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

FORM 10-K

(Mark One)        

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

 
    For the fiscal year ended December 31, 2011    

 

 

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
(State of incorporation)
  99-0148992
(I.R.S. Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii
(Address of principal executive offices)
  96813
(Zip Code)

1-888-643-3888
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $.01 Par Value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o    No ý

The aggregate market value of the registrant's outstanding voting common stock held by non-affiliates on June 30, 2011 (the last business day of the registrant's most recently completed second fiscal quarter), determined using the per share closing price on that date on the New York Stock Exchange of $46.52, was approximately $2,169,588,083. There was no non-voting common equity of the registrant outstanding on that date.

As of February 14, 2012, there were 45,904,973 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement relating to the 2012 Annual Meeting of Shareholders to be held on April 27, 2012, are incorporated by reference into Part III of this Report.

   


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Bank of Hawaii Corporation
2011 Form 10-K Annual Report
Table of Contents

   
 
  Item Number    
  Page  
Part I   Item 1.   Business     2  
    Item 1A.   Risk Factors     7  
    Item 1B.   Unresolved Staff Comments     13  
    Item 2.   Properties     13  
    Item 3.   Legal Proceedings     13  
   
Part II   Item 5.   Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     14  
    Item 6.   Selected Financial Data     16  
    Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations     18  
    Item 7A.   Quantitative and Qualitative Disclosures About Market Risk     55  
    Item 8.   Financial Statements and Supplementary Data     56  
    Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     117  
    Item 9A.   Controls and Procedures     117  
    Item 9B.   Other Information     119  
   
Part III   Item 10.   Directors, Executive Officers and Corporate Governance     119  
    Item 11.   Executive Compensation     119  
    Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     119  
    Item 13.   Certain Relationships and Related Transactions, and Director Independence     119  
    Item 14.   Principal Accounting Fees and Services     119  
   
Part IV   Item 15.   Exhibits, Financial Statement Schedules     120  

Signatures

 

 

 

 

 

 

124

 

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Part I

Item 1.    Business

General

Bank of Hawaii Corporation (the "Parent") is a Delaware corporation and a bank holding company ("BHC") headquartered in Honolulu, Hawaii.

The Parent's principal and only operating subsidiary, Bank of Hawaii (the "Bank"), was organized on December 17, 1897 and is chartered by the State of Hawaii. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") and the Bank is a member of the Federal Reserve System.

The Bank provides a broad range of financial services and products primarily to customers in Hawaii, Guam, and other Pacific Islands. References to "we," "our," "us," or "the Company" refer to the Parent and its subsidiaries that are consolidated for financial reporting purposes.

The Bank's subsidiaries include Bank of Hawaii Leasing, Inc., Bankoh Investment Services, Inc., Pacific Century Life Insurance Corporation, BOH Wholesale Insurance Agency, Inc. (formerly known as Triad Insurance Agency, Inc.), and Bank of Hawaii Insurance Services, Inc. The Bank's subsidiaries are engaged in equipment leasing, securities brokerage, investment services, wholesale insurance, and insurance agency services.

We are organized into four business segments for management reporting purposes: Retail Banking, Commercial Banking, Investment Services, and Treasury and Other. See Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") and Note 13 to the Consolidated Financial Statements for more information.

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports can be found free of charge on our website at www.boh.com as soon as reasonably practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC"). The SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our Corporate Governance Guidelines; charters of the Audit and Risk Committee, the Executive and Strategic Planning Committee, the Human Resources and Compensation Committee, and the Nominating and Corporate Governance Committee; and our Code of Business Conduct and Ethics are available on our website at www.boh.com. Printed copies of this information may be obtained, without charge, by written request to the Corporate Secretary at 130 Merchant Street, Honolulu, Hawaii, 96813.

The Parent's other subsidiary is the BOHC Investment Fund, LLC (the "Fund"). The Fund was organized in September 2007, to invest in and hold securities of Qualified High Technology Businesses, as defined in the Hawaii Revised Statutes.

Competition

The Company is subject to intense competition from traditional financial service providers including banks, savings associations, credit unions, mortgage companies, finance companies, mutual funds, brokerage firms, insurance companies, and other non-traditional providers of financial services including financial service subsidiaries of commercial and manufacturing companies. Some of our competitors are not subject to the same level of regulation and oversight that is required of banks and BHCs. As a result, some of our competitors may have lower cost structures. Also, some of our competitors, through alternative delivery channels such as the Internet, may be based outside of the markets that we serve. By emphasizing our extensive branch network, exceptional service levels, and knowledge of local trends and conditions, we believe the Company has developed an effective competitive advantage.

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Supervision and Regulation

Our operations are subject to extensive regulation by federal and state governmental authorities. The regulations are primarily intended to protect depositors, customers, and the integrity of the U.S. banking system. The following information describes some of the more significant laws and regulations applicable to us. The description is qualified in its entirety by reference to the applicable laws and regulations. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures, and with the various bank regulatory agencies. Changes in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on our business, operations, and earnings.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") became effective. This new law has broadly affected the financial services industry by implementing changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services industry, and will continue to significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including the Company and the Bank. Under the Dodd-Frank Act a broad range of new rules and regulations by various federal agencies have been implemented, and further rulemaking must be proposed and adopted which will take effect over several years. Although we have already experienced some decrease in revenue as a result of the rules already implemented under the Dodd-Frank Act, it remains difficult to anticipate the overall financial impact the Dodd-Frank Act will have on the Company, our customers or the financial industry in general.

The Parent

The Parent is registered as a BHC under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to the supervision of and to examination by the Board of Governors of the Federal Reserve Bank (the "FRB"). The Parent is also registered as a financial institution holding company under the Hawaii Code of Financial Institutions (the "Code") and is subject to the registration, reporting, and examination requirements of the Code.

The BHC Act prohibits, with certain exceptions, a BHC from acquiring beneficial ownership or control of more than 5% of the voting shares of any company, including a bank, without the FRB's prior approval. The Act also prohibits a BHC from engaging in any activity other than banking, managing or controlling banks or other subsidiaries authorized under the BHC Act, or furnishing services to or performing services for its subsidiaries.

Under the BHC Act, a BHC may elect to become a financial holding company and thereby engage in a broader range of financial and other activities than are permissible for traditional BHCs. In order to qualify for the election, all of the depository institution subsidiaries of the BHC must be well-capitalized and well-managed. Additionally, all of its insured depository institution subsidiaries must have achieved a rating of "satisfactory" or better under the Community Reinvestment Act (the "CRA"). Financial holding companies are permitted to engage in activities that are "financial in nature"; activities incidental to or complementary of the financial activities of traditional BHCs, as determined by the FRB. The Parent has not elected to become a financial holding company.

Under FRB policy, a BHC is expected to serve as a source of financial and management strength to its subsidiary bank. A BHC is also expected to commit resources to support its subsidiary bank in circumstances where it might not do so absent such a policy. Under this policy, a BHC is expected to stand ready to provide adequate capital funds to its subsidiary bank during periods of financial adversity and to maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary bank.

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act, banks and bank holding companies from any state are permitted to acquire banks located in any other state, subject to certain conditions, including certain nationwide and state-imposed deposit concentration limits. The Bank also has the ability, subject to certain restrictions, to acquire branches outside its home state by acquisition or merger. The establishment of new interstate branches is also possible in those states with laws that expressly permit de novo branching. Because the Code permits de novo branching by out-of-state banks, those banks may establish new branches in Hawaii. Interstate branches are subject to certain laws of the states in which they are located.

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Bank of Hawaii

The Bank is subject to supervision and examination by the FRB of San Francisco and the State of Hawaii Department of Commerce and Consumer Affairs' ("DCCA") Division of Financial Institutions. The Bank is subject to extensive federal and state regulations that significantly affect business and activities. These regulatory bodies have broad authority to implement standards and to initiate proceedings designed to prohibit depository institutions from engaging in activities that represent unsafe or unsound banking practices or constitute violations of applicable laws, rules, regulations, administrative orders, or written agreements with regulators. The standards relate generally to operations and management, asset quality, interest rate exposure, capital, and executive compensation. These regulatory bodies are authorized to take action against institutions that fail to meet such standards, including the assessment of civil monetary penalties, the issuance of cease-and-desist orders, and other actions.

Bankoh Investment Services, Inc., the broker dealer subsidiary of the Bank, is incorporated in Hawaii and is regulated by the Financial Industry Regulatory Authority, and the DCCA's Business Registration Division. The Bank's insurance subsidiaries, BOH Wholesale Insurance Agency, Inc. and Bank of Hawaii Insurance Services, Inc. are incorporated in Hawaii and are regulated by the DCCA's Division of Insurance. Pacific Century Life Insurance Corporation is incorporated in Arizona and is regulated by the State of Arizona Department of Insurance.

Capital Requirements

The federal bank regulatory agencies have issued substantially similar risk-based and leverage capital guidelines applicable to BHCs and the banks they supervise. Under the risk-based capital requirements, the Company and the Bank are each generally required to maintain a minimum ratio of total capital to risk-weighted assets of 8% to be considered "adequately capitalized." At least half of the total capital is to be composed of common equity, retained earnings, and qualifying perpetual preferred stock, less certain intangibles ("Tier 1 Capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of the allowance for loan and lease losses ("Tier 2 Capital") and, together with Tier 1 Capital, equals total capital ("Total Capital"). Risk-weighted assets are calculated by taking assets and credit equivalent amounts of off-balance-sheet items and assigning them to one of several broad risk categories. The risk categories are assigned according to the obligor, or, if relevant, to the guarantor, or to the nature of the collateral. The aggregate dollar value of the amount in each category is then multiplied by the risk weight associated with that category.

BHCs and banks are also required to maintain minimum leverage ratios established by the federal bank regulatory agencies. These requirements provide for a minimum leverage ratio of Tier 1 Capital to adjusted quarterly average assets ("Tier 1 Leverage Ratio") equal to 3% to be considered "adequately capitalized" for BHCs and banks that have the highest regulatory rating and are not experiencing significant growth or expansion. All other BHCs and banks will generally be required to maintain a Tier 1 Leverage Ratio of at least 100 to 200 basis points above the stated minimum. See Note 11 to the Consolidated Financial Statements for capital ratios for the Company and the Bank.

The risk-based capital standards identify concentrations of credit risk and the risk arising from non-traditional banking activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by the agencies in assessing an institution's overall capital adequacy. The capital guidelines also provide that exposure to a decline in the economic value of an institution's capital due to changes in interest rates is a factor to be considered in evaluating a bank's capital adequacy.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") the federal banking agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. FDICIA identifies five capital categories for insured depository institutions: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Under regulations established by the federal banking agencies, a "well capitalized" institution must have a Tier 1 Capital Ratio of at least 6%, a Total Capital Ratio of at least 10%, a Tier 1 Leverage Ratio of at least 5%, and not be subject to a capital directive order. As of December 31, 2011, the Bank was classified as "well capitalized." The classification of a depository institution under FDICIA is primarily for the purpose of applying the federal banking agencies'

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prompt corrective action provisions, and is not intended to be, nor should it be interpreted as, a representation of the overall financial condition or the prospects of that financial institution.

On December 16, 2010, the oversight body of the Basel Committee on Banking Supervision published the final text of the Basel III package of reforms regarding capital, leverage, and liquidity. See the "Regulatory Initiatives Related to Liquidity and Capital" section in MD&A for more information.

Dividend Restrictions

The Parent is a legal entity separate and distinct from the Bank. The Parent's principal source of funds to pay dividends on its common stock and to service its debt is dividends from the Bank. Various federal and state laws and regulations limit the amount of dividends the Bank may pay to the Parent without regulatory approval. The FRB is authorized to determine the circumstances when the payment of dividends would be an unsafe or unsound practice and to prohibit such payments. The right of the Parent, its shareholders, and creditors, to participate in any distribution of the assets or earnings of its subsidiaries is also subject to the prior claims of creditors of those subsidiaries.

For information regarding the limitations on the Bank's ability to pay dividends to the Parent, see Note 11 to the Consolidated Financial Statements.

Transactions with Affiliates and Insiders

Under federal law, the Bank is subject to restrictions that limit the transfer of funds or other items of value to the Parent, and any other non-bank affiliates in so-called "covered transactions." In general, covered transactions include loans, leases, other extensions of credit, investments and asset purchases, as well as other transactions involving the transfer of value from the Bank to an affiliate or for the benefit of an affiliate. The Dodd-Frank Act broadened the definition of affiliate, and the definition of covered transaction to include securities lending, repurchase agreements, and derivative transactions that the Bank may have with an affiliate. The Dodd-Frank Act also strengthened the collateral requirements and limited FRB exemptive authority.

Unless an exemption applies, 1) covered transactions by the Bank with a single affiliate are limited to 10% of the Bank's capital and surplus, and 2) with respect to all covered transactions with affiliates in the aggregate, to 20% of the Bank's capital and surplus.

The Federal Reserve Act also requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other non-affiliated persons. The Federal Reserve has issued Regulation W which codifies the above restrictions on transactions with affiliates.

The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to as "insiders") contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such loans can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus. The definition of "extension of credit" for transactions with executive officers, directors, and principal shareholders was also expanded under the Dodd-Frank Act to include credit exposure arising from a derivative transaction, a repurchase or reverse repurchase agreement, and securities lending or borrowing transactions.

FDIC Insurance

The Deposit Insurance Fund ("DIF") of the FDIC insures deposit accounts in the Bank up to a maximum amount of $250,000 per depositor, per institution, for each account ownership category as defined by the FDIC. On November 9, 2010, the FDIC issued a final rule to implement a provision of the Dodd-Frank Act that provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts at all FDIC-insured depository institutions. Institutions cannot opt out of this coverage, nor will the FDIC charge a separate assessment for the insurance. On December 29, 2010, President Obama signed into law an amendment to the Federal Deposit Insurance Act to include Interest on Lawyers Trust Accounts ("IOLTA") within the definition of noninterest-bearing transaction accounts. This amendment will provide IOLTAs with the same temporary, unlimited insurance coverage afforded to noninterest-bearing transaction accounts under the Dodd-Frank Act. This unlimited coverage for noninterest-bearing transaction

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accounts became effective on December 31, 2010 and terminates on December 31, 2012.

FDIC-insured depository institutions are required to pay deposit insurance premiums based on the risk an institution poses to the DIF. In order to restore reserves and ensure that the DIF will be able to adequately cover losses from future bank failures, the FDIC approved new deposit insurance rules in November 2009. These new rules required insured depository institutions to prepay their estimated quarterly risk-based assessments for all of 2010, 2011, and 2012. On December 30, 2009, the Bank prepaid its assessment in the amount of $42.3 million related to years 2010 through 2012. As of December 31, 2011 the remaining balance of our prepaid FDIC assessment was $22.6 million.

As required by the Dodd-Frank Act, on February 7, 2011, the FDIC finalized new rules which redefined the base for FDIC insurance assessments from the amount of insured deposits to "average consolidated total assets less average tangible equity." A new rate schedule and other revisions to the assessment rules became effective April 1, 2011, and were used to calculate the June 2011 assessments which were due in September 2011. The FDIC's final rules also eliminated risk categories and debt ratings from the assessment calculation for large banks (over $10.0 billion) and will instead use scorecards that the FDIC believes better reflect risks to the DIF. Our FDIC insurance assessment for 2011 was approximately $9.3 million.

Other Safety and Soundness Regulations

As required by FDICIA, the federal banking agencies' prompt corrective action powers impose progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. These actions can include: requiring an insured depository institution to adopt a capital restoration plan guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution.

The federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation and benefits. The federal regulatory agencies may take action against a financial institution that does not meet such standards.

Community Reinvestment and Consumer Protection Laws

In connection with its lending activities, the Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Community Reinvestment Act (the "CRA"). In addition, federal banking regulators, pursuant to the Gramm-Leach-Bliley Act, have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated third parties.

The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The Bank received an "outstanding" rating in its most recent CRA evaluation.

The Dodd-Frank Act also created the Consumer Financial Protection Bureau (the "CFPB"), an independent bureau within the FRB that is responsible for implementing, examining and enforcing compliance with federal consumer financial laws. The CFPB has broad rule-making, supervisory and examination authority to set and enforce rules in the consumer protection area over financial institutions that have assets of $10.0 billion or more, such as the Bank. The Dodd-Frank Act also gives the CFPB expanded data collecting powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices. The consumer complaint function has also been consolidated into the CFPB.

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Several major regulatory and legislative initiatives adopted under the Dodd-Frank Act will have significant future impacts on our business and financial results. Amendments to Regulation E, which implement the Electronic Funds Transfer Act (the "EFTA"), involve changes to the way banks may charge overdraft fees by limiting our ability to charge an overdraft fee for ATM and one-time debit card transactions that overdraw a consumer's account, unless the consumer affirmatively consents to payment of overdrafts for those transactions. Additional amendments to the EFTA include the "Durbin Amendment," which mandates limiting debit card interchange fees that banks may charge merchants.

Additional rulemakings to come under the Dodd-Frank Act will dictate compliance changes for lenders and financial institutions, particularly in the areas of mortgage reform involving the Real Estate Settlement Procedures Act, the Truth in Lending Act, the fair lending laws and the fair debt collection practices laws. Any such changes in regulations or regulatory policies applicable to the Bank make it difficult to predict the ultimate effect on our financial condition or results of operations.

Bank Secrecy Act / Anti-Money Laundering Laws

The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. The USA PATRIOT Act substantially broadened the scope of U.S. anti-money laundering laws and regulations by creating new laws, regulations, and penalties, imposing significant new compliance and due diligence obligations, and expanding the extra-territorial jurisdiction of the U.S. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report potential money laundering and terrorist financing and to verify the identity of its customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and BHC acquisitions.

Employees

As of December 31, 2011, we had approximately 2,400 employees.

Item 1A.    Risk Factors

There are a number of risks and uncertainties that could negatively affect our business, financial condition or results of operations. The risks and uncertainties described below are some of the important inherent risk factors that could affect our business and operations, although they are not the only risks that may have a material adverse affect on the Company.

Changes in business and economic conditions, in particular those of Hawaii and the Pacific Islands (Guam, nearby islands, and American Samoa), could lead to lower revenue, lower asset quality, and lower earnings.

Unlike larger national or other regional banks that are more geographically diversified, our business and earnings are closely tied to the economies of Hawaii and the Pacific Islands. These local economies rely on tourism, real estate, government, and other service-based industries. Declines in tourism, real or threatened acts of war or terrorism, increases in energy costs, the availability of affordable air transportation, natural disasters and adverse weather, public health issues, and State of Hawaii and County budget issues impact consumer and corporate spending. As a result, such events may contribute to the deterioration in general economic conditions in our markets which could adversely impact us and our customers' operations. Although economic conditions in Hawaii have not deteriorated to the same extent as in other geographic areas, such conditions could decline further. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic calamities, unemployment or other factors could impact these local economic conditions and could negatively affect the Company's financial condition, results of operations and cash flows. Hawaii's economy continued to show signs of recovery during 2011 due to increasing visitor arrivals and spending. However, deterioration of economic conditions or the slow pace of economic recovery could adversely affect the quality of our assets, credit losses, and the demand for our products and services, which could lead to lower revenues and lower earnings.

The level of visitor arrivals and spending, housing prices, and unemployment rates are some of the metrics that we continually monitor. We also monitor the value of collateral, such as real estate, that secures the loans we have made. The borrowing

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power of our customers could also be impacted by a decline in the value of collateral.

Changes in defense spending by the federal government as a result of congressional budget cuts could adversely impact the economy in Hawaii and the Pacific Islands.

The U.S. military has a major presence in Hawaii and the Pacific Islands. As a result, the U.S. military is an important aspect of the economies in which we operate. Recent proposals to cut defense and other security spending could have an adverse impact on the economies in which we operate, which could adversely affect our business, financial condition, and results of operations.

Difficult market conditions and economic trends have adversely affected our industry.

The banking industry continues to be affected by sharp declines in the real estate market, high levels of unemployment, low loan demand, and low interest margins. Dramatic declines in the national housing market over the past several years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions. Although economic conditions in Hawaii and the U.S. are showing signs of recovery, a further decline in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment could have an adverse effect on our borrowers and/or their customers, which could adversely affect our financial condition and results of operations. Continued economic conditions that negatively affect the housing market, the job market and the demand for other goods and services could cause the credit quality of the Company's loan portfolios to deteriorate, which would have a negative impact on the Company's business.

Real estate values in Hawaii continued to be somewhat more resilient than many markets on the U.S. Mainland over the past two years. However, there is no assurance that Hawaii real estate values will continue to be more resilient than U.S. Mainland markets. Market turmoil and the tightening of credit has led to an increased level of commercial and consumer delinquencies, a lack of confidence in the financial sector, and increased volatility in the financial markets. The resulting economic pressure on consumers and lack of confidence in the financial markets may adversely affect our business, financial condition, and results of operations.

