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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to section 13 or 15(d) of the Securities
Exchange Act 1934 (fee required)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-12396
CB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0197163
(State of Incorporation) (IRS Employer Identification No.)
201 Merchant Street Honolulu, Hawaii 96813
(Address of principal executive offices)
(Registrant's Telephone Number) (808) 546-2411
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par value $1.00 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of January 31, 1996, registrant had outstanding 3,551,228 shares of common
stock. The aggregate market value of registrant's Common Stock held by
non-affiliates based on the closing price on January 31, 1996 was approximately
$103,061,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on May 23, 1996 are incorporated by reference into Part III. Exhibit
Index on page 69.
ITEM 1. BUSINESS
CB BANCSHARES, INC.
CB Bancshares, Inc. (the "Company") is a bank holding company incorporated in
the State of Hawaii in 1980. As a bank holding company, the Company has the
flexibility to directly or indirectly engage in certain bank-related activities
other than banking, subject to regulation by the Board of Governors of the
Federal Reserve System and the Office of Thrift Supervision. The Company has
four wholly-owned subsidiaries, City Bank, International Savings and Loan
Association, Limited (which the Company acquired in April 1994), City Finance
and Mortgage, Inc.(inactive) and O.R.E. Inc. which are discussed below.
CITY BANK
City Bank (the "Bank") is a state-chartered bank organized under the laws of
the State of Hawaii in 1959. The Bank is insured by the Federal Deposit
Insurance Corporation, and provides full commercial banking services through
eleven offices on Oahu, one office on Hawaii, and one office on Maui. These
services include receiving demand, savings and time deposits; making
commercial, real estate and consumer loans; financing international trade
activities; issuing letters of credit; handling domestic and foreign
collections; selling travelers' checks and bank money orders; and renting safe
deposit boxes.
The Bank is subject to regular examinations by the Federal Deposit Insurance
Corporation and the Division of Financial Institutions of the Department of
Commerce and Consumer Affairs, State of Hawaii.
Citibank Properties, Inc., a wholly-owned subsidiary of the Bank, was organized
to hold title to bank-facilities realty.
INTERNATIONAL SAVINGS AND LOAN ASSOCIATION, LIMITED
International Savings and Loan Association, Limited (the "Association" or
("ISL") was chartered by the Territory of Hawaii in 1925. The Association is
insured with funds administered by the Federal Deposit Insurance Corporation
and conducts its business through ten branches on Oahu and one on Maui.
The Association's principal business consists of attracting deposits from the
general public and utilizing advances from the Federal Home Loan Bank and
other borrowings to fund its real estate lending activities, which consist
primarily of lending on one-to-four family residential properties.
The Association has four wholly-owned subsidiaries, ISL Services,
Inc.(inactive), DRI Assurance, Inc. (inactive), ISL Capital Corporation and ISL
Financial Corp. ISL Capital Corporation engages in mortgage banking activities.
ISL Financial Corp. is a special purpose subsidiary which has issued debt
obligations collateralized by mortgaged-backed securities provided by the
Association.
CITY FINANCE AND MORTGAGE, INC. and O.R.E., Inc.
City Finance and Mortgage, Inc. is a state-chartered financial services company
organized, under the laws of the State of Hawaii in 1990, to provide first and
second mortgage loans.
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O.R.E., Inc., a wholly-owned subsidiary of the Company, was organized for the
primary purpose of engaging in the disposition of real and/or personal property
that are encumbered by loans of the Bank. To date, no transactions have been
consummated.
REGULATION AND COMPETITION
The earnings and growth of the Company, the Bank and ISL are affected by the
changes in the monetary and fiscal policies of the United States of America, as
well as by the general, local, national and international economic conditions.
The overall growth of loans and investments, deposit levels and interest rates
are directly influenced by the monetary policies of the Federal Reserve System.
Since these changes are generally unpredictable, it is difficult to ascertain
the impact of such future changes on the operations of the Company and its
subsidiaries.
The banking business is highly competitive. The Bank and ISL competes for
deposits and loans with seven other commercial banks and five other savings
associations located in Hawaii. In addition to other banks and savings
associations, the Bank and ISL compete for savings and time deposits and
certain types of loans with other financial institutions, such as consumer
finance companies, credit unions, merchandise retailers, and a variety of
financial services and advisory companies, and they also compete for mortgage
loans with insurance companies and mortgage companies.
The economy of the State of Hawaii is supported principally by tourism,
governmental expenditures (primarily for military), agriculture and
manufacturing (including sugar and pineapple processing). A small island
economy like that of the State of Hawaii which depends mostly on imports for
consumption is greatly influenced by the changes in external economic
conditions. A key to Hawaii's economic performance is the health of the U.S.
and Japan economies, and to a lesser extent, the economies of Canada, Europe
and other Asian nations. After rapid expansion in the late 1980s, the Hawaii
economy began to stumble in the early 1990s with the onset of the national
recession and Gulf War and its related negative impact on the tourist
industry. This was exacerbated by Hurricane Iniki in 1992 and the recession of
the Japanese economy. Hawaii gross state product ("GSP") in constant dollars
declined 0.4% in 1991 before expanding 0.8%, 0.2% and 0.4% for the 1992 to
1994 period. Meanwhile, Hawaii construction activity has slowed and foreign
investment in Hawaii (particularly by Japanese real estate investors) has been
reduced.
Tourism has also been affected since 1991 by a weakened economy on the U.S.
mainland, especially in the state of California, and the recession in the
Japanese economy. Recovery of the Japanese economy has been slow, but the
strengthening of the yen in 1995 has helped to improve visitor arrivals from
Japan. After experiencing three years of decline, total visitor arrivals
rebounded in 1994 and 1995 and increased by 5% (each year) compared to the
prior year.
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REGULATORY CONSIDERATIONS
The following discussion sets forth certain elements of the regulatory
framework applicable to the Company, the Bank and ISL. Federal and state
regulation of financial institutions is intended primarily for the protection
of depositors rather than shareholders of those entities. To the extent that
the following discussion describes statutory or regulatory provisions, it is
not intended to be complete and is qualified in its entirety by reference to
the particular statutory or regulatory provisions, and any case law or
interpretive letters concerning such provisions. In addition, there are other
statutes and regulations that apply to and regulate the operation of the
Company and its subsidiaries. Any change in applicable law or regulation may
have a material, possibly adverse, effect on the business of the Company, the
Bank, ISL or other subsidiaries of the Company.
Bank Holding Company. The Company is a bank holding company subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") under the Bank Holding Company Act of
1956, as amended (the "BHCA"). As a bank holding company, the Company's
activities and those of its banking and nonbanking subsidiaries are limited
to the business of banking and activities closely related or incidental to
banking, and the Company may not acquire directly or indirectly more than 5%
of any class of the voting shares of, or substantially all of the assets of,
a bank or any other company without the prior approval of the Federal Reserve
Board.
Savings and Loan Holding Company. As a result of its acquisition of ISL, the
Company is subject to OTS regulations as a unitary savings and loan holding
company within the meaning of the Home Owners Loan Act ("HOLA"). Among other
things, HOLA prohibits a savings and loan holding company, directly or
indirectly, from (1) acquiring control (as defined) of another insured
institution (or holding company thereof) without prior OTS approval, (2)
acquiring any voting shares of another insured institution (or holding company
thereof) which is not a subsidiary, subject to certain exceptions, (3)
acquiring through merger, consolidation or purchase of assets, another savings
institution (whether or not it is insured by the SAIF) or holding company
thereof or acquiring all or substantially all of the assets of such
institution (or holding company thereof) without prior OTS approval.
Dividend Restrictions. The principal source of the Company's cash flow has
been dividend payments received from the Bank. Dividends paid to the Company
by the Bank and ISL in 1995 totaled $14.98 million. Under the laws of the
State of Hawaii, payment of dividends by the Bank, is subject to certain
restrictions, and payments of dividends by the Company are likewise subject
to certain restrictions. In addition, applicable regulatory authorities are
authorized to prohibit banks, thrifts and their holding companies from paying
dividends which would constitute an unsafe and unsound banking practice. The
Federal Reserve Board has indicated that it would generally be an unsafe and
unsound banking practice for banks to pay dividends except out of current
operating earnings. Furthermore, an insured depository institution, such as
the Bank or ISL, cannot make a capital distribution (broadly defined to
include, among other things, dividends, redemptions and other repurchases of
stock), or pay management fees to its holding company, if thereafter the
depository institution would be undercapitalized.
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OTS regulations impose uniform limitations on the ability of savings
associations to engage in various distributions of capital such as dividends,
stock repurchases and cash-out mergers. Such regulations utilize a three-
tiered approach which permits various levels of distributions based primarily
upon a
savings association's capital level. As of December 31, 1995, ISL was
classified as a first-tier association under the guidelines discussed below.
In the first tier, a savings association that has capital equal to or greater
than its fully phased-in capital requirement (both before and after the
proposed capital distribution) and that has not been notified by the OTS that
it is in need of more than normal supervision, may make (without application)
capital distributions during a calendar year up to 100% of its net income to
date during the calendar year plus one-half its surplus capital ratio at the
beginning of the calendar year, or 75% of its net income over the most recent
four-quarter period. Capital distributions in excess of such amount require
advance approval from the OTS.
In the second tier, a savings association with either (i) capital equal to or
in excess of its minimum capital requirement but below its fully phased-in
capital requirement (both before and after the proposed capital distribution),
or (ii) capital in excess of its fully phased-in capital requirement (both
before and after the proposed capital distribution) but which has been
notified by the OTS that it shall be treated as a tier 2 association because
it is in need of more than normal supervision, may make (without application)
capital distributions of up to 75% of its net income during the previous four
quarters depending on how close the association is to meeting its fully
phased-in capital requirement.
In the third tier, a savings association with either (i) capital below its
minimum capital requirement (either before or after the proposed capital
distribution), or (ii) capital in excess of either its fully phased-in capital
requirement or minimum capital requirement but which has been notified by the
OTS that it shall be treated as a tier 3 association because it is in need of
more than normal supervision, may not make any capital distributions without
prior approval from the OTS.
Capital Standards. The Company and the Bank are subject to capital standards
promulgated by the Federal Reserve Board, the FDIC, and the Hawaii Division of
Financial Institutions. At the end of 1995, the minimum ratio of total
Capital to risk-weighted assets, provided for in the guidelines adopted by the
Federal Reserve Board, including certain off balance sheet items such as
standby letters of credit, was 8%. At least half of the total capital is to
be comprised of common equity, retained earnings, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock
less goodwill ("Tier 1 Capital"). The remainder may consist of a limited
amount of subordinated debt, other preferred stock, certain other instruments,
and a limited amount of reserves for loan losses ("Tier 2 Capital"). The
FDIC's risk-based capital guidelines for state non-member banks of the Federal
Reserve System are generally similar to those established by the Federal
Reserve Board for bank holding companies.
The Federal Reserve Board and FDIC also have adopted minimum leverage ratios
for bank holding companies and banks requiring bank organizations to maintain
a Leverage Ratio (defined as Tier 1 Capital divided by average total assets
less goodwill) of at least 3% of total assets. The Leverage Ratio is the
minimum requirement for the most highly rated banking organizations, and other
banking organizations are expected to maintain an additional cushion of at
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least 100 to 200 basis points, taking into account the level and nature of
risk, to be allocated to the specific banking organizations by the primary
regulator.
Federal Reserve Board guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels,
without significant reliance on intangible assets. Furthermore, the guidelines
indicate that the Federal Reserve Board will continue to consider a "tangible
Tier 1 leverage ratio" in evaluating proposals for expansion or new activities.
The tangible Tier 1 leverage ratio is the ratio of a banking organization's
Tier 1 Capital, less intangibles, to total assets, less intangibles.
The OTS has established minimum capital standards applicable to all savings
associations. The OTS also is authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations create three capital requirements: a tangible capital
requirement, a leverage or core capital requirement, and a risk-based capital
requirement. These three capital standards are discussed below.
Each savings association must currently maintain tangible capital equal to at
least 1.5% of its adjusted total assets. Tangible capital includes common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, and minority interests in the equity
accounts of fully consolidated subsidiaries.
Each savings association must currently maintain core capital equal to at
least 3% of its adjusted total assets. Core capital includes common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries and qualifying supervisory goodwill (i.e.,
supervisory goodwill existing on April 12, 1989) amortized on a straight line
basis over the shorter of 20 years or the remaining period for amortization in
effect on April 12, 1989.
The OTS risk-based capital standard presently requires savings associations to
maintain a minimum ratio of total capital to risk-weighted assets of 8%. Total
capital consists of core capital, defined above, and supplementary capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may
be used to satisfy the risk-based requirement only in an amount equal to the
amount of core capital. In determining the required amount of risk-based
capital, total assets, including certain off-balance sheet items, are
multiplied by a risk weight based on the risks inherent in the type of assets.
The risk weights assigned by the OTS for principal categories of assets are
(I) 0% for cash and securities issued by the federal government or
unconditionally backed by the full faith and credit of the federal government;
(ii) 20% for securities (other than equity securities) issued by federal
government sponsored agencies and mortgage-backed securities issued by, or
fully guaranteed as to principal and interest by, the FNMA or the FHLMC,
except for those classes with residual characteristics or stripped mortgage-
related securities; (iii) 50% for prudently underwritten permanent one-to-four
family first lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or the FHLMC; and (iv) 100% for all
other loans and investments, including consumer loans, commercial loans, and
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one-to-four family residential real estate loans, more than 90 days
delinquent, and all repossessed assets or assets more than 90 days past due.
Effective January 1, 1994, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under
the rule, an institution with a greater than "normal" level of interest rate
risk will be subject to a deduction of its interest rate risk component from
total capital for purposes of calculating risk-based capital. As a result,
such an institution will be required to maintain additional capital in order
to comply with the risk-based capital requirement. An institution with a
greater than "normal" interest rate risk is defined as an institution that
would suffer a loss of net portfolio value exceeding 2% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease (with certain minor exceptions) in interest rates. The interest rate
risk component will be calculated, on a quarterly basis, as one-half of the
difference between an institution's measured interest rate risk and 2%,
multiplied by the market value of its assets. The rule also authorizes the
director of the OTS, or his designee, to waive or defer an institution's
interest rate risk component on a case-by-case basis. The rule is subject to
a two-quarter "lag" time between the reporting date of the data used to
calculate an institution's interest rate risk and the effective date of each
quarter's interest rate risk component. ISL is currently in regulatory
capital compliance.
Failure to meet capital guidelines could subject a bank or savings association
to a variety of enforcement remedies, including the termination of deposit
insurance by the FDIC, and to certain restrictions on its business. At
December 31, 1995, the Company, the Bank and ISL exceeded applicable capital
requirements. The consolidated capital position of the Company at December 31,
1995 was as follows:
Company ratio Minimum required ratio
Risk-based Capital:
Tier 1 capital ratio 11.58% 4%
Total capital ratio 12.83% 8%
Leverage ratio 6.96% 3%
Qualified Thrift Lender Test. All savings associations, including ISL, are
required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. Under FDICIA, a depository institution must
have at least 65% of its portfolio assets (which consist of total assets less
intangibles, properties used to conduct the savings association's business and
liquid assets not exceeding 20% of total assets) in qualified thrift
investments on a monthly average basis in nine of every 12 months. Loans and
mortgage-based securities secured by domestic residential housing, as well as
certain obligations of the FDIC and certain other related entities, may be
included in qualifying thrift investments without limit. Certain other
housing-related and non-residential real estate loans and investments,
including loans to develop churches, nursing homes, hospitals and schools,
and consumer loans and investments in subsidiaries engaged in house-related
activities may also be included. Qualifying assets for the QTL test include,
among other things, investments related to domestic residential real estate
or manufactured housing, the book value of property used by an association or
its subsidiaries for the conduct of its business, 50% of residential mortgage
loans that ISL sold within 90 days of origination, shares of stock issued by
any FHLB and shares of stock issued by FHLMC or FNMA. ISL was in compliance
with the QTL test as of December 31, 1995.
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Company Support of Bank and ISL. A depository institution insured by the FDIC
can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC after August 9, 1989, in connection with (i) the default
of a commonly controlled FDIC-insured depository institution or (ii) any
assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution "in danger of default". "Default" is defined generally
as the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance.
Under Federal Reserve Board regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's
failure to meet its obligations to serve as a source of strength to its
subsidiary banks will generally be considered by the Federal Reserve Board to
be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board regulations or both. Any capital loans by a bank holding
company to any of its subsidiary banks are subordinate in right of payment to
deposits and to certain other indebtedness of such subsidiary bank. Moreover,
Congress recently passed legislation pursuant to which depositors are granted
a preference over all other unsecured creditors in the event of the insolvency
of a bank or thrift.
Affiliate Transactions. Sections 23A and 23B of the Federal Reserve Act (i)
limit the extent to which a financial institution or its subsidiaries may
engage in "covered transactions" with an affiliate, to an amount equal to 10%
of such institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus and (ii) require that all transactions with an affiliate, be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions.
In addition to the restrictions that apply to member banks pursuant to
Sections 23A and 23B, three other restrictions apply to savings institutions,
including those that are part of a holding company organization. First,
savings institutions may not make any loan or extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies. Second, savings institutions may not purchase or
invest in affiliate securities except those of a subsidiary. Finally, the
Director of the OTS is granted authority to impose more stringent restrictions
for reasons of safety and soundness.
Safety and Soundness. The Federal Deposit Insurance Corporation Improvements
Act of 1991 ("FDICA") requires each federal banking regulatory agency to
prescribe, by regulation, standards for all insured depository institutions
and depository institution holding companies relating to (i) internal
controls, information systems and audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth;
(vi) compensation, fees and benefits; and (vii) such other operational and
managerial standards as the agency determines to be appropriate. The
compensation standards would prohibit employment contracts, compensation or
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benefit arrangements, stock option plans, fee arrangements or other
compensatory arrangements that provide excessive compensation, fees or
benefits or could lead to material financial loss. In addition, each federal
banking regulatory agency must prescribe by regulation standards specifying
(i) a maximum ratio of classified assets to capital; (ii) minimum earnings
sufficient to absorb losses without impairing capital (iii) to the extent
feasible, a minimum ratio of market value to book value for publicly traded
shares of depository institutions and depository institution holding
companies; and (iv) such other standards relating to asset quality, earnings
and valuation as the agency determines to be appropriate. If an insured
depository institution or its holding company fail
to meet any of the standards promulgated by regulations, then such company
will be required to submit a plan to its federal regulator specifying the
steps it will take to correct the deficiency. The federal banking agencies
have uniform rules concerning these standards.
