UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

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
incorporation or organization)

(I.R.S. Employer
Identification No.)

220 South King Street, Honolulu, Hawaii

96813

(Address of principal executive offices)

(Zip Code)

 

(808)544-0500

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x                               Accelerated filer o                                 Non-accelerated filer 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 October 29, 2006, the number of shares of common stock outstanding of the registrant was 30,667,310 shares.

 




 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Table of Contents

 

Page

Part I.

Financial Information

 

 

 

 

Item I.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets
September 30, 2006 and 2005, and December 31, 2005

 

 

 

 

 

Consolidated Statements of Income
Three and nine months ended September 30, 2006 and 2005

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
Nine months ended September 30, 2006 and 2005

 

 

 

 

 

Consolidated Statements of Cash Flows
Nine months ended September 30, 2006 and 2005

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity and Use of Proceeds

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 5.

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 may include the words “believes”, “plans”, “intends”, “expects”, “anticipates”, “forecasts” or words of similar meaning. While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could materially differ from projections for a variety of reasons, to include, but not limited to: the impact of local, national, and international economies and events (including natural disasters) 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 changes in asset quality; and the price of the Company’s stock. For further information on factors that could cause actual results to materially differ from projections, please see the Company’s publicly available Securities and Exchange Commission filings, including the Company’s Form 10-K for the last fiscal year. The Company does not update any of its forward-looking statements.

3




 

Item 1.  Financial Statements

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

 

 

September 30,

 

December 31,

 

September 30,

 

(Dollars in thousands)

 

2006

 

2005

 

2005

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

110,554

 

$

154,927

 

$

111,223

 

Interest-bearing deposits in other banks

 

9,472

 

9,813

 

15,971

 

Investment securities:

 

 

 

 

 

 

 

Held to maturity, at amortized cost (fair value of $65,821 at September 30, 2006, $70,651 at December 31, 2005, and $76,515 at September 30, 2005)

 

66,918

 

71,843

 

77,418

 

Available for sale, at fair value

 

832,255

 

853,442

 

871,942

 

Total investment securities

 

899,173

 

925,285

 

949,360

 

 

 

 

 

 

 

 

 

Loans held for sale

 

21,742

 

60,538

 

53,970

 

 

 

 

 

 

 

 

 

Loans

 

3,765,081

 

3,552,749

 

3,366,620

 

Less allowance for loan losses

 

52,611

 

52,936

 

52,745

 

Net loans

 

3,712,470

 

3,499,813

 

3,313,875

 

 

 

 

 

 

 

 

 

Premises and equipment

 

76,909

 

72,568

 

72,982

 

Accrued interest receivable

 

25,631

 

22,006

 

20,787

 

Investment in unconsolidated subsidiaries

 

11,160

 

12,417

 

12,298

 

Due from customers on acceptances

 

271

 

530

 

202

 

Goodwill

 

298,121

 

303,358

 

299,232

 

Core deposit premium

 

32,872

 

35,795

 

37,450

 

Mortgage servicing rights

 

11,794

 

11,820

 

11,848

 

Bank-owned life insurance

 

101,101

 

68,325

 

67,799

 

Federal Home Loan Bank stock

 

48,797

 

48,797

 

48,797

 

Other assets

 

18,823

 

13,147

 

25,768

 

 

 

 

 

 

 

 

 

Total assets

 

$

5,378,890

 

$

5,239,139

 

$

5,041,562

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

608,229

 

$

730,952

 

$

659,699

 

Interest-bearing demand

 

433,437

 

442,879

 

432,530

 

Savings and money market

 

1,204,488

 

1,091,057

 

1,136,418

 

Time

 

1,535,769

 

1,377,356

 

1,242,150

 

Total deposits

 

3,781,923

 

3,642,244

 

3,470,797

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

58,773

 

82,734

 

114,448

 

Long-term debt

 

730,784

 

749,258

 

709,685

 

Bank acceptances outstanding

 

271

 

530

 

202

 

Minority interest

 

13,515

 

13,157

 

13,541

 

Other liabilities

 

70,686

 

74,982

 

67,881

 

Total liabilities

 

4,655,952

 

4,562,905

 

