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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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)
HAWAII 99-0148992
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
130 MERCHANT STREET, HONOLULU, HAWAII 96813
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(808) 643-3888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $2 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of said stock on the New York Stock
Exchange on February 27, 1998 ($21.56 per share): $1,720,956,214
As of February 27, 1998, 79,950,189 shares of Common Stock, $2 par value, of
the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 24, 1998, are incorporated by reference into
Part III of this Report.
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PART I
ITEM 1. BUSINESS
Pacific Century Financial Corporation (Pacific Century) was organized on
August 12, 1971, as the first bank holding company in the State of Hawaii.
Originally organized as Hawaii Bancorporation, Inc., its name was changed in
1979 to Bancorp Hawaii, Inc. and in 1997 changed to Pacific Century Financial
Corporation. The latter change in name was made to provide a more distinctive
and descriptive identity that reflects the Company's strategic goals to expand
its activities beyond Hawaii to Asia, the West and South Pacific, and the U.S.
Mainland.
Pacific Century provides a broad range of financial products and services to
customers in Hawaii, other areas of the Pacific Basin, Asia, and the U.S.
Mainland. It is the largest bank holding company headquartered in the State of
Hawaii. The principal subsidiaries of Pacific Century are Bank of Hawaii,
Bancorp Pacific, Inc., California United Bank (CUB), and Pacific Century Bank,
N.A. (PCB).
In March 1997, Bank of Hawaii International, Inc. (BOHI), a wholly-owned
subsidiary of Bank of Hawaii, finalized its acquisition of Indosuez Niugini
Bank, Ltd. in Papua New Guinea, renaming it Bank of Hawaii (PNG) Ltd. With
this acquisition, BOHI has operations across the South Pacific from French
Polynesia to Papua New Guinea.
Pacific Century also finalized its acquisition of CU Bancorp and its wholly-
owned subsidiary, CUB in July 1997. The acquisition accounted for as a
purchase merged CU Bancorp into Pacific Century making it the parent of CUB.
CUB's headquarters are located in Encino, California. CUB has 21 branches in
Southern California and targets small and middle market commercial businesses
and retail customers.
In December 1997, BOHI announced the signing of a definitive agreement to
acquire Banque Paribas Pacifique in New Caledonia and Banque Paribas Polynesie
in French Polynesia. The acquisitions, which are subject to regulatory
approval, are expected to be completed in the second quarter of 1998. Upon
completion, the acquired banks will be merged into two of BOHI's existing
subsidiaries, Bank of Hawaii-Nouvelle Caledonie and Banque de Tahiti. Banque
Paribas Pacifique reported assets of $211.3 million and Banque Paribas
Polynesie reported assets of $80.6 million, both as of December 31, 1997.
In October 1997, Hawaiian Trust Company, Limited was merged into Bank of
Hawaii and became Pacific Century Trust, a division of Bank of Hawaii. This
merger provides synergy to grow both bank and trust products through
coordinated marketing and bundled services.
Pacific Century Asset Management, Inc. (formerly Pacific Capital Asset
Management) was closed at the end of 1997 having been operational since 1994.
The company intended to provide high-end, performance-oriented portfolio
management services to the institutional marketplace. However, the ability to
penetrate this highly competitive market could not be demonstrated.
Pacific Century's organization structure as of December 31, 1997 is included
in Exhibit 21.1. All subsidiaries are wholly-owned except as otherwise noted
for certain banks in the South Pacific and for those entities whose directors
own qualifying shares. Each entity is consolidated with its immediate parent
company except for affiliate banks in the South Pacific. BOHI's investments in
these affiliate banks include Bank of Tonga, National Bank of Solomon Islands
and Pacific Commercial Bank, Ltd., which are accounted for under the equity
method.
At December 31, 1997, Pacific Century and its subsidiaries employed 5,114
persons on a full-time or part-time basis.
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The following is a brief description of each of Pacific Century's
subsidiaries.
Bank of Hawaii was organized under the laws of Hawaii on December 17, 1897,
and has been continuously in business since. Its headquarters are in Honolulu,
Hawaii, and its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC). Bank of Hawaii is the largest full-service financial
institution in Hawaii with a statewide network of 65 regular branches and 13
supermarket branches. It is not a member of the Federal Reserve System.
Pacific Century and 15 directors of Bank of Hawaii (each of whom holds 125
qualifying shares each) own 100% of the outstanding shares. There are four
directors of Bank of Hawaii who do not hold qualifying shares. The legal
requirement for directors of Hawaii banks to hold qualifying shares was
eliminated in 1993. It is anticipated that directors currently holding such
shares will retain them until they retire or resign from the Board of Bank of
Hawaii.
Bank of Hawaii provides customary commercial banking services through branch
offices in the State of Hawaii and branches or representative offices in
Bahamas (Nassau), Republic of Fiji (Suva, Nadi, and Lautoka), Hong Kong, Japan
(Tokyo), South Korea (Seoul), Philippines (Manila, Cebu, and Davao),
Singapore, Taiwan (Taipei), American Samoa, Commonwealth of the Northern
Mariana Islands (Saipan), Federated States of Micronesia (Pohnpei, Kosrae, and
Yap), Guam, Republic of the Marshall Islands (Majuro), and Republic of Palau
(Koror). Bank of Hawaii also provides representative services in India through
Capital Trust Limited, a leading merchant bank in India. Bank of Hawaii also
has subsidiary and affiliate banks in New Caledonia, Papua New Guinea, French
Polynesia, Tonga, Vanuatu, Solomon Islands, and Samoa. Pacific Century Trust,
a division of Bank of Hawaii, operates offices in Guam and Arizona as well as
Hawaii. Trust assets under administration at year-end 1997 were $12.5 billion.
Bank of Hawaii owns all of the outstanding stock of Pacific Century Leasing,
Inc.; BOHI; Bank of Hawaii International Corp., New York; Pacific Century
Investment Services, Inc.; Bankoh Corporation; Pacific Century Advisory
Services, Inc.; Pacific Century Insurance Agency, Inc.; and Realty and
Mortgage Investors of the Pacific, Ltd. A brief discussion of these Bank
subsidiaries follows:
Pacific Century Leasing, Inc. (PCL), formerly Bancorp Leasing of Hawaii,
Inc., formed in 1973, provides leasing and leasing services, mainly to the
commercial sector in Hawaii. PCL has several subsidiaries that are "specific
purpose leasing vehicles." These subsidiaries include S.I.L., Inc.; Arbella
Leasing Corp.; Pacific Century Leasing International, Inc.; and BNE Airfleets
Corporation. On a consolidated basis, PCL's assets represented 1.5% of Pacific
Century's total assets at year-end 1997. In 1997, Bankoh Equipment Leasing
Corp. and Pacific Century Leasing of America, Inc. were dissolved. Both of
these companies were former subsidiaries of PCL.
BOHI was formed in 1968. BOHI holds equity interests in the following
foreign financial institutions (in the percentages indicated): Bank of Hawaii-
Nouvelle Caledonie--91%; Bank of Hawaii (PNG) Ltd.--100%; Banque de Tahiti--
92%; Bank of Tonga--30%; Banque d'Hawaii (Vanuatu), Ltd.--100%; National Bank
of Solomon Islands--51%; and Pacific Commercial Bank, Ltd.--43%, in Samoa.
BOHI's total assets represented 6.3% of Pacific Century's total assets at
year-end 1997.
Bank of Hawaii International Corp., New York (BOHICNY) was organized in 1982
as an Edge Act corporation. BOHICNY provides payment, clearing, and settlement
services with the New York Clearing House and Clearing House Interbank Payment
Service for both affiliated and unaffiliated banks. BOHICNY had total assets
representing 1.3% of Pacific Century's total assets at year-end 1997.
Pacific Century Investment Services, Inc. (PCIS), formerly Bancorp
Investment Group, Ltd., was formed in 1991 to provide full service brokerage
and other investment services. The company began operations in February of
1992 as a subsidiary of Pacific Century. In 1994, Pacific Century contributed
the stock of PCIS to Bank of Hawaii. As a result, PCIS became a wholly-owned
subsidiary of Bank of Hawaii.
3
Bankoh Corporation was originally incorporated in 1984 as Hawaiian Hong Kong
Holdings, Ltd. and remained inactive until 1994. In 1994, the name was changed
to Bankoh Corporation, with minimal activity since its name change.
Pacific Century Advisory Services, Inc., formerly Bankoh Investment Advisory
Services Ltd., was reactivated in 1991 to provide advisory services for
businesses seeking to operate in Hawaii. The activity of this company remained
very limited during 1997.
Pacific Century Insurance Agency, Inc. (PCIA), formerly Pan-Ocean Insurance
Agency, Inc., engages in general insurance agency, insurance sub agency and
general insurance brokerage business to the extent permitted under applicable
federal and state laws. Business activity began in late 1995 with limited
activity in 1997.
Realty and Mortgage Investors of the Pacific, Ltd. (RAMPAC), a wholly-owned
subsidiary, was organized in 1992 as a financial services company in the State
of Hawaii. Its activity is focused on commercial real estate lending in
Hawaii, and it does not accept deposits. Total assets at year-end 1997 were
$37.4 million.
Pacific Century also holds all of the outstanding stock, except as noted, of
the corporations listed below:
Bancorp Pacific, Inc., formerly known as FirstFed America, Inc., was
incorporated under Delaware law in July 1986 for the purpose of becoming a
savings and loan holding company to own the outstanding stock of First Federal
Savings and Loan Association of America (First Federal) upon its conversion
from a federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association.
Bancorp Pacific Inc.'s only significant business is conducted through its
wholly-owned subsidiary, First Federal, and First Federal's subsidiary, First
Savings and Loan Association of America (First Savings).
First Federal, a federally chartered stock savings and loan association, has
been in operation since 1904. First Federal operates 21 full service branches
in Hawaii whose deposits are insured by the FDIC. In 1997, three First Federal
branches were closed with the deposits transferred to nearby Bank of Hawaii
branches. In addition, First Federal's Lanai branch was transferred to, and
continues to operate as a branch of Bank of Hawaii. Total assets for First
Federal represented 7.0% of Pacific Century's total assets at year-end 1997.
First Savings operates in a market area that includes the entire territory
of Guam and the island of Saipan in the Commonwealth of the Northern Mariana
Islands (located approximately 120 miles northeast of Guam). First Savings
operates three full-service branches and three in-store branches in Guam and
one full-service branch in Saipan. The FDIC insures its deposits. First
Savings has agreed to transfer its Saipan office to Bank of Hawaii. Upon the
transfer, which is expected to occur in the spring of 1998 following the
receipt of regulatory approvals, the deposits and certain assets of the branch
will be consolidated with a nearby branch of Bank of Hawaii. The stock of
Pacific Century Capital Corporation (PCCC), formerly Bancorp Finance of
Hawaii-(Guam), Inc., was contributed to First Savings in 1991. PCCC was
originally formed in 1979 as Bankoh Finance, Inc. through the purchase of the
assets of an industrial loan company based in Guam. PCCC has deposit-taking
authority under Guam law, but discontinued accepting new deposits in 1984 and
has had no deposit liabilities since 1987. On a consolidated basis, First
Savings' assets represented 1.2% of Pacific Century's total assets at year-end
1997.
PCB, formerly First National Bank of Arizona, was acquired by Pacific
Century in October 1987. Pacific Century and the directors of PCB (each of
whom holds 1,000 qualifying shares) own 100% of the outstanding shares of PCB.
PCB is organized under the laws of the United States. The FDIC insures its
deposits, and it is a member of the Federal Reserve System. PCB provides
customary commercial banking services through ten branch offices located in
the State of Arizona. Four of these branches were acquired from Home Savings
of America in March 1997 along with deposits of approximately $250 million.
PCB had total assets representing 3.6% of Pacific Century's total assets at
year-end 1997.
Pacific Century Life Insurance Corporation (PCLIC), formerly Bancorp Life
Insurance Company of Hawaii, Inc., was incorporated in 1981 in the State of
Arizona to underwrite, as a reinsurer, the credit life and credit accident and
health insurance sold in conjunction with Bank of Hawaii's short-term consumer
lending activities.
4
Pacific Century Agency, Inc., formerly Bancorp Insurance Agency of Hawaii,
Inc., was formed in 1982 to act as an agent for the sale of all credit life
and credit accident and health insurance that is reinsured with PCLIC.
In 1989, Pacific Century established a wholly-owned captive insurance
company, Pacific Century Insurance Services, Inc. (Pacific Century Insurance),
formerly Bancorp Hawaii Insurance Services, Ltd. With Pacific Century
Insurance's formation, Pacific Century became the first Hawaii corporation to
establish a Hawaii captive insurance company for its self-insurance needs.
Pacific Century Insurance provides bankers professional liability insurance
exclusively to Pacific Century and its subsidiaries and affiliates. In 1992,
Pacific Century Insurance began providing workers compensation insurance for
Pacific Century and its subsidiaries. Pacific Century Insurance's formation
provides Pacific Century with greater flexibility and stability in controlling
insurance coverages and premium costs. Pacific Century Insurance also provides
Pacific Century with the opportunity to design self-insurance programs not
otherwise available in the conventional insurance market.
Pacific Century Small Business Investment Company, Inc. (PCSBIC), formerly
Bancorp Hawaii Small Business Investment Company, Inc., was formed in
September 1983 in the State of Hawaii as a small business investment company.
Its investment and lending activities were reactivated in 1995 with several
new investments made during the year. In 1997, activity remained limited with
new investments totaling $0.8 million. Total assets of PCSBIC was $2.1 million
at year-end 1997.
REGULATION AND COMPETITION
Effect of Governmental Policies
The earnings of Pacific Century and its principal subsidiaries are affected
not only by general economic conditions, both domestically and
internationally, but also by the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve System, and foreign
governments and their agencies. The monetary policies of the Federal Reserve
System influence to a significant extent the overall growth of loans,
investments, deposits, interest rates charged on loans, and interest rates
paid on deposits. The nature and impact of future changes in monetary policies
are often not predictable. Flexibility is a key attribute in successfully
responding to these varied forces.
Competition
The financial services industry has become highly competitive. Pacific
Century, Bank of Hawaii, and First Federal compete with local Hawaii financial
institutions, and CUB and PCB compete with local financial institutions in
Southern California and Arizona, respectively. In addition, each of them
competes with institutions located in the major financial centers of the
world. These financial institutions include not only banks and savings
associations, but also insurance companies, brokerage houses, mortgage
companies, consumer finance companies, credit unions, and diversified
financial services companies that provide many or all of the services offered
by commercial banks and savings institutions but operate without a banking
charter and thus free of most of the associated regulatory requirements.
Six commercial banks, four savings associations, approximately seven
deposit-taking financial services loan companies, approximately 114 credit
unions, and scores of mortgage companies and other financial services firms
serve the State of Hawaii. The State is also served by a large number of out-
of-state institutions and foreign banks. Bank of Hawaii is the largest Hawaii
based financial services firm operating in the market. Outside of Hawaii, Bank
of Hawaii's primary competition in the Pacific Basin comes from several major
U.S. Mainland and foreign banks that operate in those areas. First Federal is
the second largest savings association in Hawaii.
Southern California, in which CUB competes, is served by at least 226 local
commercial banks, at least 52 savings associations, and approximately 443
credit unions as well as numerous other financial services firms of a wide
variety of types, including foreign banks and other foreign financial
entities. Likewise, in the state of Arizona, in which PCB competes,
approximately 41 commercial banks, 7 savings associations, 71 credit unions,
5
and numerous other financial services firms conduct full-service operations.
CUB is approximately the 46th largest insured depository institution, and PCB
is approximately the eleventh largest insured depository institution, in
Southern California and Arizona, respectively, as measured by deposits placed
in offices there.
Additional financial institution holding companies or their subsidiaries may
enter markets served by Pacific Century and thereby provide additional
competition. Likewise, if Pacific Century, Bank of Hawaii, First Federal, CUB,
PCB and their respective subsidiaries pursue additional business
opportunities, they will encounter significant competition from other
businesses, including ones not associated with banks or financial institution
holding companies.
Supervision and Regulation
Pacific Century is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the BHC Act) and, as such, is subject
to the Act and regulations issued thereunder by the Board of Governors of the
Federal Reserve System (the Board of Governors). Pacific Century is also
registered as a bank holding company under the Hawaii Code of Financial
Institutions (the Code) and, as such, is subject to the registration,
reporting, and examination requirements of the Code.
The BHC Act requires prior approval of the Board of Governors of the
acquisition by Pacific Century of more than 5% of the voting shares of any
bank or any other bank holding company. The statute has been eliminated,
effective September 29, 1995, which had prohibited the acquisition of more
than 5% of the stock of Pacific Century by a bank holding company whose
operations are principally conducted in a state other than Hawaii, and the
acquisition by Pacific Century of more than 5% of the stock of any bank
located in a state other than Hawaii unless the statutory law of the state in
which such bank is located specifically authorized such acquisition.
Accordingly, at the present time and subject to certain limits, the BHC Act
allows adequately capitalized and adequately managed bank holding companies to
acquire control of banks in any state. Thus, assuming it is judged to be
adequately capitalized and adequately managed, Pacific Century is no longer
disabled by the BHC Act from acquiring control of banks in any state, and bank
holding companies whose operations are principally conducted in states other
than Hawaii are no longer disabled by the BHC Act from acquiring control of
Pacific Century. An interstate acquisition may not be approved, however, if
immediately before the acquisition the acquirer controls an FDIC-insured
institution or branch in the state of the institution to be acquired, and if
immediately following the acquisition the acquirer would control 30 percent or
more of the total FDIC-insured deposits in that state; but a state may waive
the 30 percent limitation by statute, regulation, or order, or by certain
nondiscriminatory administrative approvals.
Beginning on June 1, 1997, an adequately capitalized and adequately managed
bank may apply for permission to merge with an out-of-state bank and convert
all branches of both parties into branches of a single bank. States retain the
authority to prohibit such mergers if between September 29, 1994 and June 1,
1997 they enacted a statute expressly prohibiting them and that statute
applies equally to all out-of-state banks. An interstate merger may not be
approved, however, if immediately before the acquisition the acquirer controls
an FDIC-insured institution or branch in the state of the institution to be
acquired, and if immediately following the acquisition the acquirer would
control 30 percent or more of the total FDIC-insured deposits in that state;
but a state may waive the 30 percent limitation by statute, regulation, or
order, or by certain nondiscriminatory administrative approvals. Banks are
also permitted to open newly established branches in any state that expressly
permits all out-of-state banks to open newly established branches, if the law
applies equally to all banks.
Hawaii has enacted a statute, effective June 1, 1997, which authorizes out-
of-state banks to engage in "interstate merger transactions" with (mergers and
consolidations with and purchases of all or substantially all of the assets
and branches of) Hawaii banks, following which any such out-of-state bank may
operate the branches of the Hawaii bank it has acquired. The Hawaii bank must
have been in continuous operation for at least five years prior to such an
acquisition, unless it is subject to or in danger of becoming subject to
certain types of supervisory action. This statute does not permit out-of-state
banks to acquire branches of Hawaii banks
6
other than through an "interstate merger transaction" (except in the case of a
bank that is subject to or in danger of becoming subject to certain types of
supervisory action) nor to open branches in Hawaii on a de novo basis.
The BHC Act prohibits, with certain exceptions, Pacific Century from
acquiring direct or indirect control of more than 5% of the voting shares of
any company that is not a bank or bank holding company and from engaging
directly or indirectly in any activity other than those of banking, managing
or controlling banks or other subsidiaries authorized under the BHC Act, or
furnishing services to or performing services for its subsidiaries. Among the
permitted activities is the ownership of shares of any company the activities
of which the Board of Governors determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Board of Governors is required to weigh the expected
benefits to the public, such as greater convenience, increased competition, or
gains in efficiency, against the risks of possible adverse effects, such as
undue concentration of resources, decreased or unfair competition, conflicts
of interest, or unsound banking practices. The Board of Governors has adopted
regulations that specify various activities as being so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The exact nature and scope of such activities have been the subject of intense
national debate, and thus, they may change and become broader as they evolve
over time.
Under the policies of the Board of Governors, Pacific Century is expected to
act as a source of financial strength to its subsidiary banks and to commit
resources to support its subsidiary banks in circumstances where it might not
do so absent such a policy. It is the policy of the Board of Governors that in
serving as a source of strength to its subsidiary banks, a bank holding
company should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial adversity
and should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks.
In 1989 Congress expanded the authority of bank holding companies to acquire
savings associations, subject to approval by the Board of Governors. Bank
holding companies may acquire healthy as well as failed or failing savings
associations in any state. Congress in 1989 restructured the regulation of the
savings and loan industry and its deposit insurance and provided a new
regulatory structure for the resolution of troubled and insolvent savings
associations. Congress in 1989 also permitted the FDIC to impose cross-
guarantee liability on insured institutions for any cost or loss incurred by
the FDIC in connection with the default by, or assistance to, a commonly
controlled institution.
By virtue of Section 23A of the Federal Reserve Act and Section 18(j) of the
Federal Deposit Insurance Act, Pacific Century and its subsidiaries are
"affiliates" of Bank of Hawaii, CUB and PCB and are subject to the provisions
of Section 23A, which limit the amount of and require substantial security for
loans and extensions of credit by Bank of Hawaii, CUB or PCB to, and
investments in, Pacific Century or certain of its subsidiaries and the amount
of advances to third parties collateralized by the securities and obligations
of Pacific Century or certain of its subsidiaries. Sections 23A and 18(j) are
designed to assure that the capital of depository institutions such as Bank of
Hawaii, CUB and PCB is not put at risk to support their non-bank affiliates. A
similar provision, Section 11 of the Home Owners' Loan Act, subjects the
thrift subsidiaries of Pacific Century to essentially the same limitations in
their transactions with their "affiliates," including Pacific Century. Also,
Pacific Century and its subsidiaries are prohibited from engaging in certain
"tie-in" arrangements in connection with extensions of credit or provision of
property or services.
Bank of Hawaii is subject to supervision and examination by the FDIC and the
Department of Commerce and Consumer Affairs of the State of Hawaii. CUB is
subject to supervision and examination by the Board of Governors and the
California State Department of Financial Institutions and in certain respects
the FDIC. PCB is subject to supervision and examination by the Comptroller of
the Currency and in certain respects the FDIC.
Banks, including Bank of Hawaii, CUB and PCB, are subject to extensive
federal and (in the case of Bank of Hawaii and CUB) state statutes and
regulations that significantly affect their business and activities. Banks
must file reports with their regulators concerning their activities and
financial condition and obtain regulatory approval to enter into certain
transactions. Banks are also subject to periodic examinations by their
regulators to
7
ascertain compliance with various regulatory requirements. Other applicable
statutes and regulations relate to insurance of deposits, allowable
investments, loans, acceptance of deposits, trust activities, mergers,
consolidations, payment of dividends, capital requirements, reserves against
deposits, establishment of branches and certain other facilities, foreign and
international operations, limitations on loans to one borrower and loans to
affiliated persons, and other aspects of the business of banks. Recent federal
legislation has instructed federal agencies to adopt standards or guidelines
governing banks' internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, compensation and benefits, asset quality, earnings and stock
valuation, and other matters. Similar provisions subject savings associations,
including First Federal and First Savings, to comparable requirements and
restrictions. Legislation adopted in 1994 gives the federal banking agencies
greater flexibility in implementing standards on asset quality, earnings, and
stock valuation. Regulatory authorities have broad authority to initiate
proceedings designed to prohibit banks and savings associations from engaging
in unsafe and unsound banking practices.
Bancorp Pacific, Inc., as a savings and loan holding company, is subject to
supervision by the Office of Thrift Supervision (OTS), and its thrift
subsidiaries are subject to supervision by the OTS and in certain respects the
FDIC. As owner of all of the stock of Bancorp Pacific, Inc., Pacific Century
is itself registered with the OTS as a savings and loan holding company and in
such capacity is subject to various OTS regulations, examinations, and
reporting requirements.
The Home Owners' Loan Act and regulations issued thereunder generally
prohibit a savings and loan holding company, directly or indirectly, from (i)
acquiring control of an insured savings institution or its holding company
without prior OTS approval; (ii) acquiring more than 5% of the voting shares
of an insured savings institution or holding company that is not a subsidiary;
or (iii) acquiring control of an uninsured savings institution. No director or
officer of a savings and loan holding company or person owning or controlling
more than 25% of its voting shares may, except with the prior approval of the
OTS, acquire control of an insured savings association that is not a
subsidiary of that holding company.
Congress adopted legislation in 1991 to permit the FDIC to increase deposit
insurance assessment rates for insured banks and to levy emergency special
assessments against insured institutions. In response, the FDIC adopted a
premium schedule under which the actual assessment rate for a particular
institution depends in part upon the risk classification the FDIC assigns to
that institution. The FDIC may raise an institution's insurance premiums or
terminate insurance altogether upon a finding that the institution has engaged
in unsafe and unsound practices. On September 30, 1996, legislation was signed
into law to recapitalize the Savings Association Insurance Fund administered
by the FDIC (SAIF), which generally insures the deposits of savings
associations. The legislation required the FDIC to impose a one-time special
assessment on SAIF-assessable deposits, including the deposits of First
Federal and First Savings. This one time assessment was accrued and paid in
1996.
The Federal Deposit Insurance Corporation Improvements Act of 1991 (FDICIA)
requires the federal banking regulators to take "prompt corrective action" in
respect to depository institutions that do not meet minimum capital
requirements and imposes certain restrictions upon banks which meet minimum
capital requirements but are not "well capitalized" for purposes of FDICIA.
FDICIA generally prohibits a depository institution from paying any dividend
or making any capital distribution or paying any management fee to its holding
company if the depository institution would thereafter be undercapitalized.
Undercapitalized institutions are subject to regulatory monitoring and may be
required to divest themselves of or liquidate subsidiaries. Holding companies
of such institutions may be required to divest themselves of such institutions
or divest themselves of or liquidate nondepository affiliates. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Further, a bank that is not well capitalized is generally subject to various
restrictions on "pass through" insurance coverage for certain of its accounts
and is generally prohibited from accepting brokered deposits and offering
interest rates on any deposits significantly higher than the prevailing rate.
Such banks and their holding companies are also required to obtain regulatory
approval before retaining senior executive officers.
8
Subject to certain exceptions, FDICIA (as modified in 1992) restricts
certain investments and activities as principal by state banks (including Bank
of Hawaii and CUB) and requires the federal banking regulators to prescribe
standards for extensions of credit secured by real estate or made to finance
improvements to real estate, loans to bank insiders, regulatory accounting and
reports, internal control reports, independent audits, and other matters, and
requires that insured depository institutions generally be examined on-site by
federal or state personnel at least once every twelve months.
Federal legislation enacted in 1992 affords the federal banking agencies
limited discretion to provide relief from certain regulatory requirements to
depository institutions doing business or seeking to do business in an
emergency or major disaster area. The Omnibus Budget Reconciliation Act of
1993 affects the amortization of intangible assets by banks, requires
securities dealers (including banks) to adopt mark-to-market accounting with
respect to certain of their securities in calculating income taxes, and
establishes a preference for depositors in liquidations of FDIC-insured banks.
Bills are now pending or expected to be introduced in the United States
Congress that contain proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. If enacted,
these bills could increase or decrease the cost of doing business, limit or
expand permissible activities (including activities in the insurance and
securities fields), or affect the competitive balance among banks, savings
associations, credit unions and other financial institutions. Some of these
bills would broaden the powers of bank holding companies, reduce regulatory
burdens on financial institutions, address aspects of competitive imbalance
between credit unions and other regulated financial institutions, promote more
open financial markets for U.S. banks and financial companies in foreign
nations, limit the prerogative of regulators to expand the range of
permissible activities for banks, particularly in the field of insurance,
eliminate or revise the features of the specialized savings-association
charter, permit affiliations among banks, insurance companies, and securities
firms or between banks and nonfinancial companies, and realign the structure
and jurisdiction of various financial institution regulatory agencies. Whether
or in what form any such legislation may be adopted or the extent to which the
business of Pacific Century might be affected thereby cannot be predicted.
ITEM 2. PROPERTIES
Pacific Century and its subsidiaries own and lease premises primarily
consisting of operating facilities, the majority of which are located in
Hawaii. Bank of Hawaii owns four significant properties, the largest of which
are condominium units in the Financial Plaza of the Pacific (FPP) in which the
Bank's main branch and administrative offices are located. Portions of the FPP
are owned in fee simple or leased. The capital leases are for portions (less
than 12%) of the FPP. Details of the capital leases are included in the long
term debt footnote. Additionally, Bank of Hawaii owns a two-story building
near downtown Honolulu which houses data processing and certain other
operational functions; a parcel of land in downtown Honolulu; and Hale O
Kapolei, a 248,000 square feet operations facility in the Kapolei area on
Oahu. Hale O Kapolei was completed and placed in service in 1995. Interest
expense of $1,500,000 was capitalized while Hale O Kapolei was under
construction in 1995. First Federal owns a five-story building in downtown
Honolulu that serves as its main branch and administrative offices.
ITEM 3. LEGAL PROCEEDINGS
Note J to the Audited Financial Statements on page 69.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1997 to a vote of
security holders through the solicitation of proxies or otherwise.
Executive Officers of Registrant:
NAME AGE POSITION
---- --- --------
Lawrence M. Johnson....... 57 Chairman and Chief Executive Officer of
Pacific Century and the Bank of Hawaii (the
Bank) since August 1994.
Richard J. Dahl........... 46 President of Pacific Century and the Bank
since August 1994; Chief Operating Officer
of Pacific Century since April 1997 and the
Bank since August 1995.
Alton T. Kuioka........... 54 Vice Chair of Pacific Century since April
1997; Vice Chair of the Bank since June
1994; Chief Lending Officer of Pacific
Century since April 1997 and the Bank since
August 1995.
Mary P. Carryer........... 50 Vice Chair of Pacific Century and the Bank
since November 1997.
Thomas C. Leppert......... 43 Vice Chair of Pacific Century since April
1997 to December 31, 1997; Vice Chair of
the Bank since December 1996 to December
31, 1997.
David A. Houle............ 50 Executive Vice President of Pacific Century
since April 1997; Treasurer and Chief
Financial Officer of Pacific Century since
December 1992; Executive Vice President and
Chief Financial Officer of the Bank since
February 1994.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Listing
The common stock of Pacific Century Financial Corporation, is traded over
the counter on the New York Stock Exchange and quoted daily in leading
financial publications.
NYSE Symbol: BOH
Market Prices, Book Values, and Common Stock Dividends--Table 2 on page 14.
ITEM 6. SELECTED FINANCIAL DATA
Year-End Summary of Selected Consolidated Financial Data--Table 24 on page
46.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PERFORMANCE HIGHLIGHTS
Pacific Century Financial Corporation (Pacific Century), formerly known as
Bancorp Hawaii, Inc., reported earnings of $139.5 million in 1997, up 4.8%
from $133.1 million reported in 1996. In 1995, net income was $121.8 million.
Basic earnings per share were $1.75 for 1997, compared to $1.63 in 1996 and
$1.46 in 1995. Diluted earnings per share in 1997 were $1.72, compared to
$1.62 and $1.45, in 1996 and 1995, respectively.
In 1997, return on average assets (ROAA) decreased slightly to 0.98% but
return on average equity (ROAE) improved to 12.57%. ROAA in 1996 was 1.00% and
ROAE was 12.43%.
Pacific Century has accounted for all of its business acquisitions under the
purchase method, which results in the recording of goodwill and other
intangible assets. These intangible assets are amortized over various periods
as a non-cash charge to operating income. Operating results under a tangible
performance basis excludes from reported earnings the after tax impact of
amortization of all intangibles, including goodwill. On a tangible performance
basis, Pacific Century's earnings were $147.7 million in 1997, $139.2 million
in 1996 and $127.3 million in 1995. On a per share basis, tangible diluted
earnings per share were $1.82 in 1997, compared to $1.69 and $1.51 in 1996 and
1995, respectively.
Tangible ROAA for Pacific Century was 1.05% in both 1997 and 1996 and 1.03%
in 1995. Tangible ROAE was 15.47%, 14.23%, and 13.62% in 1997, 1996, and 1995,
respectively.
Net interest income (on a taxable equivalent basis) increased 11.1% from
1996 to $537.2 million in 1997. Analyzing this increase, about $30.1 million
was attributed to an increase in average earning assets, while $23.7 million
was attributed to a widening in net interest margin from 3.90% in 1996 to
4.08% in 1997. Comparatively, net interest margin was 3.73% in 1995.
Total non-performing assets, plus accruing loans past due 90 days or more,
increased to $122.1 million, representing 1.29% of total loans at year-end
1997, compared to $117.9 million, or 1.36% of total loans reported at year-end
1996 and $77.6 million, or 0.95% of total loans at year-end 1995. The increase
in non-performing assets in 1997 is largely attributed to a $17.6 million
increase in the foreign loan category. As a percentage of outstanding loans,
non-performing assets increased to 1.02% as of year-end, up from 0.96% at
year-end 1996 and 0.70% at year-end 1995. Other real estate totaled $6.2
million at year-end 1997, down from $10.7 million at year-end 1996.
The reserve for loan losses totaled $174.4 million at the end of 1997,
representing 1.88% of loans outstanding, compared with $167.8 million and
1.97%, respectively at year-end 1996. Net charge-offs in 1997
11
were $30.2 million, or 0.34% of average loans, compared to net charge-offs of
$13.0 million, or 0.16% of average loans in 1996 and net charge-offs of $14.1
million in 1995, or 0.18% of average loans. In 1997, provisions for loan
losses of $30.3 million were charged to income, up from $22.2 million in 1996
and $17.0 million in 1995.
Presented in Table 1 are additional 1997 earnings measures and performance
ratios. Summarized below are significant events that occurred in 1997.
In 1997, Hawaii's economy remained stagnant continuing a multi-year trend
that began in the early 1990's. Since 1991, the growth in Hawaii's real gross
state product has averaged under 1%. The growth in Pacific Century's Hawaii
market is tied to the State's general economic well-being, and accordingly,
Hawaii's weak economy has limited the Company's operating performance in 1997.
By the end of 1997, an economic crisis had spread throughout much of Asia.
Many countries in the region experienced a significant devaluation of their
currency relative to the U.S. dollar, as well as higher interest rates and a
general tightening of credit. In 1997, Pacific Century recognized charge-offs
totaling $10.4 million relating to loans in Thailand and placed $17.6 million
in Thai loans on non-accrual. Asia continues to play an important part of
Pacific Century's longer term strategy of developing a comprehensive franchise
and customer base across the Pacific. Additional information regarding Asian
events are included in the International Operations section of this report.
Recognizing the risks of operating in only one economy, Pacific Century's
long standing strategy calls for expanding outside of Hawaii, with emphasis on
key Pacific locations. In 1997, Pacific Century further developed this
strategy by completing the following acquisitions in California, Arizona and
the South Pacific.
Pacific Century acquired CU Bancorp and its wholly owned subsidiary
California United Bank (CUB) in July 1997. The acquisition was accounted for
as a purchase. As of December 31, 1997, total assets of CUB was $797.1
million. CUB's net income for the six months of 1997 totaled $4.7 million, net
of goodwill amortization.
Additionally, Pacific Century Bank, N.A. (PCB), formerly First National Bank
of Arizona, completed in March 1997 its acquisition of four branches and
approximately $250 million in deposits in Arizona from Home Savings of
America.
In March 1997, Bank of Hawaii International, Inc. (a wholly owned subsidiary
of Bank of Hawaii) finalized its purchase of Indosuez Niugini Bank, Ltd.,
operating in Papua New Guinea. The name was changed to Bank of Hawaii (PNG)
Ltd. The acquisition was accounted for as a purchase. Bank of Hawaii (PNG)
Ltd. reported total assets of $80.3 million at year-end 1997 and net income of
$2.6 million for the ten-month period since the acquisition after considering
the amortization of goodwill.
The 1997 acquisitions affect the comparison between the amounts reported in
the 1997 consolidated financial statements and the corresponding amounts in
the 1996 statements. In addition, the May 1996 purchases of Banque de Tahiti
and Banque de Nouvelle Caledonie (renamed in 1997 to Bank of Hawaii-Nouvelle
Caledonie) also affect the comparability between these financial statements.
In December 1997, Pacific Century entered into a definitive purchase
contract to acquire, subject to regulatory approval, 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 December 31, 1997, total assets of Banque Paribas Pacifique and
Banque Paribas Polynesie were $292 million in the aggregate.
Pacific Century has agreed, subject to regulatory approval, to purchase
approximately $25 million in Bank of Queensland Convertible Notes. 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.
12
PERFORMANCE HIGHLIGHTS
TABLE 1
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
1997 1996 FIVE-
----------------- --------- YEAR
PERCENT COMPOUND
EARNINGS MEASURES AMOUNT CHANGE AMOUNT GROWTH
- ----------------- --------- ------- --------- --------
Net Income................................ $ 139.49 4.8% $ 133.12 1.8%
Basic Earnings Per Share.................. 1.75 7.4 1.63 2.9
Diluted Earnings Per Share................ 1.72 6.2 1.62 2.9
Average Assets............................ 14,242.3 7.1 13,295.2 4.1
Average Loans............................. 8,929.7 6.9 8,353.6 6.2
Average Deposits.......................... 9,260.4 13.3 8,172.8 1.9
Average Shareholders' Equity.............. 1,109.3 3.6 1,070.9 7.2
Excluding the Effects of Intangibles (1)
Tangible Net Income..................... 147.72 6.1 139.20
Tangible Basic Earnings Per Share....... 1.85 8.2 1.71
Tangible Diluted Earnings Per Share..... 1.82 7.7 1.69
FIVE-YEAR
PERFORMANCE RATIOS 1997 1996 AVERAGE
- ------------------ ----- ----- ---------
Return on Average Assets................................ 0.98% 1.00% 0.99%
Return on Average Equity................................ 12.57 12.43 12.77
Average Equity to Average Assets Ratio.................. 7.79 8.05 7.76
Loan Loss Reserve to Loans Outstanding.................. 1.88 1.97 1.89
Tier I Capital Ratio.................................... 9.34 10.57
Total Capital Ratio..................................... 11.65 12.96
Leverage Ratio.......................................... 7.21 7.98
Excluding the Effects of Intangibles (1)
Tangible Return on Average Assets..................... 1.05 1.05 1.04
Tangible Return on Average Equity..................... 15.47 14.23 14.82
- --------
(1) Intangibles include goodwill, core deposit and trust intangibles, and other
intangibles.
13
MARKET PRICES, BOOK VALUES AND COMMON STOCK DIVIDENDS
TABLE 2
MARKET PRICE (MP) RANGE HIGH MP AS
----------------------------- A PERCENT
YEAR/PERIOD HIGH LOW BOOK VALUE (BV) OF BV DIVIDEND
- ----------- ------ ------ --------------- ---------- --------
1993.......................... $17.96 $13.34 $11.00 163% $.45
====== ====== ====== === ====
1994.......................... $17.38 $12.07 $11.55 150% $.52
====== ====== ====== === ====
1995.......................... $18.57 $12.44 $12.76 146% $.54
====== ====== ====== === ====
1996.......................... $22.00 $16.57 $13.34 165% $.58
First Quarter................. 18.13 16.63 .14
Second Quarter................ 18.82 16.57 .14
Third Quarter................. 19.88 17.07 .15
Fourth Quarter................ 22.00 19.19 .15
1997.......................... $28.06 $20.31 $14.02 200% $.63
First Quarter................. 23.19 20.56 .15
Second Quarter................ 23.94 20.31 .15
Third Quarter................. 27.13 23.19 .16
Fourth Quarter................ 28.06 23.50 .17
PACIFIC CENTURY'S MARKETS
Pacific Century is the largest bank holding company headquartered in the
State of Hawaii. Pacific Century's oldest and largest market is Hawaii, where
operations are conducted primarily through its principal subsidiary Bank of
Hawaii. Bank of Hawaii was established 100 years ago in 1897 and remained an
entirely Hawaii based financial institution until 1959, when it opened its
first branch beyond Hawaii in which is now known as the Republic of the
Marshall Islands. Expansion has continued since then on a measured basis.
Today, Pacific Century provides services to a customer base that spans
12,000 miles between New York and Singapore and covers much of the South and
West Pacific. Pacific Century's focus is in four primary markets: Hawaii, the
Pacific, Asia, and the U.S. Mainland.
Hawaii Market
Bank of Hawaii is the largest financial institution in Hawaii offering a
wide array of financial products and services to individuals, businesses and
institutions. It is the only financial institution that has offices on every
major Hawaiian island. In Hawaii, Bank of Hawaii operates through 78 offices,
including both traditional full-service branches and in-store locations.
Pacific Century also conducts business in Hawaii through its subsidiary
First Federal Savings and Loan Association of America (First Federal). Of
First Federal's 21 branches, all but two are located on Oahu. First Federal's
focus is on the retail market offering a full line of deposit and residential
mortgage products and services.
Pacific Century's combined assets in the Hawaii market totaled $9.1 billion
at year-end 1997, compared to $8.8 billion at year-end 1996. Total loans in
Hawaii were $5.2 billion, as presented in Table 4, an increase of 2.0% from
the $5.1 billion reported at year-end 1996.
