Central Pacific Financial - 10-Q quarterly report FY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

(808)544-0500

(Registrant’s telephone number, including area code)

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

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

Yes ý  No o

As of April 30, 2004, the number of shares of common stock outstanding of the registrant was 16,096,607 shares.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARY

Table of Contents

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PART I.   FINANCIAL INFORMATION

Forward-Looking Statements

This document contains forward-looking statements.  Such statements include, but are not limited to, (i) statements about the benefits of a merger between Central Pacific Financial Corp. (“CPF” or “Company”) and CB Bancshares, Inc. (“CBBI”), including future financial and operating results, costs savings and accretion to reported and cash earnings that may be realized from such merger; (ii) statements with respect to CPF’s plans, objectives, expectations and intentions and other statements that are not historical facts; and (iii) other statements identified by words such as “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “targets”, “projects” and other similar expressions.  These statements are based upon the current beliefs and expectations of CPF’s management and are subject to significant risks and uncertainties.  Actual results may differ from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:  (1) the business of CPF and CBBI may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; (2) expected revenue synergies and cost savings from the merger may not be fully realized or realized within the expected time frame; (3) revenues following the merger may be lower than expected; (4) deposit attrition, operating costs, customer loss and business disruption, including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers, may be greater than expected following the merger; (5) any necessary approvals required for the merger may not be obtained on the proposed terms; (6) the failure of CPF’s and CBBI’s shareholders to approve the merger; (7) competitive pressures among depository and other financial institutions may increase significantly and may have an effect on pricing, spending, third-party relationships and revenues; (8) the strength of the United States economy in general and the strength of the Hawaii economy may be different than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on the combined company’s loan portfolio and allowance for loan losses; (9) changes in the U.S. legal and regulatory framework; and (10) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate conditions) and the impact of such conditions on the combined company’s activities.

Additional factors that could cause CPF results to differ

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materially from those described in the forward-looking statements can be found in CPF’s reports (such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the Securities and Exchange Commission (“SEC”) and available at the SEC’s Internet web site (www.sec.gov). All subsequent written and oral forward-looking statements concerning the proposed transaction with CBBI or other matters attributable to CPF or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above.  CPF does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statement is made.

CPF will amend its registration statement on Form S-4 to register the shares of CPF common stock to be issued in connection with the merger.  The registration statement will include a joint proxy statement/prospectus for soliciting proxies from CPF and CBBI shareholders, in connection with meetings of such shareholders at a date or dates subsequent hereto.

Investors and security holders are urged to read the registration statement and joint proxy statement and any other relevant documents, when available, as well as any amendments or supplements to those documents, because they will contain important information.  Investors and security holders may obtain a free copy of documents filed with the SEC at the SEC Internet web site at www.sec.gov.  Such documents may also be obtained free of charge from CPF by directing such request to: Central Pacific Financial Corp., 220 South King Street, Honolulu, Hawaii 96813, Attention: David Morimoto, (808) 544-0627.

CPF and CBBI, its directors and executive officers and certain other persons may be deemed to be “participants” if CPF solicits proxies from CBBI and CPF shareholders in connection with the merger.  A detailed list of the names, affiliations and interests of the participants in any such solicitation is contained in CPF’s definitive proxy revocation statement as filed on May 22, 2003.  Information about the directors and executive officers of CPF and their ownership of and interests in CPF stock is set forth in the proxy statement for CPF’s 2004 Annual Meeting of Shareholders.  Information about the directors and executive officers of CBBI and their ownership of and interests in CPF stock is set forth in the proxy statement for CBBI’s 2004 Annual Meeting of Shareholders.  Additional information regarding the interests of those participants may be obtained by reading the joint proxy statement/prospectus when it becomes available.

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Item 1.  Financial Statements

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2004 and 2003

1.  Basis of Presentation

The financial information included herein is unaudited, except for the consolidated balance sheet at December 31, 2003. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of Management, necessary for a fair statement of results for the interim periods.

The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year.