4,376,554

 

 

 

 

 

 

 

 

 

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 30,659,972 shares at September 30, 2006, 30,436,862 shares at December 31, 2005, and 30,412,482 shares at September 30, 2005

 

430,204

 

428,012

 

427,458

 

Surplus

 

50,612

 

46,432

 

46,362

 

Retained earnings

 

258,880

 

218,341

 

204,765

 

Deferred stock awards

 

 

(612

)

(280

)

Accumulated other comprehensive loss

 

(16,758

)

(15,939

)

(13,297

)

Total shareholders’ equity

 

722,938

 

676,234

 

665,008

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,378,890

 

$

5,239,139

 

$

5,041,562

 

 

See accompanying notes to unaudited consolidated financial statements.

4




 

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

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(Dollars in thousands, except per share data)

 

2006

 

2005

 

2006

 

2005

 

Interest income:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

72,444

 

$

56,366

 

$

204,603

 

$

161,338

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

Taxable interest

 

8,486

 

8,980

 

25,996

 

24,377

 

Tax-exempt interest

 

1,227

 

1,297

 

3,822

 

3,932

 

Dividends

 

153

 

93

 

264

 

228

 

Interest on deposits in other banks

 

79

 

37

 

306

 

242

 

Interest on Federal funds sold and securities purchased under agreements to resell

 

31

 

87

 

85

 

166

 

Dividends on Federal Home Loan Bank stock

 

 

 

 

272

 

Total interest income

 

82,420

 

66,860

 

235,076

 

190,555

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Interest on deposits

 

19,155

 

9,969

 

49,424

 

26,491

 

Interest on short-term borrowings

 

1,221

 

319

 

2,035

 

1,159

 

Interest on long-term debt

 

8,949

 

6,998

 

26,163

 

18,501

 

Total interest expense

 

29,325

 

17,286

 

77,622

 

46,151

 

Net interest income

 

53,095

 

49,574

 

157,454

 

144,404

 

Provision for loan losses

 

300

 

1,000

 

1,350

 

2,917

 

Net interest income after provision for loan losses

 

52,795

 

48,574

 

156,104

 

141,487

 

 

 

 

 

 

 

 

 

 

 

Other operating income:

 

 

 

 

 

 

 

 

 

Income from fiduciary activities

 

740

 

649

 

2,157

 

1,763

 

Service charges on deposit accounts

 

3,570

 

3,383

 

10,563

 

8,281

 

Other service charges and fees

 

2,994

 

2,915

 

8,993

 

8,288

 

Equity in earnings of unconsolidated subsidiaries

 

90

 

251

 

421

 

541

 

Fees on foreign exchange

 

207

 

188

 

601

 

594

 

Loan placement fees

 

464

 

738

 

1,256

 

1,169

 

Gains on sales of loans

 

680

 

1,617

 

4,133

 

3,039

 

Investment securities gains (losses)

 

 

(23

)

(19

)

1,423

 

Income from bank-owned life insurance

 

1,085

 

522

 

2,794

 

1,670

 

Other

 

715

 

1,234

 

2,770

 

2,761

 

Total other operating income

 

10,545

 

11,474

 

33,669

 

29,529

 

 

 

 

 

 

 

 

 

 

 

Other operating expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

17,451

 

17,594

 

54,128

 

48,046

 

Net occupancy

 

2,399

 

2,516

 

6,974

 

7,560

 

Equipment

 

1,171

 

1,196

 

3,624

 

3,721

 

Amortization of core deposit premium

 

974

 

1,656

 

2,922

 

4,611

 

Communication expense

 

1,186

 

947

 

3,562

 

3,100

 

Legal and professional services

 

1,985

 

1,600

 

6,174

 

5,960

 

Computer software expense

 

716

 

553

 

1,956

 

2,221

 

Advertising expense

 

515

 

662

 

1,789

 

1,920

 

Other

 

4,819

 

5,617

 

15,324

 

14,825

 

Total other operating expense

 

31,216

 

32,341

 

96,453

 

91,964

 

Income before income taxes

 

32,124

 

27,707

 

93,320

 

79,052

 

Income taxes

 

11,521

 

9,710

 