Over the years, Bank of Hawaii has been actively introducing new
electronically based banking products that provide enhanced customer
convenience and service. Additionally, the use of technology has also led to
the introduction of new value-added products. These products include: PC Home
Banking, Bankoh Bill Pay (an
14
electronic bill payment service), and various debit cards (Mileage Access
Card, the Access Card and Isle Pay cards).
In 1997, Bank of Hawaii expanded its ATM network to 480 machines, up from
401 machines at year-end 1996. ATM services have also increased, with many
ATMs having been enhanced to dispense postage stamps, gift certificates and
discount coupons.
Hawaii's overall economic condition has a substantial impact on Pacific
Century's performance. After less than 0.5% real annual gross state product
(GSP) growth from 1991-1995, Hawaii's GSP rose 0.9% during 1996. The current
consensus estimate among economists is for Hawaii's 1997 GSP to have remained
flat with zero growth estimated for 1998. Tourist arrivals totaled 6.9 million
in both 1995 and 1996, and is forecast to be about the same level in 1997.
Pacific Market
Pacific Century has maintained a presence in the Intra-Pacific region for
nearly four decades. This market has grown over the years and now spans island
nations across the South and West Pacific that have developed as participants
in the economic growth occurring within the Asia-Pacific Rim. Pacific Century
is the only United States financial organization to have such a broad presence
in this region.
Pacific Century serves the West Pacific through branches of both Bank of
Hawaii and First Savings and Loan Association of America (First Savings), a
wholly owned subsidiary of First Federal. Bank of Hawaii serves Guam through
three branches and also has branches in the Commonwealth of the Northern
Marianas Islands (Saipan), the Federated States of Micronesia (Yap, Pohnpei
and Kosrae), the Republic of the Marshall Islands (Majuro) and the Republic of
Palau (Koror). First Savings maintains branches in Guam and Saipan providing
retail deposit and mortgage lending products.
For financial reporting purposes, the West Pacific operations are considered
domestic, because the U.S. dollar is used as the currency in these locations.
Total assets in the West Pacific region were $916 million at year-end 1997,
compared to $874 million at year-end 1996. Loans as of year-end 1997 increased
to $768.0 million from $714.8 million last year, an increase of 7.4%.
The economic forecast for the West Pacific region is a mix of modest to
booming economies. Overall, these dollar denominated economies are expected to
grow at an average rate of 2% to 5% in 1998. Steady growth is anticipated in
Guam with more rapid growth projected in Saipan and Palau.
Pacific Century's presence in the South Pacific includes branches of Bank of
Hawaii and the subsidiary and affiliate banks owned by Bank of Hawaii
International, Inc. (BOHI). BOHI owns interests in Banque d'Hawaii (Vanuatu),
Ltd. (100%), Bank of Hawaii (PNG) Ltd. (100%), Banque de Tahiti (BDT) (92.4%)
and Bank of Hawaii-Nouvelle Caledonie (BHNC) (91.5%) all of which are included
in Pacific Century's consolidated financial statements. BOHI also has
investments in the National Bank of Solomon Islands (51%), Bank of Tonga (30%)
and Pacific Commercial Bank, Ltd. (43%) in Samoa, which are accounted for
under the equity method. Four branches of Bank of Hawaii are included in this
region: the three branches in Fiji and the American Samoa branch. Since the
American Samoa branch is U.S. dollar based, its operations are considered
domestic.
Total assets in the South Pacific region were $1.1 billion, down $0.1
billion from the same date a year ago.
Economic forecasts indicate overall growth in the South Pacific to be
between 2% and 5%. Modest growth is anticipated in most countries in this
region. The economies in French Polynesia and Samoa are in the upper range of
forecasted growth. However, given the size of these economies, the growth in
monetary terms is modest.
15
Asia Market
Asia is a market that Pacific Century has developed over the last 19 years.
Pacific Century operates in Asia through branches in Hong Kong, South Korea,
Singapore, Taiwan and Japan and a representative office with extensions in the
Philippines.
Pacific Century's business focus in Asia is correspondent banking and trade
financing. The actual activities include letters of credit, remittance
processing, foreign exchange, cash management, export bill collection, and
working capital loans. The lending emphasis is on short-term loans based on
cash flows. Pacific Century provides correspondent banking and lending
services to the Asia market through its International Banking Group. Pacific
Century's network of locations in the Pacific and its presence on the U.S.
Mainland help customers facilitate the flow of business and investment
transactions across Asia-Pacific.
The Asia Market reported $1.7 billion in total assets at year-end 1997,
compared to $1.8 billion a year ago. Pacific Century's strategy for this
region continues to emphasize a trade finance focus.
Countries in the Asian Rim experienced a high level of financial turmoil in
1997. Confidence in Asian equity markets and currencies waned, adversely
affecting currency exchange rates and values. Pacific Century's exposure in
this region is discussed further in the International Operations section of
this report.
U.S. Mainland Market
The U.S. Mainland market provides opportunities to grow both loans and
deposits. Pacific Century's interest in this market continues to focus on
distinct groups of customers. Specific markets presenting opportunities have
been targeted in Arizona and California. Additional lending activity through
Bank of Hawaii has targeted Fortune 1000 companies, businesses that have
interests in the Pacific, and businesses in the media and communications
industry.
Both CUB and PCB focus on the small and middle market commercial customers,
while also serving retail borrowers and depositors in their respective
markets. In 1997, PCB acquired approximately $250 million in deposits and four
branch locations in Arizona from Home Savings of America.
Both the Arizona and California economies remain robust, with growth
expected through 1998. The healthy Southwest economic environment is
consistent with growth opportunities for both CUB and PCB.
In aggregate, total assets in the U.S. Mainland market were $2.2 billion at
December 31, 1997. The increase from the $1.4 billion reported a year ago is
largely due to the acquisition of CUB in 1997 and the 1997 deposit acquisition
by PCB.
The following sections provide additional information on Pacific Century's
1997 financial position, operating results, lending activities and market
risks:
. Risk Elements Involved in Lending Activities
. Asset and Liability Management
. Capital Adequacy
. Market Risk Exposures
. Liquidity Management
. Control of Net Overhead
. Income Taxes
. Fourth Quarter Results and Other Matters
16
RISK ELEMENTS INVOLVED IN LENDING ACTIVITIES
Risk Profile of Lending Activity
Loans comprise the largest category of earnings assets for Pacific Century
and produce the highest level of earnings. At year-end 1997, loans outstanding
grew to $9.5 billion, a 9.2% increase from $8.7 billion at year-end 1996. Most
of this growth is attributed to the July 1997 acquisition of CUB. Without the
CUB acquisition, loans would have increased 3.9% in 1997. This modest rate of
internal loan growth is reflective of the continued adverse impact of Hawaii's
weak economy.
It is Pacific Century's objective to maintain a diverse loan portfolio in
order to spread credit risk and reduce exposure to economic downturns that may
impact different markets and industries. Pacific Century regularly monitors
the composition of its loan portfolio to ensure diversity as to loan type,
geographic distribution, and industry and borrower concentration.
Table 3 presents the composition of the loan portfolio by major loan
categories. For 1997, much of the year-to-year growth in commercial and
industrial loans, construction and commercial mortgages, and installment loans
are attributed to the 1997 CUB acquisition. Although real estate loans still
continue to comprise the largest portion of the loan portfolio, their level of
representation has declined slightly from 47.1% of total loans at year-end
1996 to 46.1% at year-end 1997. Included in real estate loans at December 31,
1997, were $2.7 billion in residential mortgages that comprised 62.6% of total
real estate loans, down from 64.3% at the prior year-end.
LOAN PORTFOLIO BALANCES
TABLE 3
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic Loans
Commercial and Industrial....... $2,104.3 $1,806.7 $1,902.2 $1,830.8 $1,709.2
Real Estate
Construction--Commercial...... 268.1 212.3 199.6 114.2 141.9
--Residential........... 12.9 23.6 33.7 39.7 51.4
Mortgage--Commercial.......... 1,354.5 1,227.8 1,308.8 1,241.0 1,230.6
--Residential............. 2,738.9 2,635.3 2,702.4 2,849.9 2,454.0
Installment..................... 891.6 849.3 817.3 741.6 676.2
Lease Financing................. 519.4 437.8 392.9 378.1 401.6
-------- -------- -------- -------- --------
Total Domestic.............. 7,889.7 7,192.8 7,356.9 7,195.3 6,664.9
Foreign Loans
Banks and Other Financial
Institutions................... 207.7 281.8 268.7 299.0 295.8
Commercial and Industrial....... 1,074.9 923.2 513.6 364.2 259.4
All Others...................... 326.1 301.5 13.2 33.5 38.3
-------- -------- -------- -------- --------
Total Foreign............... 1,608.7 1,506.5 795.5 696.7 593.5
-------- -------- -------- -------- --------
Total Loans................. $9,498.4 $8,699.3 $8,152.4 $7,892.0 $7,258.4
======== ======== ======== ======== ========
Commercial and Industrial Loans
At December 31, 1997, commercial and industrial loans (C&I) totaled $2.1
billion, up 16.5% from year-end 1996. The proportion of C&I loans to the total
loan portfolio increased to 22.2% at year-end 1997, from 20.8% at year-end
1996. This growth is attributed to the CUB acquisition in 1997 and reflects
CUB's emphasis on commercial lending. At the end of 1997 CUB reported $274.7
million in C&I loans.
17
C&I loans consist of loans made for commercial, financial, and agricultural
purposes and involves lending on both a secured and unsecured basis.
Collateral requirements vary, but are based on the Company's underwriting and
collateral policies to ensure that consistent safety standards are maintained.
The geographic distribution of C&I loans is concentrated in Hawaii and the
U.S. Mainland with 34.9% and 54.3%, respectively, as of year-end 1997. In
Hawaii, Pacific Century is a major commercial lender and maintains a
significant presence throughout the State. Pacific Century provides continuing
support to the entire business community by offering a wide range of products
and services. At year-end 1997, C&I loans in Hawaii totaled $735.1 million. In
the U.S. Mainland market, C&I lending totaled $1.1 billion at year-end 1997,
up $266.1 million from year-end 1996, and is comprised largely of loans to
Fortune 1000 companies and the media and communication industry, as well as
loans that were originated by Pacific Century's two U.S. Mainland subsidiary
banks.
Real Estate Loans
At year-end 1997, Pacific Century's total real estate loans were $4.4
billion, 6.7% higher than year-end 1996. This portfolio consists of loans that
are secured by residential as well as commercial properties.
The largest component of the real estate loan portfolio consists of loans
secured by 1-to-4 family residential properties. At $2.7 billion, this group
grew $103.6 million from year-end 1996, and represented 28.8% of total loans
outstanding at year-end 1997. More than 90% of these loans are secured by real
estate in Hawaii (see Table 4). Pacific Century originates residential
mortgages on both a fixed-rate and adjustable-rate basis. Most of the fixed-
rate products are sold in the secondary mortgage market, while adjustable-rate
mortgages are held in the Company's loan portfolio. Included in the
residential mortgage total at year-end 1997 were $96.2 million in available
for sale loans. At December 31, 1997, approximately 68% of the 1-to-4 family
residential mortgage portfolio were underwritten on a floating rate basis. The
average loan size in the residential loan portfolio was $138,000 at year-end
1997, and on average these loans have been outstanding for about 6 years. The
Company has targeted residential mortgage lending in Hawaii as an attractive
line of business for growth. In 1997, residential first mortgage originations
by Pacific Century in Hawaii totaled $570.8 million, representing about 15% of
the State's total first mortgage originations. Comparatively, Pacific Century
originated $821.6 million and $572.8 million in first mortgage loans in 1996
and 1995, respectively.
Also included in the residential real estate portfolio are home equity
credit lines. The total available credit under these lines was $480.6 million
at year-end 1997, compared to $489.7 million at year-end 1996. Outstandings
declined to $263.7 million at year-end 1997 from $285.6 million at year-end
1996. These credit lines are underwritten based on the borrower's repayment
ability rather than the value of the underlying property. Home equity credit
lines are generally limited to 75% of the value of the collateral less the
amount of prior liens.
The commercial real estate portfolio (excluding construction loans) totaled
$1.4 billion at year-end 1997, an increase of 10.3% over year-end 1996.
Approximately 70% of these loans were secured by commercial real estate in
Hawaii. The commercial real estate portfolio is diversified in the type of
property securing the obligations.
Total commercial construction loans increased to $268.1 million at year-end
1997, compared to $212.3 million at year-end 1996. These loans are secured
primarily by properties located in Hawaii, which accounted for 71.6% of such
loans at December 31, 1997. Because construction lending is considered to
generally involve greater risk than financing on improved properties, Pacific
Century utilizes higher underwriting and disbursement standards that are
designed to compensate for this risk. The majority of these loans are
underwritten based on the projected cash flows of the completed project,
rather than the value of the underlying property, and generally require a
committed source for permanent financing. At year-end 1997 the commercial
construction portfolio consisted of the following major categories: tract and
land development for residential housing, $129.4 million; hotels, $39.6
million; retail facilities, $31.1 million; commercial offices, $14.9 million
and industrial projects, $7.4 million.
18
Consumer Loans
Total consumer loans (excluding residential mortgages and home equity loans)
increased to $891.6 million, up 5.0% from year-end 1996. These loans are shown
in Table 3 under the caption "Installment." At year-end 1997, consumer loans
consisted of credit cards and consumer installment loans (e.g., auto loans,
unsecured credit lines, and guaranteed student loans) representing 32% and
68%, respectively, of the total loans in this category.
The credit card portfolio balance was $288.7 million at year-end 1997, a
decrease of 0.8% from year-end 1996. At year-end 1997, 1.8% of the credit card
portfolio (based on balances) was more than 90 days delinquent, compared to
0.8% and 1.4%, at year-end 1996 and 1995, respectively. At year-end 1997,
Pacific Century's base of credit cardholders decreased about 3.7% to 159,700
cardholders from year-end 1996. The decline in cardholders is attributed to
higher than expected card cancellations with respect to a co-branded credit
card program. As a result of the high level of cancellations, a charge-off of
approximately $1.6 million in capitalized card origination costs was
recognized in 1997.
Leasing Activities
At year-end 1997, leases outstanding increased to $519.4 million, up 18.6%
from year-end 1996. Pacific Century's lease portfolio is diversified,
consisting primarily of leases on equipment, autos, trucks, ships, aircraft,
and computers. Also during 1997, a leveraged lease matured and a gain of $4.4
million (pre-tax) was recognized upon the sale of the underlying equipment.
International Lending
Pacific Century's international 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
foreign loans are short-term and are largely based on the Company's
traditional focus on relationships. Foreign loans at the end of 1997 totaled
$1.6 billion, an increase of 6.8% over year-end 1996. At year-end 1997 foreign
loans represented 16.9% of the total loan portfolio, down from 17.3% at year-
end 1996.
At December 31, 1997, foreign loans in the South Pacific totaled $766.8
million, an increase of 3.4% over $741.3 million at year-end 1996. This
increase is accounted for by the March 1997 acquisition of Indosuez Niugini
Bank, Ltd. in Papua New Guinea, which had $30.6 million in loans outstanding
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 total loans of $684.9 million at the end of the current year.
At December 31, 1997, outstanding loans to borrowers in Asia totaled $818.6
million, compared to $738.6 million at December 31, 1996. In addition,
outstanding commitments represented by open letters of credit and bankers
acceptances relative to borrowers in Asia were approximately $388.5 million at
year-end 1997. Additional information on Asian credit exposure and recent
Asian economic events are contained in the International Operations section of
this report.
Geographic Distribution of the Loan Portfolio
A geographic distribution of the loan portfolio is presented in Table 4
based on the geographic location of borrowers. Although loans in Hawaii still
constitute the highest geographic lending concentration, their proportion to
the total loan portfolio has declined to 54.8% at December 31, 1997 from 58.6%
at December 31, 1996. For 1997, the U.S. Mainland figures in Table 4 are
affected by the loans acquired in the CUB merger. At year-end 1997, the
percentage of U.S. Mainland loans to total loans increased to 19.7% from 15.3%
at year-end 1996.
The amounts reflected in the West Pacific include Guam and other locations
in the region where both Bank of Hawaii and First Savings and Loan Association
of America, have branches. Loan balances in the South Pacific reflect the U.S.
dollar equivalent balances of subsidiary banks in French Polynesia, New
Caledonia, Papua
19
New Guinea, Vanuatu and Bank of Hawaii branches in Fiji. Loan balances in
American Samoa make up the remainder of loans in the South Pacific region.
GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO (1)
TABLE 4
TOTAL
YEAR-END WEST SOUTH U.S. ASIA
1997 HAWAII PACIFIC PACIFIC MAINLAND AND OTHER
-------- -------- ------- ------- -------- ---------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial............. $2,104.3 $ 735.1 $203.5 $ 11.1 $1,142.5 $ 12.1
Real Estate
Construction--
Commercial........... 268.1 191.9 0.2 -- 76.0 --
--Residential... 12.9 9.5 3.4 -- -- --
Mortgage--Commercial.. 1,354.5 946.2 186.8 6.0 215.5 --
--Residential..... 2,738.9 2,484.6 223.0 2.0 29.3 --
Installment............. 891.6 684.6 145.6 23.3 38.1 --
Foreign................. 1,608.7 23.3 -- 766.8 -- 818.6
Lease Financing......... 519.4 125.4 5.5 -- 368.1 20.4
-------- -------- ------ ------ -------- ------
Total............... $9,498.4 $5,200.6 $768.0 $809.2 $1,869.5 $851.1
-------- -------- ------ ------ -------- ------
Percentage of Total..... 100.0% 54.8% 8.1% 8.5% 19.7% 8.9%
======== ======== ====== ====== ======== ======
- --------
(1)Loans classified based upon geographic location of borrowers.
Non-Performing Assets and Past Due Loans
Non-performing assets (NPA) consist of non-accrual loans, restructured loans
and foreclosed real estate. These assets, which generally have more than a
normal risk of loss, totaled $97.1 million at year-end 1997, compared to $83.2
million at the end of 1996, and $56.9 million at the end of 1995. Pacific
Century has generally maintained a level of NPA to outstanding loans of around
1%. In 1997, this ratio rose to 1.02%. Comparatively the ratio was 0.96% and
0.70% for 1996 and 1995, respectively. Table 6 presents the Company's NPA and
ratio of NPA to total loans for the last five years.
In order to minimize credit losses, Pacific Century strives to maintain high
underwriting standards, identify potential problem loans early and work with
borrowers to cure delinquencies. Moreover, charge-offs, if required, are taken
promptly and reserve levels are maintained at adequate levels. Pacific
Century's policy is to place loans on non-accrual status when a loan is over
90 days delinquent, unless collection is likely based on specific factors such
as the type of borrowing agreement and/or collateral. At the time a loan is
placed on non-accrual, all accrued but unpaid interest is reversed against
current earnings.
Total non-accrual loans rose to $89.3 million at year-end 1997, up 23.2%
over year-end 1996. This increase is attributed to higher non-accrual balances
in the real estate and foreign loan categories. At year-end 1997, non-accrual
loans secured by real estate totaled $36.7 million, or 41.1% of total non-
accruals loans; with the majority of these loans secured by residential real
estate in Hawaii. Non-performing residential mortgages (excluding construction
loans) totaled $32.9 million at year-end 1997, compared to $23.6 million at
year-end 1996. The year-over-year increase in non-accrual residential
mortgages was $9.3 million in 1997 reflecting the weak economy and declining
real estate prices in Hawaii. Although residential mortgage non-accruals have
increased, charge-offs on these loans have remained stable at $1.9 million for
both 1997 and 1996.
Because residential mortgages are secured by real estate, the credit risk on
these loans are lower than unsecured lending. Most of the Company's
residential loans are owner-occupied first mortgages and were underwritten to
provide a loan-to-value ratio of no more than 80% at origination.
Additionally, the risk in this portfolio is also moderated by the smaller
average loan balance compared to commercial lending.
20
At December 31, 1997, non-performing foreign loans were $39.9 million,
compared to $22.3 million at December 31, 1996 and were minimal at December
31, 1995. The rise in non-performing foreign loans in 1997, is primarily
related to the recent turmoil in the economies of certain Asian countries.
Approximately, $17.6 million in Thai loans were reported as non-accrual at
December 31, 1997, following a partial charge-off and proposed restructuring
of these loans. At year-end 1997, BDT and BHNC reported $20.5 million in NPA
compared with $22.3 million at year-end 1996. Accruing loans past due 90 or
more days for BDT and BHNC were $5.8 million at year-end 1997, compared to
$9.5 million at year-end 1996. Additional information relative to foreign
loans is contained in the International Operations section of this report.
C&I loans that were classified as non-performing totaled $10.7 million or
11.0% of total NPA at year-end 1997, a decline from $20.9 million and $16.9
million at year-end 1996 and 1995, respectively.
Foreclosed real estate declined to $6.2 million at year-end 1997, from $10.7
million at year-end 1996. This decline is attributed to the sale of a $6.6
million residential property in November 1997 at a modest gain. At December
31, 1997, the foreclosed real estate portfolio consisted of 32 properties,
mostly located in Hawaii. The largest property represented 18.4% of the total.
In 1997, net gains on the sale of foreclosed real estate were $523,000,
compared to net losses of $380,000 in 1996 and $276,000 in 1995.
Accruing loans past due 90 days or more totaled $25.0 million at year-end
1997, a decline of $9.7 million from $34.7 million reported at year-end 1996.
This decline is mainly due to lower delinquencies in the commercial real
estate loan portfolio and, to a lesser extent, in improvements in the foreign
and installment loan portfolios. Table 6 presents a five-year history of
accruing loans that were past due 90 days or more.
In 1997, Pacific Century recorded $3.7 million in cash basis interest on
loans that were previously on non-accrual or charged-off, compared to $2.6
million in 1996. In 1997, $204,000 in interest reversals were recorded on non-
accrual loans, an increase from the $216,000 reversed in 1996 and $156,000 in
1995.
FOREGONE INTEREST ON NON-ACCRUALS
YEARS ENDED DECEMBER 31
TABLE 5
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
(IN MILLIONS OF DOLLARS)
Interest Income Which Would Have Been
Recorded Under Original Terms:
Domestic................................. $6.6 $6.3 $7.6 $5.4 $5.3
Foreign.................................. 2.4 2.3 -- 0.1 --
Interest Income Recorded During the Current
Year on Non-Accruals:
Domestic................................. 1.5 1.6 0.6 1.0 0.9
Foreign.................................. 0.5 0.6 -- 0.1 --
21
NON-PERFORMING ASSETS AND ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
TABLE 6
1997 1996 1995 1994 1993
------ ------ ----- ----- -----
(IN MILLIONS OF DOLLARS)
Non-Accrual Loans
Commercial and Industrial............... $ 10.7 $ 20.9 $16.9 $20.3 $15.7
Real Estate
Construction.......................... 1.0 0.3 0.3 1.5 17.7
Commercial............................ 2.8 4.1 14.9 14.1 7.8
Residential........................... 32.9 23.6 14.7 15.1 16.4
Installment............................. 2.0 1.3 0.8 0.5 0.5
Foreign................................. 39.9 22.3 -- 0.3 --
Leases.................................. -- -- -- 0.8 0.3
------ ------ ----- ----- -----
Subtotal............................ 89.3 72.5 47.6 52.6 58.4
------ ------ ----- ----- -----
Restructured Loans
Commercial and Industrial............... -- -- -- -- 1.0
Real Estate
Commercial............................ 1.6 -- -- -- 5.3
------ ------ ----- ----- -----
Subtotal............................ 1.6 -- -- -- 6.3
------ ------ ----- ----- -----
Foreclosed Real Estate
Domestic................................ 6.2 10.7 9.3 0.6 4.1
Foreign................................. -- -- -- -- --
------ ------ ----- ----- -----
Subtotal............................ 6.2 10.7 9.3 0.6 4.1
------ ------ ----- ----- -----
Total Non-Performing Assets....... $ 97.1 $ 83.2 $56.9 $53.2 $68.8
====== ====== ===== ===== =====
Accruing Loans Past Due 90 Days or More
Commercial and Industrial............... 2.0 2.0 1.8 1.1 0.4
Real Estate
Construction.......................... -- 0.4 -- -- --
Commercial............................ 0.6 6.8 2.4 0.7 1.9
Residential........................... 7.3 6.8 5.8 3.9 4.1
Installment............................. 7.6 9.0 10.5 5.9 3.5
Foreign................................. 7.4 9.5 -- -- --
Leases.................................. 0.1 0.2 0.2 -- 0.1
------ ------ ----- ----- -----
Subtotal............................ 25.0 34.7 20.7 11.6 10.0
------ ------ ----- ----- -----
Total............................. $122.1 $117.9 $77.6 $64.8 $78.8
====== ====== ===== ===== =====
Ratio of Non-Performing Assets to Total
Loans.................................... 1.02% 0.96% 0.70% 0.67% 0.95%
Ratio of Non-Performing Assets and
Accruing Loans Past Due 90 Days or More
to Total Loans........................... 1.29% 1.36% 0.95% 0.82% 1.09%
====== ====== ===== ===== =====
Summary of Loan Loss Experience
The reserve for loan losses represents the aggregate reserves of Pacific
Century's banking subsidiaries that are available to absorb future losses on
loans. Additions to the reserve are provided through provisions for loan
losses that are charged against earnings.
At the end of 1997, the reserve for loan losses was $174.4 million, an
increase of $6.6 million over the prior year level of $167.8 million. The 1997
reserves included $11.5 million of acquired reserves from CUB.
22
The ratio of reserves to loans outstanding at year-end 1997 was 1.88%,
compared with 1.97% at year-end 1996 and 1.90% at year-end 1995. Loan loss
provisions in 1997 were $30.3 million, $8.1 million higher than the prior year
level of $22.2 million. Net charge-offs in 1997 were $30.2 million or 0.34% of
average loans, compared to $13.0 million, or 0.16% of average loans in 1996
and $14.1 million, or 0.18% of average loans in 1995. A summary of the
activity in the reserve for loan losses for the last five years is presented
in Table 7.
Pacific Century maintains the reserve for loan losses at a level that it
believes is adequate to absorb estimated future losses on all loans. The
reserve level is determined based on a continuing assessment of problem
credits, recent loss experience, changes in collateral values, and current and
anticipated economic conditions. Pacific Century's credit administration
procedures emphasizes the early recognition and monitoring of loans in order
to control delinquencies and minimize losses. For larger commercial credits, a
line driven loan grading system is used. These loans are generally graded
annually by the lending officer and an independent evaluation of this process
is performed by the Credit Review department to ensure reasonable and timely
grades.
At year-end 1997, the reserve for loan losses provided a coverage of 180% of
non-performing loans, compared to a 202% coverage at year-end 1996.
Additionally, the ratio of year-end reserves to gross charge-off was 3.2 times
and 3.8 times for 1997 and 1996, respectively.
Gross charge-offs in 1997 totaled $55.1 million, representing 0.62% of
average loans outstanding. Comparatively, the ratio was 0.53% and 0.36%,
respectively at year-end 1996 and 1995. Gross charge-offs as a percentage of
the reserve for loan losses were 31.6%, 26.3% and 18.4% in 1997, 1996 and
1995, respectively. Average annual charge-offs for the five years ended in
December 1997 was $43.6 million.
The increase in gross charge-offs in 1997 is attributed to a rise in the
foreign category to $10.6 million from $0.9 million in 1996. Of this amount,
approximately $10.4 million relates to charge-offs recognized on Thai loans.
Excluding foreign loans, charge-offs in 1997 were mostly concentrated in the
installment and commercial loan categories. In 1997, charge-offs on
installment loans declined slightly to $28.1 million from $28.9 million in
1996, while charge-offs on commercial loans reflected a $4.0 million increase
to $12.7 million.
In 1997, recoveries of previously charged-off loans declined to $24.9
million. Recoveries were $31.1 million in 1996 and $13.8 million in 1995. Most
of the 1997 recoveries were concentrated in the C&I portfolio. The level of
C&I recoveries in 1997 include $11.7 million collected from the $45 million
charged-off in 1992 and 1993 relating to one credit. All charge-offs relating
to that credit have now been fully recovered.
23
SUMMARY OF LOAN LOSS EXPERIENCE
TABLE 7
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Average Amount of Loans
Outstanding................. $8,929.7 $8,353.6 $7,654.9 $7,393.7 $6,991.0
======== ======== ======== ======== ========
Balance of Reserve for Loan
Losses at Beginning of
Period...................... $ 167.8 $ 152.0 $ 148.5 $ 125.3 $ 128.6
Loans Charged-Off
Commercial and Industrial.. 12.7 8.7 7.8 11.3 43.9
Real Estate--
Construction............. -- -- 2.1 0.1 0.5
Mortgage--Commercial..... 1.3 3.3 2.3 3.5 2.7
--Residential.... 1.9 1.9 1.1 0.7 0.4
Installment................ 28.1 28.9 13.3 8.7 8.6
Foreign.................... 10.6 0.9 0.9 0.7 7.5
Leases..................... 0.5 0.4 0.4 0.4 2.1
-------- -------- -------- -------- --------
Total Charged-Off............ 55.1 44.1 27.9 25.4 65.7
Recoveries on Loans
Previously Charged-Off
Commercial and Industrial.. 16.4 21.8 6.1 19.5 3.9
Real Estate--
Construction............. -- 0.7 -- 0.2 --
Mortgage--Commercial..... 0.6 1.1 1.4 0.9 0.7
--Residential.... 1.0 0.4 0.1 0.2 0.3
Installment................ 6.3 4.7 3.3 3.2 3.2
Foreign.................... 0.6 1.8 1.9 -- --
Leases..................... -- 0.6 1.0 0.8 0.1
-------- -------- -------- -------- --------
Total Recoveries............. 24.9 31.1 13.8 24.8 8.2
-------- -------- -------- -------- --------
Net Loans Charged-Off........ (30.2) (13.0) (14.1) (0.6) (57.5)
Provisions Charged to
Operating Expenses.......... 30.3 22.2 17.0 21.9 54.2
Other Net Additions(1)....... 6.5 6.6 0.6 1.9 --
-------- -------- -------- -------- --------
Balance at End of Period..... $ 174.4 $ 167.8 $ 152.0 $ 148.5 $ 125.3
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to
Average Loans Outstanding... 0.34% 0.16% 0.18% -- 0.82%
Ratio of Reserve to Loans
Outstanding................. 1.88% 1.97% 1.90% 1.92% 1.76%
======== ======== ======== ======== ========
The details of the Foreign Reserve for Loan Losses, which are included in the
table above, are:
Beginning Balance............ $ 28.4 $ 15.1 $ 12.9 $ 10.5 $ 14.2
Charge-Offs................ 10.6 0.9 0.9 0.7 7.5
Recoveries................. 0.6 1.8 1.9 -- --
-------- -------- -------- -------- --------
Net Loans Charged-Off...... (10.0) 0.9 1.0 (0.7) (7.5)
Provisions Charged to
Operating Expenses........ 17.6 5.8 0.6 1.2 3.8
Other Net Additions (1).... (5.0) 6.6 0.6 1.9 --
-------- -------- -------- -------- --------
Ending Balance............... $ 31.0 $ 28.4 $ 15.1 $ 12.9 $ 10.5
======== ======== ======== ======== ========
- --------
(1) Includes balance transfers, reserves acquired, and foreign currency
translation adjustments.
24
ALLOCATION OF LOAN LOSS RESERVE
TABLE 8
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
RESERVE OUTSTANDING RESERVE OUTSTANDING RESERVE OUTSTANDING RESERVE OUTSTANDING RESERVE OUTSTANDING
AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT AMOUNT LOAN AMOUNT
------- ----------- ------- ----------- ------- ----------- ------- ----------- ------- -----------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial........ $ 57.5 2.73% $ 60.0 3.32% $ 61.9 3.25% $ 59.5 3.25% $ 51.2 3.00%
Real Estate--
Construction...... 4.2 1.50 4.5 1.91 4.2 2.00 2.6 2.00 4.3 2.51
Commercial........ 21.8 1.61 18.5 1.51 19.6 1.50 18.6 1.50 15.4 1.25
Residential....... 13.8 0.50 20.0 0.76 20.5 0.75 21.6 0.75 18.5 0.75
Installment........ 34.9 3.91 26.0 3.06 20.4 2.50 18.5 2.50 13.5 2.00
Foreign............ 31.0 1.93 28.4 1.89 15.1 1.90 12.9 1.85 10.5 1.77
Leases............. 2.6 0.50 2.0 0.46 2.0 0.50 1.9 0.50 2.0 0.50
Not allocated...... 8.6 -- 8.4 -- 8.3 -- 12.9 -- 9.9 --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
$174.4 1.88% $167.8 1.97% $152.0 1.90% $148.5 1.92% $125.3 1.76%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
International Operations
Pacific Century maintains an extensive international presence in the Asia-
Pacific region that provides opportunities to take part in lending,
correspondent banking and deposit-taking activities in these markets. These
activities are facilitated through Bank of Hawaii branches, a representative
office with extensions and full service subsidiary/affiliate banks. This
network of locations across the Asia-Pacific has enabled customers to
participate in trade and investment between the U.S. Mainland, Asia, and the
Pacific Islands.
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 controls its exposure to the risks of international lending
by evaluating the political and economic factors that bear on a country's
ability to meet its foreign debt obligations. Based on these analyses, maximum
credit limits (both short and long term) are established for each country to
ensure diversity and minimize and control risk in the international portfolio.
These credit limits are reviewed on a regular basis so that risks and
exposures are understood and properly assessed. Pacific Century's strategy for
foreign lending is to deal, on a direct basis, primarily with countries and
companies that have a strong trade and investment interest in Hawaii and Asia-
Pacific region. Pacific Century divides its international business into two
areas: the International market, which is Asia related and the Pacific market,
which comprises the South and West Pacific Divisions.
Through the International Banking Group of Bank of Hawaii, Pacific Century
offers international banking services to its corporate and financial
institution customers in most of the major Asian financial centers with
support from its New York and Honolulu operations. Bank of Hawaii's offices
that offer these services are located in Hong Kong, the Philippines (Manila,
Cebu, and Davao), South Korea, Singapore, Japan, Taiwan, and New York. The
International Banking Group of Bank of Hawaii continues to focus on
correspondent banking and trade-related financing activities and lending to
customers with which it has a direct relationship.
The South Pacific Region 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. In March 1997, Pacific Century
expanded its investments in this region by acquiring Indosuez Niugini Bank,
Ltd.
25
in Papua New Guinea. Additionally, Bank of Hawaii has interests in affiliate
banks located in Tonga, Samoa and Solomon Islands.
The Banks in the French territories are currently operating under a
management contract with Credit Lyonnais. The managers of those areas have a
direct reporting line to the South Pacific Manager at Bank of Hawaii. The
operations and the clients of the subsidiaries and affiliates are evaluated on
a similar basis to those in branch offices. Exposure to foreign currency
fluctuations is limited as each subsidiary/affiliate primarily deals in its
own currency. The largest South Pacific subsidiary operations are in the
French territories of French Polynesia and New Caledonia.
Bank of Hawaii's West Pacific Division provides commercial and retail
banking services through branches in the Commonwealth of the Northern Mariana
Islands (Saipan), the Federated States of Micronesia (Pohnpei, Kosrae, and
Yap), Guam, the Republic of the Marshall Islands (Majuro), and the Republic of
Palau (Koror). Since the U.S. dollar is used in these locations, the Company's
operations in the West Pacific are not considered foreign for financial
reporting purposes and are included in domestic operations.
Table 9 provides a summary of assets, liabilities, operating revenue, and
net income for Pacific Century's International Operations for the last three
years. Net income for 1997 increased to $10.2 million, compared to the $8.1
million in 1996. This represents a return on assets for these operations of
0.34% in 1997, up from the 0.29% in 1996.
SUMMARY OF INTERNATIONAL ASSETS, LIABILITIES, AND INCOME AND PERCENT OF
CONSOLIDATED TOTALS
TABLE 9
1997 1996 1995
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS OF DOLLARS)
Average Assets............... $3,005.1 21.1% $2,752.6 20.7% $1,724.3 13.9%
Average Liabilities.......... 2,523.3 19.2 2,687.6 22.0 1,585.2 13.9
Operating Revenue............ 215.9 17.3 192.1 16.8 107.9 10.3
Net Income................... 10.2 7.3 8.1 6.1 4.8 3.9
Cross-border interbank placements and loans accounted for $835 million at
year-end 1997. Table 10 presents, for the last three years, a geographic
distribution of international assets for which Pacific Century has cross-
border exposure exceeding 0.75% of total assets.
26
GEOGRAPHIC DISTRIBUTION OF CROSS-BORDER INTERNATIONAL ASSETS (1)
TABLE 10
GOVERNMENT BANKS AND
AND OTHER OTHER FINANCIAL COMMERCIAL
OFFICIAL INSTITUTIONS AND INDUSTRIAL
INSTITUTIONS (2) COMPANIES TOTAL
------------ --------------- -------------- --------
(IN MILLIONS OF DOLLARS)
at December 31, 1997
South Korea.............. $ -- $ 219.7 $193.5 $ 413.2
Japan.................... -- 253.1 136.8 389.9
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
====== ======== ====== ========
at December 31, 1996
Japan.................... $ -- $ 196.0 $115.8 $ 311.8
South Korea.............. -- 253.0 122.4 375.4
Taiwan................... -- 108.6 18.2 126.8
Thailand................. -- 74.2 47.4 121.6
All Others............... 1.0 300.0 69.8 370.8
------ -------- ------ --------
$ 1.0 $ 931.8 $373.6 $1,306.4
====== ======== ====== ========
at December 31, 1995
Japan.................... $ -- $ 296.4 $198.1 $ 494.5
South Korea.............. -- 181.8 125.8 307.6
Taiwan................... -- 260.0 11.0 271.0
Thailand................. -- 169.7 -- 169.7
All Others............... 1.0 253.2 68.5 322.7
------ -------- ------ --------
$ 1.0 $1,161.1 $403.4 $1,565.5
====== ======== ====== ========
- --------
(1) 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. 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 1997, 1996
and 1995 were $419.9 million, $327.9 million and $293.2 million,
respectively.
An economic crisis that began in Thailand in mid-Spring of 1997 spread
throughout Asia by the end of the year. In June of 1997, the Bank of Thailand
suspended the operations of sixteen finance companies. The action helped to
intensify the economic crisis throughout Asia. With the suspension of another
forty-two finance companies in August, coupled with continuing pressure on the
Thai currency, the Thai Baht, a greater erosion of confidence took place.
As the crisis spread, many countries throughout the region began to see a
sharp depreciation of their currencies against the U.S. dollar. Those that did
not felt significant pressure to devalue. By year-end, currencies such as the
Korean Won, the Indonesian Rupiah, and the Thai Baht had depreciated
substantially. The rapid rate of depreciation had an immediate negative impact
on those companies in Asia that maintained liabilities in dollars.
Additionally, the crisis of confidence also led to a general tightening of
credit across the region that made it increasingly difficult for businesses to
obtain credit. A devalued currency along with much higher levels of interest
rates created a greater level of tension and uncertainty to the Asia markets.
Those countries that have been affected the most from the current turmoil are
Thailand, Indonesia and South Korea. More tangibly, local
27
companies and financial institutions required greater amounts of local
currencies to service debt. The tighter credit environment escalated to a
general liquidity crisis that required the intervention of the International
Monetary Fund in Thailand, Indonesia and South Korea.
The countries in Asia to which Pacific Century maintains its largest credit
exposure on a cross border basis include South Korea, Japan and Taiwan. At
December 31, 1997, cross border credit exposure in South Korea, Japan and
Taiwan were $413.2 million, $389.9 million, and $120.8 million, respectively.
In Japan and Taiwan, despite pressures from neighboring countries, the high
levels of foreign exchange reserves have helped to maintain economic
stability.
With current on-going implementation of an International Monetary Fund
restructuring plan, South Korea is working to bring back confidence and
liquidity to the country. Our experience and history in the country give us
confidence in our ability to manage our exposure during this difficult period.
Pacific Century's lending in South Korea is focused on trade-related
activities and is mostly short-term in nature. Most of the South Korean loans
are to financial institutions (e.g., national and regional banks) or to the
top five major conglomerates.
Pacific Century's cross-border credit exposure in Thailand and Indonesia
were $74.4 million and $21.1 million, respectively, at year-end 1997. In 1997,
Pacific Century recognized charge-offs totaling $10.4 million in connection
with Thai loans. The charge-offs that related to finance companies were
largely based on a proposed workout plan that is being arranged by the Thai
government to restructure these loans. After the charge-off, these loans
totaled $17.6 million and were reported as non-accrual loans as of December
31, 1997.
Pacific Century believes that it has prudently managed its exposure in Asia
and has dealt with the known situations. However, because of the uncertainties
inherent in Asia, it is difficult to accurately predict the impact of the
turmoil in Asia on the economies of Hawaii and the U.S. Mainland, changes in
currencies of Pacific region countries relative to the U.S. dollar, changes in
interest rates, and changes in applicable U.S. and foreign regulatory and
monetary policy. Moreover, it is not known what, if any, further impact there
will be on Pacific Century's Asia exposure.
ASSET AND LIABILITY MANAGEMENT
At Pacific Century, assets and liabilities are managed to maximize long term
risk adjusted returns to shareholders. Pacific Century's asset and liability
management process involves measuring, monitoring, controlling and managing
financial risks that can significantly impact the Company's financial position
and operating results. Financial risks in the form of capital adequacy,
interest rate sensitivity, foreign currency exchange fluctuations and
liquidity are balanced with expected returns to maximize earnings performance
and shareholder value, while limiting the volatility of each.
