form10-q.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, 2008

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 £
Smaller reporting company £

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 November 3, 2008 was 28,728,478 shares.
 



CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
Table of Contents
 
   
Part I.
Financial Information
   
Item I.
Financial Statements (Unaudited)
   
 
Consolidated Balance Sheets
September 30, 2008 and December 31, 2007
   
 
Consolidated Statements of Operations
Three and nine months ended September 30, 2008 and 2007
   
 
Consolidated Statements of Cash Flows
Nine months ended September 30, 2008 and 2007
   
 
Notes to Consolidated Financial Statements
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
   
Item 4.
Controls and Procedures
   
Part II.
Other Information
   
Item 1.
Legal Proceedings
   
Item 1A.
Risk Factors
   
Item 2.
Unregistered Sales of Equity and Use of Proceeds
   
Item 3.
Defaults Upon Senior Securities
   
Item 4.
Submission of Matters to a Vote of Security Holders
   
Item 5.
Other Information
   
Item 6.
Exhibits
   
Signatures
 
Exhibit Index
 

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 or malaise in economic conditions, including the continued destabilizing factors in the financial industry and continued deterioration of the real estate market, as well as the impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular. 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.
 

Item 1. Financial Statements
 
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
           
 
September 30,
   
December 31,
 
(Dollars in thousands)
2008
   
2007
 
           
Assets
         
Cash and due from banks
$ 68,293     $ 79,088  
Interest-bearing deposits in other banks
  133       241  
Federal funds sold
  12,000       2,800  
Investment securities:
             
   Available for sale
  779,016       835,130  
   Held to maturity (fair value of $23,896 at September 30, 2008 and $46,077 at December 31, 2007)
  23,968       46,124  
      Total investment securities
  802,984       881,254  
               
Loans held for sale
  36,470       37,572  
               
Loans and leases
  4,080,266       4,141,705  
  Less allowance for loan and lease losses
  100,227       92,049  
      Net loans and leases
  3,980,039       4,049,656  
               
Premises and equipment, net
  81,918       82,841  
Accrued interest receivable
  22,591       26,041  
Investment in unconsolidated subsidiaries
  16,104       17,404  
Other real estate
  11,590       -  
Goodwill
  152,820       244,702  
Other intangible assets
  43,519       39,972  
Bank-owned life insurance
  134,200       131,454  
Federal Home Loan Bank stock
  48,797       48,797  
Income tax receivable
  41,608       1,488  
Other assets
  51,238       37,076  
      Total assets
$ 5,504,304     $ 5,680,386  
               
Liabilities and Shareholders' Equity
             
Deposits:
             
   Noninterest-bearing demand
$ 596,907     $ 665,034  
   Interest-bearing demand
  457,906       461,175  
   Savings and money market
  1,067,690       1,178,855  
   Time
  1,654,569       1,697,655  
      Total deposits
  3,777,072       4,002,719  
               
Short-term borrowings
  278,205       16,000  
Long-term debt
  881,534       916,019  
Minority interest
  10,055       13,104  
Other liabilities
  47,367       58,141  
      Total liabilities
  4,994,233       5,005,983  
               
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
             
      28,729,933 shares at September 30, 2008 and 28,756,647 shares at December 31, 2007
  403,117       403,304  
   Surplus
  55,639       54,669  
   Retained earnings
  63,489       222,644  
   Accumulated other comprehensive loss
  (12,174 )     (6,214 )
      Total shareholders' equity
  510,071       674,403  
      Total liabilities and shareholders' equity
$ 5,504,304     $ 5,680,386  
               
See accompanying notes to consolidated financial statements.
 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                     
 
Three Months Ended
   
Nine Months Ended
 
September 30,
   
September 30,
(Amounts in thousands, except per share data)
2008
   
2007
   
2008
   
2007
                     
Interest income:
                   
  Interest and fees on loans and leases
$ 64,224     $ 78,325     $ 200,195     $ 231,561
  Interest and dividends on investment securities:
                           
    Taxable interest
  8,696       8,386       27,275       25,964
    Tax-exempt interest
  1,351       1,343       4,156       4,071
    Dividends
  7       83       42       176
  Interest on deposits in other banks
  4       82       11       156
  Interest on Federal funds sold and securities purchased under agreements to resell
  33       125       76       244
  Dividends on Federal Home Loan Bank stock
  171       73       464       195
    Total interest income
  74,486       88,417       232,219       262,367
                             
Interest expense:
                           
  Interest on deposits:
                           
