U N I T E D S T A T E S
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly
period ended September 30, 2000
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
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(Exact name of registrant as specified in its charter)
Delaware 99-0148992
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(State of incorporation) (IRS Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
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(Address of principal executive offices) (Zip Code)
(888) 643-3888
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value; outstanding at October 31, 2000 -
79,510,926 shares
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION and subsidiaries
September 30, 2000
PART I. - Financial Information
Item 1. Financial Statements
<PAGE>
<TABLE>
Consolidated Statements of Condition (Unaudited) Pacific Century Financial Corporation and subsidiaries
------------------------------------------------------------------------------------------------------------
<CAPTION>
September 30 December 31 September 30
(in thousands of dollars) 2000 1999 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-Bearing Deposits $185,312 $278,473 $410,497
Investment Securities - Held to Maturity
(Market Value of $714,920, $787,720 and $815,416, respectively) 716,392 796,322 816,728
Investment Securities - Available for Sale 2,484,482 2,542,232 2,625,545
Securities Purchased Under Agreements to Resell 5,560 0 4,103
Funds Sold 28,323 52,740 40,726
Loans 9,750,661 9,717,556 9,746,581
Unearned Income (272,219) (242,503) (213,798)
Reserve for Loan Losses (244,966) (194,205) (211,306)
------------------------------------------------------------------------------------------------------------
Net Loans 9,233,476 9,280,848 9,321,477
------------------------------------------------------------------------------------------------------------
Total Earning Assets 12,653,545 12,950,615 13,219,076
Cash and Non-Interest Bearing Deposits 438,312 639,895 417,142
Premises and Equipment 251,240 271,728 281,512
Customers' Acceptance Liability 10,956 7,236 10,797
Accrued Interest Receivable 86,109 78,974 77,915
Other Real Estate 5,128 4,576 5,874
Intangibles, including Goodwill 194,418 205,904 211,609
Other Assets 300,153 281,387 281,436
------------------------------------------------------------------------------------------------------------
Total Assets $13,939,861 $14,440,315 $14,505,361
============================================================================================================
Liabilities
Domestic Deposits
Demand - Non-Interest Bearing $1,626,426 $1,676,425 $1,683,210
- Interest Bearing 2,039,325 2,076,358 2,059,662
Savings 671,437 700,720 712,968
Time 2,801,947 2,761,650 2,570,112
Foreign Deposits
Demand - Non-Interest Bearing 343,828 401,613 437,110
Time Due to Banks 571,576 597,675 679,344
Other Savings and Time 766,129 1,179,777 1,147,983
------------------------------------------------------------------------------------------------------------
Total Deposits 8,820,668 9,394,218 9,290,389
Securities Sold Under Agreements to Repurchase 1,791,983 1,490,655 1,916,747
Funds Purchased 377,069 839,962 628,212
Short-Term Borrowings 365,407 458,962 335,416
Bank's Acceptances Outstanding 10,956 7,236 10,797
Accrued Retirement Expense 37,796 40,360 41,494
Accrued Interest Payable 80,792 64,588 60,138
Accrued Taxes Payable 97,597 85,022 90,380
Minority Interest 4,154 4,435 4,587
Other Liabilities 103,634 114,890 123,888
Long-Term Debt 999,736 727,657 794,814
------------------------------------------------------------------------------------------------------------
Total Liabilities 12,689,792 13,227,985 13,296,862
Shareholders' Equity
Common Stock ($.01 par value), authorized 500,000,000 shares;
issued / outstanding; September 2000 - 80,556,883 /79,503,301;
December 1999 - 80,550,728 / 80,036,417;
September 1999 - 80,550,124 / 80,308,130 806 806 806
Capital Surplus 346,016 345,851 345,477
Accumulated Other Comprehensive Income (56,620) (66,106) (52,525)
Retained Earnings 979,007 942,177 919,664
Treasury Stock, at Cost - (September 2000 - 1,053,582; December 1999 - 514,311
and September 1999 - 241,994 shares) (19,140) (10,398) (4,923)
------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,250,069 1,212,330 1,208,499
------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $13,939,861 $14,440,315 $14,505,361
============================================================================================================
</TABLE>
<TABLE>
Consolidated Statements of Income (Unaudited) Pacific Century Financial Corporation and subsidiaries
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<CAPTION>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept 30 Sept 30 Sept 30 Sept 30
(in thousands of dollars except per share amounts) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest on Loans $192,749 $173,414 $558,735 $521,050
Loan Fees 7,679 8,792 24,902 30,090
Income on Lease Financing 9,935 7,035 27,661 21,751
Interest and Dividends on Investment Securities
Taxable 12,943 14,657 40,500 43,248
Non-taxable 241 268 763 820
Income on Investment Securities Available for Sale 41,772 42,808 123,966 126,508
Interest on Deposits 3,319 5,700 10,917 20,391
Interest on Security Resale Agreements 55 70 71 238
Interest on Funds Sold 577 223 1,535 4,374
------------------------------------------------------------------------------------------------------------
Total Interest Income 269,270 252,967 789,050 768,470
Interest Expense
Interest on Deposits 73,162 63,916 212,440 193,703
Interest on Security Repurchase Agreements 26,941 21,812 75,915 70,621
Interest on Funds Purchased 8,960 9,975 25,321 31,486
Interest on Short-Term Borrowings 4,739 2,213 15,785 8,783
Interest on Long-Term Debt 16,164 11,598 42,171 32,180
------------------------------------------------------------------------------------------------------------
Total Interest Expense 129,966 109,514 371,632 336,773
------------------------------------------------------------------------------------------------------------
Net Interest Income 139,304 143,453 417,418 431,697
Provision for Loan Losses 20,145 13,500 117,074 40,038
------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 119,159 129,953 300,344 391,659
Non-Interest Income
Trust Income 15,874 14,670 49,078 44,653
Service Charges on Deposit Accounts 10,074 8,638 29,811 25,708
Fees, Exchange, and Other Service Charges 22,714 21,956 66,926 66,572
Other Operating Income 12,676 26,061 41,348 50,510
Gain on Settlement of Pension Obligation 0 0 11,900 0
Investment Securities Gains (Losses) (82) 77 (315) 8,742
------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 61,256 71,402 198,748 196,185
Non-Interest Expense
Salaries 45,220 50,768 137,227 152,093
Pensions and Other Employee Benefits 12,303 13,437 37,721 43,387
Net Occupancy Expense 12,577 11,560 36,873 35,638
Net Equipment Expense 13,365 12,380 37,498 36,192
Other Operating Expense 41,350 44,889 123,301 132,389
Restructuring Charge 0 22,478 0 22,478
Minority Interest 110 81 286 384
------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 124,925 155,593 372,906 422,561
------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 55,490 45,762 126,186 165,283
Provision for Income Taxes 20,887 24,283 45,111 69,925
------------------------------------------------------------------------------------------------------------
Net Income $34,603 $21,479 $81,075 $95,358
============================================================================================================
Basic Earnings Per Share $0.44 $0.27 $1.02 $1.19
Diluted Earnings Per Share $0.44 $0.27 $1.02 $1.18
Dividends Declared Per Share $0.18 $0.17 $0.53 $0.51
Basic Weighted Average Shares 79,455,040 80,274,350 79,566,807 80,332,150
Diluted Weighted Average Shares 79,525,474 80,860,870 79,791,250 81,116,106
============================================================================================================
</TABLE>
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
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<CAPTION>
Accumulated
Other
Common Capital Comprehensive Retained Treasury Comprehensive
(in thousands of dollars) Total Stock Surplus Income Earnings Stock Income
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $1,212,330 $806 $345,851 ($66,106) $942,177 ($10,398)
Comprehensive Income
Net Income 81,075 0 - - 81,075 - $81,075
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment 9,960 0 0 9,960 0 - 9,960
Foreign Currency Translation Adjustment (474) 0 0 (474) 0 - (474)
------------
Total Comprehensive Income $90,561
============
Common Stock Issued
62,102 Profit Sharing Plan 1,096 0 18 0 (167) 1,245
195,094 Stock Option Plan 2,610 0 0 0 (1,500) 4,110
142,421 Dividend Reinvestment Plan 2,481 0 52 0 (431) 2,860
4,973 Directors' Restricted Shares and
Deferred Compensation Plan 95 0 95 0 0 0
Treasury Stock Purchased (16,957) 0 0 0 0 (16,957)
Cash Dividends Paid (42,147) 0 0 0 (42,147) 0
----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $1,250,069 $806 $346,016 ($56,620) $979,007 ($19,140)
======================================================================================================================
Balance at December 31, 1998 $1,185,594 $805 $342,932 ($22,476) $867,852 ($3,519)
Comprehensive Income
Net Income 95,358 0 - - 95,358 - $95,358
Other Comprehensive Income, Net of Tax
Investment Securities, Net of
Reclassification Adjustment (28,231) 0 0 (28,231) 0 - (28,231)
Foreign Currency Translation Adjustment (1,818) 0 0 (1,818) 0 - (1,818)
-----------
Total Comprehensive Income $65,309
===========
Common Stock Issued
37,419 Profit Sharing Plan 736 0 3 0 (70) 803
318,672 Stock Option Plan 5,843 0 2,265 0 (2,288) 5,866
154,515 Dividend Reinvestment Plan 3,204 1 137 0 (197) 3,263
6,595 Directors' Restricted Shares and
Deferred Compensation Plan 140 0 140 0 0 0
Treasury Stock Purchased (11,336) 0 0 0 0 (11,336)
Cash Dividends Paid (40,991) 0 0 0 (40,991) 0
-----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $1,208,499 $806 $345,477 ($52,525) $919,664 ($4,923)
===================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
--------------------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months ended September 30
(in thousands of dollars) 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net Income 81,075 95,358
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, depreciation, and amortization of income and expense 125,319 46,428
Deferred income taxes (35,743) (34,140)
Realized and unrealized investment security (gains) losses 387 (8,779)
Other assets and liabilities, net 14,198 (4,657)
-----------------------
Net cash provided by operating activities 185,236 94,210
--------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from redemptions of investment securities held to maturity 106,539 191,667
Purchases of investment securities held to maturity (26,609) (355,592)
Proceeds from sales of investment securities available for sale 158,690 1,184,289
Purchases of investment securities available for sale (84,727) (829,680)
Net decrease in interest-bearing deposits 93,161 49,530
Net decrease in funds sold 18,857 854
Net decrease (increase) in loans (34,369) 110,783
Premises and equipment, net (8,474) (15,474)
Purchase of Triad Insurance Agency, Inc.
net of cash and non-interest bearing deposits acquired -- (2,183)
Purchase of additional interest in Bank of Hawaii Nouvelle Caledonie,
net of cash and non-interest bearing deposits acquired -- (642)
Purchase of additional interest in Banque de Tahiti,
net of cash and non-interest bearing deposits acquired -- (633)
------------------------
Net cash provided by investing activities 223,068 332,919
--------------------------------------------------------------------------------------------------------------
Financing Activities
Net decrease in demand, savings, and time deposits (573,550) (311,733)
Proceeds from lines of credit and long-term debt 300,072 434,126
Principal payments on lines of credit and long-term debt (27,993) (225,058)
Net decrease in short-term borrowings (255,120) (427,343)
Net common stock repurchased (10,675) (1,413)
Cash dividends (42,147) (40,991)
------------------------
Net cash used by financing activities (609,413) (572,412)
--------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (474) (1,818)
------------------------
Decrease in cash and non-interest bearing deposits (201,583) (147,101)
Cash and non-interest bearing deposits at beginning of year 639,895 564,243
------------------------
Cash and non-interest bearing deposits at end of period 438,312 417,142
==============================================================================================================
</TABLE>
Pacific Century Financial Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements
of Pacific Century Financial Corporation (Pacific Century) have
been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. In the opinion of management, the consolidated
financial statements reflect all adjustments of a normal and
recurring nature, including adjustments related to completed
acquisitions, which are necessary for a fair presentation of the
results for the interim periods, and should be read in
conjunction with the audited consolidated financial statements
and related notes included in Pacific Century's 1999 Annual
Report on Form 10-K. Operating results for the nine months
ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31,
2000.
