locations, operations in the West Pacific are
not considered foreign for financial reporting purposes.
The countries in which the Company maintains its largest exposure on a cross-
border basis include Japan, Netherlands, Singapore, and United Kingdom. Table 6
presents as of September 30, 2001, December 31, 2000, and September 30, 2000 a
geographic distribution of the Company's cross-border assets for each country in
which such assets exceed 0.75% of total assets.
Geographic Distribution of Cross-Border International Assets Table 6
- --------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
Country Sept 30, 2001 December 31, 2000 Sept 30, 2000
==========================================================================================================================
Australia $ 91.2 $ - $ -
Canada 104.2 - -
France 103.3 - -
Germany 96.8 - -
Italy 95.6 - -
Japan 120.3 298.8 293.1
South Korea - 282.0 305.5
Netherlands 183.1 - -
Singapore 145.7 - -
United Kingdom 295.0 - -
All Others 399.7 509.6 556.0
---------------- -------------------- ---------------
$1,634.9 $1,090.4 $1,154.6
================ ==================== ===============
In this table, cross-border outstandings are defined as foreign monetary assets
that are payable to the Company in U.S. dollars or other non-local currencies,
plus amounts payable in local currency but funded with U.S. dollars or other
non-local currencies.
Cross-border outstandings include loans, acceptances, interest-bearing deposits
with other banks, other interest-bearing investments, and other monetary assets.
CORPORATE RISK PROFILE
Credit Risk
Prior to the terrorist attacks of September 11, 2001, the Company's asset
quality was continuing to improve as evidenced by the continued reductions in
the level of internally criticized and classified credits.
The extent of the economic impact due to the events of September 11 on Hawaii's
tourism business will depend on future events. However, management's progress in
improving asset quality over the past year, combined with a strong allowance for
loan and lease losses has limited the initial impact on earnings.
Following September 11, a forward looking review was completed of individual
borrowers in identified high and medium impact industries where greater than
twenty percent of their revenues are tied to tourism. In response, allocated
reserves were increased for those portfolio segments. Improvement in asset
quality and loan reductions prior to the event allowed for a reallocation
without incremental provisioning.
The Company's total exposure to the air transportation industry at September 30,
2001 was $188 million, consisting of $141 million in secured equity interests in
leveraged aircraft leases and $47 million in lending exposure, of which $38
million was undrawn, including $24 million to an air cargo carrier. The lease
exposure is comprised of $95 million on 14 aircraft leased to United States and
international passenger carriers, $31 million on 16 aircraft leased to regional
passenger carriers and $15 million on one aircraft leased to an air cargo
carrier. The allowance for loan and lease losses includes amounts available to
absorb estimated losses, giving effect to discounted aircraft values.
At September 30, 2001 outstanding loans to national hotel and management
companies totaled $72 million with undrawn commitments of $44 million. In
October, the Company sold $10 million of this exposure. Subsequent to this sale,
approximately 60% of the Company's exposure to national hotel and management
companies is investment grade. Exposure to hotel companies in Hawaii at
September 30, 2001 included loans outstanding of $126 million and undrawn
commitments of $12 million. In the West and South Pacific, loans outstanding to
hotel owners totaled $54 million and $18 million, respectively. Approximately
80% of the Hawaii and Pacific hotel loans are collateralized by hotel properties
or guaranteed by either financial institutions or entities with limited exposure
to tourism. The allowance for loan and lease losses includes amounts for hotel
loans that were recently downgraded as a result of the projected decreases in
revenues.
All of the Company's air transportation and hotel loans and leases are
performing.
Another group that is being affected is the broad category of tourism. Because
of the indirect and varied impact on many businesses, it is difficult to make
meaningful aggregations of tourism exposure. Concentrations in tourism are
relatively small. For example, combining tour and cruise operators and golf
exposures that may be most affected, total outstanding are $37 million.
During the third quarter, total Asian exposure, including loans, placements and
off balance sheet items, decreased $94 million to $345 million and Syndicated
exposure consisting of loans and undrawn commitments declined $526 million to
$1.7 billion at September 30, 2001.