    Demand
  251       139       567       418
    Savings and money market
  3,171       6,321       9,936       18,773
    Time
  10,932       17,925       37,367       51,182
  Interest on short-term borrowings
  1,583       302       5,863       1,110
  Interest on long-term debt
  7,965       10,900       25,661       31,484
    Total interest expense
  23,902       35,587       79,394       102,967
                             
    Net interest income
  50,584       52,830       152,825       159,400
Provision for loan and lease losses
  22,900       21,200       144,972       24,800
    Net interest income after provision for loan and lease losses
  27,684       31,630       7,853       134,600
                             
Other operating income:
                           
  Service charges on deposit accounts
  3,702       3,581       10,756       10,488
  Other service charges and fees
  3,501       3,281       10,626       10,052
  Income from fiduciary activities
  945       968       2,940       2,583
  Equity in earnings of unconsolidated subsidiaries
  103       169       517       593
  Fees on foreign exchange
  142       149       448       541
  Investment securities gains
  12       -       265       -
  Loan placement fees
  201       248       567       790
  Net gain on sales of residential loans
  1,807       1,116       5,846       3,886
  Income from bank-owned life insurance
  888       1,861       3,603       4,075
  Other
  409       379       2,352       1,434
    Total other operating income
  11,710       11,752       37,920       34,442
                             
Other operating expense:
                           
  Salaries and employee benefits
  17,558       16,240       53,570       49,534
  Net occupancy
  3,261       2,624       9,380       7,721
  Equipment
  1,420       1,255       4,248       3,810
  Amortization of other intangible assets
  1,237       1,162       3,687       3,542
  Communication expense
  1,155       1,032       3,365       3,118
  Legal and professional services
  3,209       2,223       8,237       6,660
  Computer software expense
  865       869       2,537       2,561
  Advertising expense
  1,016       661       2,398       1,919
  Goodwill impairment
  -       -       94,279       -
  Foreclosed asset expense
  83       -       6,657       -
  Loss on sales of commercial real estate loans
  203       -       1,874       -
  Write down of assets
  100       -       22,524       -
  Other
  7,358       5,487       16,452       14,495
    Total other operating expense
  37,465       31,553       229,208       93,360
                             
     Income (loss) before income taxes
  1,929       11,829       (183,435 )     75,682
Income tax expense (benefit)
  (1,112 )     2,722       (41,876 )     25,424
     Net income (loss)
$ 3,041     $ 9,107     $ (141,559 )   $ 50,258
                             
Per share data:
                           
   Basic earnings (loss) per share
$ 0.11     $ 0.30     $ (4.94 )   $ 1.65
   Diluted earnings (loss) per share
  0.11       0.30       (4.94 )     1.64
   Cash dividends declared
  0.10       0.25       0.60       0.73
                             
Shares used in computation:
                           
  Basic shares
  28,665       30,192       28,668       30,480
  Diluted shares
  28,699       30,378       28,668       30,707
                             
See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
 
Nine Months Ended September 30,
 
(Dollars in thousands)
2008
   
2007
 
           
Cash flows from operating activities:
         
Net income (loss)
$ (141,559 )   $ 50,258  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
             
Provision for loan and lease losses
  144,972       24,800  
Depreciation and amortization
  5,964       5,303  
Goodwill impairment
  94,279       -  
Write down of assets
  22,524       -  
Foreclosed asset expense
  6,657       -  
Amortization of other intangible assets
  3,687       3,542  
Net amortization of investment securities
  1,074       1,591  
Share-based compensation
  1,764       2,920  
Net gain on investment securities
  (265 )     -  
Deferred income tax benefit
  (11,889 )     (6,521 )
Net gain on sales of residential loans
  (5,846 )     (3,886 )
Loss on sale of commercial real estate loans
  1,874       -  
Proceeds from sales of trading securities
  4,986       -  
Proceeds from sales of loans held for sale
  1,147,478       688,923  
Originations of loans held for sale
  (973,176 )     (689,756 )
Tax benefits from share-based compensation
  (40 )     (10 )
Equity in earnings of unconsolidated subsidiaries
  (517 )     (593 )
Increase in cash surrender value of bank-owned life insurance
  (3,589 )     (4,124 )
Increase in income tax receivable
  (40,120 )     (2,283 )
Net change in other assets and liabilities
  (9,630 )     (2,178 )
Net cash provided by operating activities
  248,628       67,986  
               
Cash flows from investing activities:
             
