form424b3.htm
Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-172480
 
 

 
PROSPECTUS SUPPLEMENT
(To Prospectus dated April 12, 2011)

 
 

 

 

 
Up to 18,487,715 Shares of Common Stock


--------------------------------------------------------------------------------


 
 
RECENT DEVELOPMENTS

We have attached to this prospectus supplement, and incorporated by reference into it, our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (“SEC”) on May 13, 2011, our Current Report on Form 8-K filed with the SEC on May 12, 2011, our Current Report on Form 8-K filed with the SEC on May 10, 2011, our Current Report on Form 8-K filed with the SEC on April 29, 2011 and our Current Report on Form 8-K filed with the SEC on April 21, 2011.

 

 
--------------------------------------------------------------------------------


 
 
May 13, 2011

 
 
 
 
 

 
 


 
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 March 31, 2011

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  £   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 £
Accelerated filer £
Non-accelerated filer £
Smaller reporting company T

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, no par value, on April 29, 2011 was 39,649,510 shares.
 
 


 
 

 
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Table of Contents
 
Part I.
Financial Information
   
Item I.
Financial Statements (Unaudited)
   
 
Consolidated Balance Sheets
March 31, 2011 and December 31, 2010
   
 
Consolidated Statements of Operations
Three months ended March 31, 2011 and 2010
   
 
Consolidated Statements of Cash Flows
Three months ended March 31, 2011 and 2010
   
 
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 6.
Exhibits
   
Signatures
 
Exhibit Index
 
 
 
 
 
2

 
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 regulatory actions on the Company including the Bank MOU (as defined below) which replaced the Consent Order (as defined below) by the Federal Deposit Insurance Corporation and the Hawaii Division of Financial Institutions and the BSA MOU (as defined below); the impact of legislation affecting the banking industry (including the Emergency Economic Stabilization Act of 2008 and the Dodd-Frank Wall Street Reform and Consumer Protection Act); the impact of competitive products, services, pricing, and other competitive forces; movements in interest rates; loan delinquency rates and changes in asset quality; volatility in the financial markets and uncertainties concerning the availability of debt or equity financing; 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  levels of consumer and business confidence in the state of the economy and in financial institutions in general and in particular our bank. 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.
 
 
 
 
3

 
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
           
 
March 31,
   
December 31,
 
 
2011
   
2010
 
 
(Dollars in thousands)
 
Assets
         
Cash and due from banks
$ 63,687     $ 61,725  
Interest-bearing deposits in other banks
  537,495       729,014  
Investment securities:
             
   Available for sale, at fair value
  1,076,181       702,517  
   Held to maturity (fair value of $2,009 at March 31, 2011 and $2,913 at December 31, 2010)
  1,943       2,828  
      Total investment securities
  1,078,124       705,345  
               
Loans held for sale
  54,093       69,748  
               
Loans and leases
  2,067,302       2,169,444  
  Less allowance for loan and lease losses
  178,010       192,854  
      Net loans and leases
  1,889,292       1,976,590  
               
Premises and equipment, net
  55,977       57,390  
Accrued interest receivable
  11,461       11,279  
Investment in unconsolidated subsidiaries
  13,950       14,856  
Other real estate
  56,601       57,507  
Other intangible assets
  44,498       44,639  
Bank-owned life insurance
  142,000       142,296  
Federal Home Loan Bank stock
  48,797       48,797  
Income tax receivable
  2,353       2,223  
Other assets
  15,070       16,642  
      Total assets
$ 4,013,398     $ 3,938,051  
               
Liabilities and Equity
             
Deposits:
             
   Noninterest-bearing demand
$ 678,007     $ 611,744  
   Interest-bearing demand
  528,533       639,548  
   Savings and money market
  1,120,272       1,089,813  
   Time
  818,651       791,842  
      Total deposits
  3,145,463       3,132,947  
               
Short-term borrowings
  1,423       202,480  
Long-term debt
  409,299       459,803  
Other liabilities
  62,231       66,766  
      Total liabilities
  3,618,416       3,861,996  
               
Equity:
             
   Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding
             
      none at March 31, 2011 and 135,000 shares at December 31, 2010
  -       130,458  
   Common stock, no par value, authorized 185,000,000 shares, issued and outstanding
             
      39,649,052 shares at March 31, 2011 and 1,527,000 shares at December 31, 2010
  764,463       404,167  
   Surplus
  63,436       63,308  
   Accumulated deficit
  (428,780 )     (517,316 )
   Accumulated other comprehensive loss
  (14,135 )     (14,565 )
      Total shareholders' equity
  384,984       66,052  
   Non-controlling interest
  9,998       10,003  
      Total equity
  394,982       76,055  
      Total liabilities and equity
$ 4,013,398     $ 3,938,051  
               
See accompanying notes to consolidated financial statements.
 
 
4

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
 
Three Months Ended March 31,
 
(Amounts in thousands, except per share data)
2011
   
2010
 
     
Interest income:
         
  Interest and fees on loans and leases
$ 28,566     $ 37,312  
  Interest and dividends on investment securities:
             
    Taxable interest
  5,221       8,101  
    Tax-exempt interest
  184       515  
    Dividends
  3       3  
  Interest on deposits in other banks
  389       330  
    Total interest income
  34,363       46,261  
Interest expense:
             
  Interest on deposits:
             
    Demand
  132       258  
    Savings and money market
  732       1,649  
    Time
  2,377       3,981  
  Interest on short-term borrowings
  204       189  
  Interest on long-term debt
  2,717       5,115  
    Total interest expense
  6,162       11,192  
    Net interest income
  28,201       35,069  
Provision (credit) for loan and lease losses
  (1,575 )     58,837  
    Net interest income (loss) after provision for loan and lease losses
  29,776       (23,768 )
               
Other operating income:
             
  Service charges on deposit accounts
  2,614       3,207  
  Other service charges and fees
  4,058       3,485  
  Income from fiduciary activities
  761       811  
  Equity in earnings of unconsolidated subsidiaries
  127       29  
  Fees on foreign exchange
  137       156  
  Investment securities gains
  -       831  
  Loan placement fees
  102       85  
  Net gain on sales of residential loans
  2,198       1,945  
  Income from bank-owned life insurance
  1,190       1,184  
  Other
  1,313       1,031  
    Total other operating income
  12,500       12,764  
Other operating expense:
             