32,940

 

25,948

 

Net income

 

$

20,603

 

$

17,997

 

$

60,380

 

$

53,104

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.67

 

$

0.59

 

$

1.98

 

$

1.78

 

Diluted earnings per share

 

0.67

 

0.58

 

1.96

 

1.75

 

Cash dividends declared

 

0.23

 

0.19

 

0.65

 

0.54

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

30,532

 

30,401

 

30,465

 

29,804

 

Diluted weighted average shares outstanding

 

30,838

 

30,836

 

30,790

 

30,266

 

 

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

Other

 

 

 

 

 

Common

 

 

 

Retained

 

Stock

 

Comprehensive

 

 

 

(Dollars in thousands, except per share data)

 

Stock

 

Surplus

 

Earnings

 

Awards

 

Loss

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2005

 

$

428,012

 

$

46,432

 

$

218,341

 

$

(612

)

$

(15,939

)

$

676,234

 

Net income

 

 

 

60,380

 

 

 

60,380

 

Net change in unrealized loss on investment securities, net of taxes of $583

 

 

 

 

 

(819

)

(819

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

59,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends ($0.65 per share)

 

 

 

(19,841

)

 

 

(19,841

)

849 shares of common stock purchased by  directors’ deferred compensation plan

 

(32

)

 

 

 

 

(32

)

212,700 shares of common stock issued in conjunction with stock option exercises

 

2,947

 

 

 

 

 

2,947

 

10,410 shares of common stock issued under stock plans

 

 

260

 

 

 

 

260

 

Share-based compensation

 

 

2,580

 

 

 

 

2,580

 

Tax benefit related to stock options exercises

 

 

675

 

 

 

 

675

 

Reclassification of share-based plans

 

(723

)

665

 

 

612

 

 

554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2006

 

$

430,204

 

$

50,612

 

$

258,880

 

$

 

$

(16,758

)

$

722,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclosure of reclassification amount:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding loss on investment securities during period, net of taxes of $572

 

$

 

$

 

$

 

$

 

$

(803

)

$

(803

)

Less reclassification adjustment for losses included in net income, net of taxes of $11

 

 

 

 

 

16

 

16

 

Net change in unrealized loss on investment securities

 

$

 

$

 

$

 

$

 

$

(819

)

$

(819

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2004

 

$

360,550

 

$

45,848

 

$

167,801

 

$

(174

)

$

(6,163

)

$

567,862

 

Net income

 

 

 

53,104

 

 

 

53,104

 

Net change in unrealized loss on investment securities, net of taxes of $4,834

 

 

 

 

 

(7,134

)

(7,134

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

45,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends ($0.54 per share)

 

 

 

(16,071

)

 

 

(16,071

)

2,012,500 shares issued in conjunction with common stock offering

 

64,210

 

 

 

 

 

64,210

 

239,125 shares of common stock issued in conjunction with stock option exercises

 

2,626

 

 

 

 

 

2,626

 

1,181 shares of common stock purchased by directors’ deferred compensation plan

 

(46

)

 

 

 

 

(46

)

2,893 shares of common stock repurchased

 

(37

)

 

(69

)

 

 

(106

)

4,355 shares of deferred stock awards granted

 

155

 

 

 

(155

)

 

 

Amortization of deferred stock awards

 

 

 

 

49

 

 

49

 

Tax impact of nonqualified stock options exercised

 

 

514

 

 

 

 

514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2005

 

$

427,458

 

$

46,362

 

$

204,765

 

$

(280

)

$

(13,297

)

$

665,008

 

Disclosure of reclassification amount:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding loss on investment securities during period, net of taxes of $4,771

 

$

 

$

 

$

 

$

 

$

(7,039

)

$

(7,039

)

Less reclassification adjustment for gains included in net income, net of taxes of $63

 

 

 

 

 

95

 

95

 

Net change in unrealized loss on investment securities

 

$

 

$

 

$

 

$

 

$

(7,134

)

$

(7,134

)

 

See accompanying notes to unaudited consolidated financial statements.