Proceeds from maturities of and calls on investment securities available for sale
  413,915       520,640  
Proceeds from sales of investment securities available for sale
  10,735       -  
Purchases of investment securities available for sale
  (369,131 )     (485,956 )
Proceeds from maturities of and calls on investment securities held to maturity
  21,648       17,657  
Proceeds from sales of investment securities held to maturity
  454       -  
Net loan originations
  (435,078 )     (220,098 )
Purchase of loan portfolio
  -       (10,496 )
Proceeds from sales of loans originated for investment
  111,471       -  
Proceeds from sales of securitized residential mortgage loans
  20,838       -  
Proceeds from sale of other real estate
  2,000       -  
Proceeds from bank-owned life insurance
  843       1,364  
Purchase of bank-owned life insurance
  -       (25,000 )
Purchases of premises and equipment
  (5,041 )     (8,136 )
Distributions from unconsolidated subsidiaries
  656       596  
Contributions to unconsolidated subsidiaries
  (846 )     (5,294 )
Acquisition of businesses and minority interests
  (6,738 )     -  
Net cash used in investing activities
  (234,274 )     (214,723 )
               
Cash flows from financing activities:
             
Net increase (decrease) in deposits
  (225,647 )     97,776  
Proceeds from long-term debt
  30,000       150,000  
Repayments of long-term debt
  (64,111 )     (73,046 )
Net increase (decrease) in short-term borrowings
  262,205       (7,063 )
Cash dividends paid
  (17,240 )     (22,274 )
Tax benefits from share-based compensation
  40       10  
Repurchases of common stock
  (1,824 )     (31,075 )
Proceeds from issuance of common stock and stock option exercises
  520       2,261  
Net cash provided by (used in) financing activities
  (16,057 )     116,589  
               
Net decrease in cash and cash equivalents
  (1,703 )     (30,148 )
Cash and cash equivalents at beginning of period
  82,129       135,648  
Cash and cash equivalents at end of period
$ 80,426     $ 105,500  
               
Supplemental disclosure of cash flow information:
             
Cash paid during the period for:
             
Interest
$ 85,751     $ 100,488  
Income taxes
  13,798       24,711  
Cash received during the period for:
             
Income taxes
  1,820       -  
Supplemental disclosure of noncash investing and financing activities:
             
Net change in common stock held by directors' deferred compensation plan
$ 73     $ 33  
Net reclassification of loans to other real estate
  17,490       -  
Net transfer of loans to loans held for sale
  167,354       -  
Securitization of residential mortgage loans into trading mortgage backed securities
  4,995       -  
Securitization of residential mortgage loans into available for sale mortgage backed securities
  10,936       -  
               
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, 2007. 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 financial statements and the notes thereto have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net income (loss) or shareholders’ equity for any periods presented.

2.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On January 1, 2008, we adopted the following new accounting pronouncements:

·  
SFAS 157 – Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,”

·  
SFAS 159 – Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,”

·  
EITF 06-10 – Emerging Issues Task Force Issue No. 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements,” and

·  
SAB 109 – Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.”

The adoption of these pronouncements did not have a material impact on our consolidated financial statements.

In February 2008, the Financial Accounting Standards Board (“FASB”) amended SFAS 157 through the issuance of FSP FAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 is effective upon issuance and delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). As permitted under SFAS 157, we plan to adopt the provisions of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in our financial statements on a recurring basis effective January 1, 2009. We are evaluating the impact of the adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities on our consolidated financial statements.

In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS 154, “Accounting Changes and Error Corrections.” However, the disclosure provisions in SFAS 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. We adopted the provisions of FSP FAS 157-3 and such adoption did not have a material impact on our consolidated financial statements for the three and nine months ended September 30, 2008.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest (minority interest) in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination or a gain from a bargain purchase and determining what information should be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after fiscal years beginning after December 15, 2008. We do not expect the adoption of this statement to have a material impact on our consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We are evaluating the impact of this pronouncement on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement 133” (“SFAS 161”). SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Specifically, SFAS 161 requires (1) disclosure of the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation; (2) disclosure of the fair values of derivative instruments and their gains and losses in a tabular format; (3) disclosure of information about credit-risk-related contingent features; and (4) cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We are evaluating the impact of this pronouncement on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. We are evaluating the impact of this pronouncement on our consolidated financial statements.

In June 2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We are evaluating the impact of this pronouncement on our consolidated financial statements.

In June 2008, the EITF reached a consensus on EITF No. 08-3 “Accounting by Lessees for Nonrefundable Maintenance Deposits” (“EITF 08-3”). EITF 08-3 states that lessees shall account for nonrefundable maintenance deposits as a deposit asset if it is probable that the maintenance activities will occur and the deposit is realizable. EITF 08-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We are evaluating the impact of this pronouncement on our consolidated financial statements.