Prompt Corrective Action. Under FDICIA each federal banking agency is
required to take prompt corrective action to resolve the problems of insured
depository institutions that do not meet minimum capital ratios. The extent
of an agency's power to take prompt corrective action depends upon whether an
institution is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized."
In September 1992, the federal banking agencies, adopted regulations to
implement the prompt corrective action provisions of FDICIA. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if it
has total risk-based capital of 10% or more, has a Tier 1 risk-based capital
ratio of 6% or more, has a Tier 1 leverage capital ratio of 5% or more and is
not subject to any order or final capital directive to meet and maintain a
specific capital level for any capital measure, (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based
capital ratio of 4% or more and a Tier 1 leverage capital ratio of 4% or more
(3% under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less
than 4% or a Tier 1 leverage capital ratio that is less than 4% (3% under
certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6%, a Tier 1 risk-based
capital ratio that is less than 3% or a Tier 1 leverage capital ratio that is
less than 3%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2%.
FDICIA authorizes the appropriate federal banking agency, after notice and an
opportunity for a hearing, to treat a well capitalized, adequately capitalized
or undercapitalized insured depository institution as if it had a lower
capital-based classification if it is in an unsafe or unsound condition or
engaging in an unsafe or unsound practice. Thus, an adequately capitalized
institution can be subjected to the restrictions on under-capitalized
institutions.
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An undercapitalized institution is required to submit an acceptable capital
restoration plan to its appropriate federal banking agency. The plan must
specify (i) the steps the institution will take to become adequately
capitalized, (ii) the capital levels to be attained each year, (iii) how the
institution will comply with any regulatory sanctions then in effect against
the institution and (iv) the types and levels of activities in which the
institution will engage. An undercapitalized institution is also generally
prohibited from increasing its average total assets and is generally
prohibited from making any acquisitions, establishing any new branches or
engaging in any new line of business except in accordance with an accepted
capital restoration plan or with the approval of the FDIC.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"IBBEA") amended the Bank Holding Company Act of 1956 (the "BHCA") to create
certain interstate banking and branching opportunities. The IBBEA generally
applies only to traditional savings banks and commercial banks. Under the
IBBEA, commencing September 29, 1995, a bank holding company may acquire a
bank located in any state, provided that the acquisition does not result in
the bank holding company controlling more than 10% of the deposits in the
United States, or 30% of deposits in the state in which the bank to be
acquired is located (unless the state waives the 30% deposit limitation).
The IBBEA permits individual states to restrict the ability of an out-of-
state bank holding company or bank to acquire an in-state bank that has been
in existence for less than five years and to establish a state concentration
limit of less than 30% if such reduced limit does not discriminate against
out-of-state bank holding companies or banks.
Effective June 1, 1997, the IBBEA authorizes an "adequately capitalized" bank,
with the approval of the appropriate federal banking agency, to merge with
another adequately capitalized bank in any state that has not opted out of
interstate branching. Such a bank may operate the target's offices as
branches if certain conditions are satisfied. The same national and state
deposit concentration limits and applicable state minimum-existence
restrictions which apply to interstate acquisitions (as discussed above) also
apply to interstate mergers. The applicant also must comply with any
nondiscriminatory host state filing and notice requirements and demonstrate a
record of compliance with applicable federal and state community reinvestment
laws. A state may opt out of interstate branching by enacting a new law
between September 29, 1994, and June 1, 1997, expressly prohibiting interstate
merger transactions. As of the date of this Form 10-K, Hawaii has not opted
out of interstate banking.
Under the IBBEA, the resulting bank in an interstate merger may establish or
acquire additional branches at any location in a state where any of the banks
involved in the merger could have established or acquired a branch. A bank
also may acquire one or more branches of an out-of-state bank without
acquiring the target out-of-state bank if the law of the target's home state
permits such a transaction. In addition, the IBBEA permits a bank to
establish a de novo branch in another state if the host state statutorily
permits de novo interstate branching.
The IBBEA also permits a bank subsidiary of a bank holding company to act as
agent for other depository institutions owned by the same holding company for
purposes of receiving deposits, renewing time deposits, closing or servicing
loans and receiving loan payments. Under the IBBEA a savings association may
perform similar agency services for affiliated banks to the extent that the
savings association was affiliated with a bank on July 1, 1994, and satisfies
certain additional requirements.
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Deposit Insurance. On October 5, 1994, the FDIC issued an advance notice of
proposed rule-making seeking comment on whether the deposit-insurance
assessment base should be redefined in light of the recent transition to a
risk-based deposit insurance system. The FDIC stated that, while it did not
intend any redefinition of the assessment base to have a significant impact
on the total amount of assessments industry-wide, there is a potential for
significant change in the assessments paid on an institution-by-institution
basis. Depending on the type of activities in which a particular institution
is engaged, and the type of products and services it offers, a change in the
assessment base could have a significant effect on the amount of the
assessments such an institution pays. The deadline for submitting written
comments on the advanced notice of proposed rule-making expired on February 2,
1995 and, as of the date of this Form 10-K, the FDIC has not yet issued a
proposed rule.
Effective January 1996, deposit insurance premiums for most banks insured by
the Bank Insurance Fund (BIF) dropped to zero, but those for savings
associations insured by the Savings Association Insurance Fund (SAIF) remained
unchanged at 23 to 31 cents per $100 of domestic deposits. This disparity is
the direct result of the over-capitalization of the BIF and the serious under-
capitalization of SAIF. This disparity in deposit insurance premiums raises
obvious issues.relating to the competitiveness of institutions subject to the
SAIF premiums, as well as the possibility that SAIF-insured institutions could
convert or otherwise move their deposits to BIF-insured institutions.
Legislation currently pending calls for the recapitalization of SAIF through a
one-time assessment of 85 cents per $100 in deposits at SAIF-insured
institutions. While the legislation is currently stalled in budget
negotiations, such an assessment would be a significant cost to the
Association (estimated cost of $3 million), if the law is enacted. Other
changes proposed in this area include adding approximately 2.5 cents per $100
of domestic deposits to the deposit insurance costs of BIF-insured banks in
order to make FICO bond payments which stem from bonds issued in 1987 to
recapitalize the thrift insurance fund. This legislation, and other
proposals, call for the eventual merger of SAIF and BIF. All of the various
aspects of the proposed legislation could have significant effects on the
Company, the Bank and Association.
Other Regulatory Considerations. The Bank and ISL are also subject to a wide
array of other state and federal laws and regulations, including without
limitation, usury laws, the Equal Credit Opportunity Act, the Electronic Funds
Transfer requirements, the Truth-in-Lending Act, the Truth-in-Savings Act and
the Real Estate Settlement Procedures Act. The Bank and ISL are also subject
to laws and regulations that may impose liability on lenders and owners for
cleanup expenses and other costs stemming from hazardous waste located on
property securing real estate loans made by lenders or on real estate that is
owned by lenders following a foreclosure or otherwise. Some court decisions
also have expanded the circumstances under which lenders have been held liable
for hazardous wastes on such properties.
NUMBER OF EMPLOYEES
As of December 31, 1995 the Company and its subsidiaries employed 558 persons;
528 on a full-time basis and 30 on a part-time basis. Management of the
Company and its subsidiaries believe that they have favorable employee
relations. Neither the Company nor any of its subsidiaries is a party to any
collective bargaining agreements. In January 1996, the Company announced an
voluntary separation program to all employees - see further discussion in
11
Management's Discussion and Analysis of Other Expenses.
FOREIGN OPERATIONS
Not applicable.
STATISTICAL DISCLOSURES
The following tables and data set forth, for the respective periods shown,
selected statistical information relating to the Company and its subsidiaries.
These tables should be read in conjunction with the information contained in
ITEM 6. "Selected Financial Data," ITEM 7. "Management's Discussion and
analysis of Financial Condition and Results of Operations," and ITEM 8.
"Financial Statements and Supplementary Data."
INVESTMENT PORTFOLIO
The following table sets forth the amortized cost and the distribution by
category of investment securities at December 31 for the years indicated:
At December 31,
(in thousands) 1995 1994 1993
----------------------------
Held-to-Maturity
U.S. Treasury securities $ - $97,823 $ 14,886
and other U.S. government
agencies and corps.
State and political subdivisions 102 4,954 5,962
Mortgage-backed securities 9,142 123,970 105,127
Other - 21,248 15,243
----------------------------
$ 9,244 $247,995 $141,218
==============================
Available-for-sale
U.S. Treasury securities $ 95,257 $ 11,912 $ -
and other U.S. government
agencies and corps.
State and political subdivisions 3,470 - -
Mortgage-backed securities 106,875 2,676 -
Other 23,228 - -
------------------------------
$ 228,830 $ 14,588 $ -
==============================
12
The following table sets forth the maturities of investment securities at
December 31, 1995, the weighted average yields of such securities (calculated
on the basis of the cost and effective yields weighted for the scheduled
maturity of each security):
Maturing
within after 1 after 5 after
1 year under 5 under 10 10 years
Held-to-Maturity Amount Yield Amount Yield Amount Yield Amount Yield
-----------------------------------------------------------------------
U.S. Treasury securities
and other U.S. government
agencies and corps. $ 102 6.50% - - - - - -
State subdivisions - - - - - - - -
Mortgage-backed securities - - - - $1,504 8.53% $7,638 7.95%
Other - - - - - - - -
-----------------------------------------------------------------------
$ 102 6.50% - - $1,504 8.53% $7,638 7.95%
=======================================================================
Maturing
within after 1 after 5 after
1 year under 5 under 10 10 years
Available-for-sale Amount Yield Amount Yield Amount Yield Amount Yield
-----------------------------------------------------------------------
U.S. Treasury securities
and other U.S. government
agencies and corps. $28,000 5.44% $57,271 5.83% $9,986 6.68% - -
State subdivisions 254 7.23% 1,648 6.60% 1,568 5.74% - -
Mortgage-backed securities - - 24,221 5.93% - - 82,654 7.48%
Other - - - - - - 23,228 7.25%
-----------------------------------------------------------------------
$28,254 5.46% $83,140 5.88% $11,554 6.55% $105,882 7.43%
=======================================================================
A table setting forth information regarding investments in securities,
including estimated fair value and carrying value of such securities is
included in Note C to the Company's Consolidated Financial Statements.
LOAN PORTFOLIO
Total loans at December 31, 1995 increased to $1,128.53 million, a 4.33%
increase over the previous year-end. The increase in total loans was due
primarily to an increase in real estate mortgage loans, which increased by
$53.25 million or 6.67%.
The amount of loans outstanding at December 31 for the years indicated are
shown in the following table categorized as to types of loans:
13
At December 31,
(In thousands) 1995 1994 1993 1992 1991
--------------------------------------------------------
Commercial and financial $ 168,497 $ 167,460 $163,394 $181,063 $172,767
Real estate - construction 18,408 24,448 12,983 19,691 18,795
Real estate - mortgage 851,242 797,997 294,855 254,748 190,396
Installment 90,378 91,738 81,016 83,955 97,688
--------------------------------------------------------
$1,128,525 $1,081,643 $552,248 $539,457 $479,646
========================================================
Commercial and financial. Loans outstanding in this category increased to
$168.5 million, up $1.04 million or .62% from year-end 1994. Loans in this
category are primarily loans to small and medium-sized businesses and
professionals doing business in Hawaii. The average loan balance was $114,000
at year end 1995. These loans have been made primarily on a secured basis.
Typically, real estate serves as collateral as well as equipment, receivables
and personal assets as deemed necessary. The Bank has made a limited number of
unsecured loans in this category.
Real estate - mortgage. Real estate - mortgage loans rose to $851.2 million
at year-end 1995, an increase of $53.25 million or 6.67% from year-end 1994.
The average size of loans in this category at December 31, 1995 was
approximately
$98,000. The Bank has also made a limited number of loans to finance homes
in excess of $1 million. However, loan-to-value ratios lower than 80% are
necessary to qualify for these loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the amount of loans (excluding categories of "real
estate-mortgage" and "installment") outstanding as of December 31, 1995,
which, based on remaining scheduled repayments of principal, are due in the
periods indicated:
At December 31, 1995
Maturing
within after 1 after
1 yr. Within 5 yrs. 5 yrs. Total
------------------------------------------
(in thousands)
Commercial and financial $ 93,445 $36,256 $38,796 $168,497
Real estate-construction 18,408 - - 18,408
------------------------------------------
$111,853 $36,256 $38,796 $186,905
==========================================
14
The following table sets forth the sensitivity of the above amounts due after
one year:
At December 31, 1995
Fixed Variable
(in thousands) rate rate Total
---------------------------------
Due after 1 but within 5 years $ 8,373 $27,883 $36,256
Due after 5 years 28,382 10,414 38,796
---------------------------------
$36,755 $38,297 $75,052
=================================
RISK ELEMENTS IN LENDING ACTIVITIES
The following table presents information concerning the aggregate amount of
non-performing assets. Non-performing assets are comprised of (a) assets
accounted for on a non-accrual basis; (b) assets contractually past due ninety
days or more as to interest or principal payments (but not included in the
non-accrual assets in (a) above); There are no potential problem loans not
already disclosed in item in (a) or (b) above).
(In thousands) December 31,
1995 1994 1993 1992 1991
----------------------------------------
Loans accounted for on a $14,338 $7,366 $3,777 $3,790 $ -
non-accrual basis
Loans contractually past
due 90 days or more as
to principal or interest 3,113 5,946 1,965 2,061 2,729
----------------------------------------
Total non-performing 17,451 13,312 5,742 5,851 2,729
Other real estate owned 1,715 2,122 - 2,000 500
----------------------------------------
Total non performing assets $19,166 $15,434 $5,742 $7,851 $3,229
========================================
Ratio of non-performing loans
to period end total loans 1.54% 1.23% 1.05% 1.09% 0.57%
Ratio of non-performing assets
to period end total assets 1.27% 1.07% .73% 1.08% 0.47%
The increase in non accrual loans in 1995 was due primarily to an increase in
ISL's delinquent mortgage loans, which increased by $4.69 million to $9.87
million at the end of 1995. The increase in ISL's non-accrual loans, which
are comprised primarily of mortgage loans on one-to four family residential
property, is a reflection of the continued weakness in the Hawaii economy and
real estate market.
As of January 1, 1995, the Company adopted the provisions of SFAS 114 as
amended by SFAS 118. The adoption of this accounting policy had no material
effect on the consolidated financial statements of the Company. At December
31, 1995, the recorded investment in loans that are considered to be impaired
was $4.4 million. Included in this amount is $4.3 million of impaired loans
of which the related allowance for credit losses is $1.1 million - see Note E
of Notes to Consolidated Financial Statements.
15
The increase in non-performing loans in 1994 was due primarily to the
Association's non-accrual loans and loans past due ninety-days of $5.2 million
and $3.3 million, respectively included in the 1994 amounts.
It is the Company's policy to discontinue accrual of interest on loans when
there is reasonable doubt as to collectibility. Whenever the payment of
interest or principal is 90 days past due, or sooner in certain situations
determined by management of the Company, interest accrual is normally
discontinued. Previously accrued but uncollected interest is reversed and
income recorded only as collected.
See Note D to the Consolidated Financial Statements for interest foregone and
recorded on non-accrual loans. Substantially all of the Company's loan
portfolio, including real estate mortgage loans, are located in the State of
Hawaii.
SUMMARY OF CREDIT LOSS EXPERIENCE
The following table summarizes loan balances at the end of each period
presented and daily averages; changes in the allowance for possible credit
losses arising from loans charged-off and recoveries on loans previously
charged-off according to loan categories and additions to the allowance which
have been charged to expense:
Years ended December 31,
(dollars in thousands) 1995 1994 1993 1992 1991
Balance of allowance
for credit losses at
beginning of year $14,326 $9,816 $8,715 $7,542 $5,865
Allowance of ISL at
acquisition date - 3,128 - - -
Charge offs:
Commercial and financial 87 602 816 1,244 14
Real estate - construction - - - - -
Real estate - mortgage 563 300 443 376 52
Installment 602 694 777 1,371 781
-----------------------------------------
Total charge-offs 1,252 1,596 2,036 2,991 847
Recoveries: -----------------------------------------
Commercial and financial 92 609 528 105 552
Real estate - construction - - - - -
Real estate - mortgage 142 14 72 - 5
Installment 288 391 473 334 277
-----------------------------------------
Total recoveries 522 1,014 1,073 439 834
-----------------------------------------
Net loans charged-off 730 582 963 2,552 13
Provision for loan losses 980 1,964 2,064 3,725 1,690
-----------------------------------------
Balance at year end $14,576 $14,326 $9,816 $8,715 $7,542
Ratio of net-charge-offs to
average net loans outstanding .07% .07% .18% .50% 0.00%
Ratio of allowance for credit
losses to period-end loans 1.29% 1.32% 1.79% 1.62% 1.58%
Ratio of allowance for credit
losses to non-performing loans 83.53% 107.62% 170.95% 148.95% 276.36%
16
The amount of the allowance for possible loan losses is based on periodic
evaluations by management. In these evaluations, management considers numerous
factors including, but not limited to, current economic conditions, loan
portfolio composition, prior loan loss experience and management's estimation
of potential losses. These various analyses lead to a determination of the
amount needed in the allowance for possible loan losses. To the extent the
existing allowance is below the amount so determined, a provision is made that
will bring the allowance to such amount. Thus, the provision for loan
allowance may fluctuate and may not be comparable from year to year.
Allowances for possible loan losses as a percentage of period-end total loans
was 1.29% at December 31, 1995, compared to 1.32% and 1.79% at 1994 and 1993.
The 47 basis point decrease in the allowance for loan losses ratio during 1994
was primarily due to a change in the mix of the Company's loan portfolio. Real
estate mortgage loans, which have a lower historical loan loss experience,
increased to 73.78% of the total loan portfolio at December 31, 1994, compared
to 53.39% at December 31, 1993. The increase in real estate mortgage loans was
due primarily to the acquisition of the Association in 1994.
