U N I T E D S T A T E S
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_____________
Commission File Number 1-6887
PACIFIC CENTURY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 99-0148992
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(State of incorporation) (IRS Employer Identification No.
130 Merchant Street, Honolulu, Hawaii 96813
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(Address of principal executive offices) (Zip Code)
(808) 643-3888
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $2 Par Value; outstanding at April 30, 1998 - 80,175,145 shares
PACIFIC CENTURY FINANCIAL CORPORATION and subsidiaries
March 31, 1998
PART I. - Financial Information
Item 1. Financial Statements
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Condition (Unaudited)
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March 31 December 31 March 31
(in thousands of dollars) 1998 1997 1997
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Assets
Interest-Bearing Deposits $425,637 $335,847 $547,722
Investment Securities - Held to Maturity
(Market Value of $996,667, $1,223,235, and $1,298,874 respectively) 992,058 1,220,215 1,303,763
Investment Securities - Available for Sale 2,808,370 2,651,270 2,419,376
Funds Sold 119,480 80,457 72,499
Loans 9,403,406 9,498,408 8,753,384
Unearned Income (202,865) (209,721) (182,472)
Reserve for Loan Losses (175,194) (174,362) (170,059)
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Net Loans 9,025,347 9,114,325 8,400,853
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Total Earning Assets 13,370,892 13,402,114 12,744,213
Cash and Non-Interest Bearing Deposits 586,746 795,332 532,009
Premises and Equipment 285,916 288,358 269,506
Customers' Acceptance Liability 16,893 21,575 33,158
Accrued Interest Receivable 85,478 93,831 83,457
Other Real Estate 6,131 6,151 11,274
Intangibles, including Goodwill 204,501 203,366 115,183
Other Assets 201,258 184,737 197,994
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Total Assets $14,757,815 $14,995,464 $13,986,794
===========================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $1,751,301 $1,714,886 $1,473,197
- Interest Bearing 2,089,060 2,112,425 1,765,568
Savings 802,912 823,216 854,633
Time 2,845,498 2,929,782 2,920,405
Foreign Deposits
Demand - Non-Interest Bearing 356,684 351,178 331,989
Time Due to Banks 622,694 707,684 821,807
Other Savings and Time 967,250 968,524 933,451
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Total Deposits 9,435,399 9,607,695 9,101,050
Securities Sold Under Agreements to Repurchase 2,304,423 2,279,124 1,995,206
Funds Purchased 559,573 710,472 376,688
Short-Term Borrowings 259,604 226,127 381,039
Bank's Acceptances Outstanding 16,893 21,575 33,158
Accrued Pension Costs 17,560 15,134 19,573
Accrued Interest Payable 67,171 57,512 70,229
Accrued Taxes Payable 161,076 152,092 158,340
Minority Interest 5,824 5,758 7,486
Other Liabilities 102,214 96,979 84,271
Long-Term Debt 684,782 705,789 698,350
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Total Liabilities 13,614,519 13,878,257 12,925,390
Shareholders' Equity
Common Stock ($2 par value), authorized 200,000,000 shares;
issued and outstanding, March 1998 - 80,140,398;
December 1997 - 79,684,553; March 1997 - 39,685,182 160,281 159,369 79,370
Capital Surplus 176,496 168,920 174,180
Accumulated Other Comprehensive Income (28,193) (24,766) (19,237)
Retained Earnings 834,712 813,684 827,091
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Total Shareholders' Equity 1,143,296 1,117,207 1,061,404
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Total Liabilities and Shareholders' Equity $14,757,815 $14,995,464 $13,986,794
===========================================================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Income (Unaudited)
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3 Months 3 Months
Ended Ended
March 31 March 31
(in thousands of dollars except per share amounts) 1998 1997
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Interest Income
Interest on Loans $187,150 $166,325
Loan Fees 10,732 9,370
Income on Lease Financing 5,883 4,772
Interest and Dividends on Investment Securities
Taxable 19,964 20,028
Non-taxable 294 292
Income on Investment Securities Available for Sale 41,470 39,001
Interest on Deposits 6,483 9,430
Interest on Security Resale Agreements -- 63
Interest on Funds Sold 1,090 888
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Total Interest Income 273,066 250,169
Interest Expense
Interest on Deposits 79,878 76,805
Interest on Security Repurchase Agreements 30,598 26,633
Interest on Funds Purchased 6,910 6,300
Interest on Short-Term Borrowings 2,809 3,995
Interest on Long-Term Debt 11,153 11,401
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Total Interest Expense 131,348 125,134
Net Interest Income 141,718 125,035
Provision for Loan Losses 18,303 5,088
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Net Interest Income After Provision for Loan Losses 123,415 119,947
Non-Interest Income
Trust Income 13,960 13,367
Service Charges on Deposit Accounts 8,214 6,680
Fees, Exchange, and Other Service Charges 18,910 14,655
Other Operating Income 8,399 6,536
Investment Securities Gains 3,381 463
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Total Non-Interest Income 52,864 41,701
Non-Interest Expense
Salaries 46,265 41,478
Pensions and Other Employee Benefits 14,907 15,084
Net Occupancy Expense 11,108 10,337
Net Equipment Expense 10,755 9,032
Other Operating Expense 38,416 29,810
Minority Interest 252 320
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Total Non-Interest Expense 121,703 106,061
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Income Before Income Taxes 54,576 55,587
Provision for Income Taxes 20,556 20,106
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Net Income $34,020 $35,481
===========================================================================================================
Basic Earnings Per Share $0.43 $0.45
Diluted Earnings Per Share $0.42 $0.44
Dividends Declared Per Share $0.1625 $0.15
Basic Weighted Average Shares 79,881,229 79,438,552
Diluted Weighted Average Shares 80,735,604 80,542,522
===========================================================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
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Accumulated
Other
Common Capital Comprehensive Retained Comprehensive
(in thousands of dollars) Total Stock Surplus Income Earnings Income
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $1,117,207 $159,369 $168,920 ($24,766)$813,684
Comprehensive Income
Net Income 34,020 - - - 34,020 $34,020
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment (2,045) - - (2,045) - (2,045)
Foreign Currency Translation Adjustment (1,382) - - (1,382) - (1,382)
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Total Comprehensive Income $30,593
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Common Stock Issued
107,473 Profit Sharing Plan 2,392 215 2,177 - -
257,748 Stock Option Plan 4,064 516 3,548 - -
90,142 Dividend Reinvestment Plan 2,021 180 1,841 - -
482 Directors' Restricted Shares and
Deferred Compensation Plan 11 1 10 - -
Cash Dividends Paid (12,992) - - - (12,992)
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Balance at March 31, 1998 $1,143,296 $160,281 $176,496 ($28,193)$834,712
=============================================================================================================
Balance at December 31, 1996 $1,066,122 $79,918 $186,391 ($3,722)$803,535
Comprehensive Income
Net Income 35,481 - - - 35,481 $35,481
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment (9,384) - - (9,384) - (9,384)
Foreign Currency Translation Adjustment (6,131) - - (6,131) - (6,131)
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Total Comprehensive Income $19,966
=============
Common Stock Issued
43,365 Profit Sharing Plan 1,926 87 1,839 - -
65,009 Stock Option Plan 1,672 130 1,542 - -
35,453 Dividend Reinvestment Plan 1,601 71 1,530 - -
221 Directors' Restricted Shares and
Deferred Compensation Plan 9 - 9 - -
Stock Repurchased (17,967) (836) (17,131) - -
Cash Dividends Paid (11,925) - - - (11,925)
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Balance at March 31, 1997 $1,061,404 $79,370 $174,180 ($19,237)$827,091
=============================================================================================================
Consolidated Statements of Cash Flows (Unaudited) Pacific Century Financial Corporation and subsidiaries
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(in thousands of dollars) 1998 1997
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Operating Activities
Net Income $34,020 $35,481
