U N I T E D S T A T E S
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transition
period from _____________ to _____________
Commission File Number 1-6887
PACIFIC CENTURY FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 99-0148992
------------------------ ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
808) 643-3888
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value; outstanding at April 30, 1999 -
80,333,943 shares
PACIFIC CENTURY FINANCIAL CORPORATION and subsidiaries
March 31, 1999
PART I. - Financial Information
Item 1. Financial Statements
Consolidated Statements of Condition (Unaudited) Pacific Century Financial Corporation and subsidiaries
- ----------------------------------------------------------------------------------------------------------------------
March 31 December 31 March 31
(in thousands of dollars) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------
Assets
Interest-Bearing Deposits $494,202 $453,527 $425,637
Investment Securities - Held to Maturity
(Market Value of $902,830, $668,068
and $996,667 respectively) 894,502 652,802 992,058
Investment Securities - Available for Sale 2,733,466 3,018,403 2,808,370
Securities Purchased Under Agreements to Resell 4,083 - -
Funds Sold 111,894 45,683 119,480
Loans 9,637,661 9,854,000 9,403,406
Unearned Income (220,206) (225,915) (202,865)
Reserve for Loan Losses (209,329) (211,276) (175,194)
- ----------------------------------------------------------------------------------------------------------------------
Net Loans 9,208,126 9,416,809 9,025,347
- ----------------------------------------------------------------------------------------------------------------------
Total Earning Assets 13,446,273 13,587,224 13,370,892
Cash and Non-Interest Bearing Deposits 617,362 564,243 586,746
Premises and Equipment 292,583 293,591 285,916
Customers' Acceptance Liability 13,965 8,227 16,893
Accrued Interest Receivable 88,887 85,485 85,478
Other Real Estate 6,225 5,648 6,131
Intangibles, including Goodwill 217,470 216,106 204,501
Other Assets 245,521 256,039 201,258
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $14,928,286 $15,016,563 $14,757,815
======================================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $1,676,816 $1,745,747 $1,751,301
- Interest Bearing 2,156,649 2,385,285 2,089,060
Savings 735,442 740,378 802,912
Time 2,539,649 2,637,746 2,845,498
Foreign Deposits
Demand - Non-Interest Bearing 409,994 489,672 356,684
Time Due to Banks 776,257 685,137 622,694
Other Savings and Time 1,139,620 892,377 967,250
- ----------------------------------------------------------------------------------------------------------------------
Total Deposits 9,434,427 9,576,342 9,435,399
Securities Sold Under Agreements to Repurchase 2,090,663 2,008,399 2,304,423
Funds Purchased 775,577 942,062 559,573
Short-Term Borrowings 377,387 356,822 259,604
Bank's Acceptances Outstanding 13,965 8,227 16,893
Accrued Retirement Expense 40,519 39,811 38,560
Accrued Interest Payable 76,287 55,694 67,171
Accrued Taxes Payable 126,243 114,443 161,076
Minority Interest 4,849 7,394 5,824
Other Liabilities 105,176 136,159 81,214
Long-Term Debt 675,634 585,616 684,782
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,720,727 13,830,969 13,614,519
Shareholders' Equity
Common Stock ($.01 par value at March 31, 1999 and
December 31, 1998 and $2.00 at March 31, 1998):
authorized 500,000,000 shares; issued / outstanding;
March 1999 - 80,537,756 / 80,398,067;
December 1998 - 80,512,372 / 80,325,998;
March 1998 - 80,140,398 / 80,140,398 805 805 160,281
Capital Surplus 344,955 342,932 176,496
Accumulated Other Comprehensive Income (23,536) (22,476) (28,193)
Retained Earnings 888,367 867,852 834,712
Treasury Stock, at Cost - (March 1999 - 139,689 and
December 1998 - 186,374 Shares) (3,032) (3,519) -
- ----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,207,559 1,185,594 1,143,296
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,928,286 $15,016,563 $14,757,815
======================================================================================================================
Consolidated Statements of Income (Unaudited) Pacific Century Financial Corporation and subsidiaries
- ----------------------------------------------------------------------------------------------------------------------
3 Months 3 Months
Ended Ended
March 31 March 31
(in thousands of dollars except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Interest Income
Interest on Loans $178,341 $187,150
Loan Fees 9,581 10,732
Income on Lease Financing 8,268 5,883
Interest and Dividends on Investment Securities
Taxable 13,679 19,964
Non-taxable 276 294
Income on Investment Securities Available for Sale 41,782 41,470
Interest on Deposits 8,226 6,483
Interest on Security Resale Agreements 101 -
Interest on Funds Sold 2,553 1,090
- ----------------------------------------------------------------------------------------------------------------------
Total Interest Income 262,807 273,066
Interest Expense
Interest on Deposits 68,668 79,878
Interest on Security Repurchase Agreements 24,416 30,598
Interest on Funds Purchased 12,768 6,910
Interest on Short-Term Borrowings 3,249 2,809
Interest on Long-Term Debt 9,862 11,153
- ----------------------------------------------------------------------------------------------------------------------
Total Interest Expense 118,963 131,348
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Income 143,844 141,718
Provision for Loan Losses 12,590 18,303
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 131,254 123,415
Non-Interest Income
Trust Income 15,575 13,960
Service Charges on Deposit Accounts 9,395 8,214
Fees, Exchange, and Other Service Charges 21,998 18,910
Other Operating Income 12,355 8,399
Investment Securities Gains 1,847 3,381
- ----------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 61,170 52,864
Non-Interest Expense
Salaries 50,842 46,265
Pensions and Other Employee Benefits 15,043 14,907
Net Occupancy Expense 12,268 11,108
Net Equipment Expense 12,127 10,755
Other Operating Expense 44,353 38,416
Minority Interest 207 252
- ----------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 134,840 121,703
- ----------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 57,584 54,576
Provision for Income Taxes 22,167 20,556
- ----------------------------------------------------------------------------------------------------------------------
Net Income $35,417 $34,020
======================================================================================================================
Basic Earnings Per Share $0.44 $0.43
Diluted Earnings Per Share $0.44 $0.42
Dividends Declared Per Share $0.17 $0.1625
Basic Weighted Average Shares 80,421,563 79,881,229
Diluted Weighted Average Shares 81,405,868 80,735,604
======================================================================================================================
/TABLE
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Capital Comprehensive Retained Treasury Comprehensive
(in thousands of dollars) Total Stock Surplus Income Earnings Stock Income
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $1,185,594 $805 $342,932 ($22,476) $867,852 ($3,519)
Comprehensive Income
Net Income 35,417 - - - 35,417 - $35,417
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment 1,131 - - 1,131 - - 1,131
Foreign Currency Translation Adjustmen (2,191) - - (2,191) - - (2,191)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $34,357
===================================================================================================================================
Common Stock Issued
81 Profit Sharing Plan 2 - 2 - - -
19,786 Stock Option Plan 3,746 - 1,860 - (1,195) 3,081
4,276 Dividend Reinvestment Plan 1,447 - 137 - (16) 1,326
1,241 Directors' Restricted Shares and
Deferred Compensation Plan 24 - 24 - - -
Treasury Stock Purchased (3,920) - - - - (3,920)
Cash Dividends Paid (13,691) - - - (13,691) -
- ------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $1,207,559 $805 $344,955 ($23,536) $888,367 ($3,032)
========================================================================================================================
Balance at December 31, 1997 $1,117,207 $159,369 $168,920 ($24,766) $813,684 $-
Comprehensive Income
Net Income 34,020 - - - 34,020 - $34,020
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment (2,045) - - (2,045) - - (2,045)
Foreign Currency Translation Adjustmen (1,382) - - (1,382) - - (1,382)
Total Comprehensive Income $30,593
Common Stock Issued
107,473 Profit Sharing Plan 2,392 215 2,177 - - -
257,748 Stock Option Plan 4,064 516 3,548 - - -
90,142 Dividend Reinvestment Plan 2,021 180 1,841 - - -
482 Directors' Restricted Shares and
Deferred Compensation Plan 11 1 10 - - -
Cash Dividends Paid (12,992) - - - (12,992) -
- ------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $1,143,296 $160,281 $176,496 ($28,193) $834,712 $-
========================================================================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------------------------------------
Three Months ended March 31
(in thousands of dollars) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $35,417 $34,020
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, depreciation, and
amortization of income and expense 11,314 18,712
Deferred income taxes 8,281 (440)
Realized and unrealized investment security gains (1,952) (3,523)
Other assets and liabilities, net (5,863) 15,074
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 47,197 63,843
- --------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from redemptions of investment securities held to maturity 104,528 277,813
Purchases of investment securities held to maturity (346,227) (49,656)
Proceeds from sales of investment securities available for sale 974,607 681,474
Purchases of investment securities available for sale (685,809) (838,459)
Net increase in interest-bearing deposits (34,175) (89,790)
Net increase in funds sold (70,294) (39,023)
Net decrease in loans and lease financing 230,343 82,367
Premises and equipment, net (7,112) (5,843)
Purchase of Triad Insurance Agency, Inc.
net of cash and non-interest bearing deposits acquired (2,183) --
Purchase of additional interest in Bank of Hawaii Nouvelle Caledonie,
net of cash and non-interest bearing deposits acquired (642) --
Purchase of additional interest in Banque de Tahiti,
net of cash and non-interest bearing deposits acquired (633) --
- --------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 162,403 18,883
- --------------------------------------------------------------------------------------------------------------
Financing Activities
Net decrease in demand, savings, and time deposits (167,695) (172,296)
Proceeds from lines of credit and long-term debt 276,766 --
Principal payments on lines of credit and long-term debt (186,878) (21,007)
Net decrease in short-term borrowings (64,091) (92,123)
Net proceeds from sale of stock 1,299 8,488
Cash dividends (13,691) (12,992)
- --------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (154,290) (289,930)
- --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (2,191) (1,382)
- --------------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and non-interest bearing deposits 53,119 (208,586)
Cash and non-interest bearing deposits at beginning of year 564,243 795,332
- --------------------------------------------------------------------------------------------------------------
Cash and non-interest bearing deposits at end of period $617,362 $586,746
==============================================================================================================
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements
of Pacific Century Financial Corporation (Pacific Century) have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
the consolidated financial statements reflect all adjustments of
a normal and recurring nature, including adjustments related to
completed acquisitions which are necessary for a fair
presentation of the results for the interim periods, and should
be read in conjunction with the audited consolidated financial
statements and related notes included in Pacific Century's 1998
Annual Report to Shareholders. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31,
1999.