International operations include certain activities located
domestically in Hawaii, as well as branches and subsidiaries
domiciled outside the United States. The operations of Bank of
Hawaii and First Savings and Loan Association of America located
in the West and South Pacific that are denominated in U.S.
dollars are classified as domestic. Pacific Century's
international operations are primarily concentrated in Hong Kong,
Japan, Singapore, South Korea, Taiwan, French Polynesia, Fiji,
New Caledonia, Papua New Guinea and Vanuatu.
Certain amounts in prior period financial statements have
been reclassified to conform to the 2000 presentation.
Note 2. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
new accounting and reporting standards for derivative
instruments. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133," and in
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- An
Amendment of FASB Statement No. 133." SFAS 133, as amended,
establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the
statement of financial position as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in
the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
These rules become effective for the Company on January 1,
2001. The Company has made an initial estimate of the impact
from adoption of these new accounting standards. This estimate
indicates that the change will not have a material impact on its
financial position or results of operations.
Note 3. Gain on Settlement of Pension Obligation
In the second quarter of 2000, the Employees Retirement Plan
of Bank of Hawaii, a defined benefit plan, purchased an annuity
for retirees currently receiving benefits from the Plan. Benefits
for approximately 880 retirees were settled eliminating about $36
million of the projected benefit obligation of the Plan. This
partial settlement caused the recognition of a gain of
$11,900,000 for Bank of Hawaii as the Plan sponsor.
Note 4. Earnings Per Share
For the three and nine months ended September 30, 2000 and
1999, there were no adjustments to net income (the numerator) for
purposes of computing basic and diluted earnings per share (EPS).
The weighted average shares (the denominator) for computing basic
and diluted EPS for the three and nine months ended September
30, 2000 and 1999 are presented in the Consolidated Statements of
Income. Included in the weighted average shares for computing
EPS is the dilutive effect of stock options of 70,434 and 586,520
shares for the three months ended September 30, 2000 and 1999,
respectively and 224,443 and 783,956 for the nine months ended
September 30, 2000 and 1999, respectively.
Note 5. Income Taxes
The provision for income taxes is computed by applying
statutory federal and state income tax rates to income before
income taxes as reported in the Consolidated Statements of Income
after adjusting for non-taxable items, principally from certain
state tax adjustments, tax exempt interest income, income from
bank owned life insurance policies, low income housing tax
credits, foreign tax credits and investment tax credits.
Note 6. Restructuring Charge
In the third quarter of 1999, Pacific Century recorded a
restructuring charge of $22.5 million in connection with a
redesign program to increase revenues and improve efficiencies.
The restructuring charge included direct and incremental costs
associated with this program and consisted of the recognition of
accruals for staff reductions, occupancy and equipment
abandonment, and included period costs that were directly related
to completing the project. Staffing costs consisted of projected
employee severance payments. The occupancy and equipment portion
consisted of estimated lease termination costs and losses on the
disposal of fixed assets. Project costs included costs relative
to the assessment phase of the redesign project of which $14.7
million was paid in September 1999. The project has been largely
completed as of September 30, 2000, with approximately $613,000
of the restructuring charge unutilized and recognized as credit
to other income during the quarter.
Note 7. Regulatory Matters
On September 22, 2000, Pacific Century entered into a
Memorandum of Understanding ("MOU") with its regulator, whereby
Pacific Century has agreed to comply with certain directives
which are intended to assess or correct certain potential
deficiencies in the operation and management of the company.
Under the terms of the MOU, Pacific Century may not declare
or pay any dividends, redeem any shares in excess of the existing
repurchase programs authorized by the Board in August 1998 and
October 1999, or incur any debt, directly or indirectly, without
the prior written approval of its regulator.
Pacific Century has received approval for the next dividend
of $0.18 per common share payable on December 14, 2000 to
shareholders of record on November 24, 2000. The company has
also received approval to pay the December 15, 2000 dividend on
the 8.25% Capital Securities issued by Bancorp Hawaii Capital
Trust I which mature in 2026. Pacific Century has also received
approval for the continuation of its existing commercial paper
issuance program.
Note 8. Business Segments
Pacific Century is a financial services organization that
maintains a broad presence throughout the Pacific region.
Pacific Century assesses the financial performance of its
operating components in accordance with geographic and functional
areas of operations. Geographically, Pacific Century has aligned
its operations into four principal 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 segments
including allocations for overhead, economic provision and
capital. In its business segment financial reporting process,
Pacific Century utilizes certain accounting practices that could
differ from accounting principles generally accepted in the
United States. Accordingly, certain balances reflected in the
business segment report may not agree with corresponding amounts
in the Consolidated Financial Statements. For example, the
economic provision for loan losses differs from the provision
determined under generally accepted accounting principles. The
economic provision for loan losses reflects the expected
normalized loss factor determined by a statistically applied
approach that considers risk factors, including historical loss
experience, within a given portfolio. This approach eliminates
the unusual loss provisions which allows for a normalized
perspective in managing the line of business.
Pacific Century's business segment management reporting
process may change based on refinements in segment reporting
policies or changes in accounting systems, information systems,
organizational structure, or product lines. These changes could
result in a realignment of business segments or modifications to
allocation and transfer methodologies. Should material changes
be made to the financial management reporting process, prior
period reports would be restated.
Presented below are the financial results for each of
Pacific Century's principal market segments for the three and
nine months ended September 30, 2000 and 1999.
<PAGE>
<TABLE>
Line of Business Selected Financial Information
----------------------------------------------------------------------------------------------------------------
<CAPTION>
Treasury
U. S. and Other Consolidated
(in thousands of dollars) Hawaii Pacific Asia Mainland Corporate Total
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended September 30, 2000
Net Interest Income $73,921 $29,926 $5,166 $26,019 $4,272 $139,304
Economic Provision (1) (7,903) (3,132) (4,014) (4,015) (1,081) (20,145)
------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 66,018 26,794 1,152 22,004 3,191 119,159
Non-Interest Income 36,157 8,515 4,583 4,239 7,762 61,256
------------------------------------------------------------------------
Total Risk-Adjusted Revenue 102,175 35,309 5,735 26,243 10,953 180,415
Non-Interest Expense 70,415 22,863 6,349 18,024 7,274 124,925
------------------------------------------------------------------------
Net Income (Loss) Before Income Taxes 31,760 12,446 (614) 8,219 3,679 55,490
Income Taxes (2) (12,019) (4,743) 232 (970) (3,387) (20,887)
------------------------------------------------------------------------
Net Income (Loss) $19,741 $7,703 ($382) $7,249 $292 $34,603
========================================================================
Total Assets (End of Period) $5,281,505 $2,186,350 $1,146,062 $3,078,099 $2,247,845 $13,939,861
=========================================================================
Three Months Ended September 30, 1999
Net Interest Income $72,405 $31,122 $6,549 $25,531 $7,846 $143,453
Economic Provision (1) (3) (8,174) (3,579) (4,875) (2,639) 5,767 (13,500)
-------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 64,231 27,543 1,674 22,892 13,613 129,953
Non-Interest Income 32,321 8,870 4,995 17,450 7,766 71,402
-------------------------------------------------------------------------
Total Risk-Adjusted Revenue 96,552 36,413 6,669 40,342 21,379 201,355
Non-Interest Expense 73,762 26,570 6,693 17,315 31,253 155,593
-------------------------------------------------------------------------
Net Income Before Income Taxes 22,790 9,843 (24) 23,027 (9,874) 45,762
Income Taxes (2) (10,282) (4,420) (183) (13,674) 4,276 (24,283)
-------------------------------------------------------------------------
Net Income $12,508 $5,423 ($207) $9,353 ($5,598) $21,479
=========================================================================
Total Assets (End of Period) $5,255,893 $2,498,351 $1,572,218 $2,632,591 $2,546,308 $14,505,361
=========================================================================
(1) The economic provision for loan losses reflects the expected normalized loss factor determined by a statistically applied
approach that considers risk factors, including historical loss experience, within a given portfolio. The economic provision
differs from the provision determined under generally accepted accounting principles. The difference between the sum of the
economic provision for business segments and the provision in the consolidated financial statements is included in Treasury
and Other Corporate.
(2) Tax benefits are allocated to the business segment to which they relate. In the quarters ended September 30, 2000 and
1999, income taxes for the U. S. Mainland segment included $3.4 million and $4.0 million, respectively, in tax benefits for
each period from low income housing tax credits and investment tax credits.
(3) The 1999 results were retroactively adjusted to reflect the economic provision for Asia which was adjusted upwards from
the amount reported previously to reflect the normalized loss factors resulting from the company's assessment of reform
measures initiated to deal with the financial turmoil in the region. Previously, economic provisions for uncertainty in the
region were reflected in the provision for Treasury.
