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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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____ to _____
Commission File Number 1-6887
PACIFIC CENTURY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 99-0148992
(State of incorporation) (IRS Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
(Address of principal executive (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 Value New York Stock Exchange
</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, 1999 ($15.50 per share): $1,226,703,713
As of February 28, 2000, 79,650,024 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 28, 2000, are incorporated by reference into
Part III of this Report.
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<PAGE>
PART I
ITEM 1. BUSINESS
Pacific Century Financial Corporation (Pacific Century) is a bank holding
company, which through its banking subsidiaries is engaged primarily in the
business of commercial and retail banking. 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. 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.
Pacific Century groups its principal revenue-producing businesses into the
following four market regions: Hawaii, the South and West Pacific, Asia, and
the U.S. Mainland. Pacific Century offers a broad range of customary
commercial and consumer banking products and services that include, but are
not limited to, lending, leasing, deposit services, trust and investment
activities, and trade financing. The majority of Pacific Century's operations
are conducted through its banking subsidiaries. The principal subsidiaries of
Pacific Century are Bank of Hawaii and Pacific Century Bank, N.A.
At December 31, 1999, Pacific Century and its subsidiaries had approximately
4,700 full-time and part-time employees.
Acquisitions
In January 1999, Pacific Century completed the acquisition of Triad
Insurance Agency, Inc. (Triad). Triad is a Hawaii-based property/casualty
insurance agency. The acquisition was accounted for under the purchase method
of accounting.
Organization Structure
Pacific Century's organization structure as of December 31, 1999 is included
in Exhibit 21.1. All subsidiaries are wholly-owned except as otherwise noted
for certain banks in the South Pacific and for those entities whose directors
own qualifying shares.
Subsidiaries
Provided below 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.
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 headquartered in the State of Hawaii with a
statewide network of 74 traditional and in-store 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 six
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
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Micronesia (Pohnpei, Kosrae, and Yap), Guam, Republic of the Marshall Islands
(Majuro), and Republic of Palau (Koror). In addition, Bank of Hawaii maintains
a presence in the South Pacific through subsidiary banks located in French
Polynesia, New Caledonia, Papua New Guinea, and Vanuatu, and through affiliate
banks located in Samoa, Solomon Islands, and Tonga. Pacific Century Trust, a
division of Bank of Hawaii, operates offices in Hawaii, California, Arizona
and Guam. Trust assets under administration at year-end 1999 were $13.8
billion.
As of December 31, 1999, wholly-owned direct subsidiaries of Bank of Hawaii
included Pacific Century Leasing, Inc.; Bank of Hawaii International, Inc.;
Bank of Hawaii International Corporation, New York; Pacific Century Life
Insurance Corporation; Triad Insurance Agency, Inc.; Bankoh Insurance Agency;
Pacific Century Investment Services, Inc.; Pacific Century Insurance Services,
Inc.; Bankoh Corporation and Pacific Century Advisory Services, Inc. A brief
discussion of these direct 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." At December 31, 1999, these subsidiaries included
S.I.L., Inc.; Pacific Century Leasing International, Inc.; and BNE Airfleets
Corporation. In September 1999, Arbella Leasing Corp., a specific purpose
leasing subsidiary was sold. On a consolidated basis, PCL's assets represented
2.2% of Pacific Century's total assets at year-end 1999.
Bank of Hawaii International, Inc. (BOHI) was formed in 1968. BOHI's primary
business purpose is to hold an equity interest in the following foreign
financial institutions (in the percentages indicated): Bank of Hawaii-Nouvelle
Caledonie--96%; Bank of Hawaii (PNG) Ltd.--100%; Banque de Tahiti--95%; Banque
d'Hawaii (Vanuatu), Ltd.--100%; National Bank of Solomon Islands--51%; Pacific
Commercial Bank, Ltd.-- 43%; and Bank of Tonga--30%. At December 31, 1999,
total assets of BOHI and its subsidiaries accounted for 8.4% of the
consolidated total of Pacific Century.
Bank of Hawaii International Corporation, 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. At
December 31, 1999, total assets of BOHICNY represented 0.8% of consolidated
total assets of Pacific Century.
At December 31, 1999, Bank of Hawaii's retail insurance subsidiaries held in
the aggregate total assets representing 0.1% of the consolidated total assets
of Pacific Century. Provided below is a brief description of these
subsidiaries.
. 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.
. Triad Insurance Agency, Inc. (Triad), a Hawaii based property/casualty
insurance agency, and its subsidiary Insurance Agents Group, Inc. (IAG)
were acquired in January 1999. Triad represents a number of large U.S.
property/casualty insurance companies in Hawaii, for whom it acts as a
servicing agent.
. In 1999 Bankoh Insurance Agency emerged as the remaining entity from the
consolidation of Pacific Century Agency, Inc., Pacific Century Insurance
Agency, Inc. and IAG. This reorganization was implemented to streamline
the insurance structure.
A brief description of Bank of Hawaii subsidiaries that provide investment,
captive insurance and other services is set forth below. The aggregate total
assets of these subsidiaries as of December 31, 1999 was 0.1% of consolidated
total assets of Pacific Century.
. Pacific Century Investment Services, Inc. formerly Bancorp Investment
Group, Ltd., was organized 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.
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. Pacific Century Insurance Services, Inc. (Pacific Century Insurance),
formerly Bancorp Hawaii Insurance Services, Ltd. was established in 1989
as a wholly-owned captive insurance company. With the formation of
Pacific Century Insurance, 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. These services
provide Pacific Century with greater flexibility and stability in
managing insurance coverages and premium costs. Additionally, Pacific
Century Insurance also provides Pacific Century with the opportunity to
design self-insurance programs not otherwise available in the
conventional insurance market. In 1999 Pacific Century Insurance became 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 1999.
Pacific Century also holds all of the outstanding stock of the corporations
listed below:
Pacific Century Bank, N.A. (PCB) is headquartered in Encino, California, and
its business primarily consists of providing commercial banking products and
services in Southern California and the State of Arizona. PCB is organized
under the laws of the United States. It is a member of the Federal Reserve
System and its deposits are insured by the FDIC. PCB's operations are
conducted through 19 branch offices in the State of California and 9 branch
offices in the State of Arizona. PCB's total assets represented 7.8% of
Pacific Century's consolidated total at December 31, 1999.
First Savings and Loan Association of America, F.S.A. (First Savings), a
wholly-owned subsidiary of Pacific Century, was acquired in 1990. First
Savings is engaged primarily in the business of providing retail financial
services in the territory of Guam. Operations are conducted primarily through
three full-service branches and three in-store locations. Its deposits are
insured by the FDIC. First Savings' assets represented 1.3% of Pacific
Century's total assets at December 31, 1999.
Pacific Century Small Business Investment Company, Inc., formerly Bancorp
Hawaii Small Business Investment Company, Inc., was formed in September 1983
in the State of Hawaii as a small business investment company. At the end of
1999, total assets of this subsidiary were not significant.
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
was 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, and deposits; the level of interest rates earned on assets and
paid for liabilities; and interest rates charged on loans and paid on
deposits. The nature and impact of future changes in monetary policies are
often not predictable.
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Competition
Pacific Century and its subsidiaries are subject to substantial competition
in all aspects of the businesses in which they engage from banks (both
domestic and foreign), savings associations, credit unions, mortgage
companies, finance companies, mutual funds, brokerage firms, insurance
companies and other providers of financial services. Pacific Century also
competes with certain non-financial institutions and governmental entities
that offer financial products and services. Many of Pacific Century
competitors are not subject to the same level of extensive regulations and
oversight that are required of banks, bank holding companies and savings
associations.
Supervision and Regulation
Pacific Century is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the BHC Act) and, as such, is subject
to the Act and regulations issued thereunder by the Board of Governors of the
Federal Reserve System (the Board of Governors). Pacific Century is also
registered as a bank holding company under the Hawaii Code of Financial
Institutions (the Code) and, as such, is subject to the registration,
reporting, and examination requirements of the Code.
The BHC Act requires prior approval of the Board of Governors of the
acquisition by Pacific Century of more than 5% of the voting shares of any
bank or any other bank holding company. 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 may acquire
control of banks in any state, and bank holding companies whose operations are
principally conducted in states other than Hawaii may acquire 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. 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
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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.
Effective March 11, 2000, pursuant to authority granted under the Gramm-
Leach-Bliley Act, a bank holding company may elect to become a financial
holding company and thereby to engage in a broader range of financial and
other activities than are permissible for traditional bank holding companies.
In order to qualify for the election, all of the depository institution
subsidiaries of the bank holding company must be well capitalized and well
managed, as defined by regulation, and all of its insured depository
institution subsidiaries have achieved a rating of "satisfactory" or better
with respect to meeting community credit needs. Pursuant to the Gramm-Leach-
Bliley Act, financial holding companies will be permitted to engage in
activities that are "financial in nature" or incidental or complementary
thereto, as determined by the Federal Reserve Board. The Gramm-Leach-Bliley
Act identifies several activities as "financial in nature," including, among
others, insurance underwriting and agency, investment advisory services,
merchant banking and underwriting, and dealing or making a market in
securities. Pacific Century has not, at this time, made any decision with
respect to whether it will elect to become a financial holding company under
the Act.
Under the policies of the Board of Governors, Pacific Century is expected to
act as a source of financial strength to its subsidiary banks and to commit
resources to support its subsidiary banks in circumstances where it might not
do so absent such a policy. It is the policy of the Board of Governors that in
serving as a source of strength to its subsidiary banks, a bank holding
company should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial adversity
and should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks.
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.
Regulatory authorities have broad authority to implement
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standards on asset quality, earnings, and stock valuation and to initiate
proceedings designed to prohibit depository institutions from engaging in
unsafe and unsound banking practices.
The FDIC has 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 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 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.
Under the Gramm-Leach-Bliley Act, subject to limitations on investment, a
national bank that is well capitalized and well managed, as defined by
regulation, and has a satisfactory or better community reinvestment rating,
may through a financial subsidiary of the bank engage in activities that are
financial in nature or incidental thereto, excluding, among others, insurance
underwriting, insurance company portfolio investment, real estate development
and real estate investment. In addition to the above qualifications, each
depository institution affiliate of the national bank must be well capitalized
and well managed, the aggregate consolidated total assets of all financial
subsidiaries of the national bank may not exceed the lesser of 45 percent of
the consolidated total assets of the parent bank or $50 million and, if the
bank is one of the 100 largest insured banks, it must meet specified debt
rating criteria. An insured state-chartered bank may, through a qualifying
subsidiary, also engage in activities as principal that would only be
permissible for a national bank to conduct through a financial subsidiary. To
qualify, a state-chartered bank and each of its insured depository institution
affiliates must be well capitalized and it must comply with certain deduction
and financial disclosure requirements, financial and operational safeguards
and limitations on inter-affiliate transfers comparable to those applicable to
national banks. Existing authority of the Office of the Comptroller of the
Currency and the FDIC to review subsidiary activities are preserved. No
decision has, at this time, been made with respect to the establishment of new
financial subsidiaries of either Bank of Hawaii or PCB.
The Gramm-Leach-Bliley Act does not significantly alter the regulatory
regimes under which Pacific Century, Bank of Hawaii and PCB currently operate,
as described above. While certain business combinations not currently
permissible will be possible after March 11, 2000, we cannot predict at this
time resulting changes in the competitive environment or the financial
condition of Pacific Century, Bank of Hawaii or PCB. Using the
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financial holding company structure, insurance companies and securities firms
may acquire bank holding companies, such as Pacific Century, and may compete
more directly with banks or bank holding companies.
Various legislation, including proposals to substantially change the
financial institution regulatory system and to expand or contract the powers
of banking institutions and bank holding companies, is from time to time
introduced in the Congress. This legislation may change banking statutes and
the operating environment of the combined company and its subsidiaries in
substantial and unpredictable ways. If enacted, such legislation could
increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance among banks, savings
associations, credit unions and other financial institutions. Pacific Century
cannot accurately predict whether any of this potential legislation will
ultimately be enacted, and, if enacted, the ultimate effect that it, or
implementing regulations, would have upon the financial condition or results
of operations of itself or any of its subsidiaries.
ITEM 2. PROPERTIES
Pacific Century and its subsidiaries own and lease premises primarily
consisting of branch and operating facilities, the majority of which are
located in Hawaii, California, Arizona, Asia, and the West and South Pacific.
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 Note G to
the Consolidated Financial Statements. Additionally, Bank of Hawaii owns a
five story office building in downtown Honolulu, the former headquarters of
First Federal Savings and Loan of America; a two-story building near downtown
Honolulu which houses data processing and certain other operational functions;
a parcel of land in downtown Honolulu; and Hale O Kapolei, a 248,000 square
feet operations facility in the Kapolei area on Oahu.
ITEM 3. LEGAL PROCEEDINGS
See 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 1999 to a vote of
security holders through the solicitation of proxies or otherwise.
Executive Officers of Registrant:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lawrence M. Johnson........ 59 Chairman and Chief Executive Officer of Pacific
Century and the Bank of Hawaii (the Bank) since
August 1994.
Richard J. Dahl............ 48 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............ 56 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............ 52 Vice Chair of Pacific Century and the Bank since
November 1997.
David A. Houle............. 52 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 (NYSE Symbol: BOH) and quoted daily
in leading financial publications.
Market Prices, Book Values, and Common Stock Dividends--See Table 2 included
in Item 7 of this report.
ITEM 6. SELECTED FINANCIAL DATA
Summary of Selected Consolidated Financial Data--See 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
Net income at Pacific Century Financial Corporation (Pacific Century) was
$133.0 million in 1999, reflecting an increase of 24.3% over the $107.0
million reported in 1998. Financial results for both years were impacted by
special items that included restructuring charges of $22.5 million in 1999 and
$19.4 million in 1998 and an increase in the 1998 loan loss provision in light
of financial volatility in Asia (for additional information refer to sections
on "Restructuring and Redesign Program" and "Reserve for Loan Losses").
Basic earnings per share were $1.66 in 1999, up from $1.33 in 1998. On a
diluted per share basis, operating earnings were $1.64 in 1999, compared to
$1.32 last year.
In 1999, return on average assets (ROAA) and return on average equity (ROAE)
increased to 0.91% and 10.99%, respectively. Comparatively, ROAA was 0.72% and
ROAE was 9.22% in 1998.
Financial results under a tangible basis excludes from reported earnings the
after tax impact of amortization of all intangibles, including goodwill. On a
tangible basis, Pacific Century's earnings were $149.7 million in 1999 and
$121.7 million in 1998. On a per share basis, tangible diluted earnings per
share were $1.85 in 1999, compared to $1.50 in 1998.
Tangible ROAA for Pacific Century was 1.04% in 1999 improving from 0.83% in
1998. Tangible ROAE was 15.02% and 12.84% in 1999 and 1998, respectively.
On a taxable equivalent basis, net interest income was $575.4 million in
1999, down $1.8 million from 1998. In 1999 lower average net assets reduced
net interest income by $3.3 million. This impact was partially offset by a
wider net interest margin, that caused net interest income to rise by $1.5
million in 1999.
Average assets in 1999 were $14.6 billion, down 1.9% from $14.9 billion in
1998. Most of this decline resulted from discretionary reductions in the
investment portfolio. Average net loans for 1999 were $9.4 billion, reflecting
a marginal increase over 1998.
Non-performing assets, exclusive of accruing loans past due 90 days or more,
were $149.9 million, or 1.54% of total loans, at year-end 1999, compared to
$137.5 million, or 1.40% of total loans, at year-end 1998.
Net loan charge-offs in 1999 increased to $73.8 million from $65.7 million
in 1998. Included in the 1999 amount are charge-offs of $19.5 million
connected with a South Korean conglomerate and its related group of companies.
For additional information, see "Foreign Operations" and "Reserve for Loan
Losses."
9
<PAGE>
PERFORMANCE HIGHLIGHTS
TABLE 1
<TABLE>
<CAPTION>
1999 1998 FIVE-
---------------- -------- YEAR
PERCENT COMPOUND
FINANCIAL PERFORMANCE AMOUNT CHANGE AMOUNT GROWTH
- --------------------- -------- ------- -------- --------
(IN MILLIONS OF DOLLARS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Year Ended December 31
Net Income................................... $ 132.96 24.3% $ 106.96 2.46%
Basic Earnings Per Share..................... 1.66 24.8 1.33 3.61
Diluted Earnings Per Share................... 1.64 24.2 1.32 3.66
Average Assets............................... 14,582.9 (1.9) 14,870.7 2.97
Average Loans................................ 9,444.5 0.2 9,422.3 5.02
Average Deposits............................. 9,315.3 (2.5) 9,549.7 5.01
Average Shareholders' Equity................. 1,210.0 4.2 1,160.8 4.50
Tangible Basis Financial Data/1/
Net Income................................. 149.75 23.0 121.70 3.55
Basic Earnings Per Share................... 1.86 22.4 1.52 4.68
Diluted Earnings Per Share................. 1.85 23.3 1.50 4.71
</TABLE>
<TABLE>
<CAPTION>
FIVE-YEAR
PERFORMANCE RATIOS 1999 1998 AVERAGE
- ------------------ ----- ----- ---------
<S> <C> <C> <C>
Year Ended December 31
Return on Average Assets................................ 0.91% 0.72% 0.92%
Return on Average Equity................................ 10.99 9.22 11.41
Average Equity to Average Assets ....................... 8.30 7.81 8.04
Tangible Basis Financial Data/1/
Return on Average Assets.............................. 1.04 0.83 1.01
Return on Average Equity.............................. 15.02 12.84 14.38
At December 31
Loan Loss Reserve to Loans Outstanding.................. 2.05 2.19
Tier I Capital Ratio.................................... 10.28 9.42
Total Capital Ratio..................................... 13.22 11.47
Leverage Ratio.......................................... 8.31 7.48
</TABLE>
- --------
/1/ Tangible basis calculations exclude the effect of all intangibles including
goodwill, core deposit and trust intangibles, and other intangibles.
10
<PAGE>
MARKET PRICES, BOOK VALUES AND COMMON STOCK DIVIDENDS
TABLE 2
<TABLE>
<CAPTION>
MARKET PRICE
(MP) RANGE HIGH MP AS
------------- BOOK VALUE A PERCENT
YEAR/PERIOD HIGH LOW (BV) OF BV DIVIDEND
- ----------- ------ ------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
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
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
1999............................... $24.94 $17.38 $15.15 165% $.68
First Quarter...................... 24.94 19.94 .17
Second Quarter..................... 23.25 19.81 .17
Third Quarter...................... 22.31 17.63 .17
Fourth Quarter..................... 23.50 17.38 .17
</TABLE>
Restructuring and Redesign Program
In February 1998, Pacific Century announced a two-phase restructuring and
redesign plan to improve efficiency, accelerate expense reduction and enhance
revenues. In the initial phase, the primary initiatives included rationalizing
Pacific Century's corporate structure by merging First Federal Savings & Loan
Association of America with Bank of Hawaii, consolidating the branch network
in Hawaii, merging the two U.S. Mainland banking subsidiaries, outsourcing
credit card operations and reincorporation and charter changes. In conjunction
with this phase, a pre-tax restructuring charge of $19.4 million was taken
against second quarter 1998 earnings. By year-end 1998, all of these actions
had been substantially completed.
Phase two of the plan consists of the redesign portion, which is targeted to
improve the delivery of financial services, generate revenue growth from new
and existing sources, and reduce expenses by simplifying and streamlining
business processes. The idea generation and assessment phase of the redesign
was completed in September 1999. When fully implemented in the fourth quarter
of 2000, the redesign is expected to contribute an annualized increase in
revenues of $21 million and annualized reduction in operating expenses of $43
million. Related to the redesign, Pacific Century recorded a restructuring
charge of $22.5 million in the third quarter of 1999.
Acquisitions and Strategic Alliances
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 expands Pacific Century's
range of financial services that it can offer to customers.
In August 1999, Pacific Century completed the purchase of 5.8 million
shares, or approximately 10%, of the outstanding shares of the Bank of
Queensland Limited (Bank of Queensland) in Australia. This transaction was in
addition to a 1998 purchase of 5.4 million convertible notes of the Bank of
Queensland. Pacific Century has entered into a strategic alliance with Bank of
Queensland that broadens its geographic reach in the Pacific Rim and enhances
business growth opportunities.
11
<PAGE>
Forward-Looking Statements
This report contains forward-looking statements regarding Pacific Century's
beliefs, estimates, projections and assumptions, which are provided to assist
in the understanding of certain aspects of Pacific Century's anticipated
future financial performance. Pacific Century cautions readers not to place
undue reliance on any forward-looking statement. Forward-looking statements
are subject to significant risks and uncertainties, many of which are beyond
Pacific Century's control. Although Pacific Century believes that the
assumptions underlying its forward-looking statements are reasonable, any
assumption could prove to be inaccurate and actual results may differ from
those contained in or implied by such forward-looking statements for a variety
of reasons. Factors that might cause differences to occur include, but are not
limited to, economic conditions in the markets Pacific Century serves
including those in Hawaii, the U.S. Mainland, Asia and the South Pacific;
shifts in interest rates; fluctuations in currencies of Asian Rim and South
Pacific countries relative to the U.S. dollar; changes in credit quality;
changes in applicable federal, state, and foreign income tax laws and
regulatory and monetary policies; and increases in competitive pressures in
the banking and financial services industry, particularly in connection with
product delivery and pricing. In addition, factors that could significantly
differ from estimates relative to Pacific Century's redesign program include
the following: expected cost savings from the redesign program cannot be fully
realized or realized within the expected timeframe; income or revenues from
the redesign are lower or operating or implementation costs are higher than
expected; business disruption related to implementation of the redesign
programs or methodologies; inability to achieve expected customer acceptance
of revised pricing structures and strategies; and other unanticipated
occurrences which could delay or adversely impact the implementation of all or
part of the redesign. Pacific Century does not undertake and specifically
disclaims any obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
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 182 branches and representative and extension offices
(including branches of affiliate banks). Its staff of approximately 4,700
employees provides diverse financial products and services to individuals,
businesses, governmental agencies and financial institutions.
