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<SEC-DOCUMENT>0001017062-02-000375.txt : 20020415
<SEC-HEADER>0001017062-02-000375.hdr.sgml : 20020415
ACCESSION NUMBER: 0001017062-02-000375
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 16
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020308
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PACIFIC CENTURY FINANCIAL CORP
CENTRAL INDEX KEY: 0000046195
STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022]
IRS NUMBER: 990148992
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-06887
FILM NUMBER: 02570052
BUSINESS ADDRESS:
STREET 1: 130 MERCHANT ST
CITY: HONOLULU
STATE: HI
ZIP: 96813-
BUSINESS PHONE: 8886433888
MAIL ADDRESS:
STREET 1: PO BOX 2900
CITY: HONOLULU
STATE: HI
ZIP: 96846
FORMER COMPANY:
FORMER CONFORMED NAME: BANCORP HAWAII INC
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: HAWAII BANCORPORATION INC
DATE OF NAME CHANGE: 19800128
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>PACIFIC CENTURY FINANCIAL FORM 10-K
<TEXT>
<PAGE>
================================================================================
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, 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)
<TABLE>
<CAPTION>
Delaware 99-0148992
<S> <C>
(State of incorporation) (IRS Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
</TABLE>
(808) 537-8430
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
<S> <C>
Common Stock, $.01 Par Value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates is approximately $1,531,569,500, based on the January 31, 2002
closing price of said stock on the New York Stock Exchange ($24.57 per share).
As of January 31, 2002, there were 73,347,423 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 26, 2002, are incorporated by reference into Part
III of this Report.
================================================================================
<PAGE>
PART I
Item 1. Description Of Business
General
Pacific Century Financial Corporation ("the Company") is a Delaware
corporation and a bank holding company. The Company was incorporated in Hawaii
in 1971 and in April 1998, the Company changed its state of incorporation to
Delaware.
Through its banking subsidiaries, the Company provides a diversified range
of banking financial services and products primarily in Hawaii, the West
Pacific (consisting of Guam and nearby islands) and American Samoa. Additional
subsidiaries are engaged in equipment leasing, insurance and insurance agency
services, securities brokerage and investment services and other activities.
The Company's principal banking subsidiary is Bank of Hawaii. The Company also
owns First Savings and Loan Association of America ("First Savings").
The Company groups its principal revenue-producing businesses into the
following markets: Retail Banking, Commercial Banking, Financial Services, and
Treasury and Other Corporate. The divestiture businesses were grouped
separately. For additional information about the Company and its operations see
the Business Segments discussion in Note Q to the Consolidated Financial
Statements of this report.
Divestiture Activity
Beginning in December of 2000 and extending to the end of the first quarter
of 2001, the Company performed a rigorous self-assessment of its businesses.
Management evaluated the attractiveness of the Company's businesses, as well as
the ability to compete in those businesses in the future. The performance of
each business was assessed in relation to the risks assumed. Evaluations
considered the extent to which returns are expected to exceed the cost of the
capital allocated to the businesses. As a result of this assessment, a decision
was made that certain businesses would be divested or liquidated.
The following divestitures were completed this year:
In March 2001, the Company sold its credit card portfolio to American
Express Centurion Bank.
In April 2001, the Company's U.S. Mainland subsidiary, Pacific Century Bank,
N.A., sold its nine branch Arizona franchise to Zions Bancorporation.
Also in April 2001, the Company sold its entire investment in the Bank of
Queensland Limited in Australia. The Company's convertible notes were sold back
to the Bank of Queensland Limited and its common share investment was sold to a
private Australian investor.
In August 2001, the Company closed its Bank of Hawaii Hong Kong branch and
its representative and two extension offices in the Philippines. The Bank of
Hawaii Tokyo branch closed in September and the Taipei, Seoul and Singapore
branches in October. The bank's subsidiary, Bank of Hawaii Incorporated, New
York, an Edge Act corporation, also closed in October.
In September 2001, the Company sold Pacific Century Bank, N.A's 19 branch
California franchise to U.S. Bancorp.
In November 2001, the Company completed the sale of its operations in Papua
New Guinea and Vanuatu to Australia-based ANZ. The sale of its Fiji operations
to ANZ closed in December 2001. These transactions involved two branches in
Papua New Guinea, two in Vanuatu and three in Fiji.
1
<PAGE>
In December 2001, the Company completed the sale of its approximately 95%
share interest in its French Polynesia and New Caledonia operations to
France-based Caisse Nationale des Caisses d'Epargne (CNCE). The sale included
all 17 branches of Bank of Hawaii's subsidiary bank in French Polynesia, Banque
de Tahiti, and all eight branches of its subsidiary bank in New Caledonia, Bank
of Hawaii-Nouvelle Caledonie.
2002 Outlook
The Company has reaffirmed its net income expectations of $120 million for
the full year 2002. Compared to the strategic plan (announced in April 2001),
the forecast is for slightly lower revenues and expenses than originally
estimated. Achieving these results will require diligent expense control which
will also improve the efficiency ratio. Programs have been put in place to
reduce inefficient process costs. In addition, the Company is currently
evaluating rescaling its technology and operating systems to achieve efficiency
and cost savings. Any benefits or costs from this potential project have not
been included in forecast assumptions.
Quarterly earnings should show an improving trend during 2002. A quarterly
run-rate of $90 million for expenses is anticipated, with the possibility of
slightly higher costs in the first quarter as divestiture and restructuring
activities are completed. These costs may be offset by additional sales gains
when post-closing audits for some of the divested businesses are completed
during the quarter.
With respect to credit quality, loan losses may increase from the strategic
plan due to economic conditions. The Company plans to continue to provide for
net loan charge-offs until economic uncertainty is reduced. The tax rate should
improve due to tax strategies that allow the utilization of foreign tax credits.
Earnings per share guidance is not being provided as it is dependent on the
timing, amount, and cost of share repurchases which are difficult to estimate.
Currently, the gradual open market purchase of shares, verses an accelerated
buy-back program, is anticipated to continue. As of February 22, 2002, the
Company has remaining authority of approximately $360 million under share
repurchase programs approved by the Board of Directors (see further discussion
in the Capital Management section of Management's Discussion and Analysis of
Financial Condition and Results of Operations).
Bank Subsidiaries
Bank of Hawaii was organized under the laws of Hawaii on December 17, 1897
and has its headquarters in Honolulu, Hawaii. Its deposits are insured by the
Federal Deposit Insurance Corporation (FDIC). Bank of Hawaii became a member of
the Federal Reserve System in February 2002. Bank of Hawaii is the largest
full-service financial institution headquartered in the State of Hawaii with a
statewide network of 76 traditional and in-store branches. Bank of Hawaii
provides customary commercial banking services through branch offices or
representative offices mainly in Hawaii, the West Pacific and American Samoa.
First Savings is located in the territory of Guam. It provides retail
financial services through six branches.
Regulation and Competition
Effect of Governmental Policies
The earnings of the Company 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.
2
<PAGE>
Competition
The Company 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. The Company also competes with certain
non-financial institutions and governmental entities that offer financial
products and services. Many of the Company's competitors are not subject to the
same level of extensive regulations and oversight that are required of banks
and bank holding companies.
Supervision and Regulation
General
The Company is registered as a bank holding company (BHC) under the Bank
Holding Company Act of 1956, as amended (the BHC Act) and is subject to the
supervision of and to examinations by the Board of Governors of the Federal
Reserve System (FRB). The Company is also registered as a bank holding company
under the Hawaii Code of Financial Institutions (the Code) and is subject to
the registration, reporting, and examination requirements of the Code. In
January 2002, the Company announced that it had satisfied its obligations under
the Memorandum of Understanding imposed by its regulators during the third
quarter of 2000 and it has been removed. See further discussion in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of the report, and Note A to the Consolidated Financial
Statements.
The BHC Act prohibits, with certain exceptions, a BHC from acquiring
beneficial ownership or control of more than 5% of the voting shares of any
company, including a bank, without the FRB's prior approval and from engaging
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 FRB determines
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
Subject to certain limits, under the Riegle-Neal Interstate Banking and
Branching Efficiency Act (Riegle-Neal Act) an adequately capitalized and
adequately managed BHC may acquire control of banks in any state. An interstate
acquisition may not be approved if immediately following the acquisition the
BHC would control 30 percent or more of the total FDIC-insured deposits in that
state (or such lesser or greater amount set by the state), unless the
acquisition is the BHC's initial entry into the state. 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 bank merger may not be approved, if immediately
following the acquisition, the acquirer would control 30 percent or more of the
total FDIC-insured deposits in that state (or such lesser or greater amount set
by the state), unless the acquisition is the acquirer's initial entry into the
state. Banks are also permitted to open newly established branches in any state
in which it does not already have banking branches if such state enacts a law
permitting such de novo branching.
Hawaii has enacted a statute that authorizes out-of-state banks to engage in
mergers with Hawaii banks or acquisitions of substantially all of their assets,
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 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" under the Riegle-Neal Act (except in
the case of a bank that is subject to or in danger of becoming subject to
certain types of supervisory action) or to open branches in Hawaii on a de novo
basis.
Under the Gramm-Leach-Bliley Act, a BHC 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 BHCs. In order to qualify for
the election, all of the depository institution subsidiaries of the BHC must be
well capitalized and
3
<PAGE>
well managed and all of its insured depository institution subsidiaries must
have achieved a rating of "satisfactory" or better under the Community
Reinvestment Act. Financial holding companies are permitted to engage in
activities that are "financial in nature" or incidental or complementary
thereto as determined by the FRB. 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. The Company has not
elected to become a financial holding company.
Subsidiary Banks
Bank of Hawaii is subject to supervision and examination by the Federal
Reserve Bank of San Francisco and the State of Hawaii Department of Commerce
and Consumer Affairs Division of Financial Institutions. Prior to becoming a
member of the Federal Reserve System in February 2002, Bank of Hawaii was
subject to supervision and examination by the FDIC. First Savings is subject to
supervision and examination by the Office of Thrift Supervision. Depository
institutions, including Bank of Hawaii and First Savings, are subject to
extensive federal and state regulation that significantly affects their
business and activities. Regulatory authorities have broad authority to
implement standards and to initiate proceedings designed to prohibit depository
institutions from engaging in unsafe and unsound banking practices.
Dividend Restrictions
The Company is a legal entity separate and distinct from its subsidiary
banks and other subsidiaries. Its principal source of funds to pay dividends on
its common stock and debt service on its debt is dividends from its
subsidiaries. Various federal and state statutory provisions and regulations
limit the amount of dividends the Company's subsidiary banks and certain other
subsidiaries may pay without regulatory approval. For information about the
restrictions applicable to the Company's subsidiary banks, see Note I to the
Consolidated Financial Statements, incorporated by reference herein.
Holding Company Structure
Transfer Of Funds From Subsidiary Banks. The Company's subsidiary banks are
subject to restrictions under federal law that limit the transfer of funds or
other items of value from such subsidiaries to the Company and its nonbank
subsidiaries (including affiliates) in so-called "covered transactions." In
general, covered transactions include loans and other extensions of credit,
investments and asset purchases, as well as other transactions involving the
transfer of value from a subsidiary bank to an affiliate or for the benefit of
an affiliate. Unless an exemption applies, covered transactions by a subsidiary
bank with a single affiliate are limited to 10% of the subsidiary bank's
capital and surplus and, with respect to all covered transactions with
affiliates in the aggregate, to 20% of the subsidiary bank's capital and
surplus. Also, loans and extensions of credit to affiliates generally are
required to be secured in specified amounts.
Source Of Strength Doctrine. Under FRB policy, a BHC is expected to serve as
a source of financial and management 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. This support may be required at times
when the BHC may not have the resources to provide it. Under this policy, a BHC
is expected to stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial adversity and
to maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks.
Capital Requirements
The Company is subject to risk-based capital requirements and guidelines
imposed by the banking regulatory agencies.
4
<PAGE>
As an additional means to identify problems in the financial management of
depository institutions, the FDI Act requires federal bank regulatory agencies
to establish certain non-capital safety and soundness standards for
institutions for which they are the primary federal regulator. The standards
relate generally to operations and management, asset quality, interest rate
exposure and executive compensation. The agencies are authorized to take action
against institutions that fail to meet such standards.
The FDI Act requires federal bank regulatory agencies to take "prompt
corrective action" with respect to FDIC-insured depository institutions that do
not meet minimum capital requirements. A depository institution's treatment for
purposes of the prompt corrective action provisions will depend upon how its
capital levels compare to various capital measures and certain other factors,
as established by regulation.
FDIC Insurance
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 upon a finding that the institution
has engaged in unsafe and unsound practices.
This regulatory framework is intended primarily for the protection of
depositors, federal deposit insurance funds and the banking system as a whole,
and not for the protection of security holders. To the extent that this
information describes statutory and regulatory provisions, it is qualified in
its entirety by reference to those provisions. Any change in applicable laws or
regulations may have a material effect on the business of the Company and its
subsidiaries.
Employees
At December 31, 2001, the Company and its subsidiaries had 3,175 employees.
Item 2. Description of Property
The Company and its subsidiaries own and lease premises primarily consisting
of branch and operating facilities, the majority of which are located in
Hawaii, the West Pacific, and American Samoa. Bank of Hawaii's main branch and
administrative offices are located at the Financial Plaza of the Pacific in
Honolulu, Hawaii. Additionally, Bank of Hawaii owns a fee simple two-story
building near downtown Honolulu that houses data processing operational
functions and an operations facility in the Kapolei area on Oahu.
Item 3. Legal Proceedings
The Company and its subsidiaries are defendants in various legal proceedings
arising from normal business activities. In the opinion of management, after
reviewing these proceedings with counsel, the aggregate liability, if any
resulting from these proceedings would not have a material effect on the
Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 2001 to a vote of
security holders through solicitation of proxies or otherwise.
5
<PAGE>
Executive Officers of Registrant:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael E. O'Neill...... 55 Chairman and Chief Executive Officer of the Company and Bank of
Hawaii (the Bank) since November 2000; Vice Chairman and
Chief Financial Officer, BankAmerica Corporation, 1995 to 1999.
Richard J. Dahl......... 50 President of the Company and the Bank since August 1994; Chief
Operating Officer of the Company since April 1997 and the Bank
since August 1995.
Neal C. Hocklander...... 49 Vice Chair--Human Resources of the Company and the Bank since
April 2001; Executive Vice President of Human Resources of the
Bank, August 2000 to April 2001; Vice President of International
Human Resources, Kelly Services, September 1997 to August
2000; Country Human Resources Director of Citibank N.A.
October 1984 to August 1997.
Alton T. Kuioka......... 58 Vice Chair--Commercial Banking of the Company and the Bank
since April 1997; Vice Chair of the Bank since June 1994; Chief
Lending Officer of the Company since April 1997 and the Bank
since August 1995.
Allan R. Landon......... 53 Vice Chair and Chief Financial Officer of the Company and the
Bank since January 2001; Director of Risk Management for the
Company from April 2000 to January 2001; Chief Financial
Officer, First American Corporation, 1998 to 2000; Partner, Ernst
& Young, LLP, 1984 to 1998.
Walter J. Laskey........ 60 Vice Chair--Financial Services Group of the Company and the Bank
since April 2001; Executive Vice President of Financial Services
Group of the Bank, August 1993 to April 2001.
Gretchen M. Mohen....... 40 Vice Chair of Technology and Operations of the Company and the
Bank since December 2001; Group Vice President and Chief
Information Officer, Mellon Investor Services, April 1999 to
November 2001; Manager of Technology Service, Morgan
Stanley Dean Witter, November 1994 to April 1999.
William C. Nelson....... 54 Vice Chair and Chief Risk Officer of the Company and the Bank
since January 2001; Managing Director, Bank of America Credit
Products Group U.S. health care industry, 1999 to January 2001;
Executive Vice President, Bank of America credit risk
management Asia Pacific region, 1993 to 1999.
David W. Thomas......... 50 Vice Chair for Retail Banking of the Company and the Bank since
April 2001; Executive Vice President, Summit Bank, 1999 to
2001; President- Electronic Delivery, Bank One, 1974 to 1998.
Joseph T. Kiefer........ 61 Executive Vice President and General Counsel of the Company and
the Bank since January 1994.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Lori L. McCarney........ 47 Executive Vice President of Marketing for the Company since July
1999; Senior Vice President and Director of Brand Management,
Wells Fargo, from 1998 to 1999; Senior Vice President and
Director of Brand Management for Bank of America, 1992 to
1998.
Scott E. Miller......... 55 Executive Vice President, Hawaii Commercial Banking since
September 2001; Executive Vice President and Director of Asset
Recovery, January 2001 to August 2001; President of Heller
Commercial Services, 1998 to 2000; Senior Vice President and
General Manager of Asset Based Lending, Bank of America, 1993
to 1998.
Richard C. Keene........ 42 Executive Vice President and Controller of the Company and the
Bank since January 2002; Independent consultant for the Bank,
April 2001 to December 2001; Chief Operating Officer and
Controller, MaxRate.com, Inc., March 2000 to April 2001; Senior
Vice President and Controller, Prudential Bank, September 1994
to March 2000.
</TABLE>
7
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Common Stock Listing
The common stock of the Company is traded on the New York Stock Exchange
(NYSE Symbol: BOH) and quoted daily in leading financial publications. As of
January 31, 2002, there were 10,918 common shareholders.
Market Prices, Book Values, and Common Stock Dividends--See Table 2 included
in Item 7 of this report.
The Board of Directors of the Company considers on a quarterly basis the
feasibility of paying a cash dividend to its shareholders.
8
<PAGE>
Item 6. Selected Financial Data
Summary of Selected Consolidated Financial Data/1/
Table 1
<TABLE>
<CAPTION>
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(dollars in millions except per share amounts)
<S> <C> <C> <C> <C> <C>
At December 31
Balance Sheet Totals
Net Loans........................................ $ 5,493.5 $ 8,988.3 $ 9,144.7 $ 9,157.3 $ 9,018.1
Total Assets..................................... 10,627.8 14,013.8 14,440.3 15,016.6 14,995.5
Deposits......................................... 6,673.6 9,080.6 9,394.2 9,576.3 9,607.7
Long-Term Debt................................... 469.7 623.7 727.7 585.6 705.8
Shareholder's Equity............................. 1,247.0 1,301.4 1,212.3 1,185.6 1,117.2
Average Assets................................... 12,681.0 14,055.3 14,582.9 14,870.7 14,242.3
Average Loans.................................... 7,719.6 9,415.9 9,259.6 9,289.3 8,877.9
Average Deposits................................. 8,054.0 9,005.1 9,315.3 9,549.7 9,260.4
Average Shareholders' Equity..................... 1,344.1 1,234.6 1,210.0 1,160.8 1,109.3
For the Year Ended December 31
Operating Results
Total Interest Income............................ 828.3 1,032.4 1,003.4 1,098.3 1,044.4
Net Interest Income.............................. 459.7 531.2 551.6 543.1 491.5
Provision for Loan and Lease Losses.............. 74.3 142.9 60.9 84.0 30.3
Net Income....................................... 117.8 113.7 133.0 107.0 139.5
Basic Earnings Per Share......................... 1.49 1.43 1.66 1.33 1.75
Diluted Earnings Per Share....................... 1.46 1.42 1.64 1.32 1.72
Cash Dividends Paid Per Common Share............. 0.72 0.71 0.68 0.66 0.63
Performance Ratios
Return on Average Assets......................... 0.93% 0.81% 0.91% 0.72% 0.98%
Return on Average Equity......................... 8.76 9.21 10.99 9.21 12.57
Efficiency Ratio................................. 65.55 60.44 65.76 68.59 65.08
Average Equity to Average Assets................. 10.60 8.78 8.30 7.81 7.79
Allowance for Loan and Lease Losses to Loans
Outstanding..................................... 2.81 2.67 2.08 2.26 1.90
Tier I Capital Ratio............................. 19.76 11.78 10.28 9.42 9.34
Total Capital Ratio.............................. 23.29 14.64 13.22 11.47 11.65
Leverage Ratio................................... 11.20 9.10 8.31 7.48 7.21
Tangible Basis Financial Data/2/
Net Income....................................... $ 131.1 $ 128.9 $ 149.7 $ 121.7 $ 150.7
Basic Earnings Per Share......................... 1.66 1.62 1.86 1.52 1.89
Diluted Earnings Per share....................... 1.63 1.62 1.85 1.50 1.86
Return on Average Assets......................... 1.05% 0.93% 1.04% 0.83% 1.05%
Return on Average Equity......................... 11.00 12.45 15.02 12.84 15.47
Non-Financial Data
Common Shareholders of Record at Year-End/3/..... 10,937 8,438 9,899 10,396 10,514
Weighted Average Shares--Basic................... 78,977,011 79,551,296 80,298,725 80,228,424 79,794,011
Weighted Average Shares--Diluted................. 80,577,763 79,813,443 81,044,558 81,142,144 80,946,170
</TABLE>
- --------
/1/ Comparison between years is affected by business combinations and
divestitures. See Note A to the Consolidated Financial Statements.
/2/ Tangible basis information excludes the effect of intangibles, including
goodwill.
/3/ The number of common shareholders is based on the number of record holders.
9
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On April 23, 2001, the Company announced a new strategic plan designed to
maximize shareholder value by strengthening its Hawaii and West Pacific
operations and divesting most other holdings, including Pacific Century Bank in
California, the Asia Division, and the South Pacific Division, excluding
American Samoa.
The divestiture program was completed prior to year-end. As discussed in
more detail earlier in this document, the Company's credit card portfolio was
sold in March 2001, Pacific Century Bank, N.A.'s franchise in Arizona was sold
in April 2001, the investment in the Bank of Queensland Limited in Australia
was sold in April 2001, substantially all of the Asia division was closed by
October 2001, Pacific Century Bank N.A.'s California branch franchise was sold
in September 2001, and the South Pacific banks were sold in November and
December 2001. These divestitures and other strategic actions have made
comparison of results between accounting periods more difficult and less
meaningful.
A new organizational structure was also announced in April 2001. Businesses
were aligned into the following units: Retail Banking, Commercial Banking,
Financial Services, and Treasury and Other Corporate. The divestiture
businesses were grouped separately. 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 the previous year. Note Q to the
Consolidated Financial Statements includes the Company's business segment
financial reports for the three years ended December 31, 2001, 2000, and 1999.
As part of its efforts to effectively manage capital, the Company initiated
a $70 million and a $200 million common share repurchase program in the third
and fourth quarters of 2001, respectively. Through December 31, 2001 the
Company had repurchased 8.3 million shares under these programs at an average
cost of $23.57 per share for a total of $195.7 million. In January 2002, the
Company's Board of Directors approved an additional $300 million common stock
repurchase program.
2001 Performance Summary
. Net income of the Company was $117.8 million in 2001, reflecting an
increase of 3.6% from the $113.7 million reported in 2000.
. Diluted earnings per share were $1.46 in 2001 compared to $1.42 in 2000.
. Net interest income decreased 13.5%, from $531.2 million in 2000 to
$459.7 million in 2001 primarily due to the divested businesses and the
managed reduction of the loan portfolio to improve asset quality.
. Net gains of $173.4 million were recognized in 2001 from the sales of
banking operations and venture investment losses.
. The Company realized $33.0 million in investment securities gains during
2001, mostly related to the strategic plan.
. Restructuring and other related costs of $104.8 million were recognized
in 2001. In addition, a higher effective tax rate was incurred due to
non-tax-deductible goodwill and other costs associated with the
divestitures.
. The provision for loan and lease losses was $74.3 million in 2001, a
decrease of $68.6 million from $142.9 million in 2000 due to improved
asset quality and recoveries.
. Assets totaled $10.6 billion at December 31, 2001, down from $14.0
billion at December 31, 2000. This decline was primarily a result of the
divested businesses.
. The Allowance for Loan and Lease Losses as a percent of loans
outstanding was 2.81% at December 31, 2001 compared to 2.67% at the end
of 2000.
. Non-performing assets were $79.7 million, or 1.41% of total loans at
year-end 2001, compared to $183.0 million, or 1.98% at year-end 2000.
10
<PAGE>
The stock performance in 2001 reflects the improved asset quality, risk
reduction and successful completion of divesting the non-strategic businesses.
Table 2 provides information on the market prices, book values and dividends
related to the Company's stock.
Market Prices, Book Value and Common Stock Dividends
Table 2
<TABLE>
<CAPTION>
Market Price (MP) Range High MP as
----------------------- Book Value a Percent
Year/Period High Low Close (BV) of BV Dividend
- ----------- ------ ------ ------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1997................................... $28.06 $20.31 $24.75 $14.02 200% $0.63
1998................................... 25.88 14.75 24.38 14.76 175% 0.66
1999................................... 24.94 17.38 18.69 15.15 165% 0.68
2000................................... $23.19 $11.06 $17.69 $16.35 142% $0.71
First Quarter.......................... 20.38 14.38 0.17
Second Quarter......................... 23.19 14.63 0.18
Third Quarter.......................... 17.50 13.13 0.18
Fourth Quarter......................... 18.75 11.06 0.18
2001................................... $28.30 $16.88 $25.89 $17.03 166% $0.72
First Quarter.......................... 20.99 16.88 0.18
Second Quarter......................... 25.80 19.38 0.18
Third Quarter.......................... 28.30 20.20 0.18
Fourth Quarter......................... 26.40 19.32 0.18
</TABLE>
The market price is based on the end of day closing price.
Statement of Income Analysis
Net Interest Income
Net interest income on a taxable equivalent basis was $459.9 million in
2001, down from $532.0 million in 2000, and $552.2 million in 1999. The
decrease in net interest income from the prior year is primarily a result of
the divestitures, the closure of the Asia business and the managed reduction of
loans to improve credit quality.
The decline in net interest margin from 4.08% in 2000 to 3.91% in 2001
resulted largely from loan reductions, assets sales (particularly the sale of
higher-yielding assets such as the credit card portfolio), and lower returns
earned on the increased liquidity that arose as the divestitures were completed.
11
<PAGE>
Average balances, related income and expenses, and resulting yields and
rates are presented in Table 3.
Consolidated Average Balances, Income and Expense
and Yields and Rates
(Taxable-Equivalent Basis)
Table 3
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------------
2001 2000/4/ 1999/4/
------------------------ ------------------------- -------------------------
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
--------- ------- ------- --------- -------- ------- --------- -------- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Interest-Bearing Deposits.............. $ 733.4 $ 27.6 3.76% $ 216.2 $ 15.7 7.25% $ 385.0 $ 24.9 6.48%
Funds Sold............................. 136.7 5.1 3.63 43.2 2.7 6.22 102.0 5.1 4.98
Investment Securities:
--Held-to-Maturity.................... 525.6 33.7 6.42 658.9 48.8 7.41 748.8 54.5 7.28
--Available for Sale.................. 2,242.3 137.3 6.12 2,502.5 166.3 6.64 2,698.8 168.3 6.24
Loans Held for Sale.................... 312.7 21.4 6.85 128.4 9.8 7.63 184.9 13.6 7.36
Loans/1/
--Domestic............................ 6,693.2 525.5 7.85 7,948.0 687.5 8.65 7,557.4 626.2 8.29
--Foreign............................. 1,026.4 72.5 7.07 1,467.9 97.7 6.65 1,702.2 106.4 6.25
--------- ------ ---- --------- -------- ---- --------- -------- ----
Total Loans.......................... 7,719.6 598.0 7.75 9,415.9 785.2 8.34 9,259.6 732.6 7.91
Other.................................... 79.6 5.4 6.72 73.0 4.7 6.50 68.1 5.0 7.37
--------- ------ ---- --------- -------- ---- --------- -------- ----
Total Earning Assets/2/.............. 11,749.9 828.5 7.05 13,038.1 1,033.2 7.92 13,447.2 1,004.0 7.47
Cash and Due From Banks.................. 376.6 443.1 486.6
Other Assets............................. 554.5 574.1 649.1
--------- --------- ---------
Total Assets......................... $12,681.0 $14,055.3 $14,582.9
========= ========= =========
Interest-Bearing Liabilities
Domestic Deposits
--Demand.............................. $ 1,894.5 34.4 1.82 $ 2,061.9 $ 48.7 2.36 $ 2,137.1 48.5 2.27
--Savings............................. 780.3 16.2 2.08 684.8 13.9 2.03 723.9 14.7 2.03
--Time................................ 2,506.7 129.6 5.17 2,781.1 154.1 5.54 2,559.4 123.3 4.82
--------- ------ ---- --------- -------- ---- --------- -------- ----
Total Domestic....................... 5,181.5 180.2 3.48 5,527.8 216.7 3.92 5,420.4 186.5 3.44
Foreign Deposits
--Time Due to Banks................... 351.2 14.5 4.13 505.4 30.5 6.03 641.4 33.7 5.25
--Other Savings and Time.............. 648.2 22.6 3.49 960.5 38.9 4.05 1,165.7 41.0 3.52
--------- ------ ---- --------- -------- ---- --------- -------- ----
Total Foreign........................ 999.4 37.1 3.71 1,465.9 69.4 4.73 1,807.1 74.7 4.13
--------- ------ ---- --------- -------- ---- --------- -------- ----
Total Deposits....................... 6,180.9 217.3 3.52 6,993.7 286.1 4.09 7,227.5 261.2 3.61
Short-Term Borrowings.................. 2,105.6 97.4 4.63 2,597.4 156.1 6.01 3,014.8 146.3 4.85
Long-Term Debt......................... 800.5 53.9 6.73 886.8 59.0 6.66 685.9 44.3 6.46
--------- ------ ---- --------- -------- ---- --------- -------- ----
Total Interest-Bearing Liabilities... 9,087.0 368.6 4.06 10,477.9 501.2 4.78 10,928.2 451.8 4.13
--------- ------ ---- --------- -------- ---- --------- -------- ----
Net Interest Income...................... 459.9 2.99 532.0 3.14 552.2 3.34
------ ---- -------- ---- -------- ----
Spread on Earning Assets................. 3.91% 4.08% 4.11%
---- ---- ----
Non-Interest Bearing Demand Deposits
--Domestic............................. 1,527.1 1,640.0 1,652.6
--Foreign.............................. 346.0 371.4 435.2
--------- --------- ---------
Total Non-Interest Bearing Demand
Deposits............................ 1,873.1 2,011.4 2,087.8
Other Liabilities........................ 376.8 331.4 356.9
Shareholders' Equity..................... 1,344.1 1,234.6 1,210.0
--------- --------- ---------
Total Liabilities & Shareholder's
Equity.............................. $12,681.0 $14,055.3 $14,582.9
========= ========= =========
Provision for Loan and Lease Losses...... 74.3 142.9 60.9
Net Overhead............................. 145.4 207.9 265.0
------ -------- --------
Income Before Taxes...................... 240.2 181.2 226.3
Provision for Taxes...................... 122.2 66.7 92.7
Tax Equivalency Adjustment/3/............ 0.2 0.8 0.6
------ -------- --------
Net Income............................... $117.8 $ 113.7 $ 133.0
====== ======== ========
</TABLE>
- --------
/1/ Nonperforming loans are included in the respective average loan balances.
Income on such loans is recognized on a cash basis.
/2/ Interest income includes taxable-equivalent basis adjustments.
/3/ Based upon a statutory tax rate of 35%.
/4/ Adjusted to reflect the reclassification of interchange fees, mortgage
banking income and other interest income.
12
<PAGE>
Provision for Loan and Lease Losses
The provision for loan and lease losses was $74.3 million in 2001, compared
to $142.9 million in 2000 and $60.9 million in 1999. Net charge-offs were
$121.4 million in 2001, an increase from last year when net charge-offs
were $89.4 million. A substantial amount of the charge-offs in 2001 were the
result of efforts to reduce risks in the loan portfolio. For further
information on credit quality, refer to the section on "Allowance for Loan and
Lease Losses" of this report.
Non-Interest Income
Non-interest income was $452.6 million in 2001 compared to $284.9 million in
2000 and $285.5 million in 1999. In 2001, non-interest income included gains of
$173.4 million on the sales of banking operations net of venture investment
losses, and gains on the sale of non-strategic investment securities totaling
$32.1 million. Adjusted for special items, non-interest income decreased 8.4%
in 2001 from the prior year. The decrease is mainly due to the implementation
of the Company's strategic plan to divest certain businesses.
In 2000, non-interest income included gains of $11.9 million on the
settlement of certain pension benefit obligations and $3.2 million on the sale
of minority interests in Bank of Tonga and Pacific Commercial Bank, Ltd. of
Samoa.
In 1999, non-interest income included other special credits that contributed
$18.3 million to other income and $12.1 million to securities gains.
Table 4 presents the details of non-interest income for the last three years.
Non-Interest Income
Table 4
<TABLE>
<CAPTION>
2001 2000 1999
------------- -------------- ------
Percent Percent
Amount Change Amount Change Amount
------ ------- ------ ------- ------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Trust and Asset Management.......................... $ 59.9 (9.4)% $ 66.1 8.9 % $ 60.7
Mortgage Banking.................................... 20.1 82.7 11.0 23.6 8.9
Service Charges on Deposit Accounts................. 38.5 (4.0) 40.1 16.9 34.3
Fees, Exchange and Other Service Charges
Card Fees........................................ 28.3 (16.5) 33.9 149.3 13.6
Letters of Credit and Acceptance Fees............ 6.2 (43.1) 10.9 (12.8) 12.5
Profit on Foreign Currency....................... 12.9 (25.9) 17.4 0.6 17.3
ATM.............................................. 11.4 -- 11.4 (27.8) 15.8
Exchange Fees.................................... 3.4 (19.0) 4.2 (10.6) 4.7
Payroll Services................................. 0.8 (11.1) 0.9 12.5 0.8
Cash Management.................................. 1.9 (26.9) 2.6 8.3 2.4
Other Fees....................................... 13.9 (23.6) 18.2 (44.3) 32.7
Gains on Sales of Banking Operations, Net of Venture
Investment Losses................................. 173.4 -- -- -- --
Gain on Settlement of Pension Obligation............ -- (100.0) 11.9 -- --
Investment Securities Gains and (Losses)............ 0.9 N.M. (4.3) (338.9) 1.8
Gains on Non-Strategic Investments.................. 32.1 903.1 3.2 (73.6) 12.1
Insurance........................................... 13.7 6.2 12.9 -- --
Mutual Fund and Annuity Fees........................ 10.8 30.1 8.3 -- --
Gain on Sale of Leased Equipment.................... 4.0 233.3 1.2 (92.1) 15.2
Other Income........................................ 20.4 (41.7) 35.0 (33.6) 52.7
------ ------ ------ ------ ------
Total........................................ $452.6 58.9 % $284.9 (0.2)% $285.5
====== ====== ====== ====== ======
</TABLE>
13
<PAGE>
Trust and Asset Management income decreased in 2001 from 2000 mainly due to
the decline in market value of the assets under management, driven by a general
decline in stock market values in 2001. Assets under management totaled $12.2
billion at December 31, 2001 compared to $12.8 billion at December 31, 2000.
The increase in Mortgage Banking income in 2001 was due to higher levels of
loans originated, sold and serviced for others.
Service Charges on Deposit Accounts decreased from the prior year primarily
due to decreases in the number of deposit accounts, including those from the
sale of the Pacific Century Bank branch franchise.
Letters of Credit and Acceptance Fees decreased primarily due to the closing
of the Asia Division.
As previously discussed, in 2001, $173.4 million was recognized as Gains on
Sales of Banking Operations, Net of Venture Investment Losses related to the
divestitures that took place during the year. Table 5 presents the details of
these gains and losses:
Table 5
<TABLE>
<CAPTION>
Amount
------------
(dollars
in millions)
<S> <C>
Credit Card Portfolio.......................................................... $ 75.4
Pacific Century Bank, N.A.-Arizona............................................. 24.8
Pacific Century Bank, N.A.-California.......................................... 49.4
South Pacific Operations....................................................... 33.6
Venture Investment Losses...................................................... (9.8)
------
Total Gains on Sales of Banking Operations, Net of Venture Investment Losses... $173.4
======
</TABLE>
In 2001, gains on investment securities included $28.4 million from the sale
of a stock investment in ATM processor Star Systems, Inc. and $3.7 million gain
on the sale of Bank of Queensland stock. Net Losses on Investment Securities in
2000 included losses taken on the investment portfolio, partially offset by
gains of $2.1 million from the sale of minority interests in Pacific Commercial
Bank Ltd. of Samoa and Bank of Tonga. Securities gains in 1999 included a $12.1
million gain from the sale of securities associated with venture capital
investments.
In 2000, the Company recognized a gain of $11.9 million from the settlement
of a portion of the Company's pension benefit obligation. The Company settled
this obligation by purchasing annuities with a portion of the pension plan
assets.
Non-Interest Expense
Non-interest expense in 2001 was $598.0 million compared to $493.2 million
in 2000 and $550.5 million in 1999. Non-interest expense in 2001 included
$104.8 million of restructuring and other related costs primarily resulting
from the implementation of the strategic plan and the related divestiture
program. Adjusting for such expenses, non-interest expense was $493.2 million,
essentially flat compared to 2000.
Salaries increased $7.1 million primarily due to normal compensation
increases, additional management costs, and an increased number of employees at
the Bank, mainly in customer service positions. In 2000, salaries decreased
primarily due to a reduction in staff levels from a Bank-wide redesign project
and the completion of the Year 2000 computer project.
14
<PAGE>
Net Occupancy expense in 2001 was $46.3 million, a decline from $48.8
million in 2000. The decrease in net occupancy expense was caused primarily by
decreases in rent and property taxes related to the sale and closure of the
divested businesses.
Net Equipment expense was $53.4 million in 2001, an increase from $50.6
million in 2000. The increase was due to software licensing fees and
write-downs and acceleration of depreciation of certain equipment of the
divested businesses.
Credit Card Processing expenses declined in 2001 due to the sale in the
first quarter of the credit card portfolio.
The 2001 efficiency ratio of 65.6% was negatively impacted by the
divestiture program, where revenue declined more quickly than the related
expenses.
Non Interest Expense
Table 6
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
2001 2000 1999
------------- ------------- ------
Percent Percent
Amount Change Amount Change Amount
------ ------- ------ ------- ------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Salaries......................................... $191.5 3.9% $184.4 (7.2)% $198.7
Pensions and Other Employee Benefits............. 52.2 8.8 48.0 (13.2) 55.3
Net Occupancy Expense............................ 46.3 (5.1) 48.8 1.9 47.9
Net Equipment Expense............................ 53.4 5.5 50.6 3.9 48.7
Goodwill and Other Intangibles Amortization...... 13.3 (13.1) 15.3 (5.6) 16.2
Restructuring and Other Related Costs............ 104.8 -- -- (100.0) 22.5
Minority Interest................................ 0.4 -- 0.4 (20.0) 0.5
Other Operating Expense
Legal and Other Professional Fees............. 25.4 -- 25.4 (21.6) 32.4
Stationery and Supplies....................... 8.0 8.1 7.4 (24.5) 9.8
Credit Card Processing........................ 11.5 (34.7) 17.6 2.3 17.2
Other......................................... 91.2 (4.3) 95.3 (5.9) 101.3
------ ----- ------ ------ ------
Total..................................... $598.0 21.2% $493.2 (10.4)% $550.5
====== ===== ====== ====== ======
</TABLE>
Restructuring and Other Related Costs
In 2001, restructuring and other related costs were comprised primarily of
foreign currency translation losses, the write-down of goodwill related to the
sale of banking operations, and employee termination costs. The employee
termination costs related largely to severance for 336 employees of the Pacific
Century Bank N.A.'s California franchise, the Asia Division, the South Pacific
banking operations, and Hawaii based personnel who supported those businesses.
See Note B to the Consolidated Financial Statements for additional information.
Income Taxes
The tax structure at the Company is complex given the various foreign and
domestic locations in which it has operated. The 2001 provision for taxes
reflected an effective tax rate of 50.9%, compared to effective rates of
15
<PAGE>
36.9% and 41.1% in 2000 and 1999, respectively. The unusually high rate in 2001
was a result of a higher level of non-tax-deductible costs associated with the
divestitures, the most significant of which was $83.6 million of goodwill from
the divested California branch franchise.
The Company invests in low income housing tax credits that reduced tax by
$12.4 million and $12.0 million in 2001 and 2000, respectively. See Note N to
the Consolidated Financial Statements for additional information.
Balance Sheet Analysis
Loans
Loans comprise the largest category of earning assets for the Company and
produce the highest level of income. Overall loans decreased $3.6 billion or
39% to $5.7 billion at December 31, 2001. The decrease is primarily due to the
implementation of the Company's strategic plan which included the divestiture
of approximately $0.86 billion of loans from Pacific Century Bank N.A., $0.34
billion of loans from the Asia Division, $0.89 billion of loans from South
Pacific and $6.9 million of other loans based on December 31, 2000 balances. In
addition, loans totaling $294.2 million were sold based on the Company's
decision to exit certain higher risk relationships. Note D to the Consolidated
Financial Statements presents the composition of the loan portfolio by major
loan categories.
Commercial
Commercial loans consist of loans made for commercial, financial, and
agricultural purposes and involves lending on both a secured and unsecured
basis. Collateral requirements vary in accordance with the Company's
underwriting standards.
Geographically, commercial loans are concentrated in the U.S. Mainland and
Hawaii, which represented 30.1% and 55.3%, respectively, of the total
commercial portfolio as of year-end 2001. 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. In the U.S. Mainland market, commercial lending
is comprised of business loans to Fortune 1000 companies.
Real Estate Construction
Construction loans are secured primarily by commercial properties located in
Hawaii. Because construction lending is generally considered to involve greater
risk than financing on improved properties, the Company 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.
