U N I T E D   S T A T E S
 
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 September 30, 2002	
 
or
 
¨	 	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)	  	(IRS Employer Identification No.)	
 	 	 	
130 Merchant Street, Honolulu, Hawaii

	  	96813

	
(Address of principal executive offices)	  	(Zip Code)	
(808) 538-4727

(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, and (2) has been subject to such filing requirements for the past 90 days.
 
Yes    x         No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common Stock, $.01 Par Value; outstanding at October 22, 2002 – 64,825,194 shares

 
Index
 
Bank of Hawaii Corporation and Subsidiaries
 
Part I. — Financial Information	
 	 	 	
Item  1.	  	Financial Statements (Unaudited)	
 	 	 	
 	  	Consolidated Statements of Income—Three months and Nine months ended September 30, 2002 and 2001	
 	 	 	
 	  	Consolidated Statements of Condition—September 30, 2002, December 31, 2001, and September 30, 2001	
 	 	 	
 	  	Consolidated Statements of Shareholders’ Equity—Nine months ended September 30, 2002 and 2001	
 	 	 	
 	  	Consolidated Statements of Cash Flows—Nine months ended September 30, 2002 and 2001	
 	 	 	
 	  	Notes to Consolidated Financial Statements	
 	 	 	
Item 2.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
 	 	 	
Item 3.	  	Quantitative and Qualitative Disclosure of Market Risk	
 	 	 	
Item 4.	  	Controls and Procedures	
 	 	 	
Part II. — Other Information	
 	 	 	
Item 6.	  	Exhibits and Reports on Form 8-K	
 	 	 	
Signatures	
 	 	 	
Certifications	
2

 
Bank of Hawaii Corporation and subsidiaries
 
Consolidated Statements of Income (Unaudited)

	
 	  	Three Months Ended
September 30	  	Nine Months Ended September 30	
(dollars in thousands except per share amounts)	  	2002	  	2001	  	2002	  	2001	

	
Interest Income	  	 	 	  	 	 	  	 	 	  	 	 	
Interest and Fees on Loan and Leases	  	$	89,335	  	$	143,205	  	$	280,421	  	$	495,732	
Income on Investment Securities—Held to Maturity	  	 	4,847	  	 	8,007	  	 	14,939	  	 	27,120	
Income on Investment Securities—Available for Sale	  	 	25,291	  	 	31,390	  	 	78,886	  	 	107,982	
Deposits	  	 	5,384	  	 	9,413	  	 	16,442	  	 	19,738	
Funds Sold and Security Resale Agreements	  	 	914	  	 	1,781	  	 	2,669	  	 	4,231	
Other	  	 	1,575	  	 	1,384	  	 	4,302	  	 	3,948	

	
Total Interest Income	  	 	127,346	  	 	195,180	  	 	397,659	  	 	658,751	
Interest Expense	  	 	 	  	 	 	  	 	 	  	 	 	
Deposits	  	 	20,547	  	 	50,145	  	 	66,691	  	 	182,147	
Security Repurchase Agreements	  	 	7,039	  	 	17,576	  	 	25,588	  	 	63,049	
Funds Purchased	  	 	299	  	 	1,279	  	 	775	  	 	9,735	
Short-Term Borrowings	  	 	334	  	 	2,019	  	 	1,272	  	 	8,013	
Long-Term Debt	  	 	6,946	  	 	12,459	  	 	23,320	  	 	42,232	

	
Total Interest Expense	  	 	35,165	  	 	83,478	  	 	117,646	  	 	305,176	

	
Net Interest Income	  	 	92,181	  	 	111,702	  	 	280,013	  	 	353,575	
Provision for Loan and Lease Losses	  	 	—  	  	 	919	  	 	11,616	  	 	59,798	

	
Net Interest Income After Provision for Loan and Lease Losses	  	 	92,181	  	 	110,783	  	 	268,397	  	 	293,777	
Non-Interest Income	  	 	 	  	 	 	  	 	 	  	 	 	
Trust and Asset Management	  	 	13,655	  	 	13,999	  	 	42,648	  	 	45,041	
Mortgage Banking	  	 	4,037	  	 	10,411	  	 	15,300	  	 	20,192	
Service Charges on Deposit Accounts	  	 	7,925	  	 	9,592	  	 	24,291	  	 	29,409	
Fees, Exchange, and Other Service Charges	  	 	13,114	  	 	17,587	  	 	38,631	  	 	60,837	
Gain on Sales of Banking Operations, Net of Venture Investment Losses	  	 	—  	  	 	47,771	  	 	—  	  	 	144,680	
Investment Securities Gains	  	 	—  	  	 	935	  	 	3	  	 	32,914	
Other	  	 	9,517	  	 	13,060	  	 	30,311	  	 	38,720	

	
Total Non-Interest Income	  	 	48,248	  	 	113,355	  	 	151,184	  	 	371,793	
Non-Interest Expense	  	 	 	  	 	 	  	 	 	  	 	 	
Salaries	  	 	38,837	  	 	50,341	  	 	117,437	  	 	149,791	
Pensions and Other Employee Benefits	  	 	7,377	  	 	9,646	  	 	26,764	  	 	34,070	
Net Occupancy Expense	  	 	9,597	  	 	11,422	  	 	28,511	  	 	35,447	
Net Equipment Expense	  	 	10,058	  	 	12,443	  	 	30,176	  	 	38,929	
Goodwill Amortization	  	 	—  	  	 	3,333	  	 	—  	  	 	10,916	
Restructuring and Other Related Costs	  	 	—  	  	 	2,986	  	 	1,979	  	 	86,329	
Information Technology Systems Replacement Project	  	 	6,576	  	 	—  	  	 	6,576	  	 	—  	
Other	  	 	20,509	  	 	32,397	  	 	64,297	  	 	100,727	

	
Total Non-Interest Expense	  	 	92,954	  	 	122,568	  	 	275,740	  	 	456,209	

	
Income Before Income Taxes	  	 	47,475	  	 	101,570	  	 	143,841	  	 	209,361	
Provision for Income Taxes	  	 	17,275	  	 	70,511	  	 	51,569	  	 	117,886	

	
Net Income	  	$	30,200	  	$	31,059	  	$	92,272	  	$	91,475	

	
Basic Earnings Per Share	  	$	0.44	  	$	0.39	  	$	1.30	  	$	1.14	
Diluted Earnings Per Share	  	$	0.43	  	$	0.37	  	$	1.26	  	$	1.11	
Dividends Declared Per Share	  	$	0.19	  	$	0.18	  	$	0.55	  	$	0.54	
Basic Weighted Average Shares	  	 	67,893,086	  	 	80,539,330	  	 	71,148,663	  	 	80,261,610	
Diluted Weighted Average Shares	  	 	69,910,264	  	 	83,418,955	  	 	73,158,354	  	 	82,497,107	

	
 
See accompanying notes to the consolidated financial statements.
3

Bank of Hawaii Corporation and subsidiaries
 
Consolidated Statements of Condition (Unaudited)

	

	

	

	

	

	

	
 	  	September 30	 	  	December 31	 	  	September 30	 	
(dollars in thousands)	  	2002	 	  	2001	 	  	2001	 	

	

	

	

	

	

	

	
Assets	  	 	 	 	  	 	 	 	  	 	 	 	
Interest-Bearing Deposits	  	$	1,019,823	 	  	$	1,101,974	 	  	$	1,227,095	 	
Investment Securities—Held to Maturity
    (Market Value of $286,526, $407,838, and $471,579, respectively)	  	 	277,856	 	  	 	396,216	 	  	 	460,461	 	
Investment Securities—Available for Sale	  	 	2,241,106	 	  	 	2,001,420	 	  	 	2,064,141	 	
Securities Purchased Under Agreements to Resell	  	 	—  	 	  	 	—  	 	  	 	7,639	 	
Funds Sold	  	 	95,000	 	  	 	115,000	 	  	 	162,830	 	
Loans Held for Sale	  	 	30,863	 	  	 	456,709	 	  	 	228,056	 	
Loans	  	 	5,258,675	 	  	 	5,652,518	 	  	 	6,766,063	 	
Allowance for Loan and Lease Losses	  	 	(154,475	)	  	 	(158,979	)	  	 	(182,541	)	

	
Net Loans	  	 	5,104,200	 	  	 	5,493,539	 	  	 	6,583,522	 	

	
Total Earning Assets	  	 	          8,768,848	 	  	 	          9,564,858	 	  	 	        10,733,744	 	
Cash and Non-Interest Bearing Deposits	  	 	328,135	 	  	 	405,981	 	  	 	426,884	 	
Premises and Equipment	  	 	182,230	 	  	 	196,171	 	  	 	223,528	 	
Customers’ Acceptance Liability	  	 	1,106	 	  	 	593	 	  	 	1,310	 	
Accrued Interest Receivable	  	 	38,839	 	  	 	42,687	 	  	 	55,968	 	
Foreclosed Real Estate	  	 	17,568	 	  	 	17,174	 	  	 	37,240	 	
Mortgage Servicing Rights	  	 	29,911	 	  	 	27,291	 	  	 	23,899	 	
Goodwill	  	 	36,216	 	  	 	36,216	 	  	 	67,617	 	
Other Assets	  	 	299,190	 	  	 	336,826	 	  	 	373,949	 	

	
Total Assets	  	$	9,702,043	 	  	$	10,627,797	 	  	$	11,944,139	 	

	
Liabilities	  	 	 	 	  	 	 	 	  	 	 	 	
Domestic Deposits	  	 	 	 	  	 	 	 	  	 	 	 	
Demand—Non-Interest Bearing	  	$	1,593,137	 	  	$	1,548,322	 	  	$	1,428,454	 	
—Interest Bearing	  	 	2,063,426	 	  	 	1,926,018	 	  	 	1,792,155	 	
Savings	  	 	1,382,719	 	  	 	967,825	 	  	 	813,427	 	
Time	  	 	1,549,693	 	  	 	1,927,778	 	  	 	2,186,849	 	
Foreign Deposits	  	 	 	 	  	 	 	 	  	 	 	 	
Demand—Non-Interest Bearing	  	 	—  	 	  	 	2	 	  	 	321,706	 	
Time Due to Banks	  	 	4,387	 	  	 	230,247	 	  	 	30,357	 	
Other Savings and Time	  	 	33,681	 	  	 	73,404	 	  	 	826,789	 	

	
Total Deposits	  	 	6,627,043	 	  	 	6,673,596	 	  	 	7,399,737	 	
Securities Sold Under Agreements to Repurchase	  	 	1,089,287	 	  	 	1,643,444	 	  	 	1,833,091	 	
Funds Purchased	  	 	116,775	 	  	 	55,800	 	  	 	129,715	 	
Current Maturities of Long-Term Debt	  	 	15,975	 	  	 	100,670	 	  	 	216,670	 	
Short-Term Borrowings	  	 	17,941	 	  	 	134,222	 	  	 	138,910	 	
Banker’s Acceptances Outstanding	  	 	1,106	 	  	 	593	 	  	 	1,310	 	
Retirement Expense Payable	  	 	38,317	 	  	 	36,175	 	  	 	36,775	 	
Accrued Interest Payable	  	 	21,870	 	  	 	29,762	 	  	 	49,057	 	
Taxes Payable	  	 	191,519	 	  	 	138,366	 	  	 	224,915	 	
Other Liabilities	  	 	87,709	 	  	 	98,422	 	  	 	65,166	 	
Long-Term Debt	  	 	393,795	 	  	 	469,735	 	  	 	477,738	 	

	
Total Liabilities	  	 	8,601,337	 	  	 	9,380,785	 	  	 	10,573,084	 	
Shareholders’ Equity	  	 	 	 	  	 	 	 	  	 	 	 	
Common Stock ($.01 par value), authorized 500,000,000 shares; issued / outstanding: September 2002—81,310,042 / 66,048,072; December 2001—81,377,241 / 73,218,326; September 2001—81,365,600 / 79,195,668	  	 	806	 	  	 	806	 	  	 	806	 	
Capital Surplus	  	 	371,098	 	  	 	367,672	 	  	 	367,394	 	
Accumulated Other Comprehensive Income	  	 	26,038	 	  	 	22,761	 	  	 	24,579	 	
Retained Earnings	  	 	1,100,016	 	  	 	1,055,424	 	  	 	1,044,039	 	
Deferred Stock Grants	  	 	(2,886	)	  	 	(7,637	)	  	 	(14,679	)	
Treasury Stock, at Cost (Shares: September 2002—15,261,970; December 2001—8,158,915; September 2001—2,169,932)	  	 	(394,366	)	  	 	(192,014	)	  	 	(51,084	)	

	
Total Shareholders’ Equity	  	 	1,100,706	 	  	 	1,247,012	 	  	 	1,371,055	 	

	
Total Liabilities and Shareholders’ Equity	  	$	9,702,043	 	  	$	10,627,797	 	  	$	11,944,139	 	

	
See accompanying notes to the consolidated financial statements.
4

 
Bank of Hawaii Corporation and subsidiaries
Consolidated Statements of Shareholders’ Equity (Unaudited)

