Edgar Filing: CENTRAL PACIFIC FINANCIAL CORP

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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 March 31, 2015

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 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 x No o

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 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 o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of registrant’s common stock, no par value, on April 28, 2015 was 31,537,681 shares.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

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Part I.	Financial Information	3

Item I.	Financial Statements (Unaudited)

	Consolidated Balance Sheets March 31, 2015 and December 31, 2014	4

	Consolidated Statements of Income Three months ended March 31, 2015 and 2014	5

	Consolidated Statements of Comprehensive Income Three months ended March 31, 2015 and 2014	6

	Consolidated Statements of Changes in Equity Three months ended March 31, 2015 and 2014	7

	Consolidated Statements of Cash Flows Three months ended March 31, 2015 and 2014	8

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	55

Part II.	Other Information	56

Item 1A.	Risk Factors	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 6.	Exhibits	57

Signatures		58

Exhibit Index		59

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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, net interest margin 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, deterioration in asset quality, and 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 stock; 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 key personnel; 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.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			December 31,
	2015			2014
	(Dollars in thousands)
Assets
Cash and due from banks	$	74,743		$	72,316
Interest-bearing deposits in other banks	10,478			13,691
Investment securities:
Available for sale, at fair value	1,298,487			1,229,018
Held to maturity, at amortized cost (fair value of $256,357 at March 31, 2015 and $235,597 at December 31, 2014)	255,592			238,287
Total investment securities	1,554,079			1,467,305

Loans held for sale	7,206			9,683

Loans and leases	2,967,772			2,932,198
Allowance for loan and lease losses	(71,433		)	(74,040		)
Net loans and leases	2,896,339			2,858,158

Premises and equipment, net	48,768			49,214
Accrued interest receivable	13,420			13,584
Investment in unconsolidated subsidiaries	6,840			7,246
Other real estate	3,349			2,948
Other intangible assets	28,230			29,697
Bank-owned life insurance	153,251			152,283
Federal Home Loan Bank stock	43,442			43,932
Other assets	125,780			132,930
Total assets	$	4,965,925		$	4,852,987

Liabilities and Equity
Deposits:
Noninterest-bearing demand	$	1,042,781		$	1,034,146
Interest-bearing demand	806,555			788,272
Savings and money market	1,247,266			1,242,598
Time	1,092,040			1,045,284
Total deposits	4,188,642			4,110,300

Short-term borrowings	70,000			38,000
Long-term debt	92,785			92,785
Other liabilities	41,573			43,861
Total liabilities	4,393,000			4,284,946

Equity:
Preferred stock, no par value, authorized 1,100,000 shares, issued and outstanding none at March 31, 2015 and December 31, 2014, respectively	—			—
Common stock, no par value, authorized 185,000,000 shares, issued and outstanding 34,797,133 and 35,233,674 shares at March 31, 2015 and December 31, 2014, respectively	632,867			642,205
Surplus	80,545			79,716
Accumulated deficit	(150,815		)	(157,039		)
Accumulated other comprehensive income	10,328			3,159
Total equity	572,925			568,041
Total liabilities and equity	$	4,965,925		$	4,852,987

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended
	March 31,
(Amounts in thousands, except per share data)	2015			2014

Interest income:
Interest and fees on loans and leases	$	28,602		$	26,883
Interest and dividends on investment securities:
Taxable interest	8,150			9,496
Tax-exempt interest	998			994
Dividends	9			1
Interest on deposits in other banks	11			7
Dividends on Federal Home Loan Bank stock	11			12
Total interest income	37,781			37,393

Interest expense:
Interest on deposits:
Demand	95			90
Savings and money market	223			224
Time	548			630
Interest on short-term borrowings	43			17
Interest on long-term debt	637			636
Total interest expense	1,546			1,597

Net interest income	36,235			35,796
Provision (credit) for loan and lease losses	(2,747		)	(1,316		)
Net interest income after credit for loan and lease losses	38,982			37,112

Other operating income:
Service charges on deposit accounts	1,968			1,993
Loan servicing fees	1,423			1,444
Other service charges and fees	3,105			2,943
Income from fiduciary activities	834			1,062
Equity in earnings of unconsolidated subsidiaries	96			52
Fees on foreign exchange	128			114
Income from bank-owned life insurance	674			670
Loan placement fees	147			143
Net gain on sales of residential loans	1,594			1,239
Net gain on sales of foreclosed assets	33			162
Other	1,188			322
Total other operating income	11,190			10,144

Other operating expense:
Salaries and employee benefits	17,165			17,434
Net occupancy	3,501			3,590
Equipment	909			796
Amortization of other intangible assets	2,105			1,240
Communication expense	824			894
Legal and professional services	2,219			1,812
Computer software expense	2,096			1,358
Advertising expense	635			686
Foreclosed asset expense	72			105
Other	4,492			4,015
Total other operating expense	34,018			31,930

Income before income taxes	16,154			15,326
Income tax expense	5,759			5,518
Net income	$	10,395		$	9,808

Per common share data:
Basic earnings per share	$	0.30		$	0.23
Diluted earnings per share	0.29			0.23
Cash dividends declared	0.12			0.08

Shares used in computation:
Basic shares	34,827			41,915
Diluted shares	35,479			42,477

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended
	March 31,
	2015		2014
	(Dollars in thousands)

Net income	$	10,395	$	9,808
Other comprehensive income, net of tax
Net change in unrealized gain on investment securities	6,909		9,576
Minimum pension liability adjustment	260		187
Other comprehensive income, net of tax	7,169		9,763
Comprehensive income	$	17,564	$	19,571

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

													Accumulated
	Common												Other			Non-
	Shares		Preferred		Common					Accumulated			Comprehensive			Controlling
	Outstanding		Stock		Stock			Surplus		Deficit			Income (Loss)			Interests		Total
	(Dollars in thousands, except per share data)

Balance at December 31, 2014	35,233,674		$	—	$	642,205		$	79,716	$	(157,039	)	$	3,159		$	—	$	568,041
Net income			—		—			—		10,395			—			—		10,395
Other comprehensive income	—		—		—			—		—			7,169			—		7,169
Cash dividends ($0.12 per share)	—		—		—			—		(4,171		)	—			—		(4,171		)
12,559 net shares of common stock purchased by directors’ deferred compensation plan	—		—		(50		)	—		—			—			—		(50		)
473,829 shares of common stock repurchased and other related costs	(473,829	)	—		(9,288		)	—		—			—			—		(9,288		)
Share-based compensation	37,288		—					829		—			—			—		829
Non-controlling interests	—		—		—			—		—			—			—		—
Balance at March 31, 2015	34,797,133		$	—	$	632,867		$	80,545	$	(150,815	)	$	10,328		$	—	$	572,925

Balance at December 31, 2013	42,107,633		$	—	$	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 net shares of common stock sold by directors’ deferred compensation plan	—		—		34			—		—			—			—		34
3,405,888 shares of common stock repurchased and other related costs	(3,405,888	)	—		(68,873		)	—		—			—			—		(68,873		)
Share-based compensation	21,505		—		—			928		—			—			—		928
Non-controlling interests	—		—		—			—		—			—			—		—
Balance at March 31, 2014	38,723,250		$	—	$	715,708		$	76,426	$	(177,649	)	$	(6,082	)	$	61	$	608,464

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	March 31,
	2015			2014
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	10,395		$	9,808
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan and lease losses	(2,747		)	(1,316		)
Depreciation and amortization	1,479			1,463
Write down of other real estate, net of gain on sale	—			(65		)
Amortization of other intangible assets	2,105			1,240
Net amortization of investment securities	1,918			2,191
Share-based compensation	829			928
Net gain on sales of residential loans	(1,594		)	(1,239		)
Proceeds from sales of loans held for sale	96,788			84,989
Originations of loans held for sale	(92,717		)	(82,627		)
Equity in earnings of unconsolidated subsidiaries	(96		)	(52		)
Increase in cash surrender value of bank-owned life insurance	(968		)	(670		)
Deferred income taxes	5,339			5,535
Net change in other assets and liabilities	(5,020		)	(1,169		)
Net cash provided by operating activities	15,711			19,016

Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities available for sale	35,942			32,639
Purchases of investment securities available for sale	(95,716		)	(18,923		)
Proceeds from maturities of and calls on investment securities held to maturity	4,807			3,171
Purchases of investment securities held to maturity	(22,249		)	—
Net loan originations	(36,803		)	(66,567		)
Proceeds from sale of other real estate	968			771
Purchases of premises and equipment	(1,033		)	(416		)
Distributions from unconsolidated subsidiaries	214			354
Contributions to unconsolidated subsidiaries	—			(60		)
Proceeds from redemption of FHLB stock	490			601
Net cash used in investing activities	(113,380		)	(48,430		)

Cash flows from financing activities:
Net increase in deposits	78,342			49,594
Repayments of long-term debt	—			(4		)
Net increase in short-term borrowings	32,000			93,985
Cash dividends paid on common stock	(4,171		)	(3,370		)
Repurchases of common stock and other related costs	(9,288		)	(68,873		)
Net cash provided by financing activities	96,883			71,332

Net increase (decrease) in cash and cash equivalents	(786		)	41,918
Cash and cash equivalents at beginning of period	86,007			49,348
Cash and cash equivalents at end of period	$	85,221		$	91,266

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,599		$	1,654
Income taxes	100			—
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	$	50		$	(34	)
Net reclassification of loans to other real estate	1,369			372

See accompanying notes to consolidated financial statements.

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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, 2014. 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. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, “Investments — Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects.” The provisions of ASU 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The ASU permits entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The Company did not elect the use of the proportional amortization method of ASU 2014-01 on January 1, 2015 which has no material impact on our consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, “Receivables — Troubled Debt Restructurings by Creditors — Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The provisions of ASU 2014-04 provide guidance on when an in substance repossession or foreclosure occurs, which is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. Additionally, the amendments in this update require interim and annual disclosure of both: 1) the amount of foreclosed residential real estate property held by the creditor and 2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The Company adopted the prospective transition method of ASU 2014-04 on January 1, 2015 and the adoption did not have a material impact on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU 2014-11 requires two accounting changes. First, the amendments change the accounting for repurchase-to-maturity transactions to secured borrowings. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. ASU 2014-11 requires disclosures for certain transactions comprising a transfer of a financial asset accounted for as a sale, and an agreement with the same transferee entered into in contemplation of the initial transfer which results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. ASU 2014-11 also requires additional disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The adoption of ASU 2014-11 on January 1, 2015 did not have a material impact on our consolidated financial statements.

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In August 2014, the FASB issued ASU 2014-14, “Receivables — Troubled Debt Restructurings by Creditors Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” ASU 2014-14 requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor. The adoption of ASU 2014-14 on January 1, 2015 did not have a material impact on our consolidated financial statements.

3. 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, 2015:
Held to Maturity:
Mortgage-backed securities - U.S. Government sponsored entities	$	255,592	$	1,446	$	(681	)	$	256,357

Available for Sale:
Debt securities:
States and political subdivisions	$	189,961	$	3,380	$	(863	)	$	192,478
Corporate securities	98,847		2,480		—			101,327
Mortgage-backed securities:
U.S. Government sponsored entities	776,750		12,912		(2,616		)	787,046
Non-agency collateralized mortgage obligations	208,455		8,412		(81		)	216,786
Other	747		103		—			850
Total	$	1,274,760	$	27,287	$	(3,560	)	$	1,298,487

At December 31, 2014:
Held to Maturity:
Mortgage-backed securities - U.S. Government sponsored entities	$	238,287	$	196	$	(2,886	)	$	235,597

Available for Sale:
Debt securities:
States and political subdivisions	$	191,280	$	2,054	$	(1,689	)	$	191,645
Corporate securities	99,237		1,492		(125		)	100,604
Mortgage-backed securities:
U.S. Government sponsored entities	744,527		11,064		(4,033		)	751,558
Non-agency collateralized mortgage obligations	180,905		4,456		(1,027		)	184,334
Other	757		120		—			877
Total	$	1,216,706	$	19,186	$	(6,874	)	$	1,229,018

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The amortized cost and estimated fair value of investment securities at March 31, 2015 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, 2015
	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
Held to Maturity
Mortage-backed securities	$	255,592	$	256,357

Available for Sale
Due in one year or less	$	—	$	—
Due after one year through five years	70,129		71,798
Due after five years through ten years	103,461		105,207
Due after ten years	115,218		116,800
Mortage-backed securities	985,205		1,003,832
Other	747		850
Total	$	1,274,760	$	1,298,487

We did not sell any available for sale securities during the first quarter of 2015 and 2014.

Investment securities of $944.4 million and $900.5 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public funds on deposit and other long-term and short-term borrowings.

Provided below is a summary of the 121 and 195 investment securities which were in an unrealized loss position at March 31, 2015 and December 31, 2014, respectively.

	Less than 12 months					12 months or longer					Total
			Unrealized					Unrealized					Unrealized
Description of Securities	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
	(Dollars in thousands)
At March 31, 2015:
Debt securities:
States and political subdivisions	$	34,821	$	(257	)	$	23,447	$	(606	)	$	58,268	$	(863	)
Corporate securities	—		—			—		—			—		—
Mortgage-backed securities:
U.S. Government sponsored entities	143,680		(1,298		)	176,086		(1,999		)	319,766		(3,297		)
Non-agency collateralized mortgage obligations	31,664		(81		)	—		—			31,664		(81		)
Total temporarily impaired securities	$	210,165	$	(1,636	)	$	199,533	$	(2,605	)	$	409,698	$	(4,241	)

At December 31, 2014:
Debt securities:
States and political subdivisions	$	23,591	$	(145	)	$	68,622	$	(1,544	)	$	92,213	$	(1,689	)
Corporate securities	23,938		(125		)	—		—			23,938		(125		)
Mortgage-backed securities:
U.S. Government sponsored entities	119,210		(521		)	403,926		(6,398		)	523,136		(6,919		)
Non-agency collateralized mortgage obligations	20,857		(100		)	47,539		(927		)	68,396		(1,027		)
Total temporarily impaired securities	$	187,596	$	(891	)	$	520,087	$	(8,869	)	$	707,683	$	(9,760	)

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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 declines 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.

