Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q

 
(Mark One)
x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2003	
 
or
 
¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                to              	
 
Commission File Number 1-6887

 
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)

 
Delaware	 	99-0148992	
(State of incorporation)	 	(IRS Employer Identification No.)	
 
130 Merchant Street, Honolulu, Hawaii	 	96813	
(Address of principal executive offices)	 	(Zip Code)	
 
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, and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common Stock, $.01 Par Value; outstanding at October 24, 2003—55,925,677 shares

Table of Contents
Bank of Hawaii Corporation
Form 10-Q
INDEX
 
 	    	 	  	Page

	
Part I.—Financial Information	  	 	
 	 	 	
Item 1.	    	Financial Statements (Unaudited)	  	 	
 	 	 	
 	    	Consolidated Statements of Income—Three and Nine months ended September 30, 2003 and 2002	  	3	
 	 	 	
 	    	Consolidated Statements of Condition—September 30, 2003, December 31, 2002, and September 30, 2002	  	4	
 	 	 	
 	    	Consolidated Statements of Shareholders’ Equity—Nine months ended September 30, 2003 and 2002	  	5	
 	 	 	
 	    	Consolidated Statements of Cash Flows—Nine months ended September 30, 2003 and 2002	  	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 of Market Risk	  	31	
 	 	 	
Item 4.	    	Controls and Procedures	  	31	
 	 	
Part II.—Other Information	  	 	
 	 	 	
Item 6.	    	Exhibits and Reports on Form 8-K	  	32	
 	 	
Signatures	  	33	
 
2

Table of Contents
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
 	  	Three Months Ended
September 30,

	  	Nine Months Ended
September 30,

	
(dollars in thousands except per share amounts)

	  	2003

	  	2002

	  	2003

	  	2002

	
Interest Income	  	 	 	  	 	 	  	 	 	  	 	 	
Interest and Fees on Loans and Leases	  	$	82,715	  	$	89,335	  	$	254,442	  	$	280,421	
Income on Investment Securities—Held to Maturity	  	 	6,407	  	 	3,963	  	 	11,773	  	 	13,652	
Income on Investment Securities—Available for Sale	  	 	16,483	  	 	26,175	  	 	58,761	  	 	80,173	
Deposits	  	 	1,179	  	 	5,384	  	 	3,647	  	 	16,442	
Funds Sold	  	 	248	  	 	914	  	 	1,834	  	 	2,669	
Other	  	 	1,032	  	 	1,575	  	 	3,237	  	 	4,302	

	

	  	

	

	  	

	

	  	

	

	
Total Interest Income	  	 	108,064	  	 	127,346	  	 	333,694	  	 	397,659	
Interest Expense	  	 	 	  	 	 	  	 	 	  	 	 	
Deposits	  	 	10,284	  	 	20,547	  	 	38,040	  	 	66,691	
Security Repurchase Agreements	  	 	1,947	  	 	7,039	  	 	6,580	  	 	25,588	
Funds Purchased	  	 	271	  	 	299	  	 	695	  	 	775	
Short-Term Borrowings	  	 	26	  	 	334	  	 	75	  	 	1,272	
Long-Term Debt	  	 	4,431	  	 	6,946	  	 	15,714	  	 	23,320	

	

	  	

	

	  	

	

	  	

	

	
Total Interest Expense	  	 	16,959	  	 	35,165	  	 	61,104	  	 	117,646	

	

	  	

	

	  	

	

	  	

	

	
Net Interest Income	  	 	91,105	  	 	92,181	  	 	272,590	  	 	280,013	
Provision for Loan and Lease Losses	  	 	—  	  	 	—  	  	 	—  	  	 	11,616	

	

	  	

	

	  	

	

	  	

	

	
Net Interest Income After Provision for Loan and Lease Losses	  	 	91,105	  	 	92,181	  	 	272,590	  	 	268,397	
Non-Interest Income	  	 	 	  	 	 	  	 	 	  	 	 	
Trust and Asset Management	  	 	12,511	  	 	13,655	  	 	38,237	  	 	42,648	
Mortgage Banking	  	 	5,888	  	 	3,669	  	 	12,232	  	 	14,468	
Service Charges on Deposit Accounts	  	 	8,901	  	 	7,925	  	 	26,496	  	 	24,291	
Fees, Exchange, and Other Service Charges	  	 	16,034	  	 	13,114	  	 	42,496	  	 	38,631	
Investment Securities Gains	  	 	639	  	 	—  	  	 	1,809	  	 	3	
Insurance	  	 	3,988	  	 	2,677	  	 	10,083	  	 	7,839	
Other	  	 	5,830	  	 	5,997	  	 	17,930	  	 	20,100	

	

	  	

	

	  	

	

	  	

	

	
Total Non-Interest Income	  	 	53,791	  	 	47,037	  	 	149,283	  	 	147,980	
Non-Interest Expense	  	 	 	  	 	 	  	 	 	  	 	 	
Salaries	  	 	36,873	  	 	37,994	  	 	112,564	  	 	115,065	
Pensions and Other Employee Benefits	  	 	8,858	  	 	7,377	  	 	27,307	  	 	26,764	
Net Occupancy Expense	  	 	9,806	  	 	9,597	  	 	29,047	  	 	28,511	
Net Equipment Expense	  	 	7,301	  	 	10,058	  	 	26,257	  	 	30,176	
Restructuring and Other Related Costs	  	 	—  	  	 	—  	  	 	—  	  	 	1,979	
Information Technology Systems Replacement Project	  	 	4,349	  	 	6,576	  	 	21,871	  	 	6,576	
Other	  	 	21,690	  	 	20,141	  	 	57,425	  	 	63,465	

	

	  	

	

	  	

	

	  	

	

	
Total Non-Interest Expense	  	 	88,877	  	 	91,743	  	 	274,471	  	 	272,536	

	

	  	

	

	  	

	

	  	

	

	
Income Before Income Taxes	  	 	56,019	  	 	47,475	  	 	147,402	  	 	143,841	
Provision for Income Taxes	  	 	19,332	  	 	17,275	  	 	50,880	  	 	51,569	

	

	  	

	

	  	

	

	  	

	

	
Net Income	  	$	36,687	  	$	30,200	  	$	96,522	  	$	92,272	

	

	  	

	

	  	

	

	  	

	

	
Basic Earnings Per Share	  	$	0.64	  	$	0.44	  	$	1.63	  	$	1.30	
Diluted Earnings Per Share	  	$	0.61	  	$	0.43	  	$	1.56	  	$	1.26	
Dividends Per Share	  	$	0.19	  	$	0.19	  	$	0.57	  	$	0.73	
Basic Weighted Average Shares	  	 	57,195,570	  	 	67,893,086	  	 	59,337,319	  	 	71,148,663	
Diluted Weighted Average Shares	  	 	59,961,823	  	 	69,910,264	  	 	61,911,794	  	 	73,158,354	

	

	  	

	

	  	

	

	  	

	

	
 
See accompanying notes to the consolidated financial statements.
 
3

Table of Contents
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
 
(dollars in thousands)

	  	September 30,
2003

	 	 	December 31,
2002

	 	 	September 30,
2002

	 	
Assets	  	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Deposits	  	$	208,712	 	 	$	549,978	 	 	$	1,019,823	 	
Investment Securities—Held to Maturity (Market Value of $749,036, $236,016 and $286,526, respectively)	  	 	754,659	 	 	 	229,720	 	 	 	277,856	 	
Investment Securities—Available for Sale	  	 	2,027,062	 	 	 	2,287,201	 	 	 	2,241,106	 	
Funds Sold	  	 	—  	 	 	 	195,000	 	 	 	95,000	 	
Loans Held for Sale	  	 	23,144	 	 	 	40,118	 	 	 	30,863	 	
Loans	  	 	5,570,405	 	 	 	5,359,004	 	 	 	5,259,332	 	
Allowance for Loan and Lease Losses	  	 	(132,675	)	 	 	(142,853	)	 	 	(154,475	)	

	

	

	 	

	

	

	 	

	

	

	
Net Loans	  	 	5,437,730	 	 	 	5,216,151	 	 	 	5,104,857	 	

	

	

	 	

	

	

	 	

	

	

	
Total Earning Assets	  	 	8,451,307	 	 	 	8,518,168	 	 	 	8,769,505	 	
Cash and Non-Interest Bearing Deposits	  	 	329,705	 	 	 	374,352	 	 	 	331,786	 	
Premises and Equipment	  	 	163,277	 	 	 	176,969	 	 	 	182,230	 	
Customers’ Acceptance Liability	  	 	1,077	 	 	 	2,680	 	 	 	1,106	 	
Accrued Interest Receivable	  	 	33,210	 	 	 	36,722	 	 	 	38,839	 	
Foreclosed Real Estate	  	 	8,757	 	 	 	9,434	 	 	 	17,568	 	
Mortgage Servicing Rights	  	 	23,266	 	 	 	28,820	 	 	 	29,911	 	
Goodwill	  	 	36,216	 	 	 	36,216	 	 	 	36,216	 	
Other Assets	  	 	323,940	 	 	 	333,057	 	 	 	295,539	 	

	

	

	 	

	

	

	 	

	

	

	
Total Assets	  	$	9,370,755	 	 	$	9,516,418	 	 	$	9,702,700	 	

	

	

	 	

	

	

	 	

	

	

	
Liabilities	  	 	 	 	 	 	 	 	 	 	 	 	
Domestic Deposits	  	 	 	 	 	 	 	 	 	 	 	 	
Non-Interest Bearing Demand	  	$	1,846,030	 	 	$	1,719,633	 	 	$	1,593,766	 	
Interest Bearing Demand	  	 	1,266,530	 	 	 	1,169,128	 	 	 	1,042,937	 	
Savings	  	 	2,760,418	 	 	 	2,535,219	 	 	 	2,403,209	 	
Time	  	 	1,178,213	 	 	 	1,461,780	 	 	 	1,549,693	 	
Foreign Deposits	  	 	 	 	 	 	 	 	 	 	 	 	
Time Due to Banks	  	 	20,832	 	 	 	1,130	 	 	 	4,387	 	
Other Savings and Time	  	 	30,093	 	 	 	33,271	 	 	 	33,681	 	

	

	

	 	

	

	

	 	

	

	

	
Total Deposits	  	 	7,102,116	 	 	 	6,920,161	 	 	 	6,627,673	 	
Securities Sold Under Agreements to Repurchase	  	 	646,890	 	 	 	735,621	 	 	 	1,089,287	 	
Funds Purchased	  	 	90,520	 	 	 	64,467	 	 	 	116,775	 	
Current Maturities of Long-Term Debt	  	 	96,757	 	 	 	114,781	 	 	 	122,945	 	
Short-Term Borrowings	  	 	14,796	 	 	 	33,420	 	 	 	17,941	 	
Banker’s Acceptances Outstanding	  	 	1,077	 	 	 	2,680	 	 	 	1,106	 	
Retirement Benefits Payable	  	 	63,281	 	 	 	61,385	 	 	 	38,317	 	
Accrued Interest Payable	  	 	7,207	 	 	 	13,731	 	 	 	21,870	 	
Taxes Payable	  	 	195,628	 	 	 	196,813	 	 	 	191,519	 	
Other Liabilities	  	 	101,179	 	 	 	82,596	 	 	 	87,736	 	
Long-Term Debt	  	 	227,544	 	 	 	275,004	 	 	 	286,825	 	

	

	

	 	

	

	

	 	

	

	

	
Total Liabilities	  	 	8,546,995	 	 	 	8,500,659	 	 	 	8,601,994	 	
Shareholders’ Equity	  	 	 	 	 	 	 	 	 	 	 	 	
Common Stock ($.01 par value); authorized 500,000,000 shares; issued / outstanding: September 2003—81,568,791 / 55,985,364; December 2002—81,294,730 / 63,015,442; September 2002—81,310,042 / 66,048,072	  	 	807	 	 	 	806	 	 	 	806	 	
Capital Surplus	  	 	385,694	 	 	 	372,192	 	 	 	371,098	 	
Accumulated Other Comprehensive Income (Loss)	  	 	(2,799	)	 	 	11,659	 	 	 	26,038	 	
Retained Earnings	  	 	1,177,459	 	 	 	1,115,910	 	 	 	1,100,016	 	
Deferred Stock Grants	  	 	(7,466	)	 	 	(1,424	)	 	 	(2,886	)	
Treasury Stock, at Cost (Shares: September 2003—25,583,427; December 2002—18,279,288; September 2002—15,261,970)	  	 	(729,935	)	 	 	(483,384	)	 	 	(394,366	)	

	

	

	 	

	

	

	 	

	

	

	
Total Shareholders’ Equity	  	 	823,760	 	 	 	1,015,759	 	 	 	1,100,706	 	

	

	

	 	

	

	

	 	

	

	

	
Total Liabilities and Shareholders’ Equity	  	$	9,370,755	 	 	$	9,516,418	 	 	$	9,702,700	 	

	

	

	 	

	

	

	 	

	

	

	
 
See accompanying notes to the consolidated financial statements.
 