Capital Adequacy
Pacific Century manages its capital level to optimize shareholder value,
support asset growth, provide protection against unforeseen losses and comply
with regulatory requirements. Capital levels are reviewed periodically
relative to the Company's risk profile and current and projected economic
conditions. Pacific Century's objective is to hold sufficient capital on a
regulatory basis to exceed the minimum guidelines of a well capitalized
institution.
At year-end 1997, Pacific Century's shareholders' equity grew to $1.12
billion, an increase from $1.07 billion at year-end 1996. The source of growth
in shareholders' equity in 1997 included retention of earnings, issuance of
common stock under the dividend reinvestment plan and various stock-based
employee benefit plans, and shares issued to acquire CU Bancorp. Offsetting
these increases were cash dividends paid of $49.7 million, shares repurchased
of $142.5 million, and net unrealized valuation adjustments of $21.0 million.
In December 1997, the Company's common shares outstanding were increased
through a two-for-one stock split. All historical per share data in this
report have been restated to reflect the stock split.
28
Pacific Century's regulatory capital ratios at year-end 1997 were: Tier 1
Capital Ratio of 9.34%, Total Capital Ratio of 11.65%, and Leverage Ratio of
7.21%. All three capital ratios exceeded the minimum threshold levels that
were established in 1993 by federal bank regulators to qualify an institution
as well capitalized. The minimum regulatory standards to qualify as well
capitalized are as follows: Tier 1 Capital 6%; Total Capital 10%; and the
Leverage Ratio 5%. There are certain financial and regulatory benefits of
maintaining a well capitalized status. Financial institutions that are
designated as well capitalized pay lower FDIC deposit insurance premiums and
are subject to fewer regulatory restrictions on certain activities. Table 11
presents a five-year history of activities and balances in Pacific Century's
capital accounts along with key capital ratios.
In December 1996, Pacific Century completed a $100 million 8.25% Capital
Securities offering that was issued through Bancorp Hawaii Capital Trust I, a
newly organized grantor trust. The capital securities mature in 30 years and
bear cumulative dividends at 8.25% payable semi-annually. Proceeds from this
issue were used for general corporate purposes. These capital securities
qualify as Tier I Capital for regulatory accounting purposes, but are
classified as long-term debt in the statement of condition.
In order to maintain its capital position at a desired level, Pacific
Century has repurchased shares, over the past few years, under various stock
repurchase programs. Under these programs, approximately 2.9 million shares in
1997 and 1.8 million shares in 1996 were repurchased. Pacific Century also
purchases shares in the open market for use in employee stock-based benefit
and dividend reinvestment plans. However, due to the uncertainties of the
impact of the economic turmoil in Asia, share repurchase activities have been
suspended.
29
EQUITY CAPITAL
TABLE 11
1997 1996 1995 1994 1993
--------- --------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Source of Common Equity
Net Income................. $ 139.5 $ 133.1 $ 121.8 $ 117.7 $ 132.6
Dividends Paid............. (49.7) (47.4) (45.2) (44.0) (38.4)
Dividend Reinvestment
Program................... 6.8 6.8 7.1 7.4 7.7
Stock Issued for
Acquisition............... 108.4 -- -- -- --
Stock Repurchases.......... (142.5) (70.4) (40.0) (44.3) (2.0)
Other (1).................. (11.4) (10.4) 43.9 (8.1) 9.9
--------- --------- -------- -------- --------
Annual Increase in Equity.. $ 51.1 $ 11.7 $ 87.6 $ 28.7 $ 109.8
========= ========= ======== ======== ========
Year-End Common Equity..... $ 1,117.2 $ 1,066.1 $1,054.4 $ 966.8 $ 938.1
Add: 8.25% Capital
Securities of
Bancorp Hawaii
Capital Trust I... 100.0 100.0 -- -- --
Minority Interest.. 5.8 9.3 -- -- --
Less: Intangibles........ 180.9 68.9 60.2 64.6 72.0
Unrealized
Valuation
Adjustments....... 5.5 2.2 11.3 (17.3) 3.9
--------- --------- -------- -------- --------
Tier I Capital............. 1,036.6 1,104.3 982.9 919.5 862.2
Allowable Loan Loss
Reserve................. 139.2 131.1 120.2 111.1 100.2
Subordinated Debt........ 118.7 118.7 118.7 118.6 124.6
Investment in
Unconsolidated
Subsidiary.............. (1.9) -- -- -- --
--------- --------- -------- -------- --------
Total Capital......... $ 1,292.6 $ 1,354.1 $1,221.8 $1,149.2 $1,087.0
========= ========= ======== ======== ========
Risk Weighted Assets....... $11,098.6 $10,452.1 $9,587.0 $8,848.6 $7,990.4
========= ========= ======== ======== ========
Key Ratios
Growth in Common Equity.... 4.8% 1.1% 9.1% 3.1% 13.3%
Average Equity/Average
Assets Ratio.............. 7.79% 8.05% 8.28% 7.71% 7.09%
Tier I Capital Ratio....... 9.34% 10.57% 10.25% 10.39% 10.79%
Total Capital Ratio........ 11.65% 12.96% 12.74% 12.99% 13.60%
Leverage Ratio............. 7.21% 7.98% 7.82% 7.28% 6.89%
- --------
(1) Includes profit sharing; stock options and directors' restricted shares
and deferred compensation plans and unrealized valuation adjustments for
investment securities and foreign currency translation.
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 will modify balance sheet
positions or direct the use of derivative instruments as market conditions
dictate.
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 the Company's normal business activities of making loans and
taking deposits. Many other factors also affect the Company's exposure to
changes in interest rates. These factors
30
include general economic and financial conditions, customer preferences, and
historical pricing spread relationships.
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.
These estimates are based on a large number of 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 the 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.
Table 12 presents as of December 31, 1997, the estimate of the change in NII
from a gradual 200 basis point increase or decrease in interest rates, moving
in parallel fashion over the entire yield curve, over the next 12-month period
relative to what the NII would have been if interest rates did not change. 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.
Pacific Century also measures the market value of equity (MVE) sensitivity
to complement the results from the NII simulation model. The MVE model
measures the net present value of all future cash flows for each asset,
liability, and off-balance sheet position based on the implied forward yield
curve. This model therefore, measures the exposure to interest rate changes
for a longer period than the 12-months time frame of the NII simulation model.
There are some limitations to the results from the MVE model. These
limitations include factors such as the following: liquidity and credit risk
are not considered in valuing the various on- and off-balance sheet positions;
maturity and cash flow assumptions are made for indeterminate maturity assets
and deposits; and future balance sheet changes from shifting customer
preferences or discretionary management responses are not factored into this
analysis.
Table 12 presents, as of December 31, 1997, the estimate from the MVE model
of the change in MVE from an immediate 200 basis point increase or decrease in
interest rates, moving in parallel fashion over the entire yield curve
relative to what the MVE would have been if interest rates did not change. The
resulting estimate in MVE exposure is well within the approved ALCO guidelines
and, similar to the NII simulation results, reflects a balance sheet exposure
that is slightly liability sensitive.
MARKET RISK EXPOSURE TO INTEREST RATE CHANGES
TABLE 12
INTEREST
RATE
CHANGE
(IN BASIS
POINTS)
---------
-200 +200
---- ----
Estimated Exposure at December 31, 1997, as a:
Percent of Net Interest Income............................ 2.3% (2.0)%
Percent of Market Value of Equity......................... 1.2% (9.6)%
In managing interest rate risks, the Company 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, as detailed in Note O to the consolidated financial
statements, 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.
31
Foreign Currency Risk Pacific Century's broad area of operations throughout
the South Pacific and the Asian Rim has the potential to expose the Company 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 as disclosed in Note O to the
consolidated financial statements. By policy, 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 Asian Rim. These investments
are designed to diversify the Company's total balance sheet exposure. While a
portion of the capital investment in Tahiti and New Caledonia is hedged by a
$43 million borrowing denominated in French Francs, as outlined in Note G to
the consolidated financial statements, the rest of these capital positions 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. The
Company 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. In other words, a loss greater than VAR has
approximately a 5% probability of occurring.
Table 13 represents as of December 31, 1997 the foreign currency exposure,
as measured by the VAR, of the Company's net investment in subsidiaries and
branch operations that are denominated in a foreign currency.
MARKET RISK EXPOSURE FROM CHANGES IN FOREIGN EXCHANGE RATES
TABLE 13
1997
---------------
BOOK VALUE-AT-
VALUE RISK
----- ---------
(IN MILLIONS
OF DOLLARS)
Net Investments in Foreign Subsidiaries and Branches
Japanese Yen............................................. $11.0 $ 1.9
Korean Won............................................... 29.5 23.0
Pacific Franc (1)........................................ 24.3 3.7
Other.................................................... 29.5 8.9
----- -----
Total.................................................. $94.3 $37.5
===== =====
- --------
(1)Net of a $43 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 measure of foreign
currency risk. These transactions are executed on behalf of customers and for
the Company'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, the Company uses
the VAR methodology described above. The VAR measurement for trading
activities as of year-end 1997 continues to be immaterial.
32
CONSOLIDATED AVERAGE BALANCES, INCOME AND EXPENSE
SUMMARY, AND YIELDS AND RATES
(TAXABLE EQUIVALENT)
TABLE 14
1997 1996 1995
-------------------------- ------------------------- -------------------------
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE EXPENSE RATES
--------- -------- ------- --------- ------- ------- --------- ------- -------
(IN MILLIONS OF DOLLARS)
Earning Assets
Interest-Bearing
Deposits.............. $ 497.8 $ 33.9 6.80% $ 579.9 $ 42.0 7.24% $ 645.7 $ 39.4 6.11%
Investment
Securities--Held to
Maturity
--Taxable............ 1,208.9 81.1 6.70 1,078.1 70.4 6.53 1,516.5 92.3 6.09
--Tax-Exempt......... 12.5 1.8 14.55 13.0 1.8 14.08 15.9 2.1 13.25
Investment
Securities--Available
for Sale.............. 2,452.0 158.9 6.48 2,288.7 148.0 6.46 1,639.0 107.9 6.58
Funds Sold............. 76.4 3.8 4.99 92.1 4.0 4.39 68.5 3.8 5.57
Loans (1)
--Domestic........... 7,389.4 620.5 8.40 7,099.9 579.7 8.17 6,908.9 572.8 8.29
--Foreign............ 1,540.3 129.2 8.39 1,253.7 107.6 8.58 746.0 51.5 6.90
Loan Fees.............. 34.3 29.7 28.5
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total Earning
Assets............ 13,177.3 1,063.5 8.07 12,405.4 983.2 7.93 11,540.5 898.3 7.78
Cash and Due From Banks. 545.1 462.8 460.6
Other Assets............ 519.9 427.0 389.1
--------- --------- ---------
Total Assets....... $14,242.3 $13,295.2 $12,390.2
========= ========= =========
Interest-Bearing
Liabilities
Domestic Deposits
--Demand............. $ 1,945.3 52.9 2.72 $1,726.6 47.2 2.73 $1,752.4 50.9 2.91
--Savings............ 865.5 21.4 2.48 937.0 23.7 2.53 1,058.5 30.6 2.89
--Time............... 2,858.7 157.0 5.49 2,465.0 133.5 5.42 1,839.9 98.5 5.36
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total Domestic..... 5,669.5 231.3 4.08 5,128.6 204.4 3.98 4,650.8 180.0 3.87
Foreign Deposits
--Time Due to Banks.. 731.1 44.0 6.01 733.5 46.4 6.33 652.7 37.8 5.79
--Other Time and
Savings............. 1,079.0 48.2 4.47 745.0 37.9 5.09 329.5 21.7 6.57
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total Foreign...... 1,810.1 92.2 5.09 1,478.5 84.3 5.70 982.2 59.5 6.06
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total Deposits..... 7,479.6 323.5 4.33 6,607.1 288.7 4.37 5,633.0 239.5 4.25
Short-Term Borrowings... 2,856.3 156.4 5.48 2,809.6 150.2 5.35 3,155.1 174.0 5.52
Long-Term Debt.......... 725.5 46.4 6.39 1,029.2 60.9 5.91 866.8 54.6 6.29
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total Interest-
Bearing
Liabilities....... 11,061.4 526.3 4.76 10,445.9 499.8 4.78 9,654.9 468.1 4.85
--------- -------- ----- --------- ------ ----- --------- ------ -----
Net Interest Income..... 537.2 3.31 483.4 3.15 430.2 2.93
----- ----- -----
Spread on Earning
Assets................. 4.08% 3.90% 3.73%
----- ----- -----
Demand Deposits
--Domestic............. 1,516.8 1,371.5 1,391.6
--Foreign.............. 264.0 194.2 11.8
--------- --------- ---------
Total Demand
Deposits.......... 1,780.8 1,565.7 1,403.4
Other Liabilities....... 290.8 212.7 305.9
Shareholders' Equity.... 1,109.3 1,070.9 1,026.0
--------- --------- ---------
Total Liabilities &
Equity............ $14,242.3 $13,295.2 $12,390.2
========= ========= =========
Provision for Loan
Losses................. 30.3 22.2 17.0
Net Overhead............ 288.0 256.8 218.0
-------- ------ ------
Income Before Income
Taxes.................. 218.9 204.4 195.2
Provision for Income
Taxes.................. 78.5 70.2 71.8
Tax Equivalency
Adjustment (2)......... 0.9 1.1 1.6
-------- ------ ------
Net Income.............. $ 139.5 $133.1 $121.8
======== ====== ======
- --------
(1) Includes non-accrual loans.
(2) Based upon a statutory tax rate of 35%.
33
Liquidity Management
Liquidity is managed to ensure that Pacific Century has continuous access to
sufficient, reasonably priced funding to conduct its business in a normal
manner. The Company's ALCO monitors sources and uses of funds and modifies
asset and liability positions as liquidity requirements change. This process
combined with Pacific Century's ability to raise funds in money and capital
markets and through private placements provides flexibility in managing the
exposure to liquidity risk.
A primary source of funding at Pacific Century comes from deposits. For
1997, average deposits increased to $9.3 billion from $8.2 billion for 1996.
Table 22 presents the average deposits by category. The year-to-year increase
reflects the positive impact from the acquisition of deposits by PCB during
the first quarter of 1997 and Pacific Century's acquisition of CUB during
1997's third quarter.
Pacific Century's balance sheet is unique given the high level of state and
local government funding. Historically, these governmental entities have
provided a stable source of funds. Over the years, much of this funding has
been converted to Securities Sold Under Agreements to Repurchase (Repos).
Repos are supported by the same type of collateral that supports governmental
deposits, but are not insured by the FDIC. At year-end 1997, repos totaled
$2.3 billion compared to $2.1 billion at year-end 1996 and $1.9 billion at
year-end 1995.
During 1997, Pacific Century issued commercial paper only in the Hawaii
marketplace. To further enhance liquidity, Pacific Century also maintains
access to the mainland wholesale commercial paper market through a pre-
selected issuing agent. At year-end 1997 commercial paper outstanding totaled
$104.9 million, compared to $69.7 million at year-end 1996.
Pacific Century maintains a line of credit for working capital purposes. The
line is for $35 million and is subject to annual renewals. Fees are paid on
the unused balance of the line. During 1997, the line was not drawn upon.
Bank of Hawaii, First Federal and First Savings are all members of the
Federal Home Loan Bank of Seattle (FHLB). FHLB provides these institutions
with an additional source of short to intermediate term funding. At year-end
1997, Bank of Hawaii had outstanding debt to the FHLB of $65 million, as
compared to $125 million at year-end 1996. First Federal and First Savings
also decreased their borrowings from the FHLB to $238 million at year-end 1997
as compared to $273 million at year-end 1996. Borrowings from the FHLB are
collateralized by mortgage loans and FHLB stock.
Long term debt on December 31, 1997 totaled $0.7 billion, compared to $0.9
billion at year-end 1996, and $1.1 billion at year-end 1995. Certain amounts
of the long-term debt were private placements, which totaled $150 million,
$110 million, and $60 million at year-ends 1997, 1996, and 1995, respectively.
Pacific Century's access to such private placement counterparties enhances its
balance sheet liquidity. In 1997, Pacific Century negotiated several private
placement borrowings totaling $90 million. The proceeds were primarily used to
finance the CUB acquisition. These borrowings were issued for a seven year
term on a floating rate basis.
Additionally, Bank of Hawaii maintains a $1.0 billion revolving medium term
note program. Notes outstanding under this facility decreased to $25.0 million
at year-end 1997 from $350.0 million at year-end 1996, and $849.7 million at
year-end 1995.
Moody's Investors Services and Standard and Poor's downgraded the long and
short-term debt ratings of Pacific Century and its subsidiary, Bank of Hawaii
on January 30, 1998 and February 4, 1998, respectively. Both rating agencies
cited Pacific Century's exposures to Asian events as the primary reason for
their downgrade. See International Operations section for further discussion
on the Asia economic crisis.
34
Control of Net Overhead
Pacific Century primarily utilizes the net overhead ratio and efficiency
ratio to measure efficiency. The net overhead ratio is defined as non-interest
expense to non-interest income (without securities transactions). In 1997,
Pacific Century's net overhead ratio was 2.58, compared to 2.58 and 2.53 in
1996 and 1995, respectively.
The efficiency ratio is the percentage of non-interest expense to net
operating revenue (net interest income plus non-interest income before
securities transactions). In 1997, Pacific Century's efficiency ratio was
66.0%, compared to 65.3% and 63.6% for 1996 and 1995, respectively.
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 date coding practices in both software and hardware that
used two-digit numbers, rather than four-digit numbers to represent years. If
not corrected, systems that use the two-digit format will be unable to
correctly distinguish the date after December 31, 1999. This problem could
cause these systems to fail or provide incorrect information.
Pacific Century has made the identification and resolution of Year 2000
exposures the top priority of the Company. A task force 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;
implementing solutions (e.g. rewriting program code, upgrading software and
hardware, replacing systems, and obtaining vendor certifications); testing
changes made to software and hardware; and formulating contingency plans.
As of December 31, 1997, Pacific Century completed its identification
process and has compiled a comprehensive inventory of assets and systems with
Year 2000 exposure. In the process of accumulating this inventory, the size,
complexity and required resources have been assessed for all critical systems.
In Pacific Century's case, very few of its core systems (less than 25%) were
developed internally. Instead, most systems were purchased from outside
vendors. Therefore, Pacific Century must rely on these vendors to make the
necessary modifications to their systems and provide a certification of the
system's compliance with Year 2000 issues. Moreover, Pacific Century must
review each vendor's Year 2000 software upgrade, incorporate customized
software changes, if any, modify system interfaces, and perform validation
testing to ensure that the system will operate properly in the year 2000.
Although all Year 2000 issues are being addressed, the Company has
identified its most critical systems and has established priorities to provide
greater assurance that these systems will be Year 2000 compliant in a timely
manner. Pacific Century's goal is to complete all Year 2000 changes for
business critical systems by December 31, 1998. However, for a few systems
that were purchased from outside vendors, the Year 2000 resolution will extend
into the first half of 1999.
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, the Company is formulating contingency plans to assure an orderly
transition to the millennium.
Pacific Century initially estimated the total cost of its Year 2000 project
in the range of $30 million. These costs include estimates for employee
compensation, consultants, and software and hardware expenses. Year 2000
related costs are expensed as incurred and approximately $3.2 million was
expensed in 1997. As the Year 2000 project progresses, the Company's 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.
35
Non-Interest Income For 1997, total non-interest income was $187.8 million,
compared to $164.5 million in 1996 and $146.1 million in 1995. Non-interest
income in 1997 increased 14.2% from 1996. The comparison of non-interest
income between 1997 and 1996 is affected by the acquisitions of BDT and BHNC
(May 1996), CUB (July 1997), and Bank of Hawaii (PNG), Limited (March 1997).
For 1997, BDT and BHNC contributed $17.6 million in non-interest income
compared to $12.8 million in 1996. CUB and Bank of Hawaii (PNG), Limited
reported combined non-interest income of $5.5 million for the year. Table 15
presents the details of non-interest income for the last five years. Trust
operations, electronic financial services, insurance and annuity sales, and
brokerage sales continue to grow, although at varying rates.
Trust income for 1997 totaled $52.2 million, up from $49.8 million in 1996
and $49.5 million in 1995. For the last two years, the growth rate has been
affected by aggressive competition from non-Hawaii based asset management
companies. During 1997, Hawaiian Trust Company, Limited was merged into Bank
of Hawaii, and, in connection therewith, its name was changed to Pacific
Century Trust (PCT). This merger provides synergism to grow both bank and
trust products through coordinated marketing and packaged services. While
trust income showed a 4.8% increase in 1997, total trust assets administered
by PCT increased to $12.5 billion at year-end 1997, up from $11.4 billion at
year-end 1996 and $11.2 billion at year-end 1995. Activity in Pacific
Century's family of mutual funds has continued to grow, increasing to $2.6
billion at year-end 1997, from $2.2 billion at year-end 1996.
Service charges on deposit accounts increased to $29.4 million, compared to
$26.7 million in 1996 and $25.9 million in 1995. The acquisitions accounted
for the increase between 1996 and 1997. Pacific Century regularly reviews its
fee schedules (including exchange and service charges on deposit accounts) to
assure competitive pricing and acceptable levels of profitability.
Fees, exchange and other service charges increased to $67.1 million in 1997,
from $58.9 million in 1996 and $47.3 million in 1995. Approximately $4.8
million of the increase was due to the acquisitions. Pacific Century's
involvement in trade finance in Asia has steadily increased through its
network of offices and branches in the area. Reflecting the continuing
increase in international activity, fees for letters of credit, export bills,
and acceptances increased to $11.1 million in 1997, compared to $10.1 million
and $8.8 million in 1996 and 1995, respectively. Also, related to
international activity, profits on foreign currency increased to $12.2 million
in 1997, compared to $8.9 million in 1996 and $6.5 million in 1995. The recent
financial and economic issues arising in Asia (see International Operations)
have impacted currency exchange rates and may affect the level of future fee
income.
Mortgage servicing fees increased to $7.1 million in 1997 from $6.6 million
in 1996 and $4.3 million in 1995. This increase reflects Bank of Hawaii's
continued emphasis on residential mortgage lending and secondary market sales
activities. Pacific Century's mortgage servicing portfolio grew to $1.7
billion at year-end 1997.
Also included in fees, exchange and other service charges are fees earned
through Pacific Century's ATM network. During 1997, Pacific Century expanded
its ATM network, ending the year with 480 machines, an increase from 401 at
year-end 1996. The fees generated by this network totaled $9.6 million in
1997, $8.6 million in 1996, and $7.7 million in 1995. The majority of Pacific
Century's ATMs are located in Hawaii (403) with 30 in the Western Pacific, 24
in the South Pacific and 23 on the U.S. Mainland. ATM usage has increased
steadily over the years averaging more than 1.9 million transactions per month
in 1997, compared to more than 1.7 million transactions per month in 1996.
Other operating income ended 1997 at $36.0 million, up from $27.7 million in
1996 and $21.0 million in 1995. In 1997, the acquisitions contributed $0.7
million in incremental fees. During the fourth quarter, a leveraged lease
matured and the underlying equipment was sold. The sale resulted in a gain of
$4.4 million and was recognized in other operating income. With a high level
of recoveries recorded, cash basis interest totaled $3.7 million in 1997,
compared to $2.6 million in 1996, and $1.3 million reported in 1995. The
income recorded
36
as cash basis generally includes interest collected on loans written-off or
interest collected on non-accrual loans that relate to prior years.
Sales of investment securities in 1997 resulted in a net securities gain of
$3.1 million (pre-tax), compared to net gains of $1.4 million and $2.5 million
in 1996 and 1995, respectively.
NON-INTEREST INCOME
TABLE 15
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
Trust Income............... $ 52.2 + 4.8% $ 49.8 + 0.6% $ 49.5 $ 48.6 $ 40.9
Service Charges on Deposit
Accounts.................. 29.4 + 10.1 26.7 + 3.1 25.9 28.3 26.5
Fees, Exchange and Other
Service Charges
Card Fees............... 13.2 + 23.4 10.7 + 46.6 7.3 8.3 7.4
Letters of Credit and
Acceptance Fees......... 11.1 + 9.9 10.1 + 14.8 8.8 7.8 7.3
Profit on Foreign
Currency................ 12.2 + 37.1 8.9 + 36.9 6.5 4.3 4.6
ATM...................... 9.6 + 11.6 8.6 + 11.7 7.7 6.6 5.3
Mortgage Servicing Fees.. 7.1 + 7.6 6.6 + 53.5 4.3 2.9 2.4
Exchange Fees............ 4.2 + 23.5 3.4 - 12.8 3.9 4.0 2.9
Payroll Services......... 1.6 - 33.3 2.4 + 14.3 2.1 2.1 1.8
Cash Management.......... 0.8 -- 0.8 - 20.0 1.0 1.1 1.1
Other Fees............... 7.3 - 1.4 7.4 + 29.8 5.7 5.4 4.9
Other Income............... 32.3 + 28.7 25.1 + 28.1 19.6 23.4 17.9
Cash Basis Interest........ 3.7 + 42.3 2.6 +100.0 1.3 3.4 2.4
Investment Securities Gains
(Losses).................. 3.1 +121.4 1.4 - 44.0 2.5 (17.8) 10.0
------ ------ ------ ------ ------ ------ ------
Total.................. $187.8 + 14.2% $164.5 + 12.6% $146.1 $128.4 $135.4
====== ====== ====== ====== ====== ====== ======
Non-Interest Expense Total non-interest expense for 1997, 1996 and 1995 was
$475.7 million, $421.3 million and $364.1 million, respectively. The
incremental increase in non-interest expense due to the acquisitions was $32.4
million in 1997, including the amortization of intangibles.
The largest component of non-interest expense is salary expense, which was
$173.2 million, $159.2 million and $142.1 million in 1997, 1996 and 1995,
respectively. Approximately $11.7 million of this increase is accounted for by
the acquisitions (BDT and BHNC in 1996 and CUB, Home Savings branches, and
Bank of Hawaii (PNG), Limited in 1997). Excluding the acquisitions, total
salary expense would have increased 1.5% over 1996.
Pension and other employee benefits expense for 1997 totaled $53.5 million,
an increase of 9.6% over 1996's total of $48.8 million. Part of this increase
is due to the acquisitions which were responsible for $2.1 million in pension
and benefit expense for the year. Excluding the acquisitions, pension and
benefit expense would have risen approximately $2.6 million in 1997, or 5.3%
from 1996.
Net occupancy expense for 1997 increased to $46.7 million from $39.4 million
in 1996 and $41.1 million in 1995. The increase is partly due to the
acquisitions. Additionally, during the fourth quarter, a five story building
in downtown Honolulu was closed and demolished and its book value of $2.7
million was written-off. Taking the building out of service will save
approximately $1.1 million in annual premises operating expenses.
37
Net equipment expense increased 13.2% over 1996. Net equipment expense was
$38.5 million, $34.0 million and $31.7 million in 1997, 1996 and 1995,
respectively. The increase results from the acquisitions, and also reflects
Pacific Century's continuing investment in technological enhancements. Pacific
Century's ongoing commitment to upgrade and improve its information systems
continued in 1997. Also contributing to the increase were one-time costs
associated with converting the computer systems of two subsidiaries.
Other operating expense increased to $162.3 million in 1997 from $138.4
million in 1996 and $104.4 million in 1995. About $15.5 million of this
increase was due to the various acquisitions. The comparison between years is
also affected by a $2.8 million loss recognized in 1996 on the early
termination of a leveraged lease.
Legal and professional fees increased to $23.4 million in 1997 from $17.7
million in 1996 and $15.6 million in 1995. The increase was partly due to
legal fees incurred in a lender liability suit for which a favorable verdict
was reached in the fourth quarter. During the fourth quarter, partial recovery
of legal fees was realized from an insurance policy. Further recovery is being
pursued.
FDIC insurance declined $5.3 million in 1997 to $1.5 million. The decline
primarily results from a one-time FDIC special assessment of $5.0 million that
was paid in 1996 by the Company's two thrift subsidiaries.
Reflecting the acquisitions made in 1997 and 1996, the amortization of
intangibles increased to $12.7 million for 1997, compared to $9.3 million for
1996 and $8.4 million for 1995.
NON-INTEREST EXPENSE
TABLE 16
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
Salaries.................... $173.2 + 8.8% $159.2 +12.0% $142.1 $138.0 $134.6
Pension and Other Employee
Benefits................... 53.5 + 9.6 48.8 +11.9 43.6 42.4 42.4
Net Occupancy Expense....... 46.7 +18.5 39.4 - 4.1 41.1 37.4 37.0
Net Equipment Expense....... 38.5 +13.2 34.0 + 7.3 31.7 30.5 27.3
Other Operating Expense
Legal and Professional.... 23.4 +32.2 17.7 +13.5 15.6 18.2 11.9
Advertising............... 10.6 - 7.0 11.4 + 1.8 11.2 10.3 9.7
Stationery and Supplies... 10.7 -- 10.7 +15.1 9.3 8.8 7.5
FDIC Insurance............ 1.5 -77.9 6.8 -10.5 7.6 13.6 15.1
Amortization of Intangible
Assets................... 12.7 +36.6 9.3 +10.7 8.4 9.3 7.2
Other..................... 103.4 +25.2 82.6 +57.6 52.4 51.4 43.4
Minority Interest........... 1.5 + 7.1 1.4 +27.3 1.1 0.5 --
------ ----- ------ ----- ------ ------ ------
Total................... $475.7 +12.9% $421.3 +15.7% $364.1 $360.4 $336.1
====== ===== ====== ===== ====== ====== ======
INCOME TAXES
The 1997 tax provision reflects a change in the effective tax rate to 36.0%
from 34.5% and 37.1% in 1996 and 1995, respectively. The tax structure at
Pacific Century is complex given the various foreign and domestic locations in
which it operates. Pacific Century uses its municipal securities portfolio,
low income housing tax credits and its leasing portfolio to manage its tax
liability. The first two reduce the effective tax rate, while the leasing
portfolio assists in deferring the payment of taxes.
The tax-exempt securities portfolio continues to decline. For 1997, average
tax exempt securities totaled $12.5 million, minimally impacting Pacific
Century's effective tax rate. Low income housing credits are Pacific
38
Century's main vehicle for reducing the effective tax rate. In 1997, Pacific
Century's low income housing credit investments decreased $1.7 million to
$64.6 million at year-end 1997. Pacific Century's low income housing
investments are predominantly in Hawaii. While low income housing investments
provide an opportunity to reduce taxes and earn competitive yields, there are
regulatory limits on the total investments an institution may hold. As of
year-end 1997, the regulatory limit is 10% of Pacific Century's capital. For
Pacific Century, that limit was about $110 million at December 31, 1997.
Pacific Century also continues to pursue lease financing to defer tax
payments. During 1997, the leasing portfolio grew 18.6% to $519.4 million at
year-end with much of this activity in smaller traditional leasing
transactions. There were no leveraged leases recorded in 1997.
Pacific Century's tax planning is also structured to minimize the impact of
the alternative minimum tax (AMT). At the end of 1997, Pacific Century was not
subject to the AMT.
FOURTH QUARTER RESULTS AND OTHER MATTERS
Fourth Quarter Results
Earnings in the fourth quarter of 1997 totaled $33.1 million, a decrease of
3.8% from the $34.5 million reported in the same quarter of 1996. Basic
earnings per share were $0.41 and $0.43 in the fourth quarter of 1997 and
1996, respectively. Diluted earnings per share were $0.41 and $0.42 in the
same respective periods.
Interest margin in the fourth quarter of 1997 was 4.17%, compared to 3.93%
in the fourth quarter of 1996. The improvement was driven by acquisitions and
the continued efforts to position the balance sheet towards higher yielding
assets. Earning asset yields increased to 8.17% from 8.01% comparing the
fourth quarters of 1997 and 1996, respectively. The cost of funds rate
decreased to 4.74% from 4.89% between the same periods.
The provision for loan losses totaled $9.8 million in the fourth quarter,
the highest amount for any quarter in 1997. The level of provisioning
increased as gross charge-offs increased to $22.3 million during the quarter,
which includes $10.4 million that relates to Thai loans. Recoveries were $10.5
million in the last quarter, the highest quarterly level reported in 1997.
Included in the fourth quarter's results were the following non-recurring
transactions. A gain of $4.4 million was recognized on a leveraged lease. A
downtown office building was demolished resulting in a $2.7 million write-off
of its book value.
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. and foreign government regulations
and monetary policies.
Reengineering for a New Era
On February 17, 1998, Pacific Century unveiled a comprehensive two-year
reorganization and restructuring program to accelerate expense reduction and
improve the Company's efficiency. The program will see the merger of First
Federal Savings & Loan Association of America with Bank of Hawaii, the closing
of approximately 25 branches in the State of Hawaii, and a comprehensive
customer-focused redesign process to begin in 1999. At present the timing of
these changes and their related cost and expenses (including intangibles) have
not been determined.
39
Pacific Century recognizes that the competitive environment in the financial
services industry has dramatically intensified. At the same time Hawaii's
stagnant economy, coupled with economic turbulence in Asia, has inhibited the
Company's attempts to significantly improve its financial results. Pacific
Century must, therefore, become more efficient in the use of its resources to
improve performance.
Pacific Century has set a goal to lower (improve) its efficiency ratio to 55
percent by the end of year 2000. A 55 percent efficiency ratio is consistent
with the Company's targeted financial objectives. This efficiency target is
expected to be achieved by taking steps to reduce redundancy, enhance revenues
and streamline operations.
Through strategic alliances and rationalization of delivery channels in the
State of Hawaii, Pacific Century expects to realize annualized expense
reductions of approximately $25 million and a reduction of its statewide
workforce by about 15 percent over the next two years.
Pacific Century's restructuring program will culminate in 1999 with a
comprehensive nine-month redesign process that will put the Company on track
to meet its financial goals. Pacific Century has contracted with Aston
Associates, a nationally recognized corporate redesign specialist, to
orchestrate this activity.
In the near term, the plan calls for First Federal, which was acquired by
Pacific Century in 1990, to be merged with Bank of Hawaii (pending regulatory
approval). 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. Customer accounts will be consolidated into Bank of Hawaii's remaining
75 branches throughout the State. The Company has also implemented a hiring
freeze in the State of Hawaii for 1998 and 1999.
Subject to the approval of shareholders at the annual meeting in April,
Pacific Century will reincorporate in the State of Delaware. The holding
company will remain headquartered in Hawaii.
Also in 1998, (pending regulatory approval) Pacific Century's U.S. Mainland
operations will be merged into one nationally chartered entity, to be
headquartered in California. California United Bank, acquired in 1997, and
Pacific Century Bank, 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.
It is hoped that the Hawaii and Asian economies will be reinvigorated very
soon, but the Company cannot rely on these markets to rebound in the near
term. Therefore, Pacific Century will move through 1998 and 1999 focused on
expense effectiveness, efficiency gains and revenue enhancements, and doing
what it can to support economic revitalization in the areas in which it does
business.
40
CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS
TABLE 17
THREE MONTHS ENDED
--------------------------------------------------------
1997 1996
--------------------------- ----------------------------
MAR. JUN. SEPT. DEC. MAR. JUN. SEPT. DEC.
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Total Interest Income... $253.8 $258.9 $274.6 $275.3 $231.4 $244.4 $250.5 $255.8
Total Interest Expense.. 125.1 130.6 135.9 134.7 118.3 123.2 127.9 130.4
Net Interest Income..... 128.7 128.3 138.7 140.6 113.1 121.2 122.6 125.4
Provision for Loan
Losses................. 5.1 7.3 8.1 9.8 4.4 4.2 3.7 9.9
Investment Securities
Gains (Losses)......... 0.5 1.5 0.2 0.8 (0.1) 0.1 0.2 1.1
Non-Interest Income..... 41.2 44.8 45.9 52.9 37.1 40.9 41.8 43.4
Non-Interest Expense.... 109.6 112.3 122.1 131.7 97.5 103.8 112.6 107.3
------ ------ ------ ------ ------ ------ ------ ------
Income Before Income
Taxes.................. 55.7 55.0 54.6 52.8 48.2 54.2 48.3 52.7
Provision for Income
Taxes.................. 20.2 19.4 19.3 19.7 15.5 19.6 17.0 18.2
------ ------ ------ ------ ------ ------ ------ ------
Net Income.............. $ 35.5 $ 35.6 $ 35.3 $ 33.1 $ 32.7 $ 34.6 $ 31.3 $ 34.5
====== ====== ====== ====== ====== ====== ====== ======
Basic Earnings Per
Share.................. $ 0.45 $ 0.45 $ 0.44 $ 0.41 $ 0.40 $ 0.42 $ 0.38 $ 0.43
Diluted Earnings Per
Share.................. $ 0.44 $ 0.44 $ 0.43 $ 0.41 $ 0.40 $ 0.42 $ 0.38 $ 0.42
41
SUPPLEMENTARY DATA
MATURITY DISTRIBUTION, MARKET VALUE AND WEIGHTED-AVERAGE YIELD TO MATURITY OF
SECURITIES
TABLE 18
WITHIN 1-5 5-10 OVER APPROXIMATE
AT YEAR-END DECEMBER 31 1 YEAR YEARS YEARS 10 YEARS TOTAL MARKET VALUE
----------------------- ------ -------- ------ -------- -------- ------------
(IN MILLIONS OF DOLLARS)
Maturity Distribution
Based on Amortized Cost
U.S. Treasury
Securities........... $ 80.0 $ -- $ -- $ -- $ 80.0 $ 74.7
U.S. Government
Agencies............. 191.3 125.5 -- -- 316.8 322.2
Obligations of States
and Political
Subdivisions......... 3.4 8.3 0.1 0.2 12.0 13.3
Corporate Securities.. -- -- -- 64.2 64.2 64.3
Mortgage-Backed
Securities (1)....... 77.8 109.2 10.4 440.6 638.0 639.8
Other................. 98.2 5.5 -- -- 103.7 103.4
Securities Available
for Sale (1)......... 212.4 729.2 94.5 1,606.0 2,642.1 2,651.3
------ -------- ------ -------- -------- --------
Total--1997......... $663.1 $ 977.7 $105.0 $2,111.0 $3,856.8 $3,869.0
--1996.............. $310.1 $1,382.0 $ 94.6 $1,841.2 $3,627.9 $3,634.0
--1995.............. $382.9 $1,195.1 $ 75.6 $1,706.6 $3,360.2 $3,366.3
------ -------- ------ -------- -------- --------
Weighted-Average Yield
to Maturity (2)
U.S. Treasury
Securities........... 5.2% -- % -- % -- % 5.2%
U.S. Government
Agencies............. 6.0 6.6 -- -- 6.2
Obligations of States
and Political
Subdivisions......... 12.4 10.7 10.8 7.4 11.1
Corporate Securities.. -- -- -- 6.8 6.8
Mortgage-Backed
Securities........... 5.6 5.9 8.3 7.1 6.7
Other................. 10.8 5.9 -- -- 10.5
Securities Available
for Sale............. 6.6 6.2 6.4 6.7 6.5
------ -------- ------ -------- --------
Total--1997......... 6.8% 6.3% 6.6% 6.8% 6.6%
====== ======== ====== ======== ========
Tax Equivalent Adjust-
ment Amount............ $ 0.2 $ 0.4 $ 0.1 $ 0.1 $ 0.8
- --------
(1)Contractual maturities do not anticipate reductions for periodic paydowns.
(2)Tax equivalent at 35% tax rate.
42
AVERAGE ASSETS
TABLE 19
1997 1996 1995 1994 1993
--------------- --------------- --------- --------- ---------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
--------- ----- --------- ----- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
Interest-Bearing
Deposits............... $ 497.8 3.5% $ 579.9 4.4% $ 645.7 $ 812.6 $ 1,140.1
Investment Securities
--Held to Maturity.... 1,221.4 8.6 1,091.1 8.2 1,532.4 2,482.1 3,542.3
--Available for Sale.. 2,452.0 17.2 2,288.7 17.2 1,639.0 1,063.9 69.1
Funds Sold.............. 76.4 0.5 92.1 0.7 68.5 52.5 146.0
Loans................... 8,929.7 62.7 8,353.6 62.8 7,654.9 7,393.7 6,991.0
--------- ----- --------- ----- --------- --------- ---------
Total Earning
Assets............. 13,177.3 92.5 12,405.4 93.3 11,540.5 11,804.8 11,888.5
Non-Earning Assets...... 1,065.0 7.5 889.8 6.7 849.7 791.8 697.3
--------- ----- --------- ----- --------- --------- ---------
Total............... $14,242.3 100.0% $13,295.2 100.0% $12,390.2 $12,596.6 $12,585.8
========= ===== ========= ===== ========= ========= =========
AVERAGE LOANS
TABLE 20
1997 1996 1995 1994 1993
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial............. $1,923.8 21.5% $1,784.0 21.4% $1,850.3 $1,681.1 $1,695.5
Real Estate
Construction.......... 264.6 3.0 229.6 2.7 164.2 145.2 181.1
Mortgage.............. 3,882.0 43.5 3,863.2 46.2 3,765.8 3,840.1 3,419.2
Installment............. 846.3 9.5 814.8 9.8 754.4 686.7 639.5
Foreign (1)............. 1,540.3 17.2 1,253.7 15.0 746.0 667.8 666.1
Lease Financing......... 472.7 5.3 408.3 4.9 374.2 372.8 389.6
-------- ----- -------- ----- -------- -------- --------
Total............... $8,929.7 100.0% $8,353.6 100.0% $7,654.9 $7,393.7 $6,991.0
======== ===== ======== ===== ======== ======== ========
- --------
(1)See section entitled International Operations for definition of Foreign.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES (1)
TABLE 21
DUE IN DUE IN DUE AFTER
ONE YEAR OR LESS ONE TO FIVE YEARS (2) FIVE YEARS (2) TOTAL
---------------- --------------------- -------------- --------
(IN MILLIONS OF DOLLARS)
DECEMBER 31, 1997
- -----------------
Commercial and
Industrial............. $1,360.8 $ 564.0 $ 179.5 $2,104.3
Real Estate--
Construction........... 206.8 63.6 10.6 281.0
Other Loans............. 1,356.4 2,340.4 1,807.6 5,504.4
Foreign Loans........... 1,475.3 113.3 20.1 1,608.7
-------- -------- -------- --------
Total............... $4,399.3 $3,081.3 $2,017.8 $9,498.4
======== ======== ======== ========
- --------
(1)Based on contractual maturities.
