Edgar Filing: CENTRAL PACIFIC FINANCIAL CORP

form424b3.htm

Filed Pursuant to Rule 424(b)(3)

Registration Statement No. 333-172480

PROSPECTUS SUPPLEMENT

(To Prospectus dated June 16, 2011)

Up to 15,612,715 Shares of Common Stock

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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 August 8, 2011.

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August 8, 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 June 30, 2011

£	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 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 £

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 August 1, 2011 was 41,738,830 shares.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Table of Contents

Part I.	Financial Information

Item I.	Financial Statements (Unaudited)

	Consolidated Balance Sheets June 30, 2011 and December 31, 2010

	Consolidated Statements of Operations Three and six months ended June 30, 2011 and 2010

	Consolidated Statements of Cash Flows Six months ended June 30, 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

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 and the Company’s Form 10-Q for the last fiscal quarter. The Company does not update any of its forward-looking statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

	June 30,			December 31,
	2011			2010
	(Dollars in thousands)
Assets
Cash and due from banks	$	68,986		$	61,725
Interest-bearing deposits in other banks		384,477			729,014
Investment securities:
Available for sale, at fair value		1,400,380			702,517
Held to maturity (fair value of $1,631 at June 30, 2011 and $2,913 at December 31, 2010)		1,578			2,828
Total investment securities		1,401,958			705,345

Loans held for sale		22,290			69,748

Loans and leases		2,046,747			2,169,444
Less allowance for loan and lease losses		166,934			192,854
Net loans and leases		1,879,813			1,976,590

Premises and equipment, net		54,702			57,390
Accrued interest receivable		11,711			11,279
Investment in unconsolidated subsidiaries		13,477			14,856
Other real estate		42,863			57,507
Other intangible assets		43,526			44,639
Bank-owned life insurance		142,980			142,296
Federal Home Loan Bank stock		48,797			48,797
Income tax receivable		2,400			2,223
Other assets		13,753			16,642
Total assets	$	4,131,733		$	3,938,051

Liabilities and Equity
Deposits:
Noninterest-bearing demand	$	687,468		$	611,744
Interest-bearing demand		521,047			639,548
Savings and money market		1,115,339			1,089,813
Time		906,466			791,842
Total deposits		3,230,320			3,132,947

Short-term borrowings		1,385			202,480
Long-term debt		409,076			459,803
Other liabilities		57,178			66,766
Total liabilities		3,697,959			3,861,996

Equity:
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding
none at June 30, 2011 and 135,000 shares at December 31, 2010		-			130,458
Common stock, no par value, authorized 185,000,000 shares, issued and outstanding
41,738,830 shares at June 30, 2011 and 1,527,000 shares at December 31, 2010		784,207			404,167
Surplus		64,350			63,308
Accumulated deficit		(420,569	)		(517,316	)
Accumulated other comprehensive loss		(4,206	)		(14,565	)
Total shareholders' equity		423,782			66,052
Non-controlling interest		9,992			10,003
Total equity		433,774			76,055
Total liabilities and equity	$	4,131,733		$	3,938,051

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(Amounts in thousands, except per share data)	2011			2010			2011			2010

Interest income:
Interest and fees on loans and leases	$	26,464		$	35,788		$	55,030		$	73,100
Interest and dividends on investment securities:
Taxable interest		7,241			3,653			12,462			11,754
Tax-exempt interest		179			190			363			705
Dividends		-			2			3			5
Interest on deposits in other banks		300			467			689			797
Total interest income		34,184			40,100			68,547			86,361

Interest expense:
Interest on deposits:
Demand		161			250			293			508
Savings and money market		500			1,487			1,232			3,136
Time		1,902			3,808			4,279			7,789
Interest on short-term borrowings		-			306			204			495
Interest on long-term debt		2,642			5,053			5,359			10,168
Total interest expense		5,205			10,904			11,367			22,096

