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 June 30, 2002	
 
OR
 
¨	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
    	 	For the transition period from                      to                     	
 
Commission File Number 1-6887

 
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware	 	99-0148992	
(State of incorporation)	 	(IRS Employer
Identification No.)	
 	 	 	
130 Merchant Street, Honolulu, Hawaii	 	96813	
(Address of principal executive offices)	 	(Zip Code)	
 
(808) 538-4727
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes   x   No   ¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common Stock, $.01 Par Value; outstanding at July 31, 2002—68,112,930 shares

Table of Contents
 
INDEX
 
BANK OF HAWAII CORPORATION AND SUBSIDIARIES

 	 	 	 	 	
Part I.—Financial Information	    	 	
 	 	 	 	 	
Item 1.	 	Financial Statements (Unaudited)	    	 	
 	 	 	 	 	
 	 	Consolidated Statements of Income—Three months and Six months ended June 30, 2002 and 2001	    	3	
 	 	 	 	 	
 	 	Consolidated Statements of Condition—June 30, 2002, December 31, 2001, and June 30, 2001	    	4	
 	 	 	 	 	
 	 	Consolidated Statements of Shareholders’ Equity—Six months ended June 30, 2002 and 2001	    	5	
 	 	 	 	 	
 	 	Consolidated Statements of Cash Flows—Six months ended June 30, 2002 and 2001	    	6	
 	 	 	 	 	
 	 	Notes to Consolidated Financial Statements	    	7	
 	 	 	 	 	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	    	11	
 	 	 	 	 	
Item 3.	 	Quantitative and Qualitative Disclosure of Market Risk	    	37	
 	 	 	 	 	
Part II.—Other Information	    	 	
 	 	 	 	 	
Item 4.	 	Submission of Matters to a Vote of Shareholders	    	37	
 	 	 	 	 	
Item 6.	 	Exhibits and Reports on Form 8-K	    	38	
 	 	 	 	 	
Signatures	    	39	
2

Table of Contents
 
BANK OF HAWAII CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 	 	Three Months Ended
June 30

	 	Six Months Ended
June 30

	
 	 	2002

	 	2001

	 	2002

	 	2001

	
 	 	(dollars in thousands except per share amounts)	
Interest Income	 	 	 	 	 	 	 	 	 	 	 	 	
Interest and Fees on Loan and Leases	 	$	92,441	 	$	163,622	 	$	191,086	 	$	352,527	
Income on Investment Securities—Held to Maturity	 	 	4,894	 	 	9,097	 	 	10,092	 	 	19,114	
Income on Investment Securities—Available for Sale	 	 	26,455	 	 	36,750	 	 	53,595	 	 	76,591	
Deposits	 	 	6,011	 	 	4,941	 	 	11,058	 	 	10,325	
Funds Sold and Security Resale Agreements	 	 	752	 	 	1,352	 	 	1,755	 	 	2,450	
Other	 	 	1,395	 	 	1,347	 	 	2,727	 	 	2,564	

	

	 	

	

	 	

	

	 	

	

	
Total Interest Income	 	 	131,948	 	 	217,109	 	 	270,313	 	 	463,571	
Interest Expense	 	 	 	 	 	 	 	 	 	 	 	 	
Deposits	 	 	22,166	 	 	60,021	 	 	46,144	 	 	132,002	
Security Repurchase Agreements	 	 	8,256	 	 	20,843	 	 	18,549	 	 	45,473	
Funds Purchased	 	 	245	 	 	2,334	 	 	476	 	 	8,456	
Short-Term Borrowings	 	 	289	 	 	2,763	 	 	938	 	 	5,993	
Long-Term Debt	 	 	8,055	 	 	14,459	 	 	16,374	 	 	29,773	

	

	 	

	

	 	

	

	 	

	

	
Total Interest Expense	 	 	39,011	 	 	100,420	 	 	82,481	 	 	221,697	

	

	 	

	

	 	

	

	 	

	

	
Net Interest Income	 	 	92,937	 	 	116,689	 	 	187,832	 	 	241,874	
Provision for Loan and Lease Losses	 	 	3,324	 	 	6,413	 	 	11,616	 	 	58,878	

	

	 	

	

	 	

	

	 	

	

	
Net Interest Income After Provision for Loan and Lease Losses	 	 	89,613	 	 	110,276	 	 	176,216	 	 	182,996	
Non-Interest Income	 	 	 	 	 	 	 	 	 	 	 	 	
Trust and Asset Management	 	 	14,175	 	 	15,247	 	 	28,993	 	 	31,042	
Mortgage Banking	 	 	3,080	 	 	4,673	 	 	11,263	 	 	9,781	
Service Charges on Deposit Accounts	 	 	7,956	 	 	9,878	 	 	16,366	 	 	19,817	
Fees, Exchange, and Other Service Charges	 	 	13,065	 	 	19,784	 	 	25,517	 	 	43,250	
Gain on Sales of Banking Operations, Net of Venture Investment Losses	 	 	—  	 	 	24,794	 	 	—  	 	 	96,908	
Investment Securities Gains	 	 	3	 	 	11,776	 	 	3	 	 	31,979	
Other	 	 	10,643	 	 	11,823	 	 	20,794	 	 	25,659	

	

	 	

	

	 	

	

	 	

	

	
Total Non-Interest Income	 	 	48,922	 	 	97,975	 	 	102,936	 	 	258,436	
Non-Interest Expense	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries	 	 	38,650	 	 	49,469	 	 	78,600	 	 	99,451	
Pensions and Other Employee Benefits	 	 	9,391	 	 	11,506	 	 	19,387	 	 	24,424	
Net Occupancy Expense	 	 	9,321	 	 	11,898	 	 	18,914	 	 	24,025	
Net Equipment Expense	 	 	9,997	 	 	13,103	 	 	20,118	 	 	26,486	
Goodwill Amortization	 	 	—  	 	 	3,634	 	 	—  	 	 	7,583	
Restructuring and Other Related Costs	 	 	—  	 	 	38,904	 	 	1,979	 	 	83,343	
Other	 	 	23,015	 	 	32,807	 	 	43,788	 	 	68,329	

	

	 	

	

	 	

	

	 	

	

	
Total Non-Interest Expense	 	 	90,374	 	 	161,321	 	 	182,786	 	 	333,641	

	

	 	

	

	 	

	

	 	

	

	
Income Before Income Taxes	 	 	48,161	 	 	46,930	 	 	96,366	 	 	107,791	
Provision for Income Taxes	 	 	17,145	 	 	20,191	 	 	34,294	 	 	47,375	

	

	 	

	

	 	

	

	 	

	

	
Net Income	 	$	31,016	 	$	26,739	 	$	62,072	 	$	60,416	

	

	 	

	

	 	

	

	 	

	

	
Basic Earnings Per Share	 	$	0.43	 	$	0.33	 	$	0.85	 	$	0.75	
Diluted Earnings Per Share	 	$	0.42	 	$	0.32	 	$	0.83	 	$	0.74	
Dividends Declared Per Share	 	$	0.18	 	$	0.18	 	$	0.36	 	$	0.36	
Basic Weighted Average Shares	 	 	72,299,850	 	 	80,516,216	 	 	72,803,414	 	 	80,120,449	
Diluted Weighted Average Shares	 	 	74,486,987	 	 	82,975,267	 	 	74,815,508	 	 	82,030,085	

	

	 	

	

	 	

	

	 	

	

	
 
See accompanying notes to the consolidated financial statements.
3

Table of Contents
 
BANK OF HAWAII CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
 
 	  	June 30
2002

	 	  	December 31
2001

	 	  	June 30
2001

	 	
 	  	(dollars in thousands)	 	
ASSETS	  	 	 	 	  	 	 	 	  	 	 	 	
Interest-Bearing Deposits	  	$	1,346,014	 	  	$	1,101,974	 	  	$	458,696	 	
Investment Securities—Held to Maturity
(Market Value of $323,722, $407,838, and $542,795, respectively)	  	 	312,467	 	  	 	396,216	 	  	 	530,815	 	
Investment Securities—Available for Sale	  	 	1,806,384	 	  	 	2,001,420	 	  	 	2,200,965	 	
Securities Purchased Under Agreements to Resell	  	 	—  	 	  	 	—  	 	  	 	7,688	 	
Funds Sold	  	 	125,000	 	  	 	115,000	 	  	 	318,182	 	
Loans Held for Sale	  	 	48,416	 	  	 	456,709	 	  	 	571,395	 	
Loans	  	 	5,408,477	 	  	 	5,652,518	 	  	 	7,617,806	 	
Allowance for Loan and Lease Losses	  	 	(158,979	)	  	 	(158,979	)	  	 	(199,800	)	

	

	

	  	

	

	

	  	

	

	

	
Net Loans	  	 	5,249,498	 	  	 	5,493,539	 	  	 	7,418,006	 	

	

	

	  	

	

	

	  	

	

	

	
Total Earning Assets	  	 	8,887,779	 	  	 	9,564,858	 	  	 	11,505,747	 	
Cash and Non-Interest Bearing Deposits	  	 	314,541	 	  	 	405,981	 	  	 	391,552	 	
Premises and Equipment	  	 	188,128	 	  	 	196,171	 	  	 	242,040	 	
Customers’ Acceptance Liability	  	 	1,657	 	  	 	593	 	  	 	4,184	 	
Accrued Interest Receivable	  	 	38,425	 	  	 	42,687	 	  	 	61,702	 	
Foreclosed Real Estate	  	 	17,223	 	  	 	17,174	 	  	 	40,078	 	
Mortgage Service Rights	  	 	30,244	 	  	 	27,291	 	  	 	19,282	 	
Goodwill	  	 	36,216	 	  	 	36,216	 	  	 	138,233	 	
Other Assets	  	 	309,135	 	  	 	336,826	 	  	 	352,689	 	

	

	

	  	

	

	

	  	

	

	

	
Total Assets	  	$	9,823,348	 	  	$	10,627,797	 	  	$	12,755,507	 	

	

	

	  	

	

	

	  	

	

	

	
LIABILITIES	  	 	 	 	  	 	 	 	  	 	 	 	
Domestic Deposits	  	 	 	 	  	 	 	 	  	 	 	 	
Demand—Non-Interest Bearing	  	$	1,465,378	 	  	$	1,548,322	 	  	$	1,591,824	 	
             —Interest Bearing	  	 	2,002,926	 	  	 	1,926,018	 	  	 	1,914,474	 	
Savings	  	 	1,276,016	 	  	 	967,825	 	  	 	758,262	 	
Time	  	 	1,652,805	 	  	 	1,927,778	 	  	 	2,602,035	 	
Foreign Deposits	  	 	 	 	  	 	 	 	  	 	 	 	
Demand-Non-Interest Bearing	  	 	—  	 	  	 	2	 	  	 	319,165	 	
Time Due to Banks	  	 	16,777	 	  	 	230,247	 	  	 	53,968	 	
Other Savings and Time	  	 	41,366	 	  	 	73,404	 	  	 	868,740	 	

	

	

	  	

	

	

	  	

	

	

	
Total Deposits	  	 	6,455,268	 	  	 	6,673,596	 	  	 	8,108,468	 	
Securities Sold Under Agreements to Repurchase	  	 	1,257,808	 	  	 	1,643,444	 	  	 	1,632,774	 	
Funds Purchased	  	 	60,243	 	  	 	55,800	 	  	 	176,768	 	
Current Maturities of Long-Term Debt	  	 	50,000	 	  	 	100,670	 	  	 	316,670	 	
Short-Term Borrowings	  	 	29,910	 	  	 	134,222	 	  	 	227,280	 	
Banker’s Acceptances Outstanding	  	 	1,657	 	  	 	593	 	  	 	4,184	 	
Retirement Expense Payable	  	 	37,642	 	  	 	36,175	 	  	 	36,010	 	
Accrued Interest Payable	  	 	23,427	 	  	 	29,762	 	  	 	59,558	 	
Taxes Payable	  	 	181,826	 	  	 	138,366	 	  	 	170,811	 	
Other Liabilities	  	 	80,154	 	  	 	98,422	 	  	 	97,571	 	
Long-Term Debt	  	 	454,341	 	  	 	469,735	 	  	 	529,682	 	

	

	

	  	

	

	

	  	

	

	

	
Total Liabilities	  	 	8,632,276	 	  	 	9,380,785	 	  	 	11,359,776	 	
SHAREHOLDERS’ EQUITY	  	 	 	 	  	 	 	 	  	 	 	 	
Common Stock ($.01 par value), authorized 500,000,000 shares;
issued / outstanding: June 2002-81,329,346 / 69,856,075;
Dec. 2001-81,377,241 / 73,218,326; June 2001-81,368,629 / 80,948,825	  	 	806	 	  	 	806	 	  	 	806	 	
Capital Surplus	  	 	370,947	 	  	 	367,672	 	  	 	367,390	 	
Accumulated Other Comprehensive Income	  	 	29,931	 	  	 	22,761	 	  	 	25,033	 	
Retained Earnings	  	 	1,082,421	 	  	 	1,055,424	 	  	 	1,028,036	 	
Deferred Stock Grants	  	 	(4,182	)	  	 	(7,637	)	  	 	(17,038	)	
Treasury Stock, at Cost (Shares: June 2002-11,473,271;
December 2001-8,158,915; June 2001-419,804)	  	 	(288,851	)	  	 	(192,014	)	  	 	(8,496	)	

	

	

	  	

	

	

	  	

	

	

	
Total Shareholders’ Equity	  	 	1,191,072	 	  	 	1,247,012	 	  	 	1,395,731	 	

	

	

	  	

	

	

	  	

	

	

	
Total Liabilities and Shareholders’ Equity	  	$	9,823,348	 	  	$	10,627,797	 	  	$	12,755,507	 	

	

	

	  	

	

	

	  	

	

	

	
 
See accompanying notes to the consolidated financial statements.
4

Table of Contents
 
BANK OF HAWAII CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
 
 	  	Total

	 	  	Common
Stock

	  	Capital
Surplus

	 	    	Accum. Other
Comprehensive
Income

	 	  	Retained
Earnings

	 	  	Deffered
Stock
Grants

	 	  	Treasury
Stock

	 	    	Comprehensive
Income

	 	
 	  	(dollars in thousands)	 	
For the Six Months Ended June 30, 2002	  	 	 	 	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	
Balance at December 31, 2001	  	$	1,247,012	 	  	$	806	  	$	367,672	 	    	$	22,761	 	  	$	1,055,424	 	  	$	(7,637	)	  	$	(192,014	)	    	 	 	 	
Comprehensive Income	  	 	 	 	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	
Net Income	  	 	62,072	 	  	 	—  	  	 	—  	 	    	 	—  	 	  	 	62,072	 	  	 	—  	 	  	 	—  	 	    	$	62,072	 	
Other Comprehensive Income, Net of Tax	  	 	 	 	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	
Investment Securities	  	 	7,547	 	  	 	—  	  	 	—  	 	    	 	7,547	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	7,547	 	
Foreign Currency Translation Adjustment	  	 	(377	)	  	 	—  	  	 	—  	 	    	 	(377	)	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	(377	)	