</TABLE>
<PAGE>
<TABLE>
Line of Business Selected Financial Information
-----------------------------------------------------------------------------------------------------------------
<CAPTION>
Treasury
U. S. and Other Consolidated
(in thousands of dollars) Hawaii Pacific Asia Mainland Corporate Total
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 2000
Net Interest Income $210,874 $90,033 $16,136 $84,424 $15,951 $417,418
Economic Provision (1) (21,982) (9,840) (13,113) (9,696) (62,443) (117,074)
------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 188,892 80,193 3,023 74,728 (46,492) 300,344
Non-Interest Income 109,728 25,983 14,634 11,333 37,070 198,748
------------------------------------------------------------------------
Total Risk-Adjusted Revenue 298,620 106,176 17,657 86,061 (9,422) 499,092
Non-Interest Expense 204,147 72,853 19,507 53,480 22,919 372,906
------------------------------------------------------------------------
Net Income Before Income Taxes 94,473 33,323 (1,850) 32,581 (32,341) 126,186
Income Taxes (2) (40,287) (14,147) 743 (7,272) 15,852 (45,111)
------------------------------------------------------------------------
Net Income $54,186 $19,176 ($1,107) $25,309 ($16,489) $81,075
========================================================================
Total Assets (End of Period) $5,281,505 $2,186,350 $1,146,062 $3,078,099 $2,247,845 $13,939,861
=========================================================================
Nine Months Ended September 30, 1999
Net Interest Income $217,969 $90,916 $17,723 $77,495 $27,594 $431,697
Economic Provision (1) (3) (25,038) (10,368) (14,625) (8,252) 18,245 (40,038)
-------------------------------------------------------------------------
Risk-Adjusted Net Interest Income 192,931 80,548 3,098 69,243 45,839 391,659
Non-Interest Income 100,275 30,078 13,635 27,289 24,908 196,185
-------------------------------------------------------------------------
Total Risk-Adjusted Revenue 293,206 110,626 16,733 96,532 70,747 587,844
Non-Interest Expense 222,430 80,933 19,852 52,042 47,304 422,561
-------------------------------------------------------------------------
Net Income Before Income Taxes 70,776 29,693 (3,119) 44,490 23,443 165,283
Income Taxes (2) (30,785) (12,856) 1,066 (16,043) (11,307) (69,925)
------------------------------------------------------------------------
Net Income $39,991 $16,837 ($2,053) $28,447 $12,136 $95,358
=========================================================================
Total Assets (End of Period) $5,255,893 $2,498,351 $1,572,218 $2,632,591 $2,546,308 $14,505,361
=========================================================================
(1) The economic provision for loan losses reflects the expected normalized loss factor determined by a statistically applied
approach that considers risk factors, including historical loss experience, within a given portfolio. The economic provision
differs from the provision determined under generally accepted accounting principles. The difference between the sum of the
economic provision allocated to business segments and the provision in the consolidated financial statements is included in
Treasury and Other Corporate.
(2) Tax benefits are allocated to the business segment to which they relate. For each nine month period ended September 30,
2000 and 1999, income taxes for the U. S. Mainland segment included $10.3 million in tax benefits from low income housing tax
credits and investment tax credits.
(3) The 1999 results were retroactively adjusted to reflect the economic provision for Asia which was adjusted upwards from
the amount reported previously to reflect the normalized loss factors resulting from the company's assessment of reform
measures initiated to deal with the financial turmoil in the region. Previously, economic provisions for uncertainty in the
region were reflected in the provision for Treasury.
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PERFORMANCE HIGHLIGHTS
Pacific Century Financial Corporation (Pacific Century)
reported earnings for the three months ended September 30, 2000
of $34.6 million, significantly greater than $21.5 million for
the same period in 1999. Earnings for the third quarter of 1999
included a restructuring charge of $22.5 million in connection
with the New Era Redesign program whose purpose was to increase
revenues and improve efficiencies. Basic and diluted earnings
per share in the third quarter of 2000 were both $0.44.
Comparatively, both basic and diluted earnings per share were
$0.27 for the same period last year.
Earnings in the first nine months of 2000 totaled $81.1
million, a 15.0% decrease from $95.4 million in the same period
last year. Basic earnings per share were $1.02 in the first nine
months of 2000, down from $1.19 in the comparable 1999 period.
Diluted earnings per share were also $1.02 for the nine months
ended September 30, 2000, compared to $1.18 in the like year ago
period.
Performance ratios for the three months ended September 30,
2000 reflected improvement from the same period in 1999. In the
third quarter of 2000, return on average assets (ROAA) and return
on average equity (ROAE) increased to 0.98% and 11.20%,
respectively from 0.59% and 7.01% in the like 1999 period. For
the nine months ended September 30, 2000, ROAA and ROAE were
0.77% and 8.85%, compared to 0.87% and 10.55%, respectively, in
the same year ago period. For the full year of 1999, ROAA was
0.91% and ROAE was 10.99%.
Pacific Century has accounted for all of its business
acquisitions under the purchase method, which has resulted in the
recognition of goodwill and other intangible assets. These
intangible assets are amortized over various periods as a non-
cash charge to operating income. Operating results under a
tangible performance basis excludes from reported earnings the
after tax impact of amortization of all intangibles, including
goodwill. On a tangible performance basis, Pacific Century's
earnings in the third quarter of 2000 were $38.8 million, up from
$25.9 million for the same quarter in 1999. Tangible earnings in
the first nine months of 2000 and 1999 were $93.7 million and
$107.4 million, respectively. On a per share basis, tangible
diluted earnings per share were $0.49 and $0.32 in the third
quarters of 2000 and 1999, respectively, and were $1.17 and $1.32
in the first nine months of 2000 and 1999, respectively.
Third quarter tangible ROAA for Pacific Century was 1.12% in
2000 and 0.72% in 1999. Tangible ROAE was 14.94% and 10.25% for
the similar quarters of 2000 and 1999, respectively. In the
first nine months of 2000 tangible ROAA and ROAE were 0.90% and
12.23%, respectively, compared to 0.99% and 14.45%, respectively,
for the same period in 1999.
On a taxable equivalent basis, net interest income for the
three and nine months ended September 30, 2000 were $139.6
million and $418.2 million, respectively, reflecting a decline
from $143.8 million and $432.4 million in the same year ago
periods. The decline in net interest income is attributed to a
decrease in average earning assets combined with a decline in net
interest margin comparing the third quarters of 2000 and 1999.
Total assets at September 30, 2000 declined to $13.9 billion
relative to $14.5 billion at September 30, 1999 and $14.4 billion
at December 31, 1999. The decline in total assets was the result
of managed reductions of loans and short-term interest bearing
deposits and securities. In addition, less productive assets
such as cash and non-interest bearing deposits have also been
managed down. Average assets in the third quarter and nine
months of 2000 were down 2.6% and 3.5%, respectively, from the
same year-earlier periods.
Non-performing assets (NPAs), exclusive of accruing loans
past due 90 days or more, ended the third quarter at $219.6
million, or 2.25% of total loans, up from $210.6 million at June
30, 2000. Comparatively, NPAs were $154.8 million or 1.59% of
total loans at September 30, 1999 and $149.9 million or 1.54% at
December 31, 1999. The increase in NPAs were primarily from
syndicated loans and commercial real estate loans in Hawaii.
The reserve for loan losses totaled $245.0 million at the
end of September 2000, representing 2.58% of loans outstanding,
compared to $211.3 million and 2.22%, respectively, on the same
date in 1999. Net charge-offs for the third quarter of 2000 were
$19.6 million, or 0.81% (annualized) of average loans, compared
to $32.9 million and 1.37% (annualized), respectively, in 2000's
second quarter and $13.5 million, or 0.57% (annualized) in the
third quarter of 1999. For the first nine months of 2000 net
charge-offs were $63.8 million, up from $37.0 million in the like
period last year. In the third quarter, provisions for loan
losses of $20.1 million were charged to income, up from $13.5
million for the same quarter in 1999. For the nine months ended
September 30, 2000 and 1999 provision for loan losses were $117.1
million and $40.1 million, respectively. The higher 2000 loan
loss provision reflects the increase in NPAs and net charge-offs.
In September 1999, Pacific Century announced its redesign
program to improve the delivery of financial services in Hawaii
and the West Pacific, generate revenue growth from new and
existing sources, and reduce expenses by simplifying and
streamlining processes. The implementation phase of the redesign
began in fourth quarter of 1999 and has been substantially
completed as of September 30, 2000.
In a significant development since the end of the third
quarter, on November 3, 2000, Michael E. O'Neill replaced
Lawrence M. Johnson as Chairman and CEO of the company.
<TABLE>
Performance Highlights
Table 1
---------------------------------------------------------------------------------------------------
<CAPTION>
(in millions of dollars except per share amounts)
Percentage
Earnings Highlights and Performance Ratios 2000 1999 Change
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended September 30
Net Income $34.6 $21.5 61.1%
Basic Earnings Per Share 0.44 0.27 63.0%
Diluted Earnings Per Share 0.44 0.27 63.0%
Cash Dividends 14.3 13.7
Return on Average Assets 0.98% 0.59%
Return on Average Equity 11.20% 7.01%
Net Interest Margin 4.25% 4.28%
Efficiency Ratio 62.26% 72.44%
Nine Months Ended September 30
Net Income $81.1 $95.4 -15.0%
Basic Earnings Per Share 1.02 1.19 -14.3%
Diluted Earnings Per Share 1.02 1.18 -13.6%
Cash Dividends 42.1 41.0
Return on Average Assets 0.77% 0.87%
Return on Average Equity 8.85% 10.55%
Net Interest Margin 4.27% 4.27%
Efficiency Ratio 60.49% 68.25%
Summary of Results Excluding the Effect of Intangibles (a)
---------------------------------------------------------------------------------------------------
Three Months Ended September 30
Net Income $38.8 $25.8 49.9%
Basic Earnings per Share $0.49 $0.32 53.1%
Diluted Earnings per Share $0.49 $0.32 53.1%
Return on Average Assets 1.12% 0.72%
Return on Average Equity 14.94% 10.25%
Efficiency Ratio 59.83% 70.04%
Nine Months Ended September 30
Net Income $93.7 $107.4 -12.8%
Basic Earnings per Share $1.18 $1.34 -11.9%
Diluted Earnings per Share $1.17 $1.32 -11.4%
Return on Average Assets 0.90% 0.99%
Return on Average Equity 12.23% 14.45%
Efficiency Ratio 58.12% 66.03%
(a) Intangibles include goodwill, core deposit and trust intangibles, and other intangibles.
</TABLE>
<PAGE>
Forward-Looking Statements
This report contains forward-looking information. 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, 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 structure and
strategies; general economic conditions in the geographic areas
where the Company operated are weaker than expected;
deterioration of credit quality may cause higher level of
provisioning; continued increase to interest rates may put
additional pressure on those weaker obligors in servicing their
debt which in turn may cause further deterioration to the
portfolio; continued weakness in the syndicated national credit
market creating greater difficulty for companies to create, find
or roll over credit facilities; increased volatility in Asia or
the Pacific either politically or economically; economic recovery
in Hawaii slows because of U. S. Mainland economic slowdown which
may restrict our ability to grow our relationship portfolio as
originally forecasted; the need to maintain market
competitiveness may require much higher levels of capital
expenditures than originally forecasted; higher oil prices
reducing tourism; loss of confidence by
customers/borrowers/depositors erodes funding and asset base;
loss of staff confidence creating higher rates of turnover and
the consequent ability to attract new staff may cause a higher
than expected increase to non-interest expense. The Company does
not undertake and specifically disclaims any obligation to update
any forward-looking statements to reflect events or circumstance
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.
