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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-6887
PACIFIC CENTURY FINANCIAL CORPORATION
(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 (Zip Code)
offices)
(808) 643-3888
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
<S> <C>
Common Stock, $.01 Par New York Stock Exchange
Value
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.[_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of said stock on the New York Stock
Exchange on December 31, 1998 ($24.38 per share): $1,958,347,831
As of February 23, 1999, 80,530,016 shares of Common Stock, $.01 par value,
of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 23, 1999, are incorporated by reference into
Part III of this Report.
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Part I
Item 1. Business
Pacific Century Financial Corporation (Pacific Century) was organized on
August 12, 1971, as the first bank holding company in the State of Hawaii.
Originally organized as Hawaii Bancorporation, Inc., its name was changed in
1979 to Bancorp Hawaii, Inc. and in 1997 changed to Pacific Century Financial
Corporation. The latter change in name was made to provide a more distinctive
and descriptive identity that reflects the Company's strategic goals to expand
its activities beyond Hawaii to Asia, the West and South Pacific, and the U.S.
Mainland.
Pacific Century provides a broad range of financial products and services to
customers in four market regions. These regions are Hawaii, the South and West
Pacific, Asia, and the U.S. Mainland. Pacific Century is the largest bank
holding company headquartered in the State of Hawaii. The principal
subsidiaries of Pacific Century are Bank of Hawaii and Pacific Century Bank,
N.A. (PCB).
In 1998, Pacific Century announced a new strategy called the "New Era." The
project's first steps were to rationalize Pacific Century's corporate
structure in an effort to reduce regulatory burden and streamline operations.
During the year, several subsidiaries were merged, closed or transferred.
. Pacific Century's two subsidiary banks on the U.S. Mainland, California
United Bank with operations in California and Pacific Century Bank, N.A.
with operations in Arizona, were merged during the third quarter of 1998.
Pacific Century Bank, N.A., the surviving entity, is headquartered in
Encino, California and targets small and middle-market commercial
businesses and retail customers through branch offices in both states.
. Bancorp Pacific, Inc. was merged into Bank of Hawaii during the third
quarter of 1998. The merger left First Savings and Loan Association of
America, F.S.B. (First Savings), with operations in Guam, as a subsidiary
of Pacific Century, merged Hawaii-based First Federal Savings and Loan
Association of America (First Federal) into Bank of Hawaii, and
eliminated Bancorp Pacific, Inc. The merger of First Federal consolidates
the Pacific Century depository institutions in the Hawaii market under
Bank of Hawaii. Following the merger, 19 branch locations of First
Federal in Hawaii were closed. In addition, First Savings acquired by
merger the operations of its wholly-owned subsidiary, Pacific Century
Capital Corporation, formerly Bancorp Finance of Hawaii--(Guam), Inc.
First Savings also converted from a Guam charter to a federal savings
bank charter.
. Pacific Century closed Realty and Mortgage Investors of the Pacific, Ltd.
in September 1998. With its activity focused on commercial real estate
lending in Hawaii, activity had been limited and its continuation not
practical.
. Finally, in the fourth quarter of 1998, Pacific Century Life Insurance
Corporation (PCLIC) and Pacific Century Agency, Inc. were contributed to
Bank of Hawaii where they remain as wholly-owned subsidiaries.
In December 1997, Bank of Hawaii International, Inc. (BOHI) announced the
signing of a definitive agreement to acquire Banque Paribas Pacifique in New
Caledonia and Banque Paribas Polynesie in French Polynesia. The acquisitions
were completed in the second quarter of 1998. The acquired banks were merged
into two of BOHI's existing subsidiaries, Bank of Hawaii-Nouvelle Caledonie
and Banque de Tahiti. Banque Paribas Pacifique reported assets of $238 million
and Banque Paribas Polynesie reported assets of $83 million as of May 31,
1998, the merger date.
In April 1998 Pacific Century changed its state of incorporation from Hawaii
to Delaware, by merging into a new wholly-owned subsidiary formed for that
purpose. This change was made to enable Pacific Century to take advantage of
the flexibility and other benefits of the Delaware corporate law.
Pacific Century's organization structure as of December 31, 1998 is included
in Exhibit 21.1. The percentages indicate the proportion of total assets that
each group of entities contributed to Pacific Century's
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consolidated financial position at December 31, 1998. All subsidiaries are
wholly-owned except as otherwise noted for certain banks in the South Pacific
and for those entities whose directors own qualifying shares. Each entity is
consolidated with its immediate parent company except for three of the
affiliate banks in the South Pacific--Bank of Tonga, National Bank of Solomon
Islands and Pacific Commercial Bank, Ltd.--the investments in which are
accounted for under the equity method.
At December 31, 1998, Pacific Century and its subsidiaries employed 5,134
persons on a full-time or part-time basis.
The following is a brief description of each of Pacific Century's
subsidiaries.
Bank of Hawaii was organized under the laws of Hawaii on December 17, 1897,
and has been continuously in business since. Its headquarters are in Honolulu,
Hawaii, and its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC). Bank of Hawaii is the largest full-service financial
institution in Hawaii with a statewide network of 59 regular branches and 13
supermarket branches. It is not a member of the Federal Reserve System.
Pacific Century and 14 directors of Bank of Hawaii (each of whom holds 125
qualifying shares each) own 100% of the outstanding shares. There are five
directors of Bank of Hawaii who do not hold qualifying shares. The legal
requirement for directors of Hawaii banks to hold qualifying shares was
eliminated in 1993.
Bank of Hawaii provides customary commercial banking services through branch
offices in the State of Hawaii and branches or representative offices in
Bahamas (Nassau), Republic of Fiji (Suva, Nadi, and Lautoka), Hong Kong, Japan
(Tokyo), South Korea (Seoul), Philippines (Manila, Cebu, and Davao),
Singapore, Taiwan (Taipei), American Samoa, Commonwealth of the Northern
Mariana Islands (Saipan), Federated States of Micronesia (Pohnpei, Kosrae, and
Yap), Guam, Republic of the Marshall Islands (Majuro), and Republic of Palau
(Koror). Bank of Hawaii also has subsidiary and affiliate banks in New
Caledonia, Papua New Guinea, French Polynesia, Tonga, Vanuatu, Solomon
Islands, and Samoa. Pacific Century Trust, a division of Bank of Hawaii,
operates offices in California, Arizona and Guam as well as Hawaii. Trust
assets under administration at year-end 1998 were $13.1 billion.
Bank of Hawaii owns all of the outstanding stock of Pacific Century Leasing,
Inc.; BOHI; Bank of Hawaii International Corp., New York; Pacific Century
Investment Services, Inc.; Bankoh Corporation; Pacific Century Advisory
Services, Inc.; Pacific Century Insurance Agency, Inc.; PCLIC; and Pacific
Century Agency, Inc. A brief discussion of these Bank subsidiaries follows:
Pacific Century Leasing, Inc. (PCL), formerly Bancorp Leasing of Hawaii,
Inc., formed in 1973, provides leasing and leasing services, mainly to the
commercial sector in Hawaii. PCL has several subsidiaries that are "specific
purpose leasing vehicles." These subsidiaries include S.I.L., Inc.; Arbella
Leasing Corp.; Pacific Century Leasing International, Inc.; and BNE Airfleets
Corporation. On a consolidated basis, PCL's assets represented 1.7% of Pacific
Century's total assets at year-end 1998.
BOHI was formed in 1968. BOHI holds equity interests in the following
foreign financial institutions (in the percentages indicated): Bank of
Hawaii--Nouvelle Caledonie-91%; Bank of Hawaii (PNG) Ltd.-100%; Banque de
Tahiti-92%; Bank of Tonga-30%; Banque d'Hawaii (Vanuatu), Ltd.-100%; National
Bank of Solomon Islands-51%; and Pacific Commercial Bank, Ltd.-43%, in Samoa.
BOHI's total assets represented 8.9% of Pacific Century's total assets at
year-end 1998.
Bank of Hawaii International Corp., New York (BOHICNY) was organized in 1982
as an Edge Act corporation. BOHICNY provides payment, clearing, and settlement
services with the New York Clearing House and Clearing House Interbank Payment
Service for both affiliated and unaffiliated banks. BOHICNY had total assets
representing 1.7% of Pacific Century's total assets at year-end 1998.
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Pacific Century Investment Services, Inc. (PCIS), formerly Bancorp
Investment Group, Ltd., was formed in 1991 to provide full service brokerage
and other investment services originally as a subsidiary of Pacific Century
and, since 1994, as a wholly-owned subsidiary of Bank of Hawaii.
Bankoh Corporation was originally incorporated in 1984 as Hawaiian Hong Kong
Holdings, Ltd. and remained inactive until 1994. In 1994, the name was changed
to Bankoh Corporation, with minimal activity since its name change.
Pacific Century Advisory Services, Inc., formerly Bankoh Investment Advisory
Services Ltd., was reactivated in 1991 to provide advisory services for
businesses seeking to operate in Hawaii. The activity of this company remained
limited during 1998.
Pacific Century Insurance Agency, Inc., formerly Pan-Ocean Insurance Agency,
Inc., engages in general insurance agency, insurance sub agency and general
insurance brokerage business to the extent permitted under applicable federal
and state laws. Business activity began in late 1995 with limited activity in
1998.
Pacific Century Life Insurance Corporation, formerly Bancorp Life Insurance
Company of Hawaii, Inc., was incorporated in 1981 in the State of Arizona to
underwrite, as a reinsurer, the credit life and credit accident and health
insurance sold in conjunction with Bank of Hawaii's short-term consumer
lending activities. PCLIC became a wholly-owned subsidiary of Bank of Hawaii
in 1998.
Pacific Century Agency, Inc., formerly Bancorp Insurance Agency of Hawaii,
Inc., was formed in 1982 to act as an agent for the sale of all credit life
and credit accident and health insurance that is reinsured with PCLIC. Pacific
Century Agency, Inc. became a wholly-owned subsidiary of Bank of Hawaii in
1998.
Pacific Century also holds all of the outstanding stock, except as noted, of
the corporations listed below:
First Savings, a wholly-owned subsidiary of Pacific Century, operates in a
market area that includes the entire territory of Guam. First Savings operates
three full-service branches and three in-store branches in Guam. The FDIC
insures its deposits. First Savings' assets represented 1.2% of Pacific
Century's total assets at year-end 1998.
As mentioned earlier, Pacific Century Bank, N.A. (PCB) was merged with
California United Bank. In the merger, PCB's headquarters was designated as
Encino, California. Pacific Century and three of the directors of PCB (each of
whom holds 1,000 qualifying shares) own 100% of the outstanding shares of PCB.
PCB is organized under the laws of the United States. The FDIC insures its
deposits, and it is a member of the Federal Reserve System. PCB provides
customary commercial banking services through 20 branch offices in the State
of California and 9 branch offices in the State of Arizona. PCB had total
assets representing 7.6% of Pacific Century's total assets at year-end 1998.
In 1989, Pacific Century established a wholly-owned captive insurance
company, Pacific Century Insurance Services, Inc. (Pacific Century Insurance),
formerly Bancorp Hawaii Insurance Services, Ltd. With Pacific Century
Insurance's formation, Pacific Century became the first Hawaii corporation to
establish a Hawaii captive insurance company for its self-insurance needs.
Pacific Century Insurance provides bankers professional liability insurance
and workers compensation insurance exclusively to Pacific Century and its
subsidiaries and affiliates. Pacific Century Insurance's formation provides
Pacific Century with greater flexibility and stability in managing insurance
coverages and premium costs. Pacific Century Insurance also provides Pacific
Century with the opportunity to design self-insurance programs not otherwise
available in the conventional insurance market.
Pacific Century Small Business Investment Company, Inc. (PCSBIC), formerly
Bancorp Hawaii Small Business Investment Company, Inc., was formed in
September 1983 in the State of Hawaii as a small business investment company.
In 1998, activity in PCSBIC remained limited with new investments totaling
$0.3 million. Total assets of PCSBIC were $2.1 million at year-end 1998.
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PCFC Hawaii, Corporation was formed in 1998 for the single purpose of
holding a real estate investment. The investment was sold in late 1998 and the
company will be dissolved in 1999.
Regulation and Competition
Effect of Governmental Policies
The earnings of Pacific Century and its principal subsidiaries are affected
not only by general economic conditions, both domestically and
internationally, but also by the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve System, and foreign
governments and their agencies. The monetary policies of the Federal Reserve
System influence to a significant extent the overall growth of loans,
investments, deposits, interest rates charged on loans, and interest rates
paid on deposits. The nature and impact of future changes in monetary policies
are often not predictable. Flexibility is a key attribute in successfully
responding to these varied forces.
Competition
The financial services industry has become highly competitive. Pacific
Century and Bank of Hawaii compete with local Hawaii financial institutions,
and PCB competes with local financial institutions in Southern California and
Arizona. In addition, each of them competes with institutions located in the
major financial centers of the world. These financial institutions include not
only banks and savings associations, but also insurance companies, brokerage
houses, mortgage companies, consumer finance companies, credit unions, and
diversified financial services companies that provide many or all of the
services offered by commercial banks and savings institutions but operate
without a banking charter and thus free of most of the associated regulatory
requirements.
Seven commercial banks, three savings associations, approximately seven
deposit-taking financial services loan companies, approximately 114 credit
unions, and scores of mortgage companies and other financial services firms
serve the State of Hawaii. The State is also served by a large number of out-
of-state institutions and foreign banks. Bank of Hawaii is the largest Hawaii
based financial services firm operating in the market. Outside of Hawaii, Bank
of Hawaii's primary competition in the Pacific Basin comes from several major
U.S. Mainland and foreign banks that operate in those areas.
PCB competes in two distinct markets, Southern California and Arizona.
Southern California is served by at least 223 local commercial banks, at least
48 savings associations, and approximately 443 credit unions as well as
numerous other financial services firms of a wide variety of types, including
foreign banks and other foreign financial entities. Likewise, in the state of
Arizona, approximately 41 commercial banks, 7 savings associations, 71 credit
unions, and numerous other financial services firms conduct full-service
operations. PCB is approximately the 46th largest insured depository
institution and the twelfth largest insured depository institution in Southern
California and Arizona, respectively, as measured by deposits placed in
offices there.
Additional financial institution holding companies or their subsidiaries may
enter markets served by Pacific Century and thereby provide additional
competition. Likewise, if Pacific Century, Bank of Hawaii, PCB and their
respective subsidiaries pursue additional business opportunities, they will
encounter significant competition from other businesses, including ones not
associated with banks or financial institution holding companies.
Supervision and Regulation
Pacific Century is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the BHC Act) and, as such, is subject
to the Act and regulations issued thereunder by the Board of Governors of the
Federal Reserve System (the Board of Governors). Pacific Century is also
registered as a bank holding company under the Hawaii Code of Financial
Institutions (the Code) and, as such, is subject to the registration,
reporting, and examination requirements of the Code.
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The BHC Act requires prior approval of the Board of Governors of the
acquisition by Pacific Century of more than 5% of the voting shares of any
bank or any other bank holding company. The statute has been eliminated,
effective September 29, 1995, which had prohibited the acquisition of more
than 5% of the stock of Pacific Century by a bank holding company whose
operations are principally conducted in a state other than Hawaii, and the
acquisition by Pacific Century of more than 5% of the stock of any bank
located in a state other than Hawaii unless the statutory law of the state in
which such bank is located specifically authorized such acquisition.
Accordingly, at the present time and subject to certain limits, the BHC Act
allows adequately capitalized and adequately managed bank holding companies to
acquire control of banks in any state. Thus, assuming it is judged to be
adequately capitalized and adequately managed, Pacific Century is no longer
disabled by the BHC Act from acquiring control of banks in any state, and bank
holding companies whose operations are principally conducted in states other
than Hawaii are no longer disabled by the BHC Act from acquiring control of
Pacific Century. An interstate acquisition may not be approved, however, if
immediately before the acquisition the acquirer controls an FDIC-insured
institution or branch in the state of the institution to be acquired, and if
immediately following the acquisition the acquirer would control 30 percent or
more of the total FDIC-insured deposits in that state; but a state may waive
the 30 percent limitation by statute, regulation, or order, or by certain
nondiscriminatory administrative approvals.
An adequately capitalized and adequately managed bank may apply for
permission to merge with an out-of-state bank and convert all branches of both
parties into branches of a single bank. States retain the authority to
prohibit such mergers if between September 29, 1994 and June 1, 1997 they
enacted a statute expressly prohibiting them and that statute applies equally
to all out-of-state banks. An interstate merger may not be approved, however,
if immediately before the acquisition the acquirer controls an FDIC-insured
institution or branch in the state of the institution to be acquired, and if
immediately following the acquisition the acquirer would control 30 percent or
more of the total FDIC-insured deposits in that state; but a state may waive
the 30 percent limitation by statute, regulation, or order, or by certain
nondiscriminatory administrative approvals. Banks are also permitted to open
newly established branches in any state that expressly permits all out-of-
state banks to open newly established branches, if the law applies equally to
all banks.
Hawaii has enacted a statute which authorizes out-of-state banks to engage
in "interstate merger transactions" with (mergers and consolidations with and
purchases of all or substantially all of the assets and branches of) Hawaii
banks, following which any such out-of-state bank may operate the branches of
the Hawaii bank it has acquired. The Hawaii bank must have been in continuous
operation for at least five years prior to such an acquisition, unless it is
subject to or in danger of becoming subject to certain types of supervisory
action. This statute does not permit out-of-state banks to acquire branches of
Hawaii banks other than through an "interstate merger transaction" (except in
the case of a bank that is subject to or in danger of becoming subject to
certain types of supervisory action) nor to open branches in Hawaii on a de
novo basis.
The BHC Act prohibits, with certain exceptions, Pacific Century from
acquiring direct or indirect control of more than 5% of the voting shares of
any company that is not a bank or bank holding company and from engaging
directly or indirectly in any activity other than those of banking, managing
or controlling banks or other subsidiaries authorized under the BHC Act, or
furnishing services to or performing services for its subsidiaries. Among the
permitted activities is the ownership of shares of any company the activities
of which the Board of Governors determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Board of Governors is required to weigh the expected
benefits to the public, such as greater convenience, increased competition, or
gains in efficiency, against the risks of possible adverse effects, such as
undue concentration of resources, decreased or unfair competition, conflicts
of interest, or unsound banking practices. The Board of Governors has adopted
regulations that specify various activities as being so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The exact nature and scope of such activities have been the subject of intense
national debate, and thus, they may change and become broader as they evolve
over time.
Under the policies of the Board of Governors, Pacific Century is expected to
act as a source of financial strength to its subsidiary banks and to commit
resources to support its subsidiary banks in circumstances where
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it might not do so absent such a policy. It is the policy of the Board of
Governors that in serving as a source of strength to its subsidiary banks, a
bank holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks.
In 1989 Congress expanded the authority of bank holding companies to acquire
savings associations, subject to approval by the Board of Governors. Bank
holding companies may acquire healthy as well as failed or failing savings
associations in any state. Congress in 1989 restructured the regulation of the
savings and loan industry and its deposit insurance and provided a new
regulatory structure for the resolution of troubled and insolvent savings
associations. Congress in 1989 also permitted the FDIC to impose cross-
guarantee liability on insured institutions for any cost or loss incurred by
the FDIC in connection with the default by, or assistance to, a commonly
controlled institution.
By virtue of Section 23A of the Federal Reserve Act and Section 18(j) of the
Federal Deposit Insurance Act, Pacific Century and its subsidiaries are
"affiliates" of Bank of Hawaii and PCB and are subject to the provisions of
Section 23A, which limit the amount of and require substantial security for
loans and extensions of credit by Bank of Hawaii or PCB to, and investments
in, Pacific Century or certain of its subsidiaries and the amount of advances
to third parties collateralized by the securities and obligations of Pacific
Century or certain of its subsidiaries. Sections 23A and 18(j) are designed to
assure that the capital of depository institutions such as Bank of Hawaii and
PCB is not put at risk to support their non-bank affiliates. Also, Pacific
Century and its subsidiaries are prohibited from engaging in certain "tie-in"
arrangements in connection with extensions of credit or provision of property
or services.
Bank of Hawaii is subject to supervision and examination by the FDIC and the
Department of Commerce and Consumer Affairs of the State of Hawaii. PCB is
subject to supervision and examination by the Comptroller of the Currency and
in certain respects the FDIC.
Banks, including Bank of Hawaii and PCB, are subject to extensive federal
and (in the case of Bank of Hawaii) state statutes and regulations that
significantly affect their business and activities. Banks must file reports
with their regulators concerning their activities and financial condition and
obtain regulatory approval to enter into certain transactions. Banks are also
subject to periodic examinations by their regulators to ascertain compliance
with various regulatory requirements. Other applicable statutes and
regulations relate to insurance of deposits, allowable investments, loans,
acceptance of deposits, trust activities, mergers, consolidations, payment of
dividends, capital requirements, reserves against deposits, establishment of
branches and certain other facilities, foreign and international operations,
limitations on loans to one borrower and loans to affiliated persons, and
other aspects of the business of banks. Federal legislation has instructed
federal agencies to adopt standards or guidelines governing banks' internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation and
benefits, asset quality, earnings and stock valuation, and other matters.
Legislation adopted in 1994 gives the federal banking agencies greater
flexibility in implementing standards on asset quality, earnings, and stock
valuation. Regulatory authorities have broad authority to initiate proceedings
designed to prohibit depository institutions from engaging in unsafe and
unsound banking practices.
Congress adopted legislation in 1991 to permit the FDIC to increase deposit
insurance assessment rates for insured banks and to levy emergency special
assessments against insured institutions. In response, the FDIC adopted a
premium schedule under which the actual assessment rate for a particular
institution depends in part upon the risk classification the FDIC assigns to
that institution. The FDIC may raise an institution's insurance premiums or
terminate insurance altogether upon a finding that the institution has engaged
in unsafe and unsound practices.
The Federal Deposit Insurance Corporation Improvements Act of 1991 (FDICIA)
requires the federal banking regulators to take "prompt corrective action" in
respect to depository institutions that do not meet minimum capital
requirements and imposes certain restrictions upon banks which meet minimum
capital
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requirements but are not "well capitalized" for purposes of FDICIA. FDICIA
generally prohibits a depository institution from paying any dividend or
making any capital distribution or paying any management fee to its holding
company if the depository institution would thereafter be undercapitalized.
Undercapitalized institutions are subject to regulatory monitoring and may be
required to divest themselves of or liquidate subsidiaries. Holding companies
of such institutions may be required to divest themselves of such institutions
or divest themselves of or liquidate nondepository affiliates. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Further, a bank that is not well capitalized is generally subject to various
restrictions on "pass through" insurance coverage for certain of its accounts
and is generally prohibited from accepting brokered deposits and offering
interest rates on any deposits significantly higher than the prevailing rate.
Such banks and their holding companies are also required to obtain regulatory
approval before retaining senior executive officers.
Subject to certain exceptions, FDICIA (as modified in 1992) restricts
certain investments and activities as principal by state banks (including Bank
of Hawaii) and requires the federal banking regulators to prescribe standards
for extensions of credit secured by real estate or made to finance
improvements to real estate, loans to bank insiders, regulatory accounting and
reports, internal control reports, independent audits, and other matters, and
requires that insured depository institutions generally be examined on-site by
federal or state personnel at least once every twelve months.
Federal legislation enacted in 1992 affords the federal banking agencies
limited discretion to provide relief from certain regulatory requirements to
depository institutions doing business or seeking to do business in an
emergency or major disaster area. The Omnibus Budget Reconciliation Act of
1993 affects the amortization of intangible assets by banks, requires
securities dealers (including banks) to adopt mark-to-market accounting with
respect to certain of their securities in calculating income taxes, and
establishes a preference for depositors in liquidations of FDIC-insured banks.
Bills are now pending or expected to be introduced in the United States
Congress that contain proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. If enacted,
these bills could increase or decrease the cost of doing business, limit or
expand permissible activities (including activities in the insurance and
securities fields), or affect the competitive balance among banks, savings
associations, credit unions and other financial institutions. Some of these
bills would broaden the powers of bank holding companies, permit affiliations
among banks, insurance companies, and securities firms or between banks and
nonfinancial companies, reduce regulatory burdens on financial institutions,
address aspects of competitive imbalance between credit unions and other
regulated financial institutions, promote more open financial markets for U.S.
banks and financial companies in foreign nations, limit the prerogative of
regulators to expand the range of permissible activities for banks,
particularly in the field of insurance, eliminate or revise the features of
the specialized savings-association charter, and realign the structure and
jurisdiction of various financial institution regulatory agencies. Whether or
in what form any such legislation may be adopted or the extent to which the
business of Pacific Century might be affected thereby cannot be predicted.
Item 2. Properties
Pacific Century and its subsidiaries own and lease premises primarily
consisting of operating facilities, the majority of which are located in
Hawaii. Bank of Hawaii owns five significant properties, the largest of which
are condominium units in the Financial Plaza of the Pacific (FPP) in which the
Bank's main branch and administrative offices are located. Portions of the FPP
are owned in fee simple or leased. The capital leases are for portions (less
than 12%) of the FPP. Details of the capital leases are included in the long
term debt footnote. Additionally, Bank of Hawaii owns a five story office
building in downtown Honolulu, the former headquarters of First Federal
Savings and Loan; a two-story building near downtown Honolulu which houses
data processing and certain other operational functions; a parcel of land in
downtown Honolulu; and Hale O Kapolei, a 248,000
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square feet operations facility in the Kapolei area on Oahu. Hale O Kapolei was
completed and placed in service in 1995. Interest expense of $1,500,000 was
capitalized while Hale O Kapolei was under construction in 1995.
Item 3. Legal Proceedings
Note J to the Audited Financial Statements included in Item 8 of this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1998 to a vote of
security holders through the solicitation of proxies or otherwise.
Executive Officers of Registrant:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Lawrence M. Johnson....... 58 Chairman and Chief Executive Officer of
Pacific Century and the Bank of Hawaii (the
Bank) since August 1994.
Richard J. Dahl........... 47 President of Pacific Century and the Bank
since August 1994; Chief Operating Officer
of Pacific Century since April 1997 and the
Bank since August 1995.
Alton T. Kuioka........... 55 Vice Chair of Pacific Century since April
1997; Vice Chair of the Bank since June
1994; Chief Lending Officer of Pacific
Century since April 1997 and the Bank since
August 1995.
Mary P. Carryer........... 51 Vice Chair of Pacific Century and the Bank
since November 1997.
David A. Houle............ 51 Executive Vice President of Pacific Century
since April 1997; Treasurer and Chief
Financial Officer of Pacific Century since
December 1992; Executive Vice President and
Chief Financial Officer of the Bank since
February 1994.
</TABLE>
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Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Common Stock Listing
The common stock of Pacific Century Financial Corporation, is traded over
the counter on the New York Stock Exchange and quoted daily in leading
financial publications.
NYSE Symbol: BOH
Market Prices, Book Values, and Common Stock Dividends--Table 2 included in
Item 7 of this report.
Item 6. Selected Financial Data
Year-End Summary of Selected Consolidated Financial Data--Table 24 included
in Item 7 of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Overview
Performance Highlights
Pacific Century Financial Corporation (Pacific Century) reported earnings of
$107.0 million in 1998, compared to $139.5 million in 1997 and $133.1 million
in 1996. The decline in 1998 earnings is attributed to special charges in the
second quarter, that included a pre-tax restructuring charge of $19.4 million
($12.6 million after tax) and a significant increase in the provision for loan
losses (for additional information refer to sections on "Restructuring and
Redesign Program" and "Credit Risk--Reserve for Loan Losses"). Excluding the
restructuring charge, 1998 earnings were $119.6 million, a 14.3% decrease from
1997.
Basic earnings per share were $1.33 in 1998, compared to $1.75 in 1997 and
$1.63 in 1996. On a diluted per share basis, operating earnings were $1.32 in
1998, compared to $1.72 and $1.62, in 1997 and 1996, respectively.
Performance ratios in 1998 were also impacted by the special charges. In
1998, return on average assets (ROAA) decreased to 0.72% and return on average
equity (ROAE) declined to 9.21%. ROAA was 0.98% in 1997 and 1.00% in 1996,
while ROAE was 12.57% and 12.43% in 1997 and 1996, respectively.
Pacific Century has accounted for all of its business acquisitions under the
purchase method, which results in the recording of goodwill and other
intangible assets. These intangible assets are amortized over various periods
as a non-cash charge to operating income. Operating results under a tangible
performance basis excludes from reported earnings the after tax impact of
amortization of all intangibles, including goodwill. On a tangible performance
basis, Pacific Century's earnings were $121.7 million in 1998, $150.7 million
in 1997 and $141.3 million in 1996. On a per share basis, tangible diluted
earnings per share were $1.50 in 1998, compared to $1.86 and $1.71 in 1997 and
1996, respectively.
Tangible ROAA for Pacific Century was 0.83% in 1998 and 1.07% in both 1997
and 1996. Tangible ROAE was 12.84%, 15.78%, and 14.45% in 1998, 1997, and
1996, respectively.
Net interest income (on a taxable equivalent basis) in 1998 increased $52.9
million over 1997 of which approximately $39.5 million was attributed to a
rise in net average earning assets, while $13.4 million was attributed to a
widening in net interest margin.
Total assets were just over $15 billion at December 31, 1998, a slight
increase from year-end 1997. Average assets increased 4.4% in the year-to-year
comparison to $14.9 billion in 1998 mostly from a 5.5% growth in average
loans.
10
<PAGE>
Non-performing assets, exclusive of accruing loans past due 90 days or more,
were $137.5 million, or 1.40% of total loans, at year-end 1998, compared to
$97.1 million, or 1.02% of total loans, at year-end 1997. The year-to-year
increase in non-performing assets is largely accounted for by a rise in the
commercial and industrial category and the foreign loan category, which
reflects the 1998 Banque Paribas acquisitions (see section on "Acquisitions
and Strategic Alliances").
The reserve for loan losses totaled $211.3 million at the end of 1998,
representing 2.19% of loans outstanding, compared to $174.4 million and 1.88%,
respectively at year-end 1997. Net charge-offs in 1998 were $65.7 million, or
0.70% of average loans, compared to $30.2 million and 0.34%, respectively, in
1997. For the year ended December 31, 1998, provisions for loan losses of
$84.0 million were charged to income, up from $30.3 million in 1997.
11
<PAGE>
Performance Highlights
Table 1
(in millions of dollars except per share amounts)
<TABLE>
<CAPTION>
1998 1997 Five-
---------------- -------- Year
Percent Compound
Earnings Measures Amount Change Amount Growth
- ----------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Income................................. $ 106.96 (23.3)% $ 139.49 (4.2)%
Basic Earnings Per Share................... 1.33 (24.0) 1.75 (3.1)
Diluted Earnings Per Share................. 1.32 (23.3) 1.72 (3.0)
Average Assets............................. 14,870.7 4.4 14,242.3 3.4
Average Loans.............................. 9,422.3 5.5 8,929.7 6.2
Average Deposits........................... 9,549.7 3.3 9,248.0 4.9
Average Shareholders' Equity............... 1,160.8 4.6 1,109.3 5.4
Excluding the Effects of Intangibles/1/
Tangible Net Income...................... 121.70 (19.2) 150.67 (2.4)
Tangible Basic Earnings Per Share........ 1.52 (19.6) 1.89 (1.3)
Tangible Diluted Earnings Per Share...... 1.50 (19.4) 1.86 (1.3)
</TABLE>
<TABLE>
<CAPTION>
Five-Year
Performance Ratios 1998 1997 Average
- ------------------ ----- ----- ---------
<S> <C> <C> <C>
Return on Average Assets................................ 0.72% 0.98% 0.92%
Return on Average Equity................................ 9.21 12.57 11.64
Average Equity to Average Assets Ratio.................. 7.81 7.79 7.93
Loan Loss Reserve to Loans Outstanding.................. 2.19 1.88 1.97
Tier I Capital Ratio.................................... 9.42 9.34
Total Capital Ratio..................................... 11.47 11.65
Leverage Ratio.......................................... 7.48 7.21
Excluding the Effects of Intangibles/1/
Tangible Return on Average Assets..................... 0.83 1.07 1.01
Tangible Return on Average Equity..................... 12.84 15.78 14.26
</TABLE>
- --------
/1/ Intangibles include goodwill, core deposit and trust intangibles, and other
intangibles.
12
<PAGE>
Market Prices, Book Values and Common Stock Dividends
Table 2
<TABLE>
<CAPTION>
Market Price (MP) Range High MP as
----------------------------- a Percent
Year/Period High Low Book Value (BV) of BV Dividend
- ----------- ------ ------ --------------- ---------- --------
<S> <C> <C> <C> <C> <C>
1994.......................... $17.38 $12.07 $11.55 150% $.52
====== ====== ====== === ====
1995.......................... $18.57 $12.44 $12.76 146% $.54
====== ====== ====== === ====
1996.......................... $22.00 $16.57 $13.34 165% $.58
====== ====== ====== === ====
1997.......................... $28.06 $20.31 $14.02 200% $.63
First Quarter................. 23.19 20.56 .15
Second Quarter................ 23.94 20.31 .15
Third Quarter................. 27.13 23.19 .16
Fourth Quarter................ 28.06 23.50 .17
1998.......................... $25.88 $14.75 $14.76 175% $.66
First Quarter................. 25.13 20.31 .16
Second Quarter................ 25.88 23.56 .16
Third Quarter................. 24.06 14.75 .17
Fourth Quarter................ 24.38 15.50 .17
</TABLE>
Other Events
The Asian economic crisis, which began in mid-1997 has impacted many
countries in the region in which Pacific Century conducts business. Some of
those countries affected have experienced a significant devaluation of their
currencies relative to the U.S. dollar, as well as higher volatility in
interest rates and a general tightening of credit. Although most Asian
currencies ended 1998 somewhat improved or stabilized, financial uncertainty
still remains. Pacific Century is carefully following developments in the
region, monitoring its credit exposure in those countries experiencing
financial difficulties, and taking action on credit reserves as appropriate
under the circumstances.
Asia continues to play an important part of Pacific Century's longer term
strategy of developing a comprehensive franchise and customer base across the
Pacific. Additional information regarding Asian events are included in the
"International Operations" section of this report.
In Hawaii, the current consensus forecast for growth in real gross state
product ranges from 1% to 2% for 1999, following a multi-year trend of slow
growth that began in the early 1990's. While this projected rate of growth
still remains low, there were some positive economic signs which developed in
1998. A recent strengthening of the Japanese yen is expected to have a
positive effect on Hawaii's tourism and retail sectors. Also, in 1998, Pacific
Century's residential mortgage originations rose to $1.06 billion, the highest
level recorded by any mortgage lender in the State of Hawaii.
Acquisitions and Strategic Alliances
Recognizing the risks of operating in only one economy, Pacific Century's
long standing strategy calls for expanding outside of Hawaii, with emphasis on
key Pacific locations. In May 1998, Pacific Century further developed this
strategy by acquiring Banque Paribas Pacifique in New Caledonia and Banque
Paribas Polynesie in French Polynesia. Subsequent to the merger, the
operations of both acquired banks were consolidated into Pacific Century
subsidiaries located in the same region. As of the acquisition date, Banque
Paribas Pacifique and Banque Paribas Polynesie had total assets of
approximately $238 million and $83 million, respectively.
13
<PAGE>
In April 1998, Pacific Century completed its purchase of approximately $20
million (U.S. dollar equivalent) in 6.375% convertible notes issued by the
Bank of Queensland. The Bank of Queensland is an independent bank operating in
northeastern Australia. Pacific Century has entered into a strategic alliance
agreement with the Bank of Queensland that will further expand its geographic
reach in the Pacific Rim.
In January 1999, Pacific Century acquired Triad Insurance Agency, Inc.
(Triad), a major Hawaii-based property/casualty insurance agency. In Hawaii,
Triad represents a number of large U.S. property/casualty insurance companies
for whom it acts as a servicing agent. The merger will expand Pacific
Century's range of financial services that it can offer to customers.
Restructuring and Redesign Program
On February 17, 1998, Pacific Century announced a restructuring and redesign
program to accelerate expense reduction, improve efficiency and enhance
revenues. In the initial phase, the plan called for the merger of First
Federal Savings and Loan Association of America (First Federal) into Bank of
Hawaii and the rationalization of traditional branch delivery channels in the
State of Hawaii. The First Federal merger was completed on September 30, 1998
resulting in the closure of 19 thrift branches during the fourth quarter.
Additionally, to further reduce delivery channel redundancy, eight Bank of
Hawaii branches were also closed during the year, bringing the total bank and
thrift branches closed in 1998 to 27.
In August 1998, Pacific Century's U.S. Mainland operations were merged into
one nationally chartered entity. California United Bank, acquired in 1997, and
Pacific Century Bank, N.A. located in Phoenix, Arizona, were consolidated
under the name Pacific Century Bank, N.A. with its headquarters in Southern
California.
Also, as part of the restructuring plan, Bank of Hawaii's credit card
services functions were outsourced in the fourth quarter of 1998 to a third
party vendor.
In connection with these actions, a pre-tax restructuring charge of $19.4
million was taken against second quarter earnings. The restructuring charge
consists of direct and incremental costs that are primarily associated with
closing facilities and reducing staff. Through December 31, 1998, $9.8 million
of the restructuring accrual has been utilized. Pacific Century believes that
the year-end 1998 restructuring accrual of $9.6 million is adequate to
complete the above mentioned initiatives.
Pacific Century's restructuring program will continue in 1999 with a
comprehensive redesign process to increase revenues and further improve
efficiency. Pacific Century has contracted with a nationally recognized
corporate redesign specialist to assist in this activity. The redesign
timeline calls for a six month process review and idea development phase that
will begin in March 1999 followed by a twelve month implementation phase.