6




 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

(Dollars in thousands)

 

2006

 

2005

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

60,380

 

$

53,104

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

1,350

 

2,917

 

Provision for depreciation and amortization

 

5,150

 

5,786

 

Amortization of intangible assets

 

4,619

 

5,697

 

Net amortization of deferred stock awards

 

 

50

 

Net amortization of investment securities

 

2,236

 

3,162

 

Share-based compensation

 

2,580

 

 

Net loss (gain) on investment securities

 

19

 

(1,423

)

Net gain on sale of loans

 

(4,133

)

(3,323

)

Proceeds from sales of loans held for sale

 

413,756

 

197,927

 

Originations of loans held for sale

 

(370,827

)

(230,838

)

Tax benefits from share-based compensation

 

(675

)

 

Deferred income tax expense

 

24

 

14,713

 

Equity in earnings of unconsolidated subsidiaries

 

(421

)

(541

)

Net change in other assets and other liabilities

 

(41,561

)

(35,922

)

 

 

 

 

 

 

Net cash provided by operating activities

 

72,497

 

11,309

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from maturities of and calls on investment securities held to maturity

 

4,685

 

23,298

 

Proceeds from sales of investment securities available for sale

 

57

 

121,524

 

Proceeds from maturities of and calls on investment securities available for sale

 

392,151

 

595,998

 

Purchases of investment securities available for sale

 

(374,439

)

(853,066

)

Net loan originations

 

(212,955

)

(236,891

)

Purchases of premises and equipment

 

(9,491

)

(4,968

)

Distributions from unconsolidated subsidiaries

 

768

 

536

 

Contributions to unconsolidated subsidiaries

 

 

(1,998

)

Acquisition of Hawaii HomeLoans, Inc., net of cash and cash equivalents acquired

 

 

(8,300

)

 

 

 

 

 

 

Net cash used in investing activities

 

(199,224

)

(363,867

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

139,679

 

143,677

 

Proceeds from long-term debt

 

75,000

 

150,000

 

Repayments of long-term debt

 

(92,486

)

(26,092

)

Net decrease in short-term borrowings

 

(23,961

)

(2,452

)

Cash dividends paid

 

(19,841

)

(16,071

)

Tax benefits from share-based compensation

 

675

 

 

Proceeds from common stock offering

 

 

67,312

 

Proceeds from stock option exercises

 

2,947

 

 

Repurchases of common stock

 

 

(69

)

 

 

 

 

 

 

Net cash provided by financing activities

 

82,013

 

316,305

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(44,714

)

(36,253

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

At beginning of period

 

164,740

 

163,447

 

 

 

 

 

 

 

At end of period

 

$

120,026

 

$

127,194

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

74,354

 

$

43,176

 

Income taxes

 

25,517

 

33,942

 

Cash received during the period for:

 

 

 

 

 

Income taxes

 

3,255

 

10,498

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

Net change in common stock held by directors’ deferred compensation plan

 

$

32

 

$

46

 

 

See accompanying notes to unaudited consolidated financial statements.

7




 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.              BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Central Pacific Financial Corp. (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 2005. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

Certain prior period amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period presentation. Such reclassifications had no impact on net income or shareholders’ equity for any periods presented.

2.     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 amends the guidance in SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired beginning January 1, 2007. The Company is evaluating the impact of this new pronouncement on its consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value and permits an entity to choose to either amortize servicing assets or servicing liabilities in

8




 

proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date, or measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. SFAS 156 also permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, provided that the available-for-sale securities are identified as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value, requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value and specifies additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS 156 is effective as of the beginning of the entity’s first fiscal year that begins after September 15, 2006. The Company plans to adopt SFAS 156 on January 1, 2007, and does not expect such adoption to have a material impact on its consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of this new pronouncement on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 requires that, for split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods, an employer should recognize a liability for future benefits in accordance with SFAS No. 106. EITF 06-4 is effective for fiscal years beginning after December 15, 2007 and it requires that recognition of the effects of adoption should be either by (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The Company is currently evaluating the impact of EITF 06-4 on its consolidated financial statements.