International operations include certain activities located
domestically in Hawaii, as well as branches and subsidiaries
domiciled outside the United States. The operations of Bank of
Hawaii and First Savings and Loan Association of America located
in the West and South Pacific that are denominated in U.S.
dollars are classified as domestic. Pacific Century's
international operations are located in Japan, South Korea,
Singapore, Hong Kong, Taiwan, French Polynesia, New Caledonia,
Papua New Guinea and Vanuatu.
Certain amounts in prior period financial statements have
been reclassified to conform to the 1999 presentation.
Note 2. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement
standardizes the accounting for derivative instruments by
requiring the recognition of those instruments as assets or
liabilities in the statement of financial condition, measured at
fair value. Gains or losses resulting from changes in the fair
values of derivatives would be accounted for depending on the use
of the derivatives and whether they qualify for hedge accounting.
In order to qualify for hedge accounting, the hedging
relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 requires
matching the timing of gain or loss recognition on derivative
instruments with the recognition of the changes in the fair value
of the hedged asset or liability that is attributed to the hedged
risk or the effect on earnings of the hedged forecasted
transaction. SFAS No. 133 will become effective for fiscal years
beginning after June 15, 1999. The adoption of SFAS No. 133 is
not expected to have a material impact on Pacific Century's
financial position or results of operations.
Note 3. Acquisitions
In January 1999, Pacific Century acquired Triad Insurance
Agency, Inc. (Triad), a major Hawaii-based property/casualty
insurance agency. In Hawaii, Triad represents a number of large
U.S. property/casualty insurance companies for whom it acts as a
servicing agent. The merger, accounted for as a purchase, will
expand Pacific Century's range of financial services which it can
offer to customers. Goodwill of approximately $4 million will be
amortized over 15 years on a straight-line basis.
In May 1998, Pacific Century concluded an agreement to
acquire the interest of Group Paribas in Banque Paribas Pacifique
in New Caledonia and Banque Paribas Polynesie in French
Polynesia. As of the acquisition date, Banque Paribas Pacifique
and Banque Paribas Polynesie had total assets of approximately
$238 million and $83 million, respectively. The acquired banks
were merged into other Pacific Century subsidiaries in the
region. The acquisitions were accounted for under the purchase
method and the combined goodwill of approximately $17.1 million
is being amortized over 15 years on a straight-line basis.
Note 4. Earnings Per Share
For the three months ended March 31, 1999 and 1998, there
were no adjustments to net income (the numerator) for purposes of
computing basic and diluted earnings per share (EPS). The
weighted average shares (the denominator) for computing basic and
diluted EPS for the three months ended March 1999 and March 1998
are presented in the Consolidated Statements of Income. Included
in the weighted average shares for computing EPS is the dilutive
effect of stock options of 984,305 and 854,375 shares for the
quarters ended March 31, 1999 and March 31, 1998, respectively.
Note 5. Income Taxes
The provision for income taxes is computed by applying
statutory federal and state income tax rates to income before
income taxes as reported in the consolidated financial statements
after adjusting for non-taxable items, principally from certain
state tax adjustments, tax exempt interest income, bank owned
life insurance income and tax credits for low income housing,
foreign taxes and investment tax credits.
Note 6. Restructuring Charge
In the second quarter of 1998, Pacific Century recognized a
pre-tax restructuring charge of $19.4 million in connection with
its strategic actions to accelerate expense reduction and improve
efficiency. These actions primarily included the merger in
Hawaii of First Federal Savings and Loan Association of America
with Bank of Hawaii, and the merger of Pacific Century Bank, N.A.
and California United Bank into a single nationally chartered
entity. In August 1998, the consolidation of Pacific Century's
two U.S. Mainland banks was consummated under the name Pacific
Century Bank, N.A. The merger of the two Hawaii-based companies
was completed as of September 30, 1998 and resulted in the
closing of 19 thrift branches and eight Bank of Hawaii branches
during 1998. Also, as part of the restructuring plan, Bank of
Hawaii's credit card services activities were outsourced in the
fourth quarter of 1998 to a third party vendor.
The restructuring charge included expected direct and
incremental costs associated with these consolidations and
initiatives and consisted of $9.1 million for lease termination
costs, $5.4 million for disposal of fixed assets, $1.6 million
for staff reduction, and $3.3 million for data processing and
other costs. As of December 31, 1998, the balance in the
restructuring accrual was $9.6 million, of which $7.8 million
related to termination of lease obligations. During the first
quarter, the amount utilized from the restructuring accrual
totaled $1.7 million, leaving the balance of the restructuring
accrual at $7.9 million, most of which related to the termination
of lease obligations.
Since the establishment of the restructuring accrual, no
adjustments have been made to revise the accrual. Pacific
Century believes that the restructuring accrual as of March 31,
1999 remains adequate to complete the planned initiatives.
Note 7. Business Segments
Pacific Century is a financial services organization that
maintains a broad presence throughout the Pacific region.
Pacific Century has aligned its operations into the following
four major geographic business segments: Hawaii, the Pacific,
Asia, and the U.S. Mainland. In addition, the Treasury and Other
Corporate segment includes corporate asset and liability
management activities and the unallocated portion of various
administrative and support units. Descriptions of the business
segments are discussed in Pacific Century's 1998 Annual Report to
Shareholders on pages 93-95. There have been no significant
changes in these descriptions since year-end.
Line of business results are determined based on Pacific
Century's internal financial management reporting process and
organization structure. The financial management reporting
process uses various techniques to assign and transfer balance
sheet and income statement amounts between business units. In
measuring line of business financial performance, Pacific Century
utilizes certain accounting practices that differ from generally
accepted accounting principles. Accordingly, certain balances
reflected in the line of business report differ from the
corresponding amounts in the Consolidated Financial Statements.
Accounting practices and other key elements of Pacific Century's
line of business financial management reporting is discussed in
Pacific Century's 1998 Annual Report to Shareholders.
From time to time, Pacific Century's line of business
management reporting process may change based on refinements in
segment reporting policies or changes in accounting systems,
information systems, organizational structure, or product lines.
These changes could result in a realignment of business lines or
modifications to allocation and transfer methodologies. Should
material changes be made to the financial management reporting
process, prior period reports would be restated.
Presented below are the financial results for each of
Pacific Century's major market segments for the quarters ended
March 31, 1999 and 1998.
Line of Business Selected Financial Information
- ----------------------------------------------------------------------------------------------------------------
Treasury
U. S. and Other Consolidated
(in thousands of dollars) Hawaii Pacific Asia Mainland Corporate Total
- ----------------------------------------------------------------------------------------------------------------
March 31, 1999
Net Interest Income $72,818 $30,900 $8,751 $26,185 $5,190 $143,844
Economic Provision (1) (8,915) (3,383) (1,227) (2,951) 3,886 (12,590)
- ----------------------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 63,903 27,517 7,524 23,234 9,076 131,254
Non-Interest Income 30,821 11,338 4,221 2,829 11,961 61,170
- ----------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 94,724 38,855 11,745 26,063 21,037 192,424
Non-Interest Expense 72,519 27,902 6,760 17,472 10,187 134,840
- ----------------------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 22,205 10,953 4,985 8,591 10,850 57,584
Income Taxes (2) (9,605) (4,541) (1,962) (1,720) (4,339) (22,167)
- ----------------------------------------------------------------------------------------------------------------
Net Income $12,600 $6,412 $3,023 $6,871 $6,511 $35,417
================================================================================================================
Total Assets $5,209,603 $2,420,963 $1,223,607 $2,819,027 $3,255,086 $14,928,286
================================================================================================================
March 31, 1998
Net Interest Income $74,734 $25,950 $7,986 $24,895 $8,153 $141,718
Economic Provision (1) (9,122) (3,072) (1,278) (2,731) (2,100) (18,303)
- ----------------------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 65,612 22,878 6,708 22,164 6,053 123,415
Non-Interest Income 27,272 9,447 5,197 2,794 8,154 52,864
- ----------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 92,884 32,325 11,905 24,958 14,207 176,279
Non-Interest Expense 70,799 22,992 6,231 17,465 4,216 121,703
- ----------------------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 22,085 9,333 5,674 7,493 9,991 54,576
Income Taxes (2) (9,498) (3,841) (2,262) (959) (3,996) (20,556)
- ----------------------------------------------------------------------------------------------------------------
Net Income $12,587 $5,492 $3,412 $6,534 $5,995 $34,020
================================================================================================================
Total Assets $5,339,420 $2,112,666 $1,602,722 $2,884,638 $2,818,369 $14,757,815
================================================================================================================
(1) The economic provision for loan losses reflects the expected normalized loss factor determined by a
statistically applied approach that considers risk factors, including historical loss experience, within a given
portfolio. The economic provision differs from the provision determined under generally accepted accounting
principles. The difference between the sum of the economic provision allocated to business segments and the
provision in the consolidated financial statements is included in Treasury and Other Corporate.
