form10q.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
______________________
 
FORM 10-Q
______________________
 
(Mark One)

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007

or
 
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission file number 0-10777
 
 
 
CENTRAL PACIFIC FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

Hawaii
99-0212597
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

220 South King Street, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)

(808) 544-0500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes T  No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer T
Accelerated filer £
Non-accelerated filer £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £  No T
 
The number of shares outstanding of registrant’s common stock, par value $.01 per share, on October 31, 2007 was 29,880,993 shares.
 



CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Table of Contents

   
   
   
 
   
 
   
 
   
 
   
   
   
   
   
   
   
   
   
   
   
   
 

PART I.   FINANCIAL INFORMATION

Forward-Looking Statements

This document may contain forward-looking statements concerning projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items, concerning plans and objectives of management for future operations, concerning future economic performance, or concerning any of the assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and may include the words “believes”, “plans”, “intends”, “expects”, “anticipates”, “forecasts” or words of similar meaning. While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could materially differ from projections for a variety of reasons, to include, but not limited to: the impact of local, national, and international economies and events (including natural disasters such as wildfires, tsunamis and earthquakes) on the Company’s business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business; the impact of legislation affecting the banking industry; the impact of competitive products, services, pricing, and other competitive forces; movements in interest rates; loan delinquency rates and changes in asset quality; adverse conditions in the public debt market, the stock market or other capital markets, including any adverse changes in the price of the Company's stock; and a general deterioration in economic conditions, including the continued slowing of the real estate market. For further information on factors that could cause actual results to materially differ from projections, please see the Company’s publicly available Securities and Exchange Commission filings, including the Company’s Form 10-K for the last fiscal year. The Company does not update any of its forward-looking statements.

 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
             
   
September 30,
   
December 31,
 
(Dollars in thousands)
 
2007
   
2006
 
                 
Assets
               
Cash and due from banks
  $
90,161
    $
129,715
 
Interest-bearing deposits in other banks
   
439
     
5,933
 
Federal funds sold
   
14,900
     
-
 
Investment securities:
               
   Held to maturity, at amortized cost (fair value of $46,977 at
               
      September 30, 2007 and $64,249 at December 31, 2006)
   
47,465
     
65,204
 
   Available for sale, at fair value
   
801,640
     
833,154
 
      Total investment securities
   
849,105
     
898,358
 
                 
Loans held for sale
   
31,388
     
26,669
 
Loans and leases
   
4,072,536
     
3,846,004
 
   Less allowance for loan and lease losses
   
72,517
     
52,280
 
      Net loans and leases
   
4,000,019
     
3,793,724
 
                 
Premises and equipment
   
80,173
     
77,341
 
Accrued interest receivable
   
27,580
     
26,269
 
Investment in unconsolidated subsidiaries
   
16,333
     
12,957
 
Goodwill
   
292,453
     
297,883
 
Core deposit premium
   
29,844
     
31,898
 
Mortgage servicing rights
   
11,111
     
11,640
 
Bank-owned life insurance
   
130,089
     
102,394
 
Federal Home Loan Bank stock
   
48,797
     
48,797
 
Other assets
   
25,232
     
23,614
 
      Total assets
  $
5,647,624
    $
5,487,192
 
                 
Liabilities and Shareholders' Equity
               
Deposits:
               
   Noninterest-bearing demand
  $
630,586
    $
661,027
 
   Interest-bearing demand
   
441,884
     
438,943
 
   Savings and money market
   
1,216,991
     
1,205,271
 
   Time
   
1,652,798
     
1,539,242
 
      Total deposits
   
3,942,259
     
3,844,483
 
                 
Short-term borrowings
   
72,245
     
79,308
 
Long-term debt
   
816,535
     
740,189
 
Minority interest
   
13,110
     
13,130
 
Other liabilities
   
59,503
     
71,943
 
      Total liabilities
   
4,903,652
     
4,749,053
 
                 
Shareholders' equity:
               
   Preferred stock, no par value, authorized 1,000,000 shares, none issued
   
-
     
-
 
   Common stock, no par value, authorized 100,000,000 shares, issued and outstanding
               
      29,914,586 shares at September 30, 2007 and 30,709,389 shares at December 31, 2006
   
419,463
     
430,904
 
   Surplus
   
54,686
     
51,756
 
   Retained earnings
   
281,682
     
270,624
 
   Accumulated other comprehensive loss
    (11,859 )     (15,145 )
      Total shareholders' equity
   
743,972
     
738,139
 
      Total liabilities and shareholders' equity
  $
5,647,624
    $
5,487,192
 
                 
See accompanying notes to consolidated financial statements.
 

