form10-q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
______________________

FORM 10-Q
______________________

(Mark One)

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or

£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission file number 001-31567
 
 
CENTRAL PACIFIC FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

Hawaii
99-0212597
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

220 South King Street, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)

(808) 544-0500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  T   No  £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  T   No  £

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

Large accelerated filer £
Accelerated filer T
Non-accelerated filer £
Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  £   No  T
 
The number of shares outstanding of registrant’s common stock, no par value, on April 25, 2014 was 35,941,072 shares.
 


 
 

 
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

Table of Contents
 
Part I.
Financial Information
   
Item I.
Financial Statements (Unaudited)
   
 
Consolidated Balance Sheets
March 31, 2014 and December 31, 2013
   
 
Consolidated Statements of Income
Three months ended March 31, 2014 and 2013
   
 
Consolidated Statements of Comprehensive Income
Three months ended March 31, 2014 and 2013
   
 
Consolidated Statements of Changes in Equity
Three months ended March 31, 2014 and 2013
   
 
Consolidated Statements of Cash Flows
Three months ended March 31, 2014 and 2013
   
 
Notes to Consolidated Financial Statements
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
   
Item 4.
Controls and Procedures
   
Part II.
Other Information
   
Item 1A.
Risk Factors
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
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/loss, earnings/loss 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,” “hopes,” “should,” “estimates” 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 be limited to: an increase in inventory or adverse conditions in the Hawaii and California real estate markets and deterioration in the construction industry; adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, further deterioration in asset quality, and further losses in our loan portfolio; the impact of local, national, and international economies and events (including natural disasters such as wildfires, tsunamis, storms and earthquakes) on the Company’s business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business; deterioration or malaise in domestic economic conditions, including any further destabilization in the financial industry and deterioration of the real estate market, as well as the impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular; changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, changes in capital standards, other regulatory reform, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau, government-sponsored enterprise reform, and any related rules and regulations on our business operations and competitiveness; 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; ability to successfully implement our initiatives to lower our efficiency ratio; the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, securities market and monetary fluctuations; negative trends in our market capitalization and adverse changes in the price of the Company’s common shares; political instability; acts of war or terrorism; changes in consumer spending, borrowings and savings habits; failure to maintain effective internal control over financial reporting or disclosure controls and procedures; technological changes; changes in the competitive environment among financial holding companies and other financial service providers; 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; our ability to attract and retain skilled employees; changes in our organization, compensation and benefit plans; and our success at managing the risks involved in the foregoing items. For further information on factors that could cause actual results to materially differ from projections, please see the Company’s publicly available Securities and Exchange Commission filings, including the Company’s Form 10-K for the last fiscal year and, in particular, the discussion of “Risk Factors” set forth therein. The Company does not update any of its forward-looking statements except as required by law.
 
 
 
3

 
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
           
 
March 31,
   
December 31,
 
 
2014
   
2013
 
 
(Dollars in thousands)
 
Assets
         
Cash and due from banks
$ 85,347     $ 45,092  
Interest-bearing deposits in other banks
  5,919       4,256  
Investment securities:
             
   Available for sale, at fair value
  1,408,124       1,407,999  
   Held to maturity, at amortized cost (fair value of $238,782 at
             
      March 31, 2014 and $238,705 at December 31, 2013)
  248,788       252,047  
      Total investment securities
  1,656,912       1,660,046  
               
Loans held for sale
  11,247       12,370  
               
Loans and leases
  2,697,454       2,630,601  
Allowance for loan and lease losses
  (83,162 )     (83,820 )
      Net loans and leases
  2,614,292       2,546,781  
               
Premises and equipment, net
  47,992       49,039  
Accrued interest receivable
  13,507       14,072  
Investment in unconsolidated subsidiaries
  8,478       9,127  
Other real estate
  4,829       5,163  
Other intangible assets
  31,951       32,783  
Bank-owned life insurance
  150,274       149,604  
Federal Home Loan Bank stock
  45,592       46,193  
Other assets
  151,097       166,672  
      Total assets
$ 4,827,437     $ 4,741,198  
               
Liabilities and Equity
             
Deposits:
             