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, depreciation, and amortization of income and expense 18,712 5,301
Deferred income taxes (440) 7,591
Realized and unrealized investment security gains (3,523) (448)
Other assets and liabilities, net 15,074 (16,222)
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Net cash provided by operating activities 63,843 31,703
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Investing Activities
Proceeds from redemptions of investment securities held to maturity 277,813 37,396
Purchases of investment securities held to maturity (49,656) (34,934)
Proceeds from sales of investment securities available for sale 681,474 91,800
Purchases of investment securities available for sale (838,459) (153,471)
Net decrease (increase) in interest-bearing deposits placed in other banks (89,790) 88,655
Net decrease (increase) in funds sold (39,023) 69,421
Net decrease (increase) in loans and lease financing 82,367 (26,145)
Premises and equipment, net (5,843) (2,438)
Purchase of Bank of Hawaii (PNG) Ltd. net of cash and non-interest
bearing deposits acquired -- (5,371)
Purchase of Home Savings of America branches, net of cash and non-interest
bearing deposits acquired -- 235,020
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Net cash provided by investing activities 18,883 299,933
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Financing Activities
Net increase (decrease) in demand, savings, and time deposits (172,296) 99,675
Proceeds from lines of credit and long-term debt -- 103
Principal payments on lines of credit and long-term debt (21,007) (233,896)
Net decrease in short-term borrowings (92,123) (215,915)
Net proceeds (payments) from sale (repurchase) of stock 8,488 (12,759)
Cash dividends (12,992) (11,925)
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Net cash used by financing activities (289,930) (374,717)
Effect of exchange rate changes on cash (1,382) (6,131)
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Decrease in cash and non-interest bearing deposits (208,586) (49,212)
Cash and non-interest bearing deposits at beginning of year 795,332 581,221
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Cash and non-interest bearing deposits at end of period $586,746 $532,009
==================================================================================================================
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
Pacific Century Financial Corporation (Pacific Century) have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, the consolidated financial statements reflect all
adjustments of a normal and recurring nature, including adjustments
related to completed acquisitions which are necessary for a fair
presentation of the results for the interim periods, and should be read
in conjunction with the audited consolidated financial statements and
related notes included in Pacific Century's 1997 Annual Report to
Shareholders. Operating results for the three months ended March 31,
1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998.
International operations include certain activities located
domestically in the International Banking Group, as well as branches and
subsidiaries domiciled outside the United States. The operations of
Bank of Hawaii and Bancorp Pacific, Inc. located in the West and South
Pacific which are denominated in U.S. dollars are classified as
domestic. Pacific Century's international operations are primarily
located in Japan, South Korea, Singapore, Hong Kong, Taiwan, French
Polynesia and New Caledonia.
Certain reclassifications have been made from prior year amounts
to conform to the 1998 presentation.
Note 2. Recent Accounting Pronouncements
With the adoption in 1998 of Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," the format
of the Consolidated Statements of Shareholders' Equity has changed to
provide the disclosures required by SFAS No. 130. The adoption of SFAS
No. 130 had no impact on Pacific Century's financial position or results
of operations.
In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The purpose of SFAS No. 132 is to
standardize, to the extent practicable, disclosure requirements for
pensions and other postretirement benefits and make disclosures more
understandable. Some of the more significant changes required by SFAS
No. 132 include new requirements to disclose a reconciliation of the
changes in benefit obligations and fair value of plan assets, provide
certain information regarding the funded status of the plan, and show
the effect of both a 1% increase and decrease in the assumed health care
cost trend rate. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997. The implementation of SFAS No. 132 will have
no impact on Pacific Century's financial position or results of
operations.
Note 3. Pending Acquisitions
In April 1998, Pacific Century received regulatory approval to
acquire Group Paribas' interest in Banque Paribas Pacifique in New
Caledonia and Banque Paribas Polynesie in French Polynesia. The
purchase is expected to close in the second quarter of 1998. At March
31, 1997, combined total assets of Banque Paribas Pacifique and Banque
Paribas Polynesie were $278 million in the aggregate.
Note 4. Earnings Per Share
For the three months ended March 31, 1998 and 1997, there were no
adjustments to net income (the numerator) for purposes of computing
basic and diluted EPS. The weighted average shares (the denominator)
for computing diluted EPS for the quarter ended March 31, 1998 and 1997
were 80,735,604 and 80,542,522, respectively, and included the dilutive
effect of stock options of 854,375 and 1,103,970 shares, respectively.
On December 12, 1997, a two-for-one stock split in the form of a
100% stock dividend was distributed to shareholders. Prior period EPS
data in the consolidated financial statements have been retroactively
adjusted to reflect the stock split.
Note 5. Income Taxes
The provision for income taxes is computed by applying statutory
federal and state income tax rates to income before income taxes as
reported in the consolidated financial statements after adjusting for
non-taxable items, principally from certain state tax adjustments, tax
exempt interest income, and low income housing and investment tax
credits.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Performance Highlights
Pacific Century Financial Corporation (Pacific Century) reported
earnings for the three months ended March 31, 1998 of $34.0 million, a
decrease of 4.1% from $35.5 million in the same 1997 period. Basic
earnings per share were $0.43 in 1998's first quarter, compared to $0.45
in the same quarter a year ago. Diluted earnings per share in the March
1998 quarter were $0.42, down 4.5% from $0.44 in the first quarter of
1997.
Performance ratios for the three months ended March 31, 1998 were
down from those reported in the like 1997 period. On an annualized
basis, ROAA was 0.95% and ROAE was 12.11% in the first quarter of 1998.
Comparatively, ROAA and ROAE for the first quarter of 1997 were 1.04%
and 13.40%, respectively, and for the full year 1997 were 0.98% and
12.57%, respectively.
Operating results under a tangible performance basis excludes from
reported earnings the after tax impact of amortization of all
intangibles, including goodwill. On a tangible performance basis,
Pacific Century's earnings were $36.5 million for the three months ended
March 31, 1998, compared to $37.1 million in the same quarter last year.
On a per share basis, tangible diluted earnings per share were $0.45
and $0.46 for the first quarter of 1998 and 1997, respectively.
The decline in earnings for the current quarter is primarily
attributed to an increase in provision for loan losses of $13.2 million
over the same 1997 period. The higher provision reflects an increase in
gross charge-offs for the first quarter of 1998 of $20.4 million,
compared to $7.2 million in the same period last year. In the first
quarter of 1998, foreign loan charge-offs increased $10.2 million over
the same prior year quarter and largely reflects $8.1 million in charge-
offs related to loans in Thailand. For further information, see the
Summary of Loan Loss Experience section in this report.
Non-performing assets, excluding accruing loans past due 90 days
or more, ended the current quarter at $94.4 million, or 1.00% of total
loans, compared to $87.6 million, or 1.00% of total loans, at March 31,
1997.
From an asset quality standpoint, Asia remains the focus of
Pacific Century's attention. Although Asian stock markets and
currencies generally ended the first quarter improved or stable compared
with year-end 1997, financial volatility still remains high in those
countries. Additional information regarding Asian events are included
in the International Operations section of this report.