  Salaries and employee benefits
  15,033       14,836  
  Net occupancy
  3,358       3,297  
  Equipment
  1,130       1,477  
  Amortization of other intangible assets
  1,547       1,408  
  Communication expense
  881       1,212  
  Legal and professional services
  2,460       5,650  
  Computer software expense
  883       903  
  Advertising expense
  836       839  
  Goodwill impairment
  -       102,689  
  Foreclosed asset expense
  2,242       5,532  
  Write down of assets
  1,565       774  
  Other
  7,702       10,598  
    Total other operating expense
  37,637       149,215  
               
     Income (loss) before income taxes
  4,639       (160,219 )
Income tax expense
  -       -  
     Net income (loss)
  4,639       (160,219 )
Preferred stock dividends, accretion of discount and conversion of preferred stock to common stock
  (83,897 )     2,074  
     Net income (loss) available to common shareholders
$ 88,536     $ (162,293 )
               
Per common share data:
             
   Basic earnings (loss) per share
$ 4.59     $ (107.23 )
   Diluted earnings (loss) per share
  4.58       (107.23 )
Shares used in computation:
             
  Basic shares
  19,301       1,513  
  Diluted shares
  19,321       1,513  
See accompanying notes to consolidated financial statements.
 
   
5

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2011
   
2010
 
 
(Dollars in thousands)
 
Cash flows from operating activities:
         
Net income (loss)
$ 4,639     $ (160,219 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
             
Provision (credit) for loan and lease losses
  (1,575 )     58,837  
Depreciation and amortization
  1,757       2,062  
Goodwill impairment
  -       102,689  
Write down of assets
  1,565       774  
Write down of other real estate, net of gain on sale
  534       5,532  
Amortization of other intangible assets
  1,547       1,408  
Net amortization of investment securities
  1,433       812  
Share-based compensation
  128       284  
Net gain on investment securities
  -       (831 )
Deferred income tax expense
  -       2,439  
Net gain on sales of residential loans
  (2,198 )     (1,945 )
Proceeds from sales of loans held for sale
  196,043       262,534  
Originations of loans held for sale
  (179,824 )     (216,694 )
Equity in earnings of unconsolidated subsidiaries
  (127 )     (29 )
Increase in cash surrender value of bank-owned life insurance
  (1,190 )     (1,030 )
Decrease (increase) in income tax receivable
  (130 )     862  
Net change in other assets and liabilities
  1,843       3,441  
Net cash provided by operating activities
  24,445       60,926  
Cash flows from investing activities:
             
Proceeds from maturities of and calls on investment securities available for sale
  114,515       131,753  
Proceeds from sales of investment securities available for sale
  -       439,436  
Purchases of investment securities available for sale
  (488,616 )     (98,068 )
Proceeds from maturities of and calls on investment securities held to maturity
  880       461  
Net loan principal repayments
  82,376       71,082  
Proceeds from sales of loans originated for investment
  -       37,950  
Proceeds from sale of other real estate
  6,948       7,664  
Proceeds from bank-owned life insurance
  158       -  
Purchases of premises and equipment
  (344 )     (222 )
Distributions from unconsolidated subsidiaries
  523       710  
Contributions to unconsolidated subsidiaries
  -       (227 )
Net cash provided by (used in) investing activities
  (283,560 )     590,539  
Cash flows from financing activities:
             
Net increase (decrease) in deposits
  12,516       (233,878 )
Proceeds from long-term debt
  -       50,000  
Repayments of long-term debt
  (50,218 )     (50,284 )
Net decrease in short-term borrowings
  (201,057 )     (40,355 )
Net proceeds from issuance of common stock and stock option exercises
  308,317       -  
Other, net
  -       37  
Net cash provided by (used in) financing activities
  69,558       (274,480 )
Net increase (decrease) in cash and cash equivalents
  (189,557 )     376,985  
Cash and cash equivalents at beginning of period
  790,739       488,367  
Cash and cash equivalents at end of period
$ 601,182     $ 865,352  
               
Supplemental disclosure of cash flow information:
             
Cash paid during the period for:
             
Interest
$ 6,365     $ 11,276  
Income taxes
  7       -  
Cash received during the period for:
             
Income taxes
  -       1,068  
Supplemental disclosure of noncash investing and financing activities:
             
Net change in common stock held by directors' deferred compensation plan
$ 16     $ 6  
Net reclassification of loans to other real estate
  6,575       17,364  
Net transfer of loans to loans held for sale
  -       17,724  
Dividends accrued on preferred stock
  969       1,742  
Accretion of preferred stock discount
  204       332  
Preferred stock and accrued unpaid dividends converted to common stock
  142,988       -  
Common stock received in exchange for preferred stock and accrued unpaid dividends
  56,201       -  
               
See accompanying notes to consolidated financial statements.
 
6

 
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. and Subsidiaries (herein referred to 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, 2010. 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.

As discussed in our 2010 Form 10-K and our independent auditor’s report dated February 9, 2011, at the time of the filing of our 2010 Form 10-K, there was substantial doubt about our ability to continue as a going concern. Since the filing of our 2010 Form 10-K, we have completed a number of significant milestones as part of our recovery plan. Upon completion of these milestones, which are described more fully below, substantial doubt about our ability to continue as a going concern no longer exists as of the end of the period covered by this report.

2.  REGULATORY MATTERS AND RECOVERY PLAN PROGRESS

While economic conditions have shown recent signs of stabilization and we successfully completed our capital raise and recapitalization, we continue to operate in a difficult environment. Deterioration in the Hawaii and California commercial real estate markets and related declines in property values in those markets has negatively impacted our operating results since the latter half of 2007.

Regulatory Matters

In May 2011, the members of the Board of Directors of the bank entered into a Memorandum of Understanding (the “Bank MOU”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the Hawaii Division of Financial Institutions (the “DFI”), effective May 5, 2011, which replaced the Consent Order (the “Consent Order”) the Board of Directors of the bank agreed to with the FDIC and DFI in December 2009. The termination of the Consent Order was effective May 11, 2011. The Bank MOU continues a number of the same requirements previously required by the Consent Order, including the maintenance of an adequate allowance for loan and lease losses, improvement of our asset quality, limitations on credit extensions, maintenance of qualified management and the prohibition on cash dividends to Central Pacific Financial Corp. (“CPF”), among other matters. In addition, the Bank MOU requires the bank to further reduce classified assets below the level previously required by the Consent Order. The Bank MOU lowers the minimum leverage capital ratio that the bank is required to maintain from 10% in the Consent Order to 8% and does not mandate a minimum total risk-based capital ratio.
 
