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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____ to _____
Commission File Number 1-6887
PACIFIC CENTURY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 99-0148992
(State of incorporation) (IRS Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
(Address of principal executive (Zip Code)
offices)
(808) 643-3888
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock, $.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of said stock on the New York Stock
Exchange on December 31, 1999 ($15.50 per share): $1,226,703,713
As of February 28, 2000, 79,650,024 shares of Common Stock, $.01 par value,
of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 28, 2000, are incorporated by reference into
Part III of this Report.
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PART I
ITEM 1. BUSINESS
Pacific Century Financial Corporation (Pacific Century) is a bank holding
company, which through its banking subsidiaries is engaged primarily in the
business of commercial and retail banking. Pacific Century was organized on
August 12, 1971, as the first bank holding company in the State of Hawaii.
Originally organized as Hawaii Bancorporation, Inc., its name was changed in
1979 to Bancorp Hawaii, Inc. and in 1997 changed to Pacific Century Financial
Corporation. The latter change in name was made to provide a more distinctive
and descriptive identity that reflects the Company's strategic goals to expand
its activities beyond Hawaii to Asia, the West and South Pacific, and the U.S.
Mainland. In April 1998, Pacific Century changed its state of incorporation
from Hawaii to Delaware, by merging into a new wholly-owned subsidiary formed
for that purpose.
Pacific Century groups its principal revenue-producing businesses into the
following four market regions: Hawaii, the South and West Pacific, Asia, and
the U.S. Mainland. Pacific Century offers a broad range of customary
commercial and consumer banking products and services that include, but are
not limited to, lending, leasing, deposit services, trust and investment
activities, and trade financing. The majority of Pacific Century's operations
are conducted through its banking subsidiaries. The principal subsidiaries of
Pacific Century are Bank of Hawaii and Pacific Century Bank, N.A.
At December 31, 1999, Pacific Century and its subsidiaries had approximately
4,700 full-time and part-time employees.
Acquisitions
In January 1999, Pacific Century completed the acquisition of Triad
Insurance Agency, Inc. (Triad). Triad is a Hawaii-based property/casualty
insurance agency. The acquisition was accounted for under the purchase method
of accounting.
Organization Structure
Pacific Century's organization structure as of December 31, 1999 is included
in Exhibit 21.1. All subsidiaries are wholly-owned except as otherwise noted
for certain banks in the South Pacific and for those entities whose directors
own qualifying shares.
Subsidiaries
Provided below is a brief description of each of Pacific Century's
subsidiaries.
Bank of Hawaii was organized under the laws of Hawaii on December 17, 1897.
Its headquarters are in Honolulu, Hawaii, and its deposits are insured by the
Federal Deposit Insurance Corporation (FDIC). Bank of Hawaii is the largest
full-service financial institution headquartered in the State of Hawaii with a
statewide network of 74 traditional and in-store branches. It is not a member
of the Federal Reserve System.
Pacific Century and 14 directors of Bank of Hawaii (each of whom holds 125
qualifying shares each) own 100% of the outstanding shares. There are six
directors of Bank of Hawaii who do not hold qualifying shares. The legal
requirement for directors of Hawaii banks to hold qualifying shares was
eliminated in 1993.
Bank of Hawaii provides customary commercial banking services through branch
offices in the State of Hawaii and branches or representative offices in
Bahamas (Nassau), Republic of Fiji (Suva, Nadi, and Lautoka), Hong Kong, Japan
(Tokyo), South Korea (Seoul), Philippines (Manila, Cebu, and Davao),
Singapore, Taiwan (Taipei), American Samoa, Commonwealth of the Northern
Mariana Islands (Saipan), Federated States of
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Micronesia (Pohnpei, Kosrae, and Yap), Guam, Republic of the Marshall Islands
(Majuro), and Republic of Palau (Koror). In addition, Bank of Hawaii maintains
a presence in the South Pacific through subsidiary banks located in French
Polynesia, New Caledonia, Papua New Guinea, and Vanuatu, and through affiliate
banks located in Samoa, Solomon Islands, and Tonga. Pacific Century Trust, a
division of Bank of Hawaii, operates offices in Hawaii, California, Arizona
and Guam. Trust assets under administration at year-end 1999 were $13.8
billion.
As of December 31, 1999, wholly-owned direct subsidiaries of Bank of Hawaii
included Pacific Century Leasing, Inc.; Bank of Hawaii International, Inc.;
Bank of Hawaii International Corporation, New York; Pacific Century Life
Insurance Corporation; Triad Insurance Agency, Inc.; Bankoh Insurance Agency;
Pacific Century Investment Services, Inc.; Pacific Century Insurance Services,
Inc.; Bankoh Corporation and Pacific Century Advisory Services, Inc. A brief
discussion of these direct Bank subsidiaries follows:
Pacific Century Leasing, Inc. (PCL), formerly Bancorp Leasing of Hawaii,
Inc., formed in 1973, provides leasing and leasing services, mainly to the
commercial sector in Hawaii. PCL has several subsidiaries that are "specific
purpose leasing vehicles." At December 31, 1999, these subsidiaries included
S.I.L., Inc.; Pacific Century Leasing International, Inc.; and BNE Airfleets
Corporation. In September 1999, Arbella Leasing Corp., a specific purpose
leasing subsidiary was sold. On a consolidated basis, PCL's assets represented
2.2% of Pacific Century's total assets at year-end 1999.
Bank of Hawaii International, Inc. (BOHI) was formed in 1968. BOHI's primary
business purpose is to hold an equity interest in the following foreign
financial institutions (in the percentages indicated): Bank of Hawaii-Nouvelle
Caledonie--96%; Bank of Hawaii (PNG) Ltd.--100%; Banque de Tahiti--95%; Banque
d'Hawaii (Vanuatu), Ltd.--100%; National Bank of Solomon Islands--51%; Pacific
Commercial Bank, Ltd.-- 43%; and Bank of Tonga--30%. At December 31, 1999,
total assets of BOHI and its subsidiaries accounted for 8.4% of the
consolidated total of Pacific Century.
Bank of Hawaii International Corporation, New York (BOHICNY) was organized
in 1982 as an Edge Act corporation. BOHICNY provides payment, clearing, and
settlement services with the New York Clearing House and Clearing House
Interbank Payment Service for both affiliated and unaffiliated banks. At
December 31, 1999, total assets of BOHICNY represented 0.8% of consolidated
total assets of Pacific Century.
At December 31, 1999, Bank of Hawaii's retail insurance subsidiaries held in
the aggregate total assets representing 0.1% of the consolidated total assets
of Pacific Century. Provided below is a brief description of these
subsidiaries.
. Pacific Century Life Insurance Corporation, formerly Bancorp Life
Insurance Company of Hawaii, Inc., was incorporated in 1981 in the State
of Arizona to underwrite, as a reinsurer, the credit life and credit
accident and health insurance sold in conjunction with Bank of Hawaii's
short-term consumer lending activities.
. Triad Insurance Agency, Inc. (Triad), a Hawaii based property/casualty
insurance agency, and its subsidiary Insurance Agents Group, Inc. (IAG)
were acquired in January 1999. Triad represents a number of large U.S.
property/casualty insurance companies in Hawaii, for whom it acts as a
servicing agent.
. In 1999 Bankoh Insurance Agency emerged as the remaining entity from the
consolidation of Pacific Century Agency, Inc., Pacific Century Insurance
Agency, Inc. and IAG. This reorganization was implemented to streamline
the insurance structure.
A brief description of Bank of Hawaii subsidiaries that provide investment,
captive insurance and other services is set forth below. The aggregate total
assets of these subsidiaries as of December 31, 1999 was 0.1% of consolidated
total assets of Pacific Century.
. Pacific Century Investment Services, Inc. formerly Bancorp Investment
Group, Ltd., was organized in 1991 to provide full service brokerage and
other investment services originally as a subsidiary of Pacific Century
and, since 1994, as a wholly-owned subsidiary of Bank of Hawaii.
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. Pacific Century Insurance Services, Inc. (Pacific Century Insurance),
formerly Bancorp Hawaii Insurance Services, Ltd. was established in 1989
as a wholly-owned captive insurance company. With the formation of
Pacific Century Insurance, Pacific Century became the first Hawaii
corporation to establish a Hawaii captive insurance company for its self-
insurance needs. Pacific Century Insurance provides bankers professional
liability insurance and workers compensation insurance exclusively to
Pacific Century and its subsidiaries and affiliates. These services
provide Pacific Century with greater flexibility and stability in
managing insurance coverages and premium costs. Additionally, Pacific
Century Insurance also provides Pacific Century with the opportunity to
design self-insurance programs not otherwise available in the
conventional insurance market. In 1999 Pacific Century Insurance became a
wholly-owned subsidiary of Bank of Hawaii.
. Bankoh Corporation was originally incorporated in 1984 as Hawaiian Hong
Kong Holdings, Ltd. and remained inactive until 1994. In 1994, the name
was changed to Bankoh Corporation, with minimal activity since its name
change.
. Pacific Century Advisory Services, Inc., formerly Bankoh Investment
Advisory Services Ltd., was reactivated in 1991 to provide advisory
services for businesses seeking to operate in Hawaii. The activity of
this company remained limited during 1999.
Pacific Century also holds all of the outstanding stock of the corporations
listed below:
Pacific Century Bank, N.A. (PCB) is headquartered in Encino, California, and
its business primarily consists of providing commercial banking products and
services in Southern California and the State of Arizona. PCB is organized
under the laws of the United States. It is a member of the Federal Reserve
System and its deposits are insured by the FDIC. PCB's operations are
conducted through 19 branch offices in the State of California and 9 branch
offices in the State of Arizona. PCB's total assets represented 7.8% of
Pacific Century's consolidated total at December 31, 1999.
First Savings and Loan Association of America, F.S.A. (First Savings), a
wholly-owned subsidiary of Pacific Century, was acquired in 1990. First
Savings is engaged primarily in the business of providing retail financial
services in the territory of Guam. Operations are conducted primarily through
three full-service branches and three in-store locations. Its deposits are
insured by the FDIC. First Savings' assets represented 1.3% of Pacific
Century's total assets at December 31, 1999.
Pacific Century Small Business Investment Company, Inc., formerly Bancorp
Hawaii Small Business Investment Company, Inc., was formed in September 1983
in the State of Hawaii as a small business investment company. At the end of
1999, total assets of this subsidiary were not significant.
PCFC Hawaii Corporation was formed in 1998 for the single purpose of holding
a real estate investment. The investment was sold in late 1998 and the company
was dissolved in 1999.
REGULATION AND COMPETITION
Effect of Governmental Policies
The earnings of Pacific Century and its principal subsidiaries are affected
not only by general economic conditions, both domestically and
internationally, but also by the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve System, and foreign
governments and their agencies. The monetary policies of the Federal Reserve
System influence to a significant extent the overall growth of loans,
investments, and deposits; the level of interest rates earned on assets and
paid for liabilities; and interest rates charged on loans and paid on
deposits. The nature and impact of future changes in monetary policies are
often not predictable.
4
Competition
Pacific Century and its subsidiaries are subject to substantial competition
in all aspects of the businesses in which they engage from banks (both
domestic and foreign), savings associations, credit unions, mortgage
companies, finance companies, mutual funds, brokerage firms, insurance
companies and other providers of financial services. Pacific Century also
competes with certain non-financial institutions and governmental entities
that offer financial products and services. Many of Pacific Century
competitors are not subject to the same level of extensive regulations and
oversight that are required of banks, bank holding companies and savings
associations.
