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 March 31, 2001
--------------
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from _____________ to _____________
Commission File Number 1-6887
PACIFIC CENTURY FINANCIAL CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 99-0148992
------------------------ ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
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(Address of principal executive offices) (Zip Code)
(808) 537-8430
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value; outstanding at April 30, 2001 - 79,936,486 shares
- -------------------------------------------------------------------------------
Index
Pacific Century Financial Corporation and Subsidiaries
Part I. - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001, December 31, 2000,
and March 31, 2000
Consolidated Statements of Income - Three months ended March 31,
2001 and March 31, 2000
Consolidated Statements of Cash Flows - Three months ended March 31,
2001 and March 31, 2000
Consolidated Statements of Shareholders' Equity - Three months ended
March 31, 2001 and March 31, 2000
Notes to condensed 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
Item 4. Submission of Matters to a Vote of Shareholders
Signatures
Consolidated Statements of Condition (Unaudited) Financial Pacific Century Financial Corporation and subsidiaries
- -----------------------------------------------------------------------------------------------------------------
March 31 December 31 March 31
(in thousands of dollars) 2001 2000 2000
- -----------------------------------------------------------------------------------------------------------------
Assets
Interest-Bearing Deposits $411,070 $188,649 $225,314
Investment Securities - Held to Maturity
(Market Value of $665,722; $676,621 and $721,620 respectively) 656,174 670,038 732,344
Investment Securities - Available for Sale 2,390,518 2,507,076 2,537,617
Securities Purchased Under Agreements to Resell 377 3,969 902
Funds Sold 84,732 134,644 42,208
Loans Held for Sale 308,605 179,229 115,160
Loans 8,683,416 9,489,061 9,664,473
Unearned Income (258,445) (253,903) (237,764)
Allowance for Loan Losses (199,800) (246,247) (195,409)
- -----------------------------------------------------------------------------------------------------------------
Net Loans 8,533,776 9,168,140 9,346,460
- -----------------------------------------------------------------------------------------------------------------
Total Earning Assets 12,076,647 12,672,516 12,884,845
Cash and Non-Interest Bearing Deposits 559,227 523,969 491,218
Premises and Equipment 251,746 254,621 267,497
Customers' Acceptance Liability 7,225 14,690 8,262
Accrued Interest Receivable 67,875 68,585 74,597
Other Real Estate 11,336 4,526 4,633
Intangibles, including Goodwill 186,313 192,264 202,832
Other Assets 550,306 282,645 316,502
- -----------------------------------------------------------------------------------------------------------------
Total Assets $13,710,675 $14,013,816 $14,250,386
=================================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $1,685,149 $1,707,724 $1,708,635
- Interest Bearing 2,042,129 2,008,730 2,110,998
Savings 665,643 665,239 693,077
Time 2,948,232 2,836,083 2,759,319
Foreign Deposits
Demand - Non-Interest Bearing 337,854 385,366 380,179
Time Due to Banks 390,395 535,126 398,176
Other Savings and Time 746,121 942,313 1,092,679
- -----------------------------------------------------------------------------------------------------------------
Total Deposits 8,815,523 9,080,581 9,143,063
Securities Sold Under Agreements to Repurchase 1,703,982 1,655,173 1,806,197
Funds Purchased 297,613 413,241 511,440
Short-Term Borrowings 278,786 211,481 424,720
Bank's Acceptances Outstanding 7,225 14,690 8,262
Accrued Retirement Expense 34,820 37,868 40,851
Accrued Interest Payable 64,113 72,460 66,456
Accrued Taxes Payable 164,893 130,766 103,826
Minority Interest 4,295 4,536 4,269
Other Liabilities 84,750 94,512 109,669
Long-Term Debt 882,733 997,152 805,726
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities 12,338,733 12,712,460 13,024,479
Shareholders' Equity
Common Stock ($.01 par value), authorized 500,000,000 shares;
issued / outstanding; March 2001 - 80,558,704 / 79,863,450;
December 2000 - 80,558,811 / 79,612,178; March 2000 - 806 806 806
80,551,253 / 79,661,479;
Capital Surplus 346,411 346,045 345,863
Accumulated Other Comprehensive Income 21,835 (25,079) (72,307)
Retained Earnings 1,015,867 996,791 967,308
Treasury Stock, at Cost - (March 2001 - 695,254; December 2000 -
946,633; and March 2000 - 889,774) (12,977) (17,207) (15,763)
- -----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,371,942 1,301,356 1,225,907
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $13,710,675 $14,013,816 $14,250,386
=================================================================================================================
Consolidated Statements of Income (Unaudited) Pacific Century Financial Corporation and subsidiaries
-------------------------------------------------------------------------------------------------------------------
3 Months 3 Months
Ended Ended
Mar 31 Mar 31
(in thousands of dollars except per share amounts) 2001 2000
-------------------------------------------------------------------------------------------------------------------
Interest Income
Interest on Loans $180,173 $180,402
Loan Fees 10,903 8,246
Income on Lease Financing 6,857 7,979
Interest and Dividends on Investment Securities
Taxable 11,636 14,236
Non-taxable 140 279
Income on Investment Securities Available for Sale 39,301 41,033
Interest on Deposits 5,214 3,764
Interest on Security Resale Agreements 38 10
Interest on Funds Sold 1,059 473
-------------------------------------------------------------------------------------------------------------------
Total Interest Income 255,321 256,422
Interest Expense
Interest on Deposits 72,019 68,214
Interest on Security Repurchase Agreements 24,630 22,953
Interest on Funds Purchased 6,123 8,527
Interest on Short-Term Borrowings 3,230 4,532
Interest on Long-Term Debt 15,314 12,688
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Total Interest Expense 121,316 116,914
-------------------------------------------------------------------------------------------------------------------
Net Interest Income 134,005 139,508
Provision for Loan Losses 52,466 13,522
-------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 81,539 125,986
Non-Interest Income
Trust and Asset Management Income 15,795 16,887
Service Charges on Deposit Accounts 9,940 9,557
Fees, Exchange, and Other Service Charges 20,782 21,626
Other Operating Income 13,410 15,575
Gain on Sale of Credit Card Portfolio 75,414 --
Investment Securities Gains 20,203 282
-------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 155,544 63,927
Non-Interest Expense
Salaries 47,883 47,547
Pensions and Other Employee Benefits 14,353 14,630
Net Occupancy Expense 12,124 11,816
Net Equipment Expense 13,379 12,067
Other Operating Expense 39,131 35,211
Goodwill Amortization 4,836 4,742
Restructuring and Other Related Costs 44,438 --
Minority Interest 79 69
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Total Non-Interest Expense 176,223 126,082
-------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 60,860 63,831
Provision for Income Taxes 27,183 24,066
-------------------------------------------------------------------------------------------------------------------
Net Income $33,677 $39,765
===================================================================================================================
Basic Earnings Per Share $0.42 $0.50
Diluted Earnings Per Share $0.42 $0.50
Dividends Declared Per Share $0.18 $0.17
Basic Weighted Average Shares 79,720,284 79,821,365
Diluted Weighted Average Shares 81,124,713 80,017,761
===================================================================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
=========================================================================================================================
Accumulated
Other
Common Capital Comprehensive
(in thousands of dollars) Total Stock Surplus Income
=========================================================================================================================
Balance at December 31, 2000 $1,301,356 $806 $346,045 ($25,079)
Comprehensive Income
Net Income 33,677 -- -- --
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment 19,510 -- -- 19,510
Foreign Currency Translation Adjustment 26,710 -- -- 26,710
Pension Liability Adjustments (159) -- -- (159)
Stock Compensation 853 -- -- 853
Total Comprehensive Income $79,738
Common Stock Issued
18,317 Profit Sharing Plan 370 -- 92 --
184,092 Stock Option Plan 3,000 -- 114 --
34,904 Dividend Reinvestment Plan 700 -- 163 --
893 Directors' Restricted Shares and
Deferred Compensation Plan 288 -- (3) --
Treasury Stock Purchased -- -- -- --
Cash Dividends Paid (14,363) -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $1,371,942 $806 $346,411 $21,835
=========================================================================================================================