Pacific Century's operating performance has been limited by
Hawaii's weak economy. The current forecast among economists is for
Hawaii's gross state product to remain flat in 1998, continuing a trend
of stagnant growth that stretches back to 1991. In addition, recent
financial turbulence in Asian markets could have an adverse affect on
the economies of Hawaii and the U.S. Mainland and on currency exchange
rates of countries in the Pacific region relative to the U.S. dollar.
These uncertainties could lower the number of Asian visitors to Hawaii
and reduce the level of their spending.
In April 1998, Pacific Century received regulatory approval to
purchase Group Paribas' interest in Banque Paribas Pacifique in New
Caledonia and Banque Paribas Polynesie in French Polynesia. The
purchase is expected to close in the second quarter of 1998.
Pacific Century completed its purchase of approximately $20
million (U.S. dollar equivalent) in Bank of Queensland Convertible Notes
in April 1998. The Bank of Queensland is located in northeastern
Australia, and the purchase will enable Pacific Century to broaden its
geographic reach in the Pacific Rim.
The acquisitions of California United Bank in July 1997, Bank of
Hawaii (PNG) Ltd. in March 1997, and Home Savings of America's deposits
in Arizona affect the comparison between those amounts reported in the
March 31, 1998 consolidated financial statements and the corresponding
amounts in the March 31, 1997 statements.
Pacific Century Markets
Pacific Century's oldest and largest market is Hawaii, where
operations are conducted primarily through its principal subsidiary Bank
of Hawaii. Over the past four decades, Pacific Century's strategy has
called for expanding outside of Hawaii, with emphasis on key Pacific
locations. Today, Pacific Century's strategic focus is to provide
targeted financial services to four primary markets: Hawaii, the
Pacific, Asia, and the U.S. Mainland.
Reorganization and Restructuring Program
On February 17, 1998, Pacific Century launched a two-year
reorganization and restructuring program to accelerate expense reduction
and improve Pacific Century's efficiency. In the initial phase, the
program calls for First Federal Savings and Loan Association of America
(First Federal), which was acquired by Pacific Century in 1990, to be
merged with Bank of Hawaii. First Federal branches will be consolidated
into the Bank of Hawaii network, and up to 25 branches in Hawaii
(approximately 25% of the combined First Federal and Bank of Hawaii
total) will be closed over the next two years. Pacific Century has also
implemented a hiring freeze in the State of Hawaii for 1998 and 1999 and
expects to realize a reduction of its statewide workforce by about 550
positions, or 15 percent.
Pacific Century's U.S. Mainland operations will also be merged
into one nationally chartered entity, to be headquartered in California.
California United Bank (CUB), acquired in 1997, and Pacific Century
Bank, N.A. located in Phoenix, Arizona, will be consolidated under the
name Pacific Century Bank, N.A.
First Savings and Loan Association of America (Guam), First
Federal's subsidiary in the West Pacific, is to become a federally
chartered institution and a direct subsidiary of Pacific Century.
Completion of each of the above initiatives is subject to various
regulatory approvals. Any delays in obtaining these approvals could
result in significant changes to the restructuring program. When all of
the initiatives are fully implemented, Pacific Century expects to
realize annualized expense reductions of approximately $25 million
pretax.
While planning for the restructuring program continues, the timing
of these changes, identification of branches to be closed, and the
related costs to exit these activities have not yet been finalized. It
is expected that when these factors are determined and the necessary
regulatory approvals are received, a restructuring charge will be
recognized that could impact income by an estimate of up to $20 million
before taxes. Pacific Century is reviewing Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets to Be Disposed Of," as it pertains to assets that might be
impacted by the restructuring.
Pacific Century's restructuring program will culminate in 1999
with a comprehensive nine-month redesign process to increase revenues
and further improve efficiency. Pacific Century has contracted with a
nationally recognized corporate redesign specialist to orchestrate this
activity.
Risk Elements in Lending Activities
Total loans outstanding were $9.4 billion as of March 31, 1998, an
increase of 7.4% over the same date last year. Much of the increase is
attributed to the July 1997 acquisition of CUB, which reported $449
million in outstanding loans as of March 31, 1998. Excluding the impact
of the CUB acquisition, the year-to-year loan growth as of March 31,
1998 would have been 2.3%. Compared to year-end 1997, total loans at
the end of 1998's first quarter showed a slight decline of 1%. The
following table presents Pacific Century's total loan portfolio for the
periods indicated.
Loan Portfolio Balances Pacific Century Financial Corporation and subsidiaries
- --------------------------------------------------------------------------------
March 31 December 31 March 31
(in millions of dollars) 1998 1997 1997
- --------------------------------------------------------------------------------
Domestic Loans
Commercial and Industrial $2,095.1 $2,104.3 $1,831.6
Real Estate
Construction -- Commercial 284.3 268.1 226.7
-- Residential 12.4 12.9 17.2
Mortgage -- Commercial 1,364.2 1,354.5 1,194.3
-- Residential 2,732.9 2,738.9 2,655.8
Installment 861.4 891.6 853.5
Lease Financing 507.2 519.4 441.4
- --------------------------------------------------------------------------------
Total Domestic 7,857.5 7,889.7 7,220.5
- --------------------------------------------------------------------------------
Foreign Loans 1,545.9 1,608.7 1,532.9
- --------------------------------------------------------------------------------
Total Loans $9,403.4 $9,498.4 $8,753.4
================================================================================
Commercial and Industrial Loans
Commercial and Industrial (C & I) loans ended both March 31, 1998
and year-end 1997 at approximately $2.1 billion. As of the end of the
current quarter, C & I loans showed an increase of $263.5 million over
the same 1997 quarter-end, which is mostly attributed to the CUB
acquisition and reflects CUB's emphasis on commercial lending. The
proportion of C & I loans to the total loan portfolio was 22.3% at March
31, 1998.
Real Estate Loans
Real estate loans, as a group, remain the largest segment of the
loan portfolio. As of March 31, 1998, real estate loans represented
46.7% of total loans. The table above presents the composition of loans
in the real estate group. Residential mortgage loans continue to
represent the largest component in the real estate group totaling $2.7
billion at March 31, 1998, down slightly from year-end 1997 and up over
March 31, 1997.
Commercial mortgage loans were approximately $1.4 billion at both
March 31, 1998 and year-end 1997 and $1.2 billion at March 31, 1997.
About 70% of commercial mortgage loans are secured by real estate
located in Hawaii, with the remainder mostly in Guam, California and
Arizona. The commercial real estate portfolio is diversified in the
types of properties securing the obligations, which include shopping
centers, commercial/industrial/warehouse facilities, and office
buildings. Generally, loans secured by commercial/industrial/warehouse
and office buildings are either solely or partially owner-occupied.
Total construction loans at March 31, 1998, represent 3.2% of the
total loan portfolio. As of March 31, 1998, total construction loans
(both residential and commercial) totaled $296.7 million, an increase of
5.6% and 21.6% over year-end 1997 and March 31, 1997, respectively.
These loans tend to be short-term in nature with permanent take out
financing commitments in place before the construction begins.
Foreign Loans
Foreign loans at the end of 1998's first quarter totaled $1.5
billion, down 3.9% from year-end 1997 and up 0.8% over the same year
earlier date. At March 31, 1998 foreign loans represented 16.4% of the
total loan portfolio, down from 16.9% and 17.5% at year-end 1997 and
March 31, 1997, respectively.
