BOH

Business Context and Reporting Period

Company: Pacific Century Financial Corporation (Parent of Bank of Hawaii Corp)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three months ended March 31, 2000

Overview: Pacific Century is a financial services organization with a broad presence throughout the Pacific region, including Hawaii, the U.S. Mainland, Asia, and the South Pacific. The company operates through a network of branches and subsidiaries offering retail, commercial, and international banking services.

Key Financial Metrics

Liquidity and Capital: Shareholders' equity totaled $1.23 billion. Regulatory capital ratios exceeded "well capitalized" thresholds: Tier 1 Capital Ratio of 10.68%, Total Capital Ratio of 13.64%, and Leverage Ratio of 8.59%.

Material Changes vs. Prior Period

• Profitability Growth: Net income increased 12.3% year-over-year, driven by a 6.5% reduction in non-interest expenses and a 4.5% increase in non-interest income, which offset a 3.0% decline in net interest income.
• Expense Reduction: Non-interest expenses decreased primarily due to reduced Year 2000 remediation costs and savings from the "redesign" program aimed at streamlining operations.
• Asset Composition: Total assets declined 4.5% year-over-year. While loans grew 1.5%, investment securities and other short-term earning assets decreased by approximately $700 million as the company managed down less productive assets.
• Deposit Trends: Total deposits fell 3.1%. Domestic deposits increased by $163 million, but foreign deposits declined by $455 million, largely due to a reduction in "time due to banks" and currency fluctuations in the South Pacific.
• Credit Quality: Non-performing assets (NPAs) improved to 1.39% of total loans (down from 1.69% in Q1 1999). Net charge-offs were $11.3 million (0.48% of average loans), slightly higher than the prior year's $10.8 million.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Redesign Program: The company is implementing a redesign program to improve service delivery and reduce costs. When fully implemented (expected Q4 2000), it is projected to generate an annualized pretax revenue increase of $21 million and an annualized operating expense reduction of $43 million.
• Tangible Earnings: On a tangible basis (excluding intangible amortization), earnings were $43.9 million, up 11.8% from the prior year. Tangible ROE was 17.54%.
• Segment Performance: The Hawaii segment saw a 41.1% increase in net income. The U.S. Mainland segment increased income by 29%. The Asia segment reported a net loss of $0.5 million compared to a profit of $0.8 million in the prior year, attributed to lower net interest margins.

Risks and Contingencies

• Forward-Looking Statements: Management cautions that actual results may differ due to economic conditions in Hawaii, the U.S. Mainland, Asia, and the South Pacific; interest rate shifts; and currency fluctuations.
• Redesign Risks: Risks include the inability to realize expected cost savings, lower-than-expected revenue from new initiatives, or business disruption during implementation.
• Foreign Operations: The company maintains significant exposure in Asia and the South Pacific. While most foreign currency assets are funded by like currency liabilities, capital investments in foreign subsidiaries remain exposed to exchange rate fluctuations. An unhedged position of $90.4 million existed as of March 31, 2000.
• Interest Rate Risk: The balance sheet is slightly liability sensitive, implying a potential short-term unfavorable impact on net interest income if interest rates rise rapidly.

Investor Verification Checklist

• Redesign Program Execution: Verify if the projected $43 million in annualized expense savings and $21 million in revenue growth are being realized as the program moves toward completion in Q4 2000.
• Asia Segment Credit Quality: Monitor the Asia segment's performance, which turned to a net loss, and the specific exposure to South Korean credits mentioned in the foreign operations section.
• Foreign Deposit Stability: Assess the sustainability of the $455 million year-over-year decline in foreign deposits and the impact of currency fluctuations in the South Pacific.
• Investment Portfolio Strategy: Confirm the rationale and impact of the $700 million reduction in investment securities and short-term earning assets on future liquidity and yield.
• Non-Performing Asset Trends: Track the ratio of NPAs to total loans (currently 1.39%) to ensure the downward trend continues despite the slight increase in net charge-offs.