Real Estate Mortgage
The Company's real estate loan portfolio consists of loans that are secured
by residential as well as commercial properties. The largest component of the
real estate loan portfolio consists of loans secured by 1-to-4 family
residential properties. At December 31, 2001, approximately 91.2% of these
loans were secured by real estate in Hawaii.
The Company sells the majority of its fixed rate loans in the secondary
mortgage market. In 2001, residential mortgage originations by Bank of Hawaii
totaled $2.3 billion compared to $0.9 billion in 2000.
Commercial real estate loans are 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
16
<PAGE>
the type of property securing the obligations, including loans secured by
commercial offices, hotels, retail facilities, industrial properties,
residential projects and warehouses.
At December 31, 2001 outstanding loans to national hotel and management
companies totaled $65 million with undrawn commitments of $59 million. Exposure
to hotel companies in Hawaii at December 31, 2001 included loans outstanding of
$112 million and undrawn commitments of $19 million. In the West Pacific, loans
outstanding to hotel owners totaled $59 million at December 31, 2001.
Installment
As of December 31, 2001, installment loans consisted of home equity credit
lines and other consumer loans (e.g., auto loans and unsecured credit lines).
Home equity credit lines are underwritten primarily based on the borrower's
repayment ability rather than the value of the underlying property. The total
available credit under home equity credit lines was $575 million at year-end
2001.
Installment loans declined $272.2 million to $729.7 million at December 31,
2001. The decline is primarily due to the sale of the Company's $209.3 million
credit card portfolio in the first quarter of 2001.
Lease Financing
Lease Financing is comprised of leveraged leases and auto leases. See Note D
to the Consolidated Financial Statements for additional information about the
Company's leveraged lease portfolio.
The Company's total exposure to the air transportation industry at December
31, 2001 was $158 million, consisting of $136 million in equity interests in
leveraged leases and $22 million in lending exposure of which $5 million was
undrawn. The leases are comprised of $90 million in 14 aircraft leased to major
United States and international passenger carriers, $31 million on 13 aircraft
leased to regional carriers and $15 million on one aircraft leased to a major
air cargo carrier.
Foreign Loans
As previously discussed, the Company divested its South Pacific banking
operations and the business of the Asia Division was curtailed. As of December
31, 2001, there were no foreign loans outstanding in the South Pacific.
Additional information on foreign credit exposure is contained in the
"Foreign Operations" section of this report.
17
<PAGE>
Geographic Distribution of the Loan Portfolio
A geographic distribution of the loan portfolio is presented in Table 7
based on the geographic location of borrowers.
The amounts reflected for the West Pacific include Guam and other locations
in the region where both Bank of Hawaii and First Savings have branches.
Geographic Distribution of Loan Portfolio
Table 7
<TABLE>
<CAPTION>
As of December 31, 2001
-------------------------------------------------
West Mainland
Total Hawaii Pacific U.S. Japan Other
-------- -------- ------- -------- ----- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Commercial................... $1,175.5 $ 650.4 $171.0 $354.1 $ -- $ --
Real Estate
Construction.............. 169.6 145.5 14.6 9.5 -- --
Mortgage--Residential..... 2,419.4 2,205.2 214.2 -- -- --
--Commercial...... 640.7 525.8 101.4 13.5 -- --
Installment.................. 729.7 596.7 133.0 -- -- --
Lease Financing.............. 493.4 86.6 1.8 374.5 -- 30.5
-------- -------- ------ ------ ----- -----
Total Domestic Loans...... 5,628.3 4,210.2 636.0 751.6 -- 30.5
Foreign...................... 24.2 -- -- -- 6.5 17.7
-------- -------- ------ ------ ----- -----
Total Loans............... $5,652.5 $4,210.2 $636.0 $751.6 $ 6.5 $48.2
======== ======== ====== ====== ===== =====
Percentage of Total.......... 100.0% 74.5% 11.2% 13.3% 0.1% 0.9%
======== ======== ====== ====== ===== =====
</TABLE>
Investment Securities
The Company's investment portfolio is managed to provide liquidity and
interest income, offset interest rate risk positions and provide collateral for
cash management needs. See Table 22 for the maturity distribution, market value
and weighted-average yield to maturity of securities.
Deposits
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 20 presents average deposits by type for the three years ended
December 31, 2001.
As of December 31, 2001, deposits totaled $6.7 billion compared to $9.1
billion at the end of 2000. The decline of $2.4 billion, or 27%, is
attributable to the sales of the Pacific Century Bank franchise in Arizona and
California, approximately $1.0 billion, and South Pacific operations. In
addition the closure of the Asia business contributed to the decline in foreign
deposits.
During the fourth quarter, domestic deposits continued to reflect positive
trends as demand and savings deposit balances increased.
18
<PAGE>
Borrowings
The decrease in short-term debt was due to lower funding needs resulting
from the decrease in assets. See Notes G and H to the Consolidated Financial
Statements for the detail of borrowings. Securities sold under agreement to
repurchase are offered to governmental entities as an alternative to deposits
and are supported by the same type of collateral.
Foreign Operations
The South Pacific bank subsidiaries were sold during the fourth quarter of
2001 in line with the Company's strategic plan. Except for a representative
office in Japan, all Asian branches have been closed.
The operations in Guam include Bank of Hawaii and First Savings' branches.
The U.S. dollar is used in these locations, accordingly, these operations are
not considered foreign for financial reporting purposes.
Table 8 provides a summary of average assets, average liabilities, operating
revenue, and net income (loss) for the Company's foreign operations for the
last three years. The net income in 2001 included the net gain on sale of the
South Pacific subsidiaries and related restructuring costs, including foreign
currency conversion losses and severance payments. The net losses in 2000 and
1999 reflected significantly higher foreign loan loss provisions in comparison
to historical levels (see "Allowance for Loan and Lease Losses").
Summary of International Assets, Liabilities, and Income and Percent of
Consolidated Totals
Table 8
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------
2001 2000 1999
--------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Average Assets.......... $2,039.7 16.1% $2,891.4 20.6% $3,413.0 23.4%
Average Liabilities..... 1,794.4 15.8 2,673.0 20.8 3,271.6 24.5
Operating Revenue....... 201.1 15.7 236.7 17.9 252.1 19.5
Net Income (Loss)....... 3.8 3.2 (0.2) N.M. (1.4) N.M.
</TABLE>
Credit limits have been established for each country. These credit limits
are monitored and reviewed on a regular basis.
The Company's foreign lending included 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.
19
<PAGE>
Table 9 presents, for the last three years, a geographic distribution of
international assets for which the Company has cross-border exposure exceeding
0.75% of total assets.
Geographic Distribution of Cross-Border International Assets/1/
Table 9
<TABLE>
<CAPTION>
Government
and Other Banks and Commercial
Official Other Financial and Industrial
Institutions Institutions/2/ Companies Total
------------ --------------- -------------- --------
(dollars in millions)
<S> <C> <C> <C> <C>
December 31, 2001
United Kingdom........ $ -- $ 248.3 $ 9.6 $ 257.9
Netherlands........... -- 180.2 12.7 192.9
Germany............... -- 187.7 0.5 188.2
Singapore............. -- 140.0 0.6 140.6
Canada................ 115.6 4.3 119.9
Australia............. -- 113.9 2.1 116.0
All Others/3/......... 0.5 285.9 77.4 363.8
----- -------- ------ --------
$ 0.5 $1,271.6 $107.2 $1,379.3
===== ======== ====== ========
December 31, 2000
South Korea........... $ -- $ 233.7 $ 48.3 $ 282.0
Japan................. -- 249.9 48.9 298.8
All Others............ 21.8 331.5 156.3 509.6
----- -------- ------ --------
$21.8 $ 815.1 $253.5 $1,090.4
===== ======== ====== ========
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............ 10.7 290.5 262.2 563.4
----- -------- ------ --------
$51.2 $ 885.0 $437.0 $1,373.2
===== ======== ====== ========
</TABLE>
- --------
/1/ This table details by country cross-border outstandings that individually
amounted to 0.75% or more of consolidated total assets as of year-end 2001,
2000 and 1999. Cross-border outstandings are defined as foreign monetary
assets that are payable to the Company in U.S. dollars or other non-local
currencies, plus amounts payable in local currency but funded with U.S.
dollars or other non-local currencies. 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, 2001,
2000 and 1999 were $2.5 million, $364.8 million and $378.2 million
respectively.
/3/ At December 31, 2001, the All Others category included cross-border
outstandings of $81.9 million in Japan and $70.1 million in Sweden.
20
<PAGE>
Corporate Risk Profile
Credit Risk
The Company's asset quality improved as evidenced by the continued
reductions in the level of internally criticized and classified credits, as
well as the level of non-performing assets. Strides have also been made to
improve portfolio quality through early identification and disengagement or
remediation of deteriorating borrowers as appropriate.
The largest part of the Company's continuing business is based in Hawaii
where tourism has a significant influence on the economy. Immediately after the
tragic events of September 11, tourism was adversely affected. Thereafter, the
Company evaluated the impact of this event on its customers by performing a
forward looking review of individual borrowers in identified high impact
industries, where greater than twenty percent of revenues were tied to tourism.
As a result of this review, allocated reserves were increased for those
portfolio segments. Improvement in asset quality and loan reductions prior to
the event allowed for a reallocation without an incremental increase in the
provision for loan and lease losses. The two major industries that were
impacted were the hotel industry and the air transportation industry. As
previously discussed, at December 31, 2001, outstanding loans to national hotel
and management companies totaled $65 million with undrawn commitments of $59
million. The Company's total exposure to the air transportation industry at
December 31, 2001 was $158 million, consisting of $136 million in equity
interests in leveraged leases and $22 million in lending exposure, of which $5
million was undrawn.
Non-Performing Assets
Non-performing assets (NPAs) consist of non-accrual loans, including those
held for sale, restructured loans and foreclosed real estate.
Total non-performing assets decreased to $79.7 million, or 1.41% of total
loans, at December 31, 2001. This represents a decrease of $103.3 million, or
56.4%, from December 31, 2000 non-performing assets that totaled $183.0
million, or 1.98% of total loans.
The decrease in non-performing assets between December 31, 2000 and December
31, 2001 was largely due to loan sales, pay-offs, and necessary charge-offs as
management made significant progress on its commitment to improve asset
quality. Significant reductions since last year resulted from the sale of the
South Pacific subsidiaries ($20.1 million), the closure of the Asia Division
($10.6 million) and the sale of the Fiji branches ($3.1 million).
Accruing loans past due 90 days or more totaled $4.9 million at December 31,
2001, down from $18.8 million at year-end 2000.
21
<PAGE>
Table 10 presents a five-year history of non-performing assets and accruing
loans past due 90 days or more.
Non-Performing Assets and Accruing Loans
Past Due 90 Days or More
Table 10
<TABLE>
<CAPTION>
December 31
------------------------------------
2001 2000 1999 1998 1997
----- ------ ------ ------ -----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans
Commercial.................................................. $18.9 $ 55.4 $ 23.7 $ 28.2 $10.7
Real Estate
Construction............................................ 9.3 6.4 1.1 2.9 1.0
Mortgage--Residential................................... 15.4 22.7 29.7 36.4 32.9
--Commercial.................................... 16.3 60.1 19.0 5.4 2.8
Installment................................................. 0.1 -- 0.5 0.8 2.0
Lease Financing............................................. 0.8 0.4 3.9 0.7 --
Foreign..................................................... -- 33.5 67.4 57.5 39.9
----- ------ ------ ------ -----
Total Non-Accrual Loans.............................. 60.8 178.5 145.3 131.9 89.3
----- ------ ------ ------ -----
Loans Held For Sale............................................ 1.7 -- -- -- --
Restructured Loans
Real Estate--Commercial..................................... -- -- -- -- 1.6
----- ------ ------ ------ -----
Total Restructured Loans............................. -- -- -- -- 1.6
----- ------ ------ ------ -----
Foreclosed Real Estate.........................................
Domestic.................................................... 17.2 4.2 4.3 5.5 6.2
Foreign..................................................... -- 0.3 0.3 0.1 --
----- ------ ------ ------ -----
Total Foreclosed Real Estate......................... 17.2 4.5 4.6 5.6 6.2
----- ------ ------ ------ -----
Total Non-Performing Assets...................... $79.7 $183.0 $149.9 $137.5 $97.1
===== ====== ====== ====== =====
Accruing Loans Past Due 90 Days or More........................
Commercial.................................................. $ 0.1 $ 5.0 $ 5.9 $ 0.4 $ 2.0
Real Estate.................................................
Construction............................................ -- -- -- 0.4 --
Mortgage--Residential................................... 3.8 3.3 4.0 4.5 7.3
--Commercial.................................... -- 1.3 1.9 -- 0.6
Installment................................................. 0.9 5.6 4.5 7.3 7.6
Lease Financing............................................. 0.1 0.4 1.2 0.3 0.1
Foreign..................................................... -- 3.2 1.0 7.9 7.4
----- ------ ------ ------ -----
Total Accruing Past Due Loans........................ $ 4.9 $ 18.8 $ 18.5 $ 20.8 $25.0
===== ====== ====== ====== =====
Ratio of Non-Accrual Loans to Total Loans...................... 1.08% 1.93% 1.56% 1.41% 0.97%
Ratio of Non-Performing Assets to Total Loans, Foreclosed Real
Estate, Restructured Loans, and Non-Performing Loans Held For
Sale......................................................... 1.41% 1.98% 1.60% 1.47% 1.06%
Ratio of Non-Performing Assets and Accruing Loans Past Due
90 Days or More to Total Loans............................... 1.50% 2.19% 1.80% 1.69% 1.33%
</TABLE>
22
<PAGE>
Foregone Interest on Non-Accural Loans
Table 11
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
2001 2000 1999 1998 1997
---- ----- ----- ---- ----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Interest Income Which Would Have Been Recorded Under Original Terms:
Domestic......................................................... $6.5 $10.2 $11.2 $8.4 $6.6
Foreign.......................................................... 4.2 2.8 7.1 4.1 2.4
Interest Income Recorded During the Current Year on Non-Accruals:
Domestic......................................................... 1.6 3.4 1.1 1.3 1.5
Foreign.......................................................... 1.1 1.0 3.0 1.4 0.5
</TABLE>
Allowance for Loan and Lease Losses
The Company maintains the Allowance for Loan and Lease Losses (Allowance) at
a level that it believes is adequate to absorb estimated inherent losses on all
loans and leases. The Allowance level is determined based on a continuing
assessment of problem credits, recent loss experience, changes in collateral
values, and current and anticipated economic conditions. For loans other than
consumer loans, a risk rating system is used to identify potential problem
loans. Loans are rated based on the degree of risk at origination by the
lending officer, and thereafter are reviewed periodically and revised as
appropriate. To ensure compliance with the internal risk rating system and the
timeliness of rating changes, the Credit Review department performs periodic
independent evaluations of this process.
The Company performs a comprehensive quarterly analysis to determine the
adequacy of its Allowance. This analysis incorporates loss migration modeling
and transfer risk. The Company utilizes a methodology that establishes
allowances for both specific loans and pools of loans. Commercial loans and
leases are individually reviewed according to specified criteria to determine
specific loss exposure.
Loss allocations for various loan pools are determined based on a loss
migration analysis. The migration model determines potential loss factors based
on historical loss experience for homogeneous loan portfolios and based on risk
ratings for risk-rated portfolios. The methodology also 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
factors. For foreign credits, reserves are further stratified to address
transfer risk. Reserve allocations for transfer risk is determined based on the
type of credit facility and internal country risk ratings.
The Allowance at December 31, 2001 was $159.0 million or 2.81% of loans and
leases outstanding, compared to $246.2 million or 2.67% of outstandings at
December 31, 2000. At December 31, 2001 the Allowance to non-accrual loans was
262% compared to 137% at prior year-end. The increase in the coverage is
attributable to the decline in non-accrual loans.
The Allowance decreased by net charge-offs taken as the Company exited
certain higher risk relationships by selling those loans at a loss. Additional
risk reduction resulted from exiting markets where loans were collected or sold
net of a discount that approximated the recorded Allowance related to the loans
sold.
Recoveries totaled $47.6 million for the year-ended December 31, 2001
compared to $21.4 million in 2000. The increase was primarily in foreign loan
recoveries which totaled $24.1 million.
Overall, the Allowance decreased due to strategic reductions in risk and the
divestitures. As a percentage of loans, the Allowance increased due to
continued economic uncertainty.
See Note D to the Consolidated Financial Statements for the activity in the
Allowance for the last five years.
23
<PAGE>
Table 12 presents an allocation of the Allowance for the last five years.
The allocated portion continued to be weighted toward the commercial loan
portfolio, which reflected a higher level of non-performing loans and the
potential for higher individual losses. The decline in the foreign allocation
was attributable to the divestitures. The leasing allocation increased due to
downgrades of the portfolio related to the transportation industry.
Allocation of Allowance for Loan and Lease Losses
Table 12
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Out- of Out- of Out- of Out- of Out-
standing standing standing standing standing
Allowance Loan Allowance Loan Allowance Loan Allowance Loan Allowance Loan
Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................... $ 57.5 4.89% $ 90.0 3.70% $ 50.5 2.03% $ 60.8 2.37% $ 57.5 2.74%
Real Estate..................
Construction................ 5.3 3.10 6.0 1.95 5.0 1.52 1.0 0.33 4.2 1.49
Mortgage--Residential....... 9.0 0.37 8.3 0.32 8.3 0.37 8.1 0.37 13.8 0.58
--Commercial........ 16.1 2.51 27.5 2.44 17.3 1.39 3.3 0.29 21.8 1.61
Installment.................. 14.6 2.00 15.5 1.55 20.0 1.98 27.1 2.67 34.9 3.05
Lease Financing.............. 20.0 4.05 3.7 0.69 3.0 0.67 5.9 1.51 2.6 0.71
Foreign...................... 0.6 2.66 73.3 5.78 78.4 4.93 74.7 4.18 31.0 1.96
Not allocated/1/............. 35.9 -- 21.9 -- 11.7 -- 30.4 -- 8.6 --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
$159.0 2.81% $246.2 2.67% $194.2 2.08% $211.3 2.26% $174.4 1.90%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
- --------
/1/ Includes both foreign and domestic unallocated reserves.
The Company's determination of the level of the Allowance and,
correspondingly, the provision for loan and lease losses is dependent on
judgments and assumptions and, for this reason, the Company considers the
Allowance methodology a critical accounting policy. As part of the Company's
quarterly Allowance analysis, management reviews the calculated historical
charge-off and migration rates and applies adjustments as deemed appropriate.
The adjustments are based on: existing and emerging trends in and expectations
of portfolio performance; economic conditions and positioning in the cycle;
borrower, industry and geographical concentrations; seasoning of the portfolio;
changes in credit management including underwriting policies, charge-off
policies, and personnel; coverage tests of exposure, non-accruals and
charge-offs; and comparison to external data.
At December 31, 2001 the Company performed additional stress testing of the
portfolio and the assumptions used in determining the Allowance. Based on this
information, adjustments were made to the Allowance allocation to account for
the possibility for downgrades of risk ratings and increased loss rates in the
consumer portfolio.
The unallocated portion of the Allowance represents management's judgmental
determination of the amounts necessary for concentrations, economic uncertainty
and other factors. Although management has allocated a portion of the Allowance
to specific loan categories, the adequacy of the Allowance must be considered
in its entirety.
Management considers the Allowance adequate to cover losses inherent in the
portfolio at December 31, 2001.
Market Risk
The Company's market risk management process involves measuring, monitoring,
controlling and managing risks that can significantly impact the Company's
financial position and operating results. Market risks resulting from the
fluctuation of interest rates, foreign exchange rates, commodity prices and
equity prices are balanced with expected
24
<PAGE>
returns to enhance earnings performance and shareholder value, while limiting
the volatility of each. The activities associated with these market risks are
categorized into "other than trading" and "trading."
Other Than Trading Activities
In the normal course of business, elements of the Company's balance sheet
are exposed to varying degrees of market risk. The Company's primary market
risk exposures are interest rate risk and foreign exchange risk (see below). A
key element in the process of managing market risk involves oversight by senior
management and the Board of Directors as to the level of such risk assumed by
the Company in its balance sheet.
The Board of Directors reviews and approves risk management policies,
including risk limits and guidelines and delegates to the Asset Liability
Management Committee (ALCO) oversight functions. The ALCO, consisting of senior
business and finance officers, monitors the Company's market risk exposure and
as market conditions dictate, modifies balance sheet positions or directs the
use of derivative instruments.
Interest Rate Risk
The Company's balance sheet is sensitive to changes in the general level of
interest rates. This interest rate risk arises primarily from the Company's
normal business activities of making loans and taking deposits. Many other
factors also affect the Company's exposure to changes in interest rates. These
factors include general economic and financial conditions, customer
preferences, and historical pricing relationships.
A key element in the Company's ongoing process to measure and monitor
interest rate risk is the utilization of a net interest income (NII) Monte
Carlo simulation model. This model is used to estimate the amount that NII will
change over a one-year time horizon under various interest rate scenarios.
These estimates are based on assumptions on the behavior of loan and deposit
volumes as a function of pricing, prepayment speeds on mortgage-related assets,
and principal amortization and maturities on other financial instruments. The
model specification includes imbedded optionality. While such assumptions are
inherently uncertain, management believes that these assumptions are
reasonable. As a result, 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 13 presents, as of December 31, 2001, 2000 and 1999, the estimate of
the change in NII from a gradual 200 basis point increase or decrease in
interest rates, moving in parallel fashion for the entire yield curve, over the
next 12-month period relative to the measured base case scenario for NII. The
resulting estimate in NII exposure was well within the approved ALCO guidelines
Market Risk Exposure to Interest Rate Changes
Table 13
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
Interest Rate Interest Rate Interest Rate
Change Change Change
(in basis points) (in basis points) (in basis points)
----------------- ----------------- -----------------
-200 200 -200 200 -200 200
------ ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Estimated Exposure as a Percent of Net Interest Income..... (0.3)% 3.5% (2.3)% 0.5% 1.4% (1.7)%
</TABLE>
To enhance and complement the results from the NII simulation model, the
Company also reviews other measures of interest rate risk. These measures
include the sensitivity of market value of equity and the exposure to basis
risk and non-parallel yield curve shifts. There are inherent limitations to
these measures but used along with the NII simulation model, the Company gets a
better overall insight for managing its exposure to changes in interest rates.
25
<PAGE>
In managing interest rate risks, the Company uses several approaches to
modify its risk position. Approaches that are used to shift balance sheet mix
or alter the interest rate characteristics of assets and liabilities include
changing product pricing strategies, modifying investment portfolio
characteristics, or using financial derivative instruments. The use of
financial derivatives, as detailed in Note O to the Consolidated Financial
Statements, has been limited over the past several years.
Foreign Currency Risk
By year-end 2001, the majority of the Company's operations throughout the
South Pacific and Asia were divested. These divestitures significantly reduced
the amount of capital exposed to foreign currency risk and the remaining
exposure is expected to decrease further. To estimate the potential loss from
foreign currency exposure for the remaining net investments in subsidiaries,
the Company continues to use a value-at-risk (VAR) calculation based on an
estimated variance-co-variance matrix. This VAR calculation determines the
potential loss within a 95% confidence interval. In other words, a loss greater
than VAR has approximately a 5% probability of occurring.
Table 14 presents, as of December 31, 2001 and 2000, the Company's foreign
currency exposure from its remaining net investment in subsidiaries and branch
operations as measured by the VAR.
Market Risk Exposure from Changes in Foreign Exchange Rates
Table 14
<TABLE>
<CAPTION>
2001 2000
--------------- ----------------
Book Value-at- Book Value-at-
Value Risk Value Risk
----- --------- ----- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Net Investments in Foreign Subsidiaries and Branches
Japanese Yen..................................... $1.1 $0.2 $10.6 $ 1.4
Korean Won....................................... 2.1 0.3 29.6 5.1
Pacific Franc.................................... -- -- 32.0 6.2
Other............................................ 0.1 0.1 (1.0) 14.4
---- ---- ----- -----
Total........................................ $3.3 $0.6 $71.2 $27.1
==== ==== ===== =====
</TABLE>
The average value-at-risk for the Japanese yen, Korean won, Pacific franc,
and other currencies was $1.4 million, $3.2 million, $3.6 million and $12.1
million, respectively for the year ended December 31, 2001, and was $1.8
million, $3.9 million, $5.9 million and $17.0 million, respectively for the
year ended December 31, 2000.
The book value of net investments in foreign subsidiaries and branches is
net of a $37 million borrowing at December 31, 2000, denominated in euro and
foreign exchange hedge transactions of $26 million at December 31, 2000. There
were no borrowing or foreign exchange hedge transactions related to the foreign
subsidiaries and branches at December 31, 2001.
Trading Activities
The Company's trading activities include foreign currency and foreign
exchange contracts that expose the Company to a minor degree of foreign
currency risk. These transactions are executed on behalf of customers and for
the Company's own account. The Company, however, manages its trading account
such that it does not maintain significant foreign currency open positions. The
exposure from foreign currency trading positions measured by the VAR
methodology as of year-end 2001 continued to be immaterial.
Liquidity Management
Liquidity is managed to ensure that the Company has continuous access to
sufficient, reasonably priced funding to conduct its business in a normal
manner. The Company's ALCO monitors sources and uses of funds
26
<PAGE>
and modifies asset and liability positions as liquidity requirements change.
This process combined with the Company's ability to raise funds in money and
capital markets and through private placements provides flexibility in managing
the exposure to liquidity risk.
To ensure that its liquidity needs are met, the Company actively manages
both the asset and liability sides of the balance sheet. The primary sources of
liquidity on the asset side of the balance sheet are available-for-sale
investment securities, interest bearing deposits, and cash flows from loans and
investments, as well as the ability to securitize certain assets. With respect
to liabilities, liquidity is generated through growth in deposits and the
ability to obtain wholesale funding in national and local markets through a
variety of sources. During 2001, the Company's divestiture program created
significant balance sheet liquidity. This liquidity has been used to repurchase
stock (see Capital Management) and reduce debt where possible. The Company has
not utilized off-balance sheet financing arrangements as a significant source
of liquidity. It is not expected that such arrangements will be used
significantly in the future.
The Company's primary liquidity needs for contractual obligations and other
commitments as of December 31, 2001 are summarized below. These obligations do
not reflect maturities of customer time deposits, many of which have
historically been reinvested in other deposit products. See Note G to the
Consolidated Financial Statements for additional information on Short-Term
Borrowing; Note H for Long-Term Debt; and Note E for Capital and Operating
Lease obligations.
Contractual Obligations
<TABLE>
<CAPTION>
Payments Due By Period
---------------------------------------
Less Than After 5
One Year 1-3 Years 4-5 Years Years Total
---------- --------- --------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities Sold Under Agreements to Repurchase............. $1,643,444 $ -- $ -- $ -- $1,643,444
Funds Purchased............................................ 55,800 -- -- -- 55,800
Short-Term Borrowings...................................... 134,222 -- -- -- 134,222
Banker's Acceptances....................................... 593 -- -- -- 593
Current Maturities of Long-Term Debt....................... 100,670 -- -- -- 100,670
Long-Term Debt............................................. -- 132,936 103,786 233,013 469,735
Capital Lease Obligations.................................. 7 1,210 1,210 32,505 34,932
Operating Leases........................................... 8,034 15,388 12,304 67,813 103,539
---------- -------- -------- -------- ----------
Total Contractual Cash Obligations...................... $1,942,770 $149,534 $117,300 $333,331 $2,542,935
========== ======== ======== ======== ==========
</TABLE>
Other Commitments
<TABLE>
<CAPTION>
Amount of Commitment
Expiration Per Period
----------------------------------
Less Than Greater Than
One Year One Year Total
---------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C>
Lines of Credit............................................ $1,076,656 $1,012,092 $2,088,748
Standby Letters of Credit.................................. 75,300 -- 75,300
Commercial Letters of Credit............................... 23,800 -- 23,800
---------- ---------- ----------
Total Other Commitments................................. $1,175,756 $1,012,092 $2,187,848
========== ========== ==========
</TABLE>
The Company obtains short-term wholesale funding through federal funds,
securities sold under agreements to repurchase, and commercial paper. The
Company issues commercial paper in various denominations with maturities of
generally 90 days or less. During 2001, the Company issued commercial paper
only in the Hawaii marketplace.
27
<PAGE>
Securities sold under agreements to repurchase are financing transactions,
under which securities are pledged as collateral for short-term borrowings.
Nearly all of these transactions are with governmental entities. The Company's
balance sheet is unique given the high level of state and local government
funding. Historically, these governmental entities have provided a stable
source of funds.
The Company maintained a $25 million, annually renewable line of credit for
working capital purposes. Fees are paid on the unused balance of the line.
During 2001, the line was not drawn upon. In January 2002, this line was
discontinued.
Bank of Hawaii and First Savings are both members of the Federal Home Loan
Bank of Seattle (FHLB). The FHLB provides these institutions with an additional
source for short and long-term funding. Borrowings from the FHLB were $147
million and $518 million at the end of 2001 and 2000, respectively.
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. Subordinated notes outstanding under this bank note program
totaled $244 million at December 31, 2001 and 2000.
Capital Management
The Company manages its capital level over the long-term, to optimize
shareholder value, support asset growth, reflect risks inherent in its markets,
provide protection against unforeseen losses and comply with regulatory
requirements. Capital levels are reviewed relative to the Company's risk
profile and current and projected economic conditions. The Company's regulatory
capital ratios at year-end 2001 were: Tier I Capital Ratio of 19.76%, Total
Capital Ratio of 23.29%, and Leverage Ratio of 11.20%. These ratios exceed the
minimum regulatory standards to qualify as "well capitalized", which are: Tier
I Capital 6%; Total Capital 10%; and Leverage Ratio 5%. The Company's objective
is to hold sufficient capital on a regulatory basis to exceed the minimum
guidelines of a "well capitalized" financial institution.
At year-end 2001, the Company's shareholders' equity was $1.25 billion, a
decrease of $54.3 million, or 4.2%, from year-end 2000. The decline in
shareholders' equity was a result of dividends paid of $56.6 million and
treasury stock purchases that totaled $195.7 million. These decreases were
offset by current year earnings, the issuance of common stock under the
dividend reinvestment plan and various stock-based employee benefit plans, and
unrealized valuation adjustments. Table 15 presents a five-year history of
activities and balances in the Company's capital accounts along with key
capital ratios.
In 2001, the Company's Board of Directors approved share repurchase programs
that authorized the repurchase of a total of $270 million in common stock,
beginning in the third quarter of 2001. Through December 31, 2001 the Company
had repurchased 8.3 million shares under these programs at an average cost of
$23.57 per share for a total of $195.7 million. In January 2002, the Company's
Board of Directors approved an additional $300 million common stock repurchase
program. From January 1, 2002 through February 22, 2002, the Company
repurchased 672,100 shares at an average cost of $24.44 per share for a total
of $16.4 million.
As of December 31, 2001, $100 million of 8.25% Capital Securities that
mature in 2026 were outstanding. These securities qualify as Tier I Capital for
regulatory accounting purposes, but are classified as long-term debt in the
Consolidated Statements of Condition. In addition, the Company had subordinated
debt of $148.4 million at the end of 2001 that qualify as total capital for
regulatory purposes.
28
<PAGE>
Equity Capital
Table 15
<TABLE>
<CAPTION>
2001 2000 1999 1998 1997
-------- --------- --------- --------- ---------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Year Ended December 31
Source of Shareholders' Equity
Net Income...................................... $ 117.8 $ 113.7 $ 133.0 $ 107.0 $ 139.5
Dividends Paid.................................. (56.6) (56.5) (54.6) (52.8) (49.7)
Dividend Reinvestment Program................... 2.8 3.3 4.0 5.4 6.8
Stock Issued for Acquisition.................... 1.3 -- -- -- 108.4
Stock Repurchases............................... (195.7) (17.0) (21.8) (7.3) (142.5)
Other/1/........................................ 76.0 45.6 (33.9) 16.1 (11.4)
-------- --------- --------- --------- ---------
Increase (Decrease) in Shareholders' Equity..... $ (54.4) $ 89.1 $ 26.7 $ 68.4 $ 51.1
======== ========= ========= ========= =========
As of December 31
Shareholders' Equity............................ $1,247.0 $ 1,301.4 $ 1,212.3 $ 1,185.6 $ 1,117.2
Add: 8.25% Capital Securities of Bancorp
Hawaii Capital Trust I................ 100.0 100.0 100.0 100.0 100.0
Minority Interest...................... -- 4.5 4.4 7.4 5.8
Less: Intangibles............................ 26.7 163.9 175.8 186.2 180.9
Unrealized Valuation and Other
Adjustments........................... 22.9 2.5 (37.9) 3.6 5.5
-------- --------- --------- --------- ---------
Tier I Capital.................................. 1,297.4 1,239.5 1,178.8 1,103.2 1,036.6
Allowable Reserve for Loan Losses............ 83.0 133.0 143.9 147.2 139.2
Subordinated Debt............................ 148.4 172.1 195.8 95.0 118.7
Investment in Unconsolidated Subsidiary...... -- (3.4) (3.2) (2.5) (1.9)
-------- --------- --------- --------- ---------
Total Capital............................ $1,528.8 $ 1,541.2 $ 1,515.3 $ 1,342.9 $ 1,292.6
======== ========= ========= ========= =========
Risk Weighted Assets............................ $6,559.6 $10,524.9 $11,461.0 $11,708.5 $11,098.6
======== ========= ========= ========= =========
Key Capital Ratios
Growth in Common Equity......................... (4.18)% 7.30% 2.30% 6.10% 4.80%
Average Equity/Average Assets Ratio............. 10.60% 8.78% 8.30% 7.81% 7.79%
Tier I Capital Ratio............................ 19.76% 11.78% 10.28% 9.42% 9.34%
Total Capital Ratio............................. 23.29% 14.64% 13.22% 11.47% 11.65%
Leverage Ratio.................................. 11.20% 9.10% 8.31% 7.48% 7.21%
</TABLE>
- --------
/1/ Includes profit sharing; stock options and directors' restricted shares and
deferred compensation plans; and unrealized valuation adjustments for
investment securities, foreign currency translation and pension liability.
Business Segments
Business segment results are determined based on the Company's internal
financial management reporting process and organizational structure. This
process uses various techniques to assign balance sheet and income statement
amounts to business segments, including allocations of overhead, credit loss
provision, and capital. The new organizational structure announced in April
2001 changed the structure used to analyze financial performance. Unlike
financial accounting, there is no comprehensive, authoritative guidance for
management accounting that is equivalent to generally accepted accounting
principles. The management accounting process measures the performance of the
operating segments based on the management structure of the Company and is not
necessarily comparable with similar information for any other financial
institution.
29
<PAGE>
Note Q to the Consolidated Financial Statements provides additional
information about the Company's business segments, including segment financial
information for the years ended December 31, 2001, 2000, and 1999.
Retail Banking
The Company's retail banking franchise and market share in Hawaii and
American Samoa are key strengths of the Company. Retail Banking provides
checking and savings products for the consumer and small business segments,
merchant services, installment, home equity and mortgage lending products, as
well as other products and services.
In 2001, total revenue for the Retail Segment was relatively flat to the
prior year. Net interest income declined in 2001 from 2000 primarily due to a
reduction in the interest spread earned by the segment on its deposits. The
interest spread narrowed as a result of significant reductions in interest
rates during the year. Non-interest income was lower in 2001 due to mortgage
banking losses incurred in the fourth quarter, offset by increased mortgage
loan originations. Non-interest expense increased in 2001 as a result of higher
mortgage loan volume and higher expense allocations related to systems and
product development.
Commercial Banking
The Commercial Banking segment offers corporate banking, commercial
products, leasing, commercial real estate lending and auto finance. The
Company's West Pacific operations are included in this segment. Total earning
assets in the Commercial Banking segment declined in 2001 from 2000 due to the
Company's managed reduction of credit risk. As a result, the provision for loan
and lease losses declined from prior periods. Net interest income also declined
in 2001 as a result of the lower levels of earning assets and the general
decline in interest rates in 2001.
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 generally based on the market values of assets under
management. The decline in net income in 2001 was attributable to increased
expenses associated with operational improvements.
Treasury and Other Corporate
The primary component of this segment is the Treasury function, 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 managing interest rate and foreign currency
risks. Additionally, the net residual effect of transfer pricing of assets and
liabilities is included in Treasury. The increase in net interest income for
2001 compared to 2000 was due to the increased liquidity of the Company from
the divestitures.
Divested Businesses
This segment included the financial results for the businesses that the
Company divested or closed in 2001. Revenues and expenses in this segment
declined from prior periods due to the timing of the sales of banking
operations and the closing of the Asia Division.
Corporate Restructuring Related Activities
This segment reflected the 2001 implementation of the Company's strategic
plan to improve credit quality and to divest underperforming businesses. It
included the impact of the sales of the divested businesses and restructuring
and other related costs of the Company. It also includes losses associated with
accelerated resolution of credit problems undertaken in the first quarter of
2001.
30
<PAGE>
The Company utilizes "risk-adjusted return on capital" (RAROC) as a
measurement of business segment performance. RAROC is the ratio of net income
to risk-adjusted equity. Equity is allocated to business segments based on risk
factors inherent in the operations of each segment. Another management
performance measurement is "net income after capital charge" (NIACC). NIACC is
net income available to common shareholders less a charge for allocated
capital. The cost of capital is based on the estimated minimum rate of return
expected by the financial markets. The Company assumes a cost of capital that
is equal to 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 charge for capital has
fluctuated between 12% and 15%.
NIACC and RAROC results were as follows:
<TABLE>
<CAPTION>
Financial Treasury Restructuring
Services and Other Divestiture and Other
Retail Commercial Group Corporate Businesses Related Costs
------- ---------- --------- --------- ----------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 2001
NIACC (Economic)....................... $ 3,482 $ (658) $ (467) $(61,431) $(50,624) $25,885
RAROC (Economic)....................... 17% 15% 14% 9% (1)% N/A
Year Ended December 31, 2000
NIACC (Economic)....................... $16,587 $2,516 $7,137 $(51,066) $(44,628) $ --
RAROC (Economic)....................... 25% 16% 28% (12)% 5% --
Year Ended December 31, 1999
NIACC (Economic)....................... $11,900 $ 421 $1,347 $(35,144) $(27,168) $ --
RAROC (Economic)....................... 22% 15% 18% 4% 9% --
</TABLE>
Fourth Quarter Results and Other Matters
Net income for the fourth quarter of 2001 was $26.3 million, a decrease of
19.3% from the $32.6 million reported in the fourth quarter of 2000. Basic
earnings per share were $0.35 and $0.41 in the fourth quarter of 2001 and 2000,
respectively. Diluted earnings per share were $0.34 and $0.41 in the same
respective periods.
Net interest income on a tax equivalent basis totaled $106.2 million in the
fourth quarter of 2001, $25.9 million, or 19.6% lower than the same period in
2000. This decline was primarily due to reduced business activity as a result
of the divestitures, the closure of the Asia Division, and the ongoing managed
reduction of loans to improve the Company's credit profile.
The Company's net interest margin of 3.93% for the fourth quarter was down
from 4.08% in the comparable quarter last year. The decrease was primarily due
to loan reductions and asset sales, including the credit card portfolio, and
lower returns earned on the increased liquidity of the Company.
The provision for loan and lease losses was $14.5 million for the fourth
quarter 2001, down from $25.8 million in the same quarter last year. The 2001
fourth quarter provision equaled net charge-offs. Included in loan losses was
approximately $10 million recognized in connection with loan sales.
Non-interest income was $80.0 million for the fourth quarter, including
$28.7 million in sales gains net of investment write-downs. Adjusted for these
items, non-interest income decreased $19.1 million from the fourth quarter of
2000. This decrease was largely due to the intentional downsizing of certain
businesses, sales of the Company's credit card portfolio, Pacific Century Bank
branch franchise and South Pacific entities, and mortgage banking losses of
$8.5 million recorded during fourth quarter 2001. The mortgage banking losses
resulted from unhedged exposure to increases in interest rates.
31
<PAGE>
Non-interest expense for the fourth quarter of 2001 was $141.5 million.
Excluding a total of $18.5 million of restructuring and other related costs,
non-interest expense was essentially flat compared to non-interest expense of
$122.9 million in the fourth quarter last year.
Non-performing assets were reduced by 25.1% during the quarter, dropping
from $106.4 million at September 30, 2001 to $79.7 million at year-end 2001.
NPAs totaled $183.0 million at December 31, 2000. The decline was primarily due
to the sale of foreclosed assets.
Consolidated Quarterly Results of Operations
Table 16
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
2001 2000
--------------------------- ----------------------------
Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec.