Balance at December 31, 1999 $1,212,330 $806 $345,851 ($66,106)
Comprehensive Income
Net Income 39,765 -- -- --
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment (7,630) -- -- (7,630)
Foreign Currency Translation Adjustment 1,429 -- -- 1,429
Pension Liability Adjustments -- -- -- --
Total Comprehensive Income $33,564
Common Stock Issued
22,377 Profit Sharing Plan 361 -- -- --
33,932 Stock Option Plan 398 -- 3 --
78,723 Dividend Reinvestment Plan 1,123 -- -- --
525 Directors' Restricted Shares and
Deferred Compensation Plan 9 -- 9 --
Treasury Stock Purchased (8,337) -- -- --
Cash Dividends Paid (13,541) -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 $1,225,907 $806 $345,863 ($72,307)
=========================================================================================================================
===============================================================================================
Retained Treasury Comprehensive
Earnings Stock Income
===============================================================================================
Balance at December 31, 2000 $996,791 ($17,207)
Comprehensive Income
Net Income 33,677 -- $33,677
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment -- -- 19,510
Foreign Currency Translation Adjustment -- -- 26,710
Pension Liability Adjustments -- -- (159)
Stock Compensation -- -- 853
---------
Total Comprehensive Income $79,738
=========
Common Stock Issued
18,317 Profit Sharing Plan -- 278
184,092 Stock Option Plan (238) 3,124
34,904 Dividend Reinvestment Plan -- 537
893 Directors' Restricted Shares and
Deferred Compensation Plan -- 291
Treasury Stock Purchased -- --
Cash Dividends Paid (14,363) --
- -------------------------------------------------------------------------------
Balance at March 31, 2001 $1,015,867 ($12,977)
===============================================================================
Balance at December 31, 1999 $942,177 ($10,398)
Comprehensive Income
Net Income 39,765 -- $39,765
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment -- -- (7,630)
Foreign Currency Translation Adjustment -- -- 1,429
Pension Liability Adjustments -- -- --
---------
Total Comprehensive Income $33,564
=========
Common Stock Issued
22,377 Profit Sharing Plan (128) 489
33,932 Stock Option Plan (362) 757
78,723 Dividend Reinvestment Plan (603) 1,726
525 Directors' Restricted Shares and
Deferred Compensation Plan -- --
Treasury Stock Purchased -- (8,337)
Cash Dividends Paid (13,541) --
- -------------------------------------------------------------------------------
Balance at March 31, 2000 $967,308 ($15,763)
===============================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
================================================================================================================
Three Months ended March 31
(in thousands of dollars) 2001 2000
================================================================================================================
Operating Activities
Net Income $ 33,677 $ 39,765
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, depreciation, and amortization 59,150 13,826
Deferred income taxes (375) (13,079)
Realized and unrealized investment security gains (21,357) (58)
Net adjustments to pension liability and stock compensation 694 -
Gain on sale of credit card portfolio (75,414) -
Other assets and liabilities, net 12,555 1,477
------------------------
Net cash provided by operating activities 8,930 41,931
- ----------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from redemptions of investment securities held to maturity 33,650 66,605
Purchases of investment securities held to maturity (19,786) (2,627)
Proceeds from sales and maturities of investment securities available for sale 249,114 33,854
Purchases of investment securities available for sale (78,682) (41,898)
Net decrease (increase) in interest-bearing deposits (222,421) 53,159
Net decrease in funds sold 53,504 9,630
Net decrease (increase) in loans and lease financing 380,140 (65,080)
Premises and equipment, net (6,905) (5,385)
------------------------
Net cash provided by investing activities 388,614 48,258
- ----------------------------------------------------------------------------------------------------------------
Financing Activities
Net decrease in demand, savings, and time deposits (265,058) (251,155)
Proceeds from lines of credit and long-term debt 2,024 100,024
Principal payments on lines of credit and long-term debt (116,443) (21,955)
Net increase (decrease) in short-term borrowings 486 (47,222)
Net Common Stock issued (repurchased) 4,358 (6,446)
Cash dividends (14,363) (13,541)
------------------------
Net cash used by financing activities (388,996) (240,295)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 26,710 1,429
------------------------
Increase (Decrease) in cash and non-interest bearing deposits 35,258 (148,677)
Cash and non-interest bearing deposits at beginning of year 523,969 639,895
------------------------
Cash and non-interest bearing deposits at end of period $ 559,227 $ 491,218
================================================================================================================
Pacific Century Financial Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Pacific Century
Financial Corporation (Pacific Century) have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, the
consolidated financial statements reflect all adjustments, which are necessary
for a fair presentation of the results for the interim periods. These
statements should be read in conjunction with the audited consolidated financial
statements and related notes included in Pacific Century's 2000 Annual Report on
Form 10-K. Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements of Pacific Century at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements.
International operations include certain activities located domestically in
Hawaii, as well as branches and subsidiaries domiciled outside the United
States. The operations of Bank of Hawaii and First Savings and Loan Association
of America located in the West and South Pacific that are denominated in U.S.
dollars are classified as domestic. Pacific Century's international operations
are primarily concentrated in Hong Kong, Japan, Singapore, South Korea, Taiwan,
French Polynesia, Fiji, New Caledonia, Papua New Guinea and Vanuatu.
Regulatory Matters
Pacific Century continues to comply with the terms of the previously disclosed
Memorandum of Understanding. Pacific Century has obtained regulatory approval
for dividend payments for the first and second quarters of 2001.
Note 2. Recent Accounting Pronouncements
On January 1, 2001 Pacific Century adopted Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities as amended by
SFAS No. 137 and SFAS No. 138. SFAS No. 133 requires that all derivatives be
recorded on the balance sheet at fair value. Changes in a derivative's fair
value that do not qualify for hedge treatment, as well as the ineffective
portion of a hedge, must be recognized currently in earnings. The transition
adjustment at the time of adoption was a charge to income of $412 thousand.
Note 3. Earnings Per Share
For the three months ended March 31, 2001 and 2000, the weighted average shares
for computing basic and diluted EPS are presented on the Consolidated Statement
of Income. The dilutive effect of stock options was 1,404,429 and 196,396
shares for the three months ended March 31, 2001 and 2000, respectively.
Note 4. 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 certain state tax adjustments, tax exempt interest income and
bank owned life insurance income. The tax provision is also reduced by low
income housing, foreign and investment tax credits.
Note 5. Business Segments
Pacific Century is a financial services organization that has maintained a broad
presence throughout the Pacific region. However, its presence will be changing
over the remainder of the year. On April 23, 2001, management announced its
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. Consequently, during the first
quarter of 2001, Pacific Century realigned its business from geographic segments
into the following segments: Retail Banking, Commercial Banking, Financial
Services Group, Divestiture Businesses and Treasury and Other Corporate.
Business segment results are determined based on Pacific Century's internal
financial management organizational structure. Pacific Century 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.
These techniques and accounting practices are not covered by accounting
principles generally accepted in the United States. The Company is continuing to
develop its business segment accounting practices and implemented changes in the
first quarter 2001. Accordingly, the previously presented operating results for
the quarter ended March 31, 2000 have been reclassified to be consistent with
the quarter ended March 31, 2001. It is possible that accounting practices may
be changed again in future periods. If this occurs, prior segment information
may be restated.
The financial results for three months ended March 31, 2001 and 2000 are
presented below for each of Pacific Century's principal market segments.