Its activities are conducted primarily through more than 180
branches and representative and extension offices (including
branches of affiliate banks). Pacific Century provides diverse
financial products and services to individuals, businesses,
governmental agencies and financial institutions.
Pacific Century assesses the financial performance of its
operating components primarily in accordance with geographic and
functional areas of operations. Geographically, Pacific Century
has aligned its operations into four principal geographic
segments: Hawaii, the Pacific, Asia, and the U.S. Mainland. In
addition, there is also a segment for Treasury and Other
Corporate.
Note 8 to the Consolidated Financial Statements presents
Pacific Century's business segment financial reports for the
three and nine months ended September 30, 2000 and 1999. Because
business segment financial reports are prepared in accordance
with accounting practices that could differ from accounting
principles generally accepted in the United States, the amounts
reflected therein may not agree with the corresponding amounts
reported in the Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations. For example, the economic provision for
loan losses differs from the provision determined under generally
accepted accounting principles. The economic provision for loan
losses reflects the expected normalized loss factor determined by
a statistically applied approach that considers risk factors,
including historical loss experience, within a given portfolio.
This approach eliminates the unusual loss provisions which allows
for a normalized perspective in managing the line of business.
In addition to the performance measurements in the business
segment financial report, Pacific Century also utilizes risk-
adjusted return on capital (RAROC) to assess segment performance.
RAROC is the ratio of risk-adjusted net income to equity. Equity
is allocated to business units based on various risk factors
inherent in the operations of each unit. A second performance
measurement is net income after capital charge (NIACC). NIACC is
net income available to common shareholders less a charge for
allocated capital. The cost of capital is based on the estimated
minimum rate of return expected by the financial markets. The
minimum rate of return consists of the following components: the
long-term government bond rate plus an additional level of return
for the average risk premium of an equity investment adjusted for
Pacific Century's market risk.
Hawaii Market
Pacific Century's oldest and largest market is Hawaii, where
operations are conducted primarily through its principal
subsidiary, Bank of Hawaii. Bank of Hawaii was established in
1897, and is the largest bank headquartered in the State of
Hawaii offering a wide array of financial products and services.
Bank of Hawaii operates through 76 branches in Hawaii, including
both traditional full-service branches and in-store locations.
The Hawaii segment includes retail and commercial operating
units. Retail operating units service and sell a broad line of
consumer financial products. These units include consumer
deposits, consumer lending, residential real estate lending, auto
financing, credit cards, and private and institutional services
(trust, mutual funds, and stock brokerage).
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, Hawaii commercial banking, commercial
products and commercial real estate.
For the quarter ended September 30, 2000, the Hawaii segment
contributed $19.7 million in net income an increase of 57.8% from
the $12.5 million reported for the third quarter of 1999. The
increase in the quarter's results was primarily driven by the
continued implementation of redesign initiatives during the
quarter which resulted in a $3.8 million increase in non-interest
income and a $3.3 million reduction in non-interest expense.
RAROC for this segment rose to 21% for the third quarter of 2000
from 13% in the same quarter of 1999. Total assets in the Hawaii
segment were $5.3 billion at September 30, 2000, year-end 1999,
and September 30, 1999.
For the nine months ended September 30, 2000, net income for
the Hawaii segment was up 35.5% to $54.2 million from $40.0
million in the same year-earlier period. RAROC rose to 20% in
the first nine months of 2000 from 14% in the comparable 1999
period.
Pacific Market
Pacific Century's Intra-Pacific region spans island nations
across the West and South Pacific. Pacific Century is the only
United States financial institution to have such a broad presence
in this region.
Pacific Century serves the West Pacific through branches of
both Bank of Hawaii and First Savings and Loan Association of
America (First Savings).
Pacific Century's presence in the South Pacific includes
various subsidiary and affiliate banks and branches of Bank of
Hawaii. Subsidiaries in the South Pacific are located in French
Polynesia, New Caledonia, Papua New Guinea and Vanuatu, and
affiliates are located in Samoa, Solomon Islands, and Tonga.
Bank of Hawaii locations in this region consist of three branches
in Fiji and two branches in American Samoa.
Net income in the Pacific segment was $7.7 million for the
quarter ended September 30, 2000, up from $5.4 million in the
third quarter of 1999. Implementation of redesign initiatives
which reduced non-interest expenses by 14% quarter-over-quarter
enhanced the performance of the West Pacific operations during
the third quarter. In the South Pacific, 2000 results were lower
primarily due to unfavorable fluctuations in currency exchange
rates. RAROC, including the amortization of intangibles for this
segment, increased to 14% in the third quarter of 2000 from 10%
for the same quarter in 1999. Total assets in the Pacific
segment were $2.2 billion at the end of September 2000, down from
$2.5 billion from year-end 1999 and the same year ago date,
respectively.
For the first nine months of 2000, net income for the
Pacific segment was $19.2 million, a 13.9% increase from $16.8
million reported in the same period last year. Year-to-date
RAROC for the Pacific segment moved to 12% in 2000 from 11% for
the first nine months of 1999.
Asia Market
Pacific Century operates in Asia through Bank of Hawaii
branches in Hong Kong, Japan, Singapore, South Korea and Taiwan
and a representative office with extensions in the Philippines.
Pacific Century's business focus in Asia is correspondent
banking and trade financing. The lending emphasis is on credits
relating to and resulting from trade activities, trade finance
and working capital loans for companies that have business
interests in the Asia-Pacific markets. Pacific Century's network
of locations in the Pacific and its presence on the U.S. Mainland
help customers facilitate the flow of business and investment
transactions across Asia-Pacific.
For the quarter ended September 30, 2000, the Asia segment
reflected a net loss of $0.4 million, compared to net loss of
$0.2 million for the same quarter in 1999. RAROC for this
segment was (2)% in the third quarter of 2000, compared to (1)%
for the same quarter in 1999. As of September 30, 2000, December
31, 1999 and September 30, 1999, total assets in the Asia segment
were $1.1 billion, $1.4 billion and $1.6 billion, respectively.
For the nine months ended September 30, 2000, net loss for
the Asia segment was $1.1 million, compared to a loss of $2.1
million in the comparable 1999 period. RAROC for the Asia
segment was (2)% and (3)% for the nine months ended September 30,
2000 and 1999.
For additional information on Asia, see the "International
Operations" section in this report.
U.S. Mainland Market
Pacific Century's U.S. Mainland segment includes Pacific
Century Bank, N.A. and Bank of Hawaii operating units for large
corporate lending and leasing.
In the third quarter of 2000, the U.S. Mainland segment
contributed net income of $7.3 million, down from $9.4 million in
the same year ago quarter. Comparison between periods reflect a
net gain of $1.3 million from the 1999 sale of Arbella Leasing
Corp., a special purpose leasing subsidiary. Net income for the
three months ended September 30, 2000 and 1999, included tax
benefits of $3.4 million and $4.0 million for each period,
respectively, from low income housing tax credits and investment
tax credits. RAROC, including the amortization of intangibles
for this segment was 9% in the third quarter of 2000, declining
from 13% for the same quarter in 1999. As of September 30, 2000,
December 31, 1999 and September 30, 1999, total assets in the
U.S. Mainland segment were $3.1 billion, $2.7 billion and $2.6
billion, respectively.
For the first nine months of 2000, net income for the U.S.
Mainland segment was $25.3 million, down from $28.4 million in
the like 1999 period. Included in net income were tax benefits
from low income housing tax credits and investment tax credits of
$10.3 million for each nine month period ended September 30, 2000
and 1999. RAROC for the U.S. Mainland segment was 12% and 14% in
the first nine months of 2000 and 1999, respectively.
Treasury and Other Corporate
The primary operations in this segment is Treasury, which
consists of corporate asset and liability management activities
including investment securities, federal funds purchased and
sold, government deposits, short and long-term borrowings, and
derivative activities for managing interest rate and foreign
currency risks. Additionally, the net residual effect of
transfer pricing assets and liabilities is included in Treasury,
as is any corporate-wide interest rate risk.
The Treasury and Other Corporate segment reflected third
quarter 2000 net income of $0.3 million, compared to a net loss
of $5.6 million in the same quarter in 1999. The economic
provision for loan losses reflects the expected normalized loss
factor determined by a statistically applied approach that
considers risk factors, including historical loss experience,
within a given portfolio. The economic provision differs from
the provision determined under generally accepted accounting
principles. The difference between the sum of the economic
provision for business segments and the provision in the
consolidated financial statements is included in Treasury and
Other Corporate. During the quarter, Pacific Century recorded
loan loss provisions totaling $20.1 million to cover losses
sustained in certain credit portfolios. At September 30, 2000,
year-end 1999 and September 30, 1999 this segment held assets of
$2.2 billion, $2.6 billion, and $2.6 billion, respectively. The
year-over-year reduction in assets is primarily due to a decline
in investment securities and other short-term interest earning
assets.
For the nine months ended September 30, 2000, net loss for
the Treasury and Other Corporate segment was $16.5 million,
compared to net income of $12.1 million in the same 1999 period.
STATEMENT OF INCOME ANALYSIS
Net Interest Income
In the third quarter of 2000, net interest income on a
taxable equivalent basis was $139.6 million, down from $143.8
million in the same year-earlier quarter. For the nine months
ended September 30, 2000, tax equivalent net interest income was
$418.2 million about 3.3% lower than the $432.4 million in the
same period last year. The decline in 2000's net interest income
reflected a year-to-year drop in average earning assets of $228.2
million (1.7%) and $442.8 million (3.3%) compared with the third
quarter and first nine months of 1999, respectively. The decline
in average earning assets is largely attributed to the impact of
foreign exchange rates in the South Pacific and the reduction in
both syndicated loans and the Asian portfolios.
In the third quarter of 2000, the average net interest
margin on earning assets was 4.25% similar to 4.28% for the same
quarter in 1999 and remained constant for both the first nine
months of 2000 and 1999 at 4.27%. The changes in net interest
margin was driven by the changes in the mix of earning assets,
previously referred to in the discussion on total assets. The
year-over-year improvement in the yield on earning assets was 65
and 46 basis points in 2000's September quarter and first nine
months, respectively. Comparatively, the cost of funds was 4.94%
and 4.70% for the third quarter of 2000 and year-to-date,
respectively, an increase of 88 and 61 basis points over the same
periods last year. Presented in Table 2 are average balances,
yields, and rates paid for the three and nine months ended
September 30, 2000 and 1999.