Non-Performing Assets
Non-performing assets consist of non-accrual loans, including those held for
sale and foreclosed real estate. Total non-performing assets decreased to $106.4
million, or 1.56% of total loans, at September 30, 2001. This represents a
decrease of $76.6 million, or 41.9%, from December 31, 2000 non-performing
assets that totaled $183.0 million, or 1.98% of total loans. Non-performing
assets at September 30, 2000 were $219.6 million, or 2.35% of loans.
The decrease in domestic non-performing assets between December 31, 2000 and
September 30, 2001 was largely due to loan sales, pay-offs, and charge-offs as
management made significant progress on its commitment to improve asset quality.
The slightly higher ratio in the third quarter of 2001 compared to the previous
quarter is due to a decrease of over $900 million in loans. Non-accrual loans of
$61.8 million at the end of the third quarter declined $5.5 million or 8.2% from
the previous quarter and $152.7 million or 71.2% from the same period last year.
Non-accrual loans as a percentage of total loans were 0.91%, a slight increase
from 0.88% in the previous quarter due to lower loan levels.
There was no significant in-migration of non-accrual loans during the quarter
ended September 30, 2001. The largest non-accrual loan was $7.4 million which
was in the held for sale category. Only one other loan, which was put on non-
accrual status during the quarter, exceeded $5 million at September 30, 2001.
Two large Hawaiian real estate loans were transferred to foreclosed assets in
the second quarter as the loans proceeded toward resolution. This caused an
increase in foreclosed assets from year-end 2000. At September 30, 2001,
foreclosed real estate totaled $37.2 million.
Impaired loans at September 30, 2001 of $83.5 million decreased $137.5 million
from $221.0 million at December 31, 2000. Impaired loans totaling $67.2 million
had a related allowance that totaled $20.6 million at September 30, 2001.
Accruing loans past due 90 days or more were $5.3 million at September 30, 2001,
down from $18.8 million at year-end 2000 and $20.6 million at September 30,
2000.
For further information concerning non-performing assets refer to Table 7.
Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More (Unaudited) Table 7
- ------------------------------------------------------------------------------------------------------------------------------
Sept 30 June 30 Mar 31 Dec 31 Sept 30
(dollars in millions) 2001 2001 2001 2000 2000
- ------------------------------------------------------------------------------------------------------------------------------
Non-Accrual Loans
Commercial & Industrial $ 10.5 $ 11.8 $ 23.8 $ 55.4 $ 49.0
Real Estate
Construction 0.7 5.8 6.3 6.4 8.1
Commercial 12.8 14.4 29.7 60.1 86.8
Residential 19.5 16.2 18.5 22.7 22.0
Installment 0.1 0.2 0.1 - 0.1
Leases 1.0 0.4 0.2 0.4 0.2
------------------------------------------------------------------------------
Total Domestic 44.6 48.8 78.6 145.0 166.2
Foreign 17.2 18.5 16.9 33.5 48.3
------------------------------------------------------------------------------
Subtotal 61.8 67.3 95.5 178.5 214.5
Loans Held For Sale 7.4 11.5 12.8 - -
Foreclosed Real Estate
Domestic 36.9 39.8 10.9 4.2 4.9
Foreign 0.3 0.3 0.3 0.3 0.2
------------------------------------------------------------------------------
Subtotal 37.2 40.1 11.2 4.5 5.1
------------------------------------------------------------------------------
Total Non-Performing Assets $ 106.4 $ 118.9 $ 119.5 $ 183.0 $ 219.6
==============================================================================
Accruing Loans Past Due 90 Days or More
Commercial & Industrial $ 0.1 $ 0.2 $ 3.9 $ 5.0 $ 2.2
Real Estate - Construction & Commercial - - 0.9 1.3 5.0
- Residential 3.4 3.7 3.3 3.3 7.2
Installment 1.0 1.8 2.7 5.6 4.6
Leases - 0.1 0.1 0.4 0.1
------------------------------------------------------------------------------
Total Domestic 4.5 5.8 10.9 15.6 19.1
Foreign 0.8 0.4 0.2 3.2 1.5
------------------------------------------------------------------------------
Total Accruing & Past Due $ 5.3 $ 6.2 $ 11.1 $ 18.8 $ 20.6
==============================================================================
Total Loans $ 6,766.6 $7,618.4 $8,425.0 $9,235.2 $9,339.3
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Non-Accrual Loans
to Total Loans 0.91% 0.88% 1.13% 1.93% 2.30%
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Non-Performing Assets