Business Segment Selected Financial Information
Table 1
(in thousands of dollars)
FINANCIAL TREASURY
SERVICES DIVESTITURE AND OTHER CONSOLIDATED
RETAIL COMMERCIAL GROUP BUSINESSES CORPORATE TOTAL
-------------------------------------------------------------------------------
Three Months Ended March 31, 2001
Net Interest Income 47,598 44,030 2,532 37,966 1,879 134,005
Loan Loss Provision (2,746) (40,885) - (8,835) - (52,466)
-----------------------------------------------------------------------------
Net Interest Income after Provision 44,852 3,145 2,532 29,131 1,879 81,539
Gains from Divestitures - - - - 96,353 96,353
Other Non-Interest Income 17,352 3,585 20,637 13,074 4,543 59,191
-----------------------------------------------------------------------------
Total Revenue 62,204 6,730 23,169 42,205 102,775 237,083
Restructuring & Other related costs - - - - 44,438 44,438
Non-Interest Expense 42,144 24,408 19,169 38,345 7,719 131,785
-----------------------------------------------------------------------------
Net Income (Loss) Before Income Taxes 20,060 (17,678) 4,000 3,860 50,618 60,860
Income Taxes (8,426) 7,221 (1,681) (1,622) (22,675) (27,183)
-----------------------------------------------------------------------------
Net Income (Loss) 11,634 (10,457) 2,319 2,238 27,943 33,677
=============================================================================
FINANCIAL TREASURY
SERVICES DIVESTITURE AND OTHER CONSOLIDATED
RETAIL COMMERCIAL GROUP BUSINESSES CORPORATE TOTAL
-------------------------------------------------------------------------------
Three Months Ended March 31, 2000
Net Interest Income 46,015 46,545 2,731 42,220 1,997 139,508
Loan Loss Provision (2,451) (6,801) - (4,270) - (13,522)
-------------------------------------------------------------------------------
Net Interest Income after Provision 43,564 39,744 2,731 37,950 1,997 125,986
Non-Interest Income 15,163 10,337 22,427 11,424 4,576 63,927
-------------------------------------------------------------------------------
Total Revenue 58,727 50,081 25,158 49,374 6,573 189,913
Non-Interest Expense 44,116 23,885 17,580 37,125 3,376 126,082
-------------------------------------------------------------------------------
Net Income (Loss) Before Income Taxes 14,611 26,196 7,578 12,249 3,197 63,831
Income Taxes (5,372) (9,657) (2,804) (4,519) (1,714) (24,066)
-------------------------------------------------------------------------------
Net Income (Loss) 9,239 16,539 4,774 7,730 1,483 39,765
=============================================================================
Note 6. Restructuring
During the first quarter 2001, Pacific Century incurred restructuring and
related costs as follows.
(in millions)
Foreign Currency Translation Losses $28.0
Unrecoverable Investments 6.1
Termination Costs 1.6
Unrealizable Deferred Tax Asset 5.0
Consulting Costs 0.6
Other 3.1
-----
Total $44.4
=====
Pacific Century expects to sell its operations in California and the South
Pacific and to sell or close its Asian branches by the end of 2001. As a result
of these divestitures, assets with no future benefit were written off at March
31, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PERFORMANCE HIGHLIGHTS
Pacific Century Financial Corporation (Pacific Century) reported earnings for
the three months ended March 31, 2001 of $33.7 million down 15.3% from $39.8
million reported in the same period of 2000. Both basic and diluted earnings
per share were $0.42 for the first quarter 2001 compared to $0.50 in the first
quarter 2000.
Earnings for the first quarter of 2001 included gains of $75.4 million from the
sale of the Pacific Century's credit card portfolio and $20.9 million related to
the sale of ownership interest in Star Systems, Inc.
Pacific Century's continuing emphasis on improving asset quality resulted in
significant reduction of credit risk during the quarter. Non-performing assets
(NPAs), exclusive of accruing loans past due 90 days or more, were $119.5
million, down 34.7% from $183.0 million reported at December 31, 2000 and $136.4
reported at March 31, 2000. At March 31, 2001 the allowance for loan losses
stood at $199.8 million compared with $246.2 million and $195.4 million at year
end and March 31, 2000, respectively. The ratio of the allowance to loans was
2.29%, 2.62% and 2.05% at the end of each of the respective periods.
In the first quarter of 2001, return on average assets (ROAA) and return on
average equity (ROAE) were 0.99% and 10.42%, respectively, compared to 1.13% and
13.19% in the same 2000 quarter.
Total assets at March 31, 2001 stood at $13.7 billion relative to $14.0 billion
at December 31, 2000 and $14.3 billion at March 31, 2000. Year-over-year, loans
declined by $981.1 million and investment securities available for sale
declined by $147.1 million, offset by a $185.8 million increase in interest-
bearing deposits.
On April 23, 2001 Pacific Century announced its new strategic plan designed to
maximize shareholder value by strengthening its Hawaii and West Pacific
operations and divesting most other holdings. Pacific Century plans to divest
or wind down its operations in California, the South Pacific and Asia. It will
maintain its operations in Hawaii, the West Pacific, American Samoa, Japan and a
leasing office in Arizona. As a consequence of the plan, Pacific Century
recognized restructuring and related costs of $44.4 million.
Forward-Looking Statements
This report contains forward-looking statements regarding Pacific Century's
beliefs, estimates, projections and assumptions, which are provided to assist in
the understanding of certain aspects of Pacific Century's anticipated future
financial performance. Pacific Century 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 Pacific
Century's control. Although Pacific Century 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 Pacific Century serves including those in Hawaii, the
U.S. Mainland, Asia and the South Pacific; shifts in interest rates;
fluctuations in currencies of Asian Rim and South Pacific countries relative to
the U.S. dollar; changes in credit quality; implementation of the restructuring
plan may not be completed within the expected financial and time estimates;
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, particularly in connection with product delivery
and pricing. Pacific Century 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.
Highlights Pacific Century Financial Corporation and subsidiaries
- -----------------------------------------------------------------------------------------------------------------
Table 2
(in thousands of dollars except per share amounts)
Percentage
Earnings Highlights and Performance Ratios 2001 2000 Change
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31
Net Income $33,677 $39,765 -15.3%
Basic Earnings Per Share 0.42 0.50 -16.0%
Diluted Earnings Per Share 0.42 0.50 -16.0%
Cash Dividends 14,363 13,541
Return on Average Assets 0.99% 1.13%
Return on Average Equity 10.42% 13.19%
Net Interest Margin 4.24% 4.31%
Efficiency Ratio 65.43% 62.06%
Summary of Results Excluding the Effect of Intangibles (a)
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31
Net Income $39,283 $43,889 -10.5%
Basic Earnings per Share $0.49 $0.55 -10.9%
Diluted Earnings per Share $0.48 $0.55 -12.7%
Return on Average Assets 1.17% 1.26%
Return on Average Equity 14.21% 17.54%
Efficiency Ratio 63.10% 59.73%
(a) Intangibles include goodwill, core deposit and
trust intangibles, and other intangibles.
March 31 March 31 Percentage
Statement of Condition Highlights and Performance Ratios 2001 2000 Change
- ------------------------------------------------------------------------------------------------------------------
Total Assets $13,710,675 $14,250,386 -3.8%
Net Loans 8,533,776 9,346,460 -8.7%
Total Deposits 8,815,523 9,143,063 -3.6%
Total Shareholders' Equity 1,371,942 1,225,907 11.9%
Book Value Per Common Share $17.18 $15.39
Loss Reserve / Loans Outstanding 2.29% 2.05%
Average Equity / Average Assets 9.47% 8.54%
Common Stock Price Range High Low
2000 $23.19 $11.06
2001 First Quarter $20.99 $16.88
STATEMENT OF INCOME ANALYSIS
Net Interest Income
Taxable-equivalent net interest income for the first quarter of 2001 was $134.1
million, down $5.7 million, or 4.1% from the comparable period in 2000. Adjusted
for a lease residual revaluation recorded during the quarter, taxable-equivalent
net interest income was $136.5 million for the first quarter of 2001, down $3.3
million, or 2.4% from the same period last year.