<TABLE>
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
Table 2
------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
Average Income/Yield/ Average Income/ Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Interest Bearing Deposits $197.3 $3.3 6.69% $348.5 $5.7 6.49%
Investment Securities Held to Maturity
-Taxable 711.7 12.9 7.23 804.8 14.7 7.23
-Tax-Exempt 8.3 0.4 17.70 11.7 0.4 14.04
Investment Securities Available for Sale 2,490.2 41.8 6.67 2,677.5 42.8 6.31
Funds Sold 38.8 0.6 6.48 38.9 0.5 5.57
Net Loans
-Domestic 8,193.4 177.6 8.62 7,692.0 154.6 7.98
-Foreign 1,435.2 25.2 7.00 1,729.7 25.8 5.92
Loan Fees 7.7 8.8
---------------------------------------------------
Total Earning Assets 13,074.9 269.5 8.20 13,303.1 253.3 7.55
Cash and Due From Banks 418.2 425.2
Other Assets 523.6 655.2
--------- ---------
Total Assets $14,016.7 $14,383.5
========= =========
Interest Bearing Liabilities
Domestic Dep- Demand $2,043.7 11.9 2.31 $2,128.8 12.3 2.30
- Savings 680.4 3.5 2.03 720.5 3.7 2.03
- Time 2,799.4 40.3 5.73 2,492.7 29.4 4.68
---------------------------------------------------
Total Domestic 5,523.5 55.7 4.01 5,342.0 45.4 3.37
Foreign Deposits
- Time Due to Banks 552.6 8.5 6.13 606.7 8.1 5.27
- Other Time and Savings 821.4 9.0 4.36 1,175.7 10.4 3.52
----------------------------------------------------
Total Foreign 1,374.0 17.5 5.07 1,782.4 18.5 4.11
----------------------------------------------------
Total Interest Bearing Deposits 6,897.5 73.2 4.22 7,124.4 63.9 3.56
Short-Term Borrowings 2,599.4 40.6 6.22 2,837.3 34.0 4.75
Long-Term Debt 963.4 16.1 6.67 732.3 11.6 6.28
----------------------------------------------------
Total Interest Bearing Liabilities 10,460.3 129.9 4.94 10,694.0 109.5 4.06
----------------------------------------------------
Net Interest Income 139.6 143.8
Interest Rate Spread 3.26% 3.49%
Net Interest Margin 4.25% 4.28%
Demand Deposit- Domestic 1,619.8 1,633.7
- Foreign 345.6 438.6
---------- -----------
Total Demand Deposits 1,965.4 2,072.3
Other Liabilities 361.6 401.2
Shareholders' Equity 1,229.4 1,216.0
----------- -----------
Total Liabilities and
Shareholders' Equity $14,016.7 $14,383.5
=========== ===========
Provision for Loan Losses 20.1 13.5
Net Overhead 63.7 84.2
------ ------
Income Before Income Taxes 55.8 46.1
Provision for Income Taxes 20.9 24.3
Tax-Equivalent Adjustment 0.3 0.1
------ ------
Net Income $34.6 $21.7
====== ======
</TABLE>
<TABLE>
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
Table 2
-----------------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
Average Income/Yield/ Average Income/ Yield/
(in millions of dollars) Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Interest Bearing Deposits $216.4 $10.9 6.74% $424.2 $20.4 6.43%
Investment Securities Held to Maturity
-Taxable 736.8 40.5 7.34 808.9 43.2 7.15
-Tax-Exempt 8.9 1.2 17.67 11.7 1.3 14.44
Investment Securities Available for Sale 2,510.6 124.0 6.60 2,735.4 126.5 6.18
Funds Sold 35.3 1.6 6.07 125.2 4.9 5.20
Net Loans
-Domestic 8,065.7 511.5 8.47 7,721.9 461.6 7.99
-Foreign 1,517.6 75.2 6.62 1,706.8 81.2 6.36
Loan Fees 24.9 30.1
-----------------------------------------------------------------------------------------------
Total Earning Assets 13,091.3 789.8 8.06 13,534.1 769.2 7.60
Cash and Due From Banks 456.1 475.6
Other Assets 597.7 648.5
--------- ---------
Total Assets $14,145.1 $14,658.2
========= =========
Interest Bearing Liabilities
Domestic Dep- Demand $2,085.6 36.4 2.33 $2,146.0 36.4 2.27
- Savings 690.6 10.5 2.03 728.0 11.0 2.03
- Time 2,769.5 111.8 5.39 2,534.0 90.9 4.80
---------------------------------------------------
Total Domestic 5,545.7 158.7 3.82 5,408.0 138.3 3.42
Foreign Deposits
- Time Due to Banks 487.7 21.7 5.95 646.7 25.0 5.17
- Other Time and Savings 1,024.9 32.0 4.18 1,163.7 30.4 3.49
---------------------------------------------------
Total Foreign 1,512.6 53.7 4.75 1,810.4 55.4 4.09
---------------------------------------------------
Total Interest Bearing Deposits 7,058.3 212.4 4.02 7,218.4 193.7 3.59
Short-Term Borrowings 2,651.2 117.0 5.90 3,118.3 110.9 4.75
Long-Term Debt 848.3 42.2 6.64 665.2 32.2 6.47
---------------------------------------------------
Total Interest Bearing Liabilities 10,557.8 371.6 4.70 11,001.9 336.8 4.09
---------------------------------------------------
Net Interest Income 418.2 432.4
Interest Rate Spread 3.36% 3.51%
Net Interest Margin 4.27% 4.27%
Demand Deposit- Domestic 1,649.9 1,649.2
- Foreign 376.9 427.6
--------- ---------
Total Demand Deposits 2,026.8 2,076.8
Other Liabilities 336.6 370.8
Shareholders' Equity 1,223.9 1,208.7
--------- ---------
Total Liabilities and
Shareholders' Equity $14,145.1 $14,658.2
========== ==========
Provision for Loan Losses 117.1 40.0
Net Overhead 174.2 226.4
----- -----
Income Before Income Taxes 126.9 166.0
Provision for Income Taxes 45.1 69.9
Tax-Equivalent Adjustment 0.7 0.7
----- -----
Net Income $81.1 $95.4
===== =====
</TABLE>
<PAGE>
Provision for Loan Losses
The provision for loan losses was $20.1 million in the third
quarter of 2000, an increase from $13.5 million for the same
quarter in 1999. For the first nine months of 2000, the
provision for loan losses totaled $117.1 million, compared to
$40.1 million in the like year ago period. For further
discussion on credit quality, refer to the section on "Credit
Risk - Reserve for Loan Losses."
Non-Interest Income
Total non-interest income in the third quarter of 2000, was
$61.3 million, compared to $71.4 million for the same quarter in
1999, a decrease of 14.2%. The decrease reflects the gain on the
sale of Arbella Leasing of $14.0 million recognized in the third
quarter of 1999. For the first nine months of 2000, total non-
interest income was $198.7 million, up 1.3% over the same year-
earlier period. The gain on the pension settlement recorded in
the second quarter of 2000 and the Arbella gain affect the
comparison. Excluding both these transactions, the increase in
non-interest income was 2.6% year-over-year. The changes between
periods are discussed in each section following.
<TABLE>
Non-Interest Income
Table 3
<CAPTION>
3 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended
(in millions) Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Income $15.9 $14.7 $49.1 $44.7
Service Charges on Deposit Accounts 10.1 8.6 29.8 25.7
Fees, Exchange and Other Service 22.7 21.9 66.9 66.6
Charges
Other Operating Income 12.7 26.1 41.3 50.5
Gain on Settlement of Pension Obligation - - 11.9 -
Investment Securities Gains (Losses) (0.1) 0.1 (0.3) 8.7
---------------------------------------------------------------------------------------------------
Total Non-Interest Income $61.3 $71.4 $198.7 $196.2
===================================================================================================
</TABLE>
Trust income for the third quarter of 2000 increased to
$15.9 million, up 8.2% from the same quarter last year. Year-to-
date trust income totaled $49.1 million, reflecting a 9.9%
increase over the first nine months of 1999. Pacific Century
continues to show growth in the trust category due in part, to
organizational changes that have allowed relationship officers to
deliver a wider array of financial services to customers. New
Era brought changes to trust pricing strategy that rationalized
pricing and the cost of providing the service. Finally, the
Pacific Capital family of mutual funds and Hawaiian Tax Free
Trust, which are managed by Pacific Century Trust, have continued
to experience strong growth. At the end of September 2000, the
Pacific Capital fund family of investments totaled $4.1 billion
compared to $3.5 billion on the same date in 1999 and $3.7
billion at year-end 1999.
Service charges on deposit accounts for the September 2000
quarter increased to $10.1 million, from $8.6 million in the
third quarter of 1999. The increase largely reflecting the
pricing changes developed in the New Era Redesign project.
Pricing changes developed in New Era were to realign fees
commensurate with the cost to provide the service. For the year-
to-date, service charges on deposit accounts increased to $29.8
million, 16.0% increase over the same period in 1999.
Fees, exchange and other service charges were $22.7 million
for the third quarter of 2000, up modestly from $21.9 million for
the same quarter in 1999. The year-to-date total for this
category was $66.9 million in 2000, a modest increase from $66.6
million for the first nine months of 1999. The change between
year-to-date 2000 and 1999 was the net of increases in fees
reflecting New Era changes offset by a decline in fees earned in
the South Pacific banks. The decline in the South Pacific fees
is partly due to the weakening of the exchange rate against the
dollar.
Other operating income in the third quarter of 2000 was
$12.7 million, a 51.3% decrease from $26.1 million reported in
the same quarter of 1999. As previously discussed, in the third
quarter of 1999, Arbella Leasing a subsidiary of Pacific Century
Leasing was sold at a gain of $14.0 million. Excluding that
gain, the increase would have been 5.1% comparing the third
quarters of 1999 and 2000. Year-to-date other operating income
decreased 18.1% from the same period in 1999. The year-to-year
comparison is also affected by the non-recurring gain ($2.0
million) on the sale of shares received as an insurance company
demutualized in the first quarter of 2000 as well as the Arbella
transaction. Without these two transactions, year to date other
income would have grown 7.8% over the same period in 1999.
There were no significant securities transactions reported
for the third quarter of 2000 and 1999. For the year-to-date
2000, securities losses of $0.3 million were recognized, compared
with gains of $8.7 million for the same period in 1999. The
gains reported in 1999 were related to investments held by
Pacific Century Small Business Investment Company.
