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U N I T E D S T A T E S
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 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
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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 [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value; outstanding at July 31, 2001 - 80,750,640 shares
================================================================================
Index
Pacific Century Financial Corporation and Subsidiaries
Part I. - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three months and Six months
ended June 30, 2001 and 2000
Consolidated Balance Sheets - June 30, 2001, December 31, 2000, and
June 30, 2000
Consolidated Statements of Shareholders' Equity - Six months ended
June 30, 2001 and 2000
Consolidated Statements of Cash Flows - Six months ended June 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
Item 4. Submission of Matters to a Vote of Shareholders
Signatures
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Income (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
(dollars in thousands except per share amounts) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income
Interest and Fees on Loans and Leases $ 163,815 $ 197,980 $ 352,974 $ 389,382
Interest and Dividends on Investment Securities 11,046 13,564 22,822 28,079
Income on Investment Securities Available for Sale 36,146 41,161 75,447 82,194
Deposits 4,903 3,834 10,117 7,598
Funds Sold and Security Resale Agreements 1,353 491 2,450 974
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 217,263 257,030 463,810 508,227
Interest Expense
Deposits 60,061 71,064 132,080 139,278
Security Repurchase Agreements 20,843 26,021 45,473 48,974
Funds Purchased 2,333 7,834 8,456 16,361
Short-Term Borrowings 2,764 6,514 5,994 11,046
Long-Term Debt 14,459 13,319 29,773 26,007
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Total Interest Expense 100,460 124,752 221,776 241,666
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Net Interest Income 116,803 132,278 242,034 266,561
Provision for Loan Losses 6,413 83,407 58,879 96,929
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 110,390 48,871 183,155 169,632
Non-Interest Income
Trust and Asset Management 15,247 16,317 31,042 33,204
Mortgage Banking 4,606 2,799 9,683 4,878
Service Charges on Deposit Accounts 9,878 10,180 19,818 19,737
Fees, Exchange, and Other Service Charges 20,000 25,393 43,593 49,485
Gain on Sale of Card Portfolio and Branches 24,794 - 100,208 -
Gain on Settlement of Pension Obligation - 11,900 - 11,900
Investment Securities Gains (Losses) 11,681 (515) 31,884 (233)
Other Operating Income 12,170 13,097 22,883 28,672
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 98,376 79,171 259,111 147,643
Non-Interest Expense
Salaries 47,722 44,460 95,605 92,007
Pensions and Other Employee Benefits 12,543 10,788 26,896 25,418
Net Occupancy Expense 12,488 12,480 24,612 24,296
Net Equipment Expense 13,729 12,066 27,108 24,133
Goodwill and Other Intangibles Amortization 3,633 4,278 7,583 8,340
Restructuring and Other Related Costs 37,751 - 82,189 -
Minority Interest 84 107 163 176
Other Operating Expense 33,885 36,998 70,319 72,209
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Total Non-Interest Expense 161,835 121,177 334,475 246,579
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Income Before Income Taxes 46,931 6,865 107,791 70,696
Provision for Income Taxes 20,192 158 47,375 24,224
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 26,739 $ 6,707 $ 60,416 $ 46,472
====================================================================================================================================
Basic Earnings Per Share $0.33 $0.08 $0.75 $0.58
Diluted Earnings Per Share $0.32 $0.08 $0.74 $0.58
Dividends Declared Per Share $0.18 $0.18 $0.36 $0.35
Basic Weighted Average Shares 80,516,216 79,425,245 80,120,449 79,623,305
Diluted Weighted Average Shares 82,975,267 80,002,989 82,030,085 79,975,904
====================================================================================================================================
See accompanying notes to consolidated financial statements.
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Condition (Unaudited)
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June 30 December 31 June 30
(dollars in thousands) 2001 2000 2000
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Assets
Interest Bearing Deposits $ 458,696 $ 188,649 $ 199,020
Investment Securities - Held to Maturity
(Market Value of $628,393, $676,621 and $721,617, 616,412 670,038 730,445
respectively)
Investment Securities - Available for Sale 2,202,718 2,507,076 2,493,066
Securities Purchased Under Agreements to Resell 7,688 3,969 -
Funds Sold 318,182 134,644 50,646
Loans Held for Sale 571,395 179,229 128,720
Loans 7,618,407 9,235,158 9,615,277
Allowance for Loan Losses (199,800) (246,247) (246,559)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Loans 7,418,607 8,988,911 9,368,718
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Total Earning Assets 11,593,698 12,672,516 12,970,615
Cash and Non-Interest Bearing Deposits 391,552 523,969 473,950
Premises and Equipment 242,040 254,621 259,037
Customers' Acceptance Liability 4,184 14,690 9,406
Accrued Interest Receivable 61,702 68,585 75,883
Foreclosed Assets 40,077 4,526 4,915
Goodwill and Other Intangibles 157,515 192,264 198,363
Other Assets 264,743 282,645 302,456
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $12,755,511 $14,013,816 $14,294,625
=================================================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $ 1,591,824 $ 1,707,724 $ 1,696,106
- Interest Bearing 1,914,474 2,008,730 2,091,074
Savings 758,262 665,239 684,572
Time 2,602,035 2,836,083 2,781,868
Foreign Deposits
Demand - Non-Interest Bearing 319,165 385,366 378,497
Time Due to Banks 265,768 535,126 442,678
Other Savings and Time 656,940 942,313 1,034,351
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Total Deposits 8,108,468 9,080,581 9,109,146
Securities Sold Under Agreements to Repurchase 1,632,774 1,655,173 1,573,980
Funds Purchased 176,768 413,241 663,234
Short-Term Borrowings 242,781 211,481 530,231
Bank's Acceptances Outstanding 4,184 14,690 9,406
Accrued Retirement Expense 35,946 37,868 37,214
Accrued Interest Payable 59,559 72,460 64,579
Accrued Taxes Payable 170,815 130,766 83,343
Minority Interest 4,014 4,536 4,350
Other Liabilities 93,619 94,512 107,569
Long-Term Debt 830,852 997,152 902,174
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 11,359,780 12,712,460 13,085,226
Shareholders' Equity
Common Stock ($.01 par value), authorized 500,000,000
shares;
issued / outstanding: June 2001 - 81,368,629 /
80,948,825;
December 2000 - 80,558,811 / 79,612,178; June 2000 -
80,555,424 / 79,399,919 806 806 806
Capital Surplus 367,390 346,045 346,018
Accumulated Other Comprehensive Income 25,886 (25,079) (75,462)
Retained Earnings 1,028,036 996,791 959,041
Deferred Stock Grants (17,891) - -
Treasury Stock, at Cost - (Shares: June 2001 - 419,804;
December 2000 - 946,633;
and June 2000 - 1,155,505) (8,496) (17,207) (21,004)
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Total Shareholders' Equity 1,395,731 1,301,356 1,209,399
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $12,755,511 $14,013,816 $14,294,625
=================================================================================================================================
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
Common Capital Comprehensive Retained Deferred Treasury Comprehensive
(dollars in thousands) Total Stock Surplus Income Earnings Stock Grants Stock Income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $1,301,356 $806 $346,045 $(25,079) $ 996,791 $ - $(17,207)
Comprehensive Income
Net Income 60,416 - - - 60,416 - $ 60,416
Other Comprehensive Income, Net of Tax
Investment Securities 22,775 - - 22,775 - - - 22,775
Foreign Currency Translation Adjustment 27,496 - - 27,496 - - - 27,496
Pension Liability Adjustments (159) - - (159) - - - (159)
--------
Total Comprehensive Income $110,528
========
Common Stock Issued
32,942 Profit Sharing Plan 725 - 180 - - - 545
416,413 Stock Option Plan 7,073 - 643 - (381) - 6,811
64,791 Dividend Reinvestment Plan 1,419 - 326 - - - 1,093
3,672 Directors' Restricted Shares and
Deferred Compensation Plan 343 - 81 - - - 262
741,000 Employees' Restricted Shares 925 - 18,816 - - (17,891) -
65,146 Hawaii Insurance Network 1,299 - 1,299 - - - -
Stock Compensation 853 - 853 - - -
Cash Dividends Paid (28,790) - - - (28,790) - -
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $1,395,731 $806 $367,390 $ 25,886 $1,028,036 $(17,891) $ (8,496)
=====================================================================================================================
Balance at December 31, 1999 $1,212,330 $806 $345,851 $(66,106) $ 942,177 $ - $(10,398)
Comprehensive Income
Net Income 46,472 - - - 46,472 - - $ 46,472
Other Comprehensive Income, Net of Tax
Investment Securities (10,696) - - (10,696) - - - (10,696)
Foreign Currency Translation Adjustment 1,340 - - 1,340 - - - 1,340
--------
Total Comprehensive Income $ 37,116
========
Common Stock Issued
39,382 Profit Sharing Plan 723 - 18 - (128) - 833
140,260 Stock Option Plan 2,018 - 3 - (1,019) - 3,034
115,574 Dividend Reinvestment Plan 1,899 - 52 - (616) - 2,463
4,696 Directors' Restricted Shares and
Deferred Compensation Plan 94 - 94 - - - -
Treasury Stock Purchased (16,936) - - - - - (16,936)
Cash Dividends Paid (27,845) - - - (27,845) - -
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $1,209,399 $806 $346,018 $(75,462) $ 959,041 $ - $(21,004)
=====================================================================================================================
See accompanying notes to consolidated financial statements.