Pacific Century assesses the financial performance of its operating
components in accordance with geographic and functional areas of operations.
Geographically, Pacific Century has aligned certain of its operations into
four major 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.
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 segments,
including allocations for overhead, economic provision, and capital. In its
business segment financial reporting process, Pacific Century utilizes certain
accounting practices that differ from accounting principles generally accepted
in the United States. 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 business segment financial information for each
of Pacific Century's major market segments for the years ended December 31,
1999 and 1998. Because business segment financial reports are prepared in
accordance with accounting practices that could differ from accounting
principles generally accepted in the United States, certain amounts reflected
therein may not agree with corresponding amounts contained in the Consolidated
Financial Statements and Management Discussion and Analysis of Operations.
Pacific Century also utilizes risk-adjusted return on capital (RAROC) as an
additional measurement to assess business segment performance. RAROC is the
ratio of net income to risk-adjusted equity. Equity is
12
<PAGE>
allocated to business segments based on various risk factors inherent in the
operations of each segment. Another performance measurement that Pacific
Century utilizes 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 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 74 branches in Hawaii, including
both traditional branches and in-store locations.
The Hawaii segment includes retail, commercial, and insurance 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).
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. In 1999 Bank of Hawaii expanded e-
Bankoh, its internet banking product, to include an on-line trust service and
401(k) program. In addition e-Bankoh clients can have 24-hour access to a wide
range of financial products and services, including checking, savings and time
deposit accounts, credit cards, and investments.
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, corporate
banking, commercial products and commercial real estate.
For the year ended December 31, 1999, the Hawaii segment contributed $54.9
million in net income, up 12.9% from $48.6 million in 1998. RAROC for this
segment was 15% in 1999 and 13% in 1998. Total assets in the Hawaii segment
were $5.3 billion at year-end 1999, reflecting a marginal rise over year-end
1998.
Pacific Market
Pacific Century has maintained a presence in the Intra-Pacific region for 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, F.S.A. (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 Mariana
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 and three in-store branch locations.
Pacific Century's presence in the South Pacific includes branches of Bank of
Hawaii and 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, 1999, these subsidiary and
affiliate
13
<PAGE>
banks had a total of 29 and 20 branches, respectively. In Australia, Pacific
Century maintains a strategic alliance with the Bank of Queensland that
involves an investment as well as providing opportunities to expand markets in
the region. Pacific Century's largest markets in the South Pacific are in
French Polynesia and New Caledonia.
For the year ended December 31, 1999, net income in the Pacific segment was
$22.5 million, which was marginally lower than 1998. RAROC, including the
amortization of intangibles, for this segment was 11% for both 1999 and 1998.
Total assets in the Pacific segment stood at $2.5 billion at year-end 1999,
reflecting a 1.4% increase over year-end 1998.
Asia Market
Asia is a market that Pacific Century has developed for more than 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 bills 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 the Asia-Pacific region.
For the year ended December 31, 1999, net income in the Asia segment was
$5.9 million, down 57.2% from 1998. The drop in 1999 earnings largely is
accounted for by a $14.5 million increase in the economic provision relative
to last year. The higher 1999 economic provision for Asia reflects adjustments
for normalized loss factors resulting from the company's assessment of reform
measures initiated to deal with the financial turmoil in the region. Prior to
1999, economic provisions for uncertainty in the region were reflected in the
provision for Treasury. RAROC for Asia declined to 7% in 1999 from 14% in
1998. Total assets in the Asia segment were $1.4 billion at year-end 1999
reflecting a 3.6% decrease from year-end 1998.
For additional information on Asia, see "Foreign Operations" in this report.
U.S. Mainland Market
Pacific Century operates in the U.S. Mainland primarily through its banking
subsidiary Pacific Century Bank, N.A. (PCB). PCB provides financial products
and services through 19 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
ties to the Asia-Pacific region.
In addition to the operations of PCB, the U.S. Mainland segment also
includes business units for corporate banking and leasing. The corporate
banking unit primarily targets large corporate clients that have interests in
the Asia-Pacific region as well as companies in the media and communications
industries. Leasing activities consist of providing financing to businesses
largely for aircraft, vehicles and equipment.
In 1999, net income for the U.S. Mainland segment increased 40.3% to $37.6
million from $26.8 million in 1998. Several non-recurring items contributed to
the increase in 1999's earnings that included an after-tax gain of
approximately $4.0 million from the sale of newly issued securities acquired
relative to leasing transactions and a $1.3 million after-tax gain from the
sale of a special purpose leasing subsidiary. Income taxes for this segment
were reduced in 1999 and 1998 by $14.0 million and $13.5 million, respectively
for low income housing tax credits and investment tax credits. RAROC, which
includes the amortization of intangibles, rose to 14% in 1999 from 10% in
1998. As of December 31, 1999, total assets in the U.S. Mainland segment were
$2.7 billion, up 2.2% over year-end 1998.
14
<PAGE>
Treasury and Other Corporate
Treasury 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
certain non-bank subsidiaries, unallocated overhead expenses, and the residual
effect of reconciling the economic provision with the provision in the
consolidated financial statements.
The Treasury and Other Corporate segment reflected net income of $12.1
million in 1999, compared with a net loss of $5.2 million in 1998. Impacting
operating results of both years was a pre-tax restructuring charge of $22.5
million in 1999 and $19.4 million in 1998. At year-end 1999, this segment held
$2.6 billion in total assets, most of which were in Treasury, compared to $3.3
billion at the same year ago date. The lower total assets in part, reflects
discretionary reductions in the investment portfolio.
STATEMENT OF INCOME ANALYSIS
Comparability between periods in the Consolidated Statements of Income is
impacted by the January 1999 acquisition of Triad Insurance Agency, Inc., the
May 1998 acquisitions of Banque Paribas Pacifique and Banque Paribas
Polynesie, the July 1997 purchase of California United Bank, the March 1997
acquisition of Indosuez Niugini Bank, Ltd., and the March 1997 acquisition of
deposits from Home Savings of America.
Net Interest Income
Net interest income on a taxable equivalent basis was $575.4 million in
1999, down slightly from $577.2 million in 1998, but up from $524.3 million in
1997. For 1999, the reduction in net interest income from the prior year is
attributed to a decline in average earning assets that was partially offset by
a wider net interest margin. The increase relative to 1997 is largely due to
the acquisitions.
Average earning assets were $13.4 billion in 1999, compared to $13.7 billion
in 1998 and $13.2 billion in 1997. On a year-over-year basis, average earning
assets in 1999 reflected a 1.6% decrease from the prior year primarily due to
lower average balances for interest bearing deposits and available-for-sale
investment securities.
In 1999, the average net interest margin on earning assets rose to 4.28%
from 4.22% in 1998 and 3.98% in 1997. The improvement in 1999's net interest
margin relative to a year ago resulted primarily from a drop in the average
rate paid on interest-bearing liabilities. In 1999, the average rate on
interest-bearing liabilities decreased 44 basis points to 4.13% from 4.57% in
1998, which reflects the low interest rate environment during the first part
of 1999. This benefit was partially offset by a 33 basis points decline in the
average yield on earning assets to 7.64% from 7.97% in 1998. Presented in
Table 3 are the average balances, yields, and rates paid for the years ended
December 31, 1999, 1998 and 1997.
15
<PAGE>
Consolidated Average Balances, Income and Expense and Yields and Rates
(Taxable Equivalent)
Table 3
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
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.............. $ 385.0 $ 24.9 6.48% $ 508.8 $ 36.7 7.21% $ 486.3 $ 33.1 6.80%
Investment Securities--
Held to Maturity
--Taxable............. 805.2 57.8 7.18 890.6 67.7 7.60 1,220.4 81.8 6.71
--Tax-Exempt.......... 11.7 1.7 14.41 11.8 1.7 14.34 12.5 1.8 14.55
Investment Securities--
Available for Sale.... 2,698.8 168.0 6.23 2,769.3 171.0 6.17 2,452.0 158.8 6.48
Funds Sold............. 102.0 5.4 5.31 69.7 3.8 5.45 76.4 3.8 4.99
Loans/1/
--Domestic............ 7,742.3 623.0 8.05 7,669.7 643.8 8.39 7,389.4 607.7 8.22
--Foreign............. 1,702.2 106.4 6.25 1,752.6 119.2 6.80 1,540.3 119.2 7.74
Loan Fees.............. 39.9 45.3 34.4
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Earning Assets.. 13,447.2 1,027.1 7.64 13,672.5 1,089.2 7.97 13,177.3 1,040.6 7.90
Cash and Due From Banks. 486.6 590.1 545.1
Other Assets............ 649.1 608.1 519.9
--------- --------- ---------
Total Assets.......... $14,582.9 $14,870.7 $14,242.3
========= ========= =========
Interest-Bearing
Liabilities
Domestic Deposits
--Demand.............. $ 2,137.1 48.5 2.27 $ 2,114.8 55.7 2.64 $ 1,945.3 52.9 2.72
--Savings............. 723.9 14.7 2.03 783.9 18.5 2.35 865.5 21.4 2.48
--Time................ 2,559.4 123.3 4.82 2,780.7 145.4 5.23 2,858.7 157.0 5.49
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Domestic........ 5,420.4 186.5 3.44 5,679.4 219.6 3.87 5,669.5 231.3 4.08
Foreign Deposits
--Time Due to Banks... 641.4 33.7 5.25 596.1 40.4 6.78 718.7 43.6 6.06
--Other Savings and
Time.................. 1,165.7 41.0 3.52 1,176.1 46.7 3.97 1,079.0 38.2 3.55
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Foreign......... 1,807.1 74.7 4.13 1,772.2 87.1 4.91 1,797.7 81.8 4.55
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Deposits........ 7,227.5 261.2 3.61 7,451.6 306.7 4.12 7,467.2 313.1 4.19
Short-Term Borrowings.. 3,014.8 146.2 4.85 3,072.9 162.6 5.29 2,868.7 156.8 5.47
Long-Term Debt......... 685.9 44.3 6.46 676.5 42.7 6.32 725.5 46.4 6.39
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Interest-Bearing
Liabilities.......... 10,928.2 451.7 4.13 11,201.0 512.0 4.57 11,061.4 516.3 4.67
--------- ------- ----- --------- ------- ----- --------- ------- -----
Net Interest Income..... 575.4 3.51 577.2 3.40 524.3 3.23
------- ----- ------- ----- ------- -----
Spread on Earning
Assets................. 4.28% 4.22% 3.98%
----- ----- -----
Demand Deposits
-- Domestic............ 1,652.6 1,650.4 1,516.8
-- Foreign............. 435.2 447.7 264.0
--------- --------- ---------
Total Demand Deposits. 2,087.8 2,098.1 1,780.8
Other Liabilities....... 356.9 410.8 290.8
Shareholders' Equity.... 1,210.0 1,160.8 1,109.3
--------- --------- ---------
Total Liabilities &
Shareholders' Equity. $14,582.9 $14,870.7 $14,242.3
========= ========= =========
Provision for Loan
Losses................. 60.9 84.0 30.3
Net Overhead............ 288.2 329.0 275.1
------- ------- -------
Income Before Taxes..... 226.3 164.2 218.9
Provision for Taxes..... 92.7 56.6 78.5
Tax Equivalency
Adjustment/2/ ......... 0.6 0.6 0.9
------- ------- -------
Net Income.............. $ 133.0 $ 107.0 $ 139.5
======= ======= =======
</TABLE>
- --------
/1/ Includes non-accrual loans.
/2/ Based upon a statutory tax rate of 35%.
16
<PAGE>
Provision for Loan Losses
The provision for loan losses was $60.9 million in 1999, compared to $84.0
million in 1998 and $30.3 million in 1997. For 1999, net loan charge-offs of
$73.8 million exceeded the provision for loan losses by approximately $13
million. This difference is partially explained by charge-offs taken in 1999
relative to certain Asian borrowers who have continued to experience
difficulties in adjusting to reforms measures that were initiated to deal with
the Asian economic crisis. In 1998, as a result of evaluating the impact of
the financial volatility in Asia, the provision for loan losses and the
related reserve were increased to provide for the risk associated with this
event. The provision for loan losses reflects management's assessment of the
adequacy of the reserve for loan losses, considering the current risk
characteristics of the loan portfolio along with economic and other relevant
factors. For further information on credit quality, refer to the section on
"Reserve for Loan Losses."
Non-Interest Income
Non-interest income in 1999 increased to $265.6 million from $211.8 million
in 1998 and $187.8 million in 1997. On a year-over-year basis non-interest
income increased 25.4% in 1999 and 12.8% in 1998. For 1999, non-interest
income included nonrecurring credits that contributed $18.3 million to other
income and $12.1 million to investment securities gains as discussed in
greater detail below. Additionally, the Triad acquisition contributed
incremental non-interest income of approximately $8.4 million in 1999.
Comparing 1998 with 1997, the acquisitions accounted for approximately $15.0
million of the increase between these periods. Table 4 presents the details of
non-interest income for the last five years.
Trust income for 1999 totaled $60.7 million, up from $55.9 million in 1998
and $52.2 million in 1997. Revenue categories that generated the largest year-
over-year gains were mutual fund fees, brokerage fees and trust and agency
fees. While trust income showed an 8.6% increase in 1999, total trust assets
administered by Pacific Century Trust increased to $13.8 billion at year-end
1999, up from $12.9 billion at year-end 1998 and $12.1 billion at year-end
1997. The Pacific Capital family of mutual funds and Hawaiian Tax Free Trust,
which are managed by Pacific Century Trust, have continued to experience
growth. At December 31, 1999, the aggregate balance of these funds stood at
$3.7 billion, compared to $3.1 billion and $2.6 billion at year-end 1998 and
1997, respectively.
Service charges on deposit accounts were $34.3 million for the year ended
December 31, 1999, compared to $35.5 million in 1998 and $29.4 million in
1997. These fees have remained relatively constant over the last two years.
The increase in these fees compared to 1997 was largely driven by the
acquisitions.
Fees, exchange and other service charges increased to $88.8 million in 1999,
from $77.9 million in 1998 and $67.1 million in 1997. Included in these fees
were income generated from international activities relative to letters of
credit and acceptance fees, profit on foreign currency, and exchange fees.
Collectively, income from these sources totaled $34.5 million in 1999, an
18.6% increase over 1998.
Mortgage servicing fees increased to $8.8 million in 1999 from $7.9 million
in 1998 and $7.1 million in 1997. 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 $2.5
billion at year-end 1999 from $2.1 billion at year-end 1998.
Also included in fees, exchange and other service charges are fees earned
through Pacific Century's ATM network. ATM fees reflected a 51.9% increase
during 1999, which mainly resulted from an increase in the ATM fee structure.
During 1999, Pacific Century's ATM network continued to expand, ending the
year with 510 machines, an increase from 492 at year-end 1998. Fees generated
by this network totaled $15.8 million in 1999, compared to $10.4 million in
1998, and $9.6 million in 1997.
Other operating income in 1999 was $67.7 million, an increase of 76.1% from
$38.4 million in 1998. For the year ended December 31, 1999, other operating
income included $14.0 million from the sale of Arbella
17
<PAGE>
Leasing Corp. (Arbella), a specific purpose leasing subsidiary and $4.3
million from the termination of a venture capital limited partnership. The net
impact on earnings of the Arbella sale was $1.3 million after providing for
income taxes of $12.7 million. The increase in 1999 other operating income is
also impacted by insurance commissions from the Triad acquisition. With a
higher level of recoveries recorded in 1999, cash basis interest increased to
$3.2 million from $1.3 million in 1998. Comparatively, cash basis interest was
$3.7 million in 1997. Cash basis interest includes interest collected on loans
written-off or interest collected on non-accrual loans that relate to prior
years.
Net investment securities gains in 1999 were $14.1 million, significantly
higher than net gains of $4.1 million and $3.1 million in 1998 and 1997,
respectively. Included in 1999 were gains of $6.5 million from the sale of
newly issued equity securities acquired in conjunction with leasing
transactions and $5.6 million from the disposition of a venture capital
investment.
NON-INTEREST INCOME
TABLE 4
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Trust Income................ $ 60.7 8.6% $ 55.9 7.1% $ 52.2 $ 49.8 $ 49.5
Service Charges on Deposit
Accounts................... 34.3 (3.4) 35.5 20.7 29.4 26.7 25.9
Fees, Exchange and Other
Service Charges
Card Fees................. 13.6 (0.7) 13.7 3.8 13.2 10.7 7.3
Letters of Credit and
Acceptance Fees.......... 12.5 18.1 10.6 (4.5) 11.1 10.1 8.8
Profit on Foreign
Currency................. 17.3 17.0 14.8 21.3 12.2 8.9 6.5
ATM....................... 15.8 51.9 10.4 8.3 9.6 8.6 7.7
Mortgage Servicing Fees... 8.8 11.4 7.9 11.3 7.1 6.6 4.3
Exchange Fees............. 4.7 25.8 3.7 (11.9) 4.2 3.4 3.9
Payroll Services.......... 0.8 (26.9) 1.1 (31.3) 1.6 2.4 2.1
Cash Management........... 2.4 1.2 2.4 200.0 0.8 0.8 1.0
Other Fees................ 12.9 (3.0) 13.3 82.2 7.3 7.4 5.7
Other Operating Income
Other Income.............. 49.3 39.3 35.4 30.1 27.2 24.2 19.6
Gain on Sale of Leased
Equipment................ 15.2 794.1 1.7 (66.7) 5.1 0.9 --
Cash Basis Interest....... 3.2 138.2 1.3 (64.9) 3.7 2.6 1.3
Investment Securities Gains. 14.1 244.0 4.1 32.3 3.1 1.4 2.5
------ ----- ------ ----- ------ ------ ------
Total................... $265.6 25.4% $211.8 12.8% $187.8 $164.5 $146.1
====== ===== ====== ===== ====== ====== ======
</TABLE>
Non-Interest Expense
For the years ended December 31, 1999, 1998 and 1997 non-interest expense
totaled $553.7 million, $540.7 million and $462.9 million, respectively. Non-
interest expense increased 2.4% in 1999 and 16.8% in 1998 from the respective
prior year. Comparability between periods is impacted by restructuring charges
of $22.5 million in 1999 and $19.4 million in 1998. Additionally, non-interest
expense in 1999 and 1998 include incremental increases of approximately $7.2
million and $34.2 million, respectively, resulting from acquisitions,
including the amortization of intangibles.
18
<PAGE>
Salaries and pensions and other employee benefits totaled $254.0 million,
$250.5 million and $226.7 million in 1999, 1998 and 1997, respectively.
Approximately $3.1 million and $14.6 million of the increase relative to 1999
and 1998, respectively, is accounted for by the acquisitions. Excluding the
effects of the acquisitions, the year-over-year increase would have been 0.2%
in 1999 and 4.1% in 1998. The Year 2000 project also contributed to the
increase in salaries and employee benefits for 1999 and 1998.
Net occupancy and equipment expense for 1999 totaled $96.6 million, compared
to $95.8 million in 1998 and $85.2 million in 1997. Included in the 1998 and
1997 totals were $1.7 million and $2.7 million, respectively, relating to
write-offs of equipment and premises.
Other operating expense increased to $180.1 million in 1999 from $174.6
million in 1998 and $149.5 million in 1997. Approximately $3.5 million and
$14.8 million of the year-over-year increase relative to 1999 and 1998,
respectively, was due to the acquisitions, including the amortization of
intangibles. Large one-time costs included in other operating expense were
$2.3 million in 1999 and $6.4 million in 1998.
Legal and professional fees were $32.4 million in 1999, $35.8 million in
1998 and $23.4 million in 1997. The higher fees in 1999 and 1998 relative to
1997 is primarily attributed to consulting and other professional fees
including those related to the Year 2000 project.
All systems at Pacific Century transitioned to the new millennium without
significant incident. Pacific Century's total cost relative to Year 2000
readiness was $36.1 million, of which $10.7 million was incurred in 1999,
$22.2 million in 1998 and $3.2 million in 1997. The total budget for the Year
2000 project was $41 million. Year 2000 related costs included expenditures
for technology and program management staff, staff retention, consultants,
software and hardware, and customer education and training.
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 1999, 1998 and 1997, the
efficiency ratio was 67.0%, 69.0% and 65.4%, respectively. Comparison of this
ratio between periods is affected by the restructuring charges in 1999 and
1998 and the sale of Arbella in 1999.
19
<PAGE>
NON-INTEREST EXPENSE
TABLE 5
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries.................... $198.7 2.2% $194.5 12.3% $173.2 $159.2 $142.1
Pensions and Other Employee
Benefits................... 55.3 (1.2) 56.0 4.7 53.5 48.8 43.6
Net Occupancy Expense....... 47.9 2.3 46.8 0.2 46.7 39.4 41.1
Net Equipment Expense....... 48.7 (0.7) 49.0 27.3 38.5 34.0 31.7
Other Operating Expense
Legal and Other
Professional Fees........ 32.4 (9.5) 35.8 53.0 23.4 17.7 15.6
Stationery and Supplies... 9.8 (11.3) 11.1 3.7 10.7 10.7 9.3
Amortization of Intangible
Assets................... 19.4 11.7 17.4 27.9 13.6 9.8 8.4
Credit Card Processing.... 17.2 16.2 14.8 4.2 14.2 9.1 2.1
Other..................... 101.3 6.1 95.5 9.0 87.6 91.2 69.1
Restructuring Charge........ 22.5 15.9 19.4 N.M. -- -- --
Minority Interest........... 0.5 8.7 0.4 (73.3) 1.5 1.4 1.1
------ ----- ------ ----- ------ ------ ------
Total................... $553.7 2.4% $540.7 16.8% $462.9 $421.3 $364.1
====== ===== ====== ===== ====== ====== ======
</TABLE>
Income Taxes
The tax structure at Pacific Century is complex given the various foreign
and domestic locations in which it operates. In 1999, provision for taxes
reflected an effective tax rate of 41.1%, compared to 34.6% and 36.0% in 1998
and 1997, respectively. The higher 1999 effective tax rate is largely
explained by the Arbella sale that generated $14.0 million in income and $12.7
million in income tax expense. For 1998, the effective tax rate was impacted
by an equipment lease termination loss of $2.7 million that provided an
equivalent amount of tax benefits. Excluding the effects of the above items,
the effective tax rate for 1999 and 1998 would have been 37.6% and 35.7%,
respectively.