Supervision and Regulation
Pacific Century is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the BHC Act) and, as such, is subject
to the Act and regulations issued thereunder by the Board of Governors of the
Federal Reserve System (the Board of Governors). Pacific Century is also
registered as a bank holding company under the Hawaii Code of Financial
Institutions (the Code) and, as such, is subject to the registration,
reporting, and examination requirements of the Code.
The BHC Act requires prior approval of the Board of Governors of the
acquisition by Pacific Century of more than 5% of the voting shares of any
bank or any other bank holding company. Subject to certain limits, the BHC Act
allows adequately capitalized and adequately managed bank holding companies to
acquire control of banks in any state. Thus, assuming it is judged to be
adequately capitalized and adequately managed, Pacific Century may acquire
control of banks in any state, and bank holding companies whose operations are
principally conducted in states other than Hawaii may acquire control of
Pacific Century. An interstate acquisition may not be approved, however, if
immediately before the acquisition the acquirer controls an FDIC-insured
institution or branch in the state of the institution to be acquired, and if
immediately following the acquisition the acquirer would control 30 percent or
more of the total FDIC-insured deposits in that state; but a state may waive
the 30 percent limitation by statute, regulation, or order, or by certain
nondiscriminatory administrative approvals.
An adequately capitalized and adequately managed bank may apply for
permission to merge with an out-of-state bank and convert all branches of both
parties into branches of a single bank. An interstate merger may not be
approved, however, if immediately before the acquisition the acquirer controls
an FDIC-insured institution or branch in the state of the institution to be
acquired, and if immediately following the acquisition the acquirer would
control 30 percent or more of the total FDIC-insured deposits in that state;
but a state may waive the 30 percent limitation by statute, regulation, or
order, or by certain nondiscriminatory administrative approvals. Banks are
also permitted to open newly established branches in any state that expressly
permits all out-of-state banks to open newly established branches, if the law
applies equally to all banks.
Hawaii has enacted a statute which authorizes out-of-state banks to engage
in "interstate merger transactions" with (mergers and consolidations with and
purchases of all or substantially all of the assets and branches of) Hawaii
banks, following which any such out-of-state bank may operate the branches of
the Hawaii bank it has acquired. The Hawaii bank must have been in continuous
operation for at least five years prior to such an acquisition, unless it is
subject to or in danger of becoming subject to certain types of supervisory
action. This statute does not permit out-of-state banks to acquire branches of
Hawaii banks other than through an "interstate merger transaction" (except in
the case of a bank that is subject to or in danger of becoming subject to
certain types of supervisory action) nor to open branches in Hawaii on a de
novo basis.
The BHC Act prohibits, with certain exceptions, Pacific Century from
acquiring direct or indirect control of more than 5% of the voting shares of
any company that is not a bank or bank holding company and from engaging
directly or indirectly in any activity other than those of banking, managing
or controlling banks or other subsidiaries authorized under the BHC Act, or
furnishing services to or performing services for its subsidiaries. Among the
permitted activities is the ownership of shares of any company the activities
of which the Board of Governors determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Board of Governors is required to weigh the expected
benefits
5
to the public, such as greater convenience, increased competition, or gains in
efficiency, against the risks of possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. The Board of Governors has adopted
regulations that specify various activities as being so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The exact nature and scope of such activities have been the subject of intense
national debate, and thus, they may change and become broader as they evolve
over time.
Effective March 11, 2000, pursuant to authority granted under the Gramm-
Leach-Bliley Act, a bank holding company may elect to become a financial
holding company and thereby to engage in a broader range of financial and
other activities than are permissible for traditional bank holding companies.
In order to qualify for the election, all of the depository institution
subsidiaries of the bank holding company must be well capitalized and well
managed, as defined by regulation, and all of its insured depository
institution subsidiaries have achieved a rating of "satisfactory" or better
with respect to meeting community credit needs. Pursuant to the Gramm-Leach-
Bliley Act, financial holding companies will be permitted to engage in
activities that are "financial in nature" or incidental or complementary
thereto, as determined by the Federal Reserve Board. The Gramm-Leach-Bliley
Act identifies several activities as "financial in nature," including, among
others, insurance underwriting and agency, investment advisory services,
merchant banking and underwriting, and dealing or making a market in
securities. Pacific Century has not, at this time, made any decision with
respect to whether it will elect to become a financial holding company under
the Act.
Under the policies of the Board of Governors, Pacific Century is expected to
act as a source of financial strength to its subsidiary banks and to commit
resources to support its subsidiary banks in circumstances where it might not
do so absent such a policy. It is the policy of the Board of Governors that in
serving as a source of strength to its subsidiary banks, a bank holding
company should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial adversity
and should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks.
By virtue of Section 23A of the Federal Reserve Act and Section 18(j) of the
Federal Deposit Insurance Act, Pacific Century and its subsidiaries are
"affiliates" of Bank of Hawaii and PCB and are subject to the provisions of
Section 23A, which limit the amount of and require substantial security for
loans and extensions of credit by Bank of Hawaii or PCB to, and investments
in, Pacific Century or certain of its subsidiaries and the amount of advances
to third parties collateralized by the securities and obligations of Pacific
Century or certain of its subsidiaries. Sections 23A and 18(j) are designed to
assure that the capital of depository institutions such as Bank of Hawaii and
PCB is not put at risk to support their non-bank affiliates. Also, Pacific
Century and its subsidiaries are prohibited from engaging in certain "tie-in"
arrangements in connection with extensions of credit or provision of property
or services.
Bank of Hawaii is subject to supervision and examination by the FDIC and the
Department of Commerce and Consumer Affairs of the State of Hawaii. PCB is
subject to supervision and examination by the Comptroller of the Currency and
in certain respects the FDIC.
Banks, including Bank of Hawaii and PCB, are subject to extensive federal
and (in the case of Bank of Hawaii) state statutes and regulations that
significantly affect their business and activities. Banks must file reports
with their regulators concerning their activities and financial condition and
obtain regulatory approval to enter into certain transactions. Banks are also
subject to periodic examinations by their regulators to ascertain compliance
with various regulatory requirements. Other applicable statutes and
regulations relate to insurance of deposits, allowable investments, loans,
acceptance of deposits, trust activities, mergers, consolidations, payment of
dividends, capital requirements, reserves against deposits, establishment of
branches and certain other facilities, foreign and international operations,
limitations on loans to one borrower and loans to affiliated persons, and
other aspects of the business of banks. Federal legislation has instructed
federal agencies to adopt standards or guidelines governing banks' internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation and
benefits, asset quality, earnings and stock valuation, and other matters.
Regulatory authorities have broad authority to implement
6
standards on asset quality, earnings, and stock valuation and to initiate
proceedings designed to prohibit depository institutions from engaging in
unsafe and unsound banking practices.
The FDIC has adopted a premium schedule under which the actual assessment
rate for a particular institution depends in part upon the risk classification
the FDIC assigns to that institution. The FDIC may raise an institution's
insurance premiums or terminate insurance altogether upon a finding that the
institution has engaged in unsafe and unsound practices.
The Federal Deposit Insurance Corporation Improvements Act of 1991 (FDICIA)
requires the federal banking regulators to take "prompt corrective action" in
respect to depository institutions that do not meet minimum capital
requirements and imposes certain restrictions upon banks which meet minimum
capital requirements but are not "well capitalized" for purposes of FDICIA.
FDICIA generally prohibits a depository institution from paying any dividend
or making any capital distribution or paying any management fee to its holding
company if the depository institution would thereafter be undercapitalized.
Undercapitalized institutions are subject to regulatory monitoring and may be
required to divest themselves of or liquidate subsidiaries. Holding companies
of such institutions may be required to divest themselves of such institutions
or divest themselves of or liquidate nondepository affiliates. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Further, a bank that is not well capitalized is generally subject to various
restrictions on "pass through" insurance coverage for certain of its accounts
and is generally prohibited from accepting brokered deposits and offering
interest rates on any deposits significantly higher than the prevailing rate.
Such banks and their holding companies are also required to obtain regulatory
approval before retaining senior executive officers.
Subject to certain exceptions, FDICIA (as modified in 1992) restricts
certain investments and activities by state banks (including Bank of Hawaii)
and requires the federal banking regulators to prescribe standards for
extensions of credit secured by real estate or made to finance improvements to
real estate, loans to bank insiders, regulatory accounting and reports,
internal control reports, independent audits, and other matters, and requires
that insured depository institutions generally be examined on-site by federal
or state personnel at least once every twelve months.
Under the Gramm-Leach-Bliley Act, subject to limitations on investment, a
national bank that is well capitalized and well managed, as defined by
regulation, and has a satisfactory or better community reinvestment rating,
may through a financial subsidiary of the bank engage in activities that are
financial in nature or incidental thereto, excluding, among others, insurance
underwriting, insurance company portfolio investment, real estate development
and real estate investment. In addition to the above qualifications, each
depository institution affiliate of the national bank must be well capitalized
and well managed, the aggregate consolidated total assets of all financial
subsidiaries of the national bank may not exceed the lesser of 45 percent of
the consolidated total assets of the parent bank or $50 million and, if the
bank is one of the 100 largest insured banks, it must meet specified debt
rating criteria. An insured state-chartered bank may, through a qualifying
subsidiary, also engage in activities as principal that would only be
permissible for a national bank to conduct through a financial subsidiary. To
qualify, a state-chartered bank and each of its insured depository institution
affiliates must be well capitalized and it must comply with certain deduction
and financial disclosure requirements, financial and operational safeguards
and limitations on inter-affiliate transfers comparable to those applicable to
national banks. Existing authority of the Office of the Comptroller of the
Currency and the FDIC to review subsidiary activities are preserved. No
decision has, at this time, been made with respect to the establishment of new
financial subsidiaries of either Bank of Hawaii or PCB.
The Gramm-Leach-Bliley Act does not significantly alter the regulatory
regimes under which Pacific Century, Bank of Hawaii and PCB currently operate,
as described above. While certain business combinations not currently
permissible will be possible after March 11, 2000, we cannot predict at this
time resulting changes in the competitive environment or the financial
condition of Pacific Century, Bank of Hawaii or PCB. Using the
7
financial holding company structure, insurance companies and securities firms
may acquire bank holding companies, such as Pacific Century, and may compete
more directly with banks or bank holding companies.
Various legislation, including proposals to substantially change the
financial institution regulatory system and to expand or contract the powers
of banking institutions and bank holding companies, is from time to time
introduced in the Congress. This legislation may change banking statutes and
the operating environment of the combined company and its subsidiaries in
substantial and unpredictable ways. If enacted, such legislation could
increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance among banks, savings
associations, credit unions and other financial institutions. Pacific Century
cannot accurately predict whether any of this potential legislation will
ultimately be enacted, and, if enacted, the ultimate effect that it, or
implementing regulations, would have upon the financial condition or results
of operations of itself or any of its subsidiaries.
ITEM 2. PROPERTIES
Pacific Century and its subsidiaries own and lease premises primarily
consisting of branch and operating facilities, the majority of which are
located in Hawaii, California, Arizona, Asia, and the West and South Pacific.
Bank of Hawaii owns five significant properties, the largest of which are
condominium units in the Financial Plaza of the Pacific (FPP) in which the
Bank's main branch and administrative offices are located. Portions of the FPP
are owned in fee simple or leased. The capital leases are for portions (less
than 12%) of the FPP. Details of the capital leases are included in Note G to
the Consolidated Financial Statements. Additionally, Bank of Hawaii owns a
five story office building in downtown Honolulu, the former headquarters of
First Federal Savings and Loan of America; a two-story building near downtown
Honolulu which houses data processing and certain other operational functions;
a parcel of land in downtown Honolulu; and Hale O Kapolei, a 248,000 square
feet operations facility in the Kapolei area on Oahu.