4

Table of Contents
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Unaudited)
 
(dollars in thousands)

	  	Total

	 	 	Common
Stock

	  	Capital
Surplus

	 	 	Accum.
Other
Compre-
hensive
Income
(Loss)

	 	 	Retained
Earnings

	 	 	Deferred
Stock
Grants

	 	 	Treasury
Stock

	 	 	Compre-
hensive
Income

	 	
Balance at December 31, 2002	  	$	1,015,759	 	 	$	806	  	$	372,192	 	 	$	11,659	 	 	$	1,115,910	 	 	$	(1,424	)	 	$	(483,384	)	 	 	 	 	
Comprehensive Income:	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	  	 	96,522	 	 	 	—  	  	 	—  	 	 	 	—  	 	 	 	96,522	 	 	 	—  	 	 	 	—  	 	 	$	96,522	 	
Other Comprehensive Income, Net of Tax:	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in Unrealized Gains and Losses on Investment Securities	  	 	(14,458	)	 	 	—  	  	 	—  	 	 	 	(14,458	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(14,458	)	

	

	

	
Total Comprehensive Income	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	82,064	 	

	

	

	
Common Stock Issued:	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    26,311    Retirement Savings Plan	  	 	860	 	 	 	—  	  	 	269	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	591	 	 	 	 	 	
  775,872    Stock Option Plan	  	 	18,227	 	 	 	—  	  	 	2,930	 	 	 	—  	 	 	 	(1,154	)	 	 	(817	)	 	 	17,268	 	 	 	 	 	
    67,510    Dividend Reinvestment Plan	  	 	2,205	 	 	 	—  	  	 	696	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,509	 	 	 	 	 	
      7,174    Directors’ Restricted Shares and
                Deferred Compensation Plan	  	 	54	 	 	 	1	  	 	237	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(184	)	 	 	 	 	
  266,400    Employees’ Restricted Shares	  	 	4,145	 	 	 	—  	  	 	9,370	 	 	 	—  	 	 	 	—  	 	 	 	(5,225	)	 	 	—  	 	 	 	 	 	
Treasury Stock Purchased (8,166,579 shares)	  	 	(265,735	)	 	 	—  	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(265,735	)	 	 	 	 	
Cash Dividends Paid	  	 	(33,819	)	 	 	—  	  	 	—  	 	 	 	—  	 	 	 	(33,819	)	 	 	—  	 	 	 	—  	 	 	 	 	 	

	

	

	 	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	
Balance at September 30, 2003	  	$	823,760	 	 	$	807	  	$	385,694	 	 	$	(2,799	)	 	$	1,177,459	 	 	$	(7,466	)	 	$	(729,935	)	 	 	 	 	

	

	

	 	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	
Balance at December 31, 2001	  	$	1,247,012	 	 	$	806	  	$	367,672	 	 	$	22,761	 	 	$	1,055,424	 	 	$	(7,637	)	 	$	(192,014	)	 	 	 	 	
Comprehensive Income:	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	  	 	92,272	 	 	 	—  	  	 	—  	 	 	 	—  	 	 	 	92,272	 	 	 	—  	 	 	 	—  	 	 	$	92,272	 	
Other Comprehensive Income, Net of Tax:	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in Unrealized Gains and Losses on Investment Securities	  	 	3,859	 	 	 	—  	  	 	—  	 	 	 	3,859	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	3,859	 	
Foreign Currency Translation Adjustment	  	 	(582	)	 	 	—  	  	 	—  	 	 	 	(582	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(582	)	

	

	

	
Total Comprehensive Income	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	95,549	 	

	

	

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

	

	

	 	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

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

	

	

	 	

	

	  	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	
 
See accompanying notes to the consolidated financial statements.
 
5

Table of Contents
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
 	  	Nine Months ended
September 30,

	 	
(dollars in thousands)

	  	2003

	 	 	2002

	 	
Operating Activities	  	 	 	 	 	 	 	 	
Net Income	  	$	96,522	 	 	$	92,272	 	
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:	  	 	 	 	 	 	 	 	
Provision for Loan and Lease Losses	  	 	—  	 	 	 	11,616	 	
Depreciation and Amortization	  	 	23,405	 	 	 	22,154	 	
Amortization of Deferred Loan and Lease Fees	  	 	(6,788	)	 	 	(5,499	)	
Amortization and Accretion of Investment Securities	  	 	28,800	 	 	 	14,248	 	
Deferred Stock Grants	  	 	4,145	 	 	 	3,636	 	
Deferred Income Taxes	  	 	16,844	 	 	 	19,839	 	
Investment Security Gains	  	 	(1,809	)	 	 	(3	)	
Proceeds From Sales of Loans Held for Sale	  	 	635,163	 	 	 	993,316	 	
Originations of Loans Held for Sale	  	 	(618,189	)	 	 	(567,470	)	
Net Change in Other Assets and Liabilities	  	 	22,932	 	 	 	59,081	 	

	

	

	 	

	

	

	
Net Cash Provided by Operating Activities	  	 	201,025	 	 	 	643,190	 	

	

	

	 	

	

	

	
Investing Activities	  	 	 	 	 	 	 	 	
Proceeds from Redemptions of Investment Securities Held to Maturity	  	 	159,799	 	 	 	132,092	 	
Purchases of Investment Securities Held to Maturity	  	 	(685,325	)	 	 	(20,513	)	
Proceeds from Sales and Redemptions of Investment Securities Available for Sale	  	 	1,602,336	 	 	 	703,998	 	
Purchases of Investment Securities Available for Sale	  	 	(1,391,205	)	 	 	(950,177	)	
Net (Increase) Decrease in Loans	  	 	(214,791	)	 	 	387,169	 	
Premises and Equipment, Net	  	 	(9,713	)	 	 	(8,213	)	

	

	

	 	

	

	

	
Net Cash Provided (Used) by Investing Activities	  	 	(538,899	)	 	 	244,356	 	

	

	

	 	

	

	

	
Financing Activities	  	 	 	 	 	 	 	 	
Net Increase in Demand Deposits	  	 	223,799	 	 	 	127,577	 	
Net Increase in Savings Deposits	  	 	225,199	 	 	 	465,546	 	
Net Decrease in Time Deposits	  	 	(283,567	)	 	 	(378,085	)	
Net Increase (Decrease) in Foreign Deposits	  	 	16,524	 	 	 	(265,585	)	
Proceeds from Long-Term Debt	  	 	50,000	 	 	 	—  	 	
Repayments of Long-Term Debt	  	 	(115,484	)	 	 	(180,610	)	
Net Decrease in Short-Term Borrowings	  	 	(81,302	)	 	 	(589,488	)	
Proceeds from Issuance of Common Stock	  	 	21,346	 	 	 	31,024	 	
Repurchase of Common Stock	  	 	(265,735	)	 	 	(238,073	)	
Cash Dividends	  	 	(33,819	)	 	 	(38,442	)	

	

	

	 	

	

	

	
Net Cash Used by Financing Activities	  	 	(243,039	)	 	 	(1,066,136	)	

	

	

	 	

	

	

	
Effect of Exchange Rate Changes on Cash	  	 	—  	 	 	 	(582	)	

	

	

	 	

	

	

	
Decrease in Cash and Cash Equivalents	  	 	(580,913	)	 	 	(179,172	)	
Cash and Cash Equivalents at Beginning of Year	  	 	1,119,330	 	 	 	1,625,781	 	

	

	

	 	

	

	

	
Cash and Cash Equivalents at End of Period	  	$	538,417	 	 	$	1,446,609	 	

	

	

	 	

	

	

	
 
See accompanying notes to the consolidated financial statements.
 
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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. The Company’s principal subsidiary is Bank of Hawaii (the “Bank”) which provides a broad range of financial products and services to customers in Hawaii and the Pacific Islands (Guam, nearby islands and American Samoa). 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 accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the consolidated financial statements reflect 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 2002 Annual Report on Form 10-K. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.
 
Recent Accounting Standards
 
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51  (“FIN 46”). FIN 46 provides a new framework for identifying a variable interest entity (“VIE”) and determining when a company should include assets, liabilities, noncontrolling interest and results of activities of a VIE in its consolidated financial statements. FIN 46 was effective immediately for VIEs created after January 31, 2003 and is effective December 31, 2003 for VIEs created prior to February 1, 2003. Management does not anticipate a material impact on the Company’s financial statements from the adoption of this new interpretation.
 
In April 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities  (“SFAS No. 149”) which is effective for hedging relationships entered into or modified after June 30, 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Management does not anticipate a material impact on the Company’s financial statements from the adoption of this pronouncement.
 
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity in its statement of financial position. The Company adopted SFAS No. 150 effective July 1, 2003 and the adoption of the standard did not have a material effect on the Company’s financial statements.
 
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Stock-Based Compensation
 
The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees  (“APB No. 25”) and related interpretations. As permitted by APB No. 25, stock-based employee compensation expense is generally not included in reported net income as options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Over the last several years, new accounting standards were developed that permit fair value expense recognition of employee stock options. Under current guidance which does not require fair value expense recognition, there are three methods available for transition to the new accounting standards—prospective, modified prospective and retroactive restatement. If the standards were adopted as of January 1, 2003, each transition method would have a different impact on the Company’s financial statements, including reductions in net income ranging from $2.6 million to $8.2 million for the nine months ended September 30, 2003.
 
The following table illustrates the effect on net income and earnings per share if the Company had fully applied these new accounting standards:
 
 	  	Nine Months Ended
September 30,

	 	
(dollars in thousands except per share and per option data)

	  	2003

	 	 	2002

	 	
Net Income, as reported	  	$	96,522	 	 	$	92,272	 	
Add: Stock-Based Employee Compensation Expense Included in Reported Net Income, Net of Related Tax Effects	  	 	490	 	 	 	480	 	
Deduct: Total Stock-Based Employee Compensation Expense Determined Under Fair Value Method For All Awards, Net of Related Tax Effects 1	  	 	(8,231	)	 	 	(7,320	)	

	

	

	 	

	

	

	
Pro Forma Net Income	  	$	88,781	 	 	$	85,432	 	

	

	

	 	

	

	

	
Earnings per share:	  	 	 	 	 	 	 	 	
Basic-as reported	  	$	1.63	 	 	$	1.30	 	
Basic-pro forma1	  	$	1.50	 	 	$	1.20	 	
Diluted-as reported	  	$	1.56	 	 	$	1.26	 	
Diluted-pro forma1	  	$	1.43	 	 	$	1.17	 	
Weighted Average Fair Value per Option Granted During the Period1	  	$	8.58	 	 	$	7.99	 	
Assumptions:	  	 	 	 	 	 	 	 	
Average Risk Free Interest Rate	  	 	3.92	%	 	 	5.06	%	
Average Expected Volatility	  	 	31.97	%	 	 	31.36	%	
Expected Dividend Yield	  	 	3.07	%	 	 	3.16	%	
Expected Life	  	 	6.37 years	 	 	 	6.5 years	 	

1	The Black-Scholes option pricing model was used to develop the fair values of the options granted.	
 
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Note 2.	 	Information Technology Systems Replacement Project	
 
In July 2002, the Company entered into a contract with Metavante Corporation to serve as the Company’s primary technology systems provider. The conversion to the Metavante systems was completed in July 2003 and all project costs have been incurred as of September 30, 2003. Total project costs by period in connection with the transition to this outsourcing arrangement are summarized below:
 
Information Technology Systems Replacement Project (Unaudited)
 
(dollars in millions)

	  	Professional
Fees

	  	Employee
Termination
Benefits

	  	Accelerated
Depreciation

	  	Other
Associated
Costs 1

	  	Total

	
Costs Incurred:	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Three Months Ended:	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
September 30, 2002	  	$	1.9	  	$	1.0	  	$	3.2	  	$	0.5	  	$	6.6	
December 31, 2002	  	 	3.2	  	 	0.2	  	 	2.2	  	 	1.4	  	 	7.0	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Year Ended December 31, 2002	  	 	5.1	  	 	1.2	  	 	5.4	  	 	1.9	  	 	13.6	
Three Months Ended:	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
March 31, 2003	  	 	3.5	  	 	0.4	  	 	2.0	  	 	1.5	  	 	7.4	
June 30, 2003	  	 	2.9	  	 	2.6	  	 	1.8	  	 	2.8	  	 	10.1	
September 30, 2003	  	 	1.4	  	 	0.7	  	 	0.1	  	 	2.2	  	 	4.4	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Nine Months Ended September 30, 2003	  	 	7.8	  	 	3.7	  	 	3.9	  	 	6.5	  	 	21.9	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Costs Incurred	  	$	12.9	  	$	4.9	  	$	9.3	  	$	8.4	  	$	35.5	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Expected Project Costs	  	$	12.9	  	$	4.9	  	$	9.3	  	$	8.4	  	$	35.5	

	

	  	

	

	  	

	

	  	

	

	  	

	

	

1	Includes contract termination, equipment, excise tax, and other costs.	
 
Changes in related liability balances during the nine months ended September 30, 2003 were as follows:
 
(dollars in millions)

	  	Professional
Fees

	  	Employee
Termination
Benefits

	  	Other
Associated
Costs 1

	  	Total

	
Liability Balance at December 31, 2002	  	$	0.1	  	$	0.3	  	$	—  	  	$	0.4	
Accruals	  	 	7.8	  	 	3.7	  	 	6.5	  	 	18.0	
Payments	  	 	5.1	  	 	2.8	  	 	5.7	  	 	13.6	

	

	  	

	

	  	

	

	  	

	

	
Liability Balance at September 30, 2003	  	$	2.8	  	$	1.2	  	$	0.8	  	$	4.8	

	

	  	

	

	  	

	

	  	

	

	
 
Note 3.	 	Business Segments	
 
The information under the caption “Business Segments” in Management’s Discussion and Analysis is incorporated herein by reference.
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward Looking Statements
 
This report contains forward-looking statements concerning, among other things, the economic environment in our service area, the expected level of loan loss provisioning, anticipated costs and annual savings of our information technology systems replacement project, and anticipated dividends, revenues and expenses during the remainder of 2003. We believe the assumptions underlying our forward-looking statements are reasonable. However, any of the assumptions could prove to be inaccurate and actual results may differ materially from those projected for a variety of reasons, including, but not limited to: 1) unanticipated changes in business and economic conditions, the competitive environment, fiscal and monetary policies, or legislation in Hawaii and the other markets we serve; 2) changes in our credit quality or risk profile which may increase or decrease the required level of allowance for loan and lease losses; 3) changes in market interest rates that may deteriorate our credit markets and ability to maintain our net interest margin; 4) changes to the amount and timing of our proposed equity repurchases; 5) inability to achieve expected benefits of our information technology systems replacement project and other business process changes due to adverse changes in implementation processes or costs, operational savings, or timing; 6) actions by the United States military and real or threatened terrorist activity affecting business conditions; and 7) adverse weather and other natural conditions impacting our and our customers’ operations. We do not undertake any obligation to update any forward-looking statements to reflect later events or circumstances.
 