Pacific Century primarily utilizes low income housing tax credits and lease
financing to manage its tax liability. As of December 31, 1999, Pacific
Century's low income housing investments totaled $74.3 million, compared to
$69.6 million at year-end 1998. These investments provided tax credits of
$13.7 million and $10.0 million in 1999 and 1998, respectively.
Pacific Century also continued to pursue lease financing to defer tax
payments. Consisting of both direct and leveraged leases, the leasing
portfolio grew 13.2% during 1999.
Tax planning at Pacific Century is structured to minimize the impact of the
alternative minimum tax (AMT). At the end of 1999, 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 income. At December 31, 1999, loans
outstanding were $9.7 billion, a 1.4% decrease from $9.9 billion at year-end
1998. This decline primarily is accounted for by a $197 million reduction in
foreign loans, that partially is attributed to foreign currency translation
adjustments in the South Pacific.
20
<PAGE>
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.
LOAN PORTFOLIO BALANCES
TABLE 6
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Domestic Loans
Commercial and Industrial....... $2,493.0 $2,579.7 $2,104.3 $1,806.7 $1,902.2
Real Estate
Construction--Commercial...... 315.1 276.3 268.1 212.3 199.6
--Residential............ 13.8 23.5 12.9 23.6 33.7
Mortgage--Commercial.......... 1,244.8 1,139.1 1,354.5 1,227.8 1,308.8
--Residential............. 2,645.4 2,699.4 2,738.9 2,635.3 2,702.4
Installment..................... 756.1 763.0 891.6 849.3 817.3
Lease Financing................. 627.6 554.5 519.4 437.8 392.9
-------- -------- -------- -------- --------
Total Domestic Loans........ 8,095.8 8,035.5 7,889.7 7,192.8 7,356.9
Foreign Loans
Banks and Other Financial
Institutions................... 207.7 158.2 207.7 281.8 268.7
Commercial and Industrial....... 943.4 1,281.5 1,074.9 923.2 513.6
Other........................... 470.7 378.8 326.1 301.5 13.2
-------- -------- -------- -------- --------
Total Foreign Loans......... 1,621.8 1,818.5 1,608.7 1,506.5 795.5
-------- -------- -------- -------- --------
Total Loans................. $9,717.6 $9,854.0 $9,498.4 $8,699.3 $8,152.4
======== ======== ======== ======== ========
</TABLE>
Commercial and Industrial Loans
At December 31, 1999, commercial and industrial loans (C&I) totaled $2.5
billion, down 3.4% from year-end 1998. The proportion of C&I loans to the
total portfolio was 25.7% at year-end 1999, compared to 26.2% at year-end
1998.
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.
Geographically C&I loans are concentrated in the U.S. Mainland and Hawaii
representing 54% and 37%, respectively, of the total C&I portfolio as of year-
end 1999. In Hawaii, Bank of Hawaii is a major commercial lender and maintains
a significant presence throughout the State. Bank of Hawaii supports the
business community in Hawaii by offering a wide range of products and
services. At year-end 1999, C&I loans in Hawaii were $930.8 million. In the
U.S. Mainland market, C&I lending totaled $1.3 billion at year-end 1999, down
12.4% from year-end 1998, 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.
21
<PAGE>
Real Estate Loans
At year-end 1999, Pacific Century's total real estate loans (excluding
construction) were $3.9 billion, 1.3% above year-end 1998. This portfolio
consists of loans that are secured by residential as well as commercial
properties. Real estate mortgage loans continue to comprise the largest
portion of the loan portfolio, representing 40.0% of total loans at year-end
1999, compared 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 $2.6 billion, this
portfolio declined modestly from year-end 1998, and represented 27.2% of total
loans outstanding at the end of 1999. Approximately 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
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 1999 were
$136 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 1999, residential mortgage originations by Bank of Hawaii totaled
$0.98 billion, compared to a record $1.06 billion in 1998.
Also included in the residential real estate portfolio are home equity
credit lines. The total available credit under these lines was $506 million at
year-end 1999, compared to $477 million at year-end 1998. Outstandings
increased marginally to $267 million at year-end 1999 from $261 million at
year-end 1998. 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
$1.2 billion at year-end 1999, up 9.3% from year-end 1998. Approximately 59%
and 24% of these loans were secured by commercial real estate in Hawaii and
the U.S. Mainland, respectively, with the remainder mostly in the West
Pacific. The commercial real estate portfolio is diversified in the type of
property securing the obligations, including loans secured by commercial
offices, hotels, retail facilities, industrial properties and warehouses.
Total commercial construction loans increased to $315.1 million at year-end
1999, compared to $276.3 million at year-end 1998. These loans are secured
primarily by properties located in the U.S. Mainland and Hawaii, which
accounted for 50% and 45%, respectively, of such loans at December 31, 1999.
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.
Installment Loans
Total installment loans (excluding residential mortgages and home equity
loans) ended 1999 at $756.1 million, relatively unchanged from year-end 1998.
As of December 31, 1999, installment loans consisted of credit cards and
consumer loans (e.g., auto loans and unsecured credit lines). Consumer loans
totaled $503.5 million at December 31, 1999, compared to $485.0 million at
December 31, 1998.
The credit card portfolio balance was $252.6 million at year-end 1999, a
decrease of 9.1% from year-end 1998. At year-end 1999, 0.91% of the credit
card portfolio (based on balances) were more than 90 days delinquent, compared
to 0.77% at year-end 1998.
Leasing Activities
At year-end 1999, leases outstanding increased to $627.6 million, up 13.2%
from year-end 1998. Pacific Century's lease portfolio is diversified,
consisting primarily of leases on equipment, automobiles, trucks, ships,
aircraft, and computers.
22
<PAGE>
Lending in Asia and the South Pacific
Pacific Century's international business predominately consists of Asia
where the business emphasis is primarily on correspondent banking activities
and undertaking credit risk relating to and resulting from trade activities,
trade finance and working capital loans for companies that have business
interests in the Asia-Pacific markets. The majority of loans in Asia are
short-term and are largely based on Pacific Century's traditional focus on
cash flow lending. The South Pacific market largely consists of the operations
of subsidiary banks in French Polynesia, New Caledonia, Papua New Guinea, and
Vanuatu, and to a lesser degree, through affiliate banks and Bank of Hawaii
branches in the region. Foreign loans in both Asia and the South Pacific
totaled $1.6 billion at the end of 1999, down 10.8% from year-end 1998. At
year-end 1999 foreign loans represented 16.7% of the total loan portfolio,
compared to 18.5% at year-end 1998.
Foreign loans in the South Pacific totaled $0.9 billion at December 31,
1999, a decrease of 13.7% from $1.1 billion at year-end 1998. To a large
degree, this decline is attributed to a 16% reduction during 1999 in the
conversion rate of the Pacific franc, the currency of French Polynesia and New
Caledonia, relative to the U.S. dollar. A large portion of the South Pacific
loan portfolio is concentrated in two subsidiary banks, Banque de Tahiti and
Bank of Hawaii--Nouvelle Caledonie, which in the aggregate held total loans of
$871 million at the end of 1999.
At December 31, 1999, outstanding loans to borrowers in Asia totaled $644.8
million, down from $690.5 million and $818.6 million at December 31, 1998 and
1997, respectively. Outstanding commitments represented by letters of credit
and unused loan commitments relative to borrowers in Asia were approximately
$267 million at year-end 1999, compared to $367 million at year-end 1998.
Additional information on Asian credit exposure and recent Asian economic
events are contained in the "Foreign Operations" section of this report.
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. The highest geographic lending
concentration is in Hawaii constituting 50.3% of the total loan portfolio at
December 31, 1999, compared to 50.2% at December 31, 1998. At year-end 1999,
the percentage of U.S. Mainland loans to total loans was 23.9%, compared to
23.1% at year-end 1998.
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.
23
<PAGE>
GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO/1/
TABLE 7
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------------------
WEST SOUTH MAINLAND
TOTAL HAWAII PACIFIC PACIFIC U.S. JAPAN OTHER
-------- -------- ------- ------- -------- ------ ------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Industrial............. $2,493.0 $ 930.8 $185.4 $ 14.4 $1,337.4 $ -- $ 25.0
Real Estate
Construction--
Commercial........... 315.1 143.1 13.4 -- 158.6 -- --
--Residential.... 13.8 11.0 2.2 0.1 0.5 -- --
Mortgage--Commercial.. 1,244.8 734.8 201.5 8.7 299.8 -- --
--Residential..... 2,645.4 2,381.2 247.3 1.3 15.6 -- --
Installment............. 756.1 566.0 146.5 31.2 12.4 -- --
Foreign................. 1,621.8 34.7 -- 942.3 -- 200.4 444.4
Lease Financing......... 627.6 82.4 5.3 -- 498.7 -- 41.2
-------- -------- ------ ------ -------- ------ ------
Total............... $9,717.6 $4,884.0 $801.6 $998.0 $2,323.0 $200.4 $510.6
======== ======== ====== ====== ======== ====== ======
Percentage of Total..... 100.0% 50.3% 8.2% 10.3% 23.9% 2.1% 5.2%
======== ======== ====== ====== ======== ====== ======
</TABLE>
- --------
/1/ Loans are classified based upon the 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, 1999, available-for-sale securities
totaled $2.5 billion reflecting a $476 million decrease from December 31,
1998. Most of this decline was in the mortgage backed securities portfolio and
to a lesser degree in the U.S. government and agency debt securities
portfolio. Securities held to maturity were $796 million at year-end 1999, up
$143 million from year-end 1998. Purchases of U.S. government and agency
mortgage-backed securities accounted for most of this increase.
Table 18 presents the maturity distribution, market value and weighted-
average yield to maturity of securities.
Deposits
As of December 31, 1999, total deposits were $9.4 billion, down 1.9% from
the year earlier date. During 1999, domestic deposits decreased $294 million,
while foreign deposits saw an increase of $112 million. With respect to
domestic deposits, the non-interest bearing and interest bearing demand
categories experienced the largest declines. 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, 1999.
Borrowings
Short-term borrowings, including funds purchased and securities sold under
agreements to repurchase (repos), totaled $2.8 billion at December 31, 1999,
compared to $3.3 billion at year-end 1998. 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 1999, repos were $1.5 billion, down from $2.0 billion at year-end
1998. Included in short-term borrowings at December 31, 1999, were $97 million
in commercial paper and $150 million in Federal Home Loan Bank of Seattle
(FHLB) advances.
24
<PAGE>
Long-term debt on December 31, 1999 totaled $728 million, up from $586
million on December 31, 1998. A new $125 million issue of subordinated notes
that mature in 2009 largely explains the rise in long-term debt for 1999.
Subordinated notes also included $119 million issued in 1993 that mature in
2003. All subordinated notes bear a fixed interest rate of 6.875%. Also
outstanding, as of December 31, 1999, were $100 million in 8.25% Capital
Securities that mature in 2026. FHLB borrowings totaled $247 million at
December 31, 1999, compared to $223 million at December 31, 1998. Private
placement notes totaled $90 million at both year-end 1999 and 1998.
FOREIGN OPERATIONS
Pacific Century maintains an extensive 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 customers of Pacific Century to facilitate trade and
investment between the U.S., Asia and the Pacific Islands.
Through its Asia Division, the Bank of Hawaii 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), Seoul, Singapore, Tokyo
and Taipei. The Asia Division continues to focus on correspondent banking and
trade-related financing activities and lending to customers with which it has
a direct relationship.
The South Pacific Division in Honolulu oversees 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
an equity interest in affiliate banks located in Samoa, Solomon Islands and
Tonga.
The operations of subsidiaries and affiliates are evaluated on a similar
basis as branch offices. Exposure to foreign currency fluctuations is in large
measure limited to the unhedged positions of Pacific Century's capital
investment in these subsidiaries (see "Market Risk"). 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, Pacific Century'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 foreign operations for the last three years.
Operating results in 1999 reflected a net loss of $1.4 million, compared to
net loss of $0.8 million in 1998. The loss for both years reflect
significantly higher foreign loan loss provisions in comparison to historical
levels (see "Reserve for Loan Losses").
SUMMARY OF INTERNATIONAL ASSETS, LIABILITIES, AND INCOME AND PERCENT OF
CONSOLIDATED TOTALS
TABLE 8
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1999 1998 1997
----------------- ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Average Assets............. $3,413.0 23.4% $3,426.6 23.0% $3,005.1 21.1%
Average Liabilities........ 3,271.6 24.5 3,348.8 24.4 2,523.3 19.2
Operating Revenue.......... 252.1 19.5 287.9 21.9 215.9 17.4
Net Income (Loss).......... (1.4) N.M. (0.8) N.M. 10.2 7.3
</TABLE>
25
<PAGE>
Pacific Century controls its foreign lending risk exposure 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 are
established for each country to control risk in the foreign 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 trade activity in the Asia-Pacific region and investment
interest in Hawaii and the West and South Pacific.
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 $885.0 million at year-end
1999. 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 to which Pacific Century maintains its largest credit exposure
on a cross-border basis include Japan, South Korea, and France. At December
31, 1999, cross-border credit exposure in Japan, South Korea, and France were
$320 million, $294 million and $195 million, respectively, compared to $356
million, $265 million and $36 million, respectively, at December 31, 1998. The
rise in cross-border exposure to France resulted from an increase in interbank
placements with French banks.
Beginning in mid-1997, a number of countries in Asia experienced financial
difficulties that included significant devaluation of their currency, higher
interest rates and general tightening of credit. In view of the risks, Pacific
Century increased its provision for loan losses in 1998. By the end of 1999,
the economies and financial environment in most Asian countries had improved
in terms of currency exchange rate stability, interest rates and gross
domestic product growth. However, in spite of the improving economic trend,
the impact of government and corporate restructuring in the region is still
being felt. For Pacific Century the impact was greatest in South Korea. While
South Korea has made tremendous strides in improving its economy and financial
markets, certain Korean corporations have had difficulties in adjusting to
mandated and advisable reforms.
The most notable impact to Pacific Century was $33.7 million in exposure to
a South Korean conglomerate of which $30.2 million was outstanding. During the
third quarter of 1999, the borrower suspended debt service payments and began
negotiations with its domestic and foreign bank creditors. At the end of 1999,
those negotiations had not produced a definitive resolution of the matter with
foreign lenders. Consequently, Pacific Century charged off credits of $19.5
million and placed $10.7 million on non-performing status. Negotiations with
the conglomerate and its creditors are in process. For additional information,
see "Reserve for Loan Losses."
Pacific Century continues to monitor its international activities on a
country by country basis as events evolve and will adjust activities and take
such actions in the region as appropriate.
26
<PAGE>
GEOGRAPHIC DISTRIBUTION OF CROSS-BORDER INTERNATIONAL ASSETS/1/
TABLE 9
<TABLE>
<CAPTION>
GOVERNMENT
AND OTHER BANKS AND COMMERCIAL
OFFICIAL OTHER FINANCIAL AND INDUSTRIAL
INSTITUTIONS INSTITUTIONS/2/ COMPANIES TOTAL
------------ --------------- -------------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
December 31, 1999
Japan.................... $ -- $217.8 $102.6 $ 320.4
South Korea.............. 24.3 198.0 72.0 294.3
France................... 16.2 178.7 0.2 195.1
All Others/3/ ........... 10.7 290.5 262.2 563.4
------ ------ ------ --------
$ 51.2 $885.0 $437.0 $1,373.2
====== ====== ====== ========
December 31, 1998
Japan.................... $ -- $224.6 $131.1 $ 355.7
South Korea.............. 85.8 94.4 84.7 264.9
Taiwan................... -- 41.6 82.3 123.9
All Others............... 68.5 462.1 188.7 719.3
------ ------ ------ --------
$154.3 $822.7 $486.8 $1,463.8
====== ====== ====== ========
December 31, 1997
South Korea.............. $ -- $219.9 $193.5 $ 413.4
Japan.................... -- 253.6 136.8 390.4
Taiwan................... 57.5 39.5 23.8 120.8
All Others............... 67.1 406.5 154.5 628.1
------ ------ ------ --------
$124.6 $919.5 $508.6 $1,552.7
====== ====== ====== ========
</TABLE>
- --------
/1/ This table details by country cross-border outstandings that individually
amounted to 0.75% or more of consolidated total assets as of year-end
1999, 1998 and 1997. Cross-border outstandings are defined as foreign
monetary assets that are payable to Pacific Century in U.S. dollars or
other non-local currencies, plus amounts payable in local currency but
funded with U.S. dollars or other non-local currencies. Cross-border
outstandings include loans, acceptances, interest-bearing deposits with
other banks, other interest-bearing investments, and other monetary
assets.
/2/ Includes U.S. dollar advances to foreign branches and affiliate banks
which were used to fund local currency transactions. Totals at December
31, 1999, 1998 and 1997 were $378.2 million, $411.1 million and $419.9
million, respectively.
/3/ At December 31, 1999, the all others category included cross-border
outstandings of $77.7 million in French Polynesia and $47.1 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 $149.9 million at year-end 1999, compared to
$137.5 million at the end of 1998, and $97.1 million at the end of 1997.
At December 31, 1999, the ratio of NPAs to outstanding loans rose to 1.54%.
Comparatively the ratio was 1.40% and 1.02% for 1998 and 1997, respectively.
27
<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 $145.3 million at year-end 1999, up 10.2%
over year-end 1998. Higher non-accrual balances in the foreign and commercial
real estate categories accounted for this increase. Non-accrual loans in the
C&I and residential real estate portfolios reflected a decline from year-end
1998.
At December 31, 1999, foreign loans on non-accrual were $67.4 million,
compared to $57.5 million at December 31, 1998 and $39.9 million at December
31, 1997. The 1999 increase partially results from placing $10.7 million of
loans to a South Korean conglomerate on non-accrual status. Total non-accrual
loans in Asia rose to $32.3 million at December 31, 1999, from $8.6 million at
December 31, 1998. Additional information relative to Asian exposure is
contained in "Foreign Operations."
C&I loans classified as non-accrual totaled $23.7 million at year-end 1999,
compared to $28.2 million and $10.7 million at year-end 1998 and 1997,
respectively.
At December 31, 1999, non-accrual loans secured by real estate totaled $49.8
million, or 34.3% of total non-accrual loans.
Commercial real estate loans on non-accrual status were $19.0 million at
December 31, 1999, up from $5.4 million at the end of 1998. This increase is
mainly due to the transfer of several large Hawaii-based commercial real
estate loans to non-accrual in the first quarter of 1999. Non-performing
residential mortgages (excluding construction loans) totaled $29.7 million at
year-end 1999, compared to $36.4 million at year-end 1998, reflecting a year-
over-year decline of $6.7 million.
Because residential mortgages are secured by real estate, the credit risk on
these loans are lower than unsecured lending. Most of the Company's
residential loans are owner-occupied first mortgages and were 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 $4.6 million at year-end 1999, from $5.6
million at year-end 1998. At December 31, 1999, the foreclosed real estate
portfolio consisted of 38 properties, mostly located in Hawaii. The largest
property represented 14% of the total. In 1999, sales of foreclosed real
estate resulted in a net loss of $152,000, compared to a net losses of
$871,000 and $523,000 in 1998 and 1997, respectively.
Accruing loans past due 90 days or more totaled $18.5 million at year-end
1999, declining $2.3 million from $20.8 million at year-end 1998. Lower
delinquencies in the foreign portfolio and, to a lesser degree, improvements
in the installment portfolio largely explains this decline. The C&I loan
portfolio reflected a $5.5 million increase in past due loans over the prior
year.
28
<PAGE>
Table 10 presents a five-year history of non-performing assets and accruing
loans past due 90 days or more.
NON-PERFORMING ASSETS AND ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
TABLE 10
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ -----
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans
Commercial and Industrial............. $ 23.7 $ 28.2 $ 10.7 $ 20.9 $16.9
Real Estate
Construction........................ 1.1 2.9 1.0 0.3 0.3
Commercial.......................... 19.0 5.4 2.8 4.1 14.9
Residential......................... 29.7 36.4 32.9 23.6 14.7
Installment........................... 0.5 0.8 2.0 1.3 0.8
Foreign............................... 67.4 57.5 39.9 22.3 --
Lease Financing....................... 3.9 0.7 -- -- --
------ ------ ------ ------ -----
Total Non-Accrual Loans........... 145.3 131.9 89.3 72.5 47.6
------ ------ ------ ------ -----
Restructured Loans
Real Estate--Commercial............... -- -- 1.6 -- --
------ ------ ------ ------ -----
Total Restructured Loans.......... -- -- 1.6 -- --
------ ------ ------ ------ -----
Foreclosed Real Estate
Domestic.............................. 4.3 5.5 6.2 10.7 9.3
Foreign............................... 0.3 0.1 -- -- --
------ ------ ------ ------ -----
Total Foreclosed Real Estate...... 4.6 5.6 6.2 10.7 9.3
------ ------ ------ ------ -----
Total Non-Performing Assets..... 149.9 137.5 97.1 83.2 56.9
------ ------ ------ ------ -----
Accruing Loans Past Due 90 Days or More
Commercial and Industrial............. 5.9 0.4 2.0 2.0 1.8
Real Estate
Construction........................ -- 0.4 -- 0.4 --
Commercial.......................... 1.9 -- 0.6 6.8 2.4
Residential......................... 4.0 4.5 7.3 6.8 5.8
Installment........................... 4.5 7.3 7.6 9.0 10.5
Foreign............................... 1.0 7.9 7.4 9.5 --
Lease Financing....................... 1.2 0.3 0.1 0.2 0.2
------ ------ ------ ------ -----
Total Past Due Loans.............. 18.5 20.8 25.0 34.7 20.7
------ ------ ------ ------ -----
Total Non-Performing Assets and
Past Due Loans................. $168.4 $158.3 $122.1 $117.9 $77.6
====== ====== ====== ====== =====
Ratio of Non-Performing Assets to Total
Loans.................................. 1.54% 1.40% 1.02% 0.96% 0.70%
Ratio of Non-Performing Assets and
Accruing Loans Past Due 90 Days or More
to Total Loans......................... 1.73% 1.61% 1.29% 1.36% 0.95%
</TABLE>
29
<PAGE>
FOREGONE INTEREST ON NON-ACCRUALS
TABLE 11
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Interest Income Which Would Have Been Recorded Under
Original Terms:
Domestic.......................................... $11.2 $8.4 $6.6 $6.3 $7.6
Foreign........................................... 7.1 4.1 2.4 2.3 --
Interest Income Recorded During the Current Year on
Non-Accruals:
Domestic.......................................... 1.1 1.3 1.5 1.6 0.6
Foreign........................................... 3.0 1.4 0.5 0.6 --
</TABLE>
Reserve for Loan Losses
Pacific Century maintains the reserve for loan losses at a level that it
believes is adequate to absorb estimated inherent 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. This analysis incorporates risk
migration modeling and transfer 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 transfer risk. General reserve
allocations for transfer risk are determined based on the type of credit
facility and internal country risk ratings.