Pacific Century's net interest margin was 4.24%, a decrease of 6 basis points
from the comparable period a year ago. Adjusted for the lease residual
revaluation, the net interest margin increased 2 basis points to 4.32% from the
first quarter of 2000. The yield on average earnings assets was 8.08% for the
first quarter of 2001. Excluding the lease residual adjustment, the yield on
average earnings assets was 8.16%, an increase of 26 basis points from the same
period a year ago largely the result of higher prevailing market rates. The
average cost of funds was 4.85% for the quarter, up from 4.44% reported in the
first quarter 2000 - mainly due to changes in funding sources and changing
interest rates. Presented in Table 3 are average balances, yields, and rates
paid for the three months ended March 31, 2001, March 31, 2000 and December 31,
2000. The results for the full year 2000 are also presented.
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Table 3 Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
Average Income/ Yield/ Average Income/ Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $332.3 $5.2 6.36% $232.1 $3.8 6.52%
Investment Securities Held to Maturity
-Taxable 652.6 11.7 7.23 775.5 14.2 7.38
-Tax-Exempt 3.7 0.2 23.28 10.0 0.4 17.32
Investment Securities Available for Sale 2,479.9 39.3 6.43 2,527.0 41.0 6.53
Funds Sold 80.5 1.1 5.53 35.0 0.5 5.56
Net Loans
-Domestic 7,985.7 165.6 8.41 7,897.9 163.6 8.33
-Foreign 1,277.8 21.4 6.80 1,586.1 24.9 6.30
Loan Fees 10.9 8.3
------------------------------- -------------------------------
Total Earning Assets 12,812.5 255.4 8.08 13,063.6 256.7 7.90
Cash and Due From Banks 438.2 506.5
Other Assets 595.1 631.4
------------- -------------
Total Assets $13,845.8 $14,201.5
============= =============
Interest Bearing Liabilities
Domestic Deposits - Demand $2,008.2 11.7 2.36 $2,115.6 12.3 2.33
- Savings 665.7 3.4 2.04 700.1 3.5 2.03
- Time 2,902.7 43.1 6.03 2,764.9 35.1 5.10
------------------------------- -------------------------------
Total Domestic 5,576.6 58.2 4.23 5,580.6 50.9 3.67
Foreign Deposits
- Time Due to Banks 489.4 6.6 5.51 487.8 7.0 5.79
- Other Time and Savings 801.0 7.2 3.65 1,121.6 10.3 3.70
------------------------------- -------------------------------
Total Foreign 1,290.4 13.8 4.35 1,609.4 17.3 4.33
------------------------------- -------------------------------
Total Interest Bearing Deposits 6,867.0 72.0 4.25 7,190.0 68.2 3.82
Short-Term Borrowings 2,364.8 34.0 5.83 2,626.6 36.0 5.51
Long-Term Debt 916.0 15.3 6.78 773.0 12.7 6.60
------------------------------- -------------------------------
Total Interest Bearing Liabilities 10,147.8 121.3 4.85 10,589.6 116.9 4.44
------------------------------- -------------------------------
Net Interest Income 134.1 139.8
Interest Rate Spread 3.23% 3.46%
Net Interest Margin 4.24% 4.30%
Demand Deposits - Domestic 1,636.8 1,663.6
- Foreign 377.5 419.5
------------- -------------
Total Demand Deposits 2,014.3 2,083.1
Other Liabilities 372.4 316.7
Shareholders' Equity 1,311.3 1,212.1
------------- -------------
Total Liabilities and Shareholders' Equity $13,845.8 $14,201.5
============= =============
Provision for Loan Losses 52.5 13.5
Net Overhead 20.6 62.2
--------- ---------
Income Before Income Taxes 61.0 64.1
Provision for Income Taxes 27.2 24.1
Tax-Equivalent Adjustment 0.1 0.2
--------- ---------
Net Income $33.7 $39.8
========= =========
----------------------------------------------------------------
Three Months Ended Twelve Months Ended
December 31, 2000 December 31, 2000
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $215.7 $3.7 6.91% $216.2 $14.7 6.78%
Investment Securities Held to Maturity
-Taxable 687.0 12.5 7.24 724.3 53.0 7.32
-Tax-Exempt 3.8 0.2 22.24 7.6 1.4 18.24
Investment Securities Available for Sale 2,478.4 41.2 6.60 2,502.5 165.1 6.60
Funds Sold 66.8 1.1 6.46 43.2 2.7 6.22
Net Loans
-Domestic 8,108.3 178.7 8.76 8,076.4 690.1 8.55
-Foreign 1,319.9 22.5 6.78 1,467.9 97.7 6.65
Loan Fees 8.7 33.6
------------------------------- -------------------------------
Total Earning Assets 12,879.9 268.6 8.30 13,038.1 1,058.3 8.12
Cash and Due From Banks 404.6 443.2
Other Assets 503.3 574.0
------------ ------------
Total Assets $13,787.8 $14,055.3
============ ============
Interest Bearing Liabilities
Domestic Deposits - Demand $1,991.6 12.1 2.41 $2,061.9 48.7 2.36
- Savings 667.5 3.4 2.03 684.8 13.9 2.03
- Time 2,815.6 42.3 5.98 2,781.1 154.1 5.54
------------------------------- -------------------------------
Total Domestic 5,474.7 57.8 4.20 5,527.8 216.7 3.92
Foreign Deposits
- Time Due to Banks 557.9 8.7 6.23 505.4 30.4 6.03
- Other Time and Savings 768.9 7.1 3.65 960.5 38.9 4.05
------------------------------- -------------------------------
Total Foreign 1,326.8 15.8 4.73 1,465.9 69.3 4.73
------------------------------- -------------------------------
Total Interest Bearing Deposits 6,801.5 73.6 4.30 6,993.7 286.0 4.09
Short-Term Borrowings 2,437.1 39.1 6.38 2,597.4 156.1 6.01
Long-Term Debt 1,001.6 17.0 6.72 886.9 59.1 6.66
------------------------------- -------------------------------
Total Interest Bearing Liabilities 10,240.2 129.7 5.04 10,478.0 501.2 4.78
------------------------------- -------------------------------
Net Interest Income 138.9 557.1
Interest Rate Spread 3.26% 3.34%
Net Interest Margin 4.29% 4.27%
Demand Deposits - Domestic 1,610.8 1,640.0
- Foreign 354.7 371.4
------------ ------------
Total Demand Deposits 1,965.5 2,011.4
Other Liabilities 315.6 331.3
Shareholders' Equity 1,266.5 1,234.6
------------ ------------
Total Liabilities and Shareholders' Equity $13,787.8 $14,055.3
============ ============
Provision for Loan Losses 25.8 142.9
Net Overhead 59.2 233.4
---------- ----------
Income Before Income Taxes 53.9 180.8
Provision for Income Taxes 21.2 66.3
Tax-Equivalent Adjustment 0.1 0.8
---------- ----------
Net Income $32.6 $113.7
========== ==========
Provision for Loan Losses
The provision for loan losses was $52.5 million in the first quarter 2001, up
from $13.5 million for the same quarter last year. 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 after excluding the unusual gains was $59.2 million in the
first quarter of 2001, compared to $61.9 million in the first quarter 2000 after
adjusting for unusual gains in that quarter. Exclusive of investment securities
gains and nonrecurring gains reported in both quarters, non-interest income was
down $1.7 million in the March 2001 quarter over the same year ago period.
Asset management income for the first quarter of 2001 decreased to $15.8
million, down 6.5% from the same quarter last year. The year-over-year decrease
is primarily attributable to the declining market value of managed assets.
Service charges on deposit accounts for the March 2001 quarter totaled $9.9
million, This 4.0% increase over the same quarter last year reflects higher fee
structures implemented at the end of the first quarter of 2000.
Fees, exchange and other service charges were $20.8 million in the first quarter
of 2001, compared to $21.6 million in the same 2000 quarter. This reduction
reflects the scaleback in the letter of credit and exchange volumes.
Other operating income in first quarter 2001, was $13.4 million compared to
$15.6 million in the first quarter 2000. The current quarter, included a $3.3
million impairment loss on a partnership interest and the year ago quarter
included a $2 million gain on equity investments. After adjusting for the
impairment loss in 2001 and the gain in 2000, other operating income increased
by $3.1 million in 2001.
Sales of investment securities during the three months ended March 31, 2000
resulted in net investment security gains of $20.2 million, including a gain of
$20.9 million from the sale of a stock investment in ATM processor Star Systems,
Inc. Adjusting for the Star Systems gain, Pacific Century reported a securities
loss of $0.7 million for the three months ended March 31, 2001 compared to gains
of $0.3 million in the prior year quarter.
Non-Interest Expense
Total non-interest expense for the March 2001 quarter, excluding restructuring
and related costs of $44.4 million, was $131.8 million, up 4.5% from $126.1
million in the comparable quarter of 2000.