 
CONSOLIDATED STATEMENTS OF INCOME
 
(Unaudited)
 
             
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Amounts in thousands, except per share data)
 
2007
   
2006
   
2007
   
2006
 
                                 
Interest income:
                               
  Interest and fees on loans and leases
  $
78,325
    $
72,444
    $
231,561
    $
204,603
 
  Interest and dividends on investment securities:
                               
    Taxable interest
   
8,386
     
8,486
     
25,964
     
25,996
 
    Tax-exempt interest
   
1,343
     
1,227
     
4,071
     
3,822
 
    Dividends
   
83
     
153
     
176
     
264
 
  Interest on deposits in other banks
   
82
     
79
     
156
     
306
 
  Interest on Federal funds sold and securities
                               
    purchased under agreements to resell
   
125
     
31
     
244
     
85
 
  Dividends on Federal Home Loan Bank stock
   
73
     
-
     
195
     
-
 
    Total interest income
   
88,417
     
82,420
     
262,367
     
235,076
 
                                 
Interest expense:
                               
  Interest on deposits:
                               
    Demand
   
139
     
136
     
418
     
428
 
    Savings and money market
   
6,321
     
4,969
     
18,773
     
11,667
 
    Time
   
17,925
     
14,050
     
51,182
     
37,329
 
  Interest on short-term borrowings
   
302
     
1,221
     
1,110
     
2,035
 
  Interest on long-term debt
   
10,900
     
8,949
     
31,484
     
26,163
 
    Total interest expense
   
35,587
     
29,325
     
102,967
     
77,622
 
                                 
    Net interest income
   
52,830
     
53,095
     
159,400
     
157,454
 
Provision for loan and lease losses
   
21,200
     
300
     
24,800
     
1,350
 
    Net interest income after provision for loan and lease losses
   
31,630
     
52,795
     
134,600
     
156,104
 
                                 
Other operating income:
                               
  Service charges on deposit accounts
   
3,581
     
3,570
     
10,488
     
10,563
 
  Other service charges and fees
   
3,281
     
2,994
     
10,052
     
8,993
 
  Income from fiduciary activities
   
968
     
740
     
2,583
     
2,157
 
  Equity in earnings of unconsolidated subsidiaries
   
169
     
90
     
593
     
421
 
  Fees on foreign exchange
   
149
     
207
     
541
     
601
 
  Loan placement fees
   
248
     
464
     
790
     
1,256
 
  Gains on sales of loans
   
1,116
     
680
     
3,886
     
4,133
 
  Income from bank-owned life insurance
   
1,861
     
1,085
     
4,075
     
2,794
 
  Other
   
379
     
715
     
1,434
     
2,751
 
    Total other operating income
   
11,752
     
10,545
     
34,442
     
33,669
 
                                 
Other operating expense:
                               
  Salaries and employee benefits
   
16,240
     
17,451
     
49,534
     
54,128
 
  Net occupancy
   
2,624
     
2,399
     
7,721
     
6,974
 
  Equipment
   
1,255
     
1,171
     
3,810
     
3,624
 
  Amortization of core deposit premium
   
684
     
974
     
2,054
     
2,922
 
  Amortization of mortgage servicing rights
   
478
     
547
     
1,488
     
1,697
 
  Communication expense
   
1,032
     
1,186
     
3,118
     
3,562
 
  Legal and professional services
   
2,223
     
1,985
     
6,660
     
6,174
 
  Computer software expense
   
869
     
716
     
2,561
     
1,956
 
  Advertising expense
   
661
     
515
     
1,919
     
1,789
 
  Other
   
5,487
     
4,272
     
14,495
     
13,627
 
    Total other operating expense
   
31,553
     
31,216
     
93,360
     
96,453
 
                                 
     Income before income taxes
   
11,829
     
32,124
     
75,682
     
93,320
 
Income taxes
   
2,722
     
11,521
     
25,424
     
32,940
 
     Net income
  $
9,107
    $
20,603
    $
50,258
    $
60,380
 
                                 
Per share data:
                               
   Basic earnings per share
  $
0.30
    $
0.67
    $
1.65
    $
1.98
 
   Diluted earnings per share
   
0.30
     
0.67
     
1.64
     
1.96
 
   Cash dividends declared
   
0.25
     
0.23
     
0.73
     
0.65
 
                                 
Shares used in computation:
                               
