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 September 30, 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 October 29, 1999 -
80,243,020 shares
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION and subsidiaries
September 30, 1999
PART I. - Financial Information
Item 1. Financial Statements
<TABLE>
Consolidated Statements of Condition (Unaudited) Pacific Century Financial Corporation and subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
September 30 December 31 September 30
(in thousands of dollars) 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-Bearing Deposits $410,497 $453,527 $407,265
Investment Securities - Held to Maturity
(Market Value of $815,416, $668,068 and $792,205, respectively) 816,728 652,802 773,659
Investment Securities - Available for Sale 2,625,545 3,018,403 2,753,981
Securities Purchased Under Agreements to Resell 4,103 -- 40,000
Funds Sold 40,726 45,683 114,940
Loans 9,746,581 9,854,000 9,549,741
Unearned Income (213,798) (225,915) (207,346)
Reserve for Loan Losses (211,306) (211,276) (209,731)
- ------------------------------------------------------------------------------------------------------------------------------
Net Loans 9,321,477 9,416,809 9,132,664
- ------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 13,219,076 13,587,224 13,222,509
Cash and Non-Interest Bearing Deposits 417,142 564,243 541,217
Premises and Equipment 281,512 293,591 301,124
Customers' Acceptance Liability 10,797 8,227 6,244
Accrued Interest Receivable 77,915 85,485 88,581
Other Real Estate 5,874 5,648 10,853
Intangibles, including Goodwill 211,609 216,106 219,442
- ------------------------------------------------------------------------------------------------------------------------------
Other Assets 281,436 256,039 248,536
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $14,505,361 $15,016,563 $14,638,506
==============================================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $1,683,210 $1,745,747 $1,656,713
- Interest Bearing 2,059,662 2,385,285 2,292,272
Savings 712,968 740,378 740,679
Time 2,570,112 2,637,746 2,759,057
Foreign Deposits
Demand - Non-Interest Bearing 437,110 489,672 415,846
Time Due to Banks 679,344 685,137 718,210
Other Savings and Time 1,147,983 892,377 840,100
- ------------------------------------------------------------------------------------------------------------------------------
Total Deposits 9,290,389 9,576,342 9,422,877
Securities Sold Under Agreements to Repurchase 1,916,747 2,008,399 2,380,071
Funds Purchased 628,212 942,062 288,727
Short-Term Borrowings 335,416 356,822 363,461
Bank's Acceptances Outstanding 10,797 8,227 6,244
Accrued Retirement Expense 41,494 39,811 38,555
Accrued Interest Payable 60,138 55,694 70,311
Accrued Taxes Payable 90,380 114,443 137,209
Minority Interest 4,587 7,394 7,690
Other Liabilities 123,888 136,159 131,735
Long-Term Debt 794,814 585,616 624,619
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,296,862 13,830,969 13,471,499
Shareholders' Equity
Common Stock ($.01 par value), authorized 500,000,000 shares;
issued / outstanding; September 1999 - 80,550,124 / 80,308,130;
December 1998 - 80,512,372 / 80,325,998; September 1998 - 80,462,983 / 80,462,983 806 805 804
Capital Surplus 345,477 342,932 341,534
Accumulated Other Comprehensive Income (52,525) (22,476) (21,839)
Retained Earnings 919,664 867,852 846,508
Treasury Stock, at Cost - (September 1999 - 241,994 and December 1998 - 186,374 Shares) (4,923) (3,519) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,208,499 1,185,594 1,167,007
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,505,361 $15,016,563 $14,638,506
==============================================================================================================================
</TABLE>
<TABLE>
Consolidated Statements of Income (Unaudited) Pacific Century Financial Corporation and subsidiaries
<CAPTION>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
- ------------------------------------------------------------------------------------------------------------------------------
Sept 30 Sept 30 Sept 30 Sept 30
(in thousands of dollars except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest on Loans $173,414 $185,559 $521,050 $556,921
Loan Fees 8,792 12,482 30,090 35,060
Income on Lease Financing 7,035 5,938 21,751 18,429
Interest and Dividends on Investment Securities
Taxable 14,657 16,414 43,248 54,449
Non-taxable 268 221 820 823
Income on Investment Securities Available for Sale 42,808 43,068 126,508 127,106
Interest on Deposits 5,700 8,585 20,391 25,780
Interest on Security Resale Agreements 70 41 238 41
Interest on Funds Sold 223 1,001 4,374 2,963
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 252,967 273,309 768,470 821,572
Interest Expense
Interest on Deposits 63,916 77,590 193,703 232,390
Interest on Security Repurchase Agreements 21,812 31,405 70,621 94,348
Interest on Funds Purchased 9,975 4,968 31,486 18,688
Interest on Short-Term Borrowings 2,213 4,063 8,783 10,341
Interest on Long-Term Debt 11,598 10,785 32,180 32,737
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 109,514 128,811 336,773 388,504
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 143,453 144,498 431,697 433,068
Provision for Loan Losses 13,500 10,737 40,038 71,022
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 129,953 133,761 391,659 362,046
Non-Interest Income
Trust Income 14,670 13,730 44,653 41,561
Service Charges on Deposit Accounts 8,638 9,053 25,708 25,947
Fees, Exchange, and Other Service Charges 21,956 20,143 66,572 57,788
Other Operating Income 26,061 11,183 50,510 28,139
Investment Securities Gains 77 (493) 8,742 2,843
- ------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 71,402 53,616 196,185 156,278
Non-Interest Expense
Salaries 50,768 50,198 152,093 145,908
Pensions and Other Employee Benefits 13,437 14,544 43,387 42,176
Net Occupancy Expense 11,560 13,087 35,638 34,994
Net Equipment Expense 12,380 12,962 36,192 35,829
Other Operating Expense 44,889 45,314 132,389 130,616
Restructuring Charge 22,478 -- 22,478 19,400
Minority Interest 81 86 384 687
- ------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 155,593 136,191 422,561 409,610
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 45,762 51,186 165,283 108,714
Provision for Income Taxes 24,283 16,351 69,925 36,763
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $21,479 $34,835 $95,358 $71,951
==============================================================================================================================
Basic Earnings Per Share $0.27 $0.43 $1.19 $0.90
Diluted Earnings Per Share $0.27 $0.43 $1.18 $0.89
Dividends Declared Per Share $0.17 $0.1625 $0.51 $0.4875
Basic Weighted Average Shares 80,274,350 80,459,112 80,332,150 80,201,636
Diluted Weighted Average Shares 80,860,870 81,033,346 81,116,106 81,128,698
==============================================================================================================================
</TABLE>
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
Other
Common Capital Comprehensive Retained Treasury Comprehensive
(in thousands of dollars) Total Stock Surplus Income Earnings Stock Income
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $1,185,594 $805 $342,932 ($22,476) $867,852 ($3,519)
Comprehensive Income
Net Income 95,358 - - - 95,358 - $95,358
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment (28,231) - - (28,231) - - (28,231)
Foreign Currency Translation Adjustment (1,818) - - (1,818) - - (1,818)
--------------
Total Comprehensive Income $65,309
==============
Common Stock Issued
37,419 Profit Sharing Plan 736 - 3 - (70) 803
318,672 Stock Option Plan 5,843 - 2,265 - (2,288) 5,866
154,515 Dividend Reinvestment Plan 3,204 1 137 - (197) 3,263
6,595 Directors' Restricted Shares and
Deferred Compensation Plan 140 - 140 - - -
Treasury Stock Purchased (11,336) - - - - (11,336)
Cash Dividends Paid (40,991) - - - (40,991) -
- ---------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $1,208,499 $806 $345,477 ($52,525) $919,664 ($4,923)
=====================================================================================================================
Balance at December 31, 1997 $1,117,207 $159,369 $168,920 ($24,766) $813,684 $-
Comprehensive Income
Net Income 71,951 - - - 71,951 - $71,951
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment 4,479 - - 4,479 - - 4,479
Foreign Currency Translation Adjustment (1,552) - - (1,552) - - (1,552)
--------------
Total Comprehensive Income $74,878
==============
Common Stock Issued
148,307 Profit Sharing Plan 3,225 225 3,000 - - -
543,608 Stock Option Plan 8,943 530 8,413 - - -
207,415 Dividend Reinvestment Plan 4,431 199 4,232 - - -
5,100 Directors' Restricted Shares and
Deferred Compensation Plan (416) 1 (417) - - -
Stock Repurchased (2,134) (1) (2,133)
Change in par value of common stock from
$2.00 per share to $.01 per share - (159,519) 159,519 - - -
Cash Dividends Paid (39,127) - - - (39,127) -
- ---------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $1,167,007 $804 $341,534 ($21,839) $846,508 $-
=====================================================================================================================
</TABLE>
<TABLE>
Pacific Century Financial Corporation and subisidaries
Consolidated Statements of Cash Flows (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months ended September 30
(in thousands of dollars) 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net Income $95,358 $71,951
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, depreciation, and amortization of income and expense 46,428 71,649
Deferred income taxes (34,140) (16,479)
Realized and unrealized investment security gains (8,779) (3,562)
Other assets and liabilities, net (4,657) (10,078)
------------ ------------
Net cash provided by operating activities 94,210 113,481
- -----------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from redemptions of investment securities held to maturity 191,667 545,530
Purchases of investment securities held to maturity (355,592) (98,974)
Proceeds from sales of investment securities available for sale 1,184,289 1,822,875
Purchases of investment securities available for sale (829,680) (1,914,473)
Net decrease (increase) in interest-bearing deposits 49,530 (44,366)
Net decrease (increase) in funds sold 854 (74,483)
Net decrease in loans and lease financing 110,783 170,635
Premises and equipment, net (15,474) (29,167)
Purchase of Paribas Bank, net of cash and non-interest
bearning deposits acquired -- 6,327
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 332,919 383,904
- -----------------------------------------------------------------------------------------------------------------
Financing Activities
Net decrease in demand, savings, and time deposits (311,733) (455,761)
Proceeds from lines of credit and long-term debt 434,126 52,034
Principal payments on lines of credit and long-term debt (225,058) (134,247)
Net decrease in short-term borrowings (427,343) (186,896)
Net proceeds (payments) from sale (repurchase) of stock (1,413) 14,049
Cash dividends (40,991) (39,127)
------------ ------------
Net cash used by financing activities (572,412) (749,948)
Effect of exchange rate changes on cash (1,818) (1,552)
------------ ------------
Decrease in cash and non-interest bearing deposits (147,101) (254,115)
Cash and non-interest bearing deposits at beginning of year 564,243 795,332
------------ ------------
Cash and non-interest bearing deposits at end of period $417,142 $541,217
=================================================================================================================
</TABLE>
<PAGE>
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 nine
months ended September 30, 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 Hong Kong, Japan,
Singapore, South Korea, Taiwan, French Polynesia, Fiji, 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 Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (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.