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Six Months ended June 30
(dollars in thousands) 2001 2000
=============================================================================================
Operating Activities
Net Income $ 60,416 $ 46,472
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses 58,879 96,929
Depreciation and amortization 30,427 28,908
Amortization of deferred loan fees and leasing income (21,330) (23,051)
Amortization of deferred stock grants 1,778 --
Deferred income taxes (10,652) (24,685)
Investment security (gains) losses (31,884) 78
Proceeds from sales of loans held for sale 195,922 120,151
Originations of loans held for sale (588,088) (112,774)
Gain on sale of card portfolio and branches (100,208) --
Net change in other assets and liabilities 49,716 (942)
--------------------------
Net cash provided (used) by operating activities (355,024) 131,086
- ---------------------------------------------------------------------------------------------
Investing Activities
Proceeds from redemptions of investment securities
held to maturity 102,322 84,074
Purchases of investment securities held to maturity (48,696) (18,197)
Proceeds from sales and redemptions of investment securities
available for sale 683,078 86,216
Purchases of investment securities available for sale (324,061) (54,955)
Net decrease (increase) in loans and lease financing 925,953 (297,845)
Proceeds from sale of card portfolio and branches 707,010 --
Premises and equipment, net (7,976) (6,475)
--------------------------
Net cash provided (used) by investing activities 2,037,630 (207,182)
- ---------------------------------------------------------------------------------------------
Financing Activities
Net decrease in demand, savings, and time deposits (972,113) (285,072)
Proceeds from lines of credit and long-term debt 2,048 200,048
Repayments of long-term debt (168,348) (25,531)
Net decrease in short-term borrowings (227,572) (22,134)
Proceeds from issuance of common stock, net of
common stock repurchased 9,560 (12,202)
Cash dividends (28,790) (27,845)
--------------------------
Net cash used by financing activities (1,385,215) (172,736)
- ---------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 27,496 1,340
--------------------------
Increase (Decrease) in cash and cash equivalents 324,887 (247,492)
Cash and cash equivalents at beginning of year 851,231 971,108
--------------------------
Cash and cash equivalents at end of period $ 1,176,118 $ 723,616
=============================================================================================
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 (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 six months ended June
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 Hong Kong, 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 quarter of 2001. The
write-off was associated with the Company's divestiture of its California bank.
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
addition, regulatory approval was obtained for a $70 million share repurchase
program which began on July 26, 2001.
Note 2. Restructuring
On April 23, 2001 the Company announced its new strategic plan designed to
maximize shareholder value by strengthening its Hawaii and West Pacific
operations and divesting most other holdings. The Company 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.
On June 5, 2001, the Company announced the sale of Pacific Century Bank, N.A,
its California bank subsidiary. The sale of all 20 branches includes
approximately $640 million in deposits, $570 million in loans and 300 employees.
The sale is expected to be completed in the third quarter. The Company also
expects to sell its operations in the South Pacific and to close its Asian
branches by the end of 2001.
In connection with these divestitures, the Company incurred restructuring and
related costs as follows.
(in millions) Three-Months Ended Six-Months Ended
June 30, 2001 June 30, 2001
Foreign Currency Translation Losses $ 2.2 $30.2
Write-down of goodwill 15.5 15.5
Termination Costs 14.3 15.7
Unrealizable Foreign Tax Credit - 5.0
Unrecoverable Investments - 6.1
Contract and Lease Terminations 3.1 3.1
Consulting fees 1.5 2.1
Other 1.2 4.5
----- -----
Total $37.8 $82.2
===== =====
In addition, $1.2 million of accelerated depreciation on assets to be disposed
of in connection with the closure of the Asian branches was incurred in the
second quarter 2001.
The foreign currency translation losses were for the write-off of the deferred
tax assets associated with translation losses that were previously recognized.
The $15.5 million goodwill impairment charge was taken in anticipation of the
sale of the California bank subsidiary and reflects the after tax loss that will
occur as a result of the sale. The termination costs accrued were primarily for
severance costs that will be paid out over the next six months to 474 employees
of the Asia Division and the California bank. The termination costs and the
lease and contract termination are included in the restructuring accrual as of
June 30, 2001.
Activity in the Restructuring Accrual
Balance at December 31, 2000 $ -
Restructuring Charges 2.3
------
Balance at March 31, 2001 $ 2.3
Restructuring Charges 17.4
Payments (1.2)
------
Balance at June 30, 2001 $ 16.2
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. Consequently, 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, Divestiture Businesses and Treasury and Other Corporate.
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.
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, during the first half
of 2001, implemented changes in the way that segment results are used.
Accordingly, the previously presented operating results for the periods ended
June 30, 2000 have been reclassified to be consistent with the periods ended
June 30, 2001. 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 six months ended June 30, 2001 and 2000
are presented below for each of the Company's principal segments.
