U N I T E D S T A T E S SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001 -------------- or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____________ to _____________ Commission File Number 1-6887 PACIFIC CENTURY FINANCIAL CORPORATION ------------------------------------- (Exact name of registrant as specified in its charter) Delaware 99-0148992 ------------------------ --------------------------------- (State of incorporation) (IRS Employer Identification No.) 130 Merchant Street, Honolulu, Hawaii 96813 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (808) 537-8430 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value; outstanding at April 30, 2001 - 79,936,486 shares - -------------------------------------------------------------------------------
Index Pacific Century Financial Corporation and Subsidiaries Part I. - Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 2001, December 31, 2000, and March 31, 2000 Consolidated Statements of Income - Three months ended March 31, 2001 and March 31, 2000 Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and March 31, 2000 Consolidated Statements of Shareholders' Equity - Three months ended March 31, 2001 and March 31, 2000 Notes to condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure of Market Risk Part II. - Other Information Item 1. Exhibits and Reports on Form 8-K Item 4. Submission of Matters to a Vote of Shareholders Signatures
<TABLE> <CAPTION> Consolidated Statements of Condition (Unaudited) Financial Pacific Century Financial Corporation and subsidiaries - ----------------------------------------------------------------------------------------------------------------- March 31 December 31 March 31 (in thousands of dollars) 2001 2000 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Assets Interest-Bearing Deposits $411,070 $188,649 $225,314 Investment Securities - Held to Maturity (Market Value of $665,722; $676,621 and $721,620 respectively) 656,174 670,038 732,344 Investment Securities - Available for Sale 2,390,518 2,507,076 2,537,617 Securities Purchased Under Agreements to Resell 377 3,969 902 Funds Sold 84,732 134,644 42,208 Loans Held for Sale 308,605 179,229 115,160 Loans 8,683,416 9,489,061 9,664,473 Unearned Income (258,445) (253,903) (237,764) Allowance for Loan Losses (199,800) (246,247) (195,409) - ----------------------------------------------------------------------------------------------------------------- Net Loans 8,533,776 9,168,140 9,346,460 - ----------------------------------------------------------------------------------------------------------------- Total Earning Assets 12,076,647 12,672,516 12,884,845 Cash and Non-Interest Bearing Deposits 559,227 523,969 491,218 Premises and Equipment 251,746 254,621 267,497 Customers' Acceptance Liability 7,225 14,690 8,262 Accrued Interest Receivable 67,875 68,585 74,597 Other Real Estate 11,336 4,526 4,633 Intangibles, including Goodwill 186,313 192,264 202,832 Other Assets 550,306 282,645 316,502 - ----------------------------------------------------------------------------------------------------------------- Total Assets $13,710,675 $14,013,816 $14,250,386 ================================================================================================================= Liabilities Domestic Deposits Demand - Non-Interest Bearing $1,685,149 $1,707,724 $1,708,635 - Interest Bearing 2,042,129 2,008,730 2,110,998 Savings 665,643 665,239 693,077 Time 2,948,232 2,836,083 2,759,319 Foreign Deposits Demand - Non-Interest Bearing 337,854 385,366 380,179 Time Due to Banks 390,395 535,126 398,176 Other Savings and Time 746,121 942,313 1,092,679 - ----------------------------------------------------------------------------------------------------------------- Total Deposits 8,815,523 9,080,581 9,143,063 Securities Sold Under Agreements to Repurchase 1,703,982 1,655,173 1,806,197 Funds Purchased 297,613 413,241 511,440 Short-Term Borrowings 278,786 211,481 424,720 Bank's Acceptances Outstanding 7,225 14,690 8,262 Accrued Retirement Expense 34,820 37,868 40,851 Accrued Interest Payable 64,113 72,460 66,456 Accrued Taxes Payable 164,893 130,766 103,826 Minority Interest 4,295 4,536 4,269 Other Liabilities 84,750 94,512 109,669 Long-Term Debt 882,733 997,152 805,726 - ----------------------------------------------------------------------------------------------------------------- Total Liabilities 12,338,733 12,712,460 13,024,479 Shareholders' Equity Common Stock ($.01 par value), authorized 500,000,000 shares; issued / outstanding; March 2001 - 80,558,704 / 79,863,450; December 2000 - 80,558,811 / 79,612,178; March 2000 - 806 806 806 80,551,253 / 79,661,479; Capital Surplus 346,411 346,045 345,863 Accumulated Other Comprehensive Income 21,835 (25,079) (72,307) Retained Earnings 1,015,867 996,791 967,308 Treasury Stock, at Cost - (March 2001 - 695,254; December 2000 - 946,633; and March 2000 - 889,774) (12,977) (17,207) (15,763) - ----------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 1,371,942 1,301,356 1,225,907 - ----------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $13,710,675 $14,013,816 $14,250,386 ================================================================================================================= </TABLE>
<TABLE> <CAPTION> Consolidated Statements of Income (Unaudited) Pacific Century Financial Corporation and subsidiaries ------------------------------------------------------------------------------------------------------------------- 3 Months 3 Months Ended Ended Mar 31 Mar 31 (in thousands of dollars except per share amounts) 2001 2000 ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Interest Income Interest on Loans $180,173 $180,402 Loan Fees 10,903 8,246 Income on Lease Financing 6,857 7,979 Interest and Dividends on Investment Securities Taxable 11,636 14,236 Non-taxable 140 279 Income on Investment Securities Available for Sale 39,301 41,033 Interest on Deposits 5,214 3,764 Interest on Security Resale Agreements 38 10 Interest on Funds Sold 1,059 473 ------------------------------------------------------------------------------------------------------------------- Total Interest Income 255,321 256,422 Interest Expense Interest on Deposits 72,019 68,214 Interest on Security Repurchase Agreements 24,630 22,953 Interest on Funds Purchased 6,123 8,527 Interest on Short-Term Borrowings 3,230 4,532 Interest on Long-Term Debt 15,314 12,688 ------------------------------------------------------------------------------------------------------------------- Total Interest Expense 121,316 116,914 ------------------------------------------------------------------------------------------------------------------- Net Interest Income 134,005 139,508 Provision for Loan Losses 52,466 13,522 ------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 81,539 125,986 Non-Interest Income Trust and Asset Management Income 15,795 16,887 Service Charges on Deposit Accounts 9,940 9,557 Fees, Exchange, and Other Service Charges 20,782 21,626 Other Operating Income 13,410 15,575 Gain on Sale of Credit Card Portfolio 75,414 -- Investment Securities Gains 20,203 282 ------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 155,544 63,927 Non-Interest Expense Salaries 47,883 47,547 Pensions and Other Employee Benefits 14,353 14,630 Net Occupancy Expense 12,124 11,816 Net Equipment Expense 13,379 12,067 Other Operating Expense 39,131 35,211 Goodwill Amortization 4,836 4,742 Restructuring and Other Related Costs 44,438 -- Minority Interest 79 69 ------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense 176,223 126,082 ------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 60,860 63,831 Provision for Income Taxes 27,183 24,066 ------------------------------------------------------------------------------------------------------------------- Net Income $33,677 $39,765 =================================================================================================================== Basic Earnings Per Share $0.42 $0.50 Diluted Earnings Per Share $0.42 $0.50 Dividends Declared Per Share $0.18 $0.17 Basic Weighted Average Shares 79,720,284 79,821,365 Diluted Weighted Average Shares 81,124,713 80,017,761 =================================================================================================================== </TABLE>