  Basic shares
   
30,192
     
30,532
     
30,480
     
30,465
 
  Diluted shares
   
30,378
     
30,838
     
30,707
     
30,790
 
   
See accompanying notes to consolidated financial statements.
 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
                 
   
Nine Months Ended
 
   
September 30,
 
(Dollars in thousands)
 
2007
   
2006
 
                 
Cash flows from operating activities:
               
Net income
  $
50,258
    $
60,380
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan and lease losses
   
24,800
     
1,350
 
Depreciation and amortization
   
5,303
     
5,150
 
Amortization of intangible assets
   
3,542
     
4,619
 
Net amortization of investment securities
   
1,591
     
2,236
 
Net loss on investment securities
   
-
     
19
 
Share-based compensation
   
2,920
     
2,580
 
Deferred income tax (benefit) expense
    (6,521 )    
24
 
Net gain on sale of loans
    (3,886 )     (4,133 )
Proceeds from sales of loans held for sale
   
688,923
     
413,756
 
Originations of loans held for sale
    (689,756 )     (370,827 )
Tax benefits from share-based compensation
    (10 )     (675 )
Equity in earnings of unconsolidated subsidiaries
    (593 )     (421 )
Increase in cash surrender value of bank-owned life insurance
    (4,124 )     (2,775 )
Net change in other assets and liabilities
    (4,461 )     (8,786 )
Net cash provided by operating activities
   
67,986
     
102,497
 
                 
Cash flows from investing activities:
               
Proceeds from maturities of and calls on investment securities held to maturity
   
17,657
     
4,685
 
Proceeds from maturities of and calls on investment securities available for sale
   
520,640
     
392,151
 
Proceeds from sales of investment securities available for sale
   
-
     
57
 
Purchases of investment securities available for sale
    (485,956 )     (374,439 )
Net loan originations
    (220,098 )     (212,955 )
Purchase of loan portfolio
    (10,496 )    
-
 
Proceeds from bank-owned life insurance
   
1,364
     
-
 
Purchase of bank-owned life insurance
    (25,000 )     (30,000 )
Purchases of premises and equipment
    (8,136 )     (9,491 )
Distributions from unconsolidated subsidiaries
   
596
     
768
 
Contributions to unconsolidated subsidiaries
    (5,294 )    
-
 
Net cash used in investing activities
    (214,723 )     (229,224 )
                 
Cash flows from financing activities:
               
Net increase in deposits
   
97,776
     
139,679
 
Proceeds from long-term debt
   
150,000
     
75,000
 
Repayments of long-term debt
    (73,046 )     (92,486 )
Net decrease in short-term borrowings
    (7,063 )     (23,961 )
Cash dividends paid
    (22,274 )     (19,841 )
Tax benefits from share-based compensation
   
10
     
675
 
Repurchases of common stock
    (31,075 )    
-
 
Proceeds from stock option exercises
   
2,261
     
2,947
 
Net cash provided by financing activities
   
116,589
     
82,013
 
                 
Net decrease in cash and cash equivalents
    (30,148 )     (44,714 )
Cash and cash equivalents at beginning of period
   
135,648
     
164,740
 
Cash and cash equivalents at end of period
  $
105,500
    $
120,026
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
  $
100,488
    $
74,354
 
Income taxes
   
24,711
     
25,517
 
Cash received during the period for:
               
Income taxes
   
-
     
3,255
 
                 
Supplemental disclosure of noncash investing and financing activities:
               
Net change in common stock held by directors' deferred compensation plan
  $
33
    $
32
 
   
See accompanying notes to consolidated financial statements.
 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.   BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements of Central Pacific Financial Corp. (referred to herein as “the Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 2006. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.
 
Certain prior period amounts in the Consolidated Statements of Income and Consolidated Statement of Cash Flows have been reclassified to conform to the current period presentation. Such reclassifications were considered to be immaterial and had no impact on the Company’s net income or financial condition for any periods presented.
 
2.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 amends the guidance in SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. We adopted the provisions of SFAS 155 beginning January 1, 2007 and such adoption did not have a material impact on our consolidated financial statements.
 
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value and permits an entity to choose to either amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date, or measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. SFAS 156 also permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, provided that the available-for-sale securities are identified as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value, requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value and specifies additional disclosures for all separately recognized servicing assets and servicing liabilities. We adopted the provisions of SFAS 156 beginning January 1, 2007 and such adoption did not have a material impact on our consolidated financial statements.
 