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 our investments to be other-than-temporarily impaired.

4. LOANS AND LEASES

Loans and leases, excluding loans held for sale, consisted of the following:

	March 31,		December 31,
	2015		2014
	(Dollars in thousands)

Commercial, financial and agricultural	$	500,251	$	463,070
Real estate:
Construction	113,137		115,023
Mortgage - residential	1,298,076		1,280,089
Mortgage - commercial	702,113		704,099
Consumer	350,344		365,662
Leases	2,885		3,140
	2,966,806		2,931,083
Net deferred costs	966		1,115
Total loans and leases	$	2,967,772	$	2,932,198

During the three months ended March 31, 2015, we transferred the collateral in three portfolio loans with a carrying value of $1.4 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, 2015.

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.

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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, 2015 and December 31, 2014:

	Commercial,		Real Estate
	Financial & Agricultural		Construction			Mortgage - Residential		Mortgage - Commercial			Consumer			Leases		Total
	(Dollars in thousands)
March 31, 2015
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	772	$	—		$	—	$	—		$	—		$	—	$	772
Collectively evaluated for impairment	8,019		14,305			17,057		20,161			7,119			—		66,661
	8,791		14,305			17,057		20,161			7,119			—		67,433
Unallocated																4,000
Total ending balance	$	8,791	$	14,305		$	17,057	$	20,161		$	7,119		$	—	$	71,433

Loans and leases:
Individually evaluated for impairment	$	13,727	$	4,606		$	28,514	$	22,601		$	—		$	—	$	69,448
Collectively evaluated for impairment	486,524		108,531			1,269,562		679,512			350,344			2,885		2,897,358
	500,251		113,137			1,298,076		702,113			350,344			2,885		2,966,806
Net deferred costs (income)	432		(416		)	2,228		(857		)	(421		)	—		966
Total ending balance	$	500,683	$	112,721		$	1,300,304	$	701,256		$	349,923		$	2,885	$	2,967,772

December 31, 2014
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	1,533	$	—		$	—	$	—		$	—		$	—	$	1,533
Collectively evaluated for impairment	7,421		14,969			17,927		20,869			7,314			7		68,507
	8,954		14,969			17,927		20,869			7,314			7		70,040
Unallocated																4,000
Total ending balance	$	8,954	$	14,969		$	17,927	$	20,869		$	7,314		$	7	$	74,040

Loans and leases:
Individually evaluated for impairment	$	13,369	$	4,888		$	30,893	$	23,126		$	—		$	—	$	72,276
Collectively evaluated for impairment	449,701		110,135			1,249,196		680,973			365,662			3,140		2,858,807
	463,070		115,023			1,280,089		704,099			365,662			3,140		2,931,083
Net deferred costs (income)	693		(469		)	2,235		(826		)	(518		)	—		1,115
Total ending balance	$	463,763	$	114,554		$	1,282,324	$	703,273		$	365,144		$	3,140	$	2,932,198

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The following table presents by class, impaired loans as of March 31, 2015 and December 31, 2014:

	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
	(Dollars in thousands)
March 31, 2015
Impaired loans with no related allowance recorded:
Commercial, financial & agricultural	$	5,178	$	3,599	$	—
Real estate:
Construction	10,951		4,606		—
Mortgage - residential	31,161		28,514		—
Mortgage - commercial	29,723		22,601		—
Total impaired loans with no related allowance recorded	77,013		59,320		—
Impaired loans with an allowance recorded:
Commercial, financial & agricultural	12,660		10,128		772
Total impaired loans with an allowance recorded	12,660		10,128		772
Total	$	89,673	$	69,448	$	772

December 31, 2014
Impaired loans with no related allowance recorded:
Commercial, financial & agricultural	$	738	$	738	$	—
Real estate:
Construction	11,275		4,888		—
Mortgage - residential	34,131		30,893		—
Mortgage - commercial	30,249		23,126		—
Total impaired loans with no related allowance recorded	76,393		59,645		—
Impaired loans with an allowance recorded:
Commercial, financial & agricultural	16,630		12,631		1,533
Total impaired loans with an allowance recorded	16,630		12,631		1,533
Total	$	93,023	$	72,276	$	1,533

The following table presents by class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2015 and 2014:

	Three Months Ended March 31,
	2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Commercial, financial & agricultural	$	13,646	$	5	$	8,417	$	5
Real estate:
Construction	4,699		86		6,822		32
Mortgage - residential	28,954		1		36,407		163
Mortgage - commercial	22,751		164		16,045		39
Leases					—		—
Total	$	70,050	$	256	$	67,691	$	239

The Company had $3.9 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at March 31, 2015.

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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, 2015 and December 31, 2014:

	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, 2015
Commercial, financial & agricultural	$	290	$	225	$	—	$	13,377	$	13,892	$	486,791	$	500,683
Real estate:
Construction	—		—		—		146		146		112,575		112,721
Mortgage - residential	1,945		—		—		11,430		13,375		1,286,929		1,300,304
Mortgage - commercial	—		—		—		12,468		12,468		688,788		701,256
Consumer	895		212		5		—		1,112		348,811		349,923
Leases	—		—		—		—		—		2,885		2,885
Total	$	3,130	$	437	$	5	$	37,421	$	40,993	$	2,926,779	$	2,967,772

December 31, 2014
Commercial, financial & agricultural	$	183	$	85	$	—	$	13,007	$	13,275	$	450,488	$	463,763
Real estate:
Construction	—		—		—		310		310		114,244		114,554
Mortgage - residential	3,078		379		—		13,048		16,505		1,265,819		1,282,324
Mortgage - commercial	68		—		—		12,722		12,790		690,483		703,273
Consumer	1,500		417		77		—		1,994		363,150		365,144
Leases	—		—		—		—		—		3,140		3,140
Total	$	4,829	$	881	$	77	$	39,087	$	44,874	$	2,887,324	$	2,932,198

Modifications

Troubled debt restructurings (“TDRs”) included in nonperforming assets at March 31, 2015 consisted of 33 Hawaii residential mortgage loans with a combined principal balance of $6.6 million, 11 Hawaii commercial mortgage loans to the same borrower with a combined principal balance of $0.9 million, a Hawaii commercial loan of $0.4 million, and a Hawaii construction and development loan of $0.04 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 $19.8 million of TDRs still accruing interest at March 31, 2015, none of which were more than 90 days delinquent. At December 31, 2014, there were $29.5 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 on our provision for loan and lease losses (the “Provision”) and the Allowance during the three months ended March 31, 2015.

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The following table presents by class, information related to loans modified in a TDR during the three months ended March 31, 2015 and 2014.

	Number of Contracts	Recorded Investment (as of Period End)		Increase in the Allowance
	(Dollars in thousands)
Three Months Ended March 31, 2015
Real estate mortgage - commercial	11	$	910	$	—

Three Months Ended March 31, 2014
Real estate mortgage - residential	9	$	613	$	—

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, 2015 and 2014. 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, 2015 and 2014.

	Three Months Ended March 31,
	2015		2014
	Number of Contracts	Recorded Investment (as of Period End)	Number of Contracts	Recorded Investment (as of Period End)
	(Dollars in thousands)

Real estate mortgage -construction	—	—	1	175

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.

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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.

Loans and leases not meeting the criteria above are considered to be pass rated. The following table presents by class and credit indicator, the recorded investment in the Company’s loans and leases as of March 31, 2015 and December 31, 2014:

	Pass		Special Mention		Substandard		Subtotal		Net Deferred Costs (Income)			Total
	(Dollars in thousands)
March 31, 2015
Commercial, financial & agricultural	$	468,515	$	16,656	$	15,080	$	500,251	$	432		$	500,683
Real estate:
Construction	110,294		1,831		1,012		113,137		(416		)	112,721
Mortgage - residential	1,285,124		344		12,608		1,298,076		2,228			1,300,304
Mortgage - commercial	668,772		8,493		24,848		702,113		(857		)	701,256
Consumer	350,267		72		5		350,344		(421		)	349,923
Leases	2,885		—		—		2,885		—			2,885
Total	$	2,885,857	$	27,396	$	53,553	$	2,966,806	$	966		$	2,967,772

December 31, 2014
Commercial, financial & agricultural	$	432,892	$	14,655	$	15,523	$	463,070	$	693		$	463,763
Real estate:
Construction	111,370		—		3,653		115,023		(469		)	114,554
Mortgage - residential	1,265,470		352		14,267		1,280,089		2,235			1,282,324
Mortgage - commercial	660,492		10,498		33,109		704,099		(826		)	703,273
Consumer	365,332		294		36		365,662		(518		)	365,144
Leases	3,140		—		—		3,140		—			3,140
Total	$	2,838,696	$	25,799	$	66,588	$	2,931,083	$	1,115		$	2,932,198

In accordance with applicable Interagency Guidance issued by our primary bank regulators, we define subprime borrowers as typically having weakened credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers. At March 31, 2015 and December 31, 2014, we did not have any loans that we considered to be subprime.

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5. ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents by class, the activity in the Allowance for the periods indicated:

	Commercial,			Real estate
	Financial &						Mortgage -			Mortgage -
	Agricultural			Construction			Residential			Commercial			Consumer			Leases			Unallocated		Total
	(Dollars in thousands)
Three Months Ended March 31, 2015
Beginning balance	$	8,954		$	14,969		$	17,927		$	20,869		$	7,314		$	7		$	4,000	$	74,040
Provision (credit) for loan and lease losses	147			(787		)	(2,344		)	(721		)	965			(7		)	—		(2,747		)
	9,101			14,182			15,583			20,148			8,279			—			4,000		71,293
Charge-offs	878			—			14			—			1,894			—			—		2,786
Recoveries	568			123			1,488			13			734			—			—		2,926
Net charge-offs (recoveries)	310			(123		)	(1,474		)	(13		)	1,160			—			—		(140		)
Ending balance	$	8,791		$	14,305		$	17,057		$	20,161		$	7,119		$	—		$	4,000	$	71,433

Three Months Ended March 31, 2014
Beginning balance	$	13,196		$	2,774		$	25,272		$	29,947		$	6,576		$	55		$	6,000	$	83,820
Provision (credit) for loan and lease losses	(943		)	11,764			(7,517		)	(4,035		)	(548		)	(37		)	—		(1,316		)
	12,253			14,538			17,755			25,912			6,028			18			6,000		82,504
Charge-offs	73			—			37			—			580			8			—		698
Recoveries	606			402			94			13			239			2			—		1,356
Net charge-offs (recoveries)	(533		)	(402		)	(57		)	(13		)	341			6			—		(658		)
Ending balance	$	12,786		$	14,940		$	17,812		$	25,925		$	5,687		$	12		$	6,000	$	83,162

Loans held for sale and other real estate assets are not included in our assessment of the Allowance.

Our Provisions were credits of $2.7 million and $1.3 million in the three months ended March 31, 2015 and 2014, respectively.

In determining the amount of our Allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as regulatory requirements and input. If our assumptions prove to be incorrect, our current Allowance may not be sufficient to cover future loan losses and we may experience significant increases to our Provision.

6. SECURITIZATIONS

In prior years, we securitized certain residential mortgage loans with a U.S. Government sponsored entity and continue to service the residential mortgage loans. The servicing assets were recorded at their respective fair values at the time of securitization.

All unsold mortgage-backed securities from prior securitizations were categorized as available for sale securities and were therefore recorded at their fair values of $3.3 million and $3.5 million at March 31, 2015 and December 31, 2014, respectively. The fair values of these mortgage-backed securities were based on quoted prices of similar instruments in active markets. Unrealized gains of $0.3 million on unsold mortgage-backed securities were recorded in accumulated other comprehensive income (“AOCI”) at March 31, 2015 and December 31, 2014.

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7. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

The components of the Company’s investments in unconsolidated subsidiaries were as follows:

	March 31,		December 31,
	2015		2014
	(Dollars in thousands)

Investments in low income housing tax credit partnerships	$	3,492	$	3,781
Trust preferred investments	2,792		2,792
Investments in affiliates	440		557
Other	116		116
	$	6,840	$	7,246

Investments in low income housing tax credit (“LIHTC”) partnerships are accounted for using the cost method. For the three months ended March 31, 2015 and 2014, the Company recognized amortization expense of $0.3 million and $0.4 million, respectively, in pretax income. For the three months ended March 31, 2015, the Company recognized $0.3 million in tax credits associated with our investments in LIHTC partnerships. The Company did not recognize any tax credits associated with our investments in LIHTC partnerships during the three months ended March 31, 2014.

8. OTHER INTANGIBLE ASSETS

Other intangible assets include a core deposit premium and mortgage servicing rights. The following table presents changes in other intangible assets for the three months ended March 31, 2015:

	Core			Mortgage
	Deposit			Servicing
	Premium			Rights			Total
	(Dollars in thousands)

Balance, beginning of period	$	10,029		$	19,668		$	29,697
Additions	—			638			638
Amortization	(668		)	(1,437		)	(2,105		)
Balance, end of period	$	9,361		$	18,869		$	28,230

Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans and totaled $0.6 million and $0.4 million for the three months ended March 31, 2015 and 2014, respectively. Amortization of mortgage servicing rights was $1.4 million and $0.6 million for the three months ended March 31, 2015 and 2014, respectively.

