UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2005
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                  

 

Commission file number 0-10777

 

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Hawaii		99-0212597
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
220 South King Street, Honolulu, Hawaii		96813
(Address of principal executive offices)		(Zip Code)

 

(808)544-0500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý  No o

 

As of May 6, 2005, the number of shares of common stock outstanding of the registrant was 30,354,058 shares.

 

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Table of Contents

 

Part I - Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets - March 31, 2005 and 2004, and December 31, 2004
	Consolidated Statements of Income - Three months ended March 31, 2005 and 2004
	Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) - Three months ended March 31, 2005 and 2004
	Consolidated Statements of Cash Flows - Three months ended March 31, 2005 and 2004
	Notes to Consolidated Financial Statements - March 31, 2005 and 2004
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II - Other Information
Item 6.	Exhibits
Signatures
Exhibit Index

 

2

 

PART I.   FINANCIAL INFORMATION

 

Forward-Looking Statements

 

This document may contain forward-looking statements concerning projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items, concerning plans and objectives of management for future operations, concerning future economic performance, or concerning any of the assumptions underlying or relating to any of the foregoing.  Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and generally include the words “believes”, “plans”, “intends”, “expects”, “anticipates” or words of similar meaning.  While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions, are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect.  Accordingly, actual results could materially differ from projections for a variety of reasons, to include, but not limited to:  the impact of local, national, and international economies and events on the company’s business and operations and on tourism, the military, and other major industries operating within the Hawaii market; the impact of legislation affecting the banking industry; the impact of competitive products, services, pricing, and other competitive forces; movements in interest rates; loan delinquency rates; and trading of the company’s stock.  For further information on factors which could cause actual results to materially differ from projections, please see our publicly available Securities and Exchange Commission filings, including our Form 10-K for the last fiscal year.  Be advised, we do not update any of our forward-looking statements.

 

3

 

Item 1.             Financial Statements

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		March 31,			December 31,			March 31,
(Dollars in thousands)		2005			2004			2004
Assets
Cash and due from banks		$	113,065		$	84,869		$	70,854
Interest-bearing deposits in other banks		6,512			52,978			2,645
Federal funds sold		—			25,600			—
Investment securities:
Held to maturity, at amortized cost (fair value of $97,602 at March 31, 2005, 2005, $101,869 at December 31, 2004, and $35,046 at March 31, 2004)		98,590			101,337			33,642
Available for sale, at fair value		819,581			798,084			615,725
Total investment securities		918,171			899,421			649,367
Loans held for sale		32,273			17,736			2,337
Loans and leases		3,235,788			3,099,830			1,459,442
Less allowance for loan and lease losses		51,623			50,703			24,848
Net loans and leases		3,184,165			3,049,127			1,434,594
Premises and equipment		77,098			77,099			57,355
Accrued interest receivable		19,154			18,298			8,723
Investment in unconsolidated subsidiaries		11,367			11,536			4,625
Due from customers on acceptances		222			547			—
Other real estate		—			580			—
Goodwill		289,848			284,712			—
Core deposit premium		40,761			49,188			—
Other assets		88,387			80,211			53,825
Total assets		$	4,781,023		$	4,651,902		$	2,284,325
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing deposits		$	652,309		$	594,401		$	369,151
Interest-bearing deposits		2,729,950			2,732,625			1,436,116
Total deposits		3,382,259			3,327,026			1,805,267
Short-term borrowings		97,610			88,900			12,851
Long-term debt		586,419			587,380			228,425
Bank acceptances outstanding		222			547			—
Minority interest		13,258			12,782			10,362
Other liabilities		60,439			67,405			23,907
Toal liabilities		4,140,207			4,084,040			2,080,812
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 30,352,184 shares at March 31, 2005, 28,159,395 shares at December 31, 2004, and 16,093,999 shares at March 31, 2004		427,009			360,550			9,907
Surplus		45,848			45,848			45,848
Retained earnings		180,414			167,801			147,972
Deferred stock awards		(317		)	(174		)	(47		)
Accumulated other comprehensive income (loss)		(12,138		)	(6,163		)	(167		)
Total shareholders’ equity		640,816			567,862			203,513
Total liabilities and shareholders’ equity		$	4,781,023		$	4,651,902		$	2,284,325

