UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)	
 	
x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2007	
 	 	
 	or	
 	 	
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                   to                   	
 
Commission File Number: 1-6887
 
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)
Delaware	 	99-0148992	
(State of incorporation)	 	(I.R.S. Employer Identification No.)	
 	 	 	
130 Merchant Street, Honolulu, Hawaii	 	96813	
(Address of principal executive offices)	 	(Zip Code)	
 	 	 	
1-888-643-3888	
(Registrant’s telephone number, including area code)	
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x      No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer x           Accelerated filer o           Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o      No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 20, 2007, there were 49,353,090 shares of common stock outstanding.

Bank of Hawaii Corporation
Form 10-Q
Index
 	 	 	 	Page	
Part I - Financial Information	 	 	
 	 	 	 	 	
Item 1.	 	Financial Statements (Unaudited)	 	 	
 	 	 	 	 	
 	 	Consolidated Statements of Income – Three and six months ended
June 30, 2007 and 2006	 	 
3	
 	 	 	 	 	
 	 	Consolidated Statements of Condition –June 30, 2007,
December 31, 2006, and June 30, 2006	 	 
4	
 	 	 	 	 	
 	 	Consolidated Statements of Shareholders’ Equity – Six months ended
June 30, 2007 and 2006	 	 
5	
 	 	 	 	 	
 	 	Consolidated Statements of Cash Flows – Six months ended
June 30, 2007 and 2006	 	 
6	
 	 	 	 	 	
 	 	Notes to Consolidated Financial Statements (Unaudited)	 	7	
 	 	 	 	 	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	15	
 	 	 	 	 	
Item 3.	 	Quantitative and Qualitative Disclosures About Market Risk	 	42	
 	 	 	 	 	
Item 4.	 	Controls and Procedures	 	42	

Part II - Other Information	 	 	
 	 	 	 	 	
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds	 	42	
 	 	 	 	 	
Item 4.	 	Submission of Matters to a Vote of Security Holders	 	43	
 	 	 	 	 	
Item 5.	 	Other Information	 	43	
 	 	 	 	 	
Item 6.	 	Exhibits	 	43	
 	 	 	 	 	
Signatures	 	44	
 	 	 	 	 	
Exhibit Index	 	45	

Bank of Hawaii Corporation and Subsidiaries	
Consolidated Statements of Income (Unaudited)	
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(dollars in thousands, except per share amounts)	 	2007	 	2006	 	2007	 	2006	 	
Interest Income	 	 	 	 	 	 	 	 	 	
Interest and Fees on Loans and Leases	 	$	112,026	 	$	104,388	 	$	222,324	 	$	203,759	 	
Income on Investment Securities	 	 	 	 	 	 	 	 	 	
Trading	 	1,357	 	-	 	2,975	 	-	 	
Available-for-Sale	 	31,563	 	31,226	 	62,524	 	62,061	 	
Held-to-Maturity	 	3,827	 	4,658	 	7,879	 	9,415	 	
Deposits	 	96	 	55	 	154	 	98	 	
Funds Sold	 	533	 	170	 	1,591	 	295	 	
Other	 	364	 	272	 	697	 	544	 	
Total Interest Income	 	149,766	 	140,769	 	298,144	 	276,172	 	
Interest Expense	 	 	 	 	 	 	 	 	 	
Deposits	 	33,701	 	24,656	 	67,076	 	44,289	 	
Securities Sold Under Agreements to Repurchase	 	11,665	 	9,802	 	23,551	 	17,692	 	
Funds Purchased	 	1,452	 	2,652	 	2,375	 	4,545	 	
Short-Term Borrowings	 	91	 	73	 	178	 	130	 	
Long-Term Debt	 	3,979	 	3,730	 	7,949	 	7,458	 	
Total Interest Expense	 	50,888	 	40,913	 	101,129	 	74,114	 	
Net Interest Income	 	98,878	 	99,856	 	197,015	 	202,058	 	
Provision for Credit Losses	 	3,363	 	2,069	 	5,994	 	4,830	 	
Net Interest Income After Provision for Credit Losses	 	95,515	 	97,787	 	191,021	 	197,228	 	
Noninterest Income	 	 	 	 	 	 	 	 	 	
Trust and Asset Management	 	16,135	 	14,537	 	31,968	 	29,385	 	
Mortgage Banking	 	2,479	 	2,569	 	5,850	 	5,556	 	
Service Charges on Deposit Accounts	 	11,072	 	9,695	 	22,039	 	19,827	 	
Fees, Exchange, and Other Service Charges	 	16,556	 	15,633	 	32,617	 	30,400	 	
Investment Securities Gains, Net	 	575	 	-	 	591	 	-	 	
Insurance	 	4,887	 	4,691	 	11,102	 	9,710	 	
Other	 	6,324	 	6,076	 	14,821	 	10,895	 	
Total Noninterest Income	 	58,028	 	53,201	 	118,988	 	105,773	 	
Noninterest Expense	 	 	 	 	 	 	 	 	 	
Salaries and Benefits	 	44,587	 	44,811	 	89,993	 	90,597	 	
Net Occupancy	 	9,695	 	9,376	 	19,506	 	19,019	 	
Net Equipment	 	4,871	 	4,802	 	9,658	 	9,830	 	
Professional Fees	 	2,599	 	2,589	 	5,142	 	3,027	 	
Other	 	18,080	 	17,164	 	37,656	 	37,087	 	
Total Noninterest Expense	 	79,832	 	78,742	 	161,955	 	159,560	 	
Income Before Provision for Income Taxes	 	73,711	 	72,246	 	148,054	 	143,441	 	
Provision for Income Taxes	 	25,982	 	35,070	 	52,990	 	60,915	 	
Net Income	 	$	47,729	 	$	37,176	 	$	95,064	 	$	82,526	 	
Basic Earnings Per Share	 	$	0.97	 	$	0.74	 	$	1.93	 	$	1.63	 	
Diluted Earnings Per Share	 	$	0.95	 	$	0.72	 	$	1.89	 	$	1.59	 	
Dividends Declared Per Share	 	$	0.41	 	$	0.37	 	$	0.82	 	$	0.74	 	
Basic Weighted Average Shares	 	49,265,698	 	50,456,121	 	49,346,306	 	50,633,911	 	
Diluted Weighted Average Shares	 	50,066,097	 	51,491,585	 	50,168,203	 	51,748,350	 	
 
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
3

 
Bank of Hawaii Corporation and Subsidiaries	
Consolidated Statements of Condition (Unaudited)	
 
 	 	June 30,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2006	 	2006	 	
Assets	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	$	130,732	 	$	4,990	 	$	4,145	 	
Funds Sold	 	200,000	 	50,000	 	-	 	
Investment Securities	 	 	 	 	 	 	 	
Trading	 	123,591	 	-	 	-	 	
Available-for-Sale	 	 	 	 	 	 	 	
Portfolio	 	1,683,417	 	1,846,742	 	2,177,220	 	
Pledged as Collateral	 	772,251	 	751,135	 	334,947	 	
Held-to-Maturity (Fair Value of $313,589; $360,719; and $408,203)	 	327,118	 	371,344	 	426,910	 	
Loans Held for Sale	 	13,527	 	11,942	 	15,506	 	
Loans and Leases	 	6,566,126	 	6,623,167	 	6,441,625	 	
Allowance for Loan and Lease Losses	 	(90,998	)	(90,998	)	(91,035	)	
Net Loans and Leases	 	6,475,128	 	6,532,169	 	6,350,590	 	
Total Earning Assets	 	9,725,764	 	9,568,322	 	9,309,318	 	
Cash and Noninterest-Bearing Deposits	 	345,226	 	398,342	 	397,061	 	
Premises and Equipment	 	122,929	 	125,925	 	130,435	 	
Customers’ Acceptances	 	2,234	 	1,230	 	646	 	
Accrued Interest Receivable	 	49,121	 	49,284	 	45,343	 	
Foreclosed Real Estate	 	48	 	407	 	188	 	
Mortgage Servicing Rights	 	29,112	 	19,437	 	18,750	 	
Goodwill	 	34,959	 	34,959	 	34,959	 	
Other Assets	 	413,175	 	373,909	 	388,490	 	
Total Assets	 	$	10,722,568	 	$	10,571,815	 	$	10,325,190	 	
 	 	 	 	 	 	 	 	
Liabilities	 	 	 	 	 	 	 	
Deposits	 	 	 	 	 	 	 	
Noninterest-Bearing Demand	 	$	1,896,335	 	$	1,993,794	 	$	1,976,051	 	
Interest-Bearing Demand	 	1,755,646	 	1,642,375	 	1,602,914	 	
Savings	 	2,923,168	 	2,690,846	 	2,691,029	 	
Time	 	1,739,255	 	1,696,379	 	1,496,039	 	
Total Deposits	 	8,314,404	 	8,023,394	 	7,766,033	 	
Funds Purchased	 	90,650	 	60,140	 	353,700	 	
Short-Term Borrowings	 	15,644	 	11,058	 	12,100	 	
Securities Sold Under Agreements to Repurchase	 	910,302	 	1,047,824	 	835,563	 	
Long-Term Debt	 	260,329	 	260,288	 	242,749	 	
Banker’s Acceptances	 	2,234	 	1,230	 	646	 	
Retirement Benefits Payable	 	43,892	 	48,309	 	72,192	 	
Accrued Interest Payable	 	18,292	 	22,718	 	13,023	 	
Taxes Payable and Deferred Taxes	 	277,516	 	277,202	 	274,146	 	
Other Liabilities	 	80,499	 	100,232	 	88,310	 	
Total Liabilities	 	10,013,762	 	9,852,395	 	9,658,462	 	
Shareholders’ Equity	 	 	 	 	 	 	 	
Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: June 2007 - 56,927,022 / 49,440,204;
December 2006 - 56,848,609 / 49,777,654; and
June 2006 - 56,855,346 / 50,570,697)	 	566	 	566	 	566	 	
Capital Surplus	 	480,389	 	475,178	 	469,461	 	
Accumulated Other Comprehensive Loss	 	(45,705	)	(39,084	)	(76,204	)	
Retained Earnings	 	645,149	 	630,660	 	581,406	 	
Treasury Stock, at Cost (Shares: June 2007 - 7,486,818;
December 2006 - 7,070,955; and June 2006 - 6,284,649)	 	(371,593	)	(347,900	)	(308,501	)	
Total Shareholders’ Equity	 	708,806	 	719,420	 	666,728	 	
Total Liabilities and Shareholders’ Equity	 	$	10,722,568	 	$	10,571,815	 	$	10,325,190	 	
 
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
4

 
Bank of Hawaii Corporation and Subsidiaries	
Consolidated Statements of Shareholders’ Equity (Unaudited)	
 
 	 	 	 	 	 	 	 	Accum.	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Other	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Compre-	 	 	 	Deferred	 	 	 	Compre-	 	
 	 	 	 	Common	 	Capital	 	hensive	 	Retained	 	Stock	 	Treasury	 	hensive	 	
(dollars in thousands)	 	Total	 	Stock	 	Surplus	 	Loss	 	Earnings	 	Grants	 	Stock	 	Income	 	
Balance as of December 31, 2006	 	$	719,420	 	$	566	 	$	475,178	 	$	(39,084	)	$	630,660	 	$	-	 	$	(347,900	)	 	 	
Cumulative-Effect Adjustment of a Change in Accounting Principle, Net of Tax:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140”	 	5,126	 	-	 	-	 	5,279	 	(153	)	-	 	-	 	 	 	
FSP No. 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction”	 	(27,106	)	-	 	-	 	-	 	(27,106	)	-	 	-	 	 	 	
FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”	 	(7,247	)	-	 	-	 	-	 	(7,247	)	-	 	-	 	 	 	
Comprehensive Income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	95,064	 	-	 	-	 	-	 	95,064	 	-	 	-	 	$	95,064	 	
Other Comprehensive Income, Net of Tax:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in Unrealized Gains and Losses on Investment Securities Available-for-Sale	 	(12,316	)	-	 	-	 	(12,316	)	-	 	-	 	-	 	(12,316	)	
Amortization of Prior Service Credit and Net Actuarial Loss	 	416	 	-	 	-	 	416	 	-	 	-	 	-	 	416	 	
Total Comprehensive Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	83,164	 	
Share-Based Compensation	 	2,748	 	-	 	2,748	 	-	 	-	 	-	 	-	 	 	 	
Common Stock Issued under Share-Based Compensation Plans and Related Tax Benefits (444,008 shares)	 	14,615	 	-	 	2,463	 	-	 	(5,312	)	-	 	17,464	 	 	 	
Common Stock Repurchased (779,689 shares)	 	(41,157	)	-	 	-	 	-	 	-	 	-	 	(41,157	)	 	 	
Cash Dividends Paid	 	(40,757	)	-	 	-	 	-	 	(40,757	)	-	 	-	 	 	 	
Balance as of June 30, 2007	 	$	708,806	 	$	566	 	$	480,389	 	$	(45,705	)	$	645,149	 	$	-	 	$	(371,593	)	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2005	 	$	693,352	 	$	565	 	$	473,338	 	$	(47,818	)	$	546,591	 	$	(11,080	)	$	(268,244	)	 	 	
Comprehensive Income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	82,526	 	-	 	-	 	-	 	82,526	 	-	 	-	 	$	82,526	 	
Other Comprehensive Income, Net of Tax:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in Unrealized Gains and Losses on Investment Securities Available-for-Sale	 	(28,386	)	-	 	-	 	(28,386	)	-	 	-	 	-	 	(28,386	)	
Total Comprehensive Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	54,140	 	
Share-Based Compensation	 	2,803	 	-	 	2,803	 	-	 	-	 	-	 	-	 	 	 	
Common Stock Issued under Share-Based Compensation Plans and Related Tax Benefits (537,554 shares)	 	19,598	 	1	 	(6,680	)	-	 	(9,999	)	11,080	 	25,196	 	 	 	
Common Stock Repurchased (1,241,303 shares)	 	(65,453	)	-	 	-	 	-	 	-	 	-	 	(65,453	)	 	 	
Cash Dividends Paid	 	(37,712	)	-	 	-	 	-	 	(37,712	)	-	 	-	 	 	 	
Balance as of June 30, 2006	 	$	666,728	 	$	566	 	$	469,461	 	$	(76,204	)	$	581,406	 	$	-	 	$	(308,501	)	 	 	
 
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
5

 
Bank of Hawaii Corporation and Subsidiaries	
Consolidated Statements of Cash Flows (Unaudited)	
 
 	 	 	Six Months Ended	 	
 	 	 	June 30,	 	
(dollars in thousands)	 	2007	 	2006	 	
Operating Activities	 	 	 	 	 	
Net Income	 	$	95,064	 	$	82,526	 	
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:	 	 	 	 	 	
Provision for Credit Losses	 	5,994	 	4,830	 	
Depreciation and Amortization	 	7,376	 	8,342	 	
Amortization of Deferred Loan and Lease Fees	 	(911	)	(1,679	)	
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net	 	1,603	 	2,121	 	
Change in Fair Value of Mortgage Servicing Rights	 	600	 	-	 	
Share-Based Compensation	 	2,748	 	2,803	 	
Deferred Income Taxes	 	(35,400	)	11,694	 	
Net Gain on Investment Securities	 	(591	)	-	 	
Net Change in Investment Securities Trading	 	40,551	 	-	 	
Proceeds from Sales of Loans Held for Sale	 	179,139	 	168,656	 	
Originations of Loans Held for Sale	 	(180,724	)	(166,247	)	
Tax Benefits from Shared-Based Compensation	 	(2,229	)	(4,181	)	
Net Change in Other Assets and Other Liabilities	 	(27,139	)	(21,443	)	
Net Cash Provided by Operating Activities	 	86,081	 	87,422	 	
 	 	 	 	 	 	
Investing Activities	 	 	 	 	 	
Proceeds from the Prepayment and Maturity of Investment Securities Available-for-Sale	 	301,327	 	212,464	 	
Purchases of Investment Securities Available-for-Sale	 	(334,901	)	(232,385	)	
Proceeds from the Prepayment and Maturity of Investment Securities Held-to-Maturity	 	43,861	 	47,055	 	
Purchases of Investment Securities Held-to-Maturity	 	-	 	(20,250	)	
Net Change in Loans and Leases	 	9,239	 	(276,350	)	
Premises and Equipment, Net	 	(4,380	)	(4,864	)	
Net Cash Provided by (Used in) Investing Activities	 	15,146	 	(274,330	)	
 	 	 	 	 	 	