------ ------ ------ ------ ------ ------ ------ ------
(dollars in millions except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Interest Income............... $246.3 $217.2 $195.3 $169.5 $251.0 $257.0 $262.8 $261.6
Total Interest Expense.............. 121.3 100.4 83.5 63.4 117.0 124.7 130.0 129.6
------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income................. 125.0 116.8 111.8 106.1 134.0 132.3 132.8 132.0
Provision for Loan and Lease Losses. 52.5 6.4 0.9 14.5 13.5 83.4 20.1 25.8
Investment Securities Gains (Losses) 20.2 11.7 0.9 0.1 -- (0.5) -- (0.6)
Non-Interest Income................. 140.4 86.4 112.9 80.0 68.2 79.7 67.0 71.1
Non-Interest Expense................ 171.8 161.6 123.1 141.5 124.9 121.2 124.2 122.9
------ ------ ------ ------ ------ ------ ------ ------
Income Before Taxes................. 61.3 46.9 101.6 30.2 63.8 6.9 55.5 53.8
Provision for Taxes................. 27.6 20.2 70.5 3.9 24.0 0.2 20.9 21.2
------ ------ ------ ------ ------ ------ ------ ------
Net Income.......................... $ 33.7 $ 26.7 $ 31.1 $ 26.3 $ 39.8 $ 6.7 $ 34.6 $ 32.6
====== ====== ====== ====== ====== ====== ====== ======
Basic Earnings Per Share............ $ 0.42 $ 0.33 $ 0.39 $ 0.35 $ 0.50 $ 0.08 $ 0.44 $ 0.41
Diluted Earnings Per Share.......... $ 0.42 $ 0.32 $ 0.37 $ 0.34 $ 0.50 $ 0.08 $ 0.44 $ 0.41
</TABLE>
Average Assets
Table 17
<TABLE>
<CAPTION>
2001 2000 1999
--------------- --------------- ---------
Amount Mix Amount Mix Amount
--------- ----- --------- ----- ---------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Interest-Bearing Deposits.............. $ 733.4 5.8% $ 216.2 1.5% $ 385.0
Funds Sold............................. 136.7 1.1 43.2 0.3 102.0
Investment Securities
--Held to Maturity.................. 525.6 4.1 658.9 4.7 748.8
--Available for Sale................ 2,242.3 17.7 2,502.5 17.8 2,698.8
Loans Held for Sale.................... 312.7 2.5 128.4 0.9 184.9
Loans.................................. 7,719.6 60.9 9,415.9 67.0 9,259.6
Other.................................. 79.6 0.6 73.0 0.6 68.1
--------- ----- --------- ----- ---------
Total Earning Assets............ 11,749.9 92.7 13,038.1 92.8 13,447.2
Non-Earning Assets..................... 931.1 7.3 1,017.2 7.2 1,135.7
--------- ----- --------- ----- ---------
Total........................... $12,681.0 100.0% $14,055.3 100.0% $14,582.9
========= ===== ========= ===== =========
</TABLE>
32
<PAGE>
Average Loans
Table 18
<TABLE>
<CAPTION>
2001 2000 1999 1998 1997
-------------- -------------- -------- -------- --------
Amount Mix Amount Mix Amount Amount Amount
-------- ----- -------- ----- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial................... $1,761.6 22.8% $2,466.3 26.2% $2,402.7 $2,258.3 $1,923.8
Real Estate
Construction.............. 240.5 3.1 304.4 3.2 318.1 284.0 264.6
Mortgage.................. 3,356.4 43.5 3,775.4 40.1 3,557.4 3,705.6 3,830.2
Installment.................. 809.1 10.5 712.5 7.6 723.9 793.2 846.3
Foreign...................... 1,026.4 13.3 1,467.9 15.6 1,702.2 1,752.6 1,540.3
Lease Financing.............. 525.6 6.8 689.4 7.3 555.3 495.6 472.7
-------- ----- -------- ----- -------- -------- --------
Total................. $7,719.6 100.0% $9,415.9 100.0% $9,259.6 $9,289.3 $8,877.9
======== ===== ======== ===== ======== ======== ========
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates/1/
Table 19
<TABLE>
<CAPTION>
December 31, 2001
----------------------------------------------------
Due in One Due After One Due After
Year or Less to Five Years /2/ Five Years/ 2/ Total
------------ ---------------- ------------- --------
(dollars in millions)
<S> <C> <C> <C> <C>
Commercial............................. $ 807.2 $ 224.6 $ 143.7 $1,175.5
Real Estate--Construction.............. 60.4 50.1 59.1 169.6
Other Loans............................ 840.7 735.1 2,707.4 4,283.2
Foreign Loans.......................... 7.5 1.1 15.6 24.2
-------- -------- -------- --------
Total........................... $1,715.8 $1,010.9 $2,925.8 $5,652.5
======== ======== ======== ========
</TABLE>
- --------
/1/ Based on contractual maturities.
/2/ As of December 31, 2001, loans maturing after one year consisted of
$2,226.4 million with floating rates and $1,710.3 million with fixed rates.
33
<PAGE>
Average Deposits
Table 20
<TABLE>
<CAPTION>
2001 2000 1999
-------------- -------------- --------
Amount Mix Amount Mix Amount
-------- ----- -------- ----- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Domestic
Non-Interest Bearing Demand............... $1,527.1 19.0% $1,640.0 18.2% $1,652.6
Interest-Bearing Demand................... 1,894.5 23.5 2,061.9 22.9 2,137.1
Regular Savings........................... 780.3 9.7 684.8 7.6 723.9
Private Time Certificates of Deposit
($100,000 or More)...................... 1,107.5 13.8 1,128.4 12.5 948.9
Public Time Certificates of Deposit
($100,000 or More)...................... 66.2 0.8 83.7 0.9 94.3
All Other Time and Savings Certificates... 1,333.0 16.5 1,569.0 17.5 1,516.2
-------- ----- -------- ----- --------
Total Domestic........................ 6,708.6 83.3 7,167.8 79.6 7,073.0
-------- ----- -------- ----- --------
Foreign
Non-Interest Bearing Demand............... 346.0 4.3 371.4 4.1 435.2
Time Due to Banks......................... 351.2 4.4 505.4 5.6 641.4
Other Savings and Time.................... 648.2 8.0 960.5 10.7 1,165.7
-------- ----- -------- ----- --------
Total Foreign......................... 1,345.4 16.7 1,837.3 20.4 2,242.3
-------- ----- -------- ----- --------
Total................................. $8,054.0 100.0% $9,005.1 100.0% $9,315.3
======== ===== ======== ===== ========
</TABLE>
34
<PAGE>
Interest Differential
Table 21
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
2001 Compared to 2000 2000 Compared to 1999/2/
------------------------ -----------------------
Volume/1/ Rate/1/ Total Volume/1/ Rate/1/ Total
-------- ------ ------- -------- ------ ------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Change in Interest Income
Interest Bearing Deposits
Foreign............................... $ 22.5 $(10.6) $ 11.9 $(12.0) $ 2.7 $ (9.3)
Funds Sold................................ 3.9 (1.5) 2.4 (3.4) 1.0 (2.4)
Investment Securities:
Held-to-Maturity...................... (9.1) (6.0) (15.1) (6.6) 1.0 (5.6)
Available for Sale.................... (16.5) (12.4) (28.9) (12.5) 10.5 (2.0)
Loans Held for Sale....................... 12.7 (1.1) 11.6 (4.3) 0.5 (3.8)
Loans, Net of Unearned Income
Domestic.............................. (102.2) (59.9) (162.1) 33.1 28.3 61.4
Foreign............................... (31.0) 5.8 (25.2) (15.2) 6.5 (8.7)
Other..................................... 0.4 0.2 0.6 0.3 (0.6) (0.3)
------- ------ ------- ------ ------ ------
Total Interest Income.............. $(119.3) (85.5) $(204.8) $(20.6) $ 49.9 $ 29.3
======= ====== ======= ====== ====== ======
Change in Interest Expense
Interest Bearing Deposits:
Demand Deposits....................... $ (3.7) $(10.5) $ (14.2) $ (1.7) $ 1.9 $ 0.2
Savings Deposits...................... 1.9 0.3 2.2 (0.8) 0.0 (0.8)
Time Deposits......................... (14.6) (9.9) (24.5) 11.3 19.5 30.8
Deposits in Foreign Offices........... (19.2) (13.0) (32.2) (15.2) 9.9 (5.3)
Short-Term Borrowings..................... (26.6) (32.2) (58.8) (22.0) 31.9 9.9
Long-Term Debt............................ (5.8) 0.6 (5.2) 13.3 1.4 14.7
------- ------ ------- ------ ------ ------
Total Interest Expense............. $ (68.0) $(64.7) $(132.7) $(15.1) $ 64.6 $ 49.5
======= ====== ======= ====== ====== ======
Net Interest Differential
Domestic.................................. $ (62.0) $(29.0) $ (91.0) $ 6.5 $(14.0) $ (7.5)
Foreign................................... 10.7 8.2 18.9 (12.0) (0.7) (12.7)
------- ------ ------- ------ ------ ------
Total Interest Differential........ $ (51.3) $(20.8) $ (72.1) $ (5.5) $(14.7) $(20.2)
======= ====== ======= ====== ====== ======
</TABLE>
- --------
/1/ The change in interest due to both rate and volume was allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
/2/ Adjusted to reflect the reclassification of interchange fees, mortgage
banking income and other interest income.
35
<PAGE>
The following presents the maturity distribution, market value, and
weighted-average yield to maturity of securities:
Table 22
Supplementary Data
Maturity Distribution, Market Value and Weighted-Average Yield to Maturity of
Securities
<TABLE>
<CAPTION>
1 Year Weighted After Weighted After Weighted Weighted Weighted
or Average 1 Year- Average 5 Years- Average Over 10 Average Average
Less Yield/2/ 5 Years Yield/2/ 10 Years Yield/2/ Years Yield/2/ Total Yield/2/
------ -------- ------- -------- -------- -------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maturity Distribution Based on
Amortized Cost
December 31, 2001
Held to Maturity
U.S. Treasury Securities....... $ 3.0 2.0% $ -- -- % $ -- -- % $ -- -- % $ 3.0 2.0%
U.S. Government Agencies....... 17.8 3.9 -- -- -- -- -- -- 17.8 3.9
Obligations of States and
Political Subdivisions........ 3.5 9.1 -- 5.0 0.2 6.1 -- -- 3.7 8.9
Corporate Equity Securities.... -- -- -- -- -- -- -- -- -- --
Mortgage-Backed Securities/1/.. 0.4 7.2 0.7 7.0 3.5 8.2 361.7 6.8 366.3 6.8
Other.......................... -- -- 4.8 3.0 0.6 2.9 -- -- 5.4 3.0
------ --- ----- --- ------ --- -------- --- -------- ---
Total Held to Maturity.......... 24.7 4.4 5.5 3.5 4.3 7.3 361.7 6.8 396.2 6.6
Available for Sale Securities/3/
U.S. Treasury Securities....... 1.0 5.0 0.5 5.8 0.9 5.2 -- -- 2.4 5.2
U.S. Government Agencies....... 3.1 5.7 18.3 6.3 42.2 7.5 17.7 4.4 81.3 6.5
Obligations of States and
Political Subdivisions........ 0.4 4.3 5.2 4.9 0.8 5.1 -- -- 6.4 4.9
Corporate Equity Securities.... -- -- -- -- -- -- 1.4 4.9 1.4 4.9
Mortgage-Backed Securities/1/.. -- -- -- -- 66.8 6.5 1,787.9 6.4 1,854.7 6.4
Other.......................... -- -- 14.3 3.7 3.0 6.4 -- -- 17.3 4.1
------ --- ----- --- ------ --- -------- --- -------- ---
Total Available for Sale
Securities..................... $ 4.5 5.4% $38.3 5.1% $113.7 6.9% $1,807.0 6.4% $1,963.5 6.4%
------ ----- ------ -------- --------
Total Investment Securities
--December 31, 2001......... $ 29.2 $43.8 $118.0 $2,168.7 $2,359.7
====== ===== ====== ======== ========
--December 31, 2000......... $116.0 $79.0 $138.0 $2,756.6 $3,089.3
====== ===== ====== ======== ========
--December 31, 1999......... $163.2 $88.7 $ 99.4 $2,982.1 $3,333.4
====== ===== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Approximate
Market Value
------------
<S> <C>
Maturity Distribution Based on
Amortized Cost
December 31, 2001
Held to Maturity
U.S. Treasury Securities....... $ 3.0
U.S. Government Agencies....... 17.8
Obligations of States and
Political Subdivisions........ 3.9
Corporate Equity Securities.... --
Mortgage-Backed Securities/1/.. 377.8
Other.......................... 5.3
--------
Total Held to Maturity.......... 407.8
Available for Sale Securities/3/
U.S. Treasury Securities....... 2.4
U.S. Government Agencies....... 83.5
Obligations of States and
Political Subdivisions........ 6.7
Corporate Equity Securities.... 1.4
Mortgage-Backed Securities/1/.. 1,889.8
Other.......................... 17.6
--------
Total Available for Sale
Securities..................... $2,001.4
--------
Total Investment Securities
--December 31, 2001......... $2,409.2
========
--December 31, 2000......... $3,098.4
========
--December 31, 1999......... $3,253.4
========
</TABLE>
- --------
/1/ Contractual maturities do not anticipate reductions for periodic paydowns.
/2/ Tax equivalent at 35% tax rate.
/3/ The weighted-average yields on available for sale securities are based on
amortized cost.
36
<PAGE>
Item 7a. Qualitative and Quantitative Disclosures About Market Risk
See the Market Risk section in the Management's Discussion and Analysis of
Financial Condition and Results of Operations beginning on page 24 of this
report.
Forward-Looking Statements
This report contains forward-looking statements regarding the Company's
beliefs, estimates, projections and assumptions, which are provided to assist
in the understanding of certain aspects of the Company's anticipated future
financial performance. We believe the assumptions underlying our
forward-looking statements are reasonable. However, any of the assumptions
could prove to be inaccurate and actual results may differ materially from
those projected for a variety of reasons including, but not limited to: the
Hawaii economy may not recover at the pace we anticipate; our refocused
emphasis on our Hawaii market may not achieve the customer and revenue gains we
anticipate; our credit markets may deteriorate and our credit quality may fall
short of our goals; we may not achieve the expense reductions we expect; we may
not be able to maintain our net interest margin; we may not be able to
implement our proposed equity repurchases in the amount or at the times
planned; customer acceptance of our business as restructured may be less than
expected; there may be economic volatility in the markets we serve; and there
may be changes in business and economic conditions, competition, fiscal and
monetary policies or legislation. Except where specified, we do not undertake
any obligation to update any forward-looking statements to reflect later events
or circumstances.
Item 8. Financial Statements and Supplementary Data
Consolidated Quarterly Results of Operations--See Narrative and Table 16
included in Item 7 of this report.
37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Pacific Century Financial Corporation
We have audited the accompanying consolidated statements of condition of
Pacific Century Financial Corporation and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pacific
Century Financial Corporation and subsidiaries at December 31, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Honolulu, Hawaii
January 28, 2002
38
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
(dollars in thousands except per share amounts)
<S> <C> <C> <C>
Interest Income
Interest and Fees on Loans and Leases................................. $ 619,447 $ 795,028 $ 746,089
Income on Investment Securities-Held to Maturity...................... 33,521 48,013 53,625
Income on Investment Securities-Available for Sale.................... 137,320 166,266 168,349
Deposits.............................................................. 27,596 15,685 24,960
Funds Sold and Security Resale Agreements............................. 5,034 2,689 5,078
Other................................................................. 5,344 4,742 5,278
----------- ----------- -----------
Total Interest Income.............................................. 828,262 1,032,423 1,003,379
Interest Expense
Deposits.............................................................. 217,305 286,046 261,184
Security Repurchase Agreements........................................ 77,764 104,536 92,175
Funds Purchased....................................................... 10,099 32,636 41,677
Short-Term Borrowings................................................. 9,562 19,002 12,414
Long-Term Debt........................................................ 53,854 59,053 44,326
----------- ----------- -----------
Total Interest Expense............................................. 368,584 501,273 451,776
----------- ----------- -----------
Net Interest Income................................................... 459,678 531,150 551,603
Provision for Loan and Lease Losses................................... 74,339 142,853 60,915
----------- ----------- -----------
Net Interest Income After Provision for Loan and Lease Losses...... 385,339 388,297 490,688
Non-Interest Income
Trust and Asset Management............................................ 59,924 66,077 60,700
Mortgage Banking...................................................... 20,133 10,996 8,949
Service Charges on Deposit Accounts................................... 38,467 40,062 34,267
Fees, Exchange, and Other Service Charges............................. 78,787 99,519 99,823
Gains on Sales of Banking Operations, Net of Venture Investment
Losses............................................................... 173,426 -- --
Gain on Settlement of Pension Obligation.............................. -- 11,900 --
Investment Securities Gains (Losses).................................. 32,982 (1,101) 13,903
Other Operating Income................................................ 48,900 57,459 67,873
----------- ----------- -----------
Total Non-Interest Income.......................................... 452,619 284,912 285,515
Non-Interest Expense
Salaries.............................................................. 191,473 184,413 198,743
Pensions and Other Employee Benefits.................................. 52,235 48,042 55,343
Net Occupancy Expense................................................. 46,344 48,798 47,893
Net Equipment Expense................................................. 53,395 50,620 48,674
Goodwill and Other Intangibles Amortization........................... 13,342 15,265 16,229
Restructuring and Other Related Costs................................. 104,794 -- 22,478
Minority Interest..................................................... 383 387 485
Other Operating Expense............................................... 136,033 145,694 160,672
----------- ----------- -----------
Total Non-Interest Expense......................................... 597,999 493,219 550,517
----------- ----------- -----------
Income Before Income Taxes................................................ 239,959 179,990 225,686
Provision for Income Taxes................................................ 122,164 66,329 92,729
----------- ----------- -----------
Net Income......................................................... $ 117,795 $ 113,661 $ 132,957
=========== =========== ===========
Basic Earnings Per Share.................................................. $ 1.49 $ 1.43 $ 1.66
Diluted Earnings Per Share................................................ $ 1.46 $ 1.42 $ 1.64
Dividends Declared Per Share.............................................. $ 0.72 $ 0.71 $ 0.68
Basic Weighted Average Shares............................................. 78,977,011 79,551,296 80,298,725
Diluted Weighted Average Shares........................................... 80,577,763 79,813,443 81,044,558
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31
------------------------
2001 2000
----------- -----------
(dollars in thousands)
<S> <C> <C>
Assets
Interest-Bearing Deposits........................................................... $ 1,101,974 $ 189,301
Investment Securities
--Held to Maturity (Market Value of $407,838 in 2001 and $589,079 in 2000)......... 396,216 583,587
Investment Securities--Available for Sale........................................... 2,001,420 2,509,359
Securities Purchased Under Agreements to Resell..................................... -- 3,969
Funds Sold.......................................................................... 115,000 134,644
Loans Held for Sale................................................................. 456,709 179,229
Loans............................................................................... 5,652,518 9,234,558
Allowance for Loan and Lease Losses................................................ (158,979) (246,247)
----------- -----------
Net Loans........................................................................ 5,493,539 8,988,311
----------- -----------
Total Earning Assets............................................................. 9,564,858 12,588,400
Cash and Non-Interest Bearing Deposits.............................................. 405,981 523,968
Premises and Equipment.............................................................. 196,171 254,621
Customers' Acceptance Liability..................................................... 593 14,690
Accrued Interest Receivable......................................................... 42,687 68,585
Foreclosed Real Estate.............................................................. 17,174 4,526
Mortgage Servicing Rights........................................................... 27,291 16,195
Goodwill and Other Intangibles...................................................... 36,216 176,070
Other Assets........................................................................ 336,826 366,761
----------- -----------
Total Assets..................................................................... $10,627,797 $14,013,816
=========== ===========
Liabilities
Domestic Deposits
Demand--Non-Interest Bearing....................................................... $ 1,548,322 $ 1,707,724
--Interest Bearing........................................................... 1,926,018 2,008,730
Savings............................................................................ 967,825 665,239
Time............................................................................... 1,927,778 2,836,083
Foreign Deposits
Demand--Non-Interest Bearing....................................................... 2 385,366
Time Due to Banks.................................................................. 230,247 535,126
Other Savings and Time............................................................. 73,404 942,313
----------- -----------
Total Deposits................................................................... 6,673,596 9,080,581
Securities Sold Under Agreements to Repurchase...................................... 1,643,444 1,655,173
Funds Purchased..................................................................... 55,800 413,241
Current Maturities of Long-Term Debt................................................ 100,670 373,500
Short-Term Borrowings............................................................... 134,222 211,481
Banker's Acceptances Outstanding.................................................... 593 14,690
Retirement Expense Payable.......................................................... 36,175 37,931
Accrued Interest Payable............................................................ 29,762 72,460
Taxes Payable....................................................................... 138,366 130,760
Minority Interest................................................................... -- 4,536
Other Liabilities................................................................... 98,422 94,450
Long-Term Debt...................................................................... 469,735 623,657
----------- -----------
Total Liabilities................................................................ 9,380,785 12,712,460
Shareholders' Equity
Common Stock ($.01 par value),
authorized 500,000,000 shares; issued / outstanding:
2001--81,377,241 / 73,218,326;
2000--80,558,811 / 79,612,178...................................................... 806 806
Capital Surplus..................................................................... 367,672 346,045
Accumulated Other Comprehensive Income (Loss)....................................... 22,761 (25,079)
Retained Earnings................................................................... 1,055,424 996,791
Deferred Stock Grants............................................................... (7,637) --
Treasury Stock, at Cost (8,136,134 shares in 2001 and 946,633 shares in 2000)....... (192,014) (17,207)
----------- -----------
Total Shareholders' Equity....................................................... 1,247,012 1,301,356
----------- -----------
Total Liabilities and Shareholders' Equity....................................... $10,627,797 $14,013,816
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Deferred
Common Capital Comprehensive Retained Stock Treasury
Total Stock Surplus Income (Loss) Earnings Grants Stock
---------- ------ -------- ------------- ---------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998....................... $1,185,594 $805 $342,932 $(22,476) $ 867,852 $ -- $ (3,519)
Comprehensive Income
Net Income....................................... 132,957 -- -- -- 132,957 -- --
Other Comprehensive Income, Net of Tax
Investment Securities, Net of Reclassification
Adjustment..................................... (44,803) -- -- (44,803) -- -- --
Foreign Currency Translation Adjustment......... 1,154 -- -- 1,154 -- -- --
Pension Liability Adjustment.................... 19 -- -- 19 -- -- --
Total Comprehensive Income...................
Common Stock Issued
57,249 Profit Sharing Plan...................... 1,096 -- 4 -- (71) -- 1,163
501,929 Stock Option Plan........................ 8,616 -- 2,620 -- (3,651) -- 9,647
198,851 Dividend Reinvestment Plan............... 4,032 -- 142 -- (270) -- 4,160
7,199 Directors' Restricted Shares and
Deferred Compensation Plan............. 154 1 153 -- -- -- --
Treasury Stock Purchased (1,051,900 shares)........ (21,849) -- -- -- -- -- (21,849)
Cash Dividends Paid................................ (54,640) -- -- -- (54,640) -- --
---------- ---- -------- -------- ---------- -------- ---------
Balance at December 31, 1999....................... $1,212,330 $806 $345,851 $(66,106) $ 942,177 $ -- $ (10,398)
Comprehensive Income
Net Income....................................... 113,661 -- -- -- 113,661 -- --
Other Comprehensive Income, Net of Tax
Investment Securities, Net of Reclassification
Adjustment..................................... 45,300 -- -- 45,300 -- -- --
Foreign Currency Translation Adjustment......... (4,273) -- -- (4,273) -- -- --
Total Comprehensive Income...................
Common Stock Issued
86,670 Profit Sharing Plan.................... 1,470 -- 18 -- (230) -- 1,682
228,438 Stock Option Plan...................... 2,948 -- 3 -- (1,763) -- 4,708
193,689 Dividend Reinvestment Plan............. 3,261 -- 51 -- (583) -- 3,793
6,901 Directors' Restricted Shares and
Deferred Compensation Plan............... 122 -- 122 -- -- -- --
Treasury Stock Purchased (934,800 shares).......... (16,992) -- -- -- -- -- (16,992)
Cash Dividends Paid................................ (56,471) -- -- -- (56,471) -- --
---------- ---- -------- -------- ---------- -------- ---------
Balance at December 31, 2000....................... $1,301,356 $806 $346,045 $(25,079) $ 996,791 $ -- $ (17,207)
Comprehensive Income
Net Income....................................... 117,795 -- -- -- 117,795 -- --
Other Comprehensive Income, Net of Tax
Investment Securities........................... 20,733 -- -- 20,733 -- -- --
Foreign Currency Translation Adjustment......... 27,266 -- -- 27,266 -- -- --
Pension Liability Adjustments................... (159) -- -- (159) -- -- --
Total Comprehensive Income...................
Common Stock Issued
59,586 Profit Sharing Plan...................... 1,402 -- 261 -- -- -- 1,141
916,817 Stock Option Plan........................ 21,314 -- 1,054 -- (2,591) 5,655 17,196
120,397 Dividend Reinvestment Plan............... 2,819 -- 495 -- (4) -- 2,328
5,487 Directors' Restricted Shares and
Deferred Compensation Plan............... 336 -- 121 -- -- -- 215
727,800 Employees' Restricted Shares............. 5,105 -- 18,397 -- -- (13,292) --
65,146 Hawaii Insurance Network................. 1,299 -- 1,299 -- -- -- --
Treasury Stock Purchased (8,300,900 shares)........ (195,687) -- -- -- -- -- (195,687)
Cash Dividends Paid................................ (56,567) -- -- -- (56,567) -- --
---------- ---- -------- -------- ---------- -------- ---------
Balance at December 31, 2001....................... $1,247,012 $806 $367,672 $ 22,761 $1,055,424 $ (7,637) $(192,014)
========== ==== ======== ======== ========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Compre-
hensive
Income
--------
<S> <C>
Balance at December 31, 1998.......................
Comprehensive Income
Net Income....................................... $132,957
Other Comprehensive Income, Net of Tax
Investment Securities, Net of Reclassification
Adjustment..................................... (44,803)
Foreign Currency Translation Adjustment......... 1,154
Pension Liability Adjustment.................... 19
--------
Total Comprehensive Income................... $ 89,327
========
Common Stock Issued
57,249 Profit Sharing Plan......................
501,929 Stock Option Plan........................
198,851 Dividend Reinvestment Plan...............
7,199 Directors' Restricted Shares and
Deferred Compensation Plan.............
Treasury Stock Purchased (1,051,900 shares)........
Cash Dividends Paid................................
Balance at December 31, 1999.......................
Comprehensive Income
Net Income....................................... $113,661
Other Comprehensive Income, Net of Tax
Investment Securities, Net of Reclassification
Adjustment..................................... 45,300
Foreign Currency Translation Adjustment......... (4,273)
--------
Total Comprehensive Income................... $154,688
========
Common Stock Issued
86,670 Profit Sharing Plan....................
228,438 Stock Option Plan......................
193,689 Dividend Reinvestment Plan.............
6,901 Directors' Restricted Shares and
Deferred Compensation Plan...............
Treasury Stock Purchased (934,800 shares)..........
Cash Dividends Paid................................
Balance at December 31, 2000.......................
Comprehensive Income
Net Income....................................... $117,795
Other Comprehensive Income, Net of Tax
Investment Securities........................... 20,733
Foreign Currency Translation Adjustment......... 27,266
Pension Liability Adjustments................... (159)
--------
Total Comprehensive Income................... $165,635
========
Common Stock Issued
59,586 Profit Sharing Plan......................
916,817 Stock Option Plan........................
120,397 Dividend Reinvestment Plan...............
5,487 Directors' Restricted Shares and
Deferred Compensation Plan...............
727,800 Employees' Restricted Shares.............
65,146 Hawaii Insurance Network.................
Treasury Stock Purchased (8,300,900 shares)........
Cash Dividends Paid................................
Balance at December 31, 2001.......................
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
PACIFIC CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
2001 2000 1999
----------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Operating Activities
Net Income................................................................... $ 117,795 $ 113,661 $ 132,957
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Provision for Loan and Lease Losses....................................... 74,339 142,853 60,915
Depreciation and Amortization............................................. 107,583 64,934 61,503
Amortization of Deferred Loan Fees and Leasing Income..................... (43,436) (47,689) (46,900)
Deferred Stock Grants..................................................... 10,760 -- --
Deferred Income Taxes..................................................... (2,708) 8,224 (10,599)
Investment Security (Gains) Losses........................................ (32,982) 1,101 (13,695)
Net Change in Loans Held for Sale......................................... (277,480) (43,132) 123,410
Gain on Sale of Banking Operations, Net of Venture Investment Losses...... (173,426) -- --
Net Change in Other Assets and Liabilities................................ (39,152) 17,681 (27,993)
----------- --------- ----------
Net Cash Provided (Used) by Operating Activities.......................... (258,707) 257,633 279,598
----------- --------- ----------
Investing Activities
Proceeds from Redemptions of Investment Securities Held to Maturity.......... 424,345 146,559 212,739
Purchases of Investment Securities Held to Maturity.......................... (236,974) (9,555) (356,258)
Proceeds from Sales and Redemptions of Investment Securities Available for
Sale........................................................................ 1,351,460 180,739 1,267,473
Purchases of Investment Securities Available for Sale........................ (789,806) (103,667) (852,255)
Net Decrease in Loans and Lease Financing.................................... 1,615,335 61,276 18,279
Proceeds from Sale of Banking Operations..................................... 353,013 -- 3,042
Premises and Equipment, Net.................................................. (9,980) (28,455) (19,394)
----------- --------- ----------
Net Cash Provided by Investing Activities.................................... 2,707,393 246,897 273,626
----------- --------- ----------
Financing Activities
Net Decrease in Demand, Savings, and Time Deposits........................... (599,513) (313,637) (207,904)
Proceeds from Lines of Credit and Long-Term Debt............................. 39,071 300,096 434,126
Repayments of Long-Term Debt................................................. (465,823) (30,596) (292,215)
Net Decrease in Short-Term Borrowings........................................ (446,429) (509,684) (518,139)
Proceeds from Issuance of Common Stock, Net of Common Stock
Repurchased................................................................. (175,618) (9,191) (7,951)
Cash Dividends............................................................... (56,567) (56,471) (54,640)
----------- --------- ----------
Net Cash Used by Financing Activities........................................ (1,704,879) (619,483) (646,723)
----------- --------- ----------
Effect of Exchange Rate Changes on Cash.......................................... 27,266 (4,273) 1,154
----------- --------- ----------
Increase (Decrease) in Cash and Cash Equivalents................................. 771,073 (119,226) (92,345)
Cash and Cash Equivalents at Beginning of Year................................... 851,882 971,108 1,063,453
----------- --------- ----------
Cash and Cash Equivalents at End of Period....................................... $ 1,622,955 $ 851,882 $ 971,108
=========== ========= ==========
</TABLE>
During the years ended December 31, 2001, 2000 and 1999, interest payments
of $411,282,000, $493,390,000 and $442,882,000, respectively, and income tax
charges of $114,564,000, $42,029,000 and $62,674,000, respectively, were paid.
See accompanying notes to consolidated financial statements.
42
<PAGE>
Note A--Summary of Significant Accounting Policies
The accounting principles followed by Pacific Century Financial Corporation
and its subsidiaries (the Company), and the methods of applying those
principles conform with accounting principles generally accepted in the United
States and general practices within the banking industry. The preparation of
financial statements in conformity with these accounting principles requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results may differ
from those estimates and such differences could be material to the financial
statements. Certain accounts in prior years have been reclassified to conform
with the 2001 presentation. The significant accounting policies are summarized
below.
Organization/Consolidation
The Company is a bank holding company providing a broad range of financial
products and services to customers in Hawaii, the West Pacific, and American
Samoa. During the year, the Company divested most of its business in Asia, the
South Pacific, and the U.S. Mainland as part of its strategic plan to provide
increased shareholder value. The majority of the Company's operations consist
of customary commercial and consumer banking services including, but not
limited to, lending, leasing, deposit services, trust and investment activities
and trade financing. The Company's principal subsidiary bank is Bank of Hawaii.
The Company also owns First Savings and Loan Association of America ("First
Savings"). The consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation and minority
interests have been recognized.
The Company has no investment in unconsolidated, Company sponsored special
purpose entities or other similar business structures. The Company has
investments in leveraged leases, as discussed in Note D.
International Operations
As of December 31, 2001, the Company had curtailed most of its international
operations. Bank of Hawaii and First Savings have operations that are conducted
in the West and South Pacific that are denominated in U.S. dollars. These
operations are classified as domestic.
Acquisitions
In May 2001, the Company acquired Hawaii Insurance Network LLP (HIN) through
the issuance of 65,146 shares of the Company's common stock. HIN specializes in
the sale of benefit programs such as health plans and disability products.
In January 1999, the Company acquired Triad Insurance Agency, Inc. (Triad),
a Hawaii-based property/casualty insurance agency. Triad represents a number of
large U.S. property/casualty insurance companies for whom it acts as a
servicing agent. The merger, accounted for as a purchase, has expanded the
Company's range of financial services offered to customers.
In August 1999, the Company acquired 5.8 million shares, or approximately
10%, of the outstanding shares of the Bank of Queensland Limited in Australia.
In 2001, the Company's ownership interest in the Bank of Queensland Limited was
sold.
Accounting Changes
During 2001, the Company adopted the following Statements of Financial
Accounting Standards (SFAS's):
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133), as amended by SFAS No.'s Statements No. 137
and 138 requires companies to recognize all of its derivative
instruments as either assets or liabilities in the statement of
financial position at fair value and was adopted on January 1, 2001. The
accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of
hedging relationship. For those derivative instruments that are
43
<PAGE>
designated and qualify as hedging instruments, a company must designate
the hedging instrument, based upon the exposure being hedged, as a fair
value hedge, cash flow hedge or a hedge of a net investment in a foreign
operation. The adoption of SFAS No. 133 did not have a material impact
on the Company's financial position or results of operations.
For derivative instruments that are designated and qualify as a fair
value hedge (i.e., hedging the exposure to changes in the fair value of
an asset or a liability or an identified portion thereof that is
attributable to a particular risk), the gain or loss on the derivative
instrument as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk are recognized in the same line item
associated with the hedged item in current earnings during the period of
the change in fair values (for example, in "interest expense" when the
hedged item is fixed-rate debt).
For derivative instruments that are designated and qualify as a cash
flow hedge (i.e., hedging the exposure to variability in expected future
cash flows that is attributable to a particular risk), the effective
portion of the gain or loss on the derivative instrument is reported as
a component of other comprehensive income and reclassified into earnings
in the same line item associated with the forecasted transaction in the
same period or periods during which the hedged transaction affects
earnings (for example, in "interest expense" when the hedged
transactions are interest cash flows associated with floating-rate
debt). The remaining gain or loss on the derivative instrument in excess
of the cumulative change in the present value of future cash flows of
the hedged item, if any, is recognized in other income/expense in
current earnings during the period of change.
For derivative instruments that are designated and qualify as a hedge
of a net investment in a foreign currency, the gain or loss is reported
in other comprehensive income as part of the cumulative translation
adjustment to the extent it is effective. Any ineffective portions of
net investment hedges are recognized in other income/expense in current
earnings during the period of change.
For derivative instruments not designated as hedging instruments, the
gain or loss is recognized in other income/expense in current earnings
during the period of change.
SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities (SFAS No. 140) was adopted on
April 1, 2001. SFAS No. 140 revised the criteria for accounting for
securitizations and other transfers of financial assets and collateral,
and introduced new disclosures. Adoption of SFAS No. 140 did not have
material impact on the Company's financial position or results of
operations.
SFAS No. 141, Business Combinations (SFAS No. 141), SFAS No. 141,
effective June 30, 2001, requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method
of accounting.
Investment Securities
Investment Securities Held to Maturity are those securities, which the
Company has the ability and positive intent to hold to maturity. These
securities are stated at cost adjusted for amortization of premiums and
accretion of discounts. In 2001, 2000 and 1999, there were no transfers from
investment securities held to maturity.
Investment Securities Available for Sale are recorded at fair value with
unrealized gains and losses recorded as an unrealized valuation adjustment, net
of taxes, in other comprehensive income.
Trading Securities are those securities that are purchased for the Company's
funding of liabilities associated with certain compensation plans. Securities
in the trading portfolio are carried at fair value with unrealized holding
gains and losses recognized currently in income. Trading Securities of
$3,759,016 and $3,844,000 as of December 31, 2001 and 2000, respectively, were
included in Other Assets on the Consolidated Statements of Condition. During
2001, 2000 and 1999, the net gain (loss) from the trading securities portfolio
was
44
<PAGE>
$(1,399,564), $(627,000) and $361,000, respectively, and was recognized as a
component of investment securities gains and (losses) in the Consolidated
Statements of Income. Income from trading securities was $607,524, $464,000 and
$247,000 during 2001, 2000 and 1999, respectively, and was included as part of
other operating income.
The Company uses the specific identification method to determine the cost of
all investment securities sold.
Loans Held for Sale
Loans Held for Sale are primarily residential mortgage loans. These loans
are recorded at the lower of cost or market on an aggregate basis.
Loans
Loans are carried at the principal amount outstanding net of unearned
income. Interest income is generally recognized on the accrual basis. Net loan
fees are deferred and amortized as an adjustment to yield.
The Company's policy is to discontinue the accrual of income when a loan is
over 90 days delinquent, unless collection is probable based on specific
factors such as the type of borrowing agreement and/or collateral. At the time
a loan is placed on non-accrual, all accrued but unpaid interest is reversed
against current earnings. Subsequent payments received are generally applied to
reduce the principal balance.
Allowance for Loan and Lease Losses
The Allowance for Loan and Lease Losses (Allowance) is established through
provisions that are charged against income. Losses on uncollectable loans are
charged against the Allowance, and subsequent recoveries, if any, are credited
to the Allowance.
The Allowance is maintained at a level believed adequate by management to
absorb estimated inherent losses. Management's periodic evaluation of the
adequacy of the Allowance is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse conditions that may affect
the borrower's ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the loan
portfolio, current economic conditions and other factors. This evaluation is
inherently subjective as it requires material estimates including the amounts
and timing of expected cash flows that may be susceptible to significant
changes.
A loan is considered impaired when it is probable that all amounts due will
not be collected in accordance with the contractual terms of the loan.
Impairment is measured based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Cash receipts on impaired loans generally are
applied to reduce the carrying value of the loan. Large groups of smaller
balance homogeneous loans, such as residential mortgages and consumer loans,
are evaluated collectively for impairment based primarily on the historical
loss experience for each portfolio.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include:
cash and non-interest bearing deposits, interest bearing deposits, securities
purchased under agreements to resell and funds sold. All amounts are readily
convertible to cash and have maturities less than ninety days.
Under the terms of the Depository Institutions Deregulation and Monetary
Control Act, the Company is required to place reserves with the Federal Reserve
Bank based on the amount of deposits held. During 2001 and 2000, the average
amount of these reserve balances was $17,716,000 and $7,171,000, respectively.
Premises and Equipment
Premises and equipment are stated at cost less allowances for depreciation
and amortization. Depreciation is computed using the straight line method over
lives of three to fifty years for premises and improvements, and three to ten
years for equipment.
45
<PAGE>
Foreclosed Real Estate
Foreclosed Real Estate consists of properties acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure. These properties
are carried at the lower of cost or fair value based on current appraisals less
selling costs. Losses arising at the time of acquiring such property are
charged against the Allowance. Subsequent declines in property value are
recognized through charges to non-interest expense.
Mortgage Servicing Rights
Servicing assets are recognized when mortgage loans are originated and sold
with servicing rights retained. Servicing assets are also periodically
purchased. Servicing assets are recorded at their fair values on the date the
loans are sold or the servicing assets are purchased. The capitalized cost of
servicing assets are amortized over the estimated life of the related loans. An
impairment analysis is performed on a periodic basis and includes a review of
prepayment trends, delinquency and other relevant factors. For purposes of
measuring impairment, servicing assets are stratified by product type.
Impairment is recognized when the carrying value of the servicing assets for a
stratum exceed its fair value. The fair value of servicing assets is estimated
based on a review of servicing right values of loans with similar
characteristics.
Goodwill and Other Intangible Assets
Intangible assets include goodwill and identifiable intangible assets such
as core deposits resulting from acquisitions accounted for under the purchase
method. Goodwill and core intangibles have been amortized using the
straight-line method over periods of 15 to 25 years. These intangible assets
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
Income Taxes
The Company files a consolidated federal income tax return with the Bank of
Hawaii and its other domestic subsidiaries. Deferred income taxes are provided
to reflect the tax effect of temporary differences between financial statement
carrying amounts and the corresponding tax basis of assets and liabilities.
Deferred taxes are calculated by applying enacted statutory tax rates and tax
laws to future years in which temporary differences are expected to reverse.
The impact on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that the rate change is enacted. A deferred
tax valuation reserve is established if it is more likely than not that a
deferred tax asset will not be realized.
The Company's tax sharing policy provides for the settlement of income taxes
between each relevant subsidiary as if the subsidiary had filed a separate
return. Payments are made to the Company by subsidiaries with tax liabilities,
and subsidiaries that generate tax benefits receive payments for those benefits
as used.
For lease arrangements that are accounted for by the financing method,
investment tax credits are deferred and amortized over the lives of the
respective leases.
Risk Management Instruments
The Company utilizes off-balance sheet derivative financial instruments,
primarily as an end-user in connection with its risk management activities and,
to a lesser extent, as a service to accommodate the needs of customers. In the
initial year of adoption of SFAS No. 133, the Company has not implemented any
of the hedge accounting methods (i.e., fair value, cash flows or net investment
in foreign operations) currently addressed under this standard. All risk
management derivative instruments are carried at fair value and the associated
unrealized gains and losses are recognized currently in the Consolidated
Statements of Income. Over the past two years the Company has not used interest
rate swaps as a risk management tool, however it continues to use foreign
exchange contracts to mitigate foreign currency risk.
46
<PAGE>
Stock-Based Compensation
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25 (APB No. 25) and related
interpretations. SFAS No. 123 "Accounting for Stock-Based Compensation,"
permits companies to elect to recognize stock-based compensation expense based
on the estimated fair value of the awards on the grant date or to continue to
use the accounting under APB No. 25. Included in Note M is the impact of the
fair value of employee stock-based compensation plans on net income and
earnings per share on a pro forma basis for awards granted in 2001, 2000 and
1999.
