PARENT COMPANY AND REGULATORY RESTRICTIONS

12 Months Ended

Dec. 31, 2018

Condensed Financial Information of Parent Company Only Disclosure [Abstract]

PARENT COMPANY AND REGULATORY RESTRICTIONS

27. PARENT COMPANY AND REGULATORY RESTRICTIONS

At December 31, 2018, the accumulated deficit of the parent company, Central Pacific Financial Corp., included $435.0 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, 2018, the bank had Statutory Retained Earnings of $46.6 million. For further information, see Note 13 - Equity.

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks ("Basel III rules") became effective for the Company on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a "capital conservation buffer" above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in at the rate of 0.625% per year from 0.625% in 2016 to 2.50% on January 1, 2019. The capital conservation buffer for 2018 is 1.875% and for 2017 is 1.25%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2018, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If under-capitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2018 and 2017, the most recent regulatory notifications categorized the Bank as "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

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.



	Actual				Minimum required for capital adequacy purposes				Minimum required to be well-capitalized
	Amount		Ratio		Amount		Ratio (1)		Amount		Ratio
	(Dollars in thousands)
Company
As of December 31, 2018
Tier 1 capital to avg. assets (leverage ratio)	$	570,260	9.9	%	$	230,847	4.0	%			N/A
Tier 1 capital to risk-weighted assets	570,260		13.5		252,921		6.0				N/A
Total capital to risk-weighted assets	619,419		14.7		337,228		8.0				N/A
Common equity tier 1 ("CET1") capital to risk-weighted assets	500,260		11.9		189,691		4.5				N/A

As of December 31, 2017
Tier 1 capital to avg. assets (leverage ratio)	578,607		10.4		223,646		4.0				N/A
Tier 1 capital to risk-weighted assets	578,607		14.7		236,721		6.0				N/A
Total capital to risk-weighted assets	628,068		15.9		315,628		8.0				N/A
CET1 capital to risk-weighted assets	490,861		12.4		177,541		4.5				N/A

Central Pacific Bank
As of December 31, 2018
Tier 1 capital to avg. assets (leverage ratio)	$	533,166	9.3	%	$	230,638	4.0	%	$	288,298	5.0	%
Tier 1 capital to risk-weighted assets	533,166		12.7		252,667		6.0		336,889		8.0
Total capital to risk-weighted assets	582,325		13.8		336,889		8.0		421,111		10.0
CET1 capital to risk-weighted assets	533,166		12.7		189,500		4.5		273,722		6.5

As of December 31, 2017
Tier 1 capital to avg. assets (leverage ratio)	565,412		10.1		223,431		4.0		279,289		5.0
Tier 1 capital to risk-weighted assets	565,412		14.4		236,401		6.0		315,201		8.0
Total capital to risk-weighted assets	614,732		15.6		315,201		8.0		394,002		10.0
CET1 capital to risk-weighted assets	565,412		14.4		177,301		4.5		256,101		6.5

(1) Ratios exclude the capital conservation buffer ("CCB"). When fully phased-in on January 1, 2019, the Basel III rules will include a CCB of 2.5% that is added on top of each of the minimum risk-based capital ratios noted above (excluding the leverage ratio). The CCB is being phased in at the rate of 0.625% per year from 0.625% in 2016 to 2.50% on January 1, 2019.

Condensed financial statements of the parent company are as follows:

CENTRAL PACIFIC FINANCIAL CORP.

CONDENSED BALANCE SHEETS



	December 31,
	2018		2017
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	16,743	$	13,931
Equity investment securities	826		825
Investment in subsidiary bank, at equity in underlying net assets	519,978		572,101
Other assets	30,312		9,577
Total assets	$	567,859	$	596,434

Liabilities and Equity
Long-term debt	$	72,166	$	92,785
Other liabilities	3,968		3,614
Total liabilities	76,134		96,399

Total shareholders’ equity	491,725		500,011
Non-controlling interest	—		24
Total equity	491,725		500,035

Total liabilities and equity	$	567,859	$	596,434

CENTRAL PACIFIC FINANCIAL CORP.

CONDENSED STATEMENTS OF INCOME



	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Income:
Dividends from subsidiary bank	$	103,001		$	43,000		$	29,965
Interest income from subsidiary bank	5			6			6
Other income	160			150			100
Total income	103,166			43,156			30,071

Expense:
Interest expense on long-term debt	4,338			3,479			3,005
Other expenses	1,617			2,002			2,739
Total expenses	5,955			5,481			5,744

Income before income taxes and equity in undistributed income of subsidiaries	97,211			37,675			24,327
Income tax expense (benefit)	(1,261		)	(1,781		)	(2,467		)
Income before equity in undistributed income of subsidiaries	98,472			39,456			26,794

Equity in undistributed income (loss) of subsidiary bank	(38,986		)	1,748			20,198
Net income	$	59,486		$	41,204		$	46,992

CENTRAL PACIFIC FINANCIAL CORP.

CONDENSED STATEMENTS OF CASH FLOWS



	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	59,486		$	41,204		$	46,992
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense (benefit)	450			(442		)	15,683
Dividends receivable from subsidiary bank	(21,004		)	—			—
Equity in undistributed loss (income) of subsidiary bank	38,986			(1,748		)	(20,198		)
Share-based compensation	2,778			1,918			1,045
Other, net	(920		)	1,357			(697		)
Net cash provided by operating activities	79,776			42,289			42,825

Cash flows from investing activities:
Distributions from unconsolidated subsidiaries	622			—			—
Net cash provided by investing activities	622			—			—

Cash flows from financing activities:
Net proceeds from issuance of common stock and stock option exercises	—			—			941
Repayments of long-term debt	(20,619		)	—			—
Repurchases of common stock	(32,824		)	(26,559		)	(18,206		)
Dividends paid	(24,143		)	(21,299		)	(18,619		)
Net cash used in financing activities	(77,586		)	(47,858		)	(35,884		)

Net increase (decrease) in cash and cash equivalents	2,812			(5,569		)	6,941

Cash and cash equivalents at beginning of year	13,931			19,500			12,559
Cash and cash equivalents at end of year	$	16,743		$	13,931		$	19,500

- Definition

The entire disclosure for condensed financial information, including the financial position, cash flows, and the results of operations of the registrant (parent company) as of the same dates or for the same periods for which audited consolidated financial statements are being presented. Alternatively, the details of this disclosure can be reported by the specific parent company taxonomy elements, indicating the appropriate date and period contexts in an instance document.

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