The clock has begun ticking for Central Pacific Bank to get its financial house in order.

Central Pacific, the state's third-largest bank in terms of assets, has 60 days to comply with a consent order from federal and state regulators requiring the bank to improve its capital position, asset quality, liquidity and management oversight, among other matters.

The bank announced yesterday that it has agreed to a stipulation with the Federal Deposit Insurance Corp. and the Hawaii Division of Financial Institutions that requires the bank to develop and adopt a plan to meet and maintain specified capital requirements. As part of that plan, the bank also must include a contingency plan that would include the possible sale or merger of the bank—if directed by regulators—in case Central Pacific cannot comply with the consent order.

“;This time is the most critical in their history for their survival,”; said Brett Rabatin, senior research analyst of Birmingham, Ala.-based Sterne Agee.

The consent order requires Central Pacific to increase its Tier 1 capital by March 31 to maintain a minimum leverage capital ratio of 10 percent, and maintain its total risk-based capital ratio at or above 12 percent. At the end of the third quarter, Central Pacific's leverage capital ratio was 8.11 percent, and its risk-based capital ratio was 12.24 percent.

The 10 percent leverage capital ratio represents an increase from the 9 percent Central Pacific agreed to in a memorandum of understanding last December when it received $135 million as part of a federal bailout through the Troubled Asset Relief Program, or TARP.

“;To be considered well capitalized, most banks have to have Tier 1 capital of risk-leveraged assets of 6 percent and total risk-based capital of 10 percent,”; Rabatin said. “;So the 10 and 12 percent ratios that Central Pacific has been told to achieve are simply high ratios due to concerns about the current asset quality at the institution, and the regulators want extra capital to give enough cushion for any unforeseen losses.”;

The order also states that an adequate allowance for loan and lease losses must be maintained at all times, and the amount of commercial real estate loans, particularly land development and construction loans, must be reduced systematically.

“;We have been in close communication with our regulators and, as previously disclosed (in a third-quarter conference call), expected to agree to this consent order,”; said Ronald Migita, chairman, president and chief executive officer of Central Pacific. “;With a major loan sale completed this week, we have already made progress toward the regulatory order and are fully committed to meeting the requirements of the agreement.”;

On Tuesday the bank completed the sale of a $47.5 million package of commercial real estate loans at par value. Additional loans, primarily commercial real estate loans, with an aggregate book value of $62 million as of Sept. 30, also have been sold or are contracted to be sold this quarter at a net discount of 10 percent of book value.

Central Pacific said Wednesday that it would exit the California market by 2012—where many of its commercial real estate loans are located—and focus on business development in Hawaii. The bank, which has lost hundreds of millions of dollars due to its exposure to the California real estate market, has not made a loan in California for more than 18 months.

The company also has engaged an outside loan review firm, Alvarez & Marsal, to conduct an independent review of its commercial real estate loan portfolio and expects to continue pursuing sales of certain loans, in addition to loan restructurings and renegotiations with its borrowers, over the coming quarters.

“;The loan review and loan sales are important steps in reaching our capital and asset-quality goals in order to comply with the consent order,”; Migita said.

Nick Griffin, commissioner of the state Division of Financial Institutions, said it's the agency's policy not to talk about individual banks.

However, he did say that “;we are working closely with the bank on their capital and asset-quality issues and helping them understand things and achieve compliance with the terms of the consent order.”;

The bank said it will continue to offer a full range of financial products and services, and its deposits continue to be insured by the FDIC. Central Pacific elected to continue its participation in the extended FDIC insurance program, which, in addition to the $250,000 coverage per depositor, provides unlimited insurance coverage on transactional accounts earning less than a 0.5 percent interest rate.

“;Hawaii is our market, and despite the local economic conditions, our core deposit base has grown by 17 percent from a year ago,”; Migita said. “;We are committed to continue being a leading force in supporting homeownership and small businesses in Hawaii.”;

Ohana Pacific Bank, which opened in 2006 and caters primarily to Hawaii's Korean community, agreed last month to a similar order by the FDIC and DFI to shore up capital, improve asset quality and maintain adequate liquidity levels.

The last time Central Pacific received a formal regulatory enforcement order was on Nov. 29, 2006, when the FDIC and DFI required the bank to take additional steps to improve its program for detecting, monitoring and reporting large currency transactions and suspicious activity as mandated by the Bank Secrecy Act. The bank was found in compliance on Nov. 28, 2007.

Central Pacific's stock, which hit an all-time low of 81 cents on Dec. 1, closed yesterday down 2 cents at $1.16. The consent order announcement came after the market closed.