We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007. As a result of the adoption, we recognized a net decrease of $5.3 million in the liability for uncertain tax positions, of which, $0.5 million was accounted for as an increase to beginning retained earnings, $5.3 million was accounted for as a decrease to goodwill and $0.5 million was recorded as a decrease in other liabilities. Including the cumulative effect of the decrease in the liability for uncertain tax positions, our unrecognized tax benefits totaled $6.9 million at January 1, 2007, of which $1.8 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. We have substantially concluded all U.S. federal income tax matters for years through 1997. Federal income tax returns for 1998, 2000 through 2002, and 2004 are currently under examination. Our continuing practice is to recognize interest and penalties related to income tax matters in interest expense and other expense, respectively. At the date of adoption, we had $2.1 million accrued for interest relating to income tax matters and at September 30, 2007, accrued interest amounted to $2.6 million. There were no penalties relating to income tax matters accrued at the date of adoption, as well as at September 30, 2007.
 
In September 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 06-5, “Accounting for Purchases of Life Insurance - Determining the Amount that Could Be Realized in Accordance with FASB Tech Bulletin 85-4” (“EITF 06-5”). The EITF concluded that a policyholder should consider any additional amounts included in the contractual terms of the life insurance policy in determining the “amount that could be realized under the insurance contract” on a policy by policy basis. EITF 06-5 is effective for fiscal years beginning after December 15, 2006 and it requires that recognition of the effects of adoption should be either by (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. We adopted the provisions of EITF 06-5 beginning January 1, 2007 and such adoption did not have a material impact on our consolidated financial statements.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). The standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America and expands disclosure about fair value measurements. The pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, the statement does not require any new fair value measurement. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and we plan to adopt SFAS 157 on January 1, 2008. We are evaluating the requirements of SFAS 157 and assessing the impact of this statement on our consolidated financial statements.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of this statement on our consolidated financial statements.
 
In March 2007, the FASB ratified EITF No. 06-10 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”). EITF 06-10 requires that an employer recognize a liability for the postretirement benefit obligation related to a collateral assignment arrangement in accordance with SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (if deemed part of a postretirement plan) or Accounting Principles Board Opinion 12 “Omnibus Opinion-1967” (if not part of a plan). The consensus is applicable if, based on the substantive agreement with the employee, the employer has agreed to (a) maintain a life insurance policy during the postretirement period or (b) provide a death benefit. The EITF also reached a consensus that an employer should recognize and measure the associated asset on the basis of the terms of the collateral assignment arrangement. We are required to adopt EITF 06-10 effective January 1, 2008 and we are currently assessing the impact of this EITF issue on our consolidated financial statements.

3.   LOANS AND LEASES
 
Loans, excluding loans held for sale, consisted of the following at the dates indicated:
 
   
September 30,
   
December 31,
 
   
2007
   
2006
 
   
(Dollars in thousands)
 
                 
Commercial, Financial and Agricultural
  $
377,456
    $
405,046
 
Real Estate:
               
   Construction
   
1,175,590
     
1,144,680
 
   Mortgage-Residential
   
1,023,345
     
898,932
 
   Mortgage-Commercial
   
1,252,577
     
1,165,267
 
Consumer
   
202,869
     
195,436
 
Leases
   
53,112
     
50,741
 
     
4,084,949
     
3,860,102
 
Unearned income
    (12,413 )     (14,098 )
  Total loans and leases
  $
4,072,536
    $
3,846,004
 
 
In July 2007, we purchased a consumer loan portfolio for $10.5 million, which represented a $0.4 million premium over the $10.1 million outstanding balance. At the time of purchase, the consumer loan portfolio had a weighted average remaining term of 70 months.
 