Salaries and pension and other employee benefits expense totaled $62.2 million
in the first quarter of 2001, unchanged from $62.2 million in the same quarter
last year.
Net occupancy and equipment expense in the March 2001 quarter was $25.5 million,
an increase of 6.7% from $23.9 million for the same period in 2000. The
increase was largely due to higher software and equipment maintenance costs
incurred in 2001.
Other operating expense increased to $39.1 million in the first quarter of 2001
from $35.2 million for the same quarter in 2000. This increase was due to higher
professional fees, fraud losses, losses on derivatives with the implementation
of SFAS No. 133, increased recruiting costs, costs of a new mileage awards
program, as well as increases in other categories offset by lower insurance
costs, reduced ORE expense, and lower audit and examination costs.
Income Tax Provision
Pacific Century's effective tax rate was 44.7% for the first quarter compared to
37.7% in the first quarter of 2000. The increase is attributable to higher
state and foreign taxes and the write-off of $5 million of foreign tax assets,
with no tax benefit. Given the reduction in foreign operations, the tax
provision increased due to Pacific Century's inability to fully utilize foreign
taxes to reduce the U.S. tax.
BALANCE SHEET ANALYSIS
Loans
At March 31, 2001, loans outstanding, including loans held for sale, had
declined to $9.0 billion, from $9.7 billion at year-end 2000 and $9.8 billion at
March 31, 2000. During the quarter, Pacific Century sold $166.8 million of
commercial loans, its $209.3 million credit card portfolio, and $105.4 million
of loans were charged off. Additional decline is attributable to other planned
risk reductions in the portfolio offset by a $294.4 million increase in
residential mortgages.
Table 4 presents the composition of the loan portfolio by major loan categories
as of March 31, 2001, December 31, 2000 and March 31, 2000.
Pacific Century Financial Corporation and subsidiaries
Loan Portfolio Balances
Table 4
- -------------------------------------------------------------------------------------------------------------------------
March 31 December 31 March 31
(in millions of dollars) 2001 2000 2000
- -------------------------------------------------------------------------------------------------------------------------
Domestic Loans
Commercial and Industrial $2,094.7 $2,443.3 $2,558.6
Real Estate
Construction -- Commercial 284.0 282.4 317.5
-- Residential 28.9 25.0 16.8
Mortgage -- Commercial 1,023.8 1,125.5 1,246.8
-- Residential 2,866.7 2,855.9 2,572.3
Installment 496.4 729.9 745.0
Loans Held for Sale 308.6 179.2 115.2
Lease Financing 731.2 725.5 626.3
- -------------------------------------------------------------------------------------------------------------------------
Total Domestic 7,834.3 8,366.7 8,198.5
- -------------------------------------------------------------------------------------------------------------------------
Foreign Loans 1,157.7 1,301.6 1,581.1
- -------------------------------------------------------------------------------------------------------------------------
Total Loans $8,992.0 $9,668.3 $9,779.6
=========================================================================================================================
Investment Securities
Pacific Century's investment portfolio is managed to provide collateral for cash
management needs, to meet strategic asset/liability positioning, and to provide
both interest income and balance sheet liquidity. Available-for-sale securities
at March 31, 2001 were $2.4 billion down 4.7% from $2.5 billion at year end and
the same date last year. Securities held to maturity were $656 million at March
31, 2001, declining from $670 million at year-end 2000 and $732 million a year
ago. These decreases were largely due to maturities. Other short-term interest
earning assets totaled $496 million at the end of the first quarter, compared to
$323 million and $268 million at December 31, 2000 and March 31, 2000,
respectively. The increase occurred as Pacific Century increased its liquidity.
INVESTMENT SECURITIES
Table 5
The book value and estimated market values of investment securities are as
follows:
Aggregate
Amortized Fair
(in thousands of dollars) Cost Value
- ----------------------------------------------------------------------------------------------------------------------
At MARCH 31, 2001
Securities Held to Maturity:
Restricted Equity Securities $89,198 $89,198
Debt Securities Issued by the U. S. Treasury and Agencies 19,935 19,863
Debt Securities Issued by State and Municipalities
of the United States 3,948 4,254
Debt Securities Issued by Foreign Governments 22,307 22,310
Mortgage Backed-Securities 515,633 524,944
Other Debt Securities 5,153 5,153
------------------------------
Totals $656,174 $665,722
==============================
Securities Available for Sale:
Equity Securities $22,734 $20,676
Debt Securities Issued by the U. S. Treasury and Agencies 181,681 184,099
Debt Securities Issued by State and Municipalities
of the United States 11,886 12,168
Debt Securities Issued by Foreign Governments 16,999 18,267
Mortgage Backed-Securities 2,084,229 2,118,133
Other Debt Securities 37,036 37,175
------------------------------
Totals $2,354,565 $2,390,518
==============================
At December 31, 2000
Securities Held to Maturity:
Restricted Equity Securities $87,991 $87,991
Debt Securities Issued by the U. S. Treasury and Agencies 6,812 6,773
Debt Securities Issued by State and Municipalities --
of the United States 3,984 4,287
Debt Securities Issued by Foreign Governments 18,631 18,631
Mortgage Backed-Securities 547,463 553,782
Other Debt Securities 5,157 5,157
------------------------------
Totals $670,038 $676,621
==============================
Securities Available for Sale:
Equity Securities $26,266 $25,817
Debt Securities Issued by the U. S. Treasury and Agencies 195,920 197,035
Debt Securities Issued by State and Municipalities
of the United States 11,634 11,742
Debt Securities Issued by Foreign Governments 490 490
Mortgage Backed-Securities 2,235,987 2,237,160
Other Debt Securities 33,502 34,832
------------------------------
Totals $2,503,799 $2,507,076
==============================
At MARCH 31, 2000 Securities Held to Maturity:
Restricted Equity Securities $76,895 $76,901
Debt Securities Issued by the U. S. Treasury and Agencies 153 154
Debt Securities Issued by State and Municipalities
of the United States 8,547 9,022
Debt Securities Issued by Foreign Governments 38,372 38,371
Mortgage Backed-Securities 605,832 594,627
Other Debt Securities 2,545 2,545
------------------------------
Totals $732,344 $721,620
==============================
Securities Available for Sale:
Equity Securities $1,654 $592
Debt Securities Issued by the U. S. Treasury and Agencies 220,736 219,887
Debt Securities Issued by State and Municipalities
of the United States 15,819 15,710
Debt Securities Issued by Foreign Governments 21,877 22,423
Mortgage Backed-Securities 2,333,703 2,252,847
Other Debt Securities 28,870 26,158
------------------------------
Totals $2,622,659 $2,537,617
==============================
Deposits
As of March 31, 2001, deposits totaled $8.8 billion, down from $9.1 billion at
both year-end and March 31, 2000. Year-over-year, domestic deposits reflected an
increase of $42 million, while foreign deposits declined by $397 million. The
decline in foreign deposits is largely in the other savings and time, which
decreased $347 million year-over-year and is attributed to foreign currency
exchange rate fluctuations in the South Pacific and a decline in funding needed
for foreign loans.
Table 6 presents average deposits by type for the first quarters of 2001 and
2000 and the full year 2000.
Average Deposits
Table 6
- ---------------------------------------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000 March 31, 2000
------------------------------------------------------------------------------
(in millions of dollars) Amount Mix Amount Mix Amount Mix
- ---------------------------------------------------------------------------------------------------------------------------------
Domestic
Non-Interest Bearing Demand $1,636.8 18.4% $1,640.0 18.2% $1,663.6 17.9%
Interest-Bearing Demand 2,008.2 22.6% 2,061.9 22.9% 2,115.6 22.8%
Regular Savings 665.7 7.5% 684.8 7.6% 700.1 7.6%
Time Certificates
of Deposit
($100,000 or More) 1,318.9 14.9% 1,212.1 13.5% 1,177.3 12.7%
All Other Time and
Savings Certificates 1,583.8 17.8% 1,569.0 17.4% 1,587.6 17.1%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Domestic 7,213.4 81.2% 7,167.8 79.6% 7,244.2 78.1%
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign
Non-Interest Bearing Demand 377.5 4.3% 371.4 4.1% 419.5 4.5%
Time Due to Banks 489.4 5.5% 505.4 5.6% 487.8 5.3%
Other Time and Savings 801.0 9.0% 960.5 10.7% 1,121.6 12.1%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Foreign 1,667.9 18.8% 1,837.3 20.4% 2,028.9 21.9%
- ---------------------------------------------------------------------------------------------------------------------------------
Total $8,881.3 100.0% $9,005.1 100.0% $9,273.1 100.0%
=================================================================================================================================
Borrowings
Short-term borrowings, including funds purchased and securities sold under
agreements to repurchase, totaled $2.3 billion at March 31, 2001, $2.3 billion
at year-end 2000 and $2.7 billion at March 31, 2000. The decline reflects the
lower funding needs resulting from a decrease in outstanding assets.