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	
(dollars in thousands)	  	Total	 	  	Common Stock	  	Capital Surplus	 	  	Accum Other Comprehensive Income	 	  	Retained Earnings	 	  	Deferred Stock Grants	 	  	Treasury Stock	 	  	Compre- hensive Income	 	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2002	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2001	  	$	1,247,012	 	  	$	806	  	$	367,672	 	  	$	22,761	 	  	$	1,055,424	 	  	$	(7,637	)	  	$	(192,014	)	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive Income	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	  	 	92,272	 	  	 	—  	  	 	—  	 	  	 	—  	 	  	 	92,272	 	  	 	—  	 	  	 	—  	 	  	$	92,272	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other Comprehensive Income, Net of Tax	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized Gain on Investment Securities	  	 	3,859	 	  	 	—  	  	 	—  	 	  	 	3,859	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	3,859	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign Currency Translation Adjustment	  	 	(582	)	  	 	—  	  	 	—  	 	  	 	(582	)	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(582	)	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Comprehensive Income	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	$	95,549	 	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock Issued	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     33,402  Profit Sharing Plan	  	 	933	 	  	 	—  	  	 	196	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	737	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
1,369,679  Stock Option Plan	  	 	27,895	 	  	 	—  	  	 	4,022	 	  	 	—  	 	  	 	(9,236	)	  	 	(233	)	  	 	33,342	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     77,270  Dividend Reinvestment Plan	  	 	2,152	 	  	 	—  	  	 	439	 	  	 	—  	 	  	 	(2	)	  	 	—  	 	  	 	1,715	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
       4,101  Directors’ Restricted Shares and
                    Deferred Compensation Plan	  	 	44	 	  	 	—  	  	 	117	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(73	)	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    (71,300)  Employees’ Restricted Shares	  	 	3,636	 	  	 	—  	  	 	(1,348	)	  	 	—  	 	  	 	—  	 	  	 	4,984	 	  	 	 	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Treasury Stock Purchased (8,581,000 shares)	  	 	(238,073	)	  	 	—  	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(238,073	)	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash Dividends Paid	  	 	(38,442	)	  	 	      —  	  	 	—  	 	  	 	—  	 	  	 	(38,442	)	  	 	—  	 	  	 	—  	 	  	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at September 30, 2002	  	$	1,100,706	 	  	$	806	  	$	371,098	 	  	$	26,038	 	  	$	1,100,016	 	  	$	(2,886	)	  	$	(394,366	)	  	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2001	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2000	  	$	1,301,356	 	  	$	806	  	$	346,045	 	  	$	(25,079	)	  	$	996,791	 	  	$	—	 	  	$	(17,207	)	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive Income	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	  	 	91,475	 	  	 	—  	  	 	—  	 	  	 	—  	 	  	 	91,475	 	  	 	—  	 	  	 	—  	 	  	$	91,475	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other Comprehensive Income, Net of Tax	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized Gain on Investment Securities	  	 	23,906	 	  	 	—  	  	 	—  	 	  	 	    23,906	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	23,906	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign Currency Translation Adjustment	  	 	25,911	 	  	 	—  	  	 	—  	 	  	 	25,911	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	25,911	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pension Liability Adjustments	  	 	(159	)	  	 	—  	  	 	—  	 	  	 	(159	)	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(159	)	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Comprehensive Income	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	$	141,133	 	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock Issued	  	 	 	 	  	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  46,408  Profit Sharing Plan	  	 	1,065	 	  	 	—  	  	 	257	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	808	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
604,264  Stock Option Plan	  	 	11,160	 	  	 	—  	  	 	892	 	  	 	—  	 	  	 	(812	)	  	 	847	 	  	 	10,233	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  91,764  Dividend Reinvestment Plan	  	 	2,103	 	  	 	—  	  	 	483	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	1,620	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    4,248  Directors’ Restricted Shares and
                Deferred Compensation Plan	  	 	341	 	  	 	—  	  	 	95	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	246	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
724,600  Employees’ Restricted Shares	  	 	2,797	 	  	 	—  	  	 	      18,323	 	  	 	—  	 	  	 	—  	 	  	 	(15,526	)	  	 	—  	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  65,146  Hawaii Insurance Network	  	 	1,299	 	  	 	—  	  	 	1,299	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Treasury Stock Purchased (1,965,000 shares)	  	 	(46,784	)	  	 	—  	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(46,784	)	  	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash Dividends Paid	  	 	(43,415	)	  	 	—  	  	 	—  	 	  	 	—  	 	  	 	(43,415	)	  	 	—  	 	  	 	—  	 	  	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at September 30, 2001	  	$	1,371,055	 	  	$	806	  	$	367,394	 	  	$	24,579	 	  	$	1,044,039	 	  	$	(14,679	)	  	$	(51,084	)	  	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	
See accompanying notes to the consolidated financial statements.
5

 
Bank of Hawaii Corporation and subsidiaries
 
Consolidated Statements of Cash Flows

	
Nine Months ended September 30

(dollars in thousands)	  	2002	 	  	2001	 	

	
Operating Activities	  	 	 	 	  	 	 	 	
Net Income	  	$	92,272	 	  	$	91,475	 	
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:	  	 	 	 	  	 	 	 	
Provision for Loan and Lease Losses	  	 	11,616	 	  	 	59,798	 	
Depreciation and Amortization	  	 	22,106	 	  	 	43,289	 	
Amortization of Deferred Loan Fees and Leasing Income	  	 	(25,316	)	  	 	(33,041	)	
Amortization and Accretion of Investment Securities	  	 	14,248	 	  	 	12,526	 	
Deferred Stock Grants	  	 	3,636	 	  	 	2,797	 	
Deferred Income Taxes	  	 	23,236	 	  	 	(1,543	)	
Investment Security Gains	  	 	(3	)	  	 	(32,914	)	
Proceeds From Sales of Loans Held for Sale	  	 	993,316	 	  	 	798,922	 	
Originations of Loans Held for Sale	  	 	(567,470	)	  	 	(847,749	)	
Gain on Sale of Banking Operations, Net of Venture Investment Losses	  	 	—  	 	  	 	(144,680	)	
Net Change in Other Assets and Liabilities	  	 	54,815	 	  	 	(44,113	)	

	
Net Cash Provided (Used) by Operating Activities	  	 	622,456	 	  	 	(95,233	)	

	
Investing Activities	  	 	 	 	  	 	 	 	
Proceeds from Redemptions of Investment Securities Held to Maturity	  	 	132,092	 	  	 	295,828	 	
Purchases of Investment Securities Held to Maturity	  	 	(20,513	)	  	 	(170,340	)	
Proceeds from Sales and Redemptions of Investment Securities Available for Sale	  	 	772,864	 	  	 	1,106,773	 	
Purchases of Investment Securities Available for Sale	  	 	(1,019,046	)	  	 	(602,171	)	
Net Decrease in Loans and Lease Financing	  	 	403,039	 	  	 	1,292,394	 	
Proceeds from Sale of Banking Operations	  	 	—  	 	  	 	657,476	 	
Premises and Equipment, Net	  	 	(8,165	)	  	 	(13,222	)	

	
Net Cash Provided by Investing Activities	  	 	260,271	 	  	 	2,566,738	 	

	
Financing Activities	  	 	 	 	  	 	 	 	
Net Increase (Decrease) in Demand Deposits	  	 	182,223	 	  	 	(194,797	)	
Net Increase in Savings Deposits	  	 	414,894	 	  	 	304,124	 	
Net Decrease in Time Deposits	  	 	(378,085	)	  	 	(393,766	)	
Net Decrease in Foreign Deposits	  	 	(265,585	)	  	 	(683,953	)	
Proceeds from Lines of Credit and Long-Term Debt	  	 	—  	 	  	 	4,572	 	
Repayments and Repurchases of Long-Term Debt	  	 	(160,635	)	  	 	(307,321	)	
Net Decrease in Short-Term Borrowings	  	 	(609,463	)	  	 	(178,179	)	
Proceeds from Issuance of Common Stock	  	 	31,024	 	  	 	14,669	 	
Repurchase of Common Stock	  	 	(238,073	)	  	 	(46,784	)	
Cash Dividends	  	 	(38,442	)	  	 	(43,415	)	

	
Net Cash Used by Financing Activities	  	 	(1,062,142	)	  	 	(1,524,850	)	

	
Effect of Exchange Rate Changes on Cash	  	 	(582	)	  	 	25,911	 	

	
Increase (Decrease) in Cash and Cash Equivalents	  	 	(179,997	)	  	 	972,566	 	
Cash and Cash Equivalents at Beginning of Year	  	 	1,622,955	 	  	 	851,882	 	

	
Cash and Cash Equivalents at End of Period	  	$	1,442,958	 	  	$	1,824,448	 	

	
 
See accompanying notes to the consolidated financial statements.
6

 
Bank of Hawaii Corporation
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 1.    Summary of Significant Accounting Policies
 
Name Change and Organization
 
On April 26, 2002, the Shareholders of Pacific Century Financial Corporation approved changing the company name. An amendment to the company’s Certificate of Incorporation was filed in April 2002 to change the name of the company to Bank of Hawaii Corporation (the Company).
 
The Company’s principal subsidiary bank is Bank of Hawaii. The Company also owns First Savings and Loan Association of America (First Savings) in Guam. An application was filed with its regulators seeking approval to merge First Savings into Bank of Hawaii. The merger is expected to be completed before the end of the year.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the consolidated financial statements reflect all 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 2001 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
 
Income Taxes
 
The provision for income taxes is computed by applying statutory federal, foreign, and state income tax rates to income before income taxes as reported in the Consolidated Statements of Income after adjusting for tax preference items, such as tax-exempt interest income, bank owned life insurance and low-income housing investment tax credits.
7

 
Note 2.    Recent Accounting Pronouncements
 
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. During a transition period from July 1, 2001 through December 31, 2001, goodwill associated with business combinations completed prior to July 1, 2001 continued to be amortized through the income statement. Effective January 1, 2002, periodic goodwill amortization and expense recognition was discontinued and goodwill is assessed at least annually for impairment at the reporting unit level by applying a fair-value based test. SFAS 142 also provides additional guidance on acquired intangibles that should be separately recognized and amortized. Under SFAS 142, intangibles with indefinite lives will no longer be amortized through the income statement. The Company adopted SFAS 142 on January 1, 2002. An initial impairment assessment was completed and it was determined that a transition impairment charge was not required. Under SFAS 142 the elimination of goodwill amortization is expected to increase net income by approximately $7.6 million in 2002.
 
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supercedes FASB Statement No.121,  Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of  (SFAS 121), and certain of the accounting and reporting provisions of APB Opinion No. 30. For long-lived assets to be held and used, SFAS 144 retains the requirements of SFAS 121 to (a) recognize an impairment loss only if the carrying value of the long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. For long-lived assets to be disposed of by sale, the SFAS 121 model is also retained which requires an asset to be measured at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. SFAS 144 establishes criteria beyond that previously specified in SFAS 121 to determine when a long-lived asset is held for sale. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and is generally to be applied prospectively. The Company adopted SFAS 144 on January 1, 2002, no transition adjustment was necessary.
 
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). The provisions of SFAS 146 will become effective for disposal activities initiated after December 31, 2002, with early adoption encouraged. This statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS 144. Those costs include, but are not limited to termination benefits, costs to terminate contracts, costs to consolidate facilities and costs to relocate employees. The Statement requires that a liability be recognized and measured initially at its fair value in the period in which the liability is incurred, except for termination benefits that are recognized over time. Termination benefits for employees not required to render service until they are terminated or not required to render service beyond the minimum retention period should be recognized at fair value at the communication date. Termination benefits for employees that are required to render service until they are terminated in order to receive the termination benefit or who are required to render service beyond the minimum retention period should be recognized ratably over the service period. Costs to terminate a contract before the end of its term shall be recognized and measured at fair value when the contract terminates. The Company adopted SFAS 146 in the third quarter of 2002.
8

 
Note 3.    Business Segments
 
The Company is a financial services organization that is aligned into the following segments: Retail Banking, Commercial Banking, Investment Services Group, and Treasury and Other Corporate. Divestiture Businesses reflected the results of operations of businesses which the Company exited in 2001. Corporate Restructuring Related Activities includes gains, losses and expenses arising out of the divestiture and credit quality enhancement processes.
 
Business segment results are determined based on the Company’s internal financial management reporting process and organizational structure. This process uses various techniques to assign balance sheet and income statement amounts to business segments, including allocations of overhead, credit loss provision, and capital. This process is dynamic and requires certain allocations based on judgment and subjective factors. Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting that is equivalent to generally accepted accounting principles. The management accounting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution.
 
The financial results for the three and nine months ended September 30, 2002 and 2001 are presented on pages 10 and 11 for each of the Company’s principal segments. Segment information for 2001 has been reclassified to conform to the 2002 presentation.
9

 
Business Segments Selected Financial Information (Unaudited)	 	

	 	
(dollars in thousands)	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	 	
 	  	RETAIL	 	  	COMMERCIAL	 	  	INVESTMENT SERVICES GROUP	 	  	TREASURY AND OTHER CORPORATE	 	  	DIVESTITURE BUSINESSES	 	    	CORPORATE RESTRUCTURING RELATED ACTIVITIES	 	  	CONSOLIDATED TOTAL	 	 	

	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended September 30, 2002	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	 	
Net Interest Income	  	$	49,293	 	  	$	35,700	 	  	$	3,250	 	  	$	3,938	 	  	$	—  	 	    	$	—  	 	  	$	92,181	 	 	
Provision for Loan and Lease Losses	  	 	(722	)	  	 	(4,456	)	  	 	(76	)	  	 	5,254	 	  	 	—  	 	    	 	—  	 	  	 	—  	 	 	

	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	 	
Net Interest Income after Provision for Loan and Lease Losses	  	 	48,571	 	  	 	31,244	 	  	 	3,174	 	  	 	9,192	 	  	 	—  	 	    	 	—  	 	  	 	92,181	 	 	
Non-Interest Income	  	 	20,118	 	  	 	9,112	 	  	 	16,667	 	  	 	2,351	 	  	 	—  	 	    	 	—  	 	  	 	48,248	 	 	
Non-Interest Expense	  	 	(43,625	)	  	 	(25,280	)	  	 	(15,780	)	  	 	(1,693	)	  	 	—  	 	    	 	—  	 	  	 	(86,378	)	 	
Information Technology Systems Replacement Project	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(6,576	)	  	 	—  	 	    	 	—  	 	  	 	(6,576	)	 	

	 	
Income Before Income Taxes	  	 	25,064	 	  	 	15,076	 	  	 	4,061	 	  	 	3,274	 	  	 	—  	 	    	 	—  	 	  	 	47,475	 	 	
Provision for Income Taxes	  	 	(9,524	)	  	 	(5,635	)	  	 	(1,543	)	  	 	(573	)	  	 	—  	 	    	 	—  	 	  	 	(17,275	)	 	

	 	
Net Income	  	$	15,540	 	  	$	9,441	 	  	$	2,518	 	  	$	2,701	 	  	$	—  	 	    	$	—  	 	  	$	30,200	 	 	

	 	
Total Assets (End of Period)	  	$	3,135,092	 	  	$	2,324,205	 	  	$	118,625	 	  	$	4,124,121	 	  	$	—  	 	    	$	—  	 	  	$	9,702,043	 	 	
Total Assets (Average)	  	$	3,159,190	 	  	$	2,358,495	 	  	$	121,254	 	  	$	4,164,957	 	  	$	—  	 	    	$	—  	 	  	$	9,803,896	 	 	

	 	
 	  	RETAIL	 	  	COMMERCIAL	 	  	INVESTMENT SERVICES GROUP	 	  	TREASURY AND OTHER CORPORATE	 	  	DIVESTITURE BUSINESSES	 	    	CORPORATE RESTRUCTURING RELATED ACTIVITIES	 	  	CONSOLIDATED TOTAL	 	 	

	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended September 30, 2001	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	 	
Net Interest Income	  	$	45,009	 	  	$	36,995	 	  	$	2,337	 	  	$	6,667	 	  	$	20,694	 	    	$	—  	 	  	$	111,702	 	 	
Provision for Loan and Lease Losses	  	 	(2,131	)	  	 	(5,089	)	  	 	—  	 	  	 	799	 	  	 	5,502	 	    	 	—  	 	  	 	(919	)	 	

	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income after Provision for Loan and Lease Losses	  	 	42,878	 	  	 	31,906	 	  	 	2,337	 	  	 	7,466	 	  	 	26,196	 	    	 	—  	 	  	 	110,783	 	 	
Gain on Sale of Banking Operations, Net of Venture Investment Losses	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	47,771	 	  	 	47,771	 	 	
Non-Interest Income	  	 	26,822	 	  	 	7,765	 	  	 	17,735	 	  	 	1,409	 	  	 	8,034	 	    	 	3,819	 	  	 	65,584	 	 	
Non-Interest Expense	  	 	(48,191	)	  	 	(24,769	)	  	 	(17,372	)	  	 	(591	)	  	 	(28,659	)	    	 	—	 	  	 	(119,582	)	 	
Restructuring & Other Related Costs	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	(2,986	)	  	 	(2,986	)	 	