4.   ALLOWANCE FOR LOAN AND LEASE LOSSES
 
The following table presents the changes in the allowance for loan and lease losses for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(Dollars in thousands)
 
                                 
   Balance, beginning of period
  $
51,409
    $
52,914
    $
52,280
    $
52,936
 
                                 
   Provision for loan and lease losses
   
21,200
     
300
     
24,800
     
1,350
 
                                 
   Charge-offs
    (835 )     (1,266 )     (6,513 )     (3,599 )
   Recoveries
   
743
     
663
     
1,950
     
1,924
 
      Net charge-offs
    (92 )     (603 )     (4,563 )     (1,675 )
   Balance, end of period
  $
72,517
    $
52,611
    $
72,517
    $
52,611
 
 
5.   GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the changes in goodwill allocated to each of our reportable segments during the nine months ended September 30, 2007:
 
   
Hawaii
   
Commercial
       
   
Market
   
Real Estate
   
Total
 
   
(Dollars in thousands)
 
                         
Balance, beginning of period
  $
152,812
    $
145,071
    $
297,883
 
Additions
   
468
     
-
     
468
 
Reductions
    (2,983 )     (2,915 )     (5,898 )
Balance, end of period
  $
150,297
    $
142,156
    $
292,453
 

The addition to goodwill was the result of an earnout payment of $0.5 million related to the Company's acquisition of Hawaii HomeLoans in fiscal 2005. Reductions to goodwill were due to adjustments recorded on CB Bancshares, Inc. (“CBBI”) tax contingencies upon the adoption of FIN 48 of $5.3 million and the reversal of previously accrued acquisition costs of $0.6 million.
 
Other intangible assets include a core deposit premium and mortgage servicing rights. The following table presents changes in other intangible assets for the nine months ended September 30, 2007:
 
   
Core Deposit
Premium
   
Mortgage
Servicing Rights
 
   
(Dollars in thousands)
 
                 
Balance, beginning of period
  $
31,898
    $
11,640
 
Additions
   
-
     
959
 
Amortization
    (2,054 )     (1,488 )
Balance, end of period
  $
29,844
    $
11,111
 
 
The gross carrying value and accumulated amortization related to the core deposit premium and mortgage servicing rights are presented below:
 
   
September 30, 2007
   
December 31, 2006
 
   
Gross
               
Gross
             
   
Carrying
   
Accumulated
         
Carrying
   
Accumulated
       
   
Value
   
Amortization
   
Net
   
Value
   
Amortization
   
Net
 
 
(Dollars in thousands)
 
                                                 
Core deposit premium
  $
44,642
    $ (14,798 )   $
29,844
    $
44,642
    $ (12,744 )   $
31,898
 
Mortgage servicing rights
   
20,053
      (8,942 )    
11,111
     
19,094
      (7,454 )    
11,640
 
 
Based on the core deposit premium and mortgage servicing rights held as of September 30, 2007, estimated amortization expense for the remainder of fiscal 2007, the next five succeeding fiscal years and all years thereafter are as follows:
 
   
Estimated Amortization Expense
 
   
Core Deposit
   
Mortgage
 
   
Premium
   
Servicing Rights
 
   
(Dollars in thousands)
 
             
2007 (remainder)
  $
685
    $
284
 
2008
   
2,491
     
1,497
 
2009
   
2,491
     
1,233
 
2010
   
2,491
     
1,074
 
2011
   
2,491
     
934
 
2012
   
2,491
     
814
 
Thereafter
   
16,704
     
5,275
 
    $
29,844
    $
11,111
 
 
We account for our mortgage servicing rights under the provisions of SFAS 156, which was adopted beginning January 1, 2007. Mortgage servicing rights are recorded when loans are sold to third-parties with servicing of those loans retained and we classify our entire mortgage servicing rights into one class.

Initial fair value of the servicing right is calculated by a discounted cash flow model prepared by a third party service provider based on market value assumptions at the time of origination and we assess the servicing right for impairment using current market value assumptions at each reporting period. Critical assumptions used in the discounted cash flow model include mortgage prepayment speeds, discount rates, costs to service and ancillary income. Variations in our assumptions could materially affect the estimated fair values. Changes to our assumptions are made when current trends and market data indicate that new trends have developed. Current market value assumptions based on loan product types (fixed rate, adjustable rate and balloon loans) include average discount rates and national prepayment speeds. Many of these assumptions are subjective and require a high level of management judgment. Our mortgage servicing rights portfolio and valuation assumptions are periodically reviewed by management.
 
Prepayment speeds may be affected by economic factors such as home price appreciation, market interest rates, the availability of other credit products to our borrowers and customer payment patterns. Prepayment speeds include the impact of all borrower prepayments, including full payoffs, additional principal payments and the impact of loans paid off due to foreclosure liquidations. As market interest rates decline, prepayment speeds will generally increase as customers refinance existing mortgages under more favorable interest rate terms. As prepayment speeds increase, anticipated cash flows will generally decline resulting in a potential reduction, or impairment, to the fair value of the capitalized mortgage servicing rights. Alternatively, an increase in market interest rates may cause a decrease in prepayment speeds and therefore and an increase in fair value of mortgage servicing rights.
 