<TABLE> <CAPTION> Pacific Century Financial Corporation and subsidiaries Consolidated Statements of Shareholders' Equity (Unaudited) ========================================================================================================================= Accumulated Other Common Capital Comprehensive (in thousands of dollars) Total Stock Surplus Income ========================================================================================================================= <S> <C> <C> <C> <C> Balance at December 31, 2000 $1,301,356 $806 $346,045 ($25,079) Comprehensive Income Net Income 33,677 -- -- -- Other Comprehensive Income, Net of Tax Investment Securities, Net of Reclassification Adjustment 19,510 -- -- 19,510 Foreign Currency Translation Adjustment 26,710 -- -- 26,710 Pension Liability Adjustments (159) -- -- (159) Stock Compensation 853 -- -- 853 Total Comprehensive Income $79,738 Common Stock Issued 18,317 Profit Sharing Plan 370 -- 92 -- 184,092 Stock Option Plan 3,000 -- 114 -- 34,904 Dividend Reinvestment Plan 700 -- 163 -- 893 Directors' Restricted Shares and Deferred Compensation Plan 288 -- (3) -- Treasury Stock Purchased -- -- -- -- Cash Dividends Paid (14,363) -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $1,371,942 $806 $346,411 $21,835 ========================================================================================================================= Balance at December 31, 1999 $1,212,330 $806 $345,851 ($66,106) Comprehensive Income Net Income 39,765 -- -- -- Other Comprehensive Income, Net of Tax Investment Securities, Net of Reclassification Adjustment (7,630) -- -- (7,630) Foreign Currency Translation Adjustment 1,429 -- -- 1,429 Pension Liability Adjustments -- -- -- -- Total Comprehensive Income $33,564 Common Stock Issued 22,377 Profit Sharing Plan 361 -- -- -- 33,932 Stock Option Plan 398 -- 3 -- 78,723 Dividend Reinvestment Plan 1,123 -- -- -- 525 Directors' Restricted Shares and Deferred Compensation Plan 9 -- 9 -- Treasury Stock Purchased (8,337) -- -- -- Cash Dividends Paid (13,541) -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 2000 $1,225,907 $806 $345,863 ($72,307) ========================================================================================================================= <CAPTION> =============================================================================================== Retained Treasury Comprehensive Earnings Stock Income =============================================================================================== <S> <C> <C> <C> Balance at December 31, 2000 $996,791 ($17,207) Comprehensive Income Net Income 33,677 -- $33,677 Other Comprehensive Income, Net of Tax Investment Securities, Net of Reclassification Adjustment -- -- 19,510 Foreign Currency Translation Adjustment -- -- 26,710 Pension Liability Adjustments -- -- (159) Stock Compensation -- -- 853 --------- Total Comprehensive Income $79,738 ========= Common Stock Issued 18,317 Profit Sharing Plan -- 278 184,092 Stock Option Plan (238) 3,124 34,904 Dividend Reinvestment Plan -- 537 893 Directors' Restricted Shares and Deferred Compensation Plan -- 291 Treasury Stock Purchased -- -- Cash Dividends Paid (14,363) -- - ------------------------------------------------------------------------------- Balance at March 31, 2001 $1,015,867 ($12,977) =============================================================================== Balance at December 31, 1999 $942,177 ($10,398) Comprehensive Income Net Income 39,765 -- $39,765 Other Comprehensive Income, Net of Tax Investment Securities, Net of Reclassification Adjustment -- -- (7,630) Foreign Currency Translation Adjustment -- -- 1,429 Pension Liability Adjustments -- -- -- --------- Total Comprehensive Income $33,564 ========= Common Stock Issued 22,377 Profit Sharing Plan (128) 489 33,932 Stock Option Plan (362) 757 78,723 Dividend Reinvestment Plan (603) 1,726 525 Directors' Restricted Shares and Deferred Compensation Plan -- -- Treasury Stock Purchased -- (8,337) Cash Dividends Paid (13,541) -- - ------------------------------------------------------------------------------- Balance at March 31, 2000 $967,308 ($15,763) =============================================================================== </TABLE>
<TABLE> <CAPTION> Pacific Century Financial Corporation and subsidiaries Consolidated Statements of Cash Flows (Unaudited) ================================================================================================================ Three Months ended March 31 (in thousands of dollars) 2001 2000 ================================================================================================================ <S> <C> <C> Operating Activities Net Income $ 33,677 $ 39,765 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses, depreciation, and amortization 59,150 13,826 Deferred income taxes (375) (13,079) Realized and unrealized investment security gains (21,357) (58) Net adjustments to pension liability and stock compensation 694 - Gain on sale of credit card portfolio (75,414) - Other assets and liabilities, net 12,555 1,477 ------------------------ Net cash provided by operating activities 8,930 41,931 - ---------------------------------------------------------------------------------------------------------------- Investing Activities Proceeds from redemptions of investment securities held to maturity 33,650 66,605 Purchases of investment securities held to maturity (19,786) (2,627) Proceeds from sales and maturities of investment securities available for sale 249,114 33,854 Purchases of investment securities available for sale (78,682) (41,898) Net decrease (increase) in interest-bearing deposits (222,421) 53,159 Net decrease in funds sold 53,504 9,630 Net decrease (increase) in loans and lease financing 380,140 (65,080) Premises and equipment, net (6,905) (5,385) ------------------------ Net cash provided by investing activities 388,614 48,258 - ---------------------------------------------------------------------------------------------------------------- Financing Activities Net decrease in demand, savings, and time deposits (265,058) (251,155) Proceeds from lines of credit and long-term debt 2,024 100,024 Principal payments on lines of credit and long-term debt (116,443) (21,955) Net increase (decrease) in short-term borrowings 486 (47,222) Net Common Stock issued (repurchased) 4,358 (6,446) Cash dividends (14,363) (13,541) ------------------------ Net cash used by financing activities (388,996) (240,295) - ---------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 26,710 1,429 ------------------------ Increase (Decrease) in cash and non-interest bearing deposits 35,258 (148,677) Cash and non-interest bearing deposits at beginning of year 523,969 639,895 ------------------------ Cash and non-interest bearing deposits at end of period $ 559,227 $ 491,218 ================================================================================================================ </TABLE>
Pacific Century Financial Corporation Notes to Consolidated Financial Statements (Unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Pacific Century Financial Corporation (Pacific Century) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the results for the interim periods. These statements should be read in conjunction with the audited consolidated financial statements and related notes included in Pacific Century's 2000 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements of Pacific Century at that date but does not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. International operations include certain activities located domestically in Hawaii, as well as branches and subsidiaries domiciled outside the United States. The operations of Bank of Hawaii and First Savings and Loan Association of America located in the West and South Pacific that are denominated in U.S. dollars are classified as domestic. Pacific Century's international operations are primarily concentrated in Hong Kong, Japan, Singapore, South Korea, Taiwan, French Polynesia, Fiji, New Caledonia, Papua New Guinea and Vanuatu. Regulatory Matters Pacific Century continues to comply with the terms of the previously disclosed Memorandum of Understanding. Pacific Century has obtained regulatory approval for dividend payments for the first and second quarters of 2001. Note 2. Recent Accounting Pronouncements On January 1, 2001 Pacific Century adopted Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 requires that all derivatives be recorded on the balance sheet at fair value. Changes in a derivative's fair value that do not qualify for hedge treatment, as well as the ineffective portion of a hedge, must be recognized currently in earnings. The transition adjustment at the time of adoption was a charge to income of $412 thousand.
