UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)	
 	
ý	 	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2005	
 	 	 	
 	 	or	
 	 	 	
o	 	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                to	
 
Commission File Number 1-6887
 
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware	 	99-0148992	
(State of incorporation)	 	(IRS Employer Identification No.)	
 	 	 	
130 Merchant Street, Honolulu, Hawaii	 	96813	
(Address of principal executive offices)	 	(Zip Code)	
 
1-(888)-643-3888
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  ý  No
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  ý  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 July 22, 2005 – 51,846,908 shares

 
Bank of Hawaii Corporation
Form 10-Q
INDEX
 
 	Page	
 	 	
Part I. - Financial Information	 	
 	 	 	
Item 1.	Financial Statements (Unaudited)	 	
 	 	 	
 	Consolidated Statements of Income - Three and six months ended June 30, 2005 and 2004	3	
 	 	 	
 	Consolidated Statements of Condition – June 30, 2005, December 31, 2004 and June 30, 2004	4	
 	 	 	
 	Consolidated Statements of Shareholders’ Equity – Six months ended  June 30, 2005 and 2004	5	
 	 	 	
 	Consolidated Statements of Cash Flows – Six months ended  June 30, 2005 and 2004	6	
 	 	 	
 	Notes to Consolidated Financial Statements	7	
 	 	 	
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10	
 	 	 	
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34	
 	 	 	
Item 4.	Controls and Procedures	34	
 	 	 	
Part II. - Other Information	 	
 	 	 	
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34	
 	 	 	
Item 4.	Submission of Matters to a Vote of Security Holders	35	
 	 	 	
Item 6.	Exhibits	36	
 	 	 	
Signatures	 	37	

 
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(dollars in thousands except per share amounts)	 	2005	 	2004	 	2005	 	2004	 	
Interest Income	 	 	 	 	 	 	 	 	 	
Interest and Fees on Loans and Leases	 	$	90,119	 	$	80,346	 	$	176,586	 	$	161,774	 	
Income on Investment Securities - Available for Sale	 	27,987	 	21,745	 	55,306	 	42,591	 	
Income on Investment Securities - Held to Maturity	 	5,527	 	6,711	 	11,352	 	13,687	 	
Deposits	 	36	 	1,646	 	59	 	2,877	 	
Funds Sold	 	165	 	177	 	240	 	594	 	
Other	 	271	 	865	 	720	 	1,723	 	
Total Interest Income	 	124,105	 	111,490	 	244,263	 	223,246	 	
Interest Expense	 	 	 	 	 	 	 	 	 	
Deposits	 	13,577	 	8,560	 	25,181	 	17,760	 	
Securities Sold Under Agreements to Repurchase	 	4,562	 	2,222	 	7,887	 	4,148	 	
Funds Purchased	 	1,151	 	506	 	1,884	 	737	 	
Short-Term Borrowings	 	45	 	13	 	77	 	28	 	
Long-Term Debt	 	3,731	 	4,340	 	7,537	 	8,693	 	
Total Interest Expense	 	23,066	 	15,641	 	42,566	 	31,366	 	
Net Interest Income	 	101,039	 	95,849	 	201,697	 	191,880	 	
Provision for Loan and Lease Losses	 	—	 	(3,500)	 	—	 	(3,500)	 	
Net Interest Income After Provision for Loan and Lease Losses	 	101,039	 	99,349	 	201,697	 	195,380	 	
Non-Interest Income	 	 	 	 	 	 	 	 	 	
Trust and Asset Management	 	14,058	 	12,995	 	28,680	 	26,859	 	
Mortgage Banking	 	2,594	 	2,808	 	5,184	 	4,785	 	
Service Charges on Deposit Accounts	 	9,569	 	9,540	 	19,748	 	19,490	 	
Fees, Exchange, and Other Service Charges	 	15,211	 	14,243	 	29,047	 	27,482	 	
Investment Securities Gains (Losses)	 	337	 	(37)	 	337	 	(37)	 	
Insurance	 	4,330	 	4,926	 	10,118	 	9,584	 	
Other	 	4,575	 	10,373	 	9,875	 	15,527	 	
Total Non-Interest Income	 	50,674	 	54,848	 	102,989	 	103,690	 	
Non-Interest Expense	 	 	 	 	 	 	 	 	 	
Salaries and Benefits	 	43,856	 	46,689	 	88,625	 	92,690	 	
Net Occupancy Expense	 	9,189	 	9,543	 	18,734	 	18,929	 	
Net Equipment Expense	 	5,377	 	5,799	 	10,848	 	11,763	 	
Other	 	20,582	 	23,094	 	41,660	 	44,765	 	
Total Non-Interest Expense	 	79,004	 	85,125	 	159,867	 	168,147	 	
Income Before Income Taxes	 	72,709	 	69,072	 	144,819	 	130,923	 	
Provision for Income Taxes	 	26,280	 	24,840	 	52,868	 	46,892	 	
Net Income	 	$	46,429	 	$	44,232	 	$	91,951	 	$	84,031	 	
Basic Earnings Per Share	 	$	0.90	 	$	0.84	 	$	1.75	 	$	1.57	 	
Diluted Earnings Per Share	 	$	0.87	 	$	0.79	 	$	1.69	 	$	1.48	 	
Dividends Declared Per Share	 	$	0.33	 	$	0.30	 	$	0.66	 	$	0.60	 	
Basic Weighted Average Shares	 	51,873,772	 	52,491,874	 	52,646,022	 	53,389,261	 	
Diluted Weighted Average Shares	 	53,403,781	 	55,662,415	 	54,250,018	 	56,710,653	 	
 
3

 
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
 
 	 	June 30,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2005	 	2004	 	2004	 	
Assets	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	$	4,825	 	$	4,592	 	$	179,680	 	
Investment Securities - Available for Sale	 	 	 	 	 	 	 	
Held in Portfolio	 	2,396,204	 	2,483,719	 	2,275,272	 	
Pledged as Collateral	 	117,947	 	—	 	—	 	
Investment Securities - Held to Maturity	 	 	 	 	 	 	 	
(Fair Value of $522,993, $585,836, and $663,534)	 	526,767	 	589,908	 	679,382	 	
Funds Sold	 	50,000	 	21,000	 	—	 	
Loans Held for Sale	 	17,435	 	17,642	 	9,565	 	
Loans and Leases	 	6,151,418	 	5,986,930	 	5,787,314	 	
Allowance for Loan and Lease Losses	 	(101,587)	 	(106,796)	 	(124,904)	 	
Net Loans	 	6,049,831	 	5,880,134	 	5,662,410	 	
Total Earning Assets	 	9,163,009	 	8,996,995	 	8,806,309	 	
Cash and Non-Interest-Bearing Deposits	 	293,115	 	225,359	 	339,486	 	
Premises and Equipment	 	137,907	 	146,095	 	149,128	 	
Customers’ Acceptance Liability	 	1,598	 	1,406	 	1,213	 	
Accrued Interest Receivable	 	38,540	 	36,044	 	36,378	 	
Foreclosed Real Estate	 	292	 	191	 	4,889	 	
Mortgage Servicing Rights	 	18,239	 	18,769	 	20,819	 	
Goodwill	 	34,959	 	36,216	 	36,216	 	
Other Assets	 	372,031	 	305,116	 	294,331	 	
Total Assets	 	$	10,059,690	 	$	9,766,191	 	$	9,688,769	 	
Liabilities	 	 	 	 	 	 	 	
Deposits	 	 	 	 	 	 	 	
Non-Interest-Bearing Demand	 	$	1,918,749	 	$	1,977,703	 	$	1,939,580	 	
Interest-Bearing Demand	 	1,641,873	 	1,536,323	 	1,464,207	 	
Savings	 	2,967,993	 	2,960,351	 	2,976,108	 	
Time	 	1,198,143	 	1,090,290	 	1,089,393	 	
Total Deposits	 	7,726,758	 	7,564,667	 	7,469,288	 	
Securities Sold Under Agreements to Repurchase	 	861,233	 	568,981	 	687,816	 	
Funds Purchased	 	63,565	 	149,635	 	139,055	 	
Short-Term Borrowings	 	9,894	 	15,000	 	11,055	 	
Banker’s Acceptances Outstanding	 	1,598	 	1,406	 	1,213	 	
Retirement Benefits Payable	 	66,638	 	65,708	 	62,821	 	
Accrued Interest Payable	 	8,617	 	7,021	 	7,169	 	
Taxes Payable and Deferred Taxes	 	283,082	 	229,928	 	225,989	 	
Other Liabilities	 	83,462	 	96,373	 	87,325	 	
Long-Term Debt	 	242,674	 	252,638	 	297,600	 	
Total Liabilities	 	9,347,521	 	8,951,357	 	8,989,331	 	
Shareholders’ Equity	 	 	 	 	 	 	 	
Common Stock ($.01 par value); authorized 500,000,000 shares;
issued / outstanding: June 2005 - 81,721,733 / 51,853,734,
December 2004 - 81,711,752 / 54,960,857,
June 2004 - 81,711,599 / 52,426,010	 	815	 	813	 	813	 	
Capital Surplus	 	457,280	 	450,998	 	403,150	 	
Accumulated Other Comprehensive Income (Loss)	 	(18,471)	 	(12,917)	 	(27,258)	 	
Retained Earnings	 	1,339,119	 	1,282,425	 	1,251,689	 	
Deferred Stock Grants	 	(7,166)	 	(8,433)	 	(9,391)	 	
Treasury Stock, at Cost (Shares: June 2005 - 29,867,999,
December 2004 - 26,750,895, June 2004 - 29,285,589)	 	(1,059,408)	 	(898,052)	 	(919,565)	 	
Total Shareholders’ Equity	 	712,169	 	814,834	 	699,438	 	
Total Liabilities and Shareholders’ Equity	 	$	10,059,690	 	$	9,766,191	 	$	9,688,769	 	
 
4

 
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Unaudited)
 
 	 	 	 	 	 	 	 	Accum.	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Other	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Compre-	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	hensive	 	 	 	Deferred	 	 	 	Compre-	 	
 	 	 	 	Common	 	Capital	 	Income	 	Retained	 	Stock	 	Treasury	 	hensive	 	
(dollars in thousands)	 	Total	 	Stock	 	Surplus	 	(Loss)	 	Earnings	 	Grants	 	Stock	 	Income	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2004	 	$	814,834	 	$	813	 	$	450,998	 	$	(12,917)	 	$	1,282,425	 	$	(8,433)	 	$	 (898,052)	 	 	 	
Comprehensive Income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	91,951	 	—	 	—	 	—	 	91,951	 	—	 	—	 	$	91,951	 	
Other Comprehensive Income, Net of Tax:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in Unrealized Gains and Losses on
Investment Securities	 	(5,554)	 	—	 	—	 	(5,554)	 	—	 	—	 	—	 	(5,554)	 	
Total Comprehensive Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	86,397	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock Issued under Stock Plans and
Related Tax Benefits (605,364 shares)	 	21,499	 	2	 	6,282	 	—	 	(610)	 	1,267	 	14,558	 	 	 	
Treasury Stock Purchased (3,710,379 shares)	 	(175,914)	 	—	 	—	 	—	 	—	 	—	 	(175,914)	 	 	 	
Cash Dividends Paid	 	(34,647)	 	—	 	—	 	—	 	(34,647)	 	—	 	—	 	 	 	
Balance at June 30, 2005	 	$	712,169	 	$	815	 	$	457,280	 	$	(18,471)	 	$	1,339,119	 	$	(7,166)	 	$	 (1,059,408)	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2003	 	$	793,132	 	$	807	 	$	391,701	 	$	(5,711)	 	$	1,199,077	 	$	(8,309)	 	$	 (784,433)	 	 	 	
Comprehensive Income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	84,031	 	—	 	—	 	—	 	84,031	 	—	 	—	 	$	84,031	 	
Other Comprehensive Income, Net of Tax:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in Unrealized Gains and Losses on
Investment Securities	 	(21,547)	 	—	 	—	 	(21,547)	 	—	 	—	 	—	 	(21,547)	 	
Total Comprehensive Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	62,484	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock Issued under Stock Plans and
Related Tax Benefits (908,502 shares)	 	32,028	 	6	 	11,449	 	—	 	803	 	(1,082)	 	20,852	 	 	 	
Treasury Stock Purchased (3,527,779 shares)	 	(155,984)	 	—	 	—	 	—	 	—	 	—	 	(155,984)	 	 	 	
Cash Dividends Paid	 	(32,222)	 	—	 	—	 	—	 	(32,222)	 	—	 	—	 	 	 	
Balance at June 30, 2004	 	$	699,438	 	$	813	 	$	403,150	 	$	(27,258)	 	$	1,251,689	 	$	(9,391)	 	$	 (919,565)	 	 	 	
 
5

 
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
 	 	Six Months Ended	 	
 	 	June 30,	 	
(dollars in thousands)	 	2005	 	2004	 	
 	 	 	 	 	 	
Operating Activities	 	 	 	 	 	
Net Income	 	$	91,951	 	$	84,031	 	
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:	 	 	 	 	 	
Provision for Loan and Lease Losses	 	—	 	(3,500)	 	
Goodwill Impairment	 	1,257	 	—	 	
Depreciation and Amortization	 	9,673	 	10,523	 	
Amortization of Deferred Loan and Lease Fees, Net	 	(382)	 	(1,248)	 	
Amortization/Accretion of Premiums/Discounts on Investment Securities, Net	 	4,692	 	6,830	 	
Deferred Stock Grants	 	2,572	 	2,444	 	
Deferred Income Taxes	 	5,908	 	8,296	 	
Net (Gain) Loss on Investment Securities	 	(337)	 	37	 	
Proceeds from Sales of Loans Held for Sale	 	219,688	 	250,449	 	
Originations of Loans Held for Sale	 	(219,481)	 	(250,803)	 	
Net Change in Other Assets and Other Liabilities	 	(28,070)	 	11,323	 	
Net Cash Provided by Operating Activities	 	87,471	 	118,382	 	
 	 	 	 	 	 	
Investing Activities	 	 	 	 	 	
Proceeds from Sales and Redemptions of Investment Securities - Available for Sale	 	324,008	 	347,709	 	
Purchases of Investment Securities - Available for Sale	 	(366,619)	 	(671,520)	 	
Proceeds from Redemptions of Investment Securities - Held to Maturity	 	62,291	 	117,212	 	
Purchases of Investment Securities - Held to Maturity	 	—	 	(70,238)	 	
Net Increase in Loans and Leases	 	(167,091)	 	(29,567)	 	
Premises and Equipment, Net	 	(1,485)	 	354	 	
Net Cash Used by Investing Activities	 	(148,896)	 	(306,050)	 	
 	 	 	 	 	 	
Financing Activities	 	 	 	 	 	
Net Increase in Demand Deposits	 	46,596	 	113,529	 	
Net Increase in Savings Deposits	 	7,642	 	142,729	 	
Net Increase (Decrease) in Time Deposits	 	107,853	 	(119,749)	 	
Net Increase in Short-Term Borrowings	 	201,076	 	243,389	 	
Repayments of Long-Term Debt	 	(9,964)	 	(26,468)	 	
Proceeds from Issuance of Common Stock	 	15,772	 	23,380	 	
Repurchase of Common Stock	 	(175,914)	 	(155,984)	 	
Cash Dividends Paid	 	(34,647)	 	(32,222)	 	
Net Cash Provided by Financing Activities	 	158,414	 	188,604	 	
 	 	 	 	 	 	
Increase in Cash and Cash Equivalents	 	96,989	 	936	 	
Cash and Cash Equivalents at Beginning of Period	 	250,951	 	518,230	 	
Cash and Cash Equivalents at End of Period	 	$	347,940	 	$	519,166	 	
 
6

 
Bank of Hawaii Corporation
Notes to Consolidated Financial Statements
(Unaudited)

Note 1.          Summary of Significant Accounting Policies
 
Bank of Hawaii Corporation (the “Company”) is a bank holding company providing a broad range of financial products and services to customers in Hawaii and the Pacific Islands (Guam, nearby islands and American Samoa).  The Company’s principal subsidiary is Bank of Hawaii (the “Bank”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.
 
