UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the	
 	quarterly period ended September 30, 2006	
 	 	
 	or	
 	 	
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the	
 	transition period from                 to                	
 
Commission File Number 1-6887
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware	99-0148992	
(State of incorporation)	(IRS Employer Identification No.)	
 	 	
130 Merchant Street, Honolulu, Hawaii	96813	
(Address of principal executive offices)	(Zip Code)	
 
1-888-643-3888
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer x	 	Accelerated filer o	 	Non-accelerated filer o	
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value; outstanding at October 20, 2006 – 49,698,331 shares

 
Bank of Hawaii Corporation
Form 10-Q
INDEX
    
 	 	 	 	 	Page	 	
Part I - Financial Information	 	 	 	
 	 	 	 	
Item 1.	 	Financial Statements (Unaudited)	 	 	 	
 	 	 	 	 	 	
 	 	Consolidated Statements of Income – Three and nine months ended
September 30, 2006 and 2005	 	3	 	
 	 	 	 	 	 	
 	 	Consolidated Statements of Condition – September 30, 2006, December 31, 2005 and
September 30, 2005	 	4	 	
 	 	 	 	 	 	
 	 	Consolidated Statements of Shareholders’ Equity – Nine months ended
September 30, 2006 and 2005	 	5	 	
 	 	 	 	 	 	
 	 	Consolidated Statements of Cash Flows — Nine months ended
September 30, 2006 and 2005	 	6	 	
 	 	 	 	 	 	
 	 	Notes to Consolidated Financial Statements (Unaudited)	 	7	 	
 	 	 	 	 	 	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	16	 	
 	 	 	 	 	 	
Item 3.	 	Quantitative and Qualitative Disclosures About Market Risk	 	39	 	
 	 	 	 	 	 	
Item 4.	 	Controls and Procedures	 	39	 	
 	 	 	 	 	 	
Part II - Other Information	 	 	 	
 	 	 	 	 	 	
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds	 	39	 	
 	 	 	 	 	 	
Item 5.	 	Other Information	 	40	 	
 	 	 	 	 	 	
Item 6.	 	Exhibits	 	40	 	
 	 	 	 	 	 	
Signatures	 	41	 	

 

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)	
 
 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	September 30,	 	September 30,	 	
(dollars in thousands, except per share amounts)	 	2006	 	2005	 	2006	 	2005	 	
Interest Income	 	 	 	 	 	 	 	 	 	
Interest and Fees on Loans and Leases	 	$	110,065	 	$	94,381	 	$	313,824	 	$	270,967	 	
Income on Investment Securities Available-for-Sale	 	31,949	 	28,482	 	94,010	 	83,788	 	
Income on Investment Securities Held-to-Maturity	 	4,558	 	5,109	 	13,973	 	16,461	 	
Deposits	 	50	 	57	 	148	 	116	 	
Funds Sold	 	66	 	935	 	361	 	1,175	 	
Other	 	272	 	270	 	816	 	990	 	
Total Interest Income	 	146,960	 	129,234	 	423,132	 	373,497	 	
Interest Expense	 	 	 	 	 	 	 	 	 	
Deposits	 	28,464	 	15,766	 	72,753	 	40,947	 	
Securities Sold Under Agreements to Repurchase	 	11,959	 	6,796	 	29,651	 	14,683	 	
Funds Purchased	 	2,270	 	901	 	6,815	 	2,785	 	
Short-Term Borrowings	 	82	 	50	 	212	 	127	 	
Long-Term Debt	 	3,835	 	3,761	 	11,293	 	11,298	 	
Total Interest Expense	 	46,610	 	27,274	 	120,724	 	69,840	 	
Net Interest Income	 	100,350	 	101,960	 	302,408	 	303,657	 	
Provision for Credit Losses	 	2,785	 	3,000	 	7,615	 	3,000	 	
Net Interest Income After Provision for Credit Losses	 	97,565	 	98,960	 	294,793	 	300,657	 	
Noninterest Income	 	 	 	 	 	 	 	 	 	
Trust and Asset Management	 	14,406	 	14,052	 	43,791	 	42,732	 	
Mortgage Banking	 	2,394	 	2,618	 	7,950	 	7,802	 	
Service Charges on Deposit Accounts	 	10,723	 	10,046	 	30,550	 	29,794	 	
Fees, Exchange, and Other Service Charges	 	16,266	 	15,394	 	46,666	 	44,441	 	
Investment Securities Gains, Net	 	19	 	8	 	19	 	345	 	
Insurance	 	6,713	 	5,324	 	16,423	 	15,442	 	
Other	 	6,366	 	8,074	 	17,261	 	17,949	 	
Total Noninterest Income	 	56,887	 	55,516	 	162,660	 	158,505	 	
Noninterest Expense	 	 	 	 	 	 	 	 	 	
Salaries and Benefits	 	43,133	 	44,366	 	133,730	 	132,991	 	
Net Occupancy	 	9,998	 	9,896	 	29,017	 	28,630	 	
Net Equipment	 	5,285	 	5,335	 	15,115	 	16,183	 	
Professional Fees	 	2,638	 	5,689	 	5,665	 	11,645	 	
Other	 	18,751	 	19,310	 	55,838	 	55,014	 	
Total Noninterest Expense	 	79,805	 	84,596	 	239,365	 	244,463	 	
Income Before Provision for Income Taxes	 	74,647	 	69,880	 	218,088	 	214,699	 	
Provision for Income Taxes	 	27,727	 	25,051	 	88,642	 	77,919	 	
Net Income	 	$	46,920	 	$	44,829	 	$	129,446	 	$	136,780	 	
Basic Earnings Per Share	 	$	0.95	 	$	0.87	 	$	2.58	 	$	2.62	 	
Diluted Earnings Per Share	 	$	0.93	 	$	0.85	 	$	2.53	 	$	2.55	 	
Dividends Declared Per Share	 	$	0.37	 	$	0.33	 	$	1.11	 	$	0.99	 	
Basic Weighted Average Shares	 	49,586,947	 	51,385,840	 	50,180,280	 	52,221,345	 	
Diluted Weighted Average Shares	 	50,506,267	 	52,844,961	 	51,226,763	 	53,745,612	 	
 
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
3

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)	
 
 	 	September 30,	 	December 31,	 	September 30,	 	
(dollars in thousands)	 	2006	 	2005	 	2005	 	
Assets	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	$	5,238	 	$	4,893	 	$	10,119	 	
Funds Sold	 	—	 	—	 	10,000	 	
Investment Securities Available-for-Sale	 	 	 	 	 	 	 	
Held in Portfolio	 	1,973,719	 	2,333,417	 	2,381,462	 	
Pledged as Collateral	 	678,914	 	204,798	 	172,500	 	
Investment Securities Held-to-Maturity
(Fair Value of $385,891; $442,989; and $475,884)	 	397,520	 	454,240	 	485,041	 	
Loans Held for Sale	 	15,336	 	17,915	 	18,095	 	
Loans and Leases	 	6,489,057	 	6,168,536	 	6,202,546	 	
Allowance for Loan and Lease Losses	 	(90,795	)	(91,090	)	(91,654	)	
Net Loans and Leases	 	6,398,262	 	6,077,446	 	6,110,892	 	
Total Earning Assets	 	9,468,989	 	9,092,709	 	9,188,109	 	
Cash and Noninterest-Bearing Deposits	 	283,621	 	493,825	 	296,152	 	
Premises and Equipment	 	127,521	 	133,913	 	135,952	 	
Customers’ Acceptances	 	673	 	1,056	 	1,081	 	
Accrued Interest Receivable	 	49,339	 	43,033	 	40,898	 	
Foreclosed Real Estate	 	409	 	358	 	413	 	
Mortgage Servicing Rights	 	18,995	 	18,010	 	18,049	 	
Goodwill	 	34,959	 	34,959	 	34,959	 	
Other Assets	 	386,709	 	369,175	 	369,622	 	
Total Assets	 	$	10,371,215	 	$	10,187,038	 	$	10,085,235	 	
Liabilities	 	 	 	 	 	 	 	
Deposits	 	 	 	 	 	 	 	
Noninterest-Bearing Demand	 	$	1,879,644	 	$	2,134,916	 	$	1,890,904	 	
Interest-Bearing Demand	 	1,608,774	 	1,678,454	 	1,716,306	 	
Savings	 	2,596,940	 	2,819,258	 	2,880,066	 	
Time	 	1,601,765	 	1,274,840	 	1,269,310	 	
Total Deposits	 	7,687,123	 	7,907,468	 	7,756,586	 	
Funds Purchased	 	160,600	 	268,110	 	172,365	 	
Short-Term Borrowings	 	11,290	 	9,447	 	8,537	 	
Securities Sold Under Agreements to Repurchase	 	1,099,260	 	609,380	 	756,407	 	
Long-Term Debt	 	265,268	 	242,703	 	242,692	 	
Banker’s Acceptances	 	673	 	1,056	 	1,081	 	
Retirement Benefits Payable	 	72,651	 	71,116	 	67,136	 	
Accrued Interest Payable	 	18,659	 	10,910	 	9,416	 	
Taxes Payable and Deferred Taxes	 	280,611	 	269,094	 	276,678	 	
Other Liabilities	 	91,608	 	104,402	 	98,026	 	
Total Liabilities	 	9,687,743	 	9,493,686	 	9,388,924	 	
Shareholders’ Equity	 	 	 	 	 	 	 	
Common Stock ($.01 par value); authorized 500,000,000 shares; issued / outstanding: September 2006 - 56,848,799 / 49,809,709; December 2005 - 56,827,483 / 51,276,286; and September 2005 - 81,722,233 / 51,282,537	 	566	 	565	 	815	 	
Capital Surplus	 	471,908	 	473,338	 	463,084	 	
Accumulated Other Comprehensive Loss	 	(49,422	)	(47,818	)	(34,697	)	
Retained Earnings	 	605,976	 	546,591	 	1,366,058	 	
Deferred Stock Grants	 	—	 	(11,080	)	(5,974	)	
Treasury Stock, at Cost (Shares: September 2006 - 7,039,090; December 2005 - 5,551,197; and September 2005 - 30,439,696)	 	(345,556	)	(268,244	)	(1,092,975	)	
Total Shareholders’ Equity	 	683,472	 	693,352	 	696,311	 	
Total Liabilities and Shareholders’ Equity	 	$	10,371,215	 	$	10,187,038	 	$	10,085,235	 	
 
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
4

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Unaudited)	
 
 	 	 	 	 	 	 	 	Accum.	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Other	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Compre-	 	 	 	Deferred	 	 	 	Compre-	 	
 	 	 	 	Common	 	Capital	 	hensive	 	Retained	 	Stock	 	Treasury	 	hensive	 	
(dollars in thousands)	 	Total	 	Stock	 	Surplus	 	Loss	 	Earnings	 	Grants	 	Stock	 	Income	 	
Balance at December 31, 2005	 	$	693,352	 	$	565	 	$	473,338	 	$	(47,818	)	$	546,591	 	$	(11,080	)	$	(268,244	)	 	 	
Comprehensive Income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	129,446	 	—	 	—	 	—	 	129,446	 	—	 	—	 	$	129,446	 	
Other Comprehensive Income, Net of Tax:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in Unrealized Gains and Losses on	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment Securities Available-for-Sale	 	(1,604	)	—	 	—	 	(1,604	)	—	 	—	 	—	 	(1,604	)	
Total Comprehensive Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	127,842	 	
Common Stock Issued under Share-Based Compensation Plans and Related Tax Benefits (730,432 shares)	 	30,766	 	1	 	(1,430	)	—	 	(13,764	)	11,080	 	34,879	 	 	 	
Common Stock Repurchased (2,194,534 shares)	 	(112,191	)	—	 	—	 	—	 	-	 	—	 	(112,191	)	 	 	
Cash Dividends Paid	 	(56,297	)	—	 	—	 	—	 	(56,297	)	—	 	—	 	 	 	
Balance at September 30, 2006	 	$	683,472	 	$	566	 	$	471,908	 	$	(49,422	)	$	605,976	 	$	—	 	$	(345,556	)	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2004	 	$	814,834	 	$	813	 	$	450,998	 	$	(12,917	)	$	1,282,425	 	$	(8,433	)	$	(898,052	)	 	 	
Comprehensive Income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	136,780	 	—	 	—	 	—	 	136,780	 	—	 	—	 	$	136,780	 	
Other Comprehensive Income, Net of Tax:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in Unrealized Gains and Losses on	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment Securities Available-for-Sale	 	(21,780	)	—	 	—	 	(21,780	)	—	 	—	 	—	 	(21,780	)	
Total Comprehensive Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	115,000	 	
Common Stock Issued under Share-Based Compensation Plans and Related Tax Benefits (803,278 shares)	 	33,268	 	2	 	12,086	 	—	 	(1,353	)	2,459	 	20,074	 	 	 	
Common Stock Repurchased (4,478,932 shares)	 	(214,997	)	—	 	—	 	—	 	—	 	—	 	(214,997	)	 	 	
Cash Dividends Paid	 	(51,794	)	—	 	—	 	—	 	(51,794	)	—	 	—	 	 	 	
Balance at September 30, 2005	 	$	696,311	 	$	815	 	$	463,084	 	$	(34,697	)	$	1,366,058	 	$	(5,974	)	$	(1,092,975	)	 	 	
 
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
5

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)	
 
 	 	Nine Months Ended	 	
 	 	September 30,	 	
(dollars in thousands)	 	2006	 	2005	 	
Operating Activities	 	 	 	 	 	
Net Income	 	$	129,446	 	$	136,780	 	
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:	 	 	 	 	 	
Provision for Credit Losses	 	7,615	 	3,000	 	
Goodwill Impairment	 	—	 	1,257	 	
Depreciation and Amortization	 	12,292	 	14,056	 	
Amortization of Deferred Loan and Lease Fees	 	(2,350	)	(496	)	
Amortization/Accretion of Premiums/Discounts on Investment Securities, Net	 	3,086	 	7,139	 	
Share-Based Compensation	 	4,017	 	3,892	 	
Deferred Income Taxes	 	19,475	 	8,911	 	
Net Gain on Investment Securities	 	(19	)	(345	)	
Proceeds from Sales of Loans Held for Sale	 	242,040	 	346,950	 	
Originations of Loans Held for Sale	 	(239,461	)	(347,403	)	
Tax Benefits from Equity Based Compensation	 	(5,416	)	—	 	
Net Change in Other Assets and Other Liabilities	 	(29,641	)	(6,342	)	
Net Cash Provided by Operating Activities	 	141,084	 	167,399	 	
 	 	 	 	 	 	
Investing Activities	 	 	 	 	 	
Proceeds from Redemptions of Investment Securities Available-for-Sale	 	344,866	 	503,818	 	
Purchases of Investment Securities Available-for-Sale	 	(464,103	)	(613,559	)	
Proceeds from Redemptions of Investment Securities Held-to-Maturity	 	76,183	 	103,534	 	
Purchases of Investment Securities Held-to-Maturity	 	(20,250	)	—	 	
Net Increase in Loans and Leases	 	(326,376	)	(230,975	)	
Premises and Equipment, Net	 	(5,900	)	(3,913	)	
Net Cash Used in Investing Activities	 	(395,580	)	(241,095	)	
 	 	 	 	 	 	