   Noninterest-bearing demand
$ 939,138     $ 891,017  
   Interest-bearing demand
  744,690       728,619  
   Savings and money market
  1,230,480       1,207,016  
   Time
  1,071,459       1,109,521  
      Total deposits
  3,985,767       3,936,173  
               
Short-term borrowings
  102,000       8,015  
Long-term debt
  92,795       92,799  
Other liabilities
  38,411       44,037  
      Total liabilities
  4,218,973       4,081,024  
               
Equity:
             
   Preferred stock, no par value, authorized 1,100,000 shares, issued and
             
      outstanding none at March 31, 2014 and December 31, 2013, respectively
  -       -  
   Common stock, no par value, authorized 185,000,000 shares, issued and
             
      outstanding 38,723,250 and 42,107,633 shares at March 31, 2014 and
             
      December 31, 2013, respectively
  715,708       784,547  
   Surplus
  76,426       75,498  
   Accumulated deficit
  (177,649 )     (184,087 )
   Accumulated other comprehensive loss
  (6,082 )     (15,845 )
      Total shareholders' equity
  608,403       660,113  
   Non-controlling interest
  61       61  
      Total equity
  608,464       660,174  
      Total liabilities and equity
$ 4,827,437     $ 4,741,198  
               
See accompanying notes to consolidated financial statements.
 
 
4

 
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
 
(Unaudited)
 
             
   
Three Months Ended March 31,
 
(Amounts in thousands, except per share data)
 
2014
   
2013
 
             
Interest income:
           
  Interest and fees on loans and leases
  $ 26,883     $ 24,443  
  Interest and dividends on investment securities:
               
    Taxable interest
    9,496       7,031  
    Tax-exempt interest
    994       1,027  
    Dividends
    1       5  
  Interest on deposits in other banks
    7       89  
  Dividends on Federal Home Loan Bank stock
    12       -  
    Total interest income
    37,393       32,595  
                 
Interest expense:
               
  Interest on deposits:
               
    Demand
    90       81  
    Savings and money market
    224       217  
    Time
    630       759  
  Interest on short-term borrowings
    17       -  
  Interest on long-term debt
    636       869  
    Total interest expense
    1,597       1,926  
                 
    Net interest income
    35,796       30,669  
Provision (credit) for loan and lease losses
    (1,316 )     (6,561 )
    Net interest income after provision for loan and lease losses
    37,112       37,230  
                 
Other operating income:
               
  Service charges on deposit accounts
    1,993       1,591  
  Loan servicing fees
    1,444       1,543  
  Other service charges and fees
    2,943       2,787  
  Income from fiduciary activities
    1,062       697  
  Equity in earnings of unconsolidated subsidiaries
    52       28  
  Fees on foreign exchange
    114       71  
  Income from bank-owned life insurance
    670       564  
  Loan placement fees
    143       149  
  Net gain on sales of residential loans
    1,239       4,128  
  Net gain on sales of foreclosed assets
    162       558  
  Other
    322       914  
    Total other operating income
    10,144       13,030  
                 
Other operating expense:
               
  Salaries and employee benefits
    17,434       18,535  
  Net occupancy
    3,590       3,227  
  Equipment
    796       958  
  Amortization of other intangible assets
    1,240       2,248  
  Communication expense
    894       950  
  Legal and professional services
    1,812       2,310  
  Computer software expense
    1,358       933  
  Advertising expense
    686       812  
  Foreclosed asset expense
    105       300  
  Other
    4,015       2,480  
    Total other operating expense
    31,930       32,753  
                 
     Income before income taxes
    15,326       17,507  
Income tax expense (benefit)
    5,518       (119,802 )
     Net income
  $ 9,808     $ 137,309  
                 
Per common share data:
               
   Basic earnings per share
  $ 0.23     $ 3.28  
   Diluted earnings per share
    0.23       3.25  
   Cash dividends declared
    0.08       -  
                 
Shares used in computation:
               
  Basic shares
    41,915       41,816  
  Diluted shares
    42,477       42,297  
                 
See accompanying notes to consolidated financial statements.
 