Note 3. Earnings Per Share For the three months ended March 31, 2001 and 2000, the weighted average shares for computing basic and diluted EPS are presented on the Consolidated Statement of Income. The dilutive effect of stock options was 1,404,429 and 196,396 shares for the three months ended March 31, 2001 and 2000, respectively. Note 4. Income Taxes The provision for income taxes is computed by applying statutory federal, foreign, and state income tax rates to income before income taxes as reported in the Consolidated Statements of Income after adjusting for non-taxable items, principally from certain state tax adjustments, tax exempt interest income and bank owned life insurance income. The tax provision is also reduced by low income housing, foreign and investment tax credits. Note 5. Business Segments Pacific Century is a financial services organization that has maintained a broad presence throughout the Pacific region. However, its presence will be changing over the remainder of the year. On April 23, 2001, management announced its intention to divest non-core holdings. Operations in Hawaii, the West Pacific, American Samoa and Japan will be retained as well as an office in Arizona for its leasing operations and technology support. Consequently, during the first quarter of 2001, Pacific Century realigned its business from geographic segments into the following segments: Retail Banking, Commercial Banking, Financial Services Group, Divestiture Businesses and Treasury and Other Corporate. Business segment results are determined based on Pacific Century's internal financial management organizational structure. Pacific Century uses a variety of techniques to assign and transfer balance sheet and income statement amounts between business segments including allocations of common costs and capital. These techniques and accounting practices are not covered by accounting principles generally accepted in the United States. The Company is continuing to develop its business segment accounting practices and implemented changes in the first quarter 2001. Accordingly, the previously presented operating results for the quarter ended March 31, 2000 have been reclassified to be consistent with the quarter ended March 31, 2001. It is possible that accounting practices may be changed again in future periods. If this occurs, prior segment information may be restated. The financial results for three months ended March 31, 2001 and 2000 are presented below for each of Pacific Century's principal market segments. Business Segment Selected Financial Information Table 1 (in thousands of dollars) <TABLE> <CAPTION> FINANCIAL TREASURY SERVICES DIVESTITURE AND OTHER CONSOLIDATED RETAIL COMMERCIAL GROUP BUSINESSES CORPORATE TOTAL ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Three Months Ended March 31, 2001 Net Interest Income 47,598 44,030 2,532 37,966 1,879 134,005 Loan Loss Provision (2,746) (40,885) - (8,835) - (52,466) ----------------------------------------------------------------------------- Net Interest Income after Provision 44,852 3,145 2,532 29,131 1,879 81,539 Gains from Divestitures - - - - 96,353 96,353 Other Non-Interest Income 17,352 3,585 20,637 13,074 4,543 59,191 ----------------------------------------------------------------------------- Total Revenue 62,204 6,730 23,169 42,205 102,775 237,083 Restructuring & Other related costs - - - - 44,438 44,438 Non-Interest Expense 42,144 24,408 19,169 38,345 7,719 131,785 ----------------------------------------------------------------------------- Net Income (Loss) Before Income Taxes 20,060 (17,678) 4,000 3,860 50,618 60,860 Income Taxes (8,426) 7,221 (1,681) (1,622) (22,675) (27,183) ----------------------------------------------------------------------------- Net Income (Loss) 11,634 (10,457) 2,319 2,238 27,943 33,677 ============================================================================= <CAPTION> FINANCIAL TREASURY SERVICES DIVESTITURE AND OTHER CONSOLIDATED RETAIL COMMERCIAL GROUP BUSINESSES CORPORATE TOTAL ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Three Months Ended March 31, 2000 Net Interest Income 46,015 46,545 2,731 42,220 1,997 139,508 Loan Loss Provision (2,451) (6,801) - (4,270) - (13,522) ------------------------------------------------------------------------------- Net Interest Income after Provision 43,564 39,744 2,731 37,950 1,997 125,986 Non-Interest Income 15,163 10,337 22,427 11,424 4,576 63,927 ------------------------------------------------------------------------------- Total Revenue 58,727 50,081 25,158 49,374 6,573 189,913 Non-Interest Expense 44,116 23,885 17,580 37,125 3,376 126,082 ------------------------------------------------------------------------------- Net Income (Loss) Before Income Taxes 14,611 26,196 7,578 12,249 3,197 63,831 Income Taxes (5,372) (9,657) (2,804) (4,519) (1,714) (24,066) ------------------------------------------------------------------------------- Net Income (Loss) 9,239 16,539 4,774 7,730 1,483 39,765 ============================================================================= </TABLE>
Note 6. Restructuring During the first quarter 2001, Pacific Century incurred restructuring and related costs as follows. (in millions) Foreign Currency Translation Losses $28.0 Unrecoverable Investments 6.1 Termination Costs 1.6 Unrealizable Deferred Tax Asset 5.0 Consulting Costs 0.6 Other 3.1 ----- Total $44.4 ===== Pacific Century expects to sell its operations in California and the South Pacific and to sell or close its Asian branches by the end of 2001. As a result of these divestitures, assets with no future benefit were written off at March 31, 2001. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PERFORMANCE HIGHLIGHTS Pacific Century Financial Corporation (Pacific Century) reported earnings for the three months ended March 31, 2001 of $33.7 million down 15.3% from $39.8 million reported in the same period of 2000. Both basic and diluted earnings per share were $0.42 for the first quarter 2001 compared to $0.50 in the first quarter 2000. Earnings for the first quarter of 2001 included gains of $75.4 million from the sale of the Pacific Century's credit card portfolio and $20.9 million related to the sale of ownership interest in Star Systems, Inc. Pacific Century's continuing emphasis on improving asset quality resulted in significant reduction of credit risk during the quarter. Non-performing assets (NPAs), exclusive of accruing loans past due 90 days or more, were $119.5 million, down 34.7% from $183.0 million reported at December 31, 2000 and $136.4 reported at March 31, 2000. At March 31, 2001 the allowance for loan losses stood at $199.8 million compared with $246.2 million and $195.4 million at year end and March 31, 2000, respectively. The ratio of the allowance to loans was 2.29%, 2.62% and 2.05% at the end of each of the respective periods. In the first quarter of 2001, return on average assets (ROAA) and return on average equity (ROAE) were 0.99% and 10.42%, respectively, compared to 1.13% and 13.19% in the same 2000 quarter. Total assets at March 31, 2001 stood at $13.7 billion relative to $14.0 billion at December 31, 2000 and $14.3 billion at March 31, 2000. Year-over-year, loans declined by $981.1 million and investment securities available for sale declined by $147.1 million, offset by a $185.8 million increase in interest- bearing deposits.
On April 23, 2001 Pacific Century announced its new strategic plan designed to maximize shareholder value by strengthening its Hawaii and West Pacific operations and divesting most other holdings. Pacific Century plans to divest or wind down its operations in California, the South Pacific and Asia. It will maintain its operations in Hawaii, the West Pacific, American Samoa, Japan and a leasing office in Arizona. As a consequence of the plan, Pacific Century recognized restructuring and related costs of $44.4 million. 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; implementation of the restructuring plan may not be completed within the expected financial and time estimates; 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. 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. <TABLE> <CAPTION> Highlights Pacific Century Financial Corporation and subsidiaries - ----------------------------------------------------------------------------------------------------------------- Table 2 (in thousands of dollars except per share amounts) Percentage Earnings Highlights and Performance Ratios 2001 2000 Change - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Three Months Ended March 31 Net Income $33,677 $39,765 -15.3% Basic Earnings Per Share 0.42 0.50 -16.0% Diluted Earnings Per Share 0.42 0.50 -16.0% Cash Dividends 14,363 13,541 Return on Average Assets 0.99% 1.13% Return on Average Equity 10.42% 13.19% Net Interest Margin 4.24% 4.31% Efficiency Ratio 65.43% 62.06% Summary of Results Excluding the Effect of Intangibles (a) - ------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31 Net Income $39,283 $43,889 -10.5% Basic Earnings per Share $0.49 $0.55 -10.9% Diluted Earnings per Share $0.48 $0.55 -12.7% Return on Average Assets 1.17% 1.26% Return on Average Equity 14.21% 17.54% Efficiency Ratio 63.10% 59.73% (a) Intangibles include goodwill, core deposit and trust intangibles, and other intangibles. March 31 March 31 Percentage Statement of Condition Highlights and Performance Ratios 2001 2000 Change - ------------------------------------------------------------------------------------------------------------------ Total Assets $13,710,675 $14,250,386 -3.8% Net Loans 8,533,776 9,346,460 -8.7% Total Deposits 8,815,523 9,143,063 -3.6% Total Shareholders' Equity 1,371,942 1,225,907 11.9% Book Value Per Common Share $17.18 $15.39 Loss Reserve / Loans Outstanding 2.29% 2.05% Average Equity / Average Assets 9.47% 8.54% Common Stock Price Range High Low 2000 $23.19 $11.06 2001 First Quarter $20.99 $16.88 </TABLE>