Financing Activities	 	 	 	 	 	
Net (Decrease) Increase in Deposits	 	(220,345	)	191,919	 	
Net Increase in Short-Term Borrowings	 	384,213	 	203,693	 	
Proceeds from Long-Term Debt	 	25,000	 	—	 	
Repayments of Long-Term Debt	 	(2,500	)	(10,000	)	
Tax Benefits from Equity Based Compensation	 	5,416	 	—	 	
Proceeds from Issuance of Common Stock	 	21,341	 	20,195	 	
Repurchase of Common Stock	 	(112,191	)	(214,997	)	
Cash Dividends Paid	 	(56,297	)	(51,794	)	
Net Cash Provided by Financing Activities	 	44,637	 	139,016	 	
 	 	 	 	 	 	
(Decrease) Increase in Cash and Cash Equivalents	 	(209,859	)	65,320	 	
Cash and Cash Equivalents at Beginning of Period	 	498,718	 	250,951	 	
Cash and Cash Equivalents at End of Period	 	$	288,859	 	$	316,271	 	
 	 	 	 	 	 	
Supplemental Information	 	 	 	 	 	
Cash paid for:	 	 	 	 	 	
Interest	 	$	112,975	 	$	67,445	 	
Income taxes	 	63,487	 	20,657	 	
 
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
6

 
Bank of Hawaii Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1.           Summary of Significant Accounting Policies
Basis of Presentation
Bank of Hawaii Corporation and its subsidiaries (the “Company”) provides a broad range of financial products and services to customers in Hawaii and the Pacific Islands (Guam, nearby islands and American Samoa).  The Company’s principal subsidiary is Bank of Hawaii (the “Bank”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.
Certain prior period amounts have been reclassified to conform to current period classifications.
These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.  Operating results for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.
Recently Issued Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155,  “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.”   SFAS No. 155 permits, but does not require, fair value accounting for hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation in accordance with SFAS No. 133.  SFAS No. 155 also eliminates the temporary exemption for interests in securitized financial assets provided for by SFAS No. 133, Implementation Issue D1.  As a result, the Company will be required to evaluate its interests in securitized financial assets to determine whether its interest is a free standing derivative or a hybrid financial instrument that may be subject to the bifurcation requirements of SFAS No. 133.  If the Company’s interest in a securitized financial asset is determined to contain an embedded derivative, that financial instrument is eligible to be accounted for under the fair value accounting provisions of SFAS No. 155.  SFAS No. 155 is effective for all financial instruments acquired or issued after December 31, 2006 as well as to those hybrid financial instruments that had been previously bifurcated under SFAS No. 133.  As of September 30, 2006, the Company did not have any hybrid financial instruments which were bifurcated under SFAS No. 133.  As a result, the adoption of SFAS No. 155 is not expected to have a material impact on the Company’s results of operations and financial condition.
7

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.”   SFAS No. 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable.  Following the initial measurement at fair value, the Company is permitted to choose to either subsequently measure servicing assets at fair value and report changes in fair value in earnings, or amortize the servicing assets in proportion to and over the period of estimated net servicing income or loss and periodically assess for impairment.  The Company expects that the after-tax cumulative-effect adjustment, as of January 1, 2007, will be to increase retained earnings by approximately $7.0 million.  The Company also expects to adopt the fair value measurement provisions of SFAS No. 156 in subsequent re-measurements of the servicing asset.
In June 2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. ”  FIN No. 48 establishes a recognition threshold and measurement for income tax positions recognized in the Company’s financial statements in accordance with SFAS No. 109.  FIN No. 48 also prescribes a two-step evaluation process for tax positions.  The first step is recognition and the second is measurement.  In evaluating a tax position for recognition, the Company judgmentally evaluates whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position.  If the tax position meets the more-likely-than-not recognition threshold, the tax position is measured and recognized in the Company’s financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate resolution.  As required by the provisions of FIN No. 48, the Company plans to adopt the provisions of the Interpretation on January 1, 2007.  Management is currently evaluating the effect that the provisions of FIN No. 48 will have on the Company’s results of operations and financial condition.
In July 2006, the FASB issued Staff Position (“FSP”) No. 13-2 “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction, ” which amends SFAS No. 13.  Under the provisions of FSP No. 13-2, a material revision in the timing of expected cash flows of a leveraged lease requires a recalculation of the original lease assumptions.  As required by the provisions of FSP No. 13-2, the Company plans to adopt the provisions of this Staff Position on January 1, 2007 by recording an after-tax cumulative-effect adjustment to retained earnings for any leases that have been determined to have an expected change in the timing of cash flows.  After adoption, a subsequent change in the assumption of expected cash flows that results in a change in the net investment of a leveraged lease shall be recorded as a gain or loss in the period in which the assumption is changed.  The Company has entered into one leveraged lease transaction known as a Lease In/Lease Out (“LILO”) and five Sale In/Lease Out (“SILO”) transactions that are currently under review by the Internal Revenue Service (the “IRS”).  The IRS review of the LILO transaction has progressed further than the review of the SILO transactions. The outcome of these reviews may change the expected timing of cash flows from these leases which would subject these leases to the provisions of FSP No. 13-2.  Based on current discussions with the IRS, the estimated after-tax cumulative-effect reduction to retained earnings as of January 1, 2007 could be as much as $5.0 million for the LILO and as much as $18.0 million for the SILOs.
8

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).”   This standard requires the Company to recognize in its statement of condition an asset for a plan’s overfunded status or a liability for a plan’s underfunded status.  The Company has two pension plans and a postretirement benefit plan (the “Plans”) which are subject to the provisions of SFAS No. 158.  SFAS No. 158 also requires that the Company measure the Plans’ assets and obligations that determine its funded status as of the end of the fiscal year and to recognize those changes in the year in which the changes occur as a component of other comprehensive income, net of taxes.  The adoption of SFAS No. 158, effective December 31, 2006, is expected to result in an addition to other comprehensive income, net of tax, of between $2.0 million and $6.0 million.
In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-5,  “Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.”   FASB Technical Bulletin No. 85-4 requires that the amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset.  Since the issuance of FASB Technical Bulletin No. 85-4, there has been diversity in practice in the calculation of the amount that could be realized under insurance contracts.  EITF Issue No. 06-5, which is effective January 1, 2007, concludes that the Company should consider any additional amounts (e.g., cash stabilization reserves and deferred acquisition cost taxes) included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized in accordance with FASB Technical Bulletin No. 85-4.  The adoption of EITF Issue No. 06-5 is not expected to have a material impact on the Company’s results of operations and financial condition.
Note 2.           Recently-Enacted Legislation
In May 2006, the Tax Increase Prevention and Reconciliation Act (“TIPRA”) was enacted by Congress effective January 1, 2007, which resulted in the repeal of the exclusion from federal income taxation of a portion of the income from foreign sales corporations.  The Company has two leveraged leases that were affected by this legislation.  SFAS No. 13, “ Accounting for Leases ,” requires that the cumulative-effect of a change in a significant assumption affecting the net income recorded over the entire term of a lease, such as a change in tax law, be recognized as a cumulative-effect adjustment to the lease in the period in which the change occurs.  Accordingly, during the second quarter of 2006, the Company recorded a charge of $8.8 million to reflect the cumulative-effect of the change in tax law.  The charge was comprised of a $0.6 million reduction of lease interest income and an increase of $8.2 million in the provision for income taxes.  TIPRA is not expected to materially increase the Company’s provision for income taxes in future periods.
9

Note 3.           Share-Based Compensation
The Company adopted SFAS No. 123(R), “Share-Based Payment,” on January 1, 2006 using the “modified prospective” method.  Under this method, stock-based awards that are granted, modified, or settled after December 31, 2005, are measured and accounted for in accordance with SFAS No. 123(R).  Also under this method, expense is recognized for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123, “ Accounting for Stock-Based Compensation.”   Prior to the adoption of SFAS No. 123(R), the Company accounted for share-based compensation under the intrinsic value method as permitted by APB Opinion No. 25, “ Accounting for Stock Issued to Employees ” and related interpretations.  Accordingly, the Company previously recognized no compensation expense for employee stock options that were granted with an exercise price equal to the fair value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123(R) in 2005.
 
 	 	Three Months Ended	 	Nine Months Ended	 	
(dollars in thousands, except per share data) 	(Unaudited)	 	September 30, 2005 1	 	September 30, 2005 1	 	
Net Income, as reported	 	$	 	44,829	 	$	136,780	 	
Add:	Share-Based Employee Compensation Expense Included in	 	 	 	 	 	 	
 	Reported Net Income, Net of Related Tax Effects	 	 	847	 	 	2,479	 	
Less:	Share-Based Employee Compensation Expense Determined	 	 	 	 	 	 	
 	Under Fair Value Method, Net of Related Tax Effects 2	 	 	(1,358	)	 	(4,193	)	
Pro Forma Net Income	 	$	44,318	 	$	135,066	 	
 	 	 	 	 	 	 	
Basic Earnings Per Share — As Reported	 	$	0.87	 	$	2.62	 	
Basic Earnings Per Share — Pro Forma	 	 	0.86	 	 	2.59	 	
Diluted Earnings Per Share — As Reported	 	 	0.85	 	 	2.55	 	
Diluted Earnings Per Share — Pro Forma	 	 	0.84	 	 	2.51	 	

1   Prior period amounts restated to account for forfeitures and adjustment to dividend yield calculations.
2   A Black-Scholes option pricing model was used to determine the fair value of the options granted.
 
There was no material impact to the Company’s income before provision for income taxes and net income from the adoption of SFAS No. 123(R) on January 1, 2006.  Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options and the vesting of restricted stock as operating cash flows in the Consolidated Statements of Cash Flows.  SFAS No. 123(R) requires that the cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for those stock options and restricted stock (excess tax benefits) to be reported as financing cash flows.  An excess tax benefit of approximately $5.4 million is classified as financing cash inflows for the nine months ended September 30, 2006.
Employee and director share-based compensation expense recognized for stock options and restricted stock was $4.0 million and $4.2 million for the nine months ended September 30, 2006 and 2005, respectively.  The related income tax benefit recognized was $1.7 million and $1.8 million for the nine months ended September 30, 2006 and 2005, respectively.
10

Director Stock Compensation Program
The Company has a Director Stock Compensation Program that annually grants shares of restricted common stock (“Restricted Shares”) and stock options to purchase common shares to each non-employee director.  The exercise price of the stock options is based on the closing market price of the shares on the date that the options are granted.  The Restricted Shares and the stock options are generally not transferable.  The total number of shares authorized for awards under the Director Stock Compensation Program was 471,900 as of September 30, 2006.
Stock options granted in 2005 and 2006 vest ratably over three years and expire at the earliest of 1) three months after termination of the director’s membership on the Company’s Board of Directors (the “Board”) for any reason other than death or disability; 2) one year after termination of the director’s membership on the Board due to death or disability; or 3) ten years after the date of grant.  The Restricted Shares vest after three years or upon death or disability, if earlier.
Stock options granted prior to 2005 are immediately exercisable and expire ten years from the date of grant. However, the shares received upon exercise of the stock options (“Option Shares”) are restricted.  The restriction period for both Restricted Shares and Option Shares continues as long as the director remains on the Board.  If an optionee ceases to serve as a director prior to the end of his or her term, for any reason other than death, disability or change in control of the Company, the Option Shares will be redeemed by the Company at the exercise price and any unexercised options and restricted shares are forfeited.  As of September 30, 2006, there were 214,571 stock options and 28,263 Restricted Shares outstanding under this program.
Employee Stock Option Plans
The Company’s employee stock option plans are shareholder approved and administered by the Compensation Committee of the Board.  Awards under the employee stock option plans may include stock options, stock appreciation rights, restricted stock and restricted stock units.  The total number of shares authorized for awards under the 2004 Employee Stock Option Plan is 1.7 million as of September 30, 2006.
Stock Options
Stock options provide grantees the option to purchase shares of common stock at a specified exercise price and, generally, expire ten years from the date of grant.  Stock option grants include incentive and nonqualified stock options whose vesting may be based on a service period and/or Company performance measures.  Generally, options granted prior to December 2005 had vesting terms of one or three years.  Options granted in December 2005 and in prior years were fully vested as of December 31, 2005.  The exercise prices were equal to the fair value of the shares on the dates the options were granted.  The Company recognizes compensation expense, measured as the fair value of the stock option on the date of grant, on a straight-line basis over the vesting period.
The fair value of each stock option award is estimated on the date of grant using a Black-Scholes option pricing model that uses the assumptions noted in the following table.  Expected volatilities are based on the historical volatility of the Company’s common stock over the expected term of the options, excluding the interim years 2000-2003.  The Company uses historical data to estimate option exercise and employee termination within the option pricing model.  The expected term of stock options granted is derived from the output of the option pricing model and represents the period of time that stock options granted are expected to be outstanding.  The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the date of grant.
11

 
 	 	Nine Months Ended	 	
 	 	September 30,	 	
(Unaudited)	 	2006	 	2005	 	
Weighted Average Fair Value of Stock Options Granted	 	$	11.99	 	$	9.58	 	
Assumptions:	 	 	 	 	 	
Average Risk-Free Rate	 	4.92	%	3.90	%	
Average Expected Volatility	 	22.07	%	22.70	%	
Expected Dividend Yield	 	2.73	%	2.80	%	
Expected Life	 	5.6 years	 	5.6 years	 	

The following table presents the activity related to stock options under all plans for the nine months ended September 30, 2006.
 	 	 	 	 	 	Weighted Average	 	Aggregate	 	
 	 	 	 	Weighted	 	Remaining	 	Intrinsic	 	
 	 	Stock	 	Average	 	Contractual Term	 	Value	 	
(Unaudited)	 	Options	 	Exercise Price	 	(in years)	 	(in thousands)	 	
Stock Options Outstanding at January 1, 2006	 	3,011,653	 	$	29.71	 	 	 	 	 	
Granted	 	24,101	 	54.31	 	 	 	 	 	
Exercised	 	(605,632	)	26.77	 	 	 	 	 	
Forfeited or Expired	 	(5,980	)	36.37	 	 	 	 	 	
Stock Options Outstanding at September 30, 2006	 	2,424,142	 	30.66	 	5.8	 	$	42,417	 	
Stock Options Exercisable at September 30, 2006	 	2,386,331	 	30.33	 	5.8	 	42,554	 	