The allowance for possible loan losses has been allocated by the Company's
management according to the amount deemed to be reasonably necessary to provide
for the possibility of loan losses being incurred within the following
categories of loans at the dates indicated:
(in thousands) At December 31,
1995 1994 1993 1992 1991
Amt. %(1) Amt. %(1) Amt. %(1) Amt. %(1) Amt. %(1)
-----------------------------------------------------------------------------------
Commercial &
financial $5,039 14.91% $3,649 15.47% $4,280 29.82% $4,153 33.78% $3,765 36.22%
Real estate -
Construction 184 1.62% 378 2.25% 128 2.36% 127 3.67% 243 3.93%
Real estate -
Mortgage 5,053 75.46% 4,097 73.79% 2,210 53.06% 1,928 46.90% 1,284 39.37%
Installment 1,510 8.01% 1,563 8.49% 1,063 14.76% 1,138 15.65% 1,154 20.48%
Unallocated 2,790 n/a 4,639 n/a 2,135 n/a 1,369 n/a 1,096 n/a
------------------------------------------------------------------------------------
Total $14,576 100% $14,326 100% $9,816 100% $8,715 100% $7,542 100%
====================================================================================
(1) represents percentage of loans in each category to total loans. DEPOSITS
The Company competes for deposits in Hawaii principally by providing quality
customer service at its branch offices.
17
The Company has a network of twenty-four branch offices which seek to provide
a stable core deposit base. The newest branch office in Kapolei, Oahu opened
in December 1993. The deposit base provided by these branches consists of
interest and non-interest bearing demand and savings accounts, money market
certificates and time certificates of deposit. The Company does not offer or
have brokered deposits.
The average daily amount of deposits and the average rate paid on each of the
following deposit categories is summarized below for the years indicated:
Years Ended December 31,
1995 1994 1993
Average Average Average
Balance rate Balance rate Balance rate
--------------------------------------------------
Non-interest bearing
demand deposits $120,396 0.00% $108,996 0.00% $101,326 0.00%
Interest bearing
demand deposits 153,168 2.28% 140,732 1.61% 123,874 2.08%
Savings 196,795 2.45% 224,365 2.34% 140,808 2.80%
Time deposits 512,931 5.49% 355,265 4.08% 218,225 3.49%
--------------------------------------------------
Total $983,290 3.71% $829,358 2.65% $584,233 2.42%
==================================================
The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at December 31, 1995 is summarized below:
(in thousands)
3 months or less $110,098
Over 3 months through 6 months 49,468
Over 6 months through 12 months 36,292
Over 12 months 11,901
----------
Total $207,759
==========
SHORT-TERM BORROWINGS
The following table sets forth outstanding balances of short-term borrowings at
year-end :
At December 31,
(in thousands) 1995 1994 1993
---------------------------------
Federal funds purchased and
securities sold under
repurchase agreements $38,698 $69,006 $ -
Federal treasury tax and loan 2,577 1,422 2,930
Advances from the FHLB 194,085 195,475 -
Notes payable to banks 4,000 9,000 4,407
---------------------------------
Total $239,360 $274,903 $7,337
=================================
18
Average rates and average and maximum balances for short-term borrowing
categories were as follows, for categories of borrowings where the average
outstanding balance for the period was 30% or more of stockholders' equity at
the end of the period:
At December 31,
(in thousands) 1995 1994
-------------------------
Federal funds purchased and
securities sold under repurchase
agreements :
Average interest rate at December 31, 6.01% 6.11%
Maximum outstanding at any month-end $47,484 $83,673
Average outstanding 40,195 $41,585
Average interest rate for the period 6.00% 3.82%
Advances from the Federal Home Bank :
Average interest rate at December 31, 5.82% 6.29%
Maximum outstanding at any month-end $238,693 $198,600
Average outstanding $195,538 $141,819
Average interest rate for the period 6.60% 4.56%
Federal funds purchased generally mature on the day following the date of
purchase. Securities sold under agreements to repurchase were treated as
financings and the obligations to repurchase the securities sold were
reflected as a liability with the dollar amount of securities underlying
the agreement remaining in the asset accounts.
Advances from the Federal Home Loan Bank were made under a credit line
agreements of $439.3 million, of which $147.77 million was undrawn at December
1995. The interest paid monthly on this line floats and is based on the
overnight interbank borrowing rate. See Notes I and J to the Audited Financial
Statements.
ITEM 2. PROPERTIES
The operations of the Company are transacted through its main banking offices
and twenty-four branches. The Company's facilities are located on leased
premises, and expenditures by the Company for interior improvements are
capitalized. The leases for these premises expire on various dates though the
year 2040. Lease terms generally provide for additional payments for real
property taxes, insurance and maintenance. See Note Q to the Company's
Consolidated Financial Statements. On March 21, 1989, a limited partnership
of which Citibank Properties, Inc., the Bank's only subsidiary owned a 25%
interest, sold its office building where the administrative and banking offices
of the Bank are currently located to an unrelated third party in a transaction
similar to a sale-leaseback transaction. See Note M to the Company's
Consolidated Financial Statements.
19
ITEM 3. LEGAL PROCEEDINGS
On January 30, 1996, a lawsuit was filed in the Circuit Court of the First
Circuit, State of Hawaii, by Hamamoto Corporation and Shinsuke Hamamoto
("Plaintiffs") against International Savings and Loan Association, Limited
("ISL"), ISL Services, Inc., DRI Realty, Inc., Richard C Lim, as an officer
and director of ISL (the foregoing defendants are referred to herein as the
"ISL defendants", as well as CB Bancshares, Inc. (The "Company") and other
entities and individuals. The lawsuit is an action by Plaintiffs, as purchasers
of the International Savings Building at 1111 Bishop Street in Honolulu, Hawaii,
for recission, special, general and punitive damages. Plaintiff seek recission
of a $7.45 million sale, made in May 1988, based on allegations that various
parties negligently or intentionally misrepresented and/or fraudulently failed
to disclose unsuccessful negotiations for a new ground lease with the fee
simple landowner and the alleged unreasonableness of demands by the fee simple
owner. Plaintiffs also allege failure to disclose land appraisals concerning
the property and presence of toxic asbestos in the cooling system, pipes,
walls and ceiling tiles of the building. On March 1, 1996, the Company and the
ISL Defendants filed an Answer to Plaintiffs' Complaint denying any liability
in connection with the matters alleged in Plaintiffs' Complaint, and a
Counterclaim against Plaintiffs alleging breach of contract, abuse of process
and related claims. While the Company and the ISL Defendants believe they have
meritorious defenses in this action, due to the uncertainties inherent in the
early stages of litigation, no assurances can be given as to the ultimate
outcome of the lawsuit at this time. Accordingly, no provision for any loss or
recovery that may result upon resolution of the lawsuit has been made in the
Company's Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "CBBI". At February 29, 1996, the Company had approximately 4,000
common shareholders of record.
The following table sets forth quarterly market price and dividend information
on the Company's common stock over the preceding two years.
1995 High Low Dividends
----------------------------
First quarter $31.25 $29.50 $0.375
Second quarter 31.00 29.50 0.375
Third quarter 30.50 29.00 0.375
Fourth quarter 30.25 28.75 0.375
1994
First quarter $33.00 $31.50 $0.375
Second quarter 32.00 30.50 0.375
Third quarter 35.50 30.50 0.375
Fourth quarter 34.75 29.50 0.375
The Company expects to continue its policy of paying quarterly dividends.
However. The payment of cash dividends is subject to the Company's future
earnings, capital requirements, financial condition and certain limitations
described in Note S of Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data and selected ratios)
1995 1994 1993 1992 1991
-----------------------------------------------------------
Income Statement Data:
Interest income $111,716 $89,350 $58,582 $ 61,297 $60,014
Interest expense 57,686 34,445 17,048 22,554 28,069
Net interest income 54,030 54,905 41,534 38,743 31,945
Provision for credit losses 980 1,964 2,064 3,725 1,690
Net income 8,013 11,071 7,926 7,810 7,466
End of Period Balance Sheet Data:
Total assets 1,501,513 1,439,511 789,541 726,565 686,172
Total loans 1,128,525 1,081,643 552,248 539,547 479,646
Total deposits 1,011,483 923,444 622,084 594,855 576,252
Long-term debt 101,371 106,850 65,000 35,000 0
Stockholders' equity 116,506 111,165 78,586 56,703 51,663
Per Share Data:
Net income 2.26 3.32 3.12 3.66 3.50
Cash dividends declared 1.30 1.30 0.98 1.30 1.30
Outstanding Shares:
Average during period 3,551 3,335 2,538 2,131 2,131
Selected Ratios
Return on average total assets 0.54% 0.95% 1.06% 1.09% 1.15%
Return on average equity 7.05% 10.92% 10.92% 14.13% 15.05%
Period-end total stockholders'
equity to period-end assets 7.76% 7.72% 9.95% 7.80% 7.53%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to facilitate the understanding and
assessment of significant changes in trends related to the financial condition
of the Company and the results of its operations. The Management's Discussion
and Analysis should be read in conjunction with the Selected Consolidated
Financial Data and the Company's Consolidated Financial Statements and related
notes thereto appearing elsewhere in this Annual Report.
It should be noted that the Company is affected by various factors such as
regulatory actions, economic conditions, the general business environment, as
well as by the competition. Accordingly, historical performance may not be a
reliable indicator of future earnings.
21
Results of Operations.
Consolidated net income for 1995 was $8.01 million, a decrease of 27.64% from
the $11.07 million in 1994 and exceeding the $7.93 million reported in 1993.
Net income on a per share basis was $2.26 in 1995 as compared to $3.32 in 1994
and $3.12 in 1993. The Company's return on average stockholders' equity was
7.05% in 1995 and 10.92% in 1994 and 1993. The return on average total assets
for 1995 was 0.54%, as compared to 0.95% for 1994 and 1.06% for 1993. Net
interest margin (on a tax equivalent basis) declined to 3.93% in 1995, compared
to 4.96% and 6.11% in 1994 and 1993, respectively.
The following tables 1 and 2 set forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields and
rates thereon. Interest income and resultant yield information in the tables
are on a taxable equivalent basis.
TABLE 1: DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
Years ended December 31, 1995 1994 1993
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - ----------------------------------------------------------------------------------------------
ASSETS (dollars in thousands)
Interest-earning assets:
Loans $1,117,976 $94,142 8.42% $ 879,184 $73,007 8.30% $544,623 $47,869 8.79%
Taxable investment
securities 254,565 17,249 6.78 222,577 15,964 7.17 130,465 10,333 7.92
Non-taxable investment
securities 4,485 388 8.65 5,369 465 8.66 5,593 592 10.59
Federal funds sold
and securities
purchased under
agreements to resell 4,801 257 5.35 6,054 239 3.95 4,657 135 2.90
Total interest-earning
assets 1,381,827 112,036 8.11 1,113,184 89,675 8.06 685,338 58,929 8.60
Non-interest-earning assets:
Cash and due
from banks 35,240 24,118 34,939
Premises and
equipment-net 11,696 9,417 7,991
Other assets 64,800 35,209 31,844
Less allowance for
credit losses (14,414) (12,729) (9,076)
- - ----------------------------------------------------------------------------------------------
Total assets $1,479,149 $1,169,199 $751,036
22
TABLE 1: DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
Years ended December 31, 1995 1994 1993
(continued) Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - ---------------------------------------------------------------------------------------------
LIABILITIES AND (dollars in thousands)
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $349,963 $8,322 2.38% $365,097 7,511 2.06% $264,682 $6,525 2.47%
Time deposits 512,931 28,138 5.49 355,265 14,499 4.08 218,225 7,609 3.49
Short-term borrowings 195,538 12,915 6.60 100,823 7,665 7.60 12,824 818 6.38
Long-term debt 146,102 8,311 5.69 130,682 4,770 3.65 59,027 2,096 3.55
Total interest-bearing
liabilities 1,204,534 57,686 4.79 951,867 34,445 3.62 554,758 17,048 3.07
Non-interest bearing liabilities:
Demand deposits 120,396 108,996 101,326
Other liabilities 40,492 6,935 22,359
Stockholders' equity 113,727 101,401 72,593
- - ----------------------------------------------------------------------------------------------
Total $1,479,149 $1,169,199 $751,036
Net interest income $54,350 $ 55,230 $41,881
Net interest margin 3.93% 4.96% 6.11%
TABLE 2: INTEREST DIFFERENTIAL
1995 compared to 1994 1994 compared to 1993
Increase (Decrease) Increase (Decrease)
due to change in: (1) due to change in: (1)
(in thousands) Volume Rate Net Change Volume Rate Net Change
- - ----------------------------------------------------------------------------------------------
Interest earning assets:
Loans $20,094 $1,041 $21,135 $27,916 $(2,778) $25,138
Taxable investment securities 2,203 (918) 1,285 6,688 (1,057) 5,631
Non-taxable investment securities (76) (1) (77) (23) (104) (127)
Federal funds sold and
securities purchased under
agreements to resell (56) 74 18 47 57 104
Total interest-earning assets $22,165 $196 $22,361 $34,628 $(3,882) $30,746
Interest-bearing liabilities:
Savings deposits $(322) $1,133 $811 $2,190 $(1,204) $986
Time deposits 7,682 5,957 13,639 5,419 1,471 6,890
Short-term borrowings 6,372 (1,122) 5,250 6,661 186 6,847
Long-term debt 618 2,923 3,541 2,614 60 2,674
Total interest-bearing
liabilities $14,350 $8,891 $23,241 $16,884 $513 $17,397
- - ----------------------------------------------------------------------------------------------
Net interest income $7,815 $(8,695) $ (880) $17,744 $(4,395) $13,349
23
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Averages are computed on daily average balances for each month in the
period divided by the number of months in the period.
(3) Interest income and resultant yield information in the table are on a
taxable equivalent basis using an assumed tax rate of 35.00%.
(4) Yields and amounts earned include loan fees. Non-accrual loans have been
included in interest-earning assets for purposes of these computations.
Net interest income is the largest single component of the Company's earnings
and represents the difference between interest income received on loans and
other earning assets and interest expense paid on deposits and borrowings. Net
interest income, on a tax equivalent basis, was $54.35 million in 1995, a
decrease of $0.88 million or 1.59% from 1994.
As summarized on Table 2, the $0.88 million decrease in net interest income
for 1995 consisted of a $22.36 million increase in interest income that was
offset by a $23.24 million increase in interest expense.
The $22.36 million increase in interest income on interest-earning assets was
primarily due to a $268.64 million, or 24.13%, increase in the average balance
of interest-earning assets. The average balance of loans increased by $238.79
million, or 27.16%, to $1,117.98 million. The increase in the average balance
of loans was due primarily to a growth in mortgage loans, which increased by
$53.25 million during 1995 to $851.24 million. The average yield on interest-
earning assets increased to 8.11% compared to 8.06% in 1994, and 8.60% in 1993.
Table 2 summarizes the dollar effect of the volume increase in interest-earning
assets, which had a $22.17 million positive effect on net interest income,
supplemented by the $0.20 million positive effect of the increase in the
average yield on interest-earning assets.
The $23.24 million increase in interest paid on interest-bearing liabilities
was primarily due to a $252.67 million, or 26.54%, increase in the average
balance of interest-bearing liabilities. The increase in interest-bearing
liabilities was primarily due to an increase in time deposits. Also
contributing to the increase in interest expense was an increase in the average
cost of funds that increased to 4.79% in 1995 compared to 3.62% in 1994. The
117 basis point increase in the average cost of funds in 1995 was due a higher
use of time deposits which had an average cost of 5.49%. The volume and rate
growth in interest-bearing liabilities increased interest expense by $14.35
million and $8.89 million, respectively.
In 1994 and 1993, the increase in net interest income of $13.35 million and
$1.21 million, respectively, was attributed to the growth in average interest-
earning assets, which fully offset an increase in average interest-bearing
liabilities. The increase in interest income and expense in 1994 was due to the
April 1994 acquisition of the Association and the reflection of its interest-
earning assets and interest-bearing liabilities in the Company's operating
results.
24
Provision and Allowance for Loan Losses
The amount of the allowance for possible loan losses is based on periodic
evaluations by management. In these evaluations, management considers numerous
factors including, but not limited to, current economic conditions, loan
portfolio composition, prior loan loss experience and management's estimation
of potential losses. These various analyses lead to a determination of the
amount needed in the allowance for possible loan losses. To the extent the
existing allowance is below the amount so determined, a provision is made that
will bring the allowance to such an amount. Thus, the provision for loan
allowance may fluctuate and may not be comparable from year to year.
The Company's allowance for possible loan losses increased to $14.58 million
at December 31, 1995, from $14.33 million in 1994 and $9.82 million in 1993.
Allowances for possible loan losses as a percentage of period-end total loans
was 1.29% at December 31, 1995, compared to 1.32% and 1.78% at 1994 and 1993.
The increase in the allowance for loan losses from 1993 to 1994 was primarily
due to the Association allowances of $3.86 million included in the 1994 year-
end balances.
Effective January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment
of a Loan" (SFAS 114). The adoption of this accounting policy had no material
effect on the consolidated financial statements of the Company. At December 31,
1995, the recorded investment in loans that are considered to be impaired under
SFAS 114 was $4.43 million. Included in this amount is $4.33 million of
impaired loans of which the related allowance for credit losses is $1.05
million and $0.10 million of impaired loans that do not have an allowance for
credit losses-see Note E of Notes to Consolidated Financial Statements.
Other Income
In 1995, other income was $10.33 million as compared to $9.16 million in 1994
and $6.90 million in 1993. During 1995, the Bank sold its merchant accounts
portfolio due to declining volume and reduced profit margins from such
activities. The gain of $1.0 million from the sale of merchant accounts is
included in other income for 1995. Other income also includes $0.45 million of
gain in each year resulting from amortization of deferred gain recognized in a
manner similar to a sale-leaseback transaction of the Company's headquarters in
1989. This deferred gain, which totaled $8.57 million in 1989, will be
amortized into income over a 20-year period. See Note M to the Company's
Consolidated Financial Statements.