	

	

	
Total Comprehensive Income	  	 	 	 	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	$	69,242	 	

	

	

	
Common Stock Issued	  	 	 	 	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	
22,894 Profit Sharing Plan	  	 	632	 	  	 	—  	  	 	119	 	    	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	513	 	    	 	 	 	
1,222,308 Stock Option Plan	  	 	25,142	 	  	 	—  	  	 	3,727	 	    	 	—  	 	  	 	(8,828	)	  	 	48	 	  	 	30,195	 	    	 	 	 	
53,227 Dividend Reinvestment Plan	  	 	1,464	 	  	 	—  	  	 	264	 	    	 	—  	 	  	 	(2	)	  	 	—  	 	  	 	1,202	 	    	 	 	 	
3,605 Directors’ Restricted Shares and Deferred Compensation Plan	  	 	50	 	  	 	—  	  	 	103	 	    	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(53	)	    	 	 	 	
(51,500) Employees’ Restricted Shares	  	 	2,469	 	  	 	—  	  	 	(938	)	    	 	—  	 	  	 	—  	 	  	 	3,407	 	  	 	—  	 	    	 	 	 	
Treasury Stock Purchased (4,610,800 shares)	  	 	(128,694	)	  	 	—  	  	 	—  	 	    	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(128,694	)	    	 	 	 	
Cash Dividends Paid	  	 	(26,245	)	  	 	—  	  	 	—  	 	    	 	—  	 	  	 	(26,245	)	  	 	—  	 	  	 	—  	 	    	 	 	 	

	

	

	  	

	

	  	

	

	

	    	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	 	 	 	
Balance at June 30, 2002	  	$	1,191,072	 	  	$	806	  	$	370,947	 	    	$	29,931	 	  	$	1,082,421	 	  	$	(4,182	)	  	$	(288,851	)	    	 	 	 	

	

	

	  	

	

	  	

	

	

	    	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	 	 	 	
For the Six Months Ended June 30, 2001	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	
Balance at December 31, 2000	  	$	1,301,356	 	  	$	806	  	$	346,045	 	    	$	(25,079	)	  	$	996,791	 	  	$	—  	 	  	$	(17,207	)	    	 	 	 	
Comprehensive Income	  	 	 	 	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	
Net Income	  	 	60,416	 	  	 	—  	  	 	—  	 	    	 	—  	 	  	 	60,416	 	  	 	—  	 	  	 	—  	 	    	$	60,416	 	
Other Comprehensive Income, Net of Tax	  	 	 	 	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	
Investment Securities	  	 	22,775	 	  	 	—  	  	 	—  	 	    	 	22,775	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	22,775	 	
Foreign Currency Translation Adjustment	  	 	27,496	 	  	 	—  	  	 	—  	 	    	 	27,496	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	27,496	 	
Pension Liability Adjustments	  	 	(159	)	  	 	—  	  	 	—  	 	    	 	(159	)	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	(159	)	

	

	

	
Total Comprehensive Income	  	 	 	 	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	$	110,528	 	

	

	

	
Common Stock Issued	  	 	 	 	  	 	 	  	 	 	 	    	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	
32,942 Profit Sharing Plan	  	 	725	 	  	 	—  	  	 	180	 	    	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	545	 	    	 	 	 	
416,413 Stock Option Plan	  	 	7,926	 	  	 	—  	  	 	643	 	    	 	—  	 	  	 	(381	)	  	 	853	 	  	 	6,811	 	    	 	 	 	
64,791 Dividend Reinvestment Plan	  	 	1,419	 	  	 	—  	  	 	326	 	    	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	1,093	 	    	 	 	 	
3,672 Directors’ Restricted Shares and Deferred Compensation Plan	  	 	343	 	  	 	—  	  	 	81	 	    	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	262	 	    	 	 	 	
741,000 Employees’ Restricted Shares	  	 	925	 	  	 	—  	  	 	18,816	 	    	 	—  	 	  	 	—  	 	  	 	(17,891	)	  	 	—  	 	    	 	 	 	
65,146 Hawaii Insurance Network	  	 	1,299	 	  	 	—  	  	 	1,299	 	    	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	 	 	
Cash Dividends Paid	  	 	(28,790	)	  	 	—  	  	 	—  	 	    	 	—  	 	  	 	(28,790	)	  	 	—  	 	  	 	—  	 	    	 	 	 	

	

	

	  	

	

	  	

	

	

	    	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	 	 	 	
Balance at June 30, 2001	  	$	1,395,731	 	  	$	806	  	$	367,390	 	    	$	25,033	 	  	$	1,028,036	 	  	$	(17,038	)	  	$	(8,496	)	    	 	 	 	

	

	

	  	

	

	  	

	

	

	    	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	 	 	 	
 
See accompanying notes to the consolidated financial statements.
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BANK OF HAWAII CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 	  	Six Months ended June 30

	

	
 	  	2002

	 	  	2001

	 	 	
 	  	(dollars in thousands)	 	 	
Operating Activities	  	 	 	 	  	 	 	 	 	
Net Income	  	$	62,072	 	  	$	60,416	 	 	
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:	  	 	 	 	  	 	 	 	 	
Provision for Loan and Lease Losses	  	 	11,616	 	  	 	58,878	 	 	
Depreciation and Amortization	  	 	14,950	 	  	 	31,697	 	 	
Amortization of Deferred Loan Fees and Leasing Income	  	 	(17,111	)	  	 	(21,842	)	 	
Amortization and Accretion of Investment Securities	  	 	8,814	 	  	 	7,779	 	 	
Deferred Stock Grants	  	 	2,469	 	  	 	925	 	 	
Deferred Income Taxes	  	 	14,698	 	  	 	10,812	 	 	
Investment Security Gains	  	 	(3	)	  	 	(31,979	)	 	
Proceeds from Sales of Loans Held for Sale	  	 	821,170	 	  	 	195,922	 	 	
Originations of Loans Held for Sale	  	 	(412,877	)	  	 	(588,088	)	 	
Gain on Sale of Banking Operations Net of Venture Investment Losses	  	 	—  	 	  	 	(96,908	)	 	
Net Change in Other Assets and Liabilities	  	 	34,962	 	  	 	8,424	 	 	

	

	

	  	

	

	

	 	
Net Cash Provided (Used) by Operating Activities	  	 	540,760	 	  	 	(363,964	)	 	

	

	

	  	

	

	

	 	
Investing Activities	  	 	 	 	  	 	 	 	 	
Proceeds from Redemptions of Investment Securities Held to Maturity	  	 	97,805	 	  	 	103,689	 	 	
Purchases of Investment Securities Held to Maturity	  	 	(20,513	)	  	 	(48,674	)	 	
Proceeds from Sales and Redemptions of Investment Securities Available for Sale	  	 	433,064	 	  	 	692,176	 	 	
Purchases of Investment Securities Available for Sale	  	 	(233,220	)	  	 	(324,062	)	 	
Net Decrease in Loans and Lease Financing	  	 	249,536	 	  	 	926,467	 	 	
Proceeds from Sale of Banking Operations	  	 	—  	 	  	 	707,010	 	 	
Premises and Equipment, Net	  	 	(6,907	)	  	 	(11,534	)	 	

	

	

	  	

	

	

	 	
Net Cash Provided by Investing Activities	  	 	519,765	 	  	 	2,045,072	 	 	

	

	

	  	

	

	

	 	
Financing Activities	  	 	 	 	  	 	 	 	 	
Net Decrease in Demand Deposits	  	 	(6,036	)	  	 	(210,156	)	 	
Net Increase in Savings Deposits	  	 	308,191	 	  	 	93,023	 	 	
Net Decrease in Time Deposits	  	 	(274,973	)	  	 	(234,048	)	 	
Net Decrease in Foreign Deposits	  	 	(245,510	)	  	 	(620,932	)	 	
Proceeds from Lines of Credit and Long-Term Debt	  	 	—  	 	  	 	2,048	 	 	
Repayments of Long-Term Debt	  	 	(66,064	)	  	 	(152,853	)	 	
Net Decrease in Short-Term Borrowings	  	 	(485,505	)	  	 	(243,073	)	 	
Proceeds from Issuance of Common Stock	  	 	27,288	 	  	 	10,413	 	 	
Repurchase of Common Stock	  	 	(128,694	)	  	 	—  	 	 	
Cash Dividends	  	 	(26,245	)	  	 	(28,790	)	 	

	

	

	  	

	

	

	 	
Net Cash Used by Financing Activities	  	 	(897,548	)	  	 	(1,384,368	)	 	

	

	

	  	

	

	

	 	
Effect of Exchange Rate Changes on Cash	  	 	(377	)	  	 	27,496	 	 	

	

	

	  	

	

	

	 	
Increase in Cash and Cash Equivalents	  	 	162,600	 	  	 	324,236	 	 	
Cash and Cash Equivalents at Beginning of Year	  	 	1,622,955	 	  	 	851,882	 	 	

	

	

	  	

	

	

	 	
Cash and Cash Equivalents at End of Period	  	$	1,785,555	 	  	$	1,176,118	 	 	

	

	

	  	

	

	

	 	
 
See accompanying notes to the consolidated financial statements.
 
6

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BANK OF HAWAII CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.    Summary of Significant Accounting Policies
 
Name Change and Organization
 
On April 26, 2002, the Shareholders of Pacific Century Financial Corporation approved changing the company name. An amendment to the company’s Certificate of Incorporation was filed in April, 2002 to change the name of the company to Bank of Hawaii Corporation (the Company).
 
The Company’s principal subsidiary bank is Bank of Hawaii. The Company also owns First Savings and Loan Association of America (First Savings) in Guam. An application was filed with its regulators seeking approval to merge First Savings into Bank of Hawaii. The merger is expected to be completed before the end of the year.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the consolidated financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for the interim periods. Certain prior period amounts have been reclassified to conform to current period classifications.
 
These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2001 Annual Report on Form 10-K. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
 
Income Taxes
 
The provision for income taxes is computed by applying statutory federal, foreign, and state income tax rates to income before income taxes as reported in the Consolidated Statements of Income after adjusting for non-taxable items, principally from certain state tax adjustments, tax-exempt interest income and bank owned life insurance. The tax provision is also reduced by low-income housing and investment tax credits.
7

Table of Contents
 
Note 2.    Recent Accounting Pronouncements
 
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. During a transition period from July 1, 2001 through December 31, 2001, goodwill associated with business combinations completed prior to July 1, 2001 continued to be amortized through the income statement. Effective January 1, 2002, periodic goodwill amortization and expense recognition was discontinued and goodwill is assessed at least annually for impairment at the reporting unit level by applying a fair-value based test. SFAS 142 also provides additional guidance on acquired intangibles that should be separately recognized and amortized. Under SFAS 142, intangibles with indefinite lives will no longer be amortized to the income statement. The Company adopted SFAS 142 on January 1, 2002. An initial impairment assessment was completed and it was determined that a transition impairment charge was not required. Under SFAS 142 the elimination of goodwill amortization is expected to increase net income by approximately $7.6 million in 2002.
 
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supercedes FASB Statement No.121,  Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of  (SFAS 121), and certain of the accounting and reporting provisions of APB Opinion No. 30. For long-lived assets to be held and used, SFAS 144 retains the requirements of SFAS 121 to (a) recognize an impairment loss only if the carrying value of the long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. For long-lived assets to be disposed of by sale, the SFAS 121 model is also retained which requires an asset to be measured at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. SFAS 144 establishes criteria beyond that previously specified in SFAS 121 to determine when a long-lived asset is held for sale. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and is generally to be applied prospectively. The Company adopted SFAS 144 on January 1, 2002, no transition adjustment was deemed necessary.
 
In June 2002, the FASB issued SFAS 146, Accounting for Cost Associated with Exit or Disposal Activities (SFAS 146). The provisions of SFAS 146 will become effective for disposal activities initiated after December 31, 2002, with early adoption encouraged. The Company plans to adopt SFAS 146 in the third quarter of 2002 and follow the standards included in SFAS 146 to account for the key systems replacement project, as further discussed on page 36.
 
Note 3.    Business Segments
 
The Company is a financial services organization that is aligned into the following segments: Retail Banking, Commercial Banking, Investment Services Group, and Treasury and Other Corporate. Divestiture Businesses and Corporate Restructuring Related Activities were segregated in 2001 due to their non-recurring nature.
 
Business segment results are determined based on the Company’s internal financial management reporting process and organizational structure. This process uses various techniques to assign balance sheet and income statement amounts to business segments, including allocations of overhead, credit loss provision, and capital. This process is dynamic and requires certain allocations based on judgment and subjective factors. Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting that is equivalent to generally accepted accounting principles. The management accounting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution.
 