Advertising Costs
The nature of the Company's marketing programs generally do not include
direct-response advertising. The Company, therefore, recognizes its advertising
costs as incurred. Advertising costs were $6,029,000; $6,156,000 and $5,360,000
in 2001, 2000 and 1999, respectively.
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the dilutive impact of stock
options and stock appreciation rights and uses the average share price during
the period in determining the number of incremental shares to be added to the
weighted average number of common shares outstanding. For the years ended
December 31, 2001, 2000 and 1999 there were no adjustments to net income (the
numerator) for purposes of computing basic EPS. A reconciliation of the
weighted average common shares outstanding for computing diluted EPS for 2001,
2000 and 1999 follows:
<TABLE>
<CAPTION>
Weighted Average Shares
--------------------------------
2001 2000 1999
---------- ---------- ----------
<S> <C> <C> <C>
Denominator for Basic EPS....... 78,977,011 79,551,296 80,298,725
Dilutive Effect of Stock Options 1,600,752 262,147 745,833
---------- ---------- ----------
Denominator for Diluted EPS..... 80,577,763 79,813,443 81,044,558
========== ========== ==========
</TABLE>
Regulatory Matters
In January 2002, the Company announced that it has satisfied its obligations
under the Memorandum of Understanding imposed by its regulators during the
third quarter of 2000 and it has been removed. Under the Memorandum of
Understanding, the Company had agreed to take certain actions to strengthen and
maintain its operations and financial position, and to request prior approval
for the payments of dividends, increases in indebtedness, or repurchases of
common stock.
Recent Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142). SFAS No. 142
eliminates amortization of goodwill associated with business combinations
completed after June 30, 2001. During a transition period from July 1, 2001
through December 31, 2001, goodwill associated with business combinations
completed prior to July 1, 2001 continued to be amortized through the income
statement. Effective January 1, 2002, periodic goodwill amortization and
expense recognition will be discontinued and goodwill will be assessed at least
annually for impairment at the reporting unit level by applying a fair-value
based test. SFAS No. 142 also provides additional guidance on acquired
intangibles that should be separately recognized and amortized. Under SFAS No.
142 intangibles with indefinite lives will no longer be amortized. The Company
adopted SFAS No. 142 on January 1, 2002. An initial impairment assessment was
completed and it was determined that a transition impairment charge will not be
required. Under SFAS No. 142 the elimination of amortization is expected to
increase net income by approximately $7.6 million in 2002.
47
<PAGE>
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, (SFAS No. 144). SFAS No. 144 superceded FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of (SFAS No. 121), and certain of the
accounting and reporting provisions of APB Opinion No. 30. For long-lived
assets to be held and used, SFAS No. 144 retained the requirements of SFAS No.
121 to (a) recognize an impairment loss only if the carrying value of
long-lived asset is not recoverable from its undiscounted cash flows and (b)
measure an impairment loss as the difference between the carrying amount and
fair value of the asset. For long-lived assets to be disposed of by sale, the
SFAS No. 121 model was also retained which requires an asset to be measured at
the lower of its carrying amount or fair value less cost to sell and to cease
depreciation. SFAS No. 144 establishes criteria beyond that previously
specified in SFAS No. 121 to determine when a long-lived asset is held for
sale. SFAS No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and is generally to be applied
prospectively. The Company is currently evaluating the impact of SFAS No. 144;
however, it is not expected that the adoption of SFAS No. 144 will have a
material impact on the Company's financial position or results of operations.
Note B--Divestiture Program and Restructuring Charges
In April 2001, the Company announced a strategic plan designed to maximize
shareholder value by strengthening its Hawaii and West Pacific operations and
divesting most other holdings. The Company will maintain its operations in
Hawaii, the West Pacific, American Samoa, a representative office in Japan, and
a leasing office in Arizona.
In March 2001, the Company sold its credit card portfolio.
In April 2001, the Company's U.S. Mainland subsidiary, Pacific Century Bank,
N.A., sold its nine-branch Arizona franchise.
In April 2001, the Company sold its entire investment in the Bank of
Queensland Limited in Australia. The Company's convertible notes were sold back
to the Bank of Queensland Limited and its common share investment was sold to a
private Australian investor.
Between August 2001 and October 2001, the Company closed its Asian branches.
In September 2001, the Company completed the sale of Pacific Century Bank,
N.A's 19 branch franchise in Southern California.
In November 2001, the Company completed the sale of its operations in Papua
New Guinea and Vanuatu. The sale of its Fiji operations was finalized in
December 2001. The transaction included two branches in Papua New Guinea, two
in Vanuatu and three in Fiji.
In December 2001, the Company sold its approximately 95% share interest in
its French Polynesia and New Caledonia operations. The sale included all 17
branches of Bank of Hawaii's subsidiary bank in French Polynesia, Banque de
Tahiti, and all eight branches of its subsidiary bank in New Caledonia, Bank of
Hawaii-Nouvelle Caledonie.
48
<PAGE>
In connection with the implementation of the strategic plan and the
divestiture program, the Company recognized restructuring and other related
costs as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 2001
----------------------
(dollars in thousands)
<S> <C>
Foreign Currency Translation Losses.... $ 30,600
Write-down of Goodwill................. 15,500
Employee Termination Costs............. 26,900
Asset Impairments...................... 7,500
Unrecoverable Investments.............. 6,100
Professional Fees...................... 9,300
Other.................................. 8,894
--------
Total............................... $104,794
========
</TABLE>
The following schedule reflects the activity in the restructuring accrual:
<TABLE>
<CAPTION>
Total
-------------
(dollars
in thousands)
<S> <C>
Balance at December 31, 2000..................... $ --
Accruals...................................... 29,400
Payments...................................... (13,600)
Reversals..................................... (4,000)
--------
Balance at December 31, 2001..................... $ 11,800
========
</TABLE>
The remaining accrual of $11.8 million, which is a component of other
liabilities, was comprised of $7.8 million in severance for 65 employees
primarily in the South Pacific, $0.4 million for lease terminations and $3.6
million for other costs associated with the divested businesses.
In the third quarter of 1999, the Company recorded a restructuring charge of
$22.5 million in connection with a redesign program to enhance revenues,
improve efficiencies and reduce expenses. Implementation of this project was
completed on September 30, 2000. Included in the restructuring charge were
direct and incremental costs associated with the project, including severance
payments, lease termination costs and losses on the disposal of fixed assets.
49
<PAGE>
Note C--Investment Securities
The following presents the details of the investment securities portfolio:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
At December 31, 2001
Securities Held to Maturity:
Debt Securities Issued by the U.S. Treasury and
Agencies................................................ $ 20,799 $ 7 $ (30) $ 20,776
Debt Securities Issued by State and Municipalities of the
United States........................................... 3,720 191 -- 3,911
Mortgage-Backed Securities................................ 366,314 11,464 (10) 377,768
Other Debt Securities..................................... 5,383 -- -- 5,383
---------- ------- ------- ----------
Total................................................. $ 396,216 $11,662 $ (40) $ 407,838
========== ======= ======= ==========
Securities Available for Sale:
Equity Securities......................................... $ 1,382 $ -- $ -- $ 1,382
Debt Securities Issued by the U.S. Treasury and
Agencies................................................ 83,689 2,220 -- 85,909
Debt Securities Issued by State and Municipalities of the
United States........................................... 6,453 265 (1) 6,717
Mortgage-Backed Securities................................ 1,854,732 38,451 (3,339) 1,889,844
Other Debt Securities..................................... 17,272 296 -- 17,568
---------- ------- ------- ----------
Total................................................. $1,963,528 $41,232 $(3,340) $2,001,420
========== ======= ======= ==========
At December 31, 2000
Securities Held to Maturity:
Restricted Equity Securities.............................. $ 4,986 $ -- $(4,537) $ 449
Debt Securities Issued by the U.S. Treasury and
Agencies................................................ 6,812 -- (39) 6,773
Debt Securities Issued by State and Municipalities of the
United States........................................... 3,984 303 -- 4,287
Debt Securities Issued by Foreign Governments............. 15,185 3,446 -- 18,631
Mortgage-Backed Securities................................ 547,463 7,412 (1,093) 553,782
Other Debt Securities..................................... 5,157 -- -- 5,157
---------- ------- ------- ----------
Total................................................. $ 583,587 $11,161 $(5,669) $ 589,079
========== ======= ======= ==========
Securities Available for Sale:
Equity Securities......................................... $ 24,740 $ -- $ (86) $ 24,654
Debt Securities Issued by the U.S. Treasury and
Agencies................................................ 195,920 1,262 (147) 197,035
Debt Securities Issued by State and Municipalities of the
United States........................................... 11,634 126 (18) 11,742
Debt Securities Issued by Foreign Governments............. 3,936 -- -- 3,936
Mortgage-Backed Securities................................ 2,235,987 9,599 (8,426) 2,237,160
Other Debt Securities..................................... 33,502 1,391 (61) 34,832
---------- ------- ------- ----------
Total................................................. $2,505,719 $12,378 $(8,738) $2,509,359
========== ======= ======= ==========
</TABLE>
50
<PAGE>
The following presents an analysis of the contractual maturities of the
investment securities portfolio as of December 31, 2001:
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
---------- ----------
(dollars in thousands)
<S> <C> <C>
Securities Held to Maturity
Due in One Year or Less....................... $ 24,299 $ 24,460
Due After One Year Through Five Years......... 4,810 4,810
Due After Five Years Through Ten Years........ 793 800
---------- ----------
29,902 30,070
Mortgage-Backed Securities.................... 366,314 377,768
---------- ----------
$ 396,216 $ 407,838
========== ==========
Securities Available for Sale
Due in One Year or Less....................... $ 4,566 $ 4,637
Due After One Year Through Five Years......... 38,282 39,963
Due After Five Years Through Ten Years........ 46,834 47,540
Due After Ten Years........................... 17,732 18,054
---------- ----------
107,414 110,194
Mortgage-Backed Securities.................... 1,854,732 1,889,844
Equity Securities............................. 1,382 1,382
---------- ----------
$1,963,528 $2,001,420
========== ==========
</TABLE>
Investment securities carried at $2,318,966,000 and $2,876,547,000 were
pledged to secure deposits of certain public (governmental) entities,
repurchase agreements and swap agreements at December 31, 2001 and 2000,
respectively. The December 31, 2001 amount included investment securities with
a carrying value of $1,818,534,000 and a market value of $1,856,408,000 which
were pledged as collateral for repurchase agreements.
The following presents gross gains and losses and proceeds from sales and
maturities of Securities Available for Sale:
<TABLE>
<CAPTION>
Gross Gains & Losses on Securities
Available for Sale
----------------------------------
2001 2000 1999
---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Gross Gains on Sales of Securities................................... $ 37,779 $ 364 $ 16,562
Gross Losses on Sales of Securities.................................. 3,397 1,312 2,867
---------- -------- ----------
Net Gains(Losses) on Sales of Securities Available for Sale.......... $ 34,382 $ (948) $ 13,695
========== ======== ==========
Proceeds from Sales and Maturities of Securities Available for Sale.. $1,351,460 $180,739 $1,267,473
========== ======== ==========
</TABLE>
Taxes related to 2001 gains and losses were $13,804,000. The cumulative,
other comprehensive income from investment securities was $22,968,000 (net of
taxes) as of December 31, 2001.
51
<PAGE>
Note D--Loans
Loans consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Domestic Loans
Commercial............................. $1,175.5 $2,433.6 $2,483.3 $2,570.7 $2,095.9
Real Estate
Construction....................... 169.6 307.4 328.9 299.8 281.0
Mortgage--Residential.............. 2,419.4 2,558.8 2,233.5 2,165.1 2,369.3
--Commercial............... 640.7 1,125.5 1,244.8 1,139.1 1,354.5
Installment............................ 729.7 1,001.9 1,007.6 1,015.2 1,144.0
Lease Financing........................ 493.4 539.8 450.6 389.6 366.3
-------- -------- -------- -------- --------
Total Domestic Loans............... 5,628.3 7,967.0 7,748.7 7,579.5 7,611.0
Foreign Loans
Banks and Other Financial Institutions. 1.4 132.6 207.7 158.2 207.7
Commercial............................. 22.8 744.8 943.4 1,281.5 1,074.9
Other.................................. -- 390.2 439.2 349.4 298.8
-------- -------- -------- -------- --------
Total Foreign Loans................ 24.2 1,267.6 1,590.3 1,789.1 1,581.4
-------- -------- -------- -------- --------
Total Loans........................ $5,652.5 $9,234.6 $9,339.0 $9,368.6 $9,192.4
======== ======== ======== ======== ========
</TABLE>
Total loans are net of unearned income totaling $204,549,906 and
$253,902,354 as of December 31, 2001 and 2000, respectively.
The Company's lending activities are concentrated in its primary geographic
markets of Hawaii, the West Pacific and American Samoa.
Commercial and mortgage loans totaling $1,389,789,000 and $904,015,000 were
pledged to secure certain public deposits and Federal Home Loan Bank advances
at December 31, 2001 and 2000, respectively.
The Company is the lessor in various leveraged lease agreements beginning
from as far back as 1987 under which airplanes, railcars and water craft, with
estimated economic lives ranging from 20 to 36 years are leased for terms up to
20 years. The Company's equity investment typically represents approximately
21.5 percent of the purchase price; with the remaining percentage being
furnished by third-party financing in the form of long-term debt that provides
for no recourse against the Company and is secured by a first lien on the
asset. At the end of the lease terms, the assets are turned back to the
Company. The residual value at that time is estimated to be a certain
percentage of the costs. For federal income tax purposes, the Company receives
the investment tax credit and has the benefit of tax deductions for
depreciation on the entire leased asset and for interest on the long-term debt.
During the early years of the leases those deductions exceed the lease rental
income, substantial income tax deductions are available to be applied against
the Company's other income. In the later years of the leases, rental income
will exceed the deductions and taxes will be payable. Deferred taxes are
provided to reflect this reversal.
52
<PAGE>
The Company's net investment in leveraged leases is composed of the
following elements:
<TABLE>
<CAPTION>
December 31
---------------------
2001 2000
--------- ---------
(dollars in thousands)
<S> <C> <C>
Rentals receivable (net of principal and interest on nonrecourse debt).... $ 262,023 $ 264,162
Estimated residual value of leased assets................................. 151,432 170,362
Less: Unearned and deferred income........................................ (121,607) (131,149)
--------- ---------
Investment in leverage leases............................................. 291,848 303,375
Less: Deferred taxes arising from leveraged leases........................ (183,634) (179,407)
--------- ---------
Net Investment in leveraged leases........................................ $ 108,214 $ 123,968
========= =========
</TABLE>
Certain directors and executive officers of the Company, its subsidiary
companies, companies in which they are principal owners, and trusts in which
they are involved, have loans with the Company subsidiaries. These loans were
made in the ordinary course of business at normal credit terms, including
interest rate and collateral requirements. Such loans at December 31, 2001 and
2000 amounted to $19,814,317 and $22,648,174, respectively. During 2001, the
activity in these loans included new borrowings of $2,972,094, repayments of
$2,736,961, and other reductions of $3,068,990. Other reductions were
attributable to individuals no longer being considered insiders and loan
portfolios being sold.
53
<PAGE>
Activity in the allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Balance of Allowance for Loan and Lease Losses
Beginning of Period.................................... $ 246.2 $ 194.2 $ 211.3 $ 174.4 $ 167.8
Loans Charged-Off
Commercial........................................... (97.5) (22.1) (18.5) (15.3) (12.7)
Real Estate:
Construction....................................... (0.1) (0.6) (1.4) -- --
Mortgage--Commercial............................... (19.2) (15.2) (4.5) (2.5) (1.3)
--Residential.............................. (8.9) (6.5) (7.8) (2.9) (1.9)
Installment............................................ (20.5) (20.1) (25.1) (25.8) (28.1)
Foreign................................................ (22.0) (45.8) (45.8) (34.8) (10.6)
Lease Financing........................................ (0.8) (0.5) (0.2) (0.7) (0.5)
-------- -------- -------- -------- --------
Total Charge-Offs........................................ (169.0) (110.8) (103.3) (82.0) (55.1)
Recoveries on Loans Previously Charged-Off
Commercial........................................... 11.1 5.5 14.0 2.8 16.4
Real Estate:
Construction....................................... -- -- 0.1 0.1 --
Mortgage--Commercial............................... 3.2 0.6 1.6 1.2 0.6
--Residential.............................. 1.0 1.1 0.6 0.2 1.0
Installment............................................ 8.0 6.9 7.6 6.4 6.3
Foreign................................................ 24.1 7.3 5.6 5.6 0.6
Lease Financing........................................ 0.2 -- -- -- --
-------- -------- -------- -------- --------
Total Recoveries......................................... 47.6 21.4 29.5 16.3 24.9
-------- -------- -------- -------- --------
Net Loan Charge-Offs..................................... (121.4) (89.4) (73.8) (65.7) (30.2)
Provisions Charged to Operating Expense.................. 74.3 142.9 60.9 84.0 30.3
Allowance Related to Divestitures........................ (40.2) -- -- -- --
Other/1/................................................. 0.1 (1.5) (4.2) 18.6 6.5
-------- -------- -------- -------- --------
Balance at End of Period................................. $ 159.0 $ 246.2 $ 194.2 $ 211.3 $ 174.4
======== ======== ======== ======== ========
Average Loans Outstanding................................ $7,719.6 $9,415.9 $9,259.6 $9,289.3 $8,877.9
Ratio of Net Charge-Offs to Average Loans
Outstanding............................................ 1.57% 0.95% 0.80% 0.71% 0.34%
Ratio of Allowance to Loans and Leases Outstanding....... 2.81% 2.67% 2.08% 2.26% 1.90%
Details of the foreign allowance for loan and lease losses, which is included in the table above, are as
follows:
Beginning Balance........................................ $ 73.3 $ 78.4 $ 74.7 $ 31.0 $ 28.4
Charge-Offs............................................. (22.0) (45.8) (45.8) (34.8) (10.6)
Recoveries.............................................. 24.1 7.3 5.6 5.6 0.6
-------- -------- -------- -------- --------
Net Loan (Charge-Offs) Recoveries....................... 2.1 (38.5) (40.2) (29.2) (10.0)
Provisions Charged to Operating Expense................. 6.4 34.7 42.2 54.2 17.6
Allowance Related to Divestitures....................... (23.8) -- -- -- --
Other/1/................................................ (57.4) (1.3) 1.7 18.7 (5.0)
-------- -------- -------- -------- --------
Balance at End of Period................................. $ 0.6 $ 73.3 $ 78.4 $ 74.7 $ 31.0
======== ======== ======== ======== ========
</TABLE>
- --------
/1/ Includes balance transfers, allowance acquired and foreign currency
translation.
54
<PAGE>
The following table presents information on impaired loans as of December
31, 2001 and 2000:
<TABLE>
<CAPTION>
2001 2000
------- --------
(dollars in thousands)
<S> <C> <C>
Recorded Investment in Impaired Loans not Requiring
an Allowance for Loan and Lease Losses..................... $25,338 $ 15,170
Recorded Investment in Impaired Loans Requiring an
Allowance for Loan and Lease Losses........................ 41,849 205,878
------- --------
Recorded Investment in Impaired Loans........................ $67,187 $221,048
======= ========
Allowance for Losses on Impaired Loans....................... $10,626 $ 53,631
Average Recorded Investment in Impaired Loans During the Year $89,575 $150,334
</TABLE>
Servicing assets are summarized in the following table:
<TABLE>
<CAPTION>
2001 2000
------- -------
(dollars in thousands)
<S> <C> <C>
Balance at Beginning of Year........ $16,195 $15,215
Originated Mortgage Servicing Rights 9,490 1,840
Purchased Servicing Rights.......... 7,159 2,049
Mortgage Servicing Rights Valuation. (207) --
Amortization........................ (5,346) (2,909)
------- -------
Balance at End of Year.............. $27,291 $16,195
======= =======
Fair Value at End of Year........... $34,721 $36,618
======= =======
</TABLE>
As of December 31, 2001 and 2000, the Company's loan servicing portfolio
totaled $3,761,955,000 and $2,847,839,000, respectively.
Note E--Premises and Equipment
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
Accumulated Net
Depreciation and Book
Cost Amortization Value
-------- ---------------- --------
(dollars in thousands)
<S> <C> <C> <C>
December 31, 2001
Premises......... $269,028 $(125,983) $143,045
Capital Leases... 4,464 (1,607) 2,857
Equipment........ 199,288 (149,019) 50,269
-------- --------- --------
$472,780 $(276,609) $196,171
======== ========= ========
December 31, 2000
Premises......... $320,155 $(139,096) $181,059
Capital Leases... 4,464 (1,429) 3,035
Equipment........ 242,229 (171,702) 70,527
-------- --------- --------
$566,848 $(312,227) $254,621
======== ========= ========
</TABLE>
Depreciation and amortization (including capital lease amortization)
included in non-interest expense were $42,719,000, $45,562,000 and $42,068,000
in 2001, 2000 and 1999, respectively.
55
<PAGE>
The Company leases certain branch premises and data processing equipment
with lease terms extending through 2055. Most of the leases for premises
provide for a base rent over a specified period with renewal options
thereafter. Portions of certain properties are subleased for periods expiring
in various years through 2010. Lease terms generally provide for the Company to
pay taxes, maintenance and other operating costs.
Future minimum payments, by year and in the aggregate, for non-cancelable
operating leases with initial or remaining terms of one year or more and
capital leases consisted of the following at December 31, 2001:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(dollars in thousands)
<S> <C> <C>
2002............................................. $ 7 $ 8,034
2003............................................. 605 7,033
2004............................................. 605 8,355
2005............................................. 605 7,522
2006............................................. 605 4,782
Thereafter....................................... 32,505 67,813
------- --------
Total Minimum Lease Payments..................... $34,932 $103,539
========
Amounts Representing Interest.................... 26,575
-------
Present Value of Net Minimum Lease Payments...... $ 8,357
=======
</TABLE>
Minimum future rentals receivable under subleases for non-cancelable
operating leases at December 31, 2001, amounted to $4,382,000.
Rental expense for all operating leases for the years ended December 31,
2001, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
2001 2000 1999
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Minimum Rentals.................................. $18,184 $22,934 $21,867
Sublease Rental Income........................... (1,489) (1,490) (1,331)
------- ------- -------
$16,695 $21,444 $20,536
======= ======= =======
</TABLE>
Note F--Deposits
Time deposits with balances of $100,000 or more totaled $1,285,722,000 at
December 31, 2001. Of this amount, $37,788,570 consisted of deposits of public
(governmental) entities, which require collaterization by acceptable
securities. The majority of deposits in the foreign category were in
denominations of $100,000 or more.
Maturities of time deposits of $100,000 or more at December 31, 2001, were
as follows:
<TABLE>
<CAPTION>
Domestic Foreign
---------- --------
(dollars in thousands)
<S> <C> <C>
Under 3 Months................................... $ 548,417 $264,114
3 to 6 Months.................................... 164,927 6,051
7 to 12 Months................................... 150,070 3,802
Greater than 1 to 2 Years........................ 97,418 --
Greater than 2 to 3 Years........................ 25,257 895
Greater than 3 to 4 Years........................ 1,085 --
Greater than 4 to 5 Years........................ 20,356 --
Greater than 5 Years............................. 3,330 --
---------- --------
$1,010,860 $274,862
========== ========
</TABLE>
56
<PAGE>
Note G--Short-Term Borrowings
Details of short-term borrowings for 2001, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Securities
Sold Under Other
Funds Agreements to Commercial Short-Term
Purchased Repurchase Paper Borrowings
---------- ------------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
2001
Amounts Outstanding at December 31............ $ 55,800 $1,643,444 $104,127 $ 30,095
Average Amount Outstanding During Year........ 219,631 1,670,116 103,323 112,495
Maximum Amount Outstanding at any month end... 553,779 1,922,586 144,105 186,514
Weighted Average Interest Rate During Year/1/. 4.60% 4.66% 4.90% 4.02%
Weighted Average Interest Rate End of Year.... 1.25% 2.95% 4.59% 4.86%
2000
Amounts Outstanding at December 31............ $ 413,241 $1,655,173 $154,664 $ 56,817
Average Amount Outstanding During Year........ 518,916 1,702,129 119,472 256,854
Maximum Amount Outstanding at any month end... 742,085 1,806,197 175,142 432,016
Weighted Average Interest Rate During Year/1/. 6.29% 6.14% 5.81% 4.68%
Weighted Average Interest Rate End of Year.... 5.77% 6.42% 6.04% 5.19%
1999
Amounts Outstanding at December 31............ $ 839,962 $1,490,655 $ 97,319 $361,643
Average Amount Outstanding During Year........ 821,755 1,868,485 111,894 212,676
Maximum Amount Outstanding at any month end... 1,351,672 2,100,987 172,290 361,643
Weighted Average Interest Rate During Year/1/. 5.07% 4.93% 4.81% 3.31%
Weighted Average Interest Rate End of Year.... 4.62% 5.37% 5.00% 5.46%
</TABLE>
- --------
/1/ Average rates for the year are computed by dividing actual interest expense
on borrowings by average daily borrowings.
Funds purchased generally mature on the day following the date of purchase.
Securities sold under agreements to repurchase are accounted for as
financing transactions and the obligations to repurchase these securities are
recorded as liabilities in the Consolidated Statements of Condition. The
securities underlying the agreements to repurchase continue to be reflected as
assets of the Company and are delivered to and held in collateral accounts with
third party trustees. At December 31, 2001, the weighted average contractual
maturity of these agreements was 109 days and consisted of transactions with
public (governmental) entities, primarily the State of Hawaii, $1.1 billion,
and local municipalities, $0.5 billion. A schedule of maturities of repurchase
agreements follows:
<TABLE>
<CAPTION>
2001
----------------------
(dollars in thousands)
<S> <C>
Overnight........ $ --
Less than 30 days 244,968
30 to 90 days.... 623,916
Over 90 days..... 774,560
----------
$1,643,444
==========
</TABLE>
Commercial paper is issued in various denominations generally maturing 90
days or less from date of issuance.
At December 31, 2001, other short-term borrowings consisted mainly of
Federal Home Loan Bank advances and Treasury Tax and Loan Balances. The Federal
Home Loan Bank advance totaling $20.0 million bears interest at rates from
6.42% to 6.63% and matures within one year. Treasury Tax and Loan Balances
represent tax payments collected on behalf of the U.S. Government, which are
callable at any time and bear market interest rates.
57
<PAGE>
A line of credit totaling $25,000,000 is maintained for working capital
purposes. At December 31, 2001 there was no amount drawn on this line. Fees
related to this line were $32,000 in 2001. This line of credit was discontinued
in January 2002.
Note H--Long-Term Debt
Amounts outstanding as of December 31, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>
2001 2000
-------- --------
(dollars in thousands)
<S> <C> <C>
8.25% Capital Securities............... $100,000 $100,000
Privately Placed Notes................. 91,286 90,000
Federal Home Loan Bank Advances........ 26,500 144,645
Subordinated Notes..................... 243,572 243,476
Foreign Debt........................... -- 36,946
Capitalized Lease Obligations.......... 8,377 7,820
Other Long-Term Debt................... -- 770
-------- --------
$469,735 $623,657
======== ========
</TABLE>
The $100 million 8.25% Capital Securities (the Securities) were issued in
1996 by Bancorp Hawaii Capital Trust I, a grantor trust wholly-owned by the
Company. The Securities bear a cumulative fixed interest rate of 8.25% and
mature on December 15, 2026. Interest payments are semi-annual. In addition,
the Company has entered into an expense agreement with the trust obligating the
Company to pay any costs, expenses or liabilities of the trust, other than
obligations of the trust to pay amounts due pursuant to the terms of the
Securities. The sole assets of the trust are Junior Subordinated Debt
Securities (the Debt) issued by the Company to the trust. The Debt is
redeemable prior to the stated maturity at the Company's option. The Securities
are subject to mandatory redemption upon repayment of the related Debt at their
stated maturity dates or their earlier redemption at a redemption price equal
to their liquidation amount plus accrued distributions to the date fixed for
redemption and the premium, if any, paid by the Company upon concurrent
repayment of the related Debt. The Company has issued guarantees for the
payment of distributions and payments on liquidation or redemption of the
Securities, but only to the extent of funds held by the trust. The guarantees
are junior subordinated obligations of the Company. Distributions to securities
holders may be deferred for up to five consecutive years. During any such
deferred period the Company's ability to pay dividends on its common shares
will be restricted. The Federal Reserve has announced that certain cumulative
preferred securities, having the characteristics of the Securities, qualify as
minority interest, which is included in Tier 1 capital for bank holding
companies.
Privately placed notes issued by the Company, including fair value
adjustments, totaled $91 million at December 31, 2001. These notes carry seven
year terms and bear floating interest rates of 10 to 25 basis points above the
three-month LIBOR rate, which was 1.88% at December 31, 2001. No new notes were
issued in 2001.
Federal Home Loan Bank (FHLB) advances bear interest at rates from 5.38% to
8.00% and mature from 2002 through 2006. Long-term FHLB advances that mature
within the next year were classified as current on the Consolidated Statements
of Condition. At December 31, 2001, loans totaling $496,520,000 and FHLB stock
totaling $101,884,000 were pledged to secure these advances.
Total subordinated notes issued by Bank of Hawaii include $118,891,000
issued in 1993 and $124,585,000 issued in 1999 under the Bank's $1 billion note
programs that mature in 2003 and 2009, respectively. These notes bear a fixed
interest rate of 6.875%.
Bank of Hawaii converted its existing revolving note program into a $1
billion revolving senior and subordinated note program. Under the terms of this
program Bank of Hawaii may issue additional notes provided that at any time the
aggregate amount outstanding does not exceed $1 billion.
58
<PAGE>
Capitalized lease obligations relate to office space at the headquarters of
the Company and Bank of Hawaii. The lease began in 1993 and has a 60 year term.
Lease payments are fixed at $7,000 per year through 2002, $605,000 per year
from 2003 to 2007, and $665,000 per year from 2008 to 2012 and are negotiable
thereafter.
As of December 31, 2001, principal payments on long-term debt are expected
to be:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2002............................................. $ --
2003............................................. 126,936
2004............................................. 6,000
2005............................................. 101,286
2006............................................. 2,500
Thereafter....................................... 233,013
--------
Total..................................... $469,735
========
</TABLE>
Note I--Shareholders' Equity
The Company's consolidated banking subsidiaries, Bank of Hawaii and First
Savings, are subject to federal regulatory restrictions that limit cash
dividends and loans to the Company. As of December 31, 2001, approximately
$564,234,000 of undistributed earnings of the Company's consolidated
subsidiaries are available for distribution to the Company without prior
regulatory approval.
In evaluating capital adequacy, federal regulators require bank holding
companies and insured depository institutions to maintain three capital ratios
at specific minimum levels. Tier 1 Capital (common shareholders' equity reduced
by certain intangibles and increased for qualifying preferred shares and
minority interests) expressed as a percentage of average risk weighted assets
is the Tier 1 Capital Ratio. Total Capital (Tier 1 capital plus qualifying
portions of the reserve for loan and lease losses) expressed as a percentage of
average risk weighted assets is the Total Capital Ratio. The third ratio is the
Leverage Ratio which is Tier 1 Capital divided by average assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 requires
federal banking regulators to take "prompt corrective action" with respect to
depository institutions that do not meet minimum capital requirements. For
purposes of applying the prompt corrective action framework, federal bank
regulators group institutions into five categories based on their capital
ratios: "well capitalized," "adequately capitalized," "under capitalized,"
"significantly undercapitalized" and "critically undercapitalized."
Institutions that fail to meet the applicable capital requirements are subject
to increased regulatory monitoring and certain other enforcement actions that
could include restricting dividend payments.
As of December 31, 2001, the Company, Bank of Hawaii, and First Savings were
all well capitalized under the regulatory provisions for prompt and corrective
action. There were no conditions or events since year-end that management
believes have changed the Company's or its subsidiaries' capital ratings.
59
<PAGE>
The table below sets forth the minimum required capital for well capitalized
institutions and the actual capital amounts and ratios for the Company and its
depository subsidiaries at December 31, 2001 and 2000:
<TABLE>
<CAPTION>
Well-Capitalized
Minimum Pacific Century Bank of Pacific Century First
Ratio Financial Corp Hawaii Bank, N.A. Savings
---------------- --------------- ---------- --------------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
At December 31, 2001
Shareholders' Equity......... $1,247,012 $1,086,247 N/A $46,759
Tier 1 Capital............... 1,297,369 1,040,575 N/A 46,759
Total Capital................ 1,528,793 1,271,514 N/A 47,947
Tier 1 Capital Ratio......... 6% 19.76% 15.96% N/A 50.34%
Total Capital Ratio.......... 10% 23.29% 19.51% N/A 51.62%
Leverage Ratio............... 5% 11.20% 9.16% N/A 27.91%
At December 31, 2000
Shareholders' Equity......... $1,301,356 $1,100,243 $162,758 $46,653
Tier 1 Capital............... 1,239,552 1,044,150 149,276 46,653
Total Capital................ 1,541,225 1,334,519 162,455 47,942
Tier 1 Capital Ratio......... 6% 11.78% 11.17% 14.22% 46.18%
Total Capital Ratio.......... 10% 14.64% 14.23% 15.48% 47.46%
Leverage Ratio............... 5% 9.10% 8.48% 12.54% 25.02%
</TABLE>
The following are the components of accumulated other comprehensive income
as of December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
2001 2000 1999
------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Foreign Currency Translation
Adjustment...................... $ 582 $(26,684) $(22,411)
Investment Securities Valuation... 22,968 2,235 (43,065)
Pension Liability Adjustment...... (789) (630) (630)
------- -------- --------
Accumulated Other Comprehensive
Income.......................... $22,761 $(25,079) $(66,106)
======= ======== ========
</TABLE>
For the years ended December 31, 2001, 2000 and 1999, the adjustment of
gains and losses on Investment Securities Available for Sale that were included
in net income and that have also been included in other comprehensive income as
unrealized holding gains in the period in which they arose were as follows:
<TABLE>
<CAPTION>
2001 2000 1999
-------- ------- --------
(dollars in thousands)
<S> <C> <C> <C>
Investment Securities Valuation Adjustment on Available for Sale
Securities........................................................... $ 42,106 $44,279 $(35,540)
Adjustment for Realized Amounts Included in Income..................... (21,373) 1,021 (9,263)
-------- ------- --------
Unrealized investment securities valuation adjustment included in other
accumulated comprehensive income..................................... $ 20,733 $45,300 $(44,803)
======== ======= ========
</TABLE>
The amount of income tax allocated to each component of comprehensive income
for the years ended December 31, 2001, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
2001 2000 1999
------- ------- --------
(dollars in thousands)
<S> <C> <C> <C>
Foreign Currency Translation Adjustment..... $14,682 $(2,301) $ 621
Investment Securities....................... 13,822 30,200 (29,869)
Pension Liability Adjustment................ (86) -- 10
</TABLE>
60
<PAGE>
Note J--International Operations
The following table provides selected financial data for the Company's
international operations for the years ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
2001 2000 1999
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
International
Average Assets...................... $2,039,686 $2,891,364 $3,413,003
Average Loans....................... 1,026,360 1,467,923 1,702,188
Average Deposits.................... 1,653,678 2,080,728 2,481,802
Operating Revenue................... 199,094 236,720 252,060
Income Before Taxes................. 16,646 7,302 6,486
Net Income (Loss)................... 3,805 (181) (1,374)
</TABLE>
Average assets include short-term interest-bearing deposits with foreign
branches of U.S. banks and large international banks. On average, these
deposits were $834,973,000, $354,391,000 and $577,257,000 during 2001, 2000 and
1999, respectively.
To measure international profitability, the Company maintains an internal
transfer pricing system that makes certain income and expense allocations,
including interest expense for the use of domestic funds. Interest rates used
in determining charges on advances of funds are based on prevailing deposit
rates. Overhead is allocated based on services rendered by administrative units
to profit centers.
As discussed in Note B, in 2001 the Company divested its South Pacific
banking operations and closed all branches in the Asia Division, except for a
representative office in Japan.
Note K--Contingent Liabilities
The Company is a defendant in various legal proceedings and, in addition,
there are various other contingent liabilities arising in the normal course of
business. After consultation with legal counsel, management does not anticipate
that the disposition of these proceedings and contingent liabilities will have
a material effect upon the Consolidated Financial Statements.
Note L--Employee Benefits
A deferred-compensation profit sharing plan (Profit Sharing Plan) is
provided for the benefit of all employees of the Company and its subsidiaries
who have met the Profit Sharing Plan's eligibility requirements. Contributions
to the Profit Sharing Plan are at the sole discretion of the Company's Board of
Directors. Participants in the Profit Sharing Plan receive up to 50% of their
annual allocation in cash. The remaining amounts are deferred and may be
invested in various options including mutual funds, a collective trust, and
common shares of the Company. The Company's contributions to the Profit Sharing
Plan totaled $3,687,000 in 2001, $4,569,000 in 2000, $6,849,000 in 1999. The
Profit Sharing Plan provides for a company match of $1.25 for each $1.00 in
401(k) contributions made by qualified employees up to a maximum of 2% of the
employee's compensation. For 2001, 2000 and 1999, matching contributions under
this plan totaled $2,945,000, $3,169,000 and $3,176,000, respectively.
The Company has a defined-contribution money purchase plan (Money Purchase
Plan) under which it contributes 4% of an employee's compensation for employees
meeting certain eligibility and vesting requirements. The Money Purchase Plan
has a one year eligibility requirement and a five year vesting period. For
2001, 2000 and 1999, the Company contributed $5,122,000, $5,553,000 and
$5,898,000, respectively, to the Money Purchase Plan.
The Company also has an Excess Profit Sharing Plan and an Excess Money
Purchase Plan, which cover certain employees for amounts exceeding the limits
under those plans.
61
<PAGE>
In 1995, the Company froze its non-contributory, qualified defined-benefit
retirement plan (Retirement Plan) and excess retirement plan (Excess Plan),
which covered employees of the Company and participating subsidiaries who met
certain eligibility requirements. The Company's funding policy is to contribute
annually an amount that falls within the minimum and maximum range deductible
for income tax purposes. Beginning December 31, 2000, the Retirement Plan no
longer provides for compensation increases in the determination of benefits.
Retirement Plan assets are managed by investment advisors in accordance with
investment policies established by the plan trustees.
Retirement Plan investments primarily consist of marketable securities
including stocks, U.S. Government agency securities, a money market fund,
mutual funds, and a collective investment fund. The assets of the Retirement
Plan include securities of related parties (Pacific Capital Funds, a Pacific
Century Trust collective investment fund, and a Pacific Century Trust money
market fund). Pacific Century Trust is a division of Bank of Hawaii and either
manages or advises the Pacific Capital Funds and the Pacific Century Trust
collective investment fund and money market fund. The fair value of securities
of related parties as of December 31, 2001 was $22,600,000.
The Excess Plan is a non-qualified excess retirement benefit plan which
covers certain employees of the Company and participating subsidiaries. The
unfunded Excess Plan recognizes the liability to participants for amounts
exceeding the limits allowed under the Retirement Plan.
For the Excess Plan, the accumulated benefit obligation exceeded the plan
assets. Each of the projected benefit obligation, accumulated benefit
obligation and accrued benefit liability were $5.2 million as of December 31,
2001 and $8.1 million as of December 31, 2000. Because the Excess Plan is
unfunded, it has no plan assets.
The Company's Postretirement Benefit Plans provide retirees with group life,
dental and medical insurance coverage. The cost of providing postretirement
benefits are "shared costs" where both the employer and former employees pay a
portion of the premium. Most employees of the Company and its subsidiaries who
have met the eligibility requirements are covered by this plan. Beginning in
1993, the Company recognizes the transition obligation over 20 years. The
Company has no segregated assets to provide postretirement benefits.
62
<PAGE>
The following table sets forth the change in benefit obligation, change in
fair value of plan assets, funded status, and net amount recognized in the
Consolidated Statements of Condition for the aggregated pension plans
(Retirement Plan and Excess Plan) and Postretirement Benefit Plans for the
years ended December 31, 2001 and 2000.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
----------------- ----------------------
2001 2000 2001 2000
------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit Obligation at Beginning of Year....................... $54,987 $ 84,771 $ 25,214 $ 24,105
Service Cost.................................................. -- -- 868 932
Interest Cost................................................. 3,886 5,142 1,768 1,716
Amendments.................................................... -- -- (517) --
Obligation Settled............................................ (3,483) (35,070) -- --
Obligation Curtailed.......................................... -- -- (768) --
Actuarial (Gain) Loss......................................... 591 3,969 138 (597)
Employer Benefits Paid/1/..................................... (1,529) (3,825) (1,009) (942)
------- -------- -------- --------
Benefit Obligation at End of Year............................. $54,452 $ 54,987 $ 25,694 $ 25,214
======= ======== ======== ========
Change in Fair Value of Plan Assets
Fair Value of Plan Assets at Beginning of Year................ $60,418 $ 96,849 $ -- $ --
Actual Return on Plan Assets.................................. (3,935) 2,966 -- --
Employer Contribution......................................... 4,358 481 1,009 942
Employer Benefits Paid........................................ (1,529) (3,825) (1,009) (942)
Settlement Benefits Paid...................................... (3,925) -- -- --
Annuity Purchased............................................. -- (36,053) -- --
------- -------- -------- --------
Fair Value of Plan Assets at End of Year...................... $55,387 $ 60,418 $ -- $ --
======= ======== ======== ========
Funded Status................................................. $ 935 $ 5,431 $(25,694) $(25,214)
Unrecognized Net Actuarial Gain/(Loss)........................ 7,277 (2,088) (11,977) (12,432)
Unrecognized Transition (Asset) Obligation.................... -- -- 7,188 8,358
------- -------- -------- --------
Net Amount Prepaid (Accrued).................................. $ 8,212 $ 3,343 $(30,483) $(29,288)
======= ======== ======== ========
Amounts Recognized in the Consolidated Statements of Financial
Condition Consist of:
Prepaid Benefit Cost....................................... $12,152 $ 10,439 $ -- $ --
Accrued Benefit Liability.................................. (5,159) (8,066) (30,483) (29,288)
Accumulated Other Comprehensive Income..................... 1,219 970 -- --
------- -------- -------- --------
Net Amount Prepaid (Accrued).................................. $ 8,212 $ 3,343 $(30,483) $(29,288)
======= ======== ======== ========
</TABLE>
- --------
/1/ Participants' contributions relative to the Postretirement Benefits Plan
are offset against employer benefits paid in the above table. For the
years ended December 31, 2001 and 2000, participants' contributions for
postretirement benefits totaled $698,000 and $896,000, respectively. There
were no participants' contributions in the pension plans.