Table 1
 
Highlights (Unaudited)
 
(dollars in thousands except per share amounts)	  	Three Months Ended
September 30,

	 	 	Nine Months Ended
September 30,

	 	
Earnings Highlights and Performance Ratios

	  	2003

	 	 	2002 1

	 	 	2003

	 	 	2002 1

	 	
Net Income	  	$	36,687	 	 	$	30,200	 	 	$	96,522	 	 	$	92,272	 	
Basic Earnings Per Share	  	 	0.64	 	 	 	0.44	 	 	 	1.63	 	 	 	1.30	 	
Diluted Earnings Per Share	  	 	0.61	 	 	 	0.43	 	 	 	1.56	 	 	 	1.26	 	
Cash Dividends	  	 	10,887	 	 	 	12,197	 	 	 	33,819	 	 	 	38,442	 	
Return on Average Assets	  	 	1.53	%	 	 	1.22	%	 	 	1.37	%	 	 	1.22	%	
Return on Average Equity	  	 	16.69	%	 	 	10.40	%	 	 	13.95	%	 	 	10.10	%	
Net Interest Margin	  	 	4.15	%	 	 	4.03	%	 	 	4.19	%	 	 	3.97	%	
Efficiency Ratio	  	 	61.34	%	 	 	65.90	%	 	 	65.06	%	 	 	63.68	%	
Efficiency Ratio excluding ITSRP and Restructuring Costs	  	 	58.34	%	 	 	61.18	%	 	 	59.88	%	 	 	61.68	%	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
 
 	  	 	  	September 30,

	 	
Statement of Condition Highlights and Performance Ratios

	  	 	  	2003

	 	 	2002 1

	 	
Total Assets	  	 	  	$	9,370,755	 	 	$	9,702,700	 	
Net Loans	  	 	  	 	5,437,730	 	 	 	5,104,857	 	
Total Deposits	  	 	  	 	7,102,116	 	 	 	6,627,673	 	
Total Shareholders’ Equity	  	 	  	 	823,760	 	 	 	1,100,706	 	
 	 	 	 	
Book Value Per Common Share	  	 	  	$	14.71	 	 	$	16.67	 	
Allowance / Loans Outstanding	  	 	  	 	2.38	%	 	 	2.94	%	
Average Equity / Average Assets	  	 	  	 	9.82	%	 	 	12.10	%	
Employees (FTE)	  	 	  	 	2,764	 	 	 	2,934	 	
Branches and offices	  	 	  	 	89	 	 	 	97	 	
 	 	 	 	
Market Price Per Share of Common Stock for the Quarter Ended:	  	 	  	 	 	 	 	 	 	 	
 	  	Closing	  	$	33.58	 	 	$	27.90	 	
 	  	High	  	$	35.55	 	 	$	30.00	 	
 	  	Low	  	$	32.92	 	 	$	22.79	 	

1	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
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Table of Contents
ANALYSIS OF STATEMENT OF INCOME
 
Net Interest Income
 
Taxable-equivalent net interest income for the three and nine month periods ended September 30, 2003 declined $1.1 million, or 1%, and $7.6 million, or 3%, respectively, from the same periods in 2002. The decline in net interest income was primarily due to the low interest rate environment, in particular the low interest rates of mortgage loans and short-term investments whose rates were at their lowest levels in several decades. Partially offsetting the effect of lower interest rates was a positive impact on net interest income from a change in the mix of average interest earning assets and interest bearing liabilities, which declined 8% and 9%, respectively, for the nine months ended 2003 from the same period last year. The decrease in average balances was primarily due to utilization of excess liquidity for stock repurchases and debt reductions. The Company’s net interest margin was 4.15% for the quarter ended September 30, 2003, a 12 basis point increase from the comparable period a year ago. The net interest margin for the first nine months of 2003 was 4.19%, a 22 basis point increase from the same period in 2002. The improvement in the net interest margin was largely due to lengthening the maturities of certain short-term investments, reduction in short-term borrowings and time deposits, as well as debt reductions, which lowered the Company’s cost of funds. Presented in Table 2 are average balances, yields earned, and rates paid for the three and nine months ended September 30, 2003 and September 30, 2002. An analysis of changes in net interest income is presented in Table 3 for the nine months ended September 30, 2003 compared to the same 2002 period.
 
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Table 2
 
Consolidated Average Balances and Interest Rates—Taxable Equivalent Basis (Unaudited)
 
 	  	Three Months Ended
September 30, 2003

	 	 	Three Months Ended 1
September 30, 2002

	 	 	Nine Months Ended
September 30, 2003

	 	 	Nine Months Ended 1
September 30, 2002

	 	
(dollars in millions)

	  	Average
Balance

	  	Income/
Expense

	  	Yield/
Rate

	 	 	Average
Balance

	  	Income/
Expense

	  	Yield/
Rate

	 	 	Average
Balance

	  	Income/
Expense

	  	Yield/
Rate

	 	 	Average
Balance

	  	Income/
Expense

	  	Yield/
Rate

	 	
Earning Assets	  	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	
Interest Bearing Deposits	  	$	224.7	  	$	1.2	  	2.08	%	 	$	1,142.3	  	$	5.4	  	1.87	%	 	$	230.2	  	$	3.7	  	2.12	%	 	$	1,202.3	  	$	16.4	  	1.83	%	
Funds Sold	  	 	102.4	  	 	0.3	  	0.97	 	 	 	210.2	  	 	0.9	  	1.74	 	 	 	206.2	  	 	1.8	  	1.19	 	 	 	206.9	  	 	2.7	  	1.72	 	
Investment Securities	  	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	
Held to Maturity	  	 	675.1	  	 	6.4	  	3.82	 	 	 	296.9	  	 	4.1	  	5.45	 	 	 	402.4	  	 	11.9	  	3.94	 	 	 	331.1	  	 	13.9	  	5.59	 	
Available for Sale	  	 	2,090.6	  	 	16.5	  	3.15	 	 	 	2,009.5	  	 	26.2	  	5.21	 	 	 	2,224.5	  	 	58.8	  	3.52	 	 	 	1,946.5	  	 	80.2	  	5.49	 	
Loans Held for Sale	  	 	52.2	  	 	0.7	  	5.45	 	 	 	40.0	  	 	0.6	  	6.24	 	 	 	48.1	  	 	1.9	  	5.40	 	 	 	147.6	  	 	7.4	  	6.70	 	
Net Loans and Lease Financing	  	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	
Commercial and Industrial	  	 	862.8	  	 	10.8	  	4.95	 	 	 	978.0	  	 	12.8	  	5.19	 	 	 	861.2	  	 	31.3	  	4.86	 	 	 	1,072.1	  	 	40.8	  	5.08	 	
Construction	  	 	87.8	  	 	0.9	  	4.26	 	 	 	147.7	  	 	2.1	  	5.57	 	 	 	95.3	  	 	3.3	  	4.65	 	 	 	158.3	  	 	6.5	  	5.49	 	
Commercial Mortgage	  	 	670.6	  	 	9.4	  	5.56	 	 	 	571.5	  	 	9.8	  	6.84	 	 	 	650.6	  	 	28.6	  	5.87	 	 	 	594.8	  	 	30.2	  	6.78	 	
Residential Mortgage	  	 	2,298.8	  	 	36.2	  	6.30	 	 	 	2,333.9	  	 	40.5	  	6.94	 	 	 	2,281.1	  	 	111.2	  	6.50	 	 	 	2,375.4	  	 	125.7	  	7.06	 	
Installment	  	 	558.6	  	 	12.8	  	9.09	 	 	 	406.8	  	 	11.3	  	11.01	 	 	 	532.2	  	 	39.2	  	9.85	 	 	 	396.5	  	 	33.4	  	11.25	 	
Home Equity	  	 	448.1	  	 	5.6	  	4.99	 	 	 	411.3	  	 	5.9	  	5.70	 	 	 	441.8	  	 	16.9	  	5.11	 	 	 	383.7	  	 	17.0	  	5.92	 	
Purchased Home Equity	  	 	132.6	  	 	0.7	  	2.20	 	 	 	—  	  	 	—  	  	—  	 	 	 	158.2	  	 	5.3	  	4.51	 	 	 	—  	  	 	—  	  	—  	 	
Lease Financing	  	 	487.2	  	 	5.6	  	4.52	 	 	 	500.8	  	 	6.3	  	4.98	 	 	 	488.5	  	 	16.7	  	4.58	 	 	 	498.3	  	 	19.4	  	5.22	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	
Total Net Loans and Lease Financing	  	 	5,546.5	  	 	82.0	  	5.89	 	 	 	5,350.0	  	 	88.7	  	6.60	 	 	 	5,508.9	  	 	252.5	  	6.12	 	 	 	5,479.1	  	 	273.0	  	6.65	 	
Other	  	 	76.1	  	 	1.0	  	5.38	 	 	 	99.6	  	 	1.5	  	6.28	 	 	 	75.3	  	 	3.2	  	5.75	 	 	 	95.8	  	 	4.3	  	6.01	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	
Total Earning Assets	  	 	8,767.6	  	 	108.1	  	4.91	 	 	 	9,148.5	  	 	127.4	  	5.55	 	 	 	8,695.6	  	 	333.8	  	5.12	 	 	 	9,409.3	  	 	397.9	  	5.65	 	
Cash and Non-interest Bearing Deposits	  	 	333.2	  	 	 	  	 	 	 	 	300.2	  	 	 	  	 	 	 	 	330.1	  	 	 	  	 	 	 	 	315.9	  	 	 	  	 	 	
Other Assets	  	 	399.2	  	 	 	  	 	 	 	 	355.7	  	 	 	  	 	 	 	 	392.3	  	 	 	  	 	 	 	 	373.0	  	 	 	  	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	
Total Assets	  	$	9,500.0	  	 	 	  	 	 	 	$	9,804.4	  	 	 	  	 	 	 	$	9,418.0	  	 	 	  	 	 	 	$	10,098.2	  	 	 	  	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	
Interest Bearing Liabilities	  	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	
Interest Bearing Deposits	  	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	
Domestic Deposits	  	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	
Demand	  	$	1,242.7	  	$	0.5	  	0.15	%	 	$	1,021.5	  	$	0.9	  	0.37	%	 	$	1,185.9	  	$	1.9	  	0.22	%	 	$	971.4	  	$	3.1	  	0.42	%	
Savings	  	 	2,754.6	  	 	3.4	  	0.49	 	 	 	2,360.7	  	 	8.1	  	1.35	 	 	 	2,702.8	  	 	12.5	  	0.62	 	 	 	2,194.4	  	 	23.1	  	1.41	 	
Time	  	 	1,249.9	  	 	6.3	  	2.01	 	 	 	1,600.0	  	 	11.4	  	2.82	 	 	 	1,364.2	  	 	23.4	  	2.30	 	 	 	1,739.8	  	 	39.0	  	3.00	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	
Total Domestic Deposits	  	 	5,247.2	  	 	10.2	  	0.77	 	 	 	4,982.2	  	 	20.4	  	1.62	 	 	 	5,252.9	  	 	37.8	  	0.96	 	 	 	4,905.6	  	 	65.2	  	1.78	 	
Foreign Deposits	  	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	
Time Due to Banks	  	 	5.3	  	 	—  	  	—  	 	 	 	9.6	  	 	—  	  	—  	 	 	 	2.1	  	 	—  	  	—  	 	 	 	54.8	  	 	0.8	  	1.90	 	
Other Time and Savings	  	 	33.6	  	 	0.1	  	0.63	 	 	 	38.3	  	 	0.2	  	1.68	 	 	 	31.5	  	 	0.2	  	0.91	 	 	 	60.2	  	 	0.7	  	1.69	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	
Total Foreign Deposits	  	 	38.9	  	 	0.1	  	0.78	 	 	 	47.9	  	 	0.2	  	1.59	 	 	 	33.6	  	 	0.2	  	0.92	 	 	 	115.0	  	 	1.5	  	1.79	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	
Total Interest Bearing Deposits	  	 	5,286.1	  	 	10.3	  	0.77	 	 	 	5,030.1	  	 	20.6	  	1.62	 	 	 	5,286.5	  	 	38.0	  	0.96	 	 	 	5,020.6	  	 	66.7	  	1.78	 	
Short-Term Borrowings	  	 	827.8	  	 	2.3	  	1.08	 	 	 	1,301.3	  	 	7.7	  	2.34	 	 	 	763.3	  	 	7.4	  	1.29	 	 	 	1,503.7	  	 	27.6	  	2.46	 	
Long-Term Debt	  	 	325.7	  	 	4.4	  	5.40	 	 	 	451.6	  	 	6.9	  	6.10	 	 	 	362.3	  	 	15.7	  	5.80	 	 	 	498.7	  	 	23.3	  	6.25	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	
Total Interest Bearing Liabilities	  	 	6,439.6	  	 	17.0	  	1.04	 	 	 	6,783.0	  	 	35.2	  	2.06	 	 	 	6,412.1	  	 	61.1	  	1.27	 	 	 	7,023.0	  	 	117.6	  	2.24	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	 	