Risks from the debt crisis in Europe could result in a disruption of the financial markets which may have a detrimental impact on global economic conditions and affect economic conditions in Hawaii.

There remains considerable uncertainty as to future developments in the European debt crisis and the impact on financial markets. Market and economic disruptions have affected, and may continue to affect, consumer confidence levels, spending, and credit factors, such that our business and results of operations could be adversely affected.

Changes in interest rates could adversely impact our results of operations and capital.

Our earnings are highly dependent on the spread between the interest earned on loans, leases, and investment securities and the interest paid on deposits and borrowings. Changes in market interest rates impact the rates earned on loans, leases, and investment securities and the rates paid on deposits and borrowings. In addition, changes to market interest rates could impact the level of loans, leases, investment securities, deposits, and borrowings, and the credit profile of our current borrowers. Interest rates are affected by many factors beyond our control, and fluctuate in response to general economic conditions, currency fluctuations, and the monetary and fiscal policies of various governmental and regulatory authorities. Changes in monetary policy, including changes in interest rates, will influence the origination of loans and leases, the purchase of investments, the generation of deposits, and the rates received on loans and investment securities and paid on deposits. Any substantial prolonged change in market interest rates may negatively impact our ability to attract deposits, originate loans and leases, and achieve satisfactory interest rate spreads, any of which could adversely affect our financial condition or results of operations.

Credit losses could increase if economic conditions stagnate or deteriorate.

Although there are indications of an economic recovery nationally and in Hawaii, increased credit losses for us could result if economic conditions stagnate or deteriorate. The risk of nonpayment of loans and leases is inherent in all lending activities. We maintain a reserve for credit losses to absorb estimated probable credit losses inherent in the loan, lease, and commitment portfolios as of the balance sheet date. Management makes various assumptions and judgments about the loan and lease portfolio in

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determining the level of the reserve for credit losses. Many of these assumptions are based on current economic conditions. Should economic conditions stagnate or deteriorate nationally or in Hawaii, we may experience higher credit losses in future periods.

Inability of our borrowers to make timely repayments on their loans, or decreases in real estate collateral values may result in increased delinquencies, foreclosures, and customer bankruptcies, any of which could have a material adverse effect on our operating results.

Legislation and regulatory initiatives affecting the financial services industry, including restrictions and requirements, could detrimentally affect the Company's business.

In light of current conditions and the market expectation of a slow economic recovery, regulators have increased their focus on the regulation of financial institutions. Laws and regulations, and in particular banking, securities and tax laws, are under intense scrutiny because of the current economic environment. As a result, we continue to monitor regulatory changes and the associated costs of compliance, which could detrimentally affect our business.

Much of the Dodd-Frank Act remains to be implemented through rulemaking, creating uncertainty for the Company and the financial services industry in general. Some of the provisions of the Dodd-Frank Act that have adversely impacted the Company include the Durbin Amendment which mandates a limit to debit card interchange fees and the FRB's amendments to Regulation E of the EFTA regarding overdraft fees. In future periods, these provisions may limit the type of products we offer, the methods by which we offer them, and the prices at which they are offered. These provisions may also increase our costs in offering these products in the future.

The regulation of most consumer financial products and services will be the responsibility of the newly created CFPB. However, regulation of overall safety and soundness, the CRA, federal housing and flood insurance, as they pertain to consumer financial products and services, will remain with the FRB. The CFPB will have broad rule-making, supervisory and examination authority, as well as expanded data collecting and enforcement powers over depository institutions with more than $10.0 billion in assets. Much of the rules and regulations of the CFPB have not been implemented, and therefore, the scope and impact of the CFPB's actions cannot be determined at this time. This creates significant uncertainty for the Company and the financial services industry in general.

These new laws, regulations, and changes may increase our costs of regulatory compliance. They may significantly affect the markets in which we do business, the markets for and value of our investments, and our ongoing operations, costs, and profitability. The future impact of the many provisions of the Dodd-Frank Act and other legislative and regulatory initiatives on the Company's business and results of operations will depend upon regulatory interpretation and rulemaking that will be undertaken over the next several months and years. As a result, we are unable to predict the ultimate impact of the Dodd-Frank Act or of other future legislation or regulation, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition, and results of operations.

Changes in the capital, leverage and liquidity requirements for financial institutions could materially affect future requirements of the Company.

Under Basel III, financial institutions are required to have more capital and a higher quality of capital. Basel III also imposes a leverage ratio requirement and liquidity standards. Implementation of these new capital and liquidity requirements has created significant uncertainty with respect to the future requirements for financial institutions. These new requirements may result in increases to our capital, liquidity, and disclosure requirements. See the "Regulatory Initiatives Related to Liquidity and Capital" section in MD&A for more information.

Consumer protection initiatives related to the foreclosure process could affect our remedies as a creditor.

Proposed consumer protection initiatives related to the foreclosure process, including voluntary and/or mandatory programs intended to permit or require lenders to consider loan modifications or other alternatives to foreclosure, could increase our credit losses or increase our expense in pursuing our remedies as a creditor.

For example, in May 2011, a new Hawaii foreclosure law ("Act 48") overhauled rules for nonjudicial, or

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out-of-court, foreclosures. Previously, nonjudicial foreclosures were how lenders handled the vast majority of foreclosures in Hawaii, as the process was quicker and less expensive than going through court. Act 48 was intended to curb potential lender abuses while providing qualified owner-occupants an option to have a dispute resolution professional assist with foreclosure mitigation in front of a lender's representative before a foreclosure sale can proceed. However, Act 48 has had the unintended effect of lenders forgoing nonjudicial foreclosures entirely and filing all foreclosures in court, creating a backlog that threatens to slow the judicial foreclosure process. Currently there are several foreclosure-related bills being considered by the state legislature, many of which seek to amend Act 48. The manner in which these issues are ultimately resolved could impact our foreclosure procedures, which in turn could affect our financial condition or results of operations. In addition, the recent joint federal-state settlement with several mortgage servicers over foreclosure practice abuses creates additional uncertainty for the Company and the mortgage servicing industry in general as it relates to the implementation of mortgage loan modifications and loss mitigation practices in the future.

Competition may adversely affect our business.

Our future depends on our ability to compete effectively. We compete for deposits, loans, leases, and other financial services with a variety of competitors, including banks, thrifts, credit unions, mortgage companies, broker dealers, and insurance companies all of which may be based in or outside of Hawaii and the Pacific Islands. We will continue to experience intense competition as the trend for further consolidation in the financial services industry continues. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. Failure to effectively compete, innovate, and to make effective use of available channels to deliver our products and services could adversely affect our financial condition or results of operations.

Our liquidity is dependent on dividends from the Bank.

The Parent is a separate and distinct legal entity from the Bank. The Parent receives substantially all of its cash in the form of dividends from the Bank. These dividends are the principal source of funds to pay, for example, dividends on the Parent's common stock or to repurchase common stock under our share repurchase program. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Parent. If the amount of dividends paid by the Bank is further limited, the Parent's ability to meet its obligations, pay dividends to shareholders, or repurchase stock, may be further limited.

An interruption or breach in security of our information systems may result in financial losses, loss of customers, or damage to our reputation.

We rely heavily on communications and information systems to conduct our business. In addition, we rely on third parties to provide key components of our infrastructure, including loan, deposit and general ledger processing, internet connections, and network access. These types of information and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our customers. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. As a financial institution, we face a heightened risk of a security breach or disruption from threats to gain unauthorized access to our and our customers' data and financial information, whether through cyber attack, cyber intrusion over the internet, malware, computer viruses, attachments to e-mails, spoofing, phishing, or spyware.

Our customers have been, and will continue to be, targeted by parties using fraudulent emails and other communications to misappropriate passwords, credit card numbers, or other personal information or to introduce viruses or other malware through "trojan horse" programs to our customers' computers. These communications appear to be legitimate messages sent by the Bank, but direct recipients to fake websites operated by the sender of the e-mail or request that the recipient send a password or other confidential information via e-mail or download a program. Despite our efforts to mitigate these tactics through product improvements and customer education, such attempted frauds remain a serious problem that may cause customer and/or Bank losses, damage to our brand, and increase in our costs.

Although we make significant efforts to maintain the security and integrity of our information systems and

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we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber attacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. A security breach or other significant disruption could: 1) Disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; 2) Result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers, including account numbers and other financial information; 3) Result in a violation of applicable privacy and other laws, subjecting the Bank to additional regulatory scrutiny and expose the Bank to civil litigation and possible financial liability; 4) Require significant management attention and resources to remedy the damages that result; or 5) Harm our reputation or cause a decrease in the number of customers that choose to do business with us. The occurrence of any such failures, disruptions or security breaches could have a negative impact on our results of operations, financial condition, and cash flows.

Negative public opinion could damage our reputation and adversely impact our earnings and liquidity.

Reputational risk, or the risk to our business, earnings, liquidity, and capital from negative public opinion could result from our actual or alleged conduct in a variety of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues, or inadequate protection of customer information. We expend significant resources to comply with regulatory requirements. Failure to comply could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers, and adversely impact our earnings and liquidity.

We are subject to certain litigation, and our expenses related to this litigation may adversely affect our results.

We are, from time to time, involved in various legal proceedings arising from our normal business activities. These claims and legal actions, including supervisory actions by our regulators, could involve large monetary claims and significant defense costs. The outcome of these cases is uncertain. Substantial legal liability or significant regulatory action against us could have material financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. We may be exposed to substantial uninsured liabilities, which could materially affect our results of operations and financial condition. Based on information currently available, we believe that the eventual outcome of known actions against us will not be materially in excess of such amounts accrued by us. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters may be material to our statement of income for any particular period.

Changes in income tax laws or interpretations or in accounting standards could materially affect our financial condition or results of operations.

Changes in income tax laws could be enacted, or interpretations of existing income tax laws could change, causing an adverse effect to our financial condition or results of operations. Similarly, our accounting policies and methods are fundamental to how we report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the value of our assets, liabilities, and financial results. Periodically, new accounting standards are imposed or existing standards are revised, changing the methods for preparing our financial statements. These changes are not within our control and may significantly impact our financial condition and results of operations.

Our performance depends on attracting and retaining key employees and skilled personnel to operate our business effectively.

Our success is dependent on our ability to recruit qualified and skilled personnel to operate our business effectively. Competition for these qualified and skilled people is intense. There are a limited number of qualified personnel in the markets we serve, so our success depends in part on the

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continued services of many of our current management and other key employees. Failure to retain our key employees and maintain adequate staffing of qualified personnel could adversely impact our operations and our ability to compete.

The soundness of other financial institutions, as counterparties, may adversely impact our financial condition or results of operations.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, lending, counterparty, or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions or the financial services industry in general have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. We have exposure to many different industries and counterparties, and we routinely execute transactions with brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. Such losses could materially affect our financial condition or results of operations.

Changes in the capital markets could materially affect the level of assets under management and the demand for our other fee-based services.

Changes in the capital markets could affect the volume of income from and demand for our fee-based services. Our investment management revenues depend in large part on the level of assets under management. Market volatility that leads customers to liquidate investments, move investments to other institutions or asset classes, as well as lower asset values can reduce our level of assets under management and thereby decrease our investment management revenues.

Our mortgage banking income may experience significant volatility.

Our mortgage banking income is highly influenced by the level and direction of mortgage interest rates, real estate activity, and refinancing activity. Interest rates can affect the amount of mortgage banking activity and impact fee income and the fair value of our mortgage servicing rights. Mortgage banking income may also be impacted by changes in our strategy to manage our residential mortgage portfolio. For example, we may occasionally change the proportion of our loan originations that are sold in the secondary market and added to our loan portfolio.

Our investment in the Federal Home Loan Bank of Seattle (the "FHLB") stock may be subject to impairment charges in future periods if the financial condition of the FHLB further declines.

The Bank is a member of the FHLB, and as such, is required to hold FHLB stock as a condition of membership. As of December 31, 2011, the carrying value of our FHLB stock was $61.3 million and consisted of 612,924 shares valued at a par value of $100 per share. As of December 31, 2011, the Bank held 375,608 shares in excess of the minimum number of shares the Bank was required to hold as a condition of membership. Ownership of FHLB stock is restricted and can only be redeemed or sold at their par value and only to the FHLB or to another member institution. In August 2009, the FHLB received a capital classification of "undercapitalized" from their primary regulator, the Federal Housing Finance Agency (the "Finance Agency").

In October 2010, the Finance Agency and the FHLB agreed to the stipulation and issuance of a Consent Order by the Finance Agency that sets forth requirements for capital management, asset composition, and other operational and risk management improvements. The Consent Order required the FHLB to meet certain minimum financial metrics by the end of the Stabilization period and maintain them for each quarter end thereafter. Based on the FHLB's Form 10-Q for the period ended September 30, 2011, with the exception of not meeting the retained earnings requirement as of June 30, 2011, the FHLB met all minimum financial metrics at each quarter end during the Stabilization Period and as of the quarter ended September 30, 2011. However, until the Finance Agency determines that the FHLB has met the requirements of the Consent Order, the FHLB expects that it will remain classified as "undercapitalized." As such, the FHLB remains restricted from redeeming or repurchasing capital stock or paying dividends.

See discussion in MD&A and Note 7 to the Consolidated Financial Statements related to the

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impairment analysis of our FHLB stock as of December 31, 2011.

The requirement to record certain assets and liabilities at fair value may adversely affect our financial results.

We report certain assets, including available-for-sale investment securities, at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we record these assets at their estimated fair value, we may incur losses even if the asset in question presents minimal credit risk. The level of interest rates can impact the estimated fair value of investment securities. Disruptions in the capital markets may require us to recognize other-than-temporary impairments in future periods with respect to investment securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of our investment securities and our estimation of the anticipated recovery period.

Changes to the amount and timing of proposed common stock repurchases

The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, applicable SEC rules, and various other factors.

Item 1B.    Unresolved Staff Comments

Not Applicable.

Item 2.    Properties

Our principal offices are located in the Financial Plaza of the Pacific in Honolulu, Hawaii. We own and lease other branch offices and operating facilities located throughout Hawaii and the Pacific Islands.

Item 3.    Legal Proceedings

See discussion of Legal Proceedings in Note 18 to the Consolidated Financial Statements.

Executive Officers of the Registrant

Listed below are executive officers of the Parent as of February 28, 2012.

Peter S. Ho, 46
Chairman and Chief Executive Officer since July 2010 and President since April 2008; Vice Chairman and Chief Banking Officer from January 2006 to April 2008.

Kent T. Lucien, 58
Vice Chairman and Chief Financial Officer since April 2008; Trustee, C. Brewer & Co., Ltd. from April 2006 to December 2007.

Peter M. Biggs, 60
Vice Chairman, Retail Banking since February 2011; Senior Executive Vice President, Consumer Products Division from March 2006 to February 2011.

Wayne Y. Hamano, 57
Vice Chairman since December 2008 and Chief Commercial Officer since September 2007; Senior Executive Vice President, Hawaii Commercial Banking Division from July 2006 to September 2007.

Mark A. Rossi, 63
Vice Chairman, Chief Administrative Officer, General Counsel, and Corporate Secretary since February 2007; President of Lane Powell PC from July 2004 to January 2007.

Mary E. Sellers, 55
Vice Chairman and Chief Risk Officer since July 2005.

Donna A. Tanoue, 57
Vice Chairman, Client Relations and Community Activities since February 2007; President of the Bank of Hawaii Foundation since April 2006.

Derek J. Norris, 62
Senior Executive Vice President and Controller since December 2009; Executive Vice President and Controller since December 2008; Executive Vice President and General Auditor from January 2002 to December 2008.

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Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information, Shareholders, and Dividends

Information regarding the historical market prices of the Parent's common stock, book value, and dividends declared on that stock are shown below.

Market Prices, Book Values, and Common Stock Dividends Per Share

   
 
  Market Price Range
   
   
 
 
       
   
 
 
   
  Dividends
Declared

 
Year/Period
  High
  Low
  Close
  Book Value
 
   

2011

  $ 49.26   $ 34.50   $ 44.49   $ 21.82   $ 1.80  

First Quarter

    49.23     44.32     47.82           0.45  

Second Quarter

    49.26     44.90     46.52           0.45  

Third Quarter

    47.10     35.30     36.40           0.45  

Fourth Quarter

    45.13     34.50     44.49           0.45  

2010

 
$

54.10
 
$

41.60
 
$

47.21
 
$

21.02
 
$

1.80
 

First Quarter

    50.42     41.60     44.95           0.45  

Second Quarter

    54.10     45.00     48.35           0.45  

Third Quarter

    51.60     43.77     44.92           0.45  

Fourth Quarter

    48.27     42.94     47.21           0.45  

The common stock of the Parent is traded on the New York Stock Exchange (NYSE Symbol: BOH) and quoted daily in leading financial publications. As of February 14, 2012, there were 6,923 common shareholders of record.

The Parent's Board of Directors considers on a quarterly basis the feasibility of paying a cash dividend to its shareholders and the level and feasibility of repurchasing shares of the Parent's common stock. Under the Parent's general practice, dividends are declared upon completion of a quarter and, if declared, are paid prior to the end of the subsequent quarter. See "Dividend Restrictions" under "Supervision and Regulation" in Item 1 of this report and Note 11 to the Consolidated Financial Statements for more information.

Issuer Purchases of Equity Securities

   
Period
  Total Number of
Shares Purchased 1

  Average Price
Paid Per Share

  Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs

  Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Plans or Programs 2

 
   

October 1 - 31, 2011

    229,856   $ 39.11     229,100   $ 94,124,113  

November 1 - 30, 2011

    171,572     41.27     171,000     87,064,883  

December 1 - 31, 2011

    302,231     43.29     302,200     73,983,508  
         

Total

    703,659   $ 41.43     702,300        
         
1
During the fourth quarter of 2011, 1,359 shares were purchased from employees in connection with stock swaps and shares purchased for a deferred compensation plan. These shares were not purchased as part of the publicly announced program. The shares were purchased at the closing price of the Parent's common stock on the dates of purchase.
2
The share repurchase program was first announced in July 2001. As of December 31, 2011, $74.0 million remained of the total $1.82 billion total repurchase amount authorized by the Parent's Board of Directors under the share repurchase program. The program has no set expiration or termination date.

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Performance Graph

The following graph shows the cumulative total return for the Parent's common stock compared to the cumulative total returns for the Standard & Poor's ("S&P") 500 Index and the S&P Banks Index. The graph assumes that $100 was invested on December 31, 2006 in the Parent's common stock, the S&P 500 Index, and the S&P Banks Index. The cumulative total return on each investment is as of December 31 of each of the subsequent five years and assumes reinvestment of dividends.

GRAPHICS

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Item 6. Selected Financial Data

Summary of Selected Consolidated Financial Data

   
(dollars in millions, except per share amounts)
  2011
  2010
  2009
  2008
  2007
 
   

Year Ended December 31,

                               

Operating Results

                               

Net Interest Income

  $ 390.2   $ 406.5   $ 412.3   $ 418.8   $ 395.0  

Provision for Credit Losses

    12.7     55.3     107.9     60.5     15.5  

Total Noninterest Income

    197.7     255.3     267.8     258.1     240.5  

Total Noninterest Expense

    348.2     346.2     350.0     346.8     335.4  

Net Income

    160.0     183.9     144.0     192.2     183.7  

Basic Earnings Per Share

    3.40     3.83     3.02     4.03     3.75  

Diluted Earnings Per Share

    3.39     3.80     3.00     3.99     3.69  

Dividends Declared Per Share

    1.80     1.80     1.80     1.77     1.67  

Performance Ratios

                               

Net Income to Average Total Assets (ROA)

    1.22   %   1.45   %   1.22   %   1.84   %   1.75   %

Net Income to Average Shareholders' Equity (ROE)

    15.69     18.16     16.42     24.54     25.15  

Efficiency Ratio 1

    59.23     52.32     51.46     51.23     52.78  

Net Interest Margin 2

    3.13     3.41     3.72     4.33     4.08  

Dividend Payout Ratio 3

    52.94     47.00     59.60     43.92     44.53  

Average Shareholders' Equity to Average Assets

    7.78     7.98     7.44     7.50     6.97  

Average Balances

                               

Average Loans and Leases

  $ 5,349.9   $ 5,472.5   $ 6,145.0   $ 6,542.2   $ 6,561.6  

Average Assets

    13,105.0     12,687.7     11,783.4     10,448.2     10,472.1  

Average Deposits

    9,924.7     9,509.1     9,108.4     7,851.3     7,887.5  

Average Shareholders' Equity

    1,020.1     1,012.7     877.2     783.1     730.3  

Weighted Average Shares Outstanding

                               

Basic Weighted Average Shares

    47,064,925     48,055,025     47,702,500     47,674,000     49,033,208  

Diluted Weighted Average Shares

    47,224,981     48,355,965     48,009,277     48,200,650     49,833,546  

As of December 31,

                               

Balance Sheet Totals

                               

Loans and Leases

  $ 5,538.3   $ 5,335.8   $ 5,759.8   $ 6,530.2   $ 6,580.9  

Total Assets

    13,846.4     13,126.8     12,414.8     10,763.5     10,472.9  

Total Deposits

    10,592.6     9,889.0     9,409.7     8,292.1     7,942.4  

Long-Term Debt

    30.7     32.7     90.3     203.3     235.4  

Total Shareholders' Equity

    1,002.7     1,011.1     896.0     790.7     750.3  

Asset Quality

                               

Allowance for Loan and Lease Losses

  $ 138.6   $ 147.4   $ 143.7   $ 123.5   $ 91.0  

Non-Performing Assets 4

    40.8     37.8     48.3     14.9     5.3  

Financial Ratios

                               

Allowance to Loans and Leases Outstanding

    2.50   %   2.76   %   2.49   %   1.89   %   1.38   %

Tier 1 Capital Ratio

    16.68     18.28     14.84     11.24     10.32  

Total Capital Ratio

    17.95     19.55     16.11     12.49     11.92  

Tier 1 Leverage Ratio

    6.73     7.15     6.76     7.30     7.02  

Total Shareholders' Equity to Total Assets

    7.24     7.70     7.22     7.35     7.16  

Tangible Common Equity to Tangible Assets 5

    7.03     7.48     6.98     7.04     6.84  

Tangible Common Equity to Risk-Weighted Assets 5

    17.93     19.29     15.45     11.28     10.07  

Non-Financial Data

                               

Full-Time Equivalent Employees

    2,370     2,399     2,418     2,581     2,594  

Branches and Offices

    81     82     83     85     83  

ATMs

    506     502     485     462     411  

Common Shareholders of Record

    6,977     7,128     7,323     7,523     7,721  
1
Efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).