The following table presents the fair market value and key assumptions used in determining the fair market value of our mortgage servicing rights:

	Three Months Ended March 31,
	2015			2014
	(Dollars in thousands)

Fair market value, beginning of period	$	19,975		$	21,399
Fair market value, end of period	19,172			20,832
Weighted average discount rate	9.5		%	8.0		%
Weighted average prepayment speed assumption	13.9			14.1

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The gross carrying value and accumulated amortization related to our intangible assets are presented below:

	March 31, 2015							December 31, 2014
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Value		Amortization			Value		Value		Amortization			Value
	(Dollars in thousands)

Core deposit premium	$	44,642	$	(35,281	)	$	9,361	$	44,642	$	(34,613	)	$	10,029
Mortgage servicing rights	55,587		(36,718		)	18,869		56,687		(37,019		)	19,668
	$	100,229	$	(71,999	)	$	28,230	$	101,329	$	(71,632	)	$	29,697

Based on the core deposit premium and mortgage servicing rights held as of March 31, 2015, estimated amortization expense for the remainder of fiscal 2015, the next five succeeding fiscal years and all years thereafter are as follows:

	Estimated Amortization Expense
	Core		Mortgage
	Deposit		Servicing
	Premium		Rights		Total
	(Dollars in thousands)

2015 (remainder)	$	2,006	$	4,115	$	6,121
2016	2,674		4,380		7,054
2017	2,674		3,417		6,091
2018	2,007		2,700		4,707
2019	—		2,102		2,102
2020	—		1,772		1,772
Thereafter	—		383		383
	$	9,361	$	18,869	$	28,230

We perform an impairment assessment of our other intangible assets whenever events or changes in circumstance indicate that the carrying value of those assets may not be recoverable. Our impairment assessments involve, among other valuation methods, the estimation of future cash flows and other methods of determining fair value. Estimating future cash flows and determining fair values is subject to judgment and often involves the use of significant estimates and assumptions. The variability of the factors we use to perform our impairment tests depend on a number of conditions, including the uncertainty about future events and cash flows. All such factors are interdependent and, therefore, do not change in isolation. Accordingly, our accounting estimates may materially change from period to period due to changing market factors.

9. DERIVATIVES

We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in interest rates including interest rate swaps, interest rate lock commitments and forward sale commitments. We measure all derivatives at fair value on our consolidated balance sheet. In each reporting period, we record the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as hedging instruments, we record the effective portion of the changes in the fair value of the derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings.

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Interest Rate Lock and Forward Sale Commitments

We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At March 31, 2015, we were a party to interest rate lock and forward sale commitments on $66.7 million and $27.5 million of mortgage loans, respectively.

The following table presents the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheets:

		Asset Derivatives				Liability Derivatives
Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	Fair Value at March 31, 2015		Fair Value at December 31, 2014		Fair Value at March 31, 2015		Fair Value at December 31, 2014
		(Dollars in thousands)
Interest rate contracts	Other assets / other liabilities	$	1,150	$	504	$	302	$	122

The following table presents the impact of derivative instruments and their location within the consolidated statements of income:

Derivatives Not in Cash Flow Hedging Relationship	Location of Gain (Loss) Recognized in Earnings on Derivatives	Amount of Gain (Loss) Recognized in Earnings on Derivatives
		(Dollars in thousands)
Three Months Ended March 31, 2015
Interest rate contracts	Other operating income	$	466

Three Months Ended March 31, 2014
Interest rate contracts	Other operating income	(60		)

10. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

The bank is a member of the Federal Home Loan Bank of Seattle (the “FHLB”) and maintained a $965.4 million line of credit with the FHLB as of March 31, 2015. Short-term and long-term borrowings under this arrangement totaled $70.0 million and nil at March 31, 2015, respectively, compared to $38.0 million and nil at December 31, 2014, respectively. FHLB advances outstanding at March 31, 2015 were secured by unencumbered investment securities with a fair value of $0.8 million and certain real estate loans with a carrying value of $1.5 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At March 31, 2015, $895.4 million was undrawn under this arrangement.

At March 31, 2015 and December 31, 2014, our bank had additional unused borrowings available at the Federal Reserve discount window of $34.0 million and $33.3 million, respectively. As of March 31, 2015 and December 31, 2014, certain commercial and commercial real estate loans with a carrying value totaling $70.9 million and $72.9 million, respectively, were pledged as collateral on our line of credit with the Federal Reserve discount window. The Federal Reserve does not have the right to sell or repledge these loans.

11. EQUITY

We have generated considerable tax benefits, including net operating loss carry-forwards and federal and state tax credits. Our use of the tax benefits in the future would be significantly limited if we experience an “ownership change” for U.S. federal income tax purposes. In general, an “ownership change” will occur if there is a cumulative increase in the Company’s ownership by “5-percent shareholders” (as defined under U.S. income tax laws) that exceeds 50 percentage points over a rolling three-year period.

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On November 23, 2010, our Board of Directors declared a dividend of preferred share purchase rights (“Rights”) in respect to our common stock which were issued pursuant to a Tax Benefits Preservation Plan, dated as of November 23, 2010 (the “Tax Benefits Preservation Plan”), between the Company and Wells Fargo Bank, National Association, as rights agent. Each Right represents the right to purchase, upon the terms and subject to the conditions in the Plan, 1/10,000th of a share of our Junior Participating Preferred Stock, Series C, no par value, for $6.00, subject to adjustment. The Tax Benefits Preservation Plan is designed to reduce the likelihood that the Company will experience an ownership change by discouraging any person from becoming a beneficial owner of 4.99% or more of our common stock (a “Threshold Holder”). On January 29, 2014, our Board of Directors approved an amendment to the Tax Benefits Preservation Plan to extend it for up to an additional two years (until February 18, 2016).

To further protect our tax benefits, on January 26, 2011, our Board of Directors approved an amendment to our restated articles of incorporation to restrict transfers of our stock if the effect of an attempted transfer would cause the transferee to become a Threshold Holder or to cause the beneficial ownership of a Threshold Holder to increase (the “Protective Charter Amendment”). At our annual meeting of shareholders on April 27, 2011, we proposed the amendment which shareholders approved. On January 29, 2014, our Board of Directors approved an amendment to the Protective Charter Amendment to extend it for up to an additional two years (until May 2, 2016). Our shareholders approved the Protective Charter Amendment on April 25, 2014. There is no guarantee, however, that the Tax Benefits Preservation Plan or the Protective Charter Amendment will prevent the Company from experiencing an ownership change.

As a Hawaii state-chartered bank, Central Pacific Bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law (“Statutory Retained Earnings”), which differs from GAAP retained earnings. As of March 31, 2015, the bank had Statutory Retained Earnings of $124.3 million.

Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. Our ability to pay cash dividends to our shareholders is subject to restrictions under federal and Hawaii law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to, including covenants set forth in our subordinated debentures.

On February 21, 2014, we announced a tender offer to purchase for cash up to $68.8 million in value of shares of our common stock at a price not greater than $21.00 nor less than $18.50 per share (the “Tender Offer”).

The Tender Offer expired on March 21, 2014 and 3,369,850 shares of our common stock were properly tendered and not withdrawn at or below the purchase price of $20.20 per share (“Purchase Price”). In addition, 167,572 shares were tendered through notice of guaranteed delivery at or below the Purchase Price. Based on these results, we accepted for purchase 3,405,888 shares, at the Purchase Price for a total cost of $68.8 million, excluding fees and expenses related to the Tender Offer. The Tender Offer closed on March 28, 2014.

Due to the oversubscription of the Tender Offer, we accepted for purchase on a pro rata basis approximately 96.6% of the shares properly tendered and not properly withdrawn at or below the Purchase Price by each tendering shareholder, except for tenders of odd lots, which were accepted in full, and except for certain conditional tenders automatically regarded as withdrawn pursuant to the terms of the Tender Offer.

On February 20, 2014, we also entered into repurchase agreements (the “Repurchase Agreements”) with each of Carlyle Financial Services Harbor, L.P. (“Carlyle”) and ACMO-CPF, L.L.C. (“Anchorage” and together with Carlyle, the “Lead Investors”), each of whom was the owner of 9,463,095 shares (representing 22.5% of the outstanding shares or 44.9% in the aggregate at that time) of our common stock, pursuant to which we agreed to purchase up to $28.1 million of shares of common stock from each of the Lead Investors at the Purchase Price of the Tender Offer (the “Private Repurchases”) (or an aggregate of $56.2 million of shares). Conditions to the Private Repurchases were satisfied and we purchased 1,391,089 shares from each of Carlyle and Anchorage at the Purchase Price for a total cost of $56.2 million, excluding fees and expenses related to the Private Repurchases. The Private Repurchases closed on April 7, 2014, the eleventh business day following the expiration of the Tender Offer.

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The completion of the Tender Offer and the Private Repurchases resulted in the aggregate repurchase by us of 6,188,066 shares totaling $125 million, or 14.7% of our issued and outstanding shares of our common stock prior to the completion of the Tender Offer and the Private Repurchases. Upon completion of the Tender Offer and Private Repurchases, we had approximately 35.9 million shares outstanding.

On March 26, 2015, the Company, Carlyle and Anchorage (together the “Selling Shareholders”), and Citigroup Global Markets, Inc. (the “Underwriter”) entered into a secondary offering underwriting agreement (the “Underwriting Agreement”) pursuant to which the Selling Shareholders agreed to each sell 3,802,694 shares for a total of 7,605,388 shares of CPF common stock, no par value per share, to the Underwriter at a price of $23.01 per common share for a total of approximately $175 million. In connection with the Underwriting Agreement, the Company repurchased 3,259,452 shares of its common stock from the Underwriter at a price of $23.01 per share for an aggregate cost of approximately $75 million. The transactions were consummated on April 1, 2015 and are not reflected in our consolidated financial statements for the quarter ended March 31, 2015. The Company did not receive any of the proceeds from the sale of these shares by the Selling Shareholders and no shares were sold by the Company. The Company accrued $0.5 million of costs recorded in other operating expenses related to the secondary offering by the Selling Shareholders.

In January 2008, our Board of Directors authorized the repurchase and retirement of up to 60,000 shares of the Company’s common stock (the “2008 Repurchase Plan”). Repurchases under the 2008 Repurchase Plan may be made from time to time on the open market or in privately negotiated transactions. A total of 55,000 shares remained available for repurchase under the 2008 Repurchase Plan at December 31, 2013. In January 2014, the 2008 Repurchase Plan and the remaining 55,000 shares were superseded by the Tender Offer and Repurchase Agreements with our Lead Investors.

On May 20, 2014, our Board of Directors authorized the repurchase and retirement of up to $30.0 million of the Company’s outstanding common stock (the “CPF Repurchase Plan”). Repurchases under the CPF Repurchase Plan may be made from time to time on the open market or in privately negotiated transactions. In 2014, 857,554 shares of common stock, at a cost of $16.5 million, were repurchased under this program.

In January 2015, our Board of Directors increased the authorization under the CPF Repurchase Plan by $25.0 million. In March 2015, our Board of Directors increased the authorization under the CPF Repurchase Plan by an additional $75.0 million in connection with the Underwriting Agreement. In the first quarter of 2015, 473,829 shares of common stock, at an aggregate cost of $9.3 million, were repurchased under this program. A total of $104.2 million remained available for repurchase under the CPF Repurchase Plan at March 31, 2015. See Note 20.

12. SHARE-BASED COMPENSATION

Restricted Stock Awards and Units

The table below presents the activity of restricted stock awards and units for the three months ended March 31, 2015:

			Weighted Average
			Grant Date
	Shares		Fair Value

Nonvested at January 1, 2015	715,460		$	15.77
Changes during the period:
Granted	60,873		23.98
Vested	(54,123	)	17.13
Forfeited	(28,160	)	16.16
Nonvested at March 31, 2015	694,050		16.37

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13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the components of other comprehensive income for the three months ended March 31, 2015 and 2014, by component:

	Before Tax		Tax Effect		Net of Tax
	(Dollars in thousands)
Three Months Ended March 31, 2015
Net unrealized gains on investment securities:
Net unrealized gains arising during the period	$	11,476	$	4,567	$	6,909

Defined benefit plans:
Amortization of net actuarial losses	420		165		255
Amortization of net transition obligation	4		2		2
Amortization of prior service cost	5		2		3
Defined benefit plans, net	429		169		260

Other comprehensive income	$	11,905	$	4,736	$	7,169

Three Months Ended March 31, 2014
Net unrealized gains on investment securities:
Net unrealized gains arising during the period	$	15,944	$	6,368	$	9,576

Defined benefit plans:
Amortization of net actuarial losses	305		123		182
Amortization of net transition obligation	4		2		2
Amortization of prior service cost	5		2		3
Defined benefit plans, net	314		127		187

Other comprehensive income	$	16,258	$	6,495	$	9,763

The following table presents the changes in each component of AOCI, net of tax, for the three months ended March 31, 2015 and 2014:

				Defined			Accumulated Other
	Investment			Benefit			Comprehensive
	Securities			Plans			Income (Loss)
	(Dollars in thousands)
Three Months Ended March 31, 2015
Balance at beginning of period	$	13,586		$	(10,427	)	$	3,159

Other comprehensive income before reclassifications	6,909			—			6,909
Amounts reclassified from AOCI	—			260			260
Total other comprehensive income	6,909			260			7,169

Balance at end of period	$	20,495		$	(10,167	)	$	10,328

Three Months Ended March 31, 2014
Balance at beginning of period	$	(9,125	)	$	(6,720	)	$	(15,845	)

Other comprehensive income before reclassifications	9,576			—			9,576
Amounts reclassified from AOCI	—			187			187
Total other comprehensive income	9,576			187			9,763

Balance at end of period	$	451		$	(6,533	)	$	(6,082	)

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The following table presents the amounts reclassified out of each component of AOCI for the three months ended March 31, 2015 and 2014:

	Amount Reclassified from AOCI						Affected Line Item in the
	Three Months Ended March 31,						Statement Where Net
Details about AOCI Components	2015			2014			Income is Presented
	(Dollars in thousands)
Amortization of defined benefit plan items
Net actuarial losses	$	(420	)	$	(305	)	(1)
Net transition obligation	(4		)	(4		)	(1)
Prior service cost	(5		)	(5		)	(1)
	(429		)	(314		)	Total before tax
	169			127			Tax benefit
Total reclassifications for the period	$	(260	)	$	(187	)	Net of tax

(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 14 for additional details).