	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income Before Income Taxes	  	 	21,509	 	  	 	14,902	 	  	 	2,700	 	  	 	8,284	 	  	 	5,571	 	    	 	48,604	 	  	 	101,570	 	 	
Provision for Income Taxes	  	 	(9,476	)	  	 	(5.626	)	  	 	(748	)	  	 	(2,790	)	  	 	(2,806	)	    	 	(49,065	)	  	 	(70,511	)	 	

	 	
Net Income	  	$	12,033	 	  	$	9,276	 	  	$	1,952	 	  	$	5,494	 	  	$	2,765	 	    	$	(461	)	  	$	31,059	 	 	

	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Assets (End of Period)	  	$	3,389,485	 	  	$	3,320,492	 	  	$	191,900	 	  	$	2,351,940	 	  	$	2,690,322	 	    	$	—  	 	  	$	11,944,139	 	 	
Total Assets (Average)	  	$	3,435,534	 	  	$	3,071,464	 	  	$	139,730	 	  	$	2,673,427	 	  	$	2,978,528	 	    	$	—  	 	  	$	12,298,683	 	 	
10

 
Business Segments Selected Financial Information (Unaudited)	

	
(dollars in thousands)

 	 	RETAIL	 	  	COMMERCIAL	 	  	INVESTMENT SERVICES GROUP	 	 	TREASURY AND OTHER CORPORATE	 	 	DIVESTITURE BUSINESSES	 	    	CORPORATE RESTRUCTURING RELATED ACTIVITIES	 	  	CONSOLIDATED TOTAL	 	

	
Nine Months Ended September 30, 2002	
Net Interest Income	 	$	147,784	 	  	$	106,009	 	  	$	9,371	 	 	$	16,849	 	 	$	—  	 	    	$	—  	 	  	$	280,013	 	
Provision for Loan and Lease Losses	 	 	(3,213	)	  	 	(14,062	)	  	 	(76	)	 	 	5,735	 	 	 	—  	 	    	 	—  	 	  	 	(11,616	)	

	
Net Interest Income after Provision for Loan and Lease Losses	 	 	144,571	 	  	 	91,947	 	  	 	9,295	 	 	 	22,584	 	 	 	—  	 	    	 	—  	 	  	 	268,397	 	
Non-Interest Income	 	 	62,771	 	  	 	27,955	 	  	 	51,926	 	 	 	8,532	 	 	 	—  	 	    	 	—  	 	  	 	151,184	 	
Non-Interest Expense	 	 	(134,428	)	  	 	(76,133	)	  	 	(49,903	)	 	 	(6,721	)	 	 	—  	 	    	 	—  	 	  	 	(267,185	)	
Restructuring & Other Related Costs	 	 	—  	 	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 	    	 	(1,979	)	  	 	(1,979	)	
Information Technology Systems Replacement Project	 	 	—  	 	  	 	—  	 	  	 	—  	 	 	 	(6,576	)	 	 	—  	 	    	 	—  	 	  	 	(6,576	)	

	
Income Before Income Taxes	 	 	72,914	 	  	 	43,769	 	  	 	11,318	 	 	 	17,819	 	 	 	—  	 	    	 	(1,979	)	  	 	143,841	 	
Provision for Income Taxes	 	 	(27,707	)	  	 	(16,346	)	  	 	(4,301	)	 	 	(3,919	)	 	 	—  	 	    	 	704	 	  	 	(51,569	)	

	
Net Income	 	$	45,207	 	  	$	27,423	 	  	$	7,017	 	 	$	13,900	 	 	$	—  	 	    	$	(1,275	)	  	$	92,272	 	

	
Total Assets (End of Period)	 	$	3,135,092	 	  	$	2,324,205	 	  	$	118,625	 	 	$	4,124,121	 	 	$	—  	 	    	$	—  	 	  	$	9,702,043	 	
Total Assets (Average)	 	$	3,258,970	 	  	$	2,503,595	 	  	$	120,686	 	 	$	4,213,707	 	 	$	—  	 	    	$	—  	 	  	$	10,096,958	 	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	RETAIL	 	  	COMMERCIAL	 	  	INVESTMENT SERVICES GROUP	 	 	TREASURY AND OTHER CORPORATE	 	 	DIVESTITURE BUSINESSES	 	    	CORPORATE RESTRUCTURING RELATED ACTIVITIES	 	  	CONSOLIDATED TOTAL	 	

	
Nine Months Ended September 30, 2001	
Net Interest Income	 	$	137,838	 	  	$	118,060	 	  	$	7,422	 	 	$	7,665	 	 	$	85,034	 	    	$	(2,444	)	  	$	353,575	 	
Provision for Loan and Lease Losses	 	 	(6,665	)	  	 	(15,178	)	  	 	—  	 	 	 	800	 	 	 	(2,039	)	    	 	(36,716	)	  	 	(59,798	)	

	
Net Interest Income after Provision for Loan and Lease Losses	 	 	131,173	 	  	 	102,882	 	  	 	7,422	 	 	 	8,465	 	 	 	82,995	 	    	 	(39,160	)	  	 	293,777	 	
Gain on Sale of Banking Operations, Net of Venture Investment Losses	 	 	—  	 	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 	    	 	144,680	 	  	 	144,680	 	
Non-Interest Income	 	 	69,629	 	  	 	26,735	 	  	 	53,273	 	 	 	13,642	 	 	 	27,940	 	    	 	35,894	 	  	 	227,113	 	
Non-Interest Expense	 	 	(143,683	)	  	 	(76,205	)	  	 	(50,721	)	 	 	(2,392	)	 	 	(96,879	)	    	 	—  	 	  	 	(369,880	)	
Restructuring & Other Related Costs	 	 	—  	 	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 	    	 	(86,329	)	  	 	(86,329	)	

	
Income Before Income Taxes	 	 	57,119	 	  	 	53,412	 	  	 	9,974	 	 	 	19,715	 	 	 	14,056	 	    	 	55,085	 	  	 	209,361	 	
Provision for Income Taxes	 	 	(24,011	)	  	 	(20,240	)	  	 	(3,760	)	 	 	(8,868	)	 	 	(4,229	)	    	 	(56,778	)	  	 	(117,886	)	

	
Net Income	 	$	33,108	 	  	$	33,172	 	  	$	6,214	 	 	$	10,847	 	 	$	9,827	 	    	$	(1,693	)	  	$	91,475	 	

	
Total Assets (End of Period)	 	$	3,389,485	 	  	$	3,320,492	 	  	$	191,900	 	 	$	2,351,940	 	 	$	2,690,322	 	    	$	—  	 	  	$	11,944,139	 	
Total Assets (Average)	 	$	3,500,491	 	  	$	3,354,314	 	  	$	143,419	 	 	$	2,585,894	 	 	$	3,457,165	 	    	$	—  	 	  	$	13,041,283	 	
11

 
Note 4.    Information Technology Systems Replacement Project (ITSRP)
 
On July 22, 2002 the Company entered into a seven year outsourcing arrangement with Metavante Corporation to serve as the Company’s primary technology systems provider. The Company will convert its key systems, including loans and deposits, to Metavante’s state-of-the-industry computer system. The arrangement is intended to enhance customer service and convenience, as well as improve the Company’s efficiency. The seven-year outsourcing arrangement is expected to be operational in the third quarter of 2003 and should provide annual cost savings of over $17 million compared to current level expenses. In connection with this decision, the Company estimates that it will recognize transition charges of approximately $35 million over the five-quarter conversion period.
 
Costs incurred, total expected costs and changes in the liability balance by type of expense are presented below.
 
Information Technology Systems Replacement Project (Unaudited)

	

	

	

	

	

	

	

	

	

	

	
(dollars in thousands)	  	Professional Fees	 	  	Employee Termination Benefits	 	    	Accelerated Depreciation	  	Other
Associated
Costs2	 	  	      Total      	 	

	

	

	

	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Costs Incurred1	  	$	1,875	 	  	$	1,042	 	    	$	3,197	  	$	462	 	  	$	6,576	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Expected Costs	  	$	12,481	 	  	$	6,371	 	    	$	9,371	  	$	7,236	 	  	$	35,459	 	
 	  	 	 	 	  	 	 	 	    	 	 	  	 	 	 	  	 	 	 	
Beginning Liability Balance at July 1, 2002	  	$	—  	 	  	$	—  	 	    	 	N/A	  	$	—  	 	  	$	—  	 	
Costs Incurred	  	 	1,875	 	  	 	1,042	 	    	 	N/A	  	 	462	 	  	 	3,379	 	
Payments	  	 	(1,875	)	  	 	(374	)	    	 	N/A	  	 	(146	)	  	 	(2,395	)	

	

	

	

	

	

	

	

	

	

	

	
Ending Liability Balance at September 30, 2002	  	$	—  	 	  	$	668	 	    	 	N/A	  	$	316	 	  	$	984	 	

	

	

	

	

	

	

	

	

	

	

	
1	 	Three and nine months ended September 30, 2002 and project-to-date are the same.	
2	 	Includes contract termination, equipment, excise tax, and other costs.	
12

 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward Looking Statements
 
This report contains forward-looking statements concerning anticipated revenues and expenses in 2002 and beyond. We believe the assumptions underlying our forward-looking statements are reasonable. However, any of the assumptions could prove to be inaccurate and actual results may differ materially from those projected for a variety of reasons including, but not limited to: the Hawaii economy may not continue at the pace we anticipate; our refocused emphasis on our Hawaii market may not achieve the customer and revenue gains we anticipate; our credit markets may deteriorate and our credit quality may fall short of our goals; we may not achieve the expense reductions we expect; we may not be able to maintain our net interest margin; we may not be able to implement our proposed equity repurchases in the amount or at the times planned; the economics or timing, or both, of our information technology systems replacement project may not result in the expected benefits; unanticipated difficulties or delays in the conversion of our data processing to outsourcing may result in the reduction or delay of anticipated cost savings or increased cost of conversion; the information technology systems replacement project may not be able to achieve the projected reductions in staffing; we may encounter unanticipated difficulties or costs in exiting existing data processing agreements with third parties; the required level of the allowances for loan and lease losses may increase or decrease due to changes in our credit quality or risk profile; there may be economic volatility in the markets we serve; and there may be changes in business and economic conditions, competition, fiscal and monetary policies or legislation. We do not undertake any obligation to update any forward-looking statements to reflect later events or circumstances.
 
PERFORMANCE HIGHLIGHTS
 
The Company reported earnings for the three months ended September 30, 2002 of $30.2 million, a decrease of 2.8% from $31.1 million for the three months ended September 30, 2001. Diluted earnings per share was $0.43 for the third quarter of 2002, an increase of 16.2% from $0.37 in the third quarter of 2001, which was primarily attributable to share repurchases. The Company’s net income for the first nine months of 2002 was $92.3 million, compared to $91.5 million for the corresponding period of the prior year. Prior year earnings included gains of $144.7 million from the sale of the Company’s credit card portfolio and Pacific Century Bank N.A.’s branches, $20.9 million related to the exchange of stock in Star Systems, Inc. for Concord EFS, Inc., and $11.1 million from the sale of the Company’s interest in the Bank of Queensland and Concord EFS, Inc., partially offset by restructuring and other related costs of $86.3 million.
 
Net interest income for the third quarter of 2002 on a fully taxable equivalent basis was $92.2 million for the third quarter of 2002, a decline of $19.6 million from $111.8 million the same quarter last year and $0.8 million from June 30, 2002. The decrease from the prior year quarter was primarily due to divested businesses, the managed reduction of loans in an effort to improve the Company’s credit profile, and lower returns earned on the increased liquidity of the Company. The Company’s net interest margin for the third quarter of 2002 was 4.03%, an increase from 3.89% in the same quarter last year and an increase from 3.97% in the quarter ended June 30, 2002.
 
There was no provision for loan and lease losses in the third quarter of 2002, compared to $0.9 million in the third quarter last year. The decrease reflects improvements in the Company’s asset quality.
 
Non-performing assets were $63.3 million at September 30, 2002, a decline of $16.4 million from December 31, 2001 and $43.1 million, or 40.5%, from September 30, 2001. Non-performing assets declined $15.5 million, or 19.7%, from $78.8 million at the end of second quarter 2002.
 
In the third quarter of 2002, return on average assets (ROAA) and return on average equity (ROAE) were 1.22% and 10.40%, respectively, compared to 1.00% and 8.88% in the same 2001 quarter.
 
Total assets at September 30, 2002 were $9.7 billion, $10.6 billion at December 31, 2001 and $11.9 billion at September 30, 2001. The most significant reductions were in commercial loans and foreign loans resulting from the divestitures and managed reduction of loans in an effort to improve the Company’s credit profile.
13

 
Bank of Hawaii Corporation and subsidiaries
 
Highlights (Unaudited)	Table 1	

	

	

	

	

	

	

	

	

	
(dollars in thousands except per share amounts)	 	Three Months Ended	  	Nine Months Ended	 	 	 	 	 	 	
 	 	September 30	  	September 30	 	 	 	 	 	 	
Earnings Highlights and Performance Ratios

	 	2002             2001

	  	2002                2001

	 	 	 	 	 	 	
 	 	 	  	 	  	 	  	 	 	 	 	 	 	 	
Net Income	 	$	30,200	  	$	31,059	  	$	92,272	  	$	91,475	 	 	 	 	 	 	
Basic Earnings Per Share	 	 	0.44	  	 	0.39	  	 	1.30	  	 	1.14	 	 	 	 	 	 	
Diluted Earnings Per Share	 	 	0.43	  	 	0.37	  	 	1.26	  	 	1.11	 	 	 	 	 	 	
Cash Dividends	 	 	12,197	  	 	14,625	  	 	38,442	  	 	43,415	 	 	 	 	 	 	
Return on Average Assets	 	 	1.22%	  	 	1.00%	  	 	1.22%	  	 	0.94%	 	 	 	 	 	 	
Return on Average Equity	 	 	10.40%	  	 	8.88%	  	 	10.10%	  	 	8.96%	 	 	 	 	 	 	
Net Interest Margin	 	 	4.03%	  	 	3.89%	  	 	3.97%	  	 	3.91%	 	 	 	 	 	 	
Efficiency Ratio	 	 	66.19%	  	 	54.46%	  	 	63.95%	  	 	62.89%	 	 	 	 	 	 	
Continuing Business Efficiency Ratio ¹	 	 	    61.51%	  	 	    61.03%	  	 	61.96%	  	 	60.81%	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	 	 	 	
 	 	 	  	 	  	September 30	 	 	 	 	 	 	
Statement of Condition Highlights and Performance Ratios