Business Segment Selected Financial Information
Corporate
Restruc-
Financial Treasury turing Consoli-
Services Divestiture and Other Related dated
Retail Commercial Group Businesses Corporate Activities Total
--------- ---------- --------- ----------- ---------- ---------- ---------
Three Months Ended June 30, 2001
Net Interest Income $ 42,150 $ 41,096 $ 2,863 $ 28,979 $ 1,715 -- $ 116,803
Loan Loss Provision (1,724) (848) -- (3,841) -- -- (6,413)
--------- --------- --------- --------- --------- --------- ---------
Net Interest Income after Provision 40,426 40,248 2,863 25,138 1,715 -- 110,390
Gains from Divestitures -- -- -- -- -- 35,929 35,929
Other Non-Interest Income 20,370 6,474 20,959 7,507 7,137 -- 62,447
--------- --------- --------- --------- --------- --------- ---------
Total Revenue 60,796 46,722 23,822 32,645 8,852 35,929 208,766
Restructuring & Other related costs -- -- -- -- -- 38,988 38,988
Non-Interest Expense 45,394 22,749 19,843 30,625 4,236 -- 122,847
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) Before Income Taxes 15,402 23,973 3,979 2,020 4,616 (3,059) 46,931
Income Taxes (7,140) (9,845) (1,672) (828) 394 (1,101) (20,192)
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) $ 8,262 $ 14,128 $ 2,307 $ 1,192 $ 5,010 ($ 4,160) $ 26,739
========= ========= ========= ========= ========= ========= =========
Corporate
Restruc-
Financial Treasury turing Consoli-
Services Divestiture and Other Related dated
Retail Commercial Group Businesses Corporate Activities Total
--------- ---------- --------- ----------- ---------- ---------- ---------
Three Months Ended June 30, 2000
Net Interest Income $ 40,041 $ 49,695 $ 2,069 $ 38,213 $ 2,260 -- $ 132,278
Loan Loss Provision (2,026) (58,117) -- (15,596) (7,668) -- (83,407)
--------- --------- --------- --------- --------- --------- ---------
Net Interest Income after Provision 38,015 (8,422) 2,069 22,617 (5,408) -- 48,871
Gains from Divestitures -- -- -- -- -- -- --
Other Non-Interest Income 18,634 8,067 21,780 11,517 19,173 -- 79,171
--------- --------- --------- --------- --------- --------- ---------
Total Revenue 56,649 (355) 23,849 34,134 13,765 -- 128,042
Restructuring & Other related costs -- -- -- -- -- -- --
Non-Interest Expense 39,511 22,810 16,952 33,746 8,158 -- 121,177
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) Before Income Taxes 17,138 (23,165) 6,897 388 5,607 -- 6,865
Income Taxes (7,198) 9,720 (2,896) 675 (459) -- (158)
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) $ 9,940 ($ 13,445) $ 4,001 $ 1,063 $ 5,148 -- $ 6,707
========= ========= ========= ========= ========= ========= =========
Business Segment Selected Financial Information
Corporate
Restruc-
Financial Treasury turing Consoli-
Services Divestiture and Other Related dated
Retail Commercial Group Businesses Corporate Activities Total
--------- ---------- --------- ----------- ---------- ---------- ---------
Six Months Ended June 30, 2001
Net Interest Income $ 84,307 $ 81,713 $ 5,395 $ 66,945 $ 6,118 (2,444) $ 242,034
Loan Loss Provision (4,470) (10,152) -- (7,541) -- (36,716) (58,879)
--------- --------- --------- --------- --------- --------- ---------
Net Interest Income after Provision 79,837 71,561 5,395 59,404 6,118 (39,160) 183,155
Gains from Divestitures -- -- -- -- -- 132,282 132,282
Other Non-Interest Income 41,972 15,492 41,867 20,581 10,217 (3,300) 126,829
--------- --------- --------- --------- --------- --------- ---------
Total Revenue 121,809 87,053 47,262 79,985 16,335 89,822 442,266
Restructuring & Other related costs -- -- -- -- -- 83,426 83,426
Non-Interest Expense 86,557 46,240 39,024 68,970 10,258 -- 251,049
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) Before Income Taxes 35,252 40,813 8,238 11.015 6,077 6,396 107,791
Income Taxes (14,805) (18,690) (3,460) (2,450) (257) (7,713) (47,375)
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) $ 20,447 $ 22,123 $ 4,778 $ 8,565 $ 5,820 ($ 1,317) $ 60,416
========= ========= ========= ========= ========= ========= =========
Corporate
Restruc-
Financial Treasury turing Consoli-
Services Divestiture and Other Related dated
Retail Commercial Group Businesses Corporate Activities Total
--------- ---------- --------- ----------- ---------- ---------- ---------
Six Months Ended June 30, 2000
Net Interest Income $ 81,830 $ 98,164 $ 3,874 $ 76,148 $ 18,098 -- $ 278,114
Loan Loss Provision (4,477) (64,917) -- (19,866) (7,669) -- (96,929)
--------- --------- --------- --------- --------- --------- ---------
Net Interest Income after Provision 77,353 33,247 3,874 56,282 10,429 -- 181,185
Gains from Divestitures -- -- -- -- -- -- --
Other Non-Interest Income 36,797 15,595 44,206 22,942 17,952 -- 137,492
--------- --------- --------- --------- --------- --------- ---------
Total Revenue 114,150 48,842 48,080 79,224 28,381 -- 318,677
Restructuring & Other related costs -- -- -- -- -- -- --
Non-Interest Expense 80,327 45,025 34,532 70,870 17,227 -- 247,981
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) Before Income Taxes 33,823 3,817 13,548 8,354 11,154 -- 70,696
Income Taxes (14,206) (807) (5,690) (2,619) (902) -- (24,224)
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) $ 19,617 $ 3,010 $ 7,858 $ 5,735 $ 10,252 -- $ 46,472
========= ========= ========= ========= ========= ========= =========
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 issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
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, all goodwill
amortization expense will cease 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 $1.8 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.
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 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. 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 June 30, 2001 of $26.7
million, compared to $6.7 million for the three months ended June 30, 2000.
Diluted earnings per share were $0.32 for the second quarter of 2001 compared to
$0.08 in the second quarter of 2000. The Company's net income for the first six
months of 2001 was $60.4 million, compared to $46.5 million for the
corresponding period of the prior year.
On April 23, 2001 the Company announced a new strategic plan designed to
maximize shareholder value by strengthening its Hawaii and West Pacific
operations and divesting most other holdings. In connection with this plan, the
Company announced in June 2001, the sale of Pacific Century Bank, N.A., the
California bank subsidiary. The sale is expected to be completed in the third
quarter. The Company also plans to sell its operations in the South Pacific and
close its Asian branches by the end of 2001. 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, the Company recognized restructuring and other
related costs of $39.0 million and $83.4 million during the three and six months
ended June 30, 2001.
For the quarter ended June 30, 2001, earnings included gains of $24.8 million
from the sale of Pacific Century Bank N.A.'s Arizona branches, and $11.1 million
from the sale of investment securities. During the first quarter of 2001, the
Company realized a gain of $75.4 million on the sale of its credit card
portfolio and a gain of $20.9 million on the exchange of stock in Star Systems,
Inc. for Concord EFS, Inc.
The provision for loan and lease losses was $6.4 million for the second quarter
2001, approximating net charge-offs. The prior quarter and comparable quarter
last year included provisions for loan and lease losses of $52.5 million and
$83.4 million, respectively, which strengthened the allowance for loan and lease
losses.
The Company continued to improve its asset quality during the second quarter.
Non-performing assets, exclusive of accruing loans past due 90 days or more,
decreased to $118.9 million at June 30, 2001, relatively unchanged from March
31, 2001 and down from $183.0 million at December 31, 2000 and $210.6 million at
June 30, 2000. At June 30, 2001 and March 31, 2001 the allowance for loan losses
was $199.8 million compared with $246.2 million and $246.6 million at December
31 and June 30, 2000, respectively. The ratio of the allowance to loans was
2.62% and 2.56% at June 30, 2001 and 2000, respectively.
In the second quarter of 2001, return on average assets (ROAA) and return on
average equity (ROAE) were 0.83% and 7.69%, respectively, compared to 0.19% and
2.19% in the second quarter of 2000. On a year-to-date basis, ROAA was 0.91%
and 0.66% in 2001 and 2000, respectively, and ROAE was 9.0% in 2001 compared to
7.65% in 2000.