(2) Tax benefits are allocated to the business segment to which they relate. In the quarters ended March 31, 1999
and 1998, income taxes for the U. S. Mainland segment included $2.8 million and $2.7 million, respectively, in tax
benefits from low income housing tax credits and investment tax credits.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PERFORMANCE HIGHLIGHTS
Pacific Century Financial Corporation (Pacific Century)
reported earnings for the three months ended March 31, 1999 of
$35.4 million compared to $34.0 million for the same period in
1998, an increase of 4.1%.
Both basic and diluted earnings per share for the first
quarter of 1999 were $0.44. Comparatively, basic and diluted
earnings per share were $0.43 and $0.42, respectively, for the
same period in 1998.
For the first quarter of 1999, return on average assets
(ROAA) was 0.96% compared to 0.95% for the same quarter in 1998
and 0.72% for the twelve months of 1998. Return on average
equity (ROAE) was 12.00%, 12.11%, and 9.21%, for the similar
periods. The 1998 full year results included a special loan loss
provision and restructuring charge recognized in the second
quarter of 1998. Further discussion is included in Pacific
Century's 1998 Annual Report on Form 10-K.
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 for the first quarter of 1999 were $39.3 million
compared with $36.5 million for the same period in 1998. On a
per share basis, tangible diluted earnings per share were $0.48
and $0.45 for the first quarters of 1999 and 1998, respectively.
First quarter tangible ROAA for Pacific Century was 1.08% in
1999 and 1.03% in 1998. Tangible ROAE was 16.21% and 15.87% for
the similar quarters of 1999 and 1998, respectively.
Net interest income (on a taxable equivalent basis) for the
first quarter of 1999 increased to $144.0 million from $141.9
million for the same quarter in 1998. The increase is attributed
to a rise in average earning assets, partially offset by a 5
basis point decline in net interest margin between the periods.
Total assets at March 31, 1999 were just under $15 billion,
a 1.2% increase from the same date a year ago and 0.6% below
total assets reported at December 31, 1998. Average assets in
the first quarter were $15.0 billion, up 2.8% over the same year
ago period. Average assets for the first quarter of 1999
reflected a slight increase of 0.4% over the fourth quarter of
1998.
Non-performing assets, exclusive of accruing loans past due
90 days or more, increased to $163.3 million, or 1.69% of total
loans, at March 31, 1999, compared to $94.4 million, or 1.00% of
total loans, at March 31, 1998 and $137.5 million, or 1.40% of
total loans at year-end 1998. The increase in non-performing
assets since year-end is largely accounted for by a rise in the
commercial and industrial and commercial real estate categories.
See "Credit Risk - Non-Performing Assets and Past Due Loan"
section in this report for further details.
The reserve for loan losses totaled $209.3 million at the
end of March 1999, representing 2.22% of loans outstanding,
compared to $175.2 million and 1.90%, respectively, on the same
date in 1998. Net charge-offs for the first quarter of 1999 were
$10.8 million, or 0.46% of average loans, compared to $17.9
million and 0.78%, respectively, in 1998. For the current
quarter, provisions for loan losses of $12.6 million were charged
to income, down from $18.3 million for the same quarter in 1998.
Performance Highlights
Table 1
- --------------------------------------------------------------------------------------
(in millions of dollars except per share amounts)
Percent
Earnings Measures 1999 1998 Change
- --------------------------------------------------------------------------------------
Three Months Ended March 31
Net Income $35.4 $34.0 4.1%
Basic Earnings Per Share 0.44 0.43 2.3
Diluted Earnings Per Share 0.44 0.42 4.8
At March 31
Total Assets $14,928.3 $14,757.8 1.2%
Total Loans 9,208.1 9,025.3 2.0
Total Deposits 9,434.4 9,435.4 0.0
Total Shareholders' Equity 1,207.6 1,143.3 5.6
Excluding the Effects of Intangibles (1)
Three Months Ended March 31
Tangible Net Income $39.3 $36.5 7.5%
Tangible Basic Earnings Per Share 0.49 0.46 6.5
Tangible Diluted Earnings Per Share 0.48 0.45 6.7
- --------------------------------------------------------------------------------------
Performance Ratios 1999 1998
- --------------------------------------------------------------------------------------
Three Months Ended March 31
Return on Average Assets 0.96% 0.95%
Return on Average Equity 12.00% 12.11%
Excluding the Effects of Intangibles (1)
Tangible Return on Average Assets 1.08% 1.03%
Tangible Return on Average Equity 16.21% 15.87%
At March 31
Average Equity to
Average Assets Ratio 7.98% 7.81%
Loan Loss Reserve to Loans Outstanding 2.22% 1.90%
- --------------------------------------------------------------------------------------
(1) Intangibles include goodwill, core deposit and trust intangibles, and other intangibles.
/TABLE
Forward-Looking Statements
This report contains forward-looking statements regarding
Pacific Century's beliefs, estimates, projections and
assumptions. Although Pacific Century believes that its
expectations are based on reasonable assumptions, there can be no
assurance that such assumptions will ultimately materialize.
Forward-looking statements are contained in various sections of
this report including those covering the Overview, International
Operations, Market Risk and Year 2000. These forward-looking
statements are subject to risks and uncertainties, and
accordingly, actual results could differ significantly from those
stated or implied by such forward-looking statements. Factors
that might cause differences to occur include, but are not
limited to, economic conditions in the markets Pacific Century
serves and those that impact Hawaii, the U.S. Mainland and Asian
economies, fluctuations in interest rates, changes in currencies
of Asian Rim and South Pacific countries relative to the U.S.
dollar, credit quality, and changes in applicable federal, state,
and foreign income tax laws and regulatory and monetary policies,
and the nature and level of competition. Additional forward-
looking statements that could significantly differ from estimates
include uncertainties relating to Pacific Century's efforts to
prepare its systems and technology for Year 2000 readiness, as
well as uncertainties relating to the ability of third parties
with whom Pacific Century has business relationships to address
Year 2000 issues in a timely and adequate manner.
LINE OF BUSINESS FINANCIAL REVIEW
Pacific Century is a financial services organization that
maintains a broad presence throughout the Pacific region and
operates through a unique trans-Pacific network of locations.
Pacific Century's activities are conducted primarily through 180
branches and representative and extension offices (including
branches of affiliate banks). Its staff of approximately 5,100
employees provide diverse financial products and services to
individuals, businesses, governmental agencies and financial
institutions.
Pacific Century assesses the financial performance of its
operating components primarily in accordance with geographic
areas of operations. For business segment reporting, Pacific
Century has aligned its operations into the following four major
geographic segments: Hawaii, the Pacific, Asia, and the U.S.
Mainland. In addition there is also a segment for Treasury and
Other Corporate. A further discussion of these segments and the
reporting process is included in the 1998 Annual Report to
Shareholders.
Note 7 to the Consolidated Financial Statements presents the
line of business financial report for each of Pacific Century's
major market segments for the quarter ended March 31, 1999 and
1998. Because the market segment financial report is prepared in
accordance with accounting practices that could differ from
generally accepted accounting principles, the amounts reflected
therein may not agree with the corresponding amounts reported in
the Consolidated Financial Statements and Management Discussion
and Analysis of Financial Condition and Results of Operations.
In addition to the performance measurements in the line of
business financial report, Pacific Century also utilizes risk-
adjusted return on capital (RAROC) to assess business segment
performance. RAROC is the ratio of net income to risk-adjusted
equity. Equity is allocated to business units based on various
risk factors inherent in the operations of each unit. A second
performance measurement is net income after capital charge
(NIACC). NIACC is net income available to common shareholders
less a charge for allocated capital. The cost of capital is
based on the estimated minimum rate of return expected by the
financial markets. The minimum rate of return consists of the
following components: the long-term government bond rate plus an
additional level of return for the average risk premium of an
equity investment adjusted for Pacific Century's market risk.
Over the past few years the cost of capital has fluctuated
between 12% to 15%.
Hawaii Market
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 in
1897, and today it is the largest bank headquartered in the State
of Hawaii offering a wide array of financial products and
services. Bank of Hawaii operates through 72 branches in Hawaii,
including both traditional full-service branches and in-store
locations.
Within the Hawaii segment, line of business results are
divided into retail and commercial operating units. Retail
operating units service and sell a broad line of consumer
financial products. These units include consumer deposits,
consumer lending, residential real estate lending, auto
financing, credit cards, and private and institutional services
(trust, mutual funds, and stock brokerage).
