U N I T E D S T A T E S
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _____________ to _____________
Commission File Number 1-6887
PACIFIC CENTURY FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Hawaii 99-0148992
------------------------ ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
- ---------------------------------------- ----------
(Address of principal executive 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, $2 Par Value; outstanding at July 31, 1997 -
40,143,980 shares
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION and subsidiaries
June 30, 1997
PART I. - Financial Information
Item 1. Financial Statements
<PAGE>
<TABLE>
Consolidated Statements of Condition (Unaudited) Pacific Century Financial Corporation and subsidiaries
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
June 30 December 31 June 30
(in thousands of dollars) 1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-Bearing Deposits $562,215 $635,519 $638,204
Investment Securities - Held to Maturity
(Market Value of $1,281,545, $1,261,146 and $1,288,816 respectively 1,279,349 1,258,756 1,296,708
Investment Securities - Available for Sale 2,411,882 2,372,897 2,201,538
Securities Purchased Under Agreements to Resell 1,600 -- --
Funds Sold 85,758 141,920 218,628
Loans 9,018,809 8,699,286 8,549,043
Unearned Income (197,967) (183,586) (177,225)
Reserve for Possible Loan Losses (167,842) (167,795) (163,266)
- --------------------------------------------------------------------------------------------------------------------
Net Loans 8,653,000 8,347,905 8,208,552
- --------------------------------------------------------------------------------------------------------------------
Total Earning Assets 12,993,804 12,756,997 12,563,630
Cash and Non-Interest Bearing Deposits 484,239 581,221 482,067
Premises and Equipment 272,080 273,122 271,762
Customers' Acceptance Liability 19,856 21,178 21,759
Accrued Interest Receivable 90,151 88,074 85,910
Other Real Estate 11,632 10,711 9,571
Intangibles, including Goodwill 112,734 96,456 96,971
Trading Securities 2,157 1,687 1,192
Other Assets 182,093 179,721 157,292
- --------------------------------------------------------------------------------------------------------------------
Total Assets $14,168,746 $14,009,167 $13,690,154
====================================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $1,358,368 $1,435,091 $1,295,882
- Interest-Bearing 1,814,164 1,724,105 1,612,901
Savings 822,200 866,453 931,286
Time 2,738,374 2,571,569 2,517,056
Foreign Deposits
Demand - Non-Interest Bearing 329,482 553,274 299,697
Time Due to Banks 736,212 804,818 769,256
Other Savings and Time 1,129,991 728,769 996,743
- --------------------------------------------------------------------------------------------------------------------
Total Deposits 8,928,791 8,684,079 8,422,821
Securities Sold Under Agreements to Repurchase 2,146,713 2,075,571 1,695,907
Funds Purchased 471,956 599,994 600,232
Short-Term Borrowings 478,134 293,257 499,580
Bank's Acceptances Outstanding 19,856 21,178 21,759
Accrued Pension Costs 19,440 17,309 23,451
Accrued Interest Payable 56,684 69,545 70,629
Accrued Taxes Payable 155,672 154,984 145,427
Minority Interest 7,466 9,307 17,057
Other Liabilities 100,232 85,678 86,166
Long-Term Debt 701,633 932,143 1,057,225
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,086,577 12,943,045 12,640,254
Shareholders' Equity
Common Stock ($2 par value), authorized 100,000,000 shares;
outstanding, June 1997 - 39,363,421;
December 1996 - 39,959,234; June 1996 - 40,830,130; 78,727 79,918 81,660
Surplus 160,375 186,391 221,897
Unrealized Valuation Adjustments (7,836) (3,722) (15,760)
Retained Earnings 850,903 803,535 762,103
- --------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,082,169 1,066,122 1,049,900
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,168,746 $14,009,167 $13,690,154
====================================================================================================================
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Income (Unaudited) Pacific Century Financial Corporation and subsidiaries
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30 June 30 June 30 June 30
(in thousands of dollars except per share amounts) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest on Loans $172,647 $166,410 $338,972 $322,848
Loan Fees 7,366 8,283 16,736 16,577
Income on Lease Financing 8,948 6,640 17,324 9,674
Interest and Dividends on Investment Securities
Taxable 20,916 14,545 40,705 29,161
Non-taxable 286 298 578 609
Income on Investment Securities Available for Sale 38,546 36,481 77,547 74,050
Interest on Deposits 9,470 10,842 19,139 20,654
Interest on Security Resale Agreements 22 -- 85 --
Interest on Funds Sold 736 916 1,624 2,078
- --------------------------------------------------------------------------------------------------------------------
Total Interest Income 258,937 244,415 512,710 475,651
Interest Expense
Interest on Deposits 80,560 70,360 157,457 133,362
Interest on Security Repurchase Agreements 28,399 24,582 55,032 49,925
Interest on Funds Purchased 5,493 7,352 11,793 14,718
Interest on Short-Term Borrowings 4,960 5,328 8,863 11,472
Interest on Long-Term Debt 11,128 15,587 22,529 31,982
- --------------------------------------------------------------------------------------------------------------------
Total Interest Expense 130,540 123,209 255,674 241,459
Net Interest Income 128,397 121,206 257,036 234,192
Provision for Possible Loan Losses 7,286 4,163 12,374 8,587
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 121,111 117,043 244,662 225,605
Non-Interest Income
Trust Income 12,742 11,814 26,109 24,718
Service Charges on Deposit Accounts 6,518 6,793 13,198 12,784
Fees, Exchange, and Other Service Charges 17,538 14,023 32,193 26,552
Other Operating Income 7,913 8,264 14,449 13,928
Investment Securities Gains (Losses) 1,549 67 2,012 (62)
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 46,260 40,961 87,961 77,920
Non-Interest Expense
Salaries 40,047 40,899 81,525 77,519
Pensions and Other Employee Benefits 12,426 12,071 27,510 25,480
Net Occupancy Expense of Premises 11,218 8,662 21,555 19,444
Net Equipment Expense 9,661 8,797 18,693 16,554
Other Operating Expense 38,610 32,857 72,024 61,711
Minority Interest 392 501 712 657
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 112,354 103,787 222,019 201,365
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 55,017 54,217 110,604 102,160
Provision for Income Taxes 19,411 19,604 39,517 34,837
- --------------------------------------------------------------------------------------------------------------------
Net Income $35,606 $34,613 $71,087 $67,323
====================================================================================================================
Earnings Per Common Share and Common Share Equivalents $0.89 $0.84 $1.77 $1.63
- --------------------------------------------------------------------------------------------------------------------
Average Common Shares and Common Share Equivalents Outstanding 39,885,681 41,276,498 40,057,959 41,411,266
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Shareholders' Equity (Unaudited) Pacific Century Financial Corporation and subsidiaries
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Common Unrealized Retained
(in thousands of dollars except per share amounts) Total Stock Surplus Valuation Adj. Earnings
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $1,066,122 $79,918 $186,391 ($3,722) $803,535
Net Income 71,087 - - - 71,087
Sale of Common Stock
57,643 Profit Sharing Plan 2,552 115 2,437 - -
131,711 Stock Option Plan 3,451 263 3,188 - -
72,163 Dividend Reinvestment Plan 3,283 145 3,138 - -
770 Directors' Restricted Shares and
Deferred Compensation Plan 34 2 32 - -
Stock Repurchased (36,527) (1,716) (34,811) - -
Unrealized Valuation Adjustments
Investment Securities (1,434) - - (1,434) -
Foreign Exchange Translation Adjustment (2,680) - - (2,680) -
Cash Dividends Paid of $.60 Per Share (23,719) - - - (23,719)