Total assets at June 30, 2001 were $12.8 billion, down from $14.0 billion at
December 31, 2000 and $14.3 billion at June 30, 2000. The decrease in total
assets was largely due to reductions in the Company's loan portfolio, which was
$2.0 billion lower at June 30, 2001 as compared to June 30, 2000. The decline
in loans was partially due to sales in 2001 of commercial loans, credit card
loans, the Company's Arizona branches and planned risk reduction in the
portfolio, partially offset by a $106.9 million increase in the mortgage loan
portfolio. In addition, since December 31, 2000, loans in the Company's Asia
branches have declined as the branches are winding down their operations.
Highlights Table 1
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(dollars in thousands except per share amounts)
Earnings Highlights and Performance Ratios 2001 2000
- -------------------------------------------------------------------------------------------
Three Months Ended June 30
Net Income $26,739 $6,707
Basic Earnings Per Share 0.33 0.08
Diluted Earnings Per Share 0.32 0.08
Cash Dividends 14,426 14,305
Return on Average Assets 0.83% 0.19%
Return on Average Equity 7.69% 2.19%
Net Interest Margin 3.92% 4.11%
Core Efficiency Ratio (a) 68.74% 60.57%
Six Months Ended June 30
Net Income $60,416 $46,472
Basic Earnings Per Share 0.75 0.58
Diluted Earnings Per Share 0.74 0.58
Cash Dividends 28,790 27,845
Return on Average Assets 0.91% 0.66%
Return on Average Equity 9.00% 7.65%
Net Interest Margin 3.94% 4.12%
Core Efficiency Ratio (a) 66.98% 61.26%
Summary of Results Excluding the Effect of Intangibles (b)
- -------------------------------------------------------------------------------------------
Three Months Ended June 30
Net Income $28,676 $10,526
Basic Earnings per Share $0.36 $0.13
Diluted Earnings per Share $0.35 $0.13
Return on Average Assets 0.90% 0.30%
Return on Average Equity 9.41% 4.10%
Core Efficiency Ratio (a) 66.71% 58.43%
Six Months Ended June 30
Net Income $67,383 $53,973
Basic Earnings per Share $0.84 $0.68
Diluted Earnings per Share $0.82 $0.67
Return on Average Assets 1.03% 0.77%
Return on Average Equity 11.59% 10.66%
Core Efficiency Ratio (a) 64.96% 59.18%
(a) Core earnings excludes restructuring and non-recurring transactions.
(b) Intangibles include goodwill, core deposit and trust Intangibles, and other intangibles.
June 30 June 30
Statement of Condition Highlights 2001 2000
- -------------------------------------------------------------------------------------------
Total Assets $12,755,511 $14,294,625
Net Loans 7,418,607 9,368,718
Total Deposits 8,108,468 9,109,146
Total Shareholders' Equity 1,395,731 1,209,399
Book Value Per Common Share $17.24 $15.23
Allowance / Loans Outstanding 2.62% 2.56%
Average Equity / Average Assets 10.08% 8.59%
Employee (FTE) 4,197 4,275
Branches 156 174
Common Stock Price Range Quarter Ended
Closing $25.79 $14.63
High $25.80 $23.19
Low $19.38 $14.63
STATEMENT OF INCOME ANALYSIS
Net Interest Income
Taxable-equivalent net interest income was $116.9 million for the second
quarter of 2001, down $17.2 million, or 12.8% from the comparable period in
2000. Taxable-equivalent net interest income was $242.2 million for the six-
months ended June 30, 2001, down $26.4 million, or 9.8% 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 Arizona 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 second quarter of 2001, the
Federal Reserve reduced interest rates by 125 basis points. Since the end of
the second quarter 2000 interest rates have been reduced by 275 basis points.
The income statement presentation has been modified effective June 30, 2001. All
prior periods have been reclassified. The modifications include: presenting
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 six months ended June 30, 2000.
Three Months Ended 6/30/00 Six Months Ended 6/30/00
=============================================================================================================
(in thousands)
Previously Amounts after Previously Amounts after
Reported Reclassification Reported Reclassification
- -------------------------------------------------------------------------------------------------------------
Interest & Fees on Loans & Leases $185,584 $197,980 $365,986 $389,382
Income from Lease Financing 9,747 -- 17,726 --
Loan Fees 8,977 -- 17,223 --
Mortgage Banking -- 2,799 -- 4,878
Fees, Exchange, and Other Service Charges 22,586 25,393 44,212 49,485
Goodwill & Other Intangible Amortization -- 4,278 -- 8,340
Other Operating Expense 41,998 36,998 81,951 72,209
The Company's net interest margin was 3.92% in the quarter ended June 30, 2001,
a decrease of 19 basis points from the comparable period a year ago. For the
first six-months of the year, the net interest margin was 3.94%, compared to
4.12% for the comparable period in 2000. Presented in Table 2 are average
balances, yields earned, and rates paid for the three and six-month periods
ended June 30, 2001 and June 30, 2000.
Consolidated Average Balances and Interest Rates Taxable Equivalent Table 2
=============================================================================================================================
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
Average Income/ Yield/ Average Income/ Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
=============================================================================================================================
Earning Assets
Interest Bearing Deposits $414.3 $4.9 4.75% $220.0 $3.6 6.49%
Investment Securities Held to Maturity
-Taxable 638.4 10.9 6.85 723.3 13.3 7.41
-Tax-Exempt 3.7 0.2 23.78 8.3 0.4 18.04
Investment Securities Available for Sale 2,318.3 36.2 6.25 2,514.8 41.2 6.58
Funds Sold 120.3 1.4 4.51 32.2 0.5 6.13
Net Loans
-Domestic 7,341.8 144.5 7.90 8,104.4 174.6 8.66
-Foreign 1,136.9 19.3 6.80 1,532.5 25.1 6.58
-------------------------------------- -----------------------------
Total Loans 8,478.7 163.8 7.75 9,636.9 199.6 8.33
-------------------------------------- -----------------------------
Total Earning Assets 11,973.7 217.4 7.28 13,135.5 258.5 7.92
Cash and Due From Banks 367.6 444.0
Other Assets 655.1 638.8
--------- ---------
Total Assets $12,996.4 $14,218.4
========= =========
Interest Bearing Liabilities
Domestic Deposits - Demand $1,905.0 9.3 1.95 $2,097.8 12.3 2.36
- Savings 698.8 3.7 2.14 691.5 3.5 2.03
- Time 2,654.1 37.3 5.64 2,744.0 36.4 5.33
-------------------------------------- -----------------------------
Total Domestic 5,257.9 50.3 3.83 5,533.3 52.1 3.79
Foreign Deposits
- Time Due to Banks 317.4 3.5 4.45 422.0 6.2 5.90
- Other Time and Savings 709.3 6.3 3.55 1,133.8 12.4 4.42
-------------------------------------- -----------------------------
Total Foreign 1,026.7 9.8 3.83 1,555.8 18.6 4.82
-------------------------------------- -----------------------------
Total Interest Bearing Deposits 6,284.6 60.1 3.83 7,089.1 70.8 4.02
Short-Term Borrowings 2,108.2 25.9 4.94 2,728.1 40.4 5.95
Long-Term Debt 864.5 14.5 6.71 807.2 13.3 6.64
-------------------------------------- -----------------------------
Total Interest Bearing Liabilities 9,257.3 100.5 4.35 10,624.4 124.5 4.71
-------------------------------------- -----------------------------
Net Interest Income 116.9 134.1
Interest Rate Spread 2.93% 3.21%
Net Interest Margin 3.92% 4.11%
Demand Deposits - Domestic 1,567.8 1,666.5
- Foreign 348.4 366.0
--------- ---------
Total Demand Deposits 1,916.2 2,032.5
Other Liabilities 428.5 331.5
