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: Quarter and nine months ended September 30, 1998

Overview: Pacific Century operates primarily in Hawaii, the Pacific, Asia, and the U.S. Mainland. The period was characterized by a strategic restructuring plan involving branch closures and bank mergers, as well as significant exposure to the Asian financial crisis which impacted loan loss provisions and non-performing assets.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Decline: Nine-month net income decreased 32.3% year-over-year. This decline is primarily attributed to a $19.4 million pre-tax restructuring charge recognized in Q2 1998 and a significant increase in the provision for loan losses ($71.0 million vs. $20.5 million).
• Loan Loss Provisions: The provision for loan losses surged due to rising gross charge-offs ($63.0 million YTD vs. $32.8 million YTD 1997) and a buildup of reserves to address economic uncertainties in Asia. Foreign loan charge-offs were $26.8 million YTD, compared to nil in 1997.
• Non-Performing Assets: NPAs increased to $151.5 million (1.59% of loans) from $94.7 million (0.99% of loans) a year ago. The increase is driven by foreign and commercial categories, including assets acquired in May 1998 from Banque Paribas.
• Acquisitions: In May 1998, the company acquired Group Paribas' interests in New Caledonia and French Polynesia, adding approximately $304 million in assets and impacting comparability.
• Restructuring: The company completed the merger of First Federal Savings and Loan Association of America with Bank of Hawaii and consolidated its U.S. Mainland banks, resulting in the closure of 27 branches in 1998.

Guidance, Outlook, and Risks

• Asian Economic Crisis: Management continues to monitor credit exposure in Asia, specifically Thailand and Indonesia, where economic volatility remains high. Cross-border credit assets in these regions were reduced to $37 million and $16 million, respectively, as of September 30, 1998.
• Hawaii Economy: The local economy is forecast to exhibit little growth in 1998, with the Asian crisis negatively impacting tourism and spending.
• Year 2000 (Y2K) Compliance: The company estimates total costs for Y2K remediation at approximately $41 million. As of September 30, 1998, $20.2 million had been incurred. Critical systems are expected to be fully implemented by June 1999.
• Capital Position: Regulatory capital ratios remain well above minimum guidelines for "well capitalized" status (Total Capital Ratio: 11.74%; Tier 1: 9.65%).
• Interest Rate Risk: The balance sheet is slightly liability sensitive. A 200 basis point rise in rates would decrease Net Interest Income (NII) by 1.1%, while a 200 basis point drop would increase NII by 1.6%.

Investor Verification Checklist

• Loan Loss Reserve Adequacy: Verify the sufficiency of the $209.7 million reserve (2.24% of loans) given the continued volatility in Asian markets and the specific exposure to Thailand and Indonesia.
• Restructuring Execution: Confirm the realization of cost savings from the branch closures and bank mergers announced in the restructuring plan.
• Y2K Cost Estimates: Monitor actual spending against the $41 million estimate and assess potential operational disruptions from third-party vendors.
• Foreign Asset Quality: Review the specific composition of the $67.9 million in foreign non-accrual loans, particularly the $41.8 million in French Polynesia and New Caledonia.
• Deposit Stability: Assess the impact of intense competition on deposit retention, noting the 1.9% decline in total deposits from year-end 1997.