The financial results for the three and six months ended June 30, 2002 and 2001 are presented on pages 9 and 10 for each of the Company’s principal segments. Segment information for 2001 has been reclassified to conform to the 2002 presentation.
8

Table of Contents
 
BUSINESS SEGMENTS SELECTED FINANCIAL INFORMATION
 
 	  	Retail

	 	  	Commercial

	 	  	Investment Services Group

	 	  	Treasury
and Other Corporate

	 	  	Divestiture Businesses

	 	    	Corporate Restructuring Related Activities

	 	  	Consolidated Total

	 	
 	  	(dollars in thousands)	 	
Three Months Ended: June 30, 2002	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	
Net Interest Income	  	$	49,933	 	  	$	33,066	 	  	$	3,601	 	  	$	6,337	 	  	$	—  	 	    	$	—  	 	  	$	92,937	 	
Provision for Loan and Lease Losses	  	 	(684	)	  	 	(2,932	)	  	 	(29	)	  	 	321	 	  	 	—  	 	    	 	—  	 	  	 	(3,324	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	

	

	

	  	

	

	

	
Net Interest Income after Provision for Loan and Lease Losses	  	 	49,249	 	  	 	30,134	 	  	 	3,572	 	  	 	6,658	 	  	 	—  	 	    	 	—  	 	  	 	89,613	 	
Non-Interest Income	  	 	18,406	 	  	 	6,237	 	  	 	20,769	 	  	 	3,510	 	  	 	—  	 	    	 	—  	 	  	 	48,922	 	
Non-Interest Expense	  	 	45,499	 	  	 	21,081	 	  	 	21,119	 	  	 	2,675	 	  	 	—  	 	    	 	—  	 	  	 	90,374	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	

	

	

	  	

	

	

	
Income Before Income Taxes	  	 	22,156	 	  	 	15,290	 	  	 	3,222	 	  	 	7,493	 	  	 	—  	 	    	 	—  	 	  	 	48,161	 	
Provision for Income Taxes	  	 	(8,419	)	  	 	(5,712	)	  	 	(1,224	)	  	 	(1,790	)	  	 	—  	 	    	 	—  	 	  	 	(17,145	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	

	

	

	  	

	

	

	
Net Income	  	$	13,737	 	  	$	9,578	 	  	$	1,998	 	  	$	5,703	 	  	$	—  	 	    	$	—  	 	  	$	31,016	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	

	

	

	  	

	

	

	
Total Assets (End of Period)	  	$	3,261,244	 	  	$	2,328,594	 	  	$	149,919	 	  	$	4,083,591	 	  	$	—  	 	    	$	—  	 	  	$	9,823,348	 	
Total Assets (Average)	  	$	3,250,028	 	  	$	2,427,745	 	  	$	153,916	 	  	$	4,247,209	 	  	$	—  	 	    	$	—  	 	  	$	10,078,898	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	Retail

	 	  	Commercial

	 	  	Investment Services Group

	 	  	Treasury and Other Corporate

	 	  	Divestiture Businesses

	 	    	Corporate Restructuring Related Activities

	 	  	Consolidated Total

	 	
Three Months Ended: June 30, 2001	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	    	 	 	 	  	 	 	 	
Net Interest Income	  	$	48,825	 	  	$	36,939	 	  	$	2,894	 	  	$	(835	)	  	$	28,866	 	    	$	—  	 	  	$	116,689	 	
Provision for Loan and Lease Losses	  	 	(1,863	)	  	 	(710	)	  	 	—  	 	  	 	1	 	  	 	(3,841	)	    	 	—  	 	  	 	(6,413	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	

	

	

	  	

	

	

	
Net Interest Income after Provision for Loan and Lease Losses	  	 	46,962	 	  	 	36,229	 	  	 	2,894	 	  	 	(834	)	  	 	25,025	 	    	 	—  	 	  	 	110,276	 	
Gain on Sale of Banking Operations, Net of Venture Investment Losses	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	24,794	 	  	 	24,794	 	
Non-Interest Income	  	 	21,035	 	  	 	5,824	 	  	 	20,959	 	  	 	7,123	 	  	 	7,105	 	    	 	11,135	 	  	 	73,181	 	
Non-Interest Expense	  	 	49,450	 	  	 	21,997	 	  	 	20,330	 	  	 	445	 	  	 	30,195	 	    	 	—  	 	  	 	122,417	 	
Restructuring & Other Related Costs	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	    	 	38,904	 	  	 	38,904	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	

	

	

	  	

	

	

	
Income Before Income Taxes	  	 	18,547	 	  	 	20,056	 	  	 	3,523	 	  	 	5,844	 	  	 	1,935	 	    	 	(2,975	)	  	 	46,930	 	
Provision for Income Taxes	  	 	(7,637	)	  	 	(6,659	)	  	 	(1,487	)	  	 	(2,480	)	  	 	(827	)	    	 	(1,101	)	  	 	(20,191	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	

	

	

	  	

	

	

	
Net Income	  	$	10,910	 	  	$	13,397	 	  	$	2,036	 	  	$	3,364	 	  	$	1,108	 	    	$	(4,076	)	  	$	26,739	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	    	

	

	

	  	

	

	

	
Total Assets (End of Period)	  	$	4,003,656	 	  	$	3,506,275	 	  	$	225,053	 	  	$	2,534,285	 	  	$	2,486,238	 	    	$	—  	 	  	$	12,755,507	 	
Total Assets (Average)	  	$	3,658,443	 	  	$	3,172,019	 	  	$	220,923	 	  	$	2,458,118	 	  	$	3,486,988	 	    	$	—  	 	  	$	12,996,491	 	
9

Table of Contents
BUSINESS SEGMENTS SELECTED FINANCIAL INFORMATION
 
 	 	Retail

	 	 	Commercial

	 	 	Investment Services Group

	 	 	Treasury and Other Corporate

	 	 	Divestiture Businesses

	 	  	Corporate Restructuring Related Activities

	 	 	Consolidated Total

	 	
 	 	(dollars in thousands)	
Six Months Ended: June 30, 2002	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Net Interest Income	 	$	100,447	 	 	$	66,992	 	 	$	7,096	 	 	$	13,297	 	 	$	—  	 	  	$	—  	 	 	$	187,832	 	
Provision for Loan and Lease Losses	 	 	(2,934	)	 	 	(8,880	)	 	 	(282	)	 	 	480	 	 	 	—  	 	  	 	—  	 	 	 	(11,616	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	  	

	

	

	 	

	

	

	
Net Interest Income after Provision for Loan and Lease Losses	 	 	97,513	 	 	 	58,112	 	 	 	6,814	 	 	 	13,777	 	 	 	—  	 	  	 	—  	 	 	 	176,216	 	
Non-Interest Income	 	 	42,337	 	 	 	12,345	 	 	 	42,072	 	 	 	6,182	 	 	 	—  	 	  	 	—  	 	 	 	102,936	 	
Non-Interest Expense	 	 	92,855	 	 	 	42,584	 	 	 	40,340	 	 	 	5,028	 	 	 	—  	 	  	 	—  	 	 	 	180,807	 	
Restructuring & Other Related Costs	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	  	 	1,979	 	 	 	1,979	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	  	

	

	

	 	

	

	

	
Income Before Income Taxes	 	 	46,995	 	 	 	27,873	 	 	 	8,546	 	 	 	14,931	 	 	 	—  	 	  	 	(1,979	)	 	 	96,366	 	
Provision for Income Taxes	 	 	(17,858	)	 	 	(10,399	)	 	 	(3,248	)	 	 	(3,493	)	 	 	—  	 	  	 	704	 	 	 	(34,294	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	  	

	

	

	 	

	

	

	
Net Income	 	$	29,137	 	 	$	17,474	 	 	$	5,298	 	 	$	11,438	 	 	$	—  	 	  	$	(1,275	)	 	$	62,072	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	  	

	

	

	 	

	

	

	
Total Assets (End of Period)	 	$	3,261,244	 	 	$	2,328,594	 	 	$	149,919	 	 	$	4,083,591	 	 	$	—  	 	  	$	—  	 	 	$	9,823,348	 	
Total Assets (Average)	 	$	3,353,362	 	 	$	2,513,777	 	 	$	156,570	 	 	$	4,222,210	 	 	$	—  	 	  	$	—  	 	 	$	10,245,919	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Retail

	 	 	Commercial

	 	 	Investment Services Group

	 	 	Treasury and Other Corporate

	 	 	Divestiture Businesses

	 	  	Corporate Restructuring Related Activities

	 	 	Consolidated Total

	 	
Six Months Ended: June 30, 2001	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Net Interest Income	 	$	95,716	 	 	$	77,835	 	 	$	5,427	 	 	$	999	 	 	$	64,341	 	  	$	(2,444	)	 	$	241,874	 	
Provision for Loan and Lease Losses	 	 	(4,972	)	 	 	(9,650	)	 	 	—  	 	 	 	1	 	 	 	(7,541	)	  	 	(36,716	)	 	 	(58,878	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	  	

	

	

	 	

	

	

	
Net Interest Income after Provision for Loan and Lease Losses	 	 	90,744	 	 	 	68,185	 	 	 	5,427	 	 	 	1,000	 	 	 	56,800	 	  	 	(39,160	)	 	 	182,996	 	
Gain on Sale of Banking Operations, Net of Venture Investment Losses	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	  	 	96,908	 	 	 	96,908	 	
Non-Interest Income	 	 	42,896	 	 	 	12,553	 	 	 	41,867	 	 	 	12,233	 	 	 	19,905	 	  	 	32,074	 	 	 	161,528	 	
Non-Interest Expense	 	 	95,112	 	 	 	45,197	 	 	 	39,968	 	 	 	1,801	 	 	 	68,220	 	  	 	—  	 	 	 	250,298	 	
Restructuring & Other Related Costs	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	  	 	83,343	 	 	 	83,343	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	  	

	

	

	 	

	

	

	
Income Before Income Taxes	 	 	38,528	 	 	 	35,541	 	 	 	7,326	 	 	 	11,432	 	 	 	8,485	 	  	 	6,479	 	 	 	107,791	 	
Provision for Income Taxes	 	 	(15,655	)	 	 	(13,486	)	 	 	(3,020	)	 	 	(6,079	)	 	 	(1,422	)	  	 	(7,713	)	 	 	(47,375	)	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	  	

	

	

	 	

	

	

	
Net Income	 	$	22,873	 	 	$	22,055	 	 	$	4,306	 	 	$	5,353	 	 	$	7,063	 	  	$	(1,234	)	 	$	60,416	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	 	

	

	

	  	

	

	

	 	

	

	

	
Total Assets (End of Period)	 	$	4,003,657	 	 	$	3,506,275	 	 	$	225,053	 	 	$	2,534,285	 	 	$	2,486,237	 	  	$	—  	 	 	$	12,755,507	 	
Total Assets (Average)	 	$	3,538,325	 	 	$	3,426,839	 	 	$	211,721	 	 	$	2,541,319	 	 	$	3,700,532	 	  	$	—  	 	 	$	13,418,736	 	
 
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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 anticipated revenues and expenses in 2002 and beyond. We believe the assumptions underlying our forward-looking statements are reasonable. However, any of the assumptions could prove to be inaccurate and actual results may differ materially from those projected for a variety of reasons including, but not limited to: the Hawaii economy may not recover at the pace we anticipate; our refocused emphasis on our Hawaii market may not achieve the customer and revenue gains we anticipate; our credit markets may deteriorate and our credit quality may fall short of our goals; we may not achieve the expense reductions we expect; we may not be able to maintain our net interest margin; we may not be able to implement our proposed equity repurchases in the amount or at the times planned; the economics or timing, or both, of our technology outsourcing project may not result in the expected benefits; unanticipated difficulties or delays in the conversion of our data processing to outsourcing may result in the reduction of anticipated cost savings or increased cost of conversion; the technology outsourcing project may not be able to achieve the projected reductions in staffing; we may encounter unanticipated difficulties or costs in exiting existing data processing agreements with third parties; the required level of reserves for loan and lease losses may increase or decrease due to changes in our credit quality or risk profile; there may be economic volatility in the markets we serve; and there may be changes in business and economic conditions, competition, fiscal and monetary policies or legislation. We do not undertake any obligation to update any forward-looking statements to reflect later events or circumstances.
 
PERFORMANCE HIGHLIGHTS
 
The Company reported earnings for the three months ended June 30, 2002 of $31.0 million, an increase of 16.0% from $26.7 million for the three months ended June 30, 2001. Diluted earnings per share were $0.42 for the second quarter of 2002 compared to $0.32 in the second quarter of 2001. The Company’s net income for the first six months of 2002 was $62.1 million, compared to $60.4 million for the corresponding period of the prior year. Prior year earnings included gains of $100.2 million from the sale of the Company’s credit card portfolio and Pacific Century Bank N.A.’s Arizona branches, $20.9 million related to the exchange of stock in Star Systems, Inc. for Concord EFS, Inc., and $11.1 million from the sale of the Company’s interest in the Bank of Queensland and Concord EFS, Inc.
 
Net interest income for the second quarter of 2002 on a fully taxable equivalent basis was $93.0 million, down $23.7 million from $116.7 million the same quarter last year and down $1.9 million from the previous quarter. The decrease from prior year quarter was primarily due to divestitures relating to the strategic plan, the wind down of the Asia business, the managed reduction of loans in an effort to improve the Company’s credit profile, and lower returns earned on the increased liquidity of the Company. The Company’s net interest margin for the second quarter of 2002 was 3.97%, an increase from 3.93% in the previous quarter and from 3.91% in the second quarter last year.
 
The provision for loan and lease losses was $3.3 million for the second quarter 2002, down 48.2% from $6.4 million in the second quarter last year. The decrease reflects improvements in the Company’s asset quality and improvement in the coverage ratio of the allowance for loan and lease losses. The provision equaled net charge-offs for the quarter.
 
Non-performing assets were $78.8 million at June 30, 2002. Compared to December 31, 2001, non-performing assets decreased $0.9 million. Compared to June 30, 2001, non-performing assets declined $40.1 million or 33.7%.
 
In the second quarter of 2002, return on average assets (ROAA) and return on average equity (ROAE) were 1.23% and 9.94%, respectively, compared to 0.83% and 7.69% in the same 2001 quarter.
 