The following table sets forth information by category of other operating
income for the Company for the years indicated:
For the Year 1995 1994 1993
- - ------------------------------------------------(dollars in thousands)--
Service charges on deposits $1,716 $1,773 $1,447
Other service charges and fees 5,515 6,917 3,682
Net trading account gains (losses) 61 (174) -
Net realized gains on sales of
available-for-sale-securities 4 195 -
Other 3,032 450 1,769
- - ------------------------------------------------------------------------
Total $10,328 $9,161 $6,898
========================================================================
25
Other Expenses
The following table sets forth information by category of other operating
expenses of the Company for the years indicated:
For the Year 1995 1994 1993
- - ------------------------------------------------(dollars in thousands)---
Salaries and employee benefits $21,340 $18,234 $13,774
Net occupancy expense 7,295 6,887 4,856
Equipment expense 2,929 2,332 2,169
Professional fees 2,904 2,686 1,967
Merchant interchange fees 1,616 1,739 1,654
Charge card processing 640 795 775
Stationery and supplies 1,074 922 693
Deposit insurance premiums 1,472 1,918 1,371
Advertising and promotion 1,880 1,752 1,035
Commissions 1,082 1,123 -
Other 7,882 5,986 4,720
- - ------------------------------------------------------------------------
Total $50,114 $44,374 $33,014
========================================================================
Total operating expenses as a percent
of average assets 3.39% 3.80% 4.40%
Other operating expenses increased to $50.11 million, compared to $44.37
million in 1994 and $33.01 in 1993. The Company's operating expense ratio
(total operating expense as a percentage of average assets), which is a
commonly used indicator of operating efficiency, improved by 41 basis points
in 1995 to 3.39%, compared to 3.80% in 1994 and 4.40% in 1993. In addition to
the lower operating expense ratio of the Association, the trend of improving
operating efficiency reflects Management's continuing efforts to control and
reduce non-interest expenses and consolidate certain operations of the Bank
and Association.
The $5.74 million increase in other operating expenses in 1995 was due
primarily to an increase of $4.23 million in other operating expenses from the
Association. Other operating expenses of the Association were included for all
of 1995, whereas, in 1994, the Association's expenses were incurred only from
the April 4, 1994 acquisition date of the Association.
Total compensation expense, which comprises the largest category of other
operating expenses, increased by $3.11 million in 1995 to $21.34 million.
This increase was due to compensation expenses of the Association being
included for all of 1995, as described above. In addition, deferred
compensation expenses incurred in 1995 increased by $.98 million to $1.42
million - See Note R3 of Notes to the Consolidated Financial Statements.
On January 31, 1996, the Company announced a major initiative to further
improve operating efficiency and decrease expenses by offering a voluntary
separation program to all employees. The program offers all eligible employees
the opportunity of electing to terminate their employment. The Company has the
right to deny or delay an employee's election. The voluntary separation program
is the first phase of a cost reduction plan. If the response to this first
phase is not sufficient to achieve the Company's goals, Phase II will be
implemented which will incorporate executive pay reductions of up to 10% and
involuntary staff reductions.
26
Deposit insurance premiums, which decreased to $1.47 million in 1995 from $1.92
million in 1994, includes a one-time FDIC premium refund of $.38 million. The
refund reflects a reduction in the FDIC assessment rate from 23 to 4 basis,
which the Bank received in the third quarter of 1995.
Income Taxes
Total income tax expense of the Company was $5.25 million, $6.66 million and
$4.85 million in 1995, 1994 and 1993, respectively. The Company's effective
income tax rate for the years 1995, 1994 and 1993 was 39.6%, 37.6% and 36.3%,
respectively. Note L to the Company's Consolidated Financial Statements
presents a reconciliation of the Company's effective and statutory income tax
rates.
In February of 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 109, entitled "Accounting for
Income Taxes." The new accounting standard established financial accounting
and
reporting standards for income taxes. This standard, which supersedes FASB
Statement No. 96, and amends or supersedes various other related accounting
pronouncements, provides for an assets and liability approach to accounting for
income taxes. Statement No. 109 was adopted as of January 1, 1993, as allowed.
The cumulative impact of this change decreased 1993 net income by $580,000. See
Note L to the Company's Consolidated Financial Statements.
Liquidity Management
The primary objective of liquidity management is to maintain a balance between
sources and uses of funds in order that the cash flow needs of the Company are
met in the most economical and expedient manner. The liquidity needs of a
financial institution require the availability of cash to meet the withdrawal
demands of depositors and the credit commitments of borrowers. In order to
optimize liquidity, management monitors and forecasts the various sources and
uses of funds in an effort to continually meet the financial requirements of
the Company and the financial needs of its customer base.
To ensure liquidity on a short-term basis, the Company's primary sources are
cash or cash equivalents, loan repayments, proceeds from the sale of assets
available for sale, increases in deposits, proceeds from maturing securities
and, when necessary, federal funds purchased and credit arrangements with
correspondent banks and the FHLB. Maturities of investment securities are also
structured to cover large commitments and seasonal fluctuations in credit
arrangements.
The Consolidated Statement of Cash Flows summarizes the sources and uses of
cash from operating, investing and financing activities for the three years
ended December 31, 1995. The following discussion is based on the
aforementioned Statement of Cash Flows included in the Company's Consolidated
Financial Statements.
Cash provided by operating activities during 1995 was $9.42 million compared
to $30.36 and $10.76 million for 1994 and 1993, respectively. Cash provided by
operating activities consists primarily of the Company's net income from
operations.
27
Investing activities reduced cash flow by $37.09 million during 1995, compared
to $213.39 million and $51.44 million in 1994 and 1993, respectively. The
primary use of cash flow for investing activities in 1995 was for the $49.15
million net increase in loans.
Cash flow provided from financing activities was $42.55 million during 1995,
compared to $180.58 million and $54.05 million in 1994 and 1993, respectively.
During 1995, there was an $88.04 million net increase in deposits, offset by a
$35.54 million net decrease in short-term borrowings.
As of December 31, 1995, the Bank and Association had available unused credit
lines of $147.75 million from the FHLB and committed available lines of credit
of $161.5 million from other sources. At any time the Company has outstanding
commitments to extend credit. See Note O of Notes to Consolidated Financial
Statements.
Asset/Liability Management
Asset/liability management involves the maintenance of an appropriate balance
between interest-sensitive assets and interest-sensitive liabilities to reduce
interest rate exposure while also providing liquidity.
The Company's management has placed an increased emphasis on interest rate
sensitivity management. Interest-earnings assets and interest-bearing
liabilities are those which have yields or rates which are subject to change
within a future time period due to either the maturity of the instrument or
changes in the rate environment. Gap refers to the difference between the
rate-sensitive assets and rate-sensitive liabilities. When the amount of
rate-sensitive assets is in excess of rate-sensitive liabilities, a
"positive"
gap exists, and when the opposite occurs, a "negative" gap exists. Generally,
when rate-sensitive assets exceed rate-sensitive liabilities, the net interest
margin is expected to be positively impacted during periods of increasing
interest rates and negatively impacted during periods of decreasing interest
rates. Interest rate shifts, resulting from movements in the economic
environment, can cause interest-sensitive assets and liabilities to reprice
within relatively short time frames. As a result, major fluctuations in net
interest income and net earnings could occur due to imbalances between rate-
sensitive assets and liabilities. Asset/liability management seeks to protect
earnings by maintaining an appropriate balance between interest-earning assets
and interest-bearing liabilities in order to minimize fluctuations in the net
interest margin and net earnings in periods of volatile interest rates.
The Company's policy is to closely match its level of interest-earning assets
and interest-bearing liabilities within a limited range, thereby reducing its
exposure to interest rate fluctuations. In connection with these asset and
liability management objectives, various actions have been taken, including
changes in the composition of assets and liabilities, and the use of financial
instruments.
28
The financial instruments used and their notional amounts outstanding at year-
end were as follows:
December 31,
1995 1994 1993
(dollars in thousands)
- - ------------------------------------------------------------------------
Interest rate swaps
(Pay) Receive-fixed swaps
notional amount $(50,000) $75,000 $60,000
Average receive rate 5.88% 6.25% 6.22%
Average pay rate 6.50% 6.14% 3.33%
Under interest rate swaps, the Company agrees with other parties to exchange,
at specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to the agreed notional amount.
Interest rate contracts are primarily used to convert certain deposits and
long-term debt to floating interest rates or to convert certain groups of
customer loans and other interest-earning assets to fixed rates. Certain
interest rate swaps specifically match the amounts and terms of particular
liabilities.
See Note N of Notes to Consolidated Financial Statements for further discussion
and disclosure of financial instruments.
The table on the following page sets forth information concerning interest rate
sensitivity of the Company's consolidated assets and liabilities as of December
31, 1995. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever comes first. In the case of amortizing
assets (such as mortgage loans, for example) maturities are reflected in terms
of the expected principal repayment streams, based upon scheduled amortization
and anticipated prepayments. Prepayments are estimated using current market
expectations for assets with interest rates at similar levels to the Company's.
It should be noted that while the Company's investment portfolio is classified
according to repricing or maturity, most of the portfolio is available for
sale. This will provide the Company with the flexibility to restructure the
portfolio if it wishes to in the face of a changing interest rate environment.
Further note should be taken of the short term classification of most of the
Company's savings deposits. In fact, although technically immediately
repriceable, most of these deposits are considered to be relatively insensitive
to changes in market interest rates.
29
0-90 91-180 181-365 1-5 Over 5 Non-rate
days days days years years sensitive Total
- - -----------------------------------(in thousands)-----------------------------------------------------
Assets:
Investment securities $127,331 $8,345 $6,183 $67,063 $ 18,846 $13,067 $240,835
Commercial loans 123,388 1,909 6,445 8,373 28,382 - 168,497
Real estate loans 121,086 87,272 184,123 341,088 136,081 - 869,650
Consumer loans 46,021 3,741 7,036 33,580 - - 90,378
Other assets - - - - - 132,153 132,153
Total assets $417,826 $101,267 $203,787 $450,104 $183,309 $145,220 $1,501,513
Liabilities and stockholders' equity:
Non-interest bearing
demand deposits $ - $ - $ - $ - $ - $137,287 $137,287
Savings deposits 353,389 - - - - - 353,389
Time deposits 211,504 133,121 110,399 65,779 4 - 520,807
Short-term borrowings 165,980 34,835 38,545 - - - 239,360
Long-term debt - 15,000 34,617 45,501 6,253 - 101,371
Other liabilities - - - - - 32,793 32,793
Stockholders' equity - - - - - 116,506 116,506
Total liabilities and
stockholders' equity $730,873 $182,956 $183,561 $111,280 $6,257 $286,586 $1,501,513
- - ------------------------------------------------------------------------------------------------------
Interest rate
sensitivity gap $(313,047) $(81,689) $20,226 $338,824 $177,052 $(141,366) $ -
Cumulative interest rate
sensitivity gap $(313,047) $(394,736) $(374,510) $ (35,686) $141,366 $ - $ -
======================================================================================================
Capital Resources
The Company has a strong capital base with a Tier 1 capital ratio of 11.58% at
December 31, 1995. This is well above the minimum regulatory guideline of 4.00%
for Tier 1 capital. Bank holding companies are also required to comply with
risk-based capital guidelines as established by the Federal Reserve Board.
Risk-based capital ratios are calculated with reference to risk-weighted assets
which include both on and off-balance sheet exposures. A company's risk-based
capital ratio is calculated by dividing its qualifying capital (the numerator
of the ratio) by its risk-weighted assets (the denominator). The minimum
required qualifying Total Capital ratio is 8%. As of December 31, 1995, the
Company's total capital to risk-adjusted assets ratio was 12.83%.
Effects Of Inflation
The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.
Virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rate changes have a more significant impact on
the Company's performance than the effects of general levels of inflation.
30
Recent Regulatory Developments
Effective January 1996, deposit insurance premiums for most banks insured by
the Bank Insurance Fund (BIF) dropped to zero, but those for savings
associations insured by the Savings Association Insurance Fund (SAIF) remained
unchanged at 23 to 31 cents per $100 of domestic deposits. this disparity is
the direct result of the over-capitalization of BIF and the serious under-
capitalization of SAIF. This disparity in deposit insurance premiums raises
obvious issues relating to the competitiveness of institutions subject to the
SAIF premiums, as well as the possibility that SAIF-insured institutions could
convert or otherwise move their deposits to BIF-insured institutions.
Legislation currently pending calls for the recapitalization of SAIF through a
one-time assessment of approximately 80 cents per $100 in deposits at SAIF-
insured institutions. While the legislation is currently stalled in budget
negotiations, such an assessment would amount to approximately $2.7 million for
the Association. Other changes proposed in this area include adding
approximately 2.5 cents per $100 of domestic deposits to the deposit insurance
costs of BIF-insured banks in order to make The Financing Corp. bond payments
which stem from bonds issued in 1987 to recapitalize the thrift insurance fund.
This legislation could have significant effects on the company, the Bank and
Association.
Effects Of Changes Issued By The Financial Accounting Standards Board
In November 1995, the Financial Accounting Standards Board issued a special
report which permitted Institutions to reclassify investment securities under
SFAS 115 "Accounting and Reporting for Certain Investments in Debt and Equity
Securities", which the Company had adopted effective January 1, 1994, without
tainting the investment portfolio. Investment securities with an amortized cost
of $200.96 million were transferred from "held-to-maturity" to "available-
for-sale" with the related net unrealized gain of $2.15 million recorded as a
separate component of equity. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS 121), No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122)
and No. 123, "Accounting for Stock-Based Compensation "(SFAS 123). These
standards are effective for the Company's 1996 year end and are described
further in Note
U of Notes to the Company's Consolidated Financial Statements. The adoption of
SFAS 121, 122 and 123 is not expected to have a significant impact on the
Company's operating results or financial position.
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Earnings for the fourth quarter of 1995 were $1.27 million ($0.36 per share),
a decrease of $1.44 million over the $2.71 million ($0.76 per share) during
the same quarter in 1994. The decrease in earnings was due primarily to
decease in net interest margin which declined by $2.97 million to $12.83
million in the fourth quarter of 1995 compared to the same quarter in 1994.
31
The following table summarizes the Company's quarterly results for the years
1995 and 1994:
1995 Quarter
March June September December
- - --------------------------------(in thousands, except per share data)------
Total Interest Income $27,603 $28,156 $28,590 $27,367
Total Interest Expense 13,662 14,863 14,620 14,541
Net Interest Income 13,941 13,293 13,970 12,826
Provision for Possible Loan Losses 120 120 420 320
Other Non-Interest Income 2,184 2,222 2,432 3,490
Other Non-Interest Expense 12,269 12,137 12,166 13,542
Income Before Income Taxes 3,736 3,258 3,816 2,454
Provision for Income Taxes 1,400 1,230 1,434 1,187
- - ---------------------------------------------------------------------------
Net Income $2,336 $2,028 $2,382 $1,267
===========================================================================
Per common share:
Net Income $ 0.66 $ 0.57 $ 0.67 $ 0.36
===========================================================================
1994 Quarter
March June September December
- - --------------------------------(in thousands, except per share data)------
Total Interest Income $13,983 $23,148 $24,993 $27,226
Total Interest Expense 3,990 8,731 10,294 11,430
Net Interest Income 9,993 14,417 14,699 15,796
Provision for Credit Losses 409 341 375 839
Other Income 1,941 3,895 1,701 1,624
Other Expense 7,798 13,236 11,183 12,157
Income Before Income Taxes 3,727 4,735 4,842 4,424
Income Tax Expense 1,463 1,750 1,729 1,715
- - ---------------------------------------------------------------------------
Net Income $ 2,264 $ 2,985 $ 3,113 $ 2,709
===========================================================================
Per common share:
Net Income $ 0.84 $ 0.84 $ 0.88 $ 0.76
===========================================================================
31.1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountants
- - --------------------------------------------------
Board of Directors and Stockholders
CB Bancshares, Inc.
Honolulu, Hawaii
We have audited the accompanying consolidated balance sheets of CB Bancshares,
Inc. (a Hawaii corporation) and Subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CB Bancshares,
Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in notes A2, A4, A8, C and L to the consolidated financial
statements, the Company changed its method of accounting for impairment of
loans, certain investments in debt and equity securities and income taxes in
1995, 1994 and 1993, respectively.
GRANT THORNTON LLP
Honolulu, Hawaii
January 31, 1996
32
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except shares and per share data)
December 31,
1995 1994
---------- ----------
ASSETS
Cash and due from banks (including amounts
restricted for the Federal Reserve
requirement of $4,276 in 1995 and
$4,565 in 1994) $ 63,619 $ 48,748
Interest-bearing deposits in other banks 11,500 -
Investment securities (notes C, I and J)
Held-to-maturity - market values of $9,521 in
1995 and $238,056 in 1994 9,244 247,995
Available-for-sale 231,495 13,998
Trading - net of unrealized holding gains
of $5 in 1995 and losses of $89 in 1994 96 4,997
Loans held for sale 14,350 544
Loans, net (notes D, E, J and O) 1,106,610 1,060,554
Premises and equipment (note G) 16,960 17,287
Goodwill (net of accumulated amortization of
$1,497 in 1995 and $638 in 1994) (note B) 11,277 12,136
Other assets (notes L and R3) 36,362 33,252
--------- ---------
TOTAL ASSETS $1,501,513 $1,439,511
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes F and H)
Non-interest bearing $ 137,287 $ 135,368
Interest bearing 874,196 788,076
--------- ---------
Total deposits 1,011,483 923,444
Short-term borrowings (note I) 239,360 274,903
Other liabilities (notes L and M) 32,793 23,149
Long-term debt (note J) 101,371 106,850
--------- ---------
Total liabilities 1,385,007 1,328,346
Commitments and contingencies
(notes F, P and Q) - -
Stockholders' equity (notes R4 and S)
Preferred stock - authorized but unissued,
25,000,000 shares, $1 par value - -
Common stock - authorized 50,000,000 shares
of $1 par value; issued and outstanding,
3,551,228 shares 3,551 3,551
Additional paid-in capital 65,080 65,080
Net unrealized gain (loss) on
available-for-sale securities 1,596 (352)
Retained earnings 46,279 42,886
--------- ---------
Total stockholders' equity 116,506 111,165
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,501,513 $1,439,511
========= =========
The accompanying notes are an integral part of these statements.