63
<PAGE>
Components of net periodic benefit cost for the aggregated pension plans and
the Postretirement Benefit Plans are presented in the following table for the
years ended December 31, 2001, 2000 and 1999.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------- ----------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of Net Periodic (Benefit) Cost:
Service Cost........................... $ -- $ -- $ -- $ 868 $ 932 $1,059
Interest Cost.......................... 3,886 5,142 6,305 1,768 1,716 1,709
Expected Return on Plan Assets......... (5,440) (7,157) (7,425) -- -- --
Amortization of Unrecognized Net
Transition (Asset) Obligation........ -- -- (315) 653 696 696
Recognized Net Actuarial (Gain)
Loss................................. 143 (724) 125 (317) (616) (399)
------- ------- ------- ------ ------ ------
Net Periodic (Benefit) Cost............ $(1,411) $(2,739) $(1,310) $2,972 $2,728 $3,065
======= ======= ======= ====== ====== ======
</TABLE>
Assumptions used for the aggregated pension plans and Postretirement Benefit
Plans at December 31, 2001, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
---------------- ----------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Assumptions as of December 31:
Discount Rate............................... 7.50% 7.50% 7.75% 7.50% 7.50% 7.75%
Expected Return on Plan Assets.............. 9.00% 9.00% 9.00% -- -- --
Rate of Compensation Increase............... -- 5.00% 5.00% -- -- --
</TABLE>
The medical cost trend rate for employees under the age of 65 was revised at
December 31, 1998 to 8.0% for 1999 and leveling thereafter to 6.0%. The medical
cost trend rate for employees over the age of 65 and the dental cost trend rate
were both revised at December 31, 1998 to a flat rate of 6.0% per year. A one
percent change in this assumption (with all other assumptions remaining
constant) would impact the service and interest cost components of the net
periodic postretirement benefit cost and the postretirement benefit obligation
for 2001 as follows:
<TABLE>
<CAPTION>
One One
Percent Percent
Increase Decrease
-------- --------
(dollars in thousands)
<S> <C> <C>
Effect on the total of service and interest cost components..... $ 242 $ (196)
Effect on postretirement benefit obligation..................... $1,663 $(1,363)
</TABLE>
Note M--Stock Compensation
The Company Stock Option Plans (the Plans) are administered by the
Compensation Committee of the Board of Directors. The Plans provide
participants with the option to purchase shares of common stock at a specified
exercise price and dates not less than one year after the date the option was
granted and expiring ten years from the date of grant. The exercise price is
the fair market value of the shares on the date the option was granted. The
Plans also provide certain participants with stock options in tandem with stock
appreciation rights (SAR). A SAR entitles an optionee, in lieu of exercising
the stock option, to receive cash equal to the excess of the market value of
the shares as of the exercise date over the option price. The expense for the
SARs recognized in the Consolidated Statements of Income was zero in 2001 and
2000 and $370,000 in 1999.
The Company has a Director Stock Option Plan that grants restricted common
shares to directors and requires directors to retain shares exercised
throughout the service period as a director. The plan automatically grants
annually an option for 3,000 shares and a restricted stock grant for 200 shares
to each director of the Company. The exercise price is based on the closing
market price of the shares on the date that the option was granted.
64
<PAGE>
Each option expires on the tenth anniversary date of its grant and is
generally not transferable. If an optionee ceases to serve as a director for
any reason other than death, the option immediately terminates and any
restricted shares that were previously acquired are subject to redemption at a
price equal to the market value of the shares at the time of grant. As of
December 31, 2001, 121,000 options were outstanding under this plan.
The following information relates to options outstanding for all the Plans
as of December 31, 2001:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted Average
Number of Remaining Number of
Range of Shares Weighted Average Contractual Life Shares Weighted Average
Exercise Prices Outstanding Exercise Price (in years) Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$10.87-$12.88 87,434 $12.86 3.0 87,434 $12.86
13.56-16.01 3,636,458 13.77 7.8 2,161,792 13.90
16.19-18.38 1,841,617 17.69 5.3 1,841,617 17.69
18.80-21.16 1,833,304 19.84 7.8 599,304 21.00
21.56-23.94 119,500 22.26 6.1 113,000 22.20
24.50-26.81 1,015,414 25.52 7.1 533,664 25.91
--------- ---------
Total 8,533,727 17.43 7.1 5,336,811 17.37
========= =========
</TABLE>
The following table presents the activity of Stock Option Plans for the
years ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
2001 2000 1999
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1............... 7,981,150 $16.66 5,079,388 $18.65 4,787,562 $17.99
Granted................................ 1,791,250 20.95 3,487,650 13.65 1,014,000 18.69
Exercised/1/........................... (990,520) 17.00 (245,506) 12.81 (553,676) 12.44
Forfeited.............................. (102,825) 15.46 (74,300) 18.28 (115,000) 18.79
Expired................................ (145,328) 23.36 (266,082) 21.24 (53,498) 24.33
--------- --------- ---------
Outstanding at December 31............. 8,533,727 $17.43 7,981,150 $16.66 5,079,388 $18.65
========= ========= =========
Options Exercisable at December 31..... 5,336,811 4,794,250 4,105,388
Shares Available for Future Grants..... 5,170,277 1,718,480 974,144
</TABLE>
- --------
/1/ The price per share of options exercised on an actual exercise price basis
ranged between $12.88 and $26.06 for 2001, $10.87 and $26.06 for 2000, and
$7.24 and $21.13 for 1999.
65
<PAGE>
The following table presents for the years ended December 31, 2001, 2000 and
1999 the pro forma disclosures of the impact that option grants would have had
on net income and earnings per share had the grants been measured using the
fair value of accounting prescribed by SFAS No. 123:
<TABLE>
<CAPTION>
2001 2000 1999
-------- -------- --------
(dollars in thousands except
per share and option data)
<S> <C> <C> <C>
Pro Forma Data/1/
- -----------------
Net Income....................................... $113,498 $109,336 $130,749
Basic Earnings Per Share......................... $ 1.44 $ 1.37 $ 1.63
Diluted Earnings Per Share....................... $ 1.41 $ 1.37 $ 1.61
Weighted Average Fair Value of Options Granted
During the Year................................ $ 5.76 $ 3.76 $ 5.37
Assumptions......................................
Average Risk Free Interest Rate............... 4.90% 5.81% 5.96%
Average Expected Volatility................... 31.25% 29.36% 31.47%
Expected Dividend Yield....................... 3.21% 3.28% 3.18%
Expected Life................................. 6 years 6 years 5 years
</TABLE>
- --------
/1/ The Black-Scholes option pricing model was used to develop the fair values
of the grants.
During 2001 the Company granted restricted stock of 778,300 shares with a
weighted average fair market value of $21.76 per share. The shares vest over
periods from three to five years from issuance, although accelerated vesting is
provided in certain instances. Shares are cancelled if an employee terminates
prior to the vesting date. During 2001, 50,500 shares were cancelled.
At the time of grant all shares were considered outstanding. The Company is
recognizing compensation expense, measured as the quoted market price of the
stock on the grant date, straight-line over the vesting period. The unearned
compensation is shown as a separate component of stockholders' equity.
Dividends are paid on the restricted stock.
Total compensation expense recognized by the Company for restricted stock in
2001 was $2,743,000.
Note N--Income Taxes
The significant components of the provision for income taxes for the years
ended December 31, 2001, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2001 2000 1999
-------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Current:
Federal........................ $ 86,593 $22,495 $38,340
State.......................... 25,155 7,469 11,970
Foreign........................ 13,193 19,353 19,124
-------- ------- -------
124,941 49,317 69,434
-------- ------- -------
Deferred:
Federal........................ (10,959) 16,864 19,386
State.......................... 3,889 3,390 2,817
Foreign........................ 4,293 (3,242) 1,092
-------- ------- -------
(2,777) 17,012 23,295
-------- ------- -------
Provision for Income Taxes........ $122,164 $66,329 $92,729
======== ======= =======
</TABLE>
66
<PAGE>
The current income tax provision included taxes on gains and losses on the
sale of securities of $13,242,000, $(580,000) and $5,776,000 for 2001, 2000 and
1999, respectively. Deferred income taxes reflected the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 2001 and 2000 reclassified based on the tax returns as filed,
were as follows:
<TABLE>
<CAPTION>
2001 2000
-------- --------
(dollars in thousands)
<S> <C> <C>
Deferred Tax Liabilities:
Lease Transactions........................ $209,112 $208,181
Deferred Investment Tax Credits........... -- 2,224
Accelerated Depreciation.................. (2,799) 154
Accrued Pension Cost...................... 4,753 3,928
Net Unrealized Gains on Investment
Securities Available for Sale........... 15,120 1,492
Other..................................... 3,816 4,881
-------- --------
Total Deferred Tax Liabilities............... 230,002 220,860
-------- --------
Deferred Tax Assets:
Reserve for Loan and Lease Losses......... 57,075 87,226
Net Operating Loss Carry Forwards......... -- 4,293
Postretirement Benefits................... 12,682 12,076
Other..................................... 22,766 1,208
Foreign Tax Credit Carry Forwards......... 5,356 5,356
-------- --------
Total Deferred Tax Assets............. 97,879 110,159
-------- --------
Net Deferred Tax Liabilities................. $132,123 $110,701
======== ========
</TABLE>
For financial statement purposes, the Company had deferred investment tax
credits for property purchased for lease to customers of zero, $2,224,000, and
$2,646,000 at December 31, 2001, 2000, and 1999, respectively. In 2001, 2000
and 1999, investment tax credits included in the computation of the provision
for income taxes were $2,224,000, $422,000 and $331,000, respectively. The
Company has foreign tax credit carry forwards of approximately $5,400,000 at
December 31, 2001, which may be used to offset future federal income tax
expense. The foreign tax credit carry forwards will expire at the end of 2005.
Management expects to generate sufficient foreign source income to utilize the
foreign tax credit carry forwards.
The following is a reconciliation of the Federal statutory income tax rate
to the effective consolidated income tax rate for the years ended December 31,
2001, 2000 and 1999:
<TABLE>
<CAPTION>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Statutory Federal Income Tax Rate......................................... 35.0% 35.0% 35.0%
Increase (Decrease) in Tax Rate Resulting From:
State Taxes, Net of Federal Income Tax and Foreign Tax Adjustments..... 8.1 3.9 4.4
Tax-Exempt Interest Income............................................. (0.2) (0.3) (0.3)
Intangibles, primarily Goodwill........................................ 13.6 2.0 1.6
Low Income Housing and Investment Tax Credits.......................... (4.1) (5.6) (4.7)
Other/1/............................................................... (1.5) 1.9 5.1
---- ---- ----
Effective Tax Rate........................................................ 50.9% 36.9% 41.1%
==== ==== ====
</TABLE>
- --------
/1/ For 1999, income taxes associated with the sale of a special purpose
leasing subsidiary increased the effective tax rate by 3.5%.
67
<PAGE>
For financial statement purposes, no deferred income tax liability was
recorded for tax bad debt reserves that arose in tax years beginning before
December 31, 1987. Such tax bad debt reserves totaled approximately $18.2
million for which no provision for federal income taxes was provided. If these
amounts are used for purposes other than to absorb bad debt losses, they will
be subject to federal income taxes at the then applicable rates.
Note O--Derivative and Financial Instruments
The Company is a party to derivative financial instruments in the normal
course of its business to meet the financing needs of its customers and to
manage its own exposure to fluctuations in interest and foreign exchange rates.
These financial instruments include commitments to extend credit, standby
letters of credit, foreign exchange contracts, interest rate swaps, mortgage
banking loan commitments and interest rate options.
As with any financial instrument, derivative instruments have inherent
risks. Adverse changes in interest rate, foreign exchange rates, commodity
prices and equity prices affect the Company's market risks. The market risks
are balanced with the expected returns to enhance earnings performance and
shareholder value, while limiting the volatility of each. The Company uses
various processes to monitor the overall market risk exposure, including
sensitivity analysis, value-at-risk valuations and other methodologies.
The Company's exposure to derivative credit risk is defined as the
possibility of sustaining a loss due to the failure of the counterparty to
perform in accordance with the terms of the contract. Credit risks associated
with derivative financial instruments are similar to those relating to
traditional on-balance sheet financial instruments. The Company manages
derivative credit risk with the same standards and procedures applied to its
commercial lending activity.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of the terms or conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since commitments may expire without being
drawn, the total commitment amount does not necessarily represent future cash
requirements. The Company evaluates each customer's credit worthiness on an
individual basis. The amount of collateral obtained is based on management's
credit evaluation of the customer. The type of collateral varies, but may
include cash, accounts receivable, inventory, and property, plant and
equipment. The amount of commitments outstanding is disclosed in Note P.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. These guarantees
are primarily issued to support borrowing agreements. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company holds cash and deposits as
collateral on those commitments for which collateral is deemed necessary. The
amount of committed standby letters of credit is disclosed in Note P.
The Company's primary market risks are foreign exchange and interest rate
risk. While the Company utilizes foreign exchange contracts to offset risk
related to an asset or liability that is accounted for at fair value in the
financial statements it has not designated any foreign exchange contracts as
fair value hedges under SFAS No. 133 for operational purposes. Management has
also not used a significant amount of derivative instruments to protect against
the risk of interest rate movements on the value of certain assets and
liabilities or on future cash flows of the Company and instead has tried to
manage interest rate risk with other assets or liabilities.
From time to time the Company has utilized interest rate-swaps in managing
its exposure to interest rate risk. These financial instruments require the
exchange of fixed and floating rate interest payments based on the notional
amount of the contract for a specified period. In prior years, the Company used
interest rate swap agreements to effectively convert portions of its floating
rate loan portfolio to fixed rate. At December 31, 2001 and 2000, no swaps were
in effect.
68
<PAGE>
Interest rate options, which primarily consist of caps and floors, are
interest rate protection instruments that involve the obligation of the seller
to pay the buyer an interest rate differential in exchange for a premium paid
by the buyer. This differential represents the difference between current
interest rates and an agreed upon rate applied to a notional amount. Exposure
to loss on these options will increase or decrease over their respective lives
as interest rates fluctuate. The Company may transact interest rate options on
behalf of its customers. However, at December 31, 2001 and 2000, no interest
rate options were in effect.
As discussed in Note A, on January 1, 2001 the Company adopted SFAS No. 133,
as amended, which requires all derivative instruments to be carried at fair
value on the Consolidated Statements of Condition and established new hedge
accounting principles. As of December 31, 2001, the Company did not designate
any derivative instruments as fair value, cash flows or net investment in
foreign operations hedges and all free standing and embedded derivatives
required to be bifurcated have been recorded at fair value in the results of
operations.
The derivatives identified and recorded at fair value as of December 31,
2001 were as follows:
The total notional value of foreign exchange contracts outstanding
was $238.5 million and had a net fair value of $0.7 million.
An embedded extended term option with a fixed interest rate on a
commercial note for $40.0 million issued by the Company to a third party
was bifurcated and the resulting fair value of the option was recorded
as an addition to long term debt and a $1.3 million loss was recognized.
The fair market value of the options was ($1.3 million).
In the mortgage banking operations, the Company had a notional net
loan sale commitment of $20.0 million with a fair market value of
$(136,000). In addition, the Company had commitments to close mortgage
loans at specific interest rates. The notional amount of these loan
commitments was $145.5 million with a fair value of ($2.0 million).
Note P--Fair Values of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced liquidation sale. When possible, fair values are
measured based on quoted market prices for the same or comparable instruments.
Because many of the Company's financial instruments lack an available market
price, management must use its best judgment in estimating the fair value of
those instruments based on present value or other valuation techniques. Such
techniques are significantly affected by estimates and assumptions, including
the discount rate, future cash flows, economic conditions, risk
characteristics, and other relevant factors. These estimates are subjective in
nature and involve uncertain assumptions and, therefore, cannot be determined
with precision. Many of the derived fair value estimates cannot be
substantiated by comparison to independent markets and could not be realized in
immediate settlement of the instrument. Certain financial instruments and all
non-financial instruments are excluded from disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheet for cash and short-term investments approximated the fair value of
these assets.
Investment Securities Held to Maturity, Investment Securities Available
for Sale and Trading Securities: Fair values for investment securities were
based on quoted market prices, where available. If quoted market prices were
not available, fair values were based on quoted market prices of comparable
instruments.
69
<PAGE>
Loans: Fair values of loans were determined by discounting the expected
future cash flows of pools of loans with similar characteristics. Loans were
first segregated by type such as commercial, real estate, consumer, and
foreign and were then further segmented into fixed and adjustable rate and
loan quality categories. Expected future cash flows were projected based on
contractual cash flows, adjusted for estimated prepayments.
Deposit Liabilities: Fair values of non-interest bearing and interest
bearing demand deposits and savings deposits were equal to the amount
payable on demand (e.g., their carrying amounts) because these products have
no stated maturity. Fair values of time deposits were estimated using
discounted cash flow analyses. The discount rates used were based on rates
currently offered for deposits with similar remaining maturities.
Short-Term Borrowings: The carrying amounts of securities sold under
agreements to repurchase, funds purchased, commercial paper, and other
short-term borrowings approximated their fair values.
Long-Term Debt: Fair values of long-term debt were estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowings.
Derivative and Financial Instruments: Fair values of derivative
instruments (e.g., commitments to extend credit, standby letters of credit,
commercial letters of credit, foreign exchange and swap contracts, and
interest rate swap agreements) were based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing, current settlement
values or quoted market prices of comparable instruments.
70
<PAGE>
The following table presents the fair values of the Company's financial
instruments at December 31, 2001 and 2000:
<TABLE>
<CAPTION>
2001 2000
------------------------- -------------------------
Book or Book or
Notional Value Fair Value Notional Value Fair Value
-------------- ---------- -------------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Financial Instruments--Assets
Loans/1/..................................... $5,453,500 $5,601,100 $8,591,300 $8,968,100
Investment Securities/2/..................... 2,482,700 2,541,400 3,177,100 3,183,700
Other Financial Assets/3/.................... 1,060,600 1,060,600 327,100 327,100
Financial Instruments--Liabilities
Deposits..................................... 6,173,200 6,185,500 9,101,600 9,101,800
Short-Term Borrowings/4/..................... 2,064,500 2,064,500 2,279,900 2,279,900
Long-Term Debt/5/............................ 572,600 592,700 997,200 1,048,000
Financial Instruments--Off-Balance Sheet
Financial Instruments Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend Credit............. 2,088,748 5,600 3,347,600 8,900
Standby Letters of Credit................ 75,300 35 290,700 1,500
Commercial Letters of Credit............. 23,800 20 125,900 300
Financial Instruments Whose Notional or
Contract Amounts Exceed the Amount of
Credit Risk:
Foreign Exchange and Swap Contracts...... 238,500 5,100 1,087,400 24,400
</TABLE>
- --------
/1/ Includes loans and loans held for sale, net of unearned income and
allowance for loan losses, and excludes net leases.
/2/ Includes held to maturity, available for sale securities, and FRB and FHLB
stock.
/3/ Includes interest-bearing deposits, funds sold and trading securities.
/4/ Includes securities sold under agreements to repurchase, funds purchased
and short-term borrowings.
/5/ Excludes capitalized lease obligations.
Note Q--Business Segments
Business segment results are determined based on the Company's internal
financial management reporting process and organizational structure. This
process uses various techniques to assign balance sheet and income statement
amounts to business segments, including allocations of overhead, credit loss
provision, and capital. This process is dynamic and requires certain
allocations based on judgment and subjective factors. Unlike financial
accounting, there is no comprehensive, authoritative guidance for management
accounting that is equivalent to generally accepted accounting principles. The
management accounting process measures the performance of the operating
segments based on the management structure of the Company and is not
necessarily comparable with similar information for any other financial
institution.
The new organizational structure announced in April 2001 changed the lines
of business that were used to analyze financial performance. Results for prior
periods have been reclassified to facilitate comparability of the business
segment results.
Because business segment financial reports are prepared using accounting
practices that differ from accounting principles generally accepted in the
United States, certain amounts reflected therein do not agree with
corresponding amounts in the Consolidated Financial Statements.
71
<PAGE>
The Company's business segments are as follows:
Retail Banking
The Company's Retail Banking franchise and market share in Hawaii and
American Samoa are key strengths of the Company. Retail Banking provides
checking and savings products for the consumer and small business segments,
merchant services, installment, home equity and mortgage lending products, as
well as other products and services.
Commercial Banking
The Commercial Banking segment offers corporate banking, commercial
products, leasing, commercial real estate lending and auto finance. The
Company's West Pacific operations are included in this segment.
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 generally based on the market values of assets under management.
Treasury and Other Corporate
The primary component of this segment is the Treasury function, 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 managing interest rate and foreign currency
risks. Additionally, the net residual effect of transfer pricing of assets and
liabilities is included in Treasury, along with other minor unallocated
amounts. Eliminations of intercompany transactions are also reflected in this
segment.
Divestitures and Corporate Restructuring Related Activities
This information reflected the 2001 implementation of the Company's
strategic plan to improve credit quality and to divest underperforming
businesses. It includes the impact of the sales of the divested businesses and
restructuring and other related costs of the Company. It also includes losses
associated with the accelerated resolution of credit problems undertaken in the
first quarter of 2001.
72
<PAGE>
The financial results for each of the Company's business segments for the
years ended December 31, 2001, 2000, and 1999 were as follows:
Business Segment Selected Financial Information
<TABLE>
<CAPTION>
Corporate
Financial Treasury Restructuring
Services and Other Divestiture Related Consolidated
Retail Commercial Group Corporate Businesses Activities Total
---------- ---------- --------- ---------- ----------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 2001
Net Interest Income.................... $ 164,512 $ 159,861 $ 9,798 $ 30,637 $ 97,314 $ (2,444) $ 459,678
Provision for Loan and Lease Losses.... (8,902) (28,748) -- -- 27 (36,716) (74,339)
---------- ---------- -------- ---------- ---------- -------- -----------
Net Interest Income after Provision.... 155,610 131,113 9,798 30,637 97,341 (39,160) 385,339
Gain on Sales of Banking Operations Net
of Venture Investment Losses.......... -- -- -- -- -- 173,426 173,426
Other Non-Interest Income.............. 80,586 26,852 83,249 17,297 35,316 35,893 279,193
---------- ---------- -------- ---------- ---------- -------- -----------
236,196 157,965 93,047 47,934 132,657 170,159 837,958
Restructuring & Other Related Costs.... -- -- -- -- -- 104,794 104,794
Non-Interest Expense................... 185,661 93,129 79,103 17,025 118,287 -- 493,205
---------- ---------- -------- ---------- ---------- -------- -----------
Net Income Before Income Taxes......... 50,535 64,836 13,944 30,909 14,370 65,365 239,959
Income Taxes........................... (21,224) (26,548) (5,857) (3,616) (4,533) (60,386) (122,164)
---------- ---------- -------- ---------- ---------- -------- -----------
Net Income............................. $ 29,311 $ 38,288 $ 8,087 $ 27,293 $ 9,837 $ 4,979 $ 117,795
========== ========== ======== ========== ========== ======== ===========
Total Assets at December 31, 2001...... $3,541,699 $2,851,629 $219,928 $3,429,998 $ 584,543 $ -- $10,627,797
========== ========== ======== ========== ========== ======== ===========
Year Ended December 31, 2000
Net Interest Income.................... $ 156,075 $ 196,227 $ 6,338 $ 14,526 $ 157,984 $ -- $ 531,150
Provision for Loan and Lease Losses.... (8,182) (88,541) (153) -- (45,977) -- (142,853)
---------- ---------- -------- ---------- ---------- -------- -----------
Net Interest Income after Provision.... 147,893 107,686 6,185 14,526 112,007 -- 388,297
Other Non-Interest Income.............. 87,377 31,714 85,790 30,790 49,241 -- 284,912
---------- ---------- -------- ---------- ---------- -------- -----------
235,270 139,400 91,975 45,316 161,248 -- 673,209
Non-Interest Expense................... 164,841 90,450 68,191 28,352 141,385 -- 493,219
---------- ---------- -------- ---------- ---------- -------- -----------
Net Income Before Income Taxes......... 70,429 48,950 23,784 16,964 19,863 -- 179,990
Income Taxes........................... (29,580) (19,130) (9,989) 1,580 (9,210) -- (66,329)
---------- ---------- -------- ---------- ---------- -------- -----------
Net Income............................. $ 40,849 $ 29,820 $ 13,795 $ 18,544 $ 10,653 $ -- $ 113,661
========== ========== ======== ========== ========== ======== ===========
Total Assets at December 31, 2000...... $3,171,529 $4,481,370 $161,746 $2,439,547 $3,759,624 $ -- $14,013,816
========== ========== ======== ========== ========== ======== ===========
Year Ended December 31, 1999
Net Interest Income.................... $ 163,975 $ 152,331 $ 7,841 $ 20,634 $ 206,822 $ -- $ 551,603
Provision for Loan and Lease Losses.... (10,423) (12,650) -- -- (37,842) -- (60,915)
---------- ---------- -------- ---------- ---------- -------- -----------
Net Interest Income after Provision.... 153,552 139,681 7,841 20,634 168,980 -- 490,688
Other Non-Interest Income.............. 83,711 37,454 79,525 23,803 61,022 -- 285,515
---------- ---------- -------- ---------- ---------- -------- -----------
237,263 177,135 87,366 44,437 230,002 -- 776,203
Non-Interest Expense................... 172,622 80,061 73,902 56,210 167,722 -- 550,517
---------- ---------- -------- ---------- ---------- -------- -----------
Net Income Before Income Taxes......... 64,641 97,074 13,464 (11,773) 62,280 -- 225,686
Income Taxes........................... (27,149) (40,771) (5,655) 7,004 (26,158) -- (92,729)
---------- ---------- -------- ---------- ---------- -------- -----------
Net Income............................. $ 37,492 $ 56,303 $ 7,809 $ (4,769) $ 36,122 $ -- $ 132,957
========== ========== ======== ========== ========== ======== ===========
Total Assets at December 31, 1999...... $3,010,398 $4,702,561 $162,733 $2,533,904 $4,030,719 $ -- $14,440,315
========== ========== ======== ========== ========== ======== ===========
</TABLE>
73
<PAGE>
Note R--Parent Company Financial Statements
Condensed financial statements of Pacific Century Financial Corporation
(Parent only) follow:
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
2001 2000 1999
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Dividends From
Bank Subsidiaries......................................... $304,295 $ 83,946 $ 80,545
Other Subsidiaries........................................ 2,423 7,176 1,500
Interest Income
From Subsidiaries......................................... 9,048 11,794 9,130
From Others............................................... -- -- 35
Loss on Sale of Banking Operations........................... (68,137) -- --
Other Income................................................. 195 776 4,695
Securities Gains (Losses).................................... (464) (509) 7,009
-------- -------- --------
Total Income.......................................... 247,360 103,183 102,914
Interest Expense............................................. 17,672 21,506 18,845
Other Expense................................................ 35,641 9,107 10,780
-------- -------- --------
Total Expense......................................... 53,313 30,613 29,625
-------- -------- --------
Income Before Income Taxes and Equity in Undistributed Income
of Subsidiaries............................................ 194,047 72,570 73,289
Income Tax Benefits.......................................... 9,614 5,032 1,192
-------- -------- --------
Income Before Equity in Undistributed Income of Subsidiaries. 203,661 77,602 74,481
Equity in Undistributed Income of Subsidiaries
Bank Subsidiaries......................................... (85,676) 40,038 53,460
Other Subsidiaries........................................ (190) (3,979) 5,016
-------- -------- --------
(85,866) 36,059 58,476
-------- -------- --------
Net Income................................................... $117,795 $113,661 $132,957
======== ======== ========
</TABLE>
74
<PAGE>
Condensed Statements of Condition
<TABLE>
<CAPTION>
December 31
----------------------
2001 2000
---------- ----------
(dollars in thousands)
<S> <C> <C>
Assets
Cash with Bank of Hawaii........................... $ 301 $ 280
Investment Securities Available for Sale........... -- 31
Equity in Net Assets of Bank Subsidiaries.......... 1,086,247 1,262,946
Equity in Net Assets of Other Subsidiaries......... 54,430 54,843
Interest-Bearing Deposits with Bank of Hawaii...... 392,100 234,100
Trading Securities................................. 3,759 3,845
Other Assets....................................... 16,017 106,006
---------- ----------
Total Assets................................... $1,552,854 $1,662,051
========== ==========
Liabilities and Shareholders' Equity
Commercial Paper and Short-Term Borrowings......... $ 104,127 $ 154,664
Long-Term Debt..................................... 194,379 193,093
Other Liabilities.................................. 7,336 12,938
Shareholders' Equity............................... 1,247,012 1,301,356
---------- ----------
Total Liabilities and Shareholders' Equity..... $1,552,854 $1,662,051
========== ==========
</TABLE>
75
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
2001 2000 1999
--------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Operating Activities
Net Income..................................................... $ 117,795 $113,661 $132,957
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Amortization Expense....................................... 90,321 7,960 7,890
Realized Investment Securities (Gains) Losses.............. (7,364) 116 (6,635)
Undistributed Income from Subsidiaries..................... 85,867 (36,059) (56,226)
Net Decrease (Increase) in Trading Securities.............. 84 (439) (1,097)
Other Assets and Liabilities, Net.......................... 5,640 (1,276) 362
--------- -------- --------
Net Cash Provided by Operating Activities............... 292,343 83,963 77,251
Investing Activities
Investment Securities Transactions, Net........................ 7,114 104 6,721
Loan Transactions, Net......................................... -- -- 782
Return of Capital, Net of contribution to Subsidiaries......... 140,000 -- (9,015)
Advances Made to Subsidiaries, Net............................. -- 266 (266)
--------- -------- --------
Net Cash Provided (Used) by Investing Activities........ 147,114 370 (1,778)
Financing Activities
Net Proceeds (Payments) of Borrowings.......................... (49,251) 57,345 (29,992)
Proceeds from Sale of Stock.................................... 19,854 7,801 13,898
Stock Repurchased.............................................. (195,472) (16,992) (21,849)
Cash Dividends Paid............................................ (56,567) (56,471) (54,640)
--------- -------- --------
Net Cash Used by Financing Activities................... (281,436) (8,317) (92,583)
--------- -------- --------
Increase (Decrease) in Cash....................................... 158,021 76,016 (17,110)
Cash and Cash Equivalents at Beginning of Year.................... 234,380 158,364 175,474
--------- -------- --------
Cash and Cash Equivalents at End of Year.......................... $ 392,401 $234,380 $158,364
========= ======== ========
</TABLE>
76
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
The following information required by the Instructions to Form 10-K is
incorporated herein by reference (except as otherwise indicated below) from
various pages of the Pacific Century Financial Corporation Proxy Statement for
the annual meeting of shareholders to be held on April 26, 2002, as summarized
below:
Item 10. Directors and Executive Officers of the Registrant
Board of Directors on pages 5-6 Section 16(a) Beneficial Ownership Reporting
Compliance on page 22.
For information relative to executive officers of the Registrant, see
"Executive Officers of the Registrant" at the end of Part I of this report.
Item 11. Executive Compensation
Executive Compensation on pages 17-21.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership on pages 7-8.
Item 13. Certain Relationships and Related Transactions
Certain Transactions with Management and Others on page 22.
77
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules
The following Consolidated Financial Statements of Pacific Century Financial
Corporation and subsidiaries are included in Item 8 of this report:
Consolidated Statements of Income--Years ended December 31, 2001, 2000, and
1999
Consolidated Statements of Condition--December 31, 2001 and 2000
Consolidated Statements of Shareholders' Equity--Years ended December 31,
2001, 2000, and 1999
Consolidated Statements of Cash Flows--Years ended December 31, 2001, 2000,
and 1999
Notes to Consolidated Financial Statements
All other schedules to the Consolidated Financial Statements stipulated by
Article 9 of Regulation S-X and all other schedules to the financial statements
of the registrant required by Article 5 of Regulation S-X are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
78
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<C> <S>
3.1 Certificate of Incorporation of Pacific Century Financial Corporation (incorporated herein by reference to
Appendix C of Pacific Century Financial Corporation 1998 Proxy Statement dated March 10, 1998)
3.2 By-Laws of Pacific Century Financial Corporation (incorporated herein by reference to Appendix D of
Pacific Century Financial Corporation 1998 Proxy Statementdated March 10, 1998)
4.1 Instruments Defining the Rights of Holders of Long-Term Debt (incorporated herein by reference to Exhibit
4.1 of Form 10K for the fiscal year ended December 31, 2000)
10.1 Pacific Century Financial Corporation, One-Year Incentive Plan Effective January 1, 1999 (incorporated
herein by reference to Exhibit 10.1 of Form 10K for the fiscal year ended December 31, 1998)*
10.2 Pacific Century Financial Corporation, Long-Term Incentive Compensation Plan Effective January 1, 1999
(incorporated herein by reference to Exhibit 10.4 of Form 10K for the fiscal year ended December 31, 1998)*
10.3 Pacific Century Financial Corporation, Sustained Profit Growth Plan Effective January 1, 1998 (incorporated
herein by reference to Exhibit 10.3 of Form 10K for the fiscal year ended December 31, 1997)*
10.4 Bancorp Hawaii, Inc., Sustained Profit Growth Plan Effective January 1, 1994 (incorporated herein by
reference to Exhibit C of Bancorp Hawaii, Inc. 1994 Proxy Statement dated March 10, 1994)*
10.5 Pacific Century Financial Corporation Stock Option Plan of 1988 (incorporated herein by reference to
Exhibit 4(a) of Registration No. 33-23495)*
10.6 Pacific Century Financial Corporation Stock Option Plan of 1988 Amendment 99-1 (incorporated herein by
reference to Exhibit 10.11 of Form 10K for the fiscal year ended December 31, 1998)*
10.7 Pacific Century Financial Corporation Stock Option Plan of 1994 (incorporated herein by reference to
Exhibit 4(a) of Registration No. 33-54777)*
10.8 Pacific Century Financial Corporation Stock Option Plan of 1994 Amendment 97-1 (incorporated herein by
reference to Exhibit 10.13 of Form 10K for the fiscal year ended December 31, 1998)*
10.9 Pacific Century Financial Corporation Stock Option Plan of 1994 Amendment 97-2 (incorporated herein by
reference to Appendix A of Pacific Century Financial Corporation 1998 Proxy Statement dated
March 10, 1998)*
10.10 Pacific Century Financial Corporation Stock Option Plan of 1994 Amendment 99-1 (incorporated herein by
reference to Exhibit 10.10 of Form 10K for the fiscal year ended December 31, 2000)*
10.11 Pacific Century Financial Corporation Stock Option Plan of 1994 Amendment 99-2 (incorporated herein by
reference to Exhibit 10.15 of Form 10K for the fiscal year ended December 31, 1998)*
10.12 Pacific Century Financial Corporation Stock Option Plan of 1994 Amendment 2000-1 (incorporated herein
by reference to Exhibit 10.12 of Form 10K for the fiscal year ended December 31, 2000)*
10.13 Pacific Century Financial Corporation Stock Option Plan of 1994 Amendment 2000-2 (incorporated herein
by reference to Exhibit 10.13 of Form 10K for the fiscal year ended December 31, 2000)*
10.14 Pacific Century Financial Corporation Stock Option Plan of 1994 Amendment 2000-3 (incorporated herein
by reference to Exhibit 10.14 of Form 10K for the fiscal year ended December 31, 2000)*
10.15 Bancorp Hawaii, Inc. Key Executive Severance Plan dated April 27, 1983 (incorporated herein by reference
to Exhibit 10.4 of Form 10K for the fiscal year ended December 31, 1995)*
10.16 Executive Severance Agreement (incorporated herein by reference to Exhibit 19 (e) of Form 10K for fiscal
year ended December 31, 1989) for L. M. Johnson *
10.17 Amended Key Executive Change-in-Control Severance Agreement (incorporated herein by reference to
Exhibit 10(e) of Form 10K for the fiscal year ended December 31, 1994--October 3, 1994 for R. J. Dahl)*
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<C> <S>
10.18 Key Executive Change-in-Control Severance Agreement (incorporated herein by reference to
Exhibit 10(f) of Form 10K for the fiscal year ended December 31, 1994-October 3, 1994 for A.T.
Kuioka)*
10.19 Pacific Century Financial Corporation Stock Option Plan of 1994 Amendment 2001-1*
10.20 Pacific Century Financial Corporation Stock Option Plan of 1994 Amendment 2001-2*
10.21 Key Executive Change-in-Control Severance Agreement dated January 28, 2000 for K. K. Y. Pan
(incorporated herein by reference to Exhibit 10.21 of Form 10K for the fiscal year ended
December 31, 2000)*
10.22 Key Executive Change-in-Control Severance Agreement dated January 26, 2001 for A. R. Landon
(incorporated herein by reference to Exhibit 10.22 of Form 10K for the fiscal year ended
December 31, 2000)*
10.23 Key Executive Change-in-Control Severance Agreement dated January 26, 2001 for W. C. Nelson
(incorporated herein by reference to Exhibit 10.23 of Form 10K for the fiscal year ended
December 31, 2000)*
10.24 Pacific Century Financial Corporation Directors' Deferred Compensation Plan (Restatement
Effective 1/1/96) with Amendment No. 96-1; Trust Agreement (Effective 9/1/96) (incorporated
by reference herein to Exhibit (4) of Registration No. 333-14929)
10.25 Pacific Century Financial Corporation Directors Stock Compensation Program (incorporated
herein by reference to Exhibit (4) of Registration No. 333-02835)
10.26 Pacific Century Financial Corporation Directors Stock Compensation Program Amendment 97-1
(incorporated herein by reference to Exhibit 10.26 of Form 10K for the fiscal year ended
December 31, 2000)
10.27 Separation Agreement between L. M. Johnson, former Chairman and CEO, and Pacific Century
Financial Corporation dated September 22, 2000 (incorporated herein by reference to Exhibit
10.27 of Form 10K for the fiscal year ended December 31, 2000)*
10.28 Employment Agreement dated November 3, 2000 between M. E. O'Neill, Chairman and CEO,
and Pacific Century Financial Corporation (incorporated herein by reference to Exhibit 10.28 of
Form 10K for the fiscal year ended December 31, 2000)*
10.29 Separation Agreement between D. Houle, former CFO, and Pacific Century Financial Corporation
dated January 29, 2001*
10.30 Separation Agreement between R. J. Dahl, President, and Pacific Century Financial Corporation
dated December 18, 2001*
10.31 Key Executive Change-in-Control Severance Agreement dated April 27, 2001 for N. C.
Hocklander*
10.32 Key Executive Change-in-Control Severance Agreement dated April 27, 2001 for W. J. Laskey*
10.33 Key Executive Change-in-Control Severance Agreement dated December 14, 2001 for G. M.
Mohen*
10.34 Key Executive Change-in-Control Severance Agreement dated June 22, 2001 for D. W. Thomas*
10.35 Key Executive Change-in-Control Severance Agreement dated January 25, 2002 for J. T. Kiefer*
10.36 Key Executive Change-in-Control Severance Agreement dated January 25, 2002 for L. L.
McCarney*
10.37 Key Executive Change-in-Control Severance Agreement dated January 25, 2002 for S. E. Miller*
10.38 Executive Change-in-Control Severance Agreement dated January 25, 2002 for R. C. Keene*
12.1 Statement Regarding Computation of Ratios
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
</TABLE>
- --------
* Management contract or compensatory plan or arrangement
80
<PAGE>
(b) Registrant filed one Form 8-K during the quarter ended December 31, 2001.
. A Form 8K was filed on October 12, 2001 announcing Pacific Century
Financial Corporation's sale of Papua New Guinea, Vanuatu and Fiji
operations to ANZ.
(c) Response to this item is the same as Item 14(a).
(d) Response to this item is the same as Item 14(a).
81
<PAGE>
STATISTICAL DISCLOSURES
CONTENTS AND REFERENCE
The following statistical disclosures required by the Instructions to Form
10-K are summarized below:
Item I. Distribution of Assets, Liabilities, and Shareholders' Equity; Interest
Rates and Interest Differential
Interest Differential--Table 21 included in Item 7 of this report.
Consolidated Average Balances, Income and Expense Summary, and Yields
and Rates--Taxable Equivalent--Table 3 included in Item 7 of this
report.
Average Loans--Table 18 included in Item 7 of this report.
Average Deposits--Table 20 included in Item 7 of this report.
Item II. Investment Portfolio
Note C to the Consolidated Financial Statements included in Item 8 of
this report.
Maturity Distribution, Market Value and Weighted-Average Yield to
Maturity of Securities--Table 22 included in Item 7 of this report.
Item III. Loan Portfolio
Loan Portfolio Balances--Note D to the Consolidated Financial
Statements included in Item 8 of this report.
Maturities and Sensitivities of Loans to Changes in Interest
Rates--Table 19 included in Item 7 of this report.