(2) As of December 31, 1997, of the loans maturing after one year, $2,771.6
million have floating rates and $2,327.5 million have fixed rates.
43
AVERAGE DEPOSITS
TABLE 22
1997 1996 1995 1994 1993
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic
Non-Interest Bearing
Demand............... $1,516.8 16.4% $1,371.5 16.8% $1,391.6 $1,373.2 $1,312.1
Interest-Bearing
Demand............... 1,945.3 21.0 1,726.6 21.1 1,752.4 1,895.4 2,032.3
Regular Savings....... 865.5 9.3 937.0 11.5 1,058.5 1,232.3 1,239.4
Private Time
Certificates of
Deposit ($100,000 or
More)................ 848.1 9.2 719.2 8.8 581.5 476.8 489.4
Public Time
Certificates of
Deposit ($100,000 or
More)................ 205.9 2.2 310.6 3.8 89.3 64.6 143.4
Bearer Certificates of
Deposit.............. -- -- 1.3 -- 5.0 5.0 5.0
All Other Time and
Savings Certificates. 1,804.7 19.5 1,433.9 17.5 1,164.1 998.4 1,074.1
-------- ----- -------- ----- -------- -------- --------
Total Domestic...... 7,186.3 77.6 6,500.1 79.5 6,042.4 6,045.7 6,295.7
-------- ----- -------- ----- -------- -------- --------
Foreign (1)
Non-Interest Bearing
Demand............... 264.0 2.8 194.2 2.4 11.8 12.8 12.8
Time Due to Banks..... 731.1 7.9 733.5 9.0 652.7 896.5 1,032.7
Other Time and
Savings.............. 1,079.0 11.7 745.0 9.1 329.5 340.2 191.2
-------- ----- -------- ----- -------- -------- --------
Total Foreign....... 2,074.1 22.4 1,672.7 20.5 994.0 1,249.5 1,236.7
-------- ----- -------- ----- -------- -------- --------
Total............... $9,260.4 100.0% $8,172.8 100.0% $7,036.4 $7,295.2 $7,532.4
======== ===== ======== ===== ======== ======== ========
- --------
(1) See section entitled International Operations for definition of Foreign.
44
INTEREST DIFFERENTIAL
TABLE 23
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-------------------------- --------------------------
VOLUME (1) RATE (1) TOTAL VOLUME (1) RATE (1) TOTAL
---------- -------- ------ ---------- -------- ------
(IN MILLIONS OF DOLLARS)
Change in Interest
Income:
Interest Bearing
Deposits:
Foreign............. $ (5.6) $(2.5) $ (8.1) $ (4.2) $ 6.8 $ 2.6
Investment
Securities--Held to
Maturity Taxable... 8.8 1.9 10.7 (28.2) 6.3 (21.9)
Tax-Exempt.......... (0.1) 0.1 -- (0.4) 0.1 (0.3)
Investment
Securities--Available
for Sale............. 10.4 0.5 10.9 42.1 (2.0) 40.1
Funds Sold............ (0.7) 0.5 (0.2) 1.1 (0.9) 0.2
Loans, Net of Unearned
Income:
Domestic............ 26.9 18.5 45.4 16.2 (8.1) 8.1
Foreign............. 24.0 (2.4) 21.6 41.3 14.8 56.1
------ ----- ------ ------ ------ ------
Total Interest
Income........... $ 63.7 $16.6 $ 80.3 $ 67.9 $ 17.0 $ 84.9
====== ===== ====== ====== ====== ======
Change in Interest Ex-
pense:
Interest Bearing
Deposits:
Demand Deposits..... $ 5.9 $(0.2) $ 5.7 $ (0.7) $ (3.0) $ (3.7)
Savings Deposits.... (1.8) (0.5) (2.3) (3.3) (3.6) (6.9)
Time Deposits....... 21.7 1.8 23.5 33.8 1.2 35.0
Deposits in Foreign
Offices............ 17.5 (9.6) 7.9 28.5 (3.7) 24.8
Short-Term Borrowings. 2.5 3.7 6.2 (18.6) (5.2) (23.8)
Long-Term Debt........ (19.1) 4.6 (14.5) 9.7 (3.4) 6.3
------ ----- ------ ------ ------ ------
Total Interest
Expense.......... $ 26.7 $(0.2) $ 26.5 $ 49.4 $(17.7) $ 31.7
====== ===== ====== ====== ====== ======
Net Interest
Differential:
Domestic.............. $ 36.1 $12.1 $ 48.2 $ 9.9 $ 9.4 $ 19.3
Foreign............... 0.9 4.7 5.6 8.6 25.3 33.9
------ ----- ------ ------ ------ ------
Total Interest
Differential..... $ 37.0 $16.8 $ 53.8 $ 18.5 $ 34.7 $ 53.2
====== ===== ====== ====== ====== ======
- --------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
45
YEAR-END SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
TABLE 24
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET TOTALS
Net Loans............. $ 9,114.3 $ 8,347.9 $ 7,853.0 $ 7,599.5 $ 6,983.1
Total Assets.......... 14,995.5 14,009.2 13,206.8 12,586.4 12,462.1
Deposits.............. 9,621.3 8,684.1 7,576.8 7,115.1 7,005.0
Long-Term Debt........ 705.8 932.1 1,063.4 861.6 378.2
Shareholders' Equity.. 1,117.2 1,066.1 1,054.4 966.8 938.1
OPERATING RESULTS
Total Interest Income. $ 1,062.6 $ 982.1 $ 896.7 $ 813.0 $ 802.6
Net Interest Income... 536.3 482.3 428.5 449.3 467.2
Provision for Loan
Losses............... 30.3 22.2 17.0 21.9 54.2
Net Income............ 139.5 133.1 121.8 117.7 132.6
Basic Earnings Per
Share................ $ 1.75 $ 1.63 $ 1.46 $ 1.39 $ 1.56
Diluted Earnings Per
Share................ $ 1.72 $ 1.62 $ 1.45 $ 1.37 $ 1.54
Common Dividends Paid
Per Share............ $ 0.63 $ 0.58 $ 0.54 $ 0.52 $ 0.45
Excluding the Effects
of Intangibles (1)
Tangible Net Income. $ 147.7 $ 139.2 $ 127.3 $ 123.8 $ 137.2
Tangible Basic
Earnings Per Share. $ 1.85 $ 1.71 $ 1.53 $ 1.46 $ 1.62
Tangible Diluted
Earnings Per Share. $ 1.82 $ 1.69 $ 1.51 $ 1.45 $ 1.60
NON-FINANCIAL DATA
Common Shareholders of
Record at Year-End... 6,695 7,120 7,439 6,947 8,315
Weighted Average
Shares--Basic........ 79,794,011 81,595,728 83,325,878 84,712,506 84,827,274
Weighted Average
Shares--Diluted...... 80,946,170 82,424,524 84,054,913 85,649,062 85,935,579
- --------
(1)Intangibles include goodwill, core deposit and trust intangibles, and other
intangibles.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Quarterly Results of Operations--Table 17 on page 41 and
narrative on page 39.
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Pacific Century Financial Corporation
We have audited the accompanying consolidated statements of condition of
Pacific Century Financial Corporation and subsidiaries as of December 31,
1997, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pacific
Century Financial Corporation and subsidiaries at December 31, 1997, 1996 and
1995, and the consolidated results of their operations and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Honolulu, Hawaii
January 23, 1998
47
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
Interest Income
Interest on Loans........................... $ 714,572 $ 659,701 $ 610,959
Loan Fees................................... 34,334 29,692 28,560
Income on Lease Financing................... 34,917 27,124 12,384
Interest and Dividends on Investment
Securities
Taxable................................... 81,041 70,401 92,295
Non-Taxable............................... 1,186 1,193 1,371
Income on Investment Securities Available
for Sale................................... 158,851 147,949 107,870
Interest on Deposits........................ 33,862 41,957 39,454
Interest on Security Resale Agreements...... 86 -- 448
Interest on Funds Sold...................... 3,727 4,039 3,365
---------- ---------- ----------
Total Interest Income..................... 1,062,576 982,056 896,706
Interest Expense
Interest on Deposits........................ 323,507 288,716 239,537
Interest on Security Repurchase Agreements.. 115,461 100,085 122,030
Interest on Funds Purchased................. 23,805 29,020 32,176
Interest on Short-Term Borrowings........... 17,161 21,110 19,854
Interest on Long-Term Debt.................. 46,344 60,842 54,560
---------- ---------- ----------
Total Interest Expense.................... 526,278 499,773 468,157
---------- ---------- ----------
Net Interest Income........................... 536,298 482,283 428,549
Provision for Loan Losses..................... 30,338 22,227 16,967
---------- ---------- ----------
Net Interest Income After Provision for
Loan Losses.............................. 505,960 460,056 411,582
Non-Interest Income
Trust Income................................ 52,237 49,761 49,468
Service Charges on Deposit Accounts......... 29,354 26,716 25,886
Fees, Exchange and Other Service Charges.... 67,081 58,949 47,311
Other Operating Income...................... 36,043 27,687 20,962
Investment Securities Gains................. 3,074 1,364 2,457
---------- ---------- ----------
Total Non-Interest Income................. 187,789 164,477 146,084
Non-Interest Expense
Salaries.................................... 173,159 159,213 142,143
Pensions and Other Employee Benefits........ 53,535 48,811 43,550
Net Occupancy Expense....................... 46,725 39,416 41,108
Net Equipment Expense....................... 38,524 34,017 31,729
Other Operating Expense..................... 162,318 138,359 104,444
Minority Interest........................... 1,488 1,444 1,116
---------- ---------- ----------
Total Non-Interest Expense................ 475,749 421,260 364,090
---------- ---------- ----------
Income Before Taxes........................... 218,000 203,273 193,576
Provision for Taxes........................... 78,512 70,149 71,776
---------- ---------- ----------
Net Income................................ $ 139,488 $ 133,124 $ 121,800
========== ========== ==========
Basic Earnings Per Share...................... $ 1.75 $ 1.63 $ 1.46
Diluted Earnings Per Share.................... $ 1.72 $ 1.62 $ 1.45
Basic Weighted Average Shares................. 79,794,011 81,595,728 83,325,878
Diluted Weighted Average Shares............... 80,946,170 82,424,524 84,054,913
========== ========== ==========
See Notes to Consolidated Financial Statements.
48
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
ASSETS
Interest-Bearing Deposits............... $ 341,347 $ 635,519 $ 789,050
Investment Securities
--Held to Maturity (Market Value of
$1,217,735, $1,261,146 and
$1,172,228, respectively)............ 1,214,715 1,258,756 1,166,115
--Available for Sale.................. 2,651,270 2,372,897 2,194,038
Funds Sold.............................. 80,457 141,920 116,173
Loans................................... 9,498,408 8,699,286 8,152,406
Unearned Income....................... (209,721) (183,586) (147,404)
Reserve for Loan Losses............... (174,362) (167,795) (151,979)
----------- ----------- -----------
Net Loans........................... 9,114,325 8,347,905 7,853,023
----------- ----------- -----------
Total Earning Assets................ 13,402,114 12,756,997 12,118,399
Cash and Non-Interest Bearing Deposits.. 795,332 581,221 469,031
Premises and Equipment.................. 288,358 273,122 246,515
Customers' Acceptance Liability......... 21,575 21,178 16,825
Accrued Interest Receivable............. 93,831 88,074 84,669
Other Real Estate....................... 6,151 10,711 9,306
Intangibles, Including Goodwill......... 203,366 96,456 87,673
Other Assets............................ 184,737 181,408 174,366
----------- ----------- -----------
Total Assets........................ $14,995,464 $14,009,167 $13,206,784
=========== =========== ===========
LIABILITIES
Domestic Deposits
Demand--Non-Interest Bearing.......... $ 1,714,886 $ 1,435,091 $ 1,549,302
--Interest Bearing............... 2,112,425 1,724,105 1,592,533
Savings............................... 823,216 866,453 1,004,550
Time.................................. 2,929,782 2,571,569 2,204,242
Foreign Deposits
Demand--Non-Interest Bearing.......... 351,178 553,274 46,056
Time Due to Banks..................... 707,684 804,818 664,269
Other Savings and Time................ 982,104 728,769 515,818
----------- ----------- -----------
Total Deposits...................... 9,621,275 8,684,079 7,576,770
Securities Sold Under Agreements to
Repurchase............................. 2,279,124 2,075,571 1,926,540
Funds Purchased......................... 710,472 599,994 787,437
Short-Term Borrowings................... 212,547 293,257 476,867
Bank's Acceptances Outstanding.......... 21,575 21,178 16,825
Accrued Pension Costs................... 15,134 17,309 21,261
Accrued Interest Payable................ 57,512 69,545 49,473
Accrued Taxes Payable................... 152,092 154,984 160,306
Minority Interest....................... 5,758 9,307 2,961
Other Liabilities....................... 96,979 85,678 70,472
Long-Term Debt.......................... 705,789 932,143 1,063,436
----------- ----------- -----------
Total Liabilities................... 13,878,257 12,943,045 12,152,348
----------- ----------- -----------
Shareholders' Equity
Common Stock ($2 par value), authorized
200,000,000 shares; issued and
outstanding, 79,684,553; 39,959,234;
and 41,340,817, respectively........... 159,369 79,918 82,682
Capital Surplus......................... 168,920 186,391 240,080
Unrealized Valuation Adjustments........ (24,766) (3,722) 13,902
Retained Earnings....................... 813,684 803,535 717,772
----------- ----------- -----------
Total Shareholders' Equity.......... 1,117,207 1,066,122 1,054,436
----------- ----------- -----------
Total Liabilities and Shareholders'
Equity............................. $14,995,464 $14,009,167 $13,206,784
=========== =========== ===========
See Notes to Consolidated Financial Statements.
49
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED
COMMON CAPITAL VALUATION RETAINED
TOTAL STOCK SURPLUS ADJUSTMENT EARNINGS
---------- -------- --------- ---------- --------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE
AMOUNTS)
Balance at December 31,
1994.................... $ 966,788 $ 83,703 $ 260,040 $(18,122) $641,167
Net Income............. 121,800 -- -- -- 121,800
Common Stock Issued
96,251 Profit Sharing
Plan................ 2,637 192 2,445 -- --
443,879 Stock Option
Plan................ 9,291 888 8,403 -- --
228,321 Dividend
Reinvestment Plan... 7,095 457 6,638 -- --
Stock Repurchased...... (40,004) (2,558) (37,446) -- --
Unrealized Valuation
Adjustments
Investment
Securities.......... 28,630 -- -- 28,630 --
Foreign Currency
Translation
Adjustment.......... 3,394 -- -- 3,394 --
Cash Dividends Paid.... (45,195) -- -- -- (45,195)
---------- -------- --------- -------- --------
Balance at December 31,
1995.................... $1,054,436 $ 82,682 $ 240,080 $ 13,902 $717,772
Net Income............. 133,124 -- -- -- 133,124
Common Stock Issued
37,220 Profit Sharing
Plan................ 1,288 74 1,214 -- --
245,437 Stock Option
Plan................ 5,491 491 5,000 -- --
170,577 Dividend
Reinvestment Plan... 6,756 341 6,415 -- --
11,483 Directors'
Restricted Shares
and Deferred
Compensation Plan... 456 23 433 -- --
Stock Repurchased...... (70,444) (3,693) (66,751) -- --
Unrealized Valuation
Adjustments
Investment
Securities.......... (9,114) -- -- (9,114) --
Foreign Currency
Translation
Adjustment.......... (8,510) -- -- (8,510) --
Cash Dividends Paid.... (47,361) -- -- -- (47,361)
---------- -------- --------- -------- --------
Balance at December 31,
1996.................... $1,066,122 $ 79,918 $ 186,391 $ (3,722) $803,535
Net Income............. 139,488 -- -- -- 139,488
Common Stock Issued
88,517 Profit Sharing
Plan................ 4,116 177 3,939 -- --
231,264 Stock Option
Plan................ 5,356 463 4,893 -- --
164,671 Dividend
Reinvestment Plan... 6,754 329 6,425 -- --
3,407 Directors'
Restricted Shares
and Deferred
Compensation Plan... 150 7 143 -- --
2,317,873 CU Bancorp
Acquisition......... 108,469 4,636 103,833 -- --
Stock Repurchased...... (142,479) (5,775) (136,704) -- --
Unrealized Valuation
Adjustments
Investment
Securities.......... 3,233 -- -- 3,233 --
Foreign Currency
Translation
Adjustment.......... (24,277) -- -- (24,277) --
Two-for-One Stock Split
in the Form of a 100%
Stock Dividend........ -- 79,614 -- -- (79,614)
Cash Dividends Paid.... (49,725) -- -- -- (49,725)
---------- -------- --------- -------- --------
Balance at December 31,
1997.................... $1,117,207 $159,369 $ 168,920 $(24,766) $813,684
========== ======== ========= ======== ========
See Notes to Consolidated Financial Statements.
50
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- -----------
(IN THOUSANDS OF DOLLARS)
Operating Activities (1)
Net Income................................. $ 139,488 $ 133,124 $ 121,800
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses................ 30,338 22,227 16,967
Depreciation and Amortization............ 45,244 38,956 33,165
Deferred Income Taxes.................... 100 2,423 7,924
Realized Gains on Investment Securities
Available for Sale...................... (2,939) (1,193) (1,707)
Amortization of Deferred Lease Income.... (30,505) (26,326) (25,482)
Amortization of Deferred Loan Fee Income. (12,210) (8,318) (12,174)
Increase in Interest Receivable.......... (5,757) (286) (7,329)
Increase (Decrease) in Interest Payable.. (13,193) 14,116 220
Decrease (Increase) in Other Assets...... 18,942 (20,958) (57,040)
Decrease in Other Liabilities............ (40,136) (15,641) (8,777)
--------- --------- -----------
Net Cash Provided by Operating
Activities............................ 129,372 138,124 67,567
--------- --------- -----------
Investing Activities
Proceeds from Redemptions of Investment
Securities Held to Maturity............... 219,216 594,894 956,491
Purchases of Investment Securities Held to
Maturity.................................. (127,706) (665,427) (535,499)
Proceeds from Sales of Investment
Securities Available for Sale............. 714,742 703,899 655,269
Proceeds from Redemptions of Investment
Securities Available for Sale............. 195,233 81,757 150,507
Purchases of Investment Securities
Available for Sale........................ (981,411) (978,512) (1,379,626)
Net Increase (Decrease) in Interest-
bearing Deposits Placed in Other Banks.... 295,031 409,619 (62,034)
Decrease (Increase) in Funds Sold.......... 92,663 (25,747) (62,006)
Increase (Decrease) in Net Loans........... (283,536) 95,118 (229,536)
Purchases of Premises and Equipment........ (27,995) (38,665) (49,893)
Proceeds from Sale of Premises and
Equipment................................. -- -- 2,061
Purchase of Additional Interest in
Credipac Polynesie and Creditpac Nouvelle
Caledonie, Net of Cash and Non-Interest
Bearing Deposits Acquired................. -- (4,114) --
Purchase of Banque de Tahiti and Banque de
Nouvelle Caledonie, Net of Cash and Non-
Interest Bearing Deposits Acquired........ -- 18,090 --
Purchase of Banque d'Hawaii (Vanuatu),
Ltd., Net of Cash and Non-Interest
Bearing Deposits Acquired................. -- -- 6,808
Purchase of Bank of Hawaii (PNG), Ltd.,
Net of Cash and Non-Interest Bearing
Deposits Acquired......................... (5,371) -- --
Purchase of CU Bancorp and California
United Bank, Net of Cash and Non-Interest
Bearing Deposits Acquired................. 24,523 -- --
Purchase of Home Savings of America
Deposits, Net of Cash and Non-Interest
Bearing Deposits Acquired................. 235,020 -- --
--------- --------- -----------
Net Cash Provided (Used) by Investing
Activities............................ 350,409 190,912 (547,458)
--------- --------- -----------
Financing Activities
Net Increase (Decrease) in Demand,
Savings, and Time Deposits................ (72,506) 248,793 450,487
Proceeds from Lines of Credit and Long-
Term Debt................................. 104,000 512,787 854,779
Principal Payments on Lines of Credit and
Long-Term Debt............................ (330,354) (644,080) (652,915)
Net Increase (Decrease) in Short-Term
Borrowings................................ 233,295 (222,022) (149,409)
Proceeds from Sale of Common Stock......... 16,376 13,991 19,023
Stock Repurchased.......................... (142,479) (70,444) (40,004)
Cash Dividends............................. (49,725) (47,361) (45,195)
--------- --------- -----------
Net Cash Provided (Used) by Financing
Activities............................ (241,393) (208,336) 436,766
--------- --------- -----------
Effect of Exchange Rate Changes on Cash.... (24,277) (8,510) 3,394
--------- --------- -----------
Increase (Decrease) in Cash and Non-
Interest Bearing Deposits............. 214,111 112,190 (39,731)
Cash and Non-Interest Bearing Deposits at
Beginning of Year......................... 581,221 469,031 508,762
--------- --------- -----------
Cash and Non-Interest Bearing Deposits
at End of Year........................ $ 795,332 $ 581,221 $ 469,031
========= ========= ===========
- --------
(1) During the years ended December 31, 1997, 1996 and 1995, Pacific Century
Financial Corporation made interest payments of $538,311,000, $479,701,000
and $467,937,000, respectively, and paid income taxes of $81,404,000,
$75,471,000 and $45,462,000, respectively.
See Notes to Consolidated Financial Statements.
51
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting principles followed by Pacific Century Financial Corporation
and its subsidiaries (Pacific Century), and the methods of applying those
principles conform with generally accepted accounting principles and general
practices within the banking industry. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results may differ
from those estimates and such differences could be material to the financial
statements. Certain accounts have been reclassified to conform with the 1997
presentation. The significant accounting policies are summarized below.
Name Change
On April 25, 1997, the Company's name was changed from Bancorp Hawaii, Inc.
to Pacific Century Financial Corporation (Pacific Century). The change was
made to provide a more distinctive and descriptive identity that reflects
Pacific Century's strategic goals to grow in Hawaii and throughout the Pacific
region. Pacific Century's primary subsidiary, the Bank of Hawaii has
maintained its name along with that of First Federal Savings & Loan
Association of America. However, some of the Company's other subsidiaries have
adopted names that correspond with Pacific Century.
Organization/Consolidation
Pacific Century is a bank holding company providing a broad range of
financial services to customers in Hawaii, the Pacific, Asia and the U.S.
Mainland. It is the largest bank holding company headquartered in the State of
Hawaii. The majority of Pacific Century's operations consist of customary
commercial and consumer banking services including, but not limited to,
lending, leasing, deposit services, trust and investment activities and trade
financing. The principal subsidiaries of Pacific Century are Bank of Hawaii,
Bancorp Pacific, Inc. and California United Bank. The consolidated financial
statements include the accounts of Pacific Century and its principal
subsidiaries including all majority-owned entities. All significant
intercompany accounts and transactions have been eliminated and minority
interests recognized in consolidation.
Accounting Changes
On January 1, 1997, Pacific Century adopted the Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS)
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities and establishes guidelines to distinguish
transfers of financial assets that are sales from transfers that are secured
borrowings.
SFAS No. 125 requires that servicing assets and liabilities be recorded at
fair value at the time loans are sold or securitized. The pronouncement also
requires that servicing assets be evaluated for impairment by risk
characteristics and are to be carried at the lower of capitalized cost or fair
value. There was no material effect on Pacific Century's financial position at
December 31, 1997 or results of operations for the year then ended from
adopting SFAS No. 125.
On December 31, 1997, Pacific Century adopted SFAS No. 128, "Earnings Per
Share." SFAS No. 128 simplifies the computation and disclosure standards for
earnings per share (EPS). The new pronouncement replaces primary EPS with
basic EPS and fully diluted EPS with diluted EPS. Basic EPS excludes dilution
and is computed by dividing net earnings available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if stock
52
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
options or other contracts to issue common stock were exercised. In computing
diluted EPS, SFAS No. 128 requires the use of the average share price for the
period in determining the weighted average number of shares outstanding rather
than the higher of the average market price or ending market price as was
required under the prior standard. EPS for prior periods have been restated to
conform with the presentation required by SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of financial statements.
The Statement requires that all items that meet the definition of components
of comprehensive income be reported in a financial statement for the period in
which they are recognized. SFAS No. 130 does not specify a specific format for
reporting comprehensive income in financial statements, but requires that the
amount representing total comprehensive income be displayed in the financial
statements. Under existing accounting standards, other comprehensive income
include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on available-for-sale securities.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997
and requires the restatement of financial statements for earlier periods. Its
implementation will have no impact on Pacific Century's financial position or
results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the reporting of financial information about operating segments in annual
financial statements to stockholders, and requires certain selected segment
information in interim reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS No. 131 will have no material impact on
Pacific Century's financial statements. SFAS No. 131 will become effective in
1998 and requires comparative information for earlier years.
Acquisitions
On July 3, 1997, Pacific Century acquired all of the outstanding common
stock of CU Bancorp and its subsidiary, California United Bank (CUB), for a
purchase price of $185,421,000, which consisted of $56,092,000 in cash and
2,318,000 shares of Pacific Century common stock. As of December 31, 1997, CUB
operated 21 branches in Southern California and had total assets of
$797,135,000. The acquisition was accounted for as a purchase, and the
resulting goodwill of $100,700,000 is being amortized over 25 years on a
straight-line basis.
In March 1997, Pacific Century Bank, N.A. (PCB), a wholly-owned subsidiary
of Pacific Century purchased approximately $251,300,000 in deposits in Arizona
from Home Savings of America. As a result of this purchase, PCB now has a
combined total of ten branches servicing customers in Phoenix, Tucson and
Yuma, Arizona. Pacific Century paid approximately $17,976,000 for the core
deposit base, deposit premium intangibles and other items.
In March 1997, Bank of Hawaii International, Inc. acquired 100% of Indosuez
Niugini Bank, Ltd. in Papua New Guinea, for approximately $5.6 million.
Indosuez Niugini Bank, Ltd. has been renamed Bank of Hawaii (PNG) Ltd. The
acquisition was accounted for as a purchase, resulting in $3,328,000 in
goodwill, which is being amortized over 15 years. At December 31, 1997 the
Bank of Hawaii (PNG) Ltd. had approximately $80,325,000 in total assets.
In May 1996, Pacific Century finalized its purchase of majority ownership in
Banque de Tahiti (BDT), Bank of Hawaii-Nouvelle Caledonie (BNC), formally
known as Banque de Nouvelle Caledonie, and two smaller finance companies for
an aggregate cost of $60,500,000. After the acquisitions, Pacific Century's
ownership in BDT increased to 92.4% from 38% and in BNC it increased to 91.5%
from 21%. These acquisitions were accounted for using the purchase method, and
the resulting goodwill of $12,200,000 is being amortized over
53
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15 years on a straight line basis. Total assets of both BDT and BNC were
$921,721,000 and $981,400,000 at year-end 1997 and 1996, respectively.
In March 1995, Pacific Century acquired the remaining 20% of the shares of
Banque d'Hawaii (Vanuatu), Limited. This residual acquisition, like the
original 80% purchase of Banque Indosuez Vanuatu, Limited, in 1993, was
accounted for using the purchase method. The goodwill recorded in this
transaction was $1,100,000 and is being amortized over 15 years. The combined
purchase price totaled $13.8 million. Total assets were $90,600,000,
$89,500,000 and $74,200,000 at year-end 1997, 1996 and 1995, respectively.
In conjunction with these acquisitions, the following table discloses assets
acquired and liabilities assumed:
1997 1996 1995
---------- -------- -------
(IN THOUSANDS OF DOLLARS)
Assets Acquired............................. $1,239,616 $552,657 $14,127
Cash and Shares Paid for Capital Stock...... (209,023) (60,583) (1,786)
---------- -------- -------
Liabilities Assumed......................... $1,030,593 $492,074 $12,341
========== ======== =======
In December 1997, Pacific Century entered into a definitive purchase
contract to acquire Group Paribas' interest in Banque Paribas Pacifique
(located in New Caledonia) and Banque Paribas Polynesie (located in French
Polynesia). The purchase, which is expected to close in the second quarter of
1998, is subject to approval by regulators in France and the United States.
Upon completion of this transaction at least 85% of the Banque Paribas
Pacifique shares and 70% of the Banque Paribas Polynesie shares will be
transferred to Bank of Hawaii International, Inc. or its subsidiaries. At
December 31, 1997, total assets of Banque Paribas Pacifique and Banque Paribas
Polynesie in the aggregate were $291,893,000.
Advertising Costs
The nature of Pacific Century's marketing programs generally do not include
direct-response advertising. Pacific Century, therefore, recognizes its
advertising costs as incurred.
Credit Card Costs
Pacific Century issues its own VISA and Mastercard credit cards for which
all costs are recognized as period costs. In 1996, Pacific Century entered
into certain arrangements with third parties to originate VISA cards in
specific target markets. As of year-end 1997 and 1996, the unamortized
capitalized origination costs totaled $1,611,000 and $3,740,000, respectively.
These costs are being amortized over the anticipated life of the cards,
currently five years. As cards are canceled, the unamortized costs are
expensed. In 1997, capitalized origination costs totaling $1,606,000 were
charged-off due to higher than expected levels of card cancellations.
Cash and Non-Interest Bearing Deposits
Cash and non-interest bearing deposits include amounts due from other
financial institutions as well as in-transit clearings. Under the terms of the
Depository Institutions Deregulation and Monetary Control Act, Pacific Century
is required to place reserves with the Federal Reserve Bank based on the
amount of deposits held. For 1997, 1996 and 1995, the average amount of these
reserve balances was $135,697,000, $131,061,000 and $149,104,000,
respectively.
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the dilutive
54
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
impact of stock options and stock appreciation rights and uses the average
share price during the period in determining the number of incremental shares
to be added to the weighted average number of common shares outstanding. For
the years ended December 31, 1997, 1996 and 1995 there were no adjustments to
net income (the numerator) for purposes of computing basic EPS. A
reconciliation of the weighted average common shares outstandings for
computing diluted EPS follows:
WEIGHTED AVERAGE SHARES
--------------------------------
1997 1996 1995
---------- ---------- ----------
Denominator for Basic EPS................. 79,794,011 81,595,728 83,325,878
Dilutive Effect of Stock Options.......... 1,152,159 828,796 729,035
---------- ---------- ----------
Denominator for Diluted EPS............... 80,946,170 82,424,524 84,054,913
========== ========== ==========
On December 12, 1997, a two-for-one stock split in the form of a 100% stock
dividend was distributed to shareholders. Prior period average outstanding
shares, stock options, and per common share data in the consolidated financial
statements have been retroactively adjusted to reflect the stock split.
Income Taxes
Pacific Century files a consolidated federal income tax return with the Bank
of Hawaii, Bancorp Pacific, Inc., and its other domestic subsidiaries.
Deferred income taxes are provided to reflect the tax effect of temporary
differences between financial statement carrying amounts and the corresponding
tax basis of assets and liabilities. Deferred taxes are calculated by applying
enacted statutory tax rates and tax laws to future years in which temporary
differences are expected to reverse. The impact on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that the rate change is enacted. Deferred tax assets that will result in
deductible amounts in future years are recognized if based on management's
judgment, it is more likely than not that the deferred tax assets will be
realized.
Pacific Century's tax sharing policy provides for the settlement of income
taxes between each relevant subsidiary as if the subsidiary had filed a
separate return. Payments are made to Pacific Century by subsidiaries with tax
liabilities, and subsidiaries that generate tax benefits receive payments for
those benefits as used.
For lease arrangements, that are accounted for by the financing method,
investment tax credits are deferred and amortized over the lives of the
respective leases.
Intangible Assets and Amortization
The excess of cost over the fair value of tangible assets and liabilities
acquired (goodwill) arising from business combinations is being amortized
using the straight-line method over various periods not exceeding 25 years.
These intangibles are reviewed periodically for other than temporary
impairment. The amortization of goodwill is included in other operating
expense and totaled $12,668,000, $9,344,000 and $8,405,000 for 1997, 1996 and
1995, respectively. As of December 31, 1997, the accumulated amortization
totaled $55,533,000.
Servicing assets are recognized when mortgage loans are originated and sold
or securitized with servicing rights retained. The capitalized cost of
servicing assets is amortized over the estimated life of the related loans.
The fair value of servicing assets is estimated based on a review of servicing
right values of loans with similar characteristics. An impairment analysis is
performed on a periodic basis and includes a review of prepayment trends,
delinquency and other relevant factors. For purposes of measuring impairment,
servicing assets are stratified by product type. Impairment is recognized when
the carrying value of the servicing assets for a stratum exceed its fair
value.
55
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest Rate/Foreign Currency Risk Management
Pacific Century utilizes off-balance sheet derivative financial instruments,
primarily as an end-user in connection with its risk management activities
and, to a lesser extent, as a service to accommodate the needs of customers.
Most of Pacific Century's derivative transactions consist of interest rate
swaps and foreign exchange contracts. Other derivative instruments may be
employed, from time to time, but in the aggregate, these instruments generally
are immaterial.
Pacific Century utilizes interest rate swaps for purposes other than trading
to manage its exposure to interest rate risks. Interest rate swaps are
contractual agreements that generally require the exchange of fixed and
floating rate payments based on specified financial indices and the underlying
notional amount over the life of the agreements.
The accrual method is used to account for interest rate swaps. Under this
method, the differential between interest to be paid and received is accrued
and recognized as an adjustment to interest income or expense of the
designated asset or liability. The fair value of these agreements is not
recorded in the consolidated financial statements. Changes in the fair value
of swap contracts are not recognized as long as the hedge correlation
continues to exist. If the hedge correlation ceases to exist based on
effectiveness tests, any existing gain or loss is amortized over the remaining
term of the agreement, and future changes in fair value are accounted for on a
mark-to-market basis. If the designated asset or liability matures, or is
extinguished, any unrealized gain or loss on the related derivate instrument
is recognized immediately.
A foreign exchange contract is a commitment to exchange foreign currency at
a contracted price on a specified date. These derivative instruments are used
for purposes other than trading primarily for asset and liability management
activities, and changes in the fair value of both the foreign exchange
contracts and related assets or liabilities hedged are offset and not included
in the financial results.
Derivative instruments entered into for trading purposes consist of foreign
exchange contracts that are used to offset foreign currency positions taken on
behalf of customers and for the Company's own account. These derivatives are
carried at fair value, and the associated unrealized gains and losses are
recognized currently in the statement of income.
International Operations
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.
Investment Securities
Pacific Century adopted the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," as of December 31, 1993.
Pursuant to the transition provisions of the FASB's Special Report on SFAS No.
115, Pacific Century transferred, in December 1995, $235,099,000 of investment
securities classified as held to maturity to the available for sale category.
The unrealized gains and losses relating to these securities were $2,082,000
and $2,491,000, respectively. The primary reason for selecting these
securities for reclassification was to further enhance Pacific Century's
flexibility in managing its investment portfolio.
Investment securities held to maturity are those securities, which the
Company has the ability and positive intent to hold to maturity. These
securities are stated at cost adjusted for amortization of premiums and
accretion
56
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of discounts. Restricted equity securities represent Federal Home Loan Bank
and Federal Reserve Bank shares, recorded at par, which also reflects fair
value. In 1997 and 1996, there were no transfers from investment securities
held to maturity.
Investment securities available for sale are recorded at fair value with
unrealized gains and losses recorded as an unrealized valuation adjustment in
equity, net of taxes. The fair value of mortgage-backed securities is based on
quoted prices.
Trading securities are those securities that are purchased for the Company's
trading activities and are expected to be sold in the near term. Securities in
the trading portfolio are carried at fair value with unrealized holding gains
and losses recognized currently in income. Trading securities were $2,374,000,
$1,687,000, and $29,000 as of December 31, 1997, 1996, and 1995, respectively.
During 1997, 1996 and 1995, the net gain from the trading securities portfolio
was $1,612,000, $823,000 and $623,000, respectively, and is recognized as a
component of investment securities gains/losses in the income statement.
Income from trading securities was $60,000, $16,000 and $323,000 for 1997,
1996 and 1995, respectively, and is included as part of other operating
income.
The Company uses the specific identification method to determine the cost of
all investment securities sold.
Loans
Loans are carried at the principal amount outstanding. Interest income is
generally recognized on the accrual basis. Net loan fees are deferred and
amortized as an adjustment to yield.
Pacific Century's policy is to place loans on non-accrual when a loan is
over 90 days delinquent, unless collection is reasonably assured based on
specific factors such as the type of borrowing agreement and/or collateral. At
the time a loan is placed on non-accrual, all accrued but unpaid interest is
reversed against current earnings. Subsequent payments received are generally
applied to reduce the principal balance.
Other Real Estate
Other real estate consists of properties acquired through foreclosure
proceedings, acceptance of a deed-in-lieu of foreclosure, abandoned bank
premises and loans for which possession of the collateral has been taken.
These properties are carried at the lower of cost or fair value based on
current appraisals less selling costs. Losses arising at the time of acquiring
such property are charged against the reserve for loan losses. Subsequent
declines in property value are recognized through charges to operating
expense.
Premises and Equipment
Premises and equipment are stated at cost less allowances for depreciation
and amortization. Depreciation is computed using the straight-line method over
lives of two to fifty years for premises and improvements, and three to ten
years for equipment.
Reserve for Loan Losses
The reserve for loan losses is established through provisions that are
charged against income. Loans deemed to be uncollectible are charged against
the reserve for loan losses, and subsequent recoveries, if any, are credited
to the reserve.
The reserve for loan losses is maintained at a level believed adequate by
management to absorb estimated future losses. Management's periodic evaluation
of the adequacy of the reserve is based on Pacific Century's
57
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
past loan loss experience, known and inherent risks in the portfolio, adverse
conditions that may affect the borrower's ability to repay (including the
timing of future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
factors. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on loans that may be susceptible to significant changes.
In 1995, Pacific Century adopted SFAS No. 114. Under the standard, a loan is
considered impaired when it is probable that all amounts due according to the
contractual terms of the loan will not be collected. Impairment is measured
based on discounted cash flows using the loan's initial effective interest
rate or the fair value of the collateral for certain collateral dependent
loans. Prior to 1995, loan losses were based on undiscounted cash flows, the
fair value of the collateral for collateral dependent loans or other factors
specific to the credit. Cash receipts on impaired loans generally are applied
to reduce the carrying value of the loan.
Large groups of smaller balance homogeneous loans, such as residential
mortgages and consumer loans are excluded from the scope of SFAS No. 114.
Loans in these groups are evaluated collectively for impairment based
primarily on the historical loss experience for each portfolio.
Stock-Based Compensation
Effective January 1, 1996, Pacific Century adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." This standard permits companies to continue to
use the intrinsic value method under Accounting Principles Board Opinion No.
25, "Accounting for Stock Based Compensation" (APB No. 25). Pacific Century
has elected to continue to use the intrinsic value method. The required
disclosures under APB No. 25 and SFAS No. 123 for stock-based compensation
plans are included in Note L to the Consolidated Financial Statements.