Certain prior period amounts have been reclassified to conform to current period classifications.
 
These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2004 Annual Report on Form 10-K.  Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
 
Securities Sold Under Agreements to Repurchase
 
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities (“repos”).  Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.  As a result, repurchase agreements are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities.  The obligation to repurchase the securities is reflected as a liability in the Consolidated Statements of Condition while the securities underlying the agreements remain in the respective asset accounts.  If the secured party can re-sell or re-pledge the securities, they are classified as pledged securities in the Consolidated Statements of Condition.  If the secured party cannot resell or re-pledge the securities, they are not separately identified.
 
Stock-Based Compensation
 
As permitted by the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), the Company currently accounts for share-based payments using the intrinsic value method permitted by Accounting Principles Board Opinion No. 25,  Accounting for Stock Issued to Employees  (“APB No. 25”) and related interpretations.  Accordingly, the Company recognizes no compensation cost for employee stock options that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant.
 
7

 
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123:
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(dollars in thousands except per share and option data)	 	2005	 	2004 1	 	2005	 	2004 1	 	
Net Income, as reported	 	$	46,429	 	$	44,232	 	$	91,951	 	$	84,031	 	
Less: Total Stock-Based Employee Compensation Expense Associated with Stock Options Determined Under Fair Value Method for All Option Awards, Net of Related Tax Effects  2	 	(500	)	(1,161	)	(1,204	)	(2,672	)	
Pro Forma Net Income	 	$	45,929	 	$	43,071	 	$	90,747	 	$	81,359	 	
 	 	 	 	 	 	 	 	 	 	
Earnings Per Share:	 	 	 	 	 	 	 	 	 	
Basic-as reported	 	$	0.90	 	$	0.84	 	$	1.75	 	$	1.57	 	
Basic-pro forma	 	0.89	 	0.82	 	1.72	 	1.52	 	
Diluted-as reported	 	0.87	 	0.79	 	1.69	 	1.48	 	
Diluted-pro forma	 	0.86	 	0.77	 	1.67	 	1.43	 	

1 Prior period amounts restated to account for forfeitures and adjustment to dividend yield calculation.
2 A Black-Scholes option pricing model was used to determine the fair values of the options granted.
 
Recently Issued and Proposed Accounting Pronouncements
 
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”),  Share-Based Payment , which is a revision of SFAS No. 123 .   SFAS No. 123(R) supersedes APB No. 25 and amends FASB Statement No. 95,  Statement of Cash Flows .  SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense through the income statement based on their fair values at issue date.  Pro forma disclosure will no longer be an alternative.  On April 14, 2005, the Securities and Exchange Commission announced that it would provide for a phased-in-implementation process for SFAS No. 123(R).  Under this process, the Company will be required to adopt SFAS No. 123(R) no later than the beginning of the first fiscal year that begins after June 15, 2005.  The Company plans to adopt SFAS No. 123(R) on January 1, 2006.
 
The Company plans to adopt SFAS No. 123(R) using the “modified prospective” method.  Under this method, awards that are granted, modified, or settled after January 1, 2006, will be measured and accounted for in accordance with SFAS No. 123(R).  Also under this method, expense will be recognized in the income statement for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123.
 
The adoption of SFAS No. 123(R) will have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position.  Had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share shown in the table above.
 
8

 
In July 2005, the FASB issued an exposure draft, FASB Staff Position (“FSP”) No. FAS 13-a “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction ” (“FSP 13-a”).  Under FSP 13-a, a revision in the timing of expected cash flows of a leveraged lease may require a recalculation of the original lease assumptions.  A material change in the net investment in a leveraged lease using different cash flow assumptions would be recognized as a gain or loss in the period in which the assumptions are revised.  The Company has entered into leveraged lease transactions that are currently under various stages of review by the Internal Revenue Service (“IRS”).  The outcome of these reviews may change the timing of cash flows from these leases which may result in gain or loss recognition.  Management is currently evaluating the potential effect of the proposed recognition provisions of FSP 13-a.
 
Note 2.   Business Segments
 
The information under the caption “Business Segments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
 
Note 3.   Pension Plans and Postretirement Benefit Plan
 
The components of net periodic cost for the aggregated pension plans and the postretirement benefit plan for the three and six months ended June 30, 2005 and 2004 are presented in the following table:
 
 	 	Pension Benefits	 	Postretirement Benefits	 	
(dollars in thousands)	 	2005	 	2004	 	2005	 	2004	 	
Three Months Ended June 30,	 	 	 	 	 	 	 	 	 	
Service Cost	 	$	—	 	$	—	 	$	285	 	$	247	 	
Interest Cost	 	1,125	 	1,091	 	500	 	443	 	
Expected Return on Plan Assets	 	(1,185	)	(1,182	)	—	 	—	 	
Amortization of Unrecognized Net Transition Obligation	 	—	 	—	 	146	 	147	 	
Recognized Net Actuarial Loss (Gain)	 	421	 	328	 	(41	)	(156	)	
Total Net Periodic Cost	 	$	361	 	$	237	 	$	890	 	$	681	 	
 	 	 	 	 	 	 	 	 	 	
Six Months Ended June 30,	 	 	 	 	 	 	 	 	 	
Service Cost	 	$	—	 	$	—	 	$	540	 	$	494	 	
Interest Cost	 	2,250	 	2,183	 	950	 	886	 	
Expected Return on Plan Assets	 	(2,370	)	(2,364	)	—	 	—	 	
Amortization of Unrecognized Net Transition Obligation	 	—	 	—	 	293	 	294	 	
Recognized Net Actuarial Loss (Gain)	 	841	 	656	 	(83	)	(312	)	
Total Net Periodic Cost	 	$	721	 	$	475	 	$	1,700	 	$	1,362	 	
 
There were no significant changes from the previously reported $1.8 million in contributions expected to be paid during 2005.
 
9

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD-LOOKING STATEMENTS
 
This report, including the statements under the caption “Financial Outlook,” contains forward-looking statements concerning, among other things, the economic and business environment in the Company’s service area and elsewhere, credit quality, the expected level of loan and lease loss provisioning, anticipated net income and other financial and business matters in future periods.  The Company’s forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate and actual results may differ materially from those projected for a variety of reasons, including, but not limited to: 1) unanticipated changes in business and economic conditions, the competitive environment, fiscal and monetary policies, legislation in Hawaii and the other markets the Company serves, or the timing and interpretation of accounting standards; 2) changes in the Company’s credit quality or risk profile which may increase or decrease the required level of the reserve for credit losses; 3) changes in market interest rates that may affect the Company’s credit markets and ability to maintain the Company’s net interest margin; 4) changes to the amount and timing of the Company’s proposed equity repurchases and repayment of maturing debt; 5) real or threatened acts of war or terrorist activity affecting business conditions; and 6) adverse weather and other natural conditions impacting the Company and its customers’ operations.  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements.  The Company does not undertake any obligation to update forward-looking statements to reflect later events or circumstances.
 
10

 
OVERVIEW
 
The Company is in the second year of its 2004-2006 plan (the “Plan”), which continues to build on the objective of maximizing shareholder value over time.  This objective was established in the previous three-year strategic plan.
 
The Plan consists of five key elements:
•                  Accelerate revenue growth in our island markets
•                  Better integrate our business segments
•                  Continue to develop our management teams
•                  Improve operating efficiency
•                  Maintain a culture of dependable risk and capital management
 
During the first six months of 2005, the Company continued to meet the key financial objectives of the Plan.  Total revenue, consisting of net interest income and non-interest income, for the first six months of 2005, increased 3% from the same prior year period.  As of June 30, 2005, loans and leases outstanding increased 6% and deposits increased 3% compared to June 30, 2004.
 
The Company continues to better integrate the Company’s three primary business segments – Retail Banking, Commercial Banking and the Investment Services Group – through improved processes, training and communications.  As a result, the needs of the Company’s customers are better addressed and customer relationships continue to strengthen.
 
The Company utilizes various financial measures to evaluate its performance against the objectives of the Plan, many of which are discussed below.
 
Operating efficiency improved in the first six months of 2005 compared to the same period in 2004, as the Company continues to improve processes.  The efficiency ratio for the first six months of 2005 was 52.47% compared to 56.89% in the same period in 2004.  Operating income, which is defined as the income before the provision for loan and lease losses and income taxes increased 13.7% in the first six months of 2005 compared to the same period in 2004.
 
The management of both risk and capital continues to be dependable and disciplined in 2005.  As of June 30, 2005, the ratio of non-accrual loans to total loans was 0.16% and the leverage ratio was 7.18%.
 
The Company’s net income for the first six months of 2005 was $92.0 million, an increase of 9% from $84.0 million reported in the same prior year period.  Additional results for the first six months of 2005 compared to the same period in 2004 were as follows:
 
•                  Diluted earnings per share were $1.69, an increase of 14%
•                  The net interest margin was 4.39%, an increase of 16 basis points
•                  Return on average assets increased to 1.87% from 1.73%
•                  Return on average equity increased to 24.78% from 22.03%
 
The Company’s overall financial results are more fully discussed in the following sections of this report.
 
Table 1 presents the Company’s financial highlights for the three and six months ended June 30, 2005 and 2004.
 
11

 
Highlights (Unaudited)	 	Table 1	
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(dollars in thousands except per share amounts)	 	2005	 	2004	 	2005	 	2004	 	
For the Period:	 	 	 	 	 	 	 	 	 	
Interest Income	 	$	124,105	 	$	111,490	 	$	244,263	 	$	223,246	 	
Net Interest Income	 	101,039	 	95,849	 	201,697	 	191,880	 	
Net Income	 	46,429	 	44,232	 	91,951	 	84,031	 	
Basic Earnings Per Share	 	0.90	 	0.84	 	1.75	 	1.57	 	
Diluted Earnings Per Share	 	0.87	 	0.79	 	1.69	 	1.48	 	
Dividends Declared Per Share	 	0.33	 	0.30	 	0.66	 	0.60	 	
 	 	 	 	 	 	 	 	 	 	
Net Income to Average Total Assets (ROA)	 	1.87	%	1.80	%	1.87	%	1.73	%	
Net Income to Average Shareholders’ Equity (ROE)	 	25.98	 	24.28	 	24.78	 	22.03	 	
Net Interest Margin 1	 	4.36	 	4.17	 	4.39	 	4.23	 	
Efficiency Ratio 2	 	52.07	 	56.49	 	52.47	 	56.89	 	
 	 	 	 	 	 	 	 	 	 	
Average Assets	 	$	9,969,243	 	$	9,893,303	 	$	9,907,845	 	$	9,785,603	 	
Average Loans and Leases	 	6,090,149	 	5,772,926	 	6,045,609	 	5,757,647	 	
Average Deposits	 	7,747,331	 	7,371,388	 	7,717,729	 	7,345,645	 	
Average Shareholders’ Equity	 	716,767	 	732,652	 	748,344	 	766,950	 	
Average Equity to Average Assets	 	7.19	%	7.41	%	7.55	%	7.84	%	
 
 	 	June 30,	 	
 	 	2005	 	2004	 	
At Period End:	 	 	 	 	 	
Net Loans	 	$	6,049,831	 	$	5,662,410	 	
Total Assets	 	10,059,690	 	9,688,769	 	
Deposits	 	7,726,758	 	7,469,288	 	
Long-Term Debt	 	242,674	 	297,600	 	
Shareholders’ Equity	 	712,169	 	699,438	 	
 	 	 	 	 	 	
Allowance to Loans and Leases Outstanding	 	1.65	%	2.16	%	
Dividend Payout Ratio	 	37.71	 	38.22	 	
Leverage Ratio	 	7.18	 	7.16	 	
 	 	 	 	 	 	
Book Value Per Common Share	 	$	13.73	 	$	13.34	 	
 	 	 	 	 	 	
Employees (FTE)	 	2,561	 	2,683	 	
Branches and offices	 	86	 	89	 	
 	 	 	 	 	 	
Market Price Per Share of Common Stock for the Quarter Ended:	 	 	 	 	 	
Closing	 	$	50.75	 	$	45.22	 	
High	 	51.30	 	46.84	 	
Low	 	43.82	 	40.97	 	

1 The net interest margin is defined as net interest income, on a fully-taxable equivalent basis, as a percentage of average earning assets.
2 The efficiency ratio is defined as non-interest expense divided by total revenue (net interest income and non-interest income).
 
12

 
ANALYSIS OF STATEMENT OF INCOME
 
Net Interest Income
 
Net interest income on a taxable equivalent basis for the three and six month periods ended June 30, 2005 increased $5.2 million and $9.8 million, respectively, or a 5% change for both periods compared to the same periods in 2004.  The net interest margin for the three months ended June 30, 2005 was 4.36%, a 19 basis point increase from the same prior year period.  The net interest margin for the first six months of 2005 was 4.39%, a 16 basis point increase from the same period in 2004.  The increase in net interest income was primarily a result of higher income earned on the investment securities and loans portfolio.  The increase in interest income on the investment securities portfolio was due to an increase in average balances resulting from better utilization of the Company’s liquidity and reduction in prepayments on mortgage-backed securities.  Interest income on commercial and industrial loans increased primarily due to higher average yields earned, which was consistent with increases in benchmark interest rates, and an increase in average balances.  Home equity loans experienced higher interest income due to re-pricing of initial introductory rates to fully indexed rates and increases in the average balance outstanding resulting from promotions.  Partially offsetting these positive increases in interest income was an increase in interest expense due mainly to the increase in short-term interest rates.  As a result of the Federal Reserve increasing short-term interest rates, the average federal funds rate was 172 basis points higher for the six months ended June 30, 2005 compared to the same prior year period.  In comparison, the Company’s average interest-bearing deposits rates increased by 22 basis points.
 
Average balances, related interest income and expenses and resulting yields and rates are presented in Table 2.  An analysis of change in net interest income is presented in Table 3.
 
