PARENT COMPANY AND REGULATORY RESTRICTIONS

12 Months Ended

Dec. 31, 2019

Condensed Financial Information Disclosure [Abstract]

PARENT COMPANY AND REGULATORY RESTRICTIONS

27. PARENT COMPANY AND REGULATORY RESTRICTIONS

At December 31, 2019, the accumulated deficit of the parent company, Central Pacific Financial Corp., included $415.0 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, 2019, the bank had Statutory Retained Earnings of $66.6 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, and were fully phased in on 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 was 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 2019, 2018 and 2017 was 2.50%, 1.875% and 1.25%, respectively. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes as of December 31, 2019, 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 2019 and 2018, 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, 2019
Tier 1 capital to avg. assets (leverage ratio)	$	568,529	9.5	%	$	238,630	4.0	%			N/A
Tier 1 capital to risk-weighted assets	568,529		12.6		271,788		6.0				N/A
Total capital to risk-weighted assets	617,772		13.6		362,384		8.0				N/A
Common equity tier 1 ("CET1") capital to risk-weighted assets	518,529		11.5		203,841		4.5				N/A

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
CET1 capital to risk-weighted assets	500,260		11.9		189,691		4.5				N/A

Central Pacific Bank
As of December 31, 2019
Tier 1 capital to avg. assets (leverage ratio)	$	556,077	9.3	%	$	238,342	4.0	%	$	297,928	5.0	%
Tier 1 capital to risk-weighted assets	556,077		12.3		271,350		6.0		361,800		8.0
Total capital to risk-weighted assets	605,320		13.4		361,800		8.0		452,250		10.0
CET1 capital to risk-weighted assets	556,077		12.3		203,512		4.5		293,962		6.5

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

(1) Under the Basel III Capital Rules, the Company and the bank must also maintain the required Capital Conservation Buffer ("CCB") to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The CCB is calculated as a ratio of CET1 capital to risk-weighted assets, and effectively increases the required minimum risk-based capital ratios. The CCB requirement was phased in over a three-year period that began on January 1, 2016. The phase-in period ended on January 1, 2019, and the CCB is now at its fully phased-in level of 2.5%.

Condensed financial statements of the parent company are as follows:

CENTRAL PACIFIC FINANCIAL CORP.

CONDENSED BALANCE SHEETS



	December 31,
	2019		2018
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	10,634	$	16,743
Equity investment securities, at fair value	1,127		826
Investment in subsidiary bank	564,460		519,978
Other assets	8,354		30,312
Total assets	$	584,575	$	567,859

Liabilities and Equity
Long-term debt	$	51,547	$	72,166
Other liabilities	4,508		3,968
Total liabilities	56,055		76,134

Total shareholders’ equity	528,520		491,725
Total equity	528,520		491,725

Total liabilities and equity	$	584,575	$	567,859

CENTRAL PACIFIC FINANCIAL CORP.

CONDENSED STATEMENTS OF INCOME



	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Income:
Dividends from subsidiary bank	$	42,008		$	103,001		$	43,000
Interest income from subsidiary bank	5			5			6
Other income	92			160			150
Total income	42,105			103,166			43,156

Expense:
Interest expense on long-term debt	2,453			4,338			3,479
Other expenses	2,599			1,617			2,002
Total expenses	5,052			5,955			5,481

Income before income taxes and equity in undistributed income of subsidiaries	37,053			97,211			37,675
Income tax expense (benefit)	(1,289		)	(1,261		)	(1,781		)
Income before equity in undistributed income of subsidiaries	38,342			98,472			39,456

Equity in undistributed income (loss) of subsidiary bank	19,980			(38,986		)	1,748
Net income	$	58,322		$	59,486		$	41,204

CENTRAL PACIFIC FINANCIAL CORP.

CONDENSED STATEMENTS OF CASH FLOWS



	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	58,322		$	59,486		$	41,204
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense (benefit)	3,055			450			(442		)
Net change in dividends receivable from subsidiary bank	21,004			(21,004		)	—
Equity in undistributed loss (income) of subsidiary bank	(19,980		)	38,986			(1,748		)
Share-based compensation expense	2,735			2,778			1,918
Net change in other assets and liabilities	(2,900		)	(920		)	1,357
Net cash provided by operating activities	62,236			79,776			42,289

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

Cash flows from financing activities:
Net proceeds from issuance of common stock and stock option exercises	151			—			—
Repayments of long-term debt	(20,619		)	(20,619		)	—
Repurchases of common stock	(22,793		)	(32,824		)	(26,559		)
Cash dividends paid on common stock	(25,706		)	(24,143		)	(21,299		)
Net cash used in financing activities	(68,967		)	(77,586		)	(47,858		)

Net increase (decrease) in cash and cash equivalents	(6,109		)	2,812			(5,569		)

Cash and cash equivalents at beginning of year	16,743			13,931			19,500
Cash and cash equivalents at end of year	$	10,634		$	16,743		$	13,931