Financing Activities	 	 	 	 	 	
Net Change in Deposits	 	291,010	 	(141,435	)	
Net Change in Short-Term Borrowings	 	(102,426	)	314,426	 	
Tax Benefits from Share-Based Compensation	 	2,229	 	4,181	 	
Proceeds from Issuance of Common Stock	 	12,500	 	15,389	 	
Repurchase of Common Stock	 	(41,157	)	(65,453	)	
Cash Dividends Paid	 	(40,757	)	(37,712	)	
Net Cash Provided by Financing Activities	 	121,399	 	89,396	 	
 	 	 	 	 	 	
Net Change in Cash and Cash Equivalents	 	222,626	 	(97,512	)	
Cash and Cash Equivalents at Beginning of Period	 	453,332	 	498,718	 	
Cash and Cash Equivalents at End of Period	 	$	675,958	 	$	401,206	 	
 	 	 	 	 	 	
Supplemental Information	 	 	 	 	 	
Cash paid for:	 	 	 	 	 	
Interest	 	$	105,555	 	$	72,001	 	
Income Taxes	 	33,076	 	30,399	 	
Non-Cash Investing and Financing Activities:	 	 	 	 	 	
Transfers from Investment Securities Available-for-Sale to Trading	 	164,180	 	-	 	
Transfers from Loans to Foreclosed Real Estate	 	138	 	241	 	

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
6

Bank of Hawaii Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1.  Summary of Significant Accounting Policies
Basis of Presentation
Bank of Hawaii Corporation (the “Parent”) is a bank holding company headquartered in Honolulu, Hawaii.  Bank of Hawaii Corporation and its Subsidiaries (the “Company”) provide a broad range of financial products and services to customers in Hawaii and the Pacific Islands (Guam, nearby islands, and American Samoa).  The Parent’s principal subsidiary is Bank of Hawaii (the “Bank”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.
Certain prior period amounts have been reclassified to conform to current period classifications.
These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.  Operating results for the six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.
Mortgage Servicing Rights
Effective January 1, 2007, the Company adopted the provisions of SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.”   SFAS No. 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable.  In adopting the provisions of SFAS No. 156, the Company recorded an increase in the value of mortgage servicing rights of $8.0 million and a net of tax increase to retained earnings of $5.1 million.  Also, as permitted by SFAS No. 156, the Company reclassified investment securities with a carrying value of $164.2 million (“Designated Securities”) from the available-for-sale portfolio to the trading portfolio.  Concurrently, the Company reclassified unrealized losses of $5.3 million, net of tax, previously recorded as a component of accumulated other comprehensive loss, to retained earnings.  The Designated Securities are carried at fair value on the Company’s statement of condition, with realized and unrealized gains and losses recorded as a component of the change in fair value of Designated Securities in mortgage banking income.  The change in fair value of Designated Securities are intended to offset changes in valuation assumptions affecting the recorded value of the mortgage servicing rights.  The net after-tax cumulative-effect adjustment to adopt the provisions of SFAS No. 156 was to reduce retained earnings by $0.2 million as of January 1, 2007.  The Company also adopted the fair value measurement provisions of SFAS No. 156 in subsequent re-measurements of the mortgage servicing rights.
7

Leveraged Leases
Effective January 1, 2007, the Company adopted the provisions of FASB Staff Position (“FSP”) No. 13-2, “ Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,”  which amends SFAS No. 13,  “Accounting for Leases.”   The timing of cash flows relating to income taxes generated by a leveraged lease is an important assumption that affects the periodic income recognized by the lessor for that lease transaction.  Under the provisions of FSP No. 13-2, a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction requires a recalculation of the total and periodic income related to the leveraged lease transaction.  During the years 1998 through 2002, the Company entered into one leveraged lease transaction known as a Lease In-Lease Out (“LILO”) transaction and five Sale In-Lease Out (“SILO”) transactions.  As of January 1, 2007, the income tax impact of these LILO and SILO transactions was in various stages of review by the Internal Revenue Service (the “IRS”).  Management expected that the outcome of these reviews would change the projected timing of cash flows from these leveraged leases.  As a result, in adopting the provisions of FSP No. 13-2 on January 1, 2007, the Company recorded an after-tax cumulative-effect adjustment to reduce retained earnings by $27.1 million.  This adjustment represented a $42.7 million reduction in the carrying value of lease financing balances and a $15.6 million reduction in deferred income taxes payable.  The provisions of FSP No. 13-2 also provide that subsequent changes in the timing of projected cash flows that results in a change in the net investment of a leveraged lease is to be recorded as a gain or loss in the period in which the assumption is changed.
During the second quarter of 2007, the Company reached an agreement with the IRS as to the terms of settlement of the issues related to the Company’s LILO transaction.  See Note 4 for further discussion on the matter.  There has been no change in the status of the IRS review of the Company’s SILO transactions.
Income Taxes
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”   FIN 48 established a recognition threshold and measurement attributes for income tax positions recognized in the Company’s financial statements in accordance with SFAS No. 109,  “Accounting for Income Taxes.”   In evaluating a tax position for recognition, the Company judgmentally evaluates whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position.  If the tax position meets the more-likely-than-not recognition threshold, the tax position is measured and recognized in the Company’s financial statements as the largest amount of tax benefit that is in management’s judgment greater than 50% likely of being realized upon ultimate settlement.  Effective January 1, 2007, the Company also adopted the provisions of FSP No. FIN 48-1,  “Definition of Settlement in FASB Interpretation No. 48,”  which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing a liability for previously unrecognized tax benefits in the statement of condition.  In adopting the provisions of FIN 48 and FSP No. FIN 48-1 on January 1, 2007, the Company recorded an after-tax cumulative-effect adjustment to reduce retained earnings by $7.2 million.
See Note 4 for further discussion on the Company’s FIN 48 tax positions as of January 1, 2007 and June 30, 2007.
8

Future Application of Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which is effective for the Company on January 1, 2008.  SFAS No. 157 established a framework for measuring fair value, while expanding fair value measurement disclosures.  SFAS No. 157 established a fair value hierarchy that distinguishes between independent observable inputs and unobservable inputs developed based on the best information available.  SFAS No. 157 expands disclosures about the use of fair value to measure assets and liabilities, the effect of these measurements on earnings for the period, and the inputs used to measure fair value.  Management is currently evaluating the effect that the provisions of SFAS No. 157 will have on the Company’s statements of income and condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115,”  which is effective for the Company on January 1, 2008.  SFAS No. 159 provides entities with an option to report selected financial assets and financial liabilities, on an instrument by instrument basis, at fair value, with the objective of reducing both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently.  Management is currently evaluating the effect that the provisions of SFAS No. 159 will have on the Company’s statements of income and condition.
Note 2.  Mortgage Banking
The Company’s portfolio of residential mortgage loans serviced for third parties was $2.5 billion as of June 30, 2007 and 2006.  The Company’s mortgage servicing activities includes collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of the borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors.  The Company’s residential mortgage loan servicing portfolio is comprised primarily of fixed rate loans concentrated in Hawaii.
Mortgage servicing rights are recognized as assets when mortgage loans are sold and the rights to service those loans are retained.  As of December 31, 2006, the Company recorded its mortgage servicing rights at their relative fair values on the date the loans were sold and were carried at the lower of the initial recorded value, adjusted for amortization, or fair value.  As of January 1, 2007, the Company adopted the provisions of SFAS No. 156 which requires all separately recognized servicing assets to be initially measured at fair value, if practicable.  As of January 1, 2007, the Company identified its entire balance of mortgage servicing rights as one class of servicing assets for this measurement.  The table below reconciles the balance of the Company’s mortgage servicing rights as of December 31, 2006 and January 1, 2007.
(Unaudited)     (dollars in thousands)	 	 	 	
Balance as of December 31, 2006	 	$	19,437	 	
Cumulative-Effect of a Change in Accounting Principle	 	8,007	 	
Balance as of January 1, 2007	 	$	27,444	 	
 
9

The changes in the fair value of the Company’s mortgage servicing rights for the three and six months ended June 30, 2007 were as follows:
 	 	Three Months Ended	 	Six Months Ended	 	
(Unaudited)     (dollars in thousands)	 	June 30, 2007	 	June 30, 2007	 	
Beginning of Period, Fair Value	 	$	27,005	 	$	27,444	 	
Origination of Mortgage Servicing Rights	 	1,340	 	2,268	 	
Change in Fair Value of Mortgage Servicing Rights:	 	 	 	 	 	
Due to Change in Valuation Assumptions1	 	1,980	 	1,169	 	
Other Changes in Fair Value2	 	(1,213	)	(1,769	)	
Total Change in Fair Value of Mortgage Servicing Rights	 	767	 	(600	)	
End of Period, Fair Value	 	$	29,112	 	$	29,112	 	
 
1Principally reflects changes in weighted-average constant prepayment rate and weighted-average life assumptions.
2 Principally represents changes due to the pay-off of loans during the period.
The Company estimates the fair value of its mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income.  The model uses factors such as loan repayment rates, costs to service, ancillary income, impound account balances, and interest rate assumptions in its calculations.  Risks inherent in the valuation of mortgage servicing rights include changes in interest rates, higher than expected loan repayment rates, and the delayed receipt of cash flows, among other factors.  The key assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of June 30, 2007 were as follows:
 	 	As of	 	
(Unaudited)	 	June 30, 2007	 	
Weighted-Average Constant Prepayment Rate1	 	10.37%	 	
Weighted-Average Life (in years)	 	6.24   	 	
Weighted-Average Note Rate	 	5.81%	 	
Weighted-Average Discount Rate	 	8.57%	 	
 
1Represents annualized loan repayment rate assumption.
For the three and six months ended June 30, 2007 and 2006, the Company’s mortgage banking income was comprised of the following:
Mortgage Banking Income (Unaudited)	
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2006	 	2007	 	2006	 	
Servicing Income	 	$	1,559	 	$	1,616	 	$	3,129	 	$	3,202	 	
Gains on the Sale of Residential Mortgage Loans	 	1,395	 	1,292	 	2,424	 	2,642	 	
Change in Fair Value of Mortgage Servicing Rights	 	767	 	-	 	(600	)	-	 	
Change in Fair Value of Designated Securities1	 	(1,917	)	-	 	(343	)	-	 	
Mortgage Loan Fees	 	676	 	584	 	1,223	 	1,119	 	
Gains (Losses) on Derivative Financial Instruments	 	29	 	(171	)	51	 	(61	)	
Amortization of Mortgage Servicing Rights	 	-	 	(720	)	-	 	(1,201	)	
Other	 	(30	)	(32	)	(34	)	(145	)	
Total Mortgage Banking Income	 	$	2,479	 	$	2,569	 	$	5,850	 	$	5,556	 	
 
1 On-balance-sheet hedging instruments.
10

For the three and six months ended June 30, 2007, the Company’s entire trading portfolio, comprised of mortgage-backed securities, was designated to manage the volatility of the fair value of mortgage servicing rights as an on-balance-sheet hedge.  For the three and six months ended June 30, 2007, realized investment trading gains and losses were not material.
The fair value of the Company’s mortgage servicing rights is sensitive to changes in interest rates and their effect on loan repayment rates.  A sensitivity analysis of the Company’s fair value of mortgage servicing rights to changes in the constant prepayment rate and the discount rate is presented in the following table:
Sensitivity Analysis (Unaudited)	
 
 	 	As of	
(dollars in thousands)	 	June 30, 2007	
Constant Prepayment Rate	 	 	 	
Decrease in fair value from 25 basis points (“bps”) adverse change	 	$	(690	)	
Decrease in fair value from 50 bps adverse change	 	(1,624	)	
Discount Rate	 	 	 	
Decrease in fair value from 25 bps adverse change	 	(285	)	
Decrease in fair value from 50 bps adverse change	 	(565	)	

This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s mortgage servicing rights usually is not linear.  The calculation of the fair value of mortgage servicing rights is dynamic in nature, in that changes in one key assumption may result in changes in other assumptions, which may magnify or counteract the sensitivity analysis presented in the table above.
Note 3.  Pension Plans and Postretirement Benefit Plan
The components of net periodic benefit cost for the Company’s pension plans and the postretirement benefit plan for the three and six months ended June 30, 2007 and 2006 are presented in the following table:
Pension Plans and Postretirement Benefit Plan (Unaudited)	
 
 	 	Pension Benefits	 	Postretirement Benefits	 	
(dollars in thousands)	 	2007	 	2006	 	2007	 	2006	 	
Three Months Ended June 30,	 	 	 	 	 	 	 	 	 	
Service Cost	 	$	-	 	$	-	 	$	155	 	$	290	 	
Interest Cost	 	1,223	 	1,170	 	395	 	480	 	
Expected Return on Plan Assets	 	(1,373	)	(1,261	)	-	 	-	 	
Amortization of Unrecognized Net Transition Obligation	 	-	 	-	 	-	 	146	 	
Prior Service Credit	 	-	 	-	 	(50	)	-	 	
Recognized Net Actuarial Loss (Gain)	 	450	 	468	 	(75	)	(34	)	
Net Periodic Benefit Cost	 	$	300	 	$	377	 	$	425	 	$	882	 	
 	 	 	 	 	 	 	 	 	 	
Six Months Ended June 30,	 	 	 	 	 	 	 	 	 	
Service Cost	 	$	-	 	$	-	 	$	310	 	$	580	 	
Interest Cost	 	2,446	 	2,340	 	790	 	960	 	
Expected Return on Plan Assets	 	(2,746	)	(2,522	)	-	 	-	 	
Amortization of Unrecognized Net Transition Obligation	 	-	 	-	 	-	 	293	 	
Prior Service Credit	 	-	 	-	 	(100	)	-	 	
Recognized Net Actuarial Loss (Gain)	 	900	 	937	 	(150	)	(70	)	
Net Periodic Benefit Cost	 	$	600	 	$	755	 	$	850	 	$	1,763	 	
 
11

The net periodic benefit cost for the Company’s pension plans and postretirement benefit plan are recorded as a component of salaries and benefits in the statements of income.  There were no significant changes from the previously reported $7.7 million that the Company expects to contribute to the pension plans and the $1.3 million that it expects to contribute to the postretirement benefit plan for the year ending December 31, 2007.  For the three and six months ended June 30, 2007, the Company contributed $4.6 million and $4.8 million, respectively, to its pension plans.  For the three and six months ended June 30, 2007, the Company contributed $0.2 million and $0.5 million, respectively, to its postretirement benefit plan.
Note 4.  Income Taxes
The following is a reconciliation of the statutory Federal income tax rate to the Company’s effective tax rate for the three and six months ended June 30, 2007 and 2006.
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(Unaudited)	 	2007	 	2006	 	2007	 	2006	 	
Statutory Federal Income Tax Rate	 	35.00	%	35.00	%	35.00	%	35.00	%	
Increase (Decrease) in Income Tax Rate Resulting From:	 	 	 	 	 	 	 	 	 	
State Income Tax, Net of Federal Income Tax	 	3.67	 	4.95	 	3.75	 	3.42	 	
Foreign Tax Credits	 	(0.72	)	-	 	(1.08	)	-	 	
Low Income Housing Investments	 	(0.14	)	(0.19	)	(0.15	)	(0.19	)	
Bank-Owned Life Insurance	 	(0.94	)	(0.63	)	(0.90	)	(0.67	)	
Leveraged Leases	 	(1.15	)	9.55	 	(0.50	)	5.06	 	
Other	 	(0.47	)	(0.14	)	(0.33	)	(0.15	)	
Effective Tax Rate	 	35.25	%	48.54	%	35.79	%	42.47	%	
 
Income earned by the Company is subject to U.S. Federal taxation and to state and territorial taxation in Hawaii and Guam, respectively.  Small amounts of income are subject to taxation by other states and territories as well as some foreign countries.  The Company has effectively settled issues raised during income tax examinations by taxing authorities for years prior to 1998.
As noted in Note 1, the Company reached an agreement with the IRS to effectively settle the matter related to the LILO transaction in June 2007.  The effective settlement with the IRS resulted in a change in the timing of projected cash flows from the LILO transaction.  In January 2007, in adopting the provisions of FSP No. 13-2, the Company recalculated the total and periodic income from the LILO transaction assuming an entire disallowance of income tax deductions taken on previously filed tax returns based on a tax court case which concluded in January 2007.  With the effective settlement of the LILO transaction at a disallowance percentage of less than its original estimate, the Company recalculated the total and periodic income from the LILO transaction from the inception of the lease through June 30, 2007.  In the second quarter of 2007, the Company recorded a $1.5 million credit, which was comprised of a $1.1 million credit to lease financing interest income and a $0.4 million net credit to the provision for income taxes, as a result of the June 2007 change in the disallowance assumption.  The Company is currently appealing issues raised by the IRS in the examination of its income tax returns filed for 1998 through 2002 related to the Company’s five SILO transactions.  There has been no change in the status of the IRS review of the Company’s SILO transactions.  The IRS is currently in the process of examining income tax returns filed for 2003 and 2004.  The State of Hawaii is currently in the process of examining income tax returns filed for 2002 through 2004.
12

As noted in Note 1, FIN 48 established a recognition threshold and measurement attributes for income tax positions recognized in the Company’s financial statements in accordance with SFAS No. 109.  FIN 48 requires the Company to record a liability, referred to as an unrecognized tax benefit (“UTB”), for the entire amount of benefit taken in a prior or future income tax return when the Company determines that a tax position has a less than 50% likelihood of being accepted by the taxing authority.  If the Company determines that the likelihood of a tax position being accepted is greater than 50%, but less than 100%, the Company records a liability for UTBs in the amount it believes will be disallowed by the taxing authority.
As of December 31, 2006, prior to adopting the provisions of FIN 48, the Company had recorded the equivalent of $116.4 million of UTBs in its statement of condition.  On January 1, 2007, in adopting the provisions of FIN 48, the Company increased its liability for UTBs to $130.6 million, of which $7.2 million was recorded as a cumulative-effect adjustment to reduce retained earnings, primarily due to the accrual of interest expense.  As of January 1, 2007, of the $130.6 million in the Company’s liability for UTBs, $29.3 million, that if reversed, would have an impact on the Company’s effective tax rate.  As of June 30, 2007, there were no material changes in the Company’s liability for UTBs or in the amount, that if reversed, would have an impact on the Company’s effective tax rate.  With respect to the Company’s appeals of its five SILO transactions, it is reasonably possible that the amount of the liability for UTBs may decrease if facts and circumstances related to the IRS appeals change within the next twelve months.  However, management is currently not able to estimate a range of possible change in the amount of the liability for UTBs recorded as of June 30, 2007.
The Company classifies interest and penalties, if any, related to the liability for UTBs as a component of the provision for income taxes.  As of January 1, 2007, after recording the cumulative-effect adjustment to adopt the provisions of FIN 48, the Company had accrued $21.7 million for the payment of possible interest and penalties.  For the three and six months ended June 30, 2007, the amount recorded by the Company as an estimate of the expected payment of interest and penalties in the provision for income taxes was not material.
Note 5.  Business Segments
The Company’s business segments are Retail Banking, Commercial Banking, Investment Services, and Treasury.  The Company’s internal management accounting process measures the performance of the business segments based on the management structure of the Company.  This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, the Provision, and capital.  This process is dynamic and requires certain allocations based on judgment and other subjective factors.  Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting that is equivalent to U.S. GAAP.
13

Selected financial information for each segment is presented below for the three and six months ended June 30, 2007 and 2006.
Business Segment Selected Financial Information (Unaudited)	
 
 	 	Retail	 	Commercial	 	Investment	 	 	 	Consolidated	 	
(dollars in thousands)	 	Banking	 	Banking	 	Services	 	Treasury	 	Total	 	
Three Months Ended June 30, 2007	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income (Loss)	 	$	60,126	 	$	35,288	 	$	4,325	 	$	(861	)	$	98,878	 	
Provision for Credit Losses	 	2,559	 	813	 	-	 	(9	)	3,363	 	
Net Interest Income (Loss) After Provision for Credit Losses	 	57,567	 	34,475	 	4,325	 	(852	)	95,515	 	
Noninterest Income	 	27,063	 	7,528	 	19,686	 	3,751	 	58,028	 	
Noninterest Expense	 	(42,717	)	(19,978	)	(16,251	)	(886	)	(79,832	)	
Income Before Provision for Income Taxes	 	41,913	 	22,025	 	7,760	 	2,013	 	73,711	 	
Provision for Income Taxes	 	(15,509	)	(8,231	)	(2,871	)	629	 	(25,982	)	
Allocated Net Income	 	$	26,404	 	$	13,794	 	$	4,889	 	$	2,642	 	$	47,729	 	
Total Assets as of June 30, 2007	 	$	3,987,482	 	$	2,746,074	 	$	243,026	 	$	3,745,986	 	$	10,722,568	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended June 30, 2006 1	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	58,697	 	$	32,987	 	$	4,477	 	$	3,695	 	$	99,856	 	
Provision for Credit Losses	 	1,862	 	317	 	999	 	(1,109	)	2,069	 	
Net Interest Income After Provision for Credit Losses	 	56,835	 	32,670	 	3,478	 	4,804	 	97,787	 	
Noninterest Income	 	24,792	 	7,905	 	17,561	 	2,943	 	53,201	 	
Noninterest Expense	 	(41,861	)	(19,049	)	(16,512	)	(1,320	)	(78,742	)	
Income Before Provision for Income Taxes	 	39,766	 	21,526	 	4,527	 	6,427	 	72,246	 	
Provision for Income Taxes	 	(14,714	)	(16,632	)	(1,666	)	(2,058	)	(35,070	)	
Allocated Net Income	 	$	25,052	 	$	4,894	 	$	2,861	 	$	4,369	 	$	37,176	 	
Total Assets as of June 30, 2006	 	$	3,951,725	 	$	2,671,854	 	$	228,584	 	$	3,473,027	 	$	10,325,190	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Six Months Ended June 30, 2007	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	118,996	 	$	69,075	 	$	8,765	 	$	179	 	$	197,015	 	
Provision for Credit Losses	 	5,891	 	125	 	-	 	(22	)	5,994	 	
Net Interest Income After Provision for Credit Losses	 	113,105	 	68,950	 	8,765	 	201	 	191,021	 	
Noninterest Income	 	52,960	 	19,167	 	39,089	 	7,772	 	118,988	 	
Noninterest Expense	 	(85,675	)	(40,523	)	(32,684	)	(3,073	)	(161,955	)	
Income Before Provision for Income Taxes	 	80,390	 	47,594	 	15,170	 	4,900	 	148,054	 	
Provision for Income Taxes	 	(29,745	)	(17,440	)	(5,613	)	(192	)	(52,990	)	
Allocated Net Income	 	$	50,645	 	$	30,154	 	$	9,557	 	$	4,708	 	$	95,064	 	
Total Assets as of June 30, 2007	 	$	3,987,482	 	$	2,746,074	 	$	243,026	 	$	3,745,986	 	$	10,722,568	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Six Months Ended June 30, 20061	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	116,387	 	$	66,729	 	$	8,882	 	$	10,060	 	$	202,058	 	
Provision for Credit Losses	 	4,357	 	738	 	999	 	(1,264	)	4,830	 	
Net Interest Income After Provision for Credit Losses	 	112,030	 	65,991	 	7,883	 	11,324	 	197,228	 	
Noninterest Income	 	48,907	 	16,313	 	35,307	 	5,246	 	105,773	 	
Noninterest Expense	 	(83,821	)	(39,153	)	(33,454	)	(3,132	)	(159,560	)	
Income Before Provision for Income Taxes	 	77,116	 	43,151	 	9,736	 	13,438	 	143,441	 	
Provision for Income Taxes	 	(28,533	)	(24,581	)	(3,594	)	(4,207	)	(60,915	)	
Allocated Net Income	 	$	48,583	 	$	18,570	 	$	6,142	 	$	9,231	 	$	82,526	 	
Total Assets as of June 30, 2006	 	$	3,951,725	 	$	2,671,854	 	$	228,584	 	$	3,473,027	 	$	10,325,190	 	
 
1 Certain prior period information has been reclassified to conform to current presentation.
14

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report may contain, and other statements made by the Company in connection with this report may contain, forward-looking statements concerning, among other things, the Company’s business outlook, the economic and business environment in the Company’s service areas and elsewhere, credit quality and other financial and business matters in future periods.  The Company’s forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate, and actual results may differ materially from those projected for a variety of reasons, including, but not limited to: 1) general economic conditions are less favorable than expected; 2) competitive pressure among financial services and products; 3) the impact of legislation and the regulatory environment; 4) fiscal and monetary policies of the markets in which the Company serves; 5) changes in accounting standards; 6) changes in tax laws or regulations or the interpretation of such laws and regulations; 7) changes in the Company’s credit quality or risk profile that may increase or decrease the required level of the reserve for credit losses; 8) changes in market interest rates that may affect the Company’s credit markets and ability to maintain its net interest margin; 9) unpredictable costs and other consequences of legal, tax, or regulatory matters; 10) changes to the amount and timing of proposed common stock repurchases; and 11) geopolitical risk, military or terrorist activity, natural disaster, adverse weather, public health and other conditions impacting the Company and its customers’ operations.  For a detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, refer to the section entitled “Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, and subsequent periodic and current reports, filed with the U.S. Securities and Exchange Commission.  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements.  The Company does not undertake an obligation to update forward-looking statements to reflect later events or circumstances.
Overview
2007+ Plan
In January 2007, the Company introduced its 2007+ Plan to its shareholders, customers, and employees.  The 2007+ Plan emphasizes growth in revenues, integration of service delivery and business units, development of people, enhancement of the Bank of Hawaii brand, and discipline in managing risk and financial performance.  The 2007+ Plan does not contemplate near-term expansion beyond the Company’s current footprint.
The Company’s 2007+ Plan is based on moderate growth in revenues and consistent positive operating leverage.  Performance objectives include an annual return on assets above 1.7%, return on equity above 25%, and an efficiency ratio approaching 50%, and is based on a stable economy (which continues in Hawaii) and a return to a more traditional interest rate environment (which has not occurred).  The Company’s 2007+ Plan will be reevaluated periodically and updated as market events and business developments dictate.
Earnings Summary
The Company reported strong financial performance for the three and six months ended June 30, 2007 compared to the same periods in 2006.  The Company had strong growth in noninterest income while maintaining discipline in increases to noninterest expense.  These positive factors offset the continued decrease of net interest margin the Company has experienced as a result of the challenging interest rate environment.  Overall credit quality of the Company remains strong and the Hawaii economy remains stable.
15

Table 1 presents the Company’s financial highlights and performance ratios for the three and six months ended June 30, 2007 and 2006 and as of June 30, 2007, December 31, 2006, and June 30, 2006.
 
Financial Highlights (Unaudited)	Table 1	
 
 	 	Three Month Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(dollars in thousands, except per share amounts)	 	2007	 	2006 1	 	2007	 	2006 1	 	
For the Period:	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	98,878	 	$	99,856	 	$	197,015	 	$	202,058	 	
Total Noninterest Income	 	58,028	 	53,201	 	118,988	 	105,773	 	
Net Income	 	47,729	 	37,176	 	95,064	 	82,526	 	
Basic Earnings Per Share	 	0.97	 	0.74	 	1.93	 	1.63	 	
Diluted Earnings Per Share	 	0.95	 	0.72	 	1.89	 	1.59	 	
Dividends Declared Per Share	 	0.41	 	0.37	 	0.82	 	0.74	 	
 	 	 	 	 	 	 	 	 	 	
Net Income to Average Total Assets	 	1.84	%	1.47	%	1.84	%	1.64	%	
Net Income to Average Shareholders’ Equity	 	26.30	 	21.70	 	26.64	 	23.93	 	
Net Interest Margin2	 	4.12	 	4.25	 	4.09	 	4.33	 	
Operating Leverage3	 	 	 	 	 	3.90	 	2.38	 	
Efficiency Ratio4	 	50.88	 	51.45	 	51.25	 	51.83	 	
 	 	 	 	 	 	 	 	 	 	
Average Assets	 	$	10,383,030	 	$	10,169,341	 	$	10,432,130	 	$	10,130,718	 	
Average Loans and Leases	 	6,532,736	 	6,317,682	 	6,547,212	 	6,250,082	 	
Average Deposits	 	7,810,089	 	7,728,227	 	7,865,469	 	7,735,384	 	
Average Shareholders’ Equity	 	727,887	 	687,083	 	719,549	 	695,424	 	
Average Shareholders’ Equity to Average Assets	 	7.01	%	6.76	%	6.90	%	6.86	%	
 	 	 	 	 	 	 	 	 	 	
Market Price Per Share of Common Stock:	 	 	 	 	 	 	 	 	 	
Closing	 	$	51.64	 	$	49.60	 	$	51.64	 	$	49.60	 	
High	 	55.00	 	54.51	 	55.00	 	55.15	 	
Low	 	50.64	 	48.33	 	50.11	 	48.33	 	
 
 	 	 	 	June 30,
2007	 	December 31,
2006	 	June 30,
2006	 	
As of Period End:	 	 	 	 	 	 	 	 	 	
Net Loans and Leases	 	 	 	$	6,475,128	 	$	6,532,169	 	$	6,350,590	 	
Total Assets	 	 	 	10,722,568	 	10,571,815	 	10,325,190	 	
Total Deposits	 	 	 	8,314,404	 	8,023,394	 	7,766,033	 	
Long-Term Debt	 	 	 	260,329	 	260,288	 	242,749	 	
Total Shareholders’ Equity	 	 	 	708,806	 	719,420	 	666,728	 	
 	 	 	 	 	 	 	 	 	 	
Non-Performing Assets	 	 	 	$	6,314	 	$	6,407	 	$	5,377	 	
 	 	 	 	 	 	 	 	 	 	
Allowance to Loans and Leases Outstanding	 	 	 	1.39	%	1.37	%	1.41	%	
Dividend Payout Ratio5	 	 	 	42.27	 	39.81	 	50.00	 	
Leverage Ratio	 	 	 	7.02	 	7.06	 	7.09	 	
 	 	 	 	 	 	 	 	 	 	
Book Value Per Common Share	 	 	 	$	14.34	 	$	14.45	 	$	13.18	 	
 	 	 	 	 	 	 	 	 	 	
Full-Time Equivalent Employees	 	 	 	2,571	 	2,586	 	2,563	 	
Branches and Offices	 	 	 	84	 	86	 	86	 	
 
1   Diluted earnings per share for the three and six months ended June 30, 2006 was corrected from $0.73 and $1.60, respectively, in the fourth quarter of 2006.
2   The net interest margin is defined as net interest income, on a taxable equivalent basis, as a percentage of average earning assets.
3   The operating leverage is defined as the percentage change in income before the provision for credit losses and the provision for income taxes.
4   The efficiency ratio is defined as noninterest expense divided by total revenues (net interest income and total noninterest income).
5   The dividend payout ratio is defined as dividends declared per share divided by basic earnings per share for the quarter.
16

Recent Accounting Changes
The Company adopted several new accounting pronouncements on January 1, 2007.  Note 1 to the Consolidated Financial Statements (Unaudited), which is incorporated herein by reference, provides additional information on the adoption of these recently issued accounting pronouncements as well as the future application of accounting pronouncements not yet adopted by the Company.
Analysis of Statements of Income
Net Interest Income
Net interest income, on a taxable-equivalent basis, decreased by $1.0 million or 1% and by $4.9 million or 2% for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006.   The Company’s net interest income was negatively impacted by the yield curve which was inverted or flat for most of the six months ended June 30, 2007 and throughout 2006.
The decrease in net interest income, on a taxable-equivalent basis, in 2007 was primarily due to increased funding costs.  Rates paid on demand, savings, and time deposit accounts increased for the three and six months ended June 30, 2007 compared to the same periods in 2006, reflecting a general rise in short-term interest rates.  Also contributing to the Company’s higher funding costs were increased levels of securities sold under agreements to repurchase, utilized to fund growth in loans and leases.  Partially offsetting the increase in the Company’s funding costs was an increase in the Company’s average loans and leases and an increase in yields on loans and leases and investment securities.  For the three and six months ended June 30, 2007 the yields on loans and leases increased by 25 basis points and 28 basis points, respectively, compared to the same periods in 2006, reflecting a higher interest rate environment in 2007.  In addition, during the second quarter of 2007, the Company reached an agreement with the Internal Revenue Service (the “IRS”) as to the terms of settlement of the issues related to the Company’s Lease In-Lease Out (“LILO”) transaction.  In June 2007, the Company recalculated the total and periodic income from the LILO transaction from the inception of the lease transaction and recorded a $1.5 million credit to net income, which was comprised of a $1.1 million credit to lease financing interest income and a $0.4 million credit to the provision for income taxes.
Average loans and leases increased by $215.0 million or 3% and by $297.2 million or 5% for the three and six months ended June 30, 2007, respectively, compared to the same periods 2006, with growth in substantially all loan categories.  Average interest-bearing deposits increased by $173.4 million or 3% and by $213.4 million or 4% for the three and six months ended June 30, 2007, respectively, compared to the same periods 2006.  This increase in average interest-bearing deposits was primarily due to strong growth in average time deposits.  Customers have shifted their balances from noninterest-bearing demand, interest-bearing demand, and savings accounts to higher rate time deposit accounts.  Customers have also shifted some deposits to their off-balance sheet managed cash accounts as a means of obtaining higher rates.  Average balances in securities sold under agreements to repurchase were higher for the three and six months ended June 30, 2007, compared to the same periods in 2006, as a result of serving as one source of funding the Company’s growth in loans and leases.  The Company’s average long-term debt balances increased modestly by $17.6 million or 7% for both the three and six months ended June 30, 2007 compared to the same periods in 2006.
17

The Company’s net interest margin decreased by 13 basis points and by 24 basis points for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006.  The decrease in the Company’s net interest margin for both periods was primarily interest rate driven.  The net interest margin compression being experienced by the Company is a result of the prolonged effects of the inverted or flat yield curve has had on the Company’s mix of funding sources and related rates paid.
Average balances, related income and expenses, and resulting yields and rates, on a taxable equivalent basis, are presented in Table 2 for the three and six months ended June 30, 2007 and 2006.  An analysis of the change in net interest income, on a taxable equivalent basis, from the six months ended June 30, 2006 to the six months ended June 30, 2007, is presented in Table 3.
18

 
Consolidated Average Balances and Interest Rates - Taxable Equivalent Basis (Unaudited)	Table 2	
 
 	 	Three Months Ended	 	Three Months Ended	 	Six Months Ended	 	Six Months Ended	 	
 	 	June 30, 2007	 	June 30, 2006 1	 	June 30, 2007	 	June 30, 2006 1	 	
 	 	Average	 	Income/	 	Yield/	 	Average	 	Income/	 	Yield/	 	Average	 	Income/	 	Yield/	 	Average	 	Income/	 	Yield/	 	
(dollars in millions)	 	Balance	 	Expense	 	Rate	 	Balance	 	Expense	 	Rate	 	Balance	 	Expense	 	Rate	 	Balance	 	Expense	 	Rate	 	
Earning Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	$	8.0	 	$	0.1	 	4.83	%	$	5.7	 	$	0.1	 	3.82	%	$	6.3	 	$	0.2	 	4.89	%	$	5.5	 	$	0.1	 	3.57	%	
Funds Sold	 	40.6	 	0.5	 	5.26	 	13.9	 	0.2	 	4.89	 	60.8	 	1.6	 	5.28	 	12.5	 	0.3	 	4.77	 	
Investment Securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Trading	 	137.1	 	1.4	 	3.96	 	-	 	-	 	-	 	149.5	 	3.0	 	3.98	 	-	 	-	 	-	 	
Available-for-Sale	 	2,486.9	 	31.8	 	5.11	 	2,564.2	 	31.4	 	4.90	 	2,470.1	 	62.9	 	5.10	 	2,576.7	 	62.4	 	4.84	 	
Held-to-Maturity	 	339.3	 	3.8	 	4.51	 	429.5	 	4.6	 	4.34	 	350.1	 	7.9	 	4.50	 	436.6	 	9.4	 	4.31	 	
Loans Held for Sale	 	13.6	 	0.2	 	6.34	 	8.8	 	0.1	 	6.29	 	10.5	 	0.3	 	6.27	 	10.4	 	0.3	 	6.15	 	
Loans and Leases2	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	1,053.3	 	19.5	 	7.43	 	967.5	 	17.6	 	7.29	 	1,064.6	 	39.3	 	7.44	 	950.0	 	33.8	 	7.17	 	
Construction	 	253.8	 	5.0	 	7.93	 	176.7	 	3.5	 	8.08	 	249.7	 	9.8	 	7.95	 	159.8	 	6.4	 	8.06	 	
Commercial Mortgage	 	620.0	 	10.6	 	6.85	 	598.8	 	9.9	 	6.66	 	618.3	 	20.9	 	6.82	 	585.4	 	19.1	 	6.58	 	
Residential Mortgage	 	2,499.5	 	38.3	 	6.12	 	2,449.2	 	36.4	 	5.94	 	2,497.9	 	76.5	 	6.12	 	2,435.8	 	71.8	 	5.89	 	
Other Revolving Credit and Installment	 	684.2	 	15.8	 	9.27	 	718.0	 	16.3	 	9.10	 	693.3	 	31.7	 	9.23	 	721.8	 	32.2	 	9.00	 	
Home Equity	 	941.4	 	17.9	 	7.62	 	912.8	 	16.8	 	7.39	 	941.8	 	35.6	 	7.62	 	903.6	 	32.3	 	7.20	 	
Lease Financing	 	480.5	 	4.7	 	3.92	 	494.7	 	3.7	 	2.99	 	481.6	 	8.2	 	3.41	 	493.6	 	7.9	 	3.20	 	
Total Loans and Leases	 	6,532.7	 	111.8	 	6.86	 	6,317.7	 	104.2	 	6.61	 	6,547.2	 	222.0	 	6.82	 	6,250.0	 	203.5	 	6.54	 	
Other	 	79.4	 	0.4	 	1.83	 	79.4	 	0.3	 	1.37	 	79.4	 	0.7	 	1.76	 	79.4	 	0.5	 	1.37	 	
Total Earning Assets3	 	9,637.6	 	150.0	 	6.23	 	9,419.2	 	140.9	 	5.99	 	9,673.9	 	298.6	 	6.20	 	9,371.1	 	276.5	 	5.92	 	
Cash and Noninterest-Bearing Deposits	 	275.3	 	 	 	 	 	304.3	 	 	 	 	 	292.8	 	 	 	 	 	318.0	 	 	 	 	 	
Other Assets	 	470.1	 	 	 	 	 	445.8	 	 	 	 	 	465.4	 	 	 	 	 	441.6	 	 	 	 	 	
Total Assets	 	$	10,383.0	 	 	 	 	 	$	10,169.3	 	 	 	 	 	$	10,432.1	 	 	 	 	 	$	10,130.7	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Demand	 	$	1,581.0	 	4.1	 	1.03	 	$	1,611.7	 	3.9	 	0.97	 	$	1,591.7	 	8.3	 	1.05	 	$	1,633.1	 	7.2	 	0.89	 	
Savings	 	2,627.8	 	12.6	 	1.93	 	2,699.0	 	9.4	 	1.39	 	2,633.8	 	25.1	 	1.92	 	2,727.4	 	16.5	 	1.22	 	
Time	 	1,707.9	 	17.0	 	3.99	 	1,432.6	 	11.4	 	3.20	 	1,719.9	 	33.7	 	3.94	 	1,371.5	 	20.6	 	3.02	 	
Total Interest-Bearing Deposits	 	5,916.7	 	33.7	 	2.28	 	5,743.3	 	24.7	 	1.72	 	5,945.4	 	67.1	 	2.28	 	5,732.0	 	44.3	 	1.56	 	
Short-Term Borrowings	 	116.9	 	1.5	 	5.30	 	219.0	 	2.7	 	4.99	 	98.4	 	2.6	 	5.23	 	198.6	 	4.7	 	4.75	 	
Securities Sold Under Agreements to Repurchase	 	1,040.6	 	11.7	 	4.46	 	855.9	 	9.8	 	4.57	 	1,055.1	 	23.5	 	4.46	 	814.2	 	17.7	 	4.37	 	
Long-Term Debt	 	260.3	 	4.0	 	6.12	 	242.7	 	3.7	 	6.15	 	260.3	 	7.9	 	6.12	 	242.7	 	7.4	 	6.16	 	
Total Interest-Bearing Liabilities	 	7,334.5	 	50.9	 	2.78	 	7,060.9	 	40.9	 	2.32	 	7,359.2	 	101.1	 	2.76	 	6,987.5	 	74.1	 	2.14	 	
Net Interest Income	 	 	 	$	99.1	 	 	 	 	 	$	100.0	 	 	 	 	 	$	197.5	 	 	 	 	 	$	202.4	 	 	 	
Interest Rate Spread	 	 	 	 	 	3.45	%	 	 	 	 	3.67	%	 	 	 	 	3.44	%	 	 	 	 	3.78	%	
Net Interest Margin	 	 	 	 	 	4.12	%	 	 	 	 	4.25	%	 	 	 	 	4.09	%	 	 	 	 	4.33	%	
Noninterest-Bearing Demand Deposits	 	1,893.4	 	 	 	 	 	1,984.9	 	 	 	 	 	1,920.1	 	 	 	 	 	2,003.4	 	 	 	 	 	
Other Liabilities	 	427.2	 	 	 	 	 	436.4	 	 	 	 	 	433.3	 	 	 	 	 	444.4	 	 	 	 	 	
Shareholders’ Equity	 	727.9	 	 	 	 	 	687.1	 	 	 	 	 	719.5	 	 	 	 	 	695.4	 	 	 	 	 	
Total Liabilities and Shareholders’ Equity	 	$	10,383.0	 	 	 	 	 	$	10,169.3	 	 	 	 	 	$	10,432.1	 	 	 	 	 	$	10,130.7	 	 	 	 	 	
 
1	Certain prior period information has been reclassified to conform to current presentation.	
2	Non-performing loans and leases are included in the respective average loan and lease balances. Income, if any, on such loans and leases is recognized on a cash basis.	
3	Interest income includes taxable equivalent basis adjustments, based upon a federal statutory income tax rate of 35%, of $236,000 and $175,000 for the three months ended June 30, 2007 and 2006, respectively, and $449,000 and $337,000 for the six months ended June 30, 2007 and 2006, respectively.	
 
19

 
Analysis of Change in Net Interest Income - Taxable Equivalent Basis (Unaudited)	Table 3	
 
 	 	Six Months Ended June 30, 2007	 	
 	 	compared to June 30, 2006	 	
(dollars in millions)	 	Volume 1	 	Rate 1	 	Total	 	
Change in Interest Income:	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	$	-	 	$	0.1	 	$	0.1	 	
Funds Sold	 	1.3	 	-	 	1.3	 	
Investment Securities	 	 	 	 	 	 	 	
Trading	 	3.0	 	-	 	3.0	 	
Available-for-Sale	 	(2.8	)	3.3	 	0.5	 	
Held-to-Maturity	 	(1.9	)	0.4	 	(1.5	)	
Loans and Leases	 	 	 	 	 	 	 	
Commercial and Industrial	 	4.2	 	1.3	 	5.5	 	
Construction	 	3.5	 	(0.1	)	3.4	 	
Commercial Mortgage	 	1.1	 	0.7	 	1.8	 	
Residential Mortgage	 	1.9	 	2.8	 	4.7	 	
Other Revolving Credit and Installment	 	(1.3	)	0.8	 	(0.5	)	
Home Equity	 	1.4	 	1.9	 	3.3	 	
Lease Financing	 	(0.2	)	0.5	 	0.3	 	
Total Loans and Leases	 	10.6	 	7.9	 	18.5	 	
Other	 	-	 	0.2	 	0.2	 	
Total Change in Interest Income	 	10.2	 	11.9	 	22.1	 	
 	 	 	 	 	 	 	 	
Change in Interest Expense:	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	 	 	 	 	 	 	
Demand	 	(0.2	)	1.3	 	1.1	 	
Savings	 	(0.6	)	9.2	 	8.6	 	
Time	 	6.0	 	7.1	 	13.1	 	
Total Interest-Bearing Deposits	 	5.2	 	17.6	 	22.8	 	
Short-Term Borrowings	 	(2.5	)	0.4	 	(2.1	)	
Securities Sold Under Agreements to Repurchase	 	5.4	 	0.4	 	5.8	 	
Long-Term Debt	 	0.5	 	-	 	0.5	 	
Total Change in Interest Expense	 	8.6	 	18.4	 	27.0	 	
 	 	 	 	 	 	 	 	
Change in Net Interest Income	 	$	1.6	 	$	(6.5	)	$	(4.9	)	
 
1 The changes for each category of interest income and expense are allocated between the portion of changes attributable to the variance in volume and rate for that category.
Provision for Credit Losses
The provision for credit losses (the “Provision”) reflects management’s judgment of the expense or benefit necessary to establish the appropriate amount of the allowance for loan and lease losses (the “Allowance”).  The Provision is determined through detailed analyses of the Company’s loan and lease portfolio.  For the three months ended June 30, 2007 and 2006, the Company recorded a Provision of $3.4 million and $2.1 million, respectively.  For the six months ended June 30, 2007 and 2006, the Company recorded a Provision of $6.0 million and $4.8 million, respectively.  The Provision in 2007 and 2006 was recorded by the Company in order to maintain the Allowance at levels considered appropriate to cover credit losses inherent in the lending process.  For further discussion on the Allowance, see the “Corporate Risk Profile – Reserve for Credit Losses” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
Noninterest Income
Noninterest income increased by $4.8 million or 9% and by $13.2 million or 12% for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006, with growth in substantially all categories.
20

Trust and asset management income increased by $1.6 million or 11% and by $2.6 million or 9% for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006.  For the three months ended June 30, 2007 compared to the same period in 2006, the increase in trust and asset management income was primarily due to a $0.6 million increase in asset management fees and a $0.3 million increase in both agency fees and testamentary trust fees.  For the six months ended June 30, 2007 compared to the same period in 2006, the increase in trust and asset management income was primarily due to a $1.1 million increase in asset management fees, a $0.6 million increase in agency fees, and a $0.4 million increase in testamentary trust fees.  Trust and asset management fees are generally correlated with the market value of the assets under administration by the Company.  Total trust assets under administration were $13.2 billion and $12.6 billion as of June 30, 2007 and 2006, respectively.
Mortgage banking income decreased by $0.1 million or 4% and increased by $0.3 million or 5% for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006.  For the three months ended June 30, 2007 compared to the same period in 2006, the decrease in mortgage banking income was primarily due to $1.9 million in investment trading losses, partially offset by a $0.8 million increase in the fair value of the Company’s mortgage servicing rights and a $0.7 million decrease in the amortization of mortgage servicing rights.  The decrease in the amortization of mortgage servicing rights was the result of the Company’s adoption of SFAS No. 156 on January 1, 2007.  For the six months ended June 30, 2007 compared to the same period in 2006, the increase in mortgage banking income was primarily due to a $1.2 million decrease in the amortization of mortgage servicing rights, partially offset by a $0.6 million decrease in the fair value of the Company’s mortgage servicing rights and a $0.3 million in investment trading losses.  Residential mortgage loan production was $233.1 million and $218.7 million for the three months ended June 30, 2007 and 2006, respectively.  Residential mortgage loan production was $437.2 million and $439.3 million for the six months ended June 30, 2007 and 2006, respectively.  The Company’s residential mortgage loan production data is reflective of a strong and stable Hawaii real estate market over these periods.
Service charges on deposit accounts increased by $1.4 million or 14% and by $2.2 million or 11% for the three and six months ended June 30, 2007, respectively, compared to same periods in 2006.  The increase in both periods from 2006 was primarily due to an increase in the number of transactional deposit accounts.  For the six months ended June 30, 2007 compared to the same period in 2006, the increase was partially offset by lower account analysis fees on analyzed business checking accounts as a result of higher earnings credit rates from a rise in short-term interest rates.
Fees, exchange, and other service charges increased by $0.9 million or 6% and by $2.2 million or 7% for the three and six months ended June 30, 2007, respectively, compared to same periods in 2006.  The increase in fees, exchange, and other service charges was primarily due to a $1.0 million and $1.9 million increase in interchange income for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006, as a result of increased transactional volume from new and existing debit cardholders.  In addition, for the six months ended June 30, 2007, the Company recorded $0.5 million in income from facilitating customer interest rate swaps.
Insurance income increased by $0.2 million or 4% and by $1.4 million or 14% for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006.  For the three months ended June 30, 2007 compared to the same period in 2006, the increase in insurance income was due to higher annuity product income as a result of higher premiums written.  For the six months ended June 30, 2007 compared to the same period in 2006, the increase was due to a $0.8 million increase in commission and brokerage income and a $0.6 million increase in life and annuity product income.
21

Other noninterest income increased by $0.2 million or 4% and by $3.9 million or 36% for the three and six months ended June 30, 2007, respectively, compared to same periods in 2006.  For the three months ended June 30, 2007 compared to the same period in 2006, the increase in other noninterest income was due to a $0.7 million increase in income from Bank-Owned Life Insurance (“BOLI”).  This increase was partially offset by reductions in gains from the sale of leveraged leased assets.  For the six months ended June 30, 2007 compared to the same period in 2006, the increase in other noninterest income was primarily due to a $1.0 million increase in income from BOLI, a $1.8 million increase in gains from the sale of leveraged leased assets, and a $0.4 million increase in mutual fund and retail brokerage income.
Noninterest Expense
Noninterest expense increased by $1.1 million or 1% and by $2.4 million or 2% for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006.
Table 4 presents the components of salaries and benefits expense for the three and six months ended June 30, 2007 and 2006.
Salaries and Benefits (Unaudited)	Table 4	

 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2006	 	2007	 	2006	 	
Salaries	 	$	29,220	 	$	27,727	 	$	57,344	 	$	54,451	 	
Incentive Compensation	 	3,794	 	3,844	 	7,413	 	8,165	 	
Share-Based Compensation	 	1,333	 	1,631	 	2,560	 	3,112	 	
Commission Expense	 	2,161	 	1,833	 	4,154	 	3,755	 	
Retirement and Other Benefits	 	3,365	 	4,833	 	7,134	 	10,068	 	
Payroll Taxes	 	2,247	 	2,297	 	5,769	 	5,682	 	
Medical, Dental, and Life Insurance	 	2,263	 	2,185	 	4,501	 	4,346	 	
Separation Expense	 	204	 	461	 	1,118	 	1,018	 	
Total Salaries and Benefits	 	$	44,587	 	$	44,811	 	$	89,993	 	$	90,597	 	
 
Salaries and benefits expense decreased by $0.2 million or 1% and by $0.6 million or 1% for the three and six months ended June 30, 2007, respectively, compared to same periods in 2006.  For the three months ended June 30, 2007 compared to the same period in 2006, the decrease in salaries and benefits expense was primarily due to a $0.5 million reduction in postretirement benefits expense, a $0.5 million reversal of the Company’s Money Purchase Plan forfeiture reserve, and a $0.6 million decrease in the Company’s value sharing accrual.  These decreases in salaries and benefits were partially offset by a $1.2 million increase in salaries expense as a result of annual increases.  For the six months ended June 30, 2007 compared to the same period in 2006, the decrease in salaries and benefits expense was primarily due to a $0.9 million reduction in postretirement benefits expense, a $1.0 million reversal of the Money Purchase Plan forfeiture reserve, a $1.2 million decrease in the Company’s value sharing accrual, and a $0.3 million decrease in share-based compensation expense resulting from the vesting of restricted stock units in 2006.  These decreases in salaries and benefits were partially offset by a $2.3 million increase in salaries expense as a result of annual increases.
Professional fees were $2.6 million for the three months ended June 30, 2007 and 2006.  Professional fees increased by $2.1 million or 70% for the six months ended June 30, 2007 compared to the same period in 2006, primarily due to the reversal of legal expenses recorded in 2006.
22

Provision for Income Taxes
The Company recorded a provision for income taxes of $26.0 million and $35.1 million for the three months end June 30, 2007 and 2006, respectively.  The Company recorded a provision for income taxes of $53.0 million and $60.9 million for the six months ended June 30, 2007 and 2006, respectively.   The Company’s effective tax rate was 35.25% and 48.54% for the three months ended June 30, 2007 and 2006, respectively.  The Company’s effective tax rate was 35.79% and 42.47% for the six months ended June 30, 2007 and 2006, respectively.  The higher effective tax rates in 2006 were the result of an $8.2 million charge recorded in the provision for income taxes in the second quarter of 2006 related to a change in tax law.  The lower effective tax rates in 2007 are also a result of the aforementioned LILO transaction which was effectively settled with the IRS in June 2007.  For the three and six months ended June 30, 2007, the effective settlement of the LILO transaction had the effect of reducing the provision for income taxes by $0.4 million.  Note 4 to the Consolidated Financial Statements (Unaudited) provides an effective tax rate reconciliation for the three and six months ended June 30, 2007 and 2006 and is incorporated herein by reference.
23

Analysis of Statements of Condition
Investment Securities
Table 5 presents the amortized cost and approximate fair value of the Company’s available-for-sale and held-to-maturity investment securities as of June 30, 2007, December 31, 2006, and June 30, 2006.
Investment Securities (Unaudited)	Table 5	
 
 	 	Amortized	 	Fair	 	
(dollars in thousands)	 	Cost	 	Value	 	
June 30, 2007	 	 	 	 	 	
Available-for-Sale:	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Government Agencies	 	$	4,041	 	$	4,017	 	
Debt Securities Issued by States and Political Subdivisions	 	47,550	 	46,801	 	
Debt Securities Issued by U.S. Government-Sponsored Enterprises	 	333,125	 	330,820	 	
Mortgage-Backed Securities	 	1,866,563	 	1,820,219	 	
Other Debt Securities	 	258,337	 	253,811	 	
Total	 	$	2,509,616	 	$	2,455,668	 	
 	 	 	 	 	 	
Held-to-Maturity:	 	 	 	 	 	
Debt Securities Issued by States and Political Subdivisions	 	$	30	 	$	30	 	
Mortgage-Backed Securities	 	327,088	 	313,559	 	
Total	 	$	327,118	 	$	313,589	 	
 	 	 	 	 	 	
December 31, 2006	 	 	 	 	 	
Available-for-Sale:	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Government Agencies	 	$	19,036	 	$	18,940	 	
Debt Securities Issued by States and Political Subdivisions	 	38,833	 	38,780	 	
Debt Securities Issued by U.S. Government-Sponsored Enterprises	 	258,938	 	257,896	 	
Mortgage-Backed Securities	 	1,990,893	 	1,955,144	 	
Other Debt Securities	 	333,131	 	327,117	 	
Total	 	$	2,640,831	 	$	2,597,877	 	
 	 	 	 	 	 	
Held-to-Maturity:	 	 	 	 	 	
Debt Securities Issued by States and Political Subdivisions	 	$	30	 	$	31	 	
Mortgage-Backed Securities	 	371,314	 	360,688	 	
Total	 	$	371,344	 	$	360,719	 	
 	 	 	 	 	 	
June 30, 20061	 	 	 	 	 	
Available-for-Sale:	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Government Agencies	 	$	4,608	 	$	4,535	 	
Debt Securities Issued by States and Political Subdivisions	 	37,546	 	36,682	 	
Debt Securities Issued by U.S. Government-Sponsored Enterprises	 	182,018	 	179,854	 	
Mortgage-Backed Securities	 	2,041,740	 	1,968,564	 	
Other Debt Securities	 	333,242	 	322,532	 	
Total	 	$	2,599,154	 	$	2,512,167	 	
 	 	 	 	 	 	
Held-to-Maturity:	 	 	 	 	 	
Debt Securities Issued by States and Political Subdivisions	 	$	70	 	$	71	 	
Mortgage-Backed Securities	 	426,840	 	408,132	 	
Total	 	$	426,910	 	$	408,203	 	
 
1  Certain prior period information has been reclassified to conform to current presentation
The carrying value of the Company’s investment securities was $2.8 billion, $3.0 billion, and $2.9 billion as of June 30, 2007, December 31, 2006, and June 30, 2006, respectively.  Investment securities with a carrying value of $1.8 billion, $2.0 billion, and $1.8 billion as of June 30, 2007, December 31, 2006, and June 30, 2006, respectively, which approximates fair value, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.
24

Table 6 presents the Company’s temporarily impaired investment securities as of June 30, 2007, December 31, 2006, and June 30, 2006.
Temporarily Impaired Investment Securities (Unaudited)	Table 6	
 
 	 	Temporarily Impaired	 	Temporarily Impaired	 	 	 	 	 	
 	 	Less Than 12 Months	 	12 Months or Longer	 	Total	 	
 	 	 	 	Gross	 	 	 	Gross	 	 	 	Gross	 	
 	 	 	 	Unrealized	 	 	 	Unrealized	 	 	 	Unrealized	 	
(dollars in thousands)	 	Fair Value	 	Losses	 	Fair Value	 	Losses	 	Fair Value	 	Losses	 	
June 30, 2007	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Government Agencies	 	$	500	 	$	-	 	$	3,017	 	$	(26	)	$	3,517	 	$	(26	)	
Debt Securities Issued by State and Political Subdivisions	 	27,376	 	(523	)	14,722	 	(252	)	42,098	 	(775	)	
Debt Securities Issued by U.S. Government-Sponsored Enterprises	 	249,491	 	(1,647	)	67,714	 	(703	)	317,205	 	(2,350	)	
Mortgage-Backed Securities	 	402,149	 	(5,285	)	1,221,212	 	(46,221	)	1,623,361	 	(51,506	)	
Other Debt Securities	 	-	 	-	 	571,929	 	(14,963	)	571,929	 	(14,963	)	
Total Temporarily Impaired
Investment Securities
June 30, 2007	 	$	679,516	 	$	(7,455	)	$	1,878,594	 	$	(62,165	)	$	2,558,110	 	$	(69,620	)	
December 31, 2006	 	$	357,014	 	$	(2,771	)	$	2,188,561	 	$	(54,928	)	$	2,545,575	 	$	(57,699	)	
June 30, 2006	 	$	1,333,582	 	$	(42,146	)	$	1,434,147	 	$	(65,605	)	$	2,767,729	 	$	(107,751	)	
 
The Company’s temporarily impaired investment securities had gross unrealized losses of $69.6 million as of June 30, 2007, an increase of $11.9 million or 21% and a decrease of $38.1 million or 35% from December 31, 2006 and June 30, 2006, respectively.  The increase in the Company’s temporarily impaired investment securities and related gross unrealized losses from December 31, 2006 to June 30, 2007 was primarily due to an increasing interest rate environment over this time period.  This increase was partially offset by the reclassification of gross unrealized losses of $8.2 million ($5.3 million, net of tax) from accumulated other comprehensive loss to retained earnings as a result of the Company’s adoption of SFAS No. 156 on January 1, 2007.  The decrease in the Company’s temporarily impaired investment securities and related gross unrealized losses from June 30, 2006 to June 30, 2007 was primarily due to run-off and pay-downs on investment securities as well as the timing of purchasing new investment securities. 
The Company does not believe that gross unrealized losses as of June 30, 2007 represent an other-than-temporary impairment.  The gross unrealized losses reported for mortgage-backed securities relate primarily to investment securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and private institutions.  The gross unrealized losses of temporarily impaired investment securities as of June 30, 2007, which represented 2% of the amortized cost basis of the Company’s total investment securities, were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.  The Company has both the intent and ability to hold the investment securities for a period of time necessary to recover the amortized cost.
25

Loans and Leases
Table 7 presents the composition of the Company’s loan and lease portfolio by major categories and Table 8 presents the composition of the Company’s consumer loans and leases by geographic area. 
Loan and Lease Portfolio Balances (Unaudited)	Table 7	
 
 	 	June 30,	 	March 31,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2007	 	2006	 	2006 1	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	$	1,065,155	 	$	1,042,174	 	$	1,093,392	 	$	1,008,618	 	
Commercial Mortgage	 	619,668	 	611,784	 	611,334	 	619,839	 	
Construction	 	261,478	 	245,951	 	249,263	 	212,490	 	
Lease Financing	 	480,358	 	460,837	 	508,997	 	475,549	 	
Total Commercial	 	2,426,659	 	2,360,746	 	2,462,986	 	2,316,496	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	2,505,073	 	2,495,141	 	2,493,110	 	2,457,867	 	
Home Equity	 	938,261	 	938,135	 	944,873	 	929,386	 	
Other Revolving Credit and Installment	 	677,750	 	693,132	 	700,896	 	714,617	 	
Lease Financing	 	18,383	 	19,998	 	21,302	 	23,259	 	
Total Consumer	 	4,139,467	 	4,146,406	 	4,160,181	 	4,125,129	 	
Total Loans and Leases	 	$	6,566,126	 	$	6,507,152	 	$	6,623,167	 	$	6,441,625	 	
 
1  Certain prior period information has been reclassified to conform to current presentation.
Consumer Loans by Geographic Area (Unaudited)	Table 8	
 
 	 	June 30,	 	March 31,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2007	 	2006	 	2006 1	 	
Hawaii	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	$	2,260,948	 	$	2,251,564	 	$	2,253,633	 	$	2,223,994	 	
Home Equity	 	877,251	 	873,375	 	877,624	 	852,118	 	
Other Revolving Credit and Installment	 	485,484	 	507,542	 	517,504	 	527,759	 	
Lease Financing	 	18,383	 	19,998	 	21,302	 	23,259	 	
Guam	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	235,206	 	234,663	 	230,485	 	224,757	 	
Home Equity	 	13,526	 	12,868	 	11,951	 	10,942	 	
Other Revolving Credit and Installment	 	121,515	 	123,261	 	124,621	 	122,854	 	
Mainland U.S.	 	 	 	 	 	 	 	 	 	
Home Equity	 	43,563	 	47,688	 	51,038	 	61,875	 	
Other Revolving Credit and Installment	 	16,269	 	6,612	 	363	 	-	 	
Other Pacific Islands	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	8,919	 	8,914	 	8,992	 	9,116	 	
Home Equity	 	3,921	 	4,204	 	4,260	 	4,451	 	
Other Revolving Credit and Installment	 	54,482	 	55,717	 	58,408	 	64,004	 	
Total Consumer Loans	 	$	4,139,467	 	$	4,146,406	 	$	4,160,181	 	$	4,125,129	 	
 
1  Certain prior period information has been reclassified to conform to current presentation.
26

As of June 30, 2007, loans and leases outstanding were $6.6 billion, a decrease of $57.0 million or 1% from December 31, 2006.  Total commercial loans and total consumer loans decreased by $36.3 million and $20.7 million, respectively.  The decrease in total commercial loans was primarily due to the Company’s decision to exit certain commercial credits classified in the commercial and industrial category and pay-off of certain bridge and short-term loans originated during the fourth quarter of 2006.  Commercial lease financing balances also decreased from December 31, 2006 to June 30, 2007 as a result of the Company’s adoption of FSP No. 13-2, which had the effect of reducing commercial lease financing balances by $42.7 million as of January 1, 2007.  The decrease in total consumer loans was primarily due to decreases in other revolving credit and installment and home equity loans.  The decrease in other revolving credit and installment loans was primarily due to repayments in the Company’s indirect auto portfolio.  The decrease in the Company’s home equity portfolio was primarily due to continued paydowns in the purchased home equity portfolio.  The decrease in total consumer loans was partially offset by an increase in residential mortgage loans which is reflective of the continued strength of the Hawaii residential real estate market. 
Loans and leases outstanding increased by $124.5 million or 2% from June 30, 2006 to June 30, 2007.  Total commercial loans and total consumer loans increased by $110.2 million and $14.3 million, respectively.  The increase in commercial loans was primarily due to growth in commercial and industrial as well as construction lending areas of the Company.  The increase in consumer loans over this time period was primarily due to growth in residential mortgage lending activities, which was partially offset by a decrease in other revolving credit and installment loans. 
Mortgage Servicing Rights
The Company’s portfolio of residential mortgage loans serviced for third parties was $2.5 billion as of June 30, 2007, December 31, 2006, and June 30, 2006.  Residential mortgage loan repayment rates for the Company’s servicing portfolio, which is concentrated in Hawaii, was slightly higher than the national average for the three months ended June 30, 2007, December 31, 2006, and June 30, 2006. 
The recorded value of the Company’s mortgage servicing rights was $29.1 million, $19.4 million, and $18.8 million as of June 30, 2007, December 31, 2006, and June 30, 2006, respectively.  The increase in the value of the Company’s mortgage servicing rights from June 30, 2006 and December 31, 2006 to June 30, 2007 was primarily due to the Company’s adoption of SFAS No. 156 on January 1, 2007 which had the effect of increasing the recorded value of mortgage servicing rights by $8.0 million.  For the six months ended June 30, 2007, the Company capitalized originated mortgage servicing rights of $2.3 million and recorded a reduction in the fair value of mortgage servicing rights of $0.6 million.  Note 2 to the Consolidated Financial Statements (Unaudited) provides additional information on the changes in the fair value of the mortgage servicing rights for the three and six months ended June 30, 2007 and is incorporated herein by reference. 
Other Assets
Table 9 presents the major components of the Company’s other assets as of June 30, 2007, December 31, 2006, and June 30, 2006.
Other Assets (Unaudited)	Table 9	
 
 	 	June 30,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2006 1	 	2006 1	 	
Bank-Owned Life Insurance	 	$	184,909	 	$	156,115	 	$	153,157	 	
Federal Home Loan Bank and Federal Reserve Bank Stock	 	79,415	 	79,415	 	79,415	 	
Low Income Housing Investments and Other Equity Investment	 	25,932	 	21,898	 	24,921	 	
Accounts Receivable	 	24,416	 	23,216	 	22,601	 	
Federal Tax Deposit	 	61,000	 	61,000	 	61,000	 	
Other	 	37,503	 	32,265	 	47,396	 	
Total Other Assets	 	$	413,175	 	$	373,909	 	$	388,490	 	
 
1  Certain prior period information has been reclassified to conform to current presentation.
27

The increase in the Company’s other assets from June 30, 2006 and December 31, 2006 to June 30, 2007 was primarily due to an additional $25.0 million placement of BOLI in the first quarter of 2007.   Another component of other assets is the Company’s federal tax deposits of $61.0 million as of June 30, 2007, December 31, 2006, and June 30, 2006, relating to the IRS review of the Company’s LILO and SILO transactions.  The placement of the deposits with the IRS reduced the accrual of additional interest and penalties, which was higher than the Company’s funding costs, associated with the potential underpayment of income taxes related to these transactions.  During the second quarter of 2007, the Company reached an agreement with the IRS that effectively settled the matter related to the Company’s LILO transaction.  The Company expects that the federal tax deposit will be reduced when the final adjustments are processed by the IRS.  There has been no change in the status of the IRS review of the Company’s SILO transactions.   Management believes that the Company has adequate reserves for potential tax exposures related to SILO transactions under review by the IRS as of June 30, 2007. 
Deposits
As of June 30, 2007, total deposits were $8.3 billion, an increase of $291.0 million or 4% and by $548.4 million or 7% from December 31, 2006 and June 30, 2006, respectively.  Although the number of noninterest-bearing demand deposit accounts increased, balances decreased by $97.5 million and $79.7 million from December 31, 2006 and June 30, 2006, respectively, primarily due to customers moving their balances to higher yielding products.  Interest-bearing demand and savings balances collectively increased by $345.6 million and $384.9 million from December 31, 2006 and June 30, 2006, respectively, as rates paid on these interest-bearing products have increased.  Time deposits also increased by $42.9 million and $243.2 million from December 31, 2006 and June 30, 2006, respectively, largely due to a migration of retail deposits to higher yielding time deposits.
Table 10 presents the Company’s average balance of time deposits of $100,000 or more. 
Average Time Deposits of $100,000 or More (Unaudited)	Table 10	
 
 	 	Three Months Ended	 	Six Months Ended	 	
(dollars in thousands)	 	June 30, 2007	 	December 31, 2006	 	June 30, 2006 1	 	June 30, 2007	 	June 30, 2006 1	 	
Average Time Deposits	 	$	960,960	 	$	914,070	 	$	769,275	 	$	973,817	 	$	739,916	 	

1  Certain prior period information has been reclassified to conform to current presentation.
Securities Sold Under Agreements to Repurchase 
Securities sold under agreements to repurchase were $910.3 million as of June 30, 2007, a decrease of $137.5 million or 15% from December 31, 2006 and an increase of $74.7 million or 9% from June 30, 2006.  The decrease from December 31, 2006 was primarily due to paydowns of securities sold under agreements to repurchase placed with private entities.  The increase from June 30, 2006 was primarily due to additional securities sold under agreements to repurchase placed with private entities to provide for sources of liquidity.  As of June 30, 2007, total securities sold under agreements to repurchase placed with private entities were $600.0 million, of which $575.0 million were indexed to the London Inter Bank Offering Rate and $25.0 million were indexed to the 10 year Constant Maturity Swap Rate.  The remaining terms of the private entity agreements range from eight to 14 years.  However, the private entities have the right to terminate the agreements on predetermined dates.  If the private entity agreements are not terminated by predetermined dates, the interest rates on the agreements become fixed, at rates ranging from 4.00% to 5.00%, for the remaining term of the respective agreements.  As of June 30, 2007, the average rate for outstanding private entity agreements was 4.13%.
28

Table 11 presents the composition of securities sold under agreements to repurchase as of June 30, 2007, December 31, 2006, and June 30, 2006.
Securities Sold Under Agreements to Repurchase (Unaudited)	Table 11	
 
 	 	June 30,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2006	 	2006	 	
Government Entities	 	$	310,302	 	$	372,824	 	$	535,563	 	
Private Entities	 	600,000	 	675,000	 	300,000	 	
Total Securities Sold Under Agreements to Repurchase	 	$	910,302	 	$	1,047,824	 	$	835,563	 	
 
Borrowings and Long-Term Debt
Borrowings, including funds purchased and other short-term borrowings, were $106.3 million as of June 30, 2007, an increase of $35.1 million or 49% from December 31, 2006 and a decrease of $259.5 million or 71% from June 30, 2006.  The increase in these borrowing instruments from December 31, 2006 was used to partially offset reductions in securities sold under agreements to repurchase over this same period.  The decrease in these borrowing instruments from June 30, 2006 was primarily due to the funding capacity that resulted from an increase in the Company’s deposit balances. 
Long-term debt was $260.3 million as of June 30, 2007, relatively unchanged from December 31, 2006 and an increase of $17.6 million or 7% from June 30, 2006.  The increase in the balance from June 30, 2006 was due to $25.0 million of new long-term debt which was placed during the third quarter of 2006, partially offset by other maturing long-term debt and the repurchase of $5.0 million in Bancorp Hawaii Capital Trust I’s capital securities.  The long-term debt placed during the third quarter of 2006 is comprised of $10.0 million which bears a fixed interest rate of 6.00% and is scheduled to mature in five years, and $15.0 million which bears a fixed interest rate of 6.27% and is scheduled to mature in 10 years.  Further discussion of the Company’s borrowings is included in the “Corporate Risk Profile – Liquidity Management” section of MD&A. 
Shareholders’ Equity
As of June 30, 2007, the Company’s shareholders’ equity was $708.8 million.  This represented a $10.6 million or 1% decrease from December 31, 2006 and a $42.1 million or 6% increase from June 30, 2006.  The reduction in the Company’s shareholders’ equity from December 31, 2006 to June 30, 2007 was primarily due to $41.2 million in common stock repurchases, $40.8 million in cash dividends paid, and $34.5 million in reductions to retained earnings as a result of the Company’s adoption of several new accounting pronouncements on January 1, 2007.  These reductions to shareholders’ equity were partially offset by net income for the six months ended June 30, 2007 of $95.1 million.  Further discussion of the Company’s capital structure is included in the “Corporate Risk Profile – Capital Management” section of MD&A.
Analysis of Business Segments
The Company’s business segments are Retail Banking, Commercial Banking, Investment Services, and Treasury.  The Company’s internal management accounting process measures the performance of the business segments based on the management structure of the Company.  This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, the Provision, and capital.  This process is dynamic and requires certain allocations based on judgment and other subjective factors.  Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting that is equivalent to U.S. generally accepted accounting principles.
29

The Company evaluates several performance measures of the business segments, the most important of which are net income after capital charge (“NIACC”) and risk adjusted return on capital (“RAROC”).  NIACC is economic net income less a charge for the cost of allocated capital.  The cost of allocated capital is determined by multiplying management’s estimate of a shareholder’s minimum required rate of return on the cost of capital invested (currently 11%) by the business segment’s allocated equity.  The Company assumes a cost of capital that is equal to a risk-free rate plus a risk premium.  RAROC is the ratio of economic net income to risk-adjusted equity.  Equity is allocated to each business segment based on an assessment of its inherent risk.  The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis.  The basis for the allocation of net interest income is a function of management decisions and assumptions that are subject to change based on changes in current interest rate and market conditions.  Funds transfer pricing also serves to transfer interest rate risk to the Treasury segment.  However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.  The business segments are charged an economic provision which is a statistically derived estimate of average annual expected credit losses over an economic cycle.
On a consolidated basis, the Company considers NIACC a measure of shareholder value creation.  For the six months ended June 30, 2007, consolidated NIACC was $52.8 million, compared to $40.4 million for the six months ended June 30, 2006.  The increase in NIACC was primarily due to the impact of the aforementioned $8.2 million charge recorded in the provision for income taxes in the second quarter of 2006 related to a change in tax law. 
30

Table 12 summarizes NIACC and RAROC results for the Company’s business segments for the three and six months ended June 30, 2007 and 2006.
Business Segment Selected Financial Information (Unaudited)	Table 12	
 
 	 	Retail	 	Commercial	 	Investment	 	 	 	 	 	Consolidated	 	
(dollars in thousands)	 	Banking	 	Banking	 	Services	 	Total	 	Treasury	 	Total	 	
Three Months Ended June 30, 2007	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allocated Net Income	 	$	26,404	 	$	13,794	 	$	4,889	 	$	45,087	 	$	2,642	 	$	47,729	 	
Allowance Funding Value	 	(242	)	(737	)	(10	)	(989	)	989	 	-	 	
Provision for Credit Losses	 	2,559	 	813	 	-	 	3,372	 	(9	)	3,363	 	
Economic Provision	 	(2,911	)	(2,079	)	(83	)	(5,073	)	-	 	(5,073	)	
Tax Effect of Adjustments	 	220	 	741	 	34	 	995	 	(362	)	633	 	
Income Before Capital Charge	 	26,030	 	12,532	 	4,830	 	43,392	 	3,260	 	46,652	 	
Capital Charge	 	(5,448	)	(3,946	)	(1,574	)	(10,968	)	(9,047	)	(20,015	)	
Net Income (Loss) After Capital Charge (NIACC)	 	$	20,582	 	$	8,586	 	$	3,256	 	$	32,424	 	$	(5,787	)	$	26,637	 	
RAROC (ROE for the Company)	 	53%	 	35%	 	34%	 	 	 	11%	 	26%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended June 30, 20061	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allocated Net Income	 	$	25,052	 	$	4,894	 	$	2,861	 	$	32,807	 	$	4,369	 	$	37,176	 	
Allowance Funding Value	 	(198	)	(602	)	(8	)	(808	)	808	 	-	 	
Provision for Credit Losses	 	1,862	 	317	 	999	 	3,178	 	(1,109	)	2,069	 	
Economic Provision	 	(3,076	)	(2,188	)	(85	)	(5,349	)	-	 	(5,349	)	
Tax Effect of Adjustments	 	522	 	915	 	(335	)	1,102	 	111	 	1,213	 	
Income Before Capital Charge	 	24,162	 	3,336	 	3,432	 	30,930	 	4,179	 	35,109	 	
Capital Charge	 	(5,375	)	(4,063	)	(1,588	)	(11,026	)	(7,867	)	(18,893	)	
Net Income (Loss) After Capital Charge (NIACC)	 	$	18,787	 	$	(727	)	$	1,844	 	$	19,904	 	$	(3,688	)	$	16,216	 	
RAROC (ROE for the Company)	 	50%	 	9%	 	24%	 	 	 	13%	 	22%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Six Months Ended June 30, 2007	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allocated Net Income	 	$	50,645	 	$	30,154	 	$	9,557	 	$	90,356	 	$	4,708	 	$	95,064	 	
Allowance Funding Value	 	(450	)	(1,432	)	(20	)	(1,902	)	1,902	 	-	 	
Provision for Credit Losses	 	5,891	 	125	 	-	 	6,016	 	(22	)	5,994	 	
Economic Provision	 	(5,869	)	(4,264	)	(164	)	(10,297	)	(1	)	(10,298	)	
Tax Effect of Adjustments	 	158	 	2,061	 	68	 	2,287	 	(696	)	1,591	 	
Income Before Capital Charge	 	50,375	 	26,644	 	9,441	 	86,460	 	5,891	 	92,351	 	
Capital Charge	 	(10,898	)	(8,013	)	(3,153	)	(22,064	)	(17,506	)	(39,570	)	
Net Income (Loss) After Capital Charge (NIACC)	 	$	39,477	 	$	18,631	 	$	6,288	 	$	64,396	 	$	(11,615	)	$	52,781	 	
RAROC (ROE for the Company)	 	51%	 	37%	 	33%	 	 	 	9%	 	27%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Six Months Ended June 30, 20061	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allocated Net Income	 	$	48,583	 	$	18,570	 	$	6,142	 	$	73,295	 	$	9,231	 	$	82,526	 	
Allowance Funding Value	 	(387	)	(1,149	)	(16	)	(1,552	)	1,552	 	-	 	
Provision for Credit Losses	 	4,357	 	738	 	999	 	6,094	 	(1,264	)	4,830	 	
Economic Provision	 	(6,236	)	(4,470	)	(188	)	(10,894	)	(1	)	(10,895	)	
Tax Effect of Adjustments	 	839	 	1,806	 	(294	)	2,351	 	(107	)	2,244	 	
Income Before Capital Charge	 	47,156	 	15,495	 	6,643	 	69,294	 	9,411	 	78,705	 	
Capital Charge	 	(10,832	)	(8,368	)	(3,216	)	(22,416	)	(15,844	)	(38,260	)	
Net Income (Loss) After Capital Charge (NIACC)	 	$	36,324	 	$	7,127	 	$	3,427	 	$	46,878	 	$	(6,433	)	$	40,445	 	
RAROC (ROE for the Company)	 	48%	 	21%	 	23%	 	 	 	15%	 	24%	 	
 
1  Certain prior period information has been reclassified to conform to current presentation.
31

Retail Banking
The Retail Banking segment offers a broad range of financial products and services to consumers and small businesses.  Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases and installment loans.  Deposit products include checking, savings and time deposit accounts.  The Retail Banking segment also provides merchant services to its small business customers.  Products and services from the Retail Banking segment are delivered to customers through 71 Hawaii branch locations, 468 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), and a 24-hour telephone banking service.  This segment also offers retail property and casualty insurance products.
The segment’s key financial measures increased for the three and six months ended June 30, 2007 compared to three and six months ended June 30, 2006.  The segment experienced higher noninterest income, primarily as a result of higher interchange from debit card sales, transaction volume, and growth in the number of transactional deposit accounts.   The increase in net interest income was due to higher earnings credit on the segment’s deposit portfolio.  These positive trends were partially offset by an increase in noninterest expense primarily resulting from higher debit card program and salary expenses. 
Commercial Banking
The Commercial Banking segment offers products including corporate banking and commercial real estate loans, lease financing, auto dealer financing, deposit and cash management products, and wholesale property and casualty insurance products.  Lending, deposit, and cash management services are offered to middle-market and large companies in Hawaii.  Commercial real estate mortgages are focused on customers that include investors, developers, and builders primarily domiciled in Hawaii.  The Commercial Banking segment also includes the Company’s operations at 12 branches in the Pacific Islands. 
The improvement in the segment’s key financial measures for the three and six months ended June 30, 2006 to the three and six months ended June 30, 2007  was primarily due to a charge recorded in the second quarter of 2006 related to a change in tax law.   
The improvement in net interest income for the three and six months ended June 30, 2006 compared to the six months ended June 30, 2007 was due to growth in average loans and deposits, offset by net interest margin compression.  Net interest margin declined due to lower loan spreads and growth in higher cost savings and time deposits.  The increase in noninterest expense was primarily due to higher salaries and allocated expenses.  The increase in noninterest income for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 was due to higher gains on the sale of leased equipment. 
Investment Services Group
The Investment Services segment includes private banking, trust services, asset management, and institutional investment services.  A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management.  The private banking and personal trust group assists individuals and families in building and preserving their wealth by providing investment, credit, and trust services to high-net-worth individuals.  The asset management group manages portfolios and creates investment products.  Institutional sales and service offers investment advice to corporations, government entities, and foundations.  This segment also provides a full service brokerage offering equities, mutual funds, life insurance, and annuity products.
32

The improvement in the segment’s key financial measures for the three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2007 was primarily due to an increase in noninterest income and a decrease in noninterest expense. Trust and asset management fee income increased largely due to improved market conditions, resulting in increases in both average market values of assets under management and investment advisory fees on money market accounts. The increase in noninterest income was also due to growth in fee income on products offered through the full service brokerage business.  Noninterest expense decreased primarily due to lower salaries and benefits, other operating, and allocated expenses.
Treasury
Treasury consists of corporate asset and liability management activities, including interest rate risk management and foreign exchange business.  This segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits and short-term and long-term borrowings.  The primary sources of noninterest income are from bank-owned life insurance and foreign exchange income related to customer driven currency requests from merchants and island visitors.  The net residual effect of transfer pricing of assets and liabilities is included in Treasury, along with eliminations of inter-company transactions.  
The decline in the segment’s key financial measures for the three and six months ended June 30, 2007 compared to the three and six months ended June 30, 2006 was primarily due to a decrease in net interest income.  The decrease in net interest income was primarily due to higher funding costs associated with the Company’s deposit portfolio and an increase in the volume of short-term borrowings.  Additionally, average short-term borrowing rates for the six months ended June 30, 2007 increased compared to the six months ended June 30, 2006. 
Corporate Risk Profile
Credit Risk
The Company’s credit risk position remained strong during the six months ended June 30, 2007.  The Company’s non-accrual loans and leases increased modestly to $6.3 million as of June 30, 2007 from $5.9 million as of December 31, 2006 primarily due to an increase in non-accrual loans in lease financing, partially offset by a reduction in the commercial and industrial category.  The ratio of non-accrual loans and leases to total loans and leases of 0.10% as of June 30, 2007 was slightly higher than the ratio of 0.09% as of December 31, 2006 and 0.08% as of June 30, 2006. 
The Company’s favorable credit risk profile reflected sustained strength in the Hawaii and Mainland economies, improving economic conditions in Guam, as well as disciplined commercial and retail underwriting and portfolio management.  The quality of the Hawaii-based portfolio was complimented by a stable local economy in construction and real estate industries and continued strength in domestic visitor arrivals, despite higher energy costs and increasing inflationary trends.
Relative to the Company’s total loan and lease portfolio, domestic airline carriers continued to demonstrate a higher risk profile due to fuel costs, pension plan obligations, and marginal pricing power.  In the evaluation of the Reserve for Credit Losses (the “Reserve”), Management continues to consider the ongoing financial issues within the airline industry in its evaluation of the Company’s reserve for credit losses.  Table 13 below summarizes the Company’s air transportation credit exposure as of June 30, 2007, December 31, 2006, and June 30, 2006.
33

 
Air Transportation Credit Exposures 1 (Unaudited)	Table 13	
 
 	 	June 30, 2007	 	Dec. 31, 2006	 	June 30, 2006	 	
 	 	 	 	Unused	 	Total	 	Total	 	Total	 	
(dollars in thousands)	 	Outstanding	 	Commitments	 	Exposure	 	Exposure	 	Exposure	 	
Passenger Carriers Based In the United States	 	$	65,607	 	$	-	 	$	65,607	 	$	68,035	 	$	68,213	 	
Passenger Carriers Based Outside the United States	 	19,246	 	-	 	19,246	 	19,406	 	19,542	 	
Cargo Carriers	 	13,279	 	-	 	13,279	 	13,240	 	13,240	 	
Total Air Transportation Credit Exposure	 	$	98,132	 	$	-	 	$	98,132	 	$	100,681	 	$	100,995	 	
 
1  Exposure includes loans, leveraged leases and operating leases.
Non-Performing Assets
Non-performing assets (“NPAs”) consisted of non-accrual loans and leases, foreclosed real estate, and other non-performing investments.  The Company’s NPAs were $6.3 million as of June 30, 2007, a $0.1 million decrease from December 31, 2006 and a $0.9 million increase from June 30, 2006.  The increase in NPAs from June 30, 2006 was primarily due to the addition of one lease collateralized by construction equipment of $0.9 million which was placed on non-accrual status in the second quarter of 2007.
Included in NPAs are loans considered impaired.  Impaired loans are defined as those which the Company believes it is probable it will not collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans were $0.1 million as of June 30, 2007 and 2006.   Impaired loans were $0.4 million as of December 31, 2006.  The decrease in impaired loans from December 31, 2006 was primarily due to the charge-off of a $0.4 million commercial and industrial loan during the first quarter of 2007. 
Loans and Leases Past Due 90 Days or More and Still Accruing Interest
Consisting primarily of residential mortgages and personal unsecured lines of credit, accruing loans and leases past due 90 days or more were $1.4 million as of June 30, 2007, a decrease of $1.4 million from December 31, 2006 and June 30, 2006.  The decrease in accruing loans and leases past due 90 days or more from December 31, 2006 to June 30, 2007 was primarily due to the resolution of revolving credit and installment loans.  The decrease in accruing loans and leases past due 90 days or more from June 30, 2006 to June 30, 2007 was primarily due to a decrease in past due loans in the residential mortgage category.
Due to the low volume of NPAs and accruing loans and leases past due 90 days or more, management anticipates some degree of variability in the balances in these categories from period to period and does not consider modest changes to be indicative of significant asset quality trends.
34

Table 14 presents information on the Company’s non-performing assets and accruing loans and leases past due 90 days or more.
Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More (Unaudited)	Table 14	
 
 	 	June 30,	 	March 31,	 	December 31,	 	September 30,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2007	 	2006	 	2006	 	2006	 	
Non-Performing Assets	 	 	 	 	 	 	 	 	 	 	 	
Non-Accrual Loans and Leases	 	 	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	$	265	 	$	273	 	$	769	 	$	400	 	$	227	 	
Commercial Mortgage	 	130	 	38	 	40	 	44	 	48	 	
Lease Financing	 	914	 	-	 	31	 	-	 	-	 	
Total Commercial	 	1,309	 	311	 	840	 	444	 	275	 	
Consumer	 	 	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	3,844	 	4,345	 	4,914	 	4,253	 	4,628	 	
Home Equity	 	899	 	476	 	164	 	254	 	204	 	
Other Revolving Credit and Installment	 	214	 	242	 	-	 	-	 	-	 	
Total Consumer	 	4,957	 	5,063	 	5,078	 	4,507	 	4,832	 	
Total Non-Accrual Loans and Leases	 	6,266	 	5,374	 	5,918	 	4,951	 	5,107	 	
Foreclosed Real Estate	 	48	 	462	 	407	 	409	 	188	 	
Other Investments	 	-	 	-	 	82	 	82	 	82	 	
Total Non-Performing Assets	 	$	6,314	 	$	5,836	 	$	6,407	 	$	5,442	 	$	5,377	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Accruing Loans and Leases Past Due 90 Days or More	 	 	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	 	 	
Lease Financing	 	$	-	 	$	4	 	$	-	 	$	-	 	$	-	 	
Consumer	 	 	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	188	 	706	 	519	 	882	 	1,157	 	
Home Equity	 	60	 	219	 	331	 	62	 	86	 	
Other Revolving Credit and Installment	 	1,158	 	1,441	 	1,954	 	2,044	 	1,561	 	
Lease Financing	 	-	 	10	 	10	 	-	 	-	 	
Total Consumer	 	1,406	 	2,376	 	2,814	 	2,988	 	2,804	 	
Total Accruing Loans and Leases Past Due 90 Days or More	 	$	1,406	 	$	2,380	 	$	2,814	 	$	2,988	 	$	2,804	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Loans and Leases	 	$	6,566,126	 	$	6,507,152	 	$	6,623,167	 	$	6,489,057	 	$	6,441,625	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of Non-Accrual Loans and Leases to Total Loans and Leases	 	0.10%	 	0.08%	 	0.09%	 	0.08%	 	0.08%	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of Non-Performing Assets to Total Loans and Leases, Foreclosed Real Estate, and Other Investments	 	0.10%	 	0.09 %	 	0.10 %	 	0.08 %	 	0.08 %	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases	 	0.12 %	 	0.13 %	 	0.14 %	 	0.13 %	 	0.13 %	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Quarter to Quarter Changes in Non-Performing Assets	 	 	 	 	 	 	 	 	 	 	 	
Balance at Beginning of Quarter	 	$	5,836	 	$	6,407	 	$	5,442	 	$	5,377	 	$	5,906	 	
Additions	 	2,279	 	1,548	 	2,427	 	1,507	 	1,509	 	
Reductions	 	 	 	 	 	 	 	 	 	 	 	
Payments	 	(804	)	(1,150	)	(255	)	(848	)	(1,347	)	
Return to Accrual	 	(473	)	(435	)	(897	)	(382	)	(260	)	
Sales of Foreclosed Assets	 	(326	)	(56	)	(112	)	(20	)	(99	)	
Charge-offs/Write-downs	 	(198	)	(478	)	(198	)	(192	)	(332	)	
Total Reductions	 	(1,801	)	(2,119	)	(1,462	)	(1,442	)	(2,038	)	
Balance at End of Quarter	 	$	6,314	 	$	5,836	 	$	6,407	 	$	5,442	 	$	5,377	 	
 
35

Reserve for Credit Losses
The Company maintains a Reserve which consists of two components, the Allowance and a Reserve for Unfunded Commitments (“Unfunded Reserve”).  The Reserve provides for the risk of credit losses inherent in the loan portfolio and is based on loss estimates derived from a comprehensive  quarterly evaluation.  The evaluation reflects analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment that considers observable trends, conditions, other relevant environmental and economic factors.
The level of the Allowance is adjusted by recording an expense or recovery through the Provision.  The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense.  After considering the evaluation criteria above and net charge-offs for the period, the Company recorded a Provision of $3.4 million and $6.0 million for the three and six months ended June 30, 2007, respectively.  As a result, the Allowance and the Unfunded Reserve were unchanged from December 31, 2006 and June 30, 2006 reflecting a relatively stable asset quality environment during this period.  The ratio of the Allowance to total loans and leases outstanding was 1.39% as of June 30, 2007, an increase of two basis points from December 31, 2006 primarily due to an increase in loans and leases outstanding.  Table 15 presents the Company’s Reserve for the three and six months ended June 30, 2007 and 2006.
Consolidated Reserve for Credit Losses (Unaudited)	 	 	 	Table 15	
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2006 1	 	2007	 	2006 1	 	
Balance at Beginning of Period	 	$	96,167	 	$	96,167	 	$	96,167	 	$	96,167	 	
Loans and Leases Charged-Off	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	(738	)	(677	)	(1,543	)	(1,060	)	
Lease Financing	 	-	 	-	 	(22	)	-	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	(47	)	(29	)	(47	)	(39	)	
Home Equity	 	(240	)	(86	)	(342	)	(227	)	
Other Revolving Credit and Installment	 	(4,195	)	(4,467	)	(9,909	)	(8,721	)	
Lease Financing	 	-	 	-	 	-	 	(12	)	
Total Loans and Leases Charged-Off	 	(5,220	)	(5,259	)	(11,863	)	(10,059	)	
Recoveries on Loans and Leases Previously Charged-Off	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	315	 	1,445	 	592	 	1,740	 	
Commercial Mortgage	 	36	 	335	 	121	 	424	 	
Lease Financing	 	6	 	-	 	2,087	 	-	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	54	 	119	 	189	 	241	 	
Home Equity	 	55	 	127	 	120	 	188	 	
Other Revolving Credit and Installment	 	1,384	 	1,158	 	2,749	 	2,621	 	
Lease Financing	 	7	 	6	 	11	 	15	 	
Total Recoveries on Loans and Leases Previously Charged-Off	 	1,857	 	3,190	 	5,869	 	5,229	 	
Net Loans and Leases Charged-Off	 	(3,363	)	(2,069	)	(5,994	)	(4,830	)	
Provision for Credit Losses	 	3,363	 	2,069	 	5,994	 	4,830	 	
Balance at End of Period2	 	$	96,167	 	$	96,167	 	$	96,167	 	$	96,167	 	
 	 	 	 	 	 	 	 	 	 	
Components	 	 	 	 	 	 	 	 	 	
Allowance for Loan and Lease Losses	 	$	90,998	 	$	91,035	 	$	90,998	 	$	91,035	 	
Reserve for Unfunded Commitments	 	5,169	 	5,132	 	5,169	 	5,132	 	
Total Reserve for Credit Losses	 	$	96,167	 	$	96,167	 	$	96,167	 	$	96,167	 	
 	 	 	 	 	 	 	 	 	 	
Average Loans and Leases Outstanding	 	$	6,532,736	 	$	6,317,682	 	$	6,547,212	 	$	6,250,082	 	
 	 	 	 	 	 	 	 	 	 	
Ratio of Net Loans and Leases Charged-Off to	 	 	 	 	 	 	 	 	 	
Average Loans and Leases Outstanding (annualized)	 	0.21%	 	0.13%	 	0.18%	 	0.16%	 	
Ratio of Allowance for Loans and Lease Losses to Loans and Leases Outstanding	 	1.39%	 	1.41%	 	1.39%	 	1.41%	 	
 
1  Certain prior period information has been reclassified to conform to current presentation.
2  Included in this analysis is activity related to the Company’s reserve for unfunded commitments, which is separately recorded in other liabilities in the Consolidated Statements of Condition (Unaudited).
36

Market Risk
Market risk is the potential of loss arising from adverse changes in interest rates and prices.  The Company is exposed to market risk as a consequence of the normal course of conducting its business activities.  Financial products that expose the Company to market risk include investment securities, loans and leases, deposits, debt, and derivative financial instruments.  The Company’s market risk management process involves measuring, monitoring, controlling, and managing risks that can significantly impact the Company’s statements of income and condition.  In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance, while limiting volatility.  In the management of market risks, activities are categorized into “trading” and “other than trading.”
The Company’s trading activities include trading securities that are used to manage the market risk exposure of the Company’s mortgage servicing rights which are recorded at fair value on the statement of condition as of January 1, 2007.  The Company’s trading activities also includes foreign currency and foreign exchange contracts that expose the Company to a small degree of foreign currency risk.  Foreign currency and foreign exchange contracts are primarily executed on behalf of customers and at times for the Company’s own account.  The Company also enters into interest rate swap agreements with customers in order to facilitate their desire to manage market risk.  However, the Company mitigates this risk by entering into equal and offsetting interest rate swap agreements with highly rated third parties.
The Company’s other than trading activities include normal business transactions that expose the Company’s balance sheet profile to varying degrees of market risk.  The Company’s primary market risk exposure is interest rate risk.  A key element in the process of managing market risk involves oversight by senior management and the Board of Directors as to the level of such risk assumed by the Company on its statement of condition.  The Board of Directors reviews and approves risk management policies, including risk limits and guidelines, and delegates oversight functions to the Asset/Liability Management Committee (“ALCO”).  The ALCO, consisting of senior business and finance officers, monitors the Company’s market risk exposure and, as market conditions dictate, modifies positions as deemed appropriate.  The ALCO may also direct the Company to use derivative financial instruments, as deemed prudent.
Interest Rate Risk
The objective of the Company’s interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
The Company’s statement of condition is sensitive to changes in the general level of interest rates.  This interest rate risk arises primarily from the Company’s normal business activities of gathering deposits and extending loans and leases.  Many other factors also affect the Company’s exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and repricing characteristics of financial instruments.
The earnings of the Company are affected not only by general economic conditions, but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the Board of Governors of the Federal Reserve System (the “FRB”).  The monetary policies of the FRB influence, to a significant extent, the overall growth of loans, leases, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities.  The nature and impact of future changes in monetary policies are generally not predictable.
37

In managing interest rate risk, the Company, through the ALCO, measures short-term and long-term sensitivities to changes in interest rates.  The ALCO utilizes several techniques to manage interest rate risk, which include shifting balance sheet mix or altering the interest rate characteristics of assets and liabilities, changing product pricing strategies, modifying characteristics of the investment securities portfolio, or using derivative financial instruments.  The Company’s use of derivative financial instruments has generally been limited over the past several years.  This is due to the natural on-balance sheet hedge arising out of offsetting interest rate exposures from loans, leases, and investment securities with deposits and other interest bearing liabilities.  In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by ALCO.  For example, during the six months ended June 30, 2007, the Company utilized its trading portfolio to offset the change in fair value of its mortgage servicing rights.  Natural and offsetting hedges reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures.  Expected movements in interest rates are also considered in managing interest rate risk.  Thus, as interest rates change, the Company may use different techniques to manage interest rate risk.
A key element in the Company’s ongoing process to measure and monitor interest rate risk is the utilization of an asset/liability simulation model.  This model is used to estimate and measure the balance sheet sensitivity to changes in interest rates.  These estimates are based on assumptions about the behavior of loan, lease, and deposit pricing, repayment rates on mortgage-based assets, and principal amortization and maturities on other financial instruments.  The model’s analytics include the effects of embedded options.  While such assumptions are inherently uncertain, management believes that these assumptions are reasonable.  As a result, the simulation model attempts to capture the dynamic nature of the balance sheet and provide a sophisticated estimate rather than a precise prediction of exposure to changes in interest rates.
The Company utilizes net interest income simulations to analyze short-term income sensitivities to changes in interest rates.  Table 16 presents, as of June 30, 2007 and 2006, an estimate of the change in net interest income during a quarterly time frame that would result from a gradual 100 and 200 basis point increase or decrease in interest rates, moving in a parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario for net interest income without any change in strategy.  Based on the net interest income simulation as of June 30, 2007, the Company’s statement of condition was approximately neutral to parallel changes in interest rates.  Net interest income sensitivity to changes in interest rates as of June 30, 2007 was slightly less sensitive to changes in interest rates in absolute terms as compared to the sensitivity profile of the Company as of June 30, 2006.  To analyze the impact of changes in interest rates in a more realistic manner, non-parallel rate scenarios are also simulated.  These non-parallel rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve become inverted for a period of time.  Conversely, if the yield curve should steepen, net interest income may increase.
Net Interest Income Sensitivity Profile (Unaudited)	 	Table 16	
 	 	Change in Net Interest Income Per Quarter	 	
(dollars in thousands)	 	June 30, 2007	 	June 30, 2006	 	
Change in Interest Rates (basis points)	 	 	 	 	 	 	 	 	 	
+200	 	$	(199	)	(0.2	)  %	$	306	 	0.3	%	
+100	 	(99	)	(0.1	)	407	 	0.4	 	
-100	 	(298	)	(0.3	)	(306	)	(0.3	)	
-200	 	(1,093	)	(1.1	)	(1,121	)	(1.1	)	