At March 31, 1998, foreign loans in the South Pacific totaled $755
million, a decrease of 1.6% from $767 million at year-end 1997. Most of
the South Pacific loans are in two subsidiary banks, Banque de Tahiti
and Bank of Hawaii-Nouvelle Caledonie, which in the aggregate held loans
of $658 million at the end of the first quarter of 1998.
Excluding the South Pacific loans, the remaining foreign loans are
mostly in Asia. Loans in this group totaled $791 million at March 31,
1998, down 6.1% from $842 million at year-end 1997. Pacific Century's
Asian business emphasis is primarily on correspondent banking, trade
finance and working capital loans for companies that have business
interests in the Asia-Pacific markets. The majority of Asian loans are
short-term and are largely based on Pacific Century's traditional focus
on relationships.
Additional information on Asian credit exposure and recent Asian
economic events are contained in the International Operations section of
this report.
Other Lending
Other lending includes installment loans and lease financing.
Installment loans ended the first quarter of 1998 at $861.4 million,
compared to $891.6 million at year-end 1997 and $853.5 million at March
31, 1997. Credit cards (included in the installment totals) were $276.7
million as of March 31, 1998, down 4.2% and 2.3% from year-end 1997 and
March 31, 1997, respectively. Also included in the installment category
are consumer installment loans which totaled $584.7 million at March 31,
1998, compared to $602.9 million at December 31, 1997 and $570.4 million
on March 31, 1997. These loans consist mainly of auto loans (direct and
indirect), unsecured creditlines, and guaranteed student loans.
Leases as of March 31, 1998 declined 2.3% from year-end 1997. At
March 31, 1998, total leases outstanding were $507.2 million, compared
to $519.4 million at year-end 1997 and $441.4 million at March 31, 1997.
Non-Performing Assets and Past Due Loans
Pacific Century's non-performing assets (NPAs) consist of non-
accrual loans, restructured loans and foreclosed real estate. As of
March 31, 1998, NPAs totaled $94.4 million, or 1.00% of total loans
outstanding. Comparatively, this ratio was unchanged from the same date
a year ago and was down from 1.02% at year-end 1997. In dollars, total
NPAs have increased over $87.6 million at March 31, 1997 and declined
from $97.1 million at year-end 1997.
Non-accrual loans were $86.7 million at March 31, 1998, down $2.6
million from year-end 1997. In the first quarter, foreign non-accruals
declined $12.2 million, which was partially offset by increases
aggregating $9.2 million in real estate construction and residential
loan non-accruals. As of March 31, 1998, foreign non-accruals consisted
primarily of $19.4 million in French Polynesia and New Caledonia loans
and $5.0 million in Thai loans.
Foreclosed real estate was $6.1 million at March 31, 1998 compared
to $6.2 million at year-end 1997 and $11.3 million at March 31, 1997.
At March 31, 1998, foreclosed real estate loans consisted primarily of
residential properties. Total foreclosed real estate remains at a low
level representing 0.04% of total assets as of March 31, 1998.
Accruing loans past due 90 days or more declined slightly to $24.4
million at March 31, 1998 from $25.0 million at year-end 1997. On a
year-over-year basis accruing loans past due 90 days were down $5.5
million, in part due to a decline in the foreign category.
Total NPAs and loans 90 days past due totaled $118.8 million at
March 31, 1998, compared to $122.1 million and $117.5 million at year-
end 1997 and March 31, 1997, respectively. Total NPAs and loans 90 days
past due represented 1.26% of total loans outstanding at March 31, 1998,
compared to 1.29% at year-end 1997 and 1.34% at March 31, 1997.
The following table presents NPAs and accruing loans past due 90
days or more for the periods indicated.
Pacific Century Financial Corporation and subsidiaries
Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More
- -------------------------------------------------------------------------------
March 31 December 31 March 31
(in millions of dollars) 1998 1997 1997
- -------------------------------------------------------------------------------
Non-Accrual Loans
Commercial $11.1 $10.7 $20.9
Real Estate
Construction 6.4 1.0 0.6
Commercial 2.2 2.8 3.6
Residential 36.7 32.9 29.4
Installment 2.3 2.0 1.6
Leases 0.3 -- 0.1
Foreign 27.7 39.9 20.1
- -------------------------------------------------------------------------------
Subtotal 86.7 89.3 76.3
Restructured Loans
Real Estate
Commercial 1.6 1.6 --
- -------------------------------------------------------------------------------
Subtotal 1.6 1.6 --
Foreclosed Real Estate
Domestic 6.1 6.2 11.3
- -------------------------------------------------------------------------------
Subtotal 6.1 6.2 11.3
- -------------------------------------------------------------------------------
Total Non-Performing Assets 94.4 97.1 87.6
- -------------------------------------------------------------------------------
Accruing Loans Past Due 90 Days or More
Commercial 2.2 2.0 1.5
Real Estate
Commercial 5.8 0.6 2.8
Residential 3.8 7.3 6.8
Installment 7.7 7.6 10.2
Leases 0.1 0.1 0.1
Foreign 4.8 7.4 8.5
- -------------------------------------------------------------------------------
Subtotal 24.4 25.0 29.9
- -------------------------------------------------------------------------------
Total $118.8 $122.1 $117.5
===============================================================================
- -------------------------------------------------------------------------------
Ratio of Non-Performing Assets
to Total Loans 1.00% 1.02% 1.00%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Ratio of Non-Performing Assets
and Accruing Loans Past Due
90 Days or More to Total Loans 1.26% 1.29% 1.34%
- -------------------------------------------------------------------------------
Summary of Loan Loss Experience
The reserve for loan losses totaled $175.2 million, 1.90% of loans
outstanding as of March 31, 1998. Comparatively, this ratio was 1.88%
and 1.98% at year-end 1997 and March 31, 1997, respectively.
The provision for loan losses in the first quarter of 1998 was
$18.3 million, compared to $5.1 million and $9.8 million for first
quarter of 1997 and fourth quarter of 1997, respectively. Net charge-
offs in the current quarter were $17.9 million, or 0.78% of average
loans, compared to $1.5 million, or 0.07% of average loans in the March
1997 quarter and $11.8 million, or 0.51% in the December 1997 quarter.
Gross charge-offs in the first quarter of 1998 were $20.4 million,
down from $22.3 million in the fourth quarter of 1997, but up from $7.2
million in the first quarter of 1997. During the last two quarters,
gross charge-offs have increased, reflecting higher foreign loan charge-
offs of $10.2 million and $10.6 million for the quarters ended March 31,
1998 and December 31, 1997, respectively, of which $8.1 million and
$10.4 million, respectively, relate to loans in Thailand. In the
current quarter, recoveries decreased to $2.5 million, compared to $5.7
million for the same 1997 period and $10.5 million in the prior quarter.
A detailed breakdown of the loan loss reserve including charge-
offs and recoveries by category is presented in the following table.