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $1,082,169 $78,727 $160,375 ($7,836) $850,903
====================================================================================================================
Balance at December 31, 1995 $1,054,436 $82,682 $240,080 $13,902 $717,772
Net Income 67,323 - - - 67,323
Sale of Common Stock
35,803 Profit Sharing Plan 1,231 72 1,159 - -
151,216 Stock Option Plan 3,549 302 3,247 - -
92,394 Dividend Reinvestment Plan 3,634 184 3,450 - -
1,800 Restricted Share Plan 64 4 60 - -
Stock Repurchased (27,683) (1,584) (26,099) - -
Unrealized Valuation Adjustments
Investment Securities (22,349) - - (22,349) -
Foreign Exchange Translation Adjustment (7,313) - - (7,313) -
Cash Dividends Paid of $.56 Per Share (22,992) - - - (22,992)
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 $1,049,900 $81,660 $221,897 ($15,760) $762,103
====================================================================================================================
/TABLE
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (Unaudited) Pacific Century Financial Corporation and subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended June 30
(in thousands of dollars) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net Income $71,087 $67,323
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, depreciation, and amortization of income and expense 11,683 6,935
Deferred income taxes 6,281 (1,704)
Realized and unrealized investment security gains (1,971) 94,067
Net decrease in trading securities (470) 1,163
Other assets and liabilities, net (13,725) 19,810
----------- ---------
Net cash provided by operating activities 72,885 187,594
- -----------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from redemptions of investment securities held to maturity 59,641 419,088
Purchases of investment securities held to maturity (32,765) (548,108)
Proceeds from sales of investment securities available for sale 304,648 527,659
Purchases of investment securities available for sale (344,052) (645,939)
Net decrease in interest-bearing deposits placed in other banks 74,162 355,537
Net decrease (increase) in funds sold 54,562 (102,455)
Net increase in loans and lease financing (274,587) 241,710
Premises and equipment, net (12,380) (21,936)
Purch of addtnl int, net of cash and non-int deposits, Credipac Polynesie and Credipac Nouvelle Caledonie -- 1,291
Purchase of majority interest of Banque de Tahiti & New Caledonie
net of cash and non-interest bearing deposits acquired -- 23,892
Purchase of Bank of Hawaii (PNG), Ltd., net of cash and non-interest
bearing deposits acquired (5,371) --
Purchase of Home Savings of America branches, net of cash and non-interest
bearing deposits acquired 235,020 --
----------- ---------
Net cash provided by investing activities 58,878 250,739
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase in demand, savings, and time deposits (72,584) 25,549
Proceeds from lines of credit and long-term debt 14,207 571,293
Principal payments on lines of credit and long-term debt (244,717) (577,504)
Net increase (decrease) in short-term borrowings 127,955 (395,125)
Net proceeds from sale (repurchase) of stock (27,207) (19,205)
Cash dividends (23,719) (22,992)
----------- ---------
Net cash used by financing activities (226,065) (417,984)
Effect of exchange rate changes on cash (2,680) (7,313)
----------- ---------
Decrease in cash and non-interest bearing deposits (96,982) 13,036
Cash and non-interest bearing deposits at beginning of year 581,221 469,031
----------- ---------
Cash and non-interest bearing deposits at end of period $484,239 $482,067
</TABLE>
<PAGE>
Note 1. Name Change
On April 25, 1997, the company's name was changed from
Bancorp Hawaii, Inc. to Pacific Century Financial Corporation
("Pacific Century"). The change was made to better reflect the
company's strategic goals to grow in Hawaii and throughout the
Pacific and to position it as a full-service financial provider.
Bank of Hawaii will maintain its name along with First Federal
Savings & Loan Association of America, however, several of the
company's other subsidiaries will adopt names with a Pacific
Century theme.
Note 2. Basis of Presentation
The accompanying unaudited consolidated financial statements
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 1996
Annual Report to Shareholders. Operating results for the six
months ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31,
1997.
Certain reclassifications have been made from prior year
amounts to conform to the 1997 presentation.
Note 3. Recent Accounting Pronouncements
In June 1996, Statement of Financial Accounting Standards
(SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" was issued.
In the first half of 1997, there was no impact of SFAS No. 125.
In accordance with the statement, an entity recognizes the
financial assets it controls and the liabilities it has incurred,
recognizes when control over financial assets has been
surrendered and recognizes when liabilities are extinguished.
The statement also requires that servicing assets and other
retained interests in the transferred assets be measured by
allocating the previous carrying amount between the assets sold,
if any, and retained interests, if any, based on their relative
fair values at the date of transfer. Servicing assets and
liabilities would subsequently be measured by (a) amortization in
proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or
increased obligation based on their fair values. The statement
is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.
In October 1996 Financial Accounting Standards Board (Board)
issued SFAS No. 127 which deferred for one year paragraphs 9-12
(Accounting for Transfers and Servicing of Financial Assets) for
securities lending, repurchase agreements, dollar rolls, and
other similar secured transactions. The Board also agreed to
defer for one year paragraph 15 (Secured borrowings and
Collateral) for all transactions.
In February 1997, the FASB issued SFAS No. 128, "Earnings
Per Share" and SFAS No. 129, "Capital Structure". SFAS No. 128
simplifies the calculation of earnings per share (EPS) and makes
it comparable to international standards. SFAS No. 129
consolidates the existing guidance from several other
pronouncements relating to an entity's capital structure.
Under SFAS No. 128 primary EPS is replaced with a
calculation called basic EPS. Basic EPS is calculated by
dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period.
Fully diluted EPS has not changed significantly but has been
renamed diluted EPS. Under the new rules, income available to
common shareholders should be adjusted for the assumed conversion
of all potentially dilutive securities. The treasury stock
method is used to calculate the dilutive effect of options and
warrants. The treasury stock method is applied using the average
market price of the company's common stock during the period
rather than the higher of the average market price or the ending
market price. The dilutive effect of convertible debt or
convertible preferred stock will be calculated using the if-
converted method, which assumes conversion at the beginning of
the period if the effect is dilutive.
SFAS No. 128 is effective for both interim and annual
financial statements for periods ending after December 15, 1997.
Earlier application is not permitted. Under SFAS No. 128, basic
EPS for the second quarter would have been $0.90 and dilutive EPS
$0.89. For the year-to-date, the basic and dilutive EPS would
have been $1.80 and $1.77, respectively.
Note 4. Mergers and Acquisitions
In February 1997, Bank of Hawaii International Inc. acquired
100% of the Indosuez Niugini Bank, Ltd. from Indosuez Bank, Ltd.
for approximately $5.6 million. Indosuez Niugini Bank, Ltd. has
been renamed Bank of Hawaii (PNG), Ltd. At June 30, 1997 the
Bank had approximately $93 million in total assets. As a result
of the acquisition the Bank recognized $2.5 million in goodwill
and will amortize it over 15 years. The acquisition was
accounted for as a purchase.