Net interest income		28,979			29,196			57,180			64,265
Provision (credit) for loan and lease losses		(8,784	)		20,412			(10,359	)		79,249
Net interest income (loss) after provision for loan and lease losses		37,763			8,784			67,539			(14,984	)

Other operating income:
Service charges on deposit accounts		2,449			2,982			5,063			6,189
Other service charges and fees		4,444			3,850			8,502			7,335
Income from fiduciary activities		739			811			1,500			1,622
Equity in earnings of unconsolidated subsidiaries		38			102			165			131
Fees on foreign exchange		149			175			286			331
Investment securities gains		261			-			261			831
Loan placement fees		82			92			184			177
Net gain on sales of residential loans		1,005			1,332			3,203			3,277
Income from bank-owned life insurance		980			1,890			2,170			3,074
Other		790			1,503			2,103			2,534
Total other operating income		10,937			12,737			23,437			25,501

Other operating expense:
Salaries and employee benefits		15,442			14,408			30,475			29,244
Net occupancy		3,410			3,310			6,768			6,607
Equipment		1,154			1,305			2,284			2,782
Amortization of other intangible assets		1,629			1,581			3,176			2,989
Communication expense		922			846			1,803			2,058
Legal and professional services		3,592			5,416			6,052			11,066
Computer software expense		929			873			1,812			1,776
Advertising expense		830			764			1,666			1,603
Goodwill impairment		-			-			-			102,689
Foreclosed asset expense		(791	)		403			1,451			5,935
Write down of assets		3,090			166			4,655			940
Other		10,282			8,554			17,984			19,152
Total other operating expense		40,489			37,626			78,126			186,841

Income (loss) before income taxes		8,211			(16,105	)		12,850			(176,324	)
Income tax expense		-			-			-			-
Net income (loss)		8,211			(16,105	)		12,850			(176,324	)
Preferred stock dividends, accretion of discount and
conversion of preferred stock to common stock		-			2,096			(83,897	)		4,170
Net income (loss) available to common shareholders	$	8,211		$	(18,201	)	$	96,747		$	(180,494	)

Per common share data:
Basic earnings (loss) per share	$	0.20		$	(12.01	)	$	3.22		$	(119.18	)
Diluted earnings (loss) per share		0.20			(12.01	)		3.15			(119.18	)

Shares used in computation:
Basic shares		40,700			1,515			30,059			1,514
Diluted shares		41,078			1,515			30,733			1,514

See accompanying notes to consolidated financial statements.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended June 30,
	2011			2010
	(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)	$	12,850		$	(176,324	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision (credit) for loan and lease losses		(10,359	)		79,249
Depreciation and amortization		3,472			3,933
Goodwill impairment		-			102,689
Write down of assets		4,655			940
Write down of other real estate, net of gain on sale		(1,599	)		5,935
Amortization of other intangible assets		3,176			2,989
Net amortization of investment securities		3,137			1,001
Share-based compensation		1,042			(232	)
Net gain on investment securities		(261	)		(831	)
Net change in trading securities		-			25,217
Deferred income tax expense		-			2,439
Net gain on sales of residential loans		(3,203	)		(3,277	)
Proceeds from sales of loans held for sale		307,958			481,093
Originations of loans held for sale		(292,597	)		(440,278	)
Equity in earnings of unconsolidated subsidiaries		(165	)		(131	)
Increase in cash surrender value of bank-owned life insurance		(842	)		(2,784	)
Decrease (increase) in income tax receivable		(177	)		862
Net change in other assets and liabilities		644			889
Net cash provided by operating activities		27,731			83,379

Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available for sale		182,915			203,337
Proceeds from sales of investment securities available for sale		5,324			439,435
Purchases of investment securities available for sale		(877,800	)		(173,558	)
Proceeds from maturities of and calls on investment securities held to maturity		1,240			954
Net loan principal repayments		102,598			218,976
Proceeds from sales of loans originated for investment		26,721			56,605
Proceeds from sale of other real estate		24,724			14,040
Proceeds from bank-owned life insurance		158			2,069
Purchases of premises and equipment		(784	)		(856	)
Distributions from unconsolidated subsidiaries		523			714
Contributions to unconsolidated subsidiaries		-			(227	)
Net cash provided by (used in) investing activities		(534,381	)		761,489