The total intrinsic value (i.e., the amount by which the fair value of the underlying common stock exceeds the exercise price of a stock option on exercise date) of stock options exercised during the nine months ended September 30, 2006 and 2005 were $10.8 million and $15.2 million, respectively.
Cash received from stock option exercises for the nine months ended September 30, 2006 and 2005 were $16.3 million and $15.1 million, respectively.  The tax benefit realized for the deductions related to the stock option exercises were $4.2 million and $5.6 million for the nine months ended September 30, 2006 and 2005, respectively.
The Company reissues treasury stock to satisfy stock option exercises.
Restricted Stock
Restricted Stock provides grantees with rights to shares of common stock upon completion of a service period or achievement of Company performance measures.  During the restriction period, all shares are considered outstanding and dividends are paid on the Restricted Stock.  The Restricted Stock vests over periods ranging from three to ten years from the date of grant, although accelerated vesting was provided for in certain grants, based on the attainment of defined Company performance measures.  The Company recognizes compensation expense, measured as the quoted market price of the Restricted Stock on the date of grant, on a straight-line basis over the vesting period for service period vesting, plus additional recognition of the costs associated with accelerated vesting based upon projected attainment of Company performance measures.  Restricted Stock is forfeited if an employee terminates prior to vesting.
As of September 30, 2006, unrecognized compensation cost related to unvested Restricted Stock was $7.0 million.  The cost is expected to be recognized over a weighted average period of 2.2 years.  The total grant date fair value of Restricted Stock which vested during the nine months ended September 30, 2006 and 2005 was $4.0 million and $5.2 million, respectively.
12

The following table presents the activity for Restricted Stock for the nine months ended September 30, 2006.
(Unaudited)	 	
Number of Shares	 	Weighted Average
Grant-Date Fair Value	 	
Unvested as of December 31, 2005	 	306,747	 	$	41.36	 	
Granted	 	55,575	 	52.98	 	
Vested	 	(96,548	)	41.73	 	
Forfeited	 	(19,017	)	37.25	 	
Unvested as of September 30, 2006	 	246,757	 	$	44.15	 	
 
Restricted Stock Units
Restricted Stock Units (“RSUs”) entitle grantees to a cash payment based upon the fair value of the Company’s common stock at the time the award vests.  During the vesting period, the participant is entitled to dividend equivalent payments equal to dividends declared on the Company’s common stock.  Expenses associated with RSUs are considered share-based compensation expense and are recognized over the vesting period.  The primary RSU grant was made in 2003.  Under this grant, with the achievement of certain performance objectives, 50% of the grant vested April 30, 2004 and the remaining 50% vested March 31, 2005.  For certain grantees, the original award is supplemented with additional RSUs after the original vesting period, based upon the achievement of certain additional performance objectives.  Total expense recognized by the Company for RSUs for the nine months ended September 30, 2006 and 2005 was $0.4 million and $1.5 million, respectively.
The following table presents the activity for RSUs for the nine months ended September 30, 2006 and 2005.
(Unaudited)	 	Number of Units	 	
Balance as of December 31, 2005	 	15,000	 	
Granted	 	5,625	 	
Vested	 	(15,000	)	
Balance as of September 30, 2006	 	5,625	 	
 	 	 	 	
Balance as of December 31, 2004	 	114,000	 	
Vested	 	(97,500	)	
Forfeited	 	(1,500	)	
Balance as of September 30, 2005	 	15,000	 	
 
Note 4.           Business Segments
The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services Group, and Treasury and Other Corporate.  The Company’s internal management accounting process measures the performance of the business segments based on the management structure of the Company.  This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of interest income, expense overhead, the provision for credit losses and capital.  This process is dynamic and requires certain allocations based on judgment and other subjective factors.  Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting that is equivalent to GAAP.  Previously reported results have been reclassified to conform to the current organizational reporting structure.
13

 
Selected financial information for each segment is presented below for the three and nine months ended September 30, 2006 and 2005.
Business Segment Selected Financial Information (Unaudited)	
 
 	 	 	 	 	 	Investment	 	Treasury	 	 	 	
 	 	Retail	 	Commercial	 	Services	 	and Other	 	Consolidated	 	
(dollars in thousands)	 	Banking	 	Banking	 	Group	 	Corporate	 	Total	 	
Three Months Ended September 30, 2006	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	59,397	 	$	33,996	 	$	4,293	 	$	2,664	 	$	100,350	 	
Provision for Credit Losses	 	2,609	 	480	 	—	 	(304	)	2,785	 	
Net Interest Income After Provision for Credit Losses	 	56,788	 	33,516	 	4,293	 	2,968	 	97,565	 	
Noninterest Income	 	25,243	 	11,929	 	17,344	 	2,371	 	56,887	 	
Noninterest Expense	 	(43,030	)	(19,739	)	(15,432	)	(1,604	)	(79,805	)	
Income Before Provision for Income Taxes	 	39,001	 	25,706	 	6,205	 	3,735	 	74,647	 	
Provision for Income Taxes	 	(14,430	)	(9,682	)	(2,296	)	(1,319	)	(27,727	)	
Allocated Net Income	 	24,571	 	16,024	 	3,909	 	2,416	 	46,920	 	
Total Assets at September 30, 2006	 	$	3,931,334	 	$	2,692,163	 	$	219,715	 	$	3,528,003	 	$	10,371,215	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended September 30, 2005	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	56,537	 	$	34,602	 	$	4,651	 	$	6,170	 	$	101,960	 	
Provision for Credit Losses	 	2,946	 	10,564	 	—	 	(10,510	)	3,000	 	
Net Interest Income After Provision for Credit Losses	 	53,591	 	24,038	 	4,651	 	16,680	 	98,960	 	
Noninterest Income	 	24,136	 	12,329	 	16,611	 	2,440	 	55,516	 	
Noninterest Expense	 	(43,068	)	(20,155	)	(19,002	)	(2,371	)	(84,596	)	
Income Before Provision for Income Taxes	 	34,659	 	16,212	 	2,260	 	16,749	 	69,880	 	
Provision for Income Taxes	 	(12,954	)	(5,974	)	(836	)	(5,287	)	(25,051	)	
Allocated Net Income	 	21,705	 	10,238	 	1,424	 	11,462	 	44,829	 	
Total Assets at September 30, 2005	 	$	3,830,473	 	$	2,512,802	 	$	209,222	 	$	3,532,738	 	$	10,085,235	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2006	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	175,788	 	$	100,725	 	$	13,175	 	$	12,720	 	$	302,408	 	
Provision for Credit Losses	 	6,965	 	1,218	 	999	 	(1,567	)	7,615	 	
Net Interest Income After Provision for Credit Losses	 	168,823	 	99,507	 	12,176	 	14,287	 	294,793	 	
Noninterest Income	 	74,149	 	28,242	 	52,651	 	7,618	 	162,660	 	
Noninterest Expense	 	(126,851	)	(58,892	)	(48,886	)	(4,736	)	(239,365	)	
Income Before Provision for Income Taxes	 	116,121	 	68,857	 	15,941	 	17,169	 	218,088	 	
Provision for Income Taxes	 	(42,965	)	(34,263	)	(5,889	)	(5,525	)	(88,642	)	
Allocated Net Income	 	73,156	 	34,594	 	10,052	 	11,644	 	129,446	 	
Total Assets at September 30, 2006	 	$	3,931,334	 	$	2,692,163	 	$	219,715	 	$	3,528,003	 	$	10,371,215	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2005	 	 	 	 	 	 	 	 	 	 	 	
Net Interest Income	 	$	163,084	 	$	102,305	 	$	13,161	 	$	25,107	 	$	303,657	 	
Provision for Credit Losses	 	9,962	 	11,216	 	(1	)	(18,177	)	3,000	 	
Net Interest Income After Provision for Credit Losses	 	153,122	 	91,089	 	13,162	 	43,284	 	300,657	 	
Noninterest Income	 	70,742	 	29,285	 	51,493	 	6,985	 	158,505	 	
Noninterest Expense	 	(126,816	)	(58,457	)	(53,059	)	(6,131	)	(244,463	)	
Income Before Provision for Income Taxes	 	97,048	 	61,917	 	11,596	 	44,138	 	214,699	 	
Provision for Income Taxes	 	(35,908	)	(22,949	)	(4,290	)	(14,772	)	(77,919	)	
Allocated Net Income	 	61,140	 	38,968	 	7,306	 	29,366	 	136,780	 	
Total Assets at September 30, 2005	 	$	3,830,473	 	$	2,512,802	 	$	209,222	 	$	3,532,738	 	$	10,085,235	 	
 
14

Note 5.           Pension Plans and Postretirement Benefit Plan
The components of net periodic benefit cost for the aggregated pension plans and the postretirement benefit plan for the three and nine months ended September 30, 2006 and 2005 are presented in the following table:
 	 	Pension Benefits	 	Postretirement Benefits	 	
(dollars in thousands)	(Unaudited)	 	2006	 	2005	 	2006	 	2005	 	
Three Months Ended September 30,	 	 	 	 	 	 	 	 	 	
Service Cost	 	$	—	 	$	—	 	$	290	 	$	270	 	
Interest Cost	 	1,170	 	1,126	 	480	 	475	 	
Expected Return on Plan Assets	 	(1,261	)	(1,183	)	—	 	—	 	
Amortization of Unrecognized Net Transition Obligation	 	—	 	—	 	147	 	147	 	
Recognized Net Actuarial Loss (Gain)	 	469	 	427	 	(36	)	(42	)	
Total Net Periodic Cost	 	$	378	 	$	370	 	$	881	 	$	850	 	
 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30,	 	 	 	 	 	 	 	 	 	
Service Cost	 	$	—	 	$	—	 	$	870	 	$	810	 	
Interest Cost	 	3,510	 	3,376	 	1,440	 	1,425	 	
Expected Return on Plan Assets	 	(3,783	)	(3,553	)	—	 	—	 	
Amortization of Unrecognized Net Transition Obligation	 	—	 	—	 	440	 	440	 	
Recognized Net Actuarial Loss (Gain)	 	1,406	 	1,268	 	(106	)	(125	)	
Total Net Periodic Cost	 	$	1,133	 	$	1,091	 	$	2,644	 	$	2,550	 	

There were no significant changes from the previously reported $2.0 million in contributions expected to be paid during 2006.
15

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements concerning, among other things, the economic and business environment in the Company’s service area and elsewhere, credit quality, anticipated net income and other financial and business matters in future periods.  The Company’s forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate and actual results may differ materially from those projected for a variety of reasons, including, but not limited to: 1) unanticipated changes in business and economic conditions, the competitive environment, taxing authority interpretations, legislation in Hawaii and the other markets the Company serves, or the timing and interpretation of proposed accounting standards; 2) changes in the Company’s credit quality or risk profile that may increase or decrease the required level of reserve for credit losses; 3) changes in market interest rates that may affect the Company’s credit markets and ability to maintain the Company’s net interest margin; 4) unpredictable costs and other consequences of legal, tax or regulatory matters involving the Company; 5) changes to the amount and timing of the Company’s proposed equity repurchases; 6) real or threatened acts of war or terrorist activity affecting business conditions; and 7) adverse weather, public health, and other natural hazards or conditions impacting the Company and its customers’ operations.  For further discussion of these and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements, please refer to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the U.S. Securities and Exchange Commission.  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements.  The Company does not undertake an obligation to update forward-looking statements to reflect later events or circumstances.
16

 
OVERVIEW
The Company’s net income was $46.9 million and $44.8 million for the third quarter of 2006 and 2005, respectively.  Net income for the first nine months of 2006 was $129.4 million, including a second quarter charge of $8.8 million related to a recently-enacted tax legislation and a Provision for Credit Losses (“Provision”) of $7.6 million.  Net income for the first nine months of 2005 was $136.8 million, including a Provision of $3.0 million.
The return on average assets for the third quarter of 2006 was 1.81% compared to 1.74% for the third quarter of 2005.  The return on average assets for the first nine months of 2006 was 1.70% compared to 1.83% for the first nine months of 2005.  The return on average shareholders’ equity for the third quarter of 2006 was 27.09% compared to 24.61% for the third quarter of 2005.  The return on average shareholders’ equity for the first nine months of 2006 was 24.99% compared to 24.72% for the first nine months of 2005.
The efficiency ratio for the third quarter of 2006 was 50.75% compared to 53.72% for the third quarter of 2005.  The efficiency ratio for the first nine months of 2006 was 51.47% compared to 52.90% for the first nine months of 2005.  Operating leverage, which is defined as the change in income before the Provision and the provision for income taxes, for the third quarter of 2006 compared to the third quarter of 2005 was 6.25%.  Operating leverage for the first nine months of 2006 compared to the first nine months of 2005 was 3.68%.
As of September 30, 2006 and 2005, the ratio of the allowance for loan and lease losses to loans and leases outstanding was 1.40% and 1.48%, respectively.  As of September 30, 2006 and 2005, the leverage capital ratio was 6.90% and 6.98%, respectively.
The Company is in the final year of its 2004 - 2006 plan, which continues to build on the objective of maximizing shareholder value over time.
The 2004 — 2006 plan consists of five key elements:
·              Accelerate revenue growth in our island markets;
·               Better integrate our business segments;
·               Continue to develop our management team;
·               Improve operating efficiency; and
·               Maintain a culture of dependable risk and capital management.
The Company’s financial results as of and for the periods ended September 30, 2006 and 2005 are more fully discussed in the following sections of this report.
The Company’s 2007 — 2009 plan will be discussed in our Annual Report on Form 10-K for the year ending December 31, 2006.
17

Table 1 presents the Company’s financial highlights and performance ratios for the three and nine months ended September 30, 2006 and 2005.
 