STATEMENT OF INCOME ANALYSIS Net Interest Income Taxable-equivalent net interest income for the first quarter of 2001 was $134.1 million, down $5.7 million, or 4.1% from the comparable period in 2000. Adjusted for a lease residual revaluation recorded during the quarter, taxable-equivalent net interest income was $136.5 million for the first quarter of 2001, down $3.3 million, or 2.4% from the same period last year. Pacific Century's net interest margin was 4.24%, a decrease of 6 basis points from the comparable period a year ago. Adjusted for the lease residual revaluation, the net interest margin increased 2 basis points to 4.32% from the first quarter of 2000. The yield on average earnings assets was 8.08% for the first quarter of 2001. Excluding the lease residual adjustment, the yield on average earnings assets was 8.16%, an increase of 26 basis points from the same period a year ago largely the result of higher prevailing market rates. The average cost of funds was 4.85% for the quarter, up from 4.44% reported in the first quarter 2000 - mainly due to changes in funding sources and changing interest rates. Presented in Table 3 are average balances, yields, and rates paid for the three months ended March 31, 2001, March 31, 2000 and December 31, 2000. The results for the full year 2000 are also presented. <TABLE> <CAPTION> Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited) - ---------------------------------------------------------------------------------------------------------------------- Table 3 Three Months Ended Three Months Ended March 31, 2001 March 31, 2000 Average Income/ Yield/ Average Income/ Yield/ (in millions of dollars) Balance Expense Rate Balance Expense Rate - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Earning Assets Interest Bearing Deposits $332.3 $5.2 6.36% $232.1 $3.8 6.52% Investment Securities Held to Maturity -Taxable 652.6 11.7 7.23 775.5 14.2 7.38 -Tax-Exempt 3.7 0.2 23.28 10.0 0.4 17.32 Investment Securities Available for Sale 2,479.9 39.3 6.43 2,527.0 41.0 6.53 Funds Sold 80.5 1.1 5.53 35.0 0.5 5.56 Net Loans -Domestic 7,985.7 165.6 8.41 7,897.9 163.6 8.33 -Foreign 1,277.8 21.4 6.80 1,586.1 24.9 6.30 Loan Fees 10.9 8.3 ------------------------------- ------------------------------- Total Earning Assets 12,812.5 255.4 8.08 13,063.6 256.7 7.90 Cash and Due From Banks 438.2 506.5 Other Assets 595.1 631.4 ------------- ------------- Total Assets $13,845.8 $14,201.5 ============= ============= Interest Bearing Liabilities Domestic Deposits - Demand $2,008.2 11.7 2.36 $2,115.6 12.3 2.33 - Savings 665.7 3.4 2.04 700.1 3.5 2.03 - Time 2,902.7 43.1 6.03 2,764.9 35.1 5.10 ------------------------------- ------------------------------- Total Domestic 5,576.6 58.2 4.23 5,580.6 50.9 3.67 Foreign Deposits - Time Due to Banks 489.4 6.6 5.51 487.8 7.0 5.79 - Other Time and Savings 801.0 7.2 3.65 1,121.6 10.3 3.70 ------------------------------- ------------------------------- Total Foreign 1,290.4 13.8 4.35 1,609.4 17.3 4.33 ------------------------------- ------------------------------- Total Interest Bearing Deposits 6,867.0 72.0 4.25 7,190.0 68.2 3.82 Short-Term Borrowings 2,364.8 34.0 5.83 2,626.6 36.0 5.51 Long-Term Debt 916.0 15.3 6.78 773.0 12.7 6.60 ------------------------------- ------------------------------- Total Interest Bearing Liabilities 10,147.8 121.3 4.85 10,589.6 116.9 4.44 ------------------------------- ------------------------------- Net Interest Income 134.1 139.8 Interest Rate Spread 3.23% 3.46% Net Interest Margin 4.24% 4.30% Demand Deposits - Domestic 1,636.8 1,663.6 - Foreign 377.5 419.5 ------------- ------------- Total Demand Deposits 2,014.3 2,083.1 Other Liabilities 372.4 316.7 Shareholders' Equity 1,311.3 1,212.1 ------------- ------------- Total Liabilities and Shareholders' Equity $13,845.8 $14,201.5 ============= ============= Provision for Loan Losses 52.5 13.5 Net Overhead 20.6 62.2 --------- --------- Income Before Income Taxes 61.0 64.1 Provision for Income Taxes 27.2 24.1 Tax-Equivalent Adjustment 0.1 0.2 --------- --------- Net Income $33.7 $39.8 ========= ========= <CAPTION> ---------------------------------------------------------------- Three Months Ended Twelve Months Ended December 31, 2000 December 31, 2000 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ---------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Earning Assets Interest Bearing Deposits $215.7 $3.7 6.91% $216.2 $14.7 6.78% Investment Securities Held to Maturity -Taxable 687.0 12.5 7.24 724.3 53.0 7.32 -Tax-Exempt 3.8 0.2 22.24 7.6 1.4 18.24 Investment Securities Available for Sale 2,478.4 41.2 6.60 2,502.5 165.1 6.60 Funds Sold 66.8 1.1 6.46 43.2 2.7 6.22 Net Loans -Domestic 8,108.3 178.7 8.76 8,076.4 690.1 8.55 -Foreign 1,319.9 22.5 6.78 1,467.9 97.7 6.65 Loan Fees 8.7 33.6 ------------------------------- ------------------------------- Total Earning Assets 12,879.9 268.6 8.30 13,038.1 1,058.3 8.12 Cash and Due From Banks 404.6 443.2 Other Assets 503.3 574.0 ------------ ------------ Total Assets $13,787.8 $14,055.3 ============ ============ Interest Bearing Liabilities Domestic Deposits - Demand $1,991.6 12.1 2.41 $2,061.9 48.7 2.36 - Savings 667.5 3.4 2.03 684.8 13.9 2.03 - Time 2,815.6 42.3 5.98 2,781.1 154.1 5.54 ------------------------------- ------------------------------- Total Domestic 5,474.7 57.8 4.20 5,527.8 216.7 3.92 Foreign Deposits - Time Due to Banks 557.9 8.7 6.23 505.4 30.4 6.03 - Other Time and Savings 768.9 7.1 3.65 960.5 38.9 4.05 ------------------------------- ------------------------------- Total Foreign 1,326.8 15.8 4.73 1,465.9 69.3 4.73 ------------------------------- ------------------------------- Total Interest Bearing Deposits 6,801.5 73.6 4.30 6,993.7 286.0 4.09 Short-Term Borrowings 2,437.1 39.1 6.38 2,597.4 156.1 6.01 Long-Term Debt 1,001.6 17.0 6.72 886.9 59.1 6.66 ------------------------------- ------------------------------- Total Interest Bearing Liabilities 10,240.2 129.7 5.04 10,478.0 501.2 4.78 ------------------------------- ------------------------------- Net Interest Income 138.9 557.1 Interest Rate Spread 3.26% 3.34% Net Interest Margin 4.29% 4.27% Demand Deposits - Domestic 1,610.8 1,640.0 - Foreign 354.7 371.4 ------------ ------------ Total Demand Deposits 1,965.5 2,011.4 Other Liabilities 315.6 331.3 Shareholders' Equity 1,266.5 1,234.6 ------------ ------------ Total Liabilities and Shareholders' Equity $13,787.8 $14,055.3 ============ ============ Provision for Loan Losses 25.8 142.9 Net Overhead 59.2 233.4 ---------- ---------- Income Before Income Taxes 53.9 180.8 Provision for Income Taxes 21.2 66.3 Tax-Equivalent Adjustment 0.1 0.8 ---------- ---------- Net Income $32.6 $113.7 ========== ========== </TABLE>
Provision for Loan Losses The provision for loan losses was $52.5 million in the first quarter 2001, up from $13.5 million for the same quarter last year. For further information on credit quality, refer to the section on "Corporate Risk Profile - Credit Risk - Allowance for Loan Losses" in this report. Non-Interest Income Non-interest income after excluding the unusual gains was $59.2 million in the first quarter of 2001, compared to $61.9 million in the first quarter 2000 after adjusting for unusual gains in that quarter. Exclusive of investment securities gains and nonrecurring gains reported in both quarters, non-interest income was down $1.7 million in the March 2001 quarter over the same year ago period. Asset management income for the first quarter of 2001 decreased to $15.8 million, down 6.5% from the same quarter last year. The year-over-year decrease is primarily attributable to the declining market value of managed assets. Service charges on deposit accounts for the March 2001 quarter totaled $9.9 million, This 4.0% increase over the same quarter last year reflects higher fee structures implemented at the end of the first quarter of 2000. Fees, exchange and other service charges were $20.8 million in the first quarter of 2001, compared to $21.6 million in the same 2000 quarter. This reduction reflects the scaleback in the letter of credit and exchange volumes. Other operating income in first quarter 2001, was $13.4 million compared to $15.6 million in the first quarter 2000. The current quarter, included a $3.3 million impairment loss on a partnership interest and the year ago quarter included a $2 million gain on equity investments. After adjusting for the impairment loss in 2001 and the gain in 2000, other operating income increased by $3.1 million in 2001. Sales of investment securities during the three months ended March 31, 2000 resulted in net investment security gains of $20.2 million, including a gain of $20.9 million from the sale of a stock investment in ATM processor Star Systems, Inc. Adjusting for the Star Systems gain, Pacific Century reported a securities loss of $0.7 million for the three months ended March 31, 2001 compared to gains of $0.3 million in the prior year quarter. Non-Interest Expense Total non-interest expense for the March 2001 quarter, excluding restructuring and related costs of $44.4 million, was $131.8 million, up 4.5% from $126.1 million in the comparable quarter of 2000.