58
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--INVESTMENT SECURITIES
The following presents the details of the investment securities portfolio:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
At December 31, 1997
Securities Held to Maturity:
Restricted Equity Securities..... $ 64,254 $ 1 $ -- $ 64,255
Debt Securities Issued by the
U.S. Treasury and Agencies...... 396,750 503 (384) 396,869
Debt Securities Issued by State
and Municipalities of the United
States.......................... 12,029 1,266 -- 13,295
Debt Securities Issued by Foreign
Governments..................... 62,102 1 (567) 61,536
Mortgage-Backed Securities....... 637,997 3,908 (2,119) 639,786
Other Debt Securities............ 41,583 417 (6) 41,994
---------- ------- -------- ----------
Total.......................... $1,214,715 $ 6,096 $ (3,076) $1,217,735
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................ $ 3,984 $ 6 $ (524) $ 3,466
Debt Securities Issued by the
U.S. Treasury and Agencies...... 1,002,106 3,660 (1,278) 1,004,488
Debt Securities Issued by State
and Municipalities of the United
States.......................... 20,629 280 (6) 20,903
Debt Securities Issued by Foreign
Governments..................... 21,335 -- -- 21,335
Corporate Debt Securities........ 64,874 12 -- 64,886
Mortgage-Backed Securities....... 1,529,201 12,079 (5,088) 1,536,192
Other Debt Securities............ -- -- -- --
---------- ------- -------- ----------
Total.......................... $2,642,129 $16,037 $ (6,896) $2,651,270
========== ======= ======== ==========
At December 31, 1996
Securities Held to Maturity:
Restricted Equity Securities..... $ 57,220 $ -- $ -- $ 57,220
Debt Securities Issued by the
U.S. Treasury and Agencies...... 348,116 570 (1,453) 347,233
Debt Securities Issued by State
and Municipalities of the United
States.......................... 12,632 1,474 -- 14,106
Debt Securities Issued by Foreign
Governments..................... 74,685 1,922 (7) 76,600
Mortgage-Backed Securities....... 766,103 5,035 (5,151) 765,987
Other Debt Securities............ -- -- -- --
---------- ------- -------- ----------
Total.......................... $1,258,756 $ 9,001 $ (6,611) $1,261,146
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................ $ 12,509 $ 893 $ (100) $ 13,302
Debt Securities Issued by the
U.S. Treasury and Agencies...... 984,534 5,509 (4,309) 985,734
Debt Securities Issued by State
and Municipalities of the United
States.......................... 6,401 177 (3) 6,575
Corporate Debt Securities........ 67,204 18 (12) 67,210
Mortgage-Backed Securities....... 1,267,238 8,894 (7,284) 1,268,848
Other Debt Securities............ 31,228 -- -- 31,228
---------- ------- -------- ----------
Total.......................... $2,369,114 $15,491 $(11,708) $2,372,897
========== ======= ======== ==========
59
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
At December 31, 1995
Securities Held to Maturity:
Restricted Equity Securities..... $ 52,926 $ -- $ -- $ 52,926
Debt Securities Issued by the
U.S. Treasury and Agencies...... 507,298 1,108 (833) 507,573
Debt Securities Issued by State
and Municipalities of the United
States.......................... 33,812 1,808 -- 35,620
Debt Securities Issued by Foreign
Governments..................... 29,091 325 -- 29,416
Mortgage-Backed Securities....... 540,461 5,122 (1,394) 544,189
Other Debt Securities............ 2,527 1 (24) 2,504
---------- ------- ------- ----------
Total.......................... $1,166,115 $ 8,364 $(2,251) $1,172,228
========== ======= ======= ==========
Securities Available for Sale:
Equity Securities................ $ 33,494 $ 1,827 $ -- $ 35,321
Debt Securities Issued by the
U.S. Treasury and Agencies...... 670,980 9,186 (120) 680,046
Debt Securities Issued by State
and Municipalities of the United
States.......................... 6,200 208 -- 6,408
Debt Securities Issued by Foreign
Governments..................... 26,201 -- -- 26,201
Corporate Debt Securities........ 2,891 21 (16) 2,896
Mortgage-Backed Securities....... 1,434,038 12,502 (4,717) 1,441,823
Other Debt Securities............ 1,317 26 -- 1,343
---------- ------- ------- ----------
Total.......................... $2,175,121 $23,770 $(4,853) $2,194,038
========== ======= ======= ==========
The following presents an analysis of the contractual maturities of the
investment securities portfolio as of December 31, 1997:
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS OF
DOLLARS)
Securities Held to Maturity
Due in One Year or Less................................ $ 372,924 $ 372,627
Due After One Year Through Five Years.................. 139,195 140,712
Due After Five Years Through Ten Years................. 130 130
Due After Ten Years.................................... 215 225
---------- ----------
512,464 513,694
Mortgage-Backed Securities............................. 637,997 639,786
Restricted Equity Securities........................... 64,254 64,255
---------- ----------
$1,214,715 $1,217,735
========== ==========
Securities Available for Sale
Due in One Year or Less................................ $ 210,350 $ 211,478
Due After One Year Through Five Years.................. 726,026 725,838
Due After Five Years Through Ten Years................. 53,584 53,897
Due After Ten Years.................................... 118,984 120,399
---------- ----------
1,108,944 1,111,612
Mortgage-Backed Securities............................. 1,529,201 1,536,192
Equity Securities...................................... 3,984 3,466
---------- ----------
$2,642,129 $2,651,270
========== ==========
60
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proceeds from sales and maturities of investment securities available for
sale during 1997 were $909,975,000. Gross gains of $1,575,000 and gross losses
of $82,000 were realized on those sales. Taxes related to these gains and
losses were $523,000 in 1997. The cumulative investment valuation reserve was
$5,485,000 (net of taxes) as of December 31, 1997.
Investment securities carried at $3,319,340,000, $3,255,203,000 and
$3,170,854,000 were pledged to secure deposits of certain public
(governmental) entities, repurchase agreements and swap agreements at December
31, 1997, 1996 and 1995, respectively. The December 31, 1997 amount included
investment securities with a carrying value of $2,530,835,000 and a market
value of $2,538,282,000 which were pledged solely for repurchase agreements.
NOTE C--LOANS
Loans consisted of the following at year-end:
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Domestic Loans
Commercial and Industrial............... $2,104,318 $1,806,699 $1,902,189
Real Estate
Construction--Commercial.............. 268,153 212,324 199,552
--Residential.................... 12,869 23,599 33,722
Mortgage--Commercial.................. 1,354,459 1,227,845 1,308,779
--Residential..................... 2,738,917 2,635,313 2,702,438
Installment............................. 891,607 849,259 817,337
---------- ---------- ----------
Total Domestic Loans................ 7,370,323 6,755,039 6,964,017
---------- ---------- ----------
Foreign Loans............................. 1,608,667 1,506,447 795,477
---------- ---------- ----------
Subtotal............................ 8,978,990 8,261,486 7,759,494
---------- ---------- ----------
Lease Financing
Direct.................................. 246,212 181,666 124,753
Leveraged............................... 273,206 256,134 268,159
---------- ---------- ----------
Total Lease Financing............... 519,418 437,800 392,912
---------- ---------- ----------
Total Loans......................... $9,498,408 $8,699,286 $8,152,406
========== ========== ==========
Commercial and mortgage loans totaling $960,882,000 were pledged to secure
certain public deposits and Federal Home Loan Bank advances at December 31,
1997.
Included in the Mortgage-Residential category above were $96,156,000 and
$49,567,000 of available for sale loans as of December 31, 1997 and 1996,
respectively. These loans were recorded at the lower of cost or market on an
aggregate basis.
Servicing assets are summarized in the following table:
1997 1996
------ ------
(IN THOUSANDS
OF DOLLARS)
Balance at Beginning of Year............................... $5,258 $1,946
Originated Mortgage Servicing Rights....................... 1,629 2,926
Purchased Servicing Rights................................. 889 824
Amortization............................................... (959) (438)
------ ------
Balance at End of Year................................... $6,817 $5,258
====== ======
Fair Value............................................... $6,979 $5,195
====== ======
61
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997 and 1996, Pacific Century's loan servicing portfolio
totaled $1,651,838,000 and $1,543,985,000, respectively.
Pacific Century's lending activities are concentrated in its primary
geographic markets of Hawaii, the U.S. Mainland, Asia, and the West and South
Pacific.
Certain directors and executive officers of Pacific Century, its subsidiary
companies, companies in which they are principal owners, and trusts in which
they are involved, have loans with Pacific Century subsidiaries. These loans
were made in the ordinary course of business at normal credit terms, including
interest rate and collateral requirements. Such loans at December 31, 1997,
1996 and 1995 amounted to $21,383,000, $27,593,000 and $37,335,000,
respectively. During 1997, the activity in these loans included new borrowings
of $21,958,000, repayments of $23,636,000, and other changes of $4,532,000.
Other changes relate to new and retiring directors or companies and trusts in
which they are involved.
Transactions in the reserve for loan losses were as follows:
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Balance at Beginning of Year................. $167,795 $151,979 $148,508
Provision Charged to Operations.............. 30,338 22,227 16,967
Reserves Acquired............................ 12,372 6,581 --
Valuation Adjustments........................ (5,917) 25 611
Charge-Offs.................................. (55,132) (44,084) (27,857)
Recoveries................................... 24,906 31,067 13,750
-------- -------- --------
Net Charge-Offs............................ (30,226) (13,017) (14,107)
-------- -------- --------
Balance at End of Year..................... $174,362 $167,795 $151,979
======== ======== ========
The following table presents information on impaired loans:
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS
OF DOLLARS)
Recorded Investment in Impaired Loans Not Requiring an
Allowance for Credit Losses............................. $ 7,187 $20,918
Recorded Investment in Impaired Loans Requiring an
Allowance for Credit Losses............................. 26,490 5,239
------- -------
Recorded Investment in Impaired Loans.................... $33,677 $26,157
======= =======
Reserve for Losses on Impaired Loans..................... $16,586 $ 2,763
Average Recorded Investment in Impaired Loans............ $12,580 $47,085
======= =======
62
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE D--PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
ACCUMULATED
DEPRECIATION NET BOOK
COST AND AMORTIZATION VALUE
-------- ---------------- --------
(IN THOUSANDS OF DOLLARS)
December 31, 1997
Premises.............................. $304,881 $(103,008) $201,873
Capital Leases........................ 4,464 (893) 3,571
Equipment............................. 215,909 (132,995) 82,914
-------- --------- --------
$525,254 $(236,896) $288,358
======== ========= ========
December 31, 1996
Premises.............................. $294,664 $ (96,090) $198,574
Capital Leases........................ 4,464 (714) 3,750
Equipment............................. 177,800 (107,002) 70,798
-------- --------- --------
$476,928 $(203,806) $273,122
======== ========= ========
December 31, 1995
Premises.............................. $267,724 $ (76,543) $191,181
Capital Leases........................ 4,464 (536) 3,928
Equipment............................. 136,965 (85,559) 51,406
-------- --------- --------
$409,153 $(162,638) $246,515
======== ========= ========
Depreciation and amortization (including capital lease amortization)
included in non-interest expense were $33,641,000, $29,612,000 and $24,760,000
in 1997, 1996 and 1995, respectively.
Pacific Century leases certain branch premises and data processing
equipment. Most of the premise leases provide for a base rent over a specified
period with renewal options thereafter. Portions of certain properties are
subleased for periods expiring in various years through 2000. Lease terms
generally provide for the lessee to pay taxes, maintenance and other operating
costs.
Future minimum payments, by year and in the aggregate, for noncancelable
operating leases with initial or remaining terms of one year or more and
capital leases consisted of the following at December 31, 1997:
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS OF
DOLLARS)
1998..................................................... $ 7 $ 15,048
1999..................................................... 7 14,036
2000..................................................... 7 12,478
2001..................................................... 7 11,062
2002..................................................... 7 9,330
Thereafter............................................... 34,924 107,648
------- --------
Total Minimum Lease Payments............................. $34,959 $169,602
Amounts Representing Interest............................ 28,660 --
------- --------
Present Value of Net Minimum Lease Payments.............. $ 6,299 $ --
======= ========
63
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Minimum future rentals receivable under subleases for noncancelable
operating leases at December 31, 1997, amounted to $3,298,000.
Rental expense for all operating leases consisted of:
1997 1996 1995
------- ------- -------
(IN THOUSANDS OF
DOLLARS)
Minimum Rentals................................. $23,088 $20,164 $21,573
Sublease Rental Income.......................... (544) (657) (606)
------- ------- -------
$22,544 $19,507 $20,967
======= ======= =======
NOTE E--DEPOSITS
Interest on deposit liabilities in 1997, 1996 and 1995 consisted of the
following:
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Domestic Interest-Bearing Demand Accounts...... $ 52,912 $ 47,167 $ 50,913
Domestic Savings Accounts...................... 21,444 23,713 30,558
Domestic Time Accounts......................... 156,988 133,493 98,528
Foreign Deposits............................... 92,163 84,343 59,538
-------- -------- --------
$323,507 $288,716 $239,537
======== ======== ========
Time deposits with balances of $100,000 or more were $2,705,197,000 in 1997.
Of this amount, $112,510,000 represents deposits of public (governmental)
entities which require collaterization by acceptable securities. The majority
of deposits in the foreign category are time deposits in denominations of
$100,000 or more.
Maturities of time deposits of $100,000 or more at December 31, 1997, are
summarized as follows:
DOMESTIC FOREIGN
---------- ----------
(IN THOUSANDS OF
DOLLARS)
Under 3 Months...................................... $ 520,866 $1,090,047
3 to 6 Months....................................... 187,854 416,786
7 to 12 Months...................................... 223,011 64,759
Greater than 1 to 2 Years........................... 70,273 18,204
Greater than 2 to 3 Years........................... 22,012 2,083
Greater than 3 to 4 Years........................... 8,132 1,437
Greater than 4 to 5 Years........................... 5,412 --
Greater than 5 Years................................ 13,266 61,055
---------- ----------
$1,050,826 $1,654,371
========== ==========
64
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--SHORT-TERM BORROWINGS
Details of short-term borrowings for 1997, 1996 and 1995 were as follows:
SECURITIES
SOLD UNDER OTHER
FUNDS AGREEMENTS COMMERCIAL SHORT-TERM
PURCHASED TO REPURCHASE PAPER BORROWINGS
--------- ------------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
1997
Amounts Outstanding December
31......................... $710,472 $2,279,124 $104,916 $107,631
Average Amount Outstanding
During Year................ 422,217 2,108,746 92,311 233,050
Maximum Amount Outstanding
at Any Month End........... 710,472 2,309,775 121,909 399,152
Weighted Average Interest
Rate During Year (1)....... 5.64% 5.48% 5.19% 5.31%
Weighted Average Interest
Rate on Balance Outstanding
at End of Year............. 5.88% 5.47% 5.13% 4.30%
1996
Amounts Outstanding December
31......................... $599,994 $2,075,571 $ 69,727 $223,530
Average Amount Outstanding
During Year................ 533,647 1,857,286 83,181 335,509
Maximum Amount Outstanding
at Any Month End........... 643,988 2,075,571 114,446 477,697
Weighted Average Interest
Rate During Year (1)....... 5.44% 5.39% 5.03% 5.04%
Weighted Average Interest
Rate on Balance Outstanding
at End of Year............. 5.77% 5.38% 4.95% 4.91%
1995
Amounts Outstanding December
31......................... $787,437 $1,926,540 $ 73,509 $403,358
Average Amount Outstanding
During Year................ 532,787 2,120,220 69,002 433,046
Maximum Amount Outstanding
at Any Month End........... 787,437 2,263,425 85,600 601,990
Weighted Average Interest
Rate During Year (1)....... 6.04% 5.76% 5.08% 3.78%
Weighted Average Interest
Rate on Balance Outstanding
at End of Year............. 5.57% 5.57% 5.18% 4.99%
- --------
(1) Average rates for the year are computed by dividing actual interest
expense on borrowings by average daily borrowings.
Funds purchased generally mature on the day following the date of purchase.
Commercial paper is issued by the parent corporation in various denominations
generally maturing 90 days or less from date of issuance.
Securities sold under agreements to repurchase are accounted for as
financing transactions and the obligations to repurchase these securities are
recorded as liabilities in the Consolidated Statements of Condition. The
securities underlying the agreements to repurchase continue to be reflected as
an asset of Pacific Century and are delivered to and held in collateral
accounts with third party trustees. At December 31, 1997, the weighted average
contractual maturity of these agreements was 103 days and consists of
transactions with public
65
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(governmental) entities, primarily the State of Hawaii ($1.5 billion) and
local municipalities ($0.8 billion). A schedule of maturities of repurchase
agreements is as follows:
DECEMBER 31,
1997
-------------
(IN THOUSANDS
OF DOLLARS)
Overnight.................................................... $ --
Less than 30 days............................................ 576,996
30 to 90 days................................................ 849,484
Over 90 days................................................. 852,644
----------
$2,279,124
==========
A line of credit totaling $35,000,000 is maintained to back up commercial
paper issued by Pacific Century. At December 31, 1997 there was no amount
drawn on this line. Fees related to line were $34,000 in 1997.
At December 31, 1997, other short-term borrowings consisted mainly of
Foreign Call Deposits and Treasury Tax and Loan balances. Foreign Call
Deposits generally mature in 90 days and bear interest rates that are
reflective of rates on borrowings with similar maturities. Treasury Tax and
Loan balances represent tax payments collected on behalf of the U.S.
government that are callable at any time and bear market interest rates. A
5.63% Bank note totaling $150 million at December 31, 1996 matured in November
1997. A Federal Home Loan Bank advance totaling $15.0 million bears an
interest rate of 5.65% and matures on December 4, 1998.
NOTE G--LONG-TERM DEBT
Amounts outstanding as of year-end were as follows:
1997 1996 1995
-------- -------- ----------
(IN THOUSANDS OF DOLLARS)
Notes........................................ $150,000 $259,956 $ 709,747
Federal Home Loan Bank Advances.............. 288,045 398,045 229,545
Subordinated Notes........................... 118,755 118,707 118,657
8.25% Capital Securities..................... 100,000 100,000 --
Foreign Debt................................. 42,690 49,556 --
Capitalized Lease Obligations................ 6,299 5,879 5,487
-------- -------- ----------
$705,789 $932,143 $1,063,436
======== ======== ==========
In December 1996, Pacific Century completed a $100 million offering of 8.25%
Capital Securities (the "Securities"). The offering was issued by Bancorp
Hawaii Capital Trust I, a grantor trust wholly-owned by Pacific Century. The
Securities bear a cumulative fixed interest rate of 8.25% and mature on
December 15, 2026. Interest payments are semi-annual. In addition, Pacific
Century has entered into an expense agreement with the trust obligating
Pacific Century to pay any costs, expenses or liabilities of the trust, other
than obligations of the trust to pay amounts due pursuant to the terms of the
Securities. The sole assets of the trust are Junior Subordinated Debt
Securities (the "Debt") issued by Pacific Century to the trust. The Debt is
redeemable prior to the stated maturity at Pacific Century's option. The
Securities are subject to mandatory redemption upon repayment of the related
Debt at their stated maturity dates or their earlier redemption at a
redemption price equal to their liquidation amount plus accrued distributions
to the date fixed for redemption and the premium, if any, paid by Pacific
Century upon concurrent repayment of the related Debt. Pacific Century has
issued guarantees for the payment of distributions and payments on liquidation
or redemption of the Securities, but only to the
66
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
extent of funds held by the trust. The guarantees are junior subordinated
obligations of Pacific Century. Distributions to Securities holders may be
deferred for up to five consecutive years. During any such deferred period
Pacific Century's ability to pay dividends on its common shares will be
restricted. The Federal Reserve has announced that certain cumulative
preferred securities, having the characteristics of the Securities, qualify as
minority interest, which is included in Tier 1 capital for bank holding
companies.
In 1996, Bank of Hawaii borrowed the equivalent of $50 million USD in French
Francs through a private placement. This debt has a fixed interest rate of
5.16% and matures in 1999.
In 1995, Bank of Hawaii incorporated its existing medium term note program
into a $1 billion revolving note program. Under the terms of this program the
Bank may issue additional notes provided that at any time the aggregate amount
outstanding does not exceed $1 billion. At December 31, 1997, there was a
total of $24,991,000 outstanding under this program, all of which was
classified as short-term.
Privately placed notes issued by Pacific Century totaled $150 million at
December 31, 1997. Notes totaling $90 million were issued in 1997. These notes
carry seven year terms and bear floating interest rates which are tied to the
three-month LIBOR rate. Notes totaling $60 million were issued in 1995. These
notes carry three year terms, and bear interest rates from 6.08% to 6.48%.
Federal Home Loan Bank (FHLB) advances bear interest at rates from 5.240% to
7.996% and mature from 1998 through 2004. At December 31, 1997, loans totaling
$345,654,000 were pledged to secure these advances along with all FHLB stock.
The subordinated notes issued by Bank of Hawaii in 1993, bear a fixed
interest rate of 6.875%. These notes mature in 2003.
Capitalized lease obligations are for certain condominium units in the
Financial Plaza of the Pacific. The lease began in 1993 and has a 60 year
term. Lease payments are fixed at $7,000 per year until 2002; $605,000 per
year from 2003 to 2007 and $665,000 per year from 2008 to 2012 and are
negotiable thereafter.
Long-term debt maturities for the five years succeeding December 31, 1997,
are $188,000,000 in 1998, $128,190,000 in 1999, $38,875,000 in 2000,
$21,000,000 in 2001 and $12,670,000 in 2002.
Interest paid on long-term debt in 1997 totaled $57,144,000.
NOTE H--SHAREHOLDERS' EQUITY
Certain of Pacific Century's consolidated subsidiaries (including Bank of
Hawaii, Bancorp Pacific, Inc., and Pacific Century Bank, N.A., and California
United Bank) are subject to regulatory restrictions that limit cash dividends
and loans to Pacific Century. As of December 31, 1997, approximately
$380,166,000 of undistributed earnings of Pacific Century's consolidated
subsidiaries were available for distribution to Pacific Century without prior
regulatory approval.
Pacific Century is required to maintain minimum levels of capital to meet
regulatory guidelines. For evaluating capital adequacy, the regulators require
Pacific Century to maintain three capital ratios at specific minimum levels.
Tier 1 Capital (common equity reduced by certain intangibles and increased for
qualifying preferred shares and minority interests) expressed as a percentage
of average risk weighted assets is the Tier 1 Capital Ratio. Total Capital
(Tier 1 capital plus qualifying portions of the reserve for loan losses)
expressed as a percentage of average risk weighted assets is the Total Capital
Ratio. The third ratio is the Leverage Ratio which is Tier 1 Capital divided
by average assets. The table below presents the minimum Capital levels that an
67
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
institution must maintain to qualify as "well capitalized" as it applies to
Pacific Century and its subsidiaries Bank of Hawaii, Bancorp Pacific, Inc.,
Pacific Century Bank, N.A. and California United Bank.
The Federal Deposit Insurance Corporation Improvements Act of 1991 (FDICIA)
requires the federal banking regulators to take "prompt corrective action"
with respect to depository institutions that do not meet minimum capital
requirements and imposes certain restrictions upon banks which meet minimum
capital requirements but are not "well capitalized" for purposes of FDICIA.
Undercapitalized institutions are subject to regulatory monitoring and may be
required to divest themselves of or liquidate subsidiaries. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Pacific Century, Bank of Hawaii, Bancorp Pacific, Inc., Pacific Century
Bank, N.A. and California United Bank have all been notified by their
respective regulators of their status as "well capitalized." The table below
sets forth regulatory capital for Pacific Century and its depository
subsidiaries at December 31, 1997 and 1996:
PACIFIC CENTURY BANK OF BANCORP PACIFIC CENTURY CALIFORNIA
MINIMUM FINANCIAL CORP. HAWAII PACIFIC, INC. BANK, N.A. UNITED BANK
------- --------------- --------- ------------- --------------- -----------
(IN THOUSANDS OF DOLLARS)
At December 31, 1997
Common Equity........... $1,117,207 $ 872,402 $129,261 $53,753 $86,871
Tier 1 Capital.......... 1,036,558 818,136 129,219 36,435 86,645
Total Capital........... 1,292,619 1,055,129 137,826 41,226 93,837
Tier 1 Capital Ratio.... 6% 9.34% 8.54% 9.57% 9.60% 14.94%
Total Capital Ratio..... 10% 11.65% 11.01% 18.02% 10.86% 16.18%
Leverage Ratio.......... 5% 7.21% 6.63% 9.57% 7.18% 10.99%
At December 31, 1996
Common Equity........... $1,066,122 $ 865,761 $123,560 $14,120 $ --
Tier 1 Capital.......... 1,104,304 815,983 123,512 14,120 --
Total Capital........... 1,354,120 1,054,089 132,297 15,864 --
Tier 1 Capital Ratio.... 6% 10.57% 8.57% 9.08% 10.64%
Total Capital Ratio..... 10% 12.96% 11.07% 16.96% 11.95%
Leverage Ratio.......... 5% 7.98% 6.63% 9.08% 7.28%
The following is a breakdown of the unrealized valuation adjustment
component of shareholders' equity as of December 31:
1997 1996 1995
-------- ------- -------
(IN THOUSANDS OF
DOLLARS)
Foreign Currency Translation Adjustment...... $(30,251) $(5,974) $ 2,536
Investment Securities........................ 5,485 2,252 11,366
-------- ------- -------
Unrealized Valuation Adjustments............. $(24,766) $(3,722) $13,902
======== ======= =======
68
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--INTERNATIONAL OPERATIONS
The following table provides selected financial data for Pacific Century's
international operations for the years ended:
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
International
Average Assets.......................... $3,005,084 $2,752,642 $1,724,347
Average Loans........................... 1,540,294 1,253,695 745,948
Average Deposits........................ 2,074,103 1,672,734 994,102
Operating Revenue....................... 215,876 192,084 107,884
Income Before Taxes..................... 20,870 17,347 9,353
Net Income.............................. 10,243 8,082 4,805
Average assets include short-term interest-bearing deposits with foreign
branches of U.S. banks and large international banks. On average, these
deposits were $704,366,000, $584,622,000 and $648,473,000 during 1997, 1996
and 1995, respectively.
To measure international profitability, Pacific Century maintains an
internal transfer pricing system that makes certain income and expense
allocations, including interest expense for the use of domestic funds.
Interest rates used in determining charges on advances of funds are based on
prevailing deposit rates. Overhead is allocated based on services rendered by
administrative units to profit centers.
By the end of 1997, an economic crisis that first began in Thailand had
spread throughout much of Asia. Many countries in the region experienced
significant devaluation of their currency, as well as higher interest rates
and a general tightening of credit. The tighter credit environment escalated
to a liquidity crisis that required the intervention of the International
Monetary Fund in South Korea, Thailand and Indonesia. At December 31, 1997,
Pacific Century's cross-border exposure to South Korea, Thailand, and
Indonesia were $413.2 million, $74.4 million and $21.1 million, respectively.
Given the inherent uncertainties and complexities related to the troubled
economies in Asia, it is possible that the Company's estimate of the impact of
these uncertainties on its operations may change.
NOTE J--CONTINGENT LIABILITIES
Pacific Century is a defendant in various legal proceedings and, in
addition, there are various other contingent liabilities arising in the normal
course of business. After consultation with legal counsel, management does not
anticipate that the disposition of these proceedings and contingent
liabilities will have a material effect upon the consolidated financial
statements.
NOTE K--PROFIT-SHARING, RETIREMENT AND POSTRETIREMENT BENEFITS PLANS
A deferred-compensation profit-sharing plan (Profit Sharing Plan) is
provided for the benefit of all employees of Pacific Century and its
subsidiaries who have met the Profit Sharing Plan's eligibility requirements.
The Profit Sharing Plan provides for annual contributions based on a schedule
of performance levels. The schedule establishes the percentage of adjusted net
income to be contributed based on Pacific Century's adjusted return on equity.
Participants in the Profit Sharing Plan receive up to 50% of their annual
allocation in cash. The remaining amounts are deferred and may be invested in
various mutual funds, including a fund that invests solely in the common
shares of Pacific Century Financial Corporation. Pacific Century's
contributions to the Profit Sharing Plan totaled $9,723,000 in 1997,
$9,098,000 in 1996 and $7,629,000 in 1995.
Effective January 1, 1996, the Profit Sharing Plan was enhanced with a
company match of $1.25 for each $1.00 in 401(k) contributions made by
qualified employees up to a maximum of 2% of the employee's
69
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
compensation. For 1997 and 1996, matching contributions under this plan
totaled $2,882,000 and $2,671,000, respectively.
In 1995, Pacific Century froze its non-contributory, qualified defined-
benefit retirement plan (Retirement Plan) and excess retirement plan (Excess
Plan) which covered salaried employees of Pacific Century and participating
subsidiaries who met certain eligibility requirements. Benefits were based on
years of service and an average of the five highest years of annual
compensation. In freezing this Plan, all participants became fully vested and
final benefits were determined as of December 31, 1995. In conjunction with
the termination of the Retirement Plan, qualifying employees who were at least
50 years of age and had 9 years or more of eligible service were offered an
early retirement option. The option provided for an extra 5 years of service
and 5 years of age for benefit calculation purposes. In addition, the option
also provided employees with $250 per month until age 65 to defray medical
benefit costs. The early retirement option was elected by 340 employees,
almost 75% of those eligible. The curtailment gain in 1995 for the Retirement
Plan was $2,971,000 and the curtailment loss for the Excess Retirement Plan
was $2,811,000. Additionally, qualifying employees whose combined age and
years of service exceeded 60 as of December 31, 1995, were provided a
transition benefit that allows for an increase for salary changes until the
year 2000. Pacific Century's funding policy is to contribute annually an
amount that falls within the minimum and maximum range deductible for income
tax purposes. Retirement Plan assets are managed by investment advisors in
accordance with investment policies established by the Retirement Plan
Trustees. Investments generally consist of marketable securities including
stocks, bonds and money market funds.
The Excess Plan is a non-qualified excess benefit plan which covers all
employees of Pacific Century and participating subsidiaries who have met
eligibility requirements. The unfunded Excess Plan recognizes the liability to
participants for amounts exceeding the limits allowed under the Retirement
Plan.
The following table sets forth information regarding both the Retirement
Plan and Excess Plan at December 31.
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Actuarial Present Value of Benefit
Obligations:
Vested Benefit Obligation................. $ 76,599 $ 71,406 $ 71,159
======== ======== ========
Accumulated Benefit Obligation............ $ 79,314 $ 74,550 $ 75,725
======== ======== ========
Projected Benefit Obligation................ $ 84,243 $ 81,479 $ 82,443
Plan Assets (Primarily Marketable
Securities) at Fair Value.................. 80,201 71,271 63,519
-------- -------- --------
Projected Benefit Obligation in Excess of
Plan Assets................................ (4,042) (10,208) (18,924)
Unrecognized Net (Gain)/Loss................ (10,459) (6,150) (836)
Unrecognized Net Asset at December 31....... (633) (951) (1,501)
-------- -------- --------
Accrued Pension Liability Recognized in the
Statement of Condition..................... $(15,134) $(17,309) $(21,261)
======== ======== ========
70
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension costs included the following components:
1997 1996 1995
-------- ------- -------
(IN THOUSANDS OF
DOLLARS)
Service Cost--Benefits Earned During the
Period...................................... $ -- $ -- $ 6,881
Interest Cost on Projected Benefit
Obligation.................................. 6,065 6,046 8,000
Actual Return on Assets...................... (13,502) (7,187) (6,122)
Net Amortization and Deferral................ 7,067 1,422 111
-------- ------- -------
Net Periodic Pension Cost.................... $ (370) $ 281 $ 8,870
======== ======= =======
Assumptions used in determining net pension cost were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Weighted-Average Discount Rates.... 7.50% 7.75% 7.50%
Rates of Increase in Compensation
Levels............................ 5.00% 5.00% 5.00%
Expected Long-Term Rate of Return
on Assets......................... 9.00% 9.00% 8.50%
==== ==== ====
As of January 1, 1996, Pacific Century established a new defined-
contribution money purchase plan under which it contributes 4% of compensation
to employees meeting certain eligibility and vesting requirements. The money
purchase plan has a one year eligibility requirement and a five year vesting
period. Employees meeting these requirements as of January 1, 1996,
immediately became participants. For 1997 and 1996, Pacific Century
contributed $4,943,000 and $4,839,000, respectively, to the money purchase
plan.
Pacific Century's postretirement benefit plan provides retirees with group
life, dental and medical insurance coverage. The cost of providing
postretirement benefits are "shared costs" where both the employer and
employees pay a portion of the premium. Most employees of Pacific Century and
its subsidiaries who have met the eligibility requirements are covered by this
Plan. Pacific Century recognizes the transition obligation over 20 years.
Pacific Century has no segregated assets to provide postretirement benefits.
The curtailment of the Retirement Plan and Excess Plan in 1995 also affected
the postretirement benefit plan. A curtailment loss of $772,000 was recorded
to reflect this change.
The following schedule presents information regarding the postretirement
liability and cost as of December 31, 1997, 1996 and 1995.
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Accumulated Postretirement Benefit
Obligation
Retirees.................................. $(14,652) $(15,163) $(14,515)
Other Fully Eligible Plan Participants.... (4,452) (3,228) (3,054)
Other Active Plan Participants............ (8,643) (8,457) (11,095)
-------- -------- --------
Accumulated Postretirement Benefit
Obligation................................. (27,747) (26,848) (28,664)
Unrecognized Transition Obligation Being
Amortized Over 20 Years.................... 10,446 11,142 11,838
Unrecognized Net Gain/(Loss)................ (5,302) (4,494) (459)
-------- -------- --------
Accrued Postretirement Benefit Liability.... $(22,603) $(20,200) $(17,285)
======== ======== ========
71
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Net Periodic Postretirement Benefit Cost was:
1997 1996 1995
------ ------ ------
(IN THOUSANDS OF
DOLLARS)
Service Cost........................................ $1,002 $1,262 $1,046
Interest Cost....................................... 1,894 2,057 1,912
Amortization of Transition Obligation............... 696 696 647
Other Amortization and Deferral..................... (189) -- --
------ ------ ------
Net Periodic Postretirement Benefit Cost............ $3,403 $4,015 $3,605
====== ====== ======
The following table presents the assumptions utilized to determine the
expense and liability:
1997 1996 1995
---- ---- -----
Health Care Cost Trend Rate............................. 9.00% 9.00% 15.00%
Dental Care Cost Trend Rate............................. 7.00% 7.00% 7.50%
Weighted Average Discount Rate.......................... 7.50% 7.75% 7.50%
Rate of Increase in Compensation Level.................. 5.00% 5.00% 5.00%
The health care cost trend rate was revised in 1996 to 9% per year until the
year 1999 and leveling to 7% thereafter. A one percent increase in this
assumption (with all other assumptions remaining constant) would increase the
service and interest cost components of the net periodic postretirement cost
for 1997 from $2,896,000 to $3,266,000. Additionally, a one percent increase
in health care costs would cause the accumulated postretirement benefit
obligation to rise from $27,747,000 to $30,457,000 at December 31, 1997.
NOTE L--STOCK OPTION PLANS
The Pacific Century Stock Option Plans (the Plans) are administered by the
Compensation Committee which is composed entirely of non-employee directors.
The Plans provide participants with the option to purchase shares of common
stock at a specified exercise price beginning one year after the date the
option was granted and expiring 10 years thereafter. The exercise price is
equal to the fair market value of the shares on the date the option was
granted. The Plans also provide certain participants with stock options in
tandem with stock appreciation rights (SAR). A SAR entitles an optionee, in
lieu of exercising the stock option, to receive cash equal to the excess of
the market value of the shares as of the exercise date over the option price.
The Compensation Committee has limited the exercise of SARs to $1 million per
year, allocated among the participants. The expense for the SARs recognized in
the income statement was $1,000,000 in 1997 and 1996.
In 1996, a Director Stock Option Plan was established that permits the
Company to grant options for restricted common shares to directors and
requires retention of such shares exercised throughout the service period as a
director. The plan automatically grants annually an option for 1,000 shares to
each Pacific Century director who is also a director of Bank of Hawaii and an
option for 500 shares to directors who are only directors of Pacific Century
or Bank of Hawaii. The exercise price is based on the closing market price of
the shares on the date that the option was granted. Each option expires on the
tenth anniversary date of its grant and is generally not transferable. If an
optionee ceases to serve as a director for any reason other than death, the
option immediately terminates and any restricted shares that were previously
acquired are subject to redemption at a price equal to the market value of the
shares at the time of grant. The 42,000 options outstanding under this plan
are included in the table below.
72
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following information relates to options outstanding as of December 31,
1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE
SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
------------------------ ----------- -------- ------------ ----------- --------
$ 6.04--$14.08.......... 1,194,134 $12.15 57.6 months 1,194,134 $12.15
14.25-- 18.38.......... 1,224,616 16.84 79.2 months 1,224,616 16.84
20.88-- 23.94.......... 988,000 21.44 108.0 months 890,000 21.16
25.22-- 26.06.......... 690,300 26.00 118.8 months -- --
--------- ------ ------------ --------- ------
Total................. 4,097,050 $18.13 86.4 months 3,308,750 $16.31
The following table presents the activity of Stock Option Plans for the
years indicated:
1997 1996 1995
------------------------------ --------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding at
January 1.............. 3,917,790 $15.83 3,644,906 $13.73 3,684,078 $11.77
Granted................ 811,300 25.61 921,000 21.07 1,132,000 17.06
Exercised.............. (575,492)(1) 13.10 (529,558) 11.09 (895,752) 10.37
Forfeited.............. (25,000) 21.13 (117,634) 12.52 (275,420) 9.96
Expired................ (31,548) 13.96 (924) 6.57 -- --
--------- ------ --------- ------ --------- ------
Outstanding at December
31..................... 4,097,050 $18.13 3,917,790 $15.83 3,644,906 $13.73
========= ====== ========= ====== ========= ======
Options Exercisable at
December 31............ 3,308,750 2,996,790 2,557,906
Shares Available for
Future Grants.......... 1,233,994 1,988,746 2,792,112
- --------
(1) The price per share of options exercised during 1997 ranged between $6.04
and $21.13 on an actual exercise price basis.
73
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the pro-forma disclosures of the impact that
the 1997 and 1996 option grants would have had on net income and earnings per
share had the grants been measured using the fair value of accounting
prescribed by SFAS No. 123:
1997 1996 1995
-------- -------- --------
(IN THOUSANDS EXCEPT PER
SHARE AND OPTION DATA)
Pro Forma
Net Income (1).......................... $135,805 $130,605 $120,902
Basic Earnings Per Share................ $ 1.70 $ 1.60 $ 1.45
Diluted Earnings Per Share.............. $ 1.68 $ 1.58 $ 1.44
Weighted Average Fair Value of Options
Granted During the Year (1)............ $ 6.13 $ 5.85 $ 4.68
Assumptions
Average Risk Free Interest Rate....... 5.85% 6.47% 6.51%
Average Expected Volatility........... 17.08% 17.73% 17.90%
Expected Dividend Yield............... 3.13% 2.75% 2.75%
Expected Life......................... 10 years 10 years 10 years
- --------
(1) The Black-Scholes option pricing model was used to develop the fair values
of the grants.
NOTE M--OTHER OPERATING EXPENSE
Other operating expense at year-end was as follows:
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
FDIC Insurance................................. $ 1,530 $ 6,781 $ 7,632
Legal and Other Professional Fees.............. 23,362 17,642 15,623
Advertising.................................... 10,612 11,407 11,144
Stationery and Supplies........................ 10,701 10,678 9,247
Other.......................................... 116,113 91,851 60,798
-------- -------- --------
Total...................................... $162,318 $138,359 $104,444
======== ======== ========
NOTE N--INCOME TAXES
The significant components of the provision for income taxes are as follows:
1997 1996 1995
------- ------- -------
(IN THOUSANDS OF
DOLLARS)
Current:
Federal........................................ $51,588 $45,641 $49,145
State.......................................... 11,570 10,003 8,634
Foreign........................................ 15,254 12,082 6,073
------- ------- -------
$78,412 $67,726 $63,852
======= ======= =======
Deferred:
Federal........................................ $ 1,493 $ 1,711 $ 7,273
State.......................................... (480) 712 651
Foreign........................................ (913) -- --
------- ------- -------
$ 100 $ 2,423 $ 7,924
======= ======= =======
Provision for Income Taxes....................... $78,512 $70,149 $71,776
======= ======= =======
74
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The current income tax provision includes taxes on gains and losses on the
sale of securities of $1,107,000, $471,000 and $912,000 for 1997, 1996 and
1995, respectively. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1997, 1996 and 1995 reclassified based on the tax returns as
filed, are as follows:
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Deferred Tax Liabilities:
Lease Transactions........................ $187,822 $182,018 $181,612
Deferred Investment Tax Credits........... 5,620 6,003 6,851
Accelerated Depreciation.................. 831 1,406 1,445
Core Deposit Intangible................... 8,076 9,141 10,206
-------- -------- --------
Total Deferred Tax Liabilities.......... 202,349 198,568 200,114
-------- -------- --------
Deferred Tax Assets:
Reserve for Loan Losses................... 57,110 55,778 54,426
Accrued Pension Cost...................... 3,541 3,969 4,507
Net Operating Loss Carry Forwards......... -- 385 1,299
Securities Valuation Reserve.............. (3,761) (1,440) (7,470)
Post Retirement Benefits.................. 8,741 7,277 6,343
Other--Net................................ (4,673) (9,541) (4,763)
-------- -------- --------
Total Deferred Tax Assets............... 60,958 56,428 54,342
Valuation Allowance for Deferred Tax
Assets................................... -- (385) (1,299)
-------- -------- --------
Net Deferred Tax Assets................. 60,958 56,043 53,043
-------- -------- --------
Net Deferred Tax Liabilities................ $141,391 $142,525 $147,071
======== ======== ========
For financial statement purposes, Pacific Century had deferred investment
tax credits for property purchased for lease to customers of $5,620,000,
$6,003,000 and $6,851,000 at December 31, 1997, 1996 and 1995, respectively.
In 1997, 1996 and 1995, investment tax credits included in the computation of
the provision for income taxes were $383,000, $848,000 and $467,000,
respectively.