In September 2006, the EITF reached a consensus on EITF No. 06-5, “Accounting for Purchases of Life Insurance - Determining the Amount that Could Be Realized in Accordance with FASB Tech Bulletin 85-4” (“EITF 06-5”). The EITF concluded that a policyholder should consider any additional amounts included in the contractual terms of the life insurance policy in determining the “amount that could be realized under the insurance contract” on a policy by policy basis. EITF 06-5 is effective for fiscal years beginning after December 15, 2006 and it requires that recognition of the effects of adoption should be either by (a) a change in accounting

9




 

principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods.  The Company is currently evaluating the impact of EITF 06-5 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). The standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America and expands disclosure about fair value measurements. The pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, the statement does not require any new fair value measurement. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and the Company plans to adopt SFAS 157 on January 1, 2008. The Company is evaluating the requirements of SFAS 157 and has not yet determined the impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). The statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its statement of financial position. SFAS 158 also requires an employer to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. The provisions of the statement also require an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS 158 is effective for fiscal years ending after December 15, 2006. Accordingly, the Company will be required to adopt SFAS 158 for the current fiscal year ending December 31, 2006. The Company is evaluating the requirements of SFAS 158 and has not yet determined the impact on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. The interpretations in SAB 108 contain guidance on correcting errors under the dual approach as well as provide transition guidance for correcting errors. This interpretation does not change the requirements within SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB No. 20 and FASB Statement No. 3,” for the correction of an error on financial statements. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company is currently evaluating the requirements of SAB 108 and has not yet determined the impact on its consolidated financial statements.

3.     SHARE-BASED COMPENSATION

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123, “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires all share-based

10




 

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. The Company 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. The Company recognizes 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.

Prior to January 1, 2006, as permitted by SFAS 123, the Company accounted for its share-based payment plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, whereby compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Costs of restricted stock awards granted, determined to be the fair market value of the shares at the date of grant, have been recognized as compensation expense ratably over the respective vesting period.

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:

 

Three Months Ended

 

Nine Months Ended

 

(Dollars in thousands)

 

September 30, 2006

 

September 30, 2006

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

878

 

$

2,580

 

Income tax benefit

 

(352

)

(1,034

)

Net share-based compensation effect

 

$

526

 

$

1,546

 

 

In accordance with SFAS 123R, the Company is 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. Historically, and as permitted under SFAS 123R, the Company chose to record reductions in compensation expense in the periods the awards were forfeited. The cumulative effect of the change to an estimated number of awards for which the requisite service and performance is expected to be rendered resulted in a reduction of salary expense of $0.2 million in the Consolidated Statements of Income.

Stock Option Plans

The Company has 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

11




 

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).

In February 1997, the Company adopted the 1997 Stock Option Plan (“1997 Plan”) basically as a continuance of the 1986 Stock Option Plan. In April 1997, the Company’s 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, the Company adopted and the Company’s 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. To satisfy share issuances pursuant to the share-based compensation programs, the Company issues new shares from the 2004 Plan.

The fair value of each option award is estimated on the date of grant based on the following:

Valuation and amortization method—The Company estimates the fair value of stock options granted using the Black-Scholes option pricing formula and a single option award approach. The Company uses 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 the Company’s current expectations about its anticipated dividend policy.

12




 

The fair value of the Company’s stock options granted to employees for the three and nine months ended September 30, 2006 was estimated using the following weighted-average assumptions:

 

Three and Nine Months
Ended September 30, 2006

 

Expected volatility

 

34.4

%

Risk free interest rate

 

4.9

%

Expected dividends

 

2.4

%

Expected life

 

6.5 years

 

Weighted average fair value

 

$

11.99

 

 

There were no grants of stock options for the three and nine months ended September 30, 2005.

As of September 30, 2006, the total compensation cost related to stock options granted to employees under the Company’s stock option plans but not yet recognized was approximately $3.8 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted-average period of 1.9 years and will be adjusted for subsequent changes in estimated forfeitures. The total fair value of shares vested during each of the three and nine months ended September 30, 2006 and 2005 was $0.4 million and $1.0 million, respectively.