Shareholders' Equity 1,394.4 1,230.0
--------- ---------
Total Liabilities and Shareholders' Equity $12,996.4 $14,218.4
========= =========
Provision for Loan Losses 6.4 83.4
Net Overhead 63.5 43.1
--------- ---------
Income Before Income Taxes 47.0 7.6
Provision for Income Taxes 20.2 0.2
Tax-Equivalent Adjustment 0.1 0.7
--------- ---------
Net Income $26.7 $6.7
========= =========
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
=============================================================================================================
Earning Assets
Interest Bearing Deposits $373.5 $10.1 5.46% $226.0 $7.3 6.51%
Investment Securities Held to Maturity
-Taxable 645.5 22.5 7.04 749.4 27.6 7.40
-Tax-Exempt 3.7 0.4 23.53 9.1 0.8 17.65
Investment Securities Available for Sale 2,398.7 75.4 6.34 2,520.9 82.2 6.56
Funds Sold 100.5 2.5 4.92 33.6 1.0 5.83
Net Loans
-Domestic 7,662.0 311.9 8.21 8,001.2 341.2 8.58
-Foreign 1,206.9 41.1 6.87 1,559.3 49.9 6.44
--------------------------- --------------------------
Total Loans 8,868.9 353.0 8.03 9,560.5 391.1 8.23
--------------------------- --------------------------
Total Earning Assets 12,390.8 463.9 7.55 13,099.5 510.0 7.83
Cash and Due From Banks 402.7 475.3
Other Assets 625.2 635.1
---------- ---------
Total Assets $13,418.7 $14,209.9
========= =========
Interest Bearing Liabilities
Domestic Deposits - Demand $1,956.4 20.9 2.16 $ 2,106.7 24.5 2.34
- Savings 682.3 7.1 2.09 695.8 7.0 2.03
- Time 2,777.7 80.4 5.84 2,754.4 71.5 5.22
Total Domestic 5,416.4 108.4 4.04 5,556.9 103.0 3.73
Foreign Deposits
- Time Due to Banks 402.9 10.2 5.09 454.9 13.2 5.84
- Other Time and Savings 754.9 13.4 3.60 1,127.7 22.8 4.06
Total Foreign 9,700.1 23.6 4.12 1,582.6 36.0 4.57
Total Interest Bearing Deposits 6,574.2 132.0 4.05 7,139.5 139.0 3.92
Short-Term Borrowings 2,235.8 59.9 5.40 2,677.4 76.4 5.74
Long-Term Debt 890.1 29.8 6.75 790.1 26.0 6.62
Total Interest Bearing Liabilities 9,700.1 221.7 4.61 10,607.0 241.4 4.58
Net Interest Income 242.2 268.6
Interest Rate Spread 2.94% 3.25%
Net Interest Margin 3.94% 4.12%
Demand Deposits - Domestic 1,602.1 1,665.0
- Foreign 362.8 392.8
--------- ---------
Total Demand Deposits 1,964.9 2,057.8
Other Liabilities 400.7 324.1
Shareholders' Equity 1,353.0 1,221.0
--------- ---------
Total Liabilities and Shareholders' Equity $13,418.7 $14,209.9
========= =========
Provision for Loan Losses 58.9 96.9
Net Overhead 75.4 100.0
----- -----
Income Before Income Taxes 107.9 71.7
Provision for Income Taxes 47.4 24.2
Tax-Equivalent Adjustment 0.1 1.0
----- -----
Net Income $60.4 $46.5
===== =====
Provision for Loan Losses
The provision for loan losses was $6.4 million and $58.9 million for the three
and six-month periods ended June 30, 2001, compared to $83.4 million and $96.9
million for the same respective periods in 2000. The provision for the second
quarter 2001 approximated net charge-offs, while the quarters ended June 30,
2000 and March 31, 2001 included additional provisions intended to strengthen
the allowance for loan losses. 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 $98.4 million and $259.1 million for the three and six-
month periods ended June 30, 2001, compared to $79.2 million and $147.6 million
for the comparable periods in 2000. Several transactions that resulted in gains
being recognized, including the sales of the Company's Arizona branches and
credit card portfolio and the sale of investment securities impacted non-
interest income in 2001. After excluding non-recurring gains in 2001 and in
2000, core non-interest income was $62.4 million in the second quarter of 2001,
compared to $67.3 million in the second quarter of 2000, and core non-interest
income for the first half of 2001 was $130.1 million, compared to $137.5 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 an intentional scale-back in
certain businesses. The $5.4 million decrease in the second quarter 2001 from
the second 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 $15.2 million in the second
quarter of 2001, from $16.3 million in the second quarter of 2000. Trust and
asset management income was $31.0 million for the first six months of 2001, also
down from the corresponding period of the prior year. The decreases were
primarily attributable to reduced fees associated with declines in assets under
administration.
Despite a 9% decrease in average demand deposits, service charges on deposit
accounts declined only 3% to $9.9 million in the second quarter of 2001 compared
to $10.2 million in the second quarter of 2000. This is primarily attributable
to changes in deposit rate structures. Service charges were flat for the
comparative six-month periods.
Mortgage banking income was $4.6 million in second quarter of 2001, an increase
of 64.2% from $2.8 million in the second quarter of 2000. For the six-months
ended June 30, 2001 and 2000, mortgage banking income was $9.7 million and $4.9
million, respectively. The 2001 increase was due to increased mortgage
originations and higher gains on the sale of mortgage loans, partially offset by
valuation adjustments of the held-for-sale portfolio.
Sales of investment securities during the three and six-months ended June 30,
2001 resulted in net investment security gains of $11.7 million and $31.9
million, respectively. These results compare to slight losses on the sale of
securities in the same periods of 2000. Second quarter gains on sales included
$7.4 million related to the sale of the Company's ownership interest in Concord
EFS, Inc. and $3.7 million from the sale of the Company's holdings in the Bank
of Queensland. In the first quarter of 2001 a $20.9 million gain was recognized
on the exchange of the Company's ownership interest in Star Systems, Inc. for
Concord EFS, Inc.
Non-Interest Expenses
Non-interest expenses were $161.8 million and $334.5 million for the three and
six-month periods ended June 30, 2001, compared to $121.2 million and $246.6
million for the comparable periods in 2000. After excluding restructuring and
related costs, core non-interest expenses were $122.8 million in the second
quarter of 2001, compared to $121.2 million in the second quarter of 2000, and
core non-interest expenses for the first half of 2001 were $251.1 million,
compared to $248.0 million in the same period of 2000.
The restructuring and related costs that were referred to above totaled $37.8
million and $82.2 million for the three and six-month periods ended June 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 in anticipation of the Company's
pending sale of the California bank. In addition, $1.2 million of accelerated
depreciation on fixed assets to be abandoned in conjunction with the closure of
the Asian branches was incurred in the second quarter. These expenses are
included in net occupancy and net equipment expense. Refer to Note 2 to the
Consolidated Financial Statements for further discussion.
Salaries and pension and other employee benefits expense totaled $60.3 million
and $122.5 million in the three and six-month periods of 2001, compared to $55.2
million and $117.4 million for the corresponding periods of 2000. The reduction
in employees due to the sale of the Arizona branches was offset by the addition
of employees to improve service levels in Hawaii. The increased expenses were
primarily attributable to higher commission and incentive plan costs. In
addition, the grants of restricted stock to employees increased costs by
slightly less than $1.0 million.