In March 1997, Pacific Century Bank, N.A. (PCB), a wholly-
owned subsidiary of Pacific Century purchased approximately $254
million in deposits from Home Savings' Arizona operations. As a
result of the purchase, PCB now has a combined total of ten
branches servicing customers in the greater Phoenix vicinity,
Tucson and Yuma, Arizona. Pacific Century paid approximately
$19.7 million for the core deposit base, deposit premium
intangibles and other items.
On February 24, 1997, Pacific Century announced the signing
of a definitive agreement for Pacific Century to acquire CU
Bancorp and its subsidiary bank, California United Bank.
California United Bank has 21 branches in Southern California.
The transaction received all regulatory approvals and was
approved by shareholders on June 27, 1997. On July 3, 1997, the
transaction was closed with Pacific Century common shares
exchanged for approximately 60% of CU Bancorp shares at the rate
of 0.3278 Pacific Century shares for every CU Bancorp share.
Remaining CU Bancorp shareholders electing to take cash in
exchange for their shares. The transaction will be accounted for
using the purchase method with California United Bank becoming a
wholly-owned subsidiary of Pacific Century.
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 financial statements after
deducting non-taxable items, principally from state taxes, net of
federal income tax and foreign tax adjustments, low income
housing and investment tax credits and tax exempt interest
income.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Review
Performance Highlights
Pacific Century Financial Corporation (Pacific Century)
reported earnings for the second quarter of 1997 of $35.6
million, 2.9% above earnings for the second quarter of 1996. On
a per share basis, earnings were $0.89 for the second quarter of
1997, an increase from the $0.84 reported for the second quarter
of 1996, and from the $0.88 reported for the first quarter of
1997.
For the six months ended June 30, 1997, Pacific Century
reported net income of $71.1 million, 5.6% above that for the
same period in 1996. Earnings per share were $1.77 for the first
half of 1997, compared with $1.63 for the same period in 1996.
Earnings growth reflects the economy in Hawaii, Pacific Century's
main market, the improvement in Pacific Century's net interest
margin, and the effect of the acquisition of the majority
interest of Banque de Tahiti (BDT) and Banque de Nouvelle
Caledonie (BNC) recognized in the second quarter of 1996. With
the increased ownership, Pacific Century's consolidated financial
statements included the balance sheet of BDT and BNC since June
30, 1996 and earnings from May 2, 1996, the acquisition date.
Earnings comparisons with prior periods should consider this
change.
Performance ratios for the year-to-date period improved over
those reported for the year ended December 31, 1996. Return on
average assets and return on average equity were 1.04% and
13.37%, respectively, for the first half of 1997. These ratios
were 1.04% and 12.70%, respectively, for the like period in 1996
and 0.99% and 12.43%, respectively, for all of 1996.
Total assets ended June 30, 1997 at $14.2 billion, an
increase from $14.0 billion at December 31, 1996 and $13.7
billion at June 30, 1996. Net loans outstanding increased from
June 30, 1996 and year-end 1996 by 5.4% and 3.7%, respectively.
Total investment securities increased to $3.7 billion at June 30,
1997, representing a 1.6% increase from year-end 1996 and 5.5%
from the same date a year ago.
Total deposits increased to $8.9 billion, compared to $8.7
billion reported at year-end 1996 and increased from the $8.4
billion reported a year ago on June 30. Securities sold under
agreements to repurchase (repos) as of June 30, 1997 totaled $2.1
billion, an increase of 3.4% from year-end 1996 and a 26.6%
increase from June 30, 1996. The changes in repo balances, which
are mainly comprised of government funds, are explained later in
this report.
Non-performing assets (NPAs) have increased to $93.6 million
at June 30, 1997. A further discussion on NPAs and the Reserve
for Loan Losses follows later in this report.
Non-interest income for the second quarter of 1997 totaled
$46.3 million, a 12.9% increase from the same quarter in 1996.
Non-interest expense has likewise increased by 8.3% comparing the
same periods. The change in these categories are discussed later
in this report.
The average net interest margin on earning assets for the
second quarter of 1997 was 4.00%, bringing year-to-date net
interest margin through June 30 to 4.05%. Comparatively, net
interest margin was 3.95% for the same quarter in 1996 and 3.89%
for the first half of 1996. A further discussion of net interest
margin follows in this report.
Risk Elements in Lending Activities
At June 30, 1997, total loans were $9.0 billion, a 3.7%
increase from year-end 1996 and 5.5% above total loans on June
30, 1996. The comparisons with prior periods are affected by the
February 1997 acquisition of Indosuez Niugini Bank, Limited which
reported total loans of $30.2 million at the end of June 1997.
The following table presents Pacific Century's total loan
portfolio balances for the periods indicated.
<PAGE>
<TABLE>
Loan Portfolio Balances Pacific Century Financial Corporation and subsidiaries
- --------------------------------------------------------------------------------
<CAPTION>
June 30 December 31 June 30
(in millions of dollars) 1997 1996 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic Loans
Commercial and Industrial $1,860.6 $1,806.7 $1,771.7
Real Estate
Construction -- Commercial 242.2 212.3 210.6
-- Residential 16.3 23.6 26.2
Mortgage -- Commercial 1,219.4 1,227.8 1,283.9
-- Residential 2,671.8 2,635.3 2,550.9
Installment 845.7 849.3 815.4
Lease Financing 482.3 437.8 406.8
- --------------------------------------------------------------------------------
Total Domestic 7,338.3 7,192.8 7,065.5
- --------------------------------------------------------------------------------
Foreign Loans 1,680.5 1,506.5 1,483.5
- --------------------------------------------------------------------------------
Total Loans $9,018.8 $8,699.3 $8,549.0
================================================================================
</TABLE>
<PAGE>
Commercial and Industrial Loans
Commercial and Industrial loans outstanding were $1.9
billion as of June 30, 1997, an increase of 3.0% from year-end
1996 and 5.0% from June 30, 1996. The change in Commercial and
Industrial loans has been impacted by the Hawaii economy which
has affected loan demand, low pricing in the U.S. corporate
market, and aggressive management of substandard borrowers.
Real Estate Loans
Real estate loans totaled $4.1 billion at June 30, 1997, a
1.2% increase from year-end 1996 and a 1.9% increase from the
same date a year ago. The increase since year-end 1996 was
reflected in residential mortgage lending and commercial
construction.
Other Lending
Installment loans and leases have remained at similar levels
compared to year-end 1996 balances. At June 30, 1997, total
installment loans were $845.7 million, compared with $849.3
million reported at year-end 1996, and $815.4 million on the same
date in 1996. The change since year-end reflected a decrease of
3.2% in charge card and revolving plan credits and an increase in
consumer installment loans of 1.6% to $497.7 million. Total
leases at June 30, 1997 increased to $482.3 million from $437.8
million at year-end 1996.
Foreign loan balances were $1.7 billion as of June 30, 1997,
compared to $1.5 billion at both year-end 1996 and June 30, 1996.
The rise in the foreign loan total since year-end reflects the
PNG loan portfolio acquired during the quarter and loan growth in
the South Pacific branches and affiliates.