Non-Interest Expense
Total non-interest expense for the September 2000 quarter
was $124.9 million, compared to $155.6 million in the similar
quarter of 1999, a decrease of $30.7 million. As previously
stated, in the third quarter of 1999, a restructuring charge of
$22.5 million was recorded relative to the New Era Redesign
program. Without that charge, non-interest expense for the
quarter would have still decreased by 6.2%. Year-to-date total
non-interest expense was $372.9 million, down from $422.6 million
for the first nine months of 1999. Comparisons between 2000 and
1999 largely reflect the impact of the implementation of New Era
ideas on the redesign of processes and procedures (excluding the
impact of the restructuring charge in 1999). The implementation
of New Era had its greatest impact on salaries and benefits which
is discussed in further detail following.
<PAGE>
<TABLE>
Non-Interest Expense
Table 4
<CAPTION>
3 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended
(in millions) Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries $45.2 $50.8 $137.2 $152.1
Pension and Other Employee Benefits 12.3 13.4 37.7 43.4
Net Occupancy Expense 12.6 11.5 36.9 35.6
Net Equipment Expense 13.4 12.4 37.5 36.2
Other Operating Expense 41.3 44.9 123.3 132.4
Restructuring Charge - 22.5 - 22.5
Minority Interest 0.1 0.1 0.3 0.4
--------------------------------------------------------------------------------------------------
Total Non-Interest Expense $124.9 $155.6 $372.9 $422.6
==================================================================================================
</TABLE>
Salaries and pension and other employee benefits expense
totaled $57.5 million in the third quarter of 2000 compared to
$64.2 million in the same quarter last year. For the first nine
months, total salaries and benefits declined 10.5% to $174.9
million from $195.5 million in the same period last year. This
significant change in salary and benefit expense largely reflects
the implementation of the process changes in the New Era
Redesign. The implementation of changes in processes and
procedures identified in New Era allowed the reduction of staff
and, along with it, lower salary and benefit costs.
Net occupancy and equipment expense in the third quarter of
2000 quarter increased to $26.0 million from $23.9 million for
the same period in 1999. For the first nine months of 2000, net
occupancy and equipment expense totaled $74.3 million, up 3.5%
from $71.8 million in the similar period last year.
Other operating expense decreased to $41.3 million in the
third quarter of 2000, a 7.9% decline from $44.9 million for the
same quarter in 1999. Year-to-date other operating expense
decreased $9.1 million to $123.3 million from $132.4 million for
the same period in 1999. Much of the decrease in other expense
is attributed to the Year 2000 remediation costs incurred in
1999. For the third quarter of 1999, Year 2000 expenses were
$1.9 million and $9.1 million for the first nine months of 1999.
Pacific Century utilizes the efficiency ratio as a tool to
manage non-interest income and expense. The efficiency ratio is
derived by dividing non-interest expense by net operating revenue
(net interest income plus non-interest income before securities
transactions). For the third quarter and first nine months of
2000, the efficiency ratio was 62.3% and 60.5%, respectively.
Comparatively, this ratio was 72.4% in the same quarter last year
and 68.3% for the nine months of 1999. As mentioned earlier,
both 2000 and 1999 efficiency ratios were affected by the one-
time items, without these transactions, the efficiency ratios
would have been 62.3% and 66.3% for the third quarters of 2000
and 1999, respectively. On a year-to-date basis, the ratios
would have improved from 66.1% for 1999 to 61.7% for 2000.
On a tangible basis, the efficiency ratio was 59.8% and
70.0% for the third quarters of 2000 and 1999, respectively. For
the respective years-to-date, the tangible efficiency ratio was
58.1% and 66.0% for 2000 and 1999 and 59.3% and 63.8% for 2000
and 1999 without the one-time transactions in both years.
BALANCE SHEET ANALYSIS
Loans
Loans comprise the largest category of earning assets for
Pacific Century and produce the highest level of earnings. At
September 30, 2000, loans outstanding were $9.7 billion, the same
as at year-end 1999 and September 30, 1999.
Pacific Century's objective is to maintain a diverse loan
portfolio in order to spread credit risk and reduce exposure to
economic downturns that may impact different markets and
industries. The composition of the loan portfolio is regularly
monitored to ensure diversity as to loan type, geographic
distribution, and industry and borrower concentration.
Table 5 presents the composition of the loan portfolio by
major loan categories as of September 30, 2000, December 31, 1999
and September 30, 1999.
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Loan Portfolio Balances
Table 5
---------------------------------------------------------------------
<CAPTION>
September December 31 September
(in millions of dollars) 2000 1999 1999
---------------------------------------------------------------------
<S> <C> <C> <C>
Domestic Loans
Commercial and Industrial $2,562.3 $2,493.0 $2,491.5
Real Estate
Constructio-- Commercial 284.7 315.1 303.7
-- Residential 22.3 13.8 12.4
Mortgage --Commercial 1,169.3 1,244.8 1,264.5
-- Residential 2,908.9 2,645.4 2,584.0
Installment 735.4 756.1 743.9
Lease Financing 729.8 627.6 547.1
---------------------------------------------------------------------
Total Domestic 8,412.7 8,095.8 7,947.1
---------------------------------------------------------------------
Foreign Loans 1,338.0 1,621.8 1,799.5
---------------------------------------------------------------------
Total Loans $9,750.7 $9,717.6 $9,746.6
=====================================================================
</TABLE>
<PAGE>
Investment Securities
Pacific Century's investment portfolio is managed to provide
collateral for cash management needs, to meet strategic
asset/liability positioning, and to provide both interest income
and balance sheet liquidity. At $2.5 billion, available-for-sale
securities at September 30, 2000 were almost level with year-end
1999, but were down from $2.6 billion at the same date last year.
Securities held to maturity were down to $0.7 billion at
September 30, 2000, declining from $0.8 billion at year-end 1999
and a year ago. Other short-term interest bearing assets totaled
$0.2 billion at the end of the third quarter, down from $0.3
billion and $0.5 billion at December 31, 1999 and September 30,
1999, respectively. The decline in investment securities and
other short-term interest earning assets relative to year-end
1999 and September 30, 1999, is primarily the result of managed
reductions of lower yielding assets to improve balance sheet
efficiency.
Deposits
As of September 30, 2000, deposits totaled $8.8 billion,
down from $9.3 billion from September 30, 1999 and $9.4 billion
at year-end 1999. As of September 30, 2000, the mix of deposits
has changed with domestic deposits increasing and foreign
deposits decreasing. At $7.1 billion, domestic deposits at
September 30, 2000 were $76 million lower than year-end 1999,
while foreign deposits decreased $497 million. Foreign deposits
are declining largely due to the impact of exchange rates
particularly in French Polynesia and a reduction in foreign time
deposits due to banks (functionally a form of short-term
borrowings handled centrally by the Treasury function).
Table 6 presents deposits by type as of September 30, 2000
and 1999 and year-end 1999.
<PAGE>
<TABLE>
Deposits
Table 6
---------------------------------------------------------------------------------------------------------
<CAPTION>
September 30, 2000 December 31, 1999 September 30, 1999
--------------------------------------------------------------------
(in millions of dollars) Amount Mix Amount Mix Amount Mix
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Non-Interest Bearing Demand $1,626.4 18.4% $1,676.4 17.8% $1,683.2 18.1%
Interest-Bearing Demand 2,039.3 23.1% 2,076.4 22.1% 2,059.7 22.2%
Regular Savings 671.4 7.6% 700.1 7.5% 713.0 7.7%
Time Certificates
of Deposit
($100,000 or More) 1,289.7 14.6% 1,203.7 12.8% 1,110.1 11.9%
All Other Time and
Savings Certificates 1,512.3 17.2% 1,557.9 16.6% 1,460.0 15.7%
---------------------------------------------------------------------------------------------------------
Total Domestic 7,139.1 80.9% 7,214.5 76.8% 7,026.0 75.6%
---------------------------------------------------------------------------------------------------------
Foreign
Non-Interest Bearing Demand 343.8 3.9% 401.6 4.3% 437.1 4.7%
Time Due to Banks 571.6 6.5% 597.7 6.4% 679.3 7.3%
Other Time and Savings 766.1 8.7% 1,179.8 12.5% 1,148.0 12.4%
---------------------------------------------------------------------------------------------------------
Total Foreign 1,681.5 19.1% 2,179.1 23.2% 2,264.4 24.4%
---------------------------------------------------------------------------------------------------------
Total $8,820.6 100.0% $9,393.6 100.0% $9,290.4 100.0%
=========================================================================================================
</TABLE>
<PAGE>
Borrowings
Short-term borrowings, including funds purchased and
securities sold under agreements to repurchase, totaled $2.5
billion at September 30, 2000 compared with $2.8 billion at year-
end 1999 and $2.9 billion at September 30, 1999.
Long-term debt on September 30, 2000 increased to $1.0
billion from $728 million at year-end 1999 and $795 million at
September 30, 1999. This increase is primarily attributed to new
Federal Home Loan Bank advances, net of maturities.
INTERNATIONAL OPERATIONS
Pacific Century maintains an extensive international
presence in the Asia-Pacific region that provides opportunities
to take part in lending, correspondent banking, trade financing
and deposit-taking activities in these markets. Pacific Century
divides its international business into two areas: the Asia
Market and the Pacific Market, the latter of which is comprised
of economies located in the South and West Pacific.
Through its Asia Market, Pacific Century offers banking
services to its corporate and financial institution customers in
most of the major Asian financial centers with support from its
New York and Honolulu operations. The Asia Division of Bank of
Hawaii continues to focus on correspondent banking and trade-
related financing activities and lending to customers with which
it has a direct relationship.
The South Pacific Division consists of investments in
subsidiary banks in French Polynesia, New Caledonia, Papua New
Guinea, Vanuatu, and Bank of Hawaii branch operations in Fiji and
American Samoa. Since American Samoa is U.S. dollar based, its
operation is included as domestic. Additionally, Bank of Hawaii
has interests in affiliate banks located in Samoa, Solomon
Islands and Tonga.
The West Pacific Division includes Bank of Hawaii branches
in Guam and in other locations in the region. Since the U.S.
dollar is used in these locations, Pacific Century's operations
in the West Pacific are not considered foreign for financial
reporting purposes.
A detailed description of controls over risk exposure in
international lending is provided in Pacific Century's 1999
Annual Report on Form 10-K. There has been no significant change
to that process during 2000. Pacific Century continues to
monitor its exposure in international lending with particular
attention provided to Asia and the South Pacific.