3.   BUSINESS COMBINATIONS

On July 1, 2008 (the “acquisition date”), we completed the acquisition of certain assets of Pacific Islands Financial Management LLC (“PIFM”), a Hawaii based investment advisory firm that managed money for private clients, corporate accounts and various retirement plans. The acquisition is expected to enhance our asset management operations by providing access to new customers and greater resources.

At the acquisition date, we paid $2.1 million (the “purchase price”) in cash to purchase the assets of PIFM. Additional cash consideration of up to $2.1 million may be paid five years from the date of acquisition as a result of earnout provisions tied to revenue growth during the five year period immediately following the acquisition date.

The acquisition was accounted for using the purchase accounting method. Accordingly, the purchase price was allocated to the assets acquired based on their estimated fair values at the acquisition date. No liabilities were assumed in the acquisition. As a result of the acquisition, we recognized certain identifiable intangible assets including customer relationships of $1.4 million and non-compete agreements of $0.3 million, which are amortized on a straight-line basis over their estimated useful lives of 10 years and 5 years, respectively. The excess of the purchase price over the amounts assigned to the assets acquired of $0.5 million was recognized as goodwill and was assigned to our Hawaii Market reportable segment. It is anticipated that all of the goodwill resulting from the acquisition will be deductible for income tax purposes.

Pro forma results of operations have not been presented for the acquisition of PIFM because the effects of the acquisition were not material to our consolidated financial statements.
 
4.   INVESTMENT SECURITIES

A summary of investment securities is as follows:

       
Gross
   
Gross
   
 
 
Amortized
   
unrealized
   
unrealized
   
Estimated
 
cost
   
gains
   
losses
   
fair value
 
(Dollars in thousands)
September 30, 2008
                   
Held to Maturity
                   
   U.S. Government sponsored entities debt securities
$ 8,623     $ 7     $ -     $ 8,630
   U.S. Government sponsored entities mortgage-backed securities
  7,261       4       (104 )     7,161
   States and political subdivisions
  8,084       21       -       8,105
      Total
$ 23,968     $ 32     $ (104 )   $ 23,896
                             
Available for Sale
                           
   U.S. Government sponsored entities debt securities
$ 99,061     $ 315     $ (1,378 )   $ 97,998
   U.S. Government sponsored entities mortgage-backed securities
  446,695       2,569       (2,627 )     446,637
   States and political subdivisions
  129,357       602       (3,552 )     126,407
   Privately-issued mortgage-backed securities
  113,786       -       (6,737 )     107,049
   Other
  1,026       -       (101 )     925
      Total
$ 789,925     $ 3,486     $ (14,395 )   $ 779,016
                             
December 31, 2007
                           
Held to Maturity
                           
   U.S. Government sponsored entities debt securities
$ 26,844     $ -     $ (68 )   $ 26,776
   U.S. Government sponsored entities mortgage-backed securities
  9,637       9       (41 )     9,605
   States and political subdivisions
  9,643       53       -       9,696
      Total
$ 46,124     $ 62     $ (109 )   $ 46,077
                             
Available for Sale
                           
   U.S. Government sponsored entities debt securities
$ 79,563     $ 539     $ -     $ 80,102
   U.S. Government sponsored entities mortgage-backed securities
  484,012       1,644       (2,229 )     483,427
   States and political subdivisions
  147,559       1,251       (672 )     148,138
   Privately-issued mortgage-backed securities
  123,499       401       (1,167 )     122,733
   Other
  898       -       (168 )     730
      Total
$ 835,531     $ 3,835     $ (4,236 )   $ 835,130


The amortized cost and estimated fair value of investment securities at September 30, 2008 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
September 30, 2008
 
Amortized
   
Estimated
 
cost
   
fair value
 
(Dollars in thousands)
Held to Maturity
       
   Due in one year or less
$ 11,498     $ 11,518
   Due after one year through five years
  1,064       1,072
   Due after five years through ten years
  922       922
   Due after ten years
  3,223       3,223
   Mortgage-backed securities
  7,261       7,161
      Total
$ 23,968     $ 23,896
             
Available for Sale
           
   Due in one year or less
$ 5,408     $ 5,460
   Due after one year through five years
  60,902       61,324
   Due after five years through ten years
  112,387       110,922
   Due after ten years
  49,721       46,699
   Mortgage-backed securities
  560,481       553,686
   Other
  1,026       925
      Total
$ 789,925     $ 779,016

Proceeds from sales of investment securities available for sale were $10.7 million for the nine months ended September 30, 2008, resulting in gross realized gains of $0.1 million and gross realized losses of $0.1 million. There were no sales of available for sale securities during the nine months ended September 30, 2007. Proceeds from sales of investment securities classified as trading were $5.0 million for the nine months ended September 30, 2008, resulting in gross realized gains and losses of less than $0.1 million. There were no sales of trading securities during the nine months ended September 30, 2007.