14. PENSION AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

Central Pacific Bank has a defined benefit retirement plan (the “Pension Plan”) which covers certain eligible employees. The plan was curtailed effective December 31, 2002, and accordingly, plan benefits were fixed as of that date. The following table sets forth the components of net periodic benefit cost for the Pension Plan:

	Three Months Ended
	March 31,
	2015			2014
	(Dollars in thousands)

Interest cost	$	348		$	366
Expected return on assets	(472		)	(524		)
Amortization of net actuarial losses	393			304
Net periodic cost	$	269		$	146

Our bank also established Supplemental Executive Retirement Plans (“SERPs”), which provide certain (current and former) officers of our bank with supplemental retirement benefits. The following table sets forth the components of net periodic benefit cost for the SERPs:

	Three Months Ended
	March 31,
	2015		2014
	(Dollars in thousands)

Interest cost	$	110	$	113
Amortization of net transition obligation	4		4
Amortization of prior service cost	5		5
Amortization of net actuarial losses	27		1
Net periodic cost	$	146	$	123

15. INCOME AND FRANCHISE TAXES

In assessing the need for a valuation allowance on our deferred tax assets (“DTA”), management considers whether it is more likely than not that some portion or all of the DTA will not be realized. The ultimate realization of DTA is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment.

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At March 31, 2015, the Company had net operating loss carryforwards for Federal income tax purposes of $117.9 million, that are available to offset future Federal taxable income, if any, through 2030. At March 31, 2015, the Company had net operating loss carryforwards for Hawaii and California state income tax purposes of $82.7 million and $39.5 million, respectively, which are available to offset future state taxable income, if any, through 2030. In addition, the Company has state tax credit carryforwards of $14.8 million that do not expire, and federal tax credit carryforwards of $16.6 million, of which $13.7 million will expire within 20 years, and $2.9 million will not expire.

Income tax expense for the periods presented differed from the “expected” tax expense (computed by applying the U.S. Federal corporate tax rate of 35% to income (loss) before income taxes) for the following reasons:

	Three months ended March 31,
	2015			2014
	(Dollars in thousands)

Computed “expected” tax expense	$	5,654		$	5,364
Increase (decrease) in taxes resulting from:
Tax-exempt interest	(352		)	(351		)
Other tax-exempt income	(236		)	(235		)
Income tax credits	(327		)	(195		)
State income taxes, net of Federal income tax effect, excluding impact of deferred tax valuation allowance	739			600
Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense	18			135
Other	263			200
Total	$	5,759		$	5,518

16. EARNINGS PER SHARE

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

	Three Months Ended
	March 31,
	2015		2014
	(In thousands, except per share data)

Net income	$	10,395	$	9,808

Weighted average shares outstanding - basic	34,827		41,915
Dilutive effect of employee stock options and awards	652		562
Weighted average shares outstanding - diluted	35,479		42,477

Basic earnings per share	$	0.30	$	0.23
Diluted earnings per share	$	0.29	$	0.23

A total of 13,472 potentially dilutive securities have been excluded from the dilutive share calculation for the three months ended March 31, 2015, as their effect was antidilutive, compared to 23,624 for the three months ended March 31, 2014.

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17. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Disclosures about Fair Value of Financial Instruments

Fair value estimates, methods and assumptions are set forth below for our financial instruments.

Short-Term Financial Instruments

The carrying values of short-term financial instruments are deemed to approximate fair values. Such instruments are considered readily convertible to cash and include cash and due from banks, interest-bearing deposits in other banks, accrued interest receivable, short-term borrowings, and accrued interest payable.

Investment Securities

The fair value of investment securities is based on market price quotations received from securities dealers. Where quoted market prices are not available, fair values are based on quoted market prices of comparable securities.

Loans

Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of credit and interest rate risks inherent in the Company’s various loan types and are derived from available market information, as well as specific borrower information. The fair value of loans are not based on the notion of exit price.

Loans Held for Sale

The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We report the fair values of Hawaii and U.S. Mainland construction and commercial real estate loans net of applicable selling costs on our consolidated balance sheets.

Other Interest Earning Assets

The equity investment in common stock of the FHLB, which is redeemable for cash at par value, is reported at its par value.

Deposit Liabilities

The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Long-Term Debt

The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements.

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Off-Balance Sheet Financial Instruments

The fair values of off-balance sheet financial instruments are estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties, current settlement values or quoted market prices of comparable instruments.

For derivative financial instruments, the fair values are based upon current settlement values, if available. If there are no relevant comparables, fair values are based on pricing models using current assumptions for interest rate swaps and options.

Limitations

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of future business and the value of assets and liabilities that are not considered financial instruments. For example, significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets, premises and equipment and intangible assets. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.

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						Fair Value Measurement Using
						Quoted Prices		Significant
						in Active		Other			Significant
						Markets for		Observable			Unobservable
	Carrying		Estimated			Identical Assets		Inputs			Inputs
	Amount		Fair Value			(Level 1)		(Level 2)			(Level 3)
	(Dollars in thousands)
March 31, 2015
Financial assets
Cash and due from banks	$	74,743	$	74,743		$	74,743	$	—		$	—
Interest-bearing deposits in other banks	10,478		10,478			10,478		—			—
Investment securities	1,554,079		1,554,844			850		1,541,347			12,647
Loans held for sale	7,206		7,206			—		—			7,206
Net loans and leases	2,896,339		2,852,249			—		68,676			2,783,573
Accrued interest receivable	13,420		13,420			13,420		—			—

Financial liabilities
Deposits:
Noninterest-bearing deposits	1,042,781		1,042,781			1,042,781		—			—
Interest-bearing demand and savings deposits	2,053,821		2,053,821			2,053,821		—			—
Time deposits	1,092,040		1,093,931			—		—			1,093,931
Short-term debt	70,000		70,000			—		70,000			—
Long-term debt	92,785		68,237			—		68,237			—
Accrued interest payable (included in other liabilities)	965		965			965		—			—

Off-balance sheet financial instruments
Commitments to extend credit	743,758		3,719			—		3,719			—
Standby letters of credit and financial guarantees written	20,768		156			—		156			—
Interest rate options	66,696		1,081			—		1,081			—
Forward interest rate contracts	27,457		(233		)	—		(233		)	—

December 31, 2014
Financial assets
Cash and due from banks	$	72,316	$	72,316		$	72,316	$	—		$	—
Interest-bearing deposits in other banks	13,691		13,691			13,691		—			—
Investment securities	1,467,305		1,464,615			877		1,450,643			13,095
Loans held for sale	9,683		9,683			—		—			9,683
Net loans and leases	2,858,158		2,752,420			—		70,743			2,681,677
Accrued interest receivable	13,584		13,584			13,584		—			—

Financial liabilities
Deposits:
Noninterest-bearing deposits	1,034,146		1,034,146			1,034,146		—			—
Interest-bearing demand and savings deposits	2,030,870		2,030,870			2,030,870		—			—
Time deposits	1,045,284		1,047,322			—		—			1,047,322
Short-term debt	38,000		38,000			—		38,000			—
Long-term debt	92,785		42,454			—		42,454			—
Accrued interest payable (included in other liabilities)	1,018		1,018			1,018		—			—

Off-balance sheet financial instruments
Commitments to extend credit	720,255		3,601			—		3,601			—
Standby letters of credit and financial guarantees written	18,797		141			—		141			—
Interest rate options	44,266		444			—		444			—
Forward interest rate contracts	23,919		(62		)	—		(62		)	—

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Fair Value Measurements

We group our financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

· Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

· Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

· Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that requires the use of significant judgment or estimation.

We base our fair values on the price that we would expect to receive if an asset were sold or pay to transfer a liability in an orderly transaction between market participants at the measurement date. We also maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

We use fair value measurements to record adjustments to certain financial assets and liabilities and to determine fair value disclosures. Available for sale securities and derivatives are recorded at fair value on a recurring basis. From time to time, we may be required to record other financial assets at fair value on a nonrecurring basis such as loans held for sale, impaired loans and mortgage servicing rights. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2015.

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The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014:

			Fair Value at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
March 31, 2015
Available for sale securities:
Debt securities:
States and political subdivisions	$	192,478	$	—	$	179,831	$	12,647
Corporate securities	101,327		—		101,327		—
Mortgage-backed securities:
U.S. Government sponsored entities	787,046		—		787,046		—
Non-agency collateralized mortgage obligations	141,423		—		141,423		—
Non-agency residential mortgage-backed securities	75,363		—		75,363		—
Other	850		850		—		—
Derivatives - Interest rate contracts	848		—		848		—
Total	$	1,299,335	$	850	$	1,285,838	$	12,647

December 31, 2014
Available for sale securities:
Debt securities:
States and political subdivisions	$	191,645	$	—	$	178,550	$	13,095
Corporate securities	100,604		—		100,604		—
Mortgage-backed securities:
U.S. Government sponsored entities	751,558		—		751,558		—
Non-agency collateralized mortgage obligations	184,334		—		184,334		—
Other	877		877		—		—
Derivatives - Interest rate contracts	382		—		382		—
Total	$	1,229,400	$	877	$	1,215,428	$	13,095

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For the three months ended March 31, 2015 and 2014, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

	Available for Sale States and Political Subdivisions Debt Securities
	(Dollars in thousands)

Balance at December 31, 2014	$	13,095
Principal payments received	(735		)
Unrealized net gain included in other comprehensive income	287
Purchases	—
Balance at March 31, 2015	$	12,647

Balance at December 31, 2013	$	10,518
Principal payments received	(71		)
Unrealized net gain included in other comprehensive income	299
Purchases	1,042
Balance at March 31, 2014	$	11,788

Within the state and political subdivisions debt securities category, the Company holds four mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of $12.6 million and $11.8 million at March 31, 2015 and March 31, 2014, respectively. The Company estimates the fair value of its mortgage revenue bonds by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.

The significant unobservable input used in the fair value measurement of the Company’s mortgage revenue bonds is the weighted average discount rate. As of March 31, 2015, the weighted average discount rate utilized was 4.14%, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

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For assets measured at fair value on a nonrecurring basis that were recorded at fair value on our balance sheet at March 31, 2015 and December 31, 2014, the following table provides the level of valuation assumptions used to determine the respective fair values:

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
March 31, 2015
Impaired loans (1)	$	68,676	$	—	$	68,676	$	—
Other real estate (2)	3,349		—		3,349		—

December 31, 2014
Impaired loans (1)	$	70,743	$	—	$	70,743	$	—
Other real estate (2)	2,948		—		2,948		—

(1) Represents carrying value and related write-downs of loans for which adjustments are based on agreed upon purchase prices for the loans or the appraised value of the collateral.

(2) Represents other real estate that is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral.

18. SEGMENT INFORMATION

We have the following three reportable segments: Banking Operations, Treasury and All Others. These segments are consistent with our internal functional reporting lines and are managed separately because each unit has different target markets, technological requirements, marketing strategies and specialized skills.

The Banking Operations segment includes construction and real estate development lending, commercial lending, residential mortgage lending, indirect auto lending, trust services, retail brokerage services and our retail branch offices, which provide a full range of deposit and loan products, as well as various other banking services. The Treasury segment is responsible for managing the Company’s investment securities portfolio and wholesale funding activities. The All Others segment consists of all activities not captured by the Banking Operations or Treasury segments described above and includes activities such as electronic banking, data processing and management of bank owned properties.

The accounting policies of the segments are consistent with the Company’s accounting policies that are described in Note 1 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC. The majority of the Company’s net income is derived from net interest income. Accordingly, management focuses primarily on net interest income, rather than gross interest income and expense amounts, in evaluating segment profitability.

Intersegment net interest income (expense) was allocated to each segment based upon a funds transfer pricing process that assigns costs of funds to assets and earnings credits to liabilities based on market interest rates that reflect interest rate sensitivity and maturity characteristics. All administrative and overhead expenses are allocated to the segments at cost. Cash, investment securities, loans and leases and their related balances are allocated to the segment responsible for acquisition and maintenance of those assets. Segment assets also include all premises and equipment used directly in segment operations.

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Segment profits and assets are provided in the following table for the periods indicated.

	Banking
	Operations			Treasury			All Others			Total
	(Dollars in thousands)
Three Months Ended March 31, 2015:
Net interest income	$	27,854		$	8,381		$	—		$	36,235
Intersegment net interest income (expense)	10,302			(8,698		)	(1,604		)	—
Credit for loan and lease losses	2,747			—			—			2,747
Other operating income	6,446			1,027			3,717			11,190
Other operating expense	(14,824		)	(478		)	(18,716		)	(34,018		)
Administrative and overhead expense allocation	(12,104		)	(288		)	12,392			—
Income taxes	(7,148		)	20			1,369			(5,759		)
Net income (loss)	$	13,273		$	(36	)	$	(2,842	)	$	10,395

Three Months Ended March 31, 2014:
Net interest income	$	26,187		$	9,609		$	—		$	35,796
Intersegment net interest income (expense)	6,007			(6,612		)	605			—
Credit for loan and lease losses	1,316			—			—			1,316
Other operating income	5,649			745			3,750			10,144
Other operating expense	(15,318		)	(551		)	(16,061		)	(31,930		)
Administrative and overhead expense allocation	(13,804		)	(272		)	14,076			—
Income taxes	(3,614		)	(1,051		)	(853		)	(5,518		)
Net income	$	6,423		$	1,868		$	1,517		$	9,808

At March 31, 2015:
Investment securities	$	—		$	1,554,079		$	—		$	1,554,079
Loans and leases (including loans held for sale)	2,974,978			—			—			2,974,978
Other	103,496			254,415			78,957			436,868
Total assets	$	3,078,474		$	1,808,494		$	78,957		$	4,965,925

At December 31, 2014:
Investment securities	$	—		$	1,467,305		$	—		$	1,467,305
Loans and leases (including loans held for sale)	2,941,881			—			—			2,941,881
Other	111,071			248,455			84,275			443,801
Total assets	$	3,052,952		$	1,715,760		$	84,275		$	4,852,987

19. LEGAL PROCEEDINGS

We are involved in legal actions arising in the ordinary course of business. Management, after consultation with our legal counsel, believes the ultimate disposition of those matters will not have a material adverse effect on our consolidated financial statements.