	

	  	

	

	  	

	

	
Net Interest Income	  	 	 	  	$	91.1	  	 	 	 	 	 	  	$	92.2	  	 	 	 	 	 	  	$	272.7	  	 	 	 	 	 	  	$	280.3	  	 	 	

	

	  	 	 	 	 	 	  	

	

	  	 	 	 	 	 	  	

	

	  	 	 	 	 	 	  	

	

	  	 	 	
Interest Rate Spread	  	 	 	  	 	 	  	3.87	%	 	 	 	  	 	 	  	3.49	%	 	 	 	  	 	 	  	3.85	%	 	 	 	  	 	 	  	3.41	%	
Net Interest Margin	  	 	 	  	 	 	  	4.15	%	 	 	 	  	 	 	  	4.03	%	 	 	 	  	 	 	  	4.19	%	 	 	 	  	 	 	  	3.97	%	
Non-Interest Bearing Demand Deposits (Domestic)	  	 	1,844.4	  	 	 	  	 	 	 	 	1,547.5	  	 	 	  	 	 	 	 	1,726.2	  	 	 	  	 	 	 	 	1,541.3	  	 	 	  	 	 	
Other Liabilities	  	 	344.1	  	 	 	  	 	 	 	 	321.6	  	 	 	  	 	 	 	 	354.4	  	 	 	  	 	 	 	 	312.0	  	 	 	  	 	 	
Shareholders’ Equity	  	 	871.9	  	 	 	  	 	 	 	 	1,152.3	  	 	 	  	 	 	 	 	925.3	  	 	 	  	 	 	 	 	1,221.9	  	 	 	  	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	
Total Liabilities and Shareholders’ Equity	  	$	9,500.0	  	 	 	  	 	 	 	$	9,804.4	  	 	 	  	 	 	 	$	9,418.0	  	 	 	  	 	 	 	$	10,098.2	  	 	 	  	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	 	

	

	  	 	 	  	 	 	

1	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
12

Table of Contents
Table 3
 
Analysis of Change in Net Interest Income—Tax Equivalent Basis (Unaudited)
 
 	  	Nine Months Ended September 30, 2003 Compared to September 30, 2002 2

	 	
(dollars in millions)

	  	Volume 1

	 	 	Rate 1

	 	 	Total

	 	
Change in Interest Income:	  	 	 	 	 	 	 	 	 	 	 	 	
Interest Bearing Deposits	  	$	(15.0	)	 	$	2.3	 	 	$	(12.7	)	
Funds Sold	  	 	—  	 	 	 	(0.9	)	 	 	(0.9	)	
Investment Securities	  	 	 	 	 	 	 	 	 	 	 	 	
Held to Maturity	  	 	2.6	 	 	 	(4.6	)	 	 	(2.0	)	
Available for Sale	  	 	10.3	 	 	 	(31.7	)	 	 	(21.4	)	
Loans Held for Sale	  	 	(4.2	)	 	 	(1.3	)	 	 	(5.5	)	
Net Loans and Lease Financing	  	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	  	 	(7.8	)	 	 	(1.7	)	 	 	(9.5	)	
Construction	  	 	(2.3	)	 	 	(0.9	)	 	 	(3.2	)	
Commercial Mortgage	  	 	2.6	 	 	 	(4.2	)	 	 	(1.6	)	
Residential Mortgage	  	 	(4.8	)	 	 	(9.7	)	 	 	(14.5	)	
Installment	  	 	10.4	 	 	 	(4.6	)	 	 	5.8	 	
Home Equity	  	 	2.4	 	 	 	(2.5	)	 	 	(0.1	)	
Purchased Home Equity	  	 	5.3	 	 	 	—  	 	 	 	5.3	 	
Lease Financing	  	 	(0.4	)	 	 	(2.3	)	 	 	(2.7	)	

	

	

	 	

	

	

	 	

	

	

	
Total Net Loans and Lease Financing	  	 	5.4	 	 	 	(25.9	)	 	 	(20.5	)	
Other	  	 	(0.9	)	 	 	(0.2	)	 	 	(1.1	)	

	

	

	 	

	

	

	 	

	

	

	
Total Change in Interest Income	  	 	(1.8	)	 	 	(62.3	)	 	 	(64.1	)	

	

	

	 	

	

	

	 	

	

	

	
Change in Interest Expense:	  	 	 	 	 	 	 	 	 	 	 	 	
Interest Bearing Deposits	  	 	 	 	 	 	 	 	 	 	 	 	
Domestic Deposits	  	 	 	 	 	 	 	 	 	 	 	 	
Demand	  	 	0.5	 	 	 	(1.7	)	 	 	(1.2	)	
Savings	  	 	4.5	 	 	 	(15.1	)	 	 	(10.6	)	
Time	  	 	(7.5	)	 	 	(8.1	)	 	 	(15.6	)	

	

	

	 	

	

	

	 	

	

	

	
Total Domestic Deposits	  	 	(2.5	)	 	 	(24.9	)	 	 	(27.4	)	
Foreign Deposits	  	 	(0.8	)	 	 	(0.5	)	 	 	(1.3	)	

	

	

	 	

	

	

	 	

	

	

	
Total Interest Bearing Deposits	  	 	(3.3	)	 	 	(25.4	)	 	 	(28.7	)	
Short-Term Borrowings	  	 	(10.2	)	 	 	(10.0	)	 	 	(20.2	)	
Long-Term Debt	  	 	(6.0	)	 	 	(1.6	)	 	 	(7.6	)	

	

	

	 	

	

	

	 	

	

	

	
Total Change in Interest Expense	  	 	(19.5	)	 	 	(37.0	)	 	 	(56.5	)	

	

	

	 	

	

	

	 	

	

	

	
Change in Net Interest Income	  	$	17.7	 	 	$	(25.3	)	 	$	(7.6	)	

	

	

	 	

	

	

	 	

	

	

	

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.	
2	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
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Provision for Loan and Lease Losses
 
Consistent with the previous four quarters, no Provision for Loan and Lease Losses (“Provision”) was recorded for the three months ended September 30, 2003. This resulted in a reduction in the Allowance for Loan and Lease Losses (“Allowance”) equal to the amount of net charge-offs of $5.3 million for the third quarter and $10.2 million for the first nine months of 2003. No Provision was recorded in the third quarter of 2002 and the Provision for the first nine months of 2002 was $11.6 million. For further information on Credit Quality, refer to the section on “Corporate Risk Profile-Credit Risk.”
 
Non-Interest Income
 
Non-interest income for the three and nine month periods ended September 30, 2003 increased $6.8 million and $1.3 million, respectively, from the same periods of 2002.
 
The decline in trust and asset management income in the third quarter and first nine months of 2003 from the same periods of 2002 was primarily attributable to a decrease in the market values of assets under administration and lower investment advisory fees on money market assets due to declining short-term interest rates.
 
Mortgage banking income increased $2.2 million, or 60%, in the third quarter of 2003 compared to the same period in 2002. For the nine months ended September 30, 2003, mortgage banking income declined $2.2 million, or 15%, compared to the same period in 2002. During the first nine months of 2003, mortgage interest rates declined to near record lows. As a result, mortgage loan activity was strong, with high levels of loan originations, but also high levels of loan prepayments. Because mortgage loan production was higher in 2003 than in 2002, sales of newly originated loans and related gains were also higher. Net servicing income was lower in 2003 compared to 2002 due to increased amortization of mortgage servicing rights resulting from the high level of prepayments. The decrease in mortgage banking income in the first nine months of 2003 from the prior year was attributable to a first quarter 2002 recovery in loan valuations that amounted to $4.4 million, following a market value adjustment made at December 31, 2001.
 
Service charges on deposit accounts increased by 9% in the first nine months of 2003 compared to the same period last year largely attributable to a 7% increase in deposit balances from September 30, 2002 to September 30, 2003. In addition, overdraft fees increased from a new fee structure implemented in late 2002 and account analysis fees increased because customers received lower offsetting earnings credits as a result of the lower interest rate environment.
 
The increase in fees, exchange, and other service charges in the third quarter and the first nine months of 2003 compared to the same periods in 2002 was mainly due to a prepayment penalty on a commercial real estate loan in the third quarter of 2003.
 
Insurance income increased 49% and 29%, respectively, in the third quarter and first nine months of 2003 compared to 2002. The third quarter increase is attributable to settlements for prior period claim experience and increased premiums of the commercial insurance business. In addition, in the first nine months of 2003, in conjunction with consumer loan growth, credit life and disability insurance premium income has increased.
 
Other operating income for the nine months ended September 30, 2003 declined 11% from the same period in 2002 primarily due to decreased sales of annuities and other brokerage services.
 
Non-Interest Expense
 
Non-interest expense declined $2.9 million or 3% in the third quarter of 2003 compared to the same period in 2002, primarily due to a reduction in costs associated with the information technology systems replacement project and the related reduction in salary and equipment expenses. Non-interest expense increased $1.9 million in the first nine months of 2003 compared to the same period in 2002 resulting from a $15.3 million increase in the systems replacement project costs which was offset by declines in other expense categories. The project was completed in the third quarter of 2003 and no additional conversion expenses are expected. Refer to Note 2 to the Consolidated Financial Statements for additional information on the systems replacement project.
 
14

Table of Contents
Salaries and employee benefits expense decreased 1% for the first nine months of 2003 compared to the same period in 2002 mainly due to a 6% decrease in the number of employees. Partially offsetting the decrease in base salary expense was an increase in compensation expense for the accelerated vesting of restricted stock as a result of meeting certain stock performance thresholds and an increase in commission expense associated with higher mortgage loan originations.
 
Net equipment expense declined 13% for the first nine months of 2003 compared to the same period in 2002 primarily due to reduced depreciation costs resulting from the systems replacement project. Refer to Note 2 to the Consolidated Financial Statements for additional information on the systems replacement project.
 
Other operating expense decreased by $6.0 million in the first nine months of 2003 compared to the same period in 2002 primarily due to a decline in expenses relating to professional services, sales and service training, legal services, advertising and marketing and Federal Deposit Insurance Corporation insurance. Partially offsetting the decline was a $1.5 million contribution to the Bank of Hawaii Charitable Foundation.
 
Income Tax
 
Income tax expense remained relatively flat for the first nine months of 2003 as compared to the same period in 2002. The effective tax rate was 34.5% which approximates the rate expected for the full year 2003.
 
BALANCE SHEET ANALYSIS
 
Short-Term Interest Earning Assets
 
Short-term interest-earning assets, consisting of interest-bearing deposits and funds sold, totaled $208.7 million at September 30, 2003, compared to $745.0 million and $1.1 billion at December 31, 2002 and September 30, 2002, respectively. The decline was mainly due to the use of funds to repurchase the Company’s stock, invest in longer-term assets and reduce debt.
 
Investments
 
The Company’s investment portfolio is managed in an effort to meet strategic asset/liability objectives, to provide both interest income and balance sheet liquidity and to collateralize customer deposits. Securities available for sale at September 30, 2003 were $2.0 billion, compared to $2.3 billion at December 31, 2002, and $2.2 billion at September 30, 2002. The 11% decrease from year-end 2002 is attributable to prepayments of investment securities. The proceeds were utilized to purchase investment securities which were designated as held to maturity. Securities held to maturity were $754.7 million at September 30, 2003, an increase from $229.7 million at December 31, 2002 and $277.9 million at September 30, 2002. At September 30, 2003 and December 31, 2002 investment securities with a book value of $1.3 billion and $1.5 billion, respectively, were pledged as collateral for repurchase agreements.
 
Loans Held for Sale
 
Loans held for sale, primarily residential mortgage loans, totaled $23.1 million at September 30, 2003, a decrease of $17.0 million and $7.7 million from December 31, 2002 and September 30, 2002, respectively. The decrease from prior periods is due to increased sales activities in the secondary market.
 
Loans
 
As of September 30, 2003, loans outstanding increased to $5.6 billion from $5.4 billion at year-end 2002. The increase was attributable to increases in residential and commercial mortgages, home equity loans, and other consumer loans, including automobile and direct personal loans.
 
Table 4 presents the composition of the loan portfolio by major loan categories and Table 5 presents the composition of consumer loans by geographic area.
 