Investment securities of $731.9 million at September 30, 2008 were pledged to secure public funds on deposit, securities sold under agreements to repurchase and other long-term and short-term borrowings.
 

Provided below is a summary of investment securities which were in an unrealized loss position at September 30, 2008 and December 31, 2007. There were a total of 142 securities in an unrealized loss position at September 30, 2008.

   
Less than 12 months
   
12 months or longer
   
Total
 
         
Unrealized
         
Unrealized
         
Unrealized
 
Description of Securities
 
Fair Value
   
Losses
   
Fair Value
   
Losses
   
Fair Value
   
Losses
 
   
(Dollars in thousands)
 
At September 30, 2008:
                                   
U.S. Government sponsored entities
                                   
   debt securities
  $ 37,629     $ (1,378 )   $ -     $ -     $ 37,629     $ (1,378 )
U.S. Government sponsored entities
                                               
   mortgage-backed securities
    211,190       (1,848 )     35,800       (883 )     246,990       (2,731 )
States and political subdivisions
    61,234       (3,518 )     2,084       (34 )     63,318       (3,552 )
Privately issued mortgage backed-securities
    52,414       (4,988 )     54,635       (1,749 )     107,049       (6,737 )
Other
    925       (101 )     -       -       925       (101 )
   Total temporarily impaired securities
  $ 363,392     $ (11,833 )   $ 92,519     $ (2,666 )   $ 455,911     $ (14,499 )
                                                 
At December 31, 2007:
                                               
U.S. Government sponsored entities
                                               
   debt securities
  $ -     $ -     $ 26,776     $ (68 )   $ 26,776     $ (68 )
U.S. Government sponsored entities
                                               
   mortgage-backed securities
    44,436       (93 )     200,045       (2,177 )     244,481       (2,270 )
States and political subdivisions
    21,479       (348 )     25,013       (324 )     46,492       (672 )
Privately issued mortgage backed-securities
    20       -       81,307       (1,167 )     81,327       (1,167 )
Other
    730       (168 )     -       -       730       (168 )
   Total temporarily impaired securities
  $ 66,665     $ (609 )   $ 333,141     $ (3,736 )   $ 399,806     $ (4,345 )

The declines in market value were primarily attributable to changes in interest rates and disruptions in the credit and financial markets. Because we have the ability and intent to hold all of these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired.

5.   LOANS AND LEASES

Loans, excluding loans held for sale, consisted of the following at the dates indicated:

 
September 30,
   
December 31,
 
 
2008
   
2007
 
 
(Dollars in thousands)
 
           
Commercial, financial and agricultural
$ 375,389     $ 385,521  
Real estate:
             
  Construction
  1,113,110       1,226,138  
  Mortgage - residential
  1,098,849       1,036,702  
  Mortgage - commercial
  1,250,491       1,243,383  
Consumer
  191,947       209,166  
Leases
  60,204       53,303  
    4,089,990       4,154,213  
Unearned income
  (9,724 )     (12,508 )
  Total loans and leases
$ 4,080,266     $ 4,141,705  
 
Impaired loans requiring an allowance for loan and lease losses at September 30, 2008 and December 31, 2007 amounted to $49.8 million and $74.3 million, respectively, and included all nonaccrual and restructured loans greater than $0.5 million. At September 30, 2008 impaired loans not requiring an allowance for loan and lease losses amounted to $78.0 million. There were no impaired loans that did not require an allowance at December 31, 2007.

6.   ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents the changes in the allowance for loan and lease losses (the “Allowance”) for the periods indicated:

 
Three Months Ended
   
Nine Months Ended
 
 
September 30,
   
September 30,
 
 
2008
   
2007
   
2008
   
2007
 
 
(Dollars in thousands)
 
                       
   Balance, beginning of period
$ 86,050     $ 51,409     $ 92,049     $ 52,280  
   Provision for loan and lease losses
  22,900       21,200       144,972       24,800  
    108,950       72,609       237,021       77,080  
   Charge-offs
  (9,141 )     (835 )     (138,208 )     (6,513 )
   Recoveries
  418       743       1,414       1,950  
      Net charge-offs
  (8,723 )     (92 )     (136,794 )     (4,563 )
   Balance, end of period
$ 100,227     $ 72,517     $ 100,227     $ 72,517  

