Reports show that personal income is growing, bankruptcies are falling and foreclosure filings may finally be on the decline. Tourism has just finished a strong year and most local bankers are enjoying record profits.

But even with the state economy seemingly ready to climb out of its decade-long malaise, major obstacles still loom for local banks in the year ahead.

Rising problem loans and squeezed profit margins, combined with a slowing U.S. economy, are expected to create another challenging year for banks and financial service companies in 2001.

Just how tough a year will it be? One factor will be what the Federal Reserve does.

Experts say further dramatic cuts in interest rates to boost the national economy would help bank profits by stimulating loan demand, but it could also increase a fund shortage for some where deposits have been slow to grow.

"Some of the concerns that bankers in Hawai‘i have this year that they have not had in the recent past is loan growth," said Jim Bradshaw, an analyst with D.A. Davidson & Co. in Portland, Ore.

Bradshaw expects demand for loans will grow between 7 percent and 8 percent on average this year, outpacing a projected 3 percent to 5 percent growth in deposits, and challenging banks to find the money to cover the difference.

American Savings Bank Chief Executive Wayne Minami said his bank will have to borrow again this year from the Federal Home Loan Bank in Seattle to make up for that shortfall.

Despite these challenges, experts say local financial service companies could close the performance gap with their Mainland counterparts for the first time in years.

"Hawai‘i looks to have stronger economic activity (compared to the Mainland) and that could attract more Mainland competition starting in the second half of 2001," Bradshaw said.

Betting on an improving Hawai‘i economy, many local banks are slowly reversing years of cuts to expand services and hire new staff. Many have started offering insurance and investment products and nearly all of them are now on the World Wide Web where they can reach customers around the clock.

Minami said his bank is looking to expand its branch network this year to more supermarkets and shopping malls. There is no timetable for the expansion and locations are still being reviewed.

Pacific Century Financial Corp., once the state’s biggest financial services company and parent of Bank of Hawai‘i, has spent the past several years struggling to remake itself after asset-quality problems stalled its Pacific-growth strategy.

Those efforts are expected to continue this year as a newly appointed chairman and chief executive reviews operations.

Already in the past month, Pacific Century has announced plans to shed hundreds of millions of dollars in assets, including the sale of its stake in two small South Pacific banks, the sale of its credit card business to American Express, and the sale of its nine Arizona branches to Zions Bancorp.

"Competition among financial institutions is going to remain strong during the coming year," said Mike O’Neill, Pacific Century’s chairman and chief executive.

But with a major restructuring of its balance sheet expected this year, analysts said Pacific Century will be able to take advantage of the growing Hawai‘i economy and be well positioned for any slowdown.

Like Pacific Century, BancWest Corp., parent of First Hawaiian Bank, will also be challenged by the slowing Mainland economy.

BancWest will complete the acquisition of dozens of new mainland branches this year to build out its mainland franchise and focus on cutting costs, something banking experts say will keep the company busy throughout 2001.

Hawai‘i’s smallest banks may do best this year, analysts said.

"The beauty of small banks is they can focus on niches and only worry about local trends," Bradshaw said. "They are not impacted as much as the big banks by national events."

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