32
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
(in thousands of dollars, except per share data)
1995 1994 1993
-------- ------- -------
Interest and dividend income
Interest and fees on loans $ 93,958 $72,840 $47,723
Interest and dividends on investment
securities
Taxable interest income 15,563 14,652 9,105
Nontaxable interest income 252 307 391
Dividends 1,467 1,231 1,228
Trading account interest 47 81 -
Other interest income 429 239 135
------- ------ ------
Total interest income 111,716 89,350 58,582
Interest expense
Deposits (note H) 36,460 22,010 14,134
Short-term borrowings 12,915 7,665 818
Long-term debt 8,311 4,770 2,096
------- ------ ------
Total interest expense 57,686 34,445 17,048
------- ------ ------
Net interest income 54,030 54,905 41,534
Provision for credit losses (note E) 980 1,964 2,064
------- ------ ------
Net interest income after
provision for credit losses 53,050 52,941 39,470
Other income
Service charges on deposit accounts 1,716 1,773 1,447
Other service charges and fees 5,515 6,917 3,682
Net trading account gains (losses) 61 (174) -
Net realized gains on sales of available-
for-sale securities (note C) 4 195 -
Other (note M) 3,032 450 1,769
------- ------ ------
Total other income 10,328 9,161 6,898
Other expenses
Salaries and employee benefits (note R) 21,340 18,234 13,774
Net occupancy expense of premises 7,295 6,887 4,856
Equipment expense 2,929 2,332 2,169
Other (note K) 18,550 16,921 12,215
------- ------ ------
Total other expenses 50,114 44,374 33,014
------- ------ ------
Income before income taxes $ 13,264 $17,728 $13,354
33
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
(in thousands of dollars, except per share data)
1995 1994 1993
-------- ------- -------
Income before income taxes $ 13,264 $17,728 $13,354
Income tax expense (note L) 5,251 6,657 4,848
------- ------ -------
Income before cumulative effect
of a change in accounting
principle 8,013 11,071 8,506
Cumulative effect of a change in
accounting principle (note L) - - (580)
------- ------ -------
NET INCOME $ 8,013 $11,071 $ 7,926
======= ====== ======
Per share data
Income before cumulative effect of
a change in accounting principle $2.26 $3.32 $3.35
Cumulative effect of a change in
accounting principle (note L) - - (.23)
---- ---- ----
Net income $2.26 $3.32 $3.12
==== ==== ====
The accompanying notes are an integral part of these statements.
34
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three years ended December 31, 1995
(in thousands of dollars, except per share data)
Net
unrealized
gain (loss)
Additional on available-
Common paid-in for-sale Retained
stock capital securities earnings Total
------ ---------- ------------- -------- --------
Balance at January 1, 1992 $2,131 $23,703 $ - $30,869 $ 56,703
Sale of common stock (note S1) 575 16,020 - - 16,595
Net income for the year
ended December 31, 1993 - - - 7,926 7,926
Cash dividends - $0.98
per share - - - (2,638) (2,638)
----- ------ ----- ------ -------
Balance at December 31, 1993 2,706 39,723 - 36,157 78,586
Issuance of common stock to
purchase International
Holding Capital Corp.
(note B) 845 25,357 - - 26,202
Net income for the year
ended December 31, 1994 - - - 11,071 11,071
Net unrealized loss on
available-for-sale
securities - - (352) - (352)
Cash dividends - $1.30
per share - - - (4,342) (4,342)
----- ------ ----- ------ -------
Balance at December 31, 1994 3,551 65,080 (352) 42,886 111,165
Net income for the year
ended December 31, 1995 - - - 8,013 8,013
Net unrealized gain on
available-for-sale
securities - - 1,948 - 1,948
Cash dividends - $1.30
per share - - - (4,620) (4,620)
----- ------ ----- ------ -------
Balance at December 31, 1995 $3,551 $65,080 $1,596 $46,279 $116,506
===== ====== ===== ======= =======
The accompanying notes are an integral part of this statement.
35
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(in thousands of dollars)
Increase (decrease) in cash 1995 1994 1993
-------- -------- --------
Cash flows from operating activities:
Net income $ 8,013 $ 11,071 $ 7,926
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 980 1,964 2,064
Loss on disposition of premises and equipment 386 - -
Depreciation and amortization 2,102 1,510 1,148
Net (increase) decrease in loans held for sale (13,806) 17,156 -
Deferred income taxes (1,878) 2,762 (499)
Net decrease (increase) in trading securities 4,901 (2,112) -
(Increase) decrease in interest receivable (1,600) (1,979) 268
Increase in interest payable 649 1,409 722
Increase in other assets (5,391) (9,780) (899)
Increase (decrease) in income taxes payable 5,985 (943) (1,217)
Increase in other liabilities 6,713 8,402 1,941
Deferred gain recognized (447) (447) (447)
Other 2,811 1,347 (243)
------- -------- -------
Net cash provided by operating activities 9,418 30,360 10,764
Cash flows from investing activities:
Net increase in interest-bearing deposits in
other banks (11,500) - -
Net decrease (increase) in federal funds sold and
securities purchased under agreements to resell - 25,000 (25,005)
Proceeds from maturities of held-to-maturity
investment securities 43,096 43,189 -
Purchases of held-to-maturity investment
securities (4,946) (113,912) -
Proceeds from sales of available-for-sale
securities 1,511 98,304 -
Proceeds from maturities of available-for-sale
securities 5,695 2,320 -
Purchase of available-for-sale securities (20,480) (65,615) -
Proceeds from maturities of investment securities - - 49,255
Purchase of investment securities - - (62,779)
Purchase of International Holding Capital Corp.,
net of cash acquired of $4,515 - (21,720) -
Net increase in loans (49,150) (173,417) (13,517)
Capital expenditures (2,382) (7,540) (1,392)
Proceeds from sale of premises and equipment 221 - -
Proceeds from sale of foreclosed assets 843 - 2,000
------- -------- -------
Net cash used in investing activities (37,092) (213,391) (51,438)
------- -------- -------
Subtotal carried forward $(27,674) $(183,031) $(40,674)
36
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31,
(in thousands of dollars, except share data)
1995 1994 1993
--------- --------- ---------
Subbtotal brought forward $(27,674) $(183,031) $(40,674)
Cash flows from financing activities:
Net increase in deposits 88,039 3,311 27,229
Net (decrease) increase in short-term borrowings (35,543) 230,647 (16,630)
Proceeds from long-term debt 27,500 10,350 30,000
Principal payments on long-term debt (32,831) (59,660) -
Proceeds from sale of common stock - - 16,595
Cash dividends paid (4,620) (4,068) (3,143)
------- -------- -------
Net cash provided by financing activities 42,545 180,580 54,051
------- -------- -------
INCREASE (DECREASE) IN CASH 14,871 (2,451) 13,377
Cash and due from banks at beginning of year 48,748 51,199 37,822
------- -------- -------
Cash and due from banks at end of year $ 63,619 $ 48,748 $ 51,199
======= ======== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings $57,037 $33,036 $16,326
Income taxes 3,874 4,838 6,397
Supplemental schedule of noncash investing activity:
During 1994, the Company issued 845,228 shares of common stock having a value
of $26,202 as part of the consideration to purchase International Holding
Capital Corp.
37
The accompanying notes are an integral part of these statements
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF ACCOUNTING POLICIES
CB Bancshares, Inc. and Subsidiaries (the "Company") provide banking and
savings services to domestic markets and grant commercial, financial, real
estate, installment and consumer loans to customers throughout the State of
Hawaii. Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is primarily dependent
upon the local economy and the local real estate market.
The Company's accounting and reporting policies are based on generally accepted
accounting principles and conform to practices within the banking and savings
industry. A summary of the significant accounting and reporting policies
applied in the preparation of the accompanying financial statements follows.
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of CB Bancshares,
Inc. (the "Parent Company") and its wholly-owned subsidiaries City Bank (the
"Bank"), and its wholly-owned subsidiary; International Savings and Loan
Association, Limited (the "Association"), and its wholly-owned subsidiaries;
City Finance and Mortgage, Inc.; and O.R.E., Inc. Significant intercompany
transactions and amounts have been eliminated in consolidation.
2. Investment Securities
---------------------
As of January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). In accordance with SFAS 115, investment securities are
classified in three categories and accounted for as follows:
Trading. Government bonds held principally for resale in the near term and
mortgage-backed securities held for sale in conjunction with the Company's
mortgage banking activities are classified as trading securities and recorded
at their fair values. Unrealized gains and losses on trading securities are
included in other income.
Held-to-Maturity. Bonds, notes and debentures for which the Company has the
positive intent and ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts which are recognized in
interest income using the interest method over the period to maturity.
38
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities (continued)
---------------------------------
Available-for-Sale. Securities available-for-sale consist of bonds, notes,
debentures, and certain equity securities not classified as trading securities
nor as securities to be held to maturity. Unrealized holding gains and losses,
net of tax, on securities available-for-sale are reported as a net amount in a
separate component of stockholders' equity until realized. Gains and losses on
sale of securities available-for-sale are determined using the specific-
identification method.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their cost that are other than temporary would result in
write-downs of the individual securities to their fair value. The related
write-downs would be included in earnings as realized losses.
Prior to January 1, 1994, investment securities were carried at cost adjusted
for amortization of premiums and accretion of discounts, which were recognized
as adjustments to interest income. Gains or losses on disposition were based
on the net proceeds and the adjusted carrying value of the securities sold,
using the specific-identification method. The Company's management had
determined that the Company had both the ability and the intent to hold these
investments to maturity.
3. Loans Held for Sale
-------------------
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
4. Loans
- - -------------------
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding principal
amounts. Interest income on the loans is accrued and credited to interest
income on the principal amount outstanding. Interest income on discounted
loans is recognized over the term of the loans using a method which
approximates the interest method.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received. However, loans that are in the process of renewal, or are well
secured and in the process of collection, may not be considered impaired at the
judgment of management.
Loan origination fees and certain direct origination costs are deferred and
recognized as an adjustment of the yield of the related loan.
39
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
4. Loans (continued)
-----------------
The allowance for credit losses is increased by charges to income and decreased
by charge offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based upon the Company's past loan loss
experience, known and inherent risk in the portfolio, adverse situations that
may offset the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Statement of Financial Accounting Standards 114, "Accounting by Creditors for
Impairment of a Loan"(SFAS 114), as amended by Statement of Financial
Accounting Standards 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures"(SFAS 118), requires that impaired loans be
measured at either the present value of expected future cash flows, discounted
at the loan's effective interest rate or the fair value of the collateral. The
Company adopted the provisions of SFAS 114, as amended by SFAS 118, effective
January 1, 1995. Prior to 1995, the allowance for credit losses related to
these loans was based on undiscounted cash flows or the fair value of the
collateral for collateral dependent loans.
5. Premises and Equipment
----------------------
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided on both the straight-line and
accelerated methods over the estimated useful lives of each type of asset.
Leasehold improvements are amortized over the life of the respective lease or
the estimated useful lives of the improvements, whichever is shorter. The
estimated lives for depreciation and amortization is principally 3 to 45 years
for premises and leasehold improvements and 3 to 20 years for equipment.
6. Foreclosed Real Estate
----------------------
Real estate properties acquired through, or in lieu of, foreclosure are to be
sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at its lower of (1)
carrying amount or (2) fair value minus the cost to sell. Revenue and
expenses from operations, and additions to the valuation allowance are charged
to operations.
7. Goodwill
--------
On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company estimates the value of and the
estimated undiscounted future net income expected to be generated by the
related subsidiaries to determine that no impairment has occurred. Goodwill is
being amortized on the straight-line method over 15 years.
40
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
8. Income Taxes
------------
The Company files a consolidated federal income tax return. The subsidiaries
pay to or receive from the Parent Company the amount of federal income taxes
they would have paid or received had the subsidiaries filed separate federal
income tax returns.
Effective January 1, 1993, the Company adopted the requirements of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109) which requires a change from the deferred method to the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
9. Risk Management Instruments
---------------------------
Amounts receivable or payable under interest rate swap agreements are
recognized as interest income or expense unless the instrument qualifies for
hedge accounting. Gains and losses on other interest rate derivative financial
instruments that do not qualify as hedges are recognized as other income or
expense.
Gains and losses on hedges of existing assets or liabilities are included in
the carrying amounts of those assets or liabilities and are ultimately
recognized in income as part of those carrying amounts. Gains and losses
related to qualifying hedges of firm commitments or anticipated transactions
also are deferred and are recognized in income or as adjustments of carrying
amounts when the hedged transaction occurs. Gains and losses on early
terminations of contracts that modify the characteristics of designated assets
or liabilities are deferred and amortized as an adjustment to the yield of the
related assets or liabilities over their remaining lives.
10. Commitments
-----------
Fees received in connection with loan commitments are deferred in other
liabilities until the loan is advanced and are then recognized over the term of
the loan as an adjustment of the yield. Fees on commitments that expire unused
are recognized in fees and commission revenue at expiration. Fees received for
guarantees are recognized as fee revenue over the term of the guarantees.
11. Net Income Per Share
--------------------
Net income per share is based on the weighted average number of shares
outstanding of 3,551,228 for 1995, 3,335,869 for 1994 and 2,538,886 for 1993.
40
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Cash and Cash Equivalents
-------------------------
For purposes of presentation in the consolidated statements of cash flows, cash
and cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks."
13. Fair Values of Financial Instruments
------------------------------------
General Comment
The financial statements include various estimated fair value information.
Such information, which pertains to the Company's financial instruments, does
not purport to represent the aggregate net fair value of the Company. Further,
the fair value estimates are based on various assumptions, methodologies and
subjective considerations, which vary widely among different financial
institutions and which are subject to change.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity
in estimating financial instrument fair values.
Fair values have been estimated using data that management considered the best
available, as generally provided in the Company's Regulatory Reports, and
estimation methodologies deemed suitable for the pertinent category of
financial instrument. The carrying amounts are the amounts at which the
financial instruments are reported in the financial statements.
Cash and due from banks, and interest-bearing deposits in other banks: The
balance sheet carrying amounts for cash and short-term instruments approximate
the estimated fair values of such assets.
Trading account assets: The balance sheet carrying amounts for trading account
assets are based on quoted market prices where available. If quoted market
prices are not available, fair values are estimated on quoted market prices of
comparable instruments, except in the case of certain options and swaps for
which pricing models are used.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
41
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Values of Financial Instruments (continued)
------------------------------------------------
Loans: For variable rate loans that reprice frequently and which entail no
significant change in credit risk, fair values are based on the carrying
values. The estimated fair values of certain mortgage loans (e.g., one-to-four
family residential) are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The estimated fair values of other loans are estimated based
on discounted cash flow analyses using interest rates currently offered for
loans with similar terms to borrowers of similar credit quality. The carrying
amount of accrued interest approximates its fair value.
Off-balance-sheet instruments: Estimated fair values for the Company's off-
balance-sheet instruments (letters of credit, guarantees, and lending
commitments) are based on fees currently charged to enter into similar
agreements, considering the remaining terms of the agreements and the
counterparties' credit standing.
Derivative financial instruments: Estimated fair values for derivative
financial instruments (swaps, forwards, and options) are based upon current
settlement values (financial forwards); or if there are no relevant
comparables, on pricing models or formulas using current assumptions (interest
rate swaps and options).
Deposits: The fair values estimated for demand deposits (e.g., interest and
non-interest bearing checking accounts, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts of variable-rate, fixed-term money market accounts and time deposits
approximate their fair values at the reporting date. Fair values of fixed rate
time deposits are estimated using a discounted cash flow calculation that
applies interest rates currently being offered to a schedule of aggregated
expected monthly time deposit maturities. The carrying amount of accrued
interest payable approximates its fair value.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, advances from the Federal Home Loan
Bank (FHLB) and other short-term borrowings approximate their fair values.
Long-term debt: The fair values of the Company's long-term debt (other than
deposits) are estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
14. Use of Estimates
----------------
In preparing the Company's consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
42
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Reclassifications and Year-end Adjustments
------------------------------------------
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation. At year-end 1995, the Company
made an adjustment of $1,200,000 to recognize additional amortization of loan
premium and to reduce interest and fees on loans.
NOTE B - ACQUISITION OF INTERNATIONAL SAVINGS AND LOAN ASSOCIATION,
LIMITED
On April 4, 1994, the Company acquired all the outstanding stock of
International Holding Capital Corp. ("IHCC") at a purchase price of $52,437,000
through the merger of IHCC with and into the Company. As a result of the
merger, International Savings and Loan Association, Limited (the
"Association")
became a wholly-owned subsidiary of the Company. The Company also acquired
indirect control over ISL Services, Inc., ISL Capital Corporation, ISL
Financial Corp. and DRI Assurance, Inc., which are wholly-owned subsidiaries of
the Association.
The consideration consisted of $26,235,000 in cash and 845,228 shares of the
Company's common stock having a value of $26,202,000. The acquisition was
accounted for using the purchase method of accounting and the results of
operations of the Association are included in the consolidated statements of
income from the date of acquisition. The excess cost over net assets acquired
was approximately $12,774,000.
The following unaudited pro forma information shows the consolidated results of
operations as though the above acquisition, including related purchase
accounting adjustments, had been made at the beginning of each year:
1994 1993
------- -------
(in thousands of dollars,
except per share data)
Interest income $99,102 $97,842
Interest expense 38,863 37,792
Other income 10,661 12,790
Other expenses 59,617 61,839
------ ------
NET INCOME $11,283 $11,001
====== ======
Income per share $3.18 $3.25
==== ====
NOTE C - INVESTMENT SECURITIES
As of January 1, 1994, the Company adopted SFAS 115. The adoption of this
accounting policy had no material effect on the consolidated financial
statements of the Company.
43
NOTE C - INVESTMENT SECURITIES (continued)
In November 1995, the Financial Accounting Standards Board issued a special
report which allowed institutions to reclassify investment securities under
SFAS 115 without tainting the investment portfolio. Securities with an
amortized cost of $200,955,000 were transferred from Held-to-Maturity to
Available-for-Sale and a net unrealized gain of $2,152,000 was recorded as a
separate component of equity.
The amortized cost, gross unrealized gains and losses, and estimated fair
values of the Company's available-for-sale, held-to-maturity investment
securities held at December 31 are summarized as follows:
1995
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
(in thousands of dollars)
Held-to-Maturity Securities:
States and political
subdivisions $ 102 $ 6 $ - $ 108
Mortgage-backed securities 9,142 272 1 9,413
------- ----- --- -------
TOTAL $ 9,244 $ 278 $ 1 $ 9,521
======= ===== === =======
Available-for-Sale Securities:
U.S. Treasury and other
U.S. Government agencies
and corporations $ 95,257 $1,274 $348 $ 96,183
States and political
subdivisions 3,470 242 2 3,710
Mortgage-backed securities 106,875 1,837 348 108,364
Other 23,228 10 - 23,238
------- ----- --- ------
TOTAL $228,830 $3,363 $698 $231,495
======= ===== === =======
44
NOTE C - INVESTMENT SECURITIES (continued)
1994
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
(in thousands of dollars)
Held-to-Maturity Securities:
U.S. Treasury and other
U.S. Government agencies
and corporations $ 97,823 $ 80 $ 4,624 $ 93,279
States and political
subdivisions 4,954 80 29 5,005
Mortgage-backed securities 123,970 338 5,784 118,524
Other 21,248 - - 21,248
------- --- ------ -------
TOTAL $247,995 $498 $10,437 $238,056
======= === ====== =======
Available-for-Sale Securities:
U.S. Treasury and other
U.S. Government agencies
and corporations
and corporations $ 11,912 $ - $ 508 $ 11,404
Mortgage-backed securities 2,676 8 90 2,594
------- --- ------ -------
TOTAL $ 14,588 $ 8 $ 598 $ 13,998
======= === ====== =======
At December 31, 1995 and 1994, securities with an aggregate carrying value of
$133,015,000 and $101,763,000, respectively, were pledged as collateral for
public deposits, securities sold under agreements to repurchase and for other
purposes required or permitted by law (notes I and J).