13

 
Consolidated Average Balances and Interest Rates - Taxable Equivalent Basis (Unaudited)	Table 2	
 
 	 	Three Months Ended	 	Three Months Ended	 	Six Months Ended	 	Six Months Ended	 	
 	 	June 30, 2005	 	June 30, 2004	 	June 30, 2005	 	June 30, 2004	 	
 	 	Average	 	Income/	 	Yield/	 	Average	 	Income/	 	Yield/	 	Average	 	Income/	 	Yield/	 	Average	 	Income/	 	Yield/	 	
(dollars in millions)	 	Balance	 	Expense	 	Rate	 	Balance	 	Expense	 	Rate	 	Balance	 	Expense	 	Rate	 	Balance	 	Expense	 	Rate	 	
Earning Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	$	6.0	 	$	—	 	2.36	%	$	408.8	 	$	1.6	 	1.62	%	$	5.4	 	$	0.1	 	2.17	%	$	329.2	 	$	2.8	 	1.76	%	
Funds Sold	 	23.1	 	0.2	 	2.86	 	71.3	 	0.2	 	0.99	 	17.9	 	0.2	 	2.68	 	120.1	 	0.6	 	0.99	 	
Investment Securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Available for Sale	 	2,542.5	 	28.0	 	4.41	 	2,148.9	 	21.8	 	4.06	 	2,517.0	 	55.4	 	4.41	 	2,068.7	 	42.6	 	4.13	 	
Held to Maturity	 	544.1	 	5.5	 	4.06	 	709.8	 	6.7	 	3.78	 	559.3	 	11.4	 	4.06	 	714.8	 	13.7	 	3.83	 	
Loans Held for Sale	 	15.1	 	0.2	 	5.72	 	20.7	 	0.3	 	5.54	 	14.1	 	0.4	 	5.57	 	18.1	 	0.5	 	5.45	 	
Loans and Leases 1	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	945.0	 	14.3	 	6.07	 	845.2	 	10.3	 	4.90	 	924.8	 	27.5	 	5.99	 	844.8	 	20.4	 	4.86	 	
Construction	 	140.9	 	2.1	 	5.91	 	100.4	 	0.9	 	3.80	 	132.5	 	3.7	 	5.69	 	100.4	 	2.0	 	4.05	 	
Commercial Mortgage	 	599.3	 	8.8	 	5.89	 	638.9	 	8.6	 	5.39	 	602.6	 	17.4	 	5.81	 	636.5	 	17.2	 	5.42	 	
Residential Mortgage	 	2,343.9	 	33.1	 	5.64	 	2,281.8	 	32.2	 	5.65	 	2,338.0	 	65.7	 	5.62	 	2,299.6	 	65.5	 	5.70	 	
Other Revolving Credit and Installment	 	739.6	 	15.4	 	8.37	 	683.2	 	14.4	 	8.51	 	738.2	 	30.5	 	8.32	 	667.1	 	28.7	 	8.67	 	
Home Equity	 	719.0	 	10.8	 	6.01	 	534.6	 	6.1	 	4.63	 	699.0	 	20.2	 	5.83	 	511.9	 	11.9	 	4.68	 	
Purchased Home Equity	 	103.3	 	0.8	 	3.06	 	178.8	 	1.9	 	4.16	 	110.0	 	1.8	 	3.32	 	191.8	 	4.6	 	4.70	 	
Lease Financing	 	499.2	 	4.7	 	3.74	 	510.1	 	5.6	 	4.38	 	500.5	 	9.4	 	3.81	 	505.5	 	11.0	 	4.35	 	
Total Loans and Leases	 	6,090.2	 	90.0	 	5.91	 	5,773.0	 	80.0	 	5.56	 	6,045.6	 	176.2	 	5.86	 	5,757.6	 	161.3	 	5.62	 	
Other	 	66.3	 	0.3	 	1.64	 	78.1	 	0.9	 	4.45	 	60.1	 	0.7	 	2.42	 	77.8	 	1.8	 	4.45	 	
Total Earning Assets2	 	9,287.3	 	124.2	 	5.35	 	9,210.6	 	111.5	 	4.86	 	9,219.4	 	244.4	 	5.32	 	9,086.3	 	223.3	 	4.93	 	
Cash and Non-Interest-Bearing Deposits	 	305.8	 	 	 	 	 	306.3	 	 	 	 	 	310.6	 	 	 	 	 	316.9	 	 	 	 	 	
Other Assets	 	376.1	 	 	 	 	 	376.4	 	 	 	 	 	377.8	 	 	 	 	 	382.4	 	 	 	 	 	
Total Assets	 	$	9,969.2	 	 	 	 	 	$	9,893.3	 	 	 	 	 	$	9,907.8	 	 	 	 	 	$	9,785.6	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Demand	 	$	1,667.3	 	2.4	 	0.58	 	$	1,390.2	 	0.6	 	0.17	 	$	1,642.9	 	4.1	 	0.50	 	$	1,380.1	 	1.1	 	0.16	 	
Savings	 	2,970.8	 	4.8	 	0.65	 	2,911.5	 	3.1	 	0.43	 	2,971.5	 	9.2	 	0.62	 	2,891.6	 	6.4	 	0.44	 	
Time	 	1,159.0	 	6.4	 	2.20	 	1,129.5	 	4.9	 	1.74	 	1,137.0	 	11.9	 	2.11	 	1,159.1	 	10.3	 	1.79	 	
Total Interest-Bearing Deposits	 	5,797.1	 	13.6	 	0.94	 	5,431.2	 	8.6	 	0.63	 	5,751.4	 	25.2	 	0.88	 	5,430.8	 	17.8	 	0.66	 	
Short-Term Borrowings	 	822.9	 	5.8	 	2.81	 	1,082.5	 	2.7	 	1.02	 	764.9	 	9.9	 	2.60	 	972.4	 	4.9	 	1.02	 	
Long-Term Debt	 	242.7	 	3.7	 	6.16	 	317.3	 	4.3	 	5.48	 	245.6	 	7.5	 	6.15	 	319.1	 	8.6	 	5.46	 	
Total Interest-Bearing Liabilities	 	6,862.7	 	23.1	 	1.35	 	6,831.0	 	15.6	 	0.92	 	6,761.9	 	42.6	 	1.27	 	6,722.3	 	31.3	 	0.94	 	
Net Interest Income	 	 	 	$	101.1	 	 	 	 	 	$	95.9	 	 	 	 	 	$	201.8	 	 	 	 	 	$	192.0	 	 	 	
Interest Rate Spread	 	 	 	 	 	4.00	%	 	 	 	 	3.94	%	 	 	 	 	4.05	%	 	 	 	 	3.99	%	
Net Interest Margin	 	 	 	 	 	4.36	%	 	 	 	 	4.17	%	 	 	 	 	4.39	%	 	 	 	 	4.23	%	
Non-Interest-Bearing Demand Deposits	 	1,950.2	 	 	 	 	 	1,940.2	 	 	 	 	 	1,966.4	 	 	 	 	 	1,914.8	 	 	 	 	 	
Other Liabilities	 	439.5	 	 	 	 	 	389.4	 	 	 	 	 	431.2	 	 	 	 	 	381.5	 	 	 	 	 	
Shareholders’ Equity	 	716.8	 	 	 	 	 	732.7	 	 	 	 	 	748.3	 	 	 	 	 	767.0	 	 	 	 	 	
Total Liabilities and Shareholders’ Equity	 	$	9,969.2	 	 	 	 	 	$	9,893.3	 	 	 	 	 	$	9,907.8	 	 	 	 	 	$	9,785.6	 	 	 	 	 	

1Non-performing loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.
2 Interest income includes taxable-equivalent basis adjustment based upon a statutory tax rate of 35%.
 
14

 
Analysis of Change in Net Interest Income - Taxable Equivalent Basis (Unaudited)	Table 3	
 
 	 	Six Months Ended June 30, 2005 Compared to June 30, 2004	 	
(dollars in millions)	 	Volume 1	 	Rate 1	 	Total	 	
Change in Interest Income:	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	$	(3.3)	 	$	0.6	 	$	(2.7)	 	
Funds Sold	 	(0.8)	 	0.4	 	(0.4)	 	
Investment Securities	 	 	 	 	 	 	 	
Available for Sale	 	9.7	 	3.1	 	12.8	 	
Held to Maturity	 	(3.1)	 	0.8	 	(2.3)	 	
Loans Held for Sale	 	(0.1)	 	—	 	(0.1)	 	
Loans and Leases	 	 	 	 	 	 	 	
Commercial and Industrial	 	2.1	 	5.0	 	7.1	 	
Construction	 	0.7	 	1.0	 	1.7	 	
Commercial Mortgage	 	(1.0)	 	1.2	 	0.2	 	
Residential Mortgage	 	1.1	 	(0.9)	 	0.2	 	
Other Revolving Credit and Installment	 	2.9	 	(1.1)	 	1.8	 	
Home Equity	 	5.0	 	3.3	 	8.3	 	
Purchased Home Equity	 	(1.6)	 	(1.2)	 	(2.8)	 	
Lease Financing	 	(0.1)	 	(1.5)	 	(1.6)	 	
Total Loans and Leases	 	9.1	 	5.8	 	14.9	 	
Other	 	(0.4)	 	(0.7)	 	(1.1)	 	
Total Change in Interest Income	 	11.1	 	10.0	 	21.1	 	
Change in Interest Expense:	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	 	 	 	 	 	 	
Demand	 	0.2	 	2.8	 	3.0	 	
Savings	 	0.2	 	2.6	 	2.8	 	
Time	 	(0.2)	 	1.8	 	1.6	 	
Total Interest-Bearing Deposits	 	0.2	 	7.2	 	7.4	 	
Short-Term Borrowings	 	(1.2)	 	6.2	 	5.0	 	
Long-Term Debt	 	(2.2)	 	1.1	 	(1.1)	 	
Total Change in Interest Expense	 	(3.2)	 	14.5	 	11.3	 	
Change in Net Interest Income	 	$	14.3	 	$	(4.5)	 	$	9.8	 	

1  The changes for each category of interest income and expense are divided between the portion of changes attributable to the variance in volume or rate for that category.
 
Provision for Loan and Lease Losses
 
For the three and six months ending June 30, 2005, the Company recorded no Provision for Loan and Lease Losses (“Provision”).  The Company returned to income $3.5 million from a release of a portion of the allowance for loan and lease losses in the second quarter of 2004.  For information on the reserve for credit losses, refer to “Corporate Risk Profile – Reserve for Credit Losses” section of this report.
 
Non-Interest Income
 
Non-interest income decreased $4.2 million or 8% and $0.7 million or 1% for the three and six months ended June 30, 2005, respectively, from the comparable prior year periods primarily due to $5.7 million special income items that occurred in the second quarter of 2004 as shown on Table 4 below.
 
15

 
Non-Interest Income (Unaudited)	Table 4	
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	Percent	 	June 30,	 	Percent	 	
(dollars in thousands)	 	2005	 	2004	 	Change	 	2005	 	2004	 	Change	 	
Trust and Asset Management	 	$	14,058	 	$	12,995	 	8	%	$	28,680	 	$	26,859	 	7	%	
Mortgage Banking	 	2,594	 	2,808	 	(8)	 	5,184	 	4,785	 	8	 	
Service Charges on Deposit Accounts	 	9,569	 	9,540	 	—	 	19,748	 	19,490	 	1	 	
Fees, Exchange, and Other Service Charges	 	15,211	 	14,243	 	7	 	29,047	 	27,482	 	6	 	
Investment Securities Gains (Losses)	 	337	 	(37)	 	n.m.	 	337	 	(37)	 	n.m.	 	
Insurance	 	4,330	 	4,926	 	(12)	 	10,118	 	9,584	 	6	 	
Other Income:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from Bank-Owned Life Insurance	 	1,509	 	1,800	 	(16)	 	2,976	 	3,567	 	(17)	 	
Leasing Partnership Distribution	 	—	 	3,218	 	n.m.	 	7	 	3,218	 	n.m.	 	
Gain on the Sale of Land	 	—	 	2,454	 	n.m.	 	—	 	2,454	 	n.m.	 	
Other	 	3,066	 	2,901	 	6	 	6,892	 	6,288	 	10	 	
Total Other Income	 	4,575	 	10,373	 	(56)	 	9,875	 	15,527	 	(36)	 	
Total Non-Interest Income	 	$	50,674	 	$	54,848	 	(8)	%	$	102,989	 	$	103,690	 	(1)	%	

n.m. - not meaningful.
 
Trust and asset management income increased $1.1 million or 8% and $1.8 million or 7%, respectively, for the three and six months ended June 30, 2005 compared to the same periods in 2004.  The increase in fee income was due to an improvement in market conditions, which resulted in an increase in the average market value of assets under management, and an increase in investment advisory fees on money market assets.
 
Mortgage banking income declined $0.2 million and increased $0.4 million, respectively, for the three and six months ended June 30, 2005, or an 8% change for both periods compared to the same periods in 2004.  The decline from the second quarter of 2004 was primarily a result of lower gains on the sale of mortgage loans in 2005, which was attributable to a 21% decrease in mortgage loan originations due to the low interest rate environment in the second quarter of 2004.  On a year-to-date comparison, the increase was largely due to higher net servicing income as a result of slowdown in prepayments.
 
Fees, exchange and other service charges increased $1.0 million or 7% and $1.6 million or 6%, respectively, for the three and six months ended June 30, 2005 compared to the same prior year periods.  This increase was primarily due to higher merchant card transaction income, resulting from increased transaction volume and higher loan fees, partially offset by a decrease in foreign exchange income.
 
Insurance income decreased $0.6 million or 12% and increased by $0.5 million or 6% for the three and six months ended June 30, 2005, respectively, compared to the same periods in 2004.  The decline from the second quarter of 2004 was a result of lower premium income.  On a year-to-date comparison, the increase was primarily due to higher annuity and life insurance product income.
 
Other non-interest income decreased $5.8 million or 56% and $5.7 million or 36%, respectively, for the three and six months ended June 30, 2005 compared to the same prior year periods.  The decline was due to a $3.2 million distribution from a leasing partnership investment and a $2.5 million gain realized on the sale of a parcel of land, both occurring in the second quarter of 2004.
 
Non-Interest Expense
 
Non-interest expense decreased $6.1 million or 7% and $8.3 million or 5%, respectively, for the three and six months ended June 30, 2005 compared to the same prior year periods.  Table 5 presents the components of non-interest expense.
 