The following analysis reconciles the Federal statutory income tax rate to
the effective consolidated income tax rate:
1997 1996 1995
---- ---- ----
Statutory Federal Income Tax Rate....................... 35.0% 35.0% 35.0%
Increase (Decrease) in Tax Rate Resulting From:
State Taxes, Net of Federal Income Tax and Foreign Tax
Adjustments.......................................... 3.3 3.4 3.1
Tax-Exempt Interest Income............................ (0.2) (0.3) (0.4)
Low Income Housing and Investment Tax Credit.......... (3.8) (2.8) (0.7)
Other................................................. 1.7 (0.8) 0.1
---- ---- ----
Effective Tax Rate...................................... 36.0% 34.5% 37.1%
==== ==== ====
For financial statement purposes, no deferred income tax liability has been
recorded by Bancorp Pacific, Inc. for tax bad debt reserves that arose in tax
years beginning before December 31, 1987. Such tax bad debt
75
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reserves total approximately $18.2 million for which no provision for federal
income taxes has been provided. If these amounts are used for purposes other
than to absorb bad debt losses, they will be subject to federal income taxes
at the then applicable rates.
NOTE O--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Century is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to manage its own exposure to fluctuations in interest and
foreign exchange rates. These financial instruments include commitments to
extend credit, standby letters of credit, foreign exchange contracts, interest
rate swaps and interest rate options. To varying degrees, these instruments
involve elements of credit and interest rate risk in excess of the amount
recognized in the statements of condition. The contract or notional amounts of
these instruments reflect the extent of involvement that Pacific Century has
in each class of financial instrument. The FASB has categorized certain of
these off-balance sheet financial instruments that include foreign currency
contracts and interest rate swaps as derivative financial instruments. FASB
has further categorized these derivative financial instruments into "held or
issued for purposes other than trading" or "trading."
Pacific Century's exposure to off-balance sheet credit risk is defined as
the possibility of sustaining a loss due to the failure of the counterparty to
perform in accordance with the terms of the contract. Credit risks associated
with off-balance sheet financial instruments are similar to those relating to
on-balance sheet financial instruments. Pacific Century manages off-balance
sheet credit risk with the same standards and procedures applied to its
commercial lending activity.
Traditional Off-Balance Sheet Risk Instruments
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of the terms or conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since commitments may expire without being
drawn, the total commitment amount does not necessarily represent future cash
requirements. Pacific Century evaluates each customer's credit worthiness on
an individual basis. The amount of collateral obtained is based on
management's credit evaluation of the customer. The type of collateral varies,
but may include cash, accounts receivable, inventory, and property, plant, and
equipment.
Standby letters of credit are conditional commitments issued by Pacific
Century to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support borrowing agreements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Pacific Century holds cash
and deposits as collateral on those commitments for which collateral is deemed
necessary.
Derivative Financial Instruments Held for Trading
Foreign exchange contracts are contracts for delayed delivery of a foreign
currency in which the seller agrees to make delivery at a specified future
date at a specified price. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
currency rates. Collateral is generally not required for these transactions.
At December 31, 1997, the notional amount of foreign exchange contracts held
for trading totaled $427.6 million, with a fair value of $(6.8) million.
Pacific Century uses foreign exchange contracts to offset foreign currency
positions taken on behalf of its customers and for its own account. Pacific
Century does not maintain significant net open positions in its foreign
exchange trading account.
76
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Derivative Financial Instruments Held or Issued for Other Than Trading
At December 31, 1997, the notional amount of foreign exchange contracts held
for other than trading totaled $406.0 million with a fair value of $15.7
million. Pacific Century uses these foreign exchange contracts primarily for
asset and liability management activities. Pacific Century does not maintain
significant net open foreign exchange positions in its other than trading
account.
Interest rate options, which primarily consist of caps and floors, are
interest rate protection instruments that involve the obligation of the seller
to pay the buyer an interest rate differential in exchange for a premium paid
by the buyer. This differential represents the difference between current
interest rates and an agreed-upon rate applied to a notional amount. Exposure
to loss on these options will increase or decrease over their respective lives
as interest rates fluctuate. Pacific Century transacts interest rate options
on behalf of its customers and does not maintain significant open positions.
Pacific Century utilizes interest-rate swaps in managing its exposure to
interest-rate risk. These financial instruments require the exchange of fixed
and floating rate interest payments based on the notional amount of the
contract for a specified period. Pacific Century has used swap agreements to
effectively convert portions of its floating rate loan portfolio to fixed
rate. At December 31, 1997, $492.5 million of such "receive-fixed" swaps were
in effect.
Pacific Century's current credit risk exposure on interest-rate swaps is
equal to the market value of these instruments plus or minus the market value
of any collateral exchanged with swap counterparties. The aggregate credit
risk of swaps at year-end 1997 was $1.6 million. The net market value of all
positions at year-end 1997 was $(2.0) million compared with $(7.7) million at
year-end 1996. Net expense on interest rate swap agreements totaled $(2.5)
million, $(4.2) million and $(11.7) million for 1997, 1996 and 1995,
respectively.
The table below summarizes by notional amounts the activity for each major
category of interest-rate swaps in 1997. Pacific Century had no deferred gains
or losses relating to terminated swap contracts in 1997.
RECEIVE
FIXED PAY FIXED
---------- ---------
(IN THOUSANDS OF DOLLARS)
Balance, December 31, 1994................. $1,472,050 $ 119,297
Additions................................ -- --
Maturities/Amortizations................. (376,814) (100,524)
---------- ---------
Balance, December 31, 1995................. $1,095,236 $ 18,773
Additions................................ -- --
Maturities/Amortizations................. (421,999) (18,773)
---------- ---------
Balance, December 31, 1996................. $ 673,237 $ --
Additions................................ 50,000 --
Maturities/Amortizations................. (230,688) --
---------- ---------
Balance, December 31, 1997................. $ 492,549 $ --
========== =========
77
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The approximate annual maturities of interest-rate swap agreements
outstanding as of December 31, 1997 were:
NOTIONAL PRINCIPAL
EXPECTED TO MATURE IN
---------------------------
1998 1999 TOTAL
-------- ------- --------
(IN THOUSANDS OF DOLLARS)
Receive-Fixed Interest-Rate Swaps:
Fixed Maturity.............................. $100,000 $50,000 $150,000
Pay Rate.................................. 5.72% -- --
Receive Rate.............................. 5.97% 6.46% --
Amortizing (1).............................. 248,179 94,370 $342,549
Pay Rate.................................. 5.81% -- --
Receive Rate.............................. 5.21% 5.30% --
- --------
(1) Amortization was estimated by utilizing average prepayment speeds provided
by various dealers in these instruments.
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments, whether or not
recognized in the balance sheet are as follows. When possible, fair values are
measured based on quoted market prices for the same or comparable instruments.
Because many of the Company's financial instruments lack an available market
price, management must use its best judgment in estimating the fair value of
those instruments based on present value or other valuation techniques. Such
techniques are significantly affected by estimates and assumptions, including
the discount rate, future cash flows, economic conditions, risk
characteristics, and other relevant factors. These estimates are subjective in
nature and involve uncertain assumptions and, therefore, cannot be determined
with precision. Many of the derived fair value estimates cannot be
substantiated by comparison to independent markets and could not be realized
in immediate settlement of the instrument. Certain financial instruments and
all non-financial instruments are excluded from disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by Pacific Century in
estimating fair values of financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheet for cash and short-term investments approximate the fair value of
these assets.
Investment Securities Held to Maturity, Investment Securities Available
for Sale and Trading Securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Loans: Fair values of loans are determined by discounting the expected
future cash flows of pools of loans with similar characteristics. Loans are
first segregated by type such as commercial, real estate, consumer, and
foreign and are then further segmented into fixed and adjustable rate and
loan quality categories. Expected future cash flows are projected based on
contractual cash flows, adjusted for estimated prepayments.
Deposit Liabilities: Fair values of non-interest bearing and interest
bearing demand deposits and savings deposits are equal to the amount
payable on demand (i.e., their carrying amounts) because these products
have no stated maturity. Fair values of time deposits are estimated using
discounted cash flow analyses. The discount rates used are based on rates
currently offered for deposits with similar remaining maturities.
78
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Short-Term Borrowings: The carrying amounts of securities sold under
agreements to repurchase, funds purchased, commercial paper, and other
short-term borrowings approximate their fair values.
Long-Term Debt: Fair values of long-term debt are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowings.
Off-Balance Sheet Instruments: Fair values of off-balance sheet
instruments (e.g., commitments to extend credit, standby letters of credit,
commercial letters of credit, foreign exchange and swap contracts, and
interest rate swap agreements) are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing, current settlement
values or quoted market prices of comparable instruments.
79
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the fair values of Pacific Century's financial
instruments at December 31, 1997, 1996 and 1995.
1997 1996 1995
--------------------- --------------------- ---------------------
BOOK OR BOOK OR BOOK OR
NOTIONAL FAIR NOTIONAL FAIR NOTIONAL FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
FINANCIAL INSTRUMENTS--ASSETS
Loans (1)................... $8,718,900 $8,915,500 $7,988,400 $8,123,400 $7,565,800 $7,741,700
Investment Securities (2)... 3,866,000 3,869,000 3,631,700 3,634,000 3,360,200 3,366,300
Other Financial Assets (3).. 424,200 424,200 779,100 779,100 905,300 905,300
FINANCIAL INSTRUMENTS--
LIABILITIES
Deposits.................... 9,652,500 9,663,500 8,677,100 8,681,800 7,576,800 7,627,600
Short-Term Borrowings (4)... 3,202,100 3,202,100 2,968,800 2,968,800 3,190,800 3,190,800
Long-Term Debt (5).......... 699,500 700,600 926,300 861,500 1,057,900 1,053,500
FINANCIAL INSTRUMENTS--
OFF-BALANCE SHEET
Financial Instruments Whose
Contract Amounts Represent
Credit Risk:
Commitments to Extend
Credit................... 4,122,300 10,700 3,840,200 10,200 3,615,200 9,600
Standby Letters of Credit. 258,700 5,000 257,400 4,900 224,400 4,200
Commercial Letters of
Credit................... 299,500 400 239,700 400 244,800 400
Financial Instruments Whose
Notional or Contract
Amounts Exceed the Amount
of Credit Risk:
Foreign Exchange and Swap
Contracts................ 833,600 8,900 631,300 900 510,800 1,200
Interest Rate Swap
Agreements............... 492,500 (2,000) 673,200 (7,700) 1,114,000 (8,300)
- --------
(1) Includes all loans, net of reserve for loan losses, and excludes leases.
(2) Includes both held to maturity and available for sale securities.
(3) Includes interest-bearing deposits, funds sold and trading securities.
(4) Includes securities sold under agreements to repurchase, funds purchased
and short-term borrowings.
(5) Excludes capitalized lease obligations.
80
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q--PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial statements of Pacific Century Financial Corporation
(Parent only) follow:
Condensed Statements of Income
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Dividends From
Bank Subsidiaries................................. $ 97,103 $106,165 $ 44,426
Other Subsidiaries................................ 14,000 15,000 7,000
Interest Income
From Subsidiaries................................. 9,987 5,415 6,059
From Others....................................... 1,625 1,919 939
Other Income........................................ 195 143 48
Securities Gains.................................... 1,605 661 136
-------- -------- --------
Total Income.................................... 124,515 129,303 58,608
Interest Expense.................................... 19,691 8,036 7,110
Other Expense....................................... 9,444 5,950 6,015
-------- -------- --------
Total Expense................................... 29,135 13,986 13,125
Income Before Income Taxes and Equity in
Undistributed Income of Subsidiaries............... 95,380 115,317 45,483
Income Tax Benefits................................. 5,029 2,024 2,484
-------- -------- --------
Income Before Equity in Undistributed Income........ 100,409 117,341 47,967
Equity in Undistributed Income of Subsidiaries
Bank Subsidiaries................................. 34,172 15,539 61,372
Other Subsidiaries................................ 4,907 244 12,461
-------- -------- --------
39,079 15,783 73,833
-------- -------- --------
Net Income.......................................... $139,488 $133,124 $121,800
======== ======== ========
81
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Condensed Statements of Condition
DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Assets
Cash in Bank of Hawaii...................... $ 100 $ 134 $ 245
Investment Securities Available for Sale.... 1,759 11,931 12,740
Equity in Net Assets of Bank Subsidiaries... 1,013,025 868,066 881,160
Equity in Net Assets of Other Subsidiaries.. 155,290 162,446 147,491
Interest Bearing Deposits from Bank......... 171,997 200,300 89,446
Net Loans................................... 733 10,298 12,638
Trading Securities.......................... 2,352 1,663 --
Other Assets................................ 145,853 57,782 54,006
---------- ---------- ----------
Total Assets.............................. $1,491,109 $1,312,620 $1,197,726
========== ========== ==========
Liabilities and Shareholders' Equity
Commercial Paper and Short-Term Borrowings.. $ 105,216 $ 70,827 $ 74,559
Long-Term Debt.............................. 253,093 163,093 60,000
Other Liabilities........................... 15,593 12,578 8,731
Shareholders' Equity........................ 1,117,207 1,066,122 1,054,436
---------- ---------- ----------
Total Liabilities and Shareholders'
Equity................................... $1,491,109 $1,312,620 $1,197,726
========== ========== ==========
82
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Condensed Statements of Cash Flows
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- --------- --------
(IN THOUSANDS OF DOLLARS)
Operating Activities
Net Income................................... $ 139,488 $ 133,124 $121,800
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Provision for Loan Losses and Amortization
Expense................................... 6,009 3,943 3,943
Realized Investment Securities Gains....... (1,476) (653) --
Undistributed Income from Subsidiaries..... (39,079) (15,783) (73,833)
Net Decrease (Increase) in Trading
Securities................................ (689) (1,663) 472
Other Assets and Liabilities, Net.......... (11,400) (3,468) 23,052
--------- --------- --------
Net Cash Provided by Operating
Activities.............................. 92,853 115,500 75,434
Investing Activities
Investment Securities Transactions, Net...... 11,272 449 (9,800)
Interest Bearing Deposits, Net............... 28,303 (110,854) (10,246)
Loan Transactions, Net....................... 9,565 2,340 411
Capital Contributions to Subsidiaries, Net... (36,400) (3,093) 17
Purchase of CU Bancorp....................... (54,188) -- --
--------- --------- --------
Net Cash Used by Investing Activities.... (41,448) (111,158) (19,618)
Financing Activities
Net Proceeds from Borrowings................. 124,389 99,361 10,445
Proceeds from Sale of Stock.................. 16,376 13,991 19,023
Stock Repurchased............................ (142,479) (70,444) (40,004)
Cash Dividends Paid.......................... (49,725) (47,361) (45,195)
--------- --------- --------
Net Cash Used by Financing Activities.... (51,439) (4,453) (55,731)
Increase (Decrease) in Cash.............. (34) (111) 85
Cash at Beginning of Year.................... 134 245 160
--------- --------- --------
Cash at End of Year.......................... $ 100 $ 134 $ 245
========= ========= ========
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The following information required by the Instructions to Form 10-K is
incorporated herein by reference (except as otherwise indicated below) from
various pages of the Pacific Century Financial Corporation Proxy Statement for
the annual meeting of shareholders to be held on April 24, 1998, as summarized
below:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Election of Directors on pages 2-7. Disclosure of Compliance with section 16
(a) of the Securities Exchange Act on page 8.
For information relative to executive officers of the Registrant, see
"Executive Officers of the Registrant" at the end of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation on pages 11-16.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Securities and Principal Holders Thereof and Election of Directors on
pages - .
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others on pages 24-25.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The following consolidated financial statements of Pacific Century
Financial Corporation and subsidiaries are included in Item 8:
Consolidated Statements of Condition--December 31, 1997, 1996, and 1995
Consolidated Statements of Income--Years ended December 31, 1997, 1996,
and 1995
Consolidated Statements of Shareholders' Equity--Years ended December
31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows--Years ended December 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements--December 31, 1997
All other schedules to the consolidated financial statements stipulated by
Article 9 of Regulation S-X and all other schedules to the financial
statements of the registrant required by Article 5 of Regulation S-X are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
Financial statements (and summarized financial information) of (1)
unconsolidated subsidiaries or (2) 50% or less owned persons accounted for by
the equity method have been omitted because they do not, considered
individually or in the aggregate, constitute a significant subsidiary.
84
EXHIBIT INDEX
EXHIBIT
NUMBER
-------
3.1 Articles of Incorporation as of April 25, 1997 and amended October
27, 1997
3.2 Revised By-laws dated April 25, 1997
4.1 Instruments Defining the Rights of Holders of Long-Term Debt
10.1 Pacific Century Financial Corporation, One-Year Incentive Plan
Effective January 1, 1998*
10.2 Pacific Century Financial Corporation, Executive Officer One-Year
Incentive Plan Effective January 1, 1998*
10.3 Pacific Century Financial Corporation, Sustained Profit Growth Plan
Effective January 1, 1998*
10.4 Bancorp Hawaii, Inc. Key Executive Severance Plan dated April 27,
1983 (incorporated herein by reference to Exhibit 10.4 of Form 10K
for the fiscal year ended December 31, 1995)*
10.5 Bancorp Hawaii, Inc. Stock Option Plan of 1983 (incorporated herein
by reference to Exhibit 4(a) of Registration No. 2-84164)*
10.6 Bancorp Hawaii, Inc. Stock Option Plan of 1988 (incorporated herein
by reference to Exhibit 4(a) of Registration No. 33-23495)*
10.7 Pacific Century Financial Corporation Stock Option Plan of 1994
(incorporated herein by reference to Exhibit 4(a) of Registration
No. 33-54777)*
10.8 Bancorp Hawaii, Inc., One-Year Executive Incentive Plan Effective
January 1, 1997 (incorporated herein by reference to Exhibit 10.2 of
Form 10K for the fiscal year ended December 31, 1996)*
10.9 Bancorp Hawaii, Inc., One-Year Incentive Plan Effective January 1,
1997 (incorporated herein by reference to Exhibit 10.1 of Form 10K
for the fiscal year ended December 31, 1996)*
10.10 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective January
1, 1994 (incorporated herein by reference to Exhibit C of Bancorp
Hawaii, Inc. 1994 Proxy Statement dated March 10, 1994)*
10.11 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective January
1, 1995 (incorporated herein by reference to Exhibit 10(d) of
Bancorp Hawaii, Inc. Form 10K for the fiscal year ended December 31,
1994)*
10.12 Bancorp Hawaii, Inc. Sustained Profit Growth Plan Effective January
1, 1996 (incorporated herein by reference to Exhibit 10.3 of Bancorp
Hawaii, Inc. Form 10K for the fiscal year ended December 31, 1995)*
10.13 Bancorp Hawaii, Inc. Sustained Growth Plan Effective January 1, 1997
(incorporated herein by reference to Exhibit 10.3 of Bancorp Hawaii,
Inc. Form 10K for the fiscal year ended December 31, 1996)*
10.14 Form of Key Executive Severance Agreement (incorporated herein by
reference to Exhibit 19(e) of Bancorp Hawaii, Inc. Form 10K for the
fiscal year ended December 31, 1989 for L. M. Johnson)*
10.15 Form of Amended Key Executive Change-in-Control Severance Agreement
(incorporated herein by reference to Exhibit 10(e) of Bancorp
Hawaii, Inc. 10K for the fiscal year ended December 31, 1994--
October 3, 1994 for R. J. Dahl)*
10.16 Form of Key Executive Change-in-Control Severance Agreement
(incorporated herein by reference to Exhibit 10(f) of Bancorp
Hawaii, Inc. 10K for the fiscal year ended December 31, 1994--
October 3, 1994 for A. T. Kuioka)*
10.17 Form of Executive Change-in-Control Severance Agreement
(incorporated herein by reference to Exhibit 10(g) of Bancorp
Hawaii, Inc. 10K for the fiscal year ended December 31, 1994--for
D. A. Houle)*
85
EXHIBIT
NUMBER
-------
10.18 Pacific Century Financial Corporation Directors' Deferred
Compensation Plan (Restatement Effective 1/1/96) with Amendment
No. 96-1; Trust Agreement (Effective 9/1/96) (incorporated by
reference herein to Exhibit (4) of Registration No. 333-14929)
10.19 Pacific Century Financial Corporation Directors Stock Compensation
Program (incorporated herein by reference herein to Exhibit (4) of
Registration No. 333-02835)
11.1 Statement Regarding Computation of Per Share Earnings
12.1 Statement Regarding Computation of Ratios
19.1 Report to Shareholders for Quarter ended September 30, 1997
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
- --------
*Management contract or compensatory plan or arrangement
(b) Registrant filed no Form 8-Ks during the quarter ended December 31, 1997.
(c) Response to this item is the same as Item 14(a).
(d) Response to this item is the same as Item 14(a).
86
STATISTICAL DISCLOSURES
CONTENTS AND REFERENCE
The following statistical disclosures required by the Instructions to Form
10-K are summarized below:
ITEM I. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
Interest Differential--Table 23 on page 45.
Consolidated Average Balances, Income and Expense Summary, and Yields
and Rates--Taxable Equivalent--Table 14 on page 33.
Average Loans--Table 20 on page 43.
Average Deposits--Table 22 on page 44.
ITEM II. INVESTMENT PORTFOLIO
Note B to the Audited Financial Statements on page 59.
Maturity Distribution, Market Value and Weighted-Average Yield to
Maturity of Securities--Table 18 on page 42.
ITEM III. LOAN PORTFOLIO
Loan Portfolio Balances--Table 3 on page 17.
Maturities and Sensitivities of Loans to Changes in Interest Rates--
Table 21 on page 43.
Non-Performing Assets and Accruing Loans Past Due 90 Days or More--
Table 6 on page 22.
Foregone Interest on Non-Accruals--Table 5 on page 21.
Geographic Distribution of Cross-Border International Assets--Table 10
on page 27.
ITEM IV. SUMMARY OF LOAN LOSS EXPERIENCE
Summary of Loan Loss Experience--Table 7 on page 24.
Allocation of Loan Loss Reserve--Table 8 on page 25.
Narrative on pages 22 to 23.
ITEM V. DEPOSITS
Consolidated Average Balances, Income and Expense Summary, and Yields
and Rates--Taxable Equivalent--Table 14 on page 33.
Note E to the Audited Financial Statements on page 64.
ITEM VI. RETURN ON EQUITY AND ASSETS
1997 1996 1995
----- ----- -----
Return on Average Assets............................. 0.98% 1.00% 0.98%
Return on Average Equity............................. 12.57% 12.43% 11.87%
Dividend Payout Ratio................................ 36.16% 35.80% 37.24%
Average Equity to Average Assets Ratio............... 7.79% 8.05% 8.28%
ITEM VII. SHORT-TERM BORROWINGS
Note F to the Audited Financial Statements on page 65.
87
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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: March 12, 1998 Pacific Century Financial
Corporation
/s/ Lawrence M. Johnson
By: _________________________________
Lawrence M. Johnson
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATE INDICATED.
Date: March 12, 1998
/s/ Lawrence M. Johnson /s/ H. Howard Stephenson
- ------------------------------------- -------------------------------------
Lawrence M. Johnson H. Howard Stephenson
Director Director
/s/ Peter D. Baldwin /s/ Fred E. Trotter
- ------------------------------------- -------------------------------------
Peter D. Baldwin Fred E. Trotter
Director Director
/s/ Mary G. F. Bitterman /s/ Stanley S. Takahashi
- ------------------------------------- -------------------------------------
Mary G. F. Bitterman Stanley S. Takahashi
Director Director
/s/ Richard J. Dahl /s/ Donald M. Takaki
- ------------------------------------- -------------------------------------
Richard J. Dahl Donald M. Takaki
Director Director
/s/ David A. Heenan /s/ David A. Houle
- ------------------------------------- -------------------------------------
David A. Heenan David A. Houle
Director Chief Financial Officer
/s/ Stuart T. K. Ho /s/ Denis K. Isono
- ------------------------------------- -------------------------------------
Stuart T. K. Ho Denis K. Isono
Director Chief Accounting Officer
/s/ Herbert M. Richards, Jr.
- -------------------------------------
Herbert M. Richards, Jr.
Director
88
Exhibit 3.1
RESTATED
ARTICLES OF INCORPORATION
AS OF APRIL 25, 1997
AND
AS AMENDED OCTOBER 24, 1997
OF
PACIFIC CENTURY FINANCIAL CORPORATION
HONOLULU, HAWAII
OCTOBER 24, 1997
RESTATED
ARTICLES OF INCORPORATION
OF
PACIFIC CENTURY FINANCIAL CORPORATION
(As Amended October 24, 1997)
THESE ARTICLES OF INCORPORATION, made and entered into this 12th day of
August, 1971, by and between HARRISON R. COOKE, C.D. TERRY AND WILSON P. CANNON,
JR., residents of the City and County of Honolulu, State of Hawaii, United
States of America:
WITNESSETH:
That the parties hereto, desiring to become incorporated as a corporation
in accordance with the laws of the State of Hawaii, and to obtain the rights and
benefits conferred by said laws upon corporations, do hereby associate
themselves together and unite and form a corporation, and do make and enter into
the following Articles of Incorporation, the terms whereof it is agreed shall be
equally obligatory upon the parties signing this instrument and upon all the
parties who from time to time may hold stock in the corporation:
I
NAME
The name of the corporation shall be:
PACIFIC CENTURY FINANCIAL CORPORATION
II
OFFICES
The location of the principal office of the corporation shall be at
Honolulu, City and County of Honolulu, State of Hawaii, and the mailing address
of the initial office of the corporation shall be 111 South King Street,
Honolulu, Hawaii 96813. The corporation may have such other offices within and
without the State of Hawaii as its business may from time to time require.
III
CAPITAL STOCK
The capital stock of the corporation shall be $420,000,000. The number of
shares of stock that the corporation is authorized to issue shall be 220,000,000
shares, of which 200,000,000 shares shall be common stock of the par value of $2
per share and 20,000,000 shares shall be preferred stock of the par value of $1
per share.
No holder of the shares of stock of any class of the corporation shall have
any preemptive or preferential right of subscription for or to purchase any
shares of any class of stock or other securities of the corporation, whether now
or hereafter authorized.
In connection with any offering to stockholders, or any stock dividend, or
any other change in the capitalization of the corporation, or any merger of
consolidation, the Board of Directors may provide for the issuance of fractional
shares of the capital stock of the corporation, or the Board of Directors may
provide that no fractional shares shall be issued in connection therewith and
that the issuance of fractional shares may be avoided by the sale of shares
representing fractions or by the issuance of scrip or in any other manner. The
stockholders shall not have the right to split whole shares into fractions or to
split fractions.
The Board of Directors is authorized to provide for the issuance from time
to time of authorized but unissued shares of the common or preferred stock of
the corporation and to determine and approve the consideration for which such
shares shall be issued, and the other terms and conditions of the offering. The
Board of Directors is authorized to divide authorized and unissued shares of the
preferred stock of the corporation into series and issue any such series, and to
fix the terms, preferences, voting power, restrictions and qualifications of the
preferred stock or any series thereof. The Board of Directors is authorized to
determine whether any of the preferred stock or any series of the preferred
stock of the corporation shall be convertible into shares of the common stock,
of the corporation, and to fix, before issuance, the terms and conditions with
or without limitations on which the preferred stock or any series of the
preferred stock shall be so convertible.
The Board of Directors may authorize the corporation to issue, sell or
dispose of bonds, debentures, notes, certificates of indebtedness and other
obligations and securities of the corporation, convertible into common or
preferred stock of the corporation or into any form of other security (or not so
convertible), all upon such terms and conditions and with such limitations as
may be fixed by the Board of Directors.
IV
INITIAL DIRECTORS AND OFFICERS
The names and mailing addresses of the persons who are to act as the
initial directors and officers of the corporation are as follows:
DIRECTORS
NAMES MAILING ADDRESSES
Harrison R. Cooke 2549 Tantalus Drive
Honolulu, Hawaii 96813
Hung Wo Ching 1944C Ualakaa
Honolulu, Hawaii 96822
James F. Gary 4746 Aukai Avenue
Honolulu, Hawaii 96816
Douglas S. Guild 140 Wailupe Circle
Honolulu, Hawaii 96821
Keiji Kawakami 2650 Kaaipu Avenue
Honolulu, Hawaii 96822
Garfield King 2969 Kalakaua Avenue
Honolulu, Hawaii 96815
Edmond H. Leavey 2003 Kalia Road
Honolulu, Hawaii 96815
Philip E. Spalding, Jr. 4340 Pahoa Avenue
Honolulu, Hawaii 96816
C. D. Terry 938 Onaha Street
Honolulu, Hawaii 96816
OFFICERS
NAMES MAILING ADDRESSES
Harrison R. Cooke 2549 Tantalus Drive
Chairman of the Board of Directors Honolulu, Hawaii 96813
C D. Terry 938 Onaha Street
President Honolulu, Hawaii 96816
Charles R. Klenske 3622 Anela Place
Vice President Honolulu, Hawaii 96815
Wilson P. Cannon, Jr. 3936 Gail Street
Vice President Honolulu, Hawaii 96815
Frank J. Manaut 4866 Analii Place
Vice President Honolulu, Hawaii 96821
Max L. Pilliard 3887 Lurline Drive
Secretary and Treasurer Honolulu, Hawaii 96816
V
PURPOSES AND POWERS
The purposes for which the corporation is organized and its powers in
connection therewith are as follows:
(a) To engage generally in all businesses in which a bank holding
company may lawfully engage, and in connection therewith to subscribe for,
purchase, take, receive or otherwise acquire, hold, own, use, employ,
mortgage, lend, pledge, sell or otherwise dispose of and otherwise deal in
and with shares of the capital stock and/or other securities of one or more
banks or banking institutions and other corporations.
(b) To buy, take leases of or otherwise acquire, hold, own, use,
improve, develop, cultivate, grant, bargain, sell, convey, lease, mortgage
or otherwise dispose of, and in all respects deal in and with, real
properties, improved or unimproved, and any interests and rights therein;
(c) To buy, hire, or otherwise acquire, hold, own, use, produce,
manufacture, sell, assign, transfer, pledge, or otherwise dispose of, and
in all respects deal in and with, personal property of whatever nature,
tangible or intangible, and any interests and rights therein, including any
and all kinds of machinery, equipment, materials, tools and other goods and
chattels, and including franchises, rights, licenses, patents, trademarks,
bonds, notes, choses in action and other evidences of indebtedness, and
options for the purchase of any of the foregoing;
(d) To purchase, take, receive, subscribe for, or otherwise acquire,
own, hold, use, employ, sell, mortgage, lend, pledge, or otherwise dispose
of, and otherwise use and deal in and with, shares of the capital stock of
or other interests in, or obligations of, other domestic or foreign
corporations, associations, trusts, partnerships or individuals, or direct
or indirect obligations of the United States or of any other government,
state, territory, governmental district, or municipality or of any
instrumentality thereof;
(e) To borrow money and to incur indebtedness, without limit as to
the amount and in excess of the capital stock of the corporation, and to
issue bonds, debentures, debenture stock, warrants, notes, or other
obligations therefor, and to secure the same by any lien, charge, grant,
pledge, deed of trust or mortgage of the whole or any part of the real and
personal property of the corporation, then owned or thereafter to be
acquired and/or to issue bonds, debentures, debenture stocks, warrants,
notes or other obligations without any such security;
(f) To act as agent of any corporation, association, trust,
partnership or individual or as manager of the business and affairs of any
corporation, association, trust, partnership or individual and in such
connection to exercise powers and authority on behalf of any corporation,
association, trust, partnership or individual, including ministerial,
executive, discretionary, and managerial powers, all on such terms and
conditions as may be agreed between the corporation and such corporation,
association, trust, partnership or individual;
(g) To promote or to aid in any manner, financially or otherwise, any
corporation or association any of whose stock or obligations are held
directly or indirectly by this corporation, and for this purpose to enter
into plans of reorganization or readjustment and to guarantee the whole or
any part of the indebtedness and obligations of any such other corporation
or association and the payment of dividends on its stock, and to do any
other acts or things designed to protect, preserve, improve, or enhance the
value of such stock or obligations;
(h) To issue shares of the capital stock and the notes, bonds, and
other obligations of the corporation, and options for the purchase of any
thereof, in payment for property acquired by the corporation or for
services rendered to the corporation or for any other objects in and about
its business, and to purchase, take, receive, or otherwise acquire, own,
hold, sell, transfer, accept as security for loans, and deal generally in
shares of its capital stock and its obligations in every lawful manner;
(i) To enter into, make, perform, and carry out contracts of every
kind for any lawful purpose with any person, firm, association, trust or
corporation, one or more;
(j) To acquire the whole or any part of the property, assets,
business, good will, and rights of any person, firm, association, trust or
corporation engaged in any business or enterprise which may lawfully be
undertaken by the corporation, and to pay for the same in cash or shares of
the capital stock or obligations of the corporation, or by undertaking and
assuming the whole or any part of the indebtedness and obligations of the
transferor, or otherwise, and to hold or in any manner dispose of the
whole, or any part of the property and assets so acquired, and to conduct
in any
lawful manner the whole or any part of the business so acquired and to
exercise all the powers necessary or convenient in and about the conduct,
management and carrying on of such business;
(k) To draw, make, accept, endorse, guarantee, execute and issue
promissory notes, bills of exchange, drafts, warrants of all kinds,
obligations and certificates and negotiable or transferable instruments, to
loan money to others with or without security, and to guarantee the debts
and obligations of others and go security on bonds of others, but nothing
herein contained shall be construed as authorizing the business of banking
or as including the business purposes of a commercial bank, savings bank or
trust company;
(l) To effect any of the purposes mentioned in these Articles and to
exercise any powers so mentioned either directly or through the acquisition
and ownership of shares of stock of any other corporation or association
and by holding and voting the same or otherwise exercising and enjoying the
rights and advantages incidental thereto, and to operate wholly or
partially as a holding company through the acquisition and ownership of
shares of stock of any other corporation or association, whether or not
such shares of stock so acquired or owned by this corporation shall give to
this corporation control of such other corporation or association;
(m) To carry on any other lawful business whatsoever which may seem
to the corporation capable of being carried on in connection with the
foregoing purposes and powers, or calculated directly or indirectly to
promote the interests of the corporation or to enhance the value of its
properties;
(n) To enter into partnerships and joint ventures with corporations,
partnerships, or persons for the carrying on through such partnerships and
joint ventures of any business the purposes of which are the same as or are
germane, in whole or in part, to the purposes or business of the
corporation;
(o) To conduct its business, carry on its operations and purposes,
and exercise its powers or any thereof in any state, territory, district,
or possession of the United States of America or in any foreign country;
(p) To have succession by its corporate name perpetually, and to
have, enjoy, and exercise all the other rights, powers, and privileges
which are now or which may hereafter be conferred upon corporations
organized under the general corporation laws of the State of Hawaii;
(q) To have and exercise all powers necessary or convenient to effect
any or all of the purposes set forth in these Articles or reasonably
incidental to the fulfillment of its purposes or the exercise of its powers
as set forth therein;
(r) To make donations of property or money to benevolent or
charitable institutions or associations, community funds,
municipalities or public charities or to public or private enterprises or
purposes so far as it may deem necessary or helpful in connection with the
accomplishment of the purposes herein stated or in the public or community
interest.
The foregoing clauses shall each be construed as purposes and powers and
the matters expressed in each clause or any part of any clause shall not be
limited or restricted in any manner by reference to or inference from any other
clause or any other part of the same clause, but shall be regarded as
independent purposes and powers and the enumeration of specific purposes and
powers shall not be construed to limit or restrict in any manner the meaning of
the general purposes and powers of the corporation, nor shall the expression of
one thing be deemed to exclude another, although it be of like nature, not
expressed.
VI
BOARD OF DIRECTORS
There shall be a Board of Directors of the corporation to consist of not
less than three (3) nor more than fifteen (15) members. No less than one-third
of the members of the Board of Directors shall be residents of the State of
Hawaii, and in the absence of such one-third membership the Board of Directors
shall not function. The members of the Board of Directors shall be elected or
appointed at such times, in such manner and for such terms as may be prescribed
by the By-Laws which also may provide for the removal of directors and the
filling of vacancies and may provide that the remaining members of the Board of
Directors, although less than a majority thereof, may by the affirmative vote of
the majority of such remaining members fill vacancies in the Board of Directors,
including temporary vacancies caused by the illness of directors or the
temporary absence of directors from the city in which a meeting is to be held.
The directors need not be stockholders of the corporation. The Board of
Directors shall have full power to control and direct the business and affairs
of the corporation, subject, however, to resolutions adopted by the stockholders
and to any limitations which may be set forth in statutory provisions, in these
Articles or in the By-Laws. There may be an executive committee and such other
committees as the Board of Directors shall determine, each of which shall
possess and may exercise such powers of the Board of Directors as may be
delegated to it by the Board of Directors. The Board of Directors, without the
approval of the stockholders of the corporation, or of any percentage thereof,
may authorize the making of donations referred to in paragraph (r) of Article V
hereof. Directors, as such, shall not receive any stated salary for their
services, but by resolution of the Board of Directors a fixed sum reasonable in
amount, and expenses of attendance, if any, may be allowed for attendance at
each regular or special meeting of the Board of
Directors.
VII
OFFICERS
The officers of the corporation shall consist of a Chairman of the Board of
Directors, a President, one or more Vice Presidents as may be prescribed by the
By-Laws, a Secretary, a Treasurer, and such other officers and assistant
officers and agents as may be prescribed by the By-Laws. The officers shall be
elected or appointed, hold office and may be removed as may be prescribed by the
By-Laws. The Chairman of the Board of Directors shall be a director of the
corporation. No other officer and no subordinate officer need be a director of
the corporation, and no officer need be a stockholder of the corporation. Any
two or more offices may be held by the same person.
All officers and agents of the corporation, as between themselves and the
corporation, shall have such authority and perform such duties in the management
of the corporation as may be prescribed by the By-Laws, or as may be determined
by resolution of the Board of Directors not inconsistent with the By-Laws.
VIII
CONTRACTS
No contract or other transaction between the corporation and any other
person, firm, corporation, association or other organization, and no act of the
corporation, shall in any way be affected or invalidated by the fact that any of
the directors or officers of the corporation are parties to such contract,
transaction or act or are pecuniarily or otherwise interested in the same or are
directors or officers or members of any such other firm, corporation,
association or other organization, provided that the interest of such director
shall be disclosed or shall have been known to the Board of Directors
authorizing or approving the same, or to a majority thereof. Any director of
the corporation who is a party to such transaction, contract, or act or who is
pecuniarily or otherwise interested in the same or is a director or officer or
member of such other firm, corporation, association or other organization, may
be counted in determining a quorum of any meeting of the Board of Directors
which shall authorize or approve any such contract, transaction or act, and may
vote thereon with like force and effect as if he were in no way interested
therein. Neither any director nor any officer of the corporation, being so
interested in any such contract, transaction or act of the corporation which
shall be approved by the Board of Directors of the corporation, nor any such
other person, firm, corporation, association or other organization in which such
director or officer may be interested or
of which such officer or director may be a director, officer or member, shall be
liable or accountable to the corporation, or to any stockholder thereof, for any
loss incurred by the corporation pursuant to or by reason of such contract,
transaction or act, or for any gain received by any such other party pursuant
thereto or by reason thereof.
IX
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND AGENTS
Section 1. As used in this Article IX, the following terms shall have the
following meanings:
(a) "Employee" means each person who is or was a director, officer,
employee, or agent of the corporation or who is or was serving at the
request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, association, or
other enterprise.
(b) "Costs" means expenses (including attorney's fees), judgments,
fines, and amounts paid in settlement in connection with any Cause of
Action.
(c) "Cause of Action" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative.
Section 2. The corporation shall indemnify each Employee who was or is a
party or is threatened to be made a party to any Cause of Action (other than a
Cause of Action by or in the right of the corporation) by reason of the fact
that he is or was an Employee against Costs actually and reasonably incurred by
him in connection with such Cause of Action if (i) he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and (ii) with respect to any criminal Cause of Action, he had
no reasonable cause to believe his conduct was unlawful.
Section 3. The corporation shall indemnify each Employee who was a party or
is threatened to be made a party to any Cause of Action by or in the right of
the corporation by reason of the fact that he is or was an Employee against
Costs actually and reasonably incurred by him in connection with such Cause of
Action if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation.
Section 4. (a) To the extent that an Employee has been successful on the
merits or otherwise in defense of any Cause of Action or defense of any claim,
issue, or matter therein, the Employee shall be deemed to have met the
applicable standard of conduct set forth in Section 2 or Section 3 of this
Article IX and shall be indemnified by the corporation against Costs actually
and reasonably incurred by him in connection therewith.
(b) To the extent that an Employee has not been
successful on the merits or otherwise in defense of any Cause of Action or
defense of any claim, issue or matter therein, the Employee shall
nonetheless be indemnified against Costs actually and reasonably incurred
by him in connection therewith unless the tribunal, if any, in which such
Cause of Action is or was pending upon application by the corporation
determines that the Employee has not met the applicable standard of conduct
set forth in Section 2 or Section 3 or this Article IX. The termination of
any Cause of Action by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent shall not create a presumption
that such applicable standard of conduct has not been met.
Section 5. Costs incurred in connection with any Cause of Action shall be
paid by the corporation in advance of the final disposition of such Cause of
Action upon receipt of an undertaking by or on behalf of the Employee to repay
the advanced amount if it is ultimately determined pursuant to Section 4(b) of
this Article IX that the Employee is not entitled to be indemnified by the
corporation.