Total assets at June 30, 2002 were $9.8 billion, down from $10.2 billion at March 31, 2002, $10.6 billion at December 31, 2001 and $12.8 billion at June 30, 2001. The most significant reductions were in commercial loans and foreign loans resulting from the divestitures and managed reduction of loans in an effort to improve the Company’s credit profile.
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BANK OF HAWAII CORPORATION AND SUBSIDIARIES
 
HIGHLIGHTS
(Unaudited)
 
Table 1

 	  	Three Months Ended

	 	  	Six Months Ended

	 	
Earnings Highlights and Performance Ratios

	  	June 30, 2002

	 	  	June 30, 2001

	 	  	June 30, 2002

	 	  	June 30, 2001

	 	
 	  	(dollars in thousands except per share amounts)	 	
Net Income	  	$	31,016	 	  	$	26,739	 	  	$	62,072	 	  	$	60,416	 	
Basic Earnings Per Share	  	 	0.43	 	  	 	0.33	 	  	 	0.85	 	  	 	0.75	 	
Diluted Earnings Per Share	  	 	0.42	 	  	 	0.32	 	  	 	0.83	 	  	 	0.74	 	
Cash Dividends	  	 	13,068	 	  	 	14,427	 	  	 	26,245	 	  	 	28,790	 	
Return on Average Assets	  	 	1.23	%	  	 	0.83	%	  	 	1.22	%	  	 	0.91	%	
Return on Average Equity	  	 	9.94	%	  	 	7.69	%	  	 	9.96	%	  	 	9.00	%	
Net Interest Margin	  	 	3.97	%	  	 	3.91	%	  	 	3.95	%	  	 	3.94	%	
Efficiency Ratio	  	 	63.71	%	  	 	75.15	%	  	 	62.86	%	  	 	66.69	%	
 
Statement of Condition Highlights and Performance Ratios

	  	 	  	June 30, 2002

	 	  	June 30, 2001

	 	
Total Assets	  	 	  	$	9,823,348	 	  	$	12,755,507	 	
Net Loans	  	 	  	 	5,249,498	 	  	 	7,418,006	 	
Total Deposits	  	 	  	 	6,455,268	 	  	 	8,108,468	 	
Total Shareholders’ Equity	  	 	  	 	1,191,072	 	  	 	1,395,731	 	
Book Value Per Common Share	  	 	  	$	17.05	 	  	$	17.24	 	
Allowance / Loans Outstanding	  	 	  	 	2.94	%	  	 	2.62	%	
Average Equity / Average Assets	  	 	  	 	12.27	%	  	 	10.08	%	
Employees (FTE)	  	 	  	 	2,983	 	  	 	4,197	 	
Branches and offices	  	 	  	 	97	 	  	 	163	 	
Market Price Per Share of Common Stock for the Quarter Ended:	  	 	  	 	 	 	  	 	 	 	
 	  	Closing	  	$	28.00	 	  	$	25.79	 	
 	  	High	  	$	29.86	 	  	$	25.80	 	
 	  	Low	  	$	25.45	 	  	$	19.38	 	
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STATEMENT OF INCOME ANALYSIS
 
Net Interest Income
 
Average assets and liabilities declined 22.4% and 23.9%, respectively, in the second quarter of 2002 from the same quarter last year, mainly due to the divested businesses. The Company’s net interest margin was 3.97% in the quarter ended June 30, 2002, an increase of 6 basis points from the comparable period a year ago. Taxable-equivalent net interest income was $93.0 million for the second quarter of 2002, down $23.7 million, or 20.3% from the comparable period in 2001. The decline in net interest income was primarily due to the divestitures and the managed reduction of loans in an effort to improve the Company’s credit profile. Also contributing to the decline was the general declining interest rate environment. Since the end of the second quarter of 2001, as a result of actions of the Federal Reserve, the average prime interest rate has been reduced by 260 basis points. The Company is slightly asset sensitive and expects to benefit if and when short term interest rates begin to increase. The net interest margin is expected to remain near the current level for the remainder of the year. Presented in Table 2 are average balances, yields earned, and rates paid for the three and six months ended June 30, 2002 and June 30, 2001.
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Consolidated Average Balances and Interest Rates Taxable Equivalent (Unaudited)
 
Table 2
 
 	  	Three Months Ended
June 30, 2002

	 	  	Three Months Ended(1)
June 30, 2001

	 	  	Six Months Ended
June 30, 2002

	 	  	Six Months Ended(1)
June 30, 2001

	 	
 	  	Average Balance

	  	Income/ Expense

	  	Yield/ Rate

	 	  	Average Balance

	  	Income/ Expense

	  	Yield/ Rate

	 	  	Average Balance

	  	Income/ Expense

	  	Yield/ Rate

	 	  	Average Balance

	  	Income/ Expense

	  	Yield/ Rate

	 	
 	  	(dollars in millions)	 	
Earning Assets	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Interest Bearing Deposits	  	$	1,310.0	  	$	6.0	  	1.84	%	  	$	414.3	  	$	4.9	  	4.78	%	  	$	1,232.8	  	$	11.1	  	1.81	%	  	$	373.5	  	$	10.3	  	5.57	%	
Funds Sold	  	 	173.3	  	 	0.8	  	1.74	 	  	 	120.3	  	 	1.4	  	4.51	 	  	 	205.1	  	 	1.8	  	1.71	 	  	 	100.5	  	 	2.5	  	4.92	 	
Investment Portfolio	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
—Held-To-Maturity	  	 	328.6	  	 	5.0	  	6.06	 	  	 	565.0	  	 	9.2	  	6.51	 	  	 	348.6	  	 	10.2	  	5.88	 	  	 	572.6	  	 	19.3	  	6.78	 	
—Available for Sale	  	 	1,890.3	  	 	26.5	  	5.60	 	  	 	2,318.3	  	 	36.8	  	6.36	 	  	 	1,914.5	  	 	53.6	  	5.60	 	  	 	2,398.7	  	 	76.6	  	6.44	 	
Loans Held For Sale	  	 	65.2	  	 	1.1	  	6.88	 	  	 	430.9	  	 	7.4	  	6.88	 	  	 	202.3	  	 	6.8	  	6.72	 	  	 	317.0	  	 	11.0	  	6.99	 	
Net Loans and Lease Financing	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Domestic	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
—Commercial and Industrial	  	 	1,061.1	  	 	13.5	  	5.12	 	  	 	1,865.5	  	 	34.4	  	7.39	 	  	 	1,105.7	  	 	28.0	  	5.12	 	  	 	2,095.7	  	 	83.0	  	7.98	 	
—Construction	  	 	157.5	  	 	2.3	  	5.72	 	  	 	252.5	  	 	5.1	  	8.11	 	  	 	163.6	  	 	4.4	  	5.45	 	  	 	282.5	  	 	12.0	  	8.51	 	
—Mortgage	  	 	2,985.4	  	 	52.3	  	7.01	 	  	 	3,481.1	  	 	68.1	  	7.85	 	  	 	3,001.5	  	 	105.6	  	7.04	 	  	 	3,543.3	  	 	138.3	  	7.88	 	
—Installment	  	 	783.2	  	 	16.6	  	8.50	 	  	 	766.5	  	 	20.9	  	10.91	 	  	 	761.0	  	 	33.0	  	8.74	 	  	 	881.2	  	 	52.6	  	12.04	 	
—Lease Financing	  	 	502.1	  	 	6.6	  	5.25	 	  	 	545.3	  	 	8.5	  	6.22	 	  	 	497.1	  	 	13.2	  	5.35	 	  	 	542.3	  	 	14.5	  	5.41	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Domestic Loans	  	 	5,489.3	  	 	91.3	  	6.66	 	  	 	6,910.9	  	 	137.0	  	7.95	 	  	 	5,528.9	  	 	184.2	  	6.69	 	  	 	7,345.0	  	 	300.4	  	8.25	 	
Foreign	  	 	14.1	  	 	—  	  	—  	 	  	 	1,136.9	  	 	19.2	  	6.80	 	  	 	14.3	  	 	0.1	  	1.66	 	  	 	1,206.9	  	 	41.1	  	6.87	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Loans	  	 	5,503.4	  	 	91.3	  	6.65	 	  	 	8,047.8	  	 	156.2	  	7.79	 	  	 	5,543.2	  	 	184.3	  	6.68	 	  	 	8,551.9	  	 	341.5	  	8.05	 	
Other	  	 	99.2	  	 	1.3	  	5.64	 	  	 	77.1	  	 	1.3	  	7.00	 	  	 	93.8	  	 	2.7	  	5.86	 	  	 	76.6	  	 	2.5	  	6.75	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Earning Assets	  	 	9,370.0	  	 	132.0	  	5.64	 	  	 	11,973.7	  	 	217.2	  	7.28	 	  	 	9,540.3	  	 	270.5	  	5.69	 	  	 	12,390.8	  	 	463.7	  	7.55	 	
Cash and Due From Banks	  	 	341.8	  	 	 	  	 	 	  	 	367.6	  	 	 	  	 	 	  	 	322.0	  	 	 	  	 	 	  	 	402.7	  	 	 	  	 	 	
Other Assets	  	 	367.1	  	 	 	  	 	 	  	 	655.1	  	 	 	  	 	 	  	 	383.6	  	 	 	  	 	 	  	 	625.2	  	 	 	  	 	 	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	
Total Assets	  	$	10,078.9	  	 	 	  	 	 	  	$	12,996.4	  	 	 	  	 	 	  	$	10,245.9	  	 	 	  	 	 	  	$	13,418.7	  	 	 	  	 	 	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	
Interest Bearing Liabilities	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Domestic Deposits	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
—Demand	  	 	1,974.6	  	 	4.4	  	0.88	 	  	 	1,905.0	  	 	9.3	  	1.95	 	  	 	1,954.9	  	 	8.7	  	0.90	 	  	 	1,956.4	  	 	20.9	  	2.16	 	
—Savings	  	 	1,164.0	  	 	4.5	  	1.57	 	  	 	698.8	  	 	3.7	  	2.14	 	  	 	1,100.8	  	 	8.4	  	1.54	 	  	 	682.3	  	 	7.1	  	2.09	 	
—Time	  	 	1,732.0	  	 	12.9	  	2.98	 	  	 	2,654.1	  	 	37.3	  	5.63	 	  	 	1,811.1	  	 	27.7	  	3.08	 	  	 	2,777.7	  	 	80.4	  	5.84	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Domestic Deposits	  	 	4,870.6	  	 	21.8	  	1.79	 	  	 	5,257.9	  	 	50.3	  	3.83	 	  	 	4,866.8	  	 	44.8	  	1.86	 	  	 	5,416.4	  	 	108.4	  	4.04	 	
Foreign Deposits	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
—Time Due to Banks	  	 	37.3	  	 	0.1	  	1.47	 	  	 	317.4	  	 	3.5	  	4.45	 	  	 	77.8	  	 	0.7	  	1.94	 	  	 	402.9	  	 	10.2	  	5.09	 	
—Other Time and Savings	  	 	59.1	  	 	0.3	  	1.67	 	  	 	709.3	  	 	6.3	  	3.55	 	  	 	71.4	  	 	0.6	  	1.68	 	  	 	754.9	  	 	13.4	  	3.60	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Foreign Deposits	  	 	96.4	  	 	0.4	  	1.59	 	  	 	1,026.7	  	 	9.8	  	3.83	 	  	 	149.2	  	 	1.3	  	1.82	 	  	 	1,157.8	  	 	23.6	  	4.12	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Interest Bearing Deposits	  	 	4,967.0	  	 	22.2	  	1.79	 	  	 	6,284.6	  	 	60.1	  	3.83	 	  	 	5,016.0	  	 	46.1	  	1.86	 	  	 	6,574.2	  	 	132.0	  	4.05	 	
Short-Term Borrowings	  	 	1,475.9	  	 	8.8	  	2.39	 	  	 	2,108.2	  	 	25.9	  	4.94	 	  	 	1,606.6	  	 	20.0	  	2.51	 	  	 	2,235.8	  	 	59.9	  	5.40	 	
Long-Term Debt	  	 	507.1	  	 	8.0	  	6.37	 	  	 	864.5	  	 	14.5	  	6.71	 	  	 	522.6	  	 	16.4	  	6.32	 	  	 	890.1	  	 	29.8	  	6.75	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Interest Bearing Liabilities	  	 	6,950.0	  	 	39.0	  	2.25	 	  	 	9,257.3	  	 	100.5	  	4.35	 	  	 	7,145.2	  	 	82.5	  	2.33	 	  	 	9,700.1	  	 	221.7	  	4.61	 	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Net Interest Income	  	 	 	  	 	93.0	  	 	 	  	 	 	  	 	116.7	  	 	 	  	 	 	  	 	188.0	  	 	 	  	 	 	  	 	242.0	  	 	 	
Interest Rate Spread	  	 	 	  	 	 	  	3.39	%	  	 	 	  	 	 	  	2.93	%	  	 	 	  	 	 	  	3.36	%	  	 	 	  	 	 	  	2.94	%	
Net Interest Margin	  	 	 	  	 	 	  	3.97	%	  	 	 	  	 	 	  	3.91	%	  	 	 	  	 	 	  	3.95	%	  	 	 	  	 	 	  	3.94	%	
Non-Interest Bearing Demand Deposits	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
—Demand	  	 	1,565.6	  	 	 	  	 	 	  	 	1,567.8	  	 	 	  	 	 	  	 	1,536.4	  	 	 	  	 	 	  	 	1,602.1	  	 	 	  	 	 	
—Foreign	  	 	—  	  	 	 	  	 	 	  	 	348.4	  	 	 	  	 	 	  	 	—  	  	 	 	  	 	 	  	 	362.8	  	 	 	  	 	 	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	
Total Demand Deposits	  	 	1,565.6	  	 	 	  	 	 	  	 	1,916.2	  	 	 	  	 	 	  	 	1,536.4	  	 	 	  	 	 	  	 	1,964.9	  	 	 	  	 	 	
Other Liabilities	  	 	312.3	  	 	 	  	 	 	  	 	428.5	  	 	 	  	 	 	  	 	307.1	  	 	 	  	 	 	  	 	400.7	  	 	 	  	 	 	
Shareholders’ Equity	  	 	1,251.0	  	 	 	  	 	 	  	 	1,394.4	  	 	 	  	 	 	  	 	1,257.2	  	 	 	  	 	 	  	 	1,353.0	  	 	 	  	 	 	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	
Total Liabilities and Shareholders’ Equity	  	$	10,078.9	  	 	 	  	 	 	  	$	12,996.4	  	 	 	  	 	 	  	$	10,245.9	  	 	 	  	 	 	  	$	13,418.7	  	 	 	  	 	 	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	
Provision for Loan and Lease Losses	  	 	 	  	 	3.3	  	 	 	  	 	 	  	 	6.4	  	 	 	  	 	 	  	 	11.6	  	 	 	  	 	 	  	 	58.9	  	 	 	
Net Overhead	  	 	 	  	 	41.5	  	 	 	  	 	 	  	 	63.3	  	 	 	  	 	 	  	 	79.9	  	 	 	  	 	 	  	 	75.2	  	 	 	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	
Income Before Income Taxes	  	 	 	  	 	48.2	  	 	 	  	 	 	  	 	47.0	  	 	 	  	 	 	  	 	96.5	  	 	 	  	 	 	  	 	107.9	  	 	 	
Provision for Income Taxes	  	 	 	  	 	17.1	  	 	 	  	 	 	  	 	20.2	  	 	 	  	 	 	  	 	34.3	  	 	 	  	 	 	  	 	47.4	  	 	 	
Tax-Equivalent Adjustment	  	 	 	  	 	0.1	  	 	 	  	 	 	  	 	0.1	  	 	 	  	 	 	  	 	0.1	  	 	 	  	 	 	  	 	0.1	  	 	 	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	
Net Income	  	 	 	  	$	31.0	  	 	 	  	 	 	  	$	26.7	  	 	 	  	 	 	  	$	62.1	  	 	 	  	 	 	  	$	60.4	  	 	 	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	  	 	 	  	

	

	  	 	 	

(1)	 	Adjusted to reflect the reclassification of other interest income and certain average balances.	
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Provision for Loan and Lease Losses
 
The provision for loan and lease losses was $3.3 million for the three months ended June 30, 2002, compared to $6.4 million for the same period in 2001. The provision matched net charge-offs for the quarter. For further information on credit quality, refer to the section on “Corporate Risk Profile—Credit Risk—Allowance for Loan and Lease Losses” in this report.
 