The following is a summary of option activity for the Company’s stock option plans:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

Aggregate

 

 

 

 

 

Weighted

 

Remaining

 

Intrinsic

 

 

 

 

 

Average

 

Contractual Term

 

Value

 

 

 

Shares

 

Exercise Price

 

(in years)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2006

 

1,289,645

 

$

23.50

 

 

 

 

 

Changes during the year:

 

 

 

 

 

 

 

 

 

Granted

 

4,000

 

35.11

 

 

 

 

 

Exercised

 

(212,700

)

13.85

 

 

 

 

 

Expired

 

(560

)

27.82

 

 

 

 

 

Forfeited

 

(37,607

)

35.39

 

 

 

 

 

Outstanding at September 30, 2006

 

1,042,778

 

$

25.08

 

6.5

 

$

11,994

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at September 30, 2006

 

1,014,867

 

$

24.84

 

6.5

 

$

11,914

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2006

 

581,347

 

$

18.95

 

5.0

 

$

10,249

 

 

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 September 30, 2006. During the three and nine months ended September 30, 2006, the aggregate intrinsic value of options exercised under the Company’s

13




 

stock option plans was $4.0 million and $4.7 million, respectively, determined as of the date of exercise. The aggregate intrinsic value of options exercised during the three and nine months ended September 30, 2005 was less than $0.1 million and $5.9 million, respectively, determined as of the date of exercise.

Restricted Stock Awards

Under the 1997 and 2004 Plans, the Company awarded restricted stock awards to its 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.

As of September 30, 2006, 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.

The table below presents the activity of restricted stock awards for the nine months ended September 30, 2006.

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

 

 

 

 

 

 

Nonvested at January 1, 2006

 

20,420

 

$

33.36

 

Changes during the year:

 

 

 

 

 

Granted

 

3,000

 

35.10

 

Vested

 

(900

)

14.50

 

Nonvested at September 30, 2006

 

22,520

 

34.35

 

 

 

 

 

 

 

Vested and expected to vest at September 30, 2006

 

22,520

 

34.35

 

 

Performance Shares and Stock Appreciation Rights

In 2005, the Company established a Long Term Incentive Plan (“LTIP”) that covers certain executive and senior management personnel. The LTIP is comprised of three components: performance shares, stock appreciation rights, and cash awards.

Performance shares are granted under the 2004 Plan and 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 requires 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 the Company to assess the expectation over the performance period of the performance targets being achieved as well as to estimate expected pre-vested

14




 

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.

As of September 30, 2006, there was $1.3 million of total unrecognized compensation cost related to performance shares that is expected to be recognized over a weighted-average period of 1.5 years.

The table below presents activity of performance shares for the nine months ended September 30, 2006:

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

 

 

 

 

 

 

Nonvested at January 1, 2006

 

94,698

 

$

34.43

 

Changes during the year:

 

 

 

 

 

Granted

 

6,737

 

35.67

 

Forfeited

 

(18,420

)

33.77

 

Nonvested at September 30, 2006

 

83,015

 

34.68

 

 

 

 

 

 

 

Vested and expected to vest at September 30, 2006

 

69,973

 

34.53

 

 

Stock appreciation rights (“SARs”) are granted under the 2004 Plan. These SARs require the employee to achieve the same performance conditions as the performance shares described above as well as to satisfy service conditions that approximate three years from the date of grant.  Upon exercise of the SAR, 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.  The Company 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 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 is determined at 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. Similar to the performance shares 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.

15




 

The fair value of SARs granted to employees for the three and nine months ended September 30, 2006 was estimated using Black-Scholes option pricing formula with the following weighted-average assumptions:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Expected volatility

 

33.3

%

 

33.3

%

34.3

%

Risk free interest rate

 

4.9

%

 

4.9

%

4.8

%

Expected dividends

 

2.4

%

 

2.4

%

2.3

%

Expected life in years

 

6.1

 

 

6.1

 

6.3

 

Weighted average fair value

 

$

11.48

 

 

$

11.48

 

$

12.40

 

 

As of September 30, 2006, there was $0.3 million of total unrecognized compensation cost related to SARs that is expected to be recognized over a weighted-average period of 2.4 years.