The reserve for loan losses ended 1999 at $194.2 million, declining $17.1
million from the prior year level of $211.3 million. Net charge-offs in 1999
were $73.8 million or 0.78% of average loans, compared to $65.7 million, or
0.70% of average loans in 1998 and $30.2 million, or 0.34% of average loans in
1997. The ratio of reserves to loans outstanding at year-end 1999 was 2.05%,
compared to 2.19% at year-end 1998 and 1.88% at year-end 1997. A summary of
the activity in the reserve for loan losses for the last five years is
presented in Table 12.
At year-end 1999, the reserve for loan losses provided coverage of 130% of
non-performing loans, compared to 154% coverage at year-end 1998 and 180% at
year-end 1997. Additionally, the ratio of year-end reserves to gross charge-
offs was 1.9 times, 2.6 times, and 3.2 times for 1999, 1998, and 1997,
respectively.
Gross charge-offs in 1999 totaled $103.3 million, representing 1.09% of
average loans outstanding. Comparatively, this ratio was 0.87% and 0.62% in
1998 and 1997, respectively. The increase in gross charge-offs in 1999 is
partly attributed to a rise in the foreign category to $45.8 million from
$34.8 million in 1998. Of this amount, $19.5 million is associated with
charge-offs pertaining to a South Korean conglomerate. For further discussion,
see "Foreign Operations" and "Provision for Loan Losses."
30
<PAGE>
Gross charge-offs as a percentage of the reserve for loan losses were 53.2%,
38.8% and 31.6% in 1999, 1998 and 1997, respectively.
Excluding foreign loans, gross charge-offs in 1999 were mostly concentrated
in the installment and C&I portfolios. Gross charge-offs on installment loans
in 1999 were $25.1 million, marginally lower than last year. With respect to
C&I loans, gross charge-offs rose to $18.5 million in 1999 from $15.3 million
in 1998.
In 1999, recoveries of previously charged-off loans increased to $29.5
million from $16.3 million in 1998. C&I loan recoveries of $14.0 million
accounted for most of 1999's increase and was driven by a $7.0 million recovery
of a U.S. Mainland loan. Installment and foreign loan recoveries in 1999 of
$7.6 million and $5.6 million, respectively, were relatively level with last
year.
31
<PAGE>
RESERVE FOR LOAN LOSSES
TABLE 12
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Average Amount of Loans
Outstanding................ $9,444.5 $9,422.3 $8,929.7 $8,353.6 $7,654.9
======== ======== ======== ======== ========
Balance of Reserve for Loan
Losses at Beginning of
Period..................... $ 211.3 $ 174.4 $ 167.8 $ 152.0 $ 148.5
Loan Charge-Offs
Commercial and Industrial. 18.5 15.3 12.7 8.7 7.8
Real Estate--
Construction............ 1.4 -- -- -- 2.1
Mortgage--Commercial.... 4.5 2.5 1.3 3.3 2.3
--Residential....... 7.8 2.9 1.9 1.9 1.1
Installment............... 25.1 25.8 28.1 28.9 13.3
Foreign................... 45.8 34.8 10.6 0.9 0.9
Lease Financing........... 0.2 0.7 0.5 0.4 0.4
-------- -------- -------- -------- --------
Total Charge-Offs..... 103.3 82.0 55.1 44.1 27.9
Recoveries of Loans
Previously Charged-Off
Commercial and Industrial. 14.0 2.8 16.4 21.8 6.1
Real Estate--
Construction............ 0.1 0.1 -- 0.7 --
Mortgage--Commercial.... 1.6 1.2 0.6 1.1 1.4
--Residential....... 0.6 0.2 1.0 0.4 0.1
Installment............... 7.6 6.4 6.3 4.7 3.3
Foreign................... 5.6 5.6 0.6 1.8 1.9
Lease Financing........... -- -- -- 0.6 1.0
-------- -------- -------- -------- --------
Total Recoveries...... 29.5 16.3 24.9 31.1 13.8
-------- -------- -------- -------- --------
Net Loan Charge-Offs........ (73.8) (65.7) (30.2) (13.0) (14.1)
Provisions Charged to
Operating Expense.......... 60.9 84.0 30.3 22.2 17.0
Other Net Additions/1/ ..... (4.2) 18.6 6.5 6.6 0.6
-------- -------- -------- -------- --------
Balance at End of Period.... $ 194.2 $ 211.3 $ 174.4 $ 167.8 $ 152.0
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to
Average Loans Outstanding.. 0.78% 0.70% 0.34% 0.16% 0.18%
Ratio of Reserve to Loans
Outstanding................ 2.05% 2.19% 1.88% 1.97% 1.90%
Details of the foreign
reserve for loan losses,
which are included in the
table above, are as
follows:
Beginning Balance........... $ 74.7 $ 31.0 $ 28.4 $ 15.1 $ 12.9
Charge-Offs............... 45.8 34.8 10.6 0.9 0.9
Recoveries................ 5.6 5.6 0.6 1.8 1.9
-------- -------- -------- -------- --------
Net Loan (Charge-Offs)
Recoveries............... (40.2) (29.2) (10.0) 0.9 1.0
Provisions Charged to
Operating Expense........ 42.2 54.2 17.6 5.8 0.6
Other Net Additions/1/ ... 1.7 18.7 (5.0) 6.6 0.6
-------- -------- -------- -------- --------
Ending Balance.............. $ 78.4 $ 74.7 $ 31.0 $ 28.4 $ 15.1
======== ======== ======== ======== ========
</TABLE>
- --------
/1/ Includes balance transfers, reserves acquired, and foreign currency
translation adjustments.
32
<PAGE>
Table 13 presents an allocation of the loan loss reserve for the last five
years. At year-end 1999, the reserve allocation for foreign loans was $78.4
million, compared to $86.6 million at December 31, 1998. On a percentage of
outstanding loan basis, reserves allocated to the foreign portfolio
represented 4.83% of outstandings at year-end 1999, which was marginally above
year-end 1998. For year-end 1999, the allocation of reserves to the commercial
real estate category increased to $17.3 million from $3.3 million at December
31, 1998, which reflects the rise in non-performing loans in this portfolio.
The lower reserve allocation in the C&I portfolio is partially attributed to a
decline in non-performing C&I loans. Lower reserves allocated to the
installment category is due to improvements in the risk characteristics of
this portfolio that reflects both a decline in delinquencies and charge-offs.
ALLOCATION OF RESERVE FOR LOAN LOSSES
TABLE 13
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
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............. $ 50.5 2.03% $ 60.8 2.36% $ 57.5 2.73% $ 60.0 3.32% $ 61.9 3.25%
Real Estate
Construction........... 5.0 1.52 1.0 0.33 4.2 1.50 4.5 1.91 4.2 2.00
Commercial............. 17.3 1.39 3.3 0.29 21.8 1.61 18.5 1.51 19.6 1.50
Residential............. 8.3 0.31 8.1 0.30 13.8 0.50 20.0 0.76 20.5 0.75
Installment............. 20.0 2.65 27.1 3.55 34.9 3.91 26.0 3.06 20.4 2.50
Foreign................. 78.4 4.83 86.6 4.76 31.0 1.93 28.4 1.89 15.1 1.90
Lease Financing......... 3.0 0.48 5.9 1.06 2.6 0.50 2.0 0.46 2.0 0.50
Not allocated........... 11.7 -- 18.5 -- 8.6 -- 8.4 -- 8.3 --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
$194.2 2.05% $211.3 2.19% $174.4 1.88% $167.8 1.97% $152.0 1.90%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
Market Risk
At Pacific Century, assets and liabilities are managed to maximize long term
risk adjusted returns to shareholders. Pacific Century's asset and liability
management process involves measuring, monitoring, controlling and managing
financial risks that can significantly impact the company's financial position
and operating results. Financial risks in the form of interest rate
sensitivity, foreign exchange fluctuations, liquidity exposure, 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 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.
33
<PAGE>
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 Pacific Century's normal business activities of making loans
and taking deposits. Many other factors also affect Pacific Century'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 Pacific Century's ongoing process to measure and monitor
interest rate risk is the utilization of a net interest income (NII)
simulation model. This model is used to estimate the amount that NII will
change over a one-year time horizon under various interest rate scenarios.
These estimates are based on numerous assumptions that include loan and
deposit volumes and pricing, prepayment speeds on mortgage-related assets, and
principal amortization and maturities on other financial instruments. While
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, 1999, 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 for 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 an
unfavorable short-term impact on NII in periods of rising interest rates.
Market Risk Exposure to Interest Rate Changes
Table 14
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Interest Rate Interest Rate Interest Rate
Change Change Change
(in basis points) (in basis points) (in basis points)
----------------- ----------------- -----------------
-200 +200 -200 +200 -200 +200
------ ---------- ------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Estimated Exposure as a
Percent of Net Interest
Income................. 1.4% (1.7)% 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, Pacific Century uses several approaches,
both on- and off-balance sheet, to modify its risk position. Approaches that
are used to shift balance sheet mix or alter the interest rate characteristics
of assets and liabilities include changing product pricing strategies,
modifying investment portfolio strategies, or using financial derivatives. The
use of financial derivatives, 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.
34
<PAGE>
On the other hand, Pacific Century is exposed to foreign currency exchange
rate changes from the capital invested in its foreign subsidiaries and
branches located throughout the South Pacific and Asian Rim. These investments
are designed to diversify Pacific Century's total balance sheet exposure.
While a portion of the capital investment in French Polynesia and New
Caledonia is offset by a borrowing denominated in euro or foreign exchange
currency hedge transactions, the remainder of these capital positions,
aggregating $87.6 million at December 31, 1999, is 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.
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, 1999 and 1998 Pacific Century's foreign
currency exposure from its net investment in subsidiaries and branch
operations that are denominated in a foreign currency as measured by the VAR.
Market Risk Exposure From Changes in Foreign Exchange Rates
Table 15
<TABLE>
<CAPTION>
December 31
-------------------------------------
1999 1998
------------------ ------------------
Book Value-at- Book Value-at-
Value/2/ Risk/1/ Value/2/ Risk/1/
-------- --------- -------- ---------
(in millions of dollars)
<S> <C> <C> <C> <C>
Net Investments in Foreign Subsidiaries
and Branches
Japanese Yen.......................... $ 9.4 $ 1.8 $ 9.6 $ 2.7
Korean Won............................ 34.3 4.2 44.2 7.9
Pacific Franc......................... 25.9 4.2 22.8 3.6
Other Currencies...................... 18.0 17.0 16.4 15.3
----- ----- ----- -----
Total............................... $87.6 $27.2 $93.0 $29.5
===== ===== ===== =====
</TABLE>
- --------
/1/ The average value-at-risk for the Japanese yen, Korean won, Pacific franc,
and other currencies was $2.0 million, $5.5 million, $4.7 million and
$15.3 million, respectively for the year ended December 31, 1999 and was
$2.6 million, $13.2 million, $4.1 million, and $14.0 million,
respectively, for the year ended December 31, 1998.
/2/ The book value of net investments in foreign subsidiaries and branches is
net of a $40 million and $46 million borrowing at December 31, 1999 and
1998, respectively, denominated in euro and foreign exchange hedge
transactions of $23 million and $26 million at December 31, 1999 and 1998,
respectively.
35
<PAGE>
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, Pacific Century
uses the VAR methodology described above. The VAR measurement for trading
activities as of year-end 1999 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. Pacific Century'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.
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 1999, Pacific Century issued commercial paper only in the Hawaii
marketplace.
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 $25 million, annually renewable line of credit
for working capital purposes. Fees are paid on the unused balance of the line.
During 1999, the line was not drawn upon.
Bank of Hawaii and First Savings are both members of the Federal Home Loan
Bank of Seattle. The FHLB provides these institutions with an additional
source for short and long-term funding.
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, 1999, there was $125 million outstanding
under this program represented by the issuance of subordinated notes in 1999.
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 1999, Pacific Century's shareholders' equity grew to $1.2
billion, an increase of 2.3% over year-end 1998. The source of growth in
shareholders' equity in 1999 included retention of earnings and issuance of
common stock under the dividend reinvestment plan and various stock-based
employee benefit plans.
36
<PAGE>
Offsetting these increases were cash dividends paid of $54.6 million and
treasury stock purchases of $21.8 million and unrealized valuation adjustments
of $43.6 million.
Pacific Century's regulatory capital ratios at year-end 1999 were: Tier 1
Capital Ratio of 10.28%, Total Capital Ratio of 13.22%, and Leverage Ratio of
8.31%. All three capital ratios exceeded the federal bank regulators' minimum
threshold levels for an institution to qualify as well capitalized. The
regulatory standards for well capitalized are as follows: Tier 1 Capital 6%;
Total Capital 10%; and the Leverage Ratio 5%. These standards represent
minimum 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.
As of December 31, 1999, $100 million of 8.25% Capital Securities that
mature in 2026 were outstanding. These securities qualify as Tier I Capital
for regulatory accounting purposes, but are classified as long-term debt in
the statement of condition. In addition, Pacific Century had subordinated debt
of $195.8 million at the end of 1999 that qualified as total capital for
regulatory purposes.
Over the past few years, Pacific Century has repurchased shares under
various stock repurchase programs in order to maintain its capital position at
a desired level. In 1999, Pacific Century's Board of Directors approved a
share repurchase program that authorizes the repurchase of up to 300,000
shares of common stock per quarter beginning in the fourth quarter of 1999.
During 1999's fourth quarter, Pacific Century repurchased approximately
271,000 shares under this program.
37
<PAGE>
Equity Capital
Table 16
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Year Ended December 31
Source of Shareholders'
Equity
Net Income............... $ 133.0 $ 107.0 $ 139.5 $ 133.1 $ 121.8
Dividends Paid........... (54.6) (52.8) (49.7) (47.4) (45.2)
Dividend Reinvestment
Program................. 4.0 5.4 6.8 6.8 7.1
Stock Issued for
Acquisition............. -- -- 108.4 -- --
Stock Repurchases........ (21.8) (7.3) (142.5) (70.4) (40.0)
Other/1/ ................ (33.9) 16.1 (11.4) (10.4) 43.9
--------- --------- --------- --------- --------
Increase in Shareholders'
Equity.................. $ 26.7 $ 68.4 $ 51.1 $ 11.7 $ 87.6
========= ========= ========= ========= ========
As of December 31
Shareholders' Equity..... $ 1,212.3 $ 1,185.6 $ 1,117.2 $ 1,066.1 $1,054.4
Add: 8.25% Capital
Securities of
Bancorp Hawaii
Capital Trust I. 100.0 100.0 100.0 100.0 --
Minority Interest... 4.4 7.4 5.8 9.3 --
Less: Intangibles...... 175.8 186.2 180.9 68.9 60.2
Unrealized Valuation
and Other
Adjustments........ (37.9) 3.6 5.5 2.2 11.3
--------- --------- --------- --------- --------
Tier I Capital........... 1,178.8 1,103.2 1,036.6 1,104.3 982.9
Allowable Reserve for
Loan Losses........... 143.9 147.2 139.2 131.1 120.2
Subordinated Debt...... 195.8 95.0 118.7 118.7 118.7
Investment in
Unconsolidated
Subsidiary............ (3.2) (2.5) (1.9) -- --
--------- --------- --------- --------- --------
Total Capital........ $ 1,515.3 $ 1,342.9 $ 1,292.6 $ 1,354.1 $1,221.8
========= ========= ========= ========= ========
Risk Weighted Assets..... $11,461.0 $11,708.5 $11,098.6 $10,452.1 $9,587.0
========= ========= ========= ========= ========
Key Capital Ratios
Growth in Common Equity.. 2.3% 6.1% 4.8% 1.1% 9.1%
Average Equity/Average
Assets Ratio............ 8.30% 7.81% 7.79% 8.05% 8.28%
Tier I Capital Ratio..... 10.28% 9.42% 9.34% 10.57% 10.25%
Total Capital Ratio...... 13.22% 11.47% 11.65% 12.96% 12.74%
Leverage Ratio........... 8.31% 7.48% 7.21% 7.98% 7.82%
</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.
38
<PAGE>
FOURTH QUARTER RESULTS AND OTHER MATTERS
Earnings in 1999's fourth quarter were $37.6 million, an increase of 7.4%
over the $35.0 million reported in the fourth quarter of 1998. Basic earnings
per share were $0.47 and $0.44 in the fourth quarter of 1999 and 1998,
respectively. Diluted earnings per share were $0.47 and $0.43 in the same
respective periods.
Net interest income on a tax equivalent basis totaled $143.2 million in the
fourth quarter of 1999, almost level with the same period in 1998. The net
interest margin in 1999's fourth quarter was 4.31%, compared to 4.15% in the
fourth quarter of 1998. This improvement primarily was driven by a 15 basis
points drop in the average rate on interest bearing liabilities for the
quarter from the same year earlier period. Additionally a 5 basis points rise
in the average yield on earning assets in 1999's fourth quarter relative to
the same period last year also contributed to the wider net interest margin.
In the fourth quarter of 1999, provision for loan losses was $20.9 million,
up from $13.0 million in the same year ago quarter. The current quarter loan
loss provision was less than net charge-offs of $36.8 million, that included
charge-offs of $19.5 million relative to a South Korean conglomerate. Certain
Asian borrowers have continued to experience difficulties arising from the
financial volatility in Asia. In 1998, Pacific Century increased its reserve
for loan losses primarily through a second quarter provision of $42.0 million
as a result of its evaluation of the inherent risk associated with the Asian
economic crisis.
Non-interest income in the final quarter of 1999 increased to $69.4 million
from $55.4 million in 1998's comparable period. During the current quarter the
disposition of two venture capital related assets contributed $4.3 million to
other income and $5.6 million to investment securities gains.
Non-interest expense totaled $131.1 million, relatively unchanged from
1998's fourth quarter and $2.0 million less than reported in 1999's third
quarter, exclusive of the restructuring charge. Large non-recurring items that
impacted fourth quarter 1999 non-interest expense included a $2.3 million
reduction in accruals for deferred compensation and post retirement medical
benefits, and approximately $2.3 million in increased one-time costs for
various other operating expense items.
Cost savings from the redesign are primarily reflected in compensation
expense, which after adjusting for one-time items, would have ended the
quarter at $60.9 million, down from $62.4 million in 1998's fourth quarter and
down from $64.2 million in 1999's third quarter.
CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS
TABLE 17
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
1999 1998
--------------------------- -----------------------------
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... $260.5 $255.0 $253.0 $258.0 $269.4 $278.9 $273.3 $267.0
Total Interest Expense.. 116.7 110.6 109.5 115.0 127.6 132.1 128.8 123.5
Net Interest Income..... 143.8 144.4 143.5 143.0 141.8 146.8 144.5 143.5
Provision for Loan
Losses................. 12.6 13.9 13.5 20.9 18.3 42.0 10.7 13.0
Investment Securities
Gains (Losses)......... 1.9 6.8 0.1 5.3 3.4 -- (0.5) 1.2
Non-Interest Income..... 59.3 56.8 71.3 64.1 49.5 49.8 54.1 54.2
Non-Interest Expense.... 134.9 132.1 155.6 131.1 121.7 151.7 136.2 131.1
------ ------ ------ ------ ------ ------ ------ ------
Income Before Taxes..... 57.5 62.0 45.8 60.4 54.7 2.9 51.2 54.8
Provision for Taxes..... 22.1 23.5 24.3 22.8 20.6 (0.2) 16.4 19.8
------ ------ ------ ------ ------ ------ ------ ------
Net Income.............. $ 35.4 $ 38.5 $ 21.5 $ 37.6 $ 34.1 $ 3.1 $ 34.8 $ 35.0
====== ====== ====== ====== ====== ====== ====== ======
Basic Earnings Per
Share.................. $ 0.44 $ 0.48 $ 0.27 $ 0.47 $ 0.43 $ 0.04 $ 0.43 $ 0.44
Diluted Earnings Per
Share.................. $ 0.44 $ 0.47 $ 0.27 $ 0.47 $ 0.42 $ 0.04 $ 0.43 $ 0.43
</TABLE>
39
<PAGE>
SUPPLEMENTARY DATA
MATURITY DISTRIBUTION, MARKET VALUE AND WEIGHTED-AVERAGE YIELD TO MATURITY OF
SECURITIES
TABLE 18
<TABLE>
<CAPTION>
AFTER
1
1 YEAR YEAR- AFTER 5
OR 5 YEARS- OVER APPROXIMATE
LESS YEARS 10 YEARS 10 YEARS TOTAL MARKET VALUE
------ ------ -------- -------- -------- ------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Maturity Distribution
Based on Amortized Cost
December 31, 1999
U.S. Treasury
Securities........... $ 26.0 $ -- $ -- $ -- $ 26.0 $ 26.0
U.S. Government
Agencies............. 15.9 -- -- -- 15.9 15.9
Obligations of States
and Political
Subdivisions......... 7.8 3.8 0.2 -- 11.8 12.4
Corporate Equity
Securities........... -- 0.3 -- 75.7 76.0 76.0
Mortgage-Backed
Securities/1/ ....... 18.6 2.4 6.6 589.9 617.5 608.3
Other................. 48.0 0.3 0.8 -- 49.1 49.1
Available for Sale
Securities/1/ ....... 46.9 81.9 91.8 2,393.9 2,614.5 2,542.2
------ ------ ------ -------- -------- --------
Total--December 31,
1999............... $163.2 $ 88.7 $ 99.4 $3,059.5 $3,410.8 $3,329.9
====== ====== ====== ======== ======== ========
--December 31,
1998............... $239.3 $184.7 $170.6 $3,072.0 $3,666.6 $3,686.5
====== ====== ====== ======== ======== ========
--December 31,
1997............... $668.6 $977.7 $105.0 $2,046.5 $3,797.8 $3,809.9
====== ====== ====== ======== ======== ========
Weighted-Average Yield
to Maturity/2/
U.S. Treasury
Securities........... 4.7% -- % -- % -- % 4.7%
U.S. Government
Agencies............. 5.8 -- -- -- 5.8
Obligations of States
and Political
Subdivisions......... 12.8 11.7 7.6 -- 12.4
Corporate Equity
Securities........... -- -- -- -- --
Mortgage-Backed
Securities........... 6.0 8.8 8.2 7.0 7.0
Other................. 15.9 3.1 3.5 -- 15.6
Available for Sale
Securities/3/ ....... 5.5 5.9 6.4 6.9 6.8
------ ------ ------ -------- --------
Total--December 31,
1999............... 8.9% 6.2% 6.5% 6.7% 6.8%
====== ====== ====== ======== ========
Tax Equivalent
Adjustment Amount...... $ 0.3 $ 0.2 $ 0.1 $ 0.1 $ 0.7
</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.