As a result of the downturn in the California residential construction market, which began in 2007 and has continued through the third quarter of 2008, some of our borrowers are finding it increasingly difficult to repay amounts due on their outstanding balances as they primarily rely on the proceeds received from the sales of homes to repay their loans. In turn, the collateral values securing some of these loans have significantly declined in value as evidenced by appraisals received in the first three quarters of 2008. In some instances, recent appraisals reflect market values that have dropped more than 50% from the market values indicated in appraisals obtained in the latter part of 2007. Due to the deterioration in the California housing market and the downturn in the national and local economies, we have also started to see signs of weakness in a few of our mainland commercial construction and Hawaii residential construction borrowers. These factors have contributed to increases in the number of loan downgrades, nonaccrual loans, specific reserves on certain impaired loans and certain loan loss factors for specified pools of loans during the nine months ended September 30, 2008. Additionally, our methodology for determining the adequacy of the Allowance has required that we increase our reserve levels on these loans.

Net charge-offs for the nine months ended September 30, 2008 included charge-offs of loans transferred to loans held for sale of $79.5 million and were primarily concentrated on loans with direct exposure to the California residential construction market. There were no net charge-offs of loans transferred to loans held for sale during the three months ended September 30, 2008.

In July 2008, we reduced our exposure to the California residential construction market by selling certain non-performing assets with a combined carrying amount of $44.2 million at June 30, 2008. No gain or loss was recorded on the sale as the carrying values of these assets were written down to their sales price at June 30, 2008.

7.      SECURITIZATIONS

During the nine months ended September 30, 2008, we securitized certain residential mortgage loans with an outstanding principal balance of $36.5 million with a U.S. Government sponsored entity. After the securitizations, we continued to hold mortgage-backed securities and service the residential mortgage loans.

At September 30, 2008, $10.9 million of unsold mortgage-backed securities that we received were categorized as available for sale securities and were therefore recorded at their fair value of $10.9 million. The fair values of these mortgage-backed securities were based on quoted prices of similar instruments in active markets in accordance with SFAS 157. Unrealized gains and losses on these securities were recorded in other comprehensive income (loss) and were less than $0.1 million at September 30, 2008. During the nine months ended, we recognized a gain of $0.3 million on the sale of securitized mortgage-backed securities.

We recorded $0.5 million of servicing assets related to the securitizations during the nine months ended September 30, 2008. The servicing assets were recorded at their respective fair values at the time of securitization. The fair value of the servicing assets were determined using a discounted cash flow model based on market value assumptions at the time of securitization and is amortized in proportion to and over the period of net servicing income in accordance with SFAS 156.

8.   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, 2008:
 
 
Hawaii
   
Commercial
       
 
Market
   
Real Estate
   
Total
 
 
(Dollars in thousands)
 
                 
Balance, beginning of period
$ 150,423     $ 94,279     $ 244,702  
Additions
  2,397       -       2,397  
Impairment charge
  -       (94,279 )     (94,279 )
Balance, end of period
$ 152,820     $ -     $ 152,820  

The additions to goodwill were the result of an earnout payment of $1.4 million related to our acquisition of Hawaii HomeLoans in fiscal 2005, goodwill recognized from the acquisition of PIFM of $0.5 million and adjustments related to CB Bancshares, Inc. income tax contingencies of $0.5 million.

At the end of the second quarter of 2008, we experienced a decline in our market capitalization which we determined to be an indicator that an impairment test was required under SFAS 142. As a result of the impairment test performed, we determined that the remaining goodwill associated with our Commercial Real Estate reporting segment was impaired and we recorded an impairment charge of $94.3 million in the second quarter of 2008. At September 30, 2008, we performed an impairment assessment and concluded that our remaining goodwill was not impaired.

Other intangible assets include a core deposit premium, mortgage servicing rights, customer relationships and non-compete agreements. The following table presents changes in other intangible assets for the nine months ended September 30, 2008:

 
Core
   
Mortgage
                   
 
Deposit
   
Servicing
   
Customer
   
Non-Compete
       
 
Premium
   
Rights
   
Relationships
   
Agreements
   
Total
 
 
(Dollars in thousands)
 
                             
Balance, beginning of period
$ 28,750     $ 11,222     $ -     $ -     $ 39,972  
Additions
  -       5,534       1,400       300       7,234  
Amortization
  (2,006 )     (1,631 )     (35 )     (15 )     (3,687 )
Balance, end of period
$ 26,744     $ 15,125     $ 1,365     $ 285     $ 43,519  

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $2.0 million and $5.5 million for the three and nine months ended September 30, 2008, respectively, compared to $0.3 million and $1.0 million for the three and nine months ended September 30, 2007, respectively. The fair value of our mortgage servicing rights was $17.0 million and $12.4 million at September 30, 2008 and December 31, 2007, respectively.