In June 1999, the FASB issued SFAS No. 137 "Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 defers
the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. 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 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 resulting from the acquisition
of approximately $4 million is being amortized over 15 years on a
straight-line basis.
In August 1999, Pacific Century concluded the transaction to
increase its ownership by acquiring 5.8 million shares, or
approximately 10%, of the outstanding shares of the Bank of
Queensland in Australia. This transaction is in addition to a
1998 purchase of 5.4 million convertible notes of the Bank of
Queensland.
Note 4. Earnings Per Share
For the three and nine months ended September 30, 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 and nine months ended September 30,
1999 and 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 586,520 and
574,234 shares for the three months ended September 30, 1999 and
1998, respectively, and 783,956 and 927,062 for the first nine
months ended September 30, 1999 and 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 Statements of Income
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
Pacific Century recorded a restructuring charge of $22.5
million in the third quarter of 1999 in connection with a
redesign program to increase revenues and improve efficiencies.
The restructuring charge included direct and incremental costs
associated with this program and consisted of the recognition of
accruals of $6.1 million for staff reduction and $0.7 million for
occupancy and equipment. In addition, the restructuring charge
included period costs of $15.7 million that were directly related
to completing the project. Staffing costs consist of projected
employee severance payments. The occupancy and equipment portion
consists of estimated lease termination costs and losses on the
disposal of fixed assets. Project costs include costs relative
to the assessment phase of the redesign project of which $14.7
million was paid in September 1999.
In the second quarter of 1998, Pacific Century recognized a
$19.4 million restructuring charge in connection with its
strategic actions to improve efficiencies through consolidating
subsidiaries, closing branches, and outsourcing activities. The
restructuring charge included expected direct and incremental
costs associated with these actions 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. In the
third quarter of 1999 restructuring liabilities of $2.1 million
were transferred to the fixed assets category from the lease
obligations ($1.8 million) and other ($0.3 million) categories.
During the first nine months of 1999, amounts charged against the
restructuring accrual (including amounts set aside to settle
long-term lease obligations) totaled $9.5 million. An adjustment
of $134,000, netted against non-interest expense was made in
1999's third quarter to eliminate the restructuring accrual.
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 these business
segments are included in Pacific Century's 1998 Annual Report to
Shareholders on pages 93-95. There have been no significant
changes to Pacific Century's business segments since year-end
1998.
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 three and nine
months ended September 30, 1999 and 1998.
<TABLE>
Line of Business Selected Financial Information
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Treasury
U. S. and Other Consolidated
(in thousands of dollars) Hawaii Pacific Asia Mainland Corporate Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended September 30, 1999
Net Interest Income $72,396 $31,123 $10,127 $25,530 $4,277 $143,453
Economic Provision (1) (8,174) (3,579) (1,203) (2,639) 2,095 (13,500)
- -----------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 64,222 27,544 8,924 22,891 6,372 129,953
Non-Interest Income 29,365 8,870 4,995 17,450 10,722 71,402
- -----------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 93,587 36,414 13,919 40,341 17,094 201,355
Non-Interest Expense (2) 71,378 26,570 6,693 17,314 33,638 155,593
- -----------------------------------------------------------------------------------------------------
Net Income (Loss) Before Income Taxes 22,209 9,844 7,226 23,027 (16,544) 45,762
Income Taxes (3) (10,256) (4,420) (3,031) (13,676) 7,100 (24,283)
- -----------------------------------------------------------------------------------------------------
Net Income (Loss) 11,953 5,424 4,195 9,351 (9,444) 21,479
Capital Charge (13,589) (7,774) (3,058) (10,294) (10,464) (45,179)
- -----------------------------------------------------------------------------------------------------
Net Income (Loss) After Capital Charge($1,636) ($2,350) $1,137 ($943) ($19,908) ($23,700)
=====================================================================================================
Total Assets $5,051,881 $2,498,351 $1,337,413 $2,632,591 $2,985,125 $14,505,361
Three Months Ended September 30, 1998
Net Interest Income $73,435 $30,428 $9,335 $24,893 $6,407 $144,498
Economic Provision (1) (9,203) (2,123) (1,270) (2,834) 4,693 (10,737)
- -----------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 64,232 28,305 8,065 22,059 11,100 133,761
Non-Interest Income 30,217 10,993 4,038 2,602 5,766 53,616
- -----------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 94,449 39,298 12,103 24,661 16,866 187,377
Non-Interest Expense 73,592 29,602 6,842 20,935 5,220 136,191
- -----------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 20,857 9,696 5,261 3,726 11,646 51,186
Income Taxes (3) (9,126) (3,949) (2,061) 2,338 (3,553) (16,351)
- -----------------------------------------------------------------------------------------------------
Net Income 11,731 5,747 3,200 6,064 8,093 34,835
Capital Charge (14,346) (8,476) (3,950) (10,419) (6,581) (43,772)
- -----------------------------------------------------------------------------------------------------
Net Income (Loss) After Capital Charge (2,615) (2,729) (750) (4,355) 1,512 (8,937)
=====================================================================================================
Total Assets $5,204,899 $2,519,051 $1,001,921 $2,408,904 $3,503,732 $14,638,507
=====================================================================================================
(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) Non-interest expense for the Treasury and Other Corporate segment included a restructuring charge of
$22.5 million.
(3) Tax benefits are allocated to the business segment to which they relate. In the quarters ended
September 30, 1999 and 1998, income taxes for the U. S. Mainland segment included $4.0 million and $5.0
million, respectively, in tax benefits from low income housing tax credits and investment tax credits.
</TABLE>
<TABLE>
Line of Business Selected Financial Information
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Treasury
U. S. and Other Consolidated
(in thousands of dollars) Hawaii Pacific Asia Mainland Corporate Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1999
Net Interest Income $217,941 $90,916 $28,552 $77,495 $16,793 $431,697
Economic Provision (1) (25,038) (10,368) (3,599) (8,252) 7,219 (40,038)
- -----------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 192,903 80,548 24,953 69,243 24,012 391,659
Non-Interest Income 91,408 30,078 13,635 27,289 33,775 196,185
- -----------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 284,311 110,626 38,588 96,532 57,787 587,844
Non-Interest Expense (2) 215,280 80,933 19,852 52,042 54,454 422,561
- -----------------------------------------------------------------------------------------------------
Net Income Before Income Taxes 69,031 29,693 18,736 44,490 3,333 165,283
Income Taxes (3) (30,708) (12,856) (7,676) (16,043) (2,642) (69,925)
- -----------------------------------------------------------------------------------------------------
Net Income 38,323 16,837 11,060 28,447 691 95,358
Capital Charge (41,169) (23,329) (9,433) (31,316) (30,446) (135,693)
- -----------------------------------------------------------------------------------------------------
Net Income (Loss) After Capital Charge($2,846) ($6,492) $1,627 ($2,869) ($29,755) ($40,335)
=====================================================================================================
Total Assets $5,051,881 $2,498,351 $1,337,413 $2,632,591 $2,985,125 $14,505,361
=====================================================================================================
Nine Months Ended September 30, 1998
Net Interest Income $217,792 $88,536 $27,806 $75,267 $23,667 $433,068
Economic Provision (1) (27,477) (8,320) (3,801) (8,320) (23,104) (71,022)
- -----------------------------------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 190,315 80,216 24,005 66,947 563 362,046
Non-Interest Income 87,943 31,747 11,921 8,269 16,398 156,278
- -----------------------------------------------------------------------------------------------------
Total Risk-Adjusted Revenue 278,258 111,963 35,926 75,216 16,961 518,324
Non-Interest Expense (2) 214,696 82,867 19,060 56,412 36,575 409,610
- -----------------------------------------------------------------------------------------------------
Net Income (Loss) Before Income Taxes 63,562 29,096 16,866 18,804 (19,614) 108,714
Income Taxes (3) (27,037) (11,658) (6,546) 1,350 7,128 (36,763)
- -----------------------------------------------------------------------------------------------------
Net Income (Loss) 36,525 17,438 10,320 20,154 (12,486) 71,951
Capital Charge (42,247) (21,900) (10,860) (31,005) (23,706) (129,718)
- -----------------------------------------------------------------------------------------------------
Net Income (Loss) After Capital Charge (5,722) (4,462) (540) (10,851) (36,192) (57,767)
=====================================================================================================
Total Assets $5,204,899 $2,519,051 $1,001,921 $2,408,904 $3,503,731 $14,638,506
=====================================================================================================
(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) Non-interest expense for the Treasury and Other Corporate segment included a restructuring charge of
$22.5 million in 1999 and $19.4 million in 1998.