2
Net interest margin is defined as net interest income, on a fully taxable-equivalent basis, as a percentage of average earning assets.

3
Dividend payout ratio is defined as dividends declared per share divided by basic earnings per share.

4
Excluded from non-performing assets are contractually binding non-accrual loans held for sale of $4.2 million as of December 31, 2009.

5
Tangible common equity to tangible assets and tangible common equity to risk-weighted assets are Non-GAAP financial measures. See the "Use of Non-GAAP Financial Measures" section below.

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Use of Non-GAAP Financial Measures

The ratios "tangible common equity to tangible assets" and "tangible common equity to risk-weighted assets" are Non-GAAP financial measures and should not be considered a substitute for similar GAAP measures "total shareholders' equity to total assets" and "tier 1 capital ratio." The Company believes these Non-GAAP measures are useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The following table provides a reconciliation of these Non-GAAP financial measures with financial measures defined by GAAP.

GAAP to Non-GAAP Reconciliation

   
 
  December 31,  
(dollars in thousands)
  2011
  2010
  2009
  2008
  2007
 
   

Total Shareholders' Equity

  $ 1,002,667   $ 1,011,133   $ 895,973   $ 790,704   $ 750,255  

Less:    Goodwill

    31,517     31,517     31,517     34,959     34,959  

            Intangible Assets

    83     154     233     978     1,024  
   

Tangible Common Equity

  $ 971,067   $ 979,462   $ 864,223   $ 754,767   $ 714,272  
   

Total Assets

 
$

13,846,391
 
$

13,126,787
 
$

12,414,827
 
$

10,763,475
 
$

10,472,942
 

Less:    Goodwill

    31,517     31,517     31,517     34,959     34,959  

            Intangible Assets

    83     154     233     978     1,024  
   

Tangible Assets

  $ 13,814,791   $ 13,095,116   $ 12,383,077   $ 10,727,538   $ 10,436,959  
   

Risk-Weighted Assets, determined in accordance with prescribed regulatory requirements

  $ 5,414,481   $ 5,076,909   $ 5,594,532   $ 6,688,530   $ 7,089,846  
   

Total Shareholders' Equity to Total Assets

   
7.24%
   
7.70%
   
7.22%
   
7.35%
   
7.16%
 

Tangible Common Equity to
Tangible Assets (Non-GAAP)

    7.03%     7.48%     6.98%     7.04%     6.84%  

Tier 1 Capital Ratio

   
16.68%
   
18.28%
   
14.84%
   
11.24%
   
10.32%
 

Tangible Common Equity to
Risk-Weighted Assets (Non-GAAP)

    17.93%     19.29%     15.45%     11.28%     10.07%  

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Item 7. 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 our service area and elsewhere, credit quality, and other financial and business matters in future periods. Our 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 because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally; 3) the competitive pressure among financial services and products; 4) the impact of recent legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"); 5) changes in fiscal and monetary policies of the markets in which we operate; 6) the increased cost of maintaining or the Company's ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators; 7) actual or alleged conduct which could harm our reputation; 8) changes in accounting standards; 9) changes in tax laws or regulations or the interpretation of such laws and regulations; 10) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 11) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 12) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments; 13) any interruption or breach of security of our information systems resulting in failures or disruptions in customer account management, general ledger processing, and loan or deposit systems; 14) changes to the amount and timing of proposed common stock repurchases; and 15) natural disasters, public unrest or adverse weather, public health, and other conditions impacting us and our customers' operations. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under the section entitled "Risk Factors" in Part I of this report. 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. We undertake no obligation to update forward-looking statements to reflect later events or circumstances.

Critical Accounting Policies

Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 1 to the Consolidated Financial Statements. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are those that are related to the determination of the reserve for credit losses, fair value estimates, leased asset residual values, mortgage servicing rights, pension and postretirement benefit obligations, and income taxes.

Reserve for Credit Losses

A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers. The reserve for credit losses consists of the allowance for loan and lease losses (the "Allowance") and a reserve for unfunded commitments (the "Unfunded Reserve"). The reserve for credit losses provides for credit losses inherent in lending or commitments to lend and is based on loss estimates derived from a comprehensive quarterly evaluation, reflecting analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment to

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address observed changes in trends, conditions, and other relevant environmental and economic factors. The Allowance provides for probable and estimable losses inherent in our loan and lease portfolio. The Allowance is increased or decreased through the provisioning process. There is no exact method of predicting specific losses or amounts that ultimately may be charged-off on particular segments of the loan and lease portfolio.

Management's evaluation of the adequacy of the reserve for credit losses is often the most critical of accounting estimates for a banking institution. Our determination of the amount of the reserve for credit losses is a critical accounting estimate as it requires the use of estimates and significant judgment as to the amount and timing of expected future cash flows on impaired loans, estimated loss rates on homogenous portfolios, and consideration of economic factors and trends. On a quarterly basis, an evaluation of specific individual commercial borrowers is performed to identify impaired loans. See Note 4 to the Consolidated Financial Statements and the "Corporate Risk Profile – Credit Risk" section in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for more information on the Allowance and the reserve for credit losses, respectively.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines Level 1 and 2 valuations as those that are based on quoted prices for identical instruments traded in active markets and quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 valuations are based on model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that we believe market participants would use in pricing the asset or liability.

Financial assets that are recorded at fair value on a recurring basis include available-for-sale investment securities, mortgage servicing rights, investments related to deferred compensation arrangements, and derivative assets and liabilities. As of December 31, 2011 and 2010, $3.5 billion or 25% and $6.6 billion or 50%, respectively, of our total assets consisted of financial assets recorded at fair value on a recurring basis and most of these financial assets consisted of available-for-sale investment securities measured using information from a third-party pricing service. These investments in debt securities and mortgage-backed securities were all classified in either Levels 1 or 2 of the fair value hierarchy. As of December 31, 2011 and 2010, Level 3 financial assets recorded at fair value on a recurring basis were $9.2 million and $9.9 million, respectively, or less than 1% of our total assets, and was comprised of mortgage servicing rights and derivative assets and liabilities.

Our third-party pricing service makes no representations or warranties that the pricing data provided to us is complete or free from errors, omissions, or defects. As a result, we have processes in place to monitor and periodically review the information provided to us by our third-party pricing service such as: 1) Our third-party pricing service provides us with documentation by asset class of inputs and methodologies used to value securities. We review this documentation to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy. This documentation is periodically updated by our third-party pricing service. Accordingly, transfers of securities within the fair value hierarchy are made if deemed necessary. 2) On a quarterly basis, management reviews the pricing information received from our third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by our third-party pricing service. We also identify investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of

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trades relative to historic levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. As of December 31, 2011 and 2010, management did not make adjustments to prices provided by our third-party pricing service as a result of illiquid or inactive markets. 3) On a quarterly basis, management also reviews a sample of securities priced by the Company's third-party pricing service to review significant assumptions and valuation methodologies used. Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted. 4) On an annual basis, to the extent available, we obtain and review independent auditor's reports from our third-party pricing service related to controls placed in operation and tests of operating effectiveness. We did not note any significant control deficiencies in our review of the independent auditor's reports related to services rendered by our third-party pricing service. 5) Our third-party pricing service has also established processes for us to submit inquiries regarding quoted prices. Periodically, we will challenge the quoted prices provided by our third-party pricing service. Our third-party pricing service will review the inputs to the evaluation in light of the new market data presented by us. Our third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis.

Based on the composition of our investment securities portfolio, we believe that we have developed appropriate internal controls and performed appropriate due diligence procedures to prevent or detect material misstatements. See Note 19 to the Consolidated Financial Statements for more information on our fair value measurements.

Leased Asset Residual Values

Lease financing receivables include a residual value component, which represents the estimated value of leased assets upon lease expiration. Our determination of residual value is derived from a variety of sources, including equipment valuation services, appraisals, and publicly available market data on recent sales transactions on similar equipment. The length of time until lease termination, the cyclical nature of equipment values, and the limited marketplace for re-sale of certain leased assets, are important variables considered in making this determination. We update our valuation analysis on an annual basis, or more frequently as warranted by events or circumstances. When we determine that the fair value is lower than the expected residual value at lease expiration, the difference is recognized as an asset impairment in the period in which the analysis is completed.

Mortgage Servicing Rights

When mortgage loans are sold with servicing rights retained, a servicing asset is established and accounted for based on estimated fair values. An estimated fair value is used because there is no quoted or established market for mortgage servicing rights. The estimated fair value is determined using discounted cash flow modeling techniques, which requires us to make estimates and assumptions regarding the amount and timing of expected future cash flows, loan repayment rates, costs to service, and interest rates that reflect the risks involved. Our estimates of the fair value of mortgage servicing rights are sensitive to changes in the underlying estimates and assumptions. Had we assumed lower interest rates and higher loan repayment rates, the estimated fair value of our mortgage servicing rights may have been lower than recorded in our consolidated statements of condition. See Note 5 to the Consolidated Financial Statements for key assumptions used by management as well as a sensitivity analysis of changes in certain key assumptions.

Pension and Postretirement Benefit Obligations

Our pension and postretirement benefit obligations and net periodic benefit cost are actuarially determined based on a number of key assumptions, including the discount rate, estimated future return on plan assets, and the health care cost trend rate. Our determination of the pension and postretirement benefit obligations and net periodic benefit cost is a critical accounting estimate as it requires the use of estimates and judgment related to the amount and timing of expected future cash out-flows for benefit payments and cash in-flows for maturities and return on plan assets. Changes in estimates and assumptions related to mortality rates and future health care costs could also have a material impact to our financial condition or results of operations. A discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate used to value the present value of future benefit obligations as of each year-end is the rate used to determine the net periodic benefit cost for the following year.

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Table 1 presents a sensitivity analysis of a 25 basis point change in discount rates to the pension and postretirement benefit net periodic benefit cost and benefit obligation:

Discount Rate Sensitivity Analysis
  Table 1
 
   
 
  Impact of  
(dollars in thousands)
  Base
Discount
Rate

  Discount
Rate
25 Basis
Point
Increase

  Discount
Rate
25 Basis
Point
Decrease

 
   

2011 Net Periodic Benefit Cost

    5.75%   $ (220 ) $ 219  

Benefit Plan Obligations as of December 31, 2011

    5.04%     (3,514 )   3,678  

Estimated 2012 Net Periodic Benefit Cost

    5.04%     (32 )   16  

See Note 14 to the Consolidated Financial Statements for more information on our pension and postretirement benefit plans.

Income Taxes

We determine our liabilities for income taxes based on current tax regulation and interpretations in tax jurisdictions where our income is subject to taxation. Currently, we file tax returns in nine federal, state and local domestic jurisdictions, and four foreign jurisdictions. In estimating income taxes payable or receivable, we assess the relative merits and risks of the appropriate tax treatment considering statutory, judicial, and regulatory guidance in the context of each tax position. Accordingly, previously estimated liabilities are regularly reevaluated and adjusted, through the provision for income taxes. Changes in the estimate of income taxes payable or receivable occur periodically due to changes in tax rates, interpretations of tax law, the status of examinations being conducted by various taxing authorities, and newly enacted statutory, judicial and regulatory guidance that impact the relative merits and risks of each tax position. These changes, when they occur, may affect the provision for income taxes as well as current and deferred income taxes, and may be significant to our statements of income and condition.

Management's determination of the realization of net deferred tax assets is based upon management's judgment of various future events and uncertainties, including the timing and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of the deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. As of December 31, 2011 and 2010, we carried a valuation allowance of $4.4 million and $7.4 million, respectively, related to our deferred tax assets established in connection with our low-income housing investments.

We are required to record a liability, referred to as an unrecognized tax benefit ("UTB"), for the entire amount of benefit taken in a prior or future income tax return when we determine that a tax position has a less than 50% likelihood of being accepted by the taxing authority. As of December 31, 2011 and 2010, our liabilities for UTBs were $13.6 million and $23.0 million, respectively. See Note 16 to the Consolidated Financial Statements for more information on income taxes.

Reclassifications

Certain prior period information in MD&A has been reclassified to conform to the 2011 presentation.

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Overview

We are a regional financial services company serving businesses, consumers, and governments in Hawaii, Guam, and other Pacific Islands. Our main operating subsidiary, the Bank, was founded in 1897 and is the largest independent financial institution in Hawaii.

Exceptional people working together are the foundation for our success and enable us to build exceptional value for our customers, communities, shareholders, and each other. Excellence, integrity, respect, innovation, commitment, and teamwork are the core values for the way we do business. "Maximizing shareholder value over time" remains our governing objective. In striving to achieve our governing objective, our business plan is balanced between growth and risk management, including the flexibility to adjust, given the uncertainties of an economy in recovery. We remain cautious about the economy, interest rates, and loan demand. We intend to continue to focus on providing customers with a competitive mix of products and services, improving expense management, and efficiently managing capital.

Hawaii Economy

Hawaii's economy was stable with continued improvements in certain aspects of the economy during the fourth quarter of 2011. For 2011, total visitor arrivals increased by 3.8% and visitor spending increased by 15.6% compared to 2010. The increase in visitor spending was primarily due to strong spending growth from visitors from the Asia-Pacific region, Canada, Australia, and New Zealand. Hotel occupancy continued to improve and revenue per available room reflects signs of improvement. Overall, state job growth has begun to stabilize as the statewide seasonally-adjusted unemployment rate was at 6.6% as of December 31, 2011, compared to 8.5% nationally. Although the volume and median price of single-family homes on Oahu were slightly lower in 2011 compared to 2010, months of inventory continued to decline and was below 5 months as of December 31, 2011.

Earnings Summary

Net income for 2011 was $160.0 million, a decrease of $23.9 million or 13% compared to 2010. Diluted earnings per share were $3.39 for 2011, a decrease of $0.41 or 11% compared to 2010. Our lower net income in 2011 was primarily due to the following:

Net interest income was $390.2 million for 2011, a decrease of $16.3 million or 4% compared to 2010. The decrease in net interest income was primarily due to lower average loan balances and lower yields on loans and investments. Given the current economic environment, we have maintained discipline in our loan underwriting and deposit pricing and have also invested conservatively.

Overdraft fees, a component of service charges on deposit accounts, were $21.3 million for 2011, a decrease of $12.3 million or 37% compared to 2010. We have been adversely impacted by overdraft processing changes implemented in the first quarter of 2011 as well as the Federal Reserve Board's amendments to Regulation E which took effect in mid-2010.

Net investment securities gains were $6.4 million for 2011, a decrease of $36.5 million or 85% compared to 2010.

Other noninterest expense was $85.4 million for 2011, an increase of $4.9 million or 6% compared to 2010. On July 15, 2011, we reached a tentative settlement relating to an overdraft litigation matter. We fully accrued for the $9.0 million tentative settlement amount in the second quarter of 2011. In February 2012, the court gave its final approval to the settlement.

The impact of these items was partially offset by a lower provision for credit losses (the "Provision"), provision for income taxes, and FDIC insurance assessments in 2011 compared to 2010. The Provision was $12.7 million in 2011, a decrease of $42.6 million or 77% compared to 2010. The lower Provision in 2011 was consistent with lower levels of net charge-offs and a generally improving economy in Hawaii. The provision for income taxes was $66.9 million in 2011, a decrease of $9.3 million or 12% compared to 2010. The lower provision for income taxes was primarily due to lower pre-tax income in 2011 compared to 2010. FDIC insurance assessments were $9.3 million in 2011, a decrease of

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$3.2 million or 26% compared to 2010. In 2010, we also incurred $5.2 million in early termination costs related to the prepayment of $75.0 million in securities sold under agreements to repurchase.

Our results in 2011 were influenced by a generally improving economy in Hawaii. However, we remained cautious about the slow pace of economic recovery both in Hawaii and on the U.S. Mainland. We also continued to monitor regulatory changes and the associated costs of compliance. As a result of the uncertainties in the economic recovery, we sought to maintain adequate reserves for credit losses and high levels of liquidity and capital during 2011. In particular:

The allowance for loan and lease losses (the "Allowance") was $138.6 million as of December 31, 2011, a decrease of $8.8 million or 6% from December 31, 2010. The ratio of our Allowance to total loans and leases outstanding decreased to 2.50% as of December 31, 2011, compared to 2.76% as of December 31, 2010. Absent significant deterioration in the economy and assuming continued improvement and/or stability in credit quality, we may decrease the level of the Allowance in future periods.

Total deposits were $10.6 billion as of December 31, 2011, an increase of $703.6 million or 7% from December 31, 2010. We believe that our strong brand continues to play a key role in new account acquisitions.

We continued to invest excess liquidity in high-grade investment securities. As of December 31, 2011, the total carrying value of our investment securities portfolio was $7.1 billion. In 2011, we reduced our positions in mortgage-backed securities issued by the Government National Mortgage Association ("Ginnie Mae"). We re-invested these proceeds, in part, into U.S. Treasury notes and debt securities issued by the Small Business Administration (the "SBA") in an effort to further reduce the average duration of our portfolio.

Total shareholders' equity was $1.0 billion as of December 31, 2011, unchanged from December 31, 2010. We continued to return capital to our shareholders in the form of share repurchases and dividends. During 2011, we repurchased 2.5 million shares of common stock at a total cost of $109.9 million under our share repurchase program. We also paid cash dividends of $84.9 million during 2011.

In 2012, we may see continued economic recovery and improving prospects for loan growth. However, we remain cautious about the uncertainties of government regulation as well as increased pressure on fee-based revenues in future periods. In particular, the full year impact of compliance with the Durbin Amendment in 2012 is expected to significantly reduce debit card income. In 2012, we intend to continue to focus on maintaining adequate levels of liquidity, reserves for credit losses, and capital.

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Analysis of Statements of Income

Average balances, related income and expenses, and resulting yields and rates are presented in Table 2. An analysis of the change in net interest income, on a taxable-equivalent basis, is presented in Table 3.