to Total Loans , Foreclosed Real Estate
and Non-Performing Loans Held for Sale 1.56% 1.55% 1.41% 1.98% 2.35%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Non-Performing Assets
and Accruing Loans Past Due
90 Days or More to Total Loans 1.65% 1.64% 1.55% 2.19% 2.57%
- ------------------------------------------------------------------------------------------------------------------------------
Quarter to Quarter Changes in Non-Performing Assets
Beginning Balance $ 118.9 $ 119.5 $ 183.0 $ 219.6 $ 210.6
Additions 23.2 23.8 43.1 50.7 66.9
Reductions
Payments (25.8) (14.4) (63.7) (68.4) (36.4)
Return to Accrual (0.9) (2.5) (3.0) (4.4) (2.9)
Sales of Foreclosed Assets (2.2) (1.6) (3.0) (2.7) (3.0)
Charge-offs (6.8) (5.9) (36.9) (11.8) (15.6)
------------------------------------------------------------------------------
Total Reductions (35.7) (24.4) (106.6) (87.3) (57.9)
Ending Balance $ 106.4 $ 118.9 $ 119.5 $ 183.0 $ 219.6
Allowance for Loan and Lease Losses
The allowance for loan and lease losses at September 30, 2001 was $182.5 million
or 2.70% of loans outstanding, down $17.3 million from the prior quarter
primarily due to the release of reserves resulting from the sale of the
California Bank subsidiary. Following improvement in asset quality, the
allowance decreased from $246.2 million or 2.56% of loans at December 31, 2000,
and from $245.0 million or 2.62% of loans at September 30, 2000. A summary of
the activity for the allowance for loan losses is presented in Table 8.
Net charge-offs for the third quarter of 2001 were $2.4 million or 0.13% of
total average loans (annualized) compared to 0.82% in the prior year. Charge-
offs of $17.4 million were largely offset by recoveries of $15.0 million. The
high level of recoveries is not expected to continue in the fourth quarter.
The ratio of the allowance for loan and lease losses to non-accrual loans was
295%, up from 114% last year due to significant improvement in the level of non-
accruals.
Consolidated Allowance for Loan and Lease Losses Table 8
- -----------------------------------------------------------------------------------------------------------------------------
Third Third First Nine First Nine
Quarter Quarter Months Months
(dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Average Loans Outstanding $ 7,271.9 $ 9,510.1 $ 8,120.6 $ 9,463.3
- -----------------------------------------------------------------------------------------------------------------------------
Balance of Allowance for Loan and Lease Losses
at Beginning of Period $ 199.8 $ 246.6 $ 246.2 $ 194.2
Loans Charged-Off
Commercial and Industrial 3.4 8.0 87.8 17.7
Real Estate
Construction - - - 0.5
Commercial 2.6 2.8 16.1 14.3
Residential 1.3 1.5 5.5 5.2
Installment 5.4 4.6 15.0 14.5
Leases 0.6 0.2 0.7 0.4
- -----------------------------------------------------------------------------------------------------------------------------
Total Domestic 13.3 17.1 125.1 52.6
Foreign 4.1 9.5 18.0 26.6
- -----------------------------------------------------------------------------------------------------------------------------
Total Charged-Off 17.4 26.6 143.1 79.2
Recoveries on Loans Previously Charged-Off
Commercial and Industrial 1.1 2.2 8.1 5.1
Real Estate
Construction - - - -
Commercial 1.3 0.1 2.4 0.3
Residential 0.2 0.3 0.7 1.0
Installment 2.2 1.7 5.6 5.3
Leases - - 0.2 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Domestic 4.8 4.3 17.0 11.7
Foreign 10.2 2.7 19.1 3.7
- -----------------------------------------------------------------------------------------------------------------------------
Total Recoveries 15.0 7.0 36.1 15.4
- -----------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (2.4) (19.6) (107.0) (63.8)
Provision for Loan Losses 0.9 20.1 59.8 117.1
Allowance Related to Disposition (16.4) - (16.4) -
Other Net Additions (Reductions)* 0.6 (2.1) (0.1) (2.5)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 182.5 $ 245.0 $ 182.5 $ 245.0
=============================================================================================================================
Ratio of Net Charge-Offs to
Average Loans Outstanding (annualized) 0.13% 0.82% 1.76% 0.90%
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of Allowance to Loans Outstanding 2.70% 2.62% 2.70% 2.62%
- -----------------------------------------------------------------------------------------------------------------------------
* Includes balance transfers, reserves acquired, and foreign currency
translation adjustments.