16

 
Non-Interest Expense (Unaudited)	Table 5	
 
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	Percent	 	June 30,	 	Percent	 	
(dollars in thousands)	 	2005	 	2004	 	Change	 	2005	 	2004	 	Change	 	
Salaries and Benefits:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries	 	$	26,616	 	$	27,904	 	(5)	%	$	52,669	 	$	55,108	 	(4)	%	
Incentive Compensation	 	3,725	 	3,260	 	14	 	7,693	 	7,076	 	9	 	
Stock-Based Compensation	 	1,828	 	3,233	 	(44)	 	3,543	 	6,129	 	(42)	 	
Commission Expense	 	2,281	 	2,284	 	—	 	4,533	 	3,911	 	16	 	
Retirement and Other Benefits	 	4,437	 	4,214	 	5	 	9,205	 	8,571	 	7	 	
Payroll Taxes	 	2,205	 	3,103	 	(29)	 	5,658	 	6,533	 	(13)	 	
Medical, Dental, and Life Insurance	 	1,823	 	2,136	 	(15)	 	4,054	 	4,240	 	(4)	 	
Separation Expense	 	941	 	555	 	70	 	1,270	 	1,122	 	13	 	
Total Salaries and Benefits	 	43,856	 	46,689	 	(6)	 	88,625	 	92,690	 	(4)	 	
Net Occupancy Expense	 	9,189	 	9,543	 	(4)	 	18,734	 	18,929	 	(1)	 	
Net Equipment Expense	 	5,377	 	5,799	 	(7)	 	10,848	 	11,763	 	(8)	 	
Other Expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Professional Services	 	3,361	 	4,175	 	(20)	 	6,946	 	8,257	 	(16)	 	
Delivery and Postage Services	 	2,397	 	2,454	 	(2)	 	4,855	 	5,082	 	(5)	 	
Data Services	 	2,908	 	2,480	 	17	 	5,707	 	4,805	 	19	 	
Other	 	11,916	 	13,985	 	(15)	 	24,152	 	26,621	 	(9)	 	
Total Other Expense	 	20,582	 	23,094	 	(11)	 	41,660	 	44,765	 	(7)	 	
Total Non-Interest Expense	 	$	79,004	 	$	85,125	 	(7)	%	$	159,867	 	$	168,147	 	(5)	%	
 
Salaries and benefits expense decreased $2.8 million or 6% and $4.1 million or 4%, respectively, for the three and six months ended June 30, 2005 compared to the same prior year periods.  Base salaries decreased as a result of a decline in the number of employees.  In addition, stock-based compensation decreased as a result of fewer restricted stock units outstanding in 2005.
 
Net equipment expense declined by $0.4 million or 7% and $0.9 million or 8%, respectively, for the three and six months ended June 30, 2005, compared to the same prior year periods as a result of lower technology expense.
 
Other non-interest expense decreased $2.5 million or 11% and $3.1 million or 7%, respectively, for the three and six months ended June 30, 2005 compared to the same periods in 2004.  The decrease in the three months ended June 30, 2005 from the same prior year period was largely related to a $2.2 million legal settlement during the second quarter of 2004. The decrease for six months ended June 30, 2005 compared to the same prior year period was due to the aforementioned settlement and lower professional fees.
 
Provision for Income Taxes
 
The effective tax rate for the three and six months ended June 30, 2005 was 36.14% and 36.51%, respectively, compared to 35.96% and 35.82% in the comparable periods of 2004.  The increase was largely due to a goodwill impairment charge in the first quarter of 2005, which was not tax deductible.
 
17

 
BALANCE SHEET ANALYSIS
 
Short-Term Earning Assets
 
Short-term earning assets which consist of interest-bearing deposits and funds sold totaled $54.8 million at June 30, 2005, an increase of $29.2 million from December 31, 2004 and a decrease of $124.9 million from June 30, 2004.  The decline from June 30, 2004 was mainly a result of more effective management of liquidity.
 
Investment Securities
 
Investment securities totaled $3.0 billion as of June 30, 2005, a $32.7 million decrease from December 31, 2004 and a $86.3 million increase from June 30, 2004.  At June 30, 2005 investment securities with a book value of $1.5 billion were pledged to secure deposits of government entities and $117.9 million was pledged to secure certain repos.
 
Table 6 presents the details of the investment securities portfolio at June 30, 2005 and December 31, 2004.
 
Investment Securities (Unaudited)	 	 	 	Table 6	 	
 	 	 	 	 	 	
(dollars in thousands)	 	Amortized Cost	 	Fair Value	 	
June 30, 2005	 	 	 	 	 	
Securities - Available for Sale:	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Agencies	 	$	68,620	 	$	68,906	 	
Debt Securities Issued by States and Municipalities	 	19,863	 	20,090	 	
Mortgage-Backed Securities	 	2,092,440	 	2,094,429	 	
Other Debt Securities	 	333,552	 	330,726	 	
Total	 	$	2,514,475	 	$	2,514,151	 	
Securities - Held to Maturity:	 	 	 	 	 	
Debt Securities Issued by States and Municipalities	 	$	90	 	$	94	 	
Mortgage-Backed Securities	 	526,677	 	522,899	 	
Total	 	$	526,767	 	$	522,993	 	
 	 	 	 	 	 	
December 31, 2004	 	 	 	 	 	
Securities - Available for Sale:	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Agencies	 	$	38,551	 	$	38,942	 	
Debt Securities Issued by States and Municipalities	 	7,958	 	8,081	 	
Mortgage-Backed Securities	 	2,090,510	 	2,098,994	 	
Other Debt Securities	 	338,495	 	337,702	 	
Total	 	$	2,475,514	 	$	2,483,719	 	
Securities - Held to Maturity:	 	 	 	 	 	
Debt Securities Issued by States and Municipalities	 	$	90	 	$	96	 	
Mortgage-Backed Securities	 	589,818	 	585,740	 	
Total	 	$	589,908	 	$	585,836	 	
 
18

 
Table 7 presents temporarily impaired investment securities as of June 30, 2005 and December 31, 2004.
 
Temporarily Impaired Investment Securities (Unaudited)	 	Table 7	 	
 	 	 	 	 	 	 	 	 	 	
 	 	Temporarily Impaired	 	Temporarily Impaired	 	 	 	 	 	
 	 	Less Than 12 Months	 	12 Months or Longer	 	Total	 	
(dollars in thousands)	 	Fair Value	 	Gross
Unrealized
Losses	 	Fair Value	 	Gross
Unrealized
Losses	 	Fair Value	 	Gross
Unrealized
Losses	 	
June 30, 2005	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt Securities Issued by the U.S.
Treasury and Agencies	 	$	11,368	 	$	(76)	 	$	—	 	$	—	 	$	11,368	 	$	(76)	 	
Debt Securities Issued by
State and Municipalities	 	4,605	 	(21)	 	—	 	—	 	4,605	 	(21)	 	
Mortgage-Backed Securities	 	638,193	 	(3,690)	 	680,896	 	(11,459)	 	1,319,089	 	(15,149)	 	
Foreign Bonds	 	223,239	 	(2,313)	 	49,189	 	(914)	 	272,428	 	(3,227)	 	
Total Temporarily Impaired
Investment Securities	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
June 30, 2005	 	$	877,405	 	$	(6,100)	 	$	730,085	 	$	(12,373)	 	$	1,607,490	 	$	(18,473)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2004	 	$	1,184,863	 	$	(10,374)	 	$	284,389	 	$	(4,774)	 	$	1,469,252	 	$	(15,148)	 	
 
The gross unrealized losses on temporarily impaired investment securities at June 30, 2005 represented less than 1.0% of the total amortized cost of total investment securities.  These unrealized losses were primarily attributable to an increase in interest rates during the first six months of 2005 and are believed to be temporary.
 
Loans Held for Sale
 
Loans held for sale, consisting of residential mortgage loans, totaled $17.4 million at June 30, 2005, $17.6 million at December 31, 2004 and $9.6 million at June 30, 2004.  The change from June 30, 2004 was a result of the impact of mortgage loan sales activity and production volume.
 
Loans and Leases
 
As of June 30, 2005, loans and leases outstanding were $6.2 billion, an increase of $164.5 million and $364.1 million from December 31, 2004 and June 30, 2004, respectively.  Total commercial loans increased as loan originations continue to strengthen and outpace payoff activity.  Consumer loans increased primarily as a result of increases in home equity outstanding from successful loan promotions in a strong Hawaii residential real estate market.  Table 8 presents the composition of the loan portfolio by major categories and Table 9 presents the composition of consumer loans by geographic area.
 
19

 
Loan Portfolio Balances (Unaudited)	 	 	 	 	 	 	 	Table 8	 	
 	 	 	 	 	 	 	 	 	 	
 	 	June 30,	 	March 31,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2005	 	2005	 	2004	 	2004	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	$	997,762	 	$	918,878	 	$	909,264	 	$	800,893	 	
Commercial Mortgage	 	563,979	 	609,689	 	602,678	 	643,382	 	
Construction	 	165,772	 	107,403	 	122,355	 	98,916	 	
Lease Financing	 	471,600	 	468,349	 	479,100	 	479,488	 	
Total Commercial	 	2,199,113	 	2,104,319	 	2,113,397	 	2,022,679	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	2,347,877	 	2,342,062	 	2,326,385	 	2,286,618	 	
Home Equity	 	739,161	 	694,261	 	657,164	 	559,225	 	
Purchased Home Equity	 	93,806	 	109,632	 	122,728	 	162,730	 	
Other Revolving Credit and Installment	 	742,834	 	734,836	 	734,721	 	721,386	 	
Lease Financing	 	28,627	 	30,680	 	32,535	 	34,676	 	
Total Consumer	 	3,952,305	 	3,911,471	 	3,873,533	 	3,764,635	 	
Total Loans and Leases	 	$	6,151,418	 	$	6,015,790	 	$	5,986,930	 	$	5,787,314	 	
 
Consumer Loans by Geographic Area (Unaudited)	 	 	 	 	 	 	 	Table 9	 	
 	 	 	 	 	 	 	 	 	 	
 	 	June 30,	 	March 31,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2005	 	2005	 	2004	 	2004	 	
Hawaii	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	$	2,120,033	 	$	2,120,747	 	$	2,110,147	 	$	2,071,073	 	
Home Equity	 	726,313	 	682,351	 	646,980	 	551,099	 	
Other Revolving Credit and Installment	 	558,396	 	558,712	 	559,135	 	554,995	 	
Lease Financing	 	28,627	 	30,680	 	32,535	 	34,676	 	
Guam	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	221,886	 	215,600	 	210,563	 	209,972	 	
Home Equity	 	8,636	 	8,431	 	7,631	 	8,067	 	
Other Revolving Credit and Installment	 	108,357	 	100,599	 	98,309	 	87,963	 	
U.S. Mainland	 	 	 	 	 	 	 	 	 	
Purchased Home Equity	 	93,806	 	109,632	 	122,728	 	162,730	 	
Other Pacific Islands	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	5,958	 	5,715	 	5,675	 	5,573	 	
Home Equity	 	4,212	 	3,479	 	2,553	 	59	 	
Other Revolving Credit and Installment	 	76,081	 	75,525	 	77,277	 	78,428	 	
Total Consumer Loans by Geographic Area	 	$	3,952,305	 	$	3,911,471	 	$	3,873,533	 	$	3,764,635	 	
 
Mortgage Servicing Rights
 
As of June 30, 2005, the Company’s portfolio of residential loans serviced for third parties totaled $2.5 billion.  In the second quarter of 2005, prepayment speeds increased as interest rates decreased, which resulted in a lower market value of the mortgage servicing rights.  Recent prepayment speeds for Hawaii mortgages continued to either approximate or be slightly higher than national averages.
 
Table 10 presents the changes in the carrying value of mortgage servicing rights, net of valuation allowance.
 
20

 
Mortgage Servicing Rights (Unaudited)	 	 	 	Table 10	 	
 	 	 	 	 	 	
 	 	Six Months Ended	 	Year Ended	 	
(dollars in thousands)	 	June 30, 2005	 	December 31, 2004	 	
Balance at Beginning of Period	 	$	18,769	 	$	22,178	 	
Originated Mortgage Servicing Rights	 	2,247	 	3,895	 	
Purchased Servicing Rights	 	21	 	235	 	
Valuation Allowance	 	—	 	(13)	 	
Amortization	 	(2,798)	 	(7,526)	 	
Balance at End of Period	 	$	18,239	 	$	18,769	 	
Fair Value at End of Period	 	$	20,886	 	$	22,154	 	
 
Other Assets and Other Liabilities
 
Table 11 presents the major components of other assets and other liabilities.
 
Other Assets and Other Liabilities (Unaudited)	 	 	 	 	 	Table 11	 	
 	 	 	 	 	 	 	 	
 	 	June 30,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2005	 	2004	 	2004	 	
Other Assets:	 	 	 	 	 	 	 	
Bank-Owned Life Insurance	 	$	147,346	 	$	144,370	 	$	141,370	 	
Federal Home Loan Bank and Federal Reserve Bank Stock	 	79,415	 	53,847	 	78,713	 	
Low Income Housing Investments	 	32,786	 	34,597	 	38,083	 	
Accounts Receivable	 	21,414	 	25,568	 	26,053	 	
Federal Tax Deposit	 	43,000	 	—	 	—	 	
Other	 	48,070	 	46,734	 	10,112	 	
Total Other Assets	 	$	372,031	 	$	305,116	 	$	294,331	 	
Other Liabilities:	 	 	 	 	 	 	 	
Incentive Plans Payable	 	$	7,246	 	$	12,090	 	$	6,582	 	
Insurance Premiums Payable	 	7,425	 	7,940	 	8,294	 	
Reserve for Unfunded Commitments 1	 	4,576	 	6,800	 	—	 	
Self Insurance Reserve	 	5,779	 	6,366	 	6,189	 	
Other	 	58,436	 	63,177	 	66,260	 	
Total Other Liabilities	 	$	83,462	 	$	96,373	 	$	87,325	 	

1 Prior to December 31, 2004, the reserve for unfunded commitments was a component of the allowance for loan and lease losses.  As of June 30, 2004, the reserve for unfunded commitments was $5.4 million.
 
During the second quarter of 2005, a deposit was placed with the IRS relating to a review by the IRS of the Company’s tax positions for certain leveraged lease transactions.  The placing of the deposit will prevent further accrual of potential interest related to the timing of tax payments for these transactions.   The Company believes its tax position related to these transactions was proper based on applicable statutes, regulations and case laws at the time the transactions were entered into.  The Company believes it has adequate reserves for these tax exposures as of June 30, 2005.
 
Deposits
 
As of June 30, 2005, deposits totaled $7.7 billion, an increase of $162.1 million and $257.5 million from December 31, 2004 and June 30, 2004, respectively.  The increase in the balances of interest-bearing demand deposits was due to an increase in the number of consumer and business accounts.  Time deposits growth was a result of customers transferring excess account balances to higher rate time deposits.  In 2005, time deposits rates have gradually increased.
 
21

 
Average time deposits of $100,000 or more is presented in Table 12.
 