Summary of Loan Loss Experience Pacific Century Financial Corporation and subsidiaries
- ----------------------------------------------------------------------------------------
First Year First
Quarter Ended Quarter
(in millions of dollars) 1998 12/31/97 1997
- ----------------------------------------------------------------------------------------
Average Amount of Loans Outstanding $9,234.0 $8,929.7 $8,476.3
Balance of Reserve for Loan Losses
at Beginning of Period $174.4 $167.8 $167.8
Loans Charged-Off
Commercial and Industrial 2.3 12.7 1.4
Real Estate - Mortgage
Commercial -- 1.3 --
Residential 0.6 1.9 0.1
Installment 7.2 28.1 5.6
Foreign 10.2 10.6 --
Leases 0.1 0.5 0.1
- ----------------------------------------------------------------------------------------
Total Charged-Off 20.4 55.1 7.2
Recoveries on Loans Previously Charged-Off
Commercial and Industrial 0.6 16.4 4.3
Real Estate - Mortgage
Commercial -- 0.6 --
Residential 0.1 1.0 --
Installment 1.5 6.3 1.3
Foreign 0.3 0.6 0.1
- ----------------------------------------------------------------------------------------
Total Recoveries 2.5 24.9 5.7
- ----------------------------------------------------------------------------------------
Net Charge-Offs (17.9) (30.2) (1.5)
Provision Charged to Operating Expenses 18.3 30.3 5.1
Other Net Additions (Deductions) * 0.4 6.5 (1.3)
- ----------------------------------------------------------------------------------------
Balance at End of Period $175.2 $174.4 $170.1
========================================================================================
Ratio of Net Charge-Offs to
Average Loans Outstanding (annualized) 0.78% 0.34% 0.07%
- ----------------------------------------------------------------------------------------
Ratio of Reserve to Loans Outstanding 1.90% 1.88% 1.98%
- ----------------------------------------------------------------------------------------
* Includes balance transfers, reserves acquired, and foreign currency translation adjustments.
International Operations
Pacific Century maintains an extensive international presence in
the Asia-Pacific region that provides opportunities to take part in
correspondent banking, lending and deposit-taking activities in these
markets. These activities are facilitated through Bank of Hawaii
branches, a representative office with extensions, and full service
subsidiary/affiliate banks. Pacific Century's international operations
are primarily located in Japan, South Korea, Singapore, Hong Kong,
Taiwan, French Polynesia and New Caledonia. The operations of Pacific
Century's subsidiaries located in the West and South Pacific, which are
denominated in U.S. dollars are classified as domestic.
An important part of Pacific Century's strategy is to facilitate
trade activity within and across the Pacific. Providing trade financing
in both directions throughout the Pacific provides short-term exposure
and generates fee income for letters of credit and bankers acceptances.
Letters of credit and bankers acceptances are considered in the overall
country exposure analysis. At March 31, 1998, letters of credit and
bankers acceptances totaled $257 million, compared to $462 million at
year-end 1997.
Pacific Century's foreign lending consists of both local currency
and cross-border lending. Local currency loans are those that are
funded and will be repaid in the currency of the borrower's country.
Cross-border lending, on the other hand, involves loans that will be
repaid in a currency other than that of the borrower's country. This
type of lending involves greater risk because the borrower's ability to
repay is additionally dependent on changes in the currency exchange
rate.
Pacific Century's total credit exposure on a cross border basis
was $1.6 billion at March 31, 1998, up from $1.4 billion at year-end
1997. Cross-border interbank placements and loans were $987 million at
March 31, 1998, compared to $835 million at December 31, 1997. The
table below presents for March 31, 1998 and December 31, 1997 a
geographic distribution of international assets for which Pacific
Century has cross-border exposure exceeding 0.75% of total assets.
Geographic Distribution of Cross-Border International Assets (1)
Government
and Other Banks and Commercial
Official Other Financial and Industrial
(in millions of dollars) Institutions Institutions (2) Companies Total
At March 31, 1998
Japan $ - $342.5 $138.9 $ 481.4
South Korea - 204.3 142.6 346.9
Taiwan - 146.3 50.1 196.4
All Others 30.0 293.6 218.7 542.3
------ ------ ------ --------
$30.0 $986.7 $550.3 $1,567.0
At December 31, 1997
Japan $ - $253.1 $136.8 $ 389.9
South Korea - 219.7 193.5 413.2
Taiwan 57.5 39.5 23.8 120.8
All Others 48.4 322.9 154.5 525.8
------ ------ ------ --------
$105.9 $835.2 $508.6 $1,449.7
(1) Cross-border outstandings are defined as foreign monetary assets that are payable to Pacific Century in
U.S. dollars or other non-local currencies, plus amounts payable in local currency but funded with U.S.
dollars or other non-local currencies. Monetary assets include loans, acceptances, and interest-bearing
deposits with other banks.
(2) Includes U.S. dollar advances to foreign branches and affiliate banks which were used to fund local
currency transactions. Totals for March 31, 1998 and December 31, 1997 were $479.1 million and $419.9
million, respectively.
The Asian economic turmoil, which began in mid-1997, has adversely
impacted the economies of many countries in the region. Those countries
affected have experienced a significant devaluation of their currencies
relative to the U.S. dollar, as well as higher interest rates and a
general tightening of credit. These problems have made it more
difficult for borrowers to obtain and repay credit. Those countries
that have been affected most from the current turmoil are Thailand,
Indonesia and South Korea, which have all experienced liquidity problems
that required the intervention of the International Monetary Fund.
While financial volatility in many Asian markets is still high, in
a general sense the related stock markets and currencies of these
countries ended the first quarter of 1998 stable or improved from where
they were at year-end 1997. At Pacific Century, all loans in South
Korea, Japan, Taiwan, Hong Kong, Malaysia and Indonesia ended both year-
end 1997 and March 31, 1998 on performing status. In the first quarter,
Pacific Century exchanged $83.5 million of short-term Korean bank loans
for loans that are guaranteed by the Republic of Korea, mature in one to
three years, and bear interest at rates of 2.25% to 2.75% over the six-
month London Interbank Offering Rate.
Within Asia, the two most problematic economies remain Thailand
and Indonesia, where Pacific Century's cross-border credit exposure at
March 31, 1998 was approximately $54 million and $23 million,
respectively, compared to $74 million and $21 million, respectively, at
year-end 1997. In Thailand, the government's restructuring plan for
finance companies was completed in the first quarter of 1998. In the
current quarter, charge-offs relative to Thai loans totaled $8.1
million, of which $2.4 million relate to loans that were restructured
and exchanged for Thai government deposits. Finance company loans
eligible for, but not exchanged for Thai government deposits totaled
$4.0 million and remain on non-performing status. Total Thai non-
performing assets at March 31, 1998 were $5.0 million, down from $17.6
million at year-end 1997. With respect to Indonesia, all credit
exposure was on performing status at March 31, 1998.
Capital
At March 31, 1998, Pacific Century's total capital was $1.1
billion, an increase of $82 million from March 31, 1997. Dividends in
the first quarter were paid at $0.1625 per share.
In prior years, Pacific Century had maintained a stock repurchase
program. However, due to the uncertainties of the Asian economic
turmoil, share repurchase activities were suspended in January 1998.
Regulatory risk-based capital remained well above minimum
guidelines. At March 31, 1998, Pacific Century's Total Capital, Tier 1
Capital and leverage ratios were 12.04%, 9.73% and 7.41%, respectively.
This compares with year-end 1997, when the Total Capital Ratio was
11.65%, the Tier 1 Capital Ratio was 9.34% and the leverage ratio was
7.21%. Regulatory guidelines prescribe a minimum Total Capital Ratio of
10%, a Tier 1 Capital Ratio of 6% and a leverage ratio of 5% for an
institution to qualify as "well capitalized." Pacific Century's
strategy is to maintain its capital ratios at levels to meet this
qualification to benefit from the financial and regulatory incentives
provided to "well capitalized" institutions.