Average Balances and Interest Rates – Taxable-Equivalent Basis
  Table 2
 
   
 
  2011   2010   2009  
(dollars in millions)
  Average 
Balance   

  Income/ 
Expense   

  Yield/
Rate

  Average
Balance   

  Income/
Expense   

  Yield/
Rate

  Average 
Balance   

  Income/ 
Expense   

  Yield/
Rate

 
   

Earning Assets

                                                       

Interest-Bearing Deposits

  $ 4.2   $ -     0.19   % $ 4.7   $ -     0.59   % $ 5.8   $ -     0.34   %

Funds Sold

    380.2     0.8     0.22     390.2     1.1     0.28     690.9     1.8     0.26  

Investment Securities

                                                       

Trading

    -     -     -     -     -     -     12.0     0.6     4.94  

Available-for-Sale

    4,439.8     105.4     2.37     5,854.1     170.1     2.91     3,938.2     159.4     4.05  

Held-to-Maturity

    2,279.6     72.2     3.16     154.2     6.5     4.22     211.2     9.1     4.33  

Loans Held for Sale

    11.0     0.5     4.54     10.8     0.9     8.51     21.7     0.8     3.85  

Loans and Leases 1

                                                       

Commercial and Industrial

    790.6     31.8     4.02     764.2     33.7     4.41     929.4     37.6     4.05  

Commercial Mortgage

    887.1     42.8     4.82     827.7     42.0     5.07     769.1     39.9     5.19  

Construction

    80.1     4.0     5.06     95.4     4.8     5.08     142.9     5.7     3.97  

Commercial Lease Financing

    322.1     8.7     2.71     385.1     11.3     2.92     453.7     13.8     3.04  

Residential Mortgage

    2,126.9     111.5     5.24     2,105.6     118.7     5.64     2,322.6     136.1     5.86  

Home Equity

    784.9     37.4     4.76     863.7     43.2     4.99     982.3     49.9     5.08  

Automobile

    194.4     13.2     6.78     241.2     18.3     7.58     319.3     25.3     7.91  

Other 2

    163.8     12.4     7.57     189.6     14.5     7.66     225.7     17.8     7.87  
   

Total Loans and Leases

    5,349.9     261.8     4.89     5,472.5     286.5     5.23     6,145.0     326.1     5.31  
   

Other

    79.9     1.1     1.40     79.8     1.1     1.39     79.7     1.1     1.39  
   

Total Earning Assets 3

    12,544.6     441.8     3.52     11,966.3     466.2     3.90     11,104.5     498.9     4.49  
   

Cash and Noninterest-Bearing Deposits

    135.3                 229.6                 214.8              

Other Assets

    425.1                 491.8                 464.1              
                                                   

Total Assets

  $ 13,105.0               $ 12,687.7               $ 11,783.4              
                                                   

Interest-Bearing Liabilities

                                                       

Interest-Bearing Deposits

                                                       

Demand

  $ 1,786.7     0.7     0.04   $ 1,715.8     1.1     0.06   $ 1,747.7     1.1     0.06  

Savings

    4,501.0     7.3     0.16     4,465.0     14.7     0.33     4,046.7     28.1     0.69  

Time

    1,067.8     10.3     0.96     1,088.7     13.4     1.23     1,320.1     24.9     1.88  
   

Total Interest-Bearing Deposits

    7,355.5     18.3     0.25     7,269.5     29.2     0.40     7,114.5     54.1     0.76  
   

Short-Term Borrowings

    18.2     -     0.11     23.3     -     0.13     20.3     -     0.11  

Securities Sold Under Agreements to Repurchase

    1,845.8     29.2     1.58     1,700.2     26.0     1.53     1,257.0     25.9     2.06  

Long-Term Debt

    31.6     2.0     6.23     61.0     3.5     5.81     100.4     5.4     5.43  
   

Total Interest-Bearing Liabilities

    9,251.1     49.5     0.53     9,054.0     58.7     0.65     8,492.2     85.4     1.01  
   

Net Interest Income

        $ 392.3               $ 407.5               $ 413.5        
                                                   

Interest Rate Spread

                2.99   %               3.25   %               3.48   %

Net Interest Margin

                3.13   %               3.41   %               3.72   %

Noninterest-Bearing

                                                       

Demand Deposits

    2,569.2                 2,239.6                 1,993.9              

Other Liabilities

    264.6                 381.4                 420.1              

Shareholders' Equity

    1,020.1                 1,012.7                 877.2              
                                                   

Total Liabilities and

                                                       

Shareholders' Equity

  $ 13,105.0               $ 12,687.7               $ 11,783.4              
                                                   
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
Comprised of other consumer revolving credit, installment, and consumer lease financing.
3
Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $2,080,000 for 2011, $975,000 for 2010, and $1,137,000 for 2009.

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Analysis of Change in Net Interest Income – Taxable-Equivalent Basis
  Table 3
 
   
 
  Year Ended December 31,
2011 Compared to 2010
  Year Ended December 31,
2010 Compared to 2009
 
(dollars in millions)
  Volume 1
  Rate 1
  Total
  Volume 1
  Rate 1
  Total
 
   

Change in Interest Income:

                                     

Funds Sold

  $ -   $ (0.3 ) $ (0.3 ) $ (0.8 ) $ 0.1   $ (0.7 )

Investment Securities

                                     

Trading

    -     -     -     (0.3 )   (0.3 )   (0.6 )

Available-for-Sale

    (36.5 )   (28.2 )   (64.7 )   63.7     (53.0 )   10.7  

Held-to-Maturity

    67.7     (2.0 )   65.7     (2.4 )   (0.2 )   (2.6 )

Loans Held for Sale

    -     (0.4 )   (0.4 )   (0.6 )   0.7     0.1  

Loans and Leases

                                     

Commercial and Industrial

    1.1     (3.0 )   (1.9 )   (7.1 )   3.2     (3.9 )

Commercial Mortgage

    2.9     (2.1 )   0.8     3.0     (0.9 )   2.1  

Construction

    (0.8 )   0.0     (0.8 )   (2.2 )   1.3     (0.9 )

Commercial Lease Financing

    (1.8 )   (0.8 )   (2.6 )   (2.0 )   (0.5 )   (2.5 )

Residential Mortgage

    1.2     (8.4 )   (7.2 )   (12.4 )   (5.0 )   (17.4 )

Home Equity

    (3.8 )   (2.0 )   (5.8 )   (5.8 )   (0.9 )   (6.7 )

Automobile

    (3.3 )   (1.8 )   (5.1 )   (6.0 )   (1.0 )   (7.0 )

Other 2

    (1.9 )   (0.2 )   (2.1 )   (2.8 )   (0.5 )   (3.3 )
   

Total Loans and Leases

    (6.4 )   (18.3 )   (24.7 )   (35.3 )   (4.3 )   (39.6 )
   

Total Change in Interest Income

    24.8     (49.2 )   (24.4 )   24.3     (57.0 )   (32.7 )
   

Change in Interest Expense:

                                     

Interest-Bearing Deposits

                                     

Demand

    -     (0.4 )   (0.4 )   -     -     -  

Savings

    0.1     (7.5 )   (7.4 )   2.6     (16.0 )   (13.4 )

Time

    (0.2 )   (2.9 )   (3.1 )   (3.9 )   (7.6 )   (11.5 )
   

Total Interest-Bearing Deposits

    (0.1 )   (10.8 )   (10.9 )   (1.3 )   (23.6 )   (24.9 )
   

Securities Sold Under Agreements to Repurchase

    2.3     0.9     3.2     7.7     (7.6 )   0.1  

Long-Term Debt

    (1.8 )   0.3     (1.5 )   (2.3 )   0.4     (1.9 )
   

Total Change in Interest Expense

    0.4     (9.6 )   (9.2 )   4.1     (30.8 )   (26.7 )
   

Change in Net Interest Income

  $ 24.4   $ (39.6 ) $ (15.2 ) $ 20.2   $ (26.2 ) $ (6.0 )
   
1
The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.
2
Comprised of other consumer revolving credit, installment, and consumer lease financing.

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earnings assets.

As demand for new lending opportunities remained soft in 2011, we invested most of our liquidity into investment securities.

Net interest income, on a taxable-equivalent basis, decreased by $15.2 million or 4% in 2011 compared to 2010. Net interest margin decreased by 28 basis points in 2011 compared to 2010. Yields on our earning assets decreased by 38 basis points in 2011 compared to 2010, reflective of higher levels of liquidity, lower average loan balances, and lower yields on loans and investment securities. Yields on our loans and leases declined in every category in 2011 compared to 2010. Yields on our investment securities portfolio decreased by 30 basis points in 2011 compared to 2010. Partially offsetting the lower yields on our earning assets was a decrease in our funding costs primarily due to lower rates paid on our interest-bearing deposits, reflective of the re-pricing of our deposits at lower interest rates. Rates paid on our savings deposits decreased by 17 basis points and rates paid on our time deposits decreased by 27 basis points in 2011 compared to 2010, partially offset by a 5 basis point increase on our rates paid on our securities sold under agreements to repurchase.

Average balances of our earning assets increased by $578.3 million or 5% in 2011 compared to 2010 primarily due to an increase in our investment securities portfolio. In 2011, we changed the composition of our investment securities portfolio. We increased our holdings in U.S. Treasury notes and securities issued by the SBA in an effort to further

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reduce the average duration of our portfolio. Average balances of our debt securities issued by the U.S. Treasury increased by $363.4 million and average balances of our SBA securities increased by $165.0 million in 2011 compared to 2010. Average balances of mortgaged-backed securities issued by Ginnie Mae also increased by $232.6 million in 2011 compared to 2010. This increase was mainly the result of lower balances during the first half of 2010. Partially offsetting the increase in average balances of our earning assets was a $122.6 million decrease in average loan and lease balances resulting from continued paydowns along with subdued demand for new lending opportunities. Average balances of our interest-bearing liabilities increased by $197.0 million or 2% in 2011 compared to 2010 primarily due to growth in our interest-bearing deposits and securities sold under agreements to repurchase. Average balances of our interest-bearing demand deposits increased by $70.9 million primarily due to growth in our premier interest-bearing demand products. Average savings deposits increased by $35.9 million primarily due to an $83.7 million growth in our premier savings products and a $24.4 million growth in our personal savings product, partially offset by a $65.8 million decline in our business money market savings products. These increases were partially offset by a decline in our average time deposits as some customers moved their funds to more liquid deposits. Average balances in our securities sold under agreements to repurchase increased by $145.6 million in 2011 compared to 2010 primarily due to new placements to accommodate local government entities, partially offset by the prepayment of three repurchase agreements with private institutions in the third quarter of 2010.

Net interest income, on a taxable-equivalent basis, decreased by $6.0 million or 1% in 2010 compared to 2009. Net interest margin decreased by 31 basis points in 2010 compared to 2009. Yields on our earning assets decreased by 59 basis points in 2010 compared to 2009, reflective of lower interest rates and a higher level of investment securities. Yields on our available-for-sale investment securities decreased by 114 basis points in 2010 compared to 2009. Partially offsetting the lower yields on our earning assets was a corresponding decrease in our funding costs primarily due to lower rates paid on our interest-bearing deposits, reflective of the re-pricing of our deposits at lower interest rates. Rates paid on our savings deposits decreased by 36 basis points and rates paid on our time deposits decreased by 65 basis points in 2010 compared to 2009. Also contributing to our lower funding costs was a 53 basis point decrease in rates paid on securities sold under agreements to repurchase in 2010 primarily due to lower rates paid on placements with government entities.

Average balances of our earning assets increased by $861.8 million or 8% in 2010 compared to 2009, primarily due to an increase in investment securities. Average balances in our available-for-sale investment securities portfolio increased by $1.9 billion in 2010 primarily due to the investment of excess liquidity in mortgage-backed securities issued by government agencies. Partially offsetting the increase in our available-for-sale investment securities portfolio was a $672.4 million decrease in average loan and lease balances resulting from continued paydowns and weak demand for new lending opportunities. Average balances of our interest-bearing liabilities increased by $561.9 million in 2010 compared to 2009 primarily due to growth in our savings deposits and securities sold under agreements to repurchase. Average savings deposits increased by $418.3 million primarily due to growth in our bonus rate savings and business money market products. This was partially offset by a $231.3 million decrease in our average time deposit balances as some customers moved their deposits to more liquid savings products. Average balances in securities sold under agreements to repurchase increased by $443.2 million in 2010 compared to 2009 primarily due to new placements to accommodate local government entities. This was partially offset by the prepayment of three repurchase agreements with private institutions in the third quarter of 2010.

Provision for Credit Losses

The Provision reflects our judgment of the expense or benefit necessary to achieve the appropriate amount of the Allowance. We maintain the Allowance at levels adequate to cover our estimate of probable credit losses as of the end of the reporting period. The Allowance is determined through detailed quarterly analyses of our loan and lease portfolio. The Allowance is based on our loss experience and changes in the economic environment, as well as an ongoing assessment of our credit quality. We recorded a Provision of $12.7 million in 2011, $55.3 million in 2010, and $107.9 million in 2009. The lower Provision recorded in 2011 and 2010 was reflective of lower levels of net charge-offs of loans and leases and a generally improving Hawaii economy. For further discussion on the Allowance, see the "Corporate Risk Profile – Credit Risk" section in MD&A.

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Noninterest Income

Table 4 presents the major components of noninterest income for 2011, 2010, and 2009.

Noninterest Income
  Table 4
 
   
 
  Year Ended December 31,   Dollar Change   Percent Change  
(dollars in thousands)
  2011
  2010
  2009
  2011 to 2010
  2010 to 2009
  2011 to 2010
  2010 to 2009
 
   

Trust and Asset Management

  $ 45,046   $ 44,889   $ 46,174   $ 157   $ (1,285 )   -   %   (3 )  %

Mortgage Banking

    14,664     18,576     22,995     (3,912 )   (4,419 )   (21 )   (19 )

Service Charges on Deposit Accounts

    38,733     53,039     54,470     (14,306 )   (1,431 )   (27 )   (3 )

Fees, Exchange, and Other Service Charges

    60,227     61,006     60,122     (779 )   884     (1 )   1  

Investment Securities Gains, Net

    6,366     42,848     25,770     (36,482 )   17,078     (85 )   66  

Insurance

    10,957     9,961     20,015     996     (10,054 )   10     (50 )

Other Income:

                                           

Income from Bank-Owned Life Insurance

    6,329     6,357     7,165     (28 )   (808 )   -     (11 )

Gain on Mutual Fund Sale

    1,956     2,852     -     (896 )   2,852     (31 )   n.m.  

Gain on the Sale of Leased Assets

    1,001     1,126     14,227     (125 )   (13,101 )   (11 )   (92 )

Gain on the Sale of Insurance Subsidiaries

    -     904     2,363     (904 )   (1,459 )   n.m.     (62 )

Other

    12,376     13,700     14,507     (1,324 )   (807 )   (10 )   (6 )
   

Total Other Income

    21,662     24,939     38,262     (3,277 )   (13,323 )   (13 )   (35 )
   

Total Noninterest Income

  $ 197,655   $ 255,258   $ 267,808   $ (57,603 ) $ (12,550 )   (23 )  %   (5 )  %
   

n.m. - not meaningful.

Trust and asset management income is comprised of fees earned from the management and administration of trusts and other customer assets. These fees are largely based upon the market value of the assets that we manage and the fee rate charged to customers. Total trust assets under administration were $9.3 billion as of December 31, 2011, $10.1 billion as of December 31, 2010, and $9.9 billion as of December 31, 2009. Trust and asset management income remained relatively unchanged in 2011 compared to 2010. Our unified managed accounts, which were introduced in the latter half of 2010, generated an additional $1.1 million of fee revenue in 2011 compared to 2010. In addition, agency fees increased by $0.9 million and irrevocable trust fees rose by $0.6 million in 2011 compared to 2010 primarily due higher fee rates for assets previously invested in our proprietary mutual funds, which were sold/liquidated in July 2010. These increases were largely offset by a $2.9 million decrease in mutual fund investment management fees mainly due to the sale/liquidation of our proprietary mutual funds noted above. Trust and asset management income decreased by $1.3 million or 3% in 2010 compared to 2009. This decrease was primarily due to a $4.1 million decrease in mutual fund management fees due in large part to the aforementioned sale/liquidation of our proprietary mutual funds in July 2010, combined with an increase in fee waivers and a decrease in the holdings of our money market mutual funds. This decrease was partially offset by a combined $2.7 million increase in agency fees, irrevocable trust fees, and IRA fees primarily due to higher market values and higher fee rates for assets previously invested in our proprietary mutual funds.

Mortgage banking income is highly influenced by mortgage interest rates and the housing market. Mortgage banking income decreased by $3.9 million or 21% in 2011 compared to 2010. This decrease was primarily due to lower loan origination and sales volume in 2011 compared to 2010, as well as our decision to add more 30-year conforming saleable loans to our portfolio. Residential mortgage loan originations were $925.7 million in 2011, an $89.9 million or 9% decrease compared to 2010. Residential mortgage loan sales were $434.2 million in 2011, a $235.6 million or 35% decrease from 2010. Mortgage banking income decreased by $4.4 million or 19% in 2010 compared to 2009. This decrease was primarily due to lower loan origination and sales volume in 2010 compared to 2009. Residential mortgage loan originations were $1.0 billion in 2010, a $222.4 million or 18% decrease from 2009. Residential mortgage loan sales were $669.8 million in 2010, a $373.2 million or 36% decrease from 2009.

Service charges on deposit accounts decreased by $14.3 million or 27% in 2011 compared to 2010. This decrease was primarily due to a $12.3 million decline in overdraft fees mainly the result of several processing changes implemented in the first quarter

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of 2011, combined with the Federal Reserve Board's amendments to Regulation E. Beginning on July 1, 2010 for new customers and August 15, 2010 for existing customers, these amendments prohibit a financial institution from assessing a fee to complete an ATM withdrawal or one-time debit card transaction which will cause an overdraft unless the customer consents in advance ("opts-in"). In addition, account analysis fees decreased by $1.4 million primarily due to higher investable balances resulting in larger earnings credit rates granted to our customers. Service charges on deposit accounts decreased by $1.4 million or 3% in 2010 compared to 2009 primarily due to a $1.0 million decrease in account analysis fees due to a decline in the number of accounts subscribing to this service. Also contributing to the decrease was a $0.4 million decline in overdraft fees due to the amendments to Regulation E noted above, partially offset by account growth.

Fees, exchange, and other service charges are primarily comprised of debit card income, fees from ATMs, merchant service activity, and other loan fees and service charges. Fees, exchange, and other service charges decreased by $0.8 million or 1% in 2011 compared to 2010 primarily due to a $0.8 million decrease in ATM fees and a $0.5 million decrease in other loan fees. This decrease was partially offset by a $0.7 million increase in debit card income resulting mainly from growth in debit card usage and an increase in mileage program fees. However, debit card income was adversely affected in the fourth quarter of 2011 by the changes in the debit card interchange rules as the result of the pricing restrictions imposed by the Durbin Amendment.

In June 2011, the Federal Reserve Bank (the "FRB") approved a final debit card interchange rule that would limit the amount charged for debit card transactions (often called interchange or swipe fees). The effective date for the pricing restrictions, commonly referred to as "the Durbin Amendment," was October 1, 2011. Included in fees, exchange, and other service charges was debit card interchange fees of approximately $22.0 million in 2011. For the fourth quarter of 2011, debit card interchange fees totaled approximately $2.6 million, a decrease of $4.1 million or 62% compared to the third quarter of 2011.

Fees, exchange, and other service charges increased by $0.9 million or 1% in 2010 compared to 2009 primarily due to a $3.4 million increase in debit card income resulting mainly from account growth. The increase in debit card income was partially offset by a $1.4 million decrease in ATM fees primarily due to lower transaction volume and a $0.8 million decrease in income from merchant services.

Net gains from the sales of investment securities were $6.4 million in 2011, $42.8 million in 2010, and $25.8 million in 2009. The amount and timing of our sale of investment securities is dependent on a number of factors, including our efforts to preserve capital levels while managing duration and extension risk. In 2011, we primarily sold available-for-sale investment securities to manage our interest rate and extension risks. In 2010, we primarily sold available-for-sale securities to preserve capital levels while managing our interest rate risk. In 2009, the net gains were largely due to sales of available-for-sale securities in the fourth quarter of 2009, including a complete liquidation of our investments in private-label mortgage-backed securities.

Insurance income increased by $1.0 million or 10% in 2011 compared to 2010 primarily due to an increase in income from our variable annuity products. Insurance income decreased by $10.1 million or 50% in 2010 compared to 2009. This decrease was largely due to the sales of assets of our retail insurance brokerage operation, Bank of Hawaii Insurance Services, Inc. in the second quarter of 2009, and our wholesale insurance business, BOH Wholesale Insurance Agency, Inc. (formerly known as Triad Insurance Agency, Inc.) in the fourth quarter of 2009.

Other noninterest income decreased by $3.3 million or 13% in 2011 compared to 2010. This decrease was primarily due to net gains of $2.9 million resulting from the sale of our proprietary mutual funds in the third quarter of 2010, partially offset by a $2.0 million contingent payment received in the third quarter of 2011 related to the 2010 sale of our proprietary mutual funds. In addition, we recognized $0.9 million from a contingent payment received in the third quarter of 2010 related to the previously noted sale of our retail insurance brokerage operation in the second quarter of 2009. Other noninterest income decreased by $13.3 million or 35% in 2010 compared to 2009. The decrease was primarily due to a $10.0 million gain from the sale of our equity interest in two watercraft leveraged leases in the first quarter of 2009 and a $2.8 million gain resulting from the sale of our equity interest in a cargo aircraft leveraged lease in the second quarter of 2009.

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Noninterest Expense

Table 5 presents the major components of noninterest expense for 2011, 2010, and 2009.