We have elected to use the amortization method to measure our mortgage servicing rights. Under the amortization method, we amortize our mortgage servicing rights in proportion to and over the period of net servicing income. Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $0.3 million and $1.0 million for the three and nine months ended September 30, 2007, respectively, compared to $0.5 million and $1.7 million for the three and nine months ended September 30, 2006, respectively. Amortization of the servicing rights is reported as amortization of mortgage servicing rights in our consolidated statements of income. Ancillary income is recorded in other income.
 
The following table presents the fair market value and key assumptions used in determining the fair market value of our mortgage servicing rights as of September 30, 2007:
 
   
(Dollars in thousands)
 
Fair market value at January 1, 2007
  $
12,086
 
Fair market value at September 30, 2007
  $
13,059
 
Weighted average discount rate
    8.6 %
Weighted average prepayment speed assumption
    10.9 %
 
6.   MERGER WITH CB BANCSHARES, INC.

In connection with the completion of our merger with CBBI in fiscal 2004, we recorded liabilities totaling $17.6 million for estimated costs to exit certain CBBI facilities and operations. These liabilities, net of tax, were included in the cost of the merger, resulting in an increase in goodwill. Certain adjustments to the estimates have been recorded as adjustments to the cost of the merger.

The following table sets forth information related to the exit costs accrued, adjustments to estimates and payments made against accrued amounts:
 
   
Balance at
   
Adjustments
         
Balance at
 
   
December 31, 2006
   
to estimates
   
Payments
   
September 30, 2007
 
   
(Dollars in thousands)
 
                                 
Lease termination fees
  $
5,012
    $
396
    $ (2,109 )   $
3,299
 
Asset write-offs
   
271
      (271 )    
-
     
-
 
Contract termination fees
   
319
      (319 )    
-
     
-
 
  Total
  $
5,602
    $ (194 )   $ (2,109 )   $
3,299
 

7.   SHARE REPURCHASE

In April 2006, the Company’s board of directors authorized the repurchase and retirement of up to 600,000 shares of the Company’s common stock (the “2006 Repurchase Plan”). The 2006 Repurchase Plan remained in effect through April 26, 2007.

On April 26, 2007, the Company’s board of directors authorized the repurchase and retirement of up to 600,000 shares, under a new repurchase plan that will remain in effect through April 30, 2008 (the “2007 Repurchase Plan”). On July 25, 2007, the Company’s board of directors authorized the repurchase of an additional 1,500,000 shares under the 2007 Repurchase Plan. Repurchases may be made from time to time on the open market or in privately negotiated transactions. The repurchase authorization under the 2007 Repurchase Plan rescinded the planned repurchase of any remaining shares under the Company’s 2006 Repurchase Plan.

During the nine months ended September 30, 2007, we repurchased and retired a total of 973,700 shares of common stock for approximately $31.1 million. At September 30, 2007, a total of 1,182,300 shares remained authorized for repurchase under the 2007 Repurchase Plan.

8.   SHARE-BASED COMPENSATION

The following table reflects total share-based compensation recognized for the periods indicated:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(Dollars in thousands)
 
                         
Salaries and employee benefits
  $
743
    $
878
    $
2,920
    $
2,580
 
Income tax benefit
    (298 )     (352 )     (1,170 )     (1,034 )
Net share-based compensation effect
  $
445
    $
526
    $
1,750
    $
1,546
 

In accordance with SFAS 123R, we are required to base initial share-based compensation expense on the estimated number of awards for which the requisite service and performance is expected to be rendered.

Stock Option Plans

We have adopted stock option plans for the purpose of granting options to purchase the Company’s common stock to directors, officers and other key individuals. Option awards are granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards generally vest based on three or five years of continuous service and have 10-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the stock option plans below). We have historically issued new shares of common stock upon exercises of stock options and purchases of restricted awards.

In February 1997, we adopted the 1997 Stock Option Plan (“1997 Plan”) basically as a continuance of the 1986 Stock Option Plan. In April 1997, the Company’s shareholders approved the 1997 Plan, which provided 2,000,000 shares of the Company’s common stock for grants to employees as qualified incentive stock options and to directors as nonqualified stock options.