Cash flows from financing activities:
Net increase (decrease) in deposits		97,373			(360,342	)
Proceeds from long-term debt		-			50,000
Repayments of long-term debt		(50,441	)		(65,572	)
Net decrease in short-term borrowings		(201,095	)		(40,721	)
Net proceeds from issuance of common stock and stock option exercises		323,537			-
Other, net		-			73
Net cash provided by (used in) financing activities		169,374			(416,562	)

Net increase (decrease) in cash and cash equivalents		(337,276	)		428,306
Cash and cash equivalents at beginning of period		790,739			488,367
Cash and cash equivalents at end of period	$	453,463		$	916,673

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	11,543		$	21,921
Income taxes		8			-
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		8,481			26,788
Net transfer of loans to loans held for sale		1,256			26,434
Net transfer of investment securities available for sale to trading		-			49,126
Dividends accrued on preferred stock		969			3,504
Accretion of preferred stock discount		204			666
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.

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, including the completion of a $325 million capital raise in February 2011 (the “Private Placement”) and a $20 million common stock rights offering. Upon completion of these milestones, which are described more fully in Note 11, there is no longer substantial doubt about our ability to continue as a going concern.

2. REGULATORY MATTERS

In May 2011, the regulatory Consent Order (the “Consent Order”) that Central Pacific Bank (“the bank” or “our bank”) entered into with the Federal Deposit Insurance Corporation (the “FDIC”) and the Hawaii Division of Financial Institutions (the “DFI”) on December 9, 2009 was lifted. In place of the Consent Order, the Board of Directors of the bank entered into a Memorandum of Understanding (the “Bank MOU”) with the FDIC and DFI effective May 5, 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 to the Bank MOU, the Company continues to be subject to a Written Agreement (the “Agreement”) with the Federal Reserve Bank of San Francisco (the “FRBSF”) and DFI dated July 2, 2010, which superseded in its entirety the Memorandum of Understanding that the Company entered into on April 1, 2009 with the FRBSF and DFI. 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 Bank MOU and any other supervisory action taken by the bank’s regulators. We were also required to submit to the FRBSF an acceptable capital plan and cash flow projection.

On February 9, 2011, the bank entered into a separate Memorandum of Understanding (the “BSA MOU”) with the FDIC and DFI relating to compliance with 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.

Even though the Consent Order has been replaced by the Bank MOU, the bank remains subject to a number of requirements as described above. We cannot assure you whether or when the Company and the bank will be in full compliance with the agreements with the regulators or whether or when the Bank MOU, the Agreement or the BSA MOU will be terminated. Even if terminated, we may still be subject to other agreements with regulators that restrict our activities and may also continue to impose capital ratios requirements. 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 a new consent order, 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.

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.

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)
June 30, 2011
Available for Sale
U.S. Government sponsored entities debt securities	$	382,777	$	2,033	$	(30	)	$	384,780
States and political subdivisions		12,443		-		-			12,443
U.S. Government sponsored entities mortgage-backed securities		990,018		13,344		(1,216	)		1,002,146
Non-agency collateralized mortgage obligations		17		-		-			17
Other		972		22		-			994
Total	$	1,386,227	$	15,399	$	(1,246	)	$	1,400,380

Held to Maturity
U.S. Government sponsored entities mortgage-backed securities	$	1,578	$	53	$	-		$	1,631

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 June 30, 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.