Non-Performing Assets and Past Due Loans
Pacific Century's non-performing assets include non-accrual
loans, restructured loans and foreclosed real estate. NPAs as of
June 30, 1997 increased to $93.6 million. The growth, largely in
the residential loan category, reflects a migration from the 90
day past due category. While NPAs in the residential real estate
loan category have grown over the last six months, 90 day past
due loans have decreased as discussed later in this report. NPAs
as of June 30, 1997 represented 1.04% of total loans outstanding.
This ratio compares with 1.00% at the end of the first quarter
1997 and 0.96% as of year-end 1996. This ratio was 0.98% at the
end of the second quarter 1996. Pacific Century continues its
effort to monitor and manage NPAs aggressively. Total non-
performing assets and loans 90 days past due represented 1.29% of
loans outstanding compared with 1.36% at year-end 1996 and 1.34%
at March 31, 1997.
Non-accrual loans increased during the quarter to $82.0
million from $76.3 million at the March 1997 quarter-end and
$72.5 million at year-end 1996. The increases are largely
reported in the residential real estate category with the
commercial category reflecting the largest decrease (see table
following).
Accruing 90 day past due loans have decreased to $22.6
million mainly in the real estate categories, both commercial and
residential. Installment past due loans (including charge cards)
decreased to $8.2 million at June 30, 1997 from $10.2 million as
of March 31, 1997, the result of continuing stepped up collection
efforts and charge-offs. Residential real estate past due 90
days decreased to $2.6 million, 0.10% of total residential real
estate loans. Past due commercial real estate loans decreased to
$0.3 million, 0.02% of total commercial real estate loans. For
residential real estate loans, the underlying collateral which
represented, at original booking, loan to value ratios of 70-80%,
reduces loss exposure.
The foreclosed real estate category remained stable,
totaling $11.6 million at June 30, 1997, compared with $11.3
million at March 31, 1997 and $10.7 million at year-end 1996.
There were 26 properties in Other Real Estate at June 30, 1997,
the three largest representing 68.3% of the total in dollars.
The following table presents NPAs and past due loans for the
periods indicated.
<PAGE>
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More
- -----------------------------------------------------------------------------------
<CAPTION>
June 30 December 31 June 30
(in millions of dollars) 1997 1996 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Accrual Loans
Commercial $16.6 $20.9 $17.7
Real Estate
Construction 0.7 0.3 --
Commercial 3.5 4.1 14.7
Residential 35.7 23.6 19.0
Installment 1.7 1.3 1.1
Leases 0.3 -- 1.8
Foreign 23.5 22.3 20.1
- -----------------------------------------------------------------------------------
Subtotal 82.0 72.5 74.4
Foreclosed Real Estate
Domestic 11.6 10.7 9.6
Foreign 0.0 -- --
- -----------------------------------------------------------------------------------
Subtotal 11.6 10.7 9.6
- -----------------------------------------------------------------------------------
Total Non-Performing Assets 93.6 83.2 84.0
- -----------------------------------------------------------------------------------
Accruing Loans Past Due 90 Days or More
Commercial 0.7 2.0 1.9
Real Estate
Construction 0.1 0.4 0.4
Commercial 0.3 6.8 3.5
Residential 2.6 6.8 7.3
Installment 8.2 9.0 8.0
Leases 0.2 0.2 0.1
Foreign 10.5 9.5 13.8
- -----------------------------------------------------------------------------------
Subtotal 22.6 34.7 35.0
- -----------------------------------------------------------------------------------
Total $116.2 $117.9 $119.0
===================================================================================
- -----------------------------------------------------------------------------------
Ratio of Non-Performing Assets
to Total Loans 1.04% 0.96% 0.98%
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Ratio of Non-Performing Assets
and Accruing Loans Past Due
90 Days or More to Total Loans 1.29% 1.36% 1.39%
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE>
Summary of Loan Loss Experience
The reserve for loan losses stood at $167.8 million at June
30, 1997, representing 1.90% of loans outstanding. This compares
with 1.98% as of March 31, 1997, 1.97% at year-end 1996 and 1.95%
on June 30, 1996.
Loan loss provisions were $7.3 million for the second
quarter of 1997, compared with the $5.1 million reported for the
first quarter of 1997. Pacific Century reported net charge-offs
of $8.4 million for the second quarter of 1997, bringing year-to-
date net charge-offs to $9.9 million. Comparatively, strong
recoveries for the first six months of 1996 resulted in net
charge-offs of $3.9 million.
Gross charge-offs increased to $11.9 million for the second
quarter of 1997, compared to $7.2 million for the first quarter
of 1997. Year-to-date, gross charge-offs totaled $19.1 million,
compared with $20.9 million for the same period in 1996.
Recoveries reported for the quarter ended June 30, 1997 were $3.5
million, bringing year-to-date recoveries to $9.2 million.
Recoveries reported last year through June 30, were boosted by an
$11.5 million recovery on loans secured by commercial leasehold
property charged off in 1992 and 1993.
The annualized ratio of net charge-offs to average loans
outstanding for the second quarter 1997 was 0.39%. The ratio of
net charge-offs to average loans were 0.23% for the first half of
1997 and 0.09% for the comparable period in 1996. For the full
year of 1996, Pacific Century reported a ratio of 0.16%.
A detailed breakdown of charge-offs and recoveries by loan
category is presented in the following table.
<PAGE>
<TABLE>
Summary of Loss Experience Pacific Century Financial Corporation and subsidiaries
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Second Second First Six First Six
Quarter Quarter Months Months
(in millions of dollars) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Loans Outstanding $8,659.1 $8,464.6 $8,568.2 $8,242.3
Balance of Reserve for Possible Loan Losses
at Beginning of Period $170.1 $152.1 $167.8 $152.0
Loans Charged Off
Commercial and Industrial 3.3 1.7 4.7 3.1
Real Estate - Construction -- -- -- --
Real Estate - Mortgage
Commercial 0.2 0.8 0.2 1.3
Residential 0.6 0.7 0.7 0.9
Installment 7.7 10.0 13.3 14.6
Foreign -- 0.8 -- 0.8
Leases 0.1 -- 0.2 0.2
- -----------------------------------------------------------------------------------------------------
Total Charged Off 11.9 14.0 19.1 20.9
Recoveries on Loans Previously Charged Off
Commercial and Industrial 1.0 12.7 5.3 13.5
Real Estate - Construction -- -- -- 0.7
Real Estate - Mortgage
Commercial 0.3 0.1 0.3 0.1
Residential 0.7 0.1 0.7 0.2
Installment 1.5 1.1 2.8 2.1
Foreign -- -- 0.1 --
Leases -- 0.2 -- 0.4
- -----------------------------------------------------------------------------------------------------
Total Recoveries 3.5 14.2 9.2 17.0
- -----------------------------------------------------------------------------------------------------
Net Charge Offs 8.4 (0.2) 9.9 3.9
Provision Charged to Operating Expenses 7.3 4.2 12.4 8.6
Other Net Additions (Deductions) * (1.2) 6.8 (2.5) 6.6
- -----------------------------------------------------------------------------------------------------
Balance at End of Period $167.8 $163.3 $167.8 $163.3
=====================================================================================================
Ratio of Net Charge Offs to
Average Loans Outstanding (annualized) 0.39% -0.01% 0.23% 0.09%
- -----------------------------------------------------------------------------------------------------
Ratio of Reserve to Loans Outstanding 1.90% 1.95% 1.90% 1.95%
- -----------------------------------------------------------------------------------------------------
* Includes foreign currency translation adjustments and reserves acquired.