For the quarter ended March 31, 1999, the Hawaii segment
contributed $12.6 million in net income the same amount reported
for the first quarter of 1998. RAROC for this segment declined
to 13.0% for the first quarter of 1999 from 13.4% for the first
quarter of 1998. Total assets in the Hawaii segment also
declined to $5.2 billion at March 31, 1999 from $5.3 billion at
both year-end 1998 and a year ago.
Pacific Market
Pacific Century's Intra-Pacific region spans island nations
across the West and South Pacific. Pacific Century is the only
United States financial institution 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).
Pacific Century's presence in the South Pacific includes
various subsidiary and affiliate banks and branches of Bank of
Hawaii. Principal subsidiaries in the South Pacific are located
in French Polynesia and New Caledonia. The Bank of Hawaii
locations in this region consist of three branches in Fiji and
two branches in American Samoa.
Net income in the Pacific segment was $6.4 million for the
quarter ended March 31, 1999 compared with $5.5 million for the
similar quarter in 1998. The improvement reflected the impact of
the acquisitions. RAROC, including the amortization of
intangibles for this segment, improved to 12.4% for the first
quarter of 1999 from 12.3% for the same quarter in 1998. Total
assets in the Pacific segment increased to $2.4 billion at the
end of March 1999 compared with $2.1 billion a year ago and $2.4
billion at year-end 1998.
Asia Market
Pacific Century operates in Asia through Bank of Hawaii
branches in Hong Kong, Japan, Singapore, South Korea and Taiwan
and a representative office with extensions in the Philippines.
Pacific Century's business focus in Asia is correspondent
banking and trade financing. The lending emphasis is on short-
term loans based on cash flows. 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.
For the quarter ended March 31, 1999, net income in the Asia
segment was $3.0 million compared with $3.4 million for the same
quarter in 1998. RAROC for this segment was 13.9% for the first
quarter of 1999 compared with 14.0% for the same quarter in 1998
and 14% for all of 1998. As of March 31, 1999, March 31, 1998
and December 31, 1998, total assets in the Asia segment were $1.2
billion, $1.6 billion and $1.0 billion, respectively.
For additional information on Asia, see the "International
Operations" section in this report.
U.S. Mainland Market
Pacific Century's U.S. Mainland segment includes Pacific
Century Bank, N.A. (PCB) and Bank of Hawaii operating units for
large corporate lending and leasing.
For the first quarter of 1999, the U.S. Mainland segment
contributed $6.9 million in net income, which included tax
benefits of $2.8 million from low income housing tax credits and
investment tax credits. Comparatively, net income and tax
benefits attributed to the U.S. Mainland segment were $6.5 and
$2.7, respectively, for the first quarter of 1998. RAROC,
including the amortization of intangibles for this segment was
9.7% for the first quarter of 1999, improving from 9.5% for the
same quarter in 1998, but declining from 10% for all of 1998. As
of March 31, 1999, March 31, 1998 and December 31, 1998, total
assets in the U.S. Mainland segment were $2.8 billion, $2.9
billion and $2.6 billion, respectively.
Treasury and Other Corporate
The primary operations in this segment is Treasury, which
consists of corporate asset and liability management activities
including investment securities, federal funds purchased and
sold, government deposits, short and long-term borrowings, and
derivative activities for managing interest rate and foreign
currency risks. Additionally, the net residual effect of
transfer pricing assets and liabilities is included in Treasury,
as is any corporate-wide interest rate risk.
The Treasury and Other Corporate segment reflected net
income of $6.5 million for the first quarter of 1999 compared
with $6.0 million for the same quarter in 1998. For the full
year 1998, the Treasury and Other Corporate segment reported a
loss of $5.2 million. The loss reflected special charges in the
second quarter of 1998 for an increase in the consolidated
provision for loan losses that exceeded the economic provision
and a pre-tax restructuring charge of $19.4 million. At March
31, 1999, March 31, 1998 and year-end 1998 this segment held
assets of $3.3 billion, $2.8 billion, and $3.7 billion,
respectively.
STATEMENT OF INCOME ANALYSIS
Comparability between periods in the Consolidated Statements
of Income is impacted by the timing of the 1999 acquisition of
Triad and the 1998 acquisitions of Banque Paribas Pacifique and
Banque Paribas Polynesie.
Net Interest Income
For the first quarter of 1999, net interest income (taxable
equivalent basis) was $144.0 million, up from $141.9 million for
the same period in 1998. The increase relative to 1998 is
largely due to the acquisitions, which have helped to grow
average earning assets. Average earning assets were $13.8
billion in the first quarter of 1999 compared with $13.4 billion
for the same period in 1998, reflecting a period-over-period
increase of 2.7%. In the first quarter of 1999, the average net
interest margin on earning assets declined modestly to 4.24% from
4.29% for the same period in 1998 and improved from 4.22% for all
of 1998. Presented in Table 2 are the average balances, yields,
and rates paid for the quarters ended March 31, 1999 and 1998,
and December 31, 1998. Additionally, the results for the full
year of 1998 are also presented.
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
Table 2
- -----------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
Average Income/ Yield/ Average Income/ Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $466.6 $8.2 7.15% $368.7 $6.5 7.13%
Investment Securities Held to Maturity
-Taxable 790.0 13.7 7.02 1,118.7 20.0 7.24
-Tax-Exempt 11.7 0.4 14.73 12.0 0.4 15.25
Investment Securities Available for Sal 2,815.3 41.8 6.02 2,562.9 41.5 6.56
Funds Sold 208.2 2.7 5.17 127.1 1.1 3.48
Net Loans
-Domestic 7,778.2 158.3 8.25 7,690.8 162.5 8.57
-Foreign 1,713.7 28.3 6.71 1,543.2 30.6 8.04
Loan Fees 9.6 10.7
- -----------------------------------------------------------------------------------------------------
Total Earning Assets 13,783.7 263.0 7.74 13,423.4 273.3 8.26
Cash and Due From Banks 517.6 560.0
Other Assets 694.3 598.8
- -----------------------------------------------------------------------------------------------------
Total Assets $14,995.6 $14,582.2
=====================================================================================================
Interest Bearing Liabilities
Domestic Dep- Demand $2,163.9 12.0 2.25 $2,171.5 14.0 2.61
- Savings 735.0 3.7 2.02 823.5 5.0 2.48
- Time 2,610.9 30.7 4.77 2,873.4 38.8 5.47
- -----------------------------------------------------------------------------------------------------
Total Domestic 5,509.8 46.4 3.41 5,868.4 57.8 3.99
Foreign Deposits
- Time Due to Banks 652.9 8.6 5.36 622.0 9.5 6.17
- Other Time and Savings 1,160.1 13.7 4.77 1,013.2 12.6 5.05
- -----------------------------------------------------------------------------------------------------
Total Foreign 1,813.0 22.3 4.98 1,635.2 22.1 5.48
- -----------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 7,322.8 68.7 3.80 7,503.6 79.9 4.32
Short-Term Borrowings 3,372.5 40.4 4.86 3,039.7 40.3 5.38
Long-Term Debt 651.8 9.9 6.14 694.0 11.2 6.52
- -----------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 11,347.1 119.0 4.25 11,237.3 131.4 4.74
- -----------------------------------------------------------------------------------------------------
Net Interest Income 144.0 3.49 141.9 3.52
Average Spread on Earning Assets 4.24% 4.29%
Demand Deposit- Domestic 1,644.4 1,698.2
- Foreign 448.2 271.9
- -----------------------------------------------------------------------------------------------------
Total Demand Deposits 2,092.6 1,970.1
Other Liabilities 359.1 236.0
Shareholders' Equity 1,196.8 1,138.8
- -----------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $14,995.6 $14,582.2
=====================================================================================================
Provision for Loan Losses 12.6 18.3
Net Overhead 73.7 68.8
- -----------------------------------------------------------------------------------------------------
Income Before Income Taxes 57.7 54.8
Provision for Income Taxes 22.2 20.6
Tax-Equivalent Adjustment 0.1 0.2
- -----------------------------------------------------------------------------------------------------
Net Income $35.4 $34.0
=====================================================================================================
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
Table 2
- -----------------------------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
December 31, 1998 December 31, 1998
Average Income/ Yield/ Average Income/ Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------
Earning Assets
Interest Bearing Deposits $510.0 $10.9 8.48% $508.8 $36.7 7.21%
Investment Securities Held to Maturity
-Taxable 670.0 13.3 7.86 890.6 67.7 7.60
-Tax-Exempt 11.7 0.4 14.21 11.8 1.7 14.34
Investment Securities Available for Sale 2,983.0 43.9 5.83 2,769.3 171.0 6.17
Funds Sold 67.9 0.8 4.65 69.7 3.8 5.45
Net Loans
-Domestic 7,727.2 156.4 8.03 7,669.7 643.8 8.39
-Foreign 1,762.9 33.4 7.53 1,752.6 130.4 7.44
Loan Fees 10.3 45.3
- -----------------------------------------------------------------------------------------------------
Total Earning Assets 13,732.7 269.4 7.78 13,672.5 1,100.4 8.05
Cash and Due From Banks 585.0 590.1
Other Assets 611.8 608.1
- -----------------------------------------------------------------------------------------------------
Total Assets $14,929.5 $14,870.7
=====================================================================================================
Interest Bearing Liabilities
Domestic Dep- Demand $2,074.1 13.3 2.54 $2,114.8 55.7 2.64
- Savings 755.1 3.9 2.07 783.9 18.5 2.35
- Time 2,798.1 34.5 4.89 2,780.7 145.4 5.23
- -----------------------------------------------------------------------------------------------------
Total Domestic 5,627.3 51.7 3.65 5,679.4 219.6 3.87
Foreign Deposits
- Time Due to Banks 630.2 10.2 6.41 596.1 40.4 6.78
- Other Time and Savings 1,188.5 14.6 4.88 1,176.1 57.9 4.92
- -----------------------------------------------------------------------------------------------------
Total Foreign 1,818.7 24.8 5.41 1,772.2 98.3 5.55
- -----------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 7,446.0 76.5 4.08 7,451.6 317.9 4.27
Short-Term Borrowings 3,031.9 39.2 5.12 3,072.9 162.6 5.29
Long-Term Debt 639.3 10.0 6.20 676.5 42.7 6.32
- -----------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 11,117.2 125.7 4.48 11,201.0 523.2 4.67
- -----------------------------------------------------------------------------------------------------
Net Interest Income 143.7 3.30 577.2 3.38
Average Spread on Earning Assets 4.15% 4.22%
Demand Deposit- Domestic 1,648.3 1,650.4
- Foreign 511.8 447.7
- -----------------------------------------------------------------------------------------------------
Total Demand Deposits 2,160.1 2,098.1
Other Liabilities 466.7 410.8
Shareholders' Equity 1,185.5 1,160.8
- -----------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $14,929.5 $14,870.7
=====================================================================================================
Provision for Loan Losses 13.0 84.0
Net Overhead 75.6 329.0
- -----------------------------------------------------------------------------------------------------
Income Before Income Taxes 55.1 164.2
Provision for Income Taxes 19.9 56.6
Tax-Equivalent Adjustment 0.2 0.6
- -----------------------------------------------------------------------------------------------------
Net Income $35.0 $107.0
=====================================================================================================
/TABLE
Provision for Loan Losses
The provision for loan losses was $12.6 million for the
first quarter, down from $18.3 million for the same quarter in
1998. The smaller 1999 provision reflects a decline in net loan
charge-offs. Comparatively, the provision for loan losses was
$84.0 million for all of 1998. The provision for loan losses in
1998 primarily reflected a higher level of gross loan charge-offs
relating mostly to the foreign category and a build up of
reserves. For further information on credit quality, refer to
the section on "Credit Risk - Reserve for Loan Losses."