Noninterest Expense
  Table 5
 
   
 
  Year Ended December 31,   Dollar Change   Percent Change  
(dollars in thousands)
  2011
  2010
  2009
  2011 to 2010
  2010 to 2009
  2011 to 2010
  2010 to 2009
 
   

Salaries and Benefits:

                                           

Salaries

  $ 115,512   $ 119,515   $ 119,888   $ (4,003 ) $ (373 )   (3 )  %   -   %

Incentive Compensation

    16,367     15,544     17,688     823     (2,144 )   5     (12 )

Share-Based Compensation and Cash Grants for the Purchase of Company Stock

    5,720     6,805     7,775     (1,085 )   (970 )   (16 )   (12 )

Commission Expense

    6,489     6,666     7,071     (177 )   (405 )   (3 )   (6 )

Retirement and Other Benefits

    16,829     15,708     16,425     1,121     (717 )   7     (4 )

Payroll Taxes

    10,645     10,084     9,972     561     112     6     1  

Medical, Dental, and Life Insurance

    9,039     8,242     9,001     797     (759 )   10     (8 )

Separation Expense

    2,215     3,149     748     (934 )   2,401     (30 )   n.m.  
   

Total Salaries and Benefits

    182,816     185,713     188,568     (2,897 )   (2,855 )   (2 )   (2 )
   

Net Occupancy

    43,169     40,988     41,053     2,181     (65 )   5     -  

Net Equipment

    18,849     19,371     17,713     (522 )   1,658     (3 )   9  

Professional Fees

    8,623     7,104     12,439     1,519     (5,335 )   21     (43 )

FDIC Insurance

    9,346     12,564     17,342     (3,218 )   (4,778 )   (26 )   (28 )

Other Expense:

                                           

Data Services

    14,067     13,812     13,063     255     749     2     6  

Delivery and Postage Services

    8,955     9,072     9,628     (117 )   (556 )   (1 )   (6 )

Mileage Program Travel

    8,910     8,055     5,887     855     2,168     11     37  

Bank of Hawaii Foundation

    2,000     1,000     1,000     1,000     -     100     -  

Settlement Related to Overdraft Claims

    9,000     -     -     9,000     -     n.m.     n.m.  

Legal Contingencies

    (57 )   155     1,007     (212 )   (852 )   (137 )   (85 )

Repurchase Agreement Early Termination Expense

    -     5,189     -     (5,189 )   5,189     n.m.     n.m.  

Gain on the Sale of Foreclosed Real Estate

    -     (1,343 )   -     1,343     (1,343 )   n.m.     n.m.  

Other

    42,515     44,556     42,324     (2,041 )   2,232     (5 )   5  
   

Total Other Expense

    85,390     80,496     72,909     4,894     7,587     6     10  
   

Total Noninterest Expense

  $ 348,193   $ 346,236   $ 350,024   $ 1,957   $ (3,788 )   1   %   (1 )  %
   

n.m. - not meaningful.

Total salaries and benefits decreased by $2.9 million or 2% in 2011 compared to 2010. This decrease was primarily due to an increase in deferred salaries, which has the effect of decreasing salaries expense, resulting from our decision to add more 30-year conforming saleable loans to our portfolio. Lower salaries expense was also due to a decline in the number of full-time equivalent employees and one fewer paid working day, combined with lower share-based compensation and cash grants for the purchase of company stock. The decrease in salaries and benefits expense in 2011 was partially offset by an increase in retirement benefits expense mainly due to a $1.0 million settlement gain in 2010 on the extinguishment of retiree life insurance obligations. In addition, we also incurred higher incentive compensation expense in 2011. Our incentive programs are designed to reward performance and to provide market competitive total compensation. Executive incentive programs, in particular, are designed to align the long-term interests of executives and shareholders through the achievement of earnings growth and stock price appreciation. Total salaries and benefits decreased by $2.9 million or 2% in 2010 compared to 2009 primarily due to decreases in incentive compensation, cash grants for the purchase of Company stock, and medical insurance expense. Also contributing to the decrease in salaries and benefits expense in 2010 was a decrease in retirement benefits expense mainly due to the aforementioned $1.0 million settlement gain on the extinguishment of retiree life insurance obligations. Partially offsetting these decreases in 2010 was an increase in separation expense.

Net occupancy increased by $2.2 million or 5% in 2011 compared to 2010. This increase was primarily due to a $1.4 million increase in utilities mainly the

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result of higher electricity rates, and a $1.0 million increase in depreciation expense due mainly to the change in estimated useful lives related to two properties. We are focused on achieving expense efficiencies and accordingly we announced in the fourth quarter of 2011 the planned consolidation of four branches in our network. Net occupancy remained relatively unchanged in 2010 compared to 2009.

Professional fees increased by $1.5 million or 21% in 2011 compared to 2010. This increase was primarily due to a $1.0 million increase in legal fees combined with a $0.8 million increase in fees related to management of our investment platform and for providing investment advisory services to our customers. Professional fees decreased by $5.3 million or 43% in 2010 compared to 2009. This decrease was primarily due to a $3.2 million decrease in legal fees mainly due to the resolution of legal matters in 2009, and a $1.9 million decrease in various other professional services.

FDIC insurance expense decreased by $3.2 million or 26% in 2011 compared to 2010. This decrease was primarily due to lower rate assessments as a result of new rules finalized by the FDIC. As required by the Dodd-Frank Act, on February 7, 2011, the FDIC finalized new rules which redefined the assessment base as "average consolidated total assets minus average tangible equity." The new rate schedule and other revisions to the assessment rules became effective April 1, 2011. The FDIC's final rules also eliminated risk categories and debt ratings from the assessment calculation for large banks (over $10.0 billion) and will instead use scorecards that the FDIC believes better reflect risks to the Deposit Insurance Fund. FDIC insurance expense decreased by $4.8 million or 28% in 2010 compared to 2009. This decrease was primarily due to the Company's $5.7 million share of an industry-wide assessment by the FDIC recorded in the second quarter of 2009. This decrease was partially offset by the Company utilizing its credits from the Federal Deposit Insurance Reform Act of 2005, which were available to offset our deposit insurance assessments. These credits were fully utilized by the end of the first quarter of 2009.

Other noninterest expense increased by $4.9 million or 6% in 2011 compared to 2010. This increase was primarily due to a $9.0 million tentative settlement of overdraft litigation recorded in the second quarter of 2011. In September 2011, the court gave its initial approval to the settlement and in February 2012, the court gave its final approval to the settlement. See Note 18 to the Consolidated Financial Statements for more information. Also contributing to the increase was a $1.3 million gain in 2010 related to the sale of foreclosed real estate. This increase was partially offset by $5.2 million in early termination costs incurred in the third quarter of 2010 related to the prepayment of $75.0 million in securities sold under agreements to repurchase. Other noninterest expense increased by $7.6 million or 10% in 2010 compared to 2009. The increase was primarily due to the aforementioned $5.2 million in early termination costs related to the prepayment of $75.0 million in securities sold under agreements to repurchase, and a $2.2 million increase in mileage program travel expense. Also contributing to the increase in other noninterest expense in 2010 was a $1.5 million reduction to our casualty self insurance reserves in 2009. This was partially offset by the $1.3 million gain in 2010 related to the sale of foreclosed real estate noted above.

Income Taxes

Our provision for income taxes and effective tax rates for 2011, 2010, and 2009 were as follows:

Provision for Income Taxes and Effective Tax Rates
  Table 6
 
   
(dollars in thousands)
  Provision
  Effective Tax Rates
 
   

2011

  $ 66,937     29.49%  

2010

    76,273     29.31%  

2009

    78,207     35.19%  

The effective tax rate for 2011 remained relatively unchanged from 2010. We recorded a $3.5 million credit to the provision for income taxes related to the release of liabilities for unrecognized state tax benefits due to the lapse in the statute of limitations related to tax years held open by the settlement of the Lease In-Lease Out ("LILO") and Sale In-Lease Out ("SILO") transactions and the filing of Hawaii amended tax returns to report the Internal Revenue Service ("IRS") adjustments. We also recorded a $3.5 million credit to the provision for income taxes related to the release of general reserves due to the closing of the IRS audit for tax years 2007 and 2008 and as a result of settling interest due to the IRS for tax years 1998 through 2006. Also favorably impacting our effective tax rate in 2011 was the $3.5 million release of a valuation allowance for the expected utilization of capital losses on the future sale of a low-income housing investment.

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The lower effective tax rate in 2010 from 2009 was primarily due to a $7.7 million credit to the provision for income taxes in 2010 for the release of reserves. This credit was the result of the closing of the audit by the IRS related to the tax years held open by the settlement of the LILO and SILO transactions and the filing of Hawaii amended tax returns to report the IRS adjustments. Also favorably impacting our effective tax rate in 2010 was the $2.7 million release of a valuation allowance for the expected utilization of capital losses on the future sale of a low-income housing investment. The other significant transaction that favorably impacted our effective tax rate was the sale of our equity interest in two leveraged leases, which resulted in a $4.4 million credit to the provision for income taxes in 2010.

Analysis of Business Segments

Our business segments are Retail Banking, Commercial Banking, Investment Services, and Treasury and Other.

Table 7 summarizes net income from our business segments for 2011, 2010, and 2009. Additional information about segment performance, including financial captions discussed below, is presented in Note 13 to the Consolidated Financial Statements.

Business Segment Net Income
  Table 7
 
   
 
  Year Ended December 31,  
(dollars in thousands)
  2011
  2010
  2009
 
   

Retail Banking

  $ 30,730   $ 47,587   $ 55,171  

Commercial Banking

    53,397     52,737     45,291  

Investment Services

    9,939     11,451     5,359  
   

Total

    94,066     111,775     105,821  

Treasury and Other

    65,977     72,167     38,212  
   

Consolidated Total

  $ 160,043   $ 183,942   $ 144,033  
   

Retail Banking

Net income decreased by $16.9 million or 35% in 2011 compared to 2010 primarily due to a decrease in net interest income and noninterest income, combined with an increase in noninterest expense. This was partially offset by a decrease in the Provision for the segment. The decrease in net interest income was primarily due to lower earnings credits on the segment's deposit portfolio and lower average loan balances and loan margins, partially offset by higher average deposit balances. The decrease in noninterest income was primarily due to lower overdraft fees mainly resulting from several overdraft processing changes implemented in the first quarter of 2011, combined with the FRB's amendments to Regulation E. Also contributing to the decrease in noninterest income was lower mortgage banking income, ATM fees, and account analysis fees. The increase in noninterest expense was primarily due to the segment's share of the previously noted accrual related to the tentative settlement of overdraft litigation recorded in the second quarter of 2011, combined with higher occupancy and debit card expense, partially offset by lower allocated FDIC insurance costs. The decrease in the Provision was primarily due to lower net charge-offs of loans and leases in the segment.

Net income decreased by $7.6 million or 14% in 2010 compared to 2009 primarily due to a decrease in net interest income and noninterest income, combined with an increase in noninterest expense. This was partially offset by a decrease in the Provision for the segment. The decrease in net interest income was primarily due to lower earnings credits on the segment's deposit portfolio and lower average loan balances, partially offset by higher average deposit balances. The decrease in noninterest income was primarily due to lower mortgage banking income, ATM fees, and account analysis fees, partially offset by higher debit card income, deposit account growth, and transaction activity. The increase in noninterest expense was primarily due to higher occupancy and debit card expense, partially offset by lower allocated costs. The decrease in the Provision was primarily due to lower net charge-offs of loans and leases in the segment and risk in the segment's consumer real estate portfolios.

Commercial Banking

Net income increased by $0.7 million or 1% in 2011 compared to 2010 primarily due to decreases in the Provision and noninterest expense. This was partially offset by lower net interest income and noninterest income. The decrease in the Provision was primarily due to reduced risk, lower net charge-offs of loans and leases in the segment, and a partial recovery on a previously charged-off leveraged lease. The decrease in noninterest expense was primarily due to lower salaries, occupancy, and allocated expenses. The decrease in net interest income was primarily due to lower earnings credits on the segment's deposit portfolio, partially offset by higher average deposit balances. The decrease in noninterest income was primarily due to lower overdraft fees, account analysis fees, and a contingent payment received in 2010 related to the sale of assets of our retail insurance brokerage operation in 2009.

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Net income increased by $7.4 million or 16% in 2010 compared to 2009 primarily due to decreases in the Provision and noninterest expense. This was partially offset by lower net interest income and noninterest income. The decrease in the Provision was primarily due to reduced risk and lower net charge-offs of loans and leases in the segment. The decrease in noninterest expense was primarily due to lower salaries, combined with lower operating and allocated expenses including the segment's share of an industry-wide assessment by the FDIC in 2009. The decrease in net interest income was primarily due to lower earnings credits on the segment's deposit portfolio, partially offset by higher average deposit balances. The decrease in noninterest income was primarily due to a $10.0 million gain on the sale of our equity interest in two watercraft leveraged leases and a $2.8 million gain on the sale of our equity interest in a cargo aircraft leveraged lease, both of which occurred in 2009. Also contributing to the decrease in noninterest income was lower insurance income as a result of the sale of assets of our wholesale and retail insurance businesses in 2009.

Investment Services

Net income decreased by $1.5 million or 13% in 2011 compared to 2010 primarily due to a decrease in net interest income and an increase in noninterest expense. The decrease in net interest income was primarily due to lower earnings credits on the segment's deposit portfolio and lower average deposit balances. The increase in noninterest expense was due to higher direct operating and allocated expenses.

Net income increased by $6.1 million or 114% in 2010 compared to 2009 primarily due to an increase in noninterest income and decreases in noninterest expense and the Provision. The increase in noninterest income was primarily due to the gain on sale of our proprietary mutual funds. The decrease in noninterest expense was primarily due to lower legal fees, other professional services, and allocated expenses. The decrease in the Provision was due to lower net charge-offs of loans in the segment.

Treasury and Other

Net income decreased by $6.2 million or 9% in 2011 compared to 2010 primarily due to a decrease in noninterest income. This was partially offset by higher net interest income, and a lower Provision and noninterest expense. The decrease in noninterest income was primarily due to lower net investment securities gains. The increase in net interest income was primarily due to lower deposit funding costs. The decrease in the Provision for the segment represents the reduction in the Allowance due to improvements in credit quality. The decrease in noninterest expense was primarily due to the early termination costs related to the prepayment of $75.0 million in securities sold under agreements to repurchase in 2010 and lower separation expense in 2011.

Net income increased by $34.0 million or 89% in 2010 compared to 2009 primarily due to higher net interest income and noninterest income. This was partially offset by higher noninterest expense. The increase in net interest income was primarily due to lower loan and deposit funding costs, an increase in the average balance of our investment securities portfolio, and lower costs associated with long-term debt. The increase in noninterest income was primarily due to net investment securities gains, partially offset by the change in fair value of mortgage servicing rights. The increase in noninterest expense was primarily due to the previously noted early termination costs related to the prepayment of $75.0 million in securities sold under agreements to repurchase and higher separation expense.

Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) included in Treasury and Other provide a wide-range of support to the Company's other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.

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Analysis of Statements of Condition

Investment Securities

Table 8 presents the contractual maturity distribution, weighted-average yield to maturity, and fair value of our investment securities.

Contractual Maturity Distribution, Weighted-Average Yield to Maturity, and Fair Value of Investment Securities
  Table 8
 
   
(dollars in millions)
  1 Year
or Less

  Weighted
Average
Yield

  After 1
Year-5
Years

  Weighted
Average
Yield

  After 5
Years-10
Years

  Weighted
Average
Yield

  Over 10
Years

  Weighted
Average
Yield

  Total
  Weighted
Average
Yield

  Fair
Value

 
   

As of December 31, 2011

                                                                   

Investment Securities Available-for-Sale 1

                                                                   

Debt Securities Issued by the U.S. Treasury and Government Agencies

  $ 326.1     0.7%   $ 485.6     1.1%   $ 46.1     2.3%   $ 362.5     2.2%   $ 1,220.3     1.3%   $ 1,231.0  

Debt Securities Issued by States and Political Subdivisions 2

    26.4     1.7        27.2     2.9        122.2     4.4        215.5     5.6        391.3     4.7        407.1  

Debt Securities Issued by Corporations

    -     -        97.9     2.5        -     -        -     -        97.9     2.5        96.4  

Mortgage-Backed Securities Issued by 3 Government Agencies

    74.8     0.9        -     -        14.1     3.5        1,530.0     2.7        1,618.9     2.6        1,655.9  

U.S. Government-Sponsored Enterprises

    -     -        1.3     4.5        1.5     2.8        55.7     4.1        58.5     4.1        61.5  
   

Total Mortgage-Backed Securities

    74.8     0.9        1.3     4.5        15.6     3.4        1,585.7     2.7        1,677.4     2.7        1,717.4  
   

Total Investment Securities Available-for-Sale

  $ 427.3     0.8%   $ 612.0     1.4%   $ 183.9     3.8%   $ 2,163.7     2.9%   $ 3,386.9     2.4%   $ 3,451.9  

                                                       

Investment Securities Held-to-Maturity

                                                                   

Debt Securities Issued by the U.S. Treasury and Government Agencies

  $ -     -%   $ 179.5     1.6%   $ -     -%   $ -     -%   $ 179.5     1.6%   $ 186.2  

Mortgage-Backed Securities Issued by 3 Government Agencies

    -     -     -     -     3.1     4.4        3,425.9     3.4        3,429.0     3.4        3,515.9  

U.S. Government Sponsored Enterprises

    -     -     -     -     13.8     3.7        35.5     4.0        49.3     3.9        52.1  
   

Total Mortgage-Backed Securities

    -     -     -     -     16.9     3.8        3,461.4     3.4        3,478.3     3.4        3,568.0  
   

Total Investment Securities Held-to-Maturity

  $ -     -%   $ 179.5     1.6%   $ 16.9     3.8%   $ 3,461.4     3.4%   $ 3,657.8     3.3%   $ 3,754.2  

                                                       

Total Investment Securities

                                                                   

As of December 31, 2011

 
$

427.3
       
$

791.5
       
$

200.8
       
$

5,625.1
       
$

7,044.7
       
$

7,206.1
 

                                                       

As of December 31, 2010

  $ 172.2         $ 180.0         $ 195.1         $ 6,037.1         $ 6,584.4         $ 6,667.9  

                                                       

As of December 31, 2009

  $ 12.2         $ 341.1         $ 214.0         $ 4,903.5         $ 5,470.8         $ 5,517.5  

                                                       
1
Weighted-average yields on investment securities available-for-sale are based on amortized cost.
2
Weighted-average yields on obligations of states and political subdivisions are generally tax-exempt and are computed on a taxable-equivalent basis using a federal statutory tax rate of 35%.
3
Contractual maturities do not anticipate reductions for periodic paydowns.

The carrying value of our investment securities portfolio was $7.1 billion as of December 31, 2011, an increase of $448.6 million or 7% compared to December 31, 2010.

We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.

During 2011, we reduced our positions in mortgage-backed securities issued by Ginnie Mae. The proceeds were primarily re-invested into U.S. Treasury notes and debt securities issued by the SBA. We also increased our municipal and corporate bond holdings in an effort to manage extension risk. As of December 31, 2011, our remaining portfolio of Ginnie Mae mortgage-backed securities were primarily comprised of securities issued between 2008 and 2011. As of December 31, 2011, the credit ratings of these mortgage-backed securities were all AAA-rated, with a low probability of a change in ratings in the near future.

During 2011, we also reclassified at fair value approximately $3.2 billion in available-for-sale investment securities to the held-to-maturity category. Generally, our longer duration investment securities were reclassified into the held-to-maturity category. The related unrealized after-tax gains of approximately $27.9 million remained in accumulated other comprehensive income to be amortized over the estimated remaining life of the securities as an adjustment of yield, in a manner consistent with the amortization of any premium or discount. No gains

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or losses were recognized at the time of reclassification. We consider the held-to-maturity classification of these investment securities to be appropriate as there is both the positive intent and ability to hold these securities to maturity. As of December 31, 2011, our remaining available-for-sale investment securities portfolio is comprised of securities with an average base duration of less than three years.

Gross unrealized gains in our investment securities portfolio were $168.0 million as of December 31, 2011 and $116.0 million as of December 31, 2010. Gross unrealized losses on our temporarily impaired investment securities were $6.6 million as of December 31, 2011 and $32.5 million as of December 31, 2010. As of December 31, 2011, the gross unrealized losses were primarily related to mortgage-backed securities issued by government agencies and debt securities issued by corporations and were attributable primarily to changes in interest rates, relative to when the investment securities were purchased.

As of December 31, 2011, we did not own any subordinated debt, or preferred or common stock of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. See Note 3 to the Consolidated Financial Statements for more information.

Loans and Leases

Total loans and leases were $5.5 billion as of December 31, 2011. This represents a $202.5 million or 4% increase from December 31, 2010.

The commercial loan and lease portfolio is comprised of commercial and industrial loans, commercial mortgages, construction loans, and lease financing. Commercial and industrial loans are made primarily to corporations, middle market, and small businesses. Commercial mortgages and construction loans are offered to real estate investors, developers, and builders primarily domiciled in Hawaii. Commercial mortgages are secured by real estate. The source of repayment for investor property is cash flow from the property and for owner-occupied property is the operating cash flow from the business. Construction loans are for the purchase or construction of a property for which repayment will be generated by the property. Lease financing consists of direct financing leases and leveraged leases. Although our primary market is Hawaii, the commercial portfolio contains loans to some borrowers based on the U.S. Mainland, including some Shared National Credits.