Long-term debt on March 31, 2001 decreased to $883 million from $997 million at
year-end 2000, but had increased from $806 million at March 31, 2000 due to
changing funding strategies.
LINE OF BUSINESS FINANCIAL REVIEW
Beginning in December of 2000 and extending to the end of the first quarter,
Pacific Century 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 markets, as well as the ability to compete in those markets in the
future. Each business's performance was assessed in relation to the risks
assumed and whether returns were generated that exceeded the cost of the capital
allocated to them. It was concluded that three businesses: Pacific Century Bank;
the Asia Division, and the South Pacific Division, excluding American Samoa did
not achieve sufficient returns to create shareholder value and therefore, would
be divested or liquidated.
A new organizational structure was announced in April as a result of the
assessment process. Businesses have been aligned into the following units:
Retail Banking, Commercial Banking, Financial Services, Divestiture Businesses,
and Treasury and Other Corporate. The Line of Business Financial Review in this
report is presented in a format that is consistent with the new organization
structure which is different from previous quarters. Note 5 to the Consolidated
Financial Statements includes Pacific Century's business segment financial
reports for the three months ended March 31, 2001 and 2000.
Pacific Century measures performance of its businesses from multiple
perspectives. Key measures are:
- - Risk Adjusted Return on Capital (RAROC) - This method allocates equity to
business units based on various risk factors, including credit, country,
market/interest rate, and business/operating risks that are inherent in the
operation of each business.
- - Net Income After Capital Charge (NIACC) - This method of measuring
performance reflects net income available to common shareholders less a
charge to the unit for the cost
of capital allocated to it. The capital charge is based on the estimated rate
of return expected by the financial markets for companies with risk levels
similar to Pacific Century.
The determination of NIACC and RAROC uses an economic loan loss provision as a
proxy for the actual results. The economic provision reflects the expected
nomalized loss determined by a statistically applied approach that considers
risk factors, including historical loss experience, within a given portfolio.
Retail Banking
Pacific Century's retail banking franchise and market share in Hawaii and
American Samoa are key strengths of the company. Retail Banking provides
checking and savings services, small business, merchant services, installment,
home equity and mortgage lending as well as other services. First Quarter 2001
results in Retail Banking showed improvement in revenues largely from increased
mortgage banking activities and an increase in ATM and service charge fees.
Commercial Banking
The Commercial Banking segment offers corporate banking, and commercial
products, leasing and commercial real estate lending and auto finance. Pacific
Century's West Pacific operations are included in this segment. The income
decline in commercial banking is largely the result of losses recognized due to
Pacific Century's effort to improve its credit quality.
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. Such revenues
declined in the first quarter compared to the prior year quarter due to the
general decline in the stock market during the first quarter.
Divestiture Businesses
This segment includes all of the businesses Pacific Century will divest or
close. Pacific Century expects to complete the divestitures and closures by
December 31, 2001.
Treasury and Other Corporate
The primary operations in this segment is Treasury, which consists of corporate
asset and liability management activities including investment securities,
federal funds purchased and sold, government deposits, short and long-term
borrowings, and derivative activities for managing interest rate and foreign
currency risks. Additionally, the net residual effect of transfer pricing
assets and liabilities is included in Treasury, as is any corporate-wide
interest rate risk and other reconciling differences.
In the first quarter of 2001, this segment was allocated gains from the sale of
the credit card portfolio and Star Systems totaling $96.3 million and
restructing and related costs of $44.4 million associated with the planned
divestitures and closures.
Economic NIACC and RAROC for each segment for the first quarters of 2001 and
2000 are presented below.
Economic NIACC and RAROC
Table 7
(in thousands of dollars)
FINANCIAL TREASURY
SERVICES DIVESTITURE AND OTHER CONSOLIDATED
RETAIL COMMERCIAL GROUP BUSINESSES CORPORATE TOTAL
---------------------------------------------------------------------------------
Three Months Ended March 31, 2001
NIACC (Economic) 5,474 115 (301) (14,429) (6,242) (15,383)
RAROC (Economic) 28% 15% 13% 2% 6% 10%
Total Average Allocated Equity 169,659 327,618 67,304 440,444 366,917 1,371,942
=================================================================================
Three Months Ended March 31, 2000
NIACC (Economic) 1,174 3,588 1,643 (12,492) 397 (5,690)
RAROC (Economic) 18% 19% 25% 4% 16% 13%
Total Average Allocated Equity 180,687 349,757 65,407 456,281 159,970 1,212,102
=================================================================================
FOREIGN OPERATIONS
Pacific Century maintains an international presence in the Asia-Pacific region
that provides lending, correspondent banking, foreign exchange, trade finance
and deposit gathering activities in these markets. Pacific Century divides its
international business into three areas: the West Pacific, the South Pacific and
Asia.
The West Pacific includes Bank of Hawaii branches in Guam and in other locations
in the West Pacific region. First Federal Savings and Loan of America 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 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. Pacific
Century also has investments in the National Bank of the Solomon Islands and the
Bank of Queensland. As a result of the recent strategic assessment it has been
decided to divest the entire South Pacific Division, excluding American Samoa,
which will be integrated into and managed as part of the Hawaii Retail Business.
This exit is anticipated to be complete by the end of 2001.
Through its Asia Division, Pacific Century provides banking services to
corporate and financial institution customers in six Asian locations with
support from its New York and Honolulu operations. As a result of the recent
strategic assessment it has been decided to divest the entire Asia Division,
although a representative office will be maintained in Japan, which has
extensive ties to businesses in Hawaii and the West Pacific. This exit is also
anticipated to largely be complete by the end of 2001.
The countries in which Pacific Century maintains its largest credit exposure on
a cross-border basis include Japan, South Korea and France. Table 8 presents as
of March 31, 2001, December 31, 2000, and March 31, 2000 a geographic
distribution of Pacific Century's cross-border assets for each country in which
such assets exceed 0.75% of total assets.
Geographic Distribution of Cross-Border International Assets (1)
Table 8
(in millions)
Country March 31, 2001 December 31, 2000 March 31, 2000
=============================================================================
Japan $222.0 $298.8 $316.2
South Korea 246.7 282.0 305.6
France 97.8 85.8 147.8
All Others 596.4 423.8 549.4
======== ======== ========
$1,162.9 $1,090.4 $1,319.0
(1) In this table, cross-border outstandings are defined as foreign monetary
assets that are payable to Pacific Century in U.S. dollars or other non-
local currencies, plus amounts payable in local currency but funded with
U.S. dollars or other non-local currencies. 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
Non-Performing Assets and Past Due Loans
Non-performing assets (NPAs) consist of non-accrual loans, restructured loans
and foreclosed real estate. Total non-performing assets decreased to $119.5
million, or 1.33% of total loans at March 31, 2001 down $63.5 million, or 35%
from non-performing assets of $183.0 million, or 1.89% of total loans at
December 31, 2000 and down from $136.4, or 1.39% of loans at March 31, 2000.
The decrease in domestic non-performing assets is largely due to loan sales and
charge-off activity as management made significant progress on its commitment to
improve asset quality. Charge-offs and exchange rate valuations primarily drove
the decrease in foreign non-performing assets. Total non-performing assets are
currently at the lowest level since 1998.
Foreclosed real estate totaled $11.2 million, up $6.7 million from year-end 2000
due to the acquisition of two large properties and several other smaller
properties located in Hawaii totaling $9.7 million. This is offset by $3.0
million in sales during the quarter.