Market Risk Exposures
Other Than Trading Activities
In the normal course of business, elements of Pacific Century's
balance sheet are exposed to varying degrees of market risk. Market
risk arises from movements in interest rates and foreign currency
exchange rates. A key element in the process of managing market risk
involves oversight by the Board of Directors and senior management as to
the level of such risk assumed by Pacific Century in its balance sheet.
The Board reviews and approves risk management policies, including risk
limits and guidelines and delegates to the Asset Liability Management
Committee (ALCO) oversight functions. The ALCO, consisting of the
Managing Committee and senior business and finance officers, monitors
Pacific Century's market risk exposure and as market conditions dictate,
modifies balance sheet positions or directs the use of derivative
instruments.
Interest Rate Risk. Pacific Century's balance sheet is sensitive to
changes in the general level of interest rates. This interest rate risk
arises primarily from normal business activities of making loans and
taking deposits. Many other factors also affect Pacific Century's
exposure to changes in interest rates. These factors include general
economic and financial conditions, customer preferences, and historical
pricing spread relationships.
The primary method in Pacific Century's ongoing process to measure
and monitor interest rate risk is the utilization of a net interest
income (NII) simulation model. This model is used to estimate the
amount that NII will change over a one-year time horizon under various
interest rate scenarios. These estimates are based on numerous
assumptions that include loan and deposit volumes and pricing,
prepayment speeds on mortgage-related assets, and principal amortization
and maturities on other financial instruments. While such assumptions
are inherently uncertain, management believes that these assumptions are
reasonable. As a result, the NII simulation model provides a
sophisticated estimate rather than a precise prediction of the exposure
to higher or lower interest rates on NII.
The simulation model is used to estimate the change in NII from a
gradual increase or decrease in interest rates, moving in parallel
fashion over the entire yield curve, over the next 12-month period
relative to what the NII would have been if interest rates had not
changed. Based on the result of the model as of March 31, 1998, a 200
basis points rise in interest rate showed a decline in NII of 2.0%,
while a 200 basis points drop in interest rates showed an increase in
NII of 2.9%. The resulting estimate in NII exposure is well within the
approved ALCO guidelines and presents a balance sheet exposure that is
slightly liability sensitive. A liability sensitive exposure would
imply a favorable short-term impact on NII in periods of declining
interest rates.
In managing interest rate risks, Pacific Century uses several
approaches, both on- and off-balance sheet, to modify its risk position.
Approaches that are used to shift balance sheet mix or alter the
interest rate characteristics of assets and liabilities include changing
product pricing strategies, modifying investment portfolio strategies,
or using financial derivatives. The use of financial derivatives has
been limited over the past three years. During this period, Pacific
Century has relied more on the use of on-balance sheet alternatives to
manage its interest rate risk position.
Foreign Currency Risk. Pacific Century's broad area of operations
throughout the South Pacific and Asia has the potential to expose
Pacific Century 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 specific policy limits, the net exposure in these
"other than trading" activities is insignificant.
On the other hand, Pacific Century is exposed to foreign currency
exchange rate changes from the capital invested in its foreign
subsidiaries and branches located throughout the South Pacific and Asia.
These investments are designed to diversify the total balance sheet
exposure. While a portion of the capital investment in French Polynesia
and New Caledonia is offset by a $42 million borrowing denominated in
French Francs, the remainder of these capital positions, aggregating
approximately $102 million, are not hedged.
Pacific Century uses a value-at-risk (VAR) calculation to measure
the potential loss from foreign currency exposure. Pacific Century's
VAR is calculated at a 95% confidence interval and assumes a normal
distribution. Pacific Century utilizes the variance/covariance approach
to estimate the probability of future changes in foreign exchange rates.
Under this approach, equally weighted daily closing prices are used to
determine the daily volatility for the last 10, 30, 50, and 100 days.
Pacific Century uses the highest daily volatility of the four trading
periods in its VAR calculation.
To estimate the potential loss in its net investment in foreign
subsidiaries and branches, Pacific Century takes the daily volatility
and annualizes it by multiplying by the number of trading days in a
year. Therefore, the VAR determines the potential one-year loss within
a 95% confidence interval of the net investment in subsidiaries.
Presented below, as of March 31, 1998, is Pacific Century's
foreign currency exposure from its net investments in subsidiaries and
branch operations that are denominated in a foreign currency as measured
by the VAR.
Market Risk Exposure From Changes in Foreign Exchange Rates
March 31, 1998
(in millions of dollars) Book Value Value-at-Risk
Net Investments in Foreign
Subsidiaries and Branches
Japanese Yen $ 11.2 $ 2.2
Korean Won 33.1 19.6
Pacific Franc (1) 26.2 4.0
Other 31.7 9.7
-------- -------
Total $102.2 $35.5
======== =======
(1) Net of a $42 million borrowing denominated in French Francs.
Trading Activities
Pacific Century's trading activities include foreign currency and
foreign exchange contracts that expose Pacific Century to a modest
degree of foreign currency risk. These transactions are executed on
behalf of customers and for Pacific Century's own account. Pacific
Century, however, manages its trading account such that it does not
maintain significant foreign currency open positions. To measure the
exposure of these open positions, Pacific Century uses the VAR
methodology described above. The VAR measurement for trading activities
as of March 31, 1998 continues to be immaterial.
Liquidity
Liquidity is managed to ensure that Pacific Century has continuous
access to sufficient, reasonably priced funding to conduct its business
in a normal manner.
As of March 31, 1998, deposits declined 1.8% to $9.4 billion from
$9.6 billion at year-end 1997, reflecting a reduction in both domestic
and foreign deposits. The intense competition for deposits by banks and
other financial institutions, as well as securities brokerage firms,
continues to impact the ability to attract and retain deposits.
Comparing March 31, 1998 with the same date in 1997, deposits rose $334
million, due to acquisitions.
Repos, which are offered to governmental entities as an
alternative to deposits, were $2.3 billion at March 31, 1998, compared
to $2.3 billion and $2.0 billion at year-end 1997 and March 31, 1997,
respectively.
Short-term borrowing, including Fed Funds, were $819 million at
the end of March 1998 down from $937 million at year-end 1997 and up
from $758 million at March 31, 1997. Long-term debt has decreased from
$706 million at year-end 1997 to $685 million at March 31, 1998,
reflecting maturities. During the current quarter no new debt was
issued under Bank of Hawaii's $1 billion "revolving" Bank Note program.
Long-term debt outstanding includes the $100 million Bancorp Hawaii
Capital Trust I, 8.25% Capital Securities issued in December 1996.
Net Interest Margin
The average net interest margin (taxable equivalent basis) on
earning assets in the first quarter of 1998 was 4.29%, an increase from
3.99% in the same quarter in 1997 and 4.09% in the fourth quarter of
1997. The increase in net margin over the March 1997 quarter is partly
attributed to the CUB acquisition, as CUB's margins are incrementally
higher than Pacific Century. Net interest income (taxable equivalent
basis) totaled $141.9 million in the first quarter of 1998, compared to
$125.3 million and $138.1 million for the first and fourth quarters of
1997, respectively.