Commercial loans and leases were $2.2 billion as of December 31, 2011, an increase of $114.7 million or 6% from December 31, 2010. Commercial and industrial loans increased by $44.5 million and commercial mortgage loans increased by $74.9 million from December 31, 2010, primarily due to refinancing activity and new lending opportunities in these portfolios. Construction loans also increased by $18.3 million from December 31, 2010. While we have seen growth in the construction lending portfolio during 2011, demand for new development activity remains soft. Lease financing decreased by $23.1 million, consistent with our strategy to reduce our positions in leveraged leases on the U.S. Mainland.

The consumer loan and lease portfolio is comprised of residential mortgage loans, home equity lines and loans, personal credit lines, direct installment loans, and indirect auto loans and leases. These products are offered generally in the markets we serve. Although we offer a variety of products, our residential mortgage loan portfolio is primarily comprised of fixed rate loans concentrated in Hawaii. We also offer a variety of home equity lines and loans, secured by second mortgages on residential property of the borrower. Direct installment loans are secured or unsecured and are often used for personal expenses or for debt consolidation. Auto loans are available at fixed interest rates at terms up to 78 months. Auto leases are also available at select Hawaii new car dealerships.

Consumer loans and leases were $3.4 billion as of December 31, 2011, an increase of $87.8 million or 3% from December 31, 2010. Residential mortgage loans increased by $121.7 million or 6% from December 31, 2010 primarily due to strong refinancing activity, the result of low interest rates, as well as our decision to add more 30-year conforming saleable loans to our portfolio. Home equity loans decreased by $26.8 million or 3% and automobile loans decreased by $16.5 million or 8% from December 31, 2010 primarily due to continued paydowns and reduced consumer demand for new lending opportunities. Other consumer loans increased by $9.4 million or 5% from December 31, 2010 primarily due to the re-introduction of the installment loan product in Hawaii.

See Note 4 to the Consolidated Financial Statements and the "Corporate Risk Profile – Credit Risk" section of MD&A for more information on our loan and lease portfolio.

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Table 9 presents the geographic distribution of our loan and lease portfolio. Table 10 presents a maturity distribution for selected loan categories. This table excludes real estate loans (other than construction loans), lease financing, and consumer loans.

Geographic Distribution of Loan and Lease Portfolio
   
  Table 9
 
   
 
  December 31, 2011    
 
(dollars in thousands)
  Hawaii
  U.S.
Mainland 1

  Guam
  Other
Pacific
Islands

  Foreign 2
  Total
 
   

Commercial

                                     

Commercial and Industrial

  $ 700,570   $ 42,296   $ 67,870   $ 3,325   $ 3,109   $ 817,170  

Commercial Mortgage

    849,551     23,965     64,711     3     20     938,250  

Construction

    98,669     -     -     -     -     98,669  

Lease Financing

    30,488     236,203     21,868     -     23,369     311,928  
   

Total Commercial

    1,679,278     302,464     154,449     3,328     26,498     2,166,017  
   

Consumer

                                     

Residential Mortgage

    2,059,448     -     150,676     5,768     -     2,215,892  

Home Equity

    750,196     10,512     17,877     2,106     -     780,691  

Automobile

    140,111     9,073     41,113     2,209     -     192,506  

Other 3

    139,229     -     19,136     24,828     5     183,198  
   

Total Consumer

    3,088,984     19,585     228,802     34,911     5     3,372,287  
   

Total Loans and Leases

  $ 4,768,262   $ 322,049   $ 383,251   $ 38,239   $ 26,503   $ 5,538,304  
   

Percentage of Total Loans and Leases

    86%     6%     7%     1%     0%     100%  
   
1
For secured loans and leases, classification as U.S. Mainland is made based on where the collateral is located. For unsecured loans and leases, classification as U.S. Mainland is made based on the location where the majority of the borrower's business operations are conducted.
2
Loans classified as Foreign represent those which are recorded in the Company's international business units. Lease financing classified as Foreign represent those with air transportation carriers based outside the United States.
3
Comprised of other revolving credit, installment, and lease financing.

Maturities for Selected Loan Categories 1
  Table 10
 
   
 
  December 31, 2011    
 
(dollars in thousands)
  Due in
One Year or Less

  Due After One
to Five Years 2

  Due After
Five Years 2

  Total
 
   

Commercial and Industrial

  $ 338,862   $ 309,938   $ 168,370   $ 817,170  

Construction

    59,012     29,153     10,504     98,669  
   

Total

  $ 397,874   $ 339,091   $ 178,874   $ 915,839  
   
1
Based on contractual maturities.

2
As of December 31, 2011, loans maturing after one year consisted of $327.2 million in variable rate loans and $190.8 million in fixed rate loans.

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Other Assets

Other assets were $441.8 million as of December 31, 2011, a $1.8 million or less than 1% decrease from December 31, 2010. The decrease in other assets was primarily due to a $16.3 million decrease in federal tax deposits. Also contributing to the decrease in other assets was an $8.4 million decrease resulting from the amortization of prepaid FDIC assessments. This was partially offset by a $9.6 million increase in the fair value of our customer-related interest rate swap accounts, which have off-setting amounts recorded in other liabilities, a $5.3 million increase in the value of our bank-owned life insurance, a $4.4 million increase in receivables related to principal paydowns and settlements of investment securities, and a $3.9 million increase in the balance of our low-income housing and other equity investments. See Note 7 to the Consolidated Financial Statements for more information on the composition of our other assets.

As of December 31, 2011, the carrying value of our Federal Home Loan Bank of Seattle ("FHLB") stock was $61.3 million. Our investment in the FHLB is a condition of membership and, as such, is required to obtain credit and other services from the FHLB. As of September 30, 2011, the FHLB met all of its regulatory capital requirements, but remained classified as "undercapitalized" by its primary regulator, the Federal Housing Finance Agency ("Finance Agency"), due to several factors including the possibility that further declines in the value of its private-label mortgage-backed securities could cause it to fall below its risk-based capital requirements. As such, the FHLB remains restricted from redeeming or repurchasing capital stock or paying dividends.

We consider our investment in the FHLB as a long-term investment and we value the investment based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The FHLB had increased capital levels as of September 30, 2011 compared to December 31, 2010, continues to meet its debt obligations, and if needed has an additional source of liquidity available to U.S. Government-Sponsored Enterprises through the U.S. Treasury. Based upon the foregoing, we have not recorded an impairment of the carrying value of our FHLB stock as of December 31, 2011.

Goodwill

Goodwill was $31.5 million as of December 31, 2011 and 2010. As of December 31, 2011, based on our qualitative assessment, there were no reporting units where we believed that it was more likely than not that the fair value of a reporting unit was less than its carrying amount, including goodwill. As a result, we had no reporting units where there was a reasonable possibility of failing Step 1 of the goodwill impairment test. See Note 1 to the Consolidated Financial Statements for more information on our goodwill impairment policy.

Deposits

During 2011, volatility in the financial and equity markets contributed to customers' demand for more liquidity. Total deposits were $10.6 billion as of December 31, 2011, a $703.6 million or 7% increase from December 31, 2010. Consumer, commercial, and public customers all contributed to strong deposit growth in 2011. The increase in deposit balances in 2011 was primarily due to a $516.0 million increase in our public deposits mainly due to higher public time deposits. Also contributing to the increase was a $415.4 million increase in our personal and business interest and non-interest bearing demand accounts. This was partially offset by a $216.6 million decrease in our business money market savings accounts and a $13.7 million decrease in our consumer bonus rate savings products.

We believe that our strong brand played a key role in increasing deposit balances over the past 12 months, as we compete with other financial institutions for a share of the deposit market.

Average time deposits of $100,000 or more was $675.1 million in 2011 and $635.4 million in 2010. See Note 8 to the Consolidated Financial Statements for more information.

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Table 11 presents the components of our savings deposits as of December 31, 2011 and 2010.

Savings Deposits
  Table 11
 
   
(dollars in thousands)
  2010
  2010
 
   

Money Market

  $ 1,732,999   $ 1,942,034  

Regular Savings

    2,665,639     2,584,859  
   

Total Savings Deposits

  $ 4,398,638   $ 4,526,893  
   

Borrowings

Borrowings consisted of funds purchased and short-term borrowings. Borrowings were $10.8 million as of December 31, 2011, a $4.9 million or 31% decrease from December 31, 2010. We manage the level of our borrowings to ensure that we have adequate sources of liquidity. Due to high levels of deposits and our increased capital levels, our level of borrowings as a source of funds has remained low. See Note 9 to the Consolidated Financial Statements for more information.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase were $1.9 billion as of December 31, 2011, a $24.9 million or 1% increase from December 31, 2010. This increase was primarily due to new placements to accommodate local government entities. Average rates paid on securities sold under agreements to repurchase were 1.58% in 2011, a 5 basis point increase from 2010. We have not entered into agreements in which the securities sold and the related liability was not recorded on the consolidated statements of condition. See Note 9 to the Consolidated Financial Statements for more information.

Long-Term Debt

Long-term debt was $30.7 million as of December 31, 2011, a $2.0 million or 6% decrease from December 31, 2010. Due to our strong liquidity position, we have not needed additional long-term funding in recent years.

Pension and Postretirement Plan Obligations

Retirement benefits payable were $46.9 million as of December 31, 2011, a $16.1 million or 52% increase from December 31, 2010. The accounting for pension and postretirement benefit plans reflect the long-term nature of the obligations and the investment horizon of the plan assets. Amounts recorded in the consolidated statements of condition reflect actuarial assumptions about participant benefits and plan asset returns. The increase in retirement benefits payable was primarily due to a $10.2 million increase due to utilizing a lower discount rate and an $8.4 million increase due to lower expected return on plan assets. Significant inputs to determine the valuation of the obligation include the discount rate, expected long-term rate of return on plan assets, mortality, retirement, withdrawal and disability rates, and the form of benefit payment (i.e. lump-sum or life annuity). The change in the discount rate assumption from 5.75% as of December 31, 2010 to 5.04% as of December 31, 2011 resulted in the largest impact to the benefits payable balance. See Note 14 to the Consolidated Financial Statements for more information.

Foreign Activities

Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments, and any other monetary assets which are denominated in dollars or other non-local currency. As of December 31, 2011, 2010 and 2009, we did not have cross-border outstandings to any foreign country which exceeded 0.75% of our total assets.

We continue to monitor the debt crisis in Europe and the potential direct and indirect impact it may have on us. As of December 31, 2011, we had no exposures to sovereign European governments and our non-sovereign European exposures posed a low risk of loss to the Company. The U.S. and Hawaii economies and our customers may be adversely affected by future developments arising from the debt crisis in Europe. However, we believe that there is a low risk that this indirect exposure will have a material impact to our financial condition, results of operations, or cash flows.

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Corporate Risk Profile

Managing risks is an essential part of successfully operating our business. Management believes that the most prominent risk exposures for the Company are credit risk, market risk, liquidity risk management, capital management, and operational risk. We must properly and effectively identify, assess, measure, monitor, control, and report these risks across the Company to maintain safety and soundness, while maximizing shareholder value and profitability.

Credit Risk

Credit risk is defined as the risk that borrowers or counter-parties will not be able to repay their obligations to us. Credit exposures reflect legally binding commitments for loans, leases, banker's acceptances, standby and commercial letters of credit, and deposit account overdrafts.

We manage and control risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Written credit policies document underwriting standards, approval levels, exposure limits, and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, industry, product, and/or geographic location levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent credit review process that assesses compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. In addition to implementing risk management practices that are based upon established and sound lending practices, we adhere to sound credit principles. We understand and evaluate our customers' borrowing needs and capacity to repay, in conjunction with their character and history.

Commercial and industrial loans are made primarily for the purpose of financing equipment acquisition, expansion, working capital, and other general business purposes. Lease financing consists of direct financing leases and leveraged leases and are used by commercial customers to finance capital purchases ranging from computer equipment to transportation equipment. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. A determination is made as to the applicant's ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. In addition to an evaluation of the applicant's financial condition, a determination is made of the probable adequacy of the primary and secondary sources of repayment, such as additional collateral or personal guarantees, to be relied upon in the transaction. Credit agency reports of the applicant's credit history supplement the analysis of the applicant's creditworthiness.

Commercial mortgages and construction loans are offered to real estate investors, developers, builders, and owner-occupants primarily domiciled in Hawaii. These loans are secured by first mortgages on real estate at loan-to-value ("LTV") ratios deemed appropriate based on the property type, location, overall quality, and sponsorship. Generally, these LTV ratios do not exceed 75%. The commercial properties are predominantly developments such as retail centers, apartments, industrial properties and, to a lesser extent, more specialized properties such as hotels. Substantially all of our commercial mortgage loans are secured by properties located in our primary market area.

In the underwriting of our commercial mortgage loans, we obtain appraisals for the underlying properties. Decisions to lend are based on the economic fundamentals of the property and the creditworthiness of the borrower. In evaluating a proposed commercial mortgage loan, we primarily emphasize the ratio of the property's projected net cash flows to the loan's debt service requirement. The debt service coverage ratio normally is not less than 120% and it is computed after deduction for a vacancy factor and property expenses as appropriate. In addition, a personal guarantee of the loan or a portion thereof is sometimes required from the principal(s) of the borrower. We typically require title insurance insuring the priority of our lien, fire, and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property. In addition, business interruption insurance or other insurance may be required.

Owner-occupant commercial mortgage loans are underwritten based upon the cash flow of the business provided that the real estate asset is utilized in the operation of the business. Real estate is evaluated independently as a secondary source of repayment. As noted above, LTV ratios generally do not exceed 75%.

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Construction loans are underwritten against projected cash flows derived from rental income, business income from an owner-occupant, or the sale of the property to an end-user. We may mitigate the risks associated with these types of loans by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements.

We offer a variety of first mortgage and junior lien loans to consumers within our markets with residential home mortgages comprising our largest loan category. These loans are secured by a primary residence and are underwritten using traditional underwriting systems to assess the credit risks and financial capacity and repayment ability of the consumer. Decisions are primarily based on LTV ratios, debt-to-income ("DTI") ratios, liquidity, and credit scores. LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance. We offer variable rate mortgage loans with interest rates that are subject to change every year after the first, third, fifth, or seventh year, depending on the product and are based on the London Interbank Offered Rate ("LIBOR"). Variable rate mortgage loans are underwritten at fully-indexed interest rates. Non-traditional product offerings such as interest-only facilities are underwritten using a fully amortizing payment. We do not offer payment-option facilities, sub-prime or Alt-A loans, or any product with negative amortization.

Home equity loans are secured primarily by second mortgages on residential property of the borrower. The underwriting terms for the home equity product generally permits borrowing availability, in the aggregate, up to 80% of the value of the collateral property at the time of origination. We offer fixed and variable rate home equity loans, with variable rate loans underwritten at fully-indexed interest rates. Our procedures for underwriting home equity loans include an assessment of an applicant's overall financial capacity and repayment ability. Decisions are primarily based on LTV ratios, DTI ratios, and credit scores. We do not offer home equity loan products with reduced documentation.

Automobile lending activities include loans and leases secured by new or used automobiles. We originate automobile loans and leases on an indirect basis through selected dealerships. Our procedures for underwriting automobile loans include an assessment of an applicant's overall financial capacity and repayment ability, credit history, and the ability to meet existing obligations and payments on the proposed loan. Although an applicant's creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount. We require borrowers to maintain full coverage automobile insurance on automobile loans and leases, with the Bank listed as either the loss payee or additional insured.

Our overall credit risk position reflects a slowly improving Hawaii economy, with decreasing levels of higher risk loans and leases, criticized and classified loans and leases, and credit losses compared to 2010. The tourism industry is recovering due to increasing visitor arrivals and spending, although the construction and real estate industries remain weak. Overall, statewide employment continues to be stable and the generally improving economy is resulting in lower loss rates in our loan and lease portfolios

Higher Risk Loans and Leases

Although asset quality has improved over the past two years, we remain vigilant in light of the uncertainties in the U.S. economy as well as concerns related to specific segments of our lending portfolio that present a higher risk profile. As of December 31, 2011, the higher risk segments within our loan and lease portfolio continue to be concentrated in residential home building, residential land loans, home equity loans, and air transportation leases. In addition, loans and leases based on Hawaiian islands other than Oahu (the "neighbor islands") may present a higher risk profile as the neighbor islands have continued to experience higher levels of unemployment and have shown signs of slower economic recovery when compared to Oahu.

Table 12 summarizes the amount of our loan and lease portfolio that demonstrate a higher risk profile. The Allowance associated with these higher risk loans and leases is consistent with our methodologies for each of the respective loan or lease classes. These higher risk loans and leases have been

39


Table of Contents

considered in our quarterly evaluation of the adequacy of the Allowance.

Higher Risk Loans and Leases Outstanding
  Table 12
 
   
 
  December 31,  
(dollars in thousands)
  2011
  2010
 
   

Residential Home Building

  $ 13,475   $ 14,964  

Residential Land Loans

    18,163     23,745  

Home Equity Loans

    21,413     23,179  

Air Transportation

    36,144     37,879  
   

Total

  $ 89,195   $ 99,767  
   

Residential home building loans represented $29.0 million or 29% of our total commercial construction portfolio balance as of December 31, 2011. The higher risk loans in our residential home building portfolio consist of loans with a well-defined weakness or weaknesses that jeopardize the orderly repayment of the loans. Higher risk loans in our residential home building portfolio included $2.3 million in projects on the neighbor islands. As of December 31, 2011, the Allowance associated with the remaining balance of higher risk residential home building loans, which was comprised of four loans, was $3.0 million or 23% of outstanding loan balances. As of December 31, 2011, there were no delinquencies in this portfolio of higher risk loans, however, one of the loans is maintained on non-accrual status due to concerns about its full collectability.

Residential land loans in our residential mortgage portfolio consist of consumer loans secured by unimproved lots. These loans often represent higher risk due to the volatility in the value of the underlying collateral. Our residential land loan portfolio was $18.2 million as of December 31, 2011, of which $15.7 million related to properties on the neighbor islands. The decrease in our higher risk exposure in this portfolio segment in 2011 was primarily due to $5.0 million in paydowns and $0.8 million in gross loan charge-offs. Residential land loans are collectively evaluated for impairment in connection with the evaluation of our residential mortgage portfolio. As of December 31, 2011, there was no specific Allowance associated with the remaining balance of our residential land loans. As of December 31, 2011, there were no residential land loans that were 90 days past due as to principal or interest.

The higher risk segment within our Hawaii home equity lending portfolio was $21.4 million or 3% of our total home equity loans outstanding as of December 31, 2011. The higher risk segment within our Hawaii home equity portfolio includes those loans originated in 2005 or later, with current monitoring credit scores below 600, and with original LTV ratios greater than 70%. The decrease in our higher risk exposure in this portfolio segment in 2011 was primarily due to improved credit score migration for our Oahu owner occupants, which account for 66% of this higher risk segment. Higher risk loans in our Hawaii home equity portfolio are collectively evaluated for impairment in connection with the evaluation of our entire home equity portfolio. As of December 31, 2011, there was no specific Allowance associated with the remaining balance of our higher risk home equity loans. As of December 31, 2011, the higher risk home equity loans had a 90 day past due delinquency ratio of 2.5%. In 2011, $5.5 million or 51% of our gross charge-offs of home equity loans were from our higher risk segment.

We consider all of our air transportation leases to be of higher risk due to the volatile financial profile of the industry. As of December 31, 2011, included in our commercial leasing portfolio were four leveraged leases on aircraft that were originated in the 1990's and prior. Outstanding credit exposure related to these leveraged leases was $27.5 million as of December 31, 2011 and $27.7 million as of December 31, 2010. Relative to our total loan and lease portfolio, domestic air transportation carriers continue to demonstrate a higher risk profile due to fuel costs, pension plan obligations, consumer demand, and marginal pricing power. We believe that volatile fuel costs, coupled with a slow economic recovery, could continue to place stress on the financial health of air transportation carriers for the foreseeable future. As of December 31, 2011, the Allowance associated with the remaining balance of our air transportation leases was $23.1 million or 64% of outstanding balances. In 2011, there were no delinquencies in our air transportation lease portfolio and no charge-offs were recorded. We recorded a $3.4 million partial recovery on a previously charged-off leveraged lease in 2011.

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Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More

Table 13 presents a five-year history of non-performing assets and accruing loans and leases past due 90 days or more.

Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More
  Table 13
 
   
 
  December 31,
 
 
     
(dollars in thousands)
  2011
  2010
  2009
  2008
  2007
 
   

Non-Performing Assets 1

                               

Non-Accrual Loans and Leases

                               

Commercial

                               

Commercial and Industrial

  $ 6,243   $ 1,642   $ 6,646   $ 3,869   $ 598  

Commercial Mortgage

    2,140     3,503     1,167     -     112  

Construction

    2,080     288     8,154     5,001     -  

Lease Financing

    5     19     631     133     297  
   

Total Commercial

    10,468     5,452     16,598     9,003     1,007  
   

Consumer

                               

Residential Mortgage

    25,256     28,152     19,893     3,904     2,681  

Home Equity

    2,024     2,254     5,153     1,614     1,414  

Other 2

    -     -     550     -     -  
   

Total Consumer

    27,280     30,406     25,596     5,518     4,095  
   

Total Non-Accrual Loans and Leases

    37,748     35,858     42,194     14,521     5,102  
   

Non-Accrual Loans Held for Sale

    -     -     3,005     -     -  

Foreclosed Real Estate

    3,042     1,928     3,132     428     184  
   

Total Non-Performing Assets

  $ 40,790   $ 37,786   $ 48,331   $ 14,949   $ 5,286  
   

Accruing Loans and Leases Past Due 90 Days or More

                               

Commercial

                               

Commercial and Industrial

  $ 1   $ -   $ 623   $ 6,785   $ -  

Lease Financing

    -     -     120     268     -  
   

Total Commercial

    1     -     743     7,053     -  
   

Consumer

                               

Residential Mortgage

    6,422     5,399     8,979     4,192     4,884  

Home Equity

    2,194     1,067     2,210     1,077     413  

Automobile

    170     410     875     743     1,174  

Other 2

    435     707     886     1,134     1,112  
   

Total Consumer

    9,221     7,583     12,950     7,146     7,583  
   

Total Accruing Loans and Leases
Past Due 90 Days or More

  $ 9,222   $ 7,583   $ 13,693   $ 14,199   $ 7,583  
   

Restructured Loans on Accrual Status and
Not Past Due 90 Days or More

  $ 33,703   $ 23,724   $ 7,274   $ -   $ -  
   

Total Loans and Leases

  $ 5,538,304   $ 5,335,792   $ 5,759,785   $ 6,530,233   $ 6,580,861  
   

Ratio of Non-Accrual Loans and Leases to
Total Loans and Leases

   
0.68

%
 
0.67

%
 
0.73

%
 
0.22

%
 
0.08

%
   

Ratio of Non-Performing Assets to Total Loans and Leases,
Loans Held for Sale, and Foreclosed Real Estate

   
0.73

%
 
0.71

%
 
0.84

%
 
0.23

%
 
0.08

%
   

Ratio of Commercial Non-Performing Assets to
Total Commercial Loans and Leases, Commercial Loans
Held for Sale, and Commercial Foreclosed Real Estate

   
0.56

%
 
0.31

%
 
1.03

%
 
0.37

%
 
0.04

%
   

Ratio of Consumer Non-Performing Assets to Total Consumer
Loans and Leases, and Consumer Foreclosed Real Estate

   
0.85

%
 
0.95

%
 
0.72

%
 
0.14

%
 
0.10

%
   

Ratio of Non-Performing Assets and Accruing Loans and Leases
Past Due 90 Days or More to Total Loans and Leases,
Loans Held for Sale, and Foreclosed Real Estate

   
0.90

%
 
0.85

%
 
1.07

%
 
0.44

%
 
0.20

%
   
1
Excluded from non-performing assets were contractually binding non-accrual loans held for sale of $4.2 million as of December 31, 2009.

2
Comprised of other revolving credit, installment, and lease financing.

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Table of Contents

Table 14 presents the activity in Non-Performing Assets ("NPAs") for 2011:

Non-Performing Assets    (dollars in thousands)
  Table 14
 
   

Balance at Beginning of Year

  $ 37,786  

Additions

    28,876  

Reductions

       

Payments

    (8,937 )

Return to Accrual Status

    (12,457 )

Sales of Foreclosed Real Estate

    (1,974 )

Charge-offs/Write-downs

    (2,504 )
   

Total Reductions

    (25,872 )
   

Balance at End of Year

  $ 40,790  
   

NPAs are comprised of non-accrual loans and leases, non-accrual loans held for sale and foreclosed real estate. Our NPAs were $40.8 million as of December 31, 2011, compared to $37.8 million as of December 31, 2010. This increase was primarily due to the addition of one $4.9 million commercial and industrial loan and one $2.1 million construction loan to non-accrual status during 2011, partially offset by a $2.9 million reduction in residential mortgage non-accrual loans. The largest component of our NPAs continues to be centered in residential mortgage loans, which generally take longer to resolve through the judicial foreclosure process. The ratio of our non-accrual loans and leases to total loans and leases was 0.68% as of December 31, 2011, compared to 0.67% as of December 31, 2010.

Commercial and industrial non-accrual loans increased by $4.6 million from December 31, 2010 to $6.2 million as of December 31, 2011, primarily due to the addition of the one $4.9 million commercial and industrial loan to non-accrual status noted above. As of December 31, 2011, three commercial borrowers comprised 98% of the non-accrual balance. We have evaluated these loans for impairment and have recorded partial charge-offs totaling $5.3 million on two of these loans.

Commercial mortgage non-accrual loans decreased by $1.4 million from December 31, 2010 to $2.1 million as of December 31, 2011. As of December 31, 2011, the balance consists of three borrowers. We have evaluated these loans for impairment and have recorded a partial charge-off of $0.5 million on one of the loans.

Construction non-accrual loans increased by $1.8 million from December 31, 2010 to $2.1 million as of December 31, 2011. This increase was primarily due to the addition of the one $2.1 million construction loan to non-accrual status noted above.

Residential mortgage non-accrual loans decreased by $2.9 million from December 31, 2010 to $25.3 million as of December 31, 2011, primarily due to residential mortgage loan modifications that were restored to accrual status after the borrower demonstrated performance under the modified terms by making six consecutive payments. As of December 31, 2011, our residential mortgage non-accrual loans were comprised of 61 loans with a weighted average current LTV ratio of 78%.

Foreclosed real estate represents property acquired as the result of borrower defaults on loans. Foreclosed real estate is recorded at fair value, less estimated selling costs, at the time of foreclosure. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Foreclosed real estate increased by $1.1 million from December 31, 2010 to $3.0 million as of December 31, 2011. This increase was primarily due to the addition of one foreclosed commercial property on the neighbor islands.

Included in NPAs are loans that we consider impaired. Impaired loans are defined as those which we believe it is probable we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring ("TDR"). Impaired loans were $47.6 million as of December 31, 2011, compared to $38.0 million as of December 31, 2010. Impaired loans had a related Allowance of $5.5 million as of December 31, 2011 and $4.2 million as of December 31, 2010. As of December 31, 2011, we have recorded charge-offs of $12.7 million related to our impaired loans.

Loans Modified in a Troubled Debt Restructuring

Table 15 presents information on loans whose terms have been modified in a TDR.

Loans Modified in a Troubled Debt Restructuring
  Table 15
 
   
(dollars in thousands)
  2011
  2010
 
   

Restructured Loans on Accrual Status and Not Past Due 90 Days or More

  $ 33,703   $ 23,724  

Restructured Loans Included in Non-Accrual Loans or Accruing Loans Past Due 90 Days or More

    5,127     8,953  
   

Total Restructured Loans

  $ 38,830   $ 32,677  
   

We had loans whose terms had been modified in a TDR of $38.8 million as of December 31, 2011, compared to $32.7 million as of December 31, 2010.

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Table of Contents

This increase was primarily due to a $4.7 million increase in modified residential mortgage loans. Residential mortgage loans modified in a TDR were primarily comprised of loans where we lowered monthly payments to accommodate the borrowers' financial needs for a period of time.

Loans and Leases Past Due 90 Days or More and Still Accruing Interest

Loans and leases that are 90 days or more past due, as to principal or interest, and still accruing interest are in this category because they are well secured and in the process of collection. Loans and leases past due 90 days or more and still accruing interest were $9.2 million as of December 31, 2011, an increase of $1.6 million from December 31, 2010. This increase was primarily in our residential mortgage and home equity portfolios.

If interest due on the balances of all non-accrual loans as of December 31, 2011 had been accrued under the original terms, approximately $3.7 million in total interest income would have been recorded in 2011, compared to the $0.9 million recorded as interest income on those loans.

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Table of Contents

Reserve for Credit Losses

The Company's reserve for credit losses is comprised of two components, the Allowance and the reserve for unfunded commitments (the "Unfunded Reserve"). Table 16 presents the activity in the Company's reserve for credit losses for the years ended December 31:

 
   
   
   
  Table 16
 
Reserve for Credit Losses
   
 
   
(dollars in thousands)
  2011
  2010
  2009
  2008
  2007
 
   

Balance at Beginning of Period

  $ 152,777   $ 149,077   $ 128,667   $ 96,167   $ 96,167  

Loans and Leases Charged-Off

                               

Commercial

                               

Commercial and Industrial

    (8,112 )   (21,125 )   (26,641 )   (8,059 )   (3,266 )

Commercial Mortgage

    -     (2,048 )   (2,092 )   -     -  

Construction

    -     (2,274 )   (10,360 )   (1,932 )   -  

Lease Financing

    -     (500 )   (14,022 )   (304 )   (145 )

Consumer

                               

Residential Mortgage

    (8,174 )   (12,139 )   (7,768 )   (723 )   (169 )

Home Equity

    (10,853 )   (15,052 )   (12,722 )   (2,530 )   (1,097 )

Automobile

    (3,229 )   (6,425 )   (9,903 )   (11,236 )   (10,340 )

Other 1

    (6,392 )   (10,315 )   (13,233 )   (10,564 )   (9,893 )
   

Total Loans and Leases Charged-Off

    (36,760 )   (69,878 )   (96,741 )   (35,348 )   (24,910 )
   

Recoveries on Loans and Leases Previously Charged-Off

                               

Commercial

                               

Commercial and Industrial

    2,434     2,082     1,211     1,634     1,203  

Commercial Mortgage

    538     68     45     -     156  

Construction

    -     7,321     476     -     -  

Lease Financing

    3,528     158     131     10     2,092  

Consumer

                               

Residential Mortgage

    2,152     1,544     1,059     175     221  

Home Equity

    1,695     1,597     364     108     359  

Automobile

    2,479     3,128     3,153     2,817     2,582  

Other 1

    2,492     2,393     2,584     2,589     2,790  
   

Total Recoveries on Loans and Leases
Previously Charged-Off

    15,318     18,291     9,023     7,333     9,403  
   

Net Loans and Leases Charged-Off

    (21,442 )   (51,587 )   (87,718 )   (28,015 )   (15,507 )

Provision for Credit Losses

    12,690     55,287     107,878     60,515     15,507  

Provision for Unfunded Commitments

    -     -     250     -     -  
   

Balance at End of Period 2

  $ 144,025   $ 152,777   $ 149,077   $ 128,667   $ 96,167  
   

Components

                               

Allowance for Loan and Lease Losses

  $ 138,606   $ 147,358   $ 143,658   $ 123,498   $ 90,998  

Reserve for Unfunded Commitments

    5,419     5,419     5,419     5,169     5,169  
   

Total Reserve for Credit Losses

  $ 144,025   $ 152,777   $ 149,077   $ 128,667   $ 96,167  
   

Average Loans and Leases Outstanding

 
$

5,349,938
 
$

5,472,534
 
$

6,144,976
 
$

6,542,178
 
$

6,561,584
 
   

Ratio of Net Loans and Leases Charged-Off to
Average Loans and Leases Outstanding

   
0.40

%
 
0.94

%
 
1.43

%
 
0.43

%
 
0.24

%

Ratio of Allowance for Loan and Lease Losses to
Loans and Leases Outstanding

    2.50 %   2.76 %   2.49 %   1.89 %   1.38 %
1
Comprised of other revolving credit, installment, and lease financing.
2
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.

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Table of Contents

Allowance for Loan and Lease Losses

Table 17 presents the allocation of the Allowance by loan and lease category.

 
   
   
   
  Table 17
 
Allocation of Allowance for Loan and Lease Losses
   
 
   
(dollars in thousands)
  2011
  2010
  2009
  2008
  2007
 
   

Commercial

                               

Commercial and Industrial

  $ 23,865   $ 26,343   $ 24,551   $ 31,183   $ 15,117  

Commercial Mortgage

    25,900     26,634     25,559     14,119     12,148  

Construction

    5,326     5,691     4,499     6,227     2,768  

Lease Financing

    25,471     22,309     27,698     43,091     33,428  
   

Total Commercial

    80,562     80,977     82,307     94,620     63,461  
   

Consumer

                               

Residential Mortgage

    18,758     18,063     13,884     4,443     4,293  

Home Equity

    27,232     29,838     28,877     4,814     3,064  

Automobile

    2,646     5,579     7,349     10,992     11,315  

Other 1

    9,408     12,901     11,241     8,629     8,865  
   

Total Consumer

    58,044     66,381     61,351     28,878     27,537  
   

Total Allocation of Allowance
for Loan and Lease Losses

  $ 138,606   $ 147,358   $ 143,658   $ 123,498   $ 90,998  
   

 

 
  2011
  2010
  2009
  2008
  2007
 
 
     
 
  Alloc.
Allow. as
% of
loan or
lease
category

  Loan
category
as % of
total
loans
and
leases

  Alloc.
Allow. as
% of
loan or
lease
category

  Loan
category
as % of
total
loans
and
leases

  Alloc.
Allow. as
% of
loan or
lease
category

  Loan
category
as % of
total
loans
and
leases

  Alloc.
Allow. as
% of
loan or
lease
category

  Loan
category
as % of
total
loans
and
leases

  Alloc.
Allow. as
% of
loan or
lease
category

  Loan
category
as % of
total
loans
and
leases

 
   

Commercial

                                                             

Commercial and Industrial

    2.92 %   14.75 %   3.41 %   14.48 %   3.09 %   13.81 %   2.96 %   16.14 %   1.43 %   16.02 %

Commercial Mortgage

    2.76     16.94     3.08     16.18     3.04     14.61     1.91     11.34     1.91     9.64  

Construction

    5.40     1.78     7.09     1.50     4.15     1.88     4.04     2.36     1.33     3.17  

Lease Financing

    8.17     5.63     6.66     6.28     6.71     7.17     9.20     7.17     6.94     7.32  
   

Total Commercial

    3.72     39.10     3.95     38.44     3.81     37.47     3.92     37.01     2.67     36.15  
   

Consumer

                                                             

Residential Mortgage

    0.85     40.01     0.86     39.25     0.63     38.03     0.18     37.70     0.17     38.11  

Home Equity

    3.49     14.10     3.70     15.13     3.13     16.00     0.47     15.82     0.31     14.79  

Automobile

    1.37     3.48     2.67     3.92     2.59     4.93     2.97     5.66     2.55     6.73  

Other1

    5.14     3.31     7.42     3.26     5.47     3.57     3.47     3.81     3.20     4.22  
   

Total Consumer

    1.72     60.90     2.02     61.56     1.70     62.53     0.70     62.99     0.66     63.85  
   

Total

    2.50 %   100.00 %   2.76 %   100.00 %   2.49 %   100.00 %   1.89 %   100.00 %   1.38 %   100.00 %
   
1
Comprised of other revolving credit, installment, and lease financing.

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Based on our ongoing assessment of credit quality of the loan and lease portfolio and the economic environment, our Allowance was $138.6 million as of December 31, 2011 and $147.4 million as of December 31, 2010. The ratio of the Allowance to total loans and leases outstanding was 2.50% as of December 31, 2011 compared to 2.76% as of December 31, 2010. The decrease in the ratio of the Allowance to total loans and leases in 2011 was primarily due to an $8.8 million reduction in the Allowance in 2011 due to improvements in credit quality and a generally improving economy in Hawaii. With continued stability in the Hawaii economy and continued improvements in credit quality, including reductions in our higher risk loan segments, we may require a lower level of the Allowance in future periods.

Net loan and lease charge-offs were $21.4 million or 0.40% of total average loans and leases in 2011, a decrease from $51.6 million or 0.94% of total average loans and leases in 2010. Net loans and leases charged-off decreased in all of our commercial and consumer lending portfolios during 2011. Commercial net charge-offs were $1.6 million in 2011, a decrease of $14.7 million from 2010. This decrease was primarily in our commercial and industrial portfolio, which experienced a $13.4 million decrease in net charge-offs in 2011 compared to 2010. Consumer net charge-offs were $19.8 million in 2011, a decrease of $15.4 million from 2010. This decrease was primarily in our residential mortgage and home equity portfolios.

The components of the Allowance, including the allocation between commercial and consumer categories is based on an evaluation of individual credits, historical loan and lease loss experience, management's evaluation of the current loan portfolio, and current economic conditions. The allocation of the Allowance to our commercial portfolio decreased by $0.4 million from December 31, 2010 primarily due to lower levels of charge-offs across all classes of our commercial loan portfolio. We have decreased the allocation of the Allowance to all classes of our commercial portfolio, except leasing. Relative to our total loan and lease portfolio, our domestic air transportation leases continue to demonstrate a higher risk profile as evidenced by recent airlines bankruptcies and continued high fuel prices. The allocation of the Allowance to our consumer portfolio decreased by $8.3 million from December 31, 2010 primarily due to lower levels of charge-offs across all classes of our consumer loan portfolio. See Note 4 to the Consolidated Financial Statements for more information on the Allowance and credit quality indicators.

Reserve for Unfunded Commitments

The Unfunded Reserve was $5.4 million as of December 31, 2011, unchanged from December 31, 2010. The process used to determine the Unfunded Reserve is consistent with the process for determining the Allowance, as adjusted for estimated funding probabilities or loan and lease equivalency factors.

Risks Related to Representation and Warranty Provisions

We sell residential mortgage loans in the secondary market primarily to Fannie Mae. We also pool Federal Housing Administration ("FHA") insured and U.S. Department of Veterans Affairs ("VA") guaranteed residential mortgage loans for sale to Ginnie Mae. These pools of FHA-insured and VA-guaranteed residential mortgage loans are securitized by Ginnie Mae. The agreements under which we sell residential mortgage loans to Fannie Mae or Ginnie Mae and the insurance or guaranty agreements with FHA and VA contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, and other matters.

As of December 31, 2011, the unpaid principal balance of our portfolio of residential mortgage loans sold was $3.0 billion. These loans are generally sold on a non-recourse basis. The agreements under which we sell residential mortgage loans require us to deliver various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans where required documents are not delivered or are defective. Investors may require the immediate repurchase of a mortgage loan when an early payment default underwriting review reveals significant underwriting deficiencies, even if the mortgage loan has subsequently been brought current. Upon receipt of a repurchase request, we work with investors or insurers to arrive at a mutually agreeable

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resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor or insurer and to determine if a contractually required repurchase event has occurred. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. For the year ended December 31, 2011, we repurchased 15 residential mortgage loans with an unpaid principal balance of $1.9 million as a result of the representation and warranty provisions contained in these contracts. Of these repurchased loans, 90% were current as to principal and interest at the time of repurchase. For the year ended December 31, 2011, no losses were incurred related to these repurchases. As of December 31, 2011, there was one pending repurchase request related to representation and warranty provisions with an unpaid principal balance of less than $0.1 million.

Risks Relating to Residential Mortgage Loan Servicing Activities

In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained. The loans we service were originated by us or by other mortgage loan originators. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or, to the extent consistent with the documents governing a securitization, consider alternatives to foreclosure, such as loan modifications or short sales.

Each agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Bank. Remedies could include repurchase of an affected loan. As of December 31, 2011, there was one pending repurchase request related to servicing activities with an unpaid principal balance of $0.2 million.

Although to date repurchase requests related to representation and warranty provisions, and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as of December 31, 2011, we believe that this exposure is not material due to the historical level of repurchase requests and loss trends and thus have not established a liability for losses related to mortgage loan repurchases. As of December 31, 2011, 99% of our residential mortgage loans serviced for investors were current. We maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios.

Market Risk

Market risk is the potential of loss arising from adverse changes in interest rates and prices. We are exposed to market risk as a consequence of the normal course of conducting our business activities. Our market risk management process involves measuring, monitoring, controlling, and mitigating risks that can significantly impact our statements of income and condition. In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance, while limiting volatility.

Our primary market risk exposure is interest rate risk.

Interest Rate Risk

The objective of our interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.

The potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans.

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Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and repricing characteristics of financial instruments.

Our earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the FRB. The monetary policies of the FRB can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities. The nature and impact of future changes in monetary policies are generally not predictable.

In managing interest rate risk, we, through the Asset/Liability Management Committee ("ALCO"), measure short and long-term sensitivities to changes in interest rates. The ALCO, which is comprised of members of executive management, utilizes several techniques to manage interest rate risk, which include:

adjusting balance sheet mix or altering the interest rate characteristics of assets and liabilities;
changing product pricing strategies;
modifying characteristics of the investment securities portfolio; or
using derivative financial instruments.

The use of derivative financial instruments, as detailed in Note 17 to the Consolidated Financial Statements, has generally been limited. This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities with deposits and other interest-bearing liabilities. In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO. We utilize natural and offsetting economic hedges in an effort to reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures. Expected movements in interest rates are also considered in managing interest rate risk. Thus, as interest rates change, we may use different techniques to manage interest rate risk.