15

Table of Contents
Table 4
 
Loan Portfolio Balances (Unaudited)
 
(dollars in millions)

	  	September 30,
2003

	  	June 30,
2003

	  	December 31,
2002  1

	  	September 30,
2002  1

	
Domestic	  	 	 	  	 	 	  	 	 	  	 	 	
Commercial	  	 	 	  	 	 	  	 	 	  	 	 	
Commercial and Industrial	  	$	843.9	  	$	808.5	  	$	875.0	  	$	863.3	
Commercial Mortgage	  	 	629.2	  	 	689.7	  	 	591.1	  	 	616.5	
Construction	  	 	92.3	  	 	83.6	  	 	127.5	  	 	146.3	
Lease Financing	  	 	426.9	  	 	416.9	  	 	427.3	  	 	433.6	

	

	  	

	

	  	

	

	  	

	

	
Total Commercial	  	 	1,992.3	  	 	1,998.7	  	 	2,020.9	  	 	2,059.7	
Consumer	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	 	2,329.4	  	 	2,222.0	  	 	2,131.4	  	 	2,259.8	
Home Equity	  	 	446.0	  	 	450.3	  	 	428.2	  	 	419.2	
Purchased Home Equity	  	 	109.8	  	 	145.6	  	 	185.8	  	 	—  	
Other Consumer	  	 	582.9	  	 	554.8	  	 	493.3	  	 	421.6	
Lease Financing	  	 	35.3	  	 	34.0	  	 	34.5	  	 	36.5	

	

	  	

	

	  	

	

	  	

	

	
Total Consumer	  	 	3,503.4	  	 	3,406.7	  	 	3,273.2	  	 	3,137.1	

	

	  	

	

	  	

	

	  	

	

	
Total Domestic	  	 	5,495.7	  	 	5,405.4	  	 	5,294.1	  	 	5,196.8	

	

	  	

	

	  	

	

	  	

	

	
Foreign	  	 	74.7	  	 	66.5	  	 	64.9	  	 	62.5	

	

	  	

	

	  	

	

	  	

	

	
Total Loans	  	$	5,570.4	  	$	5,471.9	  	$	5,359.0	  	$	5,259.3	

	

	  	

	

	  	

	

	  	

	

	

1	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
Table 5
 
Consumer Loans by Geographic Area (Unaudited)
 
(dollars in millions)

	  	September 30,
2003

	  	June 30,
2003

	  	December 31,
2002  1

	  	September 30,
2002  1

	
Hawaii	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	$	2,118.4	  	$	2,019.5	  	$	1,923.6	  	$	2,051.1	
Home Equity	  	 	437.1	  	 	441.2	  	 	419.2	  	 	410.2	
Other Consumer	  	 	494.3	  	 	466.1	  	 	418.5	  	 	345.4	
Guam	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	 	206.1	  	 	197.3	  	 	202.9	  	 	203.7	
Home Equity	  	 	8.9	  	 	9.1	  	 	9.0	  	 	9.0	
Other Consumer	  	 	56.0	  	 	52.6	  	 	42.8	  	 	45.6	
U.S. Mainland	  	 	 	  	 	 	  	 	 	  	 	 	
Purchased Home Equity	  	 	109.8	  	 	145.6	  	 	185.8	  	 	—  	
American Samoa and Other Pacific Islands	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	 	4.9	  	 	5.2	  	 	4.9	  	 	5.0	
Other Consumer	  	 	67.9	  	 	70.1	  	 	66.5	  	 	67.1	

	

	  	

	

	  	

	

	  	

	

	
Total	  	$	3,503.4	  	$	3,406.7	  	$	3,273.2	  	$	3,137.1	

	

	  	

	

	  	

	

	  	

	

	

1	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
16

Table of Contents
Mortgage Servicing Rights
 
As of September 30, 2003, the Company’s portfolio of residential loans serviced for third parties totaled $3.1 billion, a decrease of $0.8 billion and $1.0 billion from December 31, 2002 and September 30, 2002, respectively. The carrying value of mortgage servicing rights amounted to $23.3 million at September 30, 2003, a decrease of $5.6 million and $6.6 million from December 31, 2002 and September 30, 2002, respectively. These decreases are attributable to the high level of mortgage prepayments that have resulted from the low interest rate environment in 2003. The Company did not incur an impairment charge related to mortgage servicing rights thus far in 2003. The prepayment speed of Hawaii mortgages continues to be lower than national speeds.
 
Deposits
 
As of September 30, 2003, deposits totaled $7.1 billion, a $0.2 billion increase from December 31, 2002 and a $0.5 billion increase from September 30, 2002. The Company’s deposit growth has primarily been in demand and savings deposits, while higher cost time deposits have been reduced.
 
Borrowings
 
Short-term borrowings, including securities sold under agreements to repurchase, funds purchased, and other short-term borrowings, totaled $0.8 billion at September 30, 2003 and December 31, 2002, and $1.2 billion at September 30, 2002. The reduction in short-term borrowings reflected the modest net funding needs of the Company. For additional information, refer to the section on “Corporate Risk Profile—Liquidity Management”.
 
Shareholders’ Equity
 
The Company’s capital position remains strong. 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 $107.9 million as of September 30, 2003.
 
BUSINESS SEGMENTS
 
The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services Group, and Treasury and Other Corporate. The management accounting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. This process uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of 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 accounting principles generally accepted in the United States.
 
17

Table of Contents
The business segments are primarily managed with a focus on performance measures, including risk adjusted return on capital (“RAROC”) and net income after capital charge (“NIACC”). 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. NIACC is net income available to common shareholders less a charge for allocated capital. The cost of capital is determined by multiplying management’s estimate of the shareholder’s minimum required rate of return on capital invested (11% for 2003 and 12% for 2002) by the segment’s allocated equity. The Company assumes a cost of capital that is equal to the long-term government bond rate plus an additional level of return for the average risk premium of an equity investment adjusted for the Company’s market 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. During the third quarter of 2003, the Company changed the credit assigned for the value of deposits. Previously reported 2003 results have been reclassified to conform to the current methodology. The basis for the allocation of net interest income is a function of management decisions and assumptions which are subject to change based on changes in current interest rate and market conditions. The Provision charged to the Treasury and Other Corporate segment represents changes in the level of the Allowance. 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 the three and nine months ended September 30, 2003 and 2002 are discussed below and are presented in Table 6 and Table 6a, respectively.
 
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 74 Hawaii branch locations and over 500 bank ATMs in the State of Hawaii, e-bankoh (on-line banking service), and 24-hour telephone banking service.
 
The improvement in the segment’s financial measures for the three and nine months ended September 30, 2003 compared to the same periods in 2002 was primarily due to an increase in net interest income and non-interest income. In addition, for the nine months of 2003 compared to the same period in 2002 the improvement was due to the decrease in non-interest expense resulting from reductions in technology support and advertising costs. These positive trends were partially offset by an increase in the Provision and system replacement project expenses in 2003. The increase in net interest income for the Retail Banking segment was reflective of higher average loan and lease balances and lower deposit interest expense. Average loans and leases increased by $304.7 million, or 10.4%, as compared to the third quarter of 2002, largely as a result of strong growth in the Retail Banking segment’s automobile, direct personal, small business and home equity portfolios, augmented by a purchase of home equity loans in December 2002. The increase in non-interest income was primarily due to an increase in mortgage banking income, service charges, fees and insurance income. The third quarter 2003 to third quarter 2002 increase in non-interest expense was primarily due to an increase in commissions resulting from higher mortgage loan origination volume in 2003.
 
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 serves customers through its 14 branches in the Pacific Islands. As part of the initiatives for improving efficiency, the representative office in Tokyo was closed in the third quarter of 2003.
 
18

Table of Contents
The improvement in the segment’s financial measures for the three and nine months ended September 30, 2003 compared to the same periods in 2002 was a result of an increase in non-interest income, decreases in the Provision and non-interest expense, moderately offset by lower net interest income. The increase in non-interest income was due to a prepayment penalty fee on a commercial real estate loan, and an increase in insurance income and other fees. The decline in the Provision was a result of improved credit quality of the loan portfolio. The decline in non-interest expense was due to savings from lower staffing levels and other direct expenses including the realization of system conversion benefits, as well as savings from allocated expenses.
 
Investment Services Group
 
The Investment Services Group includes private banking, trust services, asset management, institutional investment advice, and retail brokerage. 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. Also included in the segment is Bankoh Investment Services, Inc., a full service brokerage offering equities, mutual funds, and annuities.
 
The decline in the segment’s financial measures for the three and nine months ended September 30, 2003 compared to the same periods in 2002, was primarily due to a decrease in non-interest income attributable to a decrease in trust and asset management fee income which resulted from declines in the value of assets under management and from decreased sales and fee income. The decrease in non-interest expense for the first nine months of 2003 compared to the same period in 2002 was mainly due to a decrease in outside service fees and commissions.
 
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, federal 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 that provide a wide-range of support (Technology and Operations, Human Resources, Finance and Legal, and Risk Management) to the other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process. This segment also includes the system replacement project expenses that are not incurred by or allocated to the Retail, Commercial and Investment Services Group segments.
 
The improvement in the segment’s financial measures for the third quarter of 2003 compared to the same quarter in 2002 was primarily due to an increase in non-interest income resulting from securities gains recorded in the third quarter of 2003. The lower capital charge was due to the reduction of the Company’s excess capital as a result of the continuing share repurchase activity. The decline in the segment’s financial measures for the nine month period of 2003 compared to the same period in 2002 was attributable to the increase in system replacement project expenses.
 
On a consolidated basis, the Company considers NIACC a measure of value creation. For the nine months ended September 30, 2003, consolidated NIACC was a positive $8.7 million, a result of improved financial performance primarily in the third quarter of 2003 and more efficient use of capital.
 
19

Table of Contents
Table 6
 
Business Segment Selected Financial Information (Unaudited)
 
(dollars in thousands)

	  	Retail
Banking

	 	 	Commercial
Banking

	 	 	Investment
Services
Group

	 	 	Treasury
and Other
Corporate

	 	 	Consolidated
Total

	 	
Three Months Ended September 30, 2003	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	  	$	51,317	 	 	$	33,958	 	 	$	3,001	 	 	$	2,829	 	 	$	91,105	 	
Provision for Loan and Lease Losses	  	 	(2,451	)	 	 	(3,549	)	 	 	5	 	 	 	5,995	 	 	 	—  	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Net Interest Income After Provision for Loan and Lease Losses	  	 	48,866	 	 	 	30,409	 	 	 	3,006	 	 	 	8,824	 	 	 	91,105	 	
Non-Interest Income	  	 	23,044	 	 	 	12,148	 	 	 	15,288	 	 	 	3,311	 	 	 	53,791	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
 	  	 	71,910	 	 	 	42,557	 	 	 	18,294	 	 	 	12,135	 	 	 	144,896	 	
Information Technology Systems Replacement Project	  	 	(36	)	 	 	—  	 	 	 	—  	 	 	 	(4,313	)	 	 	(4,349	)	
Non-Interest Expense	  	 	(44,240	)	 	 	(22,313	)	 	 	(15,763	)	 	 	(2,212	)	 	 	(84,528	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Income Before Income Taxes	  	 	27,634	 	 	 	20,244	 	 	 	2,531	 	 	 	5,610	 	 	 	56,019	 	
Provision for Income Taxes	  	 	(10,224	)	 	 	(7,357	)	 	 	(937	)	 	 	(814	)	 	 	(19,332	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Allocated Net Income	  	 	17,410	 	 	 	12,887	 	 	 	1,594	 	 	 	4,796	 	 	 	36,687	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Allowance Funding Value	  	 	(152	)	 	 	(940	)	 	 	(7	)	 	 	1,099	 	 	 	—  	 	
GAAP Provision	  	 	2,451	 	 	 	3,549	 	 	 	(5	)	 	 	(5,995	)	 	 	—  	 	
Economic Provision	  	 	(3,014	)	 	 	(3,139	)	 	 	(106	)	 	 	(12	)	 	 	(6,271	)	
Tax Effect of Adjustments	  	 	265	 	 	 	196	 	 	 	44	 	 	 	1,815	 	 	 	2,320	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Income Before Capital Charge	  	 	16,960	 	 	 	12,553	 	 	 	1,520	 	 	 	1,703	 	 	 	32,736	 	
Capital Charge	  	 	(5,614	)	 	 	(5,586	)	 	 	(1,493	)	 	 	(11,270	)	 	 	(23,963	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Net Income (Loss) After Capital Charge (NIACC)	  	$	11,346	 	 	$	6,967	 	 	$	27	 	 	$	(9,567	)	 	$	8,773	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
RAROC (ROE for the Company)	  	 	33	%	 	 	25	%	 	 	11	%	 	 	1	%	 	 	17	%	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Assets at September 30, 2003	  	$	3,507,960	 	 	$	2,226,160	 	 	$	140,735	 	 	$	3,495,900	 	 	$	9,370,755	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Three Months Ended September 30, 2002 1	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	  	$	49,432	 	 	$	35,738	 	 	$	3,219	 	 	$	3,792	 	 	$	92,181	 	
Provision for Loan and Lease Losses	  	 	(722	)	 	 	(4,456	)	 	 	(76	)	 	 	5,254	 	 	 	—  	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Net Interest Income After Provision for Loan and Lease Losses	  	 	48,710	 	 	 	31,282	 	 	 	3,143	 	 	 	9,046	 	 	 	92,181	 	
Non-Interest Income	  	 	19,897	 	 	 	8,295	 	 	 	16,640	 	 	 	2,205	 	 	 	47,037	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
 	  	 	68,607	 	 	 	39,577	 	 	 	19,783	 	 	 	11,251	 	 	 	139,218	 	
Information Technology Systems Replacement Project	  	 	(587	)	 	 	—  	 	 	 	—  	 	 	 	(5,989	)	 	 	(6,576	)	
Non-Interest Expense	  	 	(42,628	)	 	 	(24,260	)	 	 	(15,711	)	 	 	(2,568	)	 	 	(85,167	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Income Before Income Taxes	  	 	25,392	 	 	 	15,317	 	 	 	4,072	 	 	 	2,694	 	 	 	47,475	 	
Provision for Income Taxes	  	 	(9,395	)	 	 	(5,587	)	 	 	(1,507	)	 	 	(786	)	 	 	(17,275	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Allocated Net Income	  	 	15,997	 	 	 	9,730	 	 	 	2,565	 	 	 	1,908	 	 	 	30,200	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Allowance Funding Value	  	 	(201	)	 	 	(1,507	)	 	 	(8	)	 	 	1,716	 	 	 	—  	 	
GAAP Provision	  	 	722	 	 	 	4,456	 	 	 	76	 	 	 	(5,254	)	 	 	—  	 	
Economic Provision	  	 	(3,128	)	 	 	(3,340	)	 	 	(121	)	 	 	(7	)	 	 	(6,596	)	
Tax Effect of Adjustments	  	 	965	 	 	 	144	 	 	 	20	 	 	 	1,312	 	 	 	2,441	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Income (Loss) Before Capital Charge	  	 	14,355	 	 	 	9,483	 	 	 	2,532	 	 	 	(325	)	 	 	26,045	 	
Capital Charge	  	 	(5,216	)	 	 	(5,814	)	 	 	(1,475	)	 	 	(19,176	)	 	 	(31,681	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Net Income (Loss) After Capital Charge (NIACC)	  	$	9,139	 	 	$	3,669	 	 	$	1,057	 	 	$	(19,501	)	 	$	(5,636	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
RAROC (ROE for the Company)	  	 	30	%	 	 	18	%	 	 	19	%	 	 	0	%	 	 	10	%	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Assets at September 30, 2002	  	$	3,135,752	 	 	$	2,325,782	 	 	$	118,625	 	 	$	4,122,541	 	 	$	9,702,700	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	