Non-Performing Assets and Accruing Loans Past Due 90 Days or
more--Table 10 included in Item 7 of this report.
Foregone Interest on Non-Accruals--Table 11 included in Item 7 of this
report.
Geographic Distribution of Cross-Border International Assets--Table 9
included in Item 7 of this report.
Item IV. Summary of Loan Loss Experience
Allowance for Loan and Lease Losses--Note D to the Consolidated
Financial Statements included in Item 8 of this report.
Allocation of Loan and Lease Loss Allowance--Table 12 included in Item
7 of this report.
Narrative discussion of "Allowance for Loan and Lease Losses" included
in Item 7 of this report.
82
<PAGE>
Item V. Deposits
Consolidated Average Balances, Income and Expense and Yields and
Rates--Taxable Equivalent--Table 3 included in Item 7 of this report.
Note F to the Consolidated Financial Statements included in Item 8 of
this report.
Item VI. Return on Equity and Assets
<TABLE>
<CAPTION>
2001 2000 1999
----- ----- -----
<S> <C> <C> <C>
Return on Average Assets.................... 0.93% 0.81% 0.91%
Return on Average Equity.................... 8.76% 9.21% 10.99%
Dividend Payout Ratio....................... 48.32% 49.68% 41.46%
Average Equity to Average Assets Ratio...... 10.60% 8.78% 8.30%
</TABLE>
Item VII. Short-Term Borrowings
Note G to the Consolidated Financial Statements included in Item 8 of
this report.
83
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 8, 2002 PACIFIC CENTURY FINANCIAL
CORPORATION
By: /s/ MICHAEL E. O'NEILL
-----------------------------
Michael E. O'Neill,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
Date:
/s/ MICHAEL E. O'NEILL /s/ DONALD M. TAKAKI
---------------------------------- ----------------------------------
Michael E. O'Neill, Donald M. Takaki,
Director Director
/s/ PETER D. BALDWIN /s/ MARTIN A. STEIN
---------------------------------- ----------------------------------
Peter D. Baldwin, Martin A. Stein,
Director Director
/s/ MARY G. F. BITTERMAN /s/ CLINTON R. CHURCHILL
---------------------------------- ----------------------------------
Mary G. F. Bitterman, Clinton R. Churchill,
Director Director
/s/ RICHARD J. DAHL /s/ STANLEY S. TAKAHASHI
---------------------------------- ----------------------------------
Richard J. Dahl, Stanley S. Takahashi,
Director Director
/s/ DAVID A. HEENAN /s/ ROBERT A. HURET
---------------------------------- ----------------------------------
David A. Heenan, Robert A. Huret,
Director Director
/s/ ALLAN R. LANDON /s/ RICHARD C. KEENE
---------------------------------- ----------------------------------
Allan R. Landon, Richard C. Keene,
Chief Financial Officer Chief Accounting Officer
84
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.19
<SEQUENCE>3
<FILENAME>dex1019.txt
<DESCRIPTION>STOCK OPTION PLAN OF 1994 AMENDMENT 2001-1
<TEXT>
<PAGE>
Exhibit 10.19
AMENDMENT 2001-1 TO THE
PACIFIC CENTURY FINANCIAL CORPORATION
STOCK OPTION PLAN OF 1994
-------------------------
In accordance with Article 13 of the Pacific Century Financial
Corporation Stock Option Plan of 1994 (hereinafter "Plan"), and conditioned upon
the approval of shareholders no later than one year after the date of adoption
by the Board of Directors of Pacific Century Financial Corporation, the Plan is
hereby amended by this Amendment No. 2001-1, effective as of the date of
adoption by the Board of Directors, as follows:
The first sentence of Section 4.1 of the Plan shall be amended to
increase the total number of Shares reserved and available for grant under the
Plan by revising such sentence to read in its entirety as follows:
4.1 Number of Shares. Subject to adjustment as provided in Section
----------------
4.3 herein, the total number of Shares available for grant under the Plan
shall be 14,650,000.
- --------------------------------------------------------------------------------
To record the adoption of this amendment to the Plan, Pacific Century
Financial Corporation has executed this document this 26th day of January, 2001.
PACIFIC CENTURY FINANCIAL
CORPORATION
By /S/ Richard J. Dahl
----------------------------------------
Its Richard J. Dahl
President & Chief Operating Officer
By /S/ Neal C. Hocklander
----------------------------------------
Its Neal C. Hocklander
Executive Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.20
<SEQUENCE>4
<FILENAME>dex1020.txt
<DESCRIPTION>STOCK OPTION PLAN OF 1994 AMENDMENT 2001-2
<TEXT>
<PAGE>
Exhibit 10.20
AMENDMENT 2001-2 TO THE
PACIFIC CENTURY FINANCIAL CORPORATION
STOCK OPTION PLAN OF 1994
-------------------------
In accordance with Article 13 of the Pacific Century Financial
Corporation Stock Option Plan of 1994 (hereinafter "Plan", and conditioned upon
the approval of shareholders no later than one year after the date of adoption
by the Board of Directors of Pacific Century Financial Corporation, the Plan is
hereby amended by this Amendment No. 2001-2, effective as of the date of
adoption by the Board of Directors, as follows:
Section 2.1(1) shall be amended by adding the following provisions at
the end thereof:
For purposes of this Plan, the term "Employee" shall include any
independent contractor providing services to the Company or a Subsidiary,
other than a Director who is not also an employee of the Company or a
Subsidiary, and such Employee shall be eligible to participate in the Plan
as selected by the Committee in accordance with Article 5. Notwithstanding
any other provision in the Plan to the contrary, the following shall apply
in the case of an independent contractor who is included within the term
"Employee" pursuant to the preceding sentence: (a) with respect to any
reference in this Plan to the working relationship between such Employee
and the Company or a Subsidiary, the term "service" shall apply as may be
appropriate in lieu of the term "employment" or "employ"; (b) no such
Employee shall be eligible for a grant of an ISO; (c) the exercise period
and vesting of an Award following such Employee's termination from service
shall be specified and governed under the terms and conditions of the Award
as may be determined by the Committee (and, accordingly, the
post-termination exercise and vesting provisions of Sections 6.8 - 6.10
relating to Options, and Sections 7.8 - 7.10 relating to SARs, and Sections
8.9 - 8.10 relating to Restricted Stock and Restricted Stock Units shall
not apply); and (d) the required "full-time, active, salaried" status
described as a condition for eligibility in
<PAGE>
Section 5.1 shall not apply to such Employee. The inclusion of an
independent contractor within the term "Employee" under this Section 2.1(1)
is intended exclusively for the purpose of extending this Plan's coverage
to independent contractors, and such inclusion shall not mean or imply that
an independent contractor is in fact an employee for any purpose.
- --------------------------------------------------------------------------------
To record the adoption of this amendment to the Plan, Pacific Century
Financial Corporation has executed this document this 26th day of January,
2001.
PACIFIC CENTURY FINANCIAL
CORPORATION
By /S/ Richard J. Dahl
---------------------------------------
Its Richard J. Dahl
President & Chief Operating Officer
By /S/ Neal C. Hocklander
---------------------------------------
Its Neal C. Hocklander
Executive Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.29
<SEQUENCE>5
<FILENAME>dex1029.txt
<DESCRIPTION>SEPARATION AGREEMENT DATED JANUARY 29, 2001
<TEXT>
<PAGE>
Exhibit 10.29
January 29, 2001
David A. Houle
Executive Vice President
Chief Financial Officer
Dear Dave:
This letter, upon your signature, will constitute a Separation
Agreement ("Agreement") between you and Pacific Century Financial Corporation
and Bank of Hawaii (collectively, the "Bank") regarding the terms of your
resignation and separation from employment with the Bank and its subsidiaries
and affiliates.
1. Your date of termination ("Termination Date") be no later than December 31,
2001, but may be effective on such earlier date as you may elect. Effective
February 3, 2001, however, you will be relieved of all your current duties
and responsibilities. From February 3, 2001 until all of your accrued
vacation time is used, you will be on vacation. Thereafter until your
Termination Date, you will make yourself available to the Bank for
consultation on an as needed basis to assure a smooth transition. As part
of the transition you will also resign any positions you hold as a
director, officer or other management official of any Bank affiliate or
subsidiary, or as trustee or fiduciary of any Bank benefit plan or trust.
2. You will be paid your earned salary and auto allowance through your
Termination Date, and the Bank's portion of your club dues will continue to
be paid through April 30, 2001. You will continue to participate in all
Bank employee benefit plans through your Termination Date. You will receive
payment under the Bank's 2000 one-year incentive plan in the amount of
$160,000.00. You acknowledge and agree that no compensation other than that
specified herein is owed to you.
3. You have received or will receive by separate cover information regarding
your rights to health insurance continuation after your Termination Date.
To the extent that you have such rights, nothing in this agreement will
impair those rights.
4. On or before February 19, 2001 you will return to the Bank any information
you have about the Bank's practices, procedures or trade secrets, including
but not limited to, customer data, lists and accounts; Bank strategies,
growth plans, business plans, and marketing strategies; and any Bank
property such as Bank Visa card and keys.
<PAGE>
5. Because your employment is being terminated by way of resignation, you are
not entitled to benefits under our Employees' Severance Plan. By acceptance
of this Agreement, you are waiving and releasing your benefits under that
Plan. While the Bank makes no representation to you concerning your
possible entitlement to unemployment insurance benefits, under the
circumstances, it will truthfully report, should unemployment compensation
authorities ask that the termination of your employment was voluntary.
6. Although you are not otherwise entitled to it, in further consideration of
your acceptance of the terms of this Agreement, the Bank will pay you
$375,000.00, less customary payroll deductions [(this portion hand written
in on 1/30/01, and initialed by both parties), payable on January 15, 2002
regardless of the termination date]. In addition, if you elect a
Termination Date before December 31, 2001, the Bank will pay an amount
equal to your salary and any accrued but unused vacation, from that date
through December 31, 2001. These amounts will be paid within two weeks of
your Termination Date, but no earlier than the effective date of this
Agreement as defined in paragraph 13 below (the "Effective Date"). In
addition to the foregoing payments, the Bank will pay for outplacement
services with its selected outplacement services provider for a period of
six months. Finally, with regard to all Qualified and Nonqualified Stock
Options ("Options") currently held by you which are not vested, the
Compensation Committee will provide for the full vesting of such Options
upon the completion of six months following their date of grant. Also, with
regard to vested Options held by you as of your Termination Date, the
Compensation Committee will extend the period within which these Options
are exercisable to three years following your Termination Date in the case
of 1994 Plan Options, and one year following your Termination Date in the
case of 1988 Plan Options (or, if earlier, in either case to the end of the
original terms of the Options). The extension of the exercise period for
your Qualified Stock Options may result in conversion of your Qualified
Stock Options into Nonqualified Stock Options with a consequent loss of
certain tax benefits. Therefore, Qualified Stock Options will not be
subject to these extensions unless you consent on or before your
Termination Date.
7. You waive, release and forego any and all claims, whether or not now known,
suspected or claimed, that you ever had, now have, or may later claim to
have had as of or prior to the Effective Date of this Agreement against the
Bank and any of its predecessors, subsidiaries, related entities, officers,
directors, shareholders, agents, attorneys, employees, successors or
assigns arising from or related to your employment with the Bank and/or the
termination of your employment with the Bank.
These claims include, but are not limited to, claims arising under federal,
state and local statutory or common law, including, but not limited to, the
Age Discrimination in Employment Act, Title VII of the Civil Rights Act of
1964, Hawaii civil rights and anti-discrimination statutes, wage and hour
laws, the law of contract and tort (such as claims for breach of contract,
infliction of emotional distress, defamation, invasion of privacy, wrongful
termination, etc.), and any claims for attorneys' fees and/or costs.
8. The Bank and you agree that any inquiries regarding verification of your
employment will be handled through the Bank of Hawaii, Human Resources
Division. You agree that you will instruct anyone of whom you are aware who
is making such inquiries to contact the Human Resources Division. As is the
Bank's practice, the Human Resources Division will only release information
confirming your dates of employment and position title.
<PAGE>
9. The Bank and you agree that each will not make any disparaging, negative or
derogatory statements regarding the other.
10. Unless compelled by court order or subpoena or otherwise required by law,
you will not disclose to others or use any information regarding the
following:
a. Any information regarding the Bank's practices, procedures or trade
secrets, including but not limited to, customer data, lists and
accounts; and Bank strategies, growth plans, business plans, and
marketing strategies.
b. The terms of this Agreement, the benefit being paid under it, and the
fact of its payment are confidential, except that you may disclose
this information to (i) your attorney, accountant or other
professional advisor to whom you must make the disclosure in order for
them to render professional services to you, and (ii) your spouse. You
will instruct any such people to whom you make a disclosure, however,
to maintain the confidentiality of this information just as you must.
11. In the event that you breach any of your obligations under this Agreement
or otherwise imposed by law, the Bank will be entitled to recover the
benefit paid under this Agreement and to obtain all other relief provided
by law or equity. In addition, you acknowledge and agree that breach of
Paragraphs 4, 9, and 10 will result in irreparable harm to the Bank for
which it will have no adequate remedy at law and for which the Bank may
seek immediate injunctive relief.
12. You agree that you will not seek reinstatement to the Bank nor apply for
employment with the Bank or its subsidiaries or affiliates.
13. The following is required by the Older Workers Benefit Protection Act:
This Agreement includes a waiver of any claims you may have under the
Age Discrimination in Employment Act through the Effective Date of this
Agreement. You have up to 21 days from the date of this letter, or February
19, 2001, to accept the terms of this Agreement, although you may accept it
at any time within those 21 days. There are advantages and disadvantages
for you in entering into this Agreement. Prompt receipt of the payment
provided for in paragraph 6 and an amicable resolution to the situation may
be considered advantages. Release of potential claims may be considered a
disadvantage. To properly weigh the advantages and disadvantages you are
advised to consult an attorney about this Agreement prior to signing the
Agreement. If you want to accept the Agreement prior to the expiration of
the 21 days, you will need to indicate your waiver of the 21-day
consideration period by signing in the space indicated below.
To accept this Agreement, please date and sign this letter and return
it to me. (An extra copy for your file is enclosed)
Once you do so, you will still have an additional seven days in which to
revoke your acceptance. To revoke, you must send me a written statement of
revocation by registered mail, return receipt requested. If you do not
revoke, the eighth day after the date of your acceptance will be the
"Effective Date" of this Agreement. The Agreement will not be effective and
enforceable until the revocation period has expired.
<PAGE>
14. This Agreement represents the complete agreement of the parties, and is
intended to bind both the parties, and all persons claiming by or through
the parties. It supersedes any and all prior agreements, and may only be
amended in writing signed by both you and Bank. It shall be governed by and
interpreted under Hawaii law and may be pleaded as a full and complete
defense to, and as the basis for an injunction against, any future
proceeding. You understand and agree that this Agreement is not intended to
be and is not an admission of any fact or wrongdoing or liability by any of
the parties.
Dave, I am pleased that we were able to part ways on these amicable
terms. The Bank and I wish you every success in your future endeavors.
Sincerely,
/S/ Neal C. Hocklander
Neal C. Hocklander
Executive Vice President & Director,
Human Resources Division
By signing this letter, I acknowledge that I have had the opportunity to
review this Agreement carefully with an attorney of my choice; that I have read
and understand the terms of the Agreement; and that I voluntarily agree to them.
Dated: January 30, 2001
/S/ David A. Houle
-----------------------------------------------------
David A. Houle
Pursuant to 29 C.F.R. ss. 1625.22(e)(6), I hereby knowingly and voluntarily
waive the twenty-one (21) day pre-execution consideration period set forth in
Older Workers Benefit Protection Act (29 U.S.C. (S) 626(f)(1)(F)(i)).
Dated: January 30, 2001
/S/ David A. Houle
-----------------------------------------------------
David A. Houle
<PAGE>
AMENDMENT TO PACIFIC CENTURY FINANCIAL CORPORATION
STOCK OPTIONS FOR DAVID A. HOULE
This Amendment, effective as of November 29, 2001, is made by and
between Pacific Century Financial Corporation, a Hawaii corporation, with its
principal office at 130 Merchant Street, 22nd Floor, Honolulu, Hawaii ("PCFC"),
and David A. Houle, residing at 1016 Hanohano Way Honolulu, HI 96825
("Optionee"), as an amendment to certain outstanding stock option agreements
between such parties.
WHEREAS, PCFC and Optionee have entered into stock option agreements
for the grant to the Optionee of certain qualified incentive stock options
("ISOs") and nonqualified stock options ("NQSOs") (together, "Options") pursuant
to the Pacific Century Financial Corporation Stock Option Plan of 1994 ("1994
Plan") and the Pacific Century Financial Corporation Stock Option Plan of 1988
("1988 Plan") (together, "Plans");
WHEREAS, in a manner consistent with the terms of the Plans and
pursuant to the terms of that certain Separation Agreement between PCFC and the
Optionee dated January 29, 2001 "Separation Agreement"), PCFC and the Optionee
desire to modify the vesting and exercise periods applicable to the outstanding
Options held by the Optionee;
NOW, THEREFORE, the parties hereto agree to amend the Options as
follows:
(a) Effective as of the date of the Separation Agreement, any
nonvested outstanding Options then held by the Optionee shall be fully vested
upon completion of six months following their date of grant.
(b) Effective as of his "Termination Date" (within the meaning of the
Separation Agreement), any vested outstanding Options held by the Optionee as of
his Termination Date which have been granted under the 1994 Plan shall be
exercisable during the period of three years following his Termination Date (or,
if later, until the end of the applicable exercise period provided for under the
terms of the Option), and any vested outstanding Options held by the Optionee as
of his Termination Date which have been granted under the 1988 Plan shall be
exercisable during the period of one year following his Termination Date (or, if
later, until the end of the applicable exercise period under the terms of the
Option). However, the exercise period of an Option shall not be extended under
this Amendment beyond the original term of the Option.
<PAGE>
(c) The extended exercise periods described in paragraph (b) above
shall apply only to the ISOs as described in the attached Exhibit A, in which
case such ISOs shall be deemed to be NQSOs.
(d) The above modifications shall not apply to any other awards under
the Plans or any other plan or agreement, including any tandem or freestanding
stock appreciation rights that may have been awarded under the Plans.
(e) This Amendment shall constitute an amendment to the underlying
option agreements for the affected Options.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment on the date first above written.
PACIFIC CENTURY FINANCIAL
CORPORATION
By /S/ Leslie F. Paskett
-------------------------------------------------
Its
"PCFC"
/S/ David A. Houle
-------------------------------------------------
"Optionee"
<PAGE>
AMENDMENT TO PACIFIC CENTURY FINANCIAL CORPORATION
STOCK OPTIONS FOR DAVID A. HOULE
EXHIBIT A -- ISO's SUBJECT TO EXTENDED EXERCISE PERIODS
The following ISOs shall be subject to the extended exercise periods
as provided for under the Amendment:
Grant Date Expiration Date Plan ISOs
- ---------- --------------- ---- ----
02/18/1994 02/18/2004 1994 6,600
12/04/1995 12/31/2004 1994 3,186
12/20/1996 12/31/2004 1994 4,732
12/12/1997 12/31/2004 1994 3,836 *
09/08/1998 12/31/2004 1994 5,925
12/10/1999 12/31/2004 1994 5,517
11/03/2000 12/31/2004 1994 5,000
* Does not apply with respect to tandem SAR
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.30
<SEQUENCE>6
<FILENAME>dex1030.txt
<DESCRIPTION>SEPARATION AGREEMENT DATED DECEMBER 18, 2001
<TEXT>
<PAGE>
Exhibit 10.30
December 18, 2001
Mr. Richard J. Dahl, President
Dear Richard:
This letter, upon your acceptance, will constitute a legally binding agreement
("letter Agreement") between you and Pacific Century Financial Corporation and
Bank of Hawaii (collectively "PCFC" or the "Company") governing the terms of
your employment by PCFC between the date of this letter agreement (the
"Effective Date") and March 31, 2002 (the "Completion Date"). This letter
agreement also provides the terms of your separation from employment with PCFC
if your employment terminates on or before the Completion Date.
You and PCFC agree as follows:
1. Responsibilities. During the period from the Effective Date until the
----------------
Completion Date (the "Term"), your sole duty as officer and employee of the
Company will consist of using your best efforts to manage, in accordance
with established PCFC operating standards, and direct and carry out, in
accordance with policies, procedures and directions established by the
Board of Directors of PCFC and under the direct supervision of Michael E.
O'Neill, the disposition by sale or closure of PCFC interests in the
following properties, investments and lines of business (collectively, the
"Properties"):
a. All of the Company's operations and investments in the South Pacific
except the Bank of Hawaii branches located in the Territory of
American Samoa. This consists of the three branches of Bank of Hawaii
in Fiji, the Company's investment in Bank of Queensland, Ltd., and the
Company's interest in Banque de Tahiti, Bank of Hawaii - Nouvelle
Caledonie, Bank of Hawaii (PNG) Ltd., Banque de Hawaii (Vanuatu),
Ltd., National Bank of the Solomon Islands, and all of their
subsidiaries (collectively the "South Pacific Operations").
<PAGE>
b. Bank of Hawaii branches and representative offices in Hong Kong, the
Philippines, Korea, Singapore and Taiwan and Bank of Hawaii
International Corporation, New York (collectively the "Asian
Operations").
c. Pacific Century Bank, N.A. ("PCB").
In addition to the disposition of the Properties, you shall direct the
restructuring of Bank of Hawaii's Tokyo branch to a representative office.
In this letter agreement these dispositions and the restructuring of the Tokyo
branch are called the "Project". The Project will be completed when PCFC no
longer holds title to any of the Properties and the Tokyo branch has been
restructured to a representative office.
2. No Employment Agreement. Nothing in this letter agreement shall be deemed
-----------------------
to create an employment agreement between you and PCFC providing for your
employment by PCFC for any fixed period of time. Your employment with PCFC
is terminable at will by you or PCFC and each shall have the right to
terminate your employment with PCFC at any time, with or without cause.
Except as specifically provided in this letter agreement, the termination
of your employment shall not effect the incentive compensation to be paid
to you.
3. Project Approvals. In carrying out your responsibilities you will report
-----------------
directly to Michael E. O'Neill and will be responsible for keeping him
fully informed, through written monthly progress reports and other reports
as requested, of all developments related to the Project. The retention of
outside professional assistance (investment bankers, accountants,
attorneys, etc.), any significant changes in the operation of any of the
Properties included within the Project during the Term, any binding or
nonbinding letters of intent, term sheets or contracts or other agreements
to dispose of any of the Properties and all other major elements related to
the Project, will be subject to the prior approval of Michael E. O'Neill.
All decisions related to the Project including Property operations will be
subject to the final approval of PCFC and PCFC may terminate the Project in
whole or in part at any time, all in its sole and absolute discretion.
<PAGE>
4. Property Operations. PCFC anticipates entering into separation/retention
-------------------
agreements with Karl Pan, Marshall Laitsch, Mark Bauer and Kai Chin to
encourage their continued and active participation and efforts to operate
the Properties properly and to assist in carrying out the Project. During
the Term, they will report to you and work with you in that regard. You
will use your best efforts to ensure that the Properties continue to
operate during the Term consistent with PCFC standards, procedures and
controls and consistent with the divestiture plan presented to and approved
by the PCFC Board of Directors and PCFC will continue to support the
Properties at the same level as before the Effective Date.
5. Support. You will retain your current offices and staff support and,
-------
consistent with other needs of the Company, will be entitled to call upon
the internal resources of the Company (finance, accounting, legal, human
resources, etc.) in carrying out your efforts on the Project.
6. Corporate Titles and Responsibilities. During the Term, you will continue
-------------------------------------
to hold your present corporate title of President and will continue to
serve on the Managing Committee for purposes of coordinating activities
related to the Project with other Company operations and will continue as a
member of the Board of Directors of Bank of Hawaii, Pacific Century
Financial Corporation and any boards of directors for any of the Properties
upon which you currently serve. To afford you maximum time to work on the
Project, you will relinquish your membership on other PCFC subsidiary
boards of directors unless directed otherwise.
7. Project Goals. We each acknowledge and agree that it is in the best
-------------
interest of the Company and its shareholders that the Project be carried
out in a manner which, to the greatest extent possible, protects the
reputation of the Company while providing the greatest benefit of the
Company, its shareholders and the Company's ongoing operations after
completion of the Project. All aspects of the Project will be planned and
conducted to achieve these goals.
8. Base Compensation. During the Term you will receive the following base
-----------------
salary and benefits:
a. Effective on April 1, 2001, your base salary was increased to $600,000
per annum, payable in semi-monthly installments.
b. You will continue to participate in the Company medical, dental, life
insurance, long-term care, disability, profit sharing, money purchase,
excess profit sharing, excess money purchase and vacation accrual
employee benefit programs.
<PAGE>
c. You will continue to receive your automobile allowance, existing
parking space, and the payment of your club dues.
d. Effective as of June 22, 2001, PCFC has granted you 35,000 shares of
restricted PCFC common stock, which are subject to the terms of the
Restricted Share Agreement dated as of June 22, 2001 (the "Restricted
Stock Agreement"), between you and the Company.
9. Termination of Other Compensation and Benefits. As of the Effective Date,
----------------------------------------------
your participation in future grants under the Company Stock Option Program,
in the One-Year Incentive Plan, in all Long-Term Incentive Plans and in all
severance or separation plans (except for the Executive Change-in-Control
Severance Agreement) will terminate, and you will not be entitled to any
further payments or awards under those plans or agreements. Subject to
paragraphs 11 and 12.h below, the compensation and benefits payable to you
under this letter agreement the Restricted Stock Agreement and your
Executive Change-In-Control Severance Agreement will be the only
compensation and benefits you will be entitled to receive from the Company
after the Effective Date.
10. Incentive Compensation. You will be entitled to the following incentive
----------------------
compensation for your work on the Project:
a. On the Completion Date PCFC will pay you a bonus of $1,500,000.
b. On the Completion Date PCFC will pay you an additional incentive bonus
payment of not less than $1,250,000 and up to $3,000,000 to the extent
you have, in the judgment of the Company acting in its sole and
absolute discretion, successfully carried out your responsibilities
under this letter agreement. In the event that all of the Properties
have not been disposed of on the Completion Date, the Company shall
consider the amount to be paid to you as the additional incentive
bonus payment taking into consideration the Properties that were
disposed of, the consideration received for the Properties disposed of
and the number of, status of and prognosis for the Properties whose
disposition is not then complete.
11. Continued Employment. We each acknowledge that neither you nor PCFC has
--------------------
made a final decision as to whether your employment by PCFC will continue
after the Completion Date. Provisions in this letter agreement related to
the termination of employment are included only to facilitate that process
if it does occur. If we mutually agree that your employment by PCFC will
continue after the Completion Date:
<PAGE>
a. You will not receive the payment, if any, due under paragraph 10.a.
above.
b. You will receive the payment due under paragraph 10.b. above in the
amount determined by the Company.
c. Your participation in all programs and plans terminated under
paragraph 9 above will be reinstated.
12. Employment Termination. If your employment with the Company terminates:
----------------------
a. You will receive information regarding your rights to health insurance
continuation after the termination. To the extent you have any such
rights, nothing in this letter agreement will impair those rights.
b. On the date of your termination you will return to PCFC any
information you have about PCFC's practices, procedures or trade
secrets, including but not limited to customer data, lists, accounts,
bank strategies, growth plans, business plans and marketing strategies
and any Company properties such as credit cards and keys.
c. If your employment terminates because you die or become totally
disabled or PCFC terminates your employment without cause, you will be
entitled to receive (a) your base compensation under paragraph 8.a.
above through the Completion Date, (b) the incentive compensation
payable under paragraph 10.a. above, and (c) an amount we mutually
agree will fairly compensate you for the incentive compensation you
would have received under paragraph 10.b. above at the completion of
the Project or, failing such mutual agreement, such amount determined
by arbitration as provided in paragraph 20 below.
d. If you become eligible to receive "Severance Benefits" under your
Executive Change-In-Control Severance Agreement you may, at your
option, choose to receive these Severance Benefits or any amounts due
you under paragraphs 10.a. and 10.b. above, but not both. You agree
that the payments provided for in this letter agreement shall be in
lieu of and you shall not be entitled to any benefits under any of the
Company's other employee severance or separation plans. By entering
into this letter agreement, you are waiving and releasing any of your
benefits under those plans.
<PAGE>
e. If you voluntarily terminate your employment with PCFC before the
Completion Date for any reason or PCFC terminates your employment for
cause as defined in paragraph 13 below, all rights, compensation and
benefits you have under paragraphs 8, 10, and 12.g. of this letter
agreement will terminate automatically and you will not be entitled to
any rights, compensation or benefits under those paragraphs.
f. On the date of the termination of your employment, you will be paid
any accrued but unused vacation.
g. With regard to all Qualified and Non-Qualified Stock Options
("Options") currently held by you that are not vested, the
Compensation Committee of PCFC's Board of Directors, will provide for
the full vesting of such options upon the completion of six months
following their date of grant. With regard to all vested options held
by you as of the date of your termination of employment, the
Compensation Committee will extend the period within which those
options are exercisable to three years following the date of your
termination of employment in the case of the Options under the 1994
Option Plan and one year following the Termination Date in the case of
Options under the 1988 Option Plan; provided, however, that in no
instance will the period for exercising an option be longer than the
original exercise period for the option. Extension of the exercise
period for your Qualified Stock Options may result in conversion of
your Qualified Stock Options into Non-Qualified Stock Options with the
consequent loss of tax benefits. Therefore, Qualified Stock Options
will not be subject to these extensions unless you so request in
writing on or before the Termination Date.
13. Termination for Cause. PCFC may terminate your employment at any time for
---------------------
"cause." As used in this letter agreement, "for cause" means:
a. Your material breach of this letter agreement and failure to take
reasonable steps to cure the breach within a reasonable time after you
have been notified of the breach by the Company;
b. Your material breach of the policies of PCFC or the Bank of Hawaii
Code of Ethics and failure to take reasonable steps to cure the breach
within a reasonable time after you have been notified of the breach by
the Company;
c. Your commission of a felony or immoral act which is materially
detrimental to PCFC's reputation or regulatory standing;
<PAGE>
d. Your commission of an act of fraud, dishonesty or gross misconduct
relating to the business of the Properties or PCFC;
e. Your failure to perform your duties with PCFC within a reasonable time
after a demand for such performance is delivered to you by an officer
of PCFC; or
f. Your habitual neglect of job duties resulting in material damage to
PCFC or its reputation within a reasonable time after a demand to
perform your job duties is delivered to you by an officer of PCFC.
14. Waiver and Release. Upon receipt of all of the payments and the performance
------------------
of all of the Company's obligations to you, you will waive, release and
forego any and all claims, whether or not now known, suspected or claimed,
that you ever had, now have, or may later claim to have had as of or prior
to the Effective Date against PCFC and any of its predecessors,
subsidiaries, related entities, officers, directors, shareholders, agents,
attorneys, employees, successors or assigns arising from or related to your
employment with PCFC and/or the termination of your employment with PCFC.
These claims include, but are not limited to, claims arising under federal,
state and local statutory or common law, including, but not limited to, the
Age Discrimination in Employment Act, Title VII of the Civil Rights Act of
1964, Hawaii civil rights and anti-discrimination statutes, wage and hour
laws, the law of contract and tort (such as claims for breach of contract,
infliction of emotional distress, defamation, invasion of privacy, wrongful
termination, etc.), and any claims for attorneys' fees and/or costs.
15. Inquiries. PCFC and you agree that any inquiries regarding verification of
---------
your employment will be handled through the Bank of Hawaii, Human Resources
Division. You agree that you will instruct anyone of whom you are aware who
is making such inquiries to contact the Human Resources Division or Michael
E. O'Neill. As is the Bank's practice, the Human Resources Division will
only release information confirming your dates of employment and position
title.
16. Negative Statements. PCFC and you agree that each will not make any
-------------------
disparaging, negative or derogatory statements regarding the other.
17. Disclosure. Unless compelled by court order or subpoena or otherwise
----------
required by law, you will not disclose to others or use any information
regarding PCFC's practices, procedures or trade secrets, including but not
limited to, customer data, lists and accounts; and PCFC strategies, growth
plans, business plans, and marketing strategies.
<PAGE>
18. Breach; Remedies. In the event that you materially breach your obligations
----------------
under this letter agreement and fail to cure within a reasonable period of
time after written notice to you by an officer of the Company to perform
any of your obligations under this letter agreement, PCFC will be entitled
to terminate your employment and any of your rights, benefits and
compensation payable under this letter agreement and to obtain all other
relief provided at law or equity. In addition, your breach of paragraph
12.b., 16 or 17 will result in irreparable harm to PCFC for which it will
have no adequate remedy at law and for which PCFC may seek immediate
injunctive relief.
19. Age Discrimination. The following is required by the Older Workers Benefit
------------------
Protection Act:
This letter agreement includes a waiver of any claims you may have
under the Age Discrimination in Employment Act through the Effective
Date of this letter agreement. You have up to 21 days from the date of
this letter to accept the terms of this letter agreement, although you
may accept it at any time within those 21 days. There are advantages
and disadvantages for you in entering into this letter agreement.
Prompt receipt of the payment provided for in paragraph 8 and 9 and an
amicable resolution to the situation may be considered advantages.
Release of potential claims may be considered a disadvantage. To
properly weigh the advantages and disadvantages you are advised to
consult an attorney about this letter agreement prior to signing this
letter agreement. If you want to accept this letter agreement prior to
the expiration of the 21 days, you will need to indicate your waiver
of the 21-day consideration period by signing in the space indicated
below.
Once you do so, you will still have an additional seven days in which
to revoke your acceptance. To revoke, you must send me a written
statement of revocation by registered mail, return receipt requested.
If you do not revoke, the eighth day after the date of your acceptance
will be the "Effective Date" of this letter agreement. This letter
agreement will not be effective and enforceable until the revocation
period has expired.
<PAGE>
20. Arbitration. Any dispute under or related to this letter agreement shall be
-----------
submitted to binding arbitration in Honolulu, Hawaii in accordance with the
applicable rules of the American Arbitration Association. The arbitrators
shall be required to apply and follow the terms of this letter agreement
and shall not in any event award any punitive damages. The arbitrators
shall have the authority to award the prevailing party in any arbitration
his or its reasonable attorney's fees.
21. General. This letter agreement may be executed in counterparts. Paragraph
-------
headings are for ease of reference only. This letter agreement represents
the complete agreement of the parties, and is intended to bind all parties,
and all persons claiming by or through the parties. It supersedes any and
all prior agreements, and may only be waived or amended in whole or in part
in writing signed by all parties. This letter agreement will be governed by
and interpreted under Hawaii law. Appropriate tax withholding and other
deductions will be made from all amounts payable under this letter
agreement.
<PAGE>
If you agree to the terms of this letter agreement, please execute and date both
copies, as indicated below, retain a copy for your records and return the other
copy to me.
Very truly yours,
PACIFIC CENTURY
FINANCIAL CORPORATION
and BANK OF HAWAII
By /S/ Michael E. O'Neill
Michael E. O'Neill
Chief Executive Officer
By signing this letter, I acknowledge that I have had the opportunity to review
this letter agreement carefully with an attorney of my choice; that I have read
and understand the terms of this letter agreement; and that I voluntarily agree
to them.
/S/ Richard J. Dahl
Richard J. Dahl
Pursuant to 29 C.F.R. ss. 1625.22(e)(6), I hereby knowingly and voluntarily
waive the twenty-one day pre-execution consideration period set forth in Older
Workers Benefit Protection Act (29 U.S.C. ss. 626(F)(1)(f)(i).
/S/ Richard J. Dahl
Richard J. Dahl
Signature page of letter agreement dated December 18, 2001 among Pacific Century
Financial Corporation, Bank of Hawaii, and Richard J. Dahl.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.31
<SEQUENCE>7
<FILENAME>dex1031.txt
<DESCRIPTION>SEVERANCE AGREEMENT FOR N.C. HOCKLANDER
<TEXT>
<PAGE>
Exhibit 10.31
Key Executive
Change-in-Control
Severance Agreement
__________
Pacific Century Financial Corporation
<PAGE>
Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Article 1. Establishment and Purpose ............................... 1
Article 2. Definitions and Construction ............................ 2
Article 3. Severance Benefits ...................................... 4
Article 4. Just Cause .............................................. 6
Article 5. Form and Timing of Severance Benefits ................... 7
Article 6. Parachute Payments ...................................... 7
Article 7. Other Rights and Benefits Not Affected .................. 7
Article 8. Successors .............................................. 8
Article 9. Administration .......................................... 8
Article 10. Legal Fees and Arbitration .............................. 9
</TABLE>
<PAGE>
Pacific Century Financial Corporation
Key Executive
Change-in-Control Severance Agreement
Article 1. Establishment and Purpose
-------------------------
1.1 Effective Date. This Executive Change-in-Control Severance Agreement
(the "Agreement) is made and entered into pursuant to Pacific Century Financial
Corporation's Key Executive Severance Plan (the "Plan"), and is effective as of
this 27th day of April, 2001 (the "Effective Date"), by and between Pacific
Century Financial Corporation ("PCFC"), a Hawaii corporation, and Neal C.
Hocklander, an executive (the "Executive") of PCFC and its subsidiary, Bank of
Hawaii (the "Bank"). This Agreement shall supersede and replace any prior
severance agreement entered into between PCFC and the Executive.
1.2 Term of the Agreement. The Agreement shall commence as of the Effective
Date written above, and shall continue until the Board of Directors of PCFC (the
"Board") determines, in good faith and in its sole discretion, that the
Executive is no longer to be included in the Plan and so notifies in writing the
Executive during the term of this Agreement of such determination.
Provided, however, in the event that a Change in Control of PCFC, as
defined in Section 2.1 herein, occurs during the term of this Agreement, this
Agreement shall remain irrevocably in effect for the greater of twenty-four (24)
months from the date of such Change in Control, or until all benefits have been
paid to the Executive hereunder.
Further, in the event that the Board has knowledge that a third party
has taken steps reasonably calculated to effect a Change in Control of PCFC,
including, but not limited to, the commencement of a tender offer for the voting
stock of PCFC, or the circulation of a proxy to PCFC's shareholders, then this
Agreement shall remain irrevocably in effect until the Board, in good faith,
determines that such third party has fully abandoned or terminated its effort to
effect a Change in Control of PCFC.
1.3 Purpose of the Agreement. The purpose of this Agreement pursuant to the
Plan, is to advance the interests of PCFC and the Bank by assuring that PCFC and
the Bank will have the continued employment and dedication of the Executive and
the availability of his advice and counsel in the event that an acquisition or
Change in Control of PCFC occurs. This Agreement shall also assure the Executive
of equitable treatment during the period of uncertainty that surrounds an
acquisition or Change in Control, and allow the Executive to act at all times in
the best interests of PCFC and its shareholders.
1.4 Contractual Right to Benefits. This Agreement establishes and vests in
the Executive a contractual right to the benefits which he or she is entitled
hereunder, enforceable by the Executive against PCFC. However, nothing herein
shall require PCFC to segregate, earmark, or otherwise set aside any funds or
other assets to provide for any payments hereunder.
<PAGE>
This Agreement shall be considered an unfunded agreement to provide
benefits to a select group of management or highly compensated employees, and is
therefore intended to be a "top-hat" plan exempt from the requirements of the
provisions of Parts 2, 3, and 4 of Title I of ERISA.
Article 2. Definitions and Construction
----------------------------
2.1 Definitions. Whenever used in the Agreement, the following terms shall
have the meanings set forth below and, when the meaning is intended, the initial
letter of the word is capitalized.
(a) "Base Salary" means the annualized salary at the beginning of
each Year, which includes all regular basic wages, before
reduction for any amounts deferred on a tax-qualified or
nonqualified basis, payable in cash to an Executive for services
rendered during the Year. Base Salary shall exclude bonuses,
incentive compensation, special fees or awards, commissions,
allowances, or any other form of premium or incentive pay, or
amounts designated by PCFC as payment toward or reimbursement of
expenses.
(b) "Beneficial Owner" shall have the meaning ascribed to such term
in Rule 13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(c) "Beneficiary" with respect to an Executive means the person or
entities designated or deemed designated by an Executive pursuant
to Section 8.2 herein.
(d) "Board" means the Board of Directors of PCFC.
(e) "Change in Control" of PCFC means any one or more of the
following occurrences:
(i) Any Person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, becomes the
beneficial owner of shares of PCFC having 25 percent or more
of the total number of votes that may be cast for the
election of Directors of PCFC; or
(ii) As the result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale
of assets or contested election, or any combination of the
foregoing transactions, the person who were Directors of
PCFC before the
<PAGE>
transaction shall cease to constitute a majority of the Board of
Directors of PCFC or any successor to PCFC.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "PCFC" means Pacific Century Financial Corporation, a Hawaii
corporation, or any successor thereto that adopts the Agreement,
as provided in Section 8.1 herein.
(h) "Committee" means the Compensation Committee of the Board of
Directors of PCFC or any other committee appointed by the Board
to administer this Agreement.
(i) "Disability" means a physical or mental condition which renders
an Executive unable to discharge his or her normal work
responsibility with PCFC or the Bank and which, in the opinion of
a licensed physician selected by the Executive, subject to
reasonable approval by the Committee based upon sufficient
medical evidence, can be reasonably expected to continue for a
period of at least one full calendar year. If an Executive fails
to select a physician with ten (10) business days of a written
request made by PCFC, then PCFC may select a physician for
purposes of this paragraph.
(j) "Effective Date" means the date the Agreement is approved by the
Board, or such other date as the Board shall designate in its
resolution approving the Agreement, and as provided in Section
1.1 herein.