Salaries and pension and other employee benefits expense totaled $62.2 million in the first quarter of 2001, unchanged from $62.2 million in the same quarter last year. Net occupancy and equipment expense in the March 2001 quarter was $25.5 million, an increase of 6.7% from $23.9 million for the same period in 2000. The increase was largely due to higher software and equipment maintenance costs incurred in 2001. Other operating expense increased to $39.1 million in the first quarter of 2001 from $35.2 million for the same quarter in 2000. This increase was due to higher professional fees, fraud losses, losses on derivatives with the implementation of SFAS No. 133, increased recruiting costs, costs of a new mileage awards program, as well as increases in other categories offset by lower insurance costs, reduced ORE expense, and lower audit and examination costs. Income Tax Provision Pacific Century's effective tax rate was 44.7% for the first quarter compared to 37.7% in the first quarter of 2000. The increase is attributable to higher state and foreign taxes and the write-off of $5 million of foreign tax assets, with no tax benefit. Given the reduction in foreign operations, the tax provision increased due to Pacific Century's inability to fully utilize foreign taxes to reduce the U.S. tax.
BALANCE SHEET ANALYSIS Loans At March 31, 2001, loans outstanding, including loans held for sale, had declined to $9.0 billion, from $9.7 billion at year-end 2000 and $9.8 billion at March 31, 2000. During the quarter, Pacific Century sold $166.8 million of commercial loans, its $209.3 million credit card portfolio, and $105.4 million of loans were charged off. Additional decline is attributable to other planned risk reductions in the portfolio offset by a $294.4 million increase in residential mortgages. Table 4 presents the composition of the loan portfolio by major loan categories as of March 31, 2001, December 31, 2000 and March 31, 2000. Pacific Century Financial Corporation and subsidiaries <TABLE> <CAPTION> Loan Portfolio Balances Table 4 - ------------------------------------------------------------------------------------------------------------------------- March 31 December 31 March 31 (in millions of dollars) 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Domestic Loans Commercial and Industrial $2,094.7 $2,443.3 $2,558.6 Real Estate Construction -- Commercial 284.0 282.4 317.5 -- Residential 28.9 25.0 16.8 Mortgage -- Commercial 1,023.8 1,125.5 1,246.8 -- Residential 2,866.7 2,855.9 2,572.3 Installment 496.4 729.9 745.0 Loans Held for Sale 308.6 179.2 115.2 Lease Financing 731.2 725.5 626.3 - ------------------------------------------------------------------------------------------------------------------------- Total Domestic 7,834.3 8,366.7 8,198.5 - ------------------------------------------------------------------------------------------------------------------------- Foreign Loans 1,157.7 1,301.6 1,581.1 - ------------------------------------------------------------------------------------------------------------------------- Total Loans $8,992.0 $9,668.3 $9,779.6 ========================================================================================================================= </TABLE>
Investment Securities Pacific Century's investment portfolio is managed to provide collateral for cash management needs, to meet strategic asset/liability positioning, and to provide both interest income and balance sheet liquidity. Available-for-sale securities at March 31, 2001 were $2.4 billion down 4.7% from $2.5 billion at year end and the same date last year. Securities held to maturity were $656 million at March 31, 2001, declining from $670 million at year-end 2000 and $732 million a year ago. These decreases were largely due to maturities. Other short-term interest earning assets totaled $496 million at the end of the first quarter, compared to $323 million and $268 million at December 31, 2000 and March 31, 2000, respectively. The increase occurred as Pacific Century increased its liquidity. INVESTMENT SECURITIES Table 5 The book value and estimated market values of investment securities are as follows: <TABLE> <CAPTION> Aggregate Amortized Fair (in thousands of dollars) Cost Value - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> At MARCH 31, 2001 Securities Held to Maturity: Restricted Equity Securities $89,198 $89,198 Debt Securities Issued by the U. S. Treasury and Agencies 19,935 19,863 Debt Securities Issued by State and Municipalities of the United States 3,948 4,254 Debt Securities Issued by Foreign Governments 22,307 22,310 Mortgage Backed-Securities 515,633 524,944 Other Debt Securities 5,153 5,153 ------------------------------ Totals $656,174 $665,722 ============================== Securities Available for Sale: Equity Securities $22,734 $20,676 Debt Securities Issued by the U. S. Treasury and Agencies 181,681 184,099 Debt Securities Issued by State and Municipalities of the United States 11,886 12,168 Debt Securities Issued by Foreign Governments 16,999 18,267 Mortgage Backed-Securities 2,084,229 2,118,133 Other Debt Securities 37,036 37,175 ------------------------------ Totals $2,354,565 $2,390,518 ============================== At December 31, 2000 Securities Held to Maturity: Restricted Equity Securities $87,991 $87,991 Debt Securities Issued by the U. S. Treasury and Agencies 6,812 6,773 Debt Securities Issued by State and Municipalities -- of the United States 3,984 4,287 Debt Securities Issued by Foreign Governments 18,631 18,631 Mortgage Backed-Securities 547,463 553,782 Other Debt Securities 5,157 5,157 ------------------------------ Totals $670,038 $676,621 ============================== Securities Available for Sale: Equity Securities $26,266 $25,817 Debt Securities Issued by the U. S. Treasury and Agencies 195,920 197,035 Debt Securities Issued by State and Municipalities of the United States 11,634 11,742 Debt Securities Issued by Foreign Governments 490 490 Mortgage Backed-Securities 2,235,987 2,237,160 Other Debt Securities 33,502 34,832 ------------------------------ Totals $2,503,799 $2,507,076 ============================== At MARCH 31, 2000 Securities Held to Maturity: Restricted Equity Securities $76,895 $76,901 Debt Securities Issued by the U. S. Treasury and Agencies 153 154 Debt Securities Issued by State and Municipalities of the United States 8,547 9,022 Debt Securities Issued by Foreign Governments 38,372 38,371 Mortgage Backed-Securities 605,832 594,627 Other Debt Securities 2,545 2,545 ------------------------------ Totals $732,344 $721,620 ============================== Securities Available for Sale: Equity Securities $1,654 $592 Debt Securities Issued by the U. S. Treasury and Agencies 220,736 219,887 Debt Securities Issued by State and Municipalities of the United States 15,819 15,710 Debt Securities Issued by Foreign Governments 21,877 22,423 Mortgage Backed-Securities 2,333,703 2,252,847 Other Debt Securities 28,870 26,158 ------------------------------ Totals $2,622,659 $2,537,617 ============================== </TABLE> Deposits As of March 31, 2001, deposits totaled $8.8 billion, down from $9.1 billion at both year-end and March 31, 2000. Year-over-year, domestic deposits reflected an increase of $42 million, while foreign deposits declined by $397 million. The decline in foreign deposits is largely in the other savings and time, which decreased $347 million year-over-year and is attributed to foreign currency exchange rate fluctuations in the South Pacific and a decline in funding needed for foreign loans. Table 6 presents average deposits by type for the first quarters of 2001 and 2000 and the full year 2000. <TABLE> <CAPTION> Average Deposits Table 6 - --------------------------------------------------------------------------------------------------------------------------------- March 31, 2001 December 31, 2000 March 31, 2000 ------------------------------------------------------------------------------ (in millions of dollars) Amount Mix Amount Mix Amount Mix - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Domestic Non-Interest Bearing Demand $1,636.8 18.4% $1,640.0 18.2% $1,663.6 17.9% Interest-Bearing Demand 2,008.2 22.6% 2,061.9 22.9% 2,115.6 22.8% Regular Savings 665.7 7.5% 684.8 7.6% 700.1 7.6% Time Certificates of Deposit ($100,000 or More) 1,318.9 14.9% 1,212.1 13.5% 1,177.3 12.7% All Other Time and Savings Certificates 1,583.8 17.8% 1,569.0 17.4% 1,587.6 17.1% - --------------------------------------------------------------------------------------------------------------------------------- Total Domestic 7,213.4 81.2% 7,167.8 79.6% 7,244.2 78.1% - --------------------------------------------------------------------------------------------------------------------------------- Foreign Non-Interest Bearing Demand 377.5 4.3% 371.4 4.1% 419.5 4.5% Time Due to Banks 489.4 5.5% 505.4 5.6% 487.8 5.3% Other Time and Savings 801.0 9.0% 960.5 10.7% 1,121.6 12.1% - --------------------------------------------------------------------------------------------------------------------------------- Total Foreign 1,667.9 18.8% 1,837.3 20.4% 2,028.9 21.9% - --------------------------------------------------------------------------------------------------------------------------------- Total $8,881.3 100.0% $9,005.1 100.0% $9,273.1 100.0% ================================================================================================================================= </TABLE>