	 	 	  	 	  	2002                2001

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Assets	 	 	 	  	 	 	  	$	9,702,043	  	$	11,944,139	 	 	 	 	 	 	
Net Loans	 	 	 	  	 	 	  	 	5,104,200	  	 	6,583,522	 	 	 	 	 	 	
Total Deposits	 	 	 	  	 	 	  	 	6,627,043	  	 	7,399,737	 	 	 	 	 	 	
Total Shareholders’ Equity	 	 	 	  	 	 	  	 	1,100,706	  	 	1,371,055	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Book Value Per Common Share	 	 	 	  	 	 	  	$	16.67	  	$	17.31	 	 	 	 	 	 	
Allowance / Loans Outstanding	 	 	 	  	 	 	  	 	2.94%	  	 	2.70%	 	 	 	 	 	 	
Average Equity / Average Assets	 	 	 	  	 	 	  	 	12.10%	  	 	10.47%	 	 	 	 	 	 	
Employees (FTE)	 	 	 	  	 	 	  	 	2,934	  	 	3,881	 	 	 	 	 	 	
Branches and offices	 	 	 	  	 	 	  	 	97	  	 	140	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Market Price Per Share of Common Stock for the Quarter Ended:	 	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	
 	 	 	 	  	 	Closing	  	$	27.90	  	$	23.37	 	 	 	 	 	 	
 	 	 	 	  	 	High	  	$	30.00	  	$	28.30	 	 	 	 	 	 	
 	 	 	 	  	 	Low	  	$	22.79	  	$	20.20	 	 	 	 	 	 	
 
1	 	Excludes the effects of the businesses that were divested in 2001, restructuring, non-core transactions and costs associated with the information technology system replacement project.	
14

 
STATEMENT OF INCOME ANALYSIS
 
Net Interest Income
 
Average interest earning/yielding assets and liabilities declined 20.2% and 22.5%, respectively, in the third quarter of 2002 from the same quarter last year, mainly due to the divested businesses. The Company’s net interest margin was 4.03% for the quarter ended September 30, 2002, an increase of 14 basis points from the comparable period a year ago. Taxable-equivalent net interest income was $92.2 million for the third quarter of 2002, a decline of $19.6 million, or 17.5% from the comparable period in 2001. The decline in net interest income was primarily due to the divestitures and the managed reduction of loans in an effort to improve the Company’s credit profile. Also contributing to the decline was the general declining interest rate environment. The average prime rate for the quarter ended September 30, 2002 was 4.75% compared to 6.58% for the comparable quarter in the prior year. The Company was asset sensitive in the third quarter of 2002 and expects to benefit when short term interest rates begin to increase. The net interest margin is expected to increase slightly in the fourth quarter. Presented in Table 2 are average balances, yields earned, and rates paid for the three and nine months ended September 30, 2002 and September 30, 2001.
15

 
Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)	 	Table 2	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	
 	 	Three Months Ended
September 30, 2002	 	 	Three Months Ended 1
September 30, 2001	 	 	Nine Months Ended
September 30, 2002	 	 	Nine Months Ended 1
September 30, 2001	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(dollars in millions)	 	Average Balance	 	Income/ Expense	 	Yield/ Rate	 	 	Average Balance	 	Income/ Expense	 	Yield/ Rate	 	 	Average Balance	 	Income/ Expense	 	Yield/ Rate	 	 	Average Balance	 	Income/ Expense	 	Yield/ Rate	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earning Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest Bearing Deposits	 	$	1,142.3	 	$	5.4	 	1.87	%	 	$	938.7	 	$	9.4	 	3.98	%	 	$	1,202.3	 	$	16.4	 	1.83	%	 	$	564.0	 	$	19.7	 	4.68	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Funds Sold	 	 	210.2	 	 	0.9	 	1.74	 	 	 	194.3	 	 	1.8	 	3.59	 	 	 	206.9	 	 	2.7	 	1.72	 	 	 	132.1	 	 	4.2	 	4.22	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment Securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Held-To-Maturity	 	 	296.9	 	 	5.0	 	6.63	 	 	 	526.9	 	 	8.1	 	6.12	 	 	 	331.1	 	 	15.2	 	6.11	 	 	 	557.3	 	 	27.4	 	6.55	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Available for Sale	 	 	2,009.5	 	 	25.3	 	5.03	 	 	 	2,139.7	 	 	31.4	 	5.86	 	 	 	1,946.5	 	 	78.9	 	5.40	 	 	 	2,311.4	 	 	108.0	 	6.23	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans Held For Sale	 	 	40.0	 	 	0.6	 	6.24	 	 	 	310.6	 	 	5.3	 	6.83	 	 	 	147.6	 	 	7.4	 	6.70	 	 	 	314.8	 	 	16.3	 	6.94	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Loans and Lease Financing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Domestic	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Commercial and Industrial	 	 	963.9	 	 	12.9	 	5.31	 	 	 	1,583.9	 	 	27.8	 	6.96	 	 	 	1,057.9	 	 	41.0	 	5.18	 	 	 	1,923.3	 	 	110.8	 	7.70	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Construction	 	 	147.7	 	 	2.1	 	5.57	 	 	 	223.0	 	 	4.2	 	7.41	 	 	 	158.3	 	 	6.5	 	5.49	 	 	 	262.4	 	 	16.1	 	8.19	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Mortgage	 	 	2,904.9	 	 	50.4	 	6.93	 	 	 	3,261.2	 	 	62.3	 	7.58	 	 	 	2,969.0	 	 	155.9	 	7.01	 	 	 	3,448.2	 	 	200.7	 	7.78	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Installment	 	 	818.1	 	 	17.0	 	8.25	 	 	 	751.6	 	 	19.4	 	10.22	 	 	 	780.2	 	 	50.0	 	8.56	 	 	 	837.5	 	 	72.0	 	11.49	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Lease Financing	 	 	500.8	 	 	6.3	 	4.98	 	 	 	533.4	 	 	7.4	 	5.53	 	 	 	498.3	 	 	19.4	 	5.22	 	 	 	539.3	 	 	22.0	 	5.45	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Domestic Loans	 	 	5,335.4	 	 	88.7	 	6.62	 	 	 	6,353.1	 	 	121.1	 	7.59	 	 	 	5,463.7	 	 	272.8	 	6.67	 	 	 	7,010.7	 	 	421.6	 	8.03	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign	 	 	14.1	 	 	—  	 	—  	 	 	 	920.4	 	 	16.8	 	7.23	 	 	 	14.2	 	 	0.2	 	1.61	 	 	 	1,110.4	 	 	57.9	 	6.97	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Loans	 	 	5,349.5	 	 	88.7	 	6.60	 	 	 	7,273.5	 	 	137.9	 	7.54	 	 	 	5,477.9	 	 	273.0	 	6.65	 	 	 	8,121.1	 	 	479.5	 	7.89	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other	 	 	99.6	 	 	1.5	 	6.28	 	 	 	78.8	 	 	1.4	 	6.96	 	 	 	95.8	 	 	4.3	 	6.01	 	 	 	77.3	 	 	3.9	 	6.83	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Earning Assets	 	 	9,148.0	 	 	127.4	 	5.55	 	 	 	11,462.5	 	 	195.3	 	6.78	 	 	 	9,408.1	 	 	397.9	 	5.65	 	 	 	12,078.0	 	 	659.0	 	7.29	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and Non-Interest Bearing Assets	 	 	297.6	 	 	 	 	 	 	 	 	347.3	 	 	 	 	 	 	 	 	313.7	 	 	 	 	 	 	 	 	384.0	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other Assets	 	 	358.3	 	 	 	 	 	 	 	 	488.9	 	 	 	 	 	 	 	 	375.1	 	 	 	 	 	 	 	 	579.3	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Assets	 	$	9,803.9	 	 	 	 	 	 	 	$	12,298.7	 	 	 	 	 	 	 	$	10,096.9	 	 	 	 	 	 	 	$	13,041.3	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 
Interest Bearing Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Domestic Deposits	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Demand	 	 	2,036.0	 	 	4.0	 	0.78	 	 	 	1,892.6	 	 	8.3	 	1.74	 	 	 	1,982.2	 	 	12.8	 	0.86	 	 	 	1,934.9	 	 	29.3	 	2.02	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Savings	 	 	1,346.2	 	 	5.0	 	1.46	 	 	 	794.9	 	 	4.6	 	2.29	 	 	 	1,183.6	 	 	13.4	 	1.51	 	 	 	720.3	 	 	11.7	 	2.16	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Time	 	 	1,600.0	 	 	11.4	 	2.82	 	 	 	2,432.0	 	 	29.5	 	4.81	 	 	 	1,739.8	 	 	39.0	 	3.00	 	 	 	2,661.2	 	 	109.9	 	5.52	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Domestic Deposits	 	 	4,982.2	 	 	20.4	 	1.62	 	 	 	5,119.5	 	 	42.4	 	3.29	 	 	 	4,905.6	 	 	65.2	 	1.78	 	 	 	5,316.4	 	 	150.9	 	3.79	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign Deposits	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Time Due to Banks	 	 	9.6	 	 	—  	 	—  	 	 	 	235.3	 	 	2.2	 	3.78	 	 	 	54.8	 	 	0.8	 	1.90	 	 	 	346.4	 	 	12.4	 	4.79	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Other Time and Savings	 	 	38.3	 	 	0.2	 	1.68	 	 	 	640.7	 	 	5.5	 	3.41	 	 	 	60.2	 	 	0.7	 	1.69	 	 	 	716.4	 	 	19.0	 	3.54	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Foreign Deposits	 	 	47.9	 	 	0.2	 	1.59	 	 	 	876.0	 	 	7.7	 	3.51	 	 	 	115.0	 	 	1.5	 	1.79	 	 	 	1,062.8	 	 	31.4	 	3.95	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Interest Bearing Deposits	 	 	5,030.1	 	 	20.6	 	1.62	 	 	 	5,995.5	 	 	50.1	 	3.32	 	 	 	5,020.6	 	 	66.7	 	1.78	 	 	 	6,379.2	 	 	182.3	 	3.82	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Short-Term Borrowings	 	 	1,301.3	 	 	7.7	 	2.34	 	 	 	2,012.6	 	 	20.9	 	4.11	 	 	 	1,503.7	 	 	27.6	 	2.46	 	 	 	2,160.5	 	 	80.8	 	5.00	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-Term Debt	 	 	451.6	 	 	6.9	 	6.10	 	 	 	746.0	 	 	12.5	 	6.63	 	 	 	498.7	 	 	23.3	 	6.25	 	 	 	841.6	 	 	42.2	 	6.71	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Interest Bearing Liabilities	 	 	6,783.0	 	 	35.2	 	2.06	 	 	 	8,754.1	 	 	83.5	 	3.78	 	 	 	7,023.0	 	 	117.6	 	2.24	 	 	 	9,381.3	 	 	305.3	 	4.35	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	 	 	 	 	92.2	 	 	 	 	 	 	 	 	111.8	 	 	 	 	 	 	 	 	280.3	 	 	 	 	 	 	 	 	353.7	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest Rate Spread	 	 	 	 	 	 	 	3.49	%	 	 	 	 	 	 	 	3.00	%	 	 	 	 	 	 	 	3.41	%	 	 	 	 	 	 	 	2.94	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Margin	 	 	 	 	 	 	 	4.03	%	 	 	 	 	 	 	 	3.89	%	 	 	 	 	 	 	 	3.97	%	 	 	 	 	 	 	 	3.91	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-Interest Bearing Demand Deposits	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Demand	 	 	1,547.0	 	 	 	 	 	 	 	 	1,509.0	 	 	 	 	 	 	 	 	1,540.0	 	 	 	 	 	 	 	 	1,570.7	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
—  Foreign	 	 	—  	 	 	 	 	 	 	 	 	330.7	 	 	 	 	 	 	 	 	—  	 	 	 	 	 	 	 	 	352.0	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Demand Deposits	 	 	1,547.0	 	 	 	 	 	 	 	 	1,839.7	 	 	 	 	 	 	 	 	1,540.0	 	 	 	 	 	 	 	 	1,922.7	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other Liabilities	 	 	312.6	 	 	 	 	 	 	 	 	316.6	 	 	 	 	 	 	 	 	312.0	 	 	 	 	 	 	 	 	372.4	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Shareholders’ Equity	 	 	1,152.3	 	 	 	 	 	 	 	 	1,388.3	 	 	 	 	 	 	 	 	1,221.9	 	 	 	 	 	 	 	 	1,364.9	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Liabilities and Shareholders’ Equity	 	$	9,803.9	 	 	 	 	 	 	 	$	12,298.7	 	 	 	 	 	 	 	$	10,096.9	 	 	 	 	 	 	 	$	13,041.3	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision for Loan and Lease Losses	 	 	 	 	 	—  	 	 	 	 	 	 	 	 	0.9	 	 	 	 	 	 	 	 	11.6	 	 	 	 	 	 	 	 	59.8	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Overhead	 	 	 	 	 	44.6	 	 	 	 	 	 	 	 	9.2	 	 	 	 	 	 	 	 	124.6	 	 	 	 	 	 	 	 	84.4	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income Before Income Taxes	 	 	 	 	 	47.6	 	 	 	 	 	 	 	 	101.7	 	 	 	 	 	 	 	 	144.1	 	 	 	 	 	 	 	 	209.5	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision for Income Taxes	 	 	 	 	 	17.3	 	 	 	 	 	 	 	 	70.5	 	 	 	 	 	 	 	 	51.6	 	 	 	 	 	 	 	 	117.8	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tax-Equivalent Adjustment	 	 	 	 	 	0.1	 	 	 	 	 	 	 	 	0.1	 	 	 	 	 	 	 	 	0.2	 	 	 	 	 	 	 	 	0.2	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	 	 	 	$	30.2	 	 	 	 	 	 	 	$	31.1	 	 	 	 	 	 	 	$	92.3	 	 	 	 	 	 	 	$	91.5	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
1 Adjusted to reflect the reclassification of certain average balances and other interest income.	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
16

 
Provision for Loan and Lease Losses
 
No provision for loan and lease losses was recorded for the three months ended September 30, 2002, due to further stabilization and improvements in the Company’s asset quality. The provision in the third quarter 2001 was equal to net charge-offs of $0.9 million. Net loan charge-offs in the third quarter 2001 benefited from significant foreign loan recoveries. Net loan charge-offs for the quarter ended September 30, 2002 were $4.5 million. Based on current conditions, the Company does not expect to record a provision for loan and lease losses in the fourth quarter 2002. However, the actual amount of the provision for loan and lease losses will depend on determinations of credit risk in the portfolio and the economic environment that will be made near the end of the quarter. For further information on credit quality, refer to the section “Corporate Risk Profile”.
 
Non-Interest Income
 
Non-interest income was $48.2 million for the three months ended September 30, 2002, compared to $113.4 million for the comparable period in 2001. The prior year included a gain on the sale of Pacific Century Bank N.A.’s California branches of $49.4 million, $1.9 million gain on sale of a leverage lease, partially offset by a $3.5 million write-down taken on an equity investment. After excluding 2001 non-recurring gains and divested businesses, non-interest income from continuing businesses was $53.7 million in the third quarter of 2001 and $163.3 million for the nine months ended September 30, 2001.
 
Trust and asset management income declined to $13.7 million in the third quarter of 2002, a decrease of 2.5% from $14.0 million in the third quarter of 2001. The decrease was primarily attributable to reduced fees resulting from declines in values of assets under administration and the decline in interest rates.
 