Non-Interest Income
For the first quarter of 1999, total non-interest income was
$61.2 million, compared to $52.9 million for the same quarter in
1998, an increase of 15.7%. The incremental non-interest income
attributed to the acquisitions was approximately $3.6 million for
the first quarter of 1999.
Non-Interest Income
Table 3
3 Months Ended 3 Months Ended
(in millions) March 31, 1999 March 31, 1998
- -----------------------------------------------------------------------------------------------------------
Trust Income $15.6 $14.0
Service Charges on Deposit Accounts 9.4 8.2
Fees, Exchange and Other Service
Charges 22.0 18.9
Other Operating Income 12.4 8.4
Investment Securities Gains 1.8 3.4
- ------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $61.2 $52.9
============================================================================================================
Trust income for the first quarter of 1999 increased to
$15.6 million, up 11.6% from the same quarter last year. Pacific
Century continues to see growth in this revenue category due in
part, to organizational changes that have allowed relationship
officers to deliver a wider array of financial services to
customers. The Pacific Capital family of mutual funds and
Hawaiian Tax Free Trust, which are managed by Pacific Century
Trust, have continued to experience growth. The growth in these
funds has contributed to the growth in trust income for the
quarter.
Service charges on deposit accounts increased to $9.4
million, from $8.2 million for the first quarter of 1998. Most
of the growth resulted from an increase in account analysis fees
recognized on commercial accounts. The acquisitions accounted
for approximately $0.2 million of the increase between the first
quarters of 1999 and 1998.
Fees, exchange and other service charges increased to $22.0
million for the first quarter of 1999, from $18.9 million in the
same 1998 quarter. Approximately $0.8 million of the increase
between 1999 and 1998 was due to the acquisitions. Income
generated from international activities including letter of
credit and acceptance fees, profit on foreign currency, and
exchange fees all reported increases. Collectively, income from
these sources totaled $11.1 million for the first quarter of
1999, a 9.4% increase over the same period in 1998.
Mortgage servicing fees increased to $2.0 million for the
first quarter of 1999, up 9.2% from $1.9 million for the same
period in 1998. This increase is due to the growth in Pacific
Century's mortgage servicing portfolio to $2.3 billion at March
31, 1999 from $1.6 billion at March 31, 1998. The growth in the
servicing portfolio reflected Bank of Hawaii's record level of
residential loan originations in 1998 that totaled $1.06 billion,
and the effects of continuing strong loan demand in 1999.
Also, included in fees, exchange and other service charges
are fees earned through Pacific Century's ATM network. Pacific
Century's ATM network at the end of March 1999 was 488 machines,
compared to 492 at year-end 1998 and 476 a year ago. Fees
generated by this network totaled $3.6 million for the first
quarter of 1999, compared to $2.2 million for the same quarter in
1998.
Other operating income for the first quarter of 1999 was
$12.4 million, a strong increase over the $8.4 million reported
for the same quarter of 1998. The growth in large measure
reflected the 1999 acquisition of Triad. For the current
quarter, insurance commissions of approximately $2.2 million were
reported. Affiliates in the South Pacific and the acquisition
resulted in an increase of about $0.8 million between 1999's and
1998's first quarters.
Sales of investment securities during the first quarter of
1999 resulted in a net securities gain of $1.8 million, compared
to net gains of $3.4 million for the same quarter last year.
Non-Interest Expense
Restructuring and Redesign Program
On February 17, 1998, Pacific Century announced a
restructuring and redesign program to accelerate expense
reduction, improve efficiency and enhance revenues. The program
is described in Pacific Century's 1998 Annual Report to
Shareholders.
In connection with the restructuring portion of the program,
a pre-tax restructuring charge of $19.4 million was taken in the
second quarter of 1998. The restructuring charge consists of
direct and incremental costs that are primarily associated with
closing facilities and reducing staff. Through March 31, 1999,
$11.5 million of the restructuring accrual has been utilized.
For the first quarter, $1.7 million was charged to the accrual.
Pacific Century believes that the restructuring accrual as of
March 31, 1999 remains adequate to complete the planned
initiatives.
Pacific Century's redesign program continues in 1999 with a
comprehensive process to increase revenues and further improve
efficiency. Pacific Century has contracted with a nationally
recognized corporate redesign specialist to assist in this
activity. The redesign timeline calls for a six-month process
review and idea development phase that began in March 1999
followed by a twelve-month implementation phase. Pacific Century
is in the early stages of this redesign program, with much effort
remaining before opportunities are quantified or realized.
Non-Interest Expense
Total non-interest expense for the first quarter of 1999 was
$134.8 million compared with $121.7 million for the similar
quarter of 1998, an increase of 10.8%. The incremental increase
in non-interest expense due to the acquisitions was approximately
$4.6 million in the first quarter of 1999, including the
amortization of intangibles for both the Paribas and Triad
acquisitions. Excluding the effects of the acquisitions, non-
interest expense increased by approximately 7.0% from the first
quarter of 1998.
Non-Interest Expense
Table 4
3 Months Ended 3 Months Ended
(in millions) March 31, 1999 March 31, 1998
- -----------------------------------------------------------------------------------------------------------
Salaries $50.8 $46.3
Pension and Other Employee Benefits 15.0 14.9
Net Occupancy Expense 12.3 11.1
Net Equipment Expense 12.1 10.8
Other Operating Expense 44.4 38.4
Minority Interest 0.2 0.2
- -----------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $134.8 $121.7
===========================================================================================================
Salaries and pension and other employee benefits expense
totaled $65.9 million for the first quarter of 1999 compared with
$61.2 million for the same quarter last year. Approximately $2.0
million of the increase is attributed to the acquisitions.
Excluding the effects of the acquisitions, these expenses would
have increased 4.5% over the same period in 1998. The Year 2000
project continues to affect salaries and benefits for 1999.
Net occupancy and equipment expense for the first quarter of
1999 increased to $24.4 million from $21.9 million for the same
period in 1998. Included in the first quarter of 1999 totals
were approximately $1.2 million in expenses attributed to the
acquisitions.
Other operating expense increased to $44.4 million for the
first quarter of 1999, a 15.5% increase from $38.4 million for
the same quarter in 1998. Approximately $1.4 million of the
increase was due to the acquisitions, including the amortization
of intangibles. Also contributing to the increase were
consulting and other professional fees including those related to
the Year 2000 project.
Pacific Century utilizes the efficiency ratio as a tool to
manage non-interest income and expense. The efficiency ratio is
derived by dividing non-interest expense by net operating revenue
(net interest income plus non-interest income before securities
transactions). For the first quarter of 1999, the efficiency
ratio was 66.4%. Comparatively, the ratio was 63.7% for the same
quarter last year and 64.3% for 1998 (excluding the
restructuring charge).
BALANCE SHEET ANALYSIS
Loans
Loans comprise the largest category of earning assets for
Pacific Century and produce the highest level of earnings. At
March 31, 1999, loans outstanding were $9.6 billion, compared to
$9.9 billion at year-end 1998 and $9.4 billion at March 31, 1998.