Borrowings Short-term borrowings, including funds purchased and securities sold under agreements to repurchase, totaled $2.3 billion at March 31, 2001, $2.3 billion at year-end 2000 and $2.7 billion at March 31, 2000. The decline reflects the lower funding needs resulting from a decrease in outstanding assets. Long-term debt on March 31, 2001 decreased to $883 million from $997 million at year-end 2000, but had increased from $806 million at March 31, 2000 due to changing funding strategies. LINE OF BUSINESS FINANCIAL REVIEW Beginning in December of 2000 and extending to the end of the first quarter, Pacific Century performed an analytically rigorous self-assessment of all of its lines of business. The fundamental objective was to develop a plan to improve shareholder value. Management evaluated the attractiveness of each of the company's markets, as well as the ability to compete in those markets in the future. Each business's performance was assessed in relation to the risks assumed and whether returns were generated that exceeded the cost of the capital allocated to them. It was concluded that three businesses: Pacific Century Bank; the Asia Division, and the South Pacific Division, excluding American Samoa did not achieve sufficient returns to create shareholder value and therefore, would be divested or liquidated. A new organizational structure was announced in April as a result of the assessment process. Businesses have been aligned into the following units: Retail Banking, Commercial Banking, Financial Services, Divestiture Businesses, and Treasury and Other Corporate. The Line of Business Financial Review in this report is presented in a format that is consistent with the new organization structure which is different from previous quarters. Note 5 to the Consolidated Financial Statements includes Pacific Century's business segment financial reports for the three months ended March 31, 2001 and 2000. Pacific Century measures performance of its businesses from multiple perspectives. Key measures are: - - Risk Adjusted Return on Capital (RAROC) - This method allocates equity to business units based on various risk factors, including credit, country, market/interest rate, and business/operating risks that are inherent in the operation of each business. - - Net Income After Capital Charge (NIACC) - This method of measuring performance reflects net income available to common shareholders less a charge to the unit for the cost
of capital allocated to it. The capital charge is based on the estimated rate of return expected by the financial markets for companies with risk levels similar to Pacific Century. The determination of NIACC and RAROC uses an economic loan loss provision as a proxy for the actual results. The economic provision reflects the expected nomalized loss determined by a statistically applied approach that considers risk factors, including historical loss experience, within a given portfolio. Retail Banking Pacific Century's retail banking franchise and market share in Hawaii and American Samoa are key strengths of the company. Retail Banking provides checking and savings services, small business, merchant services, installment, home equity and mortgage lending as well as other services. First Quarter 2001 results in Retail Banking showed improvement in revenues largely from increased mortgage banking activities and an increase in ATM and service charge fees. Commercial Banking The Commercial Banking segment offers corporate banking, and commercial products, leasing and commercial real estate lending and auto finance. Pacific Century's West Pacific operations are included in this segment. The income decline in commercial banking is largely the result of losses recognized due to Pacific Century's effort to improve its credit quality. Financial Services Group The Financial Services Group offers private banking, trust services, asset management, investments such as mutual funds and stocks, financial planning, and insurance. A significant portion of this segment's income is derived from fees which are based on the market values of assets under management. Such revenues declined in the first quarter compared to the prior year quarter due to the general decline in the stock market during the first quarter. Divestiture Businesses This segment includes all of the businesses Pacific Century will divest or close. Pacific Century expects to complete the divestitures and closures by December 31, 2001. Treasury and Other Corporate The primary operations in this segment is Treasury, which consists of corporate asset and liability management activities including investment securities, federal funds purchased and sold, government deposits, short and long-term borrowings, and derivative activities for managing interest rate and foreign currency risks. Additionally, the net residual effect of transfer pricing assets and liabilities is included in Treasury, as is any corporate-wide interest rate risk and other reconciling differences.
In the first quarter of 2001, this segment was allocated gains from the sale of the credit card portfolio and Star Systems totaling $96.3 million and restructing and related costs of $44.4 million associated with the planned divestitures and closures. Economic NIACC and RAROC for each segment for the first quarters of 2001 and 2000 are presented below. Economic NIACC and RAROC Table 7 (in thousands of dollars) <TABLE> <CAPTION> FINANCIAL TREASURY SERVICES DIVESTITURE AND OTHER CONSOLIDATED RETAIL COMMERCIAL GROUP BUSINESSES CORPORATE TOTAL --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Three Months Ended March 31, 2001 NIACC (Economic) 5,474 115 (301) (14,429) (6,242) (15,383) RAROC (Economic) 28% 15% 13% 2% 6% 10% Total Average Allocated Equity 169,659 327,618 67,304 440,444 366,917 1,371,942 ================================================================================= Three Months Ended March 31, 2000 NIACC (Economic) 1,174 3,588 1,643 (12,492) 397 (5,690) RAROC (Economic) 18% 19% 25% 4% 16% 13% Total Average Allocated Equity 180,687 349,757 65,407 456,281 159,970 1,212,102 ================================================================================= </TABLE> FOREIGN OPERATIONS Pacific Century maintains an international presence in the Asia-Pacific region that provides lending, correspondent banking, foreign exchange, trade finance and deposit gathering activities in these markets. Pacific Century divides its international business into three areas: the West Pacific, the South Pacific and Asia. The West Pacific includes Bank of Hawaii branches in Guam and in other locations in the West Pacific region. First Federal Savings and Loan of America also operates branches in Guam. Since the U.S. dollar is used in these locations, operations in the West Pacific are not considered foreign for financial reporting purposes. The South Pacific consists of investments in subsidiary banks in French Polynesia, New Caledonia, Papua New Guinea, Vanuatu, and Bank of Hawaii branch operations in Fiji and American Samoa. As American Samoa is U.S. dollar based, its operation is included as domestic for financial reporting purposes. Pacific Century also has investments in the National Bank of the Solomon Islands and the Bank of Queensland. As a result of the recent strategic assessment it has been decided to divest the entire South Pacific Division, excluding American Samoa, which will be integrated into and managed as part of the Hawaii Retail Business. This exit is anticipated to be complete by the end of 2001. Through its Asia Division, Pacific Century provides banking services to corporate and financial institution customers in six Asian locations with support from its New York and Honolulu operations. As a result of the recent strategic assessment it has been decided to divest the entire Asia Division, although a representative office will be maintained in Japan, which has extensive ties to businesses in Hawaii and the West Pacific. This exit is also anticipated to largely be complete by the end of 2001. The countries in which Pacific Century maintains its largest credit exposure on a cross-border basis include Japan, South Korea and France. Table 8 presents as of March 31, 2001, December 31, 2000, and March 31, 2000 a geographic distribution of Pacific Century's cross-border assets for each country in which such assets exceed 0.75% of total assets. Geographic Distribution of Cross-Border International Assets (1) Table 8 (in millions) Country March 31, 2001 December 31, 2000 March 31, 2000 ============================================================================= Japan $222.0 $298.8 $316.2 South Korea 246.7 282.0 305.6 France 97.8 85.8 147.8 All Others 596.4 423.8 549.4 ======== ======== ======== $1,162.9 $1,090.4 $1,319.0 (1) In this table, cross-border outstandings are defined as foreign monetary assets that are payable to Pacific Century in U.S. dollars or other non- local currencies, plus amounts payable in local currency but funded with U.S. dollars or other non-local currencies. Cross-border outstandings include loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments, and other monetary assets.