(3) Tax benefits are allocated to the business segment to which they relate. For the nine months ended
September 30, 1999 and 1998, income taxes for the U. S. Mainland segment included $10.3 million and
$10.5 million, respectively, in tax benefits from low income housing tax credits and investment tax
credits.
</TABLE>
<PAGE>
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 September 30, 1999
of $21.5 million, which reflects a pretax restructuring charge of
$22.5 million relative to a redesign program to enhance revenues
and improve efficiencies. When fully implemented in the fourth
quarter of 2000, the redesign is estimated to produce annualized
cost savings of $43 million and revenue enhancements of $21
million (Refer to "Forward-Looking Statements"). Comparatively,
earnings in the third quarter of 1998 were $34.8 million. Both
basic and diluted earnings per share in the third quarter of 1999
were $0.27, compared to $0.43 in the same 1998 quarter.
Earnings in the first nine months of 1999 totaled $95.4
million, a 32.5% increase from $72.0 million in the same year
earlier period. Basic earnings per share were $1.19 in the first
nine months of 1999, up from $0.90 in the comparable 1998 period.
Diluted earnings per share were $1.18 for the nine months ended
September 30, 1999, compared to $0.89 in the like year ago
period.
Year-over-year comparability in earnings is impacted by the
previously mentioned restructuring charge in 1999 and by special
charges in the second quarter of 1998, that included a pretax
restructuring charge of $19.4 million and a significant increase
in the provision for loan losses.
In the third quarter of 1999, return on average assets
(ROAA) and return on average equity (ROAE) were 0.59% and 7.01%,
respectively compared to 0.95% and 11.87% in the same 1998
quarter. Performance ratios for the nine months ended September
30, 1999 improved over 1998. ROAA and ROAE were 0.87% and 10.55%
in the first nine months of 1999, compared to 0.65% and 8.35%,
respectively, in the same year ago period. For the full year of
1998, ROAA was 0.72% and ROAE was 9.21%.
Pacific Century has accounted for all of its business
acquisitions under the purchase method, which has resulted in the
recognition 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 in the third quarter of 1999 were $25.9 million, down
from $39.0 million for the same quarter in 1998. Tangible
earnings for the nine months ended September 30, 1999 and 1998
were $107.4 million and $82.9 million, respectively. On a per
share basis, tangible diluted earnings per share were $0.32 and
$0.48 in the third quarter of 1999 and 1998, respectively, and
were $1.32 and $1.02 in the first nine months of 1999 and 1998,
respectively.
Third quarter tangible ROAA for Pacific Century was 0.73% in
1999 and 1.07% in the same 1998 quarter. Tangible ROAE was
10.25% and 14.78% for the similar quarters of 1999 and 1998,
respectively. In the first nine months of 1999 tangible ROAA and
ROAE were 0.99% and 14.45%, respectively, compared to 0.76% and
11.78%, respectively, in the same year ago period.
On a taxable equivalent basis, net interest income for the
three and nine months ended September 30, 1999 were $143.8
million and $432.4 million, compared to $144.6 million and $433.5
million in the same year ago periods. The lower 1999 net
interest income is attributed to a decrease in average earning
assets that was partially offset by a rise in net interest margin
between periods.
Total assets at September 30, 1999 stood at $14.5 billion
relative to $14.6 billion at September 30, 1998 and $15.0 billion
at December 31, 1998. The decline in total assets is the result
of managed reductions in less productive assets such as cash and
non-interest bearing deposits and short-term investments.
Average assets in the third quarter and first nine months of 1999
were down 0.9% and 1.3%, respectively, from the same year-earlier
periods.
Non-performing assets (NPAs), exclusive of accruing loans
past due 90 days or more, ended 1999's third quarter at $154.8
million, or 1.59% of total loans. Comparatively, NPAs were
$151.5 million, or 1.59% of total loans at September 30, 1998 and
$137.5 million, or 1.40% of total loans at year-end 1998.
The reserve for loan losses totaled $211.3 million at the
end of September 1999, representing 2.22% of loans outstanding,
compared to $209.7 million and 2.24%, respectively, on the same
date in 1998. Net charge-offs for the third quarter of 1999 were
$13.5 million, or 0.57% of average loans, compared to $12.7
million and 0.54%, respectively, in 1999's second quarter and
$10.2 million, or 0.43% in the third quarter of 1998. For the
first nine months of 1999 net charge-offs were $37.0 million,
down from $54.1 million in the like period last year. In the
current quarter, provisions for loan losses of $13.5 million were
charged to income, compared to $13.9 million for the quarter
ended June 30, 1999 and $10.7 million in the same quarter last
year. For the nine months ended September 30, 1999, loan loss
provisions were $40.0 million, down from $71.0 million in the
same year ago period. The higher 1998 loan loss provision
reflects a build up in reserves during the second quarter of 1998
to cover an increase in NPAs and net charge-offs.
<TABLE>
Performance Highlights
Table 1
- -------------------------------------------------------------------------
<CAPTION>
(in millions of dollars except per share amounts)
Percentage
Earnings Highlights and Performance Ratios 1999 1998 Change
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended September 30
Net Income $21.5 $34.8 -38.3%
Basic Earnings Per Share 0.27 0.43 -37.2%
Diluted Earnings Per Share 0.27 0.43 -37.2%
Cash Dividends 13.7 13.1
Return on Average Assets 0.59% 0.95%
Return on Average Equity 7.01% 11.87%
Average Spread on Earning Assets 4.28% 4.24%
Efficiency Ratio 72.44% 68.57%
Nine Months Ended September 30
Net Income $95.4 $72.0 32.5%
Basic Earnings Per Share 1.19 0.90 32.2%
Diluted Earnings Per Share 1.18 0.89 32.6%
Cash Dividends 41.0 39.1
Return on Average Assets 0.87% 0.65%
Return on Average Equity 10.55% 8.35%
Average Spread on Earning Assets 4.27% 4.25%
Efficiency Ratio 68.25% 69.84%
Summary of Results Excluding the Effect of Intangibles (a)
- -------------------------------------------------------------------------
Three Months Ended September 30
Tangible Net Income $25.9 $39.0 -33.6%
Tangible Basic Earnings per Share 0.32 0.48 -33.3%
Tangible Diluted Earnings per Shar 0.32 0.48 -33.3%
Tangible Return on Average Assets 0.73% 1.07%
Tangible Return on Average Equity 10.25% 14.78%
Tangible Efficiency Ratio 70.04% 66.18%
Nine Months Ended September 30
Tangible Net Income $107.4 $82.9 29.6%
Tangible Basic Earnings per Share 1.34 1.03 30.1%
Tangible Diluted Earnings per Shar 1.32 1.02 29.4%
Tangible Return on Average Assets 0.99% 0.76%
Tangible Return on Average Equity 14.45% 11.78%
Tangible Efficiency Ratio 66.03% 67.73%
- -------------------------------------------------------------------------
(a) 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, which are provided to assist in the understanding of
certain aspects of Pacific Century's anticipated future financial
performance. Pacific Century cautions readers not to place undue
reliance on any forward-looking statement. Forward-looking
statements are subject to significant risks and uncertainties,
many of which are beyond Pacific Century's control. Although
Pacific Century believes that the assumptions underlying its
forward-looking statements are reasonable, any assumptions could
prove to be inaccurate and actual results may differ from those
contained in 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.
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 and uncertainties of fully realizing the
anticipated cost savings and revenue enhancements associated with
Pacific Century's recently announced redesign program within the
expected timeframe.
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.
Its activities are conducted primarily through approximately 180
branches and representative and extension offices (including
branches of affiliate banks). Pacific Century provides 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 reports for Pacific Century's major
market segments for the three and nine months ended September 30,
1999 and 1998. Because market segment financial reports are
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's 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 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 September 30, 1999, the Hawaii segment
contributed $12.0 million in net income an increase from the
$11.7 million reported for the third quarter of 1998. RAROC for
this segment rose to 13% for the third quarter of 1999 from 12%
in the same quarter of 1998. Total assets in the Hawaii segment
declined to $5.1 billion at September 30, 1999 from $5.2 billion
at September 30, 1998 and $5.3 billion at year-end 1998.
For the nine months ended September 30, 1999, net income for
the Hawaii segment was up 4.9% to $38.3 million from $36.5
million in the same year-earlier period. RAROC rose to 14% in
the first nine months of 1999 from 13% in the comparable 1998
period.
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. Subsidiaries in the South Pacific are located in French
Polynesia, New Caledonia, Papua New Guinea and Vanuatu, and
affiliates are located in Samoa, Solomon Islands, and Tonga.