(k) "Effective Date of Termination" means the date on which a
voluntary employment termination or involuntary employment
termination other than for Just Cause occurs within twenty-four
(24) months of a Change in Control which triggers Severance
Benefits hereunder.
(l) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, or any successor act thereto.
(m) "Expiration Date" means the date the Agreement expires, as
provided in Section 1.2 herein.
(n) "Just Cause" means a termination of an Executive's employment by
PCFC for which no Severance Benefits are payable hereunder, as
provided in Article 4 herein.
(o) "Normal Retirement Date" shall mean the date the Executive
reaches 65 years of age.
(p) "Person" shall have the meaning ascribed to such terms in Section
<PAGE>
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
(q) "Plan" means the Pacific Century Financial Corporation Key
Executive Severance Plan, adopted April 27, 1983.
(r) "Severance Benefit" means the payment of severance compensation
as provided in Article 3 herein.
(s) "Year" means the consecutive 12-month period beginning each
January 1 and ending December 31.
2.2 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.
2.3 Severability. In the event any provision of the Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Agreement, and the Agreement shall be
construed and enforced as if the illegal or invalid provision had not been
included.
2.4 Modification. No express provisions of this Agreement may be
modified, waived, or discharged unless such modification, waiver, or discharge
is agreed to by the Executive in writing and approved by the Compensation
Committee of the Board of Directors.
2.5 Applicable Law. To the extent not preempted by the laws of the United
States, the laws of the State of Hawaii shall be the controlling law in all
matters relating to the Agreement.
Article 3. Severance Benefits
------------------
3.1 Right to Severance Benefits. The Executive shall be entitled to
receive from PCFC Severance Benefits as described in Section 3.2 herein, if
there has been a Change in Control of PCFC, as defined in Section 2.1(e) herein,
and if, within twenty-four (24) months thereafter, the Executive voluntarily
terminates employment or is involuntarily terminated without Just Cause with
PCFC. An Executive shall not be entitled to receive Severance Benefits if the
Executive's employment with PCFC or Bank of Hawaii ends due to an involuntary
termination by PCFC for Just Cause, as provided under Article 4 herein.
3.2 Description of Severance Benefits. In the event that an Executive
becomes entitled to receive Severance Benefits, as provided in Section 3.1
herein, PCFC shall pay to the Executive and provide the Executive with the
following:
(a) An amount equal to three (3) times the Executive's highest
annual Base
<PAGE>
Salary earned (i) at any time during the three (3) complete
fiscal years immediately preceding the Effective Date of
Termination, or (ii) if the Executive was not employed during
such time period, at any time thereafter; and
(b) An amount equal to three (3) times the Executive's highest annual
bonus earned under the One-Year Incentive Plan during the three
(3) complete fiscal years prior to the Effective Date of
Termination, or, if shorter, over the Executive's entire period
of employment. However, if the Executive's period of employment
is less than one year, the bonus shall be considered zero (0);
and
(c) An amount equal to three (3) times the Executive's highest annual
incentive compensation earned under the Pacific Century Financial
Corporation Profit Sharing Plan, the Long-Term Incentive Plan, or
any successor plans thereto over the three (3) complete fiscal
years prior to the Effective Date of Termination, or, if shorter,
over the Executive's entire period of employment. However, if the
Executive's period of employment is less than one year, the
average incentive compensation shall be considered zero (0); and
(d) An amount equal to the excess of (i) the maximum payment the
Executive would have received under the One-Year Incentive Plan
if he had continued in the employment of PCFC and the Bank
through the end of the performance period following the Effective
Date of Termination, and if the Bank had met its maximum
performance goals as provided under the terms of the Plan and the
maximum amount payable to the Executive had been paid, over (ii)
the actual payout under the One-Year Incentive Plan resulting
from the Executive's termination of employment; and
(e) A payout under the Long-Term Incentive Plan, in accordance with
the terms of such Plan; and
(f) A continuation of all welfare benefits at no direct cost to the
Executive, including medical insurance, long-term disability, and
group term life insurance for three (3) full years from the
Effective Date of Termination or until the Executive reaches his
Normal Retirement Date, whichever occurs earlier.
3.3 Reduction of Severance Benefits. In the event there are fewer than
thirty-six (36) whole or partial months remaining from the Executive's Effective
Date of Termination until the Executive's Normal Retirement Date, as defined
under the Retirement Plan, then the amounts provided for under Sections 3.2(a),
(b), and (c) above shall be reduced by a fraction, the
<PAGE>
numerator of which shall be the number of whole or partial months remaining
until the Executive's Normal Retirement Date, and the denominator of which shall
be thirty-six (36).
3.4 Fringe Benefits. The Executive's participation in fringe benefits
prior to the Executive's Effective Date of Termination shall be continued, or
equivalent benefits shall be provided, at no cost to the Executive, for a period
of three (3) years from the Executive's Effective Date of Termination (or until
he or she reaches his Normal Retirement Date, whichever occurs earlier).
3.5 Relocation Benefits. Should the Executive move his residence in order
to pursue other business opportunities within two (2) years of Executive's
Effective Date of Termination, the Executive shall be reimbursed for any moving
expenses (as defined in Section 217(b) of the Code) incurred in that relocation
(including taxes, if any, payable on the reimbursement) which are not reimbursed
by another employer. Benefits provided herein shall not exceed the assistance
and benefits customarily provided by PCFC to transferred employees prior to the
Change in Control.
3.6 Incentive Compensation. Any deferred awards previously granted to the
Executive under PCFC's incentive compensation plans and not previously paid to
the Executive, shall immediately vest on the date of the Executive's Effective
Date of Termination and shall be paid no later than ninety (90) calendar days
following that date, and be included as compensation in the month paid.
3.8 Stock Options and SARs. Stock options ("options") and stock
appreciation rights ("SARs"), if any, granted to the Executive by PCFC will be
exercisable pursuant to the terms of the applicable plans.
Article 4. Just Cause
----------
4.1 Just Cause. Nothing in this Agreement shall be construed to prevent
PCFC or the Bank from terminating an Executive's employment for Just Cause. In
such case, no Severance Benefits shall be payable to the Executive under this
Agreement.
Just Cause shall mean the criminal conviction of the Executive for an
act of fraud, embezzlement, theft or any other act constituting a felony.
The determination that the Executive's actions constitute Just Cause
for termination shall be made by the Board, acting in good faith.
Article 5. Form and Timing of Severance Benefits
-------------------------------------
5.1 Form and Timing of Severance Benefits. The Severance Benefits
described in Sections 3.2 (a), (b), (c), (d) and (e), shall be paid in cash to
the Executive in a single lump sum
<PAGE>
as soon as practicable following the Executive's Effective Date of Termination,
but in no event beyond ninety (90) calendar days from such date.
The Severance Benefits described in Section 3.2(f) and 3.5 herein
shall be provided by PCFC to the Executive immediately upon the Executive's
Effective Date of Termination and shall continue to be provided for three (3)
full calendar years from the Executive's Effective Date of Termination or until
the Executive reaches his or her Normal Retirement date, whichever occurs
earlier.
5.2 Withholding of Taxes. PCFC shall withhold from any amounts payable
under this Agreement all Federal, state, city, or other taxes as legally shall
be required.
Article 6. Parachute Payments
------------------
6.1 Excise Tax Cap. In the event that a Change in Control of PCFC shall
occur and a determination is made by PCFC, pursuant to Sections 280G and 4999 of
the Code (and corresponding state law provisions) that a golden parachute excise
tax is due, the Executive's Severance Benefits under this Plan shall be grossed
up for the amount equal to and only equal to the amount necessary to pay the
excise tax.
6.2 Subsequent Recalculation. In the event the Internal Revenue Service
adjusts the excise tax computation of PCFC, as provided in Section 6.1 herein,
such that the Executive is liable for the payment of a greater excise tax under
Sections 280G and 4999 of the Code, or such that the Executive does not receive
the full benefit that he or she would have received, PCFC shall reimburse the
Executive for the full amount necessary to make the Executive whole (less any
amounts received by the Executive that he or she would not have received had the
computation initially been computed as subsequently adjusted), including the
value of the excise tax and all corresponding interest and penalties due to the
Internal Revenue Service.
Article 7. Other Rights and Benefits Not Affected
--------------------------------------
7.1 Other Benefits. Neither the provisions of this Agreement nor the
Severance Benefits provided for hereunder shall reduce any amounts otherwise
payable, or in any way diminish the Executive's rights as an employee of PCFC,
whether existing now or hereafter, under any benefit, incentive, retirement,
stock option, stock bonus, stock purchase plan, or any employment agreement, or
other plan or arrangement.
7.2 Employment Status. This Agreement does not constitute a contract of
employment or impose on the Executive or PCFC any obligation to retain the
Executive as an employee, to change the status of the Executive's employment, or
to change PCFC's policies regarding termination of employment.
<PAGE>
Article 8. Successors
----------
8.1 Successors. PCFC will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) of all or
substantially all of the business and/or assets of PCFC or of any division or
subsidiary thereof to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that PCFC would be required to perform it
if no such succession had taken place. Failure of PCFC to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
PCFC in the same amount and on the same terms as they would be entitled
hereunder if terminated voluntarily following a Change in Control. Except for
the purposes of implementing the foregoing, the date on which any succession
becomes effective shall be deemed the Effective Date of Termination.
This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees, and legatees. If an Executive should
die while any amount would still be payable hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement, to the Executive's devisee,
legatee, or other designee, or if there is no such designee, to the Executive's
estate.
8.2 Beneficiaries. The beneficiary of the Executive under the Pacific
Century Financial Corporation Money Purchase Plan shall be the beneficiary of
the Executive's benefits under this Agreement, unless a beneficiary is otherwise
designated by the Executive in the form of a signed writing acceptable to the
Committee. An Executive may make or change such designation at any time.
Article 9. Administration
--------------
9.1 Administration. This Agreement shall be administered by the
Compensation Committee of the Board of Directors. The Committee is authorized to
interpret this Agreement, to prescribe and rescind rules and regulations, to
provide conditions and assurances deemed necessary and advisable, to protect the
interests of PCFC, and to make all other determinations necessary or advisable
for the Agreement's administration.
In fulfilling its administrative duties hereunder, the Committee may
rely on outside counsel, independent accountants, or other consultants to render
advice or assistance.
9.2 Indemnification and Exculpation. The members of the Board, its agents
and officers, directors, and employees of PCFC and its affiliates shall be
indemnified and held harmless by PCFC against and from any and all loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by them in
connection with or resulting from any claim, action, suit, or proceeding to
which they may be a party or in which they may be involved by reason of any
action taken or failure to act under this Agreement and against and from any and
all amounts paid by them in settlement (with PCFC's written approval) or paid by
them in satisfaction of a judgment in any such action, suit, or proceeding. The
foregoing provision shall
<PAGE>
not be applicable to any person if the loss, cost, liability, or expense is due
to such person's gross negligence or willful misconduct.
Article 10. Legal Fees
----------
10.1 Legal Fees and Expenses. PCFC shall pay all reasonable legal fees,
costs of litigation, and other expenses incurred in good faith by the Executive
as a result of PCFC's refusal to provide the Severance Benefits to which the
Executive becomes entitled under this Agreement, or as a result of PCFC's
contesting the validity, enforceability, or interpretation of the Agreement.
Provided, however, that such payments shall not exceed the amount permitted by
law and PCFC's Restated Articles of Incorporation.
IN WITNESS WHEREOF, PCFC has caused this Agreement to be executed by
a resolution of the Board of Directors, as of the day and year first above
written.
Pacific Century Financial Corporation
By: /S/ Michael E. O'Neill
----------------------------------
Michael E. O'Neill
Its: Chairman & CEO
By: /S/ Neal C. Hocklander
----------------------------------
(Executive)
ATTEST:
/S/ Mary Carryer
- ----------------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.32
<SEQUENCE>8
<FILENAME>dex1032.txt
<DESCRIPTION>SEVERANCE AGREEMENT FOR W. J. LASKEY
<TEXT>
<PAGE>
Exhibit 10.32
Key Executive
Change-in-Control
Severance Agreement
_________________
Pacific Century Financial Corporation
<PAGE>
Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Article 1. Establishment and Purpose ..................................... 1
Article 2. Definitions and Construction .................................. 2
Article 3. Severance Benefits ............................................ 4
Article 4. Just Cause .................................................... 6
Article 5. Form and Timing of Severance Benefits ......................... 7
Article 6. Parachute Payments ............................................ 7
Article 7. Other Rights and Benefits Not Affected ........................ 7
Article 8. Successors .................................................... 8
Article 9. Administration ................................................ 8
Article 10. Legal Fees and Arbitration .................................... 9
</TABLE>
<PAGE>
Pacific Century Financial Corporation
Key Executive
Change-in-Control Severance Agreement
Article 1. Establishment and Purpose
-------------------------
1.1 Effective Date. This Executive Change-in-Control Severance
Agreement (the "Agreement) is made and entered into pursuant to Pacific Century
Financial Corporation's Key Executive Severance Plan (the "Plan"), and is
effective as of this 27th day of April, 2001 (the "Effective Date"), by and
between Pacific Century Financial Corporation ("PCFC"), a Hawaii corporation,
and Walter J. Laskey, an executive (the "Executive") of PCFC and its subsidiary,
Bank of Hawaii (the "Bank"). This Agreement shall supersede and replace any
prior severance agreement entered into between PCFC and the Executive.
1.2 Term of the Agreement. The Agreement shall commence as of the
Effective Date written above, and shall continue until the Board of Directors of
PCFC (the "Board") determines, in good faith and in its sole discretion, that
the Executive is no longer to be included in the Plan and so notifies in writing
the Executive during the term of this Agreement of such determination.
Provided, however, in the event that a Change in Control of PCFC,
as defined in Section 2.1 herein, occurs during the term of this Agreement, this
Agreement shall remain irrevocably in effect for the greater of twenty-four (24)
months from the date of such Change in Control, or until all benefits have been
paid to the Executive hereunder.
Further, in the event that the Board has knowledge that a third
party has taken steps reasonably calculated to effect a Change in Control of
PCFC, including, but not limited to, the commencement of a tender offer for the
voting stock of PCFC, or the circulation of a proxy to PCFC's shareholders, then
this Agreement shall remain irrevocably in effect until the Board, in good
faith, determines that such third party has fully abandoned or terminated its
effort to effect a Change in Control of PCFC.
1.3 Purpose of the Agreement. The purpose of this Agreement pursuant to
the Plan, is to advance the interests of PCFC and the Bank by assuring that PCFC
and the Bank will have the continued employment and dedication of the Executive
and the availability of his advice and counsel in the event that an acquisition
or Change in Control of PCFC occurs. This Agreement shall also assure the
Executive of equitable treatment during the period of uncertainty that surrounds
an acquisition or Change in Control, and allow the Executive to act at all times
in the best interests of PCFC and its shareholders.
1.4 Contractual Right to Benefits. This Agreement establishes and vests
in the Executive a contractual right to the benefits which he or she is entitled
hereunder, enforceable by the Executive against PCFC. However, nothing herein
shall require PCFC to segregate, earmark, or otherwise set aside any funds or
other assets to provide for any payments hereunder.
<PAGE>
This Agreement shall be considered an unfunded agreement to provide
benefits to a select group of management or highly compensated employees, and is
therefore intended to be a "top-hat" plan exempt from the requirements of the
provisions of Parts 2, 3, and 4 of Title I of ERISA.
Article 2. Definitions and Construction
----------------------------
2.1 Definitions. Whenever used in the Agreement, the following terms
shall have the meanings set forth below and, when the meaning is intended, the
initial letter of the word is capitalized.
(a) "Base Salary" means the annualized salary at the beginning of
each Year, which includes all regular basic wages, before
reduction for any amounts deferred on a tax-qualified or
nonqualified basis, payable in cash to an Executive for
services rendered during the Year. Base Salary shall exclude
bonuses, incentive compensation, special fees or awards,
commissions, allowances, or any other form of premium or
incentive pay, or amounts designated by PCFC as payment toward
or reimbursement of expenses.
(b) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(c) "Beneficiary" with respect to an Executive means the person or
entities designated or deemed designated by an Executive
pursuant to Section 8.2 herein.
(d) "Board" means the Board of Directors of PCFC.
(e) "Change in Control" of PCFC means any one or more of the
following occurrences:
(i) Any Person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934,
becomes the beneficial owner of shares of PCFC having
25 percent or more of the total number of votes that
may be cast for the election of Directors of PCFC; or
(ii) As the result of, or in connection with, any cash
tender or exchange offer, merger or other business
combination, sale of assets or contested election, or
any combination of the foregoing transactions, the
person who were Directors of PCFC before the
<PAGE>
transaction shall cease to constitute a majority of the Board
of Directors of PCFC or any successor to PCFC.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "PCFC" means Pacific Century Financial Corporation, a Hawaii
corporation, or any successor thereto that adopts the
Agreement, as provided in Section 8.1 herein.
(h) "Committee" means the Compensation Committee of the Board of
Directors of PCFC or any other committee appointed by the
Board to administer this Agreement.
(i) "Disability" means a physical or mental condition which
renders an Executive unable to discharge his or her normal
work responsibility with PCFC or the Bank and which, in the
opinion of a licensed physician selected by the Executive,
subject to reasonable approval by the Committee based upon
sufficient medical evidence, can be reasonably expected to
continue for a period of at least one full calendar year. If
an Executive fails to select a physician with ten (10)
business days of a written request made by PCFC, then PCFC may
select a physician for purposes of this paragraph.
(j) "Effective Date" means the date the Agreement is approved by
the Board, or such other date as the Board shall designate in
its resolution approving the Agreement, and as provided in
Section 1.1 herein.
(k) "Effective Date of Termination" means the date on which a
voluntary employment termination or involuntary employment
termination other than for Just Cause occurs within
twenty-four (24) months of a Change in Control which triggers
Severance Benefits hereunder.
(l) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, or any successor act
thereto.
(m) "Expiration Date" means the date the Agreement expires, as
provided in Section 1.2 herein.
(n) "Just Cause" means a termination of an Executive's employment
by PCFC for which no Severance Benefits are payable hereunder,
as provided in Article 4 herein.
(o) "Normal Retirement Date" shall mean the date the Executive
reaches 65 years of age.
(p) "Person" shall have the meaning ascribed to such terms in
Section
<PAGE>
3(a)(9) of the Exchange Act and used in Sections 13(d) and
14(d) thereof, including a "group" as defined in Section
13(d).
(q) "Plan" means the Pacific Century Financial Corporation Key
Executive Severance Plan, adopted April 27, 1983.
(r) "Severance Benefit" means the payment of severance
compensation as provided in Article 3 herein.
(s) "Year" means the consecutive 12-month period beginning each
January 1 and ending December 31.
2.2 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.
2.3 Severability. In the event any provision of the Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Agreement, and the Agreement shall be
construed and enforced as if the illegal or invalid provision had not been
included.
2.4 Modification. No express provisions of this Agreement may be
modified, waived, or discharged unless such modification, waiver, or discharge
is agreed to by the Executive in writing and approved by the Compensation
Committee of the Board of Directors.
2.5 Applicable Law. To the extent not preempted by the laws of the
United States, the laws of the State of Hawaii shall be the controlling law in
all matters relating to the Agreement.
Article 3. Severance Benefits
------------------
3.1 Right to Severance Benefits. The Executive shall be entitled to
receive from PCFC Severance Benefits as described in Section 3.2 herein, if
there has been a Change in Control of PCFC, as defined in Section 2.1(e) herein,
and if, within twenty-four (24) months thereafter, the Executive voluntarily
terminates employment or is involuntarily terminated without Just Cause with
PCFC. An Executive shall not be entitled to receive Severance Benefits if the
Executive's employment with PCFC or Bank of Hawaii ends due to an involuntary
termination by PCFC for Just Cause, as provided under Article 4 herein.
3.2 Description of Severance Benefits. In the event that an Executive
becomes entitled to receive Severance Benefits, as provided in Section 3.1
herein, PCFC shall pay to the Executive and provide the Executive with the
following:
(a) An amount equal to three (3) times the Executive's highest
annual Base
<PAGE>
Salary earned (i) at any time during the three (3) complete
fiscal years immediately preceding the Effective Date of
Termination, or (ii) if the Executive was not employed during
such time period, at any time thereafter; and
(b) An amount equal to three (3) times the Executive's highest
annual bonus earned under the One-Year Incentive Plan during
the three (3) complete fiscal years prior to the Effective
Date of Termination, or, if shorter, over the Executive's
entire period of employment. However, if the Executive's
period of employment is less than one year, the bonus shall be
considered zero (0); and
(c) An amount equal to three (3) times the Executive's highest
annual incentive compensation earned under the Pacific Century
Financial Corporation Profit Sharing Plan, the Long-Term
Incentive Plan, or any successor plans thereto over the three
(3) complete fiscal years prior to the Effective Date of
Termination, or, if shorter, over the Executive's entire
period of employment. However, if the Executive's period of
employment is less than one year, the average incentive
compensation shall be considered zero (0); and
(d) An amount equal to the excess of (i) the maximum payment the
Executive would have received under the One-Year Incentive
Plan if he had continued in the employment of PCFC and the
Bank through the end of the performance period following the
Effective Date of Termination, and if the Bank had met its
maximum performance goals as provided under the terms of the
Plan and the maximum amount payable to the Executive had been
paid, over (ii) the actual payout under the One-Year Incentive
Plan resulting from the Executive's termination of employment;
and
(e) A payout under the Long-Term Incentive Plan, in accordance
with the terms of such Plan; and
(f) A continuation of all welfare benefits at no direct cost to
the Executive, including medical insurance, long-term
disability, and group term life insurance for three (3) full
years from the Effective Date of Termination or until the
Executive reaches his Normal Retirement Date, whichever occurs
earlier.
3.3 Reduction of Severance Benefits. In the event there are fewer than
thirty-six (36) whole or partial months remaining from the Executive's Effective
Date of Termination until the Executive's Normal Retirement Date, as defined
under the Retirement Plan, then the amounts provided for under Sections 3.2(a),
(b), and (c) above shall be reduced by a fraction, the
<PAGE>
numerator of which shall be the number of whole or partial months remaining
until the Executive's Normal Retirement Date, and the denominator of which shall
be thirty-six (36).
3.4 Fringe Benefits. The Executive's participation in fringe benefits
prior to the Executive's Effective Date of Termination shall be continued, or
equivalent benefits shall be provided, at no cost to the Executive, for a period
of three (3) years from the Executive's Effective Date of Termination (or until
he or she reaches his Normal Retirement Date, whichever occurs earlier).
3.5 Relocation Benefits. Should the Executive move his residence in
order to pursue other business opportunities within two (2) years of Executive's
Effective Date of Termination, the Executive shall be reimbursed for any moving
expenses (as defined in Section 217(b) of the Code) incurred in that relocation
(including taxes, if any, payable on the reimbursement) which are not reimbursed
by another employer. Benefits provided herein shall not exceed the assistance
and benefits customarily provided by PCFC to transferred employees prior to the
Change in Control.
3.6 Incentive Compensation. Any deferred awards previously granted to
the Executive under PCFC's incentive compensation plans and not previously paid
to the Executive, shall immediately vest on the date of the Executive's
Effective Date of Termination and shall be paid no later than ninety (90)
calendar days following that date, and be included as compensation in the month
paid.
3.8 Stock Options and SARs. Stock options ("options") and stock
appreciation rights ("SARs"), if any, granted to the Executive by PCFC will be
exercisable pursuant to the terms of the applicable plans.
Article 4. Just Cause
----------
4.1 Just Cause. Nothing in this Agreement shall be construed to prevent
PCFC or the Bank from terminating an Executive's employment for Just Cause. In
such case, no Severance Benefits shall be payable to the Executive under this
Agreement.
Just Cause shall mean the criminal conviction of the Executive for
an act of fraud, embezzlement, theft or any other act constituting a felony.
The determination that the Executive's actions constitute Just
Cause for termination shall be made by the Board, acting in good faith.
Article 5. Form and Timing of Severance Benefits
-------------------------------------
5.1 Form and Timing of Severance Benefits. The Severance Benefits
described in Sections 3.2 (a), (b), (c), (d) and (e), shall be paid in cash to
the Executive in a single lump sum
<PAGE>
as soon as practicable following the Executive's Effective Date of Termination,
but in no event beyond ninety (90) calendar days from such date.
The Severance Benefits described in Section 3.2(f) and 3.5 herein
shall be provided by PCFC to the Executive immediately upon the Executive's
Effective Date of Termination and shall continue to be provided for three (3)
full calendar years from the Executive's Effective Date of Termination or until
the Executive reaches his or her Normal Retirement date, whichever occurs
earlier.
5.2 Withholding of Taxes. PCFC shall withhold from any amounts payable
--------------------
under this Agreement all Federal, state, city, or other taxes as legally shall
be required.
Article 6. Parachute Payments
------------------
6.1 Excise Tax Cap. In the event that a Change in Control of PCFC shall
occur and a determination is made by PCFC, pursuant to Sections 280G and 4999 of
the Code (and corresponding state law provisions) that a golden parachute excise
tax is due, the Executive's Severance Benefits under this Plan shall be grossed
up for the amount equal to and only equal to the amount necessary to pay the
excise tax.
6.2 Subsequent Recalculation. In the event the Internal Revenue Service
adjusts the excise tax computation of PCFC, as provided in Section 6.1 herein,
such that the Executive is liable for the payment of a greater excise tax under
Sections 280G and 4999 of the Code, or such that the Executive does not receive
the full benefit that he or she would have received, PCFC shall reimburse the
Executive for the full amount necessary to make the Executive whole (less any
amounts received by the Executive that he or she would not have received had the
computation initially been computed as subsequently adjusted), including the
value of the excise tax and all corresponding interest and penalties due to the
Internal Revenue Service.
Article 7. Other Rights and Benefits Not Affected
--------------------------------------
7.1 Other Benefits. Neither the provisions of this Agreement nor the
Severance Benefits provided for hereunder shall reduce any amounts otherwise
payable, or in any way diminish the Executive's rights as an employee of PCFC,
whether existing now or hereafter, under any benefit, incentive, retirement,
stock option, stock bonus, stock purchase plan, or any employment agreement, or
other plan or arrangement.
7.2 Employment Status. This Agreement does not constitute a contract of
employment or impose on the Executive or PCFC any obligation to retain the
Executive as an employee, to change the status of the Executive's employment, or
to change PCFC's policies regarding termination of employment.
<PAGE>
Article 8. Successors
----------
8.1 Successors. PCFC will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) of all or
substantially all of the business and/or assets of PCFC or of any division or
subsidiary thereof to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that PCFC would be required to perform it
if no such succession had taken place. Failure of PCFC to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
PCFC in the same amount and on the same terms as they would be entitled
hereunder if terminated voluntarily following a Change in Control. Except for
the purposes of implementing the foregoing, the date on which any succession
becomes effective shall be deemed the Effective Date of Termination.
This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees, and legatees. If an Executive should
die while any amount would still be payable hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement, to the Executive's devisee,
legatee, or other designee, or if there is no such designee, to the Executive's
estate.
8.2 Beneficiaries. The beneficiary of the Executive under the Pacific
Century Financial Corporation Money Purchase Plan shall be the beneficiary of
the Executive's benefits under this Agreement, unless a beneficiary is otherwise
designated by the Executive in the form of a signed writing acceptable to the
Committee. An Executive may make or change such designation at any time.
Article 9. Administration
--------------
9.1 Administration. This Agreement shall be administered by the
Compensation Committee of the Board of Directors. The Committee is authorized to
interpret this Agreement, to prescribe and rescind rules and regulations, to
provide conditions and assurances deemed necessary and advisable, to protect the
interests of PCFC, and to make all other determinations necessary or advisable
for the Agreement's administration.
In fulfilling its administrative duties hereunder, the Committee
may rely on outside counsel, independent accountants, or other consultants to
render advice or assistance.
9.2 Indemnification and Exculpation. The members of the Board, its
agents and officers, directors, and employees of PCFC and its affiliates shall
be indemnified and held harmless by PCFC against and from any and all loss,
cost, liability, or expense that may be imposed upon or reasonably incurred by
them in connection with or resulting from any claim, action, suit, or proceeding
to which they may be a party or in which they may be involved by reason of any
action taken or failure to act under this Agreement and against and from any and
all amounts paid by them in settlement (with PCFC's written approval) or paid by
them in satisfaction of a judgment in any such action, suit, or proceeding. The
foregoing provision shall
<PAGE>
not be applicable to any person if the loss, cost, liability, or expense is due
to such person's gross negligence or willful misconduct.
Article 10. Legal Fees
----------
10.1 Legal Fees and Expenses. PCFC shall pay all reasonable legal fees,
-----------------------
costs of litigation, and other expenses incurred in good faith by the Executive
as a result of PCFC's refusal to provide the Severance Benefits to which the
Executive becomes entitled under this Agreement, or as a result of PCFC's
contesting the validity, enforceability, or interpretation of the Agreement.
Provided, however, that such payments shall not exceed the amount permitted by
law and PCFC's Restated Articles of Incorporation.
IN WITNESS WHEREOF, PCFC has caused this Agreement to be executed by a
resolution of the Board of Directors, as of the day and year first above
written.
Pacific Century Financial Corporation
By: /S/ Michael E. O'Neill
---------------------------------------------
Michael E. O'Neill
Its: Chairman & CEO
By: /S/ Walter J. Laskey
---------------------------------------------
(Executive)
ATTEST:
/S/ Neal C. Hocklander
- ----------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.33
<SEQUENCE>9
<FILENAME>dex1033.txt
<DESCRIPTION>SEVERANCE AGREEMENT FOR G.M. MOHEN
<TEXT>
<PAGE>
Exhibit 10.33
Key Executive
Change-in-Control
Severance Agreement
___________________
Pacific Century Financial Corporation
<PAGE>
Contents
________________________________________________________________________________
<TABLE>
<CAPTION>
Page
<S> <C>
Article 1. Establishment and Purpose .............................. 1
Article 2. Definitions and Construction ........................... 2
Article 3. Severance Benefits ..................................... 4
Article 4. Just Cause ............................................. 6
Article 5. Form and Timing of Severance Benefits .................. 7
Article 6. Parachute Payments ..................................... 7
Article 7. Other Rights and Benefits Not Affected ................. 7
Article 8. Successors ............................................. 8
Article 9. Administration ......................................... 8
Article 10. Legal Fees and Arbitration ............................. 9
</TABLE>
<PAGE>
Pacific Century Financial Corporation
Key Executive
Change-in-Control Severance Agreement
Article 1. Establishment and Purpose
-------------------------
1.1 Effective Date. This Executive Change-in-Control Severance Agreement
(the "Agreement) is made and entered into pursuant to Pacific Century Financial
Corporation's Key Executive Severance Plan (the "Plan"), and is effective as of
this 14th day of December, 2001 (the "Effective Date"), by and between Pacific
Century Financial Corporation ("PCFC"), a Hawaii corporation, and Gretchen M.
Mohen, an executive (the "Executive") of PCFC and its subsidiary, Bank of Hawaii
(the "Bank"). This Agreement shall supersede and replace any prior severance
agreement entered into between PCFC and the Executive.
1.2 Term of the Agreement. The Agreement shall commence as of the
Effective Date written above, and shall continue until the Board of Directors of
PCFC (the "Board") determines, in good faith and in its sole discretion, that
the Executive is no longer to be included in the Plan and so notifies in writing
the Executive during the term of this Agreement of such determination.
Provided, however, in the event that a Change in Control of PCFC, as
defined in Section 2.1 herein, occurs during the term of this Agreement, this
Agreement shall remain irrevocably in effect for the greater of twenty-four (24)
months from the date of such Change in Control, or until all benefits have been
paid to the Executive hereunder.
Further, in the event that the Board has knowledge that a third
party has taken steps reasonably calculated to effect a Change in Control of
PCFC, including, but not limited to, the commencement of a tender offer for the
voting stock of PCFC, or the circulation of a proxy to PCFC's shareholders, then
this Agreement shall remain irrevocably in effect until the Board, in good
faith, determines that such third party has fully abandoned or terminated its
effort to effect a Change in Control of PCFC.
1.3 Purpose of the Agreement. The purpose of this Agreement pursuant to
the Plan, is to advance the interests of PCFC and the Bank by assuring that PCFC
and the Bank will have the continued employment and dedication of the Executive
and the availability of his advice and counsel in the event that an acquisition
or Change in Control of PCFC occurs. This Agreement shall also assure the
Executive of equitable treatment during the period of uncertainty that surrounds
an acquisition or Change in Control, and allow the Executive to act at all times
in the best interests of PCFC and its shareholders.
1.4 Contractual Right to Benefits. This Agreement establishes and vests
in the Executive a contractual right to the benefits which he or she is entitled
hereunder, enforceable by the Executive against PCFC. However, nothing herein
shall require PCFC to segregate, earmark, or otherwise set aside any funds or
other assets to provide for any payments hereunder.
<PAGE>
This Agreement shall be considered an unfunded agreement to provide
benefits to a select group of management or highly compensated employees, and is
therefore intended to be a "top-hat" plan exempt from the requirements of the
provisions of Parts 2, 3, and 4 of Title I of ERISA.
Article 2. Definitions and Construction
----------------------------
2.1 Definitions. Whenever used in the Agreement, the following terms
shall have the meanings set forth below and, when the meaning is intended, the
initial letter of the word is capitalized.
(a) "Base Salary" means the annualized salary at the beginning of
each Year, which includes all regular basic wages, before
reduction for any amounts deferred on a tax-qualified or
nonqualified basis, payable in cash to an Executive for services
rendered during the Year. Base Salary shall exclude bonuses,
incentive compensation, special fees or awards, commissions,
allowances, or any other form of premium or incentive pay, or
amounts designated by PCFC as payment toward or reimbursement of
expenses.
(b) "Beneficial Owner" shall have the meaning ascribed to such term
in Rule 13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(c) "Beneficiary" with respect to an Executive means the person or
entities designated or deemed designated by an Executive pursuant
to Section 8.2 herein.
(d) "Board" means the Board of Directors of PCFC.
(e) "Change in Control" of PCFC means any one or more of the
following occurrences:
(i) Any Person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, becomes the
beneficial owner of shares of PCFC having 25 percent or more
of the total number of votes that may be cast for the
election of Directors of PCFC; or
(ii) As the result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale
of assets or contested election, or any combination of the
foregoing transactions, the person who were Directors of
PCFC before the
<PAGE>
transaction shall cease to constitute a majority of the
Board of Directors of PCFC or any successor to PCFC.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "PCFC" means Pacific Century Financial Corporation, a
Hawaii corporation, or any successor thereto that adopts the
Agreement, as provided in Section 8.1 herein.
(h) "Committee" means the Compensation Committee of the Board of
Directors of PCFC or any other committee appointed by the
Board to administer this Agreement.
(i) "Disability" means a physical or mental condition which
renders an Executive unable to discharge his or her normal
work responsibility with PCFC or the Bank and which, in the
opinion of a licensed physician selected by the Executive,
subject to reasonable approval by the Committee based upon
sufficient medical evidence, can be reasonably expected to
continue for a period of at least one full calendar year. If
an Executive fails to select a physician with ten (10)
business days of a written request made by PCFC, then PCFC
may select a physician for purposes of this paragraph.
(j) "Effective Date" means the date the Agreement is approved by
the Board, or such other date as the Board shall designate
in its resolution approving the Agreement, and as provided
in Section 1.1 herein.
(k) "Effective Date of Termination" means the date on which a
voluntary employment termination or involuntary employment
termination other than for Just Cause occurs within
twenty-four (24) months of a Change in Control which
triggers Severance Benefits hereunder.
(l) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, or any successor act
thereto.
(m) "Expiration Date" means the date the Agreement expires, as
provided in Section 1.2 herein.
(n) "Just Cause" means a termination of an Executive's
employment by PCFC for which no Severance Benefits are
payable hereunder, as provided in Article 4 herein.
(o) "Normal Retirement Date" shall mean the date the Executive
reaches 65 years of age.
(p) "Person" shall have the meaning ascribed to such terms in
Section
<PAGE>
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
(q) "Plan" means the Pacific Century Financial Corporation Key
Executive Severance Plan, adopted April 27, 1983.
(r) "Severance Benefit" means the payment of severance compensation
as provided in Article 3 herein.
(s) "Year" means the consecutive 12-month period beginning each
January 1 and ending December 31.
2.2 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.
2.3 Severability. In the event any provision of the Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Agreement, and the Agreement shall be
construed and enforced as if the illegal or invalid provision had not been
included.
2.4 Modification. No express provisions of this Agreement may be modified,
waived, or discharged unless such modification, waiver, or discharge is agreed
to by the Executive in writing and approved by the Compensation Committee of the
Board of Directors.
2.5 Applicable Law. To the extent not preempted by the laws of the United
States, the laws of the State of Hawaii shall be the controlling law in all
matters relating to the Agreement.
Article 3. Severance Benefits
3.1 Right to Severance Benefits. The Executive shall be entitled to
receive from PCFC Severance Benefits as described in Section 3.2 herein, if
there has been a Change in Control of PCFC, as defined in Section 2.1(e) herein,
and if, within twenty-four (24) months thereafter, the Executive voluntarily
terminates employment or is involuntarily terminated without Just Cause with
PCFC. An Executive shall not be entitled to receive Severance Benefits if the
Executive's employment with PCFC or Bank of Hawaii ends due to an involuntary
termination by PCFC for Just Cause, as provided under Article 4 herein.
3.2 Description of Severance Benefits. In the event that an Executive
becomes entitled to receive Severance Benefits, as provided in Section 3.1
herein, PCFC shall pay to the Executive and provide the Executive with the
following:
(a) An amount equal to three (3) times the Executive's highest
annual Base
<PAGE>
Salary earned (i) at any time during the three (3) complete
fiscal years immediately preceding the Effective Date of
Termination, or (ii) if the Executive was not employed during
such time period, at any time thereafter; and
(b) An amount equal to three (3) times the Executive's highest annual
bonus earned under the One-Year Incentive Plan during the three
(3) complete fiscal years prior to the Effective Date of
Termination, or, if shorter, over the Executive's entire period
of employment. However, if the Executive's period of employment
is less than one year, the bonus shall be considered zero (0);
and
(c) An amount equal to three (3) times the Executive's highest annual
incentive compensation earned under the Pacific Century Financial
Corporation Profit Sharing Plan, the Long-Term Incentive Plan, or
any successor plans thereto over the three (3) complete fiscal
years prior to the Effective Date of Termination, or, if shorter,
over the Executive's entire period of employment. However, if the
Executive's period of employment is less than one year, the
average incentive compensation shall be considered zero (0); and
(d) An amount equal to the excess of (i) the maximum payment the
Executive would have received under the One-Year Incentive Plan
if he had continued in the employment of PCFC and the Bank
through the end of the performance period following the Effective
Date of Termination, and if the Bank had met its maximum
performance goals as provided under the terms of the Plan and the
maximum amount payable to the Executive had been paid, over (ii)
the actual payout under the One-Year Incentive Plan resulting
from the Executive's termination of employment; and
(e) A payout under the Long-Term Incentive Plan, in accordance with
the terms of such Plan; and
(f) A continuation of all welfare benefits at no direct cost to the
Executive, including medical insurance, long-term disability, and
group term life insurance for three (3) full years from the
Effective Date of Termination or until the Executive reaches his
Normal Retirement Date, whichever occurs earlier.
3.3 Reduction of Severance Benefits. In the event there are fewer than
thirty-six (36) whole or partial months remaining from the Executive's Effective
Date of Termination until the Executive's Normal Retirement Date, as defined
under the Retirement Plan, then the amounts provided for under Sections 3.2(a),
(b), and (c) above shall be reduced by a fraction, the
<PAGE>
numerator of which shall be the number of whole or partial months remaining
until the Executive's Normal Retirement Date, and the denominator of which shall
be thirty-six (36).
3.4 Fringe Benefits. The Executive's participation in fringe benefits prior
to the Executive's Effective Date of Termination shall be continued, or
equivalent benefits shall be provided, at no cost to the Executive, for a period
of three (3) years from the Executive's Effective Date of Termination (or until
he or she reaches his Normal Retirement Date, whichever occurs earlier).
3.5 Relocation Benefits. Should the Executive move his residence in order
to pursue other business opportunities within two (2) years of Executive's
Effective Date of Termination, the Executive shall be reimbursed for any moving
expenses (as defined in Section 217(b) of the Code) incurred in that relocation
(including taxes, if any, payable on the reimbursement) which are not reimbursed
by another employer. Benefits provided herein shall not exceed the assistance
and benefits customarily provided by PCFC to transferred employees prior to the
Change in Control.
3.6 Incentive Compensation. Any deferred awards previously granted to the
Executive under PCFC's incentive compensation plans and not previously paid to
the Executive, shall immediately vest on the date of the Executive's Effective
Date of Termination and shall be paid no later than ninety (90) calendar days
following that date, and be included as compensation in the month paid.
3.8 Stock Options and SARs. Stock options ("options") and stock
appreciation rights ("SARs"), if any, granted to the Executive by PCFC will be
exercisable pursuant to the terms of the applicable plans.
Article 4. Just Cause
----------
4.1 Just Cause. Nothing in this Agreement shall be construed to prevent
PCFC or the Bank from terminating an Executive's employment for Just Cause. In
such case, no Severance Benefits shall be payable to the Executive under this
Agreement.
Just Cause shall mean the criminal conviction of the Executive for an
act of fraud, embezzlement, theft or any other act constituting a felony.
The determination that the Executive's actions constitute Just Cause
for termination shall be made by the Board, acting in good faith.