Average Time Deposits of  $100,000 or More (Unaudited) 	Table 12	 	
 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	 	
(dollars in thousands)	 	June 30, 2005	 	December 31, 2004	 	June 30, 2004	 	June 30, 2005	 	June 30, 2004	 	
Average Time Deposits	 	$	631,831	 	$	543,382	 	$	570,738	 	$	610,546	 	$	589,100	 	

Securities Sold Under Agreements to Repurchase
 
Securities sold under agreements to repurchase totaled $861.2 million at June 30, 2005 an increase of $292.3 million from December 31, 2004 and $173.4 million from June 30, 2004.   The increases were due to additional placements received from government entities and $100.0 million in repos placed with a private entity in June 2005.  The private repos are comprised of two $50.0 million tranches at floating interest rates tied to the London International Bank Offering Rate (“LIBOR”).  The repos interest rates averaged 2.66% at June 30, 2005.  The term of the repos is 10 years, with the private entity having the right to terminate the transactions in two years.  If the agreements are not terminated the rate becomes fixed at 3.85% for the remaining eight years.
 
Table 13 presents the composition of securities sold under agreements to repurchase.
 
Securities Sold Under Agreements to Repurchase (Unaudited)	 	 	 	 	 	Table 13	 	
 	 	 	 	 	 	 	 	
 	 	June 30,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2005	 	2004	 	2004	 	
Government Entities	 	$	761,233	 	$	568,981	 	$	687,816	 	
Private Entities	 	100,000	 	—	 	—	 	
Total Securities Sold Under Agreements to Repurchase	 	$	861,233	 	$	568,981	 	$	687,816	 	
 
Short-Term Borrowings and Long-Term Debt
 
Short-term borrowings, including funds purchased, totaled $73.5 million at June 30, 2005, a decrease of $91.2 million from December 31, 2004 and a decrease of $76.7 million from June 30, 2004, primarily due to effective short-term liquidity management.  Long-term debt totaled $242.7 million at June 30, 2005, a decrease of $10.0 million and $54.9 million from December 31, 2004 and June 30, 2004, respectively.  The decreases were due to the maturity of $10.0 million in Federal Home Loan Bank (“FHLB”) advances and $70.0 million of matured private placement debt which was replaced with a $25.0 million FHLB advance.  For additional information, refer to the “Corporate Risk Profile – Liquidity Management” section of this report.
 
Shareholders’ Equity
 
The Company’s capital position remains strong.  The net reduction in capital from December 31, 2004 to June 30, 2005 is attributable to the Company’s continuing common stock repurchase program and to dividends paid, partially offset by net earnings for the first six months of 2005.  A further discussion of the Company’s capital is included in the “Corporate Risk Profile – Capital Management” section of this report.
 
Guarantees
 
The Company’s standby letters of credit totaled $109.1 million at June 30, 2005, an increase of $6.8 million from December 31, 2004 and a decrease of $6.5 million from June 30, 2004.
 
22

 
BUSINESS SEGMENTS
 
The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services Group and Treasury and Other Corporate.  The Company’s internal management accounting process measures the performance of the business segments based on the management structure of the Company.  This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of interest income and expense overhead, the 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 U.S. generally accepted accounting principles.  Results for prior periods have been reclassified to conform to current period classifications.
 
The business segments are primarily managed with a focus on performance measures, including net income after capital charge (“NIACC”) and risk adjusted return on capital (“RAROC”).  NIACC is net income less a charge for the cost of allocated capital.  The cost of allocated capital is determined by multiplying management’s estimate of a shareholder’s minimum required rate of return on capital invested (currently 11%) by the segment’s allocated equity.  The Company assumes a cost of capital that is equal to a risk-free rate plus a risk premium.  RAROC is the ratio of net income to risk-adjusted equity.  Equity is allocated to each business segment based on an assessment of its inherent risk.  The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis.  The basis for the allocation of net interest income is a function of management decisions and assumptions that are subject to change based on changes in current interest rate and market conditions.  Funds transfer pricing also serves to transfer interest rate risk to the Treasury segment.  However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.  The Provision charged to the Treasury and Other Corporate segment represents changes in the level of the reserve for credit losses.  The Provision recorded in the Retail Banking, Commercial Banking and Investment Services Group segments represents actual net charge-offs of these segments.
 
The financial results for each of the business segments for the three and six months ended June 30, 2005 and 2004 are discussed below and are presented in Table 14a and 14b.
 
Retail Banking
 
The Company’s Retail Banking segment offers a broad range of financial products and services to consumers and small businesses.  Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases and installment loans.  Deposit products include checking, savings and time deposit accounts.  The Retail Banking segment also provides merchant services to its small business customers.  Products and services from the Retail Banking segment are delivered to customers through 73 Hawaii branch locations, 500 ATMs, e-Bankoh (on-line banking service) and a 24-hour telephone banking service.  Also included in the segment is Bankoh Investment Services, Inc., a full service brokerage offering equities and bonds, mutual funds, life insurance and annuity products.
 
23

 
The improvement in the segment’s key financial measures for the three months ended June 30, 2005 as compared to the same period in 2004 was primarily due to an increase in net interest income resulting from higher earnings credit rate on the segment’s deposit portfolio.  Also contributing to the positive trend was a decrease in non-interest expense due to lower advertising, professional services and allocated expenses.
 
The improvement in the segment’s key financial measures for the six months ended June 30, 2005 as compared to the same period in 2004 was primarily due to an increase in net interest income and non-interest income.  The rise in net interest income was due to higher earnings credit on the segment’s deposit portfolio, as well as deposit and loan portfolio growth.  The increased non-interest income was largely due to policy initiatives, growth in the number of transactional deposit accounts and greater insurance and annuity sales volume.  Also contributing to this segment’s improvement was the decrease in non-interest expense due to lower professional services, consumer credit insurance and allocated expenses.
 
Commercial Banking
 
The Commercial Banking segment offers products including corporate banking and commercial real estate loans, lease financing, auto dealer financing, deposit and cash management products and property and casualty insurance products.  Lending, deposit and cash management services are offered to middle-market and large companies in Hawaii.  Commercial real estate mortgages are focused on customers that include investors, developers and builders primarily domiciled in Hawaii.  The Commercial Banking unit also includes the Company’s operations at its 12 branches in the Pacific Islands.
 
The improvement in the segment’s financial measures for the three and six months ended June 30, 2005 compared to the same periods in 2004 was a result of an increase in net interest income and a decrease in non-interest expense, partially offset by lower non-interest income.  The increase in net interest income was due primarily to higher deposit balances and higher earnings credit rates.  The decrease in non-interest income was primarily due to the distribution from a leasing partnership investment in the second quarter of 2004.  The decline in non-interest expense was primarily due to lower staffing levels.
 
Investment Services Group
 
The Investment Services Group includes private banking, trust services, asset management and institutional investment advice.  A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management.  The private banking and personal trust group assists individuals and families in building and preserving their wealth by providing investment, credit and trust expertise to high-net-worth individuals.  The asset management group manages portfolios and creates investment products.  Institutional sales and service offers investment advice to corporations, government entities and foundations.
 
The improvement in the segment’s key financial measures for the three and six months ended June 30, 2005 compared to the same periods in 2004 was due to increases in both net interest income and non-interest income.  Trust and asset management fee income increased largely due to improved market conditions which resulted in an increase in the average market value of assets under management and an increase in investment advisory fees on money market accounts.  The increase in net interest income primarily resulted from a transfer of private and consumer banking relationships between this segment and the Retail segment.  Non-interest expense increased slightly period over period.
 
24

 
Treasury and Other Corporate
 
The primary income earning component of this segment is Treasury, which consists of corporate asset and liability management activities, including interest rate risk management and foreign exchange business.  This segment’s assets and liabilities (and related net interest income) consist of interest-bearing deposits, investment securities, funds sold and purchased, government deposits and short- and long-term borrowings.  The primary source of foreign exchange income relates to customer driven currency requests from merchants and island visitors.  The net residual effect of transfer pricing of assets and liabilities is included in Treasury, along with eliminations of inter-company transactions.
 
This segment also includes divisions (Technology and Operations, Human Resources, Finance, Credit and Risk Management and Corporate and Regulatory Administration) that provide a wide-range of support to the other business segments.  Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.
 
The decrease in the segment’s key financial measures for the three and six months ended June 30, 2005 as compared to the same periods in 2004 was primarily due to decreases in both net interest income and non-interest income.  Net interest income decreased due to the impact of the higher cost of funding by the Treasury unit.  Income earned on higher average balances in the investment portfolio partially offset the reduction.  The sale of a parcel of land in 2004 was the primary reason for the reduction in non-interest income.  The reduction in non-interest expenses was a result of a legal settlement during the second quarter of 2004 and reduced stock-based compensation as compared to the same prior year periods.
 
25

 
Business Segment Selected Financial Information (Unaudited)	 	 	 	 	 	 	 	Table 14a	 	
 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Investment	 	Treasury	 	 	 	
 	 	Retail	 	Commercial	 	Services	 	and Other	 	Consolidated	 	
(dollars in thousands)	 	Banking	 	Banking	 	Group	 	Corporate	 	Total	 	
Three Months Ended June 30, 2005	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	54,212	 	$	35,525	 	$	3,222	 	$	8,080	 	$	101,039	 	
Provision for Loan and Lease Losses	 	3,531	 	236	 	—	 	(3,767)	 	—	 	
Net Interest Income After Provision for Loan and Lease Losses	 	50,681	 	35,289	 	3,222	 	11,847	 	101,039	 	
Non-Interest Income	 	25,080	 	8,735	 	14,229	 	2,630	 	50,674	 	
 	 	75,761	 	44,024	 	17,451	 	14,477	 	151,713	 	
Non-Interest Expense	 	(42,569)	 	(21,019)	 	(13,692)	 	(1,724)	 	(79,004)	 	
Income Before Income Taxes	 	33,192	 	23,005	 	3,759	 	12,753	 	72,709	 	
Provision for Income Taxes	 	(12,281)	 	(8,400)	 	(1,391)	 	(4,208)	 	(26,280)	 	
Allocated Net Income	 	20,911	 	14,605	 	2,368	 	8,545	 	46,429	 	
Allowance Funding Value	 	(168	)	(601)	 	(6)	 	775	 	—	 	
GAAP Provision	 	3,531	 	236	 	—	 	(3,767)	 	—	 	
Economic Provision	 	(3,435)	 	(2,432)	 	(103)	 	(1)	 	(5,971)	 	
Tax Effect of Adjustments	 	27	 	1,035	 	40	 	1,107	 	2,209	 	
Income Before Capital Charge	 	20,866	 	12,843	 	2,299	 	6,659	 	42,667	 	
Capital Charge	 	(5,424)	 	(4,562)	 	(1,428)	 	(8,296)	 	(19,710)	 	
Net Income (Loss) After Capital Charge (NIACC)	 	$	15,442	 	$	8,281	 	$	871	 	$	(1,637)	 	$	22,957	 	
 	 	 	 	 	 	 	 	 	 	 	 	
RAROC (ROE for the Company)	 	42	%	31	%	18	%	14	%	26	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Assets at June 30, 2005	 	$	3,789,519	 	$	2,533,496	 	$	192,378	 	$	3,544,297	 	$	10,059,690	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended June 30, 2004	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	49,524	 	$	33,583	 	$	2,832	 	$	9,910	 	$	95,849	 	
Provision for Loan and Lease Losses	 	2,587	 	2,730	 	(1)	 	(8,816)	 	(3,500)	 	
Net Interest Income After Provision for Loan and Lease Losses	 	46,937	 	30,853	 	2,833	 	18,726	 	99,349	 	
Non-Interest Income	 	24,388	 	12,141	 	12,985	 	5,334	 	54,848	 	
 	 	71,325	 	42,994	 	15,818	 	24,060	 	154,197	 	
Non-Interest Expense	 	(44,560)	 	(22,928)	 	(13,226)	 	(4,411)	 	(85,125)	 	
Income Before Income Taxes	 	26,765	 	20,066	 	2,592	 	19,649	 	69,072	 	
Provision for Income Taxes	 	(9,903)	 	(7,423)	 	(959)	 	(6,555)	 	(24,840)	 	
Allocated Net Income	 	16,862	 	12,643	 	1,633	 	13,094	 	44,232	 	
Allowance Funding Value	 	(148)	 	(688)	 	(6)	 	842	 	—	 	
GAAP Provision	 	2,587	 	2,730	 	(1)	 	(8,816)	 	(3,500)	 	
Economic Provision	 	(3,510)	 	(2,821)	 	(99)	 	(3)	 	(6,433)	 	
Tax Effect of Adjustments	 	396	 	288	 	39	 	2,951	 	3,674	 	
Income Before Capital Charge	 	16,187	 	12,152	 	1,566	 	8,068	 	37,973	 	
Capital Charge	 	(5,485)	 	(5,129)	 	(1,307)	 	(8,231)	 	(20,152)	 	
Net Income (Loss) After Capital Charge (NIACC)	 	$	10,702	 	$	7,023	 	$	259	 	$	(163)	 	$	17,821	 	
 	 	 	 	 	 	 	 	 	 	 	 	
RAROC (ROE for the Company)	 	33	%	26	%	13	%	28	%	24	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Assets at June 30, 2004	 	$	3,693,382	 	$	2,331,951	 	$	114,038	 	$	3,549,398	 	$	9,688,769	 	
 
26

 
Business Segment Selected Financial Information (Unaudited)	 	 	 	 	 	 	 	Table 14b	 	
 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Investment	 	Treasury	 	 	 	
 	 	Retail	 	Commercial	 	Services	 	and Other	 	Consolidated	 	
(dollars in thousands)	 	Banking	 	Banking	 	Group	 	Corporate	 	Total	 	
Six Months Ended June 30, 2005	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	106,562	 	$	70,087	 	$	6,111	 	$	18,937	 	$	201,697	 	
Provision for Loan and Lease Losses	 	7,016	 	652	 	(1)	 	(7,667)	 	—	 	
Net Interest Income After Provision for Loan and Lease Losses	 	99,546	 	69,435	 	6,112	 	26,604	 	201,697	 	
Non-Interest Income	 	49,322	 	20,266	 	28,855	 	4,546	 	102,989	 	
 	 	148,868	 	89,701	 	34,967	 	31,150	 	304,686	 	
Non-Interest Expense	 	(85,618)	 	(43,579)	 	(26,911)	 	(3,759)	 	(159,867)	 	
Income Before Income Taxes	 	63,250	 	46,122	 	8,056	 	27,391	 	144,819	 	
Provision for Income Taxes	 	(23,403)	 	(16,999)	 	(2,981)	 	(9,485)	 	(52,868)	 	
Allocated Net Income	 	39,847	 	29,123	 	5,075	 	17,906	 	91,951	 	
Allowance Funding Value	 	(331)	 	(1,202)	 	(12)	 	1,545	 	—	 	
GAAP Provision	 	7,016	 	652	 	(1)	 	(7,667)	 	—	 	
Economic Provision	 	(6,941)	 	(4,890)	 	(193)	 	(2)	 	(12,026)	 	
Tax Effect of Adjustments	 	94	 	2,013	 	76	 	2,267	 	4,450	 	
Income Before Capital Charge	 	39,685	 	25,696	 	4,945	 	14,049	 	84,375	 	
Capital Charge	 	(10,880)	 	(9,198)	 	(2,769)	 	(18,324)	 	(41,171)	 	
Net Income (Loss) After Capital Charge (NIACC)	 	$	28,805	 	$	16,498	 	$	2,176	 	$	(4,275)	 	$	43,204	 	
 	 	 	 	 	 	 	 	 	 	 	 	