45
NOTE C - INVESTMENT SECURITIES (continued)
The carrying and estimated fair values of securities to be held-to-maturity and
securities available-for-sale at December 31, 1995, by contractual maturity,
excluding securities which have no stated maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Held-to-Maturity Available-for-Sale
---------------------- ----------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
--------- --------- --------- ---------
(in thousands of dollars)
Due in one year or less $ - $ - $ 28,254 $ 28,503
Due after one year
through five years 102 108 58,919 59,666
Due after five years
through ten years - - 6,011 6,140
Due after ten years - - 5,543 5,584
----- ----- ------- -------
Subtotal 102 108 98,727 99,893
Mortgage-backed securities 9,142 9,413 106,875 108,364
Other - - 23,228 23,238
----- ----- ------- -------
TOTAL $9,244 $9,521 $228,830 $231,495
===== ===== ======= =======
Proceeds from sale of available-for-sale securities during 1995 and 1994 were
$1,511,000 and $98,304,000, respectively. Gross gains of $4,000 were realized
on these sales during 1995. Gross realized gains and gross realized losses on
sales of available-for-sale securities were $671,000 and $(476,000) during
1994.
46
NOTE D - LOANS
The carrying amounts and estimated fair value of the loan portfolio at December
31, are as follows:
1995 1994
--------------------- ---------------------
Estimated Estimated
Carrying fair Carrying fair
amounts value amounts value
---------- ---------- ---------- --------
(in thousands of dollars)
Commercial and financial $ 168,497 $ 166,140 $ 167,460 $ 163,789
Real estate
Construction 18,408 18,259 24,448 24,248
Commercial 132,624 125,604 122,908 105,590
Residential 718,618 726,839 675,089 660,510
Installment and consumer 90,378 86,452 91,738 84,923
--------- --------- --------- ---------
Total loans 1,128,525 1,123,294 1,081,643 1,039,060
Less
Unearned discount 12 - 38 -
Net deferred loan fees and costs 7,327 - 6,725 -
Allowance for credit losses 14,576 - 14,326 -
--------- --------- --------- ---------
LOANS, NET $1,106,610 $1,123,294 $1,060,554 $1,039,060
========= ========= ========= =========
The carrying amounts include $7,366,000 of non-accrual loans (loans on which
the accrual of interest has been discontinued or reduced) at December 31, 1994.
If interest on those loans had been accrued, such income would have
approximated $388,000 for 1994. Interest income on those loans, which is
recorded only when received, amounted to $10,000 for 1994.
In the normal course of business, the Company makes loans to its executive
officers and directors, and to companies and individuals affiliated with its
executive officers and directors. Such loans were made at the Company's normal
credit terms, including interest rate and collateralization, and did not
represent more than a normal risk of collectibility.
47
NOTE D - LOANS (continued)
During 1995, loans to such parties are summarized as follows:
(in thousands
of dollars)
Balance at January 1, 1995 $ 11,335
New loans 30,392
Repayments (27,875)
Other changes 408
-------
Balance at December 31, 1995 $ 14,260
=======
Other changes include loans outstanding at January 1, 1995 to companies and
individuals not previously affiliated with officers and directors of the
Company less loans to former officers and directors.
NOTE E - ALLOWANCE FOR CREDIT LOSSES
Changes in the consolidated allowance for credit losses are as follows:
1995 1994 1993
-------- -------- --------
(in thousands of dollars)
Balance at January 1, $14,326 $ 9,816 $ 8,715
Provisions charged to expense 980 1,964 2,064
Recoveries 522 1,014 1,073
Allowance applicable to loans
of purchased company at
April 4, 1994 - 3,128 -
Loans charged-off (1,252) (1,596) (2,036)
------ ------ ------
Balance at December 31, $14,576 $14,326 $ 9,816
====== ====== ======
As of January 1, 1995, the Company adopted the provisions of SFAS 114 as
amended by SFAS 118. The adoption of this accounting policy had no material
effect on the consolidated financial statements of the Company. At December
31, 1995, the recorded investment in loans that are considered to be impaired
under SFAS 114 was $4,431,000. Included in this amount is $4,328,000 of
impaired loans of which the related allowance for credit losses is $1,054,000
and $103,000 of impaired loans that do not have an allowance for credit losses.
The average recorded investment in impaired loans during the year ended
December 31, 1995 was $3,554,000. For the year ended December 31, 1995, the
Company recognized $1,000 of interest income on impaired loans using the cash
basis of income recognition.
48
NOTE F - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of mortgage loans underlying mortgage-backed securities were $360,402,000 and
$378,523,000 at December 31, 1995 and 1994, respectively. The unpaid principal
balances of mortgage loans serviced for others were $377,935,000 and
$407,058,000 at December 31, 1995 and 1994, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $4,644,000 and
$2,431,000 at December 31, 1995 and 1994, respectively.
NOTE G - PREMISES AND EQUIPMENT
The consolidated premises and equipment at December 31, are as follows:
1995 1994
------- -------
(in thousands
of dollars)
Premises $17,624 $19,250
Equipment 16,601 14,381
------ ------
Total cost 34,225 33,631
Less accumulated depreciation
and amortization 17,265 16,344
------ ------
NET CARRYING VALUE $16,960 $17,287
====== ======
Depreciation and amortization charged to operations for the years ended
December 31, are as follows:
1995 1994 1993
------ ------ ------
(in thousands of dollars)
Net occupancy expenses $ 380 $ 347 $ 255
Equipment expenses 1,722 1,163 893
----- ----- -----
TOTAL DEPRECIATION
AND AMORTIZATION $2,102 $1,510 $1,148
===== ===== =====
49
NOTE H - DEPOSITS
The carrying amounts and estimated fair value of deposits at December 31,
consist of the following:
1995 1994
---------------------- --------------------
Estimated Estimated
Carrying fair Carrying fair
amounts value amounts value
---------- ---------- ------- ---------
(in thousands of dollars)
Non-interest bearing $ 137,287 $ 137,287 $135,368 $135,368
Interest bearing
Savings, money market and
NOW deposits 353,389 353,389 358,191 358,191
Time deposits of $100,000 or more 207,759 208,845 184,503 181,542
Time deposits of less than $100,000 313,048 312,189 245,382 237,603
--------- --------- ------- -------
Total interest bearing 874,196 874,423 788,076 777,336
--------- --------- ------- -------
TOTAL DEPOSITS $1,011,483 $1,011,710 $923,444 $912,704
========= ========= ======= =======
Interest expense on deposits for the years ended December 31, are as follows:
1995 1994 1993
------- ------- ------
(in thousands of dollars)
Savings, money market and
NOW deposits $ 8,322 $ 7,511 $ 6,525
Time deposits of $100,000 or more 12,675 6,335 3,372
Time deposits of less than $100,000 15,463 8,164 4,237
------ ------ ------
TOTAL INTEREST EXPENSE $36,460 $22,010 $14,134
====== ====== ======
NOTE I - SHORT-TERM BORROWINGS
The carrying amounts of short-term borrowings at December 31, consist of the
following:
1995 1994
-------- --------
(in thousands
of dollars)
Federal funds purchased and securities
sold under agreements to repurchase $ 38,698 $ 69,006
Advances from the Federal Home Loan Bank 194,085 195,475
Notes payable to banks 4,000 9,000
Federal treasury tax and loan note 2,577 1,422
------- -------
TOTAL SHORT-TERM BORROWINGS $239,360 $274,903
======= =======
50
NOTE I - SHORT-TERM BORROWINGS (continued)
Securities sold under agreements to repurchase of $31,198,000 in 1995 and
$50,206,000 in 1994 are treated as financings and the obligations to repurchase
the identical securities sold are reflected as a liability with the dollar
amount of securities underlying the agreements remaining in the asset accounts.
At December 31, 1995 and 1994, the Company had notes payable of $4,000,000 and
$9,000,000, respectively, with banks. The weighted average interest rate was
7.92% and 6.92% at December 31, 1995 and 1994, respectively.
Information concerning the securities sold under the reverse repurchase
agreements at December 31, is summarized as follows:
1995 1994
-------- --------
(dollars in
thousands)
Average balance during the period $40,195 $41,585
Average interest rate during the period 6.00% 3.82%
Maximum month-end balance during the period 47,484 83,673
U.S. Treasury notes underlying the
agreements at period end:
Carrying value, including
accrued interest 31,510 35,751
Estimated market value 30,672 34,040
U.S. Government debt securities underlying
the agreements at period end:
Carrying value, including
accrued interest - 17,042
Estimated market value - 16,143
The U.S. Treasury notes and U.S. Government debt securities sold under the
reverse repurchase agreements were delivered to the broker-dealers who arranged
the transactions. The agreements at December 31, 1995 and 1994 are renewed on
a daily basis.
NOTE J - LONG-TERM DEBT
The carrying amounts and estimated fair values of long-term borrowings consist
of the following at December 31:
1995 1994
-------------------- --------------------
Estimated Estimated
Carrying fair Carrying fair
amounts value amounts value
-------- --------- -------- ---------
(in thousands of dollars)
Advances from the Federal Home
Loan Bank $ 97,448 $ 98,212 $100,854 $ 97,666
Collateralized mortgage
obligations 3,923 3,923 5,996 5,356
------- ------- ------- -------
TOTAL LONG-TERM DEBT $101,371 $102,315 $106,850 $103,022
======= ======= ======= =======
51
NOTE J - LONG-TERM DEBT (continued)
The advances from the FHLB bear interest at rates ranging from 4.43% to 8.22%.
Interest is payable monthly over the term of each advance. Pursuant to
collateral agreements with the FHLB, short and long-term advances are secured
by a blanket pledge of certain securities with carrying values of $77,091,000
and $84,387,000, and loans of $716,324,000 and $674,000,000, in 1995 and 1994,
respectively, and all stock in the FHLB. FHLB advances are under credit line
agreements of $439,281,000, in 1995.
The collateralized mortgage obligations, including a premium of $331,000, with
a weighted average interest rate of 9.10%, are subject to redemption on or
after August 20, 1999 and are collateralized by mortgage-backed securities with
an approximate book value of $6,721,000.
Aggregate maturities of long-term debt for the five years following December
31, 1995 are as follows:
(in thousands
of dollars)
1996 $50,000
1997 12,500
1998 20,000
1999 3,000
2000 10,500
NOTE K - OTHER EXPENSES
Other expenses for the year ended December 31, are as follows:
1995 1994 1993
------- ------- -------
(in thousands of dollars)
Legal and professional fees $ 2,904 $ 2,686 $ 1,967
Merchant interchange fees 1,616 1,739 1,654
Charge card processing fees 640 795 775
Stationery and supplies 1,074 922 693
Advertising and promotion 1,880 1,752 1,035
Commissions 1,082 1,123 -
Deposit insurance premium 1,472 1,918 1,371
Other 7,882 5,986 4,720
------ ------ ------
TOTAL $18,550 $16,921 $12,215
====== ====== ======
52
NOTE L - INCOME TAXES
The consolidated provision for income taxes for the years ended December 31,
consist of the following:
1995 1994 1993
-------- ------- -------
(in thousands of dollars)
Currently payable
Federal $ 5,048 $3,195 $4,460
Hawaii 2,081 700 767
------ ----- -----
Total currently payable 7,129 3,895 5,227
Deferred
Federal (1,554) 2,242 (313)
Hawaii (324) 520 (66)
------ ----- -----
Total deferred (1,878) 2,762 (379)
------ ----- -----
TOTAL INCOME TAXES $ 5,251 $6,657 $4,848
====== ===== =====
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities as of December 31, are as follows:
1995 1994
-------- -------
(in thousands
of dollars)
Deferred tax assets
Allowance for credit losses $ 4,253 $3,695
Hawaii state franchise taxes 516 278
Gain on sale of building 2,207 2,375
Deferred compensation 1,782 1,373
Other 889 994
------ -----
Total deferred tax assets 9,647 8,715
Deferred tax liabilities
FHLB stock dividends 4,331 3,748
Deferred loan fees 2,480 2,032
Purchase accounting - net premiums 1,323 2,089
Net unrealized gain on available-for-sale
securities 1,058 -
Unrealized losses on loans 64 1,334
Other 734 425
------ -----
Total deferred tax liabilities 9,990 9,628
------ -----
NET DEFERRED TAX LIABILITIES $ 343 $ 913
====== =====
In connection with the adoption of SFAS 109, effective January 1, 1993, the
cumulative impact of the change decreased net income by $580,000 and is
reported separately in the consolidated statement of income for the year ended
December 31, 1993.
53
NOTE L - INCOME TAXES (continued)
The Company's effective income tax rate differed from the federal statutory
rate as follows:
1995 1994 1993
----- ----- -----
Federal statutory rate 35.0% 35.0% 35.0%
Tax exempt interest (2.8) (2.3) (1.9)
Hawaii State franchise taxes, net of
federal tax benefit 5.6 6.0 2.4
Amortization of goodwill 2.1 1.3 -
Other (.3) (2.4) .8
---- ---- ----
Effective income tax rate 39.6% 37.6% 36.3%
==== ==== ====
ISL has met certain requirements of the Internal Revenue Code which permit a
bad debt deduction (unrelated to the amount of loan losses actually anticipated
and charged to operations) based on the reserve method. Under the reserve
method, a bad debt deduction may be taken based on an experience formula
(experience method) or a percentage of taxable income (percentage method)
before such deduction. The maximum annual effective bad debt deduction, based
on a percentage of taxable income was 8% in 1995. ISL computed its bad debt
deduction using the percentage method for the year ended December 31, 1995.
Included in retained earnings of the Association at December 31, 1995 is an
amount of approximately $10,001,000, which represents the accumulation of bad
debt deductions for which no provision for federal income taxes has been made.
If in the future these amounts are used for any purpose other than to absorb
losses on bad debts, a tax liability will be imposed on ISL for these amounts
at the then current income tax rates.
NOTE M - DEFERRED GAIN
In previous years, Citibank Properties, Inc. entered into a limited partnership
agreement as a limited partner. The partnership acquired the ground leases of
certain real property, constructed a commercial building on the property and
sold the leasehold estate and commercial building to an unrelated third party
(the Purchaser). The Bank had previously entered into a 20 year office lease
agreement with the partnership for the ground floor, mezzanine and first four
floors of the building. The lease was assigned to the Purchaser and has not
been affected by the sale of the building.
The Company recognized a deferred gain of $8,567,000 in a manner similar to
that for a sale-leaseback transaction. The deferred gain is being amortized
over the remaining lease term, resulting in gains of $447,000 recognized in
1995, 1994 and 1993.
54
NOTE N - RISK MANAGEMENT ACTIVITIES
The Company's principal objective in holding or issuing derivatives and certain
other financial instruments for purposes other than trading is the management
of interest rate and mortgage banking activities risks arising out of non-
trading assets and liabilities. The operations of the Company are subject to
risk of interest rate fluctuations to the extent that interest-earning assets
(including investment securities) and interest-bearing liabilities mature or
reprice at different times or in differing amounts. Risk management activities
are aimed at optimizing net interest income, given levels of interest rate and
mortgage banking activities risks consistent with the Company's business
strategies.
Asset-liability risk management activities are conducted in the context of the
Company's asset sensitivity to interest rate changes. This asset sensitivity
arises due to interest-earning assets repricing more frequently than interest-
bearing liabilities. This means that if interest rates are declining, margins
will narrow as assets reprice downward more quickly than liabilities. The
converse applies when rates are rising.
To achieve its risk management objective, the Company uses a combination of
derivative financial instruments, particularly interest rate swaps, options and
forward contracts.
The notional principal amounts of interest-rate swaps outstanding were
$50,000,000; $75,000,000; and $60,000,000 at December 31, 1995, 1994, and 1993,
respectively. The estimated fair values of those interest-rate swaps were
$(940,000), $(1,891,000), and $1,700,000 at December 31, 1995, 1994, and 1993,
respectively.
The nature and the significance of notional and credit exposure amounts, credit
risk and market risk factors are described below:
The notional amounts of derivatives do not represent amounts exchanged by the
parties and, thus, are not a measure of the Company's exposure through its use
of derivatives. The amounts exchanged are determined by reference to the
notional amounts and the other terms of the derivatives.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to financial instruments but does not expect any
counterparties to fail to meet their obligations. Where appropriate, master
netting agreements are arranged or collateral is obtained in the form of rights
to securities. The Company deals only with highly rated counterparties. The
current credit exposure of derivatives is represented by the fair value of
contracts with a positive fair value at the reporting date. Gross credit
exposure amounts disregard the value of collateral.
Under interest rate swaps, the Company agrees with other parties to exchange,
at specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional amount. The
Company pays the fixed rate and receives the floating rate and paid the
floating rate and received the fixed rate under the majority of its swaps
outstanding at December 31, 1995 and 1994, respectively.
Interest rate contracts are primarily used to convert certain deposits or to
convert certain groups of customer loans to fixed or floating rates. Certain
interest rate swaps specifically match the amounts and terms of particular
liabilities.
55
NOTE N - RISK MANAGEMENT ACTIVITIES (continued)
The following table indicates the types of swaps used, as of December 31, their
aggregate notional amounts, and their weighted-average interest rates, and
includes the matched swaps. Average variable rates are based on rates implied
in the yield curve at the reporting date. Those rates may change
significantly, affecting future cash flows. The swap contracts have terms
ranging up to five years, with the majority maturing within two years.