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended
		March 31,
(In thousands, except per share data)		2005			2004
Interest income:
Interest and fees on loans		$	50,834		$	21,291
Interest and dividends on investment securities:
Taxable interest		7,449			5,081
Tax-exempt interest		1,005			991
Dividends		291			217
Interest on deposits in other banks		147			23
Interest on Federal funds sold and securities purchased under agreements to resell		58			9
Total interest income		59,784			27,612
Interest expense:
Interest on deposits		7,517			2,925
Interest on short-term borrowings		527			36
Interest on long-term debt		5,420			1,950
Total interest expense		13,464			4,911
Net interest income		46,320			22,701
Provision for loan and lease losses		917			300
Net interest income after provision for loan and lease losses		45,403			22,401
Other operating income:
Income from fiduciary activities		533			549
Service charges on deposit accounts		2,442			1,443
Other service charges and fees		2,776			1,251
Equity in earnings of unconsolidated subsidiaries		91			—
Fees on foreign exchange		218			173
Investment securities gains (losses)		1,509			—
Other		1,682			495
Total other operating income		9,251			3,911
Other operating expense:
Salaries and employee benefits		16,209			8,206
Net occupancy		2,755			1,094
Equipment		1,197			568
Amortization of core deposit premium		1,300			—
Communication expense		1,084			428
Legal and professional services		2,636			648
Computer software expense		828			512
Advertising expense		765			535
Other		4,135			2,537
Total other operating expense		30,909			14,528
Income before income taxes		23,745			11,784
Income taxes		6,540			3,874
Net income		$	17,205		$	7,910
Per share data:
Basic earnings per share		$	0.60		$	0.49
Diluted earnings per share		0.59			0.48
Cash dividends declared		0.16			0.16
Basic weighted average shares outstanding		28,628			16,080
Diluted weighted average shares outstanding		29,198			16,411

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		Common Stock			Surplus			Retained Earnings			Deferred Stock Awards			Accumulated other comprehensive income(loss)				Total
Three months ended March 31, 2005
Balance at December 31, 2004		$	360,550		$	45,848		$	167,801		$	(174	)	$	(6,163		)	$	567,862
Net Income		—			—			17,205			—			—				17,205
Net change in unrealized gain (loss) on investment securities, net of taxes of $(4,229)		—			—			—			—			(5,975			)	(5,975			)
Comprehensive income																		11,230
Cash dividends ($0.16 per share)		—			—			(4,523		)	—			—				(4,523			)
2,012,500 shares issued in conjunction with common stock offering		64,592			—			—			—			—				64,592
175,934 shares of common stock issued in conjunction with stock option exercises		1,928			—			—			—			—				1,928
641 shares of common stock purchased by directors’ deferred compensation plan		(24		)	—			—			—			—				(24			)
2,893 shares of common stock repurchased		(37		)	(69		)	(106		)
4,355 shares of deferred stock awards granted		—			—			—			(155		)	—				(155			)
Amortization of vested stock awards		—			—			—			12			—				12
Balance at March 31, 2005		$	427,009		$	45,848		$	180,414		$	(317	)	$	(12,138		)	$	640,816
Disclosure of reclassification amount:
Unrealized holding loss on investment securities during period, net of taxes of $(3,797)		$	—		$	—		$	—		$	—		$	(5,325		)	$	(5,325		)
Less reclassification adjustment for gains included in net income, net of taxes of $432		—			—			—			—			650				650
Net Change in unrealized gain (loss) on investment securities		$	—		$	—		$	—		$	—		$	(5,975		)	$	(5,975		)
Three months ended March 31, 2004
Balance at December 31, 2003		$	9,589		$	45,848		$	142,635		$	(50	)	$	(3,423		)	$	194,599
Net Income		—			—			7,910			—			—				7,910
Net change in unrealized gain (loss) on investment securities, net of taxes of $2,165		—			—			—			—			3,256				3,256
Comprehensive income																		11,166
Cash dividends ($0.16 per share)		—			—			(2,573		)	—			—				(2,573			)
30,042 shares of common stock issued in conjunction with stock option exercises		318			—			—			—			—				318
Amortization of vested stock awards		—			—			—			3			—				3
Balance at March 31, 2004		$	9,907		$	45,848		$	147,972		$	(47	)	$	(167		)	$	203,513
Disclosure of reclassification amount:								$
Unrealized holding loss on investment securities during period, net of taxes of $2,165		$	—		$	—		$	—		$	—		$		3,256		$		3,256
Less reclassification adjustment for gains included in net income, net of taxes			—			—			—			—			—				—
Net Change in unrealized gain (loss) on investment securities		$	—		$	—			—		$	—		$		3,256		$		3,256