20. SUBSEQUENT EVENT

On March 26, 2015, the Company, Carlyle, Anchorage, and Citigroup Global Markets, Inc. entered into an Underwriting Agreement pursuant to which the Selling Shareholders agreed to each sell 3,802,694 shares for a total of 7,605,388 shares of CPF common stock, no par value per share, to the Underwriter at a price of $23.01 per common share for a total of approximately $175 million. In connection with the Underwriting Agreement, the Company repurchased 3,259,452 shares of its common stock from the Underwriter at $23.01 per share, or the same price per common share paid by the Underwriter to the Selling Shareholders for an aggregate cost of approximately $75 million. On April 1, 2015, the transactions were consummated. Since the transactions were consummated on April 1, 2015, they are not reflected in our consolidated financial statements for the quarter ended March 31, 2015. A total of $29.2 million remained available for repurchase of our securities immediately following the transactions contemplated by the Underwriting Agreement.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Central Pacific Financial Corp. (“CPF”) is a Hawaii corporation and a bank holding company. Our principal business is to serve as a holding company for our bank subsidiary, Central Pacific Bank. We refer to Central Pacific Bank herein as “our bank” or “the bank,” and when we say “the Company,” “we,” “us” or “our,” we mean the holding company on a consolidated basis with the bank and our other consolidated subsidiaries.

Central Pacific Bank is a full-service community bank with 36 branches and 110 ATMs located throughout the state of Hawaii. The bank offers a broad range of products and services including accepting time and demand deposits and originating loans, including commercial loans, construction loans, commercial and residential mortgage loans, and consumer loans.

Following our successful capital raises in 2011, we have accomplished a number of key performance objectives through March 31, 2015:

· In 2013, our Board of Directors and management, in consultation with our regulators, reinstated and declared quarterly cash dividends on the Company’s outstanding common stock. On January 29, 2015, the Company declared a quarterly cash dividend of $0.12 per share. The dividend was paid on March 16, 2015 to shareholders of record at the close of business on February 27, 2015.

· On March 28, 2014, we completed a tender offer to purchase 3,405,888 shares of common stock at a purchase price of $20.20 per share for a total cost of $68.8 million, excluding fees and expenses. On April 7, 2014, we also completed repurchase agreements with each of our two largest shareholders to privately purchase 1,391,089 shares of common stock at a purchase price of $20.20 per share from each shareholder for a total cost of $56.2 million, excluding fees and expenses.

· On May 20, 2014, our Board of Directors authorized the repurchase and retirement of up to $30.0 million of the Company’s outstanding common stock. In 2014, 857,554 shares of common stock, at a cost of $16.5 million, were repurchased under this program. In January 2015, our Board of Directors increased the authorization under the CPF Repurchase Plan by $25.0 million. In March 2015, our Board of Directors increased the authorization under the CPF Repurchase Plan by an additional $75.0 million in connection with the transactions contemplated by the Underwriting Agreement as described below. In the first quarter of 2015, an additional 473,829 shares of common stock, at an aggregate cost of $9.3 million, were repurchased under this program.

· On March 26, 2015, the Company, Carlyle and Anchorage (together the “Selling Shareholders”), and Citigroup Global Markets, Inc. (the “Underwriter”) entered into a secondary offering underwriting agreement (the “Underwriting Agreement”) pursuant to which the Selling Shareholders agreed to each sell 3,802,694 shares for a total of 7,605,388 shares of CPF common stock, no par value per share, to the Underwriter at a price of $23.01 per common share for a total of approximately $175 million. In connection with the Underwriting Agreement, the Company repurchased 3,259,452 shares of its common stock from the Underwriter at a price of $23.01 per share for an aggregate cost of approximately $75 million. On April 1, 2015, the transactions were consummated. Since the transactions were consummated on April 1, 2015, they are not reflected in our consolidated financial statements for the quarter ended March 31, 2015. The Company did not receive any of the proceeds from the sale of these shares and no shares were sold by the Company. The Company accrued $0.5 million of costs recorded in other expenses related to the secondary offering by the Selling Shareholders.

· We have continued to maintain a strong capital position with tier 1 risk-based capital, total risk-based capital, leverage capital, and the new common equity tier 1 capital ratios as of March 31, 2015 of 17.29%, 18.54%, 12.79%, and 14.78%, respectively. Our tier 1 risk-based capital, total risk-based capital, and leverage capital ratios were 16.97%, 18.24%, and 12.03%, respectively, as of December 31, 2014. Our capital ratios exceed the levels required for a “well-capitalized” regulatory designation under Basel III.

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· We reported four consecutive profitable years from 2011 through 2014. In the first quarter of 2015 we reported net income of $10.4 million.

· We have continued to grow our loan and lease portfolio. Loans and leases, net of deferred income/costs, totaled $2.97 billion at March 31, 2015 and increased by $35.6 million, or 1.2% from $2.93 billion at December 31, 2014.

· We maintained an allowance for loan and lease losses as a percentage of total loans and leases of 2.41% at March 31, 2015, compared to 2.53% at December 31, 2014. In addition, we maintained an allowance for loan and lease losses as a percentage of nonperforming assets of 175.21% at March 31, 2015, compared to 176.14% at December 31, 2014.

We also remain focused on lowering our efficiency ratio and growing market share within our core Hawaii market. In connection with improving our efficiency ratio, we have completed several initiatives, including (i) outsourcing the data center and hardware for our core information technology system to Fiserv, which is our existing core software application provider; and (ii) implementing a staff right-sizing plan. Additionally, we have begun designing, developing, and implementing our data warehouse and customer relationship management programs.

Basis of Presentation

Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements under “Part I, Item 1. Financial Statements (Unaudited).” The following discussion should also be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 27, 2015.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires that management make certain judgments and use certain estimates and assumptions that affect amounts reported and disclosures made. Accounting estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimate are reasonably likely to occur from period to period and would materially impact our consolidated financial statements as of or for the periods presented. Management has discussed the development and selection of the critical accounting estimates noted below with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the accompanying disclosures.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (the “Allowance”) is management’s estimate of credit losses inherent in our loan and lease portfolio at the balance sheet date. We maintain our Allowance at an amount we expect to be sufficient to absorb probable losses inherent in our loan and lease portfolio based on a projection of probable net loan charge-offs. At March 31, 2015, we had an Allowance of $71.4 million, compared to $74.0 million at December 31, 2014.

The Company’s approach to developing the Allowance has three basic elements. These elements include specific reserves for individually impaired loans, a general allowance for loans other than those analyzed as individually impaired, and an unallocated reserve. These three methods are explained below:

Specific Reserve

Individually impaired loans in all loan categories are evaluated using one of three valuation methods as prescribed under ASC 310-10; Fair Value of Collateral, Observable Market Price, or Cash Flow. A loan is generally evaluated for impairment on an individual basis if it meets one or more of the following characteristics: risk-rated as substandard, doubtful or loss, loans on nonaccrual status, troubled debt restructures, or any loan deemed prudent by management to so analyze. If the valuation of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the Allowance or, alternatively, a specific reserve will be established and included in the overall Allowance balance. As of March 31, 2015, this specific reserve represented $0.8 million of the total Allowance, compared to $1.5 million at December 31, 2014.

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General Allowance

In determining the general allowance component of the Allowance, the Company utilizes a comprehensive approach to segment the loan portfolio into homogenous groups. Six criteria divide the Company’s loan portfolio into 128 homogenous subsectors. First, loans are divided by general geographic region (U.S. Mainland and Hawaii). Second, loans are subdivided according to FDIC classification (Construction, Commercial Mortgage, Commercial, Financial and Agricultural, Leases, Residential Mortgage, Consumer). Third, loans within the Construction category are further subdivided by collateral type (Commercial and Residential). Fourth, loans within the Residential Mortgage category are further subdivided by ownership type (Investor-owned and Owner-occupied). Fifth, loans are subdivided by state or for some, by County (All Hawaii, Hawaii Island, Kauai, Maui, Oahu, Other Hawaii, All U.S. Mainland, Los Angeles/Orange County CA, Riverside/San Bernardino CA, Sacramento/Placer/El Dorado/Yolo CA, San Diego CA, Washington/Oregon, Other U.S. Mainland). Finally, loans are further subdivided by risk rating (Pass, Special Mention, Substandard, and Doubtful).

For the purpose of determining general allowance loss factors, loss experience is derived from charge-offs and recoveries. A charge-off occurs when the Company makes the determination that an amount of debt is deemed to be uncollectible. Loans are also charged off when it is probable that a loss has been incurred and it is possible to make a reasonable estimate of the loss. Charge-offs are classified into subsectors according to the underlying loan’s primary geography, loan category, collateral type (if applicable), investment type (if applicable), state/county, and the risk rating of the loan one year prior to the charge-off. A recovery occurs when a loan that is classified as a bad debt was either partially or fully charged off and has been subsequently recovered. Recoveries are classified according to the subsector of the earliest associated charge-off of the loan within the selected look-back period. The cumulative charge-offs are determined by summing all subsector-specific charge-offs that occurred within the selected look-back period and the cumulative recoveries are determined by summing the subsector-specific recoveries for each subsector. Subsector losses are measured by subtracting each subsector’s cumulative recoveries from their respective cumulative charge-offs. Subsector losses are then divided by the subsector loan balance averaged over the look-back period to determine each subsector’s historical loss rate.

From 2010 through 2013, the calculation of subsector loss factors involved a look-back period of eight quarters (for loans secured by real estate by FDIC classifications) or four quarters (for all other loans). The Company’s then rapidly evolving loss experience necessitated the use of shorter loss analysis periods in order to ensure that loss rates would be adequately responsive to changes in loss experience. During that period, the Company considered recent loss data to be more relevant to the current period under analysis and consistent with commentary provided by our primary banking regulator.

As economic conditions continued to improve and stabilize through 2014, the Company experienced improving credit quality trends that contributed to consistent reductions to the Allowance. Given the diminishing loss rates, in the first quarter of 2014 the Company extended the look-back period for loans secured by real estate from 8 quarters to 17 quarters, with the intention of extending the look-back period each quarter thereafter to a total of 24 quarters or six years to incorporate broader loss experience through a more complete economic cycle. The Company believed this would also reduce the Company’s reliance on proxy loss rates by capturing more of the Company’s own historical loss experience in the extended look-back period. The Company also believes the longer look-back period is appropriate in light of the Company’s limited loss experience throughout the recent economic recovery and stabilization. Additionally, as economic conditions have stabilized through 2014, the Company believes the lower loss rate volatility has diminished the need for shorter loss analysis periods that are more responsive to shifts in loss experience. The enhanced methodology does not incorporate data before 2010 due to the anomalous loss activity during that time period that may cause pre-2010 internal loss data to be an inappropriate representation of the current inherent risk in the Company’s loan portfolio. In our revised approach, the losses during the six year look-back period will be weighted to place more emphasis on recent loss experience.

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Application of Proxies

The Company applies external proxies for minimum loss rates in those loan categories with no associated loss experience during the prescribed look-back period, including criticized credits. The Company believes the use of external proxies is a prudent approach versus using a zero loss factor for those loan categories that do not have loss experience in the look-back period. The external proxies used are based on four select credit loss rates tracked by Moody’s Investor Service.

The following table describes the Moody’s loss rate that is applied as a proxy to each loan category when no associated loss experience is registered in a subsector of the loan category over the relevant look-back period.

Loan Segment		Proxy- Moody’s Loss Rate
Commercial, Financial and Agricultural		Maximum of Last 5 Yrs’ Annual Corporate Bond Loss Rate
Construction		Cumulative 2-Yr U.S. CMBS Loss Rate
Commercial Mortgage		Cumulative 2-Yr U.S. CMBS Loss Rate
Residential Mortgage		Cumulative 2-Yr U.S. RMBS/HEL Loss Rate
Consumer		1-Yr U.S. ABS excl. HEL Loss Rate
Leases		Maximum of Last 5 Yrs’ Annual Corporate Bond Loss Rate

In those loan categories described in the table above, specific loss rate proxies are applied based on the equivalence of respective risk ratings between the proxy rate and the loan subsector. Based on the conformity of risk characterizations, B-rated proxy rates are matched to substandard loan segments (risk rating 6), Ba-rated proxy rates are matched to special mention loan segments (risk rating 5), and Aaa, Aa, A and Baa-rated proxy rates are matched to risk ratings strong quality, above average quality, average quality, and acceptable quality, respectively (risk ratings 1, 2, 3 and 4).

For pass rated loan segments with no associated loss experience during the respective prescribed look-back periods, the proxy loss rate is determined by weighting each proxy loss rate (ratings Aaa, Aa, A and Baa) by the loan balance in each equivalent risk rating (strong, above average, average and acceptable quality, respectively).

In assessing the appropriateness of Moody’s proxy rates, the Company conducted a comprehensive review of other potential sources of proxy loss data, evaluated the qualitative and quantitative factors influencing the relevance and reliability of proxy data, and performed a correlation analysis to determine the co-dependency of historical loss ratios with Moody’s loss rates. The analysis compared historical loss ratios in each loan category to the associated Moody’s loss rates over ten years.

An analysis of the correlation between historical loss ratios and Moody’s loss rates revealed that the two metrics demonstrated a directionally consistent loss relationship in nearly every rating group and exhibited average to strong correlation across all rating groups in almost every segment. Given the results of the correlation analysis, the Company deemed application of these proxy loss rates to be reasonable and supportable.

Qualitative Adjustments

Our Allowance methodology uses qualitative adjustments for economic/market conditions and Company-specific conditions. The economic/market conditions factor is applied on a regional/geographic basis. The Company-specific condition factor is applied on a category basis. Two key indicators, personal income and unemployment, comprise the economic/market adjustment factor.