Section 6. The indemnification provided by this Article IX shall (i) not be
deemed exclusive of any other rights to which an Employee may be entitled by any
bylaw, agreement, vote of shareholders or disinterested directors, or otherwise,
and (ii) continue to a person who has ceased to be an Employee and shall inure
to the benefit of his heirs, executors, and administrators.
Section 7. The corporation may purchase and maintain insurance on behalf of
any Employee against any liability asserted against or incurred by the Employee,
whether or not the corporation would have the power to indemnify the Employee
against such liability. Any such insurance may be procured from any insurance
company, including an insurance company in which the corporation may have an
equity or other interest, through stock ownership or otherwise.
Section 8. This Article IX shall be effective with respect to any Cause of
Action arising at any time from acts or omissions occurring prior to the date
this Article IX is amended or terminated.
X
LIMITATION OF LIABILITY OF DIRECTORS
Section 1. A director of the corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders; (ii) for any act or
omission of the director not performed in good faith, or which involves
intentional misconduct or knowing violation of law, or which constitutes a
willful or reckless disregard of the director's fiduciary duty; (iii) for the
director's willful or negligent
violation of any provision of Chapter 415 of the Hawaii Revised Statutes
regarding payment of dividends or stock purchase or redemption; or (iv) for any
transaction from which the director received an improper benefit.
Section 2. Any repeal or modification of this Article X by the stockholders
of the corporation shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or modification.
XI
LIMITED LIABILITY
No stockholder of the corporation shall be liable for any debt of the
corporation beyond any amount which may be due and unpaid upon the par value of
the share or shares held by such stockholder.
XII
SERVICE OF PROCESS
Service of process may be made upon any officer of the corporation.
IN WITNESS WHEREOF, said parties have hereunto set their hands the day and
year first above written.
/s/ Harrison R. Cooke
------------------------------------
HARRISON R. COOKE
/s/ C. D. Terry
------------------------------------
C. D. TERRY
/s/ Wilson P. Cannon, Jr.
------------------------------------
WILSON P. CANNON, JR.
Incorporators
Exhibit 3.2
BY-LAWS
OF
PACIFIC CENTURY FINANCIAL CORPORATION
HONOLULU, HAWAII
APRIL 25, 1997
BY-LAWS
OF
PACIFIC CENTURY FINANCIAL CORPORATION
(As Amended April 25, 1997)
ARTICLE I
OFFICES AND SEAL
SECTION 1.01. Offices. The principal office of the corporation shall
be located at Honolulu, City and County of Honolulu, State of Hawaii. The
corporation may have such other offices either within or without the State of
Hawaii as the Board of Directors may designate or as the business of the
corporation may require from time to time.
SECTION 1.02. Corporate Seal. The corporation shall have a corporate
seal of such form and device as the Board of Directors shall from time to time
determine. Duplicate seals may be kept and used as the business of the
corporation may require from time to time.
ARTICLE II
STOCKHOLDERS' MEETINGS
SECTION 2.01. Annual Meeting. The annual meeting of the stockholders
shall be held at such place in Hawaii and on such date in the month not more
than thirteen months subsequent to the prior annual meeting of stockholders as
the Chairman of the Board or President shall designate for the purpose of
electing directors and an auditor and, subject to any requirements of law or of
the Articles of Incorporation or of these By-Laws with respect to notice, for
the transaction of such other business as may properly come before the meeting.
SECTION 2.02. Special Meetings. Special meetings of the
stockholders, to consider any business and/or nomination unless otherwise
prescribed by statute, may be called by the Chairman of the Board, by the
President, by a majority of the whole Board of Directors or, to the extent
permitted by applicable law, by a stockholder or stockholders. At any special
meeting the business brought before and transacted by the stockholders shall be
limited to that specified in the notice of the meeting. Special meetings of
stockholders shall be held at such place in Hawaii and at such time as shall be
designated in the call of the meeting.
SECTION 2.03. Notice of Meetings. Written notice specifying the time
and place of the stockholders' meeting,
whether annual or special, and if a special meeting the general nature of the
business to be considered, shall be mailed not less than ten (10) nor more than
seventy (70) days before such meeting, postage prepaid, addressed to each
stockholder of record entitled to vote at such meeting at his address as it
appears on the records of the corporation. Non-receipt of such notice by any
stockholder shall not invalidate any business done at any meeting, either annual
or special, at which a quorum is present. Any stockholder may, prior to, at the
meeting, or subsequent thereto, waive notice of any meeting in writing signed by
himself or his duly authorized attorney-in-fact. Any previously scheduled
meeting of the stockholders may be postponed, and any special meeting of the
stockholders may be canceled, by resolution of the Board of Directors upon
public notice given prior to the date previously scheduled for such meeting of
stockholders.
SECTION 2.04. Quorum. A majority of the outstanding shares of the
corporation entitled to vote at the meeting, represented in person or by proxy,
shall constitute a quorum at a meeting of stockholders, except that when
specified business is to be voted on by a class or series of stock voting as a
class, the holders of a majority of the shares of such class or series shall
constitute a quorum of such class or series for the transaction of such
business. The Chairman of the meeting may adjourn the meeting from time to
time, whether or not there is such a quorum, and, if less than a majority of the
outstanding shares entitled to vote at the meeting are represented at a meeting,
a majority of the shares so represented may adjourn the meeting from time to
time without further notice. No notice of the time and place of adjourned
meetings need be given except as required by law. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified. The
stockholders present or represented at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum. Any decision of a majority of the
outstanding shares of the corporation entitled to vote represented at a duly
organized meeting shall be valid and binding upon the corporation except as
otherwise specifically provided by law, the Articles of Incorporation or these
By-Laws, or by the resolution of the Board of Directors creating any series of
preferred stock.
The Chairman of any meeting of stockholders shall be the Chairman of
the Board, unless the Board of Directors shall by resolution prior to such
meeting designate another person as Chairman of such meeting.
SECTION 2.05. Voting. At all meetings of stockholders, a stockholder
may vote in person or by proxy
executed in writing by the stockholder or by his duly authorized attorney-in-
fact. Each outstanding share entitled to vote shall be entitled to one vote
upon each matter submitted to a vote at a meeting of stockholders; cumulative
voting shall not be permitted. The holders of the outstanding shares from time
to time of the common stock and of any preferred stock which has voting rights
shall vote together on all matters referred to the stockholders, including the
election of directors; provided, however, that the foregoing is subject to any
provisions of law or the Articles of Incorporation or the resolution of the
Board of Directors creating any series of preferred stock requiring with respect
to any matter the approval or consent of the holders of any designated
percentage of the outstanding shares of stock of any class or any series of any
class. All provisions of these By-Laws which specify or relate to the power of
the stockholders or to action which may be taken by the stockholders at or in
connection with a meeting thereof shall be interpreted as referring to the
holders of shares of voting stock of the corporation. Elections of directors at
all meeting of the stockholders at which directors are to be elected shall be by
ballot. Except as otherwise provided by law, the Articles of Incorporation, or
these By-Laws, in all mattes other than the election of directors, the
affirmative vote of a majority of the shares present in person or represented by
proxy at the meeting and entitled to vote on the matter shall be the act of the
stockholders. At any meeting of stockholders, the Chairman of the meeting shall
fix and announce at the meeting the date and time of the opening and the closing
of the polls for each matter upon which the stockholders will vote at such
meeting. Any action required to be taken at a meeting of the stockholders, or
any other action which may be taken at a meeting of the stockholders, may be
taken without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the stockholders entitled to vote with respect
to the subject matter thereof.
SECTION 2.06. Business at Meetings. To be properly brought before
any stockholders' meeting, business and nominations of persons for election to
the Board of Directors of the corporation must be (a) specified in the notice of
meeting given by or at the direction of the Chairman of the Board or the
President or a majority of the whole Board of Directors, (b) otherwise properly
brought before such meeting by or at the direction of the Board of Directors, or
(c) otherwise properly brought before such meeting by a stockholder or
stockholders who was a stockholder or were stockholders, respectively, of record
at the time of giving notice provided for in this By-Law, who is entitled to
vote for the election of Directors at such meeting and who complies with the
notice procedures set forth in this By-Law.
For business to be properly brought before any
stockholders' meeting by a stockholder or stockholders, the stockholder or
stockholders must have given timely notice thereof in writing to the Secretary
of the corporation and such business must otherwise be a proper matter for
stockholder action. To be timely, a stockholder's or stockholders' notice shall
be delivered to or received at the principal executive offices of the
corporation not later than eighty (80) days nor earlier than ninety (90) days
prior to (a) in the case of a special meeting called by such stockholder or
stockholders, the date the stockholder has, or the stockholders have, as
applicable, selected for such special meeting, and (b) in the case of an annual
meeting, the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than
thirty (30) days before or more than sixty (60) days after such anniversary
date, notice by such stockholder or stockholders to be timely must be so
received by the Secretary of the corporation (i) not later than the close of
business on the later of the eightieth (80th) day prior to such annual meeting
or the tenth (10th) day following the day on which public announcement of the
date of such annual meeting is first made by the corporation and (ii) not
earlier than the ninetieth (90th) day prior to such annual meeting. In the
event that the number of directors to be elected to the Board of Directors of
the corporation is increased and there is no public announcement by the
corporation naming all of the nominees for director or specifying the size of
the increased Board of Directors at least ninety (90) days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's or
stockholders' notice required by this By-Law shall also be considered timely,
but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the corporation not later than the close of business on the tenth
(10th) day following the day on which such pubic announcement is first made by
the corporation. In the event the corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the corporation's
notice of meeting, if the stockholder's notice required by this By-Law shall be
delivered to the Secretary at the principal executive offices of the corporation
(i) not later than the close of business on the later of the eightieth (80th)
day prior to such special meeting or the tenth (10th) day following the day on
which public announcement is first made of the date of the special meeting and
of the nominees proposed by the Board of Directors to be elected at such meeting
and (ii) not earlier than the close of business on the ninetieth (90th) day
prior to such special meeting. In no event shall the public announcement of an
adjournment of a meeting commence a new time period for the giving of a
stockholder's notice as described above.
A stockholder's notice to the Secretary of the corporation shall set
forth as to each matter that the stockholder proposes to bring before such
meeting (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before such meeting and the reasons for
conducting such business at such meeting of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; (c) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf such
nomination or proposal of business is made (i) the name and address of such
stockholder, as they appear on the corporation's books, and of such beneficial
owner, (ii) the class and number of shares of the securities of the corporation
that are beneficially owned by such stockholder and such beneficial owner; and
(d) any material interest of such stockholder and such beneficial owner in such
nomination and such business.
Only such persons who are nominated in accordance with the procedures set
forth in this By-Law shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
By-Law. Except as otherwise provided by law, the Chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that the nomination
or business that the stockholder proposes to bring before such meeting was not
properly brought before such meeting in accordance with the foregoing procedure,
and if he should so determine, he shall so declare to the meeting, and the
defective proposal or nomination shall be disregarded.
For purposes of this By-Law:
(a) "public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or comparable national
news service or in a document publicly filed by the corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the
Exchange Act.
(b) calculating the number of days elapsed between (a) the date on
which a notice is given and (b) (i) the date on which a special meeting is to be
held, (ii) the date that is the anniversary of an annual meeting, or (iii) the
date that is the
tenth (10th) day following the day on which public announcement of the date of
an annual meeting is first made, shall be made inclusive of dates between which
such calculation is made.
Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of
stockholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of preferred stock to elect directors under specified
circumstances.
ARTICLE III
DIRECTORS
SECTION 3.01. Number. The number of directors of the corporation
(exclusive of directors to be elected by the holders of any one or more series
of preferred stock voting separately as a class or classes) shall be fixed from
time to time exclusively pursuant to a resolution adopted by a majority of the
whole Board.
As used in these By-Laws, the term "whole Board" and "whole Board of
Directors" means the total number of directors which the corporation would have
if there were no vacancies.
SECTION 3.02. Classification and Election. The Board of Directors
shall be divided into three classes, as nearly equal in number as the then total
number of directors constituting the whole Board permits, with the terms of
office of one class expiring each year.
At the annual meeting of stockholders in 1983, the stockholders shall
elect three classes of directors: four members of the Board of Directors for
terms of three years; four members of the Board of Directors for terms of two
years; and three members of the Board of Directors for terms of one year.
Thereafter, the stockholders at each annual meeting shall elect members of the
Board of Directors for each class for terms of three years to succeed those
members of the Board of Directors whose terms shall have expired. Each member
of the Board of Directors shall hold office until the date of the annual meeting
of the stockholders in the calendar year in which his or her term of office
expires and thereafter until his or her successor is duly elected; provided that
no member shall be eligible for election or re-election as a member of the Board
of Directors after his or her 70th birthday and provided further that, effective
with members elected or re-elected subsequent to the
annual meeting of stockholders held on April 23, 1986, no member shall continue
in office past the date of the annual meeting of the stockholders that is held
subsequent to his of her 70th birthday.
Any vacancies in the Board of Directors for any reason other than a
vacancy created by a member not continuing in office past the date of the annual
meeting of the stockholders that is held subsequent to his or her 70th birthday
may be filled only by the Board of Directors, acting by a majority of the
directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the class for which such
director shall have been chosen and until their successors shall be elected and
qualified. In the case of a vacancy created by a member not continuing in
office past the date of the annual meeting of the stockholders that is held
subsequent to his or her 70th birthday, the stockholders at such annual meeting
shall elect a director to succeed such member, and any director so chosen shall
hold office until the next election of the class for which such director shall
have been chosen and until his or her successor shall be elected and qualified.
No decrease in the number of directors shall shorten the term of an incumbent
director.
Notwithstanding the foregoing, and except as otherwise required by
law, whenever the holders of any one or more series of preferred stock shall
have the right, voting separately as a class, to elect one or more directors of
the corporation, the terms of the director or directors elected by such holders
shall expire at the next succeeding annual meeting of stockholders.
SECTION 3.03. Quorum. A majority of the members of the Board of
Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, but if at any meeting of the Board of
Directors there shall be less than a quorum present, a majority of the directors
present may adjourn the meeting from time to time without further notice. The
act of the majority of the Directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors unless otherwise provided in
these By-Laws.
SECTION 3.04. Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this By-Law immediately after, and at
the same place as, the annual meeting of the stockholders. The Board of
Directors may provide, by resolution, the time and place, either within or
without the State of Hawaii, for the holding of additional regular meetings
without other notice than such resolution. Special meetings of the Board of
Directors may be held at such times as the business of the corporation shall
require according to resolutions of the Board of Directors, or upon the call of
the Chairman of the Board, the President or a majority of the whole Board of
Directors. The person or persons authorized to call special meetings of the
Board of Directors may fix any place, either within or without the State of
Hawaii, as the place for holding any special meeting of the Board of Directors
called by them.
SECTION 3.05. Notice of Special Meetings. Notice of any special
meeting shall be given by written notice delivered personally, first-class or
overnight mail or courier service, telegram or facsimile transmission, or orally
by telephone, to each director at his business address or residence. If mailed
by first-class mail, such notice shall be deemed to be adequately delivered when
deposited in the United States mail so addressed, with postage thereon prepaid
at least five (5) days before such meeting. If notice be given by telegram,
overnight mail or courier service, such notice shall be deemed to be adequately
delivered when the telegram is delivered to the telegraph company or the notice
is delivered by the overnight mail or courier service at least twenty four (24)
hours before such meeting. If by facsimile transmission, hand delivery, or
telephone, such notice shall be deemed adequately delivered if such notice is
transmitted, communicated by telephone or delivered by hand at least twelve (12)
hours before the time set for such meeting. Non-receipt of any such notice
shall not invalidate any business done at any meeting at which a quorum is
present. Any director, whether attending a meeting or not, may, prior to, at
the meeting, or subsequent thereto, waive notice of the meeting. The attendance
of a director at a meeting shall constitute a waiver of notice of such meeting.
Section 3.06. Action by Consent of Board of Directors. Any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting if all members of the Board
of Directors or committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors or committee.
Section 3.07. Conference Telephone Meetings. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
SECTION 3.08. Removal of Directors. The stockholders of the
corporation may, at any special meeting called expressly for the purpose, remove
from office any director pursuant to applicable law.
SECTION 3.09. Powers of Directors. The Board of
Directors shall have full power to control, manage and direct the property,
business and affairs of the corporation and to exercise all the powers and
perform all the acts which the corporation may legally exercise and perform.
SECTION 3.10. Notice of Director Nominations. Subject to Section
2.03 and 2.06 of these By-Laws, nominations for the election of directors may be
made by the Board of Directors or by any stockholder entitled to vote for the
election of directors where such stockholder makes such nomination in conformity
with the provisions of Section 2.06 of these By-Laws.
ARTICLE IV
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
SECTION 4.01. Committees Exercising Powers of Board. The Board of
Directors may, by resolution adopted by a majority of the whole Board, designate
two or more of its members to constitute an executive committee and such other
committees as the Board of Directors shall determine, and during the intervals
between meetings of the Board of Directors, each of such committees shall
possess and may exercise any powers of the Board of Directors which are
delegated to it in such resolution by the Board of Directors. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of any member of such committee or committees,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not constituting a quorum, may unanimously appoint another
member of the Board to act at the meeting in the place of any such absent or
disqualified member. Each such committee shall keep regular minutes of its
proceedings, and all action by it, and its minutes, shall be reported to the
Board of Directors at its next succeeding meeting for such action as the Board
of Directors deems proper.
SECTION 4.02. General or Special Committees. The Board of Directors
may also create and appoint from its own membership or otherwise such general or
special committees, to which no powers of the Board of Directors shall be
delegated, as it deems desirable.
SECTION 4.03. Meetings of Committees. A majority of any committee
may determine its action and fix the time and place of its meetings, unless the
Board of Directors shall otherwise provide. Notice of such meeting shall be
given to each member of the committee in the manner provided for in Section 3.05
of these By-Laws. The Board of Directors shall have power at any time to fill
vacancies in, to change the membership of, or to dissolve
any such committee. Nothing herein shall be deemed to prevent the Board or
Directors from appointing one or more committees consisting in whole or in part
of persons who are not directors of the corporation; provided, however, that no
such committee shall have or may exercise any authority of the Board of
Directors.
ARTICLE V
OFFICERS
SECTION 5.01. Generally. The principal officers of the corporation
shall consist of a Chairman of the Board, a President, one or more Vice
Chairmen, one or more Vice Presidents, one of whom may be designated as the
Executive Vice President, a Treasurer and a Secretary, all of whom shall be
appointed annually by the Board of Directors at the first meeting after the
annual or special meeting of the stockholders at which the Board of Directors is
elected and shall hold office until the next annual meeting and thereafter until
their successors shall be duly appointed and qualified, subject, however, to
removal by the Board of Directors. The number of Vice Presidents may be changed
from time to time by the Board of Directors at any meeting or meetings thereof
and if increased at any time the additional Vice President or Vice Presidents
shall be appointed by the Board of Directors. There may also be one or more
Assistant Vice Presidents, Assistant Treasurers, Assistant Secretaries, and
other offices who shall be appointed by the Directors and the number thereof
shall be determined from time to time by the Directors. One person may hold
more than one office.
SECTION 5.02. Vacancies. Vacancies which may occur in any office,
and any newly created office, shall be filled by appointment by the Board of
Directors for the remainder of the term of such office. In case of the absence
from the State of Hawaii or other temporary disability of any officer, the Board
of Directors may appoint a temporary officer to serve during such absence or
disability. Any vacancy in an office appointed by the Chairman of the Board or
the President because of death, resignation, or removal may be filled by the
Chairman of the Board or the President.
SECTION 5.03. Removals. The Board of Directors of the corporation
may at any time remove from office or discharge from employment any officer,
subordinate officer, agent or employee appointed by the Board of Directors or by
any person under authority delegated by the Board of Directors.
SECTION 5.04. Chairman of the Board. The Chairman shall preside at
all meetings of the stockholders and Board of
Directors at which he is present, and shall perform such other duties and have
such other powers as the Board of Directors may prescribe.
SECTION 5.05. President. The President shall preside at all meetings
of the Board of Directors and of the stockholders at which the Chairman is
absent. Subject to the control of the Board of Directors, the President shall
have general charge and care of the business and property of the corporation,
shall appoint and discharge employees and agents of the corporation and
determine their compensation and shall do and perform such additional duties as
shall be prescribed by the Board of Directors. When authorized by the Board of
Directors so to do, he may delegate to one of the Vice Presidents the whole or
any part of the general management and care of the business and property of the
corporation including the employment and discharge of agents and employees.
SECTION 5.06. Vice Chairmen. The Vice Chairmen shall discharge such
duties and have such authority and powers as may be prescribed by the Chief
Executive Officer and such other special duties, authority and powers as may be
assigned to him or her by these By-Laws or by the Board of Directors
consistently with these By-Laws.
SECTION 5.07. Vice Presidents. It shall be the duty of the Vice
Presidents, in the order determined by the Board of Directors, to assume and
perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. Each Vice President
shall do and perform such additional duties as shall be prescribed by the Board
of Directors.
SECTION 5.08. Treasurer. The Treasurer shall be the financial and
accounting officer of the corporation. The Treasurer shall have custody of all
moneys, valuable papers and documents of the corporation, shall keep the same
for safekeeping in such depositories as may be designated by the Board of
Directors and shall expend the funds of the corporation as directed by the Board
of Directors. He shall keep or cause to be kept a book or books setting forth a
true record of the receipts and expenditures, assets and liabilities, losses and
gains of the corporation and shall, when and as required by the Board of
Directors, render a statement of the financial condition of the corporation. He
shall also do and perform such additional duties as shall be prescribed by the
Board of Directors. In the absence or disability of the Treasurer, his duties
shall be performed by the Secretary or by an Assistant Treasurer.
SECTION 5.09. Secretary. The Secretary shall be ex officio secretary
of the Board of Directors, shall give or cause to be given all required notices
of meetings of the stockholders
and directors, shall record the proceedings of meetings of the stockholders and
directors in a book or books to be kept for that purpose, and shall perform such
other duties as may be assigned to him from time to time by the Board of
Directors and by the President. In the absence or disability of the Secretary,
his duties shall be performed by the Treasurer or by an Assistant Secretary.
SECTION 5.10. Subordinate Officers. The powers and duties of the
subordinate officers shall be as prescribed by the Board of Directors.
SECTION 5.11. Stock in Other Corporations. Unless the Board of
Directors otherwise directs with respect to any meeting or meetings of the
stockholders of any corporation shares of the stock of which are owned by this
corporation, whether or not such corporation is a subsidiary of this
corporation: the Chairman of the Board or the President or any Vice President
designated by the Board of Directors, the Chairman of the Board or the President
shall have full authority to attend any meeting of the stockholders of any such
corporation and to vote at such meeting the shares of stock of such corporation
owned by this corporation; and the Chairman of the Board or the President or any
such Vice President shall have full authority to execute on behalf of this
corporation any proxy authorizing any other person or persons to vote the shares
of stock of any such corporation owned by this corporation at any meeting or
meetings of the stockholders of such corporation; and the Chairman of the Board
or the President or any such Vice President, or any such person authorized to
act on behalf of the corporation by any proxy executed by any of the foregoing
director or officers of the corporation, shall have full authority to consent in
writing, in the name of the corporation as owner of shares of stock of any such
corporation, to any action by such other corporation, any may execute or cause
to be executed in the name and on behalf of the corporation and under its
corporate seal or otherwise, all such written proxies and other instruments as
the Chairman of the Board, the President, such Vice President, or such
authorized person, as applicable, may deem necessary or proper in the premises.
ARTICLE VI
AUDITOR
SECTION 6.01. The Auditor shall be elected by the stockholders at
their annual meeting to serve until the next annual meeting and thereafter until
a successor is elected.
ARTICLE VII
EXECUTION OF INSTRUMENTS
SECTION 7.01. All checks, drafts, notes, bonds, acceptances, deeds,
leases, contracts, and all other instruments, shall be signed by such person or
persons as may be designated by general or special resolution of the Board of
Directors, and in the absence of any such general or special resolution
applicable to any such instrument then such instrument shall be signed by the
President and a Vice President or by the President or a Vice President and by
the Treasurer or the Secretary or an Assistant Secretary or an Assistant
Treasurer. The Board of Directors may by resolution provide for the use of
facsimile signatures on any instrument and may also provide that any instrument
may be sealed with the facsimile seal of the corporation.
ARTICLE VIII
CAPITAL STOCK
SECTION 8.01. Certificates. The certificates for shares of the
capital stock of the corporation shall be in such form and not inconsistent with
the Articles of Incorporation as shall be approved by the Board of Directors.
The certificates shall be sealed with the corporate seal and signed by the
President or a Vice President and countersigned by the Treasurer or the
Secretary or an Assistant Treasurer or an Assistant Secretary; provided,
however, that the Board of Directors may provide that certificates shall be
sealed with only the facsimile seal of the corporation and signed only with the
facsimile signature of the President or a Vice President and countersigned only
with the facsimile signature of the Treasurer or the Secretary. The name of the
person owning the shares represented by each certificate, with the number of
such shares and the date of issue, shall be entered on the corporation's stock
books.
SECTION 8.02. Transfer of Shares. Transfer of shares of stock may be
made by endorsement and delivery of the certificates. No such transaction shall
be valid, except between the parties thereto, until a new certificate shall have
been obtained or the transfer shall have been recorded on the books of the
corporation so as to show the date of transfer, the parties thereto, and the
number and description of the shares transferred. Upon the surrender of any
certificate it shall be canceled.
SECTION 8.03. Regulations. The Board of Directors shall have power
and authority to make all such rules and regulations as it deems expedient
concerning the issue, transfer and registration of certificates for shares of
the capital stock of the corporation.
SECTION 8.04. Closing of Stock Transfer Books and Record Date. The
books for the transfer of stock may be closed as the Board of Director may from
time to time determine for a period not exceeding seventy (70) days before the
annual or any special meeting of stockholders, before the day appointed for the
payment of any dividend, or before any date on which rights of any kind in or in
connection with the stock of the corporation are to be determined or exercised;
provided, however, that if the books for the transfer of stock shall be closed
for the purpose of determining stockholders entitled to notice of or to vote at
a meeting of stockholders, the books shall be closed at least ten (10) days
immediately preceding the meeting; provided, further, that in lieu of closing
the books for the transfer of stock, the Board of Directors may fix a date as a
record date for the determination of stockholders entitled to notice of and to
vote at any such meeting, to receive any such dividends, or to receive or
exercise any such rights, as the case may be, such record date to be (i) not
more than seventy (70) nor less than ten (10) days prior to the date on which
the particular action requiring the determination of stockholders is to be taken
at any such meeting of stockholders or (ii) more than seventy (70) days prior to
any such payment date or any such date for the determination or exercise of
rights.
SECTION 8.05. Lost Certificates. The Board of Directors, subject to
such rules and regulations as it may from time to time adopt, may order a new
certificate of stock to be issued in the place of any certificate of the
corporation alleged to have been lost, destroyed, stolen or mutilated, subject
to production of such evidence of such loss, destruction, theft or mutilation
and on delivery to the corporation of a bond of indemnity in such amount, upon
such terms and secured by such surety, as the Board of Directors or any
financial officer may in its, his or her discretion require.
SECTION 8.06. Holders of Record. The corporation shall be entitled
to treat the holder of record of any share or shares of its capital stock as the
holder in fact thereof for any purpose whatsoever and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other claimant thereto.
ARTICLE IX
AMENDMENTS TO THE BY-LAWS
These By-Laws may be amended or repealed, in whole or in part, at any
time at any meeting of the directors by resolution adopted by the affirmative
vote of a majority of the whole Board of Directors.
Exhibit 4.1
Instruments defining the rights of holders of long-term debt of the
Registrant are not filed as exhibits because the amount of debt authorized under
any such instrument does not exceed 10% of the total assets of the Registrant
and its consolidated subsidiaries. The Registrant hereby undertakes to furnish
a copy of any such instrument to the Commission upon request.
Exhibit 10.1
PACIFIC CENTURY FINANCIAL CORPORATION
ONE-YEAR INCENTIVE PLAN
__________
Effective January 1, 1998
SECTION 1. ESTABLISHMENT AND PURPOSES.
--------------------------
1.01 Pacific Century Financial Corporation hereby establishes the 1998
One-Year Incentive Plan.
1.02 The purpose of this Plan is to advance the interests of Pacific
Century Financial Corporation by (i) motivating special achievements by Eligible
Employees upon whose judgment, initiative and efforts Pacific Century Financial
Corporation is largely dependent upon for the successful conduct of its business
through a compensation program emphasizing performance objectives; (ii)
supplementing other compensation plans; and (iii) assisting Pacific Century
Financial Corporation in retaining and attracting such employees.
1.03 This Plan shall be effective as of January 1, 1998 with the term
ending December 31, 1998.
SECTION 2. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings
unless a different meaning is plainly required in the context:
2.01 "Board" shall mean the Board of Directors of the Holding Company.
2.02 "Committee" shall mean the Compensation Committee of the Holding
Company.
2.03 "Contingent Award" shall mean an award to an Eligible Employee
expressed as a percentage of Salary for the Incentive Period.
2.04 "Eligible Employees" shall mean officers or other employees of
the Holding Company or any Subsidiary, including directors who are also officers
or other employees of the Holding Company or of a Subsidiary, who, in the
opinion of the Committee, are or give promise of becoming of exceptional
importance to the Holding Company or any Subsidiary, and of making substantial
contributions to the success, growth and profit of the Holding Company and its
Subsidiaries. Eligible Employees shall not include participants of the
---
Executive Officer One-Year Incentive Plan.
2.05 "Ending Value" shall be the amount as defined in Section 5.01.
2.06 "Financial Performance Factor" shall mean an amount ranging from
zero to 2.0, as determined by the Performance Matrix described in Section 6 (or,
in certain events, by Section 9.02 or Section 12).
2.07 "Financial Performance Percentage" shall mean the
applicable percentage as determined in Section 4.03.
2.08 "Holding Company" shall mean Pacific Century Financial
Corporation.
2.09 "Incentive Period", with respect to any Contingent Award, shall
mean the Holding Company's fiscal year 1998.
2.10 "Individual Performance Factor" shall mean an amount ranging from
zero to 2.0, as determined by following the procedures described in Section 7
(or, in certain events, by Section 9.02 or Section 12).
2.11 "Individual Performance Percentage" shall mean the applicable
percentage as determined in Section 4.03.
2.12 "Net Income" shall mean the Holding Company's consolidated net
income for the Incentive Period, as reported in the annual report to
shareholders (or as otherwise reported to shareholders) adjusted as described in
this Section 2.12. The Holding Company's reported net income shall be adjusted
for the following:
a. Any extraordinary or unusual gain or loss transaction,
b. Securities gains or losses, and
c. Dividends on preferred shares.
The Committee will, in its sole discretion, determine any adjustments to be made
pursuant to this Section 2.12.
2.13 "Participant" shall mean a person that the Committee, in its sole
discretion, selects from among the Eligible Employees to be awarded a Contingent
Award.
2.14 "Participation Level" shall mean the applicable level as defined
in Section 4.03.
2.15 "Performance Matrix" shall mean the matrix shown in Section 6 by
which the Financial Performance Factor under this Plan is calculated.
2.16 "Plan" shall mean this 1998 One-Year Incentive Plan, as it may be
amended from time to time.
2.17 "Retirement" shall mean the termination of a Participant's
employment with the Holding Company or a Subsidiary under circumstances where
the Participant terminates on or after the retirement dates specified under the
Holding Company's retirement plan and the Participant's withdrawal from any
employment in the financial services industry in the State of Hawaii during the
Incentive Period.
2.18 "Return on Average Assets" (ROAA) shall mean Net Income (as
defined in Section 2.12) of the Holding Company for the Incentive Period divided
by Average Total Assets for the Incentive Period (which Average Total Assets are
reported in the Holding Company's annual report to shareholders or as otherwise
reported to shareholders).
2.19 "Salary" shall mean actual base salary for the Incentive Period.
2.20 "Subsidiary" or "Subsidiaries" shall mean any corporation(s) in
which the Holding Company or any Subsidiary (as defined hereby) owns 50 percent
or more of the total combined voting power of all classes of stock in such
corporation.
SECTION 3. ADMINISTRATION.
--------------
3.01 The Plan shall be administered by the Committee.
3.02 The Committee shall be vested with full authority to make such
rules and regulations as it deems necessary to administer the Plan and to
interpret the provisions of the Plan. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration or application of the Plan shall be final, conclusive and
binding upon all Eligible Employees, Participants and any and all persons
claiming under or through any Eligible Employee or Participant, unless otherwise
determined by the Board.
3.03 Any determination, decision or action of the Committee provided
for in this Plan may be made or taken by action of the Board if the Board so
determines with the same force and effect as if such determination, decision or
action had been made or taken by the Committee. No member of the Committee or
Board shall be liable for any determination, decision or action made in good
faith with respect to the Plan or any Contingent Award. The fact that a member
of the Board shall at the time be, or shall theretofore have been or thereafter
may be, an Eligible Employee or a Participant shall not disqualify him or her
from taking part in and voting at any time as a member of the Board in favor of
or against any amendment of the Plan.
SECTION 4. CONTINGENT AWARDS AND PARTICIPATION LEVELS.
------------------------------------------
4.01 The Committee may, from time to time, in its sole discretion,
award to each Participant a Contingent Award based on a designated performance
level. The Committee shall cause notice to be given to each Participant of his
or her selection, their Contingent Award and Participation Level.
4.02 The Contingent Award that may be awarded to any Participant shall
be a percentage of his or her Salary, which percentage shall be no greater than
the amounts set out in the following table:
CONTINGENT AWARD
BANK OF HAWAII OFFICERS AS A % OF SALARY
----------------------- ----------------
Group Head/Division Manager 50%
Other 30%
OTHER SUBSIDIARY OFFICERS 40%
-------------------------
4.03 The Committee shall also designate one of the following three
Participation Levels for each Participant, under which an Individual Performance
Percentage and a Financial Performance Percentage shall be designated for
weighting of the Individual Performance Factor and the Financial Performance
Factor:
Level 1: 50% Individual Performance Factor / 50% Financial Performance Factor
Level 2: 75% Individual Performance Factor / 25% Financial Performance Factor
Level 3: 90% Individual Performance Factor / 10% Financial
Performance Factor
SECTION 5. ENDING VALUE OF CONTINGENT AWARD.
--------------------------------
5.01 The Ending Value of a Contingent Award shall be determined by
multiplying the Contingent Award (as a percentage) by the sum of the "Financial
Performance Value" and the "Individual Performance Value" as determined below in
this Section 5.
5.02 The Financial Performance Value is determined by multiplying the
Financial Performance Factor (as determined in accordance with Section 6) by the
Financial Performance Percentage of the Participation Level for the Participant.
5.03 The Individual Performance Value is determined by multiplying the
Individual Performance Factor (as determined in accordance with Section 7) by
the Individual Performance Percentage of the Participation Level for the
Participant.
SECTION 6. FINANCIAL PERFORMANCE FACTOR.
-----------------------------
6.01 The Financial Performance Factor shall be determined based on the
following Matrix:
===============================================
FINANCIAL PERFORMANCE FACTOR
=========================================================
R 1.03% 0.8 1.0 1.4 1.6 2.0
---------------------------------------------------------
O 0.98% 0.6 0.8 1.2 1.4 1.6
---------------------------------------------------------
A 0.93% 0.4 0.6 1.0 1.2 1.4
--------------------------------------------------------
A 0.88% 0.2 0.4 0.6 0.8 1.0
--------------------------------------------------------
0.83% 0.0 0.2 0.4 0.6 0.8
=========================================================
$130MM $135MM $140MM $144MM $148MM
NET INCOME
=========================================================
6.02 Interpolation shall be made on a straight line basis as
calculated by the Controllers Division. In unusual cases, either ROAA or Net
Income may be above 1.12% and $158MM respectively. In no case will the
Financial Performance Factor exceed 2.0.
SECTION 7. INDIVIDUAL PERFORMANCE FACTOR.
-----------------------------
7.01 The Individual Performance Factor will be established based on
individual performance. This step shall appraise each Participant's performance
on his or her assigned job responsibilities in consideration of the economic and
other circumstances with which each Participant had to cope during the Incentive
Period. For this purpose, a Participant's performance appraisal will consider,
but is not limited to:
a. 1998 Individual Performance Objectives (see Attachment A).
b. How well basic responsibilities were carried out.
c. How well problems were anticipated and avoided or mollified.
d. How well unanticipated problems were overcome.
e. How well opportunities were identified and capitalized on.
The scope of circumstances to be considered shall include economic conditions;
cost considerations; political implications; revenue generation; public,
governmental, customer relations; and the like. A Participant whose individual
performance is evaluated as "Below Expectations" or "Unsatisfactory" will not be
eligible for a payout under the conditions of the Plan (notwithstanding the
Financial Performance Value determined in Section 6), and the Ending Value of
the Participant's Contingent Award shall be zero.
7.02 The Chairman and the President shall recommend an Individual
Performance Factor for each Participant to the Committee. Individual
Performance Factors will range from zero to a maximum of 2.0. The Committee
shall make the final determination of awards and reserves the right to add to or
withhold all or any portion of an award at its sole discretion.
SECTION 8. DETERMINATION AND PAYMENT OF AWARDS.
-----------------------------------
8.01 If the Ending Value of the Contingent Award as computed in
accordance with Sections 5, 6 and 7 is zero, no payment shall be made, any
Contingent Awards shall terminate, and all rights thereunder shall cease.
8.02 Subject to the provisions of Section 9 and Section 12 hereof, the
Ending Value, if any, of the Contingent Award for each Participant shall be
determined as per Sections 5, 6 and 7. The amount determined for each
Participant shall be paid in cash in a lump sum (subject to withholding
requirements, if applicable) as soon as practical after determination thereof.
However, a Participant may make a request, on a form approved by the
Committee, for the deferral of all or part of any payment he or she may receive,
provided that such request is delivered to the Human Resources Division no later
than November 1 of the Incentive Period.
The Committee may accept or reject any such request for a deferral and
may determine the conditions of such deferral at the Committee's sole
discretion.
SECTION 9. TERMINATION OF PARTICIPATION.
----------------------------
9.01 Except as otherwise provided in Section 9.02 below, if a
Participant does not remain continuously in the employ of the Holding Company or
a Subsidiary until the expiration of the Incentive Period with respect to any
Contingent Award, such Contingent Award shall terminate and all rights
thereunder shall cease.
9.02 If the employment of a Participant with the Holding Company or a
Subsidiary terminates during the Incentive Period due to his or her death,
disability or Retirement, or if participation of a Participant under this Plan
commences or terminates mid-term during the Incentive Period, the Committee
shall determine the cash payment to be made with respect to such Participant
under the following method:
In the event of the Participant's death, disability, Retirement or
mid-term termination of participation under the Plan, salary shall be
the year-to-date actual salary annualized prior to the applicable
event. In the event of the Participant's mid-term commencement of
participation under the Plan, salary shall be the actual salary
annualized subsequent to participation in the Plan. The Ending Value
of the Contingent Award calculated under Sections 5, 6, and 7 shall be
multiplied by a fraction, the numerator of which shall be the number
of full months of the Incentive Period during which Participant was an
employee of the Holding Company or Subsidiary, and the denominator of
which shall be 12. This calculation and the payment of any award
necessarily must be paid after the termination of the Incentive Period
in accordance with Section 8.02.
SECTION 10. NON-TRANSFERABILITY OF CONTINGENT AWARD.
---------------------------------------
No Contingent Award shall be sold, assigned, transferred, encumbered,
hypothecated or otherwise anticipated by a Participant, and during the lifetime
of a Participant, any payment shall be payable only to the Participant. The
Committee shall, if it so determines, adopt rules for the designation by a
Participant of a beneficiary to receive cash payments, if any, that may become
due pursuant to this Plan after the death of the Participant.
SECTION 11. AMENDMENT OR TERMINATION OF THE PLAN.
------------------------------------
The Board or the Committee, may, at any time, terminate or at any time
and from time to time amend, modify or suspend this Plan provided that no such
amendment, modification, suspension or termination of the Plan shall in any
manner adversely affect any Contingent Award theretofore made under the Plan
without the consent of the Participant.
SECTION 12. CHANGES IN CAPITALIZATION OR CONTROL.
------------------------------------
In the event of a dissolution or liquidation of the Holding Company,
or a "Change in Control" of the Holding Company, the amount of cash payable with
respect to any Contingent Award for an Incentive Period that will end after such
event shall be determined and payable as if the Incentive Period ended on the
date of such event and an Ending Value of the Contingent Award of two times the
Contingent Award Percentage shall be used in calculating payments under this
Plan, notwithstanding any other provisions of this Plan. All Contingent Awards
shall be calculated based on the actual annualized salary for such shortened
Incentive Period. The Ending Value of the Contingent Award calculated under
this Section 12 shall be multiplied by a fraction, the numerator of which shall
be the number of full months of the Incentive Period, as adjusted under this
Section 12, and the denominator of which shall be 12. The Ending Value of the
Contingent Award under this Section 12 shall be paid to such participants within
ten days of the end of the shortened Incentive Period. For this purpose, a
"Change in Control" of the Holding Company means any one or more of the
following occurrences: (i) Any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the beneficial
owner of shares of the Holding Company having 25 percent or more of the total
number of votes that may be cast for the election of Directors of the Holding
Company; or (ii) As a result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, the
persons who were Directors of the Holding Company before the transaction shall
cease to constitute a majority of the Board of Directors of the Holding Company
or any successor to the Holding Company.