Highlights (Unaudited)	Table 1	
 
 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	September 30,	 	September 30,	 	
(dollars in thousands, except per share amounts)	 	2006	 	2005	 	2006	 	2005	 	
For the Period:	 	 	 	 	 	 	 	 	 	
Interest Income	 	$	146,960	 	$	129,234	 	$	423,132	 	$	373,497	 	
Net Interest Income	 	100,350	 	101,960	 	302,408	 	303,657	 	
Net Income	 	46,920	 	44,829	 	129,446	 	136,780	 	
Basic Earnings Per Share	 	0.95	 	0.87	 	2.58	 	2.62	 	
Diluted Earnings Per Share	 	0.93	 	0.85	 	2.53	 	2.55	 	
Dividends Declared Per Share	 	0.37	 	0.33	 	1.11	 	0.99	 	
 	 	 	 	 	 	 	 	 	 	
Net Income to Average Total Assets (ROA)	 	1.81	%	1.74	%	1.70	%	1.83	%	
Net Income to Average Shareholders’ Equity (ROE)	 	27.09	 	24.61	 	24.99	 	24.72	 	
Net Interest Margin1	 	4.20	 	4.30	 	4.29	 	4.36	 	
Efficiency Ratio2	 	50.75	 	53.72	 	51.47	 	52.90	 	
 	 	 	 	 	 	 	 	 	 	
Average Assets	 	$	10,309,314	 	$	10,196,047	 	$	10,190,904	 	$	10,004,968	 	
Average Loans and Leases	 	6,470,862	 	6,170,302	 	6,324,454	 	6,087,629	 	
Average Deposits	 	7,731,993	 	7,833,638	 	7,734,242	 	7,756,789	 	
Average Shareholders’ Equity	 	687,172	 	722,758	 	692,643	 	739,721	 	
Average Shareholders’ Equity to Average Assets	 	6.67	%	7.09	%	6.80	%	7.39	%	
 	 	 	 	 	 	 	 	 	 	
Market Price Per Share of Common Stock:	 	 	 	 	 	 	 	 	 	
Closing	 	$	48.16	 	$	49.22	 	$	48.16	 	$	49.22	 	
High	 	50.75	 	54.44	 	55.15	 	54.44	 	
Low	 	47.00	 	47.44	 	47.00	 	43.82	 	
 
 	 	September 30,	 	
 	 	2006	 	2005	 	
At Period End:	 	 	 	 	 	
Net Loans and Leases	 	$	6,398,262	 	$	6,110,892	 	
Total Assets	 	10,371,215	 	10,085,235	 	
Deposits	 	7,687,123	 	7,756,586	 	
Long-Term Debt	 	265,268	 	242,692	 	
Shareholders’ Equity	 	683,472	 	696,311	 	
 	 	 	 	 	 	
Ratio of Allowance for Loan and Lease Losses
to Loans and Leases Outstanding	 	1.40	%	1.48	%	
Dividend Payout Ratio3	 	38.95	 	37.93	 	
Leverage Capital Ratio	 	6.90	 	6.98	 	
 	 	 	 	 	 	
Book Value Per Common Share	 	$	13.72	 	$	13.58	 	
 	 	 	 	 	 	
Full-Time Equivalent Employees	 	2,589	 	2,591	 	
Branches and Offices	 	86	 	85	 	

1   Net interest margin is defined as net interest income, on a fully-taxable equivalent basis, as a percentage of average earning assets.
2   The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
3   Dividend payout ratio is defined as dividends declared per share divided by basic earnings per share for the quarter.
18

ANALYSIS OF STATEMENTS OF INCOME
Net Interest Income
Net interest income, on a taxable equivalent basis, for the three and nine months ended September 30, 2006 was $100.5 million and $302.9 million, respectively.  This represented a decrease in net interest income, on taxable equivalent basis, for the three and nine months ended September 30, 2006 of $1.6 million and $1.0 million, respectively, as compared to the same periods in 2005.
The net interest margin for the three months ended September 30, 2006 was 4.20%, which represented a 10 basis point decrease from the three months ended September 30, 2005.  The net interest margin for the nine months ended September 30, 2006 was 4.29%, which represented a 7 basis point decrease from the nine months ended September 30, 2005.  The decrease in net interest margin was primarily due to the effects of a flat to inverted yield curve during 2006 coupled with a continued shift in the Company’s funding mix.
Yields on funds sold, investment securities, loans held for sale and all loan and lease categories, except for lease financing, increased for the three and nine months ended September 30, 2006, as compared to the same periods in 2005.  The yield on lease financing was negatively affected by the Tax Increase Prevention and Reconciliation Act (“TIPRA”) legislation, which is further discussed in Note 2 to the Consolidated Financial Statements (Unaudited), and is incorporated herein by reference.  Offsetting the increase in the yield on the Company’s earning assets was the increase in the Company’s funding costs.  The Company’s funding costs were higher for the three and nine months ended September 30, 2006, as compared to the same periods in 2005, primarily due to higher rates paid on deposits, short-term borrowings, and securities sold under agreements to repurchase.
Average loans and leases increased for the three and nine months ended September 30, 2006, by $300.6 million and $236.9 million, respectively, as compared to the same periods in 2005.  The increases in the Company’s average loan and lease portfolio were primarily due to growth in residential mortgage, home equity, and commercial real estate loans.  The Company has benefited from continued economic growth in our key markets.  Average interest-bearing liabilities have increased for the three and nine months ended September 30, 2006, as compared to the same periods in 2005, primarily due to an increase in securities sold under agreements to repurchase.  The Company has placed additional agreements with private entities to provide for sources of liquidity.  Total average interest-bearing demand and savings deposits for the three and nine months ended September 30, 2006, as compared to the same periods in 2005, decreased slightly; however, this was partially offset by growth in time deposits as customers moved their balances to higher yielding products.
Average balances, related income and expenses, and resulting yields and rates are presented in Table 2, on a taxable equivalent basis.  An analysis of the change in net interest income, on a taxable equivalent basis, is presented in Table 3.
 
19

Consolidated Average Balances and Interest Rates - Taxable Equivalent Basis (Unaudited)	Table 2	
 
 	 	Three Months Ended	 	Three Months Ended	 	Nine Months Ended	 	Nine Months Ended	 	
 	 	September 30, 2006	 	September 30, 2005	 	September 30, 2006	 	September 30, 2005	 	
 	 	Average	 	Income/	 	Yield/	 	Average	 	Income/	 	Yield/	 	Average	 	Income/	 	Yield/	 	Average	 	Income/	 	Yield/	 	
(dollars in millions)	 	Balance	 	Expense	 	Rate	 	Balance	 	Expense	 	Rate	 	Balance	 	Expense	 	Rate	 	Balance	 	Expense	 	Rate	 	
Earning Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	$	4.9	 	$	0.1	 	4.12	%	$	6.4	 	$	0.1	 	3.55	%	$	5.3	 	$	0.1	 	3.74	%	$	5.8	 	$	0.1	 	2.69	%	
Funds Sold	 	5.1	 	0.1	 	5.16	 	105.7	 	0.9	 	3.51	 	10.0	 	0.4	 	4.83	 	47.5	 	1.2	 	3.31	 	
Investment Securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Available-for-Sale	 	2,583.0	 	32.1	 	4.97	 	2,574.2	 	28.6	 	4.44	 	2,578.9	 	94.5	 	4.89	 	2,536.3	 	84.0	 	4.42	 	
Held-to-Maturity	 	413.3	 	4.5	 	4.41	 	507.5	 	5.1	 	4.03	 	428.7	 	14.0	 	4.35	 	541.8	 	16.5	 	4.05	 	
Loans Held for Sale	 	8.1	 	0.1	 	6.43	 	17.0	 	0.3	 	5.82	 	9.6	 	0.5	 	6.21	 	15.1	 	0.6	 	5.66	 	
Loans and Leases1	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	1,024.3	 	19.3	 	7.46	 	992.9	 	15.9	 	6.37	 	975.0	 	53.0	 	7.27	 	957.0	 	43.8	 	6.12	 	
Construction	 	232.2	 	4.9	 	8.30	 	164.5	 	2.7	 	6.42	 	184.2	 	11.2	 	8.16	 	131.0	 	5.9	 	5.99	 	
Commercial Mortgage	 	614.0	 	10.5	 	6.77	 	560.2	 	8.4	 	5.95	 	595.1	 	29.6	 	6.65	 	588.3	 	25.8	 	5.85	 	
Residential Mortgage	 	2,454.6	 	36.8	 	6.01	 	2,352.3	 	33.7	 	5.73	 	2,442.2	 	108.7	 	5.93	 	2,338.9	 	99.1	 	5.65	 	
Other Revolving Credit and Installment	 	705.6	 	16.4	 	9.21	 	744.0	 	15.9	 	8.50	 	716.3	 	48.6	 	9.07	 	741.0	 	46.4	 	8.38	 	
Home Equity	 	937.2	 	17.9	 	7.59	 	858.7	 	13.0	 	6.02	 	914.9	 	50.2	 	7.33	 	831.8	 	35.4	 	5.68	 	
Lease Financing	 	503.0	 	4.1	 	3.27	 	497.7	 	4.5	 	3.58	 	496.8	 	12.0	 	3.23	 	499.6	 	13.9	 	3.71	 	
Total Loans and Leases	 	6,470.9	 	109.9	 	6.76	 	6,170.3	 	94.1	 	6.07	 	6,324.5	 	313.3	 	6.62	 	6,087.6	 	270.3	 	5.93	 	
Other	 	79.4	 	0.3	 	1.37	 	79.4	 	0.3	 	1.36	 	79.4	 	0.8	 	1.37	 	66.6	 	1.0	 	1.98	 	
Total Earning Assets2	 	9,564.7	 	147.1	 	6.13	 	9,460.5	 	129.4	 	5.45	 	9,436.4	 	423.6	 	5.99	 	9,300.7	 	373.7	 	5.36	 	
Cash and Noninterest-Bearing Deposits	 	296.5	 	 	 	 	 	316.1	 	 	 	 	 	310.7	 	 	 	 	 	312.5	 	 	 	 	 	
Other Assets	 	448.1	 	 	 	 	 	419.4	 	 	 	 	 	443.8	 	 	 	 	 	391.8	 	 	 	 	 	
Total Assets	 	$	10,309.3	 	 	 	 	 	$	10,196.0	 	 	 	 	 	$	10,190.9	 	 	 	 	 	$	10,005.0	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Demand	 	$	1,618.9	 	4.1	 	1.01	 	$	1,730.7	 	2.9	 	0.66	 	$	1,628.3	 	11.4	 	0.93	 	$	1,672.5	 	6.9	 	0.56	 	
Savings	 	2,641.4	 	10.6	 	1.59	 	2,890.2	 	5.3	 	0.73	 	2,698.5	 	27.1	 	1.34	 	2,944.1	 	14.5	 	0.66	 	
Time	 	1,542.7	 	13.8	 	3.53	 	1,241.9	 	7.6	 	2.42	 	1,429.1	 	34.3	 	3.20	 	1,172.3	 	19.5	 	2.22	 	
Total Interest-Bearing Deposits	 	5,803.0	 	28.5	 	1.95	 	5,862.8	 	15.8	 	1.07	 	5,755.9	 	72.8	 	1.69	 	5,788.9	 	40.9	 	0.95	 	
Short-Term Borrowings	 	179.1	 	2.4	 	5.21	 	107.4	 	1.0	 	3.52	 	192.1	 	7.0	 	4.89	 	133.2	 	2.9	 	2.92	 	
Securities Sold Under Agreements to Repurchase	 	1,005.8	 	11.9	 	4.69	 	845.8	 	6.7	 	3.18	 	878.8	 	29.6	 	4.49	 	695.2	 	14.7	 	2.82	 	
Long-Term Debt	 	248.7	 	3.8	 	6.16	 	242.7	 	3.8	 	6.19	 	244.7	 	11.3	 	6.16	 	244.7	 	11.3	 	6.16	 	
Total Interest-Bearing Liabilities	 	7,236.6	 	46.6	 	2.55	 	7,058.7	 	27.3	 	1.53	 	7,071.5	 	120.7	 	2.28	 	6,862.0	 	69.8	 	1.36	 	
Net Interest Income	 	 	 	$	100.5	 	 	 	 	 	$	102.1	 	 	 	 	 	$	302.9	 	 	 	 	 	$	303.9	 	 	 	
Interest Rate Spread	 	 	 	 	 	3.58	%	 	 	 	 	3.92	%	 	 	 	 	3.71	%	 	 	 	 	4.00	%	
Net Interest Margin	 	 	 	 	 	4.20	%	 	 	 	 	4.30	%	 	 	 	 	4.29	%	 	 	 	 	4.36	%	
Noninterest-Bearing Demand Deposits	 	1,929.0	 	 	 	 	 	1,970.8	 	 	 	 	 	1,978.3	 	 	 	 	 	1,967.9	 	 	 	 	 	
Other Liabilities	 	456.5	 	 	 	 	 	443.7	 	 	 	 	 	448.5	 	 	 	 	 	435.4	 	 	 	 	 	
Shareholders’ Equity	 	687.2	 	 	 	 	 	722.8	 	 	 	 	 	692.6	 	 	 	 	 	739.7	 	 	 	 	 	
Total Liabilities and Shareholders’ Equity	 	$	10,309.3	 	 	 	 	 	$	10,196.0	 	 	 	 	 	$	10,190.9	 	 	 	 	 	$	10,005.0	 	 	 	 	 	

1         Non-performing loans and leases are included in the respective average loan and lease balances.  Income, if any, on such loans and leases is recognized on a cash basis.
2         Interest income includes a taxable-equivalent basis adjustment based upon a statutory tax rate of 35%.
 
20

 
Analysis of Change in Net Interest Income - Taxable Equivalent Basis (Unaudited)	Table 3	
 
 	 	Nine Months Ended	 	
 	 	Sept. 30, 2006 Compared to Sept. 30, 2005	 	
(dollars in millions)	 	Volume 1	 	Rate 1	 	Total	 	
Change in Interest Income:	 	 	 	 	 	 	 	
Funds Sold	 	$	(1.2	)	$	0.4	 	$	(0.8	)	
Investment Securities	 	 	 	 	 	 	 	
Available-for-Sale	 	1.4	 	9.1	 	10.5	 	
Held-to-Maturity	 	(3.6	)	1.1	 	(2.5	)	
Loans Held for Sale	 	(0.2	)	0.1	 	(0.1	)	
Loans and Leases	 	 	 	 	 	 	 	
Commercial and Industrial	 	0.8	 	8.4	 	9.2	 	
Construction	 	2.8	 	2.5	 	5.3	 	
Commercial Mortgage	 	0.3	 	3.5	 	3.8	 	
Residential Mortgage	 	4.5	 	5.1	 	9.6	 	
Other Revolving Credit and Installment	 	(1.5	)	3.7	 	2.2	 	
Home Equity	 	3.8	 	11.0	 	14.8	 	
Lease Financing	 	(0.1	)	(1.8	)	(1.9	)	
Total Loans and Leases	 	10.6	 	32.4	 	43.0	 	
Other	 	0.1	 	(0.3	)	(0.2	)	
Total Change in Interest Income	 	7.1	 	42.8	 	49.9	 	
Change in Interest Expense:	 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	 	 	 	 	 	 	
Demand	 	(0.1	)	4.6	 	4.5	 	
Savings	 	(1.3	)	13.9	 	12.6	 	
Time	 	4.9	 	9.9	 	14.8	 	
Total Interest-Bearing Deposits	 	3.5	 	28.4	 	31.9	 	
Short-Term Borrowings	 	1.6	 	2.5	 	4.1	 	
Securities Sold Under Agreements to Repurchase	 	4.6	 	10.3	 	14.9	 	
Total Change in Interest Expense	 	9.7	 	41.2	 	50.9	 	
Change in Net Interest Income	 	$	(2.6	)	$	1.6	 	$	(1.0	)	

1        The changes for each category of interest income and expense are allocated between the portion of changes attributable to the variance in volume or rate for that category.
Provision for Credit Losses
In the third quarter of 2006, the Company recorded a Provision of $2.8 million as compared to a Provision of $3.0 million in the third quarter of 2005.  The Company recorded a Provision of $7.6 million for the nine months ended September 30, 2006, as compared to a Provision of $3.0 million for the nine months ended September 30, 2005.  The Provision in 2006 and 2005 has been recorded by the Company in order to maintain the reserve for credit losses at levels considered adequate to cover credit losses inherent in the lending process.
Noninterest Income
Noninterest income increased $1.4 million or 2% and $4.2 million or 3% for the three and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005.
Trust and asset management income increased $0.4 million or 3% and $1.1 million or 2% for the three and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005.  The increase in fee income was due to an improvement in market conditions, which resulted in an increase in the average market value of assets under management, and an increase in investment advisory fees on money market assets, partially offset by a decline in special service fees.
21