In addition, on July 2, 2010, we entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of San Francisco (the “FRBSF”) and DFI. For the most part, the Agreement continues and formalizes the terms of the Memorandum of Understanding that the Company entered into on April 1, 2009 with the FRBSF and DFI, and the Agreement supersedes that Memorandum of Understanding in its entirety. Among other matters, the Agreement provides that unless we receive the consent of the FRBSF and DFI, we cannot: (i) pay dividends; (ii) receive dividends or payments representing a reduction in capital from Central Pacific Bank; (iii) directly or through any non-bank subsidiaries make any payments on subordinated debentures or trust preferred securities; (iv) directly or through any non-bank subsidiaries incur, increase or guarantee any debt; or (v) purchase or redeem any shares of our stock. The Agreement also requires that our Board of Directors fully utilize the Company’s financial and managerial resources to ensure that the bank complies with the Consent Order and any other supervisory action taken by the bank’s regulators. Additionally, we were required to submit to the FRBSF an acceptable capital plan and cash flow projection.

In February 2011, we also entered into a Memorandum of Understanding (the “BSA MOU”) with the FDIC and DFI relating to the Bank Secrecy Act (the “BSA”). Under the BSA MOU, we are required to (i) fully comply with the BSA and anti-money laundering requirements, (ii) implement a plan to ensure such compliance, including improving and maintaining an adequate system of internal controls, bolstering policies on customer due diligence, providing for comprehensive independent testing to validate compliance and maintaining an adequate compliance staff, (iii) correct all deficiencies identified by our regulators and (iv) provide them with progress reports.

 
7

 
The requirements and restrictions of the Bank MOU, the Agreement and the BSA MOU are judicially enforceable and the Company or the bank's failure to comply with such requirements and restrictions may subject the Company and the bank to additional regulatory restrictions including: the imposition of civil monetary penalties; the termination of insurance of deposits; the issuance of removal and prohibition orders against institution-affiliated parties; the appointment of a conservator or receiver for the bank; the issuance of directives to increase capital or enter into a strategic transaction, whether by merger or otherwise, with a third party, if we again fall below the capital ratio requirement; and the enforcement of such actions through injunctions or restraining orders.

Recovery Plan Progress

As previously disclosed, we adopted and implemented a recovery plan in March 2010 to improve our financial health by completing a significant recapitalization, reducing our credit risk exposure and focusing on our core businesses and traditional markets in Hawaii.

As of March 31, 2011, we have accomplished a number of key milestones in our recovery plan, including:

·  
On February 18, 2011, we successfully completed a $325 million capital raise from accredited investors in a private placement (the “Private Placement”). Concurrently with the completion of the Private Placement, we exchanged our TARP preferred stock and accrued and unpaid dividends thereon for common stock (the “TARP Exchange”).

·  
Significantly improved our tier 1 risk-based capital, total risk-based capital, and leverage capital ratios as of March 31, 2011 to 21.34%, 22.67%, and 12.64%, respectively, from 7.64%, 8.98%, and 4.42%, respectively, as of December 31, 2010.  The Company’s capital ratios currently exceed the minimum levels previously required by the Consent Order and the minimum level required by the Bank MOU and are above the levels required for a “well-capitalized” regulatory designation.

·  
We reported net income in the first quarter of 2011 of $4.6 million, compared to net losses in the first and fourth quarters of 2010 of $160.2 million and $2.1 million, respectively.

·  
We reduced nonperforming assets by $18.0 million to $284.9 million at March 31, 2011 from $302.8 million at December 31, 2010 primarily through loan pay downs and charge-offs.

·  
We reduced our construction and development loan portfolio (excluding owner-occupied loans) by approximately $41.7 million, or 13.9%, from $299.9 million at December 31, 2010. Construction and development loans (excluding owner-occupied loans) as a percentage of our total loan portfolio was 12.5% at March 31, 2011, compared to 13.8% at December 31, 2010.

·  
We had an allowance for loan and lease losses as a percentage of total loans and leases of 8.61% at March 31, 2011, compared to 8.89% at December 31, 2010. In addition, we had an allowance for loan and lease losses as a percentage of nonperforming assets of 62.49% at March 31, 2011, compared to 63.69% at December 31, 2010.

·  
We had cash and cash equivalents totaling $601.2 million at March 31, 2011, compared to $790.7 million at December 31, 2010.

·  
We reduced total outstanding borrowings with the Federal Home Loan Bank of Seattle (the “FHLB”) to $301.0 million at March 31, 2011 from $551.3 million at December 31, 2010.

·  
On May 9, 2011, we announced that our rights offering is fully subscribed. Total gross proceeds to us from the rights offering will be approximately $20 million.
 
3.   RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires a greater level of disaggregated information about the credit quality of loan and leases and the allowance for loan and lease losses. This ASU also requires additional disclosures related to past due information, credit quality indicators and information related to loans modified in a troubled debt restructuring. We adopted this ASU effective January 1, 2011 and the adoption of this statement did not have a material impact on our consolidated financial statements.