Non-Interest Income
 
Non-interest income was $48.9 million for the three months ended June 30, 2002, compared to $98.0 million for the comparable period in 2001. The prior year included gains on the sale of Pacific Century Bank N.A.’s Arizona branches of $24.8 million and $11.1 million from the sale of the Company’s interest in the Bank of Queensland and Concord EFS, Inc. After excluding 2001 non-recurring gains and divested businesses, non-interest income from continuing businesses was $54.9 million in the second quarter of 2001.
 
Trust and asset management income declined to $14.2 million in the second quarter of 2002, a decrease of 7.0% from $15.2 million in the second quarter of 2001. The decrease was primarily attributable to reduced fees resulting from declines in values of assets under administration and the decline in interest rates.
 
Mortgage banking income was $3.1 million in the second quarter of 2002, a decrease of 34.1% from $4.7 million in the second quarter of 2001. The decrease was mainly due to declines in fee income as a result of decreased loan production.
 
Service charges on deposit accounts declined by 19.5% to $8.0 million in the second quarter of 2002 compared to the same period last year. The decline was primarily attributable to the divested businesses.
 
Fees, exchange, and other service charges were $13.1 million for the three months ended June 30, 2002 compared to $19.8 million for the same prior year period. The decrease was mainly due to the divested businesses and decreases in commercial loan fee income.
 
Gain on sales of banking operations, net of venture investment losses included the gain on sale of Pacific Century Bank N.A.’s Arizona branches of $24.8 million in the second quarter of 2001. There were no comparable transactions in 2002.
 
Sales of investment securities included a $7.4 million gain on the sale of the Company’s ownership interest in Concord EFS, Inc. and $3.7 million on the sale of its interest in the Bank of Queensland during the three months ended June 30, 2001.
 
Other operating income was $10.6 million for the second quarter of 2002, down $1.2 million from the second quarter of 2001. The divested businesses were the primary reason for the decrease. The decline was partially offset by an increase from annuity product sales.
 
Non-Interest Expense
 
Non-interest expense for the three months ended June 30, 2002 was $90.4 million, down 26.2% from $122.4 million, excluding restructuring and related costs of $38.9 million, in the comparable period of 2001. There were no restructuring and related costs for the three months ended June 30, 2002. Additional discussion of restructuring and related cost follows this section.
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Salaries and pension and other employee benefits expense totaled $48.0 million in the second quarter of 2002, compared to $61.0 million for the corresponding period of 2001. Net occupancy and equipment expense in the second quarter of June 2002 was $19.3 million, a decrease of 22.7% from $25.0 million for the same period in 2001. Other operating expense decreased to $23.0 million in the second quarter of 2002 from $32.8 million for the same quarter in 2001. These decreases in expenses were primarily attributable to the divested businesses.
 
Restructuring
 
In April 2001, the Company announced a strategic plan designed to maximize shareholder value by strengthening its Hawaii and West Pacific operations and divesting most other holdings. The Company substantially completed its divestiture activities by the end of 2001, although a small amount of wrap-up activity was concluded in the first quarter of 2002 and resulted in $2.0 million of restructuring costs.
 
The first quarter expense of $2.0 million included $3.1 million of employee severance costs, $0.2 million of other costs, offset by adjustments of $1.3 million in previous estimates of foreign currency translation losses.
 
Activity in the Restructuring Accrual
 
 	  	(in millions)	 	
Balance at December 31, 2001	  	$	11.8	 	
Restructuring Charges	  	 	2.0	 	
Payments	  	 	(10.6	)	

	

	

	
Balance at March 31, 2002	  	 	3.2	 	
Payments	  	 	(3.2	)	

	

	

	
Balance at June 30, 2002	  	$	0.0	 	

	

	

	
 
Income Tax Provision
 
The 35.6% effective tax rate for the second quarter of 2002 decreased from the second quarter of 2001 of 43.0% as the effective tax rate in the prior year reflected the impact from the divestitures and foreign taxes.
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Continuing Businesses
 
Continuing businesses exclude the divested businesses (Pacific Century Bank N.A., Asia Division, South Pacific Division and the credit card business) and restructuring and non-core transactions. Table 3 presents results from continuing businesses for June 30, 2002 and 2001.
 
In the second quarter of 2002, net interest income for the continuing businesses increased $5.1 million compared to the same quarter in 2001, primarily due to increased liquidity and reductions in long-term debt. The decrease in the provision for loan and lease losses from the prior year is due to improved asset quality. Non-interest income decreased $6.0 million compared to the same quarter in 2001 primarily from reductions in consumer deposit fees, mortgage banking income, and foreign exchange income. Non-interest expense increased $1.0 million mainly due to increased education and training costs. Net income was $31.0 million, a decline of $1.6 million from the same quarter in 2001. Year to date net income increased by $2.4 million compared to the six months ended June 30, 2001.
 
Similar to business segment results, results of continuing businesses are determined based on the Company’s internal financial management reporting process and organizational structure. This process uses various techniques to assign balance sheet and income statement amounts, including allocations of overhead, credit loss provision, and capital. This process is dynamic and requires certain allocations based on judgment and subjective factors.
 
Continuing Businesses
Table 3
 
 	  	Three Months Ended
June 30

	 	  	Six Months Ended
June 30

	 	
 	  	2002

	 	  	2001

	 	  	2002

	 	  	2001

	 	
 	  	(dollars in thousands)	 	
Net Interest Income	  	$	92,937	 	  	$	87,823	 	  	$	187,832	 	  	$	179,976	 	
Provision for Loan and Lease Losses	  	 	(3,324	)	  	 	(2,572	)	  	 	(11,616	)	  	 	(14,622	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Net Interest Income After Provision for Loan and Lease Losses	  	 	89,613	 	  	 	85,251	 	  	 	176,216	 	  	 	165,354	 	
Non-Interest Income	  	 	48,922	 	  	 	54,941	 	  	 	102,936	 	  	 	109,549	 	
Non-Interest Expense(1)	  	 	90,374	 	  	 	89,339	 	  	 	180,807	 	  	 	175,759	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Income Before Income Taxes	  	 	48,161	 	  	 	50,853	 	  	 	98,345	 	  	 	99,144	 	
Provision for Income Taxes	  	 	(17,145	)	  	 	(18,263	)	  	 	(34,998	)	  	 	(38,239	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Net Income(1)	  	$	31,016	 	  	$	32,590	 	  	$	63,347	 	  	$	60,905	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Total Assets (End of Period)	  	$	9,823,348	 	  	$	10,269,270	 	  	$	9,823,348	 	  	$	10,269,270	 	
Total Assets (Average)	  	$	10,078,898	 	  	$	9,509,503	 	  	$	10,245,919	 	  	$	9,718,204	 	
Diluted Earnings Per Share(1)	  	 	0.42	 	  	 	0.39	 	  	 	0.84	 	  	 	0.74	 	
Return on Average Equity(1)	  	 	9.94	%	  	 	9.37	%	  	 	10.16	%	  	 	9.08	%	
Efficiency Ratio(1)	  	 	63.71	%	  	 	62.58	%	  	 	62.18	%	  	 	60.71	%	

(1)	 	Adjusted to exclude goodwill amortization expense for 2001.	
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BALANCE SHEET ANALYSIS
 
Loans
 
As of June 30, 2002, loans outstanding, excluding loans held for sale, declined to $5.4 billion, from $5.7 billion at year-end 2001 and $7.6 billion at June 30, 2001. The decrease from June 30, 2001 was primarily due to the divested businesses and strategic risk reductions in the portfolio.
 
Table 4 presents the composition of the loan portfolio by major loan categories and Table 5 presents the composition of mortgage residential and installment loans by geographic area.
 
Loan Balances (Unaudited)
 
Table 4
 
 	  	June 30
2002

	  	March 31
2002

	  	December 31
2001

	  	June 30
2001

	
 	  	(dollars in millions)	
Domestic Loans	  	 	 	  	 	 	  	 	 	  	 	 	
Commercial	  	 	 	  	 	 	  	 	 	  	 	 	
Commercial and Industrial	  	$	999.6	  	$	1,120.5	  	$	1,175.5	  	$	1,778.0	
Construction	  	 	148.6	  	 	161.4	  	 	169.6	  	 	246.0	
Mortgage—Commercial	  	 	562.5	  	 	617.6	  	 	640.7	  	 	866.3	
Consumer	  	 	 	  	 	 	  	 	 	  	 	 	
Mortgage—Residential	  	 	2,360.5	  	 	2,409.1	  	 	2,419.4	  	 	2,481.4	
Installment—Revolving	  	 	447.6	  	 	413.3	  	 	375.5	  	 	347.1	
                      Non-Revolving	  	 	359.8	  	 	346.0	  	 	354.2	  	 	415.2	
Lease Financing	  	 	500.9	  	 	504.7	  	 	493.4	  	 	550.3	

	

	  	

	

	  	

	

	  	

	

	
Total Domestic	  	 	5,379.5	  	 	5,572.6	  	 	5,628.3	  	 	6,684.3	

	

	  	

	

	  	

	

	  	

	

	
Foreign Loans	  	 	29.0	  	 	28.7	  	 	24.2	  	 	933.5	

	

	  	

	

	  	

	

	  	

	

	
Total Loans	  	$	5,408.5	  	$	5,601.3	  	$	5,652.5	  	$	7,617.8	

	

	  	

	

	  	

	

	  	

	

	
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Table 5
 
Residential Mortgage and Installment Loans by Geographic Area
 
 	  	June 30
2002

	  	March 31
2002

	  	December 31
2001

	  	June 30
2001

	
 	  	(dollars in millions)	
Hawaii	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	$	2,293.1	  	$	2,345.8	  	$	2,345.4	  	$	2,391.1	
Installment	  	 	 	  	 	 	  	 	 	  	 	 	
Revolving	  	 	436.6	  	 	401.8	  	 	373.4	  	 	346.1	
Non-Revolving	  	 	238.7	  	 	219.5	  	 	213.7	  	 	258.3	
West Pacific	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	 	67.1	  	 	63.0	  	 	73.7	  	 	89.7	
Installment	  	 	 	  	 	 	  	 	 	  	 	 	
Revolving	  	 	11.0	  	 	11.5	  	 	2.1	  	 	1.0	
Non-Revolving	  	 	88.0	  	 	92.5	  	 	104.3	  	 	118.5	
American Samoa	  	 	 	  	 	 	  	 	 	  	 	 	
Residential Mortgage	  	 	0.3	  	 	0.3	  	 	0.3	  	 	0.6	
Installment—Non-Revolving	  	 	33.1	  	 	34.0	  	 	36.2	  	 	38.4	

	

	  	

	

	  	

	

	  	

	

	
 	  	$	3,167.9	  	$	3,168.4	  	$	3,149.1	  	$	3,243.7	

	

	  	

	

	  	

	

	  	

	

	
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Loans Held for Sale
 
Loans held for sale, primarily residential mortgage loans, totaled $48.4 million at June 30, 2002, compared to $456.7 million at December 31, 2001, a decrease of $408.3 million, and $571.4 million at June 30, 2001, a decrease of $523.0 million. The decrease resulted from planned sales of mortgage loans and reduced origination activity.
 
Investments
 
The Company’s investment portfolio is managed to meet strategic asset/liability objectives, to provide both interest income and balance sheet liquidity and to collateralize customer deposits. Available-for-sale securities at June 30, 2002 were $1.8 billion, compared to $2.0 billion at December 31, 2001, and $2.2 billion at June 30, 2001. Securities held to maturity were $312.5 million at June 30, 2002, declining from $396.2 million at December 31, 2001 and $530.8 million at June 30, 2001. These decreases were largely due to maturities. At June 30, 2002 and December 31, 2001 investment securities with a book value of $1.9 billion and $2.1 billion, respectively, were pledged as collateral for repurchase agreements.
 
Other short-term interest-earning assets totaled $1.5 billion at June 30, 2002, compared to $1.2 billion and $784.6 million at December 31, 2001 and June 30, 2001, respectively. The increase from the same period in the prior year was mainly due to the use of proceeds from the sales of the divested businesses and loan portfolio sales, which enabled the Company to improve its liquidity. The increase in interest bearing deposits was due to the desire to remain liquid in the current low interest rate environment.
 
Deposits
 
As of June 30, 2002, deposits totaled $6.5 billion, down $0.2 billion from $6.7 billion at December 31, 2001 and down $1.6 billion from $8.1 billion at June 30, 2001. Compared to June 30, 2001, domestic deposits decreased $0.5 billion, primarily due to the sale of Pacific Century Bank branches, while foreign deposits declined by $1.2 billion due to the sale of the South Pacific operations and the Company’s decision to exit Asia. During the second quarter of 2002, the Company experienced growth in demand and savings deposits, while continuing to manage down its higher cost time deposits.
 