Forward-Looking Statements
This report contains forward-looking statements regarding Pacific Century's
beliefs, estimates, projections and assumptions. Although Pacific Century
believes that its expectations are based on reasonable assumptions, there can
be no assurance that such assumptions will ultimately materialize. Forward-
looking statements are contained in various sections of this report including
those covering the Overview, International Operations, Market Risk, Year 2000,
and European Economic and Monetary Union. These forward-looking statements are
subject to risks and uncertainties, and accordingly, actual results could
differ significantly from those stated or implied by such forward-looking
statements. Factors that might cause differences to occur include, but are not
limited to, economic conditions in the markets Pacific Century serves and
those that impact Hawaii, the U.S. Mainland and Asian economies, fluctuations
in interest rates, changes in currencies of Asian Rim and South Pacific
countries relative to the U.S. dollar, credit quality, and changes in
applicable federal, state, and foreign income tax laws and regulatory and
monetary policies, and the nature and level of competition. Additional
forward-looking statements that could significantly differ from estimates
include uncertainties relating to Pacific Century's efforts to prepare its
systems and technology for Year 2000 readiness, as well as uncertainties
relating
14
<PAGE>
to the ability of third parties with whom Pacific Century has business
relationships to address Year 2000 issues in a timely and adequate manner.
Line of Business Financial Review
Pacific Century is a financial services organization that maintains a broad
presence throughout the Pacific region and operates through a unique trans-
Pacific network of locations. Pacific Century's activities are conducted
primarily through 180 branches and representative and extension offices
(including branches of affiliate banks). Its staff of approximately 5,100
employees provide diverse financial products and services to individuals,
businesses, governmental agencies and financial institutions.
Pacific Century assesses the financial performance of its operating
components primarily in accordance with geographic areas of operations. For
business segment reporting, Pacific Century has aligned its operations into
the following four major geographic segments: Hawaii, the Pacific, Asia, and
the U.S. Mainland. In addition to these segments, there is also a segment for
Treasury and Other Corporate. This segment includes corporate asset and
liability management activities and the unallocated portion of various
administrative and support units. Although operating units are generally
aligned geographically for business segment financial reporting, in certain
cases units are grouped in accordance with functional activities rather than
by geographic market.
Business segment 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 allocate and
transfer balance sheet and income statement amounts between business units,
including allocations for overhead, loan loss provision, and capital. In its
business segment financial reporting process, Pacific Century utilizes certain
accounting practices that differ from generally accepted accounting
principles. These practices and other key elements of Pacific Century's
business segment financial reporting process are described in Note Q to the
Consolidated Financial Statements.
The table in Note Q presents the line of business financial report for each
of Pacific Century's major market segments for the year ended December 31,
1998. Because the market segment financial report is prepared in accordance
with accounting practices that could differ from generally accepted accounting
principles, the amounts reflected therein may not agree with the corresponding
amounts reported in the Consolidated Financial Statements and Management
Discussion and Analysis of 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 the company's market risk. Over the past few years the
cost of capital has fluctuated between 12% to 15%.
Hawaii Market
Pacific Century's oldest and largest market is Hawaii, where operations are
conducted primarily through its principal subsidiary, Bank of Hawaii. Bank of
Hawaii was established in 1897, and today it is the largest bank headquartered
in the State of Hawaii offering a wide array of financial products and
services. Bank of Hawaii operates through 72 branches in Hawaii, including
both traditional full-service branches and in-store locations.
Within the Hawaii segment, line of business results are divided into retail
and commercial operating units. Retail operating units sell and service 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).
15
<PAGE>
In addition to offering traditional branch banking services, Bank of Hawaii
has actively introduced new electronic based products and services that
provide enhanced customer convenience. These products and services include: PC
Home Banking; Bankoh Bill Pay (an electronic bill payment service); e-Bankoh
(a nationally recognized service that enables customers to bank on the
internet); an ATM network with 492 machines, some of which provide enhanced
functionality; 13 super-market branches; and six business service centers (a
unique product that offers depository and change services to shopping center
merchants through conveniently located dispensing machines).
In the business banking area, Bank of Hawaii is a major commercial lender
and maintains a significant presence throughout the State. Commercial
operating units in the Hawaii market include small business, middle market,
cash management and commercial real estate.
For the year ended December 31, 1998, the Hawaii segment contributed $48.6
million in net income. RAROC for this segment was 13% in 1998. Total assets in
the Hawaii segment were $5.3 billion at year-end 1998.
Pacific Market
Pacific Century has maintained a presence in the Intra-Pacific region for
nearly 40 years, where it offers financial products and services to both
retail and commercial customers. Today, this market 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. This
unique franchise positions Pacific Century for future growth.
Pacific Century serves the West Pacific through branches of both Bank of
Hawaii and First Savings and Loan Association of America (First Savings). Bank
of Hawaii's operation in the West Pacific consists of three branches in Guam
and two branches in the Commonwealth of the Northern Marianas Islands
(Saipan), as well as branches in the Federated States of Micronesia (Yap,
Pohnpei, and Kosrae), the Republic of the Marshall Islands (Majuro) and the
Republic of Palau (Koror). First Savings operates in Guam from three
traditional branches and three in-store locations.
Pacific Century's presence in the South Pacific includes branches of Bank of
Hawaii and various subsidiary and affiliate banks. The Bank of Hawaii
locations in this region consist of three branches in Fiji and two branches in
American Samoa. Pacific Century's subsidiary banks in the South Pacific are
located in French Polynesia, New Caledonia, Papua New Guinea, and Vanuatu.
Additionally, Pacific Century maintains an investment in affiliate banks
located in Samoa, Solomon Islands and Tonga. As of December 31, 1998, these
subsidiary and affiliate banks had a total of 29 and 20 branches,
respectively. Pacific Century's largest markets in the South Pacific are in
French Polynesia and New Caledonia.
Net income in the Pacific segment was $23.0 million for the year ended
December 31, 1998. RAROC for this segment was 11% including the amortization
of intangibles. Total assets in the Pacific segment stood at $2.4 billion at
year-end 1998.
Asia Market
Asia is a market that Pacific Century has developed over the last 20 years.
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. Activities include letters of credit, remittance processing,
foreign exchange, cash management, export bill collection, and working capital
loans. The lending emphasis is on short-term loans based on cash flows.
Pacific Century'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.
16
<PAGE>
For the year ended December 31, 1998, net income in the Asia segment was
$13.7 million. RAROC for this segment was 14% in 1998. As of year-end 1998,
total assets in the Asia segment were $1.0 billion.
For additional information on Asia, see the "International Operations"
section in this report.
U.S. Mainland Market
During 1998, Pacific Century's two Mainland bank subsidiaries were merged
into one nationally-chartered entity, under the name Pacific Century Bank,
N.A. (PCB). PCB provides financial products and services through 20 branches
in Southern California and 9 branches in Arizona. PCB's emphasis is on
providing asset based lending and related services for small and middle market
businesses. Additionally, PCB also assists Pacific Century in expanding
relationships with customers who have an interest in the Asia-Pacific region.
In early 1999 PCB opened a China marketing office.
In addition to the operations of PCB, the U.S. Mainland segment also
includes operating units for large corporate lending and leasing. The large
corporate lending unit targets businesses that have interests in the Asia-
Pacific region and businesses in certain specialized industries. Leasing
activities consist of providing financing to businesses largely for aircraft,
vehicles and equipment.
In 1998, the U.S. Mainland segment contributed $26.8 million in net income,
which included tax benefits of $13.5 million from low income housing tax
credits and investment tax credits. RAROC for this segment was 10% in 1998
including the amortization of intangibles. As of December 31, 1998, total
assets in the U.S. Mainland segment were $2.6 billion.
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.
Other corporate items included in this segment consist of the operations of
insurance and other non-bank subsidiaries, unallocated overhead expenses, and
the residual effect of allocating the economic provision.
The Treasury and Other Corporate segment reflected a net operating loss of
$5.2 million in 1998. Included in the 1998 results is a pre-tax restructuring
charge of $19.4 million. At year-end 1998 this segment held $3.7 billion in
total assets, most of which were in Treasury.
Statement of Income Analysis
Comparability between periods in the Consolidated Statements of Income is
impacted by the 1998 acquisitions of Banque Paribas Pacifique and Banque
Paribas Polynesie. In addition, the July 1997 purchase of California United
Bank, the March 1997 acquisition of Indosuez Niugini Bank, Ltd., the March
1997 acquisition of deposits from Home Savings of America, and the May 1996
purchase of majority ownership in Banque de Tahiti and Banque de Nouvelle
Caledonie also affect the comparison between periods.
Net Interest Income
Net interest income (taxable equivalent basis) was $577.2 million in 1998,
up from $524.3 million in 1997 and $483.4 million in 1996. The increase
relative to 1998 is largely due to the acquisitions, which have helped to grow
average earning assets and widen the net interest margin. Average earning
assets were $13.7 billion in 1998 and $13.2 billion in 1997, reflecting a
year-over-year increase of $495 million and $772 million, respectively. In
1998, the average net interest margin on earning assets rose to 4.22% from
3.98% in 1997 and
17
<PAGE>
3.90% in 1996. The improvement in net interest margin relative to 1998 and
1997 results from both a rise in the average yield on earning assets and a
drop in the average rate paid on interest-bearing liabilities. Presented in
Table 3 are the average balances, yields, and rates paid for the years ended
December 31, 1998, 1997 and 1996.
In 1998, the average yield on earning assets improved to 8.05% from 7.97%
and 7.93% in 1997 and 1996, respectively and reflects Pacific Century's
efforts to remix the portfolio to higher yielding assets. The average rate
paid on interest-bearing liabilities decreased to 4.67% in 1998, from 4.76%
and 4.78% in 1997 and 1996, respectively, reflecting the decline in market
interest rates.
Provision for Loan Losses
The provision for loan losses was $84.0 million in 1998, up from $30.3
million in 1997 and $22.2 million in 1996. The larger 1998 loan provision
primarily reflects a $26.9 million rise in gross loan charge-offs relating
mostly to the foreign category and a build up of reserves to cover the
increase in non-performing assets. For further information on credit quality,
refer to the section on "Credit Risk--Reserve for Loan Losses."
18
<PAGE>
Consolidated Average Balances, Income and Expense
Summary, and Yields and Rates
(Taxable Equivalent)
Table 3
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -------------------------
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
--------- -------- ------- --------- -------- ------- --------- ------- -------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Interest-Bearing
Deposits.............. $ 508.8 $ 36.7 7.21% $ 486.3 $ 33.1 6.80% $ 579.9 $ 42.0 7.24%
Investment
Securities--Held to
Maturity
--Taxable............ 890.6 67.7 7.60 1,220.4 81.8 6.71 1,078.1 70.4 6.53
--Tax-Exempt......... 11.8 1.7 14.34 12.5 1.8 14.55 13.0 1.8 14.08
Investment
Securities--Available
for Sale.............. 2,769.3 171.0 6.17 2,452.0 158.8 6.48 2,288.7 148.0 6.46
Funds Sold............. 69.7 3.8 5.45 76.4 3.8 4.99 92.1 4.0 4.39
Loans /1/
--Domestic........... 7,669.7 643.8 8.39 7,389.4 607.7 8.22 7,099.9 579.7 8.17
--Foreign............ 1,752.6 130.4 7.44 1,540.3 129.2 8.39 1,253.7 107.6 8.58
Loan Fees.............. 45.3 34.4 29.7
--------- -------- ----- --------- -------- ----- --------- ------ -----
Total Earning
Assets............ 13,672.5 1,100.4 8.05 13,177.3 1,050.6 7.97 12,405.4 983.2 7.93
Cash and Due From Banks. 590.1 545.1 462.8
Other Assets............ 608.1 519.9 427.0
--------- --------- ---------
Total Assets....... $14,870.7 $14,242.3 $13,295.2
========= ========= =========
Interest-Bearing
Liabilities
Domestic Deposits
--Demand............. $ 2,114.8 55.7 2.64 $ 1,945.3 52.9 2.72 $ 1,726.6 47.2 2.73
--Savings............ 783.9 18.5 2.35 865.5 21.4 2.48 937.0 23.7 2.53
--Time............... 2,780.7 145.4 5.23 2,858.7 157.0 5.49 2,465.0 133.5 5.42
--------- -------- ----- --------- -------- ----- --------- ------ -----
Total Domestic..... 5,679.4 219.6 3.87 5,669.5 231.3 4.08 5,128.6 204.4 3.98
Foreign Deposits
--Time Due to Banks.. 596.1 40.4 6.78 718.7 43.6 6.06 733.5 46.4 6.33
--Other Time and
Savings............. 1,176.1 57.9 4.92 1,079.0 48.2 4.47 745.0 37.9 5.09
--------- -------- ----- --------- -------- ----- --------- ------ -----
Total Foreign...... 1,772.2 98.3 5.55 1,797.7 91.8 5.10 1,478.5 84.3 5.70
--------- -------- ----- --------- -------- ----- --------- ------ -----
Total Deposits..... 7,451.6 317.9 4.27 7,467.2 323.1 4.33 6,607.1 288.7 4.37
Short-Term Borrowings.. 3,072.9 162.6 5.29 2,868.7 156.8 5.47 2,809.6 150.2 5.35
Long-Term Debt......... 676.5 42.7 6.32 725.5 46.4 6.39 1,029.2 60.9 5.91
--------- -------- ----- --------- -------- ----- --------- ------ -----
Total Interest-
Bearing
Liabilities....... 11,201.0 523.2 4.67 11,061.4 526.3 4.76 10,445.9 499.8 4.78
--------- -------- ----- --------- -------- ----- --------- ------ -----
Net Interest Income..... 577.2 3.38 524.3 3.21 483.4 3.15
----- ----- -----
Spread on Earning
Assets................. 4.22% 3.98% 3.90%
----- ----- -----
Demand Deposits
--Domestic............. 1,650.4 1,516.8 1,371.5
--Foreign.............. 447.7 264.0 194.2
--------- --------- ---------
Total Demand
Deposits.......... 2,098.1 1,780.8 1,565.7
Other Liabilities....... 410.8 290.8 212.7
Shareholders' Equity.... 1,160.8 1,109.3 1,070.9
--------- --------- ---------
Total Liabilities &
Equity............ $14,870.7 $14,242.3 $13,295.2
========= ========= =========
Provision for Loan
Losses................. 84.0 30.3 22.2
Net Overhead............ 329.0 275.1 256.8
-------- -------- ------
Income Before Income
Taxes.................. 164.2 218.9 204.4
Provision for Income
Taxes.................. 56.6 78.5 70.2
Tax Equivalency
Adjustment/2/ ......... 0.6 0.9 1.1
-------- -------- ------
Net Income.............. $ 107.0 $ 139.5 $133.1
======== ======== ======
</TABLE>
/1/Includes non-accrual loans.
- --------
/2/Based upon a statutory tax rate of 35%.
19
<PAGE>
Non-Interest Income
In 1998, total non-interest income was $211.8 million, compared to $187.8
million in 1997 and $164.5 million in 1996. Non-interest income on a year-to-
year basis increased 12.8% in 1998 and 14.2% in 1997. The incremental non-
interest income attributed to the acquisitions were approximately $15.0
million and $5.5 million in 1998 and 1997, respectively. Table 4 presents the
details of non-interest income for the last five years.
Trust income for 1998 totaled $55.9 million, up from $52.2 million in 1997
and $49.8 million in 1996. In 1997, the trust operation was merged into Bank
of Hawaii and the division was renamed Pacific Century Trust (PCT). This
merger has created the synergism for new opportunities through coordinated
marketing and packaging of trust services. This opportunity was further
developed in 1998 through organizational changes that positioned relationship
officers to deliver a wider array of financial services to satisfy the growing
needs of customers. While trust income showed a 7.1% increase in 1998, total
trust assets administered by PCT increased to $13.1 billion at year-end 1998,
up from $12.5 billion at year-end 1997 and $11.4 billion at year-end 1996. The
Pacific Capital family of mutual funds and Hawaiian Tax Free Trust, which are
managed by PCT, have continued to experience growth. At December 31, 1998, the
aggregate balance of these funds stood at $3.1 billion, compared to $2.6
billion and $2.2 billion at year-end 1997 and 1996, respectively.
Service charges on deposit accounts increased to $35.5 million, compared to
$29.4 million in 1997 and $26.7 million in 1996. The acquisitions accounted
for approximately $3.1 million of the increase between 1998 and 1997.
Fees, exchange and other service charges increased to $77.9 million in 1998,
from $67.1 million in 1997 and $58.9 million in 1996. Approximately $5.1
million of the increase between 1998 and 1997 was due to the acquisitions.
Income generated from international activities include letters of credit and
acceptance fees, profit on foreign currency, and exchange fees. Collectively,
income from these sources totaled $29.1 million in 1998, a 5.8% increase over
1997.
Mortgage servicing fees increased to $7.9 million in 1998 from $7.1 million
in 1997 and $6.6 million in 1996. This increase reflects Bank of Hawaii's
emphasis on residential mortgage lending and secondary market sales
activities. Pacific Century's mortgage servicing portfolio grew to $2.05
billion at year-end 1998 from $1.65 billion at year-end 1997.
Also included in fees, exchange and other service charges are fees earned
through Pacific Century's ATM network. During 1998, Pacific Century continued
to expand its ATM network, ending the year with 492 machines, an increase from
480 at year-end 1997. Fees generated by this network totaled $10.4 million in
1998, compared to $9.6 million in 1997, and $8.6 million in 1996. The majority
of Pacific Century's ATMs are located in Hawaii (418) with the remainder in
the West Pacific (28), South Pacific (26), and the U.S. Mainland (20). ATM
usage has increased steadily over the years averaging more than 2.1 million
transactions per month in 1998, compared to more than 1.9 million transactions
per month in 1997.
Other operating income in 1998 was $38.4 million, an increase of 6.7% over
last year. Comparatively, other operating income was $36.0 million in 1997 and
$27.7 million in 1996. With a lower level of recoveries recorded in 1998, cash
basis interest declined to $1.3 million, compared to $3.7 million in 1997, and
$2.6 million reported in 1996. Cash basis interest includes interest collected
on loans written-off or interest collected on non-accrual loans that relate to
prior years.
Sales of investment securities in 1998 resulted in a net securities gain of
$4.1 million, compared to net gains of $3.1 million and $1.4 million in 1997
and 1996, respectively.
20
<PAGE>
Non-Interest Income
Table 4
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ------ ------ ------
Percent Percent
Amount Change Amount Change Amount Amount Amount
------ ------- ------ ------- ------ ------ ------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Trust Income............... $ 55.9 + 7.1% $ 52.2 + 4.8% $ 49.8 $ 49.5 $ 48.6
Service Charges on Deposit
Accounts.................. 35.5 + 20.7 29.4 + 10.1 26.7 25.9 28.3
Fees, Exchange and Other
Service Charges
Card Fees................ 13.7 + 3.8 13.2 + 23.4 10.7 7.3 8.3
Letters of Credit and
Acceptance Fees......... 10.6 - 4.5 11.1 + 9.9 10.1 8.8 7.8
Profit on Foreign
Currency................ 14.8 + 21.3 12.2 + 37.1 8.9 6.5 4.3
ATM...................... 10.4 + 8.3 9.6 + 11.6 8.6 7.7 6.6
Mortgage Servicing Fees.. 7.9 + 11.3 7.1 + 7.6 6.6 4.3 2.9
Exchange Fees............ 3.7 - 11.9 4.2 + 23.5 3.4 3.9 4.0
Payroll Services......... 1.1 - 31.3 1.6 - 33.3 2.4 2.1 2.1
Cash Management.......... 2.4 +200.0 0.8 -- 0.8 1.0 1.1
Other Fees............... 13.3 + 82.2 7.3 - 1.4 7.4 5.7 5.4
Other Operating Income
Other Income............. 37.1 + 14.9 32.3 + 28.7 25.1 19.6 23.4
Cash Basis Interest...... 1.3 - 64.9 3.7 + 42.3 2.6 1.3 3.4
Investment Securities Gains
(Losses).................. 4.1 + 32.3 3.1 +121.4 1.4 2.5 (17.8)
------ ------ ------ ------ ------ ------ ------
Total.................. $211.8 + 12.8% $187.8 + 14.2% $164.5 $146.1 $128.4
====== ====== ====== ====== ====== ====== ======
</TABLE>
Non-Interest Expense
Total non-interest expense for 1998, 1997 and 1996 was $540.7 million,
$462.9 million and $421.3 million, respectively. In 1998 and 1997, non-
interest expense increased 16.8% and 9.9%, respectively, which includes the
effects of the acquisitions and for 1998 reflects a pre-tax restructuring
charge of $19.4 million. The incremental increase in non-interest expense due
to the acquisitions was approximately $34.2 million in 1998 and $32.4 million
in 1997, including the amortization of intangibles. Excluding the effects of
the restructuring charge and the acquisitions, non-interest expense increased
by approximately 5.2% in 1998 and 2.2% in 1997. When fully implemented in the
first half of 1999, the restructuring actions relative to branch
rationalization and credit card servicing will improve efficiency and reduce
operating costs by an expected $22 million annually on a going forward basis.
In 1998, the effects of expense reductions from restructuring related mergers
and other initiatives were insignificant.
Salaries and pension and other employee benefit expense totaled $250.5
million, $226.7 million and $208.0 million in 1998, 1997 and 1996,
respectively. Approximately $14.6 million and $13.8 million of the increase
relative to 1998 and 1997, respectively is accounted for by the acquisitions.
Excluding the effects of the acquisitions, these expenses increased 4.1% in
1998 and 2.3% in 1997. The Year 2000 project also contributed to the increase
in salaries and benefits for 1998.
Net occupancy and equipment expense for 1998 increased to $95.8 million from
$85.2 million in 1997 and $73.4 million in 1996. Included in the 1998 total
were $1.7 million in non-recurring charges attributed to equipment and premise
write-offs. Additionally, approximately $4.7 million of the increase in 1998
is explained by the acquisitions. Comparison between 1997 and 1996 is affected
by a $2.7 million write-off relating to the 1997 closure and demolition of a
downtown Honolulu building.
21
<PAGE>
Other operating expense increased to $174.5 million in 1998 from $149.5
million in 1997 and $138.4 million in 1996. Approximately $14.8 million and
$15.5 million of the increase relative to 1998 and 1997, respectively, was due
to the acquisitions, including the amortization of intangibles. In addition,
1998's other operating expense was also impacted by a $3.7 million write-down
of a real estate investment, and a $2.7 million loss related to an equipment
lease termination, which was offset by an equal amount of tax savings. The
comparison between 1997 and 1996 is affected by a $2.8 million loss recognized
in 1996 on the early termination of a leveraged lease.
Legal and professional fees increased to $35.8 million in 1998 from $23.4
million in 1997 and $17.7 million in 1996. The increase for 1998 is primarily
attributed to consulting and other professional fees including those related
to the Year 2000 project.
Pacific Century utilizes the efficiency ratio as a tool to manage non-
interest income and expense. The efficiency ratio is derived by dividing non-
interest expense by net operating revenue (net interest income plus non-
interest income before securities transactions). For 1998, 1997 and 1996, the
efficiency ratio was 68.9%, 65.4% and 65.3%, respectively. Excluding the
restructuring charge and amortization of all intangibles, the efficiency ratio
was 64.3%, 63.4% and 63.8% in 1998, 1997 and 1996, respectively.
Non-Interest Expense
Table 5
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ------ ------ ------
Percent Percent
Amount Change Amount Change Amount Amount Amount
------ ------- ------ ------- ------ ------ ------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries.................... $194.5 +12.3% $173.2 + 8.8% $159.2 $142.1 $138.0
Pension and Other Employee
Benefits.................... 56.0 + 4.7 53.5 + 9.6 48.8 43.6 42.4
Net Occupancy Expense....... 46.8 + 0.2 46.7 +18.5 39.4 41.1 37.4
Net Equipment Expense....... 49.0 +27.3 38.5 +13.2 34.0 31.7 30.5
Other Operating Expense
Legal and Professional.... 35.8 +53.0 23.4 +32.2 17.7 15.6 18.2
Stationery and Supplies... 11.1 + 3.7 10.7 -- 10.7 9.3 8.8
Amortization of Intangible
Assets................... 17.4 +27.9 13.6 +38.8 9.8 8.4 9.3
Other..................... 110.3 + 8.3 101.8 + 1.5 100.3 71.2 75.3
Restructuring Charge........ 19.4 N.M. -- -- -- -- --
Minority Interest........... 0.4 -73.3 1.5 + 7.1 1.4 1.1 0.5
------ ----- ------ ----- ------ ------ ------
Total................... $540.7 +16.8% $462.9 + 9.9% $421.3 $364.1 $360.4
====== ===== ====== ===== ====== ====== ======
</TABLE>
Income Taxes
The 1998 tax provision reflects an effective tax rate of 34.6%, compared to
36.0% and 34.5% in 1997 and 1996, respectively. The effective tax rate in 1998
was impacted by the previously mentioned equipment lease termination loss of
$2.7 million that provided an equivalent amount of tax benefits. Pacific
Century's tax structure is complex given the various foreign and domestic
locations in which it operates. Pacific Century utilizes low income housing
tax credits, municipal securities, and lease financing to manage its tax
liability.
In recent years, low income housing credits have been Pacific Century's main
vehicle for reducing the effective tax rate. Pacific Century's low income
housing investments increased $5.0 million to $69.6 million at year-end 1998
and provided tax credits of $10.0 million in 1998. Pacific Century's tax-
exempt securities portfolio continues to decline and had only a minimal impact
on the effective tax rate in 1998.
22
<PAGE>
Pacific Century also continued to pursue lease financing to defer tax
payments. Consisting of both direct and leveraged leases, the leasing
portfolio grew 6.8% during 1998.
Tax planning at Pacific Century is structured to minimize the impact of the
alternative minimum tax (AMT). At the end of 1998, Pacific Century was not
subject to the AMT.
Balance Sheet Analysis
Loans
Loans comprise the largest category of earning assets for Pacific Century
and produce the highest level of earnings. At year-end 1998, loans outstanding
grew to $9.9 billion, a 3.7% increase from $9.5 billion at year-end 1997.
Comparability between periods is impacted by approximately $211 million of
loans acquired in the May 1998 Banque Paribas acquisitions. Excluding the
effects of the acquisitions, total loans in 1998 increased by 1.5%.
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 6 presents the composition of the loan portfolio by major loan
categories.
Commercial and Industrial Loans
At December 31, 1998, commercial and industrial loans (C&I) totaled $2.6
billion, up 22.6% from year-end 1997. The proportion of C&I loans to the total
loan portfolio increased to 26.2% at year-end 1998, from 22.2% at year-end
1997. This growth is primarily attributed to a $383.4 million increase in the
U.S. Mainland C&I portfolio.
C&I loans consist of loans made for commercial, financial, and agricultural
purposes and involves lending on both a secured and unsecured basis.
Collateral requirements vary, but are based on Pacific Century's underwriting
and collateral policies to ensure that consistent credit quality standards are
maintained.
The geographic distribution of C&I loans is concentrated in the U.S.
Mainland and Hawaii representing 59.2% and 33.1% of the loan portfolio,
respectively, as of year-end 1998. In Hawaii, Bank of Hawaii is a major
commercial lender and maintains a significant presence throughout the State.
Bank of Hawaii provides continuing support to the entire business community in
Hawaii by offering a wide range of products and services. At year-end 1998,
C&I loans in Hawaii totaled $853.2 million. In the U.S. Mainland market, C&I
lending totaled $1.5 billion at year-end 1998, up 33.6% over year-end 1997,
and is comprised largely of small and middle market business loans that were
originated by Pacific Century's U.S. Mainland subsidiary bank, as well as
loans to Fortune 500 industrial and service companies and the media and
communication industry.
Real Estate Loans
At year-end 1998, Pacific Century's total real estate loans (excluding
construction) were $3.8 billion, 6.2% below year-end 1997. This portfolio
consists of loans that are secured by residential as well as commercial
properties. Although real estate mortgage loans still continue to comprise the
largest portion of the loan portfolio, their level of representation has
declined from 43.1% of total loans at year-end 1997 to 39.0% at year-end 1998.
The largest component of the real estate loan portfolio consists of loans
secured by 1-to-4 family residential properties. At $2.7 billion, this
portfolio declined $39.5 million from year-end 1997, and represented 27.4% of
total loans outstanding at year-end 1998. More than 90% of these loans are
secured by real estate in Hawaii (see Table 7). Pacific Century originates
residential mortgages on both a fixed-rate and adjustable-rate basis. Most of
23
<PAGE>
the fixed-rate products are sold in the secondary mortgage market, while
adjustable-rate mortgages are generally held in Pacific Century's loan
portfolio. Included in the residential mortgage total at year-end 1998 were
$260 million in available for sale loans. In recent years, Pacific Century has
focused on residential mortgage lending in Hawaii as an attractive line of
business. In 1998, residential mortgage originations by Bank of Hawaii totaled
$1.06 billion, the highest dollar amount ever originated by a mortgage lender
in the State of Hawaii. Comparatively, Bank of Hawaii originated $571 million
in residential mortgage loans in 1997.
Also included in the residential real estate portfolio are home equity
credit lines. The total available credit under these lines was $476.8 million
at year-end 1998, compared to $480.6 million at year-end 1997. Outstandings
declined to $261.2 million at year-end 1998 from $263.7 million at year-end
1997. Home equity credit lines are underwritten primarily based on the
borrower's repayment ability rather than the value of the underlying property.
The commercial real estate portfolio (excluding construction loans) totaled
$1.1 billion at year-end 1998, a decrease of 15.9% from year-end 1997.
Approximately 68% of these loans were secured by commercial real estate in
Hawaii. The commercial real estate portfolio is diversified in the type of
property securing the obligations, including loans secured by tract and land
development for residential housing, hotels, retail facilities, and commercial
offices.
Total commercial construction loans increased to $276.3 million at year-end
1998, compared to $268.1 million at year-end 1997. These loans are secured
primarily by properties located in Hawaii, which accounted for 61% of such
loans at December 31, 1998. Because construction lending is considered to
generally involve greater risk than financing on improved properties, Pacific
Century utilizes tighter underwriting and disbursement standards. The majority
of these loans are underwritten based on the projected cash flows of the
completed project, rather than the value of the underlying property, and
generally require a committed source for permanent financing.
Loan Portfolio Balances
Table 6
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Domestic Loans
Commercial and Industrial....... $2,579.7 $2,104.3 $1,806.7 $1,902.2 $1,830.8
Real Estate
Construction--Commercial...... 276.3 268.1 212.3 199.6 114.2
--Residential........... 23.5 12.9 23.6 33.7 39.7
Mortgage--Commercial.......... 1,139.1 1,354.5 1,227.8 1,308.8 1,241.0
--Residential............. 2,699.4 2,738.9 2,635.3 2,702.4 2,849.9
Installment..................... 763.0 891.6 849.3 817.3 741.6
Lease Financing................. 554.5 519.4 437.8 392.9 378.1
-------- -------- -------- -------- --------
Total Domestic.............. 8,035.5 7,889.7 7,192.8 7,356.9 7,195.3
Foreign Loans
Banks and Other Financial
Institutions................... 158.2 207.7 281.8 268.7 299.0
Commercial and Industrial....... 1,281.5 1,074.9 923.2 513.6 364.2
All Others...................... 378.8 326.1 301.5 13.2 33.5
-------- -------- -------- -------- --------
Total Foreign............... 1,818.5 1,608.7 1,506.5 795.5 696.7
-------- -------- -------- -------- --------
Total Loans................. $9,854.0 $9,498.4 $8,699.3 $8,152.4 $7,892.0
======== ======== ======== ======== ========
</TABLE>
24
<PAGE>
Installment Loans
Total installment loans (excluding residential mortgages and home equity
loans) were $763.0 million, down 14.4% from year-end 1997. At year-end 1998,
installment loans consisted of credit cards and consumer loans (e.g., auto
loans and unsecured credit lines). Consumer loans totaled $485.0 million as of
December 31, 1998, compared to $602.9 million as of December 31, 1997. In
1998, Pacific Century sold the majority of its guaranteed student loan
portfolio.
The credit card portfolio balance was $278.0 million at year-end 1998, a
decrease of 3.7% from year-end 1997. At year-end 1998, 0.77% of the credit
card portfolio (based on balances) were more than 90 days delinquent, compared
to 0.43% at year-end 1997. In the fourth quarter of 1998, the credit card
servicing function at the Bank of Hawaii was outsourced to a third party
vendor. This action will improve efficiency and reduce operating costs.
Leasing Activities
At year-end 1998, leases outstanding increased to $554.5 million, up 6.8%
from year-end 1997. This increase is attributed to a 25.7% growth in the U.S.
Mainland portfolio. Pacific Century's lease portfolio is diversified,
consisting primarily of leases on equipment, automobiles, trucks, ships,
aircraft, and computers.
Lending in the International and South Pacific Markets
Pacific Century's International Market predominately consists of Asia where
the business emphasis is primarily on correspondent banking, trade finance and
working capital loans for companies that have business interests in the Asia-
Pacific markets. The majority of International loans are short-term and are
largely based on Pacific Century's traditional focus on relationships. Foreign
loans in both the International and South Pacific Markets at the end of 1998
totaled $1.8 billion, an increase of 13.0% over year-end 1997. This increase
reflects approximately $211 million in loans acquired in the May 1998 Banque
Paribas acquisitions. Excluding the acquisitions, total foreign loans as of
December 31, 1998, would have remained nearly unchanged from year-end 1997. At
year-end 1998 foreign loans represented 18.5% of the total loan portfolio,
compared to 16.9% at year-end 1997.
Foreign loans in the South Pacific totaled $1.1 billion at December 31,
1998, an increase of 42.5% over $766.8 million at year-end 1997. This increase
is mostly accounted for by the Banque Paribas acquisitions. A large portion of
the South Pacific loan portfolio is in two subsidiary banks, Banque de Tahiti
and Bank of Hawaii--Nouvelle Caledonie, which in the aggregate held total
loans of $1.0 billion at the end of the current year.
At December 31, 1998, outstanding foreign loans to borrowers in the
International/Asia Market totaled $690.5 million, down from $818.6 million and
$738.6 million at December 31, 1997 and 1996, respectively. In addition,
outstanding commitments represented by open letters of credit and unused loan
commitments relative to borrowers in Asia were approximately $367 million at
year-end 1998. Additional information on Asian credit exposure and recent
Asian economic events are contained in the "International Operations" section
of this report.
25
<PAGE>
Geographic Distribution of the Loan Portfolio
A geographic distribution of the loan portfolio is presented in Table 7
based on the geographic location of borrowers. Although loans in Hawaii still
constitute the highest geographic lending concentration, their proportion to
the total loan portfolio has declined to 50.2% at December 31, 1998 from 54.8%
at December 31, 1997. At year-end 1998, the percentage of U.S. Mainland loans
to total loans increased to 23.1% from 19.7% at year-end 1997.
The amounts reflected in the West Pacific include Guam and other locations
in the region where both Bank of Hawaii and First Savings have branches. Loan
balances in the South Pacific reflect the U.S. dollar equivalent balances of
subsidiary banks in French Polynesia, New Caledonia, Papua New Guinea, Vanuatu
and Bank of Hawaii branches in Fiji. Loan balances in American Samoa make up
the remainder of loans in the South Pacific region.
Geographic Distribution of Loan Portfolio/1/
Table 7
<TABLE>
<CAPTION>
Total
Year-End West South U.S. Asia
1998 Hawaii Pacific Pacific Mainland and Other
-------- -------- ------- -------- -------- ---------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Commercial and Industri-
al..................... $2,579.7 $ 853.2 $182.5 $ 17.4 $1,525.9 $ 0.7
Real Estate
Construction--Commer-
cial................. 276.3 169.3 14.3 -- 92.7 --
- --Residential........... 23.5 22.1 1.3 0.1 -- --
Mortgage--Commercial.. 1,139.1 772.6 199.0 9.4 158.1 --
- --Residential........... 2,699.4 2,451.2 228.5 1.5 18.2 --
Installment............. 763.0 571.7 144.9 26.6 19.8 --
Foreign................. 1,818.5 35.5 -- 1,092.5 -- 690.5
Lease Financing......... 554.5 65.9 6.7 -- 462.8 19.1
-------- -------- ------ -------- -------- ------
Total............... $9,854.0 $4,941.5 $777.2 $1,147.5 $2,277.5 $710.3
-------- -------- ------ -------- -------- ------
Percentage of Total..... 100.0% 50.2% 7.9% 11.6% 23.1% 7.2%
======== ======== ====== ======== ======== ======
</TABLE>
- --------
/1/ Loans classified based upon geographic location of borrowers.
Investment Securities
Pacific Century's investment portfolio is managed to provide liquidity and
interest income, offset interest rate risk positions and provide collateral
for cash management needs. At December 31, 1998, available-for-sale securities
increased to $3.0 billion from $2.6 billion at December 31, 1997. U.S.
government and agency mortgage-backed securities, as a percentage of the total
available-for-sale securities portfolio increased in 1998, while U.S.
government and agency debt securities decreased. Securities held to maturity
were $653 million at year-end 1998, down $567 million from year-end 1997.
Maturities of U.S. government and agency securities, as well as prepayments in
the mortgage-backed securities portfolio accounted for this decline. At year-
end 1998, the held to maturity portfolio consisted of debt securities
primarily with remaining contractual maturities of less than five years. Table
18 presents the maturity distributions, market value and weighted-average
yield to maturity of securities.
Deposits
As of December 31, 1998, total deposits were $9.6 billion, a 0.3% decline
from the year earlier date. During 1998, domestic deposits decreased $71
million, while foreign deposits increased $40 million. Comparability is
impacted by the May 1998 Paribas acquisitions, which added approximately $253
million to foreign deposits.
26
<PAGE>
Excluding the acquisitions, total deposits at December 31, 1998 declined by
approximately 3.0% from year-end 1997. Competition for deposits by banks and
other financial institutions, as well as securities brokerage firms, continues
to impact the ability to attract and retain deposits.
Table 22 presents average deposits by type for the five years ended December
31, 1998.
Borrowings
Short-term borrowings, including funds purchased and securities sold under
agreements to repurchase (repos), totaled $3.3 billion at December 31, 1998,
compared to $3.2 billion at year-end 1997. The largest portion of short-term
borrowings consist of repos. Repos are offered to governmental entities as an
alternative to deposits and are supported by the same type of collateral. At
year-end 1998 repos were $2.0 billion, down from $2.3 billion at year-end
1997. This decline was more than offset by a $232 million increase in funds
purchased in 1998 and a $131 million increase in other short-term borrowings.
Included in short-term borrowings at December 31, 1998, were $127 million in
commercial paper.