 
5

 
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(Unaudited)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
   
(Dollars in thousands)
 
             
Net income
  $ 9,808     $ 137,309  
Other comprehensive income, net of tax
               
   Net change in unrealized gain (loss) on investment securities
    9,576       (4,823 )
   Net change in unrealized loss on derivatives
    -       10,993  
   Minimum pension liability adjustment
    187       625  
Other comprehensive income, net of tax
    9,763       6,795  
Comprehensive income
  $ 19,571     $ 144,104  
                 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
6

 
CENTRAL PACIFIC FINANCIAL CORP. & SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
(Unaudited)
 
                                         
                         
Accumulated
             
                         
Other
   
Non-
       
 
Preferred
   
Common
         
Accumulated
   
Comprehensive
   
Controlling
       
 
Stock
   
Stock
   
Surplus
   
Deficit
   
Income (Loss)
   
Interests
   
Total
 
 
(Dollars in thousands, except per share data)
 
                                         
Balance at December 31, 2013
$ -     $ 784,547     $ 75,498     $ (184,087 )   $ (15,845 )   $ 61     $ 660,174  
Net income
  -       -       -       9,808       -       -       9,808  
Other comprehensive income
  -       -       -       -       9,763       -       9,763  
Cash dividends ($0.08 per share)
  -       -       -       (3,370 )     -       -       (3,370 )
3,368 shares of common stock sold by
                                                     
  directors' deferred compensation plan
  -       34       -       -       -       -       34  
3,405,888 shares of common stock
                                                     
  repurchased and other related costs
  -       (68,873 )     -       -       -       -       (68,873 )
Share-based compensation
  -       -       928       -       -       -       928  
Non-controlling interests
  -       -       -       -       -       -       -  
Balance at March 31, 2014
$ -     $ 715,708     $ 76,426     $ (177,649 )   $ (6,082 )   $ 61     $ 608,464  
                                                       
Balance at December 31, 2012
$ -     $ 784,512     $ 70,567     $ (349,427 )   $ (830 )   $ 9,957     $ 514,779  
Net income
  -       -       -       137,309       -       -       137,309  
Other comprehensive income
  -       -       -       -       6,795       -       6,795  
83 shares of common stock sold by
                                                     
  directors' deferred compensation plan
  -       7       -       -       -       -       7  
Share-based compensation
  -       -       1,168       -       -       -       1,168  
Non-controlling interests
  -       -       -       -       -       (6 )     (6 )
Balance at March 31, 2013
$ -     $ 784,519     $ 71,735     $ (212,118 )   $ 5,965     $ 9,951     $ 660,052  
                                                       
See accompanying notes to consolidated financial statements.
 
 
 
 
 
7

 
CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
             
   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
(Dollars in thousands)
 
Cash flows from operating activities:
           
Net income
  $ 9,808     $ 137,309  
   Adjustments to reconcile net income to net cash provided by operating activities:
         
Provision (credit) for loan and lease losses
    (1,316 )     (6,561 )
Depreciation and amortization
    1,463       1,518  
Write down of other real estate, net of gain on sale
    (65 )     (584 )
Amortization of other intangible assets
    1,240       2,248  
Net amortization of investment securities
    2,191       3,962  
Share-based compensation
    928       1,168  
Net gain on sales of residential loans
    (1,239 )     (4,128 )
Proceeds from sales of loans held for sale
    84,989       212,432  
Originations of loans held for sale
    (82,627 )     (187,314 )
Equity in earnings of unconsolidated subsidiaries
    (52 )     (28 )
Increase in cash surrender value of bank-owned life insurance
    (670 )     (564 )
Deferred income taxes
    5,535       (119,802 )
Net change in other assets and liabilities
    (1,169 )     (6,918 )
Net cash provided by operating activities
    19,016       32,738  
                 
Cash flows from investing activities:
               
Proceeds from maturities of and calls on investment securities available for sale
    32,639       155,045  
Purchases of investment securities available for sale
    (18,923 )     (164,052 )
Proceeds from maturities of and calls on investment securities held to maturity
    3,171       2,388  
Net loan originations
    (66,567 )     (74,798 )
Proceeds from sales of loans originated for investment
    -       460  
Proceeds from sale of other real estate
    771       1,842  
Purchases of premises and equipment
    (416 )     (1,337 )
Distributions from unconsolidated subsidiaries
    354       550  
Contributions to unconsolidated subsidiaries
    (60 )     (50 )
Proceeds from redemption of FHLB stock
    601       434  
Net cash used in investing activities
    (48,430 )     (79,518 )
                 