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
Average Income/Yield/ Average Income/Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $368.7 $6.5 7.13% $546.2 $9.4 7.00%
Investment Securities Held to Maturity
-Taxable 1,118.7 20.0 7.24 1,230.1 20.0 6.60
-Tax-Exempt 12.0 0.4 15.25 12.6 0.4 14.45
Investment Securities Available for Sale 2,562.9 41.5 6.56 2,378.2 39.0 6.65
Funds Sold 127.1 1.1 3.48 86.5 1.0 4.46
Net Loans
-Domestic 7,690.8 162.5 8.57 7,055.2 140.9 8.10
-Foreign 1,543.2 30.6 8.04 1,421.1 30.3 8.65
Loan Fees 10.7 9.4
------------------------ ------------------------
Total Earning Assets 13,423.4 273.3 8.26 12,729.9 250.4 7.98
Cash and Due From Banks 560.0 615.2
Other Assets 598.8 484.3
---------- ----------
Total Assets $14,582.2 $13,829.4
========== ==========
Interest Bearing Liabilities
Domestic Deposits - Demand $2,171.5 14.0 2.61 $1,779.3 12.3 2.80
- Savings 823.5 5.0 2.48 910.3 5.4 2.41
- Time 2,873.4 38.8 5.47 2,717.9 36.5 5.44
------------------------ ------------------------
Total Domestic 5,868.4 57.8 3.99 5,407.5 54.2 4.06
Foreign Deposits
- Time Due to Banks 622.0 9.5 6.17 894.9 12.7 5.78
- Other Time and Savings 1,013.2 12.6 5.05 883.1 9.9 4.54
------------------------ ------------------------
Total Foreign 1,635.2 22.1 5.48 1,778.0 22.6 5.16
------------------------ ------------------------
Total Deposits 7,503.6 79.9 4.32 7,185.5 76.8 4.33
Short-Term Borrowings 3,039.7 40.3 5.38 2,785.1 36.9 5.38
Long-Term Debt 694.0 11.2 6.52 727.0 11.4 6.36
------------------------ ------------------------
Total Interest Bearing Liabilities 11,237.3 131.4 4.74 10,697.6 125.1 4.74
------------------------ ------------------------
Net Interest Income 141.9 3.52 125.3 3.24
Average Spread on Earning Assets 4.29% 3.99%
Demand Deposits - Domestic 1,698.2 1,382.0
- Foreign 271.9 258.2
---------- ----------
Total Demand Deposits 1,970.1 1,640.2
Other Liabilities 236.0 417.5
Shareholders' Equity 1,138.8 1,074.1
---------- ----------
Total Liabilities and Shareholders' Equity $14,582.2 $13,829.4
========== ==========
Provision for Possible Loan Losses 18.3 5.1
Net Overhead 68.8 64.4
------- -------
Income Before Income Taxes 54.8 55.8
Provision for Income Taxes 20.6 20.1
Tax-Equivalent Adjustment 0.2 0.2
------- -------
Net Income $34.0 $35.5
======= =======
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent
- ------------------------------------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
December 31, 1997 December 31, 1997
Average Income/Yield/ Average Income/ Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $366.8 $6.5 7.07% $486.3 $33.1 6.80%
Investment Securities Held to Maturity
-Taxable 1,183.5 19.8 6.65 1,220.4 81.8 6.71
-Tax-Exempt 12.4 0.5 15.31 12.5 1.8 14.55
Investment Securities Available for Sale 2,494.6 40.3 6.41 2,452.0 158.8 6.48
Funds Sold 71.7 1.0 5.60 76.4 3.8 4.99
Net Loans
-Domestic 7,676.0 161.9 8.37 7,389.4 607.7 8.22
-Foreign 1,578.8 33.1 8.31 1,540.3 129.2 8.39
Loan Fees 9.7 34.4
------------------------ --------------------------
Total Earning Assets 13,383.8 272.8 8.09 13,177.3 1,050.6 7.97
Cash and Due From Banks 564.0 545.1
Other Assets 602.3 519.9
---------- ----------
Total Assets $14,550.1 $14,242.3
========== ==========
Interest Bearing Liabilities
Domestic Deposits - Demand $2,104.3 14.0 2.63 $1,945.3 52.9 2.72
- Savings 844.6 5.2 2.46 865.5 21.4 2.48
- Time 2,917.1 40.5 5.51 2,858.7 157.0 5.49
------------------------ --------------------------
Total Domestic 5,866.0 59.7 4.04 5,669.5 231.3 4.08
Foreign Deposits
- Time Due to Banks 546.4 8.8 6.39 718.7 43.6 6.06
- Other Time and Savings 1,198.5 14.2 4.69 1,079.0 48.2 4.47
------------------------ --------------------------
Total Foreign 1,744.9 23.0 5.22 1,797.7 91.8 5.10
------------------------ --------------------------
Total Deposits 7,610.9 82.7 4.31 7,467.2 323.1 4.33
Short-Term Borrowings 2,933.1 40.2 5.44 2,868.7 156.8 5.47
Long-Term Debt 727.8 11.8 6.42 725.5 46.4 6.39
------------------------ --------------------------
Total Interest Bearing Liabilities 11,271.8 134.7 4.74 11,061.4 526.3 4.76
------------------------ --------------------------
Net Interest Income 138.1 3.35 524.3 3.21
Average Spread on Earning Assets 4.09% 3.98%
Demand Deposits - Domestic 1,674.4 1,516.8
- Foreign 267.9 264.0
---------- ----------
Total Demand Deposits 1,942.3 1,780.8
Other Liabilities 194.9 290.8
Shareholders' Equity 1,141.1 1,109.3
---------- ----------
Total Liabilities and Shareholders' Equity $14,550.1 $14,242.3
========== ==========
Provision for Possible Loan Losses 9.8 30.3
Net Overhead 75.3 275.1
------- ---------
Income Before Income Taxes 53.0 218.9
Provision for Income Taxes 19.7 78.5
Tax-Equivalent Adjustment 0.2 0.9
------- ---------
Net Income $33.1 $139.5
======= =========
The yield on earning assets in the first quarter of 1998 improved
to 8.26% from 7.98% for the same quarter a year ago and 8.09% for the
fourth quarter of 1997. The yield on earnings assets was 7.97% for all
of 1997. Over the past 12 months, Pacific Century's cost of funds rate
has remained stable. The cost of funds rate was 4.74% for the quarter
ended March 31, 1998, the same level as reported for the first and
fourth quarters of 1997. Comparatively, the cost of funds rate was
4.76% for all of 1997.
Non-Interest Income and Expense
Pacific Century utilizes the efficiency ratio to measure its
success in managing non-interest income and expense. The efficiency
ratio is derived by dividing non-interest expense by net operating
revenue (net interest income plus non-interest income before securities
transactions). The efficiency ratio for the three months ended March
31, 1998 was 63.7%, compared to 63.8% for the same period in 1997 and
66.0% for the full year 1997.
Non-Interest Income
3 Months Ended 3 Months Ended
(in millions) March 31, 1998 March 31, 1997
Trust Income $14.0 $13.4
Service Charges on Deposit Accounts 8.2 6.7
Fees, Exchange and Other Service
Charges 18.9 14.7
Other Operating Income 8.4 6.5
Investment Securities Gains 3.4 0.4
------- ------
Total Non-Interest Income $52.9 $41.7
Non-interest income in the first quarter of 1998 was $52.9
million, an increase of 26.8% over the similar quarter in 1997. The
comparison between the first quarter of 1998 and 1997 is affected by the
CUB acquisition.
Trust income for the first three months totaled $14.0 million, up
4.4% compared to the same period a year ago. Service charges on deposit
accounts in the current quarter rose 23.0% over the like quarter in
1997. Most of this increase is accounted for by CUB, who reported $1.1
million in deposit related fees for the March 1998 quarter. Fees,
exchange, and other service charges in the March 1998 quarter totaled
$18.9 million, a 29.0% increase compared to the same period a year ago.