 
8

 
4.   INVESTMENT SECURITIES

A summary of available for sale and held to maturity investment securities are as follows:
 
       
Gross
   
Gross
   
 
 
Amortized
   
unrealized
   
unrealized
   
Estimated
 
cost
   
gains
   
losses
   
fair value
 
(Dollars in thousands)
March 31, 2011
                   
Available for Sale
                   
   U.S. Government sponsored entities debt securities
$ 331,345     $ 249     $ (1,050 )   $ 330,544
   States and political subdivisions
  12,530       -       -       12,530
   U.S. Government sponsored entities mortgage-backed securities
  727,303       7,563       (2,804 )     732,062
   Non-agency collateralized mortgage obligations
  17       -       -       17
   Other
  1,008       20       -       1,028
      Total
$ 1,072,203     $ 7,832     $ (3,854 )   $ 1,076,181
                             
Held to Maturity
                           
   U.S. Government sponsored entities mortgage-backed securities
$ 1,943     $ 66     $ -     $ 2,009
                             
December 31, 2010
                           
Available for Sale
                           
   U.S. Government sponsored entities debt securities
$ 202,192     $ 306     $ (643 )   $ 201,855
   States and political subdivisions
  12,619       -       -       12,619
   U.S. Government sponsored entities mortgage-backed securities
  483,647       6,653       (3,336 )     486,964
   Non-agency collateralized mortgage obligations
  17       -       -       17
   Other
  1,057       5       -       1,062
      Total
$ 699,532     $ 6,964     $ (3,979 )   $ 702,517
                             
Held to Maturity
                           
   States and political subdivisions
$ 500     $ 4     $ -     $ 504
   U.S. Government sponsored entities mortgage-backed securities
  2,328       81       -       2,409
      Total
$ 2,828     $ 85     $ -     $ 2,913
 
The amortized cost and estimated fair value of investment securities at March 31, 2011 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.
 
 
March 31, 2011
 
Amortized
Cost
   
Estimated
Fair Value
 
(Dollars in thousands)
Available for Sale
       
  Due after one year through five years
$ 331,345     $ 330,544
  Due after five years through ten years
  7,270       7,270
  Due after ten years
  5,260       5,260
  Mortage-backed securities
  727,303       732,062
  Other
  1,025       1,045
    Total
$ 1,072,203     $ 1,076,181
             
Held to Maturity
           
  Mortage-backed securities
$ 1,943     $ 2,009
 
There were no sales of available for sale securities during the first quarter of 2011. As part of our recovery plan, we sold certain available for sale investment securities during the first quarter of 2010 and received gross proceeds of $439.4 million. Gross realized gains and losses on the sales of the available for sale investment securities during the three months ended March 31, 2010 were $9.6 million and $8.8 million, respectively. The basis on which the cost of all securities sold was determined using the specific identification method.

 
9

 
Investment securities of $579.5 million and $613.5 million at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public funds on deposit, securities sold under agreements to repurchase and other long-term and short-term borrowings. None of these securities were pledged to a secured party that has the right to sell or repledge the collateral as of the same periods.

Provided below is a summary of the 28 and 18 investment securities which were in an unrealized loss position at March 31, 2011 and December 31, 2010, respectively.
 
   
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 March 31, 2011:
                                   
U.S. Government sponsored entities
                                   
   debt securities
  $ 210,122     $ (1,050 )   $ -     $ -     $ 210,122     $ (1,050 )
U.S. Government sponsored entities
                                               
   mortgage-backed securities
    248,194       (2,804 )     -       -       248,194       (2,804 )
   Total temporarily impaired securities
  $ 458,316     $ (3,854 )   $ -     $ -     $ 458,316     $ (3,854 )
                                                 
At December 31, 2010:
                                               
U.S. Government sponsored entities
                                               
   debt securities
  $ 83,973     $ (643 )   $ -     $ -     $ 83,973     $ (643 )
U.S. Government sponsored entities
                                               
   mortgage-backed securities
    194,756       (3,336 )     -       -       194,756       (3,336 )
Non-agency collateralized mortgage obligations
    17       -       -       -       17       -  
   Total temporarily impaired securities
  $ 278,746     $ (3,979 )   $ -     $ -     $ 278,746     $ (3,979 )
 
Unrealized losses for all investment securities are reviewed to determine whether the losses are deemed “other-than-temporary impairment” (“OTTI”). Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. In conducting this assessment, we evaluate a number of factors including, but not limited to:

·  
The length of time and the extent to which fair value has been less than the amortized cost basis;
·  
Adverse conditions specifically related to the security, an industry, or a geographic area;
·  
The historical and implied volatility of the fair value of the security;
·  
The payment structure of the debt security and the likelihood of the issuer being able to make payments;
·  
Failure of the issuer to make scheduled interest or principal payments;
·  
Any rating changes by a rating agency; and
·  
Recoveries or additional decline in fair value subsequent to the balance sheet date.

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses.

The declines in market value were primarily attributable to changes in interest rates and disruptions in the credit and financial markets. Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not consider these investments to be other-than-temporarily impaired.

 
10

 
5.   LOANS AND LEASES

Loans and leases, excluding loans held for sale, consisted of the following:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
             
Commercial, financial and agricultural
  $ 183,079     $ 207,900  
Real estate:
               
  Construction
    272,739       314,530  
  Mortgage - residential
    741,057       747,870  
  Mortgage - commercial
    737,249       761,710  
Consumer
    111,172       112,950  
Leases
    25,281       28,163  
      2,070,577       2,173,123  
Unearned income
    (3,275 )     (3,679 )
  Total loans and leases
  $ 2,067,302     $ 2,169,444  
 
During the three months ended March 31, 2011, we did not transfer any loans to the held-for-sale category. In addition, no loans were sold or purchased during the three months ended March 31, 2011. During the three months ended March 31, 2010, we transferred loans with a carrying value of $17.7 million, all of which were non-performing, to the held-for-sale category and sold loans with a carrying value of $7.3 million. In addition, no loans were purchased during the three months ended March 31, 2010.

The following table presents by class, the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on the Company’s impairment measurement method as of March 31, 2011:
 
 
Commercial,
 
Real estate
             
 
financial & agricultural
 
Construction
 
Mortgage -
residential
 
Mortgage - commercial
 
Consumer
 
Leases
 
Total
 
 
(Dollars in thousands)
     
Allowance for loan and lease losses:
                           
   Ending balance attributable to loans:
                           
      Individually evaluated for impairment
$ 94   $ 10,015   $ 56   $ 162   $ -   $ -   $ 10,327  
      Collectively evaluated for impairment
  11,006     49,085     30,744     68,838     2,500     1,500     163,673  
    11,100     59,100     30,800     69,000     2,500     1,500     174,000  
      Unallocated
                                      4,010  
         Total ending balance
$ 11,100   $ 59,100   $ 30,800   $ 69,000   $ 2,500   $ 1,500   $ 178,010  
                                           
Loans and leases:
                                         