Cash flows from financing activities:
               
Net increase in deposits
    49,594       83,919  
Repayments of long-term debt
    (4 )     (5 )
Net increase in short-term borrowings
    93,985       -  
Cash dividends paid on common stock
    (3,370 )     -  
Repurchases of common stock and other related costs
    (68,873 )     -  
Net cash provided by financing activities
    71,332       83,914  
                 
Net increase in cash and cash equivalents
    41,918       37,134  
Cash and cash equivalents at beginning of period
    49,348       177,375  
Cash and cash equivalents at end of period
  $ 91,266     $ 214,509  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 1,654     $ 14,048  
Income taxes
    -       5  
Cash received during the period for:
               
Income taxes
    79       -  
Supplemental disclosure of noncash investing and financing activities:
               
Net change in common stock held by directors' deferred compensation plan
  $ (34 )   $ (7 )
Net reclassification of loans to other real estate
    372       640  
                 
See accompanying notes to consolidated financial statements.
   
 
8

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

1.   BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Central Pacific Financial Corp. and Subsidiaries (herein referred to as the “Company,” “we,” “us” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 2013. 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 consolidated financial statements and the notes thereto have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net income or shareholders’ equity for any periods presented.

2.  REGULATORY MATTERS

On October 9, 2012, the bank entered into a Memorandum of Understanding (the “Compliance MOU”) with the Federal Deposit Insurance Corporation (the “FDIC”) to improve the bank’s compliance management system (“CMS”). Under the Compliance MOU, we are required to, among other things, (i) improve the Board of Directors’ oversight of the bank’s CMS; (ii) ensure the establishment and implementation of the bank’s CMS is commensurate with the complexity of the bank’s operations; (iii) perform a full review of all compliance policy and procedures, then revise and adopt policy and procedures to ensure compliance with all consumer protection regulations; (iv) enhance the bank’s training program relating to consumer protection and fair lending regulations; (v) develop and implement an effective internal monitoring program to ensure compliance with all applicable laws and regulations; (vi) strengthen the compliance audit function to ensure that the compliance audits are appropriately and comprehensively scoped; (vii) develop and implement internal controls for the bank’s third-party payment processing activity; (viii) strengthen the Board of Directors and senior management’s oversight of third-party relationships and (ix) enhance the bank’s overdraft payment program. The bank believes it has already taken substantial steps to comply with the Compliance MOU. In addition to the steps taken to comply with the Compliance MOU, the bank received an “Outstanding” rating in its most recent Community Reinvestment performance evaluation that measures how financial institutions support their communities in the areas of lending, investment and service.

We cannot assure you whether or when the Company and the bank will be in full compliance with the Compliance MOU or whether or when the Compliance MOU will be terminated. Even if terminated, we may still be subject to other agreements with regulators which restrict our activities or may also continue to impose capital ratios or other requirements on our business. The requirements and restrictions of the Compliance MOU are judicially enforceable and the Company or the bank's failure to comply with such requirements and restrictions may subject the Company and the bank to additional regulatory restrictions including: the imposition of additional regulatory requirements or orders; limitations on our activities; the imposition of civil monetary penalties; and further directives which affect our business, including, in the most severe circumstances, termination of the bank’s deposit insurance or appointment of a conservator or receiver for the bank.

