27. PARENT COMPANY AND REGULATORY RESTRICTIONS

At December 31, 2012, the accumulated deficit of the parent company, Central Pacific Financial Corp., included $385.1 million of equity in undistributed losses of Central Pacific Bank.

Central Pacific Bank, as a Hawaii state-chartered 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 December 31, 2012, the bank had Statutory Retained Earnings of $96.5 million. For further information, see Note 15.

In December 2009, the Board of Directors of Central Pacific Bank agreed to the Consent Order with the FDIC and DFI. In May 2011, the Consent Order was lifted and replaced with the Bank MOU. On October 26, 2012, the Bank MOU was terminated, as described in Note 3.

In July 2010, Central Pacific Financial Corp. entered into the Written Agreement with the FRBSF, as described in Note 3, which was terminated on February 12, 2013.

Section 131 of the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) required the Board of Governors of the Federal Reserve System, FDIC, and the Comptroller of the Currency (collectively, the “Agencies”) to develop a mechanism to take prompt corrective action to resolve the problems of insured depository institutions. The final rules to implement FDICIA’s Prompt Corrective Action provisions established minimum regulatory capital standards to determine an insured depository institution’s capital category. However, the Agencies may impose higher minimum standards on individual institutions or may downgrade an institution from one capital category to a lower capital category because of safety and soundness concerns.

The Prompt Corrective Action provisions impose certain restrictions on institutions that are undercapitalized. The restrictions become increasingly more severe as an institution’s capital category declines from undercapitalized to critically undercapitalized.

The following table sets forth actual and required capital and capital ratios for the Company and the bank, as well as the minimum capital adequacy requirements applicable generally to all financial institutions as of the dates indicated. The Company’s and the bank’s leverage capital, Tier 1 and total risk-based capital ratios as of December 31, 2012 were above the levels required for a “well-capitalized” regulatory designation.

					Minimum required for				Minimum required to
	Actual				capital adequacy purposes				be well-capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Company
As of December 31, 2012:
Tier 1 risk-based capital	$	609,394	22.5	%	$	108,128	4.0	%	$	162,192	6.0	%
Total risk-based capital	644,044		23.8		216,256		8.0		270,320		10.0
Leverage capital	609,394		14.3		170,176		4.0		212,720		5.0

As of December 31, 2011:
Tier 1 risk-based capital	$	555,315	22.9	%	$	96,845	4.0	%	$	145,267	6.0	%
Total risk-based capital	586,802		24.2		193,690		8.0		242,112		10.0
Leverage capital	555,315		13.8		161,218		4.0		201,522		5.0

Central Pacific Bank
As of December 31, 2012:
Tier 1 risk-based capital	$	580,860	21.5	%	$	108,229	4.0	%	$	162,343	6.0	%
Total risk-based capital	615,523		22.7		216,457		8.0		270,572		10.0
Leverage capital	580,860		13.6		170,274		4.0		212,843		5.0

As of December 31, 2011:
Tier 1 risk-based capital	$	524,057	21.6	%	$	96,916	4.0	%	$	145,375	6.0	%
Total risk-based capital	555,566		22.9		193,833		8.0		242,291		10.0
Leverage capital	524,057		13.0		161,259		4.0		201,574		5.0

Condensed financial statements, solely of the parent company, Central Pacific Financial Corp., follow:

Central Pacific Financial Corp.

Condensed Balance Sheets

	December 31,
	2012			2011
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	46,686		$	45,626
Investment securities available for sale	906			970
Investment in subsidiary bank, at equity in underlying net assets	581,248			530,173
Investment in other subsidiaries, at equity in underlying assets	549			541
Accrued interest receivable and other assets	6,845			7,410
Total assets	$	636,234		$	584,720

Liabilities and Shareholders’ Equity
Long-term debt	$	108,249		$	108,249
Other liabilities	23,163			20,031
Total liabilities	131,412			128,280

Shareholders’ equity:
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding 41,867,046 and 41,749,116 shares at December 31, 2012 and 2011, respectively	784,512			784,539
Surplus	70,567			66,585
Accumulated deficit	(349,427		)	(396,848		)
Accumulated other comprehensive income (loss)	(830		)	2,164
Total shareholders’ equity	504,822			456,440

Total liabilities and shareholders’ equity	$	636,234		$	584,720

Central Pacific Financial Corp.

Condensed Statements of Operations

	Year Ended December 31,
	2012			2011			2010
	(Dollars in thousands)
Income:
Interest income:
Interest and dividends on investment securities	$	—		$	—		$	11
Interest from subsidiary banks	48			109			12
Other income	9			1,047			107
Total income	57			1,156			130

Expense:
Interest on long-term debt	3,687			3,392			3,324
Other expenses	3,081			3,584			6,039
Total expenses	6,768			6,976			9,363

Loss before income taxes and equity in undistributed income (loss) of subsidiaries	(6,711		)	(5,820		)	(9,233		)
Income tax expense	—			—			—
Loss before equity in undistributed income (loss) of subsidiaries	(6,711		)	(5,820		)	(9,233		)

Equity in undistributed income (loss) of subsidiary bank	54,124			42,377			(241,720		)
Equity in undistributed income of other subsidiaries	8			14			—
Net income (loss)	$	47,421		$	36,571		$	(250,953	)

Central Pacific Financial Corp.

Condensed Statements of Cash Flows

	Year Ended December 31,
	2012			2011			2010
	(Dollars in thousands)
Cash flows from operating activities
Net income (loss)	$	47,421		$	36,571		$	(250,953	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Deferred income tax benefit	—			—			(73		)
Equity in (income) loss of subsidiary bank	(54,124		)	(42,377		)	241,720
Equity in undistributed income of other subsidiaries	(8		)	(14		)	—
Share-based compensation	90			153			56
Other, net	7,681			4,755			8,904
Net cash provided by (used in) operating activities	1,060			(912		)	(346		)

Cash flows from investing activities
Proceeds from sales of investment securities available for sale	—			—			335
Investment in subsidiary bank	—			(283,000		)	—
Net cash provided by (used in) investing activities	—			(283,000		)	335

Cash flows from financing activities
Net proceeds from issuance of common stock and stock option exercises	—			323,538			(1,023		)
Other, net	—			—			147
Net cash provided by (used in) financing activities	—			323,538			(876		)

Net increase (decrease) in cash and cash equivalents	1,060			39,626			(887		)

Cash and cash equivalents
At beginning of year	45,626			6,000			6,887
At end of year	$	46,686		$	45,626		$	6,000