Mortgage banking income decreased $0.2 million or 9% and increased $0.1 million or 2% for the three and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005.  The decrease in the third quarter of 2006 was primarily due to lower gains on the sale of mortgage loans and lower fee income resulting from a decline in loan production.  The decrease in the third quarter of 2006 was partially offset by a decline in the amortization of mortgage servicing rights as a result of lower loan prepayments.  On a year-to-date comparison, the increase in mortgage banking income was primarily due to the decline in the amortization of mortgage servicing rights, partially offset by lower gains on the sale of mortgage loans.
Service charges on deposit accounts increased $0.7 million or 7% and $0.8 million or 3% for the three and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005.  The increases were primarily due to higher overdraft fees resulting from an increase in the number of transactional deposit accounts.  The increase in overdraft fees was partially offset by lower account analysis fees on analyzed business accounts.
Fees, exchange, and other service charges increased $0.9 million or 6% and $2.2 million or 5% for the three and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005.  The increases were primarily due to higher interchange income as a result of new debit cards issued, as well as an increase in transaction volume from existing debit cardholders.
Insurance income increased $1.4 million or 26% and $1.0 million or 6% for the three and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005.  The increase in the third quarter of 2006 was primarily due to higher commission and brokerage income.  On a year-to-date comparison, the increase was primarily due to higher contingent commission income and commission and brokerage income, partially offset by lower annuity and life insurance product income.
Other noninterest income decreased $1.7 million or 21% and $0.7 million or 4% for the three and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005.  The decreases were primarily due to reductions in gains from the sale of leveraged leased assets from $3.4 million in the third quarter of 2005 to $1.1 million in the third quarter of 2006.  On a year-to-date comparison, the decrease was partially offset by higher mutual fund and retail brokerage income.
Noninterest Expense
Noninterest expense decreased $4.8 million or 6% and $5.1 million or 2% for the three and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005.
Salaries and benefits expense decreased $1.2 million or 3% for the three months ended September 30, 2006 as compared to the same period in 2005 primarily due to lower incentive compensation and share-based compensation expense.  Share-based compensation expense declined primarily as a result of fewer restricted stock units outstanding in 2006 and lower restricted stock amortization expense.  Salaries and benefits expense on a year-to-date comparison remained relatively flat.  Table 4 presents the components of salaries and benefits expense.
22

 
Salaries and Benefits (Unaudited)	Table 4	
 
 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	September 30,	 	September 30,	 	
(dollars in thousands)	 	2006	 	2005	 	2006	 	2005	 	
Salaries	 	$	27,829	 	$	27,652	 	$	82,280	 	$	80,521	 	
Incentive Compensation	 	3,697	 	4,385	 	11,862	 	12,078	 	
Share-Based Compensation	 	1,211	 	1,855	 	4,323	 	5,398	 	
Commission Expense	 	1,721	 	1,864	 	5,476	 	6,397	 	
Retirement and Other Benefits	 	4,454	 	4,512	 	14,522	 	13,717	 	
Payroll Taxes	 	2,117	 	2,091	 	7,799	 	7,749	 	
Medical, Dental, and Life Insurance	 	1,620	 	1,805	 	5,966	 	5,859	 	
Separation Expense	 	484	 	202	 	1,502	 	1,272	 	
Total Salaries and Benefits	 	$	43,133	 	$	44,366	 	$	133,730	 	$	132,991	 	
 
Net equipment expense remained flat for the third quarter of 2006 as compared to the same period in 2005.  On a year-to-date comparison, net equipment expense decreased by $1.1 million or 7% as a result of lower depreciation expense.
Professional fees decreased by $3.1 million or 54% and $6.0 million or 51% for the three and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005.  The decreases were primarily due to the reduction of legal fees as a result of the conclusion of various legal matters.
Provision for Income Taxes
The effective tax rate for the three months ended September 30, 2006 was 37.14% as compared to 35.85% for the same period in 2005.
The effective tax rate for the nine months ended September 30, 2006 was 40.65% as compared to 36.29% for the same period in 2005.  The increase in the effective tax rate, on a year to date basis, was primarily due to the enactment of TIPRA in the second quarter of 2006.  For further information, refer to Note 2 of the Consolidated Financial Statements (Unaudited).
ANALYSIS OF STATEMENTS OF CONDITION
Investment Securities
Investment securities were approximately $3.1 billion as of September 30, 2006, and $3.0 billion as of December 31, 2005 and September 30, 2005.  Investment securities with a book value of $2.0 billion at September 30, 2006, $1.7 billion at December 31, 2005 and $1.6 billion at September 30, 2005 were pledged to secure deposits of government entities and securities sold under agreements to repurchase.
Table 5 presents the details of the investment securities portfolio as of September 30, 2006, December 31, 2005, and September 30, 2005.
23

 
Investment Securities (Unaudited)	Table 5	
 
 	 	Amortized	 	Fair	 	
(dollars in thousands)	 	Cost	 	Value	 	
At September 30, 2006	 	 	 	 	 	
Available-for-Sale:	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Agencies	 	$	264,835	 	$	264,436	 	
Debt Securities Issued by States and Municipalities	 	38,096	 	38,146	 	
Mortgage-Backed Securities	 	2,061,675	 	2,023,711	 	
Other Debt Securities	 	333,213	 	326,340	 	
Total	 	$	2,697,819	 	$	2,652,633	 	
Held-to-Maturity:	 	 	 	 	 	
Debt Securities Issued by States and Municipalities	 	$	30	 	$	31	 	
Mortgage-Backed Securities	 	397,490	 	385,860	 	
Total	 	$	397,520	 	$	385,891	 	
 	 	 	 	 	 	
At December 31, 2005	 	 	 	 	 	
Available-for-Sale:	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Agencies	 	$	100,558	 	$	100,111	 	
Debt Securities Issued by States and Municipalities	 	33,240	 	32,960	 	
Mortgage-Backed Securities	 	2,113,645	 	2,079,852	 	
Other Debt Securities	 	333,418	 	325,292	 	
Total	 	$	2,580,861	 	$	2,538,215	 	
Held-to-Maturity:	 	 	 	 	 	
Debt Securities Issued by States and Municipalities	 	$	70	 	$	72	 	
Mortgage-Backed Securities	 	454,170	 	442,917	 	
Total	 	$	454,240	 	$	442,989	 	
 	 	 	 	 	 	
At September 30, 2005	 	 	 	 	 	
Available-for-Sale:	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Agencies	 	$	102,304	 	$	102,293	 	
Debt Securities Issued by States and Municipalities	 	28,505	 	28,416	 	
Mortgage-Backed Securities	 	2,120,445	 	2,101,625	 	
Other Debt Securities	 	328,564	 	321,628	 	
Total	 	$	2,579,818	 	$	2,553,962	 	
Held-to-Maturity:	 	 	 	 	 	
Debt Securities Issued by States and Municipalities	 	$	70	 	$	73	 	
Mortgage-Backed Securities	 	484,971	 	475,811	 	
Total	 	$	485,041	 	$	475,884	 	
 
24

Table 6 presents temporarily impaired investment securities as of September 30, 2006, December 31, 2005, and September 30, 2005.
 
Temporarily Impaired Investment Securities (Unaudited)	Table 6	
 
 	 	Temporarily Impaired	 	Temporarily Impaired	 	 	 	 	 	
 	 	Less Than 12 Months	 	12 Months or Longer	 	Total	 	
 	 	 	 	Gross	 	 	 	Gross	 	 	 	Gross	 	
 	 	 	 	Unrealized	 	 	 	Unrealized	 	 	 	Unrealized	 	
(dollars in thousands)	 	Fair Value	 	Losses	 	Fair Value	 	Losses	 	Fair Value	 	Losses	 	
September 30, 2006	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury and Agencies	 	$	19,880	 	$	(99	)	$	70,315	 	$	(722	)	$	90,195	 	$	(821	)	
Debt Securities Issued by State and Municipalities	 	770	 	(3	)	20,036	 	(125	)	20,806	 	(128	)	
Mortgage-Backed Securities	 	189,873	 	(2,364	)	1,891,366	 	(50,871	)	2,081,239	 	(53,235	)	
Other Debt Securities	 	—	 	—	 	318,101	 	(6,962	)	318,101	 	(6,962	)	
Total Temporarily Impaired Investment Securities	 	 	 	 	 	 	 	 	 	 	 	 	 	
September 30, 2006	 	$	210,523	 	$	(2,466	)	$	2,299,818	 	$	(58,680	)	$	2,510,341	 	$	(61,146	)	
December 31, 2005	 	$	1,510,314	 	$	(23,833	)	$	1,169,813	 	$	(35,841	)	$	2,680,127	 	$	(59,674	)	
September 30, 2005	 	$	1,972,456	 	$	(23,754	)	$	673,790	 	$	(19,392	)	$	2,646,246	 	$	(43,146	)	
 
The gross unrealized losses on temporarily impaired investment securities at September 30, 2006 represent 2% of the total amortized cost of the Company’s investment securities.  These unrealized losses were primarily due to an increase in interest rates, relative to when the investment securities were purchased.  The Company has both the intent and ability to hold the investment securities for the time necessary to recover the amortized cost.
Loans and Leases
As of September 30, 2006, loans and leases outstanding were $6.5 billion, an increase of $320.5 million from December 31, 2005 and an increase of $286.5 million from September 30, 2005.  Commercial loans increased by $257.2 million or 12% from December 31, 2005 and $170.1 million or 8% from September 30, 2005 mainly due to continued economic growth in our key markets.  Consumer loans increased by $63.3 million or 2% from December 31, 2005 and $116.4 million or 3% from September 30, 2005 primarily as a result of growth in residential mortgage and home equity loans reflecting the continued strength of the Hawaii residential real estate market.  Table 7 presents the composition of the loan and lease portfolio by major categories and Table 8 presents the composition of consumer loans and leases by geographic area.
 
Loan and Lease Portfolio Balances (Unaudited)	Table 7	
 
 	 	September 30,	 	June 30,	 	December 31,	 	September 30,	 	
(dollars in thousands)	 	2006	 	2006	 	2005	 	2005	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	$	994,531	 	$	1,008,618	 	$	918,842	 	$	975,688	 	
Commercial Mortgage	 	635,552	 	619,839	 	558,346	 	574,034	 	
Construction	 	238,995	 	212,490	 	153,682	 	170,030	 	
Lease Financing	 	489,183	 	475,549	 	470,155	 	468,378	 	
Total Commercial	 	2,358,261	 	2,316,496	 	2,101,025	 	2,188,130	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	2,464,240	 	2,457,867	 	2,417,523	 	2,370,391	 	
Home Equity	 	942,743	 	929,386	 	888,075	 	871,771	 	
Other Revolving Credit and Installment	 	701,759	 	714,617	 	736,364	 	745,149	 	
Lease Financing	 	22,054	 	23,259	 	25,549	 	27,105	 	
Total Consumer	 	4,130,796	 	4,125,129	 	4,067,511	 	4,014,416	 	
Total Loans and Leases	 	$	6,489,057	 	$	6,441,625	 	$	6,168,536	 	$	6,202,546	 	

25

 
Consumer Loans and Leases by Geographic Area (Unaudited)	 	Table 8	
 
 	 	September 30,	 	June 30,	 	December 31,	 	September 30,	 	
(dollars in thousands)	 	2006	 	2006	 	2005	 	2005	 	
Hawaii	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	$	2,224,523	 	$	2,223,994	 	$	2,190,034	 	$	2,143,193	 	
Home Equity	 	871,469	 	852,118	 	802,075	 	777,527	 	
Other Revolving Credit and Installment	 	517,929	 	527,759	 	548,971	 	559,008	 	
Lease Financing	 	22,054	 	23,259	 	25,549	 	27,105	 	
 	 	 	 	 	 	 	 	 	 	
Guam	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	230,508	 	224,757	 	221,783	 	221,992	 	
Home Equity	 	11,056	 	10,942	 	9,108	 	8,728	 	
Other Revolving Credit and Installment	 	122,188	 	122,854	 	116,833	 	112,961	 	
 	 	 	 	 	 	 	 	 	 	
U.S. Mainland	 	 	 	 	 	 	 	 	 	
Home Equity	 	55,818	 	61,875	 	72,633	 	81,076	 	
 	 	 	 	 	 	 	 	 	 	
Other Pacific Islands	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	9,209	 	9,116	 	5,706	 	5,206	 	
Home Equity	 	4,400	 	4,451	 	4,259	 	4,440	 	
Other Revolving Credit and Installment	 	61,642	 	64,004	 	70,560	 	73,180	 	
Total Consumer Loans and Leases	 	$	4,130,796	 	$	4,125,129	 	$	4,067,511	 	$	4,014,416	 	
 
Mortgage Servicing Rights
 
As of September 30, 2006, the Company’s portfolio of residential loans serviced for third parties totaled $2.5 billion.  The continued increase in interest rates and lower prepayments on loans from September 30, 2005 to September 30, 2006 were the primary reasons for the increase in the fair value of the mortgage servicing rights.  Recent prepayment speeds for Hawaii mortgages were slightly higher than national averages.
 
Table 9 presents the changes in the carrying value of mortgage servicing rights, net of a valuation allowance.
 
Mortgage Servicing Rights (Unaudited)	 	Table 9	
 
 	 	Nine Months Ended	 	Year Ended	 	Nine Months Ended	 	
(dollars in thousands)	 	September 30, 2006	 	December 31, 2005	 	September 30, 2005	 	
Balance at Beginning of Period	 	$	18,010	 	$	18,769	 	$	18,769	 	
Originated Mortgage Servicing Rights	 	2,871	 	4,533	 	3,559	 	
Amortization	 	(1,886	)	(5,292	)	(4,279	)	
Balance at End of Period	 	$	18,995	 	$	18,010	 	$	18,049	 	
Fair Value at End of Period	 	$	28,580	 	$	25,689	 	$	23,326	 	
 
See Note 1 to the Consolidated Financial Statements (Unaudited) under the caption “Recently Issued Accounting Pronouncements”  for further discussion on mortgage servicing rights.
26

 
Other Assets and Other Liabilities
 
Table 10 presents the major components of other assets and other liabilities.
 