Impaired loans at March 31, 2001 were at $123.2 million compared to $221.0
million at year end 2000. There were no restructured loans as of March 31,
2001, December 31, 2000 and March 31, 2000.
Accruing loans past due 90 days or more were $11.1 million at March 31, 2001,
down from $18.8 at year-end 2000 and $23.1 at March 31, 2000.
For further information concerning non-performing assets and past due loans,
please refer to Table 9.
Non-Performing Assets
Table 9
- -----------------------------------------------------------------------------
March 31 December 31 March 31
(in millions of dollars) 2001 2000 2000
- -----------------------------------------------------------------------------
Non-Accrual Loans
Commercial and Industrial $23.8 $55.4 $20.1
Real Estate
Construction 6.3 6.4 0.9
Commercial 42.5 60.1 18.2
Residential 18.5 22.7 23.2
Installment 0.1 -- 0.5
Leases 0.2 0.4 3.7
-----------------------------------
Total Domestic 91.4 145.0 66.6
Foreign 16.9 33.5 65.2
-----------------------------------
Subtotal 108.3 178.5 131.8
Foreclosed Real Estate
Domestic 10.9 4.2 4.3
Foreign 0.3 0.3 0.3
-----------------------------------
Subtotal 11.2 4.5 4.6
-----------------------------------
Total Non-Performing Assets 119.5 183.0 136.4
-----------------------------------
- -----------------------------------------------------------------------------
Ratio of Non-Performing Assets
to Total Loans 1.33% 1.89% 1.39%
- -----------------------------------------------------------------------------
Changes in Non-Performing Assets
Beginning Balance at 12/31/2000 $183.0
Additions to NPA
Loans 107.8
Foreclosed Real Estate 9.7
-------
Total Additions $117.5
Reductions
Payments (72.8)
Return to Accrual (3.0)
Sales of Foreclosed Real Estate (3.0)
Charge-off's (102.2)
-------
Total Reductions ($181.0)
Ending Non-Performing Assets $119.5
=======
Allowance for Loan Losses
The allowance for loan losses at March 31, 2001 was $199.8 million, or 2.29% of
total loans outstanding, compared with $246.2 million, or 2.62% at December 31,
2000 and $195.4 million, or 2.05% at March 31, 2000. The ratio of the allowance
to net loans was 2.43% at March 31, 2001. The ratio of allowance to total non-
performing assets increased to 167% at March 31, 2001, up from 117% at December
31, 2000 and up from 143% at March 31, 2000. A summary of the activity in the
allowance for loan losses is presented in table 10.
Loan loss provisions were $52.5 million for the first quarter 2001, increased
$13.5 million for the same quarter last year. Charge-offs during the quarter of
$105.4 million were partially offset by loan loss recoveries of $7.7 million.
Two thirds of the losses were due to the syndicated loan portfolio, as non-
performing loans were sold or charged off. Seven other higher risk, but
performing, syndicated loans with outstanding balances of $134 million and two
additional undrawn commitments totaling $43 million were sold during the quarter
as part of the continuing effort to reduce credit risk.
Pacific Century Financial Corporation and subsidiaries
Allowance for Loan Losses
Table 10
- --------------------------------------------------------------------------------------------
First Year First
Quarter Ended Quarter
(in millions of dollars) 2001 12/31/00 2000
- --------------------------------------------------------------------------------------------
Average Amount of Loans Outstanding $9,263.5 $9,544.3 $9,484.1
- --------------------------------------------------------------------------------------------
Balance of Reserve for Loan Losses
at Beginning of Period $246.2 $194.2 $194.2
Loans Charged-Off
Commercial and Industrial 75.5 22.1 1.4
Real Estate
Construction - 0.6 -
Commercial 11.9 15.2 3.9
Residential 2.5 6.5 2.4
Installment 5.4 20.1 4.7
Leases 0.1 0.5 -
- --------------------------------------------------------------------------------------------
Total Domestic 95.4 65.0 12.4
Foreign 10.0 45.8 3.7
- --------------------------------------------------------------------------------------------
Total Charged-Off 105.4 110.8 16.1
Recoveries on Loans Previously Charged-Off
Commercial and Industrial 2.7 5.5 1.7
Real Estate
Construction - - -
Commercial 0.3 0.6 0.1
Residential 0.2 1.1 0.5
Installment 1.8 6.9 1.7
Leases 0.1 - -
- --------------------------------------------------------------------------------------------
Total Domestic 5.1 14.1 4.0
Foreign 2.6 7.3 0.8
- --------------------------------------------------------------------------------------------
Total Recoveries 7.7 21.4 4.8
- --------------------------------------------------------------------------------------------
Net Charge-Offs (97.7) (89.4) (11.3)
Provision Charged to Operating Expenses 52.5 142.9 13.5
Other Net Additions (Reductions)* (1.2) (1.5) (1.0)
- --------------------------------------------------------------------------------------------
Balance at End of Period $199.8 $246.2 $195.4
============================================================================================
Ratio of Net Charge-Offs to
Average Loans Outstanding (annualized) 4.22% 0.94% 0.48%
- --------------------------------------------------------------------------------------------
Ratio of Allowance to Total Loans Outstanding 2.29% 2.62% 2.05%
- --------------------------------------------------------------------------------------------
* Includes balance transfers, reserves acquired, and foreign currency
translation adjustments.
Market Risk
At Pacific Century, assets and liabilities are managed to maximize long term
risk adjusted returns to shareholders. Pacific Century's asset and liability
management process involves measuring, monitoring, controlling and managing
financial risks that can significantly impact Pacific Century's financial
position and operating results. Financial risks in the form of interest rate
sensitivity, foreign currency exchange fluctuations, liquidity, and capital
adequacy are balanced with expected returns with the objective to maximize
earnings performance and shareholder value, while limiting the volatility of
each.
The activities associated with these financial risks are categorized into "other
than trading" or "trading."
Other Than Trading Activities
A key element in Pacific Century's ongoing process to measure and monitor
interest rate risk is the utilization of a net interest income (NII) simulation
model. This model is used to estimate the amount that NII will change over a
one-year time horizon under various interest rate scenarios using numerous
assumptions, which management believes are reasonable. The NII simulation model
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 11 presents, as of March 31, 2001, December 31, 2000 and March 31, 2000,
the estimate of the change in NII from a gradual 200 basis point increase or
decrease in interest rates, moving in parallel fashion over the entire yield
curve, over the next 12-month period relative to the measured base case scenario
for NII. The resulting estimate in NII exposure is well within the approved
Asset Liability Management Committee guidelines and presents a balance sheet
exposure that is slightly liability sensitive. A liability sensitive exposure
would imply a favorable short-term impact on NII in periods of decreasing
interest rates.
Market Risk Exposure to Interest Rate Changes
- ---------------------------------------------
Table 11
March 31, 2001 December 31, 2000 March 31, 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 (1.3)% (0.6)% (2.3)% 0.5% 0.6% (2.2)%
To enhance and complement the results from the NII simulation model, Pacific
Century also reviews other measures of interest rate risk. These measures
include the sensitivity of market value of equity and the exposure to basis risk
and non-parallel yield curve shifts. There are some inherent limitations to
these measures, but used along with the NII simulation model, Pacific Century
gains a better overall insight for managing its exposure to changes in interest
rates.
In managing interest rate risk, Pacific Century 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
primarily include changing product pricing strategies and modifying investment
portfolio strategies. The use of financial derivatives has been limited over
the past several years.
Pacific Century's broad area of operations throughout the South Pacific and Asia
has the potential to expose it to foreign currency risk. In general, however,
most foreign currency denominated
assets are funded by like currency liabilities, with imbalances corrected
through the use of various hedge instruments. By policy, the net exposure in
those balance sheet activities described above is insignificant.
On the other hand, Pacific Century is exposed to foreign currency exchange rate
changes from the capital invested in its foreign subsidiaries and branches
located throughout the South Pacific and Asian Rim. These investments are
designed to diversify Pacific Century's total balance sheet exposure. A portion
of the capital investment in French Polynesia and New Caledonia is offset by a
borrowing denominated in euro and a foreign exchange currency hedge transaction.