RAROC (ROE for the Company)	 	40	%	31	%	20	%	17	%	25	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Assets at June 30, 2005	 	$	3,789,519	 	$	2,533,496	 	$	192,378	 	$	3,544,297	 	$	10,059,690	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Six Months Ended June 30, 2004	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	99,681	 	$	67,602	 	$	5,645	 	$	18,952	 	$	191,880	 	
Provision for Loan and Lease Losses	 	5,334	 	2,477	 	48	 	(11,359)	 	(3,500)	 	
Net Interest Income After Provision for Loan and Lease Losses	 	94,347	 	65,125	 	5,597	 	30,311	 	195,380	 	
Non-Interest Income	 	45,403	 	22,573	 	27,426	 	8,288	 	103,690	 	
 	 	139,750	 	87,698	 	33,023	 	38,599	 	299,070	 	
Non-Interest Expense	 	(87,777)	 	(46,072)	 	(26,256)	 	(8,042)	 	(168,147)	 	
Income Before Income Taxes	 	51,973	 	41,626	 	6,767	 	30,557	 	130,923	 	
Provision for Income Taxes	 	(19,230)	 	(15,381)	 	(2,504)	 	(9,777)	 	(46,892)	 	
Allocated Net Income	 	32,743	 	26,245	 	4,263	 	20,780	 	84,031	 	
Allowance Funding Value	 	(277)	 	(1,425)	 	(14)	 	1,716	 	—	 	
GAAP Provision	 	5,334	 	2,477	 	48	 	(11,359)	 	(3,500)	 	
Economic Provision	 	(6,906)	 	(5,598)	 	(193)	 	(5)	 	(12,702)	 	
Tax Effect of Adjustments	 	684	 	1,682	 	59	 	3,570	 	5,995	 	
Income Before Capital Charge	 	31,578	 	23,381	 	4,163	 	14,702	 	73,824	 	
Capital Charge	 	(11,255)	 	(10,395)	 	(2,590)	 	(17,950)	 	(42,190)	 	
Net Income (Loss) After Capital Charge (NIACC)	 	$	20,323	 	$	12,986	 	$	1,573	 	$	(3,248)	 	$	31,634	 	
 	 	 	 	 	 	 	 	 	 	 	 	
RAROC (ROE for the Company)	 	31	%	25	%	18	%	27	%	22	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Assets at June 30, 2004	 	$	3,693,382	 	$	2,331,951	 	$	114,038	 	$	3,549,398	 	$	9,688,769	 	
 
CORPORATE RISK PROFILE
 
Credit Risk
 
Credit Risk is defined as the risk that borrowers or counterparties will not be able to repay their obligations to the Company.  Credit exposures reflect legally binding commitments for loans, leases, banker’s acceptances, financial and performance standby letters of credit and overnight overdrafts.
 
27

 
The Company’s credit risk position remained generally stable during the first six months of 2005.  The Company continued to observe lower levels of internally criticized loans, non-performing assets and loans charged-off.  The ratio of non-accrual loans to total loans at June 30, 2005 was 0.16%, slightly reduced from 0.23% at December 31, 2004.  Net loan charge-offs (annualized) for the first six months of 2005 as a percent of average loans outstanding was 0.25%, an increase from 0.02% from same prior year period, due to a $6.0 million recovery of a previously charged-off loan from the divested Asia business in the second quarter of 2004.
 
The risk profile of the Hawaii and Guam-based loan portfolios continued to improve, primarily due to the expanding local economies led by the construction and real estate industries and record levels of tourism.
 
Outstandings related to the aircraft operations of domestic legacy carriers as of June 30, 2005 were $19.3 million and are included in the United States National Passenger Carriers total, as shown in Table 15 below.  Relative to the Company’s total portfolio, domestic legacy airline carriers continued to demonstrate a higher risk profile with negative trends due to sustained high oil prices.  In the evaluation of the reserve for credit losses, the Company considered the current financial strain on airlines, which offset the impact of the improvement in other components of the loan portfolio.
 
Air Transportation Credit Exposure 1 (Unaudited)	 	 	 	 	 	 	 	Table 15	 	
 	 	 	 	 	 	 	 	 	 	 	 	
 	 	June 30, 2005	 	Dec. 31, 2004	 	June 30, 2004	 	
 	 	 	 	Unused	 	Total	 	Total	 	Total	 	
(dollars in thousands)	 	Outstanding	 	Commitments	 	Exposure	 	Exposure	 	Exposure	 	
United States Regional Passenger Carriers	 	$	41,556	 	$	7,191	 	$	48,747	 	$	54,981	 	$	58,491	 	
United States National Passenger Carriers	 	37,638	 	—	 	37,638	 	37,377	 	37,581	 	
Passenger Carriers Based Outside United States	 	22,249	 	—	 	22,249	 	25,910	 	30,325	 	
Cargo Carriers	 	13,475	 	—	 	13,475	 	13,771	 	14,122	 	
Total Air Transportation	 	$	114,918	 	$	7,191	 	$	122,109	 	$	132,039	 	$	140,519	 	

1 Exposure includes loans, leveraged leases and operating leases.
 
Non-Performing Assets
 
Non-performing assets (“NPAs”) consist of non-accrual loans, foreclosed real estate and other investments.  NPAs decreased by $2.9 million from December 31, 2004 to $10.9 million as of June 30, 2005.
 
Impaired loans totaled $1.8 million at June 30, 2005, a decrease of $2.0 million from $3.8 million at December 31, 2004.  Impaired loans had a related allowance for loans of less than $0.1 million at June 30, 2005 and December 31, 2004.
 
Loans Past Due 90 Days or More and Still Accruing Interest
 
Accruing loans past due 90 days or more were $4.9 million at June 30, 2005, an increase of $2.9 million from December 31, 2004.  The increase was primarily due to a commercial mortgage in Guam that was past its maturity, but current in payments.  In early July 2005, the maturity date of this loan was formally extended.
 
Refer to Table 16 for further information on non-performing assets and accruing loans past due 90 days or more.
 
28

 
Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More (Unaudited)	 	Table 16	 	
 	 	 	 	 	 	 	 	 	 	
 	 	June 30,	 	March 31,	 	December 31,	 	June 30,	 	
(dollars in thousands)	 	2005	 	2005	 	2004	 	2004	 	
Non-Performing Assets	 	 	 	 	 	 	 	 	 	
Non-Accrual Loans	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	$	430	 	$	470	 	$	683	 	$	680	 	
Commercial Mortgage	 	1,739	 	1,922	 	2,106	 	5,649	 	
Lease Financing	 	1,586	 	2,418	 	2,973	 	1,948	 	
Total Commercial	 	3,755	 	4,810	 	5,762	 	8,277	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	6,035	 	7,503	 	7,688	 	7,688	 	
Home Equity	 	156	 	185	 	218	 	306	 	
Total Consumer	 	6,191	 	7,688	 	7,906	 	7,994	 	
Total Non-Accrual Loans	 	9,946	 	12,498	 	13,668	 	16,271	 	
Foreclosed Real Estate	 	292	 	183	 	191	 	4,889	 	
Other Investments	 	682	 	684	 	—	 	—	 	
Total Non-Performing Assets	 	$	10,920	 	$	13,365	 	$	13,859	 	$	21,160	 	
 	 	 	 	 	 	 	 	 	 	
Accruing Loans Past Due 90 Days or More	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	$	9	 	$	29	 	$	52	 	$	19	 	
Commercial Mortgage	 	2,213	 	2,243	 	—	 	693	 	
Total Commercial	 	2,222	 	2,272	 	52	 	712	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	1,310	 	604	 	387	 	698	 	
Purchased Home Equity	 	—	 	70	 	183	 	32	 	
Other Revolving Credit and Installment	 	1,417	 	1,417	 	1,433	 	1,142	 	
Lease Financing	 	—	 	—	 	30	 	57	 	
Total Consumer	 	2,727	 	2,091	 	2,033	 	1,929	 	
Total Accruing Loans Past Due 90 Days or More	 	$	4,949	 	$	4,363	 	$	2,085	 	$	2,641	 	
 	 	 	 	 	 	 	 	 	 	
Total Loans and Leases	 	$	6,151,418	 	$	6,015,790	 	$	5,986,930	 	$	5,787,314	 	
 	 	 	 	 	 	 	 	 	 	
Ratio of Non-Accrual Loans to Total Loans	 	0.16	%	0.21	%	0.23	%	0.28	%	
 	 	 	 	 	 	 	 	 	 	
Ratio of Non-Performing Assets to Total Loans,
Foreclosed Real Estate and Other Investments	 	0.18	%	0.22	%	0.23	%	0.37	%	
 	 	 	 	 	 	 	 	 	 	
Ratio of Non-Performing Assets and Accruing Loans
Past Due 90 Days or More to Total Loans	 	0.26	%	0.29	%	0.27	%	0.41	%	
 	 	 	 	 	 	 	 	 	 	
Quarter to Quarter Changes
In Non-Performing Assets	 	 	 	 	 	 	 	 	 	
Balance at Beginning of Quarter	 	$	13,365	 	$	13,859	 	$	15,977	 	$	27,866	 	
Additions	 	3,088	 	2,796	 	5,164	 	3,909	 	
Reductions	 	 	 	 	 	 	 	 	 	
Payments	 	(5,097)	 	(2,202)	 	(6,435)	 	(4,232)	 	
Return to Accrual	 	(392)	 	(698)	 	(456)	 	(2,700)	 	
Sales of Foreclosed Assets	 	—	 	(129)	 	(206)	 	(147)	 	
Charge-offs/Write-downs	 	(44)	 	(261)	 	(185)	 	(3,536)	 	
Total Reductions	 	(5,533)	 	(3,290)	 	(7,282)	 	(10,615)	 	
Balance at End of Quarter	 	$	10,920	 	$	13,365	 	$	13,859	 	$	21,160	 	
 
29

 
Reserve for Credit Losses
 
The Company’s reserve for credit losses is comprised of two components, which are the Allowance for Loan and Lease Losses (“Allowance”) and the Reserve for Unfunded Commitments (“Unfunded Reserve”).  The Unfunded Reserve was reclassified on a prospective basis at December 31, 2004, from the Allowance to other liabilities in the Company’s Consolidated Statements of Condition.
 
The Company maintains the Allowance at a level adequate to cover management’s estimate of probable credit losses inherent in its lending portfolios.  The Unfunded Reserve is maintained at an adequate level to cover management’s estimate of probable credit losses inherent in unfunded commitments to extend credit.  The adequacy of the Allowance and the Unfunded Reserve is based on a comprehensive quarterly analysis of historical loss experience, supplemented by judgmental expectations of portfolio performance and economic conditions as of a given balance sheet date.
 
The Allowance declined by $5.2 million at June 30, 2005 from December 31, 2004 primarily due to net loan charge-offs of $7.4 million.  The ratio of the Allowance to loans and leases outstanding was 1.65% at June 30, 2005, a decrease of 13 basis points from December 31, 2004 primarily due to the increase in loans outstanding.
 
The Unfunded Reserve declined by $2.2 million from December 31, 2004 primarily due to the cancellation of a letter of credit to an air transportation company.
 
The Allowance and the Unfunded Reserve are both increased and decreased through the Provision.  After considering net charge-offs, the changes in the Allowance and the Unfunded Reserve resulted in no Provision being recorded for the six months ended June 30, 2005.
 
A summary of the reserve for credit losses is presented in Table 17.
 
30

 
Consolidated Reserve for Credit Losses (Unaudited)	 	 	 	 	 	 	 	Table 17	 	
 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	 	
 	 	June 30,	 	June 30,	 	
(dollars in thousands)	 	2005	 	2004	 	2005	 	2004	 	
Balance at Beginning of Period	 	$	109,906	 	$	127,185	 	$	113,596	 	$	129,080	 	
Loans Charged-Off	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	581	 	3,328	 	1,155	 	3,715	 	
Commercial Mortgage	 	—	 	—	 	—	 	574	 	
Lease Financing	 	—	 	379	 	—	 	607	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	67	 	319	 	382	 	464	 	
Home Equity	 	—	 	9	 	—	 	9	 	
Purchased Home Equity	 	406	 	201	 	698	 	291	 	
Other Revolving Credit and Installment	 	4,546	 	4,564	 	9,128	 	9,219	 	
Lease Financing	 	29	 	28	 	63	 	64	 	
Total Loans Charged-Off	 	5,629	 	8,828	 	11,426	 	14,943	 	
Recoveries on Loans Previously Charged-Off	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	211	 	1,245	 	753	 	2,199	 	
Commercial Mortgage	 	32	 	151	 	94	 	840	 	
Construction	 	—	 	—	 	—	 	435	 	
Lease Financing	 	130	 	1	 	162	 	16	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	189	 	304	 	295	 	598	 	
Home Equity	 	5	 	101	 	30	 	140	 	
Purchased Home Equity	 	120	 	57	 	154	 	57	 	
Other Revolving Credit and Installment	 	1,166	 	1,703	 	2,453	 	3,366	 	
Lease Financing	 	33	 	16	 	52	 	71	 	
Foreign	 	—	 	6,469	 	—	 	6,545	 	
Total Recoveries on Loans Previously Charged-Off	 	1,886	 	10,047	 	3,993	 	14,267	 	
Net Loan Recoveries (Charge-Offs)	 	(3,743)	 	1,219	 	(7,433)	 	(676)	 	
Provision for Loan and Lease Losses	 	—	 	(3,500)	 	—	 	(3,500)	 	
Balance at End of Period 1	 	$	106,163	 	$	124,904	 	$	106,163	 	$	124,904	 	
Components	 	 	 	 	 	 	 	 	 	
Allowance for Loan and Lease Losses	 	$	101,587	 	$	124,904	 	$	101,587	 	$	124,904	 	
Reserve for Unfunded Commitments 2	 	4,576	 	—	 	4,576	 	—	 	
Total Reserve for Credit Losses	 	$	106,163	 	$	124,904	 	$	106,163	 	$	124,904	 	
Average Loans Outstanding	 	$	6,090,149	 	$	5,772,926	 	$	6,045,609	 	$	5,757,647	 	
Ratio of Net Loan (Recoveries) Charge-Offs to Average Loans Outstanding (annualized)	 	0.25	%	(0.08)	%	0.25	%	0.02	%	
Ratio of Allowance to Loans and Leases Outstanding 2	 	1.65	%	2.16	%	1.65	%	2.16	%	

1   Included in this analysis is activity related to the Company’s reserve for unfunded commitments, which is separately recorded in other liabilities in the Consolidated Statements of Condition.
2   The reclassification of the reserve for unfunded commitments to other liabilities occurred in the fourth quarter of 2004 on a prospective basis. Thus, June 30, 2004 allowance for loan and lease losses and reserve for unfunded commitments were reported together. At June 30, 2004, the reserve for unfunded commitments was $5.4 million.
 
