26. PARENT COMPANY AND REGULATORY RESTRICTIONS

At December 31, 2013, the accumulated deficit of the parent company, Central Pacific Financial Corp., included $241.1 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, 2013, the bank had Statutory Retained Earnings of $240.4 million. For further information, see Note 14.

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 2.

In July 2010, Central Pacific Financial Corp. entered into the Written Agreement with the FRBSF, as described in Note 2, 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, 2013 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, 2013:
Leverage capital	$	632,724	13.7	%	$	184,995	4.0	%	$	231,244	5.0	%
Tier 1 risk-based capital	632,724		20.3		124,671		4.0		187,007		6.0
Total risk-based capital	672,317		21.6		249,343		8.0		311,678		10.0

As of December 31, 2012:
Leverage capital	$	609,394	14.3	%	$	170,176	4.0	%	$	212,720	5.0	%
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

Central Pacific Bank
As of December 31, 2013:
Leverage capital	$	610,753	13.2	%	$	184,736	4.0	%	$	230,920	5.0	%
Tier 1 risk-based capital	610,753		19.6		124,425		4.0		186,637		6.0
Total risk-based capital	650,216		20.9		248,850		8.0		311,062		10.0

As of December 31, 2012:
Leverage capital	$	580,860	13.6	%	$	170,274	4.0	%	$	212,843	5.0	%
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

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

Central Pacific Financial Corp.

Condensed Balance Sheets

	December 31,
	2013			2012
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	19,629		$	46,686
Investment securities available for sale	875			906
Investment in subsidiary bank, at equity in underlying net assets	710,122			581,248
Investment in other subsidiaries, at equity in underlying assets	554			549
Accrued interest receivable and other assets	23,202			6,845
Total assets	$	754,382		$	636,234

Liabilities and Shareholders’ Equity
Long-term debt	$	92,785		$	108,249
Other liabilities	1,484			23,163
Total liabilities	94,269			131,412

Shareholders’ equity:
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding none at December 31, 2013 and 2012	—			—
Common stock, no par value, authorized 185,000,000 shares; issued and outstanding 42,112,633 and 41,867,046 shares at December 31, 2013 and 2012, respectively	784,547			784,512
Surplus	75,498			70,567
Accumulated deficit	(184,087		)	(349,427		)
Accumulated other comprehensive loss	(15,845		)	(830		)
Total shareholders’ equity	660,113			504,822

Total liabilities and shareholders’ equity	$	754,382		$	636,234

Central Pacific Financial Corp.

Condensed Statements of Income

	Year Ended December 31,
	2013			2012			2011
	(Dollars in thousands)
Income:
Interest income:
Interest from subsidiary banks	$	30		$	48		$	109
Other income	2,001			9			1,047
Total income	2,031			57			1,156

Expense:
Interest on long-term debt	3,118			3,687			3,392
Other expenses	2,679			3,081			3,584
Total expenses	5,797			6,768			6,976

Loss before income taxes and equity in undistributed income of subsidiaries	(3,766		)	(6,711		)	(5,820		)
Income tax benefit	(31,891		)	—			—
Income (loss) before equity in undistributed income of subsidiaries	28,125			(6,711		)	(5,820		)

Equity in undistributed income of subsidiary bank	143,945			54,124			42,377
Equity in undistributed income of other subsidiaries	5			8			14
Net income	$	172,075		$	47,421		$	36,571

Central Pacific Financial Corp.

Condensed Statements of Cash Flows

	Year Ended December 31,
	2013			2012			2011
	(Dollars in thousands)
Cash flows from operating activities
Net income	$	172,075		$	47,421		$	36,571
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income tax benefit	(19,440		)	—			—
Equity in income of subsidiary bank	(143,945		)	(54,124		)	(42,377		)
Equity in undistributed income of other subsidiaries	(5		)	(8		)	(14		)
Share-based compensation	4,931			90			153
Other, net	(18,548		)	7,681			4,755
Net cash provided by (used in) operating activities	(4,932		)	1,060			(912		)

Cash flows from investing activities
Investment in subsidiary bank	—			—			(283,000		)
Distribution from unconsolidated subsidiaries	9,000			—			—
Contributions to unconsolidated subsidiaries	(9,000		)	—			—
Net cash used in investing activities	—			—			(283,000		)

Cash flows from financing activities
Net proceeds from issuance of common stock and stock option exercises	74			—			323,538
Repayments of long-term debt	(15,464		)	—			—
Dividends paid	(6,735		)	—			—
Net cash provided by (used in) financing activities	(22,125		)	—			323,538

Net increase (decrease) in cash and cash equivalents	(27,057		)	1,060			39,626

Cash and cash equivalents
At beginning of year	46,686			45,626			6,000
At end of year	$	19,629		$	46,686		$	45,626