40
<PAGE>
AVERAGE ASSETS
TABLE 19
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------------- --------------- --------- --------- ---------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
--------- ----- --------- ----- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Bearing
Deposits............... $ 385.0 2.6% $ 508.8 3.4% $ 486.3 $ 579.9 $ 645.7
Investment Securities
--Held to Maturity.... 816.9 5.6 902.4 6.1 1,232.9 1,091.1 1,532.4
--Available for Sale.. 2,698.8 18.5 2,769.3 18.6 2,452.0 2,288.7 1,639.0
Funds Sold.............. 102.0 0.7 69.7 0.4 76.4 92.1 68.5
Loans................... 9,444.5 64.8 9,422.3 63.4 8,929.7 8,353.6 7,654.9
--------- ----- --------- ----- --------- --------- ---------
Total Earning
Assets............. 13,447.2 92.2 13,672.5 91.9 13,177.3 12,405.4 11,540.5
Non-Earning Assets...... 1,135.7 7.8 1,198.2 8.1 1,065.0 889.8 849.7
--------- ----- --------- ----- --------- --------- ---------
Total............... $14,582.9 100.0% $14,870.7 100.0% $14,242.3 $13,295.2 $12,390.2
========= ===== ========= ===== ========= ========= =========
</TABLE>
AVERAGE LOANS
TABLE 20
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Industrial............. $2,402.7 25.4% $2,258.3 24.0% $1,923.8 $1,784.0 $1,850.3
Real Estate
Construction.......... 318.1 3.4 284.0 3.0 264.6 229.6 164.2
Mortgage.............. 3,742.3 39.6 3,838.6 40.7 3,882.0 3,863.2 3,765.8
Installment............. 723.9 7.7 793.2 8.4 846.3 814.8 754.4
Foreign................. 1,702.2 18.0 1,752.6 18.6 1,540.3 1,253.7 746.0
Lease Financing......... 555.3 5.9 495.6 5.3 472.7 408.3 374.2
-------- ----- -------- ----- -------- -------- --------
Total............... $9,444.5 100.0% $9,422.3 100.0% $8,929.7 $8,353.6 $7,654.9
======== ===== ======== ===== ======== ======== ========
</TABLE>
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES/1/
TABLE 21
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------
DUE IN ONE DUE AFTER ONE DUE AFTER
YEAR OR LESS TO FIVE YEARS/2/ FIVE YEARS/2/ TOTAL
------------ ---------------- ------------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Commercial and Industrial. $1,245.5 $ 836.4 $ 411.1 $2,493.0
Real Estate--Construction. 168.9 96.4 63.6 328.9
Other Loans............... 890.1 1,457.5 2,926.3 5,273.9
Foreign Loans............. 941.5 313.4 366.9 1,621.8
-------- -------- -------- --------
Total................. $3,246.0 $2,703.7 $3,767.9 $9,717.6
======== ======== ======== ========
</TABLE>
- --------
/1/ Based on contractual maturities.
/2/ As of December 31, 1999, loans maturing after one year consisted of
$2,896.0 million with floating rates and $3,575.6 million with fixed
rates.
41
<PAGE>
AVERAGE DEPOSITS
TABLE 22
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------------- -------------- -------- -------- --------
AMOUNT MIX AMOUNT MIX AMOUNT AMOUNT AMOUNT
-------- ----- -------- ----- -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic
Non-Interest Bearing
Demand............... $1,652.6 17.7% $1,650.4 17.3% $1,516.8 $1,371.5 $1,391.6
Interest-Bearing
Demand............... 2,137.1 22.9 2,114.8 22.1 1,945.3 1,726.6 1,752.4
Regular Savings....... 723.9 7.8 783.9 8.2 865.5 937.0 1,058.5
Private Time
Certificates of
Deposit ($100,000 or
More)................ 948.9 10.2 941.7 9.9 848.1 719.2 581.5
Public Time
Certificates of
Deposit ($100,000 or
More)................ 94.3 1.0 86.5 0.9 205.9 310.6 89.3
Bearer Certificates of
Deposit.............. -- -- -- -- -- 1.3 5.0
All Other Time and
Savings Certificates. 1,516.2 16.3 1,752.5 18.4 1,804.7 1,433.9 1,164.1
-------- ----- -------- ----- -------- -------- --------
Total Domestic...... 7,073.0 75.9 7,329.8 76.8 7,186.3 6,500.1 6,042.4
-------- ----- -------- ----- -------- -------- --------
Foreign
Non-Interest Bearing
Demand............... 435.2 4.7 447.7 4.7 264.0 194.2 11.8
Time Due to Banks..... 641.4 6.9 596.1 6.2 718.7 733.5 652.7
Other Savings and
Time................. 1,165.7 12.5 1,176.1 12.3 1,079.0 745.0 329.5
-------- ----- -------- ----- -------- -------- --------
Total Foreign....... 2,242.3 24.1 2,219.9 23.2 2,061.7 1,672.7 994.0
-------- ----- -------- ----- -------- -------- --------
Total............... $9,315.3 100.0% $9,549.7 100.0% $9,248.0 $8,172.8 $7,036.4
======== ===== ======== ===== ======== ======== ========
</TABLE>
42
<PAGE>
INTEREST DIFFERENTIAL
TABLE 23
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 COMPARED TO 1998 1998 COMPARED TO 1997
------------------------- -----------------------
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................. $ (8.3) $ (3.4) $(11.7) $ 1.6 $ 2.0 $ 3.6
Investment Securities--
Held to Maturity
Taxable................. (6.3) (3.6) (9.9) (24.0) 9.9 (14.1)
Tax-Exempt.............. -- -- -- (0.1) -- (0.1)
Investment Securities--
Available for Sale....... (4.5) 1.6 (2.9) 19.9 (7.8) 12.1
Funds Sold................ 1.7 (0.1) 1.6 (0.3) 0.3 --
Loans, Net of Unearned
Income
Domestic................ 4.9 (31.2) (26.3) 30.5 16.6 47.1
Foreign................. (3.4) (9.4) (12.8) 15.3 (15.4) (0.1)
------ ------ ------ ----- ----- -----
Total Interest Income. $(15.9) $(46.1) $(62.0) $42.9 $ 5.6 $48.5
====== ====== ====== ===== ===== =====
Change in Interest Expense
Interest Bearing Deposits
Demand Deposits......... $ 0.6 $ (7.8) $ (7.2) $ 4.4 $(1.6) $ 2.8
Savings Deposits........ (1.4) (2.4) (3.8) (1.9) (1.1) (3.0)
Time Deposits........... (11.1) (11.0) (22.1) (4.2) (7.3) (11.5)
Deposits in Foreign
Offices................ 1.7 (14.1) (12.4) (1.2) 6.4 5.2
Short-Term Borrowings..... (3.0) (13.3) (16.3) 11.0 (5.3) 5.7
Long-Term Debt............ 0.6 1.0 1.6 (3.1) (0.5) (3.6)
------ ------ ------ ----- ----- -----
Total Interest
Expense.............. $(12.6) $(47.6) $(60.2) $ 5.0 $(9.4) $(4.4)
====== ====== ====== ===== ===== =====
Net Interest Differential
Domestic.................. $ 10.1 $ 0.2 $ 10.3 $19.8 $34.8 $54.6
Foreign................... (13.4) 1.3 (12.1) 18.1 (19.8) (1.7)
------ ------ ------ ----- ----- -----
Total Interest
Differential......... $ (3.3) $ 1.5 $ (1.8) $37.9 $15.0 $52.9
====== ====== ====== ===== ===== =====
</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.
43
<PAGE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA/1/
TABLE 24
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
At December 31
BALANCE SHEET TOTALS
Net Loans............. $ 9,280.8 $ 9,416.8 $ 9,114.3 $ 8,347.9 $ 7,853.0
Total Assets.......... 14,440.3 15,016.6 14,995.5 14,009.2 13,206.8
Deposits.............. 9,394.2 9,576.3 9,607.7 8,684.1 7,576.8
Long-Term Debt........ 727.7 585.6 705.8 932.1 1,063.4
Shareholders' Equity.. 1,212.3 1,185.6 1,117.2 1,066.1 1,054.4
For the Year Ended
December 31
OPERATING RESULTS
Total Interest Income. $ 1,026.5 $ 1,088.6 $ 1,039.8 $ 974.0 $ 892.6
Net Interest Income... 574.7 576.6 523.4 482.3 428.5
Provision for Loan
Losses............... 60.9 84.0 30.3 22.2 17.0
Net Income............ 133.0 107.0 139.5 133.1 121.8
Basic Earnings Per
Share................ $1.66 $1.33 $1.75 $1.63 $1.46
Diluted Earnings Per
Share................ $1.64 $1.32 $1.72 $1.62 $1.45
Common Dividends Paid
Per Share............ $0.68 $0.66 $0.63 $0.58 $0.54
TANGIBLE BASIS FINANCIAL
DATA/2/
Net Income............ $ 149.7 $ 121.7 $ 150.7 $ 141.3 $ 129.2
Basic Earnings Per
Share................ $1.86 $1.52 $1.89 $1.73 $1.55
Diluted Earnings Per
Share................ $1.85 $1.50 $1.86 $1.71 $1.54
NON-FINANCIAL DATA
Common Shareholders of
Record at Year-
End/3/ .............. 9,899 10,396 10,514 10,199 10,293
Weighted Average
Shares--Basic........ 80,298,725 80,228,424 79,794,011 81,595,728 83,325,878
Weighted Average
Shares--Diluted...... 81,044,558 81,142,144 80,946,170 82,424,524 84,054,913
</TABLE>
- --------
/1/ Comparisons between years is affected by business combinations. See Note A
to the Consolidated Financial Statements.
/2/ Tangible basis calculations exclude the effect of all intangibles including
goodwill, core deposit and trust intangibles, and other intangibles.
/3/ The number of common shareholders is based on the number of record holders.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Quarterly Results of Operations--See 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, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Honolulu, Hawaii
January 21, 2000
45
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest Income
Interest on Loans........................... $ 699,939 $ 737,276 $ 704,622
Loan Fees................................... 39,899 45,340 34,334
Income on Lease Financing................... 29,391 25,699 22,063
Interest and Dividends on Investment
Securities
Taxable................................... 57,809 67,717 81,845
Non-Taxable............................... 1,094 1,096 1,186
Income on Investment Securities Available
for Sale................................... 168,349 170,963 158,851
Interest on Deposits........................ 24,960 36,676 33,058
Interest on Security Resale Agreements...... 244 82 86
Interest on Funds Sold...................... 4,834 3,718 3,727
---------- ---------- ----------
Total Interest Income..................... 1,026,519 1,088,567 1,039,772
Interest Expense
Interest on Deposits........................ 261,184 306,700 313,164
Interest on Security Repurchase Agreements.. 92,175 121,445 115,461
Interest on Funds Purchased................. 41,677 26,720 23,805
Interest on Short-Term Borrowings........... 12,414 14,376 17,554
Interest on Long-Term Debt.................. 44,326 42,725 46,344
---------- ---------- ----------
Total Interest Expense.................... 451,776 511,966 516,328
---------- ---------- ----------
Net Interest Income........................... 574,743 576,601 523,444
Provision for Loan Losses..................... 60,915 84,014 30,338
---------- ---------- ----------
Net Interest Income After Provision for
Loan Losses.............................. 513,828 492,587 493,106
Non-Interest Income
Trust Income................................ 60,700 55,879 52,237
Service Charges on Deposit Accounts......... 34,267 35,459 29,354
Fees, Exchange and Other Service Charges.... 88,838 77,881 67,081
Other Operating Income...................... 67,720 38,446 36,043
Investment Securities Gains................. 14,056 4,086 3,074
---------- ---------- ----------
Total Non-Interest Income................. 265,581 211,751 187,789
Non-Interest Expense
Salaries.................................... 198,743 194,522 173,159
Pensions and Other Employee Benefits........ 55,343 56,003 53,535
Net Occupancy Expense....................... 47,893 46,799 46,725
Net Equipment Expense....................... 48,674 49,009 38,524
Other Operating Expense..................... 180,107 174,546 149,464
Restructuring Charge........................ 22,478 19,400 --
Minority Interest........................... 485 446 1,488
---------- ---------- ----------
Total Non-Interest Expense................ 553,723 540,725 462,895
---------- ---------- ----------
Income Before Taxes........................... 225,686 163,613 218,000
Provision for Taxes........................... 92,729 56,649 78,512
---------- ---------- ----------
Net Income................................ $ 132,957 $ 106,964 $ 139,488
========== ========== ==========
Basic Earnings Per Share...................... $ 1.66 $ 1.33 $ 1.75
Diluted Earnings Per Share.................... $ 1.64 $ 1.32 $ 1.72
Basic Weighted Average Shares................. 80,298,725 80,228,424 79,794,011
Diluted Weighted Average Shares............... 81,044,558 81,142,144 80,946,170
</TABLE>
See Notes to Consolidated Financial Statements.
46
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
----------- -----------
(IN THOUSANDS OF
DOLLARS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Interest-Bearing Deposits............................ $ 278,473 $ 453,527
Investment Securities
--Held to Maturity (Market Value of $787,720 in 1999
and $668,068 in 1998).............................. 796,322 652,802
--Available for Sale................................ 2,542,232 3,018,403
Funds Sold........................................... 52,740 45,683
Loans................................................ 9,717,556 9,854,000
Unearned Income..................................... (242,503) (225,915)
Reserve for Loan Losses............................. (194,205) (211,276)
----------- -----------
Net Loans.......................................... 9,280,848 9,416,809
----------- -----------
Total Earning Assets............................... 12,950,615 13,587,224
Cash and Non-Interest Bearing Deposits............... 639,895 564,243
Premises and Equipment............................... 271,728 293,591
Customers' Acceptance Liability...................... 7,236 8,227
Accrued Interest Receivable.......................... 78,974 85,485
Other Real Estate.................................... 4,576 5,648
Intangibles, Including Goodwill...................... 205,904 216,106
Other Assets......................................... 281,387 256,039
----------- -----------
Total Assets....................................... $14,440,315 $15,016,563
=========== ===========
LIABILITIES
Domestic Deposits
Demand--Non-Interest Bearing........................ $ 1,676,425 $ 1,745,747
--Interest Bearing................................. 2,076,358 2,385,285
Savings............................................. 700,720 740,378
Time................................................ 2,761,650 2,637,746
Foreign Deposits
Demand--Non-Interest Bearing........................ 401,613 489,672
Time Due to Banks................................... 597,675 685,137
Other Savings and Time.............................. 1,179,777 892,377
----------- -----------
Total Deposits..................................... 9,394,218 9,576,342
Securities Sold Under Agreements to Repurchase....... 1,490,655 2,008,399
Funds Purchased...................................... 839,962 942,062
Short-Term Borrowings................................ 458,962 356,822
Bank's Acceptances Outstanding....................... 7,236 8,227
Accrued Retirement Expense........................... 40,360 39,811
Accrued Interest Payable............................. 64,588 55,694
Accrued Taxes Payable................................ 85,022 114,443
Minority Interest.................................... 4,435 7,394
Other Liabilities.................................... 114,890 136,159
Long-Term Debt....................................... 727,657 585,616
----------- -----------
Total Liabilities.................................. 13,227,985 13,830,969
----------- -----------
SHAREHOLDERS' EQUITY
Common Stock ($.01 par value):
authorized 500,000,000 shares; issued/outstanding;
December 1999--80,550,728/80,036,417 and
December 1998--80,512,372/80,325,998................ 806 805
Capital Surplus...................................... 345,851 342,932
Accumulated Other Comprehensive Income............... (66,106) (22,476)
Retained Earnings.................................... 942,177 867,852
Treasury Stock, at Cost (514,311 shares in 1999 and
186,374 shares in 1998)............................. (10,398) (3,519)
----------- -----------
Total Shareholders' Equity......................... 1,212,330 1,185,594
----------- -----------
Total Liabilities and Shareholders' Equity......... $14,440,315 $15,016,563
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
47
<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,
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)
Net Income.............. 132,957 -- -- -- 132,957 -- $132,957
Other Comprehensive
Income, Net of Tax
Investment Securities,
Net of
Reclassification
Adjustment............ (44,803) -- -- (44,803) -- -- (44,803)
Foreign Currency
Translation
Adjustment............ 1,154 -- -- 1,154 -- -- 1,154
Pension Liability
Adjustment............ 19 -- -- 19 -- -- 19
--------
Total Comprehensive
Income.............. $ 89,327
========
Common Stock Issued
57,249 Profit
Sharing Plan.......... 1,096 -- 4 -- (71) 1,163
501,929 Stock Option
Plan.................. 8,616 -- 2,620 -- (3,651) 9,647
198,851 Dividend
Reinvestment Plan..... 4,032 -- 142 -- (270) 4,160
7,199 Directors'
Restricted
Shares and
Deferred
Compensation
Plan............ 154 1 153 -- -- --
Treasury Stock
Repurchased............ (21,849) -- -- -- -- (21,849)
Cash Dividends Paid..... (54,640) -- -- -- (54,640) --
---------- -------- -------- -------- -------- --------
Balance at December 31,
1999................... $1,212,330 $ 806 $345,851 $(66,106) $942,177 $(10,398)
========== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
48
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- ---------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating Activities/1/
Net Income.................................... $132,957 $ 106,964 $139,488
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses................... 60,915 84,014 30,338
Depreciation and Amortization............... 61,503 55,539 47,268
Deferred Income Taxes....................... (15,593) (27,118) (1,539)
Realized Gains on Investment Securities
Available for Sale......................... (13,695) (4,444) (2,939)
Amortization of Deferred Lease Income....... (29,391) (32,470) (30,505)
Amortization of Deferred Loan Fee Income.... (17,509) (17,169) (12,210)
Decrease (Increase) in Interest Receivable.. 6,644 10,740 (5,757)
Increase (Decrease) in Interest Payable..... 8,795 (3,315) (13,193)
Decrease (Increase) in Other Assets......... (25,676) (18,946) 16,918
Increase (Decrease) in Other Liabilities.... (12,762) 44,939 (38,497)
-------- ---------- --------
Net Cash Provided by Operating Activities..... 156,188 198,734 129,372
-------- ---------- --------
Investing Activities
Proceeds from Redemptions of Investment
Securities Held to Maturity.................. 212,739 763,158 219,216
Purchases of Investment Securities Held to
Maturity..................................... (356,258) (195,745) (127,706)
Proceeds from Sales of Investment Securities
Available for Sale........................... 651,532 1,993,405 714,742
Proceeds from Redemptions of Investment
Securities Available for Sale................ 615,941 399,426 195,233
Purchases of Investment Securities Available
for Sale..................................... (852,255) (2,825,677) (981,411)
Net Decrease (Increase) in Interest-Bearing
Deposits Placed in Other Banks............... 181,554 (90,628) 295,031
Decrease (Increase) in Funds Sold............. (7,057) 34,774 92,663
Decrease (Increase) in Loans, Net............. 141,689 (113,925) (283,536)
Purchases of Premises and Equipment........... (21,511) (43,390) (27,995)
Proceeds from Sale of Premises and Equipment.. 2,117 13,032 --
Purchases, Net of Cash and Non-Interest
Bearing Deposits Acquired:
Triad Insurance Agency, Inc................. (2,183) -- --
Additional Interest in Bank of Hawaii
Nouvelle Caledonie......................... (642) -- --
Additional Interest in Banque de Tahiti..... (633) -- --
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................................... 565,033 (59,243) 350,409
-------- ---------- --------
Financing Activities
Net Decrease in Demand, Savings, and Time
Deposits..................................... (207,904) (302,296) (72,506)
Proceeds from Lines of Credit and Long-Term
Debt......................................... 434,126 190,117 104,000
Principal Payments on Lines of Credit and
Long-Term Debt............................... (292,215) (311,333) (330,354)
Net Increase (Decrease) in Short-Term
Borrowings................................... (518,139) 88,128 233,295
Proceeds from Sale of Common Stock............ 13,898 19,223 16,376
Stock Repurchased............................. (21,849) (7,314) (142,479)
Cash Dividends................................ (54,640) (52,776) (49,725)
-------- ---------- --------
Net Cash Used by Financing Activities......... (646,723) (376,251) (241,393)
-------- ---------- --------
Effect of Exchange Rate Changes on Cash....... 1,154 5,671 (24,277)
-------- ---------- --------
Increase (Decrease) in Cash and Non-
Interest Bearing Deposits................ 75,652 (231,089) 214,111
-------- ---------- --------
Cash and Non-Interest Bearing Deposits at
Beginning of Year............................ 564,243 795,332 581,221
-------- ---------- --------
Cash and Non-Interest Bearing Deposits at
End of Year.............................. $639,895 $ 564,243 $795,332
======== ========== ========
</TABLE>
- --------
/1/ During the years ended December 31, 1999, 1998 and 1997, Pacific Century
Financial Corporation made interest payments of $442,882,000, $513,784,000
and $528,361,000, respectively, and paid income taxes of $122,150,000,
$94,298,000 and $81,404,000, respectively.