Other Assets and Other Liabilities (Unaudited)	 	Table 10	
 
 	 	September 30,	 	December 31,	 	September 30,	 	
(dollars in thousands)	 	2006	 	2005	 	2005	 	
Other Assets:	 	 	 	 	 	 	 	
Bank-Owned Life Insurance	 	$	154,851	 	$	150,407	 	$	148,870	 	
Federal Home Loan Bank and Federal Reserve Bank Stock	 	79,415	 	79,415	 	79,415	 	
Low Income Housing Investments	 	23,376	 	28,529	 	30,528	 	
Accounts Receivable	 	21,027	 	22,055	 	21,094	 	
Federal Tax Deposit	 	61,000	 	43,000	 	43,000	 	
Other	 	47,040	 	45,769	 	46,715	 	
Total Other Assets	 	$	386,709	 	$	369,175	 	$	369,622	 	
 	 	 	 	 	 	 	 	
Other Liabilities:	 	 	 	 	 	 	 	
Incentive Plans Payable	 	$	9,460	 	$	12,609	 	$	9,896	 	
Insurance Premiums Payable	 	8,516	 	8,395	 	7,189	 	
Reserve for Unfunded Commitments	 	5,372	 	5,077	 	4,513	 	
Self Insurance Reserve	 	5,951	 	6,273	 	6,167	 	
Mortgage Servicing Custody Account	 	5,627	 	3,087	 	5,333	 	
Other	 	56,682	 	68,961	 	64,928	 	
Total Other Liabilities	 	$	91,608	 	$	104,402	 	$	98,026	 	
 
During the second quarter of 2006, an $18.0 million deposit was placed by the Company with the IRS relating to a review by the IRS of the Company’s tax positions for certain leveraged lease transactions.  This deposit is in addition to the $43.0 million deposit placed by the Company with the IRS in 2005 also relating to that review.  The placement of the deposits with the IRS reduces the accrual of additional interest and penalties, which was higher than the Company’s funding costs, associated with the potential underpayment of taxes related to these transactions.  The Company believes its tax position related to these transactions was proper based on applicable statutes, regulations and case laws at the time the transactions were entered into.  The Company believes it has adequate reserves for potential tax exposures related to those leases under review by the IRS as of September 30, 2006.
See Note 1 to the Consolidated Financial Statements (Unaudited) under the caption “Recently Issued Accounting Pronouncements”  for further discussion on leveraged leases and bank-owned life insurance.
Deposits
As of September 30, 2006, total deposits were $7.7 billion, a decrease of $220.3 million and $69.5 million from December 31, 2005 and September 30, 2005, respectively.  Although the number of noninterest-bearing demand deposit accounts increased, balances decreased $255.3 million from December 31, 2005 primarily due to customers moving their balances to higher yielding products.  Interest-bearing demand and savings balances decreased by $69.7 million and $222.3 million, respectively, from December 31, 2005.  The decrease is largely due to migration of retail deposits to higher yielding time deposits, which increased by $326.9 million from December 31, 2005.
Average time deposits of $100,000 or more are presented in Table 11.
Average Time Deposits of $100,000 or More (Unaudited)	 	Table 11	
 
 	 	Three Months Ended	 	Nine Months Ended	 	
(dollars in thousands)	 	Sept. 30, 2006	 	Dec. 31, 2005	 	Sept. 30, 2005	 	Sept. 30, 2006	 	Sept. 30, 2005	 	
Average Time Deposits	 	$	837,042	 	$	695,559	 	$	675,216	 	$	773,267	 	$	632,351	 	

27

 
Securities Sold Under Agreements to Repurchase
 
Securities sold under agreements to repurchase totaled $1.1 billion as of September 30, 2006, an increase of $489.9 million from December 31, 2005 and $342.9 million from September 30, 2005.  The increases from 2005 were primarily due to additional agreements placed with private entities to provide for sources of liquidity.  As of September 30, 2006,  securities sold under agreements to repurchase placed with private entities totaled $600.0 million of which $575.0 million were indexed to the London Inter Bank Offering Rate and $25.0 million were indexed to the 10 year Constant Maturity Swap Rate.  The remaining terms of the private entity agreements range from nine to 15 years.  However, the private entities have the right to terminate the agreements in declining balances over the remaining terms.  If the private entity agreements are not terminated by predetermined dates, the interest rates on the agreements become fixed, at rates ranging from 3.85% to 5.00%, for the remaining term of the respective agreements.  As of September 30, 2006, the average rate for private entity agreements was 4.30%.
Table 12 presents the composition of securities sold under agreements to repurchase.
Securities Sold Under Agreements to Repurchase (Unaudited)	 	Table 12	
 
 	 	September 30,	 	December 31,	 	September 30,	 	
(dollars in thousands)	 	2006	 	2005	 	2005	 	
Government Entities	 	$	499,260	 	$	434,380	 	$	606,407	 	
Private Entities	 	600,000	 	175,000	 	150,000	 	
Total Securities Sold Under Agreements to Repurchase	 	$	1,099,260	 	$	609,380	 	$	756,407	 	
 
Borrowings and Long-Term Debt
Borrowings, including funds purchased and other short-term borrowings, totaled $171.9 million at September 30, 2006, a decrease of $105.7 million from December 31, 2005 and $9.0 million from September 30, 2005.  The decreases in the use of these borrowing instruments were offset by higher balances in securities sold under agreements to repurchase at September 30, 2006.
Long-term debt was $265.3 million at September 30, 2006 and $242.7 million at December 31, 2005 and September 30, 2005.  The increase in the balance from 2005 was due to $25.0 million of new long-term debt which was placed during the third quarter of 2006.  Of that amount, $10.0 million bearing a fixed rate of 6.00% is scheduled to mature in five years and $15.0 million bearing a fixed interest rate of 6.27% is scheduled to mature in 10 years.  Of the total long-term debt, $2.5 million of Federal Home Loan Bank of Seattle (“FHLB”) advances matured in the third quarter of 2006.  For additional information, refer to the “Corporate Risk Profile — Liquidity Management” section of this report.
Shareholders’ Equity
As of September 30, 2006, shareholders’ equity totaled $683.5 million, a 1.4% decrease from December 31, 2005 and a 1.8% decrease from September 30, 2005.  The reduction in shareholders’ equity from 2005 was due to the previously discussed non-cash tax charge which reduced second quarter of 2006 earnings, the Company’s ongoing common stock repurchase program, and dividends paid, partially offset by net income for the first nine months of 2006.  A further discussion of the Company’s capital structure is included in the “Corporate Risk Profile — Capital Management” section of this report.
Guarantees
The Company’s standby letters of credit totaled $84.7 million at September 30, 2006, a decrease of $9.2 million and $18.4 million from December 31, 2005 and September 30, 2005, respectively.
28

 
BUSINESS SEGMENTS
The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services Group and Treasury and Other Corporate.  The Company’s internal management accounting process measures the performance of the business segments based on the management structure of the Company.  This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of interest income, expense overhead, the Provision and capital.  This process is dynamic and requires certain allocations based on judgment and subjective factors.  Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting that is equivalent to U.S. generally accepted accounting principles.  Previously reported results have been reclassified to conform to the current organizational reporting structure.
The Company evaluates several performance measures of the business segments, the most important of which are net income after capital charge (“NIACC”) and risk adjusted return on capital (“RAROC”).  NIACC is economic net income less a charge for the cost of allocated capital.  The cost of allocated capital is determined by multiplying management’s estimate of a shareholder’s minimum required rate of return on the cost of capital invested (currently 11%) by the segment’s allocated equity.  The Company assumes a cost of capital that is equal to a risk-free rate plus a risk premium.  RAROC is the ratio of economic net income to risk-adjusted equity.  Equity is allocated to each business segment based on an assessment of its inherent risk.  The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis.  The basis for the allocation of net interest income is a function of management decisions and assumptions that are subject to change based on changes in current interest rate and market conditions.  Funds transfer pricing also serves to transfer interest rate risk to the Treasury segment.  However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.  The Provision recorded in the Retail Banking, Commercial Banking and Investment Services Group segments represents actual net charge-offs of these segments.  The Provision charged to the Treasury and Other Corporate segment represents residual changes in the level of the reserve for credit losses.  The business segments are charged an economic provision which is a statistically derived estimate of average annual expected credit losses over an economic cycle.
On a consolidated basis, the Company considers NIACC a measure of shareholder value creation.  For the three months ended September 30, 2006, consolidated NIACC was $26.4 million, as compared to $23.1 million for the same period in 2005.  The increase in consolidated NIACC was primarily due to an increase in allocated net income.  The increase in allocated net income was primarily due to an increase in noninterest income and a reduction in noninterest expense, partially offset by a reduction in net interest income.  The increase in noninterest income was primarily due to higher contingent insurance commission income and overdraft fees.  The decrease in noninterest expense was primarily due to a reduction in legal fees and operational losses.  The decrease in net interest income was primarily due to an increase in funding costs.  For the nine months ended September 30, 2006, consolidated NIACC was $66.8 million, as compared to $66.3 million for the same period in 2005.  Allocated net income decreased year over year primarily due to the impact of TIPRA, which repealed the exclusion from federal income taxation of a portion of the income generated by foreign sales corporations.  NIACC benefited from reductions in both economic provision and the charge for capital which partially offset the impact of TIPRA.  See Note 2 to the Consolidated Financial Statements (Unaudited) for further discussion on TIPRA.
29

The financial results for the three and nine months ended September 30, 2006 and 2005 are presented in Table 13 and Note 4 of the Consolidated Financial Statements (Unaudited), which is incorporated herein by reference.
Table 13 summarizes NIACC and RAROC results for the Company’s business segments:
 
Business Segment Selected Financial Information (Unaudited)	 	Table 13	
 
 	 	 	 	 	 	Investment	 	Treasury	 	 	 	
 	 	Retail	 	Commercial	 	Services	 	and Other	 	Consolidated	 	
(dollars in thousands)	 	Banking	 	Banking	 	Group	 	Corporate	 	Total	 	
Three Months Ended September 30, 2006	 	 	 	 	 	 	 	 	 	 	 	
Allocated Net Income	 	$	24,571	 	$	16,024	 	$	3,909	 	$	2,416	 	$	46,920	 	
Allowance Funding Value	 	(202	)	(660	)	(9	)	871	 	—	 	
Provision for Credit Losses	 	2,609	 	480	 	—	 	(304	)	2,785	 	
Economic Provision	 	(3,105	)	(2,158	)	(98	)	—	 	(5,361	)	
Tax Effect of Adjustments	 	258	 	865	 	40	 	(210	)	953	 	
Income Before Capital Charge	 	24,131	 	14,551	 	3,842	 	2,773	 	45,297	 	
Capital Charge	 	(5,425	)	(3,914	)	(1,511	)	(8,048	)	(18,898	)	
Net Income (Loss) After Capital Charge (NIACC)	 	$	18,706	 	$	10,637	 	$	2,331	 	$	(5,275	)	$	26,399	 	
RAROC (ROE for the Company)	 	49	%	41	%	28	%	7	%	27	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Three Months Ended September 30, 2005	 	 	 	 	 	 	 	 	 	 	 	
Allocated Net Income	 	$	21,705	 	$	10,238	 	$	1,424	 	$	11,462	 	$	44,829	 	
Allowance Funding Value	 	(178	)	(586	)	(5	)	769	 	—	 	
Provision for Credit Losses	 	2,946	 	10,564	 	—	 	(10,510	)	3,000	 	
Economic Provision	 	(3,364	)	(2,409	)	(106	)	(1	)	(5,880	)	
Tax Effect of Adjustments	 	221	 	(2,800	)	41	 	3,604	 	1,066	 	
Income Before Capital Charge	 	21,330	 	15,007	 	1,354	 	5,324	 	43,015	 	
Capital Charge	 	(5,481	)	(4,529	)	(1,751	)	(8,114	)	(19,875	)	
Net Income (Loss) After Capital Charge (NIACC)	 	$	15,849	 	$	10,478	 	$	(397	)	$	(2,790	)	$	23,140	 	
RAROC (ROE for the Company)	 	42	%	36	%	8	%	16	%	25	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2006	 	 	 	 	 	 	 	 	 	 	 	
Allocated Net Income	 	$	73,156	 	$	34,594	 	$	10,052	 	$	11,644	 	$	129,446	 	
Allowance Funding Value	 	(589	)	(1,809	)	(25	)	2,423	 	—	 	
Provision for Credit Losses	 	6,965	 	1,218	 	999	 	(1,567	)	7,615	 	
Economic Provision	 	(9,341	)	(6,628	)	(286	)	(1	)	(16,256	)	
Tax Effect of Adjustments	 	1,097	 	2,671	 	(254	)	(316	)	3,198	 	
Income Before Capital Charge	 	71,288	 	30,046	 	10,486	 	12,183	 	124,003	 	
Capital Charge	 	(16,257	)	(12,282	)	(4,727	)	(23,893	)	(57,159	)	
Net Income (Loss) After Capital Charge (NIACC)	 	$	55,031	 	$	17,764	 	$	5,759	 	$	(11,710	)	$	66,844	 	
RAROC (ROE for the Company)	 	48	%	27	%	24	%	12	%	25	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2005	 	 	 	 	 	 	 	 	 	 	 	
Allocated Net Income	 	$	61,140	 	$	38,968	 	$	7,306	 	$	29,366	 	$	136,780	 	
Allowance Funding Value	 	(509	)	(1,788	)	(17	)	2,314	 	—	 	
Provision for Credit Losses	 	9,962	 	11,216	 	(1	)	(18,177	)	3,000	 	
Economic Provision	 	(10,304	)	(7,295	)	(304	)	(2	)	(17,905	)	
Tax Effect of Adjustments	 	315	 	(789	)	119	 	5,871	 	5,516	 	
Income Before Capital Charge	 	60,604	 	40,312	 	7,103	 	19,372	 	127,391	 	
Capital Charge	 	(16,206	)	(13,443	)	(4,959	)	(26,436	)	(61,044	)	
Net Income (Loss) After Capital Charge (NIACC)	 	$	44,398	 	$	26,869	 	$	2,144	 	$	(7,064	)	$	66,347	 	
RAROC (ROE for the Company)	 	41	%	33	%	16	%	16	%	25	%	
 