Market Risk
 
Market risk is the potential of loss arising from adverse changes in interest rates and prices.  The Company is exposed to market risk as a consequence of the normal course of conducting its business activities.  Financial products that expose the Company to market risk include investment securities, loans, deposits, debt and derivative financial instruments.  The Company’s market risk management process involves measuring, monitoring, controlling and managing risks that can significantly impact the Company’s financial position and operating results.  In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance and shareholder value, while limiting the volatility of each.  The activities associated with these market risks are categorized into “trading” and “other than trading.”
 
31

 
The Company’s trading activities include foreign currency and foreign exchange contracts that expose the Company to a minor degree of foreign currency risk.  These transactions are primarily executed on behalf of customers and at times for the Company’s own account.
 
The Company’s “other than trading” activities include normal business transactions that expose the Company’s balance sheet profile to varying degrees of market risk.
 
Interest Rate Risk
 
The Company’s balance sheet is sensitive to changes in the general level of interest rates.  This interest rate risk is a form of market risk and arises primarily from the Company’s normal business activities of making loans and taking deposits.  Many other factors also affect the Company’s exposure to changes in interest rates, such as general economic and financial conditions and historical pricing relationships.
 
Table 18 presents, as of June 30, 2005, December 31, 2004 and June 30, 2004, the estimate of the change in net interest income (“NII”) that would result from a gradual 200 basis point decrease or increase 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 an average increase of $1.8 million in NII per quarter.  The Company’s balance sheet continues to be asset-sensitive based on a parallel increase in rates over the entire yield curve over the next 12-month period.
 
Market Risk Exposure to Interest Rate Changes (Unaudited)	Table 18	
 
 	 	June 30, 2005	 	December 31, 2004	 	June 30, 2004	 	
 	 	Interest Rate Change	 	Interest Rate Change	 	Interest Rate Change	 	
 	 	(in basis points)	 	(in basis points)	 	(in basis points)	 	
(dollars in thousands)	 	-200	 	+200	 	-200	 	+200	 	-200	 	+200	 	
Estimated Exposure as a Percent of Net Interest Income	 	(4.7)	%	1.8	%	(6.5)	%	2.0	%	(5.0)	%	2.8	%	
Estimated Exposure to Net Interest Income Per Quarter	 	$	(4,779)	 	$	1,830	 	$	(6,347)	 	$	1,953	 	$	(4,823)	 	$	2,701	 	

The Company uses several approaches to manage its interest rate risk in an effort to shift balance sheet mix or alter the interest rate characteristics of its assets and liabilities.  These approaches can include changing product pricing strategies, modifying investment portfolio characteristics, or using financial derivative instruments.  The use of financial derivatives has been limited over the past several years.
 
Liquidity Management
 
Liquidity is managed in an effort to ensure that the Company has continuous access to sufficient, cost effective funding to conduct its business and meet its obligations as they become due in a normal manner.
 
The Bank is a member of the FHLB, which provides an additional source of short- and long-term funding.  Borrowings from the FHLB were $77.5 million at June 30, 2005, compared to $87.5 million at December 31, 2004 and $62.5 million at June 30, 2004.  The decrease from December 31, 2004 was due to a $10.0 million advance that matured in the first quarter of 2005.
 
Additionally, the Bank maintains a $1.0 billion senior and subordinated bank note program.  Under this facility, the Bank may issue additional notes provided that the aggregate amount outstanding does not exceed $1.0 billion.  Subordinated notes outstanding under this bank note program totaled $124.8 million at June 30, 2005 and December 31, 2004 and $124.7 million at June 30, 2004.
 
32

 
Capital Management
 
The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies.  The Company’s objective is to hold sufficient capital on a regulatory basis to exceed the minimum guidelines of a “well capitalized” financial institution, while over the long term optimize shareholder value, support asset growth, provide protection against unforeseen losses and risks inherent in its markets and comply with regulatory requirements.
 
At June 30, 2005, shareholders’ equity totaled $712.2 million, a 13% decrease from December 31, 2004.  The decrease in shareholders’ equity during the first six months of 2005 was primarily attributable to the Company’s repurchase of its common stock under the repurchase program and to dividends paid, partially offset by earnings.
 
During the six months ended June 30, 2005, 3.7 million shares of common stock were repurchased under the repurchase program at an average cost of $47.41 per share, totaling $173.5 million.  From the beginning of the share repurchase program in July 2001 through June 30, 2005, the Company repurchased a total of 38.6 million shares and returned a total of $1.3 billion to its shareholders at an average cost of $32.67 per share.  From July 1, 2005 through July 22, 2005, the Company repurchased an additional 75,000 shares of common stock at an average cost of $52.90 per share for a total of $4.0 million, resulting in remaining buyback authority under the share repurchase program of $85.1 million.
 
In July 2005, the Company’s Board of Directors declared a quarterly cash dividend of $0.33 per share on the Company’s outstanding shares.  The dividend will be payable on September 15, 2005 to shareholders of record at the close of business on August 29, 2005.
 
Table 19 presents the regulatory capital and ratios as of June 30, 2005, December 31, 2004 and June 30, 2004.
 
Regulatory Capital and Ratios (Unaudited)	 	 	 	 	 	Table 19	 	
 	 	 	 	 	 	 	 	
(dollars in thousands)	 	June 30, 2005	 	December 31, 2004	 	June 30, 2004	 	
Regulatory Capital	 	 	 	 	 	 	 	
Shareholders’ Equity	 	$	712,169	 	$	814,834	 	$	699,438	 	
Add:	8.25% Capital Securities of Bancorp Hawaii Capital Trust I	 	31,425	 	31,425	 	31,425	 	
Less:	Goodwill	 	34,959	 	36,216	 	36,216	 	
 	Unrealized Valuation and Other Adjustments	 	(301)	 	5,251	 	(10,776)	 	
Tier 1 Capital	 	708,936	 	804,792	 	705,423	 	
Allowable Reserve for Credit Losses	 	86,673	 	83,292	 	79,889	 	
Qualifying Subordinated Debt	 	74,870	 	99,808	 	99,787	 	
Unrealized Gains on Available for Sale Equity Securities	 	16	 	31	 	48	 	
Total Regulatory Capital	 	$	870,495	 	$	987,923	 	885,147	 	
 	 	 	 	 	 	 	 	
Risk–Weighted Assets	 	$	6,915,245	 	$	6,633,082	 	$	6,346,134	 	
 	 	 	 	 	 	 	 	
Key Regulatory Capital Ratios	 	 	 	 	 	 	 	
Tier 1 Capital Ratio	 	10.25	%	12.13	%	11.12	%	
Total Capital Ratio	 	12.59	%	14.89	%	13.95	%	
Leverage Ratio	 	7.18	%	8.29	%	7.16	%	
 
33

 
Financial Outlook
 
The Company’s earnings estimate of approximately $176.0 million to $179.0 million in net income for the full year of 2005 remains unchanged.  The Company performs a quarterly analysis of credit quality to determine the adequacy of the reserve for credit losses.  The results of this analysis determine the timing and amount of the Provision.  Earnings per share and return on equity projections continue to be dependent upon, among other things, the terms and timing of share repurchases.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Market Risk.
 
Item 4.    Controls and Procedures
 
Disclosure Controls and Procedures
 
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2005.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005.  There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the first six months of 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Changes in Internal Controls over Financial Reporting
 
None.
 
Part II. - Other Information
 
Items 1, 3 and 5 omitted pursuant to instructions.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Period	 	Total Number of
Shares Purchased  1	 	Average Price
Paid Per Share	 	Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs	 	Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the
Plans or Programs  2	 	
April 1 - 30, 2005	 	627,100	 	$	45.45	 	627,100	 	$	121,411,025	 	
May 1 - 31, 2005	 	483,968	 	48.77	 	475,000	 	98,242,976	 	
June 1 - 30, 2005	 	187,559	 	49.22	 	186,500	 	89,063,461	 	
Total	 	1,298,627	 	$	47.23	 	1,288,600	 	 	 	

1 The months of May and June included 8,968 and 1,059 mature shares, respectively, purchased from employees in connection with stock option exercises. These shares were not purchased as part of the publicly announced program. The shares were purchased at the closing price of the Company’s common stock on the dates of purchase.
2 The Company repurchased shares during the second quarter of 2005 pursuant to its ongoing share repurchase program that was first announced in July 2001. As of July 22, 2005, $85.1 million remained of the total $1.35 billion total repurchase amount authorized by the Company’s Board of Directors under the share repurchase program. The program has no set expiration or termination date.
 
34

 
Item 4.  Submission of Matters to a Vote of Security Holders
 
At the annual shareholders meeting held on April 29, 2005, the following matters were submitted to a vote of the shareholders:
 
a.               Election of Directors to the Board of Directors: *
 
Peter D. Baldwin:	 	 	 	
Votes cast for:	 	45,418,466	 	
Votes withheld:	 	1,642,067	 	
 	 	 	 	
Michael J. Chun:	 	 	 	
Votes cast for:	 	46,303,311	 	
Votes withheld:	 	757,222	 	
 	 	 	 	
Robert Huret:	 	 	 	
Votes cast for:	 	46,308,099	 	
Votes withheld:	 	752,434	 	
 	 	 	 	
Donald M. Takaki:	 	 	 	
Votes cast for:	 	45,639,136	 	
Votes withheld:	 	1,421,397	 	
 
b.              Approval of Bank of Hawaii Corporation Amended and Restated Director Stock Compensation Plan **
 
Votes cast for:	 	35,517,651	 	
Votes cast against:	 	2,895,297	 	
Broker non-votes:	 	7,840,865	 	
Abstentions:	 	806,720	 	
 
c.               Ratification of Selection of an Independent Registered Public Accounting Firm - Ernst & Young, LLP
 
Votes cast for:	 	45,399,381	 	
Votes cast against:	 	1,577,434	 	
Abstentions:	 	83,718	 	

*      The directors are elected by a plurality of the votes cast; therefore, votes cast in the election could not be recorded against or as an abstention, nor could broker non-votes be recorded.
**    A broker non-vote had no effect on this proposal and an abstention had the same effect as a vote against the proposal.
 
35

 
Item 6.    Exhibits
 
Exhibit Index
 
Exhibit Number
 
10.1	 	Bank of Hawaii Corporation Amended and Restated Director Stock Compensation Plan - Restricted Stock Agreement for April 29, 2005 Grant	
 	 	 	
10.2	 	Bank of Hawaii Corporation Amended and Restated Director Stock Compensation Plan - Stock Option Agreement for April 29, 2005 Grant	
 	 	 	
12	 	Statement Regarding Computation of Ratios	
 	 	 	
31.1	 	Rule 13a-14(a) Certifications	
 	 	 	
31.2	 	Rule 13a-14(a) Certifications	
 	 	 	
32	 	Section 1350 Certification, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 
36

 
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:   July 27, 2005	 	Bank of Hawaii Corporation and Subsidiaries	

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

 	By:	     /s/ Richard C. Keene	 	
 	 	Richard C. Keene	
 	 	Chief Financial Officer	
 
37

 
EXHIBIT INDEX
 
Exhibit Number
 
10.1	 	Bank of Hawaii Corporation Amended and Restated Director Stock Compensation Plan - Restricted Stock Agreement for April 29, 2005 Grant	
 	 	 	
10.2	 	Bank of Hawaii Corporation Amended and Restated Director Stock Compensation Plan - Stock Option Agreement for April 29, 2005 Grant	
 	 	 	
12	 	Statement Regarding Computation of Ratios	
 	 	 	
31.1	 	Rule 13a-14(a) Certifications	
 	 	 	
31.2	 	Rule 13a-14(a) Certifications	
 	 	 	
32	 	Section 1350 Certification, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 
38

Exhibit 10.1
 
DIRECTOR:
DATE OF GRANT: April 29, 2005
NUMBER OF SHARES: 555
 
BANK OF HAWAII CORPORATION
AMENDED AND RESTATED DIRECTOR STOCK COMPENSATION PLAN
 
*                    *                    *
 
RESTRICTED STOCK AGREEMENT
 
1.    Definitions.
 
1.1           “Agreement” means this Restricted Stock Agreement.
 
1.2           “Board” means the Board of Directors of the Company.
 
1.3           “Change in Control” means, and shall be deemed to have occurred, if:
 
(a)  any Person, excluding employee benefit plans of the Company or any of its affiliates, is or becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of Company securities representing 25 percent or more of the combined voting power of the Company’s then outstanding securities (“Voting Power”);
 
(b)  the Company consummates a merger, consolidation, share exchange, division or other reorganization or transaction of the Company (a “Fundamental Transaction”) with any other corporation, other than a Fundamental Transaction that results in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty percent (60%) of the combined Voting Power immediately after such Fundamental Transaction of (i) the Company’s outstanding securities, (ii) the surviving entity’s outstanding securities, or (iii) in the case of a division, the outstanding securities of each entity resulting from the division;
 
(c)   the shareholders of the Company approve a plan of complete liquidation or winding-up of the Company or an agreement for the sale or disposition (in one transaction or a series of transactions) of all or substantially all of the Company’s assets; or
 
(d)   during any period of twenty-four (24) consecutive months, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still

 
in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied).
 
1.4       “Common Stock: means the common stock par value $0.01 per share, of the Company.
 
1.5       “Company” means Bank of Hawaii Corporation, and any successor thereto.
 
1.6       “Date of Grant” means the date set forth as the “Date of Grant” on page 1 of this Agreement.
 
1.7       “Disability” means the Director’s permanent and total disability within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended.
 
1.8       “Director” means the person identified as the “Director” on page 1 of this Agreement.
 
1.9       “Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
1.10     “Person” means the term “person” within the meaning of Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d)(3) and 14(d) thereof.
 
1.11     “Plan” means the Bank of Hawaii Corporation Amended and Restated Director Compensation Plan, as amended from time to time.
 
1.12     “Restricted Shares” means the shares of Common Stock granted to the Director pursuant to Section 2 hereof
 
1.13     “Restriction Period” means the period beginning on the Date of Grant and ending on the third anniversary of the Date of Grant.  Notwithstanding the foregoing, the Restriction Period shall end immediately upon the occurrence of a Change in Control.
 
2.    Award of Restricted Shares.  Pursuant to the Plan and subject to the terms of this Agreement, the Company hereby grants to the Director  that number of shares of Common Stock (“Restricted Shares”) identified as the “Number of Shares” on page 1 of this Agreement.  During the Restriction Period, each certificate representing Restricted Shares shall be held by the Company or its designee and shall contain the following legend:
 
“This certificate and the shares of stock represented hereby are subject to the terms and conditions (including the risks of forfeiture and restrictions against transfer) contained in the Bank of Hawaii Corporation Amended and Restated Director Stock Compensation Plan and an Agreement entered into between the registered owner and Bank of Hawaii Corporation.  Release from such terms and

 
conditions shall be made only in accordance with the provisions of the Plan and the Agreement, a copy of each of which is on file in the office of the Secretary of Bank of Hawaii Corporation.”
 