A key element in our ongoing process to measure and monitor interest rate risk is the utilization of an asset/liability simulation model. The model is used to estimate and measure the balance sheet sensitivity to changes in interest rates. These estimates are based on assumptions on the behavior of loan and deposit pricing, repayment rates on mortgage-based assets, and principal amortization and maturities on other financial instruments. The model's analytics include the effects of standard prepayment options on mortgages and customer withdrawal options for deposits. While such assumptions are inherently uncertain, we believe that these assumptions are reasonable. As a result, the simulation model attempts to capture the dynamic nature of the balance sheet.

We utilize net interest income simulations to analyze short-term income sensitivities to changes in interest rates. Table 18 presents, for the next twelve months subsequent to December 31, 2011 and 2010, an estimate of the change in net interest income that would result from a gradual and immediate change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. The base case scenario assumes the balance sheet and interest rates are generally unchanged. Based on the net interest income simulation as of December 31, 2011, net interest income sensitivity to changes in interest rates as of December 31, 2011 was generally slightly less sensitive to changes in interest rates compared to the sensitivity profile as of December 31, 2010. As a result of our strategy to maintain a relatively short investment portfolio duration, net interest income is expected to increase as interest rates rise. Economic conditions and government intervention continue to result in interest rates remaining relatively low.

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Net Interest Income Sensitivity Profile
  Table 18
 
   
 
  Impact on Future Annual Net Interest Income
 
 
     
(dollars in thousands)
  December 31, 2011
  December 31, 2010
 
   

Gradual Change in Interest Rates (basis points)

                         

+200

  $ 2,934     0.8 % $ 3,048     0.7 %

+100

    2,036     0.5 %   3,139     0.8 %

-100

    (7,900 )   -2.0 %   (8,065 )   -2.0 %

Immediate Change in Interest Rates (basis points)

                         

+200

  $ 10,086     2.6 % $ 10,641     2.6 %

+100

    7,226     1.9 %   7,990     1.9 %

-100

    (25,750 )   -6.7 %   (27,971 )   -6.8 %

To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated. These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted for a period of time. Conversely, if the yield curve should steepen, net interest income may increase.

Other Market Risks

In addition to interest rate risk, we are exposed to other forms of market risk in our normal business transactions. Foreign currency and foreign exchange contracts expose us to a small degree of foreign currency risk. These transactions are primarily executed on behalf of customers. Our trust and asset management income are at risk to fluctuations in the market values of underlying assets, particularly debt and equity securities. Also, our share-based compensation expense is dependent on the fair value of the stock options and restricted stock at the date of grant. The fair value of both stock options and restricted stock is impacted by the market price of the Parent's common stock on the date of grant and is at risk to changes in equity markets, general economic conditions, and other factors.

Liquidity Risk Management

The objective of our liquidity risk management process is to manage cash flow and liquidity in an effort to provide continuous access to sufficient, reasonably priced funds. Funding requirements are impacted by loan originations and refinancings, deposit growth, liability issuances and settlements, and off-balance sheet funding commitments. We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions. The ALCO monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.

In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have immediate liquid resources in cash and noninterest-bearing deposits and funds sold. The potential sources of short-term liquidity include interest-bearing deposits as well as the ability to sell certain assets including available-for-sale investment securities. Short-term liquidity is further enhanced by our ability to sell loans in the secondary market and to secure borrowings from the FRB and FHLB. Short-term liquidity is also generated from securities sold under agreements to repurchase, funds purchased, and short-term borrowings. Deposits have historically provided us with a long-term source of stable and relatively lower cost source of funding. Additional funding is available through the issuance of long-term debt. In recent years, we have retired some long-term debt due to our strong liquidity position.

We continued to maintain a strong liquidity position throughout 2011. As of December 31, 2011, cash and cash equivalents were $669.9 million, available-for-sale investment securities were $3.5 billion, and total deposits were $10.6 billion. As of December 31, 2011, we continued to maintain our excess liquidity primarily in mortgage-backed securities issued by Ginnie Mae and in U.S. Treasury Notes. As of December 31, 2011, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of less than three years.

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Capital Management

In our ongoing efforts to maximize shareholder value over time, we regularly review our capital management activities including the amount of earnings we retain in excess of cash dividends paid and the amount and pace of common stock repurchases. We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory "well-capitalized" thresholds by an amount commensurate with our risk profile. Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.

The Company and the Bank are each subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by regulation to ensure capital adequacy. As of December 31, 2011, the Company and the Bank were "well capitalized" under this regulatory framework. The Company's regulatory capital ratios are presented in Table 19 below. There have been no conditions or events since December 31, 2011 that management believes have changed either the Company's or the Bank's capital classifications.

As of December 31, 2011, shareholders' equity was $1.0 billion, unchanged from December 31, 2010. Earnings for 2011 of $160.0 million, the net change in unrealized gains related to available-for-sale investment securities of $16.4 million, and common stock issuances of $13.4 million were offset by cash dividends paid of $84.9 million. In 2011, we also repurchased 2.5 million shares of our common stock under our share repurchase program at an average cost per share of $43.88 and a total cost of $109.9 million. From the beginning of our share repurchase program in July 2001 through December 31, 2011, we repurchased a total of 48.5 million shares of common stock and returned a total of $1.7 billion to our shareholders at an average cost of $35.98 per share. As of December 31, 2011, remaining buyback authority under our share repurchase program was $74.0 million of the total $1.82 billion repurchase amount authorized by our Board of Directors. See the "Regulatory Initiatives Related to Liquidity and Capital" section in MD&A for more information.

From January 1, 2012 through February 14, 2012, the Parent repurchased an additional 190,000 shares of common stock at an average cost of $46.41 per share for a total of $8.8 million. Remaining buyback authority was $65.2 million as of February 14, 2012. The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, regulatory rules, applicable SEC rules, and various other factors.

In January 2012, the Parent's Board of Directors declared a quarterly cash dividend of $0.45 per share on the Parent's outstanding shares. The dividend will be payable on March 14, 2012 to shareholders of record at the close of business on February 29, 2012.

We continue to evaluate the potential impact that regulatory proposals may have on our liquidity and capital management strategies, including Basel III and those required under the Dodd-Frank Act, as they continue to progress through the final rule-making process. See further discussion below on the potential impact that these regulatory proposals may have on our liquidity and capital requirements.

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Table 19 presents a five-year history of activities and balances in our capital accounts, along with key capital ratios.

Shareholders' Equity and Regulatory Capital
  Table 19
 
   
 
  December 31,
 
 
     
(dollars in thousands)
  2011
  2010
  2009
  2008
  2007
 
   

Change in Shareholders' Equity

                               

Net Income

  $ 160,043   $ 183,942   $ 144,033   $ 192,213   $ 183,703  

Cash Dividends Paid

    (84,891 )   (86,823 )   (86,236 )   (84,855 )   (82,371 )

Dividend Reinvestment Program

    5,008     5,034     5,154     5,193     5,128  

Common Stock Repurchased

    (111,544 )   (24,981 )   (1,337 )   (62,015 )   (99,656 )

Other 1

    22,918     37,988     43,655     (10,087 )   24,031  
   

Increase (Decrease) in Shareholders' Equity

  $ (8,466 ) $ 115,160   $ 105,269   $ 40,449   $ 30,835  
   

Regulatory Capital

                               

Shareholders' Equity

  $ 1,002,667   $ 1,011,133   $ 895,973   $ 790,704   $ 750,255  

Add:     Capital Securities

    -     -     -     -     26,425  

Less:    Goodwill

    31,517     31,517     31,517     34,959     34,959  

Postretirement Benefit Liability Adjustments

    2,815     2,597     5,644     7,079     8,647  

Net Unrealized Gains (Losses) on
Investment Securities

    62,932     46,521     26,290     (4,277 )   (1,388 )

Other

    2,230     2,340     2,398     1,424     2,759  
   

Tier 1 Capital

    903,173     928,158     830,124     751,519     731,703  

Allowable Reserve for Credit Losses

    68,624     64,564     70,909     84,163     88,716  

Qualifying Subordinated Debt

    -     -     -     -     24,982  

Unrealized Gains on Available-for-Sale
Equity Securities

    -     -     -     -     59  
   

Total Regulatory Capital

  $ 971,797   $ 992,722   $ 901,033   $ 835,682   $ 845,460  
   

Risk-Weighted Assets

 
$

5,414,481
 
$

5,076,909
 
$

5,594,532
 
$

6,688,530
 
$

7,089,846
 
   

Key Regulatory Capital Ratios

                               

Tier 1 Capital Ratio

    16.68 %   18.28 %   14.84 %   11.24 %   10.32 %

Total Capital Ratio

    17.95     19.55     16.11     12.49     11.92  

Tier 1 Leverage Ratio

    6.73     7.15     6.76     7.30     7.02  
1
Includes unrealized gains and losses on available-for-sale investment securities, minimum pension liability adjustments, and common stock issuances under share-based compensation and related tax benefits.

Regulatory Initiatives Related to Liquidity and Capital

On December 16, 2010, the Basel Committee on Banking Supervision released the final text of the Basel III package on capital, leverage, and liquidity reforms. Under Basel III, financial institutions are required to have more capital and a higher quality of capital. It does so by increasing the minimum regulatory capital ratios, narrowing the definition of capital, and requiring capital buffers. Basel III also imposes a leverage ratio requirement and liquidity standards.

The new minimum capital requirements will be phased in between January 2013 and January 2015 as follows: (1) the minimum requirement for Tier 1 common equity ratio will be increased from the current 2% to 4.5%; (2) the minimum requirement for the Tier 1 Capital Ratio to be considered "adequately capitalized" will be increased from the current 4% to 6%; (3) an additional 2.5% of Tier 1 common equity to total risk-weighted assets (to be phased in between January 1, 2016 and January 1, 2019); and (4) a minimum Tier 1 Leverage Ratio of 3% (to be tested starting January 1, 2013).

The liquidity proposals under Basel III include: (1) a liquidity coverage ratio (to become effective January 1, 2015); (2) a net stable funding ratio (to become effective January 1, 2018); and (3) a set of monitoring tools to establish minimum reporting requirements of financial institutions to their regulatory supervisors. The liquidity coverage ratio is intended to ensure that banks have sufficient high-quality liquid assets to sustain a significant liquidity stress scenario lasting 30 days. The net stable funding ratio, which has a one year time horizon, is intended to promote the use of more stable sources of funding on an ongoing basis.

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Implementation of these new capital and liquidity requirements has created significant uncertainty with respect to the future requirements for financial institutions.

Operational Risk

Operational risk represents the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, errors relating to transaction processing and technology, failure to adhere to compliance requirements, and the risk of cyber security attacks. The risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity.

The Operational Risk Committee (the "ORC") provides oversight and assesses the most significant operational risks facing the Company. We have developed a framework that provides for a centralized operating risk management function through the ORC, supplemented by business unit responsibility for managing operational risks specific to their business units.

While we believe that internal controls have been designed to minimize operational risks, there is no assurance that business disruption or operational losses will not occur. On an ongoing basis, management reassesses operational risks, implements appropriate process changes, and invests in enhancements to its systems of internal controls.

Off-Balance Sheet Arrangements, Credit Commitments, and Contractual Obligations

Off-Balance Sheet Arrangements

We hold interests in several unconsolidated variable interest entities ("VIEs"). These unconsolidated VIEs are primarily low-income housing partnerships. Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entity's net asset value. The primary beneficiary consolidates the VIE. We have determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs. See discussion of our accounting policy related to VIEs in Note 1 to the Consolidated Financial Statements.

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Credit Commitments and Contractual Obligations

Our credit commitments and contractual obligations as of December 31, 2011 were as follows:

Credit Commitments and Contractual Obligations 1
  Table 20
 
   
(dollars in thousands)
  Less Than One Year
  1-3 Years
  4-5 Years
  After 5 Years
  Total
 
   

Credit Commitments

                               

Unfunded Commitments to Extend Credit

  $ 553,687   $ 299,799   $ 242,984   $ 878,857   $ 1,975,327  

Standby Letters of Credit

    73,510     572     -     -     74,082  

Commercial Letters of Credit

    18,486     -     -     -     18,486  
   

Total Credit Commitments

    645,683     300,371     242,984     878,857     2,067,895  
   

Contractual Obligations

                               

Deposits

    10,338,250     158,855     74,646     20,872     10,592,623  

Funds Purchased

    10,791     -     -     -     10,791  

Securities Sold Under
Agreements to Repurchase

    1,244,665     81,333     425,000     175,000     1,925,998  

Long-Term Debt, including interest

    3,887     7,798     7,344     9,253     28,282  

Banker's Acceptances Outstanding

    476     -     -     -     476  

Capital Lease Obligations

    665     1,330     1,330     5,584     8,909  

Non-Cancelable Operating Leases

    14,594     23,072     17,540     138,130     193,336  

Purchase Obligations

    19,675     24,940     390     -     45,005  

Pension and Postretirement
Benefit Contributions

    1,760     3,734     4,173     11,263     20,930  
   

Total Contractual Obligations

    11,634,763     301,062     530,423     360,102     12,826,350  
   

Total Credit Commitments and Contractual Obligations

  $ 12,280,446   $ 601,433   $ 773,407   $ 1,238,959   $ 14,894,245  
   
1
Our liability for unrecognized tax benefits ("UTBs") as of December 31, 2011 was $13.6 million. We are unable to reasonably estimate the period of cash settlement with the respective taxing authority. As a result, our liability for UTBs is not included in this disclosure.

Commitments to extend credit, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon. Our non-cancelable operating leases and capital lease obligations are primarily related to branch premises, equipment, and a portion of the Company's headquarters' building with lease terms extending through 2052. Purchase obligations arise from agreements to purchase goods or services that are enforceable and legally binding. Our largest purchase obligation is an outsourcing agreement for technology services related to our core systems and applications. Total payments over the remaining term of this contract, through 2014, are estimated to be $29.8 million. Other contracts included in purchase obligations primarily consist of service agreements for various systems and applications supporting bank operations. Pension and postretirement benefit contributions represent the minimum expected contribution to these plans. Actual contributions may differ from these estimates.

See discussion of credit, lease, and other contractual commitments in Note 18 to the Consolidated Financial Statements which is incorporated herein by reference.

Future Application of Accounting Pronouncements

See discussion of the expected impact of accounting pronouncements recently issued but that we have not adopted as of December 31, 2011 in Note 1 to the Consolidated Financial Statements.

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Fourth Quarter Results and Other Matters

Net Income

Net income for the fourth quarter of 2011 was $39.2 million, a decrease of $1.3 million or 3% from the fourth quarter of 2010. Diluted earnings per share were $0.85 for the fourth quarter of 2011 compared with $0.84 for the fourth quarter of 2010.

Net Interest Income

Net interest income, on a taxable-equivalent basis, for the fourth quarter of 2011 was $97.2 million, an increase of $0.7 million from the fourth quarter of 2010. The net interest margin was 3.04% for the fourth quarter of 2011, a decrease of 11 basis points from the fourth quarter of 2010. Although we had higher average loan and investment balances in the fourth quarter of 2011, lower interest rates resulted in lower yields. Average balances in interest-bearing deposits were slightly higher in the fourth quarter of 2011 compared to the fourth quarter of 2010. However, lower rates paid on our interest-bearing deposits resulted in lower funding costs in the fourth quarter of 2011 compared to the fourth quarter of 2010.

Provision for Credit Losses

The Provision was $2.2 million for the fourth quarter of 2011, a decrease of $3.1 million or 58% compared to the fourth quarter of 2010. The Provision was $4.8 million less than net loans and leases charged-off in the fourth quarter of 2011 and equaled net loans and leases charged-off in the fourth quarter of 2010. The lower Provision recorded in the fourth quarter of 2011 was reflective of continued strength in asset quality and a slowly improving Hawaii economy.

Noninterest Income

Noninterest income, excluding net gains on investment securities, was $43.1 million for the fourth quarter of 2011, a decrease of $8.4 million or 16% from the fourth quarter of 2010. This decrease was primarily due to a $3.0 million decrease in debit card income, a $1.4 million decrease in overdraft fees, and a $1.1 decrease in mortgage banking income. The decrease in debit card income was primarily due to the Durbin Amendment which was effective October 1, 2011. The decrease in overdraft fees was primarily due to the processing changes we implemented in the first quarter of 2011. The decrease in mortgage banking income was due to lower loan origination and sales during the fourth quarter of 2011, as well as our decision to add more 30-year conforming saleable loans to our portfolio.

Noninterest Expense

Noninterest expense was $84.4 million for the fourth quarter of 2011, a decrease of $4.3 million or 5% from the fourth quarter of 2010. The decrease was primarily due to a $1.9 million decrease in salaries and benefits, a $1.2 million decrease in equipment expense, and a $1.2 million decrease in FDIC Insurance expense. The decrease in salaries and benefits expense in the fourth quarter of 2011 was primarily due to $1.9 million in higher incentive compensation in the fourth quarter of 2010. The decrease in equipment expense was primarily due to a $1.2 million accrual for technology equipment recorded in the fourth quarter of 2010. The decrease in FDIC insurance expense was primarily due to lower rate assessments in the fourth quarter of 2011 due to new rules finalized by the FDIC, as required by the Dodd-Frank Act.

Provision for Income Taxes

The provision for income taxes was $13.8 million for the fourth quarter of 2011, an increase of $0.7 million or 5% from the fourth quarter of 2010. The effective tax rate for the fourth quarter of 2011 was 26.06% compared with an effective tax rate of 24.51% for the fourth quarter of 2010. The fourth quarters of 2011 and 2010 were both favorably impacted by the release of tax reserves during the quarter.

Common Stock Repurchase Program

In the fourth quarter of 2011, we repurchased 0.7 million shares of common stock at an average cost per share of $41.44 and a total cost of $29.1 million. See Note 11 to the Consolidated Financial Statements for more information related to our common stock repurchase program.

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Selected Quarterly Consolidated Financial Data

Table 21 presents our selected quarterly financial data for 2011 and 2010.

Selected Quarterly Consolidated Financial Data
  Table 21
 
   
 
  Three Months Ended
2011
  Three Months Ended
2010
 
(dollars in thousands, except per share amounts)
   
   
   
   
   
 
  Dec. 31
  Sept. 30
  June 30
  March 31
  Dec. 31
  Sept. 30
  June 30
  March 31
 
   

Interest Income

  $ 107,877   $ 109,230   $ 110,163   $ 112,423   $ 109,295   $ 113,020   $ 119,362   $ 123,574  

Interest Expense

    11,631     12,464     12,664     12,726     13,022     14,394     15,434     15,921  
   

Net Interest Income

    96,246     96,766     97,499     99,697     96,273     98,626     103,928     107,653  
   

Provision for Credit Losses

    2,219     2,180     3,600     4,691     5,278     13,359     15,939     20,711  

Investment Securities Gains (Losses), Net

    282     -     -     6,084     (1 )   7,877     14,951     20,021  

Noninterest Income

    43,125     50,863     49,463     47,838     51,478     55,248     53,923     51,761  

Noninterest Expense

    84,382     83,955     93,774     86,082     88,722     89,890     85,918     81,706  
   

Income Before Provision for Income Taxes

    53,052     61,494     49,588     62,846     53,750     58,502     70,945     77,018  

Provision for Income Taxes

    13,823     18,188     14,440     20,486     13,172     14,438     24,381     24,282  
   

Net Income

  $ 39,229   $ 43,306   $ 35,148   $ 42,360   $ 40,578   $ 44,064   $ 46,564   $ 52,736  
   

Basic Earnings Per Share

  $ 0.85   $ 0.93   $ 0.74   $ 0.89   $ 0.84   $ 0.91   $ 0.97   $ 1.10  

Diluted Earnings Per Share

  $ 0.85   $ 0.92   $ 0.74   $ 0.88   $ 0.84   $ 0.91   $ 0.96   $ 1.09  

Net Income to Average
Total Assets (ROA)

   
1.17

%
 
1.31

%
 
1.09

%
 
1.32

%
 
1.24

%
 
1.37

%
 
1.48

%
 
1.73

%

Net Income to Average
Shareholders' Equity (ROE)

    15.23     16.80     13.86     16.86     15.08     16.64     19.01     22.54  

Efficiency Ratio 1

    60.42     56.87     63.81     56.04     60.05     55.57     49.72     45.54  

Net Interest Margin 2

    3.04     3.09     3.16     3.24     3.15     3.27     3.51     3.72  
1
The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
2
The net interest margin is defined as net interest income, on a fully-taxable equivalent basis, as a percentage of average earning assets.

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

See the Market Risk section in Management's Discussion and Analysis of Financial Condition and Results of Operation included in Item 7 of this report.

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Bank of Hawaii Corporation and Subsidiaries

We have audited the accompanying consolidated statements of condition of Bank of Hawaii Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period