2.  Comprehensive Income (Loss)

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

3.  Segment Information

The Company has two reportable segments: financial services and treasury.  The segments reported are consistent with internal functional reporting lines.  They are managed separately because each unit has different target markets, technological requirements, marketing strategies and specialized skills.  The financial services segment includes retail branch offices, corporate lending, construction and real estate development lending, trust services, investment services and international banking services.  A full range of deposit and loan products, and various other banking services are offered.  The treasury segment is responsible for managing the Company’s investment securities portfolio and wholesale funding activities.

The all others category includes Central Business Club of Honolulu and activities such as residential mortgage lending, mortgage servicing, electronic banking, and management of bank

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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, 2003 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) is allocated to each segment based on the amount of net investable funds provided (used) by that segment at a rate equal to the Bank’s average rate on interest-sensitive assets and liabilities. All administrative and overhead expenses are allocated to the segments at cost. Cash, investment securities, loans and their related balances are allocated to the segment responsible for acquisition and maintenance of those assets.  Segment assets also include all premises and equipment used directly in segment operations.

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

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4. Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“FIN 46”).   FIN 46 provided a new framework for identifying a variable interest entity (“VIE”) and determining when a company should include the assets, liabilities, and noncontrolling interests and results of activities of a VIE in its consolidated financial statements.  In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“FIN 46R”).  For pubic entities that have interests in VIEs or potential VIEs commonly referred to as special-purpose entities, the application of FIN 46R was required in financial statements for periods ending after December 15, 2003. Application by public entities for all other types of VIEs was required in financial statements for periods ending after March 15, 2004.  The Company’s statutory trusts, CPB Capital Trust I, CPB Capital Trust II, and CPB Statutory Trust III, were deemed to be VIEs, and were consolidated in the consolidated financial statements as of December 31, 2003.  As of March 31, 2004, upon the adoption of FIN 46R, the Company’s statutory trusts were deconsolidated from the Company’s consolidated financial statements.  The application of FIN 46R did not have a material impact on the Company’s consolidated financial statements.

5. Stock Compensation Plans

The Company has elected to apply the provisions of APB No. 25, and provide the pro forma disclosure provisions of SFAS No. 148.

The following table presents pro forma disclosures of the impact that the 2003, 2002, 2000 and 1999 option grants would have had on net income and earnings per share had the grants been measured using the fair value of accounting prescribed by SFAS No. 148.

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6. Pension Plans

Central Pacific Bank (the “Bank”) has a defined benefit retirement plan (“Pension Plan”) covering substantially all of its employees.  The plan was curtailed effective December 31, 2002, and accordingly, plan benefits were fixed as of that date.

In 1995 and 2001, the Bank established Supplemental Executive Retirement Plans (“SERP”) which provide certain officers of the Bank with supplemental retirement benefits in excess of limits imposed on qualified plans by Federal tax laws.

The following table sets forth the components of net periodic benefit cost for the three months ended March 31:

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The Company disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $1.7 million to its Pension Plan and $215,000 to its SERP in 2004.  As of March 31, 2004, the Company made contributions of $450,000 to its Pension Plan and $54,000 to its SERP, and presently anticipates that its contributions for 2004 will approximate the amounts disclosed at year-end 2003.

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

Critical Accounting Policies

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

Allowance for Loan Losses.  The Company maintains the allowance for loan losses (“Allowance”) at an amount sufficient to absorb losses inherent in the Company’s loan portfolio based on a projection of probable net loan charge-offs.  For loans classified as impaired, an estimated impairment loss is calculated.  To estimate net loan charge-offs on other loans, the Company performs a migration analysis and considers other relevant economic conditions and borrower-specific risk characteristics.  A migration analysis is a technique used to estimate the probability that a loan will progress through various grades of loan quality and ultimately result in a loan charge-off based on historical loan loss experience.  Estimated loss rates are determined by loan category and risk profile, and an overall required Allowance is calculated.  Based on management’s estimate of the level of Allowance required, a provision for loan losses (“Provision”) is recorded to maintain the Allowance at an appropriate level.  Since the Company cannot predict with certainty the amount of loan charge-offs that will be incurred, and because the eventual level of loan charge-offs are impacted by numerous conditions beyond the control of the Company, a range of loss estimates could reasonably have been used to determine the Allowance and Provision