Personal income is analyzed by comparing average quarter-to-quarter percentage change trends reported by the U.S. Bureau of Economic Analysis. Specifically, the rolling four quarter average percentage change in personal income is calculated and compared to a baseline historical factor, calculated as the average quarter-to-quarter percentage change over the prior ten years. The difference between the current average change and the historical average change is utilized as the personal income component of the economic/market adjustment factor.

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The second component of the economic/market factor, unemployment, is derived by comparing the current quarter unemployment rate, reported by the U.S. Bureau of Labor Statistics, to its ten year historical average. A constant scaling factor is applied to the difference between the current rate and the historical average in order to smooth significant period-to-period fluctuations. The result is utilized as the unemployment component of the economic factor. The personal income factor and unemployment factor are added together to determine each region’s total economic/market adjustment factor.

The general allowance also incorporates qualitative adjustment factors that capture company-specific conditions for which national/regional statistics are not available, or for which significant localized market specific events have not yet been captured within regional statistics or the Company’s historical loss experience. Since we cannot predict with certainty the amount of loan and lease charge-offs that will be incurred and because the eventual level of loan and lease charge-offs are impacted by numerous conditions beyond our control, we use our historical loss experience adjusted for current conditions to determine both our Allowance and Provision.

In the first quarter of 2015, we increased a qualitative factor applied to our syndicated loan portfolio in consideration of updated proxy information which became available in the quarter. We continually monitor for updated and refined information sources which will enable us to enhance the quality of our Allowance methodology from time to time.

In addition, various regulatory agencies, as an integral part of their examination processes, periodically review our Allowance. The determination of the Allowance requires us to make estimates of losses that are highly uncertain and involves a high degree of judgment. Accordingly, actual results could differ from those estimates. Changes in the estimate of the Allowance and related Provision could materially affect our operating results.

The sum of each subsector’s historical loss rate plus a region-specific economic/market qualitative adjustment and category-specific other qualitative adjustment, as discussed in the above “Application of Proxies” section, is then multiplied by the subsector’s period-ending loan balance to determine each subsector’s general allowance provision. The sum of the 128 subsector general allowance provisions represents the general allowance provision of the entire portfolio. As of March 31, 2015, this general allowance represented $66.6 million of the total Allowance, compared to $68.5 million at December 31, 2014.

Unallocated Reserve

The Company maintains an unallocated Allowance amount to provide for other credit losses inherent in our loan and lease portfolio that may not have been contemplated in the credit loss factors. The unallocated reserve is a measure to address judgmental estimates that are inevitably imprecise and it reflects an adjustment to the Allowance that is not attributable to specific categories of the loan portfolio. The unallocated reserve is distinct from and not captured in the Company’s qualitative adjustments in the general component of the Allowance. These qualitative adjustments only capture direct and specific risks to our portfolio, whereas the unallocated reserve is intended to capture broader national and global economic risks that could potentially have a ripple effect on our loan portfolio.

As of March 31, 2015 and December 31, 2014, an unallocated estimate of $4.0 million, was based on the Company’s recognition of domestic (U.S. mainland) and international events that pose heightened volatility in the isolated Hawaiian market. Examples of such stressors are acts of terrorism, pandemic events, energy price volatility and Federal budget changes. Any of these in isolation or combination could have significant effects on the two key drivers of the Hawaiian economy: tourism and Federal spending.

Although the Company does not have direct exposure to the economic and political crises occurring internationally, the ripple effect of continuous uncertainty surrounding ultimate resolution, along with quantifiable measures once achieved, may result in increased risk to the Company from the standpoint of consequences to its customer base and impacts on the Hawaii tourism market.

In the second quarter of 2014, the Company adopted an enhancement which limits the unallocated component of the Allowance as a percentage of the then current general component of the Allowance, rounded upward to the nearest $500,000. This is derived by taking the historical average of the percentage of the unallocated component to the general component over the maximum look-back period prescribed in our methodology. The unallocated amount may be maintained at higher levels during times of economic stress conditions on a local or global basis.

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Reserve for Unfunded Loan Commitments

Our process for determining the reserve for unfunded loan commitments is consistent with our process for determining the Allowance and is adjusted for estimated loan funding probabilities. The reserve for unfunded loan commitments is recorded separately through a valuation allowance included in other liabilities. Credit losses for off-balance sheet credit exposures are deducted from the allowance for credit losses on off-balance sheet credit exposures in the period in which the liability is settled. The allowance for credit losses on off-balance sheet credit losses is established by a charge to other operating expense. As of March 31, 2015 and December 31, 2014, our reserve for unfunded loan commitments totaled $1.7 million.

Loans Held for Sale

Loans held for sale consists of the following two types: (1) Hawaii residential mortgage loans that are originated with the intent to sell them in the secondary market and (2) non-residential mortgage loans both in Hawaii and the U.S. Mainland that were originated with the intent to be held in our portfolio but were subsequently transferred to the held for sale category. Hawaii residential mortgage loans classified as held for sale are carried at the lower of cost or fair value on an aggregate basis while the non-residential Hawaii and U.S. Mainland loans are recorded at the lower of cost or fair value on an individual basis.

When a non-residential mortgage loan is transferred to the held for sale category, the loan is recorded at the lower of cost or fair value. Any reduction in the loan’s value is reflected as a write-down of the recorded investment resulting in a new cost basis, with a corresponding reduction in the Allowance. In subsequent periods, if the fair value of a loan classified as held for sale is less than its cost basis, a valuation adjustment is recognized in our consolidated statement of income in other operating expense and the carrying value of the loan is adjusted accordingly. The valuation adjustment may be recovered in the event that the fair value increases, which is also recognized in our consolidated statement of income in other operating expense.

The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We report the fair values of the non-residential mortgage loans classified as held for sale net of applicable selling costs on our consolidated balance sheets. At March 31, 2015 and December 31, 2014, all of our loans held for sale were Hawaii residential mortgage loans.

Reserve for Residential Mortgage Loan Repurchase Losses

We sell residential mortgage loans on a “whole-loan” basis to government-sponsored entities (“GSEs” or “Agencies”) Fannie Mae and Freddie Mac and also to non-agency investors. These loan sales occur under industry standard contractual provisions that include various representations and warranties, which typically cover ownership of the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the loan, and other similar matters. We may be required to repurchase certain loans sold with identified defects, indemnify the investor, or reimburse the investor for any credit losses incurred. We establish mortgage repurchase reserves related to various representations and warranties that reflect management’s estimate for which we have a repurchase obligation. The reserves are established by a charge to other operating expense in our consolidated statements of operation. At March 31, 2015 and December 31, 2014, this reserve totaled $2.6 million and $2.7 million, respectively, and is included in other liabilities on our consolidated balance sheets.

The repurchase reserve is applicable to loans we originated and sold with representations and warranties, which is representative of the entire sold portfolio. Originations for agency and non-agency for vintages 2005 through March 31, 2015 were approximately $4.7 billion and $4.2 billion, respectively. Representations and warranties relating to borrower fraud generally are enforceable for the life of the loan, whereas early payment default clauses generally expire after 90 days, depending on the sales contract. We estimate that loans outstanding and sold that have early payment default clauses as of March 31, 2015 approximate $62.6 million.

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The repurchase loss liability is estimated by origination year to capture certain characteristics of each vintage. To the extent that repurchase demands are made by investors, we may be able to successfully appeal such repurchase demands. However, our appeals success may be affected by the reasons for repurchase demands, the quality of the demands, and our appeals strategies. Repurchase and loss estimates are stratified by vintage, based on actual experience and certain assumptions relative to potential investor demand volume, appeals success rates, and losses recognized on successful repurchase demands.

Loans repurchased during the three months ended March 31, 2015 totaled approximately $0.2 million. In 2012, additional reserves were established as an unallocated component in recognition of the emergence of make-whole demands. The establishment of an unallocated component considers anticipated future losses and our lack of historical experience with the make-whole demands. Repurchase activity by vintage and investor type are depicted in the table below.

Repurchase Demands, Appeals, Repurchased and Pending Resolution [1]

Three Months Ended March 31, 2015

	Government Sponsored Entities				Non-GSE Investors
Vintage	Repurchase Demands	Appealed	Repurchased	Pending Resolution	Repurchase Demands	Appealed	Repurchased	Pending Resolution

2005 and prior	—	—	—	—	1	—	1	—
2006	—	—	—	—	3	—	1	2
2007	—	—	—	—	3	2	—	1
2008	—	—	—	—	—	—	—	—
2009	1	—	—	1	—	—	—	—
2010	—	—	—	—	—	—	—	—
2011	—	—	—	—	—	—	—	—
2012	—	—	—	—	—	—	—	—
2013	1	—	—	1	—	—	—	—
2014	1	—	—	1	—	—	—	—
2015	—	—	—	—	—			—
Total	3	—	—	3	7	2	2	3

[1] Based on repurchase requests received between January 1, 2015 and March 31, 2015.

The reserve for residential mortgage loan repurchase losses of $2.6 million at March 31, 2015 represents our best estimate of the probable loss that we may incur due to the representations and warranties in our loan sales contracts with investors. This represents a $0.1 million decrease from December 31, 2014. The table below shows changes in the repurchase losses liability for the periods indicated.

	Three Months Ended
	March 31,
	2015			2014
	(Dollars in thousands)

Balance, beginning of period	$	2,685		$	2,949
Change in estimate	159			455
Utilizations	(221		)	(328		)
Balance, end of period	$	2,623		$	3,076

We believe that our capacity to estimate repurchase losses is improving as we record additional experience. Repurchase losses depend upon economic factors and other external conditions that may change over the life of the underlying loans. Additionally, lack of access to the servicing records of loans sold on a service released basis adds difficulty to the estimation process, thus requiring considerable management judgment. To the extent that future investor repurchase demand and appeals success differ from past experience, we could have increased demands and increased loss severities on repurchases, causing future additions to the repurchase reserve.

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Other Intangible Assets

Other intangible assets include a core deposit premium and mortgage servicing rights.

Our core deposit premium is being amortized using the straight-line method over 14 years which approximates the estimated life of the purchased deposits. The carrying value of our core deposit premium is periodically evaluated to estimate the remaining periods of benefit. If these periods of benefit are determined to be less than the remaining amortizable life, an adjustment to reflect such shorter life will be made.

We utilize the amortization method to measure our mortgage servicing rights. Under the amortization method, we amortize our mortgage servicing rights in proportion to and over the period of net servicing income. Income generated as the result of new mortgage servicing rights is reported as gains on sales of loans. Amortization of the servicing rights is reported as amortization of other intangible assets in our consolidated statements of operations. Ancillary income is recorded in other income. Mortgage servicing rights are recorded when loans are sold to third-parties with servicing of those loans retained and we classify our entire mortgage servicing rights into one pool.

Initial fair value of the servicing right is calculated by a discounted cash flow model based on market value assumptions at the time of origination. We assess the servicing right for impairment using current market value assumptions at each reporting period. Critical assumptions used in the discounted cash flow model include mortgage prepayment speeds, discount rates, costs to service and ancillary income. Variations in our assumptions could materially affect the estimated fair values. Changes to our assumptions are made when current trends and market data indicate that new trends have developed. Current market value assumptions based on loan product types (fixed rate, adjustable rate and balloon loans) include average discount rates and national prepayment speeds. Many of these assumptions are subjective and require a high level of management judgment.

Prepayment speeds may be affected by economic factors such as changes in home prices, market interest rates, the availability of alternative credit products to our borrowers and customer payment patterns. Prepayment speeds include the impact of all borrower prepayments, including full payoffs, additional principal payments and the impact of loans paid off due to foreclosure liquidations. As market interest rates decline, prepayment speeds will generally increase as customers refinance existing mortgages under more favorable interest rate terms. As prepayment speeds increase, anticipated cash flows will generally decline resulting in a potential reduction, or impairment, to the fair value of the capitalized mortgage servicing rights. Alternatively, an increase in market interest rates may cause a decrease in prepayment speeds and therefore an increase in fair value of mortgage servicing rights.

The fair value of our mortgage servicing rights is validated by first ensuring the completeness and accuracy of the loan data used in the valuation analysis. Additionally, the critical assumptions which come from independent sources are reviewed and include comparing actual results to forecast assumptions or evaluating the reasonableness of market assumptions in relation to the values and trends of assumptions used by peer banks. The validation process also includes reviewing key metrics such as the fair value as a percentage of the total unpaid principal balance of the mortgages serviced, and the resulting percentage as a multiple of the net servicing fee. These key metrics are tracked to ensure the trends are reasonable, and are periodically compared to peer banks.

We perform an impairment assessment of our other intangible assets whenever events or changes in circumstance indicate that the carrying value of those assets may not be recoverable. Our impairment assessments involve, among other valuation methods, the estimation of future cash flows and other methods of determining fair value. Estimating future cash flows and determining fair values is subject to judgments and often involves the use of significant estimates and assumptions. The variability of the factors we use to perform our impairment tests depend on a number of conditions, including the uncertainty about future events and cash flows. All such factors are interdependent and, therefore, do not change in isolation. Accordingly, our accounting estimates may materially change from period to period due to changing market factors.

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Deferred Tax Assets and Tax Contingencies

Deferred tax assets (“DTAs”) and liabilities are recognized for the estimated future tax effects attributable to temporary differences and carryforwards. A valuation allowance may be required if, based on the weight of available evidence, it is more likely than not that some portion or all of the DTAs will not be realized. In determining whether a valuation allowance is necessary, we consider the level of taxable income in prior years, to the extent that carrybacks are permitted under current tax laws, as well as estimates of future taxable income and tax planning strategies that could be implemented to accelerate taxable income, if necessary. If our estimates of future taxable income were materially overstated or if our assumptions regarding the tax consequences of tax planning strategies were inaccurate, some or all of our DTAs may not be realized, which would result in a charge to earnings. In the third quarter of 2009, we established a full valuation allowance against our net DTAs. See “- Results of Operations - Income Taxes” below. The quarter ended March 31, 2013 marked our ninth consecutive quarter of profitability. Based on this earnings performance trend, improvements in our financial condition, asset quality and capital ratios and the expectation of continued profitability, the Company determined that it was more likely than not that our net DTA would be realized. As a result, in the first quarter of 2013, the Company reversed a significant portion of the valuation allowance.

Income tax contingency reserves are established for potential tax liabilities related to uncertain tax positions. Tax benefits are recognized when we determine that it is more likely than not that such benefits will be realized. Where uncertainty exists due to the complexity of income tax statutes and where the potential tax amounts are significant, we generally seek independent tax opinions to support our positions. If our evaluation of the likelihood of the realization of benefits is inaccurate, we could incur additional income tax and interest expense that would adversely impact earnings, or we could receive tax benefits greater than anticipated which would positively impact earnings.

Impact of Recently Issued Accounting Pronouncements on Future Filings

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 is effective for the Company’s reporting period beginning on January 1, 2017. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for the Company’s reporting period beginning on January 1, 2016. As of March 31, 2015 and December 31, 2014, the Company did not have any share-based payment awards that included performance targets that could be achieved after the requisite service period. As such, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis.” ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, the amendments:1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; 2) eliminate the presumption that a general partner should consolidate a limited partnership; 3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; 4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. All legal entities are subject to reevaluation under the revised consolidation model. ASU 2015-02 is effective for the Company’s annual reporting period beginning on January 1, 2016. We are currently evaluating the potential impact the new standard will have on our consolidated financial statements.

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Financial Summary

Net income for the first quarter of 2015 was $10.4 million, or $0.29 per diluted share, compared to $9.8 million, or $0.23 per diluted share for the first quarter of 2014.

Total credit costs, which includes the Provision, gains on sales of foreclosed assets, write-downs of foreclosed assets, and the change in the reserve for unfunded commitments, amounted to a credit of $2.7 million in the three months ended March 31, 2015, compared to a credit of $2.1 million in the three months ended March 31, 2014.

The following table presents annualized returns on average assets, average shareholders’ equity, average tangible equity and basic and diluted earnings per share for the periods indicated. Average tangible equity is calculated as average shareholders’ equity less average intangible assets, which excludes mortgage servicing rights. Average intangible assets were $9.8 million for the three months ended March 31, 2015 and $12.4 million for the comparable prior year period.

	Three Months Ended
	March 31,
	2015			2014

Return on average assets	0.85		%	0.82		%
Return on average shareholders’ equity	7.32			5.79
Return on average tangible equity	7.45			5.90
Basic earnings per common share	$	0.30		$	0.23
Diluted earnings per common share	0.29			0.23

Material Trends

While there remains continued uncertainty in the global macroeconomic environment, the U.S. economy has continued to stabilize following the economic downturn caused by disruptions in the financial system beginning in 2007.

Despite this stabilization, underutilization of labor forces, a slow recovery in the housing sector, low level of inflation as a result of declining commodity prices and weak global trade have added to the uncertainty surrounding a sustained economic recovery. In addition, downgrades of ratings of foreign debt instruments could raise borrowing costs and adversely impact the mortgage and housing markets.

The majority of our operations are concentrated in the state of Hawaii. As a result, our performance is significantly influenced by conditions in the banking industry, macroeconomic conditions and the real estate markets in Hawaii. A favorable business environment is generally characterized by expanding gross state product, low unemployment and rising personal income; while an unfavorable business environment is characterized by the reverse.

In its first quarter forecast, the Hawaii Department of Business Economic Development & Tourism (“DBEDT”) projects stable economic growth will continue in 2015 and beyond. DBEDT projects real personal income to grow by 2.8% and real gross state product to grow by 3.1% in 2015.

The Department of Labor and Industrial Relations reported that Hawaii’s seasonally adjusted annual unemployment rate improved to 4.1% in March 2015, compared to 4.6% in March 2014. In addition, Hawaii’s unemployment rate in March 2015 remained below the national seasonally adjusted unemployment rate of 5.5%. DBEDT projects Hawaii’s seasonally adjusted annual unemployment rate to be at 3.9% in 2015 while the national unemployment rate is projected to be at 5.4% in 2015.

While the labor market condition continues to improve, visitor arrivals and spending have stabilized. According to the Hawaii Tourism Authority (“HTA”), 1.3 million visitors visited the state in the first two months of 2015. This was a slight increase of 0.8% from the number of visitor arrivals in the first two months of 2014. Total spending by visitors, however, decreased to $2.6 billion in the first two months of 2015, a decrease of $88.3 million, or 3.3%, from the first two months of 2014. According to DBEDT, total visitor arrivals and visitor spending are expected to increase 2.1% and 3.4% in 2015, respectively.

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Historically, real estate lending has been a primary focus for us, including construction, residential mortgage and commercial mortgage loans. As a result, we are dependent on the strength of Hawaii’s real estate market. According to the Honolulu Board of Realtors, Oahu unit sales volume decreased by 4.0% for single-family homes and 1.4% for condominiums for the three months March 31, 2015 compared to the same time period last year. The median sales price for single-family homes on Oahu for the three months ended March 31, 2015 was $676,000, representing an increase of 3.2% from $655,000 in the same prior year period. The median sales price for condominiums on Oahu for the three months ended March 31, 2015 was $363,750, representing an increase of 5.4% from $345,000 in the same prior year period. We believe the Hawaii real estate market will continue to show improvements during the remainder of 2015, however, there can be no assurance that this will occur.

As we have seen in the past, our operating results are significantly impacted by: (i) the economy in Hawaii, and to a significantly lesser extent, California, and (ii) the composition of our loan portfolio. Loan demand, deposit growth, Provision, asset quality, noninterest income and noninterest expense are all affected by changes in economic conditions. If the residential and commercial real estate markets we have exposure to deteriorate as they did in 2008 through 2010, our results of operations would be negatively impacted.

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Results of Operations

Net Interest Income

Net interest income, when expressed as a percentage of average interest earning assets, is referred to as “net interest margin.” Interest income, which includes loan fees and resultant yield information, is expressed on a taxable equivalent basis using an assumed income tax rate of 35%. A comparison of net interest income on a taxable equivalent basis (“net interest income”) for the three months ended March 31, 2015 and 2014 is set forth below.

	Three Months Ended March 31,
	2015						2014
			Average						Average
	Average		Yield/		Amount		Average		Yield/		Amount
	Balance		Rate		of Interest		Balance		Rate		of Interest
	(Dollars in thousands)
Assets
Interest earning assets:
Interest-bearing deposits in other banks	$	18,046	0.25	%	$	11	$	11,585	0.24	%	$	7
Taxable investment securities (1)	1,310,909		2.49		8,159		1,508,213		2.52		9,497
Tax-exempt investment securities (1)	177,606		3.46		1,536		178,005		3.44		1,529
Loans and leases, including loans held for sale (2)	2,955,525		3.90		28,602		2,665,825		4.07		26,883
Federal Home Loan Bank stock	43,809		0.10		11		46,072		0.10		12
Total interest earning assets	4,505,895		3.42		38,319		4,409,700		3.46		37,928
Nonearning assets	383,827						372,155
Total assets	$	4,889,722					$	4,781,855

Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	787,717	0.05	%	$	95	$	735,730	0.05	%	$	90
Savings and money market deposits	1,248,867		0.07		223		1,218,087		0.07		224
Time deposits under $100,000	237,239		0.38		222		263,479		0.41		267
Time deposits $100,000 and over	836,232		0.16		326		840,595		0.17		363
Short-term borrowings	63,227		0.27		43		25,295		0.28		17
Long-term debt	92,785		2.78		637		92,796		2.78		636
Total interest-bearing liabilities	3,266,067		0.19		1,546		3,175,982		0.20		1,597
Noninterest-bearing deposits	1,013,238						885,568
Other liabilities	42,426						42,479
Total liabilities	4,321,731						4,104,029
Shareholders’ equity	567,991						677,765
Non-controlling interests	—						61
Total equity	567,991						677,826
Total liabilities and equity	$	4,889,722					$	4,781,855

Net interest income					$	36,773					$	36,331

Net interest margin			3.28	%					3.31	%

(1) At amortized cost.

(2) Includes nonaccrual loans.

Net interest income (expressed on a taxable-equivalent basis) was $36.8 million for the first quarter of 2015, representing an increase of 1.2% from the prior year period amount of $36.3 million. The current quarter increase was primarily attributable to a significant increase in average loans and leases balances as we continue to redeploy excess liquidity into higher yielding assets. Offsetting this increase was a significant decrease in average taxable investment securities balances and a 17 basis point (“bp”) decline in average yields earned on our loans and leases.

Average yields earned on our interest-earning assets during the first quarter of 2015 declined by 4 bp from the same prior year period. Average rates paid on our interest-bearing liabilities declined by 1 bp in the first quarter of 2015 from the same period in 2014.

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Interest Income

Taxable-equivalent interest income was $38.3 million for the first quarter of 2015 compared to $37.9 million, an increase of 1.0%, from the comparable quarter in 2014. The increase was primarily attributable to a significant increase in average loans and leases, partially offset by a significant decrease in average taxable investment securities and a significant decrease in average yields earned on our loans and leases. Average loans and leases increased by $289.7 million compared to the first quarter of 2014, accounting for approximately $2.9 million of the current quarter’s increase in interest income. Average yields earned on loans and leases, however, decreased by 17 bp in the current quarter, lowering interest income by approximately $1.1 million. In addition, average taxable investment securities decreased by $197.3 million, resulting in a decrease in interest income of $1.2 million.

Interest Expense

Interest expense for the first quarter of 2015 was $1.5 million compared to $1.6 million, a decrease of 3.2% from the same quarter in the prior year. The decrease was attributable to the 1 bp decline in average rates paid on our interest-bearing liabilities, offset by an increase in average interest-bearing liabilities of $90.1 million.

Net Interest Margin

Our net interest margin was 3.28% for the first quarter of 2015, compared to 3.31% for the first quarter of 2014 and reflects declines of 17 bp and 3 bp in average yields earned on loans and leases and taxable investment securities, respectively. The contraction in our net interest margin from the first quarter of 2014 is attributable to the prevailing low interest rate environment.

The historically low interest rate environment that we continue to operate in is the result of the target Fed Funds rate of 0% to 0.25% initially set by the Federal Reserve in the fourth quarter of 2008 and other economic policies implemented by the FRB, which continued through the first quarter of 2015. We continue to expect the target Fed Funds rate to remain low throughout 2015, as longer-term inflation expectations have remained stable.

Provision for Loan and Lease Losses

Our Provision was a credit of $2.7 million during the first quarter of 2015 compared to a credit of $1.3 million in the comparable prior year period. Our net recoveries were $0.1 million during the first quarter of 2015 compared to $0.7 million in the first quarter of 2014.

The credit to the provision for loan and lease losses in the first quarter was primarily attributable to improving trends in credit quality.

Other Operating Income

Total other operating income of $11.2 million for the first quarter of 2015 increased by $1.0 million, or 10.3%, from the comparable prior year period. The increase from the year-ago quarter was primarily due to higher unrealized gains on loans held for sale and interest rate locks of $0.5 million (included in other), higher net gains on sales of residential mortgage loans of $0.4 million, and a partial recovery of a previous counterparty loss on a financing transaction of $0.3 million (included in other).

Other Operating Expense

Total other operating expense for the first quarter of 2015 was $34.0 million and increased by $2.1 million, or 6.5%, from $31.9 million in the comparable prior year period. The increase from the year-ago quarter was primarily attributable to higher amortization of mortgage servicing rights of $0.9 million, higher computer software expenses of $0.7 million, a lower credit to the reserve for unfunded commitments of $0.7 million (included in other), and higher legal and professional services due primarily to an accrual of $0.5 million related to the Selling Shareholders share repurchase. These increases were partially offset by a lower reserve for repurchased residential mortgage loans of $0.3 million and lower salaries and employee benefits of $0.3 million.

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Income Taxes

In the first quarter of 2015, the Company recorded income tax expense of $5.8 million compared to $5.5 million in the same prior year period primarily due to an increase in operating income. The effective tax rate for the first quarter of 2015 was 35.7% compared to 36.0% in the first quarter of 2014.

The remaining valuation allowance on our net DTA totaled $2.8 million at March 31, 2015 and December 31, 2014. Net of this valuation allowance, the Company’s net DTA totaled $94.3 million at March 31, 2015 compared to a net DTA of $104.4 million as of December 31, 2014, and is included in other assets on our consolidated balance sheets.

Financial Condition

Total assets at March 31, 2015 of $4.97 billion increased by $112.9 million from $4.85 billion at December 31, 2014.

Investment Securities

Investment securities of $1.55 billion at March 31, 2015 increased by $86.8 million, or 5.9%, from December 31, 2014. No investment securities were sold in the first quarter of 2015.

Loans and Leases

Loans and leases, net of deferred income/costs, of $2.97 billion at March 31, 2015 increased by $35.6 million, or 1.2%, from December 31, 2014. The increase was due to an increase in the commercial and residential mortgage loan portfolios of $36.9 million and $18.0 million, respectively, partially offset by a decrease in the commercial mortgage loan, construction loan, and leases portfolios of $2.0 million, $1.8 million, and $0.3 million, respectively. The net increase in the portfolio also reflect the transfer of three portfolio loans to other real estate totaling $1.4 million and charge-offs of loans and leases totaling $2.8 million.

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Nonperforming Assets, Accruing Loans Delinquent for 90 Days or More, Restructured Loans Still Accruing Interest

The following table sets forth nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest as of the dates indicated.