ITEM 3. LEGAL PROCEEDINGS
See Note J to the Audited Financial Statements included in Item 8 of this
report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1999 to a vote of
security holders through the solicitation of proxies or otherwise.
Executive Officers of Registrant:
NAME AGE POSITION
---- --- --------
Lawrence M. Johnson........ 59 Chairman and Chief Executive Officer of Pacific
Century and the Bank of Hawaii (the Bank) since
August 1994.
Richard J. Dahl............ 48 President of Pacific Century and the Bank since
August 1994; Chief Operating Officer of Pacific
Century since April 1997 and the Bank since
August 1995.
Alton T. Kuioka............ 56 Vice Chair of Pacific Century since April 1997;
Vice Chair of the Bank since June 1994; Chief
Lending Officer of Pacific Century since April
1997 and the Bank since August 1995.
Mary P. Carryer............ 52 Vice Chair of Pacific Century and the Bank since
November 1997.
David A. Houle............. 52 Executive Vice President of Pacific Century
since April 1997; Treasurer and Chief Financial
Officer of Pacific Century since December 1992;
Executive Vice President and Chief Financial
Officer of the Bank since February 1994.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Listing
The common stock of Pacific Century Financial Corporation, is traded over
the counter on the New York Stock Exchange (NYSE Symbol: BOH) and quoted daily
in leading financial publications.
Market Prices, Book Values, and Common Stock Dividends--See Table 2 included
in Item 7 of this report.
ITEM 6. SELECTED FINANCIAL DATA
Summary of Selected Consolidated Financial Data--See Table 24 included in
Item 7 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Performance Highlights
Net income at Pacific Century Financial Corporation (Pacific Century) was
$133.0 million in 1999, reflecting an increase of 24.3% over the $107.0
million reported in 1998. Financial results for both years were impacted by
special items that included restructuring charges of $22.5 million in 1999 and
$19.4 million in 1998 and an increase in the 1998 loan loss provision in light
of financial volatility in Asia (for additional information refer to sections
on "Restructuring and Redesign Program" and "Reserve for Loan Losses").
Basic earnings per share were $1.66 in 1999, up from $1.33 in 1998. On a
diluted per share basis, operating earnings were $1.64 in 1999, compared to
$1.32 last year.
In 1999, return on average assets (ROAA) and return on average equity (ROAE)
increased to 0.91% and 10.99%, respectively. Comparatively, ROAA was 0.72% and
ROAE was 9.22% in 1998.
Financial results under a tangible basis excludes from reported earnings the
after tax impact of amortization of all intangibles, including goodwill. On a
tangible basis, Pacific Century's earnings were $149.7 million in 1999 and
$121.7 million in 1998. On a per share basis, tangible diluted earnings per
share were $1.85 in 1999, compared to $1.50 in 1998.
Tangible ROAA for Pacific Century was 1.04% in 1999 improving from 0.83% in
1998. Tangible ROAE was 15.02% and 12.84% in 1999 and 1998, respectively.
On a taxable equivalent basis, net interest income was $575.4 million in
1999, down $1.8 million from 1998. In 1999 lower average net assets reduced
net interest income by $3.3 million. This impact was partially offset by a
wider net interest margin, that caused net interest income to rise by $1.5
million in 1999.
Average assets in 1999 were $14.6 billion, down 1.9% from $14.9 billion in
1998. Most of this decline resulted from discretionary reductions in the
investment portfolio. Average net loans for 1999 were $9.4 billion, reflecting
a marginal increase over 1998.
Non-performing assets, exclusive of accruing loans past due 90 days or more,
were $149.9 million, or 1.54% of total loans, at year-end 1999, compared to
$137.5 million, or 1.40% of total loans, at year-end 1998.
Net loan charge-offs in 1999 increased to $73.8 million from $65.7 million
in 1998. Included in the 1999 amount are charge-offs of $19.5 million
connected with a South Korean conglomerate and its related group of companies.
For additional information, see "Foreign Operations" and "Reserve for Loan
Losses."
9
PERFORMANCE HIGHLIGHTS
TABLE 1
1999 1998 FIVE-
---------------- -------- YEAR
PERCENT COMPOUND
FINANCIAL PERFORMANCE AMOUNT CHANGE AMOUNT GROWTH
- --------------------- -------- ------- -------- --------
(IN MILLIONS OF DOLLARS EXCEPT PER
SHARE AMOUNTS)
Year Ended December 31
Net Income................................... $ 132.96 24.3% $ 106.96 2.46%
Basic Earnings Per Share..................... 1.66 24.8 1.33 3.61
Diluted Earnings Per Share................... 1.64 24.2 1.32 3.66
Average Assets............................... 14,582.9 (1.9) 14,870.7 2.97
Average Loans................................ 9,444.5 0.2 9,422.3 5.02
Average Deposits............................. 9,315.3 (2.5) 9,549.7 5.01
Average Shareholders' Equity................. 1,210.0 4.2 1,160.8 4.50
Tangible Basis Financial Data/1/
Net Income................................. 149.75 23.0 121.70 3.55
Basic Earnings Per Share................... 1.86 22.4 1.52 4.68
Diluted Earnings Per Share................. 1.85 23.3 1.50 4.71
FIVE-YEAR
PERFORMANCE RATIOS 1999 1998 AVERAGE
- ------------------ ----- ----- ---------
Year Ended December 31
Return on Average Assets................................ 0.91% 0.72% 0.92%
Return on Average Equity................................ 10.99 9.22 11.41
Average Equity to Average Assets ....................... 8.30 7.81 8.04
Tangible Basis Financial Data/1/
Return on Average Assets.............................. 1.04 0.83 1.01
Return on Average Equity.............................. 15.02 12.84 14.38
At December 31
Loan Loss Reserve to Loans Outstanding.................. 2.05 2.19
Tier I Capital Ratio.................................... 10.28 9.42
Total Capital Ratio..................................... 13.22 11.47
Leverage Ratio.......................................... 8.31 7.48
- --------
/1/ Tangible basis calculations exclude the effect of all intangibles including
goodwill, core deposit and trust intangibles, and other intangibles.
10
MARKET PRICES, BOOK VALUES AND COMMON STOCK DIVIDENDS
TABLE 2
MARKET PRICE
(MP) RANGE HIGH MP AS
------------- BOOK VALUE A PERCENT
YEAR/PERIOD HIGH LOW (BV) OF BV DIVIDEND
- ----------- ------ ------ ---------- ---------- --------
1995............................... $18.57 $12.44 $12.76 146% $.54
1996............................... $22.00 $16.57 $13.34 165% $.58
1997............................... $28.06 $20.31 $14.02 200% $.63
1998............................... $25.88 $14.75 $14.76 175% $.66
First Quarter...................... 25.13 20.31 .16
Second Quarter..................... 25.88 23.56 .16
Third Quarter...................... 24.06 14.75 .17
Fourth Quarter..................... 24.38 15.50 .17
1999............................... $24.94 $17.38 $15.15 165% $.68
First Quarter...................... 24.94 19.94 .17
Second Quarter..................... 23.25 19.81 .17
Third Quarter...................... 22.31 17.63 .17
Fourth Quarter..................... 23.50 17.38 .17
Restructuring and Redesign Program
In February 1998, Pacific Century announced a two-phase restructuring and
redesign plan to improve efficiency, accelerate expense reduction and enhance
revenues. In the initial phase, the primary initiatives included rationalizing
Pacific Century's corporate structure by merging First Federal Savings & Loan
Association of America with Bank of Hawaii, consolidating the branch network
in Hawaii, merging the two U.S. Mainland banking subsidiaries, outsourcing
credit card operations and reincorporation and charter changes. In conjunction
with this phase, a pre-tax restructuring charge of $19.4 million was taken
against second quarter 1998 earnings. By year-end 1998, all of these actions
had been substantially completed.
Phase two of the plan consists of the redesign portion, which is targeted to
improve the delivery of financial services, generate revenue growth from new
and existing sources, and reduce expenses by simplifying and streamlining
business processes. The idea generation and assessment phase of the redesign
was completed in September 1999. When fully implemented in the fourth quarter
of 2000, the redesign is expected to contribute an annualized increase in
revenues of $21 million and annualized reduction in operating expenses of $43
million. Related to the redesign, Pacific Century recorded a restructuring
charge of $22.5 million in the third quarter of 1999.
Acquisitions and Strategic Alliances
In January 1999, Pacific Century acquired Triad Insurance Agency, Inc.
(Triad), a major Hawaii-based property/casualty insurance agency. In Hawaii,
Triad represents a number of large U.S. property/casualty insurance companies
for whom it acts as a servicing agent. The merger expands Pacific Century's
range of financial services that it can offer to customers.
In August 1999, Pacific Century completed the purchase of 5.8 million
shares, or approximately 10%, of the outstanding shares of the Bank of
Queensland Limited (Bank of Queensland) in Australia. This transaction was in
addition to a 1998 purchase of 5.4 million convertible notes of the Bank of
Queensland. Pacific Century has entered into a strategic alliance with Bank of
Queensland that broadens its geographic reach in the Pacific Rim and enhances
business growth opportunities.
11
Forward-Looking Statements
This report contains forward-looking statements regarding Pacific Century's
beliefs, estimates, projections and assumptions, which are provided to assist
in the understanding of certain aspects of Pacific Century's anticipated
future financial performance. Pacific Century cautions readers not to place
undue reliance on any forward-looking statement. Forward-looking statements
are subject to significant risks and uncertainties, many of which are beyond
Pacific Century's control. Although Pacific Century believes that the
assumptions underlying its forward-looking statements are reasonable, any
assumption could prove to be inaccurate and actual results may differ from
those contained in or implied by such forward-looking statements for a variety
of reasons. Factors that might cause differences to occur include, but are not
limited to, economic conditions in the markets Pacific Century serves
including those in Hawaii, the U.S. Mainland, Asia and the South Pacific;
shifts in interest rates; fluctuations in currencies of Asian Rim and South
Pacific countries relative to the U.S. dollar; changes in credit quality;
changes in applicable federal, state, and foreign income tax laws and
regulatory and monetary policies; and increases in competitive pressures in
the banking and financial services industry, particularly in connection with
product delivery and pricing. In addition, factors that could significantly
differ from estimates relative to Pacific Century's redesign program include
the following: expected cost savings from the redesign program cannot be fully
realized or realized within the expected timeframe; income or revenues from
the redesign are lower or operating or implementation costs are higher than
expected; business disruption related to implementation of the redesign
programs or methodologies; inability to achieve expected customer acceptance
of revised pricing structures and strategies; and other unanticipated
occurrences which could delay or adversely impact the implementation of all or
part of the redesign. Pacific Century does not undertake and specifically
disclaims any obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
LINE OF BUSINESS FINANCIAL REVIEW
Pacific Century is a financial services organization that maintains a broad
presence throughout the Pacific region and operates through a unique trans-
Pacific network of locations. Pacific Century's activities are conducted
primarily through 182 branches and representative and extension offices
(including branches of affiliate banks). Its staff of approximately 4,700
employees provides diverse financial products and services to individuals,
businesses, governmental agencies and financial institutions.
Pacific Century assesses the financial performance of its operating
components in accordance with geographic and functional areas of operations.