   Individually evaluated for impairment
$ 447   $ 133,645   $ 59,582   $ 15,577   $ -   $ -   $ 209,251  
   Collectively evaluated for impairment
  182,632     139,094     681,475     721,672     111,172     25,281     1,861,326  
    183,079     272,739     741,057     737,249     111,172     25,281     2,070,577  
   Unearned income
                                      (3,275 )
         Total ending balance
$ 183,079   $ 272,739   $ 741,057   $ 737,249   $ 111,172   $ 25,281   $ 2,067,302  
 
Impaired loans requiring an allowance for loan and lease losses at March 31, 2011 and December 31, 2010 amounted to $105.2 million and $119.8 million, respectively, and included all nonaccrual loans greater than $0.5 million and all loans modified in a troubled debt restructuring. Impaired loans, many of which have been reduced to the estimated fair value of the underlying collateral, not requiring an allowance for loan and lease losses amounted to $104.1 million and $105.2 million at March 31, 2011 and December 31, 2010, respectively. The average recorded investment in impaired loans was $220.0 million during the three months ended March 31, 2011. Interest income recognized on impaired loans was $0.3 million during the three months ended March 31, 2011.

 
11

 
The following table presents by class, loans individually evaluated for impairment as of March 31, 2011 and December 31, 2010:
 
 
Unpaid Principal Balance
   
Recorded Investment
   
Allowance
Allocated
 
(Dollars in thousands)
March 31, 2011
             
With no related allowance recorded:
             
Real estate:
             
   Construction
$ 130,530     $ 83,141     $ -
   Mortgage - residential
  67,439       58,782       -
   Mortgage - commercial
  13,578       13,257       -
With an allowance recorded:
                   
Commercial, financial & agricultural
  1,146       447       94
Real estate:
                   
   Construction
  86,673       50,504       10,015
   Mortgage - residential
  1,263       800       56
   Mortgage - commercial
  2,853       2,320       162
Total
$ 303,482     $ 209,251     $ 10,327
                     
December 31, 2010
                   
With no related allowance recorded:
                   
Real estate:
                   
   Construction
$ 112,675     $ 85,571     $ -
   Mortgage - residential
  66,203       58,333       -
   Mortgage - commercial
  10,917       10,917       -
With an allowance recorded:
                   
Commercial, financial & agricultural
  1,184       485       81
Real estate:
                   
   Construction
  104,429       59,384       18,197
   Mortgage - residential
  3,681       3,256       89
   Mortgage - commercial
  7,746       7,088       1,158
Total
$ 306,835     $ 225,034     $ 19,525
 
The following table presents by class, the recorded investment in nonaccrual loans and accruing loans delinquent for 90 days or more as of March 31, 2011 and December 31, 2010:
 
 
Nonaccrual
   
Accruing loans
delinquent for
90 days or more
 
(Dollars in thousands)
March 31, 2011
       
Commercial, financial & agricultural
$ 805     $ -
Real estate:
           
   Construction
  167,541       -
   Mortgage - residential
  47,859       427
   Mortgage - commercial
  12,046       -
Consumer
  -       13
Leases
  -       66
   Total
$ 228,251     $ 506
             
December 31, 2010
           
Commercial, financial & agricultural
$ 982     $ -
Real estate:
           
   Construction
  182,073       6,550
   Mortgage - residential
  47,560       1,800
   Mortgage - commercial
  14,464       -
Consumer
  225       181
   Total
$ 245,304     $ 8,531
 
12

 
For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following table presents by class, the aging of the recorded investment in past due loans and leases as of March 31, 2011 and December 31, 2010:
 
 
30 - 59 Days
Past Due
 
60 - 89 Days
Past Due
 
Greater than 90
Days Past Due
 
Nonaccrual
Loans
 
Total
Past Due
 
Loans & Leases
Not Past Due
 
Total
 
(Dollars in thousands)
March 31, 2011
                         
Commercial, financial & agricultural
$ 47   $ 129   $ -   $ 805   $ 981   $ 182,109   $ 183,090
Real estate:
                                       
   Construction
  199     -     -     167,541     167,740     104,589     272,329
   Mortgage - residential
  8,100     1,053     427     47,859     57,439     682,133     739,572
   Mortgage - commercial
  1,262     3,155     -     12,046     16,463     719,395     735,858
Consumer
  445     333     13     -     791     110,381     111,172
Leases
  312     -     66     -     378     24,903     25,281
   Total
$ 10,365   $ 4,670   $ 506   $ 228,251   $ 243,792   $ 1,823,510   $ 2,067,302
                                         
December 31, 2010
                                       
Commercial, financial & agricultural
$ 495   $ 252   $ -   $ 982   $ 1,729   $ 206,251   $ 207,980
Real estate:
                                       
   Construction
  12,551     118     6,550     182,073     201,292     112,493     313,785
   Mortgage - residential
  4,183     7,494     1,800     47,560     61,037     685,224     746,261
   Mortgage - commercial
  273     3,169     -     14,464     17,906     742,400     760,306
Consumer
  620     444     181     225     1,470     111,479     112,949
Leases
  100     -     -     -     100     28,063     28,163
   Total
$ 18,222   $ 11,477   $ 8,531   $ 245,304   $ 283,534   $ 1,885,910   $ 2,169,444
 
Restructured loans included in nonperforming assets at March 31, 2011 consisted of eight Hawaii construction and development loans with a combined principal balance of $39.3 million, 78 Hawaii residential mortgage loans with a combined principal balance of $31.3 million, one Mainland construction and development loan with a principal balance of $1.4 million and one Hawaii commercial loan with a principal balance of $0.4 million. Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers’ financial condition. The principal balances on these restructured loans were matured and/or in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were $12.4 million of restructured loans still accruing interest at March 31, 2011, none of which were more than 90 days delinquent. At December 31, 2010, there were $14.2 million of restructured loans still accruing interest, including two residential mortgage loans totaling $0.8 million that were more than 90 days delinquent.

The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases as to credit risk. This analysis includes loans and leases with an outstanding balance greater than $0.5 million or $1.0 million, depending on loan type, and non-homogeneous loans and leases, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard. Loans and leases classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimate loss is deferred until its more exact status may be determined.