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 $5.4 million for the
quarter ended September 30, 1999 compared to $5.7 million in the
third quarter of 1998. RAROC, including the amortization of
intangibles for this segment, declined to 10% in the third
quarter of 1999 from 11% for the same quarter in 1998. Total
assets in the Pacific segment were $2.5 billion at the end of
September 1999, about level with same year ago date.
Comparatively total assets at year-end 1998 were $2.4 billion.
For the first nine months of 1999, net income for the
Pacific segment was $16.8 million, down from $17.4 million
reported in the same period last year. Year-to-date RAROC for
the Pacific segment decreased to 11% in 1999 from 12% for the
first nine months of 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 September 30, 1999, net income in the
Asia segment was $4.2 million, compared to $3.2 million for the
same quarter in 1998. RAROC for this segment was 21% in the
third quarter of 1999, compared to 13% for the same quarter in
1998. The improved 1999 results in Asia were driven by higher
net interest income and fee income. As of September 30, 1999,
September 30, 1998 and December 31, 1998, total assets in the
Asia segment were $1.3 billion, $1.0 billion and $1.0 billion,
respectively.
For the nine months ended September 30, 1999, net income for
the Asia segment was $11.1 million, compared to $10.3 million in
the comparable 1998 period. RAROC for the Asia segment was 18%
and 14% for the nine months ended September 30, 1999 and 1998,
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.
In the third quarter of 1999, the U.S. Mainland segment
contributed net income of $9.4 million, up from $6.1 million in
the same year ago quarter. Results for 1999 included a net gain
of $1.3 million from the sale of Arbella Leasing Corp., a special
purpose leasing subsidiary. Net income for the three months
ended September 30, 1999 and 1998, included tax benefits of $4.0
million and $5.0 million, respectively, from low income housing
tax credits and investment tax credits. RAROC, including the
amortization of intangibles for this segment was 14% in the third
quarter of 1999, improving from 9% for the same quarter in 1998.
As of September 30, 1999, September 30, 1998 and December 31,
1998, total assets in the U.S. Mainland segment were $2.6
billion, $2.4 billion and $2.6 billion, respectively.
For the first nine months of 1999, net income for the U.S.
Mainland segment was $28.4 million, a 41.1% increase over $20.2
million in the like 1998 period. Comparison between periods
reflect a pretax security gain of $6.5 million in 1999 relative
to the sale of newly issued equity securities acquired in
conjunction with leasing transactions. Included in net income
were tax benefits from low income housing tax credits and
investment tax credits of $10.3 million and $10.5 million for the
nine months ended September 30, 1999 and 1998, respectively.
RAROC for the U.S. Mainland segment was 14% and 10% in the first
nine months of 1999 and 1998, 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 a third
quarter 1999 net loss of $9.4 million, that included the $22.5
million restructuring charge, compared to net income of $8.1
million in the same quarter in 1998. At September 30, 1999,
September 30, 1998 and year-end 1998 this segment held assets of
$3.0 billion, $3.5 billion, and $3.7 billion, respectively.
For the nine months ended September 30, 1999, net income for
the Treasury and Other Corporate segment was $0.7 million,
compared to a net loss of $12.5 million in the same 1998 period.
Both the 1999 and 1998 periods were impacted by special charges.
As previously mentioned, 1999's results were affected by a
restructuring charge, while 1998 included a $19.4 million
restructuring charge and an increase in the consolidated
provision for loan losses that exceeded the economic provision.
STATEMENT OF INCOME ANALYSIS
Comparability between periods in the Consolidated Statements
of Income is impacted by the January 1999 acquisition of Triad
and the restructuring charges recognized in 1999 and 1998.
Net Interest Income
In the third quarter of 1999, net interest income on a
taxable equivalent basis was $143.8 million, slightly lower than
$144.6 million in the same year-earlier quarter. For the nine
months ended September 30, 1999, tax equivalent net interest
income was $432.4 million compared to the $433.5 million in the
first nine months of 1998. The decline in 1999's net interest
income reflected a year-over-year drop in average earning assets
of approximately $133 million and $193 million in the third
quarter and first nine months of 1999, respectively.
In the third quarter of 1999, the average net interest
margin on earning assets improved to 4.28% from 4.24% for the
same quarter in 1998 and edged up in the first nine months of
1999 to 4.27% from 4.25% in the comparable year ago period. The
improvement in net interest margin was driven by lower cost of
funds, which declined 60 basis points in the third quarter of
1999 to 4.06% from 4.66% in the same year earlier quarter. For
the first nine months of 1999, the cost of funds was 4.09%
reflecting a decrease of 54 basis points from 4.63% in the first
nine months of 1998. During these same periods, the yield on
earning assets also fell, but by a lesser extent. The year-over-
year decline in the yield on earning assets was 46 and 45 basis
points in 1999's September quarter and first nine months,
respectively. Presented in Table 2 are average balances, yields,
and rates paid for the three and nine months ended September 30,
1999 and 1998.
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
- --------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
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 $348.5 $5.7 6.49% $560.6 $8.6 6.08%
Investment Securities Held to Maturity
-Taxable 804.8 14.7 7.23 845.9 16.4 7.70
-Tax-Exempt 11.7 0.4 14.04 11.3 0.3 11.94
Investment Securities Available for 2,677.5 42.8 6.31 2,763.0 43.1 6.18
Funds Sold 38.9 0.5 5.57 71.2 1.1 5.80
Net Loans
-Domestic 7,692.0 154.6 7.98 7,638.2 164.7 8.56
-Foreign 1,729.7 25.8 5.92 1,643.6 26.7 6.45
Loan Fees 8.8 12.5
------------------------------ ------------------------------
Total Earning Assets 13,303.1 253.3 7.55 13,533.8 273.4 8.01
Cash and Due From Banks 425.2 595.8
Other Assets 655.2 387.1
------------ ------------
Total Assets $14,383.5 $14,516.7
============ ============
Interest Bearing Liabilities
Domestic Dep- Demand $2,128.8 12.3 2.30 $2,023.8 14.4 2.83
- Savings 720.5 3.7 2.03 763.2 4.6 2.39
- Time 2,492.7 29.4 4.68 2,682.2 35.6 5.26
------------------------------ ------------------------------
Total Domestic 5,342.0 45.4 3.37 5,469.2 54.6 3.96
Foreign Deposits
- Time Due to Banks 606.7 8.1 5.27 621.3 10.6 6.79
- Other Time and Savings 1,175.7 10.4 3.52 1,172.6 12.4 4.20
------------------------------ ------------------------------
Total Foreign 1,782.4 18.5 4.11 1,793.9 23.0 5.10
------------------------------ ------------------------------
Total Interest Bearing Deposits 7,124.4 63.9 3.56 7,263.1 77.6 4.24
Short-Term Borrowings 2,837.3 34.0 4.75 3,030.8 40.4 5.29
Long-Term Debt 732.3 11.6 6.28 672.5 10.8 6.36
------------------------------ ------------------------------
Total Interest Bearing Liabilitie 10,694.0 109.5 4.06 10,966.4 128.8 4.66
Net Interest Income 143.8 144.6
Interest Rate Spread 3.49% 3.35%
Net Interest Margin 4.28% 4.24%
Demand Deposit- Domestic 1,633.7 1,574.9
- Foreign 438.6 542.7
------------ ------------
Total Demand Deposits 2,072.3 2,117.6
Other Liabilities 401.2 268.5
Shareholders' Equity 1,216.0 1,164.2
------------ ------------
Total Liabilities and Shareholder $14,383.5 $14,516.7
============ ============
Provision for Loan Losses 13.5 10.7
Net Overhead 84.2 82.6
--------- ---------
Income Before Income Taxes 46.1 51.3
Provision for Income Taxes 24.3 16.4
Tax-Equivalent Adjustment 0.1 0.1
--------- ---------
Net Income $21.7 $34.8
========= =========
</TABLE>
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
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 $424.2 $20.4 6.43% $508.4 $25.8 6.78%
Investment Securities Held to Maturity
-Taxable 808.9 43.2 7.15 964.9 54.4 7.54
-Tax-Exempt 11.7 1.3 14.44 11.8 1.3 14.39
Investment Securities Available for 2,735.4 126.5 6.18 2,697.3 127.1 6.30
Funds Sold 125.2 4.9 5.20 91.1 3.0 4.41
Net Loans
-Domestic 7,721.9 461.6 7.99 7,650.3 487.4 8.52
-Foreign 1,706.8 81.2 6.36 1,728.4 87.9 6.80
Loan Fees 30.1 35.1
------------------------------ ------------------------------
Total Earning Assets 13,534.1 769.2 7.60 13,652.2 822.0 8.05
Cash and Due From Banks 475.6 591.8
Other Assets 648.5 606.9
------------ ------------
Total Assets $14,658.2 $14,850.9
============ ============
Interest Bearing Liabilities
Domestic Dep- Demand $2,146.0 36.4 2.27 $2,128.5 42.5 2.67
- Savings 728.0 11.0 2.03 793.7 14.5 2.44
- Time 2,534.0 90.9 4.80 2,774.8 110.9 5.34
------------------------------ ------------------------------
Total Domestic 5,408.0 138.3 3.42 5,697.0 167.9 3.94
Foreign Deposits
- Time Due to Banks 646.7 25.0 5.17 584.7 30.3 6.92
- Other Time and Savings 1,163.7 30.4 3.49 1,171.9 34.2 3.91
------------------------------ ------------------------------
Total Foreign 1,810.4 55.4 4.09 1,756.6 64.5 4.91
------------------------------ ------------------------------
Total Interest Bearing Deposits 7,218.4 193.7 3.59 7,453.6 232.4 4.17
Short-Term Borrowings 3,118.3 110.9 4.75 3,086.7 123.4 5.34
Long-Term Debt 665.2 32.2 6.47 689.0 32.7 6.35
------------------------------ ------------------------------
Total Interest Bearing Liabilitie 11,001.9 336.8 4.09 11,229.3 388.5 4.63
Net Interest Income 432.4 433.5
Interest Rate Spread 3.51% 3.42%
Net Interest Margin 4.27% 4.25%
Demand Deposit- Domestic 1,649.2 1,651.1
- Foreign 427.6 426.1
------------ ------------
Total Demand Deposits 2,076.8 2,077.2
Other Liabilities 370.8 392.0
Shareholders' Equity 1,208.7 1,152.4
------------ ------------
Total Liabilities and Shareholder $14,658.2 $14,850.9
============ ============
Provision for Loan Losses 40.0 71.0
Net Overhead 226.4 253.2
---------
Income Before Income Taxes 166.0 109.3
Provision for Income Taxes 69.9 36.8
Tax-Equivalent Adjustment 0.7 0.5
--------- ---------
Net Income $95.4 $72.0
========= =========
</TABLE>
Provision for Loan Losses
The provision for loan losses was $13.5 million in 1999's
third quarter, up from $10.7 million for the same quarter last
year. In the first nine months of 1999, the provision for loan
losses totaled $40.0 million, a $31.0 million decline from $71.0
million in the year earlier period. The lower 1999 year-to-date
provision reflects a decline in net loan charge-offs.