In the first quarter of 2001, Pacific Century recognized in income 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 March 31, 2001 the remainder of these capital investments which aggregated
$56.5 million, was not hedged. The comparative unhedged position at year-end
2000 was $71.2 million and $90.4 million at March 31, 2000. The increased
provision and charge-off of loans in the South Pacific and Asia has created
situations where liabilities exceeded assets as of March 31, 2001. This anomaly
results in the negative equity reported in Table 12 for the other currency
category.
To estimate the potential loss from foreign currency exposure, Pacific Century
uses a value-at-risk (VAR) calculation. For net investments in subsidiaries,
Pacific Century's VAR is calculated at a 95% confidence interval.
Table 12 presents as of March 31, 2001, December 31, 2000 and March 31, 2000
Pacific Century's foreign currency exposure from its net investment in
subsidiaries and branch operations that are denominated in a foreign currency as
measured by the VAR.
Market Risk Exposure From Changes in Foreign Exchange Rates
Table 12
- ---------------------------------------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000 March 31, 2000
(in millions of dollars) Book Value Value-at-Risk Book Value Value-at-Risk Book Value Value-at-Risk
- ---------------------------------------------------------------------------------------------------------------------------------
Net Investments in Foreign
Subsidiaries & Branches
Japanese Yen $10.0 $2.1 $10.6 $1.4 $9.9 $2.2
Korean Won 27.0 5.7 29.6 5.1 32.2 3.9
Pacific Franc(1) 26.9 5.5 32.0 6.2 25.8 5.5
Other Currencies (7.4) 12.9 (1.0) 14.4 22.5 18.0
----------------------------------------------------------------------------------------
Total $56.5 $26.2 $71.2 $27.1 $90.4 $29.6
========================================================================================
(1) Net of $34 million, $37 million and $37 million borrowing at March 31,
2001, December 31, 2000 and March 31, 2000, respectively, denominated in
euro and foreign exchange hedge transactions of $24 million, $26 million
and $22 million at March 31, 2001, December 31, 2000 and March 31, 2000.
Trading Activities
Trading activities include foreign currency and foreign exchange contracts that
expose Pacific Century to a minor degree of foreign currency risk. Pacific
Century manages its trading account such that it does not maintain significant
foreign currency open positions. The exposure from foreign currency trading
activities positions measured by VAR methodology as of March 31, 2001 continues
to be immaterial.
Liquidity Management
Liquidity is managed to ensure that Pacific Century has continuous access to
sufficient, reasonably priced funding to conduct its business in a normal
manner. Pacific Century's liquidity management process is described in the 2000
Annual Report to Shareholders.
Pacific Century maintained a $25 million annually renewable line of credit for
working capital purposes. Fees are paid on the unused balance of the line.
During the first quarter of 2001, the line was not drawn upon.
Bank of Hawaii and First Savings are both members of the Federal Home Loan Bank
of Seattle. The FHLB provides these institutions with an additional source for
short and long-term funding. Borrowings from the FHLB ended the first quarter
of 2001 at $506 million, compared to $520 million at year-end 2000 and $487
million at March 31, 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 March 31, 2001 there was $125 million issued and outstanding under
this program.
Capital Management
Pacific Century manages its capital level to optimize shareholder value, support
asset growth, provide protection against unforeseen losses and comply with
regulatory requirements. Capital levels are reviewed periodically relative to
Pacific Century's risk profile and current and projected economic conditions.
Pacific Century's objective is to hold sufficient capital on a regulatory basis
to exceed the minimum guidelines of a well capitalized institution.
At March 31, 2001, Pacific Century's shareholders' equity grew to $1.37 billion,
an increase of 11.9% over the same date in 2000. The growth in shareholders'
equity during the first three months of 2001 included retention of earnings, net
unrealized valuation adjustments , realized foreign currency translation losses,
and issuance of common stock under various stock-based plans. Offsetting these
increases were cash dividends paid. The positive unrealized valuation
adjustment primarily is attributed to market value adjustments for available-
for-sale investment securities due to the general decline in market interest
rates.
Pacific Century's regulatory capital ratios exceeded the minimum threshold
levels that were established by federal bank regulators to qualify an
institution as well capitalized. The minimum regulatory standards to qualify as
well capitalized are as follows: Tier 1 Capital 6%; Total Capital 10%; and the
Leverage Ratio 5%. Table 13 presents the activities and balances in Pacific
Century's capital accounts along with key capital ratios.
Equity Capital
Table 13
- ------------------------------------------------------------------------------------------------------------------------
Quarter Ended Year Ended Quarter Ended
(in millions of dollars) March 31, 2001 December 31, 2000 March 31, 2000
- ------------------------------------------------------------------------------------------------------------------------
Source of Common Equity
Net Income $33.7 $113.7 $39.8
Dividends Paid (14.4) (56.5) (13.5)
Dividend Reinvestment Program 0.7 3.3 1.1
Stock Repurchases - (17.0) (8.3)
Other (1) 50.5 45.6 (5.5)
- ------------------------------------------------------------------------------------------------------------------------
Increase in Equity $70.5 $89.1 $13.6
========================================================================================================================
Common Equity $1,371.9 $1,301.4 $1,225.9
Add: 8.25% Capital Securities of
Bancorp Hawaii Capital Trust I 100.0 100.0 100.0
Minority Interest 4.3 4.5 4.3
Less: Intangibles 158.1 163.9 173.3
Unrealized Valuation and Other
Adjustments 23.0 2.2 (48.3)
- ------------------------------------------------------------------------------------------------------------------------
Tier I Capital 1,295.1 1,239.8 1,205.2
Allowable Loan Loss Reserve 127.0 132.8 141.8
Subordinated Debt 172.1 172.1 195.9
Investment in Unconsolidated Subsidiary (3.5) (3.4) (3.4)
- ------------------------------------------------------------------------------------------------------------------------
Total Capital $1,590.7 $1,541.3 $1,539.5
========================================================================================================================
Risk Weighted Assets $10,087.5 $10,512.3 $11,286.3
========================================================================================================================
Key Ratios
Tier I Capital Ratio 12.84% 11.78% 10.68%
Total Capital Ratio 15.77% 14.64% 13.64%
Leverage Ratio 9.46% 9.10% 8.59%
========================================================================================================================
(1) Includes common stock issued under the profit sharing and stock option plans
and unrealized valuation adjustments for investment securities, foreign currency
translation, pension liability, and stock compensation.
Part II. - Other Information
Items 1 to 3 and Item 5 omitted pursuant to instructions.
Item 4 - Submission of Matters to a Vote of Shareholders
At the annual shareholders meeting held on April 27, 2001, the following matters
were submitted to a vote of the shareholders.
a. Election of Directors - Three directors whose terms in office were
expiring as well as one new director nominee were elected to the Board of
Directors as follows:
Mary G. Bitterman
Martin A. Stein
Stanley S. Takahashi
Clinton R. Churchill
b. Amendment to the Stock Option Plan to Increase Available Shares - The
amendment to the plan increased the maximum shares of common stock that may
be issued under the Plan by 5,000,000 to 14,650,000.
c. Amendment to the Stock Option Plan to Allow the Number of Options
Granted to Exceed 20% for CEO Upon Hire - The amendment permitted the Company
to follow a separate maximum limitation equal to 23% of the total authorized
pool of shares as it relates to the number of options granted to the Chief
Executive Officer at the time of hire.
d. Amendment to the Option Plan to Allow the Grant of Options to Independent
Contractors - The Amendment would allow the Company to grant awards to
independent contractors providing services to the Company or a subsidiary.
Each of the matters before the Shareholders was approved by a substantial
margin.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Number
---------------
99 Statement of Ratios
(b) No Form 8-K was filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC CENTURY FINANCIAL
Date May 15, 2001 CORPORATION
------------------
/s/ Allan R. Landon
-------------------------
(Signature)
Allan R.Landon
Vice Chair and Chief Financial Officer
/s/ Leslie F. Paskett
------------------------
(Signature)
Leslie F. Paskett
Senior Vice President and Controller