In the first earnings report since Michael E. O'Neill took over at Pacific Century Financial Corp., the chairman and chief executive officer offered evidence that the company's credit problems are beginning to fade.

Brushing aside a 13% drop in net income during the fourth quarter, Mr. O'Neill sought to highlight an improving trend in nonperforming assets. However, on a conference call on Wednesday he said, "I'm not declaring victory by any means, but I am very encouraged."

Excluding loans 90 days past due, nonperforming assets at the Honolulu-based banking company dropped 17% from the third quarter, to $183 million.

Pacific Century still has work to do though. Earnings fell 13.3% from the fourth quarter of 1999, to $32.6 million, and the company missed analysts' estimates of $0.44 by three cents.

Mr. O'Neill, who joined the bank in early November after a three-month national search, also indicated that the story of the bank's rise out of quagmire of last year's credit problems is far from over. The bank has done well in dealing with existing problem credits, but the slowing economy could mean more difficulties, he said in a telephone interview Thursday. "We are not immune," he observed.

In April, the company, whose flagship is the Bank of Hawaii, will report to Wall Street analysts and investors on its ongoing review of the bank's credit and business portfolios.

Whether the report includes a nonrecurring charge "is a function of that review," Mr. O'Neill said. But he prefaced that remark with his opinion of such charges, often made at the beginning of a new management's watch to clear away inherited problems.

"People who do nonrecurring charges tend to do nonrecurring charges over and over again," he said.

The new chairman, the former chief financial officer at BankAmerica Corp. and widely acknowledged for his experience in "work-out" situations, has taken on a loan portfolio battered on several fronts.

Because of lingering distress in Hawaiian commercial real estate and last summer's crisis in Fiji, where it has banking operations and national syndicated loan exposure, the company's asset quality problems were severe enough by the third quarter to prompt its regulators to request it sign a memorandum of understanding.

That memorandum, which requires company management to get approval before taking such actions as incurring debt or paying dividends, is still in place, Mr. O'Neill confirmed.

With the earnings report, the $14 billion-asset company also announced a quarterly dividend of 18 cents per share.

Part of the improvement in nonperforming asset levels was due to a reversal or closure of some of its credit problems. Borrowers of two commercial real estate loans that had contributed to the nonaccrual loan category, totaling $29 million, repaid those credits in full. Further reductions in nonperforming assets came from chargeoffs of $7.5 million in Asian and $10 million in South Pacific loans.

In addition, during the first quarter of 1999 the bank sold at a discount a $65 million syndicated facility that appeared as a potential problem loan in its second-quarter earnings report.

Pacific Century said that it has already largely offset the sale of that loan - believed to be to Finova Corp. - in its reserves and that the sale brings it close to its stated aim of reducing the volume of outstanding credits in its syndicated portfolio to about $1 billion.

Mr. O'Neill was brought in after former chief executive Lawrence Johnson announced his retirement in August. Aware of the need to win back Wall Street's favor after a stock market rout that cut the company's share price to $11.25, he has already put his stamp on the new organization, particularly in management.

Two weeks ago, the bank announced the hiring of Bank of America Corp. alumnus William Nelson as its new chief risk officer to replace departing chief credit officer Robert Paris. It also hired a former credit management specialist at Heller Financial Inc. to be director of asset recovery.

Simultaneous with Thursday's earnings report, the company announced that chief financial officer David A. Houle, 53, would resign at the end of the first quarter. Allan R. Landon, an executive vice president and director of risk management, joined the company in April from Amsouth Bancorp in Nashville.

The preliminary changes at the bank appear to have helped Pacific Century's beleaguered share price. Since Mr. O'Neill was hired on Nov. 3, the stock has gained 37%. It gained 8% Thursday, closing at $20.125.

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