Defined Benefit Retirement Plan.  Defined benefit retirement plan assets, which consist primarily of marketable equity and debt securities, are typically valued using market quotations. Independent actuaries through the use of a number of assumptions determine plan obligations and the annual pension expense. Key assumptions in measuring the plan obligations include the discount rate and the expected long-term rate of return on plan assets.  In determining the discount rate, the Company utilizes

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the yield on high-quality, fixed-income investments currently available with maturities corresponding to the anticipated timing of the benefit payments.  Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans.

Overview of Material Events

On April 23, 2004, CPF and CBBI announced that their boards of directors approved a definitive merger agreement under which CPF will acquire all of CBBI’s outstanding shares for cash and stock with a value of $91.83 per share based on the closing price of CPF common stock on April 22, 2004.

Under the terms of the definitive merger agreement, each share of CBBI common stock is entitled to consideration in an amount equal to 2.6752 multiplied by the average price of CPF common stock over a specified 10 consecutive trading day period, plus $20.00. CBBI shareholders can elect to be paid in cash or shares of CPF common stock, with pro-rata allocation to apportion consideration among CBBI shareholders to the extent the total elections for cash or stock differ from the aggregate amounts of cash and stock to be paid by CPF in the merger.

Upon consummation of the merger, Clint Arnoldus (Chairman, President and Chief Executive Officer of CPF) will continue as Chief Executive Officer of the combined company, and Ronald K. Migita (President and Chief Executive Officer of CBBI) will become non-executive chairman of the board, Neal Kanda (Treasurer of CPF) will assume the position of President and Chief Operating Officer of the combined company, and Dean Hirata (Chief Financial Officer of CBBI) will be Chief Financial Officer of the combined company. The holding company and bank subsidiary will maintain the names of Central Pacific Financial Corp. and Central Pacific Bank, respectively. CPF’s Board will be increased to fifteen members, with the addition of six current members of the CBBI Board.

The merger is conditioned, among other factors, upon shareholder and regulatory approvals, and other customary conditions. CPF expects the transaction to close in the third quarter of 2004.

Under the terms of the merger agreement, CPF and CBBI will take all steps necessary to cause the lawsuits filed by one party against the other since May 2003 through the execution of the merger agreement to be dismissed with prejudice.

As of March 31, 2004, the Company capitalized merger-related costs totaling $10.1 million.  This amount is reflected as a component of other assets on the consolidated balance sheet.  For

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the three months ended March 31, 2004, merger-related expenses totaled $60,000 and are reflected as a component of other operating expense on the consolidated statement of income.

Financial Summary

For the three months ended March 31, 2004, the Company reported net income of $7.9 million or $0.48 per diluted share, down 7.8% and 7.7%, respectively, from the same period last year. The results for the first quarter were negatively impacted by net interest margin pressure caused by the low interest rate environment and an increase in other operating expense.

The following table presents annualized returns on average assets and average shareholders’ equity and basic and diluted earnings per share for the periods indicated.

Material Trends

Hawaii’s economy continued to improve in 2004. The state’s unemployment rate, which has remained consistently below the national unemployment rate, was 3.8% in March 2004, compared to 4.1% in March 2003.(1)  On the national level, the unemployment rate was 5.7% in March 2004, compared to 5.8% in March 2003.(2)

The housing market, supported by low mortgage interest rates, continues to show strong growth. Residential home sales on the island of Oahu for the first three months of 2004 were $907 million, an increase of 37.0% over the same period last year.(3) The median sales price for single family homes and condominiums on Oahu increased over the same period last year by 25.4% and 12.4%, respectively.(4)

(1)     Hawaii State Department of Labor and Industrial Relations.

(2)     Ibid.

(3)     Honolulu Board of Realtors.

(4)     Ibid.

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As a result of the strong housing market, the construction industry continues to reflect strong growth. In 2003, the number of construction jobs grew by 4.6% and the number of building permits increased by approximately 15.6% over the prior year.(5) As of March 31, 2004, the number of construction jobs grew by 2.6% from year-end 2003.(6)

The top five industries in the state as of March 31, 2004, representing approximately 69.7% of total jobs, include: government, food services and accommodation, retail, healthcare, and professional services.(7) Total state personal income is forecasted to grow by 5.1% in 2004.(8)

For the first three months of 2004, total visitor arrivals increased 3.8% over the same period last year.(9)  This increase was largely attributed to strong domestic visitor arrivals, which increased by 6.8% for the first three months of 2004 compared to the same period last year.(10) Although international visitor arrivals for the first three months of 2004 were down 2.3% from the prior year, the Japanese market showed signs of improvement.(11) In March 2004, Japanese visitor arrivals grew by 11.2% over March 2003, the highest year-over-year increase since January 2003.(12) In 2004, total Japanese visitor arrivals, which decreased by 10.7% in 2003, are expected to increase by 24.5%.(13)

For the two months ended February 29, 2004, the hotel occupancy rate was 79.7% and the average daily room rate was $151.73, an increase of 5.1% and 1.8%, respectively, over last year.(14) For 2003, the annual hotel occupancy rate was 72.5% and the average daily room rate was $144.44.(15)

The results of operations of the Company in 2004 may be directly impacted by the ability of Hawaii’s economy to sustain positive growth. Loan demand, deposit growth, provision for loan losses, noninterest income, and noninterest expense will be affected by economic conditions through the end of the year.

(5)     Hawaii State Department of Labor and Industrial Relations.

(6)     Ibid.

(7)     Ibid.

(8)     Hawaii State Department of Business, Economic Development and Tourism.

(9)     Ibid.

(10)   Ibid.

(11)   Ibid.

(12)   Ibid.

(13)   University of Hawaii Economic Research Organization.

(14)   Hawaii State Department of Business, Economic Development and Tourism.

(15)   Ibid.

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Results of Operations

Net Interest Income

A comparison of net interest income for the three months ended March 31, 2004 and 2003 is set forth below on a taxable equivalent basis using an assumed income tax rate of 35%.

Net interest income, when expressed as a percentage of average interest earning assets, is referred to as “net interest margin.”

Interest income, including loan fees, on a taxable equivalent basis decreased by $207,000 or 0.7% in the first quarter of 2004, compared to the same period last year.  This decrease was primarily due to the repricing of loans during an extended period of low interest rates, offset by an 11.7% increase in average interest earning assets. The yield on interest earning assets was 5.48% for the first quarter of 2004 compared to 6.17% for the comparable period in 2003.

Interest expense decreased $556,000 or 10.2% in the first quarter of 2004, compared to the same period in 2003.  This decrease was primarily due to low interest rates offset by a 5.8% increase in average interest-bearing deposits.  In addition, an increase in long-term debt, whose average cost increased from 3.37% to 3.66%, offset the overall decrease in interest expense. The average rate on interest-bearing liabilities was 1.19% for the first quarter of 2004, compared to 1.46% for the comparable period in 2003.

Net interest income on a taxable equivalent basis increased by $349,000 or 1.5% for the first quarter of 2004, compared to the same period last year. The net interest margin was 4.52% for the first quarter of 2004, compared to 4.98% for the same period in 2003.  An asset sensitive balance sheet contributed to this decline.

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Provision for Loan Losses

A discussion of the Company’s accounting policy regarding the allowance for loan losses is contained in the Critical Accounting Policies section of this report.

The following table sets forth certain information with respect to the Company’s allowance for loan losses as of the dates and for the periods indicated.

The provision for loan losses was $300,000 for the first quarter of 2004, an increase from the first quarter of 2003 when no provision was recorded.

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There were no significant charge-offs or recoveries for the first three months of 2004.  In 2003, there was a $1.0 million recovery on a commercial mortgage loan.

Net loan charge-offs, when expressed as an annualized percentage of average total loans, were 0.06% for the first quarter of 2004, compared to a net loan recovery of 0.27% for the same period last year.

The allowance for loan losses, expressed as a percentage of total loans, was 1.70% at March 31, 2004 compared to 1.87% at March 31, 2003.  Considering the relatively low level of net loan charge-offs, nonaccrual loans and delinquent loans, Management believes that the allowance for loan losses is adequate to cover the credit risks inherent in the loan portfolio.  Deterioration of Hawaii’s economy could adversely affect borrowers’ ability to repay, collateral values and, consequently, the level of nonperforming loans and provision for loan losses.

Nonperforming Assets

The following table sets forth nonperforming assets and accruing loans delinquent for 90 days or more at the dates indicated.

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Nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest totaled $7.6 million at March 31, 2004, compared to $1.4 million from a year ago and $4.3 million from year-end 2003. There was one nonaccrual construction loan at March 31, 2004 totaling $1.5 million involving an industrial building on the island of Oahu. Alternate financing arrangements are being negotiated on this loan. Nonaccrual commercial mortgage loans consisted primarily of three loans totaling $5.5 million, including a $415,000 loan related to the Oahu construction loan.  There was no other real estate at March 31, 2004 or December 31, 2003, compared to $547,000 at March 31, 2003.

As of March 31, 2004, there were five impaired loans which totaled $7.5 million and which were comprised mainly of loans secured by commercial property, compared to zero at December 31, 2003 and March 31, 2003.

Management continues to closely monitor loan delinquencies, and work with borrowers to resolve loan problems.  Deterioration of Hawaii’s economy may impact loan quality, and may result in increases in delinquencies, nonperforming assets, and restructured loans.

Other Operating Income

Total other operating income was $3.9 million for the first quarter of 2004, an increase of 6.7% from the same period last year. This increase was primarily driven by increases in trust income and service fee revenue, partially offset by decreases in gains on sale of loans and foreclosed properties.

Other Operating Expense

Total other operating expense was $14.5 million for the first quarter of 2004, an increase of 11.3% from the same period last year. Salaries and benefits totaled $8.2 million for the first quarter of 2004, a 16.0% increase from the $7.1 million reported in the first quarter of 2003. This increase is primarily attributable to the establishment of the Asset Management Division in mid-2003 and the addition of key resources in the financial services sales areas.  Other operating expenses, excluding salaries and benefits, totaled $6.3 million, an increase of 5.7% over the $6.0 million reported in the first quarter of 2003.  This increase was primarily the result of additional professional services totaling $242,000.

Income Taxes

The effective tax rate was 32.88% for the first quarter of

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2004, compared to 34.11% in the prior year. The Company’s investments in high-technology businesses in Hawaii generated net state tax benefits of $276,000 in the first quarter of 2004 and $244,000 in the first quarter of 2003.

Financial Condition

Total assets at March 31, 2004 grew to $2.28 billion, an increase of 12.3% from the $2.03 billion reported a year ago and an increase of 5.3% from the $2.17 billion reported as year-end 2003.

Loans, net of unearned income, grew to $1.46 billion, compared to $1.34 billion a year ago and $1.45 billion at year-end 2003. This increase was primarily due to an increase in the residential and commercial mortgage loan categories.  Residential mortgage loans, which totaled $398.0 million at March 31, 2004, increased by $69.3 million or 21.1% from the prior year.  Commercial mortgage loans, which totaled $586.4 million at March 31, 2004, increased by $39.2 million or 7.2% from the prior year.

Investment securities totaled $649.4 million, an increase of 22.9% over the same period last year and an increase of 17.0% over year-end 2003.

Total deposits at March 31, 2004 were $1.81 billion, an increase of $150.9 million or 9.1% over March 31, 2003 and an increase of $52.0 million or 3.0% over year-end 2003. Noninterest-bearing deposits grew to $369.2 million, a 24.0% increase from a year ago and a 9.2% increase from year-end 2003. The Company’s continued focus on business relationships and business deposits are primarily driving this increase.