Additionally, the 1998 provision included a build up of reserves
to cover an increase in NPAs. For further information on credit
quality, refer to the section on "Corporate Risk Profile - Credit
Risk - Reserve for Loan Losses."
Non-Interest Income
Total non-interest income in the third quarter of 1999, was
$71.4 million, compared to $53.6 million for the same quarter in
1998, an increase of 33.2%. For the first nine months of 1999,
total non-interest income was $196.2 million, up 25.5% over the
same year-earlier period. The rise in non-interest income is
mostly accounted for by the sale of Arbella Leasing Corp., a
special purpose leasing subsidiary, that resulted in a one-time
gain of $14.0 million. The net impact of this sale resulted in
an increase in earnings of $1.3 million after providing for
income taxes of $12.7 million. Incremental non-interest income
attributed to the Triad acquisition was approximately $2.1
million in the third quarter of 1999 and $6.3 million in the
first nine months of 1999.
<TABLE>
Non-Interest Income
Table 3
<CAPTION>
3 Months Ended 3 Months Ended 9 Months Ended9 Months Ended
(in millions) Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999Sept. 30, 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Income $14.7 $13.7 $44.7 $41.6
Service Charges on Deposit Accounts 8.6 9.1 25.7 26.0
Fees, Exchange and Other Service
Charges 22.0 20.1 66.6 57.8
Other Operating Income 26.0 11.2 50.5 28.1
Investment Securities Gains 0.1 (0.5) 8.7 2.8
- ----------------------------------------------------------------------------------------------------
Total Non-Interest Income $71.4 $53.6 $196.2 $156.3
====================================================================================================
</TABLE>
Trust income for the third quarter of 1999 increased to
$14.7 million, up 6.8% from the same quarter last year. Year-to-
date trust income totaled $44.7 million, reflecting a 7.4%
increase over the first nine months of 1998. The year-over-year
rise in trust income is primarily attributed to increases in
investment management fees, agency fees, and trust fees. The
Pacific Capital family of mutual funds and Hawaiian Tax Free
Trust, which are managed by Pacific Century Trust, have continued
to experience growth.
Service charges on deposit accounts for the September 1999
quarter decreased to $8.6 million, from $9.1 million in the same
quarter last year. For the first nine months of 1999, service
charges from deposit accounts at $25.7 million were almost level
with the same year ago period.
Fees, exchange and other service charges increased to $22.0
million for the third quarter of 1999, from $20.1 million in the
same 1998 quarter. The year-to-date total for this category was
$66.6 million in 1999, an increase of $8.8 million, or 15.2%,
over the first nine months of 1998. Income generated from
international activities including letter of credit and
acceptance fees, profit on foreign currency, and exchange fees
totaled $17.0 million for the first nine months of 1999, up $2.7
million, or 19.3% over the same period in 1998.
Mortgage servicing fees increased to $6.5 million in the
first nine months of 1999, up 25.0% from $5.2 million for the
same period in 1998. This increase is due to the growth in
Pacific Century's mortgage servicing portfolio to $2.4 billion at
September 30, 1999 from $1.9 billion at September 30, 1998. The
growth in the servicing portfolio reflects Bank of Hawaii's
exceptionally high residential loan origination levels over the
last twelve months.
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 September 1999 comprised 495
machines, compared to 492 at year-end 1998. Fees generated by
this network totaled $11.4 million in the first nine months of
1999, up 47.2% from $7.8 million for the same period in 1998.
Other operating income in 1999's third quarter was $26.0
million, an increase of $14.8 million over the same quarter of
1998. Year-to-date other income increased 79.5% over the first
nine months of 1998. As mentioned earlier, the Arbella Leasing
sale contributed a one-time gain of $14 million to other
operating income in 1999. Additionally, the increase in year-to-
date other operating income also reflected insurance commissions
from the Triad acquisition.
Sales of investment securities during the nine months ended
September 30, 1999 resulted in net investment security gains of
$8.7 million, compared to $2.8 million in the comparable year
earlier period. Approximately $6.5 million of the 1999 gain
resulted from the sale of newly issued equity securities acquired
in conjunction with leasing transactions.
Non-Interest Expense
Total non-interest expense for the September 1999 quarter
was $155.6 million, compared to $136.2 million in the similar
quarter of 1998, an increase of $19.4 million. Year-to-date non-
interest expense was $422.6 million, up 3.2% from the first nine
months of 1998. Comparability between periods is affected by
restructuring charges of $22.5 million and $19.4 million, that
were recognized in the third quarter of 1999 and in the second
quarter of 1998, respectively. The 1999 restructuring charge is
related to a redesign program to increase revenues, reduce
expenses, and improve financial services and products.
The components of the 1999 restructuring charge consisted of
accruals of $6.1 million for staff reductions and $0.7 million
for occupancy and equipment plus period costs of $15.7 million
associated with the assessment phase of the redesign project. In
the third quarter of 1999, $14.7 million of the redesign project
costs were paid.
The 1998 restructuring charge was related to strategic
actions to improve efficiencies through consolidating
subsidiaries, closing branches and outsourcing subsidiaries and
consisted of $9.1 million for lease obligation termination costs,
$5.4 million for fixed assets disposal, $1.6 million for staff
reduction, and $3.3 million for data processing and other costs.
In the third quarter of 1999, restructuring liabilities of $1.8
million and $0.3 million from the lease obligation and other
costs categories, respectively, were transferred to the fixed
assets category. In the first nine months of 1999, $9.5 million
was charged against the restructuring accrual (including amounts
set aside to settle long-term lease obligations). An adjustment
of $134,000, netted against non-interest expense was made in
1999's third quarter to eliminate the residual restructuring
accrual.
Incremental non-interest expense attributed to the Triad
acquisition was approximately $1.7 million and $5.2 million for
the three and nine months ended September 30, 1999.
<TABLE>
Non-Interest Expense
Table 4
<CAPTION>
3 Months Ended 3 Months Ended 9 Months Ended9 Months Ended
(in millions) Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999Sept. 30, 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries $50.8 $50.2 $152.1 $145.9
Pension and Other Employee Benefits 13.4 14.5 43.4 42.2
Net Occupancy Expense 11.5 13.1 35.6 35.0
Net Equipment Expense 12.4 13.0 36.2 35.8
Other Operating Expense 44.9 45.3 132.4 130.6
Restructuring Charge 22.5 - 22.5 19.4
Minority Interest 0.1 0.1 0.4 0.7
- ----------------------------------------------------------------------------------------------------
Total Non-Interest Expense $155.6 $136.2 $422.6 $409.6
====================================================================================================
</TABLE>
Salaries and pension and other employee benefits expense
totaled $64.2 million in the third quarter of 1999 compared to
$64.7 million in the same quarter last year. For the first nine
months, total salaries and benefits rose 3.9% to $195.5 million
from $188.1 million in the same period last year. Approximately
$2.3 million of the year-to-date increase is attributed to the
Triad acquisition. The Year 2000 project also continues to
affect salaries and benefits for 1999.
Net occupancy and equipment expense in the September 1999
quarter declined to $23.9 million from $26.1 million for the same
period in 1998. For the first nine months of 1999, net occupancy
and equipment expense totaled $71.8 million, up 1.4% from $70.8
million in the similar period last year.
Other operating expense decreased to $44.9 million in the
third quarter of 1999, a 0.9% decline from $45.3 million for the
same quarter in 1998. Year-to-date other operating expense,
however, increased $1.8 million to $132.4 million from $130.6
million in the first nine months of 1998. Incremental other
operating expense attributed to the Triad acquisition was
approximately $2.5 million in the first nine months of 1999.
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 third quarter and first nine months of
1999, the efficiency ratio was 72.4% and 68.3%, respectively.