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended March 31,
(Dollars in thousands)		2005			2004
Cash flows from operating activities:
Net income		$	17,205		$	7,910
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		917			300
Provision for depreciation and amortization		1,707			955
Amortization of core deposit premium		1,300			—
Net amortization of deferred stock awards		(143		)	3
Net amortization of investment securities		780			437
Net gain on investment securities		(1,509		)	—
Federal Home Loan Bank dividends received		—			(141		)
Net gain on sale of loans		(502		)	(39		)
Proceeds from sales of loans held for sale		25,861			11,614
Originations of loans held for sale		(39,896		)	(7,252		)
Deferred income tax expense (benefit)		1,712			(6,668		)
Equity in earnings of unconsolidated subsidiaries		(91		)	—
Net increase in other assets		(6,384		)	(1,285		)
Net increase (decrease) in other liabilities		(3,997		)	5,025
Net cash provided by operating activities		(3,040		)	10,859
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities held to maturity		2,396			665
Proceeds from sales of investment securities available for sale		100,549			—
Proceeds from maturities of and calls on investment securities available for sale		420,092			108,415
Purchases of investment securities available for sale		(551,065		)	(198,366		)
Net loan originations		(135,955		)	(16,514		)
Purchases of premises and equipment		(1,706		)	(1,530		)
Distributions from unconsolidated subsidiaries		533			—
Contributions to unconsolidated subsidiaries		(547		)	(880		)
Net cash used by investing activities		(165,703		)	(108,210		)
Cash flows from financing activities:
Net increase in deposits		55,233			51,983
Proceeds from long-term debt		—			77,000
Repayments of long-term debt		(961		)	(34,461		)
Net increase in short-term borrowings		8,710			9,344
Cash dividends paid		(4,523		)	(4,330		)
Proceeds from sale of common stock		66,520			318
Repurchases of common stock		(106		)	—
Net cash provided by financing activities		124,873			99,854
Net increase in cash and cash equivalents		(43,870		)	2,503
Cash and cash equivalents:
At beginning of period		163,447			70,996
At end of period		$	119,577		$	73,499
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	16,446		$	5,103
Cash paid during the period for income taxes		$	3,284		$	2,210

 

See accompanying notes to unaudited consolidated financial statements.

 

7

 

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

March 31, 2005 and 2004

 

1.               Summary of Significant Accounting Principles

 

Principles of Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of Central Pacific Financial Corp. (“CPF” or the “Company”) and its majority-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The results of CB Bancshares, Inc. (“CBBI”) are included in the consolidated financial statements from September 15, 2004, the date of the completion of the merger.

 

The financial information included herein is unaudited, except for the consolidated balance sheet at December 31, 2004. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of Management, necessary for a fair statement of results for the interim periods.

 

The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.