Net equipment expense was $13.7 million in the second quarter of 2001, an
increase of 13.2% from $12.1 million for the same period in 2000, and was $27.1
million for the first half of 2001, an increase from $24.1 million for the same
period last year. The increase was largely due to higher software and equipment
maintenance costs incurred in 2001 and accelerated depreciation on assets to be
abandoned upon closure of the Asian branches.
Other operating expenses decreased to $33.9 million in the second quarter of
2001 from $37.0 million for the same quarter in 2000. On a year-to-date basis,
other operating expenses decreased from $72.2 million in 2000 to $70.3 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 increase in the efficiency ratio for the quarter is due largely to the
divesting businesses where revenues declined faster than the corresponding
expense levels. The Company anticipates that the efficiency ratio will return to
a more normal level by the end of the year.
Income Tax Provision
The Company's effective tax rate was 43.0% for the second quarter 2001 and 43.9%
for the first six-months of 2001. These effective rates compare to 2.3% and
34.3% 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 the write-off of $15.5 million of goodwill associated with the
divestiture of the Company's California bank, and the write-off of $2 million of
foreign tax assets.
BALANCE SHEET ANALYSIS
Loans
As of June 30, 2001, loans outstanding, excluding loans held-for-sale, had
declined to $7.6 billion, from $9.2 billion at year-end 2000 and $9.6 billion at
June 30, 2000. Consistent with the Company's strategic plan, during the first
half of 2001, the Company sold $166.8 million of commercial loans, its $209.3
million credit card portfolio, and its Arizona branches ($230 million in loans).
In addition, loans in the Asian branches have declined $234.1 million or 52.7%.
The remaining decline was attributable to other strategic risk reductions in the
portfolio.
Table 3 presents the composition of the loan portfolio by major loan categories
as of June 30, 2001, March 31, 2001, December 31, 2000 and June 30, 2000.
Loan Portfolio Balances Table 3
- -----------------------------------------------------------------------------------------------------------------
June 30 March 31 December 31 June 30
(dollars in millions) 2001 2001 2000 2000
- -----------------------------------------------------------------------------------------------------------------
Domestic Loans
Commercial and Industrial $1,781.5 $2,088.7 $2,436.2 $2,674.8
Real Estate
Construction -- Commercial 213.6 284.0 282.4 294.3
-- Residential 32.4 28.9 25.0 21.9
Mortgage -- Commercial 866.3 1,023.8 1,125.5 1,241.2
-- Residential 2,755.4 2,837.2 2,827.3 2,653.3
Installment 486.1 496.4 729.9 750.0
Lease Financing 532.3 522.7 511.1 503.5
- -----------------------------------------------------------------------------------------------------------------
Total Domestic 6,667.6 7,281.7 7,937.4 8,139.0
- -----------------------------------------------------------------------------------------------------------------
Foreign Loans 950.8 1,143.3 1,297.8 1,476.3
- -----------------------------------------------------------------------------------------------------------------
Total Loans $7,618.4 $8,425.0 $9,235.2 $9,615.3
=================================================================================================================
Loans Held for Sale
Loans held for sale totaled $571.4 million at June 30, 2001, compared to $179.2
million at December 31, 2000, an increase of $392.2 million, and $128.7 million
at June 30, 2000, an increase of $442.7 million. The loans held for sale were
primarily residential mortgage loans and result from increased mortgage
production during the first half of 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 June 30, 2001
were $2.2 billion, down 12.0% from $2.5 billion at year-end and the same date
last year. Securities held to maturity were $616.4 million at June 30, 2001,
declining from $670.0 million at year-end 2000 and $730.4 million a year ago.
These decreases were largely due to maturities. Other short-term interest-
earning assets totaled $784.6 million at the end of the second quarter, compared
to $327.3 million and $249.7 million at December 31, 2000 and June 30, 2000,
respectively. This increase resulted from the proceeds of the loan portfolio
sales during the first half of 2001, and has enabled the Company to improve its
liquidity.
At June 30, 2001 and December 31, 2000 investment securities with a book value
of $2.0 billion and $2.3 billion, respectively, were pledged as collateral for
repurchase agreement.
Deposits
As of June 30, 2001, deposits totaled $8.1 billion, down $1 billion from $9.1
billion at both December 31, 2000 and June 30, 2000. During 2001, domestic
deposits decreased $351.2 million, primarily due to the sale of the Company's
Arizona branches, while foreign deposits declined by $620.9 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 June 30, 2001, December 31, 2000
and June 30, 2000.
Average Deposits Table 4
- ---------------------------------------------------------------------------------------------------------------
June 30, 2001 December 31, 2000 June 30, 2000
---------------------- ------------------- --------------------
(dollars in millions) Amount Mix Amount Mix Amount Mix
- ---------------------------------------------------------------------------------------------------------------
Domestic
Non-Interest Bearing Demand $1,567.8 19.1% $1,640.0 18.2% $1,666.5 18.3%
Interest-Bearing Demand 1,905.0 23.2% 2,061.9 22.9% 2,097.8 23.0%
Regular Savings 698.8 8.5% 684.8 7.6% 691.5 7.6%
Time Certificates
of Deposit
($100,000 or More) 1,250.2 15.3% 1,212.1 13.5% 1,231.0 13.5%
All Other Time and
Savings Certificates 1,403.9 17.1% 1,569.0 17.4% 1,513.0 16.6%
- ---------------------------------------------------------------------------------------------------------------
Total Domestic 6,825.7 83.2% 7,167.8 79.6% 7,199.8 79.0%
- ---------------------------------------------------------------------------------------------------------------
Foreign
Non-Interest Bearing Demand 348.4 4.2% 371.4 4.1% 366.0 4.0%
Time Due to Banks 317.4 3.9% 505.4 5.6% 422.0 4.6%
Other Time and Savings 709.3 8.7% 960.5 10.7% 1,133.8 12.4%
- ---------------------------------------------------------------------------------------------------------------
Total Foreign 1,375.1 16.8% 1,837.3 20.4% 1,921.8 21.0%
- ---------------------------------------------------------------------------------------------------------------
Total $8,200.8 100.0% $9,005.1 100.0% $9,121.6 100.0%
===============================================================================================================
Borrowings
Short-term borrowings, including funds purchased and securities sold under
agreements to repurchase, totaled $2.1 billion at June 30, 2001, $2.3 billion at
December 31, 2000 and $2.8 billion at June 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 June 30, 2001 decreased to $830.9 million from
$997.2 million at December 31, 2000 and $902.2 million at June 30, 2000.
Subsequent to June 30, 2001, the Company repaid $125.0 million of long-term
debt.
Shareholders' Equity
The Company's capital position remains strong. Total capital increased to $1.4
billion at June 30, 2001, an increase from $1.3 billion at December 31, 2000 and
$1.2 billion at June 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. Each business's performance 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 them. 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, Divestiture Businesses,
and Treasury and Other Corporate. 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 includes the Company's business segment financial reports
for the three and six-month periods ended June 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 (Return on Risk Adjusted 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 months and six months
ended June 30, 2001 are presented in Table 5.