Market Risk
The Company manages assets and liabilities to maximize long term, risk adjusted
returns to shareholders. The Company's asset and liability management process
involves measuring, monitoring, controlling and managing financial risks that
can significantly impact financial position and operating results. Financial
risks in the form of interest rate sensitivity, foreign currency exchange
fluctuations, liquidity, and capital adequacy are balanced with expected returns
with the objective to maximize earnings performance and shareholder value, while
limiting the volatility of each.
The activities associated with these financial risks are categorized into either
"other than trading" or "trading."
Other Than Trading Activities
A key element in the Company'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 captures the
dynamic nature of the balance sheet and provides a sophisticated estimate rather
than a precise prediction of NII's exposure to higher or lower interest rates.
Table 9 presents, as of September 30, 2001, December 31, 2000 and September 30,
2000, the estimate of the change in NII that would result 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 the
measured base case scenario for NII. During the third quarter, the Company's
liquidity position was greatly enhanced as elements of the previously announced
Strategic Assessment were executed. As a result, NII became more asset
sensitive. The resulting estimate in NII exposure is within the approved Asset
Liability Management Committee guidelines.
Market Risk Exposure to Interest Rate Changes Table 9
- -----------------------------------------------------------------------------------------------------------------------------
Sept 30, 2001 Dec 31, 2000 Sept 30, 2000
- -----------------------------------------------------------------------------------------------------------------------------
Interest Rate Change Interest Rate Change Interest Rate Change
(in basis points) (in basis points) (in basis points)
-200 +200 -200 +200 -200 +200
- -----------------------------------------------------------------------------------------------------------------------------
Estimated Exposure as a Percent of
Net Interest Income -4.30% 4.80% -2.30% 0.50% -0.80% 0.10%
To enhance and complement the results from the NII simulation model, the Company
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, the Company gains a
better overall insight for managing its exposure to changes in interest rates.
In managing interest rate risk, the Company relies primarily on the balance
sheet, to manage 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 and modifying investment portfolio
strategies. The use of financial derivatives has been limited over the past
several years.
The Company'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, the Company 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 the Company's total balance sheet exposure. A portion of
the capital investments in Japan, South Korea, French Polynesia and New
Caledonia is offset by a borrowing denominated in the euro and foreign exchange
currency hedge transactions. In the first quarter of 2001, the Company
recognized losses of $28.0 million arising from foreign currency translation
losses that could not be hedged. These losses were previously included in other
comprehensive income. As of September 30, 2001 the remainder of these capital
investments, which aggregated $33.6 million, was not hedged. The comparative
unhedged position was $71.2 million at December 31, 2000 and $29.7 million at
September 30, 2000.
To estimate the potential loss from foreign currency exposure, the Company uses
a value-at-risk (VAR) calculation. For net investments in subsidiaries, the
Company's VAR is calculated at a 95% confidence interval.
Table 10 presents, as of September 30, 2001, December 31, 2000 and September 30,
2000, the Company's foreign currency exposure from its net investment in
subsidiaries and branch operations that were denominated in a foreign currency
as measured by the VAR.
Market Risk Exposure From Changes in Foreign Exchange Rates Table 10
- ----------------------------------------------------------------------------------------------------------------------------------
Sept 30, 2001 Dec 31, 2000 Sept 30, 2000
(dollars in millions) Book Value Value-at-Risk Book Value Value-at-Risk Book Value Value-at-Risk
- ----------------------------------------------------------------------------------------------------------------------------------
Net Investments in Foreign
Subsidiaries & Branches
Japanese Yen $ 3.3 $ 0.5 $ 10.6 $ 1.4 $ 10.5 $ 1.5
Korean Won 12.9 1.5 29.6 5.1 32.4 3.9
Pacific Franc (1) 11.1 1.8 32.0 6.2 30.4 6.1
Other Currencies 6.3 15.3 (1.0) 14.4 (3.0) 18.2
--------------------------------------------------------------------------------------------
Total $33.6 $19.1 $71.2 $27.1 $ 70.3 $29.7
============================================================================================
(1) Net of $36 million, $37 million and $35 million borrowing at September 30,
2001, December 31, 2000 and September 30, 2000, respectively, denominated in
euro and foreign Exchange hedge transactions of $40 million, $26 million and $20
million at September 30, 2001, December 31, 2000 and September 30, 2000.
