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Posted on: Sunday, September 24, 2000

Bankoh investors banking on board

By Frank Cho
Advertiser Staff Writer

After two years of layoffs, troubled loans and growing unrest among investors, Bank of Hawai
ëi and its parent company are facing a crucial test: Analysts say itís now time for Hawaiëiís second biggest banking company to deliver on its promise of higher profits.

The $14.4 billion Pacific Century Financial Corp. stumbled badly in its loan business earlier this year ó so badly that the companyís stock price hit a five-year low and CEO Lawrence Johnson announced his retirement amid rising investor pressure.

Pacific Century Financial Corp.

Primary markets: Pacific Century, a regional financial services holding company, has operations in four primary markets: Hawaiëi, the west and South Pacific, Asia, the U.S. Mainland.

Principal subsidiary: Bank of Hawaiëi

Assets: $14.3 billion

Second-quarter net income: $6.71 million, according to a company report last month ó a drop of nearly 83 percent from the same quarter a year ago ó as the company set aside $83.4 million for loan losses.

Ticker symbol: BOH, New York Stock Exchange

Web site:

Now the companyís board of directors is itself under intense pressure from Wall Street to get the bank back on track in one of the most critical periods in its 102-year history as they search for a new chief executive.

Many analysts were reluctant to talk specifically about the board and its performance over the past couple of years, citing their sensitive relationship with the company. But some talked about general frustrations.

"There are some things that clearly frustrate us: Why is it that all the economic indicators are showing that the Hawaiian economy is improving, yet the bank is still reporting difficulties?" said Andrew Well-

ington, a New York-based analyst with Pzena Investment Management, one of Pacific Centuryís biggest institutional investors.

That is one of the many questions Pacific Centuryís board will have to address in the months to come in order to restore confidence among investors.

Board members ó typically 10 to 12 at any one time ó oversee Pacific Centuryís operations, monitor finances, guide acquisitions, plot strategic moves and most visibly serve as boss to the chief executive.

"I think we have been a very responsive board," said Mary Bitterman, 55, a director since 1994 and one of Pacific Centuryís 11 current board members.

Pacific Centuryís board also consists of:

David Heenan, the 60-year-old trustee for the Estate of James Campbell, a real estate development company, and former chairman of Theo H. Davies & Co. Ltd.;

Stuart Ho, 64, chairman and president of Capital Investment Hawaiëi Inc., a real estate development and management company;

Fred Trotter, 69, president of F.E. Trotter Inc.;

Peter Baldwin, 62, president of Baldwin Pacific Corp., a livestock sales and maintenance company with orchard farming operations on the Mainland;

Donald Takaki, the 58-year-old chairman and CEO of Island Movers, a local transportation service company;

Stanley Takahashi, 67, executive vice president of Kyo-Ya Ltd., a Japanese investment firm;

Martin Stein, 59, president of Sonoma Mountain Venture, a consulting and venture capital firm; and

Robert Huret is the boardís most recent addition and a managing member of Financial Technologies Ventures, a venture capital investment firm.

Mary Bitterman is president/CEO of KQED Inc. (San Francisco)

Richard J. Dahl, is president/COO of Pacific Century Financial Corp.

Lawrence Johnson is chairmain/CEO of Pacific Century Financial Corp.

Also sitting on the board are Johnson and Pacific Centuryís president and chief operating officer Richard Dahl, a leading candidate for the chief executive job.

Like other boards, Pacific Century has among its members the brightest and most experienced corporate talent in Hawaiëi. It pays its directors a retainer of $8,000 a year plus $750 and expenses for each of the quarterly meetings they attend. Members get another $3,500 annually if they chair one of Pacific Centuryís three standing committees.

Pacific Century directors also sit on the board of the companyís Bank of Hawaiëi subsidiary, which pays them another $8,000 in retainers and $600 for each meeting they attend. That board meets monthly.

Itís difficult to say exactly how much money directors end up collecting, because company reports to the Securities and Exchange Commission do not include attendance records. But for that kind of money, investors are expecting big things from Pacific Centuryís board.

"We are looking for them to find a capable leader who will be able to exploit the full value of what we still think is a really great franchise," Wellington said.

The analyst said Hawaiëiís geographic isolation has insulated the company from some of the competitive pressures on Mainland banks. "The management has been slow to adapt some of the management practices of the Mainland, so may be a bit behind the times," Wellington said.

Most Mainland banks had already completed their restructuring when Pacific Century launched its own initiatives in 1998.

'Will rise to the occasion'

But Bitterman and the other directors hope to put to rest any qualms investors may have with the bank and their ability to oversee the companyís management team.

"We definitely will rise to the occasion," Bitterman said.

She pointed to the recent addition of two outside directors from the Mainland with extensive backgrounds in banking, technology and acquisitions as examples of the board adding necessary expertise.

Two other board members contacted by The Advertiser declined to comment, saying the board was referring all questions to Bitterman, the lead director.

The board has hired Korn-Ferry, the worldís biggest executive recruiting firm, to help it find and screen CEO candidates over the next several months. It also is hoping to leverage its own expertise in the final selection.

Heenan, who has an MBA from Columbia University and a doctorate from Wharton School and the University of Pennsylvania, once ran one of Hawaiëiís Big Five companies and knows what it takes to succeed in Hawaiëi, analysts said. Stein, a former vice chairman at BankAmerica Corp., was responsible for technology, operations and payments at the banking giant and brings much-needed banking expertise to the board.

"From a collective standpoint, I think the board is patient and likes to digest information," said Jim Bradshaw, a Portland, Ore.-based banking analyst with D.A. Davidson & Co.

But the board also must decide whether to continue the companyís long tradition of promoting from within, or go outside and choose an agent of change who might face resistance.

Burned in Asia

The next chairman and chief executive will have to focus on the companyís flagging share price and long-term strategy. Pacific Century has been burned in Asia, its South Pacific holdings are not performing as expected, and it has missed much of the U.S. economic boom on the Mainland.

For decades Pacific Century ó formerly Bancorp Hawaiëi ó produced some of the stateís best-trained banking talent. But experts said it also produced a protective and insular management culture, one that resisted big change and big risk, and was slow to carry out major decisions.

"The decision before the board is very important to the institution and the communities it serves," Bitterman said. "But it is a decision that has to be deliberated in a prudent way."

While a short list of candidates is still months away, insiders said the name dropping already has begun. While Dahl is the only one to acknowledge being a candidate, speculation abounds on other local possibilities.

Analysts are quick to point out that with the consolidation of the banking industry over the last five years, there is no shortage of top-flight talent on the Mainland.

"I donít think anyone is going to make a really big bet on the company until they see who (the board) is going to bring in as CEO," said Randy Havre, chief executive officer for Hawaiëi Venture Group and a director for Neugenesis, a California biotechnology company.

Bitterman, who has served as banking regulator in Gov. George Aryoshiís administration, knows this board will be judged on its selection of the next CEO, but she and the board refuse to rush into any selection.

"Itís not a popularity contest," she said. "Hawaiëi does not have a monopoly on sensitivity. We will look for someone with a good head and a good heart. One without the other would not be sufficient."

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