Comparability between first quarter-ends are impacted by
approximately $200 million of loans acquired in the May 1998 Banque
Paribas acquisitions.
Pacific Century's objective is 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. The composition of the loan portfolio is regularly
monitored to ensure diversity as to loan type, geographic
distribution, and industry and borrower concentration.
Table 5 presents the composition of the loan portfolio by
major loan categories.
Loan Portfolio Balances
Table 5
- ------------------------------------------------------------------------------------
March 31 December 31 March 31
(in millions of dollars) 1999 1998 1998
- ------------------------------------------------------------------------------------
Domestic Loans
Commercial and Industrial $2,468.4 $2,579.7 $2,095.1
Real Estate
Construction-- Commercial 262.0 276.3 284.3
-- Residential 71.3 23.5 12.4
Mortgage -- Commercial 1,231.5 1,139.1 1,364.2
-- Residential 2,568.0 2,699.4 2,732.9
Installment 733.5 763.0 861.4
Lease Financing 556.0 554.5 507.2
- ------------------------------------------------------------------------------------
Total Domestic 7,890.7 8,035.5 7,857.5
- ------------------------------------------------------------------------------------
Foreign Loans 1,747.0 1,818.5 1,545.9
- ------------------------------------------------------------------------------------
Total Loans $9,637.7 $9,854.0 $9,403.4
====================================================================================
/TABLE
Investment Securities
Pacific Century's investment portfolio is managed to provide
liquidity and interest income, to meet strategic asset/liability
positioning, and to provide collateral for cash management needs.
At March 31, 1999, the available-for-sale securities decreased to
$2.7 billion from $2.8 billion a year ago and $3.0 billion at year-
end 1998. Securities held to maturity were $0.9 billion at March
31, 1999, down from $1.0 billion a year ago but up from $0.7
billion at year-end 1998.
Deposits
As of March 31, 1999, deposits totaled $9.4 billion, level
with total deposits reported as of March 31, 1998. Deposits
decreased 1.5% from year-end 1998. As reported in Pacific
Century's 1998 Annual Report to Shareholders, the mix of deposits
has changed with domestic deposits decreasing and foreign deposits
increasing, largely due to the acquisitions in the second quarter
of 1998. The present low domestic interest rate environment and
competition for deposits by banks and other financial institutions,
as well as securities brokerage firms, continues to impact the
ability to attract and retain deposits.
Table 6 presents average deposits by type for the first
quarters of 1999 and 1998 and the full year 1998.
Average Deposits
Table 6
- ---------------------------------------------------------------------------------------------
Quarter Ended Year Ended Quarter Ended
March 31, 1999 December 31, 1998 March 31, 1998
(in millions of dollars) Amount Mix Amount Mix Amount Mix
- ---------------------------------------------------------------------------------------------
Domestic
Non-Interest Bearing Demand $1,644.4 17.4% $1,650.4 17.3% $1,698.2 17.9%
Interest-Bearing Demand 2,163.9 23.0 2,114.8 22.1 2,171.5 22.9
Regular Savings 735.0 7.8 783.9 8.2 823.5 8.7
Private Time Certificates
of Deposit
($100,000 or More) 930.3 9.9 941.7 9.9 925.6 9.8
Public Time Certificates
of Deposit
($100,000 or More) 102.1 1.1 86.5 0.9 87.7 0.9
All Other Time and
Savings Certificates 1,578.5 16.8 1,752.5 18.4 1,860.1 19.6
- ---------------------------------------------------------------------------------------------
Total Domestic 7,154.2 76.0 7,329.8 76.8 7,566.6 79.8
- ---------------------------------------------------------------------------------------------
Foreign
Non-Interest Bearing Demand 448.2 4.8 447.7 4.7 271.8 2.9
Time Due to Banks 652.9 6.9 596.1 6.2 622.0 6.6
Other Time and Savings 1,160.1 12.3 1,176.1 12.3 1,013.2 10.7
- ---------------------------------------------------------------------------------------------
Total Foreign 2,261.2 24.0 2,219.9 23.2 1,907.0 20.2
- ---------------------------------------------------------------------------------------------
Total $9,415.4 100.0% $9,549.7 100.0% $9,473.6 100.0%
=============================================================================================
/TABLE
Borrowings
Short-term borrowings, including funds purchased and
securities sold under agreements to repurchase, totaled $3.2
billion at March 31, 1999, $3.3 billion at year-end 1998 and $3.1
billion at March 31, 1998.
Long-term debt on March 31, 1999 increased to $0.7 billion.
The increase during the quarter was due to $125 million in
subordinated notes issued by Bank of Hawaii. The notes bear a
fixed rate of interest at 6.875%, mature in 10 years (March 1,
2009), and qualify as Tier 2 capital.
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. Pacific Century divides its
international business into two areas: the International Market,
which is Asia related and the Pacific Market, which is comprised
of economies located in the South and West Pacific.
Through its International Market, Pacific Century offers
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. 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 Division 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. Since American Samoa is U.S. dollar based, its
operation is included as domestic. Additionally, Bank of Hawaii
has interests in affiliate banks located in Samoa, Solomon
Islands and Tonga.
The West Pacific Division includes Bank of Hawaii branches
in Guam and in other locations in the region. Since the U.S.
dollar is used in these locations, Pacific Century's operations
in the West Pacific are not considered foreign for financial
reporting purposes.
A detailed description of controls over risk exposure in
international lending is provided in Pacific Century's 1998
Annual Report to Shareholders. There has been no significant
change to that process during the quarter. Pacific Century
continues to monitor its exposure in international lending with
particular attention provided to Asia and the South Pacific.
The countries in Asia to which Pacific Century maintains its
largest credit exposure on a cross border basis include South
Korea, Japan and Taiwan. Within Asia, the two most problematic
economies for Pacific Century remain Thailand and Indonesia. The
financial and liquidity problems in Thailand and Indonesia
required the intervention of the International Monetary Fund.
Pacific Century's cross-border credit assets in Thailand and
Indonesia at March 31, 1999 were approximately $26 million and
$16 million, respectively, compared to approximately $24 million
and $17 million, respectively at December 31, 1998.
Geographic Distribution of Cross-Border International Assets (1)
Table 7
(in millions)
Country March 31, 1999 December 31, 1998 March 31, 1998
- -----------------------------------------------------------------------------------------------------------
Japan $346.8 $354.8 $481.4
South Korea 275.7 264.9 346.9
Taiwan 134.2 123.9 196.4
All Others 726.0 629.1 542.3
-------- -------- --------
$1,482.7 $1,372.7 $1,567.0
======== ======== ========
(1) In this table, cross-border outstandings are defined as foreign monetary assets that are payable to
Pacific Century in U.S. dollars or other non-local currencies, plus amounts payable in local currency but
funded with U.S. dollars or other non-local currencies. Monetary assets include loans, acceptances, and
interest-bearing deposits with other banks.
CORPORATE RISK PROFILE
Credit Risk
Non-Performing Assets and Past Due Loans
Non-performing assets (NPAs) consist of non-accrual loans,
restructured loans and foreclosed real estate. These assets
increased to $163.3 million at March 31, 1999, compared to $94.4
million a year ago and $137.5 million at the end of 1998.
At March 31, 1999, the ratio of NPAs to outstanding loans
rose to 1.69%. Comparatively the ratio was 1.00% at March 31,
1998 and 1.40% at year-end 1998. Table 8 presents Pacific
Century's NPAs and ratio of NPAs to total loans.
In order to minimize credit losses, Pacific Century strives
to maintain high underwriting standards, identify potential
problem loans 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 $157.1 million at March 31,
1999, up 19.1% over year-end 1998. Total non-accrual loans were
$86.7 million at March 31, 1998. Higher non-accrual balances in
the foreign, commercial real estate and commercial and industrial
loan categories accounted for most of the increase between March
1999 and March 1998. Relative to the end of the year, non-
accrual loans reflected an increase of $25.2 million. This
increase was primarily due to the rise in the Commercial and
Industrial and Commercial Real Estate categories, which reflected
the transfer of five credits in the Hawaii Market. Foreign non-
accrual loans declined $3.9 million in the current quarter from
year-end 1998 and reflected reductions in both Asia and the South
Pacific Markets.
Non-performing residential mortgages (excluding construction
loans) totaled $37.6 million at March 31, 1999, compared to $36.4
million at year-end 1998 and $36.7 million a year ago. Because
residential mortgages are secured by real estate, the credit risk
on these loans are lower than for unsecured lending. Most of
Pacific Century's residential loans are owner-occupied first
mortgages and were generally underwritten to provide a loan-to-
value ratio of no more than 80% at origination.
Foreclosed real estate totaled $6.2 million at March 31,
1999 compared with $5.6 million at year-end 1998 and $6.1 million
a year ago. At March 31, 1999, the foreclosed real estate
portfolio consisted of 44 properties, mostly located in Hawaii.
The largest property represented 15.3% of the total.
Accruing loans past due 90 days or more has remained
relatively constant over the last year. Accruing loans past due
90 days or more totaled $21.7 million at March 31, 1999, $20.8
million at year-end 1998, and $24.4 million at March 31, 1998.