The gross carrying value and accumulated amortization related to our intangible assets are presented below:

 
September 30, 2008
   
December 31, 2007
 
Gross
               
Gross
           
 
Carrying
   
Accumulated
         
Carrying
   
Accumulated
     
 
Value
   
Amortization
   
Net
   
Value
   
Amortization
   
Net
 
(Dollars in thousands)
     
                                 
Core deposit premium
$ 44,642     $ (17,898 )   $ 26,744     $ 44,642     $ (15,892 )   $ 28,750
Mortgage servicing rights
  26,054       (10,929 )     15,125       20,520       (9,298 )     11,222
Customer relationships
  1,400       (35 )     1,365       -       -       -
Non-compete agreements
  300       (15 )     285       -       -       -
  $ 72,396     $ (28,877 )   $ 43,519     $ 65,162     $ (25,190 )   $ 39,972


Based on the core deposit premium, mortgage servicing rights, customer relationships and non-compete agreements held as of September 30, 2008, estimated amortization expense for the remainder of fiscal 2008, the next five succeeding fiscal years and all years thereafter are as follows:

 
Estimated Amortization Expense
       
Mortgage
                 
 
Core Deposit
   
Servicing
   
Customer
   
Non-Compete
     
 
Premium
   
Rights
   
Relationships
   
Agreements
   
Total
 
(Dollars in thousands)
     
                           
2008 (remainder)
$ 669     $ 315     $ 35     $ 15     $ 1,034
2009
  2,674       1,885       140       60       4,759
2010
  2,674       1,684       140       60       4,558
2011
  2,674       1,480       140       60       4,354
2012
  2,674       1,294       140       60       4,168
2013
  2,674       1,130       140       30       3,974
Thereafter
  12,705       7,337       630       -       20,672
  $ 26,744     $ 15,125     $ 1,365     $ 285     $ 43,519

9.   DERIVATIVES

In January 2008, we entered into a derivative transaction to hedge future cash flows from a portion of our then existing variable rate loan portfolio. Effective January 2008 through January 2013, we will receive payments equal to a fixed interest rate of 6.25% from the counterparty on a notional amount of $400 million. In return, we will pay to the counterparty a floating rate, namely our prime rate, on the same notional amount. The purpose of this derivative transaction is to minimize the risk of fluctuations in interest payments received on our variable rate loan portfolio. The derivative transaction has been designated as a cash flow hedge.

As required by SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” we measure the derivative at fair value on our consolidated balance sheet. At each reporting period, depending on whether the derivative is in an asset or liability position, we record the derivative in other assets or other liabilities. We record the effective portion of the changes in the fair value of the derivative in accumulated other comprehensive income (loss), net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings.

At September 30, 2008, the derivative was in a net asset position and we recorded the derivative at its fair value of $0.1 million in other assets. At September 30, 2008, there was no unrealized gain or loss for the effective portion of the change in fair value of the derivative. During the nine months ended September 30, 2008, we recognized a gain related to hedge ineffectiveness of $0.1 million.

10.   SHARE REPURCHASE

In January 2008, the Company’s board of directors authorized the repurchase and retirement of up to 1,200,000 shares of the Company’s common stock (the “2008 Repurchase Plan”). Repurchases may be made from time to time on the open market or in privately negotiated transactions. During the nine months ended September 30, 2008, we repurchased and retired a total of 100,000 shares of common stock for approximately $1.8 million. Although, a total of 1,100,000 shares remained authorized for repurchase under the 2008 Repurchase Plan at September 30, 2008, the Company is not currently making any repurchases.

11.   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,
 
 
2008
   
2007
   
2008
   
2007
 
 
(Dollars in thousands)
 
                       
Salaries and employee benefits
$ 600     $ 743     $ 1,764     $ 2,920  
Income tax benefit
  (240 )     (298 )     (707 )     (1,170 )
Net share-based compensation effect
$ 360     $ 445     $ 1,057     $ 1,750  
 
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 Activity

The following is a summary of stock option activity for the Company’s stock option plans for the nine months ended September 30, 2008:

       
Weighted Average
 
Shares
   
Exercise Price
           
Outstanding at January 1, 2008
872,912     $ 27.90
Changes during the period:
         
  Granted
95,000       18.75
  Exercised
(1,000 )     9.24
  Expired
(2,564 )     26.82
  Forfeited
(42,499 )     34.81
Outstanding at September 30, 2008
921,849       26.66

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, 2008 and 2007 was estimated using the following weighted-average assumptions:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2008
 
2007
 
2008
 
2007
                               
Expected volatility
  - %     30.9 %     32.0 %     33.1 %
Risk free interest rate
  - %     4.5 %     2.8 %     4.5 %
Expected dividends
  - %     3.6 %     5.4 %     2.9 %
Expected life (in years)
  -       6.5       6.5       7.4  
Weighted average fair value
$ -     $ 7.57     $ 3.47     $ 11.20  

There were no stock options granted during the three months ended September 30, 2008.