Geographically, Pacific Century has aligned certain of its operations into
four major segments: Hawaii, the Pacific, Asia, and the U.S. Mainland. In
addition, the Treasury and Other Corporate segment includes corporate asset
and liability management activities and the unallocated portion of various
administrative and support units.
Business segment results are determined based on Pacific Century's internal
financial management reporting process and organization structure. The
financial management reporting process uses various techniques to allocate and
transfer balance sheet and income statement amounts between business segments,
including allocations for overhead, economic provision, and capital. In its
business segment financial reporting process, Pacific Century utilizes certain
accounting practices that differ from accounting principles generally accepted
in the United States. These practices and other key elements of Pacific
Century's business segment financial reporting process are described in Note Q
to the Consolidated Financial Statements.
The table in Note Q presents business segment financial information for each
of Pacific Century's major market segments for the years ended December 31,
1999 and 1998. Because business segment financial reports are prepared in
accordance with accounting practices that could differ from accounting
principles generally accepted in the United States, certain amounts reflected
therein may not agree with corresponding amounts contained in the Consolidated
Financial Statements and Management Discussion and Analysis of Operations.
Pacific Century also utilizes risk-adjusted return on capital (RAROC) as an
additional measurement to assess business segment performance. RAROC is the
ratio of net income to risk-adjusted equity. Equity is
12
allocated to business segments based on various risk factors inherent in the
operations of each segment. Another performance measurement that Pacific
Century utilizes is net income after capital charge (NIACC). NIACC is net
income available to common shareholders less a charge for allocated capital.
The cost of capital is based on the estimated minimum rate of return expected
by the financial markets. The minimum rate of return consists of the long-term
government bond rate plus an additional level of return for the average risk
premium of an equity investment adjusted for the company's market risk. Over
the past few years the cost of capital has fluctuated between 12% to 15%.
Hawaii Market
Pacific Century's oldest and largest market is Hawaii, where operations are
conducted primarily through its principal subsidiary, Bank of Hawaii. Bank of
Hawaii was established in 1897, and today it is the largest bank headquartered
in the State of Hawaii offering a wide array of financial products and
services. Bank of Hawaii operates through 74 branches in Hawaii, including
both traditional branches and in-store locations.
The Hawaii segment includes retail, commercial, and insurance operating
units. Retail operating units sell and service a broad line of consumer
financial products. These units include consumer deposits, consumer lending,
residential real estate lending, auto financing, credit cards, and private and
institutional services (trust, mutual funds, and stock brokerage).
In addition to offering traditional branch banking services, Bank of Hawaii
has actively introduced new electronic based products and services that
provide enhanced customer convenience. In 1999 Bank of Hawaii expanded e-
Bankoh, its internet banking product, to include an on-line trust service and
401(k) program. In addition e-Bankoh clients can have 24-hour access to a wide
range of financial products and services, including checking, savings and time
deposit accounts, credit cards, and investments.
In the business banking area, Bank of Hawaii is a major commercial lender
and maintains a significant presence throughout the State. Commercial
operating units in the Hawaii market include small business, corporate
banking, commercial products and commercial real estate.
For the year ended December 31, 1999, the Hawaii segment contributed $54.9
million in net income, up 12.9% from $48.6 million in 1998. RAROC for this
segment was 15% in 1999 and 13% in 1998. Total assets in the Hawaii segment
were $5.3 billion at year-end 1999, reflecting a marginal rise over year-end
1998.
Pacific Market
Pacific Century has maintained a presence in the Intra-Pacific region for 40
years, where it offers financial products and services to both retail and
commercial customers. Today, this market spans island nations across the West
and South Pacific. Pacific Century is the only United States financial
institution to have such a broad presence in this region. This unique
franchise positions Pacific Century for future growth.
Pacific Century serves the West Pacific through branches of both Bank of
Hawaii and First Savings and Loan Association of America, F.S.A. (First
Savings). Bank of Hawaii's operation in the West Pacific consists of three
branches in Guam and two branches in the Commonwealth of the Northern Mariana
Islands (Saipan), as well as branches in the Federated States of Micronesia
(Yap, Pohnpei, and Kosrae), the Republic of the Marshall Islands (Majuro) and
the Republic of Palau (Koror). First Savings operates in Guam from three
traditional and three in-store branch locations.
Pacific Century's presence in the South Pacific includes branches of Bank of
Hawaii and subsidiary and affiliate banks. The Bank of Hawaii locations in
this region consist of three branches in Fiji and two branches in American
Samoa. Pacific Century's subsidiary banks in the South Pacific are located in
French Polynesia, New Caledonia, Papua New Guinea, and Vanuatu. Additionally,
Pacific Century maintains an investment in affiliate banks located in Samoa,
Solomon Islands and Tonga. As of December 31, 1999, these subsidiary and
affiliate
13
banks had a total of 29 and 20 branches, respectively. In Australia, Pacific
Century maintains a strategic alliance with the Bank of Queensland that
involves an investment as well as providing opportunities to expand markets in
the region. Pacific Century's largest markets in the South Pacific are in
French Polynesia and New Caledonia.
For the year ended December 31, 1999, net income in the Pacific segment was
$22.5 million, which was marginally lower than 1998. RAROC, including the
amortization of intangibles, for this segment was 11% for both 1999 and 1998.
Total assets in the Pacific segment stood at $2.5 billion at year-end 1999,
reflecting a 1.4% increase over year-end 1998.
Asia Market
Asia is a market that Pacific Century has developed for more than 20 years.
Pacific Century operates in Asia through Bank of Hawaii branches in Hong Kong,
Japan, Singapore, South Korea and Taiwan and a representative office with
extensions in the Philippines.
Pacific Century's business focus in Asia is correspondent banking and trade
financing. Activities include letters of credit, remittance processing,
foreign exchange, cash management, export bills collection, and working
capital loans. The lending emphasis is on short-term loans based on cash
flows. Pacific Century's network of locations in the Pacific and its presence
on the U.S. Mainland help customers facilitate the flow of business and
investment transactions across the Asia-Pacific region.
For the year ended December 31, 1999, net income in the Asia segment was
$5.9 million, down 57.2% from 1998. The drop in 1999 earnings largely is
accounted for by a $14.5 million increase in the economic provision relative
to last year. The higher 1999 economic provision for Asia reflects adjustments
for normalized loss factors resulting from the company's assessment of reform
measures initiated to deal with the financial turmoil in the region. Prior to
1999, economic provisions for uncertainty in the region were reflected in the
provision for Treasury. RAROC for Asia declined to 7% in 1999 from 14% in
1998. Total assets in the Asia segment were $1.4 billion at year-end 1999
reflecting a 3.6% decrease from year-end 1998.
For additional information on Asia, see "Foreign Operations" in this report.
U.S. Mainland Market
Pacific Century operates in the U.S. Mainland primarily through its banking
subsidiary Pacific Century Bank, N.A. (PCB). PCB provides financial products
and services through 19 branches in Southern California and 9 branches in
Arizona. PCB's emphasis is on providing asset based lending and related
services for small and middle market businesses. Additionally, PCB also
assists Pacific Century in expanding relationships with customers who have
ties to the Asia-Pacific region.
In addition to the operations of PCB, the U.S. Mainland segment also
includes business units for corporate banking and leasing. The corporate
banking unit primarily targets large corporate clients that have interests in
the Asia-Pacific region as well as companies in the media and communications
industries. Leasing activities consist of providing financing to businesses
largely for aircraft, vehicles and equipment.
In 1999, net income for the U.S. Mainland segment increased 40.3% to $37.6
million from $26.8 million in 1998. Several non-recurring items contributed to
the increase in 1999's earnings that included an after-tax gain of
approximately $4.0 million from the sale of newly issued securities acquired
relative to leasing transactions and a $1.3 million after-tax gain from the
sale of a special purpose leasing subsidiary. Income taxes for this segment
were reduced in 1999 and 1998 by $14.0 million and $13.5 million, respectively
for low income housing tax credits and investment tax credits. RAROC, which
includes the amortization of intangibles, rose to 14% in 1999 from 10% in
1998. As of December 31, 1999, total assets in the U.S. Mainland segment were
$2.7 billion, up 2.2% over year-end 1998.
14
Treasury and Other Corporate
Treasury consists of corporate asset and liability management activities
including investment securities, federal funds purchased and sold, government
deposits, short and long-term borrowings, and derivative activities for
managing interest rate and foreign currency risks. Additionally, the net
residual effect of transfer pricing assets and liabilities is included in
Treasury, as is any corporate-wide interest rate risk.
Other corporate items included in this segment consist of the operations of
certain non-bank subsidiaries, unallocated overhead expenses, and the residual
effect of reconciling the economic provision with the provision in the
consolidated financial statements.
The Treasury and Other Corporate segment reflected net income of $12.1
million in 1999, compared with a net loss of $5.2 million in 1998. Impacting
operating results of both years was a pre-tax restructuring charge of $22.5
million in 1999 and $19.4 million in 1998. At year-end 1999, this segment held
$2.6 billion in total assets, most of which were in Treasury, compared to $3.3
billion at the same year ago date. The lower total assets in part, reflects
discretionary reductions in the investment portfolio.
STATEMENT OF INCOME ANALYSIS
Comparability between periods in the Consolidated Statements of Income is
impacted by the January 1999 acquisition of Triad Insurance Agency, Inc., the
May 1998 acquisitions of Banque Paribas Pacifique and Banque Paribas
Polynesie, the July 1997 purchase of California United Bank, the March 1997
acquisition of Indosuez Niugini Bank, Ltd., and the March 1997 acquisition of
deposits from Home Savings of America.
Net Interest Income
Net interest income on a taxable equivalent basis was $575.4 million in
1999, down slightly from $577.2 million in 1998, but up from $524.3 million in
1997. For 1999, the reduction in net interest income from the prior year is
attributed to a decline in average earning assets that was partially offset by
a wider net interest margin. The increase relative to 1997 is largely due to
the acquisitions.
Average earning assets were $13.4 billion in 1999, compared to $13.7 billion
in 1998 and $13.2 billion in 1997. On a year-over-year basis, average earning
assets in 1999 reflected a 1.6% decrease from the prior year primarily due to
lower average balances for interest bearing deposits and available-for-sale
investment securities.
In 1999, the average net interest margin on earning assets rose to 4.28%
from 4.22% in 1998 and 3.98% in 1997. The improvement in 1999's net interest
margin relative to a year ago resulted primarily from a drop in the average
rate paid on interest-bearing liabilities. In 1999, the average rate on
interest-bearing liabilities decreased 44 basis points to 4.13% from 4.57% in
1998, which reflects the low interest rate environment during the first part
of 1999. This benefit was partially offset by a 33 basis points decline in the
average yield on earning assets to 7.64% from 7.97% in 1998. Presented in
Table 3 are the average balances, yields, and rates paid for the years ended
December 31, 1999, 1998 and 1997.