Non-Performing Assets and Accruing Loans Past Due 90 Days or More
Table 8
- ------------------------------------------------------------------------------------
March 31 December 31 March 31
(in millions of dollars) 1999 1998 1998
- ------------------------------------------------------------------------------------
Non-Accrual Loans
Commercial and Industrial $39.1 $28.2 $11.1
Real Estate
Construction 3.1 2.9 6.4
Commercial 18.7 5.4 2.2
Residential 37.6 36.4 36.7
Installment 0.5 0.8 2.3
Leases 4.5 0.7 0.3
Foreign 53.6 57.5 27.7
- ------------------------------------------------------------------------------------
Subtotal 157.1 131.9 86.7
Restructured Loans
Real Estate
Commercial - - 1.6
- ------------------------------------------------------------------------------------
Subtotal - - 1.6
Foreclosed Real Estate
Domestic 6.1 5.5 6.1
Foreign 0.1 0.1 -
- ------------------------------------------------------------------------------------
Subtotal 6.2 5.6 6.1
- ------------------------------------------------------------------------------------
Total Non-Performing Assets 163.3 137.5 94.4
- ------------------------------------------------------------------------------------
Accruing Loans Past Due 90 Days or More
Commercial and Industrial 4.3 0.4 2.2
Real Estate
Construction 0.2 0.4 -
Commercial 0.4 - 5.8
Residential 3.5 4.5 3.8
Installment 6.9 7.3 7.7
Leases 0.1 0.3 0.1
Foreign 6.3 7.9 4.8
- ------------------------------------------------------------------------------------
Subtotal 21.7 20.8 24.4
- ------------------------------------------------------------------------------------
Total $185.0 $158.3 $118.8
====================================================================================
Ratio of Non-Performing Assets
to Total Loans 1.69% 1.40% 1.00%
- ------------------------------------------------------------------------------------
Ratio of Non-Performing Assets
and Accruing Loans Past Due
90 Days or More to Total Loans 1.92% 1.61% 1.26%
- ------------------------------------------------------------------------------------
/TABLE
Reserve for Loan Losses
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
problem loans in order to control delinquencies and minimize
losses. This process and the quarterly analysis to determine the
adequacy of its reserve for loan losses is described in Pacific
Century's 1998 Annual Report to Shareholders.
The reserve for loan losses ended the first quarter of 1999
at $209.3 million, a $2.0 million decrease from year-end 1998 and
a $34.1 million increase over the same date last year. The year-
over-year increase reflects reserves acquired from the Banque
Paribas acquisitions and a build up of reserves to cover the
increase in NPAs. Net charge-offs for the first quarter of 1999
were $10.8 million or 0.46% of average loans, compared to $17.9
million, or 0.78% of average loans for the same quarter last year
and $65.7 million, or 0.70% of average loans for all of 1998.
The ratio of reserves to loans outstanding at March 31, 1999 was
2.22%, compared with 1.90% at this date last year and 2.19% at
year-end 1998. A summary of the activity in the reserve for loan
losses is presented in Table 9.
At March 31, 1999, the reserve for loan losses provided
coverage of 128% of non-performing loans, compared to 154%
coverage at year-end 1998 and 186% at March 31, 1998.
Additionally, the annualized ratio of reserves to gross charge-
offs was 2.5 times for the first quarter of 1999, compared to 2.6
times for all of 1998 and 2.1 times for the first quarter of
1998.
For the first quarter of 1999, recoveries totaled $10.0
million largely driven by a $7.0 million recovery of a U.S.
mainland loan in the commercial and industrial portfolio.
Comparatively, recoveries were $2.5 million in the first quarter
of 1998 and $16.3 million for all of 1998.
Market Risk
At Pacific Century, assets and liabilities are managed to
maximize long term risk adjusted returns to shareholders.
Pacific Century's asset and liability management process involves
measuring, monitoring, controlling and managing financial risks
that can significantly impact Pacific Century's financial
position and operating results. Financial risks in the form of
interest rate sensitivity, foreign currency exchange
fluctuations, liquidity, and capital adequacy are balanced with
expected returns to maximize earnings performance and shareholder
value, while limiting the volatility of each. A detailed
discussion of these risks and Pacific Century's approach to
managing the risks are described in its 1998 Annual Report to
Shareholders.
The activities associated with these financial risks are
categorized into "other than trading" or "trading."
Other Than Trading Activities
A key element in Pacific Century's ongoing process to
measure and monitor interest rate risk is the utilization of a
net interest income (NII) simulation model. This model is used
to estimate the amount that NII will change over a one-year time
horizon under various interest rate scenarios using numerous
assumptions. During the quarter, these assumptions have not
changed and management believes these assumptions are reasonable.
The NII simulation model provides a sophisticated estimate rather
than a precise prediction of NII's exposure to higher or lower
interest rates.
Table 10 presents as of March 31, 1999, December 31, 1998
and March 31, 1998, the results from this model. The NII
simulation model provides an 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 Asset Liability Management
Committee guidelines and presents a balance sheet exposure that
is slightly liability sensitive. A liability sensitive exposure
would imply a favorable short-term impact on NII in periods of
declining interest rates.
Market Risk Exposure to Interest Rate Changes
Table 10
March 31, 1999 December 31, 1998 March 31, 1998
- --------------------------------------------------------------------------------------------------------
Interest Rate Change Interest Rate Change Interest Rate Change
(in basis points) (in basis points) (in basis points)
-200 +200 -200 +200 -200 +200
- --------------------------------------------------------------------------------------------------------
Estimated Exposure as a
Percent of Net Interest Income 1.4% (0.5)% 1.9% (2.1)% 2.9% (2.0)%
- --------------------------------------------------------------------------------------------------------
To enhance and complement the results from the NII
simulation model, Pacific Century also reviews other measures of
interest rate risk. These measures include the sensitivity of
market value of equity and the exposure to basis risk and non-
parallel yield curve shifts. There are some inherent limitations
to these measures, but used along with the NII simulation model,
Pacific Century gets a better overall insight for managing its
exposure to changes in interest rates.
In managing interest rate risks, Pacific Century uses
several approaches, both on- and off-balance sheet, to modify its
risk position. Approaches that are used to shift balance sheet
mix or alter the interest rate characteristics of assets and
liabilities include changing product pricing strategies,
modifying investment portfolio strategies, or using financial
derivatives. The use of financial derivatives has been limited
over the past several years. During this period, Pacific Century
has relied more on the use of on-balance sheet alternatives to
manage its interest rate risk position.
Pacific Century's broad area of operations throughout the
South Pacific and Asia has the potential to expose it to foreign
currency risk. In general, however, most foreign currency
denominated assets are funded by like currency liabilities, with
imbalances corrected through the use of various hedge
instruments. By policy, the net exposure in those balance sheet
activities described above is insignificant.
On the other hand, Pacific Century is exposed to foreign
currency exchange rate changes from the capital invested in its
foreign subsidiaries and branches located throughout the South
Pacific and Asian Rim. These investments are designed to
diversify Pacific Century's total balance sheet exposure. A
portion of the capital investment in French Polynesia and New
Caledonia is offset by a borrowing denominated in French Francs
and a foreign exchange currency hedge transaction. As of March
31, 1999, the remainder of these capital positions which
aggregated $97.4 million, were not hedged. The comparative
position at year-end 1998 was $93.0 million.
Pacific Century uses a value-at-risk (VAR) calculation to
measure the potential loss from foreign currency exposure.
Pacific Century's VAR is calculated at a 95% confidence interval
and assumes a normal distribution. Pacific Century utilizes the
variance/covariance approach to estimate the probability of
future changes in foreign exchange rates. Under this approach,
equally weighted daily closing prices are used to determine the
daily volatility for the last 10, 30, 50, and 100 days. Pacific
Century uses the highest daily volatility of the four trading
periods in its VAR calculation.
Table 11 presents as of March 31, 1999, December 31, 1998
and March 31, 1998 Pacific Century's foreign currency exposure
from its net investment in subsidiaries and branch operations
that are denominated in a foreign currency as measured by the
VAR.
Market Risk Exposure From Changes in Foreign Exchange Rates
Table 11
- -----------------------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998 March 31, 1998
(in millions of dollars) Book Value Value-at-Risk Book Value Value-at-Risk Book Value Value-at-Risk
- -----------------------------------------------------------------------------------------------------------
Net Investments in Foreign
Subsidiaries and Branches
Japanese Yen $9.5 $2.1 $ 9.6 $ 2.7 $ 11.2 $ 2.2
Korean Won 39.4 6.3 44.2 7.9 33.1 19.6
Pacific Franc (1) 26.1 4.2 22.8 3.6 26.2 4.0
Other Currencies 22.4 7.9 16.4 15.3 31.7 9.7
----- ----- ----- ----- ------ -----
Total $97.4 $20.5 $93.0 $29.5 $102.2 $35.5
===== ===== ===== ===== ====== =====
(1) Net of a $42 million, $46 million and $42 million borrowing at March 31, 1999, December 31, 1998 and
March 31, 1998, respectively, denominated in French francs and foreign exchange hedge transactions of $25
million and $26 million at March 31, 1999 and December 31, 1998.
Trading Activities
Trading activities include foreign currency and foreign
exchange contracts that expose Pacific Century to a minor degree
of foreign currency risk. Pacific Century manages its trading
account such that it does not maintain significant foreign
currency open positions. Trading activities remain immaterial as
of March 31, 1999.
Liquidity Management
Liquidity is managed to ensure that Pacific Century has
continuous access to sufficient, reasonably priced funding to
conduct its business in a normal manner. Pacific Century's
liquidity management process is described in the 1998 Annual
Report to Shareholders and remains in place without any
significant changes.