The table below presents activity of SARs for the nine months ended September 30, 2006:

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

 

 

Exercise

 

Contractual Term

 

Value

 

 

 

Shares

 

Price

 

(in years)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2006

 

34,685

 

$

1.72

 

 

 

 

 

Changes during the year:

 

 

 

 

 

 

 

 

 

Granted

 

31,547

 

10.80

 

 

 

 

 

Forfeited

 

(10,071

)

2.67

 

 

 

 

 

Outstanding at September 30, 2006

 

56,161

 

6.65

 

9.0

 

$

93

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest  at September 30, 2006

 

52,961

 

6.62

 

9.0

 

$

89

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2006

 

 

 

 

$

 

 

16




 

Pro Forma Disclosures

The following table illustrates the effect on net income and net income per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation during the three and nine months ended September 30, 2005:

 

Three Months Ended

 

Nine Months Ended

 

(Dollars in thousands, except per share amounts)

 

September 30, 2005

 

September 30, 2005

 

 

 

 

 

 

 

Net income, as reported

 

$

17,997

 

$

53,104

 

Add: Stock-based compensation expense included in reported net income, net of related tax effects

 

11

 

29

 

Deduct: Total stock compensation expense determined under fair value based method for all awards, net of related tax effects

 

(183

)

(548

)

 

 

 

 

 

 

Pro forma net income

 

$

17,825

 

$

52,585

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic - as reported

 

$

0.59

 

$

1.78

 

Basic - pro forma

 

$

0.58

 

$

1.76

 

 

 

 

 

 

 

Diluted - as reported

 

$

0.58

 

$

1.75

 

Diluted - pro forma

 

$

0.57

 

$

1.73

 

 

For purposes of this pro forma disclosure, the value of the options was estimated using the Black-Scholes option pricing formula and amortized on a straight-line basis over the respective vesting periods of the awards, with forfeitures recognized as they occurred.

4.     EARNINGS PER SHARE

The following table presents the information used to compute basic and diluted earnings per share for the periods indicated:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except per share data)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,603

 

$

17,997

 

$

60,380

 

$

53,104

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

30,532

 

30,401

 

30,465

 

29,804

 

Dilutive effect of employee stock options and awards

 

306

 

435

 

325

 

462

 

Weighted average shares outstanding - diluted

 

30,838

 

30,836

 

30,790

 

30,266

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.67

 

$

0.59

 

$

1.98

 

$

1.78

 

Diluted earnings per share

 

$

0.67

 

$

0.58

 

$

1.96

 

$

1.75

 

 

17




 

5.     MERGER WITH CB BANCSHARES, INC.

The Company completed its merger with CB Bancshares, Inc. (“CBBI”) on September 15, 2004 (the “Effective Date”). 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 the cost of the merger, resulting in an increase in goodwill. Certain adjustments to the estimates have been recorded as adjustments to the cost of the merger.

The Company closed nine CBBI branch offices in February 2005 and vacated the former CBBI headquarters, consolidated certain operational functions with the Company’s operations, and eliminated approximately 70 positions from the combined organization. These exit plans were finalized and completed in the third quarter of 2005.

The following table sets forth information related to the exit costs accrued, adjustments to estimates and payments made against accrued amounts:

 

 

Balance as of

 

Adjustments to

 

 

 

Balance as of

 

(Dollars in thousands)

 

December 31, 2005

 

estimates

 

Payments

 

September 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Severance

 

$

63

 

$

 

$

63

 

$

 

Lease termination fees

 

9,310

 

(1,026

)

2,509

 

5,775

 

Asset write-offs

 

983

 

 

 

983

 

Contract termination fees

 

388

 

 

 

21

 

367

 

Total

 

$

10,744

 

$

(1,026

)

$

2,593

 

$

7,125

 

 

6.     GOODWILL AND OTHER INTANGIBLE ASSETS

At September 30, 2006, goodwill recorded in conjunction with the acquisitions of CBBI and Hawaii Home Loans, Inc. (“HHL”) totaled $298.1 million, of which $153.1 million was allocated to the Hawaii Market reporting segment and $145.0 million was allocated to the Commercial Real Estate reporting segment.