/TABLE
<PAGE>
Capital
Pacific Century continues to manage its capital levels
through the target ratios outlined in Pacific Century's 1996
Annual Report. Pacific Century's average equity to average
assets ratio for the second quarter of 1997 was 7.75%, a decrease
from the 7.95% reported for 1996, but an increase from the 7.64%
for the first quarter of 1997.
Pacific Century's shareholders' equity at June 30, 1997
totaled $1.1 billion. New shares issued for the profit sharing,
stock option and dividend reinvestment plans increased capital by
$4.1 million during the quarter. Under Pacific Century's
continuing stock repurchase programs, share repurchases totaled
$18.6 million during the second quarter of 1997 and $36.5 million
for the first six months of 1997. Dividends for the quarter
totaled $11.8 million, a decrease from the first quarter
dividends, as fewer shares were outstanding. Dividends were paid
at $0.30 per share for both quarters of 1997.
Regulatory risk-based capital ratios remain well above
minimum guidelines. At June 30, 1997, Pacific Century's Total
Capital and Tier 1 Capital ratios were 12.80% and 10.42%,
respectively. This compares with year-end 1996, when the Total
Capital Ratio was 12.96% and the Tier 1 Capital Ratio was 10.57%.
These ratios reflect the fourth quarter 1996 issuance of $100
million in Capital Securities by Bancorp Hawaii Capital Trust I,
a subsidiary of Pacific Century. Regulatory guidelines prescribe
a minimum Total Capital Ratio of 10.00% and a Tier 1 Capital
Ratio of 6.00% for an institution to qualify as well capitalized.
Pacific Century's strategy is to maintain its capital ratios at
levels to meet this qualification to benefit from the financial
and regulatory incentives provided to well capitalized companies.
In addition, the leverage ratio, which represents the ratio
of Tier 1 Capital to Total Average Assets, was 8.00% at June 30,
1997, compared to 7.98% at year-end 1996. The minimum ratio to
qualify an institution as well capitalized is 5.00%.
Net Interest Margin Management
The average net interest margin on earning assets for the
second quarter of 1997 improved to 4.00% from 3.95% reported for
the second quarter of 1996. Year-to-date net interest margin
through June 1997 was 4.05% compared to 3.89% for the same period
in 1996. The improvement is partly attributed to the acquisition
of the South Pacific banks whose net interest margin is higher
and an increased level of earning assets.
The cost of funds rate for the second quarter of 1997 was
4.75%, which was above the 4.63% reported for the second quarter
of 1996. The earning asset yield was 8.07% for the second
quarter of 1997, an increase over the second quarter 1996 yield
of 7.95%.
<PAGE>
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Three Months Ended
June 30 1997 June 30 1996
Average Income/Yield/ Average Income/Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Interest Bearing Deposits $529.7 $9.5 7.17% $665.6 $10.8 6.55%
Investment Securities Held to Maturity
-Taxable 1,223.2 20.9 6.86 888.2 14.5 6.59
-Tax-Exempt 12.6 0.4 14.02 13.1 0.5 14.11
Investment Securities Available for Sale 2,397.5 38.5 6.45 2,255.7 36.5 6.50
Funds Sold 63.0 0.8 4.83 87.5 0.9 4.21
Net Loans
-Domestic 7,140.0 149.1 8.37 7,216.7 148.8 8.29
-Foreign 1,519.1 32.6 8.61 1,246.9 24.4 7.86
Loan Fees 7.4 8.3
------------------------ ------------------------
Total Earning Assets 12,885.1 259.2 8.07 12,373.7 244.7 7.95
Cash and Due From Banks 480.0 475.4
Other Assets 496.4 434.6
---------- ----------
Total Assets $13,861.5 $13,283.7
========== ==========
Interest Bearing Liabilities
Domestic Deposits - Demand $1,831.0 12.7 2.78 $1,672.2 11.9 2.86
- Savings 842.3 5.3 2.52 956.5 5.9 2.49
- Time 2,876.6 39.0 5.44 2,360.5 31.6 5.38
------------------------ ------------------------
Total Domestic 5,549.9 57.0 4.12 4,989.2 49.4 3.98
Foreign Deposits
- Time Due to Banks 869.8 12.8 5.88 844.1 9.8 4.65
- Other Time and Savings 949.3 10.8 4.56 822.7 11.1 5.46
------------------------ ------------------------
Total Foreign 1,819.1 23.6 5.19 1,666.8 20.9 5.05
------------------------ ------------------------
Total Deposits 7,369.0 80.6 4.38 6,656.0 70.3 4.25
Short-Term Borrowings 2,836.6 38.9 5.49 2,869.0 37.3 5.22
Long-Term Debt 812.6 11.1 5.49 1,181.4 15.6 5.31
------------------------ ------------------------
Total Interest Bearing Liabilities 11,018.2 130.6 4.75 10,706.4 123.2 4.63
------------------------ ------------------------
Net Interest Income 128.6 3.32 121.5 3.32
Average Spread on Earning Assets 4.00% 3.95%
Demand Deposits - Domestic 1,365.5 1,214.8
- Foreign 267.3 149.6
---------- ----------
Total Demand Deposits 1,632.8 1,364.4
Other Liabilities 140.1 149.1
Shareholders' Equity 1,070.4 1,063.8
---------- ----------
Total Liabilities and Shareholders' Equity $13,861.5 $13,283.7
========== ==========
Provision for Possible Loan Losses 7.3 4.2
Net Overhead 66.1 62.8
------- -------
Income Before Income Taxes 55.2 54.5
Provision for Income Taxes 19.4 19.6
Tax-Equivalent Adjustment 0.2 0.3
------- -------
Net Income $35.6 $34.6
======= =======
</TABLE>
<PAGE>
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
Average Income/Yield/ Average Income/Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Interest Bearing Deposits $545.1 $19.2 7.08% $598.0 $20.7 6.95%
Investment Securities Held to Maturity
-Taxable 1,219.4 40.7 6.73 907.3 29.2 6.46
-Tax-Exempt 12.6 0.9 14.23 13.4 0.9 14.03
Investment Securities Available for Sale 2,387.9 77.6 6.55 2,279.5 74.0 6.53
Funds Sold 74.7 1.7 4.62 85.9 2.1 4.86
Net Loans
-Domestic 7,097.9 293.5 8.34 7,204.1 295.9 8.26
-Foreign 1,470.3 62.9 8.63 1,037.7 36.9 7.16
Loan Fees 16.7 16.6
------------------------ ------------------------
Total Earning Assets 12,807.9 513.2 8.08 12,125.9 476.3 7.90
Cash and Due From Banks 533.2 451.4
Other Assets 490.3 425.4
---------- ----------
Total Assets $13,831.4 $13,002.7
========== ==========
Interest Bearing Liabilities
Domestic Deposits - Demand $1,803.5 25.0 2.80 $1,707.4 23.7 2.80
- Savings 873.1 10.7 2.47 978.2 12.4 2.54
- Time 2,788.5 75.5 5.46 2,286.4 61.7 5.42
------------------------ ------------------------
Total Domestic 5,465.1 111.2 4.10 4,972.0 97.8 3.95
Foreign Deposits
- Time Due to Banks 882.3 25.5 5.83 784.6 19.3 4.95
- Other Time and Savings 922.6 20.8 4.54 604.5 16.3 5.41
------------------------ ------------------------
Total Foreign 1,804.9 46.3 5.17 1,389.1 35.6 5.15
------------------------ ------------------------
Total Deposits 7,270.0 157.5 4.37 6,361.1 133.4 4.22
