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


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


 
 
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

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  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
 
 
 
 
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 and the Company’s Form 10-Q for the last fiscal quarter. The Company does not update any of its forward-looking statements.
 
 
 
3

 
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.
 
4

 
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.
 
   
5

 
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.
 
   
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, 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.
 
 
 
7

 
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
 
 
8

 
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 )
 
 
 
9

 
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.
 

 
 
10

 
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  
 
 
 
 
 
11

 
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.

 
12

 
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
 
 
13

 
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.
 
 
 
14

 
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  
 
 
15

 
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.

 
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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