 
13

 
Loss. Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

Loans and leases not meeting the criteria above that are analyzed individually as part of the process described above are considered to be pass rated loans and leases. Loans and leases listed as not rated are either less than $0.5 million or are included in groups of homogeneous loan pools. The following table presents by class and credit indicator, the recorded investment in the Company’s loans and leases as of March 31, 2011 and December 31, 2010:
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Loss
 
Not Rated
 
Unearned
Income
 
Total
 
(Dollars in thousands)
March 31, 2011
                             
Commercial, financial
                             
   & agricultural
$ 101,385   $ 14,484   $ 13,552   $ -   $ -   $ 53,658   $ (11 ) $ 183,090
Real estate:
                                             
   Construction
  33,644     31,589     201,396     -     -     6,110     410     272,329
   Mortgage - residential
  75,450     12,889     54,143     -     -     598,575     1,485     739,572
   Mortgage - commercial
  543,717     71,048     86,724     -     -     35,760     1,391     735,858
Consumer
  4,768     -     306     -     -     106,098     -     111,172
Leases
  19,355     3,800     2,126     -     -     -     -     25,281
   Total
$ 778,319   $ 133,810   $ 358,247   $ -   $ -   $ 800,201   $ 3,275   $ 2,067,302
                                               
December 31, 2010
                                             
Commercial, financial
                                             
   & agricultural
$ 109,619   $ 22,529   $ 19,370   $ -   $ -   $ 56,382   $ (80 ) $ 207,980
Real estate:
                                             
   Construction
  44,488     41,330     215,187     5,789     -     7,736     745     313,785
   Mortgage - residential
  70,747     17,475     55,533     -     -     604,115     1,609     746,261
   Mortgage - commercial
  557,511     67,639     97,871     2,883     -     35,806     1,404     760,306
Consumer
  5,778     307     769     -     14     106,082     1     112,949
Leases
  21,761     4,039     2,363     -     -     -     -     28,163
   Total
$ 809,904   $ 153,319   $ 391,093   $ 8,672   $ 14   $ 810,121   $ 3,679   $ 2,169,444
 
In accordance with applicable Interagency Guidance issued by our primary bank regulators, we define subprime borrowers as typically having weakened credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers. At March 31, 2011 and December 31, 2010, we did not have any loans that we considered to be subprime.

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
 
   
March 31,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
             
   Balance, beginning of period
  $ 192,854     $ 205,279  
   Provision (credit) for loan and lease losses
    (1,575 )     58,837  
      191,279       264,116  
   Charge-offs
    (18,131 )     (59,968 )
   Recoveries
    4,862       7,498  
      Net charge-offs
    (13,269 )     (52,470 )
   Balance, end of period
  $ 178,010     $ 211,646  
 
 
14

 
Our provision for loan and lease losses (the “Provision”) was a credit of $1.6 million in the first quarter of 2011, compared to a charge of $58.8 million in the first quarter of 2010. The year-over-year decrease in both our Provision and Allowance is directly attributable to continued improvement in our credit risk profile as evidenced by declines in both nonperforming assets and net charge-offs.

The following table presents by class, the activity in the Allowance for the three months ended March 31, 2011:
 
 
Commercial,
 
Real estate
                 
 
financial &
     
Mortgage -
 
Mortgage -
                 
 
agricultural
 
Construction
 
residential
 
commercial
 
Consumer
 
Leases
 
Unallocated
 
Total
 
 
(Dollars in thousands)
 
                                 
Beginning balance
$ 13,400   $ 76,600   $ 31,800   $ 64,300   $ 3,200   $ 1,600   $ 1,954   $ 192,854  
Provision (credit) for loan                                                 
   and lease losses
  (1,326 )   (7,008 )   336     4,887     (420 )   (100 )   2,056     (1,575 )
    12,074     69,592     32,136     69,187     2,780     1,500     4,010     191,279  
Charge-offs
  (1,406 )   (13,858 )   (2,036 )   (226 )   (605 )   -     -     (18,131 )
Recoveries
  432     3,366     700     39     325     -     -     4,862  
   Net charge-offs
  (974 )   (10,492 )   (1,336 )   (187 )   (280 )   -     -     (13,269 )
   Ending balance
$ 11,100   $ 59,100   $ 30,800   $ 69,000   $ 2,500   $ 1,500   $ 4,010   $ 178,010  
 
In determining the amount of our Allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as regulatory requirements and input. If our assumptions prove to be incorrect, our current Allowance may not be sufficient to cover future loan losses and we may experience increases to our Provision.

7.   SECURITIZATIONS

In prior years, we securitized certain residential mortgage loans with a U.S. Government sponsored entity and continue to service the residential mortgage loans. The servicing assets were recorded at their respective fair values at the time of securitization. The fair value of the servicing assets was 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.

All unsold mortgage-backed securities were categorized as available for sale securities and were therefore recorded at their fair value of $9.7 million and $10.0 million at March 31, 2011 and December 31, 2010, respectively. The fair values of these mortgage-backed securities were based on quoted prices of similar instruments in active markets. Unrealized gains of $26 thousand and $34 thousand on unsold mortgage-backed securities were recorded in accumulated other comprehensive loss (“AOCL”) at March 31, 2011 and December 31, 2010, respectively.

8.   GOODWILL AND OTHER INTANGIBLE ASSETS

We review the carrying amount of goodwill for impairment on an annual basis. Additionally, we perform an impairment assessment of goodwill and evaluate our other intangible assets whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Significant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned changes in use of the assets, divestitures and market capitalization declines may result in impairments to goodwill. Absent any impairment indicators, we perform our annual goodwill impairment test during the fourth quarter of each fiscal year.

Our impairment assessment of goodwill and other intangible assets involves the estimation of future cash flows and the fair value of reporting units to which goodwill is allocated. We reconcile the estimated fair values of our reporting units to our total market capitalization plus a control premium. Estimating future cash flows and determining fair values of the reporting units is judgmental and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of the impairment charge.

During the first quarter of 2010, we determined that an impairment test was required because of the uncertainty regarding our ability to continue as a going concern combined with the fact that our market capitalization remained depressed. As a result of our impairment test, we determined that the remaining goodwill associated with our Hawaii Market reporting unit was impaired and we recorded a non-cash impairment charge of $102.7 million during that quarter. As of March 31, 2011, we had no goodwill remaining on our consolidated balance sheet.