Restricted Stock Awards

The table below presents the activity of restricted stock awards for the nine months ended September 30, 2008:

       
Weighted Average
       
Grant Date
 
Shares
   
Fair Value
           
Nonvested at January 1, 2008
44,620     $ 34.87
Changes during the period:
         
  Forfeited
(2,500 )     36.95
Nonvested at September 30, 2008
42,120       34.74

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.

Performance Shares and Stock Appreciation Rights

In 2005 and 2008, we established Long Term Incentive Plans (the “2005 LTIP” and “2008 LTIP”) that covers certain executive and senior management personnel. Awards granted under the 2005 LTIP are comprised of three components: performance shares, stock appreciation rights (“SARs”) and cash awards, while awards granted under the 2008 LTIP consists of performance shares and SARs. All performance shares and SARs awarded under both the 2005 LTIP and 2008 LTIP are granted from the Company’s 2004 Stock Compensation Plan.

Performance shares granted under the 2005 LTIP 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 required 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 both the 2005 LTIP and 2008 LTIP during the nine months ended September 30, 2008:

       
Weighted Average
       
Grant Date
 
Shares
   
Fair Value
           
Nonvested at January 1, 2008
45,957     $ 34.74
Changes during the period:
         
  Granted
97,907       18.88
  Vested
(44,670 )     34.77
  Forfeited
(1,287 )     33.86
Nonvested at September 30, 2008
97,907       18.88

SARs granted under the 2005 LTIP require the employee to achieve the same performance conditions as the performance shares described for above for the 2005 LTIP, as well as to satisfy service conditions that approximate three years from the date of grant. Similar to the performance shares under the 2005 LTIP 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.
 
SARs granted under the 2008 LTIP require the achievement of the same market and service conditions described above for the 2008 LTIP. Similar to the performance shares awarded under the 2008 LTIP, the fair value of the SARs granted will be recognized as compensation over the service period and must be recognized as expense over the service period regardless of whether the market conditions are met, so long as the grantee meets the service condition.

Upon exercise of SARs under the 2005 LTIP and 2008 LTIP, 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 Company’s 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 for all SARs issued under the SARs plan 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.

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

 
Nine Months Ended
 
September 30,
 
2008
 
2007
               
Expected volatility
  32.0 %     31.7 %
Risk free interest rate
  2.8 %     4.5 %
Expected dividends
  5.3 %     2.8 %
Expected life (in years)
  6.5       6.5  
Weighted average fair value
$ 3.50     $ 10.49  

There were no grants of SARs for the three months ended September 30, 2008 and 2007.

The table below presents activity of SARs under both the 2005 LTIP and 2008 LTIP for the nine months ended September 30, 2008:

       
Weighted Average
 
Shares
   
Exercise Price
           
Outstanding at January 1, 2008
56,549     $ 35.00
Changes during the period:
         
  Granted
210,963       18.88
  Vested
(21,368 )     34.41
  Forfeited
(8,166 )     35.57
Outstanding at September 30, 2008
237,978       20.74

12.   ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 
September 30,
   
December 31,
 
 
2008
   
2007
 
 
(Dollars in thousands)
 
           
Unrealized holding losses on available-for-sale investment securities
$ (10,909 )   $ (401 )
Pension adjustments
  (9,409 )     (9,973 )
Tax effect
  8,144       4,160  
  Accumulated other comprehensive loss, net of tax
$ (12,174 )   $ (6,214 )
 
Components of comprehensive income (loss) for the periods indicated were as follows:

 
Three Months Ended
   
Nine Months Ended
 
September 30,
   
September 30,
 
2008
   
2007
   
2008
   
2007
 
(Dollars in thousands)
                     
Net income (loss)
$ 3,041     $ 9,107     $ (141,559 )   $ 50,258
Unrealized gain (loss) on investment securities, net of taxes
  (3,095 )     5,871       (6,297 )     2,793
Unrealized gain on derivatives, net of taxes
  5,050       -       -       -
Pension adjustments, net of taxes
  113       165       337       493
  Comprehensive income (loss)
$ 5,109     $ 15,143     $ (147,519 )   $ 53,544

13.  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,
 
 
2008