 

Business Combinations

 

Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”) requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method. The purchase method of accounting requires that the cost of an acquired entity be allocated to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition. The difference between the fair values and the purchase price is recorded to Goodwill. Also under SFAS 141, identified intangible assets acquired in a purchase business combination must be separately valued and recognized on the balance sheet if they meet certain requirements.

 

Recently Issued Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board (“FASB”) revised Statement No. 123 (“SFAS 123R”), “Share Based Payment,” which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, including share-based payments to employees. SFAS 123R requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award, usually the vesting period.  SFAS 123R eliminates use of the intrinsic value method of accounting for stock-based compensation, which was allowed under SFAS 123.  SFAS 123R also provides expanded

 

8

 

guidance on measuring fair value and requires the use of a modified version of prospective application for all outstanding awards for which the requisite service period has not yet expired.  SFAS 123R is effective as of the first interim period that begins after June 15, 2005.

 

On April 14, 2005, the Securities and Exchange Commission (the “SEC”) adopted a new rule that amended the compliance dates for the SFAS 123R.  The SEC’s new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the first interim period that begins after June 15, 2005.  The Company plans to adopt SFAS 123R on January 1, 2006.

 

Based on options outstanding as of March 31, 2005, and without any regard to any awards that may be issued prior to the adoption in 2006, implementation of SFAS 123R is expected to increase salaries and employee benefits by an annualized $647,000 net of taxes.

 

Stock Compensation Plans

 

The Company has elected to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations, and provide the pro forma disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123”.

 

The following table presents pro forma disclosures of the impact that the 2004, 2003, 2002 and 2000 option grants would have had on net income and earnings per share had the grants been measured using the fair value of accounting prescribed by SFAS No. 148.

 

		Three months ended March 31,
		2005			2004
(Dollars in thousands, except per share amounts)
Net income, as reported		$	17,205		$	7,910
Add:  Stock-based compensation expense included in reported net income, net of related tax effects		7			2
Deduct:  Total stock compensation expense determined under fair value based method for all awards, net of related tax effects		(183		)	(172		)
Pro forma net income		$	17,029		$	7,740
Earnings per share:
Basic - as reported		$	0.60		$	0.49
Basic - pro forma		$	0.59		$	0.48
Diluted - as reported		$	0.59		$	0.48
Diluted - pro forma		$	0.58		$	0.47

 

2.  Merger with CB Bancshares, Inc.

 

The Company completed its merger with CBBI on September 15, 2004 (the “Effective Date”).  At the Effective Date, CBBI had consolidated assets of $1.8 billion (including loans of $1.4 billion and investment securities of $324.8 million) and consolidated total liabilities of $1.7 billion (including total deposits of $1.4 billion and borrowings of $239.6 million).

 

Exit and Restructuring Costs

 

At the Effective Date, the Company recorded liabilities totaling $17.6 million for estimated costs to exit certain CBBI facilities and operations.  These liabilities, net of tax, were included in

 

9

 

the cost of the CBBI acquisition, resulting in an increase in goodwill.

 

The Company closed nine CBBI branch offices in February 2005, and is in the process of vacating CBBI’s headquarters, consolidating certain operational functions with the Company’s operations, and reducing the workforce by approximately 70 employees.   Execution of these exit plans is expected to be completed by the third quarter of 2005.  Certain adjustments to the estimates have been recorded as of March 31, 2005 as adjustments to the cost of the acquisition.

 

The following table sets forth information related to the exit costs accrued:

 

(Dollars in thousands)		Accrued as of September 14, 2004			Adjustments to estimates			Payments through March 31, 2005			Balance as of March 31, 2005
Severance		$	3,772		$	1,489		$	3,670		$	1,591
Lease termination fees		7,672			—			236			7,436
Asset write-offs		4,457			—			133			4,324
Contract termination fees		1,700			339			1,843			196
Total assets		$	17,601		$	1,828		$	5,882		$	13,547

 

Unaudited Pro Forma Condensed Combined Financial Statements

 

The unaudited pro forma condensed combined statements of income illustrate how the results of operations of the combined organization may have appeared had the merger actually occurred at the beginning of the periods presented.  The pro forma condensed combined statements of income are provided for illustrative purposes only and are not intended to reflect expected results of operations in future periods.