15
Consolidated Average Balances, Income and Expense and Yields and Rates
(Taxable Equivalent)
Table 3
Year Ended December 31
-----------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
--------- ------- ------- --------- ------- ------- --------- ------- -------
(in millions of dollars)
Earning Assets
Interest-Bearing
Deposits.............. $ 385.0 $ 24.9 6.48% $ 508.8 $ 36.7 7.21% $ 486.3 $ 33.1 6.80%
Investment Securities--
Held to Maturity
--Taxable............. 805.2 57.8 7.18 890.6 67.7 7.60 1,220.4 81.8 6.71
--Tax-Exempt.......... 11.7 1.7 14.41 11.8 1.7 14.34 12.5 1.8 14.55
Investment Securities--
Available for Sale.... 2,698.8 168.0 6.23 2,769.3 171.0 6.17 2,452.0 158.8 6.48
Funds Sold............. 102.0 5.4 5.31 69.7 3.8 5.45 76.4 3.8 4.99
Loans/1/
--Domestic............ 7,742.3 623.0 8.05 7,669.7 643.8 8.39 7,389.4 607.7 8.22
--Foreign............. 1,702.2 106.4 6.25 1,752.6 119.2 6.80 1,540.3 119.2 7.74
Loan Fees.............. 39.9 45.3 34.4
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Earning Assets.. 13,447.2 1,027.1 7.64 13,672.5 1,089.2 7.97 13,177.3 1,040.6 7.90
Cash and Due From Banks. 486.6 590.1 545.1
Other Assets............ 649.1 608.1 519.9
--------- --------- ---------
Total Assets.......... $14,582.9 $14,870.7 $14,242.3
========= ========= =========
Interest-Bearing
Liabilities
Domestic Deposits
--Demand.............. $ 2,137.1 48.5 2.27 $ 2,114.8 55.7 2.64 $ 1,945.3 52.9 2.72
--Savings............. 723.9 14.7 2.03 783.9 18.5 2.35 865.5 21.4 2.48
--Time................ 2,559.4 123.3 4.82 2,780.7 145.4 5.23 2,858.7 157.0 5.49
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Domestic........ 5,420.4 186.5 3.44 5,679.4 219.6 3.87 5,669.5 231.3 4.08
Foreign Deposits
--Time Due to Banks... 641.4 33.7 5.25 596.1 40.4 6.78 718.7 43.6 6.06
--Other Savings and
Time.................. 1,165.7 41.0 3.52 1,176.1 46.7 3.97 1,079.0 38.2 3.55
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Foreign......... 1,807.1 74.7 4.13 1,772.2 87.1 4.91 1,797.7 81.8 4.55
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Deposits........ 7,227.5 261.2 3.61 7,451.6 306.7 4.12 7,467.2 313.1 4.19
Short-Term Borrowings.. 3,014.8 146.2 4.85 3,072.9 162.6 5.29 2,868.7 156.8 5.47
Long-Term Debt......... 685.9 44.3 6.46 676.5 42.7 6.32 725.5 46.4 6.39
--------- ------- ----- --------- ------- ----- --------- ------- -----
Total Interest-Bearing
Liabilities.......... 10,928.2 451.7 4.13 11,201.0 512.0 4.57 11,061.4 516.3 4.67
--------- ------- ----- --------- ------- ----- --------- ------- -----
Net Interest Income..... 575.4 3.51 577.2 3.40 524.3 3.23
------- ----- ------- ----- ------- -----
Spread on Earning
Assets................. 4.28% 4.22% 3.98%
----- ----- -----
Demand Deposits
-- Domestic............ 1,652.6 1,650.4 1,516.8
-- Foreign............. 435.2 447.7 264.0
--------- --------- ---------
Total Demand Deposits. 2,087.8 2,098.1 1,780.8
Other Liabilities....... 356.9 410.8 290.8
Shareholders' Equity.... 1,210.0 1,160.8 1,109.3
--------- --------- ---------
Total Liabilities &
Shareholders' Equity. $14,582.9 $14,870.7 $14,242.3
========= ========= =========
Provision for Loan
Losses................. 60.9 84.0 30.3
Net Overhead............ 288.2 329.0 275.1
------- ------- -------
Income Before Taxes..... 226.3 164.2 218.9
Provision for Taxes..... 92.7 56.6 78.5
Tax Equivalency
Adjustment/2/ ......... 0.6 0.6 0.9
------- ------- -------
Net Income.............. $ 133.0 $ 107.0 $ 139.5
======= ======= =======
- --------
/1/ Includes non-accrual loans.
/2/ Based upon a statutory tax rate of 35%.
16
Provision for Loan Losses
The provision for loan losses was $60.9 million in 1999, compared to $84.0
million in 1998 and $30.3 million in 1997. For 1999, net loan charge-offs of
$73.8 million exceeded the provision for loan losses by approximately $13
million. This difference is partially explained by charge-offs taken in 1999
relative to certain Asian borrowers who have continued to experience
difficulties in adjusting to reforms measures that were initiated to deal with
the Asian economic crisis. In 1998, as a result of evaluating the impact of
the financial volatility in Asia, the provision for loan losses and the
related reserve were increased to provide for the risk associated with this
event. The provision for loan losses reflects management's assessment of the
adequacy of the reserve for loan losses, considering the current risk
characteristics of the loan portfolio along with economic and other relevant
factors. For further information on credit quality, refer to the section on
"Reserve for Loan Losses."
Non-Interest Income
Non-interest income in 1999 increased to $265.6 million from $211.8 million
in 1998 and $187.8 million in 1997. On a year-over-year basis non-interest
income increased 25.4% in 1999 and 12.8% in 1998. For 1999, non-interest
income included nonrecurring credits that contributed $18.3 million to other
income and $12.1 million to investment securities gains as discussed in
greater detail below. Additionally, the Triad acquisition contributed
incremental non-interest income of approximately $8.4 million in 1999.
Comparing 1998 with 1997, the acquisitions accounted for approximately $15.0
million of the increase between these periods. Table 4 presents the details of
non-interest income for the last five years.
Trust income for 1999 totaled $60.7 million, up from $55.9 million in 1998
and $52.2 million in 1997. Revenue categories that generated the largest year-
over-year gains were mutual fund fees, brokerage fees and trust and agency
fees. While trust income showed an 8.6% increase in 1999, total trust assets
administered by Pacific Century Trust increased to $13.8 billion at year-end
1999, up from $12.9 billion at year-end 1998 and $12.1 billion at year-end
1997. The Pacific Capital family of mutual funds and Hawaiian Tax Free Trust,
which are managed by Pacific Century Trust, have continued to experience
growth. At December 31, 1999, the aggregate balance of these funds stood at
$3.7 billion, compared to $3.1 billion and $2.6 billion at year-end 1998 and
1997, respectively.
Service charges on deposit accounts were $34.3 million for the year ended
December 31, 1999, compared to $35.5 million in 1998 and $29.4 million in
1997. These fees have remained relatively constant over the last two years.
The increase in these fees compared to 1997 was largely driven by the
acquisitions.
Fees, exchange and other service charges increased to $88.8 million in 1999,
from $77.9 million in 1998 and $67.1 million in 1997. Included in these fees
were income generated from international activities relative to letters of
credit and acceptance fees, profit on foreign currency, and exchange fees.
Collectively, income from these sources totaled $34.5 million in 1999, an
18.6% increase over 1998.
Mortgage servicing fees increased to $8.8 million in 1999 from $7.9 million
in 1998 and $7.1 million in 1997. This increase reflects Bank of Hawaii's
emphasis on residential mortgage lending and secondary market sales
activities. Pacific Century's mortgage servicing portfolio grew to $2.5
billion at year-end 1999 from $2.1 billion at year-end 1998.
Also included in fees, exchange and other service charges are fees earned
through Pacific Century's ATM network. ATM fees reflected a 51.9% increase
during 1999, which mainly resulted from an increase in the ATM fee structure.
During 1999, Pacific Century's ATM network continued to expand, ending the
year with 510 machines, an increase from 492 at year-end 1998. Fees generated
by this network totaled $15.8 million in 1999, compared to $10.4 million in
1998, and $9.6 million in 1997.
Other operating income in 1999 was $67.7 million, an increase of 76.1% from
$38.4 million in 1998. For the year ended December 31, 1999, other operating
income included $14.0 million from the sale of Arbella
17
Leasing Corp. (Arbella), a specific purpose leasing subsidiary and $4.3
million from the termination of a venture capital limited partnership. The net
impact on earnings of the Arbella sale was $1.3 million after providing for
income taxes of $12.7 million. The increase in 1999 other operating income is
also impacted by insurance commissions from the Triad acquisition. With a
higher level of recoveries recorded in 1999, cash basis interest increased to
$3.2 million from $1.3 million in 1998. Comparatively, cash basis interest was
$3.7 million in 1997. Cash basis interest includes interest collected on loans
written-off or interest collected on non-accrual loans that relate to prior
years.
Net investment securities gains in 1999 were $14.1 million, significantly
higher than net gains of $4.1 million and $3.1 million in 1998 and 1997,
respectively. Included in 1999 were gains of $6.5 million from the sale of
newly issued equity securities acquired in conjunction with leasing
transactions and $5.6 million from the disposition of a venture capital
investment.
NON-INTEREST INCOME
TABLE 4
YEAR ENDED DECEMBER 31
--------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
Trust Income................ $ 60.7 8.6% $ 55.9 7.1% $ 52.2 $ 49.8 $ 49.5
Service Charges on Deposit
Accounts................... 34.3 (3.4) 35.5 20.7 29.4 26.7 25.9
Fees, Exchange and Other
Service Charges
Card Fees................. 13.6 (0.7) 13.7 3.8 13.2 10.7 7.3
Letters of Credit and
Acceptance Fees.......... 12.5 18.1 10.6 (4.5) 11.1 10.1 8.8
Profit on Foreign
Currency................. 17.3 17.0 14.8 21.3 12.2 8.9 6.5
ATM....................... 15.8 51.9 10.4 8.3 9.6 8.6 7.7
Mortgage Servicing Fees... 8.8 11.4 7.9 11.3 7.1 6.6 4.3
Exchange Fees............. 4.7 25.8 3.7 (11.9) 4.2 3.4 3.9
Payroll Services.......... 0.8 (26.9) 1.1 (31.3) 1.6 2.4 2.1
Cash Management........... 2.4 1.2 2.4 200.0 0.8 0.8 1.0
Other Fees................ 12.9 (3.0) 13.3 82.2 7.3 7.4 5.7
Other Operating Income
Other Income.............. 49.3 39.3 35.4 30.1 27.2 24.2 19.6
Gain on Sale of Leased
Equipment................ 15.2 794.1 1.7 (66.7) 5.1 0.9 --
Cash Basis Interest....... 3.2 138.2 1.3 (64.9) 3.7 2.6 1.3
Investment Securities Gains. 14.1 244.0 4.1 32.3 3.1 1.4 2.5
------ ----- ------ ----- ------ ------ ------
Total................... $265.6 25.4% $211.8 12.8% $187.8 $164.5 $146.1
====== ===== ====== ===== ====== ====== ======
Non-Interest Expense
For the years ended December 31, 1999, 1998 and 1997 non-interest expense
totaled $553.7 million, $540.7 million and $462.9 million, respectively. Non-
interest expense increased 2.4% in 1999 and 16.8% in 1998 from the respective
prior year. Comparability between periods is impacted by restructuring charges
of $22.5 million in 1999 and $19.4 million in 1998. Additionally, non-interest
expense in 1999 and 1998 include incremental increases of approximately $7.2
million and $34.2 million, respectively, resulting from acquisitions,
including the amortization of intangibles.
18
Salaries and pensions and other employee benefits totaled $254.0 million,
$250.5 million and $226.7 million in 1999, 1998 and 1997, respectively.
Approximately $3.1 million and $14.6 million of the increase relative to 1999
and 1998, respectively, is accounted for by the acquisitions. Excluding the
effects of the acquisitions, the year-over-year increase would have been 0.2%
in 1999 and 4.1% in 1998. The Year 2000 project also contributed to the
increase in salaries and employee benefits for 1999 and 1998.