In September 2004, we adopted and the Company’s shareholders approved the 2004 Stock Compensation Plan (“2004 Plan”) making available 1,989,224 shares for grants to employees and directors. Upon adoption of the 2004 Plan, all unissued shares from the 1997 Plan were frozen and no new options will be granted under the 1997 Plan. Optionees may exercise outstanding options granted pursuant to the 1997 Plan until the expiration of the respective options in accordance with the original terms of the 1997 Plan. To satisfy share issuances pursuant to the share-based compensation programs, we issue new shares from the 2004 Plan.

The following is a summary of option activity for the Company’s stock option plans for the nine months ended September 30, 2007:
 
 
 
Shares
   
Weighted Average
Exercise Price
 
Outstanding at January 1, 2007
   
990,324
    $
25.55
 
Changes during the period:
               
  Granted
   
75,000
     
35.54
 
  Exercised
    (134,810 )    
14.03
 
  Expired
   
-
     
-
 
  Forfeited
    (33,041 )    
35.09
 
Outstanding at September 30, 2007
   
897,473
     
27.77
 

We estimate the fair value of stock options granted using the Black-Scholes option pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair value of the Company’s stock options granted to employees for the three and nine months ended September 30, 2007 and 2006 was estimated using the following weighted-average assumptions:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Expected volatility
    30.9 %     34.4 %     33.1 %     34.4 %
Risk free interest rate
    4.5 %     4.9 %     4.5 %     4.9 %
Expected dividends
    3.6 %     2.4 %     2.9 %     2.4 %
Expected life (in years)
   
6.5
     
6.5
     
7.4
     
6.5
 
Weighted average fair value
  $
7.57
    $
11.99
    $
11.20
    $
11.99
 

Restricted Stock Awards

Under the 1997 and 2004 Plans, we awarded restricted stock awards to our non-officer directors and certain senior management personnel. The awards typically vest over a three or five year period. Compensation expense is measured as the market price of the stock awards on the grant date, and is recognized over the specified vesting periods.

The table below presents the activity of restricted stock awards for the nine months ended September 30, 2007:

 
 
Shares
   
Weighted Average Grant Date Fair Value
 
Nonvested at January 1, 2007
   
22,520
    $
34.35
 
Changes during the period:
               
  Granted
   
26,000
     
34.79
 
  Vested
    (900 )    
27.75
 
  Forfeited
    (1,500 )    
35.90
 
Nonvested at September 30, 2007
   
46,120
     
34.67
 

Performance Shares and Stock Appreciation Rights

In 2005, we established a Long Term Incentive Plan (“LTIP”) that covers certain executive and senior management personnel. The LTIP is comprised of three components: performance shares, stock appreciation rights and cash awards.

Performance shares are granted under the 2004 Plan and vest based on achieving both performance and service conditions. Performance conditions require achievement of stated goals including earnings per share, credit quality and efficiency ratio targets. The service condition requires employees to be employed continuously with the Company through March 15, 2008.  The fair value of the grant to be recognized over this service period is determined based on the market value of the stock on the grant date, multiplied by the probability of the granted shares being earned. This requires us to assess the expectation over the performance period of the performance targets being achieved as well as to estimate expected pre-vested cancellations.

The table below presents activity of performance shares for the nine months ended September 30, 2007:

 
 
Shares
   
Weighted Average Grant Date Fair Value
 
Nonvested at January 1, 2007
   
82,438
    $
34.67
 
Changes during the period:
               
  Granted
   
-
     
-
 
  Forfeited
    (8,135 )    
34.57
 
Nonvested at September 30, 2007
   
74,303
     
34.68
 

Stock appreciation rights (“SARs”) are granted under the 2004 Plan. These SARs require the employee to achieve the same performance conditions as the performance shares described above as well as to satisfy service conditions that approximate three years from the date of grant. Upon exercise of the SAR, for each SAR exercised, the grantee shall be entitled to receive value equal to the difference between the market value of a share on the date of exercise minus the market value of a share on the date of grant. We shall pay the value owing to the grantee upon exercise in whole shares. No cash will be awarded upon exercise, and no fractional shares will be issued or delivered.

As the SARs plan is a stock-settled SAR, this plan is an equity-classified award under SFAS 123R. As such, the financial and income tax accounting for this type of award is identical to that of a nonqualified stock option plan. Therefore, the grant date fair value is determined at the grant date using the same method as would be used for determining the fair value of a grant of a nonqualified stock option, which has historically been the Black-Scholes formula. Similar to the performance shares addressed above, the amount of compensation cost to be recognized is the fair value of the SAR grant adjusted based on expectations of achieving the performance requirements and also the expected pre-vested cancellations. Compensation costs arising from the SARs will be recognized ratably over the requisite service period.

