BOH

Business Context and Reporting Period

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

Filing Type: Form 10-K (Annual Report)

Period Ended: December 31, 1999

Pacific Century is a bank holding company engaged primarily in commercial and retail banking. Operations are conducted through four geographic segments: Hawaii, the South and West Pacific, Asia, and the U.S. Mainland. Principal subsidiaries include Bank of Hawaii and Pacific Century Bank, N.A. The company employs approximately 4,700 people and operates a trans-Pacific network of branches and representative offices.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Growth: Net income increased 24.3% to $133.0 million, driven by higher non-interest income and improved efficiency, despite a $22.5 million restructuring charge.
• Restructuring: The company recorded a $22.5 million pre-tax restructuring charge in 1999 related to a redesign program aimed at reducing expenses and enhancing revenues. This compares to a $19.4 million charge in 1998.
• Loan Portfolio: Total loans decreased 1.4% to $9.72 billion, primarily due to a $197 million reduction in foreign loans (partially due to currency translation in the South Pacific).
• Asset Quality: Non-performing assets (NPAs) rose to $149.9 million (1.54% of total loans) from $137.5 million (1.40%) in 1998. Net loan charge-offs increased to $73.8 million from $65.7 million.
• Acquisitions: Acquired Triad Insurance Agency, Inc. in January 1999, contributing approximately $8.4 million in incremental non-interest income.

Guidance, Outlook, Risks, and Unusual Items

• Redesign Program: Management expects the ongoing redesign program, when fully implemented in Q4 2000, to contribute an annualized revenue increase of $21 million and expense reduction of $43 million.
• Asian Credit Exposure: A significant unusual item was a $19.5 million charge-off related to a South Korean conglomerate that suspended debt service payments. Total exposure to this borrower was $33.7 million. Negotiations with creditors were ongoing at year-end.
• Foreign Operations: The Asia segment reported a 57.2% drop in net income to $5.9 million, largely due to a $14.5 million increase in the economic provision for loan losses reflecting regional financial volatility.
• Regulatory Outlook: The company is evaluating whether to elect to become a financial holding company under the Gramm-Leach-Bliley Act, which would permit broader financial activities. No decision had been made as of the filing date.
• Market Risk: The company maintains a liability-sensitive balance sheet, implying potential short-term negative impact on net interest income if interest rates rise. Foreign currency exposure is managed via hedging, though $87.6 million of net investment in foreign subsidiaries remains unhedged.

Investor Verification Checklist

• South Korean Exposure: Verify the status of negotiations regarding the $33.7 million exposure to the South Korean conglomerate and the adequacy of remaining reserves.
• Restructuring Savings: Monitor the realization of the projected $43 million in annualized expense savings from the redesign program.
• Foreign Currency Impact: Assess the impact of the Pacific franc devaluation on South Pacific subsidiary earnings and asset values.
• Capital Ratios: Confirm that Tier 1 and Total Capital ratios remain well above the "well capitalized" regulatory thresholds (6% and 10% respectively).
• Non-Interest Income: Evaluate the sustainability of the 25.4% increase in non-interest income, which included non-recurring gains from the sale of leasing subsidiaries and venture capital assets.