Net occupancy and equipment expense for 1999 totaled $96.6 million, compared
to $95.8 million in 1998 and $85.2 million in 1997. Included in the 1998 and
1997 totals were $1.7 million and $2.7 million, respectively, relating to
write-offs of equipment and premises.
Other operating expense increased to $180.1 million in 1999 from $174.6
million in 1998 and $149.5 million in 1997. Approximately $3.5 million and
$14.8 million of the year-over-year increase relative to 1999 and 1998,
respectively, was due to the acquisitions, including the amortization of
intangibles. Large one-time costs included in other operating expense were
$2.3 million in 1999 and $6.4 million in 1998.
Legal and professional fees were $32.4 million in 1999, $35.8 million in
1998 and $23.4 million in 1997. The higher fees in 1999 and 1998 relative to
1997 is primarily attributed to consulting and other professional fees
including those related to the Year 2000 project.
All systems at Pacific Century transitioned to the new millennium without
significant incident. Pacific Century's total cost relative to Year 2000
readiness was $36.1 million, of which $10.7 million was incurred in 1999,
$22.2 million in 1998 and $3.2 million in 1997. The total budget for the Year
2000 project was $41 million. Year 2000 related costs included expenditures
for technology and program management staff, staff retention, consultants,
software and hardware, and customer education and training.
Pacific Century utilizes the efficiency ratio as a tool to manage non-
interest income and expense. The efficiency ratio is derived by dividing non-
interest expense by net operating revenue (net interest income plus non-
interest income before securities transactions). For 1999, 1998 and 1997, the
efficiency ratio was 67.0%, 69.0% and 65.4%, respectively. Comparison of this
ratio between periods is affected by the restructuring charges in 1999 and
1998 and the sale of Arbella in 1999.
19
NON-INTEREST EXPENSE
TABLE 5
YEAR ENDED DECEMBER 31
--------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- ------ ------ ------
PERCENT PERCENT
AMOUNT CHANGE AMOUNT CHANGE AMOUNT AMOUNT AMOUNT
------ ------- ------ ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
Salaries.................... $198.7 2.2% $194.5 12.3% $173.2 $159.2 $142.1
Pensions and Other Employee
Benefits................... 55.3 (1.2) 56.0 4.7 53.5 48.8 43.6
Net Occupancy Expense....... 47.9 2.3 46.8 0.2 46.7 39.4 41.1
Net Equipment Expense....... 48.7 (0.7) 49.0 27.3 38.5 34.0 31.7
Other Operating Expense
Legal and Other
Professional Fees........ 32.4 (9.5) 35.8 53.0 23.4 17.7 15.6
Stationery and Supplies... 9.8 (11.3) 11.1 3.7 10.7 10.7 9.3
Amortization of Intangible
Assets................... 19.4 11.7 17.4 27.9 13.6 9.8 8.4
Credit Card Processing.... 17.2 16.2 14.8 4.2 14.2 9.1 2.1
Other..................... 101.3 6.1 95.5 9.0 87.6 91.2 69.1
Restructuring Charge........ 22.5 15.9 19.4 N.M. -- -- --
Minority Interest........... 0.5 8.7 0.4 (73.3) 1.5 1.4 1.1
------ ----- ------ ----- ------ ------ ------
Total................... $553.7 2.4% $540.7 16.8% $462.9 $421.3 $364.1
====== ===== ====== ===== ====== ====== ======
Income Taxes
The tax structure at Pacific Century is complex given the various foreign
and domestic locations in which it operates. In 1999, provision for taxes
reflected an effective tax rate of 41.1%, compared to 34.6% and 36.0% in 1998
and 1997, respectively. The higher 1999 effective tax rate is largely
explained by the Arbella sale that generated $14.0 million in income and $12.7
million in income tax expense. For 1998, the effective tax rate was impacted
by an equipment lease termination loss of $2.7 million that provided an
equivalent amount of tax benefits. Excluding the effects of the above items,
the effective tax rate for 1999 and 1998 would have been 37.6% and 35.7%,
respectively.
Pacific Century primarily utilizes low income housing tax credits and lease
financing to manage its tax liability. As of December 31, 1999, Pacific
Century's low income housing investments totaled $74.3 million, compared to
$69.6 million at year-end 1998. These investments provided tax credits of
$13.7 million and $10.0 million in 1999 and 1998, respectively.
Pacific Century also continued to pursue lease financing to defer tax
payments. Consisting of both direct and leveraged leases, the leasing
portfolio grew 13.2% during 1999.
Tax planning at Pacific Century is structured to minimize the impact of the
alternative minimum tax (AMT). At the end of 1999, Pacific Century was not
subject to the AMT.
BALANCE SHEET ANALYSIS
Loans
Loans comprise the largest category of earning assets for Pacific Century
and produce the highest level of income. At December 31, 1999, loans
outstanding were $9.7 billion, a 1.4% decrease from $9.9 billion at year-end
1998. This decline primarily is accounted for by a $197 million reduction in
foreign loans, that partially is attributed to foreign currency translation
adjustments in the South Pacific.
20
Pacific Century's objective is to maintain a diverse loan portfolio in order
to spread credit risk and reduce exposure to economic downturns that may
impact different markets and industries. The composition of the loan portfolio
is regularly monitored to ensure diversity as to loan type, geographic
distribution, and industry and borrower concentration.
Table 6 presents the composition of the loan portfolio by major loan
categories.
LOAN PORTFOLIO BALANCES
TABLE 6
DECEMBER 31
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
Domestic Loans
Commercial and Industrial....... $2,493.0 $2,579.7 $2,104.3 $1,806.7 $1,902.2
Real Estate
Construction--Commercial...... 315.1 276.3 268.1 212.3 199.6
--Residential............ 13.8 23.5 12.9 23.6 33.7
Mortgage--Commercial.......... 1,244.8 1,139.1 1,354.5 1,227.8 1,308.8
--Residential............. 2,645.4 2,699.4 2,738.9 2,635.3 2,702.4
Installment..................... 756.1 763.0 891.6 849.3 817.3
Lease Financing................. 627.6 554.5 519.4 437.8 392.9
-------- -------- -------- -------- --------
Total Domestic Loans........ 8,095.8 8,035.5 7,889.7 7,192.8 7,356.9
Foreign Loans
Banks and Other Financial
Institutions................... 207.7 158.2 207.7 281.8 268.7
Commercial and Industrial....... 943.4 1,281.5 1,074.9 923.2 513.6
Other........................... 470.7 378.8 326.1 301.5 13.2
-------- -------- -------- -------- --------
Total Foreign Loans......... 1,621.8 1,818.5 1,608.7 1,506.5 795.5
-------- -------- -------- -------- --------
Total Loans................. $9,717.6 $9,854.0 $9,498.4 $8,699.3 $8,152.4
======== ======== ======== ======== ========
Commercial and Industrial Loans
At December 31, 1999, commercial and industrial loans (C&I) totaled $2.5
billion, down 3.4% from year-end 1998. The proportion of C&I loans to the
total portfolio was 25.7% at year-end 1999, compared to 26.2% at year-end
1998.
C&I loans consist of loans made for commercial, financial, and agricultural
purposes and involves lending on both a secured and unsecured basis.
Collateral requirements vary, but are based on Pacific Century's underwriting
and collateral policies to ensure that consistent credit quality standards are
maintained.
Geographically C&I loans are concentrated in the U.S. Mainland and Hawaii
representing 54% and 37%, respectively, of the total C&I portfolio as of year-
end 1999. In Hawaii, Bank of Hawaii is a major commercial lender and maintains
a significant presence throughout the State. Bank of Hawaii supports the
business community in Hawaii by offering a wide range of products and
services. At year-end 1999, C&I loans in Hawaii were $930.8 million. In the
U.S. Mainland market, C&I lending totaled $1.3 billion at year-end 1999, down
12.4% from year-end 1998, and is comprised largely of small and middle market
business loans that were originated by Pacific Century's U.S. Mainland
subsidiary bank, as well as loans to Fortune 500 industrial and service
companies and the media and communication industry.
21
Real Estate Loans
At year-end 1999, Pacific Century's total real estate loans (excluding
construction) were $3.9 billion, 1.3% above year-end 1998. This portfolio
consists of loans that are secured by residential as well as commercial
properties. Real estate mortgage loans continue to comprise the largest
portion of the loan portfolio, representing 40.0% of total loans at year-end
1999, compared to 39.0% at year-end 1998.
The largest component of the real estate loan portfolio consists of loans
secured by 1-to-4 family residential properties. At $2.6 billion, this
portfolio declined modestly from year-end 1998, and represented 27.2% of total
loans outstanding at the end of 1999. Approximately 90% of these loans are
secured by real estate in Hawaii (see Table 7). Pacific Century originates
residential mortgages on both a fixed-rate and adjustable-rate basis. Most of
the fixed-rate products are sold in the secondary mortgage market, while
adjustable-rate mortgages are generally held in Pacific Century's loan
portfolio. Included in the residential mortgage total at year-end 1999 were
$136 million in available for sale loans. In recent years, Pacific Century has
focused on residential mortgage lending in Hawaii as an attractive line of
business. In 1999, residential mortgage originations by Bank of Hawaii totaled
$0.98 billion, compared to a record $1.06 billion in 1998.
Also included in the residential real estate portfolio are home equity
credit lines. The total available credit under these lines was $506 million at
year-end 1999, compared to $477 million at year-end 1998. Outstandings
increased marginally to $267 million at year-end 1999 from $261 million at
year-end 1998. Home equity credit lines are underwritten primarily based on
the borrower's repayment ability rather than the value of the underlying
property.
The commercial real estate portfolio (excluding construction loans) totaled
$1.2 billion at year-end 1999, up 9.3% from year-end 1998. Approximately 59%
and 24% of these loans were secured by commercial real estate in Hawaii and
the U.S. Mainland, respectively, with the remainder mostly in the West
Pacific. The commercial real estate portfolio is diversified in the type of
property securing the obligations, including loans secured by commercial
offices, hotels, retail facilities, industrial properties and warehouses.
Total commercial construction loans increased to $315.1 million at year-end
1999, compared to $276.3 million at year-end 1998. These loans are secured
primarily by properties located in the U.S. Mainland and Hawaii, which
accounted for 50% and 45%, respectively, of such loans at December 31, 1999.
Because construction lending is considered to generally involve greater risk
than financing on improved properties, Pacific Century utilizes tighter
underwriting and disbursement standards. The majority of these loans are
underwritten based on the projected cash flows of the completed project,
rather than the value of the underlying property, and generally require a
committed source for permanent financing.
Installment Loans
Total installment loans (excluding residential mortgages and home equity
loans) ended 1999 at $756.1 million, relatively unchanged from year-end 1998.
As of December 31, 1999, installment loans consisted of credit cards and
consumer loans (e.g., auto loans and unsecured credit lines). Consumer loans
totaled $503.5 million at December 31, 1999, compared to $485.0 million at
December 31, 1998.
The credit card portfolio balance was $252.6 million at year-end 1999, a
decrease of 9.1% from year-end 1998. At year-end 1999, 0.91% of the credit
card portfolio (based on balances) were more than 90 days delinquent, compared
to 0.77% at year-end 1998.
Leasing Activities
At year-end 1999, leases outstanding increased to $627.6 million, up 13.2%
from year-end 1998. Pacific Century's lease portfolio is diversified,
consisting primarily of leases on equipment, automobiles, trucks, ships,
aircraft, and computers.