Long-term debt on December 31, 1998 totaled $586 million, down from $706
million on December 31, 1997. This decline primarily results from a $65
million reduction in borrowings from the Federal Home Loan Bank of Seattle
(FHLB) and a $60 million reduction in private placement notes. FHLB borrowings
were $223 million at December 31, 1998, compared to $288 million at December
31, 1997. Private placement notes totaled $90 million and $150 million at
year-end 1998 and 1997, respectively. The year-over-year change in FHLB
borrowings and private placement notes reflect maturities. Also included in
long-term debt at year-end 1998 were $119 million in 6.875% subordinated notes
that mature in 2003 and $100 million in 8.25% Capital Securities that mature
in 2026.
International Operations
Pacific Century maintains an extensive international presence in the Asia-
Pacific region that provides opportunities to take part in lending,
correspondent banking and deposit-taking activities in these markets. These
activities are facilitated through Bank of Hawaii branches, a representative
office with extensions and full service subsidiary/affiliate banks. This
network of locations across Asia-Pacific enables our customers to facilitate
trade and investment between the U.S. Mainland, Asia, and the Pacific Islands.
Pacific Century divides its international business into two areas: the
International Market, which is Asia related and the Pacific Market, which
comprises the South and West Pacific Divisions.
Through the International Banking Group of Bank of Hawaii and Pacific
Century Bank, N.A., Pacific Century offers international banking services to
its corporate and financial institution customers in most of the major Asian
financial centers with support from its New York and Honolulu operations. Bank
of Hawaii's offices that offer these services are located in Hong Kong, the
Philippines (Manila, Cebu, and Davao), South Korea, Singapore, Japan, Taiwan,
and New York. The International Banking Group of Bank of Hawaii continues to
focus on correspondent banking and trade-related financing activities and
lending to customers with which it has a direct relationship.
The South Pacific Region consists of investments in subsidiary banks in
French Polynesia, New Caledonia, Papua New Guinea, Vanuatu, and Bank of Hawaii
branch operations in Fiji and American Samoa. 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 Banks in the French territories are currently operating under a
management contract with Credit Lyonnais due to expire in 1999. The managers
of those areas have a direct reporting line to the South Pacific Manager at
Bank of Hawaii who is responsible for all operations in the French
Territories. The operations of subsidiaries and affiliates are evaluated on a
similar basis as branch offices. Exposure to foreign currency
27
<PAGE>
fluctuations is in large measure limited to the unhedged positions of Pacific
Century's capital investment in these subsidiaries. The largest South Pacific
subsidiary operations are in the French territories of French Polynesia and
New Caledonia.
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, the Company's operations in the West Pacific are not considered
foreign for financial reporting purposes.
Table 8 provides a summary of assets, liabilities, operating revenue, and
net income for Pacific Century's International Operations for the last three
years. Operating results in 1998 reflected a net loss of $0.8 million,
compared to net income of $10.2 million in 1997 due to significantly higher
foreign loan loss provisions (see "Credit Risk--Reserve for Loan Losses").
Pacific Century controls its risk exposure to international lending by
evaluating the political and economic factors that bear on a country's ability
to meet its foreign debt obligations. Based on these analyses, credit limits
(both short and long term) are established for each country to minimize and
control risk in the international portfolio. These credit limits are monitored
and reviewed on a regular basis so that risks and exposures are understood and
properly assessed. Pacific Century's strategy for foreign lending is to deal,
on a direct basis, primarily with countries and companies that have a strong
trade and investment interest in Hawaii and Asia-Pacific region.
Pacific Century's foreign lending consists of both local currency and cross-
border lending. Local currency loans are those that are funded and will be
repaid in the currency of the borrower's country. Cross-border lending, on the
other hand, involves loans that will be repaid in a currency other than that
of the borrower's country. This type of lending involves greater risk because
the borrower's ability to repay is additionally dependent on changes in the
currency exchange rate.
Cross-border interbank placements and loans were $760.2 million at year-end
1998. Table 9 presents, for the last three years, a geographic distribution of
international assets for which Pacific Century has cross-border exposure
exceeding 0.75% of total assets.
The countries in Asia to which Pacific Century maintains its largest credit
exposure on a cross-border basis include South Korea, Japan and Taiwan. At
December 31, 1998, cross-border credit exposure in Japan, South Korea, and
Taiwan were $355 million, $265 million and $124 million, respectively,
compared to $390 million, $413 million and $121 million, respectively, at
December 31, 1997. In Japan and Taiwan, despite pressures from neighboring
countries, the high levels of foreign exchange reserves have helped to
maintain relative economic stability. At Pacific Century, all exposures
relating to South Korea, Japan, Taiwan, Hong Kong, the Philippines and
Malaysia ended both December 31, 1998 and 1997 on a performing status.
With the implementation of the International Monetary Fund (IMF)
restructuring plan in late 1997 and throughout 1998, South Korea's foreign-
exchange reserves have significantly improved and rating agencies have
gradually raised South Korea's sovereign rating back to investment grade. Our
experience and history in the country continue to give us confidence in our
ability to manage our exposure in South Korea. Pacific Century's lending in
South Korea is focused on trade-related activities and is mostly short-term in
nature. Most of the South Korean loans are to financial institutions (e.g.,
national and regional banks) or to the top five major conglomerates. In the
first quarter of 1998, Pacific Century exchanged $83.5 million of short-term
loans to Korean banks into government guaranteed loans. These loans mature
over three years and bear interest at 2.25% to 2.75% over the six-month London
Interbank Offering Rate. During 1998, there were no charge-offs taken on any
South Korean loan.
Within Asia, the two most problematic economies for Pacific Century remain
Thailand and Indonesia. The financial and liquidity problems in Thailand and
Indonesia required the intervention of the IMF. Pacific Century's cross-border
credit assets in Thailand and Indonesia at December 31, 1998 were
approximately $24 million and
28
<PAGE>
$17 million, respectively, compared to $74 million and $21 million,
respectively, at year-end 1997. In the first quarter of 1998, $5.7 million in
U.S. dollar denominated Thai finance company loans were exchanged for Thai
baht denominated government deposits. Charge-offs relative to Thai exposures
in 1998 totaled $22.1 million, while recoveries were $5.2 million. Total Thai
non-performing credits at December 31, 1998 were $7.6 million, down from $17.6
million at year-end 1997. With respect to Indonesia, non-performing credits
totaled $0.7 million at December 31, 1998. During 1998, $12.6 million in
exposures to Indonesian banks were converted to sovereign risk in conjunction
with a government sponsored plan to support the local banking system. The
converted loans mature over four years. Overall at the end of 1998, the IMF
has praised the steps that Thailand has taken to recover from its economic
turmoil. Indonesia remains volatile as it attempts to sort through its
economic and political problems.
In view of the risks, Pacific Century increased its provision for loan
losses in 1998 as more fully discussed in the section on "Credit Risk--Reserve
for Loan Losses." Pacific Century continues to monitor its international
activities on a country by country basis as events evolve and will take such
actions as appropriate. Pacific Century believes that it has prudently managed
its exposure in Asia and has dealt with the known situations. However, because
of the uncertainties, it is difficult to accurately predict the impact of the
turmoil in Asia on the economies of Hawaii and the U.S. Mainland, changes in
currencies of Pacific region countries relative to the U.S. dollar, changes in
interest rates, and changes in applicable U.S. and foreign regulatory and
monetary policy. Moreover, it is not known what, if any, further impact there
will be on Pacific Century's Asian exposure resulting from future events.
Summary of International Assets, Liabilities, and Income and Percent of
Consolidated Totals
Table 8
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Average Assets.............. $3,426.6 23.0% $3,005.1 21.1% $2,752.6 20.7%
Average Liabilities......... 3,348.8 24.4 2,523.3 19.2 2,687.6 22.0
Operating Revenue........... 287.9 21.9 215.9 17.4 192.1 16.8
Net Income (Loss)........... (0.8) N.M. 10.2 7.3 8.1 6.1
</TABLE>
29
<PAGE>
Geographic Distribution of Cross-Border International Assets/1/
Table 9
<TABLE>
<CAPTION>
Government Commercial
and Other Banks and and
Official Other Financial Industrial
Institutions Institutions/2/ Companies Total
------------ --------------- ---------- --------
(in millions of dollars)
<S> <C> <C> <C> <C>
at December 31, 1998
Japan........................ $ -- $223.7 $131.1 $ 354.8
South Korea.................. 85.8 94.4 84.7 264.9
Taiwan....................... -- 41.6 82.3 123.9
All Others/3/ ............... 39.9 400.5 188.7 629.1
------ ------ ------ --------
$125.7 $760.2 $486.8 $1,372.7
====== ====== ====== ========
at December 31, 1997
South Korea.................. $ -- $219.7 $193.5 $ 413.2
Japan........................ -- 253.1 136.8 389.9
Taiwan....................... 57.5 39.5 23.8 120.8
All Others................... 48.4 322.9 154.5 525.8
------ ------ ------ --------
$105.9 $835.2 $508.6 $1,449.7
====== ====== ====== ========
at December 31, 1996
South Korea.................. $ -- $253.0 $122.4 $ 375.4
Japan........................ -- 196.0 115.8 311.8
Taiwan....................... -- 108.6 18.2 126.8
Thailand..................... -- 74.2 47.4 121.6
All Others................... 1.0 300.0 69.8 370.8
------ ------ ------ --------
$ 1.0 $931.8 $373.6 $1,306.4
====== ====== ====== ========
</TABLE>
- --------
/1/ In this table, cross-border outstandings are defined as foreign monetary
assets that are payable to the Company in U.S. dollars or other non-local
currencies, plus amounts payable in local currency but funded with U.S.
dollars or other non-local currencies. Monetary assets include loans,
acceptances, and interest-bearing deposits with other banks.
/2/ Includes U.S. dollar advances to foreign branches and affiliate banks
which were used to fund local currency transactions. Totals for 1998, 1997
and 1996 were $411.1 million, $419.9 million and $327.9 million,
respectively.
/3/ At December 31, 1998, the all others category included cross-border
outstandings of $62.2 million in French Polynesia and $50.4 million in New
Caledonia. The currency of both of these countries is the Pacific franc.
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, which generally have more than
a normal risk of loss, totaled $137.5 million at year-end 1998, compared to
$97.1 million at the end of 1997, and $83.2 million at the end of 1996. While
increasing from the prior year-end, the level of NPAs peaked at the end of the
third quarter at $151.5 million, with much of the increase resulting from
portfolios in the French territories.
At year-end 1998, the ratio of NPAs to outstanding loans rose to 1.40%.
Comparatively the ratio was 1.02% and 0.96% for 1997 and 1996, respectively.
Table 10 presents Pacific Century's NPAs and ratio of NPAs to total loans for
the last five years.
30
<PAGE>
In order to minimize credit losses, Pacific Century strives to maintain high
underwriting standards, identify potential problem loans early and work with
borrowers to cure delinquencies. Moreover, charge-offs, if required, are taken
promptly and reserve levels are maintained at adequate levels. Pacific
Century's policy is to place loans on non-accrual status when a loan is over
90 days delinquent, unless collection is likely based on specific factors such
as the type of borrowing agreement and/or collateral. At the time a loan is
placed on non-accrual, all accrued but unpaid interest is reversed against
current earnings.
Total non-accrual loans rose to $131.9 million at year-end 1998, up 47.7%
over year-end 1997. Higher non-accrual balances in the foreign and commercial
loan categories accounted for most of this increase. Relative to the end of
1998's third quarter, non-accrual loans reflected a decrease of $8.7 million.
At December 31, 1998, foreign loans on non-accrual were $57.5 million,
compared to $39.9 million at December 31, 1997 and $22.3 million at December
31, 1996. The increase relative to 1998 primarily reflects a $26.5 million
rise in non-accrual loans in the South Pacific from $22.4 million at year-end
1997 to $48.9 million at year-end 1998. New Caledonia accounts for most of the
higher non-accruals in the South Pacific, reporting a year-to-year increase of
$24.5 million from $5.0 million at year-end 1997 to $29.5 million at year-end
1998. In French Polynesia non-accrual loans remained relatively flat at $15.4
million at December 31, 1998, compared to $15.5 million at the year earlier
date. Included in the non-accrual totals for both New Caledonia and French
Polynesia were the effects of the Banque Paribas acquisitions.
In Asia, loans reported as non-accrual at December 31, 1998 were
approximately $8.6 million, down from $17.6 million at December 31, 1997.
Additional information relative to Asian exposure is contained in the
"International Operations" section of this report.
C&I loans classified as non-accrual totaled $28.2 million at year-end 1998,
an increase from $10.7 million and $20.9 million at year-end 1997 and 1996,
respectively. Contributing to the 1998 increase was the addition of a Hawaii-
based loan of $12.3 million for which partial charge-offs were taken in 1998.
At December 31, 1998, non-accrual loans secured by real estate totaled $44.7
million, or 33.9% of total non-accrual loans; with the majority of these loans
secured by residential real estate in Hawaii. Non-performing residential
mortgages (excluding construction loans) totaled $36.4 million at year-end
1998, compared to $32.9 million at year-end 1997, reflecting a year-over-year
increase of $3.5 million. Although residential mortgage non-accruals have
increased, charge-offs for this $2.7 billion portfolio have remained low at
$2.9 million in 1998 compared to $1.9 million in 1997.
Because residential mortgages are secured by real estate, the credit risk on
these loans are lower than for unsecured lending. Most of the Company'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. Additionally, the risk in this portfolio is also moderated by the
smaller average loan balance compared to commercial lending.
Foreclosed real estate declined to $5.6 million at year-end 1998, from $6.2
million at year-end 1997. At December 31, 1998, the foreclosed real estate
portfolio consisted of 41 properties, mostly located in Hawaii. The largest
property represented 16.9% of the total. In 1998, sales of foreclosed real
estate resulted in a net loss of $871,000, compared to a net gain of $523,000
in 1997 and a net loss of $380,000 in 1996.
Accruing loans past due 90 days or more totaled $20.8 million at year-end
1998, a decline of $4.2 million from $25.0 million at year-end 1997. This
decline is mainly due to lower delinquencies in the residential real estate
loan portfolio and, to a lesser extent, in improvements in the commercial loan
portfolio. In the foreign category, accruing loans past due 90 days or more
were $7.9 million at year-end 1998, which were all related to loans in the
South Pacific. Table 10 presents a five-year history of accruing loans that
were past due 90 days or more.
31
<PAGE>
Non-Performing Assets and Accruing Loans
Past Due 90 Days or More
Table 10
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ----- -----
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans
Commercial and Industrial............. $ 28.2 $ 10.7 $ 20.9 $16.9 $20.3
Real Estate
Construction........................ 2.9 1.0 0.3 0.3 1.5
Commercial.......................... 5.4 2.8 4.1 14.9 14.1
Residential......................... 36.4 32.9 23.6 14.7 15.1
Installment........................... 0.8 2.0 1.3 0.8 0.5
Foreign............................... 57.5 39.9 22.3 -- 0.3
Leases................................ 0.7 -- -- -- 0.8
------ ------ ------ ----- -----
Subtotal.......................... 131.9 89.3 72.5 47.6 52.6
------ ------ ------ ----- -----
Restructured Loans
Real Estate--Commercial............... -- 1.6 -- -- --
------ ------ ------ ----- -----
Subtotal.......................... -- 1.6 -- -- --
------ ------ ------ ----- -----
Foreclosed Real Estate
Domestic.............................. 5.5 6.2 10.7 9.3 0.6
Foreign............................... 0.1 -- -- -- --
------ ------ ------ ----- -----
Subtotal.......................... 5.6 6.2 10.7 9.3 0.6
------ ------ ------ ----- -----
Total Non-Performing Assets..... $137.5 $ 97.1 $ 83.2 $56.9 $53.2
====== ====== ====== ===== =====
Accruing Loans Past Due 90 Days or More
Commercial and Industrial............. 0.4 2.0 2.0 1.8 1.1
Real Estate
Construction........................ 0.4 -- 0.4 -- --
Commercial.......................... -- 0.6 6.8 2.4 0.7
Residential......................... 4.5 7.3 6.8 5.8 3.9
Installment........................... 7.3 7.6 9.0 10.5 5.9
Foreign............................... 7.9 7.4 9.5 -- --
Leases................................ 0.3 0.1 0.2 0.2 --
------ ------ ------ ----- -----
Subtotal.......................... 20.8 25.0 34.7 20.7 11.6
------ ------ ------ ----- -----
Total........................... $158.3 $122.1 $117.9 $77.6 $64.8
====== ====== ====== ===== =====
Ratio of Non-Performing Assets to Total
Loans.................................. 1.40% 1.02% 0.96% 0.70% 0.67%
Ratio of Non-Performing Assets and
Accruing Loans Past Due 90 Days or More
to Total Loans......................... 1.61% 1.29% 1.36% 0.95% 0.82%
====== ====== ====== ===== =====
</TABLE>
32
<PAGE>
Foregone Interest on Non-Accruals
Table 11
<TABLE>
<CAPTION>
Years Ended December 31
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Interest Income Which Would Have Been Recorded
Under Original Terms:
Domestic............................................ $8.4 $6.6 $6.3 $7.6 $5.4
Foreign............................................. 4.1 2.4 2.3 -- 0.1
Interest Income Recorded During the
Current Year on Non-Accruals:
Domestic............................................ 1.3 1.5 1.6 0.6 1.0
Foreign............................................. 1.4 0.5 0.6 -- 0.1
</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. For loans other than
consumer loans, a line driven risk rating system is used. Loans are graded
based on the degree of risk at origination by the lending officer and
thereafter, are reviewed periodically as appropriate. An independent
evaluation of this process is performed by the Credit Review department to
ensure compliance of the risk grades and timeliness of grade changes.
Pacific Century performs a comprehensive quarterly analysis to determine the
adequacy of its reserve for loan losses. In 1998, this analysis was enhanced
to incorporate risk migration modeling and country risk. Pacific Century
utilizes a methodology that establishes both specific and general reserves.
Commercial loans and leases are individually reviewed according to specified
criteria to determine specific loss exposure. Loans for which a specific
reserve allocation is not established are placed in loan pools for purposes of
determining the general reserve allocation.
At Pacific Century, general reserve allocations for various loan pools are
determined based on a risk migration analysis component and a subjective
factors component. The migration model determines potential loss factors based
on historical loss experience for homogeneous loan portfolios and based on
risk grades for risk-rated portfolios. The subjective factors component
includes an evaluation of the changes in the nature and volume of the
portfolio, delinquency and non-accrual trends, lending policies and
procedures, and other relevant general factors. For foreign credits, general
reserves are further stratified to address country risk. General reserve
allocations for country risk are determined based on the type of credit
facility and internal country risk ratings.
The reserve for loan losses ended 1998 at $211.3 million, an increase of
$36.9 million over the prior year level of $174.4 million. This increase
reflects $13.6 million in reserves acquired from the Banque Paribas
acquisitions and a build up of reserves to cover the increase in NPAs. Net
charge-offs in 1998 were $65.7 million or 0.70% of average loans, compared to
$30.2 million, or 0.34% of average loans in 1997 and $13.0 million, or 0.16%
of average loans in 1996. The ratio of reserves to loans outstanding at year-
end 1998 was 2.19%, compared with 1.88% at year-end 1997 and 1.97% at year-end
1996. A summary of the activity in the reserve for loan losses for the last
five years is presented in Table 12.
At year-end 1998, the reserve for loan losses provided coverage of 154% of
non-performing loans, compared to 180% coverage at year-end 1997 and 202% at
year-end 1996. Additionally, the ratio of year-end reserves to gross charge-
offs was 2.6 times, 3.2 times, and 3.8 times in 1998, 1997, and 1996,
respectively.
33
<PAGE>
Gross charge-offs in 1998 totaled $82.0 million, representing 0.87% of
average loans outstanding. Comparatively, the ratio was 0.62% and 0.53% in
1997 and 1996, respectively. The increase in gross charge-offs in 1998 is
attributed to a rise in the foreign category to $34.8 million from $10.6
million in 1997. Of this amount, $22.1 million and $12.7 million relate to
charge-offs recognized on Asian and South Pacific loans, respectively.
Gross charge-offs as a percentage of the reserve for loan losses were 38.8%,
31.6% and 26.3% in 1998, 1997 and 1996, respectively.
Excluding foreign loans, gross charge-offs in 1998 were mostly concentrated
in the installment and commercial loan categories. Gross charge-offs on
installment loans decreased $2.3 million in 1998 to $25.8 million. Charge-offs
on commercial loans rose to $15.3 million in 1998 from $12.7 million in 1997,
including partial charge-offs of $8.5 million relative to one Hawaii-based
commercial loan.
In 1998, recoveries of previously charged-off loans declined $8.6 million to
$16.3 million. Recoveries were $24.9 million in 1997 and $31.1 million in
1996. Foreign loan recoveries in 1998 were $5.6 million and primarily related
to Thai credits. Installment loan recoveries remained relatively flat in 1998
at $6.4 million. The high level of recoveries in 1997 and 1996 include $11.7
million and $19.3 million, respectively, relating to one C&I credit that was
charged-off in 1992 and 1993.
Table 13 presents an allocation of the loan loss reserve for the last five
years. At year-end 1998, the reserve allocation for foreign loans increased to
$86.6 million representing 4.76% of total outstanding foreign loans, compared
to $31.0 million and 1.93%, respectively, at December 31, 1997. This increase
reflects the reserves acquired in the Banque Paribas acquisitions, a higher
level of foreign non-performing assets and reserves created to recognize the
economic volatility in Asia. For year-end 1998, the allocation of loan loss
reserves to construction, commercial and residential mortgages was reduced
under Pacific Century's new methodology due to the low historical loss
experience in these portfolios.
34
<PAGE>
Reserve for Loan Losses
Table 12
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Average Amount of Loans
Outstanding................. $9,422.3 $8,929.7 $8,353.6 $7,654.9 $7,393.7
======== ======== ======== ======== ========
Balance of Reserve for Loan
Losses at Beginning of
Period...................... $ 174.4 $ 167.8 $ 152.0 $ 148.5 $ 125.3
Loans Charged-Off
Commercial and Industrial.. 15.3 12.7 8.7 7.8 11.3
Real Estate
Construction............. -- -- -- 2.1 0.1
Mortgage--Commercial..... 2.5 1.3 3.3 2.3 3.5
--Residential.... 2.9 1.9 1.9 1.1 0.7
Installment.............. 25.8 28.1 28.9 13.3 8.7
Foreign.................. 34.8 10.6 0.9 0.9 0.7
Leases................... 0.7 0.5 0.4 0.4 0.4
-------- -------- -------- -------- --------
Total Charged-Off............ 82.0 55.1 44.1 27.9 25.4
Recoveries on Loans
Previously Charged-Off
Commercial and Industrial.. 2.8 16.4 21.8 6.1 19.5
Real Estate
Construction............. 0.1 -- 0.7 -- 0.2
Mortgage--Commercial..... 1.2 0.6 1.1 1.4 0.9
--Residential.... 0.2 1.0 0.4 0.1 0.2
Installment................ 6.4 6.3 4.7 3.3 3.2
Foreign.................... 5.6 0.6 1.8 1.9 --
Leases..................... -- -- 0.6 1.0 0.8
-------- -------- -------- -------- --------
Total Recoveries............. 16.3 24.9 31.1 13.8 24.8
-------- -------- -------- -------- --------
Net Loans Charged-Off........ (65.7) (30.2) (13.0) (14.1) (0.6)
Provisions Charged to
Operating Expenses.......... 84.0 30.3 22.2 17.0 21.9
Other Net Additions/1/ ...... 18.6 6.5 6.6 0.6 1.9
-------- -------- -------- -------- --------
Balance at End of Period..... $ 211.3 $ 174.4 $ 167.8 $ 152.0 $ 148.5
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to
Average Loans Outstanding... 0.70% 0.34% 0.16% 0.18% --
Ratio of Reserve to Loans
Outstanding................. 2.19% 1.88% 1.97% 1.90% 1.92%
======== ======== ======== ======== ========
The details of the foreign reserve for loan losses, which are included in the
table above, are:
Beginning Balance............ $ 31.0 $ 28.4 $ 15.1 $ 12.9 $ 10.5
Charge-Offs................ 34.8 10.6 0.9 0.9 0.7
Recoveries................. 5.6 0.6 1.8 1.9 --
-------- -------- -------- -------- --------
Net Loans Charged-Off...... (29.2) (10.0) 0.9 1.0 (0.7)
Provisions Charged to
Operating Expenses........ 54.2 17.6 5.8 0.6 1.2
Other Net Additions/1/ .... 18.7 (5.0) 6.6 0.6 1.9
-------- -------- -------- -------- --------
Ending Balance............... $ 74.7 $ 31.0 $ 28.4 $ 15.1 $ 12.9
======== ======== ======== ======== ========
</TABLE>
- --------
/1/Includes balance transfers, reserves acquired, and foreign currency
translation adjustments.
35
<PAGE>
Allocation of Loan Loss Reserve
Table 13
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of Out- of Out- of Out- of Out- of Out-
standing standing standing standing standing
Reserve Loan Reserve Loan Reserve Loan Reserve Loan Reserve Loan
Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Industrial............. $ 60.8 2.36% $ 57.5 2.73% $ 60.0 3.32% $ 61.9 3.25% $ 59.5 3.25%
Real Estate
Construction........... 1.0 0.33 4.2 1.50 4.5 1.91 4.2 2.00 2.6 2.00
Commercial............. 3.3 0.29 21.8 1.61 18.5 1.51 19.6 1.50 18.6 1.50
Residential............ 8.1 0.30 13.8 0.50 20.0 0.76 20.5 0.75 21.6 0.75
Installment............. 27.1 3.55 34.9 3.91 26.0 3.06 20.4 2.50 18.5 2.50
Foreign................. 86.6/1/ 4.76 31.0 1.93 28.4 1.89 15.1 1.90 12.9 1.85
Leases.................. 5.9 1.06 2.6 0.50 2.0 0.46 2.0 0.50 1.9 0.50
Not allocated........... 18.5 -- 8.6 -- 8.4 -- 8.3 -- 12.9 --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
$211.3 2.19% $174.4 1.88% $167.8 1.97% $152.0 1.90% $148.5 1.92%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
- --------
/1/ Includes a general loan loss reserve allocation for country risk.
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 the Company'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. The activities
associated with these financial risks are categorized into "other than
trading" or "trading."
Other Than Trading Activities
In the normal course of business, elements of Pacific Century's balance
sheet are exposed to varying degrees of market risk. Market risk arises from
movements in interest rates and foreign currency exchange rates. A key element
in the process of managing market risk involves oversight by the Board of
Directors and senior management as to the level of such risk assumed by
Pacific Century in its balance sheet. The Board reviews and approves risk
management policies, including risk limits and guidelines and delegates to the
Asset Liability Management Committee (ALCO) oversight functions. The ALCO,
consisting of the Managing Committee and senior business and finance officers,
monitors Pacific Century's market risk exposure and as market conditions
dictate, modifies balance sheet positions or directs the use of derivative
instruments.
Interest Rate Risk. Pacific Century's balance sheet is sensitive to changes
in the general level of interest rates. This interest rate risk arises
primarily from the Company's normal business activities of making loans and
taking deposits. Many other factors also affect the Company's exposure to
changes in interest rates. These factors include general economic and
financial conditions, customer preferences, and historical pricing spread
relationships.
A key element in the Company's ongoing process to measure and monitor
interest rate risk is the utilization of a net interest income (NII)
simulation model. This model is used to estimate the amount that NII will
change over a one-year time horizon under various interest rate scenarios.
These estimates are based on numerous assumptions that include loan and
deposit volumes and pricing, prepayment speeds on mortgage-related assets,
36
<PAGE>
and principal amortization and maturities on other financial instruments.
While such assumptions are inherently uncertain, management believes that
these assumptions are reasonable. As a result, the NII simulation model
provides a sophisticated estimate rather than a precise prediction of NII's
exposure to higher or lower interest rates.
Table 14 presents as of December 31, 1998 and 1997, the estimate of the
change in NII from a gradual 200 basis point increase or decrease in interest
rates, moving in parallel fashion over the entire yield curve, over the next
12-month period relative to what the NII would have been if interest rates did
not change. The resulting estimate in NII exposure is well within the approved
ALCO guidelines and presents a balance sheet exposure that is slightly
liability sensitive. A liability sensitive exposure would imply a favorable
short-term impact on NII in periods of declining interest rates.
Market Risk Exposure to Interest Rate Changes
Table 14
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Interest Rate Interest Rate
Change Change
(in basis points) (in basis points)
----------------- -----------------
-200 +200 -200 +200
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Estimated Exposure as a Percent
of Net Interest Income.......... 1.9% (2.1)% 2.3% (2.0)%
</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 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, the Company uses several approaches, both
on- and off-balance sheet, to modify its risk position. Approaches that are
used to shift balance sheet mix or alter the interest rate characteristics of
assets and liabilities include changing product pricing strategies, modifying
investment portfolio strategies, or using financial derivatives. The use of
financial derivatives, as detailed in Note O to the Consolidated Financial
Statements, has been limited over the past 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.
Foreign Currency Risk. Pacific Century's broad area of operations throughout
the South Pacific and Asia has the potential to expose the Company to foreign
currency risk. In general, however, most foreign currency denominated assets
are funded by like currency liabilities, with imbalances corrected through the
use of various hedge instruments as disclosed in Note O to the Consolidated
Financial Statements. By policy, the net exposure in 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 the Company's total balance sheet exposure. While a
portion of the capital investment in French Polynesia and New Caledonia is
offset by a borrowing denominated in French Francs or foreign exchange
currency hedge transactions, the remainder of these capital positions,
aggregating $93.0 million, are not hedged.
Pacific Century uses a value-at-risk (VAR) calculation to measure the
potential loss from foreign currency exposure. Pacific Century's VAR is
calculated at a 95% confidence interval and assumes a normal distribution.
Pacific Century utilizes the variance/covariance approach to estimate the
probability of future changes in foreign exchange rates. Under this approach,
equally weighted daily closing prices are used to determine the daily
volatility for the last 10, 30, 50, and 100 days. Pacific Century uses the
highest daily volatility of the four trading periods in its VAR calculation.
37
<PAGE>
To estimate the potential loss in its net investment in foreign subsidiaries
and branches, Pacific Century takes the daily volatility and annualizes it by
multiplying by the number of trading days in a year. Therefore, the VAR
determines the potential one-year loss within a 95% confidence interval of the
net investment in subsidiaries. In other words, a loss greater than VAR has
approximately a 5% probability of occurring.
Table 15 presents as of December 31, 1998 and 1997 Pacific Century's foreign
currency exposure from its net investment in subsidiaries and branch
operations that are denominated in a foreign currency as measured by the VAR.
Market Risk Exposure From Changes in Foreign Exchange Rates
Table 15
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Book Value-at- Book Value-at-
Value Risk /1/ Value Risk
----- --------- ----- ---------
(in millions of dollars)
<S> <C> <C> <C> <C>
Net Investments in Foreign Subsidiaries
and Branches
Japanese Yen............................ $ 9.6 $ 2.7 $11.0 $ 1.9
Korean Won.............................. 44.2 7.9 29.5 23.0
Pacific Franc/2/ ....................... 22.8 3.6 24.3 3.7
Other Currencies........................ 16.4 15.3 29.5 8.9
----- ----- ----- -----
Total................................. $93.0 $29.5 $94.3 $37.5
===== ===== ===== =====
</TABLE>
- --------
/1/ The average value-at-risk for the Japanese yen, Korean won, Pacific franc,
and other currencies was $2.6 million, $13.2 million, $4.1 million, and
$14.0 million, respectively, for the year ended December 31, 1998.
/2/ Net of a $46 million and $43 million borrowing at December 31, 1998 and
1997, respectively, denominated in French francs and foreign exchange
hedge transactions of $26 million at December 31, 1998.
Trading Activities
Pacific Century's trading activities include foreign currency and foreign
exchange contracts that expose Pacific Century to a minor degree of foreign
currency risk. These transactions are executed on behalf of customers and for
the Company's own account. Pacific Century, however, manages its trading
account such that it does not maintain significant foreign currency open
positions. To measure the exposure of these open positions, the Company uses
the VAR methodology described above. The VAR measurement for trading
activities as of year-end 1998 continues to be immaterial.
Liquidity Management
Liquidity is managed to ensure that Pacific Century has continuous access to
sufficient, reasonably priced funding to conduct its business in a normal
manner. The Company's ALCO monitors sources and uses of funds and modifies
asset and liability positions as liquidity requirements change. This process
combined with Pacific Century's ability to raise funds in money and capital
markets and through private placements provides flexibility in managing the
exposure to liquidity risk.
To ensure that its liquidity needs are met, Pacific Century actively manages
both the asset and liability sides of the balance sheet. The primary sources
of liquidity on the asset side of the balance sheet are available for sale
investment securities, interest bearing deposits, and cash flows from loans
and investments, as well as the ability to securitize certain assets. With
respect to liabilities, liquidity is generated through growth in deposits and
the ability to obtain wholesale funding in national and local markets through
a variety of sources.
38
<PAGE>
Pacific Century obtains short-term wholesale funding through federal funds
purchased, repos, and commercial paper. Pacific Century issues commercial
paper in various denominations with maturities of generally 90 days or less.
During 1998, Pacific Century issued commercial paper only in the Hawaii
marketplace. To further enhance liquidity, Pacific Century also maintains
access to the mainland wholesale commercial paper market through a pre-
selected issuing agent.
Repos are financing transactions, whereby securities are pledged as
collateral for short-term borrowings. Nearly all of Pacific Century's repos
consist of transactions with governmental entities. Pacific Century's balance
sheet is unique given the high level of state and local government funding.
Historically, these governmental
entities have provided a stable source of funds.
Pacific Century maintained a $35 million, annually renewable line of credit
for working capital purposes. Fees are paid on the unused balance of the line.
During 1998, 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.
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 December 31, 1998, there were no balances outstanding
under this program.
Capital Management
Pacific Century manages its capital level to optimize shareholder value,
support asset growth, reflect risks inherent in its markets, 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 year-end 1998, Pacific Century's shareholders' equity grew to $1.2
billion, an increase of 6.1% over year-end 1997. The source of growth in
shareholders' equity in 1998 included retention of earnings, issuance of
common stock under the dividend reinvestment plan and various stock-based
employee benefit plans, and unrealized valuation adjustments. Offsetting these
increases were cash dividends paid of $52.8 million and treasury stock
purchases of $7.3 million.
Pacific Century's regulatory capital ratios at year-end 1998 were: Tier 1
Capital Ratio of 9.42%, Total Capital Ratio of 11.47%, and Leverage Ratio of
7.48%. 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 16 presents a five-year history of activities
and balances in Pacific Century's capital accounts along with key capital
ratios.
In December 1996, Pacific Century completed a $100 million 8.25% Capital
Securities offering that was issued through Bancorp Hawaii Capital Trust I, a
newly organized grantor trust. The capital securities mature in 30 years and
bear cumulative dividends at 8.25% payable semi-annually. Proceeds from this
issue were used for general corporate purposes. These capital securities
qualify as Tier I Capital for regulatory accounting purposes, but are
classified as long-term debt in the statement of condition.
In order to maintain its capital position at a desired level, Pacific
Century has repurchased shares, over the past few years, under various stock
repurchase programs. Under these programs, approximately 0.4 million shares in
1998, 2.9 million shares in 1997 and 1.8 million shares in 1996 were
repurchased. Share repurchase activities were suspended in January 1998 and
were partially reinitiated in September 1998 to offset shares issued in
conjunction with employee stock-based benefit and dividend reinvestment plans.
39
<PAGE>
Equity Capital
Table 16
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Source of Common Equity
Net Income................ $ 107.0 $ 139.5 $ 133.1 $ 121.8 $ 117.7
Dividends Paid............ (52.8) (49.7) (47.4) (45.2) (44.0)
Dividend Reinvestment
Program.................. 5.4 6.8 6.8 7.1 7.4
Stock Issued for
Acquisition.............. -- 108.4 -- -- --
Stock Repurchases......... (7.3) (142.5) (70.4) (40.0) (44.3)
Other/1/ ................. 16.1 (11.4) (10.4) 43.9 (8.1)
--------- --------- --------- -------- --------
Annual Increase in Equity. $ 68.4 $ 51.1 $ 11.7 $ 87.6 $ 28.7
========= ========= ========= ======== ========
Year-End Common Equity.... 1,185.6 1,117.2 1,066.1 1,054.4 966.8
Add: 8.25% Capital
Securities of
Bancorp Hawaii
Capital Trust I.... 100.0 100.0 100.0 -- --
Minority Interest.... 7.4 5.8 9.3 -- --
Less: Intangibles....... 186.2 180.9 68.9 60.2 64.6
Unrealized Valuation
and Other
Adjustments......... 3.6 5.5 2.2 11.3 (17.3)
--------- --------- --------- -------- --------
Tier I Capital............ 1,103.2 1,036.6 1,104.3 982.9 919.5
Allowable Loan Loss
Reserve................ 147.2 139.2 131.1 120.2 111.1
Subordinated Debt....... 95.0 118.7 118.7 118.7 118.6
Investment in
Unconsolidated
Subsidiary............. (2.5) (1.9) -- -- --
--------- --------- --------- -------- --------
Total Capital......... $ 1,342.9 $ 1,292.6 $ 1,354.1 $1,221.8 $1,149.2
========= ========= ========= ======== ========
Risk Weighted Assets...... $11,708.5 $11,098.6 $10,452.1 $9,587.0 $8,848.6
========= ========= ========= ======== ========
Key Ratios
Growth in Common Equity... 6.1% 4.8% 1.1% 9.1% 3.1%
Average Equity/Average
Assets Ratio............. 7.81% 7.79% 8.05% 8.28% 7.71%
Tier I Capital Ratio...... 9.42% 9.34% 10.57% 10.25% 10.39%
Total Capital Ratio....... 11.47% 11.65% 12.96% 12.74% 12.99%
Leverage Ratio............ 7.48% 7.21% 7.98% 7.82% 7.28%
</TABLE>
- --------
/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
adjustments.