Article 5. Form and Timing of Severance Benefits
-------------------------------------
5.1 Form and Timing of Severance Benefits. The Severance Benefits described
in Sections 3.2 (a), (b), (c), (d) and (e), shall be paid in cash to the
Executive in a single lump sum
<PAGE>
as soon as practicable following the Executive's Effective Date of Termination,
but in no event beyond ninety (90) calendar days from such date.
The Severance Benefits described in Section 3.2(f) and 3.5 herein
shall be provided by PCFC to the Executive immediately upon the Executive's
Effective Date of Termination and shall continue to be provided for three (3)
full calendar years from the Executive's Effective Date of Termination or until
the Executive reaches his or her Normal Retirement date, whichever occurs
earlier.
5.2 Withholding of Taxes. PCFC shall withhold from any amounts payable
under this Agreement all Federal, state, city, or other taxes as legally shall
be required.
Article 6. Parachute Payments
------------------
6.1 Excise Tax Cap. In the event that a Change in Control of PCFC shall
occur and a determination is made by PCFC, pursuant to Sections 280G and 4999 of
the Code (and corresponding state law provisions) that a golden parachute excise
tax is due, the Executive's Severance Benefits under this Plan shall be grossed
up for the amount equal to and only equal to the amount necessary to pay the
excise tax.
6.2 Subsequent Recalculation. In the event the Internal Revenue Service
adjusts the excise tax computation of PCFC, as provided in Section 6.1 herein,
such that the Executive is liable for the payment of a greater excise tax under
Sections 280G and 4999 of the Code, or such that the Executive does not receive
the full benefit that he or she would have received, PCFC shall reimburse the
Executive for the full amount necessary to make the Executive whole (less any
amounts received by the Executive that he or she would not have received had the
computation initially been computed as subsequently adjusted), including the
value of the excise tax and all corresponding interest and penalties due to the
Internal Revenue Service.
Article 7. Other Rights and Benefits Not Affected
--------------------------------------
7.1 Other Benefits. Neither the provisions of this Agreement nor the
Severance Benefits provided for hereunder shall reduce any amounts otherwise
payable, or in any way diminish the Executive's rights as an employee of PCFC,
whether existing now or hereafter, under any benefit, incentive, retirement,
stock option, stock bonus, stock purchase plan, or any employment agreement, or
other plan or arrangement.
7.2 Employment Status. This Agreement does not constitute a contract of
employment or impose on the Executive or PCFC any obligation to retain the
Executive as an employee, to change the status of the Executive's employment, or
to change PCFC's policies regarding termination of employment.
<PAGE>
Article 8. Successors
----------
8.1 Successors. PCFC will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) of all or
substantially all of the business and/or assets of PCFC or of any division or
subsidiary thereof to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that PCFC would be required to perform it
if no such succession had taken place. Failure of PCFC to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
PCFC in the same amount and on the same terms as they would be entitled
hereunder if terminated voluntarily following a Change in Control. Except for
the purposes of implementing the foregoing, the date on which any succession
becomes effective shall be deemed the Effective Date of Termination.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees, and legatees. If an Executive should
die while any amount would still be payable hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement, to the Executive's devisee,
legatee, or other designee, or if there is no such designee, to the Executive's
estate.
8.2 Beneficiaries. The beneficiary of the Executive under the Pacific
Century Financial Corporation Money Purchase Plan shall be the beneficiary of
the Executive's benefits under this Agreement, unless a beneficiary is otherwise
designated by the Executive in the form of a signed writing acceptable to the
Committee. An Executive may make or change such designation at any time.
Article 9. Administration
9.1 Administration. This Agreement shall be administered by the
Compensation Committee of the Board of Directors. The Committee is authorized to
interpret this Agreement, to prescribe and rescind rules and regulations, to
provide conditions and assurances deemed necessary and advisable, to protect the
interests of PCFC, and to make all other determinations necessary or advisable
for the Agreement's administration.
In fulfilling its administrative duties hereunder, the Committee may
rely on outside counsel, independent accountants, or other consultants to
render advice or assistance.
9.2 Indemnification and Exculpation. The members of the Board, its agents
and officers, directors, and employees of PCFC and its affiliates shall be
indemnified and held harmless by PCFC against and from any and all loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by them in
connection with or resulting from any claim, action, suit, or proceeding to
which they may be a party or in which they may be involved by reason of any
action taken or failure to act under this Agreement and against and from any and
all amounts paid by them in settlement (with PCFC's written approval) or paid by
them in satisfaction of a judgment in any such action, suit, or proceeding. The
foregoing provision shall
<PAGE>
not be applicable to any person if the loss, cost, liability, or expense is due
to such person's gross negligence or willful misconduct.
Article 10. Legal Fees
----------
10.1 Legal Fees and Expenses. PCFC shall pay all reasonable legal fees,
costs of litigation, and other expenses incurred in good faith by the Executive
as a result of PCFC's refusal to provide the Severance Benefits to which the
Executive becomes entitled under this Agreement, or as a result of PCFC's
contesting the validity, enforceability, or interpretation of the Agreement.
Provided, however, that such payments shall not exceed the amount permitted by
law and PCFC's Restated Articles of Incorporation.
IN WITNESS WHEREOF, PCFC has caused this Agreement to be executed by a
resolution of the Board of Directors, as of the day and year first above
written.
Pacific Century Financial Corporation
By: /S/ Michael E. O'Neill
--------------------------------------
Michael E. O'Neill
Its: Chairman & CEO
By: /S/ Gretchen M. Mohen
--------------------------------------
(Executive)
ATTEST:
/S/ Neal C. Hocklander
- --------------------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.34
<SEQUENCE>10
<FILENAME>dex1034.txt
<DESCRIPTION>SEVERANCE AGREEMENT FOR D.W. THOMAS
<TEXT>
<PAGE>
Exhibit 10.34
Key Executive
Change-in-Control
Severance Agreement
__________
Pacific Century Financial Corporation
<PAGE>
Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Article 1. Establishment and Purpose .............................. 1
Article 2. Definitions and Construction ........................... 2
Article 3. Severance Benefits ..................................... 4
Article 4. Just Cause ............................................. 6
Article 5. Form and Timing of Severance Benefits .................. 7
Article 6. Parachute Payments ..................................... 7
Article 7. Other Rights and Benefits Not Affected ................. 7
Article 8. Successors ............................................. 8
Article 9. Administration ......................................... 8
Article 10. Legal Fees and Arbitration ............................. 9
</TABLE>
<PAGE>
Pacific Century Financial Corporation
Key Executive
Change-in-Control Severance Agreement
Article 1. Establishment and Purpose
-------------------------
1.1 Effective Date. This Executive Change-in-Control Severance Agreement
(the "Agreement) is made and entered into pursuant to Pacific Century Financial
Corporation's Key Executive Severance Plan (the "Plan"), and is effective as of
this 22nd day of June, 2001 (the "Effective Date"), by and between Pacific
Century Financial Corporation ("PCFC"), a Hawaii corporation, and David W.
Thomas, an executive (the "Executive") of PCFC and its subsidiary, Bank of
Hawaii (the "Bank"). This Agreement shall supersede and replace any prior
severance agreement entered into between PCFC and the Executive.
1.2 Term of the Agreement. The Agreement shall commence as of the
Effective Date written above, and shall continue until the Board of Directors of
PCFC (the "Board") determines, in good faith and in its sole discretion, that
the Executive is no longer to be included in the Plan and so notifies in writing
the Executive during the term of this Agreement of such determination.
Provided, however, in the event that a Change in Control of PCFC, as
defined in Section 2.1 herein, occurs during the term of this Agreement, this
Agreement shall remain irrevocably in effect for the greater of twenty-four (24)
months from the date of such Change in Control, or until all benefits have been
paid to the Executive hereunder.
Further, in the event that the Board has knowledge that a third party
has taken steps reasonably calculated to effect a Change in Control of PCFC,
including,.but not limited to, the commencement of a tender offer for the voting
stock of PCFC, or the circulation of a proxy to PCFC's shareholders, then this
Agreement shall remain irrevocably in effect until the Board, in good faith,
determines that such third party has fully abandoned or terminated its effort to
effect a Change in Control of PCFC.
1.3 Purpose of the Agreement. The purpose of this Agreement pursuant to
the Plan, is to advance the interests of PCFC and the Bank by assuring that PCFC
and the Bank will have the continued employment and dedication of the Executive
and the availability of his advice and counsel in the event that an acquisition
or Change in Control of PCFC occurs. This Agreement shall also assure the
Executive of equitable treatment during the period of uncertainty that surrounds
an acquisition or Change in Control, and allow the Executive to act at all times
in the best interests of PCFC and its shareholders.
1.4 Contractual Right to Benefits. This Agreement establishes and vests
in the Executive a contractual right to the benefits which he or she is entitled
hereunder, enforceable by the Executive against PCFC. However, nothing herein
shall require PCFC to segregate, earmark, or otherwise set aside any funds or
other assets to provide for any payments hereunder.
<PAGE>
This Agreement shall be considered an unfunded agreement to provide
benefits to a select group of management or highly compensated employees, and is
therefore intended to be a "top-hat" plan exempt from the requirements of the
provisions of Parts 2, 3, and 4 of Title I of ERISA.
Article 2. Definitions and Construction
----------------------------
2.1 Definitions. Whenever used in the Agreement, the following terms
shall have the meanings set forth below and, when the meaning is intended, the
initial letter of the word is capitalized.
(a) "Base Salary" means the annualized salary at the beginning of
each Year, which includes all regular basic wages, before
reduction for any amounts deferred on a tax-qualified or
nonqualified basis, payable in cash to an Executive for
services rendered during the Year. Base Salary shall exclude
bonuses, incentive compensation, special fees or awards,
commissions, allowances, or any other form of premium or
incentive pay, or amounts designated by PCFC as payment toward
or reimbursement of expenses.
(b) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(c) "Beneficiary" with respect to an Executive means the person or
entities designated or deemed designated by an Executive
pursuant to Section 8.2 herein.
(d) "Board" means the Board of Directors of PCFC.
(e) "Change in Control" of PCFC means any one or more of the
following occurrences:
(i) Any Person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, becomes
the beneficial owner of shares of PCFC having 25 percent
or more of the total number of votes that may be cast
for the election of Directors of PCFC; or
(ii) As the result of, or in connection with, any cash tender
or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination
of the foregoing transactions, the person who were
Directors of PCFC before the
<PAGE>
transaction shall cease to constitute a majority of the Board
of Directors of PCFC or any successor to PCFC.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "PCFC" means Pacific Century Financial Corporation, a Hawaii
corporation, or any successor thereto that adopts the
Agreement, as provided in Section 8.1 herein.
(h) "Committee" means the Compensation Committee of the Board of
Directors of PCFC or any other committee appointed by the
Board to administer this Agreement.
(i) "Disability" means a physical or mental condition which
renders an Executive unable to discharge his or her normal
work responsibility with PCFC or the Bank and which, in the
opinion of a licensed physician selected by the Executive,
subject to reasonable approval by the Committee based upon
sufficient medical evidence, can be reasonably expected to
continue for a period of at least one full calendar year. If
an Executive fails to select a physician with ten (10)
business days of a written request made by PCFC, then PCFC may
select a physician for purposes of this paragraph.
(j) "Effective Date" means the date the Agreement is approved by
the Board, or such other date as the Board shall designate in
its resolution approving the Agreement, and as provided in
Section 1.1 herein.
(k) "Effective Date of Termination" means the date on which a
voluntary employment termination or involuntary employment
termination other than for Just Cause occurs within
twenty-four (24) months of a Change in Control which triggers
Severance Benefits hereunder.
(l) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, or any successor act
thereto.
(m) "Expiration Date" means the date the Agreement expires, as
provided in Section 1.2 herein.
(n) "Just Cause" means a termination of an Executive's employment
by PCFC for which no Severance Benefits are payable hereunder,
as provided in Article 4 herein.
(o) "Normal Retirement Date" shall mean the date the Executive
reaches 65 years of age.
(p) "Person" shall have the meaning ascribed to such terms in
Section
<PAGE>
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
(q) "Plan" means the Pacific Century Financial Corporation Key
Executive Severance Plan, adopted April 27, 1983.
(r) "Severance Benefit" means the payment of severance compensation
as provided in Article 3 herein.
(s) "Year" means the consecutive 12-month period beginning each
January 1 and ending December 31.
2.2 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.
2.3 Severability. In the event any provision of the Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Agreement, and the Agreement shall be
construed and enforced as if the illegal or invalid provision had not been
included.
2.4 Modification. No express provisions of this Agreement may be
modified, waived, or discharged unless such modification, waiver, or discharge
is agreed to by the Executive in writing and approved by the Compensation
Committee of the Board of Directors.
2.5 Applicable Law. To the extent not preempted by the laws of the United
States, the laws of the State of Hawaii shall be the controlling law in all
matters relating to the Agreement.
Article 3. Severance Benefits
------------------
3.1 Right to Severance Benefits. The Executive shall be entitled to
receive from PCFC Severance Benefits as described in Section 3.2 herein, if
there has been a Change in Control of PCFC, as defined in Section 2.1(e) herein,
and if, within twenty-four (24) months thereafter, the Executive voluntarily
terminates employment or is involuntarily terminated without Just Cause with
PCFC. An Executive shall not be entitled to receive Severance Benefits if the
Executive's employment with PCFC or Bank of Hawaii ends due to an involuntary
termination by PCFC for Just Cause, as provided under Article 4 herein.
3.2 Description of Severance Benefits. In the event that an Executive
becomes entitled to receive Severance Benefits, as provided in Section 3.1
herein, PCFC shall pay to the Executive and provide the Executive with the
following:
(a) An amount equal to three (3) times the Executive's highest
annual Base
<PAGE>
Salary earned (i) at any time during the three (3) complete
fiscal years immediately preceding the Effective Date of
Termination, or (ii) if the Executive was not employed during
such time period, at any time thereafter; and
(b) An amount equal to three (3) times the Executive's highest annual
bonus earned under the One-Year Incentive Plan during the three
(3) complete fiscal years prior to the Effective Date of
Termination, or, if shorter, over the Executive's entire period
of employment. However, if the Executive's period of employment
is less than one year, the bonus shall be considered zero (0);
and
(c) An amount equal to three (3) times the Executive's highest annual
incentive compensation earned under the Pacific Century Financial
Corporation Profit Sharing Plan, the Long-Term Incentive Plan, or
any successor plans thereto over the three (3) complete fiscal
years prior to the Effective Date of Termination, or, if shorter,
over the Executive's entire period of employment. However, if the
Executive's period of employment is less than one year, the
average incentive compensation shall be considered zero (0); and
(d) An amount equal to the excess of (i) the maximum payment the
Executive would have received under the One-Year Incentive Plan
if he had continued in the employment of PCFC and the Bank
through the end of the performance period following the Effective
Date of Termination, and if the Bank had met its maximum
performance goals as provided under the terms of the Plan and the
maximum amount payable to the Executive had been paid, over (ii)
the actual payout under the One-Year Incentive Plan resulting
from the Executive's termination of employment; and
(e) A payout under the Long-Term Incentive Plan, in accordance with
the terms of such Plan; and
(f) A continuation of all welfare benefits at no direct cost to the
Executive, including medical insurance, long-term disability, and
group term life insurance for three (3) full years from the
Effective Date of Termination or until the Executive reaches his
Normal Retirement Date, whichever occurs earlier.
3.3 Reduction of Severance Benefits. In the event there are fewer than
thirty-six (36) whole or partial months remaining from the Executive's Effective
Date of Termination until the Executive's Normal Retirement Date, as defined
under the Retirement Plan, then the amounts provided for under Sections 3.2(a),
(b), and (c) above shall be reduced by a fraction, the
<PAGE>
numerator of which shall be the number of whole or partial months remaining
until the Executive's Normal Retirement Date, and the denominator of which shall
be thirty-six (36).
3.4 Fringe Benefits. The Executive's participation in fringe benefits
prior to the Executive's Effective Date of Termination shall be continued, or
equivalent benefits shall be provided, at no cost to the Executive, for a period
of three (3) years from the Executive's Effective Date of Termination (or until
he or she reaches his Normal Retirement Date, whichever occurs earlier).
3.5 Relocation Benefits. Should the Executive move his residence in order
to pursue other business opportunities within two (2) years of Executive's
Effective Date of Termination, the Executive shall be reimbursed for any moving
expenses (as defined in Section 217(b) of the Code) incurred in that relocation
(including taxes, if any, payable on the reimbursement) which are not reimbursed
by another employer. Benefits provided herein shall not exceed the assistance
and benefits customarily provided by PCFC to transferred employees prior to the
Change in Control.
3.6 Incentive Compensation. Any deferred awards previously granted to the
Executive under PCFC's incentive compensation plans and not previously paid to
the Executive, shall immediately vest on the date of the Executive's Effective
Date of Termination and shall be paid no later than ninety (90) calendar days
following that date, and be included as compensation in the month paid.
3.8 Stock Options and SARs. Stock options ("options") and stock
appreciation rights ("SARs"), if any, granted to the Executive by PCFC will be
exercisable pursuant to the terms of the applicable plans.
Article 4. Just Cause
----------
4.1 Just Cause. Nothing in this Agreement shall be construed to prevent
PCFC or the Bank from terminating an Executive's employment for Just Cause. In
such case, no Severance Benefits shall be payable to the Executive under this
Agreement.
Just Cause shall mean the criminal conviction of the Executive for an
act of fraud, embezzlement, theft or any other act constituting a felony.
The determination that the Executive's actions constitute Just Cause
for termination shall be made by the Board, acting in good faith.
Article 5. Form and Timing of Severance Benefits
-------------------------------------
5.1 Form and Timing of Severance Benefits. The Severance Benefits
described in Sections 3.2 (a), (b), (c), (d) and (e), shall be paid in cash to
the Executive in a single lump sum
<PAGE>
as soon as practicable following the Executive's Effective Date of Termination,
but in no event beyond ninety (90) calendar days from such date.
The Severance Benefits described in Section 3.2(f) and 3.5 herein
shall be provided by PCFC to the Executive immediately upon the Executive's
Effective Date of Termination and shall continue to be provided for three (3)
full calendar years from the Executive's Effective Date of Termination or until
the Executive reaches his or her Normal Retirement date, whichever occurs
earlier.
5.2 Withholding of Taxes. PCFC shall withhold from any amounts payable
under this Agreement all Federal, state, city, or other taxes as legally shall
be required.
Article 6. Parachute Payments
------------------
6.1 Excise Tax Cap. In the event that a Change in Control of PCFC shall
occur and a determination is made by PCFC, pursuant to Sections 280G and 4999 of
the Code (and corresponding state law provisions) that a golden parachute excise
tax is due, the Executive's Severance Benefits under this Plan shall be grossed
up for the amount equal to and only equal to the amount necessary to pay the
excise tax.
6.2 Subsequent Recalculation. In the event the Internal Revenue Service
adjusts the excise tax computation of PCFC, as provided in Section 6.1 herein,
such that the Executive is liable for the payment of a greater excise tax under
Sections 280G and 4999 of the Code, or such that the Executive does not receive
the full benefit that he or she would have received, PCFC shall reimburse the
Executive for the full amount necessary to make the Executive whole (less any
amounts received by the Executive that he or she would not have received had the
computation initially been computed as subsequently adjusted), including the
value of the excise tax and all corresponding interest and penalties due to the
Internal Revenue Service.
Article 7. Other Rights and Benefits Not Affected
--------------------------------------
7.1 Other Benefits. Neither the provisions of this Agreement nor the
Severance Benefits provided for hereunder shall reduce any amounts otherwise
payable, or in any way diminish the Executive's rights as an employee of PCFC,
whether existing now or hereafter, under any benefit, incentive, retirement,
stock option, stock bonus, stock purchase plan, or any employment agreement, or
other plan or arrangement.
7.2 Employment Status. This Agreement does not constitute a contract of
employment or impose on the Executive or PCFC any obligation to retain the
Executive as an employee, to change the status of the Executive's employment, or
to change PCFC's policies regarding termination of employment.
<PAGE>
Article 8. Successors
----------
8.1 Successors. PCFC will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) of all or
substantially all of the business and/or assets of PCFC or of any division or
subsidiary thereof to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that PCFC would be required to perform it
if no such succession had taken place. Failure of PCFC to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
PCFC in the same amount and on the same terms as they would be entitled
hereunder if terminated voluntarily following a Change in Control. Except for
the purposes of implementing the foregoing, the date on which any succession
becomes effective shall be deemed the Effective Date of Termination.
This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees, and legatees. If an Executive should
die while any amount would still be payable hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement, to the Executive's devisee,
legatee, or other designee, or if there is no such designee, to the Executive's
estate.
8.2 Beneficiaries. The beneficiary of the Executive under the Pacific
Century Financial Corporation Money Purchase Plan shall be the beneficiary of
the Executive's benefits under this Agreement, unless a beneficiary is otherwise
designated by the Executive in the form of a signed writing acceptable to the
Committee. An Executive may make or change such designation at any time.
Article 9. Administration
--------------
9.1 Administration. This Agreement shall be administered by the
Compensation Committee of the Board of Directors. The Committee is authorized to
interpret this Agreement, to prescribe and rescind rules and regulations, to
provide conditions and assurances deemed necessary and advisable, to protect the
interests of PCFC, and to make all other determinations necessary or advisable
for the Agreement's administration.
In fulfilling its administrative duties hereunder, the Committee may
rely on outside counsel, independent accountants, or other consultants to render
advice or assistance.
9.2 Indemnification and Exculpation. The members of the Board, its agents
and officers, directors, and employees of PCFC and its affiliates shall be
indemnified and held harmless by PCFC against and from any and all loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by them in
connection with or resulting from any claim, action, suit, or proceeding to
which they may be a party or in which they may be involved by reason of any
action taken or failure to act under this Agreement and against and from any and
all amounts paid by them in settlement (with PCFC's written approval) or paid by
them in satisfaction of a judgment in any such action, suit, or proceeding. The
foregoing provision shall
<PAGE>
not be applicable to any person if the loss, cost, liability, or expense is due
to such person's gross negligence or willful misconduct.
Article 10. Legal Fees
----------
10.1 Legal Fees and Expenses. PCFC shall pay all reasonable legal fees,
costs of litigation, and other expenses incurred in good faith by the Executive
as a result of PCFC's refusal to provide the Severance Benefits to which the
Executive becomes entitled under this Agreement, or as a result of PCFC's
contesting the validity, enforceability, or interpretation of the Agreement.
Provided, however, that such payments shall not exceed the amount permitted by
law and PCFC's Restated Articles of Incorporation.
IN WITNESS WHEREOF, PCFC has caused this Agreement to be executed by
a resolution of the Board of Directors, as of the day and year first above
written.
Pacific Century Financial Corporation
By: /S/ Michael E. O'Neill
----------------------------------------
Michael E. O'Neill
Its: Chairman & CEO
By: /S/ David W. Thomas
----------------------------------------
(Executive)
ATTEST:
/S/ Neal C. Hocklander
- --------------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.35
<SEQUENCE>11
<FILENAME>dex1035.txt
<DESCRIPTION>SEVERANCE AGREEMENT FOR J.T. KIEFER
<TEXT>
<PAGE>
Exhibit 10.35
Key Executive
Change-in-Control
Severance Agreement
__________
Pacific Century Financial Corporation
<PAGE>
Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Article 1. Establishment and Purpose ............................... 1
Article 2. Definitions and Construction ............................ 2
Article 3. Severance Benefits ...................................... 4
Article 4. Just Cause .............................................. 6
Article 5. Form and Timing of Severance Benefits ................... 7
Article 6. Parachute Payments ...................................... 7
Article 7. Other Rights and Benefits Not Affected .................. 7
Article 8. Successors .............................................. 8
Article 9. Administration .......................................... 8
Article 10. Legal Fees and Arbitration .............................. 9
</TABLE>
<PAGE>
Pacific Century Financial Corporation
Key Executive
Change-in-Control Severance Agreement
Article 1. Establishment and Purpose
-------------------------
1.1 Effective Date. This Executive Change-in-Control Severance Agreement
(the "Agreement) is made and entered into pursuant to Pacific Century Financial
Corporation's Key Executive Severance Plan (the "Plan"), and is effective as of
this 25th day of January, 2002 (the "Effective Date"), by and between Pacific
Century Financial Corporation ("PCFC"), a Hawaii corporation, and Joseph T.
Kiefer, an executive (the "Executive") of PCFC and its subsidiary, Bank of
Hawaii (the "Bank"). This Agreement shall supersede and replace any prior
severance agreement entered into between PCFC and the Executive.
1.2 Term of the Agreement. The Agreement shall commence as of the
Effective Date written above, and shall continue until the Board of Directors of
PCFC (the "Board") determines, in good faith and in its sole discretion, that
the Executive is no longer to be included in the Plan and so notifies in writing
the Executive during the term of this Agreement of such determination.
Provided, however, in the event that a Change in Control of PCFC, as
defined in Section 2.1 herein, occurs during the term of this Agreement, this
Agreement shall remain irrevocably in effect for the greater of twenty-four (24)
months from the date of such Change in Control, or until all benefits have been
paid to the Executive hereunder.
Further, in the event that the Board has knowledge that a third party
has taken steps reasonably calculated to effect a Change in Control of PCFC,
including, but not limited to, the commencement of a tender offer for the voting
stock of PCFC, or the circulation of a proxy to PCFC's shareholders, then this
Agreement shall remain irrevocably in effect until the Board, in good faith,
determines that such third party has fully abandoned or terminated its effort to
effect a Change in Control of PCFC.
1.3 Purpose of the Agreement. The purpose of this Agreement pursuant to
the Plan, is to advance the interests of PCFC and the Bank by assuring that PCFC
and the Bank will have the continued employment and dedication of the Executive
and the availability of his advice and counsel in the event that an acquisition
or Change in Control of PCFC occurs. This Agreement shall also assure the
Executive of equitable treatment during the period of uncertainty that surrounds
an acquisition or Change in Control, and allow the Executive to act at all times
in the best interests of PCFC and its shareholders.
1.4 Contractual Right to Benefits. This Agreement establishes and vests
in the Executive a contractual right to the benefits which he or she is entitled
hereunder, enforceable by the Executive against PCFC. However, nothing herein
shall require PCFC to segregate, earmark, or otherwise set aside any funds or
other assets to provide for any payments hereunder.
<PAGE>
This Agreement shall be considered an unfunded agreement to provide
benefits to a select group of management or highly compensated employees, and is
therefore intended to be a "top-hat" plan exempt from the requirements of the
provisions of Parts 2, 3, and 4 of Title I of ERISA.
Article 2. Definitions and Construction
----------------------------
2.1 Definitions. Whenever used in the Agreement, the following terms
shall have the meanings set forth below and, when the meaning is intended, the
initial letter of the word is capitalized.
(a) "Base Salary" means the annualized salary at the beginning of
each Year, which includes all regular basic wages, before
reduction for any amounts deferred on a tax-qualified or
nonqualified basis, payable in cash to an Executive for
services rendered during the Year. Base Salary shall exclude
bonuses, incentive compensation, special fees or awards,
commissions, allowances, or any other form of premium or
incentive pay, or amounts designated by PCFC as payment toward
or reimbursement of expenses.
(b) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(c) "Beneficiary" with respect to an Executive means the person or
entities designated or deemed designated by an Executive
pursuant to Section 8.2 herein.
(d) "Board" means the Board of Directors of PCFC.
(e) "Change in Control" of PCFC means any one or more of the
following occurrences:
(i) Any Person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, becomes
the beneficial owner of shares of PCFC having 25 percent
or more of the total number of votes that may be cast
for the election of Directors of PCFC; or
(ii) As the result of, or in connection with, any cash tender
or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination
of the foregoing transactions, the person who were
Directors of PCFC before the
<PAGE>
transaction shall cease to constitute a majority of the Board
of Directors of PCFC or any successor to PCFC.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "PCFC" means Pacific Century Financial Corporation, a Hawaii
corporation, or any successor thereto that adopts the
Agreement, as provided in Section 8.1 herein.
(h) "Committee" means the Compensation Committee of the Board of
Directors of PCFC or any other committee appointed by the
Board to administer this Agreement.
(i) "Disability" means a physical or mental condition which
renders an Executive unable to discharge his or her normal
work responsibility with PCFC or the Bank and which, in the
opinion of a licensed physician selected by the Executive,
subject to reasonable approval by the Committee based upon
sufficient medical evidence, can be reasonably expected to
continue for a period of at least one full calendar year. If
an Executive fails to select a physician with ten (10)
business days of a written request made by PCFC, then PCFC may
select a physician for purposes of this paragraph.
(j) "Effective Date" means the date the Agreement is approved by
the Board, or such other date as the Board shall designate in
its resolution approving the Agreement, and as provided in
Section 1.1 herein.
(k) "Effective Date of Termination" means the date on which a
voluntary employment termination or involuntary employment
termination other than for Just Cause occurs within
twenty-four (24) months of a Change in Control which triggers
Severance Benefits hereunder.
(l) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, or any successor act
thereto.
(m) "Expiration Date" means the date the Agreement expires, as
provided in Section 1.2 herein.
(n) "Just Cause" means a termination of an Executive's employment
by PCFC for which no Severance Benefits are payable hereunder,
as provided in Article 4 herein.
(o) "Normal Retirement Date" shall mean the date the Executive
reaches 65 years of age.
(p) "Person" shall have the meaning ascribed to such terms in
Section
<PAGE>
3(a)(9) of the Exchange Act and used in Sections 13(d) and
14(d) thereof, including a "group" as defined in Section
13(d).
(q) "Plan" means the Pacific Century Financial Corporation Key
Executive Severance Plan, adopted April 27, 1983.
(r) "Severance Benefit" means the payment of severance
compensation as provided in Article 3 herein.
(s) "Year" means the consecutive 12-month period beginning each
January 1 and ending December 31.
2.2 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.
2.3 Severability. In the event any provision of the Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Agreement, and the Agreement shall be
construed and enforced as if the illegal or invalid provision had not been
included.
2.4 Modification. No express provisions of this Agreement may be
modified, waived, or discharged unless such modification, waiver, or discharge
is agreed to by the Executive in writing and approved by the Compensation
Committee of the Board of Directors.
2.5 Applicable Law. To the extent not preempted by the laws of the
United States, the laws of the State of Hawaii shall be the controlling law in
all matters relating to the Agreement.
Article 3. Severance Benefits
------------------
3.1 Right to Severance Benefits. The Executive shall be entitled to
receive from PCFC Severance Benefits as described in Section 3.2 herein, if
there has been a Change in Control of PCFC, as defined in Section 2.1(e) herein,
and if, within twenty-four (24) months thereafter, the Executive voluntarily
terminates employment or is involuntarily terminated without Just Cause with
PCFC. An Executive shall not be entitled to receive Severance Benefits if the
Executive's employment with PCFC or Bank of Hawaii ends due to an involuntary
termination by PCFC for Just Cause, as provided under Article 4 herein.
3.2 Description of Severance Benefits. In the event that an Executive
becomes entitled to receive Severance Benefits, as provided in Section 3.1
herein, PCFC shall pay to the Executive and provide the Executive with the
following:
(a) An amount equal to three (3) times the Executive's highest
annual Base
<PAGE>
Salary earned (i) at any time during the three (3) complete
fiscal years immediately preceding the Effective Date of
Termination, or (ii) if the Executive was not employed during
such time period, at any time thereafter; and
(b) An amount equal to three (3) times the Executive's highest annual
bonus earned under the One-Year Incentive Plan during the three
(3) complete fiscal years prior to the Effective Date of
Termination, or, if shorter, over the Executive's entire period
of employment. However, if the Executive's period of employment
is less than one year, the bonus shall be considered zero (0);
and
(c) An amount equal to three (3) times the Executive's highest annual
incentive compensation earned under the Pacific Century Financial
Corporation Profit Sharing Plan, the Long-Term Incentive Plan, or
any successor plans thereto over the three (3) complete fiscal
years prior to the Effective Date of Termination, or, if shorter,
over the Executive's entire period of employment. However, if the
Executive's period of employment is less than one year, the
average incentive compensation shall be considered zero (0); and
(d) An amount equal to the excess of (i) the maximum payment the
Executive would have received under the One-Year Incentive Plan
if he had continued in the employment of PCFC and the Bank
through the end of the performance period following the Effective
Date of Termination, and if the Bank had met its maximum
performance goals as provided under the terms of the Plan and the
maximum amount payable to the Executive had been paid, over (ii)
the actual payout under the One-Year Incentive Plan resulting
from the Executive's termination of employment; and
(e) A payout under the Long-Term Incentive Plan, in accordance with
the terms of such Plan; and
(f) A continuation of all welfare benefits at no direct cost to the
Executive, including medical insurance, long-term disability, and
group term life insurance for three (3) full years from the
Effective Date of Termination or until the Executive reaches his
Normal Retirement Date, whichever occurs earlier.
3.3 Reduction of Severance Benefits. In the event there are fewer than
thirty-six (36) whole or partial months remaining from the Executive's Effective
Date of Termination until the Executive's Normal Retirement Date, as defined
under the Retirement Plan, then the amounts provided for under Sections 3.2(a),
(b), and (c) above shall be reduced by a fraction, the
<PAGE>
numerator of which shall be the number of whole or partial months remaining
until the Executive's Normal Retirement Date, and the denominator of which shall
be thirty-six (36).
3.4 Fringe Benefits. The Executive's participation in fringe benefits
prior to the Executive's Effective Date of Termination shall be continued, or
equivalent benefits shall be provided, at no cost to the Executive, for a period
of three (3) years from the Executive's Effective Date of Termination (or until
he or she reaches his Normal Retirement Date, whichever occurs earlier).
3.5 Relocation Benefits. Should the Executive move his residence in order
to pursue other business opportunities within two (2) years of Executive's
Effective Date of Termination, the Executive shall be reimbursed for any moving
expenses (as defined in Section 217(b) of the Code) incurred in that relocation
(including taxes, if any, payable on the reimbursement) which are not reimbursed
by another employer. Benefits provided herein shall not exceed the assistance
and benefits customarily provided by PCFC to transferred employees prior to the
Change in Control.
3.6 Incentive Compensation. Any deferred awards previously granted to the
Executive under PCFC's incentive compensation plans and not previously paid to
the Executive, shall immediately vest on the date of the Executive's Effective
Date of Termination and shall be paid no later than ninety (90) calendar days
following that date, and be included as compensation in the month paid.
3.8 Stock Options and SARs. Stock options ("options") and stock
appreciation rights ("SARs"), if any, granted to the Executive by PCFC will be
exercisable pursuant to the terms of the applicable plans.
Article 4. Just Cause
----------
4.1 Just Cause. Nothing in this Agreement shall be construed to prevent
PCFC or the Bank from terminating an Executive's employment for Just Cause. In
such case, no Severance Benefits shall be payable to the Executive under this
Agreement.
Just Cause shall mean the criminal conviction of the Executive for an
act of fraud, embezzlement, theft or any other act constituting a felony.
The determination that the Executive's actions constitute Just Cause
for termination shall be made by the Board, acting in good faith.
Article 5. Form and Timing of Severance Benefits
-------------------------------------
5.1 Form and Timing of Severance Benefits. The Severance Benefits
described in Sections 3.2 (a), (b), (c), (d) and (e), shall be paid in cash to
the Executive in a single lump sum
<PAGE>
as soon as practicable following the Executive's Effective Date of Termination,
but in no event beyond ninety (90) calendar days from such date.
The Severance Benefits described in Section 3.2(f) and 3.5 herein
shall be provided by PCFC to the Executive immediately upon the Executive's
Effective Date of Termination and shall continue to be provided for three (3)
full calendar years from the Executive's Effective Date of Termination or until
the Executive reaches his or her Normal Retirement date, whichever occurs
earlier.
5.2 Withholding of Taxes. PCFC shall withhold from any amounts payable
under this Agreement all Federal, state, city, or other taxes as legally shall
be required.
Article 6. Parachute Payments
------------------
6.1 Excise Tax Cap. In the event that a Change in Control of PCFC shall
occur and a determination is made by PCFC, pursuant to Sections 280G and 4999 of
the Code (and corresponding state law provisions) that a golden parachute excise
tax is due, the Executive's Severance Benefits under this Plan shall be grossed
up for the amount equal to and only equal to the amount necessary to pay the
excise tax.
6.2 Subsequent Recalculation. In the event the Internal Revenue Service
adjusts the excise tax computation of PCFC, as provided in Section 6.1 herein,
such that the Executive is liable for the payment of a greater excise tax under
Sections 280G and 4999 of the Code, or such that the Executive does not receive
the full benefit that he or she would have received, PCFC shall reimburse the
Executive for the full amount necessary to make the Executive whole (less any
amounts received by the Executive that he or she would not have received had the
computation initially been computed as subsequently adjusted), including the
value of the excise tax and all corresponding interest and penalties due to the
Internal Revenue Service.
Article 7. Other Rights and Benefits Not Affected
--------------------------------------
7.1 Other Benefits. Neither the provisions of this Agreement nor the
Severance Benefits provided for hereunder shall reduce any amounts otherwise
payable, or in any way diminish the Executive's rights as an employee of PCFC,
whether existing now or hereafter, under any benefit, incentive, retirement,
stock option, stock bonus, stock purchase plan, or any employment agreement, or
other plan or arrangement.
7.2 Employment Status. This Agreement does not constitute a contract of
employment or impose on the Executive or PCFC any obligation to retain the
Executive as an employee, to change the status of the Executive's employment, or
to change PCFC's policies regarding termination of employment.
<PAGE>
Article 8. Successors
----------
8.1 Successors. PCFC will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) of all or
substantially all of the business and/or assets of PCFC or of any division or
subsidiary thereof to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that PCFC would be required to perform it
if no such succession had taken place. Failure of PCFC to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
PCFC in the same amount and on the same terms as they would be entitled
hereunder if terminated voluntarily following a Change in Control. Except for
the purposes of implementing the foregoing, the date on which any succession
becomes effective shall be deemed the Effective Date of Termination.
This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees, and legatees. If an Executive should
die while any amount would still be payable hereunder had the Executive
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement, to the Executive's devisee,
legatee, or other designee, or if there is no such designee, to the Executive's
estate.
8.2 Beneficiaries. The beneficiary of the Executive under the Pacific
Century Financial Corporation Money Purchase Plan shall be the beneficiary of
the Executive's benefits under this Agreement, unless a beneficiary is otherwise
designated by the Executive in the form of a signed writing acceptable to the
Committee. An Executive may make or change such designation at any time.
Article 9. Administration
--------------
9.1 Administration. This Agreement shall be administered by the
Compensation Committee of the Board of Directors. The Committee is authorized to
interpret this Agreement, to prescribe and rescind rules and regulations, to
provide conditions and assurances deemed necessary and advisable, to protect the
interests of PCFC, and to make all other determinations necessary or advisable
for the Agreement's administration.
In fulfilling its administrative duties hereunder, the Committee may
rely on outside counsel, independent accountants, or other consultants to render
advice or assistance.
9.2 Indemnification and Exculpation. The members of the Board, its agents
and officers, directors, and employees of PCFC and its affiliates shall be
indemnified and held harmless by PCFC against and from any and all loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by them in
connection with or resulting from any claim, action, suit, or proceeding to
which they may be a party or in which they may be involved by reason of any
action taken or failure to act under this Agreement and against and from any and
all amounts paid by them in settlement (with PCFC's written approval) or paid by
them in satisfaction of a judgment in any such action, suit, or proceeding. The
foregoing provision shall
<PAGE>
not be applicable to any person if the loss, cost, liability, or expense is due
to such person's gross negligence or willful misconduct.
Article 10. Legal Fees
----------
10.1 Legal Fees and Expenses. PCFC shall pay all reasonable legal fees,
costs of litigation, and other expenses incurred in good faith by the Executive
as a result of PCFC's refusal to provide the Severance Benefits to which the
Executive becomes entitled under this Agreement, or as a result of PCFC's
contesting the validity, enforceability, or interpretation of the Agreement.
Provided, however, that such payments shall not exceed the amount permitted by
law and PCFC's Restated Articles of Incorporation.
IN WITNESS WHEREOF, PCFC has caused this Agreement to be executed by
a resolution of the Board of Directors, as of the day and year first above
written.
Pacific Century Financial Corporation
By: /S/ Michael E. O'Neill
-----------------------------------------
Michael E. O'Neill
Its: Chairman & CEO
By: /S/ Joseph T. Kiefer
-----------------------------------------
(Executive)
ATTEST:
/S/ Neal C. Hocklander
- -----------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.36
<SEQUENCE>12
<FILENAME>dex1036.txt
<DESCRIPTION>SEVERANCE AGREEMENT FOR L.L. MCCARNEY
<TEXT>
<PAGE>
Exhibit 10.36
Key Executive
Change-in-Control
Severance Agreement
_______________
Pacific Century Financial Corporation
<PAGE>
Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Article 1. Establishment and Purpose .................................... 1
Article 2. Definitions and Construction ................................. 2
Article 3. Severance Benefits ........................................... 4
Article 4. Just Cause ................................................... 6
Article 5. Form and Timing of Severance Benefits ........................ 7
Article 6. Parachute Payments ........................................... 7
Article 7. Other Rights and Benefits Not Affected ....................... 7
Article 8. Successors ................................................... 8
Article 9. Administration ............................................... 8
Article 10. Legal Fees and Arbitration ................................... 9
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Pacific Century Financial Corporation
Key Executive
Change-in-Control Severance Agreement
Article 1. Establishment and Purpose
-------------------------
1.1 Effective Date. This Executive Change-in-Control Severance
Agreement (the "Agreement) is made and entered into pursuant to Pacific Century
Financial Corporation's Key Executive Severance Plan (the "Plan"), and is
effective as of this 2