Trading Activities
Trading activities include foreign currency and foreign exchange contracts that
expose the Company to a minor degree of foreign currency risk. The Company
manages its trading account such that it does not maintain significant foreign
currency open positions. The exposure from foreign currency trading activities
positions measured by VAR methodology as of September 30, 2001 continues to be
immaterial.
Liquidity Management
Liquidity is managed to ensure that the Company has continuous access to
sufficient, reasonably priced funding to conduct its business in a normal
manner. The Company's liquidity management process is described in the 2000
Annual Report to Shareholders on Form 10K.
The Company maintains a $25 million annually renewable line of credit for
working capital purposes. Fees are paid on the unused balance of the line.
During the first nine months of 2001 and throughout 2000, the line was not drawn
upon.
Bank of Hawaii and First Savings are both members of the Federal Home Loan Bank
of Seattle (FHLB). The FHLB provides these institutions with an additional
source for short and long-term funding. Borrowings from the FHLB were $254
million at September 30, 2001, compared to $520 million at December 31, 2000 and
$533 million at September 30, 2000.
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 September 30, 2001, December 31, 2000 and September 30 2000 there
was $125 million issued and outstanding under this program.
Capital Management
The Company 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
the Company's risk profile and current and projected economic conditions. The
Company's objective is to hold sufficient capital on a regulatory basis to
exceed the minimum guidelines of a well-capitalized institution.
At September 30, 2001, the Company's shareholders' equity totaled $1.371
billion, 9.7% higher than at September 30, 2000. The increase in shareholders'
equity during the first nine months of 2001 was primarily attributable to the
Company's earnings, net unrealized gains in the investment portfolio, realized
foreign currency translation adjustments, and issuance of common stock under
various stock-based compensation plans, partially offset by cash dividends that
were paid and common stock repurchases.
In July 2001, the Company announced its plan to repurchase up to $70 million in
common stock. The repurchases began on July 26, 2001 and were completed in
October, 2001. In October, the Company announced its intent to repurchase an
additional $200 million of its common stock. As of November 9, 2001, a total of
2,409,700 shares had been repurchased at a cost of $54.9 million.
At September 30, 2001, the Company's regulatory capital ratios exceeded the
minimum threshold levels established by federal bank regulators to qualify an
institution as well-capitalized, which are as follows: Tier 1 Capital - 6%;
Total Capital - 10%; and Leverage - 5%. The Company's regulatory capital ratios
are shown on Table 11, along with the activities and balances in the Company's
capital accounts. During the third quarter, the Company's capital ratios and
liquidity continued to strengthen. Even after giving effect to the $200 million
in additional share repurchases, capital and liquidity will exceed industry
norms.