 

The pro forma results reflect the estimated impact of purchase price allocation adjustments and the elimination of reported one-time merger-related charges of $495,000 in 2004 included in the Company’s historical results that are not expected to affect future periods’ results of operations.  The pro forma adjustments exclude the impact of merger cost synergies that are expected to be recognized in future periods.

 

Central Pacific Financial Corp. and CB Bancshares, Inc.

Pro Forma Condensed Combined Income Statement

Three Months Ended March 31, 2004

 

(Dollars in thousands, except per share amounts)
Interest income		$	55,487
Interest expense		10,103
Net interest income		45,384
Provision for loan losses		800
Net interest income after provision for loan losses		44,584
Other operating income		11,356
Other operating expense		30,824
Income before income taxes		25,116
Income taxes		7,601
Net income		$	17,515
Earnings per share:
Basic		$	0.63
Diluted		$	0.62
Weighted average shares outstanding:
Basic		27,967
Diluted		28,455

 

10

 

3.               Goodwill and Other Intangibles

 

At March 31, 2005, goodwill recorded in conjunction with the CBBI merger amounted to $289.8 million, of which $146.6 million was allocated to the Hawaii Market reporting segment and $143.2 million was allocated to the Commercial Real Estate reporting segment.  In accordance with SFAS 142, no goodwill amortization was recorded.

 

Other intangible assets included a core deposit premium of $40.8 million at March 31, 2005 and mortgage servicing rights of $3.7 million and $511,000 at March 31, 2005 and 2004, respectively.  The gross carrying value and accumulated amortization related to the core deposit premium and mortgage servicing rights as of March 31, 2005 and 2004 are presented below:

 

		March 31, 2005						March 31, 2004
(Dollars in thousands)		Gross Carrying Value			Accumulated Amortization			Gross Carrying Value			Accumulated Amortization
Core deposit premium		$	44,642		$	3,881		$	—		$	—
Mortgage servicing rights		8,082			4,432			4,180			3,669
		$	52,724		$	8,313		$	4,180		$	3,669

 

The following table presents changes in goodwill and other intangible assets for the periods presented:

 

		At or for the three months ended March 31, 2005									At or for the three months ended March 31, 2004
(Dollars in thousands)		Goodwill			Core Deposit Premium			Mortgage Servicing Rights			Goodwill			Core Deposit Premium			Mortgage Servicing Rights
Balance, beginning of period		$	284,712		$	49,188		$	3,848		$	—		$	—		$	505
Additions (deductions)		5,136			(7,127		)	122			—			—			64
Amortization		—			(1,300		)	(320		)	—			—			(59		)
Balance, end of period		$	289,848		$	40,761		$	3,650		$	—		$	—		$	510

 

11

 

Goodwill at March 31, 2005 reflected an increase of $5.1 million over the balance reported as of December 31, 2004 due to adjustments in purchase price allocation, primarily the core deposit premium amount.  A third-party valuation of the core deposit premium was finalized in the first quarter of 2005 resulting in a reduction of $7.1 million in the core deposit premium and an extension of the amortization period from 10 years to 15 years.

 

Amortization expense of core deposit premium totaled $1.3 million for the three months ended March 31, 2005.  The amortization expense recognized during the first quarter of 2005 reflects an adjustment to account for the reduction in core deposit premium amount and extension of the amortization period.  The Company estimates that amortization expense of core deposit premium will be $6.3 million in 2005.  In addition, the Company estimates that amortization expense of core deposit premium will be $3.9 million in 2006, $2.7 million in 2007 and $2.5 million in each subsequent year through 2010.