Table 6 presents average deposits by type for the quarters ended June 30, 2002, December 31, 2001 and June 30, 2001.
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Table 6
 
Average Deposits
 
 	  	Three Months Ended
June 30, 2002

	 	  	Three Months Ended
December 31, 2001

	 	  	Three Months Ended
June 30, 2001

	 	
 	  	Amount

	  	Mix

	 	  	Amount

	  	Mix

	 	  	Amount

	  	Mix

	 	
 	  	(dollars in millions)	 	
Domestic	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Non-Interest Bearing Demand	  	$	1,565.6	  	24.0	%	  	$	1,397.8	  	19.1	%	  	$	1,567.8	  	19.1	%	
Interest-Bearing Demand	  	 	1,974.6	  	30.2	%	  	 	1,774.7	  	24.2	%	  	 	1,905.0	  	23.2	%	
Regular Savings	  	 	1,164.0	  	17.8	%	  	 	958.3	  	13.1	%	  	 	698.8	  	8.5	%	
Time Certificates of Deposit ($100,000 or More)	  	 	843.5	  	12.9	%	  	 	990.8	  	13.5	%	  	 	1,250.2	  	15.3	%	
All Other Time and Savings Certificates	  	 	888.5	  	13.6	%	  	 	1,057.4	  	14.5	%	  	 	1,403.9	  	17.1	%	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Domestic	  	 	6,436.2	  	98.5	%	  	 	6,179.0	  	84.4	%	  	 	6,825.7	  	83.2	%	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Foreign	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Non-Interest Bearing Demand	  	 	—  	  	—  	 	  	 	328.0	  	4.5	%	  	 	348.4	  	4.2	%	
Time Due to Banks	  	 	37.3	  	0.6	%	  	 	365.5	  	5.0	%	  	 	317.4	  	3.9	%	
Other Time and Savings	  	 	59.1	  	0.9	%	  	 	445.9	  	6.1	%	  	 	709.3	  	8.7	%	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total Foreign	  	 	96.4	  	1.5	%	  	 	1,139.4	  	15.6	%	  	 	1,375.1	  	16.8	%	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
Total	  	$	6,532.6	  	100.0	%	  	$	7,318.4	  	100.0	%	  	$	8,200.8	  	100.0	%	

	

	  	

	

	  	

	

	  	

	

	  	

	

	  	

	

	
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Borrowings
 
Short-term borrowings, including funds purchased and securities sold under agreements to repurchase, totaled $1.3 billion at June 30, 2002, $1.8 billion at December 31, 2001 and $2.0 billion at June 30, 2001. Long-term debt at June 30, 2002 decreased to $504.3 million from $570.4 million at December 31, 2001 and $846.4 million at June 30, 2001. The decline in borrowings reflected the lower funding needs of the Company.
 
Shareholders’ Equity
 
The Company’s capital position remains strong. Total capital decreased to $1,191.1 million at June 30, 2002, from $1,247.0 million at December 31, 2001 and from $1,395.7 million at June 30, 2001. The reduction in capital is attributable to the Company’s common stock repurchase programs. A further discussion of the Company’s capital is included in the Corporate Risk Profile section of this report.
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Table of Contents
 
LINE OF BUSINESS FINANCIAL REVIEW
 
Business Segment performance information is presented in Note 3 to the financial statements. The following is a discussion of segment performance.
 
Retail Banking
 
The Company’s retail banking franchise and market share are key strengths of the Company. Retail Banking provides checking and savings products for the consumer and small business segments, merchant services, installment, home equity and mortgage lending products, as well as other products and services. The increase in Retail Banking’s net-interest income for the three months and six months ended June 30, 2002 compared to the same periods in 2001 was a result of increased deposit spread revenue due to the lower average cost of consumer deposit accounts. The decrease in non-interest income for the three months ended June 30, 2002 compared to the three months ended June 30, 2001 was primarily due to decreases in mortgage banking revenue and lower consumer deposit fees. The decrease in non-interest expense for the three and six months ended June 30, 2002 compared to the prior period, was a result of lower incentive compensation paid on the decreased mortgage origination volume.
 
Commercial Banking
 
The Commercial Banking segment offers an array of products including corporate banking, commercial demand and time products, lease financing, commercial real estate loans, cash management products and auto dealer financing. The Company’s West Pacific and Japan Marketing Divisions are included in this segment. For the three months ended June 30, 2002, total average assets declined 23% from the same period last year as a result of continued efforts to improve the quality of the loan portfolios. Excluding the provision for loan and lease losses, the decline in total revenue for the three months ended June 30, 2002 was attributable to reductions in the loan portfolio. The decrease in non-interest expense was a result of expense reduction initiatives.
 
Investment Services Group
 
The Investment Services Group offers private banking, trust services, asset management, investments such as mutual funds and stocks, financial planning, and insurance. A significant portion of the segment’s income is derived from fees, which are generally based on the market values of assets under management. Income from trust and asset management services declined from last year due to the declines in values of assets under management; however, this decline was offset by an increase in fixed annuity commissions and higher insurance commissions resulting from higher property and casualty insurance premiums. The increase in non-interest expense for the three months ended June 30, 2002 from the comparable period of 2001 was primarily due to additional salaries expense.
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Table of Contents
 
Treasury and Other Corporate
 
The primary component of this segment is Treasury, which consists of corporate asset and liability management activities including investment securities, federal funds purchased and sold, government deposits, short and long-term borrowings, and managing interest rate and foreign currency risks. Additionally, the net residual effect of transfer pricing of assets and liabilities is included in Treasury, along with eliminations of intercompany transactions and other minor unallocated amounts. The increase in net interest income for the three months ended June 30, 2002 compared to the same period in 2001 was due to the earnings on increased liquidity as a result of the divestitures. Second quarter 2002 non-interest income declined from 2001 due to lower foreign exchange income. Non-interest expense increased over the previous year due to severance expenses recorded and temporary staffing, professional and management fees. This segment experienced negative NIACC because a charge for excess equity is included in the NIACC calculation; however, RAROC is calculated without the excess capital charge.
 
Divestiture Businesses
 
For the second quarter of 2001, this segment reported the results of the businesses the Company planned to divest or close.
 
Corporate Restructuring and Other Related Activities
 
This segment reflects the implementation of the Company’s strategic plan to improve credit quality and to divest underperforming businesses. For 2001, this category included the gains and costs of divesting businesses (the credit card portfolio, Pacific Century Bank branches, Asia Division and the South Pacific Division) and the costs of restructuring the Company; and included losses associated with accelerated resolution of credit problems undertaken during the period.
 
Additional indicators of performance adopted by the Company include:
 
Economic
 
NIACC (Net Income After Capital Charge): The key indicator of creating value for the shareholder, it is determined by subtracting a charge for capital from economic net income. Positive value is created by generating net income above the Company’s estimated cost of capital.
 
RAROC (Risk Adjusted Return on Capital): A complementary measure that indicates the economic return produced by the business on the risk-adjusted capital assigned to it.
 
GAAP
 
Net income:    Net income generated by the business using measurement practices consistent with accounting principles generally accepted in the United States.
 
The key differences between the derivation of Economic and GAAP results are:
 
Provision for Loan and Lease Losses: The GAAP provision is an estimate of the change in risk in the current period, measured in accordance with generally accepted accounting principles. The economic provision represents estimated losses in the credit portfolio assuming a “normalized” economic environment and loss rate over the business cycle. Consequently, there is no recognition of the free funds value of the allowance for loan and lease losses under Economic accounting.
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Excess Capital Funding Value: GAAP net income includes the free funding value of a share of the Company’s excess capital not allocated to the segments to cover risk. Economic results are based on risk-adjusted capital, necessitating adjustment for the excess capital funding value.
 
Economic NIACC and RAROC for each segment for the three and six months ended June 30, 2002 and 2001 are presented in Table 7.
 
Economic NIACC and RAROC
 
Table 7
 
 	  	Retail

	 	  	Commercial

	 	  	Investment Services Group

	 	  	Divestiture Businesses

	 	  	Treasury and Other Corporate

	 	  	Restructuring and Other Related Activities

	 	
 	  	(dollars in thousands)	 	
Three Months Ended June 30, 2002	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
NIACC (Economic)	  	$	6,339	 	  	$	2,093	 	  	$	(195	)	  	$	—  	 	  	$	(16,841	)	  	$	—  	 	
RAROC (Economic)	  	 	25	%	  	 	16	%	  	 	11	%	  	 	—  	 	  	 	57	%	  	 	N/A	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Three Months Ended June 30, 2001	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
NIACC (Economic)	  	$	4,255	 	  	$	3,100	 	  	$	2,245	 	  	$	(10,197	)	  	$	(10,702	)	  	$	(4,076	)	
RAROC (Economic)	  	 	21	%	  	 	17	%	  	 	14	%	  	 	1	%	  	 	10	%	  	 	N/A	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Six Months Ended June 30, 2002	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
NIACC (Economic)	  	$	15,430	 	  	$	3,505	 	  	$	1,170	 	  	$	—  	 	  	$	(33,405	)	  	$	(1,275	)	
RAROC (Economic)	  	 	28	%	  	 	15	%	  	 	15	%	  	 	—  	 	  	 	41	%	  	 	N/A	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Six Months Ended June 30, 2001	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
NIACC (Economic)	  	$	10,062	 	  	$	4,274	 	  	$	2,885	 	  	$	(20,489	)	  	$	(15,890	)	  	$	21,163	 	
RAROC (Economic)	  	 	22	%	  	 	15	%	  	 	15	%	  	 	2	%	  	 	10	%	  	 	N/A	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
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Table of Contents
 
FOREIGN OPERATIONS
 
The countries in which the Company maintains its largest exposure on a cross-border basis include the United Kingdom, Canada, the Netherlands, and Australia. Table 8 presents as of June 30, 2002, December 31, 2001, and June 30, 2001, a geographic distribution of the Company’s cross-border assets for each country in which such assets exceeded 0.75% of total assets.
 
Geographic Distribution of Cross-Border International Assets
 
Table 8
 
Country

	  	June 30, 2002

	  	December 31, 2001

	  	June 30, 2001

	
 	  	(dollars in millions)	
Australia	  	$	166.4	  	$	116.0	  	$	—  	
Belgium	  	 	125.1	  	 	—  	  	 	—  	
Canada	  	 	278.6	  	 	119.9	  	 	—  	
France	  	 	—  	  	 	—  	  	 	98.6	
Germany	  	 	101.0	  	 	188.2	  	 	—  	
Japan	  	 	—  	  	 	81.9	  	 	126.1	
South Korea	  	 	—  	  	 	—  	  	 	143.2	
Netherlands	  	 	215.1	  	 	192.9	  	 	—  	
Singapore	  	 	122.1	  	 	140.6	  	 	—  	
United Kingdom	  	 	313.1	  	 	257.9	  	 	212.6	
All Others	  	 	163.7	  	 	281.9	  	 	420.6	

	

	  	

	

	  	

	

	
 	  	$	1,485.1	  	$	1,379.3	  	$	1,001.1	

	

	  	

	

	  	

	

	

In this table, cross-border outstandings are defined as foreign monetary assets that are payable to the Company in U.S. dollars or other non-local currencies, plus amounts payable in local currency but funded with U.S. dollars or other non-local currencies.
Cross-border outstandings include loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments, and other monetary assets.
 
The West Pacific (consisting of Guam and American Samoa which are U.S. territories, and other nearby islands) includes Bank of Hawaii and First Savings branches. Since the U.S. dollar is used in these locations, operations in the West Pacific are not considered foreign for financial reporting purposes.
26

Table of Contents
 
CORPORATE RISK PROFILE
 
Credit quality continued to benefit from the improving Hawaii and national economies as evidenced by the recent encouraging trends in credit losses and further improvement in internal credit risk ratings.
 
Concentration of Credit Risk
 
Concentration of credit risk to certain industries and the amount of syndicated loan exposure are summarized in Table 9.
 
Selected Concentrations of Credit Exposure
As of June 30, 2002
 
Table 9
 
 	    	Outstandings

	    	Unused Commitments

	  	Total Exposure

	
 	    	(dollars in millions)	
Air Transportation	    	 	 	    	 	 	  	 	 	
Regional Passenger Carriers	    	$	51	    	$	7	  	$	58	
United States Based Passenger Carriers	    	 	49	    	 	—  	  	 	49	
International Based Passenger Carriers	    	 	32	    	 	—  	  	 	32	
Cargo Carriers	    	 	15	    	 	—  	  	 	15	

	

	    	

	

	  	

	

	
Total Air Transportation	    	$	147	    	$	7	  	$	154	

	

	    	

	

	  	

	

	
Lodging	    	 	 	    	 	 	  	 	 	
National Hotel Companies	    	$	31	    	$	73	  	$	104	
Hawaii Hotels	    	 	105	    	 	32	  	 	137	
West Pacific Hotels	    	 	43	    	 	—  	  	 	43	

	

	    	

	

	  	

	

	
Total Lodging	    	$	179	    	$	105	  	$	284	

	

	    	

	

	  	

	

	
Telecommunication Companies	    	$	8	    	$	37	  	$	45	

	

	    	

	

	  	

	

	
Syndicated Exposure	    	$	348	    	$	1,096	  	$	1,444	

	

	    	

	

	  	

	

	
 
The credit exposures to the air transportation, lodging, and telecommunication industries were current at June 30, 2002. Approximately 80% of the Hawaii and West Pacific hotel loans are collateralized by hotel properties or guaranteed by either financial institutions or entities with limited exposure to tourism.
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Table of Contents
 
Non-Performing Assets
 
Non-performing assets were $78.8 million at the end of the second quarter 2002, down 13.1% from $90.7 million at the end of the first quarter 2002. Compared to the same quarter last year, non-performing assets were down $40.1 million, or 33.7%. At June 30, 2002 the ratio of non-performing assets to total loans plus foreclosed assets and non-performing loans held for sale was 1.45%, down from 1.61 % at March 31, 2002 and 1.55% at June 30, 2001. The decrease in non-performing assets was largely due to sales of a nationally syndicated credit and one Hawaii loan held for sale as well as the return to accrual of two loans to Hawaii based borrowers. These reductions were partially offset by the addition of two credits in the West Pacific region.
 
Non-accrual loans were $61.6 million at June 30, 2002, up slightly from the $60.8 million at December 31, 2001. Non-accrual loans at June 30, 2002 were down $5.7 million, or 8.5% from June 30, 2001. Non-accrual loans as a percentage of total loans were 1.14% at June 30, 2002, unchanged from the previous quarter and up from 0.88% in the same period last year. The increase in the ratio from the prior year is mainly due to a $2.2 billion decrease in loans outstanding resulting from the divestiture of operations in the South Pacific and Pacific Century Bank, the exit from Asia in the prior year, and significant reductions in national syndicated loans.
 
Foreclosed assets were $17.2 million at the end of the second quarter of 2002, a decrease of $2.0 million from the prior quarter and $22.9 million from the second quarter last year. The current quarter decrease resulted from the sales of several small loans while the decrease from the prior year is due to the sale of two large properties in Hawaii.
 
Impaired loans at June 30, 2002 of $69.8 million declined $15.5 million from $85.3 million at March 31, 2002, and increased $2.6 million from $67.2 million at December 31, 2001. These loans had a related allowance for loan losses that totaled $10.7 million at June 30, 2002.
 
A further reduction in non-performing assets is anticipated by the end of 2002.
 
Accruing loans past due 90 days or more were $1.5 million at June 30, 2002, down from $4.9 million at year-end 2001 and $6.2 million at June 30, 2001.
 