Equity Capital Table 11
- -----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Year Ended Nine Months Ended
(dollars in millions) Sept 30, 2001 Dec 31, 2000 Sept 30, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Source of Common Equity:
Net Income $ 91.5 $ 13.7 $ 81.1
Dividends Paid (43.4) (56.5) (42.1)
Dividend Reinvestment Program 2.1 3.3 2.5
Stock Repurchases (46.8) (17.0) (17.0)
Other (1) 66.3 45.6 13.3
- -----------------------------------------------------------------------------------------------------------------------------------
Increase in Equity $ 69.7 $ 89.1 $ 37.8
===================================================================================================================================
Common Equity $ 1,371.1 $ 1,301.4 $ 1,250.1
Add: 8.25% Capital Securities of
Bancorp Hawaii Capital Trust I 100.0 100.0 100.0
Minority Interest 4.4 4.5 4.2
Less: Intangibles 57.4 163.9 166.3
Unrealized Valuation and Other
Adjustments 26.2 2.2 (31.5)
- -----------------------------------------------------------------------------------------------------------------------------------
Tier I Capital 1,391.9 1,239.8 1,219.5
Allowable Loan Loss Reserve 99.2 132.8 135.5
Subordinated Debt 148.4 172.1 172.1
Investment in Unconsolidated Subsidiary - (3.4) (3.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capital $ 1,639.5 $ 1,541.3 $ 1,523.3
===================================================================================================================================
Risk Weighted Assets $ 7,858.9 $ 10,512.3 $ 10,729.5
===================================================================================================================================
Key Ratios:
Tier I Capital Ratio 17.71% 11.78% 11.37%
Total Capital Ratio 20.86% 14.64% 14.20%
Leverage Ratio 11.37% 9.10% 8.80%
===================================================================================================================================
(1) Includes common stock issued under the profit sharing and stock option
plans, unrealized valuation adjustments for investment securities, foreign
currency translation, pension liability, and stock compensation.
Financial and Economic Outlook
The Hawaii economy continues to show improvement from the initial decline in
tourism following the September 11 attacks. Through the fourth quarter of 2001
we expect visitor arrivals to be 15-20% short of prior year levels. We are
forecasting a gradual recovery to year-earlier volumes by the summer of 2002.
As stated before, the Company's guidance is based on many estimates and the
Company believes that it is accurate within two percent. The Company updated its
earnings guidance for the full year 2001 to $106 million for its continuing
businesses. This guidance assumes an increased but not outsized credit
provision. Earnings per share projections are dependent upon the terms and
timing of share repurchases. As previously indicated, the divesting businesses
are not expected to earn the $17 million that was planned in April. The
aggregate cost of restructuring cannot be further refined until the sales price
of its banks in the French Territories is determined. The actual level of fourth
quarter earnings will depend on the speed of the sales and other factors.
Accordingly, the Company cannot predict the ultimate earnings impact from the
operation and sales of the divesting businesses. The plan is to provide further
guidance once the Company can estimate the sales proceeds. Until that time, the
earlier guidance for total net income of $119 million cannot be updated.
Because of the economic uncertainties that have arisen since the projections of
earnings for 2002 and beyond, the Company is unable to update that guidance. As
indicated, the Company is reevaluating its expense levels in light of the
slowdown of the economy.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
See Management's Discussion and Analysis of Results of Operations and Financial
Condition-Market Risk.
Part II. - Other Information
Items 1 to 5 omitted pursuant to instructions.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Number
--------------
12 Statement Regarding Computation of Ratios
(b) The following reports on Form 8-K were filed during the quarter
ended September 30, 2001.
Current Report on Form 8-K dated September 10, 2001 and filed
September 13, 2001 Item 5.
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 November 13, 2001 PACIFIC CENTURY FINANCIAL
----------------------- CORPORATION
___________________________
(Signature)
Michael E. O'Neill
Chairman and Chief Executive
Officer
___________________________
(Signature)
Allan R.Landon
Vice Chairman and Chief
Financial Officer
___________________________
(Signature)
Leslie F. Paskett
Senior Vice President
and Controller
Pacific Century Financial Corporation
Exhibit 99 - Statement Regarding Computation of Ratios
Nine Months Ended September 30, 2001 & 2000
EXHIBIT 12
(dollars in millions) 2001 2000
Earnings:
1. Income Before Income Taxes $209.4 $126.2
2. Plus: Fixed Charges Including Interest on Deposits 302.8 375.6
------------------ ----------------
3. Earnings Including Fixed Charges 512.2 501.8
4. Less: Interest on Deposits 182.2 212.4
------------------ ----------------
5. Earnings Excluding Interest on Deposits $330.0 $289.4
Fixed Charges:
6. Fixed Charges Including Interest on Deposits $302.8 $375.6
7. Less: Interest on Deposits 182.2 212.4
------------------ ----------------
8. Fixed Charges Excluding Interest on Deposits $120.6 $163.2
Ratio of Earnings to Fixed Charges:
Including Interest on Deposits (Line 3 divided by Line 6) 1.7 x 1.3 x
Excluding Interest on Deposits (Line 5 divided by Line 8) 2.7 x 1.8 x