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. As
a diversified financial services organization, Pacific Century depends on a
variety of systems to operate its businesses in Hawaii, the U.S. Mainland and
the Asia-Pacific region. Recognizing the significant risks associated with the
Year 2000 problem,
40
<PAGE>
Pacific Century established "Project 2000" in 1996 as a corporate-wide Year
2000 initiative. Through Project 2000, Pacific Century centrally manages,
coordinates and tracks all Year 2000 compliance activities for its
subsidiaries. Pacific Century believes that its level of preparedness is
appropriate to address Year 2000 issues in a timely manner and has developed a
project plan that is designed to renovate both critical information technology
and non-information technology assets in a timely manner. Pacific Century's
Year 2000 program management is structured around an Executive Technology
Council (the ETC) and Program Management Office (the PMO). The ETC, which is
comprised of executive officers of Pacific Century and its subsidiaries,
maintains a corporation-wide focus on Year 2000 compliance efforts. Year 2000
compliance activities are coordinated by the PMO across all lines of business
and geographic regions to ensure consistency in project management elements
throughout the enterprise. Incorporated in Pacific Century's Year 2000 project
plan are the following five phases:
Awareness. This phase consisted of securing executive level support needed
to achieve Year 2000 compliance. In addition, this phase required the
establishment of a Year 2000 program team and the development of an overall
strategy that encompassed internal systems, service providers for systems that
are outsourced, vendors, customers, counterparties and suppliers. Pacific
Century has completed the awareness phase.
Assessment. This phase consisted of identifying the software, hardware,
networks, processing platforms, non-technology assets and customers and
vendors that are affected by the Year 2000 date change. In addition, this
phase also addressed the size and complexity of the Year 2000 issues, as well
as, identified and developed the resources necessary to perform compliance
work. Pacific Century has completed the assessment phase.
Renovation. The renovation phase included work required to bring products
and services into Year 2000 compliance (i.e., code enhancements, hardware, and
software replacements, and vendor certification). Detailed analyses were
performed to determine the impact of the required changes on related
applications and hardware. Work was prioritized based on information gathered
during the assessment phase. The determining factor in the decision to repair,
replace, or risk-accept an asset was based on the criticality of an asset to
the operation of a business unit. For Pacific Century, 99% of the mission
critical systems have been renovated as of December 31, 1998.
Validation Testing. This phase consists of testing information technology
and non-information technology assets. During the initial phase of testing,
the functionality of the Year 2000 modified system is tested to demonstrate
that changes made to data processing do not disrupt the daily processing of
the system. Next, the Year 2000 modified application is tested together with
related applications to ensure that it can be safely integrated into
production without negatively impacting related applications. Before the
modified application is placed into production, it is reviewed, tested and
approved by end-users in the business units. As of December 31, 1998, Pacific
Century has completed approximately 90% of the validation testing of its
critical systems.
In addition, the validation phase also addresses external testing with third
party and service-provider systems for Year 2000 compliance. The bulk of
third-party interface testing will be conducted during the first quarter of
1999.
Implementation. In the implementation phase systems which have been tested
as Year 2000 compliant are migrated into production. As each renovated system
passes the final quality-assurance review, it is placed into production. As of
December 31, 1998, the implementation phase has been completed for
approximately 70% of Pacific Century's critical systems. Pacific Century
expects to have all of its critical systems fully implemented into production
by the end of June 1999.
Pacific Century understands that successfully addressing the Year 2000 issue
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.
41
<PAGE>
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. 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.
Contingency Plans and Risks
While Pacific Century believes its Year 2000 project plan is designed to be
successful in resolving Year 2000 issues it is possible, that not all
potential problems will be satisfactorily addressed in a timely manner. To
mitigate this possibility, Pacific Century has developed remediation
contingency plans and is developing business continuity contingency plans.
Remediation contingency plans are intended to mitigate risks associated with
potential delays in completing the renovation, validation or implementation
phases for Pacific Century's critical systems. These plans include specific
trigger dates to activate actions that are designed to minimize potential
material disruptions. As of December 31, 1998, Pacific Century has developed
remediation contingency plans for all critical systems.
Business continuity plans address the actions that would be taken if
critical functions could not be carried out in their normal manner on January
1, 2000 and the period thereafter, as a result of Year 2000 related
information system, embedded system, or external party failure. The process
for developing these plans calls for identifying specific failure scenarios
and determining their significance, developing alternative solutions to
mitigate business disruptions, and testing the effectiveness of the plan.
Pacific Century expects to complete its business continuity contingency plans
by June 30, 1999.
Pacific Century expects to successfully complete its Year 2000 program in a
timely and effective manner. As of December 31, 1998, Pacific Century was in
compliance with all Federal Financial Institution Examination Council
guidelines relating to Year 2000. However, because of the extensiveness,
complexity, and uniqueness of the Year 2000 problem, there can be no assurance
that Pacific Century will be completely successful in its efforts to address
Year 2000 issues. For example, there can be no assurance that all systems
external to Pacific Century will be Year 2000 ready by January 1, 2000, or by
some earlier date, in order not to create a material disruption to Pacific
Century's business. Pacific Century is also subject to credit risk to the
extent borrowers fail to adequately address Year 2000 issues. If, despite
diligent, prudent efforts under its Year 2000 plan, there are Year 2000-
related failures that create substantial disruptions to Pacific Century's
business, the adverse effect of such failures could have a material impact on
Pacific Century's results of operations and financial condition. However, no
significant adverse events have been currently identified. Moreover, the
estimated costs, referred to above, of implementing the Plan do not take into
account the costs, if any, that might be incurred as a result of Year 2000-
related failures that could occur despite implementation of the Plan.
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 "Overview--Forward-Looking
Statements."
European Economic and Monetary Union
On January 1, 1999, eleven members of the European Union introduced a new
common currency called the "euro." The full implementation to the euro will
occur over a transition period. Initially, the participating countries will
turn over their monetary policies (exchange and rate setting) to a new
European Central Bank.
42
<PAGE>
Additionally, the sovereign debt of participating countries will be
exclusively issued in euro, and outstanding sovereign debt will be
redenominated.
Between 1999 and 2002 the currencies of the participating countries will
remain legal tender as denominations of the euro. Beginning January 1, 2002,
euro denominated bills and coins will be issued for use in cash transactions.
By July 1, 2002 all legacy currencies will cease to be legal tender.
Included in the conversion to the euro is the French franc. Prior to January
1, 1999, the Pacific franc, the currency of French Polynesia and New
Caledonia, was pegged to the French franc. The Pacific franc will not convert
to the euro. Instead, the French government has pegged the Pacific franc to
the euro in the same equivalent relationship as the former fixed translation
with the French franc. The conversion to the euro currency is not expected to
have a significant impact on the operations or financial results of Pacific
Century.
Pacific Century has performed an internal analysis for the euro conversion.
Currently, operational systems and procedures are euro compliant, which enable
Pacific Century to perform euro related transactions. Costs associated with
the euro conversion were not significant.
Fourth Quarter Results and Other Matters
Earnings in 1998's fourth quarter were $35.0 million, an increase of 5.6%
over the $33.1 million reported in the fourth quarter of 1997. Compared to
1998's third quarter, earnings were up 0.5%. Basic earnings per share were
$0.44 and $0.41 in the fourth quarter of 1998 and 1997, respectively. Diluted
earnings per share were $0.43 and $0.41 in the same respective periods.
Net interest income on a tax equivalent basis totaled $143.7 million in the
fourth quarter of 1998, up 4.1% from the same period in 1997 and down 0.6%
from 1998's third quarter. The average net interest margin in 1998's fourth
quarter was 4.15%, compared to 4.09% in the fourth quarter of 1997. The
improvement in margin was driven by acquisitions and the continued efforts to
position the balance sheet towards higher yielding assets. The average earning
asset yield decreased to 7.78% from 8.09% comparing the fourth quarters of
1998 and 1997, respectively, while the average cost of funds rate decreased to
4.48% from 4.74% between the same periods.
Non-interest income in the final quarter of 1998 increased to $55.4 million
from $53.7 million in 1997's comparable period. Trust income rose 10.4% during
the fourth quarter relative to last year's fourth quarter, while service
charges on deposit accounts were up 13.7% and fees, exchange, and other
service charges grew 13.0%. Other operating income in the fourth quarter of
1998 decreased $3.5 million, or 25.3% from the fourth quarter of 1997 and is
explained by a gain of $4.4 million in 1997 relating to a leveraged lease
termination.
Non-interest expense totaled $131.1 million in 1998's fourth quarter, up
1.7% from the same year ago period. Salaries and employee benefits in the
current quarter increased $2.5 million, or 4.1% relative to 1997's final
quarter. Net occupancy expense declined 16.3% during the fourth quarter
reflecting the closure of 27 branches in Hawaii pursuant to the redesign plan.
In the fourth quarter of 1998, net equipment expense rose 31.9%. Contributing
to this increase were Year 2000 and other technology related costs. Other
operating expense declined slightly by 1.0% from 1997's fourth quarter.
The provision for loan losses totaled $13.0 million in the fourth quarter of
1998, compared to $9.8 million in the same quarter in 1997. The effective tax
rate in the fourth quarter was 36.2%, compared to 37.3% in the like period
last year.
Gross charge-offs decreased to $19.0 million during 1998's fourth quarter
from $22.3 million in the comparable quarter last year. Foreign loan charge-
offs were $8.0 million in 1998's fourth quarter, compared to $10.6 million in
the same year earlier period and primarily reflect charge-offs in the South
Pacific. Recoveries were $7.4 million in the last quarter of 1998, of which
$5.1 million related to the foreign category.
43
<PAGE>
Consolidated Quarterly Results of Operations
Table 17
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------
1998 1997
----------------------------- ---------------------------
Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec.
------ ------ ------ ------ ------ ------ ------ ------
(in millions of dollars except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Interest Income... $273.0 $282.1 $275.5 $269.2 $250.1 $255.5 $271.5 $272.6
Total Interest Expense.. 131.3 135.2 131.0 125.7 125.1 130.6 135.9 134.7
Net Interest Income..... 141.7 146.9 144.5 143.5 125.0 124.9 135.6 137.9
Provision for Loan
Losses................. 18.3 42.0 10.7 13.0 5.1 7.3 8.2 9.8
Investment Securities
Gains (Losses)......... 3.4 -- (0.5) 1.2 0.5 1.5 0.3 0.8
Non-Interest Income..... 49.5 49.8 54.1 54.2 41.2 44.8 45.9 52.9
Non-Interest Expense.... 121.7 151.7 136.2 131.1 106.0 108.9 119.0 129.0
------ ------ ------ ------ ------ ------ ------ ------
Income Before Income
Taxes.................. 54.6 3.0 51.2 54.8 55.6 55.0 54.6 52.8
Provision for Income
Taxes.................. 20.6 (0.1) 16.4 19.8 20.1 19.4 19.3 19.7
------ ------ ------ ------ ------ ------ ------ ------
Net Income.............. $ 34.0 $ 3.1 $ 34.8 $ 35.0 $ 35.5 $ 35.6 $ 35.3 $ 33.1
====== ====== ====== ====== ====== ====== ====== ======
Basic Earnings Per
Share.................. $ 0.43 $ 0.04 $ 0.43 $ 0.44 $ 0.45 $ 0.45 $ 0.44 $ 0.41
Diluted Earnings Per
Share.................. $ 0.42 $ 0.04 $ 0.43 $ 0.43 $ 0.44 $ 0.44 $ 0.43 $ 0.41
</TABLE>
44
<PAGE>
Supplementary Data
Maturity Distribution, Market Value and Weighted-Average Yield to Maturity of
Securities
Table 18
<TABLE>
<CAPTION>
Approximate
Within 1-5 5-10 Over Market
At Year-End December 31 1 Year Years Years 10 Years Total Value
----------------------- ------ -------- ------ -------- -------- -----------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Maturity Distribution
Based on Amortized Cost
U.S. Treasury
Securities........... $ -- $ 26.2 $ -- $ -- $ 26.2 $ 26.2
U.S. Government
Agencies............. 39.5 12.1 -- -- 51.6 51.7
Obligations of States
and Political
Subdivisions......... 3.4 8.4 0.2 -- 12.0 13.0
Corporate Equity
Securities........... -- -- -- 70.3 70.3 70.3
Mortgage-Backed
Securities/1/ ....... 14.8 35.1 12.2 344.1 406.2 420.0
Other................. 77.4 8.5 0.6 -- 86.5 86.9
Available for Sale
Securities/1/ ....... 104.2 94.4 157.6 2,657.6 3,013.8 3,018.4
------ -------- ------ -------- -------- --------
Total--1998......... $239.3 $ 184.7 $170.6 $3,072.0 $3,666.6 $3,686.5
--1997......... $668.6 $ 977.7 $105.0 $2,046.5 $3,797.8 $3,809.9
--1996......... $310.1 $1,382.0 $ 94.6 $1,774.9 $3,561.6 $3,567.7
------ -------- ------ -------- -------- --------
Weighted-Average
Yield/2/ to Maturity
U.S. Treasury
Securities........... -- % 4.7% -- % -- % 4.7%
U.S. Government
Agencies............. 5.8 7.0 -- -- 6.1
Obligations of States
and Political
Subdivisions......... 12.6 10.9 6.7 -- 11.3
Corporate Equity
Securities........... -- -- -- -- --
Mortgage-Backed
Securities........... 5.6 6.3 8.3 7.1 7.0
Other................. 11.0 6.6 3.0 -- 10.5
Available for Sale
Securities/3/ ....... 5.5 6.1 6.5 7.1 7.0
------ -------- ------ -------- --------
Total--1998......... 7.5% 6.3% 6.7% 6.9% 6.9%
====== ======== ====== ======== ========
Tax Equivalent Adjust-
ment Amount............ $ 0.1 $ 0.3 $ 0.1 $ 0.1 $ 0.6
</TABLE>
- --------
/1/ Contractual maturities do not anticipate reductions for periodic paydowns.
/2/ Tax equivalent at 35% tax rate.
/3/ The weighted-average yields on available for sale securities are based on
amortized cost.
45
<PAGE>
Average Assets
Table 19
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------- --------------- --------- --------- ---------
Amount Mix Amount Mix Amount Amount Amount
--------- ----- --------- ----- --------- --------- ---------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Bearing
Deposits............... $ 508.8 3.4% $ 486.3 3.4% $ 579.9 $ 645.7 $ 812.6
Investment Securities
--Held to Maturity.... 902.4 6.1 1,232.9 8.7 1,091.1 1,532.4 2,482.1
--Available for Sale.. 2,769.3 18.6 2,452.0 17.2 2,288.7 1,639.0 1,063.9
Funds Sold.............. 69.7 0.4 76.4 0.5 92.1 68.5 52.5
Loans................... 9,422.3 63.4 8,929.7 62.7 8,353.6 7,654.9 7,393.7
--------- ----- --------- ----- --------- --------- ---------
Total Earning
Assets............. 13,672.5 91.9 13,177.3 92.5 12,405.4 11,540.5 11,804.8
Non-Earning Assets...... 1,198.2 8.1 1,065.0 7.5 889.8 849.7 791.8
--------- ----- --------- ----- --------- --------- ---------
Total............... $14,870.7 100.0% $14,242.3 100.0% $13,295.2 $12,390.2 $12,596.6
========= ===== ========= ===== ========= ========= =========
</TABLE>
Average Loans
Table 20
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------- -------------- -------- -------- --------
Amount Mix Amount Mix Amount Amount Amount
-------- ----- -------- ----- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Industrial............. $2,258.3 24.0% $1,923.8 21.5% $1,784.0 $1,850.3 $1,681.1
Real Estate
Construction.......... 284.0 3.0 264.6 3.0 229.6 164.2 145.2
Mortgage.............. 3,838.6 40.7 3,882.0 43.5 3,863.2 3,765.8 3,840.1
Installment............. 793.2 8.4 846.3 9.5 814.8 754.4 686.7
Foreign................. 1,752.6 18.6 1,540.3 17.2 1,253.7 746.0 667.8
Lease Financing......... 495.6 5.3 472.7 5.3 408.3 374.2 372.8
-------- ----- -------- ----- -------- -------- --------
Total............... $9,422.3 100.0% $8,929.7 100.0% $8,353.6 $7,654.9 $7,393.7
======== ===== ======== ===== ======== ======== ========
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates/1/
Table 21
<TABLE>
<CAPTION>
Due in One Due in One Due After
December 31, 1998 Year or Less to Five Years /2/ Five Years /2/ Total
----------------- ------------ ----------------- -------------- --------
(in millions of dollars)
<S> <C> <C> <C> <C>
Commercial and
Industrial............. $1,927.6 $ 562.7 $ 89.4 $2,579.7
Real Estate--
Construction........... 172.6 35.1 92.1 299.8
Other Loans............. 461.8 1,154.2 3,540.0 5,156.0
Foreign Loans........... 1,212.0 411.7 194.8 1,818.5
-------- -------- -------- --------
Total............... $3,774.0 $2,163.7 $3,916.3 $9,854.0
======== ======== ======== ========
</TABLE>
- --------
/1/Based on contractual maturities.
/2/As of December 31, 1998, of the loans maturing after one year, $3,027.8
million have floating rates and $3,052.2 million have fixed rates.
46
<PAGE>
Average Deposits
Table 22
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------- -------------- -------- -------- --------
Amount Mix Amount Mix Amount Amount Amount
-------- ----- -------- ----- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic
Non-Interest Bearing
Demand............... $1,650.4 17.3% $1,516.8 16.4% $1,371.5 $1,391.6 $1,373.2
Interest-Bearing
Demand............... 2,114.8 22.1 1,945.3 21.0 1,726.6 1,752.4 1,895.4
Regular Savings....... 783.9 8.2 865.5 9.4 937.0 1,058.5 1,232.3
Private Time
Certificates of
Deposit ($100,000 or
More)................ 941.7 9.9 848.1 9.2 719.2 581.5 476.8
Public Time
Certificates of
Deposit ($100,000 or
More)................ 86.5 0.9 205.9 2.2 310.6 89.3 64.6
Bearer Certificates of
Deposit.............. -- -- -- -- 1.3 5.0 5.0
All Other Time and
Savings Certificates. 1,752.5 18.4 1,804.7 19.5 1,433.9 1,164.1 998.4
-------- ----- -------- ----- -------- -------- --------
Total Domestic...... 7,329.8 76.8 7,186.3 77.7 6,500.1 6,042.4 6,045.7
-------- ----- -------- ----- -------- -------- --------
Foreign
Non-Interest Bearing
Demand............... 447.7 4.7 264.0 2.8 194.2 11.8 12.8
Time Due to Banks..... 596.1 6.2 718.7 7.8 733.5 652.7 896.5
Other Time and
Savings.............. 1,176.1 12.3 1,079.0 11.7 745.0 329.5 340.2
-------- ----- -------- ----- -------- -------- --------
Total Foreign....... 2,219.9 23.2 2,061.7 22.3 1,672.7 994.0 1,249.5
-------- ----- -------- ----- -------- -------- --------
Total............... $9,549.7 100.0% $9,248.0 100.0% $8,172.8 $7,036.4 $7,295.2
======== ===== ======== ===== ======== ======== ========
</TABLE>
47
<PAGE>
Interest Differential
Table 23
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
------------------------- -------------------------
Volume /1/ Rate /1/ Total Volume /1/ Rate /1/ Total
---------- -------- ----- ---------- -------- -----
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Change in Interest Income
Interest Bearing
Deposits
Foreign.............. $ 1.6 $ 2.0 $ 3.6 $(6.5) $(2.4) $(8.9)
Investment Securities--
Held to Maturity
Taxable.............. (24.0) 9.9 (14.1) 9.5 1.9 11.4
Tax-Exempt........... (0.1) -- (0.1) (0.1) 0.1 --
Investment Securities--
Available for Sale.... 19.9 (7.8) 12.1 10.4 0.5 10.9
Funds Sold............. (0.3) 0.3 -- (0.7) 0.5 (0.2)
Loans, Net of Unearned
Income
Domestic............. 30.5 16.6 47.1 28.3 4.2 32.5
Foreign.............. 16.7 (15.5) 1.2 24.0 (2.4) 21.6
----- ----- ----- ----- ----- -----
Total Interest
Income............ $44.3 $ 5.5 $49.8 $64.9 $ 2.4 $67.3
===== ===== ===== ===== ===== =====
Change in Interest
Expense
Interest Bearing
Deposits
Demand Deposits...... $ 4.4 $(1.6) $ 2.8 $ 5.9 $(0.2) $ 5.7
Savings Deposits..... (1.9) (1.1) (3.0) (1.8) (0.5) (2.3)
Time Deposits........ (4.2) (7.3) (11.5) 21.7 1.8 23.5
Deposits in Foreign
Offices............. (1.3) 7.9 6.6 16.9 (9.5) 7.4
Short-Term Borrowings.. 10.9 (5.3) 5.6 3.2 3.4 6.6
Long-Term Debt......... (3.1) (0.5) (3.6) (19.1) 4.6 (14.5)
----- ----- ----- ----- ----- -----
Total Interest
Expense........... $ 4.8 $(7.9) $(3.1) $26.8 $(0.4) $26.4
===== ===== ===== ===== ===== =====
Net Interest Differential
Domestic............... $19.9 $34.8 $54.7 $37.5 $(1.9) $35.6
Foreign................ 19.6 (21.4) (1.8) 0.6 4.7 5.3
----- ----- ----- ----- ----- -----
Total Interest
Differential...... $39.5 $13.4 $52.9 $38.1 $ 2.8 $40.9
===== ===== ===== ===== ===== =====
</TABLE>
- --------
/1/The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
48
<PAGE>
Year-End Summary of Selected Consolidated Financial Data
Table 24
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(in millions of dollars except per share amounts)
<S> <C> <C> <C> <C> <C>
Balance Sheet Totals
Net Loans............. $ 9,416.8 $ 9,114.3 $ 8,347.9 $ 7,853.0 $ 7,599.5
Total Assets.......... 15,016.6 14,995.5 14,009.2 13,206.8 12,586.4
Deposits.............. 9,576.3 9,607.7 8,684.1 7,576.8 7,115.1
Long-Term Debt........ 585.6 705.8 932.1 1,063.4 861.6
Shareholders' Equity.. 1,185.6 1,117.2 1,066.1 1,054.4 966.8
Operating Results
Total Interest Income. $ 1,099.8 $ 1,049.7 $ 982.1 $ 896.7 $ 813.0
Net Interest Income... 576.6 523.4 482.3 428.5 449.3
Provision for Loan
Losses............... 84.0 30.3 22.2 17.0 21.9
Net Income............ 107.0 139.5 133.1 121.8 117.7
Basic Earnings Per
Share................ $ 1.33 $ 1.75 $ 1.63 $ 1.46 $ 1.39
Diluted Earnings Per
Share................ $ 1.32 $ 1.72 $ 1.62 $ 1.45 $ 1.37
Common Dividends Paid
Per Share............ $ 0.66 $ 0.63 $ 0.58 $ 0.54 $ 0.52
Excluding the Effects
of Intangible/1/
Tangible Net Income. $ 121.7 $ 150.7 $ 141.3 $ 129.2 $ 125.8
Tangible Basic
Earnings Per Share. $ 1.52 $ 1.89 $ 1.73 $ 1.55 $ 1.48
Tangible Diluted
Earnings Per Share. $ 1.50 $ 1.86 $ 1.71 $ 1.54 $ 1.47
Non-Financial Data
Common Shareholders of
Record at Year-
End/2/............... 10,396 10,514 10,199 10,293 9,448
Weighted Average
Shares--Basic........ 80,228,424 79,794,011 81,595,728 83,325,878 84,712,506
Weighted Average
Shares--Diluted...... 81,142,144 80,946,170 82,424,524 84,054,913 85,649,062
</TABLE>
- --------
/1/Intangibles include goodwill, core deposit and trust intangibles, and other
intangibles.
/2/The number of common shareholders is based on the number of record holders.
49
<PAGE>
Item 8. Financial Statements and Supplementary Data
Consolidated Quarterly Results of Operations--Narrative and Table 17
included in Item 7 of this report.
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Pacific Century Financial Corporation
We have audited the accompanying consolidated statements of condition of
Pacific Century Financial Corporation and subsidiaries as of December 31,
1998, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pacific
Century Financial Corporation and subsidiaries at December 31, 1998, 1997 and
1996, and the consolidated results of their operations and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Honolulu, Hawaii
January 22, 1999
50
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands of dollars
except per share amounts)
<S> <C> <C> <C>
Interest Income
Interest on Loans........................... $ 748,495 $ 714,572 $ 659,701
Loan Fees................................... 45,340 34,334 29,692
Income on Lease Financing................... 25,699 22,063 27,124
Interest and Dividends on Investment
Securities
Taxable................................... 67,717 81,845 70,401
NonTaxable................................ 1,096 1,186 1,193
Income on Investment Securities Available
for Sale................................... 170,963 158,851 147,949
Interest on Deposits........................ 36,676 33,058 41,957
Interest on Security Resale Agreements...... 82 86 --
Interest on Funds Sold...................... 3,718 3,727 4,039
---------- ---------- ----------
Total Interest Income..................... 1,099,786 1,049,722 982,056
Interest Expense
Interest on Deposits........................ 317,919 323,114 288,716
Interest on Security Repurchase Agreements.. 121,445 115,461 100,085
Interest on Funds Purchased................. 26,720 23,805 29,020
Interest on ShortTerm Borrowings............ 14,376 17,554 21,110
Interest on LongTerm Debt................... 42,725 46,344 60,842
---------- ---------- ----------
Total Interest Expense.................... 523,185 526,278 499,773
---------- ---------- ----------
Net Interest Income........................... 576,601 523,444 482,283
Provision for Loan Losses..................... 84,014 30,338 22,227
---------- ---------- ----------
Net Interest Income After Provision for
Loan Losses.............................. 492,587 493,106 460,056
Non-Interest Income
Trust Income................................ 55,879 52,237 49,761
Service Charges on Deposit Accounts......... 35,459 29,354 26,716
Fees, Exchange and Other Service Charges.... 77,881 67,081 58,949
Other Operating Income...................... 38,446 36,043 27,687
Investment Securities Gains................. 4,086 3,074 1,364
---------- ---------- ----------
Total Non-Interest Income................. 211,751 187,789 164,477
Non-Interest Expense
Salaries.................................... 194,522 173,159 159,213
Pensions and Other Employee Benefits........ 56,003 53,535 48,811
Net Occupancy Expense....................... 46,799 46,725 39,416
Net Equipment Expense....................... 49,009 38,524 34,017
Other Operating Expense..................... 174,546 149,464 138,359
Restructuring Charge........................ 19,400 -- --
Minority Interest........................... 446 1,488 1,444
---------- ---------- ----------
Total Non-Interest Expense................ 540,725 462,895 421,260
---------- ---------- ----------
Income Before Taxes........................... 163,613 218,000 203,273
Provision for Taxes........................... 56,649 78,512 70,149
---------- ---------- ----------
Net Income................................ $ 106,964 $ 139,488 $ 133,124
========== ========== ==========
Basic Earnings Per Share...................... $ 1.33 $ 1.75 $ 1.63
Diluted Earnings Per Share.................... $ 1.32 $ 1.72 $ 1.62
Basic Weighted Average Shares................. 80,228,424 79,794,011 81,595,728
Diluted Weighted Average Shares............... 81,142,144 80,946,170 82,424,524
</TABLE>
See Notes to Consolidated Financial Statements.
51
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C>
Assets
Interest-Bearing Deposits.............. $ 453,527 $ 335,847 $ 635,519
Investment Securities
--Held to Maturity (Market Value of
$668,068, $1,223,235 and $1,261,146,
respectively)........................ 652,802 1,220,215 1,258,756
--Available for Sale.................. 3,018,403 2,586,698 2,306,586
Funds Sold............................. 45,683 80,457 141,920
Loans.................................. 9,854,000 9,498,408 8,699,286
Unearned Income....................... (225,915) (209,721) (183,586)
Reserve for Loan Losses............... (211,276) (174,362) (167,795)
----------- ----------- -----------
Net Loans........................... 9,416,809 9,114,325 8,347,905
----------- ----------- -----------
Total Earning Assets................ 13,587,224 13,337,542 12,690,686
Cash and Non-Interest Bearing Deposits. 564,243 795,332 581,221
Premises and Equipment................. 293,591 288,358 273,122
Customers' Acceptance Liability........ 8,227 21,575 21,178
Accrued Interest Receivable............ 85,485 93,831 88,074
Other Real Estate...................... 5,648 6,151 10,711
Intangibles, Including Goodwill........ 216,106 203,366 96,456
Other Assets........................... 256,039 249,309 247,719
----------- ----------- -----------
Total Assets........................ $15,016,563 $14,995,464 $14,009,167
=========== =========== ===========
Liabilities
Domestic Deposits
Demand--Non-Interest Bearing.......... $ 1,745,747 $ 1,714,886 $ 1,435,091
--Interest Bearing................. 2,385,285 2,112,425 1,724,105
Savings............................... 740,378 823,216 866,453
Time.................................. 2,637,746 2,929,782 2,571,569
Foreign Deposits
Demand--Non-Interest Bearing.......... 489,672 351,178 553,274
Time Due to Banks..................... 685,137 707,684 804,818
Other Savings and Time................ 892,377 968,524 728,769
----------- ----------- -----------
Total Deposits...................... 9,576,342 9,607,695 8,684,079
Securities Sold Under Agreements to
Repurchase............................ 2,008,399 2,279,124 2,075,571
Funds Purchased........................ 942,062 710,472 599,994
Short-Term Borrowings.................. 356,822 226,127 293,257
Bank's Acceptances Outstanding......... 8,227 21,575 21,178
Accrued Retirement Expense............. 39,811 37,737 37,509
Accrued Interest Payable............... 55,694 57,512 69,545
Accrued Taxes Payable.................. 114,443 152,092 154,984
Minority Interest...................... 7,394 5,758 9,307
Other Liabilities...................... 136,159 74,376 65,478
Long-Term Debt......................... 585,616 705,789 932,143
----------- ----------- -----------
Total Liabilities................... 13,830,969 13,878,257 12,943,045
----------- ----------- -----------
Shareholders' Equity
Common Stock ($.01 par value at
December 31, 1998 and $2.00 par value
at December 31, 1997 and 1996),
authorized 500,000,000 shares;
issued/outstanding; December 1998-
80,512,372/80,325,998; December 1997-
79,684,553/79,684,553; and December
1996-39,959,234/39,959,234............ 805 159,369 79,918
Capital Surplus........................ 342,932 168,920 186,391
Accumulated Other Comprehensive Income. (22,476) (24,766) (3,722)
Retained Earnings...................... 867,852 813,684 803,535
Treasury Stock, at Cost (186,374 shares
in 1998).............................. (3,519) -- --
----------- ----------- -----------
Total Shareholders' Equity.......... 1,185,594 1,117,207 1,066,122
=========== =========== ===========
Total Liabilities and Shareholders'
Equity............................. $15,016,563 $14,995,464 $14,009,167
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
52
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Comprehensive Retained Treasury Comprehensive
Total Stock Surplus Income Earnings Stock Income
---------- -------- -------- ------------- -------- -------- -------------
(in thousands of dollars except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $1,054,436 $ 82,682 $240,080 $ 13,902 $717,772 $ --
Net Income............. 133,124 -- -- -- 133,124 -- $133,124
Other Comprehensive
Income, Net of Tax
Investment Securities,
Net of
Reclassification
Adjustment............ (9,114) -- -- (9,114) -- -- (9,114)
Foreign Currency
Translation
Adjustment............ (8,510) -- -- (8,510) -- -- (8,510)
--------
Total Comprehensive
Income.............. 115,500
========
Common Stock Issued
37,220 Profit Sharing
Plan.................. 1,288 74 1,214 -- -- --
245,437 Stock Option
Plan.................. 5,491 491 5,000 -- -- --
170,577 Dividend
Reinvestment Plan..... 6,756 341 6,415 -- -- --
11,483 Directors'
Restricted Shares and
Deferred Compensation
Plan.................. 456 23 433 -- -- --
Stock Repurchased...... (70,444) (3,693) (66,751) -- -- --
Cash Dividends Paid.... (47,361) -- -- -- (47,361) --
---------- -------- -------- -------- -------- -------
Balance at December 31,
1996................... $1,066,122 $ 79,918 $186,391 $ (3,722) $803,535 $ --
Net Income............. 139,488 -- -- -- 139,488 -- $139,488
Other Comprehensive
Income, Net of Tax
Investment Securities,
Net of
Reclassification
Adjustment............ 3,233 -- -- 3,233 -- -- 3,233
Foreign Currency
Translation
Adjustment............ (24,277) -- -- (24,277) -- -- (24,277)
--------
Total Comprehensive
Income................ 118,444
========
Common Stock Issued
88,517 Profit Sharing
Plan.................. 4,116 177 3,939 -- -- --
231,264 Stock Option
Plan.................. 5,356 463 4,893 -- -- --
164,671 Dividend
Reinvestment Plan..... 6,754 329 6,425 -- -- --
3,407 Directors'
Restricted Shares and
Deferred Compensation
Plan.................. 150 7 143 -- -- --
2,317,873 CU Bancorp
Acquisition........... 108,469 4,636 103,833 -- -- --
Stock Repurchased...... (142,479) (5,775) (136,704) -- -- --
Two-for-One Stock Split
in the Form of a 100%
Stock Dividend........ -- 79,614 -- -- (79,614) --
Cash Dividends Paid.... (49,725) -- -- -- (49,725) --
---------- -------- -------- -------- -------- -------
Balance at December 31,
1997................... $1,117,207 $159,369 $168,920 $(24,766) $813,684 $ --
Net Income............. 106,964 -- -- -- 106,964 -- $106,964
Other Comprehensive
Income, Net of Tax
Investment Securities,
Net of
Reclassification
Adjustment............ (2,732) -- -- (2,732) -- -- (2,732)
Foreign Currency
Translation
Adjustment............ 5,671 -- -- 5,671 -- -- 5,671
Pension Liability
Adjustment............ (649) -- -- (649) -- -- (649)
--------
Total Comprehensive
Income................ 109,254
========
Common Stock Issued
125,889 Profit Sharing
Plan.................. 3,559 225 2,627 -- -- 707
543,256 Stock Option
Plan.................. 10,084 530 8,408 -- (20) 1,166
153,574 Dividend
Reinvestment Plan..... 5,441 199 3,335 -- -- 1,907
5,100 Directors'
Restricted Shares and
Deferred Compensation
Plan.................. 139 1 123 -- -- 15
Treasury Stock
Repurchased........... (7,314) -- -- -- -- (7,314)
Change in Par Value of
Common Stock from
$2.00 Per Share to $
.01 Per Share......... -- (159,519) 159,519 -- -- --
Cash Dividends Paid.... (52,776) -- -- -- (52,776) --
---------- -------- -------- -------- -------- -------
Balance at December 31,
1998................... $1,185,594 $ 805 $342,932 $(22,476) $867,852 $(3,519)
========== ======== ======== ======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
53
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------
1998 1997 1996
----------- --------- ---------
(in thousands of dollars)
<S> <C> <C> <C>
Operating Activities/1/
Net Income................................. $ 106,964 $ 139,488 $ 133,124
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses................ 84,014 30,338 22,227
Depreciation and Amortization............ 55,539 47,268 39,394
Deferred Income Taxes.................... (24,583) (1,539) 2,423
Realized Gains on Investment Securities
Available for Sale...................... (4,444) (2,939) (1,193)
Amortization of Deferred Lease Income.... (32,470) (30,505) (26,326)
Amortization of Deferred Loan Fee Income. (17,169) (12,210) (8,318)
Decrease (Increase) in Interest
Receivable.............................. 10,740 (5,757) (286)
Increase (Decrease) in Interest Payable.. (3,315) (13,193) 14,116
Decrease (Increase) in Other Assets...... (18,946) 16,918 (21,396)
Increase (Decrease) in Other Liabilities. 42,404 (38,497) (15,641)
----------- --------- ---------
Net Cash Provided by Operating Activities.. 198,734 129,372 138,124
----------- --------- ---------
Investing Activities
Proceeds from Redemptions of Investment
Securities Held to Maturity............... 763,158 219,216 594,894
Purchases of Investment Securities Held to
Maturity.................................. (195,745) (127,706) (665,427)
Proceeds from Sales of Investment
Securities Available for Sale............. 1,993,405 714,742 703,899
Proceeds from Redemptions of Investment
Securities Available for Sale............. 399,426 195,233 81,757
Purchases of Investment Securities
Available for Sale........................ (2,825,677) (981,411) (978,512)
Net Decrease (Increase) in Interest-
Bearing Deposits Placed in Other Banks.... (90,628) 295,031 409,619
Decrease (Increase) in Funds Sold.......... 34,774 92,663 (25,747)
Decrease (Increase) in Loans, Net.......... (113,925) (283,536) 95,118
Purchases of Premises and Equipment........ (43,390) (27,995) (38,665)
Proceeds from Sale of Premises and
Equipment................................. 13,032 -- --
Purchases, Net of Cash and Non-Interest
Bearing Deposits Acquired:
Additional Interest in Credipac Polynesie
and Creditpac Nouvelle Caledonie........ -- -- (4,114)
Banque de Tahiti and Banque de Nouvelle
Caledonie............................... -- -- 18,090
Banque Paribas Pacifique and Banque
Paribas Polynesie....................... 6,327 -- --
Indosuez Niugini Bank, Ltd............... -- (5,371) --
CU Bancorp and California United Bank.... -- 24,523 --
Home Savings of America Deposits......... -- 235,020 --
----------- --------- ---------
Net Cash Provided (Used) by Investing
Activities................................ (59,243) 350,409 190,912
----------- --------- ---------
Financing Activities
Net Increase (Decrease) in Demand,
Savings, and Time Deposits................ (302,296) (72,506) 248,793
Proceeds from Lines of Credit and LongTerm
Debt...................................... 190,117 104,000 512,787
Principal Payments on Lines of Credit and
Long-Term Debt............................ (311,333) (330,354) (644,080)
Net Increase (Decrease) in Short-Term
Borrowings................................ 88,128 233,295 (222,022)
Proceeds from Sale of Common Stock......... 19,223 16,376 13,991
Stock Repurchased.......................... (7,314) (142,479) (70,444)
Cash Dividends............................. (52,776) (49,725) (47,361)
----------- --------- ---------
Net Cash Used by Financing Activities...... (376,251) (241,393) (208,336)
----------- --------- ---------
Effect of Exchange Rate Changes on Cash.... 5,671 (24,277) (8,510)
----------- --------- ---------
Increase (Decrease) in Cash and Non-
Interest Bearing Deposits............. (231,089) 214,111 112,190
Cash and Non-Interest Bearing Deposits at
Beginning of Year......................... 795,332 581,221 469,031
----------- --------- ---------
Cash and Non-Interest Bearing Deposits
at End of Year........................ $ 564,243 $ 795,332 $ 581,221
=========== ========= =========
</TABLE>
- --------
/1/ During the years ended December 31, 1998, 1997 and 1996, Pacific Century
Financial Corporation made interest payments of $525,003,000, $538,311,000
and $479,701,000, respectively, and paid income taxes of $80,697,000,
$81,404,000 and $75,471,000, respectively.