 

Amortization expense of mortgage servicing rights totaled $337,000 and $59,000 for the three months ended March 31, 2005 and 2004, respectively.  The Company estimates that amortization expense of mortgage servicing rights will be $907,000 in 2005.  In addition, the Company estimates that amortization expense of mortgage servicing rights will be $887,000 in 2006, $776,000 in 2007, $755,000 in 2008, $434,000 in 2009 and $172,000 in 2010.

 

12

 

4.  Comprehensive Loss

 

Components of other comprehensive loss, net of taxes, is presented below:

 

		March 31,
(Dollars in thousands)		2005			2004
Unrealized holding gains (losses) on available-for-sale investment securities		$	(6,074	)	$	5,932
Pension liability adjustments		(6,064		)	(6,099		)
Balance at end of period		$	(12,138	)	$	(167	)

 

5.   Segment Information

 

The Company has three reportable segments: Commercial Real Estate, Hawaii Market, and Treasury.  The segments reported are consistent with internal functional reporting lines.  They 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 Hawaii, California and Washington.  The Hawaii Market segment includes retail branch offices, corporate lending, residential mortgage lending, trust services and investment services.  A full range of deposit and loan products, and various other banking services are offered.  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 indirect auto lending, mortgage servicing, electronic banking, data processing, and management of bank owned properties.

 

The accounting policies of the segments are consistent with the Company’s accounting

 

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policies that are described in Note 1 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC.  The majority of the Company’s 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.  Prior to 2005, intersegment net interest income (expense) was allocated to each segment based on the amount of net investable funds provided (used) by that segment at a rate equal to Central Pacific Bank’s average rate on interest-sensitive assets and liabilities.  In 2005, intersegment net interest income (expense) was allocated to each segment based upon a funds transfer pricing process that matches assets and liabilities with similar 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 and assets are provided in the following table for the periods indicated.

 

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(Dollars in thousands)		Commercial Real Estate			Hawaii Market			Treasury			All Others			Total
Three months ended March 31, 2005:
Net interest income		$	27,263		$	14,684		$	3,247		$	1,126		$	46,320
Intersegment net interest income (expense)		(12,940		)	15,855			(2,968		)	53			—
Provision for loan losses		122			416			—			379			917
Other operating income		18			6,088			1,590			1,555			9,251
Other operating expense		1,607			15,339			706			13,257			30,909
Administrative and overhead expense allocation		1,255			9,096			(598		)	(9,753		)	—
Income taxes		3,492			3,376			523			(851		)	6,540
Net income		$	7,865		$	8,400		$	1,238		$	(298	)	$	17,205
Three months ended March 31, 2004:
Net interest income		$	9,713		$	8,453		$	4,314		$	221		$	22,701
Intersegment net interest income (expense)		(4,837		)	6,058			(1,218		)	(3		)	—
Provision for loan losses		(16		)	298			—			18			300
Other operating income		16			3,315			127			453			3,911
Other operating expense		345			8,124			423			5,636			14,528
Administrative and overhead expense allocation		821			4,185			(217		)	(4,789		)	—
Income taxes		1,329			1,871			1,074			(400		)	3,874
Net income		$	2,413		$	3,348		$	1,943		$	206		$	7,910
At March 31, 2005:
Investment securities		$	—		$	—		$	918,171		$	—		$	918,171
Loans (including loans held for sale)		1,545,203			1,568,347			—			154,511			3,268,061
Other		147,794			240,102			95,932			110,963			594,791
Total assets		$	1,692,997		$	1,808,449		$	1,014,103		$	265,474		$	4,781,023
At December 31, 2004:
Investment securities		$	—		$	—		$	899,421		$	—		$	899,421
Loans (including loans held for sale)		1,518,860			1,455,020			—			143,686			3,117,566
Other		140,094			232,407			146,000			116,414			634,915
Total assets		$	1,658,954		$	1,687,427		$	1,045,421		$	260,100		$	4,651,902

 

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