1995 1994 1993
--------- -------- --------
(dollars in thousands)
(Pay)receive-fixed swaps - notional amount $(50,000) $75,000 $60,000
Average receive rate 5.88% 6.25% 6.22%
Average pay rate 6.50% 6.14% 3.33%
Certain assets have indefinite maturities or interest rate sensitivities and
are not readily matched with specific liabilities. Those assets are funded by
liability pools based on the assets' estimated maturities and repricing
characteristics. For example, some floating-rate loans are funded by short-
term liability pools that reprice frequently, while fixed-rate credit card
loans are funded by a longer term liability pool that reprices less frequently.
As part of the Company's asset-liability risk management, various assets and
liabilities, such as investment securities financed by borrowings, are
effectively modified by derivatives to lock in spreads and reduce the risk of
losses in value due to interest rate changes. The deferred gains and losses
arising through those instruments are included in the carrying amounts of the
related assets and liabilities, and are recognized in income as part of the
revenue or expense arising from those assets and liabilities.
Interest rate options written and purchased; and forward exchange contracts are
used in hedging the risks associated with commitments to sell securities in
connection with mortgage banking activities. The hedging gains and losses are
explicitly deferred on a net basis in the statement of financial position as
either other assets or other liabilities. The deferred gains and losses are
included in the carrying amounts of the securities until they are sold, which
normally occurs within one year of entering into the commitment.
Interest rate options written and purchased - Interest rate options are
contracts that allow the holder of the option to purchase or sell a financial
instrument at a specified price and within a specified period of time from the
seller or "writer" of the option. As a writer of options, the Company
receives
a premium at the outset and then bears the risk of an unfavorable change in the
price of the financial instrument underlying the option. As a purchaser of
options, the Company pays a premium and may then exercise the option if the
price movement of the underlying financial instrument is favorable to the
Company. As of December 31, 1995, the Company had written an option to sell
$3,000,000 in mortgage-backed securities for a premium of $13,000.
Forward contracts are commitments to either purchase or sell a financial
instrument at a future date for a specified price and are settled through
delivery of the underlying financial instrument. The credit risk of forward
contracts arise from the possible inability of the counterparties to meet the
terms of their contracts and from movements in the securities values and
interest rates.
56
NOTE O - CREDIT-RELATED INSTRUMENTS
At any time, the Company has outstanding a significant number of commitments to
extend credit. These commitments take the form of approved lines of credit,
loans and credit card limits, with terms of up to one year. The Company also
provides financial guarantees and letters of credit to guarantee the
performance of customers to third parties. These agreements generally extend
for up to one year.
The contractual amounts of these credit-related instruments are set out in the
following table by category of instrument. Because many of those instruments
expire without being advanced in whole or in part, the amounts do not represent
future cash flow requirements.
1995 1994 1993
------------------ ------------------ ------------------
Estimated Estimated Estimated
Notional fair Notional fair Notional fair
amount value amount value amount value
-------- --------- -------- --------- -------- ---------
(in thousands of dollars)
Loan commitments $157,158 $408 $146,100 $122 $129,899 $240
Credit card
commitments 20,784 81 16,812 114 18,413 128
Guarantees and
letters of credit 7,863 92 12,207 90 7,205 75
These credit-related financial instruments have off-balance-sheet risk because
only origination fees and accruals for probable losses are recognized in the
statement of financial position until the commitments are fulfilled or expire.
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
The credit risk amounts are equal to the contractual amounts, assuming that the
amounts are fully advanced and that the collateral or other security is of no
value.
The Company's policy is to require suitable collateral to be provided by
certain customers prior to the disbursement of approved loans. For retail
loans, the Company usually retains a security interest in the property or
products financed, which provides repossession rights in the event of default
by the customer. Guarantees and letters of credit also are subject to strict
credit assessments before being provided. Those agreements specify monetary
limits to the Company's obligations. Collateral for commercial loans,
guarantees, and letters of credit is usually in the form of cash, inventory,
marketable securities, or other property. Credit card commitments are
unsecured. Periodic reviews of cardholders' credit-worthiness are used to
adjust card limits if necessary.
57
NOTE P - COMMITMENTS AND CONTINGENCIES
On January 30, 1996, a lawsuit was filed against the Association, its
subsidiaries, one of its officers as well as the Company and other entities and
individuals. The lawsuit is an action by the plaintiffs, as purchasers of the
International Savings Building at 1111 Bishop Street in Honolulu, Hawaii, for
recission, special, general and punitive damages. The plaintiffs seek
recission of $7,450,000 sale, made in May 1988, based on allegations that
various parties negligently or intentionally misrepresented and/or fraudulently
failed to disclose unsuccessful negotiations for a new ground lease with the
fee-simple landowner and the alleged unreasonableness of demands by the fee-
simple owner. The plaintiffs also allege failure to disclose land appraisals
concerning the property and the presence of toxic asbestos in the cooling
system, pipes, walls and ceiling tiles of the building. While the Company and
the Association believe they have meritorious defenses in this action, due to
the uncertainties inherent in the early stages of litigation, no assurance can
be given as to the ultimate outcome of the lawsuit at this time. Accordingly,
no provision for any loss or recovery that may result upon resolution of the
lawsuit has been made in the Company's consolidated financial statements.
The Company is a defendant in other various legal proceedings arising from
normal business activities. In the opinion of management, after reviewing
these proceedings with counsel, the aggregate liability, if any, resulting from
these proceedings would not have a material effect on the Company's financial
position or results of operations.
NOTE Q - LEASE COMMITMENTS
The Company conducts its operations on a number of properties under leases
which expire on various dates through 2040. Certain leases provide for
renegotiation of rental at fixed intervals. Rent charged against operations,
including equipment rental, are as follows:
1995 1994 1993
------ ------ ------
(in thousands of dollars)
Rental expense $7,392 $6,164 $4,646
Sublease income 789 646 411
------ ------ ------
TOTAL RENT $6,603 $5,518 $4,235
===== ===== =====
The future minimum rental commitments for all long-term non-cancelable
operating leases and commitments for data processing services as of December
31, are as follows:
(in thousands
of dollars)
1996 $ 5,498
1997 4,701
1998 4,223
1999 4,534
2000 4,211
Later years 24,027
------
TOTAL $47,194
58 ======
NOTE Q - LEASE COMMITMENTS (continued)
Future rentals which are subject to renegotiation are computed on the latest
annual rents. In addition to the minimum rent, certain real estate leases
provide for payments of real estate taxes, maintenance, insurance and certain
other operating expenses.
NOTE R - EMPLOYEE BENEFIT PLANS
1. Employee Stock Ownership Plan
-----------------------------
The Company has an Employee Stock Ownership Plan ("ESOP") for all employees of
the Company who satisfy length of service requirements. The shares of the
Company purchased by the ESOP were held in an ESOP suspense account. During
1994, all remaining shares held in the ESOP suspense account were allocated to
the participants. During 1993, an amount equal to one-eighth of the company
stock initially credited to the ESOP suspense account was released from the
suspense account and allocated to participants each year. Trust assets under
the plan are invested primarily in the shares of stock of the Company.
Employer contributions are to be paid in cash, shares of stock or other
property as determined by the Board of Directors; provided, however,
contributions may not be made in amounts which cannot be allocated to any
participant's account by reason of statutory limitations. No participant shall
be required or permitted to make contributions to the plan or trust. No
contributions were made to the plan in 1995, 1994, and 1993.
2. Profit Sharing Retirement Savings Plan
--------------------------------------
The Company has an Employee Profit Sharing Retirement Savings Plan for all
employees of the Company who satisfy length of service requirements. Eligible
employees may contribute up to 10% of their compensation, limited to the total
amount deductible under applicable provisions of the Internal Revenue Code, of
which 20% of the amount contributed will be matched by the Company, provided
that the matching contribution shall not exceed 2% of the participants'
compensation. In addition, the Company will contribute an amount equal to 2%
of the compensation of all participants, and amounts determined by the Board of
Directors at their discretion. Contributions to the plan for 1995, 1994 and
1993 were $486,000, $492,000 and $283,000, respectively.
3. Deferred Compensation
---------------------
The Company has deferred compensation agreements with several key management
employees, all of whom are officers. Under the agreements, the Company is
obligated to provide for each such employee or his beneficiaries, during a
period of ten years after the employee's death, disability, or retirement,
annual benefits ranging from $25,000 to $250,000. The estimated present value
of future benefits to be paid is being accrued over the period from the
effective date of the agreements until the full eligibility dates of the
participants. The expense incurred for this plan for the years ended December
31, 1995, 1994, and 1993 amounted to $1,421,000, $444,000 and $1,498,000,
respectively. The Company is the beneficiary of life insurance policies with a
59
NOTE R - EMPLOYEE BENEFIT PLANS (continued)
3. Deferred Compensation (continued)
---------------------
face value of $18,493,000 that have been purchased as a method of partially
financing benefits under this plan.
4. Stock Compensation Plan
-----------------------
On September 16, 1994, the Board of Directors adopted a Stock Compensation Plan
(the SCP). On January 26, 1995, the stockholders approved the SCP which
authorized the granting of up to 250,000 shares of common stock to employees,
including officers and other key employees, of the Company. The purpose of the
SCP is to enhance the ability of the Company to attract, retain and reward key
employees and to encourage a sense of proprietorship and to stimulate the
interests of those employees in the financial success of the Company. The SCP
is administered by the Compensation Committee (Committee) of the Board of
Directors. The SCP provides for the award of incentive stock options,
performance stock options, non-qualified stock options, stock grants and stock
appreciation rights (SARs).
Options are granted at exercise prices not less than the fair market value of
the common stock on the date of grant. Options generally may not be exercised
prior to the first anniversary of the date of grant or more than ten years
after the date of grant. Stock options can be exercised, in whole or in part,
by payment of the option price in cash or by delivery of shares already owned
by the optionee. At December 31, 1995, 144,350 shares were available for
future grants.
The activity under the SCP is as follows:
Options
--------------------------------
Outstanding Exercisable
--------------- ---------------
Average Average
option option
Shares price Shares price
------- ------- ------- -------
Balance at December 31, 1993 - - - -
Options granted 51,450 33.50 - -
------- ------
Balance at December 31, 1994 51,450 33.50 - -
Options granted 54,200 29.00 - -
Exercisable - - 25,725 33.50
------- ------
Balance at December 31, 1995 105,650 31.19 25,725 33.50
======= ===== ====== =====
Under the SCP, the Committee may also grant a specified number of shares to an
employee subject to terms and conditions prescribed by the Committee and has
the authority to grant any participant SARs, the right to receive a payment, in
cash or common stock, equal to the excess of the fair market value of a
specified number of shares of common stock on the date such right is exercised
over the fair market value on the date of grant of such right. A SAR may not
60
NOTE R - EMPLOYEE BENEFIT PLANS (continued)
4. Stock Compensation Plan (continued)
-----------------------------------
be exercised prior to the first anniversary of the date of grant or more than
ten years after the date of grant. No shares of stocks or SARs were granted
during 1995.
Upon the occurrence of a reorganization event, as defined in the SCP, the
Committee may in its discretion provide that the options granted shall be
terminated unless exercised within 30 days of notice and advance the exercise
dates of any or all outstanding options.
NOTE S - STOCKHOLDERS' EQUITY
1. Common Stock
------------
On April 15, 1993, the Company sold 472,170 shares of common stock in a public
offering at a price of $31.50 per share and the underwriter exercised its
option to purchase 75,000 shares to cover over-allotments. Additionally, on
May 28, 1993, the Company sold 27,830 shares at a price of $31.50 per share.
Proceeds from the sale of the 575,000 additional shares of common stock were
$16,595,000, net of underwriting discount and expenses.
2. Regulatory Matters
------------------
The Bank and the Association are subject to minimum regulatory capital
requirements and certain other regulatory restrictions on the amount of
dividends they may declare and loan to the Parent Company without prior
regulatory approval. At December 31, 1995, approximately $28,403,000 was
available for dividend declaration without prior regulatory approval.
The Company is required to maintain a minimum leverage-capital ratio of Tier I
capital (as defined) to total assets based on the Company's ratings under the
regulatory rating system. The minimum leverage-capital ratio is in a range of
3% to 5% dependent upon the Company's rating. In addition, the Company must
maintain a ratio of total capital (as defined) to risk-weighted assets of 8%
and a ratio of Tier I capital to risk-weighted assets of 4%. As of December
31, 1995, the Company exceeded its minimum capital requirements.
The Bank and the Association are subject to various regulatory capital
requirements administered by federal banking agencies. These capital
requirements represent quantitative measures of the Bank's and the
Association's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting principles. The Bank's and the
Association's capital classification is also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Management believes that, as of December 31, 1995, the Bank and the Association
met all capital requirements to which it was subject.
The United States Congress is considering legislation to strengthen the
insurance fund administered by the Savings Association Insurance Fund (SAIF),
through a special assessment on the Association's deposit base as of March 31,
1995. Included as part of the Omnibus Budget Reconciliation bill is a
61
NOTE S - STOCKHOLDERS' EQUITY (continued)
2. Regulatory Matters (continued)
------------------
provision that authorizes the Federal Deposit Insurance Corporation (FDIC) to
impose this special assessment which the FDIC has estimated to be in the range
of 77-80 basis points. An 80 basis point assessment on approximately
$340,468,000 in deposits held as of March 31, 1995 may result in a liability of
$2,724,000. Action on these provisions has not been finalized.
NOTE T - FINANCIAL INFORMATION OF CB BANCSHARES, INC. (PARENT COMPANY)
The balance sheets of CB Bancshares, Inc. as of December 31, 1995 and 1994, and
the related statements of income, and cash flows for each of the three years in
the period ended December 31, 1995 are as follows:
BALANCE SHEETS
ASSETS 1995 1994
--------- ---------
(in thousands
of dollars)
Cash on deposit with the Bank
and Association $ 2,124 $ 571
Investment in Subsidiaries
The Bank 57,426 61,499
The Association 57,429 55,987
Other 453 604
Dividend receivable from the Bank 700 1,162
Other assets 3,649 2,654
------- -------
TOTAL ASSETS $121,781 $122,477
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 3,000 $ 8,000
Advances from the Bank, net 238 169
Dividends payable 1,154 1,154
Other liabilities 883 1,989
------ -------
Total liabilities 5,275 11,312
Stockholders' equity
Preferred stock - authorized but unissued,
25,000,000 shares, $1 par value - -
Common stock - authorized 50,000,000 shares
of $1 par value; issued and outstanding,
3,551,228 shares 3,551 3,551
Additional paid-in capital 65,080 65,080
Net unrealized gain (loss) of
available-for-sale securities 1,596 (352)
Retained earnings 46,279 42,886
------- -------
Total stockholders' equity 116,506 111,165
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $121,781 $122,477
======= =======
62
NOTE T - FINANCIAL INFORMATION OF CB BANCSHARES, INC.
(PARENT COMPANY) (continued)
STATEMENTS OF INCOME
1995 1994 1993
-------- -------- ------
(in thousands
of dollars)
Income
Dividends from Subsidiaries
The Bank $12,780 $ 5,169 $2,642
The Association 2,200 - -
Other - 2,519 119
Other 931 795 378
------ ------ -----
Total income 15,911 8,483 3,139
Expenses
Professional services 1,067 1,074 786
Salaries and employee benefits 3,778 1,594 1,365
Travel 90 80 136
Directors' fees 126 263 130
Interest 174 388 -
Advertising and promotion 166 84 46
Net occupancy expenses 406 254 -
Equipment expenses 53 13 18
Other 786 581 224
------ ------ -----
Total expenses 6,646 4,331 2,705
------ ------ -----
Operating profit 9,265 4,152 434
Equity in undistributed (dividends from
subsidiaries in excess of) income
of Subsidiaries
The Bank (5,258) 4,788 5,872
The Association 679 3,203 -
Other (151) (2,447) 508
------ ------ -----
(4,730) 5,544 6,380
------ ------ -----
Income before income tax benefit 4,535 9,696 6,814
Income tax benefit 3,478 1,375 1,050
------ ------ -----
Income before cumulative effect of
a change in accounting principle 8,013 11,071 7,864
Cumulative effect of a change in accounting
principle - - 62
------ ------ -----
NET INCOME $ 8,013 $11,071 $7,926
====== ====== =====
63
NOTE T - FINANCIAL INFORMATION OF CB BANCSHARES, INC.
(PARENT COMPANY) (continued)
STATEMENTS OF CASH FLOWS
1995 1994 1993
--------- --------- --------
Increase (decrease) in cash (in thousands of dollars)
Cash flows from operating activities:
Net income $ 8,013 $ 11,071 $ 7,926
Adjustments to reconcile net income
to net cash provided by operations:
Dividend from Subsidiaries in excess of
(equity in undistributed) income
of Subsidiaries 4,730 (5,544) (6,380)
Decrease (increase) in dividend
receivable from the Bank 462 (280) 518
(Increase) decrease in other assets (995) 1,026 (1,238)
(Decrease) increase in other liabilities (1,037) 1,405 569
------- ------- ------
Net cash provided by operating
activities 11,173 7,678 1,395
Cash flows from investing activities:
Purchase of International Holding Capital
Corp., net of cash acquired of $163,000 - (26,072) -
Purchase of common stock in Subsidiaries - - (15)
Purchase of investment securities - - (6,005)
Proceeds from sale of investment - 6,005 -
------- ------- ------
Net cash used in investing activities - (20,067) (6,020)
Cash flows from financing activities:
Net (decrease) increase in short-term
borrowings (5,000) 8,000 -
Proceeds from sale of common stock - - 16,595
Cash dividends (4,620) (4,068) (3,143)
------- ------- ------
Net cash (used in) provided by
financing activities (9,620) 3,932 13,452
------- ------- ------
INCREASE (DECREASE) IN CASH 1,553 (8,457) 8,827
Cash at beginning of year 571 9,028 201
------- ------- ------
Cash at end of year $ 2,124 $ 571 $ 9,028
======= ======= ======
64
NOTE U - ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121).
SFAS 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of expected future cash flows (undiscounted and without interest) is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of that loss would be based on the fair value of the asset. SFAS
121 also generally requires long-lived assets and certain identifiable
NOTE U - ACCOUNTING PRONOUNCEMENTS (continued)
intangibles to be disposed of to be reported at the lower of the carrying
amount or the fair value less cost to sell. SFAS 121 is effective for the
Company's 1996 year end.