2.    Terms, Conditions and Restrictions.  Restricted Shares shall be subject to the following terms, conditions and restrictions in addition to those contained in the Plan:
 
3.1      Prohibitions Against Sale, Assignment, etc.  Restricted Shares, the right to vote Restricted Shares and the right to receive dividends thereon may not be sold, assigned, transferred, exchanged, pledged, hypothecated or otherwise encumbered during the Restriction Period with respect to such Restricted Shares.
 
3.2      Forfeiture.  In the event of the Director’s termination of membership on the Board prior to the lapse of the Restriction Period, the Restricted Shares shall be forfeited by the Director to the Company and neither the Director nor any successors, heirs, assigns or personal representatives of the Director shall thereafter have any further rights or interest in such Restricted Shares or the certificates representing such Restricted Shares.
 
3.3      Termination of Restrictions.  In the event the Restriction Period shall terminate with respect to particular Restricted Shares and such Restricted Shares shall not theretofore have been forfeited to the Company, then the Company shall reissue the certificate representing such Restricted Shares without the legend referred to in Section 2 of this Agreement and shall deliver such certificate to the Director or his legal representative.
 
3.4      Effect of Death or Disability.  If the Director’s membership on the Board terminates during the Restriction Period due to death or Disability, the Restriction Period shall be treated as having expired immediately prior to such death or disability.
 
3.5      Withholding.  The Company’s obligation to deliver shares of Common Stock upon the termination of the Restriction Period with respect to any Restricted Shares shall be subject to the satisfaction of applicable federal, state and local tax withholding requirements.
 
4.    Legends.  The Director agrees that the certificates evidencing the shares of Common Stock may include any legend which the Board deems appropriate to reflect the transfer and other restrictions contained in the Plan, this Agreement, or to comply with applicable laws.
 
5.    Rights as Stockholder.  Except as provided in Section 3 hereof, the Director shall have all the rights and privileges of a stockholder with respect to the Restricted Shares, including (but not limited to) the right to vote the Restricted Shares and the right to receive dividends.   All such rights and privileges shall cease upon forfeiture of the Restricted Shares.

 
6.    Board Membership.  Neither the grant or issuance of Restricted Shares pursuant to this Agreement nor any term or provision of this Agreement shall constitute or be evidence of any understanding, express or implied, on the part of the Company to retain the Director as a member of the Board for any period.
 
7.    Subject to the Plan.  The Restricted Shares and this Agreement are subject to the terms and conditions of the Plan, which are incorporated herein by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement.  In addition, the Restricted Shares and this Agreement are subject to any rules and regulations promulgated by the Board in accordance with its authority under the Plan.
 
8.    Governing Law.  The validity, construction, interpretation and enforceability of this Agreement shall be determined and governed by the laws of the State of Hawaii without giving effect to the principles of conflicts of laws.
 
9.    Severability.  If any provision of this Agreement shall be held to be invalid, illegal or unenforceable in any material respect, such provision shall be replaced with a provision that is as close as possible in effect to such invalid, illegal or unenforceable provision, and still be valid, legal and enforceable, and the validity, legality and enforceability of the remainder of this Agreement shall not in any way be affected or impaired thereby.
 
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed on its behalf by the undersigned, thereunto duly authorized, effective as of the Date of Grant.
 
ATTEST:	BANK OF HAWAII CORPORATION	
 	 	
 	 	By:	 	 	 	

ACCEPTED AND AGREED TO	 	 	
AS OF THE DATE OF GRANT:	 	 	 	
 	 	DIRECTOR	

Exhibit 10.2
 
DIRECTOR:	
DATE OF GRANT:	April 29, 2005	
EXERCISE PRICE:	$47.35	
COVERED SHARES:  	2,057	

BANK OF HAWAII CORPORATION
AMENDED AND RESTATED
DIRECTOR STOCK COMPENSATION PLAN
 
*                    *                    *
 
STOCK OPTION AGREEMENT
 
Definitions.
 
“Agreement” means this Stock Option Agreement.
 
“Board” means the Board of Directors of the Company.
 
“Change in Control” means, and shall be deemed to have occurred, if:
 
any Person, excluding employee benefit plans of the Company or any of its affiliates, is or becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of Company securities representing 25 percent or more of the combined voting power of the Company’s then outstanding securities (“Voting Power”);
 
the Company consummates a merger, consolidation, share exchange, division or other reorganization or transaction of the Company (a “Fundamental Transaction”) with any other corporation, other than a Fundamental Transaction that results in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty percent (60%) of the combined Voting Power immediately after such Fundamental Transaction of (i) the Company’s outstanding securities, (ii) the surviving entity’s outstanding securities, or (iii) in the case of a division, the outstanding securities of each entity resulting from the division;
 
the shareholders of the Company approve a plan of complete liquidation or winding-up of the Company or an agreement for the sale or disposition (in one transaction or a series of transactions) of all or substantially all of the Company’s assets; or
 
during any period of twenty-four (24) consecutive months, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Company’s shareholders was approved

 
by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied).
 
“Common Stock” means the common stock, par value $0.01 per share, of the Company.
 
“Company” means Bank of Hawaii Corporation, and any successor thereto.
 
“Covered Shares” means the shares of Common Stock subject to the Option.
 
“Date of Exercise” means the date on which the Company receives notice pursuant to Section 4.1 hereof of the exercise, in whole or in part, of the Option.
 
“Date of Expiration” means the date on which the Option shall expire, which shall be the earliest of the following times:
 
three months after termination of the Director’s membership on the Board for any reason other than by reason of death or Disability;
 
one year after termination of the Director’s membership on the Board by reason of death or Disability; or
 
ten years after the Date of Grant.
 
“Date of Grant” means the date set forth as the “Date of Grant” on page 1 of this Agreement.
 
“Director” means the person identified as the “Director” on page 1 of this Agreement.
 
“Disability” means the Director’s total and permanent disability within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended.
 
3.     “Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
“Exercise Price” means the dollar amount per share of Common Stock set forth on page 1 of this Agreement, as it may be adjusted from time to time pursuant to Section 11 of the Plan.
 
“Fair Market Value” means, unless otherwise determined by the Board, the last sale price for a share of Common Stock, as of the relevant date, on such securities exchange or automated dealer quotation system as reported by such source as the Board may select, or if the Common Stock is not traded on a securities exchange or automated dealer quotation system, an amount equal to the then fair market value of a share of Common Stock as determined by the Board pursuant to a reasonable method adopted in good faith for such purpose.

 
“Option” means the stock option granted to the Director pursuant to Section 2 hereof.
 
“Director ” means the person identified as the “Director” on page 1 of this Agreement.
 
“Person” means the term “person” within the meaning of Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d)(3) and 14(d) thereof.
 
“Plan” means the Bank of Hawaii Corporation Amended and Restated Director Stock Compensation Plan, as amended from time to time.
 
Grant of Option.  Pursuant to the Plan and subject to the terms of this Agreement, the Company hereby grants to the Director, as of the Date of Grant, the Option to purchase from the Company that number of shares of Common Stock identified as the “Covered Shares” on page 1 of this Agreement, exercisable at the Exercise Price.
 
Terms of the Option.
 
Type of Option.  The Option is intended to be a nonqualified stock option.
 
Option Period; Exercisability.  The Option may be exercised in whole shares as follows:
 
no part of the Option may be exercised during the first year following the Date of Grant or at any time after the Date of Expiration;
 
beginning on the first anniversary of the Date of Grant, the Option may be exercised as to a maximum of one-third of the Covered Shares (rounded up to the next whole number of shares);
 
beginning on the second anniversary of the Date of Grant, the Option may be exercised as to an additional one-third of the Covered Shares (rounded down to the next whole number of shares); and
 
beginning on the third anniversary of the Date of Grant, the Option may be exercised as to all of the Covered Shares.
 
Notwithstanding the foregoing, in the event of a Change in Control or termination of the Director’s membership on the Board by reason of Disability or death, the Option shall thereupon become exercisable at any time prior to the Date of Expiration as to the full number of Covered Shares.  In no event shall the number of Covered Shares as to which the Option is exercisable increase after termination of the Director’s membership on the Board.
 
Nontransferability. The Option is not transferable by the Director other than by will or by the laws of descent and distribution, and is exercisable, during the Director’s  lifetime, only by the Director, or, in the event of the Director’s  legal disability, by the Director’s  legal representative.  Notwithstanding the foregoing, the Director may, subject to complying with

 
applicable securities and other laws, transfer the Option to a trust as to which the Director is both trustee and beneficiary (and such trust may hold and exercise the Option), and in the event of such transfer, the Option shall continue to be subject to the terms of this Agreement and the Plan.
 
Payment of the Exercise Price.  The Director, upon exercise, in whole or in part, of the Option, may pay the Exercise Price by any or all of the following means, either alone or in combination:
 
cash or check payable to the order of the Company;
 
delivery (either actual or constructive) of shares of unencumbered Common Stock (provided that such shares, if acquired under the Option or under any other option or award granted under the Plan or any other plan sponsored or maintained by the Company, have been held by the Director for at least six months or such other period, if any, as determined by the Board) that have an aggregate Fair Market Value on the Date of Exercise equal to that portion of the Exercise Price being paid by delivery of such shares; or
 
in accordance with such rules as may be specified by the Board, delivery to the Company of a properly executed exercise notice and irrevocable instructions to a registered securities broker promptly to deliver to the Company cash equal to the Exercise Price for that portion of the Option being exercised.
 
Exercise.
 
Notice.  The Option shall be exercised, in whole or in part by the delivery to the Company of written notice of such exercise, in such form as the Board may from time to time prescribe, accompanied by full payment of the Exercise Price with respect to that portion of the Option being exercised.
 
Withholding.  The Company’s obligation to issue or deliver shares of Common Stock upon the exercise of the Option shall be subject to the satisfaction of any applicable federal, state and local tax withholding requirements.
 
Effect.  The exercise, in whole or in part, of the Option shall cause a reduction in the number of Covered Shares as to which the Option may be exercised in an amount equal to the number of shares of Common Stock as to which the Option is exercised.
 
Representations.  The Director agrees that, upon the issuance of any shares of Common Stock upon the exercise of the Option, the Director will, upon the request of the Company, represent and warrant in writing that the Director (a) has received and reviewed a copy of the Plan; (b) is capable of evaluating the merits and risks of exercising the Option and acquiring the shares and able to bear the economic risks of such investment; (c) has made such investigation as he or she deems necessary and appropriate of the business and financial prospects of the Company, and (d) is acquiring the shares for investment only and not with a view to resale or other distribution thereof.  The Director shall make such other representations and warranties that the Board may request for the purpose of complying with applicable law.

 
Legends.  The Director agrees that the certificates evidencing the shares of Common Stock issued upon exercise of the Option may include any legend which the Board deems appropriate to comply with applicable laws.
 
Rights as Stockholder.  The Director shall have no rights as a stockholder with respect to any shares of Common Stock subject to the Option until and unless a certificate or certificates representing such shares are issued to the Director pursuant to this Agreement.
 
Membership on Board.  Neither the grant of the Option evidenced by this Agreement nor any term or provision of this Agreement shall constitute or be evidence of any understanding, express or implied, on the part of the Company to retain the Director as a member of the Board for any period.
 
Subject to the Plan.  The Option evidenced by this Agreement and the exercise thereof are subject to the terms and conditions of the Plan, which are incorporated by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any rights or benefits under this Agreement.  In addition, the Option is subject to any rules and regulations promulgated by the Board in accordance with its authority under the Plan.
 
Governing Law.  The validity, construction, interpretation and enforceability of this Agreement shall be determined and governed by the laws of the State of Hawaii without giving effect to the principles of conflicts of laws.
 
4.     Severability.  If any provision of this Agreement shall be held to be invalid, illegal or unenforceable in any material respect, such provision shall be replaced with a provision that is as close as possible in effect to such invalid, illegal or unenforceable provision, and still be valid, legal and enforceable, and the validity, legality and enforceability of the remainder of this Agreement shall not in any way be affected or impaired thereby.
 
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed on its behalf by the undersigned, thereunto duly authorized, effective as of the Date of Grant.
 
ATTEST:	BANK OF HAWAII CORPORATION	
 	 	
 	 	 	By:	 	 	
 	 	
ACCEPTED AND AGREED TO	 	
AS OF THE DATE OF GRANT:	 	 	 	
 	 	DIRECTOR	 	

Exhibit 12
 
Bank of Hawaii Corporation and Subsidiaries
Statement Regarding Computation of Ratios
 
 	 	Six Months Ended	 	
 	 	June 30,	 	
(dollars in thousands)	 	2005	 	2004	 	
Earnings:	 	 	 	 	 	
1.     Income Before Income Taxes	 	$	144,819	 	$	130,923	 	
2.     Plus: Fixed Charges Including Interest on Deposits	 	42,566	 	31,366	 	
3.     Earnings Including Fixed Charges and Interest on Deposits	 	187,385	 	162,289	 	
4.     Less: Interest on Deposits	 	25,181	 	17,760	 	
5.     Earnings Excluding Interest on Deposits	 	$	162,204	 	$	144,529	 	
 	 	 	 	 	 	
Fixed Charges:	 	 	 	 	 	
6.     Fixed Charges Including Interest on Deposits	 	$	42,566	 	$	31,366	 	
7.     Less: Interest on Deposits	 	25,181	 	17,760	 	
8.     Fixed Charges Excluding Interest on Deposits	 	$	17,385	 	$	13,606	 	
 	 	 	 	 	 	
Ratio of Earnings to Fixed Charges:	 	 	 	 	 	
Including Interest on Deposits (Line 3 divided by Line 6)	 	4.4 x	 	5.2 x	 	
Excluding Interest on Deposits (Line 5 divided by Line 8)	 	9.3 x	 	10.6 x	 	

Exhibit 31.1
 
Bank of Hawaii Corporation and Subsidiaries
Rule 13a-14(a) Certifications
 
I, Allan R. Landon, certify that:
 
1.     I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;
 
2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(15(f)) for the registrant and have:
 
a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
 
a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: July 27, 2005	 	
 	 	
 	   /s/ Allan R. Landon	 	
 	Allan R. Landon	
 	Chairman of the Board,	
 	Chief Executive Officer and President	

Exhibit 31.2
 
Bank of Hawaii Corporation and Subsidiaries
Rule 13a-14(a) Certifications
 
I, Richard C. Keene, certify that:
 
1.     I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;
 
2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(15(f)) for the registrant and have:
 
a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
 
a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: July 27, 2005	 	
 	 	
 	   /s/ Richard C. Keene	 	
 	Richard C. Keene	
 	Chief Financial Officer	

 

Exhibit 32
 
Bank of Hawaii Corporation and Subsidiaries
Section 1350 Certification,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 
We hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-Q of Bank of Hawaii Corporation (the “Issuer”) for the quarterly period ended June 30, 2005 (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.

Date: July 27, 2005	 	

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

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