1	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
20

Table of Contents
Table 6a
 
Business Segment Selected Financial Information (Unaudited)
 
(dollars in thousands)

	  	Retail
Banking

	 	 	Commercial
Banking

	 	 	Investment
Services
Group

	 	 	Treasury
and Other
Corporate

	 	 	Consolidated
Total

	 	
Nine Months Ended September 30, 2003	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	  	$	156,518	 	 	$	102,981	 	 	$	9,664	 	 	$	3,427	 	 	$	272,590	 	
Provision for Loan and Lease Losses	  	 	(4,620	)	 	 	(6,721	)	 	 	5	 	 	 	11,336	 	 	 	—  	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Net Interest Income After Provision for Loan and Lease Losses	  	 	151,898	 	 	 	96,260	 	 	 	9,669	 	 	 	14,763	 	 	 	272,590	 	
Non-Interest Income	  	 	64,328	 	 	 	28,507	 	 	 	46,396	 	 	 	10,052	 	 	 	149,283	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
 	  	 	216,226	 	 	 	124,767	 	 	 	56,065	 	 	 	24,815	 	 	 	421,873	 	
Information Technology Systems Replacement Project	  	 	(986	)	 	 	(23	)	 	 	(333	)	 	 	(20,529	)	 	 	(21,871	)	
Non-Interest Expense	  	 	(127,035	)	 	 	(68,237	)	 	 	(47,604	)	 	 	(9,724	)	 	 	(252,600	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Income (Loss) Before Income Taxes	  	 	88,205	 	 	 	56,507	 	 	 	8,128	 	 	 	(5,438	)	 	 	147,402	 	
Provision for Income Taxes	  	 	(32,636	)	 	 	(20,560	)	 	 	(3,007	)	 	 	5,323	 	 	 	(50,880	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Allocated Net Income (Loss)	  	 	55,569	 	 	 	35,947	 	 	 	5,121	 	 	 	(115	)	 	 	96,522	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Allowance Funding Value	  	 	(465	)	 	 	(3,181	)	 	 	(23	)	 	 	3,669	 	 	 	—  	 	
GAAP Provision	  	 	4,620	 	 	 	6,721	 	 	 	(5	)	 	 	(11,336	)	 	 	—  	 	
Economic Provision	  	 	(8,623	)	 	 	(9,225	)	 	 	(350	)	 	 	(22	)	 	 	(18,220	)	
Tax Effect of Adjustments	  	 	1,653	 	 	 	2,103	 	 	 	140	 	 	 	2,845	 	 	 	6,741	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Income (Loss) Before Capital Charge	  	 	52,754	 	 	 	32,365	 	 	 	4,883	 	 	 	(4,959	)	 	 	85,043	 	
Capital Charge	  	 	(16,500	)	 	 	(16,314	)	 	 	(4,523	)	 	 	(39,008	)	 	 	(76,345	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Net Income (Loss) After Capital Charge (NIACC)	  	$	36,254	 	 	$	16,051	 	 	$	360	 	 	$	(43,967	)	 	$	8,698	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
RAROC (ROE for the Company)	  	 	35	%	 	 	22	%	 	 	12	%	 	 	(1	)%	 	 	14	%	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Assets at September 30, 2003	  	$	3,507,960	 	 	$	2,226,160	 	 	$	140,735	 	 	$	3,495,900	 	 	$	9,370,755	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Nine Months Ended September 30, 2002 1	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	  	$	153,306	 	 	$	108,380	 	 	$	9,640	 	 	$	8,687	 	 	$	280,013	 	
Provision for Loan and Lease Losses	  	 	(3,213	)	 	 	(14,061	)	 	 	(76	)	 	 	5,734	 	 	 	(11,616	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Net Interest Income After Provision for Loan and Lease Losses	  	 	150,093	 	 	 	94,319	 	 	 	9,564	 	 	 	14,421	 	 	 	268,397	 	
Non-Interest Income	  	 	62,384	 	 	 	25,681	 	 	 	51,840	 	 	 	8,075	 	 	 	147,980	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
 	  	 	212,477	 	 	 	120,000	 	 	 	61,404	 	 	 	22,496	 	 	 	416,377	 	
Restructuring and Other Related Costs	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(1,979	)	 	 	(1,979	)	
Information Technology Systems Replacement Project	  	 	(587	)	 	 	—  	 	 	 	—  	 	 	 	(5,989	)	 	 	(6,576	)	
Non-Interest Expense	  	 	(133,454	)	 	 	(73,604	)	 	 	(49,830	)	 	 	(7,093	)	 	 	(263,981	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Income Before Income Taxes	  	 	78,436	 	 	 	46,396	 	 	 	11,574	 	 	 	7,435	 	 	 	143,841	 	
Provision for Income Taxes	  	 	(29,021	)	 	 	(16,927	)	 	 	(4,283	)	 	 	(1,338	)	 	 	(51,569	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Allocated Net Income	  	 	49,415	 	 	 	29,469	 	 	 	7,291	 	 	 	6,097	 	 	 	92,272	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Allowance Funding Value	  	 	(672	)	 	 	(4,656	)	 	 	(19	)	 	 	5,347	 	 	 	—  	 	
GAAP Provision	  	 	3,213	 	 	 	14,061	 	 	 	76	 	 	 	(5,734	)	 	 	11,616	 	
Economic Provision	  	 	(8,536	)	 	 	(11,247	)	 	 	(372	)	 	 	(9	)	 	 	(20,164	)	
Tax Effect of Adjustments	  	 	2,218	 	 	 	682	 	 	 	117	 	 	 	146	 	 	 	3,163	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Income Before Capital Charge	  	 	45,638	 	 	 	28,309	 	 	 	7,093	 	 	 	5,847	 	 	 	86,887	 	
Capital Charge	  	 	(15,787	)	 	 	(18,423	)	 	 	(4,596	)	 	 	(62,026	)	 	 	(100,832	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Net Income (Loss) After Capital Charge (NIACC)	  	$	29,851	 	 	$	9,886	 	 	$	2,497	 	 	$	(56,179	)	 	$	(13,945	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
RAROC (ROE for the Company)	  	 	32	%	 	 	17	%	 	 	17	%	 	 	13	%	 	 	10	%	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Assets at September 30, 2002	  	$	3,135,752	 	 	$	2,325,782	 	 	$	118,625	 	 	$	4,122,541	 	 	$	9,702,700	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	

1	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
21

Table of Contents
FOREIGN OPERATIONS
 
As of September 30, 2003, the countries in which the Company maintains its largest exposure on a cross-border basis include the Netherlands, United Kingdom, Australia and Canada. Table 7 presents, as of September 30, 2003, December 31, 2002, and September 30, 2002, a geographic distribution of the Company’s cross-border assets for selected countries. The primary component of cross-border assets as of September 30, 2003 was interest bearing deposits of $201.1 million.
 
Table 7
 
Geographic Distribution of Cross-Border International Assets (Unaudited)1
 
(dollars in millions)	  	 	  	 	  	 	
Country

	  	September 30, 2003

	  	December 31, 2002 2

	  	September 30, 2002 2

	
Australia	  	$	36.9	  	$	63.2	  	$	110.3	
Canada	  	 	32.5	  	 	31.9	  	 	120.0	
France	  	 	7.9	  	 	34.2	  	 	73.5	
Germany	  	 	25.9	  	 	100.6	  	 	76.2	
Netherlands	  	 	91.9	  	 	98.0	  	 	107.8	
Singapore	  	 	—  	  	 	100.1	  	 	139.2	
United Kingdom	  	 	59.7	  	 	170.5	  	 	309.7	
All Others	  	 	51.3	  	 	74.4	  	 	205.7	

	

	  	

	

	  	

	

	
Total	  	$	306.1	  	$	672.9	  	$	1,142.4	

	

	  	

	

	  	

	

	

1	Cross-border outstandings are defined as foreign monetary assets that are payable to the Company in U.S. dollars or other non-local currencies, plus amounts payable in local currency but funded with U.S. dollars or other non-local currencies. Cross-border outstandings include loans, acceptances, interest bearing deposits with other banks, other interest bearing investments and other monetary assets.	
2	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
Because the U.S. dollar is used in the Pacific Island Division locations (Guam and American Samoa, which are U.S. territories, and other nearby islands), these operations are not considered foreign for financial reporting purposes.
 
22

Table of Contents
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 standby letters of credit, and overnight overdrafts.
 
The Company’s asset quality continued to improve as evidenced by lower levels of internally criticized loans and non-performing assets, and a continued positive trend in the level of commercial net charge-offs. The Company’s lower risk position relative to a year ago in the corporate portfolio reflects the execution of portfolio strategy to shift to lower risk industries as well as reduce large borrower concentrations, syndicated national credits, and exposure to certain industries. Management continues to monitor the portfolio in an effort to identify and disengage from deteriorating credits. In the Hawaii commercial portfolio, overall risk has been generally stable primarily due to the resiliency of the Hawaii economy. In the retail portfolios, higher retail net charge-offs were due to a combination of growth and the non-recurring charge-off of the remaining balance of the portfolios for four Pacific Island branches where operations were previously discontinued.
 
Although the Company’s credit risk profile continues to improve overall, two components, airline/aircraft and Guam, continue to carry higher risk characteristics. Information about these components is summarized in Table 8.
 
Risk in the airline industry, while recently showing less negative trends, continues to remain high as the industry struggles with elevated cost structures, growing competition from low cost carriers that reduced higher-margin business travel, potential global mergers and marketing alliances, and a less certain geopolitical environment. The risk of additional domestic and/or international airline bankruptcies may place further downward pressure on aircraft values and lease rents.
 
In Guam, which is materially dependent on tourism and military spending, economic stress continues. The Guam hotel portfolio had $17.8 million in exposure at September 30, 2003 of which $6.0 million, or 33%, was guaranteed by financial institutions or entities with limited exposure to tourism.
 
At September 30, 2003, the largest syndicated loan outstanding amounted to $26.7 million to a prominent Hawaii based hotel operator while the second largest was $23.3 million to a Hawaii shopping center operator. The ten largest syndicated loans outstanding totaled $146.2 million to the real estate, hospitality, and gaming industries. As of September 30, 2003, one unfunded syndicated commitment, which had $6.1 million in exposure (less than 1% of total syndicated commitments), was internally classified.
 