30

Retail Banking
The Company’s Retail Banking segment offers a broad range of financial products and services to consumers and small businesses.  Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases and installment loans.  Deposit products include checking, savings and time deposit accounts.  The Retail Banking segment also provides merchant services to its small business customers.  Products and services from the Retail Banking segment are delivered to customers through 73 Hawaii branch locations, approximately 500 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service) and a 24-hour telephone banking service.  This segment also offers retail property and casualty insurance products.
The improvement in the segment’s key financial measures for the three and nine months ended September 30, 2006 as compared to the same periods in 2005 was primarily due to an increase in net interest income and noninterest income.  The increase in net interest income was primarily due to higher earnings credits on the segment’s deposit portfolio, as well as loan and lease portfolio growth.  The increase in noninterest income was due to higher interchange income from debit card sales, transaction volume, and higher fee income from policy initiatives as well as growth in the number of transactional deposit accounts.
Commercial Banking
The Commercial Banking segment offers products including corporate banking and commercial real estate loans, lease financing, auto dealer financing, deposit and cash management products, and wholesale property and casualty insurance products.  Lending, deposit, and cash management services are offered to middle-market and large companies in Hawaii.  Commercial real estate mortgages are focused on customers that include investors, developers, and builders primarily domiciled in Hawaii.  The Commercial Banking unit also includes the Company’s operations at 12 branches in the Pacific Islands.
The increase in the segment’s key financial measures for the three months ended September 30, 2006 as compared to the same period in 2005 was primarily due to lower credit risk capital allocated on the segment’s loan portfolio.  The decline in the segment’s key financial measures for the nine months ended September 30, 2006 as compared to the same period in 2005 was the result of a decrease in net interest income and noninterest income, an increase in noninterest expense, and a higher provision for income taxes.  The decline in net interest income was primarily due to the funding charge associated with the IRS deposit and the charge related to the enactment of TIPRA as discussed on Note 2 of the Consolidated Financial Statements (Unaudited).  The decrease in noninterest income was primarily due to higher gains on the sale of leased assets recognized in 2005.  The increase in noninterest expense was due to a credit resulting from the sale of foreclosed real estate property recognized in 2005.  The decrease in the Provision was the result of a leveraged lease charged-off in relation to the bankruptcy of a major airline carrier in the same periods in 2005.  The provision for income taxes also increased due to the impact of the TIPRA.
Investment Services Group
The Investment Services Group includes private banking, trust services, asset management, and institutional investment services.  A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management.  The private banking and personal trust group assists individuals and families in building and preserving their wealth by providing investment, credit, and trust services to high-net-worth individuals.  The asset management group manages portfolios and creates investment products.  Institutional sales and service offers investment advice to corporations, government entities, and foundations.  This segment also provides a full service brokerage offering equities, mutual funds, life insurance, and annuity products.
31

 
The improvement in the segment’s key financial measures for the three and nine months ended September 30, 2006 as compared to the same periods in 2005 was primarily due to an increase in noninterest income and a decrease in noninterest expense.  The growth in noninterest income was primarily due to higher trust and asset management fee income which benefited from improved market conditions.  The net result was an increase in both average market values of assets under management on which a majority of fee income is based and investment advisory fees on money market accounts.  The decrease in noninterest expense was primarily due to lower legal fees and allocated expenses.
Treasury and Other Corporate
The primary income earning component of this segment is Treasury, which consists of corporate asset and liability management activities, including interest rate risk management and foreign exchange business.  This segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, funds sold and purchased, government deposits and short-term and long-term borrowings.  The primary sources of noninterest income are from bank-owned life insurance and foreign exchange income related to customer driven currency requests from merchants and island visitors.  The net residual effect of transfer pricing of assets and liabilities is included in Treasury, along with eliminations of inter-company transactions.
This segment also includes divisions (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) that provide a wide-range of support to the other income earning segments.  Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.
The decrease in the segment’s key financial measures for the three and nine months ended September 30, 2006 as compared to the same periods in 2005 was primarily due to lower net interest income partially offset by lower noninterest expenses and capital charges.  The decrease in net interest income was primarily due to higher funding costs associated with the Company’s deposit portfolio and increases in both rate and volume of short-term borrowings.  Noninterest expenses decreased due to a reduction in share-based compensation expense.  The capital charge was favorably impacted by a reduction of the Company’s excess capital, a result of the Company’s ongoing common stock repurchase program.
32

 
CORPORATE RISK PROFILE
Credit Risk
The Company’s credit risk position remained stable and strong during the first nine months of 2006 with lower levels of internally criticized loans and non-performing assets.  The ratio of non-accrual loans and leases to total loans and leases of 0.08% at September 30, 2006 was slightly lower than the ratio of 0.09% at December 31, 2005.  Annualized net loan and lease charge-offs for the first nine months of 2006 as a percent of average loans and leases outstanding was 0.16%, a decrease from 0.45% for the same period in 2005.
The Company’s favorable credit risk profile reflected sustained growth in the Hawaii and Mainland economies, improving economic conditions in Guam, as well as disciplined commercial and retail underwriting and portfolio management.  The quality of the Hawaii-based portfolio was sustained by a growing local economy, led by construction and real estate industries and continued strength in domestic visitor arrivals, despite higher energy costs and increasing inflationary trends.
Relative to the Company’s total loan and lease portfolio, domestic airline carriers continued to demonstrate a higher risk profile due to fuel costs, pension plan obligations, and marginal pricing power.  In the evaluation of the Reserve for Credit Losses (the “Reserve”), the Company considered the ongoing financial issues within the airline industry, which offset the impact of the improvement in other components of the loan and lease portfolio.  Table 14 below summarizes the Company’s air transportation credit exposure.
 
Air Transportation Credit Exposure 1 (Unaudited)	 	Table 14	
 
 	 	September 30, 2006	 	Dec. 31, 2005	 	Sept. 30, 2005	 	
 	 	 	 	Unused	 	Total	 	Total	 	Total	 	
(dollars in thousands)	 	Outstanding	 	Commitments	 	Exposure	 	Exposure	 	Exposure	 	
Passenger Carriers Based In the United States	 	$	68,045	 	$	—	 	$	68,045	 	$	68,829	 	$	70,678	 	
Passenger Carriers Based Outside the United States	 	19,475	 	—	 	19,475	 	20,678	 	21,573	 	
Cargo Carriers	 	13,240	 	—	 	13,240	 	13,240	 	13,240	 	
Total Air Transportation Credit Exposure	 	$	100,760	 	$	—	 	$	100,760	 	$	102,747	 	$	105,491	 	

1      Exposure includes loans, leveraged leases and operating leases.
Non-Performing Assets
Non-performing assets (“NPAs”) consist of non-accrual loans and leases, foreclosed real estate and other non-performing investments.  The Company’s NPAs were $5.4 million as of September 30, 2006.  NPAs decreased by $1.0 million from December 31, 2005 and by $2.8 million from September 30, 2005.  The decrease in NPAs from 2005 was primarily due to the pay-off of a $1.5 million credit facility in December 2005.
Included in NPAs are loans considered impaired.  Impaired loans are defined as those which the Company believes it is probable it will not collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans were $0.2 million, $0.1 million, and $1.6 million as of September 30, 2006, December 31, 2005, and September 30, 2005, respectively.  The decrease in impaired loans from September 30, 2005 was primarily due to the pay-off of a $1.5 million credit facility noted above.
33

 
Loans and Leases Past Due 90 Days or More and Still Accruing Interest
Consisting primarily of residential mortgages and personal unsecured lines of credit, accruing loans and leases past due 90 days or more were $3.0 million as of September 30, 2006, an increase of $0.1 million from December 31, 2005 and a decrease of $0.2 million from September 30, 2005.  Accruing loans and leases past due 90 days or more increased by $0.2 million from June 30, 2006 primarily due to timing of renewed maturities in the second quarter which acted to reduce this amount during that period.
 
Refer to Table 15 for further information on non-performing assets and accruing loans and leases past due 90 days or more.
Consolidated Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More (Unaudited)	 	Table 15	
 
 	 	September 30,	 	June 30,	 	March 31,	 	December 31,	 	September 30,	 	
(dollars in thousands)	 	2006	 	2006	 	2006	 	2005	 	2005	 	
Non-Performing Assets	 	 	 	 	 	 	 	 	 	 	 	
Non-Accrual Loans and Leases	 	 	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	$	400	 	$	227	 	$	236	 	$	212	 	$	471	 	
Commercial Mortgage	 	44	 	48	 	52	 	130	 	1,617	 	
Lease Financing	 	—	 	—	 	—	 	—	 	4	 	
Total Commercial	 	444	 	275	 	288	 	342	 	2,092	 	
Consumer	 	 	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	4,253	 	4,628	 	4,922	 	5,439	 	5,021	 	
Home Equity	 	254	 	204	 	38	 	39	 	41	 	
Total Consumer	 	4,507	 	4,832	 	4,960	 	5,478	 	5,062	 	
Total Non-Accrual Loans and Leases	 	4,951	 	5,107	 	5,248	 	5,820	 	7,154	 	
Foreclosed Real Estate	 	409	 	188	 	358	 	358	 	413	 	
Other Investments	 	82	 	82	 	300	 	300	 	683	 	
Total Non-Performing Assets	 	$	5,442	 	$	5,377	 	$	5,906	 	$	6,478	 	$	8,250	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Accruing Loans and Leases Past Due 90 Days or More	 	 	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	$	882	 	$	1,157	 	$	464	 	$	1,132	 	$	1,545	 	
Home Equity	 	62	 	86	 	85	 	185	 	83	 	
Other Revolving Credit and Installment	 	2,044	 	1,561	 	1,390	 	1,504	 	1,479	 	
Lease Financing	 	—	 	—	 	18	 	29	 	51	 	
Total Accruing Loans and Leases Past Due 90 Days or More	 	$	2,988	 	$	2,804	 	$	1,957	 	$	2,850	 	$	3,158	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Loans and Leases	 	$	6,489,057	 	$	6,441,625	 	$	6,246,125	 	$	6,168,536	 	$	6,202,546	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of Non-Accrual Loans and Leases to Total Loans and Leases	 	0.08	%	0.08	%	0.08	%	0.09	%	0.12	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of Non-Performing Assets to Total Loans and Leases,
Foreclosed Real Estate, and Other Investments	 	0.08	%	0.08	%	0.09	%	0.11	%	0.13	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of Non-Performing Assets and Accruing Loans and Leases
Past Due 90 Days or More to Total Loans and Leases	 	0.13	%	0.13	%	0.13	%	0.15	%	0.18	%	
 	 	 	 	 	 	 	 	 	 	 	 	
Quarter to Quarter Changes in Non-Performing Assets	 	 	 	 	 	 	 	 	 	 	 	
Balance at Beginning of Quarter	 	$	5,377	 	$	5,906	 	$	6,478	 	$	8,250	 	$	10,920	 	
Additions	 	1,507	 	1,509	 	907	 	1,191	 	919	 	
Reductions	 	 	 	 	 	 	 	 	 	 	 	
Payments	 	(848	)	(1,347	)	(445	)	(2,345	)	(1,326	)	
Return to Accrual	 	(382	)	(260	)	(985	)	(231	)	(2,007	)	
Sales of Foreclosed Assets	 	(20	)	(99	)	—	 	(122	)	—	 	
Charge-offs/Write-downs	 	(192	)	(332	)	(49	)	(265	)	(256	)	
Total Reductions	 	(1,442	)	(2,038	)	(1,479	)	(2,963	)	(3,589	)	
Balance at End of Quarter	 	$	5,442	 	$	5,377	 	$	5,906	 	$	6,478	 	$	8,250	 	
 
34

 
Reserve for Credit Losses
The Company maintains a Reserve which consists of two components, the Allowance for Loan and Lease Losses (“Allowance”) and a Reserve for Unfunded Commitments (“Unfunded Reserve”).  The Reserve provides for the risk of credit losses inherent in the lending process and is based on loss estimates derived from a comprehensive quarterly evaluation.  The evaluation reflects analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment to address observed changes in trends, conditions, other relevant environmental and economic factors.
The level of the Allowance and the Unfunded Reserve is adjusted as a result of the provisioning process.  After considering the evaluation criteria above and net charge-offs, the changes in the Allowance and the Unfunded Reserve resulted in a $7.6 million Provision being recorded for the nine months ended September 30, 2006.  As a result, the Allowance and the Unfunded Reserve were relatively unchanged from December 31, 2005 reflecting a relatively stable asset quality environment during this period.  The ratio of the Allowance to total loans and leases outstanding was 1.40% at September 30, 2006, a decrease of eight basis points from December 31, 2005, primarily due to the increase in loans and leases outstanding.  A summary of the Reserve is presented in Table 16.
Consolidated Reserve for Credit Losses (Unaudited)	 	Table 16	
 
 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	September 30,	 	September 30,	 	
(dollars in thousands)	 	2006	 	2005	 	2006	 	2005	 	
Balance at Beginning of Period	 	$	96,167	 	$	106,163	 	$	96,167	 	$	113,596	 	
Loans and Leases Charged-Off	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	(593	)	(620	)	(1,653	)	(1,775	)	
Lease Financing	 	—	 	(10,049	)	—	 	(10,049	)	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	—	 	(130	)	(39	)	(512	)	
Home Equity	 	(211	)	(26	)	(438	)	(723	)	
Other Revolving Credit and Installment	 	(3,982	)	(4,488	)	(12,703	)	(13,617	)	
Lease Financing	 	(18	)	(6	)	(30	)	(69	)	
Total Loans and Leases Charged-Off	 	(4,804	)	(15,319	)	(14,863	)	(26,745	)	
Recoveries on Loans and Leases Previously Charged-Off	 	 	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	 	325	 	528	 	2,064	 	1,281	 	
Commercial Mortgage	 	84	 	146	 	509	 	240	 	
Lease Financing	 	1	 	—	 	1	 	162	 	
Consumer	 	 	 	 	 	 	 	 	 	
Residential Mortgage	 	223	 	190	 	464	 	485	 	
Home Equity	 	120	 	130	 	308	 	315	 	
Other Revolving Credit and Installment	 	1,250	 	1,322	 	3,870	 	3,775	 	
Lease Financing	 	16	 	7	 	32	 	58	 	
Total Recoveries on Loans and Leases Previously Charged-Off	 	2,019	 	2,323	 	7,248	 	6,316	 	
Net Loan and Lease Charge-Offs	 	(2,785	)	(12,996	)	(7,615	)	(20,429	)	
Provision for Credit Losses	 	2,785	 	3,000	 	7,615	 	3,000	 	
Balance at End of Period1	 	$	96,167	 	$	96,167	 	$	96,167	 	$	96,167	 	
 	 	 	 	 	 	 	 	 	 	
Components	 	 	 	 	 	 	 	 	 	
Allowance for Loan and Lease Losses	 	$	90,795	 	$	91,654	 	$	90,795	 	$	91,654	 	
Reserve for Unfunded Commitments	 	5,372	 	4,513	 	5,372	 	4,513	 	
Total Reserve for Credit Losses	 	$	96,167	 	$	96,167	 	$	96,167	 	$	96,167	 	
Average Loans and Leases Outstanding	 	$	6,470,862	 	$	6,170,302	 	$	6,324,454	 	$	6,087,629	 	
 	 	 	 	 	 	 	 	 	 	
Ratio of Net Loan and Lease Charge-Offs to	 	 	 	 	 	 	 	 	 	
Average Loans and Leases Outstanding (annualized)	 	0.17	%	0.84	%	0.16	%	0.45	%	
Ratio of Allowance for Loans and Lease Losses to Loans and Leases Outstanding	 	1.40	%	1.48	%	1.40	%	1.48	%	

1      Included in this analysis is activity related to the Company’s reserve for unfunded commitments, which is separately recorded in other liabilities in the Consolidated Statements of Condition (Unaudited).
35