22
Lending in Asia and the South Pacific
Pacific Century's international business predominately consists of Asia
where the business emphasis is primarily on correspondent banking activities
and undertaking credit risk relating to and resulting from trade activities,
trade finance and working capital loans for companies that have business
interests in the Asia-Pacific markets. The majority of loans in Asia are
short-term and are largely based on Pacific Century's traditional focus on
cash flow lending. The South Pacific market largely consists of the operations
of subsidiary banks in French Polynesia, New Caledonia, Papua New Guinea, and
Vanuatu, and to a lesser degree, through affiliate banks and Bank of Hawaii
branches in the region. Foreign loans in both Asia and the South Pacific
totaled $1.6 billion at the end of 1999, down 10.8% from year-end 1998. At
year-end 1999 foreign loans represented 16.7% of the total loan portfolio,
compared to 18.5% at year-end 1998.
Foreign loans in the South Pacific totaled $0.9 billion at December 31,
1999, a decrease of 13.7% from $1.1 billion at year-end 1998. To a large
degree, this decline is attributed to a 16% reduction during 1999 in the
conversion rate of the Pacific franc, the currency of French Polynesia and New
Caledonia, relative to the U.S. dollar. A large portion of the South Pacific
loan portfolio is concentrated in two subsidiary banks, Banque de Tahiti and
Bank of Hawaii--Nouvelle Caledonie, which in the aggregate held total loans of
$871 million at the end of 1999.
At December 31, 1999, outstanding loans to borrowers in Asia totaled $644.8
million, down from $690.5 million and $818.6 million at December 31, 1998 and
1997, respectively. Outstanding commitments represented by letters of credit
and unused loan commitments relative to borrowers in Asia were approximately
$267 million at year-end 1999, compared to $367 million at year-end 1998.
Additional information on Asian credit exposure and recent Asian economic
events are contained in the "Foreign Operations" section of this report.
Geographic Distribution of the Loan Portfolio
A geographic distribution of the loan portfolio is presented in Table 7
based on the geographic location of borrowers. The highest geographic lending
concentration is in Hawaii constituting 50.3% of the total loan portfolio at
December 31, 1999, compared to 50.2% at December 31, 1998. At year-end 1999,
the percentage of U.S. Mainland loans to total loans was 23.9%, compared to
23.1% at year-end 1998.
The amounts reflected in the West Pacific include Guam and other locations
in the region where both Bank of Hawaii and First Savings have branches. Loan
balances in the South Pacific reflect the U.S. dollar equivalent balances of
subsidiary banks in French Polynesia, New Caledonia, Papua New Guinea, Vanuatu
and Bank of Hawaii branches in Fiji. Loan balances in American Samoa make up
the remainder of loans in the South Pacific region.
23
GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO/1/
TABLE 7
DECEMBER 31, 1999
--------------------------------------------------------------
WEST SOUTH MAINLAND
TOTAL HAWAII PACIFIC PACIFIC U.S. JAPAN OTHER
-------- -------- ------- ------- -------- ------ ------
(IN MILLIONS OF DOLLARS)
Commercial and
Industrial............. $2,493.0 $ 930.8 $185.4 $ 14.4 $1,337.4 $ -- $ 25.0
Real Estate
Construction--
Commercial........... 315.1 143.1 13.4 -- 158.6 -- --
--Residential.... 13.8 11.0 2.2 0.1 0.5 -- --
Mortgage--Commercial.. 1,244.8 734.8 201.5 8.7 299.8 -- --
--Residential..... 2,645.4 2,381.2 247.3 1.3 15.6 -- --
Installment............. 756.1 566.0 146.5 31.2 12.4 -- --
Foreign................. 1,621.8 34.7 -- 942.3 -- 200.4 444.4
Lease Financing......... 627.6 82.4 5.3 -- 498.7 -- 41.2
-------- -------- ------ ------ -------- ------ ------
Total............... $9,717.6 $4,884.0 $801.6 $998.0 $2,323.0 $200.4 $510.6
======== ======== ====== ====== ======== ====== ======
Percentage of Total..... 100.0% 50.3% 8.2% 10.3% 23.9% 2.1% 5.2%
======== ======== ====== ====== ======== ====== ======
- --------
/1/ Loans are classified based upon the geographic location of borrowers.
Investment Securities
Pacific Century's investment portfolio is managed to provide liquidity and
interest income, offset interest rate risk positions and provide collateral
for cash management needs. At December 31, 1999, available-for-sale securities
totaled $2.5 billion reflecting a $476 million decrease from December 31,
1998. Most of this decline was in the mortgage backed securities portfolio and
to a lesser degree in the U.S. government and agency debt securities
portfolio. Securities held to maturity were $796 million at year-end 1999, up
$143 million from year-end 1998. Purchases of U.S. government and agency
mortgage-backed securities accounted for most of this increase.
Table 18 presents the maturity distribution, market value and weighted-
average yield to maturity of securities.
Deposits
As of December 31, 1999, total deposits were $9.4 billion, down 1.9% from
the year earlier date. During 1999, domestic deposits decreased $294 million,
while foreign deposits saw an increase of $112 million. With respect to
domestic deposits, the non-interest bearing and interest bearing demand
categories experienced the largest declines. Competition for deposits by banks
and other financial institutions, as well as securities brokerage firms,
continues to impact the ability to attract and retain deposits.
Table 22 presents average deposits by type for the five years ended December
31, 1999.
Borrowings
Short-term borrowings, including funds purchased and securities sold under
agreements to repurchase (repos), totaled $2.8 billion at December 31, 1999,
compared to $3.3 billion at year-end 1998. The largest portion of short-term
borrowings consist of repos. Repos are offered to governmental entities as an
alternative to deposits and are supported by the same type of collateral. At
year-end 1999, repos were $1.5 billion, down from $2.0 billion at year-end
1998. Included in short-term borrowings at December 31, 1999, were $97 million
in commercial paper and $150 million in Federal Home Loan Bank of Seattle
(FHLB) advances.
24
Long-term debt on December 31, 1999 totaled $728 million, up from $586
million on December 31, 1998. A new $125 million issue of subordinated notes
that mature in 2009 largely explains the rise in long-term debt for 1999.
Subordinated notes also included $119 million issued in 1993 that mature in
2003. All subordinated notes bear a fixed interest rate of 6.875%. Also
outstanding, as of December 31, 1999, were $100 million in 8.25% Capital
Securities that mature in 2026. FHLB borrowings totaled $247 million at
December 31, 1999, compared to $223 million at December 31, 1998. Private
placement notes totaled $90 million at both year-end 1999 and 1998.
FOREIGN OPERATIONS
Pacific Century maintains an extensive presence in the Asia-Pacific region
that provides opportunities to take part in lending, correspondent banking and
deposit-taking activities in these markets. These activities are facilitated
through Bank of Hawaii branches, a representative office with extensions and
full service subsidiary/affiliate banks. This network of locations across
Asia-Pacific enables customers of Pacific Century to facilitate trade and
investment between the U.S., Asia and the Pacific Islands.
Through its Asia Division, the Bank of Hawaii offers international banking
services to its corporate and financial institution customers in most of the
major Asian financial centers with support from its New York and Honolulu
operations. Bank of Hawaii's offices that offer these services are located in
Hong Kong, the Philippines (Manila, Cebu, and Davao), Seoul, Singapore, Tokyo
and Taipei. The Asia Division continues to focus on correspondent banking and
trade-related financing activities and lending to customers with which it has
a direct relationship.
The South Pacific Division in Honolulu oversees subsidiary banks in French
Polynesia, New Caledonia, Papua New Guinea, Vanuatu, and Bank of Hawaii branch
operations in Fiji and American Samoa. Since American Samoa is U.S. dollar
based, its operation is included as domestic. Additionally, Bank of Hawaii has
an equity interest in affiliate banks located in Samoa, Solomon Islands and
Tonga.
The operations of subsidiaries and affiliates are evaluated on a similar
basis as branch offices. Exposure to foreign currency fluctuations is in large
measure limited to the unhedged positions of Pacific Century's capital
investment in these subsidiaries (see "Market Risk"). The largest South
Pacific subsidiary operations are in the French territories of French
Polynesia and New Caledonia.
The West Pacific Division includes Bank of Hawaii branches in Guam and in
other locations in the region. Since the U.S. dollar is used in these
locations, Pacific Century's operations in the West Pacific are not considered
foreign for financial reporting purposes.
Table 8 provides a summary of assets, liabilities, operating revenue, and
net income for Pacific Century's foreign operations for the last three years.
Operating results in 1999 reflected a net loss of $1.4 million, compared to
net loss of $0.8 million in 1998. The loss for both years reflect
significantly higher foreign loan loss provisions in comparison to historical
levels (see "Reserve for Loan Losses").
SUMMARY OF INTERNATIONAL ASSETS, LIABILITIES, AND INCOME AND PERCENT OF
CONSOLIDATED TOTALS
TABLE 8
YEAR ENDED DECEMBER 31
----------------------------------------------------
1999 1998 1997
----------------- ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS OF DOLLARS)
Average Assets............. $3,413.0 23.4% $3,426.6 23.0% $3,005.1 21.1%
Average Liabilities........ 3,271.6 24.5 3,348.8 24.4 2,523.3 19.2
Operating Revenue.......... 252.1 19.5 287.9 21.9 215.9 17.4
Net Income (Loss).......... (1.4) N.M. (0.8) N.M. 10.2 7.3
25
Pacific Century controls its foreign lending risk exposure by evaluating the
political and economic factors that bear on a country's ability to meet its
foreign debt obligations. Based on these analyses, credit limits are
established for each country to control risk in the foreign portfolio. These
credit limits are monitored and reviewed on a regular basis so that risks and
exposures are understood and properly assessed. Pacific Century's strategy for
foreign lending is to deal, on a direct basis, primarily with countries and
companies that have trade activity in the Asia-Pacific region and investment
interest in Hawaii and the West and South Pacific.
Pacific Century's foreign lending consists of both local currency and cross-
border lending. Local currency loans are those that are funded and will be
repaid in the currency of the borrower's country. Cross-border lending, on the
other hand, involves loans that will be repaid in a currency other than that
of the borrower's country. This type of lending involves greater risk because
the borrower's ability to repay is additionally dependent on changes in the
currency exchange rate.
Cross-border interbank placements and loans were $885.0 million at year-end
1999. Table 9 presents, for the last three years, a geographic distribution of
international assets for which Pacific Century has cross-border exposure
exceeding 0.75% of total assets.
The countries to which Pacific Century maintains its largest credit exposure
on a cross-border basis include Japan, South Korea, and France. At December
31, 1999, cross-border credit exposure in Japan, South Korea, and France were
$320 million, $294 million and $195 million, respectively, compared to $356
million, $265 million and $36 million, respectively, at December 31, 1998. The
rise in cross-border exposure to France resulted from an increase in interbank
placements with French banks.
Beginning in mid-1997, a number of countries in Asia experienced financial
difficulties that included significant devaluation of their currency, higher
interest rates and general tightening of credit. In view of the risks, Pacific
Century increased its provision for loan losses in 1998. By the end of 1999,
the economies and financial environment in most Asian countries had improved
in terms of currency exchange rate stability, interest rates and gross
domestic product growth. However, in spite of the improving economic trend,
the impact of government and corporate restructuring in the region is still
being felt. For Pacific Century the impact was greatest in South Korea. While
South Korea has made tremendous strides in improving its economy and financial
markets, certain Korean corporations have had difficulties in adjusting to
mandated and advisable reforms.