Comparatively, this ratio was 68.6% in the same quarter last year
and 69.8% in the first nine months of 1998. Comparison of the
efficiency ratio between periods is affected by the restructuring
charges and the sale of Arbella Leasing Corp.
BALANCE SHEET ANALYSIS
Loans
Loans comprise the largest category of earning assets for
Pacific Century and produce the highest level of earnings. At
September 30, 1999, loans outstanding were $9.7 billion, compared
to $9.9 billion at year-end 1998 and $9.5 billion at September
30, 1998.
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 as of September 30, 1999, December 31, 1998
and September 30, 1998.
<TABLE>
Loan Portfolio Balances
Table 5
- -------------------------------------------------------------------------------
<CAPTION>
September 30 December 31 September 30
(in millions of dollars) 1999 1998 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic Loans
Commercial and Industrial $2,491.5 $2,579.7 $2,375.1
Real Estate
Constructio-- Commercial 303.7 276.3 279.4
-- Residential 12.4 23.5 15.7
Mortgage --Commercial 1,264.5 1,139.1 1,237.1
-- Residential 2,584.0 2,699.4 2,618.6
Installment 743.9 763.0 795.3
Lease Financing 547.1 554.5 479.6
- -------------------------------------------------------------------------------
Total Domestic 7,947.1 8,035.5 7,800.8
- -------------------------------------------------------------------------------
Foreign Loans 1,799.5 1,818.5 1,748.9
- -------------------------------------------------------------------------------
Total Loans $9,746.6 $9,854.0 $9,549.7
===============================================================================
</TABLE>
Investment Securities
Pacific Century's investment portfolio is managed to provide
collateral for cash management needs, to meet strategic
asset/liability positioning, and to provide both interest income
and balance sheet liquidity. At September 30, 1999, available-
for-sale securities decreased to $2.6 billion from $2.8 billion a
year ago and $3.0 billion at year-end 1998. Securities held to
maturity were $817 million at September 30, 1999, up from $774
million a year ago and $653 million at year-end 1998.
Deposits
As of September 30, 1999, deposits totaled $9.3 billion,
down from $9.4 billion at September 30, 1998 and $9.6 billion at
year-end 1998. As of September 30, 1999, the mix of deposits has
changed with domestic deposits decreasing and foreign deposits
increasing. At $7.0 billion, domestic deposits at September 30,
1999 were $483 million lower than year-end 1998, while during
this same time foreign deposits increased $197 million. A lower
level of interest-bearing demand accounts accounted for most of
the decline in domestic deposits.
Table 6 presents average deposits by type for the third
quarters of 1999 and 1998 and the full year 1998.
<TABLE>
Average Deposits
Table 6
- ---------------------------------------------------------------------------------------
<CAPTION>
Quarter Ended Year Ended Quarter Ended
September 30, 1999 December 31, 1998 September 30, 1998
(in millions of dollars) Amount Mix Amount Mix Amount Mix
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Non-Interest Bearing Demand $1,633.7 17.8% $1,650.4 17.3% $1,574.9 16.8%
Interest-Bearing Demand 2,128.8 23.1 2,114.8 22.1 2,023.8 21.6
Regular Savings 720.5 7.8 783.9 8.2 763.2 8.1
Time Certificates
of Deposit
($100,000 or More) 1,024.1 11.1 1,028.2 10.8 1,085.2 11.6
All Other Time and
Savings Certificates 1,468.6 16.0 1,752.5 18.4 1,597.0 17.0
- ---------------------------------------------------------------------------------------
Total Domestic 6,975.7 75.8 7,329.8 76.8 7,044.1 75.1
- ---------------------------------------------------------------------------------------
Foreign
Non-Interest Bearing Demand 438.6 4.8 447.7 4.7 542.7 5.8
Time Due to Banks 606.7 6.6 596.1 6.2 621.3 6.6
Other Time and Savings 1,175.7 12.8 1,176.1 12.3 1,172.6 12.5
- ---------------------------------------------------------------------------------------
Total Foreign 2,221.0 24.2 2,219.9 23.2 2,336.6 24.9
- ---------------------------------------------------------------------------------------
Total $9,196.7 100.0% $9,549.7 100.0% $9,380.7 100.0%
=======================================================================================
</TABLE>
Borrowings
Short-term borrowings, including funds purchased and
securities sold under agreements to repurchase, totaled $2.9
billion at September 30, 1999, $3.3 billion at year-end 1998 and
$3.0 billion at September 30, 1998.
Long-term debt on September 30, 1999 increased to $795
million from $586 million at year-end 1998. This increase is
primarily attributed to $125 million in subordinated notes issued
by Bank of Hawaii in the first quarter of 1999. 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 Asia Market and the
Pacific Market, which is comprised of economies located in the
South and West Pacific.
Through its Asia 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. Table 7 presents as of September
30, 1999, December 31, 1998, and September 30, 1998 a geographic
distribution of Pacific Century's cross-border assets for each
country in which such assets exceeded 0.75% of total assets.
<TABLE>
Geographic Distribution of Cross-Border International Assets (1)
Table 7
<CAPTION>
(in millions)
Country September 30, 1999 December 31, 1998 September 30, 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan $282.1 $354.8 $354.9
South Korea 345.8 264.9 255.2
Taiwan 115.1 123.9 127.1
France 166.7 35.5 55.1
All Others 580.4 593.6 561.6
----------- ----------- -----------
$1,490.1 $1,372.7 $1,353.9
======= ======= =======
(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.
</TABLE>
Pacific Century's cross-border credit assets in Thailand and
Indonesia at September 30, 1999 were $13 million and $13 million,
respectively, compared to $20 million and $16 million,
respectively, at June 30, 1999 and $24 million and $17 million,
respectively at December 31, 1998.
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 $154.8 million at September 30, 1999 from $151.5
million a year ago and $137.5 million at the end of 1998.
Compared with the prior two quarter-ends, NPAs ended the current
quarter at $5.4 million above June 30, 1999 and $8.5 million
below March 31, 1999.
At September 30, 1999, the ratio of NPAs to outstanding
loans was 1.59%. Comparatively the ratio was 1.40% at year-end
1998 and 1.59% at September 30, 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 $148.9 million at September
30, 1999, up from $131.9 million and $140.6 million at year-end
1998 and September 30, 1998, respectively. Higher non-accrual
balances in the commercial real estate, commercial and industrial
loan, and lease categories accounted for most of the increase
relative to year-end 1998 and September 1998. Foreign non-
accrual loans at September 30, 1999 declined $1.8 million from
year-end 1998 and $12.2 million from the same date last year.
Non-performing residential mortgages (excluding construction
loans) totaled $33.1 million at September 30, 1999, compared to
$36.4 million at year-end 1998 and $35.9 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 $5.9 million at September 30,
1999 compared to $5.6 million at year-end 1998 and $10.9 million
a year ago. At September 30, 1999, the foreclosed real estate
portfolio consisted of properties located mostly in Hawaii.
Accruing loans past due 90 days or more have remained
relatively constant since year-end 1998 totaling $21.6 million at
September 30, 1999 and $20.8 million at year-end 1998. Compared
to September 30, 1998 accruing loans past due 90 days or more
declined $5.7 million.
Potential Problem Loans
Pacific Century is currently involved in ongoing discussions
with a Korean group of related borrowers who are experiencing
financial difficulties. As of September 30, 1999, Pacific
Century's aggregate credit exposure to this group totaled
approximately $34 million. Although these credits were on an
accrual status at the end of the third quarter, it is difficult,
at this time, to predict the ultimate outcome of the discussions
and any resulting impact to Pacific Century.
<TABLE>
Non-Performing Assets and Accruing Loans Past Due 90 Days or More
Table 8
- ----------------------------------------------------------------------------------
<CAPTION>
September 30 December 31 September 30
(in millions of dollars) 1999 1998 1998
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Accrual Loans
Commercial and Industrial $31.7 $28.2 $24.0
Real Estate
Construction 2.1 2.9 4.4
Commercial 20.8 5.4 6.7
Residential 33.1 36.4 35.9
Installment 0.7 0.8 0.9
Leases 4.8 0.7 0.8
Foreign 55.7 57.5 67.9
-----------------------------------------
Subtotal 148.9 131.9 140.6
Foreclosed Real Estate
Domestic 5.6 5.5 10.8
Foreign 0.3 0.1 0.1
-----------------------------------------
Subtotal 5.9 5.6 10.9
-----------------------------------------
Total Non-Performing Assets 154.8 137.5 151.5
-----------------------------------------
Accruing Loans Past Due 90 Days or More
Commercial and Industrial 6.2 0.4 7.3
Real Estate
Construction 0.5 0.4 0.6
Commercial 2.4 0.0 0.8
Residential 2.8 4.5 4.8
Installment 4.5 7.3 6.6
Leases 0.2 0.3 0.1
Foreign 5.0 7.9 7.1
-----------------------------------------
Subtotal 21.6 20.8 27.3
-----------------------------------------
Total $176.4 $158.3 $178.8
=========================================
- ----------------------------------------------------------------------------------
Ratio of Non-Performing Assets
to Total Loans 1.59% 1.40% 1.59%
- ----------------------------------------------------------------------------------
Ratio of Non-Performing Assets
and Accruing Loans Past Due
90 Days or More to Total Loans 1.81% 1.61% 1.87%
- ----------------------------------------------------------------------------------
</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.
