Prepared by R.R. Donnelley Financial -- Form 10-Q Dated June 30, 2002
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)
      
        
3
        
4
        
5
        
6
        
7
Item 2.
      
11
Item 3.
      
37
Part II.—Other Information
      
Item 4.
      
37
Item 6.
      
38
    
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.

5


Table of Contents
 
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


Table of Contents
 
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
 
 

10


Table of Contents
 
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.

11


Table of Contents
 
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
 

12


Table of Contents
 
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.

13


Table of Contents
 
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.

14


Table of Contents
 
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.

15


Table of Contents
 
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.

16


Table of Contents
 
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.

17


Table of Contents
 
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 of Contents
 
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
    

  

  

  

19


Table of Contents
 
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.

20


Table of Contents
 
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
%
    

  

  

  

  

  

21


Table of Contents
 
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.

22


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.

23


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.

24


Table of Contents
 
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
 
    


  


  


  


  


  


25


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.

27


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.

28


Table of Contents
 
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
 
    


  


  


  


  


29


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.

30


Table of Contents
 
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
%

31


Table of Contents
 
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.

32


Table of Contents
 
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.

33


Table of Contents
 
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.

34


Table of Contents
 
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.

35


Table of Contents
 
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.

36


Table of Contents
 
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

37


Table of Contents
 
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.

38


Table of Contents
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
BANK OF HAWAII CORPORATION
By:
 
/s/    MICHAEL E. O’NEILL         

   
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
Prepared by R.R. Donnelley Financial -- Statement regarding Computation of Ratios
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
Prepared by R.R. Donnelley Financial -- Certification for CEO and CFO
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