For further information on non-performing assets refer to Table 10.
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Table 10
 
Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More (Unaudited)
 
 	  	June 30 2002

	 	  	March 31 2002

	 	  	December 31 2001

	 	  	Sept 30 2001

	 	  	June 30 2001

	 	
 	  	(dollars in millions)	 	
Non-Accrual Loans	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Commercial	  	$	22.3	 	  	$	27.4	 	  	$	18.9	 	  	$	10.5	 	  	$	11.8	 	
Real Estate	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Construction	  	 	0.7	 	  	 	1.0	 	  	 	9.3	 	  	 	0.7	 	  	 	5.8	 	
Mortgage—Commercial	  	 	17.4	 	  	 	15.1	 	  	 	16.3	 	  	 	12.8	 	  	 	14.4	 	
     —Residential	  	 	14.3	 	  	 	15.7	 	  	 	15.4	 	  	 	19.5	 	  	 	16.2	 	
Installment	  	 	—  	 	  	 	0.1	 	  	 	0.1	 	  	 	0.1	 	  	 	0.2	 	
Lease Financing	  	 	6.9	 	  	 	4.4	 	  	 	0.8	 	  	 	1.0	 	  	 	0.4	 	
Foreign	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	17.2	 	  	 	18.5	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Total Non-Accrual Loans	  	 	61.6	 	  	 	63.7	 	  	 	60.8	 	  	 	61.8	 	  	 	67.3	 	
Non-Accrual Loans Held For Sale	  	 	—  	 	  	 	7.8	 	  	 	1.7	 	  	 	7.4	 	  	 	11.5	 	
Foreclosed Real Estate	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Domestic	  	 	17.2	 	  	 	19.2	 	  	 	17.2	 	  	 	36.9	 	  	 	39.8	 	
Foreign	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	0.3	 	  	 	0.3	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Total Foreclosed Real Estate	  	 	17.2	 	  	 	19.2	 	  	 	17.2	 	  	 	37.2	 	  	 	40.1	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Total Non-Performing Assets	  	$	78.8	 	  	$	90.7	 	  	$	79.7	 	  	$	106.4	 	  	$	118.9	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Accruing Loans Past Due 90 Days or More	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Commercial	  	$	—  	 	  	$	0.2	 	  	$	0.1	 	  	$	0.1	 	  	$	0.2	 	
Real Estate	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Mortgage—Commercial	  	 	—  	 	  	 	1.2	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	
     —Residential	  	 	0.9	 	  	 	2.1	 	  	 	3.8	 	  	 	3.4	 	  	 	3.7	 	
Installment	  	 	0.5	 	  	 	0.7	 	  	 	0.9	 	  	 	1.0	 	  	 	1.8	 	
Lease Financing	  	 	0.1	 	  	 	0.1	 	  	 	0.1	 	  	 	—  	 	  	 	0.1	 	
Foreign	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	0.8	 	  	 	0.4	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Total Accruing and Past Due	  	$	1.5	 	  	$	4.3	 	  	$	4.9	 	  	$	5.3	 	  	$	6.2	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Total Loans	  	$	5,408.5	 	  	$	5,601.3	 	  	$	5,652.5	 	  	$	6,766.6	 	  	$	7,617.8	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Ratio of Non-Accrual Loans to Total Loans	  	 	1.14	%	  	 	1.14	%	  	 	1.08	%	  	 	0.91	%	  	 	0.88	%	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Ratio of Non-Performing Assets to Total Loans, Foreclosed Real Estate and Non-Performing Loans Held for Sale	  	 	1.45	%	  	 	1.61	%	  	 	1.41	%	  	 	1.56	%	  	 	1.55	%	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Ratio of Non-Performing Assets and Accruing Loans Past Due 90 Days or More to Total Loans	  	 	1.48	%	  	 	1.70	%	  	 	1.50	%	  	 	1.65	%	  	 	1.64	%	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Quarter to Quarter Changes in Non-Performing Assets	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Balance at Beginning of Quarter	  	$	90.7	 	  	$	79.7	 	  	$	106.4	 	  	$	118.9	 	  	$	119.5	 	
Additions	  	 	20.5	 	  	 	36.4	 	  	 	43.8	 	  	 	23.2	 	  	 	23.8	 	
Reductions	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Payments and Sales of Loans	  	 	(20.6	)	  	 	(12.9	)	  	 	(40.9	)	  	 	(25.8	)	  	 	(14.4	)	
Return to Accrual	  	 	(6.2	)	  	 	(6.3	)	  	 	(3.6	)	  	 	(0.9	)	  	 	(2.5	)	
Sales of Foreclosed Assets	  	 	(3.5	)	  	 	(0.9	)	  	 	(21.9	)	  	 	(2.2	)	  	 	(1.6	)	
Charge-offs	  	 	(2.1	)	  	 	(5.3	)	  	 	(4.1	)	  	 	(6.8	)	  	 	(5.9	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Total Reductions	  	 	(32.4	)	  	 	(25.4	)	  	 	(70.5	)	  	 	(35.7	)	  	 	(24.4	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Balance at End of Quarter	  	$	78.8	 	  	$	90.7	 	  	$	79.7	 	  	$	106.4	 	  	$	118.9	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
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Table of Contents
 
Allowance for Loan and Lease Losses
 
The Allowance for Loan and Lease Losses (Allowance) at June 30, 2002 was $159.0 million or 2.94% of loans, unchanged from March 31, 2002 and December 31, 2001. The Allowance at June 30, 2002 declined $40.8 million from the prior year level of $199.8 million or 2.62% of loans outstanding. The decrease from the prior year reflects significant improvement in asset quality, reductions in national syndicated loans, as well as a release of allowance components related to the divestitures. A summary of the activity for the Allowance is presented in Table 11.
 
Net charge-offs for the second quarter of 2002 were $3.3 million or 0.24% of total average loans (annualized), compared to $6.9 million or 0.34% of total average loans (annualized) for the same period last year. Current quarter charge-offs of $7.5 million were partially offset by recoveries of $4.2 million. Net charge-offs for the first six months of 2002 of $11.6 million or 0.42% of loans were down significantly from $104.6 million or 2.47% of loans for the same period last year. The relatively high level of net charge-offs in the first six months of last year are primarily related to exiting several higher risk credit relationships in the first quarter.
 
With the improvement in the Hawaii economy and the continued improvement in loan quality, the Company anticipates that the need for, and accordingly the level of the Allowance will be reduced. The timing and amount of any reduction will depend on the level of risk in the loan portfolios. Portfolio risk and economic conditions will continue to be evaluated quarterly, and provisions for loan losses will be recorded only to the extent necessary to maintain the Allowance at an appropriate level.
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Consolidated Allowance for Loan and Lease Losses (Unaudited)
 
Table 11
 
 	  	Three Months
Ended
June 30, 2002

	 	  	Three Months
Ended
March 31, 2002

	 	  	Three Months
Ended
June 30, 2001

	 	  	Six Months
Ended
June 30, 2002

	 	  	Six Months
Ended
June 30, 2001

	 	
 	  	(dollars in millions)	 	
Balance of Allowance for Loan and Lease Losses at Beginning of Period	  	$	159.0	 	  	$	159.0	 	  	$	199.8	 	  	$	159.0	 	  	$	246.2	 	
Loans Charged-Off	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Commercial	  	 	(2.4	)	  	 	(7.3	)	  	 	(8.9	)	  	 	(9.7	)	  	 	(84.4	)	
Real Estate:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Construction	  	 	—  	 	  	 	(0.5	)	  	 	—  	 	  	 	(0.5	)	  	 	—  	 	
Mortgage—Commercial	  	 	(0.4	)	  	 	—  	 	  	 	(1.6	)	  	 	(0.4	)	  	 	(13.5	)	
        —Residential	  	 	(1.3	)	  	 	(1.4	)	  	 	(1.7	)	  	 	(2.7	)	  	 	(4.2	)	
Installment	  	 	(2.9	)	  	 	(3.9	)	  	 	(4.2	)	  	 	(6.8	)	  	 	(9.6	)	
Foreign	  	 	—  	 	  	 	—  	 	  	 	(3.9	)	  	 	—  	 	  	 	(13.9	)	
Lease Financing	  	 	(0.5	)	  	 	—  	 	  	 	—  	 	  	 	(0.5	)	  	 	(0.1	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Total Charge-Offs	  	 	(7.5	)	  	 	(13.1	)	  	 	(20.3	)	  	 	(20.6	)	  	 	(125.7	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Recoveries on Loans Previously Charged-Off	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Commercial	  	 	2.3	 	  	 	0.7	 	  	 	4.3	 	  	 	3.0	 	  	 	7.0	 	
Real Estate:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Mortgage—Commercial	  	 	0.1	 	  	 	1.8	 	  	 	0.8	 	  	 	1.9	 	  	 	1.1	 	
        —Residential	  	 	0.3	 	  	 	0.3	 	  	 	0.3	 	  	 	0.6	 	  	 	0.5	 	
Installment	  	 	1.6	 	  	 	1.9	 	  	 	1.6	 	  	 	3.5	 	  	 	3.4	 	
Foreign	  	 	(0.1	)	  	 	0.1	 	  	 	6.3	 	  	 	—  	 	  	 	8.9	 	
Lease Financing	  	 	—  	 	  	 	—  	 	  	 	0.1	 	  	 	—  	 	  	 	0.2	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Total Recoveries	  	 	4.2	 	  	 	4.8	 	  	 	13.4	 	  	 	9.0	 	  	 	21.1	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Net Loan Charge-Offs	  	 	(3.3	)	  	 	(8.3	)	  	 	(6.9	)	  	 	(11.6	)	  	 	(104.6	)	
Provision for Loan and Lease Losses	  	 	3.3	 	  	 	8.3	 	  	 	6.4	 	  	 	11.6	 	  	 	58.9	 	
Foreign Currency Translation	  	 	—  	 	  	 	—  	 	  	 	0.5	 	  	 	—  	 	  	 	(0.7	)	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
Balance at End of Period	  	$	159.0	 	  	$	159.0	 	  	$	199.8	 	  	$	159.0	 	  	$	199.8	 	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	  	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Average Loans Outstanding	  	$	5,503.4	 	  	$	5,583.3	 	  	$	8,047.8	 	  	$	5,543.2	 	  	$	8,551.9	 	
Ratio of Net Charge-Offs to Average Loans Outstanding (annualized)	  	 	0.24	%	  	 	0.60	%	  	 	0.34	%	  	 	0.42	%	  	 	2.47	%	
Ratio of Allowance to Loans and Leases Outstanding	  	 	2.94	%	  	 	2.84	%	  	 	2.62	%	  	 	2.94	%	  	 	2.62	%	
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Market Risk
 
The Company manages assets and liabilities in an effort to maximize long term, risk adjusted returns to shareholders. The Company’s asset and liability management process involves measuring, monitoring, controlling and managing financial risks that can significantly impact financial position and operating results. Financial risks in the form of interest rate sensitivity, foreign currency exchange fluctuations, liquidity, and capital adequacy are balanced with expected returns with the objective to maximize earnings performance and shareholder value, while limiting the volatility of each.
 
The activities associated with these financial risks are categorized into either “other than trading” or “trading.”
 
Other Than Trading Activities
 
A key element in the Company’s ongoing process to measure and monitor interest rate risk is the utilization of a net interest income (NII) simulation model. This model is used to estimate the amount that NII will change over a one-year time horizon under various interest rate scenarios using numerous assumptions, which management believes are reasonable. The NII simulation model captures the dynamic nature of the balance sheet and provides a sophisticated estimate rather than a precise prediction of NII’s exposure to higher or lower interest rates.
 
Table 12 presents, as of June 30, 2002, December 31, 2001 and June 30, 2001, the estimate of the change in NII that would result from a gradual 200 basis point increase or decrease in interest rates, moving in parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario for NII. During the second quarter, the Company maintained its strong liquidity position. NII continues to be asset-sensitive. The resulting estimated NII exposure is within the approved Asset Liability Management Committee guidelines.
 
Market Risk Exposure to Interest Rate Changes
 
Table 12
 
 	  	June 30, 2002

	 	    	December 31, 2001

	 	  	June 30, 2001

	 	
 	  	Interest Rate Change
(in basis points)

	 	    	Interest Rate Change
(in basis points)

	 	  	Interest Rate Change
(in basis points)

	 	
 	  	-200

	 	    	+200

	 	    	-200

	 	    	+200

	 	  	-200

	 	    	+200

	 	
Estimated Exposure as a Percent of Net Interest Income	  	(4.3	)%	    	8.0	%	    	(0.3	)%	    	3.5	%	  	(1.7	)%	    	0.7	%	
 
To enhance and complement the results from the NII simulation model, the Company also reviews other measures of interest rate risk. These measures include the sensitivity of market value of equity and the exposure to basis risk and non-parallel yield curve shifts. There are some inherent limitations to these measures, but used along with the NII simulation model, the Company gains a better overall insight for managing its exposure to changes in interest rates.
 
In managing interest rate risk, the Company generally uses on-balance sheet transactions to manage its risk position. Approaches that are used to shift balance sheet mix or alter the interest rate characteristics of assets and liabilities include changing product pricing strategies and modifying investment portfolio strategies. The use of financial derivatives has been limited over the past several years.
 
To estimate the potential loss from foreign currency exposure for the remaining net investments in foreign subsidiaries and branches, the Company continues to use a value-at-risk (VAR) calculation based on an estimated variance-co-variance matrix. This VAR calculation determines the potential loss within a 95% confidence interval.
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Table 13 presents, as of June 30, 2002, December 31, 2001 and June 30, 2001, the Company’s foreign currency exposure from its net investment in subsidiaries and branch operations that were denominated in a foreign currency as measured by the VAR. This table shows the results of the divestiture program. Net investments at June 30, 2002 are unrepatriated funds that cannot be returned until foreign administrative requirements are satisfied.
 
Market Risk Exposure From Changes in Foreign Exchange Rates
 
Table 13
 
 	  	June 30, 2002

	  	December 31, 2001

	  	June 30, 2001

	
 	  	Book Value

	    	Value-at-Risk

	  	Book Value

	    	Value-at-Risk

	  	Book Value

	 	    	Value-at-Risk

	
 	  	(dollars in millions)	
Net Investments in Foreign Subsidiaries & Branches	  	 	 	    	 	 	  	 	 	    	 	 	  	 	 	 	    	 	 	
Japanese Yen	  	$	—  	    	$	—  	  	$	1.1	    	$	0.2	  	$	10.3	 	    	$	1.8	
Korean Won	  	 	0.1	    	 	0.02	  	 	2.1	    	 	0.3	  	 	27.9	 	    	 	4.4	
Pacific Franc(1)	  	 	—  	    	 	—  	  	 	—  	    	 	—  	  	 	23.1	 	    	 	4.3	
Other Currencies	  	 	0.2	    	 	0.01	  	 	0.1	    	 	0.1	  	 	(4.3	)	    	 	13.5	

	

	    	

	

	  	

	

	    	

	

	  	

	

	

	    	

	

	
Total	  	$	0.3	    	$	0.03	  	$	3.3	    	$	0.6	  	$	57.0	 	    	$	24.0	

	

	    	

	

	  	

	

	    	

	

	  	

	

	

	    	

	

	

(1)	 	Net of $33 million borrowing at June 30, 2001, denominated in euro and foreign exchange hedge transactions of $24 million at June 30, 2001. There were no borrowing or foreign exchange hedge transactions related to the foreign subsidiaries and branches at June 30, 2002, and December 31, 2001.	
 