Economic NIACC and RAROC Table 5
(dollars in thousands) Corporate
Financial Treasury Restructuring
Services Divestiture and Other Related
Retail Commercial Group Businesses Corporate Activities
-------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2001
NIACC (Economic) 4,784 (4,548) 340 (12,228) (3,728) --
RAROC (Economic) 19% 11% 16% 0% -23% --
=================================================================================================
Three Months Ended June 30, 2000
NIACC (Economic) 4,303 1,692 (322) (10,146) (34,518) --
RAROC (Economic) 26% 17% 13% 6% -46% --
=================================================================================================
Six Months Ended June 30, 2001
NIACC (Economic) 7,535 (7,034) 473 (20,816) (14,233) --
RAROC (Economic) 24% 10% 17% 5% -7% --
=================================================================================================
Six Months Ended June 30, 2000
NIACC (Economic) 8,294 2,580 4,964 (23,785) 36,741 --
RAROC (Economic) 25% 16% 35% 4% -20% --
=================================================================================================
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 services, small business, merchant services, installment, home equity
and mortgage lending as well as other services. For the three and six months
ended June 30, 2001 revenues improved due to increases in mortgage originations
and increases in deposit service charges. Increases in non-interest expense are
due to higher allocated costs as a result of new systems and increased usage of
systems.
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 interest
income in the three months and six months ended June 30, 2001 compared to the
same periods in 2000 are the result of the planned reduction in the loan
portfolios designed to reduce credit exposures in some of the Company's markets.
Second quarter 2000 included an additional loan loss provision of $32.9 million
that was to address weaknesses in the syndicated loan and Hawaii commercial real
estate portfolio. The decline in other non-interest income in the second
quarter 2001 was due to the aforementioned reduction in the loan portfolios,
which resulted in reduced loan fees.
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.
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 Arizona 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.
Treasury and Other Corporate
The primary operations in this segment are 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.
Corporate Restructuring Related Activites
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, N.A., Asia branches 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 Company divides its
international business into three areas: the West Pacific, the South Pacific,
and Asia.
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. This exit is
anticipated to be complete by the end of 2001. The Asia Division is winding
down its business and plans to curtail its Asia operations by year-end.
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, South Korea, United Kingdom and France. Table 6
presents as of June 30, 2001, December 31, 2000, and June 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 June 30, 2001 December 31, 2000 June 30, 2000
====================================================================================
Japan $ 126.1 $ 298.8 $ 236.7
South Korea 143.2 282.0 299.4
France 98.6 85.8 120.4
United Kingdom 212.6 -- --
All Others 420.6 423.8 537.1
--------- --------- ----------
$1,001.1 $1,090.4 $1,193.6
========= ========= ==========
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 othermonetary assets.
CORPORATE RISK PROFILE
Credit Risk
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
$118.9 million, or 1.55% of total loans, at June 30, 2001. This represents a
decrease of $64.1 million, or 35%, from December 31, 2000 non-
performing assets that totaled $183.0 million, or 1.98% of total loans. Non-
performing assets at June 30, 2000 were $210.6 million, or 2.19% of loans.
The decrease in domestic non-performing assets between December 31, 2000 and
June 30, 2001 was largely due to loan sales and charge-off activity as
management made significant progress on its commitment to improve asset quality.
There was no significant in-migration of non-accrual loans during the quarter
ended June 30, 2001. Two large Hawaiian real estate loans were transferred to
foreclosed assets during the quarter as the loans proceed towards resolution.
This caused the increase in foreclosed assets from year-end 2000. At June 30,
2001, foreclosed real estate totaled $40.1 million.
Impaired loans at June 30, 2001 totaled $85.1 million compared to $221.0 million
at December 31, 2000. The $75.2 million of impaired loans had a related
allowance which totaled $21.3 million at June 30, 2001.
Accruing loans past due 90 days or more were $6.2 million at June 30, 2001, down
from $18.8 million at year-end 2000 and $17.0 million at June 30, 2000.
For further information concerning non-performing assets refer to Table 7.
Consolidated Non-Performing Assets Table 7
=========================================================================================================================
June 30 March 31 Dec 31 Sept 30 June 30
(dollars in millions) 2001 2001 2000 2000 2000
=========================================================================================================================
Non-Accrual Loans
Commercial and Industrial $11.8 $23.8 $55.4 $49.0 $52.7
Real Estate
Construction 5.8 6.3 6.4 8.1 8.0
Commercial 14.4 29.7 60.1 86.8 62.2
Residential 16.2 18.5 22.7 22.0 23.2
Installment 0.2 0.1 - 0.1 0.1
Leases 0.4 0.2 0.4 0.2 0.3
------------------------------------------------------------------------
Total Domestic 48.8 78.6 145.0 166.2 146.5
Foreign 18.5 16.9 33.5 48.3 59.2
------------------------------------------------------------------------
Subtotal 67.3 95.5 178.5 214.5 205.7
Loans Held for Sale 11.5 12.8 -- -- --
Foreclosed Real Estate
Domestic 39.8 10.9 4.2 4.9 4.6
Foreign 0.3 0.3 0.3 0.2 0.3
------------------------------------------------------------------------
Subtotal 40.1 11.2 4.5 5.1 4.9
------------------------------------------------------------------------
Total Non-Performing Assets 118.9 119.5 183.0 219.6 210.6
------------------------------------------------------------------------
Total Loans $7,618 $8,425 $9,235 $9,339 $9,614
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Non-Accrual Loans
to Total Loans 0.88% 1.13% 1.93% 2.30% 2.14%
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Non-Performing Assets
to Total Loans, Foreclosed Real Estate
and Non-Performing Loans Held for Sale 1.55% 1.41% 1.98% 2.35% 2.19%
- -------------------------------------------------------------------------------------------------------------------------
Changes in Non-Performing Assets
Balance at December 31, 2000 $ 183.0
Additions
Loans transferred 141.1
Reductions
Payments (76.5)
Return to Accrual (5.5)
Sales of Foreclosed Assets (4.6)
Charge-offs (118.6)
-------
Total Reductions (205.2)
Ending Balance June 30, 2001 $ 118.9
=======
Allowance for Loan and Lease Losses
The allowance for loan and lease losses at June 30, 2001 was $199.8 million, or
2.62% of loans outstanding, compared with $246.2 million and $246.6 million, or
2.56% at June 30, 2000. A summary of the activity in the allowance for loan
losses is presented in table 8.
The provision for loan losses was $6.4 million for the second quarter of 2001,
which approximated net charge-offs. The provision was $77.0 million lower than
for the same quarter last year. Charge-offs during the quarter of $20.3 million
were partially offset by loan loss recoveries of $13.4 million. The Company
continued to reduce the level of internally criticized and classified assets
during the quarter ended June 30, 2001. Exposure to syndicated loans and Asia
were also significantly reduced during the 2001 quarters.