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" (SFAS 122), is effective for fiscal years beginning after
December 15, 1995 and amends SFAS 65, "Accounting for Certain Mortgage Banking
Activities." SFAS 122 requires mortgage banking enterprises to recognize
rights to service mortgage loans for others as separate assets, regardless of
how those servicing rights are acquired. A mortgage banking enterprise that
purchases or originates mortgage loans and sells or securitizes those loans
with servicing rights retained should allocate the total cost of the mortgage
loans (the recorded investment in the mortgage loans including net deferred
loan fees or costs and any premium or discount) to the mortgage servicing
rights and the mortgage loans without servicing rights based on their relative
values if it is practicable to estimate those fair values. Costs allocated to
mortgage servicing rights is recognized as a separate asset. The rights are
amortized in proportion to and over the period of estimated net servicing
income and are evaluated for impairment based on their fair value.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), is effective for fiscal years beginning after
December 15, 1995, establishes financial accounting and reporting standards for
stock-based employee compensation plans, such as the Company's Stock
Compensation Plan (see Note R to the Company's consolidated financial
statements).
65
SFAS 123 provides two methods of accounting for awards of stock-based
compensation to employees; the intrinsic-value-based method under the
provisions of the Accounting Principles Board Opinion (APB) No. 25,
"Accounting
for Stock Issued to Employees" or the fair-value-based method. SFAS 123 also
sets forth new financial statement disclosure requirements about stock-based
compensation arrangements. The Company, which is currently using the intrinsic
valuation method, has not yet decided which valuation method it will use and
does not anticipate that the adoption of SFAS 123 will have a significant
impact on the Company's operating results or financial condition.
NOTE V - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table provides summary information on the estimated fair value of
financial instruments and also cross references to the location in the
financial statements where more detailed information can be obtained.
1995 1994
----------------------- -----------------------
Carrying Carrying
or or
notional Estimated notional Estimated
amount fair value amount fair value
---------- ---------- ---------- ----------
(in thousands of dollars)
Investment securities
(note C) $ 240,739 $ 241,016 $ 261,993 $ 252,054
Loans receivable (note D) 1,106,610 1,123,294 1,060,554 1,039,060
Deposits (note H) 1,011,483 1,011,710 923,444 912,704
Long-term debt (note J) 101,371 102,135 106,850 103,022
Commitments and letters
of credit (note O) 185,805 581 175,119 326
Derivative financial
instruments (note N)
In a net receivable
position - - 75,000 (1,891)
In a net payable
position 50,000 (940) - -
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
66
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers
required by this Item is incorporated by reference to the Company's Proxy
Statement.
The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
66
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of the Registrant and its
subsidiaries are included in Item 8:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Income - Years ended December 31, 1995, 1994
and 1993
Consolidated Statement of Changes in Stockholders' Equity for the three years
December 31, 1995
Consolidated Statement of Cash Flows - Years ended December 31, 1995, 1994
and 1993
Notes to the Consolidated Financial Statements
(b) EXHIBITS
The following exhibits are filed as a part of, or incorporated by reference
into this Report:
Exhibit No. Description
2 Agreement and Plan of Reorganization between CB Bancshares,Inc.
and International Holding Capital Corp., dated July 15, 1993, is incorporated
by reference to Appendix A filed with the Registrant's Registration Statement
on Form S-4 (No. 33-72340) filed December 1, 1993, and amended on January 25,
1995 and February 8, 1994, which Registration Statement became effective
February 8, 1994.
3.1 Articles of Incorporation of CB Bancshares, Inc. is
incorporated is incorporated by reference to Exhibit 3.1 filed with the
Registrant's Registration Statement on Form S-4 (No. 33-72340) filed December
1, 1993, and amended on January 25, 1994 and February 8, 1994, which
Registration Statement became effective February 8, 1994
3.2 By-laws of CB Bancshares, Inc. is incorporated by reference to
Exhibit 3.2 and 3.3 filed with the Registrant's Registration Statement on Form
S-4 (No. 33-72340) filed December 1, 1993, and amended on January 25, 1994 and
February 8, 1994, which Registration Statement became effective February 8,
1994.
10.1 Stock Compensation Plan is incorporated by reference to Exhibit
A and B to the Registrant's Proxy Statement for the January 25, 1995 Special
Meeting of Shareholders filed on December 9, 1995.
10.2 Executive Salary Continuation Agreement between James M. Morita
and City Bank is incorporated by reference to Exhibit 10.1 filed with the
Registrant's Registration Statement on Form S-2 filed on March 17, 1993.
67
10.3 Split-Dollar Insurance Arrangement with James M. Morita is
incorporated by reference to Exhibit 10.4 filed with the Registrant's Form 10-K
filed on March 28, 1995.
10.4 Employment agreement between CB Bancshares, Inc. and Ronald M.
Migita is incorporated by reference to Exhibit 10 filed with the Registrant's
Form 10-Q filed on August 14, 1995.
.
10.5 Employment agreement between City Bank and Randall O. Chang is
incorporated by reference to Exhibit 10.1 filed with the Registrant's Form 10-K
filed on March 28, 1995.
10.6 Form of Stock Option Agreement for James M. Morita is filed
hereto as Exhibit 10.1.
10.7 Stock options granted to Named Executive Officers in 1994 and
1995 is incorporated by reference to registrants Proxy
Statement for April 29, 1995 and May 23, 1996 Annual
Meeting of Shareholderes.
21 CB Bancshares and subsidiaries
All other schedules are omitted because they are not applicable, not material,
or because the information is included in the financial statements or the notes
thereto.
(c)REPORTS OF FORM 8-K
The company has filed no reports on form 8-K for the quarter ended December
31, 1995.
68
SIGNATURES
Pursuant to the Requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 29, 1996 CB BANCSHARES, INC.
/s/ James M. Morita
--------------------------------------
James M. Morita, Chairman of the Board,
President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Date: March 29, 1996
/s/ Raymond Y. Arakawa /s/ Marcelino J. Avecilla
- - ----------------------------- -------------------------------
Raymond Y. Arakawa, Director Marcelino J. Avecilla, Director
/s/ James H. Kamo /s/ Kazuo E. Yamane
- - ----------------------------- -------------------------------
James H. Kamo, Secretary and Director Kazuo E. Yamane, Director
/s/ Robert R. Taira /s/ Lionel Y. Tokioka
- - ------------------------------ -------------------------------
Robert R. Taira, Vice Chairman Lionel Y. Tokioka, Director
& Director
/s/ Frederic K. T. Chun /s/ Tomio Fuchu
- - ------------------------------ -------------------------------
Frederic K. T. Chun, Vice President Tomio Fuchu, Director
& Director
/s/ Caryn S. Morita /s/ Norman K. Mizuguchi
- - ------------------------------ -------------------------------
Caryn S. Morita, Senior Vice President, Norman K. Mizuguchi, Director
Assistant Secretary & Director
/s/ James M. Morita /s/ Daniel Motohiro
- - ----------------------------- -------------------------------
James M. Morita, Chairman of the Board Daniel Motohiro, Senior Vice
President, Chief Executive Officer President, Treasurer & Chief
(Principal Executive Officer), Director Financial Officer (Principal
Financial Officer)
69
EXHIBIT INDEX
Exhibit Description Page Number
10.1 Form of Stock Option Agreement 70
21 Subsidiaries of the Registrant..............75
70
CB BANCSHARES, INC. AND SUBSIDIARIES
The following exhibit is submitted:
CB BANCSHARES, INC. EXHIBIT 10.1
NON-QUALIFIED STOCK OPTION AGREEMENT
Agreement dated March 29, 1996 between CB Bancshares, Inc. A Hawaii Corporation
("the Company"), with its principal office at 201 Merchant Street, Honolulu,
Hawaii and James M. Morita ("Optionee"), residing at 4219 Alae Street,
Honolulu, Hawaii 96816.
1. Grant of Option. The Company hereby grants to Optionee effective as of
December 29,1995 (the "Grant Date"), the right and option (the "Option") to
purchase from the Company for a price equal to the Exercise Price determined as
described below, up to 5000 shares of the Company's Common Stock, $1.00 par
value (the "Shares"), as a Performance Option and up to 5000 Shares as an
Index Option, each such Option being subject to the applicable terms and
conditions set forth below. The Option is granted pursuant to the Company's
Stock Compensation Plan (the "Plan").
2. Terms and Conditions of Performance Option. The Performance Option
evidenced by this Agreement is subject to the following terms and conditions,
as well as the terms and conditions of Section 4 hereof.
(a) Exercise Price. The Exercise Price is $29.00 per Share, which is the
fair market value per Share on the Grant Date as determined in accordance with
the Plan.
(b) Term of Option. The Term of the Performance Option shall commence on
the Grant Date and, subject to the provisions of Section 4(b)below, shall
terminate ten years thereafter.
(c) Exercisability of Option.
(1) As of each March 1 during the Term of the Option, the Option
shall become exercisable (and thereafter shall remain exercisable) as to one-
third (1/3) of the total number of shares with respect to which the Option was
granted for each one hundred (100) basis points by which the ROE at the end of
the fiscal year preceding such March 1, exceeds the ROE at the end of the
fiscal year preceding the Date of Grant.
(2) For purposes of paragraph (1), "ROE" shall mean the Company's
"return on equity", as determined from the audited financial statements of
the
Company as reported to the Securities and Exchange Commission of form 10-K.
Prior to March 1 following the end of each fiscal year of the Company, the
committee constituted to administer the Plan (the "Committee") shall
determine
the increase, if any, in the ROE for such year, and shall notify the Optionee
of the additional Shares, if any, with respect to which Option will be
exercisable.
(3) Notwithstanding paragraph (1), above, the Option shall become
exercisable (and thereafter shall remain exercisable in full on the fifth
anniversary of the Grant Date.
71
3. Terms and Conditions of Index Option. The Index Option evidenced by this
Agreement is subject to the following terms and conditions, as well as the
terms and conditions of Section 4 hereof.
(a) Exercise Price.
(i) The initial Exercise Price is $29.00 per share, which is the fair
market value per Share on the Grant Date as determined in accordance with the
Plan. During any calendar year commencing after the Grant Date, the Exercise
Price shall be the greater of (A) the Exercise Price in effect during the
preceding calendar year, or (B) the initial Exercise Price increased by the
"CPI factor" described in paragraph (2), below.
(ii) the "CPI factor" is the percentage increase in the Consumer
Price Index-All Urban Consumers (CPI-U), as announced by the U.S. Department of
Labor, Bureau of Labor Statistics, from the third quarter of the calendar year
preceding the Grant Date to the third quarter of the calendar year preceding
the year for which the Exercise Price is being determined.
(iii) The Committee shall determine the Exercise Price to be
effective from time to time, and shall notify the Optionee of the change, if
any, in such Exercise Price.
(b) Term of Option. The term of the Index Option shall commence on the
Grant Date and, subject to the provisions of Section 4(b), below, shall
terminate ten years thereafter.
(c) Exercisability of Option. The Index Option shall be exercisable on
the first anniversary of the Grant Date (and thereafter shall remain
exercisable) as to the total number of Shares with respect to which the Option
was granted.
4. Additional Terms and Conditions.
(a) Exercise of Option; Payment for Shares. An Option may be exercised
from time to time with respect to all or any portion of the number of Shares
with respect to which the Option has become exercisable, in whole or in part,
by written notice to the Company at the Company's then principal office, to
the attention of the CB Bancshares, Inc. Non-Qualified Stock Option Plan Plan
Administrator (`Plan Administrator"), substantially in the form of Exhibit A
attached hereto. Notwithstanding anything in this Agreement to the contrary,
no Option may be exercised prior to the later of (1) the date which the Plan is
approved by the Company shareholders, or (2) the first anniversary of the
Company (or any of its subsidiaries) throughout the one-year period beginning
on the Grant Date. Any notice of exercise of the Option shall be accompanied
by payment of the full Exercise Price for the Shares being purchased by
certified or bank check payable to the order of CB Bancshares, Inc., or by
delivery to the Company of a number of Shares already owned or by Optionee
having a fair market value equal to such Exercise Price, or by a combination
thereof. In addition, with the consent of the Committee, the Company may
cooperate with Optionee in arranging a "cashless exercise" of the Option
through a broker approved by the Committee.
72
(b) Termination of Option. If Optionee's employment with the Company or
any of its subsidiaries terminates prior to the first anniversary of the Grant
Date, the Option shall terminate. If Optionee's employment with the Company or
any of its subsidiaries terminates on or after the first anniversary of the
Grant Date, the Option shall continue to be exercisable, to the extent it was
exercisable on the date such employment terminated, for three(3) months after
such termination, except that Optionee's employment because of Optionee's death
or disability, the Option will continue to be exercisable , to the extent it
was exercisable on the date such employment terminated, for twelve(12) months
after such termination, but in no event after the date the Option terminates.
The Option granted hereunder shall confer no right on Optionee to continue in
the employ of the Company or any of its subsidiaries, or limit in any respect
the right of the Company or any of its subsidiaries (in the absence of a
specific agreement to the contrary) to terminate Optionee's employment at any
time.
(c) Issuance of Shares; Registration; Withholding Taxes. The Company may
not postpone the issuance or delivery of the Shares until (i) the completion of
registration or other qualification of such Shares or transaction under any
state or federal law, rule or regulation, or any listing on any securities
exchange, as the Company shall determine to be necessary or desirable; (ii) the
receipt by the Company of such written representations or other documentation
as the Company deems necessary to establish compliance with all applicable
laws, rules and regulations, including applicable federal and state securities
laws and listing requirements, if any; and (iii) the payment to the Company,
upon its demand, of any amount requested by the Company to satisfy any federal,
state, or other governmental withholding tax requirement related to the
exercise of the Option. Optionee shall comply with any and all legal
requirements relating to Optionee's resale or other disposition of any Shares
acquired under the Agreement. The certificates representing the Shares
acquired pursuant to the Option may bear such legend as counsel to the Company
deems appropriate to assure compliance with applicable law.
(d) Non-transferability of Options. The Option and this agreement shall
not be assignable or transferable by Optionee other than by will or by the laws
of the descent and distribution. During Optionee's lifetime, the Option and
all rights of Optionee under this Agreement may be exercised only by Optionee
(or by his guardian or legal representative). If the Option is exercised after
Optionee's death, the Committee may require evidence reasonably satisfactory to
it of the appointment and qualification of Optionee's personal representatives
and their authority and of the right of any heir or distributee to exercise the
Option.
(e) Options are Non-qualified Options. No Option granted hereunder is
intended to qualify as an `Incentive stock option", as that term is defined in
section 422 of the Internal Revenue Code of 1986, as amended.
73
5. Changes in Capitalization; Reorganization.
(a) The number of shares of Common Stock which may be subject to
options under the Plan, the number of Shares subject to the Option and the
Exercise Price may be adjusted proportionately for any increase or decrease in
the number of issued shares of Common Stock by reason of stock dividends,
split-ups, recapitalizations or other capital adjustments. Notwithstanding the
foregoing,(i) no adjustment shall be made, unless the Committee determines
otherwise, if the aggregate effect of all such increases and decreases
occurring in any fiscal year is to increase or decrease the number of issued
shares by less than five percent (5%); (ii) any right to purchase fractional
shares resulting from any such adjustment shall be eliminated; and (iii) the
terms of this Section 5(a) are subject to the terms of Section 5(b) below.
(b) In the event (i) the Company is merged or consolidated with
another corporation and the Company is not the surviving corporation, or the
Company shall be the surviving corporation and there shall be any change in the
Common Stock of the Company by reason of such merger or consolidation, or
(ii)all or substantially all of the assets of the Company are acquired by
another corporation, or (iii) there is a reorganization or liquidation of the
Company (each such event being hereinafter referred to as a "Reorganization
Event"), or (iv) the Board of Directors of the Company shall propose that the
Company enter into a Reorganization Event, then the Committee may in its
discretion take any or all of the following actions:
(A) by written notice to Optionee, provide that the Option shall
be terminated unless exercised within thirty (30) days (or such longer period
as the Committee shall determine its discretion) after the date of such notice;
and
(B) advance the dates upon which any or all outstanding Options
granted to Optionee shall be exercisable.
Whenever deemed appropriate by the Committee, any action referred to in this
Section 5(b) may be made conditional upon the consummation of the applicable
Reorganization Event.
(c) Any adjustments or other action pursuant to this Section 5 shall
be made by the Committee, and the Committee's determination as to what
adjustments shall be made or actions taken, and the extent thereof, shall be
final and binding.
6. No Rights as Shareholder, Optionee shall acquire none of the rights of
a shareholder of the Company with respect to the Shares until a certificate for
the shares are issued to Optionee upon the exercise of the Options. Except as
otherwise provided in Section 5 above, no adjustments shall be made for
dividends, distributions or other rights(whether ordinary or extraordinary, and
whether in cash, securities or other property) for which the record date is
prior to the date such certificate is issued.
74
7. Optionee Bound by Plan. Optionee hereby acknowledges receipt of a copy
of the Plan and acknowledges that Optionee shall be bound by its terms,
regardless of whether such terms have been set forth in the Agreement.
Notwithstanding the foregoing, if there is an inconsistency between the terms
of the Plan and the terms of this Agreement, Optionee shall be bound by the
terms of this Agreement.
8. Notices. Any notice or other communication made in connection with
this Agreement shall be deemed duly given when delivered in person or mailed by
certified or registered mail, return receipt requested, to Optionee at
Optionee's address listed above or such other address of which Optionee shall
have advised the Company by similar notice, or to the Company at its then
principal office, to the attention of the Plan Administrator.
9. Miscellaneous. This Agreement and the Plan set forth the parties'
final and entire agreement with respect to the subject matter hereof, may not
be changed or terminated orally and shall be governed by and shall be construed
in accordance with the laws of the State of Hawaii applicable to contracts made
and to be performed in Hawaii. This Agreement shall bind and benefit Optionee,
the heirs, distributees and personal representative of Optionee, and the
Company and its successors and assigns.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date
first above written.
/s/CB BANCSHARES, INC.
/s/JAMES M. MORITA
75
Exhibit 21 - Subsidiaries of the Registrant
The Company or one of its wholly-owned subsidiaries beneficially owns 100% of
the outstanding capital stock and voting securities of the following
Corporations.
State of
Name Incorporation
- - ---------------------------------------------------
City Bank 1959, Hawaii
Citibank Properties, Inc. 1964, Hawaii
City Finance and Mortgage, Inc. 1962, Hawaii
O.R.E., Inc. 1984, Hawaii
International Savings and
Loan Association, Limited 1925, Hawaii
ISL Services, Inc. 1972, Hawaii
ISL Capital Corp. 1985, California
ISL Financial Corp. 1987, Virginia
All subsidiaries are included in the consolidated financial statements of the
Registrant.
43
28
45
42
76