3.   RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The provisions of ASU 2013-11 provide guidance for financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar loss or a tax credit carryforward exists. The Company has reflected the adoption of this guidance prospectively on January 1, 2014, the effective date of ASU 2013-11. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 
9

 
4.   INVESTMENT SECURITIES

A summary of available for sale and held to maturity investment securities are as follows:
 
       
Gross
   
Gross
   
Estimated
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
Cost
   
Gains
   
Losses
   
Value
 
(Dollars in thousands)
At March 31, 2014:
                   
Held to Maturity:
                   
   Mortgage-backed securities - U.S. Government sponsored entities
$ 248,788     $ -     $ (10,006 )   $ 238,782
                             
Available for Sale:
                           
   Debt securities:
                           
      States and political subdivisions
$ 191,556     $ 861     $ (7,291 )   $ 185,126
      Corporate securities
  156,686       2,332       (727 )     158,291
   Mortgage-backed securities:
                           
      U.S. Government sponsored entities
  902,088       6,948       (9,970 )     899,066
      Non-agency collateralized mortgage obligations
  166,535       1,423       (3,099 )     164,859
   Other
  672       110       -       782
   Total
$ 1,417,537     $ 11,674     $ (21,087 )   $ 1,408,124
                             
At December 31, 2013:
                           
Held to Maturity:
                           
   Mortgage-backed securities - U.S. Government sponsored entities
$ 252,047     $ -     $ (13,342 )   $ 238,705
                             
Available for Sale:
                           
   Debt securities:
                           
      States and political subdivisions
$ 191,158     $ 305     $ (12,106 )   $ 179,357
      Corporate securities
  157,337       1,878       (1,120 )     158,095
   Mortgage-backed securities:
                           
      U.S. Government sponsored entities
  936,144       7,085       (15,603 )     927,626
      Non-agency collateralized mortgage obligations
  147,902       81       (5,937 )     142,046
   Other
  755       120       -       875
   Total
$ 1,433,296     $ 9,469     $ (34,766 )   $ 1,407,999
 
The amortized cost and estimated fair value of investment securities at March 31, 2014 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
March 31, 2014
 
Amortized Cost
   
Estimated Fair Value
 
(Dollars in thousands)
Held to Maturity
       
  Mortage-backed securities
$ 248,788     $ 238,782
             
Available for Sale
           
  Due in one year or less
$ 2,188     $ 2,192
  Due after one year through five years
  98,528       100,233
  Due after five years through ten years
  122,509       121,335
  Due after ten years
  125,017       119,657
  Mortage-backed securities
  1,068,623       1,063,925
  Other
  672       782
    Total
$ 1,417,537     $ 1,408,124
 
10

 
We did not sell any available for sale securities during the first quarter of 2014 and 2013.

Investment securities of $847.5 million and $914.1 million at March 31, 2014 and December 31, 2013, respectively, were pledged to secure public funds on deposit and other long-term and short-term borrowings. None of these securities were pledged to a secured party that has the right to sell or repledge the collateral as of the same periods.

Provided below is a summary of the 283 and 321 investment securities which were in an unrealized loss position at March 31, 2014 and December 31, 2013, respectively.
 
   
Less than 12 months
   
12 months or longer
   
Total
 
    Fair    
Unrealized
    Fair    
Unrealized
    Fair    
Unrealized
 
Description of Securities
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(Dollars in thousands)
 
At March 31, 2014:
                                   
Debt securities:
                                   
   States and political subdivisions
  $ 101,558     $ (4,194 )   $ 48,502     $ (3,097 )   $ 150,060     $ (7,291 )
   Corporate securities
    58,999       (727 )     -       -       58,999       (727 )
                                                 
Mortgage-backed securities:
                                               
   U.S. Government sponsored entities
    802,107       (19,176 )     17,192       (800 )     819,299       (19,976 )
   Non-agency collateralized mortgage obligations
    78,555       (3,099 )     -       -       78,555       (3,099 )
   Total temporarily impaired securities
  $ 1,041,219     $ (27,196 )   $ 65,694     $ (3,897 )   $ 1,106,913     $ (31,093 )
                                                 
At December 31, 2013:
                                               
Debt securities:
                                               
   States and political subdivisions
  $ 137,176     $ (8,985 )   $ 32,747     $ (3,121 )   $ 169,923     $ (12,106 )
   Corporate securities
    75,368       (1,120 )     -       -       75,368       (1,120 )
                                                 
Mortgage-backed securities:
                                               
   U.S. Government sponsored entities
    909,585       (28,386 )     4,848       (559 )     914,433       (28,945 )
   Non-agency collateralized mortgage obligations
    129,991       (5,937 )     -       -       129,991       (5,937 )
   Total temporarily impaired securities
  $ 1,252,120     $ (44,428 )   $ 37,595     $ (3,680 )   $ 1,289,715     $ (48,108 )
 