Other intangible assets included a core deposit premium of $32.9 million and $37.4 million and mortgage servicing rights of $11.8 million and $11.8 million at September 30, 2006 and 2005, respectively. The gross carrying value and accumulated amortization related to the core deposit premium and mortgage servicing rights as of September 30, 2006 and 2005 are presented below:

 

 

September 30, 2006

 

December 31, 2005

 

September 30, 2005

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

(Dollars in thousands)

 

Value

 

Amortization

 

Value

 

Amortization

 

Value

 

Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core deposit premium

 

$

44,642

 

$

11,770

 

$

44,642

 

$

8,847

 

$

44,642

 

$

7,192

 

Mortgage servicing rights

 

18,705

 

6,911

 

17,051

 

5,231

 

17,111

 

5,263

 

 

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

18




 

 

 

Three Months Ended

 

 

 

September 30, 2006

 

September 30, 2005

 

 

 

 

 

 

 

Mortgage

 

 

 

 

 

Mortgage

 

 

 

 

 

Core Deposit

 

Servicing

 

 

 

Core Deposit

 

Servicing

 

(Dollars in thousands)

 

Goodwill

 

Premium

 

Rights

 

Goodwill

 

Premium

 

Rights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

297,251

 

$

33,846

 

$

11,873

 

$

288,090

 

$

39,105

 

$

3,470

 

Additions (deductions)

 

870

 

 

468

 

11,142

 

 

8,956

 

Amortization

 

 

(974

)

(547

)

 

(1,655

)

(578

)

Balance, end of period

 

$

298,121

 

$

32,872

 

$

11,794

 

$

299,232

 

$

37,450

 

$

11,848

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2006

 

September 30, 2005

 

 

 

 

 

 

 

Mortgage

 

 

 

 

 

Mortgage

 

 

 

 

 

Core Deposit

 

Servicing

 

 

 

Core Deposit

 

Servicing

 

 

 

Goodwill

 

Premium

 

Rights

 

Goodwill

 

Premium

 

Rights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

303,358

 

$

35,795

 

$

11,820

 

$

284,712

 

$

49,188

 

$

3,848

 

Additions (deductions)

 

(5,237

)

 

1,671

 

14,520

 

(7,127

)

9,151

 

Amortization

 

 

(2,923

)

(1,697

)

 

(4,611

)

(1,151

)

Balance, end of period

 

$

298,121

 

$

32,872

 

$

11,794

 

$

299,232

 

$

37,450

 

$

11,848

 

 

Goodwill at September 30, 2006 reflected a decrease of $5.2 million from the balance reported as of December 31, 2005 due to adjustments related to CBBI income tax contingencies and subleases of CBBI leased properties. These decreases were partially offset by an earnout payment associated with the Company’s fiscal 2005 acquisition of HHL.

Based on the core deposit premium and mortgage servicing rights held as of September 30, 2006, estimated amortization expense for the remainder of fiscal 2006, the next five succeeding fiscal years and all years thereafter are as follows:

 

Estimated Amortization Expense

 

 

 

 

 

Mortgage

 

 

 

Core Deposit

 

Servicing

 

(Dollars in thousands)

 

Premium

 

Rights

 

 

 

 

 

 

 

2006 (remainder)

 

$

974

 

$

519

 

2007

 

2,739

 

1,889

 

2008

 

2,491

 

1,524

 

2009

 

2,491

 

1,184

 

2010

 

2,491

 

980

 

2011

 

2,491

 

816

 

Thereafter

 

19,195

 

4,882

 

 

 

$

32,872

 

$

11,794

 

 

19




 

7.     LOANS

Loans, excluding loans held for sale, consisted of the following at the dates indicated:

 

September 30,

 

December 31,

 

September 30,

 

(Dollars in thousands)

 

2006

 

2005

 

2005

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

429,625

 

$

561,470

 

$

524,030

 

Real Estate:

 

 

 

 

 

 

 

Construction

 

1,028,197

 

681,554

 

597,688

 

Mortgage-Commercial

 

1,177,995

 

1,276,564

 

1,267,388

 

Mortgage-Residential

 

909,784

 

796,015

 

758,295

 

Consumer

 

185,353

 

207,455

 

196,380

 

Leases

 

48,764

 

45,394

 

38,375

 

 

 

3,779,718

 

3,568,452

 

3,382,156