Market Risk
Market risk is the potential of loss arising from adverse changes in interest rates and prices.  The Company is exposed to market risk as a consequence of the normal course of conducting its business activities.  Financial products that expose the Company to market risk include investment securities, loans and leases, deposits, debt and derivative financial instruments.  The Company’s market risk management process involves measuring, monitoring, controlling and managing risks that can significantly impact the Company’s financial position and results of operations.  In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance and shareholder value, while limiting the volatility of each.  The activities associated with these market risks are categorized into “trading” and “other than trading.”
The Company’s trading activities include foreign currency and foreign exchange contracts that expose the Company to a minor degree of foreign currency risk.  These transactions are primarily executed on behalf of customers and at times for the Company’s own account.
The Company’s “other than trading” activities include normal business transactions (e.g., managing the Company’s investment portfolio and foreign exchange transactions for customers) that expose the Company’s balance sheet profile to varying degrees of market risk.
Interest Rate Risk
The Company’s balance sheet is sensitive to changes in the general level of interest rates.  Interest rate risk arises primarily from the Company’s normal business activities of originating loans and leases and accepting deposits.  Many other factors also affect the Company’s exposure to changes in interest rates, such as general economic and financial conditions, historical pricing relationships and repricing characteristics of instruments.
The objective of the Company’s interest rate risk management is to maximize Net Interest Income (“NII”) over the short-term and long-term while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
In managing interest rate risk, the Company, through the Asset/Liability Management Committee (“ALCO”), measures short-term and long-term sensitivities to changes in interest rates.  ALCO utilizes several techniques to manage interest rate risk, which include shifting balance sheet mix or altering the interest rate characteristics of assets and liabilities, changing product pricing strategies, modifying investment portfolio characteristics, or using derivative financial instruments.  Expected movements in interest rates are also considered in managing interest rate risk.  Thus, as interest rates change, the Company may use different techniques to manage interest rate risk.  While available as a tool to manage interest rate risk, the use of derivative financial instruments has been limited over the past several years.
NII Sensitivity — The Company utilizes NII simulations to analyze short-term income sensitivities to changes in interest rates.  Table 17 presents, as of September 30, 2006 and 2005, an estimate of the change in NII during a quarterly time frame that would result from a gradual 100 and 200 basis point increase or decrease in interest rates, moving in a parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario for NII without any change in strategy.  Based on the NII simulation as of September 30, 2006, the Company’s balance sheet is approximately neutral to parallel changes in interest rates.  To analyze the impact in a more realistic manner, non-parallel rate scenarios are simulated.  These tests and analyses indicate that NII may decrease from the base case scenario should the yield curve stay inverted for a period of time.  Conversely, if the yield curve should become positively sloped from its current inverted profile, NII may increase.
36

 
Net Interest Income Sensitivity Profile (Unaudited)	 	Table 17	
 
 	 	Change in Net Interest Income Per Quarter	 	
(dollars in thousands)	 	September 30, 2006	 	September 30, 2005	 	
Change in Interest Rates (basis points)	 	 	 	 	 	 	 	 	 	
+200	 	$	(985	)	(1.0	)%	$	1,827	 	1.8	%	
+100	 	(394	)	(0.4	)	985	 	1.0	 	
-100	 	(197	)	(0.2	)	(1,746	)	(1.7	)	
-200	 	(985	)	(1.0	)	(3,958	)	(3.9	)	

Market Value of Portfolio Equity (“MVPE”) Sensitivity — The MVPE represents the Company’s estimate of the discounted present value of net cash flows derived from individual tangible assets and liabilities and off-balance sheet financial arrangements.  As of September 30, 2006 and 2005, the MVPE was approximately $1.8 billion.  To measure long-term exposure to changes in interest rates, the Company analyzes MVPE sensitivity.  The MVPE sensitivity measures the net present value change in the Company’s assets and liabilities from changes in interest rates.  Table 18 presents, as of September 30, 2006 and 2005, an estimate of the change in MVPE that would occur from an instantaneous 100 and 200 basis point increase or decrease in interest rates, moving in a parallel fashion over the entire yield curve.  Further enhancing the MVPE analysis are value-at-risk (“VAR”), key rate analysis, duration of equity and the exposure to basis risk and non-parallel yield curve shifts.  There are inherent limitations to these measures; however, used along with the MVPE analysis, the Company obtains better overall insight for managing its exposure to changes in interest rates.  Based on the additional analyses, the Company estimates its greatest exposure is in scenarios where medium term rates rise on a relative basis more than short-term and long-term rates.
 
Market Value of Equity Sensitivity Profile (Unaudited)	 	Table 18	
 
 	 	Change in Market Value of Equity	 	
(dollars in thousands)	 	September 30, 2006	 	September 30, 2005	 	
Change in Interest Rates (basis points)	 	 	 	 	 	 	 	 	 	
+200	 	$	(164,648	)	(9.2	)%	$	(55,028	)	(2.8	)%	
+100	 	(72,414	)	(4.0	)	(12,629	)	(0.7	)	
-100	 	5,767	 	0.3	 	(57,529	)	(3.0	)	
-200	 	(87,037	)	(4.8	)	(217,252	)	(11.2	)	

In addition, results of the interest rate risk exposures, particularly NII and MVPE sensitivities, duration of equity and VAR are measured against established ALCO guidelines.  Within ALCO guidelines, NII and MVPE exposures are further managed based on forecasted interest rate changes and certain management targets.  ALCO guidelines are determined by the amount of available capital and provide some flexibility in managing exposures to actual and expected changes in rates.  Since the results are highly dependent on modeling assumptions, assumptions are reviewed regularly.
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 and satisfy obligations in a normal manner.
The Bank is a member of the FHLB, which provides an additional source of short-term and long-term funding.  Outstanding borrowings from the FHLB were $75.0 million at September 30, 2006 at a weighted average interest rate of 3.73%.  Outstanding borrowings were $77.5 million at December 31, 2005 and September 30, 2005.  A total of $25.0 million will mature in less than one year.
37

 
Additionally, the Bank maintains a $1.0 billion senior and subordinated bank note program.  Under this facility, the Bank may issue additional notes provided that the aggregate amount outstanding does not exceed $1.0 billion.  Subordinated notes outstanding under this bank note program totaled $124.8 million at September 30, 2006, December 31, 2005, and September 30, 2005 at a fixed interest rate of 6.875%.
Capital Management
The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies.  The Company’s objective is to hold sufficient capital on a regulatory basis to exceed the minimum guidelines of a “well capitalized” financial institution, while over the long-term optimize shareholder value, support asset growth, reflect risks inherent in its markets and provide protection against unforeseen losses.
At September 30, 2006, shareholders’ equity totaled $683.5 million, a 1.4% net decrease from December 31, 2005.  The decrease in shareholders’ equity during the first nine months of 2006 was due to the previously discussed non-cash tax charge which reduced second quarter of 2006 earnings, the Company’s ongoing common stock repurchase program, and dividends paid, partially offset by net income.
During the nine months ended September 30, 2006, 2.1 million shares of common stock were repurchased under the share repurchase program at an average cost of $51.09 per share, totaling $109.5 million.  From the beginning of the share repurchase program in July 2001 through September 30, 2006, the Company repurchased a total of 42.1 million shares and returned in excess of $1.4 billion to its shareholders at an average cost of $34.22 per share.  From October 1, 2006 through October 20, 2006, the Company repurchased an additional 122,500 shares of common stock at an average cost of $48.36 per share for a total of $5.9 million, resulting in remaining buyback authority under the share repurchase program of $102.5 million.
In October 2006, the Company’s Board of Directors declared a quarterly cash dividend of $0.41 per share on the Company’s outstanding shares.  The dividend will be payable on December 14, 2006 to shareholders of record at the close of business on November 30, 2006.
Table 19 presents the regulatory capital and ratios as of September 30, 2006, December 31, 2005 and September 30, 2005.
 
Regulatory Capital and Ratios (Unaudited)	 	Table 19	
 
 	 	Sept. 30,	 	Dec. 31,	 	Sept. 30,	 	
(dollars in thousands)	 	2006	 	2005	 	2005	 	
Regulatory Capital	 	 	 	 	 	 	 	 	
Shareholders’ Equity	 	$	683,472	 	$	693,352	 	$	696,311	 	
Add: 8.25% Capital Securities of Bancorp Hawaii Capital Trust I	 	31,425	 	31,425	 	31,425	 	
Less: Goodwill	 	34,959	 	34,959	 	34,959	 	
 Net Unrealized Losses on Investment Securities Available-for-Sale	 	(28,899	)	(27,281	)	(16,528	)	
Tier 1 Capital	 	708,837	 	717,099	 	709,305	 	
Allowable Reserve for Credit Losses	 	90,723	 	86,617	 	86,700	 	
Qualifying Subordinated Debt	 	49,937	 	74,883	 	74,876	 	
Unrealized Gains on Investment Securities Available-for-Sale	 	20	 	—	 	—	 	
Total Regulatory Capital	 	$	849,517	 	$	878,599	 	$	870,881	 	
 	 	 	 	 	 	 	 	
Risk-Weighted Assets	 	$	7,252,429	 	$	6,919,822	 	$	6,926,535	 	
 	 	 	 	 	 	 	 	
Key Regulatory Capital Ratios	 	 	 	 	 	 	 	 	
Tier 1 Capital Ratio	 	9.77	%	10.36	%	10.24	%	
Total Capital Ratio	 	11.71	 	12.70	 	12.57	 	
Leverage Capital Ratio	 	6.90	 	7.14	 	6.98	 	

38

Financial Outlook
The Company’s previous earnings estimate of approximately $178 million in net income for the full year of 2006 remains unchanged.  An analysis of credit quality is performed quarterly to determine the adequacy of the Reserve.  This analysis determines the timing and amount of the Provision.
Item 3.            Quantitative and Qualitative Disclosures About Market Risk
See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Market Risk and Interest Rate Risk.
Item 4.            Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2006.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2006.  There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the third quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II - Other Information
Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities (Unaudited)	
 
Period	 	Total Number of
Shares Purchased 1	 	Average Price
Paid Per Share	 	Total Number of 
Shares Purchased as 
Part of Publicly 
Announced Plans or
 Programs	 	Approximate Dollar 
Value of Shares that 
May Yet Be Purchased
 Under the Plans or
 Programs  2	 	
July 1 - 31, 2006	 	125,000	 	$	48.98	 	125,000	 	$	48,917,359	 	
August 1 - 31, 2006	 	493,231	 	49.26	 	490,000	 	24,782,220	 	
September 1 - 30, 2006	 	335,000	 	48.72	 	335,000	 	8,461,994	 	
Total	 	953,231	 	49.03	 	950,000	 	 	 	

1      The month of August included 3,231 vested shares purchased from employees in connection with stock option exercises.  These shares were not purchased as part of the publicly announced program.  The shares were purchased at the closing price of the Company’s common stock on the dates of purchase.  There were no vested shares in the month of July and September.
2      The Company repurchased shares during the third quarter of 2006 pursuant to its ongoing share repurchase program that was first announced in July 2001.  As of October 20, 2006, $102.5 million remained of the total $1.55 billion total repurchase amount authorized by the Company’s Board of Directors under the share repurchase program.  The program has no set expiration or termination date.
39

 
Item 5.            Other Information
On Sunday, October 15, 2006, Hawaii experienced a magnitude 6.7 earthquake centered near the Big Island of Hawaii.  The Company did not experience any significant loss to its premises, equipment, or data as a result of the earthquake.  Although the Company is still evaluating the effects of the earthquake, at this time the Company is not aware of any material loss or disruption to the operations or assets of its customers that could have a material impact on the Company’s results of operations or financial condition.
Item 6.            Exhibits
 	Exhibit Index	 	
 	 	 	 	
 	Exhibit Number	 	
 	 	 	 	
 	12	Statement Regarding Computation of Ratios	 	
 	 	 	 	
 	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Executive Officer	 	
 	 	 	 	
 	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Financial Officer	 	
 	 	 	 	
 	32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer	 	

 	 	 	 	
 
40

Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: October 25, 2006	Bank of Hawaii Corporation and Subsidiaries	 	

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

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

 	 	 	 	 	
 
41

Exhibit Index
Exhibit Number	 	

12	 	Statement Regarding Computation of Ratios	 	
 	 	 	 	
31.1	 	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Executive Officer	 	
 	 	 	 	
31.2	 	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Financial Officer	 	
 	 	 	 	
32	 	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer	 	

 	 	 	 	
 
42

Exhibit 12
Bank of Hawaii Corporation and Subsidiaries
Statement Regarding Computation of Ratios
(Unaudited)
 
 	 	Nine Months Ended	 	
 	 	September 30,	 	
(dollars in thousands)	 	2006	 	2005	 	
Earnings:	 	 	 	 	 	
1.   Income Before Provision for Income Taxes	 	$	218,088	 	$	214,699	 	
2.   Plus: Fixed Charges Including Interest on Deposits	 	120,724	 	69,840	 	
3.   Earnings Including Fixed Charges and Including Interest on Deposits	 	338,812	 	284,539	 	
4.   Less: Interest on Deposits	 	72,753	 	40,947	 	
5.   Earnings Excluding Interest on Deposits	 	$	266,059	 	$	243,592	 	
 	 	 	 	 	 	
Fixed Charges:	 	 	 	 	 	
6.   Fixed Charges Including Interest on Deposits	 	$	120,724	 	$	69,840	 	
7.   Less: Interest on Deposits	 	72,753	 	40,947	 	
8.   Fixed Charges Excluding Interest on Deposits	 	$	47,971	 	$	28,893	 	
 	 	 	 	 	 	
Ratio of Earnings to Fixed Charges:	 	 	 	 	 	
Including Interest on Deposits (Line 3 divided by Line 6)	 	2.8	x	4.1	x	
Excluding Interest on Deposits (Line 5 divided by Line 8)	 	5.5	x	8.4	x	

Exhibit 31.1
Bank of Hawaii Corporation and Subsidiaries
Rule 13a-14(a) Certifications
I, Allan R. Landon, certify that:
1.               I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;
2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)             Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)              Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)             Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)             Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:  October 25, 2006
 	/s/ Allan R. Landon	 	
 	Allan R. Landon	
 	Chairman of the Board,	
 	Chief Executive Officer, and President	

Exhibit 31.2
Bank of Hawaii Corporation and Subsidiaries
Rule 13a-14(a) Certifications
I, Richard C. Keene, certify that:
1.     I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;
2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)             Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)              Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)             Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)             Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:  October 25, 2006
 	/s/ Richard C. Keene	 	
 	Richard C. Keene	
 	Chief Financial Officer	

Exhibit 32
Bank of Hawaii Corporation and Subsidiaries
Section 1350 Certification,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
We hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-Q of Bank of Hawaii Corporation (the “Issuer”) for the quarterly period ended September 30, 2006 (the “Periodic Report”):
·                  fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
·                  the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Date:  October 25, 2006
 	/s/ Allan R. Landon	 	
 	Allan R. Landon	
 	Chairman of the Board,	
 	Chief Executive Officer, and President	
 
 	/s/ Richard C. Keene	 	
 	Richard C. Keene	
 	Chief Financial Officer	
 
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Periodic Report or as a separate disclosure document.