Other-Than-Temporary Impairment (“OTTI”)

Unrealized losses for all investment securities are reviewed to determine whether the losses are deemed “other-than-temporary.” Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. In conducting this assessment, we evaluate a number of factors including, but not limited to:

·  
The length of time and the extent to which fair value has been less than the amortized cost basis;
·  
Adverse conditions specifically related to the security, an industry, or a geographic area;
·  
The historical and implied volatility of the fair value of the security;
·  
The payment structure of the debt security and the likelihood of the issuer being able to make payments;
·  
Failure of the issuer to make scheduled interest or principal payments;
·  
Any rating changes by a rating agency; and
·  
Recoveries or additional decline in fair value subsequent to the balance sheet date.

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses.

The declines in market value were primarily attributable to changes in interest rates. Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not consider these investments to be other-than-temporarily impaired.
 
11

 
5.   LOANS AND LEASES

Loans and leases, excluding loans held for sale, consisted of the following:
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
   
(Dollars in thousands)
 
             
Commercial, financial and agricultural
  $ 435,692     $ 398,365  
Real estate:
               
  Construction
    86,958       75,927  
  Mortgage - residential
    1,178,533       1,135,155  
  Mortgage - commercial
    684,546       703,800  
Consumer
    306,440       311,670  
Leases
    5,338       6,241  
      2,697,507       2,631,158  
Unearned income
    (53 )     (557 )
  Total loans and leases
  $ 2,697,454     $ 2,630,601  
 
During the three months ended March 31, 2014, we transferred one loan with a carrying value of $0.4 million to other real estate. We did not transfer any portfolio loans to the held-for-sale category and no portfolio loans were sold or purchased during the three months ended March 31, 2014.

During the three months ended March 31, 2013, we transferred two loans with a carrying value of $0.6 million to other real estate. We did not transfer any portfolio loans to the held-for-sale category and no portfolio loans were sold or purchased during the three months ended March 31, 2013.

 
12

 
Impaired Loans

The following table presents by class, the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on the Company’s impairment measurement method as of March 31, 2014 and December 31, 2013:
 
 
Commercial,
   
Real Estate
                   
 
Financial & Agricultural
   
Construction
   
Mortgage -
Residential
   
Mortgage - Commercial
   
Consumer
   
Leases
   
Total
 
 
(Dollars in thousands)
 
March 31, 2014
                                       
Allowance for loan and lease losses:
                                       
   Ending balance attributable to loans:
                                       
      Individually evaluated for impairment
$ 3,492     $ -     $ -     $ -     $ -     $ -     $ 3,492  
      Collectively evaluated for impairment
  9,294       14,940       17,812       25,925       5,687       12       73,670  
    12,786       14,940       17,812       25,925       5,687       12       77,162  
      Unallocated
                                                  6,000  
         Total ending balance
$ 12,786     $ 14,940     $ 17,812     $ 25,925     $ 5,687     $ 12     $ 83,162  
                                                       
Loans and leases:
                                                     
   Individually evaluated for impairment
$ 17,462     $ 5,309     $ 36,313     $ 15,922     $ -     $ -     $ 75,006  
   Collectively evaluated for impairment
  418,230       81,649       1,142,220       668,624       306,440       5,338       2,622,501  
    435,692       86,958       1,178,533       684,546       306,440       5,338       2,697,507  
   Unearned income
  552       (303 )     1,559       (993 )     (868 )     -       (53 )
         Total ending balance
$ 436,244     $ 86,655     $ 1,180,092     $ 683,553     $ 305,572     $ 5,338     $ 2,697,454  
                                                       
December 31, 2013
                                                     
Allowance for loan and lease losses:
                                                     
   Ending balance attributable to loans:
                                                     
      Individually evaluated for impairment
$ 349     $ -     $ -     $ -     $ -     $ -     $ 349  
      Collectively evaluated for impairment
  12,847       2,774       25,272       29,947       6,576       55       77,471  
    13,196       2,774       25,272       29,947       6,576       55       77,820  
      Unallocated
                                                  6,000  
         Total ending balance
$ 13,196     $ 2,774     $ 25,272     $ 29,947     $ 6,576     $ 55     $ 83,820  
                                                       