The most notable impact to Pacific Century was $33.7 million in exposure to
a South Korean conglomerate of which $30.2 million was outstanding. During the
third quarter of 1999, the borrower suspended debt service payments and began
negotiations with its domestic and foreign bank creditors. At the end of 1999,
those negotiations had not produced a definitive resolution of the matter with
foreign lenders. Consequently, Pacific Century charged off credits of $19.5
million and placed $10.7 million on non-performing status. Negotiations with
the conglomerate and its creditors are in process. For additional information,
see "Reserve for Loan Losses."
Pacific Century continues to monitor its international activities on a
country by country basis as events evolve and will adjust activities and take
such actions in the region as appropriate.
26
GEOGRAPHIC DISTRIBUTION OF CROSS-BORDER INTERNATIONAL ASSETS/1/
TABLE 9
GOVERNMENT
AND OTHER BANKS AND COMMERCIAL
OFFICIAL OTHER FINANCIAL AND INDUSTRIAL
INSTITUTIONS INSTITUTIONS/2/ COMPANIES TOTAL
------------ --------------- -------------- --------
(IN MILLIONS OF DOLLARS)
December 31, 1999
Japan.................... $ -- $217.8 $102.6 $ 320.4
South Korea.............. 24.3 198.0 72.0 294.3
France................... 16.2 178.7 0.2 195.1
All Others/3/ ........... 10.7 290.5 262.2 563.4
------ ------ ------ --------
$ 51.2 $885.0 $437.0 $1,373.2
====== ====== ====== ========
December 31, 1998
Japan.................... $ -- $224.6 $131.1 $ 355.7
South Korea.............. 85.8 94.4 84.7 264.9
Taiwan................... -- 41.6 82.3 123.9
All Others............... 68.5 462.1 188.7 719.3
------ ------ ------ --------
$154.3 $822.7 $486.8 $1,463.8
====== ====== ====== ========
December 31, 1997
South Korea.............. $ -- $219.9 $193.5 $ 413.4
Japan.................... -- 253.6 136.8 390.4
Taiwan................... 57.5 39.5 23.8 120.8
All Others............... 67.1 406.5 154.5 628.1
------ ------ ------ --------
$124.6 $919.5 $508.6 $1,552.7
====== ====== ====== ========
- --------
/1/ This table details by country cross-border outstandings that individually
amounted to 0.75% or more of consolidated total assets as of year-end
1999, 1998 and 1997. Cross-border outstandings are defined as foreign
monetary assets that are payable to Pacific Century in U.S. dollars or
other non-local currencies, plus amounts payable in local currency but
funded with U.S. dollars or other non-local currencies. Cross-border
outstandings include loans, acceptances, interest-bearing deposits with
other banks, other interest-bearing investments, and other monetary
assets.
/2/ Includes U.S. dollar advances to foreign branches and affiliate banks
which were used to fund local currency transactions. Totals at December
31, 1999, 1998 and 1997 were $378.2 million, $411.1 million and $419.9
million, respectively.
/3/ At December 31, 1999, the all others category included cross-border
outstandings of $77.7 million in French Polynesia and $47.1 million in New
Caledonia. The currency of both of these countries is the Pacific franc.
CORPORATE RISK PROFILE
Credit Risk
Non-Performing Assets and Past Due Loans
Non-performing assets (NPAs) consist of non-accrual loans, restructured
loans and foreclosed real estate. These assets, which generally have more than
a normal risk of loss, totaled $149.9 million at year-end 1999, compared to
$137.5 million at the end of 1998, and $97.1 million at the end of 1997.
At December 31, 1999, the ratio of NPAs to outstanding loans rose to 1.54%.
Comparatively the ratio was 1.40% and 1.02% for 1998 and 1997, respectively.
27
In order to minimize credit losses, Pacific Century strives to maintain high
underwriting standards, identify potential problem loans early and work with
borrowers to cure delinquencies. Moreover, charge-offs, if required, are taken
promptly and reserve levels are maintained at adequate levels. Pacific
Century's policy is to place loans on non-accrual status when a loan is over
90 days delinquent, unless collection is likely based on specific factors such
as the type of borrowing agreement and/or collateral. At the time a loan is
placed on non-accrual, all accrued but unpaid interest is reversed against
current earnings.
Total non-accrual loans rose to $145.3 million at year-end 1999, up 10.2%
over year-end 1998. Higher non-accrual balances in the foreign and commercial
real estate categories accounted for this increase. Non-accrual loans in the
C&I and residential real estate portfolios reflected a decline from year-end
1998.
At December 31, 1999, foreign loans on non-accrual were $67.4 million,
compared to $57.5 million at December 31, 1998 and $39.9 million at December
31, 1997. The 1999 increase partially results from placing $10.7 million of
loans to a South Korean conglomerate on non-accrual status. Total non-accrual
loans in Asia rose to $32.3 million at December 31, 1999, from $8.6 million at
December 31, 1998. Additional information relative to Asian exposure is
contained in "Foreign Operations."
C&I loans classified as non-accrual totaled $23.7 million at year-end 1999,
compared to $28.2 million and $10.7 million at year-end 1998 and 1997,
respectively.
At December 31, 1999, non-accrual loans secured by real estate totaled $49.8
million, or 34.3% of total non-accrual loans.
Commercial real estate loans on non-accrual status were $19.0 million at
December 31, 1999, up from $5.4 million at the end of 1998. This increase is
mainly due to the transfer of several large Hawaii-based commercial real
estate loans to non-accrual in the first quarter of 1999. Non-performing
residential mortgages (excluding construction loans) totaled $29.7 million at
year-end 1999, compared to $36.4 million at year-end 1998, reflecting a year-
over-year decline of $6.7 million.
Because residential mortgages are secured by real estate, the credit risk on
these loans are lower than unsecured lending. Most of the Company's
residential loans are owner-occupied first mortgages and were generally
underwritten to provide a loan-to-value ratio of no more than 80% at
origination. Additionally, the risk in this portfolio is also moderated by the
smaller average loan balance compared to commercial lending.
Foreclosed real estate declined to $4.6 million at year-end 1999, from $5.6
million at year-end 1998. At December 31, 1999, the foreclosed real estate
portfolio consisted of 38 properties, mostly located in Hawaii. The largest
property represented 14% of the total. In 1999, sales of foreclosed real
estate resulted in a net loss of $152,000, compared to a net losses of
$871,000 and $523,000 in 1998 and 1997, respectively.
Accruing loans past due 90 days or more totaled $18.5 million at year-end
1999, declining $2.3 million from $20.8 million at year-end 1998. Lower
delinquencies in the foreign portfolio and, to a lesser degree, improvements
in the installment portfolio largely explains this decline. The C&I loan
portfolio reflected a $5.5 million increase in past due loans over the prior
year.
28
Table 10 presents a five-year history of non-performing assets and accruing
loans past due 90 days or more.
NON-PERFORMING ASSETS AND ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
TABLE 10
DECEMBER 31
-------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ -----
(IN MILLIONS OF DOLLARS)
Non-Accrual Loans
Commercial and Industrial............. $ 23.7 $ 28.2 $ 10.7 $ 20.9 $16.9
Real Estate
Construction........................ 1.1 2.9 1.0 0.3 0.3
Commercial.......................... 19.0 5.4 2.8 4.1 14.9
Residential......................... 29.7 36.4 32.9 23.6 14.7
Installment........................... 0.5 0.8 2.0 1.3 0.8
Foreign............................... 67.4 57.5 39.9 22.3 --
Lease Financing....................... 3.9 0.7 -- -- --
------ ------ ------ ------ -----
Total Non-Accrual Loans........... 145.3 131.9 89.3 72.5 47.6
------ ------ ------ ------ -----
Restructured Loans
Real Estate--Commercial............... -- -- 1.6 -- --
------ ------ ------ ------ -----
Total Restructured Loans.......... -- -- 1.6 -- --
------ ------ ------ ------ -----
Foreclosed Real Estate
Domestic.............................. 4.3 5.5 6.2 10.7 9.3
Foreign............................... 0.3 0.1 -- -- --
------ ------ ------ ------ -----
Total Foreclosed Real Estate...... 4.6 5.6 6.2 10.7 9.3
------ ------ ------ ------ -----
Total Non-Performing Assets..... 149.9 137.5 97.1 83.2 56.9
------ ------ ------ ------ -----
Accruing Loans Past Due 90 Days or More
Commercial and Industrial............. 5.9 0.4 2.0 2.0 1.8
Real Estate
Construction........................ -- 0.4 -- 0.4 --
Commercial.......................... 1.9 -- 0.6 6.8 2.4
Residential......................... 4.0 4.5 7.3 6.8 5.8
Installment........................... 4.5 7.3 7.6 9.0 10.5
Foreign............................... 1.0 7.9 7.4 9.5 --
Lease Financing....................... 1.2 0.3 0.1 0.2 0.2
------ ------ ------ ------ -----
Total Past Due Loans.............. 18.5 20.8 25.0 34.7 20.7
------ ------ ------ ------ -----
Total Non-Performing Assets and
Past Due Loans................. $168.4 $158.3 $122.1 $117.9 $77.6
====== ====== ====== ====== =====
Ratio of Non-Performing Assets to Total
Loans.................................. 1.54% 1.40% 1.02% 0.96% 0.70%
Ratio of Non-Performing Assets and
Accruing Loans Past Due 90 Days or More
to Total Loans......................... 1.73% 1.61% 1.29% 1.36% 0.95%
29
FOREGONE INTEREST ON NON-ACCRUALS
TABLE 11
YEAR ENDED DECEMBER 31
-------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS)
Interest Income Which Would Have Been Recorded Under
Original Terms:
Domestic.......................................... $11.2 $8.4 $6.6 $6.3 $7.6
Foreign........................................... 7.1 4.1 2.4 2.3 --
Interest Income Recorded During the Current Year on
Non-Accruals:
Domestic.......................................... 1.1 1.3 1.5 1.6 0.6
Foreign........................................... 3.0 1.4 0.5 0.6 --
Reserve for Loan Losses
Pacific Century maintains the reserve for loan losses at a level that it
believes is adequate to absorb estimated inherent losses on all loans. The
reserve level is determined based on a continuing assessment of problem
credits, recent loss experience, changes in collateral values, and current and
anticipated economic conditions. Pacific Century's credit administration
procedures emphasizes the early recognition and monitoring of problem loans in
order to control delinquencies and minimize losses. For loans other than
consumer loans, a line driven risk rating system is used. Loans are graded
based on the degree of risk at origination by the lending officer and
thereafter, are reviewed periodically as appropriate. An independent
evaluation of this process is performed by the Credit Review department to
ensure compliance of the risk grades and timeliness of grade changes.
Pacific Century performs a comprehensive quarterly analysis to determine the
adequacy of its reserve for loan losses. This analysis incorporates risk
migration modeling and transfer risk. Pacific Century utilizes a methodology
that establishes both specific and general reserves. Commercial loans and
leases are individually reviewed according to specified criteria to determine
specific loss exposure. Loans for which a specific reserve allocation is not
established are placed in loan pools for purposes of determining the general
reserve allocation.
At Pacific Century, general reserve allocations for various loan pools are
determined based on a risk migration analysis component and a subjective
factors component. The migration model determines potential loss factors based
on historical loss experience for homogeneous loan portfolios and based on
risk grades for risk-rated portfolios. The subjective factors component
includes an evaluation of the changes in the nature and volume of the
portfolio, delinquency and non-accrual trends, lending policies and
procedures, and other relevant general factors. For foreign credits, general
reserves are further stratified to address transfer risk. General reserve
allocations for transfer risk are determined based on the type of credit