See Notes to Consolidated Financial Statements.
54
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Summary of Significant Accounting Policies
The accounting principles followed by Pacific Century Financial Corporation
and its subsidiaries (Pacific Century), and the methods of applying those
principles conform with generally accepted accounting principles and general
practices within the banking industry. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results may differ
from those estimates and such differences could be material to the financial
statements. Certain accounts in prior years have been reclassified to conform
with the 1998 presentation. The significant accounting policies are summarized
below.
Organization/Consolidation
Pacific Century is a bank holding company providing a broad range of
financial products and services to customers in Hawaii, the Pacific, Asia and
the U.S. Mainland. The majority of Pacific Century's operations consist of
customary commercial and consumer banking services including, but not limited
to, lending, leasing, deposit services, trust and investment activities and
trade financing. The principal subsidiaries of Pacific Century are Bank of
Hawaii, Pacific Century Bank, N.A. and First Savings and Loan Association of
America (First Savings). The consolidated financial statements include the
accounts of Pacific Century and all significant majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated
and minority interests recognized in consolidation.
Accounting Changes
Effective January 1, 1998, Pacific Century adopted Financial Accounting
Standards Board's Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in a full set
of financial statements. The Statement requires that all items that meet the
definition of components of comprehensive income be reported in a financial
statement for the period in which they are recognized. With the adoption of
SFAS No. 130, the format of the Consolidated Statements of Shareholders'
Equity has changed to provide the required disclosures, and prior years have
been reclassified to conform with the statement. The adoption of SFAS No. 130
had no material effect on Pacific Century's financial position or results of
operations.
On December 31, 1998, Pacific Century implemented SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the reporting of financial information about
operating segments in annual financial statements to stockholders, and
requires certain selected segment information in interim reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 had no
material impact on Pacific Century's financial position or results of
operations.
On December 31, 1998, Pacific Century adopted SFAS No. 132 "Employers'
Disclosure about Pensions and Other Postretirement Benefits." This statement
standardizes, to the extent practicable, disclosure requirements and requires
additional information on changes in benefit obligations, fair value of plan
assets and certain other disclosures. The implementation of SFAS No. 132 had
no impact on Pacific Century's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement standardizes the
accounting for derivative instruments by requiring the recognition of those
instruments as assets or liabilities in the statement of financial condition,
measured at fair value. Gains or losses resulting from changes in the fair
values of derivatives would be accounted for depending on the use of the
derivatives and whether they qualify for hedge accounting. In order to qualify
for hedge accounting, the
55
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
hedging relationship must be highly effective in achieving offsetting changes
in fair value or cash flows. SFAS No. 133 requires matching the timing of gain
or loss recognition on derivative instruments with the recognition of the
changes in the fair value of the hedged asset or liability that is attributed
to the hedged risk or the effect on earnings of the hedged forecasted
transaction. SFAS No. 133 will become effective for fiscal years beginning
after June 15, 1999. The adoption of SFAS No. 133 is not expected to have a
material impact on Pacific Century's financial position or results of
operations.
Restructuring Charge
In the second quarter of 1998, Pacific Century recognized a pre-tax
restructuring charge of $19.4 million in connection with its strategic actions
to accelerate expense reduction and improve efficiency. These actions
primarily included the merger in Hawaii of First Federal Savings and Loan
Association of America with Bank of Hawaii, and the merger of California
United Bank and Pacific Century Bank, N.A. into a single nationally chartered
entity. In August 1998, the consolidation of Pacific Century's two U.S.
Mainland banks was consummated under the name Pacific Century Bank, N.A. The
merger of the two Hawaii-based companies was completed as of September 30,
1998 and resulted in the closing of 19 thrift branches in the fourth quarter.
In addition, to further reduce delivery channel redundancy, eight Bank of
Hawaii branches were also closed during 1998. Also, as part of the
restructuring plan, Bank of Hawaii's credit card services activities were
outsourced in the fourth quarter of 1998 to a third party vendor.
The restructuring charge included expected direct and incremental costs
associated with these consolidations and initiatives and consisted of $9.1
million for lease termination costs, $5.4 million for disposal of fixed
assets, $1.6 million for staff reduction, and $3.3 million for data processing
and other costs. In 1998, the amounts utilized from the restructuring accrual
were $1.3 million for lease termination costs, $4.8 million for disposal of
fixed assets, $1.1 million for staff reduction, and $2.6 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 relates to
termination of lease obligations. During 1998, no adjustments were made to the
restructuring accrual. Pacific Century believes that the restructuring accrual
as of December 31, 1998 is adequate to complete the planned initiatives.
Acquisitions
In May 1998, Pacific Century concluded an agreement to acquire the interest
of Group Paribas in Banque Paribas Pacifique in New Caledonia and Banque
Paribas Polynesie in French Polynesia. As of the acquisition date, Banque
Paribas Pacifique and Banque Paribas Polynesie had total assets of
approximately $238 million and $83 million, respectively. The acquired banks
were merged into other Pacific Century subsidiaries in the region. The
acquisitions were accounted for under the purchase method and the combined
goodwill of approximately $17.1 million is being amortized over 15 years on a
straight-line basis.
On July 3, 1997, Pacific Century acquired all of the outstanding common
stock of CU Bancorp and its subsidiary, California United Bank (CUB), for a
purchase price of $185,421,000, which consisted of $56,092,000 in cash and
2,318,000 shares of Pacific Century common stock. As of the acquisition date,
CUB had total assets of approximately $786,000,000. The acquisition was
accounted for as a purchase, and the resulting goodwill of $100,700,000 is
being amortized over 25 years on a straight-line basis.
In March 1997, Pacific Century Bank, N.A. (PCB) purchased approximately
$251,300,000 in deposits in Arizona from Home Savings of America. Pacific
Century paid approximately $17,976,000 for the core deposit intangible, which
is being amortized over 15 years on a straight line basis.
56
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1997, Bank of Hawaii International, Inc. acquired 100% of Indosuez
Niugini Bank, Ltd. in Papua New Guinea, for approximately $5.6 million.
Indosuez Niugini Bank, Ltd. has been renamed Bank of Hawaii (PNG) Ltd. The
acquisition was accounted for as a purchase, resulting in $3,328,000 in
goodwill, which is being amortized over 15 years on a straight-line basis. As
of the acquisition date, Indosuez Niugini Bank, Ltd. had approximately
$93,000,000 in total assets.
In May 1996, Pacific Century finalized its purchase of majority ownership in
Banque de Tahiti (BDT), Bank of Hawaii-Nouvelle Caledonie (BOH-NC), formally
known as Banque de Nouvelle Caledonie, and two smaller finance companies for
an aggregate cost of $60,500,000. After the acquisitions, Pacific Century's
ownership in BDT increased to 92.4% from 38% and in BOH-NC it increased to
91.5% from 21%. These acquisitions were accounted for using the purchase
method, and the resulting goodwill of $12,200,000 is being amortized over
15 years on a straight line basis.
In conjunction with these acquisitions, the following table discloses assets
acquired and liabilities assumed during the years ended December 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Assets Acquired............................ $321,081 $1,239,616 $552,657
Cash and Shares Paid for Capital Stock..... (33,412) (209,023) (60,583)
-------- ---------- --------
Liabilities Assumed........................ $287,669 $1,030,593 $492,074
======== ========== ========
</TABLE>
Advertising Costs
The nature of Pacific Century's marketing programs generally do not include
direct-response advertising. Pacific Century, therefore, recognizes its
advertising costs as incurred. Advertising costs were $7,633,000; $10,612,000
and $11,407,000 in 1998, 1997 and 1996, respectively.
Credit Card Costs
Pacific Century issues its own VISA and Mastercard credit cards for which
all costs are recognized as period costs. In 1996, Pacific Century entered
into certain arrangements with third parties to originate VISA cards in
specific target markets. As of year-end 1998 and 1997, the unamortized
capitalized origination costs totaled $1,167,000 and $1,611,000, respectively.
These costs are being amortized over the anticipated life of the cards,
currently five years. As cards are canceled, the unamortized costs are
expensed.
Cash and Non-Interest Bearing Deposits
Cash and Non-Interest bearing deposits include amounts due from other
financial institutions as well as intransit clearings. Under the terms of the
Depository Institutions Deregulation and Monetary Control Act, Pacific Century
is required to place reserves with the Federal Reserve Bank based on the
amount of deposits held. During 1998, 1997 and 1996, the average amount of
these reserve balances was $133,316,000, $135,697,000 and $131,061,000,
respectively.
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the dilutive impact of stock
options and stock appreciation rights and uses the average share price during
the period in determining the number of incremental shares to be added to the
weighted average number of common shares
57
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outstanding. For the years ended December 31, 1998, 1997 and 1996 there were
no adjustments to net income (the numerator) for purposes of computing basic
EPS. A reconciliation of the weighted average common shares outstandings for
computing diluted EPS as of year-end 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
Weighted Average Shares
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Denominator for Basic EPS................. 80,228,424 79,794,011 81,595,728
Dilutive Effect of Stock Options.......... 913,720 1,152,159 828,796
---------- ---------- ----------
Denominator for Diluted EPS............... 81,142,144 80,946,170 82,424,524
========== ========== ==========
</TABLE>
On December 12, 1997, a two-for-one stock split in the form of a 100% stock
dividend was distributed to shareholders. Prior period average outstanding
shares, stock options, and per common share data in the consolidated financial
statements have been retroactively adjusted to reflect the stock split.
Income Taxes
Pacific Century files a consolidated federal income tax return with the Bank
of Hawaii and its other domestic subsidiaries. Deferred income taxes are
provided to reflect the tax effect of temporary differences between financial
statement carrying amounts and the corresponding tax basis of assets and
liabilities. Deferred taxes are calculated by applying enacted statutory tax
rates and tax laws to future years in which temporary differences are expected
to reverse. The impact on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that the rate change is
enacted. A deferred tax valuation reserve is established if it is more likely
than not that a deferred tax asset will not be realized.
Pacific Century's tax sharing policy provides for the settlement of income
taxes between each relevant subsidiary as if the subsidiary had filed a
separate return. Payments are made to Pacific Century by subsidiaries with tax
liabilities, and subsidiaries that generate tax benefits receive payments for
those benefits as used.
For lease arrangements that are accounted for by the financing method,
investment tax credits are deferred and amortized over the lives of the
respective leases.
Intangible Assets and Amortization
The excess of cost over the fair value of tangible assets and liabilities
acquired arising from business combinations is being amortized using the
straightline method over various periods not exceeding 25 years. These
intangibles consisting primarily of goodwill and core deposit intangibles are
reviewed periodically for other than temporary impairment. The amortization of
these intangibles is included in other operating expense and totaled
$15,614,00, $12,668,000 and $9,344,000 in 1998, 1997 and 1996, respectively.
As of December 31, 1998, the unamortized balance of these intangibles totaled
$204,354,000.
Servicing assets are recognized when mortgage loans are originated and sold
or securitized with servicing rights retained. The capitalized cost of
servicing assets is amortized over the estimated life of the related loans.
The fair value of servicing assets is estimated based on a review of servicing
right values of loans with similar characteristics. An impairment analysis is
performed on a periodic basis and includes a review of prepayment trends,
delinquency and other relevant factors. For purposes of measuring impairment,
servicing assets are stratified by product type. Impairment is recognized when
the carrying value of the servicing assets for a stratum exceed its fair
value.
58
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest Rate/Foreign Currency Risk Management
Pacific Century utilizes off-balance sheet derivative financial instruments,
primarily as an end-user in connection with its risk management activities
and, to a lesser extent, as a service to accommodate the needs of customers.
Most of Pacific Century's derivative transactions consist of interest rate
swaps and foreign exchange contracts. Other derivative instruments may be
employed, from time to time, but in the aggregate, the use of these
instruments are limited.
Pacific Century utilizes interest rate swaps for purposes other than trading
to manage its exposure to interest rate risks. Interest rate swaps are
contractual agreements that generally require the exchange of fixed and
floating rate payments based on specified financial indices and the underlying
notional amount over the life of the agreements.
The accrual method is used to account for interest rate swaps. Under this
method, the differential between interest to be paid and received is accrued
and recognized as an adjustment to interest income or expense of the
designated asset or liability. The fair value of these agreements is not
recorded in the consolidated financial statements. Changes in the fair value
of swap contracts are not recognized as long as the hedge correlation
continues to exist. If the hedge correlation ceases to exist based on
effectiveness tests, any existing gain or loss is amortized over the remaining
term of the agreement, and future changes in fair value are accounted for on a
mark-to-market basis. If the designated asset or liability matures, or is
extinguished, any unrealized gain or loss on the related derivative instrument
is recognized immediately.
A foreign exchange contract is a commitment to exchange foreign currency at
a contracted price on a specified date. These derivative instruments are used
for purposes other than trading primarily for asset and liability management
activities, and changes in the fair value of both the foreign exchange
contracts and related assets or liabilities hedged are offset and not included
in the financial results.
Derivative instruments entered into for trading purposes consist of foreign
exchange contracts that are used to offset foreign currency positions taken on
behalf of customers and for Pacific Century's own account. These derivatives
are carried at fair value, and the associated unrealized gains and losses are
recognized currently in the statement of income.
International Operations
International operations include certain activities located domestically in
the International Banking Group, as well as branches and subsidiaries
domiciled outside the United States. The operations of Bank of Hawaii and
First Savings located in the West and South Pacific which are denominated in
U.S. dollars are classified as domestic. Pacific Century's international
operations are primarily concentrated in Japan, South Korea, Singapore, Hong
Kong, Taiwan, French Polynesia and New Caledonia.
Investment Securities
Investment securities held to maturity are those securities, which Pacific
Century has the ability and positive intent to hold to maturity. These
securities are stated at cost adjusted for amortization of premiums and
accretion of discounts. Restricted equity securities represent Federal Home
Loan Bank and Federal Reserve Bank shares, recorded at par, which also
reflects fair value. In 1998, 1997 and 1996, there were no transfers from
investment securities held to maturity.
Investment securities available for sale are recorded at fair value with
unrealized gains and losses recorded as an unrealized valuation adjustment in
equity, net of taxes.
59
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Trading securities are those securities that are purchased for Pacific
Century's trading activities and are expected to be sold in the near term.
Securities in the trading portfolio are carried at fair value with unrealized
holding gains and losses recognized currently in income. Trading securities
were $2,318,000, $2,374,000 and $1,687,000 as of December 31, 1998, 1997, and
1996, respectively. During 1998, 1997 and 1996, the net gain (loss) from the
trading securities portfolio was $(358,000), $1,612,000 and $823,000,
respectively, and is recognized as a component of investment securities gains
in the income statement. Income from trading securities was $220,000, $60,000
and $16,000 during 1998, 1997 and 1996, respectively, and is included as part
of other operating income.
Pacific Century uses the specific identification method to determine the
cost of all investment securities sold.
Loans
Loans are carried at the principal amount outstanding. Interest income is
generally recognized on the accrual basis. Net loan fees are deferred and
amortized as an adjustment to yield.
Pacific Century's policy is to place loans on non-accrual when a loan is
over 90 days delinquent, unless collection is probable based on specific
factors such as the type of borrowing agreement and/or collateral. At the time
a loan is placed on non-accrual, all accrued but unpaid interest is reversed
against current earnings. Subsequent payments received are generally applied
to reduce the principal balance.
Other Real Estate
Other real estate consists of properties acquired through foreclosure
proceedings, acceptance of a deed-in-lieu of foreclosure, abandoned bank
premises and loans for which possession of the collateral has been taken.
These properties are carried at the lower of cost or fair value based on
current appraisals less selling costs. Losses arising at the time of acquiring
such property are charged against the reserve for loan losses. Subsequent
declines in property value are recognized through charges to operating
expense.
Premises and Equipment
Premises and equipment are stated at cost less allowances for depreciation
and amortization. Depreciation is computed using the straightline method over
lives of two to fifty years for premises and improvements, and three to ten
years for equipment.
Reserve for Loan Losses
The reserve for loan losses is established through provisions that are
charged against income. Loans deemed to be uncollectible are charged against
the reserve for loan losses, and subsequent recoveries, if any, are credited
to the reserve.
The reserve for loan losses is maintained at a level believed adequate by
management to absorb estimated future losses. Management's periodic evaluation
of the adequacy of the reserve is based on Pacific Century's past loan loss
experience, known and inherent risks in the portfolio, adverse conditions that
may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of
the loan portfolio, current economic conditions and other factors. This
evaluation is inherently subjective as it requires material estimates
including the amounts and timing of future cash flows expected to be received
on loans that may be susceptible to significant changes.
60
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A loan is considered impaired when it is probable that all amounts due
according to the contractual terms of the loan will not be collected.
Impairment is measured based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Cash receipts on impaired loans generally are
applied to reduce the carrying value of the loan. Large groups of smaller
balance homogeneous loans, such as residential mortgages and consumer loans
are evaluated collectively for impairment based primarily on the historical
loss experience for each portfolio.
Stock-Based Compensation
Pacific Century's accounts for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25 (APB No. 25) and
related interpretations. SFAS No. 123 "Accounting for Stock-Based
Compensation," permits companies to elect to recognize stock-based
compensation expense based on the estimated fair value of the awards on the
grant date or to continue to use the accounting under APB No. 25. Included in
Note L is the impact of the fair value of employee stock-based compensation
plans on net income and earnings per share on a pro forma basis for awards
granted in 1998, 1997 and 1996.
61
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note B--Investment Securities
The following presents the details of the investment securities portfolio:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C> <C>
At December 31, 1998
Securities Held to Maturity:
Restricted Equity Securities...... $ 70,300 $ 7 $ -- $ 70,307
Debt Securities Issued by the
U.S. Treasury and Agencies....... 77,789 199 (3) 77,985
Debt Securities Issued by State
and Municipalities of the United
States........................... 11,935 1,056 -- 12,991
Debt Securities Issued by Foreign
Governments...................... 53,757 23 (131) 53,649
Mortgage-Backed Securities........ 406,258 13,780 -- 420,038
Other Debt Securities............. 32,763 335 -- 33,098
---------- ------- -------- ----------
Total........................... $ 652,802 $15,400 $ (134) $ 668,068
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................. $ 5,804 $ 323 $ (523) $ 5,604
Debt Securities Issued by the
U.S. Treasury and Agencies....... 298,609 2,264 (55) 300,818
Debt Securities Issued by State
and Municipalities of the United
States........................... 18,694 435 (36) 19,093
Debt Securities Issued by Foreign
Governments...................... 1,407 -- -- 1,407
Corporate Debt Securities......... 2,101 65 -- 2,166
Mortgage-Backed Securities........ 2,662,410 11,857 (11,365) 2,662,902
Other Debt Securities............. 24,819 1,594 -- 26,413
---------- ------- -------- ----------
Total........................... $3,013,844 $16,538 $(11,979) $3,018,403
========== ======= ======== ==========
At December 31, 1997
Securities Held to Maturity:
Restricted Equity Securities...... $ 64,254 $ 1 $ -- $ 64,255
Debt Securities Issued by the
U.S. Treasury and Agencies....... 396,750 503 (384) 396,869
Debt Securities Issued by State
and Municipalities of the United
States........................... 12,029 1,266 -- 13,295
Debt Securities Issued by Foreign
Governments...................... 62,102 1 (567) 61,536
Mortgage-Backed Securities........ 637,997 3,908 (2,119) 639,786
Other Debt Securities............. 47,083 417 (6) 47,494
---------- ------- -------- ----------
Total........................... $1,220,215 $ 6,096 $ (3,076) $1,223,235
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................. $ 3,984 $ 6 $ (524) $ 3,466
Debt Securities Issued by the
U.S. Treasury and Agencies....... 1,002,106 3,660 (1,278) 1,004,488
Debt Securities Issued by State
and Municipalities of the United
States........................... 20,629 280 (6) 20,903
Debt Securities Issued by Foreign
Governments...................... 21,335 -- -- 21,335
Corporate Debt Securities......... 302 12 -- 314
Mortgage-Backed Securities........ 1,529,201 12,079 (5,088) 1,536,192
Other Debt Securities............. -- -- -- --
---------- ------- -------- ----------
Total........................... $2,577,557 $16,037 $ (6,896) $2,586,698
========== ======= ======== ==========
At December 31, 1996
Securities Held to Maturity:
Restricted Equity Securities...... $ 57,220 $ -- $ -- $ 57,220
Debt Securities Issued by the
U.S. Treasury and Agencies....... 348,116 570 (1,453) 347,233
Debt Securities Issued by State
and Municipalities of the United
States........................... 12,632 1,474 -- 14,106
Debt Securities Issued by Foreign
Governments...................... 74,685 1,922 (7) 76,600
Mortgage-Backed Securities........ 766,103 5,035 (5,151) 765,987
Other Debt Securities............. -- -- -- --
---------- ------- -------- ----------
Total........................... $1,258,756 $ 9,001 $ (6,611) $1,261,146
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................. $ 12,509 $ 893 $ (100) $ 13,302
Debt Securities Issued by the
U.S. Treasury and Agencies....... 984,534 5,509 (4,309) 985,734
Debt Securities Issued by State
and Municipalities of the United
States........................... 6,401 177 (3) 6,575
Corporate Debt Securities......... 893 18 (12) 899
Mortgage-Backed Securities........ 1,267,238 8,894 (7,284) 1,268,848
Other Debt Securities............. 31,228 -- -- 31,228
---------- ------- -------- ----------
Total........................... $2,302,803 $15,491 $(11,708) $2,306,586
========== ======= ======== ==========
</TABLE>
62
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following presents an analysis of the contractual maturities of the
investment securities portfolio as of December 31, 1998:
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
------------ -------------
(in thousands of dollars)
<S> <C> <C>
Securities Held to Maturity
Due in One Year or Less............................ $ 120,329 $ 120,644
Due After One Year Through Five Years.............. 55,147 56,296
Due After Five Years Through Ten Years............. 768 783
------------ ------------
176,244 177,723
Mortgage-Backed Securities......................... 406,258 420,038
Restricted Equity Securities....................... 70,300 70,307
------------ ------------
$ 652,802 $ 668,068
============ ============
Securities Available for Sale
Due in One Year or Less............................ $ 102,749 $ 104,311
Due After One Year Through Five Years.............. 94,226 95,172
Due After Five Years Through Ten Years............. 68,236 68,934
Due After Ten Years................................ 80,419 81,480
------------ ------------
345,630 349,897
Mortgage-Backed Securities......................... 2,662,410 2,662,902
Equity Securities.................................. 5,804 5,604
------------ ------------
$ 3,013,844 $ 3,018,403
============ ============
</TABLE>
Proceeds from sales and maturities of investment securities available for
sale during 1998 were $2,392,831,000. Gross gains of $3,843,000 and gross
losses of $55,000 were realized on those sales. Taxes related to these gains
and losses were $1,326,000 in 1998. The cumulative investment valuation
reserve was $2,753,000 (net of taxes) as of December 31, 1998.
Investment securities carried at $3,324,126,000, $3,319,340,000 and
$3,255,203,000 were pledged to secure deposits of certain public
(governmental) entities, repurchase agreements and swap agreements at December
31, 1998, 1997 and 1996, respectively. The December 31, 1998 amount included
investment securities with a carrying value of $2,224,544,000 and a market
value of $2,236,552,000 which were pledged solely for repurchase agreements.
63
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note C--Loans
Loans consisted of the following at year-end:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C>
Domestic Loans
Commercial and Industrial............... $2,579,726 $2,104,318 $1,806,699
Real Estate
Construction--Commercial.............. 276,260 268,153 212,324
--Residential.................... 23,527 12,869 23,599
Mortgage--Commercial.................. 1,139,125 1,354,459 1,227,845
--Residential..................... 2,699,422 2,738,917 2,635,313
Installment............................. 763,036 891,607 849,259
---------- ---------- ----------
Total Domestic Loans................ 7,481,096 7,370,323 6,755,039
Foreign Loans............................. 1,818,473 1,608,667 1,506,447
---------- ---------- ----------
Subtotal............................ 9,299,569 8,978,990 8,261,486
---------- ---------- ----------
Lease Financing
Direct.................................. 266,863 246,212 181,666
Leveraged............................... 287,568 273,206 256,134
---------- ---------- ----------
Total Lease Financing............... 554,431 519,418 437,800
---------- ---------- ----------
Total Loans......................... $9,854,000 $9,498,408 $8,699,286
========== ========== ==========
</TABLE>
Commercial and mortgage loans totaling $932,467,000; $960,882,000 and
$1,000,531,000 were pledged to secure certain public deposits and Federal Home
Loan Bank advances at December 31, 1998, 1997 and 1996, respectively.
Included in the Mortgage--Residential category above were $259,507,000;
$96,156,000 and $49,567,000 of available for sale loans as of December 31,
1998, 1997 and 1996, respectively. These loans were recorded at the lower of
cost or market on an aggregate basis.
Servicing assets are summarized in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Balance at Beginning of Year................ $ 6,817 $ 5,258 $ 1,946
Originated Mortgage Servicing Rights........ 4,677 1,629 2,926
Purchased Servicing Rights.................. 2,027 889 824
Amortization................................ (1,769) (959) (438)
--------- -------- --------
Balance at End of Year...................... $ 11,752 $ 6,817 $ 5,258
========= ======== ========
Fair Value.................................. $ 12,326 $ 6,979 $ 5,195
========= ======== ========
</TABLE>
As of December 31, 1998; 1997 and 1996, Pacific Century's loan servicing
portfolio totaled $2,046,299,000; $1,651,838,000 and $1,543,985,000,
respectively.
Pacific Century's lending activities are concentrated in its primary
geographic markets of Hawaii, the U.S. Mainland, Asia, and the West and South
Pacific.
64
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain directors and executive officers of Pacific Century, its subsidiary
companies, companies in which they are principal owners, and trusts in which
they are involved, have loans with Pacific Century subsidiaries. These loans
were made in the ordinary course of business at normal credit terms, including
interest rate and collateral requirements. Such loans at December 31, 1998,
1997 and 1996 amounted to $19,813,000; $21,383,000 and $27,593,000,
respectively. During 1998, the activity in these loans included new borrowings
of $5,636,000, repayments of $5,900,000, and other changes of $1,306,000.
Other changes relate to new and retiring directors or companies and trusts in
which they are involved.
Transactions in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Balance at Beginning of Year................. $174,362 $167,795 $151,979
Provision Charged to Operations.............. 84,014 30,338 22,227
Reserves Acquired............................ 13,636 12,372 6,581
Valuation Adjustments........................ 4,933 (5,917) 25
Charge-Offs.................................. (82,005) (55,132) (44,084)
Recoveries................................... 16,336 24,906 31,067
-------- -------- --------
Net Charge-Offs............................ (65,669) (30,226) (13,017)
-------- -------- --------
Balance at End of Year....................... $211,276 $174,362 $167,795
======== ======== ========
</TABLE>
The following table presents information on impaired loans:
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997 1996
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Recorded Investment in Impaired Loans Not
Requiring a Reserve for Loan Losses.......... $ 24,635 $ 7,187 $ 20,918
Recorded Investment in Impaired Loans
Requiring a Reserve for Loan Losses.......... 41,423 26,490 5,239
-------- -------- --------
Recorded Investment in Impaired Loans......... $ 66,058 $ 33,677 $ 26,157
======== ======== ========
Reserve for Losses on Impaired Loans.......... $ 20,313 $ 16,586 $ 2,763
Average Recorded Investment in
Impaired Loans During the Year............... $ 18,872 $ 12,580 $ 47,085
======== ======== ========
</TABLE>
65
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note D--Premises and Equipment
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
Accumulated Net
Depreciation and Book
Cost Amortization Value
-------- ---------------- --------
(in thousands of dollars)
<S> <C> <C> <C>
December 31, 1998
Premises.............................. $325,725 $(118,914) $206,811
Capital Leases........................ 4,464 (1,071) 3,393
Equipment............................. 227,284 (143,897) 83,387
-------- --------- --------
$557,473 $(263,882) $293,591
======== ========= ========
December 31, 1997
Premises.............................. $304,881 $(103,008) $201,873
Capital Leases........................ 4,464 (893) 3,571
Equipment............................. 215,909 (132,995) 82,914
-------- --------- --------
$525,254 $(236,896) $288,358
======== ========= ========
December 31, 1996
Premises.............................. $294,664 $ (96,090) $198,574
Capital Leases........................ 4,464 (714) 3,750
Equipment............................. 177,800 (107,002) 70,798
-------- --------- --------
$476,928 $(203,806) $273,122
======== ========= ========
</TABLE>
Depreciation and amortization (including capital lease amortization)
included in non-interest expense were $38,156,000, $33,641,000 and $29,612,000
in 1998, 1997 and 1996, respectively.
Pacific Century leases certain branch premises and data processing
equipment. Most of the premise leases provide for a base rent over a specified
period with renewal options thereafter. Portions of certain properties are
subleased for periods expiring in various years through 2000. Lease terms
generally provide for the lessee to pay taxes, maintenance and other operating
costs.
Future minimum payments, by year and in the aggregate, for noncancelable
operating leases with initial or remaining terms of one year or more and
capital leases consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------ -------------
(in thousands of dollars)
<S> <C> <C>
1999........................................... $ 7 $ 13,352
2000........................................... 7 11,205
2001........................................... 7 9,307
2002........................................... 7 7,929
2003........................................... 605 6,565
Thereafter..................................... 34,319 91,161
------------ -------------
Total Minimum Lease Payments................... 34,952 $ 139,519
=============
Amounts Representing Interest.................. 28,202
------------
Present Value of Net Minimum Lease Payments.... $ 6,750
============
</TABLE>
Minimum future rentals receivable under subleases for noncancelable
operating leases at December 31, 1998, amounted to $3,226,000.
66
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense for all operating leases consisted of:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Minimum Rentals.............................. $ 22,269 $ 23,088 $ 20,164
Sublease Rental Income....................... (1,244) (544) (657)
-------- -------- --------
$ 21,025 $ 22,544 $ 19,507
======== ======== ========
</TABLE>
Note E--Deposits
Interest on deposit liabilities for the years ended December 31, 1998, 1997
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Domestic Interest-Bearing Demand Accounts...... $ 55,735 $ 52,912 $ 47,167
Domestic Savings Accounts...................... 18,454 21,444 23,713
Domestic Time Accounts......................... 145,431 156,988 133,493
Foreign Deposits............................... 98,299 91,770 84,343
-------- -------- --------
$317,919 $323,114 $288,716
======== ======== ========
</TABLE>
Time deposits with balances of $100,000 or more were $2,307,741,000 in 1998.
Of this amount, $84,795,000 represents deposits of public (governmental)
entities which require collaterization by acceptable securities. The majority
of deposits in the foreign category are time deposits in denominations of
$100,000 or more.
Maturities of time deposits of $100,000 or more at December 31, 1998, are
summarized as follows:
<TABLE>
<CAPTION>
Domestic Foreign
---------- ----------
(in thousands of
dollars)
<S> <C> <C>
Under 3 Months...................................... $ 513,829 $1,056,495
3 to 6 Months....................................... 250,057 67,031
7 to 12 Months...................................... 172,342 76,595
Greater than 1 to 2 Years........................... 42,540 34,569
Greater than 2 to 3 Years........................... 25,485 38,569
Greater than 3 to 4 Years........................... 7,044 5,842
Greater than 4 to 5 Years........................... 7,025 326
Greater than 5 Years................................ 9,247 745
---------- ----------
$1,027,569 $1,280,172
========== ==========
</TABLE>
67
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note F--Short-Term Borrowings
Details of short-term borrowings for 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Securities
Sold Under Other
Funds Agreements Commercial ShortTerm
Purchased to Repurchase Paper Borrowings
--------- ------------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C> <C>
1998
Amounts Outstanding at December
31............................ $942,062 $2,008,399 $127,311 $229,511
Average Amount Outstanding
During Year................... 506,978 2,267,823 108,778 189,258
Maximum Amount Outstanding at
Any Month End................. 942,062 2,476,152 127,311 300,211
Weighted Average Interest Rate
During Year/1/ ............... 5.27% 5.36% 5.10% 4.66%
Weighted Average Interest Rate
on Balance Outstanding at End
of Year....................... 4.87% 4.97% 4.91% 4.44%
1997
Amounts Outstanding at December
31............................ $710,472 $2,279,124 $104,916 $121,211
Average Amount Outstanding
During Year................... 422,217 2,108,746 92,311 245,450
Maximum Amount Outstanding at
Any Month End................. 710,472 2,309,775 121,909 399,152
Weighted Average Interest Rate
During Year/1/ ............... 5.64% 5.48% 5.19% 5.20%
Weighted Average Interest Rate
on Balance Outstanding at End
of Year....................... 5.88% 5.47% 5.13% 4.30%
1996
Amounts Outstanding at December
31............................ $599,994 $2,075,571 $ 69,727 $223,530
Average Amount Outstanding
During Year................... 533,647 1,857,286 83,181 335,509
Maximum Amount Outstanding at
Any Month End................. 643,988 2,075,571 114,446 477,697
Weighted Average Interest Rate
During Year/1/ ............... 5.44% 5.39% 5.03% 5.04%
Weighted Average Interest Rate
on Balance Outstanding at End
of Year....................... 5.77% 5.38% 4.95% 4.91%
</TABLE>
- --------
/1/ Average rates for the year are computed by dividing actual interest
expense on borrowings by average daily borrowings.
Funds purchased generally mature on the day following the date of purchase.
Commercial paper is issued by the parent corporation in various denominations
generally maturing 90 days or less from date of issuance.
Securities sold under agreements to repurchase are accounted for as
financing transactions and the obligations to repurchase these securities are
recorded as liabilities in the Consolidated Statements of Condition. The
securities underlying the agreements to repurchase continue to be reflected as
an asset of Pacific Century and are delivered to and held in collateral
accounts with third party trustees. At December 31, 1998, the weighted average
contractual maturity of these agreements was 98 days and consists of
transactions with public (governmental) entities, primarily the State of
Hawaii ($1.2 billion) and local municipalities ($0.8 billion). A schedule of
maturities of repurchase agreements follows:
<TABLE>
<CAPTION>
December 31
1998
-------------
(in thousands
of dollars)
<S> <C>
Overnight.................................................... $ 11,667
Less than 30 days............................................ 488,160
30 to 90 days................................................ 718,488
Over 90 days................................................. 790,084
----------
$2,008,399
==========
</TABLE>
68
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A line of credit totaling $35,000,000 is maintained to back up commercial
paper issued by Pacific Century. At December 31, 1998 there was no amount
drawn on this line. Fees related to line were $28,000 in 1998.
At December 31, 1998, other shortterm borrowings consisted mainly of Foreign
Call Deposits and Treasury Tax and Loan balances. Foreign Call Deposits
generally mature in 90 days and bear interest rates that are reflective of
rates on borrowings with similar maturities. Treasury Tax and Loan balances
represent tax payments collected on behalf of the U.S. government, which are
callable at any time and bear market interest rates. A Federal Home Loan Bank
advance totaling $150.0 million bears an interest rate of 5.17% and matured
and was paid on January 19, 1999.
Note G--Long-Term Debt
Amounts outstanding as of year-end were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Notes.......................................... $ 90,000 $150,000 $259,956
Federal Home Loan Bank Advances................ 223,045 288,045 398,045
Subordinated Notes............................. 118,801 118,755 118,707
8.25% Capital Securities....................... 100,000 100,000 100,000
Foreign Debt................................... 46,007 42,690 49,556
Capitalized Lease Obligations.................. 6,750 6,299 5,879
Other Long-Term Debt........................... 1,013 -- --
-------- -------- --------
$585,616 $705,789 $932,143
======== ======== ========
</TABLE>
In December 1996, Pacific Century completed a $100 million offering of 8.25%
Capital Securities (the Securities). The offering was issued by Bancorp Hawaii
Capital Trust I, a grantor trust wholly-owned by Pacific Century. The
Securities bear a cumulative fixed interest rate of 8.25% and mature on
December 15, 2026. Interest payments are semi-annual. In addition, Pacific
Century has entered into an expense agreement with the trust obligating
Pacific Century to pay any costs, expenses or liabilities of the trust, other
than obligations of the trust to pay amounts due pursuant to the terms of the
Securities. The sole assets of the trust are Junior Subordinated Debt
Securities (the Debt) issued by Pacific Century to the trust. The Debt is
redeemable prior to the stated maturity at Pacific Century's option. The
Securities are subject to mandatory redemption upon repayment of the related
Debt at their stated maturity dates or their earlier redemption at a
redemption price equal to their liquidation amount plus accrued distributions
to the date fixed for redemption and the premium, if any, paid by Pacific
Century upon concurrent repayment of the related Debt. Pacific Century has
issued guarantees for the payment of distributions and payments on liquidation
or redemption of the Securities, but only to the extent of funds held by the
trust. The guarantees are junior subordinated obligations of Pacific Century.
Distributions to Securities holders may be deferred for up to five consecutive
years. During any such deferred period Pacific Century's ability to pay
dividends on its common shares will be restricted. The Federal Reserve has
announced that certain cumulative preferred securities, having the
characteristics of the Securities, qualify as minority interest, which is
included in Tier 1 capital for bank holding companies.
In 1996, Bank of Hawaii borrowed the equivalent of $50 million USD in French
Francs through a private placement. This debt has a fixed interest rate of
5.16% and matures in 1999.
In 1998, Bank of Hawaii converted its existing revolving note program into a
$1 billion revolving senior and subordinated note program. Under the terms of
this program Bank of Hawaii may issue additional notes
69
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provided that at any time the aggregate amount outstanding does not exceed $1
billion. At December 31, 1998, there were no outstanding balances under this
program.