	March 31,			December 31,
	2015			2014
	(Dollars in thousands)
Nonperforming Assets
Nonaccrual loans (including loans held for sale):
Commercial, financial and agricultural	$	13,377		$	13,007
Real estate:
Construction	146			310
Mortgage-residential	11,430			13,048
Mortgage-commercial	12,468			12,722
Total nonaccrual loans	37,421			39,087

Other real estate:
Real estate:
Construction	—			747
Mortgage - residential	3,349			2,201
Other real estate	3,349			2,948
Total nonperforming assets	40,770			42,035

Accruing loans delinquent for 90 days or more:
Consumer	5			77
Total accruing loans delinquent for 90 days or more	5			77

Restructured loans still accruing interest:
Commercial, financial and agricultural	350			361
Real estate:
Construction	866			892
Mortgage-residential	17,084			17,845
Mortgage-commercial	1,516			10,405
Total restructured loans still accruing interest	19,816			29,503

Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	60,591		$	71,615

Total nonaccrual loans as a percentage of loans and leases	1.26		%	1.33		%

Total nonperforming assets as a percentage of loans and leases and other real estate	1.37		%	1.43		%

Total nonperforming assets and accruing loans delinquent for 90 days or more as a percentage of loans and leases and other real estate	1.37		%	1.43		%

Total nonperforming assets, accruing loans delinquent for 90 days or more, and restructured loans still accruing interest as a percentage of loans and leases and other real estate	2.04		%	2.44		%

Year-to-date changes in nonperforming assets:
Balance at December 31, 2014	$	42,035
Additions	1,884
Reductions:
Payments	(1,712		)
Return to accrual status	(197		)
Sales of foreclosed real estate	(949		)
Charge-offs and/or writedowns	(291		)
Total reductions	(3,149		)
Balance at March 31, 2015	$	40,770

Nonperforming assets, which includes nonaccrual loans and leases and other real estate, totaled $40.8 million at March 31, 2015, compared to $42.0 million at December 31, 2014. There were no nonperforming loans classified as held for sale at March 31, 2015 and December 31, 2014. The decrease in nonperforming assets from December 31, 2014 was attributable to $1.7 million in repayments, $0.9 million in sales of foreclosed properties, $0.3 million in charge-offs of nonaccrual loans and write-downs of other real estate, and $0.2 million in loans restored to accrual status, partially offset by $1.9 million in gross additions.

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Net changes to nonperforming assets by category included a net decrease in Hawaii construction and development assets of $0.9 million, Hawaii residential mortgage assets of $0.5 million, and Hawaii commercial mortgage assets of $0.2 million, partially offset by a net increase in Hawaii commercial and industrial assets of $0.4 million.

Allowance for Loan and Lease Losses

The following table sets forth certain information with respect to the Allowance as of the dates and for the periods indicated:

	Three Months Ended
	March 31,
	2015			2014
	(Dollars in thousands)
Allowance for loan and lease losses:
Balance at beginning of period	$	74,040		$	83,820

Provision (credit) for loan and lease losses	(2,747		)	(1,316		)

Charge-offs:
Commercial, financial and agricultural	878			73
Real estate:
Mortgage-residential	14			37
Consumer	1,894			580
Leases	—			8
Total charge-offs	2,786			698

Recoveries:
Commercial, financial and agricultural	568			606
Real estate:
Construction	123			402
Mortgage-residential	1,488			94
Mortgage-commercial	13			13
Consumer	734			239
Leases	—			2
Total recoveries	2,926			1,356

Net recoveries	(140		)	(658		)

Balance at end of period	$	71,433		$	83,162

Annualized ratio of net recoveries to average loans and leases	(0.02		)%	(0.10		)%

Our Allowance at March 31, 2015 totaled $71.4 million compared to $74.0 million at December 31, 2014. The decrease in our Allowance was a direct result of a credit to the Provision of $2.7 million, offset by $0.1 million in net loan recoveries.

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Our Allowance as a percentage of total loans and leases decreased from 2.53% at December 31, 2014 to 2.41% at March 31, 2015. Our Allowance as a percentage of nonperforming assets decreased from 176.14% at December 31, 2014 to 175.21% at March 31, 2015.

In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the Allowance.

Deposits

Total deposits of $4.19 billion at March 31, 2015 reflected an increase of $78.3 million, or 1.9%, from total deposits of $4.11 billion at December 31, 2014. The increase was primarily attributable to net increases in time deposits, interest-bearing demand deposits, noninterest-bearing demand deposits, and savings and money market deposits of $46.8 million, $18.3 million, $8.6 million, and $4.7 million, respectively.

Core deposits, which we define as demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled $3.33 billion at March 31, 2015 and increased by $24.0 million from December 31, 2014.

Capital Resources

In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with an analysis of the size and quality of our assets, the level of risk and regulatory capital requirements. As part of this ongoing assessment, the Board of Directors reviews our capital position on an ongoing basis to ensure it is adequate, including, but not limited to, need for raising additional capital or returning capital to our shareholders, including the ability to declare cash dividends or repurchase our securities.

Common Stock

Shareholders’ equity totaled $572.9 million at March 31, 2015, compared to $568.0 million at December 31, 2014. The increase in total shareholders’ equity was attributable to net income and other comprehensive income of $17.6 million in the first quarter of 2015, partially offset by the repurchase of 473,829 shares of common stock, at a cost of $9.3 million, under our repurchase program, and cash dividends paid of $4.2 million. During the first quarter we repurchased approximately 1.3% of our common stock outstanding as of December 31, 2014.

Holding Company Capital Resources

As a Hawaii state-chartered bank, the bank may only pay dividends to the extent it has retained earnings as defined under Hawaii banking law (“Statutory Retained Earnings”), which differs from GAAP retained earnings. As of March 31, 2015, the bank had Statutory Retained Earnings of $124.3 million. On April 22, 2015, the Company’s Board of Directors declared a cash dividend of $0.12 per share on the Company’s outstanding common stock, payable on June 15, 2015 to shareholders of record at the close of business on May 29, 2015.

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On March 26, 2015, the Company, the Selling Shareholders, and the Underwriter entered into the Underwriting Agreement pursuant to which the Selling Shareholders agreed to each sell 3,802,694 shares for a total of 7,605,388 shares of CPF common stock, no par value per share, to the Underwriter at a price of $23.01 per common share for a total of approximately $175 million. In connection with the Underwriting Agreement, the Company repurchased 3,259,452 shares of its common stock from the Underwriter at a price of $23.01 per share for an aggregate cost of approximately $75 million. On April 1, 2015, the transactions were consummated. Since the transactions were consummated on April 1, 2015, they are not reflected in our consolidated financial statements for the quarter ended March 31, 2015. The Company did not receive any of the proceeds from the sale of these shares by the Selling Shareholders and no shares were sold by the Company. The Company accrued $0.5 million of costs recorded in other expenses related to the secondary offering by the Selling Shareholders.

As of March 31, 2015, on a stand-alone basis, CPF had an available cash balance of approximately $21.1 million in order to meet its ongoing obligations.

Trust Preferred Securities

We have four statutory trusts, CPB Capital Trust II, CPB Statutory Trust III, CPB Capital Trust IV and CPB Statutory Trust V, which issued a total of $90.0 million in trust preferred securities. Our obligations with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust’s obligations with respect to its trust preferred securities. Subject to certain exceptions and limitations, we may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of dividend payments on the related trust preferred securities, for up to 20 consecutive quarterly periods without default or penalty.

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Regulatory Capital Ratios

General capital adequacy regulations adopted by the FRB and FDIC require an institution to maintain minimum leverage, Tier 1 and total risk-based capital ratios. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. For a further discussion of the effect of forthcoming changes in required regulatory capital ratios, see the discussion in our Form 10-K “Business — Supervision and Regulation.”

In April 2014 the FRB adopted as final its Basel III interim final rule (“Basel III”) intended to improve both the quality and quantity of capital for institutions supervised by the FDIC. Basel III implements a revised definition of regulatory capital, adds a new common equity tier 1 (CET1) risk-based capital requirement, increases the minimum tier 1 capital requirement and amends the methodologies for determining risk-weighted assets. Basel III became effective for the Company on January 1, 2015. A new capital conservation buffer comprised of CET1 will be phased-in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase when fully phased-in up to 2.5% in 2019.

The Company’s and the bank’s leverage capital, tier 1 risk-based capital, total risk-based capital, and CET1 risk-based capital ratios as of March 31, 2015 were above the levels required for a “well capitalized” regulatory designation.

The following table sets forth the Company’s and the bank’s capital ratios, as well as the minimum capital adequacy requirements applicable to all financial institutions as of the dates indicated.

	Actual				Minimum Required for Capital Adequacy Purposes				Minimum Required to be Well Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Company
At March 31, 2015:
Leverage capital	$	618,880	12.8	%	$	193,500	4.0	%	$	241,875	5.0	%
Tier 1 risk-based capital	618,880		17.3		214,762		6.0		286,349		8.0
Total risk-based capital	663,669		18.5		286,349		8.0		357,936		10.0
CET1 risk-based capital	528,880		14.8		217,687		4.5		314,437		6.5

At December 31, 2014:
Leverage capital	$	562,063	12.0	%	$	186,922	4.0	%	$	233,652	5.0	%
Tier 1 risk-based capital	562,063		17.0		132,475		4.0		198,712		6.0
Total risk-based capital	603,939		18.2		264,949		8.0		331,187		10.0

Central Pacific Bank
At March 31, 2015:
Leverage capital	$	588,238	12.2	%	$	192,901	4.0	%	$	241,126	5.0	%
Tier 1 risk-based capital	588,238		16.5		213,844		6.0		285,125		8.0
Total risk-based capital	632,789		17.8		285,125		8.0		356,406		10.0
CET1 risk-based capital	$	588,238	16.5		217,013		4.5		313,463		6.5

At December 31, 2014:
Leverage capital	$	540,276	11.6	%	$	186,828	4.0	%	$	233,535	5.0	%
Tier 1 risk-based capital	540,276		16.3		132,376		4.0		198,564		6.0
Total risk-based capital	582,068		17.6		264,752		8.0		330,940		10.0

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Liquidity and Borrowing Arrangements

Our objective in managing liquidity is to maintain a balance between sources and uses of funds in order to economically meet the cash requirements of customers for loans and deposit withdrawals and participate in lending and investment opportunities as they arise. We monitor our liquidity position in relation to changes in loan and deposit balances on a daily basis to ensure maximum utilization, maintenance of an adequate level of readily marketable assets and access to short-term funding sources.

Core deposits have historically provided us with a sizeable source of relatively stable and low cost funds, but are subject to competitive pressure in our market. In addition to core deposit funding, we also have access to a variety of other short-term and long-term funding sources, which include proceeds from maturities of our investment securities, as well as secondary funding sources such as the FHLB, secured repurchase agreements and the Federal Reserve discount window, available to meet our liquidity needs. While we historically have had access to these other funding sources, access to these sources may not be guaranteed and can be restricted in the future as a result of market conditions or the Company’s and bank’s financial position.

The bank is a member of and maintained a $965.4 million line of credit with the FHLB as of March 31, 2015. Short-term and long-term borrowings under this arrangement totaled $70.0 million and nil at March 31, 2015, respectively, compared to $38.0 million and nil at December 31, 2014, respectively. FHLB advances outstanding at March 31, 2015 were secured by unencumbered investment securities with a fair value of $0.8 million and certain real estate loans with a carrying value of $1.5 billion in accordance with the collateral provisions of the Advances, Security and Deposit Agreement with the FHLB. At March 31, 2015, $895.4 million was undrawn under this arrangement.

Our ability to maintain adequate levels of liquidity is dependent on our ability to continue to maintain our strong risk profile and capital base. Our liquidity may also be negatively impacted by weakness in the financial markets and industry-wide reductions in liquidity.

Contractual Obligations

Information regarding our contractual obligations is provided in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes in our contractual obligations since December 31, 2014.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency rates, commodity prices and equity prices. Our primary market risk exposure is interest rate risk that occurs when rate-sensitive assets and rate-sensitive liabilities mature or reprice during different periods or in differing amounts. Asset/liability management attempts to coordinate our rate-sensitive assets and rate-sensitive liabilities to meet our financial objectives. The Asset/Liability Committee (“ALCO”) monitors interest rate risk through the use of interest rate sensitivity gap, net interest income and market value of portfolio equity simulation, and rate shock analyses. Adverse interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and liabilities.

The primary analytical tool we use to measure and manage our interest rate risk is a simulation model that projects changes in net interest income (“NII”) as market interest rates change. Our ALCO policy requires that simulated changes in NII should be within certain specified ranges, or steps must be taken to reduce interest rate risk. The results of the model indicate that the mix of rate-sensitive assets and liabilities at March 31, 2015 would not result in a fluctuation of NII that would exceed the established policy limits.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), the Company’s management, including the Chief Executive Officer and Principal Financial and Accounting Officer, conducted an evaluation of the effectiveness and design of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and Principal Financial and Accounting Officer concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

As of the end of the period covered by this report, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes from the Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on February 27, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

In the first quarter of 2015, 473,829 shares of common stock, at an aggregate cost of $9.3 million, were repurchased under this program as described in the table below. A total of $104.2 million remained available for repurchase under the program at March 31, 2015. Following consummation of the transactions contemplated by the Underwriting Agreement with the Selling Shareholders, an aggregate of $29.2 million remained available for repurchase at April 1, 2015.

	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Shares Purchased as Part of Publicly Announced Programs		Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program

January 1-31	473,829	$	19.64		473,829	$	29,241,189
February 1-28	—	—		—		29,241,189
March 1-31	—	—		—		104,241,189
Total	473,829	$	19.64		473,829	$	104,241,189

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Item 6. Exhibits

Exhibit No.		Document

31.1		Rule 13a-14(a) Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *

31.2		Rule 13a-14(a) Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 *

32.1		Section 1350 Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **

32.2		Section 1350 Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 **

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

* Filed herewith.

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CENTRAL PACIFIC FINANCIAL CORP.
	(Registrant)


Date: May 7, 2015	/s/ John C. Dean
	John C. Dean
	Chief Executive Officer

Date: May 7, 2015	/s/ Denis K. Isono
	Denis K. Isono
	Executive Vice President and Chief Financial Officer

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Central Pacific Financial Corp.

Exhibit Index

Exhibit No.		Description

31.1		Rule 13a-14(a) Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Rule 13a-14(a) Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Section 1350 Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Section 1350 Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document