Exhibit 10.2
PACIFIC CENTURY FINANCIAL CORPORATION
EXECUTIVE OFFICER ONE-YEAR INCENTIVE PLAN
__________
Effective January 1, 1998
SECTION 1. ESTABLISHMENT AND PURPOSES.
--------------------------
1.01 Pacific Century Financial Corporation hereby establishes the
Executive Officer One-Year Incentive Plan.
1.02 The purpose of this Plan is to advance the interests of Pacific
Century Financial Corporation by (i) motivating special achievements by Eligible
Employees upon whose judgment, initiative and efforts Pacific Century Financial
Corporation is largely dependent for the successful conduct of its business
through a compensation program emphasizing performance objectives; (ii)
supplementing other compensation plans; and (iii) assisting Pacific Century
Financial Corporation in retaining and attracting such employees.
1.03 This Plan shall be effective as of January 1, 1998 and shall
operate on the basis of the current Incentive Period. This Plan constitutes the
current operating document for the administration of the Plan effective January
1, 1994, that was disclosed to shareholders and received shareholder approval on
April 27, 1994. As such, the material terms of this Plan have been approved by
shareholders for purposes of the performance-based compensation requirements of
Section 162(m) of the Internal Revenue Code of 1986, as amended.
SECTION 2. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings
unless a different meaning is plainly required in the context:
2.01 "Board" shall mean the Board of Directors of the Holding Company.
2.02 "Committee" shall mean the Compensation Committee of the Holding
Company.
2.03 "Contingent Award" shall mean an award to an Eligible Employee,
as determined in Section 4.02, expressed as a percentage of Salary for the
Incentive Period.
2.04 "Eligible Employees" shall mean the Executive Officers of the
Holding Company or of a Subsidiary (as described in Section 4.02) who, in the
opinion of the Committee, are or give promise of becoming of exceptional
importance to the Holding Company or any Subsidiary, and of making substantial
contributions to the success, growth and profit of the Holding Company and its
Subsidiaries. Neither members of the Committee nor any member of the Board who
is not an employee of the Holding Company or of a Subsidiary shall be an
Eligible Employee.
2.05 "Ending Value" shall be the amount as defined in Section 5.01.
2.06 "Financial Performance Factor" shall mean an amount ranging from
zero to 2.0, as determined by the Performance Matrix as described in Section 5
(or, in certain events, by Section 7.02 or Section 10).
2.07 "Holding Company" shall mean Pacific Century Financial
Corporation.
2.08 "Incentive Period", with respect to any Contingent Award, shall
mean the Holding Company's fiscal year 1998.
2.09 "Net Income" shall mean the Holding Company's consolidated net
income for the Incentive Period, as reported in the annual report to
shareholders (or as otherwise reported to shareholders) adjusted as described in
this Section 2.09. The Holding Company's reported net income shall be adjusted
for the following:
a. Any extraordinary or unusual gain or loss transaction,
b. Securities gains or losses, and
c. Dividends on preferred shares.
The Committee will, in its sole discretion, determine any adjustments to be made
pursuant to this Section 2.09.
2.10 "Participant" shall mean a person that the Committee, in its sole
discretion, selects from among the Eligible Employees to be awarded a Contingent
Award.
2.11 "Performance Matrix" shall mean the matrix shown in Section 5 by
which the Financial Performance Factor under this Plan is calculated.
2.12 "Plan" shall mean this Executive Officer One-Year Incentive Plan,
as it may be amended from time to time. The Plan constitutes the current
operating document for the administration of the Plan adopted effective January
1, 1994.
2.13 "Retirement" shall mean the termination of a Participant's
employment with the Holding Company or a Subsidiary under circumstances where
the Participant terminates on or after the retirement dates specified under the
Holding Company's retirement plan and the Participant's withdrawal from any
employment in the financial services industry in the State of Hawaii during the
Incentive Period.
2.14 "Return on Average Assets" (ROAA) shall mean Net Income (as
defined in Section 2.09) of the Holding Company for the Incentive Period divided
by Average Total Assets for the Incentive Period (which Average Total Assets are
reported in the Holding Company's annual report to shareholders or as otherwise
reported to shareholders).
2.15 "Salary" shall mean actual base salary for the Incentive Period.
2.16 "Subsidiary" or "Subsidiaries" shall mean any corporation(s) in
which the Holding Company or any Subsidiary (as defined hereby) owns 50 percent
or more of the total combined voting power of all classes of stock in such
corporation.
SECTION 3. ADMINISTRATION.
--------------
3.01 The Plan shall be administered by the Committee.
3.02 The Committee shall be vested with full authority to make such
rules and regulations as it deems necessary to administer the Plan and to
interpret the provisions of the Plan. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration or application of the Plan shall be final, conclusive and binding
upon all Eligible Employees, Participants and any and all persons claiming under
or through any Eligible Employee or Participant, unless otherwise determined by
the Board.
3.03 Any determination, decision or action of the Committee provided
for in this Plan may be made or taken by action of the Board if the Board so
determines with the same force and effect as if such determination, decision or
action had been made or taken by the Committee. No member of the Committee or
Board shall be liable for any determination, decision or action made in good
faith with respect to the Plan or any Contingent Award. The fact that a member
of the Board shall at the time be, or shall theretofore have been or thereafter
may be, an Eligible Employee or a Participant shall not disqualify him or her
from taking part in and voting at any time as a member of the Board in favor of
or against any amendment of the Plan.
3.04 With respect to any Incentive Period, the Performance Matrix
described in Section 5.02 may be modified by the Committee. Specifically, to
measure performance of the Holding Company and to determine the Performance
Matrix for any Incentive Period, the Committee may, no later than 90 days after
the commencement of the Incentive Period, select from among a number of business
criteria or measures, and establish specific objective numeric goals relating to
those measures. The measures may include return on average equity or year-end
equity, return on average of year-end assets, earnings per share, growth in
earnings per share, increase in Holding Company's Common Stock price, total
return to shareholders, growth in net income per employee, growth in noninterest
income, control of net overhead expense, control of nonperforming loans, capital
adequacy, or adequacy of loan loss reserves.
SECTION 4. CONTINGENT AWARDS.
-----------------
4.01 The Committee may, from time to time, in its sole discretion,
award to each Participant a Contingent Award. The Committee shall cause notice
to be given to each Participant of his or her selection.
4.02 The Contingent Award shall be an amount determined by multiplying
the Participant's salary by a percentage as determined by the Committee, which
percentage shall be no greater than the amounts set out in the table below.
CONTINGENT AWARD
BANK OF HAWAII OFFICERS AS A % OF SALARY
----------------------- ----------------
Chairman of the Board/CEO 70%
President or Vice Chairman 50%
4.03 In any event, the maximum payout under this Plan shall be two
times the Contingent Award. For example, if the Participant has a Salary of
$100,000 and the Contingent Award awarded to such Participant is 45%, the
Contingent Award is $45,000. In this example, the maximum payout under this
Plan is two times the Contingent Award, or $90,000.
4.04 For any Participant, assessment of individual performance may
result in a downward adjustment of the maximum award, or the entire elimination
of this award. No upward adjustments based on discretion are permitted beyond
the maximum award for any Participant. An adjustment under this Section 4.04
may be made prior to a final determination of the award under Section 6.
SECTION 5. ENDING VALUE OF CONTINGENT AWARD.
-------------------------------------
5.01 The Ending Value of a Contingent Award shall be determined by
multiplying the Contingent Award by the Financial Performance Factor (determined
from the Performance Matrix in this Section 5).
5.02 Performance Matrix:
===============================================
FINANCIAL PERFORMANCE FACTOR
=========================================================
R 1.03% 1.0 1.3 1.6 1.8 2.0
---------------------------------------------------------
O 0.98% 0.8 1.1 1.3 1.6 1.8
---------------------------------------------------------
A 0.93% 0.5 0.8 1.1 1.4 1.6
---------------------------------------------------------
A 0.88% 0.3 0.5 0.8 1.1 1.4
---------------------------------------------------------
0.83% 0.0 0.3 0.5 0.8 1.1
=========================================================
$130MM $135MM $140MM $144MM $148MM
NET INCOME
==============================================
5.03 Interpolation shall be made on a straight line basis as
calculated by the Controllers Division. Proration will still be performed if at
least one of these factors is within the range indicated on the Performance
Matrix. The maximum Financial Performance Factor under all circumstances is
2.000.
SECTION 6. DETERMINATION AND PAYMENT OF AWARDS.
-----------------------------------
6.01 If the Ending Value as computed and adjusted in accordance with
Section 5 is zero, no payment shall be made, any Contingent Awards shall
terminate and all rights thereunder shall cease.
6.02 Subject to the provisions of Section 7 and Section 10 hereof, the
Ending Value, if any, of the Contingent Award for each Participant shall be
determined as per Section 5. The amount
determined for each Participant shall be paid in cash in a lump sum (subject to
withholding requirements, if applicable) as soon as practicable after
determination thereof.
However, a Participant may make a request, on a form approved by the
Committee, for the deferral of all or part of any payment he or she may receive,
provided that such request is delivered to the Human Resources Division no later
than November 1 of the Incentive Period.
The Committee may accept or reject any such request for a deferral and
may determine the conditions of such deferral at the Committee's sole
discretion.
SECTION 7. TERMINATION OF EMPLOYMENT.
-------------------------
7.01 Except as otherwise provided in Section 7.02 below, if a
Participant does not remain continuously in the employ of the Holding Company or
a Subsidiary until the expiration of the Incentive Period with respect to any
Contingent Award, such Contingent Award shall terminate and all rights
thereunder shall cease.
7.02 If the employment of a Participant with the Holding Company or a
Subsidiary terminates during the Incentive Period due to his or her death,
disability or Retirement, or if participation of a Participant under this Plan
commences or terminates mid-term during the Incentive Period, the Committee
shall determine the cash payment to be made with respect to such Participant
under the following method:
In the event of the Participant's death, disability, Retirement or
mid-term termination of participation under the Plan, salary shall
be the year-to-date actual salary annualized prior to the applicable
event. In the event of the Participant's mid-term commencement of
participation under the Plan, salary shall be the actual salary
annualized subsequent to participation in the Plan. The Ending Value
of the Contingent Award calculated under Sections 4, 5 and 6 shall be
multiplied by a fraction, the numerator of which shall be the number
of full months of the Incentive Period during which Participant was
an employee of the Holding Company or Subsidiary, and the denominator
of which shall be 12. This calculation and the payment of any award
necessarily must be paid after the termination of the Incentive
Period in accordance with Section 6.02.
7.03 Any payout to pro-rated participants who enter the Plan mid-term
will be based on the number of full months of participation.
SECTION 8. NON-TRANSFERABILITY OF CONTINGENT AWARD.
---------------------------------------
No Contingent Award shall be sold, assigned, transferred, encumbered,
hypothecated or otherwise anticipated by a Participant, and during the lifetime
of a Participant, any payment shall be payable only to the Participant. The
Committee shall, if it so determines, adopt rules for the designation by a
Participant of a beneficiary to receive cash payments, if any, that may become
due pursuant to this Plan after the death of the Participant.
SECTION 9. AMENDMENT OR TERMINATION OF THE PLAN.
------------------------------------
The Board or the Committee, may, at any time, terminate or at any time
and from time to time amend, modify or suspend this Plan provided that no such
amendment, modification, suspension or termination of the Plan shall in any
manner adversely affect any Contingent Award theretofore made under the Plan
without the consent of the Participant.
SECTION 10. CHANGES IN CAPITALIZATION OR CONTROL.
------------------------------------
In the event of a dissolution or liquidation of the Holding Company,
or a "Change in Control" of the Holding Company, the amount of cash payable with
respect to any Contingent Award for an Incentive Period that will end after such
event shall be determined and payable as if the Incentive Period ended on the
date of such event and a Financial Performance Factor of 2.00 shall be used in
calculating payments under this Plan, notwithstanding any other provisions of
this Plan. All Contingent Awards shall be calculated based on the actual
annualized salary for such shortened Incentive Period. The Ending Value of the
Contingent Award calculated under this Section 10 shall be multiplied by a
fraction, the numerator of which shall be the number of full months of the
Incentive Period, as adjusted under this Section 10, and the denominator of
which shall be 12. The Ending Value of the Contingent Award under this
Section 10 shall be paid to such participants within ten days of the end of the
shortened Incentive Period. For this purpose, a "Change in Control" of the
Holding Company means any one or more of the following occurrences: (i) Any
person, including a "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, becomes the beneficial owner of shares of the Holding
Company having 25 percent or more of the total number of votes that may be cast
for the election of Directors of the Holding Company; or (ii) As a result of, or
in connection with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions, the persons who were Directors of the Holding Company
before the transaction shall cease to constitute a majority of the Board of
Directors of the Holding Company or any successor to the Holding Company.
Exhibit 10.3
PACIFIC CENTURY FINANCIAL CORPORATION
SUSTAINED PROFIT GROWTH PLAN
__________
Effective January 1, 1998
SECTION 1. ESTABLISHMENT AND PURPOSES.
--------------------------
1.01 Pacific Century Financial Corporation hereby establishes the
Sustained Profit Growth Plan.
1.02 The purpose of this Plan is to advance the interests of Pacific
Century Financial Corporation by (i) motivating special achievements by Eligible
Employees upon whose judgment, initiative and efforts Pacific Century Financial
Corporation is largely dependent for the successful conduct of its business
through a compensation program emphasizing long-term performance incentives;
(ii) supplementing other compensation plans; and (iii) assisting Pacific Century
Financial Corporation in retaining and attracting such employees.
1.03 This Plan shall be effective as of January 1, 1998 and shall
operate on the basis of the current Incentive Period. This Plan constitutes the
current operating document for the administration of the Plan effective January
1, 1994, that was disclosed to shareholders and received shareholder approval on
April 27, 1994. As such, the material terms of this Plan have been approved by
shareholders for purposes of the performance-based compensation requirements of
Section 162 (m) of the Internal Revenue Code of 1986, as amended.
SECTION 2. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings
unless a different meaning is plainly required in the context:
2.01 "Base Year" shall mean the fiscal year prior to the Incentive
Period.
2.02 "Board" shall mean the Board of Directors of the Holding Company.
2.03 "Committee" shall mean the Compensation Committee of the Holding
Company.
2.04 "Contingent Award" shall mean an award to an Eligible Employee
expressed as a percentage of average annual Salary for the Incentive Period.
2.05 "Eligible Employees" shall mean officers or other employees of
the Holding Company or any Subsidiary, including directors who are also officers
or other employees of the Holding Company or of a Subsidiary, who, in the
opinion of the Committee, are or give promise of becoming of exceptional
importance to the Holding Company or any Subsidiary, and of making substantial
contributions to the success, growth and profit of the Holding
Company and its Subsidiaries. Neither members of the Committee nor any member
of the Board who is not an employee of the Holding Company or of a Subsidiary
shall be an Eligible Employee.
2.06 "Earnings Per Share" (EPS) shall mean fully diluted Earnings Per
Share as reported by the Holding Company in its annual report (or as otherwise
reported to shareholders) adjusted as described in this Section 2.06. The
Holding Company's reported net income shall be adjusted for the following in
computing EPS:
a. Any extraordinary or unusual gain or loss transaction,
b. Securities gains or losses, and
c. Dividends on preferred shares.
The Committee will, in its sole discretion, determine any adjustments to be made
to EPS pursuant to this Section 2.06. In the event of a stock dividend or stock
split during the Incentive Period, Earnings Per Share shall be recomputed to
take into account the effects of such stock dividend or stock split. Earnings
Per share will also be recomputed to eliminate the dilution effect of any stock
issued pursuant to any shareholders rights plan or similar program.
2.07 "Earnings Growth Rate" shall mean the growth of EPS during the
Incentive Period. For example, if EPS in the Base Year is $6.00 and EPS for the
third calendar year of the Incentive Period is $7.80, then the Earnings Growth
Rate is 30 percent. For purposes of this Plan, the Earnings Growth Rate shall
be rounded to the nearest one-tenth of one percent. In the event of a stock
dividend or stock split during the Incentive Period, Earnings Growth Rate shall
be restated to take into account the effect of such stock dividend or stock
split.
2.08 "Ending Value" shall be the amount as defined in Section 5.01.
2.09 "Ending Value Multiplier", with respect to any Contingent Award,
shall mean an amount ranging from zero to 2.00 as determined by applying the
Performance Matrix as described in Section 5 (or in certain events, Section 8.02
or Section 11) of the Plan.
2.10 "Holding Company" shall mean Pacific Century Financial
Corporation.
2.11 "Incentive Period", with respect to any Contingent Award, shall
mean the Holding Company's fiscal years 1998 through 2000 inclusive.
2.12 "Participant" shall mean a person that the Committee, in its sole
discretion, selects from among the Eligible Employees to be awarded a Contingent
Award.
2.13 "Performance Matrix" shall mean the matrix shown in Section 5 by
which is used in calculating Ending Value Multipliers under this Plan.
2.14 "Plan" shall mean this Sustained Profit Growth Plan, as it may be
amended from time to time. The Plan constitutes the current operating document
for the administration of the Plan adopted effective January 1, 1994.
2.15 "Retirement" shall mean the termination of a
Participant's employment with the Holding Company or a Subsidiary under
circumstances where the Participant terminates on or after the retirement dates
specified under the Holding Company's retirement plan and the Participant's
withdrawal from any employment in the financial services industry in the State
of Hawaii during the Incentive Period.
2.16 "Return on Average Equity" (ROAE) shall mean the result of the
summation of Net Income for the three years included in the Incentive Period
divided by the summation of the adjusted Average Total Equity for the three
years included in the Incentive Period. Net Income shall be the amounts
reported in the Holding Company's annual report to shareholders adjusted as
Earnings Per Share in Section 2.06. Adjusted Average Total Equity shall be the
Average Total Equity (as reported in the Holding Company's annual report to
shareholders) adjusted as appropriate for any preferred shares outstanding.
2.17 "Salary" shall mean base salary only.
2.18 "Subsidiary" or "Subsidiaries" shall mean any corporation(s) in
which the Holding Company or any Subsidiary (as defined hereby) owns 50 percent
or more of the total combined voting power of all classes of stock in such
corporation.
SECTION 3. ADMINISTRATION.
--------------
3.01 The Plan shall be administered by the Committee.
3.02 The Committee shall be vested with full authority to make such
rules and regulations as it deems necessary to administer the Plan and to
interpret the provisions of the Plan. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration or application of the Plan shall be final, conclusive and binding
upon all Eligible Employees, Participants and any and all persons claiming under
or through any Eligible Employee or Participant, unless otherwise determined by
the Board.
3.03 Any determination, decision or action of the Committee provided
for in this Plan may be made or taken by action of the Board if the Board so
determines with the same force and effect as if such determination, decision or
action had been made or taken by the Committee. No member of the Committee or
Board shall be liable for any determination, decision or action made in good
faith with respect to the Plan or any Contingent Award. The fact that a member
of the Board shall at the time be, or shall theretofore have been or thereafter
may be, an Eligible Employee or a Participant shall not disqualify him or her
from taking part in and voting at any time as a member of the Board in favor of
or against any amendment of the Plan.
3.04 With respect to any Incentive Period, the Performance Matrix
described in Section 5.02 may be modified by the Committee. Specifically, to
measure performance of the Holding Company and to determine the Performance
Matrix for any Incentive Period, the Committee may, no later than 90 days after
the commencement of the Incentive Period, select from among a number of business
criteria or measures, and establish specific objective
numeric goals relating to those measures. The measures may include return on
average or year-end equity, return on average or year-end assets, earnings per
share, growth in earnings per share, increase in Holding Company's common stock
price, total return to shareholders, growth in net income per employee, growth
in noninterest income, control of net overhead expense, control of nonperforming
loans, capital adequacy, and adequacy of loan loss reserves.
SECTION 4. CONTINGENT AWARDS.
-----------------
4.01 The Committee may, from time to time, in its sole discretion,
award to each Participant a Contingent Award. The Committee shall cause notice
to be given to each Participant of his or her selection.
4.02 The Contingent Award that may be awarded to any Participant shall
be a percentage of his or her average annual Salary for the Incentive Period,
which percentage shall be no greater than the amounts set out in the following
table:
HOLDING COMPANY/ CONTINGENT AWARD
BANK OF HAWAII OFFICERS AS A % OF SALARY
----------------------- ----------------
Chairman of the Board/CEO 60%
President or Vice Chairman 50%
Group Head/Division Manager 40%
Executive/Senior Vice President 40%
OTHER SUBSIDIARY OFFICERS 40%
-------------------------
4.03 The Contingent Award shall be multiplied by the Participant's
average annual Salary for the Incentive Period. In any event, the maximum
payout under this Plan shall be two times the Contingent Award. For example, a
Participant with an average annual Salary of $80,000 might receive a Contingent
Award of 25% or $20,000. In this example, the maximum payout under this Plan
would be two times the Contingent Award, or $40,000.
SECTION 5. ENDING VALUE OF CONTINGENT AWARD.
--------------------------------
5.01 The Ending Value of a Contingent Award shall be determined by
multiplying the Contingent Award by the Ending Value Multiplier determined from
the Performance Matrix in Section 5.02.
5.02 Ending Value Multiplier:
=============================================
EARNINGS GROWTH RATE
=======================================================
ROAE 10% 15% 20% 25% 30%
=======================================================
17% 1.00 1.25 1.50 1.75 2.00
---------------------------------------------
16% 0.82 1.07 1.32 1.57 1.82
---------------------------------------------
15% 0.65 0.90 1.15 1.40 1.65
---------------------------------------------
14% 0.48 0.73 0.98 1.23 1.48
---------------------------------------------
13% 0.32 0.57 0.82 1.07 1.32
---------------------------------------------
12% 0.16 0.41 0.66 0.91 1.16
---------------------------------------------
11% 0.00 0.25 0.50 0.75 1.00
=======================================================
5.03 Interpolation between the points shown above shall be made on a
straight line basis as calculated by the Controllers Division. The maximum
Ending Value Multiplier under all circumstances will be 2.00.
SECTION 6. CONDITIONS.
----------
The Chairman and the President shall prepare recommendations for the
Committee. The Committee shall make the final determination of the Ending Value
Multiplier and any awards, and reserves the right to add to or withhold all or
any portion of any or all award(s) at its sole discretion. However, with
respect to any Participant subject to the deduction limit of Section 162(m) of
the Internal Revenue Code of 1986, as amended, no upward adjustments based on
discretion are permitted beyond the maximum award for the Participants.
SECTION 7. DETERMINATION AND PAYMENT OF AWARDS.
-----------------------------------
7.01 If the Ending Value as computed and adjusted in accordance with
Sections 4 and 5 is zero, no payment shall be made, any Contingent Awards shall
terminate and all rights thereunder shall cease.
7.02 Subject to the provisions of Section 8 and Section 11 hereof, the
Ending Value, if any, of the Contingent Award for each Participant shall be
determined as per Sections 4 and 5. The amount determined for each Participant
shall be paid in cash in a lump sum (subject to withholding requirements, if
applicable) as soon as practicable after determination thereof.
However, a Participant may make a request, on a form approved by the
Committee, for the deferral of all or part of any payment he or she may receive,
provided that such request is delivered to the Human Resources Division no later
than November 1 of the Incentive Period.
The Committee may accept or reject any such request for a deferral and
may determine the conditions of such deferral at the Committee's sole
discretion.
SECTION 8. TERMINATION OF EMPLOYMENT.
-------------------------
8.01 Except as otherwise provided in Section 8.02 below, if a
Participant does not remain continuously in the employ of the Holding Company or
a Subsidiary until the expiration of the Incentive Period with respect to any
Contingent Award, such Contingent Award shall terminate and all rights
thereunder shall cease.
8.02 If the employment of a Participant with the Holding Company or a
Subsidiary terminates during the Incentive Period due to his or her death,
disability or Retirement, or if participation of a Participant under this Plan
commences or terminates mid-term during the Incentive Period, the Committee
shall determine the cash payment to be made with respect to such Participant
under the following method:
In the event of the Participant's death, disability, Retirement or
mid-term termination of participation under the Plan, salary shall be
the year-to-date actual salary annualized prior to the applicable
event. In the event of the Participant's mid-term commencement of
participation under the Plan, salary shall be the actual salary
annualized subsequent to participation in the Plan. The Ending Value
of the Contingent Award calculated under Sections 4 and 5 shall be
multiplied by a fraction, the numerator of which shall be the number
of full months of the Incentive Period during which Participant was an
employee of the Holding Company or Subsidiary, and the denominator of
which shall be 36. This calculation and the payment of any award
necessarily must be paid after the termination of the Incentive Period
in accordance with Section 7.02.
8.03 Any payout to pro-rated participants who enter the Plan mid-term
will be based on the number of full months of participation.
SECTION 9. NON-TRANSFERABILITY OF CONTINGENT AWARD.
---------------------------------------
No Contingent Award shall be sold, assigned, transferred, encumbered,
hypothecated or otherwise anticipated by a Participant, and during the lifetime
of a Participant, any payment shall be payable only to the Participant. The
Committee shall, if it so determines, adopt rules for the designation by a
Participant of a beneficiary to receive cash payments, if any, that may become
due pursuant to this Plan after the death of the Participant.
SECTION 10. AMENDMENT OR TERMINATION OF THE PLAN.
------------------------------------
The Board or the Committee, may, at any time, terminate or at any time
and from time to time amend, modify or suspend this
Plan provided that no such amendment, modification, suspension or termination of
the Plan shall in any manner adversely affect any Contingent Award theretofore
made under the Plan without the consent of the Participant.
SECTION 11. CHANGES IN CAPITALIZATION.
-------------------------
In the event of a dissolution or liquidation of the Holding Company,
or a "Change in Control" of the Holding Company, the amount of cash payable with
respect to any Contingent Award for an Incentive Period that will end after
such event shall be determined and payable as if the Incentive Period ended on
the date of such event and an Ending Value Multiplier of 2.00 shall be used in
calculating the award for this Plan, notwithstanding any other provisions of
this Plan. All Contingent Awards shall be calculated based on the average
annual salary of the Participant for the shortened Incentive Period. The Ending
Value of the Contingent Award calculated under this Section 11 shall be
multiplied by a fraction, the numerator of which shall be the number of full
months of the Incentive Period, as adjusted under this Section 11, and the
denominator of which shall be 36. The Ending Value of the Contingent Award
under this Section 11 shall be paid to such Participants within ten days of the
end of the shortened Incentive Period. For this purpose, a "Change in Control"
of the Holding Company means any one or more of the following occurrences: (i)
Any person, including a "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, becomes the beneficial owner of shares of the Holding
Company having 25 percent or more of the total number of votes that may be cast
for the election of Directors of the Holding Company; or (ii) As a result of, or
in connection with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions, the persons who were Directors of the Holding Company
before the transaction shall cease to constitute a majority of the Board of
Directors of the Holding Company or any successor to the Holding Company.
Exhibit 11.1
Pacific Century Financial Corporation
Statement Regarding Computation of Per Share Earnings
Years Ended December 31
Basic Diluted
----- -------
1997
Net Income $139,488,000 $139,488,000
============ ============
Daily Weighted Average Shares Outstanding 79,794,011 79,794,011
Shares Assumed Issued for Stock Options 0 1,152,159
------------ ------------
79,794,011 80,946,170
============ ============
Earnings Per Share $ 1.75 $ 1.72
============ ============
1996
Net Income $133,124,000 $133,124,000
============ ============
Daily Weighted Average Shares Outstanding 81,595,728 81,595,728
Shares Assumed Issued for Stock Options 0 828,796
------------ ------------
81,595,728 82,424,524
============ ============
Earnings Per Share $ 1.63 $ 1.62
============ ============
1995
Net Income $121,800,000 $121,800,000
============ ============
Daily Weighted Average Shares Outstanding 83,325,878 83,325,878
Shares Assumed Issued for Stock Options 0 729,035
------------ ------------
83,325,878 84,054,913
============ ============
Earnings Per Share $ 1.46 $ 1.45
============ ============
Exhibit 12.1
Pacific Century Financial Corporation
Statement Regarding Computation of Ratios
Year Ended December 31, 1997
(in millions of dollars)
Earnings:
1. Income before income taxes............................... $218.0
2. Plus: fixed charges including interest on deposits...... 532.2
3. Earnings including fixed charges......................... 750.2
4. Less: interest on deposits.............................. 323.5
5. Earnings excluding interest on deposits.................. $426.7
Fixed Charges:
6. Fixed charges including interest on deposits............. $532.2
7. Less: interest on deposits.............................. 323.5
8. Fixed charges excluding interest on deposits............. $208.7
Ratio of Earnings to Fixed Charges:
Including interest on deposits (line 3 divided by line 6)... 1.41 x
Excluding interest on deposits (line 5 divided by line 8)... 2.04 x
EXHIBIT 19.1
To Our Shareholders:
Pacific Century Financial Corporation has achieved continued improvement in
earnings by leveraging its pan-Pacific franchise and capitalizing on
opportunities for growth throughout its markets. Your company's strategy of
geographic diversification has enabled it to overcome the challenges of Hawaii's
sluggish economy.
At the end of third quarter, your company reported year-to-date earnings of
$106.3 million, up 7.8 percent from $98.7 million for the same period in 1996.
For the first nine months of this year, earnings-per-share were $2.63 as
compared to $2.39 at September 30, 1996. Year-to-date return on average assets
was 1.01 percent and return on average equity was 12.94 percent.
Earnings for the third quarter of 1997 were $35.3 million, up 12.5 percent
from the third quarter of last year and down slightly from the $35.6 million
reported for the second quarter of 1997. In last year's third quarter, earnings
were lowered $3 million (after tax) by a special Savings Association Insurance
Fund assessment. Earnings per share for the quarter were $0.86 compared to
$0.76 for the third quarter of 1996 and $0.89 for the second quarter of 1997.
On a tangible performance basis, earnings for the third quarter were $38.7
million compared to $33.5 million for the same period last year. Tangible
earnings per share for the quarter were $0.94 compared to $0.81 for the third
quarter of 1996. Tangible earnings provide a measure of financial performance
without the impact of items such as goodwill.
Total assets stood at $14.9 billion at the end of the third quarter, an
increase of 7.9 percent from 1996's third quarter total of $13.8 billion. Net
loans grew to $9.1 billion at September 30, 1997, up 9.7 percent from last
year's third quarter level of $8.3 billion and 5.7 percent above the second
quarter 1997 level.
Pacific Century's recent acquisition of CU Bancorp and its subsidiary,
California United Bank (CUB), completed on July 3, 1997, boosted Pacific
Century's total assets by $776 million and loans by $443 million. The quarter's
results also reflect the dilutive impact of 2.3 million shares of stock issued
relative to the acquisition of CUB. The Mainland presence that CUB provides is
a cornerstone of our Pacific strategy and will serve as a platform for delivery
of financial services to clients across the Pacific from Asia to the U.S.
Mainland.
Non-performing assets (NPAs) excluding loans 90-plus days
past due stood at $94.7 million or 0.99 percent of total loans at September 30,
1997. Pacific Century's conservative credit culture together with CUB's
excellent credit quality are responsible for the improvement in this area.
We are very pleased to welcome Mary Carryer who will join Pacific Century
Financial Corporation and Bank of Hawaii as vice chair this month. Mary will be
a member of the company's Managing Committee, working closely with President and
Chief Operating Officer Richard Dahl; Vice Chairman and Chief Lending Officer
Alton Kuioka and myself. She will oversee Pacific Century's Mainland operations
as well as the company's Information Management function. A veteran of Westpac
Banking Corporation and Wells Fargo & Company, Mary brings more than 25 years of
financial experience to Hawaii. Her experience at these two financial giants
spans the areas of corporate planning, international banking and trade
operations, trust and investments, and information management.
Mary is a strategic thinker who has the ability to translate planning and
ideas into reality. She has demonstrated a remarkable ability to leverage
technology to serve a broad and diverse customer base, and possesses a skill set
that will complement the strengths that currently exist within our Managing
Committee.
Bank of Hawaii was recently recognized by the Small Business Administration
for reaching a milestone in its yearly activity of SBA lending. For the fiscal
year ending September 30, 1997, Bankoh made 100 SBA loans, putting on the books
more than three times as many loans as the next most active SBA lender in the
district. We are a strong supporter of small businesses, and our SBA
performance demonstrates our commitment to the thousands of small businesses
that are the life blood of Hawaii's economy.
Your Board of Directors has declared a fourth quarter cash dividend on the
outstanding common stock payable at the rate of $.325 per share. The Board also
declared a two-for-one stock split in the form of a 100 percent stock dividend.
The cash dividend and the stock distribution are both payable on December 12,
1997 to shareholders of record at the close of business on November 21, 1997.
The cash dividend will be paid on the "old" stock and not the stock distributed
pursuant to the stock split.
We remain confident in the future of our franchise and optimistic in the
potential of our markets. As we approach the 21st century, Pacific Century is
positioned to play a pivotal role in the greater Pacific regional economy. We
count your support among our strongest assets.
Sincerely,
/s/ LAWRENCE M. JOHNSON
Lawrence M. Johnson
Chairman and Chief Executive Officer
Corporate Offices:
Financial Plaza of the Pacific
130 Merchant Street
Honolulu, Hawaii 96813
Investor or Analyst Inquiries:
David A. Houle
Executive Vice President, Treasurer and Chief Financial Officer
(808) 537-8288
or
Sharlene K. Bliss
Investor Relations Officer
(808) 537-8037
or
Cori C. Weston
Corporate Secretary
(808) 537-8272
Highlights (Unaudited) Pacific Century Financial Corporation and subsidiaries
- ------------------------------------------------------------------------------------------------
September 30 September 30
1997 1996
- ------------------------------------------------------------------------------------------------
Return on Average Assets 1.01% 1.00%
- ------------------------------------------------------------------------------------------------
Return on Average Equity 12.94% 12.35%
- ------------------------------------------------------------------------------------------------
Average Spread on Earning Assets 4.06% 3.89%
- ------------------------------------------------------------------------------------------------
Average Equity/Average Assets 7.80% 8.09%
- ------------------------------------------------------------------------------------------------
Book Value Per Common Share $28.37 $26.19
- ------------------------------------------------------------------------------------------------
Loss Reserve/Loans and Leases Outstanding 1.91% 1.97%
- ------------------------------------------------------------------------------------------------
Common Stock Price Range High Low Dividend
1996........................................ $44.00 $33.13 $1.16
1997 First Quarter.......................... $46.38 $41.13 $0.30
Second Quarter......................... $47.88 $40.63 $0.30
Third Quarter.......................... $54.25 $46.38 $0.33
Consolidated Statements of Income (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September 30 September 30 September 30 September 30
(in thousands of dollars except per share amounts) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Total Interest Income $ 274,590 $ 250,585 $ 787,300 $ 726,236
Total Interest Expense 135,893 127,937 391,567 369,396
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 138,697 122,648 395,733 356,840
Provision for Possible Loan Losses 8,162 3,733 20,536 12,320
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 130,535 118,915 375,197 344,520
Total Non-Interest Income 46,147 42,027 134,108 119,947
Total Non-Interest Expense 122,117 112,611 344,136 313,976
- -------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 54,565 48,331 165,169 150,491
Provision for Income Taxes 19,312 17,003 58,829 51,840
- -------------------------------------------------------------------------------------------------------------------------
Net Income $ 35,253 $ 31,328 $ 106,340 $ 98,651
=========================================================================================================================
Earnings Per Common Share and Common Share Equivalents $ 0.86 $ 0.76 $ 2.63 $ 2.39
- -------------------------------------------------------------------------------------------------------------------------
Average Common Shares and Common Share Equivalents Outstanding 41,094,194 41,182,809 40,386,565 41,334,572
- -------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Condition (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------
Assets
Interest-Bearing Deposits $ 495,653 $ 635,519 $ 623,592
Investment Securities (Market Value of $3,702,269; $3,634,043; and
$3,607,561, respectively) 3,696,145 3,631,653 3,613,656
Funds Sold 111,890 141,920 88,224
Loans 9,529,535 8,699,286 8,683,244
Unearned Income (206,823) (183,586) (181,719)
Reserve for Possible Loan Losses (177,689) (167,795) (167,770)
Net Loans 9,145,023 8,347,905 8,333,755
- --------------------------------------------------------------------------------------------------------------------
Total Earning Assets 13,448,711 12,756,997 12,659,227
Cash and Non-Interest Bearing Deposits 579,087 581,221 457,116
Premises and Equipment 286,090 273,122 273,075
Other Assets 557,353 397,827 391,055
- --------------------------------------------------------------------------------------------------------------------
Total Assets $14,871,241 $14,009,167 $13,780,473
====================================================================================================================
Liabilities
Deposits $ 9,455,346 $ 8,684,079 $ 8,418,490
Securities Sold Under Agreements to Repurchase 2,268,250 2,075,571 1,996,536
Funds Purchased 364,528 599,994 479,538
Short-Term Borrowings 482,378 293,257 489,061
Other Liabilities 393,094 358,001 374,668
Long-Term Debt 766,485 932,143 957,431
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,730,081 12,943,045 12,715,724
Shareholders' Equity
Common Stock ($2 par value), authorized 100,000,000 shares;
outstanding, September 1997 - 40,221,783;
December 1996 - 39,959,234; September 1996 - 40,661,103; 80,444 79,918 81,322
Surplus 194,131 186,391 215,014
Unrealized Valuation Adjustments (6,509) (3,722) (12,759)
Retained Earnings 873,094 803,535 781,172
- --------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,141,160 1,066,122 1,064,749
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,871,241 $14,009,167 $13,780,473
====================================================================================================================
Exhibit 21.1
PACIFIC CENTURY FINANCIAL CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Pacific Century Financial Corporation's organizational structure at
December 31, 1997 follows. All of the subsidiaries are wholly owned except for
those entities for which directors own qualifying shares. All the entities are
consolidated with the immediate parent company.
PACIFIC CENTURY FINANCIAL CORPORATION (Parent)
Bank Holding Company
Subsidiaries:
PACIFIC CENTURY INSURANCE SERVICES, INC.
Hawaii
PACIFIC CENTURY SMALL BUSINESS INVESTMENT COMPANY, INC.
Hawaii
PACIFIC CENTURY AGENCY, INC.
Hawaii
PACIFIC CENTURY LIFE INSURANCE CORPORATION
Arizona
PACIFIC CENTURY BANK, N.A.
Arizona
CALIFORNIA UNITED BANK
California
BANCORP PACIFIC, INC.
Delaware
Subsidiaries:
First Federal Savings & Loan Association of America
Hawaii
First Savings & Loan Association of America (Guam)
Guam
Subsidiary:
Pacific Century Capital Corporation
Guam
BANK OF HAWAII
Subsidiaries:
Bank of Hawaii International Corp., New York - (Edge Act Office)
New York
Bank of Hawaii International, Inc. - (Foreign Holding Company)
Hawaii
Subsidiaries/Affiliates:
Bank of Hawaii-Nouvelle Caledonie (91.5%)
New Caledonia
Bank of Hawaii (PNG) Ltd. (100%)
Papua New Guinea
Banque de Tahiti (92.4%)
French Polynesia
Bank of Tonga (30%)
Tonga
Banque d'Hawaii (Vanuatu), Ltd. (100%)
Vanuatu
National Bank of Solomon Islands (51%)
Solomon Islands
Pacific Commercial Bank, Ltd. (43%)
Samoa
Pacific Century Investment Services, Inc.
Hawaii
Pacific Century Leasing, Inc. (Parent) - (Leasing)
Hawaii
Subsidiaries:
Arbella Leasing Corp.
Delaware
Pacific Century Leasing International, Inc.
Delaware
BNE Airfleets Corporation
Barbados
S.I.L., Inc.
Delaware
Bankoh Corporation (fka Hawaiian Hong Kong Holdings, Ltd.)
Hawaii
Pacific Century Advisory Services, Inc. - (Advisory
Services)
Hawaii
Pacific Century Insurance Agency, Inc. - (Insurance)
Hawaii
Realty and Mortgage Investors of the Pacific, Ltd. - (Real Estate Lending)
Delaware
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements
(Form S-8 Nos. 2-96329, 33-29872, 2-63615, 2-84164, 33-23495, 33-49836, 33-
54777, 33-57267, 333-02835 and 333-14929), (Form S-3 Nos. 33-25036, 33-44395 and
33-54775) and (Form S-4 Nos. 333-22497 and 333-24379) of Pacific Century
Financial Corporation and subsidiaries of our report dated January 23, 1998,
with respect to the consolidated financial statements of Pacific Century
Financial Corporation and subsidiaries included in this Annual Report on Form
10-K for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Honolulu, Hawaii
March 12, 1998
9
1,000
YEAR
DEC-31-1997
DEC-31-1997
795,332
341,347
80,457
2,374
2,651,270
1,214,715
1,217,735
9,498,408
174,362
14,995,464
9,621,275
3,202,143
349,050
705,789
0
0
159,369
957,838
14,995,464
783,823
241,078
37,675
1,062,576
323,507
526,278
536,298
30,338
3,074
475,749
218,000
218,000
0
0
139,488
1.75
1.72
4.08
89,300
25,000
1,600
0
167,795
55,132
24,906
174,362
134,762
31,000
8,600