Privately placed notes issued by Pacific Century totaled $90 million at
December 31, 1998. No new notes were issued in 1998. These notes carry seven
year terms and bear floating interest rates which are tied to the three-month
LIBOR rate.
Federal Home Loan Bank (FHLB) advances bear interest at rates from 5.24% to
8.00% and mature from 1999 through 2005. At December 31, 1998, loans totaling
$447,654,000 were pledged to secure these advances along with all FHLB stock.
The subordinated notes issued by Bank of Hawaii in 1993, bear a fixed
interest rate of 6.875%. These notes mature in 2003.
Capitalized lease obligations are for certain condominium units in the
Financial Plaza of the Pacific. The lease began in 1993 and has a 60 year
term. Lease payments are fixed at $7,000 per year until 2002; $605,000 per
year from 2003 to 2007 and $665,000 per year from 2008 to 2012 and are
negotiable thereafter.
Long-term debt maturities for the five years succeeding December 31, 1998,
are $131,507,000 in 1999, $38,875,000 in 2000, $71,000,000 in 2001,
$12,670,000 in 2002 and $126,801,000 in 2003.
Interest paid on long-term debt in 1998 totaled $43,820,000.
Note H--Shareholders' Equity
Certain of Pacific Century's consolidated subsidiaries (including Bank of
Hawaii, Pacific Century Bank, N.A., and First Savings) are subject to
regulatory restrictions that limit cash dividends and loans to Pacific
Century. As of December 31, 1998, approximately $416,090,000 of undistributed
earnings of Pacific Century's consolidated subsidiaries were available for
distribution to Pacific Century without prior regulatory approval.
Pacific Century is required to maintain minimum levels of capital to meet
regulatory guidelines. For evaluating capital adequacy, the regulators require
Pacific Century to maintain three capital ratios at specific minimum levels.
Tier 1 Capital (common equity reduced by certain intangibles and increased for
qualifying preferred shares and minority interests) expressed as a percentage
of average risk weighted assets is the Tier 1 Capital Ratio. Total Capital
(Tier 1 capital plus qualifying portions of the reserve for loan losses)
expressed as a percentage of average risk weighted assets is the Total Capital
Ratio. The third ratio is the Leverage Ratio which is Tier 1 Capital divided
by average assets. The table below presents the minimum Capital levels that an
institution must maintain to qualify as "well capitalized" as it applies to
Pacific Century and its subsidiaries Bank of Hawaii, Pacific Century Bank,
N.A. and First Savings.
The Federal Deposit Insurance Corporation Improvements Act of 1991 (FDICIA)
requires the federal banking regulators to take "prompt corrective action"
with respect to depository institutions that do not meet minimum capital
requirements and imposes certain restrictions upon banks which meet minimum
capital requirements but are not "well capitalized" for purposes of FDICIA.
Undercapitalized institutions are subject to regulatory monitoring and may be
required to divest themselves of or liquidate subsidiaries. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
70
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, Pacific Century, Bank of Hawaii, Pacific Century
Bank, N.A. and First Savings were all well capitalized under the regulatory
provisions for prompt and corrective action. There were no conditions or
events since year-end that management believes have changed Pacific Century's
or its subsidiaries' capital rating. The table below sets forth regulatory
capital for Pacific Century and its depository subsidiaries at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
Well-
Capitalized
Minimum Pacific Century Bank of Pacific Century First
Ratio Financial Corp. Hawaii Bank, N.A. Savings
----------- --------------- ---------- --------------- -------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
At December 31, 1998
Common Equity........... $1,185,594 $ 991,529 $148,335 $49,117
Tier 1 Capital.......... 1,103,230 928,297 132,456 49,117
Total Capital........... 1,342,888 1,155,222 146,847 50,361
Tier 1 Capital Ratio.... 6% 9.42% 8.68% 11.73% 49.35%
Total Capital Ratio..... 10% 11.47% 10.80% 13.00% 50.60%
Leverage Ratio.......... 5% 7.48% 6.98% 10.12% 26.24%
At December 31, 1997
Common Equity........... $1,117,207 $ 956,508 $140,623 $45,155
Tier 1 Capital.......... 1,036,558 902,242 123,081 45,155
Total Capital........... 1,292,619 1,147,161 135,063 46,459
Tier 1 Capital Ratio.... 6% 9.34% 8.83% 12.83% 43.29%
Total Capital Ratio..... 10% 11.65% 11.22% 14.08% 44.54%
Leverage Ratio.......... 5% 7.21% 6.73% 9.50% 24.22%
</TABLE>
The following is a breakdown of the components of accumulated other
comprehensive income as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
(in thousands of dollars)
<S> <C> <C> <C>
Foreign Currency Translation Adjustment...... $(24,580) $(30,251) $(5,974)
Investment Securities........................ 2,753 5,485 2,252
Pension Liability Adjustment................. (649) -- --
-------- -------- -------
Accumulated Other Comprehensive Income....... $(22,476) $(24,766) $(3,722)
======== ======== =======
</TABLE>
The schedule below presents for the years ended December 31, 1998, 1997 and
1996 the disclosure of the reclassification amount to adjust for gains and
losses on available for sale investment securities that were included in net
income and that have also been included in other comprehensive income as
unrealized holding gains in the period in which they arose.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Unrealized gains (losses) on available for
sale investment securities, net of tax:
Unrealized holding gains (losses) arising
during the period......................... $ 157 $ 5,143 $ (8,339)
Reclassification adjustment for gains
included in
net income................................ (2,889) (1,910) (775)
-------- ------- --------
Unrealized investment securities valuation
adjustment included in other accumulated
comprehensive income........................ $ (2,732) $ 3,233 $ (9,114)
======== ======= ========
</TABLE>
71
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amount of income tax allocated to each component of comprehensive income
for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Foreign Currency Translation Adjustment..... $ 3,053 $ (13,072) $ (4,582)
Investment Securities....................... (1,821) 2,155 (6,076)
Pension Liability Adjustment................ (350) -- --
</TABLE>
In April 1998, Pacific Century changed its state of incorporation from
Hawaii to Delaware. The Delaware Certificate of Incorporation authorizes
500,000,000 shares of Common Stock and reduces the par value to $.01 per share
from $2.00 per share under the Hawaii Restated Articles of Incorporation.
Note I--International Operations
The following table provides selected financial data for Pacific Century's
international operations for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C>
International
Average Assets......................... $3,426,614 $3,005,084 $2,752,642
Average Loans.......................... 1,752,657 1,540,294 1,253,695
Average Deposits....................... 2,219,916 2,074,103 1,672,734
Operating Revenue...................... 287,872 215,876 192,084
Income Before Taxes.................... 1,193 20,870 17,347
Net Income............................. (804) 10,243 8,082
</TABLE>
Average assets include short-term interest-bearing deposits with foreign
branches of U.S. banks and large international banks. On average, these
deposits were $702,281,000, $704,366,000 and $584,622,000 during 1998, 1997
and 1996, respectively.
To measure international profitability, Pacific Century maintains an
internal transfer pricing system that makes certain income and expense
allocations, including interest expense for the use of domestic funds.
Interest rates used in determining charges on advances of funds are based on
prevailing deposit rates. Overhead is allocated based on services rendered by
administrative units to profit centers.
The Asian economic crisis that began in July 1997 affected many countries
where Pacific Century conducts business. Those countries impacted by the
financial turmoil have experienced significant devaluation of their currency,
as well as higher interest rates and a general tightening of credit. The
tighter credit environment escalated to a liquidity crisis that required the
intervention of the International Monetary Fund in South Korea, Thailand and
Indonesia. As of December 31, 1998 and 1997, all exposures relating to South
Korea were on a performing status. Non-accrual loans in Thailand were $7.6
million and $17.6 million, at December 31, 1998 and 1997, respectively.
Indonesian loans on non-accrual were $0.7 million at December 31, 1998 and nil
at December 31, 1997. At December 31, 1998, Pacific Century's cross-border
exposure to South Korea, Thailand, and Indonesia were $264.9 million, $24.1
million and $17.1 million, respectively. Given the inherent uncertainties and
complexities related to the troubled economies in Asia, it is possible that
the Company's estimate of the impact of these uncertainties on its operations
may change.
72
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note J--Contingent Liabilities
Pacific Century is a defendant in various legal proceedings and, in
addition, there are various other contingent liabilities arising in the normal
course of business. After consultation with legal counsel, management does not
anticipate that the disposition of these proceedings and contingent
liabilities will have a material effect upon the consolidated financial
statements.
Note K--Profit-Sharing, Retirement and Postretirement Benefit Plans
A deferred-compensation profit-sharing plan (Profit Sharing Plan) is
provided for the benefit of all employees of Pacific Century and its
subsidiaries who have met the Profit Sharing Plan's eligibility requirements.
The Profit Sharing Plan provides for annual contributions based on a schedule
of performance levels. The schedule establishes the percentage of adjusted net
income to be contributed based on Pacific Century's adjusted return on equity.
Participants in the Profit Sharing Plan receive up to 50% of their annual
allocation in cash. The remaining amounts are deferred and may be invested in
various options including mutual funds, a collective trust, and common shares
of Pacific Century. In 1998, the portion of the Profit Sharing Plan consisting
of the Pacific Century Stock Fund was converted to an employee stock ownership
plan. Pacific Century's contributions to the Profit Sharing Plan totaled
$8,472,000 in 1998, $9,723,000 in 1997 and $9,098,000 in 1996. The Profit
Sharing Plan provides for a company match of $1.25 for each $1.00 in 401(k)
contributions made by qualified employees up to a maximum of 2% of the
employee's compensation. For 1998, 1997 and 1996, matching contributions under
this plan totaled $2,981,000, $2,882,000 and $2,671,000, respectively.
Pacific Century has a defined-contribution money purchase plan (Money
Purchase Plan) under which it contributes 4% of an employee's compensation for
employees meeting certain eligibility and vesting requirements. The Money
Purchase Plan has a one year eligibility requirement and a five year vesting
period. For 1998, 1997 and 1996, Pacific Century contributed $5,192,000,
$4,943,000 and $4,839,000, respectively, to the Money Purchase Plan.
Pacific Century also has an Excess Profit Sharing Plan and an Excess Money
Purchase Plan, which cover certain employees for amounts exceeding the limits
under those plans.
In 1995, Pacific Century froze its non-contributory, qualified defined-
benefit retirement plan (Retirement Plan) and excess retirement plan (Excess
Plan), which covered employees of Pacific Century and participating
subsidiaries who met certain eligibility requirements. Pacific Century's
funding policy is to contribute annually an amount that falls within the
minimum and maximum range deductible for income tax purposes. Retirement Plan
assets are managed by investment advisors in accordance with investment
policies established by the plan trustees.
Retirement Plan investments primarily consist of marketable securities
including stocks, bonds, money market funds, mutual funds, and a common trust
fund. The assets of the Retirement Plan include securities of related parties
(Pacific Capital Funds, a Pacific Century Trust collective investment fund,
and a Pacific Century Trust money market fund). Pacific Century Trust is a
division of Bank of Hawaii and either manages or advises the Pacific Capital
Funds and Pacific Century Trust collective investment fund and money market
fund. The fair value of securities of related parties as of December 31, 1998
was $35,354,000.
The Excess Plan is a non-qualified excess retirement benefit plan which
covers certain employees of Pacific Century and participating subsidiaries.
The unfunded Excess Plan recognizes the liability to participants for amounts
exceeding the limits allowed under the Retirement Plan.
73
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pacific Century's Postretirement Benefit Plan provides retirees with group
life, dental and medical insurance coverage. The cost of providing
postretirement benefits are "shared costs" where both the employer and former
employees pay a portion of the premium. Most employees of Pacific Century and
its subsidiaries who have met the eligibility requirements are covered by this
plan. Pacific Century is recognizing the transition obligation over 20 years.
Pacific Century has no segregated assets to provide postretirement benefits.
The following table sets forth the change in benefit obligation, change in
fair value of plan assets, funded status, and net amount recognized in the
Consolidated Statements of Financial Condition for the aggregated pension
plans (Retirement Plan and Excess Plan) and Postretirement Benefit Plans for
the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
---------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Change in Benefit
Obligation/1/
Benefit Obligation at
Beginning of Year...... $ 84,243 $ 81,479 $ 82,443 $ 27,747 $ 26,848 $ 28,664
Service Cost............ -- -- -- 1,292 1,002 1,262
Interest Cost........... 6,146 6,065 6,046 1,999 1,894 2,057
Actuarial (Gain) Loss... 6,309 2,200 (888) (1,048) (997) (4,035)
Employer Benefits Paid.. (5,436) (5,501) (6,122) (900) (1,000) (1,100)
-------- -------- -------- -------- -------- --------
Benefit Obligation at
End of Year............ $ 91,262 $ 84,243 $ 81,479 $ 29,090 $ 27,747 $ 26,848
======== ======== ======== ======== ======== ========
Change in Fair Value of
Plan Assets
Fair Value of Plan
Assets at Beginning of
Year................... $ 80,201 $ 71,271 $ 63,519 $ -- $ -- $ --
Actual Return on Plan
Assets................. 9,944 12,626 10,262 -- -- --
Employer Contribution... 346 1,805 3,612 900 1,000 1,100
Employer Benefits Paid.. (5,436) (5,501) (6,122) (900) (1,000) (1,100)
-------- -------- -------- -------- -------- --------
Fair Value of Plan
Assets at End of Year.. $ 85,055 $ 80,201 $ 71,271 $ -- $ -- $ --
======== ======== ======== ======== ======== ========
Funded Status........... $ (6,207) $ (4,042) $(10,208) $(29,090) $(27,747) $(26,848)
Unrecognized Net
Actuarial Gain......... (6,953) (10,459) (6,150) (6,197) (5,302) (4,494)
Unrecognized Transition
(Asset) Liability...... (315) (633) (951) 9,750 10,446 11,142
-------- -------- -------- -------- -------- --------
Net Amount Recognized;
Accrued................ $(13,475) $(15,134) $(17,309) $(25,537) $(22,603) $(20,200)
======== ======== ======== ======== ======== ========
Amounts Recognized in
the Consolidated
Statements of Financial
Condition Consist of:
Accrued Benefit
Liability............. $(14,474) $(15,134) $(17,309) $(25,537) $(22,603) $(20,200)
Accumulated Other
Comprehensive Income.. 999 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net Amount Recognized;
Accrued................ $(13,475) $(15,134) $(17,309) $(25,537) $(22,603) $(20,200)
======== ======== ======== ======== ======== ========
</TABLE>
- --------
/1/Participants' contributions relative to the Postretirement Benefits Plan
are offset against employer benefits paid in the above table. For the year
ended December 31, 1998, participants' contributions for postretirement
benefits totaled $824,000. This information is not readily available for
1997 and 1996. There were no participants' contributions in the pension
plans.
For the Excess Plan, the accumulated benefit obligation exceeded the plan
assets. The projected benefit obligation and accumulated benefit obligation
for the Excess Plan were $7.9 million and $7.4 million, respectively, as of
December 31, 1998; $7.3 million and $6.5 million, respectively, as of December
31, 1997; and $6.9 million and $6.1 million, respectively, as of December 31,
1996. Because the Excess Plan is unfunded, it has no plan assets.
74
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Components of net periodic benefit cost for the aggregated pension plans and
the Postretirement Benefit Plans are presented in the following table for the
years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------- -------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Components of Net
Periodic Benefit Cost:
Service Cost........... $ -- $ -- $ -- $ 1,292 $ 1,002 $ 1,262
Interest Cost.......... 6,146 6,065 6,046 1,999 1,894 2,057
Expected Return on Plan
Assets................ (6,982) (6,155) (5,488) -- -- --
Amortization of
Unrecognized Net
Transition (Asset)
Obligation............ (318) (318) (318) 696 696 696
Recognized Net
Actuarial (Gain) Loss. (159) 38 41 (153) (189) --
------- ------- ------- ------- ------- -------
Net Periodic Benefit
Cost................ $(1,313) $ (370) $ 281 $ 3,834 $ 3,403 $ 4,015
======= ======= ======= ======= ======= =======
</TABLE>
Assumptions used for the aggregated pension plans and Postretirement Benefit
Plans at December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------- -------------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Weighted Average
Assumptions as of
December 31:
Discount Rate.......... 7.00% 7.50% 7.75% 7.00% 7.50% 7.75%
Expected Return on Plan
Assets................ 9.00% 9.00% 9.00% -- -- --
Rate of Compensation
Increase.............. 5.00% 5.00% 5.00% -- -- --
</TABLE>
The medical cost trend rate for employees under the age of 65 was revised at
December 31, 1998 to 8.0% per year until the year 1999 and leveling thereafter
to 6.0%. The medical cost trend rate for employees over the age of 65 and the
dental cost trend rate were both revised at December 31, 1998 to a flat rate
of 6.0% per year. A one percent change in this assumption (with all other
assumptions remaining constant) would impact the service and interest cost
components of the net periodic postretirement benefit cost and the
postretirement benefit obligation for 1998 as follows:
<TABLE>
<CAPTION>
One Percent One Percent
Increase Decrease
------------ -------------
(in thousands of dollars)
<S> <C> <C>
Effect on the total of service and
interest cost components............... $ 418 $ (329)
Effect on postretirement benefit
obligation............................. 2,821 (2,298)
</TABLE>
Note L--Stock Option Plans
The Pacific Century Stock Option Plans (the Plans) are administered by the
Compensation Committee which is composed entirely of non-employee directors.
The Plans provide participants with the option to purchase shares of common
stock at a specified exercise price beginning one year after the date the
option was granted and expiring 10 years from the date of grant. The exercise
price is the fair market value of the shares on the date the option was
granted. The Plans also provide certain participants with stock options in
tandem with stock appreciation rights (SAR). A SAR entitles an optionee, in
lieu of exercising the stock option, to receive cash equal to the excess of
the market value of the shares as of the exercise date over the option price.
The Compensation Committee has limited the exercise of SARs to $1 million per
year, allocated among the participants. The expense for the SARs recognized in
the Consolidated Statements of Income was $614,000 in 1998, and $1,000,000 in
both 1997 and 1996.
75
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pacific Century has a Director Stock Option Plan that grants restricted
common shares to directors and requires directors to retain shares exercised
throughout the service period as a director. The plan automatically grants
annually an option for 1,000 shares to each Pacific Century director who is
also a director of Bank of Hawaii and an option for 500 shares to directors
who are only directors of Pacific Century or Bank of Hawaii. The exercise
price is based on the closing market price of the shares on the date that the
option was granted. Each option expires on the tenth anniversary date of its
grant and is generally not transferable. If an optionee ceases to serve as a
director for any reason other than death, the option immediately terminates
and any restricted shares that were previously acquired are subject to
redemption at a price equal to the market value of the shares at the time of
grant. As of December 31, 1998, 69,000 options were outstanding under this
plan and are included in the table below.
The following information relates to options outstanding as of December 31,
1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE
SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
------------------------ ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
$ 7.24--$15.54.......... 1,500,816 $12.89 49.2 months 1,500,816 $12.89
16.01-- 17.75.......... 1,086,622 16.87 115.2 months 58,622 16.77
18.25-- 21.13.......... 1,389,324 19.86 88.8 months 1,389,324 19.86
23.94-- 26.06.......... 810,800 25.74 106.8 months 763,300 25.78
--------- ---------
Total................. 4,787,562 $17.99 85.2 months 3,712,062 $18.21
========= =========
</TABLE>
The following table presents the activity of Stock Option Plans for the
years indicated:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ --------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1...................... 4,097,050 $18.13 3,917,790 $15.83 3,644,906 $13.73
Granted................. 1,117,000 17.43 811,300 25.61 921,000 21.07
Exercised............... (706,506)/1/ 13.99 (575,492) 13.10 (529,558) 11.09
Forfeited............... (57,500) 24.24 (25,000) 21.13 (117,634) 12.52
Expired................. (9,944) 17.34 (31,548) 13.96 (924) 6.57
Exchanged in conjunction
with purchase of CU
Bancorp................ 347,462 11.06 -- -- -- --
--------- --------- ---------
Outstanding at December
31..................... 4,787,562 $17.99 4,097,050 $18.13 3,917,790 $15.83
========= ========= =========
Options Exercisable at
December 31............ 3,712,062 3,308,750 2,996,790
Shares Available for
Future Grants.......... 1,819,646 3,233,994 1,988,746
</TABLE>
- --------
/1/ The price per share of options exercised during 1998 ranged between $7.44
and $21.88 on an actual exercise price basis.
76
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the pro forma disclosures of the impact that
the 1998, 1997 and 1996 option grants would have had on net income and
earnings per share had the grants been measured using the fair value of
accounting prescribed by SFAS No. 123:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands of dollars
except per
share and option data)
<S> <C> <C> <C>
Pro Forma
Net Income/1/ .............................. $103,160 $135,805 $130,605
Basic Earnings Per Share.................... $ 1.29 $ 1.70 $ 1.60
Diluted Earnings Per Share.................. $ 1.27 $ 1.68 $ 1.58
Weighted Average Fair Value of Options
Granted During the Year/1/ ................ $ 3.80 $ 6.13 $ 5.85
Assumptions
Average Risk Free Interest Rate........... 5.08% 5.85% 6.47%
Average Expected Volatility............... 24.52% 17.08% 17.73%
Expected Dividend Yield................... 3.10% 3.13% 2.75%
Expected Life............................. 5 years 10 years 10 years
</TABLE>
- --------
/1/ The Black-Scholes option pricing model was used to develop the fair
values of the grants.
Note M--Other Operating Expense
Other operating expense for the years ended December 31, 1998, 1997 and 1996
was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Legal and Other Professional Fees.............. $ 35,772 $ 23,362 $ 17,642
Stationery and Supplies........................ 11,062 10,701 10,678
Amortization of Intangible Assets.............. 17,383 13,627 9,782
Other.......................................... 110,329 101,774 100,257
-------- -------- --------
Total.......................................... $174,546 $149,464 $138,359
======== ======== ========
</TABLE>
Note N--Income Taxes
The significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Current:
Federal........................................ $ 50,951 $ 54,625 $ 45,641
State.......................................... 12,260 10,172 10,003
Foreign........................................ 18,021 15,254 12,082
--------- -------- --------
$ 81,232 $ 80,051 $ 67,726
--------- -------- --------
Deferred:
Federal........................................ $ (21,774) $ (1,544) $ 1,711
State.......................................... (1,578) 918 712
Foreign........................................ (1,231) (913) --
--------- -------- --------
$ (24,583) $ (1,539) $ 2,423
--------- -------- --------
Provision for Income Taxes....................... $ 56,649 $ 78,512 $ 70,149
========= ======== ========
</TABLE>
77
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The current income tax provision includes taxes on gains and losses on the
sale of securities of $1,415,000, $1,107,000 and $471,000 for 1998, 1997 and
1996, respectively. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1998, 1997 and 1996 reclassified based on the tax returns as
filed, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Deferred Tax Liabilities:
Lease Transactions.............................. $184,335 $188,709 $182,018
Deferred Investment Tax Credits................. 2,977 5,620 6,003
Accelerated Depreciation........................ 707 707 1,406
Core Deposit Intangible......................... 7,011 8,076 9,141
-------- -------- --------
Total Deferred Tax Liabilities................ 195,030 203,112 198,568
-------- -------- --------
Deferred Tax Assets:
Reserve for Loan Losses......................... 64,720 57,596 55,778
Accrued Pension Cost............................ 2,798 3,541 3,969
Net Operating Loss Carry Forwards............... 1,231 -- 385
Securities Valuation Reserve.................... (1,890) (3,732) (1,440)
Postretirement Benefits......................... 9,606 8,951 7,277
Other, Net...................................... 3,923 (2,826) (9,541)
-------- -------- --------
Total Deferred Tax Assets..................... 80,388 63,530 56,428
Valuation Allowance for Deferred
Tax Assets.................................... -- -- (385)
-------- -------- --------
Net Deferred Tax Assets....................... 80,388 63,530 56,043
-------- -------- --------
Net Deferred Tax Liabilities...................... $114,642 $139,582 $142,525
======== ======== ========
</TABLE>
For financial statement purposes, Pacific Century had deferred investment
tax credits for property purchased for lease to customers of $2,977,000,
$5,620,000 and $6,003,000 at December 31, 1998, 1997 and 1996, respectively.
In 1998, 1997 and 1996, investment tax credits included in the computation of
the provision for income taxes were $2,643,000, $383,000 and $848,000,
respectively.
The following analysis reconciles the Federal statutory income tax rate to
the effective consolidated income tax rate:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory Federal Income Tax Rate....................... 35.0% 35.0% 35.0%
Increase (Decrease) in Tax Rate Resulting From:
State Taxes, Net of Federal Income Tax and Foreign Tax
Adjustments.......................................... 4.2 3.3 3.4
Tax-Exempt Interest Income............................ (0.3) (0.2) (0.3)
Low Income Housing and Investment Tax Credits......... (6.2) (3.8) (2.8)
Other................................................. 1.9 1.7 (0.8)
---- ---- ----
Effective Tax Rate...................................... 34.6% 36.0% 34.5%
==== ==== ====
</TABLE>
78
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For financial statement purposes, no deferred income tax liability has been
recorded for tax bad debt reserves that arose in tax years beginning before
December 31, 1987. Such tax bad debt reserves total approximately $18.2
million for which no provision for federal income taxes has been provided. If
these amounts are used for purposes other than to absorb bad debt losses, they
will be subject to federal income taxes at the then applicable rates.
Note O--Financial Instruments with Off-Balance Sheet Risk
Pacific Century is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to manage its own exposure to fluctuations in interest and
foreign exchange rates. These financial instruments include commitments to
extend credit, standby letters of credit, foreign exchange contracts, interest
rate swaps and interest rate options. To varying degrees, these instruments
involve elements of credit and interest rate risk in excess of the amount
recognized in the statements of condition. The contract or notional amounts of
these instruments reflect the extent of involvement that Pacific Century has
in each class of financial instrument. The FASB has categorized certain of
these off-balance sheet financial instruments that include foreign currency
contracts and interest rate swaps as derivative financial instruments. FASB
has further categorized these derivative financial instruments into "held or
issued for purposes other than trading" or "trading."
Pacific Century's exposure to off-balance sheet credit risk is defined as
the possibility of sustaining a loss due to the failure of the counterparty to
perform in accordance with the terms of the contract. Credit risks associated
with off-balance sheet financial instruments are similar to those relating to
on-balance sheet financial instruments. Pacific Century manages off-balance
sheet credit risk with the same standards and procedures applied to its
commercial lending activity.
Traditional Off-Balance Sheet Risk Instruments
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of the terms or conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since commitments may expire without being
drawn, the total commitment amount does not necessarily represent future cash
requirements. Pacific Century evaluates each customer's credit worthiness on
an individual basis. The amount of collateral obtained is based on
management's credit evaluation of the customer. The type of collateral varies,
but may include cash, accounts receivable, inventory, and property, plant, and
equipment.
Standby letters of credit are conditional commitments issued by Pacific
Century to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support borrowing agreements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Pacific Century holds cash
and deposits as collateral on those commitments for which collateral is deemed
necessary.
Derivative Financial Instruments Held for Trading
Foreign exchange contracts are contracts for delayed delivery of a foreign
currency in which the seller agrees to make delivery at a specified future
date at a specified price. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
currency rates. Collateral is generally not required for these transactions.
At December 31, 1998, the notional amount of foreign exchange contracts held
for trading totaled $555.9 million, with a fair value of $4.3 million,
compared to $427.6 million at December 31, 1997 with a fair value of $(6.8)
million. Pacific Century uses foreign exchange contracts to offset foreign
currency positions taken on behalf of its customers and for its own account.
Pacific Century does not maintain significant net open positions in its
foreign exchange trading account.
79
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivative Financial Instruments Held or Issued for Other Than Trading
At December 31, 1998, the notional amount of foreign exchange contracts held
for other than trading totaled $318.1 million with a fair value of $(11.1)
million, compared to $406.0 million at December 31, 1997 with a fair value of
$15.7 million. Pacific Century uses these foreign exchange contracts primarily
for asset and liability management activities. Pacific Century does not
maintain significant net open foreign exchange positions in its other than
trading account.
Interest rate options, which primarily consist of caps and floors, are
interest rate protection instruments that involve the obligation of the seller
to pay the buyer an interest rate differential in exchange for a premium paid
by the buyer. This differential represents the difference between current
interest rates and an agreed-upon rate applied to a notional amount. Exposure
to loss on these options will increase or decrease over their respective lives
as interest rates fluctuate. Pacific Century transacts interest rate options
on behalf of its customers and does not maintain significant open positions.
Pacific Century utilizes interest-rate swaps in managing its exposure to
interest-rate risk. These financial instruments require the exchange of fixed
and floating rate interest payments based on the notional amount of the
contract for a specified period. Pacific Century has used swap agreements to
effectively convert portions of its floating rate loan portfolio to fixed
rate. At December 31, 1998, such "receive-fixed" swaps with a notional value
of $137.6 million were in effect.
Pacific Century's current credit risk exposure on interest-rate swaps is
equal to the total market value of those instruments with gains. The aggregate
credit risk of swaps at year-end 1998 was $0.3 million. The net market value
of all positions at year-end 1998 was $0.3 million compared with $(2.0)
million at year-end 1997. Net expense on interest rate swap agreements totaled
$1.5 million, $2.5 million and $4.2 million for 1998, 1997 and 1996,
respectively.
The table below summarizes by notional amounts the activity for each major
category of interest-rate swaps in 1998. Pacific Century had no deferred gains
or losses relating to terminated swap contracts in 1998 and 1997.
<TABLE>
<CAPTION>
Receive Pay
Fixed Fixed
---------- --------
(in thousands of
dollars)
<S> <C> <C>
Balance, December 31, 1995........................... $1,095,236 $ 18,773
Additions.......................................... -- --
Maturities/Amortizations........................... (421,999) (18,773)
---------- --------
Balance, December 31, 1996........................... $ 673,237 $ --
Additions.......................................... 50,000 --
Maturities/Amortizations........................... (230,688) --
---------- --------
Balance, December 31, 1997........................... $ 492,549 $ --
Additions.......................................... -- --
Maturities/Amortizations........................... (354,970) --
---------- --------
Balance, December 31, 1998........................... $ 137,579 $ --
========== ========
</TABLE>
80
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The approximate annual maturities of interest-rate swap agreements
outstanding as of December 31, 1998 were:
<TABLE>
<CAPTION>
Notional Principal
Expected to Mature In
1999
-------------------------
(in thousands of dollars)
<S> <C>
Receive-Fixed Interest-Rate Swaps:
Fixed Maturity................................. $50,000
Pay Rate..................................... 5.17%
Receive Rate................................. 6.46%
Amortizing/1/ ................................. $87,579
Pay Rate..................................... 4.95%
Receive Rate................................. 5.31%
</TABLE>
- --------
/1/ Amortization was estimated by utilizing average prepayment speeds provided
by various dealers in these instruments.
Note P--Fair Values of Financial Instruments
Fair value information about financial instruments, whether or not
recognized in the balance sheet are as follows. When possible, fair values are
measured based on quoted market prices for the same or comparable instruments.
Because many of Pacific Century's financial instruments lack an available
market price, management must use its best judgment in estimating the fair
value of those instruments based on present value or other valuation
techniques. Such techniques are significantly affected by estimates and
assumptions, including the discount rate, future cash flows, economic
conditions, risk characteristics, and other relevant factors. These estimates
are subjective in nature and involve uncertain assumptions and, therefore,
cannot be determined with precision. Many of the derived fair value estimates
cannot be substantiated by comparison to independent markets and could not be
realized in immediate settlement of the instrument. Certain financial
instruments and all non-financial instruments are excluded from disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of Pacific Century.
The following methods and assumptions were used by Pacific Century in
estimating fair values of financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheet for cash and short-term investments approximate the fair value of
these assets.
Investment Securities Held to Maturity, Investment Securities Available
for Sale and Trading Securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Loans: Fair values of loans are determined by discounting the expected
future cash flows of pools of loans with similar characteristics. Loans are
first segregated by type such as commercial, real estate, consumer, and
foreign and are then further segmented into fixed and adjustable rate and
loan quality categories. Expected future cash flows are projected based on
contractual cash flows, adjusted for estimated prepayments.
Deposit Liabilities: Fair values of noninterest bearing and interest
bearing demand deposits and savings deposits are equal to the amount
payable on demand (e.g., their carrying amounts) because these products
have no stated maturity. Fair values of time deposits are estimated using
discounted cash flow analyses. The discount rates used are based on rates
currently offered for deposits with similar remaining maturities.
81
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Short-Term Borrowings: The carrying amounts of securities sold under
agreements to repurchase, funds purchased, commercial paper, and other
short-term borrowings approximate their fair values.
Long-Term Debt: Fair values of long-term debt are estimated using
discounted cash flow analyses, based on Pacific Century's current
incremental borrowing rates for similar types of borrowings.
Off-Balance Sheet Instruments: Fair values of off-balance sheet
instruments (e.g., commitments to extend credit, standby letters of credit,
commercial letters of credit, foreign exchange and swap contracts, and
interest rate swap agreements) are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing, current settlement
values or quoted market prices of comparable instruments.
The following table presents the fair values of Pacific Century's financial
instruments at December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
Book or Book or Book or
Notional Notional Notional
Value Fair Value Value Fair Value Value Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Financial Instruments--
Assets
Loans/1/ ............. $8,958,800 $9,263,200 $8,718,900 $8,915,500 $7,988,400 $8,123,400
Investment
Securities/2/ ....... 3,671,000 3,686,200 3,806,900 3,809,900 3,565,300 3,567,600
Other Financial
Assets/3/ ........... 501,500 501,500 418,700 418,700 779,100 779,100
Financial Instruments--
Liabilities
Deposits.............. 9,559,000 9,585,000 9,652,500 9,663,500 8,677,100 8,681,800
Short-Term
Borrowings/4/ ....... 3,297,600 3,297,600 3,215,700 3,215,700 2,968,800 2,968,800
Long-Term Debt/5/ .... 578,900 593,700 699,500 700,600 926,300 861,500
Financial Instruments--
Off-Balance Sheet
Financial Instruments
Whose Contract
Amounts Represent
Credit Risk:
Commitments to
Extend Credit...... 4,251,700 11,200 4,122,300 10,700 3,840,200 10,200
Standby Letters of
Credit............. 532,200 10,500 258,700 5,000 257,400 4,900
Commercial Letters
of Credit.......... 386,400 4,600 299,500 400 239,700 400
Financial Instruments
Whose Notional or
Contract Amounts
Exceed the Amount of
Credit Risk:
Foreign Exchange and
Swap Contracts..... 874,000 (6,800) 833,600 8,900 631,300 900
Interest Rate Swap
Agreements......... 137,600 300 492,500 (2,000) 673,200 (7,700)
</TABLE>
- --------
/1/ Includes all loans, net of reserve for loan losses, and excludes leases.
/2/ Includes both held to maturity and available for sale securities.
/3/ Includes interest-bearing deposits, funds sold and trading securities.
/4/ Includes securities sold under agreements to repurchase, funds purchased
and short-term borrowings.
/5/ Excludes capitalized lease obligations.
82
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note Q--Business Segments
Pacific Century is a financial services organization that maintains a broad
presence throughout the Pacific region. The financial performance of
individual operating components are assessed by the chief operating decision
maker of Pacific Century primarily in accordance with geographic area of
operations. 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.
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 process follows:
. Economic Provision--Business units are allocated an economic provision
for loan losses that reflects the expected normalized loss factor
determined by a statistically applied approach that considers risk
factors, including historical loss experience, within a given portfolio.
Such provisions are expected to be sufficient to cover credit losses
over the average life of the credit portfolios. The economic provision
is different from the method used to determine Pacific Century's
consolidated provision for loan losses, which is based on an evaluation
of the adequacy of the reserve for loan losses.
. Net Interest Income--Pacific Century relies primarily on net interest
income as the relevant revenue measure in assessing segment financial
performance. Interest revenue and interest expense are allocated to
business units using a funds transfer pricing process.
. Non-Interest Expense--Expenses for centrally provided services are based
on estimated usage of those services using various allocation
techniques.
. Income Taxes--Income taxes are charged to business units based on
Pacific Century's consolidated effective tax rate, exclusive of tax
benefits. Tax benefits resulting from permanent differences between book
and tax income are allocated to the business segment to which they
relate.
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. When material
changes are made to the financial management reporting process prior period
reports would be restated.
83
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Presented below is the financial results for each of Pacific Century's major
market segments for the year ended December 31, 1998.
Line of Business Selected Financial Information
<TABLE>
<CAPTION>
Treasury
U.S. and Other Consolidated
Hawaii Pacific Asia Mainland Corporate Total
---------- ---------- ---------- ---------- ---------- ------------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income..... $ 294,898 $ 121,642 $ 36,546 $ 100,342 $ 23,173 $ 576,601
Economic Provision/1/ .. (37,012) (12,910) (5,031) (11,257) (17,804) (84,014)
---------- ---------- ---------- ---------- ---------- -----------
Risk-Adjusted Net
Interest Income........ 257,886 108,732 31,515 89,085 5,369 492,587
Non-Interest Income..... 114,094 43,348 15,847 10,938 27,524 211,751
---------- ---------- ---------- ---------- ---------- -----------
Total Risk-Adjusted
Revenue................ 371,980 152,080 47,362 100,023 32,893 704,338
Non-Interest
Expense/2/ ............ 288,258 113,770 25,016 73,251 40,430 540,725
---------- ---------- ---------- ---------- ---------- -----------
Net Income Before Income
Taxes.................. 83,722 38,310 22,346 26,772 (7,537) 163,613
Income Taxes/3/ ........ (35,083) (15,314) (8,628) 31 2,345 (56,649)
---------- ---------- ---------- ---------- ---------- -----------
Net Income.............. $ 48,639 $ 22,996 $ 13,718 $ 26,803 $ (5,192) $ 106,964
========== ========== ========== ========== ========== ===========
Total Assets............ $5,272,787 $2,432,873 $1,017,603 $2,629,987 $3,663,313 $15,016,563
========== ========== ========== ========== ========== ===========
</TABLE>
/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 $19.4 million.
/3/ Tax benefits are allocated to the business segment to which they relate.
In 1998, income taxes for the U.S. Mainland segment included $13.5 million
in tax benefits from low income housing tax credits and investment tax
credits.
Within the Hawaii segment, line of business results are divided into retail
and commercial operating units. Retail operating units sell and service 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). With respect to the commercial component, operating units in
Hawaii include small business, middle market, cash management and commercial
real estate.
In the Pacific segment, Pacific Century offers financial products and
services to both retail and commercial customers. This segment includes
operations in the West and South Pacific.
Pacific Century serves the West Pacific through Bank of Hawaii branches in
Guam, the Commonwealth of the Northern Marianas Islands, the Federated States
of Micronesia, the Republic of the Marshall Islands and the Republic of Palau.
Additionally, First Savings maintains branches in Guam.
Pacific Century's presence in the South Pacific includes branches of Bank of
Hawaii and various subsidiary and affiliate banks. The Bank of Hawaii branches
in this region are in Fiji and American Samoa. Pacific Century's subsidiary
banks in the South Pacific are located in French Polynesia, New Caledonia,
Papua New Guinea, and Vanuatu. Additionally, Pacific Century maintains an
investment in affiliate banks located in Samoa, Solomon Islands and Tonga.
84
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 activities include letters of credit, remittance processing,
foreign exchange, cash management, export bill collection, and working capital
loans. The lending emphasis is on short-term loans based on cash flows.
In the U.S. Mainland segment, consumer and business financial products and
services are provided through Pacific Century Bank, N.A. (PCB), which has
branches in Southern California and Arizona. PCB's emphasis is to develop a
niche in the small and middle business markets and expand relationships with
customers who have an interest in the Asia-Pacific region.
In addition to the operations of PCB, this segment also includes operating
units for large corporate lending and leasing. The large corporate lending
unit targets businesses that have interests in the Asia-Pacific region and
companies in certain targeted industries. Leasing activities consist of
providing financing to businesses largely for aircraft, vehicles and
equipment.
The operations in the Treasury and Other Corporate segment, consist of
corporate asset and liability management activities including investment
securities, federal funds purchased and sold, institutional deposits, short
and long-term borrowings, and derivative activities for managing interest rate
and currency risks. Additionally, the net residual effect of transfer pricing
assets and liabilities also is included in Treasury.
Other items in this segment consist of the following:
. The operations of the insurance and other non-bank related subsidiaries.
. The residual effect of unallocated expenses for support and administrative
units.
. The difference between the sum of the economic provisions allocated to
business segments and the provision in the consolidated financial
statements.
. The difference between the sum of the equity allocated to business units
and total equity in the consolidated financial statements.
. Nonrecurring income and expense items.
85
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note R--Parent Company Financial Statements
Condensed financial statements of Pacific Century Financial Corporation
(Parent only) follow:
Condensed Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------
1998 1997 1996
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Dividends From
Bank Subsidiaries................................ $ 85,600 $ 97,103 $106,165
Other Subsidiaries............................... -- 14,000 15,000
Interest Income
From Subsidiaries................................ 10,120 9,987 5,415
From Others...................................... 83 1,625 1,919
Other Income....................................... 1,758 195 143
Securities Gains (Losses).......................... (316) 1,605 661
-------- -------- --------
Total Income................................... 97,245 124,515 129,303
Interest Expense................................... 22,244 19,691 8,036
Other Expense...................................... 10,341 9,444 5,950
-------- -------- --------
Total Expense.................................. 32,585 29,135 13,986
Income Before Income Taxes and Equity in
Undistributed Income of Subsidiaries.............. 64,660 95,380 115,317
Income Tax Benefits................................ 6,070 5,029 2,024
-------- -------- --------
Income Before Equity in Undistributed Income....... 70,730 100,409 117,341
Equity in Undistributed Income of Subsidiaries
Bank Subsidiaries................................ 30,854 34,172 15,539
Other Subsidiaries............................... 5,380 4,907 244
-------- -------- --------
36,234 39,079 15,783
-------- -------- --------
Net Income......................................... $106,964 $139,488 $133,124
======== ======== ========
</TABLE>
86
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Statements of Condition
<TABLE>
<CAPTION>
December 31
--------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C>
Assets
Cash in Bank of Hawaii...................... $ 274 $ 100 $ 134
Investment Securities Available for Sale.... 430 1,759 11,931
Equity in Net Assets of Bank Subsidiaries... 1,140,132 1,013,025 868,066
Equity in Net Assets of Other Subsidiaries.. 78,901 155,290 162,446
Interest-Bearing Deposits from Bank......... 175,200 171,997 200,300
Net Loans................................... 712 733 10,298
Trading Securities.......................... 2,309 2,352 1,663
Other Assets................................ 123,533 145,853 57,782
---------- ---------- ----------
Total Assets.............................. $1,521,491 $1,491,109 $1,312,620
========== ========== ==========
Liabilities and Shareholders' Equity
Commercial Paper and Short-Term Borrowings.. $ 127,311 $ 105,216 $ 70,827
Long-Term Debt.............................. 193,093 253,093 163,093
Other Liabilities........................... 15,493 15,593 12,578
Shareholders' Equity........................ 1,185,594 1,117,207 1,066,122
---------- ---------- ----------
Total Liabilities and Shareholders'
Equity................................... $1,521,491 $1,491,109 $1,312,620
========== ========== ==========
</TABLE>
87
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1998 1997 1996
-------- --------- ---------
(in thousands of dollars)
<S> <C> <C> <C>
Operating Activities
Net Income................................... $106,964 $ 139,488 $ 133,124
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Amortization Expense....................... 7,961 6,009 3,943
Realized Investment Securities Gains....... (44) (1,476) (653)
Undistributed Income from Subsidiaries..... (36,234) (39,079) (15,783)
Net Decrease (Increase) in Trading
Securities................................ 43 (689) (1,663)
Other Assets and Liabilities, Net.......... 14,208 (11,400) (3,468)
-------- --------- ---------
Net Cash Provided by Operating Activi-
ties.................................... 92,898 92,853 115,500
Investing Activities
Investment Securities Transactions, Net...... 330 11,272 449
Interest Bearing Deposits, Net............... (3,203) 28,303 (110,854)
Loan Transactions, Net....................... 21 9,565 2,340
Capital Contributions to Subsidiaries, Net... (11,100) (36,400) (3,093)
Purchase of CU Bancorp....................... -- (54,188) --
-------- --------- ---------
Net Cash Used by Investing Activities.... (13,952) (41,448) (111,158)
Financing Activities
Net Proceeds (Payments) from Borrowings...... (37,905) 124,389 99,361
Proceeds from Sale of Stock.................. 19,223 16,376 13,991
Stock Repurchased............................ (7,314) (142,479) (70,444)
Cash Dividends Paid.......................... (52,776) (49,725) (47,361)
-------- --------- ---------
Net Cash Used by Financing Activities.... (78,772) (51,439) (4,453)
-------- --------- ---------
Increase (Decrease) in Cash.................... 174 (34) (111)
Cash at Beginning of Year...................... 100 134 245
-------- --------- ---------
Cash at End of Year............................ $ 274 $ 100 $ 134
======== ========= =========
</TABLE>
88
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
The following information required by the Instructions to Form 10-K is
incorporated herein by reference (except as otherwise indicated below) from
various pages of the Pacific Century Financial Corporation Proxy Statement for
the annual meeting of shareholders to be held on April 23, 1999, as summarized
below:
Item 10. Directors and Executive Officers of the Registrant
Election of Directors on pages 2-7. Disclosure of Compliance with section
16(a) of the Securities Exchange Act on page 9.
For information relative to executive officers of the Registrant, see
"Executive Officers of the Registrant" at the end of Part I of this report.
Item 11. Executive Compensation
Executive Compensation on pages 12-18.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Voting Securities and Principal Holders Thereof and Election of Directors on
pages 1-7.
Item 13. Certain Relationships and Related Transactions
Transactions with Management and Others on page 27.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules
The following consolidated financial statements of Pacific Century
Financial Corporation and subsidiaries are included in Item 8:
Consolidated Statements of Condition--December 31, 1998, 1997, and 1996
Consolidated Statements of Income--Years ended December 31, 1998, 1997,
and 1996
Consolidated Statements of Shareholders' Equity--Years ended December 31,
1998, 1997, and 1996
Consolidated Statements of Cash Flows--Years ended December 31, 1998,
1997, and 1996
Notes to Consolidated Financial Statements--December 31, 1998
All other schedules to the consolidated financial statements stipulated by
Article 9 of Regulation S-X and all other schedules to the financial
statements of the registrant required by Article 5 of Regulation S-X are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
Financial statements (and summarized financial information) of (1)
unconsolidated subsidiaries or (2) 50% or less owned persons accounted for by
the equity method have been omitted because they do not, considered
individually or in the aggregate, constitute a significant subsidiary.
89
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
3.1 Certificate of Incorporation of Pacific Century Financial
Corporation (incorporated herein by reference to Appendix C of
Pacific Century Financial Corporation 1998 Proxy Statement dated
March 10, 1998)
3.2 By-Laws of Pacific Century Financial Corporation (incorporated
herein by reference to Appendix D of Pacific Century Financial
Corporation 1998 Proxy Statement dated March 10, 1998)
4.1 Instruments Defining the Rights of Holders of Long-Term Debt
10.1 Pacific Century Financial Corporation, One-Year Incentive Plan
Effective January 1, 1999*
10.2 Pacific Century Financial Corporation, One-Year Incentive Plan
Effective January 1, 1998 (incorporated herein by reference to
Exhibit 10.1 of Form 10K for the fiscal year ended December 31,
1997)*
10.3 Pacific Century Financial Corporation, One-Year Executive Incentive
Plan Effective January 1, 1998 (incorporated herein by reference to
Exhibit 10.2 of Form 10K for the fiscal year ended December 31,
1997)*
10.4 Pacific Century Financial Corporation, Long-Term Incentive
Compensation Plan Effective January 1, 1999*
10.5 Pacific Century Financial Corporation, Sustained Profit Growth Plan
Effective January 1, 1998 (incorporated herein by reference to
Exhibit 10.3 of Form 10K for the fiscal year ended December 31,
1997)*
10.6 Bancorp Hawaii, Inc. Sustained Profit Growth Plan Effective January
1, 1996 (incorporated herein by reference to Exhibit 10.3 of Form
10K for the fiscal year ended December 31, 1995)*
10.7 Bancorp Hawaii, Inc. Sustained Profit Growth Plan Effective January
1, 1997 (incorporated herein by reference to Exhibit 10.3 of Form
10K for the fiscal year ended December 31, 1996)*
10.8 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective January
1, 1994 (incorporated herein by reference to Exhibit C of Bancorp
Hawaii, Inc. 1994 Proxy Statement dated March 10, 1994)*
10.9 Bancorp Hawaii, Inc. Stock Option Plan of 1983 (incorporated herein
by reference to Exhibit 4(a) of Registration No. 2-84164)*
10.10 Pacific Century Financial Corporation Stock Option Plan of 1988
(incorporated herein by reference to Exhibit 4(a) of Registration
No. 33-23495)*
10.11 Pacific Century Financial Corporation Stock Option Plan of 1988
Amendment 99-1*
10.12 Pacific Century Financial Corporation Stock Option Plan of 1994
(incorporated herein by reference to Exhibit 4(a) of Registration
No. 33-54777)*
10.13 Pacific Century Financial Corporation Stock Option Plan of 1994
Amendment 97-1*
10.14 Pacific Century Financial Corporation Stock Option Plan of 1994
Amendment 97-2 (incorporated herein by reference to Appendix A of
Pacific Century Financial Corporation 1998 Proxy Statement dated
March 10, 1998)*
10.15 Pacific Century Financial Corporation Stock Option Plan of 1994
Amendment 99-2*
10.16 Bancorp Hawaii, Inc. Key Executive Severance Plan dated April 27,
1983 (incorporated herein by reference to Exhibit 10.4 of Form 10K
for the fiscal year ended December 31, 1995)*
10.17 Form of Key Executive Severance Agreement (incorporated herein by
reference to Exhibit 19(e) of Form 10K for the fiscal year ended
December 31, 1989 for L. M. Johnson)*
10.18 Form of Amended Key Executive Change-in-Control Severance Agreement
(incorporated herein by reference to Exhibit 10(e) of Form 10K for
the fiscal year ended December 31, 1994--October 3, 1994 for R. J.
Dahl)*
</TABLE>
90
<PAGE>
<TABLE>
<C> <S>
10.19 Form of Key Executive Change-in-Control Severance Agreement
(incorporated herein by reference to Exhibit 10(f) of Form 10K for the
fiscal year ended December 31, 1994--October 3, 1994 for A. T. Kuioka
and December 12, 1997 for M.P. Carryer)*
10.20 Form of Executive Change-in-Control Severance Agreement (incorporated
herein by reference to Exhibit 10(g) of Form 10K for the fiscal year
ended December 31, 1994--for D. A. Houle)*
10.21 Pacific Century Financial Corporation Directors' Deferred Compensation
Plan (Restatement Effective 1/1/96) with Amendment No. 96-1; Trust
Agreement (Effective 9/1/96) (incorporated by reference herein to
Exhibit (4) of Registration No. 333-14929.)
10.22 Pacific Century Financial Corporation Directors Stock Compensation
Program (incorporated herein by reference herein to Exhibit (4) of
Registration No. 333-02835).
12.1 Statement Regarding Computation of Ratios
19.1 Report to Shareholders for Quarter ended September 30, 1998
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
*Management contract or compensatory plan or arrangement
(b) Registrant filed no Form 8-Ks during the quarter ended December 31, 1998.
(c) Response to this item is the same as Item 14(a).
(d) Response to this item is the same as Item 14(a).
91
<PAGE>
STATISTICAL DISCLOSURES
CONTENTS AND REFERENCE
The following statistical disclosures required by the Instructions to Form
10-K are summarized below:
Item I. Distribution of Assets, Liabilities, and Shareholders' Equity;
Interest Rates and Interest Differential
Interest Differential--Table 23 included in Item 7 of this report.
Consolidated Average Balances, Income and Expense Summary, and Yields
and Rates--Taxable Equivalent--Table 3 included in Item 7 of this
report.
Average Loans--Table 20 included in Item 7 of this report.
Average Deposits--Table 22 included in Item 7 of this report.
Item II. Investment Portfolio
Note B to the Audited Financial Statements included in Item 8 of this
report.
Maturity Distribution, Market Value and Weighted-Average Yield to
Maturity of Securities--Table 18 included in Item 7 of this report.
Item III. Loan Portfolio
Loan Portfolio Balances--Table 6 included in Item 7 of this report.
Maturities and Sensitivities of Loans to Changes in Interest Rates--
Table 21 included in Item 7 of this report.
Non-Performing Assets and Accruing Loans Past Due 90 Days or More--
Table 10 included in Item 7 of this report.
Foregone Interest on Non-Accruals--Table 11 included in Item 7 of this
report.
Geographic Distribution of Cross-Border International Assets--Table 9
included in Item 7 of this report.
Item IV. Summary of Loan Loss Experience
Reserve for Loan Losses--Table 12 included in Item 7 of this report.
Allocation of Loan Loss Reserve--Table 13 included in Item 7 of this
report.
Narrative discussion of "Reserve for Loss Losses" included in Item 7 of
this report.
Item V. Deposits
Consolidated Average Balances, Income and Expense Summary, and Yields
and Rates--Taxable Equivalent--Table 3 included in Item 7 of this
report.
Note E to the Audited Financial Statements included in Item 8 of this
report.
92
<PAGE>
Item VI. Return on Equity and Assets
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Return on Average Assets............................. 0.72% 0.98% 1.00%
Return on Average Equity............................. 9.21% 12.57% 12.43%
Dividend Payout Ratio................................ 49.81% 36.34% 35.80%
Average Equity to Average Assets Ratio............... 7.81% 7.79% 8.05%
</TABLE>
Item VII. Short-Term Borrowings
Note F to the Audited Financial Statements included in Item 8 of this
report.
93
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: February 26, 1999 Pacific Century Financial
Corporation
/s/ Lawrence M. Johnson
By: _________________________________
Lawrence M. Johnson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
Date: February 26, 1999
/s/ Lawrence M. Johnson /s/ H. Howard Stephenson
- ------------------------------------- -------------------------------------
Lawrence M. Johnson H. Howard Stephenson
Director Director
/s/ Peter D. Baldwin /s/ Fred E. Trotter
- ------------------------------------- -------------------------------------
Peter D. Baldwin Fred E. Trotter
Director Director
/s/ Mary G. F. Bitterman /s/ Stanley S. Takahashi
- ------------------------------------- -------------------------------------
Mary G. F. Bitterman Stanley S. Takahashi
Director Director
/s/ Richard J. Dahl /s/ Donald M. Takaki
- ------------------------------------- -------------------------------------
Richard J. Dahl Donald M. Takaki
Director Director
/s/ David A. Heenan /s/ David A. Houle
- ------------------------------------- -------------------------------------
David A. Heenan David A. Houle
Director Chief Financial Officer
/s/ Stuart T. K. Ho /s/ Denis K. Isono
- ------------------------------------- -------------------------------------
Stuart T. K. Ho Denis K. Isono
Director Chief Accounting Officer
/s/ Herbert M. Richards, Jr.
- -------------------------------------
Herbert M. Richards, Jr.
Director
94
<PAGE>
Exhibit 4.1
Instruments defining the rights of holders of long-term debt of the
Registrant are not filed as exhibits because the amount of debt authorized under
any such instrument does not exceed 10% of the total assets of the Registrant
and its consolidated subsidiaries. The Registrant hereby undertakes to furnish a
copy of any such instrument to the Commission upon request.
<PAGE>
Exhibit 10.1
PACIFIC CENTURY FINANCIAL CORPORATION
ONE-YEAR INCENTIVE PLAN
(Effective as of January 1, 1999)
<PAGE>
Contents
Article 1. Establishment, Objectives, and Effective Date 1
Article 2. Definitions 1
Article 3. Administration 3
Article 4. Eligibility and Participation 4
Article 5. Contingent Awards 4
Article 6. Determination and Payment of Final Awards 5
Article 7. Termination of Employment 6
Article 8. Beneficiary Designation 6
Article 9. Rights of Employees 6
Article 10. Change in Control 7
Article 11. Amendment, Modification, and Termination 8
Article 12. Withholding 8
Article 13. Indemnification 8
Article 14. Successors 9
Article 15. Legal Construction 9
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION
ONE-YEAR INCENTIVE PLAN
================================================================================
ARTICLE 1. ESTABLISHMENT, OBJECTIVES, AND EFFECTIVE DATE.
---------------------------------------------
1.1. ESTABLISHMENT OF THE PLAN. Pacific Century Financial Corporation, a
Delaware corporation ("PCFC"), hereby establishes an incentive compensation plan
to be known as the "Pacific Century Financial Corporation One-Year Incentive
Plan" ("Plan"), as set forth in this document.
1.2. OBJECTIVES OF THE PLAN. The objectives of the Plan are to optimize
the profitability and growth of PCFC and its Subsidiaries through incentives for
each current annual period which are consistent with PCFC's goals and which link
the personal interests of Participants to those of PCFC's stockholders; to
provide Participants with an incentive for excellence in individual performance;
and to promote teamwork among Participants.
1.3. EFFECTIVE DATE. The Plan shall become effective as of January 1, 1999
("Effective Date"). The Plan shall commence on the Effective Date and shall
remain in effect, subject to the right of the Board of Directors to amend or
terminate the Plan at any time pursuant to Article 11 hereof, until January 1,
2009.
ARTICLE 2. DEFINITIONS.
-----------
Whenever used in the Plan, the following capitalized terms shall have
the meanings set forth below:
2.1. "AWARD AGREEMENT" shall mean an agreement entered into by PCFC and
each Participant setting forth the terms and conditions applicable to an Award
granted under this Plan.
2.2. "BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors of
PCFC.
2.3. "CHANGE IN CONTROL" of PCFC shall mean any one or more of the
following: (i) any person, including a "group" as defined in Section 13(d)(3)
of the Securities Exchange Act of 1934, becomes the beneficial owner of shares
of PCFC having 25% or more of the total number of votes that may be cast for the
election of Directors of PCFC; or (ii) as a result of, or in connection with,
any cash tender or exchange offer, merger
<PAGE>
or other business combination, sale of assets or contested election, or any
combination of the foregoing transactions, the persons who were Directors of
PCFC before the transaction shall cease to constitute a majority of the Board of
Directors of PCFC or any successor to PCFC.
2.4. "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
2.5 "COMMITTEE" shall mean the Compensation Committee of the Board of
Directors of PCFC.
2.6. "CONTINGENT AWARD" or "AWARD" shall mean an award which is contingent
on the achievement of designated performance goals which is granted to an
Eligible Employee at the outset of the Performance Period.
2.7. "DISABILITY" shall have the meaning ascribed to such term under the
long-term disability plan sponsored by PCFC or a Subsidiary and applicable to
the Participant, or if no such plan exists, the meaning as determined at the
sole discretion of the Committee.
2.8. "EFFECTIVE DATE" shall have the meaning ascribed to such term in
Article 1.3 hereof.
2.9. "ELIGIBLE EMPLOYEES" shall mean officers or other employees of PCFC
or any Subsidiary, who, in the opinion of the Committee, are or give promise of
becoming of exceptional importance to PCFC or any Subsidiary, and of making
substantial contributions to the success, growth, and profit of PCFC and its
Subsidiaries. Neither members of the Committee nor any member of the Board who
is not an employee of PCFC or a Subsidiary shall be an Eligible Employee.
2.10. "FINAL AWARD" shall mean the award ultimately paid out to each
Participant based on the Committee's determination under Article 6.
2.11. "NAMED EXECUTIVE OFFICER" shall mean a Participant who, as of the
date of vesting or payout of an Award, as applicable, is one of the group of
"covered employees" as defined under Code Section 162(m) and regulations
thereunder.
2.12. "NET INCOME" shall mean PCFC's consolidated net income before taxes
for the Performance Period, as reported in the annual report to shareholders (or
as otherwise reported to shareholders) adjusted as described in this Section.
The
<PAGE>
Committee may, in its sole discretion, adjust PCFC's reported net income for the
following in determining Net Income:
(a) Expenses associated with this incentive plan;
(b) Any extraordinary or unusual gain or loss transaction;
(c) Securities gains or losses; and
(d) Dividends on preferred shares.
The Committee will, in its sole discretion, determine any adjustments
to be made pursuant to this definition.
2.13. "PARTICIPANT" shall mean a person that the Committee, in its sole
discretion, selects from among the Eligible Employees to be granted a Contingent
Award.
2.14. "PERFORMANCE-BASED EXCEPTION" means the performance-based exception
from the tax deduction limitations of Code Section 162(m).
2.15. "PERFORMANCE PERIOD", with respect to any Award, shall mean PCFC's
fiscal year.
2.16. "PLAN" shall mean this PCFC One-Year Incentive Plan, as it may be
amended from time to time.
2.17. "RETIREMENT" shall mean the termination of a Participant's
employment with PCFC or a Subsidiary under circumstances where the Participant
terminates on or after the retirement dates specified under the Employees'
Retirement Plan of Bank of Hawaii.
2.18. "SALARY" shall mean the actual base salary for the Performance
Period.
2.19. "SUBSIDIARY" shall mean any corporation in which PCFC or any
Subsidiary (as defined hereby) owns 50 percent or more of the total combined
voting power of all classes of stock.
ARTICLE 3. ADMINISTRATION.
--------------
3.1. THE COMMITTEE. The Plan shall be administered by the Committee. The
members of the Committee shall be appointed from time to time by, and shall
serve at the discretion of, the Board of Directors.
3.2. AUTHORITY OF THE COMMITTEE. Except as limited by law
<PAGE>
or by the articles of incorporation or bylaws of PCFC, and subject to the
provisions herein, the Committee shall have full power to interpret and
administer the Plan, including to: identify and designate Eligible Employees and
Participants under the Plan; determine the size of Awards; determine the terms
and conditions of Awards in a manner consistent with the Plan; construe and
interpret the Plan and any Award Agreement or any other agreement or instrument
entered into under the Plan; establish, amend, or waive rules and regulations
for the Plan's administration; amend the terms and conditions of any outstanding
Award or Award Agreement to the extent such terms and conditions are within the
discretion of the Committee as provided in the Plan; and amend, modify, or
terminate the Plan in the manner described in Article 11. As permitted by law,
the Committee may delegate its authority as identified herein.
3.3. DECISIONS BINDING. All determinations and decisions made by the Committee
pursuant to the provisions of the Plan and all related orders and resolutions of
the Committee shall be final, conclusive, and binding on all persons, including
PCFC and its Subsidiaries, their shareholders, their employees, and the
directors, Eligible Employees, Participants, and their estates and
beneficiaries.
ARTICLE 4. ELIGIBILITY AND PARTICIPATION.
-----------------------------
4.1. ELIGIBILITY. Eligible Employees of PCFC or any Subsidiary shall be
eligible to participate in the Plan.
4.2. PARTICIPATION. Subject to the provisions of the Plan, the Committee
may, from time to time and at its sole discretion, designate the Eligible
Employees who shall be Participants and receive grants of Contingent Awards
under the Plan.
ARTICLE 5. CONTINGENT AWARDS.
-----------------
5.1. GRANT. The Committee may, from time to time and at its sole
discretion, make a grant of a Contingent Award to each Participant. The
Contingent Award for any Participant shall be an amount or range of amounts
(expressed either in dollars or as percentages of Salary for the Performance
Period). The Committee shall cause notice to be given to each Participant of his
or her participation under the Plan.
In the event that the Committee determines that it is advisable to
grant Awards to Named Executive Officers which do not qualify for the
Performance-Based Exception, the Committee
<PAGE>
may make such grants without satisfying the requirements of Code Section 162(m).
5.2. INCENTIVE POOL. In the case of a Contingent Award to a Named Executive
Officer which is intended by the Committee to qualify for the Performance-Based
Exception, the Contingent Award shall be determined by the Committee by the end
of the first quarter of the applicable Performance Period and shall not exceed a
percent of the Incentive Pool for the Performance Period specified by the
Committee. The Incentive Pool shall be established for each Performance Period
and shall be an amount designated as a percent of PCFC's Net Income for the
Performance Period, which percent of PCFC's Net Income shall be determined by
the Committee prior to the end of the first quarter of the Performance Period.
The aggregate of Contingent Awards made to Named Executives for a Performance
Period that are intended to qualify for the Performance-Based Exception shall
not exceed the Incentive Pool for the Performance Period. The Committee may, but
need not, grant such Contingent Awards up to the full amount of the Incentive
Pool.
5.3. VALUE. A Contingent Award shall be of no immediate and certain value,
and rather the amount payable to a Participant with respect to a Contingent
Award for any given Performance Period shall be the Final Award as determined
under Article 6.
ARTICLE 6. DETERMINATION AND PAYMENT OF FINAL AWARDS.
-----------------------------------------
6.1. DETERMINATION OF FINAL AWARDS. Subject to the terms and conditions of
the Plan, after the applicable Performance Period has ended, the Committee shall
determine the Final Award to be paid to each Participant. Each Participant's
performance during the Performance Period shall be assessed by the Participant's
manager, who shall make a recommendation of Final Award to the Chief Executive
Officer of PCFC. The Chief Executive Officer shall thereafter also assess each
Participant's performance during the Performance Period and shall make a
recommendation of Final Award to the Committee. However, the determination of
Final Award for a Participant shall be within the sole discretion of the
Committee. In this regard, the Committee may follow the recommendation by the
Chief Executive Officer or may make a lesser or greater Final Award, taking into
account the Participant's overall contribution to PCFC and its Subsidiaries for
the Performance Period, the corporate performance of PCFC and its Subsidiaries
for the Performance Period, and such other criteria as the Committee may
determine to promote the objectives of the Plan
<PAGE>
in an individual case. The Committee may determine the amount of any Final Award
to a Participant without regard to the amount of the Participant's Contingent
Award. Except as otherwise provided in the case of a Change in Control or other
event as described in Article 10, the Committee may modify or repeal the
Contingent Award of any Participant at any time before the determination of the
Participant's Final Award. However, in the case of a Contingent Award which is
designed to qualify for the Performance-Based Exception with respect to a Named
Executive Officer, the Final Award shall not result in an upward adjustment of
the Contingent Award to an amount greater than the maximum percent of the
Incentive Pool determined pursuant to Article 5.2 (although the Committee shall
retain the discretion to adjust such the Contingent Award downward).
6.2. MAXIMUM AWARDS. Notwithstanding any other provision of the Plan, the
maximum aggregate payout with respect to a Contingent Award granted in any one
Plan Year to any one Participant shall be $2,000,000.
6.3. PAYMENT. Payment of Final Awards shall be made in a single lump sum as
soon practicable following the close of the applicable Performance Period and
the determination of the Final Awards.
However, a Participant may make a request, on a form approved by the
Committee, for the deferral of all or part of any payment he or she may receive,
provided that such request is delivered to the Human Resources Division no later
than November 1 of the Performance Period. The Committee may accept or reject
any such request for a deferral and may determine the conditions of such
deferral at the Committee's sole discretion.
Payment of Final Awards shall be made normally in the form of cash.
However, the Committee, in its sole discretion, may provide for payment of Final
Awards in the form of PCFC stock, restricted stock or nonqualified stock
options.
6.4. PARTICIPATION DURING PERFORMANCE PERIOD. Unless determined otherwise
by the Committee and set forth in the Participant's Award Agreement, in the
event that an Eligible Employee's participation commences or terminates (for
reason other than a termination of employment as described in Article 7) mid-
term during a Performance Period, the Participant shall receive a payout of the
Award which is prorated in a manner determined by the Committee in its sole
discretion.
<PAGE>
ARTICLE 7. TERMINATION OF EMPLOYMENT.
-------------------------
7.1. TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
Unless determined otherwise by the Committee and set forth in the Participant's
Award Agreement, in the event the employment of a Participant is terminated by
reason of death, Disability, or Retirement during a Performance Period, the
Participant shall receive a payout of the Final Award which is prorated in a
manner determined by the Committee in its sole discretion. Payments of any
prorated Final Awards shall be made at the similar time as payments are made to
Participants who did not terminate employment during the applicable Performance
Period.
7.2. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. Unless determined
otherwise by the Committee and set forth in the Participant's Award Agreement,
in the event that a Participant's employment terminates during a Performance
Period for any reason other than those reasons set forth in Article 7.1, all
Awards for that Performance Period shall be forfeited by the Participant.
ARTICLE 8. BENEFICIARY DESIGNATION.
-----------------------
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by PCFC, and shall be effective only when filed by the Participant in
writing with PCFC during the Participant's lifetime. In the absence of any such
designation, benefits remaining unpaid at the Participant's death shall be paid
to the Participant's estate.
ARTICLE 9. RIGHTS OF EMPLOYEES.
-------------------
9.1. EMPLOYMENT. Nothing in the Plan shall interfere with or limit in
any way the right of PCFC or a Subsidiary to terminate any Participant's
employment at any time, nor confer upon any Participant any right to continue in
the employ of the of PCFC or a Subsidiary.
9.2. PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having
<PAGE>
been so selected, to be selected to receive a future Award.
9.3. NONTRANSFERABILITY. No Award shall be sold, assigned, transferred,
encumbered, hypothecated, or otherwise anticipated by a Participant and, during
the lifetime of a Participant, any payment shall be payable only to the
Participant.
ARTICLE 10. CHANGE-IN-CONTROL.
-----------------
10.1. TREATMENT OF OUTSTANDING AWARDS. Notwithstanding any other
provision of the Plan to the contrary, in the event of a dissolution or
liquidation of PCFC, or a Change in Control of PCFC, the amount of cash
payable with respect to any Contingent Award for a Performance Period that ends
after such event shall be determined and payable as if the Performance Period
ended on the date of such event and a Final Award shall be calculated and paid
under the Plan in an amount equal to two times the Contingent Award. The
Contingent Award shall be calculated based on the annualized Salary of the
Participant for the shortened Performance Period. The Final Award calculated
under this Article 10 shall be multiplied by a fraction, the numerator of which
shall be the number of full months of the Performance Period, as adjusted under
this Article 10, and the denominator of which shall be the number of full months
in the intended Performance Period. The Final Award under this Article 10 shall
be paid to such Participant within ten days of the end of the shortened
Performance Period.
10.2. TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE IN CONTROL
PROVISIONS. Notwithstanding any other provision of the Plan or any Award
Agreement provision, the provisions of this Article 10 may not be terminated,
amended, or modified on or after the date of a Change in Control to affect
adversely any Award theretofore granted under the Plan without the prior written
consent of the Participant with respect to the Participant's outstanding Awards;
provided, however, the Board of Directors, upon recommendation of the Committee,
may terminate, amend, or modify this Article 10 at any time and from time to
time prior to the date of a Change in Control.
10.3. POOLING OF INTERESTS ACCOUNTING. Notwithstanding any other
provision of the Plan to the contrary, in the event that the consummation of a
Change in Control is contingent on using pooling of interests accounting
methodology, the Board may take any action necessary, including but not limited
to the amendment or repeal of any Contingent
<PAGE>
Award, to preserve the use of pooling of interests accounting.
ARTICLE 11. AMENDMENT, MODIFICATION AND TERMINATION.
---------------------------------------
11.1. AMENDMENT, MODIFICATION AND TERMINATION. The Board or the
Committee, may, at any time, terminate, amend, modify, or suspend this Plan
provided that no such amendment, modification, suspension, or termination of the
Plan shall in any manner (except as allowable under Section 10.3) adversely
affect in any material way any Final Award made under the Plan without the
consent of the Participant holding the Final Award.
11.2. COMPLIANCE WITH CODE SECTION 162(M). Except as otherwise provided
by this Article 11.2, at all times when Code Section 162(m) is applicable, all
Awards granted under this Plan shall comply with the requirements of Code
Section 162(m). However, in the event the Committee determines that such
compliance is not desired with respect to the initial grant of any Award under
the Plan, then compliance with Code Section 162(m) shall not apply and be
required for such Award. In addition, in the event that changes are made to Code
Section 162(m) to permit greater flexibility with respect to any Award available
under the Plan, the Committee may, subject to this Article 11, make any
adjustments it deems appropriate.
ARTICLE 12. WITHHOLDING.
-----------
PCFC shall have the power and the right to deduct, withhold, or
require a Participant to remit to PCFC an amount sufficient to satisfy federal,
state, and local taxes, domestic or foreign, required by law or regulation to be
withheld with respect to any taxable event arising as a result of this Plan.
ARTICLE 13. INDEMNIFICATION.
---------------
<PAGE>
Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by PCFC against and from any loss,
cost, liability, or expense that may be imposed upon or reasonably incurred by
him or her in connection with or resulting from any claim, action, suit, or
proceeding to which he or she may be a party or in which he or she may be
involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with PCFC's approval, or paid by him or her in satisfaction of any judgment in
any such action, suit, or proceeding against him or her, provided he or she
shall give PCFC an opportunity, at its own expense, to handle and defend the
same before he or she undertakes to handle and defend it on his or her own
behalf. The foregoing right of indemnification shall not be exclusive of any
other rights of indemnification to which such persons may be entitled under
PCFC's articles of incorporation or bylaws, as a matter of law, or otherwise, or
any power that PCFC have to indemnify them or hold them harmless.
ARTICLE 14. SUCCESSORS.
----------
All obligations of PCFC under the Plan with respect to Awards granted
hereunder shall be binding on any successor to PCFC, whether the existence of
such successor is the result of a direct or indirect purchase, merger,
consolidation, or otherwise, of all or substantially all of the business and/or
assets of PCFC.
ARTICLE 15. LEGAL CONSTRUCTION.
------------------
15.1. GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
15.2. SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
15.3. REQUIREMENTS OF LAW. The granting of Contingent Awards and the
payment of Final Awards under the Plan shall be subject to all applicable laws,
rules, and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required.
<PAGE>
15.4. GOVERNING LAW. To the extent not preempted by federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the state of Delaware.
<PAGE>
Exhibit 10.4
PACIFIC CENTURY FINANCIAL CORPORATION
LONG-TERM INCENTIVE COMPENSATION PLAN
(Effective as of January 1, 1999)
<PAGE>
Contents
================================================================================
Article 1. Establishment, Objectives, and Effective Date 1
Article 2. Definitions 1
Article 3. Administration 3
Article 4. Eligibility and Participation 3
Article 5. Contingent Awards 4
Article 6. Determination and Payment of Final Awards 5
Article 7. Termination of Employment 6
Article 8. Beneficiary Designation 7
Article 9. Rights of Employees 7
Article 10. Change in Control 7
Article 11. Amendment, Modification, and Termination 8
Article 12. Withholding 8
Article 13. Indemnification 9
Article 14. Successors 9
Article 15. Legal Construction 9
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION
LONG-TERM INCENTIVE COMPENSATION PLAN
================================================================================
ARTICLE 1. ESTABLISHMENT, OBJECTIVES, AND EFFECTIVE DATE.
---------------------------------------------
1.1. ESTABLISHMENT OF THE PLAN. Pacific Century Financial Corporation, a
Delaware corporation ("PCFC"), hereby establishes an incentive compensation plan
to be known as the "Pacific Century Financial Corporation Long-Term Incentive
Compensation Plan" ("Plan"), as set forth in this document.
1.2. OBJECTIVES OF THE PLAN. The objectives of the Plan are to optimize the
profitability and growth of PCFC and its Subsidiaries through incentives for a
multi-year period which are consistent with PCFC's goals and which link the
personal interests of Participants to those of PCFC's stockholders; to provide
Participants with an incentive for excellence in individual performance; and to
promote teamwork among Participants.
1.3. EFFECTIVE DATE. The Plan shall become effective as of January 1, 1999
("Effective Date"). The Plan shall commence on the Effective Date and shall
remain in effect, subject to the right of the Board of Directors to amend or
terminate the Plan at any time pursuant to Article 11 hereof, until January 1,
2009.
ARTICLE 2. DEFINITIONS.
-----------
Whenever used in the Plan, the following capitalized terms shall have
the meanings set forth below:
2.1. "AWARD AGREEMENT" shall mean an agreement entered into by PCFC and
each Participant setting forth the terms and conditions applicable to an Award
granted under this Plan.
2.2. "BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors of
PCFC.
2.3. "CHANGE IN CONTROL" of PCFC shall mean any one or more of the
following: (i) any person, including a "group" as defined in Section 13(d)(3)
of the Securities Exchange Act of 1934, becomes the beneficial owner of shares
of PCFC having 25% or more of the total number of votes that may be cast for the
election of Directors of PCFC; or (ii) as a result of, or in connection with,
any cash tender or exchange offer, merger
<PAGE>
or other business combination, sale of assets or contested election, or any
combination of the foregoing transactions, the persons who were Directors of
PCFC before the transaction shall cease to constitute a majority of the Board of
Directors of PCFC or any successor to PCFC.
2.4. "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
2.5. "COMMITTEE" shall mean the Compensation Committee of the Board of
Directors of PCFC or any other committee designated by the Board.
2.6. "CONTINGENT AWARD" OR "AWARD" shall mean an award which is contingent
on the achievement of designated performance goals and final determination by
the Committee and which is granted to an Eligible Employee at the outset of the
Performance Period.
2.7. "DISABILITY" shall have the meaning ascribed to such term under the
long-term disability plan sponsored by PCFC or a Subsidiary and applicable to
the Participant, or if no such plan exists, the meaning as determined at the
sole discretion of the Committee.
2.8. "EFFECTIVE DATE" shall have the meaning ascribed to such term in
Article 1.3 hereof.
2.9. "ELIGIBLE EMPLOYEES" shall mean officers or other employees of PCFC
or any Subsidiary, who, in the opinion of the Committee, are or give promise of
becoming of exceptional importance to PCFC or any Subsidiary, and of making
substantial contributions to the success, growth, and profit of PCFC and its
Subsidiaries. Neither members of the Committee nor any member of the Board who
is not an employee of PCFC or a Subsidiary shall be an Eligible Employee.
2.10. "FINAL AWARD" shall mean the award ultimately paid out to each
Participant, based on the extent to which corresponding performance goals have
been achieved and the Committee's determination under Article 6.
2.11. "NAMED EXECUTIVE OFFICER" shall mean a Participant who, as of the
date of vesting or payout of an Award, as applicable, is one of the group of
"covered employees" as defined under Code Section 162(m) and regulations
thereunder.
2.12. "PARTICIPANT" shall mean a person that the
<PAGE>
Committee, in its sole discretion, selects from among the Eligible Employees to
be granted a Contingent Award.
2.13. "PERFORMANCE-BASED EXCEPTION" means the performance-based exception
from the tax deductibility limitations of Code Section 162(m).
2.14. "PERFORMANCE PERIOD" shall mean the length of time over which
performance is measured for determining Final Awards. The length of the
Performance Period shall be set at the sole discretion of the Committee.
2.15. "PLAN" shall mean this Pacific Century Financial Corporation Long-
Term Incentive Compensation Plan, as it may be amended from time to time.
2.16. "RETIREMENT" shall mean the termination of a Participant's
employment with PCFC or a Subsidiary under circumstances where the Participant
terminates on or after the retirement dates specified under the Employees'
Retirement Plan of Bank of Hawaii.
2.17. "SALARY" shall mean average annual base salary.
2.18. "SUBSIDIARY"" shall mean any corporation in which PCFC or any
Subsidiary (as defined hereby) owns 50 percent or more of the total combined
voting power of all classes of stock.
ARTICLE 3. ADMINISTRATION.
--------------
3.1. THE COMMITTEE. The Plan shall be administered by the Committee. The
members of the Committee shall be appointed from time to time by, and shall
serve at the discretion of, the Board of Directors.
3.2. AUTHORITY OF THE COMMITTEE. Except as limited by law or by the
articles of incorporation or bylaws of PCFC, and subject to the provisions
herein, the Committee shall have full power to interpret and administer the
Plan, including to: identify and designate Eligible Employees and Participants
under the Plan; determine the size of Awards; determine the terms and conditions
of Awards in a manner consistent with the Plan; construe and interpret the Plan
and any Award Agreement or any other agreement or instrument entered into under
the Plan; establish, amend, or waive rules and regulations for the Plan's
administration; amend the terms and conditions of any outstanding Award or Award
Agreement to the extent such terms
<PAGE>
and conditions are within the discretion of the Committee as provided in the
Plan; and amend, modify, or terminate the Plan in the manner described in
Article 11. As permitted by law, the Committee may delegate its authority as
identified herein.
3.3. DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Committee shall be final, conclusive, and binding on all
persons, including PCFC and its Subsidiaries, their shareholders, their
employees, and the directors, Eligible Employees, Participants, and their
estates and beneficiaries.
ARTICLE 4. ELIGIBILITY AND PARTICIPATION.
-----------------------------
4.1. ELIGIBILITY. Eligible Employees of PCFC or any Subsidiary shall be
eligible to participate in the Plan.
4.2. PARTICIPATION. Subject to the provisions of the Plan, the Committee
may, from time to time and at its sole discretion, designate the Eligible
Employees who shall be Participants and receive grants of Contingent Awards
under the Plan.
ARTICLE 5. CONTINGENT AWARDS.
-----------------
5.1. GRANT. The Committee may, from time to time and at its sole
discretion, make a grant of a Contingent Award to each Participant. The
Contingent Award for any Participant shall be an amount, expressed either as a
dollar amount or as a percentage of Salary for the Performance Period. The
Committee shall cause notice to be given to each Participant of his or her
participation under the Plan.
In the event that the Committee determines that it is advisable to
grant Awards to Named Executive Officers which do not qualify for the
Performance-Based Exception, the Committee may make such grants without
satisfying the requirements of Code Section 162(m).
5.2. VALUE. A Contingent Award shall be of no immediate and certain value,
and rather the amount payable to a Participant with respect to a Contingent
Award for any given Performance Period shall be the Final Award as determined
under Article 6 and shall be conditioned upon the extent to which the
Performance Goals designated under this Article 5 are met and any adjustment to
such Award as may be determined under Article 6.
<PAGE>
5.3. PERFORMANCE MEASURE SELECTION. The performance goals upon which an
Award is conditioned shall be based upon one or more of the following
performance measures: earnings per share (actual or targeted growth), economic
value added, net income after capital cost, net income (before or after taxes),
various return measures (either absolute or relative to peers) including: return
on average assets, return on average equity, risk-adjusted return on capital
("RAROC"), efficiency ratio, full time equivalency ("FTE") control, stock price
(actual or targeted growth), total shareholder return ("TSR", absolute or
relative to an index), and non-interest income to net interest income ratio. In
the case of Awards to Named Executive Officers which are intended by the
Committee to qualify for the Performance-Based Exception, the performance goals
shall be based upon the performance measures set forth in this Article 5 as of
the Effective Date, and any material addition or change to the performance
measures shall not be utilized or taken into account for such Awards unless and
until such performance measures are disclosed to and approved by shareholders in
accordance with the requirements of Code Section 162(m).
5.4. PERFORMANCE GOAL ESTABLISHMENT. The Committee shall select among the
performance measures, and shall establish specific performance goals relative to
such performance measures prior to the end of the first quarter of the first
year of the applicable Performance Period. Such performance goals shall,
depending on the extent to which they are met as determined by the Committee,
determine the value of the Final Awards paid out to Participants.
5.5. ADJUSTMENT OF PERFORMANCE GOALS. Once established, performance goals
generally shall not be changed during a Performance Period. However, if the
Committee determines that external changes or other unanticipated business
conditions have materially affected the fairness of the goals, then the
Committee may approve appropriate adjustments to the performance goals (either
up or down) during a Performance Period as such goals apply to Contingent
Awards. However, in the case of Awards to Named Executive Officers which are
intended by the Committee to qualify for the performance-based Exception, any
adjustments shall be made within the time period described in Article 5.4 to the
extent required under Code Section 162(m).
5.6. ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. In the event of any change in corporate capitalization,
such as a stock split, or a corporate transaction, such as any merger,
consolidation, separation, including a spin-off, or other distribution of stock
or
<PAGE>
property of PCFC or a Subsidiary, any reorganization (whether or not such
reorganization comes within the definition of such term in Code Section 368), or
any partial or complete liquidation of PCFC or a Subsidiary, or in the event of
unusual or nonrecurring events affecting PCFC or the financial statements of
PCFC or of changes in applicable laws, regulations, or accounting principles,
such adjustments shall be made to the Contingent Awards and performance goals
relating to the then-current Performance Period, as may be determined to be
appropriate and equitable by the Committee, in its sole discretion, to prevent
dilution or enlargement of rights. However, in the case of Awards to Named
Executive Officers which are intended by the Committee to qualify for the
performance-based Exception, any adjustments shall be made within the time
period described in Article 5.4 to the extent regarded under Code Section
162(m).
ARTICLE 6. DETERMINATION AND PAYMENT OF FINAL AWARDS.
-----------------------------------------
6.1. DETERMINATION OF FINAL AWARDS. Subject to the terms and conditions of
the Plan, after the applicable Performance Period has ended, the Committee shall
determine the Final Award to be paid to each Participant based on the
Participant's Contingent Award and the extent to which corresponding performance
goals have been achieved.
Notwithstanding any other provision in the Plan to the contrary, the
Committee may adjust the Final Award payable to a Participant by making any
upward or downward adjustment to the corresponding Contingent Award. Except as
otherwise provided in the case of a Change in Control or other event as
described in Article 10, the Committee may modify or repeal the Contingent Award
of any Participant at any time before the determination of the Participant's
Final Award. However, Contingent Awards which are designed to qualify for the
Performance-Based Exception with respect to Named Executive Officers may not be
adjusted upward (although the Committee shall retain the discretion to adjust
such Awards downward).
6.2. MAXIMUM AWARDS. The maximum aggregate payout with respect to
Contingent Awards granted in any one fiscal year to any one Participant shall be
$2,000,000.
6.3. PAYMENT. Payment of Final Awards shall be normally made in a single
lump sum as soon practicable following the close of the applicable Performance
Period.
However, a Participant may make a request, on a form approved by the
Committee, for the deferral of all or part of
<PAGE>
any payment he or she may receive for a Performance Period, provided that such
request is delivered to the Human Resources Division no later than November 1 of
the last year within the Performance Period. The Committee may accept or reject
any such request for a deferral and may determine the conditions of such
deferral at the Committee's sole discretion.
Payment of Final Awards shall be made normally in the form of cash.
However, the Committee, in its sole discretion, may provide for payment of Final
Awards in the form of PCFC stock, restricted stock or nonqualified stock
options.
6.4. PARTICIPATION DURING PERFORMANCE PERIOD. Unless determined otherwise
by the Committee and set forth in the Participant's Award Agreement, in the
event that an Eligible Employee's participation commences or terminates (for
reason other than a termination of employment as described in Article 7) mid-
term during a Performance Period, the Participant shall receive a payout of the
Award which is prorated in a manner determined by the Committee in its sole
discretion.
ARTICLE 7. TERMINATION OF EMPLOYMENT.
-------------------------
7.1. TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
Unless determined otherwise by the Committee and set forth in the Participant's
Award Agreement, in the event the employment of a Participant is terminated by
reason of death, Disability, or Retirement during a Performance Period, the
Participant shall receive a payout of the Award which is prorated in a manner
determined by the Committee in its sole discretion. Payments of any prorated
Final Awards shall be made at the similar time as payments are made to
Participants who did not terminate employment during the applicable Performance
Period.
7.2. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. Unless determined
otherwise by the Committee and set forth in the Participant's Award Agreement,
in the event that a Participant's employment terminates during a Performance
Period for any reason other than those reasons set forth in Article 7.1, all
Awards for that Performance Period shall be forfeited by the Participant.
ARTICLE 8. BENEFICIARY DESIGNATION.
-----------------------
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the
<PAGE>
Plan is to be paid in case of his or her death before he or she receives any or
all of such benefit. Each such designation shall revoke all prior designations
by the same Participant, shall be in a form prescribed by PCFC, and shall be
effective only when filed by the Participant in writing with PCFC during the
Participant's lifetime. In the absence of any such designation, benefits
remaining unpaid at the Participant's death shall be paid to the Participant's
estate.
ARTICLE 9. RIGHTS OF EMPLOYEES.
-------------------
9.1. EMPLOYMENT. Nothing in the Plan shall interfere with or limit in
any way the right of PCFC or a Subsidiary to terminate any Participant's
employment at any time, nor confer upon any Participant any right to continue in
the employ of the of PCFC or a Subsidiary.
9.2. PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected to
receive a future Award.
9.3. NONTRANSFERABILITY. No Award shall be sold, assigned, transferred,
encumbered, hypothecated, or otherwise anticipated by a Participant and, during
the lifetime of a Participant, any payment shall be payable only to the
Participant.
ARTICLE 10. CHANGE IN CONTROL.
-----------------
10.1. TREATMENT OF OUTSTANDING AWARDS. Notwithstanding any other
provision of the Plan to the contrary, in the event of a dissolution or
liquidation of PCFC, or a Change in Control of PCFC, the amount of cash
payable with respect to any Contingent Award for a Performance Period that ends
after such event shall be determined and payable as if the Performance Period
ended on the date of such event and a Final Award shall be calculated and paid
under the Plan in an amount equal to two times the Contingent Award. The
Contingent Award shall be calculated based on the Salary of the Participant for
the shortened Performance Period. The Final Award calculated under this
Article 10 shall be multiplied by a fraction, the numerator of which shall be
the number of full months of the Performance Period, as adjusted under this
Article 10, and the denominator of which shall be the number of full months in
the intended Performance Period. The Final Award under this Article 10 shall be
paid to such Participant within ten days of the end of the shortened Performance
Period.
<PAGE>
10.2. TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE IN CONTROL
PROVISIONS. Notwithstanding any other provision of the Plan or any Award
Agreement provision, the provisions of this Article 10 may not be terminated,
amended, or modified on or after the date of a Change in Control to affect
adversely any Award theretofore granted under the Plan without the prior written
consent of the Participant with respect to the Participant's outstanding Awards;
provided, however, the Board of Directors, upon recommendation of the Committee,
may terminate, amend, or modify this Article 10 at any time and from time to
time prior to the date of a Change in Control.
10.3. POOLING OF INTERESTS ACCOUNTING. Notwithstanding any other
provision of the Plan to the contrary, in the event that the consummation of a
Change in Control is contingent on using pooling of interests accounting
methodology, the Board may take any action necessary, including but not limited
to the amendment or repeal of any Contingent Award, to preserve the use of
pooling of interests accounting.
ARTICLE 11. AMENDMENT, MODIFICATION, AND TERMINATION.
----------------------------------------
11.1. AMENDMENT, MODIFICATION, AND TERMINATION. The Board or the
Committee, may, at any time, terminate, amend, modify, or suspend this Plan
provided that no such amendment, modification, suspension, or termination of the
Plan shall in any manner (except as allowable under Section 10.3) adversely
affect in any material way any Final Award previously made under the Plan
without the consent of the Participant holding the Final Award.
11.2. COMPLIANCE WITH CODE SECTION 162(M). At all times when Code Section
162(m) is applicable, all Awards granted under this Plan shall comply with the
requirements of Code Section 162(m). However, in the event the Committee
determines that such compliance is not desired with respect to the initial grant
of any Award under the Plan, then compliance with Code Section 162(m) shall not
apply and be required for such Award. In addition, in the event that changes are
made to Code Section 162(m) to permit greater flexibility with respect to any
Award available under the Plan, the Committee may, subject to this Article 11,
make any adjustments it deems appropriate.
<PAGE>
ARTICLE 12. WITHHOLDING.
-----------
PCFC shall have the power and the right to deduct, withhold, or
require a Participant to remit to PCFC an amount sufficient to satisfy federal,
state, and local taxes, domestic or foreign, required by law or regulation to be
withheld with respect to any taxable event arising as a result of this Plan.
ARTICLE 13. INDEMNIFICATION.
---------------
Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by PCFC against and from any
loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit, or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with PCFC's approval, or paid by him or her in satisfaction of any judgment in
any such action, suit, or proceeding against him or her, provided he or she
shall give PCFC an opportunity, at its own expense, to handle and defend the
same before he or she undertakes to handle and defend it on his or her own
behalf. The foregoing right of indemnification shall not be exclusive of any
other rights of indemnification to which such persons may be entitled under
PCFC's articles of incorporation or bylaws, as a matter of law, or otherwise, or
any power that PCFC have to indemnify them or hold them harmless.
ARTICLE 14. SUCCESSORS.
----------
All obligations of PCFC under the Plan with respect to Awards granted
hereunder shall be binding on any successor to PCFC, whether the existence of
such successor is the result of a direct or indirect purchase, merger,
consolidation, or otherwise, of all or substantially all of the business and/or
assets of PCFC.
ARTICLE 15. LEGAL CONSTRUCTION.
------------------
15.1. GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
<PAGE>
15.2. SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
15.3. REQUIREMENTS OF LAW. The granting of Contingent Awards and the
payment of Final Awards under the Plan shall be subject to all applicable laws,
rules, and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required.
15.4. GOVERNING LAW. To the extent not preempted by federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the state of Delaware.
<PAGE>
EXHIBIT 10.11
AMENDMENT 99-1 TO
THE PACIFIC CENTURY FINANCIAL CORPORATION
STOCK OPTION PLAN OF 1988 AND RELATED AWARDS
--------------------------------------------
In accordance with Article 13 of the Pacific Century Financial
Corporation Stock Option Plan of 1988 (hereinafter "Plan"), the Plan and related
awards are hereby amended by this Amendment No. 99-1, effective as of the date
of adoption by the Board of Directors, in the following respects:
1. Section 2 of the Plan shall be amended by adding the following
text at the end of paragraph (a) thereof:
Notwithstanding any other provision of the Plan (and without limiting the
Committee's authority), in connection with any action concerning grants of
awards to or a transactions by participants who would be classified as
insiders of the Corporation by applicable rules of the Securities and
Exchange Commission, the Committee may adopt such procedures as it deems
necessary or desirable to assure the availability of exemptions from
Section 16 of the Securities Exchange Act afforded by Rule 16b-3 thereunder
or any successor rule. Without limiting the foregoing, in connection with
approval of any transaction by any such insider involving a grant, award or
other acquisition from the Corporation, or involving the disposition to the
Corporation of the Corporation's equity securities, the Committee may
delegate its approval authority to a subcommittee thereof comprised of two
or more "Non-Employee Directors" (as defined in Rule 16b-3), or take action
by the affirmative vote of two or more Non-Employee Directors (with all
other members of the Committee abstaining or recusing themselves from
participating in the matter), or refer the matter to the full Board of
Directors for action.
2. Section 7 of the Plan shall be amended by revising the next-to-
last sentence of paragraph (b) thereof so as to read in its entirety as follows:
Election of an alternative settlement method involving the receipt of cash
shall be subject to the approval by the Committee or a subcommittee
thereof, which approval may be made subject to limitations or conditions,
may be given in advance of or following an election by the participant, and
may be granted or withheld by the Committee or subcommittee in its sole
discretion with or without cause.
3. Section 7(e) shall be amended by revising subparagraph (2) thereof
so as to read in its entirety as follows:
<PAGE>
(2) The Corporation may withhold from the Common Stock that is subject
to the exercise of the option shares having a fair market value equal to
the amount required to satisfy the withholding requirements;
4. Section 7(e) shall be amended by revising the text following
subparagraph (4) so as to read in its entirety as follows:
No certificate for Common Stock acquired pursuant to the exercise of an
option may be issued by the Corporation until the appropriate amount of
taxes has been withheld by the Corporation. In the event a person fails to
elect a method of satisfying the withholding requirements, then the
Corporation shall withhold all applicable taxes from the person's salary or
other cash compensation. The value of Common Stock for purposes of
subparagraph (2) shall be determined on the date of withholding and shall
be the fair market value (as determined under Section 4 of this Plan) of
the stock on the previous business day.
5. Each outstanding award under the Plan held by a participant who is
classified as an insider by the Securities and Exchange Commission shall be
amended to the extent necessary to conform such award to the amendments to the
Plan set forth above. Without limiting the foregoing, each such award shall be
amended by (i) amending clause "(a)" of the last sentence of Section 6.4 thereof
so as to read "(a) an alternative settlement method involving the receipt of
cash shall be subject to approval by the Committee or a subcommittee thereof,
which approval may be made subject to limitations or conditions, may be given in
advance of or following the participant's request referred to in Section 6.3,
and may be granted or withheld by the Committee or subcommittee in its sole
discretion with or without cause; and", and (ii) deleting Section 6.5 and each
reference in the award to Section 6.5.
<PAGE>
Exhibit 10.13
AMENDMENT 97-1 TO
THE BANCORP HAWAII, INC.
STOCK OPTION PLAN OF 1994
-------------------------
In accordance with Article 13 of the Bancorp Hawaii, Inc. Stock Option Plan
of 1994 (hereinafter "Plan"), and conditioned on the approval of shareholders no
later than one year after the date of adoption by the Board of Directors of
Bancorp Hawaii, Inc., the Plan is hereby amended by this Amendment No. 97-1
effective as of the date of adoption by the Board of Directors.
1. The first sentence of Section 4.1 of the Plan shall be amended to
increase the total number of Shares reserved and available for grant under the
Plan by inserting the number "2,875,000" in lieu of the reference to
"1,250,000".
<PAGE>
EXHIBIT 10.15
AMENDMENT 99-2 TO
THE PACIFIC CENTURY FINANCIAL CORPORATION
STOCK OPTION PLAN OF 1994 AND RELATED AWARDS
--------------------------------------------
In accordance with Article 13 of the Pacific Century Financial
Corporation Stock Option Plan of 1994 (hereinafter "Plan"), the Plan and related
Awards are hereby amended by this Amendment No. 99-2, effective as of the date
of adoption by the Board of Directors, in the following respects:
1. Section 2.1(ag) of the Plan shall be deleted.
2. Section 3.1 of the Plan shall be amended to read in its entirety
as follows:
3.1 The Committee. The Plan shall be administered by the
-------------
Compensation Committee of the Board of Directors, which shall be
comprised of two or more Directors who satisfy the requirements of an
"outside" Director under Code Section 162(m)(4)(C)(i). The members of
the Committee shall be appointed from time to time by, and shall serve
at the discretion of the Board.
Notwithstanding any other provision of the Plan (and without
limiting the Committee's authority), in connection with any action
concerning grants of Awards to or a transactions by Insiders the
Committee may adopt such procedures as it deems necessary or desirable
to assure the availability of exemptions from Section 16 of the
Exchange Act afforded by Rule 16b-3 thereunder or any successor rule.
Without limiting the foregoing, in connection with approval of any
transaction by an Insider involving a grant, award or other
acquisition from the Company, or involving the disposition to the
Company of the Company's equity securities, the Committee may delegate
its approval authority to a subcommittee thereof comprised of two or
more "Non-Employee Directors" (as defined in Rule 16b-3), or take
action by the affirmative vote of two or more Non-Employee Directors
(with all other members of the Committee abstaining or recusing
themselves from participating in the matter), or refer the matter to
the full Board of Directors for action.
<PAGE>
3. The final sentence of Section 3.2 shall be amended to read as
follows:
The performance goals applicable to each Award intended to provide
Performance-Based Compensation shall be based on one or more of the
following performance measures: earnings per share (actual or
targeted growth), economic value added, net income after capital cost,
net income (before or after taxes), various return measures (either
absolute or relative to peers) including: return on average assets,
return on average equity, risk-adjusted return on capital ("RAROC"),
efficiency ratio, full time equivalency ("FTE") control, stock price
(actual or targeted growth), total shareholder return ("TSR", absolute
or relative to an index), and non-interest income to net interest
income ratio.
4. The second paragraph of Section 7.7 of the Plan shall be deleted.
5. Section 14.2 of the Plan shall be revised to read in its entirety
as follows:
14.2 Share Withholding. With respect to withholding required
-----------------
upon the exercise of Options or SARs or upon the lapse of restrictions
on Restricted Stock or Restricted Stock Units, or upon any other
taxable event hereunder, Participants may elect to satisfy the
withholding requirement, in whole or in part, by having the Company
withhold Shares having a Fair Market Value on the date the tax is to
be determined equal to the minimum statutory total tax which could be
imposed on the transaction. All elections shall be irrevocable, made
in writing, and signed by the Participant.
6. Section 16.4 shall be revised to read as follows:
16.4 Securities Law Compliance. With respect to Insiders,
-------------------------
transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the
Exchange Act (except to the extent that noncompliance of a particular
transaction would not result in liability under Section 16 of the
Exchange Act or the rules adopted thereunder). To the extent any
provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
7. Article 13 shall be revised to read as follows:
<PAGE>
ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION. The Board
may at any time and from time to time, alter, amend, suspend or
terminate the Plan in whole or in part; provided that no amendment,
modification, suspension or termination of the Plan shall in any
material manner affect any Award theretofore granted under the Plan
without the written consent of the affected Participant or any person
validly claiming under or through such Participant. Without limiting
the foregoing, if the Company or any of its subsidiaries is a party to
a merger, consolidation, reorganization, share exchange, acquisition
of stock or assets, or similar transaction, the Committee or the Board
may grant Awards (including Options) hereunder in connection with the
assumption, substitution or conversion by the Company or its
subsidiaries of similar stock compensation awards that have been
issued by another party to such transaction, and the Board may amend
the Plan, or adopt supplements to the Plan, in such manner as it deems
appropriate to provide for such assumption, substitution or
conversion, all without further action by the Company's shareholders.
8. Each outstanding Award held by an Insider shall be and hereby is
amended to the extent necessary to conform such Award to the Plan amendments set
forth above (other than paragraph 3). Without limiting the foregoing:
(a) Section 5.4 of each such Award shall be amended by revising the
last sentence thereof to read as follows:
Any provision herein contained to the contrary notwithstanding (a) the
exercise of the Tandem SAR involving the receipt of cash shall be subject
to approval of the Committee or a subcommittee thereof, which approval may
be made subject to limitations or conditions, may be given in advance of or
following a request by the Optionee therefor, and may be granted or
withheld by the Committee or subcommittee in its sole discretion with or
without cause; and (b) the Tandem SAR may be exercised only when the Fair
Market Value of the Option Shares exceeds the Option Price.
(b) Section 5.5 shall be deleted; and
(c) Section 14 shall be amended by deleting the third sentence
thereof, and by revising the second sentence to read: "The Optionee may
elect to satisfy withholding requirements by having the Company withhold
shares of Company Stock made available upon exercise of the Option."
<PAGE>
Exhibit 12.1
Pacific Century Financial Corporation
Statement Regarding Computation of Ratios
Year Ended December 31, 1998
<TABLE>
<S> <C>
(in millions of dollars)
Earnings:
1. Income before income taxes . . . . . . . . . . . . . . . $ 163.6
2. Plus: fixed charges including interest on deposits. . . 526.6
--------
3. Earnings including fixed charges . . . . . . . . . . . . 690.2
4. Less: interest on deposits. . . . . . . . . . . . . . . 317.9
--------
5. Earnings excluding interest on deposits. . . . . . . . . $ 372.3
Fixed Charges:
6. Fixed charges including interest on deposits . . . . . . $ 526.6
7. Less: interest on deposits. . . . . . . . . . . . . . . 317.9
--------
8. Fixed charges excluding interest on deposits . . . . . . $ 208.7
Ratio of Earnings to Fixed Charges:
Including interest on deposits (line 3 divided by line 6) 1.31 x
Excluding interest on deposits (line 5 divided by line 8) 1.78 x
</TABLE>
<PAGE>
EXHIBIT 19.1
To Our Shareholders:
Pacific Century Financial Corporation closed the books on its strongest quarter
so far this year with third quarter earnings of $34.8 million, up from the net
income reported for the previous three quarters ($3.1 million in second quarter
1998, $34.0 million in first quarter 1998, and $33.1 million in fourth quarter
1997) and down slightly from the same period last year (third quarter 1997,
$35.3 million). Diluted earnings per share of 43 cents matched those of 1997's
third quarter and were well above the 4 cents reported for second quarter 1998.
We are pleased to see our performance return to the levels we enjoyed prior
to the onset of turmoil in the Asia markets. Earlier this year, we took
aggressive actions to ensure prudent management of our Asia exposure by
bolstering reserves and reducing exposure in our Asian loan portfolio. The
soundness of this course is evident in our third quarter results.
Total assets at September 30, 1998 stood at $14.6 billion down from $14.9
billion a year earlier, reflecting the intentional contraction of our Asia loan
portfolio. Return on average assets for the quarter was 0.93 percent and return
on average equity was 11.87 percent.
Pacific Century's New Era restructuring program is on track and on
schedule. During the quarter, we made significant strides on several fronts
relating to our branch rationalization program, actions which are expected to
improve efficiency and reduce annual operating costs by up to $22 million. The
merger of First Federal Savings & Loan Association of America into Bank of
Hawaii took effect on September 30, and the company completed a reorganization
of its Hawaii Market delivery network in the third quarter. In August, the
company's two mainland banks were merged into a single entity known as Pacific
Century Bank N.A. based in Encino, CA.
Also during the quarter, Pacific Century resumed a share repurchase program
to offset the number of shares regularly issued by the company under the terms
of its various established plans such as dividend reinvestment, employee profit
sharing and stock option plans.
On October 23rd, your board of directors approved an increase in the
quarterly dividend from 16.25 cents to 17 cents per share, an increase of 4.6
percent. Pacific Century last increased its dividend in July of 1997. The
dividend will be payable on December 14, 1998 to shareholders of record at the
close of business on November 20, 1998. Your dividends have been increased for
the past 20 consecutive years, and dividends have been paid each quarter for the
past 100 years.
<PAGE>
Pacific Century Financial Corporation remains committed to its four markets
and its Pacific strategy. In the first nine months of this year, we have made
significant progress in implementing initiatives to improve our performance and
achieve our financial objectives. The steps we have taken to increase
efficiency and streamline operations will enable us to focus our businesses in
line with our performance goals.
Ensuring the value of your holdings in Pacific Century Financial
Corporation remains our highest priority. Your continued confidence and support
are vital to our success.
Sincerely,
/s/ LAWRENCE M. JOHNSON
Lawrence M. Johnson
Chairman and CEO
Corporate Offices:
Financial Plaza of the Pacific
130 Merchant Street
Honolulu, Hawaii 96813
Investor or Analyst Inquiries:
David A. Houle
Executive Vice President, Treasurer and Chief Financial Officer
(808) 537-8288
or
Sharlene K. Bliss
Investor Relations
(808) 537-8037
or
Cori C. Weston
Corporate Secretary
(808) 537-8272
<PAGE>
<TABLE>
<CAPTION>
Highlights (Unaudited) Pacific Century Financial Corporation and subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
September 30 September 30
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Return on Average Assets 0.64% 1.01%
- -----------------------------------------------------------------------------------------------------------------------------------
Return on Average Equity 8.35% 12.94%
- -----------------------------------------------------------------------------------------------------------------------------------
Average Spread on Earning Assets 4.22% 3.94%
- -----------------------------------------------------------------------------------------------------------------------------------
Average Equity/Average Assets 7.70% 7.77%
- -----------------------------------------------------------------------------------------------------------------------------------
Book Value Per Common Share $14.50 $14.19
- -----------------------------------------------------------------------------------------------------------------------------------
Loss Reserve/Loans and Leases Outstanding 2.24% 1.91%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Common Stock Price Range High Low Dividend
<S> <C> <C> <C>
1997.......................................... $ 28.06 $ 20.31 $ 0.625
1998 First Quarter............................ $ 25.13 $ 20.31 $0.1625
Second Quarter........................... $ 25.88 $ 23.56 $0.1625
Third Quarter............................ $ 24.06 $ 14.75 $0.1625
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September 30 September 30 September 30 September 30
(in thousands of dollars except per share amounts) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Interest Income $ 275,461 $ 271,452 $ 830,577 $ 777,160
Total Interest Expense 130,963 135,893 397,509 391,567
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 144,498 135,559 433,068 385,593
Provision for Possible Loan Losses 10,737 8,162 71,022 20,536
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 133,761 127,397 362,046 365,057
Total Non-Interest Income 53,616 46,147 156,278 134,108
Total Non-Interest Expense 136,191 118,979 409,610 333,996
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 51,186 54,565 108,714 165,169
Provision for Income Taxes 16,351 19,312 36,763 58,829
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 34,835 $ 35,253 $ 71,951 $ 106,340
- -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.43 $ 0.44 $0.90 $1.34
Diluted Earnings Per Share $ 0.43 $ 0.43 $0.89 $1.31
Basic Weighted Average Shares 80,459,112 80,936,920 80,201,636 79,730,632
Diluted Weighted Average Shares 81,033,346 82,188,388 81,128,698 80,773,130
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Condition (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
(in thousands of dollars) 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-Bearing Deposits $ 407,265 $ 335,847 $ 490,153
Investment Securities
(Market Value of $3,546,186, $3,874,505, and $3,707,769 respectively) 3,527,640 3,871,485 3,701,645
Securities Purchased Under Agreements to Resell 40,000 -- --
Funds Sold 114,940 80,457 111,890
Loans 9,549,741 9,498,408 9,529,535
Unearned Income (207,346) (209,721) (206,823)
Reserve for Loan Losses (209,731) (174,362) (177,689)
Net Loans 9,132,664 9,114,325 9,145,023
- -----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 13,222,509 13,402,114 13,448,711
Cash and Non-Interest Bearing Deposits 541,217 795,332 579,087
Premises and Equipment 301,124 288,358 286,090
Other Assets 573,656 509,660 557,353
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $14,638,506 $14,995,464 $14,871,241
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits $ 9,422,877 $ 9,607,695 $ 9,443,307
Securities Sold Under Agreements to Repurchase 2,380,071 2,279,124 2,268,250
Funds Purchased 288,727 710,472 364,528
Short-Term Borrowings 363,461 226,127 494,417
Other Liabilities 391,744 349,050 393,094
Long-Term Debt 624,619 705,789 766,485
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,471,499 13,878,257 13,730,081
Shareholders' Equity
Common Stock ($.01 par value at September 30, 1998 and $2.00 par value
at December 31, 1997 and September 30, 1997), authorized 500,000,000
shares;
issued and outstanding, September 1998 - 80,462,983;
December 1997 - 79,684,553; September 1997 - 40,221,783 804 159,369 80,444
Capital Surplus 341,534 168,920 194,131
Accumulated Other Comprehensive Income (21,839) (24,766) (6,509)
Retained Earnings 846,508 813,684 873,094
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,167,007 1,117,207 1,141,160
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,638,506 $14,995,464 $14,871,241
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 21.1
PACIFIC CENTURY FINANCIAL CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Pacific Century Financial Corporation's organizational structure at December
31, 1998 follows.
PACIFIC CENTURY FINANCIAL CORPORATION (Parent)
Bank Holding Company
Subsidiaries:
FIRST SAVINGS & LOAN ASSOCIATION OF AMERICA (Guam)
Guam
PACIFIC CENTURY BANK, N.A.
California
PACIFIC CENTURY INSURANCE SERVICES, INC.
Hawaii
PACIFIC CENTURY SMALL BUSINESS INVESTMENT COMPANY, INC.
Hawaii
PCFC HAWAII CORPORATION
Hawaii
BANK OF HAWAII
Subsidiaries:
Bank of Hawaii International Corp., New York -
New York
Bank of Hawaii International, Inc. -
Hawaii
Subsidiaries/Affiliates:
Bank of Hawaii-Nouvelle Caledonie (91.5%)
New Caledonia
Bank of Hawaii (PNG) Ltd. (100%)
Papua New Guinea
Bank of Tonga (30%)
Tonga
<PAGE>
Banque de Tahiti (92.4%)
French Polynesia
Banque d'Hawaii (Vanuatu), Ltd. (100%)
Vanuatu
National Bank of Solomon Islands (51%)
Solomon Islands
Pacific Commercial Bank, Ltd. (43%)
Samoa
Bankoh Corporation
Hawaii
Pacific Century Advisory Services, Inc.
Hawaii
Pacific Century Agency, Inc.
Hawaii
Pacific Century Insurance Agency, Inc.
Hawaii
Pacific Century Investment Services, Inc.
Hawaii
Pacific Century Leasing, Inc. (Parent)
Hawaii
Subsidiaries:
Arbella Leasing Corp.
Delaware
BNE Airfleets Corporation
Barbados
Pacific Century Leasing International, Inc.
Delaware
S.I.L., Inc.
Delaware
Pacific Century Life Insurance Corporation
Arizona
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements
(Form S-8 Nos. 2-96329, 33-29872, 2-63615, 2-84164, 33-23495, 33-49836, 33-
54777, 33-57267, 333-02835 and 333-14929), (Form S-3 Nos. 33-25036, 33-44395 and
33-54775) and (Form S-4 Nos. 333-22497, 333-22497-01 and 333-24379) of Pacific
Century Financial Corporation and subsidiaries of our report dated January 22,
1999, with respect to the consolidated financial statements of Pacific Century
Financial Corporation and subsidiaries included in this Annual Report on Form
10-K for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Honolulu, Hawaii
February 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 564,243
<INT-BEARING-DEPOSITS> 453,527
<FED-FUNDS-SOLD> 45,683
<TRADING-ASSETS> 2,318
<INVESTMENTS-HELD-FOR-SALE> 3,018,403
<INVESTMENTS-CARRYING> 652,802
<INVESTMENTS-MARKET> 668,068
<LOANS> 9,854,000
<ALLOWANCE> 211,276
<TOTAL-ASSETS> 15,016,563
<DEPOSITS> 9,576,342
<SHORT-TERM> 3,307,283
<LIABILITIES-OTHER> 361,728
<LONG-TERM> 585,616
0
0
<COMMON> 805
<OTHER-SE> 1,184,789
<TOTAL-LIABILITIES-AND-EQUITY> 15,016,563
<INTEREST-LOAN> 819,534
<INTEREST-INVEST> 239,776
<INTEREST-OTHER> 40,476
<INTEREST-TOTAL> 1,099,786
<INTEREST-DEPOSIT> 317,919
<INTEREST-EXPENSE> 523,185
<INTEREST-INCOME-NET> 576,601
<LOAN-LOSSES> 84,014
<SECURITIES-GAINS> 4,086
<EXPENSE-OTHER> 540,725
<INCOME-PRETAX> 163,613
<INCOME-PRE-EXTRAORDINARY> 163,613
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,964
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 4.22
<LOANS-NON> 131,885
<LOANS-PAST> 20,798
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 174,362
<CHARGE-OFFS> 82,005
<RECOVERIES> 16,336
<ALLOWANCE-CLOSE> 211,276
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