See Notes to Consolidated Financial Statements.
49
<PAGE>
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 accounting principles generally accepted in the United
States and general practices within the banking industry. The preparation of
financial statements in conformity with these 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 1999 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, F.S.A. (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 in consolidation and minority interests have been recognized.
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 July 1999, the Financial Accounting Standards Board issued SFAS No. 137
"Deferral of the Effective Date of SFAS No. 133," that delays the effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000. SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
standardizes the accounting for derivative instruments by requiring the
recognition of those instruments as assets or liabilities measured at fair
value in the statement of financial condition. Gains or losses resulting from
changes in the fair values of derivatives would be accounted for depending on
the use of the derivatives and whether they qualify for hedge accounting. In
order to qualify for hedge accounting, the hedging relationship must be highly
effective
50
<PAGE>
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. 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 Charges
In the third quarter of 1999, Pacific Century recorded a restructuring
charge of $22.5 million in connection with a redesign program to enhance
revenues, improve efficiencies and reduce expenses. The implementation phase
of this project will cover the twelve month period ending September 30, 2000.
Included in the restructuring charge are direct and incremental costs
associated with the redesign consisting of accruals for staff reduction of
$6.1 million and occupancy and equipment of $0.5 million. In addition, the
restructuring charge included period costs of $15.9 million that were directly
related to completing the project. Staffing costs relate to projected
severance payments associated with the termination of exempt employees.
Severance amounts are determined based on the redesign severance payment
program and are paid out at time of termination. The occupancy and equipment
portion consists of estimated lease termination costs and losses on the
disposal of fixed assets. Project costs include costs relative to the
assessment phase of the redesign project.
At December 31, 1999, the restructuring accrual balance was $4.3 million, of
which $3.8 million related to staffing. In 1999 payments were made relative to
all of the project costs. Pacific Century believes the restructuring accrual
as of December 31, 1999 remains adequate to complete the planned initiatives.
In the second quarter of 1998, Pacific Century recognized a $19.4 million
restructuring charge in connection with its strategic actions to improve
efficiencies through consolidating subsidiaries, closing branches, and
outsourcing activities. The restructuring charge included expected direct and
incremental costs associated with termination of lease obligations, disposal
of premises and equipment, staff reduction, and data processing and other
costs. Details of the 1998 restructuring charge follow:
<TABLE>
<CAPTION>
PREMISES
LEASE AND STAFF DATA PROCESSING
TERMINATION EQUIPMENT REDUCTION AND OTHER TOTAL
----------- --------- --------- --------------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
1998 Restructuring
Charge................. $ 9,084 $ 5,437 $ 1,614 $3,265 $19,400
Accrual Utilized........ (1,239) (4,831) (1,079) (2,641) (9,790)
------- ------- ------- ------ -------
Balance at December 31,
1998................... 7,845 606 535 624 9,610
Transfers............... (1,782) 2,063 -- (281) --
Accrual Utilized........ (5,929) (2,669) (535) (343) (9,476)
Adjustment.............. (134) -- -- -- (134)
------- ------- ------- ------ -------
Balance at December 31,
1999................... $ -- $ -- $ -- $ -- $ --
======= ======= ======= ====== =======
</TABLE>
Acquisitions
In January 1999, Pacific Century acquired Triad Insurance Agency, Inc.
(Triad), a Hawaii-based property/casualty insurance agency. In Hawaii, Triad
represents a number of large U.S. property/casualty insurance companies for
whom it acts as a servicing agent. The merger, accounted for as a purchase,
has expanded Pacific Century's range of financial services offered to
customers. Goodwill resulting from the acquisition of approximately $4 million
is being amortized over 15 years on a straight-line basis.
In August 1999, Pacific Century concluded the transaction to increase its
ownership by acquiring 5.8 million shares, or approximately 10%, of the
outstanding shares of the Bank of Queensland Limited in Australia. This
transaction is in addition to a 1998 purchase of 5.4 million convertible notes
of the Bank of Queensland Limited.
51
<PAGE>
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 August 1998,
Pacific Century merged its two U.S. Mainland operations, CUB and Pacific
Century Bank, located in Arizona, into one nationally-chartered entity,
Pacific Century Bank, N.A. based in Southern California.
In March 1997, Pacific Century Bank, N.A. 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.
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 conjunction with these acquisitions, the following table discloses assets
acquired and liabilities assumed for the years ended December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Assets Acquired............................ $38,393 $321,081 $1,239,616
Cash and Shares Paid for Capital Stock..... (6,806) (33,412) (209,023)
------- -------- ----------
Liabilities Assumed........................ $31,587 $287,669 $1,030,593
======= ======== ==========
</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 $5,360,000, $7,633,000
and $10,612,000 in 1999, 1998 and 1997, respectively.
Cash and Non-Interest Bearing Deposits
For purposes of reporting cash flows, cash and cash equivalents include cash
and non-interest bearing deposits, which consist of amounts due from other
financial institutions as well as in-transit clearings. Under the terms of the
Depository Institutions Deregulation and Monetary Control Act, Pacific Century
is required to place reserves with the Federal Reserve Bank based on the
amount of deposits held. During 1999 and 1998, the average amount of these
reserve balances was $137,008,000 and $133,316,000, 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 1999 and 1998, the unamortized
capitalized origination costs totaled
52
<PAGE>
$648,000 and $1,167,000, respectively. These costs are being amortized over
the anticipated life of the cards, currently five years.
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 outstanding. For the years ended
December 31, 1999, 1998 and 1997 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 for
1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARES
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Denominator for Basic EPS................ 80,298,725 80,228,424 79,794,011
Dilutive Effect of Stock Options......... 745,833 913,720 1,152,159
---------- ---------- ----------
Denominator for Diluted EPS.............. 81,044,558 81,142,144 80,946,170
========== ========== ==========
</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
Intangible assets include goodwill and identifiable intangible assets such
as core deposits resulting from acquisitions accounted for under the purchase
method and certain servicing assets. Goodwill and core intangibles are being
amortized using the straight-line method over periods of 15 to 25 years. These
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Amortization of goodwill and core intangibles are included in other operating
expense and totaled $16,229,000, $15,614,000 and $12,668,000 in 1999, 1998 and
1997, respectively. As of December 31, 1999 and 1998, the unamortized balance
of these intangibles were $190,693,000 and $204,354,000, respectively.
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
53
<PAGE>
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.
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 1999, 1998 and 1997, 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.
54
<PAGE>
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 $8,345,000 and $2,318,000 as of December 31, 1999 and 1998, respectively.
During 1999, 1998 and 1997, the net gain (loss) from the trading securities
portfolio was $361,000, $(358,000) and $1,612,000, respectively, and is
recognized as a component of investment securities gains in the income
statement. Income from trading securities was $247,000, $220,000 and $60,000
during 1999, 1998 and 1997, 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, and abandoned bank
premises. These properties are carried at the lower of cost or fair value
based on current appraisals less selling costs. Losses arising at the time of
acquiring such property are charged against the reserve for loan losses.
Subsequent declines in property value are recognized through charges to
operating expense.
Premises and Equipment
Premises and equipment are stated at cost less allowances for depreciation
and amortization. Depreciation is computed using the straight-line method over
lives of two to fifty years for premises and improvements, and three to ten
years for equipment.
Reserve for Loan Losses
The reserve for loan losses is established through provisions that are
charged against income. Loans deemed to be uncollectible are charged against
the reserve for loan losses, and subsequent recoveries, if any, are credited
to the reserve.
The reserve for loan losses is maintained at a level believed adequate by
management to absorb estimated inherent 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 expected cash flows that may be
susceptible to significant changes.
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.
55
<PAGE>
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 1999, 1998 and 1997.
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, 1999
Securities Held to Maturity:
Restricted Equity Securities...... $ 76,002 $ 6 $ -- $ 76,008
Debt Securities Issued by the
U.S. Treasury and Agencies....... 41,981 2 (42) 41,941
Debt Securities Issued by State
and Municipalities of the United
States........................... 11,852 582 -- 12,434
Debt Securities Issued by Foreign
Governments...................... 45,725 17 -- 45,742
Mortgage-Backed Securities........ 617,455 6,239 (15,406) 608,288
Other Debt Securities............. 3,307 -- -- 3,307
---------- ------- -------- ----------
Total........................... $ 796,322 $ 6,846 $(15,448) $ 787,720
========== ======= ======== ==========
Securities Available for Sale:
Equity Securities................. $ 29,300 $ -- $ (4,474) $ 24,826
Debt Securities Issued by the
U.S. Treasury and Agencies....... 185,613 1,407 (1,521) 185,499
Debt Securities Issued by State
and Municipalities of the United
States........................... 15,076 75 (104) 15,047
Debt Securities Issued by Foreign
Governments...................... 1,029 -- -- 1,029
Mortgage-Backed Securities........ 2,356,163 5,624 (72,972) 2,288,815
Other Debt Securities............. 27,364 -- (348) 27,016
---------- ------- -------- ----------
Total........................... $2,614,545 $ 7,106 $(79,419) $2,542,232
========== ======= ======== ==========
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
========== ======= ======== ==========
</TABLE>
56
<PAGE>
The following presents an analysis of the contractual maturities of the
investment securities portfolio as of December 31, 1999:
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Securities Held to Maturity
Due in One Year or Less............................. $ 97,765 $ 97,909
Due After One Year Through Five Years............... 4,096 4,508
Due After Five Years Through Ten Years.............. 1,004 1,007
---------- ----------
102,865 103,424
Mortgage-Backed Securities.......................... 617,455 608,288
Restricted Equity Securities........................ 76,002 76,008
---------- ----------
$ 796,322 $ 787,720
========== ==========
Securities Available for Sale
Due in One Year or Less............................. $ 46,929 $ 46,842
Due After One Year Through Five Years............... 81,847 80,490
Due After Five Years Through Ten Years.............. 26,006 25,866
Due After Ten Years................................. 74,300 75,393
---------- ----------
229,082 228,591
Mortgage-Backed Securities.......................... 2,356,163 2,288,815
Equity Securities................................... 29,300 24,826
---------- ----------
$2,614,545 $2,542,232
========== ==========
</TABLE>
Proceeds from sales and maturities of investment securities available for
sale were $1,267,473,000, $2,392,831,000 and $909,975,000 in 1999, 1998 and
1997, respectively. Gross gains of $16,562,000 and gross losses of $2,867,000
were realized with respect to 1999 sales. Taxes related to 1999 gains and
losses were $5,627,000. The cumulative investment securities valuation reserve
was $43,065,000 (net of taxes) as of December 31, 1999.
Investment securities carried at $3,090,325,000 and $3,324,126,000 were
pledged to secure deposits of certain public (governmental) entities,
repurchase agreements and swap agreements at December 31, 1999 and 1998,
respectively. The December 31, 1999 amount included investment securities with
a carrying value of $1,649,665,000 and a market value of $1,611,101,000 which
were pledged as collateral for repurchase agreements.
57
<PAGE>
NOTE C--LOANS
Loans consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Domestic Loans
Commercial and Industrial............................ $2,492,984 $2,579,726
Real Estate
Construction--Commercial........................... 315,072 276,260
--Residential................................. 13,767 23,527
Mortgage--Commercial............................... 1,244,809 1,139,125
--Residential.................................. 2,645,441 2,699,422
Installment.......................................... 756,078 763,036
---------- ----------
Total Domestic Loans............................... 7,468,151 7,481,096
Foreign Loans.......................................... 1,621,849 1,818,473
---------- ----------
Subtotal........................................... 9,090,000 9,299,569
---------- ----------
Lease Financing
Direct............................................... 304,109 266,863
Leveraged............................................ 323,447 287,568
---------- ----------
Total Lease Financing.............................. 627,556 554,431
---------- ----------
Total Loans........................................ $9,717,556 $9,854,000
========== ==========
</TABLE>
Commercial and mortgage loans totaling $837,519,000 and $932,467,000 were
pledged to secure certain public deposits and Federal Home Loan Bank advances
at December 31, 1999 and 1998, respectively.
Included in the Mortgage--Residential category were $136,097,000 and
$259,507,000 of available for sale loans as of December 31, 1999 and 1998,
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>
1999 1998
------- -------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C>
Balance at Beginning of Year............................... $11,752 $ 6,817
Originated Mortgage Servicing Rights....................... 5,303 4,677
Purchased Servicing Rights................................. 1,366 2,027
Amortization............................................... (3,206) (1,769)
------- -------
Balance at End of Year..................................... $15,215 $11,752
======= =======
Fair Value at End of Year.................................. $44,258 $22,924
======= =======
</TABLE>
As of December 31, 1999 and 1998, Pacific Century's loan servicing portfolio
totaled $2,471,743,000 and $2,046,299,000, respectively.
Pacific Century's lending activities are concentrated in its primary
geographic markets of Hawaii, the U.S. Mainland, Asia, and the West and South
Pacific.
Certain directors and executive officers of Pacific Century, its subsidiary
companies, companies in which they are principal owners, and trusts in which
they are involved, have loans with Pacific Century subsidiaries. These loans
were made in the ordinary course of business at normal credit terms, including
interest rate and collateral requirements. Such loans at December 31, 1999 and
1998 amounted to $22,429,000 and $19,813,000,
58
<PAGE>
respectively. During 1999, the activity in these loans included new borrowings
of $8,193,000, repayments of $5,174,000, and other changes of $403,000. 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>
1999 1998 1997
--------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance at Beginning of Year................. $ 211,276 $174,362 $167,795
Charge-Offs.................................. (103,267) (82,005) (55,132)
Recoveries................................... 29,440 16,336 24,906
--------- -------- --------
Net Charge-Offs............................ (73,827) (65,669) (30,226)
--------- -------- --------
Provision Charged to Operations.............. 60,915 84,014 30,338
Reserves Acquired............................ -- 13,636 12,372
Foreign Currency Valuation Adjustments and
Other....................................... (4,159) 4,933 (5,917)
--------- -------- --------
Balance at End of Year....................... $ 194,205 $211,276 $174,362
========= ======== ========
</TABLE>
The following table presents information on impaired loans as of December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Recorded Investment in Impaired Loans Not
Requiring a Reserve for Loan Losses............. $ 29,160 $ 24,635
Recorded Investment in Impaired Loans Requiring a
Reserve for Loan Losses......................... 52,047 41,423
------------ ------------
Recorded Investment in Impaired Loans............ $ 81,207 $ 66,058
============ ============
Reserve for Losses on Impaired Loans............. $ 14,054 $ 20,313
Average Recorded Investment in Impaired Loans
During the Year................................. $ 64,021 $ 18,872
</TABLE>
NOTE D--PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
December 31, 1999
Premises.................................... $321,128 $(129,201) $191,927
Capital Leases.............................. 4,464 (1,250) 3,214
Equipment................................... 231,585 (154,998) 76,587
-------- --------- --------
$557,177 $(285,449) $271,728
======== ========= ========
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
======== ========= ========
</TABLE>
Depreciation and amortization (including capital lease amortization)
included in non-interest expense were $42,068,000, $38,156,000 and $33,641,000
in 1999, 1998 and 1997, respectively.
59
<PAGE>
Pacific Century leases certain branch premises and data processing
equipment. Most of the leases for premises 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 2007.
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, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
2000....................................................... $ 7 $ 11,823
2001....................................................... 7 10,113
2002....................................................... 7 8,865
2003....................................................... 605 8,008
2004....................................................... 605 9,734
Thereafter................................................. 33,714 84,851
------ --------
Total Minimum Lease Payments............................... 34,945 $133,394
========
Amounts Representing Interest.............................. 27,712
------
Present Value of Net Minimum Lease Payments................ $7,233
======
</TABLE>
Minimum future rentals receivable under subleases for noncancelable
operating leases at December 31, 1999, amounted to $3,299,000.
Rental expense for all operating leases for the years ended December 31,
1999, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Minimum Rentals................................... $21,867 $22,269 $23,088
Sublease Rental Income............................ (1,331) (1,244) (544)
------- ------- -------
$20,536 $21,025 $22,544
======= ======= =======
</TABLE>
NOTE E--DEPOSITS
Interest on deposit liabilities for the years ended December 31, 1999, 1998
and 1997 consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Domestic Interest-Bearing Demand Accounts........ $ 48,512 $ 55,735 $ 52,912
Domestic Savings Accounts........................ 14,682 18,454 21,444
Domestic Time Accounts........................... 123,325 145,431 156,988
Foreign Deposits................................. 74,665 87,080 81,820
-------- -------- --------
$261,184 $306,700 $313,164
======== ======== ========
</TABLE>
Time deposits with balances of $100,000 or more totaled $1,831,544,000 at
December 31, 1999. Of this amount, $93,287,000 consisted of deposits of public
(governmental) entities, which require collaterization by acceptable
securities. The majority of deposits in the foreign category were in
denominations of $100,000 or more.
60
<PAGE>
Maturities of time deposits of $100,000 or more at December 31, 1999, are
summarized as follows:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
---------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Under 3 Months.......................................... $ 459,179 $502,438
3 to 6 Months........................................... 311,853 53,597
7 to 12 Months.......................................... 321,535 76,378
Greater than 1 to 2 Years............................... 43,568 24,135
Greater than 2 to 3 Years............................... 7,960 15,406
Greater than 3 to 4 Years............................... 4,464 1,329
Greater than 4 to 5 Years............................... 2,778 994
Greater than 5 Years.................................... 1,043 4,887
---------- --------
$1,152,380 $679,164
========== ========
</TABLE>
NOTE F--SHORT-TERM BORROWINGS
Details of short-term borrowings for 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
SECURITIES
SOLD UNDER OTHER
FUNDS AGREEMENTS COMMERCIAL SHORT-TERM
PURCHASED TO REPURCHASE PAPER BORROWINGS
---------- ------------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
1999
Amounts Outstanding at
December 31................. $ 839,962 $1,490,655 $ 97,319 $361,643
Average Amount Outstanding
During Year................. 821,755 1,868,485 111,894 212,676
Maximum Amount Outstanding at
Any Month End............... 1,351,672 2,100,987 172,290 361,643
Weighted Average Interest
Rate During Year/1/ ........ 5.07% 4.93% 4.81% 3.31%
Weighted Average Interest
Rate on Balance Outstanding
at End of Year.............. 4.62% 5.37% 5.00% 5.46%
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%
</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
61
<PAGE>
and are delivered to and held in collateral accounts with third party
trustees. At December 31, 1999, the weighted average contractual maturity of
these agreements was 182 days and consisted of transactions with public
(governmental) entities, primarily the State of Hawaii ($0.9 billion) and
local municipalities ($0.5 billion). A schedule of maturities of repurchase
agreements follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999
-------------
(IN THOUSANDS
OF DOLLARS)
<S> <C>
Overnight...................................................... $ 2,415
Less than 30 days.............................................. 358,072
30 to 90 days.................................................. 432,768
Over 90 days................................................... 697,400
----------
$1,490,655
==========
</TABLE>
A line of credit totaling $25,000,000 is maintained for working capital
purposes. At December 31, 1999 there was no amount drawn on this line. Fees
related to this line were $26,000 in 1999.
At December 31, 1999, other short-term borrowings consisted mainly of
Federal Home Loan Bank advances and Treasury Tax and Loan balances. The
Federal Home Loan Bank advances totaling $150.0 million bear interest at rates
from 5.77% to 5.80% and mature within 90 days. 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.
NOTE G--LONG-TERM DEBT
Amounts outstanding as of December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
8.25% Capital Securities.................................. $100,000 $100,000
Privately Placed Notes.................................... 90,000 90,000
Federal Home Loan Bank Advances........................... 246,545 223,045
Subordinated Notes........................................ 243,381 118,801
Foreign Debt.............................................. 39,537 46,007
Capitalized Lease Obligations............................. 7,301 6,750
Other Long-Term Debt...................................... 893 1,013
-------- --------
$727,657 $585,616
======== ========
</TABLE>
The $100 million 8.25% Capital Securities (the Securities) were issued in
1996 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
62
<PAGE>
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.
Privately placed notes issued by Pacific Century totaled $90 million at
December 31, 1999. No new notes were issued in 1999. 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 5.38% to
8.00% and mature from 2000 through 2005. At December 31, 1999, loans totaling
$475,854,000 were pledged to secure these advances along with all FHLB stock.
Subordinated notes issued by Bank of Hawaii include $118,846,000 issued in
1993 and $124,535,000 issued in 1999 that mature in 2003 and 2009,
respectively. These notes bear a fixed interest rate of 6.875%.
Foreign debt is comprised of a private placement borrowing denominated in
euro. This debt has a fixed interest rate of 3.28% and matures in 2001.
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.
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 provided that at any
time the aggregate amount outstanding does not exceed $1 billion. At December
31, 1999, there were no outstanding balances under this program.
Long-term debt maturities for the five years succeeding December 31, 1999,
are $38,875,000 in 2000, $210,537,000 in 2001, $12,670,000 in 2002,
$126,846,000 in 2003 and $96,000,000 in 2004.