 
15

 
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 three months ended March 31, 2011:
 
 
Core
   
Mortgage
                   
 
Deposit
   
Servicing
   
Customer
   
Non-Compete
       
 
Premium
   
Rights
   
Relationships
   
Agreements
   
Total
 
 
(Dollars in thousands)
 
                             
Balance, beginning of period
$ 20,727     $ 22,712     $ 1,050     $ 150     $ 44,639  
Additions
  -       1,406       -       -       1,406  
Amortization
  (669 )     (828 )     (35 )     (15 )     (1,547 )
Balance, end of period
$ 20,058     $ 23,290     $ 1,015     $ 135     $ 44,498  
 
Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $1.4 million for the three months ended March 31, 2011, compared to $1.6 million for the three months ended March 31, 2010. Amortization of mortgage servicing rights was $0.8 million and $0.7 million for the three months ended March 31, 2011 and 2010, respectively.

The following table presents the fair market value and key assumptions used in determining the fair market value of our mortgage servicing rights:
 
 
Three Months Ended March 31,
 
2011
 
2010
 
(Dollars in thousands)
           
Fair market value, beginning of period
$ 23,709     $ 23,019  
Fair market value, end of period
  24,316       22,897  
Weighted average discount rate
  8.5 %     8.5 %
Weighted average prepayment speed assumption
  14.2       13.2  
 
The gross carrying value and accumulated amortization related to our intangible assets are presented below:
 
 
March 31, 2011
   
December 31, 2010
 
Gross
               
Gross
           
 
Carrying
   
Accumulated
         
Carrying
   
Accumulated
     
 
Value
   
Amortization
   
Net
   
Value
   
Amortization
   
Net
 
(Dollars in thousands)
                                 
Core deposit premium
$ 44,642     $ (24,584 )   $ 20,058     $ 44,642     $ (23,915 )   $ 20,727
Mortgage servicing rights
  43,073       (19,783 )     23,290       41,667       (18,955 )     22,712
Customer relationships
  1,400       (385 )     1,015       1,400       (350 )     1,050
Non-compete agreements
  300       (165 )     135       300       (150 )     150
  Total $ 89,415     $ (44,917 )   $ 44,498     $ 88,009     $ (43,370 )   $ 44,639
 
Based on the core deposit premium, mortgage servicing rights, customer relationships and non-compete agreements held as of March 31, 2011, estimated amortization expense for the remainder of fiscal 2011, 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)
                           
2011 (remainder)
$ 2,006     $ 2,160     $ 105     $ 45     $ 4,316
2012
  2,674       3,119       140       60       5,993
2013
  2,674       2,705       140       30       5,549
2014
  2,674       2,351       140       -       5,165
2015
  2,674       2,014       140       -       4,828
2016
  2,674       1,709       140       -       4,523
Thereafter
  4,682       9,232       210       -       14,124
  $ 20,058     $ 23,290     $ 1,015     $ 135     $ 44,498
 
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9.   DERIVATIVES

We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in interest rates including interest rate swaps, interest rate lock commitments and forward sale commitments. We measure all derivatives at fair value on our consolidated balance sheet. At each reporting period, we record the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as hedging instruments, we record the effective portion of the changes in the fair value of the derivative in AOCL, 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. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings.

Interest Rate Swap

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. Under the terms of the arrangement, we would receive payments equal to a fixed interest rate of 6.25% from January 2008 through January 2013 from the counterparty on a notional amount of $400 million. In return, we would pay the counterparty a floating rate, namely our prime rate, on the same notional amount. The purpose of the derivative transaction was to minimize the risk of fluctuations in interest payments received on our variable rate loan portfolio. The derivative transaction was designated as a cash flow hedge.

On September 1, 2009, we terminated the derivative transaction with the counterparty at its then fair market value of $18.0 million. As a result of the termination, we recorded an unrealized gain related to hedge effectiveness of $12.5 million as a component of AOCL and $5.5 million of hedge ineffectiveness as other operating income. The unrealized gain is being recognized into income over the original contract period through January 2013 using the effective yield method and we expect to reclassify $2.7 million of this gain into earnings within the next 12 months.

Interest Rate Lock and Forward Sale Commitments

We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate lock and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At March 31, 2011, we were a party to interest rate lock and forward sale commitments on $50.5 million and $20.6 million of mortgage loans, respectively.

The following table presents the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheet:
 
       
Asset Derivatives
   
Liability Derivatives
Derivatives not designated
as hedging instruments
 
Balance Sheet
Location
 
Fair Value at
March 31, 2011
   
Fair Value at
December 31, 2010
   
Fair Value at
March 31, 2011
   
Fair Value at
December 31, 2010
       
(Dollars in thousands)
Interest rate contracts
 
Other assets /
                     
   
other liabilities
  $ 230     $ 1,035     $ 251     $ 523
 
The following table presents the impact of derivative instruments and their location within the consolidated statements of operations:
 
Derivatives in Cash Flow
Hedging Relationship
 
Amount of Gain
Recognized in AOCL
on Derivative
(Effective Portion)
   
Amount of Gain
Reclassified from
AOCL into Earnings
(Effective Portion)
   
Amount of Gain
Recognized in Earnings
on Derivative
(Ineffective Portion)
   
(Dollars in thousands)
Three Months Ended March 31, 2011
               
Interest rate contracts
  $ -     $ 1,116     $ -
                       
Three Months Ended March 31, 2010
                     
Interest rate contracts
  $ -     $ 1,890     $ -
 
 
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Amounts recognized in AOCL are net of income taxes. Amounts reclassified from AOCL into income are included in interest income in the consolidated statements of operations. The ineffective portion has been recognized as other operating income in the consolidated statements of operations.
 
Derivatives not in Cash Flow
Hedging Relationship
 
Location of Gain Recognized
in Earnings on Derivatives
 
Amount of Gain Recognized in
Earnings on Derivatives
       
(Dollars in thousands)
Three Months Ended March 31, 2011
       
Interest rate contracts
 
 Other operating income
  $ 279
           
Three Months Ended March 31, 2010
         
Interest rate contracts
 
 Other operating income
  $ 219
 
10.  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

At March 31, 2011, our bank maintained a $31.9 million line of credit with the Federal Reserve discount window, of which there were no advances outstanding. As of March 31, 2011, certain commercial real estate loans totaling $125.5 million have been pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans. Future advances under this arrangement are subject to approval of the Federal Reserve. Furthermore, all terms and maturities of advances under this arrangement are at the discretion of the Federal Reserve and are generally limited to overnight borrowings. Since September 2009, our bank was no longer eligible to access the Federal Reserve’s primary credit facility but maintained access to its secondary facility. There was no change in the level of credit available to the bank; however, future advances will have higher borrowing costs under the secondary facility.