23

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Table 8
 
Selected Concentrations of Credit Exposure (Unaudited)
 
 	 	September 30, 2003

	 	December 31, 2002

	 	September 30, 2002 1

	
(dollars in millions)

	 	Outstanding

	 	Unused
Commitments

	 	Total
Exposure

	 	Total
Exposure

	 	Total
Exposure

	
Air Transportation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Regional Passenger Carriers	 	$	45.1	 	$	12.5	 	$	57.6	 	$	57.3	 	$	57.2	
United States Based Passenger Carriers	 	 	39.9	 	 	—  	 	 	39.9	 	 	39.6	 	 	48.3	
International Based Passenger Carriers	 	 	31.7	 	 	—  	 	 	31.7	 	 	32.1	 	 	32.2	
Cargo Carriers	 	 	14.4	 	 	—  	 	 	14.4	 	 	15.0	 	 	15.0	

	

	 	

	

	 	

	

	 	

	

	 	

	

	
Total Air Transportation	 	$	131.1	 	$	12.5	 	$	143.6	 	$	144.0	 	$	152.7	

	

	 	

	

	 	

	

	 	

	

	 	

	

	
Guam	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Hotel	 	$	17.8	 	$	—  	 	$	17.8	 	$	44.4	 	$	104.7	
Other Commercial	 	 	147.2	 	 	35.9	 	 	183.1	 	 	166.0	 	 	134.6	
Consumer	 	 	271.0	 	 	6.5	 	 	277.5	 	 	257.4	 	 	250.6	

	

	 	

	

	 	

	

	 	

	

	 	

	

	
Total Guam	 	$	436.0	 	$	42.4	 	$	478.4	 	$	467.8	 	$	489.9	

	

	 	

	

	 	

	

	 	

	

	 	

	

	
Syndicated Exposure	 	$	249.1	 	$	624.4	 	$	873.5	 	$	1,002.1	 	$	1,075.8	

	

	 	

	

	 	

	

	 	

	

	 	

	

	

Exposure includes loans, leveraged leases and operating leases.
1	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
24

Table of Contents
Non-Performing Assets
 
Non-performing assets (“NPAs”) were $40.1 million at September 30, 2003, a decline of $14.3 million, or 26%, from the end of 2002. The improvement in non-performing assets was largely the result of loans that were returned to accrual status or paid-off, and a reduction in foreclosed assets due to sales. The addition of one $7.6 million credit to a Hawaii-based company in the second quarter of 2003 partially offset total reductions.
 
Compared to the same quarter last year, non-performing assets decreased by $23.2 million, or 37%. Improvement from the prior year quarter was largely due to payments, the return of loans to accrual status, and charge-offs. At September 30, 2003, the ratio of non-performing assets to total loans and foreclosed real estate was 0.72%, down from 1.01% at December 31, 2002 and 1.20% at September 30, 2002.
 
NPAs in Guam were $14.4 million at September 30, 2003, a decline of $1.1 million from June 30, 2003 primarily due to the sale of foreclosed assets. As a percent of total NPAs, Guam loans represented 36%, a decrease from 48% at December 31, 2002.
 
Non-accrual loans were $31.4 million at September 30, 2003, down $13.6 million, or 30%, from $45.0 million at December 31, 2002, and by $14.3 million, or 31%, from $45.7 million at September 30, 2002. Non-accrual loans as a percentage of total loans were 0.56% at September 30, 2003, down from 0.84% at December 31, 2002 and 0.87% at September 30, 2002.
 
Foreclosed assets were $8.7 million at September 30, 2003, a decrease of $0.7 million from $9.4 million at December 31, 2002 and a decrease of $8.9 million from $17.6 million for the same period last year. The decline from the same period in the prior year was due primarily to the sale of the majority of the Company’s largest parcel of foreclosed real estate in the fourth quarter of 2002.
 
Impaired loans at September 30, 2003 of $19.5 million decreased $22.4 million, or 53%, from $41.9 million at December 31, 2002. These loans had a related Allowance that totaled $1.7 million at September 30, 2003, a decrease of $6.6 million from year end 2002. Compared to September 30, 2002, impaired loans decreased by $34.0 million, or 64%, from $53.5 million and had a related Allowance of $7.0 million.
 
Accruing loans past due 90 days or more were $3.9 million at September 30, 2003, an increase of $0.7 million from June 30, 2003 and $2.1 million from December 31, 2002. The increase for both periods was primarily due to installment loans resulting from the seasoning of the Fall 2002 direct mail campaign. Despite this increase, delinquencies remain low at 20 basis points of the outstanding balance.
 
For further information on non-performing assets refer to Table 9.
 
25

Table of Contents
Table 9
 
Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More (Unaudited)
 
(dollars in millions)

	 	September 30,
2003

	 	 	June 30,
2003

	 	 	March 31,
2003

	 	 	December 31,
2002

	 	 	September 30,
2002  1

	 	
Non-Performing Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-Accrual Loans	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	$	7.8	 	 	$	8.8	 	 	$	2.4	 	 	$	5.9	 	 	$	6.4	 	
Commercial Mortgage	 	 	11.0	 	 	 	11.2	 	 	 	17.9	 	 	 	20.3	 	 	 	18.1	 	
Construction	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	0.5	 	 	 	0.9	 	
Lease Financing	 	 	2.4	 	 	 	2.5	 	 	 	3.2	 	 	 	4.1	 	 	 	5.7	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Commercial	 	 	21.2	 	 	 	22.5	 	 	 	23.5	 	 	 	30.8	 	 	 	31.1	 	
Consumer	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	 	9.7	 	 	 	10.2	 	 	 	11.5	 	 	 	13.9	 	 	 	14.3	 	
Home Equity	 	 	0.5	 	 	 	—  	 	 	 	0.1	 	 	 	0.3	 	 	 	0.2	 	
Other Consumer	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	0.1	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Consumer	 	 	10.2	 	 	 	10.2	 	 	 	11.6	 	 	 	14.2	 	 	 	14.6	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Non-Accrual Loans	 	 	31.4	 	 	 	32.7	 	 	 	35.1	 	 	 	45.0	 	 	 	45.7	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Foreclosed Real Estate	 	 	8.7	 	 	 	9.3	 	 	 	9.1	 	 	 	9.4	 	 	 	17.6	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Non-Performing Assets	 	$	40.1	 	 	$	42.0	 	 	$	44.2	 	 	$	54.4	 	 	$	63.3	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Accruing Loans Past Due 90 Days or More	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	$	0.7	 	 	$	0.5	 	 	$	—  	 	 	$	0.2	 	 	$	—  	 	
Commercial Mortgage	 	 	—  	 	 	 	—  	 	 	 	0.4	 	 	 	0.3	 	 	 	—  	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Commercial	 	 	0.7	 	 	 	0.5	 	 	 	0.4	 	 	 	0.5	 	 	 	—  	 	
Consumer	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	 	2.0	 	 	 	1.8	 	 	 	1.6	 	 	 	0.6	 	 	 	1.4	 	
Home Equity	 	 	—  	 	 	 	0.1	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
Purchased Home Equity	 	 	0.1	 	 	 	0.1	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
Other Consumer	 	 	1.1	 	 	 	0.4	 	 	 	2.3	 	 	 	0.7	 	 	 	0.3	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Consumer	 	 	3.2	 	 	 	2.4	 	 	 	3.9	 	 	 	1.3	 	 	 	1.7	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Accruing and Past Due	 	$	3.9	 	 	$	2.9	 	 	$	4.3	 	 	$	1.8	 	 	$	1.7	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Loans	 	$	5,570.4	 	 	$	5,471.9	 	 	$	5,565.4	 	 	$	5,359.0	 	 	$	5,259.3	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Ratio of Non-Accrual Loans to Total Loans	 	 	0.56	%	 	 	0.60	%	 	 	0.63	%	 	 	0.84	%	 	 	0.87	%	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Ratio of Non-Performing Assets to Total Loans and
Foreclosed Real Estate	 	 	0.72	%	 	 	0.77	%	 	 	0.79	%	 	 	1.01	%	 	 	1.20	%	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Ratio of Non-Performing Assets and Accruing Loans	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Past Due 90 Days or More to Total Loans	 	 	0.79	%	 	 	0.82	%	 	 	0.87	%	 	 	1.05	%	 	 	1.24	%	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Quarter to Quarter Changes in Non-Performing Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at Beginning of Quarter	 	$	42.0	 	 	$	44.2	 	 	$	54.4	 	 	$	63.3	 	 	$	78.8	 	
Additions	 	 	3.2	 	 	 	11.6	 	 	 	4.8	 	 	 	12.0	 	 	 	7.0	 	
Reductions	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Payments and Sales of Loans	 	 	(1.8	)	 	 	(4.3	)	 	 	(5.6	)	 	 	(6.9	)	 	 	(8.5	)	
Return to Accrual	 	 	(1.5	)	 	 	(7.5	)	 	 	(5.6	)	 	 	(1.9	)	 	 	(9.1	)	
Sales of Foreclosed Assets	 	 	(1.0	)	 	 	(0.7	)	 	 	(1.1	)	 	 	(9.4	)	 	 	(1.4	)	
Charge-offs	 	 	(0.8	)	 	 	(1.3	)	 	 	(2.7	)	 	 	(2.7	)	 	 	(3.5	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Total Reductions	 	 	(5.1	)	 	 	(13.8	)	 	 	(15.0	)	 	 	(20.9	)	 	 	(22.5	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	
Balance at End of Quarter	 	$	40.1	 	 	$	42.0	 	 	$	44.2	 	 	$	54.4	 	 	$	63.3	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	

1	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
26

Table of Contents
Allowance for Loan and Lease Losses
 
The Company maintains an Allowance adequate to cover management’s estimate of probable credit losses inherent in its lending portfolios 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 at September 30, 2003 of $132.7 million decreased from $142.9 million at December 31, 2002, and $154.5 million at September 30, 2002. The current quarter and year-over-year decreases were consistent with improvements in credit quality and the estimated impact of current economic conditions on portfolio performance. The ratio of the Allowance to total loans was 2.38% at September 30, 2003, a decrease from 2.67% at December 31, 2002 and 2.94% at September 30, 2002. A summary of the activity for the Allowance is presented in Table 10.
 
Net charge-offs for the third quarter of 2003 were $5.3 million, or 0.38% (annualized), of total average loans compared to $4.5 million, or 0.33% (annualized), of total average loans in the third quarter of 2002. Net charge-offs included $3.6 million of loans, primarily consumer, remaining in the Pacific Islands branches that were closed in 2002. Net charge-offs for the first nine months of 2003 were $10.2 million, or 0.25% (annualized), of total average loans, a decrease from $16.1 million, or 0.39% (annualized), of total average loans in the comparable period last year. This improvement reflects management’s execution of portfolio strategies in an effort to shift to lower risk industries, reduce large borrower concentrations and syndicated national credits, and the resiliency of the Hawaii economy, as well as enhanced credit management and collection process in the retail portfolios.
 
27

Table of Contents
Table 10
 
Consolidated Allowance for Loan and Lease Losses (Unaudited)
 
 	  	Three Months Ended

	 	 	Nine Months Ended

	 	 	
 	  	September 30,
2003

	 	 	June 30,
2003

	 	 	September 30,
2002 1

	 	 	September 30,	 	 	
(dollars in millions)

	  	 	 	 	 	 	 	 	 	 	2003

	 	 	2002 1

	 	 	 	 	 	 	 	 	 	
Balance at Beginning of Period	  	$	138.0	 	 	$	140.0	 	 	$	159.0	 	 	$	142.9	 	 	$	159.0	 	 	 	 	 	 	 	 	 	
Loans Charged-Off	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	  	 	(1.1	)	 	 	(0.6	)	 	 	(0.9	)	 	 	(3.3	)	 	 	(11.0	)	 	 	 	 	 	 	 	 	
Commercial Mortgage	  	 	(0.2	)	 	 	(0.4	)	 	 	(2.5	)	 	 	(0.6	)	 	 	(2.9	)	 	 	 	 	 	 	 	 	
Construction	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(0.5	)	 	 	(0.5	)	 	 	 	 	 	 	 	 	
Lease Financing	  	 	—  	 	 	 	(0.3	)	 	 	(0.1	)	 	 	(0.3	)	 	 	(0.3	)	 	 	 	 	 	 	 	 	
Consumer	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Residential Mortgage	  	 	(0.2	)	 	 	(0.7	)	 	 	(0.6	)	 	 	(1.5	)	 	 	(3.0	)	 	 	 	 	 	 	 	 	
Home Equity	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(0.1	)	 	 	(0.2	)	 	 	 	 	 	 	 	 	
Other Consumer	  	 	(6.8	)	 	 	(3.6	)	 	 	(3.0	)	 	 	(13.5	)	 	 	(9.7	)	 	 	 	 	 	 	 	 	
Lease Financing	  	 	—  	 	 	 	—  	 	 	 	(0.1	)	 	 	(0.2	)	 	 	(0.2	)	 	 	 	 	 	 	 	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	 	 	 	 	
Total Charge-Offs	  	 	(8.3	)	 	 	(5.7	)	 	 	(7.2	)	 	 	(20.0	)	 	 	(27.8	)	 	 	 	 	 	 	 	 	
Recoveries on Loans Previously Charged-Off	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	  	 	0.6	 	 	 	1.8	 	 	 	0.7	 	 	 	3.0	 	 	 	3.4	 	 	 	 	 	 	 	 	 	
Commercial Mortgage	  	 	—  	 	 	 	0.1	 	 	 	—  	 	 	 	0.1	 	 	 	2.0	 	 	 	 	 	 	 	 	 	
Construction	  	 	—  	 	 	 	0.1	 	 	 	—  	 	 	 	1.0	 	 	 	—  	 	 	 	 	 	 	 	 	 	
Consumer	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Residential Mortgage	  	 	0.5	 	 	 	0.3	 	 	 	0.1	 	 	 	0.9	 	 	 	0.8	 	 	 	 	 	 	 	 	 	
Home Equity	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	0.1	 	 	 	0.1	 	 	 	 	 	 	 	 	 	
Other Consumer	  	 	1.5	 	 	 	1.3	 	 	 	1.5	 	 	 	4.2	 	 	 	4.8	 	 	 	 	 	 	 	 	 	
Lease Financing	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	 	 	 	 	 	 	
Foreign	  	 	0.4	 	 	 	—  	 	 	 	0.4	 	 	 	0.5	 	 	 	0.7	 	 	 	 	 	 	 	 	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	 	 	 	 	
Total Recoveries	  	 	3.0	 	 	 	3.6	 	 	 	2.7	 	 	 	9.8	 	 	 	11.7	 	 	 	 	 	 	 	 	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	 	 	 	 	
Net Loan Charge-Offs	  	 	(5.3	)	 	 	(2.1	)	 	 	(4.5	)	 	 	(10.2	)	 	 	(16.1	)	 	 	 	 	 	 	 	 	
Provision for Loan and Lease Losses	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	11.6	 	 	 	 	 	 	 	 	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	 	 	 	 	
Balance at End of Period	  	$	132.7	 	 	$	138.0	 	 	$	154.5	 	 	$	132.7	 	 	$	154.5	 	 	 	 	 	 	 	 	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	 	 	 	 	
Average Loans Outstanding	  	$	5,546.5	 	 	$	5,518.4	 	 	$	5,350.0	 	 	$	5,508.9	 	 	$	5,479.1	 	 	 	 	 	 	 	 	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	 	 	 	 	 	 	 	
Ratio of Net Charge-Offs to Average Loans Outstanding (annualized)	  	 	0.38	%	 	 	0.15	%	 	 	0.33	%	 	 	0.25	%	 	 	0.39	%	 	 	 	 	 	 	 	 	
Ratio of Allowance to Loans Outstanding	  	 	2.38	%	 	 	2.52	%	 	 	2.94	%	 	 	2.38	%	 	 	2.94	%	 	 	 	 	 	 	 	 	

1	Certain 2002 information has been reclassified to conform to 2003 presentation.	
 
Totals may not add due to rounding.
 