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. Total non-performing assets decreased to $119.5 million, or 1.33% of total loans at March 31, 2001 down $63.5 million, or 35% from non-performing assets of $183.0 million, or 1.89% of total loans at December 31, 2000 and down from $136.4, or 1.39% of loans at March 31, 2000. The decrease in domestic non-performing assets is largely due to loan sales and charge-off activity as management made significant progress on its commitment to improve asset quality. Charge-offs and exchange rate valuations primarily drove the decrease in foreign non-performing assets. Total non-performing assets are currently at the lowest level since 1998. Foreclosed real estate totaled $11.2 million, up $6.7 million from year-end 2000 due to the acquisition of two large properties and several other smaller properties located in Hawaii totaling $9.7 million. This is offset by $3.0 million in sales during the quarter. Impaired loans at March 31, 2001 were at $123.2 million compared to $221.0 million at year end 2000. There were no restructured loans as of March 31, 2001, December 31, 2000 and March 31, 2000. Accruing loans past due 90 days or more were $11.1 million at March 31, 2001, down from $18.8 at year-end 2000 and $23.1 at March 31, 2000. For further information concerning non-performing assets and past due loans, please refer to Table 9. Non-Performing Assets Table 9 <TABLE> <CAPTION> - ----------------------------------------------------------------------------- March 31 December 31 March 31 (in millions of dollars) 2001 2000 2000 - ----------------------------------------------------------------------------- <S> <C> <C> <C> Non-Accrual Loans Commercial and Industrial $23.8 $55.4 $20.1 Real Estate Construction 6.3 6.4 0.9 Commercial 42.5 60.1 18.2 Residential 18.5 22.7 23.2 Installment 0.1 -- 0.5 Leases 0.2 0.4 3.7 ----------------------------------- Total Domestic 91.4 145.0 66.6 Foreign 16.9 33.5 65.2 ----------------------------------- Subtotal 108.3 178.5 131.8 Foreclosed Real Estate Domestic 10.9 4.2 4.3 Foreign 0.3 0.3 0.3 ----------------------------------- Subtotal 11.2 4.5 4.6 ----------------------------------- Total Non-Performing Assets 119.5 183.0 136.4 ----------------------------------- - ----------------------------------------------------------------------------- Ratio of Non-Performing Assets to Total Loans 1.33% 1.89% 1.39% - ----------------------------------------------------------------------------- Changes in Non-Performing Assets Beginning Balance at 12/31/2000 $183.0 Additions to NPA Loans 107.8 Foreclosed Real Estate 9.7 ------- Total Additions $117.5 Reductions Payments (72.8) Return to Accrual (3.0) Sales of Foreclosed Real Estate (3.0) Charge-off's (102.2) ------- Total Reductions ($181.0) Ending Non-Performing Assets $119.5 ======= </TABLE>
Allowance for Loan Losses The allowance for loan losses at March 31, 2001 was $199.8 million, or 2.29% of total loans outstanding, compared with $246.2 million, or 2.62% at December 31, 2000 and $195.4 million, or 2.05% at March 31, 2000. The ratio of the allowance to net loans was 2.43% at March 31, 2001. The ratio of allowance to total non- performing assets increased to 167% at March 31, 2001, up from 117% at December 31, 2000 and up from 143% at March 31, 2000. A summary of the activity in the allowance for loan losses is presented in table 10. Loan loss provisions were $52.5 million for the first quarter 2001, increased $13.5 million for the same quarter last year. Charge-offs during the quarter of $105.4 million were partially offset by loan loss recoveries of $7.7 million. Two thirds of the losses were due to the syndicated loan portfolio, as non- performing loans were sold or charged off. Seven other higher risk, but performing, syndicated loans with outstanding balances of $134 million and two additional undrawn commitments totaling $43 million were sold during the quarter as part of the continuing effort to reduce credit risk. Pacific Century Financial Corporation and subsidiaries Allowance for Loan Losses Table 10 <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------- First Year First Quarter Ended Quarter (in millions of dollars) 2001 12/31/00 2000 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> Average Amount of Loans Outstanding $9,263.5 $9,544.3 $9,484.1 - -------------------------------------------------------------------------------------------- Balance of Reserve for Loan Losses at Beginning of Period $246.2 $194.2 $194.2 Loans Charged-Off Commercial and Industrial 75.5 22.1 1.4 Real Estate Construction - 0.6 - Commercial 11.9 15.2 3.9 Residential 2.5 6.5 2.4 Installment 5.4 20.1 4.7 Leases 0.1 0.5 - - -------------------------------------------------------------------------------------------- Total Domestic 95.4 65.0 12.4 Foreign 10.0 45.8 3.7 - -------------------------------------------------------------------------------------------- Total Charged-Off 105.4 110.8 16.1 Recoveries on Loans Previously Charged-Off Commercial and Industrial 2.7 5.5 1.7 Real Estate Construction - - - Commercial 0.3 0.6 0.1 Residential 0.2 1.1 0.5 Installment 1.8 6.9 1.7 Leases 0.1 - - - -------------------------------------------------------------------------------------------- Total Domestic 5.1 14.1 4.0 Foreign 2.6 7.3 0.8 - -------------------------------------------------------------------------------------------- Total Recoveries 7.7 21.4 4.8 - -------------------------------------------------------------------------------------------- Net Charge-Offs (97.7) (89.4) (11.3) Provision Charged to Operating Expenses 52.5 142.9 13.5 Other Net Additions (Reductions)* (1.2) (1.5) (1.0) - -------------------------------------------------------------------------------------------- Balance at End of Period $199.8 $246.2 $195.4 ============================================================================================ Ratio of Net Charge-Offs to Average Loans Outstanding (annualized) 4.22% 0.94% 0.48% - -------------------------------------------------------------------------------------------- Ratio of Allowance to Total Loans Outstanding 2.29% 2.62% 2.05% - -------------------------------------------------------------------------------------------- </TABLE> * Includes balance transfers, reserves acquired, and foreign currency translation adjustments.
Market Risk At Pacific Century, assets and liabilities are managed to maximize long term risk adjusted returns to shareholders. Pacific Century's asset and liability management process involves measuring, monitoring, controlling and managing financial risks that can significantly impact Pacific Century's financial position and operating results. Financial risks in the form of interest rate sensitivity, foreign currency exchange fluctuations, liquidity, and capital adequacy are balanced with expected returns with the objective to maximize earnings performance and shareholder value, while limiting the volatility of each. The activities associated with these financial risks are categorized into "other than trading" or "trading." Other Than Trading Activities A key element in Pacific Century's ongoing process to measure and monitor interest rate risk is the utilization of a net interest income (NII) simulation model. This model is used to estimate the amount that NII will change over a one-year time horizon under various interest rate scenarios using numerous assumptions, which management believes are reasonable. The NII simulation model captures the dynamic nature of the balance sheet and provides a sophisticated estimate rather than a precise prediction of NII's exposure to higher or lower interest rates. Table 11 presents, as of March 31, 2001, December 31, 2000 and March 31, 2000, the estimate of the change in NII from a gradual 200 basis point increase or decrease in interest rates, moving in parallel fashion over the entire yield curve, over the next 12-month period relative to the measured base case scenario for NII. The resulting estimate in NII exposure is well within the approved Asset Liability Management Committee guidelines and presents a balance sheet exposure that is slightly liability sensitive. A liability sensitive exposure would imply a favorable short-term impact on NII in periods of decreasing interest rates. Market Risk Exposure to Interest Rate Changes - --------------------------------------------- Table 11 <TABLE> <CAPTION> March 31, 2001 December 31, 2000 March 31, 2000 - --------------------------------------------------------------------------------------------------------------- Interest Rate Change Interest Rate Change Interest Rate Change (in basis points) (in basis points) (in basis points) -200 +200 -200 +200 -200 +200 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Estimated Exposure as a Percent of Net Interest Income (1.3)% (0.6)% (2.3)% 0.5% 0.6% (2.2)% </TABLE> To enhance and complement the results from the NII simulation model, Pacific Century also reviews other measures of interest rate risk. These measures include the sensitivity of market value of equity and the exposure to basis risk and non-parallel yield curve shifts. There are some inherent limitations to these measures, but used along with the NII simulation model, Pacific Century gains a better overall insight for managing its exposure to changes in interest rates. In managing interest rate risk, Pacific Century relies primarily on the balance sheet, to manage its risk position. Approaches that are used to shift balance sheet mix or alter the interest rate characteristics of assets and liabilities primarily include changing product pricing strategies and modifying investment portfolio strategies. The use of financial derivatives has been limited over the past several years. Pacific Century's broad area of operations throughout the South Pacific and Asia has the potential to expose it to foreign currency risk. In general, however, most foreign currency denominated
assets are funded by like currency liabilities, with imbalances corrected through the use of various hedge instruments. By policy, the net exposure in those balance sheet activities described above is insignificant. On the other hand, Pacific Century is exposed to foreign currency exchange rate changes from the capital invested in its foreign subsidiaries and branches located throughout the South Pacific and Asian Rim. These investments are designed to diversify Pacific Century's total balance sheet exposure. A portion of the capital investment in French Polynesia and New Caledonia is offset by a borrowing denominated in euro and a foreign exchange currency hedge transaction. In the first quarter of 2001, Pacific Century recognized in income losses of $28.0 million arising from foreign currency translation losses that could not be hedged. These losses were previously included in other comprehensive income. As of March 31, 2001 the remainder of these capital investments which aggregated $56.5 million, was not hedged. The comparative unhedged position at year-end 2000 was $71.2 million and $90.4 million at March 31, 2000. The increased provision and charge-off of loans in the South Pacific and Asia has created situations where liabilities exceeded assets as of March 31, 2001. This anomaly results in the negative equity reported in Table 12 for the other currency category. To estimate the potential loss from foreign currency exposure, Pacific Century uses a value-at-risk (VAR) calculation. For net investments in subsidiaries, Pacific Century's VAR is calculated at a 95% confidence interval. Table 12 presents as of March 31, 2001, December 31, 2000 and March 31, 2000 Pacific Century's foreign currency exposure from its net investment in subsidiaries and branch operations that are denominated in a foreign currency as measured by the VAR. Market Risk Exposure From Changes in Foreign Exchange Rates Table 12 <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- March 31, 2001 December 31, 2000 March 31, 2000 (in millions of dollars) Book Value Value-at-Risk Book Value Value-at-Risk Book Value Value-at-Risk - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net Investments in Foreign Subsidiaries & Branches Japanese Yen $10.0 $2.1 $10.6 $1.4 $9.9 $2.2 Korean Won 27.0 5.7 29.6 5.1 32.2 3.9 Pacific Franc(1) 26.9 5.5 32.0 6.2 25.8 5.5 Other Currencies (7.4) 12.9 (1.0) 14.4 22.5 18.0 ---------------------------------------------------------------------------------------- Total $56.5 $26.2 $71.2 $27.1 $90.4 $29.6 ======================================================================================== </TABLE> (1) Net of $34 million, $37 million and $37 million borrowing at March 31, 2001, December 31, 2000 and March 31, 2000, respectively, denominated in euro and foreign exchange hedge transactions of $24 million, $26 million and $22 million at March 31, 2001, December 31, 2000 and March 31, 2000.