The bank is a member of and maintained a $732.1 million line of credit with the FHLB as of March 31, 2011. Long-term borrowings under this arrangement totaled $301.1 million at March 31, 2011, compared to $200.0 million and $351.3 million of short-term and long-term borrowings, respectively, at December 31, 2010. There were no short-term borrowings under this arrangement at March 31, 2011. FHLB advances outstanding at March 31, 2011 were secured by investment securities with a fair value of $340.9 million and certain real estate loans totaling $602.9 million in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. Approximately $431.0 million was undrawn under this arrangement at March 31, 2011. The FHLB has no obligation to make future advances to the bank.

On August 20, 2009, we began deferring regularly scheduled interest payments on our outstanding junior subordinated debentures relating to our trust preferred securities. The terms of the junior subordinated debentures and the trust documents allow us to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. During the deferral period, which currently stands at seven consecutive quarters, the respective trusts have suspended the declaration and payment of dividends on the trust preferred securities. Also during the deferral period, we may not, among other things and with limited exceptions, pay cash dividends on or repurchase our common stock or make any payment on outstanding debt obligations that rank equally with or junior to the junior subordinated debentures. During the deferral period, we will continue to accrue, and reflect in our consolidated financial statements, the deferred interest payments on our junior subordinated debentures. Accrued interest on our outstanding junior subordinated debentures relating to our trust preferred securities was $5.9 million and $5.1 million at March 31, 2011 and December 31, 2010, respectively. With the recent completion of the Private Placement, we plan to seek regulatory approval to pay all deferred payments under our trust preferred securities.

11.   EQUITY

During the first quarter of 2011, we completed the following transactions as part of our recapitalization:

·  
on February 2, 2011, we effected a one-for-twenty reverse stock split of our Common Stock (the “Reverse Stock Split”). Except as otherwise specified, the share and per share amounts for historical periods have been restated to give the effect to the Reverse Stock Split;

·  
on February 18, 2011, we completed the $325 million Private Placement with investments from (1) affiliates of each of The Carlyle Group (“Carlyle”) and Anchorage Capital Group, L.L.C. (together with Carlyle, the “Lead Investors”) pursuant to investment agreements with each of the Lead Investors and (2) various other investors, including certain of our directors and officers, pursuant to subscription agreements with each of such investors; and

·  
concurrently with the closing of the Private Placement, we completed the TARP Exchange of 135,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, no par value per share and liquidation preference $1,000 per share, held by the United States Department of the Treasury (the “Treasury”), and accrued and unpaid dividends thereon for 5,620,117 common shares. We also amended the warrant held by the Treasury (the “Amended TARP Warrant”) to, among other things, reduce the exercise price from $255.40 per share to $10 per share. The warrant grants the Treasury the right to purchase 79,288 Common Shares, subject to adjustment.
 
18

 
The TARP Exchange resulted in a non-cash increase in net income available to common shareholders of $85.1 million as the book value of the preferred stock plus accrued and unpaid dividends was greater than the estimated fair value of the common stock issued to the Treasury of $56.2 million and the fair value of the Amended TARP Warrant at the time of the TARP Exchange. This accounting treatment had no effect on our total shareholders’ equity or our regulatory capital position.

In addition to adjusting the exercise price of the Amended TARP Warrant, its terms were revised to include a “down-round” provision allowing for the future adjustment to the exercise price for any subsequent issuances of common stock by the Company. If the Company subsequently issues common stock, or rights or shares convertible into common stock, at a per share price lower than the $10 exercise price of the warrant, the exercise price of the warrant will be reduced to the per share common stock amount received in connection with the issuance and the number of shares of common stock subject to the warrant will be increased. This provision resulted in the warrant being carried as a derivative liability as compared to a common stock equivalent for balance sheet purposes as it possesses the characteristics of a freestanding derivative financial instrument as defined by Accounting Standards Codification (“ASC”) 815-10-15-83, Accounting for Derivatives and Hedging, and similar to the example illustrated in ASC 815-40-55-33 and -34. As a derivative liability, the warrant is carried at fair value, with subsequent remeasurements recorded through the current period's earnings. The initial value attributed to the warrant was $1.7 million, with the fair value estimated using the Black-Scholes options pricing model, with the following assumptions: 67% volatility, a risk-free rate of 3.59%, a yield of 1.45% and an estimated life of 10 years. From February 18, 2011 through March 31, 2011, this instrument’s estimated fair value decreased, which resulted in the recognition of $0.5 million recorded in other noninterest income.

In 2009, our Board of Directors suspended the payment of all cash dividends on our common stock. Our ability to pay dividends with respect to common stock is subject to obtaining approval from the FRBSF, DFI and Treasury, and is restricted until our obligations under our trust preferred securities are brought current. Additionally, our ability to pay dividends depends on our ability to obtain dividends from our bank. In addition to obtaining approval from the FDIC and DFI, Hawaii law only permits Central Pacific Bank to pay dividends out of retained earnings. Given that the bank had an accumulated deficit of $478.1 million at March 31, 2011, the bank is prohibited from paying any dividends until this deficit is eliminated. Accordingly, we do not anticipate that the bank will be permitted to pay dividends for the foreseeable future.

12.  SHARE-BASED COMPENSATION

Stock Option Activity

There was no activity related to stock options for the Company’s stock option plans during the three months ended March 31, 2011.

Restricted Stock Awards and Units

There was no activity related to restricted stock awards and units during the three months ended March 31, 2011.

Performance Shares and Stock Appreciation Rights

No performance shares or SARs were granted under the 2005 LTIP and 2008 LTIP during the three months ended March 31, 2011.

The table below presents activity of performance shares under both the 2005 LTIP and 2008 LTIP for the three months ended March 31, 2011: