UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________________
FORM
10-K/A
(Amendment
No. 1)
______________________
(Mark
One)
T
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the Fiscal year ended December 31, 2008
or
£
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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Commission
file number: 0-10777
_____________________________________________
Central
Pacific Financial Corp.
(Exact
name of registrant as specified in its charter)
Hawaii
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99-0212597
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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220
South King Street, Honolulu, Hawaii
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96813
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
(808)
544-0500
Securities
registered pursuant to Section 12(b) of the Act:
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Name
of each exchange on
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Title
of each class
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which
registered
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Common
Stock, No Par Value
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New
York Stock Exchange
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Preferred
Share Purchase Rights
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
x
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
o
No
x
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
x
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
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. Large Accelerated Filer
o
Accelerated Filer
x
Non-Accelerated Filer
o
Smaller
Reporting Company
o
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).Yes
o
No
x
As of June
30, 2008, the aggregate market value of the common stock held by non-affiliates
of the registrant was approximately $285,307,000. As of February 4, 2009, the
number of shares of common stock of the registrant outstanding was 28,733,408
shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s proxy statement for the 2008 annual meeting of shareholders
are incorporated by reference into Part III of this Annual Report on
Form 10-K to the extent stated herein. The proxy statement will be filed
within 120 days after the end of the fiscal year covered by this Annual Report
on Form 10-K.
PART
1
Forward-Looking
Statements and Factors that Could Affect Future Results
Certain
statements contained in this Annual Report on Form 10-K that are not statements
of historical fact constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the “Act”),
notwithstanding that such statements are not specifically identified. In
addition, certain statements may be contained in our future filings with the
U.S. Securities and Exchange Commission (“SEC”), in press releases and in oral
and written statements made by or with the approval of us that are not
statements of historical fact and constitute forward-looking statements within
the meaning of the Act. Examples of forward-looking statements include but are
not limited to: (i) projections of revenues, expenses, income or loss,
earnings or loss per share, the payment or nonpayment of dividends, capital
structure and other financial items; (ii) statements of plans, objectives
and expectations of Central Pacific Financial Corp. or its management or Board
of Directors, including those relating to products or services;
(iii) statements of future economic performance; and (iv) statements
of assumptions underlying such statements. Words such as “believes,”
“anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,”
“should,” “may” and other similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
Forward-looking
statements involve risks and uncertainties that may cause actual results to
differ materially from those in such statements. Factors that could cause actual
results to differ from those discussed in the forward-looking statements include
but are not limited to:
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Local,
regional, national and international economic conditions and events
(including natural disasters such as wildfires, tsunamis and earthquakes)
and the impact they may have on us and our customers and our assessment of
that impact;
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Changes
in the economy affecting real estate
values;
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Oversupply
of inventory and continued slowing in the California real estate
market;
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A
significant portion of our loan portfolio consists of construction loans
and further slowdown in construction activity may materially and
negatively affect our business;
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Changes
in the financial performance and/or condition of our
borrowers;
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Changes
in the level of non-performing assets and
charge-offs;
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The
effects of and changes in trade and monetary and fiscal policies and laws,
including the interest rate policies of the Federal Reserve Board
(“FRB”);
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Changes
in estimates of future reserve requirements based upon the periodic review
thereof under relevant regulatory and accounting
requirements;
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Long-term
negative trends in our market
capitalization;
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Inflation,
interest rate, securities market and monetary
fluctuations;
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Acts
of war or terrorism;
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The
timely development and acceptance of new products and services and
perceived overall value of these products and services by
users;
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Changes
in consumer spending, borrowings and savings
habits;
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Acquisitions
and integration of acquired
businesses;
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The
ability to increase market share and control
expenses;
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Changes
in the competitive environment among financial holding companies and other
financial service providers;
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The
effect of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) with which we and our
subsidiaries must comply;
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The
effect of changes in accounting policies and practices, as may be adopted
by the regulatory agencies, as well as the Public Company Accounting
Oversight Board, the Financial Accounting Standards Board and other
accounting standard setters;
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Changes
in our organization, compensation and benefit
plans;
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The
costs and effects of legal and regulatory developments including the
resolution of legal proceedings or regulatory or other governmental
inquiries and the results of regulatory examinations or
reviews;
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Greater
than expected costs or difficulties related to the integration of new
products and lines of business; and
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Our
success at managing the risks involved in the foregoing
items.
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Forward-looking
statements speak only as of the date on which such statements are made. We
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made, or to
reflect the occurrence of unanticipated events.
General
Central
Pacific Financial Corp., a Hawaii corporation and bank holding company
registered under the Bank Holding Company Act of 1956 (as amended), was
organized on February 1, 1982. Our principal business is to serve as a
holding company for our bank subsidiary, Central Pacific Bank, which was
incorporated in its present form in the state of Hawaii on March 16, 1982
in connection with the holding company reorganization, and its predecessor
entity was incorporated in the state of Hawaii on January 15,
1954.
When we
refer to “the Company,” “we,” “us” or “our,” we mean Central Pacific Financial
Corp. and its subsidiaries (consolidated). When we refer to “Central
Pacific Financial Corp.” or to the holding company, we are referring to the
parent company on a standalone basis, and we refer to Central Pacific Bank
herein as our bank or the bank.
Through
our bank and its subsidiaries, we offer full-service commercial banking with 39
bank branches and more than 95 ATMs located throughout the state of Hawaii. Our
administrative and main offices are located in Honolulu and we have 32 branches
on the island of Oahu. We operate four branches on the island of Maui, two
branches on the island of Hawaii and one branch on the island of Kauai. We also
have offices in California serving customers there. Our bank’s deposits are
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable
limits. The bank is not a member of the Federal Reserve System (the
“Fed”).
Central
Pacific Bank is a full-service commercial bank offering a broad range of banking
products and services including accepting time and demand deposits and
originating loans, including commercial loans, construction loans, commercial
and residential mortgage loans and consumer loans. We derive our income
primarily from interest and fees on loans, interest on investment securities and
fees received in connection with deposit and other services. Our major operating
expenses are the interest paid by our bank on deposits and borrowings, salaries
and employee benefits and general operating expenses. Our bank relies on a
foundation of locally generated deposits. Our operations, like those of other
financial institutions that operate in our markets, are significantly influenced
by economic conditions in Hawaii and California, including the strength of the
real estate market, as well as the fiscal and regulatory policies of the federal
and state government and the regulatory authorities that govern financial
institutions. For more information about the regulation of our holding company
and bank, see “Supervision and Regulation.”
We are
committed to maintaining a premier, relationship-based commercial bank in Hawaii
that serves the needs of small to medium-sized businesses and the owners and
employees of those businesses. In addition, we provide geographic
diversification of our credit risk through our loan production offices in
California. The strategy for serving our target markets is the delivery of a
finely focused set of value-added products and services that satisfy the primary
needs of our customers, emphasizing superior service and
relationships.
Our
Services
We offer
a full range of banking services and products to businesses, professionals and
individuals. We provide our customers with an array of commercial and consumer
loan products, including commercial real estate and construction loans,
residential mortgage loans, commercial loans and lines of credit, and consumer
loans and lines of credit.
Through
our bank, we concentrate our lending activities in four principal
areas:
(1)
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Commercial Real Estate
Lending.
Loans in this category consist of loans secured by
commercial real estate, including but not limited to, structures and
facilities to support activities designated as industrial, warehouse,
general office, retail, health care, religious and multi-family dwellings.
Our underwriting policy generally requires net cash flow from the property
to cover the debt service while maintaining an appropriate amount of
reserve. Additionally, liquidation of the collateral is available as a
secondary source of repayment.
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We
have teams who specialize in commercial real estate lending and have
long-established relationships with major real estate
developers.
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(2)
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Construction
Lending.
Construction lending encompasses the financing
of both residential and commercial construction projects. Residential
projects include the construction of single-family residential
developments, apartment buildings and condominiums, while commercial
projects include the construction of office buildings, warehouses and
retail complexes. Our underwriting standards for residential construction
projects generally require minimum pre-sale contracts, maintenance of
appropriate reserves and demonstrated experience with previous development
projects. We generally consider projected net cash flows, market
feasibility, borrower net worth and experience, as well as collateral
value as the primary factors in underwriting commercial construction
projects.
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As
with our commercial real estate lending model, we have staff that
specialize in construction lending and maintain close relationships
with major real estate developers in all of our
markets.
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(3)
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Residential Mortgage
Lending.
Residential mortgage loans include both fixed
and adjustable-rate loans primarily secured by single-family
owner-occupied residences in Hawaii. We typically require loan-to-value
ratios of not more than 80%, although higher levels are permitted with
accompanying mortgage insurance. First mortgage loans secured by
residential properties generally carry a moderate level of credit risk.
With an average loan size of approximately $0.3 million, readily
marketable collateral and, until recently, a historically stable
residential real estate market, credit losses on residential mortgages had
been minimal during the past several years. However, current changes in
interest rates, the economic recession and other market factors have
impacted, and future changes may continue to impact the marketability of
collateral and thus the level of credit risk inherent in the
portfolio.
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Since
our August 2005 acquisition of Hawaii HomeLoans, Inc., now known as
Central Pacific HomeLoans, Inc., we have grown our market position in the
residential mortgage arena with dedicated mortgage lending specialists on
all major islands in Hawaii.
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(4)
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Commercial Lending and
Leasing.
Loans in this category consist primarily of
term loans, lines of credit and equipment leases to small and
middle-market businesses and professionals in the state of Hawaii. The
borrower’s business is typically regarded as the principal source of
repayment, although our underwriting policies and practices generally
require additional sources of collateral, including real estate and other
business assets, as well as personal guarantees where possible to mitigate
risk. Risks of credit losses are greater in this loan category relative to
secured loans, such as commercial and residential mortgages where a
greater percentage of the loan amount is usually covered by collateral.
Nonetheless, collateral and personal guarantees obtained on commercial
loans can mitigate the increased risk and help to reduce credit
losses.
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Our
commercial lending and leasing model involves teams of experienced
personnel with established networks of business contacts who focus on
marketing loans, deposits and other bank services to new and existing
commercial
clients.
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In
addition, we offer deposit products and services including checking, savings and
time deposits, cash management and internet banking services, trust services and
retail brokerage services.
Our
Market Area and Competition
Based on
deposit market share among FDIC-insured financial institutions in Hawaii,
Central Pacific Bank, with $3.9 billion in deposits, was the fourth-largest
depository institution in the state of Hawaii at December 31,
2008.
The
banking and financial services industry in the state of Hawaii generally, and in
our target market areas, is highly competitive. We compete for loans, deposits
and customers with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies,
finance companies, credit unions and other nonbank financial service providers.
Many of these competitors are much larger in total assets and capitalization and
have greater access to capital markets.
In order
to compete with the other financial services providers in the state of Hawaii,
we principally rely upon local promotional activities, personal relationships
between customers and our officers, directors and employees, and specialized
services tailored to meet the needs of our customers and the communities we
serve. We remain competitive by offering flexibility and superior service
levels, coupled with competitive interest rates and pricing.
For
further discussion of factors affecting our operations see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Business
Concentrations
No
individual or single group of related accounts is considered material in
relation to the assets or deposits of our bank, or in relation to the overall
business of the Company. However, approximately 85% of our loan portfolio held
for investment at December 31, 2008 consisted of real estate-related loans,
including construction loans, residential mortgage loans and commercial mortgage
loans. See “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Financial Condition—Loan Portfolio.” Our business
activities are currently focused primarily in Hawaii and California.
Consequently, our results of operations and financial condition are affected by
the general economic trends in Hawaii and California, particularly in the
commercial and residential real estate markets. While during periods of economic
strength, the real estate market and the real estate industry typically perform
well, during periods of economic weakness, they typically slow
down.
In 2008,
the continued weakening of the real estate industry in California driven by a
tightening in the credit markets and other economic conditions significantly
adversely impacted the performance of our real estate loan
portfolio.
Our
Subsidiaries
Central
Pacific Bank is the principal wholly-owned subsidiary of Central Pacific
Financial Corp. Other wholly-owned subsidiaries include: CPB Capital Trust I;
CPB Capital Trust II; CPB Statutory Trust III; CPB Capital Trust IV; CPB
Statutory Trust V; CB Technology, Inc.; CPB Real Estate, Inc.;
Citibank Properties, Inc.; CB Technology, Inc.; and Central Pacific
HomeLoans, Inc.
Central
Pacific Bank or its wholly-owned subsidiary, Central Pacific
HomeLoans, Inc., also owns 50% of the following Hawaii limited liability
corporations: Pacific Access Mortgage, LLC; Lokahi Mortgage, LLC; Gentry
HomeLoans, LLC; Towne Island Mortgage, LLC; Pacific Island HomeLoans, LLC;
Hawaii Resort Lending, LLC; Laulima Financial, LLC; and Pacific Portfolio,
LLC.
Supervision and Regulation
Set forth
below is a description of the significant elements of the laws and regulations
applicable to us and our bank. The description is qualified in its entirety by
reference to the full text of the statutes, regulations and policies that are
described. Also, such statutes, regulations and policies are continually under
review by Congress and state legislatures and federal and state regulatory
agencies. A change in statutes, regulations or regulatory policies applicable to
us and our bank could have a material effect on our business.
Regulatory
Agencies
Central
Pacific Financial Corp. is a legal entity separate and distinct from its
subsidiaries. As a bank holding company, Central Pacific Financial Corp. is
regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”),
and is subject to inspection, examination and supervision by the Board of
Governors of the Fed (the “FRB”). It is also subject to Hawaii’s Code of
Financial Institutions and is subject to inspection, examination and supervision
by the State of Hawaii Division of Financial Institutions (“DFI”).
The
Company is also subject to the disclosure and regulatory requirements of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, as administered by the SEC. Our common stock is listed on the New York
Stock Exchange (“NYSE”) under the trading symbol “CPF,” and we are subject
to the rules of the NYSE for companies listed there.
Central
Pacific Bank, as a Hawaii-chartered bank, is subject to primary supervision,
periodic examination and regulation by the DFI and the FDIC. The bank is also
subject to certain regulations promulgated by the FRB. If, as a result of an
examination of the bank, the FDIC should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or
other aspects of its operations are unsatisfactory, or that it or its management
is violating or has violated any law or regulation, various remedies are
available to the FDIC. Such remedies include the power to enjoin “unsafe or
unsound” practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order that
can be judicially enforced, to direct an increase in capital, to restrict its
growth, to assess civil monetary penalties, to remove officers and directors,
and ultimately to terminate its deposit insurance, which for a Hawaii-chartered
bank would result in a revocation of its charter. The DFI separately holds many
of the same remedial powers.
In
December 2008, the members of the Board of Directors of Central Pacific Bank
entered into a Memorandum of Understanding (“MOU”) with the FDIC and the DFI to
address certain issues that arose in the bank’s most recent regulatory
examination in August 2008. The issues required to be addressed by
management include, among other matters, to review and establish more
comprehensive policies and methodologies relating to the adequacy of the
allowance for loan and lease losses, the re-evaluation, development and
implementation of certain plans and the requirement to increase the bank’s
leverage capital ratio to 9% within 120 days. Since entering into the MOU the
bank has made significant progress towards addressing these issues and, at the
time of the filing of this annual report on Form 10-K, has increased its
leverage capital ratio above 9%. As a result of the FRB’s most recent review of
Central Pacific Financial Corp., we anticipate that we may be subject to
additional supervisory action by the FRB.
Bank
Holding Company Activities
In
general, the BHC Act limits the business of bank holding companies to banking,
managing or controlling banks and other activities that the FRB has determined
to be so closely related to banking as to be a proper incident thereto. As a
result of the Gramm-Leach-Bliley Act of 1999, which amended the BHC Act, bank
holding companies that are financial holding companies may engage in any
activity, or acquire and retain the shares of a company engaged in any activity
that is either (i) financial in nature or incidental to such financial
activity or (ii) complementary to a financial activity and that does not
pose a substantial risk to the safety and soundness of depository institutions
or the financial system generally (as solely determined by the FRB). Activities
that are financial in nature include securities underwriting and dealing,
insurance underwriting and making merchant banking investments.
If a bank
holding company seeks to engage in the broader range of activities that are
permitted under the BHC Act for financial holding companies, (i) all of its
depository institution subsidiaries must be “well capitalized” and “well
managed” and (ii) it must file a declaration with the FRB that it elects to
be a “financial holding company.” A depository institution subsidiary is
considered to be “well capitalized” if it satisfies the requirements for this
status discussed in the section captioned “Capital Adequacy and Prompt
Corrective Action” included elsewhere in this item. A depository institution
subsidiary is considered “well managed” if it received a composite rating and
management rating of at least “satisfactory” in its most recent
examination.
In order
for a financial holding company to commence any new activity permitted by the
BHC Act or to acquire a company engaged in any new activity permitted by the BHC
Act, each insured depository institution subsidiary of the financial holding
company must have received a rating of at least “satisfactory” in its most
recent examination under the Community Reinvestment Act. See the section
captioned “Community Reinvestment Act” included elsewhere in this
item.
The BHC
Act generally limits acquisitions by bank holding companies that are not
qualified as financial holding companies to commercial banks and companies
engaged in activities that the FRB has determined to be so closely related to
banking as to be a proper incident thereto. Financial holding companies are also
permitted to acquire companies engaged in activities that are financial in
nature and in activities that are incidental and complementary to financial
activities without prior FRB approval. Central Pacific has not filed a
declaration electing Financial Holding Company status and has no current
intention to do so.
The BHC
Act, the Federal Bank Merger Act, Hawaii law and other federal and state
statutes regulate acquisitions of commercial banks. The BHC Act requires the
prior approval of the FRB for the direct or indirect acquisition of more than
5.0% of the voting shares of a commercial bank or its parent holding company. In
reviewing applications seeking approval of merger and acquisition transactions,
the bank regulatory authorities will consider, among other things, the
competitive effect and public benefits of the transactions, the capital position
of the combined organization, the applicant’s performance record under the
Community Reinvestment Act (see the section captioned “Community Reinvestment
Act” included elsewhere in this item) and fair housing laws and the
effectiveness of the subject organizations in combating money laundering
activities.
Affiliate
Transactions
There are
various restrictions on the ability of the holding company and its non-bank
subsidiaries to borrow from and engage in certain other transactions with our
subsidiary bank. In general, these restrictions require that any extensions of
credit must be secured by designated amounts of specified collateral and are
limited, as to any one of the holding company or its non-bank subsidiaries, to
10% of our subsidiary bank’s capital stock and surplus, and, as to the holding
company and all such non-bank subsidiaries in the aggregate, to 20% of our
subsidiary bank’s capital stock and surplus.
Federal
law also provides that extensions of credit and other transactions between our
subsidiary bank and the holding company or one of its non-bank subsidiaries must
be on terms and conditions that are consistent with safe and sound banking
practices, including credit standards, that are substantially the same or at
least as favorable to our subsidiary bank as those prevailing at the time for
comparable transactions involving other non-affiliated companies or, in the
absence of comparable transactions, on terms and conditions, including credit
standards, that in good faith would be offered to or would apply to
non-affiliated companies.
Source
of Strength Doctrine
FRB
policy requires bank holding companies to act as a source of financial and
managerial strength to their subsidiary banks. Under this policy, we are
expected to commit resources to support our subsidiary bank, including at times
when we may not be in a financial position to provide it. Any capital loan by a
bank holding company to any of its subsidiary banks is subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary banks.
The BHC Act provides that in the event of a bank holding company’s bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to priority of payment.
Capital
Adequacy and Prompt Corrective Action
Banks and
bank holding companies are subject to various regulatory capital requirements
administered by state and federal banking agencies. Capital adequacy guidelines
and, additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators about
components, risk weighting and other factors.
The FDIC
and the DFI have substantially similar risk-based capital ratio and leverage
ratio guidelines for banking organizations. The guidelines are intended to
ensure that banking organizations have adequate capital given the risk levels of
assets and off-balance sheet financial instruments. Under the guidelines,
banking organizations are required to maintain minimum ratios for Tier 1 capital
and total capital to risk-weighted assets (including certain off-balance sheet
items, such as letters of credit). For purposes of calculating the ratios, a
banking organization’s assets and some of its specified off-balance sheet
commitments and obligations are assigned to various risk categories. A
depository institution’s or holding company’s capital, in turn, is classified in
one of three tiers depending on type:
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Core Capital (Tier
1).
Tier 1 capital includes common equity, retained
earnings, qualifying non-cumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual stock at the holding company
level, minority interests in equity accounts of consolidated subsidiaries,
less goodwill, most intangible assets and certain other
assets.
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Supplementary Capital (Tier
2).
Tier 2 capital includes, among other things,
perpetual preferred stock and related surplus not meeting the Tier 1
definition, qualifying mandatory convertible debt securities, qualifying
subordinated debt and allowances for possible loan and lease losses,
subject to limitations.
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Market Risk Capital
(Tier 3).
Tier 3 capital includes qualifying
unsecured subordinated debt.
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We, like
other bank holding companies, are required to maintain Tier 1 capital and “total
risk-based capital” (the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at
least 4.0% and 8.0%, respectively, of total risk-weighted assets (including
various off-balance-sheet items, such as standby letters of credit). Our
subsidiary bank, like other depository institutions, is required to maintain
similar capital levels under capital adequacy guidelines.
Bank
holding companies and banks subject to the market risk capital guidelines are
required to incorporate market and interest rate risk components into their
risk-based capital standards. Under the market risk capital guidelines, capital
is allocated to support the amount of market risk related to a financial
institution’s ongoing trading activities.
Bank
holding companies and banks are also required to comply with minimum leverage
ratio requirements. The leverage ratio is the ratio of a banking organization’s
Tier 1 capital to its total adjusted quarterly average assets (as defined for
regulatory purposes). The requirements necessitate a minimum leverage ratio of
3.0% for financial holding companies and national banks that either have the
highest supervisory rating or have implemented the appropriate federal
regulatory authority’s risk-adjusted measure for market risk. All other
financial holding companies and banks are required to maintain a minimum
leverage ratio of 4.0%, unless a different minimum is specified by an
appropriate regulatory authority. For a depository institution to be considered
“well capitalized” under the regulatory framework for prompt corrective action,
it's leverage ratio must be at least 5.0%. The FRB has not advised Central
Pacific of any specific minimum leverage ratio applicable to it.
The
Federal Deposit Insurance Act, as amended (“FDIA”), requires among other things,
the federal banking agencies to take “prompt corrective action” in respect of
depository institutions that do not meet minimum capital requirements. The FDIA
sets forth the following five capital tiers: “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized.” A depository institution’s capital tier will
depend upon how its capital levels compare with various relevant capital
measures and certain other factors as established by regulation. The relevant
capital measures are the total capital ratio, the Tier 1 capital ratio and the
leverage ratio.
Under the
regulations adopted by the federal regulatory authorities, a bank will be:
(i) “well capitalized” if the institution has a total risk-based capital
ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater,
a leverage ratio of 5.0% or greater and is not subject to any order or written
directive by any such regulatory authority to meet and maintain a specific
capital level for any capital measure; (ii) “adequately capitalized” if the
institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1
risk-based capital ratio of 4.0% or greater, a leverage ratio of 4.0% or greater
(3.0% in certain circumstances ) and is not “well capitalized”;
(iii) “undercapitalized” if the institution has a total risk-based capital
ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than
4.0% or a leverage ratio of less than 4.0% (3.0% in certain circumstances);
(iv) “significantly undercapitalized” if the institution has a total
risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of
less than 3.0% or a leverage ratio of less than 3.0%; and (v) “critically
undercapitalized” if the institution’s tangible equity is equal to or less than
2.0% of average quarterly tangible assets. An institution may be downgraded to
or deemed to be in a capital category that is lower than indicated by its
capital ratios if it is determined to be in an unsafe or unsound condition or if
it receives an unsatisfactory examination rating with respect to certain
matters. A bank’s capital category is determined solely for the purpose of
applying prompt corrective action regulations and the capital category may not
constitute an accurate representation of the bank’s overall financial condition
or prospects for other purposes.
The FDIA
generally prohibits a depository institution from making any capital
distributions (including payment of a dividend) or paying any management fee to
its parent holding company if the depository institution would thereafter be
“undercapitalized.” “Undercapitalized” institutions are subject to growth
limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the
plan is based on realistic assumptions and is likely to succeed in restoring the
depository institution’s capital. In addition, for a capital restoration plan to
be acceptable, the depository institution’s parent holding company must
guarantee that the institution will comply with such capital restoration plan.
The aggregate liability of the parent holding company is limited to the lesser
of (i) an amount equal to 5.0% of the depository institution’s total assets
at the time it became undercapitalized and (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
“significantly undercapitalized.”
“Significantly
undercapitalized” depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become “adequately capitalized,” requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. “Critically
undercapitalized” institutions are subject to the appointment of a receiver or
conservator.
As of
December 31, 2008, our capital ratios and the capital ratios of our bank
exceeded the minimum thresholds for a “well-capitalized” institution. The
following table sets forth actual and required capital ratios as of
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
Minimum
required for
|
|
|
Minimum
required
|
|
|
Actual
|
|
|
capital
adequacy purposes
|
|
|
to
be well-capitalized
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
(Dollars
in thousands)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 risk-based capital
|
$
|
466,465
|
|
|
10.4
|
%
|
|
|
$
|
178,693
|
|
|
4.0
|
%
|
|
|
$
|
268,040
|
|
|
6.0
|
%
|
Total
risk-based capital
|
|
523,162
|
|
|
11.7
|
|
|
|
|
357,387
|
|
|
8.0
|
|
|
|
|
446,734
|
|
|
10.0
|
|
Leverage
capital
|
|
466,465
|
|
|
8.8
|
|
|
|
|
211,648
|
|
|
4.0
|
|
|
|
|
264,560
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 risk-based capital
|
$
|
535,670
|
|
|
11.
5
|
%
|
|
|
$
|
187,049
|
|
|
4.0
|
%
|
|
|
$
|
280,574
|
|
|
6.0
|
%
|
Total
risk-based capital
|
|
594,620
|
|
|
12.7
|
|
|
|
|
374,098
|
|
|
8.0
|
|
|
|
|
467,623
|
|
|
10.0
|
|
Leverage
capital
|
|
535,670
|
|
|
9.8
|
|
|
|
|
218,477
|
|
|
4.0
|
|
|
|
|
273,096
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Pacific Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 risk-based capital
|
$
|
449,845
|
|
|
10.1
|
%
|
|
|
$
|
178,323
|
|
|
4.0
|
%
|
|
|
$
|
267,485
|
|
|
6.0
|
%
|
Total
risk-based capital
|
|
506,427
|
|
|
11.4
|
|
|
|
|
356,646
|
|
|
8.0
|
|
|
|
|
445,808
|
|
|
10.0
|
|
Leverage
capital
|
|
449,845
|
|
|
8.5
|
|
|
|
|
210,707
|
|
|
4.0
|
|
|
|
|
263,384
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 risk-based capital
|
$
|
518,923
|
|
|
11.1
|
%
|
|
|
$
|
186,743
|
|
|
4.0
|
%
|
|
|
$
|
280,115
|
|
|
6.0
|
%
|
Total
risk-based capital
|
|
577,779
|
|
|
12.4
|
|
|
|
|
373,487
|
|
|
8.0
|
|
|
|
|
466,859
|
|
|
10.0
|
|
Leverage
capital
|
|
518,923
|
|
|
9.5
|
|
|
|
|
218,143
|
|
|
4.0
|
|
|
|
|
272,679
|
|
|
5.0
|
|
The
federal regulatory authorities’ risk-based capital guidelines are based upon the
1988 capital accord of the Basel Committee on Banking Regulations and
Supervisory Practices, or the BIS. The BIS is a committee of central banks and
bank supervisors/regulators from the major industrialized countries that
develops broad policy guidelines for use by each country’s supervisors in
determining the supervisory policies they apply. In 2004, the BIS published a
new capital accord to replace its 1988 capital accord, with an update in
November 2005 (“BIS II”). BIS II provides two approaches for setting
capital standards for credit risk—an internal ratings-based approach tailored to
individual institutions’ circumstances (which for many asset classes is itself
broken into a “foundation” approach and an “advanced or A-IRB” approach, the
availability of which is subject to additional restrictions) and a standardized
approach that bases risk weightings on external credit assessments to a much
greater extent than permitted in existing risk-based capital guidelines. BIS II
also would set capital requirements for operational risk and refine the existing
capital requirements for market risk exposures.
The U.S.
banking and thrift agencies are developing proposed revisions to their existing
capital adequacy regulations and standards based on BIS II. In
September 2006, the agencies issued a notice of proposed rulemaking setting
forth a definitive proposal for implementing BIS II in the United States that
would apply only to internationally active banking organizations—defined as
those with consolidated total assets of $250 billion or more or consolidated
on-balance sheet foreign exposures of $10 billion or more—but that other U.S.
banking organizations could elect but would not be required to apply. In
December 2006, the agencies issued a notice of proposed rulemaking
describing proposed amendments to their existing risk-based capital guidelines
to make them more risk-sensitive, generally following aspects of the
standardized approach of BIS II. These latter proposed amendments, often
referred to as “BIS I-A,” would apply to banking organizations that are not
internationally active banking organizations subject to the A-IRB approach for
internationally active banking organizations and do not “opt in” to that
approach.
The
comment periods for both of the agencies’ notices of proposed rulemakings
expired on March 26, 2007. The agencies have indicated their intent to
have the new requirements first become effective in 2009 and that those
provisions and the BIS I-A provisions for others will be implemented on similar
timeframes.
The
Company is not an internationally active banking organization and does not
expect to opt-in to the A-IRB provisions once they become
effective.
Legislative
Initiatives
From time
to time, various legislative and regulatory initiatives are introduced in
Congress and state legislatures, as well as by regulatory agencies. Such
initiatives may include proposals to expand or contract the powers of bank
holding companies and depository institutions or proposals to substantially
change the financial institution regulatory system. Such legislation could
change banking statutes and our operating environment in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the
cost of doing business, limit or expand permissible activities or affect the
competitive balance among banks, savings associations, credit unions and other
financial institutions. We cannot predict whether any such legislation will be
enacted, and if enacted, the effect that it or any implementing regulations
would have on our financial condition or results of operations. A change in
statutes, regulations or regulatory policies applicable to us or any of our
subsidiaries could have a material effect on our business.
In
October 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was
signed into law. Under the EESA, the U.S. Department of the Treasury (the “U.S.
Treasury”) was granted the authority to purchase mortgages, mortgage-backed
securities and certain other financial instruments from financial institutions.
In addition, the U.S. Treasury was also granted the authority to inject capital
in financial institutions through the purchase of equity stakes in a wide
variety of banks and thrifts under a program known as the Troubled Assets Relief
Program’s (“TARP”) Capital Purchase Program (the “CPP”). The primary purpose of
the U.S. Treasury’s initiatives is to stabilize and provide liquidity to the
U.S. financial markets.
On
January 9, 2009, the U.S. Treasury approved our participation in the CPP. As a
result, we issued and sold 135,000 shares of our Fixed Rate Cumulative Perpetual
Preferred Stock (the “Preferred Shares”) to the U.S. Treasury for an aggregate
purchase price of $135.0 million in cash. We also issued to the U.S. Treasury a
ten-year warrant (the “TARP Warrant”) to purchase up to 1,585,748 shares of our
voting common stock at an exercise price of $12.77 per share. See “Item 5.
Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases Of Equity Securities” and “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Part II,
Item 7 of our Annual Report on Form 10-K for a further discussion of
our participation in the TARP’s CPP.
On
February 17, 2009, President Obama signed into law The American Recovery and
Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus
or economic recovery package. ARRA includes a wide variety of programs intended
to stimulate the economy and provide for extensive infrastructure, energy,
health, and education needs. In addition, ARRA imposes certain new executive
compensation and corporate expenditure limits on all current and future TARP
recipients that are in addition to those previously announced by the U.S.
Treasury, until the institution has repaid the U.S. Treasury, which is now
permitted under ARRA without penalty and without the need to raise new capital,
subject to the U.S. Treasury’s consultation with the recipient’s appropriate
regulatory agency.
It is not
clear at this time what impact the EESA, TARP Program, ARRA, other liquidity and
funding initiatives of the Fed and other agencies that have been previously
announced, and any additional programs that may be initiated in the future will
have on the financial markets, the U.S. banking and financial industries, the
broader U.S. and global economies, and more importantly, the local economies in
the markets that we serve.
Dividends
We are
incorporated in Hawaii and are governed by Hawaii law. As a bank holding
company, our ability to pay dividends is affected by the ability of our bank
subsidiary to pay dividends to us. Under Hawaii law, the ability of our
subsidiary bank to pay dividends or make other capital distributions to us is
subject to the Hawaii state law that prohibits a state-chartered bank from
declaring or paying dividends greater than its retained earnings. In addition,
federal law generally prohibits a depositary institution from making any capital
distributions (including payment of a dividend) or paying any management fee to
its parent holding company if the depositary institution would thereafter be
undercapitalized. The December 2008 MOU also requires the bank to obtain
approval from the FDIC and DFI for the payment of cash dividends by the bank to
Central Pacific Financial Corp. We are required to obtain FRB approval for the
payment of cash dividends to our shareholders. We are also subject to dividend
limitations as a result of our participation in the CPP. See “Dividends” in Part
II, Item 5 of our Annual Report on Form 10-K for a further discussion of
our dividends.
Deposit
Insurance
Substantially
all of the deposits of our bank subsidiary are insured up to applicable limits
by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit
insurance assessments to maintain the DIF.
In
conjunction with the EESA, the basic limit on federal deposit insurance coverage
was temporarily raised from $100,000 to $250,000 per depositor. The legislation
provides that the basic deposit insurance limit will return to $100,000 after
December 31, 2009. The FDIC also implemented the Temporary Liquidity Guarantee
Program (“TLGP”) which insures all deposits held in non-interest bearing
transactional accounts regardless of amount for a fee. The TLGP applies to all
U.S. depository institutions insured by the FDIC and all U.S. bank
holding companies, unless they have opted out of the TLGP or the FDIC has
terminated their participation. The bank has chosen to participate in the FDIC’s
TLGP. These governmental actions were designed to rebuild confidence in the
financial markets, increase liquidity and strengthen the financial
sector.
In
December 2008, the FDIC approved increasing risk-based assessment rates
uniformly by 7 basis points (“bp”) ($0.07 for every $100 of deposits), on an
annual basis, for the first quarter of 2009. In October 2008, the FDIC also
proposed changes, which, if implemented, would take effect beginning in the
second quarter of 2009 and require riskier institutions to pay a larger share of
deposit insurance assessments. Increases in the insurance assessments our bank
subsidiary pays will increase our costs. See “Other Operating Expense” included
in Part II, Item 7 of our Annual Report on Form 10-K for a further
discussion of our FDIC costs.
Depositor
Preference
The FDIA
provides that, in the event of the “liquidation or other resolution” of an
insured depository institution, the claims of depositors of the institution,
including the claims of the FDIC as subrogee of insured depositors, and certain
claims for administrative expenses of the FDIC as a receiver, will have priority
over other general unsecured claims against the institution. If an insured
depository institution fails, insured and uninsured depositors, along with the
FDIC, will have priority in payment ahead of unsecured, non-deposit creditors,
including the parent bank holding company, with respect to any extensions of
credit they have made to such insured depository institution.
Community
Reinvestment Act
The
Community Reinvestment Act of 1977, or the CRA, requires depository institutions
to assist in meeting the credit needs of their market areas consistent with safe
and sound banking practice. Under the CRA, each depository institution is
required to help meet the credit needs of its market areas by, among other
things, providing credit to low- and moderate-income individuals and
communities. Depository institutions are periodically examined for compliance
with the CRA and are assigned ratings. Furthermore, banking regulators take into
account CRA ratings when considering approval of a proposed
transaction.
Financial
Privacy
In
accordance with the GLB Act, federal banking regulators adopted rules that
limit the ability of banks and other financial institutions to disclose
non-public personal information about consumers to nonaffiliated third parties.
These limitations require notices and disclosure of privacy policies to
consumers and in some circumstances allow consumers to prevent disclosure of
certain personal information to a nonaffiliated third party. The privacy
provisions of the GLB Act affect how consumer information is transmitted through
diversified financial companies and conveyed to outside vendors.
Anti-Money
Laundering Initiatives and the USA Patriot Act
A major
focus of governmental policy on financial institutions in recent years has been
aimed at combating money laundering and terrorist financing. The USA PATRIOT Act
of 2001, or the USA Patriot Act, substantially broadened the scope of United
States anti-money laundering laws and regulations by imposing significant new
compliance and due diligence obligations, creating new crimes and penalties and
expanding the extra-territorial jurisdiction of the United States. The U.S.
Treasury has issued a number of regulations that apply various requirements of
the USA Patriot Act to financial institutions such as our bank and broker-dealer
subsidiaries. These regulations impose obligations on financial institutions to
maintain appropriate policies, procedures and controls to detect, prevent and
report money laundering and terrorist financing and to verify the identity of
their customers. Failure of a financial institution to maintain and implement
adequate programs to combat money laundering and terrorist financing or to
comply with all of the relevant laws or regulations, could have serious legal
and reputational consequences for the institution.
Office
of Foreign Assets Control Regulation
The
United States has imposed economic sanctions that affect transactions with
designated foreign countries, nationals and others. These are typically known as
the “OFAC” rules based on their administration by the U.S. Treasury
Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered
sanctions targeting countries take many different forms. Generally, however,
they contain one or more of the following elements: (i) restrictions on
trade with or investment in a sanctioned country, including prohibitions against
direct or indirect imports from and exports to a sanctioned country and
prohibitions on “U.S. persons” engaging in financial transactions relating to
making investments in or providing investment-related advice or assistance to a
sanctioned country; and (ii) a blocking of assets in which the government
or specially designated nationals of the sanctioned country have an interest by
prohibiting transfers of property subject to U.S. jurisdiction (including
property in the possession or control of U.S. persons). Blocked assets (e.g.,
property and bank deposits) cannot be paid out, withdrawn, set off or
transferred in any manner without a license from OFAC or authorization from the
U.S. Treasury Department. Failure to comply with these sanctions could have
serious legal and reputational consequences.
Employees
At
December 31, 2008, we employed 1,065 persons, 1,002 on a full-time basis and 63
on a part-time basis. We are not a party to any collective bargaining
agreement.
Expiration
of Rights Agreement
On
February 25, 2009, Central Pacific Financial Corp. and Wells Fargo Bank, N.A.,
as successor rights agent, entered into Amendment Two (the “Amendment”) to the
Rights Agreement dated as of August 26, 1998, by and between Central Pacific
Financial Corp. and ChaseMellon Shareholder Services L.L.C., as rights agent (as
amended, the “Rights Agreement”). The Amendment modified the final expiration
date of our preferred stock purchase rights (the “Rights”) under the Rights
Agreement from August 26, 2009 to March 15, 2009. The Rights Agreement was
initially scheduled to expire on August 26, 2008 and at that time; we extended
the final expiration date of the Rights for one year to permit us to assess
whether to continue or to modify them. As a result of the Amendment,
on March 15, 2009 the Rights will cease to be of further effect.
Available
Information
Our
internet website can be found at www.centralpacificbank.com. Our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports can be found on our internet
website as soon as reasonably practicable after such material is electronically
filed with or furnished to the SEC. Copies of the Company’s filings with the SEC
may also be obtained directly from the SEC’s website at www.sec.gov. These
documents may also be obtained in print upon request by our shareholders to our
Investor Relations Department.
Also
posted on our website and available in print upon request of any shareholder to
our Investor Relations Department, are the charters for our Audit Committee, our
Compensation Committee and our Corporate Governance and Nominating Committee, as
well as our Corporate Governance Guidelines and our Code of Business Conduct and
Ethics. Within the time period required by the SEC and the NYSE, we will post on
our website any amendment to the Code of Business Conduct and Ethics and any
waiver applicable to our senior financial officers, as defined by the SEC, and
our executive officers or directors. In addition, our website includes
information concerning purchases and sales of our equity securities by our
executive officers and directors, as well as disclosure relating to certain
non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may
make public orally, telephonically, by webcast, by broadcast or by similar means
from time to time.
An
investment in our common stock is subject to risks inherent to our business. The
material risks and uncertainties that management believes affect us are
described below. Before making an investment decision, you should consider
carefully the risks and uncertainties described below together with all of the
other information included or incorporated by reference in this report. The
risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties that management is not aware of or focused on
or that management currently deems immaterial may also impair our business
operations. This report is qualified in its entirety by these risk
factors.
If any of
the following risks actually occurs, our financial condition and results of
operations could be materially and adversely affected. If this were to happen,
the value of our common stock could decline significantly and you could lose all
or part of your investment.
Factors
That May Affect Our Business
The risks
and uncertainties described below are not the only ones we face. Additional
risks and uncertainties that we are unaware of, or that we currently deem
immaterial, also may become important factors that affect us. If any one or a
combination of these risks occurs, our business, financial condition or results
of operations could be materially and adversely affected.
Difficult
economic and market conditions have adversely affected our
industry.
Dramatic
declines in the housing market, along with decreasing home prices and increasing
delinquencies and foreclosures, have negatively impacted the credit performance
of mortgage and construction loans and resulted in significant write-downs of
assets by many financial institutions. General downward economic trends, reduced
availability of commercial credit and increasing unemployment have negatively
impacted the credit performance of commercial and consumer credit, resulting in
additional write-downs. Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by financial institutions to
their customers and to each other. This market turmoil and tightening of credit
has led to increased commercial and consumer deficiencies, lack of customer
confidence, increased market volatility and widespread reduction in general
business activity. Financial institutions have experienced decreased access to
deposits and borrowings. The resulting economic pressure on consumers and
businesses and the lack of confidence in the financial markets may adversely
affect our business, financial condition, results of operations and stock price.
We do not expect that the difficult conditions in the financial markets are
likely to improve in the near future. A continuation or worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and others in the financial industry. In particular, we may
face the following risks in connection with these events:
·
|
We
potentially face increased regulation of our industry. Compliance with
such regulation may increase our costs and limit our ability to pursue
business opportunities.
|
·
|
The
process we use to estimate losses inherent in our credit exposure requires
difficult, subjective and complex judgments, including forecasts of
economic conditions and how these economic conditions might impair the
ability of our borrowers to repay their loans. The level of uncertainty
concerning economic conditions may adversely affect the accuracy of our
estimates which may, in turn, impact the reliability of the
process.
|
·
|
We
may be required to pay significantly higher premiums to the FDIC because
market developments have significantly depleted the insurance fund of the
FDIC and reduced the ratio of reserves to insured
deposits.
|
Recent
market disruptions and related governmental actions could materially and
adversely affect our business, financial condition, results of operations or
prospects.
Our
business is affected by global economic conditions, political uncertainties and
volatility and other developments in the financial markets. Factors such as
interest rates and commodity prices, regional and national rates of economic
growth, liquidity and volatility of fixed income, credit and other financial
markets and investors’ confidence can significantly affect the businesses in
which we and our customers are engaged. Such factors have affected, and may
further unfavorably affect, both economic growth and stability in markets where
we and our customers operate, creating adverse effects on many companies,
including us, in ways that are not predictable or that we may fail to
anticipate. Since mid-2007 credit and other financial markets have suffered
substantial stress, volatility, illiquidity and disruption. These forces reached
unprecedented levels in September and October of 2008, resulting in the
bankruptcy or acquisition of, or government assistance to several major domestic
and international financial institutions. These events have continued in 2009
and have significantly diminished overall confidence in the financial markets
and in financial institutions, generally. This reduced confidence could further
exacerbate the overall market disruption and increase risks to market
participants including the Company.
The
recent market developments and the potential for increased and continuing
disruptions present a material risk to our business and that of other financial
institutions. Further deterioration or a continuation of recent market
conditions may lead to a decline in the value of the assets that we hold or in
the creditworthiness of our borrowers. In response to recent market disruptions,
legislators and financial regulators implemented a number of mechanisms designed
to add stability to the financial markets, including the provision of direct and
indirect assistance to distressed financial institutions, assistance by the
banking authorities in arranging acquisitions of weakened banks and broker
dealers, implementation of programs by the Fed to provide liquidity to the
commercial paper markets and other matters. The overall effects of legislative
and regulatory efforts on the financial markets are uncertain, and they may not
have the intended stabilization effects. While these measures have been
implemented to support and stabilize the markets, these actions may have
unintended consequences on the financial system or our business, including
reducing competition or increasing the general level of uncertainty in the
markets. Should these or other legislative or regulatory initiatives fail to
stabilize and add liquidity to the financial markets, our business, financial
condition, results of operations and prospects could be adversely
affected.
Continued
economic slowdowns in Hawaii or California could materially hurt our
business.
Our
business is directly affected by factors such as economic, political and market
conditions, broad trends in industry and finance, legislative and regulatory
changes, changes in government monetary and fiscal policies and inflation, all
of which are beyond our control. The current deterioration in economic
conditions in the United States generally, and in Hawaii and
California in particular, could result in the following consequences, any of
which could materially hurt our business:
|
·
|
Loan
delinquencies may continue to
increase;
|
|
·
|
Problem
assets and foreclosures may continue to increase leading to more loan
charge-offs;
|
|
·
|
Demand
for our products and services may
decline;
|
|
·
|
Low
cost or non-interest bearing deposits may continue to decrease;
and
|
|
·
|
Collateral
for loans made by us, especially involving real estate, may continue to
decline in value, in turn reducing customers’ borrowing power and reducing
the value of assets and collateral associated with our existing
loans.
|
A large percentage of our loans are
collateralized by real estate and
continued deterioration
in the real estate market may result
in
additional
losses and adversely
affect our profitability
.
As we
have experienced with the deteriorating market conditions in California’s
real estate market, our results of operations in future periods may be
significantly impacted by the economies in Hawaii, California and other markets
we serve. Approximately 85% of our loan portfolio as of December 31, 2008
was comprised of loans primarily collateralized by real estate, 73% of these
loans were concentrated in Hawaii, 23% in California and 4% in Washington.
Deterioration of the economic environment in Hawaii, California or other markets
we serve, including a continued decline in the real estate market, further
declines in single-family home resales or a material external shock, may
significantly impair the value of our collateral and our ability to sell the
collateral upon foreclosure. In the event of a default with respect to any of
these loans, amounts received upon sale of the collateral may be insufficient to
recover outstanding principal and interest on the loan. As a result, we expect
that our profitability would be negatively impacted by an adverse change in the
real estate market.
A
large percentage of our real estate loans are construction loans which involve
the additional risk that a project may not be completed, increasing the risk of
loss.
Approximately
33% of our real estate loan portfolio as of December 31, 2008 was comprised of
construction loans. Fifty-nine percent of these construction loans were in
Hawaii, 34% in California and the remaining 7% in Washington.
Repayment of construction loans is dependent upon the successful completion of
the construction project, on time and within budget, and the successful sale of
the completed project. If a borrower is unable to complete a construction
project or if the marketability of the completed development is impaired,
proceeds from the sale of the subject property may be insufficient to repay the
loan. The continued decline in the California real estate market or a
deterioration of the real estate market in any market we serve is likely to
damage the marketability of these projects; as a result, we may incur loan
losses which will adversely affect our profitability. We have had to
increase our provision for loan and lease losses substantially in 2008 and may
have to do so again in the future.
Our
ability to maintain adequate sources of funding and liquidity and required
capital levels may be negatively impacted by the current economic environment
which may, among other things, impact our ability to pay dividends.
Liquidity
is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of investments or loans, and other sources could have a
substantial negative affect on our liquidity. Our access to funding sources in
amounts adequate to finance our activities on terms which are acceptable to us
could be impaired by factors that affect us specifically or the financial
services industry or economy in general. Factors that could detrimentally impact
our access to liquidity sources include a decrease in the level of our business
activity as a result of a downturn in the markets in which our loans or deposits
are concentrated or adverse regulatory action against us. Our ability to borrow
could also be impaired by factors that are not specific to us, such as a
disruption in the financial markets or negative views and expectations about the
prospects for the financial industry in light of the recent turmoil faced by
banking organizations and the continued deterioration in credit
markets.
The
management of liquidity risk is critical to the management of our business and
to our ability to service our customer base. In managing our balance sheet, our
primary source of funding is customer deposits. Our ability to continue to
attract these deposits and other funding sources is subject to variability based
upon a number of factors including volume and volatility in the securities
markets, our credit rating and the relative interest rates that we are prepared
to pay for these liabilities. The availability and level of deposits and other
funding sources is highly dependent upon the perception of the liquidity and
creditworthiness of the financial institution, which perception can change
quickly in response to market conditions or circumstances unique to a particular
company. Concerns about our financial condition, or concerns about our credit
exposure to other persons could adversely impact our sources of liquidity,
financial position, including regulatory capital ratios, results of operations
and our business prospects.
During
2008, the amount of our total deposits has fluctuated. If the level of deposits
were to materially decrease, we would have to raise additional funds by
increasing the interest that we pay on certificates of deposits or other
depository accounts, seek other debt or equity financing or draw upon our
available lines of credit. We rely on commercial and retail deposits, and to a
lesser extent, brokered deposits, advances from the FHLB-Seattle and the Fed
discount window, to fund our operations. Although we have historically been able
to replace maturing deposits and advances as necessary, we might not be able to
replace such funds in the future if, among other things, our results of
operations or financial condition or the results of operations or financial
condition of the FHLB-Seattle or market conditions were to change.
We
constantly monitor our activities with respect to liquidity and evaluate closely
our utilization of our cash assets; however, there can be no assurance that our
liquidity or the cost of funds to us may not be materially and adversely
impacted as a result of economic, market or operational considerations that we
may not be able to control.
Future
dividend payments and common stock repurchases are restricted by the terms of
the U.S. Treasury’s equity investment in us.
Under the
terms of the TARP’s CPP, for so long as any Preferred Shares issued under the
CPP remains outstanding, we are prohibited from increasing quarterly cash
dividends on our common stock above $0.10 per share, and from making certain
repurchases of equity securities, including our common stock, without the U.S.
Treasury’s consent until the third anniversary of the U.S. Treasury’s investment
or until the U.S. Treasury has transferred all of the Preferred Shares it
purchased under the CPP to third parties. Furthermore, as long as the Preferred
Shares issued to the U.S. Treasury is outstanding, dividend payments and
repurchases or redemptions relating to certain equity securities, including our
common stock, are prohibited until all accrued and unpaid dividends are paid on
such Preferred Shares, subject to certain limited exceptions. These
restrictions, together with the potentially dilutive impact of the warrant
issued to the U.S. Treasury, could have a negative effect on the value of our
common stock.
The
Preferred Shares issued to the U.S. Treasury impacts net income available to our
common shareholders and earnings per common share, and the TARP Warrant may be
dilutive to holders of our common stock.
The
dividends declared and the accretion on discount on the Preferred Shares issued
to the U.S. Treasury will reduce the net income available to common shareholders
and our earnings per common share. The Preferred Shares will also receive
preferential treatment in the event of liquidation, dissolution or winding up of
the Company. Additionally, the ownership interest of the existing holders of our
common stock will be diluted to the extent the TARP Warrant is exercised.
Although the U.S. Treasury has agreed not to vote any of the shares of common
stock it receives upon exercise of the TARP Warrant, a transferee of any portion
of the TARP Warrant or of any shares of common stock acquired upon exercise of
the TARP Warrant is not bound by this restriction.
If
we are unable to redeem the Preferred Shares within five years, the cost of this
capital to us will increase substantially.
If we are
unable to redeem the Preferred Shares prior to February 15, 2014, the cost of
this capital to us will increase substantially on that date, from 5.0%
(approximately $6.8 million annually) to 9.0% per annum (approximately $12.2
million annually), further reducing the net income available to common
shareholders and our earnings per common share.
Because
of our participation in the TARP’s CPP, we are subject to several restrictions
including restrictions on compensation paid to our executives.
Pursuant
to the terms of the TARP CPP, we adopted certain standards for executive
compensation and corporate governance for the period during which the U.S.
Treasury holds an investment in us. These standards generally apply to our Chief
Executive Officer, Chief Financial Officer and the three next most highly
compensated senior executive officers. The standards include (1) ensuring that
incentive compensation for senior executives does not encourage unnecessary and
excessive risks that threaten the value of the financial institution; (2)
required clawback of any bonus or incentive compensation paid to a senior
executive based on statements of earnings, gains or other criteria that are
later proven to be materially inaccurate; (3) prohibition on making golden
parachute payments to senior executives; and (4) agreement not to deduct for tax
purposes executive compensation in excess of $0.5 million for each senior
executive. In particular, the change to the deductibility limit on executive
compensation will likely increase the overall cost of our compensation programs
in future periods and may make it more difficult to attract suitable candidates
to serve as executive officers.
Our
business is subject to interest rate risk and fluctuations in interest rates may
adversely affect our earnings.
The
majority of our assets and liabilities are monetary in nature and subject to
risk from changes in interest rates. Like most financial institutions, our
earnings and profitability depend significantly on our net interest income,
which is the difference between interest income on interest-earning assets, such
as loans and investment securities, and interest expense on interest-bearing
liabilities, such as deposits and borrowings. We expect that we will
periodically experience “gaps” in the interest rate sensitivities of our assets
and liabilities, meaning that either our interest-bearing liabilities will be
more sensitive to changes in market interest rates than our interest-earning
assets, or vice versa. If market interest rates should move contrary to our
position, this “gap” will work against us and our earnings may be negatively
affected. In light of our current volume and mix of interest-earning assets and
interest-bearing liabilities, our interest rate margin could be expected to
increase during periods of rising interest rates and, conversely, to decline
during periods of falling interest rates. We are unable to predict or control
fluctuations of market interest rates, which are affected by many factors
including the following:
|
·
|
Changes
in unemployment;
|
|
·
|
International
disorder and instability in domestic and foreign financial markets;
and
|
Our
asset/liability management strategy may not be able to control our risk from
changes in market interest rates and it may not be able to prevent changes in
interest rates from having a material adverse effect on our results of
operations and financial condition. From time to time, we may reposition our
investment portfolio to reduce our net interest income volatility. See
“Asset/Liability Management and Interest Rate Risk” included in Part II,
Item 7 of our Annual Report on Form 10-K for a further discussion of
our sensitivity to interest rate changes.
Our
allowance for loan and lease losses may not be sufficient to cover actual loan
losses, which could adversely affect our results of operations. Additional loan
losses will likely occur in the future and may occur at a rate greater than we
have experienced to date.
As a
lender, we are exposed to the risk that our loan customers may not repay their
loans according to their terms and that the collateral or guarantees securing
these loans may be insufficient to assure repayment. During 2008, our provision
for loan and lease losses amounted to $171.7 million, compared to $53.0 million
in 2007 and $1.4 million in 2006 and our current allowance may not be sufficient
to cover future loan losses. We may experience significant loan losses that
could have a material adverse effect on our operating results. Management makes
various assumptions and judgments about the collectibility of our loan
portfolio, which are regularly reevaluated and are based in part
on:
|
·
|
Current
economic conditions and their estimated effects on specific
borrowers;
|
|
·
|
An
evaluation of the existing relationships among loans, potential loan
losses and the present level of the allowance for loan and lease
losses;
|
|
·
|
Results
of examinations of our loan portfolios by regulatory agencies;
and
|
|
·
|
Management’s
internal review of the loan
portfolio.
|
In
determining the size of the allowance, we rely on an analysis of our loan
portfolio, our experience and our evaluation of general economic conditions. If
our assumptions prove to be incorrect, our current allowance may not be
sufficient. With the volatility of the economic decline and unprecedented nature
of the events in the credit and real estate markets during the latter part of
2008, we made significant adjustments to our allowance in 2008 and additional
adjustments may continue to be necessary if the local or national real estate
markets and economies continue to deteriorate. Material additions to the
allowance would materially decrease our net income. In addition, federal
regulators periodically evaluate the adequacy of our allowance and may require
us to increase our provision for loan and lease losses or recognize further loan
charge-offs based on judgments different than those of our management. Any
further increase in our allowance or loan charge-offs could have a material
adverse effect on our results of operations.
During
the second quarter of 2008, we wrote off all of the remaining goodwill
associated with our Commercial Real Estate reporting segment as it was
considered to be impaired. We continue to evaluate goodwill assigned to our
Hawaii Market reporting segment for impairment. Estimates of fair value of our
Hawaii Market reporting segment are determined based on a complex model using
cash flows and company comparisons. If management’s estimates of future cash
flows are inaccurate, the fair value determined could be inaccurate and
impairment may not be recognized in a timely manner. Furthermore, market
conditions affecting our Hawaii Market reporting segment may deteriorate which
could result in a material adverse effect on the operating results of the Hawaii
Market reporting segment. If this were to occur, the goodwill assigned to our
Hawaii Market reporting segment may be considered to be impaired.
We
operate in a highly competitive industry and market area.
We face
substantial competition in all areas of our operations from a variety of
different competitors, many of which are larger and may have more financial
resources. Such competitors primarily include national, regional and community
banks within the various markets we operate. Additionally, various out-of-state
banks conduct significant business in the market areas in which we currently
operate. We also face competition from many other types of financial
institutions, including, without limitation, savings and loans, credit unions,
finance companies, brokerage firms, insurance companies, factoring companies and
other financial intermediaries.
The
financial services industry could become even more competitive as a result of
legislative, regulatory and technological changes and continued consolidation.
Banks, securities firms and insurance companies can merge under the umbrella of
a financial holding company, which can offer virtually any type of financial
service, including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. Also, technology has lowered barriers to
entry and made it possible for non-banks to offer products and services
traditionally provided by banks such as automatic transfer and automatic payment
systems. Many of our competitors have fewer regulatory constraints and may have
lower cost structures. Additionally, due to their size, many competitors may be
able to achieve economies of scale and, as a result, may offer a broader range
of products and services as well as better pricing for those products and
services than we can.
Our
ability to compete successfully depends on a number of factors, including, among
other things:
|
·
|
The
ability to develop, maintain and build upon long-term customer
relationships based on top quality service, high ethical standards and
safe, sound assets;
|
|
·
|
The
ability to expand our market
position;
|
|
·
|
The
scope, relevance and pricing of products and services offered to meet
customer needs and demands;
|
|
·
|
The
rate at which we introduce new products and services relative to its
competitors;
|
|
·
|
Customer
satisfaction with our level of service;
and
|
|
·
|
Industry
and general economic trends.
|
Failure
to perform in any of these areas could significantly weaken our competitive
position, which could adversely affect our growth and profitability, which, in
turn, could have a material adverse effect on our financial condition and
results of operations.
Our
deposit customers may pursue alternatives to deposits at our bank or seek higher
yielding deposits causing us to incur increased funding costs.
We are
facing increasing deposit-pricing pressures. Checking and savings account
balances and other forms of deposits can decrease when our deposit customers
perceive alternative investments, such as the stock market or other
non-depository investments as providing superior expected returns or seek to
spread their deposits over several banks to maximize FDIC insurance coverage.
Furthermore, technology and other changes have made it more convenient for bank
customers to transfer funds into alternative investments including products
offered by other financial institutions or non-bank service providers.
Additional increases in short-term interest rates could increase transfers of
deposits to higher yielding deposits. Efforts and initiatives we undertake to
retain and increase deposits, including deposit pricing, can increase our costs.
When bank customers move money out of bank deposits in favor of alternative
investments or into higher yielding deposits, or spread their accounts over
several banks, we can lose a relatively inexpensive source of funds, thus
increasing our funding costs.
Governmental
regulation may impair our operations or restrict our growth.
We are
subject to significant governmental supervision and regulation. These
regulations are intended primarily for the protection of depositors. Statutes
and regulations affecting our business may be changed at any time and the
interpretation of these statutes and regulations by examining authorities may
also change. Within the last several years, Congress and the President have
passed and enacted significant changes to these statutes and regulations. There
can be no assurance that such changes to the statutes and regulations or to
their interpretation will not adversely affect our business. In addition to
governmental supervision and regulation, we are subject to changes in other
federal and state laws, including changes in tax laws, which could materially
affect the banking industry. We are subject to the rules and regulations of
the FRB. If we fail to comply with federal and state bank regulations, the
regulators may limit our activities or growth, fine us or ultimately put us out
of business. Banking laws and regulations change from time to time. Bank
regulations can hinder our ability to compete with financial services companies
that are not regulated in the same manner or are less regulated. Federal and
state bank regulatory agencies regulate many aspects of our operations. These
areas include:
|
·
|
The
capital that must be maintained;
|
|
·
|
The
kinds of activities that can be engaged
in;
|
|
·
|
The
kinds and amounts of investments that can be
made;
|
|
·
|
The
locations of offices;
|
|
·
|
Insurance
of deposits and the premiums that we must pay for this insurance;
and
|
|
·
|
How
much cash we must set aside as reserves for
deposits.
|
The
value of certain securities in our investment securities portfolio may be
negatively affected by disruptions in the market for these
securities.
The
market for certain investment securities held within our investment portfolio
has become much less liquid over the past year. This coupled with uncertainty
surrounding the credit risk associated with the underlying collateral has caused
discrepancies in valuation estimates obtained from third parties. We value some
of our investments using cash flow and valuation models which include certain
subjective estimates that we believe are reflective of the estimates a purchaser
of such securities would use if such a transaction were to occur. The volatile
market may affect the value of these securities, such as through reduced
valuations due to the perception of heightened credit and liquidity risks, in
addition to interest rate risk typically associated with these securities. There
can be no assurance that declines in market value associated with these
disruptions will not result in impairment of these assets that may result in
accounting charges that could have a material adverse effect on consolidated
financial statements and capital ratios.
If
Our Investment in the Federal Home Loan Bank of Seattle is Classified as
Other-Than-Temporarily Impaired or as Permanently Impaired, Our Earnings and
Shareholders’ Equity Could Decrease
We own
common stock of the Federal Home Loan Bank of Seattle (“FHLB-Seattle”) to
qualify for membership in the Federal Home Loan Bank System and to be eligible
to borrow funds under the FHLB-Seattle’s advance program. The aggregate cost of
our FHLB-Seattle common stock as of December 31, 2008 was
$48.8 million based on its par value. There is no market for our
FHLB-Seattle common stock.
Recent
published reports indicate that certain member banks of the Federal Home Loan
Bank System may be subject to accounting rules and asset quality risks that
could result in materially lower regulatory capital levels. In an extreme
situation, it is possible that the capitalization of a Federal Home Loan Bank,
including the FHLB-Seattle, could be substantially diminished. Consequently, we
believe that there is a risk that our investment in FHLB-Seattle common stock
could be deemed other-than-temporarily impaired at some time in the future. If
this occurs, it would cause our earnings and shareholders’ equity to decrease by
the after-tax amount of the impairment charge.
We
may be unsuccessful in our federal or Hawaii state tax appeals, or ongoing tax
audits may result in additional tax liabilities.
We are
currently appealing certain tax assessments by the Internal Revenue Service and
the State of Hawaii Department of Taxation. While we believe that we have
properly applied the relevant income tax statutes and have obtained supporting
opinions from tax consultants, we may be unsuccessful in one or more of our
appeals. While we have established contingency reserves as deemed appropriate,
adverse decisions or settlements could result in income tax and related interest
exposure in excess of amounts reserved.
We
rely on dividends from our subsidiaries for most of our revenue.
Because
we are a holding company with no significant operations other than our bank, we
currently depend upon dividends from our bank for a substantial portion of our
revenues. Our ability to pay dividends will therefore continue to depend in
large part upon our receipt of dividends or other capital distributions from our
bank.
The
ability of the bank to pay dividends or make other capital distributions to us
is subject to the regulatory authority of the FDIC, the DFI, Hawaii law and the
Federal Reserve Board as further described in the Supervision and
Regulation – Dividends sections of Item 1. Business.
We
may not be able to attract and retain skilled people.
Our
success depends in large part on our ability to attract and retain key people
and there are a limited number of qualified persons with knowledge of and
experience in the banking industry in each of our markets. Furthermore, recent
demand for skilled finance and accounting personnel among publicly traded
companies has increased the importance of attracting and retaining these people.
Competition for the best people can be intense given the tight labor market in
Hawaii and we may not be able to hire people or to retain them. The unexpected
loss of services of one or more of our key personnel could have a material
adverse impact on our business because of their skills, knowledge of our market,
years of industry experience and the difficulty of promptly finding qualified
replacement personnel.
Our
information systems may experience an interruption or breach in
security.
We rely
heavily on communications and information systems to conduct our business. Any
failure, interruption or breach in security of these systems could result in
failures or disruptions in our customer relationship management, general ledger,
deposit, loan and other systems. While we have policies and procedures designed
to prevent or limit the effect of the failure, interruption or security breach
of our information systems, there can be no assurance that any such failures,
interruptions or security breaches will not occur or, if they do occur, that
they will be adequately addressed. The occurrence of any failures, interruptions
or security breaches of our information systems could damage our reputation,
result in a loss of customer business, subject us to additional regulatory
scrutiny or expose us to civil litigation and possible financial liability, any
of which could have a material adverse effect on our financial condition and
results of operations.
We
continually encounter technological change.
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and services. The
effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. Our future success
depends, in part, upon our ability to address the needs of our customers by
using technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in our operations. Many of
our competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services
to its customers. Failure to successfully keep pace with technological change
affecting the financial services industry could have a material adverse impact
on our business and, in turn, our financial condition and results of
operations.
Financial
services companies depend on the accuracy and completeness of information about
customers and counterparties.
In
deciding whether to extend credit or enter into other transactions, we may rely
on information furnished by or on behalf of customers and counterparties,
including financial statements, credit reports and other financial information.
We may also rely on representations of those customers, counterparties or other
third parties, such as independent auditors, as to the accuracy and completeness
of that information. Reliance on inaccurate or misleading financial statements,
credit reports or other financial information could have a material adverse
impact on our business and, in turn, our financial condition and results of
operations.
We
are subject to claims and litigation pertaining to fiduciary
responsibility.
From time
to time, customers make claims and take legal action pertaining to our
performance of our fiduciary responsibilities. Regardless of whether customer
claims and legal action related to our performance of our fiduciary
responsibilities are founded or unfounded, if such claims and legal actions are
not resolved in a manner favorable to us, they may result in significant
financial liability and/or adversely affect the market perception of us and our
products and services, as well as impact customer demand for our products and
services. Any financial liability or reputational damage could have a material
adverse effect on our business, which, in turn, could have a material adverse
effect on our financial condition and results of operations.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Certifications
We have
filed the required certifications under Section 302 of the Sarbanes-Oxley
Act of 2002 as Exhibits 31.1 and 31.2 to this annual report on Form 10-K
for the fiscal year ended December 31, 2008. Last year, we submitted to the
New York Stock Exchange on June 3, 2008 our annual CEO certification regarding
the Company’s compliance with the NYSE’s corporate governance listing standards
required by NYSE rule 303A.12. This year, we intend to submit to the NYSE
our annual CEO certification within 30 days of the Company’s annual meeting of
shareholders, which is scheduled for May 26, 2009.
We hold
title to the land and building in which our headquarters, Kaimuki branch office,
Hilo branch office, Kailua-Kona branch office, Pearl City branch office and
certain operations offices are located. We also hold title to the buildings in
which our Moiliili; McCully; Kalihi and Beretania branch offices and operations
center are located, as well as a portion of land on which the Moiliili branch
office and the data processing operations offices are located. The remaining
lands on which the Moiliili branch and the data processing operations offices
are located, as well as all of the land on which the McCully, Kalihi-Gullick and
Beretania branch offices are located, are leased. We also own four floors of a
commercial office condominium in downtown Honolulu where certain administrative
and support operations are located.
We occupy
or hold leases for approximately 50 other properties including office space for
our remaining branches, residential mortgage lending subsidiary and California
operations. These leases expire on various dates through 2038 and generally
contain renewal options for periods ranging from five to 15 years. For
additional information relating to lease rental expense and commitments as of
December 31, 2008, see Note 18 to the Consolidated Financial
Statements.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
Certain
claims and lawsuits have been filed or are pending against us arising in the
ordinary course of business. In the opinion of management, all such matters are
of a nature that if disposed of unfavorably, would not have a material adverse
effect on our consolidated results of operations or financial
position.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matters were submitted to our shareholders for a vote during the fourth quarter
of 2008.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our
common stock is traded on the NYSE under the ticker symbol “CPF.” Set forth
below is a line graph comparing the cumulative total stockholder return on the
Company’s common stock, based on the market price of the common stock and
assuming reinvestment of dividends, with the Russell 2000 Index and the S&P
SmallCap 600 Commercial Bank Index for the five year period commencing
December 31, 2003 and ending December 31, 2008. The graph assumes the
investment of $100 on December 31, 2003.
Indexed
Total Annual Return
(as
of December 31, 2008)
The
following table sets forth information on the range of high and low sales prices
of our common stock, as reported by the NYSE, for each full quarterly period
within 2008 and 2007:
|
Year
Ended December 31,
|
|
2008
|
|
|
2007
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
$
|
21.92
|
|
|
$
|
14.09
|
|
|
$
|
40.50
|
|
|
$
|
34.60
|
Second
quarter
|
|
20.32
|
|
|
|
10.33
|
|
|
|
36.50
|
|
|
|
32.83
|
Third
quarter
|
|
22.40
|
|
|
|
7.10
|
|
|
|
33.60
|
|
|
|
27.69
|
Fourth
quarter
|
|
19.45
|
|
|
|
8.91
|
|
|
|
30.63
|
|
|
|
18.24
|
As
of December 31, 2008, there were 4,090 shareholders of record, excluding
individuals and institutions for which shares were held in the names of nominees
and brokerage firms.
Dividends
The
following table sets forth information on dividends declared per share of common
stock for each quarterly period within 2008 and 2007:
|
Year
Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
First
quarter
|
$
|
0.25
|
|
|
$
|
0.24
|
Second
quarter
|
|
0.25
|
|
|
|
0.24
|
Third
quarter
|
|
0.10
|
|
|
|
0.25
|
Fourth
quarter
|
|
0.10
|
|
|
|
0.25
|
The
holders of our common stock share proportionately, on a per share basis, in all
dividends and other distributions declared by our Board of
Directors.
On
January 28, 2009, our Board of Directors elected to suspend the payment of cash
dividends effective immediately as they believe this a prudent measure that will
enable us to preserve capital and better meet the needs of our customers. Since
substantially all of the funds available for the payment of dividends are
derived from our bank, future dividends will depend upon our bank’s earnings,
financial condition and capital needs, applicable governmental policies and
regulations and such other matters as our Board of Directors may deem to be
appropriate. As our bank’s operating performance improves and the economic
environment stabilizes, we will reassess our capital levels and the payment of
future cash dividends.
Our
ability to pay cash dividends is further subject to our continued payment of
interest that we owe on our junior subordinated debentures. As of
December 31, 2008, we had approximately $108 million of our junior
subordinated debentures outstanding. We have the right to defer payment of
interest on the junior subordinated debentures for a period not exceeding 20
consecutive quarters. If we defer or fail to make interest payments on the
junior subordinated debentures or if we fail to comply with certain covenants
under the related indentures, we will be prohibited, subject to certain
exceptions, from paying cash dividends on our common stock until we pay all
deferred interest and resume interest payments on the junior subordinated
debentures and until we comply with the covenants under the related
indentures.
Our
ability to pay dividends is also limited by certain restrictions including (1)
rules imposed on Hawaii corporations that allow us to only pay dividends out of
funds legally available at such times as our Board of Directors determines
are appropriate, (2) our December 2008 MOU which requires the bank to obtain
approval from the FDIC and DFI for the payment of cash dividends by the bank to
Central Pacific Financial Corp, (3) FRB approval for the payment of cash
dividends to our common shareholders and (4) the terms of our participation in
the TARP’s CPP which prohibit the payment of cash dividends on our common stock
so long as any shares of the Preferred Shares remain outstanding, unless all
accrued and unpaid dividends of the Preferred Shares have been paid and limit
dividend increases. For information regarding the dividend payments made by
Central Pacific Financial Corp. and its subsidiaries, see the discussion under
the section captioned “Capital Resources” included in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
Note 25 in the Notes to Consolidated Financial Statements included in “Item 8.
Financial Statements and Supplementary Data.”
Recent
Sale of Unregistered Securities
On
January 9, 2009 (the “Closing Date”), Central Pacific Financial Corp. (the
“Company”) issued and sold, and the U.S. Treasury purchased, (1) 135,000 shares
of Preferred Shares, liquidation preference of $1,000 per share, and (2) the
TARP Warrant to purchase up to 1,585,748 shares of the Company’s voting common
stock, no par value (“Common Stock”), at an exercise price of $12.77 per share,
for an aggregate purchase price of $135 million in cash.
The
securities were sold in a private placement exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
Cumulative
dividends on the Preferred Shares will accrue on the liquidation preference at a
rate of 5% per annum for the first five years, and at a rate of 9% per annum
thereafter, if, as and when declared by the Company’s Board of Directors out of
funds legally available therefor. The Preferred Shares have no maturity date and
rank senior to the Common Stock with respect to the payment of dividends and
distributions and amounts payable upon liquidation, dissolution and winding up
of the Company. Subject to the approval of the Board of Governors of the Federal
Reserve System, the Preferred Shares are redeemable at the option of the Company
at 100% of their liquidation preference, provided, however, that the Preferred
Shares may be redeemed prior to the first dividend payment date falling after
the third anniversary of the Closing Date (February 15, 2012) only if (i) the
Company has raised aggregate gross proceeds in one or more Qualified Equity
Offerings (as defined in the letter agreement, dated the Closing Date between
the Company and the U.S. Treasury (including the Securities Purchase
Agreement—Standard Terms incorporated by reference therein) (the “Purchase
Agreement”) and set forth below) in excess of $33,750,000 and (ii) the aggregate
redemption price does not exceed the aggregate net proceeds from such Qualified
Equity Offerings.
The U.S.
Treasury may not transfer a portion or portions of the Warrant with respect to,
and/or exercise the Warrant for more than one-half of, the 1,585,748 shares of
Common Stock issuable upon exercise of the Warrant, in the aggregate, until the
earlier of (i) the date on which the Company has received aggregate gross
proceeds of not less than $135 million from one or more Qualified Equity
Offerings (as defined in the Purchase Agreement and set forth below) and (ii)
December 31, 2009. In the event the Company completes one or more Qualified
Equity Offerings on or prior to December 31, 2009 that result in the Company
receiving aggregate gross proceeds of at least $135 million, the number of the
shares of Common Stock underlying the portion of the Warrant then held by the
U.S. Treasury will be reduced by one-half of the shares of Common Stock
originally covered by the Warrant. For purposes of the foregoing, “Qualified
Equity Offering” is defined as the sale and issuance for cash by the Company to
persons other than the Company or any Company subsidiary after the Closing Date
of shares of perpetual preferred stock, Common Stock or any combination of such
stock, that, in each case, qualify as and may be included in Tier I capital of
the Company at the time of issuance under the applicable risk-based capital
guidelines of the Board of Governors of the Federal Reserve System (other than
any such sales and issuances made pursuant to agreements or arrangements entered
into, or pursuant to financing plans which were publicly announced, on or prior
to October 13, 2008).
The
Purchase Agreement pursuant to which the Preferred Shares and the Warrant were
sold contains limitations on the payment of dividends on the Common Stock
(including with respect to the payment of cash dividends in excess of the
Company’s current quarterly cash dividend of $0.10 per share) and on the
Company’s ability to repurchase its Common Stock, and subjects the Company to
certain of the executive compensation limitations included in the Emergency
Economic Stabilization Act of 2008 (the “EESA”). As a condition to the closing
of the transaction, each of Messrs. Ronald K. Migita, Blenn A. Fujimoto, Curtis
W. Chinn, Dean K. Hirata and Denis K. Isono, the Company’s Senior Executive
Officers (as defined in the Purchase Agreement) (the “Senior Executive
Officers”), (i) executed a waiver (the “Waiver”) voluntarily waiving any claim
against the U.S. Treasury or the Company for any changes to such Senior
Executive Officer’s compensation or benefits that are required to comply with
the regulation issued by the U.S. Treasury under the TARP Capital Purchase
Program as published in the Federal Register on October 20, 2008 and
acknowledging that the regulation may require modification of the compensation,
bonus, incentive and other benefit plans, arrangements and policies and
agreements (including so-called “golden parachute” agreements) (collectively,
“Benefit Plans”) as they relate to the period the U.S. Treasury holds any equity
or debt securities of the Company acquired through the TARP Capital Purchase
Program; and (ii) entered into a letter agreement (the “Letter Agreement”) with
the Company amending the Benefit Plans with respect to such Senior Executive
Officer as may be necessary, during the period that the U.S. Treasury owns any
debt or equity securities of the Company acquired pursuant to the Purchase
Agreement or the Warrant, as necessary to comply with Section 111(b) of the
EESA.
Issuer
Purchases of Equity Securities
There
were no repurchases of the Company’s common stock during the fourth quarter of
2008.
Information relating to compensation
plans under which equity securities of the Registrant are authorized for
issuance is set forth in Part III, Item 12 of this Annual Report on
Form 10-K.
ITEM
6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The
following table sets forth selected financial information for each of the years
in the five-year period ended December 31, 2008. This information is not
necessarily indicative of results of future operations and should be read in
conjunction with “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Consolidated Financial Statements
and related Notes to Consolidated Financial Statements contained in “Item 8.
Financial Statements and Supplementary Data.”
|
Year
Ended December 31,
|
|
Selected
Financial Data
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
(Dollars
in thousands, except per share data)
|
|
Statement
of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
$
|
303,952
|
|
|
$
|
349,877
|
|
|
$
|
320,381
|
|
|
$
|
263,250
|
|
|
$
|
150,389
|
|
Total
interest expense
|
|
101,997
|
|
|
|
137,979
|
|
|
|
109,532
|
|
|
|
66,577
|
|
|
|
30,217
|
|
Net
interest income
|
|
201,955
|
|
|
|
211,898
|
|
|
|
210,849
|
|
|
|
196,673
|
|
|
|
120,172
|
|
Provision
for loan and lease losses
|
|
171,668
|
|
|
|
53,001
|
|
|
|
1,350
|
|
|
|
3,917
|
|
|
|
2,083
|
|
Net
interest income after provision for loan and lease losses
|
|
30,287
|
|
|
|
158,897
|
|
|
|
209,499
|
|
|
|
192,756
|
|
|
|
118,089
|
|
Other
operating income
|
|
54,808
|
|
|
|
45,804
|
|
|
|
43,156
|
|
|
|
41,002
|
|
|
|
22,018
|
|
Goodwill
impairment
|
|
94,279
|
|
|
|
48,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
operating expense (excluding goodwill impairment)
|
|
178,543
|
|
|
|
128,556
|
|
|
|
132,163
|
|
|
|
124,772
|
|
|
|
86,131
|
|
Income
(loss) before income taxes
|
|
(187,727
|
)
|
|
|
28,145
|
|
|
|
120,492
|
|
|
|
108,986
|
|
|
|
53,976
|
|
Income
taxes (benefit)
|
|
(49,313
|
)
|
|
|
22,339
|
|
|
|
41,312
|
|
|
|
36,527
|
|
|
|
16,582
|
|
Net
income (loss)
|
|
(138,414
|
)
|
|
|
5,806
|
|
|
|
79,180
|
|
|
|
72,459
|
|
|
|
37,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (Year-End):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits in other banks
|
$
|
475
|
|
|
$
|
241
|
|
|
$
|
5,933
|
|
|
$
|
9,813
|
|
|
$
|
52,978
|
|
Investment
securities (1)
|
|
751,297
|
|
|
|
881,254
|
|
|
|
898,358
|
|
|
|
925,285
|
|
|
|
850,821
|
|
Loans
and leases
|
|
4,030,266
|
|
|
|
4,141,705
|
|
|
|
3,846,004
|
|
|
|
3,552,749
|
|
|
|
3,099,830
|
|
Allowance
for loan and lease losses
|
|
119,878
|
|
|
|
92,049
|
|
|
|
52,280
|
|
|
|
52,936
|
|
|
|
50,703
|
|
Goodwill
|
|
152,689
|
|
|
|
244,702
|
|
|
|
298,996
|
|
|
|
303,358
|
|
|
|
284,712
|
|
Other
intangible assets
|
|
39,783
|
|
|
|
39,972
|
|
|
|
43,538
|
|
|
|
47,615
|
|
|
|
53,037
|
|
Total
assets
|
|
5,432,361
|
|
|
|
5,680,386
|
|
|
|
5,487,192
|
|
|
|
5,239,139
|
|
|
|
4,651,902
|
|
Core
deposits (2)
|
|
2,805,347
|
|
|
|
2,833,317
|
|
|
|
2,860,926
|
|
|
|
2,814,435
|
|
|
|
2,716,973
|
|
Total
deposits
|
|
3,911,566
|
|
|
|
4,002,719
|
|
|
|
3,844,483
|
|
|
|
3,642,244
|
|
|
|
3,327,026
|
|
Long-term
debt
|
|
649,257
|
|
|
|
916,019
|
|
|
|
740,189
|
|
|
|
749,258
|
|
|
|
587,380
|
|
Total
shareholders' equity
|
|
526,291
|
|
|
|
674,403
|
|
|
|
738,139
|
|
|
|
676,234
|
|
|
|
567,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
$
|
(4.83
|
)
|
|
$
|
0.19
|
|
|
$
|
2.60
|
|
|
$
|
2.42
|
|
|
$
|
1.90
|
|
Diluted
earnings (loss) per share
|
|
(4.83
|
)
|
|
|
0.19
|
|
|
|
2.57
|
|
|
|
2.38
|
|
|
|
1.87
|
|
Cash
dividends declared
|
|
0.70
|
|
|
|
0.98
|
|
|
|
0.88
|
|
|
|
0.73
|
|
|
|
0.64
|
|
Book
value
|
|
18.32
|
|
|
|
23.45
|
|
|
|
24.04
|
|
|
|
22.22
|
|
|
|
20.17
|
|
Diluted
weighted average shares outstanding (in thousands)
|
|
28,669
|
|
|
|
30,406
|
|
|
|
30,827
|
|
|
|
30,487
|
|
|
|
20,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
(loss) on average assets
|
|
(2.45
|
)%
|
|
|
0.10
|
%
|
|
|
1.50
|
%
|
|
|
1.48
|
%
|
|
|
1.25
|
%
|
Return
(loss) on average shareholders' equity
|
|
(23.07
|
)
|
|
|
0.77
|
|
|
|
11.16
|
|
|
|
11.16
|
|
|
|
12.37
|
|
Net
income (loss) to average tangible shareholders' equity
|
|
(37.00
|
)
|
|
|
1.35
|
|
|
|
21.01
|
|
|
|
22.88
|
|
|
|
18.45
|
|
Average
equity to average assets
|
|
10.61
|
|
|
|
13.58
|
|
|
|
13.45
|
|
|
|
13.29
|
|
|
|
10.08
|
|
Efficiency
ratio (3)
|
|
53.93
|
|
|
|
47.80
|
|
|
|
49.67
|
|
|
|
49.59
|
|
|
|
57.77
|
|
Net
interest margin (4)
|
|
4.02
|
|
|
|
4.33
|
|
|
|
4.55
|
|
|
|
4.63
|
|
|
|
4.51
|
|
Net
charge-offs to average loans
|
|
3.42
|
|
|
|
0.33
|
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
0.06
|
|
Nonperforming
assets to year-end loans & other real estate (5)
|
|
3.26
|
|
|
|
1.48
|
|
|
|
0.23
|
|
|
|
0.35
|
|
|
|
0.35
|
|
Allowance
for loan and lease losses to year-end loans
|
|
2.97
|
|
|
|
2.22
|
|
|
|
1.36
|
|
|
|
1.49
|
|
|
|
1.64
|
|
Allowance
for loan and lease losses to nonaccrual loans
|
|
90.43
|
|
|
|
149.57
|
|
|
|
583.61
|
|
|
|
421.77
|
|
|
|
492.79
|
|
Dividend
payout ratio
|
|
N/A
|
|
|
|
515.79
|
|
|
|
33.85
|
|
|
|
30.17
|
|
|
|
33.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Held-to-maturity
securities at amortized cost, available-for-sale securities at fair
value.
|
|
(2) Noninterest-bearing
demand, interest-bearing demand and savings deposits, and time deposits
under $100,000.
|
|
(3) Efficiency
ratio is derived by dividing other operating expense excluding
amortization, impairment and write-down of intangible
assets,
|
goodwill,
loans held for sale and foreclosed property, loss on investment
transaction and loss on sale of commercial real estate loans
by
|
net
operating revenue (net interest income on a taxable equivalent basis plus
other operating income before securities transactions).
|
(4) Computed
on a taxable equivalent basis using an assumed income tax rate of
35%.
|
|
(5) Nonperforming
assets include nonaccrual loans, nonaccrual loans held for sale and other
real estate.
|
|
Five
Year Performance Comparison
The
significant items affecting the comparability of the five years’ performance
include:
·
|
Provision
for loan and lease losses of $171.7 million and $53.0 million in 2008 and
2007;
|
·
|
Goodwill
impairment charges of $94.3 million and $48.0 million in 2008 and
2007;
|
·
|
Mortgage
servicing rights impairment charge of $3.4 million in
2008;
|
·
|
Loss
on counterparty financing agreement of $2.8 million in
2008;
|
·
|
Gain
on ineffective portion of derivative of $2.1 million in
2008;
|
·
|
Tax
contingency settlement charge of $2.4 million in
2007;
|
·
|
Income
tax benefit of $2.0 million related to true up adjustments recognized in
2007;
|
·
|
Stock
option expense of $2.1 million, $2.9 million and $3.5 million recognized
in 2008, 2007 and 2006, respectively, in accordance with Statement of
Financial Accounting Standards No. 123R, “
Share-Based Payment
”
(“SFAS 123R”);
|
·
|
Executive
retirement expenses of $2.4 million and $2.1 million incurred in 2008 and
2006;
|
·
|
Income
tax charges of $1.2 million for income tax liability adjustments in
2006;
|
·
|
Nonrecurring
integration, severance and merger-related expenses of $5.5 million and
$9.3 million incurred in 2005 and
2004;
|
·
|
Incremental
earnings of Hawaii HomeLoans, Inc. (“HHL”) since August 17, 2005 and
of CB Bancshares, Inc. (“CBBI”) since September 15, 2004, the
effective dates of the respective
acquisitions;
|
·
|
Issuance
of 2.0 million shares of common stock in a public offering in
March 2005 and 11.9 million shares of common stock in
September 2004 in connection with the CBBI acquisition;
and
|
·
|
Net
amortization of core deposit premium and other purchase accounting
valuation adjustments, and interest expense on trust preferred securities
issued to finance the CB Bancshares
acquisition.
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Introduction
We are a
bank holding company that, through our banking subsidiary, Central Pacific Bank,
offers full service commercial banking in the state of Hawaii. In addition, we
have offices in California serving customers there.
Our
products and services focus on two areas:
|
·
|
Loans
: We focus our
lending activities on commercial, residential and commercial mortgage, and
construction loans to small and medium-sized companies, business
professionals and real estate developers. Our lending activities
contribute to a key component of our revenues—interest
income.
|
|
·
|
Deposits
: We strive to
provide exceptional customer service and products that meet our customers’
needs, like our Free Plus Checking, Exceptional Savings and Super Savings
accounts. We also maintain a broad branch and ATM network in the state of
Hawaii. Raising funds through our deposit accounts enables us to support
our lending activities. The interest paid on such deposits has a
significant impact on our interest expense, an important factor in
determining our earnings. In addition, fees and service charges on deposit
accounts contribute to our
revenues.
|
Additionally,
we offer wealth management products and services such as non-deposit investment
products, annuities, insurance, investment management, asset custody and general
consultation and planning services.
In this
discussion, we have included statements that may constitute “forward-looking
statements” within the meaning of the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
not historical facts but instead represent only our beliefs regarding future
events, many of which, by their nature, are inherently uncertain and beyond our
control. These statements relate to our future plans and objectives, among other
things. By identifying these statements for you in this manner, we are alerting
you to the possibility that our actual results may differ, possibly materially,
from the results indicated in the forward-looking statements. Important factors
that could, among others, cause our results to differ, possibly materially, from
those indicated in the forward-looking statements are discussed above under
“Business
-
Factors that
May Affect Our Business” in Part I, Item 1 of this Annual Report on
Form 10-K.
Executive
Overview
Fiscal
2008 proved to be one of the most challenging periods in our fifty-four year
history. Weakness and severe tightening in the overall credit markets, economic
downturns in local, national and global economies, continued deterioration in
the California real estate market and weakness in certain of our California
commercial construction and Hawaii residential construction borrowers
contributed to a net loss of $138.4 million recognized for the year. The net
loss recognized in 2008 was attributable to $171.7 million in provision for loan
and lease losses and a $94.3 million goodwill impairment charge, as continued
weakness in our California residential construction loan portfolio negatively
impacted 2008 results.
Our
results for 2008 were reflective of the challenging and unprecedented economic
environment that financial institutions across the country continue to
experience. Despite the current turmoil and uncertainty in the financial
markets, we remain committed to investing in our core Hawaii franchise and
improving our asset quality.
Business
Environment
The
global and U.S. economies are currently experiencing a continued slowdown in
business activity as a result of disruptions in the financial system, including
a freeze and lack of confidence in the worldwide credit markets. In the U.S.,
credit conditions have worsened considerably over the course of the year and the
U.S. officially entered into a recession (as announced by the National Bureau of
Economic Research). Falling home prices, as well as increased foreclosures and
unemployment rates during the past year have resulted in significant write-downs
of asset values. These write-downs have caused many financial institutions to
seek additional capital, to merge with larger and stronger institutions and, in
some cases, to fail. As a result of the current uncertainties regarding the
stability of the financial markets, many financial institutions have reduced
and/or ceased to provide funding to borrowers, including other financial
institutions. Accordingly, the availability of credit, confidence in the
financial sector, and level of volatility in the financial markets have been
adversely affected and have contributed to the recent volatility and disruption
in the capital and credit markets which have reached unprecedented
levels.
In
response to the financial crisis affecting the banking system and financial
markets, the EESA was signed into law on October 3, 2008. Under the EESA, the
U.S. Treasury was granted the authority to purchase up to $700 billion of
mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Treasury
announced that it will purchase equity stakes in a wide variety of banks and
thrifts under the TARP’s CPP. Under the CPP, the U.S. Treasury made $250 billion
of capital available to U.S. financial institutions in the form of preferred
stock. In conjunction with the purchase of preferred stock, the U.S. Treasury
will receive warrants to purchase common stock with an aggregate market price
equal to 15% of the preferred stock investment. Participating financial
institutions will also be required to adopt the U.S. Treasury’s standards for
executive compensation and corporate governance for the period during which the
U.S. Treasury holds equity issued under the CPP.
During
2008, the Fed announced a number of initiatives to provide stability and
additional liquidity to the financial markets. These initiatives include
providing additional liquidity to the asset-backed commercial paper and money
markets and planned purchases of short-term debt obligations issued by Fannie
Mae, Freddie Mac and the Federal Home Loan Banks. In December 2008, the Fed
lowered the federal funds benchmark rate to a range of zero to 0.25% and the
discount rate to 0.50%.
The
majority of our operations are concentrated in the states of Hawaii and
California. Accordingly, our business performance is directly affected by
conditions in the banking industry, macro economic conditions and the real
estate market in those states. A favorable business environment is generally
characterized by expanding gross state product, low unemployment and rising
personal income while an unfavorable business environment is characterized by
declining gross state product, high unemployment and declining personal
income.
General
economic conditions in Hawaii slowed throughout 2008 with signs of
diminished growth appearing in the latter part of 2008. Tourism remains Hawaii’s
most significant economic driver, and according to the Hawaii Department of
Business Economic Development & Tourism (“DBEDT”), 6.8 million visitors
visited the state in 2008. This was a decrease of 10.8% from the number of
visitor arrivals in 2007 and according to the DBEDT, total visitor arrivals are
expected to further decline by 1.9% in 2009. The DBEDT also reported that total
visitor spending declined to $11.3 billion in 2008 from a record $12.5 billion
in 2007. The Department of Labor and Industrial Relations reported that Hawaii’s
seasonally adjusted unemployment rate was 5.5% in December 2008, compared
to 3.1% in December 2007. Despite the increase, Hawaii’s unemployment rate
remained below the national seasonally adjusted unemployment rate of 7.2%. DBEDT
projects real personal income to decline by approximately 0.4% in 2009, with
increases in real personal income of 1.0% and 1.5% in 2010 and 2011,
respectively. DBEDT also projects real gross state product growth to remain
unchanged in 2009. With real estate lending as a primary focus, including
construction, residential mortgage and commercial mortgage loans, we are
dependent on the strength of the real estate market. The Hawaii real estate
market cooled in 2008 and, according to the Honolulu Board of Realtors, Oahu
unit sales volume dropped 24.4% for single-family homes and 28.5% for
condominiums in 2008 from 2007. Median sales prices in 2008 for single-family
homes on Oahu was $624,000, representing a 3.0% decrease from the prior year,
while median sales prices for condominiums remained unchanged at $325,000.
Expectations from local economists are for the Hawaii real estate market to
continue its slowdown in 2009 with projected declines in both unit sales volume
and median prices of 10%.
The
effects of falling home prices, limited credit availability, shrinking equity
values and growing unemployment stymied the California economy in 2008 as it
decelerated in step with the national economy. Consumer and business spending,
the core of the California economy, decreased in 2008. The outlook for the
California economy calls for negative growth in 2009, followed by weak growth in
2010 improving slightly in 2011. The California Association of Realtors (“CAR”)
reported that December 2008 unit home sales increased by 84.9%, while the
median price plunged 41.5% from year ago levels primarily driven by a
significant rise in distressed sales, including foreclosures. CAR forecasts
Calfornia median sales price will decline 6.0% to $358,000 in 2009, while the
number of sales are projected to increase by 12.5% during the same period as
distressed sales will continue to impact the market. According to the
California Department of Finance (“CDOF”), average personal income is projected
to have increased by 4.2% in 2008 from one year ago and projections for 2009
call for an increase of 2.1% from 2008. The CDOF also reported that California
civilian workforce grew by 1.8% to 18.6 million in December 2008 from 18.3
million a year ago, while California’s seasonally adjusted unemployment rate in
December 2008 increased to 9.3% from 5.9% in the prior year and continues to be
well above the national unemployment rate.
Our
results of operations in future periods will be significantly impacted by the
economies in Hawaii, California or other markets we serve. Loan demand, deposit
growth, provision for loan and lease losses, asset quality, noninterest income
and noninterest expense may be affected by changes in economic conditions. If
the California and Hawaii residential real estate markets do not improve or
continue to deteriorate, the California and Hawaii commercial real estate market
worsens, or the economic environments in Hawaii, California or other markets we
serve suffer an adverse change or a material external shock, our results of
operations may be negatively impacted.
Critical
Accounting Policies and Use of Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that management make
certain judgments and use certain estimates and assumptions that affect amounts
reported and disclosures made. Accounting estimates are deemed critical when a
different estimate could have reasonably been used or where changes in the
estimate are reasonably likely to occur from period to period and would
materially impact our consolidated financial statements as of or for the periods
presented. Management has discussed the development and selection of the
critical accounting estimates noted below with the Audit Committee of the Board
of Directors, and the Audit Committee has reviewed the accompanying
disclosures.
Allowance
for Loan and Lease Losses
We
maintain an allowance for loan and lease losses (the “Allowance”) at an amount
we expect to be sufficient to absorb probable losses inherent in our loan and
lease portfolio based on a projection of probable net loan charge-offs. For
loans classified as impaired, an estimated impairment loss is calculated. To
estimate loan charge-offs on other loans, we evaluate the level and trend of
nonperforming and potential problem loans and historical loss experience. We
also consider other relevant economic conditions and borrower-specific risk
characteristics, including current repayment patterns of our borrowers, the fair
value of collateral securing specific loans, changes in our lending and
underwriting standards and general economic factors, nationally and in the
markets we serve, including the real estate market generally and the residential
construction market. Estimated loss rates are determined by loan category and
risk profile, and an overall required Allowance is calculated. Based on our
estimate of the level of Allowance required, a provision for loan and lease
losses (the “Provision”) is recorded to maintain the Allowance at an appropriate
level. We adjusted our Provision in 2008 and 2007 in accordance with our risk
assessment policies to account for an increase in exposure throughout various
portions of our loan portfolio.
Reserves
for unfunded commitments are recorded separately through a valuation allowance
included in other liabilities. Credit losses for off-balance sheet credit
exposures are deducted from the allowance for credit losses on off-balance sheet
credit exposures in the period in which the liability is settled. The allowance
for credit losses on off-balance sheet credit losses is established by a charge
to other operating expense.
Since we
cannot predict with certainty the amount of loan and lease charge-offs that will
be incurred and because the eventual level of loan and lease charge-offs are
impacted by numerous conditions beyond our control, a range of loss estimates
could reasonably have been used to determine the Allowance and Provision. In
addition, various regulatory agencies, as an integral part of their examination
processes, periodically review our Allowance. Such agencies may require that we
recognize additions to the Allowance based on their judgments about information
available to them at the time of their examination. Accordingly, actual results
could differ from those estimates.
Further
deterioration in the California or Hawaii real estate markets could result in an
increase in loan delinquencies, additional increases in our Allowance and
Provision, as well as an increase in loan charge-offs.
Loans
Held for Sale
Loans
held for sale consists of Hawaii residential mortgage loans, as well as mainland
residential and commercial construction loans. Hawaii residential mortgage loans
classified as held for sale are carried at the lower of cost or fair value on an
aggregate basis while mainland residential and commercial construction loans are
recorded at the lower of cost or fair value on an individual basis.
Loans
originated with the intent to be held in our portfolio are subsequently
transferred to held for sale when a decision is made to sell these loans. At the
time of a loan’s transfer to the held for sale account, the loan is recorded at
the lower of cost or fair value. Any reduction in the loan’s value is reflected
as a write-down of the recorded investment resulting in a new cost basis, with a
corresponding reduction in the Allowance.
In
subsequent periods, if the fair value of a loan classified as held for sale is
less than its cost basis, a valuation adjustment is recognized in our
consolidated statement of operations in other operating expense and the carrying
value of the loan is adjusted accordingly. The valuation adjustment may be
recovered in the event that the fair value increases, which is also recognized
in our consolidated statement of operations in other operating
expense.
The fair
value of loans classified as held for sale are generally based upon quoted
prices for similar assets in active markets, acceptance of firm offer letters
with agreed upon purchase prices, discounted cash flow models that take into
account market observable assumptions, or independent appraisals of the
underlying collateral securing the loans.
Goodwill
and Other Intangible Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 142, “
Goodwill and
Other Intangible Assets
” (“SFAS 142”), we review the carrying amount of
goodwill for impairment on an annual basis. Additionally, we perform an
impairment assessment of goodwill and other intangible assets whenever events or
changes in circumstances indicate that the carrying value of goodwill and other
intangible assets may not be recoverable. Significant negative industry or
economic trends, disruptions to our business, unexpected significant changes or
planned changes in use of the assets, divestitures and market capitalization
declines may result in impairments to goodwill. Absent any impairment
indicators, we perform our goodwill impairment test annually.
Our
impairment assessment of goodwill and other intangible assets involves the
estimation of future cash flows and the fair value of reporting units to which
goodwill is allocated. We reconcile the estimated fair values of our reporting
units to our total market capitalization plus a control premium. Estimating
future cash flows and determining fair values of the reporting units is
judgmental and often involves the use of significant estimates and assumptions.
These estimates and assumptions could have a significant impact on whether or
not an impairment charge is recognized and also the magnitude of the impairment
charge.
In the
second quarter of 2008 and fourth quarter of 2007, we experienced significant
declines in our market capitalization which we determined were indicators
that impairment tests were required under SFAS 142. As a result of our
impairment tests at June 30, 2008 and December 31, 2007, we determined that the
goodwill associated with our Commercial Real Estate reporting unit, which
includes the California residential construction loan portfolio, was
impaired and we consequently recorded non-cash charges of $94.3 million and
$48.0 million in the second quarter of 2008 and fourth quarter of 2007,
respectively. The goodwill associated with our Hawaii Market reporting unit was
not considered to be impaired at any of these periods. In the fourth quarter of
2008, we experienced a further decline in our market capitalization due to the
continued deterioration of the California real estate market, however, no
goodwill impairment charge was recognized as there was no goodwill remaining in
our Commercial Real Estate reporting segment and no impairment was identified in
our Hawaii Market reporting segment. All remaining goodwill at December 31, 2008
is attributable to our Hawaii Market reporting unit. Future declines in our
market capitalization may result in the impairment of the remaining goodwill
assigned to our Hawaii Market reporting unit.
The
reconciliation of fair value estimates of the reporting units to our total
market capitalization in the second quarter of 2008 and fourth quarter of 2007
included implied control premiums of 15.5% and 31.7%, respectively. We
considered recent trends in our market capitalization and compared these implied
control premiums to observable transaction premiums for other financial
institutions from publicly available data sources and concluded that they were
reasonable at each period end.
Deferred
Tax Assets and Tax Contingencies
We
account for income taxes in accordance with SFAS 109, “
Accounting for Income Taxes
”
and FASB Interpretation No. 48, “
Accounting for Uncertainty in Income
Taxes
” (“FIN 48”). Deferred tax assets and liabilities are recognized for
the estimated future tax effects attributable to temporary differences and
carryforwards. A valuation allowance may be required if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. In determining whether a valuation
allowance is necessary, we consider the level of taxable income in prior years,
to the extent that carrybacks are permitted under current tax laws, as well as
estimates of future taxable income and tax planning strategies that could be
implemented to accelerate taxable income if necessary. If our estimates of
future taxable income were materially overstated or if our assumptions regarding
the tax consequences of tax planning strategies were inaccurate, some or all of
our deferred tax assets may not be realized, which would result in a charge to
earnings.
We have
established income tax contingency reserves for potential tax liabilities
related to uncertain tax positions. Tax benefits are recognized when we
determine that it is more likely than not that such benefits will be realized.
Where uncertainty exists due to the complexity of income tax statutes and where
the potential tax amounts are significant, we generally seek independent tax
opinions to support our positions. If our evaluation of the likelihood of the
realization of benefits is inaccurate, we could incur additional income tax and
interest expense that would adversely impact earnings, or we could receive tax
benefits greater than anticipated which would positively impact
earnings.
Defined
Benefit Retirement Plan
Defined
benefit plan obligations and related assets of our defined benefit retirement
plan are presented in Note 16 to the Consolidated Financial Statements. In 2002,
the defined benefit retirement plan was curtailed and all plan benefits were
fixed as of that date. Plan assets, which consist primarily of marketable equity
and debt securities, are typically valued using market quotations. Plan
obligations and the annual pension expense are determined by independent
actuaries through the use of a number of assumptions. Key assumptions in
measuring the plan obligations include the discount rate and the expected
long-term rate of return on plan assets. In determining the discount rate, we
utilize a yield that reflects the top 50% of the universe of bonds, ranked in
the order of the highest yield. Asset returns are based upon the anticipated
average rate of earnings expected on the invested funds of the
plans.
At
December 31, 2008, we used a weighted-average discount rate of 6.6% and an
expected long-term rate of return on plan assets of 8.0%, which affected the
amount of pension liability recorded as of year-end 2008 and the amount of
pension expense to be recorded in 2009. At December 31, 2007, a
weighted-average discount rate of 6.5% and an expected long-term rate of return
on plan assets of 8.0% were used in determining the pension liability recorded
as of year-end 2007 and the amount of pension expense recorded in 2008. For both
the discount rate and the asset return rate, a range of estimates could
reasonably have been used which would affect the amount of pension expense and
pension liability recorded.
An
increase in the discount rate or asset return rate would reduce pension expense
in 2008, while a decrease in the discount rate or asset return rate would have
the opposite effect. A 0.25% change in the discount rate assumption would impact
2009 pension expense by $0.1 million and year-end 2008 pension liability by $0.7
million, while a 0.25% change in the asset return rate would impact 2009 pension
expense by less than $0.1 million.
Overview
of Results of Operations
2008
vs. 2007 Comparison
In 2008,
we recognized a net loss of $138.4 million compared to net income of $5.8
million in 2007. The net loss recognized in 2008 was primarily driven by an
increase in credit costs and the write off of the remaining goodwill assigned to
our Commercial Real Estate reporting segment as continued weakness in the
California residential construction market persisted throughout the year.
Credit costs in 2008, which included the provision for loan and lease losses of
$171.7 million, write-downs of loans classified as held for sale of $23.8
million, write-downs of foreclosed property of $7.4 million and a decrease to
the reserve for unfunded loan commitments of $1.5 million, increased by $144.3
million, or 244.4% over credit costs recognized in 2007. The net loss recognized
in 2008 was also impacted by a non-cash mortgage servicing rights impairment
charge totaling $3.4 million and a $2.8 million net loss on a counterparty
financing transaction with Lehman Brothers, Inc. (“LBI”).
Our
diluted loss per share was $4.83 for 2008 compared to diluted earnings per share
of $0.19 in 2007. We declared cash dividends of $0.70 per common share in 2008,
representing a decrease of $0.28, or 28.6%, from the prior year. Loss on average
assets and average shareholders’ equity for 2008 was 2.45% and 23.07%,
respectively, compared to a return on average assets and average shareholders’
equity of 0.10% and 0.77%, respectively, in 2007. Our efficiency ratio, which
measures operating expenses before the amortization, impairment and write-down
of intangible assets, goodwill, loans held for sale and foreclosed property;
loss on counterparty financing transaction and loss on sale of commercial real
estate loans as a percentage of net operating revenue (net interest income
on a taxable equivalent basis plus other operating income before securities
transactions), was 53.93% in 2008 compared to 47.80% in 2007. The increase in
our efficiency ratio from the prior year was primarily attributable to the
increase in operating expenses, which are described below.
2007
vs. 2006 Comparison
Our net
income of $5.8 million in 2007 was a decrease of $73.4 million, or 92.7%, from
the $79.2 million recognized in 2006. The decrease in our net income for 2007
was driven by $53.0 million in provision for loan and lease losses directly
attributable to the significant and rapid deterioration in the California
residential construction market which began to affect us in the second half of
2007, as well as a $48.0 million goodwill impairment charge associated with our
Commercial Real Estate reporting segment, which included the California
residential construction loan portfolio. In 2006, the provision for loan and
lease losses was $1.4 million and there was no goodwill impairment. Partially
offsetting the negative effects of the increase in the provision for loan and
lease losses and the goodwill impairment charge was the decrease in income tax
expense as there was a disproportionate recognition of federal and state tax
credits compared to our taxable income. The Company earns a tax benefit from tax
credits and tax-exempt income irrespective of the level of pre-tax income. This
results in a favorable impact to the total tax benefit and the effective tax
rate especially during periods in which the Company is near break-even or
experiencing a pre-tax loss. Net income in 2007 was also impacted by $2.4
million of additional income tax expense resulting from the settlement of a tax
contingency item, $2.0 million of income tax benefit related to certain income
tax adjustments, a $1.1 million after tax reversal of prior year incentive
compensation accruals and a $1.0 million after tax loss on an investment
portfolio repositioning.
Diluted
earnings per share of $0.19 for 2007 decreased by $2.38, or 92.6%, from 2006,
while cash dividends declared of $0.98 per common share increased by $0.10, or
11.4%, over prior year amounts. Return on average assets of 0.10% in 2007
decreased from 1.50% in 2006 and return on average equity was 0.77% in 2007
compared to 11.16% in 2006. Our efficiency ratio was 47.80% in 2007 compared to
49.67% in 2006.
Net
Interest Income
Table 1
sets forth information concerning average interest earning assets and
interest-bearing liabilities and the yields and rates thereon. Table 2 presents
an analysis of changes in components of net interest income between years. Net
interest income, when expressed as a percentage of average interest earning
assets, is referred to as “net interest margin.” Interest income, which includes
loan fees and resultant yield information, are expressed on a taxable equivalent
basis using an assumed income tax rate of 35%.
Table
1.
Average Balances, Interest Income and Expense, Yields
and Rates (Taxable Equivalent)
|
2008
|
|
2007
|
|
2006
|
|
Average
|
|
Average
|
|
Amount
|
|
Average
|
|
Average
|
|
Amount
|
|
Average
|
|
Average
|
|
Amount
|
|
Balance
|
|
Yield/Rate
|
|
of
Interest
|
|
Balance
|
|
Yield/Rate
|
|
of
Interest
|
|
Balance
|
|
Yield/Rate
|
|
of
Interest
|
|
(Dollars
in thousands)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in other banks
|
$
|
1,500
|
|
0.78
|
%
|
|
$
|
12
|
|
$
|
3,358
|
|
5.08
|
%
|
|
$
|
170
|
|
$
|
11,919
|
|
4.62
|
%
|
|
$
|
550
|
Federal
funds sold
|
|
4,532
|
|
1.83
|
|
|
|
83
|
|
|
6,065
|
|
5.04
|
|
|
|
306
|
|
|
2,880
|
|
4.95
|
|
|
|
143
|
Taxable
investment securities (1)
|
|
692,610
|
|
5.03
|
|
|
|
34,837
|
|
|
733,105
|
|
4.77
|
|
|
|
34,968
|
|
|
799,583
|
|
4.42
|
|
|
|
35,313
|
Tax-exempt
investment securities (1)
|
|
143,988
|
|
5.74
|
|
|
|
8,266
|
|
|
153,459
|
|
5.43
|
|
|
|
8,338
|
|
|
136,809
|
|
5.71
|
|
|
|
7,815
|
Loans
(2)
|
|
4,209,045
|
|
6.25
|
|
|
|
263,183
|
|
|
4,021,094
|
|
7.68
|
|
|
|
308,720
|
|
|
3,689,979
|
|
7.57
|
|
|
|
279,246
|
Federal
Home Loan Bank stock
|
|
48,797
|
|
0.95
|
|
|
|
464
|
|
|
48,797
|
|
0.60
|
|
|
|
293
|
|
|
48,797
|
|
0.10
|
|
|
|
49
|
Total
interest earning assets
|
|
5,100,472
|
|
6.02
|
|
|
|
306,845
|
|
|
4,965,878
|
|
7.10
|
|
|
|
352,795
|
|
|
4,689,967
|
|
6.89
|
|
|
|
323,116
|
Nonearning
assets
|
|
552,937
|
|
|
|
|
|
|
|
|
597,106
|
|
|
|
|
|
|
|
|
581,677
|
|
|
|
|
|
|
Total
assets
|
$
|
5,653,409
|
|
|
|
|
|
|
|
$
|
5,562,984
|
|
|
|
|
|
|
|
$
|
5,271,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
$
|
463,776
|
|
0.19
|
%
|
|
$
|
860
|
|
$
|
440,537
|
|
0.13
|
%
|
|
$
|
556
|
|
$
|
426,828
|
|
0.13
|
%
|
|
$
|
566
|
Savings
and money market deposits
|
|
1,094,690
|
|
1.14
|
|
|
|
12,528
|
|
|
1,206,392
|
|
1.99
|
|
|
|
23,950
|
|
|
1,153,651
|
|
1.53
|
|
|
|
17,684
|
Time
deposits under $100,000
|
|
639,794
|
|
2.91
|
|
|
|
18,618
|
|
|
612,793
|
|
3.83
|
|
|
|
23,450
|
|
|
590,335
|
|
3.08
|
|
|
|
18,156
|
Time
deposits $100,000 and over
|
|
1,023,852
|
|
2.96
|
|
|
|
30,299
|
|
|
1,018,123
|
|
4.52
|
|
|
|
46,017
|
|
|
876,513
|
|
4.02
|
|
|
|
35,263
|
Short-term
borrowings
|
|
292,466
|
|
2.24
|
|
|
|
6,563
|
|
|
30,640
|
|
5.28
|
|
|
|
1,616
|
|
|
41,401
|
|
5.31
|
|
|
|
2,197
|
Long-term
debt
|
|
865,717
|
|
3.83
|
|
|
|
33,129
|
|
|
816,591
|
|
5.19
|
|
|
|
42,390
|
|
|
755,378
|
|
4.72
|
|
|
|
35,666
|
Total
interest-bearing liabilities
|
|
4,380,295
|
|
2.33
|
|
|
|
101,997
|
|
|
4,125,076
|
|
3.34
|
|
|
|
137,979
|
|
|
3,844,106
|
|
2.85
|
|
|
|
109,532
|
Noninterest-bearing
deposits
|
|
592,697
|
|
|
|
|
|
|
|
|
594,361
|
|
|
|
|
|
|
|
|
628,736
|
|
|
|
|
|
|
Other
liabilities
|
|
80,556
|
|
|
|
|
|
|
|
|
88,369
|
|
|
|
|
|
|
|
|
89,558
|
|
|
|
|
|
|
Shareholders'
equity
|
|
599,861
|
|
|
|
|
|
|
|
|
755,178
|
|
|
|
|
|
|
|
|
709,244
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
$
|
5,653,409
|
|
|
|
|
|
|
|
$
|
5,562,984
|
|
|
|
|
|
|
|
$
|
5,271,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
$
|
204,848
|
|
|
|
|
|
|
|
$
|
214,816
|
|
|
|
|
|
|
|
$
|
213,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
|
4.02
|
%
|
|
|
|
|
|
|
|
4.33
|
%
|
|
|
|
|
|
|
|
4.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) At
amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Includes
nonaccrual loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 2.
Analysis
of Changes in Net Interest Income (Taxable Equivalent)
|
2008
Compared to 2007
|
|
|
2007
Compared to 2006
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
Due
to Change In:
|
|
|
|
|
|
Due
to Change In:
|
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
Change
|
|
|
(Dollars
in thousands)
|
|
Interest
earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits in other banks
|
$
|
(94
|
)
|
|
$
|
(64
|
)
|
|
$
|
(158
|
)
|
|
$
|
(396
|
)
|
|
$
|
16
|
|
|
$
|
(380
|
)
|
Federal
funds sold
|
|
(77
|
)
|
|
|
(146
|
)
|
|
|
(223
|
)
|
|
|
158
|
|
|
|
5
|
|
|
|
163
|
|
Taxable
investment securities
|
|
(1,932
|
)
|
|
|
1,801
|
|
|
|
(131
|
)
|
|
|
(2,938
|
)
|
|
|
2,593
|
|
|
|
(345
|
)
|
Tax-exempt
investment securities
|
|
(514
|
)
|
|
|
442
|
|
|
|
(72
|
)
|
|
|
951
|
|
|
|
(428
|
)
|
|
|
523
|
|
Loans
|
|
14,435
|
|
|
|
(59,972
|
)
|
|
|
(45,537
|
)
|
|
|
25,065
|
|
|
|
4,409
|
|
|
|
29,474
|
|
Federal
Home Loan Bank stock
|
|
-
|
|
|
|
171
|
|
|
|
171
|
|
|
|
-
|
|
|
|
244
|
|
|
|
244
|
|
Total
interest earning assets
|
|
11,818
|
|
|
|
(57,768
|
)
|
|
|
(45,950
|
)
|
|
|
22,840
|
|
|
|
6,839
|
|
|
|
29,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
30
|
|
|
|
274
|
|
|
|
304
|
|
|
|
18
|
|
|
|
(28
|
)
|
|
|
(10
|
)
|
Savings
and money market deposits
|
|
(2,223
|
)
|
|
|
(9,199
|
)
|
|
|
(11,422
|
)
|
|
|
807
|
|
|
|
5,459
|
|
|
|
6,266
|
|
Time
deposits under $100,000
|
|
1,034
|
|
|
|
(5,866
|
)
|
|
|
(4,832
|
)
|
|
|
692
|
|
|
|
4,602
|
|
|
|
5,294
|
|
Time
deposits $100,000 and over
|
|
259
|
|
|
|
(15,977
|
)
|
|
|
(15,718
|
)
|
|
|
5,693
|
|
|
|
5,061
|
|
|
|
10,754
|
|
Short-term
borrowings
|
|
13,824
|
|
|
|
(8,877
|
)
|
|
|
4,947
|
|
|
|
(571
|
)
|
|
|
(10
|
)
|
|
|
(581
|
)
|
Long-term
debt
|
|
2,550
|
|
|
|
(11,811
|
)
|
|
|
(9,261
|
)
|
|
|
2,889
|
|
|
|
3,835
|
|
|
|
6,724
|
|
Total
interest-bearing liabilities
|
|
15,474
|
|
|
|
(51,456
|
)
|
|
|
(35,982
|
)
|
|
|
9,528
|
|
|
|
18,919
|
|
|
|
28,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
$
|
(3,656
|
)
|
|
$
|
(6,312
|
)
|
|
$
|
(9,968
|
)
|
|
$
|
13,312
|
|
|
$
|
(12,080
|
)
|
|
$
|
1,232
|
|
Net
interest income is our primary source of earnings and is derived primarily from
the difference between the interest we earn on loans and investments versus the
interest we pay on deposits and borrowings. Net interest income expressed on a
taxable-equivalent basis, totaled $204.8 million in 2008, decreasing by $10.0
million, or 4.6%, from $214.8 million in 2007, which increased by $1.2 million,
or 0.6%, over net interest income of $213.6 million recognized in 2006. The
decrease in net interest income for 2008 was reflective of the declining
interest rate environment in 2008 as the 108 bp decrease in average yields
earned on our interest earning assets outpaced the 101 bp decrease in average
rates paid on our interest-bearing liabilities.
Interest
Income
Our
primary sources of interest income include interest on loans and leases, which
represented 85.8%, 87.5%, and 86.4% of interest income in 2008, 2007 and
2006, respectively, as well as interest earned on investment securities, which
represented 14.0%, 12.3% and 13.3% of interest income in 2008, 2007 and 2006,
respectively. Interest income expressed on a taxable-equivalent basis of $306.8
million in 2008 decreased by $46.0 million, or 13.0%, from the $352.8 million
earned in 2007, which increased by $29.7 million, or 9.2%, from the $323.1
million earned in 2006.
As
depicted in Table 2, the decrease in interest income in 2008 is largely due to
the decrease in average yields on our loan balances, which declined by 143 bp
from the prior year. The decline in interest income due to rate changes is
reflective of the declining interest rate environment that existed throughout
most of 2008.
The
decrease in interest income in 2008 was also negatively impacted by the reversal
of approximately $4.0 million in interest related to certain nonaccrual
loans.
As
depicted in Table 2, the increase in interest income in 2007 is due primarily to
the increase in average loan and lease balances. Average interest earning assets
of $5.0 billion in 2007 increased by $275.9 million, or 5.9%, over 2006 due
largely to an increase of $331.1 million, or 9.0%, in average loans and leases
as loan demand remained relatively strong through most of 2007. The average
yield on interest earning assets of 7.10% in 2007 increased by 21 bp over the
2006 average yield of 6.89%, with loan and lease yields increasing by only 11 bp
as variable rate loans began to reprice downward in mid-2007.
Comparing
2007 results to those of 2006, the increase in interest income can be attributed
to the $331.1 million, or 9.0%, increase in average loans and leases and, to a
lesser extent, the increase in average yields on interest earning assets which
increased by 21 bp to 7.10% in 2007. Loan and lease growth in 2007 was
reflective of strong demand that persisted through most of
2007.
Interest
Expense
Interest
expense, expressed on a taxable-equivalent basis, of $102.0 million in 2008
decreased by $36.0 million, or 26.1%, compared to $138.0 million in 2007, which
increased by $28.4 million, or 26.0%, compared to $109.5 million in
2006.
Declines
in average rates paid on interest-bearing liabilities reflect the decreasing
interest rate environment experienced in 2008 and contributed to the overall
reduction in interest expense during 2008. The average rate paid on
interest-bearing liabilities decreased by 101 bp to 2.33% for 2008, compared to
3.34% in 2007. Decreases in average rates paid on time deposits $100,000 and
over of 156 basis points, long-term debt of 136 basis points, savings and money
market deposits of 85 basis points and short-term borrowings of 304 basis points
were primary drivers to the overall decrease in interest expense. Partially
offsetting the effects of the decrease in average rates was the increase in
total interest-bearing liabilities, which increased by $255.2 million, or 6.2%,
over the prior year as we sought to capitalize on attractive short-term
borrowing rates that were available in 2008.
In 2007,
average interest-bearing liabilities increased by $281.0 million, or 7.3%, to
$4.1 billion, including increases of $230.5 million in average interest-bearing
deposits and $61.2 million in average long-term debt, while average short-term
borrowings decrease by $10.8 million. The average rate on interest-bearing
liabilities increased by 49 bp due primarily to a 52 bp increase in rates paid
on interest-bearing deposits. Competitive pricing in the Hawaii market, coupled
with the migration in customer accounts from demand and savings and money market
accounts to time deposits, resulted in higher funding costs in
2007.
Net Interest
Margin
Our net
interest margin was 4.02%, 4.33% and 4.55% in 2008, 2007 and 2006, respectively.
The decline in our net interest margin in both 2008 and 2007 can be attributed
to the differences in timing of rate movements in our interest earning assets
and interest-bearing liabilities. In 2008, downward repricing of our variable
rate loan portfolio outpaced deposit repricings. In 2007, increases in average
yields on our interest earning assets fell short of increases in average rates
on our interest-bearing liabilities.
Our net
interest margin for 2008 was also negatively impacted by the aforementioned
reversal of interest related to certain nonaccrual loans.
Based on
our expectation of slightly declining loan levels and interest rate
movements in 2009, we anticipate moderate declines in both asset yields and
deposit rates. Accordingly, we anticipate that our net interest margin will
remain at current levels or decrease slightly during the coming year. Our
ability to generate continued growth in loans, which typically bring higher
yields than other interest earning assets, our ability to fund that asset growth
with relatively low-cost core deposits and competitive pricing factors will
directly impact our anticipated future net interest margins and net interest
income.
Other
Operating Income
Table 3
sets forth components of other operating income and the total as a percentage of
average assets for the periods indicated.
Table 3.
Components
of Other Operating Income
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
$
|
14,738
|
|
|
$
|
14,167
|
|
|
$
|
14,408
|
|
Other
service charges and fees
|
|
14,062
|
|
|
|
13,178
|
|
|
|
12,188
|
|
Income
from bank-owned life insurance
|
|
4,876
|
|
|
|
5,821
|
|
|
|
3,989
|
|
Net
gain on sales of residential loans
|
|
7,717
|
|
|
|
5,389
|
|
|
|
4,863
|
|
Income
from fiduciary activities
|
|
3,921
|
|
|
|
3,566
|
|
|
|
2,915
|
|
Loan
placement fees
|
|
814
|
|
|
|
1,079
|
|
|
|
1,767
|
|
Fees
on foreign exchange
|
|
665
|
|
|
|
721
|
|
|
|
765
|
|
Equity
in earnings of unconsolidated subsidiaries
|
|
561
|
|
|
|
703
|
|
|
|
576
|
|
Investment
securities gains (losses)
|
|
265
|
|
|
|
(1,715
|
)
|
|
|
(1,510
|
)
|
Other
|
|
7,189
|
|
|
|
2,895
|
|
|
|
3,195
|
|
Total
other operating income
|
$
|
54,808
|
|
|
$
|
45,804
|
|
|
$
|
43,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other operating income as a percentage of average assets
|
|
0.97
|
%
|
|
|
0.82
|
%
|
|
|
0.82
|
%
|
Total
other operating income of $54.8 million in 2008 increased by $9.0 million, or
19.7%, over the $45.8 million earned in 2007, which increased by $2.6 million,
or 6.1%, over the $43.2 million earned in 2006.
Other
income increased by $4.3 million, or 148.3%, in 2008, primarily due to higher
unrealized gains on outstanding interest rate locks on residential mortgage
loans totaling $2.2 million and a gain related to the ineffective portion of a
cash flow hedge totaling $2.0 million. Net gains on sales of residential loans
increased by $2.3 million, or 43.2%, from the prior year as our Central Pacific
HomeLoans subsidiary continued to experience growth in both loan originations
and refinancing activity in 2008. Investment securities gains (losses) increased
by $2.0 million over the prior year primarily due to a $1.7 million loss
recognized in 2007 on the repositioning of our investment portfolio as we sought
to reduce net interest income volatility.
In 2007,
income from bank-owned life insurance increased by $1.8 million, or 45.9%, due
to an additional $25.0 million purchase of life insurance policies and certain
death benefits received during the period. Other service charges and fees
increased by $1.0 million, or 8.1%, over prior year amounts primarily due to
increases in investment service fees of 21.6% and charge card fees of 10.0% from
2006. Income from our trust services has shown continued growth in the past few
years as income from fiduciary activities increased by $0.7 million, or 22.3%,
from the prior year. These increases were partially offset by a decrease in loan
placement fees of $0.7 million, or 38.9%.
Other
Operating Expense
Table 4
sets forth components of other operating expense and the total as a percentage
of average assets for the periods indicated.
Table 4.
Components
of Other Operating Expense
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
$
|
67,019
|
|
|
$
|
62,562
|
|
|
$
|
73,211
|
|
Net
occupancy
|
|
12,764
|
|
|
|
10,408
|
|
|
|
9,218
|
|
Legal
and professional services
|
|
12,138
|
|
|
|
9,137
|
|
|
|
8,575
|
|
Equipment
|
|
5,722
|
|
|
|
5,228
|
|
|
|
4,864
|
|
Communication
expense
|
|
4,484
|
|
|
|
4,266
|
|
|
|
4,642
|
|
Computer
software expense
|
|
3,446
|
|
|
|
3,360
|
|
|
|
2,818
|
|
Amortization
and impairment of other intangible assets
|
|
8,412
|
|
|
|
4,992
|
|
|
|
6,120
|
|
Advertising
expense
|
|
3,358
|
|
|
|
2,582
|
|
|
|
2,569
|
|
Foreclosed
asset expense
|
|
7,360
|
|
|
|
-
|
|
|
|
-
|
|
Loss
on sale of commercial real estate loans
|
|
1,874
|
|
|
|
-
|
|
|
|
-
|
|
Write
down of assets
|
|
23,796
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
28,170
|
|
|
|
26,021
|
|
|
|
20,146
|
|
Total
other operating expense (excluding goodwill impairment)
|
|
178,543
|
|
|
|
128,556
|
|
|
|
132,163
|
|
Goodwill
impairment
|
|
94,279
|
|
|
|
48,000
|
|
|
|
-
|
|
Total
other operating expense
|
$
|
272,822
|
|
|
$
|
176,556
|
|
|
$
|
132,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other operating expense as a percentage of average assets
|
|
4.83
|
%
|
|
|
3.17
|
%
|
|
|
2.51
|
%
|
Total
other operating expense of $272.8 million in 2008 increased by $96.2 million, or
54.5%, from total operating expense of $176.6 million in 2007, which
increased by $44.4 million, or 33.6%, compared to 2006. Excluding the $94.3
million goodwill impairment charge in 2008, total other operating expense as a
percentage of average assets was 3.16% in 2008.
Included
in other operating expenses for 2008 were $23.8 million of asset write downs and
$7.4 million of foreclosed asset expense as the decline in the California real
estate market continued to have an adverse effect on our asset quality. Other
operating expenses in 2008 also included a $3.4 million non-cash mortgage
servicing rights impairment charge as delinquency rate assumptions increased and
prepayment speed assumptions accelerated driven by the surge in refinance
activity as the Fed’s attempted to drive down mortgage rates during the latter
part of 2008. The increase in salaries and employee benefits in 2008 was
primarily attributable to $2.4 million of executive retirement expenses incurred
during the year as well as an increase of $1.1 million in incentive
compensation. In 2008, we also recognized a loss of $2.8 million resulting from
a counterparty repurchase transaction with LBI.
In 2008,
we experienced a six-fold increase in FDIC insurance expenses from prior year
levels. For 2009, we expect FDIC premiums, which are recorded in other operating
expenses, to more than double the $3.3 million in insurance expense incurred in
2008. The FDIC has raised insurance premiums to cover substantial losses
incurred by its Bank Insurance Fund due to the rise in bank failures in 2008 and
anticipated bank failures in future periods. FDIC insurance expenses are
projected to remain high for several years.
Excluding
the effects of the goodwill impairment charge recognized in 2007, other
operating expenses in 2007 decreased from the prior year primarily due to the
reduction of salaries and employee benefits of $10.6 million, or 14.5%, from the
prior year. The decrease in salaries and employee benefits is attributed to a
reduction in certain bonus and incentive compensation accruals, as well as the
recognition of $2.2 million in executive retirement expenses in 2006. The
decrease in salaries and employee benefits was partially offset by an increase
in other expenses of $5.9 million, or 29.2%, as we increased our reserve for
unfunded commitments by approximately $4.0 million in 2007 to cover credit risks
primarily associated with our California residential construction loan
portfolio.
A key
measure of operating efficiency tracked by management is the efficiency ratio.
Our efficiency ratio was 53.93% in 2008, compared to 47.80% in 2007 and 49.67%
in 2006. The increase in our efficiency ratio was primarily driven by the
aforementioned decrease in net interest income combined with the increase in
non-interest expense as described above.
Table 5
sets forth a reconciliation of total operating expenses as a percentage of net
operating revenue to our efficiency ratio for each of the dates
indicated:
Table 5.
Reconciliation to
Efficiency Ratio
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses as a percentage of net operating
revenue
|
|
105.18
|
%
|
|
|
67.30
|
%
|
|
|
51.18
|
%
|
Goodwill
impairment
|
|
(36.35
|
)
|
|
|
(18.30
|
)
|
|
|
-
|
|
Amortization
and impairment of other intangible assets
|
|
(1.07
|
)
|
|
|
(1.20
|
)
|
|
|
(1.51
|
)
|
Foreclosed
asset expense
|
|
(2.84
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss
on commercial real estate loans
|
|
(0.72
|
)
|
|
|
-
|
|
|
|
-
|
|
Write
down of assets
|
|
(9.17
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss
on counterparty financing transaction
|
|
(1.10
|
)
|
|
|
-
|
|
|
|
-
|
|
Efficiency
ratio
|
|
53.93
|
%
|
|
|
47.80
|
%
|
|
|
49.67
|
%
|
Income
Taxes
Income
tax benefit totaled $49.3 million in 2008, compared to income tax expense of
$22.3 million in 2007 and $41.3 million in 2006. The effective tax rate was
26.3% in 2008, 79.4% in 2007, and 34.3% in 2006. The decrease in the 2008
effective tax rate was directly attributable to the pre-tax operating loss and
the goodwill impairment charge recognized in 2008 as none of the charge was
deductible for income tax purposes and was partially offset by an increase in
tax credits recognized in 2008. Income tax expense in 2007 includes the effects
of the settlement of a tax contingency item resulting in additional income tax
expense of $2.4 million and the recording of certain income tax true-up
adjustments resulting in an income tax benefit of $2.0 million, while income tax
expense in 2006 includes a $1.2 million adjustment to our income tax liability
relating to our accounting for the net income tax benefits from tax credits
earned. We recorded net reductions in taxes of approximately $7.3 million,
$2.8 million, and $3.6 million in 2008, 2007 and 2006, respectively,
attributable to high-technology and energy tax credits. The state’s
high-technology tax credit program offers tax credits for investments in
high-technology companies at diminishing levels over a 5-year period. During the
fourth quarter of 2008, we also recognized federal and state tax credits related
to solar leases with an after-tax benefit of $4.0 million.
Financial
Condition
Total
assets of $5.4 billion at December 31, 2008 decreased by $248.0
million, or 4.4%, from the $5.7 billion at year-end 2007. Investment
securities totaled $751.3 million, a decrease of $130.0 million, or 14.7%, and
loans and leases totaled $4.0 billion, a decrease of $111.4 million, or 2.7%,
from year-end 2007. Total deposits of $3.9 billion at December 31, 2008,
decreased by $91.2 million, or 2.3%, from the prior year while shareholders’
equity of $526.3 million decreased by $148.1 million, or 22.0%, from the prior
year.
Loan
Portfolio
We focus
our lending activities on commercial, commercial mortgage and construction loans
to small and middle-market companies, business professionals and real estate
developers. Our strategy for generating new loans relies upon teams of
commercial real estate and commercial banking officers organized by geographical
and industry lines who are responsible for client prospecting and business
development.
To manage
credit risk (i.e., the inability of borrowers to repay their loan obligations),
management analyzes the borrower’s financial condition, repayment source,
collateral and other factors that could impact credit quality, such as national
and local economic conditions and industry conditions related to respective
borrowers.
Loans and
leases totaled $4.0 billion at December 31, 2008, decreasing by
$111.4 million, or 2.7%, from the $4.1 billion at year-end 2007, which
increased by $295.7 million, or 7.7%, over the $3.8 billion held at
year-end 2006. The decrease in our loan portfolio in 2008 was representative of
our concerted effort to reduce our exposure to the slumping real estate market
in California. In 2008, our construction loan portfolio contracted by $97.2
million, or 8.0%, from the prior year and included the sale of certain
non-performing assets with exposure to the California residential construction
market. In an effort to reduce our exposure to the troubled California
residential construction sector, we completed a bulk sale of loans with exposure
to this sector in July 2008 for total proceeds of $44.2 million. Our consumer
and commercial mortgage portfolios also contracted by $29.0 million, or 13.9%,
and $25.7 million, or 2.1%, respectively, from prior year levels. Partially
offsetting these decreases was the $36.0 million, or 3.5%, growth in residential
mortgages as our subsidiary, Central Pacific HomeLoans, continued to gain market
share in the residential mortgage market in Hawaii.
While our
loan portfolio has contracted over the past year, we note that our participation
in the TARP’s CPP provides us with additional resources for our lending
activities to support our commercial and retail customers in
Hawaii.
Table 6
sets forth information regarding outstanding loans by category as of the dates
indicated.
Table 6.
Loans by
Categories
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
384,423
|
|
|
$
|
384,983
|
|
|
$
|
404,259
|
|
|
$
|
579,070
|
|
|
$
|
554,021
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
1,124,976
|
|
|
|
1,222,214
|
|
|
|
1,139,585
|
|
|
|
677,383
|
|
|
|
361,340
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
residential
|
|
1,070,429
|
|
|
|
1,034,474
|
|
|
|
897,216
|
|
|
|
793,719
|
|
|
|
710,855
|
|
-
commercial
|
|
1,211,896
|
|
|
|
1,237,563
|
|
|
|
1,158,755
|
|
|
|
1,269,232
|
|
|
|
1,239,242
|
|
Consumer
|
|
180,131
|
|
|
|
209,168
|
|
|
|
195,448
|
|
|
|
187,951
|
|
|
|
198,573
|
|
Leases
|
|
58,411
|
|
|
|
53,303
|
|
|
|
50,741
|
|
|
|
45,394
|
|
|
|
35,799
|
|
Total
loans and leases
|
|
4,030,266
|
|
|
|
4,141,705
|
|
|
|
3,846,004
|
|
|
|
3,552,749
|
|
|
|
3,099,830
|
|
Allowance
for loan and lease losses
|
|
(119,878
|
)
|
|
|
(92,049
|
)
|
|
|
(52,280
|
)
|
|
|
(52,936
|
)
|
|
|
(50,703
|
)
|
Net
loans
|
$
|
3,910,388
|
|
|
$
|
4,049,656
|
|
|
$
|
3,793,724
|
|
|
$
|
3,499,813
|
|
|
$
|
3,049,127
|
|
Table 7
sets forth the geographic distribution of our loan portfolio and related
allowance for loan and lease losses as of December 31, 2008.
Table 7.
Geographic
Distribution
|
Hawaii
|
|
|
California
|
|
|
Washington
|
|
|
Total
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
367,817
|
|
|
$
|
13,869
|
|
|
$
|
2,737
|
|
|
$
|
384,423
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
659,143
|
|
|
|
383,096
|
|
|
|
82,737
|
|
|
|
1,124,976
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
residential
|
|
1,002,789
|
|
|
|
15,017
|
|
|
|
52,623
|
|
|
|
1,070,429
|
|
-
commercial
|
|
819,213
|
|
|
|
380,133
|
|
|
|
12,550
|
|
|
|
1,211,896
|
|
Consumer
|
|
180,131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180,131
|
|
Leases
|
|
58,411
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58,411
|
|
Total
loans and leases
|
|
3,087,504
|
|
|
|
792,115
|
|
|
|
150,647
|
|
|
|
4,030,266
|
|
Allowance
for loan and lease losses
|
|
(49,015
|
)
|
|
|
(58,186
|
)
|
|
|
(12,677
|
)
|
|
|
(119,878
|
)
|
Net
loans and leases
|
$
|
3,038,489
|
|
|
$
|
733,929
|
|
|
$
|
137,970
|
|
|
$
|
3,910,388
|
|
Commercial,
Financial and Agricultural
Loans
in this category consist primarily of term loans and lines of credit to small
and middle-market businesses and professionals located in the state of Hawaii.
The borrower’s business is typically regarded as the principal source of
repayment, although our underwriting policy and practice generally requires
additional sources of collateral, including real estate and other business
assets, as well as personal guarantees where possible to mitigate risk. Risks of
credit losses are greater in this loan category relative to secured loans, such
as commercial and residential mortgages, where a greater percentage of the loan
amount is usually covered by collateral. Nonetheless, any collateral or personal
guarantees obtained on commercial loans can mitigate the increased risk and help
to reduce credit losses.
Our
approach to commercial lending involves teams of lending and cash management
personnel who focus on marketing loans, deposits and other bank services to new
and existing commercial clients. Sustained long-term growth in this loan
category will be dependent upon local economic conditions, interest rate levels,
competitive market conditions and other external factors.
Real
Estate—Construction
Construction
loans offered include both residential and commercial development projects. Each
construction project is evaluated for economic viability and maximum
loan-to-value ratios of 80% on commercial projects and 85% on residential
projects are generally required. A construction loan poses higher credit risks
than typical secured loans. In addition to the financial strength of the
borrower, construction loans have the added element of completion risk, which is
the risk that the project will not be completed on time and within budget,
resulting in additional costs that could affect the economic viability of the
project. Careful consideration of the ability and reputation of the developer
and close monitoring of a project during the construction phase by construction
lending specialists is required to mitigate the higher level of risk in
construction lending.
The
increase in our construction loan portfolio from 2004 through 2007 is
representative of our historic focus on this segment and a real estate market
that had been strong with increased development activity in all of our markets
until recently. In the second half of 2007, some of our residential construction
loans in California began exhibited heightened levels of risk with some
borrowers abandoning their construction plans and defaulting on their loans due
to a range of factors including declining real estate values. As mentioned
previously, in an effort to reduce our exposure to this sector, we sold a
portion of our California residential construction loan portfolio. The
significant deterioration in this market persisted throughout 2008.
Construction
loans tend to be larger in amount and shorter in term than conventional
commercial or mortgage loans; thus a higher level of volatility in balances from
year to year is expected. We anticipate future decreases in our construction
loan portfolio as many projects are expected to be completed.
Real
Estate—Mortgage
Table
8 sets forth information with respect to the composition of the Real
Estate—Mortgage loan portfolio as of the dates indicated.
Table 8.
Mortgage
Loan Portfolio Composition
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
(Dollars
in thousands)
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4
units
|
$
|
896,631
|
|
39.0
|
%
|
|
$
|
841,095
|
|
37.0
|
%
|
|
$
|
703,172
|
|
34.2
|
%
|
|
$
|
638,720
|
|
31.0
|
%
|
|
$
|
590,851
|
|
30.3
|
%
|
5
or more units
|
|
173,798
|
|
8.0
|
|
|
|
193,379
|
|
8.5
|
|
|
|
194,044
|
|
9.4
|
|
|
|
154,999
|
|
7.5
|
|
|
|
120,004
|
|
6.2
|
|
Commercial,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
industrial
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
1,211,896
|
|
53.0
|
|
|
|
1,237,563
|
|
54.5
|
|
|
|
1,158,755
|
|
56.4
|
|
|
|
1,269,232
|
|
61.5
|
|
|
|
1,239,242
|
|
63.5
|
|
Total
|
$
|
2,282,325
|
|
100.0
|
%
|
|
$
|
2,272,037
|
|
100.0
|
%
|
|
$
|
2,055,971
|
|
100.0
|
%
|
|
$
|
2,062,951
|
|
100.0
|
%
|
|
$
|
1,950,097
|
|
100.0
|
%
|
Residential
Residential
mortgage loans include both fixed- and adjustable-rate loans primarily secured
by single-family owner-occupied residences. Maximum loan-to-value ratios of 80%
are typically required, although higher levels are permitted with accompanying
mortgage insurance. We emphasize residential mortgage loans for owner-occupied
primary residences and typically do not actively seek loans on high-end
residences, vacation homes and investment properties. First mortgage loans
secured by residential properties generally carry a moderate level of credit
risk. With an average loan size of approximately $0.3 million, readily
marketable collateral and a Hawaii residential real estate market that has
been relatively stable until recently, credit losses on residential mortgages
have been minimal during the past several years. However, future changes in
interest rates and other market factors can impact the marketability of
collateral and thus the level of credit risk inherent in the portfolio. As with
all loans, managing credit risk in the residential mortgage market entails
strong underwriting standards and diligent monitoring and handling of problems
as they arise.
Residential
mortgage loan balances as of December 31, 2008 totaled $1.1 billion,
increasing by $36.0 million, or 3.5%, over the $1.0 billion at year-end 2007,
which increased by $137.3 million, or 15.3%, over the $897.2 million held at
year-end 2006. Residential mortgage originations remained strong throughout most
of 2008 and an expected rise in refinancing activity, driven by the Fed’s
actions to lower mortgage rates, fueled additional residential mortgage activity
during the latter part of December 2008.
Substantially
all saleable fixed-rate mortgages are sold in the secondary market. Residential
mortgage loans held for sale at December 31, 2008 totaled $29.7 million, a
decrease of $2.5 million, or 7.8%, from the December 31, 2007 balance of
$32.2 million, which increased by $5.5 million, or 20.6%, over the
December 31, 2006 balance of $26.7 million. In 2008, we also securitized
certain residential mortgage loans with an outstanding principal balance of
$36.5 million with a U.S. Government sponsored entity.
The
projected cooling of the Hawaii residential real estate market in 2009 is
expected to have a moderating effect on origination activity, while increased
refinance activity is expected as mortgage rates remain near historical
lows.
Commercial
Real
estate mortgage loans secured by commercial properties continues to represent
the single largest component of our loan portfolio. Our policy with respect to
commercial mortgages is that loans be made for sound purposes, have a definite
source and/or plan of repayment established at inception, and be backed up by
reliable secondary sources of repayment and satisfactory collateral with good
marketability. Loans secured by commercial property carry a greater risk than
loans secured by residential property due to operating income risk. Operating
income risk is the risk that the borrower will be unable to generate sufficient
cash flow from the operation of the property. The commercial real estate market
and interest rate conditions through economic cycles will impact risk levels. To
mitigate the risks inherent in commercial mortgage lending, we strive to use
dedicated, experienced commercial mortgage lenders to underwrite, monitor and
service commercial mortgage loans. Nevertheless, commercial mortgage lending
generated by our California offices exposes us to certain additional risks
including the risk of continued economic downturn in the California
market.
The
commercial real estate market has not experienced quite the level of slowdown as
evidenced in the U.S. residential real estate market; however, there can be no
assurances that a significant slowdown will not occur in this sector. We expect
loan demand to decline in 2009 as a result of changes in market
conditions.
Consumer
Loans
Table 9
sets forth the major components of our consumer loan portfolio as of the dates
indicated.
Table 9.
Consumer
Loan Portfolio Composition
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
$
|
129,092
|
|
71.7
|
%
|
|
$
|
158,390
|
|
75.7
|
%
|
|
$
|
148,485
|
|
76.0
|
%
|
|
$
|
141,132
|
|
75.0
|
%
|
|
$
|
146,101
|
|
73.6
|
%
|
Credit
cards and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revolving
credit plans
|
|
36,445
|
|
20
.2
|
|
|
|
29,259
|
|
14.0
|
|
|
|
29,932
|
|
15.3
|
|
|
|
31,308
|
|
16.7
|
|
|
|
35,245
|
|
17.7
|
|
Other
|
|
14,594
|
|
8.
1
|
|
|
|
21,519
|
|
10.3
|
|
|
|
17,031
|
|
8.7
|
|
|
|
15,511
|
|
8.3
|
|
|
|
17,227
|
|
8.7
|
|
Total
|
$
|
180,131
|
|
100.0
|
%
|
|
$
|
209,168
|
|
100.0
|
%
|
|
$
|
195,448
|
|
100.0
|
%
|
|
$
|
187,951
|
|
100.0
|
%
|
|
$
|
198,573
|
|
100.0
|
%
|
For
consumer loans, credit risk is managed on a pooled basis. Considerations include
an evaluation of the quality, character and inherent risks in the loan
portfolio, current and projected economic conditions and past loan loss
experience. Consumer loans represent a moderate credit risk. Loans in this
category are generally either unsecured or secured by personal assets such as
automobiles. We do not have any credit card loans. The average loan size is
generally small and risk is diversified among many borrowers. Our policy is to
utilize credit-scoring systems for most of our consumer loans, which offer the
ability to modify credit exposure based on our risk tolerance and
loss experience.
Consumer
loans totaled $180.1 million at December 31, 2008, decreasing by $29.0
million, or 13.9%, from 2007’s year-end balance of $209.2 million, which
increased by $13.7 million, or 7.0%, compared to the $195.4 million held at
year-end 2006. Automobile loans, primarily indirect dealer loans, comprised
71.7% of consumer loans outstanding. Total automobile loans of $129.1 million at
year-end 2008 decreased by $29.3 million, or 18.5%, from 2007’s year-end balance
of $158.4 million, which increased by $9.9 million, or 6.7%, over the $148.5
million at year-end 2006. The decrease in automobile loans is reflective of the
current decline in automobile purchases experienced in Hawaii, which mirrors
that experienced throughout the nation.
We have
not focused significant resources on consumer lending in recent years as several
large competitors have dominated the Hawaii market. With the exception of
indirect dealer loans, consumer loans are generally offered as an accommodation
to existing customers. We expect consumer lending to remain a relatively small
segment of our lending business.
Interest
Reserves
Our
policies require interest reserves for certain loan types
including:
·
|
Construction
loans, including loans to build commercial buildings, residential
developments (both large tract projects and individual houses), and
multi-family projects; and
|
·
|
Land
development loans, including loans to fund the acquisition of both raw
land and entitled land being acquired for infrastructure and/or capital
improvements.
|
The
outstanding principal balance of loans with interest reserves was $629.8 million
at December 31, 2008, compared to $898.6 million in the prior year while
remaining interest reserves was $21.2 million at December 31, 2008 compared to
$57.1 million at December 31, 2007. The decrease in principal loan balances with
interest reserve and related remaining interest reserves from the prior year
were primarily attributable to paydowns resulting from project
completions.
Interest
reserves allow the Company to advance funds to borrowers to make scheduled
payments during the construction period. These advances typically are
capitalized and added to the borrower’s outstanding loan balance, although we
have the right to demand payment under certain circumstances. Our policy is to
determine if interest reserve amounts are appropriately included in
each project’s construction budget and are adequate to cover the expected
duration of the construction period.
The
amount, terms, and conditions of the interest reserve are established when a
loan is originated, although we have the option to demand payment if the credit
profile of the borrower changes. We evaluate the viability and appropriateness
of the construction project based on the project’s complexity and feasibility,
the timeline, as well as the creditworthiness of the borrowers, sponsors and/or
guarantors, and the value of the collateral.
In the
event that unfavorable circumstances alter the original project dynamics (e.g.,
cost overruns, project delays, etc.), our policy is to evaluate whether or not
it is appropriate to maintain interest capitalization or demand payment of
interest in cash and will work with the borrower to explore various
restructuring options, which may include obtaining additional equity and/or
requiring additional collateral. We may also require borrowers to directly pay
scheduled interest payments.
Our
process for determining that construction and land development projects are
moving as planned are detailed in our lending policies and guidelines. Prior to
approving a loan, the Company and the borrower generally agree on a construction
budget, a pro forma monthly disbursement schedule, and sales/leaseback
assumptions. As each project progresses, the projections are measured against
actual disbursements and sales/lease results to determine if the project is on
track and performing as planned.
The
specific monitoring requirements for each loan vary depending on the size and
complexity of the project and the experience and financial strength of the
borrower, sponsor and/or guarantor. At a minimum, to ensure that loan proceeds
are properly disbursed and to assess whether it is appropriate to capitalize
interest or demand cash payment of interest, our monitoring process generally
includes:
·
|
Physical
inspection of the project to ensure work has progressed to the stage for
which payment is being requested;
and
|
·
|
Verification
that the work completed is in conformance with plans and specifications
and items for which disbursement is requested are within
budget.
|
In
certain circumstances, we may decide to extend, renew, and/or restructure the
terms of a construction or development loan. Reasons for the restructure can
range from cost overruns to project delays and the restructuring can result in
additional funds being advanced or an extension of the maturity date of the
loan. Prior to the loan being restructured, our policy is to perform a detailed
analysis to ensure that the economics of the project remain feasible and that
the risks to the Company are within acceptable lending guidelines.
Concentrations
of Credit Risk
As of
December 31, 2008, approximately 85% of loans outstanding were real estate
related loans, including construction loans, residential mortgage loans and
commercial mortgage loans. The real estate market tends to closely follow
broader economic trends and during periods of economic strength, the real estate
market and the real estate industry typically perform well. During periods of
economic weakness, this market often slows down. In 2008, the credit crisis in
the financial markets and other economic conditions had a significant and
immediate impact on the real estate industry. Accordingly, as we have
experienced beginning in the second half of 2007, the concentration of
lending in the real estate industry led to adverse portfolio performance, namely
delinquencies and loan charge-offs. Our loan portfolio will continue to be
adversely affected should the real estate market continue to
decline.
Most of
our loans are made to companies and individuals with headquarters in or residing
in the states of Hawaii, California and Washington. Consistent with our
focus of being a Hawaii-based bank, 76% of our loan portfolio was concentrated
in the Hawaii market, while 20% was concentrated in California and the remaining
4% in Washington. As a result of the deteriorated market conditions in the
California real estate market, we anticipate that all new loan originations will
come from the Hawaii market in 2009.
To manage
risks associated with industry and geographic concentrations, our policy is to
continuously monitor our portfolio to avoid any undue concentrations.
Additionally, we employ loan officers with established client relationships,
similar lending philosophies and demonstrated expertise in their respective
markets. Our foreign credit exposure as of December 31, 2008 did not exceed
1% of total assets.
Maturities
and Sensitivities of Loans to Changes in Interest Rates
Table 10
sets forth the maturity distribution of the loan portfolio at December 31,
2008. Table 11 sets forth the sensitivity of amounts due after one year to
changes in interest rates. Both tables exclude real estate loans (other than
construction loans) and consumer loans.
Table 10.
Maturity
Distribution of Commercial and Construction Loans
|
Maturing
|
|
|
|
|
One
year
|
|
|
Over
one through
|
|
|
Over
five
|
|
|
|
|
or
less
|
|
|
five
years
|
|
|
years
|
|
|
Total
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
151,074
|
|
|
$
|
144,832
|
|
|
$
|
88,517
|
|
|
$
|
384,423
|
Real
estate - construction
|
|
878,972
|
|
|
|
231,435
|
|
|
|
14,569
|
|
|
|
1,124,976
|
Total
|
$
|
1,030,046
|
|
|
$
|
376,267
|
|
|
$
|
103,086
|
|
|
$
|
1,509,399
|
At
year-end 2008, 68.2% of our commercial and construction loans had maturities of
one year or less, increasing from the prior year’s proportion of 64.9%.
Meanwhile, loans in the one-through-five-years category decreased from 28.0% at
year-end 2007 to 24.9% at year-end 2008, and loans in the
greater-than-five-years category decreased from 7.1% to 6.8%. The change in
maturities reflects our concentration in construction lending, which generally
entails shorter terms than traditional commercial loans.
Table 11.
Maturity
Distribution of Fixed and Variable Rate Loans
|
Maturing
|
|
|
|
|
Over
one through
|
|
|
Over
five
|
|
|
|
|
five
years
|
|
|
years
|
|
|
Total
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
With
fixed interest rates
|
$
|
69,137
|
|
|
$
|
16,007
|
|
|
$
|
85,144
|
With
variable interest rates
|
|
307,130
|
|
|
|
87,078
|
|
|
|
394,208
|
Total
|
$
|
376,267
|
|
|
$
|
103,085
|
|
|
$
|
479,352
|
Of the
loans with maturities in excess of one year at year-end 2008, 17.8% had fixed
interest rates, while 82.2% had variable rates, which compares to 12.7% and
87.3%, respectively, at year-end 2007. The change in mix of fixed and variable
rate loans in 2008 is reflective of current maturities in our construction loan
portfolio.
In
January 2008, we entered into a derivative transaction to hedge cashflows
received from a portion of our then existing variable rate loan portfolio for a
period of five years. During this time, we will receive payments equal to a
fixed interest rate of 6.25% from the counterparty on a notional amount of $400
million and, in return, we will pay to the counterparty a floating rate, namely
our prime rate, on the same notional amount.
Provision
and Allowance for Loan and Lease Losses
As
described above in “Critical Accounting Policies and Use of Estimates,” the
Provision is determined by management’s ongoing evaluation of the loan portfolio
and our assessment of the ability of the Allowance to cover inherent losses. Our
methodology for determining the adequacy of the Allowance and the Provision
takes into account many factors, including the level and trend of nonperforming
and potential problem loans, net charge-off experience, current repayment by
borrowers, fair value of collateral securing specific loans, changes in lending
and underwriting standards and general economic factors, nationally and in the
markets we serve.
The
Allowance consists of two components: allocated and unallocated. To calculate
the allocated component, we combine specific reserves required for individual
loans (including impaired loans), reserves required for pooled graded loans and
loan concentrations, and reserves required for homogeneous loans (e.g., consumer
loans and residential mortgage loans). We use a loan grading system whereby
loans are segregated by risk. Certain graded commercial and commercial real
estate loans are analyzed on an individual basis. Other graded loans are
analyzed on an aggregate basis based on loss experience for the specific
loan type; risks inherent in concentrations by geographic location, collateral
or property type; and recent changes in loan grade and delinquencies. The
determination of an allocated Allowance for homogeneous loans is done on an
aggregate level based upon various factors including historical loss experience,
delinquency trends and economic conditions. The unallocated component of the
Allowance incorporates our judgment of the determination of the risks inherent
in the loan portfolio, economic uncertainties and imprecision in the estimation
process.
Table 12
sets forth certain information with respect to the Allowance as of the dates or
for the periods indicated.
Table 12.
Allowance for Loan
and Lease Losses
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
amount of loans outstanding
|
$
|
4,209,045
|
|
|
$
|
4,021,094
|
|
|
$
|
3,689,979
|
|
|
$
|
3,301,277
|
|
|
$
|
1,986,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
$
|
92,049
|
|
|
$
|
52,280
|
|
|
$
|
52,936
|
|
|
$
|
50,703
|
|
|
$
|
24,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
2,097
|
|
|
|
5,836
|
|
|
|
2,103
|
|
|
|
2,049
|
|
|
|
467
|
|
Real
estate - construction
|
|
139,557
|
|
|
|
6,433
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real
estate - mortgage - residential
|
|
383
|
|
|
|
379
|
|
|
|
-
|
|
|
|
74
|
|
|
|
225
|
|
Real
estate - mortgage - commercial
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
3,518
|
|
|
|
3,544
|
|
|
|
4,148
|
|
|
|
4,057
|
|
|
|
2,239
|
|
Leases
|
|
131
|
|
|
|
-
|
|
|
|
19
|
|
|
|
28
|
|
|
|
-
|
|
Total
|
|
145,686
|
|
|
|
16,192
|
|
|
|
6,270
|
|
|
|
6,208
|
|
|
|
2,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
295
|
|
|
|
876
|
|
|
|
2,134
|
|
|
|
1,633
|
|
|
|
661
|
|
Real
estate - construction
|
|
40
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real
estate - mortgage - residential
|
|
103
|
|
|
|
232
|
|
|
|
92
|
|
|
|
621
|
|
|
|
346
|
|
Real
estate - mortgage - commercial
|
|
12
|
|
|
|
12
|
|
|
|
13
|
|
|
|
544
|
|
|
|
39
|
|
Consumer
|
|
1,397
|
|
|
|
1,831
|
|
|
|
2,017
|
|
|
|
1,715
|
|
|
|
708
|
|
Leases
|
|
-
|
|
|
|
2
|
|
|
|
8
|
|
|
|
11
|
|
|
|
-
|
|
Total
|
|
1,847
|
|
|
|
2,960
|
|
|
|
4,264
|
|
|
|
4,524
|
|
|
|
1,754
|
|
Net
loans charged off
|
|
143,839
|
|
|
|
13,232
|
|
|
|
2,006
|
|
|
|
1,684
|
|
|
|
1,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
charged to operations
|
|
171,668
|
|
|
|
53,001
|
|
|
|
1,350
|
|
|
|
3,917
|
|
|
|
2,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
acquired in merger
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
$
|
119,878
|
|
|
$
|
92,049
|
|
|
$
|
52,280
|
|
|
$
|
52,936
|
|
|
$
|
50,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses to loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
leases outstanding at end of year
|
|
2.97
|
%
|
|
|
2.22
|
%
|
|
|
1.36
|
%
|
|
|
1.49
|
%
|
|
|
1.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans charged off during year to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans
and leases outstanding during year
|
|
3.42
|
%
|
|
|
0.33
|
%
|
|
|
0.05
|
%
|
|
|
0.05
|
%
|
|
|
0.06
|
%
|
Our
Allowance at December 31, 2008 totaled $119.9 million, an increase of $27.8
million, or 30.2%, from year-end 2007. When expressed as a percentage of total
loans, our Allowance was 2.97% at December 31, 2008 compared to 2.22% at
year-end 2007. The increase in our Allowance was a result of the $171.7 million
Provision recognized in 2008, partially offset by $143.8 million in net loan
charge-offs during the period, concentrated primarily on loans with direct
exposure to the California residential construction market. Net loan charge-offs
for 2008 included charge-offs for loans transferred to held for sale of $81.1
million. In accordance with generally accepted accounting principles in the
United States, loans held for sale and other real estate assets are not included
in our assessment of the Allowance. Given the uncertainty in the current
economic environment, the increase in our Allowance was deemed appropriate in
light of the downward risk rating migration in parts of our loan portfolio and
the reduced value of the collateral supporting our impaired commercial and
residential construction loans. To mitigate our exposure to the uncertain
economic environment and unprecedented nature of the events in the credit and
real estate markets, we have increased our efforts in monitoring and analyzing
our Allowance.
The
increase in total nonaccrual and impaired loans, combined with reduced
collateral values and increases in our loan loss factors, have contributed to
the increased Provision recognized during 2008. Collateral values are determined
based on appraisals received from qualified valuation professionals and are
obtained periodically or when indicators that property values may be impaired
are present. Risk volatility in our loan portfolio has been increasing,
resulting in higher risk rating adjustment activity in recent quarters. During
the first half of 2008, rapid risk rating migration occurred within our mainland
residential tract development portfolio and began to spill over into portions of
our mainland commercial construction portfolio and a few of our Hawaii
residential construction borrowers as the economic downturn continued and real
estate values dropped. Recent events within the financial markets, retrenching
consumer confidence, rising inflation and slow to negative job growth, have
resulted in heightened risk within the various components of our loan
portfolio.
Table 13
sets forth the allocation of the Allowance by loan category as of the dates
indicated. Our practice is to make specific allocations on impaired loans and
general allocations to each loan category based on management’s risk assessment
and estimated loss rate. The unallocated portion of the Allowance is maintained
to provide for additional credit risk which may exist but may not be adequately
accounted for in the specific and unspecified allocations due to the amount of
judgment involved in the determination of the Allowance, the absence of perfect
knowledge of all credit risks and the amount of uncertainty in predicting the
strength of the economy and the sustainability of
that strength.
Table 13.
Allocation of
Allowance for Loan and Lease Losses
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
of
loans
|
|
|
|
|
|
of
loans
|
|
|
|
|
|
of
loans
|
|
|
|
|
|
of
loans
|
|
|
|
|
|
of
loans
|
|
|
Allowance
|
|
|
in
each
|
|
|
Allowance
|
|
|
in
each
|
|
|
Allowance
|
|
|
in
each
|
|
|
Allowance
|
|
|
in
each
|
|
|
Allowance
|
|
|
in
each
|
|
|
for
loan
|
|
|
category
|
|
|
for
loan
|
|
|
category
|
|
|
for
loan
|
|
|
category
|
|
|
for
loan
|
|
|
category
|
|
|
for
loan
|
|
|
category
|
|
|
and
lease
|
|
|
to
total
|
|
|
and
lease
|
|
|
to
total
|
|
|
and
lease
|
|
|
to
total
|
|
|
and
lease
|
|
|
to
total
|
|
|
and
lease
|
|
|
to
total
|
|
|
losses
|
|
|
loans
|
|
|
losses
|
|
|
loans
|
|
|
losses
|
|
|
loans
|
|
|
losses
|
|
|
loans
|
|
|
losses
|
|
|
loans
|
|
|
(Dollars
in thousands)
|
|
Commercial,
financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and agricultural
|
$
|
11,100
|
|
|
9.5
|
%
|
|
$
|
5,100
|
|
|
9.3
|
%
|
|
$
|
8,100
|
|
|
10.6
|
%
|
|
$
|
16,000
|
|
|
16.3
|
%
|
|
$
|
17,400
|
|
|
17.9
|
%
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
71,800
|
|
|
27.9
|
|
|
|
60,800
|
|
|
29.5
|
|
|
|
19,400
|
|
|
29.6
|
|
|
|
8,400
|
|
|
19.1
|
|
|
|
3,400
|
|
|
11.7
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
6,600
|
|
|
26.6
|
|
|
|
6,600
|
|
|
25.0
|
|
|
|
5,600
|
|
|
23.3
|
|
|
|
2,800
|
|
|
22.3
|
|
|
|
2,100
|
|
|
22.9
|
|
Commercial
|
|
19,100
|
|
|
30.1
|
|
|
|
10,500
|
|
|
29.8
|
|
|
|
9,600
|
|
|
30.1
|
|
|
|
16,600
|
|
|
35.7
|
|
|
|
15,200
|
|
|
39.9
|
|
Consumer
|
|
3,900
|
|
|
4.5
|
|
|
|
4,300
|
|
|
5.1
|
|
|
|
4,100
|
|
|
5.1
|
|
|
|
3,700
|
|
|
5.3
|
|
|
|
3,500
|
|
|
7.6
|
|
Leases
|
|
1,300
|
|
|
1.4
|
|
|
|
700
|
|
|
1.3
|
|
|
|
500
|
|
|
1.3
|
|
|
|
200
|
|
|
1.3
|
|
|
|
-
|
|
|
-
|
|
Unallocated
|
|
6,078
|
|
|
-
|
|
|
|
4,049
|
|
|
-
|
|
|
|
4,980
|
|
|
-
|
|
|
|
5,236
|
|
|
-
|
|
|
|
9,103
|
|
|
-
|
|
Total
|
$
|
119,878
|
|
|
100.0
|
%
|
|
$
|
92,049
|
|
|
100.0
|
%
|
|
$
|
52,280
|
|
|
100.0
|
%
|
|
$
|
52,936
|
|
|
100.0
|
%
|
|
$
|
50,703
|
|
|
100.0
|
%
|
The
methodology applied in determining the level of Allowance and the allocation
among loan categories in 2008 was consistent with that applied in 2007, although
increased in portions of our portfolio in light of increased losses and the
challenging economic conditions referred to previously.
The
Allowance allocated to commercial loans at year-end 2008 totaled $11.1 million,
or 2.9%, of total commercial loans, compared to $5.1 million, or 1.3%, of total
commercial loans as of year-end 2007. The increase in the allocated Allowance
for commercial loans is reflective of the rise in criticized commercial loans
during the year, which contributed to $4.5 million of the current year
increase.
The
Allowance allocated to construction loans totaled $71.8 million, or 6.4%, of
construction loans at year-end 2008, compared to $60.8 million, or 5.0%, of
construction loans outstanding at year-end 2007. The increase in the amount of
Allowance allocated to construction loans is primarily a result of the
continued deterioration of the California residential construction market, and
to a lesser extent, preliminary signs of weakness in our California commercial
construction and Hawaii residential construction portfolios. Construction loans
in general have a higher level of inherent risk as compared to other types of
loans.
The
Allowance allocated to residential mortgage loans remained unchanged at $6.6
million, or 0.6%, of related loans at year-end 2008. The relatively low level of
Allowance allocated to our residential mortgage loan portfolio reflects the
strength in our residential mortgage portfolio as historical losses in this
portfolio have been minimal.
Commercial
mortgage loans were allocated an Allowance of $19.1 million, or 1.6%, of those
loans at year-end 2008, increasing from $10.5 million, or 0.8%, of commercial
mortgage loans at year-end 2007. The rise in criticized loan balances during the
year, were the result of an overall weakening in the real estate sector and
contributed to $9.4 million of the increase in the allocated Allowance in
2008.
The
allocated Allowance for consumer loans at year-end 2008 decreased to $3.9
million from $4.3 million in the prior year, however, the assigned Allowance as
a percentage of the total consumer loan portfolio remained relatively consistent
at 2.2%.
We also
allocated Allowance for leases of $1.3 million, or 2.2%, of total leases
compared to $0.7 million, or 1.3%, of total leases as of year-end
2007.
The
unallocated portion of the Allowance increased to $6.1 million as of year-end
2008, compared to $4.0 million in 2007. Despite the fact that more known and
perceived risks attributable to particular market segments and geographical risk
considerations have been incorporated into the determination of the allocated
Allowance, we believe the increase in the unallocated portion of the
Allowance was appropriate due to the overall volatility of present and future
economic conditions and the inherent uncertainty of the estimates and
assumptions incorporated into our assessments of the likelihood and magnitude of
potential losses.
Nonperforming
Assets, Accruing Loans Delinquent for 90 Days or More, Restructured Loans Still
Accruing Interest
Table 14
sets forth nonperforming assets, accruing loans delinquent for 90 days or more
and restructured loans still accruing interest at the dates
indicated.
Table 14.
Nonperforming
Assets, Past Due and Restructured Loans
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
(Dollars
in thousands)
|
|
Nonaccrual
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial & agricultural
|
$
|
1,426
|
|
|
$
|
231
|
|
|
$
|
3,934
|
|
|
$
|
2,333
|
|
|
$
|
3,713
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
119,178
|
|
|
|
61,017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
126
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
residential
|
|
6,162
|
|
|
|
-
|
|
|
|
5,024
|
|
|
|
5,995
|
|
|
|
1,529
|
|
-
commercial
|
|
5,462
|
|
|
|
293
|
|
|
|
-
|
|
|
|
4,223
|
|
|
|
4,922
|
|
Leases
|
|
335
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
nonaccrual loans
|
|
132,563
|
|
|
|
61,541
|
|
|
|
8,958
|
|
|
|
12,551
|
|
|
|
10,290
|
|
Other
real estate
|
|
11,220
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
580
|
|
Total
nonperforming assets
|
|
143,783
|
|
|
|
61,541
|
|
|
|
8,958
|
|
|
|
12,551
|
|
|
|
10,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing
loans delinquent for 90 days or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial & agricultural
|
|
-
|
|
|
|
18
|
|
|
|
88
|
|
|
|
99
|
|
|
|
23
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
residential
|
|
582
|
|
|
|
586
|
|
|
|
364
|
|
|
|
297
|
|
|
|
49
|
|
-
commercial
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,081
|
|
|
|
-
|
|
Consumer
|
|
488
|
|
|
|
299
|
|
|
|
457
|
|
|
|
427
|
|
|
|
321
|
|
Leases
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
Total
accruing loans delinquent for 90 days or more
|
|
1,070
|
|
|
|
903
|
|
|
|
909
|
|
|
|
7,906
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans still accruing interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial & agricultural
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
285
|
|
|
|
273
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
commercial
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
418
|
|
|
|
428
|
|
Total
restructured loans still accruing interest
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
703
|
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets, accruing loans delinquent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
90 days or more and restructured loans still
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accruing
interest
|
$
|
144,853
|
|
|
$
|
62,444
|
|
|
$
|
9,867
|
|
|
$
|
21,160
|
|
|
$
|
11,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets as a percentage of loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
leases, loans held for sale and other real estate
|
|
3.52
|
%
|
|
|
1.47
|
%
|
|
|
0.23
|
%
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets and accruing loans delinquent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
90 days or more as a percentage of loans and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
leases,
loans held for sale and other real estate
|
|
3.55
|
%
|
|
|
1.49
|
%
|
|
|
0.25
|
%
|
|
|
0.57
|
%
|
|
|
0.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets, accruing loans delinquent for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
days or more and restructured loans still accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
as a percentage of loans and leases, loans held
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale and other real estate
|
|
3.55
|
%
|
|
|
1.49
|
%
|
|
|
0.25
|
%
|
|
|
0.59
|
%
|
|
|
0.38
|
%
|
Nonperforming
assets, which includes nonaccrual loans and leases, nonperforming loans
classified as held for sale and foreclosed real estate, totaled $143.8 million
at December 31, 2008, compared to $61.5 million at year-end 2007. Nonperforming
assets at December 31, 2008 were comprised of $120.9 million in nonaccrual
loans, $11.7 million in nonperforming loans classified as held for sale and
$11.2 million in other real estate.
The increase in nonperforming assets
during 2008 was primarily attributable to the troubled California residential
construction market, as $206.6 million of California residential construction
loans were placed on nonaccrual status during the year, of which, $10.5 million
were classified as held for sale at December 31, 2008. In addition, $62.1
million of California commercial real estate and construction loans, $21.8
million in Hawaii residential construction loans, $7.0 million of Hawaii
residential mortgage loans and $6.0 million of Hawaii commercial mortgage loans
were also placed on nonaccrual status during 2008
.
Offsetting
the increase in nonperforming assets were charge-offs of California residential
construction loans totaling $124.0 million and California commercial real estate
and construction loans totaling $6.2 million, and write-downs of California
residential construction loans classified as held for sale of $23.8 million and
California other real estate owned of $7.2 million. In addition,
during 2008, we had loan sales of $45.5 million, $2.0 million, $1.5 million and
$0.9 million in California residential construction loans, a foreclosed
California residential construction property, a Washington residential
construction loan and a Washington commercial construction loan, respectively.
Given the current depressed nature of the real estate market in California, our
options with respect to minimizing our exposure to non-performing assets in
California are limited.
Included
in non-performing assets at December 31, 2008 were three residential mortgage
loans, one residential construction loan and one commercial real estate loan to
two Hawaii borrowers which were restructured. The principal balance and accrued
interest of these restructured loans were $10.7 million and $0.2 million,
respectively, and were matured and/or in default at the time of restructure. In
exchange for a payoff amount of $10.9 million and additional collateral of $3.1
million, we granted the borrowers a forbearance period until January 31, 2009
and agreed to waive all late fees and attorneys’ fees and costs, as well as
accrued interest from August 1, 2008 to the payoff date. The
borrowers did not payoff the loans by January 31, 2009, thus, the forbearance
agreement expired. We have no commitments to lend additional funds to these
borrowers.
Accruing
loans delinquent for 90 days or more at year-end 2008 totaled $1.1 million,
increasing by $0.2 million, or 18.5%, over the prior year. The accruing loans
delinquent for 90 days or more at year-end 2008 represented small loans
primarily less than $100,000 each in various stages of collection. Accounting
policies related to nonperforming assets are discussed in Note 1 to the
Consolidated Financial Statements.
Investment
Portfolio
Table 15
sets forth the amounts and distribution of investment securities held as of the
dates indicated.
Table 15.
Distribution of
Investment Securities
|
December
31,
|
|
2008
|
|
2007
|
|
2006
|
|
Held
to
|
|
Available
|
|
Held
to
|
|
Available
|
|
Held
to
|
|
Available
|
|
maturity
(at
|
|
for
sale
|
|
maturity
(at
|
|
for
sale
|
|
maturity
(at
|
|
for
sale
|
|
amortized
cost)
|
|
(at
fair value)
|
|
amortized
cost)
|
|
(at
fair value)
|
|
amortized
cost)
|
|
(at
fair value)
|
|
(Dollars
in thousands)
|
U.S.
Treasury and other U.S.
|
|
|
|
|
|
|
|
|
|
|
|
government
agencies
|
$
|
-
|
|
$
|
99,929
|
|
$
|
26,844
|
|
$
|
80,102
|
|
$
|
26,811
|
|
$
|
98,000
|
States
and political subdivisions
|
|
1,984
|
|
|
124,390
|
|
|
9,643
|
|
|
148,138
|
|
|
15,259
|
|
|
145,682
|
U.S.
Government sponsored entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed
securities
|
|
6,713
|
|
|
411,308
|
|
|
9,637
|
|
|
483,427
|
|
|
13,125
|
|
|
450,938
|
Privately-issued
mortgage-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed
securities
|
|
-
|
|
|
106,091
|
|
|
-
|
|
|
122,733
|
|
|
-
|
|
|
137,718
|
Other
|
|
-
|
|
|
882
|
|
|
-
|
|
|
730
|
|
|
10,009
|
|
|
816
|
Total
|
$
|
8,697
|
|
$
|
742,600
|
|
$
|
46,124
|
|
$
|
835,130
|
|
$
|
65,204
|
|
$
|
833,154
|
Investment
securities totaled $751.3 million at December 31, 2008, decreasing by
$130.0 million, or 14.7%, from the $881.3 million held at December 31,
2007, which decreased by $17.1 million, or 1.9%, from the $898.4 million at
year-end 2006. The decrease in 2008 reflects the utilization of cash flows from
our investment securities portfolio to maximize the bank’s net interest margin
by reallocating lower yielding investment securities to higher yielding
loans.
Certain
available for sale securities totaling $27.8 million were pledged as collateral
under a $25.0 million collateralized borrowing with LBI. The borrowing, in the
form of a repurchase agreement, was terminated as LBI filed for bankruptcy in
September 2008 and was subsequently placed in a Securities Investor Protection
Corporation (“SIPC”) liquidation proceeding. The filing of the SIPC liquidation
proceeding was considered an event of default under the repurchase agreement and
we subsequently recognized a loss of $2.8 million in 2008. Although we intend to
pursue full recovery of the pledged collateral, there can be no assurances that
the final settlement of this transaction will result in any recovery of the
collateral or any claim we may have against LBI.
In 2007,
we repositioned our investment portfolio to reduce our net interest income
volatility, as well as increase our prospective earnings and net interest
margin. We sold $119.0 million in available-for-sale investment securities
with an average yield of 3.98% and a weighted average life of 1.3 years and
reinvested the proceeds in a similar amount of new investment securities with an
average yield of 5.43% and a weighted average life of 4.2 years. An
after-tax loss of $1.0 million was recognized on the investment
sale.
Maturity Distribution of
Investment Portfolio
Table 16
sets forth the maturity distribution of the investment portfolio and weighted
average yields by investment type and maturity grouping at December 31,
2008.
Table 16.
Maturity
Distribution of Investment Portfolio
|
Carrying
|
|
|
Weighted
|
|
Portfolio
Type and Maturity Grouping
|
value
|
|
|
average
yield (1)
|
|
|
(Dollar
in thousands)
|
|
Held-to-maturity
portfolio:
|
|
|
|
|
|
States
and political subdivisions:
|
|
|
|
|
|
|
Within
one year
|
$
|
920
|
|
|
6.35
|
%
|
After
one but within five years
|
|
1,064
|
|
|
6.40
|
|
After
five but within ten years
|
|
-
|
|
|
-
|
|
After
ten years
|
|
-
|
|
|
-
|
|
Total
States and political subdivisions
|
|
1,984
|
|
|
6.38
|
|
U.S.
Government sponsored entities mortgage-backed securities:
|
|
|
|
|
|
|
Within
one year
|
|
-
|
|
|
-
|
|
After
one but within five years
|
|
6,608
|
|
|
4.16
|
|
After
five but within ten years
|
|
-
|
|
|
-
|
|
After
ten years
|
|
105
|
|
|
7.19
|
|
Total
U.S. Government sponsored entities mortgage-backed
securities
|
|
6,713
|
|
|
4.21
|
|
Total
held-to-maturity portfolio
|
$
|
8,697
|
|
|
4.70
|
%
|
|
|
|
|
|
|
|
Available-for-sale
portfolio:
|
|
|
|
|
|
|
U.S.
Treasury and other U.S. Government agencies:
|
|
|
|
|
|
|
Within
one year
|
$
|
-
|
|
|
-
|
%
|
After
one but within five years
|
|
60,943
|
|
|
5.56
|
|
After
five but within ten years
|
|
38,986
|
|
|
4.51
|
|
After
ten years
|
|
-
|
|
|
-
|
|
Total
U.S. Treasury and other U.S. Government agencies
|
|
99,929
|
|
|
5.15
|
|
States
and political subdivisions:
|
|
|
|
|
|
|
Within
one year
|
|
3,873
|
|
|
5.41
|
|
After
one but within five years
|
|
11,668
|
|
|
5.65
|
|
After
five but within ten years
|
|
66,093
|
|
|
5.81
|
|
After
ten years
|
|
42,756
|
|
|
6.03
|
|
Total
States and political subdivisions
|
|
124,390
|
|
|
5.86
|
|
U.S.
Government sponsored entities mortgage-backed securities:
|
|
|
|
|
|
|
Within
one year
|
|
5
|
|
|
6.62
|
|
After
one but within five years
|
|
34,209
|
|
|
3.69
|
|
After
five but within ten years
|
|
36,700
|
|
|
4.21
|
|
After
ten years
|
|
340,394
|
|
|
5.40
|
|
Total
U.S. Government sponsored entities mortgage-backed
securities
|
|
411,308
|
|
|
5.15
|
|
Other:
|
|
|
|
|
|
|
Within
one year
|
|
-
|
|
|
-
|
|
After
one but within five years
|
|
-
|
|
|
-
|
|
After
five but within ten years
|
|
-
|
|
|
-
|
|
After
ten years
|
|
106,973
|
|
|
5.49
|
|
Total
Other
|
|
106,973
|
|
|
5.49
|
|
Total
available-for-sale portfolio
|
$
|
742,600
|
|
|
5.32
|
%
|
|
|
|
|
|
|
|
Total
investment securities
|
$
|
751,297
|
|
|
5.31
|
%
|
|
|
|
|
|
|
|
(1) Weighted
average yields are computed on an annual basis, and yields on tax-exempt
obligations
|
|
are
computed on a taxable-equivalent basis using an assumed tax rate of
35%.
|
|
During
2008, the weighted average yield of the investment portfolio increased by 14 bp
to 5.31% from the prior year. The increase in yield reflects the effects of the
prior year’s investment portfolio repositioning.
Deposits
Our
ability to raise low-cost funds is a principal contributor to our ability to
operate profitably and the primary source of our funding is deposits in the
state of Hawaii. In this competitive market, we strive to distinguish ourselves
by providing quality customer service in our branch offices and establishing
long-term relationships with businesses and their principals. Our focus has been
to develop a large, stable base of core deposits, which are comprised of
noninterest-bearing demand, interest-bearing demand and savings deposits and
time deposits under $100,000. Time deposits in amounts of $100,000 and greater
are generally considered to be more price-sensitive than relationship-based and
are thus given less focus in our marketing and sales efforts.
During
2008, our total deposits of $3.9 billion decreased by $91.2 million, or 2.3%,
from total deposits of $4.0 billion at December 31, 2007, which increased
by $158.2 million, or 4.1%, over the year-end 2006 balance of $3.8 billion. The
decrease in deposits in 2008 was primarily attributable to the softening economy
in Hawaii, specifically, the slowing of Hawaii’s real estate market which
contributed to a decrease in our escrow deposits. In addition, some foreign
customers moved their deposits overseas due to concerns about the overall U.S.
economy and financial markets.
Noninterest-bearing
demand deposits of $627.1 million at year-end 2008 decreased by $37.9 million,
or 5.7%, from 2007’s year-end balance of $665.0 million, which increased by $4.0
million, or 0.6%, from the $661.0 million held at year-end 2006.
Interest-bearing deposits at December 31, 2008 of $3.3 billion decreased by
$53.2 million, or 1.6%, from year-end 2007, which increased by $154.2 million,
or 4.8%, compared to year-end 2006. Time deposits increased by 3.3% in 2008 from
the prior year as depositors sought the higher returns offered on our time
deposit products. Offsetting the decreases in 2008 described above; government,
CDARS and brokered deposits increased by $136.8 million, or 38.6%, in 2008 from
the prior year.
During
2008, we introduced several new products including our Super Savings account for
personal and business customers and our Business Money Market Savings account.
Our Super Savings account was introduced in December of 2008 and allows our
customers to earn time deposit-like rates, if certain requirements are met,
while allowing them the flexibility of a savings account. At December 31, 2008,
deposits under our Super Savings account totaled $72.0 million. Our Business
Money Market Savings account was introduced in September of 2008 and allows our
business customers to earn interest based on varying rate tiers to maximize
interest earning power while allowing account flexibility. At December 31, 2008,
deposits under our Business Money Market Savings account were $20.3
million. Despite the introduction of these new accounts and our marketing
campaigns, total core deposits (noninterest-bearing demand, interest-bearing
demand and savings and time deposits under $100,000) decreased by $27.9 million,
or 1.0%, during 2008, while the ratio of core deposits to total deposits
increased to 71.7% at year-end 2008 from 70.8% at year-end 2007. The decrease in
core deposits and the increase in time deposits reflect customers’
reallocation of idle funds into higher-yielding alternative investment products
and have resulted in our increased use of non-core funding sources including,
but not limited to, borrowings from the FHLB-Seattle, the Federal Reserve
discount window and brokered certificates of deposit. We expect to continue our
deposit growth strategy in 2009, focusing primarily on core deposits, through
competitive pricing and more aggressive marketing and customer calling
campaigns.
Table 17
sets forth information regarding the average deposits and the average rates paid
for certain deposit categories for each of the years indicated. Average balances
are computed using daily average balances. The average rate on time deposits,
which are most sensitive to changes in market rates, decreased by 132 bp in
2008, while savings and money market deposit rates decreased by 85 bp. The
average rate paid on all deposits in 2008 decreased to 1.63% from 2.43% in 2007
and 1.95% in 2006. The drop in average rates paid in 2008 was attributable to
the declining interest rate environment in which we, as well as other financial
institutions throughout the country, operated in during 2008. The increase in
average rates paid in 2007 was attributable to strong competition for core
deposits from other Hawaii financial institutions as well as from internet-based
and other financial services companies located outside of Hawaii.
We expect
overall deposit rates to decrease in 2009 in response to recent rate cuts by the
Fed. The magnitude of rate movements in our deposit base will depend in large
part on competitive pricing considerations and the level of deposit growth
needed to support our lending activities.
Table 17.
Average Balances and
Average Rates on Deposits
|
Year
Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
balance
|
|
|
rate
paid
|
|
|
balance
|
|
|
rate
paid
|
|
|
balance
|
|
|
rate
paid
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
$
|
592,697
|
|
|
-
|
%
|
|
|
$
|
594,361
|
|
|
-
|
%
|
|
|
$
|
628,736
|
|
|
-
|
%
|
Interest-bearing
demand deposits
|
|
463,776
|
|
|
0.19
|
|
|
|
|
440,537
|
|
|
0.13
|
|
|
|
|
426,828
|
|
|
0.13
|
|
Savings
and money market deposits
|
|
1,094,690
|
|
|
1.14
|
|
|
|
|
1,206,392
|
|
|
1.99
|
|
|
|
|
1,153,651
|
|
|
1.53
|
|
Time
deposits
|
|
1,663,646
|
|
|
2.94
|
|
|
|
|
1,630,916
|
|
|
4.26
|
|
|
|
|
1,466,848
|
|
|
3.64
|
|
Total
|
$
|
3,814,809
|
|
|
1.63
|
%
|
|
|
$
|
3,872,206
|
|
|
2.43
|
%
|
|
|
$
|
3,676,063
|
|
|
1.95
|
%
|
Contractual
Obligations
Table 18
sets forth contractual obligations (excluding deposit liabilities) as of
December 31, 2008.
Table 18.
Contractual
Obligations
|
Payments
Due By Period
|
|
Less
Than
|
|
|
|
|
|
|
|
|
More
Than
|
|
|
|
|
One
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
5
Years
|
|
|
Total
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
$
|
279,450
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
279,450
|
Long-term
debt
|
|
91,394
|
|
|
|
222,680
|
|
|
|
219,793
|
|
|
|
115,390
|
|
|
|
649,257
|
Pension
plan obligations
|
|
4,743
|
|
|
|
4,910
|
|
|
|
4,819
|
|
|
|
23,892
|
|
|
|
38,364
|
Operating
leases
|
|
8,200
|
|
|
|
13,528
|
|
|
|
10,301
|
|
|
|
33,427
|
|
|
|
65,456
|
Purchase
obligations
|
|
6,397
|
|
|
|
4,714
|
|
|
|
1,979
|
|
|
|
507
|
|
|
|
13,597
|
Total
|
$
|
390,184
|
|
|
$
|
245,832
|
|
|
$
|
236,892
|
|
|
$
|
173,216
|
|
|
$
|
1,046,124
|
Components
of short-term borrowings and long-term debt are discussed in Notes 12 and 13,
respectively, to the Consolidated Financial Statements. Operating leases
represent leases on bank premises as discussed in Note 18 to the Consolidated
Financial Statements. Purchase obligations represent other contractual
obligations to purchase goods or services at specified terms over a period in
excess of one year including, but not limited to, software licensing agreements,
equipment maintenance contracts and professional service contracts. Pension plan
liabilities include obligations under our defined benefit retirement plan and
Supplemental Executive Retirement Plans, which are discussed in Note 16 to the
Consolidated Financial Statements. In addition to the amounts shown in the table
above, $3.5 million of unrecognized tax benefits have been recorded as
liabilities in accordance with FIN 48, and we are uncertain as to if or
when such amounts may be settled. Related to these unrecognized tax benefits, we
have also recorded a liability for potential interest of $0.7 million at
December 31, 2008. There were no penalties accrued relating to these
unrecognized tax benefits at December 31, 2008.
Capital
Resources
Shareholders’
equity totaled $526.3 million at December 31, 2008, a decrease of $148.1
million, or 22.0%, from the $674.4 million balance at year-end 2007, which
decreased by $63.7 million, or 8.6%, from year-end 2006. When expressed as a
percentage of total assets, shareholders’ equity decreased to 9.7% at
December 31, 2008, from 11.9% at December 31, 2007 and 13.5% at
December 31, 2006.
Book
value per share was $18.32, $23.45 and $24.04 at year-end 2008, 2007 and 2006,
respectively. The decrease in 2008 was attributable to the net loss recognized
in 2008 resulting from the aforementioned increase in provision for loan and
lease losses and the goodwill impairment charge associated with our Commercial
Real Estate reporting segment.
The
tangible equity ratio and tangible book value per share, which excludes the
impact of goodwill and intangible assets, was 6.59% and $12.04, respectively, at
year-end 2008, as compared to 7.40% and $13.90, respectively, at year-end
2007.
Dividends
declared in 2008 totaled $0.70 per share, or $20.1 million, compared to $0.98
per share, or $29.6 million, in 2007 and $0.88 per share, or $26.9 million, in
2006. The dividend payout ratio (dividends declared per share divided by basic
earnings (loss) per share) was (14.49)%, 515.79% and 33.85% for 2008, 2007 and
2006, respectively. During the first and second quarters of 2008, we declared
and paid cash dividends of $0.25 per common share. During the third and fourth
quarters of 2008, we declared and paid cash dividends of $0.10 per common share.
On January 29, 2009, our Board of Director’s elected to suspend the payment of
cash dividends starting in the first quarter of 2009. The reduction in our
quarterly dividend during the second half of 2008 and suspension of our cash
dividend starting in the first quarter of 2009 reflects our decision to preserve
and build capital during these uncertain and challenging economic times. As the
economic environment stabilizes and our operating performance improves, we will
reassess our capital levels and the payment of future cash
dividends.
The
objective of our capital policy is to maintain a level of capital that will
support future growth opportunities and ensure that regulatory guidelines and
industry standards are met. For a discussion regarding the FRB and FDIC
regulations relating to capital adequacy, see “BUSINESS—Supervision and
Regulation—Capital Standards” in Part I, Item 1 of this Annual Report on
Form 10-K. Our capital ratios, including those of our subsidiary bank, as
of December 31, 2008 and 2007 are discussed in Note 27 to the Consolidated
Financial Statements. Capital levels at December 31, 2008 exceeded all
minimum regulatory requirements.
CPB
Capital Trust I, CPB Capital Trust II, CPB Statutory Trust III, CPB Capital
Trust IV and CPB Statutory Trust V collectively issued $105.0 million in
floating-rate securities. All five trusts are wholly owned subsidiaries of our
holding company. The securities are reported as long-term debt on the balance
sheet and terms of the securities issued are described in greater detail in Note
13 to the Consolidated Financial Statements. The FRB has determined that certain
cumulative preferred securities, such as the securities described above, qualify
as minority interest and may be included in Tier 1 capital, up to certain
limits.
Asset/Liability
Management and Interest Rate Risk
Our
earnings and capital are sensitive to risk of interest rate fluctuations.
Interest rate risk arises when rate-sensitive assets and rate-sensitive
liabilities mature or reprice during different periods or in differing amounts.
In the normal course of business, we are subjected to interest rate risk through
the activities of making loans and taking deposits, as well as from our
investment securities portfolio and other interest-bearing funding sources.
Asset/liability management attempts to coordinate our rate-sensitive assets and
rate-sensitive liabilities to meet our financial objectives.
Our
Asset/Liability Management Policy seeks to maximize the risk-adjusted return to
shareholders while maintaining consistently acceptable levels of liquidity,
interest rate risk and capitalization. Our Asset/Liability Management Committee,
or ALCO, monitors interest rate risk through the use of interest rate
sensitivity gap, net interest income and market value of portfolio equity
simulation and rate shock analyses. This process is designed to measure the
impact of future changes in interest rates on net interest income and market
value of portfolio equity. Adverse interest rate risk exposures are managed
through the shortening or lengthening of the duration of assets and
liabilities.
Interest
rate risk can be analyzed by monitoring an institution’s interest rate
sensitivity gap and changes in the gap over time. An asset or liability is said
to be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets and the amount of
interest-bearing liabilities maturing or repricing within a specified time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, the earnings of an institution with a positive gap theoretically
may be positively affected due to its interest-earning assets repricing to a
greater extent than its interest-bearing liabilities. An adverse impact would be
expected for an institution with a negative gap.
Table 19
sets forth information regarding our interest rate sensitivity gap at
December 31, 2008. The assumptions used in determining interest rate
sensitivity of various asset and liability products had a significant impact on
the resulting table. For purposes of this presentation, assets and liabilities
are classified by the earliest repricing date or maturity. All interest-bearing
demand and savings balances are included in the three-months-or-less category,
even though repricing of these accounts is not contractually required and may
not actually occur during that period. Since all interest rates and yields do
not adjust at the same velocity or magnitude, and since volatility is subject to
change, the interest rate sensitivity gap is only a general indicator of
interest rate risk.
Table 19.
Rate Sensitivity of
Assets, Liabilities and Shareholders’ Equity
|
|
|
|
Over
|
|
|
|
|
|
Over
One
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
Three
|
|
|
|
|
|
|
|
|
Over
|
|
|
|
|
|
|
|
Months
|
|
|
Through
|
|
|
|
|
|
|
|
|
Three
|
|
|
Nonrate
|
|
|
|
|
or
Less
|
|
|
Six
Months
|
|
|
Months
|
|
|
Years
|
|
|
Years
|
|
|
Sensitive
|
|
|
Total
|
|
(Dollars
in thousands)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits in other banks
|
$
|
475
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
475
|
Investment
securities
|
|
86,098
|
|
|
|
53,543
|
|
|
|
129,779
|
|
|
|
238,137
|
|
|
|
241,831
|
|
|
|
1,909
|
|
|
|
751,297
|
Loans
held for sale
|
|
40,108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,108
|
Loans
|
|
1,897,764
|
|
|
|
249,115
|
|
|
|
313,597
|
|
|
|
759,545
|
|
|
|
729,361
|
|
|
|
80,884
|
|
|
|
4,030,266
|
Federal
Home Loan Bank stock
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,797
|
|
|
|
48,797
|
Other
assets
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
561,418
|
|
|
|
561,418
|
Total
assets
|
$
|
2,024,445
|
|
|
$
|
302,658
|
|
|
$
|
443,376
|
|
|
$
|
997,682
|
|
|
$
|
971,192
|
|
|
$
|
693,008
|
|
|
$
|
5,432,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
627,094
|
|
|
$
|
627,094
|
Interest-bearing
deposits
|
|
2,305,271
|
|
|
|
371,440
|
|
|
|
538,597
|
|
|
|
61,078
|
|
|
|
8,086
|
|
|
|
-
|
|
|
|
3,284,472
|
Short-term
borrowings
|
|
278,450
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
279,450
|
Long-term
debt
|
|
159,273
|
|
|
|
15,274
|
|
|
|
50,561
|
|
|
|
197,391
|
|
|
|
226,758
|
|
|
|
-
|
|
|
|
649,257
|
Other
liabilities
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,797
|
|
|
|
65,797
|
Shareholders'
equity
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
526,291
|
|
|
|
526,291
|
Total
liabilities and shareholders' equity
|
$
|
2,742,994
|
|
|
$
|
386,714
|
|
|
$
|
590,158
|
|
|
$
|
258,469
|
|
|
$
|
234,844
|
|
|
$
|
1,219,182
|
|
|
$
|
5,432,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate sensitivity gap
|
$
|
(718,549
|
)
|
|
$
|
(84,056
|
)
|
|
$
|
(146,782
|
)
|
|
$
|
739,213
|
|
|
$
|
736,348
|
|
|
$
|
(526,174
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
interest rate sensitivity gap
|
$
|
(718,549
|
)
|
|
$
|
(802,605
|
)
|
|
$
|
(949,387
|
)
|
|
$
|
(210,174
|
)
|
|
$
|
526,174
|
|
|
$
|
-
|
|
|
$
|
-
|
ALCO also
utilizes a detailed and dynamic simulation model to measure and manage interest
rate risk exposures. The monthly simulation process is designed to measure the
impact of future changes in interest rates on net interest income and market
value of portfolio equity and to allow ALCO to model alternative balance sheet
strategies. The following reflects our net interest income sensitivity analysis
as of December 31, 2008, over a one-year horizon, assuming no balance sheet
growth and given both a 200 bp upward and 100 bp downward parallel shift in
interest rates.
Rate
Change
|
|
Estimated
Net Interest
Income
Sensitivity
|
+200
bp
|
|
(3.06)%
|
−100
bp
|
|
(4.20)%
|
Table 20.
Interest Rate
Sensitivity
|
Expected
Maturity Within
|
|
|
|
|
|
Total
|
|
One
Year
|
|
|
Two
Years
|
|
|
Three
Years
|
|
|
Four
Years
|
|
|
Five
Years
|
|
|
Thereafter
|
|
|
Book
Value
|
|
|
Fair
Value
|
|
(Dollars
in thousands)
|
Interest-sensitive
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits in other banks
|
$
|
475
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
475
|
|
|
$
|
475
|
Weighted
average interest rates
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate investments
|
$
|
263,123
|
|
|
$
|
154,129
|
|
|
$
|
84,009
|
|
|
$
|
74,846
|
|
|
$
|
55,389
|
|
|
$
|
110,490
|
|
|
$
|
741,986
|
|
|
$
|
742,488
|
Weighted
average interest rates
|
|
4.55
|
%
|
|
|
4.97
|
%
|
|
|
5.07
|
%
|
|
|
5.16
|
%
|
|
|
4.72
|
%
|
|
|
5.00
|
%
|
|
|
4.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate investments
|
$
|
203
|
|
|
$
|
239
|
|
|
$
|
249
|
|
|
$
|
259
|
|
|
$
|
267
|
|
|
$
|
6,988
|
|
|
$
|
8,205
|
|
|
$
|
7,989
|
Weighted
average interest rates
|
|
1.83
|
%
|
|
|
0.67
|
%
|
|
|
1.96
|
%
|
|
|
3.01
|
%
|
|
|
2.35
|
%
|
|
|
1.68
|
%
|
|
|
1.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
investments
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,106
|
|
|
$
|
1,106
|
|
|
$
|
882
|
Weighted
average interest rates
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate loans
|
$
|
431,896
|
|
|
$
|
199,943
|
|
|
$
|
137,466
|
|
|
$
|
145,136
|
|
|
$
|
104,301
|
|
|
$
|
309,542
|
|
|
$
|
1,328,284
|
|
|
$
|
1,305,787
|
Weighted
average interest rates
|
|
5.16
|
%
|
|
|
6.67
|
%
|
|
|
6.51
|
%
|
|
|
6.50
|
%
|
|
|
6.12
|
%
|
|
|
5.86
|
%
|
|
|
5.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate loans
|
$
|
1,443,959
|
|
|
$
|
450,880
|
|
|
$
|
185,016
|
|
|
$
|
161,489
|
|
|
$
|
114,150
|
|
|
$
|
266,718
|
|
|
$
|
2,622,212
|
|
|
$
|
2,645,840
|
Weighted
average interest rates
|
|
5.07
|
%
|
|
|
4.86
|
%
|
|
|
5.97
|
%
|
|
|
6.16
|
%
|
|
|
6.06
|
%
|
|
|
5.68
|
%
|
|
|
5.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48,797
|
|
|
$
|
48,797
|
|
|
$
|
48,797
|
Weighted
average interest rates
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
- December 31, 2008
|
$
|
2,139,656
|
|
|
$
|
805,191
|
|
|
$
|
406,740
|
|
|
$
|
381,730
|
|
|
$
|
274,107
|
|
|
$
|
743,641
|
|
|
$
|
4,751,065
|
|
|
$
|
4,752,258
|
Total
- December 31, 2007
|
$
|
2,436,405
|
|
|
$
|
855,212
|
|
|
$
|
506,229
|
|
|
$
|
296,307
|
|
|
$
|
287,819
|
|
|
$
|
730,397
|
|
|
$
|
5,112,369
|
|
|
$
|
5,029,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-sensitive
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand and savings deposits
|
$
|
1,530,150
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,530,150
|
|
|
$
|
1,530,150
|
Weighted
average interest rates
|
|
1.31
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
1.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
$
|
1,684,128
|
|
|
$
|
55,016
|
|
|
$
|
7,092
|
|
|
$
|
6,452
|
|
|
$
|
1,626
|
|
|
$
|
8
|
|
|
$
|
1,754,322
|
|
|
$
|
1,763,388
|
Weighted
average interest rates
|
|
2.64
|
%
|
|
|
3.15
|
%
|
|
|
2.55
|
%
|
|
|
3.77
|
%
|
|
|
2.21
|
%
|
|
|
3.15
|
%
|
|
|
2.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
$
|
279,450
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
279,450
|
|
|
$
|
279,452
|
Weighted
average interest rates
|
|
0.50
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
91,393
|
|
|
$
|
141,353
|
|
|
$
|
81,327
|
|
|
$
|
201,227
|
|
|
$
|
18,566
|
|
|
$
|
115,391
|
|
|
$
|
649,257
|
|
|
$
|
593,492
|
Weighted
average interest rates
|
|
3.92
|
%
|
|
|
3.75
|
%
|
|
|
4.20
|
%
|
|
|
4.46
|
%
|
|
|
4.81
|
%
|
|
|
4.62
|
%
|
|
|
4.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
- December 31, 2008
|
$
|
3,585,121
|
|
|
$
|
196,369
|
|
|
$
|
88,419
|
|
|
$
|
207,679
|
|
|
$
|
20,192
|
|
|
$
|
115,399
|
|
|
$
|
4,213,179
|
|
|
$
|
4,166,482
|
Total
- December 31, 2007
|
$
|
3,551,174
|
|
|
$
|
168,251
|
|
|
$
|
154,258
|
|
|
$
|
54,597
|
|
|
$
|
207,473
|
|
|
$
|
133,951
|
|
|
$
|
4,269,704
|
|
|
$
|
4,251,065
|
The
preceding sensitivity analysis does not represent our forecast and should not be
relied upon as being indicative of expected operating results. These estimates
are based upon numerous assumptions including: the magnitude and timing of
interest rate changes, prepayments on loans and investment securities, deposit
decay rates, pricing decisions on loans and deposits, reinvestment of asset and
liability cashflows and others.
Table 20
presents information on financial instruments held that are sensitive to changes
in interest rates. For purposes of this presentation, expected maturities of
interest-sensitive assets and liabilities are contractual maturities.
Interest-bearing demand and savings deposits, which have indeterminate
maturities, are included in the earliest maturity category. The resulting table
is based on numerous assumptions including prepayment rates on mortgage-related
assets and forecasted market interest rates. See Note 24 to the Consolidated
Financial Statements for a discussion of the calculation of fair
values.
Maturities
and fair values of interest-sensitive assets and liabilities may vary from
expectation if actual experience differs from the assumptions used.
Liquidity
Our
objective in managing our liquidity is to maintain a balance between sources and
uses of funds in order to economically meet the cash requirements of customers
for loans and deposit withdrawals and to participate in lending and investment
opportunities as they arise. We monitor our liquidity position in relation to
trends of loan demand and deposit growth on a daily basis to assure maximum
utilization, maintenance of an adequate level of readily marketable assets and
access to short-term funding sources.
The
consolidated statements of cash flows identify the three major categories of
sources and uses of cash as operating, investing and financing activities. As
presented in the consolidated statements of cash flows, cash provided by
operating activities has provided a steady source of funds during the past three
years. Cash provided by operating activities totaled $274.0 million in 2008,
$80.0 million in 2007 and $117.8 million in 2006. The primary source of cash
provided by operating activities continues to be our net income, excluding
non-cash items.
Investing
activities have resulted in a use of cash in each of the last three years. Net
cash used in investing activities totaled $158.1 million in 2008, $323.3 million
in 2007 and $315.5 million in 2006. Investment securities and lending activities
generally comprise the largest components of investing activities, although the
level of investment securities activities are impacted by the relationship of
loan and deposit growth during the period. In 2008, net loan originations
accounted for $395.1 million of cash used, compared to $294.6 million in 2007
and $294.0 million in 2006. Net proceeds from sales and maturities of investment
securities totaled $113.5 million in 2008 and $27.8 million in 2007 compared to
net purchases of investment securities of $23.1 million in 2006. Investing
activities in 2008 includes proceeds from sales of loans originated for
investment, securitized residential mortgage loans and other real estate owned
of $112.9 million, $20.8 million and $2.0 million, respectively. Investing
activities in 2007 and 2006 also included purchases of bank-owned life insurance
policies totaling $25.0 million and $30.0 million, respectively.
Cash used
in financing activities totaled $90.3 million in 2008, compared to cash provided
by financing activities of $189.8 million in 2007 and $168.7 million in 2006.
Deposit activities, borrowings and capital transactions represent the major
components of financing activities. Net deposit contraction in 2008 resulted in
cash outflows of $91.2 million, compared to net deposit growth in 2007 and 2006,
resulting in cash inflows of $158.2 million and $202.2 million,
respectively. Cash flows from the issuance of long-term debt, net of
repayments thereon, totaled $241.3 million of cash outflows in 2008 compared to
$176.6 million of cash inflows in 2007 and $7.8 million of cash outflows in
2006. The net increase in short-term borrowings in 2008 also resulted in cash
inflows of $263.5 million. As with investment securities, the level of net
borrowings is impacted by the levels of loan and deposit growth/contraction
during the period. Capital transactions, primarily dividends and the issuance or
repurchase of common stock, required cash outflows of $21.3 million, $81.8
million and $22.3 million in 2008, 2007 and 2006, respectively.
For the
holding company on a stand-alone basis, the primary uses of funds in 2008
included dividend payments totaling $20.1 million and share repurchases totaling
$1.8 million. The primary source of funds in 2008 was dividends received from
Central Pacific Bank.
Core
deposits have historically provided us with a sizeable source of relatively
stable and low cost of funds but are subject to competitive pressure in our
market. In addition to core deposit funding, we also have access to a variety of
other short-term and long-term funding sources, which include proceeds from
maturities of our investment securities, as well as secondary funding sources
such as the FHLB-Seattle, secured repurchase agreements, federal funds
borrowings, brokered certificates of deposit and the Federal Reserve discount
window, available to meet our liquidity needs. While we
historically
have had access to these
other funding sources, the access to these sources may not be guaranteed due to
the current volatile market conditions.
The bank
is a member of and maintained a $1.3 billion line of credit with the FHLB as of
December 31, 2008. Long-term borrowings under this arrangement totaled $541.0
million and $782.8 million at December 31, 2008 and 2007, respectively, and
there were no short-term borrowings at the end of either period. At December 31,
2008, approximately $752.2 million remained available for future borrowings and
the FHLB has the right to suspend future advances. See Note 13 in the Notes to
Consolidated Financial Statements included in “Item 8. Financial Statements and
Supplementary Data” for additional information regarding our long-term
borrowings.
The bank
also maintained a $614.2 million line of credit with the Federal Reserve
discount window as of December 31, 2008. Short-term borrowings under this
arrangement totaled $276.0 million at December 31, 2008, compared to none at
December 31, 2007. There were no long-term borrowings at December 31, 2008 and
2007. Approximately $338.2 million remained available for future borrowings at
December 31, 2008. See Note 12 in the Notes to Consolidated Financial Statements
included in “Item 8. Financial Statements and Supplementary Data” for additional
information regarding our short-term borrowings.
Proceeds
from our sale of preferred stock under the TARP CPP of $135.0 million in January
2009 provide us with additional resources for our lending activities and
proceeds from common stock offerings may also provide another source of funds as
it has done in the past. Management does not rely on any one source of liquidity
and manages availability in response to changing balance sheet
needs.
Our
liquidity may be affected by an inability to access the capital markets or by
unforeseen demands on cash. Over the past year, sources of credit in the capital
markets have tightened as mortgage loan delinquencies increased, demand for
mortgage loans in the secondary market decreased, securities and debt ratings
were downgraded and a number of institutions defaulted on their debt. The market
disruptions that started in 2007 have continued throughout 2008 making it
significantly more difficult for financial institutions to obtain capital/funds
by selling loans in the secondary market or through borrowings.
We cannot
predict with any degree of certainty how long these market conditions may
continue, nor can we anticipate the degree of impact such market conditions will
have on loan origination volumes and gains or losses on sale results.
Deterioration in the performance of other financial institutions, including
write-downs of securities, debt-rating downgrades and defaults, have resulted in
industry-wide reductions in liquidity and further deterioration in the financial
markets may affect our liquidity position.
Off-Balance
Sheet Arrangements
In the
normal course of business, we enter into off-balance sheet arrangements to meet
the financing needs of our banking customers. These financial instruments
include commitments to extend credit, standby letters of credit and financial
guarantees written, forward foreign exchange contracts, forward interest rate
contracts and interest rate swaps and options. These instruments and the
related off-balance sheet exposures are discussed in detail in Note 23 to the
Consolidated Financial Statements. In the unlikely event that we must satisfy a
significant amount of outstanding commitments to extend credit, liquidity will
be adversely impacted, as will credit risk. The remaining components of
off-balance sheet arrangements, primarily interest rate options and forward
interest rate contracts related to our mortgage banking activities, are not
expected to have a material impact on our consolidated financial position or
results of operations.
Impact
of New Accounting Standards
Various
accounting authorities including the Financial Accounting Standards Board, the
American Institute of Certified Public Accountants and the Securities and
Exchange Commission issue authoritative guidance on accounting policies and
disclosure requirements. Note 1 to the Consolidated Financial Statements
contains a discussion of recent accounting pronouncements as well as the
expected impact of those pronouncements on our consolidated financial
statements.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Quantitative
and qualitative disclosures about market risk is set forth under “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Asset/Liability Management and Interest Rate Risk” in Part II,
Item 7 of this Annual Report on Form 10-K and in Note 24 to the
Consolidated Financial Statements in Part II, Item 8 of this Annual Report
on Form 10-K.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
Central
Pacific Financial Corp.:
We
have audited the accompanying consolidated balance sheets of Central Pacific
Financial Corp. and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of income, changes in shareholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2008. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Pacific
Financial Corp. and subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.
As
discussed in note 1 to the consolidated financial statements, the Company
adopted FASB Statement No. 157,
Fair Value
Measurements
, in 2008.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Central Pacific Financial Corp. and
subsidiaries’ internal control over financial reporting as of December 31,
2008, based on criteria established in
Internal
Control—Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated
February 27, 2009, expressed an unqualified opinion on the effectiveness of
the Company’s internal control over financial reporting.
/s/
KPMG LLP
|
Honolulu,
Hawaii
|
February
27
,
2009
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Central
Pacific Financial Corp.:
We have
audited Central Pacific Financial Corp.’s (the Company’s) internal control over
financial reporting as of December 31, 2008, based on criteria established
in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management Report on Effectiveness of Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in
Internal
Control—Integrated Framework
issued by the COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Central
Pacific Financial Corp. and subsidiaries as of December 31, 2008 and 2007,
and the related consolidated statements of income, changes in shareholders’
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2008, and our report dated
February 27, 2009 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG
LLP
|
Honolulu,
Hawaii
|
February
27
,
2009
|
CENTRAL
PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(Dollars
in thousands)
|
|
Assets
|
|
|
|
|
|
Cash
and due from banks
|
$
|
107,270
|
|
|
$
|
79,088
|
|
Interest-bearing
deposits in other banks
|
|
475
|
|
|
|
241
|
|
Federal
funds sold
|
|
-
|
|
|
|
2,800
|
|
Investment
securities:
|
|
|
|
|
|
|
|
Held
to maturity, at amortized cost (fair value of $8,759 at December 31,
2008
|
|
|
|
|
|
|
|
and
$46,077 at December 31, 2007)
|
|
8,697
|
|
|
|
46,124
|
|
Available
for sale, at fair value
|
|
742,600
|
|
|
|
835,130
|
|
Total
investment securities
|
|
751,297
|
|
|
|
881,254
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
40,108
|
|
|
|
37,572
|
|
Loans
and leases
|
|
4,030,266
|
|
|
|
4,141,705
|
|
Allowance
for loan and lease losses
|
|
(119,878
|
)
|
|
|
(92,049
|
)
|
Net
loans and leases
|
|
3,910,388
|
|
|
|
4,049,656
|
|
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
81,059
|
|
|
|
82,841
|
|
Accrued
interest receivable
|
|
20,079
|
|
|
|
26,041
|
|
Investment
in unconsolidated subsidiaries
|
|
15,465
|
|
|
|
17,404
|
|
Other
real estate
|
|
11,220
|
|
|
|
-
|
|
Goodwill
|
|
152,689
|
|
|
|
244,702
|
|
Other
intangible assets
|
|
39,783
|
|
|
|
39,972
|
|
Bank-owned
life insurance
|
|
135,371
|
|
|
|
131,454
|
|
Federal
Home Loan Bank stock
|
|
48,797
|
|
|
|
48,797
|
|
Income
tax receivable
|
|
42,400
|
|
|
|
1,488
|
|
Other
assets
|
|
75,960
|
|
|
|
37,076
|
|
Total
assets
|
$
|
5,432,361
|
|
|
$
|
5,680,386
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
$
|
627,094
|
|
|
$
|
665,034
|
|
Interest-bearing
demand
|
|
472,269
|
|
|
|
461,175
|
|
Savings
and money market
|
|
1,057,881
|
|
|
|
1,178,855
|
|
Time
|
|
1,754,322
|
|
|
|
1,697,655
|
|
Total
deposits
|
|
3,911,566
|
|
|
|
4,002,719
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
279,450
|
|
|
|
16,000
|
|
Long-term
debt
|
|
649,257
|
|
|
|
916,019
|
|
Minority
interest
|
|
10,049
|
|
|
|
13,104
|
|
Other
liabilities
|
|
55,748
|
|
|
|
58,141
|
|
Total
liabilities
|
|
4,906,070
|
|
|
|
5,005,983
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, no par value, authorized 1,000,000 shares, none
issued
|
|
-
|
|
|
|
-
|
|
Common
stock, no par value, authorized 100,000,000 shares, issued and
outstanding
|
|
|
|
|
|
|
|
28,732,259
shares at December 31, 2008 and 28,756,647 shares at December 31,
2007
|
|
403,176
|
|
|
|
403,304
|
|
Surplus
|
|
55,963
|
|
|
|
54,669
|
|
Retained
earnings
|
|
63,762
|
|
|
|
222,644
|
|
Accumulated
other comprehensive income (loss)
|
|
3,390
|
|
|
|
(6,214
|
)
|
Total
shareholders' equity
|
|
526,291
|
|
|
|
674,403
|
|
Total
liabilities and shareholders' equity
|
$
|
5,432,361
|
|
|
$
|
5,680,386
|
|
See
accompanying notes to consolidated financial statements.
CENTRAL
PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands, except per share data)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
$
|
263,183
|
|
|
$
|
308,720
|
|
|
$
|
279,246
|
|
Interest
and dividends on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
interest
|
|
34,793
|
|
|
|
34,721
|
|
|
|
34,775
|
|
Tax-exempt
interest
|
|
5,373
|
|
|
|
5,420
|
|
|
|
5,080
|
|
Dividends
|
|
44
|
|
|
|
247
|
|
|
|
538
|
|
Interest
on deposits in other banks
|
|
12
|
|
|
|
170
|
|
|
|
550
|
|
Interest
on Federal funds sold and securities purchased under agreements to
resell
|
|
83
|
|
|
|
306
|
|
|
|
143
|
|
Dividends
on Federal Home Loan Bank stock
|
|
464
|
|
|
|
293
|
|
|
|
49
|
|
Total
interest income
|
|
303,952
|
|
|
|
349,877
|
|
|
|
320,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits:
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
860
|
|
|
|
556
|
|
|
|
566
|
|
Savings
and money market
|
|
12,528
|
|
|
|
23,950
|
|
|
|
17,684
|
|
Time
|
|
48,917
|
|
|
|
69,467
|
|
|
|
53,419
|
|
Interest
on short-term borrowings
|
|
6,563
|
|
|
|
1,616
|
|
|
|
2,197
|
|
Interest
on long-term debt
|
|
33,129
|
|
|
|
42,390
|
|
|
|
35,666
|
|
Total
interest expense
|
|
101,997
|
|
|
|
137,979
|
|
|
|
109,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
201,955
|
|
|
|
211,898
|
|
|
|
210,849
|
|
Provision
for loan and lease losses
|
|
171,668
|
|
|
|
53,001
|
|
|
|
1,350
|
|
Net
interest income after provision for loan and lease losses
|
|
30,287
|
|
|
|
158,897
|
|
|
|
209,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
14,738
|
|
|
|
14,167
|
|
|
|
14,408
|
|
Other
service charges and fees
|
|
14,062
|
|
|
|
13,178
|
|
|
|
12,188
|
|
Income
from bank-owned life insurance
|
|
4,876
|
|
|
|
5,821
|
|
|
|
3,989
|
|
Net
gain on sales of residential loans
|
|
7,717
|
|
|
|
5,389
|
|
|
|
4,863
|
|
Income
from fiduciary activities
|
|
3,921
|
|
|
|
3,566
|
|
|
|
2,915
|
|
Loan
placement fees
|
|
814
|
|
|
|
1,079
|
|
|
|
1,767
|
|
Fees
on foreign exchange
|
|
665
|
|
|
|
721
|
|
|
|
765
|
|
Equity
in earnings of unconsolidated subsidiaries
|
|
561
|
|
|
|
703
|
|
|
|
576
|
|
Investment
securities gains (losses)
|
|
265
|
|
|
|
(1,715
|
)
|
|
|
(1,510
|
)
|
Other
|
|
7,189
|
|
|
|
2,895
|
|
|
|
3,195
|
|
Total
other operating income
|
|
54,808
|
|
|
|
45,804
|
|
|
|
43,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
67,019
|
|
|
|
62,562
|
|
|
|
73,211
|
|
Goodwill
impairment
|
|
94,279
|
|
|
|
48,000
|
|
|
|
-
|
|
Net
occupancy
|
|
12,764
|
|
|
|
10,408
|
|
|
|
9,218
|
|
Legal
and professional services
|
|
12,138
|
|
|
|
9,137
|
|
|
|
8,575
|
|
Equipment
|
|
5,722
|
|
|
|
5,228
|
|
|
|
4,864
|
|
Communication
expense
|
|
4,484
|
|
|
|
4,266
|
|
|
|
4,642
|
|
Computer
software expense
|
|
3,446
|
|
|
|
3,360
|
|
|
|
2,818
|
|
Amortization
and impairment of other intangible assets
|
|
8,412
|
|
|
|
4,992
|
|
|
|
6,120
|
|
Advertising
expense
|
|
3,358
|
|
|
|
2,582
|
|
|
|
2,569
|
|
Foreclosed
asset expense
|
|
7,360
|
|
|
|
-
|
|
|
|
-
|
|
Loss
on sale of commercial real estate loans
|
|
1,874
|
|
|
|
-
|
|
|
|
-
|
|
Write
down of assets
|
|
23,796
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
28,170
|
|
|
|
26,021
|
|
|
|
20,146
|
|
Total
other operating expense
|
|
272,822
|
|
|
|
176,556
|
|
|
|
132,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
(187,727
|
)
|
|
|
28,145
|
|
|
|
120,492
|
|
Income
taxes (benefit)
|
|
(49,313
|
)
|
|
|
22,339
|
|
|
|
41,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
(138,414
|
)
|
|
$
|
5,806
|
|
|
$
|
79,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
$
|
(4.83
|
)
|
|
$
|
0.19
|
|
|
$
|
2.60
|
|
Diluted
earnings (
loss)
per share
|
|
(4.83
|
)
|
|
|
0.19
|
|
|
|
2.57
|
|
Cash
dividends declared
|
|
0.70
|
|
|
|
0.98
|
|
|
|
0.88
|
|
See accompanying notes to
consolidated financial statements.
CENTRAL
PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
Years
Ended December 31, 2008, 2007 & 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Common
|
|
|
|
|
|
Retained
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
|
|
|
Stock
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Awards
|
|
|
Income
(Loss)
|
|
|
Total
|
|
|
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
$
|
428,012
|
|
|
$
|
46,432
|
|
|
$
|
218,341
|
|
|
$
|
(612
|
)
|
|
$
|
(15,939
|
)
|
|
$
|
676,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
|
-
|
|
|
|
79,180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,180
|
|
Net
change in unrealized gain (loss) on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities,
net of taxes of $137
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
258
|
|
|
|
258
|
|
Minimum
pension liability adjustment, net of taxes of $556
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
883
|
|
|
|
883
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,321
|
|
Adjustment
to initially apply SFAS No. 158, net of taxes $(231)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(347
|
)
|
|
|
(347
|
)
|
Cash
dividends ($0.88 per share)
|
|
-
|
|
|
|
-
|
|
|
|
(26,897
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,897
|
)
|
262,117
shares of common stock issued in conjunction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with
stock option exercises
|
|
3,658
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,658
|
|
1,156
shares of common stock purchased by directors'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred
compensation plan
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(43
|
)
|
10,410
shares of common stock issued under stock plans
|
|
-
|
|
|
|
260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
260
|
|
Share-based
compensation
|
|
-
|
|
|
|
3,478
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,478
|
|
Reclassification
of share-based plans
|
|
(723
|
)
|
|
|
665
|
|
|
|
-
|
|
|
|
612
|
|
|
|
-
|
|
|
|
554
|
|
Tax
impact of stock options exercised
|
|
-
|
|
|
|
921
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
921
|
|
Balance
at December 31, 2006
|
$
|
430,904
|
|
|
$
|
51,756
|
|
|
$
|
270,624
|
|
|
$
|
-
|
|
|
$
|
(15,145
|
)
|
|
$
|
738,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
|
-
|
|
|
|
5,806
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,806
|
|
Net
change in unrealized gain (loss) on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities,
net of taxes of $6,020
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,001
|
|
|
|
9,001
|
|
Minimum
pension liability adjustment, net of taxes of $(50)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
(70
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,737
|
|
Cash
dividends ($0.98 per share)
|
|
-
|
|
|
|
-
|
|
|
|
(29,631
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(29,631
|
)
|
177,745
shares of common stock issued in conjunction with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with
stock option exercises and restricted stock awards
|
|
2,182
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,182
|
|
1,400
shares of common stock purchased by directors'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred
compensation plan
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(43
|
)
|
2,156,000
shares of common stock repurchased
|
|
(30,269
|
)
|
|
|
-
|
|
|
|
(24,636
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(54,905
|
)
|
Cumulative
effect of change in accounting principal
|
|
-
|
|
|
|
-
|
|
|
|
481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
481
|
|
18,529
shares of common stock issued under stock plans
|
|
530
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
530
|
|
Share-based
compensation
|
|
-
|
|
|
|
2,857
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,857
|
|
Tax
impact of stock options exercised
|
|
-
|
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
Balance
at December 31, 2007
|
$
|
403,304
|
|
|
$
|
54,669
|
|
|
$
|
222,644
|
|
|
$
|
-
|
|
|
$
|
(6,214
|
)
|
|
$
|
674,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
-
|
|
|
|
-
|
|
|
|
(138,414
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(138,414
|
)
|
Net
change in unrealized gain (loss) on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities,
net of taxes of $927
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,383
|
|
|
|
1,383
|
|
Net
change in unrealized gain (loss) on derivatives, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes
of $9,942
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,864
|
|
|
|
14,864
|
|
Minimum
pension liability adjustment, net of taxes of $(4,442)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,643
|
)
|
|
|
(6,643
|
)
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128,810
|
)
|
Cash
dividends ($0.70 per share)
|
|
-
|
|
|
|
-
|
|
|
|
(20,112
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,112
|
)
|
1,000
shares of common stock issued in conjunction with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
option exercises and restricted stock awards
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
6,362
shares of common stock purchased by directors'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred
compensation plan
|
|
(94
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(94
|
)
|
100,000
shares of common stock repurchased
|
|
(1,404
|
)
|
|
|
-
|
|
|
|
(356
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,760
|
)
|
74,612
shares of common stock issued under stock plans
|
|
1,361
|
|
|
|
(833
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
528
|
|
Share-based
compensation
|
|
-
|
|
|
|
2,087
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,087
|
|
Tax
impact of stock options exercised
|
|
-
|
|
|
|
40
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
Balance
at December 31, 2008
|
$
|
403,176
|
|
|
$
|
55,963
|
|
|
$
|
63,762
|
|
|
$
|
-
|
|
|
$
|
3,390
|
|
|
$
|
526,291
|
|
CENTRAL
PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Continued)
Years
Ended December 31, 2008, 2007 & 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Common
|
|
|
|
|
|
Retained
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
|
|
|
Stock
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Awards
|
|
|
Income
(Loss)
|
|
|
Total
|
|
|
(Dollars
in thousands, except per share data)
|
|
Disclosure
of reclassification amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure
of reclassification amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gain (loss) on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
period, net of taxes of $1,029
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,589
|
|
|
$
|
1,589
|
|
Reclassification
adjustment for losses included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
income, net of taxes of $(890)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,331
|
)
|
|
|
(1,331
|
)
|
Net
change in unrealized gain (loss) on investment securities
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
258
|
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure
of reclassification amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gain (loss) on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
period, net of taxes of $7,402
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,065
|
|
|
$
|
11,065
|
|
Reclassification
adjustment for losses included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
income, net of taxes of $(1,382)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,064
|
)
|
|
|
(2,064
|
)
|
Net
change in unrealized gain (loss) on investment securities
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,001
|
|
|
$
|
9,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure
of reclassification amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gain on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
period, net of taxes of $845
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,260
|
|
|
$
|
1,260
|
|
Reclassification
adjustment for net gains included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
income, net of taxes of $82
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123
|
|
|
|
123
|
|
Net
change in unrealized gain (loss) on investment securities
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,383
|
|
|
$
|
1,383
|
|
See
accompanying notes to consolidated financial
statements.
CENTRAL
PACIFIC FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
(138,414
|
)
|
|
$
|
5,806
|
|
|
$
|
79,180
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
171,668
|
|
|
|
53,001
|
|
|
|
1,350
|
|
Goodwill
impairment
|
|
94,279
|
|
|
|
48,000
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
8,060
|
|
|
|
7,161
|
|
|
|
6,597
|
|
Amortization
and impairment of other intangible assets
|
|
8,412
|
|
|
|
4,992
|
|
|
|
6,120
|
|
Write
down of assets
|
|
23,796
|
|
|
|
-
|
|
|
|
-
|
|
Foreclosed
asset expense
|
|
7,360
|
|
|
|
-
|
|
|
|
-
|
|
Net
amortization of investment securities
|
|
1,821
|
|
|
|
2,566
|
|
|
|
2,757
|
|
Deferred
income tax benefit
|
|
(17,497
|
)
|
|
|
(20,973
|
)
|
|
|
(3,421
|
)
|
Share-based
compensation
|
|
2,087
|
|
|
|
2,857
|
|
|
|
3,478
|
|
Net
loss (gain) on investment securities available for sale
|
|
(265
|
)
|
|
|
1,715
|
|
|
|
1,510
|
|
Net
gain on sales of residential loans
|
|
(7,717
|
)
|
|
|
(5,389
|
)
|
|
|
(4,863
|
)
|
Net
loss on sale of commercial real estate loans
|
|
1,874
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from sales of trading securities
|
|
4,986
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from sales of loans held for sale
|
|
1,406,271
|
|
|
|
965,649
|
|
|
|
520,913
|
|
Originations
of loans held for sale
|
|
(1,233,736
|
)
|
|
|
(971,163
|
)
|
|
|
(482,181
|
)
|
Tax
benefits from share-based compensation
|
|
(40
|
)
|
|
|
(56
|
)
|
|
|
(921
|
)
|
Equity
in earnings of unconsolidated subsidiaries
|
|
(561
|
)
|
|
|
(703
|
)
|
|
|
(576
|
)
|
Increase
in cash surrender value of bank-owned life insurance
|
|
(4,892
|
)
|
|
|
(5,834
|
)
|
|
|
(4,068
|
)
|
Ineffective
portion of derivative
|
|
(2,098
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss
on counterparty financing transaction
|
|
2,841
|
|
|
|
-
|
|
|
|
-
|
|
Decrease
(increase) in income tax receivable
|
|
(40,912
|
)
|
|
|
(3,593
|
)
|
|
|
5,081
|
|
Net
increase in other assets and liabilities
|
|
(13,335
|
)
|
|
|
(4,004
|
)
|
|
|
(13,185
|
)
|
Net
cash provided by operating activities
|
|
273,988
|
|
|
|
80,032
|
|
|
|
117,771
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities of and calls on investment securities available for
sale
|
|
471,605
|
|
|
|
815,750
|
|
|
|
741,865
|
|
Proceeds
from sales of investment securities available for sale
|
|
10,735
|
|
|
|
117,714
|
|
|
|
107,483
|
|
Purchases
of investment securities available for sale
|
|
(406,155
|
)
|
|
|
(924,595
|
)
|
|
|
(832,620
|
)
|
Proceeds
from maturities of and calls on investment securities held to
maturity
|
|
36,899
|
|
|
|
18,975
|
|
|
|
6,326
|
|
Proceeds
from sales of securities held to maturity
|
|
454
|
|
|
|
-
|
|
|
|
-
|
|
Net
loan originations
|
|
(395,074
|
)
|
|
|
(294,597
|
)
|
|
|
(293,970
|
)
|
Purchases
of loans and loan portfolios
|
|
-
|
|
|
|
(13,721
|
)
|
|
|
-
|
|
Proceeds
from sales of loans originated for investment
|
|
112,871
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from sales of securitized residential mortgage loans
|
|
20,838
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from sales of other real estate
|
|
2,000
|
|
|
|
-
|
|
|
|
-
|
|
Purchase
of bank-owned life insurance
|
|
(250
|
)
|
|
|
(25,000
|
)
|
|
|
(30,000
|
)
|
Proceeds
from bank-owned life insurance
|
|
1,224
|
|
|
|
1,774
|
|
|
|
-
|
|
Purchases
of premises and equipment
|
|
(6,278
|
)
|
|
|
(12,660
|
)
|
|
|
(11,370
|
)
|
Distributions
from unconsolidated subsidiaries
|
|
667
|
|
|
|
630
|
|
|
|
767
|
|
Contributions
to unconsolidated subsidiaries
|
|
(880
|
)
|
|
|
(7,109
|
)
|
|
|
(3,040
|
)
|
Acquisition
of businesses and minority interests, net of cash acquired
|
|
(6,738
|
)
|
|
|
(468
|
)
|
|
|
(975
|
)
|
Net
cash used in investing activities
|
|
(158,082
|
)
|
|
|
(323,307
|
)
|
|
|
(315,534
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
(91,153
|
)
|
|
|
158,236
|
|
|
|
202,239
|
|
Proceeds
from long-term debt
|
|
30,000
|
|
|
|
250,000
|
|
|
|
225,000
|
|
Repayments
of long-term debt
|
|
(271,291
|
)
|
|
|
(73,404
|
)
|
|
|
(232,824
|
)
|
Net
increase (decrease) in short-term borrowings
|
|
263,450
|
|
|
|
(63,308
|
)
|
|
|
(3,426
|
)
|
Cash
dividends paid
|
|
(20,112
|
)
|
|
|
(29,631
|
)
|
|
|
(26,897
|
)
|
Tax
benefits from share-based compensation
|
|
40
|
|
|
|
56
|
|
|
|
921
|
|
Repurchases
of common stock
|
|
(1,760
|
)
|
|
|
(54,905
|
)
|
|
|
-
|
|
Proceeds
from issuance of common stock and stock option exercises
|
|
536
|
|
|
|
2,712
|
|
|
|
3,658
|
|
Net
cash provided by (used in) financing activities
|
|
(90,290
|
)
|
|
|
189,756
|
|
|
|
168,671
|
|
Net
increase (decrease) in cash & cash equivalents
|
|
25,616
|
|
|
|
(53,519
|
)
|
|
|
(29,092
|
)
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
At
beginning of year
|
|
82,129
|
|
|
|
135,648
|
|
|
|
164,740
|
|
At
end of year
|
$
|
107,745
|
|
|
$
|
82,129
|
|
|
$
|
135,648
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
$
|
106,746
|
|
|
$
|
135,702
|
|
|
$
|
104,356
|
|
Income
taxes
|
|
13,857
|
|
|
|
38,261
|
|
|
|
47,223
|
|
Cash
received during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
3,364
|
|
|
|
-
|
|
|
|
-
|
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in common stock held by directors' deferred compensation
plan
|
$
|
94
|
|
|
$
|
43
|
|
|
$
|
43
|
|
Net
reclassification of loans to other real estate
|
|
17,842
|
|
|
|
-
|
|
|
|
-
|
|
Net
transfer of loans to loans held for sale
|
|
167,354
|
|
|
|
-
|
|
|
|
-
|
|
Securitization
of residential mortgage loans into trading mortgage backed
securities
|
|
4,995
|
|
|
|
-
|
|
|
|
-
|
|
Securitization
of residential mortgage loans into available for sale mortgage backed
securities
|
|
10,936
|
|
|
|
-
|
|
|
|
-
|
|
See
accompanying notes to consolidated financial
statements.
CENTRAL
PACIFIC FINANCIAL CORP. & SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2008, 2007 and 2006
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Description
of Business
Central
Pacific Financial Corp. is a bank holding company. Our principal operating
subsidiary, Central Pacific Bank (“CPB,” “our bank” or “the bank”), is a
full-service commercial bank with a combined 39 banking offices located
throughout the state of Hawaii at December 31, 2008. The bank engages
in a broad range of lending activities including the granting of commercial,
consumer and real estate loans. The bank also offers a variety of deposit
products and services. These include personal and business checking and savings
accounts, money market accounts and time certificates of deposit. Other products
and services include debit cards, internet banking, cash management services,
traveler’s checks, safe deposit boxes, international banking services, night
depository facilities and wire transfers. Wealth management products and
services include non-deposit investment products, annuities, insurance,
investment management, asset custody and general consultation and planning
services.
When we
refer to “the Company,” “we,” “us” or “our,” we mean Central Pacific Financial
Corp. & Subsidiaries (consolidated). When we refer to “Central Pacific
Financial Corp.” or to the holding company, we are referring to the parent
company on a standalone basis.
The
banking business depends on rate differentials, the difference between the
interest rates paid on deposits and other borrowings and the interest rates
received on loans extended to customers and investment securities held in our
portfolio. These rates are highly sensitive to many factors that are beyond our
control. Accordingly, the earnings and growth of the Company are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. We acquired Hawaii HomeLoans
(“HHL”), which is now known as Central Pacific HomeLoans (“CPHL”), on
August 17, 2005 and we acquired Pacific Islands Financial Management LLC
(“PIFM”) on July 1, 2008. The results of operations of CPHL and PIFM are
included in the consolidated financial statements from their respective
acquisition dates.
We have a
50% ownership interest in each of the following mortgage brokerage companies:
Pacific Access Mortgage, LLC; Lokahi Mortgage, LLC; Gentry HomeLoans, LLC; Towne
Island Mortgage, LLC; Pacific Island HomeLoans, LLC; Hawaii Resort Lending, LLC;
Laulima Financial, LLC; and Pacific Portfolio, LLC. We have concluded that these
investments do not meet the consolidation requirements under Financial
Accounting Standards Board (“FASB”) Interpretation No. 46(R) (as amended),
“
Consolidation of Variable
Interest Entities
- An
Interpretation of ARB No. 51
” or Accounting Research Bulletin No. 51
(As Amended)
, “
Consolidated Financial
Statements
.”
Accordingly, these investments are accounted for using the equity method
and are included in Investment in Unconsolidated Subsidiaries. We also have
minority equity investments in affiliates that are accounted for under the cost
method and are included in Investment in Unconsolidated
Subsidiaries.
Our
investments in unconsolidated subsidiaries accounted for under the equity and
cost methods were $0.9 million and $14.6 million, respectively, at December 31,
2008 and $0.9 million and $16.0 million, respectively, at December 31, 2007. Our
policy for determining impairment of these investments includes an evaluation of
whether a loss in value of an investment is other than temporary. Evidence of a
loss in value includes absence of an ability to recover the carrying amount of
the investment or the inability of the investee to sustain an earnings capacity
which would justify the carrying amount of the investment. We perform impairment
tests whenever indicators of impairment are present. If the value of an
investment declines and it is considered other than temporary, the investment is
written down to its respective fair value in the period in which this
determination is made.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that reflect the reported amounts
of assets and liabilities and disclosures of contingent assets and contingent
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance and provision for loan and lease losses, reserves
for unfunded commitments and deferred income tax assets and income tax expense,
as well as the valuation of investment securities, goodwill and other intangible
assets and the related amortization thereon, pension liability and expense and
fair value of financial instruments.
Reclassifications
and Corrections
Certain
prior year amounts in the consolidated financial statements and the notes
thereto have been reclassified to conform to the fiscal 2008 presentation. Such
reclassifications had no effect on the Company’s reported net income or
shareholders’ equity.
In the
fourth quarter of 2007, we performed a thorough review and reconciliation of our
income tax accounts and identified certain errors related to corrections of
prior period income tax provisions and income tax returns. Certain of these
errors resulted in an overstatement of income tax expense reported in prior
periods which were corrected in the fourth quarter of 2007. We believe that the
correction of these out-of-period amounts in 2007 was not material to our 2007
operating results or to the periods in which the errors originated.
Cash
and Cash Equivalents
For
purposes of the consolidated statements of cash flows, we consider cash and cash
equivalents to include cash and due from banks, interest-bearing deposits in
other banks, federal funds sold and all highly liquid investments with
maturities of three months or less at the time of purchase.
Investment
Securities
Investments
in debt securities and marketable equity securities are designated as trading,
available for sale, or held to maturity. Securities are designated as held to
maturity only if we have the positive intent and ability to hold these
securities to maturity. Held to maturity debt securities are reported at
amortized cost. Trading securities, of which we had none at December 31,
2008 and 2007, would be reported at fair value, with changes in fair value
included in earnings. Available-for-sale securities are reported at fair value
with net unrealized gains and losses, net of taxes, included in accumulated
other comprehensive income (loss).
We use
current quotations, where available, to estimate the fair value of investment
securities. Where current quotations are not available, we estimate fair value
based on the present value of expected future cash flows. We consider the facts
of each security including the nature of the security, the amount and duration
of the loss, credit quality of the issuer, the expectations for that security’s
performance and our intent and ability to hold the security until recovery.
Declines in the value of debt securities and marketable equity securities that
are considered other than temporary are recorded in other operating income.
Realized gains and losses on the sale of investment securities are recorded in
other operating income using the specific identification method.
We
amortize premiums and accrete discounts associated with investment securities
using the interest method over the life of the respective security
instrument.
As a
member of the FHLB-Seattle, the bank is required to obtain and hold a specific
number of shares of capital stock of the FHLB based on the amount of outstanding
FHLB advances. The securities are reported at cost and are presented separately
in the consolidated balance sheets.
Loans
Held for Sale
Loans
held for sale consists of Hawaii residential mortgage loans, as well as mainland
residential and commercial construction loans. Hawaii residential mortgage loans
classified as held for sale are carried at the lower of cost or fair value on an
aggregate basis. Net fees and costs associated with originating and acquiring
residential mortgage loans held for sale are deferred and are included in the
basis for determining the gain or loss on sales of loans held for sale. Mainland
residential and commercial construction loans are recorded at the lower of cost
or fair value on an individual basis.
Loans
originated with the intent to be held in our portfolio are subsequently
transferred to held for sale when a decision is made to sell these loans. At the
time of a loan’s transfer to the held for sale account, the loan is recorded at
the lower of cost or fair value. Any reduction in the loan’s value is reflected
as a write-down of the recorded investment resulting in a new cost basis, with a
corresponding reduction in the Allowance.
In
subsequent periods, if the fair value of a loan classified as held for sale is
less than its cost basis, a valuation adjustment is recognized in our
consolidated statement of operations in other operating expense and the carrying
value of the loan is adjusted accordingly. The valuation adjustment may be
recovered in the event that the fair value increases, which is also recognized
in our consolidated statement of operations in other operating
expense.
The fair
value of loans classified as held for sale are generally based upon quoted
prices for similar assets in active markets, acceptance of firm offer letters
with agreed upon purchase prices, discounted cash flow models that take into
account market observable assumptions, or independent appraisals of the
underlying collateral securing the loans. Collateral values are determined based
on appraisals received from qualified valuation professionals and are obtained
periodically or when indicators that property values may be impaired are
present.
Loans
Loans are
stated at the principal amount outstanding, net of unearned income. Unearned
income represents net deferred loan fees that are recognized over the life of
the related loan as an adjustment to yield. Net deferred loan fees are amortized
using the interest method over the contractual term of the loan, adjusted for
actual prepayments. Unamortized fees on loans paid in full are recognized as a
component of interest income.
Interest
income on loans is recognized on an accrual basis. Loans are placed on
nonaccrual status when interest payments are 90 days past due, or earlier should
management determine that the borrowers will be unable to meet contractual
principal and/or interest obligations, unless the loans are well-secured and in
the process of collection. When a loan is placed on nonaccrual status, all
interest previously accrued but not collected is reversed against current period
interest income should management determine that the collectibility of such
accrued interest is doubtful. All subsequent receipts are applied to principal
outstanding and no interest income is recognized unless the financial condition
and payment record of the borrowers warrant such recognition. A nonaccrual loan
may be restored to an accrual basis when principal and interest payments are
current and full payment of principal and interest is expected.
Leases
We
provide equipment financing to our customers through a variety of lease
arrangements. Direct financing leases are carried at the aggregate of lease
payments receivable plus estimated residual value of the leased property, less
unearned income. Unearned income on direct financing leases is amortized over
the lease terms by methods that approximate the interest method.
Allowance
for Loan and Lease Losses
The
allowance for loan and lease losses (the “Allowance”) is established through
provisions for loan and lease losses (“Provision”) charged against income.
Loans, to the extent deemed uncollectible, are charged off against the Allowance
and all interest previously accrued but not collected is reversed against
current period interest income. Subsequent receipts, if any, are credited first
to the remaining principal, then to the Allowance as recoveries, and finally to
unaccrued interest.
The
Allowance is maintained at a level that management deems sufficient to absorb
probable losses inherent in the loan portfolio. Our methodology for determining
the adequacy of the Allowance takes into account many factors, including the
level and trend of nonperforming and potential problem loans, net charge-off
experience, current repayment by borrowers, fair value of collateral securing
specific loans, changes in lending and underwriting standards and general
economic factors, nationally and in the markets in which we operate. In
addition, various regulatory agencies, as an integral part of their examination
processes, periodically review our Allowance. Such agencies may require that we
recognize additions to the Allowance based on their judgments about information
available to them at the time of their examination.
We
consider current information and events regarding our borrowers’ ability to
repay their obligations and treat a loan as impaired when it is probable that we
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the loan’s effective interest rate or, if the loan is considered
to be collateral dependent, based on the fair value of the collateral.
Impairment losses are included in the Allowance through a charge to the
Provision.
For
smaller-balance homogeneous loans (primarily residential real estate and
consumer loans), the Allowance is based upon management’s evaluation of the
quality, character and inherent risks in the loan portfolio, current and
projected economic conditions, and past loan loss experience.
Delinquent
consumer loans and residential mortgage loans are charged off or written down
within 120 days, unless determined to be adequately collateralized or in
imminent process of collection. Delinquent commercial loans and commercial
mortgage loans are charged off or written down when management determines that
collectibility is doubtful and the principal amount of the loans cannot be
repaid from proceeds of collateral liquidation.
Reserves
for unfunded commitments are recorded separately through a valuation allowance
included in other liabilities. Credit losses for off-balance sheet credit
exposures are deducted from the allowance for credit losses on off-balance sheet
credit exposures in the period in which the liability is settled. The allowance
for credit losses on off-balance sheet credit losses is established by a charge
to other operating expense.
Premises
and Equipment
Premises
and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are included in other operating
expense and are computed using the straight-line method over the shorter of the
estimated useful lives of the assets or the applicable leases. Useful lives
range from five to thirty-nine years for premises and improvements, and one to
seven years for equipment. Major improvements and betterments are capitalized,
while recurring maintenance and repairs are charged to operating expense. Net
gains or losses on dispositions of premises and equipment are included in other
operating expense.
Goodwill
and Other Intangible Assets
In
accordance with SFAS No. 142, “
Goodwill and Other Intangible
Assets
,” (“SFAS 142”) goodwill is tested for impairment on an annual
basis and between annual tests in certain circumstances, and written down when
impaired. Under SFAS 142, material amounts of goodwill attributable to each of
our reporting units are tested for impairment by comparing their respective fair
values to their carrying values. In its determination of fair value, the Company
utilizes both a discounted cash flow methodology and a market-based
approach, which is based on market multiples of similar businesses. Calculations
of fair value include significant assumptions and estimates of market
conditions, projected cash flows and discount rates applied. Changes in these
assumptions and estimates could result in a material adverse impact on our
goodwill impairment test. Absent any impairment indicators, we perform our
goodwill impairment test annually.
Other
intangible assets include core deposit premiums, mortgage servicing rights,
customer relationships and non-compete agreements which are carried at the lower
of amortized cost or fair value. Other intangible assets are evaluated for
impairment if events and circumstances indicate a possible impairment. Core
deposit premiums are amortized on an accelerated basis over a 14-year period.
Mortgage servicing rights are recorded when loans are sold with servicing rights
retained, thereby creating a right to receive loan servicing fees. These rights
are periodically assessed for impairment. Any such indicated impairment is
recognized in income during the period in which it occurs. Mortgage servicing
rights are amortized over the period of estimated net servicing income. Customer
relationships and non-compete agreements are amortized on a straight-line basis
over estimated useful lives of ten and five years, respectively.
Other
Real Estate
Other
real estate is composed of properties acquired through foreclosure proceedings
and is initially recorded at fair value less estimated costs to sell the
property, thereby establishing the new cost basis of other real estate. Losses
arising at the time of acquisition of such properties are charged against the
Allowance. Subsequent to acquisition, such properties are carried at the lower
of cost or fair value less estimated selling expenses, determined on an
individual asset basis. Any deficiency resulting from the excess of cost over
fair value less estimated selling expenses is recognized as a valuation
allowance. Any subsequent increase in fair value up to its cost basis is
recorded as a reduction of the valuation allowance. Increases or decreases in
the valuation allowance are included in other operating expense. Net gains or
losses recognized on the sale of these properties are included in other
operating income.
Minority
Interest
Minority
interest is comprised of preferred stock issued to third parties by the
Company’s subsidiaries, CPB Real Estate, Inc. (“CPBREI”) and Citibank
Properties, Inc. (“CPI”).
Share
Based Compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
No. 123 (revised 2004), “
Share-Based Payment
” (“SFAS
123R”). SFAS 123R requires all share-based payments to employees, including
grants of employee stock options and restricted stock awards, to be recognized
in the financial statements based on their respective grant-date fair values. We
elected to use the modified prospective transition method as permitted by SFAS
123R. Under this transition method, compensation expense recognized beginning in
2006 includes (a) compensation expense for all share-based compensation
awards granted prior to, but not yet vested as of January 1, 2006, based on
the grant-date fair value estimated in accordance with the original provisions
of SFAS 123, “
Accounting for
Stock-Based Compensation
,” as adjusted for estimated forfeitures and
(b) compensation expense for all share-based compensation awards granted
subsequent to January 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123R. We recognize compensation
expense for all share-based payment awards on a straight-line basis over the
respective requisite service period of the awards, which is generally the
vesting period.
Income
Taxes
We
account for income taxes in accordance with SFAS 109, “
Accounting for Income Taxes
”
and FASB Interpretation No. 48, “
Accounting for Uncertainty in Income
Taxes
” (“FIN 48”). Deferred tax assets and liabilities are recognized for
the estimated future tax effects attributable to temporary differences and
carryforwards. A valuation allowance may be required if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. In determining whether a valuation
allowance is necessary, we consider the level of taxable income in prior years,
to the extent that carrybacks are permitted under current tax laws, as well as
estimates of future taxable income and tax planning strategies that could be
implemented to accelerate taxable income if necessary. If our estimates of
future taxable income were reduced or if our assumptions regarding the tax
consequences of tax planning strategies were inaccurate, some or all of our
deferred tax assets may not be realized, which would result in a charge to
earnings. Our continuing practice is to recognize interest and penalties related
to income tax matters in interest expense and other expense,
respectively.
We have
established income tax contingencies reserves for potential tax liabilities
related to uncertain tax positions. Tax benefits are recognized when we
determine that it is more likely than not that such benefits will be realized.
Where uncertainty exists due to the complexity of income tax statutes, and where
the potential tax amounts are significant, we generally seek independent tax
opinions to support our positions. If our evaluation of the likelihood of the
realization of benefits is inaccurate, we could incur additional income tax and
interest expense that would adversely impact earnings, or we could receive tax
benefits greater than anticipated which would positively impact
earnings.
Earnings
(Loss) per Share
Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period, excluding unvested
restricted stock. Diluted earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the period
increased by the dilutive effect of stock options and stock awards, less shares
held in a Rabbi trust pursuant to a deferred compensation plan for
directors.
Forward
Foreign Exchange Contracts
We are
periodically a party to a limited amount of forward foreign exchange contracts
to satisfy customer requirements for foreign currencies. These contracts are not
utilized for trading purposes and are carried at market value, with realized
gains and losses included in fees on foreign exchange.
Derivatives
and Hedging Activities
We
recognize all derivatives on the balance sheet at fair value. On the date that
we enter into a derivative contract, we designate the derivative as
(1) a hedge of the fair value of an identified asset or liability (“fair
value hedge”), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to an identified asset
or liability (“cash flow hedge”) or (3) a transaction not qualifying for
hedge accounting (“free standing derivative”). For a fair value hedge, changes
in the fair value of the derivative and, to the extent that it is effective,
changes in the fair value of the hedged asset or liability, attributable to the
hedged risk, are recorded in current period net income in the same financial
statement category as the hedged item. For a cash flow hedge, changes in the
fair value of the derivative, to the extent that it is effective, is recorded in
other comprehensive income. These changes in fair value are subsequently
reclassified to net income in the same period(s) that the hedged
transaction affects net income in the same financial statement category as the
hedged item. For free standing derivatives, changes in fair values are reported
in current period other operating income.
Recent
Accounting Pronouncements
On
January 1, 2008, we adopted the following new accounting
pronouncements:
·
|
SFAS
157 – Statement of Financial Accounting Standards No. 157, “
Fair Value
Measurements
,”
|
·
|
SFAS
159 – Statement of Financial Accounting Standards No. 159, “
The Fair Value Option for
Financial Assets and Financial
Liabilities
,”
|
·
|
EITF
06-10 – Emerging Issues Task Force Issue No. 06-10, “
Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Collateral Assignment
Split-Dollar Life Insurance
Arrangements
,”
|
·
|
SAB
109 – Staff Accounting Bulletin No. 109, “
Written Loan Commitments
Recorded at Fair Value Through
Earnings.
”
|
On
October 10, 2008, we adopted FSP FAS No. 157-3, “
Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active
.”
The
adoption of the pronouncements described above did not have a material impact on
our consolidated financial statements.
In
February 2008, the FASB amended SFAS 157 through the issuance of FSP FAS No.
157-2, “
Effective Date of FASB
Statement No. 157
” (“FSP FAS 157-2”). FSP FAS 157-2 is effective
upon issuance and delays the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008, for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). Examples of applicable
nonfinancial assets and nonfinancial liabilities to which FSP FAS 157-2 applies
include, but are not limited to:
·
|
Nonfinancial
assets and nonfinancial liabilities initially measured at fair value in a
business combination or other new basis event, but not measured at fair
value in subsequent periods;
|
·
|
Reporting
units measured at fair value in the first step of a goodwill impairment
test as described in paragraph 19 of SFAS
142;
|
·
|
Nonfinancial
assets and nonfinancial liabilities measured at fair value in the second
step of a goodwill impairment test as described in paragraphs 20 and 21 of
SFAS 142;
|
·
|
Nonfinancial
long-lived assets (asset groups) measured at fair value for an impairment
assessment under SFAS No. 144, “
Accounting for the Impairment
or Disposal of Long-Lived
Assets
.”
|
As
permitted under SFAS 157, we plan to adopt the provisions of SFAS 157 for
nonfinancial assets and nonfinancial liabilities that are not recognized or
disclosed at fair value in our financial statements on a recurring basis
effective January 1, 2009. We do not expect the adoption of this statement
to have a material impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51
”
(“SFAS 160”). SFAS 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement.
SFAS 160 clarifies that changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value of
the noncontrolling equity investment on the deconsolidation date. SFAS 160
also includes expanded disclosure requirements regarding the interests of the
parent and its noncontrolling interest. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. We do not expect the
adoption of this statement to have a material impact on our consolidated
financial statements.
In March
2008, the FASB issued SFAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities - an amendment of SFAS No. 133
” (“SFAS
161”). SFAS 161 enhances required disclosures regarding derivatives and hedging
activities, including enhanced disclosures regarding how (a) an entity uses
derivative instruments; (b) derivative instruments and related hedged items are
accounted for under SFAS No. 133, “
Accounting for Derivative
Instruments and Hedging Activities
;” and (c) derivative instruments and
related hedged items affect an entity's financial position, financial
performance, and cash flows. Specifically, SFAS 161 requires (1) disclosure of
the objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation; (2) disclosure of the fair values of
derivative instruments and their gains and losses in a tabular format; (3)
disclosure of information about credit-risk-related contingent features; and (4)
cross-reference from the derivative footnote to other footnotes in which
derivative-related information is disclosed. SFAS 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. We do not expect
the adoption of this statement to have a material impact on our consolidated
financial statements.
In May
2008, the FASB issued SFAS No. 162, “
The Hierarchy of Generally Accepted
Accounting Principles
” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. SFAS 162 is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411. We are
evaluating the impact of this pronouncement on our consolidated financial
statements.
In June
2008, the FASB issued FSP EITF No. 03-6-1, “
Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
”
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. FSP EITF
03-6-1 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
We do not expect the adoption of this statement to have a material impact on our
consolidated financial statements.
In
September 2008, the EITF reached a consensus on EITF No. 08-6, “
Equity Method Investment Accounting
Considerations
” (“EITF 08-6”). EITF 08-6 applies to all investments
accounted for under the equity method and clarifies the accounting for certain
transactions and impairment considerations involving those investments. EITF
08-6 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The consensus must be applied
prospectively and earlier adoption by an entity that has previously adopted an
alternative accounting policy is not permitted. We do not expect the adoption of
this statement to have a material impact on our consolidated financial
statements.
In
December 2008, the FASB issued FSP FAS 132(R)-1, “
Employer’s Disclosures about
Postretirement Benefit Plan Assets
” (“FSP FAS 132(R)-1”). FSP FAS
132(R)-1 amends SFAS 132 (Revised 2003), “
Employers’ Disclosures about
Pensions and Other Postretirement Benefits
,”
to provide guidance on
an employer’s disclosures about plan assets of a defined benefit pension or
other postretirement plan. FSP FAS 132(R)-1 also includes a technical amendment
to SFAS 132R that requires a nonpublic entity to disclose net periodic benefit
cost for each annual period for which a statement of income is presented. FSP
FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. Upon
initial application, the provisions of FSP FAS 132(R)-1 are not required for
earlier periods that are presented for comparative purposes. Early adoption is
permitted. The technical amendment to SFAS 132R is effective upon issuance of
FSP FAS 132(R)-1. We are evaluating the impact of this pronouncement on our
consolidated financial statements.
In
January 2009, the FASB issued FSP EITF No. 99-20-1, “
Amendments to the Impairment
Guidance of EITF Issue No. 99-20
” (“FSP EITF 99-20-1”). FSP EITF 99-20-1
amends the impairment guidance in EITF 99-20, “
Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets
.” The
FASB believes this guidance will achieve a more consistent determination of
whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also
retains and emphasizes the objective of an other-than-temporary impairment
assessment and the related disclosure requirements in SFAS 115, “
Accounting for Certain Investments
in Debt and Equity Securities
,” and other related guidance. FSP EITF
99-20-1 is effective for interim and annual reporting periods ending after
December 15, 2008, and shall be applied prospectively. Retrospective application
to a prior interim or annual reporting period is not permitted. We do not expect
the adoption of this statement to have a material impact on our consolidated
financial statements.
Hawaii
HomeLoans, Inc.
Pursuant
to the Agreement of Acquisition by and between Central Pacific Bank and HHL, we
completed the acquisition of HHL on August 17, 2005 for approximately $8.3
million, net of cash acquired. The Agreement of Acquisition provides for
additional purchase consideration resulting from earnout and overage provisions
tied to future mortgage loan origination volumes. During 2008, 2007 and 2006, we
made earnout payments of approximately $1.4 million, $0.5 million and $1.0
million, respectively, in accordance with the provisions of the Agreement of
Acquisition.
Pacific Islands
Financial Management LLC
On July
1, 2008 (the “acquisition date”), we completed the acquisition of certain assets
of Pacific Islands Financial Management LLC (“PIFM”), a Hawaii based investment
advisory firm that managed money for private clients, corporate accounts and
various retirement plans. The acquisition is expected to enhance our asset
management operations by providing access to new customers and greater
resources.
At the
acquisition date, we paid $2.2 million (the “purchase price”) in cash to
purchase the assets of PIFM. Additional cash consideration of up to $2.1 million
may be paid five years from the date of acquisition as a result of earnout
provisions tied to revenue growth during the five year period immediately
following the acquisition date.
The
acquisition was accounted for using the purchase accounting method. Accordingly,
the purchase price was allocated to the assets acquired based on their estimated
fair values at the acquisition date. No liabilities were assumed in the
acquisition. As a result of the acquisition, we recognized certain identifiable
intangible assets including customer relationships of $1.4 million and
non-compete agreements of $0.3 million, which are amortized on a straight-line
basis over their estimated useful lives of 10 years and 5 years, respectively.
The excess of the purchase price over the amounts assigned to the assets
acquired of $0.5 million was recognized as goodwill and was assigned to our
Hawaii Market reportable segment. It is anticipated that all of the goodwill
resulting from the acquisition will be deductible for income tax
purposes.
Pro forma
results of operations have not been presented for the acquisition of PIFM
because the effects of the acquisition were not material to our consolidated
financial statements.
Central
Pacific Bank is required by the Federal Reserve Bank to maintain reserves based
on the amount of deposits held. The amount held as a reserve by our bank at
December 31, 2008 and 2007 was $61.9 million and $60.8 million,
respectively.
A summary
of investment securities is as follows:
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Estimated
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
fair
value
|
|
(Dollars
in thousands)
|
2008
|
|
|
|
|
|
|
|
|
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
$
|
1,984
|
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
1,992
|
U.S.
Government sponsored entities mortgage-backed securities
|
|
6,713
|
|
|
|
68
|
|
|
|
(14
|
)
|
|
|
6,767
|
Total
|
$
|
8,697
|
|
|
$
|
76
|
|
|
$
|
(14
|
)
|
|
$
|
8,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government sponsored entities debt securities
|
$
|
98,819
|
|
|
$
|
1,335
|
|
|
$
|
(225
|
)
|
|
$
|
99,929
|
States
and political subdivisions
|
|
126,427
|
|
|
|
1,003
|
|
|
|
(3,040
|
)
|
|
|
124,390
|
U.S.
Government sponsored entities mortgage-backed securities
|
|
403,031
|
|
|
|
8,615
|
|
|
|
(338
|
)
|
|
|
411,308
|
Privately-issued
mortgage-backed securities
|
|
111,308
|
|
|
|
-
|
|
|
|
(5,217
|
)
|
|
|
106,091
|
Other
|
|
1,106
|
|
|
|
-
|
|
|
|
(224
|
)
|
|
|
882
|
Total
|
$
|
740,691
|
|
|
$
|
10,953
|
|
|
$
|
(9,044
|
)
|
|
$
|
742,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government sponsored entities debt securities
|
$
|
26,844
|
|
|
$
|
-
|
|
|
$
|
(68
|
)
|
|
$
|
26,776
|
States
and political subdivisions
|
|
9,643
|
|
|
|
53
|
|
|
|
-
|
|
|
|
9,696
|
U.S.
Government sponsored entities mortgage-backed securities
|
|
9,637
|
|
|
|
9
|
|
|
|
(41
|
)
|
|
|
9,605
|
Total
|
$
|
46,124
|
|
|
$
|
62
|
|
|
$
|
(109
|
)
|
|
$
|
46,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government sponsored entities debt securities
|
$
|
79,563
|
|
|
$
|
539
|
|
|
$
|
-
|
|
|
$
|
80,102
|
States
and political subdivisions
|
|
147,559
|
|
|
|
1,251
|
|
|
|
(672
|
)
|
|
|
148,138
|
U.S.
Government sponsored entities mortgage-backed securities
|
|
484,012
|
|
|
|
1,644
|
|
|
|
(2,229
|
)
|
|
|
483,427
|
Privately-issued
mortgage-backed securities
|
|
123,499
|
|
|
|
401
|
|
|
|
(1,167
|
)
|
|
|
122,733
|
Other
|
|
898
|
|
|
|
-
|
|
|
|
(168
|
)
|
|
|
730
|
Total
|
$
|
835,531
|
|
|
$
|
3,835
|
|
|
$
|
(4,236
|
)
|
|
$
|
835,130
|
The
amortized cost and estimated fair value of investment securities at
December 31, 2008 by contractual maturity are shown below. Actual
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
|
December
31, 2008
|
|
Amortized
|
|
|
Estimated
|
|
cost
|
|
|
fair
value
|
|
(Dollars
in thousands)
|
Held
to Maturity
|
|
|
|
|
Due
in one year or less
|
$
|
920
|
|
|
$
|
922
|
Due
after one year through five years
|
|
1,064
|
|
|
|
1,069
|
Mortgage-backed
securities
|
|
6,713
|
|
|
|
6,768
|
Total
|
$
|
8,697
|
|
|
$
|
8,759
|
|
|
|
|
|
|
|
Available
for Sale
|
|
|
|
|
|
|
Due
in one year or less
|
$
|
3,837
|
|
|
$
|
3,873
|
Due
after one year through five years
|
|
71,415
|
|
|
|
72,611
|
Due
after five years through ten years
|
|
104,633
|
|
|
|
105,079
|
Due
after ten years
|
|
45,361
|
|
|
|
42,756
|
Mortgage-backed
securities
|
|
514,339
|
|
|
|
517,399
|
Other
|
|
1,106
|
|
|
|
882
|
Total
|
$
|
740,691
|
|
|
$
|
742,600
|
Proceeds
from sales of investment securities available for sale were $10.7 million,
$117.7 million and $107.5 million in 2008, 2007 and 2006, respectively,
resulting in gross realized gains of $0.1 million in 2008 and gross realized
losses of $0.1 million, $1.7 million and $1.5 million in 2008, 2007 and
2006, respectively. There were no gross realized gains in 2007 or
2006.
Investment
securities of $655.6 million and $585.2 million at December 31, 2008 and
2007, respectively, were pledged to secure public funds on deposit, securities
sold under agreements to repurchase and other long-term and short-term
borrowings.
Certain
available for sale securities totaling $27.8 million were pledged as collateral
under a $25.0 million collateralized borrowing with LBI. The borrowing, in the
form of a repurchase agreement, was terminated as LBI filed for bankruptcy in
September 2008 and was subsequently placed in a SIPC liquidation proceeding. The
filing of the SIPC liquidation proceeding was considered an event of default
under the repurchase agreement. In 2008, we recognized a pre-tax loss of $2.8
million, which represents the difference between the pledged amount of
securities and the amount of the borrowing, as we have determined that
likelihood of receiving any remuneration as an unsecured creditor of LBI is
remote.
In 2007,
we completed a repositioning of our investment securities portfolio to reduce
interest income volatility and improve our net interest margin. In connection
with the repositioning, we sold $119.4 million in available-for-sale investment
securities with an average tax equivalent yield of 3.98% and a weighted average
life of 1.3 years and reinvested the proceeds in a similar amount of new
investment securities with an average tax equivalent yield of 5.43% and a
weighted average life of 4.2 years. As a result of the sale we recognized
net losses of $1.7 million.
There
were a total of 67 and 126 securities in an unrealized loss position at
December 31, 2008 and 2007, respectively. Provided below is a summary
of investment securities which were in an unrealized loss position at
December 31, 2008 and 2007:
|
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 December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government sponsored entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt
securities
|
$
|
9,969
|
|
|
$
|
(31
|
)
|
|
$
|
13,598
|
|
|
$
|
(194
|
)
|
|
$
|
23,567
|
|
|
$
|
(225
|
)
|
States
and political subdivisions
|
|
44,933
|
|
|
|
(3,021
|
)
|
|
|
536
|
|
|
|
(19
|
)
|
|
|
45,469
|
|
|
|
(3,040
|
)
|
U.S.
Government sponsored entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed
securities
|
|
7,525
|
|
|
|
(30
|
)
|
|
|
18,956
|
|
|
|
(322
|
)
|
|
|
26,481
|
|
|
|
(352
|
)
|
Privately
issued mortgage-backed securities
|
|
53,388
|
|
|
|
(3,343
|
)
|
|
|
52,703
|
|
|
|
(1,874
|
)
|
|
|
106,091
|
|
|
|
(5,217
|
)
|
Other
|
|
882
|
|
|
|
(224
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
882
|
|
|
|
(224
|
)
|
Total
temporarily impaired securities
|
$
|
116,697
|
|
|
$
|
(6,649
|
)
|
|
$
|
85,793
|
|
|
$
|
(2,409
|
)
|
|
$
|
202,490
|
|
|
$
|
(9,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government sponsored entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt
securities
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,776
|
|
|
$
|
(68
|
)
|
|
$
|
26,776
|
|
|
$
|
(68
|
)
|
States
and political subdivisions
|
|
21,479
|
|
|
|
(348
|
)
|
|
|
25,013
|
|
|
|
(324
|
)
|
|
|
46,492
|
|
|
|
(672
|
)
|
U.S.
Government sponsored entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed
securities
|
|
44,436
|
|
|
|
(93
|
)
|
|
|
200,045
|
|
|
|
(2,177
|
)
|
|
|
244,481
|
|
|
|
(2,270
|
)
|
Privately
issued mortgage-backed securities
|
|
20
|
|
|
|
-
|
|
|
|
81,307
|
|
|
|
(1,167
|
)
|
|
|
81,327
|
|
|
|
(1,167
|
)
|
Other
|
|
730
|
|
|
|
(168
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
730
|
|
|
|
(168
|
)
|
Total
temporarily impaired securities
|
$
|
66,665
|
|
|
$
|
(609
|
)
|
|
$
|
333,141
|
|
|
$
|
(3,736
|
)
|
|
$
|
399,806
|
|
|
$
|
(4,345
|
)
|
The
declines in market value were primarily attributable to a widening of credit
spreads on investment securities as investors sought higher returns on
investments as a result of the declining national economy. Unrealized losses on
these securities were not a result of reduction in credit quality. Since the
bank has the ability and intent to hold all of these investments until a
recovery of fair value, which may be maturity, we do not consider these
investments to be other-than-temporarily impaired.
U.S.
Government Sponsored Entities Debt Securities
The
unrealized losses on our investment in debt securities issued by U.S. Government
sponsored entities were caused by a widening of credit spreads on agency
collateral securities as investors sought higher returns on investments as a
result of the declining national economy. All debt securities issued by U.S.
Government sponsored entities are rated AAA according to Standard &
Poor’s (“S&P”) and/or Moody’s. The contractual terms of these investments do
not permit the issuer to settle the securities at a price less than the current
par value.
State
and Political Subdivisions
Included
in the fixed income portfolio as of December 31, 2008 were $112.1 million of
state and local government obligations with an overall credit rating of AA. The
following table details the credit quality rating of our municipal securities
portfolio as rated by at least one Nationally Recognized Statistical Rating
Organization (“NRSRO”) such as S&P, Moody’s and Fitch.
|
|
|
General
|
|
|
Revenue
|
|
|
|
|
|
|
Obligation
|
|
|
Bonds
|
|
|
Total
|
|
|
|
(Dollars
in thousands)
|
Ratings:
|
|
|
|
|
|
|
|
|
|
Pre-Refunded,
Escrowed to Maturity (1)
|
$
|
12,377
|
|
|
$
|
4,372
|
|
|
$
|
16,749
|
|
|
AAA
|
|
21,234
|
|
|
|
3,345
|
|
|
|
24,579
|
|
|
AA
|
|
42,473
|
|
|
|
4,819
|
|
|
|
47,292
|
|
|
A
|
|
18,016
|
|
|
|
1,942
|
|
|
|
19,958
|
|
|
BBB
|
|
2,808
|
|
|
|
-
|
|
|
|
2,808
|
|
|
Other
|
|
744
|
|
|
|
-
|
|
|
|
744
|
|
|
Total
|
$
|
97,652
|
|
|
$
|
14,478
|
|
|
$
|
112,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Pre-refunded
municipal securities are considered high credit quality as source
of
payment
|
|
|
to
the bondholder is transferred to cash and securities deposited
in
accordance with the
|
|
|
indenture
and any escrow
agreement.
|
At
December 31, 2008, there were 34 municipal securities that were in an unrealized
loss position less than 12 months. Of these securities, all carry an investment
grade rating by at least one of the recognized rating agencies. Municipal
securities in an unrealized loss position 12 months or longer at December 31,
2008 consisted of one security that was rated A1 by Moody’s. The unrealized
losses associated with these securities were due to an increase in credit
spreads as a result of a decline in credit quality of the monoline insurer and
not the credit quality of the municipal issuer. Recovery of the carrying values
of these securities is expected as credit spreads return to normal levels as
these securities approach their maturity dates or as valuations for such
securities improve as market yields change.
U.S.
Government Sponsored Entities Mortgage-Backed Securities
The
unrealized losses on our investment in U.S. Government sponsored entities
mortgage-backed securities were caused by a widening of credit spreads on agency
collateral securities as investors sought higher returns on investments as a
result of the declining national economy. All mortgage-backed securities issued
by U.S. Government sponsored entities are rated AAA by S&P and/or
Moody’s and contractual cash flows of these investments are guaranteed by an
agency of the U.S. Government.
Privately
Issued Mortgage-Backed Securities
The
privately issued mortgage-backed securities portfolio consist of fixed rate,
senior tranches of prime residential mortgage collateral. Privately
issued mortgage-backed securities have a risk of loss when the securities
exhibit high rates of delinquencies, foreclosures, as well as losses on sale of
foreclosed properties. In order to reduce risk of loss on these
investments, all of our privately issued mortgage-backed securities contain one
or more of the following forms of credit protection:
·
|
Cross-collateralization
– Where the structure of the mortgage-backed securities contains more than
one pool class, in which the subordination of the various classes may
provide additional support to cover any losses that may
occur.
|
·
|
Subordination
– Where the mortgage-backed securities are structured such that the
payments to the junior classes are subordinated to senior classes to
support the cash flows to the senior
classes.
|
The
following table summarizes our privately issued mortgage-backed securities by
underlying collateral type:
Year
of Securitization
|
|
Number
of
Securities
|
|
|
Unpaid
Principal Balance
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Weighted
Average Collateral Delinquency (1) (2)
|
|
|
Current
Weighted Average Credit Enhancement (1) (3)
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
3
|
|
|
$
|
48,048
|
|
|
$
|
48,372
|
|
|
$
|
45,512
|
|
|
$
|
(2,860
|
)
|
|
2.95
|
%
|
|
|
5.20
|
%
|
2005
|
|
4
|
|
|
|
54,102
|
|
|
|
54,558
|
|
|
|
52,685
|
|
|
|
(1,873
|
)
|
|
1.40
|
|
|
|
4.06
|
|
2004
|
|
1
|
|
|
|
8,331
|
|
|
|
8,359
|
|
|
|
7,876
|
|
|
|
(483
|
)
|
|
-
|
|
|
|
1.53
|
|
2003
and prior
|
|
1
|
|
|
|
19
|
|
|
|
19
|
|
|
|
18
|
|
|
|
(1
|
)
|
|
-
|
|
|
|
-
|
|
Total
|
|
9
|
|
|
$
|
110,500
|
|
|
$
|
111,308
|
|
|
$
|
106,091
|
|
|
$
|
(5,217
|
)
|
|
1.97
|
%
|
|
|
4.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Weighted average percentages are computed based upon unpaid principal
balances.
|
|
(2)
Collateral delinquency reflects the percentage of underlying loans that
are 60 or more days past due,
|
including loans in foreclosure and real estate owned.
|
|
|
|
|
(3)
Current credit enhancement reflect the ability of subordinated classes of
securities to absorb principal
|
|
losses and interest shortfalls before the senior classes held by the bank
are impacted.
|
|
The
unrealized losses on our investment in privately issued mortgage-backed
securities were caused by increases in credit spreads due to the inactivity of
these securities. However, all of our privately issued mortgage-backed
securities are performing and are rated AAA by at least one NRSRO.
Other
Unrealized
losses relate primarily to equity securities held under our Director’s Deferred
Compensation Plan which have declined in value during the year.
Loans,
excluding loans held for sale, consisted of the following:
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(Dollars
in thousands)
|
|
Commercial, financial
& agricultural
|
$
|
384,473
|
|
|
$
|
385,521
|
|
Real
estate:
|
|
|
|
|
|
|
|
Construction
|
|
1,127,162
|
|
|
|
1,226,138
|
|
Mortgage
- residential
|
|
1,073,039
|
|
|
|
1,036,779
|
|
Mortgage
- commercial
|
|
1,215,857
|
|
|
|
1,243,383
|
|
Consumer
|
|
180,131
|
|
|
|
209,166
|
|
Leases
|
|
58,411
|
|
|
|
53,303
|
|
|
|
4,039,073
|
|
|
|
4,154,290
|
|
Unearned
income
|
|
(8,807
|
)
|
|
|
(12,585
|
)
|
Total
loans and leases
|
$
|
4,030,266
|
|
|
$
|
4,141,705
|
|
In the
normal course of business, our bank makes loans to certain directors, executive
officers and their affiliates under terms that management believes are
consistent with its general lending policies. An analysis of the activity of
such loans follows:
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
$
|
2,149
|
|
|
$
|
2,031
|
|
Additions
|
|
749
|
|
|
|
2,022
|
|
Repayments
|
|
(1,152
|
)
|
|
|
(1,904
|
)
|
Balance,
end of year
|
$
|
1,746
|
|
|
$
|
2,149
|
|
Impaired
loans requiring an allowance for loan and lease losses at December 31, 2008
and 2007 (see Note 6 for related allowance for loan and lease losses for
impaired loans) amounted to $90.6 million and $74.3 million, respectively, and
included all nonaccrual and restructured loans greater than $0.5 million. At
December 31, 2008, impaired loans not requiring an allowance for loan and lease
losses amounted to $82.5 million, while at December 31, 2007, there were no
impaired loans that did not require an allowance for loan and lease losses. The
average recorded investment in impaired loans was $93.6 million, $13.6 million
and $9.2 million in 2008, 2007 and 2006, respectively. Interest income
recognized on impaired loans was $1.0 million, $1.0 million and $1.2 million in
2008, 2007 and 2006, respectively.
Nonaccrual
loans, including loans held for sale, at December 31, 2008 and 2007 totaled
$132.6 million and $61.5 million, respectively. Interest income totaling $0.1
million, $0.9 million and $1.0 million was recognized on these loans in 2008,
2007 and 2006, respectively. Additional interest income of $6.7 million, $2.1
million and $0.3 million would have been recognized in 2008, 2007 and 2006,
respectively, had these loans been accruing interest throughout those periods.
Additionally, interest income of $0.2 million, $0.3 million and $0.7 million was
collected and recognized on charged-off loans in 2008, 2007 and 2006,
respectively.
Accruing
loans delinquent for 90 days or more at December 31, 2008 and 2007 totaled
$1.1 million and $0.9 million, respectively.
There
were no restructured loans still accruing interest at December 31, 2008 and
2007.
6.
|
ALLOWANCE
FOR LOAN AND LEASE LOSSES
|
Changes
in the Allowance were as follows:
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
$
|
92,049
|
|
|
$
|
52,280
|
|
|
$
|
52,936
|
|
Provision
for loan and lease losses
|
|
171,668
|
|
|
|
53,001
|
|
|
|
1,350
|
|
|
|
263,717
|
|
|
|
105,281
|
|
|
|
54,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(145,686
|
)
|
|
|
(16,192
|
)
|
|
|
(6,270
|
)
|
Recoveries
|
|
1,847
|
|
|
|
2,960
|
|
|
|
4,264
|
|
Net
charge-offs
|
|
(143,839
|
)
|
|
|
(13,232
|
)
|
|
|
(2,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
$
|
119,878
|
|
|
$
|
92,049
|
|
|
$
|
52,280
|
|
The
increase in the Allowance in 2008 and 2007 was primarily due to increases in the
number of loans that were downgraded, increases in our loan loss factors for
specified loan pools and increases in specific reserves on certain impaired
loans. The increase in our Allowance was deemed appropriate in response to the
increase in nonaccrual loans (excluding loans held for sale) and reflects the
reduced value of the collateral supporting our impaired loans, as well as
increased credit risk in other parts of our loan portfolio. In accordance with
generally accepted accounting principles in the United States, loans held for
sale and other real estate assets are not included in our assessment of the
Allowance.
Changes
in the allowance for loan and lease losses for impaired loans (included in the
above amounts) were as follows:
|
Year
Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
$
|
14,557
|
|
|
$
|
446
|
|
|
$
|
158
|
Provision
for loan and lease losses
|
|
17,476
|
|
|
|
14,557
|
|
|
|
-
|
Other
changes
|
|
(12,848
|
)
|
|
|
(446
|
)
|
|
|
288
|
Balance,
end of year
|
$
|
19,185
|
|
|
$
|
14,557
|
|
|
$
|
446
|
The
amounts of other changes represent the net transfer of allocated allowances for
loans and leases that were not classified as impaired for the entire year. At
December 31, 2008 and 2007, all impaired loans were measured based on the
fair value of the underlying collateral for collateral-dependent loans or at the
loan’s observable market price. The reserve for unfunded commitments, which is
included in other liabilities on the consolidated balance sheets, was $5.2
million and $6.7 million at December 31, 2008 and 2007,
respectively.
In 2008,
we securitized certain residential mortgage loans with an outstanding principal
balance of $36.5 million with a U.S. Government sponsored entity. After the
securitizations, we continued to hold mortgage-backed securities and service the
residential mortgage loans.
At
December 31, 2008, unsold mortgage-backed securities that we received were
categorized as available for sale securities and are recorded at their fair
value of $11.1 million. The fair values of these mortgage-backed securities were
based on quoted prices of similar instruments in active markets in accordance
with SFAS 157. Unrealized gains on these securities were recorded in other
comprehensive income (loss) and were $0.3 million at December 31, 2008. During
2008, we recognized a gain of $0.3 million on the sale of securitized
mortgage-backed securities.
We
recorded $0.5 million of servicing assets related to the securitizations during
2008. The servicing assets were recorded at their respective fair values at the
time of securitization. The fair value of the servicing assets were determined
using a discounted cash flow model based on market value assumptions at the time
of securitization and is amortized in proportion to and over the period of net
servicing income in accordance with SFAS 156.
8.
|
PREMISES
AND EQUIPMENT
|
Premises
and equipment consisted of the following:
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Land
|
$
|
17,321
|
|
|
$
|
17,321
|
|
Office
buildings and improvements
|
|
99,534
|
|
|
|
96,874
|
|
Furniture,
fixtures and equipment
|
|
35,380
|
|
|
|
32,100
|
|
|
|
152,235
|
|
|
|
146,295
|
|
Accumulated
depreciation and amortization
|
|
(71,176
|
)
|
|
|
(63,454
|
)
|
Net
premises and equipment
|
$
|
81,059
|
|
|
$
|
82,841
|
|
Depreciation
and amortization of premises and equipment were charged to the following
operating expenses:
|
Year
Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Net
occupancy
|
$
|
4,034
|
|
|
$
|
3,808
|
|
|
$
|
3,552
|
Equipment
|
|
4,026
|
|
|
|
3,353
|
|
|
|
3,045
|
Total
|
$
|
8,060
|
|
|
$
|
7,161
|
|
|
$
|
6,597
|
9.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
The
carrying amount of goodwill attributable to each reporting segment is as
follows:
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
Hawaii
|
|
|
Commercial
|
|
|
|
|
|
Hawaii
|
|
|
Commercial
|
|
|
|
|
|
Market
|
|
|
Real
Estate
|
|
|
Total
|
|
|
Market
|
|
|
Real
Estate
|
|
|
Total
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
$
|
150,423
|
|
|
$
|
94,279
|
|
|
$
|
244,702
|
|
|
$
|
153,375
|
|
|
$
|
145,621
|
|
|
$
|
298,996
|
|
Additions
|
|
2,008
|
|
|
|
-
|
|
|
|
2,008
|
|
|
|
468
|
|
|
|
-
|
|
|
|
468
|
|
Adjustments
|
|
258
|
|
|
|
-
|
|
|
|
258
|
|
|
|
(3,420
|
)
|
|
|
(3,342
|
)
|
|
|
(6,762
|
)
|
Impairment
charges
|
|
-
|
|
|
|
(94,279
|
)
|
|
|
(94,279
|
)
|
|
|
-
|
|
|
|
(48,000
|
)
|
|
|
(48,000
|
)
|
Balance,
end of period
|
$
|
152,689
|
|
|
$
|
-
|
|
|
$
|
152,689
|
|
|
$
|
150,423
|
|
|
$
|
94,279
|
|
|
$
|
244,702
|
|
At the
end of the second quarter of 2008, we experienced a decline in our market
capitalization which we determined to be an indicator that an impairment test
was required under SFAS 142. As a result of the impairment test performed, we
determined that the remaining goodwill associated with our Commercial Real
Estate reporting segment was impaired. As a result, we recorded an
impairment charge of $94.3 million in the second quarter of 2008. Following
the impairment charge, there was no goodwill assigned to our Commercial Real
Estate reporting segment. In the fourth quarter of 2008, we experienced a
further decline in our market capitalization due to the continued deterioration
of the California real estate market, which impacted our Commercial Real Estate
reporting segment. Despite the decline in our market capitalization, no goodwill
impairment charge was recognized as there was no goodwill remaining in our
Commercial Real Estate reporting segment and no impairment was identified in our
Hawaii Market reporting segment.
At
December 31, 2007, we also experienced a decline in our market capitalization.
Accordingly, we performed an impairment test and determined that the goodwill
associated with our Commercial Real Estate reporting segment, which includes the
California residential construction loan portfolio, was impaired and we recorded
a charge of $48.0 million in 2007.
Additions
to goodwill in 2008 included an earnout payment of $1.4 million associated
with our acquisition of HHL and goodwill recognized from the acquisition of
PIFM of $0.5 million. Adjustments to goodwill in 2008 included $0.3 million of
adjustments related to CBBI income tax contingencies.
Additions
to goodwill in 2007 included an earnout payment of $0.5 million related to
our acquisition of HHL. Adjustments to goodwill in 2007 included $5.3 million of
adjustments resulting from the adoption of FIN 48 and $1.5 million of
adjustments related to CBBI income tax contingencies and subleases of CBBI
leased properties.
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 periods presented:
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
Core
Deposit
|
|
|
Servicing
|
|
|
Customer
|
|
|
Non-compete
|
|
|
|
|
|
Premium
|
|
|
Rights
|
|
|
Relationships
|
|
|
Agreements
|
|
|
Total
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006
|
$
|
31,898
|
|
|
$
|
11,640
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
43,538
|
|
Additions
(deductions)
|
|
-
|
|
|
|
1,426
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,426
|
|
Amortization
|
|
(3,148
|
)
|
|
|
(1,844
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,992
|
)
|
Balance
as of December 31, 2007
|
$
|
28,750
|
|
|
$
|
11,222
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
39,972
|
|
Additions
(deductions)
|
|
-
|
|
|
|
6,523
|
|
|
|
1,400
|
|
|
|
300
|
|
|
|
8,223
|
|
Impairment
charge
|
|
-
|
|
|
|
(3,416
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,416
|
)
|
Amortization
|
|
(2,674
|
)
|
|
|
(2,222
|
)
|
|
|
(70
|
)
|
|
|
(30
|
)
|
|
|
(4,996
|
)
|
Balance
as of December 31, 2008
|
$
|
26,076
|
|
|
$
|
12,107
|
|
|
$
|
1,330
|
|
|
$
|
270
|
|
|
$
|
39,783
|
|
The gross
carrying value, accumulated amortization and net carrying value related to our
other intangible assets are presented below:
|
December
31, 2008
|
|
|
December
31, 2007
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
deposit premium
|
$
|
44,642
|
|
|
$
|
(18,566
|
)
|
|
$
|
26,076
|
|
|
$
|
44,642
|
|
|
$
|
(15,892
|
)
|
|
$
|
28,750
|
Mortgage
servicing rights
|
|
23,627
|
|
|
|
(11,520
|
)
|
|
|
12,107
|
|
|
|
20,520
|
|
|
|
(9,298
|
)
|
|
|
11,222
|
Customer
relationships
|
|
1,400
|
|
|
|
(70
|
)
|
|
|
1,330
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Non-compete
agreements
|
|
300
|
|
|
|
(30
|
)
|
|
|
270
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Total
|
$
|
69,969
|
|
|
$
|
(30,186
|
)
|
|
$
|
39,783
|
|
|
$
|
65,162
|
|
|
$
|
(25,190
|
)
|
|
$
|
39,972
|
Based on
our other intangible assets held as of December 31, 2008, estimated
amortization expense for the next five succeeding fiscal years and all years
thereafter are as follows:
|
Estimated
Amortization Expense
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
Core
Deposit
|
|
|
Servicing
|
|
|
Customer
|
|
|
Non-compete
|
|
|
|
|
Premium
|
|
|
Rights
|
|
|
Relationships
|
|
|
Agreements
|
|
|
Total
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
$
|
2,674
|
|
|
$
|
1,778
|
|
|
$
|
140
|
|
|
$
|
60
|
|
|
$
|
4,652
|
2010
|
|
2,674
|
|
|
|
1,620
|
|
|
|
140
|
|
|
|
60
|
|
|
|
4,494
|
2011
|
|
2,674
|
|
|
|
1,288
|
|
|
|
140
|
|
|
|
60
|
|
|
|
4,162
|
2012
|
|
2,674
|
|
|
|
1,035
|
|
|
|
140
|
|
|
|
60
|
|
|
|
3,909
|
2013
|
|
2,674
|
|
|
|
854
|
|
|
|
140
|
|
|
|
30
|
|
|
|
3,698
|
Thereafter
|
|
12,706
|
|
|
|
5,532
|
|
|
|
630
|
|
|
|
-
|
|
|
|
18,868
|
Total
|
$
|
26,076
|
|
|
$
|
12,107
|
|
|
$
|
1,330
|
|
|
$
|
270
|
|
|
$
|
39,783
|
At
December 31, 2008, there were no events or changes in circumstances that would
indicate that the assets assigned to our Hawaii Market reporting unit, which
includes the entire core deposit premium, were not recoverable.
We
account for our mortgage servicing rights under the provisions of SFAS 156,
which was adopted beginning January 1, 2007. We have elected to use the
amortization method to measure our mortgage servicing rights. Under the
amortization method, we amortize our mortgage servicing rights in proportion to
and over the period of net servicing income. Income generated as the result of
new mortgage servicing rights is reported as gains on sales of loans and totaled
$6.5 million, $1.4 million and $2.0 million in 2008, 2007 and 2006,
respectively. Amortization and impairment of the servicing rights are reported
as amortization and impairment of other intangible assets in our consolidated
statements of income. Ancillary income is recorded in other income. Mortgage
servicing rights are recorded when loans are sold to third-parties with
servicing of those loans retained and we classify our entire mortgage servicing
rights into one class.
Initial
fair value of the servicing right is calculated by a discounted cash flow model
prepared by a third party service provider based on market value assumptions at
the time of origination and we assess the servicing right for impairment using
current market value assumptions at each reporting period. Critical assumptions
used in the discounted cash flow model include mortgage prepayment speeds,
discount rates, costs to service and ancillary income. Variations in our
assumptions could materially affect the estimated fair values. Changes to our
assumptions are made when current trends and market data indicate that new
trends have developed. Current market value assumptions based on loan product
types (fixed rate, adjustable rate and balloon loans) include average discount
rates and national prepayment speeds. Many of these assumptions are subjective
and require a high level of management judgment. Our mortgage servicing rights
portfolio and valuation assumptions are periodically reviewed by
management.
Prepayment
speeds may be affected by economic factors such as home price appreciation,
market interest rates, the availability of other credit products to our
borrowers and customer payment patterns. Prepayment speeds include the impact of
all borrower prepayments, including full payoffs, additional principal payments
and the impact of loans paid off due to foreclosure liquidations. As market
interest rates decline, prepayment speeds will generally increase as customers
refinance existing mortgages under more favorable interest rate terms. As
prepayment speeds increase, anticipated cash flows will generally decline
resulting in a potential reduction, or impairment, to the fair value of the
capitalized mortgage servicing rights. Alternatively, an increase in market
interest rates may cause a decrease in prepayment speeds and therefore an
increase in fair value of mortgage servicing rights.
The
following table presents the fair market value and key assumptions used in
determining the fair market value of our mortgage servicing rights:
|
Year
Ended December 31,
|
|
2008
|
|
2007
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
Fair
market value, beginning of period
|
$
|
12,431
|
|
|
$
|
12,086
|
|
Fair
market value, end of period
|
|
12,107
|
|
|
|
12,431
|
|
Weighted
average discount rate
|
|
9.2
|
%
|
|
|
8.6
|
%
|
Weighted
average prepayment speed assumption
|
|
15.7
|
|
|
|
11.8
|
|
At
December 31, 2008, the fair value of our mortgage servicing rights was less than
the related net carrying value primarily due to increased delinquency and
accelerated prepayment speed assumptions, which indicated that the mortgage
servicing rights was impaired. Accordingly, we recorded an impairment charge of
$3.4 million in 2008 which was assigned to our Hawaii Market reportable
segment.
Fair
values at December 31, 2008 and 2007 reflected approximately $1.8 billion
and $1.3 billion in loans serviced for others, respectively.
In
January 2008, we entered into a derivative transaction to hedge future cash
flows from a portion of our then existing variable rate loan portfolio.
Effective January 2008 through January 2013, we will receive payments equal to a
fixed interest rate of 6.25% from the counterparty on a notional amount of $400
million. In return, we will pay to the counterparty a floating rate, namely our
prime rate, on the same notional amount. The purpose of this derivative
transaction is to minimize the risk of fluctuations in interest payments
received on our variable rate loan portfolio. The derivative transaction has
been designated as a cash flow hedge.
At
December 31, 2008, the derivative was in a net asset position and we recorded
the derivative at its fair value of $26.9 million in other assets. At December
31, 2008, an unrealized gain of $24.8 million was recorded in accumulated other
comprehensive income for the effective portion of the change in fair value of
the derivative. In 2008, we recognized a gain related to hedge ineffectiveness
of $2.1 million which is reported in other operating income.
Time
deposits of $100,000 or more, including brokered deposits, totaled $1.1 billion
and $1.2 billion at December 31, 2008 and 2007, respectively.
Interest
expense on certificates of deposits of $100,000 or more, including brokered
deposits, totaled $30.3 million, $46.0 million and $36.7 million for the years
ended December 31, 2008, 2007 and 2006, respectively.
Maturities
of time deposits of $100,000 or more, including brokered deposits, as of
December 31, 2008 were as follows (in thousands):
Three
months or less
|
$
|
548,615
|
Over
three through six months
|
|
211,852
|
Over
six through twelve months
|
|
300,821
|
2010
|
|
19,207
|
2011
|
|
1,364
|
2012
|
|
3,126
|
2013
|
|
718
|
Thereafter
|
|
-
|
Total
|
$
|
1,085,703
|
At
December 31, 2008 and 2007, overdrawn deposit accounts totaling $7.6
million and $8.0 million, respectively, have been reclassified as loans on
the consolidated balance sheets.
12.
|
SHORT-TERM
BORROWINGS
|
Federal
funds purchased generally mature on the day following the date of
purchase.
Securities
sold under agreements to repurchase with a weighted average contractual maturity
of 365 days at December 31, 2008 were treated as financings, and the
obligations to repurchase the identical securities sold were reflected as a
liability with the dollar amount of securities underlying the agreements
remaining in the asset accounts. The underlying securities are held in a
custodial account subject to our control.
At
December 31, 2008, other short-term borrowings consist of Federal Reserve Bank
(FRB) borrowings of $276.0 million and the Treasury Tax and Loan balance of $2.5
million, which represents tax payments collected on behalf of the U.S.
Government. The FRB borrowings bear a fixed interest rate of 0.50%. Treasury Tax
and Loan balances bear market interest rates and are callable at any time. At
December 31, 2008, our bank had additional unused FRB borrowing available
of approximately $338.2 million. At December 31, 2007, other short-term
borrowings consist of the Treasury Tax and Loan balance of $3.0
million. There were no short-term FHLB advances outstanding at December 31,
2008 and 2007, however, interest expense on FHLB advances were $5.5 million, 1.5
million and $2.1 million in 2008, 2007 and 2006,
respectively.
A summary
of short-term borrowings follows:
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
Federal
funds purchased
|
|
|
|
|
|
|
|
|
Amount
outstanding at December 31
|
$
|
-
|
|
|
$
|
12,000
|
|
|
$
|
-
|
|
Average
amount outstanding during year
|
|
8,726
|
|
|
|
1,111
|
|
|
|
86
|
|
Highest
month-end balance during year
|
|
35,000
|
|
|
|
25,000
|
|
|
|
-
|
|
Weighted
average interest rate on balances
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at December 31
|
|
-
|
|
|
|
3.00
|
%
|
|
|
-
|
|
Weighted
average interest rate during year
|
|
2.83
|
%
|
|
|
4.88
|
%
|
|
|
5.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
Amount
outstanding at December 31
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Average
amount outstanding during year
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Highest
month-end balance during year
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Weighted
average interest rate on balances
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at December 31
|
|
2.00
|
%
|
|
|
3.25
|
%
|
|
|
3.65
|
%
|
Weighted
average interest rate during year
|
|
3.09
|
%
|
|
|
3.65
|
%
|
|
|
2.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
Amount
outstanding at December 31
|
$
|
278,450
|
|
|
$
|
3,000
|
|
|
$
|
78,308
|
|
Average
amount outstanding during year
|
|
282,731
|
|
|
|
28,530
|
|
|
|
40,314
|
|
Highest
month-end balance during year
|
|
474,656
|
|
|
|
97,825
|
|
|
|
118,763
|
|
Weighted
average interest rate on balances
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at December 31
|
|
0.50
|
%
|
|
|
3.59
|
%
|
|
|
5.61
|
%
|
Weighted
average interest rate during year
|
|
2.22
|
%
|
|
|
5.35
|
%
|
|
|
5.37
|
%
|
Long-term
debt, which is based on original maturity, consisted of the
following:
|
December
31,
|
|
2008
|
|
|
2007
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
$
|
541,008
|
|
|
$
|
782,770
|
Subordinated
debentures
|
|
108,249
|
|
|
|
108,249
|
Securities
sold under agreement to repurchase
|
|
-
|
|
|
|
25,000
|
|
$
|
649,257
|
|
|
$
|
916,019
|
FHLB
advances outstanding at December 31, 2008 and 2007 carried weighted average
interest rates of 4.22% and 4.41%, respectively. FHLB advances outstanding at
December 31, 2008 were secured by interest-bearing deposits at the FHLB of
$0.8 million, our bank’s holdings of FHLB stock, other unencumbered investment
securities with a fair value of $206.9 million and certain real estate loans
totaling $1.6 billion in accordance with the collateral provisions of the
Advances, Security and Deposit Agreements with the FHLB. At December 31,
2008, our bank had additional unused FHLB advances available of approximately
$752.2 million. Interest expense on FHLB advances were $25.8 million,
$32.5 million and $26.2 million in 2008, 2007 and 2006,
respectively.
At
December 31, 2008, FHLB advances totaling $205.0 million were putable at
the option of the FHLB on a quarterly basis. The putable advances bear fixed
interest rates from 2.76% to 5.06%, with maturity dates ranging from
February 2009 to November 2012. Advances of $10.0 million and $15.0 million are
putable at the option of the FHLB on a quarterly basis if the three-month LIBOR
rate is greater than or equal to specified levels. The advances bear interest
rates of 2.76% and 3.03%, respectively, and mature in February
2009.
In
March 2003, we created a wholly-owned statutory trust, CPB Capital Trust I
(“Trust I”). Trust I issued $15.0 million in trust preferred securities
(“Securities”). The Trust I Securities bear an interest rate of three-month
LIBOR plus 3.25%, and mature on April 7, 2033. The principal assets of
Trust I are $15.5 million of the Company’s subordinated debentures with an
identical interest rate and maturity as the Trust I Securities. Trust I issued
$0.5 million of common stock to the Company.
In
October 2003, we created two wholly-owned statutory trusts, CPB Capital
Trust II (“Trust II”) and CPB Statutory Trust III (“Trust III”). Trust II issued
$20.0 million in Trust II Securities bearing an interest rate of three-month
LIBOR plus 2.85% and maturing on January 7, 2034. The principal assets of
Trust II are $20.6 million of the Company’s subordinated debentures with an
identical interest rate and maturity as the Trust II Securities. Trust II issued
$0.6 million of common stock to the Company.
Trust III
issued $20.0 million in Trust III Securities bearing an interest rate of
three-month LIBOR plus 2.85% and maturing on December 17, 2033. The
principal assets of Trust III are $20.6 million of the Company’s subordinated
debentures with an identical interest rate and maturity as the Trust III
Securities. Trust III issued $0.6 million of common stock to the
Company.
In
September 2004, we created a wholly-owned statutory trust, CPB Capital
Trust IV (“Trust IV”). Trust IV issued $30.0 million in Trust IV Securities
bearing an interest rate of three-month LIBOR plus 2.45% and maturing on
December 15, 2034. The principal assets of Trust IV are $30.9 million of
the Company’s subordinated debentures with an identical interest rate and
maturity as the Trust IV Securities. Trust IV issued $0.9 million of common
stock to the Company.
In
December 2004, we created a wholly-owned statutory trust, CPB Statutory
Trust V (“Trust V”). Trust V issued $20.0 million in Trust V Securities bearing
an interest rate of three-month LIBOR plus 1.87% and maturing on
December 15, 2034. The principal assets of Trust V are $20.6 million of the
Company’s subordinated debentures with an identical interest rate and maturity
as the Trust V Securities. Trust V issued $0.6 million of common stock to the
Company.
The
Securities, the assets of Trusts I, II, III, IV and V and the common
stock issued by Trusts I, II, III, IV and V are redeemable in whole or
in part on any January 7, April 7, July 7, or October 7 on
or after April 7, 2008 for Trust I, on or after October 7, 2008 for
Trusts II and III, and on or after December 15, 2009 for Trust IV and V, or
at any time in whole but not in part within 90 days following the occurrence of
certain events. Our obligations with respect to the issuance of the Securities
constitute a full and unconditional guarantee by the Company of the Trust’s
obligations with respect to the Securities. Subject to certain exceptions and
limitations, we may elect from time to time to defer subordinated debenture
interest payments, which could result in a deferral of distribution payments on
the related Securities. The Federal Reserve has determined that certain
cumulative preferred securities having the characteristics of the Securities
qualify as minority interest, and are included in Tier 1 capital for bank
holding companies.
In
January 2004, in accordance with FASB Interpretation No. 46(R) (As
Amended), our statutory trusts were deconsolidated from our financial
statements. This resulted in the removal of the trust preferred securities from
the long-term debt category of our balance sheets and the addition of our
subordinated debentures.
Securities
sold under agreements to repurchase are accounted for as financing transactions,
and the obligations to repurchase these securities are recorded as liabilities
in the consolidated balance sheets. The securities underlying the agreements to
repurchase are reflected as assets of the Company and are held in collateral
accounts with third-party custodians.
At
December 31, 2008, future principal payments on long-term debt based on
final maturity are as follows (in thousands):
Year
ending December 31:
|
|
2009
|
$
|
91,394
|
2010
|
|
141,353
|
2011
|
|
81,327
|
2012
|
|
201,227
|
2013
|
|
18,566
|
Thereafter
|
|
115,390
|
Total
|
$
|
649,257
|
On
August 26, 1998, our Board of Directors adopted a Shareholder Rights Plan
(the “Rights Plan”) that entitled holders of common stock to receive one right
for each share of common stock outstanding as of September 16, 1998. When
exercisable, each right entitles the registered holder to purchase from the
Company one two-hundredth (1/200th) of a share of the Company’s Junior
Participating Preferred Stock, Series A, no par value per share, at a price
of $37.50 per one two-hundredth (1/200th) of a share, subject to adjustment. The
rights are exercisable only upon the occurrence of specific events, and, unless
earlier redeemed, will expire on March 15, 2009. The Rights Plan was
designed to ensure that shareholders receive fair and equal treatment in the
event of unsolicited or coercive attempts to acquire the Company. The Rights
Plan was also intended to guard against unfair tender offers and other abusive
takeover tactics. The Rights Plan was not intended to prevent an acquisition bid
for the Company on terms that are fair to all shareholders.
In
January 2008, our Board of Directors authorized the repurchase and retirement of
up to 1,200,000 shares of the Company’s common stock (the “2008 Repurchase
Plan”). Repurchases under the 2008 Repurchase Plan may be made from time to time
on the open market or in privately negotiated transactions. During
2008, we repurchased and retired a total of 100,000 shares of common stock at a
weighted average price of $17.60 per share and an aggregate cost of
approximately $1.8 million. At December 31, 2008, 1,100,000 shares remained
available for repurchase under the 2008 Repurchase Plan.
See Note
29 related to our issuance and sale of Fixed Rate Cumulative Perpetual Preferred
Stock and ten-year warrant to purchase our voting common stock in January
2009.
15.
|
SHARE-BASED
COMPENSATION
|
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
No. 123, “
Share-Based
Payment
” (“SFAS 123R”). SFAS 123R requires all share-based payments to
employees, including grants of employee stock options and restricted stock
awards, to be recognized in the financial statements based on their respective
grant-date fair values. We elected to use the modified prospective transition
method as permitted by SFAS 123R. Under this transition method, compensation
expense recognized by the Company beginning in 2006 includes
(a) compensation expense for all share-based compensation awards granted
prior to, but not yet vested as of January 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions of SFAS 123,
“
Accounting for Stock-Based
Compensation
,” as adjusted for estimated forfeitures and
(b) compensation expense for all share-based compensation awards granted
subsequent to January 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123R. We recognize compensation
expense for all share-based payment awards on a straight-line basis over the
respective requisite service period of the awards, which is generally the
vesting period. In accordance with SFAS 123R, we are required to base initial
share-based compensation expense on the estimated number of awards for which the
requisite service and performance is expected to be rendered.
The
following table summarizes the effects of share-based compensation resulting
from the application of SFAS 123R to options and awards granted under the
Company’s equity incentive plans:
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
$
|
2,087
|
|
|
$
|
2,857
|
|
|
$
|
3,478
|
|
Income
tax benefit
|
|
(836
|
)
|
|
|
(1,145
|
)
|
|
|
(1,394
|
)
|
Net
share-based compensation effect
|
$
|
1,251
|
|
|
$
|
1,712
|
|
|
$
|
2,084
|
|
Stock
Option Plans
We have
adopted stock option plans for the purpose of granting options to purchase the
Company’s common stock to directors, officers and other key individuals. Option
awards are generally granted with an exercise price equal to the market price of
the Company’s common stock at the date of grant; those option awards generally
vest based on three or five years of continuous service and have 10-year
contractual terms. Certain option and share awards provide for accelerated
vesting if there is a change in control (as defined in the stock option plans
below). We have historically issued new shares of common stock upon exercises of
stock options and purchases of restricted awards.
In
February 1997, we adopted the 1997 Stock Option Plan (“1997 Plan”)
basically as a continuance of the 1986 Stock Option Plan. In April 1997,
our shareholders approved the 1997 Plan, which provided 2,000,000 shares of the
Company’s common stock for grants to employees as qualified incentive stock
options and to directors as nonqualified stock options.
In
September 2004, we adopted and our shareholders approved the 2004 Stock
Compensation Plan (“2004 Plan”) making available 1,989,224 shares for grants to
employees and directors. Upon adoption of the 2004 Plan, all unissued shares
from the 1997 Plan were frozen and no new options will be granted under the 1997
Plan. Optionees may exercise outstanding options granted pursuant to the 1997
Plan until the expiration of the respective options in accordance with the
original terms of the 1997 Plan. In May 2007, the 2004 Plan was amended to
increase the number of shares available for grant by an additional 1,000,000
shares. To satisfy share issuances pursuant to the share-based compensation
programs, we issue new shares from the 2004 Plan.
At
December 31, 2008, 2007 and 2006, a total of 1,433,348, 1,775,829 and
845,059 shares, respectively, were available for future grants.
The fair
value of each option award is estimated on the date of grant based on the
following:
Valuation and amortization
method—
We estimate the fair value of stock options granted using the
Black-Scholes option pricing formula and a single option award approach. We use
historical data to estimate option exercise and employee termination activity
within the valuation model; separate groups of employees that have similar
historical exercise behavior are considered separately for valuation purposes.
This fair value is then amortized on a straight-line basis over the requisite
service periods of the awards, which is generally the vesting
period.
Expected life—
The expected
life of options represents the period of time that options granted are expected
to be outstanding.
Expected volatility—
Expected
volatilities are based on the historical volatility of the Company’s common
stock.
Risk-free interest
rate—
The
risk-free interest rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
Expected dividend—
The
expected dividend
assumption is based on our current expectations about its anticipated dividend
policy.
Stock
Option Activity
The fair
value of the Company’s stock options granted to employees was estimated
using the following weighted-average assumptions:
|
Year
Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
32.0
|
%
|
|
|
33.1
|
%
|
|
|
34.4
|
%
|
Risk
free interest rate
|
|
2.8
|
%
|
|
|
4.5
|
%
|
|
|
4.9
|
%
|
Expected
dividends
|
|
5.4
|
%
|
|
|
2.9
|
%
|
|
|
2.4
|
%
|
Expected
life (in years)
|
|
6.5
|
|
|
|
7.4
|
|
|
|
6.5
|
|
Weighted
average fair value
|
$
|
3.47
|
|
|
$
|
11.20
|
|
|
$
|
11.99
|
|
The
following is a summary of option activity for our stock option plans for the
year ended December 31, 2008:
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
Value
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Term
(in years)
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2008
|
871,412
|
|
|
$
|
27.89
|
|
|
|
|
|
|
Changes
during the year:
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
95,000
|
|
|
|
18.75
|
|
|
|
|
|
|
Exercised
|
(1,000
|
)
|
|
|
9.24
|
|
|
|
|
|
|
Expired
|
(2,564
|
)
|
|
|
26.82
|
|
|
|
|
|
|
Forfeited
|
(58,524
|
)
|
|
|
34.87
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
904,324
|
|
|
|
26.50
|
|
|
5.6
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
887,148
|
|
|
|
26.54
|
|
|
5.5
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2008
|
744,074
|
|
|
|
26.58
|
|
|
4.9
|
|
|
|
106
|
The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying option awards and the quoted price of the Company’s
common stock for the options that were in-the-money at December 31, 2008.
During the years ended December 31, 2008, 2007 and 2006, the aggregate
intrinsic value of options exercised under our stock option plans was less than
$0.1 million, $2.8 million and $5.9 million, respectively, determined as of the
date of exercise.
As of
December 31, 2008, the total compensation cost related to stock options
granted to employees under our stock option plans but not yet recognized was
approximately $0.7 million, net of estimated forfeitures. This cost will be
amortized on a straight-line basis over a weighted-average period of 2.8 years
and will be adjusted for subsequent changes in estimated forfeitures. The total
fair value of shares vested during the years ended December 31, 2008, 2007
and 2006 was $2.9 million, $0.9 million and $1.0 million,
respectively.
Restricted
Stock Awards
Under the
1997 and 2004 Plans, we awarded restricted stock awards to our non-officer
directors and certain senior management personnel. The awards typically vest
over a three or five year period. Compensation expense is measured as the market
price of the stock awards on the grant date, and is recognized over the
specified vesting periods.
The table
below presents the activity of restricted stock awards for the year ended
December 31, 2008:
|
|
|
|
Weighted
Average
|
|
|
|
|
Grant
Date
|
|
Shares
|
|
|
Fair
Value
|
|
|
|
|
|
|
Nonvested
at January 1, 2008
|
44,620
|
|
|
$
|
34.87
|
Changes
during the year:
|
|
|
|
|
|
Forfeited
|
(7,464
|
)
|
|
|
36.74
|
Vested
|
(3,536
|
)
|
|
|
36.95
|
Nonvested
at December 31, 2008
|
33,620
|
|
|
|
34.23
|
|
|
|
|
|
|
Vested
and expected to vest at December 31, 2008
|
33,620
|
|
|
|
34.23
|
As of
December 31, 2008, there was $0.5 million of total unrecognized
compensation cost related to restricted stock awards that is expected to be
recognized over a weighted-average period of 2.5 years.
Performance
Shares and Stock Appreciation Rights
In 2005
and 2008, we established Long Term Incentive Plans (the “2005 LTIP” and “2008
LTIP”) that covers certain executive and senior management personnel. Awards
granted under the 2005 LTIP are comprised of three components: performance
shares, stock appreciation rights (“SARs”) and cash awards, while awards granted
under the 2008 LTIP consists of performance shares and SARs. All performance
shares and SARs awarded under both the 2005 LTIP and 2008 LTIP are granted from
the Company’s 2004 Stock Compensation Plan.
Performance
Shares
Performance
shares granted under the 2005 LTIP vest based on achieving both performance and
service conditions. Performance conditions require achievement of stated goals
including earnings per share, credit quality and efficiency ratio targets. The
service condition required employees to be employed continuously with the
Company through March 15, 2008. The fair value of the grant to be recognized
over this service period is determined based on the market value of the stock on
the grant date, multiplied by the probability of the granted shares being
earned. This requires us to assess the expectation over the performance period
of the performance targets being achieved as well as to estimate expected
pre-vested cancellations. To the extent that the actual achievement falls short
of the originally determined expectation (probability), then there is no
adjustment to reduce the remaining compensation cost to be recognized. If, on
the other hand, the actual achievement exceeds the expected achievement, then
compensation cost is adjusted for the reporting period and over the remaining
service period to reflect the increased expected compensation cost.
The table
below presents activity of performance shares under both the 2005 LTIP and 2008
LTIP for the year ended December 31, 2008:
|
|
|
|
Weighted
Average
|
|
|
|
|
Grant
Date
|
|
Shares
|
|
|
Fair
Value
|
|
|
|
|
|
|
Nonvested
at January 1, 2008
|
45,957
|
|
|
$
|
34.74
|
Changes
during the year:
|
|
|
|
|
|
Granted
|
97,907
|
|
|
|
18.88
|
Vested
|
(44,670
|
)
|
|
|
34.77
|
Forfeited
|
(3,140
|
)
|
|
|
25.02
|
Nonvested
at December 31, 2008
|
96,054
|
|
|
|
18.88
|
|
|
|
|
|
|
Vested
and expected to vest at December 31, 2008
|
63,520
|
|
|
|
18.88
|
As of
December 31, 2008, there was $0.9 million of total unrecognized
compensation cost related to performance shares that is expected to be
recognized over a weighted-average period of 2.2 years.
Stock
Appreciation Rights
SARs
granted under the 2005 LTIP require the employee to achieve the same performance
conditions as the performance shares described above for the 2005 LTIP, as well
as to satisfy service conditions that approximate three years from the date of
grant. Similar to the performance shares under the 2005 LTIP addressed above,
the amount of compensation cost to be recognized is the fair value of the SAR
grant adjusted based on expectations of achieving the performance requirements
and also the expected pre-vested cancellations. Compensation costs arising from
the SARs will be recognized ratably over the requisite service
period.
SARs
granted under the 2008 LTIP require the achievement of the same market and
service conditions as the performance shares described above for the 2008 LTIP.
Similar to the performance shares awarded under the 2008 LTIP, the fair value of
the SARs granted will be recognized as compensation over the service period and
must be recognized as expense over the service period regardless of whether the
market conditions are met, so long as the grantee meets the service
condition.
Upon
exercise of SARs under the 2005 LTIP and 2008 LTIP, for each SAR exercised, the
grantee shall be entitled to receive value equal to the difference between the
market value of a share on the date of exercise minus the market value of a
share on the date of grant. We shall pay the value owing to the grantee upon
exercise in whole shares. No cash will be awarded upon exercise, and no
fractional shares will be issued or delivered.
As the
Company’s SARs plan is a stock-settled SAR, this plan is an equity-classified
award under SFAS 123R. As such, the financial and income tax accounting for this
type of award is identical to that of a nonqualified stock option plan.
Therefore, the grant date fair value for all SARs issued under the SARs plan is
determined at the grant date using the same method as would be used for
determining the fair value of a grant of a nonqualified stock option, which has
historically been the Black-Scholes formula.
The fair
value of SARs granted to employees was estimated using the Black-Scholes
option pricing formula with the following weighted-average
assumptions:
|
Year
Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
32.0
|
%
|
|
|
31.7
|
%
|
|
|
34.3
|
%
|
Risk
free interest rate
|
|
2.8
|
%
|
|
|
4.5
|
%
|
|
|
4.7
|
%
|
Expected
dividends
|
|
5.3
|
%
|
|
|
2.8
|
%
|
|
|
2.4
|
%
|
Expected
life (in years)
|
|
6.5
|
|
|
|
6.5
|
|
|
|
6.5
|
|
Weighted
average fair value
|
$
|
3.50
|
|
|
$
|
10.49
|
|
|
$
|
10.80
|
|
The table
below presents activity of SARs under both the 2005 LTIP and 2008 LTIP for the
year ended December 31, 2008:
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
Value
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Term
(in years)
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2008
|
56,549
|
|
|
$
|
35.00
|
|
|
|
|
|
|
Changes
during the year:
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
210,963
|
|
|
|
18.88
|
|
|
|
|
|
|
Vested
|
(21,368
|
)
|
|
|
34.41
|
|
|
|
|
|
|
Forfeited
|
(8,209
|
)
|
|
|
35.57
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
237,935
|
|
|
|
20.74
|
|
|
9.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest
|
|
|
|
|
|
|
|
|
|
|
|
|
at
December 31, 2008
|
167,562
|
|
|
|
21.52
|
|
|
8.9
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2008
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
As of
December 31, 2008, there was $0.4 million of total unrecognized
compensation cost related to SARs that is expected to be recognized over a
weighted-average period of 2.1 years.
Defined
Benefit Retirement Plan
The bank
has a defined benefit retirement plan that covered substantially all of its
employees who were employed during the period that the plan was in effect. The
plan was initially curtailed in 1986, and accordingly, plan benefits were fixed
as of that date. Effective January 1, 1991, the bank reactivated its
defined benefit retirement plan. As a result of the reactivation, employees for
whom benefits were fixed in 1986 began to accrue additional benefits under a new
formula that became effective January 1, 1991. Employees who were not
participants at curtailment, but who were subsequently eligible to join, became
participants effective January 1, 1991. Under the reactivated plan,
benefits are based upon the employees’ years of service and their highest
average annual salaries in a 60-consecutive-month period of service, reduced by
benefits provided from the bank’s terminated money purchase pension plan. The
reactivation of the defined benefit retirement plan resulted in an increase of
$5.9 million in the unrecognized prior service cost, which was amortized over a
period of 13 years. Effective December 31, 2002, the bank curtailed its
defined benefit retirement plan, and accordingly, plan benefits were fixed as of
that date.
The
following tables set forth information pertaining to the defined benefit
retirement plan:
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(Dollars
in thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
Benefit
obligation at January 1
|
$
|
29,509
|
|
|
$
|
28,119
|
|
Interest
cost
|
|
1,804
|
|
|
|
1,785
|
|
Actuarial
(gain) loss
|
|
(449
|
)
|
|
|
1,709
|
|
Benefits
paid
|
|
(2,087
|
)
|
|
|
(2,104
|
)
|
Benefit
obligation at December 31
|
|
28,777
|
|
|
|
29,509
|
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
Fair
value of assets at January 1
|
|
29,805
|
|
|
|
28,200
|
|
Actual
return on plan assets
|
|
(9,421
|
)
|
|
|
1,909
|
|
Employer
contributions
|
|
1,350
|
|
|
|
1,800
|
|
Benefits
paid
|
|
(2,087
|
)
|
|
|
(2,104
|
)
|
Fair
value of assets at December 31
|
|
19,647
|
|
|
|
29,805
|
|
Funded
status
|
$
|
(9,130
|
)
|
|
$
|
296
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
Prepaid
benefit/(accrued benefit liability)
|
$
|
(9,130
|
)
|
|
$
|
296
|
|
Components
of accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss
|
|
(20,784
|
)
|
|
|
(10,260
|
)
|
Net
amount recognized
|
$
|
11,654
|
|
|
$
|
10,556
|
|
|
|
|
|
|
|
|
|
Benefit
obligation actuarial assumptions
|
|
|
|
|
|
|
|
Weighted
average discount rate
|
|
6.6
|
%
|
|
|
6.5
|
%
|
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
Components
of net periodic cost (benefit)
|
|
|
|
|
|
|
|
|
Interest
cost
|
$
|
1,804
|
|
|
$
|
1,785
|
|
|
$
|
1,570
|
|
Expected
return on plan assets
|
|
(2,298
|
)
|
|
|
(2,241
|
)
|
|
|
(2,011
|
)
|
Recognized
net loss
|
|
746
|
|
|
|
1,055
|
|
|
|
952
|
|
Net
periodic cost
|
|
252
|
|
|
|
599
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
changes in plan assets and benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
recognized
in other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain (loss)
|
|
(10,524
|
)
|
|
|
(985
|
)
|
|
|
1,449
|
|
Total
recognized in other comprehensive loss
|
|
(10,524
|
)
|
|
|
(985
|
)
|
|
|
1,449
|
|
Total
recognized in net periodic cost and other comprehensive
loss
|
$
|
10,776
|
|
|
$
|
1,584
|
|
|
$
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic cost actuarial assumptions
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average discount rate
|
|
6.5
|
%
|
|
|
5.9
|
%
|
|
|
5.7
|
%
|
Expected
long-term rate of return on plan assets
|
|
8.0
|
%
|
|
|
8.0
|
%
|
|
|
8.0
|
%
|
The
unrecognized net actuarial loss included in accumulated other comprehensive
income (loss) expected to be recognized in net periodic pension cost during 2009
is approximately $2.5 million.
The
long-term rate of return on plan assets reflects the weighted-average long-term
rates of return for the various categories of investments held in the plan. The
expected long-term rate of return is adjusted when there are fundamental changes
in expected returns on the plan investments.
The
defined benefit retirement plan assets consist primarily of equity and debt
securities. Our asset allocations by asset category were as
follows:
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Equity
securities
|
59
|
%
|
|
64
|
%
|
Debt
securities
|
22
|
|
|
19
|
|
Other
|
19
|
|
|
17
|
|
Total
|
100
|
%
|
|
100
|
%
|
Equity
securities included the Company’s common stock in the amounts of $0.3 million
and $0.6 million at December 31, 2008 and 2007,
respectively.
Our
investment strategy for the defined benefit retirement plan is to maximize the
long-term rate of return on plan assets while maintaining an acceptable level of
risk. The investment policy establishes a target allocation for each asset class
that is reviewed periodically and rebalanced when considered appropriate. Target
allocations are 62% domestic equity securities, 8% international equity
securities, 29% debt securities and 1% cash investments.
We expect
to contribute approximately $0.3 million to our defined benefit retirement plan
in 2009.
Estimated
future benefit payments are as follows (in thousands):
Year
ending December 31:
|
|
2009
|
$
|
2,250
|
2010
|
|
2,244
|
2011
|
|
2,254
|
2012
|
|
2,211
|
2013
|
|
2,208
|
2014-2018
|
|
11,497
|
Total
|
$
|
22,664
|
Supplemental
Executive Retirement Plans
In 1995,
2001, 2004 and 2006, our bank established Supplemental Executive Retirement
Plans (“SERP”) that provide certain officers of the Company with supplemental
retirement benefits. On December 31, 2002, the 1995 and 2001 SERP were
curtailed. In conjunction with the merger with CBBI, we assumed CBBI’s SERP
obligation.
The
following tables set forth information pertaining to the
SERP:
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(Dollars
in thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
Benefit
obligation at January 1
|
$
|
8,970
|
|
|
$
|
9,221
|
|
Service
cost
|
|
80
|
|
|
|
256
|
|
Interest
cost
|
|
187
|
|
|
|
533
|
|
Actuarial
(gain) loss
|
|
565
|
|
|
|
(825
|
)
|
Benefits
paid
|
|
(215
|
)
|
|
|
(215
|
)
|
Benefit
obligation at December 31
|
|
9,587
|
|
|
|
8,970
|
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
Fair
value of assets at January 1
|
|
-
|
|
|
|
-
|
|
Employer
contributions
|
|
215
|
|
|
|
215
|
|
Benefits
paid
|
|
(215
|
)
|
|
|
(215
|
)
|
Fair
value of assets at December 31
|
|
-
|
|
|
|
-
|
|
Funded
status
|
$
|
(9,587
|
)
|
|
$
|
(8,970
|
)
|
|
|
|
|
|
|
|
|
Amounts
recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
Accrued
benefit liability
|
$
|
(9,587
|
)
|
|
$
|
(8,970
|
)
|
Components
of accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
Unrecognized
transition obligation
|
|
251
|
|
|
|
269
|
|
Unamortized
prior service cost
|
|
206
|
|
|
|
224
|
|
Unrecognized
net actuarial gain
|
|
(183
|
)
|
|
|
(780
|
)
|
Net
amount recognized
|
$
|
(9,313
|
)
|
|
$
|
(9,257
|
)
|
|
|
|
|
|
|
|
|
Benefit
obligation actuarial assumptions
|
|
|
|
|
|
|
|
Weighted
average discount rate
|
|
5.7
|
%
|
|
|
6.2
|
%
|
Weighted
average rate of compensation increase
|
|
5.0
|
%
|
|
|
1.7
|
%
|
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
Components
of net periodic cost
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
80
|
|
|
$
|
256
|
|
|
$
|
1,279
|
|
Interest
cost
|
|
187
|
|
|
|
533
|
|
|
|
494
|
|
Amortization
of unrecognized transition obligation
|
|
19
|
|
|
|
21
|
|
|
|
21
|
|
Recognized
prior service cost
|
|
18
|
|
|
|
17
|
|
|
|
18
|
|
Recognized
net (gain) loss
|
|
(33
|
)
|
|
|
3
|
|
|
|
6
|
|
Net
periodic cost
|
|
271
|
|
|
|
830
|
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
changes in plan assets and benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
recognized
in other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain (loss)
|
|
(597
|
)
|
|
|
827
|
|
|
|
(47
|
)
|
Prior
service cost
|
|
-
|
|
|
|
-
|
|
|
|
(259
|
)
|
Amortization
of prior service cost
|
|
18
|
|
|
|
17
|
|
|
|
18
|
|
Transition
obligation
|
|
-
|
|
|
|
-
|
|
|
|
(311
|
)
|
Amortization
of transition obligation
|
|
18
|
|
|
|
21
|
|
|
|
21
|
|
Total
recognized in other comprehensive income (loss)
|
|
(561
|
)
|
|
|
865
|
|
|
|
(578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in net periodic cost and other comprehensive income
(loss)
|
$
|
832
|
|
|
$
|
(35
|
)
|
|
$
|
2,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic cost actuarial assumptions
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average discount rate
|
|
6.2
|
%
|
|
|
5.8
|
%
|
|
|
5.7
|
%
|
Weighted
average rate of compensation increase
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
The
estimated amortization of components included in accumulated other comprehensive
income (loss) that will be recognized into net periodic cost for 2009 is as
follows (in thousands):
Amortization
of transition obligation
|
$
|
38
|
Amortization
of prior service cost
|
|
18
|
Amortization
of net actuarial loss
|
|
3
|
The SERP
holds no plan assets other than employer contributions that are paid as benefits
during the year. We expect to contribute $2.5 million to the SERP in
2009.
Estimated
future benefit payments reflecting expected future service for the SERP are as
follows (in thousands):
Year
ending December 31:
|
|
2009
|
$
|
2,493
|
2010
|
|
207
|
2011
|
|
205
|
2012
|
|
202
|
2013
|
|
198
|
2014-2018
|
|
975
|
Total
|
$
|
4,280
|
17.
|
401(K)
RETIREMENT SAVINGS PLAN
|
We
maintain a 401(k) Retirement Savings Plan (“Retirement Savings Plan”) that
covers substantially all employees of the Company. The Retirement Savings Plan
allows employees to direct their own investments among a selection of investment
alternatives and is funded by employee elective deferrals, employer matching
contributions and employer profit sharing contributions.
We match
100% of an employee’s elective deferrals, up to 4% of the employee’s salary. Our
employer matching contributions to the Retirement Savings Plan totaled $1.8
million, $1.7 million and $2.0 million in 2008, 2007 and 2006,
respectively.
We also
make discretionary profit sharing contributions into the Retirement Savings
Plan. Our Board of Directors has sole discretion in determining the annual
profit sharing contribution, subject to limitations of the Internal Revenue
Code. We made no profit sharing contributions in 2008, $1.0 million in 2007 and
$1.9 million in 2006, excluding amounts paid to employees
in cash.
CPHL had
a 401(k) retirement savings plan (“CPHL Plan”) that covered all CPHL
employees who satisfy age and length-of-service requirements. Eligible employees
could contribute up to 25% of their compensation, subject to limitations of the
Internal Revenue Code. CPHL’s matching contributions were determined on an
annual basis. Effective January 1, 2006, the CPHL Plan was merged into the
Company’s Retirement Savings Plan.
We lease
certain properties and equipment with lease terms expiring through 2038. In most
instances, the property leases provide for the renegotiation of rental terms at
fixed intervals, and generally contain renewal options for periods ranging from
5 to 15 years.
Net rent
expense for all operating leases is summarized as follows:
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
Rent
expense charged to net occupancy
|
$
|
10,321
|
|
|
$
|
8,083
|
|
|
$
|
7,267
|
|
Less
sublease income
|
|
(158
|
)
|
|
|
(150
|
)
|
|
|
(58
|
)
|
Net
rent expense charged to net occupancy
|
|
10,163
|
|
|
|
7,933
|
|
|
|
7,209
|
|
Rent
expense charged to equipment expense
|
|
396
|
|
|
|
412
|
|
|
|
383
|
|
Total
net rent expense
|
$
|
10,559
|
|
|
$
|
8,345
|
|
|
$
|
7,592
|
|
The
following is a schedule of future minimum rental commitments for all
noncancellable operating leases that had initial lease terms in excess of one
year at December 31, 2008:
|
Rental
|
|
|
Less
Sublease
|
|
|
Net
Rental
|
|
Commitment
|
|
|
Rental
Income
|
|
|
Commitment
|
|
(Dollars
in thousands)
|
Year
ending December 31:
|
|
|
|
|
|
|
|
2009
|
$
|
8,200
|
|
|
$
|
(128
|
)
|
|
$
|
8,072
|
2010
|
|
7,127
|
|
|
|
-
|
|
|
|
7,127
|
2011
|
|
6,401
|
|
|
|
-
|
|
|
|
6,401
|
2012
|
|
5,618
|
|
|
|
-
|
|
|
|
5,618
|
2013
|
|
4,683
|
|
|
|
-
|
|
|
|
4,683
|
Thereafter
|
|
33,427
|
|
|
|
-
|
|
|
|
33,427
|
Total
|
$
|
65,456
|
|
|
$
|
(128
|
)
|
|
$
|
65,328
|
In
conjunction with the merger of CBBI, we accrued estimated lease termination
costs of $12.6 million representing the net present value of future rent
payments for CBBI branches to be closed and offices to be vacated, of which $0.7
million was outstanding as of December 31, 2008. For the leases which have
not yet been cancelled as of December 31, 2008, the corresponding rental
commitments are included in the schedule of future minimum rental commitments
above.
In
addition, the Company, as lessor, leases certain properties that it owns. The
following is a schedule of future minimum rental income for those noncancellable
operating leases that had initial lease terms in excess of one year at
December 31, 2008 (in thousands):
Year
ending December 31:
|
|
2009
|
$
|
4,653
|
2010
|
|
3,845
|
2011
|
|
3,105
|
2012
|
|
2,269
|
2013
|
|
1,425
|
Thereafter
|
|
18,707
|
Total
|
$
|
34,004
|
In
instances where the lease calls for a renegotiation of rental payments, the
lease rental payment in effect prior to renegotiation was used throughout the
remaining lease term.
19.
|
INCOME
AND FRANCHISE TAXES
|
Components
of income tax expense for the years ended December 31, 2008, 2007 and 2006
were as follows:
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
|
(Dollars
in thousands)
|
|
2008:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(30,674
|
)
|
|
$
|
(4,830
|
)
|
|
$
|
(35,504
|
)
|
State
|
|
|
(1,142
|
)
|
|
|
(12,667
|
)
|
|
|
(13,809
|
)
|
Total
|
|
$
|
(31,816
|
)
|
|
$
|
(17,497
|
)
|
|
$
|
(49,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
39,688
|
|
|
$
|
(19,336
|
)
|
|
$
|
20,352
|
|
State
|
|
|
3,624
|
|
|
|
(1,
637
|
)
|
|
|
1,987
|
|
Total
|
|
$
|
43,312
|
|
|
$
|
(20,973
|
)
|
|
$
|
22,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
39,923
|
|
|
$
|
(3,944
|
)
|
|
$
|
35,979
|
|
State
|
|
|
4,810
|
|
|
|
523
|
|
|
|
5,333
|
|
Total
|
|
$
|
44,733
|
|
|
$
|
(3,421
|
)
|
|
$
|
41,312
|
|
Income
tax expense for the periods presented differed from the “expected” tax expense
(computed by applying the U.S. Federal corporate tax rate of 35% to income
before income taxes) for the following reasons:
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
Computed
"expected" tax expense (benefit)
|
$
|
(65,704
|
)
|
|
$
|
9,851
|
|
|
$
|
42,172
|
|
Increase
(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
impairment (not deductible for tax purposes)
|
|
32,998
|
|
|
|
16,800
|
|
|
|
-
|
|
Tax-exempt
interest
|
|
(2,135
|
)
|
|
|
(2,276
|
)
|
|
|
(1,778
|
)
|
Other
tax-exempt income
|
|
(1,700
|
)
|
|
|
(2,018
|
)
|
|
|
(1,396
|
)
|
State
income taxes, net of Federal income tax effect
|
|
(8,975
|
)
|
|
|
1,292
|
|
|
|
3,467
|
|
Low-income
housing and energy tax credits
|
|
(4,387
|
)
|
|
|
(1,377
|
)
|
|
|
(1,397
|
)
|
Other
|
|
590
|
|
|
|
67
|
|
|
|
244
|
|
Total
|
$
|
(49,313
|
)
|
|
$
|
22,339
|
|
|
$
|
41,312
|
|
The
impact of the corrections made in 2007 for prior period income tax provisions
and income tax returns resulting from our thorough review and reconciliation of
our income tax accounts resulted in an increase of $0.6 million in State income
taxes (net of Federal income tax effect) and a decrease of $2.7 million in other
adjustments at December 31, 2007.
At
December 31, 2008 and 2007, current Federal income taxes receivable was
$42.4 million and $1.5 million, respectively. Current state income taxes payable
of $0.1 million and $1.0 million were included in other liabilities at
December 31, 2008 and 2007, respectively.
The tax
effects of temporary differences that gave rise to significant portions of the
deferred tax assets and deferred tax liabilities were as
follows:
|
December
31,
|
|
2008
|
|
|
2007
|
|
(Dollars
in thousands)
|
Deferred
tax assets
|
|
|
|
|
Allowance
for loan and lease losses
|
$
|
41,301
|
|
|
$
|
31,248
|
Accrued
expenses
|
|
5,948
|
|
|
|
6,341
|
Net
unrealized loss on available-for-sale securities recognized
through
|
|
|
|
|
|
|
accumulated
other comprehensive loss
|
|
-
|
|
|
|
161
|
Net
unrealized gain on available-for-sale securities recognized for tax
purposes
|
|
760
|
|
|
|
-
|
Employee
retirement benefits
|
|
8,432
|
|
|
|
3,999
|
State
tax credit carryforwards
|
|
14,496
|
|
|
|
1,692
|
Merger-related
costs
|
|
276
|
|
|
|
1,106
|
Investment
write-downs and write-offs
|
|
2,766
|
|
|
|
2,262
|
Merger-related
valuations
|
|
410
|
|
|
|
716
|
Reserve
for unfunded commitments
|
|
2,093
|
|
|
|
2,671
|
Investments
in unconsolidated subsidiaries
|
|
1,291
|
|
|
|
912
|
Interest
on nonaccrual loans
|
|
2,871
|
|
|
|
747
|
Premises
and equipment
|
|
1,003
|
|
|
|
3,090
|
Capital
loss carryforward
|
|
27
|
|
|
|
2
|
Other
real estate valuation allowance
|
|
1,525
|
|
|
|
-
|
Other
|
|
902
|
|
|
|
992
|
Total
deferred tax assets
|
$
|
84,101
|
|
|
$
|
55,939
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
Intangible
assets
|
$
|
14,978
|
|
|
$
|
15,716
|
FHLB
stock dividends received
|
|
12,345
|
|
|
|
12,345
|
Net
unrealized loss on available-for-sale securities recognized for tax
purposes
|
|
-
|
|
|
|
161
|
Net
unrealized gain on available-for-sale securities and derivatives
recognized
|
|
|
|
|
|
|
through
accumulated other comprehensive income
|
|
10,684
|
|
|
|
-
|
Leases
|
|
6,644
|
|
|
|
6,242
|
Deferred
gain on curtailed retirement plan
|
|
3,339
|
|
|
|
3,339
|
Liability
on utilization of state tax credits
|
|
3,446
|
|
|
|
704
|
Investments
in unconsolidated subsidiaries
|
|
1,000
|
|
|
|
694
|
Merger-related
valuations
|
|
1,038
|
|
|
|
1,195
|
Deferred
finance fees
|
|
2,839
|
|
|
|
1,755
|
Unrealized
gain on swaps
|
|
1,839
|
|
|
|
28
|
Accreted
discounts receivable
|
|
345
|
|
|
|
292
|
Other
|
|
1,264
|
|
|
|
618
|
Total
deferred tax liabilities
|
$
|
59,761
|
|
|
$
|
43,089
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
$
|
24,340
|
|
|
$
|
12,850
|
At
December 31, 2008, we had state tax credit carryforwards of $14.5 million
that do not expire. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers projected future taxable income and tax planning strategies
in making this assessment. Management believes that it is more likely than not
that future operations will generate sufficient taxable income to realize the
deferred tax assets. As a result, there was no valuation allowance for deferred
tax assets as of December 31, 2008 and 2007.
In 1998,
we completed a corporate reorganization that produced state franchise tax
benefits. In September 2002, the State of Hawaii Department of Taxation
notified us that it was disallowing the tax treatment of this reorganization. We
appealed this decision and were notified in December 2002 that the Hawaii
State Board of Taxation Review had denied the appeal. We subsequently filed an
appeal with the Hawaii State Tax Appeals Court and in December 2006
received a ruling against its appeal. We intend to proceed with an appeal to the
Hawaii State Supreme Court. Cumulative possible state tax benefits that have not
yet been recognized amounted to $9.7 million as of December 31, 2008. Upon
resolution of this issue, any benefit awarded will be recognized as a reduction
in income tax expense.
CBBI
completed a similar corporate reorganization prior to the merger. As of
December 31, 2008, cumulative possible state tax benefits totaled
approximately $2.1 million. In July and August 2007, the State of Hawaii
Department of Taxation issued Notices of Tax Assessments disallowing the tax
treatment of this reorganization. We subsequently filed an appeal with the
Hawaii State Tax Appeals Court. Upon resolution of this issue, any benefit
awarded will be recognized as a reduction in income tax expense.
We are
subject to U.S. Federal income tax as well as income tax of multiple state
jurisdictions. We have concluded all U.S. Federal income tax matters for years
through 2003. Federal income tax returns for 2003, 2004 and 2006 are currently
under examination or at appeals. Hawaii tax returns for 1998 through 2004 are
currently under examination or in litigation.
Included
in the unrecognized tax benefits of $3.5 million at December 31, 2008 was $3.5
million of tax benefits that, if recognized, would favorably affect the
effective income tax rate in any future periods. At December 31, 2008, we had
$0.7 million accrued for interest relating to these unrecognized tax benefits
and we recognized $0.2 million in interest expense during 2008. There were no
penalties relating to these unrecognized tax benefits at December 31, 2008. We
do not expect our unrecognized tax benefits to change significantly over the
next 12 months.
20.
|
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
|
Components
of accumulated other comprehensive income (loss), net of taxes, were as
follows:
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) on available-for-sale investment
securities
|
$
|
1,909
|
|
|
$
|
(401
|
)
|
|
$
|
(15,422
|
)
|
Tax
effect
|
|
(766
|
)
|
|
|
161
|
|
|
|
6,181
|
|
Unrealized
holding gains (losses) on available-for-sale investment securities, net of
tax
|
|
1,143
|
|
|
|
(240
|
)
|
|
|
(9,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains on derivatives
|
|
24,806
|
|
|
|
-
|
|
|
|
-
|
|
Tax
effect
|
|
(9,942
|
)
|
|
|
-
|
|
|
|
-
|
|
Unrealized
holding gains on derivatives, net of tax
|
|
14,864
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustments
|
|
(21,058
|
)
|
|
|
(9,973
|
)
|
|
|
(9,853
|
)
|
Tax
effect
|
|
8,441
|
|
|
|
3,999
|
|
|
|
3,949
|
|
Pension
liability adjustments, net of tax
|
|
(12,617
|
)
|
|
|
(5,974
|
)
|
|
|
(5,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income (loss), net of tax
|
$
|
3,390
|
|
|
$
|
(6,214
|
)
|
|
$
|
(15,145
|
)
|
21.
|
EARNINGS
(LOSS) PER SHARE
|
The table
below presents the information used to compute basic and diluted earnings (loss)
per share:
|
Year
Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
(138,414
|
)
|
|
$
|
5,806
|
|
|
$
|
79,180
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
28,669
|
|
|
|
30,197
|
|
|
|
30,511
|
Dilutive
effect of employee stock options and awards
|
|
-
|
|
|
|
209
|
|
|
|
316
|
Weighted
average shares outstanding - diluted
|
|
28,669
|
|
|
|
30,406
|
|
|
|
30,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
$
|
(4.83
|
)
|
|
$
|
0.19
|
|
|
$
|
2.60
|
Diluted
earnings (loss) per share
|
$
|
(4.83
|
)
|
|
$
|
0.19
|
|
|
$
|
2.57
|
A total
of 1,293,301, 398,210 and 349,967 potentially dilutive securities have been
excluded from the dilutive share calculation for the year ended December 31,
2008, 2007 and 2006, respectively, as their effect was
antidilutive.
22.
|
CONTINGENT
LIABILITIES AND OTHER COMMITMENTS
|
The
Company and its subsidiaries are involved in legal actions arising in the
ordinary course of business. Management, after consultation with legal counsel,
believes the ultimate disposition of those matters will not have a material
adverse effect on our consolidated financial statements.
In the
normal course of business there are outstanding contingent liabilities and other
commitments such as unused letters of credit, items held for collections and
unsold traveler’s checks, which are not reflected in the accompanying
consolidated financial statements. Management does not anticipate any material
losses as a result of these transactions.
23.
|
FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET
RISK
|
We are a
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of our customers. These financial
instruments include commitments to extend credit, standby letters of credit and
financial guarantees written, forward foreign exchange contracts, and interest
rate contracts. Those instruments involve, to varying degrees, elements of
credit, interest rate and foreign exchange risk in excess of the amounts
recognized in the consolidated balance sheets. The contract or notional amounts
of those instruments reflect the extent of involvement we have in particular
classes of financial instruments.
Our
exposure to credit loss in the event of nonperformance by the counterparty to
the financial instrument for commitments to extend credit and standby letters of
credit and financial guarantees written is represented by the contractual amount
of those instruments. For forward foreign exchange contracts and interest rate
contracts, the contract amounts do not represent exposure to credit loss. We
control the credit risk of these contracts through credit approvals, limits and
monitoring procedures. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. We evaluate each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management’s credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby
letters of credit and financial guarantees written are conditional commitments
issued by us to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. We hold collateral
supporting those commitments for which collateral is deemed
necessary.
Interest
rate options issued on residential mortgage loans expose us to interest rate
risk, which is economically hedged with forward interest rate contracts. These
derivatives are carried at fair value with changes in fair value recorded as a
component of other operating income in the consolidated statements of
income.
Forward
interest rate contracts represent commitments to purchase or sell loans at a
future date at a specified price. Risks arise from the possible inability of
counter-parties to meet the terms of their contracts and from movements in
market rates. Management reviews and approves the creditworthiness of the
counterparties to its forward interest rate contracts.
Forward
foreign exchange contracts represent commitments to purchase or sell foreign
currencies at a future date at a specified price. Risks arise from the possible
inability of counterparties to meet the terms of their contracts and from
movements in foreign currency exchange rates. Management reviews and approves
the creditworthiness of its forward foreign exchange
counterparties.
At
December 31, 2008 and 2007, financial instruments with off-balance sheet
risk were as follows:
|
December
31,
|
|
2008
|
|
|
2007
|
|
(Dollars
in thousands)
|
Financial
instruments whose contract amounts represent credit risk:
|
|
|
|
|
Commitments
to extend credit
|
$
|
835,579
|
|
|
$
|
1,347,958
|
Standby
letters of credit and financial guarantees written
|
|
59,147
|
|
|
|
62,401
|
|
|
|
|
|
|
|
Financial
instruments whose contract amounts exceed the amount of credit
risk:
|
|
|
|
|
Interest
rate options
|
|
388,934
|
|
|
|
58,197
|
Interest
rate swaps
|
|
400,000
|
|
|
|
-
|
Forward
interest rate contracts
|
|
91,378
|
|
|
|
48,461
|
Forward
foreign exchange contracts
|
|
150
|
|
|
|
-
|
24.
|
FAIR VALUE OF ASSETS AND
LIABILITIES
|
SFAS
107, Disclosures about Fair Value of Financial Instruments
Fair
value estimates, methods and assumptions are set forth below for our financial
instruments.
Short-Term Financial
Instruments
The
carrying values of short-term financial instruments are deemed to approximate
fair values. Such instruments are considered readily convertible to cash and
include cash and due from banks, interest-bearing deposits in other banks,
federal funds sold, accrued interest receivable, the majority of short-term
borrowings and accrued interest payable.
Investment
Securities
The fair
value of investment securities is based on market price quotations received from
securities dealers. Where quoted market prices are not available, fair values
are based on quoted market prices of comparable securities.
Loans
Fair
values of loans are estimated based on discounted cash flows of portfolios of
loans with similar financial characteristics including the type of loan,
interest terms and repayment history. Fair values are calculated by discounting
scheduled cash flows through estimated maturities using estimated market
discount rates. Estimated market discount rates are reflective of credit and
interest rate risks inherent in the Company’s various loan types and are derived
from available market information, as well as specific borrower
information.
Other Interest Earning
Assets
The
equity investment in common stock of the FHLB, which is redeemable for cash at
par value, is reported at its par value.
Deposit
Liabilities
The fair
values of deposits with no stated maturity, such as noninterest-bearing demand
deposits and interest-bearing demand and savings accounts, are equal to the
amount payable on demand. The fair value of time deposits is based on the higher
of discounted value of contractual cash flows or carrying value. The discount
rate is estimated using the rates currently offered for deposits of similar
remaining maturities.
Short-Term Borrowings and
Long-Term Debt
The fair
value for a portion of our short-term borrowings is estimated by discounting
scheduled cash flows using rates currently offered for securities of similar
remaining maturities. The fair value of our long-term debt, primarily FHLB
advances, is estimated by discounting scheduled cash flows over the contractual
borrowing period at the estimated market rate for similar borrowing
arrangements.
Off-Balance Sheet Financial
Instruments
The fair
values of off-balance sheet financial instruments are estimated based on the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties, current settlement values or quoted market prices of comparable
instruments.
For
derivative financial instruments, the fair values are based upon current
settlement values, if available. If there are no relevant comparables, fair
values are based on pricing models using current assumptions for interest rate
swaps and options.
Limitations
Fair
value estimates are made at a specific point in time based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time our entire holdings of a particular financial instrument. Because no
market exists for a significant portion of our financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair
value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of future business and the
value of assets and liabilities that are not considered financial instruments.
For example, significant assets and liabilities that are not considered
financial assets or liabilities include deferred tax assets, premises and
equipment and intangible assets. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in many of the
estimates.
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
Carrying/
|
|
|
|
|
|
Carrying/
|
|
|
|
|
|
notional
|
|
|
Estimated
|
|
|
notional
|
|
|
Estimated
|
|
|
amount
|
|
|
fair
value
|
|
|
amount
|
|
|
fair
value
|
|
|
(Dollars
in thousands)
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
$
|
107,270
|
|
|
$
|
107,270
|
|
|
$
|
79,088
|
|
|
$
|
79,088
|
|
Interest-bearing
deposits in other banks
|
|
475
|
|
|
|
475
|
|
|
|
241
|
|
|
|
241
|
|
Federal
funds sold
|
|
-
|
|
|
|
-
|
|
|
|
2,800
|
|
|
|
2,800
|
|
Investment
securities
|
|
751,297
|
|
|
|
751,360
|
|
|
|
881,254
|
|
|
|
881,207
|
|
Net
loans and leases, including loans held for sale
|
|
3,950,496
|
|
|
|
3,951,627
|
|
|
|
4,087,228
|
|
|
|
4,096,744
|
|
Accrued
interest receivable
|
|
20,079
|
|
|
|
20,079
|
|
|
|
26,041
|
|
|
|
26,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
627,094
|
|
|
|
627,094
|
|
|
|
665,034
|
|
|
|
665,034
|
|
Interest-bearing
demand and savings deposits
|
|
1,530,150
|
|
|
|
1,530,150
|
|
|
|
1,640,030
|
|
|
|
1,640,030
|
|
Time
deposits
|
|
1,754,322
|
|
|
|
1,763,388
|
|
|
|
1,697,655
|
|
|
|
1,698,013
|
|
Total
deposits
|
|
3,911,566
|
|
|
|
3,920,089
|
|
|
|
4,002,719
|
|
|
|
4,003,077
|
|
Short-term
borrowings
|
|
279,450
|
|
|
|
279,452
|
|
|
|
16,000
|
|
|
|
16,013
|
|
Long-term
debt
|
|
649,257
|
|
|
|
593,492
|
|
|
|
916,019
|
|
|
|
897,009
|
|
Accrued
interest payable (included in other liabilities)
|
|
12,861
|
|
|
|
12,861
|
|
|
|
17,610
|
|
|
|
17,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
835,579
|
|
|
|
4,178
|
|
|
|
1,347,958
|
|
|
|
6,740
|
|
Standby
letters of credit and financial guarantees written
|
|
59,147
|
|
|
|
444
|
|
|
|
62,401
|
|
|
|
468
|
|
Interest
rate options
|
|
388,934
|
|
|
|
3,574
|
|
|
|
58,197
|
|
|
|
131
|
|
Interest
rate swaps
|
|
400,000
|
|
|
|
26,903
|
|
|
|
-
|
|
|
|
-
|
|
Forward
interest rate contracts
|
|
91,378
|
|
|
|
(1,074
|
)
|
|
|
48,461
|
|
|
|
(62
|
)
|
Forward
foreign exchange contracts
|
|
150
|
|
|
|
149
|
|
|
|
-
|
|
|
|
-
|
|
SFAS
157, Fair Value Measurements
Effective
January 1, 2008, we partially adopted the provisions of SFAS 157. The statement
defines fair value, establishes a consistent framework for measuring fair value
and expands disclosure requirements for fair value measurements.
Under
SFAS 157, we group our financial assets and liabilities at fair value into three
levels based on the markets in which the financial assets and liabilities are
traded and the reliability of the assumptions used to determine fair value as
follows:
·
|
Level
1 – Valuation is based upon quoted prices (unadjusted) for identical
assets or liabilities traded in active markets. A quoted price in an
active market provides the most reliable evidence of fair value and shall
be used to measure fair value whenever
available.
|
·
|
Level
2 – Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the
market.
|
·
|
Level
3 – Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable
assumptions reflect our own estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation
techniques include use of discounted cash flow models and similar
techniques that requires the use of significant judgment or
estimation.
|
Under
SFAS 157, we base our fair values on the price that we would expect to receive
if an asset were sold or pay to transfer a liability in an orderly transaction
between market participants at the measurement date. As required under SFAS 157,
we maximize the use of observable inputs and minimize the use of unobservable
inputs when developing fair value measurements.
We use
fair value measurements to record adjustments to certain financial assets and
liabilities and to determine fair value disclosures. Available for sale
securities and derivatives are recorded at fair value on a recurring basis. From
time to time, we may be required to record other financial assets at fair value
on a nonrecurring basis such as loans held for sale, impaired loans and mortgage
servicing rights. These nonrecurring fair value adjustments typically involve
application of the lower of cost or fair value accounting or write-downs of
individual assets.
The
following table below presents the balances of assets and liabilities measured
at fair value on a recurring basis:
|
December
31, 2008
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
$
|
882
|
|
|
$
|
621,383
|
|
|
$
|
14,244
|
|
|
$
|
636,509
|
Available
for sale privately-issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed
securities
|
|
-
|
|
|
|
-
|
|
|
|
106,091
|
|
|
|
106,091
|
Net
derivatives
|
|
-
|
|
|
|
29,403
|
|
|
|
-
|
|
|
|
29,403
|
Total
|
$
|
882
|
|
|
$
|
650,786
|
|
|
$
|
120,335
|
|
|
$
|
772,003
|
The
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis are summarized as follows:
|
Available
for sale securities
|
|
|
Available
for sale privately-issued mortgage-backed securities
(1)
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Balance
at January 1, 2008
|
$
|
14,821
|
|
|
$
|
-
|
Principal
payments received on mortgage revenue bonds
|
|
(577
|
)
|
|
|
-
|
Net
transfers into/out of Level 3
|
|
-
|
|
|
|
106,091
|
Balance
at December 31, 2008
|
$
|
14,244
|
|
|
$
|
106,091
|
|
|
|
|
|
|
|
Net
unrealized gains (losses) included in net income for the
year
|
|
|
|
|
|
|
relating
to assets and liabilities held at December 31, 2008
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
(1) Represents
available for sale privately-issued mortgage-backed securities previously
classified as Level 2 for
|
which
the market became inactive during 2008; therefore the fair value
measurement was derived from
|
discounted cash flow models using unobservable inputs and
assumptions.
|
For
assets measured at fair value on a nonrecurring basis that were recorded at fair
value on our balance sheet at December 31, 2008, the following table provides
the level of valuation assumptions used to determine the respective fair
values:
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Total
Losses
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale (1)
|
$
|
-
|
|
|
$
|
10,450
|
|
|
$
|
-
|
|
|
$
|
10,450
|
|
|
$
|
23,796
|
Impaired
loans (1)
|
|
-
|
|
|
|
153,909
|
|
|
|
-
|
|
|
|
153,909
|
|
|
|
83,468
|
Mortgage
servicing rights (2)
|
|
-
|
|
|
|
-
|
|
|
|
12,107
|
|
|
|
12,107
|
|
|
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents carrying value and related write-downs of loans for which
adjustments are based
|
on agreed upon purchase prices for the loans or the appraised value of the
collateral.
|
(2)
Represents fair market value of mortgage servicing rights, net of an
impairment charge of $3.4
million.
|
25.
|
DECLARATION
OF DIVIDENDS AND DIVIDEND POLICY
|
We
initiated regular semi-annual cash dividends on the common stock in 1958.
Beginning in 1988, we commenced paying regular quarterly cash dividends. Our
Board of Directors, at a meeting held on October 29, 2008, declared a fourth
quarter cash dividend of $0.10 per share, in addition to the three quarterly
cash dividends previously declared, for a total of $0.70 per share for the year
ended December 31, 2008. Restrictions on dividends are discussed in Note
27.
On
January 28, 2009, our Board of Directors elected to suspend the payment of cash
dividends effective immediately.
We have
three reportable segments: Commercial Real Estate, Hawaii Market and Treasury.
The segments reported are consistent with internal functional reporting lines
and are managed separately because each unit has different target markets,
technological requirements, marketing strategies and specialized
skills.
The
Commercial Real Estate segment includes construction and real estate development
lending in the markets we serve. The Hawaii Market segment includes retail
branch offices, commercial lending, residential mortgage lending and servicing,
indirect auto lending, trust services and retail brokerage services, and
provides for a full range of deposit and loan products, as well as various other
banking services. The Treasury segment is responsible for managing the Company’s
investment securities portfolio and wholesale funding activities. The All Others
category includes activities such as electronic banking, data processing and
management of bank owned properties.
The
accounting policies of the segments are consistent with those described in Note
1. The majority of our net income is derived from net interest income.
Accordingly, management focuses primarily on net interest income, rather than
gross interest income and expense amounts, in evaluating segment profitability.
Beginning in 2005, intersegment net interest income (expense) was allocated to
each segment based upon a funds transfer pricing process that assigns costs of
funds to assets and earnings credits to liabilities based on market interest
rates that reflect interest rate sensitivity and maturity characteristics. All
administrative and overhead expenses are allocated to the segments at cost.
Cash, investment securities, loans and their related balances are allocated to
the segment responsible for acquisition and maintenance of those assets. Segment
assets also include all premises and equipment used directly in segment
operations.
Segment
profits (losses) and assets are provided in the following table for the periods
indicated:
|
Commercial
|
|
|
Hawaii
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
|
Market
|
|
|
Treasury
|
|
|
All
Others
|
|
|
Total
|
|
|
(Dollars
in thousands)
|
|
Year
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
$
|
129,432
|
|
|
$
|
77,004
|
|
|
$
|
(4,481
|
)
|
|
$
|
-
|
|
|
$
|
201,955
|
|
Intersegment
net interest income (expense)
|
|
(83,506
|
)
|
|
|
58,883
|
|
|
|
8,618
|
|
|
|
16,005
|
|
|
|
-
|
|
Provision
for loan and lease losses
|
|
(160,600
|
)
|
|
|
(11,068
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(171,668
|
)
|
Other
operating income
|
|
350
|
|
|
|
44,202
|
|
|
|
10,875
|
|
|
|
(619
|
)
|
|
|
54,808
|
|
Goodwill
impairment
|
|
(94,279
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(94,279
|
)
|
Other
operating expense (excluding goodwill impairment)
|
|
(44,590
|
)
|
|
|
(81,102
|
)
|
|
|
(5,499
|
)
|
|
|
(47,352
|
)
|
|
|
(178,543
|
)
|
Administrative
and overhead expense allocation
|
|
(5,672
|
)
|
|
|
(38,563
|
)
|
|
|
(367
|
)
|
|
|
44,602
|
|
|
|
-
|
|
Income
taxes
|
|
63,034
|
|
|
|
(9,670
|
)
|
|
|
(3,167
|
)
|
|
|
(884
|
)
|
|
|
49,313
|
|
Net
income (loss)
|
$
|
(195,831
|
)
|
|
$
|
39,686
|
|
|
$
|
5,979
|
|
|
$
|
11,752
|
|
|
$
|
(138,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
751,297
|
|
|
$
|
-
|
|
|
$
|
751,297
|
|
Loans
(including loans held for sale)
|
|
2,083,543
|
|
|
|
1,986,831
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,070,374
|
|
Other
|
|
(7,136
|
)
|
|
|
217,146
|
|
|
|
300,810
|
|
|
|
99,870
|
|
|
|
610,690
|
|
Total
assets
|
$
|
2,076,407
|
|
|
$
|
2,203,977
|
|
|
$
|
1,052,107
|
|
|
$
|
99,870
|
|
|
$
|
5,432,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
$
|
176,543
|
|
|
$
|
50,810
|
|
|
$
|
(15,455
|
)
|
|
$
|
-
|
|
|
$
|
211,898
|
|
Intersegment
net interest income (expense)
|
|
(111,590
|
)
|
|
|
80,155
|
|
|
|
7,135
|
|
|
|
24,300
|
|
|
|
-
|
|
Provision
for loan and lease losses
|
|
(44,766
|
)
|
|
|
(8,235
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(53,001
|
)
|
Other
operating income
|
|
269
|
|
|
|
36,847
|
|
|
|
7,651
|
|
|
|
1,037
|
|
|
|
45,804
|
|
Goodwill
impairment
|
|
(48,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(48,000
|
)
|
Other
operating expense (excluding goodwill impairment)
|
|
(11,086
|
)
|
|
|
(66,179
|
)
|
|
|
(2,291
|
)
|
|
|
(49,000
|
)
|
|
|
(128,556
|
)
|
Administrative
and overhead expense allocation
|
|
(7,203
|
)
|
|
|
(37,190
|
)
|
|
|
(721
|
)
|
|
|
45,114
|
|
|
|
-
|
|
Income
taxes
|
|
(636
|
)
|
|
|
(16,490
|
)
|
|
|
1,080
|
|
|
|
(6,293
|
)
|
|
|
(22,339
|
)
|
Net
income (loss)
|
$
|
(46,469
|
)
|
|
$
|
39,718
|
|
|
$
|
(2,601
|
)
|
|
$
|
15,158
|
|
|
$
|
5,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
881,254
|
|
|
$
|
-
|
|
|
$
|
881,254
|
|
Loans
(including loans held for sale)
|
|
2,228,739
|
|
|
|
1,950,538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,179,277
|
|
Other
|
|
36,301
|
|
|
|
232,295
|
|
|
|
247,525
|
|
|
|
103,734
|
|
|
|
619,855
|
|
Total
assets
|
$
|
2,265,040
|
|
|
$
|
2,182,833
|
|
|
$
|
1,128,779
|
|
|
$
|
103,734
|
|
|
$
|
5,680,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
$
|
154,957
|
|
|
$
|
61,679
|
|
|
$
|
(5,787
|
)
|
|
$
|
-
|
|
|
$
|
210,849
|
|
Intersegment
net interest income (expense)
|
|
(92,849
|
)
|
|
|
71,536
|
|
|
|
(2,753
|
)
|
|
|
24,066
|
|
|
|
-
|
|
Provision
for loan and lease losses
|
|
(71
|
)
|
|
|
(1,279
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,350
|
)
|
Other
operating income
|
|
302
|
|
|
|
36,019
|
|
|
|
4,992
|
|
|
|
1,843
|
|
|
|
43,156
|
|
Other
operating expense
|
|
(8,222
|
)
|
|
|
(63,111
|
)
|
|
|
(2,426
|
)
|
|
|
(58,404
|
)
|
|
|
(132,163
|
)
|
Administrative
and overhead expense allocation
|
|
(7,218
|
)
|
|
|
(40,392
|
)
|
|
|
(456
|
)
|
|
|
48,066
|
|
|
|
-
|
|
Income
taxes
|
|
(16,080
|
)
|
|
|
(22,098
|
)
|
|
|
2,205
|
|
|
|
(5,339
|
)
|
|
|
(41,312
|
)
|
Net
income (loss)
|
$
|
30,819
|
|
|
$
|
42,354
|
|
|
$
|
(4,225
|
)
|
|
$
|
10,232
|
|
|
$
|
79,180
|
|
27.
|
PARENT
COMPANY AND REGULATORY RESTRICTIONS
|
At
December 31, 2008, retained earnings of the parent company, Central Pacific
Financial Corp., included $61.2 million of equity in undistributed income of
CPB.
CPB, as a
Hawaii state-chartered bank, is prohibited from declaring or paying dividends
greater than its retained earnings. As of December 31, 2008, retained
earnings of the bank totaled $58.9 million.
In
December 2008, the members of the Board of Directors of Central Pacific Bank
entered into a Memorandum of Understanding (“MOU”) with the FDIC and the DFI to
address certain issues that arose in the bank’s most recent regulatory
examination in August 2008. The issues required to be addressed by
management include, among other matters, to review and establish more
comprehensive policies and methodologies relating to the adequacy of the
allowance for loan and lease losses and the re-evaluation, development and
implementation of plans and the requirement to increase the bank’s leverage
capital ratio to 9% within 120 days. The MOU also requires the bank to
obtain approval from the FDIC and DFI for the payment of cash dividends by the
bank to Central Pacific Financial Corp. We also must obtain approval from the
FRB for the payment of cash dividends.
Section 131
of the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) required
the Federal Reserve Board, the FDIC, the Comptroller of the Currency and the
Office of Thrift Supervision (collectively, the “Agencies”) to develop a
mechanism to take prompt corrective action to resolve the problems of insured
depository institutions. The final rules to implement FDICIA’s Prompt
Corrective Action provisions established minimum regulatory capital standards to
determine an insured depository institution’s capital category. However, the
Agencies may impose higher minimum standards on individual institutions or may
downgrade an institution from one capital category to a lower capital category
because of safety and soundness concerns.
The
Prompt Corrective Action provisions impose certain restrictions on institutions
that are undercapitalized. The restrictions become increasingly more severe as
an institution’s capital category declines from undercapitalized to critically
undercapitalized. As of December 31, 2008 and 2007, the Company’s and the
bank’s regulatory capital ratios exceeded the minimum thresholds for a
“well-capitalized” institution.
The
following table sets forth actual and required capital and capital ratios for
the Company and the bank as of the dates indicated:
|
|
|
|
|
|
|
|
Minimum
required for
|
|
|
Minimum
required
|
|
Actual
|
|
|
capital
adequacy purposes
|
|
|
to
be well-capitalized
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
(Dollars
in thousands)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 risk-based capital
|
$
|
466,465
|
|
|
10.4
|
%
|
|
|
$
|
178,693
|
|
|
4.0
|
%
|
|
|
$
|
268,040
|
|
|
6.0
|
%
|
Total
risk-based capital
|
|
523,162
|
|
|
11.7
|
|
|
|
|
357,387
|
|
|
8.0
|
|
|
|
|
446,734
|
|
|
10.0
|
|
Leverage
capital
|
|
466,465
|
|
|
8.8
|
|
|
|
|
211,648
|
|
|
4.0
|
|
|
|
|
264,560
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 risk-based capital
|
$
|
535,670
|
|
|
11.5
|
%
|
|
|
$
|
187,049
|
|
|
4.0
|
%
|
|
|
$
|
280,574
|
|
|
6.0
|
%
|
Total
risk-based capital
|
|
594,620
|
|
|
12.7
|
|
|
|
|
374,098
|
|
|
8.0
|
|
|
|
|
467,623
|
|
|
10.0
|
|
Leverage
capital
|
|
535,670
|
|
|
9.8
|
|
|
|
|
218,477
|
|
|
4.0
|
|
|
|
|
273,096
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Pacific Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 risk-based capital
|
$
|
449,845
|
|
|
10.1
|
%
|
|
|
$
|
178,323
|
|
|
4.0
|
%
|
|
|
$
|
267,485
|
|
|
6.0
|
%
|
Total
risk-based capital
|
|
506,427
|
|
|
11.4
|
|
|
|
|
356,646
|
|
|
8.0
|
|
|
|
|
445,808
|
|
|
10.0
|
|
Leverage
capital
|
|
449,845
|
|
|
8.5
|
|
|
|
|
210,707
|
|
|
4.0
|
|
|
|
|
263,384
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 risk-based capital
|
$
|
518,923
|
|
|
11.1
|
%
|
|
|
$
|
186,743
|
|
|
4.0
|
%
|
|
|
$
|
280,115
|
|
|
6.0
|
%
|
Total
risk-based capital
|
|
577,779
|
|
|
12.4
|
|
|
|
|
373,487
|
|
|
8.0
|
|
|
|
|
466,859
|
|
|
10.0
|
|
Leverage
capital
|
|
518,923
|
|
|
9.5
|
|
|
|
|
218,143
|
|
|
4.0
|
|
|
|
|
272,679
|
|
|
5.0
|
|
Condensed
financial statements, solely of the parent company, Central Pacific Financial
Corp., follow:
Central
Pacific Financial Corp.
Condensed
Balance Sheets
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(Dollars
in thousands)
|
|
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
10,270
|
|
|
$
|
13,519
|
|
Investment
securities available for sale
|
|
1,238
|
|
|
|
1,085
|
|
Investment
in subsidiary bank, at equity in underlying net assets
|
|
613,917
|
|
|
|
762,251
|
|
Investment
in other subsidiaries, at equity in underlying assets
|
|
516
|
|
|
|
371
|
|
Accrued
interest receivable and other assets
|
|
12,702
|
|
|
|
8,818
|
|
Total
assets
|
$
|
638,643
|
|
|
$
|
786,044
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
108,249
|
|
|
$
|
108,249
|
|
Other
liabilities
|
|
4,103
|
|
|
|
3,392
|
|
Total
liabilities
|
|
112,352
|
|
|
|
111,641
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, no par value, authorized 1,000,000 shares, none
issued
|
|
-
|
|
|
|
-
|
|
Common
stock, no par value, authorized 100,000,000 shares; issued
|
|
|
|
|
|
|
|
and
outstanding 28,732,259 and 28,756,647 shares at
|
|
|
|
|
|
|
|
December
31, 2008 and 2007, respectively
|
|
403,176
|
|
|
|
403,304
|
|
Surplus
|
|
55,963
|
|
|
|
54,669
|
|
Retained
earnings
|
|
63,762
|
|
|
|
222,644
|
|
Accumulated
other comprehensive income (loss)
|
|
3,390
|
|
|
|
(6,214
|
)
|
Total
shareholders' equity
|
|
526,291
|
|
|
|
674,403
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
$
|
638,643
|
|
|
$
|
786,044
|
|
Central
Pacific Financial Corp.
Condensed
Statements of Income
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
Income:
|
|
|
|
|
|
|
|
|
Dividends
from subsidiary banks
|
$
|
24,900
|
|
|
$
|
74,098
|
|
|
$
|
20,473
|
|
Dividends
from other subsidiaries
|
|
9
|
|
|
|
38
|
|
|
|
39
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividends on investment securities
|
|
18
|
|
|
|
19
|
|
|
|
19
|
|
Interest
from subsidiary banks
|
|
44
|
|
|
|
51
|
|
|
|
61
|
|
Other
income
|
|
337
|
|
|
|
273
|
|
|
|
253
|
|
Total
income
|
|
25,308
|
|
|
|
74,479
|
|
|
|
20,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on long-term debt
|
|
6,567
|
|
|
|
8,781
|
|
|
|
8,448
|
|
Other
expenses
|
|
5,614
|
|
|
|
4,378
|
|
|
|
3,987
|
|
Total
expenses
|
|
12,181
|
|
|
|
13,159
|
|
|
|
12,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and equity in undistributed
|
|
|
|
|
|
|
|
|
|
|
|
income
of subsidiaries
|
|
13,127
|
|
|
|
61,320
|
|
|
|
8,410
|
|
Income
taxes
|
|
(6,408
|
)
|
|
|
(6,881
|
)
|
|
|
(7,125
|
)
|
Income
before equity in undistributed income of subsidiaries
|
|
19,535
|
|
|
|
68,201
|
|
|
|
15,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed income (loss) of subsidiary banks
|
|
(157,973
|
)
|
|
|
(62,228
|
)
|
|
|
64,059
|
|
Equity
in undistributed income (loss) of other subsidiaries
|
|
24
|
|
|
|
(167
|
)
|
|
|
(414
|
)
|
Net
income (loss)
|
$
|
(138,414
|
)
|
|
$
|
5,806
|
|
|
$
|
79,180
|
|
Central
Pacific Financial Corp.
Condensed
Statements of Cash Flows
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
(138,414
|
)
|
|
$
|
5,806
|
|
|
$
|
79,180
|
|
Adjustments
to reconcile net income (loss) to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax expense (benefit)
|
|
(2,009
|
)
|
|
|
(1,768
|
)
|
|
|
2,154
|
|
Equity
in undistributed (income) loss of subsidiary banks
|
|
157,973
|
|
|
|
62,228
|
|
|
|
(64,059
|
)
|
Equity
in undistributed (income) loss of other subsidiaries
|
|
(24
|
)
|
|
|
167
|
|
|
|
414
|
|
Share-based
compensation
|
|
-
|
|
|
|
130
|
|
|
|
130
|
|
Other,
net
|
|
1,227
|
|
|
|
18,511
|
|
|
|
1,689
|
|
Net
cash provided by operating activities
|
|
18,753
|
|
|
|
85,074
|
|
|
|
19,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in and advances to subsidiaries
|
|
-
|
|
|
|
-
|
|
|
|
(10,000
|
)
|
Distribution
of capital by subsidiaries
|
|
6
|
|
|
|
1,940
|
|
|
|
-
|
|
Distribution
from unconsolidated subsidiaries
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
Contributions
to unconsolidated subsidiaries
|
|
(751
|
)
|
|
|
(1,362
|
)
|
|
|
(3,004
|
)
|
Net
cash provided by (used in) investing activities
|
|
(730
|
)
|
|
|
578
|
|
|
|
(13,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from stock option exercises
|
|
600
|
|
|
|
2,712
|
|
|
|
3,658
|
|
Repurchases
of common stock
|
|
(1,760
|
)
|
|
|
(54,905
|
)
|
|
|
-
|
|
Dividends
paid
|
|
(20,112
|
)
|
|
|
(29,631
|
)
|
|
|
(26,897
|
)
|
Net
cash used in financing activities
|
|
(21,272
|
)
|
|
|
(81,824
|
)
|
|
|
(23,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
(3,249
|
)
|
|
|
3,828
|
|
|
|
(16,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
At
beginning of year
|
|
13,519
|
|
|
|
9,691
|
|
|
|
26,426
|
|
At
end of year
|
$
|
10,270
|
|
|
$
|
13,519
|
|
|
$
|
9,691
|
|
28.
|
UNAUDITED
QUARTERLY FINANCIAL INFORMATION
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Full
Year
|
|
|
(Dollars
in thousands, except per share data)
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
81,125
|
|
|
$
|
76,608
|
|
|
$
|
74,486
|
|
|
$
|
71,733
|
|
|
$
|
303,952
|
|
Interest
expense
|
|
30,268
|
|
|
|
25,224
|
|
|
|
23,902
|
|
|
|
22,603
|
|
|
|
101,997
|
|
Net
interest income
|
|
50,857
|
|
|
|
51,384
|
|
|
|
50,584
|
|
|
|
49,130
|
|
|
|
201,955
|
|
Provision
for loan and lease losses
|
|
34,272
|
|
|
|
87,800
|
|
|
|
22,900
|
|
|
|
26,696
|
|
|
|
171,668
|
|
Net
interest income (loss) after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan and lease losses
|
|
16,585
|
|
|
|
(36,416
|
)
|
|
|
27,684
|
|
|
|
22,434
|
|
|
|
30,287
|
|
Investment
securities gains
|
|
-
|
|
|
|
253
|
|
|
|
12
|
|
|
|
-
|
|
|
|
265
|
|
Income
(loss) before income taxes
|
|
(596
|
)
|
|
|
(184,768
|
)
|
|
|
1,929
|
|
|
|
(4,292
|
)
|
|
|
(187,727
|
)
|
Net
income (loss)
|
|
1,658
|
|
|
|
(146,258
|
)
|
|
|
3,041
|
|
|
|
3,145
|
|
|
|
(138,414
|
)
|
Basic
earnings (loss) per share
|
|
0.06
|
|
|
|
(5.10
|
)
|
|
|
0.11
|
|
|
|
0.10
|
|
|
|
(4.83
|
)
|
Diluted
earnings (loss) per share
|
|
0.06
|
|
|
|
(5.10
|
)
|
|
|
0.11
|
|
|
|
0.10
|
|
|
|
(4.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
86,417
|
|
|
$
|
87,533
|
|
|
$
|
88,417
|
|
|
$
|
87,510
|
|
|
$
|
349,877
|
|
Interest
expense
|
|
32,730
|
|
|
|
34,650
|
|
|
|
35,587
|
|
|
|
35,012
|
|
|
|
137,979
|
|
Net
interest income
|
|
53,687
|
|
|
|
52,883
|
|
|
|
52,830
|
|
|
|
52,498
|
|
|
|
211,898
|
|
Provision
for loan and lease losses
|
|
2,600
|
|
|
|
1,000
|
|
|
|
21,200
|
|
|
|
28,201
|
|
|
|
53,001
|
|
Net
interest income after provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loan
and lease losses
|
|
51,087
|
|
|
|
51,883
|
|
|
|
31,630
|
|
|
|
24,297
|
|
|
|
158,897
|
|
Investment
securities losses
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,715
|
)
|
|
|
(1,715
|
)
|
Income
before income taxes
|
|
31,763
|
|
|
|
32,090
|
|
|
|
11,829
|
|
|
|
(47,537
|
)
|
|
|
28,145
|
|
Net
income
|
|
20,135
|
|
|
|
21,016
|
|
|
|
9,107
|
|
|
|
(44,452
|
)
|
|
|
5,806
|
|
Basic
earnings (loss) per share
|
|
0.66
|
|
|
|
0.69
|
|
|
|
0.30
|
|
|
|
(1.51
|
)
|
|
|
0.19
|
|
Diluted
earnings (loss) per share
|
|
0.65
|
|
|
|
0.68
|
|
|
|
0.30
|
|
|
|
(1.51
|
)
|
|
|
0.19
|
|
Net
income in the fourth quarter of 2007 included an income tax benefit of $2.0
million related to true up adjustments recorded to correct certain prior period
income tax errors which were considered immaterial to each of the respective
periods (see Note 1).
On
January 9, 2009, we issued and sold 135,000 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock to the United States Department of the
Treasury (the “U.S. Treasury”) for an aggregate purchase price of $135.0 million
in cash under the Troubled Asset Relief Program of the Emergency Economic
Stabilization Act of 2008. In connection with the purchase, we also issued to
the U.S. Treasury a ten-year warrant to purchase up to 1,585,748 shares of the
Company’s voting common stock at an exercise price of $12.77 per
share.
On
February 20, 2009, we sold certain residential mortgage loans with an aggregate
carrying value of $98.4 million. The proceeds received equaled the carrying
value of these loans. Accordingly, no gain or loss was recognized in connection
with the sale.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation of Disclosure Controls and
Procedures.
Under the supervision and with the
participation of the Company’s management, including the principal executive
officer and principal financial officer, the Company conducted an evaluation of
the effectiveness of its disclosure controls and procedures (as defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended) as of the end of the period covered by this report, or the
Evaluation Date. Based on that evaluation, the principal executive officer and
principal financial officer concluded that, as of the Evaluation Date, the
Company’s disclosure controls and procedures are effective such that information
required to be disclosed by the Company in reports that it files with the SEC
pursuant to the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms, subject to management’s completion of its assessment of
internal control over financial reporting.
Management’s Report on Internal
Control Over Financial Reporting.
Management of
Central Pacific Financial Corp., together with its consolidated subsidiaries, is
responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control over financial reporting is
a process designed under the supervision of the Company’s principal executive
and principal financial officers to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles.
As of the
end of the Company’s 2008 fiscal year, management conducted an assessment of the
effectiveness of the Company’s internal control over financial reporting based
on the framework established in
Internal Control-Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management has determined that
the Company’s internal control over financial reporting as of December 31,
2008 is effective.
Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets; provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures are being made only in accordance
with authorizations of management and the directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on our financial statements.
The
Company’s internal control over financial reporting as of December 31, 2008
has been audited by KPMG LLP, an independent registered public accounting firm,
as stated in their report appearing herein under the heading “Report of
Independent Registered Public Accounting Firm.”
Changes in Internal Control Over
Financial Reporting.
There have not been any
changes in the Company’s internal control over financial reporting, as such term
is defined in Rule 13a-15(f) under the Exchange Act during the
Company’s fiscal quarter ended December 31, 2008 that have materially
affected, or are reasonable likely to materially affect, the Company’s internal
control over financial reporting.
ITEM
9B.
|
OTHER
INFORMATION
|
None.
PART III
ITEM
10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|
Except as
hereinafter noted, the information concerning directors and executive officers
of the Company is incorporated by reference from the section entitled “
DIRECTORS' AND EXECUTIVE OFFICERS'
INFORMATION
” of the Company’s Proxy Statement to be filed with the SEC
within 120 days of the fiscal year ended December 31, 2008. Information
concerning the Company’s Code of Conduct and Ethics is set forth above under
“Available Information” and incorporated by reference from the section entitled
“
CORPORATE GOVERNANCE AND BOARD
MATTERS - Code of Conduct & Ethics
” of the Company’s Proxy Statement
to be filed with the SEC within 120 days of the fiscal year ended
December 31, 2008.
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Information
concerning executive compensation is incorporated by reference from the section
entitled “
COMPENSATION OF
DIRECTORS AND EXECUTIVE OFFICERS
” of the Company’s Proxy Statement to be
filed with the SEC within 120 days of the fiscal year ended December 31,
2008.
Information
concerning the members of the Compensation Committee of the Company is
incorporated by reference from the section entitled “
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
” of the Company’s Proxy Statement to be filed with
the SEC within 120 days of the fiscal year ended December 31, 2008.
Information
concerning the report of the Compensation Committee of the Company is
incorporated by reference from the section entitled “
COMPENSATION COMMITTEE REPORT
”
of the Company’s Proxy Statement to be filed with the SEC within 120 days of the
fiscal year ended December 31, 2008.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
concerning security ownership of certain beneficial owners and management is
incorporated by reference from the sections entitled “
INTRODUCTION—Principal
Shareholders,
” and “
INTRODUCTION—Security Ownership of
Directors, Nominees and Executive Officers
” of the Company’s Proxy
Statement to be filed with the SEC within 120 days of the fiscal year ended
December 31, 2008.
The
following table provides information as of December 31, 2008 regarding
securities issued under our equity compensation plans that were in effect during
fiscal 2008.
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
remaining
|
|
|
(a)
|
|
(b)
|
|
available
for future
|
|
|
Number of securities to
|
|
Weighted-average
|
|
issuance
under equity
|
|
|
be issued upon exercise
|
|
exercise price of
|
|
compensation
plans
|
|
|
of outstanding options,
|
|
outstanding options,
|
|
|
Plan Category
|
|
warrants and rights
|
|
warrants and rights
|
|
reflected
in column (a))
|
Equity
compensation plans approved by security holders
|
|
1,142,259
|
|
$
|
25.30
|
|
1,433,348
|
Equity
compensation plans not approved by security holders
|
|
—
|
|
|
—
|
|
—
|
Total
|
|
1,142,259
|
|
$
|
25.30
|
|
1,433,348
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information
concerning certain relationships and related transactions is incorporated by
reference from the section entitled “
ELECTION OF DIRECTORS
” and
“
CORPORATE GOVERNANCE AND BOARD
MATTERS - Director Independence and Relationships, and Loans to Related
Persons
”
of
the Company’s Proxy Statement to be filed with the SEC within 120 days of the
fiscal year ended December 31, 2008.
Information
concerning director independence is incorporated by reference from the section
entitled “
CORPORATE GOVERNANCE
AND BOARD MATTERS - Director Independence and Relationships
” of the
Company’s Proxy Statement to be filed within 120 days of the fiscal year ended
December 31, 2008.
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information
concerning principal accounting fees and services is incorporated by reference
from the section entitled “
DISCUSSION OF PROPOSALS RECOMMENDED
BY THE BOARD OF DIRECTORS - PROPOSAL 2 - RATIFICATION OF THE APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Services Rendered By and Fees
Paid To Independent Registered Public Accounting Firm
” of the Company’s
Proxy Statement to be filed with the SEC within 120 days of the fiscal year
ended December 31, 2008.
PART IV
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a)
1.
|
Financial
Statements
|
The
following consolidated financial statements are included in Item 8 of this
report:
Central
Pacific Financial Corp. and Subsidiaries:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets at December 31, 2008 and 2007
Consolidated
Statements of Income for the Years ended December 31, 2008, 2007 and
2006
Consolidated
Statements of Changes in Shareholders’ Equity and Comprehensive Income for the
Years ended December 31, 2008, 2007 and 2006
Consolidated
Statements of Cash Flows for the Years ended December 31, 2008, 2007 and
2006
Notes to
Consolidated Financial Statements
(a)
2.
|
All
schedules required by this Item 15(a) 2 are omitted because they are
not applicable, not material or because the information is included in the
consolidated financial statements or the notes
thereto.
|
Exhibit No.
|
|
Document
|
3.1
|
|
Restated
Articles of Incorporation of the Registrant (1).
|
|
|
|
3.2
|
|
Bylaws
of the Registrant, as amended *
|
|
|
|
4.1
|
|
Rights
Agreement dated as of August 26, 1998 between Registrant and the Rights
Agent (2).
|
|
|
|
4.2
|
|
Amendment
One to Rights Agreement, dated as of August 26, 2008, between
Registrant and the Rights Agent (3).
|
|
|
|
4.3
|
|
Statement
of Issuance of Shares of Preferred or Special Classes in Series Relating
to the Fixed Rate Cumulative Preferred Stock, dated as of December 31,
2008 (4).
|
|
|
|
4.4
|
|
Warrant
to purchase up to 1,585,748 shares of Common Stock, issued on January 9,
2009 (5).
|
|
|
|
4.5
|
|
Amendment
Two to Rights Agreement, dated as of February 25, 2009, by and between
Central Pacific Financial Corp. and Wells Fargo Bank, N.A.
*
|
|
|
|
10.1
|
|
License
and Service Agreement dated December 23, 2004 by and between the
Registrant and Fiserv Solutions, Inc. *
|
|
|
|
10.2
|
|
Split
Dollar Life Insurance Plan (6)(13).
|
|
|
|
10.3
|
|
Central
Pacific Bank Supplemental Executive Retirement Plan
(7)(13).
|
|
|
|
10.4
|
|
The
Registrant’s 1997 Stock Option Plan, as amended
(7)(13).
|
|
|
|
10.5
|
|
The
Registrant’s Directors’ Deferred Compensation Plan
(8)(13).
|
|
|
|
10.6
|
|
The
Registrant’s 2004 Stock Compensation Plan, as amended
(9)(13).
|
Exhibit No.
|
|
Document
|
10.7
|
|
Amendment
No. 2008-1 to the Registrant’s 2004 Stock Compensation Plan
(13) *
|
|
|
|
10.8
|
|
Employment
Agreement, effective as of September 14, 2004, by and between the
Registrant and Clinton
L.
Arnoldus (10)(13).
|
|
|
|
10.9
|
|
Employment
Agreement, effective as of August 1, 2008, by and between the Registrant
and Ronald K. Migita (portions of this exhibit have been omitted pursuant
to a request for confidential treatment) *
|
|
|
|
10.10
|
|
Employment
Agreement, effective as of September 14, 2004, by and between the
Registrant and Blenn
A.
Fujimoto (10)(13).
|
|
|
|
10.11
|
|
Employment
Agreement, effective as of September 14, 2004, by and between the
Registrant and Denis
K.
Isono (10)(13).
|
|
|
|
10.12
|
|
Employment
Agreement, effective as of September 14, 2004, by and between the
Registrant and Dean
K.
Hirata (11)(13).
|
|
|
|
10.13
|
|
Form of
Restricted Stock Award Agreement (9)(13).
|
|
|
|
10.14
|
|
Supplemental
Executive Retirement Agreement for Blenn A. Fujimoto, effective
July 1, 2005 (12)(13).
|
|
|
|
10.15
|
|
Amendment
No. 1 to the Supplemental Executive Retirement Agreement for Blenn A.
Fujimoto, effective
December
31, 2008 (13) *
|
|
|
|
10.16
|
|
Supplemental
Executive Retirement Agreement for Dean K. Hirata, effective July 1,
2005 (12)(13).
|
|
|
|
10.17
|
|
Amendment
No. 1 to the Supplemental Executive Retirement Agreement for Dean K.
Hirata, effective
December
31, 2008 (13) *
|
|
|
|
10.18
|
|
The
Registrant’s Long-Term Executive Incentive Plan
(13)(14).
|
|
|
|
10.19
|
|
Amendment
No. 2008-1 to the Registrant’s Long-Term Executive Incentive Plan (13)
*
|
|
|
|
10.20
|
|
The
Registrant’s 2004 Annual Executive Incentive Plan
(13)(15).
|
|
|
|
10.21
|
|
Amendment
No. 2008-1 to the Registrant’s 2004 Annual Executive Incentive Plan Dated
December 31, 2008 (13) *
|
|
|
|
10.22
|
|
Retirement
Agreement of Clint Arnoldus dated March 10, 2008
(13)(16).
|
|
|
|
10.23
|
|
Advances,
Security and Deposit Agreement with Federal Home Loan Bank Seattle dated
June 23, 2004 (17).
|
|
|
|
10.24
|
|
Letter
Agreement, dated January 9, 2009, including the Securities Purchase
Agreement – Standard Terms incorporated by reference therein, between the
Company and the U.S. Treasury (18).
|
|
|
|
10.25
|
|
Change
in Control Severance Agreement dated March 11, 2008 by and between the
Registrant and Denis
K.
Isono (13) *
|
|
|
|
10.26
|
|
Change
in Control Severance Agreement dated March 11, 2008 by and between the
Registrant and Curtis Chinn (13) *
|
|
|
|
14.1
|
|
The
Registrant’s Code of Conduct and Ethics (19).
|
|
|
|
14.2
|
|
The
Registrant’s Code of Conduct and Ethics for Senior Financial Officers
(19).
|
|
|
|
21
|
|
Subsidiaries
of the Registrant *
|
|
|
|
|
|
Consent
of Independent Registered Public Accounting Firm
*
|
Exhibit No.
|
|
Document
|
31.1
|
|
Rule 13a-14(a) Certification
of Chief Executive Officer in accordance with Section 302 of the
Sarbanes-Oxley
Act
of 2002 *
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification
of Chief Financial Officer in accordance with Section 302 of the
Sarbanes-Oxley
Act
of 2002 *
|
|
|
|
32.1
|
|
Section 1350
Certification of Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley
Act
of 2002 **
|
|
|
|
32.2
|
|
Section 1350
Certification of Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley
Act
of 2002 **
|
|
|
|
(1)
|
Filed
as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005, filed with the Securities and Exchange
Commission on August 9, 2005.
|
(2)
|
Filed
as Exhibit 4.1 to the Registrant’s Registration Statement on Form-8A,
filed with the Securities and Exchange Commission on September 16,
1998.
|
(3)
|
Filed
as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on August 26,
2008.
|
(4)
|
Filed
as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 12,
2009.
|
(5)
|
Filed
as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 12,
2009.
|
(6)
|
Filed
as Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, filed with the
Securities and Exchange Commission on March 27,
1992.
|
(7)
|
Filed
as Exhibits 10.8 and 10.9 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, filed
with the Securities and Exchange Commission on March 28,
1997.
|
(8)
|
Filed
as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2000, filed with the Securities
and Exchange Commission on March 30,
2001.
|
(9)
|
Filed
as Exhibits 10.8 and 10.20 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2004, filed
with the Securities and Exchange Commission on March 16,
2005.
|
(10)
|
Filed
as Exhibits 10.3, 10.7 and 10.8 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004, filed with
the Securities and Exchange Commission on November 9,
2004.
|
(11)
|
Filed
as Exhibit 10.9 to Amendment No. 1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004,
filed with the Securities and Exchange Commission on December 13,
2004.
|
(12)
|
Filed
as Exhibits 99.1 and 99.2 to the Registrant’s Current Report on
Form 8-K, filed with the Securities and Exchange Commission on
January 31, 2006.
|
(13)
|
Denotes
management contract or compensation plan or
arrangement.
|
(14)
|
Filed
as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2005, filed with the
Securities and Exchange Commission on March 15,
2006.
|
(15)
|
Filed
as Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2004, filed with the
Securities and Exchange Commission on March 16,
2005.
|
(16)
|
Filed
as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed
with the Securities and Exchange Commission on March 10,
2008.
|
(17)
|
Filed
as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2008, filed with the Securities and
Exchange Commission on November 7,
2008.
|
(18)
|
Filed
as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 12,
2009.
|
(19)
|
Filed
as Exhibits 14.1 and 14.2 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, filed
with the Securities and Exchange Commission on March 15,
2006.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March
2, 2009
|
|
|
CENTRAL
PACIFIC FINANCIAL CORP.
(Registrant)
|
|
/s/
Ronald K. Migita
|
|
Ronald
K. Migita
Chairman,
President
and
Chief
Executive
Officer
|
Exhibit
3.2
CENTRAL
PACIFIC FINANCIAL CORP.
BYLAWS
(as
amended through December 22, 2008)
ARTICLE
I
P
rincipal
Office
The
principal office of the Corporation shall be maintained at 220 South King
Street, Honolulu, Hawaii 96813, and shall be subject to change as the Board of
Directors may from time to time determine in accordance with
law. Additional places of business may be established from time to
time and hereafter changed or discontinued, in the manner prescribed by
law.
ARTICLE
II
S
tockholders
Section
1.
|
The
annual meeting of the stockholders shall be held at such time and place as
determined by the President, Chief Executive Officer or the Board of
Directors. The annual meeting shall be a general meeting, and
at such meeting any business within the powers of the corporation, without
special notice of such business may be transacted, except as limited by
law or by these Bylaws.
|
Section
2.
|
At
each annual meeting, the stockholders shall elect the number of Directors
specified in these Bylaws to serve until their term expires as provided in
Section 1 of Article III of these Bylaws and until their successors are
duly elected and qualified, and shall transact such other business as may
come before them.
|
Section
3.
|
Special
meetings of the stockholders may be called at any time by the President,
the Chief Executive Officer, the Chairman of the Board of Directors, or a
majority of the Board of Directors. The Secretary of the
corporation shall call a special meeting of stockholders upon the written
demand of stockholders entitled to make such demand in the manner
prescribed by law. A special meeting shall be held at such
date, time and place as may be stated in the notice of meeting or, if
authorized by the Board of Directors, by means of remote communication in
accordance with Section 8 of this Article II. Such notice must
state the purpose of the meeting. The business of special
meetings shall be confined to that stated in the notice. In
order that the corporation may determine the stockholders entitled to
notice of or to vote at special meeting of stockholders or at any
adjournment thereof, the Board of Directors will fix a record date, which
date may not be more than seventy days before the
meeting.
|
Section
4.
|
Notice
of all meetings, annual or special, shall include the
following: (i) the place, day and hour of the meeting; (ii)
whether it is annual or special and in case of each special meeting
stating briefly the business proposed to be transacted thereat; and (iii)
if to be held solely by means of remote communication, the means of remote
communication by which stockholders may be deemed to be present in person
and allowed to vote. Notice shall be given by mail, postage
prepaid, or by electronic transmission, at least ten (10) days before the
date assigned for the meeting, to each stockholder, if by mail, at his or
her address as it appears upon the transfer books of the Corporation; or,
if by electronic transmission, to the facsimile number or electronic mail
address to which the stockholder has previously consented to receive
notice, as noted in the books and records of the Corporation, or as
otherwise permitted by law; or, if the foregoing are deemed to be
impractical, by publication in one or more newspapers in general
circulation in Honolulu, not less than two (2) times on separate days, the
first publication to be not less than three (3) days previous to the date
assigned for the meeting. Upon notice being given in accordance
with the provisions hereof, the failure of any stockholder to receive
actual notice of any meeting shall not in any way invalidate the meeting
or proceedings thereat.
|
Section
5.
|
Notwithstanding
the provisions of Sections 1 to 4 inclusive of this Article, the meeting
and voting of stockholders may be dispensed with if all of the
stockholders who would have been entitled to vote upon the action if such
meeting of stockholders were held shall consent in writing to such
corporate action being taken. A stockholder or proxy of a
stockholder may deliver a written consent to the Corporation personally,
by mail or by electronic transmission; provided that any electronic
transmission is received by the Corporation from a facsimile number or
electronic mail address for which the stockholder has previously consented
to receive notice or is otherwise delivered with information from which
the Corporation may determine that the electronic transmission was
transmitted by the stockholder, or as otherwise permitted by law, as
amended from time to time. Any copy, facsimile, or other
reliable reproduction of a consent in writing may be substituted or used
in lieu of the original writing for any and all purposes for which the
original writing could be used; provided that the copy, facsimile or other
reproduction is a complete reproduction of the entire original
writing.
|
Section
6.
|
The
presence of all stockholders, in person or by proxy, at any meeting shall
render the same a valid meeting, unless any stockholder shall at the
opening of said meeting object to the holding of the same for
noncompliance with the provisions relating to notice of
meeting. Any meeting so held without objection shall,
notwithstanding the fact that no notice of meeting was given or that the
notice given was improper, be valid for all purposes and at such meeting
any general business may be transacted and any corporate action may be
taken.
When
notice is required to be given to any stockholder of the Corporation, a
waiver thereof in writing signed by the stockholder entitled to such
notice, whether before or after the time stated therein, and delivered to
the Corporation personally, by mail or by electronic transmission, for
inclusion in the minutes or filing with the corporate records, shall be
equivalent to the giving by the Corporation of notice to such stockholder;
provided that any waiver delivered by electronic transmission must be
received by the Corporation from a facsimile number or electronic mail
address for which the stockholder has previously consented to receive
notice or is otherwise delivered with information from which the
Corporation may determine that the electronic transmission was transmitted
by the stockholder, or as otherwise permitted by law, as amended from time
to time.
|
Section
7.
|
Any
annual or special meeting of the stockholders may be adjourned for any
period of time, but any meeting at which Directors are to be elected may
be adjourned only from day to day until such Directors have been elected;
provided, however, that such election shall be held at the second of such
adjourned meetings.
|
Section
8.
|
If
authorized by the Board of Directors, a meeting of the stockholders,
whether annual or special, may be held solely by means of remote
communication, in which all stockholders and proxies of stockholders will
be deemed present in person for purposes of the meeting and for
voting. Any meeting held by means of remote communication shall
be subject to guidelines and procedures adopted by the Board of Directors
and subject to other requirements of
law.
|
Section
9.
|
At
all meetings, the stockholders shall be entitled to one vote for each
share standing in their respective names on the books, and they may vote
either in person or by proxy. A stockholder may appoint a proxy
to vote or otherwise act for a stockholder in the manner prescribed by
law.
|
|
The
acts of the holders of a majority of the shares represented at any
meeting, at which a quorum is present, shall be the acts of the
stockholders. The stockholders present at a duly organized
meeting may continue to do business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a
quorum.
The
presence, in person or by proxy, of the holders of a majority of the
outstanding shares entitled to vote shall constitute a
quorum. If a meeting cannot be organized because a quorum has
not attended, those present may adjourn the meeting to such time and place
as they may determine; but in the case of a meeting called for the
election of Directors, those who attend the second of such adjourned
meeting, although less than a quorum as fixed in this Section, shall
nevertheless constitute a quorum for the purpose of electing
Directors.
|
Section
10.
|
The
officer or agent having charge of the transfer books for shares shall
make, at least five days before each meeting of stockholders, a complete
list of stockholders entitled to vote at the meeting, arranged in
alphabetical order, with the address of and the number of shares held by
each, which list shall be kept on file at the principal place of business
and shall be subject to inspection by any stockholder for any proper
purpose at any time during usual business hours. If the
Corporation determines that the list will be made available on an
electronic network, the Corporation shall take reasonable steps to ensure
that such information is available only to stockholders. Such
list shall also be produced and kept open at the time and place of the
meeting, and shall be subject to the inspection of any stockholder for any
proper purpose during the whole time of the
meeting.
|
Section
11.
|
The
matters to be considered and brought before any annual meeting of
stockholders of the Company shall be limited to only such matters as shall
be brought properly before such meeting in compliance with the procedures
set forth in this Section 11 or Section 1 of Article III, as the case may
be. For any matter to be properly brought before the annual
meeting, the matter must be: (i) specified in the notice
of annual meeting by or at the direction of the Board of Directors,
(ii) otherwise brought before the annual meeting by or at the
direction of the Board of Directors or (iii) brought before the
annual meeting in the manner specified in this Section 11 by a stockholder
of record.
|
|
In
addition to any other applicable requirements, for a proposal to be
properly brought before the meeting, a stockholder must have given timely
notice thereof in proper written form to the Secretary of the corporation
at the principal executive office of the corporation in the manner
contemplated hereby. To be timely, a stockholder’s notice must
be delivered to or mailed and received at the principal executive office
of the corporation not less than 90 calendar days nor more than 120
calendar days prior to the first anniversary date of the annual meeting
for the preceding year; provided, however, if and only if the annual
meeting is not scheduled to be held within a period that commences 30 days
before such anniversary date and ends 30 days after such anniversary date,
the stockholder’s notice shall be given in the manner provided herein by
the later of (i) the close of business on the date 90 days prior to the
meeting date or (ii) the tenth day following the date the meeting is first
publicly announced or disclosed.
To
be in proper written form, a stockholder’s notice of any matter proposed
to be brought before the meeting shall set forth: (a) the text
of the proposal to be presented (including the text of any resolutions to
be proposed for consideration by the stockholders) and a brief written
statement of the reasons why such stockholder favors the proposal; (b) the
name and record address, as they appear on the corporation’s books, of the
stockholder; (c) the number and class of all shares of each class of stock
of the corporation owned of record and beneficially by such stockholder;
and (d) any material interest of such stockholder in matter
proposed. As used herein, shares “beneficially owned” shall
mean all shares which such person is deemed to beneficially own pursuant
to Rules 13d-3 and 13d-5 under the Securities Exchange Act of
1934.
Only such matters
shall be properly brought before a special meeting of stockholders as
shall have been brought before the meeting pursuant to the corporation’s
notice of meeting.
For
purposes of this Section 11, a matter shall be deemed to have been
“publicly announced or disclosed” if such matter is disclosed in a press
release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission.
In
no event shall the postponement or adjournment of an annual meeting
already publicly noticed, or any announcement of such postponement or
adjournment, commence a new period (or extend any time period) for the
giving of notice as provided in this Section 11. This
Section 11 shall not apply to stockholders proposals made pursuant to
Rule l4a-8 under the Exchange Act.
The
person presiding at any meeting of stockholders, in addition to making any
other determinations that may be appropriate to the conduct of the
meeting, shall have the power and duty to determine whether notice of
matters proposed to be brought before a meeting has been duly given in the
manner provided in this Section 11 and, if not so given, shall direct and
declare at the meeting that such matters are not properly before the
meeting and shall not be
considered.
|
ARTICLE
III
B
oard of
D
irectors
Section
1.
|
The
business of the Corporation shall be managed by a Board of Directors which
shall be twelve (12) in number. The directors shall be divided
into three classes, designated Class I, Class II and Class III, with the
terms of office of one class expiring each year. Each Class
shall consist of four directors. The term of the initial Class
I directors shall terminate on the date of the 2007 Annual Meeting; the
term of the initial Class II directors shall terminate on the date of the
2005 Annual Meeting; and the term of the initial Class III directors shall
terminate on the date of the 2006 Annual Meeting or, in each case, upon
such director’s earlier death, resignation or
removal. At
each succeeding Annual Meeting of Stockholders beginning in 2005,
successors to the class of directors whose term expires at that Annual
Meeting shall be elected for a three-year term and hold office until their
successors are duly elected and
qualified.
|
|
There
shall be no right to have directors
elected by cumulative
voting.
The
matters to be considered and brought before any annual or special meeting
of stockholders of the corporation shall be limited to such matters,
including the nomination and election of directors, as shall be brought
properly before such meeting in compliance with the procedures set forth
in this Section 1 or Section 11 of Article II, as the case may
be. For any matter, including the nomination and election of
directors, to be properly before any annual meeting of stockholders, the
matter must be (i) specified in the notice of annual meeting by or at the
direction of the Board of Directors, (ii) otherwise brought before the
annual meeting by or at the direction of the Board of Directors or (iii)
brought before the annual meeting in the manner specified in this Section
1 by a stockholder of record.
In
addition to any other applicable requirements, for a nomination to be
properly brought before the meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the
Secretary of the corporation at the principal executive office of the
corporation in the manner contemplated hereby. To be timely, a
stockholder’s notice shall be delivered to or mailed and received at the
executive office of the corporation not less than 90 calendar days nor
more than 120 calendar days prior to the first anniversary date of the
annual meeting for the preceding year; provided, however, if and only if
the annual meeting is not scheduled to be held within a period that
commences 30 days before such anniversary date and ends 30 days after such
anniversary date, the stockholder’s notice shall be given in the manner
provided herein by the later of (i) the close of business on the date 90
days prior to the meeting date or (ii) the tenth day following the date
the meeting is first publicly announced or disclosed.
To
be in proper written form, a stockholder’s notice shall set forth in
writing: (a) as to each person whom the stockholder proposes to
nominate for election as a director, (i) the name of the person to be
nominated; (ii) the number and class of all shares of each class of stock
of the corporation owned of record and beneficially by such person, as
reported to such stockholder by such nominee; (iii) all information
relating to such person that is required to be disclosed in solicitations
of proxies for the election of directors or is otherwise required, in each
case pursuant to Section 14 of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder; (iv) the
person’s written consent to being named in the proxy statement as a
nominee and to serving as a director if elected; and (b) as to the
stockholder giving the notice, (i) the name and record address, as they
appear on the corporation’s books, of the stockholder; (ii) the number and
class of all shares of each class of stock of the corporation owned of
record and beneficially by such stockholder; (iii) a description of all
arrangements or understandings between the stockholder and each proposed
nominee and any other person or persons (including their names) pursuant
to which the nominations are to be made by the stockholder and (iv) a
representation that the stockholder intends to appear in person or by
proxy at the meeting to nominate the person named in the
notice. At the request of the Board of Directors, any person
nominated by the Board of Directors, or a committee thereof, for election
as a director shall furnish to the Secretary of the corporation the
information required to be set forth in a stockholder’s notice of
nomination which pertains to the nominee. As used herein,
shares “beneficially owned” shall mean all shares which such person is
deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934. The corporation may require
any proposed nominee to furnish such other information as it may
reasonably require to determine whether the nominee would be considered
“independent” under the various rules and standards applicable to the
corporation.
Notwithstanding
anything in this Section 1 to the contrary, in the event that the number
of directors to be elected to the Board of Directors of the corporation is
increased and either all of the nominees for director or the size of the
increased Board of Directors is not publicly announced or disclosed by the
corporation at least 100 days prior to the first anniversary of the
preceding year’s annual meeting, such stockholder’s notice shall also be
considered timely hereunder, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the
Secretary of the corporation at the principal executive office of the
corporation not later than the close of business on the tenth day
following the first date all of such nominees or the size of the increased
Board of Directors shall have been publicly announced or
disclosed.
Only
such matters shall be properly brought before a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
corporation’s notice of meeting. In the event the corporation
calls a special meeting of stockholders for the purpose of electing one or
more directors to the Board of Directors, any stockholder may nominate a
person or persons (as the case may be), for election to such position(s)
as specified in the corporation’s notice of meeting, if the stockholder’s
notice required by this Section 1 shall be delivered to the Secretary of
the corporation at the principal executive office of the corporation not
later than the close of business on the tenth day following the day on
which the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting is publicly announced or
disclosed.
|
|
For
purposes of this Section 1, a matter shall be deemed to have been
“publicly announced or disclosed” if such matter is disclosed in a press
release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission.
In
no event shall the postponement or adjournment of an annual meeting
already publicly noticed, or any announcement of such postponement or
adjournment, commence a new period (or extend any time period) for the
giving of notice as provided in this Section 1. This Section 1
shall not apply to the election of directors selected by or pursuant any
provisions of Article IV of the articles of incorporation that may relate
to the rights of the holders of any class or series of stock of the
corporation having a preference over the Common Stock as to dividends or
upon liquidation to elect directors under specified
circumstances.
The
person presiding at any meeting of stockholders, in addition to making any
other determinations that may be appropriate to the conduct of the
meeting, shall have the power and duty to determine whether notice of
nominees has been duly given in the manner provided in this Section 1 and,
if not so given, shall direct and declare at the meeting that such
nominees are not properly before the meeting and shall not be
considered.
|
Section
2.
|
A
Director may be removed for cause by the Board of Directors when a
Director has been declared of unsound mind by an order of court or
convicted of a felony. A director may be removed without cause
at any annual meeting of the corporation by a vote of 80% of the
shareholders entitled to vote at the meeting.
A
director may resign at any time by delivering written notice personally or
by electronic transmission to the Board of Directors or to the
Corporation. A resignation is effective when the notice is
delivered or transmitted unless the notice specifies a later effective
date.
|
Section
3.
|
Vacancies
on the Board of Directors caused by the death, resignation,
disqualification or otherwise, of any Director who was previously duly
elected, may be filled by the remaining members of the Board, though less
than a quorum, and each person so elected shall be a Director until his
successor is elected by the stockholders. Vacancies resulting
from an increase in the number of Directors may be filled only by members
of the Board of Directors.
|
Section
4.
|
A
majority of all the Directors in office shall be necessary to constitute a
quorum for the transaction of business, and the acts of a majority of the
Directors who are present at a meeting at which a quorum is present shall
be the acts of the Board of
Directors.
|
Section
5.
|
Following
the annual meeting of stockholders, the Directors-elect shall then convene
to consider and act on the appointment of Officers and employees,
authorize their compensation, and transact any other business properly
brought before the meeting.
|
Section
6.
|
Special
meetings of the Board of Directors may be called at any time by the
Chairman of the Board or the Chief Executive Officer, and shall be called
whenever so requested by not less than three (3) members of the
Board.
|
Section
7.
|
No
notice of the regular meetings of Directors need be
given. Notice of the time, place and purpose of each special
meeting shall be given to each member of the Board by telephone, telegram,
personally, by mail, or by electronic transmission, in each case not less
than twenty-four (24) hours prior to the time of the meeting. A
meeting may be held on shorter notice if all members consent.
A
Director may waive any required notice before or after the date and time
stated in the notice. Except as provided in the next sentence,
the waiver must be either in a writing, signed by the Director, or by
electronic transmission by the Director, and filed with the minutes or
corporate records. A Director's attendance at or participation
in a meeting waives any required notice to that Director of that meeting,
unless the Director at the beginning of the meeting (or promptly upon the
Director's arrival) objects to holding the meeting or transacting business
at the meeting and does not thereafter vote for or consent to action taken
at the meeting.
|
Section
8.
|
The
order of business at all meetings of the Board of Directors shall be as
determined by the Board of
Directors.
|
Section
9.
|
The
Board of Directors shall keep complete records of its proceedings in a
Minute Book kept for that purpose
alone.
|
Section
10.
|
No
director shall be entitled to any salary as such; but the Board of
Directors may fix, from time to time, reasonable compensation to be paid
each Director for his services as a member of the Board; provided that
nothing herein contained shall be construed to preclude any Director from
serving the Corporation in any other capacity, and receiving compensation
therefor.
|
Section
11.
|
At
any annual or special meeting of stockholders, all of the acts and doings
of the Board of Directors may be ratified, confirmed and approved by
stockholders and such ratification, confirmation and approval shall be as
valid and as binding upon the corporation and upon all stockholders as
though it had been approved, confirmed or ratified by every
stockholder.
|
Section
12.
|
Notwithstanding
any provisions to the contrary of this Article, and unless prohibited by
law, the meeting and voting of Directors may be dispensed with if all of
the Directors who would have been entitled to vote upon the action if such
meeting of Directors were held shall consent in writing to such corporate
action being taken. The action must be evidenced by one or more
consents describing the action taken, given either in writing and signed
before or after the intended effective date of the action by each
Director, or by electronic transmission, and included in the minutes or
filed with the corporate records reflecting the action
taken. In the case of consent by electronic transmission, such
transmission must set forth or be submitted with information from which it
may be determined that the electronic transmission was authorized by the
Director who sent the electronic
transmission.
|
Section
13.
|
Unless
prohibited by law, members of the Board of Directors or any committee
designated thereby may participate in a meeting of such board or committee
by means of a conference telephone or similar communication equipment by
means of which all persons participating in the meeting can hear each
other at the same time, and participation by such means shall constitute
presence in person at a meeting.
|
ARTICLE
IV
C
ommittees
Section
1.
|
The
Board of Directors may designate one or more committees, each committee to
consist of two or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of
a member of a committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not such member or
members constitute a quorum, may unanimously appoint another member of the
Board to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided
in the resolution of the Board of Directors or in these by-laws, shall
have and may exercise the authority of the Board of Directors in
exercising all corporate powers of, and in managing the business and
affairs of the corporation under the direction of, the Board of Directors;
but no such committee shall have the power or authority to: (i)
authorize distributions; (ii) approve or propose to stockholders action
required by law to be approved by stockholders; (iii) fill vacancies on
the Board of Directors or any of its committees; (iv) amend the articles
of incorporation pursuant to Section 414-282 of the Hawaii Business
Corporation Act, or any successor statute; (v) adopt, amend or repeal
bylaws; (vi) approve a plan of merger not requiring stockholder approval;
(vii) authorize or approve the reacquisition of shares, except according
to a formula or method prescribed by the Board of Directors; or (viii)
authorize or approve the issuance or sale or contract for sale of shares,
or determine the designation and relative rights, preferences and
limitations of a class or series of shares, except that the Board of
Directors may authorize a committee (or a senior executive officer of the
corporation) to do so within limits specifically prescribed by the Board
of Directors.
|
Section
2.
|
Unless
the Board of Directors otherwise provides, each committee designated by
the Board may adopt, amend and repeal rules for the conduct of its
business. In the absence of a provision by the Board or a
provision in the rules of such committee that requires a greater number, a
majority of the entire authorized number of members of such committee
shall constitute a quorum for the transaction of business, the vote of a
majority of the members present at a meeting at the time of such vote if a
quorum is then present shall be the act of such committee, and in other
respects each committee shall conduct its business in the same manner as
the Board conducts its business pursuant to Article III of these
by-laws.
|
ARTICLE
V
[D
eleted
]
ARTICLE
VI
O
fficers
Section
1.
|
The
Officers of the Corporation shall be a President, one or more Vice
Presidents, a Secretary, a Treasurer, and such other officers, including a
Chief Executive Officer, as the Board of Directors may deem necessary, and
such Officers shall have such powers and perform such duties as are
prescribed by the Bylaws or as may be prescribed by the Board of
Directors. No officer need be a Director or a stockholder and
two or more offices may be held by the same person.
The
Board of Directors shall have the authority to appoint the Officers of the
Corporation. All Officers of the Corporation shall have such
authority and will perform such duties as set forth in these Bylaws or, to
the extent consistent with these Bylaws, as prescribed by the Board of
Directors or by direction of an Officer authorized by the Board of
Directors to prescribe the duties of other Officers.
The
Board of Directors may, from time to time, designate a Chief Executive
Officer of the Corporation, who may also be the Chairman of the Board or
the President. The Chief Executive Officer shall be responsible
for the general supervision of the property, business and affairs of the
Corporation. He shall carry out the policies and procedures for
the governing and conduct of the affairs of the Corporation as are adopted
and directed by the Board of Directors and prescribed by
law. The Chief Executive Officer shall serve at the pleasure of
the Board and the office may be terminated at any time at the discretion
of the Board without any
cause.
|
Section
2.
|
A
Chairman of the Board of Directors may be elected by a majority of the
whole Board of Directors. If so elected, he shall preside at
all meetings of the Board of Directors and shall perform such other duties
and have such other powers as may be delegated by the Board of
Directors. The Chairman will preside at all meetings of the
stockholders, unless unavailable, in which case the Chief Executive
Officer will preside at all meetings of the stockholders, unless
unavailable, in which case the President will preside at all meetings of
the stockholders, unless unavailable, in which case the person designated
by the Board shall so preside.
|
Section
3.
|
The
President shall perform such duties as are incident to his office or are
prescribed by the Board.
|
Section
4.
|
The
Vice President shall perform such duties and do such acts as may be
prescribed by the Chief Executive Officer, the President, or the Board of
Directors. Subject to the provisions of Section 3 of this
Article, the Vice Presidents in the order directed by the Board of
Directors or the Chief Executive Officer shall perform the duties and have
the powers of the President in his absence or in the event of the
inability or refusal of the latter to
act.
|
Section
5.
|
The
Treasurer shall have custody of all the funds, notes, bonds and other
evidences of property of the corporation, and shall be responsible for
keeping all the books and accounts of the Corporation, and shall render
statements thereof in such form and as often as required by the Chief
Executive Officer, the President or the Board of Directors. He
shall be responsible for the keeping of the stock books, stock transfer
books and stock ledger of the Corporation. The Treasurer shall
perform all other duties assigned to him by the President, the Chief
Executive Officer or the Board of
Directors.
|
Section
6.
|
The
Secretary shall keep the minutes of the meetings of the Board of Directors
and of the stockholders. He shall see that proper notices are
given of all meetings of which notice is required. He shall
have custody of the seal and when necessary shall attest to the same when
affixed to written instruments properly executed on behalf of the
Corporation; and generally shall perform such other duties as may be
prescribed from time to time by the Board, the President, or the Chief
Executive Officer.
|
ARTICLE
VII
A
uthority
O
f
E
xecutive
Officers
Section
1.
|
The
Chief Executive Officer, President, Vice Presidents, Secretary, Treasurer,
and such other Officers as may be appointed from time to time, are
authorized to do and perform such corporate and official acts as are
necessary in the carrying on of the business of the Corporation, subject
always to the directions of the Board of Directors. Subject to
like limitation, they are fully empowered to make and execute such
documents and other instruments which may be necessary or desirable to
effectuate the business and affairs of the
Corporation.
|
Section
3.
|
The
Board of Directors may from time to time by resolution provide for the
execution of any corporate instrument or document by a mechanical device
or a machine, or by use of facsimile signatures, under such terms as shall
be set forth in the resolution of the Board of
Directors.
|
ARTICLE
VIII
Voting of Stock or Business
Interests By The Corporation
In all
cases where the Corporation owns, holds, or represents, under power of attorney
or proxy or in any representative capacity, shares of the capital stock of any
corporation, or shares or interests in business trusts, co-partnerships or other
associations, such shares or interests shall be represented and voted by the
Chief Executive Officer, or in the absence of the Chief Executive Officer, by
the President, or in the absence of the President, by a Vice President, or, in
the absence of a Vice President, by the Secretary; provided, however, that any
person specifically appointed by the Board of Directors for that purpose shall
have the right, if present, to represent and vote such shares or
interest.
ARTICLE
IX
[D
eleted
]
ARTICLE
X
I
ndemnification
Section
1.
|
The
company shall indemnify each person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the company) by reason of the
fact that he or she is or was a Director, Officer, employee or agent of
the company or of any division of the company, or is or was serving at the
request of the company as a Director, Officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys’ fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of this company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. The termination of any action, suit,
or proceeding by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he or she reasonably believed to be in or not opposed to the best
interests of the company and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his or her conduct was
unlawful.
|
Section
2.
|
The
company shall indemnify each person who was or is a party or is threatened
to be made a party to any threatened, pending, or completed action or suit
by or in the right of the company to procure a judgment in its favor by
reason of the fact that he or she is or was a Director, Officer, employee
or agent of the company or of any division of the company, or is or was
serving at the request of the company as a Director, Officer, employee or
agent of the company or of any division of the company, or is or was
serving at the request of the company as a Director, Officer, employee, or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys’ fees) actually and
reasonably incurred by him or her in connection with the defense or
settlement of such action or suit if he or she acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interest of the company, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance
of his duty to this company unless and only to the extent that the court
in which such action or suit was brought or in any other court having
jurisdiction in the premises shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity
for such expenses which such court shall deem
proper.
|
Section
3.
|
To
the extent that a Director, Officer, employee or agent of the company or
of any division of the company, or a person serving at the request of the
company as a Director, Officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise has been successful
on the merits or otherwise in defense of any action, suit or proceeding
referred to in Section 1 or Section 2 of this Article, or in defense of
any claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys’ fees) actually and reasonably incurred by
him or her in connection therewith.
|
Section
4.
|
Any
indemnification under Section 1 or Section 2 of this Article (unless
ordered by a court) shall be made by the company only as authorized in the
specific case upon a determination that indemnification of the Director,
Officer, employee or agent is proper in the circumstances because he or
she has met the applicable standard of conduct set forth in Section 1 or
Section 2. Such determination shall be made (1) by the Board of
Directors by a majority vote of a quorum consisting of Directors who were
not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or even if obtainable a quorum of disinterested Directors
so directs, by independent legal counsel in a written opinion to the
corporation or (3) by a majority vote of the
shareholders.
|
Section
5.
|
Expenses
incurred in defending a civil or criminal action, suit or proceeding may
be paid by the company in advance of the final disposition of such action,
suit or proceeding as authorized by the Board of Directors in a particular
case upon receipt of an undertaking by or on behalf of the Director,
Officer, employee or agent to repay such amount unless it shall ultimately
be determined that he or she is entitled to be indemnified by the company
as authorized in this Article.
|
Section
6.
|
Any
indemnification pursuant to this Article shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled
and shall continue as to the person who has ceased to be a Director,
Officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a
person.
|
Section
7.
|
The
company shall have the power to purchase and maintain insurance on behalf
of any person who is or was a Director, Officer, employee or agent of the
company or of any division of the company, or is or was serving at the
request of the company as a Director, Officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him or her and incurred by him or
her in any such capacity or arising out of his or her status as such,
whether or not the company would have the power to indemnify him or her
against such liability under the provisions of this
Article. Any such insurance may be procured from any insurance
company designated by the Board of Directors, including any insurance
company in which the corporation shall have any equity or other interest,
through stock ownership or
otherwise.
|
Section
8.
|
This
Article shall be effective with respect to any person who is a Director,
Officer, employee or agent of the company at any time on or after the date
of incorporation of this corporation with respect to any action, suit or
proceeding pending on or after that date, by reason of the fact that he or
she is or was, before or after that date, a Director, Officer, employee or
agent of the company or is or was serving, before or after that date, at
the request of the company as a Director, Officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise.
|
ARTICLE
XI
C
apital
Stock
Section
1.
|
The
Board of Directors may authorize the issuance of some or all of the shares
of any or all of its classes or series without certificates as provided by
law. If shares of the Corporation are issued with certificates,
such shares shall be issued and signed (either manually or in facsimile)
by the President, or a Vice President, and the Secretary or
Treasurer. Transfers of record of shares of stock of the
Corporation shall be made only on the books of the Corporation by the
holder thereof in person or by an attorney, and, with regard to
certificated shares of stock, upon surrender of the certificate properly
endorsed or assigned.
|
Section
2.
|
All
shares of stock in the Corporation are assignable, and any stockholder may
sell, assign and transfer his or her shares and certificates of stock at
pleasure.
|
Section
3.
|
In
case any certificate of stock is lost, mutilated or destroyed, a new
certificate may be issued in place thereof upon receipt of a proper bond
of indemnification in which the Corporation is named as the
beneficiary.
|
Section
4.
|
Transfer
of stock shall not be suspended preparatory to the declaration of
dividends; and unless an agreement to the contrary shall be expressed in
the assignment, dividends shall be paid to the stockholders in whose name
the stock shall stand at the date of the declaration of
dividends.
|
ARTICLE
XII
F
iscal
Year
The
fiscal year of the Corporation shall begin on the first day of January in each
year and end on the thirty first day of December of each year.
ARTICLE
XIII
S
eal
The seal
of the Corporation shall be circular in form and shall bear the name of the
Corporation around the border and such other device or inscription as the Board
of Directors shall determine.
ARTICLE
XIV
A
mendments
Subject
to repeal or change at any regular meeting of the stockholders, or at any
special meeting called for that purpose by the vote of the holders of eighty
percent (80%) of the outstanding shares entitled to vote at such meeting, the
power to alter, amend or repeal these Bylaws or adopt new bylaws shall be vested
in the Board of Directors.
ARTICLE
XV
G
ender
Clause
The names
and titles as used herein, or any pronouns used in place thereof, shall mean and
include the masculine or feminine, the singular or plural number, according to
the context hereof.
As
approved by all the Incorporators of this Corporation on February 1, 1982 and,
as amended by the Board of Directors of the Corporation o
n
February 20, 1985, November 7,
1986, March 6, 2000, February 12, 2003, September 24, 2003, April 1, 2004, July
27, 2005, October 25, 2006, October 31, 2007, and December 22,
2008.
Exhibit
4.5
Amendment
Two
To
Rights
Agreement
This
Amendment Two to Rights Agreement (this “
Amendment
”) is dated
as of February 25, 2009, between Central Pacific Financial Corp., a
Hawaii corporation (the “
Company
”) and Wells
Fargo Bank N.A., a national bank (the “
Rights
Agent
”).
Recitals
A.
|
On
August 26, 1998, the Company, which was formerly known as CPB, Inc. and
ChaseMellon Shareholder Services, a limited liability company organized
under the laws of the State of New Jersey, as rights agent, entered into a
Rights Agreement (the “
Rights
Agreement
”) in order to set forth provisions relating to the
dividend of one preferred share purchase right (a “
Right
”) for each Common Share (as defined
in the Rights Agreement) of the Company outstanding on September 16,
1998. Unless otherwise defined herein, the capitalized terms in
this Amendment shall have the same meaning as set forth in the Rights
Agreement.
|
B.
|
On
November 1, 2005, the Rights Agent became the successor Rights Agent under
the Rights Agreement.
|
C.
|
On
August 26, 2008, an Amendment One to Rights Agreement was adopted by the
Board of Directors of the Company (the “
Board
”) extending the expiration date of
the Rights for one year in order to provide the Company time to consider
whether to adopt a new Rights Agreement to replace the Rights Agreement,
or to amend and/or extend the Rights Agreement, with the intent to present
such new rights agreement or amended/extended Rights Agreement for
shareholder approval at the Corporation’s 2009 annual shareholders’
meeting.
|
D.
|
After
further consideration, the Board believes it is in the best interest of
the Company and its shareholders to amend the Rights Agreement to
accelerate the expiration date of the Rights to March 15, 2009, at which
time the Rights will expire and cease to be in
effect.
|
E.
|
It
is the intent of the parties by this Amendment to amend the Rights
Agreement in accordance with the terms set forth
below.
|
Amendment
In
consideration of the premises and the mutual agreements herein set forth, the
parties agree as follows:
1.
|
Amendment to Rights
Agreement
. The Final Expiration Date as set forth in
Section 7(a)(i) of the Rights Agreement shall be accelerated to March 15,
2009. Accordingly, Section 7(a) shall be amended and restated
to read as follows:
|
“(a) The
registered holder of any Right Certificate may exercise the Rights evidenced
thereby (except as otherwise provided herein) in whole or in part at any time
after the Distribution Date upon surrender of the Right Certificate, with the
form of election to purchase on the reverse side thereof duly executed, to the
Rights Agent at the principal office of the Rights Agent, together with payment
of the Purchase Price for each one one-hundredth (1/100th) of a Preferred Share
as to which the Rights are exercised, at or prior to the earliest of (i) the
close of business on March 15, 2009 (the “Final Expiration Date”),
(ii) the time at which the Rights are redeemed as provided in Section 23 hereof
(the “Redemption Date”), or (iii) the time at which such Rights are exchanged as
provided in Section 24 hereof.”
2.
|
Governing Law
. This Amendment
shall be deemed to be a contract made under the laws of the State of
Hawaii and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made
and to be performed entirely with such State, without regard to any
conflicts of laws, principles thereof; provided, however, that all
provisions regarding the rights, duties and obligations of the Rights
Agent shall be governed by and construed in accordance of the State of New
York applicable to contracts made and to be performed entirely within such
State.
|
3.
|
Counterparts
. This Amendment may
be executed in any number of counterparts and each of such counterparts
shall for all purposes be deemed to be an original and such counterparts
shall together constitute but one and the same
instrument. Facsimile and electronically transmitted signatures
shall have the same force and effect as original
signatures.
|
4.
|
No Further Amendment
. Except as
specifically amended above, the terms and provisions of the Rights
Agreement shall remain otherwise unchanged and in full force and
effect.
|
In
Witness Whereof, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
Central
Pacific Financial Corp
|
Wells
Fargo Bank N.A.
|
|
|
By:
/s/ Ronald K.
Migita
|
By:
/s/ Cindy
Gesme
|
Print
Name: Ronald K. Migita
|
Print
Name: Cindy Gesme
|
Print
Title: President & CEO
|
Print
Title: Assistant Vice
President
|
Exhibit
10.1
Agreement
Number:
3810214
AGREEMENT
between
Fiserv
Solutions, Inc.
255
Fiserv Drive
Brookfield,
WI 53045-5815
and
Central Pacific
Bank
220
South King Street
Honolulu,
Hawaii 96813
Date:
December 23, 2004
AGREEMENT
dated as of
December
23, 2004
("Agreement") between Fiserv Solutions, Inc., a Wisconsin
corporation ("Fiserv"), and
Central Pacific Bank
,
a Hawaii
financial
institution
("Client").
1.
Term
. The
initial term of this Agreement shall end 10 years following the date Fiserv
Services (as defined below) are first used by Client and, unless written notice
of non-renewal is provided by either party at least 180 days prior to expiration
of the initial term or any renewal term, this Agreement shall automatically
renew for additional term(s) of 5 years. This Agreement shall be
effective on the day services are first provided to Client by Fiserv ("Effective
Date"). Notwithstanding the foregoing, following the Effective Date, Exhibits
that may be made a part of this Agreement may contain a term longer or shorter
in duration than the initial term set forth above.
2.
Services
. (a)
Services
Generally
. Fiserv, itself and through its affiliates, agrees
to provide Client, and Client agrees to obtain from Fiserv services ("Services")
and products ("Products") (collectively, "Fiserv Services") described in the
attached Exhibits:
Exhibit C – EFT Services
Exhibit H – Development
Services
Exhibit I – Implementation
Services
Exhibit L – Material Purchased
Through Fiserv
Exhibit M – Software
Products
Exhibit Q – Professional
Services
The Exhibits set forth specific terms
and conditions applicable to the Services and/or Products, and, where
applicable, the Fiserv affiliate so performing. Client may select
additional services and products from time to time by incorporating an
appropriate Exhibit to this Agreement.
(b)
Implementation
Services
. Fiserv will provide services (i) to convert Client's
existing applicable data and/or information to the Fiserv Services; and/or (ii)
to implement the Fiserv Services. These activities are referred to as
"Implementation Services". Client agrees to cooperate with Fiserv in
connection with Fiserv's provision of Implementation Services and to provide all
necessary information and assistance to facilitate the conversion and/or
implementation. Client is responsible for all reasonable and
legitimate out-of-pocket expenses associated with Implementation
Services. Fiserv will provide Implementation Services as required in
connection with Fiserv Services.
(c)
Training
Services
. Fiserv shall provide training, training aids, user
manuals, and other documentation for Client's use as Fiserv finds necessary to
enable Client personnel to become familiar with Fiserv Services. If
requested by Client, classroom training in the use and operation of Fiserv
Services will be provided at a training facility designated by
Fiserv. All such training aids and manuals remain Fiserv's
property.
3.
Fees for Fiserv
Services
. (a)
General
. Client
agrees to pay Fiserv:
(i)
estimated fees for Fiserv Services for the following month as specified in the
Exhibits;
(ii)
reasonable and legitimate out-of-pocket charges for the month payable by Fiserv
for the account of Client; and
(iii)
Taxes (as defined below) thereon (collectively, "Fees").
Fiserv
shall timely reconcile Fees paid by Client for the Fiserv Services for the month
and the fees and charges actually due Fiserv based on Client's actual use of
Fiserv Services for such month. Fiserv shall either issue a credit to
Client or provide Client with an invoice for any additional fees or other
charges owed. Fiserv may change the amount of Fees billed to reflect
appropriate changes in actual use of Fiserv Services. Fees may be
increased from time to time as set forth in the Exhibits. Upon
notification to and acceptance by Client, Fiserv may increase its fees in excess
of amounts listed in the Exhibits in the event that Fiserv implements major
system enhancements to comply with changes in law, government regulation, or
industry practices.
(b)
Additional
Charges
. Fees for out-of-pocket expenses, such as telephone,
microfiche, courier, and other charges incurred by Fiserv for goods or services
obtained by Fiserv on Client's behalf shall be billed to Client at cost plus the
applicable Fiserv administrative fee as set forth in the Exhibits, provided such
fees and out-of-pocket expenses are reasonable and legitimate. Such
third-party vendor/provider out-of-pocket expenses may be changed from time to
time upon notification of a fee change from a vendor/provider. The
Fees do not include, and Client shall be responsible for, furnishing
transportation or transmission of information between Fiserv's service
center(s), Client's site(s), and any applicable clearing house, regulatory
agency, or Federal Reserve Bank.
(c)
Taxes
. Fiserv
shall add to each invoice any sales, use, excise, value added, and other taxes
and duties however designated that are levied by any taxing authority relating
to the Fiserv Services ("Taxes"). In no event shall "Taxes" include
any levies by any taxing authority based upon Fiserv's net income.
(d)
Payment
Terms
. Fees are due and payable monthly in advance upon
receipt of invoice. In the event any amounts due remain
unpaid beyond the 30
th
day
after payment is due, Client shall pay a late charge of 1.5% per
month. Client agrees that it shall neither make nor assert any right
of deduction or set-off from Fees on invoices submitted by Fiserv for Fiserv
Services.
4.
Access to Fiserv
Services
. (a)
Procedures
. Client
agrees to comply with applicable regulatory requirements and procedures for use
of Services established by Fiserv.
(b)
Changes
. Fiserv
continually reviews and modifies Fiserv systems used in the delivery of Services
(the "Fiserv System") to improve service and comply with government regulations,
if any, applicable to the data and information utilized in providing
Services. Fiserv reserves the right to make changes in Services,
including but not limited to operating procedures, type of equipment or software
resident at, and the location of Fiserv's service center(s). Fiserv
will notify Client of any material change that affects Client's normal operating
procedures, reporting, or service costs prior to implementation of such
change.
(c)
Communications
Lines
. Fiserv shall order the installation of appropriate
communication lines and equipment to facilitate Client's access to
Services. Client understands and agrees to pay charges relating to
the installation and use of such lines and equipment as set forth in the
Exhibits.
(d)
Terminals and Related
Equipment
. Client shall obtain necessary and sufficient
terminals and other equipment, approved by Fiserv and compatible with the Fiserv
System, to transmit and receive data and information between Client's
location(s), Fiserv's service center(s), and/or other necessary
location(s). Fiserv and Client may mutually agree to change the
type(s) of terminal and equipment used by Client.
5.
Client
Obligations
. (a)
Input
. Client
shall be solely responsible for the input, transmission, or delivery to and from
Fiserv of all information and data required by Fiserv to perform Services unless
Client has retained Fiserv to handle such responsibilities, as specifically set
forth in the Exhibits. The information and data shall be provided in
a format and manner approved by Fiserv. Client will provide at its
own expense or procure from Fiserv all equipment, computer software,
communication lines, and interface devices required to access the Fiserv
System. If Client has elected to provide such items itself, Fiserv
shall provide Client with a list of compatible equipment and software; Client
agrees to pay Fiserv's standard fee for recertification of the Fiserv System
resulting therefrom.
(b)
Client
Personnel
. Client shall designate appropriate Client personnel
for training in the use of the Fiserv System, shall supply Fiserv with
reasonable access to Client's site during normal business hours for
Implementation Services and shall cooperate with Fiserv personnel in their
performance of Services.
(c)
Use of Fiserv
System
. Client shall (i) comply with any operating
instructions on the use of the Fiserv System provided by Fiserv; (ii) review all
reports furnished by Fiserv for accuracy; and (iii) work with Fiserv to
reconcile any out of balance conditions. Client shall determine and
be responsible for the authenticity and accuracy of all information and data
submitted to Fiserv.
(d)
Client's
Systems
. Client shall be responsible for ensuring that its
systems are capable of passing and/or accepting data from and/or to the Fiserv
System.
6.
Ownership and
Confidentiality
. (a)
Definition
.
(i)
Client
Information
. "Client Information" means: (A)
confidential plans, customer lists, information, and other proprietary material
of Client that is marked with a restrictive legend, or if not so marked with
such legend or is disclosed orally, is identified as confidential at the time of
disclosure (and written confirmation thereof is promptly provided to Fiserv);
and (B) any information and data concerning the business and financial records
of Client's customers prepared by or for Fiserv, or used in any way by Fiserv in
connection with the provision of Fiserv Services (whether or not any such
information is marked with a restrictive legend).
(ii)
Fiserv
Information
. "Fiserv Information" means: (A)
confidential plans, information, research, development, trade secrets, business
affairs (including that of any Fiserv client, supplier, or affiliate), and other
proprietary material of Fiserv that is marked with a restrictive legend, or if
not so marked with such legend or is disclosed orally, is identified as
confidential at the time of disclosure (and written confirmation thereof is
promptly provided to Client); and (B) Fiserv's proprietary computer programs,
including custom software modifications, software documentation and training
aids, and all data, code, techniques, algorithms, methods, logic, architecture,
and designs embodied or incorporated therein (whether or not any such
information is marked with a restrictive legend).
(iii)
Information
. "Information"
means Client Information and Fiserv Information. No obligation of
confidentiality applies to any Information that the receiving party
("Recipient") (A) already possesses without obligation of confidentiality; (B)
develops independently; or (C) rightfully receives without obligation of
confidentiality from a third party. No obligation of confidentiality
applies to any Information that is, or becomes, publicly available without
breach of this Agreement.
(b)
Obligations
. Recipient
agrees to hold as confidential all Information it receives from the disclosing
party ("Discloser"). All Information shall remain the property of
Discloser or its suppliers and licensors. Information will be
returned to Discloser at the termination or expiration of this
Agreement. Fiserv specifically agrees that it will not use any
non-public personal information about Client's customers in any manner
prohibited by Title V of the Gramm-Leach-Bliley Act. Recipient will
use the same care and discretion to avoid disclosure of Information as it uses
with its own similar information that it does not wish disclosed, but in no
event less than a reasonable standard of care. Recipient may only use
Information in accordance with the purpose of this
Agreement. Recipient agrees that it shall not sell, transfer,
publish, disclose, display, or otherwise make available to other parties any of
Discloser’s Information, except that Recipient may disclose
Information to (i) employees and employees of affiliates who have a need to
know; and (ii) any other party with Discloser's prior written
consent. Before disclosure to any of the above parties, Recipient
will have a written agreement with such party sufficient to require that party
to treat Information in accordance with this Agreement. Recipient may
disclose Information to the extent required by law. However,
Recipient agrees to give Discloser prompt notice so that Discloser may seek a
protective order. The provisions of this sub-section survive any
termination or expiration of this Agreement.
(c)
Residuals
. Nothing
contained in this Agreement shall restrict Recipient from the use of any ideas,
concepts, know-how, or techniques contained in Information that are related to
Recipient's business activities ("Residuals"), provided that in so doing,
Recipient does not breach its obligations under this
Section. However, this does not give Recipient the right to disclose
the Residuals except as set forth elsewhere in this Agreement.
(d)
Fiserv
System
. The Fiserv System contains information and computer
software that are proprietary and confidential information of Fiserv, its
suppliers, and licensors. Client agrees not to attempt to circumvent
the devices employed by Fiserv to prevent unauthorized access to the Fiserv
System, including, but not limited to, alterations, decompiling, disassembling,
modifications, and reverse engineering thereof.
(e)
Information
Security
. Fiserv shall implement and maintain appropriate
measures designed to meet the objectives of the guidelines establishing
standards for safeguarding non-public Client customer information as adopted by
any federal regulatory agencies having jurisdiction over Client's
affairs.
(f)
Confidentiality of this
Agreement
. Fiserv and Client agree to keep confidential the
prices, terms and conditions of this Agreement, without disclosure to third
parties. Notwithstanding the foregoing, each party may disclose
Confidential Information to the extent required by a court of competent
jurisdiction, regulatory body, or other governmental authority or otherwise as
required by law or regulation; provided, however, that the party required to so
disclose Confidential Information of the other party shall use commercially
reasonable efforts to minimize such disclosure and shall, to the extent not
otherwise prohibited by law or regulation, provide written notice of such
disclosure request to the other party. Further, the party required to
so disclose the Confidential Information agrees to consult with and assist the
other party in obtaining a protective order prior to such disclosure (unless
otherwise prohibited by law or regulation). Notwithstanding the
foregoing, in the event that a party is unable, due to the requirements of
regulators having jurisdiction over the party’s operations, to provide prior
notice of the disclosure request as required by this Section, the Discloser
shall provide notice of the disclosure, including a description of the
information disclosed, to the other party within 3 business days of the
disclosure. In such an event, Discloser shall remain obligated to use
commercially reasonable efforts to minimize the disclosure.
7.
Regulatory Agencies,
Regulations and Legal Requirements
. (a)
Client
Files
. Records maintained and produced for Client ("Client
Files") may be subject to examination by such Federal, State, or other
governmental regulatory agencies as may have jurisdiction over Client's business
to the same extent as such records would be subject if maintained by Client on
its own premises. Client agrees that Fiserv is authorized to give all
reports, summaries, or information contained in or derived from the data or
information in Fiserv's possession relating to Client when formally requested to
do so by an authorized regulatory or government agency.
(b)
Compliance with Regulatory
Requirements
. Client agrees to comply with applicable
regulatory and legal requirements.
8.
Warranties
. (a)
Fiserv
Warranties
. Fiserv represents and warrants that:
(i)(A)
Services will conform to the specifications set forth in the Exhibits; (B)
Fiserv will perform Client's work accurately provided that Client supplies
accurate data and information, and follows the procedures described in all
Fiserv documentation, notices, and advices; (C) Fiserv personnel will exercise
due care in provision of Services; (D) the Fiserv System will comply in all
material respects with all applicable Federal regulations governing Services;
and (E) the Fiserv System is Year 2000 compliant. In the event of an
error or other default caused by Fiserv personnel, systems, or equipment, Fiserv
shall correct the data or information and/or reprocess the affected item or
report at no additional cost to Client. Client agrees to supply
Fiserv with a written request for correction of the error within 30 days after
Client's receipt of the work containing the error. Work reprocessed
due to errors in data supplied by Client, on Client's behalf by a third party,
or by Client's failure to follow procedures set forth by Fiserv shall be billed
to Client at Fiserv's then current time and material rates; and
(ii) it
owns or has a license to furnish all equipment or software comprising the Fiserv
System. Fiserv shall indemnify Client and hold it harmless against
any claim or action that alleges that the Fiserv System use infringes a United
States patent, copyright, or other proprietary right of a third
party. Client agrees to notify Fiserv promptly of any such claim and
grants Fiserv the sole right to control the defense and disposition of all such
claims. Client shall provide Fiserv with reasonable cooperation and
assistance in the defense of any such claim.
THE
WARRANTIES STATED HEREIN ARE LIMITED WARRANTIES AND ARE THE ONLY WARRANTIES MADE
BY FISERV. FISERV DOES NOT MAKE, AND CLIENT HEREBY EXPRESSLY WAIVES,
ALL OTHER WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. THE STATED EXPRESS WARRANTIES ARE IN LIEU OF ALL
LIABILITIES OR OBLIGATIONS OF FISERV FOR DAMAGES ARISING OUT OF OR IN CONNECTION
WITH THE DELIVERY, USE, OR PERFORMANCE OF FISERV SERVICES.
(b)
Client
Warranties
. Client represents and warrants that: (A) no
contractual obligations exist that would prevent Client from entering into this
Agreement; (B) it has complied with all applicable regulatory requirements; and
(C) Client has requisite authority to execute, deliver, and perform this
Agreement. Client shall indemnify and hold harmless Fiserv, its
officers, directors, employees, and affiliates against any claims or actions
arising out of (X) the use by Client of the Fiserv System in a manner other than
that provided in this Agreement; and (Y) any and all claims by third parties
through Client arising out of the performance and non-performance of Fiserv
Services by Fiserv,
provided
that the
indemnity listed in clause (Y) hereof shall not preclude Client's recovery of
direct damages pursuant to the terms and subject to the limitations of this
Agreement.
9.
Limitation of
Liability
. (a)
General
. IN
NO EVENT SHALL FISERV BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES ARISING FROM THIS AGREEMENT, REGARDLESS OF
WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. CLIENT MAY NOT
ASSERT ANY CLAIM AGAINST FISERV MORE THAN 2 YEARS AFTER SUCH CLAIM
ACCRUED. FISERV'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF
ACTION RELATING TO THIS AGREEMENT SHALL BE LIMITED TO THE TOTAL FEES PAID BY
CLIENT TO FISERV FOR THE FISERV SERVICE RESULTING IN SUCH LIABILITY IN THE 6
MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FISERV'S AGGREGATE
LIABILITY FOR A DEFAULT RELATING TO THIRD PARTY EQUIPMENT OR SOFTWARE SHALL BE
LIMITED TO THE AMOUNT PAID BY CLIENT FOR THE EQUIPMENT OR SOFTWARE.
(b)
Lost
Records
. If Client's records or other data submitted for
processing are lost or damaged as a result of any failure by Fiserv, its
employees, or agents to exercise reasonable care to prevent such loss or damage,
Fiserv's liability on account of such loss or damages shall not exceed the
reasonable cost of reproducing such records or data from exact duplicates
thereof in Client's possession.
10.
Disaster
Recovery
. (a)
General
. Fiserv
maintains a disaster recovery plan ("Disaster Recovery Plan") for each
Service. A "Disaster" shall mean any unplanned interruption of the
operations of or inaccessibility to Fiserv's service center in which Fiserv,
using reasonable judgment, requires relocation of processing to a recovery
location. Fiserv shall notify Client as soon as possible after Fiserv
deems a service outage to be a Disaster. Fiserv shall move the
processing of Client's standard services to a recovery location as expeditiously
as possible and shall coordinate the cut-over to back-up telecommunication
facilities with the appropriate carriers. Client shall maintain
adequate records of all transactions during the period of service interruption
and shall have personnel available to assist Fiserv in implementing the
switchover to the recovery location. During a Disaster, optional or
on-request services shall be provided by Fiserv only to the extent adequate
capacity exists at the recovery location and only after stabilizing the
provision of base services.
(b)
Communications
. Fiserv
shall work with Client to establish a plan for alternative communications in the
event of a Disaster.
(c)
Disaster Recovery
Test
. Fiserv shall test the Disaster Recovery Plan
periodically. Client agrees to participate in and assist Fiserv with
such test, if requested by Fiserv. Upon Client's request, test
results will be made available to Client's management, regulators, auditors, and
insurance underwriters.
(d)
Client
Plans
. Fiserv agrees to release information necessary to allow
Client's development of a disaster recovery plan that operates in concert with
the Disaster Recovery Plan.
(e)
No
Warranty
. Client understands and agrees that the Disaster
Recovery Plan is designed to minimize, but not eliminate, risks associated with
a Disaster affecting Fiserv's service center(s). Fiserv does not
warrant that Fiserv Services will be uninterrupted or error free in the event of
a Disaster; no performance standards shall be applicable for the duration of a
Disaster. Client maintains responsibility for adopting a disaster
recovery plan relating to disasters affecting Client's facilities and for
securing business interruption insurance or other insurance necessary for
Client's protection.
11.
Termination
. (a)
Material
Breach
. Except as provided elsewhere in this Section 11,
either party may terminate this Agreement in the event of a material breach by
the other party not cured within 90 days (or, in the case of a breach of Section
6, within 5 days) following receipt of written notice stating, with
particularity and in reasonable detail, the nature of the claimed
breach.
(b)
Failure to
Pay
. In the event any invoice remains unpaid by Client 30 days
after due, or Client deconverts any data or information from the Fiserv System
without prior written consent of Fiserv, Fiserv, at its sole option, may
terminate this Agreement and/or Client's access to and use of Fiserv
Services. Any invoice submitted by Fiserv shall be deemed correct
unless Client provides written notice to Fiserv within 30 days of the invoice
date specifying the nature of the disagreement.
(c)
Remedies
. Remedies
contained in this Section 11 are cumulative and are in addition to the other
rights and remedies available to Fiserv under this Agreement, by law or
otherwise.
(d)
Defaults
. If
Client:
(i)
defaults in the payment of any sum of money due in Section 11(b);
(ii)
breaches this Agreement in any material respect or otherwise defaults in any
material respect in the performance of any of its obligations in Section 11(a);
or
(iii)
commits an act of bankruptcy or becomes the subject of any proceeding under the
Bankruptcy Code or becomes insolvent or if any substantial part of Client's
property becomes subject to any levy, seizure, assignment, application, or sale
for or by any creditor or governmental agency;
then, in
any such event, Fiserv may, upon written notice, terminate this Agreement and be
entitled to recover from Client as liquidated damages an amount equal to the
present value of all payments remaining to be made hereunder for the remainder
of the initial term or any renewal term of this Agreement. For
purposes of the preceding sentence, present value shall be computed using the
"prime" rate (as published in
The
Wall Street Journal
) in
effect at the date of termination and "all payments remaining to be made" shall
be calculated based on the average bills for the 3 months immediately preceding
the date of termination. Client agrees to reimburse Fiserv for any
expenses Fiserv may incur, including reasonable attorneys' fees, in taking any
of the foregoing actions.
(e)
Fiserv
Default.
If Fiserv commits an act of bankruptcy or becomes the
subject of any proceeding under the Bankruptcy Code or becomes insolvent or if
any substantial part of Fiserv property becomes subject to any levy, seizure,
assignment, application, or sale for or by any creditor or governmental agency
then, in any such event, Client may, upon written notice, terminate this
Agreement.
(f)
Convenience
. Client
may terminate this Agreement by paying a termination fee based on the remaining
unused term of this Agreement. The termination fee will be calculated
by multiplying the total weighted unused months in the contract term
by Client's largest monthly invoice for each Fiserv Service received
by Client during the term (or if no monthly invoice has been received, the sum
of the estimated monthly billing for each Fiserv Service to be received
hereunder). The total weighted value of unused months will be
calculated by multiplying the number of unused months in each timeline group, as
defined in the table below, by the respective percentage applicable to the
timeline. Where applicable, the monthly Maintenance Fee will be
calculated by dividing the annual Maintenance Fee by twelve (Refer to Table 1
below). Client understands and agrees that Fiserv losses incurred as
a result of early termination of the Agreement would be difficult or impossible
to calculate as of the effective date of termination since they will vary based
on, among other things, the number of clients using the Fiserv System on the
date the Agreement terminates. Accordingly, the amount set forth in
the first sentence of this subsection represents Client's agreement to pay and
Fiserv's agreement to accept as liquidated damages (and not as a penalty) such
amount for any such Client termination. This provision 11(e) shall
not apply and no fee would be owed or due from Client to Fiserv in the event
Client elects at any time, but with Fiserv’s consent (which consent shall not be
unreasonably withheld, delayed or conditioned), to outsource facilities
management to Fiserv or to fully outsource all processing to
Fiserv. An example termination fee calculation is provided to
facilitate understanding the mechanics of this provision. This example assumes a
contract execution date of November 15, 2004:
For
Example: If termination occurred at the end of Year 3, the
calculation would be:
Years:
|
|
#
of Months in Timeline
|
|
#
of Months Used
|
|
#
of Unused Months
|
|
|
|
Weighted
Value of Unused Months
|
1
- 2
|
|
24
|
|
24
|
|
|
0
|
|
90%
|
|
0
|
3
- 4
|
|
24
|
|
12
|
|
|
12
|
|
80%
|
|
9.6
|
5
|
|
12
|
|
0
|
|
|
12
|
|
65%
|
|
7.8
|
6
- 10
|
|
60
|
|
0
|
|
|
60
|
|
40%
|
|
24
|
Total
weighed value of unused months:
|
|
41.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Fee equals:
|
41.4
months
|
|
|
Times
|
$20,000
(largest monthly invoice)
1
|
Termination
Fee Due:
|
$
828,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
Actual largest monthly invoice for each Fiserv service will be used
in actual
calculations
|
(g)
Return of Data
Files
. Upon expiration or termination of this Agreement,
Fiserv shall furnish to Client such copies of Client Files as Client may request
in a Fiserv standard format along with such information and assistance as is
reasonable and customary to enable Client to deconvert from the Fiserv System,
provided, however, that Client consents and agrees and authorizes Fiserv to
retain Client Files until (i) Fiserv is paid in full for (A) all Services
provided through the date such Client Files are returned to Client; and (B) any
and all other amounts that are due or will become due under this Agreement; (ii)
Fiserv is paid its then standard rates for the services necessary to return such
Client Files; (iii) if this Agreement is being terminated, Fiserv is paid any
applicable termination fee pursuant to subsection (d) or (e) above; and (iv)
Client has returned to Fiserv all Fiserv Information. Unless directed
by Client in writing to the contrary, Fiserv shall be permitted to destroy
Client Files any time after 30 days from the final use of Client Files for
processing.
(h)
Miscellaneous
. Client
understands and agrees that Client is responsible for the deinstallation and
return shipping of any Fiserv-owned equipment located on Client's
premises.
12.
Dispute
Resolution
. (a)
General
. Except
with respect to disputes arising from a misappropriation or misuse of either
party's proprietary rights, any dispute or controversy arising out of this
Agreement, or its interpretation, shall be submitted to and resolved exclusively
by arbitration under the rules then prevailing of the American Arbitration
Association, upon written notice of demand for arbitration by the party seeking
arbitration, setting forth the specifics of the matter in controversy or the
claim being made. The arbitration shall be heard before an arbitrator
mutually agreeable to the parties; provided, that if the parties cannot agree on
the choice of arbitrator within 10 days after the first party seeking
arbitration has given written notice, then the arbitration shall be heard by 3
arbitrators, 1 chosen by each party, and the third chosen by those 2
arbitrators. The arbitrators will be selected from a panel of persons
having experience with and knowledge of information technology and at least 1 of
the arbitrators selected will be an attorney. Discovery shall not be
permitted. A hearing on the merits of all claims for which
arbitration is sought by either party shall be commenced not later than 60 days
from the date demand for arbitration is made by the first party seeking
arbitration. The arbitrator(s) must render a decision within 10 days
after the conclusion of such hearing. Any award in such arbitration
shall be final and binding upon the parties and the judgment thereon may be
entered in any court of competent jurisdiction.
(b)
Applicable
Law
. The arbitration shall be governed by the United States
Arbitration Act, 9 U.S.C. 1-16. The arbitrators shall apply the
substantive law of the State of Wisconsin, without reference to provisions
relating to conflict of laws. The arbitrators shall not have the
power to alter, modify, amend, add to, or subtract from any term or provision of
this Agreement, nor to rule upon or grant any extension, renewal, or continuance
of this Agreement. The arbitrators shall have the authority to grant
any legal remedy available had the parties submitted the dispute to a judicial
proceeding.
(c)
Situs
. If
arbitration is required to resolve any disputes between the parties, the
proceedings to resolve the first such dispute shall be held in Honolulu, Hawaii,
the proceedings to resolve the second such dispute shall be held in Milwaukee,
Wisconsin, and the proceedings to resolve any subsequent disputes shall
alternate between Milwaukee, Wisconsin and Honolulu, Hawaii.
13.
Insurance
. Fiserv
carries the following types of insurance policies:
(i)
Comprehensive General Liability in an amount not less than $1 million per
occurrence for claims arising out of bodily injury and property
damage;
(ii)
Commercial Crime covering employee dishonesty in an amount not less than $5
million;
(iii)
All-risk property coverage including Extra Expense and Business Income coverage;
and
(iv)
Workers Compensation as mandated or allowed by the laws of the state in which
Services are being performed, including $1 million coverage for Employer's
Liability.
14.
Audit
. Fiserv
employs an internal auditor responsible for ensuring the integrity of its
processing environments and internal controls. In addition, as may be
required by law or regulation, Fiserv provides for periodic independent audits
of its operations. Fiserv shall provide Client with a copy of the
audit of the Fiserv service center providing Services within a reasonable time
after its completion. Fee to Client for a copy of such audit, if any,
shall be defined in the Exhibit for such Services. Fiserv shall also
provide a copy of such audit to the appropriate regulatory agencies, if any,
having jurisdiction over Fiserv's provision of Services.
15.
General
. (a)
Binding
Agreement
. This Agreement is binding upon the parties and
their respective successors and permitted assigns. Neither this
Agreement nor any interest may be sold, assigned, transferred, pledged, or
otherwise disposed of by Client, whether pursuant to change of control or
otherwise, without Fiserv's prior written consent. Client agrees that
Fiserv may subcontract any Services to be performed hereunder. Any
such subcontractors shall be required to comply with all applicable terms and
conditions.
(b)
Entire
Agreement
. This Agreement, including its Exhibits, which are
expressly incorporated herein by reference, constitutes the complete and
exclusive statement of the agreement between the parties as to the subject
matter hereof and supersedes all previous agreements with respect
thereto. Modifications of this Agreement must be in writing and
signed by duly authorized representatives of the parties. Each party
hereby acknowledges that it has not entered into this Agreement in reliance upon
any representation made by the other party not embodied herein. In
the event any of the provisions of any Exhibit are in conflict with any of the
provisions of this Agreement, the terms and provisions of this Agreement shall
control unless the Exhibit in question expressly provides that its terms and
provisions shall control.
(c)
Severability
. If
any provision of this Agreement is held to be unenforceable or invalid, the
other provisions shall continue in full force and effect.
(d)
Governing
Law
. This Agreement will be governed by the substantive laws
of the State of Wisconsin, without reference to provisions relating to conflict
of laws. The United Nations Convention of Contracts for the
International Sale of Goods shall not apply to this Agreement.
(e)
Force
Majeure
. Neither party shall be liable to the other nor deemed
in default under this Agreement if and to the extent that such party’s
performance of this Agreement is prevented by reason of force
majeure. The term “force majeure” means an occurrence that is beyond
the control of the party affected and occurs without its fault or
negligence. Without limiting the foregoing, force majeure includes
acts of God, war, riots, strikes, labor disputes, civil disturbances, fire,
flood, court orders, governmental intervention, failures, or refusal to act by
government authority, and other similar occurrences. Upon the
commencement of a force majeure event, the time for performance hereunder shall
be automatically extended until the force majeure event no longer prevents the
party from resuming performance in accordance with this Agreement.
(f)
Notices
. Any
written notice required or permitted to be given hereunder shall be given by:
(i) Registered or Certified Mail, Return Receipt Requested, postage prepaid;
(ii) confirmed facsimile; or (iii) nationally recognized courier service to the
other party at the addresses listed on the cover page or to such other address
or person as a party may designate in writing. All such notices shall
be effective upon receipt.
(g)
No
Waiver
. The failure of either party to insist on strict
performance of any of the provisions hereunder shall not be construed as the
waiver of any subsequent default of a similar nature.
(h)
Financial
Statements
. Fiserv shall provide Client and the appropriate
regulatory agencies so requiring a copy of Fiserv, Inc.'s audited consolidated
financial statements.
(i)
Prevailing
Party
. The prevailing party in any arbitration, suit, or
action brought against the other party to enforce the terms of this Agreement or
any rights or obligations hereunder, shall be entitled to receive its reasonable
costs, expenses, and attorneys' fees of bringing such arbitration, suit, or
action.
(j)
Survival
. All
rights and obligations of the parties under this Agreement that, by their
nature, do not terminate with the expiration or termination of this Agreement
shall survive the expiration or termination of this Agreement.
(k)
Exclusivity
. Client
agrees that Fiserv shall be the sole and exclusive provider of the services that
are the subject matter of this Agreement. For purposes of the
foregoing, the term "Client" shall include Client affiliates. During
the term of this Agreement, Client agrees not to enter into an agreement with
any other entity to provide these services (or similar services) without
Fiserv's prior written consent. If Client acquires another entity,
the exclusivity provided to Fiserv hereunder shall take effect with respect to
such acquired entity as soon as practicable after termination of such acquired
entity's previously existing arrangement for these services. If
Client is acquired by another entity, the exclusivity provided to Fiserv
hereunder shall apply with respect to the level or volume of these services
provided immediately prior to the signing of the definitive acquisition
agreement relating to such acquisition and shall continue with respect to the
level or volume of these services until any termination or expiration of this
Agreement.
(l)
Recruitment of
Employees
. Fiserv and Client each recognize that the employees
of each company and such employees’ loyalty and service to that company
constitute a valuable asset of that company. Accordingly, Fiserv and
Client hereby agree not to make any offer of employment to, or enter into a
consulting relationship with, any person who was employed by the other during
the term of this Agreement and within one (1) year of such person’s last date of
employment without the written consent of the other; provided however, that the
foregoing shall not apply to the hiring of any employee who responds to a public
advertisement not directed at such employee.
(m)
Publicity
. The
parties shall mutually agree on a press release relating to the execution of
this Agreement. Each party shall mutually agree with the other
regarding any media release, public announcement, or similar disclosure relating
to this Agreement or its subject matter and shall give the other party a
reasonable opportunity to review and comment on the content of such release,
announcement, or disclosure prior to its release. Notwithstanding the
foregoing, Fiserv shall have the right to make general references to Client and
the type of services being provided by Fiserv to Client under this Agreement in
Fiserv's oral and visual presentations to Fiserv clients, prospective Fiserv
clients, and financial analysts, provided that such references shall be
consistent with any such mutually agreed press release.
(n)
Fiserv Travel/Living
Expenses
. Client agrees to pay the reasonable travel and
living expenses of any Fiserv employees and Fiserv contractors who render
services at any Client site in connection with any project or
engagement. All such expenses shall meet the guidelines established
by the Fiserv Travel Policy, a copy of which shall be provided to the Client,
except that Client shall have the right to arrange Fiserv lodging at Client’s
preferred lodging location, provided that such accommodations in Fiserv’s
reasonable judgment meets a reasonable standard of cleanliness, safety and
proximity to the work site. All expenses shall be reasonable and
identified on invoices submitted by Fiserv.
IN WITNESS WHEREOF, the parties have
caused this Agreement to be executed by their duly authorized representatives as
of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit
C
EFT
Services
Client agrees with Fiserv as
follows:
1.
Services
. Fiserv
will provide Client the EFT Services ("EFT Services") specified in Exhibit C –
1.
2.
Network Support
Services
. Fiserv will provide Network Support Services
(monitoring, service, and maintenance for equipment) in accordance with
instructions supplied by Client. If any or all of the communication
network should fail, Fiserv or its designated agents will locate the problem and
correct any malfunction not associated with equipment or circuits provided by
common carriers. If the problem is located in the equipment or
circuits of the common carriers, Fiserv will work with the common carriers until
the problem is corrected. Maintenance fees incurred by Fiserv for
repairs caused by faulty electrical power, inadequate physical facilities,
physical abuse, or other Client-supplied or -controlled factors will be
reimbursed by Client.
3.
Fees
. Client
shall pay Fiserv the fees and other charges for EFT Services specified in
Exhibit C – 2.
4.
Responsibility for
Accounts
. Client shall be responsible for balancing its
accounts each business day and notifying Fiserv immediately of any errors or
discrepancies. Provided that Client so notifies Fiserv, Fiserv shall,
at its own expense, promptly recompute accounts affected by discrepancies solely
caused by the Fiserv System or provide for another mutually agreeable
resolution. Fiserv will use its commercially reasonable efforts to
correct errors attributable to Client or other Client third party
servicers.
5.
Reports
. Fiserv
will provide output reports to Client for daily, weekly, monthly, and annual
transactions per the service level agreement.
6.
Backup
Records
. Fiserv currently retains historical files at a
location separate from the data center sufficient to recreate files for the most
recent week- and month-end. A daily transaction log of all Client
transactions for the most recent 180 days will also be maintained at this
location, and if requested by Client, will be made available to Client within 24
hours from Client’s request.
7.
Hours of
Operation
. EFT Services will be available for use by
Client as specified in Exhibit C – 3.
8.
Performance
Standards
. EFT Services shall be performed in accordance with
the standards specified in Exhibit C – 4.
9.
Software
Modifications
. (a)
Custom
Programming
. Fiserv will develop a preliminary estimate of the
anticipated man hours and costs plus or minus ten (10) percent associated with
the implementation of change(s) requested by Client. This estimate
will be returned to Client within two weeks. Written acceptance by
Client to proceed with the project will be required prior to beginning the final
specifications. Fiserv will assign a projected completion date to the
project, provided no additional changes or modifications to the original
specifications occur once the project is in development.
(b)
Regulatory Software
Changes.
Software changes required by government bodies will
be quoted in accordance with subsection (a) above such costs will be distributed
to all clients on an equitable basis.
(c)
Major Software
Enhancements.
All major software enhancements will be subject
to additional charges for processing and development in accordance with Exhibit
C – 2 hereto. Fiserv shall upgrade its software during the term of
this Agreement so that its software shall at all times be in compliance with all
applicable regulations and laws and industry standards.
(d)
Processing
. Fiserv
acknowledges and agrees that: (i) the current form and format of Client’s data
is acceptable to Fiserv; and (ii) if Fiserv requires any changes to the form or
format of Client’s data which results in costs or expenses to Client, Fiserv
will pay for such costs and expenses.
10.
Hardware
. (a)
Client will obtain written approval from Fiserv prior to connecting any
equipment to the data communication equipment provided by
Fiserv. Equipment, if any, connected to the Fiserv System must be
configured in a manner acceptable to Fiserv. Client agrees to pay
Fiserv for the testing and acceptance of such equipment by Fiserv at then
current rates.
(b) Client shall at all reasonable
times permit authorized personnel of Fiserv and equipment manufacturers to have
access to any Fiserv owned or leased equipment provided hereunder, and shall
permit removal of such equipment upon termination of this Exhibit.
(c) Fiserv shall be
responsible for providing and maintaining adequate data communication hardware
for and data communication lines to Client.
11.
Protection of
Data
. Fiserv has developed an operations backup center, for
which Client has agreed to pay the charges indicated in Exhibit C –
2. Fiserv will test the procedure at least annually to ensure
compliance and provide a report and results of such test to Client upon Client’s
request. Copies of transactions files are maintained by Fiserv off
premises in secured vaults.
12.
Regulatory
Compliance
. (a) Client shall be responsible for using the EFT
Services in a manner which complies with all applicable state and federal
statutory and regulatory requirements. Fiserv shall make
changes in EFT Services as necessary to Keep and maintain EFT Services in
compliance with all applicable state and federal statutory and regulatory
requirements. Upon written notification by Client of state or federal
statutory or regulatory non-compliance, Fiserv shall have 30 days to draft a
compliance plan (For Client’s approval) or demonstrate to Client that the EFT
Services are in compliance. If Client does not approve the compliance
plan because Client does not in good faith and judgment believe the plan will
substantially cure the non-compliance within a reasonable period of time, Client
may terminate its use of EFT Services without payment of any penalty or early
termination fee to Fiserv, and Fiserv shall be liable to Client for any fines,
penalties, losses, liabilities, or damages sustained or incurred by Client due
to the non-compliance of the EFT Services.
(b) Upon
the written request of Client or a governmental regulatory authority, Fiserv
shall make output available to such regulatory authority for purposes of Client
audits and supervisory examinations. Client shall pay Fiserv's then
current rate(s) for any time devoted to such examination, audit, consulting, or
other similar related effort.
(c) On
an annual basis, Fiserv shall engage a qualified, independent auditing firm to
review and evaluate its internal control environment, in accordance with
relevant AICPA audit standards (a “SAS-70 Type II” Audit). Upon
completion of the engagement, a copy of the service auditor’s report shall be
made available to Client . Fiserv shall also provide Client with
documentation regarding the resolution of any SAS-70 audit
deficiencies.
(d) By
entering into this Agreement, Fiserv agrees that the Federal Reserve Board and
Federal Deposit Insurance Corporation and other regulatory agencies having
authority over Client’s business and operations shall have the authority
provided to them under the Bank Service Corporation Act.
(e) Client
has advised Fiserv that it is a regulated financial institution and Fiserv
agrees to comply as necessary for purposes of this Agreement with the laws,
rules, and regulatory guidelines which govern Client and its business and
operations, and will cooperate with any requests of any of Client’s regulators,
examiners, insurers, accountants, attorneys or auditors.
(f) Fiserv
will perform penetration testing at least quarterly, and within 30 days of
significant system configuration changes to determine the adequacy of Fiserv
security efforts and systems, and provide Client with a written summary or
report of the results of these tests. Fiserv will inform Client of
any material exposures, vulnerabilities, or intrusions occurring, which
adversely affect Client or Client’s EFT Services, within 24 hours of Fiserv’s
detection of same, and will promptly inform Client of its corrective actions
planned and taken.
13.
On-Line
Security
. Fiserv will provide Client access, after the
execution of appropriate "on-line" security measures, to allow Client to perform
Cardholder maintenance on Client Files in the Fiserv System.
14.
Network
Agreement
. Fiserv provides access to electronic fund transfer
networks for the purpose of participating in the exchange of transactions on an
inter-network basis. Client may participate in such networks subject
to the following terms and conditions:
(a)
Client
will enter into an agreement with each such network in which Client elects to
participate, and will operate within and abide by the operating rules
established by each such network, and pay any associated fees imposed by each
such network, provided, however, that any elective costs must be approved by
Client in advance, and provided, also, that any costs passed through by Fiserv
to Client must be described in reasonable detail by Fiserv in order to enable
Client to identify and understand the charge to, and provided further that
Fiserv shall be responsible for resolving any billing issues with the networks
and Fiserv will be responsible for network fees or fines that are charged to
Client as a result of an error or omission by Fiserv; and
(b) The
clearing of transactions and reconciliation of payments will be in accordance
with settlement procedures established between Fiserv and each such
network.
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit C to the Agreement to be executed by their duly
authorized representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc. d/b/a Fiserv EFT
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit C
– 1
EFT
Services
Fiserv will provide Client the
following EFT Services:
1.
On-Line Host
Interface
. The operational environment that allows an
electronic transaction to be processed against a cardholder's
account.
2.
ATM
Driving/Monitoring
. The process of providing an ATM with the
on-line instructions necessary to process transactions and verifying equipment
and telephone operability.
3.
Networks
. Those
regional or national ATM associations who provide electronic access to financial
transactions for cardholders of member financial
institutions. Network Package includes CIRRUS, NYCE, PLUS Duality,
and also includes VISA, MasterCard, American Express, and Discover
4.
Web
Connectivity.
Links Client's IBM compatible PC to the Fiserv
System, allowing Client to retrieve reports, retrieve transaction history, and
perform network adjustments.
5.
Card
Management
. An automated system for plastic card ordering, pin
ordering, card re-issue tracking, and "Hot Carding", accessible to Client via
On-Line Terminal Dial-Up PC or Batch Processing.
6.
Transmissions
. Transactions
reports and settlement information transmitted to Client's host data processing
system.
7.
Business
Continuity
. Fiserv's disaster recovery program.
8.
Telecommunications and
Equipment
. ATM phone line and modems relevant to driving and
monitoring Client's ATMs.
10.
|
Conversion
Date
. On mutually agreed upon date by Fiserv and
Client.
|
11.
|
Neural Network
Support
. Fiserv shall provide Neural Network support for
fraud prevention by no later than February 15,
2005.
|
12.
|
3DES
Compliance
. Fiserv EFT Services are 3DES
compliant.
|
13.
|
ATM
Support
. Fiserv shall: (i) support any new
ATM technology functionalities mutually agreed upon by both parties; and
(ii) develop any necessary ATM driving programs to meet regulatory
requirements.
|
14.
|
DECAL
. Fiserv
EFT is interfaced to the Diebold on-line problem report system (DECAL) for
first and second line problem
resolution.
|
Exhibit C
- 2
EFT Services
Fees
Fiserv will provide Client the
following EFT Services at the fees and prices indicated:
ESTIMATE
OF MONTHLY CHARGES
|
|
|
|
|
|
|
|
Quantity
|
Amount
|
Total
|
On-Line
Authorization
|
Interface
Maintenance Fee
|
1
|
$250.00
|
$250.00
|
|
|
|
|
|
File
Storage:
|
Monthly
Charge
|
|
|
|
|
Card
Account File (CAF) Record Storage
|
138,160
|
.02
|
2,763.20
|
|
Positive
Balance File (PBF)
|
285,598
|
.0100
|
2,855.98
|
|
|
|
|
|
Transaction
Fees:
|
ATM
/ POS Pinned Transactions (Cumulative)
|
|
|
|
|
0 -
250,000 Transactions @ .02 Each
|
|
.0200
|
|
|
250,001
– 500,000 Transactions @ $.02 Each
|
|
.0200
|
|
|
500,001
– 750,000 Transactions @ $.02 Each
|
559,403
|
.0200
|
11,188.06
|
|
>
750,001 Transactions @ $.015 Each
|
|
.0150
|
|
|
|
|
|
|
VISA
Check Card Transactions:
|
Per
Transaction Presented for Authorization
|
|
|
|
|
|
|
|
|
|
0 –
500,000 Transactions @ $.0225 Each
|
285,598
|
.0225
|
6,425.96
|
|
>
500,001 Transactions @ $.02 Each
|
|
.0200
|
|
|
|
|
|
|
|
Per
Transaction Posted
|
|
|
|
|
|
|
|
|
|
0 –
500,000 Transactions @ $.0225 Each
|
285,598
|
.0225
|
6,425.96
|
|
>
500,001 Transactions @ $.02 Each
|
|
.0200
|
|
|
|
|
|
|
Fiserv
EFT Back Office Support:
|
$.01
Per Cardholder
|
85,529
|
.010
|
855.29
|
|
$5.00
Per Chargeback
|
102
|
8.00
|
816.00
|
|
$5.00
Copy Request Only
|
2
|
5.00
|
10.00
|
|
$3.00
Per Hot Card
|
96
|
3.00
|
288.00
|
|
VISA
Charges for Arbitration/Compliance
|
Pass-Through
|
|
|
|
|
|
Card
Activation:
|
$.25
Per Activated Card
|
3,898
|
.25
|
974.50
|
|
|
|
|
|
Neural
Network:
|
$.0075
Per Authorization
|
285,598
|
.0075
|
2,141.98
|
|
|
|
|
|
Verified
By Visa:
|
$.03
Per Card Enrolled
|
|
.03
|
|
|
$.02
Per Transaction
|
|
.02
|
|
|
$.25
Per Card Activated
|
|
.25
|
|
|
$.15
Per Password Change
|
|
.15
|
|
|
|
|
|
|
ATM
Driving and Monitoring:
|
$40.00
Per ATM
|
104
|
40.00
|
4,160.00
|
|
$.05
Per Dial-up Transaction
|
|
.05
|
|
|
|
|
|
|
Surcharge
Support:
|
$.005
Per Surcharged Transaction
|
64,099
|
.005
|
320.50
|
|
|
|
|
|
Networks:
|
Memberships:
|
|
|
|
|
CIRRUS,
MasterCard, PLUS, VISA, American Express, Discover
|
4
|
50.00
|
200.00
|
|
PLUS
or CIRRUS per Card Fee
|
138,160
|
.0021
|
290.14
|
|
Star
Network
|
Pass-Through
|
|
Exchange
/ Accel
|
Waived
|
|
Visa
Bin
|
1
|
50.00
|
50.00
|
WEB
Connectivity:
|
Monthly
Port Access Fee and Support
|
1
|
100.00
|
100.00
|
|
$.01
Per File Maintenance
|
|
.01
|
|
|
Security
Tokens
|
Waived
|
|
|
|
|
|
Business
Continuity:
|
$.00657
Per Transaction with Maximum Monthly of $1,000.00
|
559,403
|
.00657
|
1,000.00
|
|
|
|
|
|
SUB-TOTAL
ESTIMATE OF MONTHLY CHARGES
|
|
|
$
41,839.55
|
|
|
|
|
|
Telecommunications
& Equipment:
|
HOST
Telephone Line Monthly Fee (estimate)
|
To
Be Determined
|
|
HOST
Modem Monthly Lease/Maintenance/Monitoring
|
To
Be Determined
|
|
ATM
Modem Lease/Maintenance * (CB machines only)
|
11
|
45.00
|
495.00
|
|
ATM
Frame Relay Circuits (estimate) **
|
To
Be Determined
|
|
ATM
Cellular Connection **
|
To
Be Determined
|
|
|
|
|
|
TOTAL
ESTIMATE OF MONTHLY CHARGES
|
|
|
$42,334.55
|
|
|
|
|
|
*
If ATM protocol is IP, modem equipment will not be necessary to support
ATM Driving / Monitoring over internal network.
|
**
Branch ATM’s will be driven over branch circuit. Off-site ATM’s
can be driven dial-up, lease-line or cellular.
|
|
|
|
|
|
|
|
|
|
|
ESTIMATE
OF ONE-TIME CHARGES
|
|
|
|
|
|
|
|
Quantity
|
Amount
|
Total
|
On-Line
Interface:
|
Install
Parameter File, Load and Test
|
1
|
$2,500.00
|
Waived
|
|
|
|
|
|
VISA
Check Card:
|
Set-up
Fee
|
1
|
1,000.00
|
Waived
|
|
|
|
|
|
Training:
|
Initial
Training at Fiserv Learning Center
|
No
Charge
|
|
|
|
|
|
WEB
Connection:
|
Installation
|
1
|
1,000.00
|
Waived
|
|
|
|
|
|
ATM:
|
Set-up
|
104
|
30.00
|
Waived
|
|
|
|
|
|
SUB-TOTAL
ESTIMATE OF ONE-TIME CHARGES
|
|
|
$0.00
|
|
|
|
|
|
Telecommunications
& Equipment:
|
Telephone
Line Installations (estimate) – At Cost Plus 10%
|
To
Be Determined
|
|
|
|
|
|
TOTAL
ESTIMATE OF ONE-TIME CHARGES
|
|
|
$0.00
|
|
|
|
|
|
-
Fiserv EFT agrees to waive the first full 18 months of actual
processing charges based on a 120 month contract
|
($738,000.00)
|
-
Excludes pass-through
costs
|
Exhibit C
– 3
Hours of
Operation
Fiserv will provide access to EFT
Services 24 hours a day, 365 days per year, except for planned downtime reserved
for scheduled maintenance. Client will be notified 3 business days in
advance of such downtime.
Client support assistance will be
available during normal business hours (business hours may be revised on an
“as-needed” basis), Monday through Friday, with the exception of the following
holidays: New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. When a holiday falls on a
Saturday or Sunday, Fiserv EFT will observe the Federal Reserve
holiday.
Exhibit C
– 4
Performance
Standards
CRITICAL
PERFORMANCE STANDARDS:
Fiserv
EFT
|
If
Fiserv EFT fails to meet one of the Critical Performance or Problem
Resolution Standards, it will give Central Pacific Bank a 3% credit off
the following monthly invoice(s) (excludes pass-thru charges) until the
standard is met.
|
Item
|
Standard
|
Report
Availability
|
Reports
(settlement, terminal, cardholder, network & card mgmt) available for
remote printing by 6am Hawaii Standard Time 95% of the
time
|
Problem
Resolution
|
Refer
to Problem Resolution Standards table Below
|
Phone
Calls
|
Express
Services and Network Control return calls on the same
day
|
Product
Installations
|
1)
95%
installed without substantial errors
2)
95%
completed by the estimated completion date
3)
95%
completed for $ amt stated on bid, unless bid states “not to
exceed”.
|
ATM
Outage (Hardware)
|
Downtime
notification calls to Central Pacific Bank or service provider within a
monthly average of 5 minutes
|
ATM
Outage (Com)
|
Initiate
ticket to service provider within 15 minutes
|
Call
Center
|
Answer
average of 80% calls within 15 seconds
|
Switch
outage and/or processor link failure notification
|
Notification
to switch or processor for resolution within 10 minutes of the
outage
|
Transaction
Response Time
|
Average
response time, from the time Fiserv EFT gets the transaction to the time
it is sent out of EFT (to processor or network), is less than 2
seconds.
|
Dispute
Resolution Processing
|
1.
98%
of all cases will be reviewed for resolution within 1 business day of
receipt by Fiserv EFT
2.
For
CB, maintain a representment rate level of no higher than 23%
(representments are defined as representment volume over first chargeback
volume).
3.
Provide
the following management information to CB by the 5th business day of the
following each month end:
·
1st
Chargeback Rates (total & by reason code)
·
Second
Chargeback Rate (total and by reason
code)
|
Exhibit C
– 4
Performance
Standards
FISERV
EFT SERVICE LEVELS:
Problem
Level
|
Description
|
Resolution
(During normal business hours)
|
1
|
·
End
customer unable to complete transactions
·
Card
status problem
|
Issues
within Fiserv EFT’s control, Fiserv EFT will immediately and continuously
work to resolution or acceptable work around and will use its best efforts
to resolve within 30 minutes after being reported.
|
Issues
reported outside of Fiserv EFT’s control, Fiserv EFT will work with the
appropriate party(ies) and will immediately and continuously work to
resolution or acceptable work around and will use it’s best efforts until
resolved.
|
2
|
·
Unable
to properly perform card maintenance
·
Web
access problem
·
Malfunction
of VRU or after-hours service
|
Issues
within Fiserv EFT’s control, Fiserv EFT will immediately and continuously
work to resolution or acceptable work around and will use its best efforts
to resolve within 1 hour after being reported.
|
Issues
reported outside of Fiserv EFT’s control, Fiserv EFT will work with the
appropriate party(ies) and will immediately and continuously work to
resolution or acceptable work around and will use it’s best efforts until
resolved.
|
3
|
·
Report
related problems
·
Incorrect
settlement
|
Issues
within Fiserv EFT’s control, Fiserv EFT will immediately and continuously
work to resolution or acceptable work around and will use its best efforts
to resolve within 2 hours after being reported.
|
Issues
reported outside of Fiserv EFT’s control, Fiserv EFT will work with the
appropriate party(ies) and will immediately and continuously
work to resolution or acceptable work around and will use it’s
best efforts until resolved.
|
4
|
·
Incorrect
monthly invoice charges to CB if $20,000 or
over
|
10
business days after being reported.
|
5
|
·
Incorrect
monthly invoice charges to CB under $20,000
|
10
business days after being reported.
|
6
|
·
Manual
posting of transactions
|
Fiserv
EFT will provide necessary assistance to
resolve.
|
AVAILABILITY
GUARANTEE (MONTHLY AVERAGE):
Fiserv
EFT
|
Availability
Guarantee
|
Penalty
(if
guaranteed availability not met)
|
EFT
Transaction Authorization (Tandem) Availability
<
99% (except planned
downtime)
|
5%
credit off monthly invoice (excludes telecom & pass-thru
charges)
|
Availability
<
98%
|
Additional
5% off monthly invoice (excludes telecom & pass-thru
charges) for each 1% under 98%
|
Availability
<
90%
|
Additional
10% off monthly invoice (excludes telecom & pass-thru charges) for
each 1% under 90%
|
Availability
<
90% for 2 consecutive
months
|
Central
Pacific Bank can terminate without payment of Cancellation
Fee.
|
Exhibit H
Development
Services
Client agrees with Fiserv as
follows:
1.
Development
Services
. Fiserv will provide Client with modifications,
enhancements, and customized programming services ("Development Services") and
associated items for particular development projects as described in Exhibit H –
n (each a "Development Project").
Fiserv agrees to provide access to
Fiserv personnel as specified in a Project Requirement Definition Authorization
(‘PRDA’) or similar statement of work, each a uniquely numbered, separate
Development Project. All Development Services for Development
Projects shall be performed in accordance with the procedures set forth
below. Client may request Fiserv to provide additions and changes to
Development Services. Any such additions or changes shall be mutually
agreed upon in writing and shall be provided at Fiserv’s then current
professional service rates. Any dates for performance are dependent
upon the timely performance by each party of the tasks assigned under the
project plans for such Development Services.
a)
|
Business
Requirements
. All Development Services to be performed
by Fiserv hereunder shall be based upon the Business Requirements of
Client. “Business Requirements” means the description of the
Client’s business needs and the functionality required. Client
shall cooperate with Fiserv in connection with the provision of
Development Services and shall provide Fiserv with all necessary
information concerning its Business Requirements or other information
requested by Fiserv for the performance of its obligations under the
Agreement, provided that such requests are reasonable and are made in a
timely manner. Fiserv shall review and suggest revisions to
such Business Requirements on a timely basis. The parties shall
mutually agree in writing on the final Business Requirements for any such
project.
|
b)
|
Functional
Specifications
. In the event Fiserv provides Development
Services, such services shall be based upon specifications created by
Fiserv and approved by Client as provided
below:
|
|
(i)
|
Fiserv
shall develop Functional Specifications based on the Business Requirements
List for Client's written approval. Fiserv shall not be
obligated to perform any further development work until Functional
Specifications are approved in writing by Client, which approval shall not
be unreasonably withheld or unduly
delayed.
|
|
(ii)
|
Modifications,
changes, enhancements, conversions, upgrades, or additions to the agreed
upon work beyond those stated in Functional Specifications shall be added
only upon mutual written agreement. In the event the parties
agree to add any such items, the Functional Specifications and applicable
Project Plan shall automatically be modified to the extent necessary to
allow for the implementation or provision of the
items.
|
c)
|
Project
Plan
. Fiserv and Client shall determine when the size
and scope of a Development Project merits the creation of a Project Plan
in addition to the Development Project. Where applicable, Fiserv shall
develop a Project Plan for each Development Project based on Functional
Specifications. Each such Project Plan shall contain a listing of the
nature and timing of tasks for the project (including the development of
an acceptance test), some of which are to be performed by Fiserv and some
by Client. Fiserv and Client shall mutually agree on the
Project Plan. Fiserv and Client shall utilize commercially reasonable
efforts to meet the dates set forth in the Project Plan or any replacement
thereof. Modifications and changes to the Project Plan
shall be only by mutual written agreement of the
parties.
|
d)
|
Acceptance
Test
. Fiserv shall prepare an "Acceptance Test", to be
performed by Fiserv, for the testing of each Development
Project. Client shall prepare an "Acceptance Test", to be
performed by Client, for the testing of each Development
Project..
|
e)
|
Acceptance
Testing
. Unless otherwise defined in the Exhibit H-n,
PRDA, or similar statement of work, Client shall have 30 days from
delivery of the Development Project (“Initial Development Delivery”) to
perform the Acceptance Test (“Acceptance Test Period”). Each Development
Project shall be deemed successfully completed by Fiserv upon the
completion of the Acceptance Test Period or by live operation and use of
the Development Project in Client's business for a period of 10 days,
whichever occurs first. Client acknowledges a Development Project can only
be adequately tested in Client’s system environment and Client agrees to
reimburse Fiserv for all assistance during Client’s user testing that is
not specifically provided for in the Development Project Exhibit
H-n.
|
f)
|
Client
agrees promptly to notify Fiserv in writing (and with reasonable
particularity) upon conclusion of Acceptance Test or earlier upon
discovery of any Specification Non-conformities disclosed by such testing,
including any applicable supporting documentation such as screen prints,
user documentation, diagrams, or other information reasonably requested by
Fiserv to allow Fiserv to properly analyze the reported non-conformity.
Fiserv will utilize such documentation to evaluate, prioritize, and
resolve Client support issues. Accurate and complete
documentation by Client is a prerequisite of all support
issues. Failure to provide adequate supporting documentation
may result in delayed resolution of a Specification Non-conformity.
“Specification Non-conformity” means a failure of the modified Software to
operate in substantial accordance with the Functional
Specifications. Fiserv shall correct any Specification
Non-conformities disclosed by such testing or use in accordance with the
severity levels outlined in Section 4 of Exhibit M. Upon
delivery of the corrected Development Project (“Corrected Development
Project”) to Client, Client shall have an additional 30 days to perform
the User Acceptance Test on the Corrected Development Project (“Extended
Acceptance Test Period”). Notwithstanding any Extended
Acceptance Test Period for the Development Project, Special Maintenance
shall, under all circumstances, begin 30 days following Initial
Development Delivery to Client.
|
g)
|
Review.
Should
Fiserv’s review of the reported Specification Non-conformity indicate, in
Fiserv’s reasonable opinion, that the reported problem is not a
Specification Non-conformity but is due to other problems including, but
not limited to, input not in accordance with specifications, Client’s
abuse or misuse of the Software, or by a modification or addition to the
Software not performed by Fiserv, or by Client’s failure to properly
maintain the Computer System or to install the required Software release
as instructed by Fiserv, then,
|
|
(i)
|
Client
agrees to reimburse Fiserv for the related costs of work performed by
Fiserv in investigating the problem at Fiserv’s then current Development
Service rates, and
|
|
(ii)
|
Fiserv,
at Client’s request, shall advise Client whether Fiserv can correct or
assist in resolving such problem, and the terms under which Fiserv shall
undertake the same. Upon written acceptance by Client, Fiserv
shall correct or assist in resolving the problem in accordance with such
terms.
|
2.
Development
Fees
. (a) Client shall pay Fiserv fees and other charges for
each Development Project in accordance with the payment terms specified in each
Exhibit H – n ("Development Fees"). The daily rates quoted therein
will be valid for 12 months from the effective date of a Development
Project. Thereafter, they will be subject to change by Fiserv on 1
month's notice to Client. A higher rate may be applied for an
individual whose support to Client has advanced to a new job grade or after 1
month's notice if such individual's general development warrants a job upgrade
by Fiserv.
(b) Client agrees to pay the reasonable
travel and living expenses of any Fiserv employees and Fiserv authorized
contractors who render services at any Client site in connection with each
Development Project. All such expenses shall meet the guidelines
established by the Fiserv Travel Policy, a copy of which shall be provided to
the Client, except that Client shall have the right to arrange Fiserv lodging at
Client’s preferred lodging location, provided that such accommodations in
Fiserv’s judgment meets a reasonable standard of cleanliness, safety and
proximity to the work site. All expenses shall be itemized on
invoices submitted by Fiserv.
(c) In the event Fiserv provides
installation, conversion, or training services to Client for a Development
Project, the scope and fees therefor shall be as specified on each Exhibit H –
n.
(d) Fiserv agrees to provide and Client
agrees to pay for maintenance services for the Development Project (‘Special
Maintenance Fees’) when specified in the Development Project. Fiserv
reserves the right to increase the applicable Special Maintenance
Fees.
(e) Fiserv reserves the right to charge
Client at Fiserv's then current professional services rates for any necessary
retrofitting of Development Services when releases of the Fiserv System(s) to
which Development Projects relate are made generally available.
3.
Use of and Rights to
Development Projects
. All information, reports, studies,
object or source code, flow charts, diagrams, and other tangible or intangible
material of any nature whatsoever produced by or as a result of any of
Development
Services and Development Projects shall be the sole and exclusive property of
Fiserv or its corporate parent. Fiserv grants to Client the right to
use the results of any Development Project in accordance with the terms and
conditions of the Agreement.
4.
Development Project
Termination
. At Client's sole option, Client may terminate any
Development Project upon 15 days prior written notice to Fiserv, provided that
Client agrees to pay Fiserv for all outstanding Development Fees for Development
Services rendered prior to the effective date of termination. In no
event shall Fiserv be liable for refund of any Development Fees already paid by
Client.
5.
Rescheduling
. If
Client is unable to provide access to required facilities or personnel or is
unable to meet its tasks assigned on a Project Plan in a timely manner, Fiserv
will endeavor to reschedule tasks to minimize non-productive
time. All such non-productive time is chargeable to
Client. If such non-productive time is expected to be significant,
Fiserv will endeavor to reassign its personnel to other suitable
work. In this event, Client will not be charged for the time
personnel were reassigned.
6.
Exclusivity
. Notwithstanding
anything to the contrary contained elsewhere in the Agreement, the parties
acknowledge and agree that the exclusivity required by Section 15 (k) of the
Agreement shall not apply with respect to the Development Services provided to
Client pursuant to this Exhibit H.
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit H to the Agreement to be executed by their duly
authorized representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit H - 1
Development
Project
Business
Requirements
:
Fiserv
shall provide Special Maintenance Services for the following Development
Projects (originally contracted under Agreement Number 3810165 between Client
and Fiserv, dated July 30, 1997 as amended through the Effective
Date).
Modifications
|
Annual
Special
Maintenance Fees
|
PSR2809-
Combine unlimited number of accounts including credit cards for related
service charges
|
$10,348.08
|
PSR3246-
Counties for property tax interface
|
$6,400.08
|
PSR3247-
Special service transaction for cash deposited items received via proof
upload
|
$5,986.68
|
PSR3264-
Price requested for Hefta support via ACH processing
|
$3,200.64
|
PSR3287-
Daily extract file in BA12 format
|
$642.72
|
PSR3604-
Modify project B0007 to use alternate address
|
$229.32
|
PSR3609-
TMK tax payment processing amendments
|
$582.12
|
PSR3804-
nFront description
|
$2,735.28
|
PRDA4350-
Add serial number to the FTPEXCP
|
$723.24
|
PRDA4802-
Card activation layout
|
$1,638.00
|
PRDA4898-
NSF/OD privilege
|
$13,219.56
|
PRDA4700(rev2)-
Statement modification
|
$6,326.16
|
Fiserv
will invoice and Client agrees to pay monthly in advance the Special Maintenance
Fees tabled above. Special Maintenance Services shall automatically
renew annually unless Client provides notice to Fiserv ninety (90) days prior to
the anniversary date of Client’s intent not to renew Special Maintenance
Services on any of the Modifications tabled above.
In the
six (6) months following the conversion contemplated in PRDA#CSD0120 of Exhibit
Q, Client may elect to terminate Special Maintenance Services on any of the
Modifications tabled above, provided Client has paid all applicable Special
Maintenance Fees up to the date of termination.
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit H – 1 to be executed by their duly authorized
representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit I
Implementation
Services
Client agrees with Fiserv as
follows:
1.
Services
. Fiserv
will provide Client with the conversion, installation, and project management
services ("Implementation Services") and associated items for the implementation
project described in Exhibit I – n (each, an "Implementation
Project").
Fiserv agrees to provide access to
Fiserv personnel as specified in a Project Requirement Definition Authorization
(‘PRDA’) or similar statement of work, each a uniquely numbered, separate
Implementation Project. All Implementation Services for Implementation Projects
shall be performed in accordance with the procedures set forth
below. Client may request Fiserv to provide additions and changes to
Implementation Services. Any such additions or changes shall be
mutually agreed upon in writing and shall be at mutually agreed upon
rates. Any dates for performance are dependent upon the timely
performance by each party of the tasks assigned under the project plans for such
Implementation Services.
(a)
|
Business
Requirements
. All Implementation Services to be
performed by Fiserv hereunder shall be based upon the Business
Requirements of Client. “Business Requirements” means the
description of the Client’s business needs and the functionality
required. Client shall cooperate with Fiserv in connection with
the provision of Implementation Services and shall provide Fiserv with all
necessary information concerning its Business Requirements or other
information requested by Fiserv for the performance of its obligations
under the Agreement, provided that such requests are reasonable and are
made in a timely manner. Fiserv shall review and suggest
revisions to such Business Requirements on a timely basis. The
parties shall mutually agree in writing on the final Business
Requirements. Any customizations, modifications, enhancements to the
unmodified software required to meet Client’s Business Requirements shall
be provided by Fiserv in accordance with the terms and conditions
specified in Exhibit H, provided that Client and Fiserv have executed a
mutually agreed upon Exhibit H-n.
|
(b)
|
Project
Plan
. Fiserv shall develop a Project Plan for the
Implementation Project based on the Business Requirements within 15
business days after receipt of the Business Requirements. The
Project Plan shall contain a listing of the nature and timing of tasks for
the Implementation Project (including the development of an acceptance
test), some of which are to be performed by Fiserv and some by
Client. Client and Fiserv shall mutually agree on the initial
Project Plan. Thereafter, Client will be provided a copy of the
weekly updates to the Project Plan. Fiserv and Client shall
utilize their commercially reasonable efforts to meet the dates set forth
in the Project Plan.
|
Modifications,
changes, enhancements, upgrades, or additions to the agreed upon work beyond
those stated in the Project Plan shall be added only upon mutual written
agreement. In the event the parties agree to add any such items, the
Project Plan shall automatically be modified to the extent necessary to allow
for the implementation or provision of the items. Any such items may
result in an increase in the Implementation Fees (as defined
below).
(c)
|
User Acceptance
Test
. Fiserv shall prepare a "User Acceptance Test", to
be performed by Fiserv, for the testing of each
Implementation Project. Client shall prepare a "User Acceptance
Test", to be performed by Client, for the testing of each
Implementation Project.
|
(d)
|
Acceptance
Testing
. Unless otherwise defined in the Exhibit I-n,
PRDA, or similar statement of work, Client shall have 30 days from
delivery of the Implementation Project (“Initial Delivery”) to perform the
User Acceptance Test (“Acceptance Test Period”). Each Implementation
Project shall be deemed successfully completed by Fiserv upon the
completion of the Acceptance Test Period or by the live operation and use
of the hardware and software associated with the Implementation Services
in Client's business for a period of 10 days, whichever occurs
first. Client agrees to notify Fiserv in writing (and with
reasonable particularity) upon conclusion of testing or upon earlier
discovery of any material Non-conformities disclosed by such
testing. Fiserv shall correct any such Non-conformities
disclosed by such testing or use in accordance with the severity levels
outlined in Section 4 of Exhibit M. Upon delivery of the
corrected Implementation Project (“Corrected Project”) to Client, Client
shall have an additional 30 days to perform the User Acceptance Test on
the Corrected Project (“Extended Acceptance Test
Period”). Notwithstanding any Extended Acceptance Test Period,
Basic Maintenance Services and/or Special Maintenance, whichever applies,
shall, under all circumstances, begin 30 days following Initial Delivery
to Client.
|
(e)
|
Review.
Should
Fiserv’s review of the reported Non-conformity indicate, in Fiserv’s
reasonable opinion, that the reported problem is not a Non-conformity but
is due to other problems including, but not limited to, input not in
accordance with specifications, Client’s abuse or misuse of the Software,
or by a modification or addition to the Software not performed by Fiserv,
or by Client’s failure to properly maintain the Computer System or to
install the required Software release as instructed by Fiserv,
then,
|
(i) Client
agrees to reimburse Fiserv for the related costs or work performed by Fiserv in
investigating the problem at Fiserv’s then current Implementation Service rates,
and
(ii) Fiserv,
at Client’s request, shall advise Client whether Fiserv can correct or assist in
resolving such problem, and the terms under which Fiserv shall undertake the
same. Upon written acceptance by Client, Fiserv shall correct or
assist in resolving the problem in accordance with such terms.
2.
Implementation
Fees
. (a) Client shall pay Fiserv the fees and other charges
for the Implementation Project as specified in Exhibit I – n ("Implementation
Fees"). The daily rates quoted therein will be valid for 12
months. Thereafter, they will be subject to change by Fiserv on 1
month's notice to Client. A higher rate may be applied for an
individual whose support to Client has advanced to a new job grade or after one
month's notice if such individual's general development warrants a job upgrade
by Fiserv.
(b) Client agrees to pay the reasonable
travel and living expenses of any Fiserv employees and Fiserv authorized
contractors who render services at any Client site in connection with the
Implementation Project. All such expenses shall meet the guidelines
established by the Fiserv Travel Policy, a copy of which shall be provided to
the Client, except that the Client shall have the right to arrange Fiserv
lodging at Client’s preferred lodging location, provided that such
accommodations in Fiserv’s judgment meets a reasonable standard of cleanliness,
safety and proximity to the work site. All expenses shall be itemized
on invoices submitted by Fiserv.
(c) Should Fiserv provide installation,
conversion or training to Client for the Implementation Project, the fees
therefore, if any, shall be as specified on Exhibit I – n.
(d) Client agrees to pay for all
freight charges associated with shipping of hardware and software from Fiserv or
Fiserv's suppliers to Client's designated storage facility. If Client
is unable to provide a secure storage facility, Client agrees to pay Fiserv a
weekly storage fee specified in Exhibit I – n.
3.
Hardware and
Software
. Purchase of hardware and software associated with
the Implementation Services shall be in accordance with Exhibit
L. For Client's existing hardware and software, Fiserv will prepare
and arrange such hardware and software for movement to Client's designated
storage area.
4.
Implementation Project
Termination
. At Client's sole option, Client may terminate the
Implementation Project upon 30 days' prior written notice to Fiserv, provided
that Client agrees to pay Fiserv for any Implementation Fees for Implementation
Services rendered prior to the effective date of termination. In no
event shall Fiserv be liable for refund of any Implementation Fees already paid
by Client.
5.
Rescheduling
. If
Client is unable to provide access to required facilities or personnel or is
unable to meet its tasks assigned on a Project Plan in a timely manner, Fiserv
will endeavor to reschedule tasks to minimize non-productive
time. All such non-productive time is chargeable to
Client. If such non-productive time is expected to be significant,
Fiserv will endeavor to reassign its personnel to other suitable
work. In this event, Client will not be charged for the time
personnel were reassigned.
6.
Support
. Unless
otherwise defined in the Exhibit I-n, PRDA, or similar statement of work, Fiserv
will provide reasonable support related to Implementation Services for 90 days
after Fiserv completes the Implementation Project as specified in the Project
Plan.
7.
Warranties
. Fiserv
represents and warrants that the Implementation Services provided hereunder will
be free from defects in material and workmanship at the time of
installation. .
8.
Exclusivity
. Notwithstanding
anything to the contrary contained elsewhere in the Agreement, the parties
acknowledge and agree that the exclusivity required by Section 15 (k) of the
Agreement shall not apply with respect to the Implementation Services provided
to Client pursuant to this Exhibit I.
Exhibit I
– n
Implementation
Project
Project
Requirement Definition Authorization (PRDA)
Business
Requirements
Project
Type: Implementation Project
Client:
Central Pacific
Bank
Client
ID#: CPBHI Project
ID: PRDA
##
Prepared by:
SAMPLE FORMAT
Definitions:
Business
Requirements:
TBD
Scope of Services to be
performed by Fiserv:
TBD
Constraints:
TBD
Assumptions:
TBD
Exclusions:
TBD
Client
Responsibilities:
TBD
Implementation
Service
Fees:
TBD
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit I to be executed by their duly authorized
representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit
L
Material Purchased Through
Fiserv
Client agrees to purchase, and Fiserv
agrees to sell, hardware and software licenses on the terms and subject to the
conditions set forth below:
1.
Equipment
. Hardware
and software licenses being purchased through Fiserv are described in each
Exhibit L – n ("Material"). Client understands that Fiserv is acting
as an independent sales organization representing each manufacturer or supplier
(each, a "Supplier") identified in each Exhibit L – n.
2.
Payment
. Client
shall pay Fiserv 50% of the total price for Material specified in each Exhibit L
– n upon execution of such Exhibit and 50% upon delivery of Material to the site
or sites designated by Client on each Exhibit L – n (collectively, "Installation
Site"). Client shall be responsible for all freight charges
associated with shipment of Material from Supplier or Fiserv, as the case may
be, to the Installation Site. In the event of any price increase by a
Supplier, Fiserv shall accordingly increase the prices for
Material.
3.
Fiserv
Obligations
. Client also understands and agrees that the
ability of Fiserv to obtain Material may be subject to availability and delays
due to causes beyond Fiserv's control. Fiserv shall promptly place
any orders submitted under this Exhibit with each Supplier and shall, at
Client's direction, request expedited delivery whenever available.
4.
Insurance
. Client
shall be responsible for appropriate property insurance for all equipment,
whether Client-owned or Fiserv-owned, within Client's premises.
5.
Delivery and
Installation
. (a)
Delivery
. On
Client's behalf, Fiserv shall arrange for delivery of Material to the
Installation Site on or about the date requested by Client ("Delivery
Date"). In the absence of shipping instructions, Fiserv shall select
a common carrier on Client's behalf.
(b)
Installation
. Fiserv
shall arrange for the installation of the items of Material in consideration of
the Installation Fees listed on each Exhibit L – n. Client shall not
perform any installation activities without Fiserv's written
consent. Fiserv or its designee shall have full and free access to
Material and the Installation Site until installation is
completed. If a suitable installation environment is not provided by
Client, then Fiserv shall be required to perform only as many normal
installation procedures as it deems to be practicable within the available
facilities. Installation of Material will take place during normal
Fiserv business hours, Monday through Friday, exclusive of Fiserv holidays,
unless otherwise agreed by Fiserv.
(c)
Installation
Environment
. Client shall provide a suitable installation
environment for Material as specified by Fiserv or its agents and any and all
other specifications provided to Client by Supplier or Fiserv. Unless
Fiserv agrees to so provide, Client shall also be responsible for (i) furnishing
all labor required for unpacking and placing Material in the desired location
for installation; and (ii) physical planning including, but not limited to,
floor planning, cable requirements, and safety requirements in accordance with
the installation manual and any and all applicable building, electrical, or
other codes, regulations, and requirements. All such physical
planning shall be completed on or before the Delivery Date
5.
Shipment and Risk of
Loss
. All prices shown on each Exhibit L – n are F.O.B.
Supplier's plant. All transportation, rigging, drayage, insurance,
and other costs of delivery of Material to the Installation Site shall be paid
by Client. Risk of loss shall pass to Client upon
shipment.
6.
Title to
Equipment
. Title to all hardware items comprising Material
shall remain with Supplier or Fiserv, as the case may be, until all payments
therefor are made by Client and, until such time, Client agrees that it shall
not sell, transfer, pledge, or otherwise dispose of such items without Fiserv's
prior written consent.
7.
Security
Interest
. Client grants Fiserv a security interest in each
component part of Equipment and the proceeds thereof until the purchase price
due Fiserv is paid in full. Client shall execute any instruments or
documents Fiserv deems appropriate to protect the security interest and, in any
event, this Exhibit shall constitute a financing agreement within the meaning of
Article 9 of the Uniform Commercial Code and a copy of this Exhibit may be filed
at any time after signature by Fiserv as a financing statement for that
purpose. Fiserv shall endeavor to notify Client of such filing within
10 days thereof In the event of default in payment or other breach by
Client, Fiserv shall have all rights and remedies of a secured creditor upon
default as provided by applicable law. Fiserv shall, at its sole
expense, file releases for any financing statements recorded pursuant to this
Exhibit promptly upon receipt of final payment, and upon request by Client,
shall promptly provide Client with a file-stamped copy of any such
release.
8.
Acceptance
. Equipment
shall be deemed to have been accepted when it has passed either Fiserv's or
Supplier's standard post-installation test procedures at the Installation
Site.
9.
Warranties
. Fiserv
warrants that Client will acquire good and clear title to all hardware items
comprising Material free and clear of all liens and
encumbrances. Fiserv hereby assigns to Client all warranties Supplier
has granted to Fiserv with respect to Material as set forth on each Exhibit L –
n. Client hereby agrees to all of the terms and conditions applicable
to those warranties and acknowledges that:
(i)
neither Supplier nor Fiserv warrants that use of Material will be uninterrupted
or error free; and
(ii)
Supplier's warranties, and the assignment of such warranties by Fiserv to
Client, shall not impose any liability on Fiserv due to the services or
assistance provided to Client by Fiserv with respect thereto.
10.
Exclusivity
. Notwithstanding
anything to the contrary contained elsewhere in the Agreement, the parties
acknowledge and agree that the exclusivity required by Section 15 (k) of the
Agreement shall not apply with respect to the Material purchased through Fiserv
and provided to Client pursuant to this Exhibit L.
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit L to be executed by their duly authorized
representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit L
– 1
Material, Supplier, and
Prices
Third
Party Hardware/Software:
Total
Third Party Hardware/Software:
|
Upgrade: eServer
iSeries Model 820/2395/1523 to i5 Model 520/8593/7453
8,192MB
Main Storage with 878.9GB (773.4GB) Disk Storage
Disk
Storage Protection: Raid-5
IBM
Operating System and Utilities: V5R3
Configuration
#CPBHI079
$214,645.00
|
Installation
Site:
|
222
North School Street
Honolulu,
Hawaii 96817
|
Summary of Charges this
Exhibit:
Third
Party Hardware/Software
Less
Valued Client Discount
Total
Third Party Hardware/Software
Previously
paid under former License and Service Agreement #3810165 Addendum
9
Total
Due this Exhibit
|
$ 214,645.00
($ 25,757.00)
$ 188,888.00
($ 188,888.00)
-0-
|
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit L – 1 to the Agreement to be executed by their
duly authorized representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit
M
Software
Products
WHEREAS,
Fiserv is the licensor of Software (as defined below), and
WHEREAS,
Client wishes to install and Use (as hereinafter defined) Software in Client's
premises.
NOW,
THEREFORE, the parties hereto agree as follows:
1. Definition
of Terms
1.1
|
‘Accounts’
means the total number of individually designated accounts processed by
the Software.
|
1.2
|
'Basic
Maintenance Services' means maintenance services as described in Section 4
of this Exhibit. Basic Maintenance Services are available only
with respect to the current release of
Software.
|
1.3
|
‘Computer
System’ means that dedicated computer machinery and manufacturer-supplied
equipment and software identified on each Exhibit M – n. Client
shall have sole responsibility to own or lease, unpack, plan, install,
test, and maintain the equipment according to any and all applicable
building or electrical codes, regulations or requirements, as well as the
manufacturer and Fiserv
recommendations.
|
1.4
|
'Documentation'
means the Software documentation specified on each Exhibit M –
n.
|
1.5
|
'Enhancements'
means modifications made to Software that add program features or
functions not originally within the Software and that are provided upon
payment of additional License Fees. Fiserv reserves the right
to determine which changes are Upgrades or separately priced
Enhancements.
|
1.6
|
‘Level
One Non-Conformity’ means a major non-conformity which renders the
Software inoperative.
|
1.7
|
‘Level
Two Non-Conformity’ means any non-conformity which significantly degrades
the performance of the Software or which affects regulatory compliance,
including, but not limited to, the calculation of interest, fees and
balances, and errors affecting the accuracy of customer
statements.
|
1.8
|
‘Level
Three Non-Conformity’ means a non-conformity which has a significant
impact on the Client’s ability to perform its normal business functions
and for which no circumvent procedure is
available.
|
1.9
|
‘Level
Four Non-Conformity’ means a non-conformity which negatively impacts the
ability of the Client to perform its normal business functions but for
which there is a relatively cost effective circumvent procedure
available.
|
1.10
|
‘Level
Five Non-Conformity’ means a non-conformity which does not fit into any of
the above categories.
|
1.11
|
'Location'
means only the premises identified on each Exhibit M –
n.
|
1.12
|
'Maintenance
Fee' means the annual fee specified in each Exhibit M – n for Basic
Maintenance Services.
|
1.13
|
‘Non-conformity'
means a failure of Software to perform in substantial accordance with the
functions described in the
Documentation.
|
1.14
|
'Operational
Support' means optional Fiserv services available, at Client request, to
support Client's Software operation. Operational Support shall
only be available if Client is receiving Maintenance
Services.
|
1.15
|
'Professional
Service Fees' means fees specified in each Exhibit M – n for professional
services provided by Fiserv.
|
1.16
|
'Software'
means the standard, unmodified computer programs in object code, unless
otherwise specified on each Exhibit M – n, together with one set of Fiserv
standard documentation. Software does not include separate,
independent, and stand-alone modules or subsystems that Client has
developed and maintained without Fiserv's
assistance.
|
1.17
|
'Software
System' means the Software and Third Party
Software.
|
1.18
|
'Special
Maintenance Services' means any other maintenance services as specified in
Exhibit M – n.
|
1.19
|
'Third
Party' means any party other than Fiserv, Client, and their respective
employees, agents, and
subcontractors.
|
1.20
|
'Third
Party Software' means software provided by Fiserv that is owned or
licensed by Third Parties, where applicable, as identified on Exhibit M –
n.
|
1.21
|
'Total
License Fee' means the total sum specified in each Exhibit M – n for the
Software. Any fees for modifications, enhancements, upgrades,
or additions to Software are excluded from this Exhibit unless otherwise
specified.
|
1.22
|
'Upgrades'
means changes made to maintain compatibility with new system software
releases or to improve previously existing features and operations within
Software. This primarily includes Software program
fixes.
|
1.23
|
'Use'
means copying or loading any portion of Software from storage units or
media into any equipment for the processing of data by Software, or the
operation of any procedure or machine instruction utilizing any portion of
either the computer program or instructional material supplied with
Software at the Location. Use is limited to type of operations
described in Documentation solely to process Client's own work and that of
Client’s majority-owned financial institutions (“Client
Affiliate”). Client shall notify Fiserv in writing, via
notification pursuant to Section 15(f) of the Agreement or as otherwise
required by Exhibit M – n, of its intent to process for a Client Affiliate
prior to beginning such processing. Use specifically excludes
any service bureau or time-share services to Third Parties without prior
written consent by Fiserv and payment by Client of additional fees in
accordance with mutually agreed
terms.
|
2. License
2.1
|
Fiserv
agrees to furnish Software to Client and does hereby grant to Client a
non-exclusive, nontransferable License to Use the Software at the Location
on the designated Computer System (i) to process the designated number of
accounts; or (ii) by the maximum number of users; as specified in each
Exhibit M – n.
|
2.2
|
Client
may change the Location in the event Client transfers its data processing
to a new location within the same country. Client will provide
Fiserv with 15 days advance notice of any proposed transfer of
operations. Assistance by Fiserv related to the transfer shall
be chargeable at Fiserv's then current professional service
rates. Client shall reimburse Fiserv for any out-of-pocket
expenses.
|
2.3
|
Fiserv
prohibits the copying of any portions of the Software System except that
Client may copy reasonable quantities of any standard end user
documentation; and may copy machine language code, in whole or in part, in
reasonable quantities, in printed or electronic form, for use by Client at
the Location for archive, testing and training in a non-production
environment, back-up, or emergency restart purposes, or to replace copy
made on defective media. The original, and any copies of
Software, or any part thereof, shall be Fiserv's
property.
|
2.4.
|
Client
shall maintain any such copies and the original at the Location and one
Client archive site in the same country as the Location. Client
may transport or transmit a copy of Software from the Location or the
Archive Site to another location in the same country as the Location for
back-up use when required by Computer System malfunction, provided that
the copy or original is destroyed or returned to the Location or Archive
Site when the malfunction is corrected. Client shall reproduce
and include Fiserv's copyright and other proprietary notices on all
Software System copies made, in whole or in part, in any
form.
|
2.5
|
Client
shall not decompile, disassemble, or otherwise reverse engineer the
Software System.
|
2.6
|
Third
Party Software is provided to Client under the following supplemental
terms:
|
|
(i)
|
Use
of Third Party Software shall be restricted to use as part of the Software
System.
|
|
(ii)
|
Third
Party Software owners shall not be liable for any damages, whether direct,
indirect, incidental, or consequential arising from the use of Third Party
Software.
|
|
(iii)
|
Publication
of benchmark tests of Third Party Software is permitted only in a writing
signed by an authorized officer of Fiserv and the Third Party Software
owner.
|
|
(iv)
|
Third
Party Software owners are hereby designated as third party beneficiaries
of this Exhibit as it relates to their
software.
|
|
(v)
|
Third
Party Software is not specifically developed, or licensed for use in any
nuclear, aviation, mass transit, or medical application or in any
inherently dangerous applications. Third Party Software owners
and Fiserv shall not be liable for any claims or damages arising from such
use if Client uses the Software System for such
applications.
|
2.7
|
Client
shall obtain and maintain at its own expense such data processing and
communications equipment and supplies as may be necessary or appropriate
to facilitate the proper use of the Software
System.
|
2.8
|
Client
shall permit Fiserv to audit Client’s Use of the Software to determine
that the provisions of this Agreement are being faithfully
performed. Where reasonably practicable, Client shall permit
Fiserv to perform such audits through the use of automated monitoring
systems, system generated reports, or other auditing
methods. If audit is required to be performed at Client’s
location, Fiserv will provide reasonable advance written
notice. Fiserv shall use commercially reasonable efforts to
perform such audits in a manner that is not disruptive to Client’s
business during normal business hours. If the audit confirms
that Client is (i) processing greater than the designated number of
Accounts; or (ii) has more than the maximum number of users; Fiserv will
invoice Client for the additional amount of fees owed per the terms of
this Agreement.
|
3. Professional
Services
3.1
|
Should
Fiserv provide Client with Implementation Services related to Software,
such services will be provided in accordance with the terms and conditions
set forth in Exhibit I. Modifications to the Software shall be
provided as Development Services subject to and in accordance with Exhibit
H. All other Professional Services shall be provided to Client subject to
and in accordance with Exhibit Q. Fees for all services
provided in accordance with this Section 3.1 shall be as set forth in
applicable Exhibit(s).
|
3.2
|
Operational
Support. If requested by Client and if applicable, and subject
to a mutually agreed upon implementation, Fiserv agrees to provide
Operational Support. Such services shall be provided to Client subject to
and in accordance with the terms and conditions set forth in Exhibit
Q. Fees for all services provided in accordance with this
Section 3.2 shall be as set forth in applicable
Exhibit(s).
|
4. Basic
Maintenance Services Terms
4.1
|
Fiserv
will provide the following maintenance services to
Client:
|
(i)
|
Up
to 10 hours per month for telephone support during normal business hours
for reasonable operator support. For telephone support over 10
hours or not during normal business hours, Client will be charged Fiserv's
then standard professional service
rates.
|
(ii)
|
On-site
support, when requested by Client, will be provided at Fiserv's then
standard professional service rates. (iii)
Software
Upgrades will be provided to
Client.
|
(iv)
|
Training
for updates may be offered to Client at Fiserv's standard professional
service rates.
|
(v)
|
If
maintenance services are conducted at the Location or other Client site,
Client agrees to reimburse Fiserv for its reasonable travel and
out-of-pocket expenses.
|
4.2
|
The
term for Basic Maintenance Services shall be specified in each Exhibit
M-n.
|
4.3
|
Fiserv
may utilize remote diagnostic software and dial-up telephone lines in
providing these services.
|
4.4
|
Client
shall cooperate and assist Fiserv to expedite resolution of all
Non-conformities. Client agrees to properly document all Non-conformities
(with reasonable particularity) using Fiserv’s then current service
request form upon discovery of the Non-conformity, and to provide adequate
supporting documentation, such as screen prints, user documentation,
diagrams, or other information reasonably requested by Fiserv to allow
Fiserv to properly analyze the reported Non-conformity. Fiserv will
utilize such documentation to evaluate, prioritize, and resolve Client
support issues. Accurate and complete documentation by Client
is a prerequisite of all support issues. Failure to provide
adequate supporting documentation may result in delayed resolution of a
Non-conformity.
|
4.5
|
Level
One Non-conformity. Fiserv shall acknowledge receipt of the
Level One Non-conformity report within one hour of Client's notice to
Fiserv. Fiserv and Client shall promptly assign such technical
personnel as are necessary to identify, isolate, and reconstruct any
reported Level One Non-conformity and, provided that such Non-conformity
is capable of reconstruction and is due to a defect in the Software,
Fiserv and Client shall utilize commercially reasonable efforts to correct
or utilize a circumvent procedure to restore system operation within
twenty-four (24) hours of Fiserv’s receipt of notification of the
Non-conformity or before the next occurrence of the
Non-conformity. Subject to Section 4.10 below, Fiserv
shall provide such services to Client free of any additional fees and
charges, including but not limited to any reimbursement for travel of
Fiserv technical personnel incurred during the resolution of the Level One
Non-conformity.
|
4.6
|
Level
Two Non-conformity. Fiserv shall acknowledge receipt of the
Level Two Non-conformity report within three hours of Client's notice to
Fiserv. Fiserv and Client shall use commercially reasonable
efforts to provide a correction or adopt a circumvent procedure, whichever
is most reasonable, with respect to a Level Two Non-Conformity within (48)
forty-eight hours of its receipt of the Level Two Non-Conformity
report.
|
4.7
|
Level
Three Non-Conformity. Fiserv and Client shall use commercially
reasonable efforts to provide a correction or adopt a circumvent
procedure, whichever is most reasonable, with respect to a Level Three
Non-Conformity within (5) five business days of its receipt of the Level
Three Non-Conformity report.
|
4.8
|
Level
Four Non-Conformity. Fiserv and Client shall use commercially
reasonable efforts to provide a correction or adopt a circumvent
procedure, whichever is most reasonable, with respect to a Level Four
Non-Conformity within (5) business days of its receipt of the
Non-conformity or the next occurrence of the issue. If a
circumvent procedure has been adopted, Fiserv may deliver a software coded
correction to the Level Four Non-Conformity with the next scheduled base
release of the Software that is still open for development changes at the
time of the notice of the Level Four
Non-Conformity.
|
4.9
|
Level
Five Non-Conformity. Fiserv shall use commercially reasonable
efforts to correct a Level Five Non-Conformity with the next Software
Release open for development at the time of the notice of the Level Five
Non-Conformity.
|
4.10
|
Should
Fiserv's review of the Non-conformity indicate, in Fiserv's reasonable
opinion, that the reported problem is not a Software defect but is due to
other problems including, but not limited to, input not in accordance with
specifications, Client's abuse or misuse of the Software System, or by a
modification or addition to the Software System not performed by Fiserv,
or by Client's failure to properly maintain the Computer System or to
install the required system software release as instructed by Fiserv,
then:
|
|
(i)
|
Client
agrees to reimburse Fiserv for the related costs of work performed by
Fiserv in investigating the problem at Fiserv's then standard professional
service rates, and
|
|
(ii)
|
Fiserv,
at Client's request, shall advise Client whether Fiserv can correct or
assist in resolving such problem, and the terms under which Fiserv shall
undertake the same. Upon written acceptance by Client, Fiserv
shall correct or assist in resolving the problem in accordance with such
terms.
|
4.11
|
The
Maintenance Fees specified in each Exhibit M-n are subject to annual
increases on the anniversary date of the Agreement. Unless specified
otherwise in each Exhibit M-n, the annual increases shall be limited to
the greater of 3% or the change in the U.S. Department of Labor, Consumer
Price Index (CPI) for the Urban Wage Earners and Clerical Workers, All
Cities, (1982 = 100) for the 12 month period preceding the anniversary
date. Maintenance Fees shall also be subject to reasonable increase
following delivery of new release(s) of, or modifications or additions to
the Software or changes in the numbers of accounts processed, user seats,
or other fee determinant factors.
|
4.12
|
Network-related
problems are not covered under Fiserv's Basic Maintenance
Service. In the event Fiserv does provide such service, Client
agrees to pay Fiserv's then standard professional service
rates.
|
4.13
|
Maintenance
services in addition to those specified in this Section may be made
available at Fiserv's then standard professional service rates on a
mutually agreed schedule.
|
5. Equipment
Terms
5.1
|
Client
agrees to purchase, and Fiserv agrees to sell, the Computer System
described in Exhibit M - n in accordance with the terms specified in
Exhibit L. Fiserv shall arrange for installation of the
Computer System in consideration of the Installation Fees listed on
Exhibit M - n.
|
5.2
|
Unless
the parties agree otherwise in writing, Fiserv shall not be responsible
for the provision of any maintenance or repairs to the Computer System or
of any parts or replacements for the Computer
System.
|
6. Performance
6.1
|
Client
shall give Fiserv full access to the Location, the Software System, and
the Computer System to enable Fiserv to provide Services and shall make
available information, facilities, and services reasonably required by
Fiserv for the performance of its obligations
hereunder.
|
6.2
|
Work
in determining the nature of any problem or in making corrections,
amendments, or additions to the Software System may be carried out at
Fiserv's site or the Location, at Fiserv's
option.
|
6.3
|
Client
agrees to maintain the Computer System, Software, and Third Party Software
in accordance with Fiserv's then current specified minimum configuration
during the term hereof, or contract with Fiserv to so
provide.
|
7. Warranties
7.1
|
Fiserv
warrants that the Software will perform the functions specified in the
Documentation. Fiserv will promptly provide replacements or
corrections to any part of the Software that does not so perform where
such failure is material, provided that Fiserv is notified in
writing. This warranty shall not apply if the problem is caused
by unauthorized modification to the Software System, use of the Software
in combination with non-Fiserv provided software, or by incorrect
Use. Client acknowledges that the Software System is designed
to operate on the Computer System and that the warranties given by Fiserv
are conditional upon the procurement and maintenance by Client of the
Computer System in accordance with the then current specified
configuration.
|
7.2
|
Fiserv
warrants that it has the right to License the Use of Software and has not
knowingly
|
|
(i)
|
infringed
a patent, copyright, or other proprietary right,
or
|
|
(ii)
|
misappropriated
a trade secret of a Third Person enforceable in the
Location.
|
8. Indemnity
8.1
|
Fiserv
shall indemnify Client and hold it harmless against any claim or action
alleging Use of Software infringes a patent, copyright, or other
proprietary right of a Third Party enforceable in the
Location. Client agrees to notify Fiserv promptly in writing of
any such claim and grants Fiserv sole right to control the defense and
disposition of such claim. Subject to Section 9 of the
Agreement, Fiserv shall reimburse the Client for reasonable direct
expenses incurred as a result of any such
claim.
|
8.2
|
If,
as a result of such claim, Fiserv or Client is permanently enjoined from
using Software by a final, non-appealable decree, Fiserv, at its sole
option and expense, may (i) procure for Client the right to continue to
use Software or (ii) provide a replacement or modification for Software so
as to settle such claim. If Software modification or
replacement is not reasonably practical in Fiserv's sole opinion, Fiserv
shall discontinue and terminate this License upon written notice to Client
and shall refund to Client the Total License Fees paid to Fiserv for the
affected Software. In making this determination, Fiserv will
give due consideration to all factors, including financial
expense.
|
8.3
|
The
foregoing states Fiserv's entire liability for the infringement of any
copyrights, patents, or other proprietary rights by Software or any part
thereof, and Client hereby expressly waives any other liabilities on the
part of Fiserv arising therefrom.
|
8.4
|
Fiserv
shall have no liability for any claim based
upon
|
|
(i)
|
Use
of any part of Software in combination with materials or software not
provided by Fiserv; or
|
|
(ii)
|
modifications
made by Client or any Third Party.
|
9. Title
9.1
|
Nothing
in this Exhibit shall convey to Client any title to or any rights in
Software, including but not limited to all proprietary rights or ownership
of any modifications. Client's sole right in relation to
Software or any modifications is Use of the same in accordance with the
terms and conditions hereof.
|
9.2
|
The
Software System and all modifications, enhancements, or upgrades made
thereto, and all patents, copyrights, or other proprietary rights related
to each of the above are the sole and exclusive property of Fiserv or its
suppliers, whether made by Fiserv, Client, or any of their employees or
agents. Client shall execute documents reasonably required by
Fiserv to perfect such rights.
|
9.3
|
All
information, reports, studies, object or source code, flow charts,
diagrams, and other tangible or intangible material of any nature
whatsoever produced by or as a result of any of the services performed
hereunder by Fiserv or jointly with Client, shall be the sole and
exclusive property of Fiserv or its corporate parent. Client
shall be entitled to Use all such work product produced by Fiserv in
accordance with the terms and conditions
hereof.
|
10. Termination
10.1
|
The
termination of this Agreement shall automatically, and without further
action by Fiserv, terminate and extinguish the License, and all rights in
and to the Software System shall automatically revert irrevocably to
Fiserv. Fiserv shall have the right to take immediate
possession of the Software System and all copies thereof wherever located
without further notice or demand.
|
10.2
|
If
Client violates any of the Non-Assignment, License, or Use provisions of
this Exhibit, or confidentiality provisions of the Agreement as relates to
Software, and fails to remedy any such breach within 5 days of notice
thereof from Fiserv, Fiserv may terminate this Exhibit without further
notice.
|
11. Non-Assignment
11.1
|
In
the event of the sale of 50% or more of Client's common stock, or the sale
of all or substantially all of Client's assets, or in the event of any
merger in which Client is not the surviving organization, Client may
transfer this Exhibit upon Fiserv's prior written consent (which consent
shall not be unreasonably withheld) and upon payment of a mutually agreed
to additional license fee for such transfer. Notwithstanding
the foregoing, no additional license fee shall be required in the event
that, following any such permitted transfer of this Exhibit, the software
and services provided hereunder shall continue to be used solely by Client
(as that entity existed immediately preceding the acquisition) for the
limited purpose of supporting its normal business operations (as
determined by the business operations of Client immediately preceding the
acquisition) in strict accordance with the terms of the Agreement,
including this Exhibit M, and provided that both Client and the acquiring
entity agree in writing to be bound by and to fully and faithfully comply
with the terms and conditions of the Agreement, including this Exhibit M
(or, in the case of Client, reaffirm such obligations), and to the
foregoing limitation on use. If at any time Fiserv, in its sole
and reasonable discretion, determines that software and/or services are
being utilized (i) by, or for the benefit of any party other than Client
(as that entity existed immediately preceding the acquisition), (ii) for
business operations of Client other than those as they existed immediately
preceding the acquisition, or (iii) otherwise in breach of the Agreement,
then Fiserv, in addition to any other rights and remedies which may be
available to Fiserv pursuant to the Agreement or
otherwise, reserves the right to require the payment by Client
and/or the acquiring entity of additional license fees. Client
agrees that, if requested by Fiserv, Client shall reimburse Fiserv for
reasonable administrative costs incurred in connection with any transfer
hereunder, which administrative fees shall not exceed
$5,000.
|
11.2
|
If
the organization acquiring Client's common stock, assets, or surviving a
merger is an organization deriving more than 5% of its gross revenues from
providing service bureau, time share, computer software consulting
services, computer software licensing, or computer hardware sales, Fiserv
shall be under no obligation to consent to such
transfer.
|
12. Exclusivity
12.1
|
Notwithstanding
anything to the contrary contained elsewhere in the Agreement, the parties
acknowledge and agree that Section 15(k) of the Agreement shall not apply
with respect to this Exhibit M and, instead, the parties expressly agree
to be bound by the following:
|
Exclusivity
. Client
agrees that Fiserv shall be the sole and exclusive provider of the services that
are the subject matter of this Exhibit M. For purposes of the
foregoing, the term "Client" shall include Client affiliates. During
the term of this Agreement, Client agrees not to enter into an agreement with
any other entity to provide these services (or similar services) without
Fiserv's prior written consent. If Client is acquired by another
entity, the exclusivity provided to Fiserv hereunder shall apply with respect to
the level or volume of these services provided immediately prior to the signing
of the definitive acquisition agreement relating to such acquisition and shall
continue with respect to the level or volume of these services until any
termination or expiration of this Agreement. If Client acquires
another entity (“Client Acquired Entity”), the exclusivity provided to Fiserv
hereunder shall take effect with respect to such Client Acquired Entity as soon
as practicable after termination of such Client Acquired Entity’s previously
existing arrangement for these services. However, Client may request,
in writing to Fiserv (setting forth the basis upon which such request is made)
given not more than 30 days following the acquisition of a Client Acquired
Entity, that the obligations set forth in the preceding sentence be waived with
respect to that particular Client Acquired Entity (“Exception
Request”). Upon receipt by Fiserv of any such Exception Request,
Fiserv shall, in good faith, 1) consider such Exception Request, 2) engage in
discussions with Client as to such Exception Request and 3) make a determination
as to whether or not the exclusivity obligations required by this Agreement
shall be waived with respect to the particular Client Acquired Entity specified
in the Exception Request. Fiserv reserves the right to condition the
granting of any such Exception Request, in whole or in part, upon the acceptance
by Client of such terms and conditions as Fiserv, in its sole discretion, deems
appropriate (“Conditions”). No waiver granted by Fiserv hereunder
shall be binding upon Fiserv unless and until the same has been reduced to
writing (which writing shall include any Conditions and shall specifically
reference this Exhibit M and the Exception Request being granted) and signed by
both Fiserv and Client. Any decision rendered by Fiserv in accordance
with this Section shall be final and binding upon the parties. The
granting or approval by Fiserv of any Exception Request shall not be deemed or
otherwise construed to render unnecessary Fiserv’s approval to or of any
subsequent Exception Request.
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit M to the Agreement to be executed by their duly
authorized representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Comprehensive Banking System
(CBS)
SOFTWARE
LICENSE:
CBS
Enterprise Banking Solution Modules
|
A. CBS
Core Applications
1
:
CBS
Common File Subsystem
CBS
Customer Information File Subsystem
CBS
General Ledger Subsystem
CBS
Universal Loans Subsystem
CBS
Financial Transaction Management Subsystem
CBS
Time Subsystem
CBS
Transaction Subsystem
CBS
ACH Origination
CBS
Account Reconciliation
CBS
Safe Deposit
CBS
Chargeback Subsystem
CBS
FHLMC & FNMA Reporting
CBS
Reserve Reallocation
CBS
Auditor’s Loan Extract
B. Electronic
Delivery Management
:
CBS
ATM Card Management Module
CBS
Transaction Authorization Module
C. Other CBS
Software Applications
:
CBS
Loan Collection System (BCAS)
CBS
Branch Delivery Account Sales and Teller
2
D. Standard
Interfaces
ATM
Network Switch Interface (MAC and Fiserv EFT)
Host
Teller and Application Interface
IPS
Sendero Asset / Liability Interface
IPS
Sendero Budget and Planning Interface
IPS
Sendero Customer Profitability Interface
ImageSoft
Nautilus Match Item Control Interface
Thomson
Financial OFAC Interface
3
Voice
Response Interface
E. Complementary
Product Applications
:
IPS
Customer Profitability for Windows
IPS
Product Profitability upgrade to Windows/Level III
IPS
Organizational Profitability Upgrade to Windows/Level III
IPS
Accounts Payable with ACH for Windows
IPS
Accounts Payable Create-a-Check
IPS
Fixed Assets for Windows
IPS
Executive Insight
- Network
|
1
Fiserv
will provide Source Code for CBS Core Applications.
2
Fiserv
may discontinue Maintenance Services for CBS Branch Delivery (Account Sales and
Teller) prior to the expiration of the Agreement by providing Client with not
less than twelve (12) months written notice.
3
The
Thomson Financial OFAC Interface is designed and intended to be used with the
Thomson Financial Publishing AS/400 FACFilter
TM
product.
Exhibit M
–1
Comprehensive Banking System
(CBS)
SOFTWARE LICENSE:
Documentation
|
Comprehensive
Banking System CD-Rom
|
Computer
System
|
As
per Exhibit L – 1
|
Third
Party Software
|
TBD
Third
Party Software shall be provided by Fiserv in accordance with the Terms
and Conditions of Exhibit L, provided Client and Fiserv have executed a
related Exhibit L-n
|
Location
|
222
North School Street, Honolulu, Hawaii 96817
|
Archive
Site
|
TBD
|
Exhibit M
–1
Comprehensive Banking System
(CBS)
Software
License Fees:
|
Initial
license fees to process up to
425,000
Accounts in the
software system
A.
CBS Core Application License Fees:
Account
Tier:
Initial
200,000 Accounts
200,001
– 275,000
275,001
– 350,000
350,001
– 425,000
CBS
Auditor’s Loan Extract
B.
Electronic Delivery Management License Fees:
CBS
ATM Card Management and Transaction Authorization
Modules
C.
Other CBS Software Application License Fees:
CBS
Loan Collection System (BCAS)
CBS
Branch Delivery- 220 Combined Account Sales &
Teller workstations
CBS
Branch Delivery- 170 additional Combined Account Sales and Teller
workstations
D.
Standard Interface License Fees:
ATM
Network Switch Interface
-
MAC
-
Fiserv EFT
Host
Teller and Application Interface
IPS
Sendero:
-
Asset / Liability Interface
-
Customer Profitability Interface
-
Budget and Planning Interface
ImageSoft
Nautilus Match Item Control Interface
Thomson
Financial OFAC Interface
Voice
Response Interface
E.
Complementary Product License Fees:
IPS
Customer Profitability for Windows
IPS
Product Profitability upgrade to Windows/Level III
IPS
Organizational Profitability Upgrade to Windows/Level III
IPS
Accounts Payable with ACH for Windows
IPS
Accounts Payable Create-a-Check
IPS
Fixed Assets for Windows
IPS
Executive Insight - Network
Check
Free VRU TouchTone Banking Interface
Subtotal
License Fees
|
$ 275,000.00
$ 97,750
.00
$ 97,750.00
$ 97,750.00 (Waived)
$ 3,500.00
$ 50,000.00
$ 20,000.00
$ 368,300.00
$
266,050.00
(Waived)
$ 75,000.00
$ 50,000.00
(Waived)
$ 60,000.00
$ 8,800.00
$ 10,000.00
$ 2,500.00
$ 117,010.00
$ 39,500.00
$ 23,500.00
$ 23,500.00
$ 4,600.00
$ 1,000.00
$ 3,750.00
$ 39,500.00
$ 17,500.00
$
1,752,260.00
|
Exhibit M
–1
Comprehensive Banking System
(CBS)
Software
License Fees (continued)
|
|
Initial
license fees
to process up
to
425,000
Accounts in the Software System
Less:
Discounts Awarded under former License and Service
Agreement
#380165
Less:
License Fees waived under this Exhibit
Total
License Fees
Less:
License Fees previously Paid under former License and Service Agreement
#3810165
License
Fees Added this
Exhibit
|
($ 242,016.00)
($ 413,800.00)
$
1,096,444.00
($ 900,944.00)
$ 195,500.00
|
License
Fee Payment Timetable
|
|
Amount
Payable
|
100%
due upon execution of this Exhibit
|
$195,500.00
|
Total
Amount Due
|
$195,500.00
|
Each
additional increment of 75,000 Accounts for CBS Core Applications
4
|
Additional
$ 97,750.00 ea.
|
|
Maximum
Accounts Licensed or processed
|
Core
Applications
|
425,000
|
User/Seat
Limitations
|
Branch
Delivery Combined Account Sales and Teller workstations
|
390
|
|
|
|
4
Incremental Account Fees do not include
additional License and Maintenance Fees for additional
Accounts/Workstations/Users/seats for CBS Electronic Delivery Management, CBS
Loan Collection, and/or CBS Branch Delivery applications which are available by
separate addendum.
Exhibit M
–1
MAINTENANCE
SERVICES
:
A.
|
Basic
Maintenance Services
|
CBS
Software Modules:
|
|
Up
to 350,000 Accounts
5
A. CBS
Core Applications:
CBS
Common File Subsystem
CBS
Customer Information File Subsystem
CBS
General Ledger Subsystem
CBS
Universal Loans Subsystem
CBS
Financial Transaction Management Subsystem
CBS
Time Subsystem
CBS
Transaction Subsystem
CBS
ACH Origination
CBS
Account Reconciliation
CBS
Safe Deposit
CBS
Chargeback Subsystem
CBS
FHLMC & FNMA Reporting
CBS
Reserve Reallocation
CBS
Auditor’s Loan Extract
B. Electronic
Delivery Management
:
CBS
ATM Card Management Module
CBS
Transaction Authorization Module
ATM
Network Switch Interface (MAC and Fiserv EFT)
C. Other CBS
Software Applications
:
CBS
Branch Delivery Account Sales and Teller
Host
Teller and Application Interface
CBS
Loan Collection System (BCAS)
D. Standard
Interfaces
IPS
Sendero Asset / Liability Interface
IPS
Sendero Budget and Planning Interface
IPS
Sendero Customer Profitability Interface
ImageSoft
Nautilus Match Item Control Interface
Thomson
Financial OFAC Interface
Voice
Response Interface
Total
Annual Maintenance Fee:
|
$
98,000.00*
Included
in Core*
Included
in Core*
Included
in Core*
Included
in Core*
Included
in Core*
Included
in Core*
Included
in Core*
$ 3,000.00
$ 3,000.00
$ 2,000.00
$ 1,900.00
$ 5,000.00
Included
in Core*
$ 735.00
$
26,814.00**
Included
Above**
Included
Above**
Included
Above**
$118,699.00***
Included
Above***
Included
Above***
$ 15,500.00
$ 2,000.00
$ 600.00
$ 600.00
$ 2,206.00
$ 794.00
$ 5,513.00
$286,361.00
|
Each
additional increment of 75,000 Accounts for CBS Core Applications
5
|
$19,500
/ yr.
|
5
Client
will pay additional maintenance on Accounts above 350,000 when actual usage
exceeds 350,000 Accounts.
Notwithstanding
Section 4.2 of Exhibit M, the parties acknowledge and agree that Basic
Maintenance Services to be provided hereunder for CBS Software listed in the
above Basic Maintenance Services table shall begin upon the Effective Date and
shall continue for a period of 10 years. Thereafter, the provision of
Basic Maintenance Services by Fiserv shall automatically renew for successive
5-year terms at Fiserv’s then current fees for all modules then licensed
pursuant to this Exhibit M – 1, unless either party provides written notice to
the other party 90 days prior to the expiry of the then current
term.
Exhibit M
–1
B.
|
Basic
Maintenance Fee Payment
Timetable
|
Notwithstanding
Exhibit I Section 1(d), Maintenance Fees will continue to be billed by Fiserv
and paid by Client in accordance with Amendment 6 of Agreement Number 3810165
through the later of February 28, 2005 or date of the conversion merger between
Client and City Bank. Thereafter, Annual Maintenance Fees will be
billed by Fiserv and paid by Client, monthly in advance, based on the amount
shown above. Notwithstanding Section 4.11 of Exhibit M, the
Maintenance Fees specified in this Exhibit M-1 are subject to an annual increase
limited to the greater of 3% or the change in the U.S. Department of Labor,
Consumer Price Index (CPI) for the Urban Wage Earners and Clerical Workers, All
Cities, (1982=100).
C.
|
Fiserv CBS Normal Business
Hours:
8:30 a.m. to 5:30
p.m., Eastern Time
.
|
D.
|
Additional Terms and
Conditions
:
|
|
›
|
For
the purposes of this Exhibit M – 1, ‘Accounts’ shall mean the total number
of individually designated accounts processed by the Transaction, Time and
Loan subsystem of the Software.
|
|
›
|
For
the purposes of this Exhibit M – 1, the parties acknowledge and agree that
Section 7.1 of Exhibit M shall be replaced with the
following:
|
Fiserv
warrants that Software will perform the functions specified in the
Documentation. Subject to Section 4.4 and 4.10 of this Exhibit, for a
period of ninety (90) days after delivery, Fiserv will promptly provide
replacements or corrections to any part of the Software that does not so perform
where such failure is a Level One, Level Two, or Level Three
Non-conformity. This warranty shall not apply if the problem is
caused by unauthorized modification to the Software System, use of the Software
in combination with non-Fiserv provided software, or by incorrect
Use. Client represents that the Software System is designed to
operate on the Computer System and that the warranties given by Fiserv are
conditional upon the procurement and maintenance by Client of the Computer
System in accordance with the then current specified configuration.
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit M-1 to the Agreement to be executed by their
duly authorized representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit M
–2
Comprehensive Banking System
(CBS)
SOFTWARE
LICENSE:
SOFTWARE
|
Other
CBS Software Applications
|
CBS
Loan Collection System Upgrade (BCAS)
Vqueue
(6 workstations)
|
Initial
license
fees
to process up to 400,000 Accounts in the Software
System
Other
CBS Software Application License Fees:
CBS
Loan Collection System Upgrade (BCAS)
Vqueue
(6 workstations)
Total
License Fees
|
$52,500.00
$ 3,000.00
$55,500.00
|
Each
additional increment of 75,000 Accounts for CBS Loan Collection System
Upgrade (BCAS)
Each
additional Vqueue workstation
|
Additional
$5,000.00 ea.
Additional
$500.00 ea.
|
Maximum
Accounts Licensed or processed
|
CBS
Loan Collection System Upgrade (BCAS)
|
400,000
|
User/Seat
Limitations
|
Vqueue:
|
|
|
-
Vqueue workstations (new)
|
6
|
|
-
Vqueue workstations (transferred from City Bank)
|
14
|
|
-
Total
Vqueue workstations
|
20
|
|
Text-based
inquiry only users
|
Unlimited
|
License
Fee Payment Timetable
|
Due On or Before:
|
Amount
Payable:
|
100%
upon execution of this Exhibit
|
$55,500.00
|
Total
Amount Due
|
$55,500.00
|
Exhibit M-2
MAINTENANCE
SERVICES :
A. Basic
Maintenance Services
CBS
Loan Collection System Upgrade (BCAS)
1
-
Up to
400,000
Accounts
|
Annual
Maintenance Fee.- $15,500.00
|
Each
additional increment of 75,000 Accounts for CBS Loan Collection System
Upgrade (BCAS)
Each
additional Vqueue workstation
|
Additional
$1,000.00 ea.
Additional
$100.00
ea.
|
1
The
Annual Maintenance Fee for the CBS Loan Collection System Upgrade (BCAS) is
included in the Annual Maintenance Fee listed in section A of Basic Maintenance
Services of Exhibit M-1.
Notwithstanding
Section 4.2 of Exhibit M, the parties acknowledge and agree that Basic
Maintenance Services to be provided hereunder for CBS Software listed in the
above Software License section shall begin upon the Effective Date and shall
continue of a period of 10 years. Thereafter, the provision of Basic
Maintenance Services by Fiserv shall automatically renew for successive 5-year
terms at Fiserv’s then current fees for all modules then licensed pursuant to
this Exhibit M – 2, unless either party provides written notice to the other
party 90 days prior to the expiry of the then current term.
B. Basic
Maintenance Fee Payment Timetable
Annual
Maintenance Fees will be billed by Fiserv and paid by Client, monthly in
advance, based on the amount shown above. Notwithstanding Section
4.11 of Exhibit M, the Maintenance Fees specified in this Exhibit M-2 are
subject to an annual increase limited to the greater of 3% or the change in the
U.S. Department of Labor, Consumer Price Index (CPI) for the Urban Wage Earners
and Clerical Workers, All Cities, (1982=100).
PROFESSIONAL
SERVICES
:
C. Professional
Services: Implementation
Pursuant
to Section 3 of Exhibit M
,
Client shall pay for the implementation services
below. Implementation fee does not include travel and living expenses
which shall be billed separately to the Client.
Implementation
Services
|
Description
|
Professional
Services
Fee
Estimate
|
Implementation
Services
1
|
$10,000.00
|
1
Uni-Source will provide Client with the Implementation Services for Vqueue
listed in section C of this Exhibit M-2.
D. Professional
Services Fees Payment Timetable: Implementation Services
Fiserv
will invoice and Client agrees to pay monthly for professional services provided
in a given month. Services related to implementation services shall be invoiced
based on Fiserv’s then current professional service rates. Fees do not include
travel and living expenses, which will be billed separately to
Client.
Exhibit M-2
E.
Fiserv
CBS Normal Business Hours:
8:30
a.m. to 5:30 p.m., Eastern Time
.
F.
Additional
Terms and Conditions:
|
›
|
For
the purpose of this Exhibit M – 2, ‘Accounts’ shall mean the total number
of individually designated accounts processed by the Transaction, Time and
Loan subsystem of the Software.
|
|
›
|
For
the purpose of this Exhibit M – 2, the parties acknowledge and agree that
Section 7.1 of Exhibit M shall be replaced with the
following:
|
Fiserv
warrants that Software will perform the functions specified in the
Documentation. Subject to Section 4.4 and 4.10 of Exhibit M, for a
period of ninety (90) days after delivery, Fiserv will promptly provide
replacements or corrections to any part of the Software that does not so perform
where such failure is a Level One, Level Two, or Level Three
Non-conformity. This warranty shall not apply if the problem is
caused by unauthorized modification to the Software System, use of the Software
in combination with non-Fiserv provided software, or by incorrect
Use. Client represents that the Software System is designed to
operate on the Computer System and that the warranties given by Fiserv are
conditional upon the procurement and maintenance by Client of the Computer
System in accordance with the then current specified configuration.
IN
WITNESS WHEREOF, the parties hereto have caused this Exhibit M-2 to the
Agreement to be executed by their duly authorized representatives as of the date
indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit
Q
Professional
Services
Client agrees with Fiserv as
follows:
1.
Professional
Services
. Fiserv will provide Client with professional
services related to Services ("Professional Services") for particular projects
as described in a uniquely numbered, separate Project Requirement Definition
Authorization or similar statement of work attached hereto as Exhibit Q – n
(each hereinafter referred to as “PRDA” or “Work Order”).
Fiserv agrees to provide access to
Fiserv personnel as at the rates and fees specified in each Exhibit
Q-n. All Professional Services shall be performed in accordance with
the procedures set forth below. Client may request Fiserv to provide
additions and changes to Professional Services. Any such additions or
changes shall be provided upon mutual agreement of the parties and shall be at
Fiserv’s then current professional service rates . Any dates for
performance are dependent upon the timely performance by each party of the tasks
assigned under the project plans for such PRDA or Work Order.
(a)
Business
Requirements
. All Professional Services to be performed by
Fiserv hereunder shall be based upon the Business Requirements of
Client. “Business Requirements” means the description of the Client’s
business needs and the functionality requirements. Client shall
cooperate with Fiserv in connection with the provision of Professional Services
and shall provide Fiserv with all necessary information concerning its Business
Requirements or other information requested by Fiserv for the performance of its
obligations under the Agreement, provided that such requests are reasonable and
are made in a timely manner. Fiserv shall review and suggest
revisions to such Business Requirements on a timely basis. The
parties shall mutually agree in writing on the final Business Requirements. Any
customizations, modifications, enhancements to the unmodified software required
to meet Client’s Business Requirements shall be provided by Fiserv in accordance
with the terms and conditions specified in Exhibit H, provided that Client and
Fiserv have executed a mutually agreed upon Exhibit H-n.
(b)
Project Plan
. Fiserv
shall develop a Project Plan for the Professional Services based on the Business
Requirements within 15 business days after receipt of the Business
Requirements. The Project Plan shall contain a listing of the nature
and timing of tasks for the Professional Service project, some of which are to
be performed by Fiserv and some by Client. Client and Fiserv shall
mutually agree on the Project Plan. Thereafter, Client will be
provided a copy of the weekly updates to the Project Plan. Fiserv and
Client shall utilize their commercially reasonable efforts to meet the dates set
forth in the Project Plan. Modifications, changes, enhancements,
upgrades, or additions to the agreed upon work beyond those stated in the
Project Plan shall be added only upon mutual written agreement. In
the event the parties agree to add any such items, the Project Plan shall
automatically be modified to the extent necessary to allow for the inclusion or
provision of the items. Any such items may result in a change in the
Professional Service Fees (as defined below).
2.
Professional Services
Fees
. ‘Professional
Services Fees’ means the greater of the sums of amounts derived by multiplying
either the minimum number of days specified in each Exhibit Q – n or the number
of days or fractions of days worked within each grade by the daily fee rate as
identified in each Exhibit Q – n. Additional fees may be raised in
respect of hours worked outside these at the request of Client at the rates
previously agreed in writing by Client.
(a)
Client shall pay Fiserv the fees and other charges for as specified in each
Exhibit Q-n ("Professional Service Fees"). The daily rates quoted
therein will be valid for 12 months unless otherwise stated in Exhibit Q -
n. Thereafter, they will be subject to change by Fiserv on one
month's notice to Client. A higher rate may be applied for an
individual whose support to Client has advanced to a new job grade or after one
month's notice if such individual's general development warrants a job upgrade
by Fiserv.
(b) Client agrees to pay the reasonable
travel and living expenses of any Fiserv employees and Fiserv authorized
contractors who render services at any Client site in connection with
Professional Services. All such expenses shall meet the guidelines
established by the Fiserv Travel Policy, a copy of which shall be provided to
the Client, except that Client shall have the right to arrange
Fiserv lodging at Client’s preferred lodging location, provided that
such accommodations in Fiserv’s judgment meets a reasonable standard of
cleanliness, safety and proximity to the work site. All travel and
living expenses shall be itemized on invoices submitted by Fiserv.
3.
Professional Service Project
Termination
. At Client's sole option, Client may terminate any
PRDA or Work Order upon 30 days' prior written notice to Fiserv, provided that
Client agrees to pay Fiserv for any and all Professional Service Fees for
professional services rendered prior to the effective date of
termination. In no event shall Fiserv be liable for a refund of any
Professional Service Fees already paid by Client.
4.
Rescheduling
. If
Client is unable to provide access to required facilities or personnel or is
unable to meet its tasks assigned on a Project Plan in a timely manner, Fiserv
will endeavor to reschedule tasks to minimize non-productive
time. All such non-productive time is chargeable to
Client. If such non-productive time is expected to be significant,
Fiserv will endeavor to reassign its personnel to other suitable
work. In this event, Client will not be charged for the time
personnel were reassigned.
5.
Exclusivity
. Notwithstanding
anything to the contrary contained elsewhere in the Agreement, the parties
acknowledge and agree that the exclusivity required by Section 15 (k) of the
Agreement shall not apply with respect to the Professional Services provided to
Client pursuant to this Exhibit Q.
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit Q to the Agreement to be executed by their duly
authorized representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit
Q – 1
Project
Requirement Definition Authorization (PRDA)
Business
Requirements
Development
and Retrofit Services are not included as part of any Conversion Project. Any
such services required shall be added by separate mutual written agreement of
the parties.
Project
Type: Professional Service Project – Conversion Services
Client:
Central Pacific
Bank
Client
ID#: CPBHI Project
ID: PRDA
#CSD0120
Prepared by: Joseph Kovach
Purpose:
The
purpose of this PRDA is to provide Client with costs associated with the
provision of Fiserv Professional Services to merge City Bank Hawaii (‘CBK’), a
CBS Outsourcing client, into Client’s existing CBS System
BNKPRD. This PRDA includes the scope of services, constraints and
assumptions, and projected costs for the project (‘Conversion
Project’).
Effective
Date: July 1, 2004
Business
Requirements:
Fiserv
will provide Project Management, programming and analyst support to accomplish a
Conversion Project of a CBS System for merging City Bank (CBK) data into
Client’s existing CBS System BNKPRD. Provided that Client’s
requirements remain consistent with the scope of services, constraints and
assumptions defined herein, and that Client meets all Client dates agreed to in
the Project Plan, Client requires and Fiserv shall endeavor to deliver the
project on schedule, accurately, within the approved costs and resulting in a
functioning business reliable system.
Fiserv
will use its CBS to CBS conversion and merge processes, working with the
appropriate Client personnel, to convert and merge the CBK accounts into
Client’s existing CBS System BNKPRD. The Project Plan identifies the
general duties and responsibilities of Fiserv and the Client. Fiserv
will assign a project manager, banker analysts, and technicians as necessary to
meet the requirements of this conversion and merger. Client and
Fiserv personnel assigned to the project will have the requisite skills,
experience and knowledge of the system, banking products, general ledger and
operations, as needed to complete their assigned responsibilities in a timely
manner, accurately, and as intended and set forth in this PRDA.
|
Constraints and
Assumptions:
|
The
Professional Services Fees for the Conversion Project contained in this PRDA are
a good faith estimate of the effort required to complete the Conversion Project.
If the quoted tasks are at risk of exceeding the specified fees, Fiserv will
elevate the issue to the Client’s management for discussion and developing
alternatives to contain the scope and fees to the agreed upon
level.
Three
file cuts are included in the Professional Services Fees for the Conversion
Project. The first file cut is for the initial testing, mapping, and
internal verification. The second file cut is for a standard mock
conversion/merge, data verification and card re-issuance purposes. The third
file cut is for the live merger. In Fiserv’s discretion, multiple
runs against each of the three test files will be done to verify and test the
conversion. One full test run (consisting of 3 file cuts) is provided
in the estimate.
The
Professional Services Fees for the Conversion Project are based on Client and
CBK being on the same release levels of the application
software. This estimate does not include conversion of the VRU
application and related information residing on the InterVoice hardware. This
estimate does include conversion of all VRU records residing on the CBK CBS Host
system.
Client
will establish all new common file values on their production BNKPRD to support
the CBK accounts. This must be completed at least one month prior to
the data verification date outlined in the Project Plan.
All ACH
Common File and customers from CBK must be manually set up in the Client’s
environment, however, ACH transactions contained within CBK’s ACH warehouse will
be merged with Client’s ACH warehouse.
Client’s
data will remain with all of its original information and no specific data
changes of Client’s data will be required, except that Fiserv will accommodate
requests to data changes which, in Fiserv’s sole opinion, are reasonable under
the base project. Such requests may necessitate the need to establish additional
environments which may result in additional costs.
The
reserved merger date will be mutually agreed upon between Fiserv and Client
prior to the project kick-off meeting, provided however, that in no event will
it be earlier than five months from the date of signing this
Amendment.
The
Client will provide, at Client’s expense, high-speed connection to Client’s
system during the conversion to facilitate the processes, and communication
between Client and Fiserv. Whenever possible, Fiserv will perform the conversion
process functions on Client’s iSeries computer. Fiserv will create
four environments on the Client’s iSeries computer:
CONVERSION:
For
Fiserv use to test the field translations of the Client, to assure that process
is working properly.
REVIEW:
For the
Client, to verify results of field translations. This is the
environment where the bank will perform its data verification.
PRODUCTION-TEST
: Used
to perform conversion readiness testing on the merged
data. Final review, running PCOMB, and balancing of the bank
occurs in this environment.
TRAINING:
For
Client’s use to train Client’s personnel.
The
conversion team shall consist of six team members: the Project Manager, three
Analysts and two technicians. The conversion team will be onsite Monday through
Friday for data verification and Friday through Thursday of the live conversion.
The exit meeting will be held on Thursday morning after the live
conversion/merge. This meeting will involve the post-conversion review, project
sign-off and turnover to Customer Support.
The
General Ledger process will utilize a spreadsheet with old to new account
numbers completed by Client. This includes cost center and account number
changes.
When
account numbers change, Fiserv will provide an old/new number file for the bank
to use in notifying third party vendors.
If
required, account number changes will be made to the donor bank (CBK), leaving
Client (surviving) account numbers intact. If Client wishes to change the
surviving account numbers, Fiserv may, in its discretion, charge its then
current rates for such changes based on the number and complexity of such
changes.
Client
and CBK will be responsible for ensuring that its Branch Delivery Terminal
environment is current and consistent between institutions prior to the merge.
The Conversion Project does not include or automate this process.
Client
will provide Fiserv with the following information for developing the merger
process:
·
|
Copy
of the entire bank prod for CBK.
|
·
|
Copy
of the entire bank prod for Client.
|
·
|
The
Client Common File representing the combined
bank.
|
The
merger process is designed to run on base CBS code. When modifications exist or
are required, there are additional services required by Fiserv to accomplish the
merger. Such services may be contracted by incorporating a separate, uniquely
number PRDA to the Agreement. The requirement for such services shall be
discussed at the beginning of the project to assess the impact of modifications
to the merger process.
The first
test run will be the conversion of the CBK accounts into the pre-merge file,
which will be loaded to the review environment for verification. Client will
review the results of the pre-merge and once satisfied with the results, Fiserv
will proceed to the next step to merge the donor accounts (CBK) into the
Client’s production environment.
The
fields listed below can be changed through translation tables as part of this
merger process. Any fields requested outside of this list require
analysis and development effort, and constitute out-of-scope
services.
Branch
Numbers
Tran Interest Plans
Officer
Codes
Tran Mail
Codes
Dealer
Numbers
Tran Status Codes
FTM
Transfer
Types
Tran Special Instructions
Loan
Product
Types
Tran User Fields
Census
Tract
Statement Model Numbers
Risk
Codes
Tran Reg DD Flag
Classification
Codes
Statement Cycle Codes
Rebate
Numbers
Time Product Type
Escrow
Numbers Time
Interest Plan
FDIC
Codes
Time Mail Codes
FRB
Codes Time
Penalty Plans
Collateral
Codes
Time User Fields
Charge-off
Codes
Time User Codes
Loan Rate
Indexes
Safe Deposit
Box
Types
Loan Bill
Lead
Days
Safe Deposit Box Discounts
Loan User
Codes
Safe Deposit Late Fees
Loan User
Fields
FTM Transfer Types
Credit
Bureau (non report
flag) CIF
Relationship Codes
Notice
Numbers CIF
User Codes
Posting
Restriction Reasons
Miscellaneous
Fees
Investors
Group
Numbers
Tran
Product Type
Tran
Service Charge Plan
Project
Turnover
. The Conversion Project team will remain onsite for 5
days following live conversion, unless outstanding conversion issues exist,
which in Fiserv and Client’s reasonable opinion require additional time onsite
to resolve. The Conversion Project will be turned over to Fiserv Customer
Support five (5) days following live conversion. The conversion team
will assist Fiserv Customer Support and remain responsible, for a period of 90
days, for any conversion issues identified after Fiserv completes the Conversion
Project, as specified in the Project Plan.
Acceptance
Test shall include, but is not limited to, Client’s validation that data has
been converted accurately and to the requested location and that the General
Ledger balances, to the extent it balanced prior to conversion.
Professional Services
Fees:
The base
Professional Services Fees for the Conversion Project contemplated under this
PRDA are based on the Business Description, Proposed Solution, Constraints and
Assumptions described herein, collectively the “Scope of
Services”. The Professional Service Fees shall not exceed $230,000
for the Scope of Services and limits set forth below. Fiserv will provide Client
with a monthly report showing actual hours incurred by each individual assigned
to the Conversion Project.
Professional Services
Function
|
Level
of Effort
(man-days)
|
Professional Services
Not to exceed
|
Programming
and Analyst Support
($1,000 per
day)
Project
Management
|
180
50
|
$180,000
$ 50,000
|
Total
Professional Services Fees
|
Within
limits defined above
|
$230,000*
|
*
Note: If Client retains CBS Outsourcing as its processing environment, then the
Conversion Project team will be made up of Outsourcing resources and a portion
of the CBK dedicated programming resources, not to exceed 25% of a Full-Time
Equivalent, may be used to offset the above stated costs.
Conversion
Project base Professional Services Fee includes:
·
|
Three
file cuts: The first is for the initial testing, mapping, and internal
verification. The second will be use for Data Verification and
card re-issuance purposes. The Third is for the Live
merger. One full test run is provided in the estimate, but
multiple runs against the test files will be done as necessary to verify
and test the conversion.
|
·
|
Data
mapping of all production master files and fields as defined by Client and
Fiserv. This shall include special mapping to identify CIF records and
accounts belonging to each institution, Major Type Groupings, CIF Officer
Code 3, Preferred Customer Codes and Bulk File
codes.
|
·
|
Conversion
of all EFT records, including ATM, POS, Debit Card and VRU records
residing on CBS Host system.
|
·
|
Conversion
of General Ledger accounts. The General Ledger process will be handled by
using a Fiserv-provided spreadsheet with old to new account numbers
completed by Central Pacific. This includes cost center and account number
changes.
|
·
|
Account
Number translation for old number/new number account translation, as
required for duplicate account
numbers.
|
·
|
Conversion
of external transfers between City Bank and Client to internal transfers
of Client.
|
·
|
ACH
Data warehouse merge. ACH Common File and company record setup will be
performed manually by Client.
|
·
|
Conversion
of all City Bank Transaction, Time and Loan subsystem history, as agreed
upon with Client.
|
·
|
Merge
GL History and Card History of City Bank with Client
history.
|
·
|
To
the extent possible, Fiserv will coordinate the BCAS Collection System
conversion project, managed by UniSource 2000, with the activities and
schedules of the Fiserv CBS core processing conversion
project.
|
Professional Services Fee
Payment Timetable
Fiserv
will invoice, and Client agrees to pay, Professional Services Fees on a
percentage of completion basis according to the schedule below:
Date/Event
|
Portion
Due
|
Amount
|
Upon
Exhibit Execution
|
25%
|
$57,500
|
Completion
of Mapping (per project plan)
|
25%
|
$57,500
|
Completion
of Data Verification (per project plan)
|
25%
|
$57,500
|
Five
(5) days following Conversion sign-off or upon turnover to
Customer
Support,
whichever occurs first.
|
25%
|
Balance
Remaining
|
Conversion
Project - Optional Services and Fees:
Additional
support or service requested by the bank and provided by Fiserv will be billed
at Fiserv’s then current professional services rates over and above the fees
outlined above. All billing of Optional Services and Fees is only for additional
work beyond the scope of the project described herein for the base Conversion
Project and requires a quote of time and fees approved by Client prior to the
work being performed.
Optional
Services
|
|
Additional
“Dry Run” Mock Conversions
|
To
be quoted on request
|
Branch
Delivery hardware/software consulting, application consulting and forms
data mapping.
|
$150
per hour
|
BCAS
Collection System
|
Provided
by quote from Unisource 2000
|
Credit
Bureau E1 Tape
|
$150
per hour
|
Deluxe
Tape for Check Reissues
|
$150
per hour
|
EFT-ATM
Plastic Card Re-order
|
$150
per hour
|
Establishment
and configuration of iSeries hardware environment to support production
environment.
|
To
be provided with iSeries Hardware Upgrade Configuration and
Agreement
|
Multiple
ATM Authorization Environment
|
$150
per hour
|
Retrofit
Services (Analysis and Coding)
|
$150
per
hour
|
Supplemental
Personnel
1
Personnel
Grade
|
Hourly
Rate
|
Project
Manager
|
$
187.50
|
Systems
Analyst
|
$
150.00
|
Programmer
|
$
150.00
|
Trainer
|
$
150.00
|
Escalation:
Client
and Fiserv shall develop an escalation process for the Conversion Project that
will be defined in the Project Charter document.
Scheduling:
Conversion
Project will be scheduled upon receipt of signed agreement and estimated
completion date will be based on department workload at the time of receipt. An
estimated completion date will be advised after receipt of signed
agreement.
Note: In
the event a regulatory body or shareholders disapprove this merger, Client will
only be responsible for Fiserv time, materials, and travel expenses incurred on
this project prior to official cancellation of the project.
IN WITNESS WHEREOF, the parties
hereto have caused this Exhibit Q – 1 to the Agreement to be executed by their
duly authorized representatives as of the date indicated below.
Central
Pacific Bank
|
|
Fiserv
Solutions, Inc.
|
|
|
|
|
|
By:
|
/s/
Denis K. Isono
|
|
By:
|
/s/
Robert Lowe
|
Name:
|
Denis
K. Isono
|
|
Name:
|
Robert
Lowe
|
Title:
|
Executive
Vice President
|
|
Title:
|
SVP
Global Finance
|
Date:
|
December
30, 2004
|
|
Date:
|
January
1, 2005
|
|
|
|
|
|
By:
|
/s/
Glenn K.C. Ching
|
|
|
|
Name:
|
Glenn
K.C. Ching
|
|
|
|
Title:
|
Senior
Vice President
|
|
|
|
Date:
|
December
30, 2004
|
|
|
|
Exhibit
10.7
Amendment
No. 2008-1 to the Central Pacific Financial Corporation
2004
Stock Compensation Plan
THIS
AMENDMENT (the “
Amendment
”) is made
by Central Pacific Financial Corporation (the “
Company
”) to be
effective as of December 31, 2008.
WHEREAS, the Company maintains the 2004
Stock Compensation Plan (the “
Plan
”) for the
benefit of certain participants (“
Participants
”);
WHEREAS, the Company desires to amend
certain provisions of the Plan in order to comply with Section 409A of the
Internal Revenue Code of 1986, as amended (“
Section 409A
”);
and
WHEREAS, the Company has reserved the
right to amend or modify the Plan.
NOW, THEREFORE, the Plan is hereby
amended as follows:
1.
|
The
following sentence shall be added to the end of the third paragraph in
Section 4.2:
|
“Notwithstanding
anything to the contrary, any adjustments, modifications, amendments or changes
of any kind made pursuant to this Section 4.2 shall be made in a manner
compliant with Section 409A of the Code.”
2.
|
The
following proviso shall be added to the end of the final sentence in
Section 8.7:
|
“,
provided that such dividends or dividend equivalents shall be paid or provided
in a manner compliant with Section 409A of the Code”
3.
|
Section 9.4
shall be amended to read as
follows:
|
“Payment
of earned Performance Shares/Performance Units shall be as determined by the
Committee and as evidenced in the Award Agreement. Subject to the
terms of the Plan, the Committee, in its sole discretion, may pay earned
Performance Shares/Performance Units in the form of cash or in Shares (or in a
combination thereof) equal to the value of the earned Performance
Shares/Performance Units as soon as practicable after the end of the applicable
Performance Period, but in no event later than 2 ½ months following the end of
the calendar year in which such Performance Period ends; provided, however, that
any Shares may be granted subject to restrictions deemed appropriate by the
Committee, but only if the terms of such restrictions are compliant with
Section 409A of the Code. The determination of the Committee
with respect to the form of payout of such Awards shall be set forth in the
Award Agreement pertaining to the grant of the Award.”
4.
|
The
following proviso shall be added to the end of the final sentence in
Section 9.5:
|
“,
provided that such dividends or dividend equivalents shall be paid or provided
in a manner compliant with Section 409A of the Code”
5.
|
The
following proviso shall be added to the end of the final sentence in
Section 10.7:
|
“,
provided that such dividends or dividend equivalents shall be paid or provided
in a manner compliant with Section 409A of the Code”
6.
|
The
following proviso shall be added to the end of the final sentence in
Article 13:
|
“,
provided that such rules and procedures for any deferrals or deferral elections
pursuant to this Article 13 shall comply in all respects with
Section 409A of the Code”
7.
|
The
first sentence of Article 15 shall be amended to read as
follows:
|
“Upon the
occurrence of a Change in Control, unless otherwise specifically prohibited
under applicable laws, or by the rules and regulations of any governing
governmental agencies or national securities exchanges, or unless the Committee
shall determine otherwise in the Award Agreement:”
8.
|
The
following proviso shall be added to the end of the first sentence in
Section 16.1:
|
“,
provided that any such alteration, amendment, modification, suspension or
termination of the Plan pursuant to this Article 16 shall be effected in a
manner compliant with Section 409A of the Code”
9.
|
The
following sentence shall be added as the final sentence of
Section 16.2:
|
“Notwithstanding
anything to the contrary, any adjustments pursuant to this Section 16.2
shall be effected in a manner compliant with Section 409A of the
Code.”
10.
|
A
new Section 20.6 shall be added to the Plan as
follows:
|
“
Section 409A of the
Code
. It is the Company’s intent that payments under the Plan
are exempt from, and do not constitute “deferred compensation” subject to,
Section 409A of the Code and that the Plan be administered
accordingly. If and to the extent that any payment is determined by
the Company to constitute “non-qualified deferred compensation” subject to
Section 409A of the Code and is payable hereunder to a Participant by reason of
his termination of employment, then (a) such payment or benefit shall be made or
provided to the Participant only upon a “separation from service” as defined for
purposes of Section 409A of the Code under applicable regulations and (b) if the
Participant is a “specified employee” (within the meaning of Section 409A of the
Code and as determined by the Company), such payment shall not be made or
provided before the date that is six months after the date of the Participant’s
separation from service (or his earlier death). Neither the Company
nor its affiliates shall have any liability to any Participant, Participant’s
spouse or other beneficiary of any Participant’s spouse or other beneficiary of
any Participant or otherwise if the Plan or any amounts paid or payable
hereunder are subject to the additional tax and penalties under Section 409A of
the Code.”
IN
WITNESS WHEREOF, the Compensation Committee has caused this Amendment 2008-1 to
the Plan to be duly executed on this 31
st
day of
December, 2008.
CENTRAL
PACIFIC FINANCIAL CORPORATION
By:
/s/ Karen K.
Street
Executive Vice President and Director
of Human Resources
Exhibit
10.9
|
P.O.
Box 3590
Honolulu,
HI 96811-3590
Telephone
(808) 544-0500
|
January
28, 2009
|
|
|
|
Ronald
K. Migita
Chairman
of the Board
President
and Chief Executive Officer
Central
Pacific Financial Corp.
Central
Pacific Bank
|
CONFIDENTIAL PORTION OMITTED
:
An
asterisk has been placed in this Exhibit to indicate the confidential
portions of this document that have been omitted pursuant to a request for
confidential treatment. This document including said
confidential portions has been filed separately with the
Commission.
|
RE:Your
Compensation
|
|
|
|
|
|
Dear Mr. Migita:
|
|
The
purpose of this letter is to confirm your compensation for serving as Chairman
of the Board, President, and Chief Executive Officer for Central Pacific
Financial Corp. (“CPF”) and Central Pacific Bank (“CPB”).
|
1.
|
For
serving as Chairman of the Board of Directors (“Board”) of CPF and CPB,
effective August 1, 2008, you will receive an annual retainer fee of
$160,000 (CPF will pay $96,000 (60%) and CPB will pay $64,000 (40%))
prorated and paid on a monthly basis; which annual retainer fee had been
reduced by 20% (from $200,000 to $160,000) on July 30, 2008, with an
effective date of August 1, 2008, as part of an overall 20% reduction in
CPF and CPB Board annual retainers.
|
|
2.
|
Effective
August 1, 2008, you will not receive any board or committee meeting fees
for attending any meetings of the CPF and CPB Boards or any of their
respective committees.
|
|
3.
|
For
serving as President and Chief Executive Officer of CPF and CPB, you will
receive an annual cash salary of $1.00, which will be effective August 1,
2008, being the date of your employment as said President and Chief
Executive Officer.
|
|
4.
|
As
an employee of CPF and CPB, you are entitled to receive all standard
employee benefits, except for unrestricted vacation which we agree will
not impede your ability to execute your duties and
responsibilities.
|
|
5.
|
As
an executive officer of CPF and CPB, you are entitled to receive
perquisites that are extended to the highest level executives of CPF
and/or CPB, to presently include an automobile allowance of $1,000 per
month and payment of Waialae Country Club membership
dues.
|
|
6.
|
You
are eligible to receive the following annual performance-based incentive
compensation:
|
|
a.
|
An
annual performance-based incentive cash payment ranging from $250,000 (if
Target is achieved) to $375,000 (if Maximum is achieved). The cash payment
will be prorated for performance achieved between Target and Maximum. No
cash payment or any portion thereof will be made if the Target is not
achieved.
|
|
b.
|
Annual
performance-bused incentive equity grants of: (i)
appreciation-based equity grants (stock options and/or stock appreciation
rights) ranging from $375,000 (if Target is achieved) to $562,500 (if
Maximum is achieved); and (ii) full-value equity grants (restricted stock
and/or performance shares) ranging from $375,000 (if Target is achieved)
to $562,500
(if Maximum is
achieved). The equity grants will be prorated for performance
achieved between Target and Maximum. No equity grants or any portion
thereof will be made if the Target is not
achieved.
|
|
c.
|
The
annual performance-based incentive cash payment and equity grants in “a”
and “b” respectively, above, shall be subject to the following Target
performance measures, weighted as set forth
below:
|
|
(i)
|
Raising
a minimum of $75 million in new capital through the issuance of CPF
convertible
preferred stock and/or common stock by December 31, 2008; and,
maintaining
a “well-capitalized” regulatory designation through June 30, 2009.
Weight: 25%
|
|
(ii)
|
Reducing
the California loan portfolio to
*
million or lower as of June 30, 2009. Weight:
15%
|
|
(iii)
|
Increasing
the total shareholder return (adjusted for the effect of any capital
raise) by at least
*
as of June 30,
2009, over the closing CPF stock price on August 27, 2008 ($11.13).
Weight: 15%
|
|
(iv)
|
Reducing
the Efficiency Ratio for CPF and CPB to
*
or lower as of June 30, 2009. Weight:
15%
|
|
(v)
|
Reducing
the Total Loans to Total Deposits Ratio to
*
or lower as of June 30, 2009. Weight:
15%
|
|
(vi)
|
Increasing
the Net Interest Margin to
*
or higher as of June 30, 2009. Weight:
15%
|
|
d.
|
The
annual performance-based incentive cash payment and equity grants in “a”
and “b” respectively, above, shall be subject to the following Maximum
performance measures, weighted as set forth
below:
|
|
(i)
|
Raising
a minimum of $75
million in new
capital through the issuance of CPF convertible preferred stock and/or
common stock by December 31, 2008; and, maintaining a “well-capitalized”
regulatory designation through June 30,
2009. Weight: These (i) requirements must be met in
order to qualify for and receive any Maximum
awards.
|
|
(ii)
|
Reducing
the California loan portfolio to
*
million or lower as of June 30, 2009. Weight:
20%
|
|
(iii)
|
Increasing
total shareholder return (adjusted for the effect of any capital raise) by
at least
*
as of June 30, 2009, over the closing CPF stock price on August 27,
2008 ($11.13). Weight: 20%
|
|
(iv)
|
Reducing
the Efficiency Ratio for CPF and CPB to
*
or lower as of June 30, 2009. Weight:
20%
|
|
(v)
|
Reducing
the Total Loans to Total Deposits Ratio to
*
or lower as of June 30. 2009. Weight:
20%
|
|
(vi)
|
Increasing
the Net Interest Margin to
*
or higher as of June 30, 2009. Weight:
20%
|
If the
foregoing is agreeable with you, please sign and return the original of this
letter to the undersigned.
Sincerely,
Central
Pacific Financial Corp.
Central
Pacific Bank
By
/s/ Colbert M.
Matsumoto
Colbert
M. Matsumoto
Compensation
Committee Chair
Board of
Directors
Accepted
and agreed to by:
/s/ Ronald K.
Migita
1/28/2009
Ronald K.
Migita Date
Exhibit
10.15
Amendment
No. 1 to the Supplemental Executive Retirement Plan
Between
Central Pacific Financial Corporation and Blenn A. Fujimoto
THIS
AMENDMENT (the “
Amendment
”) is made
by Central Pacific Financial Corporation (the “
Company
”) to be
effective as of December 31, 2008.
WHEREAS, the Company has entered into a
Supplemental Executive Retirement Plan (the “
SERP
”), dated as of
July 1, 2005, for the benefit of Blenn A. Fujimoto (the “
Executive
”);
WHEREAS, the Company desires to amend
certain provisions of the SERP in order to comply with Section 409A of the
Internal Revenue Code of 1986, as amended (“
Section 409A
”), and
to remove certain references to the Executive’s expired employment agreement;
and
WHEREAS, the Company and the Executive
have reserved the right to amend or modify the SERP.
NOW, THEREFORE, the SERP is hereby
amended as follows:
1.
|
Section 1.3,
clauses (a), (c) and (d) shall be amended to read as
follows:
|
“(a) the
Executive’s willful failure to perform substantially all of the Executive’s
responsibilities of the Executive’s position, after demand for substantial
performance has been given by the Board of Directors that specifically
identifies how the Executive has not substantially performed the Executive’s
responsibilities;”
“(c) the
Executive’s willful or intentional material breach of the Executive’s duties
that results in financial or reputational detriment to the Company or its
affiliates that is not de minimis;”
“(d) the
Executive’s willful or intentional material misconduct in the performance of the
Executive’s duties that results in financial or reputational detriment to the
Company or its affiliates that is not de minimis;”
2.
|
Section 1.11
shall be amended to read as
follows:
|
“Separation
from Service” is as defined in Treas. Reg. §1.409A-1(h).
3.
|
Section 2.1.1(a)(i)
shall be amended to read as
follows:
|
“The
amounts specified in Exhibit C as of the Executive’s Normal Retirement
Date; and”
4.
|
Section 2.1.1(b)
shall be deleted in its entirety.
|
5.
|
The
second sentence of Section 2.4.2 shall be amended to read as
follows:
|
“Alternatively,
prior to December 31, 2008, the Executive may elect that the Change-in-Control
Benefit be paid (or commence to be paid) on the first day of the month after the
date that is six months following the Executive’s Involuntary Termination of
Employment or Termination for Good Reason within 36 months after the Change in
Control.”
6.
|
Section 2.4.3
shall be amended to read as
follows:
|
“
Excess Parachute
Payment
. If any benefit payable under this Agreement
(determined without regard to any payment under this Section 2.4.3) (the
“Benefit”) would be subject to the excise tax under Section 4999 of the Code
(such excise tax, together with any such interest and penalties, collectively
referred to as the “Excise Tax”), then the provisions of Section 2.4.4
shall be applied to determine the amount and timing of a “Gross-Up Payment” that
the Company shall pay to the Executive. The Gross-Up Payment shall be
in such amount that, after payment by the Executive of all taxes (including,
without limitation, any income taxes and any interest and penalties imposed with
respect thereto and any excise tax) imposed upon the Gross-Up Payment, the
Executive will retain an amount of the Gross-Up Payment equal to the Excise Tax
imposed on the Benefit.”
7.
|
A
new Section 2.4.4 shall be added to the SERP, to read as
follows:
|
“
Gross-Up Payment
Determination
. All determinations required to be made
including whether and when a Gross-Up Payment is required, the amount of such
Gross-Up Payment, the amount of any Option Redetermination (as defined below)
and the assumptions to be utilized in arriving at such determinations, shall be
made by the public accounting firm that is retained by the Company as of the
date immediately prior to the Change in Control (the “Accounting Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within fifteen (15) business days of the receipt of notice from the
Company or the Executive that there has been a Benefit, or such earlier time as
is requested by the Company (collectively, the
“Determination”). Notwithstanding the foregoing, in the event (i) the
Board shall determine prior to the Change in Control that the Accounting Firm is
precluded from performing such services under applicable auditor independence
rules, (ii) the Audit Committee of the Board determines that it does not want
the Accounting Firm to perform such services because of auditor independence
concerns or (iii) the Accounting Firm is serving as accountant or auditor for
the person(s) effecting the Change in Control, the Board shall appoint another
nationally recognized public accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company and the Company shall enter into any agreement
requested by the Accounting Firm in connection with the performance of the
services hereunder. The Gross-Up Payment with respect to any Benefit
shall be made no later than thirty (30) days following such
Benefit. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Executive with a written opinion
to such effect, and to the effect that failure to report the Excise Tax, if any,
on the Executive’s applicable federal income tax return will not result in the
imposition of a negligence or similar penalty. The Determination by
the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the Determination, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made (“Underpayment”) or Gross-Up Payments are made by the Company which should
not have been made (“Overpayment”), consistent with the calculations required to
be made hereunder. In the event the amount of the Gross-Up Payment is
less than the amount necessary to reimburse the Executive for the Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to
or for the Executive’s benefit (but in any event no later than by the end of the
Executive’s taxable year next following the taxable year in which the Excise Tax
is remitted). In the event the amount of the Gross-Up Payment exceeds
the amount necessary to reimburse the Executive for the Excise Tax, the
Accounting Firm shall determine the amount of the Overpayment that has been made
and any such Overpayment (together with interest at the rate provided in Section
1274(b)(2) of the Code) shall be promptly paid by the Executive to or for the
benefit of the Company immediately after it is refunded to the Executive by the
Internal Revenue Service. The Executive shall cooperate, to the
extent the Executive’s expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.”
8.
|
Section 2.5
shall be amended to read as
follows:
|
“
Form of Lifetime
Benefits
. The Company shall pay the lifetime benefits under
this Article II, to the Executive in the form elected by the Executive in
accordance with the attached Exhibit A. The Executive’s election as
to the form of benefit must be made prior to December 31,
2008. Except as provided in Section 409A of the Code and related
Treasury Regulations and as permitted by the Company, the Executive may not
change the election, and no acceleration of the time or schedule of any payment
under this Agreement shall be permitted.”
9.
|
Section 5.3
shall be amended to read as
follows:
|
“
Section
409A
. Notwithstanding any other provision of this Agreement,
to the extent that any amount payable to the Executive pursuant to the Agreement
is determined by the Company to constitute “non-qualified deferred compensation”
subject to Section 409A of the Code (“Section 409A”) and is payable to the
Executive by reason of the Executive’s termination of employment, then (i) such
payment shall be made to the Executive only upon a Separation from Service and
(ii) if the Executive is a “specified employee” (within the meaning of Section
409A as determined by the Company), such payment shall not be made before the
date that is six months after the date of the Executive’s Separation from
Service (or, if earlier than the expiration of such six-month period, the date
of death). Neither the Company nor its affiliates shall have any
liability to the Executive or Beneficiary or otherwise if the Agreement or any
amounts paid or payable hereunder are subject to the additional tax and
penalties under Section 409A of the Code.”
10.
|
Exhibit
C shall be amended by amending the text under the heading, “Section
2.1.1(a)(i) Offset Assumptions” to read as
follows:
|
Blenn
Fujimoto
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
All
Other
|
Termination
|
|
Control
|
|
|
Benefit
|
Year
|
|
Offset
($)
|
|
|
Offset
($)
|
|
|
|
|
|
|
1/1/2008
|
|
1,701
|
|
|
4,828
|
1/1/2009
|
|
1,966
|
|
|
5,213
|
1/1/2010
|
|
2,253
|
|
|
5,584
|
1/1/2011
|
|
2,564
|
|
|
5,941
|
1/1/2012
|
|
2,902
|
|
|
6,284
|
1/1/2013
|
|
3,269
|
|
|
6,614
|
1/1/2014
|
|
3,666
|
|
|
6,933
|
1/1/2015
|
|
4,097
|
|
|
7,240
|
1/1/2016
|
|
4,562
|
|
|
7,535
|
1/1/2017
|
|
5,065
|
|
|
7,818
|
1/1/2018
|
|
5,609
|
|
|
8,092
|
1/1/2019
|
|
6,197
|
|
|
8,355
|
1/1/2020
|
|
6,831
|
|
|
8,608
|
1/1/2021
|
|
7,516
|
|
|
8,851
|
1/1/2022
|
|
8,256
|
|
|
9,086
|
1/1/2023
|
|
9,053
|
|
|
9,312
|
6/1/2022
|
|
9,494
|
|
|
9,494
|
|
|
|
|
|
|
Note: Monthly
offsets.
|
|
IN
WITNESS WHEREOF, the Company has caused this First Amendment to the SERP to be
duly executed on this 31
st
day of
December, 2008.
CENTRAL
PACIFIC FINANCIAL CORPORATION
By:
/s/ Karen K.
Street
Executive Vice President and Director
of Human Resources
/s/ Blenn A.
Fujimoto
BLENN A.
FUJIMOTO
Exhibit
10.17
Amendment
No. 1 to the Supplemental Executive Retirement Plan
Between
Central Pacific Financial Corporation and Dean K. Hirata
THIS
AMENDMENT (the “
Amendment
”) is made
by Central Pacific Financial Corporation (the “
Company
”) to be
effective as of December 31, 2008.
WHEREAS, the Company has entered into a
Supplemental Executive Retirement Plan (the “
SERP
”), dated as of
July 1, 2005, for the benefit of Dean K. Hirata (the “
Executive
”);
WHEREAS, the Company desires to amend
certain provisions of the SERP in order to comply with Section 409A of the
Internal Revenue Code of 1986, as amended (“
Section 409A
”), to
remove certain references to the Executive’s expired employment agreement, and
to combine the documentation of the Executive’s supplemental retirement
agreement with CB Bancshares, Inc. with the SERP; and
WHEREAS, the Company and the Executive
have reserved the right to amend or modify the SERP.
NOW, THEREFORE, the SERP is hereby
amended as follows:
1.
|
The
second through fifth recitals shall be amended to read as
follows:
|
“The
Executive was an employee of CB Bancshares, Inc. (“CBBI”) prior to the merger of
CBBI into the Company effective September 15, 2004. Effective June 1,
2002, CBBI and the Executive entered into a supplemental executive retirement
agreement (the “CBBI SERP”). The Executive is continuing to accrue
benefits under the CBBI SERP.
Effective
July 1, 2005, the Company and the Executive entered into a further supplemental
executive retirement agreement (the “CPF SERP”) which provided that the
Executive was entitled to the greater of the benefits under the CBBI SERP or the
benefits under the CPF SERP. The Executive is continuing to accrue benefits
under the CPF SERP.
|
The
Company and the Executive desire to combine the CBBI SERP and the CPF SERP
into this Agreement, and to make clarifying amendments following the
expiry of the Executive’s Employment Agreement with the Company. The
Company and the Executive also intend to amend this Agreement to comply
with Section 409A of the Internal Revenue Code of 1986, as amended (the
“Code”).
|
|
This
Agreement is intended to be an unfunded, nonqualified deferred
compensation arrangement for purposes of the Code and the Employee
Retirement Income Security Act of 1974, as amended
(“ERISA”). All benefits payable under this Agreement shall be
paid out of the general assets of the
Company.”
|
2.
|
Section 1.3,
clauses (a), (c) and (d) shall be amended to read as
follows:
|
|
“(a) the
Executive’s willful failure to perform substantially all of the
Executive’s responsibilities of the Executive’s position, after demand for
substantial performance has been given by the Board of Directors that
specifically identifies how the Executive has not substantially performed
the Executive’s responsibilities;”
|
|
“(c) the
Executive’s willful or intentional material breach of the Executive’s
duties that results in financial or reputational detriment to the Company
or its affiliates that is not de
minimis;”
|
|
“(d) the
Executive’s willful or intentional material misconduct in the performance
of the Executive’s duties that results in financial or reputational
detriment to the Company or its affiliates that is not de
minimis;”
|
3.
|
Section 1.11
shall be amended to read as
follows:
|
|
“Separation
from Service” is as defined in Treas.
Reg. §1.409A-1(h).
|
4.
|
Section 2.1
shall be amended to read as
follows:
|
|
“
Normal Retirement
Benefit
. Following the Executive’s Separation from
Service on or after his Normal Retirement Date for reasons other than
death, the Company shall pay to the Executive, in lieu of any other
benefit under this Agreement, the greater of (1) the “Normal Retirement
Benefit” described in this Section 2.1 and (2) the actuarial equivalent of
$19,708.58 per month payable in equal monthly installments over a 20-year
term commencing on the first day of the month following the Executive’s
65th birthday (the “Minimum Termination
Benefit”).”
|
5.
|
Section 2.1.1(a)(i)
shall be amended to read as
follows:
|
|
“The
amounts specified in Exhibit C as of the Executive’s Normal
Retirement Date; and”
|
6.
|
Section 2.1.1(b)
shall be deleted in its entirety.
|
7.
|
Section 2.2
shall be amended to read as
follows:
|
|
“
Early Termination
Benefit
. Following the Executive’s Separation from
Service on an Early Termination Date, the Company shall pay to the
Executive, in lieu of any other benefit under this Agreement, the greater
of (1) the “Early Termination Benefit” described in this Section 2.2 and
(2) the Minimum Termination
Benefit.”
|
8.
|
Section 2.3
shall be amended to read as
follows:
|
|
“
Disability
Benefit
. Following the Executive’s termination of
employment due to Disability prior to the Executive’s Normal Retirement
Date, the Company shall pay to the Executive, in lieu of any other benefit
under this Agreement, the greater of (1) the “Disability Benefit”
described in this Section 2.3 and (2) the Minimum Termination
Benefit.”
|
9.
|
Section 2.4
shall be amended to read as
follows:
|
|
“
Change-in-Control
Benefit
. Upon the Executive’s Involuntary Termination of
Employment or Termination for Good Reason prior to his Normal Retirement
Date and within 36 months following the occurrence of a Change in Control,
the Company shall pay to the Executive, in lieu of any other benefit under
this Agreement, the greater of (1) the “Change-in-Control Benefit”
described in this Section 2.4 and (2) the Minimum Termination
Benefit.”
|
10.
|
The
second sentence of Section 2.4.2 shall be amended to read as
follows:
|
|
“Alternatively,
prior to December 31, 2008, the Executive may elect that the
Change-in-Control Benefit be paid (or commence to be paid) on the first
day of the month after the date that is six months following the
Executive’s Involuntary Termination of Employment or Termination for Good
Reason within 36 months after the Change in
Control.”
|
11.
|
Section 2.4.3
shall be amended to read as
follows:
|
|
“
Excess Parachute
Payment
. If any benefit payable under this Agreement
(determined without regard to any payment under this Section 2.4.3) (the
“Benefit”) would be subject to the excise tax under Section 4999 of the
Code (such excise tax, together with any such interest and penalties,
collectively referred to as the “Excise Tax”), then the provisions of
Section 2.4.4 shall be applied to determine the amount and timing of
a “Gross-Up Payment” that the Company shall pay to the
Executive. The Gross-Up Payment shall be in such amount that,
after payment by the Executive of all taxes (including, without
limitation, any income taxes and any interest and penalties imposed with
respect thereto and any excise tax) imposed upon the Gross-Up Payment, the
Executive will retain an amount of the Gross-Up Payment equal to the
Excise Tax imposed on the Benefit.”
|
12.
|
A
new Section 2.4.4 shall be added to the SERP, to read as
follows:
|
“
Gross-Up Payment
Determination
. All determinations required to be made
including whether and when a Gross-Up Payment is required, the amount of such
Gross-Up Payment, the amount of any Option Redetermination (as defined below)
and the assumptions to be utilized in arriving at such determinations, shall be
made by the public accounting firm that is retained by the Company as of the
date immediately prior to the Change in Control (the “Accounting Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within fifteen (15) business days of the receipt of notice from the
Company or the Executive that there has been a Benefit, or such earlier time as
is requested by the Company (collectively, the
“Determination”). Notwithstanding the foregoing, in the event (i) the
Board shall determine prior to the Change in Control that the Accounting Firm is
precluded from performing such services under applicable auditor independence
rules, (ii) the Audit Committee of the Board determines that it does not want
the Accounting Firm to perform such services because of auditor independence
concerns or (iii) the Accounting Firm is serving as accountant or auditor for
the person(s) effecting the Change in Control, the Board shall appoint another
nationally recognized public accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company and the Company shall enter into any agreement
requested by the Accounting Firm in connection with the performance of the
services hereunder. The Gross-Up Payment with respect to any Benefit
shall be made no later than thirty (30) days following such
Benefit. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Executive with a written opinion
to such effect, and to the effect that failure to report the Excise Tax, if any,
on the Executive’s applicable federal income tax return will not result in the
imposition of a negligence or similar penalty. The Determination by
the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the Determination, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made (“Underpayment”) or Gross-Up Payments are made by the Company which should
not have been made (“Overpayment”), consistent with the calculations required to
be made hereunder. In the event the amount of the Gross-Up Payment is
less than the amount necessary to reimburse the Executive for the Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to
or for the Executive’s benefit (but in any event no later than by the end of the
Executive’s taxable year next following the taxable year in which the Excise Tax
is remitted). In the event the amount of the Gross-Up Payment exceeds
the amount necessary to reimburse the Executive for the Excise Tax, the
Accounting Firm shall determine the amount of the Overpayment that has been made
and any such Overpayment (together with interest at the rate provided in Section
1274(b)(2) of the Code) shall be promptly paid by the Executive to or for the
benefit of the Company immediately after it is refunded to the Executive by the
Internal Revenue Service. The Executive shall cooperate, to the
extent the Executive’s expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.”
13.
|
Section 2.5
shall be amended to read as
follows:
|
|
“
Form of Lifetime
Benefits
. The Company shall pay the lifetime benefits
under this Article II, to the Executive in the form elected by the
Executive in accordance with the attached Exhibit A. The
Executive’s election as to the form of benefit must be made prior to
December 31, 2008. Except as provided in Section 409A of
the Code and related Treasury Regulations and as permitted by the Company,
the Executive may not change the election, and no acceleration of the time
or schedule of any payment under this Agreement shall be
permitted.”
|
14.
|
Section 3.1
shall be amended to read as
follows:
|
|
“
Death during Active
Service
. If the Executive dies while in the active
service of the Company, the Company shall pay to the Executive’s
Beneficiary, in lieu of any other benefit under this Agreement, the
greater of (1) the “Preretirement Death Benefit” described in this Section
3.1 and (2) the Minimum Termination Benefit. The Company shall
not pay any Preretirement Death Benefit under this Section 3.1 if the
Executive has received any lifetime benefit payment provided under Article
2.”
|
15.
|
The
third sentence of Section 3.2 shall be amended to read as
follows:
|
|
“If
the Executive was receiving a Normal Retirement Benefit, Early Termination
Benefit, Change-in-Control Benefit or Minimum Termination Benefit, any
death benefit would depend on the form of lifetime benefit
chosen.”
|
16.
|
The
first sentence of Section 3.3 shall be amended to read as
follows:
|
|
“If
the Executive is entitled to a lifetime benefit under Article II, but dies
prior to the commencement of such benefit, the Company shall pay to the
Executive’s Beneficiary the greater of (1) the Executive’s vested Normal
Retirement Benefit determined as of the date of the Executive’s death
without projection for increases in Final Average Compensation or service
credit to the Executive’s Normal Retirement Date and (2) the Minimum
Termination Benefit.”
|
17.
|
Section 5.3
shall be amended to read as
follows:
|
“
Section
409A
. Notwithstanding any other provision of this Agreement,
to the extent that any amount payable to the Executive pursuant to the Agreement
is determined by the Company to constitute “non-qualified deferred compensation”
subject to Section 409A of the Code (“Section 409A”) and is payable to the
Executive by reason of the Executive’s termination of employment, then (i) such
payment shall be made to the Executive only upon a Separation from Service and
(ii) if the Executive is a “specified employee” (within the meaning of Section
409A as determined by the Company), such payment shall not be made before the
date that is six months after the date of the Executive’s Separation from
Service (or, if earlier than the expiration of such six-month period, the date
of death). Neither the Company nor its affiliates shall have any
liability to the Executive or Beneficiary or otherwise if the Agreement or any
amounts paid or payable hereunder are subject to the additional tax and
penalties under Section 409A of the Code.”
18.
|
Section 5.4
shall be deleted in its entirety.
|
19.
|
Exhibit
C shall be amended by amending the text under the heading, “Section
2.1.1(a)(i) Offset Assumptions” to read as
follows:
|
Dean Hirata
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
All
Other
|
Termination
|
|
Control
|
|
|
Benefit
|
Year
|
|
Offset
($)
|
|
|
Offset
($)
|
|
|
|
|
|
|
1/1/2008
|
|
1,751
|
|
|
4,670
|
1/1/2009
|
|
2,019
|
|
|
5,032
|
1/1/2010
|
|
2,310
|
|
|
5,381
|
1/1/2011
|
|
2,625
|
|
|
5,716
|
1/1/2012
|
|
2,967
|
|
|
6,038
|
1/1/2013
|
|
3,339
|
|
|
6,349
|
1/1/2014
|
|
3,741
|
|
|
6,649
|
1/1/2015
|
|
4,176
|
|
|
6,937
|
1/1/2016
|
|
4,647
|
|
|
7,214
|
1/1/2017
|
|
5,156
|
|
|
7,481
|
1/1/2018
|
|
5,707
|
|
|
7,738
|
1/1/2019
|
|
6,301
|
|
|
7,985
|
1/1/2020
|
|
6,943
|
|
|
8,222
|
1/1/2021
|
|
7,636
|
|
|
8,452
|
1/1/2022
|
|
8,384
|
|
|
8,672
|
7/1/2022
|
|
8,897
|
|
|
8,897
|
|
|
|
|
|
|
Note: Monthly
offsets.
|
IN
WITNESS WHEREOF, the Company has caused this First Amendment to the SERP to be
duly executed on this 31
st
day of
December, 2008.