Trading Activities Trading activities include foreign currency and foreign exchange contracts that expose Pacific Century to a minor degree of foreign currency risk. Pacific Century manages its trading account such that it does not maintain significant foreign currency open positions. The exposure from foreign currency trading activities positions measured by VAR methodology as of March 31, 2001 continues to be immaterial. Liquidity Management Liquidity is managed to ensure that Pacific Century has continuous access to sufficient, reasonably priced funding to conduct its business in a normal manner. Pacific Century's liquidity management process is described in the 2000 Annual Report to Shareholders. Pacific Century maintained a $25 million annually renewable line of credit for working capital purposes. Fees are paid on the unused balance of the line. During the first quarter of 2001, the line was not drawn upon. Bank of Hawaii and First Savings are both members of the Federal Home Loan Bank of Seattle. The FHLB provides these institutions with an additional source for short and long-term funding. Borrowings from the FHLB ended the first quarter of 2001 at $506 million, compared to $520 million at year-end 2000 and $487 million at March 31, 2000. Additionally, Bank of Hawaii maintains a $1 billion senior and subordinated bank note program. Under this facility, Bank of Hawaii may issue additional notes provided that at any time the aggregate amount outstanding does not exceed $1 billion. At March 31, 2001 there was $125 million issued and outstanding under this program. Capital Management Pacific Century manages its capital level to optimize shareholder value, support asset growth, provide protection against unforeseen losses and comply with regulatory requirements. Capital levels are reviewed periodically relative to Pacific Century's risk profile and current and projected economic conditions. Pacific Century's objective is to hold sufficient capital on a regulatory basis to exceed the minimum guidelines of a well capitalized institution. At March 31, 2001, Pacific Century's shareholders' equity grew to $1.37 billion, an increase of 11.9% over the same date in 2000. The growth in shareholders' equity during the first three months of 2001 included retention of earnings, net unrealized valuation adjustments , realized foreign currency translation losses, and issuance of common stock under various stock-based plans. Offsetting these increases were cash dividends paid. The positive unrealized valuation adjustment primarily is attributed to market value adjustments for available- for-sale investment securities due to the general decline in market interest rates.
Pacific Century's regulatory capital ratios exceeded the minimum threshold levels that were established by federal bank regulators to qualify an institution as well capitalized. The minimum regulatory standards to qualify as well capitalized are as follows: Tier 1 Capital 6%; Total Capital 10%; and the Leverage Ratio 5%. Table 13 presents the activities and balances in Pacific Century's capital accounts along with key capital ratios. Equity Capital Table 13 <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ Quarter Ended Year Ended Quarter Ended (in millions of dollars) March 31, 2001 December 31, 2000 March 31, 2000 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Source of Common Equity Net Income $33.7 $113.7 $39.8 Dividends Paid (14.4) (56.5) (13.5) Dividend Reinvestment Program 0.7 3.3 1.1 Stock Repurchases - (17.0) (8.3) Other (1) 50.5 45.6 (5.5) - ------------------------------------------------------------------------------------------------------------------------ Increase in Equity $70.5 $89.1 $13.6 ======================================================================================================================== Common Equity $1,371.9 $1,301.4 $1,225.9 Add: 8.25% Capital Securities of Bancorp Hawaii Capital Trust I 100.0 100.0 100.0 Minority Interest 4.3 4.5 4.3 Less: Intangibles 158.1 163.9 173.3 Unrealized Valuation and Other Adjustments 23.0 2.2 (48.3) - ------------------------------------------------------------------------------------------------------------------------ Tier I Capital 1,295.1 1,239.8 1,205.2 Allowable Loan Loss Reserve 127.0 132.8 141.8 Subordinated Debt 172.1 172.1 195.9 Investment in Unconsolidated Subsidiary (3.5) (3.4) (3.4) - ------------------------------------------------------------------------------------------------------------------------ Total Capital $1,590.7 $1,541.3 $1,539.5 ======================================================================================================================== Risk Weighted Assets $10,087.5 $10,512.3 $11,286.3 ======================================================================================================================== Key Ratios Tier I Capital Ratio 12.84% 11.78% 10.68% Total Capital Ratio 15.77% 14.64% 13.64% Leverage Ratio 9.46% 9.10% 8.59% ======================================================================================================================== </TABLE> (1) Includes common stock issued under the profit sharing and stock option plans and unrealized valuation adjustments for investment securities, foreign currency translation, pension liability, and stock compensation.
Part II. - Other Information Items 1 to 3 and Item 5 omitted pursuant to instructions. Item 4 - Submission of Matters to a Vote of Shareholders At the annual shareholders meeting held on April 27, 2001, the following matters were submitted to a vote of the shareholders. a. Election of Directors - Three directors whose terms in office were expiring as well as one new director nominee were elected to the Board of Directors as follows: Mary G. Bitterman Martin A. Stein Stanley S. Takahashi Clinton R. Churchill b. Amendment to the Stock Option Plan to Increase Available Shares - The amendment to the plan increased the maximum shares of common stock that may be issued under the Plan by 5,000,000 to 14,650,000. c. Amendment to the Stock Option Plan to Allow the Number of Options Granted to Exceed 20% for CEO Upon Hire - The amendment permitted the Company to follow a separate maximum limitation equal to 23% of the total authorized pool of shares as it relates to the number of options granted to the Chief Executive Officer at the time of hire. d. Amendment to the Option Plan to Allow the Grant of Options to Independent Contractors - The Amendment would allow the Company to grant awards to independent contractors providing services to the Company or a subsidiary. Each of the matters before the Shareholders was approved by a substantial margin. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit Index Exhibit Number --------------- 99 Statement of Ratios (b) No Form 8-K was filed during the quarter. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PACIFIC CENTURY FINANCIAL Date May 15, 2001 CORPORATION ------------------ /s/ Allan R. Landon ------------------------- (Signature) Allan R.Landon Vice Chair and Chief Financial Officer /s/ Leslie F. Paskett ------------------------ (Signature) Leslie F. Paskett Senior Vice President and Controller