Short-Term Borrowings 2,804.8 75.7 5.44 2,877.7 76.1 5.32
Long-Term Debt 828.2 22.5 5.49 1,201.3 32.0 5.35
------------------------ ------------------------
Total Interest Bearing Liabilities 10,903.0 255.7 4.73 10,440.1 241.5 4.65
------------------------ ------------------------
Net Interest Income 257.5 3.35 234.8 3.25
Average Spread on Earning Assets 4.05% 3.89%
Demand Deposits - Domestic 1,373.6 1,296.1
- Foreign 262.8 92.0
---------- ----------
Total Demand Deposits 1,636.4 1,388.1
Other Liabilities 219.8 108.8
Shareholders' Equity 1,072.2 1,065.7
---------- ----------
Total Liabilities and Shareholders' Equity $13,831.4 $13,002.7
========== ==========
Provision for Possible Loan Losses 12.4 8.6
Net Overhead 134.1 123.4
------- -------
Income Before Income Taxes 111.0 102.8
Provision for Income Taxes 39.5 34.8
Tax-Equivalent Adjustment 0.4 0.7
------- -------
Net Income $71.1 $67.3
======= =======
</TABLE>
<PAGE>
Interest Rate Risk and Derivatives
As discussed in Pacific Century's 1996 Annual Report,
Pacific Century utilizes interest rate sensitivity analysis and
computer simulation techniques to measure the exposure of its
earnings to interest rate movements. The objective of the
process is to position its balance sheet to optimize earnings
without unduly increasing risk. The Interest Rate Sensitivity
Table presents the traditional method of quantifying the possible
exposure to interest rate movements for various time frames at
June 30, 1997. As the table indicates, Pacific Century's one
year cumulative asset sensitivity gap totaled $0.5 billion,
representing 3.19% of total assets. Comparatively, the one year
cumulative gap was $0.4 billion at year-end 1996, 2.6% of total
assets. Simulation models are also utilized by Pacific Century
to measure the interest rate sensitivity of its balance sheet.
These models simulate changes in interest rates and project the
impact on Pacific Century's net interest income. The results of
these simulations are all within established guidelines.
Pacific Century uses swaps as a cost effective risk
management tool for dealing with interest rate risk from time to
time. One new swap agreement with a notional amount of $50
million was entered into during the quarter. At June 30, 1997,
the notional amount of swaps totaled $0.6 billion, compared with
$0.7 billion at year-end 1996 and $0.8 billion a year ago. Net
expense on interest rate swap agreements totaled $0.7 million for
the second quarter of 1997 and $1.2 million for the first six
months of 1997. Comparatively, net expense of $0.8 million was
recognized in the second quarter of 1996 and $2.2 million for the
first half of 1996.
<PAGE>
<TABLE>
Interest Rate Sensitivity Table Pacific Century Financial Corporation and subsidiaries
- ---------------------------------------------------------------------------------------------
<CAPTION>
JUNE 30, 1997 OVER NON-INTEREST
(in millions of dollars) 0 - 90 DAYS 91-365 DAYS 1 - 5 YEARS 5 YEARS BEARING
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS (1)
INVESTMENT SECURITIES 1,723.0 861.0 713.7 393.5 -
SHORT TERM INVESTMENTS 117.5 4.9 - - -
INTERNATIONAL ASSETS 1,154.7 358.9 217.9 104.1 24.6
DOMESTIC LOANS (2) 2,760.8 2,024.5 2,014.0 661.2 57.4
TRADING SECURITIES - - 2.2 - -
OTHER ASSETS 77.5 38.7 271.2 116.7 470.7
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS 5,833.5 3,288.0 3,219.0 1,275.5 552.7
=============================================================================================
LIABILITIES AND CAPITAL (1)
NON-INT BEARING DEMAND (3) 282.9 168.3 684.2 223.0 -
INT BEARING DEMAND (3) 346.8 272.1 840.5 354.8 -
SAVINGS (3) 98.7 98.7 460.4 164.4 -
TIME DEPOSITS 766.7 1,331.5 593.2 47.0 -
FOREIGN DEPOSITS 1,525.1 197.8 131.6 6.7 334.4
S/T BORROWINGS 2,128.2 918.7 49.9 0.0 -
LONG-TERM DEBT 40.0 154.9 286.0 220.7 -
OTHER LIABILITIES - - - - 359.3
CAPITAL - - - - 1,082.2
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL 5,188.4 3,142.0 3,045.8 1,016.6 1,775.9
=============================================================================================
INTEREST RATE SWAPS -536.0 196.3 339.7 - -
- ---------------------------------------------------------------------------------------------
INTEREST SENSITIVITY GAP 109.1 342.3 512.9 258.9 -1,223.2
- ---------------------------------------------------------------------------------------------
CUMULATIVE GAP 109.1 451.4 964.3 1,223.2 -
PERCENTAGE OF TOTAL ASSETS 0.77% 3.19% 6.81% 8.63% -
=============================================================================================
Assumptions used:
(1) Based on repricing date.
(2) Includes the effect of estimated amortization.
(3) Historical analysis shows that these deposit categories, while technically subject to immediate
withdrawal, actually display sensitivity
characteristics that generally fall within one and five years. The allocation presented is based on
that historic analysis.
</TABLE>
<PAGE>
Liquidity
The ability to meet day-to-day financial needs of Pacific
Century's customer base is essential. Much of the strategy of
meeting liquidity needs was described in Pacific Century's 1996
Annual Report and remains in place.
At June 30, 1997, deposits were $8.9 billion, compared to
$8.7 billion and $8.4 billion reported at year-end 1996 and June
30, 1996, respectively. The increase in deposits reflects the
acquisition of $254 million of Home Savings deposits acquired by
Pacific Century Bank, N.A. in Arizona. The acquisition, which
closed in the second quarter, increased Pacific Century Bank,
N.A. deposits to $460.5 million as of June 30, 1997. The
competition for deposits, not only by banks and savings and loan
companies, but also by securities brokerage firms continues to
impact the level of deposits. Repos which are offered to
government depositors as an alternative to deposits were $2.1
billion at June 30, 1997, compared to $1.7 billion on June 30,
1996, and $2.1 billion at year-end 1996.
Short term borrowings, including Fed Funds, were $0.95
billion at June 30, 1997, compared with $0.89 billion at year-end
1996 and $1.1 billion at June 30, 1996. Long term debt decreased
to $0.7 billion at June 30, 1997 from $0.9 billion at year-end
1996 and $1.1 billion at March 31, 1996. Long term debt
outstanding included $100 million of Capital Securities issued by
Pacific Century in Bancorp Hawaii Capital Trust I, a subsidiary
of Pacific Century in December 1996.
Non-Interest Income and Expense
Pacific Century utilizes the efficiency ratio to measure its
success in managing non-interest income and non-interest expense.
Pacific Century determines its efficiency ratio by dividing non-
interest expense by the sum of net interest income and non-
interest income (excluding securities transactions). For the
first half of 1997, Pacific Century's ratio was 64.7% compared
with 64.6% for all of 1996. The non-interest income and non-
interest expense components of the efficiency ratio are discussed
following.
<TABLE>
<CAPTION>
Non-Interest Income 3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended
(in millions) June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Income $12.8 $11.8 $26.1 $24.7
Service Charges on Deposits 6.5 6.8 13.2 12.8
Fees, Exchange and Other Service 17.5 14.0 32.2 26.5
Charges
Other Income 7.9 8.3 14.5 14.0
Securities Gain (Loss) 1.6 0.1 2.0 (0.1)
- ----------------------------------------------------------------------------------------------------
Total Non-Interest Income $46.3 $41.0 $88.0 $77.9
====================================================================================================
</TABLE>
Non-interest income for the second quarter was $46.3
million, a 12.9% increase from the same quarter in 1996. For the
year-to-date, non-interest income totaled $88.0 million, an
increase of 12.9% over the same period in 1996. The increases
between years are affected by the BDT and BNC acquisition which
occurred in May 1996 and the PNG acquisition which took place in
1997.
Trust income for the second quarter was $12.8 million,
compared with $11.8 million for the same quarter in 1996. This
7.9% increase is largely due to the increasing value of assets
under administration through new customer acquisitions and growth
in values of trust customer assets administered. At June 30,
1997, total assets under administration totaled $12.4 billion,
compared with $12.2 billion at year-end 1996.
Service charges on deposit accounts for the second quarter
totaled $6.5 million, a decrease from $6.8 million reported for
the same quarter of 1996. The decrease is largely due to the
lower level of analysis fees assessed on commercial deposit
accounts. On a year-to-date basis, service charges totaled $13.2
million, compared to $12.8 million for the same period in 1996.
This increase again reflects the impact of the acquisition on the
earnings between years.
Fees exchange and other service charges for the second
quarter were $17.5 million, bringing the year-to-date total to
$32.2 million. This increase of 21.2% reflects the growth in
fees from the acquisitions as much of the affiliate banks' fees
are recorded in this category.
Other operating income decreased 4.2% from the same quarter
last year to $7.9 million. The year-to-date income in this
category was $14.4 million, improving to $13.9 million compared
to the same period in 1996.
For the year to date, securities gains were $2.0 million,
compared with a $0.6 million loss for the same period in 1996.
<TABLE>
<CAPTION>
Non-Interest Expense 3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended
(in millions) June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries $40.1 $40.9 $81.5 $77.5
Pension and Other Benefits 12.4 12.1 27.5 25.5
Net Premises 11.2 8.7 21.6 19.4
Net Equipment 9.7 8.8 18.7 16.6
Other Expense 38.6 32.8 72.0 61.7
Minority Interest 0.4 0.5 0.7 0.7
- -------------------------------------------------------------------------------------------------------
$112.4 $103.8 $222.0 $201.4
=======================================================================================================
</TABLE>
Non-interest expense for the quarter was $112.4 million, an
increase of 8.3% from the same quarter last year and 2.4% from
the first quarter of 1997. The acquisition of BDT, BNC, and PNG
have impacted these comparisons due to the timing of the
acquisitions. For the year-to-date, non-interest expense was
$222.0 million, compared with $201.4 million at this time last
year. This is an increase of 10.3%, but expenses included only
two months of BDT and BNC expenses in the first six months of
1996.
Salary and benefit expense totaled $52.5 million for the
second quarter, compared with $52.9 million for the same quarter
of 1996 and $56.5 million for the first quarter of 1997. For the
year-to-date, salary and benefit expense increased to $109.0
million from $103.0 million for the same period in 1996. Again,
the increase is partly due to the acquisitions in May 1996.
Occupancy and equipment expense totaled $21.6 million and
$18.7 million for the first six months of 1997, respectively.
Compared to the same period in 1996, these would be increases of
10.9% and 12.9%, respectively. The growth of these expenses has
been driven by Pacific Century's continuing effort to improve
efficiency through technology.
The "Year 2000 Issue" continues to gain coverage by the
media. As the year 2000 approaches, application software
programs and operating systems will need to be updated. Based on
a preliminary study, Pacific Century expects to spend
approximately $25 to $30 million through 1998 to address this
issue. Pacific Century continues to evaluate alternative
solutions to assure that systems will transition smoothly in
2000. Alternatives being considered include the replacement of
systems (the cost of which would be capitalized and depreciated)
and the update of existing applications to assure they function
properly in the year 2000. The cost of the latter would be
expensed in the periods incurred. Pacific Century's technology
staff will undertake most of this effort with certain projects
handled by consultants.
Other operating expense for the second quarter of 1997
totaled $38.6 million, an increase of 17.5% from the same quarter
in 1996. Again, the comparison is affected by the acquisitions.
<PAGE>
PART II. - Other Information
Items 1, 2, 3 and 5 omitted pursuant to instructions.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) Pacific Century's Annual Shareholders' Meeting was held
on April 25, 1997.
(b) Omitted per instructions.
(c) A brief description of each matter voted upon at the
Annual Shareholders' Meeting held on April 25, 1997 and
number of votes cast for, against or withheld,
including a separate tabulation with respect to each
nominee for office is presented below:
(1) Election of four Class II directors for terms
expiring in 2000 and a successor to fill the
unexpired terms of one retiring Class I director,
whose term expires in 1999.
Class II director:
David A. Heenan -
Votes cast for: 34,729,296
Votes cast against: 0
Votes withheld: 740,382
Stuart T. K. Ho -
Votes cast for: 34,731,928
Votes cast against: 0
Votes withheld: 737,750
Lawrence M. Johnson -
Votes cast for: 34,726,740
Votes cast against: 0
Votes withheld: 742,938
Fred E. Trotter -
Votes cast for: 34,727,912
Votes cast against: 0
Votes withheld: 741,766
Class I director:
Donald M. Takaki -
Votes cast for: 34,724,460
Votes cast against: 0
Votes withheld: 745,218
(2) Election of Ernst & Young as Auditor.
Votes cast for: 35,225,276
Votes cast against: 156,419
Votes abstained: 87,983
(3) Proposal to approve an amendment to section 4.1 of
Bancorp Hawaii, Inc. Stock Option Plan of 1994 to
increase to 2,875,000 the number of shares of
common stock available for grant under the plan.
Votes cast for: 32,828,926
Votes cast against: 2,344,462
Votes abstained: 296,290
(4) Proposal to approve an amendment to the Restated
Articles of Incorporation to change the name of
Bancorp Hawaii, Inc. to Pacific Century Financial
Corporation.