Consolidated Allowance for Loan and Lease Losses Table 8
=======================================================================================================================
Second First Second First Six First Six
Quarter Quarter Quarter Months Months
(dollars in millions) 2001 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Average Loans Outstanding $8,047.8 $9,061.8 $9,513.1 $8,552.0 $9,439.6
- -----------------------------------------------------------------------------------------------------------------------
Balance of Allowance for Loan and Lease Losses
at Beginning of Period $199.8 $246.2 $195.4 $246.2 $194.2
Loans Charged-Off
Commercial and Industrial 8.9 75.5 12.4 84.4 9.7
Real Estate
Construction - - 0.5 - 0.5
Commercial 1.6 11.9 7.7 13.5 11.5
Residential 1.7 2.5 1.4 4.2 3.7
Installment 4.2 5.4 5.2 9.6 9.9
Leases - 0.1 0.2 0.1 0.2
- -----------------------------------------------------------------------------------------------------------------------
Total Domestic 16.4 95.4 27.4 111.8 35.5
Foreign 3.9 10.0 9.1 13.9 17.1
- -----------------------------------------------------------------------------------------------------------------------
Total Charged-Off 20.3 105.4 36.5 125.7 52.6
Recoveries on Loans Previously Charged-Off
Commercial and Industrial 4.3 2.7 1.2 7.0 2.9
Real Estate
Construction - - - - -
Commercial 0.8 0.3 0.1 1.1 0.2
Residential 0.3 0.2 0.2 0.5 0.7
Installment 1.6 1.8 1.9 3.4 3.6
Leases 0.1 0.1 - 0.2 -
- -----------------------------------------------------------------------------------------------------------------------
Total Domestic 7.1 5.1 3.4 12.2 7.4
Foreign 6.3 2.6 0.2 8.9 1.0
- -----------------------------------------------------------------------------------------------------------------------
Total Recoveries 13.4 7.7 3.6 21.1 8.4
- -----------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (6.9) (97.7) (32.9) (104.6) (44.2)
Provision for Loan Losses 6.4 52.5 83.4 58.9 96.9
Other Net Additions (Reductions)* 0.5 (1.2) 0.7 (0.7) (0.3)
- -----------------------------------------------------------------------------------------------------------------------
Balance at End of Period $199.8 $199.8 $246.6 $199.8 $246.6
=======================================================================================================================
Ratio of Net Charge-Offs to
Average Loans Outstanding (annualized) 0.34% 4.32% 1.39% 2.47% 0.95%
- -----------------------------------------------------------------------------------------------------------------------
Ratio of Allowance to Loans Outstanding 2.62% 2.37% 2.56% 2.62% 2.56%
- -----------------------------------------------------------------------------------------------------------------------
* 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 June 30, 2001, December 31, 2000 and June 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. The resulting estimate in NII exposure is well within
the approved Asset Liability Management Committee guidelines.
Market Risk Exposure to Interest Rate Changes Table 9
========================================================================================================================
June 30, 2001 December 31, 2000 June 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 (1.7)% 0.7% (2.3)% 0.5% 0.0% (2.0)%
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 investment in French Polynesia and New Caledonia is offset by a
borrowing denominated in the euro and a foreign exchange currency hedge
transaction. 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 June 30, 2001 the remainder of these capital investments, which aggregated
$57.0 million, was not hedged. The comparative unhedged position at year-end
2000 was $71.2 million and $86.1 million at June 30, 2000. The increased
provision and charge-off of loans in the South Pacific and Asia have created
situations where liabilities exceeded assets as of June 30, 2001. This anomaly
results in the negative equity reported in Table 10 for the other currency
category.
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 June 30, 2001, December 31, 2000 and June 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
================================================================================================================================
June 30, 2001 December 31, 2000 June 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 $10.3 $1.8 $10.6 $1.4 $10.2 $1.9
Korean Won 27.9 4.4 29.6 5.1 32.3 2.6
Pacific Franc (1) 23.1 4.3 32.0 6.2 28.0 5.8
Other Currencies (4.3) 13.5 (1.0) 14.4 15.6 17.3
--------------------------------------------------------------------------------------------------
Total $57.0 $24.0 $71.2 $27.1 $86.1 $27.6
==================================================================================================
(1) Net of $33 million, $37 million and $37 million borrowing at June 30,
2001, December 31, 2000 and June 30, 2000, respectively, denominated in
euro and foreign exchange hedge transactions of $24 million, $26 million
and $22 million at June 30, 2001, December 31, 2000 and June 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 June 30, 2001 continue 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 half 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 $438.0
million at June 30, 2001, compared to $520.0 million at year-end 2000 and $626.0
million at June 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 June 30, 2001, December 31, 2000 and June 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 June 30, 2001, the Company's shareholders' equity totaled $1.395 billion,
15.4% higher than at June 30, 2000. The increase in shareholders' equity during
the first half 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.
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, as of August 10,
2001, a total of 491,200 shares had been repurchased at a cost of $12.6 million.
At June 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.
Equity Capital Table 11
==========================================================================================================
Six Months Ended Year Ended Six Months Ended
(dollars in millions) June 30, 2001 December 31, 2000 June 30, 2000
- ----------------------------------------------------------------------------------------------------------
Source of Common Equity:
Net Income $60.4 $113.7 $46.5
Dividends Paid (28.8) (56.5) (27.8)
Dividend Reinvestment Program 1.4 3.3 1.9
Stock Repurchases -- (17.0) (16.9)
Other (1) 61.4 45.6 (6.6)
- ----------------------------------------------------------------------------------------------------------
Increase in Equity $94.4 $89.1 ($2.9)
==========================================================================================================
Common Equity $1,395.7 $1,301.4 $1,209.4
Add: 8.25% Capital Securities of
Bancorp Hawaii Capital Trust I 100.0 100.0 100.0
Minority Interest 4.0 4.5 4.3
Less: Intangibles 127.4 163.9 169.6
Unrealized Valuation and Other
Adjustments 25.0 2.2 (51.5)
- ----------------------------------------------------------------------------------------------------------
Tier I Capital 1,347.3 1,239.8 1,195.6
Allowable Loan Loss Reserve 112.6 132.8 141.5
Subordinated Debt 148.4 172.1 195.9
Investment in Unconsolidated
Subsidiary -- (3.4) (3.6)
- ----------------------------------------------------------------------------------------------------------
Total Capital $1,608.3 $1,541.3 $1,529.4
==========================================================================================================
Risk Weighted Assets $8,918.9 $10,512.3 $11,216.5
==========================================================================================================
Key Ratios
Tier I Capital Ratio 15.11% 11.78% 10.66%
Total Capital Ratio 18.03% 14.64% 13.64%
Leverage Ratio 10.47% 9.10% 8.51%
==========================================================================================================
(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.
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 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
Votes cast for: 66,057,712
Votes cast against: 0
Votes withheld: 3,046,761
Martin A. Stein
Votes cast for: 66,167,947
Votes cast against: 0
Votes withheld: 2,936,526
Stanley S. Takahashi
Votes cast for: 66,126,845
Votes cast against: 0
Votes withheld: 2,977,628
Clinton R. Churchill
Votes cast for: 66,335,096
Votes cast against: 0
Votes withheld: 2,769,377
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.
Votes cast for: 46,932,953
Votes cast against: 13,148,286
Votes withheld: 731,367
c. Amendment to the Stock Option Plan to Allow the Number of Options Granted to
Exceed 20% for the Chief Executive Officer (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 CEO at the time of hire.
Votes cast for: 56,402,027
Votes cast against: 11,974,788
Votes withheld: 727,658
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.
Votes cast for: 56,723,865
Votes cast against: 11,593,349
Votes withheld: 787,259
e. Election of Ernst & Young LLP as external auditor.
Votes cast for: 66,911,276
Votes cast against: 1,805,426
Votes withheld: 387,771
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
June 30, 2001.
Current Report on Form 8-K dated April 23, 2001 and filed April 24,
2001 Item 5.
Current Report on Form 8-K dated April 25, 2001 and filed April 27, 2001
Item 5.
Current Report on Form 8-K dated June 5, 2001 and filed June 7, 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 August 13, 2001 PACIFIC CENTURY FINANCIAL CORPORATION
---------------------
/s/ Michael E. O'Neill
----------------------
(Signature)
Michael E. O'Neill
Chairman and Chief Executive Officer
/s/ Allan R. Landon
----------------------
(Signature)
Allan R.Landon
Vice Chairman and Chief Financial Officer
/s/ Leslie F. Paskett
------------------------
(Signature)
Leslie F. Paskett
Senior Vice President and Controller