Sunday, April 22, 2001

O’neill to unveil
‘secret plan’ to
revitalize Pacific
Century Financial

New CEO expected to
reveal tomorrow how wide
and deep the scalpel will cut

By Rick Daysog

BANK OF AMERICA HAWAII wasn't profitable enough for Michael O'Neill. So he and other bank executives sold it.

O'Neill, then chief financial officer of Bank of America, reasoned that they needed to invest too much in the 39-branch Hawaii operations to compete with the larger and more entrenched First Hawaiian Bank and Bank of Hawaii.

If Wall Street or Bishop Street wants a hint of how O'Neill will deal with the financial woes at Bank of Hawaii and its parent, Pacific Century Financial Corp., they need only look to his role in the 1997 sale of Bank of America Hawaii.

The Bankoh building at the Financial Plaza
of the Pacific is one of the landmarks in
downtown Honolulu.

While there are no plans to sell Pacific Century, the new chairman and chief executive officer is scrutinizing the local organization from top to bottom, just like he did with Bank of America Hawaii.

Tomorrow, O'Neill is scheduled to unveil the results of his four-month strategic review of Pacific Century's operations, an effort designed to restore investor confidence in the bank and re-establish the company as a top regional lender.

The details of the plan are a closely guarded secret, but analysts and local bankers expect a major shakeup.

Unprofitable ventures will likely be phased out or sold, additional troubled loans written down and marginally profitable units will need to justify their existence.

Bank sources said O'Neill may even be looking into changing the name of Pacific Century to re-emphasize its Hawaii roots.

Already, investors like what they've seen in O'Neill. The company's stock has shot up from $13 in November to close at $21.16 Friday, its highest level this year.

"I don't think there are any sacred cows," said Joe Morford, financial services analyst with Dain Rauscher Wessels in San Francisco. "Businesses that fall short will either be restructured, downsized or exited all together."

O'Neill declined to be interviewed for this story, citing federal disclosure laws. But in recent media reports, O'Neill has been blunt about the challenges facing Pacific Century. Before he took the helm in November, and since, the bank has made a number of moves to improve its balance sheets. They include:

>> The sale of Bank of Hawaii's credit card portfolio to American Express Centurion Bank,

>> The hiring of several key officers to oversee the bank's loan portfolio, including former Bank of America executive William Nelson as vice chairman and risk management expert Allan Landon as chief financial officer and vice chairman,

>> The sale of Pacific Century's nine-branch Arizona operation to Utah-based Zions Bancorporation,

>> The disposal of a $65 million troubled commercial loan at an unspecified loss. The loss was offset by previously allocated reserves.

>> The sale of minority stakes in the Bank of Tonga and Pacific Commercial Bank Limited of Samoa.

"They're going to pare down things that don't make sense and expand in areas that are more profitable," said local analyst Richard Dole, who heads Dole Capital LLC. "They're selling off and focusing on their core business."

O'Neill's track record at Bank of America and other financial institutions indicates that he won't shy away from the tough decisions at Pacific Century, analysts said.

A retired Marine, O'Neill earned his reputation as a disciplined troubleshooter who is driven to increase shareholder value.

Morford believes that O'Neill is taking a close look at its 19-branch Southern California subsidiary. Encino-based Pacific Century Bank NA serves the small community banking niche but is "never going to be a major player" in that market, Morford said.

Brock Vandervliet, an analyst with Lehman Bros. in New York, said that Pacific Century is more likely to sell off units in the Pacific Rim rather than its California branches.

Investors understand the California strategy and the California economy is much more vibrant than Hawaii's, he said. Vandervliet believes that many of the Pacific Rim branches have been marginally profitable while requiring a lot of management attention.

"We've seen Pacific Century address some of the low-hanging fruit with the sale of their credit card unit and the Arizona branches," Morford said. "I think the questions are whether they are going to remain committed to their operations in the Pacific. What are the plans for their bank in California?"

But O'Neill's biggest target will be the bank's troubled loans.

Once the envy of the banking industry for its conservative lending practices, Bank of Hawaii's loan portfolio has deteriorated significantly during the past several years, due in large part to past-due loans in Asia and problem real estate lending in Hawaii.

The bad debts have hammered the company's recent quarterly earnings and wiped out some savings from last year's gut-wrenching New Era redesign, which slashed roughly 1,000 positions from its payroll.

They also contributed indirectly to the resignation of Pacific Century's former chief executive officer, Lawrence Johnson.

Last year, the company charged off $110.8 million in troubled loans, up from $103.3 million in 1999 and more than double 1996's $44.1 million. A charge off or write down means that the bank is recording the loan or portions of the loan as a loss.

Vandervliet said he would not be surprised if the bank charged off an additional $100 million to $200 million in bad loans, given the amount of nonperforming loans it now has.

Already, the bank has identified more than $200 million in nonperforming assets and past-due loans. That's a 20 percent increase from the $168.4 million in bad loans that the bank kept on its books in 1999 and nearly double the company's $117.9 million in bad loans five years ago.

The bank is well prepared to take the hit, said David Lackey, president of Florida-based Weiss Ratings Inc., which conducts a quarterly survey of the banking industry.

Lackey, who estimated that Pacific Century could write down about $66 million in bad loans, said the company has more than adequate reserves to cover the charges.

In a recent filing with the Securities and Exchange Commission, Pacific Century said it increased its reserves to more than $246 million last year from 1999's $194.2 million.

"They're going to blow out a lot of troubled loans," said Vandervliet. "But they can burn off a tremendous amount and still be fine."

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