Loans and leases:
                                                     
   Individually evaluated for impairment
$ 3,939     $ 8,065     $ 36,779     $ 16,271     $ -     $ -     $ 65,054  
   Collectively evaluated for impairment
  394,426       67,862       1,098,376       687,529       311,670       6,241       2,566,104  
    398,365       75,927       1,135,155       703,800       311,670       6,241       2,631,158  
   Unearned income
  351       (311 )     1,418       (1,033 )     (982 )     -       (557 )
         Total ending balance
$ 398,716     $ 75,616     $ 1,136,573     $ 702,767     $ 310,688     $ 6,241     $ 2,630,601  
 
 
13

 
The following table presents by class, impaired loans as of March 31, 2014 and December 31, 2013:

 
Unpaid Principal Balance
   
Recorded
Investment
   
Allowance
Allocated
 
(Dollars in thousands)
March 31, 2014
             
Impaired loans with no related allowance recorded:
             
Commercial, financial & agricultural
$ 3,389     $ 3,389     $ -
Real estate:
                   
   Construction
  11,695       5,309       -
   Mortgage - residential
  40,370       36,313       -
   Mortgage - commercial
  22,003       15,922       -
      Total impaired loans with no related allowance recorded
  77,457       60,933       -
Impaired loans with an allowance recorded:
                   
Commercial, financial & agricultural
  15,571       14,073       3,492
      Total impaired loans with an allowance recorded
  15,571       14,073       3,492
Total
$ 93,028     $ 75,006     $ 3,492
                     
December 31, 2013
                   
Impaired loans with no related allowance recorded:
                   
Commercial, financial & agricultural
$ 1,069     $ 1,040     $ -
Real estate:
                   
   Construction
  14,451       8,065       -
   Mortgage - residential
  41,117       36,779       -
   Mortgage - commercial
  22,353       16,271       -
      Total impaired loans with no related allowance recorded
  78,990       62,155       -
Impaired loans with an allowance recorded:
                   
Commercial, financial & agricultural
  4,367       2,899       349
      Total impaired loans with an allowance recorded
  4,367       2,899       349
Total
$ 83,357     $ 65,054     $ 349
 
The following table presents by class, the average recorded investment and interest income recognized on impaired loans as of March 31, 2014 and 2013:
 
 
Three Months Ended March 31,
 
2014
   
2013
 
Average Recorded Investment
   
Interest Income Recognized
   
Average Recorded Investment
   
Interest Income Recognized
 
(Dollars in thousands)
                     
Commercial, financial & agricultural
$ 8,417     $ 5     $ 4,091     $ 6
Real estate:
                           
   Construction
  6,822       32       43,643       176
   Mortgage - residential
  36,407       163       41,795       131
   Mortgage - commercial
  16,045       39       17,730       90
Leases
  -       -       82       -
Total
$ 67,691     $ 239     $ 107,341     $ 403
 
14

 
Aging Analysis of Accruing and Non-Accruing Loans and Leases

For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following table presents by class, the aging of the recorded investment in past due loans and leases as of March 31, 2014 and December 31, 2013:
 
 
Accruing Loans 30 - 59 Days Past Due
   
Accruing Loans 60 - 89 Days Past Due
   
Accruing Loans
Greater Than
90 Days
Past Due
   
Nonaccrual
Loans
   
Total Past
Due and
Nonaccrual
   
Loans and Leases Not Past Due
   
Total
 
(Dollars in thousands)
March 31, 2014
                                     
Commercial, financial & agricultural
$ 706     $ 69     $ 7     $ 17,067     $ 17,849     $ 418,395     $ 436,244
Real estate:
                                                   
   Construction
  -       -       -       379       379       86,276       86,655
   Mortgage - residential
  2,887       -       -       18,161       21,048       1,159,044       1,180,092
   Mortgage - commercial
  159       -       -       13,610       13,769       669,784       683,553
Consumer
  770       200       23       -       993       304,579       305,572
Leases
  -       -       -       -       -       5,338       5,338
   Total
$ 4,522     $ 269     $ 30     $ 49,217     $ 54,038     $ 2,643,416     $ 2,697,454
                                                     