Votes cast for: 32,954,363
Votes cast against: 2,174,228
Votes abstained: 341,087
(d) None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Number Description
2 Agreement and Plan of Reorganization,
dated as of February 24, 1997, between
Registrant and CU Bancorp (incorporated
by reference to Appendix A of the Proxy
Statement/Prospectus included in
Registrant's Registration Statement on
Form S-4, Amendment No. 1, filed May 6,
1997, Registration No. 333-24379)
3 Restated Articles of Incorporation
(incorporated by reference to Exhibit
3.1 of Registrant's Registration
Statement on Form S-4, filed April 2,
1997, Registration No. 333-24379)
11 Statement Regarding Computation of Per
Share Earnings
20 Quarterly Report to Shareholders
27 Financial Data Schedule
99 Statement of Ratios
(b) No Form 8-K was filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Date August 12, 1997 PACIFIC CENTURY FINANCIAL
CORPORATION
DAVID A. HOULE
(Signature)
David A. Houle
Executive Vice President,
Treasurer and Chief
Financial Officer
<PAGE>
<TABLE>
Pacific Century Financial Corporation
Exhibit 11 - Statement Regarding Computation of Per Share Earnings
Six Months Ended June 30
<CAPTION>
Fully
Primary Diluted
----------- -----------
<S> <C> <C>
1997
----
Net Income $71,087,000 $71,087,000
=========== ===========
Daily Average Shares Outstanding 39,558,745 39,558,745
Shares Assumed Issued for Stock Options 499,214 541,752
----------- -----------
40,057,959 40,100,497
=========== ===========
Earnings Per Common Share and
Common Share Equivalents $1.77 $1.77
=========== ===========
1996
----
Net Income $67,323,000 $67,323,000
=========== ===========
Daily Average Shares Outstanding 41,014,193 41,014,193
Shares Assumed Issued for Stock Options 397,073 401,426
----------- -----------
41,411,266 41,415,619
=========== ===========
Earnings Per Common Share and
Common Share Equivalents $1.63 $1.63
=========== ===========
</TABLE>
<PAGE>
To Our Shareholders:
This quarter's solid financial performance validates once
again the company's long-term growth and diversification
strategies. These strategies are now reflected in our name which
officially changed from Bancorp Hawaii, Inc., to Pacific Century
Financial Corporation (Pacific Century) following shareholder
approval at the April 25th Annual Meeting of Shareholders. Your
company's stock ticker symbol (NYSE:BOH) will remain the same as
will the name of its principal subsidiary, Bank of Hawaii.
Also, at the Annual Meeting, Donald M. Takaki was named to
the Pacific Century Board of Directors, succeeding K. Tim Yee who
reached mandatory retirement age. David A. Heenan, Stuart T.K.
Ho, Lawrence M. Johnson and Fred E. Trotter were re-elected to
the Pacific Century Board. Shareholders also approved an
amendment to increase the number of shares available under the
Stock Option Plan of 1994 and appointed Ernst & Young, LLP as
independent auditor for 1997.
In the first quarter of 1997, Bancorp posted earnings of
$35.5 million, an increase of 8.5 percent over last year's first
quarter. Earnings per share for the first three months of this
year were $0.88 compared to $0.79 for the corresponding period in
1996, an increase of 11.4 percent. Return on average assets was
1.02 percent and return on average equity was 13.40 percent.
Contributions from the company's South Pacific acquisitions
(Banque de Tahiti and Banque de Nouvelle Caledonie) and an
improved net interest margin were among the factors that
bolstered Pacific Century's first quarter results.
In February, Bancorp Hawaii announced a definitive agreement
to acquire California United Bank (CUB) through a merger with its
parent company, CU Bancorp. The acquisition, expected to close in
third quarter, is an important element of the company's strategy
of geographical diversification. In March, Pacific Century
completed the acquisition of four branches in Arizona from Home
Savings of America.
Also in March, Indosuez Niugini Bank, Limited in Papua New
Guinea became a part of the Pacific Century network. The bank,
now known as Bank of Hawaii (PNG), Limited, has total assets
equivalent to approximately US $93.0 million.
On April 25th, the Board of Directors declared a cash
dividend of 30 cents per share on the outstanding common stock
for the second quarter of 1997. The dividend is payable on June
13, 1997 to shareholders of record at the close of business on
May 22, 1997.
Pacific Century's growing and unique presence spanning
Hawaii, Asia, the West and South Pacific and the western US
Mainland enables us to participate in the economic activity
occurring throughout this dynamic region. We are confident that
each of our four markets holds revenue potential and growth
opportunities. We remain committed to enhancing the value of
your company, and we appreciate your continued confidence in our
stewardship of Pacific Century Financial Corporation.
Sincerely,
LAWRENCE M. JOHNSON
Lawrence M. Johnson
Chairman and CEO
<TABLE>
SELECTED FINANCIAL DATA PACIFIC CENTURY AND SUBSIDIARIES (in millions except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Earnings Highlights and Performance Ratios
Three months ended March 31
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income $128,639 $112,986
Provision for Possible Loan Losses $5,088 $4,424
Total Non-Interest Income $43,757 $37,477
Total Non-Interest Expense $109,665 $97,578
Net Income $35,481 $32,710
Earnings Per Common Share and Equivalents $0.88 $0.79
Cash Dividends Paid per Common Share $0.30 $0.28
Return on Average Assets 1.02% 1.03%
Return on Average Equity 13.40% 12.32%
Average Spread on Earning Assets 4.02% 3.81%
Statement of Condition Highlights and Performance Ratios March 31, 1997 March 31, 1996 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
Net Loans $8,400.9 $7,949.7 $8,347.9
Total Earning Assets $12,744.2 $11,854.5 $12,757.0
Total Assets $13,986.8 $12,905.1 $14,009.2
Total Deposits $11,108.1 $9,307.2 $8,684.1
Total Long-Term Debt $698.4 $1,142.1 $932.1
Total Shareholder's Equity $1,061.4 $1,046.7 $1,066.1
Reserve for Losses to Outstanding Loans 1.98% 1.88% 1.97%
Total Capital Ratio 12.97% 12.58% 12.96%
Leverage Ratio 7.90% 7.72% 7.98%
Book Value per Common Share $26.75 $25.65 $26.68
Corporate Offices:
Financial Plaza of the Pacific
130 Merchant Street
Honolulu, Hawaii 96813
Investor/Analyst Inquiries:
David A. Houle, EVP and Chief Financial Officer
(808) 537-8288
or
Sharlene K. Bliss
Investor Relations Officer
(808) 537-8037
or
Cori C. Weston
Corporate Secretary
(808) 537-8272
</TABLE>
<PAGE>
<TABLE>
Pacific Century Financial Corporation
Exhibit 99 - Statement Regarding Computation of Ratios
Six Months Ended June 30
<CAPTION>
(in millions of dollars) 1997 1996
<S> <C> <C>
Earnings:
1. Income Before Income Taxes $110.6 $102.2
2. Plus: Fixed Charges Including Interest on Deposits 259.0 243.0
3. Earnings Including Fixed Charges 369.6 345.2
4. Less: Interest on Deposits 157.5 133.4
5. Earnings Excluding Interest on Deposits $212.1 $211.8
Fixed Charges:
6. Fixed Charges Including Interest on Deposits $259.0 $243.0
7. Less: Interest on Deposits 157.5 133.4
8. Fixed Charges Excluding Interest on Deposits $101.5 $109.6
Ratio of Earnings to Fixed Charges:
Including Interest on Deposits (Line 3 divided by Line 6) 1.4 x 1.4 x
Excluding Interest on Deposits (Line 5 divided by Line 8) 2.1 x 1.9 x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENTS OF CONDITION AND CONSOLIDATED STATEMENTS
OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
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<LIABILITIES-OTHER> 359350
<LONG-TERM> 701633
0
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</TABLE>