Long-term debt totaled $228.4 million at March 31, 2004, up 41.2% from a year ago and 24.0% from year-end 2003.  An increase in subordinated debt relating to the Company’s statutory trusts and an increase in Federal Home Loan Bank borrowings contributed to this increase.

Capital Resources

Shareholders’ equity was $203.5 million at March 31, 2004, an increase of $24.9 million or 13.9% from a year ago, and an increase of $8.9 million or 4.6% from year-end 2003.  When expressed as a percentage of total assets, shareholders’ equity increased to 8.91% at March 31, 2004, from 8.78% a year ago and 8.97% at year-end 2003. Book value per share at March 31, 2004 was $12.65, compared to $11.16 at March 31, 2003 and $12.11 at year-end 2003.

On January 27, 2004, the board of directors declared a first

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quarter cash dividend of $0.16 per share, comparable to the dividend per share from a year ago.

In 2003, the Company created three statutory trusts:  CPB Capital Trust I, CPB Capital Trust II, and CPB Statutory Trust III, which issued a total of $55.0 million in trust preferred securities.  As mentioned previously, the statutory trusts were deconsolidated from the Company’s consolidated financial statements as of March 31, 2004.  However, the Federal Reserve has determined that certain cumulative preferred securities, such as the trust preferred securities issued by the Company’s statutory trusts, qualify as minority interest, and are included in the calculation of Tier 1 capital.

The Company’s objective with respect to capital resources is to maintain a level of capital that will support sustained asset growth and anticipated risks.  Furthermore, the Company seeks to ensure that regulatory guidelines and industry standards for well-capitalized institutions are met.

Regulations on capital adequacy guidelines adopted by the Federal Reserve Board (the “FRB”) and the Federal Deposit Insurance Corporation (the “FDIC”) are as follows.  An institution is required to maintain a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.  In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio.  For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%.  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.

The following table sets forth the Company’s capital ratios and capital adequacy requirements applicable to the Company as of the dates indicated.

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In addition, FDIC-insured institutions such as the Company’s subsidiary, Central Pacific Bank (the “Bank”), must maintain leverage, Tier 1 and total risk-based capital ratios of at least 5%, 6% and 10%, respectively, to be considered “well capitalized” under the prompt corrective action provisions of the FDIC Improvement Act of 1991.

The following table sets forth the Bank’s capital ratios and capital requirements to be considered “well capitalized” as of the dates indicated.

Asset/Liability Management and Liquidity

The Company’s asset/liability management and liquidity are discussed in the Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC.  No significant changes

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have occurred during the three months ended March 31, 2004.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company discussed the nature and extent of market risk exposure in the Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC.  No significant changes have occurred during the three months ended March 31, 2004.

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 in recording, processing, summarizing and reporting information required to be disclosed by the Company, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in internal controls

In addition and as of the end of the period covered by this

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report, there have been no changes in 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 is reasonably likely to materially affect, the internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

Please refer to the “Overview of Material Events” in Part I, Item 2, for information relating to legal proceedings involving matters related to the proposed business combination with CBBI.

Items 2, 3, 4 and 5.

Items 2, 3, 4 and 5 are omitted pursuant to instructions to Part II.

Item 6.  Exhibits and Reports on Form 8-K

(a)           Exhibits

Exhibit 3.1 - Amended Bylaws of the Registrant, as amended*

Exhibit 31.1 - Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

Exhibit 31.2 - Certification of the Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

Exhibit 32.1 - Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 32.2 - Certification of the Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* Filed herewith.

(b)           Reports on Form 8-K

The Company filed the following report on Form 8-K during the first quarter of 2004:

(1)                                  January 27, 2004, under Item 12, regarding the Company’s financial results for the quarter ended December 31, 2003.

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(2)                                  February 3, 2004, under 5, regarding the State of Hawaii Division of Financial Institutions’ approval of the Company’s application to acquire control of CB Bancshares, Inc.

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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.

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Central Pacific Financial Corp.

Exhibit Index