The foreign countries to which Pacific Century maintains its
largest credit exposure on a cross border basis are Japan, South
Korea and France (as it relates to French Polynesia and New
Caledonia). Table 7 presents as of September 30, 2000, December
31, 1999, and September 30, 1999 a geographic distribution of
Pacific Century's cross-border assets for each country in which
such assets exceeded 0.75% of total assets.
<TABLE>
Geographic Distribution of Cross-Border International Assets (1)
Table 7
<CAPTION>
(in millions)
Country September 30, 2000 December 31, 1999 September 30, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan $293.1 $320.4 $282.1
South Korea 305.5 294.3 345.8
France 93.6 195.1 166.7
All Others 462.4 563.4 695.5
----------- ----------- -----------
$1,154.6 $1,373.2 $1,490.1
======= ======= =======
(1) This table details by country cross-border outstandings that individually amounted to 0.75% or more of
consolidated total assets as of September 30, 2000, December 31, 1999 and September 30, 1999. 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, and interest-bearing deposits
with other banks.
</TABLE>
CORPORATE RISK PROFILE
Credit Risk
Non-Performing Assets and Past Due Loans
Non-performing assets (NPAs) consist of non-accrual loans,
restructured loans and foreclosed real estate. These assets
increased to $219.6 million at September 30, 2000 from $154.8
million a year ago and $149.9 million at the end of 1999.
The management of non-performing assets has received an
elevated level of management focus and attention. The
reevaluation of the loan grading system was completed during the
third quarter. This change and its resulted impact on loan
grades is reflected in the increase in NPA. During the third
quarter, NPA were impacted by payments of more than $33 million
and charge-offs of $21 million. Loans aggregating $64 million,
largely loans in the commercial real estate category, were added
to non-performing status during the quarter.
Total non-accrual loans rose to $214.5 million at September
30, 2000, up from $145.3 million and $148.9 million at year-end
1999 and September 30, 1999, respectively. The most significant
components of the increase in non-accrual loans relative to year-
end were noted in commercial industrial and commercial real
estate categories. Since year-end, foreign and residential real
estate non-accruals have decreased $19.1 million and $7.7
million, respectively.
At September 30, 2000, the ratio of NPAs to outstanding
loans was 2.25%. Comparatively the ratio was 1.54% at year-end
1999 and 1.59% at September 30, 1999. Table 8 presents Pacific
Century's NPAs and ratio of NPAs to total loans.
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.
Non-performing residential mortgages (excluding construction
loans) totaled $22.0 million at September 30, 2000 compared to
$29.7 million at year-end 1999 and $33.1 million a year ago.
This decreasing trend in 2000 reflects the first quarter sale of
certain non-performing residential loans ($4.8 million), an
aggressive collection effort and an improving residential real
estate market.
Foreclosed real estate totaled $5.1 million at September 30,
2000 compared to $4.6 million at year-end 1999 and $5.9 million a
year ago. At September 30, 2000, the foreclosed real estate
portfolio consisted of 42 properties, mostly residential property
located in Hawaii. The largest property is a commercial property
and represented approximately 11% of the total.
Accruing loans past due 90 days or more was $20.6 million as
of September 30, 2000. Accruing loans past due 90 days or more
were $18.5 million at year-end 1999, and $21.6 million at
September 30, 1999.
Potential Problem Loans
Management continues to closely monitor the $65 million loan
in the syndicated portfolio mentioned in the second quarter 10-Q.
<TABLE>
Non-Performing Assets and Accruing Loans Past Due 90 Days or More
Table 8
---------------------------------------------------------------------------
<CAPTION>
September 30 December 31 September 30
(in millions of dollars) 2000 1999 1999
---------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Accrual Loans
Commercial and Industrial $49.0 $23.7 $31.7
Real Estate
Construction 8.1 1.1 2.1
Commercial 86.8 19.0 20.8
Residential 22.0 29.7 33.1
Installment 0.1 0.5 0.7
Leases 0.2 3.9 4.8
Total Domestic 166.2 77.9 93.2
Foreign 48.3 67.4 55.7
-------------------------------
Subtotal 214.5 145.3 148.9
Foreclosed Real Estate
Domestic 4.9 4.3 5.6
Foreign 0.2 0.3 0.3
-------------------------------
Subtotal 5.1 4.6 5.9
-------------------------------
Total Non-Performing Assets 219.6 149.9 154.8
-------------------------------
Accruing Loans Past Due 90 Days or More
Commercial and Industrial 2.2 5.9 6.2
Real Estate
Construction 0.1 0.0 0.5
Commercial 4.9 1.9 2.4
Residential 7.2 4.0 2.8
Installment 4.6 4.5 4.5
Leases 0.1 1.2 0.2
Total Domestic 19.1 17.5 16.6
Foreign 1.5 1.0 5.0
--------------------------------
Subtotal 20.6 18.5 21.6
--------------------------------
Total $240.2 $168.4 $176.4
================================
---------------------------------------------------------------------------
Ratio of Non-Performing Assets
to Total Loans 2.25% 1.54% 1.59%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Ratio of Non-Performing Assets
and Accruing Loans Past Due
90 Days or More to Total Loans 2.46% 1.73% 1.81%
---------------------------------------------------------------------------
</TABLE>
<PAGE>
Reserve for Loan Losses
The reserve for loan losses ended the third quarter of 2000
at $245.0 million, a $50.8 million increase from year-end 1999
and a $33.7 million increase over the same date last year. Net
charge-offs for the third quarter of 2000 were $19.6 million or
0.81% (annualized) of average loans, compared to $13.5 million,
or 0.57% (annualized) of average loans for the same quarter last
year and $73.8 million, or 0.78% of average loans for all of
1999. For the nine months ended September 30, 2000, net charge-
offs were $63.8 million, or 0.89% (annualized) of average loans,
compared to $37.0 million and 0.52% (annualized), respectively in
same 1999 period. The ratio of reserves to loans outstanding at
September 30, 2000 was 2.58%, compared to 2.22% at this date last
year and 2.05% at year-end 1999. A summary of the activity in
the reserve for loan losses is presented in Table 9.
At September 30, 2000, the reserve for loan losses provided
coverage of 112% of non-performing loans, compared to 130%
coverage at year-end 1999 and 137% at September 30, 1999.
Additionally, the ratio of reserves to annualized gross charge-
offs was 2.3 times for the first nine months of 2000, compared to
1.9 times for all of 1999 and 2.6 times for the first nine months
of 1999.
For the first nine months of 2000, recoveries totaled $15.4
million compared to $23.7 million for the same period last year.
The 1999 total was enhanced by two large recoveries, a $7.0
million recovery of a U.S. mainland loan in the commercial and
industrial portfolio and $3.2 million in foreign loan recoveries.
During the third quarter, the Company recorded a provision
for loan losses of $20.2 million. This provision level is lower
than the provision made for the second quarter of $83.4 million.
The provision in the second quarter was to bolster the reserve to
support increases in non-performing assets and increased risk in
the loan portfolio. The increased risk arose from deterioration
in the quality of the Hawaii commercial real estate and the
Company's syndicated loan portfolios, the turmoil in Fiji, and
the finalization of the grading reevaluation to assess the
accuracy of its loan grading system. The finalization of this
review, the collection efforts of the quarter, and the
comprehensive reexamination of lending and credit practices were
reflected in the increased provisions in both the second and
third quarters.
The Company continues its effort to enhance the credit
process and improve credit quality. The ad hoc Credit Quality
Committee established by the Board of Bank of Hawaii, a special
committee consisting of three outside Directors that is charged
with monitoring management's progress, has met regularly during
the quarter. The Company has hired an industry expert as an
advisor to assist in this effort which includes hiring a new
Chief Credit Officer.
<TABLE>
Pacific Century Financial Corporation and subsidiaries
Reserve for Loan Losses
Table 9
----------------------------------------------------------------------------------------------
<CAPTION>
Third Third First Nine First Nine
Quarter Quarter Months Months
(in millions of dollars) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Amount of Loans Outstanding $9,628.6 $9,421.7 $9,583.3 $9,428.7
Balance of Reserve for Loan Losses
at Beginning of Period $246.6 $209.6 $194.2 $211.3
Loans Charged-Off
Commercial and Industrial 8.0 0.3 17.7 15.7
Real Estate
Construction 0.0 0.0 0.5 0.2
Commercial 2.8 0.1 14.3 2.3
Residential 1.5 2.0 5.2 5.6
Installment 4.6 6.2 14.5 19.1
Leases 0.2 0.1 0.4 0.2
----------------------------------------------------------------------------------------------
Total Domestic 17.1 8.7 52.6 43.1
Foreign 9.5 11.8 26.6 17.6
----------------------------------------------------------------------------------------------
Total Charged-Off 26.6 20.5 79.2 60.7
Recoveries on Loans Previously Charged-Off
Commercial and Industrial 2.2 3.4 5.1 12.9
Real Estate
Construction 0.0 0.0 0.0 0.0
Commercial 0.1 0.8 0.3 1.0
Residential 0.3 0.0 1.0 0.2
Installment 1.7 2.0 5.3 5.6
Total Domestic 4.3 6.2 11.7 19.7
----------------------------------------------------------------------------------------------
Foreign 2.7 0.8 3.7 4.0
Total Recoveries 7.0 7.0 15.4 23.7
----------------------------------------------------------------------------------------------
Net Charge-Offs (19.6) (13.5) (63.8) (37.0)
Provision Charged to Operating Expenses 20.2 13.5 117.1 40.1
Other Net Additions (Reductions)* (2.2) 1.7 (2.5) (3.1)
----------------------------------------------------------------------------------------------
Balance at End of Period $245.0 $211.3 $245.0 $211.3
==============================================================================================
Ratio of Net Charge-Offs to
Average Loans Outstanding (annualized) 0.81% 0.57% 0.89% 0.52%
----------------------------------------------------------------------------------------------
Ratio of Reserve to Loans Outstanding 2.58% 2.22% 2.58% 2.22%
----------------------------------------------------------------------------------------------
* Includes balance transfers, reserves acquired, and foreign currency translation adjustments.
</TABLE>
<PAGE>
Market Risk
At Pacific Century, assets and liabilities are managed to
maximize long term risk adjusted returns to shareholders.
Pacific Century's asset and liability management process involves
measuring, monitoring, controlling and managing financial risks
that can significantly impact Pacific Century's financial
position and operating results. Financial risks in the form of
interest rate sensitivity, foreign currency exchange
fluctuations, liquidity, and capital adequacy are balanced with
expected returns with the objective 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
A key element in Pacific Century's ongoing process to
measure and monitor interest rate risk is the utilization of a
net interest income (NII) simulation model. This model is used
to estimate the amount that NII will change over a one-year time
horizon under various interest rate scenarios using numerous
assumptions, which management believes are reasonable. The NII
simulation model provides a sophisticated estimate rather than a
precise prediction of NII's exposure to higher or lower interest
rates.
