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, 1999

Business Overview: A financial services organization with a broad presence in the Pacific region, operating through four major geographic segments: Hawaii, the Pacific, Asia, and the U.S. Mainland, plus a Treasury and Corporate segment.

Key Financial Metrics

Liquidity & Capital:

• Cash & Non-Interest Bearing Deposits: $417.1 million (Sept 30, 1999) vs. $564.2 million (Dec 31, 1998).
• Short-Term Borrowings: $335.4 million.
• Long-Term Debt: $794.8 million (increased from $585.6 million at year-end 1998 due to $125 million in subordinated notes).
• Regulatory Capital Ratios: Tier 1 (10.00%), Total Capital (12.93%), Leverage (8.15%). All exceed "well capitalized" thresholds.

Material Changes vs. Prior Period

• Earnings Decline (Q3): Net income dropped 38.3% year-over-year in Q3 1999, primarily due to a $22.5 million restructuring charge related to a redesign program. Excluding this charge, tangible net income was $25.9 million.
• Earnings Growth (9M): Year-to-date net income increased 32.5% to $95.4 million, driven by lower loan loss provisions and higher non-interest income.
• Loan Loss Provision: The provision for loan losses for the nine months ended Sept 30, 1999, was $40.0 million, a significant decrease from $71.0 million in the same period in 1998. This reflects a decline in net charge-offs ($37.0 million in 1999 vs. $54.1 million in 1998).
• Non-Interest Income: Increased 33.2% in Q3 1999 to $71.4 million, largely due to a one-time $14.0 million gain from the sale of Arbella Leasing Corp. and incremental income from the Triad Insurance Agency acquisition.
• Asset Mix: Total assets declined slightly due to managed reductions in less productive assets (cash and short-term investments). Non-performing assets (NPAs) rose to $154.8 million (1.59% of loans) from $151.5 million a year ago.

Guidance, Outlook, and Risks

• Redesign Program: Management estimates the ongoing redesign program will produce annualized cost savings of $43 million and revenue enhancements of $21 million when fully implemented in Q4 2000.
• Year 2000 (Y2K) Readiness: The company has completed all five phases of its Y2K plan for critical systems. Estimated total costs are approximately $41 million, with $34.5 million incurred through Sept 30, 1999. Risks remain regarding third-party vendor readiness.
• International Exposure: Significant credit exposure exists in South Korea ($345.8 million), Japan ($282.1 million), and Taiwan ($115.1 million). The company is in ongoing discussions with a Korean group of related borrowers regarding financial difficulties ($34 million exposure).
• Market Risk: The balance sheet is slightly liability-sensitive to interest rate changes. Foreign currency exposure is managed via hedging, with an unhedged net investment position of $92.7 million in foreign subsidiaries.

Investor Verification Checklist

• Restructuring Impact: Verify the actual cost savings and revenue enhancements realized from the $22.5 million restructuring charge in future quarters.
• One-Time Gains: Assess the sustainability of earnings growth given the $14.0 million gain from the Arbella Leasing sale and the impact of the Triad acquisition.
• Credit Quality in Asia: Monitor the resolution of the $34 million exposure to the Korean borrower group and overall credit trends in the Asia segment.
• Y2K Contingencies: Review updates on third-party vendor readiness and any potential business disruptions as the millennium approaches.
• Loan Loss Reserves: Confirm the adequacy of the $211.3 million reserve (2.22% of loans) given the rise in non-performing assets to 1.59%.