	June 30, 2011
	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
Available for Sale
Due in one year or less	$	15,197	$	15,213
Due after one year through five years		373,315		375,302
Due after five years through ten years		1,467		1,467
Due after ten years		5,241		5,241
Mortage-backed securities		990,018		1,002,146
Other		989		1,011
Total	$	1,386,227	$	1,400,380

Held to Maturity
Mortage-backed securities	$	1,578	$	1,631

We sold certain available for sale investment securities during the three months ended June 30, 2011 for gross proceeds of $5.3 million. We did not sell any available for sale securities during the first quarter of 2011. Gross realized gains and losses on the sales of the available for sale investment securities during the three months ended June 30, 2011 were $0.3 million and nil, respectively. The specific identification method was used as the basis for determining the cost of all securities sold.

As part of our recovery plan, we sold certain available for sale investment securities during the first half of 2010 for gross proceeds of $439.4 million. We did not sell any available for sale investment securities during the second quarter of 2010. Gross realized gains and losses on the sales of the available for sale investment securities during the six months ended June 30, 2010 were $9.6 million and $8.8 million, respectively.

Investment securities of $861.1 million and $613.5 million at June 30, 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 11 and 18 investment securities which were in an unrealized loss position at June 30, 2011 and December 31, 2010, respectively.

	Less than 12 months					12 months or longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses		Value		Losses
	(Dollars in thousands)
At June 30, 2011:
U.S. Government sponsored entities
debt securities	$	29,812	$	(30	)	$	-	$	-	$	29,812	$	(30	)
U.S. Government sponsored entities
mortgage-backed securities		167,111		(1,216	)		-		-		167,111		(1,216	)
Total temporarily impaired securities	$	196,923	$	(1,246	)	$	-	$	-	$	196,923	$	(1,246	)

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.

5. LOANS AND LEASES

Loans and leases, excluding loans held for sale, consisted of the following:

	June 30,			December 31,
	2011			2010
	(Dollars in thousands)

Commercial, financial and agricultural	$	198,007		$	207,900
Real estate:
Construction		241,753			314,530
Mortgage - residential		761,998			747,870
Mortgage - commercial		714,306			761,710
Consumer		110,946			112,950
Leases		22,535			28,163
		2,049,545			2,173,123
Unearned income		(2,798	)		(3,679	)
Total loans and leases	$	2,046,747		$	2,169,444

During the six months ended June 30, 2011, we transferred one loan, which was non-performing, with a carrying value of $1.3 million, to the held-for-sale category. No loans were purchased during the six months ended June 30, 2011. During the six months ended June 30, 2010, we transferred loans with a carrying value of $26.4 million, to the held-for-sale category and sold portfolio loans with a carrying value of $49.3 million. No loans were purchased during the six months ended June 30, 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 June 30, 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	$	105	$	5,926		$	5		$	596		$	-	$	-	$	6,632
Collectively evaluated for impairment		12,522		46,564			28,421			65,037			2,971		787		156,302
		12,627		52,490			28,426			65,633			2,971		787		162,934
Unallocated																	4,000
Total ending balance	$	12,627	$	52,490		$	28,426		$	65,633		$	2,971	$	787	$	166,934

Loans and leases:
Individually evaluated for impairment	$	356	$	129,269		$	59,289		$	18,137		$	-	$	-	$	207,051
Collectively evaluated for impairment		197,651		112,484			702,709			696,169			110,946		22,535		1,842,494
		198,007		241,753			761,998			714,306			110,946		22,535		2,049,545
Unearned income		96		(286	)		(1,249	)		(1,359	)		-		-		(2,798	)
Total ending balance	$	198,103	$	241,467		$	760,749		$	712,947		$	110,946	$	22,535	$	2,046,747

The following table presents by class, loans individually evaluated for impairment as of June 30, 2011 and December 31, 2010:

	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
	(Dollars in thousands)
June 30, 2011
With no related allowance recorded:
Real estate:
Construction	$	105,063	$	81,076	$	-
Mortgage - residential		67,419		59,208		-
Mortgage - commercial		8,640		8,640		-
Total impaired loans with no related allowance recorded		181,122		148,924		-
With an allowance recorded:
Commercial, financial & agricultural		1,055		356		105
Real estate:
Construction		92,854		48,193		5,926
Mortgage - residential		81		81		5
Mortgage - commercial		11,223		9,497		596
Total impaired loans with an allowance recorded		105,213		58,127		6,632
Total	$	286,335	$	207,051	$	6,632

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		-
Total impaired loans with no related allowance recorded		189,795		154,821		-
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 impaired loans with an allowance recorded		117,040		70,213		19,525
Total	$	306,835	$	225,034	$	19,525

The average recorded investment in impaired loans was $206.6 million and $214.2 million during the three and six months ended June 30, 2011, respectively. Interest income recognized on impaired loans was $0.3 million and $0.6 million during the three and six months ended June 30, 2011, respectively.

The following table presents by class, the recorded investment in nonaccrual loans and accruing loans delinquent for 90 days or more as of June 30, 2011 and December 31, 2010:

	Nonaccrual		Accruing loans delinquent for 90 days or more
	(Dollars in thousands)
June 30, 2011
Commercial, financial & agricultural	$	578	$	-
Real estate:
Construction		129,275		-
Mortgage - residential		58,204		-
Mortgage - commercial		18,428		-
Consumer		-		4
Total	$	206,485	$	4

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

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 June 30, 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)
June 30, 2011
Commercial, financial & agricultural	$	197	$	274	$	-	$	578	$	1,049	$	197,054	$	198,103
Real estate:
Construction		-		127		-		129,275		129,402		112,065		241,467
Mortgage - residential		181		1,424		-		58,204		59,809		700,940		760,749
Mortgage - commercial		-		719		-		18,428		19,147		693,800		712,947
Consumer		429		109		4		-		542		110,404		110,946
Leases		2		10		-		-		12		22,523		22,535
Total	$	809	$	2,663	$	4	$	206,485	$	209,961	$	1,836,786	$	2,046,747

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 June 30, 2011 consisted of 116 Hawaii residential mortgage loans with a combined principal balance of $47.6 million, seven Hawaii construction and development loans with a combined principal balance of $37.2 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 $1.8 million of restructured loans still accruing interest at June 30, 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.

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 June 30, 2011 and December 31, 2010:

	Pass		Special Mention		Substandard		Doubtful		Loss		Not Rated		Less: Unearned Income			Total
	(Dollars in thousands)
June 30, 2011
Commercial, financial
& agricultural	$	113,027	$	8,987	$	16,876	$	-	$	-	$	59,117	$	(96	)	$	198,103
Real estate:
Construction		55,501		14,085		166,080		-		-		6,087		286			241,467
Mortgage - residential		67,987		11,705		64,016		-		-		618,290		1,249			760,749
Mortgage - commercial		536,163		84,146		58,634		-		-		35,363		1,359			712,947
Consumer		4,310		214		69		-		-		106,353		-			110,946
Leases		20,142		575		1,818		-		-		-		-			22,535
Total	$	797,130	$	119,712	$	307,493	$	-	$	-	$	825,210	$	2,798		$	2,046,747

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 June 30, 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						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Dollars in thousands)

Balance, beginning of period	$	178,010		$	211,646		$	192,854		$	205,279
Provision (credit) for loan and lease losses		(8,784	)		20,412			(10,359	)		79,249
		169,226			232,058			182,495			284,528

Charge-offs		(6,194	)		(30,742	)		(24,325	)		(90,710	)
Recoveries		3,902			643			8,764			8,141
Net charge-offs		(2,292	)		(30,099	)		(15,561	)		(82,569	)
Balance, end of period	$	166,934		$	201,959		$	166,934		$	201,959

Our provision for loan and lease losses (the “Provision”) was a credit of $8.8 million and $10.4 million in the second quarter and first half of 2011, respectively, compared to a charge of $20.4 million and $79.2 million in the second quarter and first half of 2010, respectively. The 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 periods indicated:

	Commercial,			Real estate
	financial &						Mortgage -			Mortgage -
	agricultural			Construction			residential			commercial			Consumer			Leases			Unallocated		Total
	(Dollars in thousands)
Three Months Ended June 30, 2011
Beginning balance	$	11,134		$	59,078		$	30,823		$	68,991		$	2,451		$	1,533		$	4,000	$	178,010
Provision (credit) for loan
and lease losses		1,094			(6,137	)		(1,365	)		(2,482	)		852			(746	)		-		(8,784	)
		12,228			52,941			29,458			66,509			3,303			787			4,000		169,226
Charge-offs		(455	)		(3,000	)		(1,263	)		(879	)		(597	)		-			-		(6,194	)
Recoveries		854			2,549			231			3			265			-			-		3,902
Net charge-offs		399			(451	)		(1,032	)		(876	)		(332	)		-			-		(2,292	)
Ending balance	$	12,627		$	52,490		$	28,426		$	65,633		$	2,971		$	787		$	4,000	$	166,934

Six Months Ended June 30, 2011
Beginning balance	$	13,426		$	76,556		$	31,830		$	64,308		$	3,155		$	1,579		$	2,000	$	192,854
Provision (credit) for loan
and lease losses		(224	)		(13,123	)		(1,036	)		2,388			428			(792	)		2,000		(10,359	)
		13,202			63,433			30,794			66,696			3,583			787			4,000		182,495
Charge-offs		(1,861	)		(16,858	)		(3,299	)		(1,105	)		(1,202	)		-			-		(24,325	)
Recoveries		1,286			5,915			931			42			590			-			-		8,764
Net charge-offs		(575	)		(10,943	)		(2,368	)		(1,063	)		(612	)		-			-		(15,561	)
Ending balance	$	12,627		$	52,490		$	28,426		$	65,633		$	2,971		$	787		$	4,000	$	166,934

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 $9.8 million and $10.0 million at June 30, 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 $0.3 million and $34 thousand on unsold mortgage-backed securities were recorded in accumulated other comprehensive loss (“AOCL”) at June 30, 2011 and December 31, 2010, respectively.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

During the first quarter of 2010, we determined that an impairment test on our remaining goodwill was required because of the uncertainty regarding our ability to continue as a going concern at that time combined with the fact that our market capitalization remained depressed. As a result of that 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. Since that time, we had no goodwill remaining on our consolidated balance sheet.

Prior to the first quarter of 2010, we reviewed the carrying amount of goodwill for impairment on an annual basis and performed additional assessments on a quarterly basis whenever indicators of impairment were evident. Goodwill attributable to each of our reporting units was tested for impairment by comparing their respective fair values to their carrying values. When determining fair value, we utilized a discounted cash flow methodology for our Commercial Real Estate reporting unit and versions of the guideline company, guideline transaction and discounted cash flow methodologies for our Hawaii Market reporting unit. Absent any impairment indicators, we performed our annual goodwill impairment tests during the fourth quarter of each fiscal year.

Similar to our process for evaluating our goodwill for impairment, we also perform an impairment assessment of our other intangible assets whenever events or changes in circumstance indicate that the carrying value of those assets may not be recoverable.

Our impairment assessment of goodwill and other intangible assets involve, among other valuation methods, the estimation of future cash flows and other methods of determining fair value. Estimating future cash flows and determining fair values is subject to judgments and often involves the use of significant estimates and assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy. The variability of the factors we use to perform the goodwill impairment test depends on a number of conditions, including uncertainty about future events and cash flows. All such factors are interdependent and, therefore, do not change in isolation. Accordingly, our accounting estimates may materially change from period to period due to changing market factors. If we had used other assumptions and estimates or if different conditions occur in future periods, including, but not limited to, changes in other reporting units or operating segments, future operating results could be materially impacted.

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 six months ended June 30, 2011:

Core

Mortgage