Mortgage banking income was $4.0 million in the third quarter of 2002, a decrease of 61.2% from $10.4 million in the third quarter of 2001. The decrease was mainly due to adjustments in the prior year to recognize unearned income on mortgages sold in previous periods and the third quarter 2001 reversal of the mortgage loan portfolio valuation reserve.
 
Service charges on deposit accounts declined to $7.9 million in the third quarter of 2002, a decrease of 17.4% from $9.6 million in the same period last year. The decline was primarily attributable to the divested businesses.
 
Fees, exchange, and other service charges were $13.1 million for the three months ended September 30, 2002 compared to $17.6 million for the same prior year period. The decrease was mainly due to the divested businesses.
 
Gain on sales of banking operations, net of venture investment losses of $47.8 million included the gain on sale of Pacific Century Bank N.A.’s California branches in the third quarter of 2001. There were no sales of banking operations in 2002.
 
Other operating income was $9.5 million for the third quarter of 2002, down $3.5 million from the third quarter of 2001. The decline was primarily due to the prior year gain on sale of a leverage lease and decreased annuity income.
 
Non-Interest Expense
 
Non-interest expense for the three months ended September 30, 2002 was $93.0 million, a decline of 22.3% from $119.6 million, excluding restructuring and related costs of $3.0 million, in the comparable period of 2001. There were no restructuring and related costs for the three months ended September 30, 2002. However, $6.6 million of expenses related to the ITSRP were incurred in the current quarter. Refer to the notes to the financial statements for further discussion.
17

 
Salaries and pension and other employee benefits expense totaled $46.2 million in the third quarter of 2002, compared to $60.0 million for the corresponding period of 2001. Net occupancy and equipment expense in the third quarter of September 2002 was $19.7 million, a decrease of 17.6% from $23.9 million for the same period in 2001. Other operating expense decreased to $20.5 million in the third quarter of 2002 from $32.4 million for the same quarter in 2001. The decrease in expenses was primarily attributable to the divested businesses. In addition, salaries and benefits declined due to lower incentive compensation and reversal of 2001 accruals. Equipment expense benefited from reduced depreciation cost.
 
Restructuring
 
In April 2001, the Company announced a strategic plan designed to maximize shareholder value by strengthening its Hawaii and West Pacific operations and divesting most other holdings. The Company substantially completed its divestiture activities by the end of 2001, although a small amount of wrap-up activity was concluded in the first quarter of 2002 and resulted in $2.0 million of restructuring costs.
 
The first quarter expense of $2.0 million included $3.1 million of employee severance costs, $0.2 million of other costs, offset by adjustments of $1.3 million in previous estimates of foreign currency translation losses.
 
Activity in the Restructuring Accrual
(in millions)
 
Balance at December 31, 2001	  	$	11.8	 	
Restructuring Charges	  	 	3.3	 	
Adjustments	  	 	(1.3	)	
Payments	  	 	(10.6	)	

	

	

	
Balance at March 31, 2002	  	 	3.2	 	
Payments	  	 	(3.2	)	

	

	

	
Balance at June 30, 2002	  	$	0.0	 	

	

	

	
 
There were no costs or activity in the third quarter of 2002. The Company anticipates costs of up to $1.0 million in the fourth quarter 2002 associated with the closure of four small West Pacific branches.
 
Income Tax Provision
 
The 36.4% effective tax rate for the third quarter of 2002 decreased from 69.4% in the third quarter of 2001 primarily due to the impact of the divestitures and foreign taxes in the prior year.
18

 
Continuing Businesses
 
Similar to business segment results, continuing business results are determined based on the Company’s internal financial management reporting process and organizational structure. This process uses various techniques to assign balance sheet and income statement amounts, including allocations of overhead and loan and lease loss provision. This process is dynamic and requires certain allocations based on judgment and subjective factors.
 
Continuing businesses exclude the businesses that were divested in 2001 (Pacific Century Bank N.A., Asia Division, South Pacific Division and the credit card business) restructuring, non-core transactions and ITSRP costs. Table 3 presents results from continuing businesses for September 30, 2002 and 2001.
 
In the third quarter of 2002, net interest income from the continuing businesses increased $1.2 million compared to the same quarter in 2001, primarily due to increased liquidity and reductions in long-term debt. The decrease in the provision for loan and lease losses from the prior year is due to improved asset quality. Non-interest income decreased $5.5 million compared to the same quarter in 2001 primarily from reductions in mortgage banking income and foreign exchange income. Non-interest expense decreased $2.0 million mainly due to decreases in compensation expense and relocation costs. Net income was $34.4 million, an increase of $3.0 million from the same quarter in 2001. Year to date net income increased by $5.5 million compared to the nine months ended September 30, 2001.

Continuing Business (Unaudited)	  	 	 	 	  	 	 	 	  	 	 	 	  	 	Table 3	 	

	
 	  	Three Months Ended
September 30	 	  	Nine Months Ended
September 30	 	
(dollars in thousands)	  	2002	 	  	2001	 	  	2002	 	  	2001	 	

	
Net Interest Income	  	$	92,181	 	  	$	91,008	 	  	$	280,013	 	  	$	270,985	 	
Provision for Loan and Lease Losses	  	 	—  	 	  	 	(6,421	)	  	 	(11,616	)	  	 	(21,043	)	

	
Net Interest Income After Provision for Loan and Lease Losses	  	 	92,181	 	  	 	84,587	 	  	 	268,397	 	  	 	249,942	 	
Non-Interest Income	  	 	48,248	 	  	 	53,731	 	  	 	151,184	 	  	 	163,279	 	
Non-Interest Expense1	  	 	(86,378	)	  	 	(88,328	)	  	 	(267,185	)	  	 	(264,087	)	

	
Income Before Income Taxes	  	 	54,051	 	  	 	49,990	 	  	 	152,396	 	  	 	149,134	 	
Provision for Income Taxes	  	 	(19,668	)	  	 	(18,640	)	  	 	(54,666	)	  	 	(56,879	)	

	
Net Income1	  	$	34,383	 	  	$	31,350	 	  	$	97,730	 	  	$	92,255	 	

	
Total Assets (End of Period)	  	$	9,702,043	 	  	$	9,253,817	 	  	$	9,702,043	 	  	$	9,261,817	 	
Total Assets (Average)	  	 	9,803,896	 	  	 	9,320,155	 	  	 	10,096,958	 	  	 	9,584,119	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted Earnings Per Share1	  	$	0.49	 	  	$	0.38	 	  	$	1.34	 	  	$	1.12	 	
Return on Average Equity1	  	 	11.84	%	  	 	8.96	%	  	 	10.69	%	  	 	9.04	%	
Efficiency Ratio1	  	 	61.51	%	  	 	61.03	%	  	 	61.96	%	  	 	60.81	%	
 
1	 	Adjusted to exclude goodwill amortization expense for 2001.	
19

 
BALANCE SHEET ANALYSIS
 
Other Short-term Interest Earning Assets
 
Other short-term interest-earning assets totaled $1.1 billion at September 30, 2002, compared to $1.2 billion and $1.4 billion at December 31, 2001 and September 30, 2001, respectively. The decrease from the same period in the prior year was mainly due to the repurchase of the Company’s stock.
 
Investments
 
The Company’s investment portfolio is managed in an effort to meet strategic asset/liability objectives, to provide both interest income and balance sheet liquidity and to collateralize customer deposits. Available-for-sale securities at September 30, 2002 were $2.2 billion, compared to $2.0 billion at December 31, 2001, and $2.1 billion at September 30, 2001. Securities held to maturity were $277.9 million at September 30, 2002, declining from $396.2 million at December 31, 2001 and $460.5 million at September 30, 2001. These decreases were largely due to maturities. During the third quarter the Company extended the maturity on approximately $800 million of liquid assets. These assets were a consequence of the 2001 divestitures and had initially been invested in overnight funds in anticipation of an increase in short-term interest rates, which did not occur. At September 30, 2002 and December 31, 2001 investment securities with a book value of $1.8 billion and $2.1 billion, respectively, were pledged as collateral for repurchase agreements.
 
Loans Held for Sale
 
Loans held for sale, primarily residential mortgage loans, totaled $30.9 million at September 30, 2002, compared to $456.7 million at December 31, 2001, a decrease of $425.8 million, and compared to $228.1 million at September 30, 2001, a decrease of $197.2 million. During the third quarter the percentage of loans originated and designated held for sale increased from second quarter 2002. However, the loan held for sale balance declined due to improved delivery to the secondary market of mortgage loans for sale.
 
Loans
 
As of September 30, 2002, loans outstanding, excluding loans held for sale, declined to $5.3 billion, from $5.7 billion at year-end 2001 and $6.8 billion at September 30, 2001. The decrease from September 30, 2001 was primarily due to the divested businesses and strategic risk reductions in the portfolio.
 
The loan portfolio decreased slightly during the third quarter 2002 from second quarter 2002. Consumer loans decreased due to the acceleration of mortgage prepayments and management’s decision to sell a higher percentage of mortgage originations. However, other consumer loans continue to increase. Commercial loan balances decreased as some of the syndicated loans were exited and a slight decrease in commercial funding occurred. The increase in commercial mortgages is largely due to reclassifications.
 
Table 4 presents the composition of the loan portfolio by major loan categories and Table 5 presents the composition of consumer loans by geographic area.
20

 
Loan Portfolio Balances (Unaudited)	Table 4	

	

	

	

	

	

	

	

	

	
(dollars in millions)	  	September 30 2002	  	      June 30 2002	  	December 31 2001	  	September 30 2001	

	

	

	

	

	

	

	

	

	
Domestic Loans	  	 	 	  	 	 	  	 	 	  	 	 	
Commercial	  	 	 	  	 	 	  	 	 	  	 	 	
Commercial and Industrial1	  	$	869.4	  	$	999.6	  	$	1,175.5	  	$	1,413.6	
Mortgage – Commercial1	  	 	616.5	  	 	562.5	  	 	640.7	  	 	667.9	
Construction	  	 	146.3	  	 	148.6	  	 	169.6	  	 	175.7	
Lease Financing	  	 	451.8	  	 	450.8	  	 	441.8	  	 	466.8	

	

	

	

	

	

	

	

	

	
Total Commercial	  	 	2,084.0	  	 	2,161.5	  	 	2,427.6	  	 	2,724.0	
Consumer	  	 	 	  	 	 	  	 	 	  	 	 	
Mortgage – Residential	  	 	2,259.2	  	 	2,360.5	  	 	2,419.4	  	 	2,440.4	
Home Equity	  	 	419.2	  	 	404.2	  	 	329.9	  	 	306.3	
Other Consumer	  	 	421.6	  	 	403.2	  	 	399.8	  	 	428.4	
Lease Financing	  	 	36.5	  	 	37.3	  	 	38.9	  	 	41.2	

	

	

	

	

	

	

	

	

	
Total Consumer	  	 	3,136.5	  	 	3,205.2	  	 	3,188.0	  	 	3,216.3	

	

	

	

	

	

	

	

	

	
Total Domestic	  	 	5,220.5	  	 	5,366.7	  	 	5,615.6	  	 	5,940.3	

	

	

	

	

	

	

	

	

	
Foreign Loans	  	 	38.2	  	 	41.8	  	 	36.9	  	 	825.8	

	

	

	

	

	

	

	

	

	
Total Loans	  	$	5,258.7	  	$	5,408.5	  	$	5,652.5	  	$	6,766.1	

	

	

	

	

	

	

	

	

	
 
1	 	$42.3 million in loans were reclassified to mortgage-commercial from commercial and industrial during the third quarter of 2002.	

 
Consumer Loans by Geographic Area (Unaudited)	Table 5	

	

	

	

	

	

	

	

	

	
(dollars in millions)	  	September 30 2002	  	      June 30 2002	  	December 31 2001	  	September 30 2001	

	

	

	

	

	

	

	

	

	
Hawaii	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	$	2,190.0	  	$	2,293.1	  	$	2,345.4	  	$	2,347.0	
Home Equity	  	 	410.0	  	 	395.1	  	 	320.5	  	 	296.4	
Other Consumer	  	 	345.5	  	 	317.5	  	 	292.6	  	 	319.1	
 	 	 	 	 	 	 	 	 	 	 	 	 	
West Pacific	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	 	69.0	  	 	67.1	  	 	73.7	  	 	92.9	
Home Equity	  	 	9.2	  	 	9.1	  	 	9.4	  	 	9.9	
Other Cosumer	  	 	81.2	  	 	89.9	  	 	109.9	  	 	113.2	
 	 	 	 	 	 	 	 	 	 	 	 	 	
American Samoa	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	 	0.2	  	 	0.3	  	 	0.3	  	 	0.5	
Other Consumer	  	 	31.4	  	 	33.1	  	 	36.2	  	 	37.3	

	

	

	

	

	

	

	

	

	
Total Consumer Loans	  	$	3,136.5	  	$	3,205.2	  	$	3,188.0	  	$	3,216.3	

	

	

	

	

	

	

	

	

	
21

 
Mortgage Servicing Rights
 
The Company’s mortgage loan servicing portfolio was $3.7 billion at September 30, 2002. The Company did not incur an impairment charge related to mortgage servicing rights in the third quarter. These rights had a carrying value of $30.0 million at September 30, 2002. The prepayment speed of Hawaii mortgages has been and remains less than national speeds.
 
Deposits
 
As of September 30, 2002, deposits totaled $6.6 billion, down $0.1 billion from $6.7 billion at December 31, 2001 and down $0.8 billion from $7.4 billion at September 30, 2001. Compared to September 30, 2001, domestic deposits increased $0.4 billion, while foreign deposits declined by $1.1 billion due to the divested foreign operations. During the third quarter of 2002, the Company experienced growth in demand and savings deposits, while continuing to manage down its higher cost time deposits.
 
Table 6 presents average deposits by type for the quarters ended September 30, 2002, December 31, 2001 and September 30, 2001.
 
Average Deposits (Unaudited)	Table 6	

	

	

	

	

	

	

	

	

	

	

	

	

	
 	  	Three Months Ended September 30, 2002

	  	Three Months Ended December 31, 2001

	  	Three Months Ended September 30, 2001

	 	 	 	 	 	 	
(dollars in millions)	  	Amount	    	Mix	  	Amount	    	Mix	  	Amount	    	Mix	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Domestic	  	 	    	 	  	 	    	 	  	 	    	 	 	 	 	 	 	 	
Non-Interest Bearing Demand	  	$1,547.0	    	23.5%	  	$1,397.8	    	19.1%	  	$1,509.0	    	19.3%	 	 	 	 	 	 	
Interest-Bearing Demand	  	2,036.0	    	31.0%	  	1,774.7	    	24.2%	  	1,892.6	    	24.2%	 	 	 	 	 	 	
Regular Savings	  	1,346.2	    	20.5%	  	958.3	    	13.1%	  	794.9	    	10.1%	 	 	 	 	 	 	
Time Certificates of Deposit
    ($100,000 or More)	  	780.0	    	11.8%	  	990.8	    	13.5%	  	1,202.7	    	15.3%	 	 	 	 	 	 	
Other Time and
    Savings Certificates	  	820.0	    	12.5%	  	1,057.4	    	14.5%	  	1,229.3	    	15.7%	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Domestic	  	6,529.2	    	99.3%	  	6,179.0	    	84.4%	  	6,628.5	    	84.6%	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign	  	 	    	 	  	 	    	 	  	 	    	 	 	 	 	 	 	 	
Non-Interest Bearing Demand	  	—  	    	0.0%	  	328.0	    	4.5%	  	330.7	    	4.2%	 	 	 	 	 	 	
Time Due to Banks	  	9.6	    	0.1%	  	365.5	    	5.0%	  	235.3	    	3.0%	 	 	 	 	 	 	
Other Time and Savings	  	38.3	    	0.6%	  	445.9	    	6.1%	  	640.7	    	8.2%	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Foreign	  	47.9	    	0.7%	  	1,139.4	    	15.6%	  	1,206.7	    	15.4%	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$6,577.1	    	100.0%	  	$7,318.4	    	100.0%	  	$7,835.2	    	100.0%	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
22

 
Borrowings
 
Short-term borrowings, including funds purchased and securities sold under agreements to repurchase, totaled $1.2 billion at September 30, 2002, $1.8 billion at December 31, 2001 and $2.1 billion at September 30, 2001. The decline in borrowings reflected the lower funding needs of the Company. Long-term debt at September 30, 2002 decreased to $409.8 million from $570.4 million at December 31, 2001 and $694.4 million at September 30, 2001. Long-term debt declined due to repayments and repurchases.
 
Shareholders’ Equity
 
The Company’s capital position remains strong. Total capital decreased to $1,100.7 million at September 30, 2002, from $1,247.0 million at December 31, 2001 and from $1,371.1 million at September 30, 2001. The reduction in capital is attributable to the Company’s common stock repurchase programs. A further discussion of the Company’s capital is included in the Corporate Risk Profile section of this report.
23

 
LINE OF BUSINESS FINANCIAL REVIEW
 
Business Segment performance information is presented in Note 3 to the financial statements. The following is a discussion of segment performance.
 
Retail Banking
 
The Company’s retail banking franchise and market share are key strengths of the Company. Retail Banking provides checking and savings products for the consumer and small business segments; merchant services; installment, home equity and mortgage lending products; as well as other products and services. The increase in Retail Banking’s net-interest income for the three and nine months ended September 30, 2002 was a result of increased deposit income due to the lower average cost of consumer deposit accounts. The decrease in non-interest income for the three and nine months ended September 30, 2002 compared to the same periods in 2001 was a result of decreased mortgage banking revenue and lower fee income from consumer deposits. The decrease in non-interest expense for the three and nine months ended September 30, 2002 compared to the same periods in 2001 was due to lower incentive compensation resulting from decreased mortgage origination volume.
 
Commercial Banking
 
The Commercial Banking segment offers an array of products including corporate banking, commercial demand and time deposit products, lease financing, commercial real estate loans, commercial insurance products, cash management products and auto dealer financing. The Company’s West Pacific and Japan Marketing Divisions are included in this segment. For the nine months ended September 30, 2002, total average assets declined by 25.4% from the same period last year. Much of the decrease was due to exiting certain loans to reduce credit risks. That process was largely concluded by June 30, 2002. The provision for loan and lease losses decreased by $1.1 million or 7.4% as compared to the same nine month period last year. The decrease in net interest income for the three and nine months ended September 30, 2002 compared to the same periods last year was attributable to the reduction in average assets and the lower interest rate environment. Non-interest income increased compared to the same periods a year ago reflecting higher prepayment and placement fees.
24

 
Investment Services Group
 
The Investment Services Group offers private banking, trust services, asset management, investments such as mutual funds and stocks, financial planning, annuities, and life insurance. The primary markets served through this segment are affluent individuals, corporations and foundations with trust and investment management needs. A significant portion of the segment’s income is derived from fees, which are generally based on the market values of assets under management. Income from trust and asset management services declined for the first nine months of 2002 compared to the prior year due to declines in values of assets under management. However, this was partially offset by an increase in net interest income resulting from a higher level of private banking deposits.
 
Treasury and Other Corporate
 
The primary component of this segment is Treasury, which consists of corporate asset and liability management activities including interest rate risk management. This segment’s assets and liabilities consist of investment securities, federal funds purchased and sold, government deposits, and short and long-term borrowings. The remaining activity from the divested businesses, including loan loss recoveries, is included in this segment. The net residual effect of transfer pricing of assets and liabilities is included in Treasury, along with eliminations of intercompany transactions and other minor unallocated amounts. The decrease in net interest income for the three months ended September 30, 2002 compared to the same period in 2001 reflects the impact of the lower interest rate environment Non-interest expense increased over the previous year due to severance expenses and professional fees.
 
Divestiture Businesses
 
For 2001, this segment reported the results of the businesses that were divested or closed.
 
Corporate Restructuring and Other Related Activities
 
This segment reflects the implementation of the Company’s strategic plan to improve credit quality and to divest underperforming businesses. This category included the gains and costs of divesting certain businesses (the credit card portfolio, Pacific Century Bank branches, Asia Division and the South Pacific Division) and the costs of restructuring the Company, and losses associated with accelerated resolution of credit problems undertaken in 2001.
 
Additional indicators of performance adopted by the Company include:
 
GAAP
 
Net income: Net income generated by the business using measurement practices consistent with accounting principles generally accepted in the United States.
 
The key differences between the derivation of Economic and GAAP results are:
 
Provision for Loan and Lease Losses: The GAAP provision is an estimate of the change in risk in the current period, measured in accordance with generally accepted accounting principles. The economic provision represents estimated losses in the credit portfolio assuming a “normalized” economic environment and loss rate over the business cycle. Consequently, there is no recognition of the free funds value of the allowance for loan and lease losses under Economic accounting.
 
Excess Capital Funding Value: GAAP net income includes the free funding value of a share of the Company’s excess capital not allocated to the segments to cover risk. Economic results are based on risk-adjusted capital, necessitating adjustment for the excess capital funding value.
25

 
Economic
 
NIACC (Net Income After Capital Charge): The key indicator of creating value for the shareholder, it is determined by subtracting a charge for capital from economic results. Positive value is created by generating net income above the Company’s estimated cost of capital.
 
RAROC (Risk Adjusted Return on Capital): A complementary measure that indicates the economic return produced by the business, on the assigned risk-adjusted capital.
 
Economic NIACC and RAROC for each segment for the three and nine months ended September 30, 2002 and 2001 are presented in Table 7.
 
Economic NIACC and RAROC (Unaudited)	Table 7	

	

	

	

	

	

	

	

	

	

	

	

	

	
(dollars in thousands)	  	RETAIL	 	    	COMMERCIAL	 	    	INVESTMENT SERVICES GROUP	 	    	DIVESTITURE BUSINESSES	 	    	TREASURY AND OTHER CORPORATE  1	 	    	RESTRUCTURING
AND OTHER
RELATED ACTIVITIES	 	

	

	

	

	

	

	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended September 30, 2002	  	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	
NIACC (Economic)	  	$	8,230	 	    	$	2,846	 	    	$	871	 	    	$	—  	 	    	$	(20,398	)	    	$	—  	 	
RAROC (Economic)	  	 	29	%	    	 	17	%	    	 	18	%	    	 	—  	 	    	 	2	%	    	 	N/A	 	

	

	

	

	

	

	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended September 30, 2001	  	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	
NIACC (Economic)	  	$	6,573	 	    	$	1,547	 	    	$	243	 	    	$	(12,583	)	    	$	(10,743	)	    	$	(380	)	
RAROC (Economic)	  	 	26	%	    	 	14	%	    	 	14	%	    	 	(4	)%	    	 	18	%	    	 	N/A	 	

	

	

	

	

	

	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2002	  	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	
NIACC (Economic)	  	$	24,296	 	    	$	6,182	 	    	$	1,803	 	    	$	—  	 	    	$	(54,032	)	    	$	(1,275	)	
RAROC (Economic)	  	 	29	%	    	 	16	%	    	 	16	%	    	 	—  	 	    	 	24	%	    	 	N/A	 	

	

	

	

	

	

	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2001	  	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	    	 	 	 	
NIACC (Economic)	  	$	14,987	 	    	$	5,178	 	    	$	1,922	 	    	$	(33,071	)	    	$	(24,931	)	    	$	20,699	 	
RAROC (Economic)	  	 	22	%	    	 	14	%	    	 	17	%	    	 	0	%	    	 	13	%	    	 	N/A	 	

	

	

	

	

	

	

	

	

	

	

	

	

	
 
1	 	This segment experienced negative NIACC because a charge for excess equity is included in the NIACC calculation; however, RAROC is calculated without the excess capital charge.	
26

 
FOREIGN OPERATIONS
 
The countries in which the Company maintains its largest exposure on a cross-border basis include the United Kingdom, Canada, Singapore, the Netherlands, and Australia. Table 8 presents as of September 30, 2002, December 31, 2001, and September 30, 2001, a geographic distribution of the Company’s cross-border assets for each country in which such assets exceeded 0.75% of total assets. The primary component of cross-border assets as of September 30, 2002 was interest bearing deposits of $1,017.8 million.
 
Geographic Distribution of Cross-Border International Assets (Unaudited)	Table 8	

	

	

	

	

	

	

	
(dollars in millions)	    	 	    	 	    	 	
 	 	 	 	 	 	 	 	 	 	
Country	    	September 30, 2002	    	December 31, 2001	    	September 30, 2001	

	

	

	

	

	

	

	
 	    	 	 	    	 	 	    	 	 	
Australia	    	$	101.8	    	$	116.0	    	$	91.2	
Canada	    	 	120.0	    	 	119.9	    	 	104.2	
France	    	 	73.5	    	 	—  	    	 	103.3	
Germany	    	 	76.2	    	 	188.2	    	 	96.8	
Italy	    	 	—  	    	 	—  	    	 	95.6	
Japan	    	 	—  	    	 	81.9	    	 	120.3	
Netherlands	    	 	107.8	    	 	192.9	    	 	183.1	
Singapore	    	 	139.2	    	 	140.6	    	 	145.7	
United Kingdom	    	 	309.7	    	 	257.9	    	 	295.0	
All Others	    	 	211.8	    	 	281.9	    	 	399.7	

	

	

	

	

	

	

	
 	    	$	1,140.0	    	$	1,379.3	    	$	1,634.9	

	

	

	

	

	

	

	
 
In this table, cross-border outstandings are defined as foreign monetary assets that are payable to the Company in U.S. dollars or other non-local currencies, plus amounts payable in local currency but funded with U.S. dollars or other non-local currencies. Cross-border outstandings include loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments, and other monetary assets.	    	 	 	
 
The West Pacific (consisting of Guam and American Samoa which are U.S. territories, and other nearby islands) includes Bank of Hawaii and First Savings branches. Since the U.S. dollar is used in these locations, operations in the West Pacific are not considered foreign for financial reporting purposes.
27

 
CORPORATE RISK PROFILE
 
Credit quality continued to benefit from the resiliency in the Hawaii economy and a continued yet challenged national recovery, as evidenced by the decline in year-to-date net charge-offs and further improvement in internal credit risk ratings.
 
Concentration of Credit Risk
 
Concentration of credit risk to certain industries and the amount of syndicated loan exposure are summarized in Table 9.
 
Selected Concentrations of Credit Exposure (Unaudited)	Table 9	

	

	

	

	

	

	

	

	

	
 	    	September 30, 2002 1	    	June 30, 2002	 	 	 	 	 	 	
(dollars in millions)	    	Outstandings	    	Unused Commitments	    	Total   Exposure  	    	Total Exposure	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	    	 	 	    	 	 	    	 	 	    	 	 	 	 	 	 	 	 	
Air Transportation	    	 	 	    	 	 	    	 	 	    	 	 	 	 	 	 	 	 	
Regional Passenger Carriers	    	$	49	    	$	8	    	$	57	    	$	58	 	 	 	 	 	 	
United States Based Passenger Carriers	    	 	48	    	 	—  	    	 	48	    	 	49	 	 	 	 	 	 	
International Based Passenger Carriers	    	 	32	    	 	—  	    	 	32	    	 	32	 	 	 	 	 	 	
Cargo Carriers	    	 	15	    	 	—  	    	 	15	    	 	15	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
Total Air Transportation	    	$	144	    	$	8	    	$	152	    	$	154	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Lodging2	    	 	 	    	 	 	    	 	 	    	 	 	 	 	 	 	 	 	
National Hotel Companies	    	$	31	    	$	74	    	$	105	    	$	104	 	 	 	 	 	 	
Hawaii Hotels	    	 	103	    	 	32	    	 	135	    	 	137	 	 	 	 	 	 	
West Pacific Hotels	    	 	47	    	 	—  	    	 	47	    	 	43	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
Total Lodging	    	$	181	    	$	106	    	$	287	    	$	284	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Telecommunication Companies	    	$	6	    	$	25	    	$	31	    	$	45	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Syndicated Exposure3	    	$	312	    	$	764	    	$	1,076	    	$	1,096	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
 
1	 	The credit exposures to the air transportation, lodging, and telecommunication industries were current at September 30, 2002.	
2	 	One collateralized loan in the West Pacific with $5.6 million of exposure was reclassified in the third quarter from commercial and industrial loans to mortgage commercial-hotels. This Loan is on non-accrual, but remains current on payments. Approximately 95% of the Hawaii and West Pacific hotel loans are collateralized by hotel properties or guaranteed by either financial institutions or entities with limited exposure to tourism.	
 
3	 	The largest syndicated loan outstanding is $27.1 million to a Hawaii shopping center. The 10 largest syndicated loans outstanding totaled $174 million, centered in real estates, hospitality and gaming.	
28

 
Non-Performing Assets
 
Non-performing assets were $63.3 million at the end of the third quarter 2002, a decline of 19.7% from $78.8 million at the end of the second quarter 2002. Compared to the same quarter last year, non-performing assets declined $43.1 million, or 40.5%. At September 30, 2002 the ratio of non-performing assets to total loans plus foreclosed assets and non-performing loans held for sale was 1.20%, down from 1.45% at June 30, 2002 and 1.56% at September 30, 2001. The quarterly decrease in non-performing assets was largely due to the return to accrual status and payoff of loans by two Hawaii borrowers. There was also a lower inflow of non-performing loans. The new non-performing loans consisted of smaller exposures, the largest being a $1.8 million loan in the West Pacific, where borrowers continue to be affected by the recession in the Guam economy.
 
Non-accrual loans were $45.7 million at September 30, 2002, a decline of $15.9 million from the $61.6 million at June 30, 2002, and $16.1 million or 26.1% from September 30, 2001. Non-accrual loans as a percentage of total loans were 0.87% at September 30, 2002, a decline from 1.14% in the prior quarter and from 0.91% in the same quarter last year.
 
Impaired loans at September 30, 2002 of $53.5 million declined $16.3 million from $69.8 million at June 30, 2002, and decreased $13.7 million from $67.2 million at December 31, 2001. These loans had a related allowance for loan losses that totaled $7.0 million at September 30, 2002. Compared to September 30, 2001, impaired loans decreased $30.0 million to $83.5 million.
 