Table 10 presents as of September 30, 2000, December 31,
1999 and September 30, 1999, the results from this model. The
NII simulation model provides an estimate of the change in NII
from a gradual 200 basis point increase or decrease in interest
rates, moving in parallel fashion over the entire yield curve,
over the next 12-month period relative to what the NII would have
been if interest rates did not change. The resulting estimate in
NII exposure is well within the approved Asset Liability
Management Committee guidelines.
<TABLE>
Market Risk Exposure to Interest Rate Changes
Table 10
<CAPTION>
September 30, 2000 December 31, 1999 September 30, 1999
--------------------------------------------------------------------------------------------------
Interest Rate Change Interest Rate Change Interest Rate Change
(in basis points) (in basis points) (in basis points)
-200 +200 -200 +200 -200 +200
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Estimated Exposure as a
Percent of Net Interest Income (0.8)% 0.1% 1.4% (1.7)% 0.8% (1.3)%
--------------------------------------------------------------------------------------------------
</TABLE>
To enhance and complement the results from the NII
simulation model, Pacific Century also reviews other measures of
interest rate risk. These measures include the sensitivity of
market value of equity and the exposure to basis risk and non-
parallel yield curve shifts. There are some inherent limitations
to these measures, but used along with the NII simulation model,
Pacific Century gets a better overall insight for managing its
exposure to changes in interest rates.
In managing interest rate risks, Pacific Century uses
several approaches, both on- and off-balance sheet, to modify its
risk position. Approaches that are used to shift balance sheet
mix or alter the interest rate characteristics of assets and
liabilities include changing product pricing strategies,
modifying investment portfolio strategies, or using financial
derivatives. The use of financial derivatives has been limited
over the past several years. During this period, Pacific Century
has relied more on the use of on-balance sheet alternatives to
manage its interest rate risk position.
Pacific Century's broad area of operations throughout the
South Pacific and Asia has the potential to expose it to foreign
currency risk. In general, however, most foreign currency
denominated assets are funded by like currency liabilities, with
imbalances corrected through the use of various hedge
instruments. By policy, the net exposure in those balance sheet
activities described above is insignificant.
On the other hand, Pacific Century is exposed to foreign
currency exchange rate changes from the capital invested in its
foreign subsidiaries and branches located throughout the South
Pacific and Asian Rim. These investments are designed to
diversify Pacific Century's total balance sheet exposure. A
portion of the capital investment in French Polynesia and New
Caledonia is offset by a borrowing denominated in euro and a
foreign exchange currency hedge transaction. As presented in
Table 11, the remainder of these capital positions which
aggregated $70.3 million, was not hedged as of September 30,
2000. The comparative unhedged position at year-end 1999 was
$87.6 million and $92.7 million at September 30, 1999. The
increased provisioning and charge-off of loans in the South
Pacific and Asia has created situations where liabilities
exceeded assets as of September 30, 2000. This anomaly results
in the negative value reported in Table 11 for the other currency
category.
Pacific Century uses a value-at-risk (VAR) calculation to
measure the potential loss from foreign currency exposure.
Pacific Century's VAR is calculated at a 95% confidence interval
and assumes a normal distribution. Pacific Century utilizes the
variance/covariance approach to estimate the probability of
future changes in foreign exchange rates. Under this approach,
equally weighted daily closing prices are used to determine the
daily volatility for the last 10, 30, 50, and 100 days. Pacific
Century uses the highest daily volatility of the four trading
periods in its VAR calculation.
Table 11 presents as of September 30, 2000, December 31,
1999 and September 30, 1999 Pacific Century's foreign currency
exposure from its net investment in subsidiaries and branch
operations that are denominated in a foreign currency as measured
by the VAR.
<PAGE>
<TABLE>
Market Risk Exposure From Changes in Foreign Exchange Rates
Table 11
<CAPTION>
----------------------------------------------------------------------------------------------------
September 30, 2000 December 31, 1999 September 30, 1999
Book Value Value-at-Risk Book Value Value-at-Risk Book Value Value-at-Risk
(in millions of dollars)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Investments in Foreign
Subsidiaries and Branches
Japanese Yen $10.5 $1.5 $9.4 $1.8 $8.2 $1.9
Korean Won 32.4 3.9 34.3 4.2 40.5 3.7
Pacific Franc (1) 30.4 6.1 25.9 4.2 25.3 4.6
Other Currencies (3.0) 18.2 18.0 17.0 18.7 17.1
------- ------- ------- ------- -------- -------
Total $70.3 $29.7 $87.6 $27.2 $92.7 $27.3
==== ==== ==== ==== ===== ====
(1) Net of a $35 million, $40 million and $42 million borrowing at September 30, 2000, December 31, 1999 and
September 30, 1999, respectively, denominated in euro and foreign exchange hedge transactions of $20
million, $23 million and $24 million at September 30, 2000, December 31, 1999 and September 30, 1999.
</TABLE>
Trading Activities
Trading activities include foreign currency and foreign
exchange contracts that expose Pacific Century to a minor degree
of foreign currency risk. Pacific Century manages its trading
account such that it does not maintain significant foreign
currency open positions. Trading activities remain immaterial as
of September 30, 2000.
Liquidity Management
Liquidity is managed to ensure that Pacific Century has
continuous access to sufficient, reasonably priced funding to
conduct its business in a normal manner. Pacific Century's
liquidity management process is described in the 1999 Annual
Report to Shareholders. Additional borrowings are subject to
regulators approval (see footnote 7).
Pacific Century maintained a $25 million annually renewable
line of credit for working capital purposes. Fees are paid on
the unused balance of the line. During the third quarter of
2000, the line was not drawn upon.
Bank of Hawaii and First Savings are both members of the
Federal Home Loan Bank of Seattle. The FHLB provides these
institutions with an additional source for short and long-term
funding. Borrowings from the FHLB ended the third quarter of 2000
at $533 million, compared to $626 million at the prior quarter-
end and $247 million at the end of 1999.
Additionally, Bank of Hawaii maintains a $1 billion senior
and subordinated bank note program. Under this facility, Bank of
Hawaii may issue additional notes provided that at any time the
aggregate amount outstanding does not exceed $1 billion. At
September 30, 2000, there was $125 million issued and outstanding
under this program. No new notes have been issued in 2000.
<PAGE>
<TABLE>
Equity Capital
Table 12
---------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended Year Ended Nine Months Ended
September 30 December 31 September 30
(in millions of dollars) 2000 1999 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Source of Common Equity
Net Income $81.1 $133.0 $95.4
Dividends Paid (42.1) (54.6) (41.0)
Dividend Reinvestment Program 2.5 4.0 3.2
Stock Repurchases (17.0) (21.8) (11.3)
Other (1) 13.3 (33.9) (23.4)
---------------------------------------------------------------------------------------
Increase (Decrease) in Equity $37.8 $26.7 $22.9
=======================================================================================
Common Equity $1,250.1 $1,212.3 $1,208.5
Add: 8.25% Capital Securities of
Bancorp Hawaii Capital
Trust I 100.0 100.0 100.0
Minority Interest 4.2 4.4 4.6
Less: Intangibles 166.3 175.8 180.1
Unrealized Valuation and Other
Adjustments (31.5) (37.9) (24.3)
---------------------------------------------------------------------------------------
Tier I Capital 1,219.5 1,178.8 1,157.3
Allowable Loan Loss Reserve 135.5 143.9 145.5
Subordinated Debt 172.1 195.8 195.8
Investment in Unconsolidated
Subsidiary (3.8) (3.2) (2.7)
---------------------------------------------------------------------------------------
Total Capital $1,523.3 $1,515.3 $1,495.9
=======================================================================================
Risk Weighted Assets $10,729.5 $11,461.0 $11,569.6
=======================================================================================
Key Ratios
Tier I Capital Ratio 11.37% 10.28% 10.00%
Total Capital Ratio 14.20% 13.22% 12.93%
Leverage Ratio 8.80% 8.31% 8.15%
========================================================================================
(1) Includes common stock issued under the profit sharing and stock option plans and
unrealized valuation adjustments for investment securities, foreign currency
translation and pension liability.
</TABLE>
<PAGE>
Capital Management
Pacific Century manages its capital level to optimize
shareholder value, support asset growth, provide protection
against unforeseen losses and comply with regulatory
requirements. Capital levels are reviewed periodically relative
to Pacific Century's risk profile and current and projected
economic conditions. Pacific Century's objective is to hold
sufficient capital on a regulatory basis to exceed the minimum
guidelines of a well capitalized institution.
At September 30, 2000, Pacific Century's shareholders'
equity was $1.25 billion, an increase from $1.21 billion reported
on this date in 1999. Table 12 presents the changes in capital
by category for the nine months ended September 30, 1999 and 2000
and all of 1999. As noted in footnote 7 of the financial
statements, continuation of the share repurchase program has been
authorized by both the Board and the regulators. During the
third quarter, no treasury shares were purchased.
Pacific Century's regulatory capital ratios at September 30,
2000 were: Tier 1 Capital Ratio of 11.37%, Total Capital Ratio of
14.20%, and Leverage Ratio of 8.80%. All three capital ratios
exceeded the minimum threshold levels that were established by
federal bank regulations to qualify an institution as well
capitalized. The minimum regulatory standards to qualify as well
capitalized are as follows: Tier 1 Capital 6%; Total Capital 10%;
and the Leverage Ratio 5%. These standards are minimum
regulatory guidelines and Pacific Century manages its capital
base in accordance with the attributes noted at the beginning of
this section. Table 12 also presents the activities and balances
in Pacific Century's capital accounts along with key capital
ratios.
Regulatory Matters
Please see Note 7 to the Financial Statement which is
incorporated herein by reference.
<PAGE>
Part II. - Other Information
Items 1 to 5 omitted pursuant to instructions.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Number
20 Quarterly Report to Shareholders
27 Financial Data Schedule
99 Statement of Ratios
(b) During the third quarter of 2000, two events were
reported by Pacific Century Financial Corporation on
Form 8-K.
A Form 8-K was filed on August 22, 2000. The 8-K
announced the pending retirement of Mr. Lawrence
Johnson, Chairman and Chief Executive Officer of
Pacific Century Financial Corporation.
A Form 8-K was filed on September 14, 2000. The 8-K
announced Mr. Robert Huret as a new director of Pacific
Century Financial Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Date November 13, 2000 PACIFIC CENTURY FINANCIAL
CORPORATION
/s/ Richard J. Dahl
(Signature)
Richard J. Dahl
President and Chief Operating
Officer
/s/ David A. Houle
(Signature)
David A. Houle
Executive Vice President,
Treasurer
and Chief Financial Officer