28

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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 in the normal course of conducting its business activities. The Company’s market risk management process involves measuring, monitoring and controlling 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”.
 
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 executed on behalf of customers and for the Company’s own account. The remaining exposure from foreign currency trading positions during the first nine months of 2003 was immaterial.
 
The Company’s “other than trading” activities include normal business transactions that expose the Company’s balance sheet to interest rate risk.
 
Interest Rate Risk
 
The Company’s balance sheet is sensitive to changes in the general level of interest rates arising 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, customer preferences, historical pricing relationships and the monetary and fiscal policies of the United States government and the Federal Reserve System.
 
Table 11 presents, as of September 30, 2003, December 31, 2002 and September 30, 2002, the estimate of the change in net interest income (“NII”) that would result from a gradual 200 basis point increase or decrease in interest rates, moving in parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario for NII. The 200 basis point increase would equate to an average increase of $4.2 million in NII per quarter. The Company’s balance sheet continues to be asset-sensitive. The resulting estimated NII exposure is within the guidelines approved by the Company’s Asset Liability Management Committee.
 
Table 11
 
Market Risk Exposure to Interest Rate Changes (Unaudited)
 
 	  	September 30, 2003

	 	 	December 31, 2002

	 	 	September 30, 2002

	 	
 	  	Interest Rate Change
(in basis points)

	 	 	Interest Rate Change
(in basis points)

	 	 	Interest Rate Change
(in basis points)

	 	
(dollars in millions)

	  	-200

	 	 	+200

	 	 	-200

	 	 	+200

	 	 	-200

	 	 	+200

	 	
Estimated Exposure as a Percent of Net Interest Income	  	 	(5.6	)%	 	 	4.6	%	 	 	(3.8	)%	 	 	7.7	%	 	 	(4.7	)%	 	 	8.7	%	
Estimated Exposure to Net Interest Income Per Quarter	  	$	(5.1	)	 	$	4.2	 	 	$	(3.5	)	 	$	7.1	 	 	$	(4.4	)	 	$	8.1	 	
 
In managing interest rate risk, the Company generally uses on-balance sheet transactions to manage its risk position. Approaches that are used to shift balance sheet mix or alter the interest rate characteristics of assets and liabilities include changing product pricing strategies and modifying investment portfolio strategies. The use of financial derivatives has been limited over the past several years.
 
29

Table of Contents
Liquidity Management
 
Liquidity is managed in an effort to ensure that the Company has continuous access to sufficient, reasonably priced funding to conduct its business in a normal manner.
 
The Bank is a member of the Federal Home Loan Bank of Seattle (“FHLB”), which is a source of short and long-term funding. Outstanding borrowings from the FHLB were $68.5 million at September 30, 2003, compared to $42.5 million at December 31, 2002 and $34.5 million at September 30, 2002. The increase from year-end 2002 was mainly attributable to a $50.0 million long-term advance, the proceeds of which were used to repay a portion of a $100.0 million long-term 6  7 / 8 % subordinated debt that matured in June 2003. The advance is for a 7 year term and bears a 4% rate of interest.
 
Additionally, the Bank maintains a $1 billion senior and subordinated bank note program. Under this facility, the Bank may issue additional notes provided that at any time the aggregate amount outstanding does not exceed $1 billion. Subordinated notes outstanding under this bank note program totaled $125.0 million at September 30, 2003, December 31, 2002 and September 30, 2002.
 
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, reflect risks inherent in its markets, provide protection against unforeseen losses and comply with regulatory requirements.
 
At September 30, 2003, shareholders’ equity totaled $823.8 million, a 19% net decrease from December 31, 2002. The decrease in shareholders’ equity during the first nine months of 2003 was primarily attributable to the Company’s repurchase of its common stock under the repurchase programs, offset by earnings for the year 2003.
 
In September 2003, the Company’s Board of Directors authorized an additional stock repurchase of up to $200 million of its common stock. This authorization, combined with the Company’s previously announced authorizations of $800 million, brings the total repurchase authority to $1.0 billion.
 
During the nine months ended September 30, 2003, 8.1 million shares of common stock were repurchased at an average cost of $32.53 per share, totaling $262.9 million. As of September 30, 2003, the Company had repurchased a total of 28.2 million shares since July 2001, under all share repurchase programs, totaling $790.8 million at an average cost of $28.02 per share. Subsequent to September 30, 2003 through October 24, 2003, 183,800 shares where repurchased at an average cost of $35.62 per share for a total of $6.5 million resulting in remaining buyback authority under the existing repurchase programs of $202.7 million.
 
In October 2003, the Company’s Board of Directors declared a quarterly cash dividend of $0.30 per share on the Company’s outstanding shares, an increase from $0.19 per share in the previous quarters. The dividend will be payable on December 12, 2003 to shareholders of record at the close of the business on November 21, 2003.
 
30

Table of Contents
Table 12
 
Regulatory Capital and Ratios (Unaudited)
 
(dollars in millions)

	  	September 30, 2003

	 	 	December 31, 2002

	 	 	September 30, 2002

	 	
Regulatory Capital	  	 	 	 	 	 	 	 	 	 	 	 	
Shareholders’ Equity	  	$	823.8	 	 	$	1,015.8	 	 	$	1,100.7	 	
Add: 8.25% Capital Securities of Bancorp Hawaii Capital Trust I	  	 	31.4	 	 	 	31.4	 	 	 	43.2	 	
Less: Goodwill	  	 	36.2	 	 	 	36.2	 	 	 	36.2	 	
Unrealized Valuation and Other Adjustments	  	 	12.7	 	 	 	27.2	 	 	 	26.8	 	

	

	

	 	

	

	

	 	

	

	

	
Tier I Capital	  	 	806.3	 	 	 	983.8	 	 	 	1,080.9	 	
Allowable Reserve for Loan Losses	  	 	75.4	 	 	 	75.0	 	 	 	73.8	 	
Subordinated Debt	  	 	124.7	 	 	 	124.7	 	 	 	124.7	 	

	

	

	 	

	

	

	 	

	

	

	
Total Capital	  	$	1,006.4	 	 	$	1,183.5	 	 	$	1,279.4	 	

	

	

	 	

	

	

	 	

	

	

	
Risk Weighted Assets	  	$	5,977.3	 	 	$	5,929.6	 	 	$	5,820.9	 	

	

	

	 	

	

	

	 	

	

	

	
Key Capital Ratios	  	 	 	 	 	 	 	 	 	 	 	 	
Average Equity/Average Assets Ratio	  	 	9.18	%	 	 	11.88	%	 	 	11.75	%	
Tier I Capital Ratio	  	 	13.49	%	 	 	16.59	%	 	 	18.57	%	
Total Capital Ratio	  	 	16.84	%	 	 	19.96	%	 	 	21.98	%	
Leverage Ratio	  	 	8.52	%	 	 	10.34	%	 	 	11.07	%	
 
Economic Update
 
The Hawaii economy remained strong during the third quarter of 2003. The construction and real estate investment sectors continued to surge over the summer months, especially in the neighbor island residential markets. Tourism, as measured by passenger arrivals, also increased during the quarter. August 2003 was a record month for Hawaii tourism. Hawaii’s seasonally-adjusted unemployment increased slightly to 4.3% in August, while nonagricultural payrolls rose more than 2% in August 2003 from the prior year level.
 
Earnings Outlook
 
The Company now believes that its earnings for 2003 should exceed the previously published earnings guidance of $131 million. Based on current conditions, the Company does not expect to record a Provision in 2003. However, the actual amount of the Provision depends on determinations of credit risk that are made near the end of each quarter. Earnings per share and return on equity projections continue to be dependent upon the terms and timing of share repurchases.
 
Item 3. Quantitative and Qualitative Disclosures of Market Risk
 
See Management’s Discussion and Analysis of Results of Operations and Financial Condition-Market Risk.
 
Item 4. Controls and Procedures
 
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) under the Securities and Exchange Act of 1934, as amended) as of September 30, 2003. Based on this evaluation the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s 2003 third quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
 
31

Table of Contents
Part II.—Other Information
 
Items 1 to 5 omitted pursuant to instructions.
 
Item 6—Exhibits and Reports on Form 8-K
 
 	a.	Exhibit Index	
 
Exhibit Number
 
 	12	Statement Regarding Computation of Ratios	
 
 	31	Rule 13a-14(a) Certifications	
 
 	32	Section 1350 Certification	
 
 	b.	The following report on Form 8-K was filed during the quarter ended September 30, 2003:	
 
Filed July 29, 2003, under Item 12 of Form 8-K, regarding the Company’s financial results for the quarter ended June 30, 2003
 
32

Table of Contents
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date October 27, 2003
 
BANK OF HAWAII CORPORATION	
 	
        /s/ Michael E. O’Neill

	
Michael E. O’Neill	
Chairman, Chief Executive Officer and President	
 	
        /s/ Allan R. Landon

	
Allan R. Landon	
Vice Chairman, Treasurer and Chief Financial Officer	
 	
        /s/ Richard C. Keene

	
Richard C. Keene	
Executive Vice President and Controller	
 
33

EXHIBIT 12
 
Bank of Hawaii Corporation and Subsidiaries
Exhibit 12—Statement Regarding Computation of Ratios
Nine Months Ended September 30, 2003 and 2002
 
(dollars in millions)

	  	2003

	 	 	2002

	 	
Earnings:	  	 	 	 	 	 	 	 	
1.      Income Before Income Taxes	  	$	147.4	 	 	$	143.8	 	
2.      Plus: Fixed Charges Including Interest on Deposits	  	 	63.0	 	 	 	118.8	 	

	

	

	 	

	

	

	
3.      Earnings Including Fixed Charges	  	 	210.4	 	 	 	262.6	 	
4.      Less: Interest on Deposits	  	 	38.0	 	 	 	66.7	 	

	

	

	 	

	

	

	
5.      Earnings Excluding Interest on Deposits	  	$	172.4	 	 	$	195.9	 	

	

	

	 	

	

	

	
Fixed Charges:	  	 	 	 	 	 	 	 	
6.      Fixed Charges Including Interest on Deposits	  	$	63.0	 	 	$	118.8	 	
7.      Less: Interest on Deposits	  	 	38.0	 	 	 	66.7	 	

	

	

	 	

	

	

	
8.      Fixed Charges Excluding Interest on Deposits	  	$	25.0	 	 	$	52.1	 	

	

	

	 	

	

	

	
Ratio of Earnings to Fixed Charges:	  	 	 	 	 	 	 	 	
Including Interest on Deposits (Line 3 divided by Line 6)	  	 	3.3	x	 	 	2.2	x	
Excluding Interest on Deposits (Line 5 divided by Line 8)	  	 	6.9	x	 	 	3.8	x	

EXHIBIT 31
 
BANK OF HAWAII CORPORATION
Rule 13a-14(a) Certifications
 
I, Michael E. O’Neill, certify that:
 
 	1.	I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;	
 
 	2.	Based on my knowledge, this 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)) for the registrant and we 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)	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	
 
 	c)	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 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: October 27, 2003
 
    /s/ Michael E. O’Neill

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

EXHIBIT 31
 
BANK OF HAWAII CORPORATION
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)) for the registrant and we 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)	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	
 
 	c)	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 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: October 27, 2003
 
    /s/ Allan R. Landon

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

EXHIBIT 32
 
BANK OF HAWAII CORPORATION
Section 1350 Certification
 
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 September 30, 2003 (the “Periodic Report”):
 
 	•	fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 
 	•	the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.	
 
        /s/ Michael E. O’Neill

	
Michael E. O’Neill	
Chairman, Chief Executive Officer and President	
 	
        /s/ Allan R. Landon

	
Allan R. Landon	
Vice Chairman, Treasurer and Chief Financial Officer	
 	
October 27, 2003	
 
A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to the Issuer and will be retained by the Issuer and furnished to the staff of the Securities and Exchange Commission upon request.