CENTRAL
PACIFIC FINANCIAL CORPORATION
By:
/s/ Karen K.
Street
Executive Vice President and
Director of Human Resources
/s/ Dean K.
Hirata
DEAN K.
HIRATA
Exhibit
10.19
Amendment
No. 2008-1 to the Central Pacific Financial Corporation
Long-Term
Executive Incentive Plan
THIS
AMENDMENT (the “
Amendment
”) is made
by Central Pacific Financial Corporation (the “
Company
”) to be
effective as of December 31, 2008.
WHEREAS, the Company maintains the
Long-Term Executive Incentive Plan (the “
Plan
”) for the
benefit of certain participants (“
Participants
”);
WHEREAS, the Company desires to amend
certain provisions of the Plan in order to comply with Section 409A of the
Internal Revenue Code of 1986, as amended (“
Section 409A
”);
and
WHEREAS, the Company has reserved the
right to amend or modify the Plan.
NOW, THEREFORE, the Plan is hereby
amended as follows:
1.
|
Section
2.4 shall be amended to read as
follows:
|
““Change
in Control Event” is defined by reference to the definition of “change in
control event” in Treas. Reg. 1.409A-3(i)(5).”
2.
|
Section
2.8 shall be amended to read as
follows:
|
““Disability”
is defined by reference to the definition of “disability” in Treas. Reg.
1.409A-3(i)(4).”
3.
|
The
following sentence shall be added as the final sentence to Section
7.1:
|
“Any such
prorated Final Award payable in respect of termination of employment due to the
Participant’s death or Disability shall be paid as soon as practicable after
such termination of employment, but no later than 2½ months after the close of
the Plan Year in which the termination of employment due to the Participant’s
death or Disability occurs.”
4.
|
The
final sentence of Article 8 shall be amended to read as
follows:
|
“Any
Final Award payable because of the death of the Participant shall be paid as
soon as practicable after the Participant dies, but no later than 2½ months
after the close of the Plan Year in which the Participant dies.”
5.
|
A
new Section 15.5 shall be added to the Plan as
follows:
|
“
Code Section
409A
. It is the Company’s intent that payments under the Plan
are exempt from, and do not constitute “deferred compensation” subject to,
Section 409A of the Code and that the Plan be administered
accordingly. If and to the extent that any payment is determined by
the Company to constitute “non-qualified deferred compensation” subject to
Section 409A of the Code and is payable hereunder to a Participant by reason of
his termination of employment, then (a) such payment or benefit shall be made or
provided to the Participant only upon a “separation from service” as defined for
purposes of Section 409A of the Code under applicable regulations and (b) if the
Participant is a “specified employee” (within the meaning of Section 409A of the
Code and as determined by the Company), such payment shall not be made or
provided before the date that is six months after the date of the Participant’s
separation from service (or his earlier death). Neither the Company
nor its affiliates shall have any liability to any Participant, Participant’s
spouse or other beneficiary of any Participant’s spouse or other beneficiary of
any Participant or otherwise if the Plan or any amounts paid or payable
hereunder are subject to the additional tax and penalties under Section 409A of
the Code.”
IN
WITNESS WHEREOF, the Compensation Committee has caused this Amendment 2008-1 to
the Plan to be duly executed on this 31
st
day of
December, 2008.
CENTRAL
PACIFIC FINANCIAL CORPORATION
By:
/s/ Karen K.
Street
Executive Vice President and Director
of Human Resources
Exhibit
10.21
Amendment
No. 2008-1 to the Central Pacific Financial Corporation
2004
Annual Executive Incentive Plan
THIS
AMENDMENT (the “
Amendment
”) is made
by Central Pacific Financial Corporation (the “
Company
”) to be
effective as of December 31, 2008.
WHEREAS, the Company maintains the 2004
Annual Executive Incentive Plan (the “
Plan
”) for the
benefit of certain participants (“
Participants
”);
WHEREAS, the Company desires to amend
certain provisions of the Plan in order to comply with Section 409A of the
Internal Revenue Code of 1986, as amended (“
Section 409A
”);
and
WHEREAS, the Company has reserved the
right to amend or modify the Plan.
NOW, THEREFORE, the Plan is hereby
amended as follows:
1.
|
The
final sentence of the paragraph entitled, “Participant Payout” shall be
amended to read as follows:
|
“Payment
of any award amounts will be made after audited financial statements are made
available, but no later than March 15 of the calendar year following the year in
which the Plan Year closes, or such later date as permitted by applicable tax
rules.”
2.
|
The
final sentence of the paragraph entitled, “Termination of Employment”
shall be amended to read as
follows:
|
“Any
exceptions to this provision must be approved by the Committee, in its sole
discretion, provided that any award amounts will be paid no later than March 15
of the calendar year following the year in which the Plan Year closes, or such
later date as permitted by applicable tax rules.”
3.
|
The
following paragraph shall be added as the last paragraph of the
Plan:
|
“
Section 409A of the Internal Revenue
Code
:
It is the
Company’s intent that payments under the Plan are exempt from, and do not
constitute “deferred compensation” subject to, Section 409A of the Code and
that the Plan be administered accordingly. If and to the extent that
any payment is determined by the Company to constitute “non-qualified deferred
compensation” subject to Section 409A of the Code and is payable hereunder to a
Participant by reason of his termination of employment, then (a) such payment or
benefit shall be made or provided to the Participant only upon a “separation
from service” as defined for purposes of Section 409A of the Code under
applicable regulations and (b) if the Participant is a “specified employee”
(within the meaning of Section 409A of the Code and as determined by the
Company), such payment shall not be made or provided before the date that is six
months after the date of the Participant’s separation from service (or his
earlier death). Neither the Company nor its affiliates shall have any
liability to any Participant, Participant’s spouse or other beneficiary of any
Participant’s spouse or other beneficiary of any Participant or otherwise if the
Plan or any amounts paid or payable hereunder are subject to the additional tax
and penalties under Section 409A of the Code.”
IN
WITNESS WHEREOF, the Compensation Committee has caused this Amendment 2008-1 to
the Plan to be duly executed on this 31
st
day of
December, 2008.
CENTRAL
PACIFIC FINANCIAL CORPORATION
By:
/s/ Karen K.
Street
Executive Vice President and Director
of Human Resources
Exhibit
10.25
March 11,
2008
Denis
Isono
5056
Poola Street
Honolulu,
HI 96821
Re:
Change in Control Severance
Agreement
Dear
Denis:
This is
your
Change in
Control Severance Agreement
(the “
Agreement
”) with Central
Pacific Financial Corp., a Hawaii corporation (the “
Company
”) and its affiliates
(together, as constituted from time to time, the “
Group
”).
1.
Purpose and
Effectiveness
.
(a)
Purpose
.
This Company desires to
provide you with protection if there is a future Change in Control of the
Company (as defined below). You should review this Agreement
carefully for the terms and conditions that will apply.
(b)
Effectiveness
. If
you agree to the terms and conditions of this Agreement, please execute and
return a copy of this Agreement to the Company. This Agreement will
become effective upon execution by both you and the Company (the “
Effective
Date
”).
2.
Term of This
Agreement
.
The term
of this Agreement will begin on the Effective Date and will end on the second
anniversary of the Effective Date. However, the term of this
Agreement will be automatically extended for one additional year beginning on
the second anniversary of the Effective Date and on each subsequent anniversary,
unless the Company gives you written notice, 60 days before such anniversary, of
its determination not to extend this Agreement. In addition, (1) if
there is a Change in Control during the term of this Agreement, the term of this
Agreement will automatically extend to the second anniversary of the Change in
Control and will automatically terminate on such anniversary and (2) if the
Company gives notice of its intention not to extend this Agreement in
anticipation of a Change in Control or at the request of a third party who had
indicated an intention or taken steps reasonably calculated to effect a Change
in Control and such Change in Control (or an alternative or competing Change in
Control) actually occurs within 6 months of the purported end of the term of
this Agreement, the Agreement will be deemed not to have been terminated and its
term will be automatically extended as set forth in clause (1) of this
sentence.
3.
Termination
of Your
Employment
Following
Change in Control
.
(a)
Qualifying Termination
.
Upon a
Qualifying Termination, you will be eligible for the payments and benefits set
forth in Section 4 below. A
“Qualifying Termination”
means, within the two years following the time when a Change in Control
occurs (1) the Company terminates your employment without Cause or (2) you
terminate your employment for Good Reason.
(b)
Definitions Used in This
Section
:
(1)
“
Cause
” means any of the
following:
(A)
Your
willful failure to perform substantially the responsibilities of your position,
after
demand for
substantial performance has been given by the Company’s Chief Executive Officer
that specifically identifies how you have not substantially performed your
responsibilities;
(B)
Your
conviction of any felony or of a misdemeanor involving fraud, dishonesty, or
moral turpitude;
(C)
Your
willful or intentional material misconduct in the performance of the duties of
your position that results in financial or reputational detriment to the Group
that is not
de
minimis
;
(D)
Your
material breach of the Group’s Code of Business Conduct and Ethics if the breach
is of a nature for which other similarly situated executives of the Group would
be terminated; or
(E)
Your
willful attempt to obstruct or willful failure to cooperate with any
investigation authorized by the Board of Directors (the “
Board
”) or any governmental
or self-regulatory entity.
To
terminate your employment “for Cause,” Cause must have occurred and the Company
must comply with Section 3(c) of this Agreement.
(2)
“
Change in Control
”
means
any of the following:
(A)
Individuals
who, on the Effective Date, constitute the Board (the
“Incumbent Directors
”) cease
for any reason to constitute at least half of the Board,
provided that
any person
becoming a director subsequent to the Effective Date, whose election or
nomination for election was approved by a vote of at least two-thirds of the
Incumbent Directors then on the Board (either by a specific vote or by approval
of the proxy statement of the Company in which such person is named as a nominee
for director, without written objection to such nomination) will be an Incumbent
Director;
provided
that
no individual
initially elected or nominated as a director of the Company as a result of an
actual or threatened election contest with respect to directors or as a result
of any other actual or threatened solicitation of proxies or consents by or on
behalf of any person other than the Board will be deemed to be an Incumbent
Director;
(B)
Any
“person” (as such term is defined in Section 3(a)(9) of the Securities Exchange
Act of 1934, as amended (the “
Exchange Act
”) and as used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company’s then outstanding securities eligible to
vote for the election of the Board (the “
Company Voting Securities
”);
provided
that
the event described in
this paragraph (B) will not be deemed to be a Change in Control by virtue of any
of the following acquisitions: (i) by the Company or any Subsidiary,
(ii) by any employee benefit plan (or related trust) sponsored or maintained by
the Company or any Subsidiary, (iii) by any underwriter temporarily holding
securities pursuant to an offering of such securities, (iv) pursuant to a
Non-Qualifying Transaction (as defined in paragraph (C)), or (v) pursuant to any
acquisition by you or any group of persons including you (or any entity
controlled by you or any group of persons including you); or
(C)
The
consummation of a merger, consolidation, statutory share exchange, sale of all
or substantially all of the Company’s assets or deposits, a plan of liquidation
or dissolution of the Company or similar form of corporate transaction involving
the Company or any of its Subsidiaries that requires the approval of the
Company’s stockholders, whether for such transaction or the issuance of
securities in the transaction (a “
Business Transaction
”),
unless immediately following such Business Transaction: (i) more than
50%
of
the total voting power of (x) the corporation resulting from such Business
Transaction (the “
Surviving
Corporation
”), or (y) if applicable, the ultimate parent corporation that
directly or indirectly has beneficial ownership of at least 95% of the voting
securities eligible to elect directors of the Surviving Corporation (the “
Parent Corporation
”), is
represented by Company Voting Securities that were outstanding immediately
before such Business Transaction (or, if applicable, is represented by shares
into which such Company Voting Securities were converted pursuant to such
Business Transaction), and such voting power among the holders thereof is in
substantially the same proportion as the voting power of such Company Voting
Securities among the holders thereof immediately before the Business
Transaction, (ii) no person (other than any employee benefit plan (or related
trust) sponsored or maintained by the Surviving Corporation or the Parent
Corporation),
is
or becomes the beneficial
owner,
directly or indirectly, of 25% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
and (iii) at least half of the members of the board of directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
following the consummation of the Business Transaction were Incumbent Directors
at the time of the Board’s approval of the execution of the initial agreement
providing for such Business Transaction
(any
Business Transaction which satisfies all of the criteria specified in (i), (ii)
and (iii) above will be deemed to be a “
Non-Qualifying
Transaction
”).
Notwithstanding
the foregoing, a Change in Control of the Company will not be deemed to occur
solely because any person acquires beneficial ownership of more than 25% of the
Company Voting Securities as a result of the acquisition of Company Voting
Securities by the Company which reduces the number of Company Voting Securities
outstanding;
provided
that
if after such
acquisition by the Company such person becomes the beneficial owner of
additional Company Voting Securities that increases the percentage of
outstanding Company Voting Securities beneficially owned by such person, a
Change in Control of the Company will then occur.
(3)
“
Good Reason
” means any of the
following:
(A)
Any
material and adverse change in your position from the position you held
immediately before the Change in Control (including by reason of removal or
failure to be elected or re-elected);
(B)
Any
material and adverse reduction in your authority, responsibilities and reporting
relationships within the Company as they existed at immediately before the
Change in Control (including assigning you duties materially inconsistent with
your position and responsibilities);
(C)
Any
reduction in your rate of annual base salary as in effect immediately before the
Change in Control with the Company that is material;
(D)
Any
reduction in your annual target bonus opportunity or long-term compensation
opportunity (including any adverse change in the formula for earning annual
bonuses or long-term compensation) as in effect immediately before the Change in
Control, if in the aggregate such reduction is material;
(E)
Any
reduction in the other employee, welfare and/or fringe benefits provided to you
immediately before Change in Control (including any increase in the cost of the
benefit that you are required to pay or contribute to), if in the aggregate
(taking into account other employee, welfare and/or fringe benefits offered to
you following the Change in Control), such reduction is material;
(F)
Any
failure by the Company to comply with Section 9(c); or
(G)
Requiring
you to be principally based at any office or location more than 30 miles from
the location of your office immediately before the Change in Control (it will
not, however, be Good Reason for the Company to require you to travel on
business to an extent consistent with your travel obligations existing before
the Change in Control).
To
terminate your employment “for Good Reason”, Good Reason must have occurred and
you must comply with Section 3(c) of this Agreement.
However
, (i) Good Reason will
not include any isolated, insubstantial and inadvertent failure by the Company
that is not in bad faith and is cured within 30 days on your giving the Company
notice of such event, (ii) if you do not give notice to the Company within 90
days after you have knowledge that an event constituting Good Reason has
occurred, the event will no longer constitute Good Reason, and (iii) an event
will not constitute Good Reason if you have consented to it in accordance with
Section 11(f).
(c)
Termination
Notice
.
(1)
To
terminate your employment, either you or the Company must provide a Termination
Notice to the other. A “
Termination Notice
” is a
written notice that states the specific provision of this Agreement on which
termination is based, including, if applicable, the specific clause of the
definition of Cause or Good Reason and a reasonably detailed description of the
facts that permit termination under that clause. (The failure to
include any fact in a Termination Notice that contributes to a showing of Cause
or Good Reason does not preclude either party from asserting that fact in
enforcing its rights under this Agreement).
(2)
The date
your employment terminates is the “
Termination
Date
”. If your employment is terminated by the Company other
than for Disability or death or you terminate your employment for Good Reason,
your Termination Date will be the date specified in the Termination
Notice. If you terminate your employment without Good Reason, your
Termination Date will be 60 days after the Company receives the Termination
Notice (although the Company may accelerate your Termination Date by providing
you with notice). If your employment is terminated by reason of your
death or Disability, your employment will end on the date of death or the
Disability Effective Date, as applicable.
4.
The Company’s
Obligations in Connection With A Qualifying Termination.
(a)
If
a Qualifying Termination occurs
:
(1)
Accrued
Compensation
. The Company will pay you the following as of the
end of your employment:
(A)
your
unpaid salary
(B)
your
salary for any accrued but unused vacation and
(C)
any
accrued expense reimbursements (together, your “
Accrued
Compensation
”). In addition, the Company will timely pay you
any other amounts and provide you any benefits that are required, or to which
you are entitled (in each case as an active employee for any period before the
effectiveness of termination of your employment and as a terminated employee
after effectiveness), under any plan or contract of the Company or the Group
(together, the “
Other Accrued
Benefits
”).
(2)
Accrued
Bonus
. The Company will pay you your Accrued
Bonus. Your “
Accrued Bonus
” means the sum
of
(A)
any
unpaid but vested bonus for the fiscal year ending before the Termination Notice
is given and
(B)
any
excess of (i) the average of the bonuses you earned for the three fiscal years
ending before the year in which the Termination Notice is given
multiplied by
the number of
days of your employment since the fiscal year ending before Termination Notice
is given
divided by
365
over
(ii) any bonus
paid to you for a fiscal year ending after Termination Notice is
given.
(3)
Cash Severance
. The
Company will pay you a lump-sum cash payment equal to (A) the sum of (i) your
salary and (ii) the average of the bonuses you earned for the three fiscal years
ending before the year in which the Termination Notice is given
multiplied by
(B)
three.
(4)
Accelerated
Vesting
. All stock options issued by the Group to you will
vest and become immediately exercisable, and will remain exercisable for at
least 12 months after the end of your employment (or, if earlier, until they
would have expired but for your termination). All restricted stock
and other equity-based compensation awarded by the Group to you will vest and
become immediately payable. The benefits in this Section 4(a)(4) are
referred to as “
Accelerated
Vesting
”.
(b)
For Cause or without Good
Reason.
If the Company terminates your employment for Cause
after a Change in Control or you terminate your employment without Good Reason
after a Change in Control, the Company will pay you your Accrued Compensation
and will provide you your Other Accrued Benefits.
(c)
Death or Disability
If your employment
terminates as a result of your death or Disability, each occurring after the
time of a Change in Control, you will be entitled to Accelerated Vesting and the
Company will pay you your Accrued Compensation and Accrued Bonus and will
provide your Other Accrued Benefits. “
Disability
” means that you
(A) are unable to engage in substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or can be expected to last for a continuous period of not less
than 12 months, or (B) you are, by reason of any medically determinable physical
or mental impairment which can be expected to last for a continuous period of
not less than 12 months, receiving income replacement benefits for a period of
not less than three months under an accident and health plan covering the
Company’s employees. If the Company determines in good faith that
your Disability has occurred, it may give you Termination Notice. If
within 30 days of Termination Notice, you do not return to full-time performance
of your responsibilities, your employment will terminate (the “
Disability Effective
Date
”). If you do return to full-time performance in that
30-day period, the Termination Notice will be cancelled. Except as
provided in Section 3(c), any incapacity due to mental or physical illness or
injury will not affect the Company’s obligations under this
Agreement.
(d)
Form
and Time of Payment.
(1)
The cash
amounts provided for in this Section 4 will be paid in a single lump-sum payment
on the regularly scheduled payroll day immediately following the 15
th
day
after your Termination Date (but in no event later than March 15
th
following the calendar year in which occurs the later of the time the legally
binding right to the payment arises or the time such right first ceases to be
subject to a substantial risk of forfeiture). It is intended that
these payments constitute short-term deferred compensation within the meaning of
the applicable Treasury regulations pursuant to Section 409A of the
Code. Notwithstanding the preceding two sentences, if you are a
“specified employee” at the time you separate from service with Company and any
payment or benefit under Section 4 is determined to constitute non-qualified
deferred compensation, payment of any amounts pursuant to Section 4 will be made
or such benefit will be provided on the date that is six months after your
separation from service with the Company, all as determined in accordance with
Section 409A of the Code.
(2)
Except as
otherwise expressly provided herein, to the extent any reimbursement under this
Agreement is determined to be subject to Section 409A of the Code, the amount of
any such expenses eligible for reimbursement in one calendar year will not
affect the expenses eligible for reimbursement in any other taxable year, in no
event will any reimbursements be paid after the last day of the calendar year
following the calendar year in which you incurred such expenses, and in no event
will any right to reimbursement be subject to liquidation or exchange for
another benefit.
(e)
Condition.
The
payments and benefits stated in this Section 4 are conditioned upon your signing
(and failing to revoke during any applicable revocation period), within 55 days
following termination of your employment, a general release (substantially in
the form attached as Exhibit A)
in which you release
all claims that you may have against any member of the Group and any of their
respective past or present officers, directors, employees or agents other than
your rights under this Agreement, your rights under any Other Accrued Benefits,
and your rights to indemnification and continued liability insurance coverage
(under this Agreement or otherwise).
(f)
Resignation from Directorships and
Officerships.
Unless the Group waives this requirement, the
termination of your employment for any reason will constitute your resignation
from (1) any director, officer or employee position you then have with any
member of the Group and (2) all fiduciary positions (including as trustee) you
hold with respect to any pension plans or trusts established by any member of
the Group. You agree that this Agreement will serve as your written
notice of resignation in this circumstance.
5.
Limitation
on Payments by the Company.
(a)
Notwithstanding
anything in this Agreement to the contrary, if it is determined that any
payment, award, benefit or distribution (or any acceleration of any payment,
award, benefit or distribution) by the Company (or any of its affiliated
entities) or any entity which effectuates a Change in Control (or any of its
affiliated entities) to or for your benefit (whether pursuant to the terms of
this Agreement or otherwise) (the “
Payments
”) would be subject
to the excise tax (the “
Excise
Tax
”) under Section 4999 of the Code, then the amounts payable to you
under this Agreement will be reduced (reducing first the payments under Section
4(a)(3)) to the maximum amount as will result in no portion of the Payments
being subject to such excise tax (the “
Safe Harbor
Cap
”).
(b)
All
determinations required to be made under this Section 5 will be made by the
public accounting firm that is retained by the Company as of the date
immediately before the Change in Control (the “
Accounting Firm
”) which will
provide detailed supporting calculations both to the Company and you within 15
business days of the receipt of notice from the Company or you that there has
been a Payment, or such earlier time as is requested by the
Company. Notwithstanding the foregoing, if (i) the Board will
determine before the Change in Control that the Accounting Firm is precluded
from performing such services under applicable auditor independence rules or
(ii) the Audit Committee of the Board determines that it does not want the
Accounting Firm to perform such services because of auditor independence
concerns or (iii) the Accounting Firm is serving as accountant or auditor for
the individual, entity or group effecting the Change in Control, the Board will
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm will then be referred
to as the Accounting Firm hereunder). If payments are reduced to the
Safe Harbor Cap, the Accounting Firm will provide a reasonable opinion to you
that you are not required to report any Excise Tax on your federal income tax
return. All fees, costs and expenses (including, but not limited to,
the costs of retaining experts) of the Accounting Firm will be borne by the
Company. If the Accounting Firm determines that no Excise Tax is
payable by you, it will furnish you with a written opinion to such effect, and
to the effect that failure to report the Excise Tax, if any, on your applicable
federal income tax return will not result in the imposition of a negligence or
similar penalty. If the Accounting Firm determines that the Payments
will be reduced to the Safe Harbor Cap, it will furnish you with a written
opinion to such effect. The determination by the Accounting Firm will
be binding upon the Company and you (except as provided in Section
5(c)).
(c)
If it is
established pursuant to a final determination of a court or the Internal Revenue
Service (the “
IRS
”)
proceeding which has been finally and conclusively resolved, that Payments have
been made to, or provided for your benefit by the Company, which are in excess
of the limitations provided in this Section 5 (hereinafter referred to as an
“
Excess
Payment
”), such Excess
Payment will be deemed for all purposes to be a loan to you made on the date you
received the Excess Payment and you will repay the Excess Payment to the Company
on demand, together with interest on the Excess Payment at the applicable
federal rate (as defined in Section 1274(d) of the Code) from the date of your
receipt of such Excess Payment until the date of such repayment. As a
result of the uncertainty in the application of Section 4999 of the Code at the
time of the determination, it is possible that Payments which will not have been
made by the Company should have been made (an “
Underpayment
”), consistent
with the calculations required to be made under this Section 5. In
the event that it is determined (i) by the Accounting Firm, the Company (which
will include the position taken by the Company, or together with its
consolidated group, on its federal income tax return) or the IRS or (ii)
pursuant to a determination by a court, that an Underpayment has occurred, the
Company will pay you an amount equal to such Underpayment within 10 days of such
determination together with interest on such amount at the applicable federal
rate from the date such amount would have been paid to you until the date of
payment. You will cooperate, to the extent your expenses are
reimbursed by the Company, with any reasonable requests by the Company in
connection with any contests or disputes with the IRS in connection with the
Excise Tax or the determination of the Excess
Payment. Notwithstanding the foregoing, if amounts payable under this
Agreement were reduced pursuant to Section 5(a) and the value in stock options
is subsequently redetermined by the Accounting Firm within the context of
Treasury Regulation §1.280G-1 Q/A 33 that reduces the value of the Payments
attributable to such options, the Company will promptly pay to you within 10
days of such determination together with interest on such amount at the
applicable federal rate from the date such amount would have been paid to you
until the date of payment, any amounts payable under this Agreement that were
not previously paid solely as a result of Section 5(a) up to the Safe Harbor
Cap.
6.
Proprietary
Information
.
(a)
Definition. “Proprietary
Information”
means confidential or proprietary information, knowledge or
data concerning (1) the Group’s businesses, strategies, operations, financial
affairs, organizational matters, personnel matters, budgets, business plans,
marketing plans, studies, policies, procedures, products, ideas, processes,
software systems, trade secrets and technical know-how, and other information
regarding the business of the Group and (2) any matter relating to clients of
the Group or other third parties having relationships with the
Group. Proprietary Information may include information furnished to
you orally or in writing (whatever the form or storage medium) or gathered by
inspection, in each case before or after the date of this
Agreement. However, Proprietary Information does not include
information (1) that was or becomes generally available to you on a
non-confidential basis, if the source of this information was not reasonably
known to you to be bound by a duty of confidentiality, (2) that was or becomes
generally available to the public or within the relevant trade or industry,
other than as a result of a disclosure by you, directly or indirectly, or (3)
that was independently developed by you without reference to any Proprietary
Information.
(b)
Use and
Disclosure.
You will obtain or create Proprietary Information
in the course of your involvement in the Group’s activities and may already have
Proprietary Information. You agree that the Proprietary Information
is the Group’s exclusive property, and that, during your employment, you will
use and disclose Proprietary Information only for the Group’s benefit and in
accordance with any restrictions placed on its use or disclosure by the
Group. After your employment, you will not use or disclose any
Proprietary Information. Notwithstanding anything to the contrary in
this Section 6, Proprietary Information may be disclosed when required by law or
by any court, arbitrator, mediator or administrative or legislative body
(including any committee thereof),
provided that
(1) you will
request confidential treatment with respect to such information and/or request
matters with respect to such information be sealed and (2) you will disclose the
minimum amount required.
(c)
Limitations.
Nothing
in this Agreement prohibits you or the Group from providing truthful testimony
to governmental, regulatory or self-regulatory authorities.
7.
On-going Restrictions on Your
Activities
.
(a)
Terms used.
This
Section uses the following defined terms:
(1)
“
Client
” means any client of
the Company to whom you provided services, for whom you transacted business, or
whose identity became known to you in connection with your employment by the
Group.
(2)
“
Competitive Enterprise
” means
(1) any business enterprise operating a banking facility in the markets in which
the Group conducts business at the time of your Qualifying Termination,
including but not limited to Bank of Hawaii, First Hawaiian Bank, American
Savings Bank, Finance Factors, Hawaii National Bank and Territorial Savings Bank
and any successors thereto or (2) any business enterprise that holds a 25% or
greater equity, voting or profit participation interest in any of the
preceding.
(3)
“
Solicit
”
means any
communication, regardless of who initiates it, that invites, advises, encourages
or requests any person to take or refrain from taking any action.
(4)
“
Restriction Period
” means the
period beginning on the earlier of (A) a Change in Control or (B) your
Qualifying Termination and ending on either (i) the termination of this
Agreement if your employment terminates after the termination of this Agreement
or (ii) the
second
anniversary
of
the termination of your employment if your employment terminates during the term
of this Agreement. For the avoidance of doubt, the provisions of this Section 7
will not apply to you unless either a Qualifying Termination occurs or you
terminate your employment following a Change in Control and during the term of
this Agreement.
(b)
Your Importance to the Group and the
Effect of this Section 7.
You acknowledge that, in the course
of your involvement in the Group’s activities, you will have access to
Proprietary Information and the Group’s client base and will yourself profit
from the goodwill associated with the Group. On the other hand, in
view of your access to Proprietary Information and your importance to the Group,
if you compete with the Group for some time after your employment, the Group
will likely suffer significant harm but the amount of loss would be uncertain
and not readily ascertainable. You understand that this Section 7
will limit your ability to earn a livelihood in a Competitive Enterprise but you
have determined that your complying with this Section 7 will not result in
severe economic hardship for you or your family. For the avoidance of doubt, the
provisions of this Section 7 will not limit in any way (i) any fiduciary or
similar duty you may have to the Group or (ii) any other non-competition and/or
non-solicitation agreements you may have with (or other such obligations you may
have to) the Group.
(c)
Non-Competition.
If
a Qualifying Termination occurs, you agree that you will not, directly or
indirectly, during your Restriction Period:
(1)
hold a 5%
or greater equity, voting or profit participation interest in a Competitive
Enterprise; or
(2)
associate
(including as a director, officer, employee, partner, consultant, agent or
advisor) with a Competitive Enterprise and in connection with your association
engage in Hawaii, or directly or indirectly manage or supervise personnel
engaged in Hawaii, in any activity:
(A)
that is
substantially similar to any activity that you were engaged in;
(B)
that
calls for the application of specialized knowledge or skills substantially
similar to those used by you in your activities; or
(C)
that is
substantially similar to any activity for which you had direct or indirect
managerial or supervisory responsibility;
in each case
, for the
Group at any time during the year before the end of your
employment.
(d)
Non-Solicitation of
Clients.
If a Qualifying Termination occurs, you agree that
you will not, directly or indirectly, during your Restriction Period, Solicit
any Client to transact business with a Competitive Enterprise or to reduce or
refrain from doing any business with the Group.
(e)
Non-Solicitation of Group
Employees.
During your Restriction Period, you will not,
directly or indirectly, Solicit anyone who is then an employee of the Group (or
who was an employee of the Group within the prior six months) to resign from the
Group or to apply for or accept employment with any Competitive
Enterprise.
(f)
Notice to New
Employers.
Before you either apply for or accept employment
with any other person or entity while any of Section 7(c), 7(d) or 7(e) is in
effect, you will provide the prospective employer with written notice of the
provisions of this Section 7 and will deliver a copy of the notice to the
Group.
(g)
No
Disparagement.
You will make no public statement that would
libel, slander or disparage any member of the Group or any of their respective
past or present officers, directors, employees or agents. The Company
agrees that it will (and will use good faith efforts to cause the Chief
Executive Officer of the Company, the Board, and its officers and employees to)
make no public statement that would libel, slander or disparage
you.
(h)
Survival.
Any
termination of your employment (or breach of this Agreement by you or the Group)
will have no effect on the continuing operation of this Section 7.
8.
Effect
on Other Agreements; Entire Agreement.
This
Agreement is the entire agreement between you and the Company with respect to
the subject matter contemplated by this Agreement and supersedes any earlier
agreement, written or oral, with respect to the subject matter of this
Agreement, including, but not limited to, your Employment Agreement with the
Company dated January 1, 2003. You agree that you are not entitled to
any severance, change-in-control or similar rights under any other plan of the
Group. In entering into this Agreement, no party has relied on or
made any representation, warranty, inducement, promise or understanding that is
not in this Agreement.
9.
Successors.
(a)
Payments on Your
Death.
If you die and any amounts become payable under this
Agreement, the Company will pay those amounts to your estate.
(b)
Assignment by You.
You may not assign this
Agreement without the Company’s consent. Also, except as required by
law, your right to receive payments or benefits under this Agreement may not be
subject to execution, attachment, levy or similar process. Any
attempt to effect any of the preceding in violation of this Section 9(b),
whether voluntary or involuntary, will be void.
(c)
Assumption by any Surviving
Company.
The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place. As used in this Agreement, “Company” will mean the Company as
hereinbefore defined and any successor to all or substantially all of its
business or assets.
10.
Disputes.
(a)
Applicable
Matter.
This Section 10 applies to any controversy or claim
between you and the Group arising out of or relating to or concerning any aspect
of this Agreement (an “
Applicable
Matter
”).
(b)
Mandatory
Arbitration
. Subject to the provisions of this Section 10, any
Applicable Matter will be finally settled by arbitration in Honolulu, Hawaii
administered by the American Arbitration Association under its Commercial
Arbitration Rules then in effect.
However, the rules will be
modified in the following ways:
(1)
each
arbitrator will agree to treat as confidential evidence and other information
presented to the same extent as the information is required to be kept
confidential under Section 6,
(2)
the
optional Rules for Emergency Measures of Protections will apply,
(3)
you
and the Group agree not to request any amendment or modification to the terms of
this Agreement except as provided in Section 11(h),
(4)
a
decision must be rendered within 10 business days of the parties’ closing
statements or submission of post-hearing briefs and
(5)
the arbitration will be conducted before a panel of three
arbitrators, one selected by you within 10 days of the commencement of
arbitration, one selected by the Company in the same period and the third
selected jointly by these arbitrators (or, if they are unable to agree on an
arbitrator within 30 days of the commencement of arbitration, the third
arbitrator will be appointed by the American Arbitration Association;
provided
that
the arbitrator will be a
partner or former partner at a nationally recognized law firm.
(c)
Limitation on
Damages.
You
and the Group agree that there will be no punitive damages payable as a result
of any Applicable Matter and agree not to request punitive
damages.
(d)
Injunctions and Enforcement of
Arbitration Awards
. You or the Group may bring an action or
special proceeding in a state or federal court of competent jurisdiction sitting
in Honolulu, Hawaii to enforce any arbitration award under Section
10(b). Also, the Group may bring such an action or proceeding, in
addition to its rights under Section 10(b) and whether or not an arbitration
proceeding has been or is ever initiated, to temporarily, preliminarily or
permanently enforce any part of Sections 6 and 7. You agree that
(1)
your
violating any part of Sections 6 and 7 would cause damage to the Group that
cannot be measured or repaired,
(2)
the
Group therefore is entitled to an injunction, restraining order or other
equitable relief restraining any actual or threatened violation of those
Sections,
(3)
no
bond will need to be posted for the Group to receive such an injunction, order
or other relief and
(4)
no
proof will be required that monetary damages for violations of those Sections
would be difficult to calculate and that remedies at law would be
inadequate
.
(e)
Jurisdiction and
Choice of Forum
. You and the Group irrevocably submit to the
exclusive jurisdiction of any state or federal court located in Honolulu, Hawaii
(the “
Forum
”)
over any Applicable Matter that is not otherwise arbitrated or resolved
according to Section 10(b).
This includes any action or
proceeding to compel arbitration or to enforce an arbitration
award. Both you and the Group
(1)
acknowledge
that the Forum has a reasonable relation to this Agreement and to the
relationship between you and the Group and that the submission to the Forum will
apply even if the forum chooses to apply non-Forum law,
(2)
waive,
to the extent permitted by law, any objection to personal jurisdiction or to the
laying of venue of any action or proceeding covered by this Section 10(e) in the
Forum,
(3)
agree
not to commence any such action or proceeding in any forum other than the Forum
and
(4)
ag
ree
that, to the extent permitted by law, a final and non-appealable judgment in any
such action or proceeding in any such court will be conclusive and binding on
you and the Group. However, nothing in this Agreement precludes you
or the Group from bringing any action or proceeding in any court for the purpose
of enforcing the provisions of Sections 10(b) and this 10(e)
.
(f)
Waiver of Jury
Trial.
To the extent permitted by law, you and the Group waive
any and all rights to a jury trial with respect to any Applicable
Matter.
(g)
Governing
Law.
This Agreement will be governed by and construed in
accordance with the laws of the State of Hawaii applicable to contracts made and
to be performed entirely within that State.
(h)
Costs.
The Company will pay or
reimburse any reasonable expenses, including reasonable attorney’s fees, you
incur as a result of any Applicable Matter, provided that you substantially
prevail in the Applicable Matter.
(i)
Interest.
If the
Company fails to pay when due any amount required by the Agreement, it will pay
interest on such amount at a rate equal to its prime commercial lending
rate.
(j)
Survival.
For the
avoidance of doubt, any termination of your employment (or breach of this
Agreement by you or the Group) will have no effect on the continuing operation
of this Section 10.
11.
General
Provisions.
(a)
Construction.
(1)
References
(A)
to
Sections
are to
sections of this Agreement unless otherwise stated
;
(B)
to
any
contract
(including
this Agreement) are to the contract as amended, modified, supplemented or
replaced from time to time
;
(C)
to
any
statute,
rule
or
regulation
are to the
statute, rule or regulation as amended, modified, supplemented or replaced from
time to time (and, in the case of statutes, include any rules and regulations
promulgated under the statute) and to any
section of any
statute,
rule or
regulation
include any successor to the section
;
(D)
to
any g
overnmental
authority
include any successor to the governmental authority
;
(E)
to
any
plan
include any
programs, practices and policies
;
(F)
to
any
entity
include any
corporation, limited liability company, partnership, association, business trust
and similar organization and include any governmental authority;
and
(G)
to
any
affiliate
of any
entity are to any person or other entity directly or indirectly controlling,
controlled by or under common control with the first entity.
(2)
The
various
headings
in
this Agreement are for convenience of reference only and in no way define, limit
or describe the scope or intent of any provisions or Sections of this
Agreement.
(3)
Unless
the context requires otherwise,
(A)
words
describing the singular number include the plural and
vice versa
,
(B)
words
denoting any gender include all genders
and
(C)
the
words “
include
”, “
includes
”
and “
including
” will be deemed to
be followed by the words “without limitation”.
(4)
It is
your and the Group’s intention that this Agreement not be construed more
strictly with regard to you or the Group.
(b)
Withholding.
You and the
Group will treat all payments to you under this Agreement as compensation for
services. Accordingly, the Group may withhold from any payment any
taxes that are required to be withheld under any law, rule or
regulation. Any amounts so withheld will be timely and properly
remitted by the Company to the appropriate taxing authority.
(c)
Severability.
If any provision of
this Agreement (or if the application of any provision to a person or particular
circumstances) is found by any court of competent jurisdiction (or legally
empowered agency) to be illegal, invalid or unenforceable for any reason,
then
(1)
the
provision will be amended automatically to the minimum extent necessary to cure
the illegality or invalidity and permit enforcement and
(2)
the
remainder of this Agreement will not be affected. In particular, if
any provision of Section 7 is so found to violate law or be unenforceable
because it applies for longer than a maximum permitted period or to greater than
a maximum permitted area, it will be automatically amended to apply for the
maximum permitted period and maximum permitted area.
(d)
No Set-off or
Mitigation/Etc.
Your and the Company’s respective obligations
under this Agreement will not be affected by any set-off, counterclaim,
recoupment or other right you or any member of the Group may have against each
other or anyone else (except as provided in Section 7). You do not
need to seek other employment or take any other action to mitigate any amounts
owed to you under this Agreement, and those amounts will not be reduced if you
do obtain other employment (except as this Agreement specifically
states).
(e)
Bank Regulatory
Limitation.
If any payment or benefit under this Agreement
would otherwise be a golden parachute payment within the meaning of Section
18(k) of the Federal Deposit Insurance Act (a “
Golden Parachute Payment
”)
that is prohibited by applicable law, then the total payments and benefit will
be reduced to the greatest amount that could be made to you without there being
a Golden Parachute Payment. The Company will give you the opportunity
to select the order in which payments or benefits are reduced. To the
extent reasonably practicable, the Company will seek the approval of the Federal
Deposit Insurance Corporation and/or the State of Hawaii Division of Financial
Institutions and any other bank regulatory body, as necessary, to make any
payment to you under this Agreement that would otherwise constitute a Golden
Parachute Payment.
(f)
Notices.
All notices, requests,
demands, consents and other communications under this Agreement must be in
writing and will be deemed given
(1)
on
the business day sent, when delivered by hand or facsimile transmission (with
confirmation) during normal business hours,
(2)
on
the business day after the business day sent, if delivered by a nationally
recognized overnight courier or
(3)
on
the third business day after the business day sent if delivered by registered or
certified mail, return receipt requested, in each case to the following address
or number (or to such other addresses or numbers as may be specified by notice
that conforms to this Section 11(f)):
If to
you, to the address on record with the Company, and
If to the
Company or any other member of the Group, to:
Central
Pacific Financial Corp.
220 South
King Street
Honolulu,
Hawaii 96813
Attention: Glenn
K.C. Ching
Facsimile: (808)
544-6835
with a
copy to:
Sullivan
& Cromwell LLP
125 Broad
Street
New York,
New York 10004
Attention: Marc
Trevino
Facsimile: 212-558-3588
(g)
Consideration.
This
Agreement is entered in consideration of the mutual covenants contained in this
Agreement. You and the Group acknowledge the receipt and sufficiency
of the consideration to this Agreement and intend this Agreement to be legally
binding.
(h)
Amendments and
Waivers.
Any provision of this Agreement may be amended or
waived but only if the amendment or waiver is in writing and signed, in the case
of an amendment, by you and the Company or, in the case of a waiver, by the
party that would have benefited from the provision waived. Except as
this Agreement otherwise provides, no failure or delay by you or the Group to
exercise any right or remedy under this Agreement will operate as a waiver, and
no partial exercise of any right or remedy will preclude any further
exercise.
(i)
Third Party Beneficiaries.
Subject to Section 9, this Agreement will be binding on, inure to the
benefit of and be enforceable by the parties and their respective heirs,
personal representatives, successors and assigns. This Agreement does
not confer any rights, remedies, obligations or liabilities to any entity or
person other than you and the Company and your and the Company’s permitted
successors and assigns, although this Agreement will inure to the benefit of,
and confer related rights and remedies on, the Group.
(j)
Counterparts.
This Agreement
may be executed as counterparts, each of which will constitute an original and
all of which, when taken together, will constitute one agreement.
* * *
Please
confirm your acceptance of the terms and conditions of your employment with the
Company by signing where indicated below.
Very
truly yours,
/s/ Ronald K.
Migita
Chairman
of the Board
Accepted
and Agreed:
/s/ Denis K.
Isono
Date:
March 21, 2008
Exhibit
10.26
March 11,
2008
Curtis
Chinn
1228A
16
th
Avenue
Honolulu,
HI 96816
Re:
Change in Control Severance
Agreement
Dear
Curtis:
This is
your
Change in
Control Severance Agreement
(the “
Agreement
”) with Central
Pacific Financial Corp., a Hawaii corporation (the “
Company
”) and its affiliates
(together, as constituted from time to time, the “
Group
”).
1.
Purpose and
Effectiveness
.
(a)
Purpose
.
This Company desires to
provide you with protection if there is a future Change in Control of the
Company (as defined below). You should review this Agreement
carefully for the terms and conditions that will apply.
(b)
Effectiveness
. If
you agree to the terms and conditions of this Agreement, please execute and
return a copy of this Agreement to the Company. This Agreement will
become effective upon execution by both you and the Company (the “
Effective
Date
”).
2.
Term of This
Agreement
.
The term
of this Agreement will begin on the Effective Date and will end on the second
anniversary of the Effective Date. However, the term of this
Agreement will be automatically extended for one additional year beginning on
the second anniversary of the Effective Date and on each subsequent anniversary,
unless the Company gives you written notice, 60 days before such anniversary, of
its determination not to extend this Agreement. In addition, (1) if
there is a Change in Control during the term of this Agreement, the term of this
Agreement will automatically extend to the second anniversary of the Change in
Control and will automatically terminate on such anniversary and (2) if the
Company gives notice of its intention not to extend this Agreement in
anticipation of a Change in Control or at the request of a third party who had
indicated an intention or taken steps reasonably calculated to effect a Change
in Control and such Change in Control (or an alternative or competing Change in
Control) actually occurs within 6 months of the purported end of the term of
this Agreement, the Agreement will be deemed not to have been terminated and its
term will be automatically extended as set forth in clause (1) of this
sentence.
3.
Termination
of Your
Employment
Following
Change in Control
.
(a)
Qualifying Termination
.
Upon a
Qualifying Termination, you will be eligible for the payments and benefits set
forth in Section 4 below. A
“Qualifying Termination”
means, within the two years following the time when a Change in Control
occurs (1) the Company terminates your employment without Cause or (2) you
terminate your employment for Good Reason.
(b)
Definitions Used in This
Section
:
(1)
“
Cause
” means any of the
following:
(A)
Your
willful failure to perform substantially the responsibilities of your position,
after
demand for
substantial performance has been given by the Company’s Chief Executive Officer
that specifically identifies how you have not substantially performed your
responsibilities;
(B)
Your
conviction of any felony or of a misdemeanor involving fraud, dishonesty, or
moral turpitude;
(C)
Your
willful or intentional material misconduct in the performance of the duties of
your position that results in financial or reputational detriment to the Group
that is not
de
minimis
;
(D)
Your
material breach of the Group’s Code of Business Conduct and Ethics if the breach
is of a nature for which other similarly situated executives of the Group would
be terminated; or
(E)
Your
willful attempt to obstruct or willful failure to cooperate with any
investigation authorized by the Board of Directors (the “
Board
”) or any governmental
or self-regulatory entity.
To
terminate your employment “for Cause,” Cause must have occurred and the Company
must comply with Section 3(c) of this Agreement.
(2)
“
Change in Control
”
means
any of the following:
(A)
Individuals
who, on the Effective Date, constitute the Board (the
“Incumbent Directors
”) cease
for any reason to constitute at least half of the Board,
provided that
any person
becoming a director subsequent to the Effective Date, whose election or
nomination for election was approved by a vote of at least two-thirds of the
Incumbent Directors then on the Board (either by a specific vote or by approval
of the proxy statement of the Company in which such person is named as a nominee
for director, without written objection to such nomination) will be an Incumbent
Director;
provided
that
no individual
initially elected or nominated as a director of the Company as a result of an
actual or threatened election contest with respect to directors or as a result
of any other actual or threatened solicitation of proxies or consents by or on
behalf of any person other than the Board will be deemed to be an Incumbent
Director;
(B)
Any
“person” (as such term is defined in Section 3(a)(9) of the Securities Exchange
Act of 1934, as amended (the “
Exchange Act
”) and as used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company’s then outstanding securities eligible to
vote for the election of the Board (the “
Company Voting Securities
”);
provided
that
the event described in
this paragraph (B) will not be deemed to be a Change in Control by virtue of any
of the following acquisitions: (i) by the Company or any Subsidiary,
(ii) by any employee benefit plan (or related trust) sponsored or maintained by
the Company or any Subsidiary, (iii) by any underwriter temporarily holding
securities pursuant to an offering of such securities, (iv) pursuant to a
Non-Qualifying Transaction (as defined in paragraph (C)), or (v) pursuant to any
acquisition by you or any group of persons including you (or any entity
controlled by you or any group of persons including you); or
(C)
The
consummation of a merger, consolidation, statutory share exchange, sale of all
or substantially all of the Company’s assets or deposits, a plan of liquidation
or dissolution of the Company or similar form of corporate transaction involving
the Company or any of its Subsidiaries that requires the approval of the
Company’s stockholders, whether for such transaction or the issuance of
securities in the transaction (a “
Business Transaction
”),
unless immediately following such Business Transaction: (i) more than
50%
of
the total voting power of (x) the corporation resulting from such Business
Transaction (the “
Surviving
Corporation
”), or (y) if applicable, the ultimate parent corporation that
directly or indirectly has beneficial ownership of at least 95% of the voting
securities eligible to elect directors of the Surviving Corporation (the “
Parent Corporation
”), is
represented by Company Voting Securities that were outstanding immediately
before such Business Transaction (or, if applicable, is represented by shares
into which such Company Voting Securities were converted pursuant to such
Business Transaction), and such voting power among the holders thereof is in
substantially the same proportion as the voting power of such Company Voting
Securities among the holders thereof immediately before the Business
Transaction, (ii) no person (other than any employee benefit plan (or related
trust) sponsored or maintained by the Surviving Corporation or the Parent
Corporation),
is
or becomes the beneficial
owner,
directly or indirectly, of 25% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
and (iii) at least half of the members of the board of directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
following the consummation of the Business Transaction were Incumbent Directors
at the time of the Board’s approval of the execution of the initial agreement
providing for such Business Transaction
(any
Business Transaction which satisfies all of the criteria specified in (i), (ii)
and (iii) above will be deemed to be a “
Non-Qualifying
Transaction
”).
Notwithstanding
the foregoing, a Change in Control of the Company will not be deemed to occur
solely because any person acquires beneficial ownership of more than 25% of the
Company Voting Securities as a result of the acquisition of Company Voting
Securities by the Company which reduces the number of Company Voting Securities
outstanding;
provided
that
if after such
acquisition by the Company such person becomes the beneficial owner of
additional Company Voting Securities that increases the percentage of
outstanding Company Voting Securities beneficially owned by such person, a
Change in Control of the Company will then occur.
(3)
“
Good Reason
” means any of the
following:
(A)
Any
material and adverse change in your position from the position you held
immediately before the Change in Control (including by reason of removal or
failure to be elected or re-elected);
(B)
Any
material and adverse reduction in your authority, responsibilities and reporting
relationships within the Company as they existed at immediately before the
Change in Control (including assigning you duties materially inconsistent with
your position and responsibilities);
(C)
Any
reduction in your rate of annual base salary as in effect immediately before the
Change in Control with the Company that is material;
(D)
Any
reduction in your annual target bonus opportunity or long-term compensation
opportunity (including any adverse change in the formula for earning annual
bonuses or long-term compensation) as in effect immediately before the Change in
Control, if in the aggregate such reduction is material;
(E)
Any
reduction in the other employee, welfare and/or fringe benefits provided to you
immediately before Change in Control (including any increase in the cost of the
benefit that you are required to pay or contribute to), if in the aggregate
(taking into account other employee, welfare and/or fringe benefits offered to
you following the Change in Control), such reduction is material;
(F)
Any
failure by the Company to comply with Section 9(c); or
(G)
Requiring
you to be principally based at any office or location more than 30 miles from
the location of your office immediately before the Change in Control (it will
not, however, be Good Reason for the Company to require you to travel on
business to an extent consistent with your travel obligations existing before
the Change in Control).
To
terminate your employment “for Good Reason”, Good Reason must have occurred and
you must comply with Section 3(c) of this Agreement.
However
, (i) Good Reason will
not include any isolated, insubstantial and inadvertent failure by the Company
that is not in bad faith and is cured within 30 days on your giving the Company
notice of such event, (ii) if you do not give notice to the Company within 90
days after you have knowledge that an event constituting Good Reason has
occurred, the event will no longer constitute Good Reason, and (iii) an event
will not constitute Good Reason if you have consented to it in accordance with
Section 11(f).
(c)
Termination
Notice
.
(1)
To
terminate your employment, either you or the Company must provide a Termination
Notice to the other. A “
Termination Notice
” is a
written notice that states the specific provision of this Agreement on which
termination is based, including, if applicable, the specific clause of the
definition of Cause or Good Reason and a reasonably detailed description of the
facts that permit termination under that clause. (The failure to
include any fact in a Termination Notice that contributes to a showing of Cause
or Good Reason does not preclude either party from asserting that fact in
enforcing its rights under this Agreement).
(2)
The date
your employment terminates is the “
Termination
Date
”. If your employment is terminated by the Company other
than for Disability or death or you terminate your employment for Good Reason,
your Termination Date will be the date specified in the Termination
Notice. If you terminate your employment without Good Reason, your
Termination Date will be 60 days after the Company receives the Termination
Notice (although the Company may accelerate your Termination Date by providing
you with notice). If your employment is terminated by reason of your
death or Disability, your employment will end on the date of death or the
Disability Effective Date, as applicable.
4.
The Company’s
Obligations in Connection With A Qualifying Termination.
(a)
If
a Qualifying Termination occurs
:
(1)
Accrued
Compensation
. The Company will pay you the following as of the
end of your employment:
(A)
your
unpaid salary
(B)
your
salary for any accrued but unused vacation and
(C)
any
accrued expense reimbursements (together, your “
Accrued
Compensation
”). In addition, the Company will timely pay you
any other amounts and provide you any benefits that are required, or to which
you are entitled (in each case as an active employee for any period before the
effectiveness of termination of your employment and as a terminated employee
after effectiveness), under any plan or contract of the Company or the Group
(together, the “
Other Accrued
Benefits
”).
(2)
Accrued
Bonus
. The Company will pay you your Accrued
Bonus. Your “
Accrued Bonus
” means the sum
of
(A)
any
unpaid but vested bonus for the fiscal year ending before the Termination Notice
is given and
(B)
any
excess of (i) the average of the bonuses you earned for the three fiscal years
ending before the year in which the Termination Notice is given
multiplied by
the number of
days of your employment since the fiscal year ending before Termination Notice
is given
divided by
365
over
(ii) any bonus
paid to you for a fiscal year ending after Termination Notice is
given.
(3)
Cash Severance
. The
Company will pay you a lump-sum cash payment equal to (A) the sum of (i) your
salary and (ii) the average of the bonuses you earned for the three fiscal years
ending before the year in which the Termination Notice is given
multiplied by
(B)
three.
(4)
Accelerated
Vesting
. All stock options issued by the Group to you will
vest and become immediately exercisable, and will remain exercisable for at
least 12 months after the end of your employment (or, if earlier, until they
would have expired but for your termination). All restricted stock
and other equity-based compensation awarded by the Group to you will vest and
become immediately payable. The benefits in this Section 4(a)(4) are
referred to as “
Accelerated
Vesting
”.
(b)
For Cause or without Good
Reason.
If the Company terminates your employment for Cause
after a Change in Control or you terminate your employment without Good Reason
after a Change in Control, the Company will pay you your Accrued Compensation
and will provide you your Other Accrued Benefits.
(c)
Death or Disability
If your employment
terminates as a result of your death or Disability, each occurring after the
time of a Change in Control, you will be entitled to Accelerated Vesting and the
Company will pay you your Accrued Compensation and Accrued Bonus and will
provide your Other Accrued Benefits. “
Disability
” means that you
(A) are unable to engage in substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or can be expected to last for a continuous period of not less
than 12 months, or (B) you are, by reason of any medically determinable physical
or mental impairment which can be expected to last for a continuous period of
not less than 12 months, receiving income replacement benefits for a period of
not less than three months under an accident and health plan covering the
Company’s employees. If the Company determines in good faith that
your Disability has occurred, it may give you Termination Notice. If
within 30 days of Termination Notice, you do not return to full-time performance
of your responsibilities, your employment will terminate (the “
Disability Effective
Date
”). If you do return to full-time performance in that
30-day period, the Termination Notice will be cancelled. Except as
provided in Section 3(c), any incapacity due to mental or physical illness or
injury will not affect the Company’s obligations under this
Agreement.
(d)
Form
and Time of Payment.
(1)
The cash
amounts provided for in this Section 4 will be paid in a single lump-sum payment
on the regularly scheduled payroll day immediately following the 15
th
day
after your Termination Date (but in no event later than March 15
th
following the calendar year in which occurs the later of the time the legally
binding right to the payment arises or the time such right first ceases to be
subject to a substantial risk of forfeiture). It is intended that
these payments constitute short-term deferred compensation within the meaning of
the applicable Treasury regulations pursuant to Section 409A of the
Code. Notwithstanding the preceding two sentences, if you are a
“specified employee” at the time you separate from service with Company and any
payment or benefit under Section 4 is determined to constitute non-qualified
deferred compensation, payment of any amounts pursuant to Section 4 will be made
or such benefit will be provided on the date that is six months after your
separation from service with the Company, all as determined in accordance with
Section 409A of the Code.
(2)
Except as
otherwise expressly provided herein, to the extent any reimbursement under this
Agreement is determined to be subject to Section 409A of the Code, the amount of
any such expenses eligible for reimbursement in one calendar year will not
affect the expenses eligible for reimbursement in any other taxable year, in no
event will any reimbursements be paid after the last day of the calendar year
following the calendar year in which you incurred such expenses, and in no event
will any right to reimbursement be subject to liquidation or exchange for
another benefit.
(e)
Condition.
The
payments and benefits stated in this Section 4 are conditioned upon your signing
(and failing to revoke during any applicable revocation period), within 55 days
following termination of your employment, a general release (substantially in
the form attached as Exhibit A)
in which you release
all claims that you may have against any member of the Group and any of their
respective past or present officers, directors, employees or agents other than
your rights under this Agreement, your rights under any Other Accrued Benefits,
and your rights to indemnification and continued liability insurance coverage
(under this Agreement or otherwise).
(f)
Resignation from Directorships and
Officerships.
Unless the Group waives this requirement, the
termination of your employment for any reason will constitute your resignation
from (1) any director, officer or employee position you then have with any
member of the Group and (2) all fiduciary positions (including as trustee) you
hold with respect to any pension plans or trusts established by any member of
the Group. You agree that this Agreement will serve as your written
notice of resignation in this circumstance.
5.
Limitation
on Payments by the Company.
(a)
Notwithstanding
anything in this Agreement to the contrary, if it is determined that any
payment, award, benefit or distribution (or any acceleration of any payment,
award, benefit or distribution) by the Company (or any of its affiliated
entities) or any entity which effectuates a Change in Control (or any of its
affiliated entities) to or for your benefit (whether pursuant to the terms of
this Agreement or otherwise) (the “
Payments
”) would be subject
to the excise tax (the “
Excise
Tax
”) under Section 4999 of the Code, then the amounts payable to you
under this Agreement will be reduced (reducing first the payments under Section
4(a)(3)) to the maximum amount as will result in no portion of the Payments
being subject to such excise tax (the “
Safe Harbor
Cap
”).
(b)
All
determinations required to be made under this Section 5 will be made by the
public accounting firm that is retained by the Company as of the date
immediately before the Change in Control (the “
Accounting Firm
”) which will
provide detailed supporting calculations both to the Company and you within 15
business days of the receipt of notice from the Company or you that there has
been a Payment, or such earlier time as is requested by the
Company. Notwithstanding the foregoing, if (i) the Board will
determine before the Change in Control that the Accounting Firm is precluded
from performing such services under applicable auditor independence rules or
(ii) the Audit Committee of the Board determines that it does not want the
Accounting Firm to perform such services because of auditor independence
concerns or (iii) the Accounting Firm is serving as accountant or auditor for
the individual, entity or group effecting the Change in Control, the Board will
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm will then be referred
to as the Accounting Firm hereunder). If payments are reduced to the
Safe Harbor Cap, the Accounting Firm will provide a reasonable opinion to you
that you are not required to report any Excise Tax on your federal income tax
return. All fees, costs and expenses (including, but not limited to,
the costs of retaining experts) of the Accounting Firm will be borne by the
Company. If the Accounting Firm determines that no Excise Tax is
payable by you, it will furnish you with a written opinion to such effect, and
to the effect that failure to report the Excise Tax, if any, on your applicable
federal income tax return will not result in the imposition of a negligence or
similar penalty. If the Accounting Firm determines that the Payments
will be reduced to the Safe Harbor Cap, it will furnish you with a written
opinion to such effect. The determination by the Accounting Firm will
be binding upon the Company and you (except as provided in Section
5(c)).
(c)
If it is
established pursuant to a final determination of a court or the Internal Revenue
Service (the “
IRS
”)
proceeding which has been finally and conclusively resolved, that Payments have
been made to, or provided for your benefit by the Company, which are in excess
of the limitations provided in this Section 5 (hereinafter referred to as an
“
Excess
Payment
”), such Excess
Payment will be deemed for all purposes to be a loan to you made on the date you
received the Excess Payment and you will repay the Excess Payment to the Company
on demand, together with interest on the Excess Payment at the applicable
federal rate (as defined in Section 1274(d) of the Code) from the date of your
receipt of such Excess Payment until the date of such repayment. As a
result of the uncertainty in the application of Section 4999 of the Code at the
time of the determination, it is possible that Payments which will not have been
made by the Company should have been made (an “
Underpayment
”), consistent
with the calculations required to be made under this Section 5. In
the event that it is determined (i) by the Accounting Firm, the Company (which
will include the position taken by the Company, or together with its
consolidated group, on its federal income tax return) or the IRS or (ii)
pursuant to a determination by a court, that an Underpayment has occurred, the
Company will pay you an amount equal to such Underpayment within 10 days of such
determination together with interest on such amount at the applicable federal
rate from the date such amount would have been paid to you until the date of
payment. You will cooperate, to the extent your expenses are
reimbursed by the Company, with any reasonable requests by the Company in
connection with any contests or disputes with the IRS in connection with the
Excise Tax or the determination of the Excess
Payment. Notwithstanding the foregoing, if amounts payable under this
Agreement were reduced pursuant to Section 5(a) and the value in stock options
is subsequently redetermined by the Accounting Firm within the context of
Treasury Regulation §1.280G-1 Q/A 33 that reduces the value of the Payments
attributable to such options, the Company will promptly pay to you within 10
days of such determination together with interest on such amount at the
applicable federal rate from the date such amount would have been paid to you
until the date of payment, any amounts payable under this Agreement that were
not previously paid solely as a result of Section 5(a) up to the Safe Harbor
Cap.
6.
Proprietary
Information
.
(a)
Definition. “Proprietary
Information”
means confidential or proprietary information, knowledge or
data concerning (1) the Group’s businesses, strategies, operations, financial
affairs, organizational matters, personnel matters, budgets, business plans,
marketing plans, studies, policies, procedures, products, ideas, processes,
software systems, trade secrets and technical know-how, and other information
regarding the business of the Group and (2) any matter relating to clients of
the Group or other third parties having relationships with the
Group. Proprietary Information may include information furnished to
you orally or in writing (whatever the form or storage medium) or gathered by
inspection, in each case before or after the date of this
Agreement. However, Proprietary Information does not include
information (1) that was or becomes generally available to you on a
non-confidential basis, if the source of this information was not reasonably
known to you to be bound by a duty of confidentiality, (2) that was or becomes
generally available to the public or within the relevant trade or industry,
other than as a result of a disclosure by you, directly or indirectly, or (3)
that was independently developed by you without reference to any Proprietary
Information.
(b)
Use and
Disclosure.
You will obtain or create Proprietary Information
in the course of your involvement in the Group’s activities and may already have
Proprietary Information. You agree that the Proprietary Information
is the Group’s exclusive property, and that, during your employment, you will
use and disclose Proprietary Information only for the Group’s benefit and in
accordance with any restrictions placed on its use or disclosure by the
Group. After your employment, you will not use or disclose any
Proprietary Information. Notwithstanding anything to the contrary in
this Section 6, Proprietary Information may be disclosed when required by law or
by any court, arbitrator, mediator or administrative or legislative body
(including any committee thereof),
provided that
(1) you will
request confidential treatment with respect to such information and/or request
matters with respect to such information be sealed and (2) you will disclose the
minimum amount required.
(c)
Limitations.
Nothing
in this Agreement prohibits you or the Group from providing truthful testimony
to governmental, regulatory or self-regulatory authorities.
7.
On-going Restrictions on Your
Activities
.
(a)
Terms used.
This
Section uses the following defined terms:
(1)
“
Client
” means any client of
the Company to whom you provided services, for whom you transacted business, or
whose identity became known to you in connection with your employment by the
Group.
(2)
“
Competitive Enterprise
” means
(1) any business enterprise operating a banking facility in the markets in which
the Group conducts business at the time of your Qualifying Termination,
including but not limited to Bank of Hawaii, First Hawaiian Bank, American
Savings Bank, Finance Factors, Hawaii National Bank and Territorial Savings Bank
and any successors thereto or (2) any business enterprise that holds a 25% or
greater equity, voting or profit participation interest in any of the
preceding.
(3)
“
Solicit
”
means any
communication, regardless of who initiates it, that invites, advises, encourages
or requests any person to take or refrain from taking any action.
(4)
“
Restriction Period
” means the
period beginning on the earlier of (A) a Change in Control or (B) your
Qualifying Termination and ending on either (i) the termination of this
Agreement if your employment terminates after the termination of this Agreement
or (ii) the
second
anniversary
of
the termination of your employment if your employment terminates during the term
of this Agreement. For the avoidance of doubt, the provisions of this Section 7
will not apply to you unless either a Qualifying Termination occurs or you
terminate your employment following a Change in Control and during the term of
this Agreement.
(b)
Your Importance to the Group and the
Effect of this Section 7.
You acknowledge that, in the course
of your involvement in the Group’s activities, you will have access to
Proprietary Information and the Group’s client base and will yourself profit
from the goodwill associated with the Group. On the other hand, in
view of your access to Proprietary Information and your importance to the Group,
if you compete with the Group for some time after your employment, the Group
will likely suffer significant harm but the amount of loss would be uncertain
and not readily ascertainable. You understand that this Section 7
will limit your ability to earn a livelihood in a Competitive Enterprise but you
have determined that your complying with this Section 7 will not result in
severe economic hardship for you or your family. For the avoidance of doubt, the
provisions of this Section 7 will not limit in any way (i) any fiduciary or
similar duty you may have to the Group or (ii) any other non-competition and/or
non-solicitation agreements you may have with (or other such obligations you may
have to) the Group.
(c)
Non-Competition.
If
a Qualifying Termination occurs, you agree that you will not, directly or
indirectly, during your Restriction Period:
(1)
hold a 5%
or greater equity, voting or profit participation interest in a Competitive
Enterprise; or
(2)
associate
(including as a director, officer, employee, partner, consultant, agent or
advisor) with a Competitive Enterprise and in connection with your association
engage in Hawaii, or directly or indirectly manage or supervise personnel
engaged in Hawaii, in any activity:
(A)
that is
substantially similar to any activity that you were engaged in;
(B)
that
calls for the application of specialized knowledge or skills substantially
similar to those used by you in your activities; or
(C)
that is
substantially similar to any activity for which you had direct or indirect
managerial or supervisory responsibility;
in each case
, for the
Group at any time during the year before the end of your
employment.
(d)
Non-Solicitation of
Clients.
If a Qualifying Termination occurs, you agree that
you will not, directly or indirectly, during your Restriction Period, Solicit
any Client to transact business with a Competitive Enterprise or to reduce or
refrain from doing any business with the Group.
(e)
Non-Solicitation of Group
Employees.
During your Restriction Period, you will not,
directly or indirectly, Solicit anyone who is then an employee of the Group (or
who was an employee of the Group within the prior six months) to resign from the
Group or to apply for or accept employment with any Competitive
Enterprise.
(f)
Notice to New
Employers.
Before you either apply for or accept employment
with any other person or entity while any of Section 7(c), 7(d) or 7(e) is in
effect, you will provide the prospective employer with written notice of the
provisions of this Section 7 and will deliver a copy of the notice to the
Group.
(g)
No
Disparagement.
You will make no public statement that would
libel, slander or disparage any member of the Group or any of their respective
past or present officers, directors, employees or agents. The Company
agrees that it will (and will use good faith efforts to cause the Chief
Executive Officer of the Company, the Board, and its officers and employees to)
make no public statement that would libel, slander or disparage
you.
(h)
Survival.
Any
termination of your employment (or breach of this Agreement by you or the Group)
will have no effect on the continuing operation of this Section 7.
8.
Effect
on Other Agreements; Entire Agreement.
This
Agreement is the entire agreement between you and the Company with respect to
the subject matter contemplated by this Agreement and supersedes any earlier
agreement, written or oral, with respect to the subject matter of this
Agreement, including, but not limited to, your Employment Agreement with the
Company dated January 1, 2003. You agree that you are not entitled to
any severance, change-in-control or similar rights under any other plan of the
Group. In entering into this Agreement, no party has relied on or
made any representation, warranty, inducement, promise or understanding that is
not in this Agreement.
9.
Successors.
(a)
Payments on Your
Death.
If you die and any amounts become payable under this
Agreement, the Company will pay those amounts to your estate.
(b)
Assignment by You.
You may not assign this
Agreement without the Company’s consent. Also, except as required by
law, your right to receive payments or benefits under this Agreement may not be
subject to execution, attachment, levy or similar process. Any
attempt to effect any of the preceding in violation of this Section 9(b),
whether voluntary or involuntary, will be void.
(c)
Assumption by any Surviving
Company.
The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place. As used in this Agreement, “Company” will mean the Company as
hereinbefore defined and any successor to all or substantially all of its
business or assets.
10.
Disputes.
(a)
Applicable
Matter.
This Section 10 applies to any controversy or claim
between you and the Group arising out of or relating to or concerning any aspect
of this Agreement (an “
Applicable
Matter
”).
(b)
Mandatory
Arbitration
. Subject to the provisions of this Section 10, any
Applicable Matter will be finally settled by arbitration in Honolulu, Hawaii
administered by the American Arbitration Association under its Commercial
Arbitration Rules then in effect.
However, the rules will be
modified in the following ways:
(1)
each
arbitrator will agree to treat as confidential evidence and other information
presented to the same extent as the information is required to be kept
confidential under Section 6,
(2)
the
optional Rules for Emergency Measures of Protections will apply,
(3)
you
and the Group agree not to request any amendment or modification to the terms of
this Agreement except as provided in Section 11(h),
(4)
a
decision must be rendered within 10 business days of the parties’ closing
statements or submission of post-hearing briefs and
(5)
the arbitration will be conducted before a panel of three
arbitrators, one selected by you within 10 days of the commencement of
arbitration, one selected by the Company in the same period and the third
selected jointly by these arbitrators (or, if they are unable to agree on an
arbitrator within 30 days of the commencement of arbitration, the third
arbitrator will be appointed by the American Arbitration Association;
provided
that
the arbitrator will be a
partner or former partner at a nationally recognized law firm.
(c)
Limitation on
Damages.
You
and the Group agree that there will be no punitive damages payable as a result
of any Applicable Matter and agree not to request punitive
damages.
(d)
Injunctions and Enforcement of
Arbitration Awards
. You or the Group may bring an action or
special proceeding in a state or federal court of competent jurisdiction sitting
in Honolulu, Hawaii to enforce any arbitration award under Section
10(b). Also, the Group may bring such an action or proceeding, in
addition to its rights under Section 10(b) and whether or not an arbitration
proceeding has been or is ever initiated, to temporarily, preliminarily or
permanently enforce any part of Sections 6 and 7. You agree that
(1)
your
violating any part of Sections 6 and 7 would cause damage to the Group that
cannot be measured or repaired,
(2)
the
Group therefore is entitled to an injunction, restraining order or other
equitable relief restraining any actual or threatened violation of those
Sections,
(3)
no
bond will need to be posted for the Group to receive such an injunction, order
or other relief and
(4)
no
proof will be required that monetary damages for violations of those Sections
would be difficult to calculate and that remedies at law would be
inadequate
.
(e)
Jurisdiction and
Choice of Forum
. You and the Group irrevocably submit to the
exclusive jurisdiction of any state or federal court located in Honolulu, Hawaii
(the “
Forum
”)
over any Applicable Matter that is not otherwise arbitrated or resolved
according to Section 10(b).
This includes any action or
proceeding to compel arbitration or to enforce an arbitration
award. Both you and the Group
(1)
acknowledge
that the Forum has a reasonable relation to this Agreement and to the
relationship between you and the Group and that the submission to the Forum will
apply even if the forum chooses to apply non-Forum law,
(2)
waive,
to the extent permitted by law, any objection to personal jurisdiction or to the
laying of venue of any action or proceeding covered by this Section 10(e) in the
Forum,
(3)
agree
not to commence any such action or proceeding in any forum other than the Forum
and
(4)
ag
ree
that, to the extent permitted by law, a final and non-appealable judgment in any
such action or proceeding in any such court will be conclusive and binding on
you and the Group. However, nothing in this Agreement precludes you
or the Group from bringing any action or proceeding in any court for the purpose
of enforcing the provisions of Sections 10(b) and this 10(e)
.
(f)
Waiver of Jury
Trial.
To the extent permitted by law, you and the Group waive
any and all rights to a jury trial with respect to any Applicable
Matter.
(g)
Governing
Law.
This Agreement will be governed by and construed in
accordance with the laws of the State of Hawaii applicable to contracts made and
to be performed entirely within that State.
(h)
Costs.
The Company will pay or
reimburse any reasonable expenses, including reasonable attorney’s fees, you
incur as a result of any Applicable Matter, provided that you substantially
prevail in the Applicable Matter.
(i)
Interest.
If the
Company fails to pay when due any amount required by the Agreement, it will pay
interest on such amount at a rate equal to its prime commercial lending
rate.
(j)
Survival.
For the
avoidance of doubt, any termination of your employment (or breach of this
Agreement by you or the Group) will have no effect on the continuing operation
of this Section 10.
11.
General
Provisions.
(a)
Construction.
(1)
References
(A)
to
Sections
are to
sections of this Agreement unless otherwise stated
;
(B)
to
any
contract
(including
this Agreement) are to the contract as amended, modified, supplemented or
replaced from time to time
;
(C)
to
any
statute,
rule
or
regulation
are to the
statute, rule or regulation as amended, modified, supplemented or replaced from
time to time (and, in the case of statutes, include any rules and regulations
promulgated under the statute) and to any
section of any
statute,
rule or
regulation
include any successor to the section
;
(D)
to
any g
overnmental
authority
include any successor to the governmental authority
;
(E)
to
any
plan
include any
programs, practices and policies
;
(F)
to
any
entity
include any
corporation, limited liability company, partnership, association, business trust
and similar organization and include any governmental authority;
and
(G)
to
any
affiliate
of any
entity are to any person or other entity directly or indirectly controlling,
controlled by or under common control with the first entity.
(2)
The
various
headings
in
this Agreement are for convenience of reference only and in no way define, limit
or describe the scope or intent of any provisions or Sections of this
Agreement.
(3)
Unless
the context requires otherwise,
(A)
words
describing the singular number include the plural and
vice versa
,
(B)
words
denoting any gender include all genders
and
(C)
the
words “
include
”, “
includes
”
and “
including
” will be deemed to
be followed by the words “without limitation”.
(4)
It is
your and the Group’s intention that this Agreement not be construed more
strictly with regard to you or the Group.
(b)
Withholding.
You and the
Group will treat all payments to you under this Agreement as compensation for
services. Accordingly, the Group may withhold from any payment any
taxes that are required to be withheld under any law, rule or
regulation. Any amounts so withheld will be timely and properly
remitted by the Company to the appropriate taxing authority.
(c)
Severability.
If any provision of
this Agreement (or if the application of any provision to a person or particular
circumstances) is found by any court of competent jurisdiction (or legally
empowered agency) to be illegal, invalid or unenforceable for any reason,
then
(1)
the
provision will be amended automatically to the minimum extent necessary to cure
the illegality or invalidity and permit enforcement and
(2)
the
remainder of this Agreement will not be affected. In particular, if
any provision of Section 7 is so found to violate law or be unenforceable
because it applies for longer than a maximum permitted period or to greater than
a maximum permitted area, it will be automatically amended to apply for the
maximum permitted period and maximum permitted area.
(d)
No Set-off or
Mitigation/Etc.
Your and the Company’s respective obligations
under this Agreement will not be affected by any set-off, counterclaim,
recoupment or other right you or any member of the Group may have against each
other or anyone else (except as provided in Section 7). You do not
need to seek other employment or take any other action to mitigate any amounts
owed to you under this Agreement, and those amounts will not be reduced if you
do obtain other employment (except as this Agreement specifically
states).
(e)
Bank Regulatory
Limitation.
If any payment or benefit under this Agreement
would otherwise be a golden parachute payment within the meaning of Section
18(k) of the Federal Deposit Insurance Act (a “
Golden Parachute Payment
”)
that is prohibited by applicable law, then the total payments and benefit will
be reduced to the greatest amount that could be made to you without there being
a Golden Parachute Payment. The Company will give you the opportunity
to select the order in which payments or benefits are reduced. To the
extent reasonably practicable, the Company will seek the approval of the Federal
Deposit Insurance Corporation and/or the State of Hawaii Division of Financial
Institutions and any other bank regulatory body, as necessary, to make any
payment to you under this Agreement that would otherwise constitute a Golden
Parachute Payment.
(f)
Notices.
All notices, requests,
demands, consents and other communications under this Agreement must be in
writing and will be deemed given
(1)
on
the business day sent, when delivered by hand or facsimile transmission (with
confirmation) during normal business hours,
(2)
on
the business day after the business day sent, if delivered by a nationally
recognized overnight courier or
(3)
on
the third business day after the business day sent if delivered by registered or
certified mail, return receipt requested, in each case to the following address
or number (or to such other addresses or numbers as may be specified by notice
that conforms to this Section 11(f)):
If to
you, to the address on record with the Company, and
If to the
Company or any other member of the Group, to:
Central
Pacific Financial Corp.
220 South
King Street
Honolulu,
Hawaii 96813
Attention: Glenn
K.C. Ching
Facsimile: (808)
544-6835
with a
copy to:
Sullivan
& Cromwell LLP
125 Broad
Street
New York,
New York 10004
Attention: Marc
Trevino
Facsimile: 212-558-3588
(g)
Consideration.
This
Agreement is entered in consideration of the mutual covenants contained in this
Agreement. You and the Group acknowledge the receipt and sufficiency
of the consideration to this Agreement and intend this Agreement to be legally
binding.
(h)
Amendments and
Waivers.
Any provision of this Agreement may be amended or
waived but only if the amendment or waiver is in writing and signed, in the case
of an amendment, by you and the Company or, in the case of a waiver, by the
party that would have benefited from the provision waived. Except as
this Agreement otherwise provides, no failure or delay by you or the Group to
exercise any right or remedy under this Agreement will operate as a waiver, and
no partial exercise of any right or remedy will preclude any further
exercise.
(i)
Third Party Beneficiaries.
Subject to Section 9, this Agreement will be binding on, inure to the
benefit of and be enforceable by the parties and their respective heirs,
personal representatives, successors and assigns. This Agreement does
not confer any rights, remedies, obligations or liabilities to any entity or
person other than you and the Company and your and the Company’s permitted
successors and assigns, although this Agreement will inure to the benefit of,
and confer related rights and remedies on, the Group.
(j)
Counterparts.
This Agreement
may be executed as counterparts, each of which will constitute an original and
all of which, when taken together, will constitute one
agreement.
* * *
Please
confirm your acceptance of the terms and conditions of your employment with the
Company by signing where indicated below.
Very
truly yours,
/s/ Ronald K.
Migita
Chairman
of the Board
Accepted
and Agreed:
/s/ Curtis W.
Chinn
Date:
April 7, 2008
Exhibit
21
Subsidiaries
of the Registrant
The
Company or one of its wholly-owned subsidiaries owned the following percent of
the outstanding common stock, voting securities and interests of each of the
corporations listed below as of December 31, 2008:
Name
|
|
State or Other Jurisdiction of
Incorporation
|
|
Percent
Owned
|
Central
Pacific Bank
|
|
Hawaii
|
|
100%
|
CPB
Capital Trust I
|
|
Delaware
|
|
100%
|
CPB
Capital Trust II
|
|
Delaware
|
|
100%
|
CPB
Statutory Trust III
|
|
Connecticut
|
|
100%
|
CPB
Capital Trust IV
|
|
Delaware
|
|
100%
|
CPB
Statutory Trust V
|
|
Delaware
|
|
100%
|
CPB
Real Estate, Inc.
|
|
Hawaii
|
|
100%
|
Citibank
Properties, Inc.
|
|
Hawaii
|
|
100%
|
CB
Technology, Inc.
|
|
Hawaii
|
|
100%
|
Central
Pacific HomeLoans, Inc.
|
|
Hawaii
|
|
100%
|
Pacific
Access Mortgage, LLC
|
|
Hawaii
|
|
50%
|
Lokahi
Mortgage, LLC
|
|
Hawaii
|
|
50%
|
Gentry
HomeLoans, LLC
|
|
Hawaii
|
|
50%
|
Towne
Island Mortgage, LLC
|
|
Hawaii
|
|
50%
|
Pacific
Island HomeLoans, LLC
|
|
Hawaii
|
|
50%
|
Hawaii
Resort Lending, LLC
|
|
Hawaii
|
|
50%
|
Laulima
Financial, LLC
|
|
Hawaii
|
|
50%
|
Pacific
Portfolio, LLC
|
|
Hawaii
|
|
50%
|
Exhibit 23
Consent
of Independent Registered Public Accounting Firm
The Board
of Directors
Central
Pacific Financial Corp.:
We
consent to the incorporation by reference in the registration statements
No. 333-35999, No. 333-119538, No. 333-119798, and
No. 333-141232 on Form S-8, and No. 333-138517 and No. 333-157166
on Form S-3, of Central Pacific Financial Corp. of our reports dated
February 27, 2009, with respect to the consolidated balance sheets of
Central Pacific Financial Corp. and subsidiaries as of December 31, 2008
and 2007, and the related consolidated statements of income, changes in
shareholders’ equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2008, and the
effectiveness of internal control over financial reporting as of
December 31, 2008, which reports appear in the December 31, 2008
annual report on Form 10-K of Central Pacific Financial Corp. Our report on the
consolidated financial statements refers to the adoption of FASB Statement
No. 157,
Fair Value
Measurements
, in 2008.
/s/ KPMG
LLP
Honolulu,
Hawaii
February 27,
2009
Exhibit 31.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER PURSUANT TO
EXCHANGE
ACT RULE 13a-14(a)
I, Ronald
K. Migita, Chairman, President and Chief Executive Officer of Central Pacific
Financial Corp. (the “Company”), certify that:
1.
|
I
have reviewed this Annual Report on Form 10-K/A (Amendment No.
1) of the Company;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report.
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
c.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such
evaluation; and
|
d.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
March 2, 2009
|
By:
|
/s/
Ronald K. Migita
|
|
|
|
Ronald
K. Migita
|
|
|
Chairman,
President and Chief Executive
Officer
|
Exhibit 31.2
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER PURSUANT TO
EXCHANGE
ACT RULE 13a-14(a)
I, Dean
K. Hirata, Vice Chairman and Chief Financial Officer of Central Pacific
Financial Corp. (the “Company”), certify that:
1.
|
I
have reviewed this Annual Report on Form 10-K/A (Amendment No.
1) of the Company;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report.
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
c.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such
evaluation; and
|
d.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
March 2, 2009
|
By:
|
/s/
Dean K. Hirata
|
|
|
|
Dean
K. Hirata
|
|
|
Vice
Chairman and Chief Financial Officer
|
|
|
(Principal
Financial and Accounting
Officer)
|
Exhibit 32.1
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
As
Adopted Pursuant to Section 906 of the As Sarbanes-Oxley Act of
2002
I, Ronald
K. Migita, Chairman, President and Chief Executive Officer of Central Pacific
Financial Corp. (the “Company”), do hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
·
|
The
Annual Report on Form 10-K/A (Amendment No. 1) of the Company
for the fiscal year ended December 31, 2008, as filed with the
Securities and Exchange Commission (the “Report”), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
|
·
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
Date:
March 2, 2009
|
|
|
|
By:
|
/s/
Ronald K. Migita
|
|
|
|
Ronald
K. Migita
|
|
|
Chairman,
President and Chief Executive
Officer
|
A signed
original of this written statement required by Section 906 has been provided to
the Company and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.
This
certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
Exhibit 32.2
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
As
Adopted Pursuant to Section 906 of the As Sarbanes-Oxley Act of
2002
I, Dean
K. Hirata, Vice Chairman and Chief Financial Officer of Central Pacific
Financial Corp. (the “Company”), do hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
·
|
The
Annual Report on Form 10-K/A (Amendment No. 1) of the Company
for the fiscal year ended December 31, 2008, as filed with the
Securities and Exchange Commission (the “Report”), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
|
·
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
Date:
March 2, 2009
|
|
|
|
By:
|
/s/
Dean K. Hirata
|
|
|
|
Dean
K. Hirata
|
|
|
Vice
Chairman and Chief Financial Officer
|
|
|
(Principal
Financial and Accounting
Officer)
|
A signed
original of this written statement required by Section 906 has been provided to
the Company and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.
This
certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.