Interest paid on long-term debt in 1999, 1998 and 1997 totaled $41,200,000,
$43,820,000 and $57,144,000, respectively.
NOTE H--SHAREHOLDERS' EQUITY
Certain of Pacific Century's consolidated banking subsidiaries (including
Bank of Hawaii, Pacific Century Bank, N.A., and First Savings) are subject to
federal regulatory restrictions that limit cash dividends and loans to Pacific
Century. As of December 31, 1999, approximately $530,500,000 of undistributed
earnings of Pacific Century's consolidated subsidiaries were available for
distribution to Pacific Century without prior regulatory approval.
In evaluating capital adequacy, federal regulators require bank holding
companies and insured depository institutions to maintain three capital ratios
at specific minimum levels. Tier 1 Capital (common shareholders' 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 requires
federal banking regulators to take "prompt corrective action" with respect to
depository institutions that do not meet minimum capital requirements. For
purposes of applying the prompt corrective action framework, federal bank
regulators group
63
<PAGE>
institutions into five categories based on their capital ratios: "well
capitalized," "adequately capitalized," "under capitalized," "significantly
undercapitalized" and "critically undercapitalized." Institutions that fail to
meet the applicable capital requirements are subject to increased regulatory
monitoring and certain other enforcement actions that could include
restricting dividend payments.
As of December 31, 1999, 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,
1999 and 1998:
<TABLE>
<CAPTION>
WELL-CAPITALIZED BANK OF PACIFIC CENTURY FIRST
MINIMUM RATIO PACIFIC CENTURY HAWAII BANK, N.A. SAVINGS
---------------- --------------- ---------- --------------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
At December 31, 1999
Shareholders' Equity.... $1,212,330 $1,029,065 $156,167 $50,397
Tier 1 Capital.......... 1,178,751 1,005,812 141,486 50,397
Total Capital........... 1,515,264 1,326,564 154,374 51,643
Tier 1 Capital Ratio.... 6% 10.28% 9.86% 13.79% 51.30%
Total Capital Ratio..... 10% 13.22% 13.00% 15.04% 52.57%
Leverage Ratio.......... 5% 8.31% 7.81% 11.98% 27.17%
At December 31, 1998
Shareholders' 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%
</TABLE>
The following is a breakdown of the components of accumulated other
comprehensive income as of December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Foreign Currency Translation Adjustment....... $(22,411) $(23,565) $(29,236)
Investment Securities......................... (43,065) 1,738 4,470
Pension Liability Adjustment.................. (630) (649) --
-------- -------- --------
Accumulated Other Comprehensive Income........ $(66,106) $(22,476) $(24,766)
======== ======== ========
</TABLE>
The schedule below presents for the years ended December 31, 1999, 1998 and
1997 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>
1999 1998 1997
-------- ------- -------
(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............................ $(35,540) $ 157 $ 5,143
Reclassification adjustment for gains included
in net income................................ (9,263) (2,889) (1,910)
-------- ------- -------
Unrealized investment securities valuation
adjustment included in other accumulated
comprehensive income........................... $(44,803) $(2,732) $3,233
======== ======= =======
</TABLE>
64
<PAGE>
The amount of income tax allocated to each component of comprehensive income
for the years ended December 31, 1999, 1998 and 1997 is provided below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Foreign Currency Translation Adjustment........ $ 621 $ 3,053 $(13,072)
Investment Securities.......................... (29,869) (1,821) 2,155
Pension Liability Adjustment................... 10 (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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
International
Average Assets.......................... $3,413,003 $3,426,614 $3,005,084
Average Loans........................... 1,702,188 1,752,657 1,540,294
Average Deposits........................ 2,242,261 2,219,916 2,061,710
Operating Revenue....................... 252,060 287,872 215,876
Income Before Taxes..................... 6,486 1,193 20,870
Net Income (Loss)....................... (1,374) (804) 10,243
</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 $577,257,000, $494,325,000 and $558,739,000 during 1999, 1998
and 1997, 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.
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
65
<PAGE>
Profit Sharing Plan totaled $6,849,000 in 1999, $8,472,000 in 1998 and
$9,723,000 in 1997. 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 1999, 1998 and 1997,
matching contributions under this plan totaled $3,176,000, $2,981,000 and
$2,882,000, 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 1999, 1998 and 1997, Pacific Century contributed $5,898,000,
$5,192,000 and $4,943,000, 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, U.S. Government agency securities, a money market fund,
mutual funds, and a collective investment 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, 1999 was $24,924,000.
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.
Pacific Century's Postretirement Benefit Plans provide 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. Beginning in 1993, Pacific Century is recognizing the transition
obligation over 20 years. Pacific Century has no segregated assets to provide
postretirement benefits.
66
<PAGE>
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, 1999 and 1998.
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit Obligation at Beginning of
Year................................. $ 91,262 $ 84,243 $ 29,090 $ 27,747
Service Cost.......................... -- -- 1,059 1,292
Interest Cost......................... 6,305 6,146 1,709 1,999
Actuarial (Gain) Loss................. (7,152) 6,309 (6,653) (1,048)
Employer Benefits Paid/1/ ............ (5,644) (5,436) (1,100) (900)
-------- -------- -------- --------
Benefit Obligation at End of Year..... $ 84,771 $ 91,262 $ 24,105 $ 29,090
======== ======== ======== ========
Change in Fair Value of Plan Assets
Fair Value of Plan Assets at Beginning
of Year.............................. $ 85,055 $ 80,201 $ -- $ --
Actual Return on Plan Assets.......... 17,050 9,944 -- --
Employer Contribution................. 388 346 1,100 900
Employer Benefits Paid................ (5,644) (5,436) (1,100) (900)
-------- -------- -------- --------
Fair Value of Plan Assets at End of
Year................................. $ 96,849 $ 85,055 $ -- $ --
======== ======== ======== ========
Funded Status......................... $ 12,078 $ (6,207) $(24,105) $(29,090)
Unrecognized Net Actuarial Gain....... (23,855) (6,953) (12,451) (6,197)
Unrecognized Transition (Asset)
Liability............................ -- (315) 9,054 9,750
-------- -------- -------- --------
Net Amount Recognized; Accrued........ $(11,777) $(13,475) $(27,502) $(25,537)
======== ======== ======== ========
Amounts Recognized in the Consolidated
Statements of Financial Condition
Consist of:
Accrued Benefit Liability........... $(12,747) $(14,474) $(27,502) $(25,537)
Accumulated Other Comprehensive
Income............................. 970 999 -- --
-------- -------- -------- --------
Net Amount Recognized; Accrued........ $(11,777) $(13,475) $(27,502) $(25,537)
======== ======== ======== ========
</TABLE>
- --------
/1/ Participants' contributions relative to the Postretirement Benefits Plan
are offset against employer benefits paid in the above table. For the
years ended December 31, 1999 and 1998, participants' contributions for
postretirement benefits totaled $817,000 and $824,000, respectively. 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 $7.8 million and $7.7 million, respectively, as of
December 31, 1999 and $7.9 million and $7.4 million, respectively, as of
December 31, 1998. The accrued benefit liability as of December 31, 1999 and
1998 was $7.7 million and $7.4 million, respectively. Because the Excess Plan
is unfunded, it has no plan assets.
67
<PAGE>
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------- ----------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------ ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Components of Net
Periodic Benefit Cost:
Service Cost........... $ -- $ -- $ -- $1,059 $1,292 $1,002
Interest Cost.......... 6,305 6,146 6,065 1,709 1,999 1,894
Expected Return on Plan
Assets................ (7,425) (6,982) (6,155) -- -- --
Amortization of
Unrecognized Net
Transition (Asset)
Obligation............ (315) (318) (318) 696 696 696
Recognized Net
Actuarial (Gain) Loss. 125 (159) 38 (399) (153) (189)
------- ------- ------- ------ ------ ------
Net Periodic Benefit
Cost.................. $(1,310) $(1,313) $ (370) $3,065 $3,834 $3,403
======= ======= ======= ====== ====== ======
Assumptions used for the aggregated pension plans and Postretirement Benefit
Plans at December 31, 1999, 1998 and 1997 are as follows:
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------- ----------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Weighted Average
Assumptions as of
December 31:
Discount Rate.......... 7.75% 7.00% 7.50% 7.75% 7.00% 7.50%
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% for 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 1999 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........................................ $ 297 $ (236)
Effect on postretirement benefit obligation........ $1,966 $(1,627)
</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 ten 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 $370,000 in 1999, $614,000 in 1998
and $1,000,000 in 1997.
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
68
<PAGE>
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, 1999, 67,000 options were outstanding under this
plan.
The following information relates to options outstanding as of December 31,
1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF
SHARES WEIGHTED AVERAGE REMAINING SHARES WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$8.47--$15.54........... 1,053,415 $13.64 43.2 months 1,053,415 $13.64
16.01-- 18.13........... 1,803,489 17.46 110.4 months 964,489 16.88
18.25-- 22.19........... 1,458,986 20.01 80.4 months 1,323,986 19.88
23.94-- 26.06........... 763,498 25.78 91.2 months 763,498 25.78
--------- ---------
Total................. 5,079,388 $18.65 85.2 months 4,105,388 $18.67
========= =========
</TABLE>
The following table presents the activity of Stock Option Plans for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1...................... 4,787,562 $17.99 4,097,050 $18.13 3,917,790 $15.83
Granted................. 1,014,000 18.69 1,117,000 17.43 811,300 25.61
Exercised/1/ ........... (553,676) 12.44 (706,506) 13.99 (575,492) 13.10
Forfeited............... (115,000) 18.79 (57,500) 24.24 (25,000) 21.13
Expired................. (53,498) 24.33 (9,944) 17.34 (31,548) 13.96
Exchanged in conjunction
with purchase of CU
Bancorp................ -- -- 347,462 11.06 -- --
--------- --------- ---------
Outstanding at December
31..................... 5,079,388 $18.65 4,787,562 $17.99 4,097,050 $18.13
========= ========= =========
Options Exercisable at
December 31............ 4,105,388 3,712,062 3,308,750
Shares Available for
Future Grants.......... 974,144 1,819,646 3,233,994
</TABLE>
- --------
/1/ The price per share of options exercised on an actual exercise price basis
ranged between $7.24 and $21.13 for 1999, $7.44 and $21.88 for 1998, and
$6.04 and $21.13 for 1997.
69
<PAGE>
The following table presents for the years ended December 31, 1999, 1998 and
1997 the pro forma disclosures of the impact that 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>
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT
PER SHARE AND OPTION DATA)
<S> <C> <C> <C>
Pro Forma Data/1/
Net Income.............................. $ 130,749 $ 103,160 $ 135,805
Basic Earnings Per Share................ $ 1.63 $ 1.29 $ 1.70
Diluted Earnings Per Share.............. $ 1.61 $ 1.27 $ 1.68
Weighted Average Fair Value of Options
Granted During the Year/1/ ............ $ 5.37 $ 3.80 $ 6.13
Assumptions
Average Risk Free Interest Rate....... 5.96% 5.08% 5.85%
Average Expected Volatility........... 31.47% 24.52% 17.08%
Expected Dividend Yield............... 3.18% 3.10% 3.13%
Expected Life......................... 5 years 5 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, 1999, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Legal and Other Professional Fees................ $ 32,391 $ 35,772 $ 23,362
Stationery and Supplies.......................... 9,807 11,062 10,701
Amortization of Intangible Assets................ 19,435 17,383 13,627
Credit Card Processing........................... 17,217 14,824 14,184
Other............................................ 101,257 95,505 87,590
-------- -------- --------
Total.......................................... $180,107 $174,546 $149,464
======== ======== ========
</TABLE>
NOTE N -- INCOME TAXES
The significant components of the provision for income taxes for the years
ended December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal...................................... $ 81,278 $ 54,553 $54,625
State........................................ 12,254 11,193 10,172
Foreign...................................... 14,790 18,021 15,254
-------- -------- -------
$108,322 $ 83,767 $80,051
-------- -------- -------
Deferred:
Federal...................................... $(19,218) $(25,376) $(1,544)
State........................................ 2,533 (511) 918
Foreign...................................... 1,092 (1,231) (913)
-------- -------- -------
$(15,593) $(27,118) $(1,539)
-------- -------- -------
Provision for Income Taxes..................... $ 92,729 $ 56,649 $78,512
======== ======== =======
</TABLE>
70
<PAGE>
The current income tax provision includes taxes on gains and losses on the
sale of securities of $5,776,000, $1,415,000 and $1,107,000 for 1999, 1998 and
1997, 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 Pacific Century's deferred tax liabilities and
assets as of December 31, 1999 and 1998 reclassified based on the tax returns
as filed, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Deferred Tax Liabilities:
Lease Transactions............................. $ 169,726 $ 182,829
Deferred Investment Tax Credits................ 2,646 2,977
Accelerated Depreciation....................... (1,321) 871
Core Deposit Intangible........................ 5,946 7,011
------------ ------------
Total Deferred Tax Liabilities............... 176,997 193,688
------------ ------------
Deferred Tax Assets:
Reserve for Loan Losses........................ 62,689 64,732
Accrued Pension Cost........................... 1,959 2,738
Net Operating Loss Carry Forwards.............. 139 1,231
Securities Valuation Reserve................... 28,105 (1,873)
Postretirement Benefits........................ 10,364 9,606
Other, Net..................................... 12,702 5,165
------------ ------------
Total Deferred Tax Assets.................... 115,958 81,599
Valuation Allowance for Deferred
Tax Assets................................... -- --
------------ ------------
Net Deferred Tax Assets...................... 115,958 81,599
------------ ------------
Net Deferred Tax Liabilities..................... $ 61,039 $ 112,089
============ ============
</TABLE>
For financial statement purposes, Pacific Century had deferred investment
tax credits for property purchased for lease to customers of $2,646,000,
$2,977,000 and $5,620,000 at December 31, 1999, 1998 and 1997, respectively.
In 1999, 1998 and 1997, investment tax credits included in the computation of
the provision for income taxes were $331,000, $2,643,000 and $383,000,
respectively.
The following analysis reconciles the Federal statutory income tax rate to
the effective consolidated income tax rate for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<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............................................ 4.4 4.2 3.3
Tax-Exempt Interest Income.............................. (0.3) (0.3) (0.2)
Intangibles............................................. 1.6 2.1 1.2
Low Income Housing and Investment Tax Credits........... (4.7) (6.2) (3.8)
Other/1/ ............................................... 5.1 (0.2) 0.5
---- ---- ----
Effective Tax Rate........................................ 41.1% 34.6% 36.0%
==== ==== ====
</TABLE>
- --------
/1/ For 1999 income taxes associated with the sale of a special purpose
leasing subsidiary increased the effective tax rate by 3.5%.
71
<PAGE>
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 its business to meet the financing needs of
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, 1999, the notional amount of foreign exchange contracts held
for trading totaled $686.7 million, with a fair value of $3.7 million,
compared to $555.9 million, with a fair value of $4.3 million at December 31,
1998. 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.
72
<PAGE>
Derivative Financial Instruments Held or Issued for Other Than Trading
At December 31, 1999, the notional amount of foreign exchange contracts held
for other than trading totaled $229.3 million with a fair value of $(3.0)
million, compared to $318.1 million at December 31, 1998 with a fair value of
$(11.1) 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.
From time to time 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, 1999, no swaps were in effect.
Pacific Century's credit risk exposure on interest-rate swaps is equal to
the total market value of those instruments with gains. As of December 31,
1999 Pacific Century had no credit risk exposure from swaps. At year-end 1998
the aggregate credit risk of swaps were $0.3 million and the net market value
of all positions was $0.3 million. Net expense on interest rate swap
agreements totaled $0.1 million, $1.5 million and $2.5 million for 1999, 1998
and 1997, respectively.
The table below summarizes by notional amounts the activity for each major
category of interest-rate swaps in 1999. Pacific Century had no deferred gains
or losses relating to terminated swap contracts in 1999 and 1998.
<TABLE>
<CAPTION>
RECEIVE FIXED
-------------
(IN THOUSANDS
OF DOLLARS)
<S> <C>
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
Additions.................................................... --
Maturities/Amortizations..................................... (137,579)
---------
Balance, December 31, 1999..................................... $ --
=========
</TABLE>
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced liquidation sale. 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
73
<PAGE>
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 non-interest 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.
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.
74
<PAGE>
The following table presents the fair values of Pacific Century's financial
instruments at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
BOOK OR BOOK OR
NOTIONAL VALUE FAIR VALUE NOTIONAL VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS--
ASSETS
Loans/1/ ............... $8,818,300 $8,970,900 $8,958,800 $9,263,200
Investment
Securities/2/ ......... 3,338,600 3,330,000 3,671,000 3,686,200
Other Financial
Assets/3/ ............. 339,600 339,600 501,500 501,500
FINANCIAL INSTRUMENTS--
LIABILITIES
Deposits................ 9,394,200 9,381,000 9,559,000 9,585,000
Short-Term
Borrowings/4/ ......... 2,789,600 2,789,600 3,297,600 3,297,600
Long-Term Debt/5/ ...... 720,400 696,700 578,900 593,700
FINANCIAL INSTRUMENTS--
OFF-BALANCE SHEET
Financial Instruments
Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend
Credit............... 4,155,200 11,600 4,251,700 11,200
Standby Letters of
Credit............... 513,400 2,900 532,200 10,500
Commercial Letters of
Credit............... 159,000 600 386,400 4,600
Financial Instruments
Whose Notional or
Contract Amounts Exceed
the Amount of Credit
Risk:
Foreign Exchange and
Swap Contracts....... 916,000 700 874,000 (6,800)
Interest Rate Swap
Agreements........... -- -- 137,600 300
</TABLE>
- --------
/1/ Includes all loans, net of unearned income and reserve for loan losses,
and excludes net 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.
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 in accordance with geographic and functional area of
operations. Geographically, Pacific Century has aligned its operations into
four major 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.
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 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 determined by
a statistically applied approach that considers risk factors, including
historical loss experience, within a given portfolio. 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.
75
<PAGE>
. 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 organizational structure, accounting systems, product lines or
information systems. 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.
76
<PAGE>
Presented below is the financial results for each of Pacific Century's
business segments for the years ended December 31, 1999 and 1998.
BUSINESS SEGMENT 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>
YEAR ENDED DECEMBER 31,
1999
Net Interest Income..... $ 288,412 $ 121,780 $ 38,465 $ 105,805 $ 20,281 $ 574,743
Economic
Provision/1/,/2/ ...... (33,053) (14,105) (19,500) (10,908) 16,651 (60,915)
---------- ---------- ---------- ---------- ---------- -----------
Risk-Adjusted Net
Interest Income........ 255,359 107,675 18,965 94,897 36,932 513,828
Non-Interest Income..... 135,383 40,485 17,929 30,301 41,483 265,581
---------- ---------- ---------- ---------- ---------- -----------
Total Risk-Adjusted
Revenue................ 390,742 148,160 36,894 125,198 78,415 779,409
Non-Interest
Expense/3/ ............ 292,868 108,644 26,810 69,173 56,228 553,723
---------- ---------- ---------- ---------- ---------- -----------
Net Income Before Income
Taxes.................. 97,874 39,516 10,084 56,025 22,187 225,686
Income Taxes/4/,/5/ .... (42,978) (17,022) (4,213) (18,412) (10,104) (92,729)
---------- ---------- ---------- ---------- ---------- -----------
Net Income.............. $ 54,896 $ 22,494 $ 5,871 $ 37,613 $ 12,083 $ 132,957
========== ========== ========== ========== ========== ===========
Total Assets at December
31, 1999............... $5,294,346 $2,466,435 $1,367,586 $2,688,031 $2,623,917 $14,440,315
========== ========== ========== ========== ========== ===========
YEAR ENDED DECEMBER 31,
1998
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/3/ ............ 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/4/ ........ (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 at December
31, 1998............... $5,272,787 $2,432,873 $1,418,215 $2,629,987 $3,262,701 $15,016,563
========== ========== ========== ========== ========== ===========
</TABLE>
- --------
/1/ The economic provision for loan losses reflects the expected normalized
loss 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 for business segments and the provision in the
consolidated financial statements is included in Treasury and Other
Corporate.
/2/ The economic provision for Asia in 1999 reflects adjustments for
normalized loss factors resulting from the company's assessment of reform
measures initiated to deal with the financial turmoil in the region. Prior
to 1999, economic provisions for uncertainty in the region were reflected
in the provision for Treasury.
/3/ Non-interest expense for the Treasury and Other Corporate segment in 1999
and 1998 included a restructuring charge of $22.5 million and $19.4
million, respectively.
/4/ Tax benefits are allocated to the business segment to which they relate.
In 1999 and 1998, income taxes for the U.S. Mainland segment included
$14.0 million and $13.5 million, respectively, in tax benefits from low
income housing tax credits and investment tax credits.
/5/ Income taxes in 1999 included $12.7 million relative to the sale of a
special purpose leasing subsidiary, which generated $14.0 million in
gains.
The Hawaii segment includes both 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, corporate banking, commercial products and commercial real estate.
77
<PAGE>
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 Mariana 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.
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
bills collection, and working capital and relationship lending. 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 certain non-bank 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
segments and total equity in the consolidated financial statements.
. Significant nonrecurring income and expense items.
78
<PAGE>
NOTE R--PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial statements of Pacific Century Financial Corporation
(Parent only) follow:
Condensed Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Dividends From
Bank Subsidiaries............................. $ 80,545 $ 85,600 $ 97,103
Other Subsidiaries............................ 1,500 -- 14,000
Interest Income
From Subsidiaries............................. 9,130 10,120 9,987
From Others................................... 35 83 1,625
Other Income.................................... 4,695 1,758 195
Securities Gains (Losses)....................... 7,009 (316) 1,605
-------- -------- --------
Total Income................................ 102,914 97,245 124,515
Interest Expense................................ 18,845 22,244 19,691
Other Expense................................... 10,780 10,341 9,444
-------- -------- --------
Total Expense............................... 29,625 32,585 29,135
-------- -------- --------
Income Before Income Taxes and Equity in
Undistributed Income of Subsidiaries........... 73,289 64,660 95,380
Income Tax Benefits............................. 1,192 6,070 5,029
-------- -------- --------
Income Before Equity in
Undistributed Income of Subsidiaries............ 74,481 70,730 100,409
Equity in Undistributed Income of Subsidiaries
Bank Subsidiaries............................. 53,460 30,854 34,172
Other Subsidiaries............................ 5,016 5,380 4,907
-------- -------- --------
58,476 36,234 39,079
-------- -------- --------
Net Income...................................... $132,957 $106,964 $139,488
======== ======== ========
</TABLE>
79
<PAGE>
Condensed Statements of Condition
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1999 1998
---------- ----------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Assets
Cash in Bank of Hawaii.............................. $ 264 $ 274
Investment Securities Available for Sale............ 220 430
Equity in Net Assets of Bank Subsidiaries........... 1,182,187 1,140,132
Equity in Net Assets of Other Subsidiaries.......... 58,534 78,901
Interest-Bearing Deposits from Bank................. 158,100 175,200
Advances to Other Subsidiaries...................... 266 --
Net Loans........................................... -- 712
Trading Securities.................................. 3,406 2,309
Other Assets........................................ 120,879 123,533
---------- ----------
Total Assets...................................... $1,523,856 $1,521,491
========== ==========
Liabilities and Shareholders' Equity
Commercial Paper and Short-Term Borrowings.......... $ 97,319 $ 127,311
Long-Term Debt...................................... 193,093 193,093
Other Liabilities................................... 21,114 15,493
Shareholders' Equity................................ 1,212,330 1,185,594
---------- ----------
Total Liabilities and Shareholders' Equity........ $1,523,856 $1,521,491
========== ==========
</TABLE>
80
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating Activities
Net Income..................................... $132,957 $106,964 $139,488
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Amortization Expense......................... 7,890 7,961 6,009
Realized Investment Securities Gains......... (6,635) (44) (1,476)
Undistributed Income from Subsidiaries....... (56,226) (36,234) (39,079)
Net Decrease (Increase) in Trading
Securities.................................. (1,097) 43 (689)
Other Assets and Liabilities, Net............ 362 14,208 (11,400)
-------- -------- --------
Net Cash Provided by Operating Activities.. 77,251 92,898 92,853
Investing Activities
Investment Securities Transactions, Net........ 6,721 330 11,272
Interest Bearing Deposits, Net................. 17,100 (3,203) 28,303
Loan Transactions, Net......................... 782 21 9,565
Capital Contributions to Subsidiaries, Net..... (9,015) (11,100) (36,400)
Advances Made to Subsidiaries, Net............. (266) -- --
Purchase of CU Bancorp......................... -- -- (54,188)
-------- -------- --------
Net Cash Provided (Used) by Investing
Activities................................ 15,322 (13,952) (41,448)
Financing Activities
Net Proceeds (Payments) from Borrowings........ (29,992) (37,905) 124,389
Proceeds from Sale of Stock.................... 13,898 19,223 16,376
Stock Repurchased.............................. (21,849) (7,314) (142,479)
Cash Dividends Paid............................ (54,640) (52,776) (49,725)
-------- -------- --------
Net Cash Used by Financing Activities...... (92,583) (78,772) (51,439)
-------- -------- --------
Increase (Decrease) in Cash...................... (10) 174 (34)
Cash at Beginning of Year........................ 274 100 134
-------- -------- --------
Cash at End of Year.............................. $ 264 $ 274 $ 100
======== ======== ========
</TABLE>
81
<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 28, 2000, as summarized
below:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors on pages 6-8. Section 16(a) Beneficial Ownership
Reporting Compliance on page 24.
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 13-23.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership on pages 11-12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions with Management and Others on page 24.
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 of this report:
Consolidated Statements of Condition--December 31, 1999 and 1998
Consolidated Statements of Income--Years ended December 31, 1999, 1998, and
1997
Consolidated Statements of Shareholders' Equity--Years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Cash Flows--Years ended December 31, 1999, 1998,
and 1997
Notes to Consolidated Financial Statements
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.
82
<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 (incorporated herein by reference to
Exhibit 10.1 of Form 10K for the fiscal year ended December 31,
1998)*
10.2 Pacific Century Financial Corporation, Long-Term Incentive
Compensation Plan Effective January 1, 1999 (incorporated herein by
reference to Exhibit 10.4 of Form 10K for the fiscal year ended
December 31, 1998)*
10.3 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)*
10.4 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)*
10.5 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)*
10.6 Bancorp Hawaii, Inc. Stock Option Plan of 1983 (incorporated herein
by reference to Exhibit 4(a) of Registration No. 2-84164)*
10.7 Pacific Century Financial Corporation Stock Option Plan of 1988
(incorporated herein by reference to Exhibit 4(a) of Registration
No. 33-23495)*
10.8 Pacific Century Financial Corporation Stock Option Plan of 1988
Amendment 99-1 (incorporated herein by reference to Exhibit 10.11 of
Form 10K for the fiscal year ended December 31, 1998)*
10.9 Pacific Century Financial Corporation Stock Option Plan of 1994
(incorporated herein by reference to Exhibit 4(a) of Registration
No. 33-54777)*
10.10 Pacific Century Financial Corporation Stock Option Plan of 1994
Amendment 97-1 (incorporated herein by reference to Exhibit 10.13 of
Form 10K for the fiscal year ended December 31, 1998)*
10.11 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)*
10.12 Pacific Century Financial Corporation Stock Option Plan of 1994
Amendment 99-2 (incorporated herein by reference to Exhibit 10.15 of
Form 10K for the fiscal year ended December 31, 1998)*
10.13 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)*
10.14 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)*
10.15 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>
83
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.16 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)*
10.17 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)*
10.18 Pacific Century Financial Corporation Directors' Deferred
Compensation Plan (Restatement Effective 1/1/96) with Amendment
No. 96-1; Trust Agreement (Effective 9/1/96) (incorporated by
reference herein to Exhibit (4) of Registration No. 333-14929).
10.19 Pacific Century Financial Corporation Directors Stock Compensation
Program (incorporated herein by reference herein to Exhibit (4) of
Registration No. 333-02835).
12.1 Statement Regarding Computation of Ratios
19.1 Report to Shareholders for Quarter ended September 30, 1999
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, 1999.
(c) Response to this item is the same as Item 14(a).
(d) Response to this item is the same as Item 14(a).
84
<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 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.
85
<PAGE>
Item VI. Return on Equity and Assets
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Return on Average Assets............................. 0.91% 0.72% 0.98%
Return on Average Equity............................. 10.99% 9.22% 12.57%
Dividend Payout Ratio................................ 41.46% 49.81% 36.34%
Average Equity to Average Assets Ratio............... 8.30% 7.81% 7.79%
</TABLE>
Item VII. Short-Term Borrowings
Note F to the Audited Financial Statements included in Item 8 of this
report.
86
<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 29, 2000 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 29, 2000
/s/ Lawrence M. Johnson /s/ H. Howard Stephenson
- ------------------------------------- -------------------------------------
Lawrence M. Johnson, H. Howard Stephenson,
Director Director
/s/ Peter D. Baldwin /s/ Martin A. Stein
- ------------------------------------- -------------------------------------
Peter D. Baldwin, Martin A. Stein,
Director Director
/s/ Mary G. F. Bitterman /s/ Fred E. Trotter
- ------------------------------------- -------------------------------------
Mary G. F. Bitterman, Fred E. Trotter,
Director Director
/s/ Richard J. Dahl /s/ Stanley S. Takahashi
- ------------------------------------- -------------------------------------
Richard J. Dahl, Stanley S. Takahashi,
Director Director
/s/ David A. Heenan /s/ Donald M. Takaki
- ------------------------------------- -------------------------------------
David A. Heenan, Donald M. Takaki,
Director Director
/s/ Stuart T. K. Ho /s/ David A. Houle
- ------------------------------------- -------------------------------------
Stuart T. K. Ho, David A. Houle,
Director Chief Financial Officer
/s/ Herbert M. Richards, Jr. /s/ Denis K. Isono
- ------------------------------------- -------------------------------------
Herbert M. Richards, Jr., Denis K. Isono,
Director Chief Accounting Officer
87
<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 12.1
Pacific Century Financial Corporation
Statement Regarding Computation of Ratios
Twelve Months Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
(in millions of dollars) 1999 1998
<S> <C> <C>
Earnings:
1. Income Before Income Taxes $225.7 $163.6
2. Plus: Fixed Charges Including Interest on Deposits 453.6 515.2
------ ------
3. Earnings Including Fixed Charges 679.3 678.8
4. Less: Interest on Deposits 261.2 306.7
------ ------
5. Earnings Excluding Interest on Deposits $418.1 $372.1
Fixed Charges:
6. Fixed Charges Including Interest on Deposits $453.6 $515.2
7. Less: Interest on Deposits 261.2 306.7
------ ------
8. Fixed Charges Excluding Interest on Deposits $192.4 $208.5
Ratio of Earnings to Fixed Charges:
Including Interest on Deposits (Line 3 divided by Line 6) 1.5 x 1.3 x
Excluding Interest on Deposits (Line 5 divided by Line 8) 2.2 x 1.8 x
</TABLE>
<PAGE>
EXHIBIT 19.1
To Our Shareholders:
This quarter's earnings reflect the previously announced $22.5 million
restructuring charge related to Pacific Century's New Era Redesign program to
increase revenues, reduce expenses and improve its financial products, services
and delivery.
For the first nine months of 1999, your company's earnings reached $95.4
million, up 32.5% over $72.0 million reported for the comparable period in 1998.
Diluted earnings per share were $1.18, up from $0.89 per share for the first
nine months of 1998. Tangible or "cash" diluted earnings per share totaled
$1.32, up from $1.02 per share reported for the same period in 1998.
Earnings for the third quarter were $21.5 million versus $34.8 million
reported for the third quarter of 1998. Diluted earnings per share were $0.27
compared to $0.43 for the third quarter of 1998. Tangible earnings for the
quarter were $25.9 million compared to $39.0 million for the third quarter of
1998. Tangible diluted earnings per share for the quarter were $0.32 versus
$0.48 per share for the same period last year. The third quarter's results
reflect Pacific Century's actions to position itself for improved long-term
performance.
On September 13th, we were pleased to announce the results of New Era
Redesign, which, when fully implemented by the fourth quarter of 2000, is
estimated to produce cost savings of $43 million and revenue enhancements of $21
million on an annualized basis. Over the next four quarters, Pacific Century
will be reporting progress on the implementation of New Era Redesign ideas.
Total assets at third quarter-end stood at $14.5 billion, versus $14.6
billion at September 30, 1998. Net loans were $9.3 billion compared to $9.1
billion at third quarter-end 1998. Deposits totaled $9.3 billion relative to
$9.4 billion at September 30, 1998.
Signs of economic recovery in Hawaii continue to be positive, with key
sectors such as tourism, retail sales and construction showing growth over 1998.
Tourism in particular is forecast to grow 2% in visitor arrivals for 1999.
Economists are forecasting real gross state product growth between 2% to 2.5%
for 1999 and year 2000.
In August, Bank of Hawaii concluded the transaction to acquire 5.8 million
shares, or approximately 10% of the outstanding shares of the Bank of Queensland
in Australia. That transaction is on top of a 1998 purchase of 5.4 million Bank
of Queensland convertible notes.
Also, in the quarter, your company announced a program to repurchase up to
300,000 shares of its common stock per quarter, beginning in the fourth quarter
of 1999. The new program is incremental to the existing program to offset those
shares issued under the company's dividend reinvestment and various benefit
plans.
All of Pacific Century's critical computer systems have been successfully
tested to handle the year 2000 date change, and Y2K
<PAGE>
contingency plans are in place. For the balance of 1999, we remain focused on
validating our year 2000 contingency plans and monitoring the readiness of third
parties that we rely on to serve customers.
Pacific Century's Board of Directors has declared a quarterly cash dividend of
17 cents per share on its outstanding common shares. The dividend will be
payable on December 14, 1999 to shareholders of record at the close of business
on November 18, 1999.
Maximizing the value of your holdings in Pacific Century Financial Corporation
remains our highest priority. We remain steadfastly committed to achieving our
performance objectives. Your continued confidence in our ability to guide your
company into the new millennium are vital to our success.
Sincerely,
/s/ L. M. JOHNSON
Lawrence M. Johnson
Chairman and CEO
This report to shareholders contains forward-looking statements which are
provided to assist in the understanding of certain aspects of the Company's
anticipated future financial performance. The Company cautions readers not to
place undue reliance on any forward-looking statements, which speak only as of
the date made. Forward-looking statements are subject to significant risk and
uncertainties, many of which are beyond the Company's control. Although the
Company believes that the assumptions underlying its forward-looking statements
are reasonable, any of the assumptions could prove to be inaccurate and actual
results may differ from those contained in or implied by such forward-looking
statements for a variety of reasons. Factors which might cause such a
difference include, but are not limited to, expected cost savings from New Era
Redesign cannot be fully realized or realized within the expected timeframe;
income or revenues from New Era Redesign are lower than expected or operating or
implementation costs are higher; competitor pressures in the banking and
financial services industry increase significantly, particularly in connection
with product delivery and pricing; business disruption related to implementation
of New Era Redesign programs or methodologies; inability to achieve expected
customer acceptance of revised pricing structures and strategies; general
economic conditions in the geographic areas where the Company conducts its
operations are weaker than expected or other unanticipated occurrences which
could delay or adversely impact the implementation of all or a part of New Era
Redesign.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements.
A year 2000 readiness disclosure.
Corporate Offices:
Financial Plaza of the Pacific
130 Merchant Street
Honolulu, Hawaii 96813
<PAGE>
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
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
September 30 September 30
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Return on Average Assets 0.87% 0.65%
- ------------------------------------------------------------------------------------------------------------------------------------
Return on Average Equity 10.55% 8.35%
- ----------------------------------------------------------------------------------------------------------------------------------
Average Spread on Earning Assets 4.27% 4.25%
- ----------------------------------------------------------------------------------------------------------------------------------
Average Equity/Average Assets 8.25% 7.76%
- ----------------------------------------------------------------------------------------------------------------------------------
Book Value Per Common Share $15.05 $14.50
- ----------------------------------------------------------------------------------------------------------------------------------
Loss Reserve/Loans Outstanding 2.22% 2.24%
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Price Range High Low Dividend
- ----------------------------------------------------------------------------------------------------------------------------------
1998..........................................................$ 25.88 $ 14.75 $0.6575
- ----------------------------------------------------------------------------------------------------------------------------------
1999 First Quarter............................................$ 24.94 $ 19.94 $0.17
Second Quarter...........................................$ 23.25 $19.81 $0.17
Third Quarter............................................$ 22.31 $ 17.63 $0.17
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept 30 Sept 30 Sept 30 Sept 30
(in thousands of dollars except per share amounts) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income $ 252,967 $ 273,309 $ 768,470 $ 821,572
Total Interest Expense 109,514 128,811 336,773 388,504
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 143,453 144,498 431,697 433,068
Provision for Loan Losses 13,500 10,737 40,038 71,022
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 129,953 133,761 391,659 362,046
Total Non-Interest Income 71,402 53,616 196,185 156,278
Total Non-Interest Expense 155,593 136,191 422,561 409,610
- ----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 45,762 51,186 165,283 108,714
Provision for Income Taxes 24,283 16,351 69,925 36,763
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 21,479 $ 34,835 $ 95,358 $ 71,951
- ----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.27 $ 0.43 $1.19 $0.90
Diluted Earnings Per Share $ 0.27 $ 0.43 $1.18 $0.89
Basic Weighted Average Shares 80,274,350 80,459,112 80,332,150 80,201,636
Diluted Weighted Average Shares 80,860,870 81,033,346 81,116,106 81,128,698
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Condition (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
(in thousands of dollars) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-Bearing Deposits $ 410,497 $ 453,527 $ 407,265
Investment Securities
(Market Value of $3,440,961, $3,686,471, and $3,546,186,
respectively) 3,442,273 3,671,205 3,527,640
Securities Purchased Under Agreements to Resell 4,103 -- 40,000
Funds Sold 40,726 45,683 114,940
Loans 9,746,581 9,854,000 9,549,741
Unearned Income (213,798) (225,915) (207,346)
Reserve for Loan Losses (211,306) (211,276) (209,731)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Loans 9,321,477 9,416,809 9,132,664
- ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 13,219,076 13,587,224 13,222,509
Cash and Non-Interest Bearing Deposits 417,142 564,243 541,217
Premises and Equipment 281,512 293,591 301,124
Other Assets 587,631 571,505 573,656
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $14,505,361 $15,016,563 $14,638,506
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits $ 9,290,389 $ 9,576,342 $ 9,422,877
Securities Sold Under Agreements to Repurchase 1,916,747 2,008,399 2,380,071
Funds Purchased 628,212 942,062 288,727
Short-Term Borrowings 335,416 356,822 363,461
Other Liabilities 331,284 361,728 391,744
Long-Term Debt 794,814 585,616 624,619
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,296,862 13,830,969 13,471,499
Shareholders' Equity
Common Stock ($.01 par value), authorized 500,000,000 shares;
issued / outstanding; September 1999 - 80,550,124 / 80,308,130;
December 1998 - 80,512,372 / 80,325,998; September 1998 -
80,462,983 / 80,462,983 806 805 804
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Capital Surplus 345,477 342,932 341,534
Accumulated Other Comprehensive Income (52,525) (22,476) (21,839)
Retained Earnings 919,664 867,852 846,508
Treasury Stock, at Cost - (September 1999 - 241,994 and December 1998
- 186,374 Shares) (4,923) (3,519) --
- ----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,208,499 1,185,594 1,167,007
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $14,505,361 $15,016,563 $14,638,506
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 21.1
PACIFIC CENTURY FINANCIAL CORPORATION
SUBSIDIARIES OF THE REGISTRANT
The required information with respect to subsidiaries of Pacific Century
Financial Corporation at December 31, 1999 is provided below. All domestic
subsidiaries are wholly owned except for those entities for which directors own
qualifying shares. Each entity is consolidated with its immediate parent
company except as noted.
PACIFIC CENTURY FINANCIAL CORPORATION (Parent)
Bank Holding Company
Subsidiaries:
FIRST SAVINGS & LOAN ASSOCIATION OF AMERICA, F.S.A. (Guam)
Federally Chartered
PACIFIC CENTURY BANK, N.A.
California
PACIFIC CENTURY SMALL BUSINESS INVESTMENT COMPANY, INC.
Hawaii
BANK OF HAWAII
Subsidiaries:
Bank of Hawaii International Corp., New York - (Edge Act Office)
New York
Bank of Hawaii International, Inc. - (Foreign Holding
Company)
Hawaii
Subsidiaries/Affiliates:
Bank of Hawaii-Nouvelle Caledonie (95.8%)
New Caledonia
Bank of Hawaii (PNG) Ltd. (100%)
Papua New Guinea
Banque de Tahiti (95.4%)
French Polynesia
Banque d'Hawaii (Vanuatu), Ltd. (100%)
Vanuatu
Bank of Tonga (30%)
<PAGE>
Tonga
National Bank of Solomon Islands (51%)*
Solomon Islands
Pacific Commercial Bank, Ltd. (43%)*
Samoa
Pacific Century Investment Services, Inc.
Hawaii
Pacific Century Insurance Services, Inc.
Hawaii
Bankoh Corporation (fka Hawaiian Hong Kong Holdings, Ltd.)
Hawaii
Pacific Century Advisory Services, Inc. - (Advisory
Services)
Hawaii
Pacific Century Leasing, Inc. (Parent) - (Leasing)
Hawaii
Subsidiaries:
BNE Airfleets Corporation
Barbados
Pacific Century Leasing International, Inc.
Delaware
S.I.L., Inc.
Delaware
Pacific Century Life Insurance Corporation
Arizona
Triad Insurance Agency, Inc.
Hawaii
Bankoh Insurance Agency
Hawaii
* Accounted for under the equity method
<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, 333-14929 and 333-80127), (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 21, 2000, 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, 1999.
/s/ ERNST & YOUNG LLP
Honolulu, Hawaii
February 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 639,895
<INT-BEARING-DEPOSITS> 278,473
<FED-FUNDS-SOLD> 52,740
<TRADING-ASSETS> 8,345
<INVESTMENTS-HELD-FOR-SALE> 2,542,232
<INVESTMENTS-CARRYING> 796,322
<INVESTMENTS-MARKET> 787,720
<LOANS> 9,717,566
<ALLOWANCE> 194,205
<TOTAL-ASSETS> 14,440,315
<DEPOSITS> 9,394,218
<SHORT-TERM> 2,789,579
<LIABILITIES-OTHER> 316,531
<LONG-TERM> 727,657
0
0
<COMMON> 806
<OTHER-SE> 1,211,524
<TOTAL-LIABILITIES-AND-EQUITY> 14,440,315
<INTEREST-LOAN> 769,229
<INTEREST-INVEST> 227,252
<INTEREST-OTHER> 30,038
<INTEREST-TOTAL> 1,026,519
<INTEREST-DEPOSIT> 261,184
<INTEREST-EXPENSE> 451,776
<INTEREST-INCOME-NET> 574,743
<LOAN-LOSSES> 60,915
<SECURITIES-GAINS> 14,056
<EXPENSE-OTHER> 553,723
<INCOME-PRETAX> 225,686
<INCOME-PRE-EXTRAORDINARY> 132,957
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,957
<EPS-BASIC> 1.66
<EPS-DILUTED> 1.64
<YIELD-ACTUAL> 4.28
<LOANS-NON> 145,261
<LOANS-PAST> 18,494
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 211,276
<CHARGE-OFFS> 103,267
<RECOVERIES> 29,440
<ALLOWANCE-CLOSE> 194,205
<ALLOWANCE-DOMESTIC> 104,100
<ALLOWANCE-FOREIGN> 78,416
<ALLOWANCE-UNALLOCATED> 11,689
</TABLE>