The fair value of SARs granted to employees were estimated using the Black-Scholes option pricing formula with the following weighted-average assumptions:

 
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Expected volatility
   
-
%     33.3 %     31.7 %     34.3 %
Risk free interest rate
   
-
%     4.9 %     4.5 %     4.7 %
Expected dividends
   
-
%     2.4 %     2.8 %     2.4 %
Expected life (in years)
   
-
     
6.1
     
6.5
     
6.5
 
Weighted average fair value
  $
-
    $
11.48
    $
10.49
    $
10.80
 

There were no grants of SARs for the three months ended September 30, 2007.

The table below presents activity of SARs for the nine months ended September 30, 2007:

   
Shares
   
Weighted Average
Exercise Price
 
Outstanding at January 1, 2007
   
56,161
    $
34.95
 
Changes during the period:
               
   Granted
   
32,726
     
35.90
 
   Forfeited
    (8,701 )    
35.49
 
Outstanding at September 30, 2007
   
80,186
     
35.28
 

9.   ACCUMULATED OTHER COMPREHENSIVE LOSS

Components of accumulated other comprehensive loss, net of taxes, were as follows:

   
September 30,
   
December 31,
 
   
2007
   
2006
 
   
(Dollars in thousands)
 
                 
Unrealized holding losses on available-for-sale investment securities
  $ (10,743 )   $ (15,422 )
Pension liability adjustments
    (9,031 )     (9,853 )
Tax benefit
   
7,915
     
10,130
 
    Accumulated other comprehensive loss, net of tax
  $ (11,859 )   $ (15,145 )

Components of comprehensive income for the periods indicated were as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(Dollars in thousands)
 
                                 
Net income
  $
9,107
    $
20,603
    $
50,258
    $
60,380
 
Unrealized gain (loss) on investment securities, net of taxes
   
5,871
     
7,216
     
2,793
      (819 )
Pension adjustments, net of taxes
   
165
     
-
     
493
     
-
 
  Comprehensive income
  $
15,143
    $
27,819
    $
53,544
    $
59,561
 

10.  PENSION PLANS

Central Pacific Bank, our bank subsidiary, has a defined benefit retirement plan (the “Pension Plan”) which covers certain eligible employees. The plan was curtailed effective December 31, 2002, and accordingly, plan benefits were fixed as of that date. The following table sets forth the components of net periodic benefit cost for the Pension Plan:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(Dollars in thousands)
 
                                 
Interest cost
  $
446
    $
385
    $
1,338
    $
1,155
 
Expected return on assets
    (560 )     (505 )     (1,680 )     (1,515 )
Amortization of unrecognized loss
   
264
     
226
     
792
     
678
 
  Net periodic cost
  $
150
    $
106
    $
450
    $
318
 

Central Pacific Bank also established Supplemental Executive Retirement Plans (“SERPs”), which provide certain officers of Central Pacific Bank with supplemental retirement benefits. The following table sets forth the components of net periodic benefit cost for the SERPs:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(Dollars in thousands)
 
                                 
Service cost
  $
140
    $
182
    $
420
    $
546
 
Interest cost
   
136
     
135
     
408
     
405
 
Amortization of unrecognized transition obligation
   
5
     
49
     
15
     
147
 
Amortization of prior service cost
   
5
     
4
     
15
     
12
 
Amortization of unrecognized (gain) loss
   
1
      (12 )    
3
      (36 )
  Net periodic cost
  $
287
    $
358
    $
861
    $
1,074
 

11.  EARNINGS PER SHARE

The following table presents the information used to compute basic and diluted earnings per share for the periods indicated:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands, except per share data)
 
                                 
Net income
  $
9,107
    $
20,603
    $
50,258
    $
60,380
 
                                 
Weighted average shares outstanding - basic
   
30,192
     
30,532
     
30,480
     
30,465
 
Dilutive effect of employee stock options and awards
   
186
     
306
     
227
     
325
 
Weighted average shares outstanding - diluted
   
30,378
     
30,838
     
30,707
     
30,790
 
                                 
Basic earnings per share
  $
0.30
    $
0.67
    $
1.65
    $
1.98
 
Diluted earnings per share
  $
0.30
    $
0.67
    $
1.64