December 31, 2013
                                                   
Commercial, financial & agricultural
$ 50     $ -     $ -     $ 3,533     $ 3,583     $ 395,133     $ 398,716
Real estate:
                                                   
   Construction
  -       120       -       4,015       4,135       71,481       75,616
   Mortgage - residential
  3,898       1,885       -       20,271       26,054       1,110,519       1,136,573
   Mortgage - commercial
  544       -       -       13,769       14,313       688,454       702,767
Consumer
  577       92       -       -       669       310,019       310,688
Leases
  -       -       15       -       15       6,226       6,241
   Total
$ 5,069     $ 2,097     $ 15     $ 41,588     $ 48,769     $ 2,581,832     $ 2,630,601
 
Modifications

Troubled debt restructurings (“TDRs”) included in nonperforming assets at March 31, 2014 consisted of 44 Hawaii residential mortgage loans with a combined principal balance of $10.1 million, a U.S. Mainland commercial mortgage loan with a principal balance of $9.0 million, a Hawaii commercial loan with a principal balance of $0.5 million, and two Hawaii construction and development loans with a combined principal balance of $0.3 million. Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers’ financial condition. The principal balances on these TDRs had matured and/or were in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were $21.8 million of TDRs still accruing interest at March 31, 2014, none of which were more than 90 days delinquent. At December 31, 2013, there were $23.3 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

Some loans modified in a TDR may already be on nonaccrual status and partial charge-offs may have already been taken against the outstanding loan balance. Thus, these loans have already been identified as impaired and have already been evaluated under the Company’s allowance for loan and lease losses (the “Allowance”) methodology. As a result, some loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. The loans modified in a TDR did not have a material effect to our provision for loan and lease losses expense (the “Provision”) and the Allowance during the three months ended March 31, 2014.

 
15

 
The following table presents by class, information related to loans modified in a TDR during the three months ended March 31, 2014 and 2013:
 
 
Number of Contracts
   
Recorded
Investment (as
of Period End)
   
Increase
in the
Allowance
 
(Dollars in thousands)
Three Months Ended March 31, 2014
             
Real estate mortgage - residential
9     $ 613     $ -
                   
Three Months Ended March 31, 2013
                 
Commercial, financial & agricultural
1     $ 1,500     $ -
 
The following table presents by class, loans modified as a TDR within the previous twelve months that subsequently defaulted during the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended March 31,
 
2014
   
2013
 
Number of Contracts
 
Recorded Investment
(as of Period End)
   
Number of Contracts
 
Recorded Investment
(as of Period End)
 
(Dollars in thousands)
Real estate:
               
   Construction
1   $ 175     5   $ 1,574
   Mortgage - residential
-     -     1     354
   Total
1   $ 175     6   $ 1,928
 
Credit Quality Indicators

The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases as to credit risk. This analysis includes non-homogeneous loans and leases, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard. Loans and leases classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimate loss is deferred until its more exact status may be determined.

Loss. Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.
 
16

 
Loans and leases not meeting the criteria above are considered to be pass rated loans and leases. The following table presents by class and credit indicator, the recorded investment in the Company’s loans and leases as of March 31, 2014 and December 31, 2013:

 
Pass
   
Special Mention
   
Substandard
   
Less: Unearned Income
   
Total
 
(Dollars in thousands)
March 31, 2014
                         
Commercial, financial & agricultural
$ 398,105     $ 17,003     $ 20,584     $ (552 )   $ 436,244
Real estate:
                                   
   Construction
  78,568       4,948       3,442       303       86,655
   Mortgage - residential
  1,159,844       228       18,461       (1,559 )     1,180,092
   Mortgage - commercial
  635,915       20,495       28,136       993       683,553
Consumer
  306,417       -       23       868       305,572
Leases
  5,338       -       -       -       5,338
   Total
$ 2,584,187     $ 42,674     $ 70,646     $ 53     $ 2,697,454
                                     
December 31, 2013