38

The Company also uses a Market Value of Portfolio Equity (“MVPE”) sensitivity to estimate the net present value change in the Company’s assets, liabilities, and off-balance sheet arrangements from changes in interest rates.  The MVPE was approximately $1.9 billion as of June 30, 2007 and 2006.  Table 17 presents, as of June 30, 2007 and 2006, an estimate of the change in the MVPE sensitivity that would occur from an instantaneous 100 and 200 basis point increase or decrease in interest rates, moving in a parallel fashion over the entire yield curve.  The MVPE sensitivity increased in all interest rate change scenarios as of June 30, 2007 compared to June 30, 2006 as a result of the relative shift in the funding source for asset growth and the lower and partially inverted yield curve.  Further enhancing the MVPE sensitivity analysis are value-at-risk, key rate analysis, duration of equity, and the exposure to basis risk and non-parallel yield curve shifts.  There are inherent limitations to these measures; however, used along with the MVPE sensitivity analysis, the Company obtains better overall insight for managing its exposure to changes in interest rates.  Based on the additional analyses, the Company estimates its greatest exposure is in scenarios where medium term rates rise on a relative basis more than short-term and long-term rates.
Market Value of Equity Sensitivity Profile (Unaudited)	 	Table 17	
 	 	Change in Market Value of Equity	 	
(dollars in thousands)	 	June 30, 2007	 	June 30, 2006	 	
Change in Interest Rates (basis points)	 	 	 	 	 	 	 	 	 	
+200	 	$	(162,316	)	(8.6	) %	$	(139,453	)	(7.3	)%	
+100	 	(77,137	)	(4.1	)	(61,335	)	(3.2	)	
-100	 	19,358	 	1.0	 	18,630	 	1.0	 	
-200	 	(50,923	)	(2.7	)	(43,664	)	(2.3	)	

Liquidity Management
Liquidity is managed in an effort to ensure that the Company has continuous access to sufficient, reasonably priced funding to conduct its business and satisfy obligations in a normal manner.
Cash and noninterest-bearing deposits, interest-bearing deposits, and funds sold provide the Company with readily available liquid resources.  Investment securities in the Company’s available-for-sale portfolio are also a near-term source of asset liquidity, although the Company does not have the intent to sell such investment securities that are currently in a gross unrealized loss position.  Asset liquidity is further enhanced by the Company’s ability to sell residential mortgage loans in the secondary market.
Core customer deposits have historically provided a sizable source of relatively stable and low-cost funds.  The Company is also able to utilize funds purchased, short-term borrowings, and securities sold under agreements to repurchase as a mechanism to fund growth in the Company’s loan and lease portfolio.
The Bank is a member of the Federal Home Loan Bank of Seattle (the “FHLB”), which provides an additional source of short-term and long-term funding.  Outstanding borrowings from the FHLB were $75.0 million as of June 30, 2007 at a weighted average interest rate of 3.73%.  Outstanding borrowings were $75.0 million as of December 31, 2006 and $77.5 million as of June 30, 2006.  A total of $25.0 million are expected to mature in less than one year.
Additionally, the Bank maintains a $1.0 billion senior and subordinated bank note program.  Under this facility, the Bank may issue additional notes provided that the aggregate amount outstanding does not exceed $1.0 billion.  Subordinated notes outstanding under this bank note program were $124.9 million as of June 30, 2007 and December 31, 2006, and $124.8 million as of June 30, 2006 at a fixed interest rate of 6.875%.
39

Capital Management
The Parent and the Bank are subject to regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt correction action, the Parent and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures.  These measures were established by regulation to ensure capital adequacy.  As of June 30, 2007, the Parent and the Bank were “well capitalized” under this regulatory framework.  There have been no conditions or events since June 30, 2007 that management believes have changed either the Parent’s or the Bank’s capital classifications.
As of June 30, 2007, the Company had subordinated debt of $124.9 million, of which $25.0 million qualified as total capital for regulatory capital purposes.  Also, as of June 30, 2007, the Company had $26.4 million of capital securities outstanding, all of which qualified as Tier 1 capital for regulatory capital purposes.  However, the capital securities were classified as long-term debt in the Consolidated Statements of Condition.
As of June 30, 2007, the Company’s shareholders’ equity was $708.8 million.  This represented a $10.6 million or 1% decrease from December 31, 2006 and a $42.1 million or 6% increase from June 30, 2006.  The reduction in the Company’s shareholders’ equity from December 31, 2006 to June 30, 2007 was primarily due to $41.2 million in common stock repurchases, $40.8 million in cash dividends paid, and $34.5 million in reductions to retained earnings as a result of the Company’s adoption of several new accounting pronouncements on January 1, 2007.  These reductions to shareholders’ equity were partially offset by net income for the six months ended June 30, 2007 of $95.1 million.
For the six months ended June 30, 2007, 0.7 million shares of common stock were repurchased under the share repurchase program at an average cost of $52.80 per share, totaling $39.2 million.  From the beginning of the share repurchase program in July 2001 through June 30, 2007, the Company repurchased a total of 43.2 million shares of common stock and returned approximately $1.5 billion to its shareholders at an average cost of $34.67 per share.  From July 1, 2007 through July 20, 2007, the Company repurchased an additional 95,000 shares of common stock at an average cost of $51.55 per share for a total of $4.9 million, resulting in remaining buyback authority under the share repurchase program of $47.3 million.
In July 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.41 per share on the Company’s outstanding shares.  The dividend will be payable on September 14, 2007 to shareholders of record at the close of business on August 31, 2007.
40

Table 18 presents the Company’s regulatory capital and ratios as of June 30, 2007, December 31, 2006, and June 30, 2006.
Regulatory Capital and Ratios (Unaudited)	 	 	 	 	 	Table 18	
 	 	June 30,	 	Dec. 31,	 	June 30,	 	
(dollars in thousands)	 	2007	 	2006	 	2006	 	
Regulatory Capital	 	 	 	 	 	 	 	
Shareholders’ Equity	 	$	708,806	 	$	719,420	 	$	666,728	 	
Add:	8.25% Capital Securities of Bancorp Hawaii Capital Trust I	 	26,425	 	26,425	 	31,425	 	
Less:	Goodwill	 	34,959	 	34,959	 	34,959	 	
 	Adjustment to Initially Apply FASB Statement No. 158, Net of Tax	 	6,798	 	6,958	 	-	 	
 	Unrealized Valuation on Investment Securities Available-for-Sale and Other Adjustments	 	(34,527	)	(27,491	)	(55,681	)	
Tier 1 Capital	 	728,001	 	731,419	 	718,875	 	
Allowable Reserve for Credit Losses	 	91,368	 	91,585	 	90,545	 	
Qualifying Subordinated Debt	 	24,976	 	49,942	 	49,932	 	
Unrealized Gains on Investment Securities Available-for-Sale	 	9	 	17	 	5	 	
Total Regulatory Capital	 	$	844,354	 	$	872,963	 	$	859,357	 	
 	 	 	 	 	 	 	 	
Risk-Weighted Assets	 	$	7,304,650	 	$	7,322,255	 	$	7,237,985	 	
 	 	 	 	 	 	 	 	
Key Regulatory Capital Ratios	 	 	 	 	 	 	 	
Tier 1 Capital Ratio	 	9.97%	 	9.99%	 	9.93%	 	
Total Capital Ratio	 	11.56   	 	11.92   	 	11.87   	 	
Leverage Ratio	 	7.02   	 	7.06   	 	7.09   	 	
 
Off-Balance Sheet Arrangements, Credit Commitments, and Contractual Obligations
Off-Balance Sheet Arrangements
The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as variable-interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Credit Commitments
The Company’s credit commitments as of June 30, 2007 were as follows:
Credit Commitments (Unaudited)	 	 	 	 	 	 	 	 	 	Table 19	
 	 	Less Than	 	 	 	 	 	After 5	 	 	 	
(dollars in thousands)	 	One Year	 	1-3 Years	 	4-5 Years	 	Years	 	Total	 	
Unfunded Commitments to Extend Credit	 	$	742,054	 	$	221,380	 	$	484,190	 	$	1,302,901	 	$	2,750,525	 	
Standby Letters of Credit	 	77,621	 	2,655	 	-	 	-	 	80,276	 	
Commercial Letters of Credit	 	26,479	 	-	 	-	 	-	 	26,479	 	
Total Credit Commitments	 	$	846,154	 	$	224,035	 	$	484,190	 	$	1,302,901	 	$	2,857,280	 	
 
Contractual Obligations
The Company adopted the provisions of FIN 48 on January 1, 2007.  The adoption of FIN 48 did not have a material effect on the contractual obligations table presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
41

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
See the “Market Risk” section of MD&A.
Item 4.    Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2007.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2007.  There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the second quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II - Other Information
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities (Unaudited)	 	 	 	 	 	
 	 	 	 	 	 	Total Number of Shares	 	Approximate Dollar Value	 	
 	 	Total Number	 	 	 	Purchased as Part of	 	of Shares that May Yet Be	 	
 	 	of Shares	 	Average Price	 	Publicly Announced Plans	 	Purchased Under the	 	
Period	 	Purchased 1	 	Paid Per Share	 	or Programs	 	Plans or Programs 2	 	
April 1 - 30, 2007	 	96,034	 	$	52.95	 	95,000	 	$	67,276,423	 	
May 1 - 31, 2007	 	132,085	 	 	54.07	 	127,500	 	 	60,384,023	 	
June 1 - 30, 2007	 	157,323	 	 	52.34	 	157,000	 	 	52,166,226	 	
Total	 	385,442	 	 	53.09	 	379,500	 	 	 	 	
 
1 The months of April, May, and June 2007 included 1,034, 4,585, and 323 mature shares, respectively, purchased from employees in connection with stock option exercises. These shares were not purchased as part of the publicly announced program. The shares were purchased at the closing price of the Company’s common stock on the dates of purchase.
2 The Company repurchased shares during the second quarter of 2007 pursuant to its ongoing share repurchase program that was first announced in July 2001. As of July 20, 2007, $47.3 million remained of the total $1.55 billion total repurchase amount authorized by the Company’s Board of Directors under the share repurchase program. The program has no set expiration or termination date.
42

Item 4.    Submission of Matters to a Vote of Security Holders
At the annual shareholders meeting held on April 27, 2007, the following matters were submitted to a vote of the shareholders:
a.	 	Election of Directors to the Board of Directors: *	
 
Mary G.F. Bitterman:	 	 	 	
 	 	 	 	
Votes cast for:	 	43,324,781	 	
Votes withheld:	 	958,583	 	
 	 	 	 	
Martin A. Stein:	 	 	 	
 	 	 	 	
Votes cast for:	 	43,186,172	 	
Votes withheld:	 	1,097,193	 	
 	 	 	 	
Barbara J. Tanabe:	 	 	 	
 	 	 	 	
Votes cast for:	 	43,639,182	 	
Votes withheld:	 	644,182	 	
 	 	 	 	
Robert W. Wo, Jr.:	 	 	 	
 	 	 	 	
Votes cast for:	 	43,733,802	 	
Votes withheld:	 	549,563	 	
 
b.	 	Ratification of Selection of an Independent Registered Public	
 	 	Accounting Firm – Ernst & Young LLP	 	 	
 
Votes cast for:	 	43,170,464	 	
Votes cast against:	 	1,031,619	 	
Abstentions:	 	81,281	 	
 
*                The directors are elected by a plurality of the votes cast; therefore, votes cast in the election could not be recorded against or as an abstention, nor could broker non-votes be recorded.
Item 5.    Other Information
None.
Item 6.    Exhibits
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.
43

Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:    July 25, 2007	 	Bank of Hawaii Corporation	

 	 	By:	 	/s/ Allan R. Landon	 	
 	 	 	 	Allan R. Landon	
 	 	 	 	Chairman of the Board,	
 	 	 	 	Chief Executive Officer and President	

 	 	By:	 	/s/ Daniel C. Stevens	 	
 	 	 	 	Daniel C. Stevens	
 	 	 	 	Chief Financial Officer	 	

44

Exhibit Index
Exhibit Number	 	 	
 	
12	 	Computation of Ratio of Earnings to Fixed Charges	
 	 	 	
31.1	 	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934	
 	 	 	
31.2	 	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934	
 	 	 	
32	 	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	

45

Exhibit 12
Bank of Hawaii Corporation and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges (Unaudited)
 	 	Six Months Ended	 	
 	 	June 30,	 	
(dollars in thousands)	 	2007	 	2006	 	
Earnings:	 	 	 	 	 	
Income Before Provision for Income Taxes	 	$	148,054	 	$	143,441	 	
Add:	Fixed Charges Including Interest on Deposits	 	101,129	 	74,114	 	
 	Interest on FIN 48 Liabilities	 	600	 	-	 	
Total Earnings Including Fixed Charges and Interest on Deposits and Interest on FIN 48 Liabilities	 	249,783	 	217,555	 	
Less:	Interest on Deposits	 	67,076	 	44,289	 	
 	Interest on FIN 48 Liabilities	 	600	 	-	 	
Total Earnings Excluding Interest on Deposits and Interest on FIN 48 Liabilities	 	$	182,107	 	$	173,266	 	
 	 	 	 	 	 	
Fixed Charges:	 	 	 	 	 	
Fixed Charges Including Interest on Deposits	 	$	101,129	 	$	74,114	 	
Add:	Interest on FIN 48 Liabilities	 	600	 	-	 	
Total Fixed Charges Including Interest on Deposits and Interest on FIN 48 Liabilities	 	101,729	 	74,114	 	
Less:	Interest on Deposits	 	67,076	 	44,289	 	
 	Interest on FIN 48 Liabilities	 	600	 	-	 	
Total Fixed Charges Excluding Interest on Deposits and Interest on FIN 48 Liabilities	 	$	34,053	 	$	29,825	 	
 	 	 	 	 	 	
Ratio of Earnings to Fixed Charges:	 	 	 	 	 	
Including Interest on Deposits and Interest on FIN 48 Liabilities	 	2.5x	 	2.9x	 	
Excluding Interest on Deposits and Interest on FIN 48 Liabilities	 	5.3x	 	5.8x	 	

Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
Under the Securities Exchange Act of 1934
I, Allan R. Landon, certify that:
1.	I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;	
 	 	
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	 	
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	 	
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 	 	
 	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	 	
 	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	 	
 	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	 	 	
 	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 	 	 	
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:	
 	 	
 	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	 	 	
 	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
 
Date: July 25, 2007	 	 	
 	 	/s/ Allan R. Landon	 	
 	 	Allan R. Landon	
 	 	Chairman of the Board,	
 	 	Chief Executive Officer and President	

Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
Under the Securities Exchange Act of 1934
I, Daniel C. Stevens, certify that:
1.	I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;	
 	 	
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	 	
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	 	
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 	 	
 	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	 	
 	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	 	
 	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	 	 	
 	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 	 	
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:	
 	 	
 	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	 	 	
 	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
 
Date: July 25, 2007	 	 	
 	 	/s/ Daniel C. Stevens	 	
 	 	Daniel C. Stevens	
 	 	Chief Financial Officer	

Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
We hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-Q of Bank of Hawaii Corporation for the quarterly period ended June 30, 2007 (the “Periodic Report”):
·                  fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
·                  the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Bank of Hawaii Corporation for the dates and periods covered by the Periodic Report.
Date: July 25, 2007	 	 	

 	 	/s/ Allan R. Landon	 	
 	 	Allan R. Landon	
 	 	Chairman of the Board,	
 	 	Chief Executive Officer and President	

 	 	/s/ Daniel C. Stevens	 	
 	 	Daniel C. Stevens	
 	 	Chief Financial Officer	
 
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Periodic Report or as a separate disclosure document.