Reserve for loan losses ended the third quarter of 1999 at
$211.3 million, level with year-end 1998 and $1.6 million above
the same date last year. Net charge-offs for the third quarter
of 1999 were $13.5 million or 0.57% of average loans, compared to
$10.2 million, or 0.43% of average loans for the same quarter
last year. For the nine months ended September 30, 1999, net
charge-offs were $37.0 million, or 0.52% of average loans,
compared to $54.1 million and 0.77%, respectively, in same 1998
period. The ratio of reserves to loans outstanding at September
30, 1999 was 2.22%, compared to 2.24% 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 September 30, 1999, the reserve for loan losses provided
coverage of 136% of non-performing loans, compared to 154%
coverage at year-end 1998 and 138% at September 30, 1998.
Additionally, the annualized ratio of reserves to gross charge-
offs was 2.6 times for the first nine months of 1999, compared to
2.6 times for all of 1998 and 2.5 times for the first nine months
of 1998.
For the nine months ended September 30, 1999, recoveries
totaled $23.7 million partially driven by a $7.0 million recovery
of a U.S. mainland loan in the commercial and industrial
portfolio and $4.0 million in foreign loan recoveries.
Comparatively, recoveries were $8.9 million in the first nine
months of 1998 and $16.3 million for all of 1998.
<TABLE>
Reserve for Loan Losses
Table 9
- ------------------------------------------------------------------------------------------
<CAPTION>
Third Third First Nine First Nine
Quarter Quarter Months Months
(in millions of dollars) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Amount of Loans Outstanding $9,421.7 $9,499.6 $9,428.7 $9,378.7
- ------------------------------------------------------------------------------------------
Balance of Reserve for Loan Losses
at Beginning of Period $209.6 $204.0 $211.3 $174.4
Loans Charged-Off
Commercial and Industrial 0.3 4.3 15.7 13.8
Real Estate
Construction -- -- 0.2 --
Commercial 0.1 0.3 2.3 0.5
Residential 2.0 0.8 5.6 1.6
Installment 6.2 6.9 19.1 20.1
Foreign 11.8 0.6 17.6 26.8
Leases 0.1 -- 0.2 0.2
- ------------------------------------------------------------------------------------------
Total Charged-Off 20.5 12.9 60.7 63.0
Recoveries on Loans Previously Charged-Off
Commercial and Industrial 3.4 0.6 12.9 2.2
Real Estate
Commercial 0.8 0.2 1.0 1.2
Residential -- -- 0.2 0.2
Installment 2.0 1.8 5.6 4.8
Foreign 0.8 0.1 4.0 0.5
- ------------------------------------------------------------------------------------------
Total Recoveries 7.0 2.7 23.7 8.9
- ------------------------------------------------------------------------------------------
Net Charge-Offs (13.5) (10.2) (37.0) (54.1)
Provision Charged to Operating Expenses 13.5 10.7 40.0 71.0
Other Net Additions (Reductions)* 1.7 5.2 (3.0) 18.4
- ------------------------------------------------------------------------------------------
Balance at End of Period $211.3 $209.7 $211.3 $209.7
==========================================================================================
Ratio of Net Charge-Offs to
Average Loans Outstanding (annualized) 0.57% 0.43% 0.52% 0.77%
- ------------------------------------------------------------------------------------------
Ratio of Reserve to Loans Outstanding 2.22% 2.24% 2.22% 2.24%
- ------------------------------------------------------------------------------------------
* Includes balance transfers, reserves acquired, and foreign currency translation adjustments.
</TABLE>
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, which management believes 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 September 30, 1999, December 31,
1998 and September 30, 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.
<PAGE>
<TABLE>
Market Risk Exposure to Interest Rate Changes
Table 10
<CAPTION>
September 30, 1999 December 31, 1998September 30, 1998
- ----------------------------------------------------------------------------------------------------
Interest Rate ChangeInterest Rate ChangeInterest Rate Change
(in basis points) (in basis points) (in basis points)
-200 +200 -200 +200 -200 +200
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Estimated Exposure as a
Percent of Net Interest Income 0.8% (1.3)% 1.9% (2.1)% 1.6% (1.1)%
- ----------------------------------------------------------------------------------------------------
</TABLE>
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 euro and a
foreign exchange currency hedge transaction. As of September 30,
1999, the remainder of these capital positions which aggregated
$92.7 million, was not hedged. The comparative unhedged 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 September 30, 1999, December 31,
1998 and September 30, 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.
<PAGE>
<TABLE>
Market Risk Exposure From Changes in Foreign Exchange Rates
Table 11
- ----------------------------------------------------------------------------------------------------
<CAPTION>
September 30, 1999 December 31, 1998 September 30, 1998
Book Value Value-at-Risk Book Value Value-at-Risk Book Value Value-at-Risk
(in millions of dollars)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Investments in Foreign
Subsidiaries and Branches
Japanese Yen $ 8.2 $ 1.9 $ 9.6 $ 2.7 $11.8 $ 3.4
Korean Won 40.5 3.7 44.2 7.9 36.3 9.1
Pacific Franc (1) 25.3 4.6 22.8 3.6 27.8 4.3
Other Currencies 18.7 17.1 16.4 15.3 13.4 18.5
------- ------- ------- ------- --------- -------
Total $92.7 $27.3 $93.0 $29.5 $89.3 $35.3
===== ===== ==== ==== ===== ====
(1) Net of a $42 million, $46 million and $46 million borrowing at September 30, 1999, December 31, 1998 and
September 30, 1998, respectively, denominated in euro and foreign exchange hedge transactions of $24
million, $26 million and $23 million at September 30, 1999, December 31, 1998 and September 30, 1998.
</TABLE>
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 September 30, 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.
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 third 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 ended the third quarter of
1999 at $312 million, compared to $173 million at the prior
quarter-end. The increase is accounted for by $150 million in
new borrowings in the third quarter for terms of six and eighteen
months.
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
September 30, 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 September 30, 1999, Pacific Century's shareholders'
equity grew to $1.2 billion, an increase of 3.5% over the same
date in 1998. The source of growth in shareholders' equity during
the first nine months of 1999 included retention of earnings, and
issuance of common stock under various stock-based plans.
Offsetting these increases were cash dividends paid of $41.0
million, net treasury stock purchases of $11.3 million and
unrealized valuation adjustments of $30.0 million. The negative
unrealized valuation adjustment primarily is attributed to a
decline in the market value of available-for-sale investment
securities due to a rise in interest rates. Comparatively,
shareholders' equity at September 30, 1999 was about equivalent
with the prior quarter-end.
Pacific Century's regulatory capital ratios at September 30,
1999 were: Tier 1 Capital Ratio of 10.00%, Total Capital Ratio of
12.93%, and Leverage Ratio of 8.15%. Comparatively these ratios
were 9.65%, 11.74% and 7.32%, respectively, at September 30,
1998. 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.
<TABLE>
Equity Capital
Table 12
- -------------------------------------------------------------------------------
<CAPTION>
Quarter Ended Year Ended Quarter Ended
September 30 December 31 September 30
(in millions of dollars) 1999 1998 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Source of Common Equity
Net Income $21.5 $107.0 $34.8
Dividends Paid (13.7) (52.8) (13.1)
Dividend Reinvestment Program 0.9 5.4 1.2
Stock Repurchases (2.4) (7.3) (2.1)
Other (1) (12.0) 16.1 5.7
- -------------------------------------------------------------------------------
Increase in Equity ($5.7) $68.4 $26.5
===============================================================================
Common Equity $1,208.5 $1,185.6 $1,167.0
Add: 8.25% Capital Securities of
Bancorp Hawaii Capital
Trust I 100.0 100.0 100.0
Minority Interest 4.6 7.4 7.7
Less: Intangibles 180.1 186.2 190.3
Unrealized Valuation and Other
Adjustments (24.3) 3.6 10.3
- -------------------------------------------------------------------------------
Tier I Capital 1,157.3 1,103.2 1,074.1
Allowable Loan Loss Reserve 145.4 147.2 140.1
Subordinated Debt 195.8 95.0 95.0
Investment in Unconsolidated
Subsidiary (2.7) (2.5) (2.1)
- -------------------------------------------------------------------------------
Total Capital $1,495.8 $1,342.9 $1,307.1
===============================================================================
Risk Weighted Assets $11,569.6 $11,708.5 $11,135.2
===============================================================================
Key Ratios
Tier I Capital Ratio 10.00% 9.42% 9.65%
Total Capital Ratio 12.93% 11.47% 11.74%
Leverage Ratio 8.15% 7.48% 7.32%
===============================================================================
(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: awareness, assessment, renovation, validation
testing and implementation. Pacific Century has completed all
five phases of its Year 2000 plan for critical systems.
Additionally, Pacific Century has completed development of Year
2000 contingency plans for all critical functions. During the
remainder of 1999, Pacific Century will continue to test and
validate those plans and refine them as necessary and will focus
on monitoring the readiness of third parties that it relies on to
conduct business and serve customers.
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 has developed 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.
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 nine months of 1999, additional
expenditures aggregating $9.1 million were incurred, bringing the
total Project 2000 cost to $34.5 million at September 30, 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."
<PAGE>
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
20 Quarterly Report to Shareholders
27 Financial Data Schedule
99 Statement of Ratios
(b) On September 16, 1999, Pacific Century Financial
Corporation filed a Form 8-K regarding the redesign
program.