Pacific Century maintained a $25 million annually renewable
line of credit for working capital purposes. Fees are paid on
the unused balance of the line. During the first quarter of
1999, the line was not drawn upon.
Bank of Hawaii and First Savings are both members of the
Federal Home Loan Bank of Seattle. The FHLB provides these
institutions with an additional source for short and long-term
funding. Borrowings from the FHLB remain at similar levels to
those reported at year-end 1998 ending the first quarter of 1999
at $293 million.
Additionally, Bank of Hawaii maintains a $1 billion senior
and subordinated bank note program. Under this facility, Bank of
Hawaii may issue additional notes provided that at any time the
aggregate amount outstanding does not exceed $1 billion. At
March 31, 1999, there was $125 million issued and outstanding
under this program.
Capital Management
Pacific Century manages its capital level to optimize
shareholder value, support asset growth, provide protection
against unforeseen losses and comply with regulatory
requirements. Capital levels are reviewed periodically relative
to Pacific Century's risk profile and current and projected
economic conditions. Pacific Century's objective is to hold
sufficient capital on a regulatory basis to exceed the minimum
guidelines of a well capitalized institution.
At March 31, 1999, Pacific Century's shareholders' equity
grew to $1.2 billion, an increase of 5.6% over the same date in
1998. The source of growth in shareholders' equity in 1999
included retention of earnings, and issuance of common stock
under various stock-based plans. Offsetting these increases were
cash dividends paid of $13.7 million, net treasury stock
purchases of $0.5 million and unrealized valuation adjustments.
Pacific Century's regulatory capital ratios at March 31,
1999 were: Tier 1 Capital Ratio of 9.74%, Total Capital Ratio of
12.87%, and Leverage Ratio of 7.57%. All three capital ratios
exceeded the minimum threshold levels that were established by
federal bank regulators to qualify an institution as well
capitalized. The minimum regulatory standards to qualify as well
capitalized are as follows: Tier 1 Capital 6%; Total Capital 10%;
and the Leverage Ratio 5%. These standards are minimum
regulatory guidelines and Pacific Century manages its capital
base in accordance with the attributes noted at the beginning of
this section. Table 12 presents the activities and balances in
Pacific Century's capital accounts along with key capital ratios.
Equity Capital
Table 12
- -----------------------------------------------------------------------------------------
March 31 December 31 March 31
(in millions of dollars) 1999 1998 1998
- -----------------------------------------------------------------------------------------
Source of Common Equity
Net Income $35.4 $107.0 $34.0
Dividends Paid (13.7) (52.8) (13.0)
Dividend Reinvestment Program 1.5 5.4 2.0
Stock Repurchases (3.9) (7.3) --
Other (1) 2.7 16.1 3.1
- -----------------------------------------------------------------------------------------
Annual Increase in Equity $22.0 $68.4 $26.1
=========================================================================================
Common Equity $1,207.6 $1,185.6 $1,143.3
Add: 8.25% Capital Securities of
Bancorp Hawaii Capital
Trust I 100.0 100.0 100.0
Minority Interest 4.8 7.4 5.8
Less: Intangibles 186.4 186.2 177.3
Unrealized Valuation and Other
Adjustments 5.2 3.6 4.3
- -----------------------------------------------------------------------------------------
Tier I Capital 1,120.8 1,103.2 1,067.5
Allowable Loan Loss Reserve 144.7 147.2 137.7
Subordinated Debt 218.7 95.0 118.8
Investment in Unconsolidated
Subsidiary (3.0) (2.5) (2.1)
- -----------------------------------------------------------------------------------------
Total Capital $1,481.2 $1,342.9 $1,321.9
=========================================================================================
Risk Weighted Assets $11,505.3 $11,708.5 $10,974.7
=========================================================================================
Key Ratios
Average Equity/Average Assets Ratio 7.98% 7.81% 7.81%
Tier I Capital Ratio 9.74% 9.42% 9.73%
Total Capital Ratio 12.87% 11.47% 12.04%
Leverage Ratio 7.57% 7.48% 7.41%
=========================================================================================
(1) Includes profit sharing; stock options and directors' restricted shares and deferred
compensation plans; and unrealized valuation adjustments for investment securities,
foreign currency translation and pension liability.
/TABLE
Year 2000
A significant issue facing all banks nationwide is the
transition to the new millennium. Year 2000 concerns arise
primarily from past date-coding practices in both software and
hardware that used two-digits rather than four-digits to
represent years. If not corrected, systems that use the two-
digit format will be unable to correctly distinguish dates after
December 31, 1999. This problem could cause these systems to
fail or produce inaccurate information.
State of Readiness
The resolution of Year 2000 issues is a top priority at
Pacific Century. Recognizing the importance of having its
systems ready for the Year 2000, Pacific Century Financial
Corporation established Project 2000 as an enterprise-wide
initiative in 1996. Project 2000 is a global strategic plan
supported by senior management and approved by the Board of
Directors.
As described in Pacific Century's 1998 Annual Report to
Shareholders, Pacific Century's Year 2000 project plan includes
five phases. The first two phases, awareness and assessment were
complete and the remaining three phases, renovation, validation
testing and implementation were substantially complete at year-
end 1998. During the first quarter, Pacific Century has
substantially completed testing with service providers and
business partners to verify the interface capabilities of
external systems. Pacific Century expects to have substantially
all of its critical systems tested and ready for Year 2000 by
June 30, 1999.
Pacific Century understands that successfully addressing
Year 2000 issues extends well beyond the remediation of internal
systems. Pacific Century has a detailed and extensive process to
ascertain and monitor the Year 2000 readiness of its vendors and
service providers. Additionally, Pacific Century has embarked on
a Year 2000 risk assessment program to determine the Year 2000
readiness of all material customers, counterparties and business
partners.
Notwithstanding these actions, Pacific Century recognizes
there can be no assurances that significant customers or critical
third parties will adequately address their Year 2000 issues in a
timely manner. Consequently, Pacific Century is developing a
"Year 2000 event plan" as part of its contingency planning
process to cover all critical business operations in the event
that circumstances outside of its control causes business
disruptions.
In developing its event plan, Pacific Century is leveraging
existing back-up plans with added oversight for Year 2000 events,
which include the century rollover and the leap year 2000. The
contingency planning process is expected to be completed by June
30, 1999 leaving the remaining last two quarters of the year to
test and validate the Year 2000 event plan.
Estimated Year 2000 Costs
Pacific Century estimates that costs directly related to
Project 2000 issues will approximate $41 million, including $30
million in estimated incremental cost. Costs associated with
Project 2000 primarily include estimates for technology and
program management staff, staff retention, consultant fees, and
software and hardware costs, as well as, costs for customer
education and public relations. Through December 31, 1998,
cumulative costs for Project 2000 totaled approximately $25.4
million of which approximately $22.2 million were incurred in
1998. During the first quarter of 1999, additional expenditures
aggregating $3.5 million were incurred, bringing the Project 2000
cost to $28.9 million at March 31, 1999. As Project 2000
progresses, the cost estimate could change depending on a number
of factors, including the failure of third party vendors to
address Year 2000 issues in a timely manner. Year 2000
compliance costs are expected to be funded from operating cash
flow.
Forward-looking statements contained in the above Year 2000
disclosure should be read in conjunction with the cautionary
statements included in the introductory section of this report
under "Forward-Looking Statements."
Part II. - Other Information
Items 1 to 5 omitted pursuant to instructions.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Number
27 Financial Data Schedule
99 Statement of Ratios
(b) On February 25, 1999, Pacific Century filed a Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Date May 14, 1999 PACIFIC CENTURY
FINANCIAL CORPORATION
/s/ RICHARD J. DAHL
(Signature)
Richard J. Dahl
President and Chief
Operating Officer
/s/ DAVID A. HOULE
(Signature)
David A. Houle
Executive Vice President,
Treasurer and Chief
Financial Officer
Pacific Century Financial Corporation
Exhibit 99 - Statement Regarding Computation of Ratios
Three Months Ended March 31
(in millions of dollars) 1999 1998
Earnings:
1. Income Before Income Taxes $57.6 $54.6
2. Plus: Fixed Charges Including Interest on Deposit 117.8 131.7
------- -------
3. Earnings Including Fixed Charges 175.4 186.3
4. Less: Interest on Deposits 68.7 79.9
------- -------
5. Earnings Excluding Interest on Deposits $106.7 $106.4
======= =======
Fixed Charges:
6. Fixed Charges Including Interest on Deposits $117.8 $131.7
7. Less: Interest on Deposits 68.7 79.9
------- -------
8. Fixed Charges Excluding Interest on Deposits $49.1 $51.8
======= =======
Ratio of Earnings to Fixed Charges:
Including Interest on Deposits (Line 3 divided by Line 6) 1.5 x 1.4 x
Excluding Interest on Deposits (Line 5 divided by Line 8) 2.2 x 2.1 x
9 1000 3-MOS DEC-31-1998 MAR-31-1999 617362 494202 111894 2447 2733466 894502 902830 9637661 209329 14928286 9434427 3243627 367039 675634 0 0 805 1206754 14928286 196190 55737 10880 262807 68668 118963 143844 12590 1847 134840 57584 57584 0 0 35417 0.44 0.44 4.24 157090 21731 0 0 211276 20880 10038 209329 0 0 0