3. RECOVERY PLAN PROGRESS

As previously discussed, we adopted and implemented a recovery plan in March 2010 to improve our financial health by completing a significant recapitalization, aggressively reducing our credit risk exposure and focusing on our core businesses and traditional markets in Hawaii.

In addition to recapitalizing our Company, key elements of the recovery plan included, but were not limited to:

·	Aggressively managing the bank's existing loan portfolios to minimize further credit losses and to maximize recoveries;

·	Shrinking the bank's balance sheet, including the sale of pledged securities and reducing public deposits and repurchase positions;

·	Reducing the bank's loan portfolio through paydowns and restructurings; and

·	Lowering operating costs to align with the restructured business model.

Throughout 2010 and 2011, we accomplished several key milestones in our recovery plan, including:

·	On February 18, 2011, we successfully completed the Private Placement and TARP Exchange.

·	On May 6, 2011, we successfully completed a $20 million Rights Offering.

·	In May 2011, the Consent Order was lifted and replaced with the Bank MOU.

We significantly improved our tier 1 risk-based capital, total risk-based capital, and leverage capital ratios as of December 31, 2011 to 22.94%, 24.24%, and 13.78%, respectively, from 7.64%, 8.98%, and 4.42%, respectively, as of December 31, 2010. Our capital ratios currently exceed the minimum level required by the Bank MOU and are above the levels required for a “well-capitalized” regulatory designation.

·	We reported four consecutive profitable quarters with net income of $36.6 million for the year ended December 31, 2011.

·	We reduced our nonperforming assets by $107.2 million to $195.6 million at December 31, 2011 from $302.8 million at December 31, 2010.

·	We reduced our construction and development loan portfolio (excluding owner-occupied loans) as of December 31, 2011 to $148.4 million, or 7.2% of our total loan portfolio. At December 31, 2010, this portfolio totaled $299.9 million, or 13.8% of our total loan portfolio.

We maintained an allowance for loan and lease losses as a percentage of total loans and leases of 5.91% at December 31, 2011, compared to 8.89% at December 31, 2010. In addition, we maintained an allowance for loan and lease losses as a percentage of nonperforming assets of 62.42% at December 31, 2011, compared to 63.69% at December 31, 2010.

·	We reduced total outstanding borrowings with the FHLB to $50.0 million at December 31, 2011 from $551.3 million at December 31, 2010.

In addition to the above, see Notes 14 and 15 for further capital preservation initiatives undertaken by management related to the suspension of dividends on common shares, as well as the deferral of interest and dividend payments on the Company's subordinated debentures and trust preferred securities.

The actions described above are designed to improve the overall financial position of our bank. However, there is no assurance that we will be able to successfully implement the remaining aspects of our recovery plan.