Acquisitions contributed to $1.7 million of this increase. Other
operating income in the first quarter of 1998 was $8.4 million, an
increase of 28.5% from $6.5 million reported for the same period last
year. This increase primarily results from a $0.6 million asset sale
gain, the CUB acquisition and larger gains on mortgage loan sales.
Investment Securities net gains for the three months ended March
31, 1998, were $3.4 million, compared to net gains of $0.4 million in
the same 1997 quarter.
Non-Interest Expense
3 Months Ended 3 Months Ended
(in millions) March 31, 1998 March 31, 1997
Salaries $46.3 $41.5
Pension and Other Benefits 14.9 15.1
Net Occupancy Expense 11.1 10.4
Net Equipment Expense 10.8 9.0
Other Operating Expense 38.4 29.8
Minority Interest 0.2 0.3
------ ------
Total Non-Interest Expense $121.7 $106.1
Non-interest expense in the first quarter of 1998 totaled $121.7
million, up 14.7% from $106.1 million in the same period in 1997. This
increase primarily is accounted for by the CUB acquisition. Excluding
CUB, non-interest expense would have increased 7.2% over the March 1997
quarter.
Salaries and benefits totaled $61.2 million for the first quarter
of 1998 compared to $56.6 million for the same year ago quarter. The
increase is due to the CUB acquisition, as CUB reported total salaries
and benefits of $4.6 million in the March 1998 quarter.
Net occupancy and equipment expense for the first quarter of 1998
totaled $21.9 million, compared to $19.4 million for the same quarter in
1997, an increase of 12.9%. Included in the current quarter were $1.7
million in non-recurring expenses attributed to equipment and premise
write-offs. Also, CUB reported $1.3 million in these categories in
1998.
Other operating expenses in 1998's first quarter totaled $38.4
million, an increase of 28.9% over the $29.8 million reported for the
same quarter in 1997. Acquisitions accounted for $4.3 million of this
increase, including the amortization of intangibles. Recognition of
various non-recurring operating expenses totaling $1.4 million and Year
2000 related expenses of approximately $3.1 million in the March 1998
quarter also impacted comparability with the same year earlier quarter.
Year 2000
A significant issue facing all banks nationwide that could have a
large impact on expenses is the transition to the new millennium. Year
2000 concerns arise primarily from past date-coding practices in both
software and hardware that used two-digits rather than four-digits to
represent years. If not corrected, systems that use the two-digit
format will be unable to correctly distinguish dates after December 31,
1999. This problem could cause these systems to fail or provide
incorrect information.
Pacific Century has made the resolution of Year 2000 exposures its
top priority. A Program Management Office has been established to
monitor, evaluate and manage the risks, solutions, and costs associated
with Year 2000 issues. Pacific Century has developed a Year 2000
project plan that incorporates the following primary parts: identifying
assets and systems that have Year 2000 exposure; assessing the size and
complexity of the overall project and its parts; determining risks,
priorities and resources; renovating systems (e.g. rewriting program
code, upgrading software and hardware, replacing systems, and obtaining
vendor certifications); testing software and hardware changes;
implementing Year 2000 certified systems into production; and
formulating contingency plans. The initial project phases of inventory
and assessment have been completed. At present, Pacific Century is
working on the renovation and testing phases of the project.
Pacific Century has identified its most critical systems and has
established priorities to provide assurances that these systems will be
Year 2000 compliant in a timely manner. Pacific Century's goal is to
have a substantial portion of its business critical systems certified as
Year 2000 compliant by December 31, 1998. Management believes that
Pacific Century is on target to achieve this goal.
While Pacific Century believes its Year 2000 project plan is
designed to be successful in resolving all critical Year 2000 issues, it
is possible, because of the scope and complexity involved, that not all
of the potential problems will be satisfactorily completed in a timely
manner. To mitigate this possibility, Pacific Century is formulating
contingency plans for critical assets to assure an orderly transition
into the millennium. In addition, business continuity plans are being
developed as a safeguard against unforseen business interruptions.
Pacific Century estimates that the total cost of its Year 2000
project will be in the range of $30 million. This cost primarily
includes estimates for technology staff compensation, consultant fees,
and software and hardware expenses. Year 2000-related costs are
expensed as incurred and approximately $3.1 million was expensed in the
first quarter of 1998. The cumulative expenses for the Year 2000
project totaled approximately $6.3 million through March 31, 1998. As
the Year 2000 project progresses, the cost estimate could change
depending on a number of factors, including the failure of third party
vendors to address Year 2000 issues in a timely manner.
Forward-Looking Statements
This report contains forward-looking statements regarding
management's beliefs, estimates, projections and assumptions. These
forward-looking statements are subject to risks and uncertainties, and
accordingly, actual results may differ significantly from those
presented in such statements. Factors that might cause such a
difference include, but are not limited to, economic conditions in the
areas in which Pacific Century conducts its operations, fluctuations in
interest rates, fluctuations in foreign currency exchange rates, credit
quality, and U.S. foreign government regulations and monetary policies.
Part II. - Other Information
Items 1 to 5 omitted pursuant to instructions.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Number
11 Statement Regarding Computation of Per Share
Earnings
27 Financial Data Schedule
99 Statement of Ratios
(b) On January 20, 1998, Pacific Century filed a Form 8-K.
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 May 14, 1998 PACIFIC CENTURY FINANCIAL
CORPORATION
/s/ Richard J. Dahl
(Signature)
Richard J. Dahl
President and Chief Operating
Officer
/s/ David A. Houle
(Signature)
David A. Houle
Executive Vice President, Treasurer
and Chief Financial Officer
Pacific Century Financial Corporation
Exhibit 11 - Statement Regarding Computation of Per Share Earnings
Three Months Ended March 31
Basic Diluted
1998
----
Net Income $34,020,000 $34,020,000
Weighted Average Shares 79,881,229 80,735,604
Earnings Per Share $0.43 $0.42
1997
----
Net Income $35,481,000 $35,481,000
Weighted Average Shares 79,438,552 80,542,522
Earnings Per Share $0.45 $0.44
Pacific Century Financial Corporation
Exhibit 99 - Statement Regarding Computation of Ratios
Three Months Ended March 31
(in millions of dollars) 1998 1997
Earnings:
1. Income Before Income Taxes $54.6 $55.6
2. Plus: Fixed Charges Including Interest on Deposits 131.7 126.7
----- -----
3. Earnings Including Fixed Charges 186.3 182.3
4. Less: Interest on Deposits 79.9 76.8
----- -----
5. Earnings Excluding Interest on Deposits $106.4 $105.5
====== ======
Fixed Charges:
6. Fixed Charges Including Interest on Deposits $131.7 $126.7
7. Less: Interest on Deposits 79.9 76.8
----- -----
8. Fixed Charges Excluding Interest on Deposits $51.8 $49.9
====== ======
Ratio of Earnings to Fixed Charges:
Including Interest on Deposits (Line 3 divided by Line 6) 1.4 x 1.4 x
Excluding Interest on Deposits (Line 5 divided by Line 8) 2.1 x 2.1 x
9
1000
3-MOS
DEC-31-1997
MAR-31-1998
586746
425637
119480
2749
2808370
992058
996667
9403406
175194
14757815
9435399
3123600
370738
684782
160281
0
0
983015
14757815
203765
61728
7573
273066
79878
131348
141718
18303
3381
121703
54576
54576
0
0
34020
0.43
0.42
4.09
86794
24352
1639
0
174362
20416
2497
175194
0
0
0