Foreclosed assets were $17.6 million at the end of the third quarter of 2002, virtually unchanged from the prior quarter and 52.7% lower than the $37.2 million reported in the third quarter last year. The decrease from the prior year was due to the sale of two large properties in Hawaii.
 
Accruing loans past due 90 days or more were $1.7 million at September 30, 2002, significantly lower than the $4.9 million at year-end 2001 and $5.3 million at September 30, 2001.
 
For further information on non-performing assets refer to Table 10.
29

 
Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More
(Unaudited)	  	 	Table 10	 	

	
(dollars in millions)	  	September 30
2002	 	  	June 30
2002	 	  	March 31
2002	 	  	December 31
2001	 	  	September 30
2001	 	

	
Non-Accrual Loans	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Commercial and Industrial	  	$	6.4	 	  	$	14.4	 	  	$	27.4	 	  	$	18.9	 	  	$	10.5	 	
Mortgage—Commercial	  	 	18.1	 	  	 	25.3	 	  	 	15.1	 	  	 	16.3	 	  	 	12.8	 	
Construction	  	 	0.9	 	  	 	0.7	 	  	 	1.0	 	  	 	9.3	 	  	 	0.7	 	
Lease Financing	  	 	5.7	 	  	 	6.9	 	  	 	4.4	 	  	 	0.8	 	  	 	1.0	 	
Mortgage—Residential	  	 	14.5	 	  	 	14.3	 	  	 	15.7	 	  	 	15.4	 	  	 	19.5	 	
Other Consumer	  	 	0.1	 	  	 	—  	 	  	 	0.1	 	  	 	0.1	 	  	 	0.1	 	
Foreign	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	17.2	 	

	
Total Non-Accrual Loans	  	 	45.7	 	  	 	61.6	 	  	 	63.7	 	  	 	60.8	 	  	 	61.8	 	
Non-Accrual Loans Held For Sale	  	 	—  	 	  	 	—  	 	  	 	7.8	 	  	 	1.7	 	  	 	7.4	 	
Foreclosed Real Estate	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Domestic	  	 	17.6	 	  	 	17.2	 	  	 	19.2	 	  	 	17.2	 	  	 	36.9	 	
Foreign	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	0.3	 	

	
Total Foreclosed Real Estate	  	 	17.6	 	  	 	17.2	 	  	 	19.2	 	  	 	17.2	 	  	 	37.2	 	

	
Total Non-Performing Assets	  	$	63.3	 	  	$	78.8	 	  	$	90.7	 	  	$	79.7	 	  	$	106.4	 	

	
Accruing Loans Past Due 90 Days or More	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Commercial and Industrial	  	$	—  	 	  	$	—  	 	  	$	0.2	 	  	$	0.1	 	  	$	0.1	 	
Mortgage—Commercial	  	 	—  	 	  	 	—  	 	  	 	1.2	 	  	 	—  	 	  	 	—  	 	
Lease Financing	  	 	—  	 	  	 	0.1	 	  	 	0.1	 	  	 	0.1	 	  	 	—  	 	
Mortgage—Residential	  	 	1.4	 	  	 	0.9	 	  	 	2.1	 	  	 	3.8	 	  	 	3.4	 	
Other Consumer	  	 	0.3	 	  	 	0.5	 	  	 	0.7	 	  	 	0.9	 	  	 	1.0	 	
Foreign	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	0.8	 	

	
Total Accruing and Past Due	  	$	1.7	 	  	$	1.5	 	  	$	4.3	 	  	$	4.9	 	  	$	5.3	 	

	
Total Loans	  	$	5,258.7	 	  	$	5,408.5	 	  	$	5,601.3	 	  	$	5,652.5	 	  	$	6,766.1	 	

	

	
Ratio of Non-Accrual Loans
to Total Loans	  	 	0.87	%	  	 	1.14	%	  	 	1.14	%	  	 	1.08	%	  	 	0.91	%	

	
Ratio of Non-Performing Assets
to Total Loans, Foreclosed Real Estate
and Non-Performing Loans Held for Sale	  	 	1.20	%	  	 	1.45	%	  	 	1.61	%	  	 	1.41	%	  	 	1.56	%	

	
Ratio of Non-Performing Assets
and Accruing Loans Past Due
90 Days or More to Total Loans	  	 	1.24	%	  	 	1.48	%	  	 	1.70	%	  	 	1.50	%	  	 	1.65	%	

	
Quarter to Quarter Changes in Non-Performing Assets	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Balance at Beginning of Quarter	  	$	78.8	 	  	$	90.7	 	  	$	79.7	 	  	$	106.4	 	  	$	118.9	 	
Additions	  	 	7.0	 	  	 	20.5	 	  	 	36.4	 	  	 	43.8	 	  	 	23.2	 	
Reductions	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Payments and Sales of Loans	  	 	(8.5	)	  	 	(20.6	)	  	 	(12.9	)	  	 	(40.9	)	  	 	(25.8	)	
Return to Accrual	  	 	(9.1	)	  	 	(6.2	)	  	 	(6.3	)	  	 	(3.6	)	  	 	(0.9	)	
Sales of Foreclosed Assets	  	 	(1.4	)	  	 	(3.5	)	  	 	(0.9	)	  	 	(21.9	)	  	 	(2.2	)	
Charge-offs	  	 	(3.5	)	  	 	(2.1	)	  	 	(5.3	)	  	 	(4.1	)	  	 	(6.8	)	

	
Total Reductions	  	 	(22.5	)	  	 	(32.4	)	  	 	(25.4	)	  	 	(70.5	)	  	 	(35.7	)	

	
Balance at End of Quarter	  	$	63.3	 	  	$	78.8	 	  	$	90.7	 	  	$	79.7	 	  	$	106.4	 	

	
30

 
Allowance for Loan and Lease Losses
 
The Allowance for Loan and Lease Losses (Allowance) at September 30, 2002 of $154.5 million decreased from $159.0 million at both June 30, 2002 and December 31, 2001, and $182.5 million at September 30, 2001. The current quarter decline reflects the non-replenishment of net charge-offs based on the Company’s decision to decrease reserves commensurate with the stabilization and continued improvement in credit quality and current economic conditions. The decrease from the prior year also reflects the release of Allowance components related to the divestitures. The ratio of Allowance to total loans was 2.94%, unchanged from the prior quarter, and an increase from 2.81% at December 31, 2001 and from 2.70% for the same period last year. A summary of the activity for the Allowance is presented in Table 11.
 
Net charge-offs for the third quarter of 2002 were $4.5 million or 0.33% of total average loans (annualized), compared to $2.4 million or 0.13% of total average loans (annualized) for the same period last year. Current quarter charge-offs of $7.2 million were partially offset by recoveries of $2.7 million. Third quarter 2001 net charge-offs included a recovery of $6.5 million in the Asia business. Net charge-offs for the first nine months of 2002 of $16.1 million or 0.39% of total average loans declined significantly from $107.0 million or 1.76% of total average loans for the same period last year. The relatively high level of net charge-offs in the first nine months of last year was primarily related to exiting several higher risk credit relationships in the first quarter of 2001.
 
With continued improvement in credit quality including the trend in net charge-off rates and continued stability in the Hawaii economy, the Company anticipates that the level of the Allowance will be reduced in future quarters. The timing and amount of reduction will depend on the level of risk in the loan portfolios. Portfolio risk and economic conditions will continue to be evaluated quarterly, and provisions for loan and lease losses will be recorded to the extent necessary to maintain the Allowance at an appropriate level.
31

 
Consolidated Allowance for Loan and Lease Losses (Unaudited)	Table 11	

	

	

	

	

	

	

	

	

	

	

	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
 	  	Three Months Ended	 	  	Nine Months Ended	 	
(dollars in millions)	  	September 30 2002	 	  	    June 30    
2002	 	  	September 30 2001	 	  	September 30
2002	 	  	September 30
2001	 	

	

	

	

	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance of Allowance for Loan and Lease Losses at
Beginning of Period	  	$	159.0	 	  	$	159.0	 	  	$	199.8	 	  	$	159.0	 	  	$	246.2	 	
Loans Charged-Off	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Commercial and Industrial	  	 	(0.7	)	  	 	(1.0	)	  	 	(3.4	)	  	 	(9.0	)	  	 	(87.8	)	
Mortgage – Commercial	  	 	(2.5	)	  	 	(1.8	)	  	 	(2.6	)	  	 	(4.3	)	  	 	(16.1	)	
Construction	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(0.5	)	  	 	—  	 	
Lease Financing	  	 	(0.4	)	  	 	(0.5	)	  	 	(0.6	)	  	 	(0.9	)	  	 	(0.7	)	
Mortgage – Residential	  	 	(0.6	)	  	 	(1.3	)	  	 	(1.3	)	  	 	(3.3	)	  	 	(5.5	)	
Other Consumer	  	 	(3.0	)	  	 	(2.9	)	  	 	(5.4	)	  	 	(9.8	)	  	 	(15.0	)	
Foreign	  	 	—  	 	  	 	—  	 	  	 	(4.1	)	  	 	—  	 	  	 	(18.0	)	

	

	

	

	

	

	

	

	

	

	

	
Total Charge-Offs	  	 	(7.2	)	  	 	(7.5	)	  	 	(17.4	)	  	 	(27.8	)	  	 	(143.1	)	
Recoveries on Loans Previously Charged-Off	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Commercial and Industrial	  	 	1.0	 	  	 	2.3	 	  	 	1.1	 	  	 	4.0	 	  	 	8.1	 	
Mortgage – Commercial	  	 	0.1	 	  	 	0.1	 	  	 	1.3	 	  	 	2.0	 	  	 	2.4	 	
Lease Financing	  	 	0.1	 	  	 	—  	 	  	 	—  	 	  	 	0.1	 	  	 	0.2	 	
Mortgage – Residential	  	 	0.1	 	  	 	0.3	 	  	 	0.2	 	  	 	0.7	 	  	 	0.7	 	
Other Consumer	  	 	1.4	 	  	 	1.6	 	  	 	2.2	 	  	 	4.9	 	  	 	5.6	 	
Foreign	  	 	—  	 	  	 	(0.1	)	  	 	10.2	 	  	 	—  	 	  	 	19.1	 	

	

	

	

	

	

	

	

	

	

	

	
Total Recoveries	  	 	2.7	 	  	 	4.2	 	  	 	15.0	 	  	 	11.7	 	  	 	36.1	 	

	

	

	

	

	

	

	

	

	

	

	
Net Loan Charge-Offs	  	 	(4.5	)	  	 	(3.3	)	  	 	(2.4	)	  	 	(16.1	)	  	 	(107.0	)	
Provision for Loan and Lease Losses	  	 	—  	 	  	 	3.3	 	  	 	0.9	 	  	 	11.6	 	  	 	59.8	 	
Allowance Related to Disposition	  	 	—  	 	  	 	—  	 	  	 	(16.4	)	  	 	—  	 	  	 	(16.4	)	
Foreign Currency Translation	  	 	—  	 	  	 	—  	 	  	 	0.6	 	  	 	—  	 	  	 	(0.1	)	

	

	

	

	

	

	

	

	

	

	

	
Balance at End of Period	  	$	154.5	 	  	$	159.0	 	  	$	182.5	 	  	$	154.5	 	  	$	182.5	 	

	

	

	

	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Average Loans Outstanding	  	$	5,349.5	 	  	$	5,503.4	 	  	$	7,273.5	 	  	$	5,477.9	 	  	$	8,121.1	 	
Ratio of Net Charge-Offs to Average Loans Outstanding (annualized)	  	 	0.33%	 	  	 	0.24%	 	  	 	0.13%	 	  	 	0.39%	 	  	 	1.76%	 	
Ratio of Allowance to Loans and Leases
Outstanding	  	 	2.94%	 	  	 	2.94%	 	  	 	2.70%	 	  	 	2.94%	 	  	 	2.70%	 	
32

 
Market Risk
 
The Company manages assets and liabilities in an effort to maximize long term, risk adjusted returns to shareholders. The Company’s asset and liability management process involves measuring, monitoring, controlling and managing financial risks that can significantly impact financial position and operating results. Financial risks in the form of interest rate sensitivity, foreign currency exchange fluctuations, liquidity, and capital adequacy are balanced with expected returns with the objective to maximize earnings performance and shareholder value, while limiting the volatility of each.
 
The activities associated with these financial risks are categorized into either “other than trading” or “trading.”
 
Other Than Trading Activities
 
A key element in the Company’s ongoing process to measure and monitor interest rate risk is the utilization of a net interest income (NII) simulation model. This model is used to estimate the amount that NII will change over a one-year time horizon under various interest rate scenarios using numerous assumptions, which management believes are reasonable. The NII simulation model captures the dynamic nature of the balance sheet and provides a sophisticated estimate rather than a precise prediction of NII’s exposure to higher or lower interest rates.
 
Table 12 presents, as of September 30, 2002, December 31, 2001 and September 30, 2001, the estimate of the change in NII that would result from a gradual 200 basis point increase or decrease in interest rates, moving in parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario for NII. The 200 basis point increase would equate to a $7.0 million increase in net interest income per quarter. During the third quarter, the Company deployed some of its liquidity yet maintained its strong liquidity position. NII continues to be asset-sensitive. The resulting estimated NII exposure is within the guidelines approved by the Company’s Asset Liability Management Committee.
 
Market Risk Exposure to Interest Rate Changes (Unaudited)	Table 12	

	

	

	

	

	

	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	    	September 30, 2002	    	December 31, 2001	    	September 30, 2001	 	 	 	 	 	 	

	

	

	

	

	

	

	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	    	Interest Rate Change	    	Interest Rate Change	    	Interest Rate Change	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	    	(in basis points)	    	(in basis points)	    	(in basis points)	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	    	-200	  	+200	    	-200	  	+200	    	-200	  	+200	 	 	 	 	 	 	

	

	

	

	

	

	

	

	

	

	

	

	

	 	 	 	 	 	 	
Estimated Exposure as a Percent of
Net Interest Income	    	(4.7)%	  	8.7%	    	(0.3)%	  	3.5%	    	(4.3)%	  	4 .8%	 	 	 	 	 	 	
 
To enhance and complement the results from the NII simulation model, the Company also reviews other measures of interest rate risk. These measures include the sensitivity of market value of equity and the exposure to basis risk and non-parallel yield curve shifts. There are some inherent limitations to these measures, but used along with the NII simulation model, the Company gains a better overall insight for managing its exposure to changes in interest rates.
 
In managing interest rate risk, the Company generally uses on-balance sheet transactions to manage its risk position. Approaches that are used to shift balance sheet mix or alter the interest rate characteristics of assets and liabilities include changing product pricing strategies and modifying investment portfolio strategies. The use of financial derivatives has been limited over the past several years.
 