Trading Activities
 
Trading activities include foreign currency and foreign exchange contracts that expose the Company to a minor degree of foreign currency risk. The Company, however, manages its trading account such that it does not maintain significant foreign currency open positions. The exposure from foreign currency trading positions measured by VAR methodology as of June 30, 2002 continues to be immaterial.
 
Liquidity Management
 
Liquidity is managed in an effort to ensure that the Company has continuous access to sufficient, reasonably priced funding to conduct its business in a normal manner. The Company’s liquidity management process is described in the 2001 Annual Report to Shareholders on Form 10-K.
 
Bank of Hawaii and First Savings are both members of the Federal Home Loan Bank of Seattle (FHLB). The FHLB is a source of short and long-term funding for these institutions. Borrowings from the FHLB were $89.5 million at June 30, 2002, compared to $147.0 million at December 31, 2001 and $456.1 million at June 30, 2001.
 
Additionally, Bank of Hawaii maintains a $1 billion senior and subordinated bank note program. Under this facility, Bank of Hawaii may issue additional notes provided that at any time the aggregate amount outstanding does not exceed $1 billion. Subordinated notes outstanding under this bank note program totaled $125 million at June 30, 2002, December 31, 2001 and June 30, 2001.
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Capital Management
 
The Company manages its capital level over the long term, in an effort to optimize shareholder value, support asset growth, reflect risks inherent in its markets, provide protection against unforeseen losses and comply with regulatory requirements. Capital levels are reviewed relative to the Company’s risk profile and current and projected economic conditions. The Company’s objective is to hold sufficient capital on a regulatory basis to exceed the minimum guidelines of a “well-capitalized” financial institution.
 
At June 30, 2002, the Company’s shareholders’ equity totaled $1,191 billion, a 4.5% decrease from December 31, 2001. The decrease in shareholders’ equity during the first half of 2002 was primarily attributable to the Company’s repurchase of its common stock under the repurchase programs and cash dividends, partially offset by net income, net unrealized gains in the investment portfolio, and stock issued under various stock option plans.
 
In January 2002, the Company’s Board of Directors approved a $300 million common stock repurchase program. This program was in addition to the 2001 programs totaling $270 million. During the quarter ended June 30, 2002, 3.9 million shares were repurchased at an average cost of $28.53 per share, totaling $111.5 million. As of June 30, 2002, the Company had repurchased a total of 12.9 million shares under all share repurchase programs. Subsequent to June 30, 2002, the Company repurchased 1,747,100 shares at an average cost of $26.71 per share for a total of $46.7 million through July 31, 2002, resulting in remaining buyback authority under the existing repurchase programs of $199.0 million.
 
The Company’s regulatory capital ratios at June 30, 2002 exceeded the minimum threshold levels established by federal bank regulators to qualify an institution as well-capitalized, which are as follows: Tier 1 Capital—6%; Total Capital—10%; and Leverage—5%. The Company’s regulatory capital ratios are shown on Table 14, along with the activities and balances in the Company’s capital accounts. During the quarter, the Company’s capital ratios and liquidity remained high.
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Equity Capital
 
Table 14
 
 	    	Six Months Ended
June 30, 2002

	 	    	Year Ended December 31, 2001

	 	    	Six Months Ended
June 30, 2001

	 	
 	    	(dollars in millions)	 	
Source of Shareholders’ Equity	    	 	 	 	    	 	 	 	    	 	 	 	
Net Income	    	$	62.1	 	    	$	117.8	 	    	$	60.4	 	
Dividends Paid	    	 	(26.2	)	    	 	(56.6	)	    	 	(28.8	)	
Dividend Reinvestment Program	    	 	1.5	 	    	 	2.8	 	    	 	1.4	 	
Stock Issued for Acquisition	    	 	—  	 	    	 	1.3	 	    	 	—  	 	
Stock Repurchases	    	 	(128.7	)	    	 	(195.7	)	    	 	—  	 	
Other(1)	    	 	35.4	 	    	 	76.0	 	    	 	61.4	 	

	

	

	    	

	

	

	    	

	

	

	
Increase (Decrease) in Shareholders’ Equity	    	$	(55.9	)	    	$	(54.4	)	    	$	94.4	 	

	

	

	    	

	

	

	    	

	

	

	
 	    	 	—  	 	    	 	 	 	    	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulatory Capital	    	 	 	 	    	 	 	 	    	 	 	 	
Shareholders’ Equity	    	$	1,191.1	 	    	$	1,247.0	 	    	$	1,395.7	 	
Add:    8.25% Capital Securities of Bancorp Hawaii Capital Trust I	    	 	92.3	 	    	 	100.0	 	    	 	100.0	 	
    Minority Interest	    	 	—  	 	    	 	—  	 	    	 	4.0	 	
Less:    Goodwill	    	 	36.2	 	    	 	26.7	 	    	 	127.4	 	
Unrealized Valuation and Other Adjustments	    	 	30.5	 	    	 	22.9	 	    	 	25.0	 	

	

	

	    	

	

	

	    	

	

	

	
Tier I Capital	    	 	1,216.7	 	    	 	1,297.4	 	    	 	1,347.3	 	
Allowable Reserve for Loan Losses	    	 	75.2	 	    	 	83.0	 	    	 	112.6	 	
Subordinated Debt	    	 	124.7	 	    	 	148.4	 	    	 	148.4	 	

	

	

	    	

	

	

	    	

	

	

	
Total Capital	    	$	1,416.6	 	    	$	1,528.8	 	    	$	1,608.3	 	

	

	

	    	

	

	

	    	

	

	

	
Risk Weighted Assets	    	$	5,932.4	 	    	$	6,559.6	 	    	$	8,918.9	 	

	

	

	    	

	

	

	    	

	

	

	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Key Capital Ratios	    	 	 	 	    	 	 	 	    	 	 	 	
Growth (Decrease) in Common Equity	    	 	(4.49	)%	    	 	(4.18	)%	    	 	7.25	%	
Average Equity/Average Assets Ratio	    	 	12.27	%	    	 	10.60	%	    	 	10.08	%	
Tier I Capital Ratio	    	 	20.51	%	    	 	19.76	%	    	 	15.11	%	
Total Capital Ratio	    	 	23.88	%	    	 	23.29	%	    	 	18.03	%	
Leverage Ratio	    	 	12.11	%	    	 	11.20	%	    	 	10.47	%	

(1)	 	Includes profit sharing; stock options and directors’ restricted shares and deferred compensation plans; and unrealized valuation adjustments for investment securities, foreign currency translation and pension liability.	
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Key Systems Replacement Project
 
In an effort to reduce its operating costs over the long term, the Company announced on July 22, 2002 that it has entered into an agreement with Metavante Corporation, which will serve as the Company’s primary technology systems provider. Metavante currently provides services to over 5,100 clients, including the largest 20 banks in the United States. The Company will convert its key systems, including loans and deposits, to Metavante’s state-of-the-industry computer system. The new systems are intended to enhance customer service and convenience, as well as improve the Company’s efficiency. This seven year outsourcing arrangement is similar to those used by other Hawaii banks and is expected to be operational in the third quarter of 2003.
 
In connection with this decision, the Company estimates that it will recognize mainframe system transition charges of approximately $35 million over the next five quarters. These estimated charges are comprised of $12 million in conversion and implementation costs, $11 million in accelerated depreciation on the existing systems and other equipment costs, $6 million in severance and outplacement costs, and $6 million in other costs. The rescale of the Company’s key technology services is anticipated to result over the next year in a reduction of approximately 250 employees. In the third quarter of 2002, incremental system conversion costs, which will be separately identified, are estimated to be approximately $7.8 million. Beginning in the third quarter of 2003, the conversion should provide annual cost savings of over $17 million compared to current expense levels.
 
Economic Outlook
 
Hawaii’s economy has recovered from the adverse impact of last year’s terrorist attack. While June jobs remain down 0.5% from one year ago, annualized 2002 job growth of 3.3% through June points to a rapid employment recovery. Real estate and construction activity continue to lead the Hawaii economy, with volumes and valuations reaching new highs in some categories. Hawaii’s seasonally adjusted unemployment rate continued declining to 4.0% in June 2002, one-half of a percentage point below third quarter 2001 and down from the November 2001 peak of 5.7%.
 
Domestic visitor arrivals during June 2002 were up 3.7% from one year ago and visitor days rose 4.2%. International visitors, who normally represent approximately one-quarter of total visitors, remained down 10% to 15% in recent months. Recent strengthening of yen-dollar exchange rates and other currency trends are boosting the foreign travel recovery, a shortfall already offset by the rebound in domestic travel. Combined domestic and international visitor days in June were up 0.5% from one year ago.
 
Earnings Outlook
 
The Company’s previously published earnings guidance for the full year 2002 of $120 million in net income remains unchanged. Given the improvement in the Hawaii economy and recent encouraging trends in credit losses, the Company expects to reduce its allowance for loan and lease losses. The amount of the allowance will be based on evaluations of credit risk and the periodic provision for loan and lease losses, if any, will be based on required allowance levels. Based on current conditions, the Company does not expect to continue to record a provision for loan losses equal to the amount of net charge-offs.
 
The cost to convert its key systems will be incurred during the conversion period beginning next quarter and continuing through the third quarter of 2003. Under new accounting standards included in SFAS 146, severance costs will be recognized throughout the conversion period. The costs of abandoning software and hardware assets will be reflected as accelerated amortization and depreciation over the conversion period. Costs of conversion services and other related costs will be recognized as incurred. The Company will disclose system conversion costs on a separate line of the income statement in future periods.
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For the third quarter of 2002, operating income is expected to approximate the levels of second quarter. The amount of the provision for loan losses, if any, will depend on determinations of credit risk that will be made near the end of the quarter. Earnings per share and return on equity projections are 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.
 
Part II.—Other Information
 
Items 1 to 3 and Item 5 omitted pursuant to instructions.
 
Item 4— Submission of Matters to a Vote of Shareholders
 
At the annual shareholders meeting held on April 26, 2002, the following matters were submitted to a vote of the shareholders:
 
a.  Election of Directors—Three directors whose terms in office were expiring as well as one new director nominee were elected to the Board of Directors as follows:
 
Peter D. Baldwin
Votes cast for: 61,367,454
Votes cast against: 0
Votes withheld: 1,537,267
 
Robert A. Huret
Votes cast for: 61,227,797
Votes cast against: 0
Votes withheld: 1,676,924
 
Donald M. Takaki
Votes cast for: 61,061,539
Votes cast against: 0
Votes withheld: 1,843,182
 
Robert W. Wo, Jr.
Votes cast for: 61,186,255
Votes cast against: 0
Votes withheld: 1,718,466
 
b.  Amendment to the Company’s Certificate of Incorporation to change the name of the Company to Bank of Hawaii Corporation:
 
Votes cast for: 62,437,364
Votes cast against: 380,959
Votes abstained: 86,398
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c.  Election of an Independent Auditor-Ernst & Young, LLP:
 
Votes cast for: 59,016,987
Votes cast against: 3,417,469
Votes abstained: 470,265
 
Item 6— Exhibits and Reports on Form 8-K
 
(a)  Exhibit Index
 
Exhibit Number

	  	 	
 	 	 	
            12	  	Statement Regarding Computation of Ratios	
 	 	 	
            99	  	Additional Exhibits	
 
(b)  The following reports on Form 8-K were filed during the quarter ended June 30, 2002:
 
Current Report on Form 8-K dated April 26, 2002 and filed May 1, 2002, reporting Item 5.
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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.
 
BANKOF HAWAII CORPORATION	
 	 	 	
By:	 	/s/    MICHAEL E. O’N EILL          

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

By:	 	/s/    ALLAN R. LANDON         

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

By:	 	/s/    RICHARD C. KEENE         

	
 	 	Richard C. Keene
Executive Vice President and Controller	
Date August 12, 2002
39

EXHIBIT 12
 
BANK OF HAWAII CORPORATION
 
EXHIBIT 12—STATEMENT REGARDING COMPUTATION OF RATIOS
Six Months Ended June 30, 2002 and 2001
 
 	  	2002

	 	  	2001

	 	
 	  	(dollars in millions)	 	
Earnings:	  	 	 	 	  	 	 	 	
1.    Income Before Income Taxes	  	$	96.4	 	  	$	107.8	 	
2.    Plus: Fixed Charges Including Interest on Deposits	  	 	83.3	 	  	 	222.5	 	

	

	

	  	

	

	

	
3.    Earnings Including Fixed Charges	  	 	179.7	 	  	 	330.3	 	
4.    Less: Interest on Deposits	  	 	46.1	 	  	 	132.0	 	

	

	

	  	

	

	

	
5.    Earnings Excluding Interest on Deposits	  	$	133.6	 	  	$	198.3	 	

	

	

	  	

	

	

	
Fixed Charges:	  	 	 	 	  	 	 	 	
6.    Fixed Charges Including Interest on Deposits	  	$	83.3	 	  	$	222.5	 	
7.    Less: Interest on Deposits	  	 	46.1	 	  	 	132.0	 	

	

	

	  	

	

	

	
8.    Fixed Charges Excluding Interest on Deposits	  	$	37.2	 	  	$	90.5	 	

	

	

	  	

	

	

	
Ratio of Earnings to Fixed Charges:	  	 	 	 	  	 	 	 	
Including Interest on Deposits (Line 3 divided by Line 6)	  	 	2.2	x	  	 	1.5	x	
Excluding Interest on Deposits (Line 5 divided by Line 8)	  	 	3.6	x	  	 	2.2	x	

EXHIBIT 99
 
BANK OF HAWAII CORPORATION
 
Exhibit 99 – Additional Exhibits
 
CERTIFICATION
 
We hereby certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-Q of Bank of Hawaii Corporation (the “Issuer”) for the quarterly period ended June 30, 2002 (the “Period 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	
 
August 12, 2002