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 November 15, 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
To Our Shareholders:
This quarter's earnings were among the highest in the
history of Pacific Century Financial Corporation. Your company
reported strong net income of $38.5 million for 1999's second
quarter, up from $3.1 million for 1998's second quarter. Diluted
earnings per share were $0.47, up from $0.04 for the same period
last year. Year-over-year comparisons reflect the $19.4 million
restructuring charge and extra provisioning to the reserve for
loan losses incurred in the second quarter of 1998.
Tangible or "cash" earnings for the quarter were $42.3
million compared to $7.4 million reported for the similar period
last year. On a per share basis, tangible diluted earnings were
$0.52, up from $0.09 in 1998's second quarter.
These results reflect our continuing efforts to make the
balance sheet more efficient, control non-interest expense and
improve asset quality.
For the first six months of 1999, return on average assets
grew to 1.01 percent, up from 0.50 percent in 1998's first half
year. Return on average equity was 12.36 percent, compared with
6.53 percent reported in last year's like period.
We are pleased to note that Asia's economic recovery is
shaping up to be stronger and faster than expected. We also see
compelling evidence of gradually accelerating economic recovery
in Hawaii. The consensus economic forecast calls for 2 percent
real economic growth for the state through 1999 and into 2000.
In June, Bank of Hawaii agreed to boost its ownership in the
Bank of Queensland by acquiring 5.8 million shares, or
approximately 10 percent, of that bank's outstanding common
stock. This will bring our ownership stake in the Bank of
Queensland to approximately 17 percent. The transaction is
expected to close in the third quarter of this year, pending
regulatory approval, and will strengthen and enhance the
strategic alliance between the two banks that began in 1997.
Your company met the final major regulatory milestone for
Year 2000 readiness last month. By June 30, 1999, all of our
critical computer systems had been successfully tested to handle
the year 2000 change in date, and the Y2K contingency plans were
in place. During the remainder of 1999, we will focus on
validating our year 2000 contingency plans and monitoring the
readiness of third parties we rely on to serve our customers.
Pacific Century's Board of Directors has declared a
quarterly cash dividend of 17 cents per share on its outstanding
common shares. The dividend will be payable on September 15, 1999
to shareholders of record at the close of business on August 24,
1999.
The value of your holdings in Pacific Century remains our
utmost priority, and we appreciate your confidence in our ability
to guide your company into the 21st century.
Sincerely,
/s/ LAWRENCE M. JOHNSON
Lawrence M. Johnson
Chairman and CEO
Corporate Offices:
Financial Plaza of the Pacific
130 Merchant Street
Honolulu, HI 96813
Investor or Analyst Inquiries:
David A. Houle
Executive Vice President, Treasurer and Chief Financial Officer
(808) 537-8288
or
Sharlene K. Bliss
Investor Relations
(808) 537-8037
or
Cori C. Weston
Corporate Secretary
(808) 537-8272
<TABLE>
Highlights (Unaudited) Pacific Century Financial Corporation and subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
June 30 June 30
1999 1998
<S> <C> <C> <C>
Return on Average Assets 1.01% 0.50%
Return on Average Equity 12.36% 6.53%
Average Spread on Earning Assets 4.26% 4.25%
Average Equity/Average Assets 8.14% 7.63%
Book Value Per Common Share $15.12 $14.19
Loss Reserve/Loans and Leases Outstanding 2.23% 2.20%
Common Stock Price Range High Low Dividend
1998................................ $25.88 $14.75 $0.6575
1999 First Quarter.................. $24.94 $19.94 $0.17
Second Quarter............ $23.25 $19.81 $0.17
</TABLE>
<TABLE>
Consolidated Statements of Income (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
<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) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Interest Income $255,037 $278,934 $515,503 $548,263
Total Interest Expense 110,637 132,082 227,259 259,693
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 144,400 146,852 288,244 288,570
Provision for Possible Loan Losses 13,948 41,982 26,538 60,285
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 130,452 104,870 261,706 228,285
Total Non-Interest Income 63,613 49,798 124,783 102,662
Total Non-Interest Expense 132,128 151,716 266,968 273,419
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 61,937 2,952 119,521 57,528
Provision for Income Taxes 23,475 (144) 45,642 20,412
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $38,462 $3,096 $73,879 $37,116
==============================================================================================================================
Basic Earnings Per Share $0.48 $0.04 $0.92 $0.47
Diluted Earnings Per Share $0.47 $0.04 $0.91 $0.46
Basic Weighted Average Shares 80,302,154 80,258,217 80,361,529 80,070,764
Diluted Weighted Average Shares 81,121,840 81,416,341 81,263,475 81,170,893
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Consolidated Statements of Condition (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
June 30 December 31 June 30
(in thousands of dollars) 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-Bearing Deposits $411,239 $453,527 $542,966
Investment Securities
(Market Value of $3,547,199, $3,686,471, and $3,728,525, respectively) 3,550,115 3,671,205 3,713,420
Securities Purchased Under Agreements to Resell 4,325 -- --
Funds Sold 34,995 45,683 31,715
Loans 9,610,980 9,854,000 9,464,901
Unearned Income (219,717) (225,915) (207,742)
Reserve for Loan Losses (209,573) (211,276) (204,049)
Net Loans 9,181,690 9,416,809 9,053,110
- ------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 13,182,364 13,587,224 13,341,211
Cash and Non-Interest Bearing Deposits 493,483 564,243 575,553
Premises and Equipment 288,955 293,591 297,392
Other Assets 586,656 571,505 516,954
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $14,551,458 $15,016,563 $14,731,110
==============================================================================================================================
Liabilities
Deposits $9,286,155 $9,576,342 $9,505,968
Securities Sold Under Agreements to Repurchase 1,990,178 2,008,399 2,313,784
Funds Purchased 715,398 942,062 366,066
Short-Term Borrowings 353,177 356,822 379,129
Other Liabilities 337,489 361,728 360,583
Long-Term Debt 654,847 585,616 665,106
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,337,244 13,830,969 13,590,636
Shareholders' Equity
Common Stock ($.01 par value), authorized 500,000,000 shares;
issued / outstanding; June 1999 - 80,544,104 / 80,287,805;
December 1998 - 80,512,372 / 80,325,998;
June 1998 - 80,385,041 / 80,385,041 805 805 804
Capital Surplus 345,468 342,932 340,872
Accumulated Other Comprehensive Income (39,245) (22,476) (25,958)
Retained Earnings 912,686 867,852 824,756
Treasury Stock, at Cost - (June 1999 - 256,299 and
December 1998 - 186,374 Shares) (5,500) (3,519) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,214,214 1,185,594 1,140,474
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,551,458 $15,016,563 $14,731,110
==============================================================================================================================
</TABLE>
<TABLE>
Bank of Hawaii
Exhibit 99 - Statement Regarding Computation of Ratios
Nine Months Ended September 30
<CAPTION>
(in millions of dollars) 1999 1998
<S> <C> <C>
Earnings:
1. Income Before Income Taxes $165.3 $108.7
2. Plus: Fixed Charges Including Interest on Deposits 337.4 393.3
------- -------
3. Earnings Including Fixed Charges 502.7 502.0
4. Less: Interest on Deposits 193.7 232.4
------- -------
5. Earnings Excluding Interest on Deposits $309.0 $269.6
======= =======
Fixed Charges:
6. Fixed Charges Including Interest on Deposits $337.4 $393.3
7. Less: Interest on Deposits 193.7 232.4
------- -------
8. Fixed Charges Excluding Interest on Deposits $143.7 $160.9
======= =======
Ratio of Earnings to Fixed Charges:
Including Interest on Deposits (Line 3 divided by Line 6) 1.5 x 1.3 x
Excluding Interest on Deposits (Line 5 divided by Line 8) 2.2 x 1.7 x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENTS OF CONDIITON AND CONSOLIDATED STATEMENTS
OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 417142
<INT-BEARING-DEPOSITS> 410497
<FED-FUNDS-SOLD> 40726
<TRADING-ASSETS> 2935
<INVESTMENTS-HELD-FOR-SALE> 2625545
<INVESTMENTS-CARRYING> 816728
<INVESTMENTS-MARKET> 815416
<LOANS> 9746581
<ALLOWANCE> 211306
<TOTAL-ASSETS> 14505361
<DEPOSITS> 9290389
<SHORT-TERM> 2880375
<LIABILITIES-OTHER> 331284
<LONG-TERM> 794814
0
0
<COMMON> 806
<OTHER-SE> 1207693
<TOTAL-LIABILITIES-AND-EQUITY> 14505361
<INTEREST-LOAN> 572891
<INTEREST-INVEST> 170576
<INTEREST-OTHER> 25003
<INTEREST-TOTAL> 768470
<INTEREST-DEPOSIT> 193703
<INTEREST-EXPENSE> 336773
<INTEREST-INCOME-NET> 431697
<LOAN-LOSSES> 40038
<SECURITIES-GAINS> 8742
<EXPENSE-OTHER> 422561
<INCOME-PRETAX> 165283
<INCOME-PRE-EXTRAORDINARY> 95358
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95358
<EPS-BASIC> 1.19
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 4.27
<LOANS-NON> 148948
<LOANS-PAST> 21624
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 211276
<CHARGE-OFFS> 60675
<RECOVERIES> 23750
<ALLOWANCE-CLOSE> 211306
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