To estimate the potential loss from foreign currency exposure for the remaining net investments in foreign subsidiaries and branches, the Company continues to use a value-at-risk (VAR) calculation based on an estimated variance-co-variance matrix. This VAR calculation determines the potential loss within a 95% confidence interval.
33

 
Table 13 presents, as of September 30, 2002, December 31, 2001 and September 30, 2001, the Company’s foreign currency exposure from its net investment in subsidiaries and branch operations that were denominated in a foreign currency as measured by the VAR. This table shows the results of the divestiture program. Net investments at September 30, 2002 are unrepatriated funds that cannot be returned until foreign government administrative requirements are satisfied.
 
Market Risk Exposure From Changes in Foreign Exchange Rates (Unaudited)	  	 	 	  	 	Table 13	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	September 30, 2002	  	December 31, 2001	  	September 30, 2001	
(dollars in millions)	  	Book Value	  	Value-at-
      Risk      	  	Book Value	  	Value-at-
      Risk      	  	Book Value	  	Value-at-
Risk	

	
Net Investments in Foreign	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Subsidiaries & Branches	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Japanese Yen	  	$	—  	  	$	—  	  	$	1.1	  	$	0.2	  	$	3.3	  	$	0.5	
Korean Won	  	 	—  	  	 	—  	  	 	2.1	  	 	0.3	  	 	12.9	  	 	1.5	
Pacific Franc 1	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	11.1	  	 	1.8	
Other Currencies	  	 	0.2	  	 	0.02	  	 	0.1	  	 	0.1	  	 	6.3	  	 	15.3	

	
Total	  	$	0.2	  	$	0.02	  	$	3.3	  	$	0.6	  	$	33.6	  	$	19.1	

	
1	 	Net of $36 million borrowing denominated in euro and foreign exchange hedge transactions of $40 million at September 30, 2001. There were no borrowing or foreign exchange hedge transactions related to the foreign subsidiaries and branches at September 30, 2002, and December 31, 2001.	
 
Trading Activities
 
Trading activities include foreign currency and foreign exchange contracts that expose the Company to a minor degree of foreign currency risk. The Company, however, manages its trading account such that it does not maintain significant foreign currency open positions. The exposure from foreign currency trading positions measured by VAR methodology as of September 30, 2002 continues to be immaterial.
 
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 in a normal manner. The Company’s liquidity management process is described in the 2001 Annual Report to Shareholders on Form 10-K.
 
The Company’s banking subsidiaries are members of the Federal Home Loan Bank of Seattle (FHLB). The FHLB is a source of short and long-term funding for these institutions. Borrowings from the FHLB were $34.5 million at September 30, 2002, compared to $147.0 million at December 31, 2001 and $254.0 million at September 30, 2001.
 
Additionally, Bank of Hawaii maintains a $1 billion senior and subordinated bank note program. Under this facility, Bank of Hawaii may issue additional notes provided that at any time the aggregate amount outstanding does not exceed $1 billion. Subordinated notes outstanding under this bank note program totaled $125.0 million at September 30, 2002, December 31, 2001 and September 30, 2001.
34

 
Capital Management
 
The Company manages its capital level over the long term, in an effort to optimize shareholder value, support asset growth, reflect risks inherent in its markets, provide protection against unforeseen losses and comply with regulatory requirements. Capital levels are reviewed relative to the Company’s risk profile and current and projected economic conditions. The Company’s objective is to hold sufficient capital on a regulatory basis to exceed the minimum guidelines of a “well-capitalized” financial institution.
 
At September 30, 2002, the Company’s shareholders’ equity totaled $1.1 billion, a 11.7% decrease from December 31, 2001. The decrease in shareholders’ equity during the nine months of 2002 was primarily attributable to the Company’s repurchase of its common stock under the repurchase programs. The Company increased the quarterly dividend to $0.19 per share which will be paid in December 2002.
 
In January 2002, the Company’s Board of Directors approved a $300 million common stock repurchase program. This program was in addition to the 2001 programs totaling $270 million. During the quarter ended September 30, 2002, 4.0 million shares were repurchased at an average cost of $27.55 per share, totaling $109.4 million. As of September 30, 2002, the Company had repurchased a total of 16.9 million shares under all share repurchase programs. Subsequent to September 30, 2002, the Company repurchased 1.3 million shares at an average cost of $27.08 per share for a total of $34.3 million through October 22, 2002, resulting in remaining buyback authority under the existing repurchase programs of $102.0 million. The Company expects to extend the repurchase program.
 
The Company’s regulatory capital ratios at September 30, 2002 exceeded the minimum threshold levels established by federal bank regulators to qualify an institution as well-capitalized, which are as follows: Tier 1 Capital—6%; Total Capital—10%; and Leverage—5%. The Company’s regulatory capital ratios are shown on Table 14, along with the activities and balances in the Company’s capital accounts. During the quarter, the Company’s capital ratios and liquidity remained high.
35

 
Equity Capital (Unaudited)	Table 14	

	

	

	

	

	

	

	
 	    	 	 	    	 	 	    	 	 	
 	    	Nine Months Ended	 	    	Year Ended	 	    	Nine Months Ended	 	
(dollars in millions)	    	September 30, 2002	 	    	December 31, 2001	 	    	September 30, 2001	 	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in Shareholders’ Equity	    	 	 	 	    	 	 	 	    	 	 	 	
Net Income	    	$	92.3	 	    	$	117.8	 	    	$	91.5	 	
Dividends Paid	    	 	(38.4	)	    	 	(56.6	)	    	 	(43.4	)	
Dividend Reinvestment Program	    	 	2.2	 	    	 	2.8	 	    	 	2.1	 	
Stock Issued for Acquisition	    	 	—  	 	    	 	1.3	 	    	 	1.3	 	
Stock Repurchases	    	 	(238.1	)	    	 	(195.7	)	    	 	(46.8	)	
Other1	    	 	35.7	 	    	 	76.0	 	    	 	65.0	 	

	

	

	

	

	

	

	
Increase (Decrease) in Shareholders’ Equity	    	$	(146.3	)	    	$	(54.4	)	    	$	69.7	 	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulatory Capital	    	 	 	 	    	 	 	 	    	 	 	 	
Shareholders’ Equity	    	$	1,100.7	 	    	$	1,247.0	 	    	$	1,371.1	 	
Add:    8.25% Capital Securities of Bancorp Hawaii Capital Trust I	    	 	43.2	 	    	 	100.0	 	    	 	100.0	 	
Minority Interest	    	 	—  	 	    	 	—  	 	    	 	4.4	 	
Less:   Goodwill	    	 	36.2	 	    	 	26.7	 	    	 	57.4	 	
Unrealized Valuation and Other Adjustments	    	 	26.8	 	    	 	22.9	 	    	 	26.2	 	

	

	

	

	

	

	

	
Tier I Capital	    	 	1,080.9	 	    	 	1,297.4	 	    	 	1,391.9	 	
Allowable Reserve for Loan Losses	    	 	73.8	 	    	 	83.0	 	    	 	99.2	 	
Subordinated Debt	    	 	124.7	 	    	 	148.4	 	    	 	148.4	 	

	

	

	

	

	

	

	
Total Capital	    	$	1,279.4	 	    	$	1,528.8	 	    	$	1,639.5	 	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Risk Weighted Assets	    	$	5,825.1	 	    	$	6,559.6	 	    	$	7,858.9	 	

	

	

	

	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Key Capital Ratios	    	 	 	 	    	 	 	 	    	 	 	 	
Increase (Decrease) in Common Equity	    	 	(11.73	)%	    	 	(4.18	)%	    	 	5.36	%	
Average Equity/Average Assets Ratio	    	 	12.10	%	    	 	10.60	%	    	 	10.47	%	
Tier I Capital Ratio	    	 	18.55	%	    	 	19.76	%	    	 	17.71	%	
Total Capital Ratio	    	 	21.96	%	    	 	23.29	%	    	 	20.86	%	
Leverage Ratio	    	 	11.07	%	    	 	11.20	%	    	 	11.37	%	
 
1	 	Includes unrealized valuation adjustments for investment securities, foreign currency translation and pension liability; profit sharing; and stock options, restricted shares and deferred compensation plans.	
36

 
Economic Outlook
 
One year after the September 11 attacks, Hawaii tourism has returned to normal levels. Through the end of August, travel to Hawaii from the western United States was at record levels, with all-time highs for the California market and high single-digit growth from the intermountain west. East Coast travel to Hawaii was down and travel from Japan remains about 15% below pre September 11 volumes.
 
The momentum in Hawaii growth continues to come from construction and real estate investment. This growth was sufficient to sustain Hawaii’s 4.0% seasonally-adjusted unemployment rate in August 2002, against a backdrop of still low, 1.1% consumer price inflation during the first half of 2002 and roughly 2.0% real growth in total personal income during the two reported quarters following September 11.
 
Overall, the outlook for Hawaii is continued modest growth that is expected to slightly outpace the national economy. This outlook is confirmed by a 4.2% year-over-year increase in scheduled air seats to Hawaii during August 2002 and renewed state tax revenue growth of 3% to 4% in the first three months of the government’s new fiscal year which began on July 1, 2002.
 
Investment in Hawaii
 
Bank of Hawaii Corporation is increasingly focused on strengthening its competitive position in its markets, primarily in Hawaii. During the quarter ended September 30, 2002 the following was accomplished:
 
 	•	 	Education of nearly 1,300 personnel on customer focused sales and service.	
 	•	 	Investment of $7.0 million in new and improved branch facilities.	
 	•	 	Selection and investment of $6.6 million in primary and supporting systems to improve customer service.	
 	•	 	Special investments in community organizations of $4.0 million.	
 	•	 	Contribution of $1.3 million to local non-profit organizations from Bank of Hawaii and its charitable foundation.	
 
Earnings Outlook
 
The Company affirmed its expectation that earnings for the full year 2002 will equal or exceed $120 million. Earnings for the fourth quarter are expected to approximate third quarter levels, but could decrease slightly due to higher costs for the systems replacement project, branch closings in the West Pacific and seasonal increases in compensation and other expense categories.
 
Earnings expectations for 2003, which were established at $130 million in April 2001, are being reviewed and should be updated in January when the 2002 earnings are announced.
 
Based on current conditions, the Company does not expect to record a provision for loan losses. However, the actual amount of the provision for loan and lease losses will depend on determinations of credit risk that will be made near the end of each quarter. Earnings per share and return on equity projections continue to be dependent upon the terms and timing of share repurchases.
37

 
Item 3.    Quantitative and Qualitative Disclosures of Market Risk
 
See Management’s Discussion and Analysis of Results of Operations and Financial Condition-Market Risk.
 
Item 4.    Controls and Procedures
 
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a – 14(c) under the Securities and Exchange Act of 1934, as amended) within 90 days prior to the filing date of this quarterly report. Based on this evaluation the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in internal controls that could significantly affect the disclosure controls and procedures since the date of the evaluation.
 
Part II. – Other Information
 
Items 1 to 5 omitted pursuant to instructions.
 
Item 6 – Exhibits and Reports on Form 8-K
 
(a)	 	  	Exhibit Index	
 	 	 	 	
 	 	  	Exhibit Number	
 	 	 	 	
 	 	  	12     Statement Regarding Computation of Ratios	
 	 	 	 	
 	 	  	99     Certification	
 	 	 	 	
(b	)	  	No Form 8-K was filed during the quarter ended September 30, 2002.	
38

 
SIGNATURES
 
Pursuant to the requirements 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   October 28, 2002  
BANK OF HAWAII CORPORATION	

/s/ Michael E. O’Neill

	
(Signature)	
Michael E. O’Neill
Chairman, Chief Executive Officer and President	

/s/ Allan R. Landon

	
(Signature)	
Allan R. Landon
Vice Chairman, Treasurer and Chief Financial Officer	

/s/ Richard C. Keene

	
(Signature)	
Richard C. Keene
Executive Vice President and Controller	

39

 
CERTIFICATIONS
 
I, Michael E. O’Neill, certify that:
 
1.	 	I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;	
 
2.	 	Based on my knowledge, this quarterly 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 quarterly report;	
 
3.	 	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;	
 
4.	 	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:	
 
a)	 	designed such disclosure controls and procedures 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 quarterly report is being prepared;	
 
b)	 	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and	
 
c)	 	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;	
 
5.	 	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):	
 
a)	 	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and	
 
b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and	
 
6.	 	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.	
 
Date: October 28, 2002
 
/s/    Michael E. O’Neill

	
Michael E. O’Neill	
Chairman, Chief Executive Officer and President	

 
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 quarterly 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 quarterly report;	
 
3.	 	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;	
 
4.	 	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:	
 
a)	 	designed such disclosure controls and procedures 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 quarterly report is being prepared;	
 
b)	 	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and	
 
c)	 	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;	
 
5.	 	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):	
 
a)	 	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and	
 
b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and	
 
6.	 	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.	
 
Date: October 28, 2002
 
/s/    Allan R. Landon

	
Allan R. Landon	
Vice Chairman, Treasurer and Chief Financial Officer	

EXHIBIT 12
 
Bank of Hawaii Corportation
Exhibit 12—Statement Regarding Computation of Ratios
Nine Months Ended September 30, 2002 and 2001

	

	

	

	

	
 	 	 	 	 	 	 	 	 	
(dollars in millions) (Unaudited)	    	2002	 	    	2001	 	

	

	

	

	

	
 
Earnings:	    	 	 	 	    	 	 	 	
1.    Income Before Income Taxes	    	$	143.8	 	    	$	209.4	 	
2.    Plus: Fixed Charges Including Interest on Deposits	    	 	118.8	 	    	 	305.8	 	

	

	

	

	

	
3.    Earnings Including Fixed Charges	    	 	262.7	 	    	 	515.1	 	
4.    Less: Interest on Deposits	    	 	66.7	 	    	 	182.1	 	

	

	

	

	

	
5.    Earnings Excluding Interest on Deposits	    	$	196.0	 	    	$	333.0	 	

	

	

	

	

	
 
Fixed Charges:	    	 	 	 	    	 	 	 	
6.    Fixed Charges Including Interest on Deposits	    	$	118.8	 	    	$	305.8	 	
7.    Less: Interest on Deposits	    	 	66.7	 	    	 	182.1	 	

	

	

	

	

	
8.    Fixed Charges Excluding Interest on Deposits	    	$	52.1	 	    	$	123.6	 	

	

	

	

	

	
 
Ratio of Earnings to Fixed Charges:	    	 	 	 	    	 	 	 	
Including Interest on Deposits (Line 3 divided by Line 6)	    	 	2.2	    x	    	 	1.7	    x	
Excluding Interest on Deposits (Line 5 divided by Line 8)	    	 	3.8	    x	    	 	2.7	    x	

EXHIBIT 99
 
BANK OF HAWAII CORPORATION
CERTIFICATION
 
We hereby certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-Q of Bank of Hawaii Corporation (the “Issuer”) for the quarterly period ended September 30, 2002 (the “Periodic Report”):
 
 	•	 	fully complies with the requirements of Section 13(a) or 15(d) 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 Issuer.	
 
/s/ Michael E. O’Neill

	
(Signature)	
Michael E. O’Neill
Chairman, Chief Executive Officer and President	

/s/ Allan R. Landon

	
(Signature)	
Allan R. Landon
Vice Chairman, Treasurer and Chief Financial Officer

October 28, 2002